Public policy in the Republic between 2009 and 2014 was dominated by the need to sort out the public finances following the financial crash and bring the national debt under control. This had echoes of the 1980s, when a national debt crisis similarly drove much of the political agenda.
Since 1990, the management of State debt has been the responsibility of the National Treasury Management Agency (NTMA). Initially, it was staffed largely by the same officials who had done this job in the Department of Finance. With 9 per cent of national income in 1990 going on debt interest payments, specialist skills were required to manage the debt portfolio, and to minimise the long-run cost of servicing it.
By early 2008, our debt had fallen to 29 per cent of national income. Before the financial crisis hit later that year, the NTMA saw the storm clouds on the horizon. While the Republic was still considered a good credit risk, the NTMA borrowed heavily at competitive interest rates.
By the end of 2008, the debt had risen to 51 per cent of national income, an increase of 22 percentage points, but on the other side of the ledger, the NTMA’s holdings of cash had also risen by 11 percentage points to offer a buffer against impending fiscal shocks.
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At the time, it looked as if the excess cash would be enough for the Republic to ride out the storm. But the black hole in the banks made a bailout necessary.
In addition to holdings of cash, the State has always owned significant investments in commercial semi-State companies and, via local authorities, in housing. However, despite their significance for the Government’s finances, the financial management of these assets has received little public attention.
Among the Republic’s assets are State companies like the ESB, EirGrid, Gas Networks Ireland and Coillte.
The ESB’s assets were valued at almost €21 billion last year. It is commercially successful and is investing heavily. Last year, it made a profit of about €770 million and paid the State a dividend of €150 million. Its retained profits are being funnelled into a large investment programme, alongside a further €3 billion of State equity injection into the ESB and EirGrid.
Together, these funds will enable the State-owned electricity utilities to invest a further €18.9 billion by 2030 in strengthening our electricity system to handle more renewables and more data centres. In each year of this investment, it will amount to over 1 per cent of national income.
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If forecasts for the electricity sector prove correct, and the investment goes successfully, the State should see a substantial return on its €3 billion injection. This return to the State will likely take the form of an increase in the valuation of the State’s ownership stake in ESB and EirGrid, rather than through dividend income. It will show up as a reduction in net indebtedness of the State, rather than a larger budget surplus.
For the future, it will be vital that the investment is successful and produces an appropriate return for the State. There are risks, in particular related to investment to support data centres. That risk should be reflected in what data centres are charged for energy.
Investment in energy capacity is paid for by user fees; it isn’t a charge on the Government budget.
Unfortunately, the failure to introduce water charges a decade ago means that Uisce Éireann isn’t a commercial State company like the ESB. This delayed necessary investment in the 2010s, and now all of the €7.7 billion to be invested in water and sewerage out to 2030 must come from the government budget, leaving less cash for other public services.
Over the next five years, the State plans to invest almost €30 billion in housing, 9 per cent of national income. This will double the value of the housing stock owned by State bodies. However, when the cost of maintenance and management of the current public housing stock is factored in, the rental income represents a rate of return of under 1 per cent on the State’s assets.
It is appropriate that the State provides social housing at a rent people can afford. However, with such a low rate of return, there is a serious risk that maintenance costs and interest on borrowings will make new public housing an ongoing drain on the State’s finances.
Reform of differential rent schemes is needed to ensure a fair increase in rental income when household incomes rise, and that social housing investment is sustainable. The huge scale of planned investment by the State means effective management of such State assets is vital.
