Buy now, pay later. It’s an increasingly popular way for some people to organize the purchase of things they need or want (and there can be a difference between the two). BNPL it’s called.
People – mostly younger people who have no experience with the difficulties of paying off debt – are encouraged to use this method to get clothes, shoes and other smaller items, seemingly interest-free and with payments. staggered.
Older readers may recognize this as an age-old model of retail incentive. They know the problems caused when payments can’t be honored: suddenly all kinds of expensive penalties kick in and things that seemed cheap get very expensive.
There is talk of introducing new laws in Ireland to regulate this type of informal lending, much of which is provided by international internet retailers or banking apps.
Now you might be wondering how this is relevant to Tuesday’s budget announced by Finance Minister Paschal Donohoe and Expenditure Minister Michael McGrath.
Well, there are elements of BNPL to what Donohoe and McGrath announced on Tuesday.
Overall, there are two types of loans that a government engages in. There are loans to invest in things that will secure the future, but there are also loans to meet the daily bills.
One is much easier to justify than the other.
As any family knows, certain loans are essential: very few people have the liquidity to be able to afford to buy a house or an apartment, for example. The cost is just too high. But borrowing for a mortgage makes more sense than paying rent. The first can be justified as an investment while the second is just dead money. A car also falls into this category for many, although many now see a car as a liability, and not just as a personal financial cost, but also as an environmental cost.
Sometimes purchases of small items need to be done immediately: a new kitchen appliance, for example, or clothing for a major event. The credit card can be used, provided it is repaid on the next due date. Unfortunately, some people lose control because they have bought more than they can ever afford.
They end up with big bills that rack up large interest charges until the debt is paid off. If it can indeed be erased without help.
On Tuesday, Donohoe and McGrath announced the state’s intention to spend € 87.6 billion in 2022, the highest amount in its history. This will be a 5.5% increase from this year, which is likely to be higher than the rate of inflation – even if COVID-related spending is on the way out. The role of the state in the economy is expanding dramatically – and this should be the trigger for a major political debate about what we want and how and if we can afford it. Instead, all the opposition wants is for the government to spend even more than it pledged on Tuesday.
Last year’s budget forecast a deficit this year, to be covered with a loan of around 20 billion euros, in addition to a deficit of 18 billion euros in 2020.
This huge amount was justified, to a large extent, by expectations of major economic consequences from COVID-19. Protections had to be provided to those who had unexpectedly lost income and to their employers. Fortunately, the worst-case scenario did not happen and the deficit is now expected to reach around € 13 billion.
Alone. It’s still a scary amount. The government collected more tax revenue than expected and did not spend as much, which is why borrowing over the 24 months of 2021 and 2022 is now budgeted at 21.5 billion euros instead of 34.5 billion. euros. The 40% discount is definitely welcome.
Some people (including many politicians) reacted to this by suggesting that there should be more money available for spending in Tuesday’s budget, beyond what ministers had forecast in recent weeks.
Do they not care that the expected cumulative amount of money owed by the state will be just under € 240 billion by next year? Don’t they realize that a permanent increase in spending means a permanent increase in income and other taxes for individuals and families? Borrowing to build social housing, roads, railways and other expensive infrastructure may be justified. It is the role of the state to intervene where the market cannot or does not want to supply.
There will be an economic return on investment for the investment made, although it can sometimes be difficult to quantify. And best of all, much of the new government borrowing now is cheap because the interest rates are so low.
Low now, but there must be a few caveats to this. First, the state is not well known for ensuring value for money, whether on a running or capital basis. The health service will receive 22.2 billion euros next year, but of the 8,000 additional staff planned, how many will be the doctors and nurses we urgently need? We love to build things, but what have we learned from the huge budget overruns on projects like the National Children’s Hospital?
While the cost of money to the government now is cheap, at some point in the future that money will have to be paid back to lenders, to be replaced by new loans. And interest rates could then be higher, becoming a major burden in the future.
Even now, even with low interest rates, we are paying a big interest bill on existing loans. The interest bill amounts to around 5 billion euros per year. We’re basically borrowing new money every year to help pay that interest bill.
Donohoe and McGrath intend to return very quickly to a position that tax revenues will cover all annual running expenses and any borrowing will be for capital purposes only.
Their bet is that the economy will grow at a faster rate than our absolute debt, which means that the national debt burden will decrease. This has happened often in the past, but it depends on the accuracy of the economic forecast.
And as we have seen over the past two years, albeit under exceptional circumstances, the Department of Finance’s projections have been grossly inaccurate.
No one is quite sure what is to come, internationally or nationally. Hopefully it won’t, but it could upend all of those projections.
We have the biggest rise in inflation since June 2008 – 3.7% annualized in September – and not everyone is convinced that this is a temporary phenomenon. This can impact interest rates and export opportunities, as well as the price of imports. What if our tax revenues did not meet the new expectations? What if the economy experiences a downturn?
The government bragged about being able to borrow during COVID – € 46 billion in total – because we had put our national finances back on sound footing and were seen as a good credit risk.
But who remembers the last time we spent too much money nationwide – buy now, pay later – and had to be saved from our debauchery by others? Even just a decade later, have we forgotten the need for at least some caution?