John Fitzgerland: In Ireland, we seem to have lost the capacity to ...

During the pandemic lockdowns, we all had to adopt a more monastic approach to life. Holidays were put on hold, eating out stopped, sports events were cancelled. We couldn’t mosey through Ikea and leave with twice the amount of stuff we’d planned to buy. While incomes remained protected through government subsidies for those laid off, spending took a nosedive.

On both sides of the Atlantic savings soared, though at varying rates across countries. In the US, the cumulative excess savings by households in 2020-2021, over and above the average for the previous decade, amounted to almost 14 per cent of their annual income. The EU’s excess savings were slightly lower, at 11 per cent.

That average masked differences across countries – lower than average savings in normally frugal northern EU states such as Denmark, Estonia, Finland, Poland and Sweden, while the countries with higher excess savings were an eclectic bunch: Cyprus, Latvia, Lithuania, Luxembourg, Spain and the UK. As highlighted in Central Bank research, Ireland was top of the pile with excess savings in peak pandemic years amounting to 22 per cent of annual household income.

It’s not yet clear why savings behaviour varied – was it due to different levels of restrictions or because of different levels of government support? Ireland had particularly generous support, helped by a strong underlying fiscal position.

In all cases, the big rise in household savings largely mirrored additional borrowing by national governments as they offered temporary support to those laid off in lockdown. Because government borrowing and personal saving largely cancelled out, individual countries’ balance of payments were hardly affected. Thus we didn’t see spill-over effects on trade or exchange rates, which could have caused additional disruption to the world economy.

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The US and European governments all wound down their cash injections to households when economic activity reopened, as the virus’s impact waned. But the post-pandemic pattern of household saving differed sharply on each side of the Atlantic. US households went on a spending spree, and in 2022-2023 they spent almost half the excess savings they had built up. This boost to consumption stimulated US economic growth. European and UK households were more cautious, and didn’t draw down their extra savings to add to spending. This difference in post-pandemic household behaviour is a significant reason why the US economy has grown more rapidly than Europe since 2022.

While the US has grown faster, so has its debt pile. The US government borrowed heavily to fund its pandemic stimulus, and then continued to pump money into the economy in subsequent years. However, when US households liquidated their excess savings, the rise in government indebtedness was no longer balanced by increasing household financial assets.

In contrast, across the EU, government indebtedness has risen since 2019, but the rise in the savings of households has been even larger and has not been significantly wound down. So the change in government debt and household assets remain more evenly matched.

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In Ireland’s case, it is just as well that we have not spent our savings as the economy is at capacity. Our excess savings are mainly held in bank deposits, generally earning very low interest rates. There has been little competition in the Irish banking system. These factors, along with customer inertia, have meant few Irish households have moved their money to seek higher interest rates. As the demand for credit has been weak, the banks have lodged the excess savings with the European Central Bank at high interest rates, earning high margins on their swollen level of deposits. So bank profits have soared.

There’s now plenty of money in the banks and plenty of money in the exchequer to help finance the investment Ireland so badly needs to cater for its expanding population and address the challenges of climate change. For once in our history, money isn’t the obstacle. However, because of capacity constraints, this investment should be gradually ramped up in line with the ability of the economy to deliver.

For a nation whose labour built half of Britain’s motorways, we seem to have lost the capacity to build at scale, to manage projects big and small, and deliver them on time and in budget. We have a three-layer planning system – planning application, planning appeal, and judicial review – adding time, cost and uncertainty to virtually every project. In the middle of a housing crisis there are daily reports of planning refusals for housing developments. We seem to have solved the money problem – it’s time the building and planning system got sorted out.

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