Kevin Toolis: The Celtic tiger that lost its stripes

Like ghosts they haunt the outskirts of almost every Irish town. Swathes of newly built houses hastily walled off behind rusty makeshift fencing, the would-be family lawns growing wild and lush under the soft Irish rain. And all of these ghost estates abandoned, falling into ruin, before the first homebuyer ever crosses their thresholds.

Instead of homes Ireland's ghost estates have become the gravestones of the wildest property boom of the western world, and symbols of the near bankruptcy of the Irish State.

Back in the boom it was, of course, a very different landscape. The Irish dreamed of growing rich by selling houses to each other. Between 2000 and 2005 property prices tripled and an estimated 70,000 new homes were being built every year. Tax revenues soared, mainly from stamp duty and construction related taxes, and lavish social welfare spending ensued.

Ireland's so called "Celtic Tiger" was even cited as the role model for a purported "Celtic Lion" by First Minister Alex Salmond in New York in October 2007. Thankfully some dreams, actually nightmares, never happen. For every boom, as the Irish have painfully discovered, has a bust. Building an estimated 700,000 new homes in a country of just 4.2m people in less than a decade turned out rightly to be an empire of folly. At least 300,000 of those "homes" are now empty and practically valueless. Many will need to be demolished.

And the crash of the Irish economy, despite the previous European Central bank interventions, is far from over.

Two weeks ago the ratings agency Standard & Poor's downgraded Irish government bonds from AAA to AA-. At a stroke the interest rate payable on Irish sovereign debt soared to 5.59 per cent, 3.4 percentage points higher than German government debt.

And there is a lot of Irish debt to service. One estimate says the Irish government debt is now rising by 30,000 a minute forcing the Irish government to borrow at least 15 billion a year to fund its budget deficit.

What spooked the ratings agency, and the bond market, is a growing realisation that the bail-out for Ireland's banks, particularly the nationalised Anglo-Irish Bank, which loaned money for many of those ghost estates, is turning into a bottomless money pit whose eventual losses could cost the Irish taxpayer 30 billion.

Under financial undertakings given by the Irish government in the 2008 fiscal crisis the Irish state effectively guaranteed Anglo-Irish's profligate loans to a raft of dodgy developers.But the collateral for most of the loans - based on inflated property prices for would-be developments - has vanished into thin air.

At first Fianna Fail finance minister Brian Lenihan said the cost of the Anglo-Irish bank rescue would be a mere 3.7 billion. But the figure has continued to widen, pushing the Irish Government deficit to an amazing 47 per cent of GDP. Ireland's annual GDP runs at 147 billion so 30 billion of taxpayer's cash to bail out just one failed bank is not exactly small change. And Ireland's debt is growing at a rate of 15 billion a year - still being spent on a profligate State salary and welfare programmes.

Part of the worry for the European central bankers, and the Germans who must ultimately fund the euro bail-out, is that even as Ireland slides towards a potential default there is no sense of crisis in Dublin. Even as Standard & Poor's announced its verdict the Irish Taoiseach was caught playing golf. The Irish parliament is not even due to return from its recess until the end of the month.

But Ireland's economic structural problems remain far more deep-seated than a mere banking catastrophe and relate to a more fundamental issue of governance.

The wildest property boom in the West did not just happen by accident but was the outcome both of weak central government institutions, including the Central Bank, and an endemic corrupt political system, principally led by the ruling Fianna Fail party.

"Strokes and favours" is always part of any political system but decades of one party rule since independence in the 1920s by Fianna Fail led to an essentially corrupt alliance between developers and Irish politicians.

Instead of being dampened the property boom was fuelled by an array of tax incentive schemes that allowed, in one scheme, those building holiday homes to offset the rental income against their taxes. Planning regulations were overturned, undermined, or cast aside in a frenzy of property speculation.

Along with the ghost houses are ghost hotels - whose development was again funded and fuelled by another dodgy property incentive scheme. And the banks, and many of their directors, dished out loans to themselves and a golden circle of developers almost immune from any regulatory authority.

Like all booms there were initial benefits. Irish tax revenues, largely funded by property taxes, soared and Ireland's politicians proceeded to lavishly reward their constituents as if the boom would never end. One two-acre site in central Dublin in 2005 sold for 141m or 70m an acre. At its peak nearly 30 per cent of the Irish workforce was employed building houses.

Middle-class salaries, many state funded, were soon 20 to 50 per cent higher than in the UK. The starting salary of a newly qualified teacher in Ireland, 26,000, is still 6,000 more than their Scottish equivalent.An Irish occupational therapist starts on 30,000 while a junior news reporter could earn 58,000.

The elite fared even better. The Irish Taoiseach Brian Cowen's salary at 237,000 is 95,000 more than British Prime Minister David Cameron making the leader of Ireland's four million people one of the highest paid political leaders on the planet.

Ireland's social welfare benefits are by UK standards lavish. The Irish state pension at E219 a week is almost double the UK rate of 95. Unemployment benefit at 162 per week is nearly three times the UK figure.

If Ireland was outside the euro its currency would obviously devalue and the economy automatically adjust. But locked inside the European currency the wages of the boom years remain an economic straitjacket reducing Ireland's competitiveness and jobs.

Although its only an anecdote I had my own telling encounter with Irish wage rates when I tried recently to hire a cleaner for an Irish property and found the minimum price for a Polish migrant worker cleaner was E15 an hour - 12.45. I did the cleaning myself.

Like Italy and Greece Ireland has always had a significant "black" economy - possibly as high as 10-15 per cent of GDP. Tax evasion, as evidenced in countless tribunals, was endemic throughout all sectors of the economy. And many individuals in Ireland continue to supplement their income through the black economy. But the loss of tax revenue, and exemptions for special interest groups such as horse trainers and farmers, continues to distort and narrow the Irish tax base. Less taxes means less revenue to fund the deficit.

The incentive to work, at least in the legitimate economy, also suffers from the structure of Ireland's welfare system. Ireland does not have an NHS and unless they are on welfare patients must pay for their own expensive medical bills. It only really pays to work if you are earning above E600 a week or 500. Despite soaring unemployment, Ireland remains one of the highest waged, and highest priced, western economies. And the clock, and the looming welfare bill, cannot be easily turned back. Even the next Irish Budget is purported to only be trying to cut the deficit by 2.5b - a drop in the debt ocean.

Every boom has a painful lesson in the tail as the ghost towns of Ireland so poignantly testify. Greed, powerful self interests, and weak government are a fatal combination. In effect the mechanisms of the Irish state, both political and statutory, were unable to resist the pressure of special interest groups whether they were developers or public sector unions. The Celtic Tiger was nothing other than a bit of shameless but lethal blarney.