We’re broke (O no we’re not)

Slí Eile: This is September 2009. We’re economically broke. Well not quite…The recent
Commission on Taxation Report has drawn attention to the matter of property tax – usually understood as applying to taxes on houses or residential houses. Residential homes are only one type of wealth. There is a vast array of wealth types from cash, shares, bonds, houses, buildings, lands to other types of immovable assets. Although three years of out date and firmly ensconced in the ‘pre-2008’ world, The Wealth of the Nation report by Pat O’Sullivan, Senior Economist in the Bank of Ireland Private Banking Group makes for interesting reading.

Some of the highlights from that Report include the following:
‘Net wealth’ of Irish households was estimated at €804bn in 2006 (965bn assets less 161 in debt)
Growth in 2006 was ‘one of the fastest growth rates in the OECD’
‘The asset base (excluding residential property) of the top 1% of the population increased by €14bn to €100bn, an increase of 16%’
‘Irish per capita wealth still ranks second among leading OECD countries’
‘We estimate that the number of millionaires increased by 10% to 33,000’
‘the top 1% of the population holds 20% of the wealth, the top 2% holds 30% and the top 5% holds 40%. However, if we exclude the value of housing wealth and focus primarily on financial wealth, the concentration of wealth increases. In this instance, 1% of the population accounts for around 34% of the wealth.’

That was 2006. It would be interesting to know the current position especially in light of the very visible toxic wastelands of half-finished housing estates and non-residential properties around the country. Monuments to hubris, risk gone mad, regulation my hat. For sure, residential and commercial property has been hammered since 2007 (50%?) and equity has taken a battering in 2008 (30%?) with some quiet recovery in recent months. However, the extent to which wealth is concentrated in the hands of very few individuals is incontrovertible. Composition of asset holdings and values are an area where information is somewhat limited and comparisons over time or across countries are hard to arrive at. It is easier to deal in information about income poverty. It is much more difficult to measure the extent of such elusive concepts as negative equity, current market value, long-term ‘hope’ value (otherwise known as Long-term Economic Value) and net assets.

A short-term downturn in the economy leading to a sudden drop in income can be buffeted by drawing on savings or disposal of assets. However, a prolonged period of unemployment or very low income (as in many smaller businesses and farms) can spell ruin for individuals and families.
Economic wealth is a stock at one point in time which potentially yields a flow of benefits over time. Normally, for national or public accounting purposes, expenditure is measured as a flow over 12 months. The total level of liabilities or promises to pay in the future are expressed as a stock of values and divided by the annual flow of income or expenditure. Hence, it is estimated that close to 60% of GDP in 2009 will be accounted for by all types of Government debt. However, some cash reserves and ‘off balance sheet’ assets can be set against the total debt to arrive at net debt. So much for Government debt. The level of personal and corporate debt in Ireland is enormous following the politically and tax-driven commercial & residential property bubble.

It would be interesting to have an overall view of all types of income, expenditure, assets and liabilities in Ireland – distinguishing between Irish households and domestic enterprises, on the one hand, and large-scale financial asset-holding companies parked here on the other. Some idea of the sheer scale of the latter can be gleaned from CSO data on ‘Resident Holdings of Foreign Portfolio Securities’.

The International Investment Position (IIP) comes some of the way to providing an overview of the value and composition of the balance sheet stock of Ireland’s foreign defined as ‘financial assets (i.e. the economy's financial claims on the rest of the world) and its foreign financial liabilities (or obligations to the rest of the world)’

The latest available figures indicate a total of €1.338 Trillion (yes trillion and not billion) in Irish resident holdings of ‘foreign portfolio securities’ (equity, bonds and various money market securities) on 31 December 2007 (claims on the rest of the world). Holdings by Irish ‘residents’ of US Treasury securities, alone, was close to $46billion in June of this year (up from $20billion in June of 2008) according to the US Treasury (table here)

That amount exceeds total holdings of US Treasury securities in any of these countries: India, Canada, France, Netherlands, Norway (Luxembourg holds over $100billion)
In another interesting comparison, as Michael Taft has pointed out

To put this in some perspective, Ireland’s €1.3 trillion held abroad compares to the foreign holdings of French residents of €2 trillion – even though the French economy is more than ten times larger than the Irish economy.

However, an unknown but extremely large proportion of this is accounted for by various financial funds located in Ireland (including, for example, some housed at the IFSC). Some of these include ‘corporate bodies who have a centre of economic interest located here, including branches of foreign-registered companies.’ Along with Luxembourg and Iceland, Ireland appears to be a major hub of cross-national financial flows and deposits – relative to its small size in terms of population and GDP.

The total extent of liabilities to the rest of the world is larger still. If we add Government, corporate debt we get €1.692 Trillion in March 2009

Out of this total, Government debt comes to a mere €60billion in March 2009 (up from €34bn in March 2008)
To get some idea Table 3 of the Report shows that of €2.267 Trillion, €1.181 is accounted for IFSC alone. There are other huge-scale foreign financial interests ‘parked here’ (in referring to such interests as parked I am assuming that such entities are availing of low taxes as well as other benefits). A small proportion of their total asset/liability position is represented by financial service production which enters into Irish GDP.

On the liabilities side, there are equally vast sums – the bulk of which is portfolio investment (obligations to the rest of the world).

Table 1 in that Report shows an additional €831 in ‘financial derivatives and trade credits’ on the asset side matched by €839bn on the liabilities side. To put this in perspective, total annual income in Ireland is projected at about €160 billion this year. So, we are talking about big sums.(The ‘net IIP’ position was just a tiny €31bn in 2007 – merely the entire size of projected tax revenue this year).

Irish banks wouldn’t be so heartless as to invest in overseas bonds rather than job-creating industry here in Ireland would they? Yes they would. An exclusively privately owned banking system runs for profit for people in the first place. What did the regulators ever do for us as Monty Python might have said. We need at least one State retail bank, one National Enterprise Recovery Corporation and one local community bank building on, and extending, the work of Credit Unions.

The best argument for retaining at least one State Retail Bank and not privitising all future nationalised banks is provided by the following:
"We have a growing population, full employment, strong job creation, rising household income, a high savings ratio together with strong retail sales and industrial production. This economy is in great shape and the outlook remains positive," Brian Goggin, Bank of Ireland Chief Executive said at a press briefing on the bank's results (Finfacts June 2007).

As Michael Hennigan wrote on 6 June 2007
“Irish Economy: No crash in sight nor credible strategy to maintain export-led growth in long-term; Overseas commercial property to remain investment of choice”

During the Great Famine of 1848 grain in plenty was being exported as millions starved and over a million emigrated in the immediate aftermath of that calamity. Without signalling a prophecy of doom or attempting to draw a serious comparison between what happened then and what might be coming our way in the coming decade: Is it possible as the Irish exchequer takes on the winding down of fictitious loans and asset values a whole generation is condemned to high personal income taxes, consumption taxes, borrowing to pay off the lenders, economic stagnation and resumption of outward migration? Nobody wants that to happen but if there is any basis for it in the future I cannot see how a much better educated, confident and fair-minded younger generation will put up with it. They might just be prepared to support a political stimulus package involving a different way forward to the neo-liberal Dublin Consensus that is a plague on our house.