The Irish Credit Bubble

Slí Eile: Here is a link to an interesting paper by economist Morgan Kelly at UCD.

Reforming the Public Servic: More on Govt Prog

Slí Eile: Continuing on the Renewed Programme of Government - the Section on Reform of public services (p33) contains some good (and long overdue proposals for change). However, as with the follow-up to the OECD Review published in 2008 on Irish public service reform, change is happening at snail’s pace and it very much ‘top down’ rather than led from the ranks. The collapse in Partnership adds to the difficulty of any real consensus-based reform for the foreseeable future.
Paradoxically, the imposition of ‘control and command’ more than ever in regard to every single post subject to the public service moratorium allied to micro-management form the centre of relatively small grant payment runs counter to the spirit of the OECD report which advocated more delegation of responsibility and authority to decide on resource allocation allied to ‘working within budgets’ and being called to account for outcomes and delivery rather than micro-management of input and process. The system does not seem to learn or apply the lessons of past failed initiatives from the 1960s Devlin Report onwards.
You may be interested to note that, forty years ago, on 20th November 1969 in a Dáil debate on the Devlin report for public service reform

David Thornley, TD stated:
The Minister enjoys a justifiable reputation for the firm way he controls the Civil Service. I wonder could he elaborate on the well-known Civil Service phrase “in due course?” It seems to us on this side of the House that no matter what questions we ask about the Buchanan Report, the Devlin Report, the Todd Report and one hundred and one other reports the phrase “in due course”, whatever that means, seems to hang over the point which we are to have explained to us when major social decisions are to be taken by the Government in the light of these reports. As a student of the Civil Service, I have often wondered what the phrase “in due course” means in specific terms.

The then Minister for Finance (with responsibility for public and civil service reform), a certain Charles J. Haughey replied to Dr Thornley in the following terms:
It is a phrase that is used when you cannot use anything more specific.

Lets say that things take time ….

Sports, Arts, Tourism, Irish language
On reading this short section (p37-38) you would never think that Bord Snip had proposed vaporising this area as a Department (along with that other national non-priority in the view of Bord Snip – Community, Rural and Gaeltacht Affairs. The sentence about working with the ‘arts, sports, cultural and tourism sectors in the development of initiatives and opportunities for Ireland to capitalise on the proximity of the London 2012 Olympic Games’ (p38) is heavy on verbs and light on specifics. Still it is a good idea and worth following up as part of an imaginative investment strategy to get people back to work and avail of market opportunities in the run up to 2012.

The Renewed Programme for Government is long on aspirations and scant on exactly how and when various commitments will be delivered. A worthy example of this is the following:
As promised in our “Smarter Travel” policy, following the completion of the rapid transport studies in Cork, Galway, Waterford & Limerick cities, we will, starting in 2010 provide a high quality integrated, accessible public transport service to within 800 metres of every home.
Sounds good. I’m all for that. It is worth noting that massive capital investment has gone into roads, the port tunnel, M50 etc – all of little benefit to the environment and effectively taking scarce resources away from investment in a proper rail and bus service. Again and again, short-term thinking and blinkered cost-benefit analysis on railways in the 1950-1970 period exacted a huge long-term and environmental cost.

We will end long-term homelessness by the end of 2010 through the implementation of “The Way Home”, Ireland’s strategy on adult homelessness 2008-2013.
But, exactly how?, where? How much cost? Which agencies?

Education
The commitment to additional teachers in primary and secondary schools is vague (is it additional to the existing numbers?). One way or another the pupil-teacher ratio will increase since even a modest increases in teacher numbers will not be sufficient to absorb demographic pressures.
All in all, like its predecessor the Agreed Programme of Government in 2007, the Renewed Programme for Government is a two-pony carrier – one pony with lots of green imprints with vague timelines and costs and – in this case – a number of high-profile ‘concessions’ (fees at third level, teacher numbers and reform of donations); the other pony with a very nasty fiscal agenda indeed. We haven’t seen anything yet.

The commitment to ratifying the Antarctic Treaty, along with other nations, is indeed commendable. It would also be welcome if Government implemented and enacted legislation giving workers collective bargaining rights. Not a word about worker rights in the Programme. Strange. What about the Charter for Fundamental Rights (Lisbon Treaty)?

New Year Resolutions?

Slí Eile: Remember the Renewed Programme for Government (early October)? In the meantime we have had Budget 2010. Following earlier blogs on the Renewed Programme for Government further observations are in order:

'Subject to European Stimulus Funding, we will make broadband available to every house in the country by 2012.'
What’s this? Did I read the dreaded S word here?
Banking Reform (p13 in ms Word version) contains some welcome, but not new, proposals for putting a new code of corporate governance on a legislative footing and extending this to all publicly quoted companies and state-sponsored bodies. Pending legislation, ‘all credit institutions participating in NAMA or availing of a Government Guarantee will be expected to comply fully with the key principles of the ‘Combined Code’ (p14). We look forward to seeing the timely and practical application of all this including early legislation. The issue of personal indebtedness and family home protection features (p15). This has been a relatively neglected area and one where an alarming landmine awaits. The extent to which Governments, in the future, will provide for protection here will be vital to the project of economy recovery with fairness.

A More Caring and Just Society (p16) fails to convince or excite. It is long on aspiration and pious sentiment, short on timescales, costings and hard choices. ‘A universal health service’ is nowhere near completion if Government continues to pursue the two-tier system as it is relying on a mix of private tax breaks, private insurance and seriously under-provided services to children and families in need. Continuing failure to provide for carers, to implement the strategy on mental health – to take two examples – speaks volumes about a society that can find the money to recapitalise a largely unaccountable banking system but not for social projects.

‘We will develop and put in place a regulatory framework for the provision of after-school services.’ (p20)
Why not just inject €2bn to provide for a full-day, full-year provision for all children aged 3?
Justice and Crime

Two standalone shockers:
‘We will develop a White Paper on Crime’ (is that after the Green Paper and before the Implementation Group Report?)
‘We will progress our new Prison Building Programme’ (smells like a fiscal stimulus package?)
There is a welcome commitment to creating an official House Price Index based on property sale price data to be placed in the public domain (p29)
Education
See previous blog on ‘fee fees’

Democracy and public services
There are worthwhile ideas and commitments in this section and these have received relatively little media attention since the Programme was agreed. The idea of an electoral commission is not new. Neither is reform of the Seanad. When it comes to political institutional reform there is a clear historical track record of inaction and delay – which points to the difficulty of reforming anything in which there is a widespread political party comfort with the status quo. On local government reform the only thing on offer if a White Paper followed by ‘consultation’. In other words no change for a long time and certainly not in the remaining life of this Government
The mention of legislation to create a more open and transparent system of appointments to public bodies is welcome. There is an urgent need for an independent system of public appointments to the non-executive boards of public bodies.

In all, the Programme commits to three White Papers (on crime, local government reform and defence). More next time - public sector reform.

Ireland seeks Hedge Funds

Nat O'Connor: A article in the Financial Times states that the Government is seeking to attract hedge funds to Ireland.

Dublin to open door for hedge funds (19 December 2009): "The Irish government has passed legislation to make it easier for hedge funds based in the Cayman Islands and other tax havens to move to Dublin."

The new legislation reportedly "cuts red tape to a minimum" in terms of moving companies to Ireland.

The Minister for Finance is quoted as saying that the finance bill early next year to will "strengthen Ireland's competitive edge in this important sector".

Howver, the FT states that many investors are looking for hedge funds to be more tightly regulated. Billy Kelleher, Minister of State for Trade and Commerce, is quoted as saying that "Funds are looking for stronger oversight, and better regulation, and we believe Ireland has that in spades."

Patrick Honohan, Governor of the Central Bank in a speech (1 Dec 2009) has written that "I will certainly not allow Ireland to become a soft option for firms or activities that are no longer welcome elsewhere."

However, Honohan concludes "the primary onus for sound operation must fall on the directors and management of the banks themselves. They must renew and reform their business models and culture to ensure that a recurrence of such a collapse becomes unthinkable. As has been suggested by one former regulator abroad, a watchword for supervisors in the new era must be: trust less, verify more."

How is this different from what has gone before? Is Irish banking regulation really tightening up? And can it be tight enough (and expert enough) to regulate an influx of hedge funds?

Taking stock: 2010

Slí Eile: Following previous blogs about the principles underlying a progressive strategy for economic recovery with fairness, here are another four:

Principle VI SORT OUT BANKING – GET CREDIT FLOWING AGAIN
NAMA is not the only game in town – even now. There is a strong case for:
* Using every means to pay much less for liabilities transferred to NAMA (should be referred to as the National Liabilities Management Agency);
* Take a majority holding in one or more publicly quoted banks sooner rather than later; and
* Establishing a State Retail Bank along with a State Investment bank capitalised from holdings of existing state enterprises – these banks, subject to public scrutiny but with delegated independence, would compete with private banks on the global market taking deposits and extending loans
* As a matter of urgency a State Industrial Lending Agency – along the lines of the old ICC. This should be established to guarantee loans to small and medium enterprises and ensure that businesses stay in business and people stay in their jobs.
* Establish agencies to provide long-term and infrastructural financing – something that, historically, private sector banks have failed to provide.
The FT carried an interesting article, recently, (‘How to take moral hazard out of banking’)
reporting that Mervyn King, Governor of the Bank of England has called for ‘utility banking’ which would limit banks to their legitimate purpose – financial intermediation and payment facilitation.

Principle VII REFORM PUBLIC SERVICES DELIVERY AND CORPORATE GOVERNANCE
Linked to a reformed and enhanced public service is the need to democratise institutions (as well as reform public sector institutions, work practices and responsiveness). Our education and health sectors (to take just two examples) remain profoundly undemocratic and exclusionist in spite of all the talk about customers and inclusion. Likewise, the workplace needs to become a place where skills, team-working and decision-making are not the preserve of the shareholders or the managerial elite. Openness, transparency and accountability must reach into every public, private and voluntary organisations (but especially those in receipt of State subsidies or in charge of delivering some part of public or social services). We need to begin a process of reform of our political institutions to restore accountability, transparency and openness.

Principle VIII SAVE THE PLANET – WITH A GREEN NEW DEAL
The necessary progress towards a low-carbon economy means more than just carbon taxes; it constitutes new relationships between sustainable production and consumption. This can revive the economy through an innovative, resource-efficient society with environmental and business payoffs. We will need new financing mechanisms (e.g. Green Bonds), joint public and private enterprise initiatives, and greater grass-roots participation and collaboration.

Principle IX GOOD GOVERNANCE, PARTICIPATORY GOVERNANCE
We need a major shift towards ‘stakeholder governance’ in our political and economic institutions – private and public. The growing inclusion of employees, consumers, communities and environmental interests in decision-making process has been shown to add to productivity and sustainability and can lay a new foundation for prosperity.

NAMA revelations

Nat O'Connor: The Irish Times has a series of articles on NAMA, based on documents they got through freedom of information requests.

These include a Fianna Fáil backbencher's call for “serious and major” improvements to the NAMA legislation, the Law Society expressing concern about the NAMA assets not appearing in the Land Registry or the Registry of Deeds, and Ulster Bank arguing it would be eligible to participate in NAMA after all.

It's a pity that more of this information wasn't in the public realm when NAMA was first introduced, as we might have had a more balanced debate about its merits and flaws. Likewise, it is a pity that this information did not come to light until after the NAMA vote in the Oireachtas and its signing into law. Nevertheless, the releases provide food for thought on how NAMA will operate.

More freedom of information releases on NAMA and other topics can be found on The Story website, which is "dedicated to sharing documents, combing and combining data and promoting transparency in public life".

Out of recession?

Slí Eile: There are three types of economists - those who can count and those who cannot count. Counting two quarters of growth in GDP in a row qualifies as a 'recovery'. So, lots of waiting on the next CSO Quarterly national accounts data. In the meantime, consider an article by the Economist
here. There is talk of the 'Great Stabilisation' following the Great Recession. It is right to say that nobody knows how long, how much, where. In the meantime, the 'Markets' are god and their sentiments judge the world.

Spinning our way out of recession

Paul Sweeney: A small increase of 0.3% in GDP in Q3 of 2009 means that Ireland is no longer in recession according to some economists, and this was the spin put out by the Tánaiste and Minster for Enterprise Trade and Employment Mary Coughlan on Thursday’s radio. She was commenting on Thursday’s National Income figures for Q3 2009

Ms Coughlan also seemed to take comfort from the decline in Q3 over Q1 & 2 figures. Tiny movements in a couple of quarters are no indicator of the end of the deep recession. Such short-termism was at the heart of the financial crisis and a major cause of the recession. Too many serious people swallowed the one swallow syndrome. Not again, now?

National Income in the year to September fell by a massive 11.3% in GDP. This is a wee bit less than the decline of over 12% in the previous two quarters, but it does not mean that the recession has bottomed out. The next quarter, Q4 includes Xmas, and could be below the 12% decline, but the impact of the savage Budget will depress domestic consumption further, deep into 2010.

Furthermore, it is wrong to take GDP as the marker simply because it was more favourable than GNP. GNP, not GDP is what is accepted by economists as the better measure of National Income in Ireland. The collapse in Irish GDP was a still huge fall of 7.4%, compared to the even bigger fall of 11.3% in GNP for year to Q3, 2009.

Ireland’s economic collapse in GDP was almost the worst in the world in 2009. The deflationary impact of the Budget will mean that the economy will continue to decline in 2010.

Consumer spending, which some economists seem to believe does not matter in Ireland, was lower by 7.3% in Q3 than in the same quarter in 2008. Investment was down by 35%, though exports were up in Q3.

In 2010, unemployment will rise, assisted by the Budget, even if many more foreigners flee our shores, and Ireland will have a further fall in National Income.

Hunter commentators and the vanity of ignorance

Colm O'Doherty: It’s true, every cloud has a silver lining. The ongoing political crisis - stemming from the failure of politicians to increase social well-being in a period of economic growth and then reducing the well–being of vulnerable groups - creates an opportunity for hunter commentators in the media to “kill” those who stand in the way of the hunters.

As Bauman points out in Liquid Times (2008), hunters are unlike gardeners, not interested in social order or social progress. They are the economistas whose sole task is another kill or financial coup big enough to fill their game bags to capacity. It is not their duty or responsibility to make sure that the forest or society is looked after and replenished. In fact, as one of their ilk declared yesterday in the Irish Times, it’s not their responsibility to know anything about how society works – it’s not her worry.

Sarah Carey in her piece yesterday paraded her ignorance on how the state is run and declared that it doesn’t matter who is at fault in creating our financial destruction, as long (the implication is) as she can continue to gather a few trophies for herself. Yesterday the trophy heads belonged to the people who provide us with electricity. Her piece was titled Sorry boys, it’s your turn to share the pain now. Her message is clear – we should all become hunters now – because the alternative is relegation to the ranks of the game, i.e those on social welfare.

The culture of hunting in our society is very strong, and commentators receive their licence to hunt from a media/ political establishment that likes to hunt in packs. It stands to reason that, in a world populated mostly by hunters, ignorance of the consequences or realities of individual actions becomes a source of pride or vanity. The 'I don’t know what happened, I only want it fixed' attitude is an abdication of responsibility and a badge of honour for hunters. Yes, hunters do vote, but presumably they vote without taking any responsibility for how things pan out. Through their hunter-commentator platforms they provide perfect cover for the politicians who have run the country into the ground.

NAMA debt

Michael Burke: Leading critics of NAMA argued prior to its inception that it would provide no new credit in the economy. Writing in today's Irish Times, Karl Whelan shows how his prediction and that of many others was entirely correct. This is despite repeated assurances from Ministers that NAMA assets could be used by Irish banks as collateral at the European Central Bank to increase lending. This was another of many recent fictions.

But there may also be another, imminent negative effect arising from the creation of NAMA.

Bond investors are more comfortable lending when there is greater security on their principal. I have argued elsewhere that currently bond investors show a clear preference for lending to governments engaged in reflation,
and that they take fright when there is no clear improvement in the economic and deficit outlook.

It is not necessary to agree with the interpretation of reflation to recognise the simple truth regarding investors' preference for getting their money back. But that begs an awful, €54bn question. If bond market investors take a negative view of NAMA's viability, will they buy the bonds, or, if so, what eye-watering yields might they require to accept the risk? In either event the negative knock-on effects on government debt could be considerable.

In such a scenario, steps to nationalise the banks will be necessary but insufficient to avert a crisis. Any call to nationalise the banks should be with the strict proviso that it must be without compensation to either the failed banks' share or bondholders. Otherwise, taxpayers would be taking on debts which are a huge multiple of €54bn.

Using the recession as an opportunity for Irish economic development

Tom O'Connor: The ESRI expect national income GNP to fall by 9.4% overall in 2009, and by a further 1.8% in 2010, with growth returning in the last quarter of 2010. Accompanying these are falls in investment of 15.5% in 2009 and 30.5% in 2010. The ESRI prediction of a return to growth at the end of 2010 is consistent with Brian Lenihan’s statement that at the end of 2010 we will have turned the corner economically.

There is a dangerous complacency about these projections. Firstly, it is hard to see how growth will resume in the end of 2010 when the fall in investment is double what it was in 2010. The four billion Euro taken out of the economy next year, given that it is in wages and social welfare, is likely to have the effect of taking €8 billion in spending power out of an economy which is also predicted to see investment fall by a massive 30%.

The more likely outcome for 2010 is that GNP growth will not resume in the last quarter, and the outturn for the year is likely to see GNP fall by 4%. The figure of a 30% fall in investment would signal that there is no real expectation that the banks will start lending strongly in 2010. In fact, this has been strongly hinted at by senior bankers themselves.

As a consequence, we are unlikely to see live register unemployment fall below 400,000. The danger here is that, with combined business investment falls of 45% over 2009 and 2010, positive investment may only start in 2011 from a position where it has been going backwards for two years. This will delay significant reductions in unemployment as existing and new businesses are starved of cash.

Prof. Patrick Honohan of the Irish Central Bank told a Dail Committee yesterday that the banks would need further capitalisation. He wasn’t prepared to put a figure on this, or state whether it would be a 50% ownership by the state or more. It is believed by many that the banks will need another 9 billion, and that this will come from the National Pension Reserve Fund.

The Bank of Ireland and Allied Irish Banks have been recapitalised by €7 billion to date. This is written down as an ‘investment’ by the NPRF in the banks. A further investment of €9 billion would leave 5 billion in the National Pension Reserve Fund. This capital injection is seen as the final intervention to fully stabilise the banks.

As a result of the choreography needed to put NAMA and recapitalisation in place, money will not start to flow; this which underlies the ESRI projection of a 30% fall in investment. In the meantime, there are viable investment opportunities available which will not happen unless a new source of investment is found.

There are about 350 incubated companies at the moment, mainly in the high knowledge area, and the government has been and continues to pour €1 billion a year into them from exchequer funding. There are over 10,000 researchers, including PhDs, working here.

13 companies were ‘spun out’ as fully fledged trading companies. However, once they are spun out, they are at the mercy of venture capitalists to secure capital. This restricts their growth to employing only about 8 people per company, as they need to grow slowly, resulting from venture and other capital investment in them as businesses - which is far too low. Indigenous small high-knowledge companies of this type are either kept small or else bought up by huge global companies who can then make handsome gains on the research and development that was paid for by the Irish state.

This then further weakens our indigenous company base, and makes us more and more susceptible to global economic shocks where global companies shut down and set up elsewhere. It also involves a knowledge-stripping of Irish companies which the Irish taxpayer has paid for, which delivers the innovation profits to companies based in New York or elsewhere. This may make a handful of Irish entrepreneurs immensely wealthy overnight after the takeover of one of these Irish companies, but it delivers poor returns to the country.

Paradoxically, given the recession, we have an opportunity to try to redress this problem to some extent. If the Irish government were to use some or all of the €5 billion left in the National Pension Reserve Fund to spin hundreds of high knowledge companies on the market with sufficient capital to allow them to become large players rather than fledgling ones employing less than 10 people, a significant opportunity for long-term sustainability of Irish-owned high knowledge companies could be created for the first time.

Fledgling companies are currently bought out by huge global companies because they are too small to survive, despite their excellent business ideas. They do not have the economies of scale to compete seriously. The government now has an opportunity to spin out large companies with a large capital and asset base to allow them to compete on their own on International markets.

These in turn, within a reasonably short period of time, can employ hundreds of workers each at the very least, and become internationally sustainable. In turn, this would contribute to an improvement in our balance of payments as these Irish companies would not engage in either transfer pricing or profit repatriation, which most of the large global Trans National Corporations do.

The alternative to not investing significant resources from the NPRF and generating significant employment creation is that most of the 10,000 researchers, including PhDs, will continue to do more post docs as they do now, or emigrate; there will still be only a trickle of a dozen or less than 20 companies at most which will be spun out into the market, and because of their small venture capital funding and small size they will employ less than 10 people - and then get taken over by TNCS who will reap the benefits of years of Research and Development which will have cost the state up to €3 billion. Thus, the Irish state acts as a nursery for global capital. Once knowledge has been harvested, these companies may then site elsewhere.

A plan of this nature could create thousands of jobs. It would create sustainable employment and start the process of making Ireland a leader and not a follower. It would be attractive to all social partners, benefitting workers and entrepreneurs. It would also give the country an opportunity to start breaking the high-risk twin dependence on both construction and global capital.

Global companies will always play a huge part in Irish economic development, but we need to start the process of taking control of our own economic affairs. Through large Irish companies, in high-knowledge areas going forward, such as sustainable energy, biomedical, telematics and food, we can start to insulate the country from the economic shocks which cause recessions. In this way, the current recession can be used as an economic opportunity.

The Dutch experience

Michael Burke: There is a very useful post here on the reflationary policies in The Netherlands. The Dutch join a long list of European countries engaged in reflation. The effects are clear; rebounding economic activity, stabilising/declining government deficits and much lower bond yields than Ireland.

"It's positive from a fiscal perspective"

Slí Eile: Haven’t heard much from Bank of Ireland Chief Economist, Dan McLaughlin, of late but this statement must qualify as Quote of the Day: 'It's positive from a fiscal perspective…The government was anticipating a much higher unemployment figure and therefore the benefit payments they'll have to pay out is coming in lower than projected'
The latest unemployment figures by the Central Statistics Office today make for grim reading. They are based on the results for the Third Quarter of 2009.
The headlines indicate a ‘monthly standardised unemployment rate’ of 12.4% (or 12.0% in April-June 2009). The other story underneath the headlines is the fall of about 7% (35,000) in the population of non-Irish nationals between Q2 of 2008 and Q2 of 2009. The bulk of this fall is in the EU new accession countries. It seems that lots of single Poles in their 20s and 30s, many of them working in construction, are heading home (or elsewhere) – at least those who have lost their jobs (see Table A1 for overall summary of changes in non-Irish population).
The latest (pre-budget) forecast from the Department of Finance is for the rate of unemployment to climb from a projected average rate of 11.8% to 13.2% in 2010. This, already, looks like an under-estimate. Moreover, researchers at the Economic and Social Research Institute have stated in the latest Quarterly Economic Commentary: ‘We now expect the rate of unemployment to peak at close to 15 per cent.’ (or 14.8% in 2010 per Summary Table)

A further increase in unemployment in 2010 will, according to ESRI figures, represent an additional 55,000 unemployed persons (322,000 over 267,000 on the ILO definition of labour market status). At a conservative estimate, that level of increase would add about €1billion Euro to the Social Welfare bill. Other costs would arise, in addition, by way of lost tax revenues and negative impact on consumer spending. Still other impacts include mental health and the social costs of forced unemployment especially when these are associated with a whole cohort of people permanently scarred by the experience of long-term unemployment at an early stage in adult life.

So, when you hear some commentators and economists talking about ‘recovery’ some time next year they are referring to growth in measurable GDP or GNP – not a decrease in human misery as indicated through unemployment. Neither does a recovery in share prices constitute an adequate social and economic recovery. Only a decisive cut in unemployment and restoration of ‘full employment’ would signal recovery

[It should be pointed out that the true extent of unemployment is under-stated in all of the above figures since the CSO point out that if unemployment were reported to included ‘unemployed plus marginally attached plus others not in education who want work plus underemployed part-time workers as a percentage of the Labour Force plus marginally attached plus others not in education who want work.’ you would arrive at a figure of 15.8% in the second Quarter of 2009 (Table 20).]
Behind every statistic of averages are other statistics of particular groups. So, in this case, we are looking at a disproportionately higher unemployment rate among young people. Behind an average rate of 12% unemployment rate (ILO measure) in the second quarter of 2009 we find a figure of 36% and 23%, respectively, for 15-19 and 20-24 year olds). Moreover, the rate of unemployment among young early school leavers (aged 15-24) is higher still (although the data are not shown separately in the CSO figures for the second quarter of 2009). Some notion of the extent to which unemployment is highest among the young who leave school early is presented by the latest information available March-May 2008 (Table 9C in QNHS)when the unemployment rate among early school leavers aged 18-24 was 29% or 21% of all persons in this age group. This contrasts with an unemployment rate of 7.5% for all persons aged 18-24 in early 2008. So, before the onset of the Great Recession, unemployment among young early school leavers was running at three times the level for all young people in this age group. Since then, unemployment has soared and the relative position of those who have left school has surely worsened over the last two years. With an unemployment rate of close to 30% for 18-24 year olds in the second quarter of 2009 it is likely that the rate has increased further since the earlier part of this year (lets assume up to 35% at least by now). Where does that leave early leavers in the 18-24 age group where the rate is higher still? No wonder there is huge excess demand for further and higher education courses among those who have completed second level schooling. But what about those who left with a Junior Cert or, perhaps, no qualification? And how they are faring in 2010 when various allowances, maintenance grants and welfare payments are either withdrawn or reduced significantly? What hope is there for those people any time soon? Surely, they deserve better.
Sometimes I wonder if – unconsciously perhaps – some in authority and in the commentariat just wished that these potentially troublesome persons literally went away – through emigration – when labour market conditions pick up abroad.

Then it will be said that: Very unfortunate but we could help deflating the economy to appease the markets and ‘restore confidence’
Its all the fault of those greedy insiders who hog jobs and high salaries and don’t make room for the young (at much lower pay rates of course)

- a type of Wage Fund doctrine that sees the world in very static terms.

Will we witness a surge in political awareness among the young and their families? Where is the spirit of grey army venting their anger in the Temple in October 2008?

Budget 2010: landlords 1, SW recipients nil

in 2010, the savings made by cutting Social Welfare will be almost exactly the same as the spend on tax breaks for landlords (SW saving = €809 million in a full year, landlords tax breaks = €782 million in a full year). You can read the full details in TASC's post-Budget analysis, available here.

Bank Guarantees, NAMA and budgetary retrenchment

Slí Eile: In an article in yesterday's Business Post, Colm McCarthy made an interesting comment that should not go without attention. He wrote:

The exchequer costs of the bank rescue need to be minimised ruthlessly, and any opportunities to impose cost on bond-holders exploited in full when the guarantee runs out in September next year. Compensating providers of risk capital to failing businesses infuriates taxpayers, and gives capitalism a bad name. In approaching bank re-capitalisation next year, there should be no nervousness about revealing fully the capital losses which have occurred.

Budget 2010: carbon tax

Nat O'Connor: The Taoiseach goes to the UN climate change summit in Copenhagen flanked by two Green Party Ministers. Budget 2010 introduced Ireland's first carbon tax at €15. Ireland has never looked greener, but have we got carbon tax right?

The Economist magazine (5-11 Dec 2009) says that "Economists reckon a carbon price of around $40 is needed." (p. 12). That's around €27. Friends of the Earth present a more technical paper here.

I am not an expert in this area, but I have a few queries that I hope others can answer.

A carbon tax is meant to be a one-off pricing of carbon emissions and it is meant to be a sufficient disincentive so that the producers and consumers in the economy make a decisive shift away from oil and other carbon-heavy resources. We are setting our tax at just over half the recommended level, so it looks like we'll have to nudge it up incrementally over time. Yet, isn't incrementalism part of the problem, that we need to be decisive about this in order to create the disincentive effect?

We already disincentivise a number of carbon-heavy things in our economy, such as through the 'old reliable' excise on petrol and diesel. But we effectively have a situation where carbon price is mixed in with excise. Wouldn't it be more ecological to undertake a thorough set of tax changes and replace excise with carbon tax, plus ensure that carbon tax meets the full €27 in all cases?

To clarify the point, we are now going to have two situations in parallel:
1. Some fuels (like petrol, and coal since 2005) are affected by Mineral Oil Tax. I am going to assume that there is more than enough tax added to bring it over a carbon price of €27 or more. Hence, we could convert some of the excise to carbon tax.
2. Some fuels (like turf) are only affected by the new carbon tax, so the carbon price is effectively €15. We should really go the whole way and increase carbon tax here to €27.

A carbon tax in one country seems to depend on other countries also having a carbon tax, so that oil-based products are already carbon-taxed when they arrive in Ireland. In the absence of global agreement on this, should Ireland impose some or all of its own carbon tax on imported goods (like plastic) from countries that do not impose an equivalent tax?

In short, if we are taking global heating and climate change seriously, why shouldn't Ireland go all the whole way and introduce a carbon tax at €27 (or more)?


Of course, the disincentive to use carbon-heavy resources assumes that it is possible to move to alternatives. In this respect, governments must lead the way towards alternative energy sources, public transport, etc. But these too will either require governments to spend (and carbon tax provides revenue) or else they require private investment (which will be more incentivised by a strong carbon tax, not a weak one).

The Economist editorial (p. 11) provides a reality check about getting this right:
"Although the benefits of averting... catastrophe are incalculably large, the costs of doing so should not be enormous - as little as 1% of global output, if policy is well designed... This newspaper reckons that the world should fork out, rather as householders spend similar proportions of their income on insuring their homes against disaster."

Later in the same piece, they note: "A percentage of global economic output is affordable for a worthwhile project. Saving the banks has cost around 5% of global output."

Budget 2010: public sector pay cuts in context

Paul Sweeney: As reported by the Financial Times, the Greek Prime Minster admitted on Friday December 11th that the Greek public sector has systemic corruption: “However he made it clear that Greece would not follow Ireland’s example and enforce drastic wage cuts”.

The viciousness of the attacks on the Irish public service in the run up to the Budget was such as to lead an observer to believe that it was corrupt and bloated (the adjective used with the words “public service” by certain commentators). In fact, of course, up until now the Irish public service has been relatively free of corruption and, as I show below, is scarcely bloated. The downsides of the second tranch of imposed pay cuts - in addition to deflation and a possibly delayed recovery - could potentially include, in the long term, creating some of the conditions favourable to corruption.

Regarding its 'bloated' size, the Irish public service is actually small and similar in size to that of the USA. The recent OECD report into its performance called for some improvements, but did not indicate that it was in any way bloated. There is always room for improvement in reforming public services. Similarly, there is plenty of room for reform of private sector governance – especially in banks and with regard to remuneration.

The campaign to soften up the public to accept pay cuts was remarkably successful - in the short run. The public were tuned into expecting pay cuts in the public sector.

It was argued that the public sector enjoyed massive “premia” over the private sector. The ESRI, which may have suffered some damage to its valuable reputation as an independent, learned institute, appeared to adopt a campaigning role, on behalf, it seemed, of the Government. It appeared to publish the same report over and over, asserting a huge premium. Yet, when the dust settled, a more sophisticated study by Callaghan and Foley of the CSO, read to the Statistical Society, narrowed the premium very considerably. Internationally, public sectors do pay more - in general - than the private sector (except Greece perhaps?).

Remarkably, this latter study got no publicity, whereas the reports by the ESRI got screaming headlines. If more and more people are now questioning the independence of ESRI, its important contributions, for decades, to evidence-based policy-making would be undermined. However, the institute was a victim of exaggerated reporting by certain campaigning journalists.

TINA - “there is no alternative” - was invoked to justify the cuts. We did need to make an “adjustment” of around €4bn. It was originally planned by Government that it would comprise cuts and taxes. In the end, the representatives of the very well-off won the battle. No taxes were to be raised, beyond even more taxes on consumption (carbon) which impact hardest on low-income groups.

Of course, there were many taxes which could have been raised. Among mainstream economists, only Garret Fitzgerald is making this vital point and he makes it well and regularly. Is he Ireland’s only Saltwater Economist? Are the others all Freshwater Economists?

The tax on higher earners utilising avoidance schemes could have raised €207m instead of a paltry €50m, if it was on earnings of over €100,000 (it is levied only on tax avoiders), and if it had included pension tax-avoidance schemes. A temporary levy of a mere 2% on corporate incomes would have raised €614m. A tighter tax on fugitives would have raised up to €65m in its first year, and increasing DIRT tax would get €125m, with other taxes raising much more again.

Instead of raising these taxes, this government took money off the blind. It took money off carers, and off those on the dole.

Before the Budget, it was said that if public service workers’ pay was not cut, then welfare would be cut. It was presented as either/or. Why then did public service pay get cut AND welfare also get cut?

And now the ground has been prepared. Private sector workers will have their pay cut. Overall, contrary to assertions by many campaigners, only about 15% of private sector workers have had cuts in their basic wage or salary. Many more have had reduced earnings due to less hours, cuts in bonuses and overtime. Only in the public sector have all workers had pay cuts. If the public sector workers have had pay cuts, why should private sector workers not have pay cuts too?

“When I become Minster for Finance, Ireland had the highest unit labour costs in the Eurozone”, Mr Lenihan said repeatedly on Budget day. This is untrue. Ireland has the second LOWEST unit labour costs in the Eurozone, after France (OECD). He has not corrected this yet. It is probable that he meant to say that the rise in unit labour costs in Ireland has been one of the highest (though not the highest) in recent years. All the erroneous claims around productivity and competitiveness are part of a broad campaign to get a competitive devaluation by pushing down wages.

Ireland has high consumer costs. We see this when we go abroad, and the data shows us second highest after Denmark. Cuts in wages will bring our price levels closer to the Euro average, but not in the way or with the speed the devaluationists want. The link between pay and price levels is not clear. Prices are determined externally, and much more by exchange rate movements. And why should only workers (so far - mainly public sector) take the pain. Have you asked your solicitor or GP for a cut in fees? You know what s/he will say!

The cut of €4bn is a massive deflationary cut of 2.5% GDP and 3% off GNP in 2010. If the carry-over of €3.5bn is added, the total deflationary cut is 5.6% (not 2.5% as Garret Fitzgerald said on Saturday). With these deflationary cuts, Ireland is in danger of sinking into a long decline.

Oh, for the good ol' days

Michael Taft: With public sector pay and social welfare cuts, with the Minister announcing a ‘national downward adjustment in wages’ (that’s pay cuts across the economy), and with the Government now sizing up public enterprise (which isn’t part of the Exchequer pay bill), it’s informative to look back at the previous ‘tough budget’ days – 1987 to 1989. What happened then?

Between 1986 and 1989:

Public sector wages rose by approximately 10 percent during that three-year austerity period – or above 3 percent per year. Between 1988 and 1989, public sector wages grew by 4.9 percent in one year alone.

General social welfare rates rose by even more – by more than 10 percent, or nearly 4 percent annually. But this masked targeted increases for the lowest income groups. For instance, those on long-term unemployment assistance saw their social welfare income grow by 24 percent in the two years between 1987 and 1989.

Private sector wages grew as well. The average industrial wage grew by 14 percent, or nearly 5 percent annually.

This was a period of high debt, high budget deficits and high unemployment. Of course, this was also a period of inflation, unlike today. But the Government tried a two-hander – it kept public sector wages and social welfare rates growing, while reducing taxation to ensure that net income grew in real terms; mostly with success.

And it paid off. Between 1986 and 1989, consumer spending increased by over 21 percent. Compare that to today’s collapse of 10 percent between 2008 and 2010 – more than ten times the rate of collapse in the Eurozone.

Back then, this increased consumer spending growth contributed to a growing economy. Today, wage and welfare cuts are contributing to a deflating economy.

I’d like to think that, even at this late stage, the Minister for Finance might take note. That’s the optimist in me. But with this government and its deflationary strategies – a lot done, a lot more to do.

Reducing the Irish cost base

An Saoi: Almost all of the focus to date in terms of reducing costs has been on reducing labour costs. This has been done by reducing the numbers in employment in both the Public & Private sector, and through the Public Sector pay cuts.

I want to propose a simple effective change in landlord law, which would enable all commercial tenancies to be renegotiated in line with current economic conditions. The Government has recognised that the previously normal upward only rent reviews were oppressive, and has moved to make them illegal in the case of any new leases. However, this has no effect on existing tenants, who must struggle on paying existing exorbitant rents.

I propose that all commercial tenants be granted a legally binding break in their existing lease. Such an amendment would adjust all existing leases to provide for this right. It would not, of itself, remove the upward only rent review provisions, but would rather give the tenant the right to walk away without penalty. This would enable them to sit down and negotiate with their landlords on an equal footing. If the tenant and landlord were happy with the existing terms, then there would be no need to amend the existing terms. If, however, the tenant was not happy with the current rent levels, then the landlord would have the option of reducing the rent. If no agreement was forthcoming, the tenant would have the right to surrender the lease with no right to a premium, or of course, no penalty. Game theory, I am sure, would play a serious part in these negotiations, and there might even be work for some unemployed economists.

Rents account for perhaps 15-20% of the turnover of many service activities. A decline of 50% in rents would enable businesses not only to survive and prosper, but to do so and cut prices.

Residential leases are normally for very short periods, rarely more than a year, and follow market trends much more quickly. Advertised rents on residential property have fallen by some 36% since May 2008, and it is likely that many commercial rents would have fallen by much more. Residential rent supports from the Department of Social and Family Affairs have effectively put an artificial floor under rents. Market levels in much of Dublin have already fallen below the DSFA rates set in June 2009, and perhaps need to be adjusted substantially downwards again.

It would also give the State a chance to walk away from considerable amounts of unwanted office space around Dublin and the rest of the country, and substantially reduce the rents on the rest, providing a substantial saving in costs.

There is perhaps just one problem – NAMA. It would show up the whole NAMA proposals for the farce they are, and would demonstrate that the assets underpinning the proposals are worth just a fraction of the nominal value given. However, perhaps the choice we have is between an active economy and continuing to continue to fool ourselves about the value of worthless land & buildings, trying to save landlords from their own greed.

'Unfair, unjust Budget fails the vulnerable, damages the economy'

Slí Eile: In an excellent and hard-hitting analysis and critique of Budget 2010 (the Irish one) by Social Justice Ireland (formerly CORI Justice) fresh off the presses last Thursday within 20 hours of the Budget speech there is a comprehensive and incisive account of the budget from an equality and anti-poverty perspective. It is well worth the time to study this 20 page document. It can be downloaded here.

In a telling comment it states that:

Government has placed its faith in the failed neoliberal economic model which caused many if not most of the current economic problems not just in Ireland but across the world.

Not only did the budget worsen the already precarious situation of the poor -working, unemployed or otherwise - it 'provides no pathway towards a credible, desirable future that Irish people can strive to attain'.
Nobody can accuse Social Justice Ireland of not outlining a detailed 'alternative budget' to the one brought forward. In November SJI published a detailed set of costed proposals and fiscal adjustments that would avoid any cut in social welfare. It can be downloaded here.
A criticism I have of the document and stance taken by SJI is that in common with that taken by many progressive commentators it seems to buy into the overall parameters set by the Government from April of this year (the €4bn adjustment split between expenditure cuts and tax hikes). This is not a good strategy and is one that risks turning a recession into a depression and a lost decade. We should make the case for higher spending, not lower spending, financed by taxes on the better off and employment generating enterprises. Another criticism I have is the commitment to a 'low tax' regime - albeit higher than our super low one currently - (the 'low' defined by SJI as a level of tax revenue just below the EU average). I would argue for going well above the EU average since the latter is only an average and reflects a wide range of tax takes including very low-tax countries in the East of the EU suffering from an excessive neo-liberal overdose following the collapse of communism in those countries.
However, all in all, the SJI paper is an excellent critique and stems from a positive and welcome values base. More power to their elbows. My hope for 2010 is that more and more commentators, researchers and activists can join forces to produce the data, analysis and policy thinking and actions to begin the transition to a new society based on values of fairness and respect for human rights over the dead hand of the markets. There is a lot to be done.

Budget 2010 will do nothing to get the economy out of recession

Tom O'Connor: Budget 2010 will cause immense hardship and will do nothing to get the economy out of recession. The four billion in savings could have been found in a variety of ways which would not drive people in to unemployment, poverty and housing repossessions, as this one will.

The current approach has been driven by a business group agenda which is hell-bent on driving down wages and social welfare across the economy. More of the same will be sought next year, with further demands for wage reductions and cuts in welfare spending. If left unchallenged, this will ultimately bring Ireland in to the low wage and poor welfare state model of the USA.

The government has cut public service pay by 5% on a €30,000 earner with a sliding scale of further cuts on extra slices of income between 7.5 and 15% ranging over incomes from 40,000 up to 200,000 and beyond.

A young fireman or nurse will be earning 34,000. At present, before their tax credits are applied, they pay 36.5 % of their income in taxes: In addition to the 20% basic tax rate, they pay an income levy of 2%, a pension levy at 6.2%, a health levy of 4% and PRSI at 4%. The budget pay cut will now reduce his and her income by 1,800 to 32,200. All of the above deductions will now still apply.

The tax take on this 32,200 will now amount to 7,932, so (s)he will come home with 22,268. Before last year’s budget 09 and the supplementary budget, at Oct 08, (s)he would have taken home 28,650. In 14 months to date, the nurse and fireman have lost 6,382 which is 22.3% of their disposable income. They will also have read on the papers that only 30% of private sector workers have taken any pay cut all.

Now consider the man or woman who earns over 500,000 per annum and who is self employed. Up to now (s)he has been able to avoid paying taxes through taking advantage of the 111 tax avoidance schemes that were in operation. Over the Celtic Tiger, s/he may have earned millions per year. Irrespective of how many millions he earned, s/he would only have paid a maximum of 20% in tax by taking advantage of tax shelters.

Now given that s/he has fallen on hard times and his/her income is down to maybe 500,000, s/he will have to pay 30% while still using many of the same avoidance schemes. The government only hopes to save 55 million in these schemes in 2010 even though, it is estimated that the current value of all of these is about 4.5 billion.

We can compare this position to a physiotherapist in a public hospital who now earns about 54,000. In the past 14 months, she has seen her overall tax burden, including the pension levy of 7%, PRSI, health levy and income levy grow to 57% on income over 35,400. So she wonders why now the self employed income earner only pays 30% on income of half a million or even 10 million.

Now her income after the cuts of 5%-7.5% is 50,700. She now also has a total tax and deductions bill of 18,159, taking home now only 32,541 paying tax and other levies at 58% on the income over 35,400. Going back 14 months, her total deductions were 14,370 out of her then income of 54,000, when she paid marginal tax and PRSI at 46%. Her net income then was 39,630. She has now lost 7,000 of her disposable income, a cut of 22% in little over a year.

The fireman, nurse and physiotherapist are now led to believe that pay cuts of the same order are in store for next year, and even a further pay cut the year after. It is more than likely that many of them have already become part of the 27,000 people who are currently defaulting on their mortgages. The public are also being told that they are part of the problem with the public finances.

However, people have forgotten that 13 billion Euros were spent on tax breaks to the wealthy up to 2006 which was over half the exchequer deficit this year. Essentially, if these tax breaks were not delivered, then our exchequer deficit now would be only 12 billion.

These public servants know that they did not cause the current crisis in public finances. So also do the 425,000 people on the dole who worked hard to fuel the Celtic tiger. Many of these were young people who worked in construction at 18-19 years of age, and who are now being offered 100 or 150 per week, less than half of what they were getting, even though they are not able to find work, given the collapse of construction.

These are part of the hundreds of thousands of unemployed who know that despite cutting their dole massively, the government is doing nothing to create jobs. The so called ‘stimulus package’ in the budget amount s to a modest cut in alcohol prices and a paltry scrappage scheme. This will keep the 425,000 people on the dole.

What these jobseekers don’t know is that the government has 14 billion in reserve in the National Pension Reserve Fund, and they won’t use a single cent of it to stimulate the economy. It is clear that 7 billion of this has been given to the banks but the government will spend nothing to get the economy going.

Why? Insiders in the financial world have stated that it is the government’s intention to give this 14 billion to the banks to bolster their share capital base, while leaving hundreds of thousands on dole queues and cutting welfare payments to the point where people may even suffer ‘food poverty’, the fancy name for hunger.

The huge loss of income to the public service, welfare cutbacks and the huge cut in capital spending of over 7 billion from the government capital spending programme will prevent any possible move out of recession next year. It will drive growth next year down well beyond the 3% fall projected to at least double that number. It may well prevent the economy recovering even by 2011.

The social cost of this budget in terms of massive unemployment, a definite sharp rise of those in serious poverty, a likely strong rise in emigration, cuts in community services, and its certain effect of increasing housing repossessions will be enormous. Hundreds or even thousands of young unemployed people living in rent allowance accommodation will almost certainly be driven to homelessness.

The reason for this unthinkable harshness has been the government’s pandering to those in the high echelons of international financial markets and large business groups in Ireland. The breakdown of the public service pay talks has now been shown to be a result of a desire to please IBEC.

The government could have introduced a wealth tax and raised 1.5 billion, and could have ended 1.5 billion worth of tax breaks. It could have raised the PRSI Ceiling to force those earning over 75,000 to pay PRSI earning about 700 million. It could have doubled the income levies across the public and private service for those earning over 50,000, and this would have brought in 1 billion. It could have agreed the ICTU proposals saving 1 billion and avoiding strikes and public service reform, including lower numbers and higher productivity would have been agreed.

The government chose to do none of those things. This budget is pushing Ireland towards a Hong Kong or Taiwan model of economic and social development. It will cause immense hardship, strikes and push half the population to the brink. This is both economically and socially unnecessary. In fact it is disastrous on both counts.

Municipal bonds can help solve our funding problems

This post has been written by Stephen Kinsella of the University of Limerick and Karl Deeter of Irish Mortgage Brokers

Problem: Cash strapped local authorities, inadequate pension provision within an aging society, and reduced infrastructural development. Solution: Municipal bonds.

Municipal bonds are debt instruments issued by local authorities to finance investment projects. Yesterday’s announcement by government of a Recovery bond is a variant of the municipal bond idea, but on a national level. We have written about municipal bonds before, several times. We are interested in recapitalizing local authorities and regional authorities using these bonds, and we’d like to use this blog post to sound out possible issues with the idea, and compose a plan of action for implementing the idea if people think it is feasible.

Cash-strapped local authorities can use funds generated by municipal bond issues on a yearly basis to reduce their infrastructural deficits in transport, water provision, port equipment, broadband provision, and community initiatives. Ireland’s regions can compete on the quality of our infrastructure, rather than on direct wage competition.

Dealing locally but funded centrally to deal with extremely poor infrastructural provision with broadband, hospitals-both public and private, roads, amenities, playgrounds, local housing, homeless initiatives, and regeneration projects. Individuals can use municipal bonds in order to save and invest, or to fund their pensions, ensuring a guaranteed rate of return on their savings. Local authorities can respond to the needs of citizens directly using these bond issuances.

Ireland's recent flooding has exposed three painful facts. First, increased flooding as a result of climate change is inevitable. This 1 in 800-year event will be probably be seen again inside a decade. It should be remembered the flooding of 2008 broke all previous records in Dublin and Cork. Second, public services were not equipped to stop the flooding from occurring or to deal with the floods once they had occurred. Third, the government cannot pay for the cleanup operation, which may cost a half a billion Euros. In simple terms we need the infrastructure, we cannot go forward with the risk of recurrence unmitigated, and yet we equally can’t afford to pay for the improvements, it is a considerably difficult position to find oneself in nationally.

Municipal bonds can finance important local projects that won’t get funded.
Ireland's local authorities are underfunded, and have been systematically underfunded for decades have been systematically underfunded for decades. The current economic climate means Ireland will reduce its capital spending provision for several years on many crucial projects of long-term national importance, like flood prevention infrastructures, environmental cleanups, broadband provision, roads, port systems, and many more.

According to the Global Competitiveness Report, in the category of 'Quality of Overall Infrastructure' we rank 64th in the world. We will lag further behind as our investment reduces further in the next three to four years. A measure must be found to balance the need for public spending and public saving on a local basis, in order to develop investment strategies that are business-friendly and of long-term economic and social significance.

An aging population requires increased pension provision

By 2050, 1 in four workers will be over 65, 1 in 10 will be over 80. Regardless of the year of retirement of these workers, and the replacement rate of the old by the young, the implications of this demographic shift for our pension and health care system are enormous. Public pension provision may bankrupt the state unless private provision is instituted on a mandatory basis. Private pensions are risky, in particular Defined Benefit schemes, as Waterford Crystal employees found out last year to their dismay.

At present there are 1700 Defined Benefit schemes in Ireland. About 400 schemes are less than 50% funded, a full 1500 are below the 100% threshold, meaning there are only roughly 10% of active and deferred members who have coverage levels of 100% or greater. The scene is set for a social tragedy.

Municipal bonds represent a means to increase private provision of savings and pension entitlements while simultaneously recapitalising local and regional authorities. Authorities can reduce their other minor money-generating schemes such as rates and parking charges, and become more business-friendly, increasing inward investment by private business at the same time as providing world-class infrastructure.

Municipal bonds are working now in the US and Europe.

Municipal bonds are most developed in the US. Build America just increased and re-issued their tax-efficient subsidised debt product to the tune of 56 billion. The bond market in the US is currently thriving.

The State of Oregon is a prime example of municipal bond usage. Municipal bonds are very safe and historically have had a very low default rate. They are appropriate as a pension vehicle and also as a savings and investment vehicle.

How do Municipal Bonds work?

A simple diagram helps to explain how bonds work.

The bonds are issued by the local authority or a regional authority. They are underwritten, in this case, by the government, and rated if there is the ability to obtain a debt insurance (such as AMBAC in the USA) it reduces the cost to the municipality by ensuring they achieve a top rating. A consultant is required at this stage to manage the process. The bonds are issued to the markets at a fixed coupon and end date, usually 20 years, and their sale frees up funds to be used in the construction of large scale public projects.

Examples of projects funded by municipal bonds include: power plants and distribution systems, public markets, hospitals and health care centers, water supply, sewerage and sanitation, flood protection and prevention systems, schools and day care centres, broadband rollout, telephone and communication systems, toll roads, bridges, ports, airports and public transportation facilities, government housing and regeneration developments, development of industrial estates, tourism and green energy investment and research/development.

Broadly there are two types of bond that tend to issue, one is a ‘General Obligation’ which means that the regional authority/city/municipality are responsible for repayment of the debt out of their general revenue stream, the other is a ‘Revenue Bond’ which pays the debt via revenue from a particular project such as toll bridge/tunnel etc.

Advantages of Municipal Bonds

1. More certain payback for future pensioners, decreased volatility of pension funds, in particular if funds were moved into bonds on a dynamic basis whereby there is greater participation as you near retirement (ie: move away from equities as volatility risk due to retirement age approaching becomes a greater issue); easily transferrable title; increased savings provision for all.
2. Increases funding to local authorities for large capital projects: It would also place the full responsibility for timely and within budget projects upon the areas and taxpayers of the region that benefits from same.
3. Transparent and easily governed structure.
4. Government backed and insured.
5. Solves the 2050 pension provision problem if mandatory. Some form of mandatory participation is required, whether it is under the Singaporean Model (state managed) or Australian Model (individual managed) is a matter of process, but the need for mandatory pension provision is becoming increasingly clear.
6. If funds are never used to finance current expenditure, increased capital provision means the economy can develop in line with local voter's preferences.

Next Steps

1. Get buy in from Central government. Local authorities don't have the ability legally to do this. Yet. The current system is referred to as ‘tax and transfer’ and there are sizeable extraction costs before ground is broken on shovel ready projects.
2. Group spending priorities by region and by location first. Small projects ready to go with 3-5 year time horizon only. Essentially bonds could be part of an overall stimulus package, there is sufficient private wealth seeking low risk yield in this country which remains under utilized in terms of being a part of national recovery, there is no reason for investors not to be part of a coalition of the willing in terms of stimulus, but without the very vehicle to allow this to happen we cannot even bring them to the table.

In the example of infrastructure for floods, perhaps insurance companies would be happy to invest in these bonds as it would reduce liability to their insurance book in the future, they have a vested interest in not seeing the area under water, to the same degree residents do. Municipal projects can therefore bring together disparate groups within a common ideal, whereby profit is far from being a dirty thing, it is an honourable element of necessary infrastructural advancement.

3. Fully cost out a Municipal bond issue for the BMW region: population, prospects for issuances, new types of bonds, and new state pensions model.

Budget 2010: Multipliers not banished from Ireland

Michael Burke: The Budget contained no estimate as to the real cost, in terms of human misery, of the effects of the crisis to date and the government's own role in exacerbating both. That is a scandal, but perhaps an expected one. From the opposition parties, the case was made that, in addition to being an attack on the poor and low-paid, women and youth would bear the brunt of the cuts. The case was also well made by Sinn Fein that there is a viable an alternative of reflation.

On a smaller scale, it is also a scandal how the government treats estimates of the fiscal effects of its own policies. In the Pre-Budget Outlook, there was no account taken of the contractionary effects of their policy, so a €4bn cut was assumed to be a €4bn saving. Now, in the Budget documentation itself, there is at least a recognition that is not the case and €897mn is estimated as the impact of this Budget's measures on the fiscal position, that is a €4bn cut is now expected to be a €3.1bn saving.

This is a modest step forward. But where does this €897mn estimate come from? There is no explanation beyond "quantifying the impact of these measures is an inherently uncertain exercise". Agreed. But does this estimate correspond to experience? On the face of it, it is no more than the direct losses to the Exchequer from reduced expenditure, with no account taken of the contractionary effects on the wider economy and the further negative impact on both revenues and expenditure.

These are widely known as 'multiplier effects' and they have achieved a certain notoriety in Ireland as many commentators and even economists here doubt there existence, or argue they are so small in the Irish context that they can be disregarded. However, that is not now the view of the government.

In terms of a change in Ireland's growth resulting from a change in interest rates, the DoF calculation (using the ESRI's econometric model) is that a 1% increase in GDP could reduce the General Government Borrowing (GGB) by up to 2.2% over a 5-year period (Table 6). So, multipliers have not been banished from Irish soil after all. A similar exercise was conducted where the improvement in growth arises from export performance, with more modest results, up to 1.5%. Why the same exercise was not conducted for a 1% change in growth arising from a change government spending is not at all clear.

There is no reason to suppose that the impact on government finances from a change in spending would be any lower than from a change in interest rates. Most econometric models assume that government spending, especially government investment has the higher multiplier effects. But, using only the results arrived at for growth arising from changing interest rates, a 1% change in GDP could lead to a change of up to 2.2% in the GGB over 5 years. Now a €4bn cut in in government spending is equivalent to approximately 2.3% of GDP. But, even if all the €4bn is regarded as a 'saving', this multiplier means that the net impact is a deterioration in the GGB over 5 years of up to 2.75% of GDP.

And this is precisely what has been happening. Table 7 shows that both the debt and deficit positions have been getting worse than government forecasts. This is not because of growth undershooting. In fact, the current projection for GDP in 2009 of -7.5% is a slight improvement over April’s forecast of -7.7%. Yet the GGB is expected to have deteriorated, from an initial estimate of 10.7% of GDP to now 11.7% of GDP. At the same time the level of general government gross debt is expected to be startlingly worse, equivalent to 64.5% of GDP compared to 59% as recently as April. This pattern is repeated in official forecasts out to 2013; growth is everywhere expected to be better (indeed very strong in 2012 and 2013), but the deficit and debt levels are worse than previously expected.

This is because the government, the DoF and their supporters take insufficient account of their own negative impact on government finances arising from fiscal contraction. If the assumption was that all previous cuts were going to deliver commensurate savings, the actual outcome would a be a shock. If, as in the latest Budget document, there is a partial acknowledgement that cuts are not savings, then the impact on government finances is still an unpleasant surprise. But, from a perspective in which fiscal contraction is economically disastrous and entirely counter-productive even in its own terms, then the outcome was entirely predictable, and predicted.

Budget 2010: the geographical impact

Michael Taft: The Ireland after Nama blog offers an alarming perspective on the effect of the public sector pay cuts on the econmic fortunes of particular towns. With public sector workers constituting such a large proportion of the workforce (and, next year, an even larger proportion of the workforce actually at work), imagine the impact on demand for goods and services in these places. You'd think that representatives of small and medium-sized firms, dependent on consumer spending, would be concerned. You'd think, anyway. Thanks to Stephen Kinsella for tweeting this link.

Anglo-Irish bondholders + €4bn; Public Services - €4bn

Slí Eile: Budget 2010 has been well-rehearsed for many months. The Government, together with the media and principal political commentators, have won the argument for deflation. It is an extraordinary achievement that in the space of a few short months the case for a huge fiscal adjustment of some €4bn has been so widely accepted without a serious public debate or provision of alternative budgetary scenarios (with some honourable exceptions). Moreover, the acceptance of the case for cuts in social welfare, public sector pay and other areas of expenditure has won the day. The rest is detail and point-scoring. So, all those who have made the case and convinced through every means to bring along a large section of the public deserve acknowledgement. However, there are at least two problems:It is unlikely to work – rather it will further deflate the economy, depress consumer demand and lose jobs; and
When the full effects become increasingly felt in the course of 2010 it will lead to a questioning of the overall direction of economic and social policy at this time.

These are troubled times and clear-headed thinking is called for. Hardest hit in this budget are:

young people who are unemployed (budgetary documents foresee a further increase in unemployment to 13.2% next year - with a likely 30% plus for young people not spelt out in the documentation) families with children people in precarious economic circumstances These need hope. They all need to consider a coherent alternative to deflation and its devastating consequences on the lives of vulnerable people far removed from the comfort zones of those who scrutinise data, pronounce on the world and devise solutions based on a questionable values system.
Many commentators will parse the text and dissect the figures. There is no getting away from the core truth that four things have emerged since the onslaught of this Great Recession:

A highly vulnerable, imbalanced and inequitable national economy has take the full brunt of international recession more than any similar sized open economy;
Government has responded in a sharply pro-cyclical manner contributing directly to a free fall in tax revenues;
We are currently witnessing the beginning of a sharp and prolonged income and wealth transfer from poor to rich via a scaling back in public services, more opting out of public services by the few who can afford it and risk under-writing for bondholders and large depositors; and
There is an absence of a broad-based, popular, credible, progressive alternative strategy.

Taking these four factors – there is, understandably, a great sense of helplessness and resignation. People are angry, confused and afraid. But, about all, people do not see an alternative at this time to the deflationary strategy. What the Government did not and will not do (but we await further details in the Finance Bill) was:

Raise taxes on wealth
Raise capital gains tax
Raise capital acquisition tax
Close off tax reliefs.

The combined potential value of taxes raised could be as high as €7.6bn according to Sinn Féin who draw their estimates from the Commission on Taxation or directly from the Department of Finance).

In a telling comment by Philip Lane on irisheconomy.ie ‘Finally, it would indeed be helpful if the Department of Finance produced a report that detailed its projections concerning the macroeconomic impact of the budget. The fiscal plan for 2010-2014 surely incorporates feedback effects between fiscal decisions and macroeconomic aggregates, but the estimates of these feedback effects have not been explicitly spelled out (as far as I know).’ The Stability Programme Update released to the Dáil earlier today gives some clues as to the likely deflationary impact of Budget 2010. The document can be downloaded here.

The document contains an update on two previous reports this year. A key point worth highlighting is contained in Table 8 of same. The combined fiscal adjustment in Budget 2010 is calculated at €4bn = 2.5% of GDP (section 3.1). The document states that:
'Table 8 below sets out the estimated loss in tax revenue of €897 million associated with the introduction of the budgetary package in 2010.'

Allowing for a negative deflationary multiplier this translates into a long-term drop in GDP – other things constant – of over 3%. Suppose, instead that Government had diverted just 10% of its huge cash reserves (that is €20bn of NTMA cash reserves plus €20bn of NPRF assets = €40bn) into a jobs stimulus package using a NewEra agency based on public enterprise holding companies it could have created a a large number of additional and sustainable jobs and saved a huge proportion of the social welfare budget through lower unemployment payments as a result. (check out section 3.6 to derive the total estimate of cash balances).

Much can go wrong. See section 2.4 'Risks to forecasts'. Essentially, Government is gambling on a recovery and a steady as she goes set of scenarios. However, if interests rates rise ... oil prices surge ...the Euro appreciates .. there is a double-dip world recession (many economists internationally see this as a real possibility)... the outcomes are quantified.

But, the big elephant in the fiscal parlour is .... Anglo-Irish, NAMA and recapitalisation. It surfaced in parliamentary debate. Hidden away on the last page of '2010 Estimates of Receipts and Expenditure' is an entry for 'Anglo-Irish Bank' – a cool €4bn under 'other capital payments'. And there is a zero entry for 2010. Does anyone really believe that we have seen the end of recapitalisation? And where does money go when it is directed to a failed bank? And what is the opportunity cost? One final thought – in the interests of democracy, social cohesion and maximum citizen engagement could the people have clearer, more user-friendly and timely documentation that outlines the entire budgetary position and allowing for a informed debate in both houses of the Oireachtas allied to citizen and community dialogue where budgets are debated at national and local government. Presently, government accounting is a hidden science with partial disclosure of information.

Budget 2010: Live Blog

Austerity and the financial markets

Michael Burke: Financial markets have a great many faults. But they can frequently provide a signal of their participants’ collective thinking with much greater clarity than their cheerleaders and their ideologues. This is especially the case currently, with regard to the risks of increased government spending. Most governments are currently engaged in a policy of reflation. Yet there are already parties seeking office, in Britain and elsewhere, who favour a policy of fiscal contraction.

In Ireland, the Party of Austerity is already in power. We are frequently told that bond market investors are demanding Ireland’s unique austerity experiment, and that otherwise they will refuse to purchase the government debt. Finance Minister Lenihan has said that that taking “decisive action” on the budget deficit was a priority for the Government and it would “signal to international investors that the Irish Government possesses the ability to take the necessary action”.

Let us ignore here the impositions of Maastricht of 3% borrowing and 60% debt in relation to GDP. Everyone else has in Europe has as they go about attempting to reflate their economies. Instead, for bond investors, it is easy to put a number to the fear and greed that drives financial markets. The latter, greed, is what they demand in the form of the yield on government debt at auction. The former, fear, concerns the risk to the principal sum in the form of default. And the two are related.

Yields on benchmark Irish government debt were 4.85% as of close of business on Friday December 4 (all yields from Financial Times, December 7, page 29). That’s considerably below the peak of 6.02% in January of this year. That must surely mean that the bond market is reassured by the austerity measures to date? Well, no. The first ‘decisive’ austerity measures from the FF/Green government were in October 2008, and yet yields soared in January of this year.

It can be useful, in judging the financial market impact of policy, to look at yield spreads. The riskier the asset, the higher the spread, and movement in the spread signals a change in the perception of that risk (the fear/greed factors again). The yield spread of Irish 10year debt over the European benchmark German debt is a very sizeable 1.62% (or 162 basis points, or bps in the jargon). That represents a very large, additional cost to the Irish taxpayer and compares to the next highest yield spread of Italy of 0.79%. Only Greece has a higher spread in Europe, of 1.71%.

But a key fact is that this yield spread has been widening against Irish taxpayers. Over the past 12 months German yields have risen by 0.19%, while Irish yields have risen by 0.62%.

Now, against a possible charge of unfairness, it should be admitted right away that, if financial markets are in a panic, the riskier asset will be harder hit than the safer one. In this case the riskier asset would be Irish debt and the safer one German debt. But we have already seen that the big sell-off occurred in January, and in fact most yields have been declining since.

It is possible to develop this point further, by using a more direct parallel with Ireland’s debt. A comparison with Belgium is a very useful one because:

a. Belgium is a middling Euro Area economy, with its yield spread close to the average of the Euro Area, below Italy, Spain, Portugal, and others, and above that of France, The Netherlands, Austria

b. Belgium has a much higher government debt than Ireland but a much lower current budget deficit, and, crucially,

c. For virtually the whole of 2008, the yield spread between Belgium and Ireland was, for the reasons in (b.) almost identical, usually within or 1 or 2 bps of each other.

However, that is no longer the case. Belgium’s yield spread over Germany is now 0.33%, or approximately one-fifth of Ireland’s. The Irish government’s Pre-Budget Outlook estimates an increase in net debt this year of €26bn. With Belgian, rather than Irish yields at that maturity, Irish taxpayers would save approximately €340mn next year, and every year for the lifetime of the debt.

But there is a striking feature of the divergence in Belgian and Irish benchmark yields. The thrust of fiscal policy for the two economies has been diametrically opposed; Belgium in common with the overwhelming majority of leading economies in the Euro Area and elsewhere has been attempting to reflate its economy with a combination of increases in government spending and temporary tax cuts, amounting to 3.6% of GDP. The judgement here is that the former are likely to be more productive. But Ireland has engaged in a unique contractionary experiment, amounting to 6.4% of GDP once the December 2009 Budget is included, in order, we are told, to reassure bond markets. Yet the verdict seems clear. Irish yields have risen compared to Belgian yields. As far as the bond markets are concerned, Ireland has become a relatively riskier bet because of its austerity policy, not despite it.

In case there should be any doubt, a closer examination of the Belgian/Irish yield spread confirms this analysis. As mentioned previously, for nearly the whole of 2008 the yields were almost identical. However, they began to part company in October 2008, precisely the time of the first Irish austerity budget, which was brought forward to “reassure financial markets“. From a yield spread of zero at the beginning of October 2008, it began to move against Irish taxpayers, to 0.25% at the end of that month, to 0.75% by the middle of December, to 1.30% currently.

Now, if you ask most bond investors and certainly most government bond analysts (as they are, daily, in all the media outlets) they will say the Irish government is doing the right thing, biting the bullet, upfront pain, and so on. All this proves is you don’t need to be well-versed in accurate economic theory to buy a bond, nor to be employed at a stockbrokers which sells them. But it helps if you can see what’s actually happening. There are honourable exceptions. According to Michael O’Sullivan, head of asset allocation at Credit Suisse Private Banking, “Arguably the Irish bond market is being saved at the expense of Irish society”.In reality, both are facing potential disaster as a consequence of the same disastrous policies.

Belgian reflation has led to falling forecasts for the deficit (because of stronger growth), while Irish fiscal contraction has led rising deficit forecasts (because of weaker growth). According to the European Commission, the difference between Ireland’s and Belgian’s budget deficits in 2008, when yields were the same, was 6% of GDP (Ireland 7.2%, Belgium 1.2%) and is now expected to be 9% in 2010, with Ireland’s rising and Belgium’s falling. At the same time Irish yields have been rising compared to Belgium’s.

The market verdict is clear. Reflation is the route back to government solvency; fiscal contraction increases costs and can lead to disaster.

Some stories are too good for facts

Michael Taft: It’s good the administrators of this blog brought Peter Connell’s post back up to the top. Last night, Prime Time Investigates examined social welfare fraud (and errors and over-payments, which they never differentiated). The programme included the now-famous story of Ballyconnell, Co. Cavan. According to PTI, there were 700 people living in that border town at the time of the 2006 census, but now 1,300 people are signing on in the local social welfare office. PTI took this as proof of ‘rampant welfare tourism’. What else could explain this strange figure?

Well, there’s a very simple explanation which Peter identified. The social welfare office caters for more than just those living in Ballyconnell. According to the Social Affairs website, the Ballyconnell office caters for the town and a significant area of Cavan: Bawnboy, Carrigallen, Belturbet, Killeshandra, Redhills, Swanlinbar, and Corlough. In fact, Ballyconnell is one of only two social welfare offices serving the entire county of Cavan – the other being situated in Cavan town. Maybe that could explain it.

Of course, a little bit of research would have discovered this explanation. If you google "Ballyconnell" AND "social welfare" AND "fraud", Peter’s article comes up 11th. That should have alerted the researchers to other explanations. But the story was too good to let a little research and a few facts get in the way.

Indeed, the whole treatment of border towns experiencing disproportionate increases in the Live Register was highly selective and distortive. PTI examined the Live Register increase from July 2008 to July 2009. Nationally, the average was 83 percent. PTI cited Ardee, with a 100 percent increase, as an example of social welfare fraud – with potentially ‘a lot’ of people coming down from Northern Ireland to sign on illegally. 100 percent sounds pretty conclusive. Could welfare tourism account for this? Possibly. But, then, why was the rise in the much closer-to-the-border Dundalk only 72 percent? Are Northern Irish welfare cheats picky about the town they sign on in?

Again, PTI cited Ballybofey with an 85 percent increase (about the national average, by the way) and Ballyshannon with 91 percent as more towns with welfare cheat problems. Interestingly, they omitted other Donegal towns near the Northern border such as Buncrana and Letterkenny – the latter having a rise of only 67 percent.

They also cited Carrick-on-Shannon, a place I’m familiar with. Anyone with a passing acquaintance with the place could easily point out to you the reason why the local social welfare office experienced a 90 percent increase in signing on: the half-finished and ghost estates around the area. The town and surrounding area experienced the worst of the collapse of the property market, with hundreds of construction workers laid off. Interestingly, Manorhamilton, which is closer to the border, experienced a rise lower than the national average. That town, however, was not mentioned by PTI.

Maybe there is a horde flooding across the border to sign on illegally. But the rise in all the Border counties was less than the national average – 78 percent as opposed to a national 83 percent. Again, this fact didn’t emerge in the PTI story.

Let’s return to Ardee’s 100 percent increase. What could explain it? Maybe the same factors that explain Edenderry, Loughrea, Ballinrobe, Westport, Dun Laoire, Balbriggan, Maynooth, Kells, Navan, Trim, Bray, Kilmallock, Newcastle West, Nenagh, Thomastown, Cahir, Cashel, Bantry, Carrigaline, Cobh, Macroom, Midleton, Newmarket, Skibbereen, Kenmare, Killarney, and Kilorglin. All these places experienced a percentage rise in the Live Register in excess of Ardee – more than 100 percent. Yes, that would be an interesting Prime Time Investigates – why is unemployment rising so high and what can we do to, first, to halt it, and then reverse it as quickly as possible?

Are there people crossing the border to sign on illegally in the Republic? Yes. In fact, it would be a shock it if weren’t the case. How many? PTI could have done a bit of work and tried to describe the problem as accurately as possible. That is always the first step in resolving a problem. But rather than try to be accurate, they chose to be exploitative. We are, therefore, left no wiser.

I’ll leave you with one more stat attack: PTI’s selectivity can be seen in the period they chose to highlight. They used the July 08 to July 09 figures. However, the latest Live Register Additional Tables were published over a month ago – featuring the October to October figures. This up-to-date information was readily available to the PTI team. The only problem was that it wouldn’t have supported ‘the story’ of wide scale social welfare fraud.

The national average at year-to-end October was 65 percent, while the percentages for the border towns they cited were:

Ballybofey: 56 percent
Ballyshannon: 71 percent
Carrick-on-Shannon: 62 percent
Carrickmacross: 51 percent
Ardee: 77 percent

This doesn’t tell quite the same story, though. And above all else, we must maintain the story even if it means we miss the opportunity to describe a situation accurately.