“We broadly welcome the Report of the Independent Review of Employment Regulation Orders and Registered Employment Agreement Wage-Setting Mechanisms. In particular, the recommendation that the basic JLC framework should be retained is good news for many thousands of low-paid workers. We also endorse the conclusion reached by Kevin Duffy and Frank Walsh that reducing JLC rates to the minimum wage level would have important distributional consequences without having any substantial effect on employment.
“We are concerned that recent proposals reportedly made by Enterprise Minister Richard Bruton are not in line with the Duffy-Walsh report [...]"
Click here to read the rest of the statement issued today by 36 economists, economic analysts and social scientists, all members of the TASC Economists' Network.
Tuesday, 31 May 2011
Monday, 30 May 2011
Economics or politics? The longer game
Tom McDonnell: The reported decision to go well beyond the recommendations of the Duffy-Walsh report, coupled with the tax cutting emphasis of the recent 'jobs initiative', provide clear signals of the Government's vision for restructuring the economy.
As the Independent Duffy-Walsh report makes clear, the employment effects of cutting the wages of low-income groups are not significant. What this implies is that the impact on the public finances will be negative overall (as well as the direct taxation effects, there will also be increased Family Income Supplement payments and reduced VAT receipts). The real effect will be that the exchequer will be subsidising employers.
So why might a Government target low-paid workers? Although the economics of the move are shaky, it does make sense politically. Any Government facing into years of unpopular measures which are sure to alienate and anger various groups requires a 'narrative' to justify its actions. If such a Government can point to its 'resolve' on this issue and to its success in reducing wages, then it becomes very difficult for other groups to credibly argue about the 'inequity' of a measure or the hardship caused by future taxes or pay cuts.
If the Government is coming under pressure to shy away from a particular tax increase or spending cut it can simply play its new 'we're all in this together' card. It will point to the wage reductions it has engineered in the low-pay sectors and then tell the specific group hit that everyone has to 'contribute'.
Thus, while the economics may not make sense, in political terms the policy of going after low paid workers in the short-term can be seen as a strategy for softening the resistance to particularly controversial austerity measures in the medium-term.
As the Independent Duffy-Walsh report makes clear, the employment effects of cutting the wages of low-income groups are not significant. What this implies is that the impact on the public finances will be negative overall (as well as the direct taxation effects, there will also be increased Family Income Supplement payments and reduced VAT receipts). The real effect will be that the exchequer will be subsidising employers.
So why might a Government target low-paid workers? Although the economics of the move are shaky, it does make sense politically. Any Government facing into years of unpopular measures which are sure to alienate and anger various groups requires a 'narrative' to justify its actions. If such a Government can point to its 'resolve' on this issue and to its success in reducing wages, then it becomes very difficult for other groups to credibly argue about the 'inequity' of a measure or the hardship caused by future taxes or pay cuts.
If the Government is coming under pressure to shy away from a particular tax increase or spending cut it can simply play its new 'we're all in this together' card. It will point to the wage reductions it has engineered in the low-pay sectors and then tell the specific group hit that everyone has to 'contribute'.
Thus, while the economics may not make sense, in political terms the policy of going after low paid workers in the short-term can be seen as a strategy for softening the resistance to particularly controversial austerity measures in the medium-term.
The madness of the drive to lower wages
Michael Burke: IBEC’s attack on the JLC wage setting mechanisms in order to drive pay lower is not simply morally indefensible. It is economically illiterate.
The attack on the JLC is simply the latest round in the battle to lower real disposable wages which has already seen pay cuts and ‘levies’ in the public sector, as well as increases in indirect taxes, which, because they are based on consumption, adversely hurt and disproportionately hurt the poor.
In any normally-functioning market economy the financial functions of the three main sectors are as follows:
*Households save some proportion of their net incomes
*Corporations borrow that savings for the purposes of investment (mainly via the mediation of the banks)
*Governments can run either a deficit or surplus, depending on the fiscal policy mix
(For the sake of clarity we’ll leave aside the role of borrowing from/lending to the rest of the world)
However, as the chart below shows, this economy has not been a normally-functioning one for some time.
Source: CSO
*Over a prolonged period (2002-2008) the household sector has been a net borrower
* For the entire period the corporate sector has not been a borrower but has been a net saver, and has significantly increased its savings in the economic slump
* Therefore, the government is obliged to become a net borrower, since all sectors cannot simultaneously be net savers.
At the sectoral level the source of the deficit is simply this fact- now that both the household sector and corporate sectors are net savers government is obliged to become a net borrower.
How to correct this imbalance? Policy has been to reduce the government borrowing by seizing a greater proportion of the household sector’s income (via taxes, pay cuts and reducing the government ‘s own investment).
But it has failed for two reasons. The household sector becomes more fearful (not more confident, as some of the wilder supporters of this policy have claimed) and so becomes even more inclined to save, not spend. At the same, the corporate sector seeing its two main customers (households and government) reining in their own spending has no need to increase its investment and instead increases its savings. The economy goes into a tail-spin and the government borrowing remains stubbornly high.
Alternative
What is the alternative? The household sector is supposed to be a net saver in a normally-functioning market economy. Now it is- even if the brutal manner in which that has been achieved has been highly damaging. But the corporate sector remains a large net lender, when it should be a borrower for investment. The slump in investment arithmetically accounts for the entire slump in the GDP of this economy. It is the corporate refusal to invest which both accounts for the slump and will prove hugely damaging to the economy over the long run- if it is not corrected.
At the same time, the existence of this corporate net lending belies entirely the notion that the economy is “broke”. The household sector may feel like it is broke. The government may be in danger of becoming broke, primarily because it insists on handing over money it doesn’t have to one part of the corporate sector; finance. But in 2009 the net income of the corporate sector was €38.8bn.
This is much reduced by the slump, but it is sitting idle – the corporate sector continues to be a net lender. Therefore to end the crisis the government should consider temporary measures to access these huge cash balances for investment purposes – taxes, levies, windfall payments and so on. These should be directed to key sectors of the economy which suffer a chronic investment deficit, infrastructure, rail, ports, broadband, health and education and so on.
The opposite course advocated by IBEC has already failed repeatedly. This is because it runs counter to the most basic tenets of economics. The investment of savings, primarily from households, is the key to future prosperity. Reducing those savings and reducing investment is to repeat the failed nostrums that caused this crisis.
The attack on the JLC is simply the latest round in the battle to lower real disposable wages which has already seen pay cuts and ‘levies’ in the public sector, as well as increases in indirect taxes, which, because they are based on consumption, adversely hurt and disproportionately hurt the poor.
In any normally-functioning market economy the financial functions of the three main sectors are as follows:
*Households save some proportion of their net incomes
*Corporations borrow that savings for the purposes of investment (mainly via the mediation of the banks)
*Governments can run either a deficit or surplus, depending on the fiscal policy mix
(For the sake of clarity we’ll leave aside the role of borrowing from/lending to the rest of the world)
However, as the chart below shows, this economy has not been a normally-functioning one for some time.
Source: CSO
*Over a prolonged period (2002-2008) the household sector has been a net borrower
* For the entire period the corporate sector has not been a borrower but has been a net saver, and has significantly increased its savings in the economic slump
* Therefore, the government is obliged to become a net borrower, since all sectors cannot simultaneously be net savers.
At the sectoral level the source of the deficit is simply this fact- now that both the household sector and corporate sectors are net savers government is obliged to become a net borrower.
How to correct this imbalance? Policy has been to reduce the government borrowing by seizing a greater proportion of the household sector’s income (via taxes, pay cuts and reducing the government ‘s own investment).
But it has failed for two reasons. The household sector becomes more fearful (not more confident, as some of the wilder supporters of this policy have claimed) and so becomes even more inclined to save, not spend. At the same, the corporate sector seeing its two main customers (households and government) reining in their own spending has no need to increase its investment and instead increases its savings. The economy goes into a tail-spin and the government borrowing remains stubbornly high.
Alternative
What is the alternative? The household sector is supposed to be a net saver in a normally-functioning market economy. Now it is- even if the brutal manner in which that has been achieved has been highly damaging. But the corporate sector remains a large net lender, when it should be a borrower for investment. The slump in investment arithmetically accounts for the entire slump in the GDP of this economy. It is the corporate refusal to invest which both accounts for the slump and will prove hugely damaging to the economy over the long run- if it is not corrected.
At the same time, the existence of this corporate net lending belies entirely the notion that the economy is “broke”. The household sector may feel like it is broke. The government may be in danger of becoming broke, primarily because it insists on handing over money it doesn’t have to one part of the corporate sector; finance. But in 2009 the net income of the corporate sector was €38.8bn.
This is much reduced by the slump, but it is sitting idle – the corporate sector continues to be a net lender. Therefore to end the crisis the government should consider temporary measures to access these huge cash balances for investment purposes – taxes, levies, windfall payments and so on. These should be directed to key sectors of the economy which suffer a chronic investment deficit, infrastructure, rail, ports, broadband, health and education and so on.
The opposite course advocated by IBEC has already failed repeatedly. This is because it runs counter to the most basic tenets of economics. The investment of savings, primarily from households, is the key to future prosperity. Reducing those savings and reducing investment is to repeat the failed nostrums that caused this crisis.
Sunday, 29 May 2011
Iceland and Ireland: spot the differences
Slí Eile: 'Iceland's Road To Recovery: What Lessons To Be Learned' was the title of an address by Iceland Minister for Finance, Steingrímur Sigfússon last week. The similarities with Ireland in the story of Iceland were remarkably similar - yet crucial differences emerge not only in relation to how the crisis was managed in 2008-2009 but how the institutional context differs. Put simply, Iceland had more policy levers to play with even if they were - metaphorically speaking - more 'on their own' than is the case in Ireland. The jokes about Iceland, Ireland, the Euro etc circa 2008-09 seem ironic when recounted from the vantage point of 2011.
What is striking about Iceland in the build up to the 2008 crash was the dominance of a strong ideology of neo-liberalism from the early 1990s onwards involving de-regulation, privitisation (for example two of the three main banks were privitised in the early years of the last decade) and tax cuts. The golden circle corporate culture was in full swing prior to the crisis with cross-directorships, single families own swades of banking and close ties between politicians, regulators and bankers. That all sounds very familiar to Irish ears.
While the initial reaction to the crisis (the pots and pans revolution when 10% of the population of 320,000 took to the streets) was dramatic Iceland has managed to plot a course that avoided a chaotic disruption to economic activity. While GDP fell and unemployment rose (but not as much as in Ireland) a dramatic restructuring of banks took place. Deposits and assets were transferred in a matter of days to a new bank and claims by creditors were and are being tested in the courts. The debacle over Icesave continues. And there have been two referenda in which citizens voted down proposals to share the debt burden in a particular way. The extraordinary aspect of the story is that ordinary life went on, people continued to use credit cards and withdraw funds and somehow more people survived than not.
But there was a downside. As Iceland implemented a tough austerity programme in agreement with the IMF (but significant funding was also made available by a Nordic alliance) there were repercussion for workers, welfare recipients and users of public services. Public expenditure has been drastically reduced and revenue raised. This is the downside to currency devaluation coupled with a tought austerity programme imposed from outside.
Mr Sigfússon expressed the view that such painful measures were entirely necessary, unavoidable, morally required and proportionate. Coming from a left-of-center perspective he sounded very much in the same point of view of mainstream economic commentariat in Ireland: cut public spending, raise revenues, close the deficit quickly, more pain now for gains later. Of course, Iceland has another policy tool that we do not have: currency devaluation plus changes to the interest rate. One suspects that monetary policy had some significant effect in boosting Icelandic exports even while consumer demand continued to fall.
He also spoke about the strengths of Iceland and the need to raise hope rather than talk people into despair. He mentioned, for example:
Plenty of natural resources and energy (don't we know...)
Human capital levels which are high (just like us in Ireland)
Pensions funds which he claimed - incredible given the banking meltdown in 2008 - are in a health state (125% of GDP)
Flexible labour markets and very high participation rates for both men and women
A relative young population and less pressure from ageing population trends (Iceland has one of the highest rates of fertility in Europe - it's the long dark winter night you know...)
And what lessons for others? He said:
Don't privitise the gains and socialise the losses
Don't do market fundamentalism - it precipitated the crisis of 2008 in Iceland and elsewhere
Trust needs to be re-built - this takes time and patience
Overall, his presentation was a source of inspiration at this time - things can be changed and turned around quickly if decisive and fair action is taken. One might have appreciated alternative voices and perspectives to the official one presented here. Also, one would have liked more analysis of the underlying budgetary situation. To what extent did the sharp deflationary fiscal adjustment agreed with the IMF contribute to a remarkable improvement in the fiscal position in the last 12 months? I suspect that currency depreciation is part of the story (as it was in Ireland in 1986 and 1992). He did point out that currency devaluation involves higher import prices and further erosion in living standards of consumers. So, any policy response is difficult.
Perhaps the most interesting insight from the evening was the role of active citizens in claiming the future and changing the balance of political power in Iceland ushering in important new reforms to the political system (including legislation to fire Central Bank directors who refused to go voluntarily).
What is striking about Iceland in the build up to the 2008 crash was the dominance of a strong ideology of neo-liberalism from the early 1990s onwards involving de-regulation, privitisation (for example two of the three main banks were privitised in the early years of the last decade) and tax cuts. The golden circle corporate culture was in full swing prior to the crisis with cross-directorships, single families own swades of banking and close ties between politicians, regulators and bankers. That all sounds very familiar to Irish ears.
While the initial reaction to the crisis (the pots and pans revolution when 10% of the population of 320,000 took to the streets) was dramatic Iceland has managed to plot a course that avoided a chaotic disruption to economic activity. While GDP fell and unemployment rose (but not as much as in Ireland) a dramatic restructuring of banks took place. Deposits and assets were transferred in a matter of days to a new bank and claims by creditors were and are being tested in the courts. The debacle over Icesave continues. And there have been two referenda in which citizens voted down proposals to share the debt burden in a particular way. The extraordinary aspect of the story is that ordinary life went on, people continued to use credit cards and withdraw funds and somehow more people survived than not.
But there was a downside. As Iceland implemented a tough austerity programme in agreement with the IMF (but significant funding was also made available by a Nordic alliance) there were repercussion for workers, welfare recipients and users of public services. Public expenditure has been drastically reduced and revenue raised. This is the downside to currency devaluation coupled with a tought austerity programme imposed from outside.
Mr Sigfússon expressed the view that such painful measures were entirely necessary, unavoidable, morally required and proportionate. Coming from a left-of-center perspective he sounded very much in the same point of view of mainstream economic commentariat in Ireland: cut public spending, raise revenues, close the deficit quickly, more pain now for gains later. Of course, Iceland has another policy tool that we do not have: currency devaluation plus changes to the interest rate. One suspects that monetary policy had some significant effect in boosting Icelandic exports even while consumer demand continued to fall.
He also spoke about the strengths of Iceland and the need to raise hope rather than talk people into despair. He mentioned, for example:
Plenty of natural resources and energy (don't we know...)
Human capital levels which are high (just like us in Ireland)
Pensions funds which he claimed - incredible given the banking meltdown in 2008 - are in a health state (125% of GDP)
Flexible labour markets and very high participation rates for both men and women
A relative young population and less pressure from ageing population trends (Iceland has one of the highest rates of fertility in Europe - it's the long dark winter night you know...)
And what lessons for others? He said:
Don't privitise the gains and socialise the losses
Don't do market fundamentalism - it precipitated the crisis of 2008 in Iceland and elsewhere
Trust needs to be re-built - this takes time and patience
Overall, his presentation was a source of inspiration at this time - things can be changed and turned around quickly if decisive and fair action is taken. One might have appreciated alternative voices and perspectives to the official one presented here. Also, one would have liked more analysis of the underlying budgetary situation. To what extent did the sharp deflationary fiscal adjustment agreed with the IMF contribute to a remarkable improvement in the fiscal position in the last 12 months? I suspect that currency depreciation is part of the story (as it was in Ireland in 1986 and 1992). He did point out that currency devaluation involves higher import prices and further erosion in living standards of consumers. So, any policy response is difficult.
Perhaps the most interesting insight from the evening was the role of active citizens in claiming the future and changing the balance of political power in Iceland ushering in important new reforms to the political system (including legislation to fire Central Bank directors who refused to go voluntarily).
Friday, 27 May 2011
The Gloves are Off!
Sinead Pentony: When the Report of the Independent Review of EROs and REA Wage Setting Mechanisms was published on Wednesday, there was a general view that it’s a well researched report that puts forward a set of evidence-based recommendations that aim to “....create a framework within which greater efficiencies and necessary adjustments in payroll costs can be achieved in the affected sectors”. While I may not agree with all of the recommendations, there are certainly plenty of sensible proposals that will lead to benefits for all stakeholder groups. However, IBEC were obviously disappointed that it did not call for the abolition of the JLC system and said that the Review “...was totally out of touch with the need to create and sustain jobs.”
The following day (Thursday), the Minister for Enterprise, Jobs and Innovation published his own set of proposals that aim to pursue the agenda for “radical overhaul”; many of which are at odds with the carefully researched recommendations in the Report. Again, the message was about creating and sustaining jobs. However, the Report makes clear the finding that the balance of evidence does not support the assertion that lowering pay will lead to the creation of more jobs. The problem in the domestic economy is lack of demand - not competitiveness - and the wage cutting agenda will only exacerbate the problems in the domestic economy further. The Global Competitiveness Report 2010-2011 identified our small market size; poor infrastructure; macroeconomic instability and dysfunctional financial markets as factors inhibiting competitiveness.
In the absence of any serious efforts to address the full range of costs of doing business in the domestic economy – commercial rents, waste charges, professional fees, energy costs and the price of food - the focus is firmly on the easy target – low paid workers. The only protection many of these workers have, is the JLC system, but even within this system there is widespread abuse and derogation of responsibilities on the part of the employers. The NERA report shows that only about 20 per cent of investigated firms were compliant with the rules.
In TASC’s Submission to the Independent Review we identified the need to monitor, evaluate and review low paying sectors on a regular basis, which should be used to identify the labour market and competitive impacts of the various wage floors and the equality and poverty impacts of these wage floors. This is how evidence-based policy making works.
In Budget 2011, the budgetary measures included a cut in the minimum wage and the abolition of Section 23 tax reliefs for those renting private accommodation. The former is due to be reversed in the coming weeks. However, the implementation of the latter was postponed, following concerns about the impact of ending the reliefs and that an impact assessment was needed to ascertain the effect of phasing out such reliefs. The Programme for Government (p.23) is also committed to publishing cost-benefit analyses for major infrastructure proposals and “tax expenditure”. All of this points us in the direction of evidence-based policy analysis and formulation, albeit belatedly.
The labour market is central to the economy and any changes therein must be carefully considered. The government now has a well-researched 117 page report on the various wage setting mechanisms. Why would it not apply the same level of rigour to this aspect of the economy that is being applied to other parts of the economy? And why would it ignore the findings in this report in favour of anecdotal assertions that are being portrayed as fact? We must do our best to ensure that the facts win out over fiction, in the interests of evidence-based approaches to policy making and in the battle to protect the incomes of low paid workers
The following day (Thursday), the Minister for Enterprise, Jobs and Innovation published his own set of proposals that aim to pursue the agenda for “radical overhaul”; many of which are at odds with the carefully researched recommendations in the Report. Again, the message was about creating and sustaining jobs. However, the Report makes clear the finding that the balance of evidence does not support the assertion that lowering pay will lead to the creation of more jobs. The problem in the domestic economy is lack of demand - not competitiveness - and the wage cutting agenda will only exacerbate the problems in the domestic economy further. The Global Competitiveness Report 2010-2011 identified our small market size; poor infrastructure; macroeconomic instability and dysfunctional financial markets as factors inhibiting competitiveness.
In the absence of any serious efforts to address the full range of costs of doing business in the domestic economy – commercial rents, waste charges, professional fees, energy costs and the price of food - the focus is firmly on the easy target – low paid workers. The only protection many of these workers have, is the JLC system, but even within this system there is widespread abuse and derogation of responsibilities on the part of the employers. The NERA report shows that only about 20 per cent of investigated firms were compliant with the rules.
In TASC’s Submission to the Independent Review we identified the need to monitor, evaluate and review low paying sectors on a regular basis, which should be used to identify the labour market and competitive impacts of the various wage floors and the equality and poverty impacts of these wage floors. This is how evidence-based policy making works.
In Budget 2011, the budgetary measures included a cut in the minimum wage and the abolition of Section 23 tax reliefs for those renting private accommodation. The former is due to be reversed in the coming weeks. However, the implementation of the latter was postponed, following concerns about the impact of ending the reliefs and that an impact assessment was needed to ascertain the effect of phasing out such reliefs. The Programme for Government (p.23) is also committed to publishing cost-benefit analyses for major infrastructure proposals and “tax expenditure”. All of this points us in the direction of evidence-based policy analysis and formulation, albeit belatedly.
The labour market is central to the economy and any changes therein must be carefully considered. The government now has a well-researched 117 page report on the various wage setting mechanisms. Why would it not apply the same level of rigour to this aspect of the economy that is being applied to other parts of the economy? And why would it ignore the findings in this report in favour of anecdotal assertions that are being portrayed as fact? We must do our best to ensure that the facts win out over fiction, in the interests of evidence-based approaches to policy making and in the battle to protect the incomes of low paid workers
Wednesday, 25 May 2011
Report of the Independent Review of EROs and REA Wage-Setting Mechanisms
The Report of the Independent Review of EROs and REA Wage-Setting Mechanisms is available here. Click here to read TASC's response. On behalf of the Coalition to Protect the Low Paid, Bill Abom said: "The finding that the JLC wage setting mechanism should be maintained to protect reasonable employment standards for vulnerable workers is welcome". Meanwhile, in the blogosphere, click here to read Michael Taft's take on the report, and here to read the thread over on Irish Economy.
Tuesday, 24 May 2011
How will it end?
Tom McDonnell: It is too early to tell but there are worrying signs that the Euro zone crisis may spread. Bond spreads for Spanish and Italian 10-year bonds have shot up in recent days. A WestLB Strategist is quoted by Reuters as saying: 'The key point is that the crisis seems to be taking hold even if peripheral countries regarded as solid'
Daniel Gros over at VOXEU has run the numbers and is arguing that it is actually foreign debt rather than public debt that is driving the solvency turmoil in the Euro zone. Meanwhile Paolo Manasse is adding to the chorus pointing out the likeihood of a Greek default.
There are three ways this can end (assuming the monetary union doesn't break up):
The ball is clearly in Germany's court. Eurointelligence provides a useful overview of the current thinking in that country.
Daniel Gros over at VOXEU has run the numbers and is arguing that it is actually foreign debt rather than public debt that is driving the solvency turmoil in the Euro zone. Meanwhile Paolo Manasse is adding to the chorus pointing out the likeihood of a Greek default.
There are three ways this can end (assuming the monetary union doesn't break up):
- Roll over existing debts for the forseeable future (at a more sustainable cost of borrowing)
- Restructure the debts, or
- Introduce Euro bonds
The ball is clearly in Germany's court. Eurointelligence provides a useful overview of the current thinking in that country.
Monday, 23 May 2011
Eurozone options ....
Two links of interest: on Social Europe Journal, Henning Meyer examines Five Ways to Solve the Eurozone Crisis, while - over at the Financial Times - Wolfgang Munchau makes the point that Cosmetic Surgery will not Save the Eurozone. Comments?
Friday, 20 May 2011
Is financial repression on the agenda?
Two posts suggest it should be. Aidan Regan proposes that we should go beyond the pension levy and how, through taxation and capital regulation, generate resources for investment and to pay existing debt. In a separate post, Michael Taft suggests the Government borrow from pension funds at negotiated rates to fund an expansionary investment programme. Both conclude there are better ways to put private savings to work for the economy than is currently being pursued.
Eurozone Failures - Time for Eurobonds and a Radical Rethink
Tom McDonnell: Two quick links:
Guillermo De La Dehesa of CEPR has put together a very useful one-pager that should be mandatory reading for the hapless decision makers bumbling their way through the Euro debt crisis. De La Dehesa lays bare most of the flaws in the current strategy and identifies the most efficient way to resolve the crisis - create a Euro zone bond market as large, deep, diversified and liquid as that of the US treasury bondmarket.
Meanwhile Hugo Radice over at the SEJ also calls for a radical policy rethink and laments the institutional inertia and indecision plaguing the Euro zone.
Guillermo De La Dehesa of CEPR has put together a very useful one-pager that should be mandatory reading for the hapless decision makers bumbling their way through the Euro debt crisis. De La Dehesa lays bare most of the flaws in the current strategy and identifies the most efficient way to resolve the crisis - create a Euro zone bond market as large, deep, diversified and liquid as that of the US treasury bondmarket.
Meanwhile Hugo Radice over at the SEJ also calls for a radical policy rethink and laments the institutional inertia and indecision plaguing the Euro zone.
Thursday, 19 May 2011
The economic consequences of the ECB - "an unrepayable debt is an unrepayable debt"
Tom McDonnell: It seems the war dogs of the ECB have threatened to cut off Greece’s access to liquidity if it defaults. Jean-Claude Trichet even attacked Jean-Claude Juncker for daring to say what everybody knows. Greece need to restructure yet the ECB continues to insist that the circus must go on.
Zsolt Darvas, Jean Pisani-Ferry and André Sapirrover at Voxeu have helpfully run the numbers on the Greek debt, and their findings uncategorically show that Greece cannot support its debts.
Even the following three measures:
1. a lowering of the interest rate on all official EU loans,
2. maturity extensions on EU and IMF loans, and
3. the repurchase by the European Financial Stability Facility (EFSF) of all sovereign bonds held by the ECB at market value and the retrocession of the corresponding haircut to the issuing country ...
...would not be sufficient to return Greece to solvency. Under their most optimistic scenario, bringing public debt down to 60% of GDP by 2034 would require the country to maintain a 6% primary surplus every year for 20 years. The more cautious scenario estimates a 10.9% primary surplus would be required. Finally, they find that the haircut on marketable public debt necessary to return Greece to solvency would be in the range of 30%.
And the Financial Time’s Alphaville column points to research from Barclays capital estimating that a 67% haircut must be made on Greek debt in 2012 to push Greece towards sustainability.
The Euro zone has badly mishandled this crisis from day one. Its policy of providing a loan facility in exchange for extreme austerity has failed. The design of its chosen panacea, the European Stabilization Mechanism, simply makes it less likely that the peripherals will be able to return to the market in the short-to-medium term. Greece will remain a ward of the official lenders for the foreseeable future unless it restructures. A change of policy is now needed.
Unfortunately what we are getting is ‘blame the victim’ rhetoric. Chancellor Merkel’s seems to be playing the ‘lazy southern Europeans’ angle -
“[There’s also an issue] that people in countries such as Greece, Spain and Portugal should not be able to retire earlier than Germans – rather, everyone should labour equally – that is important. [...] We cannot have one currency, while some people enjoy very lengthy holidays and others have very short holidays.”
Hopefully these threats and abuse are signs that the issue of the inevitable Greek restructuring is finally coming to a head.
Viable solutions will have to address the core problem, which is that the current architecture of the monetary union is dysfunctional and inherently unstable. Europe’s great currency project cannot survive without fundamental reform. As Paul De Grauwe puts it, “A monetary union can only function if there is a collective mechanism of mutual support and control.”
Zsolt Darvas, Jean Pisani-Ferry and André Sapirrover at Voxeu have helpfully run the numbers on the Greek debt, and their findings uncategorically show that Greece cannot support its debts.
Even the following three measures:
1. a lowering of the interest rate on all official EU loans,
2. maturity extensions on EU and IMF loans, and
3. the repurchase by the European Financial Stability Facility (EFSF) of all sovereign bonds held by the ECB at market value and the retrocession of the corresponding haircut to the issuing country ...
...would not be sufficient to return Greece to solvency. Under their most optimistic scenario, bringing public debt down to 60% of GDP by 2034 would require the country to maintain a 6% primary surplus every year for 20 years. The more cautious scenario estimates a 10.9% primary surplus would be required. Finally, they find that the haircut on marketable public debt necessary to return Greece to solvency would be in the range of 30%.
And the Financial Time’s Alphaville column points to research from Barclays capital estimating that a 67% haircut must be made on Greek debt in 2012 to push Greece towards sustainability.
The Euro zone has badly mishandled this crisis from day one. Its policy of providing a loan facility in exchange for extreme austerity has failed. The design of its chosen panacea, the European Stabilization Mechanism, simply makes it less likely that the peripherals will be able to return to the market in the short-to-medium term. Greece will remain a ward of the official lenders for the foreseeable future unless it restructures. A change of policy is now needed.
Unfortunately what we are getting is ‘blame the victim’ rhetoric. Chancellor Merkel’s seems to be playing the ‘lazy southern Europeans’ angle -
“[There’s also an issue] that people in countries such as Greece, Spain and Portugal should not be able to retire earlier than Germans – rather, everyone should labour equally – that is important. [...] We cannot have one currency, while some people enjoy very lengthy holidays and others have very short holidays.”
Hopefully these threats and abuse are signs that the issue of the inevitable Greek restructuring is finally coming to a head.
Viable solutions will have to address the core problem, which is that the current architecture of the monetary union is dysfunctional and inherently unstable. Europe’s great currency project cannot survive without fundamental reform. As Paul De Grauwe puts it, “A monetary union can only function if there is a collective mechanism of mutual support and control.”
TASC launches discussion paper on debt and banking crisis
TASC today launched a discussion paper by TASC policy analyst (and PE blogger) Tom McDonnell, The Debt and Banking Crisis: Progressive Approaches for Europe and Ireland. You can download the document here. Comments?
Monday, 16 May 2011
Don't frighten the chislers
Slí Eile: The article is picking up a lot of hits over on journal.ie here.
Social Justice Ireland
Slí Eile: Some strong and clear messages emerge from Social Justice Ireland in its latest Socio-Economic Review. It makes the case that: 'It is profoundly wrong for example that poor people carry a major burden while senior bond-holders, who carry a large part of the responsibility for Ireland’s implosion, make no contribution to sharing the burden.' The full document may be downloaded here.
Paying for the Jobs Initiative
Gerry Hughes: In 1988, in the middle of Ireland’s last economic crisis, the Minister for Finance in the Fianna Fáil Government, Ray McSharry, imposed a levy on pension funds for one year. In his Budget speech he justified it by noting that “funded pension schemes enjoy a very favourable tax regime in respect of pension contributions, investment income and lump-sum benefits.” The levy was opposed by the pensions industry and by employer and trade union organisations on the grounds that it would have serious consequences for pension funds. It didn’t. Pension fund assets grew from €6.4 billion in 1988 to €7.5 billion in 1989 and to €39.6 billion in 1999.
Last week the Minister for Finance, Mr. Noonan, proposed a levy of 0.6 per cent per annum on pension assets. It is expected to yield €470 million per annum to pay for a four year programme of measures which the government hopes will stimulate urgently needed jobs in tourism and other sectors of the economy. Nevertheless, the pensions industry is even more opposed to the Minister’s proposal than it was in 1988. Indeed the reaction from the industry has been so strong this time that the Minister has described it as “quasi-hysterical”. The Minister went on to say that the Government “was pulling back a very small proportion” of the tax relief from which the industry has benefitted over the years. How small is this proportion in relation to the amount the Government has contributed to pension fund assets in recent years, in relation to the pensions industry’s annual earnings and in relation to the annual value of the subsidy which the Government will continue to provide for pension funds?
Well the annual Statistical Reports of the Revenue Commissioners show that during the period 1998-2008 the cumulative net cost of pension tax expenditure amounted to €28.5 billion. In relation to the amount the Government has contributed, therefore, the levy is certainly small. It is also small in relation to the amount which pension funds are now in a position to earn on assets which they have mainly invested in international financial markets. The expected yield from the levy suggests that pension assets are now worth at least €78 billion. Rubicon Investment Consulting reports that in 2010 the average managed fund earned a rate of return of 11.1 per cent. Even If the rate of return were to fall significantly over the next four years, it should be manageable for the industry to use its earnings to absorb a charge of around €0.5 billion a year. The levy is also small in relation to the annual subsidy which the Government provides for pension funds through tax forgone on pension contributions, the investment income of the funds and lump sum payments on retirement. In the three years 2006-2008 the value of the tax forgone was about €3 billion each year. Because of the loss of value of pension assets during the present crisis the cost of the Government’s annual subsidy is likely to be around €23/4 billion. A levy of 0.6 per cent would, therefore, claw back 17 per cent of the annual cost of the tax expenditure on pensions.
Apparently the Government discussed with the pensions industry the option of standard rating pension tax relief, as has been done for other tax reliefs. The ESRI estimates that standard rating the reliefs could yield €1 billion per annum. The TCD Pension Policy Research Group, Tasc, Social Justice Ireland, the OECD and other commentators have all argued that standard rating would be a fairer policy. Not surprisingly, the pensions industry rejected a policy which would create greater equity in the tax treatment of pension funds by reducing tax relief for top rate taxpayers but involve no change for those paying the standard rate. Instead it suggested “one alternative option, …, would be a levy on pension fund assets” (see here. Having got its way, the pensions industry should absorb the levy either by reducing its costs and becoming more efficient, as other sectors of the Irish economy are being required to do, or by paying it out of current earnings or out of the annual subsidy which the Government will continue to provide over the next four years.
The debate over the levy on pension assets has exposed the Government’s lack of information about the pensions industry’s charges for different types of funded pension schemes. The Taoiseach has said that he will ask the Minister for Finance and an Oireachtas committee, before the next budget, to examine alternative ways of raising the money to pay the levy by cutting costs in the pensions industry. Such an inquiry would be welcome but its terms of reference should be broadened to ask why all taxpayers have to pay higher tax rates to subsidise an industry which benefits a relatively privileged minority of the population?
Last week the Minister for Finance, Mr. Noonan, proposed a levy of 0.6 per cent per annum on pension assets. It is expected to yield €470 million per annum to pay for a four year programme of measures which the government hopes will stimulate urgently needed jobs in tourism and other sectors of the economy. Nevertheless, the pensions industry is even more opposed to the Minister’s proposal than it was in 1988. Indeed the reaction from the industry has been so strong this time that the Minister has described it as “quasi-hysterical”. The Minister went on to say that the Government “was pulling back a very small proportion” of the tax relief from which the industry has benefitted over the years. How small is this proportion in relation to the amount the Government has contributed to pension fund assets in recent years, in relation to the pensions industry’s annual earnings and in relation to the annual value of the subsidy which the Government will continue to provide for pension funds?
Well the annual Statistical Reports of the Revenue Commissioners show that during the period 1998-2008 the cumulative net cost of pension tax expenditure amounted to €28.5 billion. In relation to the amount the Government has contributed, therefore, the levy is certainly small. It is also small in relation to the amount which pension funds are now in a position to earn on assets which they have mainly invested in international financial markets. The expected yield from the levy suggests that pension assets are now worth at least €78 billion. Rubicon Investment Consulting reports that in 2010 the average managed fund earned a rate of return of 11.1 per cent. Even If the rate of return were to fall significantly over the next four years, it should be manageable for the industry to use its earnings to absorb a charge of around €0.5 billion a year. The levy is also small in relation to the annual subsidy which the Government provides for pension funds through tax forgone on pension contributions, the investment income of the funds and lump sum payments on retirement. In the three years 2006-2008 the value of the tax forgone was about €3 billion each year. Because of the loss of value of pension assets during the present crisis the cost of the Government’s annual subsidy is likely to be around €23/4 billion. A levy of 0.6 per cent would, therefore, claw back 17 per cent of the annual cost of the tax expenditure on pensions.
Apparently the Government discussed with the pensions industry the option of standard rating pension tax relief, as has been done for other tax reliefs. The ESRI estimates that standard rating the reliefs could yield €1 billion per annum. The TCD Pension Policy Research Group, Tasc, Social Justice Ireland, the OECD and other commentators have all argued that standard rating would be a fairer policy. Not surprisingly, the pensions industry rejected a policy which would create greater equity in the tax treatment of pension funds by reducing tax relief for top rate taxpayers but involve no change for those paying the standard rate. Instead it suggested “one alternative option, …, would be a levy on pension fund assets” (see here. Having got its way, the pensions industry should absorb the levy either by reducing its costs and becoming more efficient, as other sectors of the Irish economy are being required to do, or by paying it out of current earnings or out of the annual subsidy which the Government will continue to provide over the next four years.
The debate over the levy on pension assets has exposed the Government’s lack of information about the pensions industry’s charges for different types of funded pension schemes. The Taoiseach has said that he will ask the Minister for Finance and an Oireachtas committee, before the next budget, to examine alternative ways of raising the money to pay the levy by cutting costs in the pensions industry. Such an inquiry would be welcome but its terms of reference should be broadened to ask why all taxpayers have to pay higher tax rates to subsidise an industry which benefits a relatively privileged minority of the population?
Saturday, 14 May 2011
The proposed levy on pension funds
Jim Stewart: The levy on pension funds makes economic sense, but it has been very poorly presented, and it is inequitable in its proposed from.
The levy makes economic sense because the State has a large budget deficit (forecast at 10% of GDP for 2011), reducing this deficit without steps to improve economic growth would exacerbate the problem. At the same time the State cannot borrow on capital markets and borrowing from the ECB/EU is expensive.
The household savings rate for 2009 was estimated by the CSO to be 12% of income in 2009. The household sector held €105 billion in net financial assets in 2009, and an estimated €240 billion in housing (excluding land). It is likely that net financial assets have increased since then, and the value of the housing stock has fallen.
Thus the household sector in Ireland in aggregate, is not ‘bankrupt’ and cannot become ‘bankrupt’ in the context of a monetary union and integrated financial markets with no capital controls. The prediction by Morgan Kelly of ‘a prolonged and chaotic national bankruptcy’ is thus misleading. The analogy would be Orange County in the US which became bankrupt or insolvent in the sense that State employees, interest on debt etc. could not be paid, but the citizens of Orange County did not become bankrupt/insolvent.
Recent publicity given to the view that Ireland is bankrupt, and that a policy option is to leave the Euro causes further outflows, and helps bring about one aspect of that which has been predicted - the insolvency of the State.
An important economic issue is that most savings are held outside Ireland in the form of pension funds, and increasingly deposits. A solution to the budget deficit is to use these savings, by borrowing or by taxation. This is what has been proposed in relation to pension funds. It is in effect a form of wealth tax but it is a partial wealth tax which it is proposed to levy on some forms of pension assets (those pension assets that have benefited from tax relief), while ignoring those who have chosen to provide for their pension, via conventional savings or by property, and the implicit value of public sector pensions The partial nature of this levy is one of the reasons, as argued later, why it is inequitable.
But the case has been poorly presented. The vital jobs initiative is dependent on funding from this source. Yet some of the information issued is misleading, for example in relation to the decision not to impose the proposed tax on ARFs because it is argued that they were ‘closest in nature and an alternative to an annuity’. They are in fact closest in nature to a pension fund as that fund is operated in Ireland. But more important there is poor data on the value of pension fund assets. The former Minister for Finance stated in answer to a PQ (16th December) that there ‘was no data on the value of individual pension schemes’. There is also no recent data on the value of ARFs. The most recent estimate is for 2005 and the figure then was 6600 schemes held €1.1 billion in assets (Budget 2006, Internal Review of Certain Tax Schemes, G, p. 21).
The proposal as currently envisaged is inequitable. Employees in the public sector are more likely to have a pension than those in the private sector, and this pension is also likely to be larger. Yet the proposal envisages legislation which will enable funded schemes to ‘reduce the pension payable’ (Pension Fund Levy Q and A. Department of Finance). Some of those who are currently retired have extremely generous pensions, and will bear no extra tax burden, while a majority of the population aged over 65 have no occupational pension.
It is proposed not to impose a levy on ARFs yet the tax treatment of ARFs under certain circumstances is far more generous than pensions in payment.
A more equitable and hence acceptable proposal would be to extend the levy to all pension fund assets that have not been annuitised.
The proposed funding of the vital jobs initiative appears to have been poorly thought out. This may be partly explained by complications introduced into government policy making by negotiations with the EU/ECB/IMF. These bodies have conflicting views on policy, some policies proposed are incoherent. Key decision makers appear at times to be both ill informed and arrogant.
The Minister for Finance has given a commitment to ‘examine’ the issue of tax reliefs on pensions contained in the EU/IMF programme and any ‘scope for fiscally neutral changes’. The implication being that the levy on assets may result in a proposal for smaller reductions in announced tax reliefs. The implications of such changes need to be carefully considered so that existing inequities in the tax treatment of pensions are not exacerbated. Such an examination may show that further reducing tax reliefs for pension provision, increasing the pension contribution of high earners in the public sector and reducing tax allowances for those retired persons with large pensions is a more equitable and effective means of funding the vital jobs initiative .
The issue of the taxation of pension funds has been confused by the issue of high charges by pension funds. Tasc/TCD Pension Policy Research Group has long argued that pension fund charges are excessive and should be reduced. This should happen irrespective of the tax treatment of pension funds.
The levy makes economic sense because the State has a large budget deficit (forecast at 10% of GDP for 2011), reducing this deficit without steps to improve economic growth would exacerbate the problem. At the same time the State cannot borrow on capital markets and borrowing from the ECB/EU is expensive.
The household savings rate for 2009 was estimated by the CSO to be 12% of income in 2009. The household sector held €105 billion in net financial assets in 2009, and an estimated €240 billion in housing (excluding land). It is likely that net financial assets have increased since then, and the value of the housing stock has fallen.
Thus the household sector in Ireland in aggregate, is not ‘bankrupt’ and cannot become ‘bankrupt’ in the context of a monetary union and integrated financial markets with no capital controls. The prediction by Morgan Kelly of ‘a prolonged and chaotic national bankruptcy’ is thus misleading. The analogy would be Orange County in the US which became bankrupt or insolvent in the sense that State employees, interest on debt etc. could not be paid, but the citizens of Orange County did not become bankrupt/insolvent.
Recent publicity given to the view that Ireland is bankrupt, and that a policy option is to leave the Euro causes further outflows, and helps bring about one aspect of that which has been predicted - the insolvency of the State.
An important economic issue is that most savings are held outside Ireland in the form of pension funds, and increasingly deposits. A solution to the budget deficit is to use these savings, by borrowing or by taxation. This is what has been proposed in relation to pension funds. It is in effect a form of wealth tax but it is a partial wealth tax which it is proposed to levy on some forms of pension assets (those pension assets that have benefited from tax relief), while ignoring those who have chosen to provide for their pension, via conventional savings or by property, and the implicit value of public sector pensions The partial nature of this levy is one of the reasons, as argued later, why it is inequitable.
But the case has been poorly presented. The vital jobs initiative is dependent on funding from this source. Yet some of the information issued is misleading, for example in relation to the decision not to impose the proposed tax on ARFs because it is argued that they were ‘closest in nature and an alternative to an annuity’. They are in fact closest in nature to a pension fund as that fund is operated in Ireland. But more important there is poor data on the value of pension fund assets. The former Minister for Finance stated in answer to a PQ (16th December) that there ‘was no data on the value of individual pension schemes’. There is also no recent data on the value of ARFs. The most recent estimate is for 2005 and the figure then was 6600 schemes held €1.1 billion in assets (Budget 2006, Internal Review of Certain Tax Schemes, G, p. 21).
The proposal as currently envisaged is inequitable. Employees in the public sector are more likely to have a pension than those in the private sector, and this pension is also likely to be larger. Yet the proposal envisages legislation which will enable funded schemes to ‘reduce the pension payable’ (Pension Fund Levy Q and A. Department of Finance). Some of those who are currently retired have extremely generous pensions, and will bear no extra tax burden, while a majority of the population aged over 65 have no occupational pension.
It is proposed not to impose a levy on ARFs yet the tax treatment of ARFs under certain circumstances is far more generous than pensions in payment.
A more equitable and hence acceptable proposal would be to extend the levy to all pension fund assets that have not been annuitised.
The proposed funding of the vital jobs initiative appears to have been poorly thought out. This may be partly explained by complications introduced into government policy making by negotiations with the EU/ECB/IMF. These bodies have conflicting views on policy, some policies proposed are incoherent. Key decision makers appear at times to be both ill informed and arrogant.
The Minister for Finance has given a commitment to ‘examine’ the issue of tax reliefs on pensions contained in the EU/IMF programme and any ‘scope for fiscally neutral changes’. The implication being that the levy on assets may result in a proposal for smaller reductions in announced tax reliefs. The implications of such changes need to be carefully considered so that existing inequities in the tax treatment of pensions are not exacerbated. Such an examination may show that further reducing tax reliefs for pension provision, increasing the pension contribution of high earners in the public sector and reducing tax allowances for those retired persons with large pensions is a more equitable and effective means of funding the vital jobs initiative .
The issue of the taxation of pension funds has been confused by the issue of high charges by pension funds. Tasc/TCD Pension Policy Research Group has long argued that pension fund charges are excessive and should be reduced. This should happen irrespective of the tax treatment of pension funds.
Thursday, 12 May 2011
Options on default
Tom O'Connor: Doomsday scenarios have been painted recently by Prof. Morgan Kelly and others concerning the need to abandon to EU/IMF deal on the one hand or totally repudiate the debt on the other. Kelly has suggested we abandon the bailout and balance the exchequer books immediately. Balancing the books immediately is not an option however.
The newly elected Fine Gael TD Paschal Donohoe has warned against abandoning the bailout, predicting huge cuts in social welfare. The Central Bank Governor, Paddy Honohan is defending the bailout and fighting to save his reputation. There is a huge amount of kneejerk-ism around and people taking sides. I attempt in this post to stand back and examine evidence which might inform the way forward.
Let’s start with the most radical scenario, Argentina: In 2002, it had developed a triple financial crisis in terms of its unmanageable fiscal deficit, banks which were broke and ultimately a government external debt crisis as a result. To a large extent, this is where Ireland is right now. In January 2002, Argentina essentially abruptly defaulted on $81.8 billion of its external debt without consultation with creditors.
This led to a run on the banks. It wiped out the savings of citizens. It dramatically increased the cost of borrowing by the government and deflated the size of the economy by 25% in one year from 2001 to 2002. The collapse of the currency greatly indebted the country also, as much of it was denominated in dollars.
For many years afterwards, Argentinean credit has been more costly in its bond spreads. Bond debt has been more costly there and in Ecuador, far higher than in other countries which had restructured their debt with creditors in advance, such as Ukraine (1998) and Uruguay (2003).
Argentina and Ecuador also imposed large haircuts on the debt on which it defaulted, far higher than that of countries which had negotiated in advance. Ukraine and Uruguay imposed lower haircuts and in the years that followed, their bond spreads were lower. This means that they could subsequently borrow more cheaply as a reflection of the greater level of international trust in these countries.
Nonetheless all four countries did eventually formally agree repayment terms with the IMF, either pre-default or post-default. This happened under the IMF’s Sovereign Debt Restructuring Mechanism (SDRM). According to Professor Nouriel Roublini, at this point the European Union should examine this mechanism as the way forward for debt restructuring, and not be wasting its time looking for new legal mechanisms.
Working on his evidence as well as that contained in work by De Paoli (2006), Gelos (2004) and others, there is strong evidence to suggest that the preferred option is a partial and negotiated restructuring of debt in advance of a default. The term ‘restructuring’ sounds more positive and is more advantageous.
Nonetheless, a negotiated ‘restructuring’ is still a default according to the eminent work of Reinhart and Rogoff (2009). The benefits of lower bond spreads in the years following a ‘restructuring’ or ‘exchange offer’ (Roubini) of a restructured debt are augmented by a significantly less negative impact on growth in the years ahead on the ability raise finance internationally. This negotiated mechanism (as in the SDRM) reduces ‘deadweight costs’ also such as costly legal proceedings. It is infinitely better than allowing a country to stumble towards default to the destruction of its economy. This resembles death by a thousand cuts.
Taking this eminent advice on board, I would suggest that the EU/IMF deal needs to rescinded and replaced with Ireland cutting a deal on external debt, including sovereign debt and the debts of the Irish Banks.
The current bailout offers bad terms for Ireland. The prospect of repaying 70 billion worth of bank debt without any deal on writing down the bonds involved, at a rate of interest of 5.8% cannot be done, particularly as it will have to be paid in conjunction with sovereign exchequer debt. The repayment of 8 billion a year in interest is off the scale.
On the basis of the evidence from international experience, the bailout needs to be replaced by an IMF led Sovereign Debt Restructuring Mechanism (SDRM). Many Irish economists have pointed to the fact that under the current bailout, Ireland will become insolvent by 2014. The country cannot sit back and wait for this to happen. Instead, it needs to offer, along with other euro zone countries in danger of default, what Roubini terms a ‘pre-emptive, pre-default exchange rate offer’.
Without a default, national debt will be 225 billion in 2014 and our GDP according to the Dept of Finance will be only 184, a debt/GDP ratio of 122%. This figure 225 does not include NAMA. This 184 debt would include 70 billion of bank debt if we include the recapitalisations from 2008 till then. At that point, the sustained debt would be over twice the international solvency rule of thumb whereby a country needs to keep its debt below 60% of GDP.
The Roubini Pre-Default Exchange Offer under existing IMF rules should be done in the same was as was done in Pakistan, Uruguay or Ukraine and in many other countries in recent years. The EU/IMF deal should be cast aside.
This would be a partial default. It needs to be planned with creditors. A haircut of at least 50% on the bank debt of 70 billion needs to be agreed right away. Haircuts of this magnitude have been proposed by Rogoff and Roubini.
Exchequer debt needs to be extended well beyond the 7.5 years of average maturity which exists under the EU/IMF deal. A significant cut in the interest rate on sovereign external debt will also be necessary alongside a possible haircut also. The 160 billion owed to the ECB by Irish banks will also need to be restructured. These are some of the areas of ‘offer’ that the Irish government needs to make to its creditors.
Another international model which might inform the default is that of South East Asia in the late 1990s. After receiving IMF funds, they opted out of their quasi-fixed exchange rate with the dollar and devalued significantly. They recovered economically far more quickly than Hong Kong which stuck with the dollar. If Ireland sticks with the euro under a default, its recovery will take longer, as happened in Hong Kong. By contrast, the devaluation of the currencies in Thailand, Indonesia and South Korea greatly added stimulation to their economic recovery.
This scenario would help greatly in avoiding severe cutbacks in wages, social welfare payments and public spending. The scale of future GNP increases is also key to preventing punitive measures been implemented by the Irish government on its population. A significant economic stimulus is needed in this regard.
Despite the warnings of some commentators however, the published evidence does not necessarily support the inevitability that pay rates in the public sector and social welfare payments will automatically be dramatically cut in the event of a default.
If a default is ‘offered’ pre-emptively by a country in negotiation with creditors and particularly under the IMF (SDRM), recovery may happen within three years according to the in-depth research by Reinhart and Rogoff of Harvard. With access to capital markets within months and growth restored quickly, penal cuts to public pay and welfare are not in any way an inevitable and may in fact be prevented.
After a default, countries are not ‘blacked’ for finance for long periods and usually can access market finance within four months in many cases, according to a study by Gelos (2004). An exhaustive World Bank study by Zettelmeyer and Sturzenegger (2007) also echoes the view that default is far from a doomsday scenario. Many countries recovered quickly despite the negative effects on economic growth and the increased cost of borrowing. Argentina and Russia are cases in point.
In addition, it may well be the case that the blanket austerity being demanded by the EU and IMF under the bailout plan would be a lot worse and more punitive on those not responsible for the problem, than would a structured default where Ireland exerts more control on its own affairs.
It is obvious that Greece Will negotiate a default very soon. It seems increasingly likely that the EU cannot hold back the tide of default. The Portuguese bailout may never fully even get off the blocks and it certainly does not look sustainable.
The Irish government needs to stop burying its head in the sand and posturing about a possible lowering of the interest rate in the bailout. This bailout will not work. Modelling from other countries demonstrates that a negotiated default needs to happen as soon as possible. This will give the economy a better chance of bouncing back quickly, a lesson that has been learned from Japan’s stubbornness in this regard heretofore.
A Debt Audit Commission was set up in Ecuador in 2007. Some unions, academics and civil society groups have been calling for one to be set up in Ireland. This will determine the fairest course of action on defaulting. This could inform the way forward.
this piece originally appeared in the Irish Examiner
The newly elected Fine Gael TD Paschal Donohoe has warned against abandoning the bailout, predicting huge cuts in social welfare. The Central Bank Governor, Paddy Honohan is defending the bailout and fighting to save his reputation. There is a huge amount of kneejerk-ism around and people taking sides. I attempt in this post to stand back and examine evidence which might inform the way forward.
Let’s start with the most radical scenario, Argentina: In 2002, it had developed a triple financial crisis in terms of its unmanageable fiscal deficit, banks which were broke and ultimately a government external debt crisis as a result. To a large extent, this is where Ireland is right now. In January 2002, Argentina essentially abruptly defaulted on $81.8 billion of its external debt without consultation with creditors.
This led to a run on the banks. It wiped out the savings of citizens. It dramatically increased the cost of borrowing by the government and deflated the size of the economy by 25% in one year from 2001 to 2002. The collapse of the currency greatly indebted the country also, as much of it was denominated in dollars.
For many years afterwards, Argentinean credit has been more costly in its bond spreads. Bond debt has been more costly there and in Ecuador, far higher than in other countries which had restructured their debt with creditors in advance, such as Ukraine (1998) and Uruguay (2003).
Argentina and Ecuador also imposed large haircuts on the debt on which it defaulted, far higher than that of countries which had negotiated in advance. Ukraine and Uruguay imposed lower haircuts and in the years that followed, their bond spreads were lower. This means that they could subsequently borrow more cheaply as a reflection of the greater level of international trust in these countries.
Nonetheless all four countries did eventually formally agree repayment terms with the IMF, either pre-default or post-default. This happened under the IMF’s Sovereign Debt Restructuring Mechanism (SDRM). According to Professor Nouriel Roublini, at this point the European Union should examine this mechanism as the way forward for debt restructuring, and not be wasting its time looking for new legal mechanisms.
Working on his evidence as well as that contained in work by De Paoli (2006), Gelos (2004) and others, there is strong evidence to suggest that the preferred option is a partial and negotiated restructuring of debt in advance of a default. The term ‘restructuring’ sounds more positive and is more advantageous.
Nonetheless, a negotiated ‘restructuring’ is still a default according to the eminent work of Reinhart and Rogoff (2009). The benefits of lower bond spreads in the years following a ‘restructuring’ or ‘exchange offer’ (Roubini) of a restructured debt are augmented by a significantly less negative impact on growth in the years ahead on the ability raise finance internationally. This negotiated mechanism (as in the SDRM) reduces ‘deadweight costs’ also such as costly legal proceedings. It is infinitely better than allowing a country to stumble towards default to the destruction of its economy. This resembles death by a thousand cuts.
Taking this eminent advice on board, I would suggest that the EU/IMF deal needs to rescinded and replaced with Ireland cutting a deal on external debt, including sovereign debt and the debts of the Irish Banks.
The current bailout offers bad terms for Ireland. The prospect of repaying 70 billion worth of bank debt without any deal on writing down the bonds involved, at a rate of interest of 5.8% cannot be done, particularly as it will have to be paid in conjunction with sovereign exchequer debt. The repayment of 8 billion a year in interest is off the scale.
On the basis of the evidence from international experience, the bailout needs to be replaced by an IMF led Sovereign Debt Restructuring Mechanism (SDRM). Many Irish economists have pointed to the fact that under the current bailout, Ireland will become insolvent by 2014. The country cannot sit back and wait for this to happen. Instead, it needs to offer, along with other euro zone countries in danger of default, what Roubini terms a ‘pre-emptive, pre-default exchange rate offer’.
Without a default, national debt will be 225 billion in 2014 and our GDP according to the Dept of Finance will be only 184, a debt/GDP ratio of 122%. This figure 225 does not include NAMA. This 184 debt would include 70 billion of bank debt if we include the recapitalisations from 2008 till then. At that point, the sustained debt would be over twice the international solvency rule of thumb whereby a country needs to keep its debt below 60% of GDP.
The Roubini Pre-Default Exchange Offer under existing IMF rules should be done in the same was as was done in Pakistan, Uruguay or Ukraine and in many other countries in recent years. The EU/IMF deal should be cast aside.
This would be a partial default. It needs to be planned with creditors. A haircut of at least 50% on the bank debt of 70 billion needs to be agreed right away. Haircuts of this magnitude have been proposed by Rogoff and Roubini.
Exchequer debt needs to be extended well beyond the 7.5 years of average maturity which exists under the EU/IMF deal. A significant cut in the interest rate on sovereign external debt will also be necessary alongside a possible haircut also. The 160 billion owed to the ECB by Irish banks will also need to be restructured. These are some of the areas of ‘offer’ that the Irish government needs to make to its creditors.
Another international model which might inform the default is that of South East Asia in the late 1990s. After receiving IMF funds, they opted out of their quasi-fixed exchange rate with the dollar and devalued significantly. They recovered economically far more quickly than Hong Kong which stuck with the dollar. If Ireland sticks with the euro under a default, its recovery will take longer, as happened in Hong Kong. By contrast, the devaluation of the currencies in Thailand, Indonesia and South Korea greatly added stimulation to their economic recovery.
This scenario would help greatly in avoiding severe cutbacks in wages, social welfare payments and public spending. The scale of future GNP increases is also key to preventing punitive measures been implemented by the Irish government on its population. A significant economic stimulus is needed in this regard.
Despite the warnings of some commentators however, the published evidence does not necessarily support the inevitability that pay rates in the public sector and social welfare payments will automatically be dramatically cut in the event of a default.
If a default is ‘offered’ pre-emptively by a country in negotiation with creditors and particularly under the IMF (SDRM), recovery may happen within three years according to the in-depth research by Reinhart and Rogoff of Harvard. With access to capital markets within months and growth restored quickly, penal cuts to public pay and welfare are not in any way an inevitable and may in fact be prevented.
After a default, countries are not ‘blacked’ for finance for long periods and usually can access market finance within four months in many cases, according to a study by Gelos (2004). An exhaustive World Bank study by Zettelmeyer and Sturzenegger (2007) also echoes the view that default is far from a doomsday scenario. Many countries recovered quickly despite the negative effects on economic growth and the increased cost of borrowing. Argentina and Russia are cases in point.
In addition, it may well be the case that the blanket austerity being demanded by the EU and IMF under the bailout plan would be a lot worse and more punitive on those not responsible for the problem, than would a structured default where Ireland exerts more control on its own affairs.
It is obvious that Greece Will negotiate a default very soon. It seems increasingly likely that the EU cannot hold back the tide of default. The Portuguese bailout may never fully even get off the blocks and it certainly does not look sustainable.
The Irish government needs to stop burying its head in the sand and posturing about a possible lowering of the interest rate in the bailout. This bailout will not work. Modelling from other countries demonstrates that a negotiated default needs to happen as soon as possible. This will give the economy a better chance of bouncing back quickly, a lesson that has been learned from Japan’s stubbornness in this regard heretofore.
A Debt Audit Commission was set up in Ecuador in 2007. Some unions, academics and civil society groups have been calling for one to be set up in Ireland. This will determine the fairest course of action on defaulting. This could inform the way forward.
this piece originally appeared in the Irish Examiner
Wednesday, 11 May 2011
A chink of light ...
Michael Burke: In the furore about the recent Morgan Kelly article in the Irish Times, in which he advocates a debt default, there has been very little light and much heat generated. The worst response I have seen (there may be others), in terms of lack of logic, was that from former Taoiseach John Bruton, who argued that the ECB would go bust if this state defaulted on any part of its debt. Some should tell the chair of the IFSC Ireland that central banks can’t go bust from a default in the currency which they produce.
But there was one chink of light. Strangely, the NTMA has issued an ‘Information Note on Ireland’s Debt’. No-one can recall one these strangely-titled notes ever having been issued before. For any information on this topic we should be grateful, although it seems some of the thanks should be directed towards Prof. Kelly.
In the note, point 3, it refers to the holdings of government debt by residency, and produces a truncated version of a table that first appeared in the Central Bank’s Quarterly Bulletin. Below the fuller version from the Bank’s Bulletin is reproduced (Table E3).
One of the key arguments against any type of default is the damage this will do to the ordinary citizens of Ireland/Europe (the location being somewhat moveable). In effect, we are being asked to do the right thing by the widows and orphans of Dublin, or Dresden.
The table shows this concern to be misplaced. TotaI government debt at the end of 2010 was €90.1bn. If we take only Irish residents, the overwhelming bulk of the €16bn in debt held was by MFIs (monetary financial institution; banks) and the central bank. Only €252mn was held directly by households and a further €1.774bn mainly on their behalf by insurance and pension funds. So, just over €2bn held by Irish ‘widows and orphans’- most of whom aren’t, of course. Many will be very wealthy individuals who have built substantial private pensions to supplement their not-ungenerous state pensions, mainly via a tax cost to the Exchequer, ie other taxpayers.
The holdings of pensions and insurance funds have fallen significantly over the last year from already low levels. This reflects the exit of mainstream investors from the Irish government bond market. We were repeatedly told that cuts to government spending would restore the confidence of the markets. The measures of confidence are that Irish 10yr yields are now at a new high of 10.65% and the ratings’ agencies have downgraded sovereign debt again, to one notch above ‘junk’ status.
Most mainstream investment funds, certainly any managing pensions, are prevented by their investment restrictions from investing in such low-grade debt. The high yield on the debt reflects the exit of these investors. The recent downgrades are likely to produce a further decline in these holdings. But, since every sale requires a buyer some other type of entities must be increasing their holdings. Among residents this increase has been by MFIs and the central bank.
The bulk of government debt is held overseas, €74bn of €90bn. While the ECB has increased its holdings of government debt, this has been almost exclusively in the form of collateral posted by Irish and other banks in return for short-term lending from the ECB. The same investment restrictions on junk or near-junk apply to European mainstream funds as to Irish ones. They too will have been forced to divest as the credit downgrades were accumulating.
Therefore, the new buyers cannot have come from the ranks of mainstream investors. The types of funds that can purchase near-junk debt are specialist funds in ‘distressed debt’ sometimes known as vulture funds, hedge funds and others. These are not the savings vehicles for widows or orphans, but for the extremely rich.
Turning to bank debt, the same argument applies with even more force. All the main deposit-taking Irish banks have been downgraded to junk status. Mainstream investors are simply not allowed to invest in their debt- their investment mandates preclude it. The holders of that debt, aside from central banks and each other, will therefore be the same roll-call of parasitic speculators.
It is also to these funds that Irish taxpayer will be paying the proceeds of ‘promissory notes’ to fund Anglo Irish debts. This will incur €3.1bn per annum for a total cost of €43.3bn until 2015, assuming a very favourable fall in government borrowing rates. Anglo is not now and never has been a bank which performed any useful function and there is no logical reason for taxpayers to accept this imposition.
A chink of light has been let in on the State’s debts. What is revealed reinforces the case for default.
But there was one chink of light. Strangely, the NTMA has issued an ‘Information Note on Ireland’s Debt’. No-one can recall one these strangely-titled notes ever having been issued before. For any information on this topic we should be grateful, although it seems some of the thanks should be directed towards Prof. Kelly.
In the note, point 3, it refers to the holdings of government debt by residency, and produces a truncated version of a table that first appeared in the Central Bank’s Quarterly Bulletin. Below the fuller version from the Bank’s Bulletin is reproduced (Table E3).
The table shows this concern to be misplaced. TotaI government debt at the end of 2010 was €90.1bn. If we take only Irish residents, the overwhelming bulk of the €16bn in debt held was by MFIs (monetary financial institution; banks) and the central bank. Only €252mn was held directly by households and a further €1.774bn mainly on their behalf by insurance and pension funds. So, just over €2bn held by Irish ‘widows and orphans’- most of whom aren’t, of course. Many will be very wealthy individuals who have built substantial private pensions to supplement their not-ungenerous state pensions, mainly via a tax cost to the Exchequer, ie other taxpayers.
The holdings of pensions and insurance funds have fallen significantly over the last year from already low levels. This reflects the exit of mainstream investors from the Irish government bond market. We were repeatedly told that cuts to government spending would restore the confidence of the markets. The measures of confidence are that Irish 10yr yields are now at a new high of 10.65% and the ratings’ agencies have downgraded sovereign debt again, to one notch above ‘junk’ status.
Most mainstream investment funds, certainly any managing pensions, are prevented by their investment restrictions from investing in such low-grade debt. The high yield on the debt reflects the exit of these investors. The recent downgrades are likely to produce a further decline in these holdings. But, since every sale requires a buyer some other type of entities must be increasing their holdings. Among residents this increase has been by MFIs and the central bank.
The bulk of government debt is held overseas, €74bn of €90bn. While the ECB has increased its holdings of government debt, this has been almost exclusively in the form of collateral posted by Irish and other banks in return for short-term lending from the ECB. The same investment restrictions on junk or near-junk apply to European mainstream funds as to Irish ones. They too will have been forced to divest as the credit downgrades were accumulating.
Therefore, the new buyers cannot have come from the ranks of mainstream investors. The types of funds that can purchase near-junk debt are specialist funds in ‘distressed debt’ sometimes known as vulture funds, hedge funds and others. These are not the savings vehicles for widows or orphans, but for the extremely rich.
Turning to bank debt, the same argument applies with even more force. All the main deposit-taking Irish banks have been downgraded to junk status. Mainstream investors are simply not allowed to invest in their debt- their investment mandates preclude it. The holders of that debt, aside from central banks and each other, will therefore be the same roll-call of parasitic speculators.
It is also to these funds that Irish taxpayer will be paying the proceeds of ‘promissory notes’ to fund Anglo Irish debts. This will incur €3.1bn per annum for a total cost of €43.3bn until 2015, assuming a very favourable fall in government borrowing rates. Anglo is not now and never has been a bank which performed any useful function and there is no logical reason for taxpayers to accept this imposition.
A chink of light has been let in on the State’s debts. What is revealed reinforces the case for default.
Tuesday, 10 May 2011
Stating the facts again .... and again
Michael Taft: Apologies for going over this ground again but if employers’ organisations insist on misrepresenting the issues, we have to keep correcting them. Yesterday I was on Today FM’s the Last Word with Brian Fallon from the Restaurant Association of Ireland, discussing the RAI’s latest call to cut the wages of low-paid workers. Mr. Fallon claimed that workers in the Irish hospitality sector are some of the highest paid in Europe. I pointed out that he was entirely incorrect and stated that I would put up the facts on the Progressive-Economy.ie website. So that’s what I’m doing.
The EU Commission’s data collection agency, Eurostat, publishes hourly labour costs on a sectoral basis; including the Food and Accommodation sector. For the latest year, this is what they found:
Ireland is in the bottom half of the EU-15 league table – 6 percent below the average of the other countries. This was in 2008 – the last year of rising personal income. In 2009 and 2010, Irish labour costs in this sector have fallen further behind the EU-15 average.
Caution is needed here: the EU labour cost index has a different methodology and is not seasonally adjusted. But the general trend is corroborated by other indexes – the EU Ecfin Directorate and the OECD.
If the above holds, then we should expect hourly labour costs to be approximately 9 percent below the EU-average in 2010 – falling even further behind this year and next.
By all means, lets have debates about whether increasing or cutting low wages is the best direction to take.
But let’s start that debate from verifiable facts. And the fact here is that hourly labour costs in the hospitality sector are below the EU-15 average.
I look forward to seeing Mr. Fallon’s evidence and sources to the contrary.
The EU Commission’s data collection agency, Eurostat, publishes hourly labour costs on a sectoral basis; including the Food and Accommodation sector. For the latest year, this is what they found:
Ireland is in the bottom half of the EU-15 league table – 6 percent below the average of the other countries. This was in 2008 – the last year of rising personal income. In 2009 and 2010, Irish labour costs in this sector have fallen further behind the EU-15 average.
Caution is needed here: the EU labour cost index has a different methodology and is not seasonally adjusted. But the general trend is corroborated by other indexes – the EU Ecfin Directorate and the OECD.
If the above holds, then we should expect hourly labour costs to be approximately 9 percent below the EU-average in 2010 – falling even further behind this year and next.
By all means, lets have debates about whether increasing or cutting low wages is the best direction to take.
But let’s start that debate from verifiable facts. And the fact here is that hourly labour costs in the hospitality sector are below the EU-15 average.
I look forward to seeing Mr. Fallon’s evidence and sources to the contrary.
Slight but important clarification
Tom McDonnell: I believe I was slightly taken out of context in the Irish Times today.
I was quoted as saying
“...austerity measures would not restore growth”, which is fine,
and
“He urged the Government to ramp up public investment in a manner that should “echo Roosevelt’s New Deal policies . . . and the Marshall Plan policies which engendered the recovery of Western Europe in the wake of the Second World War”.
Just to clarify that the Marshall Plan comments were meant in the context of a European wide programme of investment as a countervailing force to the austerity measures being undertaken domestically in the periphery. I was not claiming the Irish Government had access to the resources to “ramp up” investment.
Centralising monetary policy, while keeping the other instruments of economic policy in member hands, is incoherent.
In the longer-term the Euro zone members (principally Germany) will have to decide between fiscal federalism and Euro zone break-up.
The status quo cannot hold.
I was quoted as saying
“...austerity measures would not restore growth”, which is fine,
and
“He urged the Government to ramp up public investment in a manner that should “echo Roosevelt’s New Deal policies . . . and the Marshall Plan policies which engendered the recovery of Western Europe in the wake of the Second World War”.
Just to clarify that the Marshall Plan comments were meant in the context of a European wide programme of investment as a countervailing force to the austerity measures being undertaken domestically in the periphery. I was not claiming the Irish Government had access to the resources to “ramp up” investment.
Centralising monetary policy, while keeping the other instruments of economic policy in member hands, is incoherent.
In the longer-term the Euro zone members (principally Germany) will have to decide between fiscal federalism and Euro zone break-up.
The status quo cannot hold.
Friday, 6 May 2011
Full steam nowhere?
Michael Taft: Sometimes we get a set of numbers which leaves us guessing. In some cases, we have someone who can give some insight. On the face of it, it looked like there was a positive turnaround in income tax revenue. Until we discover that a sizeable proportion of that was actually DIRT revenue. And until An Saoi tells us that the ‘boost’ may be explained by the fact that April contained five pay weeks and three pay fortnights. This puts a different perspective on the returns – one not mentioned by other commentaries.
With Live Register figures we are likewise left guessing at what it could mean – if we even venture to put any stock in one month’s return. A marginal fall of 1,600 signing-on – or a drop of 0.1 percent – tells us very little. But there are other numbers that might tell us something more.
The CSO provides data for inflows (signing-on) and outflows (signing-off).
In April, there was a sizeable increase in the numbers signing-on – both Benefit and Assistance. In March, there were 33,100 new signing-ons. In April this increased to 40,200. There was also a marked increase in those signing off.
Without further information it is difficult to say what this means. New registrations are fairly straight-forward (though new registrations for Assistance could include a transition from Benefit, meaning no net increase; as well as part-time, seasonal and casual workers).
The reasons underlying the outflows are more difficult to assess. Some of this will represent job-finders. But it will also represent those whose Benefit has been exhausted but denied Assistance (such as those with a spouse/partner who is still in work); or those going on training schemes or returning to education; or those emigrating.
So are we seeing an increase in jobs? An increase in emigration? People who are removed for removed administrative reasons but are still unemployed? An increase in part-time and/or casual work but reduced full-time employment?
All we know was that there was a big spike in new registrations. And in the recent Stability Programme Update, the Government projects there will be nearly 30,000 fewer people at work this year.
So, between extra pay weeks and higher registrations for the Live Register – it appears that we are still heading full-steam nowhere.
With Live Register figures we are likewise left guessing at what it could mean – if we even venture to put any stock in one month’s return. A marginal fall of 1,600 signing-on – or a drop of 0.1 percent – tells us very little. But there are other numbers that might tell us something more.
The CSO provides data for inflows (signing-on) and outflows (signing-off).
In April, there was a sizeable increase in the numbers signing-on – both Benefit and Assistance. In March, there were 33,100 new signing-ons. In April this increased to 40,200. There was also a marked increase in those signing off.
Without further information it is difficult to say what this means. New registrations are fairly straight-forward (though new registrations for Assistance could include a transition from Benefit, meaning no net increase; as well as part-time, seasonal and casual workers).
The reasons underlying the outflows are more difficult to assess. Some of this will represent job-finders. But it will also represent those whose Benefit has been exhausted but denied Assistance (such as those with a spouse/partner who is still in work); or those going on training schemes or returning to education; or those emigrating.
So are we seeing an increase in jobs? An increase in emigration? People who are removed for removed administrative reasons but are still unemployed? An increase in part-time and/or casual work but reduced full-time employment?
All we know was that there was a big spike in new registrations. And in the recent Stability Programme Update, the Government projects there will be nearly 30,000 fewer people at work this year.
So, between extra pay weeks and higher registrations for the Live Register – it appears that we are still heading full-steam nowhere.
Guest post by Arthur Doohan: The place to be is Mr. Justice Kelly's Commercial Court room on Monday morning
Buried in the terms of the latest buyback of AIB bonds is an explicit attempt to reverse the 'hierarchy of credit'.
Doesn't sound like much, does it?
Well how about saying that the Government have attempted to establish a precedent that would, potentially, invalidate every contract in the country. Does that get your attention?
You can read more of the details here and here.
The Government appears to have tried to slip through a change that would allow it to pay whom it chooses to pay and to not pay others if it chooses not to, despite any previous contracts entered into. It seems as if the Government has decided to try to empower itself to selectively not repay the interest on some bonds, while paying the due return on the preference shares issued to the NPRF for the stake in the banks that was forced into the NPRF.
This would set a ground-breaking precedent. Appeals have already been lodged and are due to be heard on Monday next. It the Government doesn’t have its way, it will be a huge climb-down for them. Equally, it seems unlikely that a successful appeal would be greeted with equanimity by the Troika. Something has to give.
Arthur Doohan is a former banker currently promoting a public policy debate on alternative solutions to the debt crisis in Ireland and to bank restructuring
Doesn't sound like much, does it?
Well how about saying that the Government have attempted to establish a precedent that would, potentially, invalidate every contract in the country. Does that get your attention?
You can read more of the details here and here.
The Government appears to have tried to slip through a change that would allow it to pay whom it chooses to pay and to not pay others if it chooses not to, despite any previous contracts entered into. It seems as if the Government has decided to try to empower itself to selectively not repay the interest on some bonds, while paying the due return on the preference shares issued to the NPRF for the stake in the banks that was forced into the NPRF.
This would set a ground-breaking precedent. Appeals have already been lodged and are due to be heard on Monday next. It the Government doesn’t have its way, it will be a huge climb-down for them. Equally, it seems unlikely that a successful appeal would be greeted with equanimity by the Troika. Something has to give.
Arthur Doohan is a former banker currently promoting a public policy debate on alternative solutions to the debt crisis in Ireland and to bank restructuring
Thursday, 5 May 2011
April tax figures - not as good as they look
An Saoi: At an initial examination the April figures appear to be very good. However, at closer examination I think that there are a number of specific reasons - administrative and technical - explaining why the underlying figures tell another story.
The Income Tax figure looks excellent at first view. However, the estimate for April appears to have been far below the underlying liability. March involved five pay weeks for those paid weekly, and three pay fortnights. The estimate was just €1,080M - just €100M over the previous month, while €1,271M was actually paid. The profiler clearly did not get out his diary and calculate the full effect of the additional pay weeks.
Bi-monthly VAT returns are not due in April and the net VAT paid for April was €287M well in excess of €205M profiled. This is probably a reflection of delays in VAT repayment claims due to staff shortages, rather than additional taxes paid. The Revenue does not publish any details of repayment claims on hands at the end of the month therefore we can only guess what the actually position is. There have been strong rumours that the Revenue has been staggering large repayments over a longer period because of staffing and cashflow problems. The real test will occur with next month’s figures, which will include the March/April VAT returns. March spending on credit cards published by the Central Bank last week reflected very poor consumer activity in the month, and suggests that the VAT returns will be poor. Add to this the processing of the balance of the repayment claims arising from earlier periods and
Corporation Tax for the month was on target and remains ahead of target. May is a crucial month for Corporation Tax. Companies with account years ending 30th November & 30th June must make payments. In Ireland this includes Microsoft, Pfizer, Oracle & Diageo (Guinness). Last month I commented as follows on Corporation Tax,
“Little or no Corporation Tax is now paid by Irish owned businesses, while a very small proportion of the net yield is accounted for by those multi nationals actually trading in the Irish economy, e.g. Vodafone & O2. The increase in yield from Corporation Tax reflects the activities of multinationals in Ireland, using Ireland as their point of sale for goods and services. The annual target for Corporation Tax of €4,020M is likely to be comfortably exceeded. The net target for March was just €10M compared to €111M actually received. Such a monthly discrepancy needs some explanation, which was not forthcoming from Dept. of Finance.”
Corporation Tax bears no relation to actually Irish economic activity rather it is paid by multi-nationals for Ireland facilitating their activities.
Excise, which includes VRT is slightly below target in April (€406M versus profile €420M), however remains slightly ahead of target. Ongoing car sales are helping to keep figures up. The real test will occur after 30th June and the scrappage scheme ends. The continuing collapse of major garages such as Maxwell Motors would suggest that without this crutch, trade will collapse in the second half of the year.
Customs Duties are collected by the Irish Revenue on behalf of the European Union. The increase in yield is down to large multi-nationals using Ireland as their point of entry on imports from outside of the European Union and is irrelevant to the Irish Exchequer.
I made a technical error last month in relation to CAT which of course was brought into the pay and file system in Finance Act 2010. We will therefore have to wait until later in the year before we can make any real comparison. Stamp Duty & CGT are both running marginally below their very low targets.
However, I would hold with my tentative projection of March, which you can access here. Real cutbacks have not yet been felt, despite what people may think. Substantial losses of jobs will continue in the Public Sector and in Construction. The May figures should enable us to make more confident predictions for the final outcome.
The Income Tax figure looks excellent at first view. However, the estimate for April appears to have been far below the underlying liability. March involved five pay weeks for those paid weekly, and three pay fortnights. The estimate was just €1,080M - just €100M over the previous month, while €1,271M was actually paid. The profiler clearly did not get out his diary and calculate the full effect of the additional pay weeks.
Bi-monthly VAT returns are not due in April and the net VAT paid for April was €287M well in excess of €205M profiled. This is probably a reflection of delays in VAT repayment claims due to staff shortages, rather than additional taxes paid. The Revenue does not publish any details of repayment claims on hands at the end of the month therefore we can only guess what the actually position is. There have been strong rumours that the Revenue has been staggering large repayments over a longer period because of staffing and cashflow problems. The real test will occur with next month’s figures, which will include the March/April VAT returns. March spending on credit cards published by the Central Bank last week reflected very poor consumer activity in the month, and suggests that the VAT returns will be poor. Add to this the processing of the balance of the repayment claims arising from earlier periods and
Corporation Tax for the month was on target and remains ahead of target. May is a crucial month for Corporation Tax. Companies with account years ending 30th November & 30th June must make payments. In Ireland this includes Microsoft, Pfizer, Oracle & Diageo (Guinness). Last month I commented as follows on Corporation Tax,
“Little or no Corporation Tax is now paid by Irish owned businesses, while a very small proportion of the net yield is accounted for by those multi nationals actually trading in the Irish economy, e.g. Vodafone & O2. The increase in yield from Corporation Tax reflects the activities of multinationals in Ireland, using Ireland as their point of sale for goods and services. The annual target for Corporation Tax of €4,020M is likely to be comfortably exceeded. The net target for March was just €10M compared to €111M actually received. Such a monthly discrepancy needs some explanation, which was not forthcoming from Dept. of Finance.”
Corporation Tax bears no relation to actually Irish economic activity rather it is paid by multi-nationals for Ireland facilitating their activities.
Excise, which includes VRT is slightly below target in April (€406M versus profile €420M), however remains slightly ahead of target. Ongoing car sales are helping to keep figures up. The real test will occur after 30th June and the scrappage scheme ends. The continuing collapse of major garages such as Maxwell Motors would suggest that without this crutch, trade will collapse in the second half of the year.
Customs Duties are collected by the Irish Revenue on behalf of the European Union. The increase in yield is down to large multi-nationals using Ireland as their point of entry on imports from outside of the European Union and is irrelevant to the Irish Exchequer.
I made a technical error last month in relation to CAT which of course was brought into the pay and file system in Finance Act 2010. We will therefore have to wait until later in the year before we can make any real comparison. Stamp Duty & CGT are both running marginally below their very low targets.
However, I would hold with my tentative projection of March, which you can access here. Real cutbacks have not yet been felt, despite what people may think. Substantial losses of jobs will continue in the Public Sector and in Construction. The May figures should enable us to make more confident predictions for the final outcome.
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