This is the first part of a two-part post.
Michael Taft: On Sunday, Colm McCarthy wrote:
‘ . . .the programme for budgetary correction needs to be accelerated. There is one, and only one, policy instrument available to Government which will improve confidence quickly and that is the pace of deficit reduction.’
Couldn’t agree more (though equally important is to prevent private banking debt from being absorbed into Government debt). We need to reduce the deficit in a sustainable manner. Therefore, the first thing the new Government should do in its review of public spending is to consign the Report of the Special Group on Public Service Numbers and Expenditure Programmes (aka An Bord Snip Nua) to the rubbish heap. Not only is it so methodologically flawed that it tells us almost nothing about generating savings for Exchequer, the strategy which it promotes (austerity, deflation) has been a failure. Indeed, that strategy may actually be adding to the deficit and debt burden. It is time to junk the report and start a real deficit reduction programme.
Hasn’t Worked So Far
In 2009 the Special Group report called for €5.3 billion in public spending cuts, almost all current expenditure. But in the three budgets in 2009 the Government did a few billion better. They cut current spending by €6.3 billion. In addition they cut €1.5 billion from the capital budget while increasing taxation by €2.8 billion – an overall contraction of €10.6 billion.
What happened next was predictable and predicted. The Finance Minister called in the Opposition Finance spokespersons in the autumn of 2010 to tell them the deficit was still rising.
The last budget cut approximately €2.1 billion in current spending and €1.8 billion in capital; all this to try to get the deficit down to below -10 percent. What’s the prognosis? Not good.
According to newly released papers, the Department of Finance is already expecting the deficit to be higher than last budget’s projections. They were hoping for an Exchequer balance of €17.7 billion; now they project a balance of €17.9 billion – and that’s after only two months of Exchequer returns.
According to the Department:
‘Income tax will be a key determining factor in the achievement or otherwise of the overall tax revenue tax target for 2011’.
If this is the case, there should be cause for worry. The briefing paper stated income tax was down €45 million on the end-February target. The recently released March Exchequer statement showed income tax falling €125 million behind target. This ‘key’ category is weakening. So is VAT, which is down €179 on target.
But this shouldn’t be too surprising. The last Government estimated that for every 1 percent of GDP in fiscal contraction, economic growth falls by half that amount (though the IMF suggests the fall in GDP could be between twice and four times what the Government estimates). This results in falling tax revenue and rising unemployment costs, which in turn adds to the deficit burden.
Already, based on current growth projections, the deficit target has slipped by nearly ½ percent in the first three months. In other words, the Government is not likely to break the -10 percent deficit threshold. And according to the Sunday Business Post (link not available yet), the Government, along with the EU and IMF, are preparing to revise future growth downwards. This will lead to a deterioration of the deficit target.
So what have we got? The Special Group report called for €5.3 billion in spending cuts. The Government responded by cutting public spending by €11.7 billion – more than twice as much as the Report’s recommendations (and this doesn’t count the cuts in the 2009 budget). And yet the deficit still remains stubbornly high, only slight below the deficit level at the time the Report was published.
The pro-austerity camp has only one response to this running-in-quicksand scenario: more austerity. But it is austerity itself that is the obstacle to sustainable deficit reduction. How much deeper down the hole do we have to dig until we realise that it is the digging itself that is the problem?
When do we start facing reality?
Next post: why the methodological flaws in the An Bord Snip report require it to be junked.
Monday, 11 April 2011
Corporate tax rate
Peadar Kirby: The issue of Ireland’s rate of corporation tax again dominated the news agenda over the weekend with the standoff between some EU Ministers (notably the Germans) and Irish Ministers being yet again reiterated. It appears ever clearer that the refusal of the Irish side to enter into discussions on the issue is becoming the obstacle to gaining a lower interest rate on the country’s borrowings and, perhaps, other concessions also on the contents of the bailout package. What is most disturbing is the lack of any debate here in Ireland as to whether the dogged stance being adopted by Irish Ministers is in the best interests of Irish development, as to whose interests it most serves, and as to what might be the balance to be struck between moral and economic grounds for continuing the present stance. The extent to which the present policy stance has been elevated into a fundamental bedrock of national policy and the extent to which the media and commentators accept this without the slighted debate or questioning, invites comparison with the worst days of the cosy consensus of the Celtic Tiger period.
There are at least three major dimensions of the issue that require public debate. The first is the economic one and, for most of those who mention this issue, this seems the only dimension that matters. But, in addition, there is a major moral dimension that urgently requires airing, and a dimension relating to international justice and fairness highlighted recently in an interesting analysis paper published by the Debt and Development Coalition Ireland which seemed to get little media attention.
To deal with the economic issue firstly. To many it seems self-evident that raising our corporation tax rate would damage our attractiveness for foreign investors. Perhaps this is true, but it would be good to have some evidence to back up such a claim. Just what damage might a few percentage points on our low rate do to Ireland’s attractiveness as a destination for investors? In other words, among the many attractions of Ireland, just how important is the present rate of tax? Indeed, the argument of some Ministers that in effect France has a lower rate than does Ireland could lead one to draw the conclusion that the tax rate is not the determining factor after all, given that Ireland continues to attract investment in this situation. Furthermore, the argument needs to be broadened to a discussion of industrial policy, something that is urgently overdue. Numerous reports have been issued over recent decades recommending that the state wean itself off its dependence on foreign investment yet, if anything, that dependence has grown over this period. One wonders what positive advantages for the development of a more robust and consistent policy for the growth of SMEs might result from the raising of our corporation tax rate, particularly if the tax regime could be designed in a way that did help foster greater innovation in this sector. At the very least, a rise in the corporation tax rate would serve to wean our politicians and officials off the instinctive reaction that economic development and export-led growth have to depend on foreign investors.
The second important issue that is entirely absent in consideration of this issue is the moral one. Are there not very strong grounds for arguing that, in a situation where those on average and low incomes are bearing a major burden of the adjustment efforts being made by the state, that those corporations which make huge profits from Irish workers and receive very favourable treatment by the state should make some modest contribution to recovery? It is noteworthy that those many voices that are raised in criticism of the fact that Irish taxpayers are being forced to bail out French and German banks, do not see the similarities between this favouring of corporate interests over citizens’ interests and the consequences of the state’s failure to seek a greater contribution from corporations which have benefited greatly from their presence in Ireland.
A third issue concerns international justice, again a dimension that is entirely missing from Irish concerns on the issue of corporation tax despite the widespread interest among the public in international development. Attention was drawn to this in the report entitled ‘Driving the Getaway Car? Ireland, Tax and Development’ issued by the Debt and Development Coalition Ireland last month. This is a very useful overview of some of the ways in which Ireland’s low corporation tax ‘is open to abuse by multinational firms in a way that directly or indirectly damages the tax take of Southern countries’ (page 41). While the author, Dr Sheila Killian of UL, does not consider the effect of raising the rate of Ireland’s corporation tax, she does recommend a number of actions that Ireland could take to seek more effectively to ensure that these abuses do not occur. The EU’s CCCTB proposal seems designed to address some of these potential abuses.
Each of these dimensions of the issue of corporation tax requires a lively public debate. Furthermore, since this touches on moral and development issues as well as ones relating to industrial policy, it would benefit from a range of voices and concerns finding expression. Yet, I suspect that one of the reasons why this is not happening is the very efficient lobbying being done on behalf of US corporations by the American Chamber of Commerce, a very powerful lobby group. It already made the position of the US corporations very clear just as EU pressure was mounting on Ireland to raise its corporation tax. Lobby groups have, of course, every right to put the position of their members forward. However, when the state adopts a similar position with no public debate, and when the media row in behind this without raising any questions, then we are in a very troubling situation which bears far too much resemblance to the lack of debate and the caving in to vested property interests that characterised the public realm during the Celtic Tiger years.
There are at least three major dimensions of the issue that require public debate. The first is the economic one and, for most of those who mention this issue, this seems the only dimension that matters. But, in addition, there is a major moral dimension that urgently requires airing, and a dimension relating to international justice and fairness highlighted recently in an interesting analysis paper published by the Debt and Development Coalition Ireland which seemed to get little media attention.
To deal with the economic issue firstly. To many it seems self-evident that raising our corporation tax rate would damage our attractiveness for foreign investors. Perhaps this is true, but it would be good to have some evidence to back up such a claim. Just what damage might a few percentage points on our low rate do to Ireland’s attractiveness as a destination for investors? In other words, among the many attractions of Ireland, just how important is the present rate of tax? Indeed, the argument of some Ministers that in effect France has a lower rate than does Ireland could lead one to draw the conclusion that the tax rate is not the determining factor after all, given that Ireland continues to attract investment in this situation. Furthermore, the argument needs to be broadened to a discussion of industrial policy, something that is urgently overdue. Numerous reports have been issued over recent decades recommending that the state wean itself off its dependence on foreign investment yet, if anything, that dependence has grown over this period. One wonders what positive advantages for the development of a more robust and consistent policy for the growth of SMEs might result from the raising of our corporation tax rate, particularly if the tax regime could be designed in a way that did help foster greater innovation in this sector. At the very least, a rise in the corporation tax rate would serve to wean our politicians and officials off the instinctive reaction that economic development and export-led growth have to depend on foreign investors.
The second important issue that is entirely absent in consideration of this issue is the moral one. Are there not very strong grounds for arguing that, in a situation where those on average and low incomes are bearing a major burden of the adjustment efforts being made by the state, that those corporations which make huge profits from Irish workers and receive very favourable treatment by the state should make some modest contribution to recovery? It is noteworthy that those many voices that are raised in criticism of the fact that Irish taxpayers are being forced to bail out French and German banks, do not see the similarities between this favouring of corporate interests over citizens’ interests and the consequences of the state’s failure to seek a greater contribution from corporations which have benefited greatly from their presence in Ireland.
A third issue concerns international justice, again a dimension that is entirely missing from Irish concerns on the issue of corporation tax despite the widespread interest among the public in international development. Attention was drawn to this in the report entitled ‘Driving the Getaway Car? Ireland, Tax and Development’ issued by the Debt and Development Coalition Ireland last month. This is a very useful overview of some of the ways in which Ireland’s low corporation tax ‘is open to abuse by multinational firms in a way that directly or indirectly damages the tax take of Southern countries’ (page 41). While the author, Dr Sheila Killian of UL, does not consider the effect of raising the rate of Ireland’s corporation tax, she does recommend a number of actions that Ireland could take to seek more effectively to ensure that these abuses do not occur. The EU’s CCCTB proposal seems designed to address some of these potential abuses.
Each of these dimensions of the issue of corporation tax requires a lively public debate. Furthermore, since this touches on moral and development issues as well as ones relating to industrial policy, it would benefit from a range of voices and concerns finding expression. Yet, I suspect that one of the reasons why this is not happening is the very efficient lobbying being done on behalf of US corporations by the American Chamber of Commerce, a very powerful lobby group. It already made the position of the US corporations very clear just as EU pressure was mounting on Ireland to raise its corporation tax. Lobby groups have, of course, every right to put the position of their members forward. However, when the state adopts a similar position with no public debate, and when the media row in behind this without raising any questions, then we are in a very troubling situation which bears far too much resemblance to the lack of debate and the caving in to vested property interests that characterised the public realm during the Celtic Tiger years.
Friday, 8 April 2011
Should there be a referendum on the IMF-EU deal?
Slí Eile: Readers may be interested in a recent Dáil debate which took place on the question of referendum on the IMF-EU deal. The Dáil Technical Group moved a motion to hold a referendum. The first part of the debate from Tuesday 5th April can be located here. Arguments for and against adopting such an approach can also be found in the continuation of the debate on Wednesday here. The final speeches and vote are reported here.
Portugal and the Tony Soprano bailout
In the excellent TV series The Sopranos there is an episode where mobster Tony Soprano tells a small-time gambler why he let him play and lose in the big stakes game. "I knew you could never afford it, but your wife had the sports goods store," he explains after stripping the store of its assets and bankrupting it.
The Sopranos is available in Portuguese. Viewers will find out more about their fate than from most media coverage now Portugal is the latest economy to fall into the clutches of the European commission and, possibly the IMF. It is a mobster's embrace, as Irish and Greek citizens can testify.
You can read the rest of PE blogger Michael Burke's piece on the Guardian website here.
The Sopranos is available in Portuguese. Viewers will find out more about their fate than from most media coverage now Portugal is the latest economy to fall into the clutches of the European commission and, possibly the IMF. It is a mobster's embrace, as Irish and Greek citizens can testify.
You can read the rest of PE blogger Michael Burke's piece on the Guardian website here.
Thursday, 7 April 2011
Forthcoming events
A few forthcoming events may be of interest to PE readers; continue below the fold for more information.
TASC and Smart Taxes are collaborating to host Lessons from the Crisis: Money, Taxes and Saving in a Changing World, a symposium due to be held on May 9th in Croke Park (9.30 am - 4 pm). Speakers will include Marshal Auerback of the Roosevelt Institute and Randall Wray of the University of Missouri - Kansas City, both of whom are known for their work on Modern Money Theory, as well as Tom McDonnell and Michael Taft, both known to PE readers. For further information go to www.tascnet.ie.
The morning session will be chaired by Paul Sweeney (Chair of the TASC Economists' Network and PE blogger), who is also President of the Statistical & Social Inquiry Society of Ireland.
A meeting of the SSISI will take place on Tuesday, 12th April 2011, starting at 6:00 pm [SHARP], in the Royal Irish Academy, 19 Dawson Street, Dublin 2. The session is titled Symposium on Research Capacity and Policy Making, and contributions will be made by Dr Rory O’Donnell (NESC), Prof. Frances Ruane (ESRI), Prof. Brendan Whelan (TILDA, TCD), and Mr Robert Watt (Department of Finance). This symposium will consider the use of research to generate evidence for economic and social policymaking in Ireland over the last 50 years, the ways in which research enters the policy formulation process and the development of Ireland’s capacity in this area.
Non-members are welcome to attend and participate in the discussion, and there is no need to book.
The 2011 AGM will take place on May 19th, when a paper will be presented on Compilation of a National House Price Index for Ireland, by Niall O'Hanlon (CSO): Royal Irish Academy, 19 Dawson Street, Dublin 2 at 6:00pm.
TASC and Smart Taxes are collaborating to host Lessons from the Crisis: Money, Taxes and Saving in a Changing World, a symposium due to be held on May 9th in Croke Park (9.30 am - 4 pm). Speakers will include Marshal Auerback of the Roosevelt Institute and Randall Wray of the University of Missouri - Kansas City, both of whom are known for their work on Modern Money Theory, as well as Tom McDonnell and Michael Taft, both known to PE readers. For further information go to www.tascnet.ie.
The morning session will be chaired by Paul Sweeney (Chair of the TASC Economists' Network and PE blogger), who is also President of the Statistical & Social Inquiry Society of Ireland.
A meeting of the SSISI will take place on Tuesday, 12th April 2011, starting at 6:00 pm [SHARP], in the Royal Irish Academy, 19 Dawson Street, Dublin 2. The session is titled Symposium on Research Capacity and Policy Making, and contributions will be made by Dr Rory O’Donnell (NESC), Prof. Frances Ruane (ESRI), Prof. Brendan Whelan (TILDA, TCD), and Mr Robert Watt (Department of Finance). This symposium will consider the use of research to generate evidence for economic and social policymaking in Ireland over the last 50 years, the ways in which research enters the policy formulation process and the development of Ireland’s capacity in this area.
Non-members are welcome to attend and participate in the discussion, and there is no need to book.
The 2011 AGM will take place on May 19th, when a paper will be presented on Compilation of a National House Price Index for Ireland, by Niall O'Hanlon (CSO): Royal Irish Academy, 19 Dawson Street, Dublin 2 at 6:00pm.
Wednesday, 6 April 2011
Over-enthusiastic spam checker
Apologies to any PE readers who've had their comments filtered as spam. During the past week or so, the automatic spam checker has been over-enthusiastic. Unfortunately, turning off the spam filter would result in a deluge of highly annoying material. We are checking the spam box at regular intervals - so please be patient, your comment will appear!
Tuesday, 5 April 2011
How much is the taxpayer on the hook for?
Michael Burke: Frightening people into submission is a fairly easy trick. One tactic is to frighten them with an outlandish demand – then soften the blow with a somewhat less outrageous demand. This might be called the Dick Turpin school of negotiation.
In the days leading up to the release of the latest instalment of the bank bailout programme, all sorts of numbers circulated about the size of the latest bank recapitalisation. Now, it is widely presented in mainstream media and elsewhere as a relief that ‘only a further €24bn’ is needed.
The insouciant recommendations of further debts that amount to €5,000 for every woman man and child in the state, while at the same time slashing public spending are remarkable. Another €24bn for the banks is entirely manageable, it seems, while benefits to lone parents, jobs seekers or the disabled amounting to tens of millions of Euros must be slashed, for fear of destroying the public finances
There are two practical reasons why further bailout for the banks should be rejected. First, the current level of projected debt is insupportable. Secondly, the current level of projected debt is wildly understated.
Unsupportable debt
The €24bn, even if it were the last recapitalisation, would take the bank debt to unsustainable levels. The Department of Finance table below shows the bank recapitalisations to date.
It is variously argued that the €24bn is the last of the bailouts, that this recapitalisation contains a ‘buffer’ against adverse developments and that there is a residual value in the banks. It might be objected that:
• we have heard the ‘one last heave’ argument before
• that the buffer is nothing of the kind as even the ‘stress test’ scenario includes assumptions that are more optimistic than the current situation
• and that the combined market capitalisation of AIB and BoI, the new ‘pillars’ is now only around €800mn, reflecting market expectations that the authorities are determined not to wipe out shareholders in full, if necessary by further capital injections.
These objections need to be fleshed out. But for now, they are largely beside the point. The cost of the bailout funds is close to 6%. Before these policies led to the state being excluded from financial markets interest rates had reached much higher levels. 10yr government yields are still close to 10%. On €70bn an annual average interest rate of 6% produces an interest bill of €4.2bn.
Under the terms of the impositions from the EU & IMF there is a total of €6bn in spending cuts and tax increases planned for this year, and an average of €3bn in same planned over the following 3 years. That is, very rapidly, the interest paid on the bank debt of €4.2bn exceeds the supposedly vital measures to secure public finances and reduce the deficit. It is argued that these cuts/taxes are permanent, whereas the bailout measures are temporary, and will be concluded within the life of this Dáil.
Putting it politely, this claim is pure fiction. If, as advocates for bailing out EU banks with Irish taxpayers’ money assert, interest will only have to be paid for a short number of years, where on earth are the funds to repay the principal going to be found - all €70bn of it?
If the principal cannot be repaid in that timeframe then interest will continue to be paid on it until it is repaid. It does not appear as if the IMF, still less the EU Commission and the ECB are about to become charitable institutions.
Therefore Irish taxpayers will either have to fund €70bn is a few years’time- or, more accurately will for many yeasrs to come, be paying greater interest on bank-related debt than the ‘savings’ made from a fiscal consolidationthat is billed as necessary to save the finances of the State.
Unstated debt
These numbers are an understatement of the true position, both currently and prospectively. NAMA has issued €28.6bn in bonds. Although the DoF seems desperate not to have them classified as government debt, the classificialtion is immaterial as to the source of the interest on them- Irish taxpayers. In a re-run of the net asset argument and the eventutality that the NAMA assets will at some point be worth something,that is entirely possible but again besides the point. They are ‘non-performing assets’ currently, ie bearing no interest, and taxpayers are paying interest to acquire them. Jam tomorrow is never a convincing argument. It is irrelevant when dealing with an immediate crisis.
The terms of the bailout are set out in the 'Financial Measures Programme Report' from the CBoI. This has had a wide airing in the media, but not a very criticial one. For example, in 88 pages of the report there are references to but no examiation of the impact of pojeced ECB interest rate increases over the next period.It is certainly daunting to contemplate the likely impact on the Irish economy.
It may be that the scenarios included in Appendix C include adverse changes to interests (and the possibility they are greater than currently projected by the money market yield curve), but, if so, these are not stated. There are also a number of key assumptions inboth the ‘base’ and ‘stress test’ scenarios which are highly questonable:
• The projected fall in property prices reflects the experienceof Finland, Britain and Sweden in the 1990s, none of whom were in a monetary union and responded with lower interest rates, not higher ones as the ECB threatens
• Even so, both base and adverse sceanarios project rising propoerty prices from next year (Exhibit 7), despite the earlier admission that even in those countries in the 1990s, ‘house prices tend to follow a pronounced decline for a protracted period’ (p.51)
• The base case interest yields on Irish debt are below (8.63% at 10yr) the current level (9.8%)
• Both the base and adverse cases for the fall in 2010 GDP (-0.2%) are below the latest offical estimate of the decline (-1.0%)
• The uenmployment rate for this year is variously estimated at 13.4% (base) and 14.9% (averse) when the starting-point is 14.7% and rising
Whatever the outcome, the consistent pattern is the current indicators are closer to the adverse of ‘stress test’ senario than the base scaenario.
There has been much discussion on the gap between the Blackrock projected €40bn in lifetime loan losses and the CboI’s recommendation of €24bn in recapitalsation and the assertion that this includes a large ‘buffer’. (The buffer is just €2.3bn in total, plus €3bn in continegent capital (Table 18)). But the CBoI’s own assessment is only for 3-year losses, and under the (undemanding) stress test this amounts to €27bn (Table 10, p.29).This is greater than €24bn, buffer included.
And, as with the €70bn repayment argument, is it seriously suggested that AIB and BoI will be genrating profits in 3 yeas’ time? Without the capital injections, all he insitutions would have negative capital (that is,worth less than zero) in 2013 (Table 14).
Crucially, the entire exercise is premised on large scale ‘deleveraging’ of the banks’ balance sheets, that is a further disposal of loans. There are two avenues for this, commercial disposals and public ones- NAMA. To date, total disposals have amounted to €120bn, but only €49bn of this has been commercial disposals (including write-offs). €71bn has come from dsposals to NAMA.
Over the next period a further €84.1bn delveraging is projected to take place mainly through the run-off and disposal of non-Irish loans, described as ‘non-core’. Therefore, to some extent, the whole plan relies on finding a buyer for these assets at book value- even though it is widely known the Irish banks are forced sellers. Realising further losses, beyond any write-down in loan values to date, may be inevitable under this plan. Surveying the world economy, it is certain that an optimal loan book would not be 100% concentrated in Irish and British lending, which is now the aim of policy.
Conclusion
Finally, in effective the same authorities who produced an economic and fiscal crisis leading to the impositions of the EU and IMF are now arguing that the related banking crisis can be resolved by parallel measures; assets sales and the protection of capital at the expense of labour. But Adam Smith noted long ago that all value is created by labour. Diminishing productive labour, failng to optimise its skill levels, increasing its naked exploitation and expelling a portion of it from the country for a prolonged period will damage the entire economy. Clearly, policymakers who have embarked on this course do not understand that economic principle or care less.
But, if they cut the wages of public sector workers and their numbers, and thereby hope to promote a ‘demonstration effect’ of lower wages in the private sector, and mortgage defaults rise as result, guess what the arguments will be? We need more capital for the banks and more cuts in public spending.
It has already begun here and here.
In the days leading up to the release of the latest instalment of the bank bailout programme, all sorts of numbers circulated about the size of the latest bank recapitalisation. Now, it is widely presented in mainstream media and elsewhere as a relief that ‘only a further €24bn’ is needed.
The insouciant recommendations of further debts that amount to €5,000 for every woman man and child in the state, while at the same time slashing public spending are remarkable. Another €24bn for the banks is entirely manageable, it seems, while benefits to lone parents, jobs seekers or the disabled amounting to tens of millions of Euros must be slashed, for fear of destroying the public finances
There are two practical reasons why further bailout for the banks should be rejected. First, the current level of projected debt is insupportable. Secondly, the current level of projected debt is wildly understated.
Unsupportable debt
The €24bn, even if it were the last recapitalisation, would take the bank debt to unsustainable levels. The Department of Finance table below shows the bank recapitalisations to date.
It is variously argued that the €24bn is the last of the bailouts, that this recapitalisation contains a ‘buffer’ against adverse developments and that there is a residual value in the banks. It might be objected that:
• we have heard the ‘one last heave’ argument before
• that the buffer is nothing of the kind as even the ‘stress test’ scenario includes assumptions that are more optimistic than the current situation
• and that the combined market capitalisation of AIB and BoI, the new ‘pillars’ is now only around €800mn, reflecting market expectations that the authorities are determined not to wipe out shareholders in full, if necessary by further capital injections.
These objections need to be fleshed out. But for now, they are largely beside the point. The cost of the bailout funds is close to 6%. Before these policies led to the state being excluded from financial markets interest rates had reached much higher levels. 10yr government yields are still close to 10%. On €70bn an annual average interest rate of 6% produces an interest bill of €4.2bn.
Under the terms of the impositions from the EU & IMF there is a total of €6bn in spending cuts and tax increases planned for this year, and an average of €3bn in same planned over the following 3 years. That is, very rapidly, the interest paid on the bank debt of €4.2bn exceeds the supposedly vital measures to secure public finances and reduce the deficit. It is argued that these cuts/taxes are permanent, whereas the bailout measures are temporary, and will be concluded within the life of this Dáil.
Putting it politely, this claim is pure fiction. If, as advocates for bailing out EU banks with Irish taxpayers’ money assert, interest will only have to be paid for a short number of years, where on earth are the funds to repay the principal going to be found - all €70bn of it?
If the principal cannot be repaid in that timeframe then interest will continue to be paid on it until it is repaid. It does not appear as if the IMF, still less the EU Commission and the ECB are about to become charitable institutions.
Therefore Irish taxpayers will either have to fund €70bn is a few years’time- or, more accurately will for many yeasrs to come, be paying greater interest on bank-related debt than the ‘savings’ made from a fiscal consolidationthat is billed as necessary to save the finances of the State.
Unstated debt
These numbers are an understatement of the true position, both currently and prospectively. NAMA has issued €28.6bn in bonds. Although the DoF seems desperate not to have them classified as government debt, the classificialtion is immaterial as to the source of the interest on them- Irish taxpayers. In a re-run of the net asset argument and the eventutality that the NAMA assets will at some point be worth something,that is entirely possible but again besides the point. They are ‘non-performing assets’ currently, ie bearing no interest, and taxpayers are paying interest to acquire them. Jam tomorrow is never a convincing argument. It is irrelevant when dealing with an immediate crisis.
The terms of the bailout are set out in the 'Financial Measures Programme Report' from the CBoI. This has had a wide airing in the media, but not a very criticial one. For example, in 88 pages of the report there are references to but no examiation of the impact of pojeced ECB interest rate increases over the next period.It is certainly daunting to contemplate the likely impact on the Irish economy.
It may be that the scenarios included in Appendix C include adverse changes to interests (and the possibility they are greater than currently projected by the money market yield curve), but, if so, these are not stated. There are also a number of key assumptions inboth the ‘base’ and ‘stress test’ scenarios which are highly questonable:
• The projected fall in property prices reflects the experienceof Finland, Britain and Sweden in the 1990s, none of whom were in a monetary union and responded with lower interest rates, not higher ones as the ECB threatens
• Even so, both base and adverse sceanarios project rising propoerty prices from next year (Exhibit 7), despite the earlier admission that even in those countries in the 1990s, ‘house prices tend to follow a pronounced decline for a protracted period’ (p.51)
• The base case interest yields on Irish debt are below (8.63% at 10yr) the current level (9.8%)
• Both the base and adverse cases for the fall in 2010 GDP (-0.2%) are below the latest offical estimate of the decline (-1.0%)
• The uenmployment rate for this year is variously estimated at 13.4% (base) and 14.9% (averse) when the starting-point is 14.7% and rising
Whatever the outcome, the consistent pattern is the current indicators are closer to the adverse of ‘stress test’ senario than the base scaenario.
There has been much discussion on the gap between the Blackrock projected €40bn in lifetime loan losses and the CboI’s recommendation of €24bn in recapitalsation and the assertion that this includes a large ‘buffer’. (The buffer is just €2.3bn in total, plus €3bn in continegent capital (Table 18)). But the CBoI’s own assessment is only for 3-year losses, and under the (undemanding) stress test this amounts to €27bn (Table 10, p.29).This is greater than €24bn, buffer included.
And, as with the €70bn repayment argument, is it seriously suggested that AIB and BoI will be genrating profits in 3 yeas’ time? Without the capital injections, all he insitutions would have negative capital (that is,worth less than zero) in 2013 (Table 14).
Crucially, the entire exercise is premised on large scale ‘deleveraging’ of the banks’ balance sheets, that is a further disposal of loans. There are two avenues for this, commercial disposals and public ones- NAMA. To date, total disposals have amounted to €120bn, but only €49bn of this has been commercial disposals (including write-offs). €71bn has come from dsposals to NAMA.
Over the next period a further €84.1bn delveraging is projected to take place mainly through the run-off and disposal of non-Irish loans, described as ‘non-core’. Therefore, to some extent, the whole plan relies on finding a buyer for these assets at book value- even though it is widely known the Irish banks are forced sellers. Realising further losses, beyond any write-down in loan values to date, may be inevitable under this plan. Surveying the world economy, it is certain that an optimal loan book would not be 100% concentrated in Irish and British lending, which is now the aim of policy.
Conclusion
Finally, in effective the same authorities who produced an economic and fiscal crisis leading to the impositions of the EU and IMF are now arguing that the related banking crisis can be resolved by parallel measures; assets sales and the protection of capital at the expense of labour. But Adam Smith noted long ago that all value is created by labour. Diminishing productive labour, failng to optimise its skill levels, increasing its naked exploitation and expelling a portion of it from the country for a prolonged period will damage the entire economy. Clearly, policymakers who have embarked on this course do not understand that economic principle or care less.
But, if they cut the wages of public sector workers and their numbers, and thereby hope to promote a ‘demonstration effect’ of lower wages in the private sector, and mortgage defaults rise as result, guess what the arguments will be? We need more capital for the banks and more cuts in public spending.
It has already begun here and here.
Is the IMF changing? A hard-hitting attack on the Washington Consensus
Paul Sweeney: As the IMF is here in Ireland, with the ECB and EU Commission, on a mission of assisting Irish citizens to bail out our banks and thus the banks of Europe, and, as a consequence, our public finances, we need to watch carefully to see what is their overall attitude and the nuances.
Yesterday, the head of the IMF, Dominique Strauss-Kahn, delivered a major speech at George Washington University where he said that the "Washington Consensus" certainties have come crashing down, with the Crash of 2008, and he spoke of the challenges that have been posed for macroeconomic policy, social inclusion and multilateralism.
He said that: “This 'Washington consensus' had a number of basic mantras. Simple rules for monetary and fiscal policy would guarantee stability. Deregulation and privatization would unleash growth and prosperity. Financial markets would channel resources to the most productive areas and police themselves effectively. And the rising tide of globalization would lift all boats.”
Mr Strauss-Kahn said that this “'Washington consensus'” not alone “caused incalculable hardship and suffering” but it did more than this. He issued a major challenge to all economists. For he said that “'Washington consensus' also devastated the intellectual foundations of the global economic order of the last quarter century.” That is some criticism.
It is hoped that this speech is heard wide and far in this land, especially by economists who are still wedded to deregulation, privatisation (and socialisation of private debt), and deflationary cuts as a panacea. I’m afraid that the 'Washington consensus' is not behind us (as he claims) here in Ireland.
In what is a possible reference to Ireland’s deep troubles DSK, as he is known, said “Europe needs a comprehensive solution—based on pan-European solidarity.” That is not exactly what is on offer. Ireland’s elite screwed up but as far as Europe cares, we are on our own, thanks to the bankers, developers, anti-regulation ethos and the government that bailed out the bondholders in our name.
He coined a new expression - “globalisation had a dark side”! This dark side was and is the growing chasm between rich and poor.
Afterwards, in replying to students' questions, he spoke of the IMF's support for countries that adopt temporary capital controls (a real surprise), of the challenges faced by European integration (challenges!! An understatement surely!) and by Greece in particular, and about the IMF's work to design carbon taxes and the issuance of new SDRs for climate-change finance.
Of course, DSK may soon resign and stand for the Socialists in France. Thus he may leave the IMF in the hands of the neo-liberals again. In the meantime, we hope his emissary in Ireland hears his words. But will his comrades in the Troika from the EU and ECB hear it too? I fear not until Ireland sinks a bit lower.
You can read his speech here.
In the meantime, the ECB is actually raising interest rates, in this climate!
And in the business pages, the ex-Anglo Irish and other bank directors are still photographed as if they are still great!. They still stride the land that they impoverished in just a few short years. No bank board member has yet to be held to account for the biggest value-destruction in the history of Ireland. Nothing seems to change when it comes to power.
Yesterday, the head of the IMF, Dominique Strauss-Kahn, delivered a major speech at George Washington University where he said that the "Washington Consensus" certainties have come crashing down, with the Crash of 2008, and he spoke of the challenges that have been posed for macroeconomic policy, social inclusion and multilateralism.
He said that: “This 'Washington consensus' had a number of basic mantras. Simple rules for monetary and fiscal policy would guarantee stability. Deregulation and privatization would unleash growth and prosperity. Financial markets would channel resources to the most productive areas and police themselves effectively. And the rising tide of globalization would lift all boats.”
Mr Strauss-Kahn said that this “'Washington consensus'” not alone “caused incalculable hardship and suffering” but it did more than this. He issued a major challenge to all economists. For he said that “'Washington consensus' also devastated the intellectual foundations of the global economic order of the last quarter century.” That is some criticism.
It is hoped that this speech is heard wide and far in this land, especially by economists who are still wedded to deregulation, privatisation (and socialisation of private debt), and deflationary cuts as a panacea. I’m afraid that the 'Washington consensus' is not behind us (as he claims) here in Ireland.
In what is a possible reference to Ireland’s deep troubles DSK, as he is known, said “Europe needs a comprehensive solution—based on pan-European solidarity.” That is not exactly what is on offer. Ireland’s elite screwed up but as far as Europe cares, we are on our own, thanks to the bankers, developers, anti-regulation ethos and the government that bailed out the bondholders in our name.
He coined a new expression - “globalisation had a dark side”! This dark side was and is the growing chasm between rich and poor.
Afterwards, in replying to students' questions, he spoke of the IMF's support for countries that adopt temporary capital controls (a real surprise), of the challenges faced by European integration (challenges!! An understatement surely!) and by Greece in particular, and about the IMF's work to design carbon taxes and the issuance of new SDRs for climate-change finance.
Of course, DSK may soon resign and stand for the Socialists in France. Thus he may leave the IMF in the hands of the neo-liberals again. In the meantime, we hope his emissary in Ireland hears his words. But will his comrades in the Troika from the EU and ECB hear it too? I fear not until Ireland sinks a bit lower.
You can read his speech here.
In the meantime, the ECB is actually raising interest rates, in this climate!
And in the business pages, the ex-Anglo Irish and other bank directors are still photographed as if they are still great!. They still stride the land that they impoverished in just a few short years. No bank board member has yet to be held to account for the biggest value-destruction in the history of Ireland. Nothing seems to change when it comes to power.
March tax returns
An Saoi: The tax returns for March give us our first real feel for what is happening in the economy in 2011 through the bi-monthly VAT returns.
VAT paid in March covers the period January/ February and the VAT for November/ December was paid in January. Two of the six VAT returns due in the year have therefore been submitted and below is a comparison of VAT received for the first three months of each of the last nine years.
The figures would seem to suggest that VAT for the year is likely to fall quite a bit short of the projected figure of €10,230M. Figures for the first three months are inflated by the extension of the car incentive scheme which will end shortly. VAT payments in the first quarter normally account for around one third of annual VAT paid (31.84% (2010), 34.65% (2009), 33.71% (2008)). The underlying trend would seem to point towards VAT for the year of close to €9,500M.
The VAT figures should not come as a surprise to anyone and reflect the Retail Sales figures for January & February issued by the CSO on 28th March 2011 or the Central Bank’s Credit Card Statistics (Table A13) issued on 31st March. The real Irish economy remains in recession.
The Income Tax position also appears very problematic. The March figures were over 8.1% off the monthly target. This may be partly down to some technical explanation and if so should be corrected in the April figures. Tax deducted in March will be paid over in April and will include five weeks than the normal four and in the case of Public Sector workers, three pay fortnights rather than the normal two. However if the trend continues then the new Government will be in serious trouble.
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.
The Excise figure for March is slightly above profile, €367M against €350M. This reflects higher than expected car sales. However once the incentive scheme ends it may be difficult for the expected profile figures later in the year to be reached.
Capital Acquisitions Tax paid is just 45% of the amount paid at the same time last year, though strangely ahead of profile. The reduction in the thresholds should have gone some way to protecting the yield despite the decline in asset values.
The March returns suggest that the new Government will find it very difficult to achieve the tax figures set out just two months ago in February. Looking at the figures I would suggest the following as an early projection.
The continued deep recession in the domestic economy make it unlikely that the tax figures can be reached. If such a discrepancy arises, the Government will be under pressure to apply additional cuts to meet targets, sending the economy into a further spiral of decline.
Pressure on households to reduce debt and the lack of access to any new credit will continue to inhibit consumer spending, even if customers wanted to spend. Income taxes will remain weak as employment numbers continue to fall. Any increases in employment numbers in the multinational sector will be swamped by the tsunami of job losses in the local economy
It is not a pretty picture.
VAT paid in March covers the period January/ February and the VAT for November/ December was paid in January. Two of the six VAT returns due in the year have therefore been submitted and below is a comparison of VAT received for the first three months of each of the last nine years.
The figures would seem to suggest that VAT for the year is likely to fall quite a bit short of the projected figure of €10,230M. Figures for the first three months are inflated by the extension of the car incentive scheme which will end shortly. VAT payments in the first quarter normally account for around one third of annual VAT paid (31.84% (2010), 34.65% (2009), 33.71% (2008)). The underlying trend would seem to point towards VAT for the year of close to €9,500M.
The VAT figures should not come as a surprise to anyone and reflect the Retail Sales figures for January & February issued by the CSO on 28th March 2011 or the Central Bank’s Credit Card Statistics (Table A13) issued on 31st March. The real Irish economy remains in recession.
The Income Tax position also appears very problematic. The March figures were over 8.1% off the monthly target. This may be partly down to some technical explanation and if so should be corrected in the April figures. Tax deducted in March will be paid over in April and will include five weeks than the normal four and in the case of Public Sector workers, three pay fortnights rather than the normal two. However if the trend continues then the new Government will be in serious trouble.
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.
The Excise figure for March is slightly above profile, €367M against €350M. This reflects higher than expected car sales. However once the incentive scheme ends it may be difficult for the expected profile figures later in the year to be reached.
Capital Acquisitions Tax paid is just 45% of the amount paid at the same time last year, though strangely ahead of profile. The reduction in the thresholds should have gone some way to protecting the yield despite the decline in asset values.
The March returns suggest that the new Government will find it very difficult to achieve the tax figures set out just two months ago in February. Looking at the figures I would suggest the following as an early projection.
Pressure on households to reduce debt and the lack of access to any new credit will continue to inhibit consumer spending, even if customers wanted to spend. Income taxes will remain weak as employment numbers continue to fall. Any increases in employment numbers in the multinational sector will be swamped by the tsunami of job losses in the local economy
It is not a pretty picture.
Monday, 4 April 2011
Coffey on the banking cost
Tom McDonnell: Seamus Coffey has put together a very lucid post over at Economic Incentives estimating the actual scale of the banking cost.
This kind of forensic analysis is a very useful counterpoint to some of the more hysterical comments over the last few days and should be required reading.
This kind of forensic analysis is a very useful counterpoint to some of the more hysterical comments over the last few days and should be required reading.
Affordable, manageable and sustainable
Michael Taft: Some commentary has suggested that Black Thursday wasn’t all that bad; in particular the bail-out won’t add much to our general debt. Therefore (and this is a curious QED) the debt remains sustainable. Phew. I was worried there for a moment. In our own little bubble, we can content ourselves with the notion that our debt is ‘affordable, manageable and sustainable’.
It is difficult to say how much of the €24 billion bail-out will find itself in general government debt. Government sources claim only €2 billion – but even then, this depends on how Eurostat categorises the ‘expenditure’. So let’s factor in this marginal increase. What follows projects debt-to-GDP and GNP ratios – but this is not the only ‘sustainability’ measurement (the other measures interest rates, primary balances and growth).
If we use the last Government’s overly-optimistic growth (and, so, deficit) projections our debt will have to be revised upwards to 104 percent due to the poor 2010 GDP outcome.
However, let’s substitute the more sober IMF’s projections for growth and the deficit up to 2014. They project that growth will be an annual 2 percent; this contrasts with the last Government’s 2.7 percent; regarding the deficit, the IMF projects that the balance will be -5.1 percent; the last Government hoped to reach -2.9 percent (but that’s gone by the boards under the new Government).
If we use the IMF’s projections, we find the Government debt rising to 113 percent by 2014. How does this compare to the IMF’s projections for EU countries by that year?
We will be well above the EU average, behind dysfunctional Greece and long-time high-debt Italy (which relies on domestic savings to support its debt).
But let’s look at this from another perspective – debt as percentage of GNP (or Gross National Income).
If we take the Government’s optimistic projections, we’re still far in excess of the EU-15 average, coming second in the table.
However, if the IMF projections hold, we will top the league – ahead of even insolvent Greece (note, however, that the Greek numbers will probably rise as their austerity programme is driving down growth and increasing the debt burden; just like Ireland).
With the markets convinced that Greece will default, how far behind can Ireland be? And this assumes that not one extra cent, as Minister Leo would put it, finds its way on to the state books. What odds on that not happening?
But even though we may be heading towards Greek levels of debt, we won’t have to worry. It will all be ‘affordable, manageable and sustainable’.
Just as long as we keep cutting (and cutting and cutting) social welfare, public services and investment.
It is difficult to say how much of the €24 billion bail-out will find itself in general government debt. Government sources claim only €2 billion – but even then, this depends on how Eurostat categorises the ‘expenditure’. So let’s factor in this marginal increase. What follows projects debt-to-GDP and GNP ratios – but this is not the only ‘sustainability’ measurement (the other measures interest rates, primary balances and growth).
If we use the last Government’s overly-optimistic growth (and, so, deficit) projections our debt will have to be revised upwards to 104 percent due to the poor 2010 GDP outcome.
However, let’s substitute the more sober IMF’s projections for growth and the deficit up to 2014. They project that growth will be an annual 2 percent; this contrasts with the last Government’s 2.7 percent; regarding the deficit, the IMF projects that the balance will be -5.1 percent; the last Government hoped to reach -2.9 percent (but that’s gone by the boards under the new Government).
If we use the IMF’s projections, we find the Government debt rising to 113 percent by 2014. How does this compare to the IMF’s projections for EU countries by that year?
But let’s look at this from another perspective – debt as percentage of GNP (or Gross National Income).
If we take the Government’s optimistic projections, we’re still far in excess of the EU-15 average, coming second in the table.
However, if the IMF projections hold, we will top the league – ahead of even insolvent Greece (note, however, that the Greek numbers will probably rise as their austerity programme is driving down growth and increasing the debt burden; just like Ireland).
With the markets convinced that Greece will default, how far behind can Ireland be? And this assumes that not one extra cent, as Minister Leo would put it, finds its way on to the state books. What odds on that not happening?
But even though we may be heading towards Greek levels of debt, we won’t have to worry. It will all be ‘affordable, manageable and sustainable’.
Just as long as we keep cutting (and cutting and cutting) social welfare, public services and investment.
Sunday, 3 April 2011
Banking on a new deal
Slí Eile: Banking is at the heart of the economy. It should serve two core social needs:
- A place of security for those who deposit savings
- A source of funding and investment to meet societal needs
Our present system of banking in Ireland together with the global financial system is mortally wounded. The speed at which the earthquake of September 2008 spread like fire and throw bond and stock markets into chaos illustrates that the global financial world is:
- More inter-connected and inter-dependent than ever
- Out of control because funds can be converted, re-priced and shifted in minutes without regard for the global consequences for millions of people across the world.
The meltdown in banking in Ireland has led to the most extraordinary and bizarre outcomes unimaginable before 2008:
- Effective nationalisation of the majority of retail and wholesale banking in Ireland
- Transfer of bad banking debts to the Irish taxpayer
- Gigantic loans of liquidity from the European Central Bank and the Central Bank of Ireland (the latter on behalf of Irish citizens) with little prospect of most of it being paid back for years
- A seizing up in the 'real' domestic economy due to domestic deflationary policies, lack of credit flow and continuing competition from low-cost selling.
Two foundation principles are needed:
1. As much as possible the fall-out from this economic crisis must not be placed on the backs of the poor, the sick, the old and the very young
2. Resources - financial, physical, environmental and human - must be directed to creating new opportunities and socially productive wealth.
As part of ensuring that the crisis is not used to punish citizens it is necessary to reverse and prevent in the future socialisation of (bad) private debt - in other words separate private banking debt from public sovereign debt. It is also necessary to protect and defend deposits and current bank infrastructure including jobs.
Seven practical steps are required:
I. Conduct a three-month audit of debt ('know in detail who owes what to who, when, where, how and why' starting from 2008 up to the present day)
II. Escalate the issue to the global through identification of common interests by forming progressive smart alliances with forces for equality and change across Europe
III. Clear out the governance of banking with new personnel, transparent reporting and democratic accountability
IV. Then hold a referendum to clarify the democratic mandate of a progress government within six months of today
V. Finally work towards an agreed approach to cancelling some debt, re-structuring other debt and sharing the impact of losses between debtors and creditors over a period of 10-15 years ('we will still be negotiating in ten years...')
VI. Re-direct savings and investment towards green, job-hungry and socially useful ends
VII. Develop a new third force banking based on credit unions, the Post Office and solidarity bonds
- A place of security for those who deposit savings
- A source of funding and investment to meet societal needs
Our present system of banking in Ireland together with the global financial system is mortally wounded. The speed at which the earthquake of September 2008 spread like fire and throw bond and stock markets into chaos illustrates that the global financial world is:
- More inter-connected and inter-dependent than ever
- Out of control because funds can be converted, re-priced and shifted in minutes without regard for the global consequences for millions of people across the world.
The meltdown in banking in Ireland has led to the most extraordinary and bizarre outcomes unimaginable before 2008:
- Effective nationalisation of the majority of retail and wholesale banking in Ireland
- Transfer of bad banking debts to the Irish taxpayer
- Gigantic loans of liquidity from the European Central Bank and the Central Bank of Ireland (the latter on behalf of Irish citizens) with little prospect of most of it being paid back for years
- A seizing up in the 'real' domestic economy due to domestic deflationary policies, lack of credit flow and continuing competition from low-cost selling.
Two foundation principles are needed:
1. As much as possible the fall-out from this economic crisis must not be placed on the backs of the poor, the sick, the old and the very young
2. Resources - financial, physical, environmental and human - must be directed to creating new opportunities and socially productive wealth.
As part of ensuring that the crisis is not used to punish citizens it is necessary to reverse and prevent in the future socialisation of (bad) private debt - in other words separate private banking debt from public sovereign debt. It is also necessary to protect and defend deposits and current bank infrastructure including jobs.
Seven practical steps are required:
I. Conduct a three-month audit of debt ('know in detail who owes what to who, when, where, how and why' starting from 2008 up to the present day)
II. Escalate the issue to the global through identification of common interests by forming progressive smart alliances with forces for equality and change across Europe
III. Clear out the governance of banking with new personnel, transparent reporting and democratic accountability
IV. Then hold a referendum to clarify the democratic mandate of a progress government within six months of today
V. Finally work towards an agreed approach to cancelling some debt, re-structuring other debt and sharing the impact of losses between debtors and creditors over a period of 10-15 years ('we will still be negotiating in ten years...')
VI. Re-direct savings and investment towards green, job-hungry and socially useful ends
VII. Develop a new third force banking based on credit unions, the Post Office and solidarity bonds
Friday, 1 April 2011
Learning like lemmings? Non-lessons of the crisis
James Wickham: Why did the Irish crisis happen in Ireland? Most public discussion still seems to oscillate between personalising the issue (‘greedy bankers’) and over-abstraction ('the global crisis'). Certainly, conventional economic commentary is more sophisticated, but ignores institutional features of the Irish socio-economic model which in retrospect meant the crisis was pre-ordained. Thus a focus on the combination on eurozone membership (cheap credit) and weak banking regulation conveniently ignores the fundamental political commitment to an ‘Anglo-Saxon’ financial system within a liberal market economy. This ensured a disproportionate role for banks within the national economy. And remember, after the crisis of the 1980s, a key element of the national growth strategy became the promotion of the Dublin International Financial Services Centre in which ‘light touch regulation’ was explicit policy. This is the institutional context for the ‘golden circle’ of property developers and politicians at the apex of the system.
Secondly, the key role of banking finance was interwoven with the financialisation of everyday life. To previous high levels of home ownership was added extensive mortgage credit creating a particular form of ‘residential capitalism’. Asset ownership (‘lite wealth’) expanded amongst the middle mass of the population (from cars to private pension and second homes) so that income from employment was only one determinant of life chances. The welfare state had become one of the most extreme ‘liberal’ states of the EU15, with very limited state services and most services (health, childcare…) provided through the market. Paradoxically, the financialisation of everyday life was accelerated by a key feature of the employment system itself: social partnership. Since 1987 tripartite agreements contributed to higher employment but also focused on delivering higher real wages. Accordingly reducing taxation was a priority, improving state services was not. Equally, cash benefits in the welfare system were high by European standards, but labour market activation was almost non-existent.
Thirdly, the central role of FDI in the national growth strategy also opened the way for the crash. Given the political priority for public tax-cutting, state policy towards FDI paid decreasing attention to social and physical infrastructure and focused increasingly on low corporate tax as the incentive for FDI. All of this ensured that a political conflict with other EU member states was pre-programmed. Such a conflict was further promoted by the Americanisation of Irish public discourse and economic thought, the promotion of ‘Boston not Berlin’ as a social model, and the direct and indirect influence of the Dublin American Chamber of Commerce on political decision-making.
Far from stimulating any re-think of the national development strategy, the crisis has turned the reliance on FDI into a national fetish. Bizarrely, not only the Labour Party but even the left nationalist Sinn Féin have made ‘our’ corporate tax rate into a symbol of national independence. While personal taxes have risen, the desirability of low personal tax rates also remains part of the national political consensus. Thus there is no sense that the crisis could stimulate any move towards collective provision in the face of collective adversity (the contrast with the creation of the British welfare state in post-1945 austerity is instructive). Instead, privatisation of pensions, education and (to some extent) health continues, while state assets are to be sold. Rather than strengthening the state, the response is to weaken it. The jettisoning of social partnership has ensured that other features of the Irish model have been consolidated. The Irish experience shows how, confronted by a cliff, lemmings will sometimes rush to fall over its edge.
Secondly, the key role of banking finance was interwoven with the financialisation of everyday life. To previous high levels of home ownership was added extensive mortgage credit creating a particular form of ‘residential capitalism’. Asset ownership (‘lite wealth’) expanded amongst the middle mass of the population (from cars to private pension and second homes) so that income from employment was only one determinant of life chances. The welfare state had become one of the most extreme ‘liberal’ states of the EU15, with very limited state services and most services (health, childcare…) provided through the market. Paradoxically, the financialisation of everyday life was accelerated by a key feature of the employment system itself: social partnership. Since 1987 tripartite agreements contributed to higher employment but also focused on delivering higher real wages. Accordingly reducing taxation was a priority, improving state services was not. Equally, cash benefits in the welfare system were high by European standards, but labour market activation was almost non-existent.
Thirdly, the central role of FDI in the national growth strategy also opened the way for the crash. Given the political priority for public tax-cutting, state policy towards FDI paid decreasing attention to social and physical infrastructure and focused increasingly on low corporate tax as the incentive for FDI. All of this ensured that a political conflict with other EU member states was pre-programmed. Such a conflict was further promoted by the Americanisation of Irish public discourse and economic thought, the promotion of ‘Boston not Berlin’ as a social model, and the direct and indirect influence of the Dublin American Chamber of Commerce on political decision-making.
Far from stimulating any re-think of the national development strategy, the crisis has turned the reliance on FDI into a national fetish. Bizarrely, not only the Labour Party but even the left nationalist Sinn Féin have made ‘our’ corporate tax rate into a symbol of national independence. While personal taxes have risen, the desirability of low personal tax rates also remains part of the national political consensus. Thus there is no sense that the crisis could stimulate any move towards collective provision in the face of collective adversity (the contrast with the creation of the British welfare state in post-1945 austerity is instructive). Instead, privatisation of pensions, education and (to some extent) health continues, while state assets are to be sold. Rather than strengthening the state, the response is to weaken it. The jettisoning of social partnership has ensured that other features of the Irish model have been consolidated. The Irish experience shows how, confronted by a cliff, lemmings will sometimes rush to fall over its edge.
The Roubini verdict on the recapitalisations
Tom McDonnell: Credibility is a hard earned thing. The commentariat is overrun with the views of so-called experts whose predictions have been...mixed.
Professor Nouriel Roubini of NYU, on the other hand, gained fame in the US for his prescient predictions about the economic crash.
So what is Professor Roubini saying about the latest bank news out of Ireland?
“Taking all of the losses of the banking system and putting them on the balance sheet of the government doesn’t make sense,”... “Eventually, the back of the government will be broken.”
Roubini argues that a better solution would be to take the senior secured and unsecured debt of the banks “reduce it, convert it into equity so you recapitalize the banks that way and you’re not adding further losses to the balance sheet of the government. Otherwise, you’re going to have not only a banking crisis, but also a sovereign debt crisis.”
The full article is here
Time will tell if he is right.
Professor Nouriel Roubini of NYU, on the other hand, gained fame in the US for his prescient predictions about the economic crash.
So what is Professor Roubini saying about the latest bank news out of Ireland?
“Taking all of the losses of the banking system and putting them on the balance sheet of the government doesn’t make sense,”... “Eventually, the back of the government will be broken.”
Roubini argues that a better solution would be to take the senior secured and unsecured debt of the banks “reduce it, convert it into equity so you recapitalize the banks that way and you’re not adding further losses to the balance sheet of the government. Otherwise, you’re going to have not only a banking crisis, but also a sovereign debt crisis.”
The full article is here
Time will tell if he is right.
Tell me: Are we out of recession yet and what can be done?
Tom O'Connor: The banking crisis is topical. Unemployment isn't and hasn't been in the last three years. This blindness towards unemployment and monopolisation of everybody's efforts solely on the banks, needs to stop. Human misery, suicide, emigration and economic recession should not be displaced from the top of the agenda by anything. Unemployment should and can be dealt with in advance of a banking solution. Last week's Quarterly National Income figures demonstrate that Unemployment cannot wait. It has been waiting since 2008 until the banking mess has resolved.
A plan and a concrete investment strategy funded from our own unborrowed resources within the NPRF and NTMA needs to happen mow. What is happening now and in the last two years is that governments, most economists and the media have all but ignored unemployment, given the urgent necessity to fix the banks. Can I suggest that unemployment is even more urgent? It should have been, and should now be, dealt with, even before this banking crisis is resolved.
Most people will not read last week's CSO figures on economic growth which are designed to tell us whether or not we are still in recession. However, people in pubs, shops, clubs and workplaces really do want to know whether we are or not. They are hanging on for dear life and their children are emigrating. Will there be an improvement? If not, they want to know why not, and what is the Government going to do about it?
Let’s look at the figures: Based on the whole of 2010, they tell us we are still in recession because both measures of economic growth fell. GDP fell by 1% and GNP by 2%. This is bad news. But, policy makers will say that we are either out of recession or coming out of recession. Why? Because they will say that GNP grew by somewhere between 0 and 2% in each of the last three quarters of 2010.
People will say, however, that they can still really feel the recession and it’s not getting any better. The truth is that we are not out of recession! This indeed is also borne out by the figures for GDP, which fell by 1.6% in the last quarter of 2010. Ah, but policy makers will say that GNP is a better measure for Ireland, so that doesn’t matter!
They would be very wrong. During this recession, the GDP figures are a far better indication of whether or not the economy is out of recession. It is a better indicator of how many jobs are being lost and created. It is a better indicator of how much money people have in their pockets and also how many people will emigrate.
The figures tell us why: firstly, the fact that GDP has fallen by 1.6% in the last quarter of 2010, and GNP rose by 2%, is explained mainly by the profit repatriation practices of multinational companies. Essentially, some of the 2% growth in GNP in the last quarter of 2010 is a statistical aberration, and happened mainly because multinationals didn’t repatriate as many profits as normal in that quarter!
Nonetheless, much of the GNP increase has been fuelled by real exports which in gross terms rose by 13.6 billion from 2009-2010 and when imports are subtracted grew by 5.7 billion. This growth arose from the multinational sector in the main, which accounts for up to 90% of Irish exports. However, the jobs dividend from this growth will be very little. Why?
Much of the work on these exports has already been done in Bermuda or elsewhere and is only registered as an Irish export to take advantage of the low 12.5% corporation tax. Multinationals' employment levels have been relatively stable over that last number of years, fixed at around 100 to 120,000 workers. The new technology which continues to revolutionise these companies also reduces the numbers employed.
But hold on, there are 2 million people needing jobs! There are 444,000 people on the live register of unemployment. The figures tell us the continuingly depressing story of the demise of these people. We knew already that 150,000 have lost their jobs in construction or construction-related work.
The big drivers in creating Irish jobs have always been based on what people produce domestically. However, the figures tell us that all domestic output fell, apart from business output which rose, and which is strongly influenced by multinationals. For example: the value of building and construction to the Irish economy fell from 8.4 billion to 5.7 billion from 2009 to 2010; the value of agriculture and fishing has fallen by 227 million; the distribution, transport and communication sectors fell by 336 million; the value of other services fell by 2 billion. Incidentally, in 2007 the value of construction output stood at 13.6 billion compared to 5.7 billion at the end of 2010.
Taking all the above into consideration, the clear message is that the loss in jobs in the Irish economy, which is reflected in the fall of GDP in 2010 and particularly in the fourth quarter of 2010, is indicative of a deep recession. Apart from multinationals, Ireland is haemorrhaging jobs out of its economy and driving up emigration.
Examining the expenditure economic growth figures, the overall demand in the economy has fallen by 7.9 billion. The fact that multinational net exports grew by 5.7 billion makes little difference as it produces few extra jobs. It does nothing to improve the catastrophic effects of the loss of jobs in the sectors of the Irish economy mentioned above which actually do provide jobs, and which have all fallen.
The current GNP figures only statistically mask this huge problem which is obvious from the fall in GDP of almost one billion in the last quarter of 2010 alone. The masking of this by a statistical increase of over 2 billion in GNP terms, based on lower repatriation of multinational profits, shows that the GDP figures are giving the correct picture.
Last year I warned against trusting the predictions of a strong economic recovery at the end of last year and the dangers of growing unemployment and emigration. Unemployment has increased to 444,000 at present, and emigration is running at 80,000 a year. The reasons are obvious from the above. Unemployment and recession will not be solved by any government which lies to the population by quoting GNP figures. They mislead the people by promising that the economy is out of recession; that it has ‘turned the corner’; or that unemployment will drop significantly going forward.
As I have stated since June 2008, the government needs a sustained set of stimulus packages to provide job beneficial growth. It needs three stimulus packages worth 8 billion over two years and includes: A state development bank to lend money to viable businesses coming from the un-borrowed cash reserves of the government at the National Treasury Management Agency and at the National Pension Reserve Fund. This is crying out to happen as money invested by businesses fell by a staggering 27% in 2010 according to the current figures. This needs to prioritise indigenous business by investing 3 billion in social partner-vetted business growth and new ventures.
A further 2 billion needs to be invested in hundreds of new schools, primary care health centres and mental health facilities; finally, 100,000 houses need to be bought by the state at never-to-be-repeated bargain basement prices which would cost 3 billion in net terms. Through low cost affordable housing and social housing with reasonable rents, thousands can be taken out of unemployment traps and the black economy, and with economic stimulation, be brought in to taxpaying real jobs, also taking them off social welfare.
This piece is written from an ideological position that the economic consensus that operating up to now, called variously by terms such as total free market philosophy, has failed. In the words of a book by Paul Krugman, Nobel Prize Winner for Economics in 2008, “A Country is not a Company”. Each business leads its own business only; the government needs to lead overall. The current debacle will continue to fail as long as there is a failure by the state to lead economic development. The direction of change at this point should be firmly rooted in a new and lean Keynesian economic model.
A plan and a concrete investment strategy funded from our own unborrowed resources within the NPRF and NTMA needs to happen mow. What is happening now and in the last two years is that governments, most economists and the media have all but ignored unemployment, given the urgent necessity to fix the banks. Can I suggest that unemployment is even more urgent? It should have been, and should now be, dealt with, even before this banking crisis is resolved.
Most people will not read last week's CSO figures on economic growth which are designed to tell us whether or not we are still in recession. However, people in pubs, shops, clubs and workplaces really do want to know whether we are or not. They are hanging on for dear life and their children are emigrating. Will there be an improvement? If not, they want to know why not, and what is the Government going to do about it?
Let’s look at the figures: Based on the whole of 2010, they tell us we are still in recession because both measures of economic growth fell. GDP fell by 1% and GNP by 2%. This is bad news. But, policy makers will say that we are either out of recession or coming out of recession. Why? Because they will say that GNP grew by somewhere between 0 and 2% in each of the last three quarters of 2010.
People will say, however, that they can still really feel the recession and it’s not getting any better. The truth is that we are not out of recession! This indeed is also borne out by the figures for GDP, which fell by 1.6% in the last quarter of 2010. Ah, but policy makers will say that GNP is a better measure for Ireland, so that doesn’t matter!
They would be very wrong. During this recession, the GDP figures are a far better indication of whether or not the economy is out of recession. It is a better indicator of how many jobs are being lost and created. It is a better indicator of how much money people have in their pockets and also how many people will emigrate.
The figures tell us why: firstly, the fact that GDP has fallen by 1.6% in the last quarter of 2010, and GNP rose by 2%, is explained mainly by the profit repatriation practices of multinational companies. Essentially, some of the 2% growth in GNP in the last quarter of 2010 is a statistical aberration, and happened mainly because multinationals didn’t repatriate as many profits as normal in that quarter!
Nonetheless, much of the GNP increase has been fuelled by real exports which in gross terms rose by 13.6 billion from 2009-2010 and when imports are subtracted grew by 5.7 billion. This growth arose from the multinational sector in the main, which accounts for up to 90% of Irish exports. However, the jobs dividend from this growth will be very little. Why?
Much of the work on these exports has already been done in Bermuda or elsewhere and is only registered as an Irish export to take advantage of the low 12.5% corporation tax. Multinationals' employment levels have been relatively stable over that last number of years, fixed at around 100 to 120,000 workers. The new technology which continues to revolutionise these companies also reduces the numbers employed.
But hold on, there are 2 million people needing jobs! There are 444,000 people on the live register of unemployment. The figures tell us the continuingly depressing story of the demise of these people. We knew already that 150,000 have lost their jobs in construction or construction-related work.
The big drivers in creating Irish jobs have always been based on what people produce domestically. However, the figures tell us that all domestic output fell, apart from business output which rose, and which is strongly influenced by multinationals. For example: the value of building and construction to the Irish economy fell from 8.4 billion to 5.7 billion from 2009 to 2010; the value of agriculture and fishing has fallen by 227 million; the distribution, transport and communication sectors fell by 336 million; the value of other services fell by 2 billion. Incidentally, in 2007 the value of construction output stood at 13.6 billion compared to 5.7 billion at the end of 2010.
Taking all the above into consideration, the clear message is that the loss in jobs in the Irish economy, which is reflected in the fall of GDP in 2010 and particularly in the fourth quarter of 2010, is indicative of a deep recession. Apart from multinationals, Ireland is haemorrhaging jobs out of its economy and driving up emigration.
Examining the expenditure economic growth figures, the overall demand in the economy has fallen by 7.9 billion. The fact that multinational net exports grew by 5.7 billion makes little difference as it produces few extra jobs. It does nothing to improve the catastrophic effects of the loss of jobs in the sectors of the Irish economy mentioned above which actually do provide jobs, and which have all fallen.
The current GNP figures only statistically mask this huge problem which is obvious from the fall in GDP of almost one billion in the last quarter of 2010 alone. The masking of this by a statistical increase of over 2 billion in GNP terms, based on lower repatriation of multinational profits, shows that the GDP figures are giving the correct picture.
Last year I warned against trusting the predictions of a strong economic recovery at the end of last year and the dangers of growing unemployment and emigration. Unemployment has increased to 444,000 at present, and emigration is running at 80,000 a year. The reasons are obvious from the above. Unemployment and recession will not be solved by any government which lies to the population by quoting GNP figures. They mislead the people by promising that the economy is out of recession; that it has ‘turned the corner’; or that unemployment will drop significantly going forward.
As I have stated since June 2008, the government needs a sustained set of stimulus packages to provide job beneficial growth. It needs three stimulus packages worth 8 billion over two years and includes: A state development bank to lend money to viable businesses coming from the un-borrowed cash reserves of the government at the National Treasury Management Agency and at the National Pension Reserve Fund. This is crying out to happen as money invested by businesses fell by a staggering 27% in 2010 according to the current figures. This needs to prioritise indigenous business by investing 3 billion in social partner-vetted business growth and new ventures.
A further 2 billion needs to be invested in hundreds of new schools, primary care health centres and mental health facilities; finally, 100,000 houses need to be bought by the state at never-to-be-repeated bargain basement prices which would cost 3 billion in net terms. Through low cost affordable housing and social housing with reasonable rents, thousands can be taken out of unemployment traps and the black economy, and with economic stimulation, be brought in to taxpaying real jobs, also taking them off social welfare.
This piece is written from an ideological position that the economic consensus that operating up to now, called variously by terms such as total free market philosophy, has failed. In the words of a book by Paul Krugman, Nobel Prize Winner for Economics in 2008, “A Country is not a Company”. Each business leads its own business only; the government needs to lead overall. The current debacle will continue to fail as long as there is a failure by the state to lead economic development. The direction of change at this point should be firmly rooted in a new and lean Keynesian economic model.
Thursday, 31 March 2011
Guest post by Martin O'Dea: What can I do you for?
Martin O'Dea lectures in Management and Human Resource Management at the Dublin Business School
In our day-to-day lives we consume, enjoy, utilise etc a broad, but not inexhaustible, range of products and services. One month or year spent analysing all of your outgoings and categorising them makes for very interesting reading.
Generally speaking the greater the percentage of money we spend on productive, innovative products/services the better, as in the round the innovation and betterment of society is best–served. Fighting this, to some extent, is the urge for wealthy interests to try to retain control over certain flows of money. This gives us punitive costs (akin to crossing a palm with silver just to get permission to cross a bridge – or taking your chances on a train in the wild West against the percentages of train robberies). We should, in essence, analyse the productivity of our individual spending. How? Well, does 'the spend' provide for employment, does it promote innovation or improvements in the quality, accessibility etc of products/services?
One quick and obvious result of this type of spending review is the amount of money that is taken up by your car, and transport in general; say car parking and petrol, as particularly unproductive spends. We would also look at monies that are prohibitive in the manner by which they tax as a means to raise income from inactive economies.
In a given week, I might spend money on coffees and restaurants; on food, on petrol, on some sports activity, on use of a train, on health insurance, car insurance, pensions provision, city car parking facility, perhaps an outing to a cinema or theatre, telephone bills, utilities, more infrequent gadget purchases, perhaps a pub or a match or saving towards a holiday. Perhaps a dentist/doctor/accountant/barrister will be met, or a hairdresser/mechanic/piano instructor. I will, like many of my generation, consign a huge portion of the money I earn - by contributing to the output of my company and the spending generated by that company - to repaying a mortgage and an incredibly large amount of money on childcare.
Okay, in these instances, I can see how the cinema, theatre, sports activity, match, coffee, food, restaurant, hairdresser/mechanic/piano instructor may provide me with what I feel is value for money, provide jobs; and generate income to the government through the taxes that the people employed in providing these services/products pay, and by the V.A.T. that my spending generates.
One of a government’s key concentrations should be that my money provides jobs and opportunities for as many as possible, as well as providing the opportunity for future products that will make my life more comfortable and enjoyable, as well as freer and longer-lived in better health.
If we see all of this we must question the use of the car park (mere unchanging space acquiring vast sums), or indeed, the petrol, insurance and taxation associated with the car. Of course, a private car is a significant part of our lifestyle, and would account for a large portion of our finances in a more ‘value-for-money’ based system, but surely not this much; and perhaps it is over-priced and well beyond the point where it provides return for the citizen spend; and while we must acknowledge the open aspect of our country, certainly, the volume of money that leaves for oil-rich countries is pretty astounding, and abetted by the drain on economic throughput of going straight to the Exchequer via the majority stake of the government charge.
What about people spending the equivalent of a mortgage on having their two young children cared for while they go and try to contribute to other work environments? How much of the money involved here is justified, how much goes to the wages of those involved and is, so, run through the economy further by their spending? What of an argument to utilise the infrastructure of existing schools to provide the option for public provided child-care covered over a lifetime contribution to taxation as opposed to strangling the spending of a huge and heavily indebted portion of current economy? What of the amount of money that is taken from the general economic activity directly as taxation on items like drink and cigarettes: is this truly productive and providing jobs and innovation and societal and technological improvement, or is it an example of short-sightedness and the desire for quick money for the exchequer?
Of course, we had items in this country like the NTR and the stunning arrangements that allowed them to open the cash-point that was their M50 toll. We can include exorbitant fees charged by professionals such as barristers, accountants, medical professionals and others (accounting for the majority of the richest top percentage earners in the land and benefitting from very regressive tax systems), and how these concentrate on areas of society where people find themselves without choice but to avail of the services; and dealing with self-regulated and non-competitive traditional strongholds of Irish society.
It is a line of thinking that shows you that, by just extending the un-productivity and protection afforded to certain vital or state-supported endeavours, we end up quickly at corruption.
Ponder the results of a range of tribunals, look at taxpayers picking up the tabs in a whole range of dealings, and see how the most massive misappropriation of funds of them all (the bank guarantee) was a continuation of a cultural practice by the elite factions of a society moulded in the promoted deference of its civilians. We must also look, together, at fees for public services that are operated in the face of innovation, in many instances. Finally, a long and international look needs to be given to a form of Tobin Tax (or an equivalent) on the trillions of euro of financial transactions and market activities that are devoid of tax.
There are two obvious elements to this: firstly, it can only work if adopted internationally (and it has at least been discussed at G8 level - and Ireland might lead the fight for this), and secondly it has the potential to right an awful lot of what is wrong about an unfettered market model, as well as affording society at large to reap the benefits from the enormous progress it is actually making. Of course, to name and tackle elements of a society that are unproductive and examples of ‘protected’ money is not that easy a thing to do, and will meet with resistance from the very factions involved. The question remains, then: will politics in Ireland see itself as the servant of the people as a whole and society as a whole or, will it continue with the practice of representing separate elements of society in a supposedly ballot-box friendly, yet, eventually counter-productive, manner?
If this government want a new way of doing things, then the public sector reform government post should have its remit widened to a public/private sector forum for encouraging productivity and innovation.
In our day-to-day lives we consume, enjoy, utilise etc a broad, but not inexhaustible, range of products and services. One month or year spent analysing all of your outgoings and categorising them makes for very interesting reading.
Generally speaking the greater the percentage of money we spend on productive, innovative products/services the better, as in the round the innovation and betterment of society is best–served. Fighting this, to some extent, is the urge for wealthy interests to try to retain control over certain flows of money. This gives us punitive costs (akin to crossing a palm with silver just to get permission to cross a bridge – or taking your chances on a train in the wild West against the percentages of train robberies). We should, in essence, analyse the productivity of our individual spending. How? Well, does 'the spend' provide for employment, does it promote innovation or improvements in the quality, accessibility etc of products/services?
One quick and obvious result of this type of spending review is the amount of money that is taken up by your car, and transport in general; say car parking and petrol, as particularly unproductive spends. We would also look at monies that are prohibitive in the manner by which they tax as a means to raise income from inactive economies.
In a given week, I might spend money on coffees and restaurants; on food, on petrol, on some sports activity, on use of a train, on health insurance, car insurance, pensions provision, city car parking facility, perhaps an outing to a cinema or theatre, telephone bills, utilities, more infrequent gadget purchases, perhaps a pub or a match or saving towards a holiday. Perhaps a dentist/doctor/accountant/barrister will be met, or a hairdresser/mechanic/piano instructor. I will, like many of my generation, consign a huge portion of the money I earn - by contributing to the output of my company and the spending generated by that company - to repaying a mortgage and an incredibly large amount of money on childcare.
Okay, in these instances, I can see how the cinema, theatre, sports activity, match, coffee, food, restaurant, hairdresser/mechanic/piano instructor may provide me with what I feel is value for money, provide jobs; and generate income to the government through the taxes that the people employed in providing these services/products pay, and by the V.A.T. that my spending generates.
One of a government’s key concentrations should be that my money provides jobs and opportunities for as many as possible, as well as providing the opportunity for future products that will make my life more comfortable and enjoyable, as well as freer and longer-lived in better health.
If we see all of this we must question the use of the car park (mere unchanging space acquiring vast sums), or indeed, the petrol, insurance and taxation associated with the car. Of course, a private car is a significant part of our lifestyle, and would account for a large portion of our finances in a more ‘value-for-money’ based system, but surely not this much; and perhaps it is over-priced and well beyond the point where it provides return for the citizen spend; and while we must acknowledge the open aspect of our country, certainly, the volume of money that leaves for oil-rich countries is pretty astounding, and abetted by the drain on economic throughput of going straight to the Exchequer via the majority stake of the government charge.
What about people spending the equivalent of a mortgage on having their two young children cared for while they go and try to contribute to other work environments? How much of the money involved here is justified, how much goes to the wages of those involved and is, so, run through the economy further by their spending? What of an argument to utilise the infrastructure of existing schools to provide the option for public provided child-care covered over a lifetime contribution to taxation as opposed to strangling the spending of a huge and heavily indebted portion of current economy? What of the amount of money that is taken from the general economic activity directly as taxation on items like drink and cigarettes: is this truly productive and providing jobs and innovation and societal and technological improvement, or is it an example of short-sightedness and the desire for quick money for the exchequer?
Of course, we had items in this country like the NTR and the stunning arrangements that allowed them to open the cash-point that was their M50 toll. We can include exorbitant fees charged by professionals such as barristers, accountants, medical professionals and others (accounting for the majority of the richest top percentage earners in the land and benefitting from very regressive tax systems), and how these concentrate on areas of society where people find themselves without choice but to avail of the services; and dealing with self-regulated and non-competitive traditional strongholds of Irish society.
It is a line of thinking that shows you that, by just extending the un-productivity and protection afforded to certain vital or state-supported endeavours, we end up quickly at corruption.
Ponder the results of a range of tribunals, look at taxpayers picking up the tabs in a whole range of dealings, and see how the most massive misappropriation of funds of them all (the bank guarantee) was a continuation of a cultural practice by the elite factions of a society moulded in the promoted deference of its civilians. We must also look, together, at fees for public services that are operated in the face of innovation, in many instances. Finally, a long and international look needs to be given to a form of Tobin Tax (or an equivalent) on the trillions of euro of financial transactions and market activities that are devoid of tax.
There are two obvious elements to this: firstly, it can only work if adopted internationally (and it has at least been discussed at G8 level - and Ireland might lead the fight for this), and secondly it has the potential to right an awful lot of what is wrong about an unfettered market model, as well as affording society at large to reap the benefits from the enormous progress it is actually making. Of course, to name and tackle elements of a society that are unproductive and examples of ‘protected’ money is not that easy a thing to do, and will meet with resistance from the very factions involved. The question remains, then: will politics in Ireland see itself as the servant of the people as a whole and society as a whole or, will it continue with the practice of representing separate elements of society in a supposedly ballot-box friendly, yet, eventually counter-productive, manner?
If this government want a new way of doing things, then the public sector reform government post should have its remit widened to a public/private sector forum for encouraging productivity and innovation.
Wednesday, 30 March 2011
A suggestion for the EFC boosters
Tom McDonnell: The IMF as an organisation has long been criticised for its dogmatic adherence to the Washington Consensus principles regardless of local context. But a strange thing happened recently. At a recent IMF conference attended by half a dozen Nobel laureates, "Macro and Growth Policies in the Wake of the Crisis", the IMF conceded that their standard prescriptions were at best incomplete and insufficient. In particular, the importance of Keynesian expansion during times of recession was explicitly acknowledged. The IMF’s own research makes clear the damaging impact of consolidation.
Despite this Damascene conversion the expansionary fiscal contraction (EFC) hypothesis of ‘expansionary austerity’ is alive and well, as Paul Krugman points out here.
I would gently suggest that the EFC boosters in the United States should look to the recent Irish experience to see just how successful extreme austerity can be in revitalising growth.
Despite this Damascene conversion the expansionary fiscal contraction (EFC) hypothesis of ‘expansionary austerity’ is alive and well, as Paul Krugman points out here.
I would gently suggest that the EFC boosters in the United States should look to the recent Irish experience to see just how successful extreme austerity can be in revitalising growth.
Friday, 25 March 2011
Innovation, rather than high-tech, is key
David Jacobson: In 1990, in a paper on MNCs in Ireland, I argued that the “completion of the single market” in 1992 would bring pressures on Ireland to increase its corporate profits tax rate and that we should begin to prepare for this. In 1993, in a paper with Sara Cantillon, I suggested that FDI into Ireland from the US was highly dependent on American IRS regulations.
Ever since, in various papers and presentations, I have taken the opportunity to express the view that Irish industrial policy was and is overly dependent on the encouragement of FDI. This is not to say that we should suddenly increase corporation tax rates nor that we should discourage inward FDI. However, the pressures from our major European partners to increase corporation tax – or to introduce a CCCTB (Common Consolidated Corporate Tax Base) – should not have come as a surprise, and the horror being expressed by policy makers and commentators alike at the prospect of having to alter this one – and apparently only – pillar of industrial policy is a reflection on the lack of understanding of the prerequisites for sustainable development.
The monofocal Irish industrial policy sees development as something like the following:
Low corporate taxes => inward FDI => increase in high-tech => increase in exports => growth
This expresses inadequate recognition of the importance of indigenous firms and of all activities other than high-tech ones. For some reason we continue in Ireland to extol the virtues of the so-called smart economy, when we continue to appear well below OECD averages in most of the indicators of advanced technology infrastructures. Moreover, firms in low and medium technology (LMT) sectors continue to account for the vast majority – in nearly all OECD countries – of employment and contribution to GDP. Innovation, not high-tech, is the key, and there is a great deal of evidence of innovation in LMT firms. In Ireland, firms like the Howth company Oceanpath in food processing, and Cork’s BCD Engineering, are in LMT sectors but are highly innovative and successful.
Rather than focussing on our hallowed 12.5 per cent we should acknowledge the complexities of development, work on the identification of differences in the policies required to support innovation in different sub-sectors, and balance the support we provide to FDI and high-tech, with some attention to indigenous firms and LMT.
Ever since, in various papers and presentations, I have taken the opportunity to express the view that Irish industrial policy was and is overly dependent on the encouragement of FDI. This is not to say that we should suddenly increase corporation tax rates nor that we should discourage inward FDI. However, the pressures from our major European partners to increase corporation tax – or to introduce a CCCTB (Common Consolidated Corporate Tax Base) – should not have come as a surprise, and the horror being expressed by policy makers and commentators alike at the prospect of having to alter this one – and apparently only – pillar of industrial policy is a reflection on the lack of understanding of the prerequisites for sustainable development.
The monofocal Irish industrial policy sees development as something like the following:
Low corporate taxes => inward FDI => increase in high-tech => increase in exports => growth
This expresses inadequate recognition of the importance of indigenous firms and of all activities other than high-tech ones. For some reason we continue in Ireland to extol the virtues of the so-called smart economy, when we continue to appear well below OECD averages in most of the indicators of advanced technology infrastructures. Moreover, firms in low and medium technology (LMT) sectors continue to account for the vast majority – in nearly all OECD countries – of employment and contribution to GDP. Innovation, not high-tech, is the key, and there is a great deal of evidence of innovation in LMT firms. In Ireland, firms like the Howth company Oceanpath in food processing, and Cork’s BCD Engineering, are in LMT sectors but are highly innovative and successful.
Rather than focussing on our hallowed 12.5 per cent we should acknowledge the complexities of development, work on the identification of differences in the policies required to support innovation in different sub-sectors, and balance the support we provide to FDI and high-tech, with some attention to indigenous firms and LMT.
Pavlov's dogs and barking mad economics
Michael Burke: Ivan Pavlov and his work are widely misunderstood. In English he is most usually associated with the phrase ‘Pavlov’s Dogs’ , used to imply an unthinking and customary response, a conditioned reflex. In fact, the great physiologist’s work was both extensive and groundbreaking in a number of areas.
Even in the caricature of his work, what conclusions could have been drawn from research which showed the dogs still panting for food after the twelfth time when the whistle had blown and there was no food?
The question came to mind in relation to the preview of the GDP data over on Irish Economy where characteristically strong opinions were not matched by strong convictions about growth. This was just as well. In real terms, GDP fell by 1.6% in the quarter and is 14.6% below its peak level prior to the recession – 3 years ago.
For 12 quarters mainstream and official economic opinion has expected government spending cuts to produce growth. It has produced contraction. ‘Pavlov’s dogs’ were smarter.
This is a new low-point for the economy - and for mainstream economic thinking. Some may be inclined to designate this a ‘double-dip’, but in reality this is just an accounting quirk. The positive quarter of growth sandwiched either side of contraction implicit in the phrase is a mirage – entirely accounted for by a rise in unwanted inventories in Q3, as was argued at that time.
Instead, some may be inclined to see a chink of light from the GNP data. Real GNP rose for the third consecutive quarter, up 2%, and now stands 2.7% higher than a year ago – although it is still 14.1% below its peak. But this too is more an accounting function than any reflection of rising domestic activity. The key components of growth fell- personal consumption -0.4% in Q4 to a new low, 11.1% below its peak. Investment (gross fixed capital formation) also fell 2.3% in Q4 to a new low, 60.7% below its pre-recession level. The total decline in investment from peak is now €27.6bn, which is the same as the total decline in GDP (€27.7bn) and exceeds the decline in GNP (€22.8bn). The entire slump is accounted for by the investment collapse. Inventories also fell once more.
So, where does rising GNP come from? Current government spending rose by an annualised €72mn in Q4, but in a €138.4bn domestic economy that really doesn’t add up to much. Infamously, government spending in this economy is falling- a quarterly rise a blip, when the numbers forced onto welfare rise at a faster rate than the welfare entitlements are cut. Maybe they got complacent when unemployment ‘steadied’ at 13.7%. If so, the surge to 14.7% will have them looking for the axe once more.
In any event, government spending has been in a downtrend since mid-2008 and fell by 2.1% while GNP was rising. Therefore all the activity components of GNP have been falling, personal consumption, investment, inventories and government spending.
The reason GNP has risen is because Net Factor Income from the Rest of the World has been rising. More accurately, the drain on growth from this source has been falling. This outflow has declined by over €7bn this year alone (annualised), much greater than the €5.3bn rise in GNP from Q1 to Q4. The reduction in this outflow is that Irish residents (ie Irish banks) are paying less interest to overseas residents. There is simple reason for this- overseas residents have taken their money out of Irish banks. They are too risky. This will probably continue, and so boost GNP artificially. But the real indicators of activity are all still contracting.
Yet this does not correspond to the dominant mainstream view. We have been repeatedly told that spending cuts would restore confidence both at home and abroad and so lead to a recovery. We were also told that cuts were a matter of urgency, to restore that confidence. But what immediately happened was that the economy contracted further and government finances collapsed as a result.
Now, the new government is about to embark on a repeat of the experiment which has already failed- 12 times. Pavlov’s dogs were smarter.
Even in the caricature of his work, what conclusions could have been drawn from research which showed the dogs still panting for food after the twelfth time when the whistle had blown and there was no food?
The question came to mind in relation to the preview of the GDP data over on Irish Economy where characteristically strong opinions were not matched by strong convictions about growth. This was just as well. In real terms, GDP fell by 1.6% in the quarter and is 14.6% below its peak level prior to the recession – 3 years ago.
For 12 quarters mainstream and official economic opinion has expected government spending cuts to produce growth. It has produced contraction. ‘Pavlov’s dogs’ were smarter.
This is a new low-point for the economy - and for mainstream economic thinking. Some may be inclined to designate this a ‘double-dip’, but in reality this is just an accounting quirk. The positive quarter of growth sandwiched either side of contraction implicit in the phrase is a mirage – entirely accounted for by a rise in unwanted inventories in Q3, as was argued at that time.
Instead, some may be inclined to see a chink of light from the GNP data. Real GNP rose for the third consecutive quarter, up 2%, and now stands 2.7% higher than a year ago – although it is still 14.1% below its peak. But this too is more an accounting function than any reflection of rising domestic activity. The key components of growth fell- personal consumption -0.4% in Q4 to a new low, 11.1% below its peak. Investment (gross fixed capital formation) also fell 2.3% in Q4 to a new low, 60.7% below its pre-recession level. The total decline in investment from peak is now €27.6bn, which is the same as the total decline in GDP (€27.7bn) and exceeds the decline in GNP (€22.8bn). The entire slump is accounted for by the investment collapse. Inventories also fell once more.
So, where does rising GNP come from? Current government spending rose by an annualised €72mn in Q4, but in a €138.4bn domestic economy that really doesn’t add up to much. Infamously, government spending in this economy is falling- a quarterly rise a blip, when the numbers forced onto welfare rise at a faster rate than the welfare entitlements are cut. Maybe they got complacent when unemployment ‘steadied’ at 13.7%. If so, the surge to 14.7% will have them looking for the axe once more.
In any event, government spending has been in a downtrend since mid-2008 and fell by 2.1% while GNP was rising. Therefore all the activity components of GNP have been falling, personal consumption, investment, inventories and government spending.
The reason GNP has risen is because Net Factor Income from the Rest of the World has been rising. More accurately, the drain on growth from this source has been falling. This outflow has declined by over €7bn this year alone (annualised), much greater than the €5.3bn rise in GNP from Q1 to Q4. The reduction in this outflow is that Irish residents (ie Irish banks) are paying less interest to overseas residents. There is simple reason for this- overseas residents have taken their money out of Irish banks. They are too risky. This will probably continue, and so boost GNP artificially. But the real indicators of activity are all still contracting.
Yet this does not correspond to the dominant mainstream view. We have been repeatedly told that spending cuts would restore confidence both at home and abroad and so lead to a recovery. We were also told that cuts were a matter of urgency, to restore that confidence. But what immediately happened was that the economy contracted further and government finances collapsed as a result.
Now, the new government is about to embark on a repeat of the experiment which has already failed- 12 times. Pavlov’s dogs were smarter.
Wednesday, 23 March 2011
Benchmarking Working Europe 2011
The European Trade Union Institute has released its annual publication 'Benchmarking Working Europe 2011' which can be downloaded here. There are lots of graphs included which allow for quick cross country comparisons on issues such as employment, education or inequality. The general theme of the publication is the EU's new strategy for 2020.
(This is perhaps a shameless plug as I wrote one of the chapters.)
(This is perhaps a shameless plug as I wrote one of the chapters.)
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