Slí Eile: The National Economic and Social Council (NESC) has recently published its Next Steps in Addressing Ireland’s Five-Part Crisis: Combining Retrenchment with Reform. You can download the full report here and the executive summary here.
The title by-line ‘retrenchment’ with ‘reform’ gives all away. Following earlier work by the Council – which represents the various social partners – it attempts to pull together various strands of the current economic crisis and to propose an ‘integrated approach’. This is welcome. To the five-part crisis (banking, fiscal, competitiveness, unemployment and reputation) must be added a sixth dimension as pointed out by a speaker at last week’s TASC Economic Conference: a political crisis. I would even suggest a 7th: a moral crisis. Do we care enough about people, their well-being and the planet in which we survive? Markets, States and non-governmental actors have failed, so far, to act with sufficient moral responsibility.
Like all NESC documents there is a good conceptual framework underlying its work. But, inevitably, reflecting its structure, function and composition there is a strong element of ‘on the one hand and on the other hand’. Here is a sample:
It is necessary to combine unavoidable retrenchment with major reform in a range of policy areas and systems.
‘unavoidable’ mirrors a highly held view these days:
TINA – There-Is-No-Other-Way (e.g. deflation)
TOGIT – The-Only-Game-In-Town (e.g. NAMA)
Joseph Stiglitz has warned us about being intimidated. Other adjectives used in the NESC document are ‘severe retrenchment’ (p7) and ‘immediate retrenchment’ (p9)
Interestingly, the NESC document goes on to say (p60):
The deterioration in the labour market, in the lives of many households and individuals, is being compounded by falling disposable incomes and retrenchments in some areas of current public social spending.
Government has achieved savings of c10.5 billion or 6.3 per cent of GDP and published the McCarthy Report. But there continues to be a huge gap in the public finances.
Policy and public debate on the fiscal, economic and social aspects of the crisis still seem dominated by short-term, immediate and zero-sum aspects; it has not proven possible to secure support for a perspective based on long-term mutual gains.
And, on page 61, the Report rightly draws attention to the way cuts in public spending can impact adversely on vulnerable and low-income groups.
In its response, the Government clearly sees this work of NESC as offering a talking and thinking platform on which to get buy-in for a new a ‘agreement’ (From the Govt Press Release: "In response to the challenge set out in the Report, the Government proposes to invite the Social Partners to meet to discuss whether there is sufficient basis for entering substantive negotiations to secure an agreed national response to the current economic crisis")
A classic nescism is the following:
There remains a tendency for opinion on the fiscal crisis to polarise into two camps, with one stressing the need to reduce the gap between spending and revenue and the other the need to maintain existing services and conditions. These positions tend to cancel one another out, rather than pushing the debate into new terrain in ways that makes policy decision clearer and public understanding greater.
But, in the meantime, the following questions have to be faced: The General Government Deficit is in the order of €20bn this year
Government can either (i) cut spending (ii) raise taxes (iii) borrow more or draw down on cash reserves (it is too late, apparently, to divert NPRF cash since Government diligently pre-paid next year’s amount as well as this years – called APCS – Acute Pro-Cyclical Syndrome). NESC clearly favours raising the share of taxes as % of GDP to bring us up closer to EU norms. But, it does not specify its stance on some of the major issues:
Pay cuts
Welfare cuts
Which areas of public spending would be cut
Instead it opts for ‘severe retrenchment’. Then again, it is hard to imagine the partners to NESC agreeing to a common approach on the above.
Wednesday, 14 October 2009
Guest post by Dieter Benecke: Qualitative growth - progressive economics and inclusive development
Dieter Benecke: Last Saturday TASC organised a conference entitled “Towards a Progressive Economics”.
The speakers focussed mainly on the reasons for the Irish crisis and recession. As the conference title indicates, the aim was to chart a path forward for Ireland. This is in line with former Irish President, Mary Robinson, who – during the Michael Collins commemoration – talked about the need to reclaim a “vision for the future of Ireland”.
After analysing the past and taking measures to overcome the crisis, other countries are more focussed on addressing the future. An interesting approach was taken by the German government together with the Indian government, inviting representatives from all Asian countries to discuss the possibilities of a more qualitative growth.
The considerable macroeconomic growth in Asia during recent years has tended to be an exclusive development: the rich people benefited much more than the poorer part of the population. The outcomes of this conference (September 2009), in which 270 representatives from the government, business, trade union, scientific and civil society sectors in 13 Asian and five European countries – as well as several international organizations - participated, could be of interest for the discussion in Ireland as well.
In general terms, it was agreed that the neo-liberal approach is inadequate for a progressive and inclusive development process.
Free competition - without concentration tendencies - is necessary in non-systemic markets in order to maintain economic dynamics. In systemic markets, however, stringent control and regulation are required.
The primary outcomes of the two-day deliberations were as follows:
1. Economic growth is a necessary, but not sufficient, condition for inclusive development and progressive economics.
2. A certain inequality is natural and can even be considered as a push for more achievement; however, excessive social inequality poses a danger to political stability, and reduces the access to development opportunities.
3. Economic and social development factors must work together, and must be combined with ecological measures. The current crisis can be viewed as an opportunity to link these factors in a better way.
4. Exclusive growth is an obstacle to international economic cooperation. Long-term FDI seeks profit and security. Social conflict militates against an investment-friendly environment.
5. A progressive economics need a public-private dialogue, as well as the participation of civil society organizations.
6. Government must invest primarily in education, infrastructure, health service and other public goods. Incentives for innovation in technology and ecology are of high priority.
7. A progressive economics is based on a model of Social and Ecological Market Economy and its fundamental principles
- individual responsibility,
- social solidarity,
- subsidiary action by the State.
8. Inclusive development can be achieved by
- responsible competition and ethically acceptable behaviour on the part of business,
- regulation of systemic markets,
- structural policy aiming towards diversification of production and services,
- social protection and prevention of social weakness,
- environmental protection through recycling, alternative and renewable energy, energy saving and emission reduction.
9. Inclusive development requires efficient and non-corrupt institutions working in the interests of stakeholders, more than in the interests of the shareholders.
10. Leading public positions must be occupied by persons appointed because of their expertise and ability, rather than party affiliation or personal contacts.
The 270 participants in the New Delhi conference would probably be delighted to exchange views with those in Ireland seeking to create a new vision. TASC must stay in touch with international thinking and experiences.
Dr. Dieter Benecke is a German economic consultant based in Dublin and former President of Inter Nationes in Bonn.
The speakers focussed mainly on the reasons for the Irish crisis and recession. As the conference title indicates, the aim was to chart a path forward for Ireland. This is in line with former Irish President, Mary Robinson, who – during the Michael Collins commemoration – talked about the need to reclaim a “vision for the future of Ireland”.
After analysing the past and taking measures to overcome the crisis, other countries are more focussed on addressing the future. An interesting approach was taken by the German government together with the Indian government, inviting representatives from all Asian countries to discuss the possibilities of a more qualitative growth.
The considerable macroeconomic growth in Asia during recent years has tended to be an exclusive development: the rich people benefited much more than the poorer part of the population. The outcomes of this conference (September 2009), in which 270 representatives from the government, business, trade union, scientific and civil society sectors in 13 Asian and five European countries – as well as several international organizations - participated, could be of interest for the discussion in Ireland as well.
In general terms, it was agreed that the neo-liberal approach is inadequate for a progressive and inclusive development process.
Free competition - without concentration tendencies - is necessary in non-systemic markets in order to maintain economic dynamics. In systemic markets, however, stringent control and regulation are required.
The primary outcomes of the two-day deliberations were as follows:
1. Economic growth is a necessary, but not sufficient, condition for inclusive development and progressive economics.
2. A certain inequality is natural and can even be considered as a push for more achievement; however, excessive social inequality poses a danger to political stability, and reduces the access to development opportunities.
3. Economic and social development factors must work together, and must be combined with ecological measures. The current crisis can be viewed as an opportunity to link these factors in a better way.
4. Exclusive growth is an obstacle to international economic cooperation. Long-term FDI seeks profit and security. Social conflict militates against an investment-friendly environment.
5. A progressive economics need a public-private dialogue, as well as the participation of civil society organizations.
6. Government must invest primarily in education, infrastructure, health service and other public goods. Incentives for innovation in technology and ecology are of high priority.
7. A progressive economics is based on a model of Social and Ecological Market Economy and its fundamental principles
- individual responsibility,
- social solidarity,
- subsidiary action by the State.
8. Inclusive development can be achieved by
- responsible competition and ethically acceptable behaviour on the part of business,
- regulation of systemic markets,
- structural policy aiming towards diversification of production and services,
- social protection and prevention of social weakness,
- environmental protection through recycling, alternative and renewable energy, energy saving and emission reduction.
9. Inclusive development requires efficient and non-corrupt institutions working in the interests of stakeholders, more than in the interests of the shareholders.
10. Leading public positions must be occupied by persons appointed because of their expertise and ability, rather than party affiliation or personal contacts.
The 270 participants in the New Delhi conference would probably be delighted to exchange views with those in Ireland seeking to create a new vision. TASC must stay in touch with international thinking and experiences.
Dr. Dieter Benecke is a German economic consultant based in Dublin and former President of Inter Nationes in Bonn.
Tuesday, 13 October 2009
Nobel Prizes for Elinor Ostrom and Oliver Williamson
Slí Eile: Yesterday, it was announced that a Nobel prize is to be awarded to Elinor Ostrom of Indiana University in the USA 'for her analysis of economic governance, especially the commons' and to Oliver Williamson of the University of California, Berkeley, CA, USA 'for his analysis of economic governance, especially the boundaries of the firm'. These follow Tobin, Sen, Krugman and many others. Ostrom, the first female economist to win the prize in economics, has researched on the way self-organised communities - and not just Governments and Corporations can successfully manage resources. She argues that 'Social capital is an essential complement to the concepts of natural, physical and human capital and can be used for beneficial or harmful ends - or simply be allowed to dissipate'
Deficit rising
Michael Taft: Over the next few days there will be considerable analysis of the ESRI’s current quarterly review (password required). I’d like to highlight just one projection – the rising annual deficit.
There are two things to remember: the one and only goal of Government fiscal strategy has been to contain the deficit. They have set no targets for job creation / retention, investment, consumer spending or even a timeline on shortening and lessening the impact of the recessionary dive. The exclusive objective of fiscal policy has been to contain the deficit.
In keeping with this strategy, the Government brought in the supplementary April budget out of fear that the deficit would rise to -12.75 percent. Only weeks earlier, they had published the Addendum where they had set a 2009 deficit target of -9.5 percent (this itself was a downward revision of a target they had set, yet again, only weeks previously in the October Budget – a target of -6.5 percent).
The April budget’s measures, combined with the earlier pension levy, was intended to contain the annual deficit at 10.75 percent for this year and next year – winding down to the Maastricht threshold of -3 percent by 2013.
So what is the ESRI projecting for this year and next? In 2009, they project the annual deficit to be -12.9 percent. That is considerably above the Government’s target for this year. In 2010, the deficit will remain pretty much the same, -12.8 percent.
While we may debate the benefits of varying fiscal approaches, there is one thing that stands out: the Government has failed to achieve the one and only target it has set for itself. It has failed – by a wide margin – to control the deficit. Simply put, its fiscal strategy is not working.
This has significant implications going forward. Government strategy has been to hold the deficit this year and next at 10.75 percent. Over the following three years they intended to reduce this deficit to -3 percent – closing the deficit by 7.75 percent. This was always going to be a big ask. However, if the Government persists with their failed strategy, they will be starting from a worse position. If the ESRI projection holds, the Government will have a -9.8 percent gap to close in three years. With the deficit going in the wrong direction – what chances of reaching the Maastricht guideline by 2013?
ICTU’s David Begg received a lot of criticism for suggesting the target date for Maastricht compliance be postponed a few years. Whatever about the desirability of this proposal (and I believe it is highly desirable), the fact is this is going to happen anyway on current trends. To attack someone for espousing a common sense position shows the extent of denial that is at work in Government circles and among certain commentators.
Perversely, though they won’t admit this, the ESRI vindicates the progressive critique of the Government’s fiscal policy. The ESRI supports the continuation of further fiscal correction. In their projections they have factored in a €4 billion correction – made up of tax increases combined with current and capital expenditure cuts (they acknowledge that now the burden will fall more on spending cuts). What is the result of this €4 billion cut in spending and people’s disposable incomes?
In 2010, the annual deficit will be reduced by 0.1 percent, or nominally by €550 million. €4 billion in cuts to achieve a reduction of €550 million only proves the old adage: pursuing deflationary policies in a recession is like running in quicksand – you use up a lot of energy, you tire yourself out, but you still keep sinking.
Even more provocatively they make the following observation:
"The consequences of such a further sharp correction are, by our estimation, significantly deflationary. Were there to be a neutral budget in 2010, then our estimates would suggest that the recovery in GDP would occur much earlier in the year leading to positive growth in GDP for the year as a whole".
In essence, they admit that the fiscal correction planned by the Government will be deflationary. More importantly, it will lengthen and deepen the recession. If these cuts didn’t proceed, the recession would not only end much earlier – but the economy would be in overall growth for the year 2010 (if the correction go ahead, GDP will fall by -1.1 percent and GNP by -1.7 percent next year).
To get around this, the ESRI takes up a ‘straw-person’ argument. They pose only one alternative to their preferred deflationary strategy – a revenue-neutral budget; that is, a budget that doesn’t take out any money from the economy. However, no one realistically believes that any Government should sit on its fiscal hands and let the recessionary fires burn themselves out. Too many other things in the economy would be burned down as well.
The alternative, as outlined at the recent TASC conference, is to pursue an expansionary fiscal policy based on crucial investment in our economic base – investment that we would have to make in any event if we want to improve our competiveness and productivity going forward.
The ESRI doesn’t refer to this alternative, never mind model it. Whatever (though I would have thought that one of the most important roles an institute can do is provide a range of alternatives with an accompanying fiscal and economic assessment).
We are, therefore, only left with one course – a deflationary course. And as the ESRI report shows – it is a failed course.
There are two things to remember: the one and only goal of Government fiscal strategy has been to contain the deficit. They have set no targets for job creation / retention, investment, consumer spending or even a timeline on shortening and lessening the impact of the recessionary dive. The exclusive objective of fiscal policy has been to contain the deficit.
In keeping with this strategy, the Government brought in the supplementary April budget out of fear that the deficit would rise to -12.75 percent. Only weeks earlier, they had published the Addendum where they had set a 2009 deficit target of -9.5 percent (this itself was a downward revision of a target they had set, yet again, only weeks previously in the October Budget – a target of -6.5 percent).
The April budget’s measures, combined with the earlier pension levy, was intended to contain the annual deficit at 10.75 percent for this year and next year – winding down to the Maastricht threshold of -3 percent by 2013.
So what is the ESRI projecting for this year and next? In 2009, they project the annual deficit to be -12.9 percent. That is considerably above the Government’s target for this year. In 2010, the deficit will remain pretty much the same, -12.8 percent.
While we may debate the benefits of varying fiscal approaches, there is one thing that stands out: the Government has failed to achieve the one and only target it has set for itself. It has failed – by a wide margin – to control the deficit. Simply put, its fiscal strategy is not working.
This has significant implications going forward. Government strategy has been to hold the deficit this year and next at 10.75 percent. Over the following three years they intended to reduce this deficit to -3 percent – closing the deficit by 7.75 percent. This was always going to be a big ask. However, if the Government persists with their failed strategy, they will be starting from a worse position. If the ESRI projection holds, the Government will have a -9.8 percent gap to close in three years. With the deficit going in the wrong direction – what chances of reaching the Maastricht guideline by 2013?
ICTU’s David Begg received a lot of criticism for suggesting the target date for Maastricht compliance be postponed a few years. Whatever about the desirability of this proposal (and I believe it is highly desirable), the fact is this is going to happen anyway on current trends. To attack someone for espousing a common sense position shows the extent of denial that is at work in Government circles and among certain commentators.
Perversely, though they won’t admit this, the ESRI vindicates the progressive critique of the Government’s fiscal policy. The ESRI supports the continuation of further fiscal correction. In their projections they have factored in a €4 billion correction – made up of tax increases combined with current and capital expenditure cuts (they acknowledge that now the burden will fall more on spending cuts). What is the result of this €4 billion cut in spending and people’s disposable incomes?
In 2010, the annual deficit will be reduced by 0.1 percent, or nominally by €550 million. €4 billion in cuts to achieve a reduction of €550 million only proves the old adage: pursuing deflationary policies in a recession is like running in quicksand – you use up a lot of energy, you tire yourself out, but you still keep sinking.
Even more provocatively they make the following observation:
"The consequences of such a further sharp correction are, by our estimation, significantly deflationary. Were there to be a neutral budget in 2010, then our estimates would suggest that the recovery in GDP would occur much earlier in the year leading to positive growth in GDP for the year as a whole".
In essence, they admit that the fiscal correction planned by the Government will be deflationary. More importantly, it will lengthen and deepen the recession. If these cuts didn’t proceed, the recession would not only end much earlier – but the economy would be in overall growth for the year 2010 (if the correction go ahead, GDP will fall by -1.1 percent and GNP by -1.7 percent next year).
To get around this, the ESRI takes up a ‘straw-person’ argument. They pose only one alternative to their preferred deflationary strategy – a revenue-neutral budget; that is, a budget that doesn’t take out any money from the economy. However, no one realistically believes that any Government should sit on its fiscal hands and let the recessionary fires burn themselves out. Too many other things in the economy would be burned down as well.
The alternative, as outlined at the recent TASC conference, is to pursue an expansionary fiscal policy based on crucial investment in our economic base – investment that we would have to make in any event if we want to improve our competiveness and productivity going forward.
The ESRI doesn’t refer to this alternative, never mind model it. Whatever (though I would have thought that one of the most important roles an institute can do is provide a range of alternatives with an accompanying fiscal and economic assessment).
We are, therefore, only left with one course – a deflationary course. And as the ESRI report shows – it is a failed course.
Guest post by Niall Douglas: Progressive pluralist economics or left-wing economics?
During the next few days we will be putting up a number of guest posts arising from the TASC Autumn Conference - Towards a Progressive Economics - held over the weekend. The first critique is by Niall Douglas.
Niall Douglas: I attended the TASC Autumn Conference - Towards a Progressive Economics - and managed to make it through from start to finish, despite having woken at 3.30am in order to travel to Dublin. I found it most illuminating and I offer my thanks to its organisers and speakers for a most welcome discourse.
Much was spoken of the failings of Neo-Classical Economics and Neo-Liberal Economics – the two not being the same, I might add, as the former is the (supposedly) apolitical collection of theories and models and the latter is the avowedly political application of those theories. Suggestions for improvement seemed to me to centre around the need for the reintroduction of pluralism within economic discussion, and the transfer of power from “the markets” to political control which could be more rationally and humanely directed than the necessarily chaotic, and often psychopathically selfish, free market. This, it seemed to be implied, is the only form of “progressive” that there is.
This is simply untrue: there are progressives on the right just as much as there are on the left – indeed, throughout human history one finds that which side is the more progressive alternates across the decades. From inspecting the last century, I would personally say that both left and right-wing politics have enacted just as much progressive legislation across the world as the other.Human rights and welfare have without doubt been improved dramatically since the 19th century, and both sides can take credit.
Most people know of the great suffering presently endured by far too many in our planet, and anyone humane feels angered and motivated to create change by their plight. What makes a person politically progressive is a profound and deep-seated belief that it IS possible to improve the state of our world and that the Thomas Malthuses of our world are wrong (I should hasten to mention that Rev. Malthus did not believe that humankind was doomed, and ascribing such negativity to the man does him an historical injustice).
Every progressive is united by a burning desire to enact social and environmental justice, to bring equality of both opportunity and outcome to all, to provide a better world for our succeeding generations and to instil freedom and democracy at every level of our world.
If TASC is a think-tank dedicated to progress, then in my opinion it needs to bring the progressive right into its debate as well – most especially its economic debate. Much of last weekend’s conference had (in my opinion) those speaking to the already converted, which is surely nothing like as progressive as advocating progressive ways ahead to a politically mixed audience.
For example, the progressive religious right in the USA are just as appalled with the events of recent years as anyone on the left: they have been instrumental in withdrawing the support of the religious right away from the Republican Party which so failed them. Without their efforts – and their progressive ideas – Obama would never have become elected, nor would he be expending so much political capital on bringing the Republican Party on board with his legislation in health, climate change and so many others still to come.
One cannot but conclude that the progressive right are instrumental to the near-term future of this world.
A good start would be to add a few voices of the progressive right to this blog – I don’t doubt that the comments will wonder who I would suggest, so I will freely admit that I have no idea as I am profoundly ignorant of the current political scene: I do look forward to seeing who commentators might suggest. I am sure that, by providing a counterfoil to left-wing arguments, the quality of the overall debate would become greatly improved and intellectually more robust: so much so that government, business and the markets would find it hard to ignore the arguments for progressive change.
In the end, pluralism is a double-edged sword: if you truly believe in it, you have to let it cut you from time to time, and in so doing hopefully become better and stronger than before.
Niall Douglas holds degrees in Business Information Systems, Economics and Management and Software Engineering. He is a member of the international Toxic Textbooks movement
Niall Douglas: I attended the TASC Autumn Conference - Towards a Progressive Economics - and managed to make it through from start to finish, despite having woken at 3.30am in order to travel to Dublin. I found it most illuminating and I offer my thanks to its organisers and speakers for a most welcome discourse.
Much was spoken of the failings of Neo-Classical Economics and Neo-Liberal Economics – the two not being the same, I might add, as the former is the (supposedly) apolitical collection of theories and models and the latter is the avowedly political application of those theories. Suggestions for improvement seemed to me to centre around the need for the reintroduction of pluralism within economic discussion, and the transfer of power from “the markets” to political control which could be more rationally and humanely directed than the necessarily chaotic, and often psychopathically selfish, free market. This, it seemed to be implied, is the only form of “progressive” that there is.
This is simply untrue: there are progressives on the right just as much as there are on the left – indeed, throughout human history one finds that which side is the more progressive alternates across the decades. From inspecting the last century, I would personally say that both left and right-wing politics have enacted just as much progressive legislation across the world as the other.Human rights and welfare have without doubt been improved dramatically since the 19th century, and both sides can take credit.
Most people know of the great suffering presently endured by far too many in our planet, and anyone humane feels angered and motivated to create change by their plight. What makes a person politically progressive is a profound and deep-seated belief that it IS possible to improve the state of our world and that the Thomas Malthuses of our world are wrong (I should hasten to mention that Rev. Malthus did not believe that humankind was doomed, and ascribing such negativity to the man does him an historical injustice).
Every progressive is united by a burning desire to enact social and environmental justice, to bring equality of both opportunity and outcome to all, to provide a better world for our succeeding generations and to instil freedom and democracy at every level of our world.
If TASC is a think-tank dedicated to progress, then in my opinion it needs to bring the progressive right into its debate as well – most especially its economic debate. Much of last weekend’s conference had (in my opinion) those speaking to the already converted, which is surely nothing like as progressive as advocating progressive ways ahead to a politically mixed audience.
For example, the progressive religious right in the USA are just as appalled with the events of recent years as anyone on the left: they have been instrumental in withdrawing the support of the religious right away from the Republican Party which so failed them. Without their efforts – and their progressive ideas – Obama would never have become elected, nor would he be expending so much political capital on bringing the Republican Party on board with his legislation in health, climate change and so many others still to come.
One cannot but conclude that the progressive right are instrumental to the near-term future of this world.
A good start would be to add a few voices of the progressive right to this blog – I don’t doubt that the comments will wonder who I would suggest, so I will freely admit that I have no idea as I am profoundly ignorant of the current political scene: I do look forward to seeing who commentators might suggest. I am sure that, by providing a counterfoil to left-wing arguments, the quality of the overall debate would become greatly improved and intellectually more robust: so much so that government, business and the markets would find it hard to ignore the arguments for progressive change.
In the end, pluralism is a double-edged sword: if you truly believe in it, you have to let it cut you from time to time, and in so doing hopefully become better and stronger than before.
Niall Douglas holds degrees in Business Information Systems, Economics and Management and Software Engineering. He is a member of the international Toxic Textbooks movement
Monday, 12 October 2009
Renewed Programme for Government: first few pages
Slí Eile: The Renewed Programme for Government is a mixed bag. It contains some very worthy aspirations not least those bearing the ecological imprint. It also affirms that there will be no deviation from the fundamental path set by the April Supplementary Budget. In the absence of any qualifying statement we have to assume that any changes or ring-fencing of public spending (such as in education – although the details remain to be seen) will be within the targets set to achieve a 3% public deficit by 2013.
In other words we are looking at comparatively minor adjustments within a fixed adjustment process - €4bn this year; €4bn next year and €4bn. If my sums are right that adds up to €12bn! Set that level of deflation against a total public spend of over €70bn (in 2008). That’s a lot of money to take out of circulation (and indirectly to start re-cycling it to guess where). In the 1980s adjustment it was claimed that a crowding in of private sector investment was brought about by a reduction in crowding-out public spending at the time. At this speed and scale, it would seem that a €16bn adjustment process will crowd a lot of things out including consumer and real (non-estate and non-financial) investor confidence. Lets hope not and lets hope that the Government will not go ahead with this scale of amputation of public services and transfers to poor households.
Tax Reform
‘Eliminate unnecessary tax reliefs and ensure that those relief schemes which are closed to new entrants will be eliminated during the lifetime of the government where possible’
Just how many of the 100 plus tax relief schemes will be delivered in 2010, 2011 and 2012? Why wait that long? What about uncollected taxes as of September 2009?
The references to more carbon taxes, changes to local government funding and raising of the PRSI ceiling are welcome in my view. However, how much of this will really be delivered and how will the promised adjustments for any negative impacts for poorer households be effected?
Pensions
‘a single 30% rate for tax relief on private pension provision’ Still no sight of the White Paper on Pensions. And clearly, the coalition partners are signed up for a continuation of the present fragmented and inequitable system of provision for long-term income for our seniors to be. A standardisation of tax relief is welcome compared to what exists presently but we should be thinking much more creatively and boldly about a public social insurance approach to pensions funded on a continental basis.
‘There are strong indications that the tough decisions of the past year are starting to bear fruit.’ (p6)
For sure there are. You only have to look at the freefall in tax receipts as more businesses fold, people going on the dole and consumption is decreased by levies on low-income households.
Higher Education
‘We will take on 1,000 Third and Fourth level graduates to provide additional capacity and skills across the public service and in Government Departments and provide valuable work experience.’ (p6)
That’s a very good idea. How does this relate to Bord Snip proposals to cut 17,000 jobs in the wider public service?
‘We will implement incentives for employees to up-skill in preparation for the Smart Economy skills on a part time basis, as set out in the Comhar “Green New Deal’ (p7)
Good point. However, no detail accompanies this. What, concretely, has been achieved since the Smart Economy document of last December?
‘We will invest for the future by setting a target to achieve a national R&D investment of 3% of GDP, public and private combined’ (p9)
When? How?
‘Develop Ireland as an international location for Energy Efficient Data Centres and cloud computing.’ (p9)
Pardon my ignorance of such matters but can anyone enlighten on this line?
ICT innovation
Some good ideas – but nothing new – are stated here. Given the failure of privitised eircom to deliver on broadband with the consequences all too clear coupled with the general failure of most state IT projects some new thinking and action is urgently needed here. This should be linked to the skills already there in third and fourth levels. For far too long state agencies have been captive to private sector consultancy with very poor results in terms of having joined up, accessible and cost-effective ‘e-government’ (Revenue Commissioners are, at least, one very obvious exception to this).
‘Subject to European Stimulus Funding, we will make broadband available to every house in the country by 2012.’ This reminds me of a promise made in the local elections in 1991 to literally ‘fill in every pot hole on every road in the country’. Somehow we recall seeing many potholes up to and including 2008.
This is amazing especially considering where we have come from in the last 10 years. Its like saying in 1973: subject to funding from the EEC, we (?) will provide colour TV to every house in the country providing they can pay for it. Food, Fuel and Furnishing for struggling families would be more helpful in the first place. Broadband is in serious need of upgrading and extending, though.
Its late. I have only got to page 9. More in a few days. At the beginning of the Document we find the following: ‘Unless we take radical and bold action to resolve the crisis that has staunched the flow of credit, the economy will not recover’ (p3)
Time will tell – but this document is unlikely to achieve this. Rather it will deepen the economic crisis. We need a genuine new deal.
In other words we are looking at comparatively minor adjustments within a fixed adjustment process - €4bn this year; €4bn next year and €4bn. If my sums are right that adds up to €12bn! Set that level of deflation against a total public spend of over €70bn (in 2008). That’s a lot of money to take out of circulation (and indirectly to start re-cycling it to guess where). In the 1980s adjustment it was claimed that a crowding in of private sector investment was brought about by a reduction in crowding-out public spending at the time. At this speed and scale, it would seem that a €16bn adjustment process will crowd a lot of things out including consumer and real (non-estate and non-financial) investor confidence. Lets hope not and lets hope that the Government will not go ahead with this scale of amputation of public services and transfers to poor households.
Tax Reform
‘Eliminate unnecessary tax reliefs and ensure that those relief schemes which are closed to new entrants will be eliminated during the lifetime of the government where possible’
Just how many of the 100 plus tax relief schemes will be delivered in 2010, 2011 and 2012? Why wait that long? What about uncollected taxes as of September 2009?
The references to more carbon taxes, changes to local government funding and raising of the PRSI ceiling are welcome in my view. However, how much of this will really be delivered and how will the promised adjustments for any negative impacts for poorer households be effected?
Pensions
‘a single 30% rate for tax relief on private pension provision’ Still no sight of the White Paper on Pensions. And clearly, the coalition partners are signed up for a continuation of the present fragmented and inequitable system of provision for long-term income for our seniors to be. A standardisation of tax relief is welcome compared to what exists presently but we should be thinking much more creatively and boldly about a public social insurance approach to pensions funded on a continental basis.
‘There are strong indications that the tough decisions of the past year are starting to bear fruit.’ (p6)
For sure there are. You only have to look at the freefall in tax receipts as more businesses fold, people going on the dole and consumption is decreased by levies on low-income households.
Higher Education
‘We will take on 1,000 Third and Fourth level graduates to provide additional capacity and skills across the public service and in Government Departments and provide valuable work experience.’ (p6)
That’s a very good idea. How does this relate to Bord Snip proposals to cut 17,000 jobs in the wider public service?
‘We will implement incentives for employees to up-skill in preparation for the Smart Economy skills on a part time basis, as set out in the Comhar “Green New Deal’ (p7)
Good point. However, no detail accompanies this. What, concretely, has been achieved since the Smart Economy document of last December?
‘We will invest for the future by setting a target to achieve a national R&D investment of 3% of GDP, public and private combined’ (p9)
When? How?
‘Develop Ireland as an international location for Energy Efficient Data Centres and cloud computing.’ (p9)
Pardon my ignorance of such matters but can anyone enlighten on this line?
ICT innovation
Some good ideas – but nothing new – are stated here. Given the failure of privitised eircom to deliver on broadband with the consequences all too clear coupled with the general failure of most state IT projects some new thinking and action is urgently needed here. This should be linked to the skills already there in third and fourth levels. For far too long state agencies have been captive to private sector consultancy with very poor results in terms of having joined up, accessible and cost-effective ‘e-government’ (Revenue Commissioners are, at least, one very obvious exception to this).
‘Subject to European Stimulus Funding, we will make broadband available to every house in the country by 2012.’ This reminds me of a promise made in the local elections in 1991 to literally ‘fill in every pot hole on every road in the country’. Somehow we recall seeing many potholes up to and including 2008.
This is amazing especially considering where we have come from in the last 10 years. Its like saying in 1973: subject to funding from the EEC, we (?) will provide colour TV to every house in the country providing they can pay for it. Food, Fuel and Furnishing for struggling families would be more helpful in the first place. Broadband is in serious need of upgrading and extending, though.
Its late. I have only got to page 9. More in a few days. At the beginning of the Document we find the following: ‘Unless we take radical and bold action to resolve the crisis that has staunched the flow of credit, the economy will not recover’ (p3)
Time will tell – but this document is unlikely to achieve this. Rather it will deepen the economic crisis. We need a genuine new deal.
Looking outward: the economic crisis and the developing world
"The UN estimates that up to 103 million more people will fall into poverty or fail to escape poverty because of the crisis. According to the International Labour Organisation (ILO), the unemployment rate is expected to increase by 0.6 per cent in 2009. About 45,000 jobs have already been lost in South Africa. In the Democratic Republic of Congo, 100,000 workers were made redundant because of smelter closures. In the Central African Republic, half of the workforce has been laid off from the Société d’Exploitation Forestière en Centrafrique (SEFCA). In the Zambian mining sector, 6,000 people lost their jobs in November 2008".
You can read the rest of this 'one-pager' on how the global economic crisis is hampering human development, issued by the International Policy Centre for Inclusive Growth, here.
You can read the rest of this 'one-pager' on how the global economic crisis is hampering human development, issued by the International Policy Centre for Inclusive Growth, here.
TASC Autumn Conference: wrap-up
The TASC Autumn Conference - Towards a Progressive Economics - held on Saturday proved very successful. Thanks to everyone who spoke, to all attendees (including many who had travelled long distances to be with us on the day) and, in particular, to Donagh Brennan of Irish Left Review who masterminded the U-streaming and live-blogging.
The Q&A sessions proved far too short to accomodate all the questions submitted from the hall and online - so apologies to anyone whose questions weren't reached. We'll know better next time.
Videos and papers will be uploaded here, on the main TASC website and to the dedicated conference site during the week. In the meantime, there's extensive coverage of the event in the Irish Times (click on side links for related stories). You can also hear a pre-conference podcast interview with Nat O'Connor and Michael Taft here.
The Q&A sessions proved far too short to accomodate all the questions submitted from the hall and online - so apologies to anyone whose questions weren't reached. We'll know better next time.
Videos and papers will be uploaded here, on the main TASC website and to the dedicated conference site during the week. In the meantime, there's extensive coverage of the event in the Irish Times (click on side links for related stories). You can also hear a pre-conference podcast interview with Nat O'Connor and Michael Taft here.
Thursday, 8 October 2009
Why not cut passive income?
An Saoi: This morning, listening to Morning Ireland, I was struck by Cathal MacCoille’s interview with Bobby Kerr, the founder of the Insomnia group of coffee shops, which you can hear here. Mr Kerr was asked on to discuss the demise of the O’Brien Sandwich franchise. He described how property interests had strangled that business and could put other businesses such as his in danger also. He had cut his prices by 25% to stay competitive, but his rent of course had remained the same. He also clearly expressed support for the minimum wage and the need to pay and protect employees.
Effectively, Mr Kerr and his employees are now working for Insomnia’s landlords, who have complete protection under the law. They sit by without contributing anything to the business, able to increase the rent if Mr. Kerr is successful and if he is not, still get their money. Rent reviews can only go one way without any obligation to share the hard times.
Right wing forces have won the argument to date, suggesting that it is salaries and wages that need to be cut to bring Irish competitiveness into line. Little or nothing has been said in relation to passive income, such as rents and the various tax subsidies such income attracts.
Pay and conditions have been agreed between employers and employees after negotiations, but it is proposed that those agreements should be torn up, or at least suspended. However, there is no quid pro quo suggested in relation to rents.
In the retail & services sectors, the level of rents has a material bearing on the final cost of goods and services. Realistic rents are part of any adjustment to the cost base in the Irish economy. A move to rents based on turnover, as is already the case with some more recent developments, and really independent arbitration, which can force rents down as well for all commercial tenants as up are needed now.
The level of protection granted to landlords is a problem for all of those involved in commercial activity in Ireland and also to the Public Sector. I have commented elsewhere on this site about the insidious way that the property game still hangs over us. It is time to force commercial rents down now to give people like Mr Kerr a chance to survive. Why should he and others be sacrificed on the High Altar to the false god, NAMA?
Effectively, Mr Kerr and his employees are now working for Insomnia’s landlords, who have complete protection under the law. They sit by without contributing anything to the business, able to increase the rent if Mr. Kerr is successful and if he is not, still get their money. Rent reviews can only go one way without any obligation to share the hard times.
Right wing forces have won the argument to date, suggesting that it is salaries and wages that need to be cut to bring Irish competitiveness into line. Little or nothing has been said in relation to passive income, such as rents and the various tax subsidies such income attracts.
Pay and conditions have been agreed between employers and employees after negotiations, but it is proposed that those agreements should be torn up, or at least suspended. However, there is no quid pro quo suggested in relation to rents.
In the retail & services sectors, the level of rents has a material bearing on the final cost of goods and services. Realistic rents are part of any adjustment to the cost base in the Irish economy. A move to rents based on turnover, as is already the case with some more recent developments, and really independent arbitration, which can force rents down as well for all commercial tenants as up are needed now.
The level of protection granted to landlords is a problem for all of those involved in commercial activity in Ireland and also to the Public Sector. I have commented elsewhere on this site about the insidious way that the property game still hangs over us. It is time to force commercial rents down now to give people like Mr Kerr a chance to survive. Why should he and others be sacrificed on the High Altar to the false god, NAMA?
Towards a Progressive Economics - update
The dedicated conference website for the TASC Autumn Conference - Towards a Progressive Economics - is now live, and papers will be uploaded to the site next week.
The vagaries of technology permitting, we hope to U-Stream and liveblog the conference here on PE; questions to the speakers will also be accepted online (you can use the liveblog facility, or the comment thread below it).
The vagaries of technology permitting, we hope to U-Stream and liveblog the conference here on PE; questions to the speakers will also be accepted online (you can use the liveblog facility, or the comment thread below it).
The National Asset Management Agency Bill 2009: Some suggested changes
Jim Stewart: The Green Party will this Saturday make what are likely to be historic decisions in relation to a programme for Government. Key amongst these decisions is the proposed NAMA legislation.
Irrespective of the degree of State involvement in the ownership of Irish banks (from minority shareholding to full ownership) the policy of the current Government is to establish NAMA. This is agreed by the ECB and the Commission, and may indeed be required by both institutions. There are many risks and uncertainties in this process. Some of the risks that are of concern are moral hazard type risks. Those involved in the process may act in their own self interest to the detriment of taxpayers and society. These risks could be reduced.
Summary
(1) Banks whose loans are transferred to NAMA will be required to provide extensive information, but will also be entitled to a fee for services provided. The Bill does not state how this fee may be calculated and banks whose loans are transferred have an incentive to maximise these fees. There is no discussion of penalties where services provided are found to be inadequate or poor. One solution would be to (a) state how fees will be calculated and (b) put a cap on these fees.
(2) Costs involved in the NAMA process could be extremely high. NAMA will realise any value on assets after costs. Risk due to high transaction and other costs could be reduced if fees were capped, for example for liquidators/ receivers. In addition a State service in relation to liquidators/receivers could also reduce costs.
(3) Options could be introduced to encourage arbitration rather than court action and give incentives to avoid expensive court action as in the Zoe/ACC case.
(4) Fees could be deferred until final outcomes are more certain.
(5) The draft Bill does not deal with the difficult issue of how value may be realised from assets financed or under the control of NAMA. A requirement for local community consultation could help ensure better use and value from assets held by NAMA. The recent Comhar Report should be required to inform NAMA policy in this area
The Details of the Bill
The Bill only applies to participating institutions which are defined as the credit institutions which are “systemically” important to the financial system in the State (section 65 a). Not all assets of participating institutions may be acquired for example if the institutions disagrees (s. 82 (3)) and more generally NAMA has the authority to omit or add any asset or to change the acquisition value (s. 86 , (2)).
The Bill gives considerable powers to NAMA to collect information from participating institutions. For example:- The bill provides that “an applicant credit institution” must provide all relevant information required (s. 62) and certify that this is accurate and complete (s. 62 (3)). Before transfer the applicant credit institution must administer and service all bank assets with the same level of skill as a “prudent lender” (64 1 (a) and 69 I (a)). There must be full disclosure ((66 2 (a)) and prompt co-operation (66 2(b)). An applicant credit institution may be required to provide NAMA with a report or certificate or both. NAMA can also require an explanation from an officer or staff member of any “information, documentation book or record” (s. 80 1).
The Bill does not discuss or allow for any payment for those services.
Difficulties may arise in relation to foreign assets. The Bill states that the participating institution must do everything required by law in the country where the asset is located, and if the law does not permit the transfer of assets the participating institution must “do all that the participating institution is permitted to assign to NAMA the greatest interest possible”. The problem is that it is likely that the participating institution will decide what is possible. Difficulties with assigning foreign assets may be one reason why Anglo-Irish is reported to be selling its US loan book (Sunday Business Post 20/9/09).
One issue is that the value of assets to be transferred is uncertain (although a global figure of €54 billion has been estimated). For example, NAMA may exercise discretion in relation to assets acquired. In addition the Bill (s. 131) allows “an adjustment to the portfolio value”. The same section also allows for the payment of performance fees and the reimbursement of costs where NAMA has arranged for the provision of services in respect of a bank asset acquired by NAMA (s. 129, (2)).
Furthermore even though the institution must supply all information required by NAMA, the participating institution must also continue to “perform relevant services” for which they will be reimbursed (128, 2).
This raises an issue of moral hazard because of conflicts of interest. Banks whose loans are transferred to NAMA will be required to provide extensive information, but will also be entitled to a fee for services provided. The Bill does not state how this fee may be calculated. If it is on the basis of cost plus, banks whose loans are transferred have an incentive to maximise these fees. There is no discussion of penalties where services provided are found to be inadequate or poor. Unless adequate controls are established participating institutions could earn very substantial fees in carry out tasks required of them. One solution would be to publish details as to how fees will be calculated and (b) place restrictions on the size of fees that may be paid.
The Bill refers in several places to liquidators and receivers (s. 53, s. 15 (d), s. 144- 147) and while s. 145 (6) states that a statutory receiver shall take all reasonable care to obtain the best price, there is no obligation to minimise costs or fees.
There are several avenues of appeal included in the bill in addition to legal proceedings generally. For example an applicant institution could appeal against an asset being included (s. 78 (3)). If NAMA still wishes to acquire the asset an expert reviewer is appointed (s. 82 (3 b)). The cost of this appeal will be borne by the participating institution and if agreement can not be reached the costs will determined by the taxing master of the High Court (s. 115, (3)).
If a participating institution wishes to appeal the values assigned to a portfolio, they may appeal to a specially appointed valuation panel, and the participating institution is liable for any costs incurred. Appeals on cost of an appeal may be made to the taxing master in the High Court (124, s. 3).
What all these procedures mean is that costs involved in the NAMA process could be extremely high. NAMA will realise any value on assets after costs. Risk due to high transaction and other costs could be reduced if fees were capped, for example for liquidators/ receivers. A State service in relation to liquidators/receivers, as recommended by the McCarthy Report (Volume II p. 184) in relation to litigation in medical expenses, could also reduce costs. Further options could be introduced for arbitration and incentives provided to avoid expensive court action as in the Zoe/ACC case. Co-operating institutions outside the NAMA process should be allowed participate in any savings/increase in value added through ‘an agreed policy approach’. Finally fees could be deferred until final outcomes are more certain.
As noted by the de Larosiere Report (p. 35) in relation to solving the financial crisis in banks, agreement on burden sharing is more difficult to achieve after intervention unless “one can rely on predetermined, ex ante arrangements”
The Bill (s. 203) also gives broad powers to control and restructure participating institutions, for example to restrict growth in balance sheet assets, prevent the take over of other institutions and to require mergers or consolidation within the participating institutions. It is not clear if merger or takeover by a non-participating institution would be allowed. The Bill also gives powers to require a restructuring plan and a business plan and to amend both (s. 205). Proposals made under this section would require careful analysis. However there is no requirement to make public any reports that participating institution may be required to produce, or to publish the rationale underlying any proposed restructuring.
The draft bill does not deal with the difficult issue of how value may be realised from assets financed or under the control of NAMA. This is an urgent issue - the longer real assets such as buildings remain unused the greater the risk of further loss due to neglect and vandalism. The quicker assets are put to use the greater the return. A requirement for local community consultation could help ensure better use and value from assets held by NAMA. Recently the Council for Sustainable Development (Comhar) issued a report arguing that NAMA should use assets to further the Green New Deal (2009). These and other issues should be part of an urgent initiative as to how best the highest value, broadly defined, may be obtained from the assets NAMA may acquire.
References
Council for Sustainable Development (Comhar) (2009), Towards a Green New Deal for Ireland.
De Larosiere Report (2009), The High-Level Group of Financial Supervision in the EU, Brussels, 25 February 2009, available at http://www.eubusiness.com/Finance/de-larosiere-report.09/view.
Irrespective of the degree of State involvement in the ownership of Irish banks (from minority shareholding to full ownership) the policy of the current Government is to establish NAMA. This is agreed by the ECB and the Commission, and may indeed be required by both institutions. There are many risks and uncertainties in this process. Some of the risks that are of concern are moral hazard type risks. Those involved in the process may act in their own self interest to the detriment of taxpayers and society. These risks could be reduced.
Summary
(1) Banks whose loans are transferred to NAMA will be required to provide extensive information, but will also be entitled to a fee for services provided. The Bill does not state how this fee may be calculated and banks whose loans are transferred have an incentive to maximise these fees. There is no discussion of penalties where services provided are found to be inadequate or poor. One solution would be to (a) state how fees will be calculated and (b) put a cap on these fees.
(2) Costs involved in the NAMA process could be extremely high. NAMA will realise any value on assets after costs. Risk due to high transaction and other costs could be reduced if fees were capped, for example for liquidators/ receivers. In addition a State service in relation to liquidators/receivers could also reduce costs.
(3) Options could be introduced to encourage arbitration rather than court action and give incentives to avoid expensive court action as in the Zoe/ACC case.
(4) Fees could be deferred until final outcomes are more certain.
(5) The draft Bill does not deal with the difficult issue of how value may be realised from assets financed or under the control of NAMA. A requirement for local community consultation could help ensure better use and value from assets held by NAMA. The recent Comhar Report should be required to inform NAMA policy in this area
The Details of the Bill
The Bill only applies to participating institutions which are defined as the credit institutions which are “systemically” important to the financial system in the State (section 65 a). Not all assets of participating institutions may be acquired for example if the institutions disagrees (s. 82 (3)) and more generally NAMA has the authority to omit or add any asset or to change the acquisition value (s. 86 , (2)).
The Bill gives considerable powers to NAMA to collect information from participating institutions. For example:- The bill provides that “an applicant credit institution” must provide all relevant information required (s. 62) and certify that this is accurate and complete (s. 62 (3)). Before transfer the applicant credit institution must administer and service all bank assets with the same level of skill as a “prudent lender” (64 1 (a) and 69 I (a)). There must be full disclosure ((66 2 (a)) and prompt co-operation (66 2(b)). An applicant credit institution may be required to provide NAMA with a report or certificate or both. NAMA can also require an explanation from an officer or staff member of any “information, documentation book or record” (s. 80 1).
The Bill does not discuss or allow for any payment for those services.
Difficulties may arise in relation to foreign assets. The Bill states that the participating institution must do everything required by law in the country where the asset is located, and if the law does not permit the transfer of assets the participating institution must “do all that the participating institution is permitted to assign to NAMA the greatest interest possible”. The problem is that it is likely that the participating institution will decide what is possible. Difficulties with assigning foreign assets may be one reason why Anglo-Irish is reported to be selling its US loan book (Sunday Business Post 20/9/09).
One issue is that the value of assets to be transferred is uncertain (although a global figure of €54 billion has been estimated). For example, NAMA may exercise discretion in relation to assets acquired. In addition the Bill (s. 131) allows “an adjustment to the portfolio value”. The same section also allows for the payment of performance fees and the reimbursement of costs where NAMA has arranged for the provision of services in respect of a bank asset acquired by NAMA (s. 129, (2)).
Furthermore even though the institution must supply all information required by NAMA, the participating institution must also continue to “perform relevant services” for which they will be reimbursed (128, 2).
This raises an issue of moral hazard because of conflicts of interest. Banks whose loans are transferred to NAMA will be required to provide extensive information, but will also be entitled to a fee for services provided. The Bill does not state how this fee may be calculated. If it is on the basis of cost plus, banks whose loans are transferred have an incentive to maximise these fees. There is no discussion of penalties where services provided are found to be inadequate or poor. Unless adequate controls are established participating institutions could earn very substantial fees in carry out tasks required of them. One solution would be to publish details as to how fees will be calculated and (b) place restrictions on the size of fees that may be paid.
The Bill refers in several places to liquidators and receivers (s. 53, s. 15 (d), s. 144- 147) and while s. 145 (6) states that a statutory receiver shall take all reasonable care to obtain the best price, there is no obligation to minimise costs or fees.
There are several avenues of appeal included in the bill in addition to legal proceedings generally. For example an applicant institution could appeal against an asset being included (s. 78 (3)). If NAMA still wishes to acquire the asset an expert reviewer is appointed (s. 82 (3 b)). The cost of this appeal will be borne by the participating institution and if agreement can not be reached the costs will determined by the taxing master of the High Court (s. 115, (3)).
If a participating institution wishes to appeal the values assigned to a portfolio, they may appeal to a specially appointed valuation panel, and the participating institution is liable for any costs incurred. Appeals on cost of an appeal may be made to the taxing master in the High Court (124, s. 3).
What all these procedures mean is that costs involved in the NAMA process could be extremely high. NAMA will realise any value on assets after costs. Risk due to high transaction and other costs could be reduced if fees were capped, for example for liquidators/ receivers. A State service in relation to liquidators/receivers, as recommended by the McCarthy Report (Volume II p. 184) in relation to litigation in medical expenses, could also reduce costs. Further options could be introduced for arbitration and incentives provided to avoid expensive court action as in the Zoe/ACC case. Co-operating institutions outside the NAMA process should be allowed participate in any savings/increase in value added through ‘an agreed policy approach’. Finally fees could be deferred until final outcomes are more certain.
As noted by the de Larosiere Report (p. 35) in relation to solving the financial crisis in banks, agreement on burden sharing is more difficult to achieve after intervention unless “one can rely on predetermined, ex ante arrangements”
The Bill (s. 203) also gives broad powers to control and restructure participating institutions, for example to restrict growth in balance sheet assets, prevent the take over of other institutions and to require mergers or consolidation within the participating institutions. It is not clear if merger or takeover by a non-participating institution would be allowed. The Bill also gives powers to require a restructuring plan and a business plan and to amend both (s. 205). Proposals made under this section would require careful analysis. However there is no requirement to make public any reports that participating institution may be required to produce, or to publish the rationale underlying any proposed restructuring.
The draft bill does not deal with the difficult issue of how value may be realised from assets financed or under the control of NAMA. This is an urgent issue - the longer real assets such as buildings remain unused the greater the risk of further loss due to neglect and vandalism. The quicker assets are put to use the greater the return. A requirement for local community consultation could help ensure better use and value from assets held by NAMA. Recently the Council for Sustainable Development (Comhar) issued a report arguing that NAMA should use assets to further the Green New Deal (2009). These and other issues should be part of an urgent initiative as to how best the highest value, broadly defined, may be obtained from the assets NAMA may acquire.
References
Council for Sustainable Development (Comhar) (2009), Towards a Green New Deal for Ireland.
De Larosiere Report (2009), The High-Level Group of Financial Supervision in the EU, Brussels, 25 February 2009, available at http://www.eubusiness.com/Finance/de-larosiere-report.09/view.
Wednesday, 7 October 2009
What Stiglitz said at NESC
Slí Eile: Nobel prize-winning US economist, Joseph Stiglitz, spoke on measurement of well-being at today's National Economic and Social Council Seminar on the NESC Social Report. Further posts will examine some of the important issues raised in this Report as well as issues raised in the course of today's seminar. In this post I attempt to recount one small part of what was said by Professor Stiglitz at the NESC Seminar in direct response to a question from the floor - 'how fast should the fiscal adjustment be in Ireland'. RTE have just released a full interview with Stiglitz here (for residents in the Republic of Ireland only).
Stiglitz said that, when confronted with issues about fiscal debt, people should consider all public assets as well as liabilities. Any attempt to reduce liabilities must take account of secondary impacts on public assets. He went pointed to the 'large amounts money squandered' by Governments in bailing out banks on the false premises that there is no alternative. Stiglitz said that we 'should play be the rules of capitalism': shared holders should take the hit in the first place followed by bondholders if that is not enough to fill the hole left by toxic assets. Instead, what is happening here as in many other banking crises is that a 'massive transfer to the banks from the public' is underway. He called the bailouts around the world “fraud” and said of taxpayers, “you are being robbed”.
Under the 'polluter pays' principle, those financial institutions polluting with toxic assets should pay the price. The price exacted through stringent fiscal measures arising from these banking bail-outs is directly undermining social solidarity and exacerbating our economic problems.
When asked about the option of kick-starting the economy through spending, he said that circumstances vary by country. He had no hesitation in supporting an investment package in the US. China and other countries were following this approach. While the Irish case is different to the extent that it is a small and open economy, policy-makers should not 'be intimated' by the situation. In relation to banking the taxpayer should 'own them' if they are paying for them. Credit to small and medium sized businesses should be extended. Investments in key areas such as green technology and human resources should be emphasised.
Stiglitz commented on the dominant school of macro-economic thinking, which simply does not recognise so much of what we discussed today and moreover, even “got it wrong” in its reliance on incentives, such as in the financial sector. He described the “absurdity” of the assumptions of free market economics (e.g. perfect information, single people, no life cycle, etc).
Stiglitz said that, when confronted with issues about fiscal debt, people should consider all public assets as well as liabilities. Any attempt to reduce liabilities must take account of secondary impacts on public assets. He went pointed to the 'large amounts money squandered' by Governments in bailing out banks on the false premises that there is no alternative. Stiglitz said that we 'should play be the rules of capitalism': shared holders should take the hit in the first place followed by bondholders if that is not enough to fill the hole left by toxic assets. Instead, what is happening here as in many other banking crises is that a 'massive transfer to the banks from the public' is underway. He called the bailouts around the world “fraud” and said of taxpayers, “you are being robbed”.
Under the 'polluter pays' principle, those financial institutions polluting with toxic assets should pay the price. The price exacted through stringent fiscal measures arising from these banking bail-outs is directly undermining social solidarity and exacerbating our economic problems.
When asked about the option of kick-starting the economy through spending, he said that circumstances vary by country. He had no hesitation in supporting an investment package in the US. China and other countries were following this approach. While the Irish case is different to the extent that it is a small and open economy, policy-makers should not 'be intimated' by the situation. In relation to banking the taxpayer should 'own them' if they are paying for them. Credit to small and medium sized businesses should be extended. Investments in key areas such as green technology and human resources should be emphasised.
Stiglitz commented on the dominant school of macro-economic thinking, which simply does not recognise so much of what we discussed today and moreover, even “got it wrong” in its reliance on incentives, such as in the financial sector. He described the “absurdity” of the assumptions of free market economics (e.g. perfect information, single people, no life cycle, etc).
Towards a Progressive Economics - last few places at TASC Autumn Conference
There are now only a few places remaining for TASC's Autumn Conference, Towards a Progressive Economics, on Saturday, October 10th, in DCU. If you wish to attend, please e-mail TASC to register as soon as possible. The full conference programme is available for download here, and an access map of the venue is available here.
When registering to attend, please also state whether you will require parking on the day. Car park exit tickets will be available at the registration desk for €3; however, we have to buy these in advance and need to have a final idea of the quantity required before Thursday.
Any places remaining on the day will be allocated on a first-come, first-served basis.
When registering to attend, please also state whether you will require parking on the day. Car park exit tickets will be available at the registration desk for €3; however, we have to buy these in advance and need to have a final idea of the quantity required before Thursday.
Any places remaining on the day will be allocated on a first-come, first-served basis.
Why (Irish) economists' eyes are smiling
James Wickham: There’s a curious paradox about economists in Ireland today. In the middle of the financial crisis, the public standing of economists is higher than ever before. This is odd, because in most countries the claim of economists to any special knowledge about the economy (or anything else) is subject to extensive criticism. Inside and outside the profession, there are calls for greater ‘modesty’. Furthermore, many ‘eccentric’ or ‘heterodox’ economists have long claimed that conventional academic economics has become essentially a branch of applied mathematics. Today their views are being given a wider audience than before. Readers of this blog will be aware of such developments, but they have had no impact in Ireland. Why?
Surely the answer lies in the national specificity of the Irish crisis. While the government claims that what has happened here is just part of a global crisis, this is of course nonsense. The global crisis – or more accurately, the crisis of Anglo-Saxon capitalism - has been exacerbated by our own construction and housing asset boom. And here I think - though I would like to check this - most Irish economists did point out that we were in a speculative bubble and many did call on the government to try to restrain it. However, I suspect that on a more general scale Irish economists were as guilty as their international colleagues. Even at home, how many called for tighter regulation of the banks? And abroad, how many pointed out the dangers of unregulated financial markets?
Surely the answer lies in the national specificity of the Irish crisis. While the government claims that what has happened here is just part of a global crisis, this is of course nonsense. The global crisis – or more accurately, the crisis of Anglo-Saxon capitalism - has been exacerbated by our own construction and housing asset boom. And here I think - though I would like to check this - most Irish economists did point out that we were in a speculative bubble and many did call on the government to try to restrain it. However, I suspect that on a more general scale Irish economists were as guilty as their international colleagues. Even at home, how many called for tighter regulation of the banks? And abroad, how many pointed out the dangers of unregulated financial markets?
Tuesday, 6 October 2009
The National Asset Management Agency Bill 2009: the value of loans
Jim Stewart: One of the contentious issues in the NAMA proposal is the value of the loans being purchased. Loans with an estimated market value of €47 billion will be taken over by NAMA at an estimated value of €54 billion. Many have argued that market values should be used. One problem with this argument is that it assumes that there is a market for property assets underlying these loans in the accepted sense of a market.
In fact, there has always been massive state intervention in the property market and there probably always will be. For example planning procedures, tax incentives (hotels, section 23 houses, multistory car parks) and absence of tax in other cases. The State can also influence values via provision of infrastructure, for example provision of a school, bus service, a Luas extension, or reopening a railway line. Planning regulations can have a considerable effect on property values. If the Minister for the Environment were to restrict apartment building so as to effectively prevent new building, existing apartment blocks are more likely to gain in value. The current crisis has revealed serious flaws in our planning process. Reform is bound to affect property values
The problem with valuing the assets that NAMA may own is that the State is both negotiating with the banks, and eventually the property owner, as to value, and at the same time can influence value. Any valuation is subjective, including the estimates that have been widely discussed of the loans to be acquired by NAMA. The draft bill recognises this.
One of the advantages of earlier intervention was the certainty of the state commitment, plus the existence of options which under certain circumstances increased returns to the State and reduced risk. For example, the preference shares issued to banks earlier this year had associated warrants for a 25% shareholding in both banks, which have become much more valuable because of the rise in bank shares. If either bank raises further capital and repays the preference shares issued, the potential State shareholding is reduced to 15%.
The current NAMA proposal envisages a small element of risk sharing – 5% of the total amount paid to the banks will be linked to the performance of NAMA, although precise details have not been published. There are other ways that the Bill could be changed to further reduce, but not eliminate, risk and uncertainty to the State.
That will be the subject of my next post.
In fact, there has always been massive state intervention in the property market and there probably always will be. For example planning procedures, tax incentives (hotels, section 23 houses, multistory car parks) and absence of tax in other cases. The State can also influence values via provision of infrastructure, for example provision of a school, bus service, a Luas extension, or reopening a railway line. Planning regulations can have a considerable effect on property values. If the Minister for the Environment were to restrict apartment building so as to effectively prevent new building, existing apartment blocks are more likely to gain in value. The current crisis has revealed serious flaws in our planning process. Reform is bound to affect property values
The problem with valuing the assets that NAMA may own is that the State is both negotiating with the banks, and eventually the property owner, as to value, and at the same time can influence value. Any valuation is subjective, including the estimates that have been widely discussed of the loans to be acquired by NAMA. The draft bill recognises this.
One of the advantages of earlier intervention was the certainty of the state commitment, plus the existence of options which under certain circumstances increased returns to the State and reduced risk. For example, the preference shares issued to banks earlier this year had associated warrants for a 25% shareholding in both banks, which have become much more valuable because of the rise in bank shares. If either bank raises further capital and repays the preference shares issued, the potential State shareholding is reduced to 15%.
The current NAMA proposal envisages a small element of risk sharing – 5% of the total amount paid to the banks will be linked to the performance of NAMA, although precise details have not been published. There are other ways that the Bill could be changed to further reduce, but not eliminate, risk and uncertainty to the State.
That will be the subject of my next post.
There are worse things than 'negative equity'
Nat O'Connor: There continue to be stories about falling housing prices (for example). We need to get some sense of what are reasonable housing costs and use this as a basis to co-ordinate policy and aim for stable housing costs.
Earlier in this blog, An Saoi has suggested that the current incarnation of NAMA is dependent on reinflating the property bubble. It's not the only state policy that may inflate property prices: the state pays the rent of over half of the private rented sector, it uses major tax expenditures to incentivise development and home ownership, and the move to leasing as the main source of social housing will also have a major effect on the rental market. None of these policies may have the explicit goal of propping up property prices, but there is no denying that huge state involvement in the property sector will have a significant effect.
High property prices sustained through public expenditure would be wasteful and are unsustainable. So, we need some kind of objective yardstick that might give us a sense of what housing costs would be reasonable. It is difficult to objectively identify a 'market' price when the state has such an influence on prices.
In the US housing market, long-term house prices appear to settle between 12 and 20 times annual rental yield value. In other words, if I can rent a house for 10,000 a year, it is worth somewhere between 120,000 to 200,000.
Irish house asking prices vary between 20 and 34 times their annual rental yield, for 3-bed houses in County Dublin, Galway City, Waterford City and Cork City. (Comparison based on DAFT house prices versus rent snapshot, Quarter 2, 2009). This suggests that they have further to fall before we get to some kind of sustainable position.
The above Irish Times article concludes (despite the weakness of the available data) that "it is likely that most people who acquired their home in the past five years are now experiencing some degree of negative equity."
Yes. There can be little doubt that the overdue, massive correction in the housing market means that house prices may have to fall a great deal and they may never again rise to anything like the equivalent of their inflated value. Remember, we had a crazy unsustainable situation where we generated a massive surplus of housing stock and yet prices rose steeply. So, 'negative equity' is definitely going to happen for many people.
But is negative equity such a bad thing? Well, first of all we need to separate the whole concept of housing-as-equity from the more basic concept of housing costs; that is, how much it costs to live somewhere in terms of rent or mortgage and associated charges.
If a lot of people cannot keep their housing costs to a reasonable proportion of their income, then that is a big problem. How much is a reasonable level of housing costs? It is suggested that housing costs shouldn't be more than a third of net household income. A household might choose to pay more in order to own or to live in a bigger house/nicer area, but this should be a choice. The state's goal should be for households to have the option of reasonable housing costing no more than a third of their income.
When households have high housing costs, it dampens their ability to do other things (which lessens overall economic activity). High housing costs also lowers Ireland's competitiveness. And when households cannot afford housing, the state currently expends resources assisting them: e.g. rent supplement, social housing, etc. It would be perverse for the state to also be expending resources that (intentionally or not) artificially maintain high house prices and rents. Essentially, the state would be raising costs that push more people to seek state assistance to meet those costs! That's unsustainable, but perhaps not so far from the current situation.
The only way out is for the state to allow a lot of households to enter negative equity; in the sense of the state avoiding actions that will inflate house prices. If households can meet their housing costs, then they will remain housed. So, that's problem number one taken care of.
If housing costs can be met (at a reasonable proportion of income), what is the remaining problem with negative equity? There seem to be three aspects to this: One is that the mobility of the household is constrained; Two is the loss of households' capital; and Three is that owner occupiers may end up paying unreasonably high housing costs.
1: A lot of people are perhaps realising that their 'starter home' may be for more than a few years. It's a pity we built so many small houses. The problem of mobility is really one of lack of uncertainty in the market, combined with a lack of credit, exacerbated by lower incomes. In other words, people are hanging on to see if they can sell for more and/or buy for less. However, if the house you sell and the house you buy are both down say €100,000, then you don't really lose out. But only if you can find a buyer for your house and only if the banks will remortgage you in your new house on the same terms as the old one.
2: The second aspect of negative equity is that people lose money that they could have spent elsewhere. Worse, they haven't lost it yet, but will continue to 'lose' it over the years where they pay more in mortgage payments than they would either in rent or if they bought when prices crashed. There is really not a lot the state can do about this. The news, like for bank shareholders, is that "the value of your investment went down, not up". Depending on how interest rates turn out, some people might actually be better off selling, write off their losses now and start again; although that may mean renting for life. Having said that, once the cost of the mortgage is even close to the cost of renting, the mortgage holder still gets to keep an asset at the end of the day, which the renter doesn't. The asset just ends up being more expensive than initially hoped for.
3: There is a risk that some owner occupiers will end up paying way above a third of their income on housing costs. Especially the newly unemployed, those who took out sub-prime mortgages or those who have lengthy fixed-rated high interest periods built into their loan. And if people get into arrears, penalty charges and a higher rate of interest can apply.
Which brings me back to the beginning. There would be a lot to be said for a state target of stable house prices in the long term. So, the state needs to examine carefully all the ways in which its actions affect the property market. Above all else, we must avoid another property price bubble, or we'll just repeat the madness all over again.
Now for the bad news, for a small number of mortgage holders in arrears, negative equity is part of a worse situation; that is, negative equity plus the inability to meet housing costs. Due to unemployment, a 100%+ mortgage or 'equity release' loans, or because their home was particularly high priced, these mortgage holders' property is not worth as much as what they paid for it AND they are unable to make their payments on it. The risk here is that these households will throw everything they've got into trying to pay arrears and punative interest rates, but in the end, despite years paying far too much for housing, they will eventually be repossessed. Not only that, but they are likely to still owe a large sum to a lender, which will not only prevent them buying again, but will take a chunk of their net income and limit their life options in many ways.
The state should have access to data about arrears and the level of household indebtedness, either through the Financial Regulator or through asking lenders directly for it.
It is the nightmare scenario of a combination of negative equity plus an inability to pay that will affect hundreds, maybe thousands of households; often those who signed up to sub-prime mortgages or who were pursuaded to 'release equity' from their homes. Yes, there was individual choice in this - but the lax regulation of credit certainly did not help. Those who get foreclosed in this above manner will end up seeking housing assistance from the state (either through rent supplement or social housing). There is an opportunity for the state to act now, to save these families much hardship and to help them restructure their debt while they still have more ability to manage it.
For example, the state (or NAMA) could act now to freeze their penalty payments, restructure their debt, and maybe fund the local authorities to buy half their property in a reverse version of the current shared ownership scheme. This will cost money, but it could be cheaper than waiting for them to become impoverished and then housing them; and it would certainly be more decent.
Earlier in this blog, An Saoi has suggested that the current incarnation of NAMA is dependent on reinflating the property bubble. It's not the only state policy that may inflate property prices: the state pays the rent of over half of the private rented sector, it uses major tax expenditures to incentivise development and home ownership, and the move to leasing as the main source of social housing will also have a major effect on the rental market. None of these policies may have the explicit goal of propping up property prices, but there is no denying that huge state involvement in the property sector will have a significant effect.
High property prices sustained through public expenditure would be wasteful and are unsustainable. So, we need some kind of objective yardstick that might give us a sense of what housing costs would be reasonable. It is difficult to objectively identify a 'market' price when the state has such an influence on prices.
In the US housing market, long-term house prices appear to settle between 12 and 20 times annual rental yield value. In other words, if I can rent a house for 10,000 a year, it is worth somewhere between 120,000 to 200,000.
Irish house asking prices vary between 20 and 34 times their annual rental yield, for 3-bed houses in County Dublin, Galway City, Waterford City and Cork City. (Comparison based on DAFT house prices versus rent snapshot, Quarter 2, 2009). This suggests that they have further to fall before we get to some kind of sustainable position.
The above Irish Times article concludes (despite the weakness of the available data) that "it is likely that most people who acquired their home in the past five years are now experiencing some degree of negative equity."
Yes. There can be little doubt that the overdue, massive correction in the housing market means that house prices may have to fall a great deal and they may never again rise to anything like the equivalent of their inflated value. Remember, we had a crazy unsustainable situation where we generated a massive surplus of housing stock and yet prices rose steeply. So, 'negative equity' is definitely going to happen for many people.
But is negative equity such a bad thing? Well, first of all we need to separate the whole concept of housing-as-equity from the more basic concept of housing costs; that is, how much it costs to live somewhere in terms of rent or mortgage and associated charges.
If a lot of people cannot keep their housing costs to a reasonable proportion of their income, then that is a big problem. How much is a reasonable level of housing costs? It is suggested that housing costs shouldn't be more than a third of net household income. A household might choose to pay more in order to own or to live in a bigger house/nicer area, but this should be a choice. The state's goal should be for households to have the option of reasonable housing costing no more than a third of their income.
When households have high housing costs, it dampens their ability to do other things (which lessens overall economic activity). High housing costs also lowers Ireland's competitiveness. And when households cannot afford housing, the state currently expends resources assisting them: e.g. rent supplement, social housing, etc. It would be perverse for the state to also be expending resources that (intentionally or not) artificially maintain high house prices and rents. Essentially, the state would be raising costs that push more people to seek state assistance to meet those costs! That's unsustainable, but perhaps not so far from the current situation.
The only way out is for the state to allow a lot of households to enter negative equity; in the sense of the state avoiding actions that will inflate house prices. If households can meet their housing costs, then they will remain housed. So, that's problem number one taken care of.
If housing costs can be met (at a reasonable proportion of income), what is the remaining problem with negative equity? There seem to be three aspects to this: One is that the mobility of the household is constrained; Two is the loss of households' capital; and Three is that owner occupiers may end up paying unreasonably high housing costs.
1: A lot of people are perhaps realising that their 'starter home' may be for more than a few years. It's a pity we built so many small houses. The problem of mobility is really one of lack of uncertainty in the market, combined with a lack of credit, exacerbated by lower incomes. In other words, people are hanging on to see if they can sell for more and/or buy for less. However, if the house you sell and the house you buy are both down say €100,000, then you don't really lose out. But only if you can find a buyer for your house and only if the banks will remortgage you in your new house on the same terms as the old one.
2: The second aspect of negative equity is that people lose money that they could have spent elsewhere. Worse, they haven't lost it yet, but will continue to 'lose' it over the years where they pay more in mortgage payments than they would either in rent or if they bought when prices crashed. There is really not a lot the state can do about this. The news, like for bank shareholders, is that "the value of your investment went down, not up". Depending on how interest rates turn out, some people might actually be better off selling, write off their losses now and start again; although that may mean renting for life. Having said that, once the cost of the mortgage is even close to the cost of renting, the mortgage holder still gets to keep an asset at the end of the day, which the renter doesn't. The asset just ends up being more expensive than initially hoped for.
3: There is a risk that some owner occupiers will end up paying way above a third of their income on housing costs. Especially the newly unemployed, those who took out sub-prime mortgages or those who have lengthy fixed-rated high interest periods built into their loan. And if people get into arrears, penalty charges and a higher rate of interest can apply.
Which brings me back to the beginning. There would be a lot to be said for a state target of stable house prices in the long term. So, the state needs to examine carefully all the ways in which its actions affect the property market. Above all else, we must avoid another property price bubble, or we'll just repeat the madness all over again.
Now for the bad news, for a small number of mortgage holders in arrears, negative equity is part of a worse situation; that is, negative equity plus the inability to meet housing costs. Due to unemployment, a 100%+ mortgage or 'equity release' loans, or because their home was particularly high priced, these mortgage holders' property is not worth as much as what they paid for it AND they are unable to make their payments on it. The risk here is that these households will throw everything they've got into trying to pay arrears and punative interest rates, but in the end, despite years paying far too much for housing, they will eventually be repossessed. Not only that, but they are likely to still owe a large sum to a lender, which will not only prevent them buying again, but will take a chunk of their net income and limit their life options in many ways.
The state should have access to data about arrears and the level of household indebtedness, either through the Financial Regulator or through asking lenders directly for it.
It is the nightmare scenario of a combination of negative equity plus an inability to pay that will affect hundreds, maybe thousands of households; often those who signed up to sub-prime mortgages or who were pursuaded to 'release equity' from their homes. Yes, there was individual choice in this - but the lax regulation of credit certainly did not help. Those who get foreclosed in this above manner will end up seeking housing assistance from the state (either through rent supplement or social housing). There is an opportunity for the state to act now, to save these families much hardship and to help them restructure their debt while they still have more ability to manage it.
For example, the state (or NAMA) could act now to freeze their penalty payments, restructure their debt, and maybe fund the local authorities to buy half their property in a reverse version of the current shared ownership scheme. This will cost money, but it could be cheaper than waiting for them to become impoverished and then housing them; and it would certainly be more decent.
What's NAMA got to do with it?
Slí Eile: Two questions:
1 Has the Bord Snip process anything to do with the banking/NAMA debacle? Colm McCarthy emphatically says no but he misses the larger picture not only going forward, but going backwards as well.
2 Is the assumption that property values will recover by 10% enough to recoup the short-term losses for Irish taxpayers (otherwise known as NAMA/NTMA) over-paying for assets? The answer to this all depends on what other assumptions you make:
It may be stating the all too obvious, but to date nobody has gone through all the loan books of all financial institutions in respect of all types of assets from landbanks to shopping centres to residential property. It is safe to assume that – in the absence of detailed explanations and briefing documents in the public domain – a number of heroic assumptions have been made somewhere, at some level, to arrive at a ‘current market value’ of €47bn in respect of assets held by banks and financial institutions, to be transferred some time soon to the Irish taxpayer.
Just to run through the arithmetic for a few seconds…..there is an estimated €88bn in assets to be bought by the Irish taxpayer. Take 77% as the ‘loan-to-value’ ratio’ and apply this to €88bn to get €68bn (rounded). Now add €9bn in ‘rolled up interest’ and you get €77bn.. Then, it has been decided to discount this figure of €77bn at 33% to get €54bn - sum to be lent by Irish taxpayers to the banks by means of a special bond issue. The banks will use these bonds (on which the taxpayer must pay 1.5% per annum interest) as collateral against which the European Central Bank will lend the same amount of €54bn to the banks.
Now, the ‘current market value’ of all these assets is estimated (assumed?) to be €47bn. This latter estimate is based on an estimated/assumed 47%. The difference between 54bn to be lent by the Irish taxpayer to the banks and the €47bn in ‘estimated current value’ is €7bn.
So, we are told, all you need is an annual 1% growth in property and the Irish taxpayer has covered his/her losses in the short-term. It would be interesting to see the detailed (assumed) cost and revenue flows under different scenarios. However, the real elephant in the parlour is the supposed current-day cost of these loans, and how any potential value in recovery will kick in. If our starting point baseline assumption is seriously out (by even say €3bn) then the required recovery growth in values will be all the greater. In a good piece in the Sunday Business Post on 20 September, journalist Richard Curran, looked at some of the components of the asset bundle. Landbank accounts for 36%; development for 28%; and ‘associated’ (mainly commercial properties) for the remaining 36%. Curran cites a number of information sources to arrive at a conclusion that the likely value of landbanks is much less than what is assumed. He reckons that it may have fallen from around €32bn to around $13bn. He questions the assumption that the drop in value of ‘development projects’ (Zoe group territory) is only 60%. In the aggregate, he arrives at a current market value of €39bn compared to the figure of €47bn that Government is working off. Market prices would need to jump by at least 33% to keep pace with this scale of over-payment (€54bn minus €39bn). Even then, there is huge uncertainty about future costs including (as is inevitable) a large increase in interest rates as the European economy is likely to recover from 2010 onwards.
The assumption of strong and sustained asset price recovery is problematic from two points of view:
Historical evidence is not a strong advocate of such a trend following property bubble implosions; and
the need to contain particular non-wage costs including rental costs and property is not helped by a view that we need to return to something like 2004 property prices (which were already over-inflated).
So, Social Justice Ireland is very right to say that – in the long-run – the Irish taxpayer will pick up the bill on NAMA and, hence, the issue of spending, debt and future liabilities are all inter-linked exposing the current taxpaying population and future ones to a massive risk against a climate of international recession and continuing pressure on costs, exports, competitiveness and fiscal balance, Lets say, NAMA and all that hangs out of it, is the bale of iron that breaks the camel’s back
I very much agree with Karl Whelan in his column in the Irish Times last Friday when he says that:
In reality, the bonds issued by Nama will be a huge addition to the stock of debt (IOUs) that must be paid back by the Irish taxpayer, a stock that is already rising so rapidly that there are serious international concerns about its sustainability, with very real consequences in the form of expenditure cuts and tax hikes.
So, NAMA – the child of the Irish Bermuda Triangle (Banks, Party and Developers) – has everything to with the current and prospective state of our public finances because:
The roots of the implosion in tax revenues and escalating public deficit are intertwined with those of the Bermuda Triangle that augmented the economic wreckage caused by the world recession.
Going forward, there is a massive risk exposure for citizens as any loss in values will be at the price of public services, health, equality and social concord. As Olivia O’Leary commented recently at a book launch on Rebuilding Trust in Banking: Essays in Regulation, Corporate Governance and Ethics by Ray Kinsella – if centrist governments impose an economic serfdom on citizen,s they may turn to the political extremes.
The point is to build a positive, political, credible, coherent and united progressive front on the left of centre to the current consensus in order to implement a programme of economic, social and democratic renewal. The time is long overdue. Ireland and its children deserve better than the present offerings of centre-right politics.
1 Has the Bord Snip process anything to do with the banking/NAMA debacle? Colm McCarthy emphatically says no but he misses the larger picture not only going forward, but going backwards as well.
2 Is the assumption that property values will recover by 10% enough to recoup the short-term losses for Irish taxpayers (otherwise known as NAMA/NTMA) over-paying for assets? The answer to this all depends on what other assumptions you make:
It may be stating the all too obvious, but to date nobody has gone through all the loan books of all financial institutions in respect of all types of assets from landbanks to shopping centres to residential property. It is safe to assume that – in the absence of detailed explanations and briefing documents in the public domain – a number of heroic assumptions have been made somewhere, at some level, to arrive at a ‘current market value’ of €47bn in respect of assets held by banks and financial institutions, to be transferred some time soon to the Irish taxpayer.
Just to run through the arithmetic for a few seconds…..there is an estimated €88bn in assets to be bought by the Irish taxpayer. Take 77% as the ‘loan-to-value’ ratio’ and apply this to €88bn to get €68bn (rounded). Now add €9bn in ‘rolled up interest’ and you get €77bn.. Then, it has been decided to discount this figure of €77bn at 33% to get €54bn - sum to be lent by Irish taxpayers to the banks by means of a special bond issue. The banks will use these bonds (on which the taxpayer must pay 1.5% per annum interest) as collateral against which the European Central Bank will lend the same amount of €54bn to the banks.
Now, the ‘current market value’ of all these assets is estimated (assumed?) to be €47bn. This latter estimate is based on an estimated/assumed 47%. The difference between 54bn to be lent by the Irish taxpayer to the banks and the €47bn in ‘estimated current value’ is €7bn.
So, we are told, all you need is an annual 1% growth in property and the Irish taxpayer has covered his/her losses in the short-term. It would be interesting to see the detailed (assumed) cost and revenue flows under different scenarios. However, the real elephant in the parlour is the supposed current-day cost of these loans, and how any potential value in recovery will kick in. If our starting point baseline assumption is seriously out (by even say €3bn) then the required recovery growth in values will be all the greater. In a good piece in the Sunday Business Post on 20 September, journalist Richard Curran, looked at some of the components of the asset bundle. Landbank accounts for 36%; development for 28%; and ‘associated’ (mainly commercial properties) for the remaining 36%. Curran cites a number of information sources to arrive at a conclusion that the likely value of landbanks is much less than what is assumed. He reckons that it may have fallen from around €32bn to around $13bn. He questions the assumption that the drop in value of ‘development projects’ (Zoe group territory) is only 60%. In the aggregate, he arrives at a current market value of €39bn compared to the figure of €47bn that Government is working off. Market prices would need to jump by at least 33% to keep pace with this scale of over-payment (€54bn minus €39bn). Even then, there is huge uncertainty about future costs including (as is inevitable) a large increase in interest rates as the European economy is likely to recover from 2010 onwards.
The assumption of strong and sustained asset price recovery is problematic from two points of view:
Historical evidence is not a strong advocate of such a trend following property bubble implosions; and
the need to contain particular non-wage costs including rental costs and property is not helped by a view that we need to return to something like 2004 property prices (which were already over-inflated).
So, Social Justice Ireland is very right to say that – in the long-run – the Irish taxpayer will pick up the bill on NAMA and, hence, the issue of spending, debt and future liabilities are all inter-linked exposing the current taxpaying population and future ones to a massive risk against a climate of international recession and continuing pressure on costs, exports, competitiveness and fiscal balance, Lets say, NAMA and all that hangs out of it, is the bale of iron that breaks the camel’s back
I very much agree with Karl Whelan in his column in the Irish Times last Friday when he says that:
In reality, the bonds issued by Nama will be a huge addition to the stock of debt (IOUs) that must be paid back by the Irish taxpayer, a stock that is already rising so rapidly that there are serious international concerns about its sustainability, with very real consequences in the form of expenditure cuts and tax hikes.
So, NAMA – the child of the Irish Bermuda Triangle (Banks, Party and Developers) – has everything to with the current and prospective state of our public finances because:
The roots of the implosion in tax revenues and escalating public deficit are intertwined with those of the Bermuda Triangle that augmented the economic wreckage caused by the world recession.
Going forward, there is a massive risk exposure for citizens as any loss in values will be at the price of public services, health, equality and social concord. As Olivia O’Leary commented recently at a book launch on Rebuilding Trust in Banking: Essays in Regulation, Corporate Governance and Ethics by Ray Kinsella – if centrist governments impose an economic serfdom on citizen,s they may turn to the political extremes.
The point is to build a positive, political, credible, coherent and united progressive front on the left of centre to the current consensus in order to implement a programme of economic, social and democratic renewal. The time is long overdue. Ireland and its children deserve better than the present offerings of centre-right politics.
Monday, 5 October 2009
Investing in drug services may save the state more in the long-term
Nat O'Connor: Merchants Quay Ireland have highlighted a growing trend of heroin use across Ireland. If this is true, it is something to be taken seriously. An increase in drug misuse is one of the predictable, ugly sides of economic recession and, besides the incalculable human cost, there is a risk here of a downward spiral of long-term costs to the exchequer if this is not handled well by the state.
In the context of public sector cuts, it is likely that drug treatment services (like everything else) will be cut. And no, this is not just another argument to 'protect' a sector from cuts; it simply means that there is a need for the relevant Departments to be very strategic about what they cut and what services they bolster.
For example, at present, many people have to travel to Dublin to avail of drug treatment services. Travel and accommodation increase the cost of the providing these services. Some localisation of services might actually save money. Also, people have a better chance of responding well to treatment where they have a network of social supports. Likewise, early access to detox, rehab and step-down facilities can help tackle addiction at the outset.
British research, cited by MQI, shows that for every £1 spent on drug treatment, at least £3 is saved in terms of social, health and criminal justice related costs. So, there is value for money in continuing to target public spending on drug treatment services, as the state has little control over expenses if someone goes to court or to hospital. (Conversely, 'savings' from cuts may be a false economy, if they result in higher costs in later years).
In the budgetary context, this is an example where one department can save (or cost) another department money. It would be worth the Department of Finance taking more of a holistic approach, and perhaps considering more flexibility about transfers from one Budget Vote to another in order to target resources where they will provide the best impact. In this particular case, if it will save money, funds could be moved from health and justice to pay for drug treatment (and we are talking about expenditure on the same cohort of people). We hear a lot of talk about public service reform. A mechanism for this kind of holistic view, with more flexibility about vote transfers, would be a concrete way of generating efficiencies.
Even when the economy recovers, we may have years of 'jobless growth'. That means years of high unemployment - which is correlated with a higher number of people falling into drug misuse. We already have a problem of over-crowded prisons and waiting lists for hospital beds. Failing to address growing drug misuse now will only result in further pressure in other areas of public spending for years to come.
In the context of public sector cuts, it is likely that drug treatment services (like everything else) will be cut. And no, this is not just another argument to 'protect' a sector from cuts; it simply means that there is a need for the relevant Departments to be very strategic about what they cut and what services they bolster.
For example, at present, many people have to travel to Dublin to avail of drug treatment services. Travel and accommodation increase the cost of the providing these services. Some localisation of services might actually save money. Also, people have a better chance of responding well to treatment where they have a network of social supports. Likewise, early access to detox, rehab and step-down facilities can help tackle addiction at the outset.
British research, cited by MQI, shows that for every £1 spent on drug treatment, at least £3 is saved in terms of social, health and criminal justice related costs. So, there is value for money in continuing to target public spending on drug treatment services, as the state has little control over expenses if someone goes to court or to hospital. (Conversely, 'savings' from cuts may be a false economy, if they result in higher costs in later years).
In the budgetary context, this is an example where one department can save (or cost) another department money. It would be worth the Department of Finance taking more of a holistic approach, and perhaps considering more flexibility about transfers from one Budget Vote to another in order to target resources where they will provide the best impact. In this particular case, if it will save money, funds could be moved from health and justice to pay for drug treatment (and we are talking about expenditure on the same cohort of people). We hear a lot of talk about public service reform. A mechanism for this kind of holistic view, with more flexibility about vote transfers, would be a concrete way of generating efficiencies.
Even when the economy recovers, we may have years of 'jobless growth'. That means years of high unemployment - which is correlated with a higher number of people falling into drug misuse. We already have a problem of over-crowded prisons and waiting lists for hospital beds. Failing to address growing drug misuse now will only result in further pressure in other areas of public spending for years to come.
Deconstructing public sector pay cuts
An Saoi and Michael Taft: There is a fundamental misconception about the fiscal impact of public expenditure cuts. It is assumed that a reduction in public expenditure of ‘x’ equals a reduction in the borrowing requirement / fiscal deficit of that same ‘x’ amount. For instance, Emmet Oliver writes in the Sunday Tribune:
‘A 5% across-the-board cut in public sector pay would yield savings of €1bn in a full year; a 10% cut would deliver €2bn.’
Our analysis tests this assumption using the example of public sector pay reduction. In doing so we have had to make some estimates (e.g. the proportion of top rate taxpayers, etc.). While these are approximations and, therefore, should be treated as ‘ballpark’ figures, variations will not result in substantially different results.
The net Public Sector wages and pensions bill for 2009 is estimated by the Department of Finance at €18.3 billion. We calculate the net savings of an across-the-board cut of 5 percent. We assume
• 60 percent of pay is taxed at the top rate
• 70 percent of employees are insurable
• 20 percent are in receipt of pensions
• No change in behaviour, (e.g. parents reducing their hours as the pay-off between additional work hours and childcare costs become less worthwhile).
5 percent of the gross Public Sector pay bill is €988 million.
Income Tax: Assuming €16 billion of the €19 billion is taxable (i.e. net of employer PRSI, pension contributions, pension levies, widow & orphans, etc), the reduction in taxable pay is €800 million. €480 million is taxable at 41% and €320 million at 20%, thus reducing the tax take by approximately €261 million.
Employer PRSI Based on the above assumption, 56% of the total payroll is insurable. Assuming that they receive pay cuts of €350 million, the Social Insurance Fund loses approximately €37 million. As the Fund is slipping into deficit, this must be made up by general taxation. There is no saving under this heading.
Employee PRSI and Health Levy: Again, making an assumption that 75 percent of the reduction in taxable pay is liable to PRSI, this would reduce the Fund by a further €24. For the Health and Income levies we assume a reduction of 4 percent – or €46 million.
Pension Contributions/Pension Levies/Widow and Orphans: Almost all Public Servants contribute to all three. The only exceptions are Civil Servants appointed before 6th April 1995, who pay the levy & W&O. Pension Levy/Pension Contributions are estimated by the Department to be €1.5 billion. A 5 percent reduction would amount to €75 million. As there is no separate pension scheme in place, Finance nets off current contributions against current pensions.
While a 5 percent reduction in the gross public sector pay/pension bill would reduce Government expenditure by €988 million, the after-tax savings would be €545 million, or 55 percent of the gross reduction.
It should be noted that the above includes a 5 percent cut in pensions. If these payments were excluded, both the gross and after-tax savings would be reduced further (pension payments make up 10.7 percent of the total pay/pension bill, or €2 billion).
However, the after-tax savings of €545 million does not represent the net savings to the Exchequer or the reduction in the borrowing requirement. For instance, with less money in the pocket there will be a reduction in VAT and Excise tax payments. This is not included in the above.
Further, it does not take into account any negative multiplier resulting in the reduction of net wages. For instance, the ESRI estimates that a reduction of €1 billion in public sector pay expenditure will result in the following:
• GNP to decline by €442 million in the first year, with a long-term effect (after six years) of a decline of €684 million
• Consumption to decline by 0.9 percent
The ESRI estimates that, on the basis of the impact to the economy, the borrowing requirement will be reduced by 0.3 percent. However, we don’t know to what extent they have factored in the above tax reductions.
Given all of the above, it is reasonable to assume that the net savings to the Exchequer / reduction in the borrowing requirement will be close to 50 percent of the gross reduction in expenditure. In other words, a 5 percent reduction in public sector pay/pensions – or approximately €1 billion – will not produce ‘savings’ of €1 billion. Rather they true savings will be close to €500 million.
If there is to be a fact-based debate over public sector pay, it is imperative that we get the numbers right.
‘A 5% across-the-board cut in public sector pay would yield savings of €1bn in a full year; a 10% cut would deliver €2bn.’
Our analysis tests this assumption using the example of public sector pay reduction. In doing so we have had to make some estimates (e.g. the proportion of top rate taxpayers, etc.). While these are approximations and, therefore, should be treated as ‘ballpark’ figures, variations will not result in substantially different results.
The net Public Sector wages and pensions bill for 2009 is estimated by the Department of Finance at €18.3 billion. We calculate the net savings of an across-the-board cut of 5 percent. We assume
• 60 percent of pay is taxed at the top rate
• 70 percent of employees are insurable
• 20 percent are in receipt of pensions
• No change in behaviour, (e.g. parents reducing their hours as the pay-off between additional work hours and childcare costs become less worthwhile).
5 percent of the gross Public Sector pay bill is €988 million.
Income Tax: Assuming €16 billion of the €19 billion is taxable (i.e. net of employer PRSI, pension contributions, pension levies, widow & orphans, etc), the reduction in taxable pay is €800 million. €480 million is taxable at 41% and €320 million at 20%, thus reducing the tax take by approximately €261 million.
Employer PRSI Based on the above assumption, 56% of the total payroll is insurable. Assuming that they receive pay cuts of €350 million, the Social Insurance Fund loses approximately €37 million. As the Fund is slipping into deficit, this must be made up by general taxation. There is no saving under this heading.
Employee PRSI and Health Levy: Again, making an assumption that 75 percent of the reduction in taxable pay is liable to PRSI, this would reduce the Fund by a further €24. For the Health and Income levies we assume a reduction of 4 percent – or €46 million.
Pension Contributions/Pension Levies/Widow and Orphans: Almost all Public Servants contribute to all three. The only exceptions are Civil Servants appointed before 6th April 1995, who pay the levy & W&O. Pension Levy/Pension Contributions are estimated by the Department to be €1.5 billion. A 5 percent reduction would amount to €75 million. As there is no separate pension scheme in place, Finance nets off current contributions against current pensions.
* * *
While a 5 percent reduction in the gross public sector pay/pension bill would reduce Government expenditure by €988 million, the after-tax savings would be €545 million, or 55 percent of the gross reduction.
It should be noted that the above includes a 5 percent cut in pensions. If these payments were excluded, both the gross and after-tax savings would be reduced further (pension payments make up 10.7 percent of the total pay/pension bill, or €2 billion).
However, the after-tax savings of €545 million does not represent the net savings to the Exchequer or the reduction in the borrowing requirement. For instance, with less money in the pocket there will be a reduction in VAT and Excise tax payments. This is not included in the above.
Further, it does not take into account any negative multiplier resulting in the reduction of net wages. For instance, the ESRI estimates that a reduction of €1 billion in public sector pay expenditure will result in the following:
• GNP to decline by €442 million in the first year, with a long-term effect (after six years) of a decline of €684 million
• Consumption to decline by 0.9 percent
The ESRI estimates that, on the basis of the impact to the economy, the borrowing requirement will be reduced by 0.3 percent. However, we don’t know to what extent they have factored in the above tax reductions.
Given all of the above, it is reasonable to assume that the net savings to the Exchequer / reduction in the borrowing requirement will be close to 50 percent of the gross reduction in expenditure. In other words, a 5 percent reduction in public sector pay/pensions – or approximately €1 billion – will not produce ‘savings’ of €1 billion. Rather they true savings will be close to €500 million.
If there is to be a fact-based debate over public sector pay, it is imperative that we get the numbers right.
Saturday, 3 October 2009
Exchequer returns: fairy godmothers desert Lenihan
An Saoi: September has come and gone, and the trees outside my window will shortly be as bare as the State’s coffers. Grey clouds mass from the west and threaten to soak me. But my problems are small – just look at Brian Lenihan’s!
His fairy godmothers have deserted him this month, with Corporation Tax falling far below the €365M expected. This must be particularly worrying as the advance preliminary tax payment for companies with 31st March year-end was due. There must have been a decidedly smaller number of balancing payments made with Corporation Tax returns submitted this month. This may also augur very badly for next month, if there are a lot of repayment claims in their place.
The figures themselves look a little bit better than reality, because the levy on Health Insurers was payable in September. This is a once off payment, which has been included under levies.
This month I would like to take a particular look at VAT, which has slipped further off target, though by slightly less than I had expected. The degree of the problem is perhaps lost as the figures themselves are still so huge. However, let me take you through them, slowly.
It is now over 7% off a target set less than 6 months ago. This target was set knowing the details of two of the six VAT returns due in 2009. If this trend continues the yield will be some €1,000M short of target. The decline in prices may be influencing some of the drop, together with as little stock as possible being retained by anyone.
The September VAT yield is 22% below 2008, 27% below 2007 and around 20% behind the same month 2006. We have now returned to the level of VAT paid in September 2004. Indeed, this is broadly where retail sales index is also.
The smaller taxes are bouncing all over the place, making it hard to forecast where they will end up. However they do not play a major role in funding State spending.
The falling yield from Income Tax shows that job losses continue apace. Income tax in September is 25% below the target. Arrears of income tax must also be building up with many employers not paying over deductions made from employees’ wages and salaries.
Back in July, I set out my own estimate of the outturn, which is below with my update based on the subsequent two months. My expected outturn is now €31,587M, an increase on the July figure but still €2,800M lower than the Minister’s. The end of year figure for 2003 was 32,102, and we are unlikely to beat it in 2009.
The filing of the self-employed returns over the next six weeks could considerably reduce the Income Tax figure, if it throws up a lot of refunds of preliminary tax paid. This may reduce the Income tax figure by a further €200M, as it would have a knock-on to preliminary tax liability. Preliminary taxes paid in 2008 held up reasonably well when compared to 2007, but profits made in 2008 are unlikely to be at 2007 levels in many cases.
Non-payment of taxes looks to me to be as another major component in the decline in tax yield. The Revenue branch of the AHCPS has made this clear to its own union and to other members of Congress that non-payment of declared liabilities is a huge issue. This suggests to me that the underlying state of Irish business is perhaps even worse than is being suggested. A business, which owes more than a few months tax is unlikely to survive.
Further cuts planned by the Government are likely to make the position worse. A gross cut of say €5,000M may reduce the tax yield by €2,500M. However if I am close then the Government starts €2,800M behind where it expected to be.
His fairy godmothers have deserted him this month, with Corporation Tax falling far below the €365M expected. This must be particularly worrying as the advance preliminary tax payment for companies with 31st March year-end was due. There must have been a decidedly smaller number of balancing payments made with Corporation Tax returns submitted this month. This may also augur very badly for next month, if there are a lot of repayment claims in their place.
The figures themselves look a little bit better than reality, because the levy on Health Insurers was payable in September. This is a once off payment, which has been included under levies.
This month I would like to take a particular look at VAT, which has slipped further off target, though by slightly less than I had expected. The degree of the problem is perhaps lost as the figures themselves are still so huge. However, let me take you through them, slowly.
It is now over 7% off a target set less than 6 months ago. This target was set knowing the details of two of the six VAT returns due in 2009. If this trend continues the yield will be some €1,000M short of target. The decline in prices may be influencing some of the drop, together with as little stock as possible being retained by anyone.
The September VAT yield is 22% below 2008, 27% below 2007 and around 20% behind the same month 2006. We have now returned to the level of VAT paid in September 2004. Indeed, this is broadly where retail sales index is also.
The smaller taxes are bouncing all over the place, making it hard to forecast where they will end up. However they do not play a major role in funding State spending.
The falling yield from Income Tax shows that job losses continue apace. Income tax in September is 25% below the target. Arrears of income tax must also be building up with many employers not paying over deductions made from employees’ wages and salaries.
Back in July, I set out my own estimate of the outturn, which is below with my update based on the subsequent two months. My expected outturn is now €31,587M, an increase on the July figure but still €2,800M lower than the Minister’s. The end of year figure for 2003 was 32,102, and we are unlikely to beat it in 2009.
The filing of the self-employed returns over the next six weeks could considerably reduce the Income Tax figure, if it throws up a lot of refunds of preliminary tax paid. This may reduce the Income tax figure by a further €200M, as it would have a knock-on to preliminary tax liability. Preliminary taxes paid in 2008 held up reasonably well when compared to 2007, but profits made in 2008 are unlikely to be at 2007 levels in many cases.
Further cuts planned by the Government are likely to make the position worse. A gross cut of say €5,000M may reduce the tax yield by €2,500M. However if I am close then the Government starts €2,800M behind where it expected to be.
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