7/12/15: A new study on psychology of crisis response & the role of the media

This is a new study developed by an excellent young Irish psychologist - Seamus Power - at the University of Chicago. 

All Irish people, over the age of 18, are eligible to take part in this survey and all walks of life, ages, demographics etc are really needed. The survey should take under 15 minutes to complete.

Seamus is interested in your responses to a range of questions and your reactions to a randomly assigned media article covering the topics relating to policy responses to the recent crisis.

I can't really stress enough how important this topic is for Ireland and for social sciences, so please, take a few minutes to complete it. We need data-based evidence and Seamus will be sharing his findings with all of us.

Study link here: http://ssd.az1.qualtrics.com/jfe/form/SV_bKESEHr6IXjkXGt .

23/1/2014: The Age of Great Stagnation: Village Magazine, January 2014

This is an unedited version of my column in Village magazine for December 2013-January 2014.


With employment rising, property prices on the mend, mortgages arrears stabilising, Exchequer returns surging and business and consumer confidence regaining pre-crisis highs, one can easily confuse Ireland for an Asia-Pacific economic dynamo.

Alas, the reality of our economic predicament suggests that once the official hullabaloo about the return to growth is stripped back to the bare facts, it becomes clear that Ireland is entering a new age, the Age of Great Stagnation.

The reasons for this are two-fold.

Firstly, we are still facing a long-term debt crisis. No matter what statistic one pulls out of the hat, this crisis, embodied in high levels of debts carried by our households, non-financial companies and the Exchequer, is going to be with us for many years to come.

Secondly, we are still in a structural growth crisis. Neither our own development model, heavily reliant on FDI and transfer pricing by the multinationals, nor our core trading partners growth models, reliant on fiscal and financial repression to drag themselves out of the crisis, are sustainable in the long run.


In our leaders’ dogmatic adherence to the past (a behavioural  fallacy that economists call path-dependency) our official growth theory suggests that economic recovery in our major trading partners will trickle down to Irish national accounts.

Alas, in the longer run, a lot is amiss with this thinking.

For starters, exports-led theory of growth is simply not true. Over 2000-2013, Ireland led the euro area in growth and in a recession. Since the onset of the crisis, cumulative real GDP across the euro area contracted by 2.1 percent. In Ireland, over the same period, GDP fell by 4.7 percent as domestic drivers for the crisis overpowered external factors. As for the recovery period, unlike in the early 1990s, the improving economic fortunes abroad are not doing much good for Ireland’s exports to-date. Over the last four years, volumes of imports of goods by the euro area countries grew by almost 15 percent. Irish exports of goods over the same period of time rose just 2.2 percent.

The reason for this is structural. Tax arbitrage only works as long as there are profits to move through the Irish tax system. Once the profits dry out, arbitrage ends. Pharma sector is a good example of this dynamic. Replacing goods exports-driven growth with ICT services-driven trade is decoupling our external balances from the real economy.

Worse, much of our trade balance improvements in 2009-2013 was down to collapse in imports. This presents a serious risk forward. To fund our public and private liabilities, we need long-term current account surpluses to average above 4 percent of GDP over the next decade or so. We also need economic growth of some 3-3.5 percent in GDP and GNP. Yet, to drive real growth in the economy we need domestic investment and demand uplifts. These require an increase in imports of real capital and consumption goods. Should our exports of goods continue down the current trajectory, any sustained improvement in the domestic economy will be associated with higher imports. A corollary to that will be deterioration in our trade balance. This, in turn, will put pressures on our economy’s capacity to fund debt.

And given the levels of debt we carry, the tipping point is not that far off the radar. In H1 2013 Ireland's external real debt (excluding monetary authorities, banks and FDI) stood at almost USD1.32 trillion - the highest level ever recorded. Large share of this debt is down to the MNCs. However, overall debt levels in the Irish system are still sky high. At the end of H1 2013, total real economic debt in Ireland - debt of Irish Government, excluding Nama, Irish-resident corporates and households - stood at over EUR492 billion - down just EUR8.5 billion on absolute peak attained in H3 2012.

Which brings us to the second point raised in the beginning of the article: our economic, regulatory, monetary and political dependency on the euro area.

Instead of charting own course toward sustainable long-term competitiveness, we remain attached at the hip to the euro area. The latter is now seized by a Japanese-styled long-term stagnation with no growth in new investment and consumption, and glacially moving deleveraging of its own banks and sovereigns. Financial, regulatory and fiscal repressions are now dominating the euro area agendas.

All of the trade growth across the euro area today comes from the emerging and middle-income economies outside the euro block. And competition for this trade is heating up. Even Portugal, Greece and Spain, not to mention Italy are posting positive trade surpluses and these are projected to strengthen in 2014.

Meanwhile, we remain on a slow path to entering new markets, despite having spent good part of the last 6 years talking about the need to 'break' into BRICS and the emerging and middle-income economies. In Q1-Q3 2012, Irish exports of goods to BRICS totalled EUR2.78 billion. A year later, these are down EUR240 million.

We are also missing the most crucial element of the growth puzzle: structural reforms.

Since 2008 there has been virtually no change in the way we do business domestically, especially when it comes to protected professions and state-controlled sectors. Legal reforms, restructuring of semi-state companies’ and the sectors where they play dominant roles, such as health, transport and energy, reductions in the costs and inefficiencies in our financial services – these are just a handful of areas where promised reforms have not been delivered.
Instead of reducing the burden of monopolistic competition in key domestic sectors, we are increasing it. In banking, oligopoly of three domestic players is being reinforced by exits of international banks and lack of new entrants into the market.

In line with the lack of transformative changes in state-controlled sectors, there is little innovation in the ways the Government approaches fiscal policies. Taxes and charges are climbing up, while spending continues to run ahead of pre-crisis trends. On a cumulative basis, over 2008-2013, Irish Government spending above 1997-2007 trend stands at around EUR79 billion. This trend is based on a generous assumption for annual growth of government spending of 6 percent from 1997-1999 on. Over the last sixteen years, average annual growth in our nominal Gross National Product run at under 6.07 percent per annum. Growth in Government spending over the same period stands at 7.22 percent and for current expenditure – at 7.46 percent.

Meanwhile, costs are rising across all categories of regulations, from taxation to professional compliance, to operational aspects of enterprise. Not surprisingly, Ireland is experiencing falling entrepreneurship. According to the World Bank data, in 2004-2008, Ireland's average density of start-ups was 6.1 allowing for an average of 17,500 new companies to be formed per annum. In 2012 the density fell to 4.5 and the number of new companies registered slipped to 13,774.  This does not account for numerous re-openings of the businesses liquidated over the recent years to resolve the back-breaking tolls of upward-only rent reviews.

The political cycle is now turning against the prospect of deep reforms with European and local elections on the horizon.  With it, any prospect of real, structural change in the economy is fading away. The current technical recovery in the economy is likely to push Irish growth to above the euro area average rates in 2014. Beyond then, there is little visibility as to what can sustain such a momentum. In short, enjoy this late sunshine, while it lasts.

27/10/2013: Financial Repression, Economic Suppression & Budget 2014

This is an unedited version of my Sunday Times article for October 20, 2013.


With fanfare of media appearances and fireworks of Dail statements, Budget 2014 was pushed off the dry dock and into the turbulent waters of reality. Full of political sparkle on the outside, overloaded with hidden taxes and charges and yet-to-be-fully-detailed painful cuts on the inside, it sailed off into the future. It will take at least 9-12 months from now to see what adjustments will have to be made in 2015 to compensate for the 'savings' on cuts delivered this week. It will take us longer to find out if the Budget 2014 will have a positive or negative effect on our ability to fund our deficits in the markets.

Yet, one thing is beyond the doubt: Budget 2014 was a significant gamble by the Government that could have done better by avoiding taking any gambles at all. Minister Noonan has decided to buy some political capital in the Budget. This capital came in the form of reduced rate of overall budgetary adjustment, compensated for by the hope-based increases in public sector efficiencies, plus some symbolic handouts to middle class families. Majority, such as the free GP visits for children under the age of 5, were poorly targeted and economically inefficient – extending scarce resources not to where they are needed most (such as, for example, long-term care provision or means-tested provision of health services) but to where political expediency leads. Many fail the core Budget objectives of making our fiscal policies more robust to adverse shocks that may occur in the near-term future.

In the end, Budget 2014 delivered virtually no real departures from the past Budgets. Predictably, there were no 'new' taxes. Instead the Budget put forward a list of new 'revenue raising measures'. The State will claw out of the banks EUR150 million in levies. Given that our banking sector is being reduced to a Three Pillars oligopoly, the levies will come straight from charging customers more for the same services. Pensions funds levy - a form of expropriation of private property - is to raise additional EUR135 million. This is a tax on present income, and in the case of pensions funds levy a tax on current wealth, plus a tax on future incomes foregone due to reduced levels of pensions funds. EUR140 million will be pumped out of the banks’ customers by taxing interest on savings. All in – financial sector will take a hit of EUR425 million on a full year basis, reducing its ability to lend, invest in the economy and to deal with mortgages distress. The measures will also weaken the quality of Irish banks' deposits base by reducing incentives to save. Carmen Reinhart and Kenneth Rogoff aptly termed such measures ‘financial repression’. De facto, we are bailing in ordinary banks customers and savers to pay for the past sins of the banks. Cyprus redux, anyone?

Cuts side of the Budget was also predictable. At the aggregate level, departmental expenditure as the share of GDP continues to run above 1990-2007 average. Instead of real cost reductions in Health we got some EUR250-300 million worth of new charges to be levied on services to insurance holders. And reduced insurance deductibility on the revenues side should do even more to reduce insurance coverage in the market. Net effect will most likely be falling transfers from private patients to public services, and higher demand for public health.

From businesses perspective, whatever the State added on one side of the budgetary equation, the state took out on the other. Thus, for all incentives for construction and building trade, overall capital spending by the Government in 2014 is projected to fall by some EUR100 million. As we stand, in 2013, capital spending by the Government barely covers amortization and depreciation of the total stock of public capital. Next year, things are going to get worse.

Much of the business stimulus schemes are geared toward supports for the property markets, including the incentives for foreign investors to put money into Irish REITs. Aside from the property-related measures, other business stimulus polices are either extensions of the already existent ones or more promise of doing something in the future. One example is the issue of Trade Finance supports. We are now five years into talking about the need to help smaller exporters with the cost of and access to trade insurance and credit.  Still, there is no tangible delivery on this.


However, the real question, left unanswered by Budget 2014 is: what's next for Ireland? The Government is rhetorically focused on our 'exit' from the Troika-led funding programme. This objective is a policy epicycle designed to ease public attention off the realities of bad domestic governance during the crisis. Exit from the bailout, financially, fiscally and economically, means a public recognition that Ireland has run out of funds we can borrow from the IMF and the EU. It also puts forward a commitment that, unlike Greece, we will not be asking for another bailout. Being not Greece does not make us Iceland, however, since Iceland repaid its bailout loans. In contrast, we will be carrying our debts to Troika for years to come.

The Government is promising that once we exit the bailout, we will regain our control over fiscal policies. This is a gross over-exaggeration. Having ratified the Fiscal Compact, Ireland is now subjected to heavy EU oversight as long as our fiscal performance falls short of the targets set in the treaty. It will be long time before we meet all of the conditions.

The scrutiny of our targets will increase, while our performance will remain under serious pressures arising from the crisis. Most recent IMF forecasts assume full EUR5.6 billion adjustments taken over 2014-2015 period, and economic growth averaging over 2.1 percent per annum (almost 6 times the average growth in 2012-2013 period). These forecasts imply that in 2014-2015 Ireland will still face the third highest cumulative deficits in the euro area ‘periphery’. And the debt levels of Irish state are set to continue rising. In 2013, the Department of Finance projects the level of Irish Government debt to be at EUR205.9 billion. By 2018 this is projected to rise to EUR211.6 billion.

And here's another kicker. The Fiscal Compact sets the target for long-term structural deficits (in other words deficits that would prevail were the economy running at its long run sustainable growth potential) at 0.5 percent of GDP. IMF projections out through 2018 put Irish structural deficits declining from 5.1 percent of potential GDP in 2013 to 2.0 percent in 2018. In other words, in 2018 Ireland is expected to be the worst performing 'peripheral' state in terms of structural deficits and operate well outside the criteria set in the Fiscal Compact.

Worse, comes December 15, we will lose a strong supporter of our efforts to restructure legacy banking debts and the only member of the Troika that promotes structurally more important economic and markets reforms.

On foot of our weak fiscal position, the politicisation of the Irish economy is already building up, driven primarily by our European partners and – until December 15 – resisted by the IMF.

The pressure is rising on Ireland's corporate taxation regime. The Government admitted as much by promising to close the loophole that allows some MNCs to nearly completely avoid paying Irish corporate taxes.

The pressure is also growing on blocking Ireland’s chances to restructure legacy banks debts. Germany, the ECB and the Eurogroup are angling to block Ireland's potential access to the European funds set up to deal with the future banking crises.

We are going into 2014 self-funding mode with all the costs of the bailout in place, including the Dvoika (Troika less one) oversight and substantial deficit and debt overhangs. It now appears that there will be no credit line to cover any increases in the cost of borrowing that might arise in the future. There will be no precautionary fund to cushion against any risk to market demand for Irish Government bonds. There will be no system in place to deal with any future banking problems or with the legacy debts should such arise. The ECB, the IMF and our forecasters are all warning us that we still face potentially significant downside risks to growth and banks stability. The IMF has been for months raising the issues of the SMEs insolvencies and poor quality of banks capital.

In other words, we are boxing ourselves into a high-risk game with little to show for this in terms of a positive return from our 'exit' from the bailout.

History suggests that prudence, not pride should be our guide. Back in 2010 we pre-borrowed aggressively in the markets prior to the state finances collapsing under the poorly structured banks bailouts. Now, we are gunning for the 'exit' without having secured any support from our 'partners' once again. The hope is that this time it will be different: the markets will lend us at decreasing costs, while growth lifts the entire domestic economy out of stagnation. This might not be an equivalent of playing Russian roulette, but it is certainly a game of chance with high stakes on the losses side and little tabled on the potential winnings side.

Box-out:
The latest OECD research on basic skills across the advanced economies puts to a serious test our claims to having a highly educated workforce. Ireland ranked eighth in terms of the proportion of younger adults with tertiary education. In terms of problem solving proficiency, both our college graduates and adults with only secondary education rank below their respective OECD averages. In problem solving in a technology-rich environment – a proxy for skills related to internationally-traded services, the sole driver of our economy today – Ireland ranks 18th in the OECD. Our younger workers score below their OECD peers in basic literacy and in numeracy. When it comes to introduction of new processes and technologies in the workplace Ireland is ranked between such premier divisions of the global innovation league as Cyprus and Belgium. Given our poor performance in digital economy-specific skills, exposed in October 2012 report by the OECD and covered in these pages before, it is high time for us to get serious about reforming our education and training systems.

17/10/2013: Budget 2014 Missing the Targets: Sunday Times, October 13

This is an unedited version of my Sunday Times column from October 13, 2013.


Recent events have led to a significant reframing of the Budget 2014. With these, the Government is now actively signaling a more accommodative stance on next year's cuts. Alas, the good news end there and the bad news begin. Any easing on austerity in 2014 will be unlikely to produce a material improvement in household budgets. In return, the Government will be placing huge hopes on robust growth returning in 2014. If this fails to materialise, lower austerity today will spell more pain in 2015. Like a dysfunctional alcoholic, unable to stop binging at closing time, we ignore tomorrow’s hangover.


A combination of the latest IMF report on the Irish economy and the outcome of the Seanad abolition referendum have settled the debate on the scale of adjustment to be taken on October 15th. Embarrassing defeat in the referendum has meant that the continuation of Taoiseach's leadership required some symbolic gesture toward the electorate. Lowering the 2014 cuts targets on October 15th can serve the purpose for a few crucial months until the New Year.

Meanwhile, ambiguity-embracing IMF lent a helping had. The IMF repeated its insistence on EUR5.1 billion combined 2014-2015 cuts in the latest assessment of the Irish economy. Yet, the IMF avoided specifying the breakdown of these adjustments between 2014 and 2015. This has given the Government confidence to argue the case in favour of partially delaying 2014 adjustment in front of the EU overseers of our budgets.

Immediately after the IMF report publication, Irish media was promptly fed the rumors that the Minister for Finance was seeking a reduction in the level of budgetary cuts. This week Minister Noonan said that the 2014 adjustment will be EUR600 million lower than EUR3.1 billion originally agreed with the Troika. The savings will amount to 0.37 percent of our GDP: a small boost for the Irish economy, but a massive splash in the PR spin terms for the Government.

With some cuts delayed to 2015, Ireland’s debt sustainability and deficit targets now hinge on the Government’s forecasts for growth materializing over the next twelve months. The risks to these are non-negligible. Last week IMF lowered Irish GDP growth forecasts for every year from 2013 through 2018. Compared to the forecasts released in June this year, October forecasts for inflation are also down. This implies that nominal growth – the source of budget deficits and debt dynamics – is expected to be even slower. If back in June this year IMF expected Irish economy to be at EUR205.8 billion by 2018, now the fund is projecting it to hit EUR201.7 billion. Cumulated forecast nominal GDP for 2013-2018 is EUR15.6 billion lower in October report than in June assessment.  Even before Minister Noonan’s latest reductions in fiscal adjustment for Budget 2014, IMF projected worsening of Irish deficits in 2014-2018.

Department of Finance forecasts, released this week and underpinning the Budget 2014 calculations are more optimistic on nominal growth, expecting higher inflation and anticipating more domestic consumption and investment than the IMF. If the Department gets its forecasts wrong, we will pay 2015 for the delays in cuts planned for the next year.



Flying on hopium of rosy growth expectations is a risky proposition for the Exchequer especially ahead of our drawing down the final tranche of the Troika funding. For this risk, the savings to be delivered in the Budget 2014 are likely to be insignificant from economy’s point of view.

Given the precarious position of the Government in public opinion polls, it is a safe bet to assume that the coalition will be putting the money to ‘work’ as an investment stimulus and a cushion against cuts to social welfare and health.

New building programmes in the more sensitive constituencies hold some serious political capital. But planning allocation of large sums to new investment is a lengthy process before construction jobs actually materialise. Growth impact of these measures in 2014 is unlikely to be significant.

But the thrust of 'savings' is likely to go to the second option. Doing as little as possible for yet another year in structurally altering the way we spend on social supports and healthcare will mean that the budgetary changes to health spending in 2014 will likely be identical to those undertaken in the past. Expect more cost shifting to private insurance, more sabre-rattling over cost overruns and more imaginary gains in productivity. Social welfare ‘cost containment’ measures will continue to rely on 'demand attrition' - the declines in demand due to unemployment benefits expiration and emigration. This means zero impact on growth in 2014.

Meanwhile, revenue side of the budgetary equation will keep pressuring the economy.

Fine Gael's side of the Coalition is promising us that the Budget will contain no new taxes. Alas, in Ireland we have a very narrow definition of both terms: 'new' and 'taxes'. In 2014 we will be facing a full annual Property Tax bill, which is expected to take out additional EUR250 from the average household income. The Budget will also likely raise charges on families to fund education and healthcare. The Irish Government is saying these are not new taxes. Anyone expected to pay them would disagree.

Last year, PRSI changes and reduction in child benefits were not identified as 'new taxes' either. These cost an average working family with two children some EUR494 per annum – an involuntary reduction in family income.

Per research note published by Grant Thornton two weeks ago, a family on EUR80,000 with two earners with two children saw their tax bill rise by 54 per cent since 2008. Their disposable income is now down a massive EUR6,132 per annum. Only a small fraction of these were officially recognised as new tax measures.

Meanwhile, the same families have also seen the costs of basic services provided by the state agencies and enterprises, or controlled by the state regulators and heavily taxed, rise dramatically over the course of the crisis. On average Irish consumer prices fell 1.6 percent between August 2008 and August 2013. Health insurance costs more than doubled over the same period, education costs inflated by 29 percent, bus fares have gone up over 46 percent, and motor tax went up 27 percent. Increases in core public services costs have taken out close to EUR3,500 annually out of the pockets of an average Irish family. These came on top of the Grant Thornton tax cost estimates cited above.

What is the opportunity cost for the families of the losses brought about by the fiscal crisis? For an average family with expected working life of 25 years, the above costs of austerity are equivalent to around EUR111,000 in foregone pensions savings. This excludes costs of the same measures continuing beyond December 31, 2013 and the new measures yet to come in 2014-2015.

The devastation of the above financial arithmetic is even more apparent when we realise that we are far from completing the full set of fiscal adjustments needed to restore our public finances to health. Medium-term Government fiscal consolidation forecasts confirmed by the IMF last week, envision total fiscal consolidation for 2014-2015 to be EUR5.1 billion. Of this, new revenue measures for 2014-2015 are to be set at EUR1.5 billion against carry forward measures of EUR0.3 billion. Current spending cuts are set at EUR3.2 billion. These adjustments translate into additional fiscal burden of EUR3,300-3,500 per annum for an ordinary family.

The hope is that the general economic recovery will mop up the household finances blood spilled by the fiscal crisis.  This rosy expectation is in turn driven by Minister Noonan’s worldview in which Irish trade partners are expected to also grow faster in years ahead. Alas, this Tuesday, IMF cut its global growth forecasts for both 2013 and 2014.


Forecasts aside, today, Ireland has run out of the road on tax hikes and revenue raising measures.

Instead of hiking tax rates, the Government is expected to widen the tax base in Budget 2014. The most efficient way for doing so would be to close loopholes on income exemptions. Less efficient, will be to lower income threshold at which upper marginal tax rate kicks in. Middle and upper-middle class families will pay in either scenario, but the costs to them will be higher in the latter.

In addition, the Government has been briefed on the potential for hiking PRSI for self-employed, while opening up access for this category of workers to social security net. Conditions for accessing cover will be so onerous, few self-employed will ever be able to qualify, but the hike will be politically acceptable. Currently, a self-employed person earning the equivalent of minimum wage pays almost six times as much tax and PRSI as an employee. Few interest groups so far have taken up a challenge of pointing this fact out.

Reality is, Ministers Noonan and Howlin have hit the brick wall. All the low-hanging fruit of marginal tax hikes and revenues extraction schemes has been picked. What's left now are two possible options. Option one: cut social welfare and health. Option two: delay adjustments and hope that comes Budget 2015 day, growth will pick up, unemployment assistance costs will fall, and Brussels will be happy enough reveling in the euro recovery to let things slip a bit on targets in Dublin. No prizes for guessing which option the Coalition will pursue comes next Tuesday.

Source: Department of Finance

BOX-OUT:

This week, the IMF published an assessment of the impact of the monetary policies deployed since 2008 by the ECB, the US Fed and the Bank of England. These unorthodox measures ranged from outright quantitative easing to lowering of the key interest rates to direct lending to the banks against riskier collateral. These monetary interventions, it has been argued in the media and by the majority of analysts, helped to ameliorate euro area sovereign crises. Per conventional wisdom, as the result of the central banks interventions, and particularly those carried out by the ECB, government bond yields and borrowing costs declined post-2011 across the euro area periphery. In addition, supporters of these policies have suggested that unconventional MPs were responsible for increasing equity funding in the real economies, thus supporting the recovery.

Rejecting the mainstream claims, the IMF researchers found that over 2008-2012 various monetary policies had zero statistical impact on the sovereign bond yields in Ireland, Portugal, and Greece. The policies have let to a moderate reduction in Italian Government bond yields, and a weak reduction in Spanish yields. In the case of Ireland, the IMF found no benefits to sovereign bond flows or prices that can be associated directly with the ECB interventions. Furthermore, ECB interventions were associated with outflows of liquidity from Irish equity funds. In contrast, Fed and Bank of England interventions resulted in net inflows of funds into Irish equities.

The paper clearly suggests that the ECB has not done enough to support recovery in sovereign debt and equity markets in the euro periphery.

7/10/2013: Taking an Easy Road Out of Budget 2014? Sunday Times, September 22

This is an unedited version of my Sunday Times column from September 22, 2013.


The upcoming Budget 2014 will be one of the toughest since the beginning of the crisis in terms of the overall levels of cuts and tax increases. It also promises to cut across the psychological barrier of austerity fatigue. The latter aspect of Budget 2014 is more pernicious. Two other factors will add to the national distress, comes October 15th. Reinforcing our national sense of exhaustion with endless austerity, this week, the IMF published a staff research paper on fiscal adjustments undertaken during the current Great Recession. According to some, the IMF study reinforces the argument that Ireland should have been allowed to spread the austerity over a longer period time. In addition to this, Ireland’s planned 2014 cuts are set to be well in excess of the deficit reduction targets for any other euro area country.

The superficial reading of the IMF statement, the nascent sense of social distress brewing underneath the surface of public calm, and the tangible and very real pain felt by many in the society suggest that the Government should take it easier in 2014-2015. The policy option, consistent with such a choice would be to cut less than committed to under the multi-annual fiscal plans agreed with the Troika. This is being proposed by a number of senior Ministers and TDs, the Opposition and the Unions.

Alas, Ministers Noonan and Howlin have little choice when it comes to the actual volumes of fiscal adjustments they will have to implement next year. Like it or not, we will need to stick very close to the EUR3.1 billion deficit reduction targets irrespective of the IMF working papers conclusions, or the volume of outcries coming from the Government backbenchers and the opposition ranks.

Here's how the brutal logic of our budgetary position stacks up against an idea of easing on deficit reductions.

If everything goes according to the plan, Ireland will end 2013 with a second or a third highest deficit in the EU, depending on how we account for the one-off spending measures across the peripheral states. We will also have the second highest primary deficit (that is deficit excluding cost of interest payments on Government debt) in the euro area. In 2014 this abysmal performance will replay once again, assuming we meet the targets. Greece and Italy are set to finish 2013 with a primary surplus. Portugal is expected to post a primary deficit of less than one half that of Ireland's. Should Ireland deliver on the targets for 2014, our gap between the Government revenues and spending will still stand at around 4.3-4.6 percent of GDP at the end of December 2014. Not a great position to be in, especially for a country that claims to be different from the rest of the euro periphery.

In this environment, talking about any change in the course on austerity or attempting to enact a fiscal stimulus will be equivalent to accelerating into a blind corner on a one-lane road.

In order to stabilise government debt, Ireland will require cumulative deficits cuts of 11.6% of GDP between January 2013 and December 2018 with quarter of these cuts scheduled for 2014-2015. This is the largest volume of cuts for any economy in the euro area - more than 20 percent greater than the one to be undertaken by Greece and more than 50 percent in excess of Spain’s requirement.

Any delay in cuts today will only multiply pain tomorrow with higher debt to deflate in 2016-2018. As things stand under the agreed plans, Ireland will be spending 4.9 percent of its GDP annually on funding debt interest payments from through 2018. This is more than one and a half times greater than what we will be allocating to gross public investment. The interest bill, over the next five years, will be at least EUR46 billion. Lowering 2014 adjustment target by EUR1 billion can result in the above cost rising to over EUR50 billion, based on my estimates using the IMF forecast models.

The reason for this is that any departure from the committed fiscal adjustment path is likely to have consequences.

Firstly, with the ongoing sell-offs of bonds in the global investment markets, it is highly likely that the cost of funding Government debt for Ireland will rise over the medium term even absent any delays in fiscal adjustments. The long-term interest rates are already showing sharper rising of yields on longer maturity bonds compared to short-dated bonds. Year to date, German 10-year yields are up 64 basis points, UK are up 105 bps and the US ones are up 111 bps. The effects of these changes on Irish debt and deficit dynamics are not yet fully priced in the latest IMF forecasts. A mild steepening of the maturity curve for Ireland can significantly increase our interest bill. This risk becomes even more pronounced if we are to delay the Troika programme.

Secondly, failure to fulfill our commitments is unlikely to help us in our transition from Troika funding. Ireland will require a precautionary standby arrangement of at least EUR10 billion in cheaply priced funds. The European Stability Mechanism (ESM) funds to cover this come on foot of good will of our EU 'partners'. These partners, in turn, are seeking to redraft EU tax policies, as well as banking, financial and ICT services regulations. In virtually all of these proposals, Ireland is at odds with the European consensus. Good will of Paris and Berlin is a hard commodity, requiring hard currency of appeasement. Whether we like it or not, by stepping into the euro system, we committed ourselves to this position.

The long run financial arithmetic also presents a major problem for those who misread the latest IMF research on austerity as a sign that the Fund is advocating easing of the 2014-2015 adjustments for Ireland. The IMF clearly shows that Ireland has already delayed required fiscal cuts more than any other euro area economy. In all euro area peripheral economies, other than Ireland, fiscal adjustments for 2014-2015 are set at less than one fifth of the total adjustment required for 2010-2015 period. In Ireland they are set at one third. Which means that, having taken more medicine upfront, Italy, Greece, Portugal and Iceland can now afford to ease on cutting future primary imbalances.


With this in mind, there is not a snowballs chance in hell that we can substantively deviate from the plan to cut EUR3.1 billion, gross, from 2014 deficit without facing steep bill for doing so. Which leaves us with the only pertinent question to be asked: how such an adjustment should be spread across three areas of fiscal policy: Government revenues, current expenditure and capital expenditure.

This year, through August, Government finances have been running ahead of both 2012 levels and we are perfuming well relative to what was planned in the budget 2013 profile. However, the headline numbers conceal some worrying sub-currents.

This year's current primary expenditure in 8 months through August stood at over EUR36.6 billion, more than targeted in the 2013 profile and ahead on the same period last year. This deterioration was caused by the one off payment made on winding down the IBRC, plus the increase in contributions to the EU budget. Nonetheless, while tax and Government revenues increases in the 8 moths of 2013 were running at almost EUR3.4 billion compared to the same period of 2012, spending reductions are down only EUR823 million.

To-date, only 17 percent of the entire annual adjustment came via current voted spending cuts and over 57 percent came from increases in Government revenues. The balance of savings was achieved by slashing further already decimated capital investment programmes.  Given the overall capital investment profile from 1994 through forecast 2013 levels, as provided by the Department of Public Expenditure and Reform, this year's net capital spending is likely to come below the amount required to cover amortisation and depreciation of the current stock of Government capital. Put simply, we are just about keeping the windows on our public buildings and doors on our public schools in working order.

In this environment, Labour Party and opposition calls for undoing 'the savage cuts to our frontline services' - or current spending side of the Government balance sheet - are about as good as Doctor Nick Rivera's cheerfully internecine surgical exploits in the Simpsons.

The adjustments to be taken over the next two years will have to fall heavily on current spending side. This is a very painful task. To-date, much of the savings achieved on the expenditure side involved either transforming public spending into private sector fees, which can be called a hidden form of taxation, or by achieving short term temporary savings.

The former is best exemplified by continued hikes of hospitals' charges which have all but decimated the markets for health insurance. The result is a simultaneous reduction in health insurance coverage, an increase in demand for public health services and costly emergency treatments. The 'savings' achieved are most likely costing us more than they bring in.

The latter is exemplified by temporary pay moderation agreements and staff reductions in the public sector. This presents a problem to be faced comes 2015-2016: with growth picking up, many savings delivered by staff reductions and pay moderation measures will be the first to be reversed under the pressure from the unions.

In short, the Government has no choice, but to largely follow the prescribed course of action. Like it or not, it also has no choice but to cut deeper into current spending. This is going to be an ugly budget by all measures possible, but the real cause of the pain it will inflict rests not with the Troika insistence on austerity. Instead, the real drivers for Ireland’s deep cuts in public spending are the internal imbalances in our public expenditure and the lack of deeper reforms in the earlier years of the crisis.

Via @IMF

Box-out: 

Recent data from the CSO on Irish goods exports painted a picture of significant gains in one indigenous economy sector: agri-food exports. The exports of Food and live animals increased by EUR101 million or 15 percent in July 2013, compared to July 2012. In seven months from January 2013, agri-food exports rose to EUR4,911 million, up 8.8 percent. Most of the increases related to exports of animals-related products, live animals, eggs and milk. The new data caused a small avalanche of press releases from various representative bodies extolling the virtues of agri-food sector in Ireland and posting claims that the sector is poised to drive Ireland out of the recession. Alas, the data on agricultural prices, also covering the period through July 2013, released just three days after the publication of exports statistics, poured some cold water over the hot coals of agri-food sector egos. From January through July 2013, the main driver for improved exports performance of our agriculture and food sectors was not some indigenous productivity growth or innovation, but the price inflation in the globally-set agricultural output prices. On an annual basis, the agricultural output prices rose 10.7 percent in July 2013. Over the same period of time, the agricultural input price index was up 5.2 percent in July 2013. This means that Irish exports uptick in 2013 to-date was built on the pain of consumers elsewhere. So good news is that our agri-food exports were up. Bad news is that we have preciously little, if anything, to do with causing this rise.

5/10/2014: Why the News of Budget 2014 'Easing' Is a Daft Idea

The reports are out about the IMF 'agreeing' to Government taking shallower adjustment in Budget 2014 are so far not based on IMF statements of record. In its latest review, published yesterday and amended to reflect the latest data, IMF clearly states that we still need a full EUR5.1bn adjustment to be taken over 2014-2015.

Irish Times reports undisclosed sources claiming that the IMF is now not opposing a shallower adjustment in 2014 in exchange for steeper adjustment in 2015. http://www.irishtimes.com/business/sectors/financial-services/imf-agrees-to-easing-of-3-1bn-target-1.1550925 This might be so. But there are several things you should consider before taking this as some unambiguous positive for Budget 2014.

Firstly, if true, this means that Ireland 'easing on austerity' in Budget 2014 to accelerate into 2015 adjustment will be equivalent to a household taking a 1 year mortgage relief in the form of reduced principal repayment relief (sort of a 'interest plus partial principal payment') that has to be recovered in full comes the following year. Even Irish Central Bank would not suggest this would be a meaningful relief to the borrower. In a sense, Irish Government will be taking a gamble if it reduces the EUR3.1 billion adjustment target - if growth undershoots the Budget 2014 projects or revenues slack or unexpected expenditure increases take place or any other possible risks arise, we will face more austerity in 2015 and possibly into 2016. All for a short-term small 'relief'?

Secondly, there are more reasons for being sceptical about the latest Government 'breakthrough':

1. Relief to be gained from such a transaction is not worth much - at most EUR300-400 million 'savings' to be immediately swallowed up by the 'black hole' of Government 'investment' - I wrote about this in my Sunday Times column on September 22nd. 
2. Much of this is unlikely to impact directly in 2014 due to time lags.
3. Much of the 'investment' will go to funding building activities in politicised constituencies. Remember primary care centres locations selection fiasco? The modus operandi that produced them is still here with us. 
4. The 'savings' will be terminated in 2015 as EUR5.1bn required total adjustment will have to erase fully the 'savings' generated in reduced adjustment for 2014. In short - we will get more waste, more future pain; and
5. Relief comes at a price of increased uncertainty into the Budget 2015 just at the time when we are heading into even more uncertainty of having to fund ourselves in the markets (keep in mind - our 2014 borrowing requirements are largely already covered by NTMA pre-borrowing, so real uncertainty over funding will coincide with the need for larger fiscal adjustment in 2015). This uncertainty is likely to result in Troika monitoring extending into 2016 and beyond, instead of Ireland gaining any meaningful clearance from Troika cover with 2015 fiscal adjustment. I covered this in the said Sunday Times article as well.

Oh, and one more little point: there is absolutely nothing new in the IMF taking such a position on Irish budget. IMF operates on the basis of longer-term targets and greater flexibility in adjustment than our EU 'partners'. IMF has signalled on a number of other occasions the same. 

So what exactly does the IMF 'support' for Budget 2014? Not much at all so far. And the risks from it, as noted above, are almost codified.

"The review had preliminary discussions on fiscal consolidation in Budget 2014. The Irish authorities are firmly committed to meeting the 5.1 percent of GDP ceiling on the deficit in 2014. They note some room to meet this ceiling with a smaller consolidation effort than the €3.1 billion (1.8 percent of GDP) set out previously, but have deferred a decision on the amount of adjustment in 2014 until closer to Budget 2014. [IMF] ...staff stressed the importance of delivering the planned cumulative consolidation in 2014–15 of €5.1 billion (2.9 percent of GDP). Under the revised macroeconomic projections, this amount of cumulative consolidation is also consistent with reaching a deficit within the EDP target of less than 3 percent of GDP by 2015." 

Note any statement about a 'relief'? I don't see one... But: "In this context, it was agreed that the authorities will publish Budget 2014 on October 15 with fiscal targets until 2016 fully in line with the 2010 Council Recommendation under the EDP, including the required fiscal consolidation effort until 2015, and national fiscal rules (proposed structural benchmark, MEFP)." Meanwhile, "the specific consolidation effort for 2014 will be discussed with the EC, ECB and IMF staff taking into account budgetary outturns in the first three quarters of 2013 and further information on growth developments and prospects." 

The IMF reiterates the same position of serious ambiguity on Budget 2014 and strict clarity on 2014-2015 adjustments targets throughout the entire Review. The Fund also clearly states where the thrust of 'savings' should be delivered: "An expenditure-led consolidation remains appropriate, including improved targeting of social supports and subsidies while protecting core public services and the most vulnerable."

2/10/2013: Low Tax, Free Market Economy that is Ireland...

Two stories from 'low tax' 'market economy' marvel that is Ireland:

http://www.independent.ie/business/personal-finance/latest-news/6000-a-year-the-hit-taken-by-families-29626588.html

and

http://www.telegraph.co.uk/technology/google/10345335/Google-under-fire-over-tax-arrangements.html

Now, I know, 'employer' etc... FDI... investing in Ireland... confidence... best little country to do business in... (or rather from, since most of the revenue discussed by google has virtually nothing to do with any business done in Ireland)... etc... etc...

At least spare us the insults of telling us we are under-taxed, low-tax, free market etc...

You can follow sets of links to the topic of Ireland as corporate tax haven from this post: http://trueeconomics.blogspot.ie/2013/09/1392013-another-month-another-look-into.html

26/9/2013: Framing Budget 2014: Village Magazine September 2013

This is an unedited version of my column in the Village Magazine, August-September 2013


With early Budget looming on the horizon, the circus of the 'austerity is overdone' politics has rolled into town. The Labour and the FG backbenchers are out in force trying desperately to salvage the little popular support they still might command in the streets. Not to be outdone, Fiana Fail, freshly converted into the Church of Socialistas has been unleashing torrents of newly-discovered social consciousness. Things are getting so hot on the anti-austerian' speaking circuit that Siptu was able to get even Jack O'Connor a gig. Their star performer was last seen thundering at the MacGill Summer School a potent brew of outlandishly misinformed comparatives between the European and the American policies for dealing with the Great Recession and calls on the imaginary Government to… no prizes for guessing… end 'human rights-violating' austerity.

Problem is, once you come back from all of the highs of this Keynesian Lollapalooza, Irish Government continues to run an insolvent state with spending not matched to revenues and with the expenditure programmes outcomes not matched to the needs of the society at large. Delivering neither fiscal sustainability, nor growth, nor value for money, our fiscal house is grossly out of shape five years into various reforms. Worse, the fiscal mess we are in has nothing to do with the lack of economic growth and everything to do with the policy institutions that the current Government inherited from the decades of political clientelism presided over by its predecessors.


Let us look at some numbers.

In the first six months of 2013, Irish State has managed to spend EUR27.12 billion on current expenditure, just EUR352 million shy of the level of spending in the same period of 2012 and EUR3.2 billion more than we spent in the six months through June 2011. Meanwhile, tax revenues rose from EUR15.3 billion in January-June 2011 to EUR17.6 billion this year. Crunchy austerity based on savage cuts, five years in still looks more like a tax squeeze and spending re-allocation from one programme to another.

Meanwhile, Department of Health spending is now running at EUR6,539 million for H1 2013, down on EUR6,754 million in H1 2011 - a whooping reduction of EUR215 million. Do keep in mind that 2011-2012 increases in the cost of beds charged to the private insurers (aka to ordinary insurance purchasers) have more than offset the above reductions in spending. Net current (ex-capital) spending on health has shrunk by just EUR128 million over the last two years.

The Department of Health is a great example to consider when dealing with the failure of our reforms. It is a frontline service by definition - the one we all are willing to pay for. Yet, it is also a symbolic dividing line between the poor (allegedly having no access to the services) and the rich (allegedly all those who hold health insurance and as 'private' patients overpopulate public wards preventing the poor from getting necessary hospital beds). Healthcare was also an epicenter of rounds of reforms over decades, including the decades of rapid economic growth and prosperity. And it is one of the two largest departments by voted spending, with budget only slightly behind the EUR6.545 billion spend in H1 2013 at the Department of Social Protection.

For this spending we - the middle classes and other payers - get little value for money in services. Over 35% of Irish households have to purchase private insurance to access any meaningful level of health services. In case you still rest in the camp of those who believes that such purchases of insurance are purely voluntary and constitute luxury, Irish Government is considering making health insurance purchasing purely obligatory.

Even with this expenditure, access to basic, quality of life-improving procedures and healthcare maintenance is shambolic. While run of the mill emergencies are getting reasonably decent attention, complex and time-sensitive treatments are wanting. Thus, Ireland ranks at or below the European averages in treatment of majority of chronic and long-term diseases, before we control for differences in population demographics. Our primary care and access to specialist consultants is pathetic outside the emergency rooms and hospitals' ICUs. Despite seeing the fastest rise in the healthcare expenditure per capita over 1997-2007 period in the entire EU27, per EU assessment, Irish healthcare expenditure increases have made only "a modest contribution to [improved mortality], substantially less than one third of the total, and possibly only a few percentage points".

In reality, of course, Irish healthcare is run for the benefit of Irish healthcare staff. In 2005-2007 pay and salary bill for HSE stood at an average 50.7% of the entire HSE non-capital budget. In 2009 it was 50.1%. In 2010, Irish salaries (excluding other income) for medical specialists were the highest in the EU, with the second highest paid cohort of physicians (in the Netherlands) coming at an average salary discount of roughly 25% relative to their Irish counterparts. These salaries were not inclusive of the Irish doctors earnings from private patients.

Per EU 2012 assessment, 33% of Irish people find access to hospitals unaffordable (8th highest in EU27) and the same find access to GP out of their financial reach (4th highest in EU27), while 53% claim that they cannot afford medical or surgical specialists (8th highest).

This is hardly surprising. Between December 2005 and mid-2012, Irish consumer price inflation (CPI) on cumulative basis has hit 9.5%. Health CPI over the same period totalled 21.4% - more than double the rate of overall inflation. Of EU15 states, Ireland and Holland were the only states where health costs were rising faster than general inflation in the last 7 years. 2005-2011 inflation run at 47.3% in Hospital services (state-controlled charges), followed by dental services 28.6%, Out-patient services 23.5% and Doctors' fees at 21.3%. This inflation took place from the already high cost base present in Ireland at the end of 2005.

By international comparisons, from 2005 through mid-2012 Ireland had the lowest rate of inflation in the EU15, while our health services inflation was the second highest after the Netherlands.

Austerity, it seems, has been a boom-time for healthcare costs. Or put differently, while the rest of the world defines efficiency-improving reforms as changes in delivery of services that reduces the cost of services given fixed or improving quality of delivery, in Ireland we define efficiency gains as providing fewer services at a higher cost.

Despite this, in Irish media and policy circles, assessment of healthcare systems performance starts and ends with the comparatives on public spending levels. Good example of such assessment was the 2010 report to the Oireachtast, titled "Benchmarking Ireland’s Health System". A foreigner reading this report can easily conclude that (a) Irish healthcare is run on a shoestring, (b) achieves great outcomes in terms of reduced rates of prevalence of and mortality from key diseases, and (c.) is delivered to the middle class and the rich, bypassing the poor.

In reality, of course, the inequality of access to Irish healthcare system means that the middle and upper-middle classes are required to buy expensive insurance to gain access to health services. Our achievements in combatting key diseases are primarily driven by our younger (and thus healthier) demographics.

And when it comes to access, only 17.2% of all non-maternity related hospitals admissions in 2011 (the latest for which we have data) were for private patients, with the balance going to public patients. On average, people on private insurance had 2.4-2.6 visits to GP in 2007-2010, while those on medical cards had 5.3-5.2. In 2012, the rich-favouring distribution of access to Irish healthcare so often decried by the media and politicians meant that 39% of population or just under 1.8 million people had access to medical cards, more than the number of private health insurance holders.

Health spending represents the case where we have at least some indications and metrics concerning the inefficiency of services provision. In contrast, in other major areas of state expenditure, there is no basis for efficiency assessments and none are being developed.

Irish welfare system is absurdly complicated, and unbalanced - providing potentially excessive services for able-bodied adults on long-term dependency and insufficient services for adults in temporary need of supports and to people with severe disabilities. Related services - in particular in the areas of skills development and training, placement supports for the unemployed - are glaringly out of touch with reality of the labour market demands. Over the last five years, Irish economy produced ever-increasing shortages of skills in several areas, most notably internationally-traded ICT services, financial services, and back- and front- office support services. Yet Irish system of unemployment supports, planned by Forfas and managed by Fas/Solace, failed to reflect these long-term trends. By the time state training behemoths turn around to face the music, the demands for skills will change again.


Irish state spending - with or without austerity - is a rich sprinkling of waste over a thin layer of substance. And it remains such in the face of five years of boisterous pro-reform rhetoric.
Irish austerity has failed, so much we can all agree on. But the real failure is not in cutting spending too much, but in failing to deliver any real gains in efficiency of public services provision or quality of these services. And it failed in containing the costs of the State, especially if we are to use long term sustainability as the benchmark for assessing the reforms.

The likes of Jack O'Connor and Fiana Fail ‘Nua’ might have discovered a magic trick for conjuring economic growth out of public spending, but reality is that the actual working population is by now sick and tired of being taxed to fund the perpetuation of the public sector mess, best exemplified by our healthcare.

19/7/2013: Ireland: Six Points on Government Spending Stats for Q1 2013

Four key trends in Irish Government expenditure through Q1 2013:

Chart above shows three aspects of Irish Government spending:

1. Overall, expenditure continues to outstrip revenues, generating deficits well in excess of the target and accelerating in Q1 2013 once again, although part of this acceleration is seasonal and part is riven by the IBRC shut-down cost (see my earlier post on this: http://trueeconomics.blogspot.ie/2013/07/1872013-irelands-government-deficit.html)
2. Decline in Government spending since Q1 2009 has been much shallower, once we strip out banks measures than at the aggregate level. This highlights the nature of our fiscal statistics reporting, whereby there is not a single full database (by either the Department of Finance, or CSO) which actually provides clear accounting for ex-banks spending. Question is: why? The IMF this week praised Irish Government for delivering on fiscal transparency. Yet, the very same Government continues to cherry-pick data to show desired effects. 
3. Q1 2009-Q1 2013, overall reduction in gross public spending ex-banks, based on Q1 figures alone (so a caveat here) is closer to EUR470 million or 2.67%. Meanwhile, tax and social security contribution revenues are up EUR979 million or 9.2%. And this disregards the fact that much of the expenditure reductions came from higher charges on private users of public services, not an actual budget cut to budget-covered institutions.

Chart above shows breakdown of the expenditure for four main lines of spending:

1. Compensation of employees has declined 7.53% on Q1 2009 (saving EUR390 million). We were promised billions in savings here and we have attained… well sort of short of that. 
2. Use of goods and services (gross of taxes payable) declined 37.47% or EUR1.01 billion, with parts of these savings now arising due to timing issues. Bunching in spending on this line has increased from 2009 through 2012. Q1-Q2 quarter on quarter changes used to be negative (higher spending in Q1 than in Q2) in 2009 and 2010 and they are now positive for 2011 and 2012. Swing in the rate of change q/q between Q1-Q2 2009 and 2012 was from -13.2% to +10.4%. Which neatly summarises the austerity we've been living through: taxes massively up, capital spending massively down, current spending… err… 'don't ask-don't tell'

One of the worrying trends in the overall expenditure, however, is the interest on our debt. Chart above shows its evolution over time and a clear trend up and up even as taxes are continuing to rise. Now, I know it is trendy nowadays to say 'debt don't matter'… actually, when 20% of your tax revenue goes to pay interest on it… err… it sort of obviously does.

16/6/2013: NPRF, Stimulus & Futility of Policy: Sunday Times June 9, 2013

This is an unedited version of my Sunday Times article from June 9, 2013.



With the coalition mulling over the idea of investment 'stimulus', there are only two questions everyone in the Leinster House should be asking: Where is the money coming from? and Is there value for money in these investments?

Since the beginning of this crisis, the State piggy bank, aka the National Pensions Reserve Fund (NPRF) has been as rich of a target for Government raids as the taxpayers pockets. Back in 2007, NPRF assets were valued at EUR21,153 million with almost 94% of these, or EUR19,817 million, held in liquid financial instruments, such as cash, listed equities and bonds. Q1 2013 data shows that the fund discretionary portfolio (portfolio of assets excluding government-mandated 'investments' in AIB and Bank of Ireland) has declined to EUR6,449 million with only EUR4,243 million of this held in relatively liquid assets that can be meaningfully used to fund any stimulus.

The reason for the NPRF’s disastrous demise has nothing to do with the fund management or strategy - both of which were relatively good, compared to some of Ireland's 'leading' private sector asset managers. The cause of the precipitous 79% drop in liquid assets held by the NPRF was the banking sector collapse and the Government decision alongside the Troika to waste some EUR20,700 million of NPRF funds to 'invest' in two pillar banks equity stakes, with EUR16,000 million of this sunk into the black hole of AIB. As of Q1 2013, the NPRF 'investments' in the banks were valued at EUR8,800 million. This, accounting for dividends paid and disposals made to-date, implies a loss of some 47% of the original investment outlay.

The sheer absurdity of the use of the NPRF to fund every possible twist and turn of the State financial crisis is magnified by the latest Government plans. The exchequer returns through May 2013 released this week show clearly that as in previous years, the heaviest burden of spending cuts by the public sector is once again falling onto the capital expenditure side. January-May current voted spending is running 1.6% ahead of the target, with capital spending outstripping targeted cuts by 12.6%. Now, the same state that has been for years slashing voted capital expenditures is angling to raise a capital investment stimulus by raiding the remaining liquid NPRF funds.

The key issue with NPRF asset holdings is that even theoretically liquid funds will have to be leveraged in order to raise cash for any meaningfully sizeable Government investment. Leveraging NPRF funds via Public-Private partnership-type schemes can yield, realistically speaking, around EUR8-10 billion of total funding for the proposed seven years-long investment envelope, or just about 8% of the cumulated gross domestic capital formation taken at the 2011-2012 running levels.

Use of NPRF funds to finance economic stimulus while the state continues to borrow cash for day-to-day management of unsustainable deficits is of a dubious virtue to begin with. The costs of leveraging the NPRF funds will add further pain to the economics of stimulating investment in the environment of already high levels of government and private sector indebtedness. Worse than that, leveraging NPRF will either increase the Government debt and deficits or put a hefty new cost onto the taxpayers and users of services funded via the stimulus. In effect, the very attractiveness to the Government of the leveraged finance via NPRF is that such funding for capital programmes will most likely be off the official balancesheet of the State. This, however, means that it will also become a direct cost to consumers and, possibly, also to the taxpayers.

Let me explain the last point in greater detail. In 2012, Irish Government spent 3.7% of the country GDP or EUR6,133 million on paying interest on its debts implying an average effective interest rate of 3.19%. With the markets in a relative calm, our latest issue of Government bonds on March 20 this year saw NTMA raising EUR5 billion in 10-year debt at 3.9% annual coupon. This is the benchmark rate for any long-term lending in the country.

Even assuming the markets conditions will not change in the wake of a significant leveraging of funds from the NPRF, current cost of funds to the State is well in excess of recent returns earned by the NPRF on its liquid assets portfolio. In Q1 2013, NPRF delivered annualised rate for return of 2.8% on its discretionary portfolio and over 2000-2011 period, compounded returns earned by the NPRF run at 3.23% per annum.

Now, consider the second question posited above. Much of the public investment in infrastructure and general economic activities, as detailed in September 2011 Strategic Investment Fund (SIF) initiative issued by the current Government requires heavy involvement of the Private Sector co-funding. Quoting NPRF annual report for 2011, under  the SIF, "investment on a commercial basis from the NPRF will be channeled towards productive investment into sectors of strategic importance to the Irish economy (including infrastructure, water, venture capital and provision of long-term capital to the SME sector) and matching commercial investment from private investors would be sought." In other words, we are already leveraging the state finances for previous rounds of stimuli.

Private co-investment requires two things to succeed: sovereign assurances and preferential treatment to reduce overall levels of risk, plus annual return well in excess of sovereign debt returns. In other words, in any PPP and joint co-investment scheme, the State must assure premium return to the co-investing private sector agents.

If the State investments were to be financed at a sovereign cost of funding absent any negative effects on Government bond yields from increased borrowings, the underlying returns on public investments through the 'stimulus' scheme, based on a 50:50 split with private funding, would have to be yielding well in excess of 7-8% per annum. These returns will have to come either from the users of services backed by the PPP investments or from the taxpayers via minimum return guarantees.

Do the math: we can borrow at 3.9% in the markets or we can borrow at 7-8% via PPPs. The only difference is that under the latter arrangement, Minister Noonan can pretend that we didn’t borrow at all, as most of the money to repay the PPP investments will simply come out of the economy directly, instead of via the Exchequer.

That is the hope that is driving the Government to use NPRF instead of its own funds to fund capital spending. This hope, however, is based on rather thin analysis of the economic realities of the PPPs.

It is worth noting that between 1999 and the end of 2011, the total volume of PPP-based investments in Ireland, both committed and allocated, was just over EUR6.4 billion - or a fraction of the hoped-for amount of funds currently under the discussion for the next stage stimulus on foot of NPRF assets. This excludes EUR2.25 billion stimulus announced in July 2012 by the Government, which is not producing much of a desired effect of a stimulus on the economy so far.

Setting aside the issues of financial returns feasibility, it is highly doubtful that this level of investment can be economically efficiently deployed in the economy. And this is on foot of rather poor PPPs performance documented for pre-crisis period, as was highlighted in a number of studies on the subject. Several reports found that the final PPP deals involving capital funding for schools, water infrastrcture and transport programmes returned final costs well above the costs of direct procurement. Severe cost transfers to the state from the PPP projects have been found in the cases of major roads contracts in Ireland, including Clonee-Kells project and Limerick Tunnel project.

An in-depth research note on the problems inherent in PPP funded capital investments in Ireland published by the NERI Institute in January 2013 concluded that "it is striking that after thirteen years of procurement under PPP, there has been no official in-depth analysis of the experience to date. Yet PPP is now a major part of the current governments plan to stimulate the economy. The absence of any publicly available body of evidence in support of this plan represents a major shortcoming in terms of the formation of economic policy."

In contrast to the pre-crisis periods, current business, investment and economic environment in Ireland is characterised by high levels of debt overhang in the private sector, involuntary entrepreneurship, falling rates of growth in global demand for indigenous exports out of Ireland, stagnant or declining real assets valuations and a number of other factors significantly increasing the risk of any new investment. In other words, any new stimulus will have to come at the time when investment opportunities are thinner on the ground and risks associated with such investments are higher.

All of the risks associated with PPP-funded projects, thus, are only exacerbated in the current economic environment.

Instead of first attempting to fix the problems with the core financing schemes, the Government is setting out to drive more forcefully into the troubled waters of privately co-funded schemes. Previously announced stimuli, ranging from capital investment supports to stamp duty and R&D tax incentives, to the 2011-2012 announcements of similar PPP-based leveraged capital investment programmes have been insufficient to stimulate the domestic economy out of its structural collapse. This time around, the Government is attempting to up the ante by increasing the amounts of funds it aims to pump into the economy. The hope, obviously, is that doing more of the same on an increasing scale will yield a different outcome.

More likely, the outcome will be a further debasing of the consumers’ disposable incomes via higher taxation and higher cost of services, in exchange for wiping out completely the NPRF – our only remaining cushion against any potential future risks. Doubling-up when losing repeatedly in the economic policy roulette is not a good idea.  Doubling-up using granny’s pension cheques might be outright reckless.

Box-out:

Back in April this year, the IMF stole the headlines in Ireland after pointing that combined unemployment and underemployment rate in Ireland stood at a staggering 23%. However, the only really surprising thing about the IMF statement was that this data was already reported by the CSO before. In fact, CSO reports quarterly broader unemployment statistics since Q1 1998. Last week, CSO database showed that in Q1 2013, the broadest measure of unemployment – the measure that includes unemployed, discouraged workers and underemployed workers – has hit 25%, rising from 23.7% in Q1 2011 when the current Government took office. However, the above measure is still incomplete, as it excludes those workers who are drawing unemployment supports but are classified as participants in state training programmes, e.g. JobBridge. Adding these workers to the broader measure referenced by the IMF, Irish broad unemployment rate in Q1 2013 stood at a massive 29% - a historical high for the metric and up 2.7 percentage points on Q1 2011.

18/10/2012: ARMs - compounded effects of austerity and banks deleveraging

As the Irish banks are hiking ARMs, it is worth reminding us as to why this is a bad news for Irish economy:

Now, here's the Catch22.

1. Irish banks funding costs are joined at a hip with the Sovereign funding costs, thus reducing these costs will require reducing Sovereign costs, which in turn means taking in more taxes and cutting back more Government spending.
2. The former part of (1) means that households on the ARMs will be bearing all of the burden of the high funding costs for the banks.
3. The latter part of (2) means that households on the ARMs are going to experience, alongside all other economic agents, the cost of Government deleveraging.

(2) + (3) means that in our 'fairness-concerned' society, ARMs holders will be paying twice the rate of the fiscal adjustment that any other group of agents.

Good luck, Michael Noonan, bankrupting the ARMs.

4/10/2012: Investor's Daily: We've been telling you porkies

In the previous post I tried to make some sense out of the headline numbers from the Exchequer returns through Q3 2012. This time around, let's take a look at the overall Exchequer balance.

Headline number being bandied around is that overall exchequer deficit stood at €11,134 mln in January-September 2012, down €9,526 mln on same period in 2011 (an impressive drop of 46.1%). Alas, that is a pure hog wash. Here's why.

In 2011, Irish state assumed banks recapitalizations and insurance shortfalls funding spending of €10,653 mln, this time around, the Government allocated only €1,775 mln to same.

Adjusting for banks recaps, therefore, Exchequer deficit stood at €10,007 mln in January-September 2011 and it was €9,359 mln in the same period this year, implying deficit reduction of €647.5 mln y/y - a drop of 6.47%.

But wait, in both 2011 and 2012 the state collected extraordinary receipts from banks recapitalization and guarantee schemes - the receipts which, as the EU Commission warned us earlier this year are likely to vanish over time. These amounted to €1.64bn in 2011 and €2.06bn in 2012 (January-September figures).

Subtracting these from the balance we have: exchequer deficit ex-banks recaps and receipts in 2011 was €11,650mln and in 2012 it was €11,417mln. In other words, the State like-for-like sustainable deficit reductions in the 9 months through September 2012 compared to the same period in 2011 were… err… massive €233.7 million (2%).

Let's do a comparative here: Budget 2012 took out of the economy €3.8 billion (with €2.2 billion in expenditure measures and €1.6 billion in taxation measures). On the net, the end result so far has been €233.7 million reduction of like-for-like deficit on 2011. How on earth can the Troika believe this to be a 'best-in-class' performance?

Or alternatively, there's €9.36 billion worth of deficit left out there to cut before we have a balanced budget. At the current rate of net savings, folks, that'd take 40 years if we were to rely on actually permanent revenues sources or 14 years if we keep faking the banking system revenues as not being a backdoor tax. Either way… that idea of 'under 3% of GDP' deficit by 2015 is… oh… how do they say it in Paris? Jonque?

And just so I don't have to produce a separate post on this, the Net Cumulated Voted Spending breakdown is also worth a line or two. You see, the heroic efforts of the Irish Government to support our economy have so far produced a reduction of €474 million on capital investment budget side y/y. But, alas, similarly heroic efforts at avoiding real cuts to the current spending side also bore their fruit, with current voted expenditure up year on year by €369 million in 9 months through September 2012.

So the bottom line is - savage austerity, tears dropping from the cheeks of our Socialist err… Labour TDs and Ministers… has yielded Total Net Voted Spending reduction cumulated over January-September 2011 of a whooping €105 million… And that is year on year. extrapolating this to the rest of the year implies that in 2012 we can expect roughly to cut our Net Voted Expenditure by a terrifyingly insignificant pittance amount of €140 million.

Yep… Jonque!

15/9/2012: A handy IMF map for Budget 2013?

The elephant in the room (at 9% of GDP or 11% of GNP, with pensions - at 10.6% GDP or 13 of GNP, that's right more than one euro in eight) - courtesy of the IMF:

7/6/2012: QNHS Q1 2012: Sectoral Decomposition

In the previous post I covered the top-of-the-line data on QNHS for Q1 2012. This time, lets take a look at some sub-trends by occupation and public v private sector numbers.

A handy summary table to outline changes by occupation:

Few surprises in the above table are:

• Twin (q/q and y/y) rises in Wholesale & Retail Trade category, 
• Y/y rise in Accommodation and food service activities with a level increase of 8,600. This appears to confirm the Government claims on the sectoral jobs creation on the foot of jobs stimulus. The problem with comparatives is that the y/y increase comes on foot of a sudden decline in employment in the sub-sector in Q1 2011 when it fell to surprisingly low, seasonally-unjustified level of 102,900. Sub-sector employment remains down on Q1 2010 when it stood at 123,700 or 12,100 ahead of Q1 2012, and it is down on Q4 2011 when it was at 113,400 against Q1 2012 at 111,600. The core factor in Q1 2012 differential on Q1 2011 might have been not so much jobs creation as the increased expense of jobs reductions under Budget 2012. This, however, is speculative argument at best. My suggestion would be to wait and see how the numbers employed in the sector pan out in Q2 2012.
• Another surprising thing is that in the category of skills closely aligned with Accommodation and food service activities there was a decrease, not an increase, y/y in terms of employment. Caring, leisure and other service category of workers saw employment drop from 142,300 in Q1 2011 to 141,500 in Q1 2012. Something is not adding up, unless the jobs created in the sub-sector were managerial and/or associate professional and technical.
• Not surprisingly, ICT sub-sector grew employment y/y with 6.81% increase on Q1 2011 - the only private sector sub-sector that posted an increase in jobs on 2007 levels (+5.31%), with only other two sectors adding jobs on 2007 levels being Education (+4.64%) and Human Health and Social Activities (+6.57%).
• For all the claims of MNCs employment gains, the core sub-sector of Professional, Scientific and Technical Activities has seen employment shrinking, not rising in Q1 2012 relative to Q4 2011 (-0.53%), to Q1 2011 (-7.56%) and on 2007 (-15.44%). Striking feature of these changes is that this sector was the hardest hit in Q1 2012 of all sub-sectors listed by CSO, amidst the robust IDA and Government claims that jobs creation in MNCs is ongoing and that R&D and innovation activities are booming.

In the core series for sub-sectors:

• There was a recorded rise in Education sub-sector. Employment in education stood at 144,200 in Q1 2012 - up 2.2% (or 3,100) on Q4 2011 and down 2.2% (-3,200) on Q1 2011. Since Q1 2007, employment in the sector grew by 4.64% or +6,400.
• Employment levels in Health and social work activities fell q/q by 1.96% (-2,000) but are up on Q1 2011 by 1.72% (+4,000). Compared to Q1 2007, Q1 2012 employment in the sector is up 6.57% (+14,600). 
• The two sectors above represent front-line services in their definition.  Between them, during the austerity period the two sub-sectors added 29,700 new jobs.

And lastly, two charts on dependencies ratios. Without any comment.