21/10/2014: Of Statistics: Ireland and ESA2010

Eurostat released a handy note showing revisions to euro area debt and deficit figures that arose as the result of conversion to ESA2010 methodology (yes, yes, that infamous inclusion of illicit trade and re-classification of R&D spending as investment, and much more).

You can read the full note here: http://epp.eurostat.ec.europa.eu/portal/page/portal/government_finance_statistics/documents/Revisions-gov-deficit-debt-2010-2013.pdf

And the effects are:

Government deficit revisions:

Click on chart to enlarge

One clear outlier in the entire EU28 is... Ireland. We had the largest, by far, downward revision in our deficit/GDP ratio of some 1.5 percentage points, pushing our deficit down from 7.2% of GDP (ESA95) to 5.7% of GDP (ESA2010) overnight. No austerity, just accounting.

We were similarly 'fortunate' on the debt calculations side:

Click on chart to enlarge

While revised actual debt levels rose, under new rules, the revised debt/GDP ratio fell due to GDP push up under the new rules. Lucky charms...

Per note, relating to deficit revisions: "Ireland (-3.1pp for 2010, -0.1pp for 2011, -0.1pp for 2012 and +1.0pp for 2013): the 2010 and 2011 deficits were  revised mainly for other reasons (than ESA 2010 introduction) and the 2012 and 2013 deficits mainly due to  introduction of ESA 2010. The deficit for 2010 was increased mainly due to reclassification of the capital injection  to AIB and the deficit for 2011 due to various reasons such as an adjustment to accrual calculation for PRSI,  health contribution and National Training Levy. The revisions in the deficit for 2012 and 2013 are mainly due to  the classification of the Irish Bank Resolution Corporation Limited (IBRC) to the central government. " 

Per note, relating to debt revisions: "Ireland (+12.2pp for 2011, +10.3pp for 2012 and +7.2pp for 2013): the revisions in the debt are mainly due to  introduction of ESA 2010: the classification of the Irish Bank Resolution Corporation Limited (IBRC) to the central  government as it became a government controlled financial defeasance structure in 2011."

So our actual debt rose. But our debt/GDP and deficit/GDP ratios fell:

Enron would be proud...

31/3/2013: Unique Ireland? Why not... per IMF working paper...

Here's an interesting case of Ireland's uniqueness:

Eyraud, Luc and Moreno Badia, Marialuz, "Too Small to Fail? Subnational Spending Pressures in Europe" [(February 2013). IMF Working Paper No. 13/46] paper looks at the re-distribution of spending between national and sub-national governments within the EU over time, covering the period of the crisis. Due to the size of the banking sector measures and their impact on the Government budgets in Ireland, the paper excludes Ireland from the dataset when running analysis.

In other words, we are so out of line with the rest of Europe in terms of resources we threw at the banks during the crisis, that our data is no longer meaningfully comprable to the rest of EU.

Here are two charts illustrating this 'uniqueness':

4/12/2012: Irish Exchequer Returns Jan-Nov 2012

So 2013 Budget will be expected to deliver 'cuts' and 'revenue measures' to bring fiscal stance €3.5 billion closer (or so the claim goes) to the balance. Which prompted the Eamon Gilmore to utter this:
"It is the budget that is going to get us to 85% of the adjustment that has to be made, and will therefore put the end in sight for these types of measures and these types of budgets".

Right. €3.5 billion will be added to the annual coffers on expectation side comes tomorrow. €3 billion will be subtracted on actual side comes March 2013 for the ritual burning of the promo notes repayments, and IL&P - the insolvent zombie bank owned by the state - will repay €2.45 billion worth of bonds using Government money comes second week of January. I guess, something is in sight, while something is a certainty-equivalent. €3.5 billion 'adjustments' vs €5.5 billion bonfire.

Six years into this shambolic 'austerity heroism' and we are, where we are:

1. On expectations forward, the Government will still have fiscal deficit of 7.5% of GDP in the end of 2013, should Gilmore's 'end in sight' hopes materialise. That is set off against pre-banks measures deficit of 7.3% in 2008. In fact, the 'end' will not be in sight even into 2017, when the IMF forecasts Irish Government deficit to be -1.8% - well within the EU 3% bounds, but still consistent with Government overspending compared to revenues.
2. Overall Government balance ex-banks supports in Ireland in 2012 will stand around 8.3% of GDP. In 2013 it is expected to hit 7.5% of GDP. The peak of insolvency was 11.5% of GDP in 2009, which means that by 2013 end we have closed 4 percentage points of GDP in fiscal deficits out of 8.5 percentage points adjustment required for 2009-2015 period. In Mr Gilmore's terms, we would have traveled not 85% of the road, but 47% of the road.

But wait, there's more. Here's a snapshot of the latest Exchequer returns for January-November 2012:

• Government tax revenue has fell 0.5% below the target with the shortfall of €171 million and although tax revenues were €1.96 billion ahead of same period (January-November) 2011, stripping out reclassifications of USC and the delayed tax receipts from 2011 carried over to 2012, this year tax receipts are running up 4.5% year on year.
• Keep in mind that target refers not to the Budget 2012 targets, but to revised targets of April 2012. 
• Meanwhile, Net Voted Government Expenditure came in at 0.6% above target. 
• So in a sum, on annualized basis, expenditure running 1.03% ahead of projections and revenue is running 0.86% below target. All of the sudden, the case of 'best boy in class' starts to look silly.

Things are even worse when you look at the expenditure side closer.

• Total Net Voted Expenditure came in at €40,635 million in 11 months through November 2012, which is €26 million above last year's, and  is 0.6% ahead of target set out in April. In other words, Ireland's heroic efforts to contain runaway public sector costs have yielded savings of €26 million in 11 months through November 2012.
• All of the net savings relative to target came in from the Capital side of expenditure, which is 20.5% below t2011 levels(-€629 million). Now, full year target savings on capital side are €562 million, which means that capital spending cuts have already overcompensated the expenditure cuts by €67 million. 
• On current expenditure side things are much worse. Relative to target, current spending is running at +1.7% (excess of €654 million). It was supposed to run at -1.6% reduction compared to 2011 for the full year 2012, but is currently running at +1.6% compared to Jan-Nov 2011. The swing is over €1.2 billion of overspend.
• Recall that in 2011 Irish Government expropriated €470 million worth of pensions funds through the 0.6% pensions levy in order to fund its glamorous Jobs Initiative. It now has cut €629 million from capital spending budget or €405 million more than it planned. In effect, thus, the entire pensions grab went to fund not Jobs Initiative, but current spending by the state.
• The savage austerity this Government allegedly unleashed saved on the net €26 million in 11 months. Pathetic does not even begin to describe this policy of destroying the future of the economy to achieve effectively absolutely nothing in terms of structural adjustments.
• The overspend took place, predictably, and at least to some extent justifiably by Health and Social Welfare. However, two other departments have posted excess spending compared to the target: Public Expenditure & Shambles-- err Reforms -- posted excess spending overall, while Transport, Tourism and Sport has managed to overspend on the current spending side of things.

On the balance side of things, stripping out banks measures and capital cuts, but retaining reclassifications of revenues and carry-over of revenues from 2011 into 2012, overall current account balance deficit was €9.626 billion in 2012, contrasted by the deficit of €9.712 billion in 2011. This suggests that the Government has managed to reduce the deficit on current account side by €86 million,

Laughable as this sounds, stripping out carry over revenues from 2011, the deficit on current side of the Exchequer finances was €9.45 billion in 2011 and that rose to €9.97 billion in 2012. Which means that the actual current account deficit is not falling, but rising.

Now, let's control for banks measures:

• In 2011 Irish state spent €2.3 billion bailing out IL&P, plus €3.085bn repaying promo notes for IBRC and €5.268bn on banks recaps. Total banks contribution to the deficit was thus €10.653 billion, This implies that overall general government deficit ex-banks was €10.716 billion in 2011.
• In 2012 we spent €1.3 billion propping up again IL&P (this time - its remnants) which implies ex-banks measures deficit of €11.668bn
• Wait a second, you shall shout at this point in time - 2012 ex-banks deficit is actually worse, not better than 2011 one. And you shall be right. There are some small items around, like our propping up Quinn Insurance fallout cost us €449.8mln in 2012 and only €280mln in 2011. We also paid €509.5 million (that's right - almost the amount the Government hopes to raise from the Property Tax in 2013) on buying shares in ESM - the fund that we were supposedly desperately needed access to during the Government campaign for Fiscal Compact Referendum, but nowadays no longer will require, since we are 'regaining access to the markets'. We also received €1.018 billion worth of cash from our sale of Bank of Ireland shares in 2011 that we did not repeat on receipts side in 2012. And more... but in the end, when all reckoned and counted for, there is effectively no real deficit reduction. Nothing dramatic happened, folks. The austerity fairy flew by and left not a trace, but few sparkles in the sky.
• Aside note - pittance, but hurtful. In 2012 Department for Finance estimates total Irish contributions to the EU Budget will run at €1.39 billion gross. For 2013 the estimate is €1.444 billion. That is a rise of €59 million. Put this into perspective - currently, the Government has run away from its previous commitment to provide ringfenced beds for acute care patients at risk of infections, e.g. those suffering from Cystic Fibrosis. I bet €59 million EU is insisting this insolvent Government must wrestle out of the economy to pay Brussels would go some way fixing the issue.

In the mean time, our interest payments on debt have been steadily accelerating. In January-November 2011 our debt servicing cost us €3.866 billion. This year over the same period of time we spent €5.659 billion plus change on same. Uplift of 46.4% in one year alone.

So here you have it, folks. This Government has an option: bring Irish debt into ESM, for which we paid the entrance fees, and avail of cheap rates. Go into the markets and raise the cost of funding our overall debt even higher - from €6.17bn annual running cost in 2012 to what? Oh, dofF projects 2013 cost to be €8.11 billion - a swing of additional €1.94 billion. So over two years 2012 and 2013, Irish debt servicing costs would have risen by €3.89 billion swallowing more than 1/2 of all fiscal 'adjustments' to be delivered over the same two years.

At this stage, there is really no longer any point of going on. No matter what this Government says tomorrow, no matter what Mr Gilmore can see in his hazed existence on his Ministerial cloud cuckoo, real figures show that Europe's 'best boy in class' is slipping into economic coma. 

5/9/2012: The balance of imbalance: Irish Exchequer deficit in January-August 2012

In the previous two posts I examined the Exchequer receipts and net voted expenditure for January-August 2012. Now, on to the overall balance.

In July 2012, the Exchequer deficit stood at €9.13 billion against July 2012 headline deficit of €18.89 billion. In August, cumulated 2012 deficit rose to €11.35 billion (up €2.22 billion in one month) compared to €20.43 billion in 2011 (2011 monthly rise in August was €1.54 billion).
Fact 1: Irish Exchequer deficit rose at faster pace in August 2012 than in August 2011, so in monthly changes terms, August 2012 was not an improvement on August 2011.

However, the headline figures are incorporating several factors that gold-plate our deficit performance in 2012 compared to 2011, none of which the Government is willing to actually directly separate to identify the true performance. Let's try doing this job for them:

• As mentioned earlier, €233 million on 2011 revenue side came from the one-off sale of the Bank of Ireland shares, while €251 million of corporate tax receipts booked into 2012 is really the revenue from 2011. This means the deficit in 2011 should be adjusted by -€18 million and the balance in 2012 should be adjusted by +€251 million.
• In January-August 2011 the state spent €7.6 billion on recapitalizing banks, while this year the spending was only €1.3 billion plus there was a payment of €450mln in 2012 into the ICF (Insurance Compensation Fund). This means we should adjust the Exchequer balance on 2011 side by -€7.6 billion and 2012 by -€1.75 billion.
• Promo notes 'restructuring' this year meant the net cost of the Notes booked at €25mln, against €3.1 billion in 2011. This means adjusting 2011 deficit by -€3.1 billion and 2012 deficit by €25 million.
• In 2011 revenues from the banks measures - clearly a temporary source, as the EU Commission has warned Ireland already about the future tapering off of these receipts - amounted to €1.27 billion, while in 2012 they amount to €2.06 billion.

Accounting for the above one-off and temporary measures, the underlying deficit figures are:

• 2011 January-August period: €10.98 billion or €9.71 billion if we omit accounting for banks receipts;
• 2012 January-August period: €11.88 billion or €9.82 billion if we omit accounting for banks receipts.
• Hence, January-August 2012 period deficit, comparable to that for the same period in 2011 is worse, not better, by €109-896 million depending on whether we consider windfall differences in temporary revenues from banks.

Fact 2: On comparable basis, stripping out one-off measures and temporary allocations, Irish Exchequer deficit is worse in the first 8 months of 2012 than it was in 2011.

2/8/2012: Irish Exchequer Fog: Reality Isolated?

Let’s take a look at the Exchequer numbers for January-July period out today.

Tax revenue shows an increase from €18,633 mln in January-July 2011 to €20,313mln in same period 2012. 

This is primarily accounted for by increases in Income Tax (which are running pretty much in line almost exactly with what the USC reclassification would have yielded). The Department states that "Income tax is €159 million (2.0%) ahead cumulatively and is over 11% up on the same period last year on an adjusted basis. This is a strong performance." However, as far as I can understand the numbers, the adjustment only includes PRSI and does not cover reclassification of the entire USC (Health Levy). Which suggests that even 2% might be questionable. Per April note (link here) PRSI reclassification was 'estimated' by the department to run €300 million in 2012. It could be, in the end, 280mln or 330mln - take our guess, but it is significant.

Another 'major' factor is a rise in corporation tax of some €400 million of which more than half is accounted for by carry-over of tax from 2011 into 2012, not new tax receipts. Here's the Department note from April (linked above): "The Department is also taking this opportunity to adjust the corporation tax profile for the €251 million in receipts which were  expected in December 2011 but were  only received into the Exchequer account in January 2012". So setting aside timings of the corporation tax and netting out €251 million of carry-over, how much is corporate tax really up? The answer is - we do not know. But not by much enough to be excited about this.

There was a €200 mln odd rise in VAT - the real impact of the Budget 2012. Which means that on the net, there are very few real increases in revenues. Total taxes went up by €1,680mln odd, but on a real comparable basis, they went up less than €1,254mln over seven months! Again, this is before we clarify what exactly happened with the Health Levy. With Health Levy effects, the impact would have been probably closer to €250mln (I am using here 2009 figures for Health Levy and PRSI to estimate).

Non-tax income rose from €1,545mln to €2,355mln – of which almost €300mln is accounted for by increased revenues by the Central Bank and another €200mln odd is from the stronger receipts on the Banks Guarantee. There was €300mln interest on Contingent Capital Notes - also from banks. Sort-of the zombie giving back odd €800mln to the town it is killing. This is the 'reforms' the Government instituted to correct for the fiscal imbalances? Not quite: earlier this year the EU warned Ireland to not consider these 'revenues' as a part of long-term adjustment as they are bound to disappear in time.

Voted Current Expenditure – the stuff that this Government is supposedly cutting back – has actually increased – from €24.008bn in 2011 to €24.563bn in 2012.

Non-voted current expenditure is up more than €2 billion: from €3.556bn in 2011 to €5.573bn in 2012 – primarily driven by increases in the cost of servicing Ireland’s debt from €2.426bn in 2011 to €3.801bn in 2012. Timing effect on sinking fund contribution of €646mln also put a dent.

This means total current expenditure rose (not fell) from €27,564mln in 2011 to €30,136mln in 2012. This is very poor performance, folks.

Thus, current account deficit also increased in January-July 2012 from €7,386mln to €7,468mln.

Sinking fund transfer debit above was offset by credit to the capital receipts, which has meant that capital-related exchequer receipts rose to €1.454bn in 2012 compared to €789.9mln in 2011. Again, there is nothing miraculous here – the state simply transferred funds from one pocket to the other.

On the capital expenditure side, however, there are – on the surface – huge ‘savings’ year on year. Total capital spending amounted to €12,298mln in January-July 2011, but that was ‘cut’ to €3,112mln in same period 2012.

How were such miraculous savings achieved? Well, simple, really. In 2011 the state spent €10,655mln on “Non-Voted (Expenditure charged under particular legislation)” items and in 2012 this line of spending was only €1,775mln. 99% of these expenditures in both 2011 and 2012 relate to banks recapitalizations (and in 2012 added insurance fund support loan of €449.75mln). So the entire savings delivered by the Government amount to putting less money into Irish banks recapitalizations.

Here’s the summary of these ‘savings’.

TABLE

But wait, things are even worse! In 2011 Irish Government paid down the promissory note to the Anglo-Irish Bank in the amount of €3.085bn. This increased Government spending in that year. This year, the Government had converted the note into Government debt, and thus got to claim that there was no payment made, so instead of €3.085bn in spending, the State registered just the cost of conversion €25mln this time around.

All in, of the entire deficit reduction claimed by the media, full €8.9 billion of the ‘savings’ are simply what the Irish Government (rightly) claimed a year ago to be ‘temporary’ one-off measures. In other words, there is no reduction in deficit via expenditure side.

Let's do one final exercise: if we subtract one-off measures from the capital side, total - current and capital accounts exchequer deficit in the first seven months of 2011 was €8.24bn, in the same period of 2012 it is €7.35bn adding to it the reclassification measures and corporate tax carry over implies like-for-like deficit in 2012 of €7.78bn. Which means 'savings' of ca €426mln. 

Of these €306mln is accounted for by timing differences and cuts to voted capital spending which the Government is going to more than undo using the latest 'off-balancesheet' stimulus. And an unknown amount is due to Health Levy reclassification, let's say ca €250mln so far (an under-estimate for 2009 figures, but...) for which the Department does not appear to adjust the numbers. All in, Irish Exchequer finances have most likely deteriorated on comparable terms by around €80million in 7 months through July 2012 compared to 2011.

These are then the colossal savings that the headlines like "Ireland Cuts Deficit in Half" simply mis-represent.


Update: Someone highlighted that the Health Levy was incorporated into the PRSI receipts. My view of the Health Levy is based on this document.

20/12/2011: IMF IV Review of Ireland Programme: part 2

This continues my review of the IMF's 4th review of Ireland. The previous post (here) covered the findings concerning mortgages arrears and property markets.


"Budget execution remains on track despite weakness in revenues linked to domestic demand. ...Excluding net banking sector support costs, the January–October Exchequer primary deficit was €12.1 billion, 0.8 percentage points of GDP narrower than the authorities’ profile after allowing for the impact of the Jobs Initiative introduced in May 2011." [In other words, folks, allowing for pensions levy hit]

"The smaller deficit primarily reflects tight expenditure control; net current spending undershot budgetary allocation by 1.6 percent (0.4 percent of GDP), while capital spending was below profile by 17.2 percent (0.8 percent of GDP)." [This further shows that the smallest positive impact on deficit was derived from the largest area of expenditure - current spending, with capital spending cuts acting as the main driver, once again, of budgetary adjustment. This, of course, has been highlighted by me on numerous occasions.]

"Overall revenues remained on track, with shortfalls in taxes such as VAT due to weak domestic demand offset by higher than budgeted non-tax revenues, such as bank guarantee fees." [That's right, folks, one-off hits on income and wealth are 'compensating' for tax revenues fall-off in income tax, VAT and corporation tax. Again, keep in mind that IMF analysis is based on data that excludes the largest revenue generating month of November.]

But here's an interesting note: "The cumulative Exchequer primary balance through end-September 2011 was -€18.3 billion, above the adjusted target of -€20.2 billion. Central government net debt was €111.7 billion, below the adjusted indicative target of €115.9 billion" [One might ask the following question, is that target of €115.9bn - set in December 2010 - reflects the €3.6bn error found in Q3 2011? If not, then, of course, our 'outperformance of the target shrinks to a virtually irrelevant €500mln which, itself, can be fully covered by capital expenditure shortfall on the target mentioned above. In other words, when all is factored in, are we really outperforming the target set, or are we simply overestimating the target and ignoring expected spending?]

The IMF catches up to that:
"Program ceilings for fiscal indicators at end-2011 are expected to be observed. Although spending will pick up toward year-end, and a funding need of 0.2 percent of GDP is expected in relation to the failure of a private insurance company, the end-December performance criterion is projected to be achieved."
[In other words, the State will have to cover €300mln of Quinn Insurance losses in 2011 and then another €400mln of same in 2012. Alas, due to the accounting trick, since these losses will be recovered by the State through an insurance levy - to be paid by the completely innocent dopes (aka, us, consumers of insurance products in Ireland), the whole thing is not counted as Government debt, even though the State will be borrowing these funds.]

"Similarly, the general government deficit is projected at 10.3 percent of GDP, within the European Council’s ceiling of 10.6 percent of GDP. The 2011 consolidation package of €5.3 billion (3.4 percent of GDP) is expected to reduce the primary deficit to 6.7 percent of GDP, representing a €3.1 billion (2 percent of GDP) year-on-year reduction." [Now, note the maths - 6.7% primary deficit remains to be closed before we can begin net debt repayments. Last year, we've closed - and that is based on pre-November 2011 pretty disastrous numbers - 2%, so 2/9th down, 7/9th still to go, roughly-speaking]

Crucially: "The realized increase in the primary balance will thus likely amount to only about three-fifths of the consolidation effort, which reflects the adverse impact of the contraction in domestic demand and the rise in unemployment, highlighting the challenge of implementing large fiscal consolidations when growth is weak." [Here's what this means - due to the adverse effects of lower growth and higher unemployment, some 40% of this year's adjustment has gone on fighting the rising tide of economic crisis, not on structural rebalancing of fiscal deficit. In other words, if this situation of fiscal targets set against unrealistic expectations for growth were to continue in 2012 and through 2015, we will get a deficit to GDP ratio of closer to 5.5-6% not 2.9% as envisaged. Now, think about this in the following terms - Budget 2012 assumes growth of 1.3% next year - although I have some questions as to whether that is indeed the number, given that a day before the Budget 2012 was published, the Department of Finance quoted the figure of 1.6% - and the expectations of ESRI, OECD, the EU Commission and the IMF are now for 0.9-1%... hmmm... realistic expectations, targets and outcomes risks are now pretty clear...]

As is, the IMF report shows progress achieved. But it also raises a number of questions:

• Is this progress - 2% adjustment of which 2/5ths are simply gone to cover lost ground - sufficient?
• Is this progress sustainable (see next post)?
• Is this progress being achieved through structural reforms (current spending cuts and sustainable revenue raising) or through capital expenditure cuts and one-off tax measures?

The following post will cover the IMF analysis of the future outlook for the Irish economy.

13/12/2011: Sunday Times 11/12/2011

The unedited version of my Sunday Times article from December 11, 2011.

Billed as the Budget that will fundamentally change our fiscal policy over the long-term, the documents released this week have managed to make history. Indeed, Budget 2012 was a record-breaking one in three ways.

Firstly, Government’s retreat over the issue of disability payment cuts for the younger beneficiaries has to mark the fastest policy reversal ever achieved by the State. Secondly, by labelling new revenue measures in health services as expenditure cuts, Minister Howlin has managed to perform a minor miracle of transfiguration – transforming sweat and labours of ordinary insurance card holders who will now pay higher services charges into a Public Sector reform.

Thirdly, the Government set another speed record that will be hard to match. Within just 9 months after coming to power, the Coalition has magically morphed into a Fiana Failesque clone, replete with Bertie-style creative thinking which equates economic growth with property incentives.

The 2012-2015 profiling of spending and tax measures, released by the Department of Finance clearly shows that this Government has adopted Brian Cowen’s approach to crisis management. Tax measures are frontloaded into 2012 and 2013 at €2.85 billion out of the total €4.65 billion. The bulk, or €5.55 billion, of the spending cuts out of the total of €7.75 billion were delayed until 2013-2015. Within spending reductions planned, capital cuts are frontloaded into 2012-2013, while current spending reductions are pushed back. In other words, the Government is delaying the painful reforms in a hope that something turns up to rescue the Exchequer revenues.

This much is clearly reflected in the Department of Finance’s overly optimistic outlook for growth. The Budget estimates appear to reflect the Department November 2011 forecast for 1.6% 2012 growth in GDP. Subsequent revision downward to 1.3% projected GDP growth in 2012, revealed on Tuesday, seems to be a window dressing to suggest caution as they clearly were introduced sometime around December 5th and 6th – with no time alter core budgetary estimates. Afterall, the Department Monthly Economic Bulletin, released this Monday continues to project 2012 growth at 1.6%. Even at that, the Department projections exceed most recent forecasts by the ESRI (0.9% GDP growth) and OECD (1.0% growth).

Past 2012, medium-term projections envision 2014-2015 growth coming in at a lively 3.0% per annum, boosted by booming exports and investment assumptions. Balance of payments, the metric that reflects economy’s overall ability to generate external growth, will skyrocket more than seven-fold from 0.5% this year, to 3.7% in 2015.

The country drowning in the sea of middle class debt, collapsed domestic investment, crashed consumption, rampant emigration, skills drain due to excessive taxation and exploding growth in the black markets, in the view of the Department of Finance economics experts will shrug off the depression and get back to the business of filling Government’s coffers with cash.

Incoherent numbers set the stage for incoherent policies.

The Government that is concerned with deposits stability in the Irish banking sector and talks about the need for investment is frontloading capital cuts and has introduced three measures on DIRT, CGT and CAT that will do exactly the opposite of what it tries to achieve. The Government that incessantly drones about jobs creation has managed to publish a budget that will further depress investment, reduce disposable incomes and increase costs of doing business in this country. To make things worse, the Budget also made hiring workers more risky by increasing the future cost of redundancies. With measures like these, the only jobs creation that will be taking place in Ireland for the foreseeable future is going to be taking place in the Fas-run schemes.

The Government that talks about exports-led recovery has managed to introduce not a single measure to help exporters. An exports credit guarantee scheme and ringfencing of new tax incentives for marketing Irish goods and services abroad would have helped. As would a scheme to encourage technical skills importation in the sectors where such skills cannot be found locally. None came.

Plagued by declining tax revenues the Budget unveiled three measures – VAT, fuel and tobacco taxes increases – that will see Black Market economy booming once again at the expense of legitimate businesses.

On the expenditure side, the very same Government promising deep reforms loaded the Budget with small-scale measures that neither address the issues relating to the value-for-money in public services delivery, nor achieve substantive real savings, nor improve productivity in the sector.

Take one of the largest ‘reforms’ – the reduction in the numbers employed in the public sector. At 6,000 planned reductions in 2012, the target is un-ambitious. More importantly, it marks the very same ‘extend-and-pretend’ approach to change that is traceable across the entire Budget. Instead of taking the medicine upfront and setting a target at 12,000-15,000 reductions, the Government opted to increase uncertainty about future positions and promotions for those who stay in their jobs. The fact that even the shallow target is to be achieved solely through early retirement adds insult to the injury. Early retirement schemes solemnly lack any connection between employees’ suitability for their jobs, their performance on the job, and other meritocratic metrics. As the result, early retirement schemes will not enhance overall levels of productivity in the workforce.

Minister Howlin, and with him the rest of the cabinet, simply appear to be unaware of what reforms are supposed to achieve. What is really needed is a comprehensive independent review of all positions across all departments and subsequent involuntary removal of those who are unsuited for their jobs.

There is also no joined-up thinking on welfare system reforms. For example, introducing a refundable tax credit per child at a mid-range rate of, say, 20%, would make the credit automatically means-tested. This would also make the scheme virtually self-administered for the majority of the recipients and allow to focus more resources on the cases where special help is needed most.

There is a virtually hit-and-run feel to the Government’s grasp of what constitutes long-term change. At this stage in the crisis, it is clear that sooner or later, the sacrosanct basic rates of social welfare as well as the unlimited nature of benefits will have to come to the chopping block. There is no economic growth path that can get us out of this painful corner.

Yet, instead of tackling the problem head on, the Government attempted once again to move along the margins, selecting individual sub-groups of aid recipients in a hope of ‘striking gold’ – finding the least vociferous ones for the hit. This is done in a naïve belief that the loudness of the group complaints is somehow proportional to the need for assistance. The end result is that those most in need, but are present in smaller numbers, got the stick, while the able-bodied adults with lesser merit claim to help are getting their carrot.

There are no reforms of the public sector pay and pensions in the Budget. The gargantuan bill for new and existing state retirees will fall this year by just €500,000 and is expected to decline by less than 2.3% in years ahead.

With social welfare fraud rampant Minister Joan Burton cheerfully reported back in August this year that her Department delivered €345 million worth of savings tightening enforcement of the welfare payments in just 7 months of 2011. Why is then Budget 2012 aiming to generate just €41 million in new fraud reduction-related savings for the entire 2012?

Despite the rhetoric, Budget 2012 was another windows-dressing for avoiding painful reforms. The new curtains of ‘austerity’ will now adorn the rotten façade of state finances until the whole structure crumbles over the next 2 years under the weight of our debts and structural recession.

Box-out:

Back in July 2010, the Minister for the Environment published a relatively un-ambitious Report of the Local Government Efficiency Review Group. The report reviewed the cost base, expenditure of and the numbers employed in local authorities in Ireland. It identified some marginal savings to the tune of €511 million comprised of €346m in efficiencies and €165m in improved cost recovery and revenue raising to be gained from introducing very moderate set of reforms, such as joint administrative areas for some sets of counties; reductions in senior management and other staffing levels; greater efficiency in procurement; more use of shared services, such as joint inspectorates and regional design offices; and better financial management. None of these suggestions have made it into specifically costed savings under the Budget 2012. Which begs a simple question – why?

08/12/2011: Budget 2012: Irish Daily Mail

Here is an unedited version of my article in the Irish Daily Mail covering Budget 2012.

Budget 2012 was billed as a path-breaking departure from the previous budgets. Quoting Minister Brendan Howlin, “Our budgetary process, …is about to change fundamentally.” The Government has been quick to stress the key concepts, that, in its view, were signaling a departure from previous 3 years of failed policy of capital cuts and tax increases, that yielded stillborn recovery we allegedly enjoy today.

Yet, in the end, Budget 2012 came down to a familiar hodgepodge of picking the proverbial low hanging fruit and covering up painful hit-and-run measures with platitudes. Once again, the nation is left with neither a long-term’, nor a ‘strategic’ model for fiscal sustainability.

We knew who were to be hit the hardest by this budget before our value-for-money busting duo of overpaid ministers set out to speak this week. The budget came down hard on the marginal groups across the less well-off: single parents, students, those reliant on public health. Old story by now. A well-tested strategy of Brian Cowen’s cowardly ‘leadership’: hit the smaller minorities as a token of ‘reforms’ and then decimate the silent majority of the middle class at will. At any cost, avoid taking on directly large vested interests.

And so, Budget 2012 cut into what effectively constitutes the largest tax rebate for the middle class – child benefit. And then it raised taxation on ordinary households. Healthcare costs – public and private went up - dressed up as 'savings' in the ministerial  speeches. Fuel taxes, VAT, DIRT, tobacco prices, household charge – you name it. Old story, once again: there is no change, no strategic approach, no long-term thinking.

Middle class that will see cuts to child benefits are ‘the new rich’, who also pay extortionary childcare costs and health insurance and after-school costs, all linked to having a real family. They finance mortgages that sustain the zombie zoo that is our banking sector. Although we did get some long overdue tax relief increases for mortgage interest for properties bought in 2004-2008, the measure is too little and too late to help the younger families pushed against the wall by the other budgetary measures.

Even adjustments in USC threshold came at a cost of applying cumulative basis to the levy on ordinary earners, implying higher tax clawback for the middle classes.

The new household charge, like the USC charge before it is not ring-fenced to cover any specific services the state might provide to the households. It is a pure tax, designed to finance pay increments to the public sector, pensions schemes rewarding early retirements in the civil service, dosh for advisers who help devise these policies of systematic impoverishment the middle class, the wasteful quangoes that the coalition is afraid to tackle.

The reductions of 6,000 via voluntary early retirement are both excessively costly and absurd from the point of view of improving public sector productivity. There are no reforms paths and no value-for-money benchmarks. The reduction target falls on those with more seniority on the job, not on those with lower ability or willingness to perform it. Good workers can be incentivised to leave their jobs, while bad workers can be encouraged to stay put.

And there is not change to the very source of our serial failures to reform Public Sector – the Croke Park agreement. Having delivered no change in the operations of the sector in two years of its existence, this deal has shown itself to be the core obstacle to reforms. But the Government continues to drone on about the inviolability of this compact with the largest vested interest group in the economy.

In the end, the only ‘fundamental change’ in the pages of the first FG/LP Budget is the clear departure from the numerous pre-election promises the coalition showered upon the gullible electorate.

08/12/2011: Budget 2012: Irish Examiner

This is an unedited version of my article for the Irish Examiner (December 8, 2011) covering Budget 2012.

As Peter Drucker once said  “Effective leadership is not about making speeches or being liked; leadership is defined by results not attributes.” By Drucker’s measure of leadership, Budget 2012 is a complete failure.

The Budget was launched with much pomp and circumstance. But in the end, the highly emotive language of ‘change’, ‘long-term thinking’ and ‘fundamental reforms’ served to cover up the return to the failed policies of the previous Government. No real change took place, and no real reforms were launched.

While much of the media attention is focused on the specific headline measures, especially those applying to the poor and the unemployed, very little analysis has been deployed to cover the budgetary dynamics – the very raison d’etre of the current austerity drive. Let’s take a closer look at what the Budget 2012 promises to deliver on the fiscal consolidation front and what it is likely to deliver in reality.

According to the Budget 2012 Ministerial Duet of Brendan Howlin and Michael Noonan, public expenditure reductions envisioned under the budget will amount to €1.4 billion in current spending and €755 million capital investment cut. These are gross savings, that will have second round effects of reduced associated tax revenues and thus their impact on deficit will be lower than envisaged.

Capital savings will come from mothballing a handful of white elephants carried over from the Bertie Ahearn’s era, but these will cost jobs and neglect in existent capital stock. Coupled with changes to CGT and CAT and Dirt, these measures will further depress investment in the economy that continues to experience collapse in this area. Yet, absent investment, there can be no jobs.

Perversely, the FG/Labor government thinks that the only capital investment worth supporting is that in property. The economy based on high value added services and knowledge and skills of its workforce is now fully incentivised for another property boom and fully disincentivised to invest in skills and entrepreneurship. The latter disincentives arising from the upper marginal income tax rate of 53% for all mortals and a special surcharge to 55% on self-employed. Never mind that self-employment is usually the first step toward enterpreneurship and business investment.

Short-termist reductions in one-parent family and jobseekers benefits are counterproductive to supporting large group of single parents in their transition to work. In the place where real reforms toward workforce activation should have been deployed, we now have a “all stick and no carrot” approach.

Health budget is one of the three mammoths of the fiscal ice age, with total spending this year projected to reach €12.83 billion this year, up 10.5% on 2010 levels. Instead of rationalising management systems at the HSE, the area where the bulk of waste resides, the Budget is achieving ‘savings’ by charging middle class insurance holders more for the very same services. A new tax, in effect, is now called ‘savings.

This Cardiffescue approach to accounting for sovereign funding and expenditure flows creates an illusion of something being done about the constantly rising current expenditure, while avoiding challenging operational and structural inefficiencies in public sector spending.

Budget 2012 is a mini-insight into a collapsed capability of a leadership system unable to cope with fiscal pressures and incapable of change.

Nothing else highlights this better than the host of new taxes that accompany the incessant drone of ‘jobs, jobs, jobs’ refrain from the Government.

Take the illogical hikes in VAT and fuel-related taxes. A 2% increase in the cost of shopping in Ireland, coupled with increase in the cost of petrol and diesel and a massive increase in tobacco taxes here will create tripple incentives for consumers to flee Irish retail sector in favour of Northern Ireland and to transact in the Black markets. None of these substitution effects are priced into Government budgetary projections, despite the fact that an error of omitting direct substitution effects of tax increases would have been a fatal one for an undergraduate student of economics.

The entire exercise looks like the repeat of Brian Cowen’s Grand Strategy of waiting until something turns up and rescues us. Thus, behold the rosy budgetary projections for 1.6% GDP growth in 2012, published just days after OECD confirmed its forecast for 1.0% growth and ESRI published its outlook with 0.9% growth projection.

These differences are material. Should the Budgetary assumptions on growth fail to materialize, the cuts and revenue measures envisioned by the Government will fall far short of what will be needed to keep the headline general government debt to GDP ratio at bay.

Karl Marx famously remarked that history repeats itself twice, first as tragedy, second as farce. Based on Irish Governments’ policies over the last 4 years, history ultimately blends into a farcical tragedy once leadership failures become a norm. Welcome to the farce of the long-term fundamental non-reforms of this new Government.

5/12/2011: Exchequer balance: November

In the previous post we looked at the Exchequer receipts. Now, let's take on Exchequer deficit.

Based on data through November 2011, Exchequer deficit stands at €21.37bn in 2011 against the same period 2010 deficit of €13.35bn. However, netting out banks recapitalizations and the sale of stake in BofI, Exchequer deficit on comparable basis was €11.72bn in 11 months of 2011 or €1.63bn below that in 2010.

Factoring in the pensions levy (temporary measure), savings to-date amount to €1.18bn on 2010 period.

Anti-climatic? You bet. Chart below breaks down the 'savings' achieved, with data reported for annualized rate of spend based on January-November 2011 receipts. Voted current expenditure for 2011 rose from €36.39bn in 2010 to €37.59bn in 2011 (data through November for both). Voted capital spending fell from €4.26bn in 2010 to €3.08bn in 2011 (again, data through November). So all of the above 'savings' come from tax increases and capital cuts. Again, when it comes to current spending (Government services), there is no austerity on the aggregate. In fact, there is ever-increasing profligacy. Once again, keep in mind, this does not mean there is no pain. It's just that the pain we have is really in the form of robbing Peter to pay Paul.

05/10/2011: Ireland's 'Sustainable' Deficit through September

With Exchequer results for September (see earlier posts on the details of tax returns and tax burden), here's the update on overall Exchequer deficit for nine months through September 2011.

Overall 2011 Exchequer deficit currently stands at €20.66bn with ex-banks deficit at €12.31bn, implying net reduction in deficit ex-banks of €1.069bn on 2010 levels and absent pensions levy / expropriation 'measure', the deficit reduction achieved through September is now just €612mln.

This hardly represents a significant drop in our overall fiscal imbalances. Cumulative deficits for 2008-present are now at €76.76bn or €42,146 per each employed person or €54,990 per each full-time employed person in Ireland (per Q2 2011 QNHS numbers, not counting Nama debts, Government promisory notes and interest on these soon to be due). 

So a run-of-the-mill family of 2 full-time employed workers is now facing, on top of massive mortgage and Government-monopolized/regulated utilities and services bills, plus gargantuan costs of childcare, education, and health care, an additional debt pile of €109,000 on average, courtesy of the serial failure of the state to control its own spending habits. 

As the 'Green Jersey' crowd would say: "It's all sustainable" cause 'exports will save us' and we have 'jobs programmes' alongside 'homes retrofitting'/'windmills-potential' economy. Sure...

05/10/2011: Tax burden distribution: Q3 2011

Tax profile for September yielded another sign of continued shift in tax burden onto the shoulders of ordinary households, courtesy of:

1. Continued underperformance in corporate tax returns despite booming exports activity
2. Continued graft of household budgets under the USC and levies.

Overall tax burden in Q3 2011 has shifted as follows:

• Q2 2011 share of Income tax receipts in total receipts was 39.52%. Q3 2011 share of Income tax receipts in total receipts was 38.40% against Q3 2010 share of 33.20% and Q3 2007 share of 28.04%
• Q2 2011 share of VAT receipts in total receipts was 33.22%. Q3 2011 share of VAT receipts in total receipts was 33.17% against Q3 2010 share of 36.81% and Q3 2007 share of 37.41%
• Q2 2011 share of Corporation tax receipts in total receipts was 9.32%. Q3 2011 share of Corporation tax receipts in total receipts was 8.52% against Q3 2010 share of 9.86% and Q3 2007 share of 7.39%
• Q2 2011 share of Excise receipts in total receipts was 14.4%. Q3 2011 share of Excise receipts in total receipts was 13.4% against Q3 2010 share of 14.77% and Q3 2007 share of 13.79%
• Stamps, CGT and CAT combined share in Q2 2011 was 2.64% against Q3 2011 share of 5.67% and 4.73% in Q3 2010 and 12.67% in Q3 2007.

Charts to illustrate:

03/05/11: Exchequer receipts for May

Exchequer returns for May are in and the results are pretty much in line with everyone's expectations. On the surface things are improving, but in reality, our fiscal problems are not going away.

Here's the analysis of receipts (analysis of expenditure will follow in a separate post):

• Income tax receipts came in at €5.061bn inclusive of the USC, which is 9.2% above 2009 levels and 19.93% above 2010 level. How much of this is due to USC and how much was substituted away from other sources of revenue, such as health levies etc.

• VAT receipts offer a more direct comparative - VAT receipts stood at €4.867bn in May 2011 slightly down on €4.873bn a year ago.
• Corporate tax receipts - another gauge of economic activity, this time dominated by MNCs - are down: May 2011 level was €599mln, as opposed to €748mln a year ago. Thus Corporate tax receipts are down 19.92% on 2010 and 47.41% on 2009. For comparative purpose, May 2008 receipts were €1.357bn - more than double 2011 levels, while 2007 receipts were €1.484bn.
  

• Excise tax receipts came in at €1.791bn in May, slightly up on May 2010 when they reached €1.704bn, the variation of 5.1% yoy, the receipts are also up on May 2009 - by 2.11%.
• Stamps continue unabated decline - down to €235mln in May 2011 or 3.69% yoy and 20.07% on 2009. To put things into perspective, May 2007 stamps were €1.438bn.

• Capital taxes are really taking a serious dive. CGT is down 25.23% year on year and 56.09% on 2009, reaching just €83mln in May 2011. CAT is down 66.09% yoy and 63.21% on 2009 at €39mln in May 2011. Combined CGT and CAT stood at €1.168bn in May 2007, €744mln in May 2008, €295mln in May 2009, €226mln in May 2010 and €122mln in May 2011. Ouch - that global capex boom of 2010 has clearly passed Ireland untouched and this can only mean one thing - we are into the 4th year of collapsed investment now.
• Lastly, customs duties stood at €98mln in May, 18.1% up yoy

• Total tax receipts, therefore, came in at €12.795bn in 5 months through May 2011. This is 5.6% above the level of tax receipts for the same period of 2010 and 5.43% below 2009.
  

• The Exchequer deficit for the five months through May 2011 now stands at €10.231bn inclusive of €3.060bn promisory notes capital injections to INBS and Anglo in March. May 2010 deficit was €7.867bn (ex-banks) and 2009 deficit for the period was €10.588bn.
  

So on the net, tax receipts suggest to me that economic activity has stalled. All comparable tax heads across years relating to economic growth - corporate tax, VAT, capital taxes - are performing either in line with 2010 or below. The only significant increases in tax heads are where new taxes were implemented and some of these are in effect transfers from non-tax receipts side, implying that increase in tax receipts via USC, for example, includes transfer of health levy which has an effect of increasing expenditure side.

Economics 31/10/10: €15bn in cuts will not be enough

This is an unedited version of my article in yesterday's Irish Examiner.

The last three days have seen dramatic volatility and extreme upward pressures on Irish, as well as Greek and Portuguese Government bonds. Briefly, early on Thursday morning, Irish 10 year bonds have set a new all-time record with yields reaching North of 7.07%. Much of these changes have been driven by the budgetary news from all three countries.

First, Greece and Portugal have shown the signs of increasing uncertainty about projected tax revenues and ability to deliver on ambitious austerity programmes.

Then, Ireland came into the line of fire.

Back in December 2009, the Government outlined a plan for piecemeal cuts in deficits over 2011-2014 that added up to a gross value of €6.5 billion (with at least €3 billion in tax measures). This was supposed to get us from having to borrow €18.8 billion in 2010 to a deficit of ca €9 billion in 2014. All courtesy of robust economic growth of more than 4% per annum penned into the Department of Finance rosy assumptions for 2011-2014.

This week, the Minister for Finance had to come down from the lofty heights of the “now you see the deficit, now your don’t” estimates by his Department. Courtesy of continuously expanding unemployment, declining tax revenues, plus ever-growing interest bills on Government debts, the headline gross savings target for 2011-2014 has been increased to €15 billion.

Dramatic as it might be, this figure is still far from being realistic – the fact that did not escape the bond vigilantes and some analysts. More than that, it represents the very conservative ethos of the Department of Finance and the Government that got us into a situation where three years into the crisis Ireland is still light years away from actually doing anything serious about correcting its fiscal position.

Let me explain.

First of all, take the actual announced plans for cuts in public spending. Over two months ago I have argued in the media that to get us onto the track toward reaching the goal of 3% to GDP deficit ratio, we need ca €7 billion in cuts in 2011, followed by €5 billion in 2012. The grand total of gross deficit reductions from now through 2014 adjusting for the effects of these cuts on our GDP and unemployment, plus steeper cost of financing Government debt, excluding new demand for funding from the banks is not the €15 billion, but €19-20 billion. In other words, once fiscal stabilizers (automatic clawbacks on Government spending) are added in, to achieve 3% target requires more than 33% deeper cuts than Minister Lenihan announced this Wednesday.

The markets know this. Just as they know that given the Government record to date there is very little chance that even €15 billion in cuts will be delivered. This mistrust in Government’s capacity to actually administer its own prescription is manifested most explicitly by the Croke Park agreement that effectively put one third of the current public expenditure out of reach of Mr Lenihan’s axe. It is further highlighted by the fact that this Government has failed to
substantially reduce public spending bills from 2008 through today. Back in 2008, net government spending stood at €55.7 billion. This year, we are likely to post a reduction of just €2.4 billion on 2008, all of which is accounted for by cuts in capital investment programmes.

Third, the markets also understand long-term implications of deficits. Even if the Irish Government manages to bring 2014 deficit close to 3% target, our Sovereign debt will grow by over €5 billion in that year. At this pace, Irish Exchequer is likely to be on the hook for a debt to GDP ratio of 125% by the end of 2014 reaching over 140% if expected additional banks liabilities materialise in 2011-2014. And all of this after we account for Mr Lenihan’s €15 billion cuts planned for 2011-2014.

Fourth, Government budgetary arithmetic falls further apart when one considers economics of the proposed deficit reduction measures. So far, the Government has planned for €3 billion increase in taxes on top of tax revenues gains due to rosy economy growth expectations between now and 2014. €15 billion target announcement raises this most likely 2-fold.

I have severe doubts that this economy has capacity left for tax revenue increases. Signs are, households are struggling with personal debts and their disposable after-tax incomes are barely sufficient to cover day-to-day spending. Credit card debts and utilities arrears are rising, savings are falling – all of which points to growing stress. Weakening sterling is pushing more retail sales out into the North just in time for Christmas shopping season. Cash economy – judging by
anecdotal evidence and corporate tax revenue in light of booming exports sectors – is expanding. The tax base is shrinking due to unemployment, underemployment and falling earnings.

Again, any rational investor will look at this as the evidence that the Government has run out of capacity to tax itself out of the fiscal corner.

But wait, this is only half of the story. The other half relates to the banking side of consumer affairs. In 2011 we can expect significant increases in mortgages costs as Irish banks once more go rummaging through the proverbial couch in search for a new injection of pennies. Bank of Ireland’s bond placing this week, with a yield of 5.4%, suggests a bleak future for lending markets. Any increases in mortgages costs will hike Government expenditure (by raising the cost of interest subsidies), hammer revenues (by reducing household consumption) and trigger new demands from banks for capital (to cover defaulting mortgages).

None of which, of course, appears to be attracting much attention from the Upper Merrion Street. At least judging by the budgetary projections released so far. At the same time, these numbers are impacting our long term growth potential and increasing the probability that Ireland, in the end, will have to restructure its public debt.

This week, similarly brutal arithmetic concerning Greek fiscal situation has prompted Professor Nouriel Roubini to make a dire prediction of the inevitable default by Greece on its Sovereign debt. Given Minister Lenihan’s recent statements and his boss’ staunch unwillingness to scrap the Croke Park agreement, it is hard to see how the forthcoming budgetary framework for 2011-2014 can get us out a similar predicament.

Economics 9/10/10: Path to reforms

This is an unedited version of my column in October 2010 Village magazine:

The events of the recent months have clearly shown that the current policies path leads to a continued status quo. This is the sole and unavoidable conclusion currently being reached by all independent analysts and commentators on either side of ideological divide. It is a non-partisan concern that informs the rising tide of discontent within the Fiana Fail and Green parties, recent changes within Fine Gael, positions of all other opposition parties, and indeed the entire electorate – as reflected in the opinion polls.

At this junction, there is no longer any need to enlist numerous factual manifestations of this reality – they are all around us, expressed by politicians and ordinary citizens. The tide of international opinion concerning the prospects for Ireland should the current policies persist has turned against us. The IMF (since April 2010), the EU Commission (since May 2010), markets makers and participants – all have put out challenging assessments of Irish Government official projections for the recovery. Irish banks – far from being repaired by Nama – just keep asking for more taxpayers bailouts with a frightening regularity of a drug addict returning to a methadone dispensary.

It is, therefore, time to challenge the existent policy consensus. It is the time to put forward proposals for reforms, to debate real alternatives and to provide those political parties and individual politicians willing to champion change with new ideas to energise the electorate.

Here is my own set of ideas – the offshoot of the ongoing ‘Manifesto Project’ I have decided to run on my blog.

To preclude any ‘kill the messenger’ objections, allow me to state that the following is just a set of policy reforms proposals that any party or politician are welcome to adopt in part or as a whole and put to the electorate.

Fine print aside, let me outline the backdrop to the policies – the backdrop of the specific crises we face as a nation. The Irish economy has been hit by a Perfect Storm that combines:

• a deeply rooted crisis in public finances;
• a structural collapse of the banking sector;
• an unemployment crisis stemming from the collapse of employment and jobs creation;
• a competitiveness crisis that is not limited to wages and labour costs, but the cost of living and doing business;
• the crisis in the quality and efficiency of domestic services - dominated and restricted by the excessive market power of the incumbent state-owned and state-regulated oligopolies.
  

These crises have been exacerbated by the Government policies since 2008. These policies have saddled ordinary families and individuals (regardless of whether they work in public sector or private sector, employed or unemployed, young or old) with the full cost of stabilizing vested interests and elites. This manifested itself in rising tax burden, falling provision of public services, lack of reforms in banking and public sectors. The resulting devastation of private entrepreneurship and businesses, contracting investment and availability of operating capital, a catastrophic lack of confidence in economy are the corollaries. The accompanying spikes in unemployment and businesses failures, and a hike in precautionary savings are additional manifestations of these.

The current crisis has clearly shown that the corporatist state - where vested interests, including Political, Business, Social and Environmental collude with the state to set economic and social preferences and priorities - is morally, politically and economically bankrupt. I believe that Irish democracy cannot be surrendered to the vested interests, no matter how broadly-based or highly minded they might be.

There are only two ways forward from this status quo. The first is the path we are travelling – the path of a generations-long and painfully deep crisis of stagnation and declining standards of living. The second one is a path of structural reforms aimed at realigning the current political system to serve the interests of the ordinary citizens and residents of this land.

Such a reform is also a disruptive and a painful one. It can only be achieved by creation of an alternative to the existent policies and structures.

In my view, the agenda for reform should champion the rights of ordinary citizens – consumers and taxpayers – to counterbalance existent system that promotes the interests of the vested pressure groups and elites. It must, therefore, include changes to the state political and governance systems, to the principles governing provision of the public services, to the systems of our private markets and, lastly, to the rebuilding of our financial system. For the sake of brevity, I will focus on the first two objectives.

Changes to political and governance systems

The core changes to the political and governance systems must put transparency and accountability principles of governance to the front. This will require creation of automatic systems of disclosure and control that are not subject to tampering by individual office holders. It also requires ending Social Partnership, delegating all authority, and the responsibility, for developing, implementing and monitoring economic and social policies solely to the Legislative and Executive branches of the State.

In terms of transparency, default setting must be public disclosure and unrestricted free access to all data not subject to the secrecy of the state considerations. Sensitive data should be published with exclusion of sensitive information and identifiers, until the time when it can be published in full.

Accountability requires that performance and productivity metrics should be designed and refined through experience for all branches of public sector. All earnings in the public sector should be linked to individual productivity.

Local authorities must be reformed, reducing the overall number of local authorities to, say, 7, covering: West & North West, South, Greater Cork, Greater Dublin, Greater Limerick, Greater Galway and Border & Midlands.

Seanad should be given real powers of the upper chamber and be elected directly by the people of Ireland, with equal representation for each of the 7 geographic region outlined above. Dail should be reformed by reducing the number of TDs and to cover both local and national mandates. The former will preserve a number of seats allocated locally, while the latter will allocate some proportion of seats based on national polls.

Both chambers along with the Executive should accord no privilege to their members that will put them above the ordinary citizens of the state. This will require abolition of unvouched expenses, enforcement of the Benefit-in-Kind principle of taxation and removal of the un-provisioned pensions entitlements.

All state purchasing should be carried on-line, made public and transparent and subject to annual audits by independent external board.

State services reforms should include the separation of provider of services from the supplier of services. This means that the Irish state should aim to be a purchaser of services, e.g. health care and care for the disabled, for those who cannot afford them. But the State should not own service providers. Instead, public services can be supplied by mutual, private for-profit or non-profit providers. Transition to such an arrangement will require significant training and logistics support for current employees.

Higher education should be based on fees set by universities and overseen by the Department for Education. The State should set up (with participation of charities and other private agencies) a number of funds that will provide financial aid to students based on need (with an objective of creating an equal opportunity for all qualified students to undertake studies) as well as merit (with an objective of rewarding real achievement). A further system of state-guaranteed student loans should be set, subject to independent oversight and audit.

The state should focus significant resources on the need to improve and strengthen provision of universal early, primary and secondary education in order to achieve maximum equality of opportunity for the children independent of the social and/or economic status of their parents.

Changes to fiscal systems

There is a need to rebalance the burden of taxation in the economy to deliver on three core objectives. First, the taxation system should be fair, transparent and protected from abuse. Second, it should involve participation from all agents in the economy. Third, it should not attempt to pick winners and leave in its wake the losers.

With these objectives in mind, I would suggest adoption of a flat rate income tax system with single personal standard deduction plus a child allowance, potentially linked to the level of unemployment benefits. All discretionary tax breaks should be removed, including any tax incentives for farming and any other economic activity. Non-residency limits should be set to reflect the needs of Irish citizens working abroad and commuting home – e.g. a limit of maximum 124 days annually to cover all weekends plus standard vacation. A move to a single rate income and corporate tax can also be used to deliver full equalization in taxation between workers, entrepreneurs and businesses.

Existent Byzantine system of indirect taxes and levies is to be simplified with a view that all such charges should be based on user fee principle and be fully ring-fenced to finance provision of services covered and mitigation of adverse externalities (e.g. environmental degradation etc) generated by these services.

There is a need for having strong, but life-time capped, welfare provisions. This will provide a sufficient insurance cover for all able-bodied working age adults in the country to a cumulative maximum of 7 years over the life-time. Provision of welfare supports to those unable to work due to health or family circumstances (e.g caring for a disabled relative etc) should be exempt from life-time limits.

The basic social insurance pension reform should ensure that the elderly are covered by s sufficient safety net, but the working-age individuals are encouraged to privately invest in their pensions.

Wages for politicians and senior public servants are to be tied to the National Disposable Income in order to create a direct link to the overall levels of welfare in the society (including that of the unemployed and socially vulnerable). There should be no bonuses or discretionary pay and all public sector pensions should be converted to a Defined Contribution system with generous matching from the employer.

Government spending should be benchmarked to a specific range of GDP (for example – 35-38%). A balanced budget should be maintained over every 3-year period. This allows for small emergency spending boosts in recessions, but prevents spending sprees before the elections and other abuses of the public funds.

All quangoes, except those with immediate independent oversight authority (e.g FR and Competition Authority) are to be abolished and their functions transferred to the respective departments. Responsibility for governance and management must rest with the Government.

There is a need for a fully transparent tax on land values (LVT) in order to finance public infrastructure investments and provision of local services, including environmental protection and improvements. I would suggest that the revenue from LVT should be split 50:50 between central & local authorities. Local authorities should be allowed to vary their rate of LVT within reasonable parameters. For example, if LVT is levied at 1% pa, the local authority can be allowed to charge between 0.25% and 0.5% as it deems suitable, while the central government will collect 0.5%.


After three years of ever-deepening crises in political, economic, and banking spheres, Ireland now faces a stark choice between two alternatives. We can, as a nation, elect to either follow the status quo path that leads to a stagnation. Alternatively, we can choose to challenge the existent policy consensus to champion the rights of ordinary citizens – consumers and taxpayers.