I will be blogging on the latest story from the 'emerging' economy of Ireland - emerging, allegedly from the recession - in a few hours time, so stay tuned. But for now, while cooking the dinner for my 3-year old let me bring to you the latest news from the 'Knowledge' economy Ireland.
Now, as a researcher I must admit, I know first hand that electronic editions of scientific journals are the sole source of published refereed research material I consult on a daily basis. Physical copies are too hard to use in modern research and archiving. And they arrive with a significant delay. And are environmentally less sustainable than e-versions.
Thus, electronic journals access is a must for any modern research in any field.
And here comes a bomb: Access to e-journals might be dropped by Irish Universities in 2010. Courtesy of the Science and Research strategy from the Government that just a week ago was science and research as the main strategy for our economic revival.
Here are the details from a leaked memorandum... I suppress personal names...
"Dear Fellows and Fellows Emeriti,
This note has been prepared by Dr F.B. of ... (Academic Department).
...alerting all interested parties including students that the Irish Government is about to burn the books. The universities of a knowledge based society must have access to electronic journals.
signed DMcC
Chairman of ... (academic body)
Dear All
Last night the Librarian ...briefed the Fellows on the current state of play with regard to the IREL/ on-line journal access service.
The position is not good and could have serious implications for staff and students at all Irish universities.
Briefly and from memory, the facts are as follows.
The service costs about €8-€8.5 million a year. Up to now, about €4.5m of this has been paid by SFI for science technology and medicine titles, but SFI have always said that their commitment was in the form of seed money and are now withdrawing their support. The HEA, which paid €4 million for humanities and social sciences titles are also stretched. But they may come up with some money. The worst case scenario may be €2 million, the best €3.5 million all from the HEA.
The IUA have been approached about bridging the gap, but either cannot or will not provide the ~€5+ million needed.
...In the short end of the medium term it will cripple research activity and undermine teaching in most areas throughout the universities...
Signed: FB"
Let me give you my quick 5-cents on this. E-journals access in Ireland is already relatively restricted compared to the US & UK universities. Cutting what we do have access to will simply mean plunging our science into the dark age of physical print, slow mail and distant archiving. In the age when Google and Microsoft are racing each other to put libraries on line, and IDA is promoting Ireland as a knowledge and innovation campus for global business, the savings of some €5-6 million at the cost of disconnecting Irish science and students from the rest of the world is just mad.
Thursday, December 17, 2009
Wednesday, December 16, 2009
Economics 16/12/2009: Budget 2010 Analysis
As promised - here is my more in-depth view of the Budget 2010. This is an un-edited version of the Sunday Times (13/12/2009 issue) article.
After weeks of leaks, speculations and over-dramatized Partnership talks, this week Brian Lenihan has delivered the final move in the Government v Economy chess game. Lisbon, Nama and the Budget 2010, we were promised, were all that the Cabinet had to do in 2009 in order to manage the nation through the worst economic storm in its history.
In its last stance of 2009 the Government has reluctantly and belatedly recognised the reality of the crisis we face. Thus, the Budget has done just about enough to delay our descent into the nightmarish company of Greece. For this Brian Lenihan deserves praise.
A Chance at Reforms - Missed
But the net outcome of the Budget 2010 is that we are now entering the third year of recession with virtually no reforms that can support future growth.
There is no real stimulus to the rapidly contracting private sector. Cost efficient and much needed export credits are not in and neither are foreign exchange risk supports – the two cornerstone policies for sustaining exports, especially for indigenous companies.
Taxes remain regressively skewed toward ‘soaking the rich’, by which the Government means the middle class. As in 2009, the burden of taxation in 2010 will be borne squarely by those in the most productive employment with above average skills and aptitude. If a combination of consumption and income taxes accounted for under 68.9% of total tax revenues in 2009, by the end of the next year these taxes will account for 70.3% of total tax take.
Today, some 40% of Irish households deliver 90% of non-corporate dosh for the Exchequer. By the end of 2010, given current trends in unemployment and wages, this ‘honor’ will befall just 37% of households. This is hardly a sign of resilience in the economy.
In 2009, 4% of top earners – many of whom are wealth and jobs creating entrepreneurs and business owners – pay 50% of total income tax. Next year, we are risking to hike this share to 55%. This is hardly a sign of the economy promoting jobs growth.
Should Ireland-based multinationals reduce their transfer pricing activities in 2010 – a prospect consistent with a possibility of a restart of new investment cycle in Asia and the US – an even greater share of the burden of paying for public sector expenditure will be falling onto the shoulders of rapidly thinning minority who still have higher value-adding jobs.
Cuts to unemployment benefits in excess of reductions to social welfare imply that Budget 2010 only strengthened the incentives to transfer from unemployment benefits roster onto social welfare for anyone in long-term unemployment. This will lead a decline in labour force participation rates throughout 2010. Paradoxically this will result in lower official unemployment but a higher cost to the taxpayers.
Uncompetitive Costs Base - Remains Intact
The Budget has done nothing to address the issue of uncompetitive costs imposed onto businesses by our state-owned utilities and suppliers of services. It also did nothing to address excessively high local authorities’ charges and rates.
A net positive of the Budget was honorable mentioning of the internationally trading financial services. However, it remains to be seen what exactly will be done on this front.
Brian Lenihan missed another chance of reforming our business-crippling quangoes. In doing so, the Budget failed to recognize the real damages state and local authorities’ costs inflation poses to the survival of both domestic and exporting companies. If anything, the Budget further expanded the Fas empire – an unchecked state behemoth that yields dubious benefits and wastes hard cash in truckloads. The policy, it seems, is to shove more unemployed into perpetual training programmes with little hope of gainful employment in the foreseeable future.
A failure to introduce university fees means that our education system will spend another year mired in funding uncertainty. It will also mean that many graduating students will desperately cling to education for another 1-2 years. For some, this is a productive opportunity to invest further into their future skills. For many, however, it is an unnecessary extension of studies that will not lead to any meaningful skills augmentation but will consume precious resources. Classroom sizes will rise, international rankings will be threatened, but we will increase output of devalued in quality degrees, certificates and diplomas.
Retaining prohibitively high rates on PRSI, health and income will undoubtedly keep jobs growth on ice. Other, so-called soft labour costs, could have been tackled through simple measures, such as for example abolishing risk equalization scheme in health insurance to lower the costs of employees benefits. These opportunities were missed.
Banking Sector Costs - Unpriced
There are no provisions whatsoever for the banking sector in the Budget. Yet, two future developments with respect to the sector are now virtually assured for 2010.
First, we are likely to see significant demands from the banks for new capital. My estimates suggest that our six banking institutions will need €9.7-12.4 billion in capital post-Nama. If even a half of this falls in 2010, Budget deficit risks reaching 14.5% of GDP. The only way to avoid such a debacle will be to use Nama as a vehicle for issuing even more State-guaranteed bonds. This will make Ireland even more dependent on ECB’s good will.
Second, the Minister has introduced a set of new conceptual frameworks for using Nama to apply pressure on lenders to increase funding for SMEs and distressed households. All are ambivalent, although well-meaning, and all are regressive when it comes to securing stable future for our banking system. None will actually expand real lending.
Structural Deficit - Unaddressed
The Budget has failed to significantly tackle our structural deficit. The pre-Budget projections suggested that Brian Lenihan was facing €14-16 billion worth of structural deficit. The Budget promises to reduce this number to €10-12 billion. Even if this comes to pass the Government is now facing two stark choices. One – hope for a spectacular recovery from the crisis with an average rate of growth in the economy of over 5% per annum over the next 5 years. In this case, the Government will need to cut some €4-6 billion more in 2011 and 2012. Two – take the medicine and cut at least €8 billion in 2011. We have clearly opted for the first option to the detriment of the future growth.
Carbon Tax - More of the Same
Carbon tax introduction is a purely revenue raising and economically distortionary measure. In theory, carbon tax should alter environmentally harmful behavior of consumers and producers, pushing them to adopt cleaner technologies and habits, thus gradually reducing carbon tax revenue. Alas, in the case of Ireland, years of poor planning and zoning, successions of absurd spatial development plans and politically motivated capital investment programmes have resulted in a situation where many Irish consumers and producers have no room for altering their choices. Living and working in the Greater Dublin area often means no alternative but to use a car to commute to work, or even to visit grocery stores. The same can be said about all other parts of the country. Our family structures – with high fertility and dispersed households – mean that many of us have no choice but to do school runs in a car, to undertake international air travel and to deal with employment patterns that do not favor efficient time management that can be conducive to reducing emissions. Ireland’s shambolic (in quality and scope) public transport system simply compounds the lack of choices.
Hence, despite its ‘Green Policy’ label, carbon tax is nothing more than an extension of an income tax with all the associated disincentives when it comes to higher value-added jobs creation in Ireland. Irony has it, transforming this economy into more human capital intensive and thus environmentally cleaner ‘knowledge’-based one is an objective poorly served by the carbon tax introduction.
On the net, Budget 2010 turned out to be more a whimper than a bang. Whether or not it will pave the way for economically more constructive policies in 2010 remains to be seen. But the task left unfinished is daunting – Ireland will need to cut some €10-12 billion more off the Exchequer annual bill in 2011 through 2012. So far, we’ve only made a first step in a longer journey.
Box out:
In light of this week’s events, it worth quickly revisiting one aspect of our budgetary trends – their frightening stickiness to historic targets that runs contrary to any change in the underlying economic realities. Looking at Budget 2007 estimates, one gets a sense of history playing a cruel trick on Department of Finance forecasting section. Back then, the Department projected a steady rise in spending from ca €45.5 billion to ca €58 billion in 2009. In line with this, the revenue was expected to rise from ca €47 billion in 2006 to roughly €58 billion in 2009. What actually happened between then and now is that the expenditure has shot up, settling at above €60 billion in 2009, while revenue has fallen to below €35 billion. Thus, Department for Finance forecasters were almost 97% right on the expenditure forecast side, but some 60% wrong on their revenue predictions. This implies an error swing of some160 points for the Department of Finance. A random error would be consistent with a 50-point range between two calls. In household economics such accuracy of forecasting could earn one a trip to a debt court. In public sector it guarantees the job for life and a nice tidy pension at the end of an errors-prone journey. Accountability is not really a strong point of Ireland Inc.
After weeks of leaks, speculations and over-dramatized Partnership talks, this week Brian Lenihan has delivered the final move in the Government v Economy chess game. Lisbon, Nama and the Budget 2010, we were promised, were all that the Cabinet had to do in 2009 in order to manage the nation through the worst economic storm in its history.
In its last stance of 2009 the Government has reluctantly and belatedly recognised the reality of the crisis we face. Thus, the Budget has done just about enough to delay our descent into the nightmarish company of Greece. For this Brian Lenihan deserves praise.
A Chance at Reforms - Missed
But the net outcome of the Budget 2010 is that we are now entering the third year of recession with virtually no reforms that can support future growth.
There is no real stimulus to the rapidly contracting private sector. Cost efficient and much needed export credits are not in and neither are foreign exchange risk supports – the two cornerstone policies for sustaining exports, especially for indigenous companies.
Taxes remain regressively skewed toward ‘soaking the rich’, by which the Government means the middle class. As in 2009, the burden of taxation in 2010 will be borne squarely by those in the most productive employment with above average skills and aptitude. If a combination of consumption and income taxes accounted for under 68.9% of total tax revenues in 2009, by the end of the next year these taxes will account for 70.3% of total tax take.
Today, some 40% of Irish households deliver 90% of non-corporate dosh for the Exchequer. By the end of 2010, given current trends in unemployment and wages, this ‘honor’ will befall just 37% of households. This is hardly a sign of resilience in the economy.
In 2009, 4% of top earners – many of whom are wealth and jobs creating entrepreneurs and business owners – pay 50% of total income tax. Next year, we are risking to hike this share to 55%. This is hardly a sign of the economy promoting jobs growth.
Should Ireland-based multinationals reduce their transfer pricing activities in 2010 – a prospect consistent with a possibility of a restart of new investment cycle in Asia and the US – an even greater share of the burden of paying for public sector expenditure will be falling onto the shoulders of rapidly thinning minority who still have higher value-adding jobs.
Cuts to unemployment benefits in excess of reductions to social welfare imply that Budget 2010 only strengthened the incentives to transfer from unemployment benefits roster onto social welfare for anyone in long-term unemployment. This will lead a decline in labour force participation rates throughout 2010. Paradoxically this will result in lower official unemployment but a higher cost to the taxpayers.
Uncompetitive Costs Base - Remains Intact
The Budget has done nothing to address the issue of uncompetitive costs imposed onto businesses by our state-owned utilities and suppliers of services. It also did nothing to address excessively high local authorities’ charges and rates.
A net positive of the Budget was honorable mentioning of the internationally trading financial services. However, it remains to be seen what exactly will be done on this front.
Brian Lenihan missed another chance of reforming our business-crippling quangoes. In doing so, the Budget failed to recognize the real damages state and local authorities’ costs inflation poses to the survival of both domestic and exporting companies. If anything, the Budget further expanded the Fas empire – an unchecked state behemoth that yields dubious benefits and wastes hard cash in truckloads. The policy, it seems, is to shove more unemployed into perpetual training programmes with little hope of gainful employment in the foreseeable future.
A failure to introduce university fees means that our education system will spend another year mired in funding uncertainty. It will also mean that many graduating students will desperately cling to education for another 1-2 years. For some, this is a productive opportunity to invest further into their future skills. For many, however, it is an unnecessary extension of studies that will not lead to any meaningful skills augmentation but will consume precious resources. Classroom sizes will rise, international rankings will be threatened, but we will increase output of devalued in quality degrees, certificates and diplomas.
Retaining prohibitively high rates on PRSI, health and income will undoubtedly keep jobs growth on ice. Other, so-called soft labour costs, could have been tackled through simple measures, such as for example abolishing risk equalization scheme in health insurance to lower the costs of employees benefits. These opportunities were missed.
Banking Sector Costs - Unpriced
There are no provisions whatsoever for the banking sector in the Budget. Yet, two future developments with respect to the sector are now virtually assured for 2010.
First, we are likely to see significant demands from the banks for new capital. My estimates suggest that our six banking institutions will need €9.7-12.4 billion in capital post-Nama. If even a half of this falls in 2010, Budget deficit risks reaching 14.5% of GDP. The only way to avoid such a debacle will be to use Nama as a vehicle for issuing even more State-guaranteed bonds. This will make Ireland even more dependent on ECB’s good will.
Second, the Minister has introduced a set of new conceptual frameworks for using Nama to apply pressure on lenders to increase funding for SMEs and distressed households. All are ambivalent, although well-meaning, and all are regressive when it comes to securing stable future for our banking system. None will actually expand real lending.
Structural Deficit - Unaddressed
The Budget has failed to significantly tackle our structural deficit. The pre-Budget projections suggested that Brian Lenihan was facing €14-16 billion worth of structural deficit. The Budget promises to reduce this number to €10-12 billion. Even if this comes to pass the Government is now facing two stark choices. One – hope for a spectacular recovery from the crisis with an average rate of growth in the economy of over 5% per annum over the next 5 years. In this case, the Government will need to cut some €4-6 billion more in 2011 and 2012. Two – take the medicine and cut at least €8 billion in 2011. We have clearly opted for the first option to the detriment of the future growth.
Carbon Tax - More of the Same
Carbon tax introduction is a purely revenue raising and economically distortionary measure. In theory, carbon tax should alter environmentally harmful behavior of consumers and producers, pushing them to adopt cleaner technologies and habits, thus gradually reducing carbon tax revenue. Alas, in the case of Ireland, years of poor planning and zoning, successions of absurd spatial development plans and politically motivated capital investment programmes have resulted in a situation where many Irish consumers and producers have no room for altering their choices. Living and working in the Greater Dublin area often means no alternative but to use a car to commute to work, or even to visit grocery stores. The same can be said about all other parts of the country. Our family structures – with high fertility and dispersed households – mean that many of us have no choice but to do school runs in a car, to undertake international air travel and to deal with employment patterns that do not favor efficient time management that can be conducive to reducing emissions. Ireland’s shambolic (in quality and scope) public transport system simply compounds the lack of choices.
Hence, despite its ‘Green Policy’ label, carbon tax is nothing more than an extension of an income tax with all the associated disincentives when it comes to higher value-added jobs creation in Ireland. Irony has it, transforming this economy into more human capital intensive and thus environmentally cleaner ‘knowledge’-based one is an objective poorly served by the carbon tax introduction.
On the net, Budget 2010 turned out to be more a whimper than a bang. Whether or not it will pave the way for economically more constructive policies in 2010 remains to be seen. But the task left unfinished is daunting – Ireland will need to cut some €10-12 billion more off the Exchequer annual bill in 2011 through 2012. So far, we’ve only made a first step in a longer journey.
Box out:
In light of this week’s events, it worth quickly revisiting one aspect of our budgetary trends – their frightening stickiness to historic targets that runs contrary to any change in the underlying economic realities. Looking at Budget 2007 estimates, one gets a sense of history playing a cruel trick on Department of Finance forecasting section. Back then, the Department projected a steady rise in spending from ca €45.5 billion to ca €58 billion in 2009. In line with this, the revenue was expected to rise from ca €47 billion in 2006 to roughly €58 billion in 2009. What actually happened between then and now is that the expenditure has shot up, settling at above €60 billion in 2009, while revenue has fallen to below €35 billion. Thus, Department for Finance forecasters were almost 97% right on the expenditure forecast side, but some 60% wrong on their revenue predictions. This implies an error swing of some160 points for the Department of Finance. A random error would be consistent with a 50-point range between two calls. In household economics such accuracy of forecasting could earn one a trip to a debt court. In public sector it guarantees the job for life and a nice tidy pension at the end of an errors-prone journey. Accountability is not really a strong point of Ireland Inc.
economics 16/12/2009: Unemployment and Jobs Destruction in Ireland
QNHS data is out for Q3 2009 and guess what... well, nothing new, really. Official unemployment rate is now 12.4% - just 10bps away from the Live Register-based Q3 average estimate of 12.5%. The cheerleaders are shouting 'A slowdown in the rate of growth in unemployment! Happy times ahead!'
But the real world data shows much darker picture. The biggest problem with unemployment is how you define it. If a person would like to have a job but is so discouraged by the labor market that he or she decide to stop looking for one, then they are not in the labor force and thus are not unemployed. Similarly, if a person had a job and upon losing it moves out of the country is search of better prospects elsewhere, then they are no longer unemployed. And if a person, disheartened by the prospect of long-term unemployment simply stops answering CSO phone calls, then she is also not unemployed.
But in the real world, all of these people are unemployed. All of these people's lives are lost in the economy even if they are not measured by the CSO.
This is not to criticise the ways in which CSO collects data. That is not the point. The point is that we need to understand just how many jobs were lost and not regained during the current crisis. And this we can glimpse from the QNHS data.
In Q3 2009 total employment fell 40,200 on Q2 2009. In 12 months to the end of Q3 2009, Irish economy shed net of 183,400 jobs - the rate of loss of 8.8% or the highest rate of jobs destruction on the record. In the course of this recession, we have now lost some 236,300 jobs.
Let's do the maths. The above losses imply:
And the problem of falling labor force is a sticky one. The overall participation rate has contracted from 64.2% in Q3 2008 to 62.5% in Q3 2009.
Much of the fall in the labor force is being driven by:
And so on the net, CSO data shows that while unemployment climbed by roughly 120,000 over the last 12 months, the actual fall in employment was 185,000 or 65,000 greater. It is the net loss of jobs figure that is more telling of the realities of Irish unemployment than the headline unemployment rate.
Finally, courtesy of Ulster Bank - a table showing that unlike in earlier QNHS releases, Q3 saw industry displacing construction sector as the main source of jobs destruction:
This is another batch of bad news for anyone who, like our Minister for Finance, believes that things are past their worst. In addition, notice that wholesale & retail trade is about to take over construction as the second greatest contributor to unemployment. Wait until Christmas sales are over for that...
But the real world data shows much darker picture. The biggest problem with unemployment is how you define it. If a person would like to have a job but is so discouraged by the labor market that he or she decide to stop looking for one, then they are not in the labor force and thus are not unemployed. Similarly, if a person had a job and upon losing it moves out of the country is search of better prospects elsewhere, then they are no longer unemployed. And if a person, disheartened by the prospect of long-term unemployment simply stops answering CSO phone calls, then she is also not unemployed.
But in the real world, all of these people are unemployed. All of these people's lives are lost in the economy even if they are not measured by the CSO.
This is not to criticise the ways in which CSO collects data. That is not the point. The point is that we need to understand just how many jobs were lost and not regained during the current crisis. And this we can glimpse from the QNHS data.
In Q3 2009 total employment fell 40,200 on Q2 2009. In 12 months to the end of Q3 2009, Irish economy shed net of 183,400 jobs - the rate of loss of 8.8% or the highest rate of jobs destruction on the record. In the course of this recession, we have now lost some 236,300 jobs.
Let's do the maths. The above losses imply:
- €13, 450 million in lost economic activity in Ireland
- €1,500 million in lost income tax to the Exchequer (using lower rate and no income levies)
- €3,750 million in lost consumption
- €675 million in lost VAT receipts, and so on
And the problem of falling labor force is a sticky one. The overall participation rate has contracted from 64.2% in Q3 2008 to 62.5% in Q3 2009.
Much of the fall in the labor force is being driven by:
- long term unemployment pushing people into permanent welfare traps;
- exits from the workforce by students who are at a risk of completing new education and not finding new jobs afterward (for 15-19 yo participation rate has fallen to 22.7% from 30.8% a year ago, while for 20-24 yo group it stands at 72.9% as opposed to 77.4% a year ago), and
- emigration.
And so on the net, CSO data shows that while unemployment climbed by roughly 120,000 over the last 12 months, the actual fall in employment was 185,000 or 65,000 greater. It is the net loss of jobs figure that is more telling of the realities of Irish unemployment than the headline unemployment rate.
Finally, courtesy of Ulster Bank - a table showing that unlike in earlier QNHS releases, Q3 saw industry displacing construction sector as the main source of jobs destruction:
This is another batch of bad news for anyone who, like our Minister for Finance, believes that things are past their worst. In addition, notice that wholesale & retail trade is about to take over construction as the second greatest contributor to unemployment. Wait until Christmas sales are over for that...
Tuesday, December 15, 2009
Economics 15/12/2009: Denmark cuts 2010 deficit by almost 50%
An interesting way of dealing with deficits: Denmark shows the way to lower taxes and deferred tax liabilities, while restructuring public expenditure away from direct spending to more pro-business, growth oriented spending. Read the details here.
Another interesting key fact: "The general government budget balance is estimated to decrease by DKK 154bn from 2008 to 2010. This corresponds to a reduction of 8.9 per cent of GDP of which one third reflects the loosening of fiscal policy... Measured by the fiscal effect fiscal policy is estimated to stimulate economic activity by 1.0 per cent of GDP in 2009."
So run this by me again? Cut balance by 8.9%, of which roughly 3% of GDP goes to fiscal spending to generate growth of ca 1%. suggested multiplier? Lowly 30cents on the euro... or rather DKK... not exactly a big bang for a buck, given that over 5 years interest alone would eat up some 15.8 cents out of this amount.
Another crucial bit: "The deficit on the central government net balance, which is essential for the central government debt, is estimated at DKK 141½bn in 2009 and 74½bn in 2010." Implied cut in deficit 2009 to 2010 is 49.6%. Irish Government approach to the cuts (see my estimates here) is to cut 15.2% of the deficit (if no banks recapitalization is taken into the account) or under 1% reduction (if banks recapitalization is factored in at €4 billion in 2010). DofF own rosy projections imply a cut in the deficit of 29.7%, which is still shallower than Denmark's.
So, the Siptunomics is not what Denmark subscribes to when it comes to fiscal discipline.
Another interesting key fact: "The general government budget balance is estimated to decrease by DKK 154bn from 2008 to 2010. This corresponds to a reduction of 8.9 per cent of GDP of which one third reflects the loosening of fiscal policy... Measured by the fiscal effect fiscal policy is estimated to stimulate economic activity by 1.0 per cent of GDP in 2009."
So run this by me again? Cut balance by 8.9%, of which roughly 3% of GDP goes to fiscal spending to generate growth of ca 1%. suggested multiplier? Lowly 30cents on the euro... or rather DKK... not exactly a big bang for a buck, given that over 5 years interest alone would eat up some 15.8 cents out of this amount.
Another crucial bit: "The deficit on the central government net balance, which is essential for the central government debt, is estimated at DKK 141½bn in 2009 and 74½bn in 2010." Implied cut in deficit 2009 to 2010 is 49.6%. Irish Government approach to the cuts (see my estimates here) is to cut 15.2% of the deficit (if no banks recapitalization is taken into the account) or under 1% reduction (if banks recapitalization is factored in at €4 billion in 2010). DofF own rosy projections imply a cut in the deficit of 29.7%, which is still shallower than Denmark's.
So, the Siptunomics is not what Denmark subscribes to when it comes to fiscal discipline.
Monday, December 14, 2009
Economics 14/12/2009: Nama comparatives
It was an honor today to speak on the issues of Nama and the future of Irish development and construction sectors at the gathering of a number of architects put together by FKL Architects (see the site here). The panel that I was a part of was very engaging and, despite my disagreement with some of its members on the matters of policy, very informative. And the event, highlighted at the above site, was very interesting and engaging - some cool ideas out there, at least to my non-professional eye.
After the event, I was exchanging a couple of views with the representative of our construction sector, who agreed with my prediction that by the end of this crisis, Irish construction sector will shrink to no more than 5% of GNP or just 20% of its pre-crisis peak. And that the risk is for our construction sector to remain at that level (instead of rising to a healthy 10-12% level) for a very long period of time.
Alas, something else has driven me to a realisation that anyone who is hoping for stabilization of our property values at their current (or near) price is inhabiting an invented reality. This:
Now, think of this...
A four-bedroom, two-bath brick historic federal in Little Falls, N.Y., a city of about 5.000 on the Erie Canal, is on the market for $250,000, the house was built in 1827 and is on the National Register of Historic Places.
Off the house's center hall are east and west parlors. Both have fireplaces.
Though it has been renovated several times over the years, it retains some original details, including mantels, and some pine and chestnut flooring.
All four bedrooms are on the second floor, two with original pine and chestnut flooring and one with a fireplace and a walk-in closet.
Ok... I can go on and on, but... check it out for yourselves here. And all for €170,000 in one of the wealthiest states of the nation that is the wealthiest on planet Earth.
My prognosis - median price in Ireland in real terms (2009 Euros) of €120,000 by the end of this crisis. Why? Because there is no reason why our average homes should be trading above 4bed historic properties in upstate New York. None.
After the event, I was exchanging a couple of views with the representative of our construction sector, who agreed with my prediction that by the end of this crisis, Irish construction sector will shrink to no more than 5% of GNP or just 20% of its pre-crisis peak. And that the risk is for our construction sector to remain at that level (instead of rising to a healthy 10-12% level) for a very long period of time.
Alas, something else has driven me to a realisation that anyone who is hoping for stabilization of our property values at their current (or near) price is inhabiting an invented reality. This:
Now, think of this...A four-bedroom, two-bath brick historic federal in Little Falls, N.Y., a city of about 5.000 on the Erie Canal, is on the market for $250,000, the house was built in 1827 and is on the National Register of Historic Places.
Off the house's center hall are east and west parlors. Both have fireplaces.
Though it has been renovated several times over the years, it retains some original details, including mantels, and some pine and chestnut flooring.
All four bedrooms are on the second floor, two with original pine and chestnut flooring and one with a fireplace and a walk-in closet.Ok... I can go on and on, but... check it out for yourselves here. And all for €170,000 in one of the wealthiest states of the nation that is the wealthiest on planet Earth.
My prognosis - median price in Ireland in real terms (2009 Euros) of €120,000 by the end of this crisis. Why? Because there is no reason why our average homes should be trading above 4bed historic properties in upstate New York. None.
Sunday, December 13, 2009
Economics 13/12/2009: News and confirmations
A quick post - per Sunday Times report today, Irish Nationwide will need 1.2-2 billion in recapitalization post-Nama. This beats my estimate for the society provided here. To remind you - back in October 2009 I estimated that post-Name demand for capital will be:
On retail sales side: October figures released last week show continued weakness across consumer spending - despite some bounce up in car sales (+1.4 mom). Total sales fell 0.3% mom and ex-motors sales declined 1.7% erasing all gains made in September. Core sales 9e-motors) are now at 2005 levels down 13% from the November 2007 peak. Despite seasonal shopping going into Christmas, 'other goods' sales (including toys, jewelry, sports wear etc) posted a drop of 4%. Furniture and lighting posted a fall of 3.2% and would have probably fallen even further if not for Ikea. This, of course implies that a rational forecast for 2010 should be in the region of 3% fall in retail sales, compounding the 7% drop in 2009 and leaving retail sales at some 84% on 2007 peak. More urgently, staying on the established trend, December retail sales are risking to sink 10-15% on 2008, which might trigger a new wave of layoffs in January-February 2010.
Services Exports data also released last week shows that our services trade deficit has widened in 2008 relative to 2007 by 370% as imports rose much faster than exports.
The detailed data clearly shows that we lack geographic diversification of exports in most services, with 76% of our services exports (allocated to specific geographic destinations) destined for Europe. And we are failing to benefit from substantial cost savings from outsourcing services to Asia - with just 2.4% of our services imports coming from Asia (Asia accounted for 7.9% of our exports of services).
In higher value added services:
- AIB €3.2-3.5bn in equity capital post-Nama;
- BofI €2.0-2.6bn;
- Anglo €4.5-5.7bn;
- INBS/EBS & IL&P €1.1-1.2bn.
- Total system demand for equity will be in the range of €9.7-12.4bn.
- AIB will require €3.0-3.5bn in equity capital;
- BofI will need €2.2-2.6bn;
- Anglo will need up to €5.7bn;
- INBS will require total of €1.2-2bn.
On retail sales side: October figures released last week show continued weakness across consumer spending - despite some bounce up in car sales (+1.4 mom). Total sales fell 0.3% mom and ex-motors sales declined 1.7% erasing all gains made in September. Core sales 9e-motors) are now at 2005 levels down 13% from the November 2007 peak. Despite seasonal shopping going into Christmas, 'other goods' sales (including toys, jewelry, sports wear etc) posted a drop of 4%. Furniture and lighting posted a fall of 3.2% and would have probably fallen even further if not for Ikea. This, of course implies that a rational forecast for 2010 should be in the region of 3% fall in retail sales, compounding the 7% drop in 2009 and leaving retail sales at some 84% on 2007 peak. More urgently, staying on the established trend, December retail sales are risking to sink 10-15% on 2008, which might trigger a new wave of layoffs in January-February 2010.
Services Exports data also released last week shows that our services trade deficit has widened in 2008 relative to 2007 by 370% as imports rose much faster than exports.
The detailed data clearly shows that we lack geographic diversification of exports in most services, with 76% of our services exports (allocated to specific geographic destinations) destined for Europe. And we are failing to benefit from substantial cost savings from outsourcing services to Asia - with just 2.4% of our services imports coming from Asia (Asia accounted for 7.9% of our exports of services).In higher value added services:
- Virtually all insurance services exports went to Europe (69%) and the US (22.1%);
- Financial services exports went to Europe (67.2%), the US (10.45%), and Asia (10.3%), but some 12% of financial services were traded into offshore centres;
- Computer services posted a massive surplus, as usual, with 86.7% of all exports flowing to Europe, and just 1.07% to the US, while Asia received 8.7%;
- Other business services exports - comprising a number of high value-added subcategories - went to Europe (69.7%), US (only 4.5%) and Asia (12.9%).
Economics 13/12/2009: Nothing exceptional
Last couple of weeks, there have been some pretty severe news flowing from the Irish economy and Irish banks. Is the current bear market in Irish banks shares a temporary adjustment / profit taking or is it a long overdue fundamentals-driven correction?
Here are few charts and my view of the story.
The general trend, per chart above, has been down since 2007 peaks, but also - convergence of the two banks to the same trading range. By 2009 beginning, the investors were no longer willing to significantly distinguish between BofI and AIB shares, preferring to treat them as a single sick puppy, rather than two different banks with different management styles, business models and investment exposures.
And guess what - they still do. The entire 2009 trading was still based on the story of Irish Banks, rather than individual stories of AIB and BofI. Now, over a short period of time, say during general market panic, this can be explained by a temporary loss of fundamentals clarity, implying that investors might see both banks as being the same. We are no longer in this period, as global markets willingness to take risks has improved significantly in H2 2009. But the same markets that are now willing to differentiate Goldman Sachs from Bank of America are still unwilling to differentiate AIB from BofI.
Another interesting feature of the data is that Nama effect (a positive push for shares of AIB and BofI) has now been fully exhausted. And this is pretty impressive - we approve €54bn in funds, nearly bankrupting the entire economy, and in return we get the markets sending banks' share price back to where they were in May 2009, prior to the Nama approval.
So in terms of absolute prices, neither Nama, nor the latest Budget, seem to be working. But what about the risks in actual trading positions on the banks?
Well, if anything intraday volatility in AIB is down, not up, in the last 12 months. And that shows once again that the markets are not buying into AIB story. There is now less heterogeneity in investors' assessment of AIB value proposition than before:
The same is true for BofI:
The same story for a broader IFIN index
And there is nothing out of the ordinary in terms of volumes either:
Still relatively heavy, but not as heavy as in late 2008 - early 2009.
But now look as spreads (high-low) and monthly volatility: calmer, much calmer seas than over 2008. Again, no panic - just calm and measured trading here.
One can't really say here that investors are treating Irish banks shares in some idiosyncratic way, with an abnormally high sensitivity to risk. There is actually much less sensitivity to risk in the markets today than in 2008 and even 2007. So the current bear trend in Irish banks shares is driven by the markets assessment of fundamentals. In other words, markets are doing the job - spotting the 'dog' and pricing it down...
Any doubt? The above chart confirms that there is no abnormally heightened sensitivity to risk when it comes to AIB and BofI shares. The only outline events of 2009 in these shares relate to the bear rally that has just ended. The downtrend, therefore, is the norm.
Here are few charts and my view of the story.
The general trend, per chart above, has been down since 2007 peaks, but also - convergence of the two banks to the same trading range. By 2009 beginning, the investors were no longer willing to significantly distinguish between BofI and AIB shares, preferring to treat them as a single sick puppy, rather than two different banks with different management styles, business models and investment exposures.
And guess what - they still do. The entire 2009 trading was still based on the story of Irish Banks, rather than individual stories of AIB and BofI. Now, over a short period of time, say during general market panic, this can be explained by a temporary loss of fundamentals clarity, implying that investors might see both banks as being the same. We are no longer in this period, as global markets willingness to take risks has improved significantly in H2 2009. But the same markets that are now willing to differentiate Goldman Sachs from Bank of America are still unwilling to differentiate AIB from BofI.Another interesting feature of the data is that Nama effect (a positive push for shares of AIB and BofI) has now been fully exhausted. And this is pretty impressive - we approve €54bn in funds, nearly bankrupting the entire economy, and in return we get the markets sending banks' share price back to where they were in May 2009, prior to the Nama approval.
So in terms of absolute prices, neither Nama, nor the latest Budget, seem to be working. But what about the risks in actual trading positions on the banks?
Well, if anything intraday volatility in AIB is down, not up, in the last 12 months. And that shows once again that the markets are not buying into AIB story. There is now less heterogeneity in investors' assessment of AIB value proposition than before:
The same is true for BofI:
The same story for a broader IFIN index
And there is nothing out of the ordinary in terms of volumes either:
Still relatively heavy, but not as heavy as in late 2008 - early 2009.But now look as spreads (high-low) and monthly volatility: calmer, much calmer seas than over 2008. Again, no panic - just calm and measured trading here.
One can't really say here that investors are treating Irish banks shares in some idiosyncratic way, with an abnormally high sensitivity to risk. There is actually much less sensitivity to risk in the markets today than in 2008 and even 2007. So the current bear trend in Irish banks shares is driven by the markets assessment of fundamentals. In other words, markets are doing the job - spotting the 'dog' and pricing it down...
Any doubt? The above chart confirms that there is no abnormally heightened sensitivity to risk when it comes to AIB and BofI shares. The only outline events of 2009 in these shares relate to the bear rally that has just ended. The downtrend, therefore, is the norm.
Wednesday, December 9, 2009
Economics 09/12/2009: Budget 2010 - first shot at numbers
I will be blogging on the Budget 2010 over the next few days, but here is the main point:
The Budget did not deliver a significant adjustment to our structural deficit.
The main conclusion here is that the Budget has not gone far enough in reducing the structural deficit. There is another €10-12 billion worth of cuts looming for 2011-2012. It would be dangerous to assume that this can be corrected for through re-jigging tax system in 2011 as Minister Lenihan appears to imply.
At this junction, I simply cannot see how the Budget delivered anything more than a breathing period for Ireland before we resume our slide toward Greece. 12.4% deficit before we factor in demand for capital from Irish banks is just not enough. Full stop.
The Minister is now talking about €3 billion cut in 2011, then €5 billion cut in 2012-2013. This implies that from next year's standing position we are looking at a deficit of well over €9-13 billion in 2014. Assuming economy grows at a robust 2.5% every year from 2011 through 2014, this would imply a deficit of 4.9-7% of GDP - way long of the SGP-required 3%. If economy grows at even briskier pace of 3% per annum over the same period, the resultant deficit will be around 4.8-6.9%. Again, not much of a fit for our promises to the EU...
The Budget did not deliver a significant adjustment to our structural deficit.
- Claimed adjustments to the deficit totaling €3,090 million on current expenditure side and €961 million on capital side. These are gross figures which imply that we can expect net adjustments of ca €2,600 and €800 million each to the total deficit reduction of no more than €3,400.
- Per table below, the Exchequer deficit will likely stand at €21,400 million in 2010 and not anywhere near the projected deficit of €17,760 million.
- Stabilization of deficit is not happening on a significant downside, but in a marginal fashion, which is simply not good enough.
The main conclusion here is that the Budget has not gone far enough in reducing the structural deficit. There is another €10-12 billion worth of cuts looming for 2011-2012. It would be dangerous to assume that this can be corrected for through re-jigging tax system in 2011 as Minister Lenihan appears to imply.At this junction, I simply cannot see how the Budget delivered anything more than a breathing period for Ireland before we resume our slide toward Greece. 12.4% deficit before we factor in demand for capital from Irish banks is just not enough. Full stop.
The Minister is now talking about €3 billion cut in 2011, then €5 billion cut in 2012-2013. This implies that from next year's standing position we are looking at a deficit of well over €9-13 billion in 2014. Assuming economy grows at a robust 2.5% every year from 2011 through 2014, this would imply a deficit of 4.9-7% of GDP - way long of the SGP-required 3%. If economy grows at even briskier pace of 3% per annum over the same period, the resultant deficit will be around 4.8-6.9%. Again, not much of a fit for our promises to the EU...
Tuesday, December 8, 2009
Economics 08/12/2009: Irish businesses ICT use
Per CSO release yesterday: “in 2009, 95% of all enterprises had a computer connected to the internet while 66% had a website or homepage. Access to the internet using broadband remained high in 2009 with 84% of all enterprises having a broadband connection. High-speed DSL broadband was used by 45% of enterprises compared with 41% in 2008. The use of mobile broadband reached a level of 27% in 2009 compared with 24% in 2008. As a consequence there has been a decline in the use of lower-speed DSL broadband and other fixed connections (e.g. cable, leased line etc).”
Sounds good? Well, actually… More detailed data shows the following worrisome trends:
Sounds good? Well, actually… More detailed data shows the following worrisome trends:
- Use of computers has actually fallen from 98% of enterprises surveyed in 2008 to 97% in 2009. It has remained static at 98% in Manufacturing sector, fallen from 99% to 96% in Construction sector (possibly a function of inactive enterprises, or in the opposite direction – a surprising result if the survivourship bias applies to the sample). In Services sector there was a decline from 98% to 97% between 2008 and 2009. These results are rather strange. On one hand, if the sample included inactive firms, then one can expect the declines due to companies folding operations in Construction and lower value-added Services sectors. But if only actively trading firms were included, then this suggests that survivourship bias was actually selecting against the ICT-using firms for some unexplainable reason.
- Interestingly, the proportion of firms with a written ICT strategy has increase overall from 20% in 2008 to 21% in 2009, and in no sub-sector was there a decline in proportion. Construction sector firms led here with an increase from 8% in 2008 to 11% in 2009, which suggests that CSO sample incorporates survivourship bias. And this is really bizarre – on one hand, sample selection clearly favoured surviving firms that have ICT policies, but on the other hand the same sample favoured survivor firms with lower penetration of ICT… Hmmm…
- Proportion of firms using internet fell from 96% to 95% between 2008 and 2009. The declines were showing in all three broader sectors, with Construction firms registering the largest drop from 99% to 96%. This is again inconsistent with survivourship bias apparently present in the data. But even more strange were the results for the percentages of firms having their own websites. In Manufacturing, the number of firms with their own websites rose strongly from 72% a year ago to 77% in 2009. In Construction sector, surviving firms actually dramatically increased their websites presence from 48% to 58% despite having shown a decline in internet use in general. There was a decline in proportion of companies with their websites in Services sector – from 65% to 64%.
- Overall use of e-services (interfacing either with the public sector or private sector clients) has declined across the board except for Manufacturing sector.
- E-commerce is growing strongly with percentages of purchases and sales via e-commerce pathways as a share of total purchase costs and turnover, respectively, rose strongly between 2008 and 2009. But as in 2008, most of e-Commerce appears to be driven by purchases, not sales. And in volumes, e-Commerce has declined in line with overall economic activities. There is only tentative evidence that e-Commerce has taken up some of the traditional purchasing and sales activities share during this recession.
- Another interesting and surprising feature of the data shows that enterprises with access to broadband have reduced their e-Commerce-based purchases from 60% to 54%, and also reduced their e-Commerce-based sales from 28% to 23%. Enterprises with no connection to broadband have lowered their purchases via e-Commerce vehicles from 29% to 24% and their sales from 14% to 9%. This seem to show that access to broadband does not result in more resilience to the recessionary contraction in enterprise activities. But, enterprises with broadband connection have retained their propensity to employ workers who e-work at 37%, while enterprises with no broadband connection have increased this share from 9% to 10%. Rising workforce mobility and flexibility for those with no broadband connection while static workforce mobility / flexibility for those with broadband connection? Clearly this can’t be happening…
Sunday, December 6, 2009
Economics 06/12/2009: Replacement rates for Irish social welfare payments
Department of Finance has published (unnoticed by most) its estimates of the replacement rates for Irish Social Welfare system. Per DofF, any replacement rate in excess of 70% is problematic, as it creates significant disincentive for the recipients to seek reentry into the labour force. Well, yes. I agree.
However, what DofF fails to recognize in its estimates is the fact that welfare recipients avail themselves of free healthcare (medical cards) and subsidized drugs scheme, plus, having no jobs to attend to, they do not have to spend a penny on childcare.
I have updated the DofF own estimates to reflect these costs wherever they apply and this is reflected in the table below which also reproduces DofF own estimates.
Effective wage in my estimates refers to the earnings that must be attained in the workplace in order to supply the same level of real income as provided by social welfare. My estimate is based on DofF replacement rate estimates, plus additional benefits as outlined in the footnote.
Telling picture. For a country with average income of ca €25,000 per capita, we are talking about virtually all groups of welfare recipients, case-studied by DofF, getting more on welfare than in average employment.
Red-bold cases are clear welfare traps with replacement income in excess of 70% relative to reference group.
However, what DofF fails to recognize in its estimates is the fact that welfare recipients avail themselves of free healthcare (medical cards) and subsidized drugs scheme, plus, having no jobs to attend to, they do not have to spend a penny on childcare.
I have updated the DofF own estimates to reflect these costs wherever they apply and this is reflected in the table below which also reproduces DofF own estimates.
Effective wage in my estimates refers to the earnings that must be attained in the workplace in order to supply the same level of real income as provided by social welfare. My estimate is based on DofF replacement rate estimates, plus additional benefits as outlined in the footnote.
Telling picture. For a country with average income of ca €25,000 per capita, we are talking about virtually all groups of welfare recipients, case-studied by DofF, getting more on welfare than in average employment.Red-bold cases are clear welfare traps with replacement income in excess of 70% relative to reference group.
Saturday, December 5, 2009
Economics 05/12.2009: Budget 2010 Estimates
The Department of Finance has published estimates of income and expenditure for next year on Friday. These form the DofF outlook for 2010 before incorporating any Budget 2010 changes.
The format in which the estimates are published is such that one cannot operate standard Adobe pdf features and requires by-hand copying of data in order to transpose the table into the Excel or any other database. One can only speculate why this is done by DofF, but any economist out there can probably wish that someone obliges the DofF to start publishing things in modern documentary formats and provide separate excel files suitable for analysis.
So here is the data with my own parallel estimates. As with DofF, my estimates do not include any promised or signaled ‘savings’ and ‘tax increases’ that might be announced in the Budget 2010.
The main table:
The above shows that DofF projects a rise in current spending next year of over €5bn, (higher social welfare and debt service costs). My projection is for a rise of under €6bn (because of even higher social welfare costs, plus an increase debt-raising fees, but no difference on DofF’s estimate of debt financing cost). Details are, of course, to follow below.
So what do these estimates (My v DofF) suggest:
Receipts side:
The differences between my and DofF estimates come from my view that:
All in, total Tax and non-Tax revenue will be lower by €1,039mln and €571mln respectivel
Next, let’s look at the detailed expenditure lines as stipulated above.
My main concerns (driving the differences to DofF estimates) are:
Net impact, I expect costs to rise by €1.1bn more than DofF does.
Details of non-voted current expenditure below:
No major differences here between mine and DofF estimates. Unlike in the case of non-voted capital expenditure:
Of course, this table incorporates my view that Anglo and other banks will swallow some €4bn in 2010 in new capital. This already assumes that most of the funding for other banks will come via Nama issuing new Nama-own bonds that the Government will attempt to keep off its own balancesheet. Of course, this is a bogus accountancy trick, but let us entertain it as the Government insists we should.
This pretty much finishes my analysis of the Exchequer estimates. If the Government does not attempt to dramatically reduce its own spending in the next Budget, we might see our annual deficit rising to over 16% of GDP. Even if DofF is correct and the deficit will be 13.5%, this does not change the bleak reality that some 9% of this figure is a purely structural deficit. In other words, no matter what, we will have to shave off ca €15.4bn worth of spending in the next 2-3 years. No other way about it.
The format in which the estimates are published is such that one cannot operate standard Adobe pdf features and requires by-hand copying of data in order to transpose the table into the Excel or any other database. One can only speculate why this is done by DofF, but any economist out there can probably wish that someone obliges the DofF to start publishing things in modern documentary formats and provide separate excel files suitable for analysis.
So here is the data with my own parallel estimates. As with DofF, my estimates do not include any promised or signaled ‘savings’ and ‘tax increases’ that might be announced in the Budget 2010.
The main table:
The above shows that DofF projects a rise in current spending next year of over €5bn, (higher social welfare and debt service costs). My projection is for a rise of under €6bn (because of even higher social welfare costs, plus an increase debt-raising fees, but no difference on DofF’s estimate of debt financing cost). Details are, of course, to follow below.
So what do these estimates (My v DofF) suggest:
- On Current Receipts side, tax revenue differences are explained below, as are non-tax revenue differences, all in these allow for some €2.4bn discrepancy between my estimates and DofF estimates;
- On Current Expenditure side, my view is that net voted expenditure is underestimated by DofF, primarily in terms of social welfare increases and some crime-related increases (I believe we will see growing number of criminal convictions for acts against property), plus the Government is underestimating the scale of costs which will be involved in dealing with households defaulting on mortgages and going to courts against the banks. I also think the Government has no idea just how expensive litigation relating to Nama will be;
- So deficit on Current Account is much wider – by €2.6bn;
- On Capital account (see below) the main difference is driven by my view that Anglo will require €2bn in 2010 and that other banks will also swallow the same amount via NPRF ‘investment’ or something of the sorts. This is atop the similar spending via Nama issuance of new own bonds;
- So deficit on Capital Account is now €5.7bn wider in my case than in the case of DofF estimates.
- Net effect, Exchequer balance is, in my view, heading for a deficit of €30.4bn in 2010, up on €25.3bn in 2009 and up on DofF estimate of €21.9bn for 2010. Do tell me if you think things will improve so significantly on 2009 once January 2010 arrives as to justify DofF’s optimism.
Receipts side:
The differences between my and DofF estimates come from my view that:- shopping to Northern Ireland will not decelerate, assuming no change in our VAT relative to UK and no changes in the FX rate
- no redundancy payments windfall and lower self-employment taxes will mean lower income tax
- MNCs transfer pricing will slow down due to investment by MNCs outside Ireland picking up
- lower deposits with CB will arise due to lower loans levels, depressing CB income
- lower dividends activity due to semi-states slowdown and arrears build up;
- lower pay out under Guarantee scheme due to creation of the Third Force, decline in banks returns on loans and Anglo fall-off.
All in, total Tax and non-Tax revenue will be lower by €1,039mln and €571mln respectivel
Next, let’s look at the detailed expenditure lines as stipulated above.
My main concerns (driving the differences to DofF estimates) are:- Social welfare costs will be much higher due to transition to welfare from long-term unemployment;
- DETE will be more involved in artificially creating ‘training’ jobs for unemployed;
- Health will also see increases in costs due to welfare cost rising;
- All organizations dealing with crime will experience an increase in costs due to rising number of crimes against property;
- Internal public sector employment conflicts will be driving costs of arbitration and conflicts resolutions;
- Rising numbers of households insolvencies will be pushing up courts and related costs;
- Costs of Nama and Banks supervision/oversight will also rise, etc.
Net impact, I expect costs to rise by €1.1bn more than DofF does.
Details of non-voted current expenditure below:
No major differences here between mine and DofF estimates. Unlike in the case of non-voted capital expenditure:
Of course, this table incorporates my view that Anglo and other banks will swallow some €4bn in 2010 in new capital. This already assumes that most of the funding for other banks will come via Nama issuing new Nama-own bonds that the Government will attempt to keep off its own balancesheet. Of course, this is a bogus accountancy trick, but let us entertain it as the Government insists we should.
This pretty much finishes my analysis of the Exchequer estimates. If the Government does not attempt to dramatically reduce its own spending in the next Budget, we might see our annual deficit rising to over 16% of GDP. Even if DofF is correct and the deficit will be 13.5%, this does not change the bleak reality that some 9% of this figure is a purely structural deficit. In other words, no matter what, we will have to shave off ca €15.4bn worth of spending in the next 2-3 years. No other way about it.
Tuesday, December 1, 2009
Economics 01/12/2009: A real breakthrough of Mr Cowen
Credit for derailing this 'savings' deal goes to the public outcry, the media, a handful of backbenchers, the Department of Finance and also to Brian Lenihan - all of whom have managed to restore our policy back to senses. The numbers bandied around by the unions' heads were simply not adding up.
For a moment - it all looked like:
As one fellow economist described the 'New Deal' to me: “a Dora the Explorer bandaid on a shark bite”. Optimist he is – more like a prehistoric shark bite, judging by its gaping size.
Now recall, Brian Lenihan has promised three things to the nation and the EU:
- cut €4bn in deficit this year and the same next;
- no new taxes (except for carbon tax and, may be, higher taxes on the so-called 'rich');
- cut €1.3bn in public sector spending
... And it says on the plinth
'commander in chief'. But it reads 'in grief', or 'in brief'
or 'in going under'.
'commander in chief'. But it reads 'in grief', or 'in brief'
or 'in going under'.
Oh, and one last thingy - if you think that €600mln in 'savings' ever had a chance of materialising, think of public sector workers taking a 14-day holiday who will have an option to do agency work to replace their own jobs... earning a nice tidy premium...
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