IRELAND TO OUTPERFORM EURO ZONE IN 2011
Good economic commentary should be Countercyclical, going against the grain. Despite Ireland having a 64% debt/GDP ratio last year and Greece having a 115%, market panic is driving up our bond spreads with painful consequences. Here good commentary should be countering the hysteria.
On growth forecasts, though, good commentary should be dampening expectations. The EU Commission is the latest forecaster (the Central Bank, ESRI and Davy's being others) to predict our economy will start growing this summer.
But they go further. Compared to 1.5 per cent for the Euro zone, Ireland's economy will grow by 3.0 per cent in 2011. That - by the way - will be the second highest growth rate in the Euro Zone, second only to Slovakia.
The ongoing crisis in the bond markets may be exaggerated (see below). But until central banks restore policy rates to more sustainable long-term average norms, the welcome given to signs of recovery should be tempered with caution. Having sait that, at least in Ireland economic recovery is going against the grain of government cutbacks and tax increases and is more real than signs of recovery in the UK. There, the Bank of England's injection of 175 billion sterling into the economy last year has inflated the economy artificially (conveniently - but ultimately in vain - in the run up to an election). Across Europe there is a fair chance that the recovery we are seeing now - if it survives the next few weeks of bond market turbulence - is real. If that happens, Ireland's growth performance as forecast by the Commission should come true, provided we continue restoring competitiveness and curbing public spending. Just don't shout about it yet.
GREECE: FUNDAMENTALS VERSUS SENTIMENT & POLITICS
Greeces' debt/GDP ratio is 115 per cent. Its deficit is - aside from Eurostat's reclassification of the 4 billion euro injected into Anglo Irish Bank - worse than ours (attempts to put Ireland and Greece in the same league on this basis are at best incompetent, at worst malicious). More to the point - and this is why Ireland's government bond spreads didn't approach anything like the levels of Greece during the height of its crisis - Greece's political economy problems, in other words its ability to deal effectively with fiscal crises, isn't a patch on Ireland's. As for the other "PIGS", Spain's 2009 debt / GDP ratio of 53% suggests concerns about it are overdone: its property bust is serious enough, but its fiscal base is less exposed than ours was. Italy's debt /GDP ratio, about 116 per cent, looks frightening. But Italy's deficit is more stable as is - whatever about its faults - its government.
But once markets have gotten it into their heads that all of the PIGS are going to fall like dominos, it's hard to stop a stampede. Is it asking too much of commentators and markets to stand back and make decisions based on calm and rational analysis? If not, then Greece's size as a share of the Euro Zone economy suggests a solution to its problems is possible, provided political will is there. If the euro comes through the coming weeks in one piece, however, a hard look will have to be taken at the Stability and Growth Pact.
BACK FROM THE BRINK
Photo's of interview with Finance Minister conducted for the book as well as photos of launch with some reviews of the book further below.
Ray McSharry, Alan Dukes Brian Lenihan
“First class analysis and full of original thinking on the way forward. A ‘must read’.
EU Commissioner Charlie McCreevy
“Against the odds, Coleman stayed faithful to Ireland’s future when other commentators gave up on it. Right on time, he has now written an outstanding book that restores Ireland’s self-belief.”
Jody Corcoran Sunday Independent
“Probing and pungent..Marc Coleman applies a capacious mind to pondering the condition of Ireland today. He not only etches sharply what has gone wrong, but even more importantly looks beyond the immediate crisis to signpost a route to national recovery”
J. J. Lee, Glucksman Professor of Irish Studies, New York University
"Marc Coleman's latest book is an excellent outlier in the sea of commentaries focusing on trivialities. Coleman gets the big picture of Ireland's real economy: outstandingly accurately…Let's hope this analytical outlier will be an influential one."
Dr. Constantin Gurdgiev, Economist Trinity College Dublin
BUDGET 2010
If the positive international reaction is anything to go by, Budget 2010 has finally grasped the nettle of controlling public spending, and not just on a once off basis. If followed through, Brian Lenihan's promise to rationalise public sector pensions, overhaul local government and streamline the tax system are a final recognition that economic policy needs to be more about crisis management: As Back from the Brink argues, drastic reform across Ireland's economy - starting with sheltered sectors of our economy - can unleash a new wave of growth and prosperity.
1. THE BIG PICTURE OF THE BUDGET
2. HOW IT IMPACTS TYPICAL CITIZENS
3. THREE BIG ISSUES: FAIRNESS, REFORM AND DEFLATION
4. ANNEXES
1. THE BIG PICTURE OF THE BUDGET
THE SPENDING SIDE
WHAT: Government budget deficit to be reduced according to the table below by making a budgetary correction of around 4 billion compared to what would otherwise be the case. Compared to 2009 the budget deficit will be only half a billion euro lower, but this ignores the fact that it would, without action, be much higher. As the table below shows the deficit in 2010 will be worse than it was forecast to be at the time of the last budget of April 2009, but better than the expectations in the Estimates of Receipts and Expenditure published just before the budget. The latter reflect what would happen under a "do nothing" scenario"
2010 Financial position | €m | % GDP |
Deficit expected April 2009 | 18,088 | 10.75 |
Deficit expected in Dec 2009 WP** | 21,800 | 13.50 |
Deficit after 2010 budget | 18,720 | 11.60 |
The ongoing deterioration in tax receipts during 2009 means that, in effect, the government has been running to stand still and without action the 2010 deficit would be almost 4 billion worse than the 2009 deficit.
The figures to concentrate are in the last two rows and in particular the difference between the €21.8 billion that would otherwise have been borrowed in 2010 and the €18.7 billion now expected. The difference is 3 billion and this is because even though the government has made 4 billion in spending cuts, these cuts will themselves reduce the government's tax take by almost €900 million
HOW: €4.05bn (€3.17bn in net terms) reductions in savings to come from
€1,005 million in payroll savings from public sector (see Annex I)
€2,085 million in cross-departmental programme savings - with particularly strong reductions in the social welfare budget - (see Annex II which covers savings made in Budget 2010) including €243 million carried forward from 2009 (which are not covered in Annex II)
€961 million in savings on capital expenditure
Tax rises account for a mere €17 million but the budget day measures will reduce tax revenues by €897 million
This leaves €3,171 million in net savings
THE TAX SIDE
There are several changes to taxation in the budget but in net revenue terms there are virtually no tax increases, with only a net gain to the exchequer of €17 million comprising of:
Restrictions of income reliefs to achieve a 30% income tax rate for those subject to the full restriction +€55 million
Extension of mortgage interest relief for loans taken out before 1st July 2011 for 7 years as well as continuing entitlement to those whose relief would expire in 2010 until 2017, by when relief will be abolished no net change
Various minor changes to capital allowances, corporation tax, income levy relief for farm expenditure (see budget documentation B.5) -€2.8 million
12 cent reduction in excise duty on beer & cider, 14 cent reduction for spirits and 60 cent reduction on a bottle of wine per 75 cl bottle -€90 million
A car scrappage scheme (see budget documentation B.6) no net change
A carbon tax of €15 per tonne on fossil fuels (see budget documentation B.6) +€250 MILLION
A reduction in the standard rate of VAT from 21.5 per cent to 21 per cent -€140 million
2. HOW TYPICAL CITIZENS ARE AFFECTED
It isn't possible to give a comprehensive picture of how citizens are affected on this website, but budget documentation provides plenty of illustrative cases. Here are, however, a few examples with different earnings levels examined for each case. Note cases 1 and 2 correspond to private sector equivalents of cases 4 and 5 respectively.
Case 1: A married couple with one income and 2 children over 6 taxed under PAYE, private sector
At €15,000 such a couple experiences a very slight gain of €32 euro per year due to slight reductions in child benefit allowance and compensating payments for those on low incomes. There are very slight losses for higher income levels up to €35,000 when an annual gain of €656 occurs. Thereafter changes are negative but modest, of the order of €384 euro a year, or between 1 and 0.25 per cent of income
Case 2: A single person taxed under PAYE, private sector
At all income levels there are no changes in income
Case 3: Married couple, one income, two children over 6, self employed
Cuts in income are more uniform in absolute terms with the reduction in child benefit incurring an across-the-board reduction of €384 euro per annum, a cut ranging from 2 per cent of income (at €15,000 a year salary) to just over 0.25 per cent (above €250,000)
Case 4: A married couple with one income and 2 children over 6 taxed under PAYE, public sector full PAYE contributor
The reduction in income ranges from €332 euro for someone on €15,000 per annum to €14,926 for someone on €250,000 a year. In percentage terms this ranges from a 1.17 per cent reduction to 12.3 per cent at the top, with higher pay cuts for public servants influencing the rising scale of reductions. There is an anomaly here as - whether measured in absolute or percentage terms - the reduction for someone on €20,000 a year gets a lesser cut of €158 euro a year, or 0.53 per cent - compared to the €15,000 a year case.
Case 5: A single person taxed under PAYE, public sector full PAYE contributor
There is a large percentage fall for those on €15,000, 5 per cent, given the €728 euro drop in annual income. Again there is an anomaly in that on €20,000 the fall is €228 euro or just 1.26 per cent. The loss then rises above this income level to €774 (3.64 per cent) at €25,000; €1,090 (4.17 per cent) at €35,000 and eventually to €14,542 euro (12.9 per cent) at €250,000
3. 3 BIG ISSUES; REFORM, FAIRNESS & DEFLATION
1. REFORM ON THREE FRONTS IS LONG OVERDUE
In Budget 2010, Brian Lenihan has promised reform on several fronts:
Public sector pensions will be examined with a view to changing the basis on which pension entitlements are calculated. Instead of being based on final earnings, the Minister wants to base payments on career average earnings. And instead of increasing public sector pensions in line with earnings growth as is presently the case - which ties a public sector pensioners pension to increases in the salary of the person who currently does their job - increases would be tied to inflation. However currently retired public workers would not be affected by these measures,which will only apply to new public servants.
Income tax The Minister wants to introduce a "Universal Social Contribution" rate which will incorporate income taxes, PRSI, health levies and income levies, bringing badly needed rationalisation into the system.
Local Authorities Ireland has 129 Local Authorities for a population of around 4.5 million people. The Minister has announced the establishment of an Efficiency Review of Local Authorities to begin work immediately and report back by June 2010. Full details will be announced by the Minister for the Environment, Heritage and Local Government.
2. FAIRNESS ARGUMENTS NOT JUST OVERDONE, BUT REVERSED
Much has been made of the fairness or lack of fairness of this budget. The previous two budgets imposed tax increases of 5.6 billion on the economy, affecting all workers both public and private sector workers. Arguments for targetting public sector spending on this occassion rested on the fact that these rises in tax rates have not yielded the hoped for increase in revenue, nor have they stabilised revenue. More fundamentally, figures presented by both the Department of Finance (see Laura Slattery article in Irish Times December 4th 2009) and the Irish Taxation Institute suggest that far from not being progressive, Ireland's income taxes are excessively so with 50 per cent of earners at the bottom paying no tax and 4 per cent at the top paying almost 50 per cent.
3. DEFLATION ARGUMENT IGNORES SIMPLE RULE: TODAY'S DEBT = TOMORROW'S TAXES
Arguments that pay cuts are deflationary ignore several crucial facts. Firstly the alternatives to pay cuts - income tax increases - have not borne fruit in terms of extra revenue. Secondly the experience of the 1980s shows clearly that responding to a fiscal crisis by raising taxes instead of cutting spending failed: After successive hikes in marginal taxes, the economy slowed to grow by just 0.1 per cent in 1986 - and this was despite strong growth in all of our trading partners. By strong contrast the announcement by Alan Dukes of the Tallaght strategy in the spring of 1987 gave the green light to a sustained programme of spending cuts. This gave consumers and investors the confidence to begin spending again. Together with falls in interest rates that arose from international confidence that spending was being brought under control boosted growth to 3.7 per cent in 1987, a thirty-seven fold improvement on the growth rate the year before.
4. ANNEXES
- Annex I: Main Public Sector Payroll Savings
The pay cuts scheduled below will - net of pensions levies introduced on public servants in January 2009 - net the government €1,005 million. Together with €243 million in savings related mainly to the impact of the early retirement scheme on payroll costs from 2010.
Salary Level | % Cut |
Up to €30K | 5.0 |
Salary between €30K & €70K | 7.5 |
Salary between €70K & €125K | 10.0 |
On whole salary above €125K up to €165K | 8.0 |
On whole salary above €165K up to €200K | 12.0 |
On whole salary above €200K | 15.0 |
- Annex II: Cross Departmental Savings
Department(s*) + Description of key measures 2010 impact | €m |
Social & Family Affairs, mainly - 4.1% cut in benefits for those of working age (no reduction in pension) including reduction in maternity & adoptive benefit; total €435m - New & lower maximum rates of jobseeker allowance, €94m - Reduction by €16 in monthly child benefit, €221 | 760 |
Health & Family Affairs, mainly - Reduction in payments to pharmaceutical suppliers, €141m - Economies in the HSE eg in procurement, transport, insurance, €106 - Collection of income from private patients in public hospitals, €75m | 400 |
Education & Science, mainly - Staffing & general efficiencie in third-level sector, €50m - Various savings across programmes, €43m | 134 |
Enterprise, Trade and Employment, mainly - Reduction in funding for FAS, skillnets, Community Employment schemes | 50 |
Ag, Forestry & Fishing (€20m) + Arts, Sports & Tourism (€28m) + Communications, Energy and Natural Resources (€13m) + Community, Rural & Gaeltacht Affairs (€15m) + Taoiseach's (€12m) + Transport (€60m) | 148 |
Defence (€38m) + Environment, Heritage & Local Gov't (€78m) + Finance (€58m) + Foreign Affairs and ODA (€22m) + Justice (€49) | 245 |
The capital budget will be cut by €961 million
*Some Departments are grouped for convenience