The Budget

Mortgage interest relief on rental properties dropped to 75% effective immediately, with a view to eventual abolition. This will put even more downward pressure on house prices further eroding the property market and the collateral the banks hold

The plan to purchase assets has the provision that if the government loses money on this plan it can levy the banks to make good on the loss. This look back option undermines the scheme. Will new investors put money into the banks if this risk iexists?

Daniel – the ivestors don’t look too worried about it so far ..
http://finance.yahoo.com/q/bc?s=AIB&t=1d
up sharply in the last hour. That implies that the deal could be bad for taxpayers.
It should also be good if the property market is eroded further towards realistic prices.

Seems to be promising a hit on the pension lump sums later in the year, after the board snip reports.

Why any ceiling on PRSI payments? That would appear to break his so called rules on fairness

The National Asset Management Agency. Some details here : http://tinyurl.com/c853fu

It says that the loans will be transferred at an ‘appropriate discount’. Anybody have any idea what that might mean?

It also says that if there the NAMA makes a loss, a levy will be imposed. But it fails to say upon whom the levy will be imposed..

At the top marginal rates, the new income tax rates and levies imply a 16% reduction in after tax income. (After tax value of 1 Euro gross income is now 0.48 cent versus 0.57 cent on prior tax levels).

NAMA loss levy would have to be on bank earnings going forward i assume? But agreed, vague and needs a lot more detail. At the end of the day, its all about the price paid for the loans, right?

How concerning is the emphasis on tax increases rather than spending cuts. Our current expenditure as a percentage of GNP is at 1988 levels.

The NAMA will be a notionally arms length branch of the government but the value of its assets and the possible eventual return to the taxpayer will largely depend on that same government’s attitude towards property development e.g. planning permission, tax reliefs etc – are we in a Catch 22 property boom?

The employment stimulus of about 128 million does not look like it will have a substantial impact, from first reading. Having said that, it is encouraging that they are trying out things like a work experience scheme which has to be worth a try, particularly for recent graduates.

They are suggesting 2,000 places on a basis cost-neutral to the state. I will be watching this very closely as this is a potentially promising way of avoiding some of the really nasty effects of unemployment on young people. Having said that, 2000 just seems too small. The main issues of worry with increasing these further are potential displacement of existing workers, absorptive capacity of the companies involved as well as administrative cost. I think all of these are surmountable particularly if we contemplate the potentially impossible jobs situation in store for graduates in June. Doing nothing is a bad option in this market.

No imagination. We got the tax increases but what about public spending cuts – it’s all in the capital programmes. The fact is we need less public servants. Someone should be doing a trawl through government bodies and quangos we don’t need and shut them down. If all we’re going to do is cut the deficit by raising tax we’re all in big trouble. Watch consumer spending fall as a result of this and therefore VAT take fall further than it already is. The current crew don’t have the guts to do what is required.

A little reported part of the budget is the reduction in the public sector pensions levy for the “lower paid” public servants – which turns out in practice to mean anyone on less than 160k…

I fear that the taxation splurge may shatter consumer confidence. Bigger public expenditure cuts would be preferable to higher taxation. Many small businesses are on their last legs. There is very little here to stimulate exports. It is a dismal failure.

@liam
The Irish economy was heading for a painful correction anyway because wages grew faster than productivity and the public sector was crowding out the private sector. The correction was triggered and exacerbated by the recession in the world economy, which pricked the housing/construction bubble and exposed the unbalances in the fiscal position. The latter two further exacerbated the recession. But, we were on the wrong track already in 2004 and yesterday’s budget will keep us going in that direction.

@Liam There was an unsustainable tax-take associated with the property boom — this was financed in part by foreign borrowing since 30% of bank liabilities were foreign (mostly institutional or interbank) borrowing. These foreign liabilities of the banks were used to build and purchase domestic property via bank lending. This big short-term tax take allowed public expenditures to grow on the back of cyclical (and in fact unsustainable boom) tax revenues. When these tax revenues dried up the government’s solution is to … keep the expenditure level but borrow the money with sovereign debt issues. Not the correct solution.

@Jane Gray
One should consider both the short and the long term.

Yesterday’s budget spared pensioners and those on benefits. It hit the private sector harder than the public sector.

Recall that at the end of the day the private sector carries the entire economy. Yesterday’s budget redistributed money from the working to the non-working population; and from those working in the private sector to those working in the public sector.

The budget did little to stimulate the private sector. Indeed, by raising labour costs, it will be harder to take advantage of increasing export opportunities in 2010 and 2011.

@Jane

Assumption 1: We accept that public expenditure needs to be cut. (By the way if you don’t agree with that then we have to bridge the gap with pure tax. In which case last person to leave the country turn off the lights)

Assumption 2: A huge proportion of the public sector bill is public pay and social welfare benefits. So cutting telephone costs and stationery costs while laudatory won’t do it.

Assumption 3: We must cut the public sector pay bill. Either by cutting wages or reducing numbers. To improve productivity you have to cut numbers.

The reality is it is inevitable that this is going to have to happen. The government have again back loaded the pain to a couple of years out presumably hoping something will turn up. They need to start now or we’ll think we’re doing fine and wham the economy takes another hit.

We need some private sector thinking to the public sector problem. Businesses scale back, restructure and then move forward. There are a whole heap of public sector jobs that produce nothing. Look at the levels of bureaucracy. I understand in the HSE there are as many back room jobs as front line staff. That can’t be right.

It can be done imaginatively. Let people take career breaks, travel years, sabaticals to do a year’s study, time out to raise young children, try to start a business, write that novel. The early retirement scheme is an example of what can be done. It needs to be extended. Reallocate staff, don’t replace leavers. But bring down the public sector wage bill. It has to be done.

@ Richard Tol
Strangely, the public sector were so productive they got benchmarked! I know, he said darkly, I was one! But no, they did not get us into this. Greed did. Pretending houses were worth 12% more pa for 20 years may also have contributed as real productivity did not keep pace, believe it or not! And we did diddle with banks….
See my earlier rants on them.
We ran out of customers cos they is all broke is the biggie. We made ourselves wealthy by pretending to the US taxpayer that their companies could make massive $ in Ireland and nothing in the US: transfer pricing. But if they can’t sell they can’t make a profit. To sell their product, they must drop costs so Poland and Thailand here we come! And de Oirish lose jobs that were subsidized by the US taxpayer….

And it is going to get much worse…..Hehehe!

@Paul Hunt
You are correct and I support you.

But trying to be productive will be the job of the next government. This one is too busy with trying to pillage the public purse to pursue that one. Unless one of its cronies can make a buck out of it. Wages must have fallen 20% by now….

This is a Cl=st%rf*ck of a budget betraying absolutely no imagination or use of any of our comparative advantages.

@Richard
increasing export opportunities in 2010 and 2011.

How do you know this? If it is true then we are only in a mid size hole and even this bunch will muddle through.
How do you know this?

@All
The public sector knows how corrupt the pollies are and some but not many went along for the ride…they too are corrupt. To get promoted, you allow someone to know how to destroy you. You are compromised and then you rise. Canvassing disqualifies only at the start of your career. After that it is more than necessary if you wish to rise. Sack them! But it won’t save much of the pay bill.

Do you want me to start a problem with some serving now and recently retired? More wasted money? Or can we get on telling our betters what to do?

@Graham
True, and sorry for being populist.

In the immediate term, though, civil servants do not pay tax. Their wages are paid for by taxes, and then they return part of their wages in “tax”. That implies that you cannot expand the share of the public sector in the economy (as the government did yesterday) without negative consequences.

Of course, the public sector is productive too if and when it provides public goods and services, and doing without a public sector would not be wise.

At present in Ireland, I would argue that the public sector is too large, rather than too small — and the current policy is to make it bigger still.

@Richard,

Yes I do agree with you on the scale and size of the public sector in Ireland.

And I accept the “immediate term” implications of the current Leviathan on the budget constraints. The public sector wage obligations represent a huge stone in the narrow fiscal straits through with the goverment must maneouvre us.

Now that we seem to have gotten over the little kerfuffle about the private and public sector, perhaps we can focus on a few things on which we all seem to agree (or should be able to agree);

1. This budget is contractionary;
2. The pain of public expenditure cuts has been postponed;
3. Any borrowing capacity the Government has will be used to close the unfunded portion of the current deficit and to purchase dodgy property loans from the main banks;
4. Potentially productive investment is being scaled back and there is only a very modest proposal to tap private sector funds to part-finance construction sector activity – rather than seeking to finance a major investment stimulus; and
5. No serious effort is being made to improve Ireland’s international competitiveness – in fact it’s being damaged.

Does anyone else see this as an intensification of the hole digging we’ve been perfecting for the last 10 years?

The government had a choice to make, take the balance of the adjustment through spending cuts or tax increases…it chose the tax option which we can probably take but only as a once off. If taxes go any higher we’ll be having our own Boston tea party…what do we get for all these high taxes & high public spending anyway?

One of the worst public services in Europe, until they cut public spending & reform the public sector…they will not be able to raise anymore tax. Someone has to shout stop!

Public spending got out of control in the last 8 years (as Garret Fitzgerald has shown). We must cut it or pay the price. It is a self inflicted wound.

@ Liam

In my opinion you are perfectly right about this. Reforming the budgetary process, through the implementation of performance budgeting, is one step in the right direction. Budgets should be outcome-driven instead of line-item, input-driven. The current Annual Output Statement approach, inadequate as it is in terms of its own objectives, is a poor substitute for this approach.

Of course, performance budgeting has the potential to be abused as a catch-phrase, but it can be more than just a slogan if it is implemented the right way – The OECD had a very good publication on this in 2007 I think, I would get onto SourceOECD and find the reference, but I am just too tired.

However, a necessary precondition for increasing performance in the public sector, whether through budget innovations or by other means, will require a greater degree of flexibility on the part of public sector workers. PMDS is a joke, and needs to be replaced by a more rigorous performance-related measurement system, which provides for both sticks AND carrots.

Microeconomists, get yer gloves on…

@Paul: “2. The pain of public expenditure cuts has been postponed;”

It’s actually worse than that. Despite having the benefit (if it may be so termed) of the most convincing set of reasons for reforming public expenditure*, the government has once again done nothing. Each successive failure to tackle the monster strengthens the conviction — both of monster and of concerned citizenry — that St George (or St Brian) lacks the spherical objects to tackle the dragon. If not now, when will it be done?

Apart from that, my overall impression of the budget is much the same as yours.

“But what good came of it at last?”
Quoth Little Peterkin.
“Why, that I cannot tell,” said he,
“But ’twas a famous victory.”

bjg

* Note that I am not commenting on what parts of public expenditure should be cut. It is not essential that widows and orphans should be sent penniless into the snow: for instance, I favour parliamentary reform, in particular by getting rid of the Dáil and making the government answerable to the Seanad.

I think there’s a misconception caused by current economic thought, that the public and private sectors are somehow separate from each other. This is probably related to the pseudo-scientific nature of the economics profession, focusing always on reductionist objectives, or the trees instead of the woods. It’s like saying that a forest exists separate from it’s soil, or that the left side of the brain is somehow a parasite of the right. It’s nonsense.

Okay granted, there are the tradable and non tradable sectors, and the tradable sector provides the increasing returns that lifts an economy (most especially an open economy). But it is still but one economy. And one sector is utterly reliant on the other. There are no parasites in this relationship.

This goes to the heart of the problem. Using a public – private dichotomy where one is perennially seen as a problem for the other, is to miss the fact that they are not separate entities. Ask the Dutch. Do you think the private sector could have built their dikes? Or the Germans, built their great industrial strength without the high taxes and consequent infrastructure, supports and services?

We really need to wise up in this country. There are many examples to follow or even just to learn from. The Anglo Saxon model is not the only one, and to be honest, not even the best. In fact, for a nation it’s poisonous.

Richard,

There is, perhaps, a deeper moral to your Dutch dike story. It demonstrates the efficacy of concerted collective action by citizens in their long term interests without centralised direction.

During the last great international economic crisis, Keynes fought the good fight to rescue capitalism from its own death-wish and from the predations of fascist corporatism and communist collectivism by advocating a compromise between the liberty of the individual and the strengthening of the State to support and regulate markets and to advance a progressive agenda. He saw this in purely technical terms where the State’s participation would wax and wane as market conditions required, but he underestimated the inherent dynamic of the State to accrete more and more power and control and its ability to impose a form of “top-down” collectivisation.

Citizens are now treated, and have allowed themselves to be treated, as objects to be managed and manipulated – and, with an increased interest in behavioural economics, manipulated in more sophisticated ways. This is not a yearning for a return to a some non-existent Golden Age, but a description of the current reality.

The challenge is to develop arrangements that will allow citizens to become subjects, rather than objects, taking more control of their destinies, either individually or collectively. Ireland has a scale and a cohesion to facilitate the development of these badly-needed alternative arrangements.

@Liam D

I guess some people would get into trouble with their bosses if their identity were known …

Sure Richard – This is an issue but even a pseudonym like “Irish Economist” or something like that would be better. I don’t mind falling afoul of my bosses or indeed anyone else but I would rather it was for something I actually said!

Anyway – the main issue is the one of how economics should think of contributing to the debate on policy reform. This is really not a question of economists trying to act as management accountants. Leave that to management accountants. Its an issue of putting the way policies are developed and targetted on a scientific footing.

@Mark Dowling I measure the size of the public sectort by the diameter of the crater it leaves in the Irish public finances.

A friend of mine works in the public service, when he complained he had nothing to do, he was asked, “did he gamble?” “a lot of the lads pass the time gamblimg!” When he said he was not “into gambling” He was asked would he consider doing a degree? “No” he said, he already had one! “Would you consider doing another one?” Bottom line he was told, ” we cannot have you going round saying you have nothing to do!” He is one of thousands upon thousands, just look at what your own whistle blowers are saying.

The above is the norm in most of the Public Service! And then we have the gross inefficiency and dysfunctionality. All in all, If I was you Mark, I would embrace change instead of looking to hide behind statistics. You can fool some of the people some of the time but not all of the people all of the time. With statistics you could prove the moon was made of cheese if that is what you really wanted.