The Minister for Finance appeared on Morning Ireland today. A strict interpretation of his comments would suggest that NAMA is going to apply a very large haircut.
Well, the legislation is out though I’m not sure we’re really much the wiser. Needless to say, my favourite bits have already been highlighted by commenters in our long-term valuation thread.
(a) a reference to the current market value of the property comprised in the security for a credit facility that is a bank asset is a reference to the estimated amount that would be paid between a willing buyer and a willing seller in an arm’s length transaction where both parties acted knowledgeably, prudently and without compulsion,
(c) a reference to the long-term economic value of the property comprised in the security for a credit facility that is a bank asset is a reference to the value that the property can reasonably be expected to attain in a stable financial system when current crisis conditions are ameliorated and in which a future price or yield of the asset is consistent with reasonable expectations having regard to the long-term historical average.
I could rant on about the craziness of paying according to (c) rather than (a) but it pretty much speaks for itself and, in any case, you already know what I think. What about the rest of you? What do make of paying according to (c) rather than (a) and is there much else in the legislation that you found interesting?
The IMF has released its ‘selected issues’ report for the euro area and a major focus this year is on the desirability of ‘special resolution regimes’ to enable the resolution of insolvencies in the banking sector: you can read it here.
It is clear that when the NAMA legislation is published later today, there will be a lot of focus on the question of long-term economic value and the European Commission’s guidelines for pricing assets transferred to government asset management agencies.
I have written about this issue before and don’t want to repeat myself. However, I’d like to emphasise two issues.
There’s a lively debate going on about Philip’s earlier comments about competitiveness and recovery and I wanted to add to it but then wrote something so long I decided it would be best to exploit privilege and start a new post.
David Begg criticises the ‘deflationary’ strategy in an article in today’s Irish Times (you can read it here). In reading this article, it is helpful to remember that the term deflation requires subtle interpretation for a member of a monetary union. In particular, the main substantive issue is whether real devaluation is a necessary part of a recovery strategy, where real devaluation means a decline in relative wages and prices in Ireland relative to our trading partners. For a low-inflation monetary union, an individual member country may require a temporary period of deflation in order to attain a significant real devaluation.
David Begg argues that there is little evidence that deflation facilitates recovery. However, there is a strong body of evidence that real devaluation is helpful. Just taking Irish economic history, the devaluations of 1986 and 1993 were contributory factors to economic growth.
It is certainly true that the global recession means that the level of external demand is low. It is also true that the re-orientation of spending in the world economy towards Asia and away from the United States does not help Ireland, given the nature of trading patterns. However, these external factors simply underline the scale of the negative shock that Ireland is enduring.
It is also true that high levels of household debt means that deflation carries an extra cost in terms of raising the real burden of debt repayments. However, the single biggest risk factor in debt repayment is unemployment and a strategy that minimises the growth in unemployment through the restoration of competitiveness dominates.
The real question is whether there is a credible alternative. If Ireland had run a counter-cyclical fiscal policy during the good years, there may have been room to do more in terms of counter-cyclical fiscal expansion now. However, the scale of the fiscal deficits and the fragile state of international bond markets mean that significant fiscal expansion cannot be entertained.
Rather, the focus has to be on restoring international competitiveness through real devaluation (plus other measures to fight monopoly power in the economy and improve productivity). This will stimulate not only the export sector but also the domestic nontraded sector, since the level of domestic consumption will be boosted if Ireland can establish a sustainable growth path. In relation to the export sector, the gain will not only be in terms of the performance of existing sectors and firms but also in relation to the ‘extensive margin’ (new firms exporting for the first time, sectors emerging as internationally competitive). In turn, suppliers of domestic services to these firms will gain, such that the employment impact will be wider than just the export sector itself.
As I write this, the government is continuing to mull over its NAMA proposal. The proposal has been around so long that it is easy to forget that we are actually still at an early stage with this process, with the legislation yet to be published even in draft form and no vote due for a couple of months. For these reasons, it is still worth discussing why alternative approaches may be worth taking.
I’d like to set out one such approach. But before doing so, let me explain why I think things have moved on since the NAMA proposal was introduced.
A remarkable recommendation from An Bord Snip Nua is to suspend payments into the National Pension Reserve Fund (NPRF). In today’s Irish Times, Fintan O’Toole comes out in support of this proposal (see his article here). The relevant text from the report is:
D.2 Suspend payments into the National Pension Reserve Fund
Under the National Pensions Reserve Fund Act 2000, one per cent of GNP is paid into the NPRF each year. The Group considers that continuation of this annual payment is difficult to justify at this time, given the rate of growth of the public sector borrowing requirement. These payments were affordable when the budget was generally in balance but the Group considers they should be suspended as the State is in effect borrowing to finance the purchase of financial instruments.Transfers to the NPRF amount to approximately €1.6bn a year. Suspending this €1.6bn transfer would have no impact on the General Government Balance, but would reduce the annual Exchequer Borrowing Requirement.
(page 182 of second part of report)
It is odd that the NPRF falls within the remit of a report on public expenditure, since payments into the Fund do not constitute public spending as it is normally understood. Rather, the Fund is a vehicle to enable partial pre-funding of the projected sizeable increase in future public spending that is connected to the ageing of the population. The logic of pre-funding follows from ‘tax smoothing’ principles – it is better to have a higher tax burden now in order to make payments into the Fund rather than to experience a discrete jump in the tax burden in the future. The annual payment into the Fund is also an important commitment device, especially during periods of scarce fiscal resources. In particular, the Fund protects the interests of those who will be paying taxes in the post-2020 period versus those who have a much shorter horizon.
There is certainly plenty of room to discuss the appropriate investment strategy for the Fund, especially when the government is running a deficit and there is a sizeable risk premium embedded in the yield on Irish sovereign debt. Moreover, the ad hoc revision of the Fund’s investment strategy to enable its investments in the main Irish banks provides a further reason to re-think the strategy for the Fund.
One dimension of this review could include the Fund’s strategy vis-a-vis Irish government debt. Although the founding legislation for the Fund prohibited the purchase of Irish government debt, this prohibition could be reviewed. Just as the US Social Security Fund holds only US treasury bonds and retirement funds in other countries have a heavy concentration in domestic government debt, it may make sense for the Fund to have the option to purchase Irish government debt under certain conditions. This is also in line with the trend towards localisation in investment decisions, as described by Gillian Tett in the FT yesterday (her article is here).
Another group has taken the legal route to try to prevent a government decision to reduce expenditure, this time the Minister of Health’s decision to reduce payments to pharmacists for dispensing drugs to patients. Eilish O’Regan, the Irish Independent’s health correspondent, has two good articles outlining both the background to the dispute and giving some details on the money at stake to individual pharmacies in today’s issue of that paper.
The case (see Irish Times report here), which is being taken by the Haire group of pharmacies, claims that the cuts will push it into a loss-making situation meaning it cannot repay its bank loans and will thus become insolvent. The pharmacies want an injunction restraining the Minister applying the regulations. Among various claims, they allege failure to provide 30 days notice of the change in the payment regime was unlawful and breached their constitutional rights. The case is being prosecuted by Gerard Hogan, SC who is also representing the teachers taking a case against the government for closing their early retirement scheme. The application for the injunction will be heard on Monday next.
If the main argument made by the pharmacies is that the Minister did not give the required 30-day notice, this would appear to simply delay rather than prevent the implementation of the cuts, which seems a lot of money simply for a few months’ reprieve. If the Minister lost on that basis, I presume she would simply start the process again giving proper notice. One assumes that the pharmacies want to prevent the cuts indefinitely, but the basis for this argument is not clear from the reports.
Eurostat have released a document yesterday summarising youth unemployment rates for Europe.
Karl Whelan also delivered a paper to the McGill summer school. I am not going to try to summarise the paper given that the author regularly posts here but I want to open a couple of aspects to discussion and I acknowledge that this may be selectively focusing on issues from a more general paper that contains some very strong insights.
In particular, I think Karl’s talk leaves wide open the extent of the problems that are emerging from credit decisions made by households and their lenders in the context of a much more open credit market during the last ten years. There seems to be some evidence for Ireland, as Karl notes, that older homeowners did not cash in their housing windfall and this, ex post, is a very lucky thing for them. However, as Karl partly acknowledges, the data currently simply does not exist for us to know the extent to which people have overstretched themselves and the potential second-round consequences this will have if a sizeable group of indebted consumers begin to default as their incomes and job prospects decline. The point made in Karl’s paper about the extent to which asset values of households also improved thus mitigating their indebtedness must be seen now in the light of drastic reductions in the value of housing and arguably many other types of household assets.
Again Karl’s paper does talk about potential problems that might arise: “So, the composition of recent changes in assets and debts likely differed substantially across demographic groups and it is the younger cohorts that are most likely to be in trouble now.” But I think we need to put something much more substantive on this statement. This is not a criticism of the paper as the data doesn’t exist so we cannot have expected Karl to incorporate non-existing information into his paper. Perhaps we can tell the story of the causes of the current decline without this information. But I can’t see how we can even begin to talk about its consequences without knowing the extent to which people have become overextended and the likely behavioural and psychological consequences of this.
One of the key questions relating to how NAMA is going to operate is the price that will be paid for the assets it acquires. Last week’s Sunday Tribune reported that
The National Asset Management Agency (Nama) plans to impose discounts of between 25% and 33% on the most devalued loans contained among the €80bn of property assets to be transfered to the state-owned organisation.
The Tribune story speculated that discounts of this size would help NAMA to break even or perhaps make money over its ten-year life cycle. Of course, one of the problems that we have had when thinking about this issue is that these discussions are happening in the abstract without reference to detailed knowledge about specific loans.
For this reason, the ACC-triggered High Court examinership of Liam Carroll’s Zoe Group is very helpful in giving us a specific example to discuss. In Monday’s Irish Times, John McManus reported the following:
Applying for court protection Zoe said that if the group of six companies, which have total debts of €1.2 billion, was liquidated, they would have a deficit of €900 million. Based on this writedown value, properties on which it has borrowed €1.1 billion from eight banks would fetch €275 million if they went on sale this morning.
That means a 75 per cent writedown for the banks.
Ok then, let’s have a write-in competition. What do readers think is the correct price at which the Irish taxpayer should purchase these Liam Carroll property investments? The €275 million they are worth today, the €550 million they’d be worth if they doubled in price or the €737 million (one third discount relative to €1.1 billion) that the Tribune reckons would be the lowest possible price that NAMA would pay?
In interpreting the various answers put forward, it might be helpful to keep in mind that AIB has over €24 billion in pure development loans and has core equity capital of about €8 billion.
I’m just back from spending a few days at the McGill Summer School in Donegal. Joe Mulholland is to be commended for having put together a very interesting line-up of speakers and I very much enjoyed my couple of days there.
One strange aspect of the McGill event, however, has been the media coverage. Judging from newspaper front pages, one would conclude that the sessions involved heated discussions about proposals to cut the minimum wage. In fact, this was not the case.
Thanks to Patrick for posting the links. He mentioned George Lee’s talk, which I have just read.
I have blogged about Deputy Lee and I state again that I dont have any connections with him or his party. He is improving the quality of the political debate around economics in my view. Whether his position is correct can be left to the comments and hopefully the comments can stick to the economic merits of these suggestions rather than more personalised political arguments that are best debated on the many politics blogs in the Irish landscape.
The speech, unsurprisingly, is critical of government performance and policy. A summary of the substantive economics points is as follows:
– The size and swiftness of the current proposed fiscal adjustment is too large. The government should reconsider trying to get the budget deficit back to 3% by 2013. “What’s so sacred anyway about having a General Government Deficit of 3% of GDP by 2013, especially if achieving that target runs the risk of turning an economic recession into a depression?”
– The tax base was narrowed too much during the economic boom and should be broadened. “Taxes on the average worker were cut to the lowest combined rates in the developed world outside of Mexico and Korea. Despite the fact that global interest rates were historically low and that access to credit both at home and abroad had never been easier, massive tax breaks were given to property developers and investors. This was an irresponsible approach to the structure of the taxation system and of our economy that has now blown up in our faces.”
– Guaranteeing all bank debts is irresponsible. “There is no sane reason why Irish taxpayers should continue protecting investors who bought bonds issued by Irish banks….The protection given by the Guarantee to bond investors in Irish banks should be removed September next year when the first two-year term for that Guarantee is up. This shouldn’t preclude the Government from renewing the Guarantee for normal wholesale borrowing by Irish banks. It would, however, help send a message to the international financial markets that the Irish Government is reducing its debt exposure in a rational way and is not lumbering ordinary taxpayers with debts obligations they should have no liability for.”
The EU Commission today published a report on the EU dairy market. It is mainly concerned with setting out the portfolio of measures available to alleviate the very difficult milk market situation. Demand for milk products, particularly the higher value products such as cheese and fresh products which account for 70 per cent of EU production, has been adversely affected by the economic downturn. At the same time, there has been a collapse in world market prices, due to a combination of production increases by other suppliers (New Zealand, Australia, Argentina, Brazil) responding to the dramatic increase in dairy product prices in 2007-08 and a drop in global demand due to the economic crisis.
The report also deals with the widening gap between the price paid to farmers for milk and the prices charged to consumers for milk products. The figures for Ireland are particularly startling, even if the pattern for other EU countries is broadly similar. Between Q4 2007 and Q1 2009, the price paid to farmers for raw milk in Ireland fell by 43%, with corresponding reductions in the wholesale prices paid for butter and skim milk powder of 44% and 41%, respectively. However, the CPI for the product category ‘milk, cheese, eggs’ (which includes other milk products but excludes butter) actually increased by 9% over the same period, compared to a 4% increase for food products generally. From the CSO databank, I calculated that the corresponding increase for butter was 2%, which while smaller, is still extraordinary in the light of the 44% decrease in the wholesale price of butter over the same period.
The Commission report underlines that this is not just an Irish problem. However, the Competition Authority’s recent investigation into grocery prices which recommended a relaxation of planning restrictions to encourage greater competition in the retail trade does not seem an adequate response to this total absence of price transmission in the dairy supply chain. At a minimum, we need much greater transparency in how margins are distributed between producers, processors and retailers.
I would be interested in Cormac’s considered opinion on this.
The reaction to An Bord Snip Nua’s proposed spending cuts in the agriculture, forestry and fishing (AFF) area has been predictably intense. The overall savings proposed are €305 million, out of total voted expenditure of €1,985 million (or €1,655 if EU receipts under the Rural Development Programme which count against this expenditure are excluded), amounting to a reduction of 15.4% on voted expenditure (18.4% on the national contribution to this voted expenditure). Taking all of public expenditure, An Bord Snip Nua identified potential savings of €5.3 billion or 9.3% of relevant expenditure. It therefore seems as if the AFF area will be asked to take a disproportionate share of the overall cuts. However, while I have some quibbles with the details, it is hard to disagree with the overall thrust of the proposals, and indeed I think some expenditure schemes were lucky to survive. I look at the details of the proposals with respect to agriculture in this post.
The focus of this year’s Patrick MacGill Summer School is the Irish economy. It features an array of excellent speakers.
Update: About 900 people crowded into the hall in Glenties Tuesday night to witness an unusually gripping evening of oratory on economic policy, with presentations by Eamonn Gilmore, George Lee and Brian Lenihan.
George Lee’s talk was particularly noteworthy and suprising.
I am opening this strand to facilitate discussion about the many recommendations made for reform of the legal system by the McCarthy Report. Whilst there are lively discussions going on here and in many other media concerning proposals for cuts there has been little discussion of the extensive proposals for the legal system beyond a focus on the abolition of the tipstaff posts within the Courts Service and merger of various ombudsman functions. The law pages of neither the Sunday Business Post nor the Irish Times give any mention to the Report. For convenience I list some of the highlights below:
Management of the courts and supporting the Judiciary
Rationalise the network and operations of the District and Circuit Courts
Abolition of Tipstaffs grade
Judicial review of judgements – ‘Courts should be given the necessary powers to correct themselves with the consent of both parties. Furthermore, those involved in the case should not be awarded costs if they insist on Judicial Review without initially engaging with the original court in its efforts to correct its decision.’
Address ‘out-dated practices which are sharply at odds with what is expected throughout other areas of the public and private sectors. In particular, the Group recommends that the Courts should:
• provide for Monday sittings;
• open the Courts for the full year (rather than closing for prolonged periods of time);
• introduce pre-trial hearings to deal with technical matters in advance of jury selection;
• streamline the selection of Juries (for example by providing the Defence an opportunity to object for stated reasons to individuals on a long panel of potential jurors, before jurors are
called to serve); and
• use court real estate more efficiently (e.g. using a court room to hear one case in the morning and one in the afternoon rather than one a day).
The efficiency of the Courts system could be improved by providing prospective judges with judicial training prior to going on the bench and ongoing professional development, by providing the Presidents of the Courts with meaningful powers and functions in the area of discipline and the
issuing of practice directions, by establishing a Judicial Council to address serious disciplinary issues and by strengthening the independent role of the Judicial Appointments Board in the appointment of judges.’
Reduce the number of County Registrars
‘The feasibility of introducing a limited number of short-term non-pensionable law graduate internship placements contracts of 1 to 2 years clerking for a group of judges to assist judges with research should be explored.’
Reduce surplus security personnel at the Four Courts
Review charging system
Introduce a limited means testing system for criminal legal aid
Extend digital audio recording to the Civil Courts
An Garda Síochána
Better co-ordination to reduce time spent by Gardaí in court
Rationalise the Garda station network
Transfer responsibility of immigration control at entry point to INIS
Review of Garda pay and allowances
Regulation and Oversight
Merger of ComReg and the Broadcasting Authority of Ireland (*corrected 22 July)
Merger of Property Registration Authority (PRA) with Ordnance Survey Ireland and the Valuations Office (*corrected 22 July)
Establishment of an Ombudsman Commission (taking on the role currently undertaken by the Office of the Ombudsman, the Children’s Ombudsman and the Information Commissioner)
Merge the Property Services Regulatory Authority with the Private Residential Tenancies Board
Transfer the disability functions of D/JE&LR to the Office for Mental Health and Disability in the Department of Health & Children
Improve Value for Money in the Coroners Service
Abolish Law Reform Commission
Reallocate the statutory employment and occupational benefits
responsibilities of the Equality Tribunal to the Employment Appeals Tribunal
‘Reduce expenditure on the gender mainstreaming [and integration] and transfer the function to the Department of Enterprise, Trade & Employment’
Reduce the allocation to equality organisations and projects
Abolish the Office of the Minister for Integration
Staffing levels in the youth detention centres should be reduced
‘Duplication of legal advice – The Group is of the view that other State bodies may be unnecessarily seeking legal advice for the same or similar matters particularly regarding the interpretation of legislation. This duplication leads to wasteful expenditure and the Group concludes that as far as possible public bodies should be able to avail of the expertise of Government legal services, via their parent Department in each
‘Legal Costs – The Group has noted the practice of different state organisations pursuing legal cases against one another e.g. the Commissioner for Aviation Regulation vs. Aer Rianta. This duplication unnecessarily increases the burden of legal costs borne by the State. The Group proposes that there should be compulsory arbitration of legal disputes involving State bodies. Any State body wishing to resolve a legal dispute with another State body would be required to inform the relevant Minister who would then be responsible for mediating a solution or arranging for other forms of independent mediation. Legislative change should be initiated to implement this proposal if necessary. The Group notes that the revised and updated Code of Practice for the Governance of State Bodies provides that where a legal dispute involves another State body, every effort should be made to mediate, arbitrate or otherwise before expensive legal costs are incurred and that the Department of Finance should be notified of such legal issues and their costs. ’
‘Distinction between junior and senior counsel – The Group has looked at the difference in the level of legal fees payable to junior and senior counsel. The Government, at its discretion, grants Patents of Precedence at the Bar on the recommendation of an Advisory Committee consisting of the Chief Justice, the President of the High Court, the Attorney General and the Chairman of the Bar Council. The Group is of the view that this distinction is unnecessary and contributes to higher legal costs payable by the State. Other jurisdictions function adequately without this hierarchy of legal professionals. The Group notes that this practice applies across the entire legal industry but considers that the removal of this distinction is unlikely to have a significant negative impact on the legal system.’
An Bord Snip Nua has a number of recommendations in the intertwined areas of energy, environment and transport:
1. End energy, environment and climate awareness programmes
2. Water charges and road pricing
3. Reduce energy subsidies to the price of carbon; abolish said subsidies when the carbon tax is introduced; end subsidies to regional airports and domestic flights
4. Discontinue selected train services
5. Merge water authorities, market regulators, and safety regulators
6. Privatise Bord na Mona and Bus Eireann Expressway
I agree with all of the above.
On 4, I would also end public subsidies to the planned interconnector to Wales. This is a commercial proposition; there are few externalities, it is not a public good, nor is it a natural monopoly.
On 5, Sean Lyons pointed out that the Irish Aviation Authority is a market regulator and should therefore be merged with other market regulators rather than with the Road Safety Authority, the Railway Safety Commission and the Maritime Safety Directory. I confused the Irish Aviation Authority, the safety regulator, with the Commission for Irish Aviation, the market regulator. The safety regulators should all be merged into Safety Ireland. The market regulators should be merged into Competition Ireland.
On 6, I would go further. An Bord Snip Nua argues that state-owned companies should pay higher dividends, but I would sell them at the first opportunity. 2010 may be too soon, but we should be able to get a decent price from 2011 onwards. I would also end the monopoly of Dublin Bus.
An Bord Snip Nua is silent on waste management. While two incinerators are being build, the government is trying to divert future waste away from incineration towards other, more expensive forms of treatment. If the government succeeds, it will (1) destroy capital and (2) increase costs. Arguably, this is not in the budget yet and therefore outside the remit of An Bord Snip Nua, but the investment is measured in hundreds of millions of euros.
One of the recommendations of An Bord Snip Nua is to transfer all research money from the departments and agencies to a single research body. Besides the cost savings, I see three advantages:
1. Competition for research allocation between fields (as opposed to the current earmarking of research money for someone’s pet projects)
2. Academic quality control (captive agencies occassionally grant funding to researchers of low repute but the right political colour)
3. Streamlining of applications and administration (at present, research bodies need to keep track of the rules of a range of bureaucracies)
I see two disadvantages, however:
1. Disruption: Transfer of tasks between public policy inevitably leads to chaos, and no research funding will flow for a certain period. This may lead to the destruction of human capital — that is, the good researchers may leave the country, leaving the dross behind. Continuity is therefore a high priority.
2. Applied research has a lower status, and funding will be under additional pressure from blue-skies research. The agencies and department that lose their research grants should have a substantial say in the type of research to be funded (but not, of course, select the researchers).
In addition to the Department-by-Department blow-by-blow recommendations, An Bord Snip Nua has offered general comments and recommendations in Chapter 2 of its Volume 1. Among other things, it speaks about:
– Outsourcing and economies through shared ICT.
– Rationalization of Departmental structures and agencies including for the delivery of services at local level;
– Improvements in procedures for public procurement and property management.
– Value for money and performance appraisals.
I would welcome specific comments on these structural and strategic aspects in this thread.
How about some specialized discussion on proposed cuts?
I haven’t yet counted the recommendations in Volume 2 of An Bord Snip’s report, but there is much detail on which specific expert comment would be valuable and could begin here.
Three-quarters of the potential savings identified by An Bord Snip nua are (unsurprisingly) in the three biggest spending areas: Health, Social Welfare and Education. I’m opening a separate thread for each of those three: keep this thread for the rest.
Please no general waffle on this thread please!
I’m opening this strand to facilitate more specialized discussion on the cuts in Education proposed by An Bord Snip, which total €0.7 bn or 8% of the €9 billion currently spent in this area.
The proposed cuts include:
Structural efficiencies (e.g. amalgamation of some ITs and VECs).
Staffing reductions and productivity improvements (e.g. in the area of sick leave arrangements, special needs assistants, pupil-teacher ratios, and more teaching hours)
Programme adjustments (mainstreaming of traveller education, costbrecovery of school transport, PRTLI)
I’m opening this strand to facilitate more specialized discussion on the cuts in Health proposed by An Bord Snip, which total over €1.2 bn or 8% of the €15 billion currently spent through the HSE.
Cuts here include: staffing roll-back of over 6000; a tightening of the eligibility requirements for medical cards; increased co-payments for prescriptions and walk-ins to A&E; and some rationalization of agencies.
I’m opening this strand to facilitate more specialized discussion on the cuts in Social Welfare proposed by An Bord Snip, which amount to €1.8 bn or 9% of the €18 billion currently spent in this area.
Among the proposed cuts are an overall roll-back in rates of 3% or 5% nominal; a 20% reduction in Child Benefit; and some changes in eligibility (double payments).
An initial glance through suggests that it’s all meat and little padding. It will be for others to frame the wider implications of what is being proposed.
There can be no doubt that the decisions that will be taken on public spending in the coming months will shape our society for a long time to come. Let the debate begin. And let’s get the balance of analysis and polemic right!
Update: OK, enough is enough. The volume of disparate comments — over a hundred now on this strand — tells me that some specialization is needed here, so I am opening five new strands to facilitate a more coherent discussion of sub-issues.
One strand, then, on each on the three biggest areas by spend (Social Welfare, Health, and Education) one on specific issues in the remainder and one on the strategic and structural aspects.
No doubt some contributors will also be drafting substantive posts on particular aspects, and on the overall implications of the report and reaction to it.
ESRI forecasts for 2010 allow me to update the internal/external balance plot first used by Brendan Walsh and myself to describe the lengthy cycle 1975-2001.
The first chart, with data up to 2006, shows the previous big counterclockwise cycle: first the balance of payments goes into deficit (1975-1979); then the correction begins and unemployment rises (1980-85), the balance of payments deficit contracts (1981-87) and moves into surplus (1991-93); finally unemployment comes down again (1993-2000).
Looks like the Irish hare is taking a shorter and sharper curve this time. The balance of payments blow-out (2003-2008) has been much smaller in amplitude and shorter in duration than in the 1970s and 1980s. The rise in unemployment (2007-2010) is much faster than in 1981-86. Sooner or later we’ll get back to the bottom centre of the graph with low unemployment and zero balance of payments.
The first chart shows data up to 2006, the second one joins the dots for 2007-2010 according the the ESRI forecasts published this morning.
(PS: For those who like two-dimensional business cycle graphs, there is a very nice one (plotting rate of change of GDP against its level) for the US in a recent issue of the New York Times. Wish I had a copy of their animation software!)
The lead headline in the Irish Times today must have depressed many: “Economy to shrink 11% over the next 18 months, says Central Bank.” Things feel bad now, how bad would they feel if output fell by another 11% over the next 18 months. Well, this is not at all what was forecasted by the Central Bank and their forecast is actually not that gloomy at all.
First, the bank’s forecast is that the average level of GDP in 2009 will be 8.3% lower than the average level of GDP in 2008, and then that the average level of GDP in 2010 will be 3% lower than in 2009. The Bank did not release a forecast about what will happen over the next 18 months.
Second, while the Bank (like the ESRI) do not release quarterly assumptions underlying their forecast, one can back out roughly what they might look like. Seasonally adjusted real GDP in 2009:Q1 is already 5.8% below last year’s average level. So, if GDP was flat for the remaining three quarters of the year, then the Bank’s figure for the year average over year average for 2009 would be -5.8%. One way to get their figure of -8.3% is to assume a decline of -1.8% over each of the last three quarters of the year.
However, if that were to occur, then even a flat level of GDP in 2010 would produce a year average over year average figure for 2010 of -2.7%. So, in fact, rather than an 11% decline over the next 18 months, the banks figures are actually consistent with a decline in GDP from the end of June to December this year of 3.6%, followed by a very small decline in the first quarter of 2010 and flat GDP after. A more likely scenario that would produce the Central Bank’s forecasted outcome would see a larger fall in 2010:Q1 and perhaps 2010:Q2 followed by a recovery in the subsequent quarters. In light of the severe fiscal contraction being inflicted on the economy over this period, this would not represent such a bad outcome.
Beyond the question of what the Central Bank forecast actually implies, there is the more general issue, which I have referred to before, of the difficulty in mapping forecasts based on year-average over year-average into commentary about what is actually happening now in the economy.
Rossa White of Davy’s has also written on this issue. See here.