Lisbon Treaty

The economics of the Lisbon vote

In this post, I want to raise the economic consequences of the vote on the Lisbon Treaty on October 2nd, not the economic consequences of the Lisbon Treaty itself. The post is prompted by my amazement at hearing the comments of Professor Ray Kinsella of the Smurfit Business School when debating the economic consequences of a No vote with Pramit Ghose of Bloxham on Morning Ireland this morning.

Ghose argued that the financial markets will exact a price if there is No vote on October 2nd. Noting that 80% of Ireland’s debt is owned by international investors, he argued that a No vote would raise uncertainty for these investors who would consequently seek an extra premium for lending to Ireland. Going back to the experience in January–February earlier this year when Anglo-Irish bank was nationalised, he suggested that this premium could be an extra 1% on the borrowing rate the Irish government would have to pay.

This view of an adverse financial fallout from a No vote was disputed by Ray Kinsella, essentially on the basis of efficient market theory. His argument essentially is that the markets are already pricing in the possibility of Ireland saying No, so that if we actually say No, there will be no effect on the premium paid over German Bunds. As evidence for this, he noted that the yield premium over Bunds has been narrowing in recent months, again underlining the complacency with which the markets are viewing a No vote.

Now, Ray Kinsella went on to say that he did not think that the Treaty was good for either Ireland or Europe, so presumably he will be a No voter himself. But, from where I sit, there is a big difference between factoring in the probability of a No vote and the actual reality of a No vote. If markets are reading the opinion polls, they might assess the probability at, say, 40%. If voters do reject the Treaty, the probability ex post is 100%. This is surely not an insignificant difference.

More generally, I was interested to learn that there are economists prominent in public debate who are advocating a No vote on 2nd October. This seems to fly in the face of the Indecon survey which reported that Ireland’s economists are strongly in favour of a Yes vote, though their survey was confined to academic and research institute economists and specifically excluded economists working in the media and banks or other financial institutions. Their findings indicate that 91% of the economists surveyed believed that, taking all factors into account, Ireland’s overall economic interests would be best served by a ‘Yes’ vote.

As I was on holiday at the time, I did not respond to the Indecon survey, but I am a strong supporter of a Yes vote on October 2nd. Perhaps, given the understandable attention to NAMA in these posts over recent weeks, we have not given enough attention to debating the issues at stake in the Lisbon Treaty referendum. Although I want to confine this thread to what readers think is riding on the outcome of the referendum for the economy, if demand is there a thread could be opened on the economic implications of the Treaty provisions themselves. While financial markets are one channel whereby the referendum vote will affect the economy, there are clearly other channels as well, including foreign investment inflows as was highlighted at the benefit bash in Farmleigh over the weekend.

Certainly, Ray Kinsella’s comments were a wake-up call for me that Yes supporters can leave nothing to chance for referendum day.

Banking Crisis Economic Performance

New Global Financial Stability Report from IMF

The analytical chapters from the latest GFSR have been released

Chapter II. Restarting Securitization Markets: Policy Proposals and Pitfalls

Chapter III. Market Interventions during the Financial Crisis: How Effective and How to Disengage?

These are available here.

Environment Fiscal Policy

Distributional implications of a carbon tax

In a paper just published in the ESR, Verde and Tol study the implications of a carbon tax across the income distribution. The paper by and large confims previous work (Callan and others being the most recent). A carbon tax is markedly regressive. It disproportionally hits poorer households. That said, the scale of the carbon tax is modest (euros per week) and small relative to income taxes and benefits. That means that the distributional damage can easily be repaired (should our dear leaders be so inclined).

The paper adds to previous research by also quantifying the indirect effects of a carbon tax. (This was last done by Cathal O’Donoghue for 1987.) A carbon tax increases the price of energy (direct effect) and thus of everything else (indirect effects). The paper shows that the indirect effects are small relative to the direct effects, and thus hardly affect the regressivity of the tax. The paper also shows that a carbon tax abroad would have a similar impact on Irish households again.

Higher education Knowledge economy

Benoit and Marsh on excellence (or not)

In a paper just published in the ESR, Benoit and Marsh confirm that research excellence is measurable — even for political scientists, some of whom argue that reality is constructed. They show that research quality varies considerably. Should research budgets be cut, there is now a basis for cuts that minimise damage to quality.

Some of you will want to bitch that Benoit and Marsh feature as the numbers 1 and 3 on their own ranking. This is nonsense. The correlation between the various indices is high. The same people are top regardless of the quality measure used, and people-in-the-know already roughly knew who would do well. This exercise primarily serves the community — and the authors invested time that they could have used to publish in a more prestigious journal.

Fiscal Policy

ESR Paper on Public Sector Pay

The new edition of the Economic and Social Review is now available online. The edition contains two policy papers. One is this paper by Eilish Kelly, Seamus McGuinness and Philip O’Connell on public sector pay rates. I think Richard Tol is going to open a thread on the other paper which focuses on the carbon tax.

The three regular papers in the edition (David Audretsh on entrepreneurship, Ken Benoit and Michael Marsh on political science in Ireland, and Vahagn Galstyan and Philip Lane on fiscal policy and competitiveness) are also, in my opinion, very interesting contributions.
World Economy

Why did world trade fall so rapidly during the present crisis?

Lots of explanations have been advanced as to why world trade fell so rapidly during 2008-9 — far more rapidly than at the start of the Great Depression. Problems associated with trade finance, and the vertical disintegration of modern manufacturing production, are the two that come up most frequently.

I’d like to offer another, more banal explanation: the composition of world trade is very different today than 80 years ago. In 1929, just 44 per cent of world merchandise trade involved manufactured goods. That proportion increased to 70 per cent in 2007. The reason this matters is that manufacturing is more volatile than the rest of the economy, and it was the output of and trade in manufactures, rather than primary products, which collapsed during the Great Depression.

Between 1929 and 1930, the volume of world trade in manufactures fell almost 15%, while trade in non-manufactures actually increased by 1% (I have to say I wonder about that, but this what what my source says). Weighting these two indices by the shares of manufactures and non-manufactures in total world trade, you get an implied fall in total world trade of 6 per cent in 1930 versus the 7.5 per cent actually experienced. Repeating the exercise, but this time using 2007 weights rather than 1929 weights, yields a counterfactual decline in world trade of 10 per cent in 1930 — equal to the decline the WTO is predicting for 2009. The changing composition of world trade can thus explain a lot, it seems.

An implication is that whenever the world economy recovers, world trade will recover with it, unless a surge of protectionism occurs in the meantime.


Dell Workers and the European Globalisation Adjustment Fund

RTE reports today that 14 million euro will be provided from the European Globalisation Adjustment Fund to people who have been made redundant at DELL to assist them in the process of retraining and finding a new job. The website of this fund is available below and the basic idea is that the fund will support people who have been displaced by trade-related developments. It is intended only to fund active programmes rather than social protection measures. It is worth some discussion of this in light of the long running debate here about active labour market intervention.

link here


Migration is endogenous

Jim O’Leary writes about migration here.

Banking Crisis

The Economist Conditionally Likes NAMA

The article is here.

Banking Crisis

Ronan Lyons on Long-Term Economic Value

Ireland’s leading property number cruncher, Ronan Lyons, has a post essentially explaining how he would have done the LTEV calculations if he had been asked. Key conclusion:

the adjustment from current market value  should be downwards by 10% to about €44bn, and not upwards to €54bn.

Banking Crisis

NAMA Bond Yield Formula Finally Revealed

Finally, and only after questioning prompted by Brian Lucey’s earlier appearance on Morning Ireland, the Minister for Finance decided it was appropriate to let us know exactly what type of bond he was issuing with €51.3 billion of our money. The regular NAMA bonds will be issued with a six-month rollover period with an interest rate set at a half percent above the ECB’s main refinancing rate. This ECB rate is now one percent but there is general agreement that it will rise over the next few years (click here for historical values).

It should be clear now that there is nothing especially good for the Irish taxpayer about the current low yield on these bonds. At a time of low short-interest rates, it can always appear as though one is saving money by borrowing short and rolling over this short-term debt. However, because bond market participants aren’t stupid, long-term rates are determined with reference to this short-term rollover strategy, so there is no “free lunch” from issuing short-dated rather than longer-dated bonds. (Here are my own teaching notes on this issue.)

Those who think that the NAMA bonds are an especially good deal for the taxpayer might also note that the government is currently able to borrow at a six month duration at a rate of 0.5 percent—the yield on the latest six-month NTMA Treasury Bill auction. The extra amount being paid on the NAMA bonds can be justified as reflecting the higher sovereign default risk associated with longer dated debt.

I would note also that, given the relatively unremarkable nature of these bonds, any claims that their current low rate reflects some sort of special deal with the ECB—claims I never understood—need to be retired from circulation.

In relation to NAMA “washing its face” (it was washing its hands on Morning Ireland earlier—perhaps because of swine flu) there is no reason to expect the coming ECB interest rate hikes to generate corresponding increases in income from the 40% of NAMA assets that are generating income, so claims NAMA will always break even on an income basis appear to have little basis in reality.

Of course, we still don’t know anything yet about the maturity of these bonds. Or about the yield on the €2.7 billion in subordinated bonds. Or about the exact conditions under which the subordinated bonds will fail to pay off—though statements that they will pay off as long as property prices bounce back by 15% suggests that, as I had feared, the definition of “NAMA making a profit” will exclude interest costs.

But hey, Pat McCardle still reckons it’s all a secret EU conspiracy, so who am I to disagree? Perhaps Pat might enlighten us as to what changes the ECB have made to their current operational procedures to accomodate NAMA. Perhaps not.

Banking Crisis

The New Guarantee Scheme

Another important document today is the description of the new guarantee scheme: the details are here.

Banking Crisis

Non-Anglo Haircut is What Matters for Taxpayer

I flagged this last night but, going by the discussion we’re having at the previous thread, I think it’s worth saying a bit louder. The only thing that matters for assessing the potential cost to the taxpayer of NAMA overpayment is the average haircut on non-Anglo loans. Anglo is a nationalised bank and this transaction is one arm of the state paying another arm of the state.

So we simply do not know right now the extent to which the taxpayer may be exposed. Nor should stock markets really know how to react to this information when valuing AIB and BOI, unless they have been supplied with information that we don’t have. However, the “cowboy factor” makes it likely that the discounts applied to Anglo (and perhaps EBS and INBS) will be greater than those for AIB and BOI. So I’d be pretty confident that the haircuts for these banks will be less than the 30% average.

We know that the markets were expecting something like “the stockbroker scenario” involving a discount of about one-quarter (the stockbrokers gradually increased their estimated haircut over the past few months as irresponsible, mischievous, destabilising and opinionated economists lead a public fuss about the price to be paid for the assets).

Can we be sure that the average haircut of 30% announced today implies a larger haircut for the two main banks than was anticipated? Well we know that AIB and BOI are transferring €40 billion in book value loans to NAMA. A discount of a quarter would imply payment of €30 billion. Since we are paying €54 billion for the loans, this would imply paying €24 billion for the remaining €37 billion in loans which would be an average haircut of 35%. That seems perfectly plausible to me.

So, as regards the future of our two main banks, I don’t think we know any more than we did this morning. And yes fellow NAMA anoraks, the failure to announce any details about the two types of bonds is incredibly annoying and, frankly, hard to justify on any grounds that I can think of.

Update: AIB telling media that the discount on their €24 billion of assets (€17 billion in land and development) will be less than the average discount of 30% and that they will only need to raise €2 billion. AIB shares up 26% in after-hours trading in New York. BOI up 16%.

Banking Crisis

NAMA Details

NAMA background documentation here. No announcements about average haircuts for AIB and BOI and how much of the average 30% discount is in the Anglo loans. Very disappointing.

Banking Crisis

NAMA From Heaven?

Fianna Fail Deputy Sean Fleming appeared on RTE’s Six-One News last night and said the following:

There’s a lot of confusion on this. NAMA … The banks … This money is being borrowed from the European Central Bank. The taxpayer is not contributing any of this money tomorrow. The European Central Bank is providing all the money and all that has to happen is that during the ten years of NAMA or thereabouts, they will repay those loans back.

Today, Minister Willie O’Dea appeared on Morning Ireland and said:

The ECB have undertaken to make these bonds available to NAMA at one and a half percent.

Appearing on the same program, Fine Gael’s George Lee objected to this statement as being false, so Minister O’Dea rephrased his position as:

The ECB has agreed to give NAMA money … If the ECB disagreed so fundamentally, as George Lee suggested, with the plan, then they wouldn’t be prepared to come up with the money.

I suggest to our readers that the following are facts:

  1. NAMA will purchase loans from the banks with bonds backed by the Irish taxpayer.
  2. The Irish government, in the form of NAMA, will be paying interest on these bonds to the Irish banks at an initial rate of approximately 1.5 pecent.
  3. The ECB is not lending NAMA money at 1.5 percent.
  4. The ECB is not lending NAMA money at all as to do so would violate the EU Treaty’s prohibition of monetary financing of government. (Click here and read Article 101.)
  5. The ECB’s current operating rules mean that it will lend to any bank that has eligible collateral and government-backed bonds are eligible collateral
  6. The taxpayer is contributing the money to pay for the NAMA assets because the taxpayer will have to pay the interest and the principle on these bonds.

I would be interested in finding out does any contributor to this site think that any of the above statements are not facts. Anyone wanting to read an earlier description from this site of the relationship between NAMA, the banks and the ECB can click here.

(Beyond facts, I would point out that to argue that the taxpayer is not contributing money to buy NAMA assets is equivalent to arguing that the taxpayer is not liable for the public sector pay bill because this is being paid for by IOUs.)

Now ask youself. Are Deputy Fleming and Minister O’Dea (both highly trained accountants) unaware of these basic facts about the operation of the most important government financial decision in the history of the state? Or are they aware and deliberately peddling inaccuracies about how NAMA will work?

Then ask youself: Which scenario are you more comfortable with?


NAMA casts its shadow over rent flexibility

According to today’s Irish Times the legislation to ban leases providing for upward-only rent reviews has been shelved in the interests of NAMA:

Nama sinks upwards-only law

The Government is not to proceed with the abolition of upwards-only rent reviews even though the legislation has already been passed by the Oireachtas, says FBD Retail Excellence which represents over 50 retailers. David Fitzsimons, CEO of Retail Excellence, told members it was very unusual for a minister to announce a measure in the Dáil and then not proceed with it. His interpretation was that advisers to the Department of Finance and Nama had insisted on not abolishing upwards-only reviews as this would further undermine asset values.

Legislation to end upwards-only reviews on new leases was approved by the Dáil before the summer. While it would not have affected existing leases, Retail Excellence says it would have “sent a strong message to the landlords”. Labour TD Ciaran Lynch has tabled a question in the Dáil enquiring whether the legislation is to be implemented.

Banking Crisis

Desmond’s Proposal for the Banks

Dermot Desmond has put forward an interesting alternative proposal to NAMA. You can read it here. Essentially, the proposal is for the Irish government to guarantee €60 billion in bonds issued by the banks themselves subject to various conditions such as the payment of a fee to the government, disallowing dividends to paid while the guarantee is outstanding and, importantly, allowing the government the right to purchase the banks for €1 in ten years time if the guaranteed obligations cannot be paid back. The banks are then given time to sort out their bad loan problems via setting up their own internal “bad banks.”

I think this is an interesting proposal and I wish that we could have had a better public debate involving proposals like this at an earlier stage. That said, let me put forwards a few (hopefully constructive) criticisms.

  1. Why does the amount of issued bonds have to be as high as €60 billion? This figure has been arrived at as a guess of the long-term economic value of assets being transferred to NAMA. If these assets are not being transferred, where does this figure come in to it?  To return to an earlier discussion, it seems highly unlikely that the banks would use €60 billion in fresh funding to make new loans. More likely, if they were able to issue bonds of this amount, they would use it to reduce their dependence on the ECB.
  2. Who will buy these bonds? I’m sure Mr. Desmond realises that, without NAMA or some other major intervention by the Irish government, the banks could not raise this kind of funding. This is why he is suggesting the government guarantee. But this effectively implies the issuance of €60 billion in debts that are viewed as quasi-sovereign obligations. Is there the market out there to purchase this much Irish government-backed debt? My understanding of the government’s position is that it’s partly driven by an assessment that the answer to this question is no. This is why they are directly issuing government bonds to the banks, which the banks can use in repo operations at the ECB. The NAMA plan does not involve direct issuance of large amounts of quasi-sovereign debt to the market all at one time.
  3. The proposal does nothing to recapitalise the banking system, focusing instead on liquidity problems. If, as many suspect, our main banks are either insolvent (or close to it) without NAMA’s intervention, then Desmond’s plan would leave us with undercapitalised banks given a ten year sentence to get themselves sorted out. This seems like a recipe for zombie banks with an incentive to restrict credit and get risk-weighted assets down as a way of returning to solvency. The ten-year Damacles sword will incentivize the banks to use retained earnings to pay off the guaranteed bonds rather than expand assets. Not a pretty picture.

Desmond’s main objection to nationalisation is that nationalising all the banks would lead to an uncompetitive banking sector. However, it may be possible to adopt a hybrid approach in which some banks are nationalised, recapitalised and then privatised, while others are perhaps given the type of liquidity help that Mr. Desmond envisages. One thing should be clear, however: Any coherent plan for our banking system must focus on its recapitalisation.

Banking Crisis Economic Performance

Crisis-Related Measures in the Financial System and Sovereign Balance Sheet Risks

The IMF has released a new report that lays out general principles that should guide governments in managing public interventions in the banking system.

Full paper here.

Summary here.

Banking Crisis

The Night Before

Since the Morgan Kelly thread is spiralling towards a Night Before the Big Event discussion, I thought I’d give our readers a dedicated pre-NAMA thread to hang out in.

Brian Lucey has posted his prediction:

My prediction for tomorrow:  55b regular (blue) NAMA bonds, max 5b subordinated (purple) NAMA-bonds to purchase low 80s of book value; we may get to know the bond issue more clearly – expect to hear that the bonds are being issued on 12-18m rollover basis, and that subbies are very longdated.

I’m not sure I can disagree too much with that but I do hope it’s wrong both on total payment (too high) and the amount of sub bonds issued (too low). Part of the point of the lobbying effort that I and others have put in has been to get the government to avoid such an outcome, so I’d be disappointed if that came to pass.

A couple of other bits of pre-match punditry:

1. Don’t focus on the average haircut. That will include the haircut on Anglo loans which is one hand of government paying another, so it has no implications for the taxpayer. Focus instead on the haircuts for BOI and (in particular) AIB.

2. Let’s hope we can get some proper evidence on the original value of the collateral put up for the loans being acquired—the commonly-cited though theoretical €120 billion figure for the original collateral value underlying the equally theoretical €90 billion in loans. Without convincing evidence for this figure, claims that we should add 25 percent to get at the discount being applied to original value of the collateral should be interpreted with a huge dollop of salt. Ideally, I would also like to see evidence provided on the amount of rolled-up interest in the loans being purchased as well as any reduction in net equity due to cross-collaterisation. Claims that this information is “commercially sensitive” should be countered by proposals that detailed, convincing, information could be provided to the main opposition spokesmen.

3. Full detailed information about both types of bonds should be revealed including the exact circumstances under which the NAMA subordinated debt will not pay off and the maturity and coupon formula for the regular bonds.

4.  Look for full details of planned recapitalisations to be announced. We should know by tomorrow what rates of regulatory capital the government intends for the banks after the NAMA transfer.

Anything else?


Stiglitz report on measuring economic progress

The report of the high-powered Commission on the Measurement of Economic Progress and Social Performance set up by President Sarkozy and chaired by Joe Stiglitz and with a stellar cast of economists amongst its members was published today. President Sarkozy has promised to follow the report by measuring well-being as well as gross domestic product. The full report does not appear to be available yet on the Commission’s website, [Update:  link is now available]. For a flavour of the issues raised in the report, see Stiglitz’s commentary on the GDP fetish.


Morgan on property prices

Morgan has a piece in today’s Irish Times, which you can read here.

Banking Crisis

The Green Preferendum: Cod or Fish?

The Irish Times has the details of the Green Party preferendum.

1) Nama with strong Green Party policy conditions and only current market values being paid for transferred loans: 23 per cent;

2) The “Swedish solution” with each institution forced to write down its loan book to current market values and the possibility of separate asset management companies for individual banks: 20-21 per cent;

3) A free-market, laissez-faire approach, with banks left to fend for themselves: 14-15 per cent;

4) The Nama legislation in its present form: 13 per cent;

5) Partial nationalisation, with a “good bank” to assist small and medium enterprises: 12-13 per cent;

6) Full nationalisation: 12 per cent.

One can only imagine what subsequent ownership structure was envisaged by the Green Party faithful who voted for (1) and (2).

Rumour has it, the menu for dinner in Athlone was:

1) Chicken

2) Cod

3) Haddock

4) Sea Bass

5) Salmon

6) Fish

Hardly anybody picked option 6.

Banking Crisis

Gift Horses and The Taxpayer’s Pocket

With only a couple of days to go before the key details are announced, it seems to me that confusion over the role of the ECB has now become a central feature of most journalistic discussions of NAMA (I’ll pass on speculating as to why this is the case). Take this paragraph from an op-ed on the Greens in today’s Irish Times by Deaglan de Breadun:

A key point was that the European Central Bank is prepared to provide €60 billion on favourable terms to assist the Nama process. Moreover, the more pragmatic element in the party is reluctant to look this particular gift-horse in the mouth, especially since it will not be coming from the taxpayer’s pocket.

Is the fact that NAMA is being paid for by the issuance of Irish government bonds really so hard to understand? Even the role that the ECB is playing in the process—which I discussed here—isn’t really so complicated.

Moreover, doesn’t anyone find it strange that the same people who worry night and day about the government budget deficit—the issuance of €400 million in IOUs per week—and tell us that large cuts are necessary because of it, then regularly tell us that we don’t need to worry about the costs of NAMA because it just involves printing IOUs?

One might as well say that deficit financing spending is a fantastic idea (a gift-horse from the bond market!) because it doesn’t come from the taxpayer’s pocket.

Economic Performance

Agri-Aware survey of food industry performance and prospects

Agri-Aware, a body set up by organisations in the farm and food industries to improve the image and understanding of agriculture and the food sector in Ireland, has just issued a report The Agriculture and Food Industry – Bigger, Brighter, Tougher prepared by Jim Power of Friends First. The report examines data on the employment performance of the food industry during the past twelve months as well as surveying the opinions of industry managers on the main challenges they face over the next 12 months as well as their views on prospects for the coming 5 years.

Unfortunately, the main finding that the report itself highlights – that one in seven jobs in Ireland are dependent on the agriculture and food industries – appears to be based on a flawed analysis of the survey data. No one would deny that the agri-food sector has a hugely important role to play in helping to turn the real economy round, and there is no doubt that it faces real challenges, as usefully documented in this report. But the attempt to puff the industry up into playing a bigger role than it actually does is simply part of the special interest pleading we see so much of in the run-up to the next budget.

Banking Crisis

Will NAMA Get Credit Flowing?

I have spent a lot of time arguing that, among the set of options available to us to put the Irish banking system back on track, the current NAMA proposals represent an approach that is unacceptably costly to the taxpayer. The sense I get back from those who defend these proposals is that, yes this may be risky for the taxpayer but that the risk is worth it because NAMA is going to “get credit flowing in the economy again.”

Forgetting for a minute the questions of cost or fairness, I would argue that there is little reason to think that the current NAMA proposals will achieve this goal over the next few years.

Economic Performance Economics

Economic Impact of the Lisbon Treaty Vote: Survey of Economists

Indecon have conducted a survey of economists on the economic impact of the Lisbon Treaty vote. The full results of the survey can be downloaded here.

Banking Crisis Economic Performance

New DKM Report on Irish Economy

This report includes an article on NAMA by Brendan Dowling.

Banking Crisis

Hollywood and Economics

The FT reports that Oliver Stone is consulting with Nouriel Roubini in making preparations for the sequel to the Wall Street movie;  moreover, Roubini may take a cameo role in the movie.


First Swallow of Spring in Ireland

Contributor John is the first to “call” a recovery in Ireland.  He suggests that this should trigger a blog-thread here on at some point.  I am a financial economist not a macroeconomist but I am curious to start such a thread and read what braver souls have to say.  See John’s text below (from an earlier thread):

“For what its worth, I’ll stick my neck out and say that Ireland is now out of recession. I should emphasise that I’m referring to Q3 rather than to Q2. I don’t claim to be infallible. Its just my opinion based on a reading of the latest manufacturing, trade, retail and other statistics. I could quite easily be wrong. But, if I’m right, I trust the news (figures won’t be published for Q3 until December) will trigger a thread here. “

Fiscal Policy

Irish Times Article on Tax

Here‘s an article I wrote for today’s Irish Times on tax.  The article was slightly edited in a way that might obscure one of the points I wanted to make. I understand that the Commission on Taxation were not really given a mandate to think about what is the “correct” level of taxation but the fact is that we are going to have make serious Boston-versus Berlin-style decisions over the next few years and this issue will come up time and again.

I don’t favour raising income taxes in the upcoming budget and I do favour full implementation of the McCarthy report. But after that point, a decision to keep income taxes at current levels will have major implications for spending. I heard the Minister for Finance on the radio yesterday say that there is was “no further room” for income tax increases. It is possible he is referring only to the upcoming budget but the idea that income tax has hit some very high level that can’t be increased doesn’t strike me as correct in light of the facts.