McCarthy and Varadkar on Fiscal Strategy

Colm McCarthy makes an important contribution to the fiscal debate in today’s Irish Times.   I agree with most of it: the precariousness of creditworthiness, the rebuttal of Ray Kinsella, and the reputational damage associated with an IMF/EU bailout. 

But Colm continues to provide the best analysis around of half the challenge facing the government – creditworthiness.   The other half is the collapse in domestic demand.   Colm is right that there is a tradeoff between the two.    What he doesn’t offer is suggestions on how the tradeoff can be improved, such as measures that increase the credibility of the four-year plan that would limit the necessary degree of front loading. 

Leo Varadkar’s piece in the Sunday Business Post is interesting in this regard.   On its face, it might seem that he is advocating an extreme front-loading of the adjustment.    The twist is that he advocates using the NPRF to maintain investment spending.   Thus he combines a large upfront and permanent improvement in the deficit with measures to limit the deflationary impact.   Of course, this could also be achieved by directly protecting the capital budget and imposing bigger burdens on current spending and taxation.  But that does not appear politically possible.   Deputy Varadkar’s proposal would obviously also be very difficult to pull off.   But it is worth debating. 

Unlike many others, I think the NPRF had value for its stated purpose of pre-funding future pension costs.   But that ship has sailed.   More recently, it has served as a valuable liquidity backstop against a self-fulfilling fiscal crisis.   It is worth considering now how the fund might be used to improve the creditworthiness-demand tradeoff.   

65 replies on “McCarthy and Varadkar on Fiscal Strategy”

I understand that the Swedish response to fiscal crisis, as is often held up as an example of best practice, was to frontload the structural changes. this means changing tax rates and attacking current expenditure.

I do not know about the following statement form Varadker:
“Capping tax relief on pension contributions would yield another €330 million, and consolidating PRSI and the income levies into a single levy charged at a low rate on all income could deliver another €200 million.”

Whilst I agree with capping tax relief on pension contributions I don’t think it will yield €330m. Similarly the administrative costs involved in taxing all income and the moral hazard it creates in the absence of reform of transfer payments makes me question the €200m saving.

If the Govt cuts current expenditure, increases income taxes and widens the tax bands then those will be changes that address the structural deficit. I also think the Government needs to look at flagging that, as and from 1 Jan 2012, it will charge stamp duty on dwellings under €125K and dwellings bought by first time buyers. As repulsive a tax as stamp duty is, the system is there and when the property market starts up again it will be a useful revenue stream.

I am not sure about using the NPRF for capital expenditure either. Once you start building something you have to finish it. Thus we lose our flexibility as to how we use large parts of the NPRF very quickly.

In the context of fiscal policy, Deputy Denis Naughten on Sunday released a reply to a PQ from the Minister for Finance who stated that FÁS has a pension deficit of €267.5m and the deficit at the universities is about €630m. Add a few more agencies and there wouldn’t be much change from €1bn.

The Trinity deficit is €315m.

Given that it has been exceptional for academic and non-academic staff to retire without additional pension years being added to their retirement entitlements, how come this reckless abuse of public funds, could have gone on for so long without anyone making an issue of it?

Maybe that is a stupid question!

I would love to know what criteria are used to define ‘strategic’ and ‘non-strategic’ assets and why the former, at all costs, must he kept in public ownership and why the latter could be sold.

@Paul Hunt
I think we could look elsewhere to see what has worked well and what hasn’t. Private ownership of the electricity transmission network in the US has resulted in chronic underinvestment. Private ownership of Railtrack in the UK, the same. On the other hand, private ownership of individual or groups of power stations and of the supply companies seems to work well everywhere? Similar divisions could probably be made with other utilities.

So if it’s expensive and largely a cost, leave it with the state, if it can be easily looted, but without impact sell it. Look at Eircom – if the state had held on to the phone network, we would have local loop unbundling by now and quite possibly genuine fast national broadband. Meanwhile, Imagine could come and go and come back again without impacting the overall service.

It might be worth a full post to the lay out the debate on NPRF. Right now it looks like a massive source of moral hazard in the pre-crisis period — (1) huge kitty in case something went wrong and (2) ah sure we’ve taken care of public sector pensions with the NPRF.

Actually Varadkar’s proposal for a single tough budget was rather convincing—right up to the point where he claimed the whole thing could be done without tax increases. Then I realised that Fine Gael have absolutely no idea how to run the country either.

He is right about one thing though; a single, harsh budget is preferable to a series of torturous bleedings over the course of several years. The best outcome for the country would be for Fianna Fail to implement a real bruiser of a budget, cutting back savagely on spending and ramping up taxes across the board (excepting corporation tax) in one year.

The government would most certainly fall(which is why it’s best to do it now), but the country would balance it’s budget and our interest rates would drop. Successive governments would then only have the problem of deciding which cuts and taxes to rail back on—in other words, how to make things better—rather than the problem of deciding how to make things worse.

Get it all over with in one year. Go mental. Send the more superfluous(and impossible to sack) civil servants home with half pay on Wednesday. Cut pensions, social welfare, and tax benefits. Introduce three new tax bans for higher earners (up to 90% PAYE, I’m serious). Luxury item VAT rates of 40+%. Property tax/charge (flat rate on district basis), betting tax, etc, etc. And most importantly, cut TD’s salaries by 60% or more.

Get it all over with in one year. Get the country as close to a surplus as possible, and put us in a position where we are deciding what we can bring back, not what we need to give up. There are still segments of society who can afford to pay, and still services the country can afford to do without. Don’t have a drawn out debate about what these are. Cut it all, Tax it all and come back next year with a lower interest rate, stable deficit and the ability and means to actually make decisions.

This would of course be political suicide, which is why it would be best if Fianna Fail were the ones to do it—right now—rather than passing the buck on to the next government as they have been doing, and as the next government will do. But as far as I can see, it’s either a tough budget now, or else half hearted, futile cutbacks for a few years followed by the ultimate entry of the IMF/ECB and the end of most of our national institutions.

Oh dear, we have a new monolithic Irish consensus. The Bigger the Austerity Package The Better. We have managed to invent a whole new sub-branch of economic theory.
Apart from the deflationary impact on the real economy what could the unintended consequences be? Could it be that we have a ragged banking system utterly dependent on growth in that economy for what is left of its chances of survival?
We are in this position because the interaction of the Guarantee, NAMA and Eu accounting rules have forced us to take our banking hit up front. We are no worse than some other countries but were much better with our initial debt position. As they do in all the hospital dramas, someone has to call it. This is nuts.

I think sovereign wealth funds are great – not to front load pensions – but to provide balance to the gov’s portfolio

Why do countries hold so few financial assets – i mean they have land, the ability to tax, natural resources etc why so few liquid assets? We are thinking of selling ESB etc – much easier to flog afew financials

@John McHale,

Labour want €2bn from the NPRF to establish their ‘enterprise bank’ to loan to small businesses. Surely there has to be a concern about any so-called State bank mandated by any government of the day to shell out 2bn of taxpayers savings in this manner? Fine Gael want to the raid the Fund for their New Era 105,000 ‘green’ economy jobs’ creation effort.

On the face of it, I can’t see how either of these proposals can be shown to deliver a return to the Fund. Therefore, the terms of the 2009 amendment to teh operations of the Fund will have to be further amended to allow the NPRF invest in loss-making projects, at the direction of the next administration.

We’re used to ‘auction politics’ in the context of general election campaigns. Right now it appears we’re engaged in the same sort of politics about a fund whose value, I would have thought, we should carefully cherish and whose proceeds should be dispensed with the greatest of care.

That said, my reading of Colm McCarthy’s article is that he was trying to convey the scope of the current problem to the average IT reader like myself, no more nor less than that. Leo Varadkar’s SBP article is intriguing from a political perspective – Fine Gael appear to be entertaining several contradictory positions simultaneously. There’s an air of headless chickens surrounding the statements emanating from all cohorts of our political class.


I think that is a bit unfair. I for one do not think the bigger the upfront austerity package the better. But we can’t simply ignore the fact the markets are factoring a high probability of default. The most constructive focus in my view is to try to ease the tradeoff not deny it.


You speculated on another thread that an IMF/EU bail out might involve a kinder adjustment path, along the lines of that advocated by ICTU. Yet we have had a ratcheting up in fiscal virility since then. Why might this be?

Has someone already been in to see our new administrator to enquire about assistance only to be rebuffed? I think the evidence points this way.

Somebody may have looked at our GDP levels and concluded that the economy has rebased to 2003 levels so cut your spending accordingly. For reference, the dole was 127 euros in 2003 qnd the OAP was 157 euros. I think the current rates are E196 and E206 respectively. On the taxation side the PAYE tax credit in 2003 was 800 euros as compared to 1830 now. I would expect a wide range of benefits and tax credits to be reset to 2003 levels over the next two budgets at the behest of Brussels. Only then will our application be considered.


Points well made. As I noted, I was a supporter of the NPRF. But it was always clear that it would only be worthwhile if free of political interference. That now seems like wishful thinking. The turning point may have been when Patrick Honohan referred to it as a “rainy day fund”. In any case, it seems to have lost credibility as a pension reserve fund. Its usefulnes may have to be judged by different criteria.

In talking about deflation in his article, Colm has stayed away from the competitiveness issue. He may have been wise in this, given that “they won’t lend” is a sufficient response to those who think we can spend our way out of depression.

Even so, it is an important issue. One would think, if one was to look at just implemented policy, as opposed to rhetoric, that the Government has been trying to prevent prices in the economy from falling.

This shows up in:
– Heavy public expenditure on construction
– The Croke Park agreement on public sector pay
– The continuing rise in employment in sectors dominated by public spending, despite the fact that public sector employment is supposedly falling
– Maintaining the nominal value of the minimum wage and many social welfare payments in the face of consumer price deflation (when there was still consumer price deflation)
– Piling on extra public debt to pay for the continued employment of bank staff the banks no longer need
– Interventions in the property market that have gone beyond preventing firesales, to prevent the market from reaching its bottom, and underpin property rental costs
– Very poor progress in reducing prices of services and utilities provided by the public sector

This was arguably decent enough policy as a holding action while we waited for the short term effects of the Great Shock on the global economy to pass. It makes no sense over the longer term. The focus has to be on building long term growth potential, much more than on playing fiscal games to soften the short term pain. Otherwise, we will condemn ourselves to high unemployment and high rates of emigration for a long time to come.

There are two aspects to this. One is the sort of capability building stuff that the Government is pursuing, to its credit, despite the flak it often gets on for doing so. The other is getting our costs in order. The first will not deliver without the second.

In an SOE that systematically strangled its cost competitiveness by driving up prices far ahead of productivity gains between 2001 and 2007, that means cutting prices in the economy. Whether or not one puts a “deflationary” label on this makes no difference to its necessity.

Getting our prices back in line with those in comparable long-standing EU countries will not be sufficient. We need more growth than they do, so matching their price levels will not be enough. In my view, we need to get back to something like the *relative* price position we were in around 1995, when the Celtic Tiger kicked off. We are unlikely to have another ICT boom to ride, but an edge on costs should allow us to grow employment ahead of other EU countries.

We need to be cautious about using any single price measure in judging cost competitiveness, so we should look at a range of measures. In particular, looking at progress on unit labour costs alone risks giving Ireland credit for progress on aspects of productivity in FDI enterprises that do not in reality reflect improvements in Irish competitiveness.

For what it’s worth, my personal headline indicator of the results of competitiveness that is available reasonably frequently comes from the QNHS. Developments in the sum of employment in Industry and Information & Communication give a reasonably good indicator of the overall direction of employment in manufacturing and internationally traded services, which are the industries most immediately impacted by competitiveness, and which are the chief paymasters of the rest of the economy. The principal route through which these industries contribute to the Irish economy is through wages and salaries, so their employment is a fairly good “quick-and-dirty” indicator of economic impact. Employment is also likely to be fairly well correlated with local sourcing of inputs and services.

This measure fell by 5.3% in the year to Q2 2010, and by 1.6% between Q1 and Q2 2010, suggesting that we still have to cut prices in the economy significantly more before things stabilise, let alone before we start to get the recovery we so desperately need.

@John McHAle
I’m not sure if I am being unfair – Tull has captured the mood corectly when he says there has been a palpable ratcheting up up the cut now and cut big rhetoric. We seem to have an Austerian approach to Austerity. Or maybe just a frenzy. I know that does not include your remarks. But the logic of cut ’em big, is, in the limit, why don’t we aim for a 3% deficit next year? Clearly ridiculous says (most) economists.
But where is the analysis behind your judgement about where the trade-off lies?
I ask the question again: if part – a large part – of the Irish economic problem is a disfunctional banking system, how is deflating, severely, the domestic economy, going to render that banking system functional? The banks are now wholly dependent on the Irish economy for their activities.
I say again: there are going to be unintended consequences of all this, just as there were with the Guarantee and NAMA. Who is trying to think this through? Who has demonstarted any capacity in this area. Not us, that’s for sure.

Maybe the “cut now, cut big” Austerians are motivated by the fact that the NTMA could not borrow a single cent on international bond markets without the “invisible” ECB back stop bid. Nor could the rickety old Irish banks fund their loan books without access to the ECB repo.

So, we are committed to the current rush back to 2003 expenditure levels as that is what our masters really want.


Absolutely. Even Krugman conceded a long toime ago that Ireland had probably no choice but years of grinding deflation to address the competitiveness problem caused by the boom – within the Euro and without default, that is.

The thing is though that the trick with deflation is to do it as quickly as possible otherwise it becomes habit forming and self fulfilling. In this respect Irl has a big problem. Everybody will play their hand to make sure their relative position moves up. You will not get synchronised wage cuts for example – it is part of the Irish tradition of being full of self-importance and getting someone to “fix” things in your favour.

The weakest therefore will bear the biggest adjustment and it is this “fixer” mentality that is the prime motivation for wondering whether the IMF might do it more appropriately.

And who, may I ask, will pay the mortgages of the many thousands in what remains of the private sector and the public sector if the government proceeds with its interpretation of an austerity budget. Is it not enough that the banks are bankrupt without most of the citizens, including the unemployed, joining them? Perhaps, the media screens commentators that are pro-austerity according to their credit rating (facetious) but the property market, which is the source of many current problems, has not bottomed out, bank losses have not bottomed out, and insolvencies have not bottomed out. PMI figures for September were dismal again. The last thing the country needs is consensus around the agenda of the a government that oversaw so much that drove the economy off a cliff.

And as for reputational damage, well, who could fly that kite with any credibility. Read the ‘foreign’ media over the past few years. Remember the ‘first’ rejection of Nice? Didn’t go down to well. Threatening the euro. Not going down at all.

One of the sentences in Colm McCarthy’s article is nonsense. Where he says:

“We are borrowing and spending €50 million of other people’s money every day.”

€50 million x 365 = €18,250 million.

In other words, he’s implying that the entire budget deficit is being financed by borrowing from ‘other people’, which I take to mean foreigners.

I’m afraid that the financing of budget deficits is a bit more complicated than such simplistic nonsense would suggest. Nearly every government in the world currently has a budget deficit. Are they all borrowing ‘other people’s money’ to finance it? If so, who are the ‘other people’? Is there a secret group of Martians lending money to all the governments of the world?

In the modern globalised world, financing budget deficits involves circular flows.

We can construct a very simplified model. I’m posting in a blog, not delivering a lecture at Harvard, so obviously what follows is the whole thing very simplified. In particular, I’m leaving out private sector flows. But, the principles involved are the same.

Governments borrow from their own people. Call that A.

They also borrow from ‘other people’. Call that B.

But, their own people also lend to other countries governments. Call that C.

A country’s net borrowing situation can be summed up crudely as: A + B – C

And emphatically not: A + B, which the Irish media seem to think it is.

And emphatically not: B alone, which Colm McCarthy seems to think it is.

The more closed an economy, the smaller B and C. In a totally closed economy, both B and C would be zero. In such an economy, a government could still have a larget budget deficit, but it would all be financed by A, ie by borrowing only from its own people. In open economies, both B and C will be much larger, but A will still be significant.

The bottom line of all these flows, A, B and C, is the balance-of-payments. If a country has a balance-of-payments surplus, that implies B C. Both the Central Bank and ESRI are forecasting that Ireland will be in balance-of-payments surplus next year. That is, by next year B becomes > C for Ireland. Even this year, B is just slightly < C for Ireland. To put it in plain English, by next year, while the Irish government will be borrowing lots from people abroad (B), people in Ireland will be lending lots to governments abroad (C).

We can get an illustration of how much people in Ireland lend to governments abroad by looking at the figures for holdings of US Treasury Securities. Here:

Ireland is one of the largest holders of these per capita in the world. As the table in the link shows, Ireland held €43.6 billion of these in July, compared to €56.4 billion for Germany (population 18 times that of Ireland), €30.5 billion for France (population 14 times that of Ireland) and €20.5 billion for Italy (population 14 times that of Ireland). China, Japan and the UK held by far the most, but, in per capita terms, Ireland held far more than any of them. I’m sure that figures for holdings of UK securities would show a similar picture, and possibly those of other countries as well. Ireland’s status as one of the most globalised economies in the world means a high proportion of its government’s borrowing is done abroad, but also a high proportion of Irish lending is to governments abroad. Considering only the former, and ignoring the latter, is nuts, like analysing a football team’s performance by considering only the goals it concedes, and ignoring those it scores.

I should make it clear that I’m not some Joe Higgins-type, railing against Irish people lending to governments abroad, when the Irish government could usefully do with the money. In fact, I have a few grand myself in US Treasury securities (at least that’s what my bank manager tells me). I’m merely explaining how these flows work.

That said, I’m in favour of deficit reduction in Ireland, as I believe that excessive government borrowing, even from its own people, is wasteful. But, it should be done on the basis of explaining things clearly, not on the basis of nonsense about the entire budget deficit being borrowed from ‘other people’.

Regarding the 3% target. This should not be set in concrete. Common sense is required, admittedly a scarce commodity among Irish economists. The target should be to get the budget deficit down to around the average EU level. Contrary to the hype we get in the Irish media. most EU governments have large budget deficits at present. It is the result of the global recession. The UK is around 11%, France around 8%, the others all vary. If the global economy booms, and all the other countries’ deficits come tumbling down to 3%, Ireland must follow suit. But, then that growth would greatly assist in doing so. If global growth is slow, then other countries’ deficits won’t fall to 3%. They’ll stay around 6%, 7%, 8%, or whatever. If that happens, it would be sufficient for Ireland to match them. Naturally, the global growth scenario is preferable, but not guaranteed. But, it would daft to be masochistic and to be obsessed with getting Ireland’s budget deficit down to 3%, if slow global growth left most countries in the region of 6% to 8%.


Just to make sure I understand you correctly, are you saying the creditworthiness-demand is upward sloping; that is, austerity would lower creditworthiness? The particular emphasis in your story is that austerity further weakens the banks (and presumably bank customers). This is a form of fiscal financial accelerator.

At the risk of adding to the doom, there is one empirical scenario that worries me, though I still think unlikely. It is useful here to imagine an Keynesian-type laffer curve, with the deficit on the vertical axis and the tax rate on the horizontal axis (a similar analysis could be done for spending). The worst place to be is at the top of the curve. Neither raising for lowering taxes would help. We then face an economic rather than a political constraint on bringing the deficit down.

As I said, I think we are to the left of that point even allowing for the very real accelerator effect you describe. (You, if I understand you, think we are to the right). But you are certainly right that our empirical understanding of the this curve and the related tradeoff is very poor — anyone expressing too much confidence here is a fool. The action then in part shifts to trying to improve the tradeoff and to tyring to overcome the political constraint on engaging in the necessary austerity. I hope that was at least marginally intelligible.

I almost fell off my chair today when I heard that the guy from Romania we tried to hire yesterday turned down the offer to interview for a job in Ireland because of the economy here.

Was mulling over your idea of rapidly cutting benefits/pensions/public sector wages, as well as general wage levels, to 1995 levels.

It’s hard to see how prices can fall that quickly. You’d have to coordinate the cuts in benefits with cuts in ESB/gas bills. Banks would need to have to have a plan for people defaulting en masse. Supermarkets would need to stock lots of spuds, and way fewer organic mesquite fries. Businesses would have no notion of how to drop prices that quickly, because (a) they’re stocking a higher quality of inventory than people would be able to afford (b) the landlords of their premises will not be willing to drop rents, as they would be locked into repayment terms themselves (c) there’s this knock on effect of businesses realising that they need drop prices that just won’t happen overnight. I feel I’m missing the next 20 knock on effects here…

I’m sure the Aldi’s of the world would do well, and Exports would do well, but I don’t see how the plan avoids 100s of 1000s more unemployed and emigrating, because I don’t see how the private sector could absorb such a big shock all at once.

I messed up one of the paragraphs. It should read.

The bottom line of all these flows, A, B and C, is the balance-of-payments. If a country has a balance-of-payments surplus, that implies B C. Both the Central Bank and ESRI are forecasting that Ireland will be in balance-of-payments surplus next year. That is, by next year B becomes C for Ireland. To put it in plain English, by next year, while the Irish government will be borrowing lots from people abroad (B), people in Ireland will be lending lots to governments abroad (C).

@ simpleton.

i think one of the biggest issues facing the banks and asset prices in the economy in general is the cost of funds and hurdle rate used to make investment decisions.

in a a close to zero overnight rate world, the current spreads irish banks should be charging for asset based lending (based on were they can raise money for term) or the current discount rate a rational investor should apply to an irish investment decision (based on the yield on ”risk free” govt or govt g’teed paper) has a big impact on asset prices and new economic actvity.

lots of chicken and egg here but i do believe a large front loading of cuts would not be as deflationary as you think if it lowers significantly cost of funds and discount rates in the economy.

@ Dave in Dublin

You illustratte part of the reason why everyone who can will resist deflation as forcefully as they can and there is no realistic prospect of effective political leadership on this. Politicians are so far behind the curve it isn’t funny, but then again who would listen to them now if they weren’t?

It is also easy to predict that those sectors that will be the most effective at resistance are the very ones that have become the most inefficient – by virtue of their political clout

Realistically speaking, no attempt to balance the budget or avoid default is going to succeed without outside help.

The outside help, as simpleton identifies, is required purely for the banks (as a bankruptcy reform would be required to accompany the changes in tax rates and wages that would follow – note, it makes no difference really if you raise taxes or lower wages, except, perhaps, that few foreign companies like to move into high tax environments and that includes for their workers).

Without the obligation to support the banks, the state will be able to continue. It may not thrive, but it should be able to pay the bills.

So, who wants six screamingly broke banks? Oh and a few foreign branch offshoots that would probably bring the parent down in that circumstance?

What would be required? Well, about 115 bn in residential mortgages, with, say, 40% way too high. But it would be unfair to bail out some and not others, so let’s just park 30% of all residential mortgage debt at 0% for as long as required (as per the Sindo, I think). Cost? 34.5 bn… gee, if only we hadn’t blown all that money on Anglo…

PS I think parking mortgage debt is a mad idea, but it is no madder than some of the other ideas that are floating around – especially the one that says we can take our time, or, in Mr. Keenan’s words “countries don’t pay back debt”…


You’ll find its elementary economics, to be found in any economics text book. If you are nice, I may buy you one for Christmas.

Could we get some reality? The idea that years of deflation are required to make the economy competitive is nonsense. Exports, service exports, and manufacturing are racing ahead. Manufacturing output was up 10.4% in August on a year ago. The economy is competitive as of now.

I’m not suggesting a return to 1995 prices. That would be impractical and excessive. I’m suggesting that we need to return the the same *relative* price position we were in, as of 1995, which is much less radical, although still very difficult. Even if it turns out to be impractical, whatever progress we make will stand us in good stead in rebuilding competitiveness.

I never read those books. They’re written by the people that got us into this mess.

“We can get an illustration of how much people in Ireland lend to governments abroad by looking at the figures for holdings of US Treasury Securities. ”

If the economy was sufficiently competitive as of now, employment in internationally traded industries would be rising instead of falling.


1988 taxation levels….that is really bearish. 1.2million in employment earning about 12k per year. the average price of a 3 bed semi in Dun Laoghaire was about 60k

@John McHale

I read Colm McCarthy’s piece to Blind Biddy early this morning – albeit very well read, if not a specialist in abstract economics, she grasped its clarity of factual exposition, and implications of inaction or inappropriate action, immediately. She almost has me convinced!_question remains HOW? “Me fader fought the Other Ferengi, u know, marched with James down Sackville Place wit de citizen dubs, and never took a fu**en schilling from the gombeens dat came after, and they took a tenner off me, de **&^%$etc – well, if he’s fightin the Foreign Ferengi, and a real genuine Dub – not like dat ridiculous fella in the cabinet in the telly – then maybe he’s all-roight! – and iffen he can give me back me tenner I’ll support him.”

Later this evening I read Deputy Varadker’s piece to Biddy – “Luvly lookin fella from the sound of him – ‘spose we could all do with a bit of stimulus – and he wants to leave the deserving poor, the blind, the deaf, the disabled, and the maimed alone and take de ten billion from the gombeens – is he a socialist be any chance? I’ll have to figure him out a bit more”

The worst thing about this whole disaster is the raiding of the NPRF. We had an opportunity to create an economic powerhouse on the same scale as the major public sector funds in Canada who are busily buying up depressed infrastructure assets worldwide. Now the NPRF is being burned and the so called pension levy is being shovelled in the direction of bondholders.

Let’s bust up the slush fund for good – break the piggy bank. Start again, but this time, make the investment fund jointly responsible to the public service unions – with the union bosses held responsible by their members for performance. If money is being put aside for pensions in the future, it’s just not the government’s money any more.

Once again it’s pertinent to raise the lack of interest in serious reform of failed systems and structures.

While DoF staff fiddle around with their spreadsheets as they try to respond to anticipated scepticism from EC officials, against a depressing economic backdrop of austerity and uncertainty, why would a local businessperson be motivated to invest in Ireland?

What is promised is the same slow-motion system of government and baby-step changes at best when a programme of national reform could provide hope that beyond a few years of austerity, Ireland can rise once again.

It’s of course hard to junk the delusions of the good years and its striking how durable spin and spoof continues to be.

Competitiveness is important but don’t fall for the blather that the potential of an export miracle is on the horizon.

We are still in denial about the challenges ahead.

Danny McCoy, former ESRI economist and now DG of IBEC, recently said in the FT: “Yet businesses have used the crisis to address their costs and productivity, bringing a substantial improvement in competitiveness. Unit labour costs have improved by nearly 10 per cent in relative terms within the past year. Other business costs are also falling. More adjustment will follow, but this improvement is fuelling export growth.

While Ireland continues to attract substantial foreign direct investment, outward investment by Irish companies actually now matches FDI, giving an international footprint to Irish business.

German unit labour costs rose during the recession because of the Kurzarbeit public-subsidised short-time working scheme while in Ireland, the spurt in chemical exports has helped productivity as there has been no significant change in employment.

As regards, “fuelling export growth,” in the short-term at least, this isn’t how the real world operates.

Besides, decisions on the destination of most of Ireland’s exports are not made in Ireland.

Last January, both Alan Ahearne and John FitzGerald created a bit of excitement on the same day with optimistic declarations on the economy.

Alan Ahearne, adviser to the Minister for Finance said a number of factors gave rise to optimism. He said there was a 5% improvement in unit labour costs since the autumn. “This is already kickstarting growth. We are starting to gain market share but we need to do more as we lost our competitiveness during the boom years,” he said.

Only if export markets worked so seamlessly and the UK with its 20% trade-weighted devaluation would be enjoying a spectacular export boom!

John FitzGerald said: “We will see a vigorous recovery in 2012.” He added that the economy could expand by as much as 5% a year between 2012 and 2015.

As for FDI, given the large existing stock, most of the new activity is expansion of existing facilities; so again if attracting “substantial foreign direct investment,” means new greenfield investment, the evidence isn’t there and UNCTAD’s WIR data are not a reliable indicator.

As for the claim: “outward investment by Irish companies actually now matches FDI, giving an international footprint to Irish business.”

This of course is both true and a fiction.

CRH is headquartered in Dublin and Accenture, the US firm of management consultants is also headquartered in Dublin.

Overseas shareholders own about 90% of CRH and it employs about 2000 in Ireland of a total payroll in Dec 2009 of 80,000 down from 93,500 in 2008.

Last month, Enterprise Department said Ireland is the seventh largest provider of FDI to Russia ahead of the US and Japan, again thanks to CRH.

So the outward FDI looks well on paper but it contrasts with Nokia, which has about 30% of its workforce in Finland and it has spawned a large number of local companies. There are for example more than 200 Finnish companies operating in China.

Norway NATIONALIZED the oil and gas business off its coast. Statoil is one result. A sovereign wealth fund, 1 or 2 in the world, is also a result.


They still have an asset bubble but it would be worse if they further inflated by diverting this capital fund. They have also spread risk, something Irishmen and women are not familiar with!!

Ive never checked this out but Ive always assumed that the US T Bond holdings in Ireland are mostly held by international banks and funds in the IFSC which hardly can be described as anything but “other peoples money”.

Michael Hennigan

+1 Shame to waste a good crisis. Too many vested interests and too little imagination at work. Gombeens only, need apply!

Mark Dowling

The NPRF was an attempt to siphon off from the bubble which all knew was growing, but too little, too late. A paltry counter cyclical fiscal measure. Now it is a fire fighting fund wasted in panic. How sad! Do we ever learn?

Hugh Sheehy

The money “came from abroad”! Well I can wash monmey through the Channel Islands or Switzerland if I had enough of it, too! I suspect much of this foreign money was previously in Ireland at a low rate of interest but ended up as bonds at a higher rate, to reflect the theoretical, exceeding faint, possibility that it might never be repaid!

@John McHale
I think I am arguing that whatever policy we pursue must be credible. We must take care that we do not substitute ‘sado-fiscalism’ for ‘credible’. Bond markets will not simply applaud our determination to eviscerate our economy; rather, they will ask, ‘will it work?’. We will be able to return to those bond markets only if the answer to that question is in the affirmative.

I worry about the macroeconomic consequences of fiscal austerity, given our starting output gap, unemployment rate, real interest rate and real exchange rate. During the four years of austerity, real interest rates will certainly rise (they are doing so already) and the exchange rate is also rising again.

I worry about second round consequences, particulalry the banking system. What is left of the Irish banking system depends exclusively on the performance of the Irish economy. I also think that, in part, the economy depends on the banks. So, not much (circular) joy in prospect there.

Your (and Tulls and..) demands for austerity are driven by the demands of the bond market. Why are we in this position when countries with as bad (or worse) non-bank-bailout deficits and inferior starting debt positions are funding themselves with consumate ease?

It’s entirely because of the perceived costs of the banking bailout: we, much more so than any other country, have been forced, by the unintended consequences of our own idiocy, to up-front (in an accounting sense) the bail-out. As others have pointed out on this blog and elsewhere, fiscal paragon Germany has as big a problem as Anglo, relative to GDP, with it’s Landesbanken. It’s just that those costs will be taken over decades and the tax payer is unlikley to ever find out about them.

I’m not making a judgement call on which policy is right or wrong. I am simply asking for some perspective and thought. We have a fiscal lynch-mob on the rampage. BE very careful.

I think Leo Varadkar makes a contribution in that he distinguishes between the required adjustment in current revenue and expenditure (as opposed to Leo, I would do the adjustment from the tax side) and capital spending.

Capital spending can and should be used to offset the negative consequences of bringing current revenue and spending into structural balance.


Your warning is well taken, even if the policy implication is not so clear. I do wnice, however, at being included amongst the big cutters. My point about Varadkar’s proposal is that when you put the elements together the overall front loading is more limited. I actuallly don’t see this as a successful political formula, but worthy of debate.

@J McH
Sorry, I never meant to give that impression. Your comments have been much more nuanced than that.
At the heart of this is old fashioned macro. I just don’t get how we think we can implement a four year austerity plan, without reference to the cycle, without reference to the probable consequences. We seem to think that provided we get the deficit down to 3%, everything else will be OK, all costs of this policy are acceptable. Indeed, we think this policy stance is both possible and credible. As you now know, I have my doubts.

Contrast all this with the debate in the US. There, Bill Dudley of the NY Fed has spoken very thoughtfully about the need for more (monetary) stimulus. Mike Woodford, as far as I can tell the last living academic who does macro, writes in today’s FT along similar lines. It’s a vey different debate, with a very different set of premises.

“I just don’t get how we think we can implement a four year austerity plan, without reference to the cycle, without reference to the probable consequences. We seem to think that provided we get the deficit down to 3%, everything else will be OK, all costs of this policy are acceptable.”
I think you are arguing with the government here. It is they that are saying that.

Most on here, all the austerians as far as I can see, are under no illusion as to the damage that will be caused. Indeed, it will be worse than the government like to say because there is little chance that we will be able to borrow at 3% of GDP beyond 2014.

The problem is that the level of growth required to avoid cuts is astonishingly high and, aside from anything else, unlikely in the current cycle. Worse, the evidence so far is that a jobless recovery is underway. The downside risks (or at least the lack of upside risks) weigh on future prospects.

Mr. Varadkar’s plan at least has an optimistic and counter-cyclical element to it; indeed, it could be argued it has two. By cutting early, the only way is up. By offsetting those cuts with investment, the damage of the cuts might be ameliorated. By reducing the deficit now, more fiscal room will be available later (as the national debt will be lower).


I agree that we have yet to see a coherent mapping of the various ‘bits of the mess’ and the inter-relationships between them in political, economic, social & psycological terms……… hence difficult to visualise how to DO coherent policy across them to get out of said mess … McCarthy has clearly mapped the fiscal (assuming the 3 and 2014; and I don’t assume or accept anything at the mo) in general terms, which was the purpose of his article …

I thought I saw a post enquiring about what the IMF might do if it were to be provided with a mandate – perhaps it was removed.

This I think is the latest IMF review of progress in Greece:

Yes, I know, Greece is different – it came very close to being a failed state. But there seems to be little recognition that Ireland, with its dysfunctional political factions – each protecting its own, but sometimes overlapping, sets of vested interests – and its extreme executive dominance, is very close to failure as a sovereign polity.

All this debate about the budget is largely irrelevant, as the Government’s draft will be scrutinised line-by-line in Brussels. Every sinew will be strained in Dublin, Brussels and Frankfurt to ensure that the markets are squared to allow the NTMA to re-enter next spring. And the Government is determined to hang on and seek to get over this hurdle.

What is interesting in the IMF’s review of progress in Greece is the extent to which there is a division of labour – perhaps not entirely to the IMF’s liking due to the slow pace of fiscal and banking refrom – where the EC and ECB are taking the lead on fiscal and banking issues, while the IMF is focused on economic restructuring and tackling the vested interests.

The latter is the area in Ireland where the least has been done and the most damage is being done. We have two-thirds of the EC/ECB/IMF treatment. What we’re lacking is the final (IMF) third.


Slighly off the point but i would like the opinion of economists.

Britain has announced more QE in order to encourage demand.

QE can be ineffective as the the cash is transferred through banks who might horde it (which i think has been the case)

What are the arguments againts the cash generated through QE to be used to fund capital expeniture?

The benifits are that it is more likly to end up on the hands of consumers and it would reduce unemployment.


“What are the arguments againts the cash generated through QE to be used to fund capital expeniture?”
I’m not by any reckoning an economist, but my understanding is that QE does not generate any new cash in the system. It supports the prices of existing assets, preventing their fall, but that is about it on the positive side. On the negative side, it reduces real returns on bonds (leading, at least indirectly, to pension problems). It also distorts inflation indicators (how can you tell if inflation expectations are anchored if you are suppressing upside price movements on the class of instruments that indicate it?).

You might like to consider the role of the IFSC in your analysis of US treasuries. Just because it is hidden behind a brass plate down there, it doesn’t mean that it is “our” money.

@ hoganmahew and Christy

Thanks for your replys.

My question is not what are the downsides of QE in general. I’d like to know what the additional downsides would be if the BOE decided not to buy bonds with this cash but rather used it to fund capital investment.

At present the BOE buys bonds from banks and gives them cash in its place. The hope is that this cash is pushed into the real economy. That doesn’t seem be effective as to some extent Banks have been hoarding it.

So what prevents the BOE from printing money and funding projects such as crossrail for example?

It’s get liquity into the economy (the aim of QE) and has additional benifits of getting the cash into consumers hands (maintaining demand) and reduces unemployment.

It is interesting to note the establishment spin (e.g. as ably expressed by CMcC in his article) of “huge reputational damage” against any IMF involvement. Straight from the “Green Jersey” chapter of the government spin manual.

I wonder exactly who these people are that currently have the “good reputation” box ticked for Ireland in their scorecard, but would switch to “bad reputation” were the IMF to become involved. Whoever they are, I’m very impressed with their faith that the current set of politicians are the ones needed to reform public administration and create policies for economic growth. Given a choice between a report such as the IMF one referenced above (quantitative, fact-based, detailed) and the first public review of our home-grown effort at reform – the Croke Park Deal (oh wait, can’t seem to find it right now), I’m glad that our own effort is being viewed as much more effective than the one being driven by those IMF slackers. I guess they might slow us down or something if they were to become involved.

“So what prevents the BOE from printing money and funding projects such as crossrail for example?”
Because it would be printing money, not doing QE. QE is a reallocation of cash – it swaps cash for assets, but those assets were originally bought for cash. In a sense it is neutral for money supply. The things is, though, that many of the assets declined in value, so by raising their price, the BoE is preventing deflation in the monetary sense (destruction of cash).

Printing is an altogether different thing. I don’t believe the BoE has the authority to do that. Even its authority to engage in QE is on reasonably shaky grounds, but that may just be anti-CB gossip (I haven’t seen evidence to back this up, just the assertion).

As a decided non-economist myself – I have always (well since I first heard of it) read QE as synonymous with printing money – just by more sopphisticated (electronic) methods. My bible (wikipedia) seems to agree, Some of the experts on this site better clarify so that maybe some of this stuff is comprehensible:

You seem to be suggesting something different – or do I misread?

“A central bank implements QE by first crediting its own account with money it creates ex nihilo (“out of nothing”).[1] It then purchases financial assets, “

Well, no. All money is created ex nihilo, as there is nothing to back it except debt. The stock of money does not increase because, for example Germany sells more cars. The stock of money increases because someone borrows some money to buy something. The borrowing is an asset of the bank, the seller gets the money and deposits it. The bank can swap the asset with someone for cash, say, someone with a deposit (like the fellow who sold the asset).

So the money can be loaned out again, less a little bit. And again. And again. And again. Hey presto, I’ve turned a euro into 9 euro 99 cent (assuming 10% reserve requirement).

This is theoretical, it is a little less efficient than that. For example, what about loan losses, or risk? Well, loan losses were effectively done away with by Basel II and light-touch regulation. You could only provision tax free the amounts that historically had defaulted. Ireland has never had a crisis of defaults like the current one. So what were the provisions of the Irish banks? Under 1%… Under 0.2% for residential mortgages…

Anyway, I digress. Oh yeah, risk… well, if you write some Interest Rate Swaps against the loan, that removes the risk… say, you pay fixed and get variable, that means you can mark the borrower to the risk of the fixed price you are paying, which means you can recognise part of the loan as regulatory capital. Which means that you have to keep less than 8% regulatory capital, which increases your leverage. It all works fine unless it is your borrower that is deadbeat and interest rates hit the floor…

Oops, another digression. Anyway, no, I don’t regard QE as synonymous with printing money, not in the current environment – enormous bad debts that the governments are trying to paper over by bailing out insolvent banks. Huge gaps in the bubble economy between what is ‘fixed capital investment’ and what is ‘speculative rubbish fit only to be torn down’. Indeed, huge gaps in economies, never mind banks. So much economic activity, so little added value. If Jedward were an economy, they’d be the UK and Ireland…

What QE is doing, for the moment, is replacing new lamps for old. The lamps still only do the same thing, they are a little shinier and a little less prone to snuffing themselves out. If it goes beyond this, it is no longer QE, it is printing money…

@ Bryan G

I’m very impressed with their faith that the current set of politicians are the ones needed to reform public administration and create policies for economic growth.

I agree.

There would be a lot of hand-wringing if the IMF was to get involved and poor headlines across the world but it would be the shock to the system that is needed for long-term prosperity.

The official line that is largely supported, is that the jobs crisis will be solved when the international recovery takes hold and we can return to business as usual.

The IMF has been the best hope for an endemically corrupt country such as Greece with its closed shops and resistance to change.

There is support for some Irish reform such as fiscal rules but it’s striking that the political elite and others with a grip on the public megaphone, including academics, have little if anything to say on structural reform of patently failed systems.

It’s hard to see how the Labour Party would in government embrace reform and deliver home truths to its newly expanded base of supporters (some temporary refugees from FF) while limited reform in the public sector, would mean that the protected private sector which is significantly sustained from public funds, would also likely escape any significant change.

It’s interesting how Gilmore and ICTU refrain from any advocacy of reform across the economy because it would shed attention on the public sector.

It’s not even clear how the slow-motion process of the Croke Park Agreement is being implemented, if at all.


Changing dysfunctional organizations from within is very difficult – in a time of crisis every sub-group retrenches, protects their own interests and hopes to keep under the radar. You mention Nokia above, which is an interesting case in point. They have struggled to adapt to a changed smartphone landscape and have recently brought in the first non-Finn to ever run the company; bringing in outsiders to effect organizational change is par for the course in the private sector as it is an efficient way to get things done. The current government have had a full two years post-crisis to show us what they can do – both the bond markets and the public in general have given their verdict on performance so far – it is unacceptable. Sadly it is hard to see how a FG/Lab combo isn’t going to be riven with disagreement on how to carry out public sector/semi-state reform. Some adult supervision could help get stuff done. We also need a counterweight to Axel ‘Tea Party’ Weber and the Bundesbank.

Another problem that I see is that if retrenchment is driven from a purely financial point of view (whether CFO or Minister for Finance) you tend to get across the board pro-rata cuts (“everybody shares the pain”), so you end up with a smaller and weaker version of the same organizational structure that got into trouble in the first place. There is a huge dearth of vision across the board from our elected representatives about what a good public administration should look like in 2015, say, and take steps towards that goal each year as resources allow. Where is the intellectual underpinning that will lend coherence to the inevitable cuts? How will the inevitable trade-offs be made – with respect to how they conform to a detailed set of published principles and objectives or based on who has the most clout?

Whatever about talk of the NPRF being used to invest in capital projects, NAMA has been handed many of the potential construction projects in the country.

NAMA can finance these construction projects off the government balance sheet. If the projects are viable and prudent and NAMA is not financing them then we are missing a huge opportunity to generate/preserve economic activity in the country. Surely a prudent but nimble NAMA could be a big contributor to activity.

NAMA’s nimbleness is in serious doubt at a time when it is most needed. Lenders should behave like lenders, not like civil servants determined to keep their heads down, there bibs clean and not to make any ‘political’ mistakes.

Where is the incentive for employees of NAMA to lend money on commercially profitable terms. While bonuses were dangerous in bubble times, properly structured incentives may have their place now.

@zhou enlai

we fought the ‘protect the NPRF’ many moons ago … and lost

…… and yes, waiting on NAMA to DO ….. and more than the battles in the commercial court …. where Judge Peter Kelly remains one of the prime sources of FACTS ….

The government can either have a National Investment Fund which invests in directed national projects for the profit of the Treasury, or it can have a Pension Fund which invests in whatever the trustees decides provides a suitable return for their investors (subject to the usual bounds of legality etc.) irrespective of the project’s location. Telling NPRF they “must invest in Irish projects” is disingenuous at best, and I would be interested to hear whether it would pass EU legal muster.

I wonder how many capital project investors have contacted the government in the past months to say “we intend to withdraw from our awarded contracts because since Ireland’s downgrades our banking partners will no longer lend at the specified terms”?

How soon do we think it will be before the NPRF is ordering nameplates and stationery for their rebrand into the Irish version of the EIB?

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