Fairness and Fiscal Strategy

I consider existence of child benefit unfair.

I think focussing on the fairness of the budget package might actually turn out to a bad idea at this juncture, and just paralyze the political process. There is no chance that people can agree on fairness weights or criteria, so it just focusses attention on an open-ended debate with lots of heat and no light. It is better to focus attention on more pressing concerns that have some chance of resolution. Fairness has to be there but it should not be the focus at the moment in my opinion. But really I am a nice guy I promise!

In the spirit of alliteration, could we add ‘Facts’ to the Fiarness & Fiscal debate? That debate is too often dominated by sound-bites with only the remotest connection with facts or truth. And there is a need, as in court, to tell the truth, the whole truth, and nothing but the trut.

For example, “we need to raise taxes” is commonly asserted. The whole truth is that “we need to raise taxes again”, in recognition of what we have done already.

If there are any economists reading this, try and explain that the deadweight losses of further tax rises with the square of the tax rate.

More importantly, does anybody know what the marginal rate of tax is? At the top end it is now 52% (but can be 55% for middle-to-higher earners). When we hear calls for ‘higher taxes on higher earners’, always ask for precision: what is the new tax rate to be, who is to pay it, how much will it raise?

Does anybody know what a married person on average earnings with two kids pays in tax/levies/PRSI net of child benefit? Answer: nothing.

When Blair Horan says on national TV that the economic crisis was caused by Ireland’s low tax economy, somebody, anybody, please challenge such egregious nonsense.

Only people who say ‘put my taxes up’ are allowed to say ‘put somebody else’s taxes up’.

When somebody says ‘I am a victim of colonisation/bad luck/bad parents etc’ and should therefore be ‘exempt’ from cutbacks, always ask them what they would cut instead.

etc

Fairness is often an abstract aspirational goal; the reality is that in a system of limited accountability like Ireland’s, people grab whatever they can get away with.

This is from the C&AG report on the universities on pensions and NUI Galway and it’s not about small change:

The statutes of NUIG state that the Governing Authority shall have the power to award years in addition to the actual service of officers in specified senior positions and posts deemed by the Governing Authority to be of a professional, technical or specialist nature and in respect of appointment to which qualifications and or experience ordinarily required would not permit appointment of a person less than 25 years of age.

In practice, all staff in the grade of administrative officer and above are awarded added years on retirement provided they meet specified conditions. Eligibility is assessed by the Pensions and Investment Officer.

The decision to award added years is not sent to the Governing Authority for further approval. The current Pensions and Investment Officer does not have a copy of the specific delegation decision giving authority to award added years.

NUIG stated that although the wording of the relevant statute indicates that added years are at the discretion of the Governing Authority, this discretion has always been exercised in line with the provisions of the statute and staff are annually advised of their projected added year’s entitlement (impacting their decisions regarding overall pension planning).

Consequently, custom and practice and legitimate expectation dictate that added years form part of the terms and conditions of employment. There is in practice, effectively no discretion available to the Governing Authority in respect of existing staff.

Added years are awarded to members who hold an academic post, a post of administrative officer, sub-librarian or equivalent. Added years range from five at 60 years of age to a maximum of ten years at 65 years of age or as an alternative one-third of actual service.

Just an added inconvenient truth:

The university pension fund deficits amount to about €630m led by Trinity College at €315m.

While the majority of Irish private sector workers have no occupational pensions and those who do face the prospect of meagre payouts, it has been an exception in universities for both academic and non-academic staff to retire without additional pensions years allocated.

Could somebody explain to me how 40% of people pay no income tax?

If the tax credit for a single earner is 1830eur that means that means that single earners earning up to 9,150eur p.a. (hardly a large proportion of people) pay no tax. For married earners it’s double.

What are the ‘allowances’ mentioned in the power point presentation?.

As far as i know, public sector workers are still receiving yearly increments on their salaries, they are still hiring as needs be, and last month the ESB gave roughly e3000 to each member of staff, money that could have gone to the state. so long as the likes of that continues, we’ll never get spending down to a reasonable level. what extra we can eke out of raising taxes becomes redundant if spending levels remain relatively unchanged.

David O’Donnell in McCarthy and Varadkar on Fiscal Strategy

” 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 …”

The ninth entry to this site was from Philip Lane on December 3rd 2008.
” Colm McCarthy provides an interesting analysis in the Irish Times today (December 3rd 2008) about the poor November tax returns. A key issue raised by Colm is the market’s appetite for sovereign bonds, in view of the projected rapid increase in issuance across the advanced economies. Since there is a general increase in risk aversion, it will be important to ensure that Ireland is perceived as a low-risk sovereign. To this end, it is important for the government to establish a new multi-year fiscal programme that shows how the growth in public debt will be managed, with a clear plan to return the debt to a sustainable path once economic recovery takes hold. ”

Two years later the Government is trying to figure out how to establish a four year plan that is credible, even though its implementation is clearly dependant on other political parties acceptance of it. They have four weeks in which to complete that if it is to be done before they go back to the markets in January.
The key point is ‘credible’ and that means, as David says, a coherent mapping of the various ‘bits of the mess’ and the inter-relationships between them in political, economic, social & psycological terms…
Without acceptance the plan is not credible. Without involvement the plan will not be acceptable. The process by which the plan is put together will be an integral part of its acceptance. That process must be fair, resilient, transparent and accessible.
A plan is going to be produced. I suspect that the DoF is not competent to produce a credible plan given its track record and politicisation. I suspect that both opposition parties will struggle to produce credible plans given the political baggage that inevitably clogs their debates.

We are where we are. The political process is jammed, the civic space is disjointed. This space here has shown a capacity to interrogate difficult questions in a civil manner. There is no alternative space with that capacity.
A plan has to start with the factors which are unique to us in our productive basics and John the Optimist gave them in a recent post as the FDI area, agriculture and tourism. I do not know enough about the IT area to add it though my gut feeling is that it should be in there. The energy sector is also something I know little about but I have a reasonably good bullshit detector and that area has a definite whiff to it.
What policies will leverage those areas. I recall Michael Hennigan mentioning that in the past 10 years, German food exports had increased by €10 billion while ours had increased by €1.76 billion. That indicates a collossal failure by us: there were €11.76 billion to be gained and we got only €1.76 billion of it. That suggests to me that there are major failings in our business model for food production. Any plan which addresses issues such as that will cause major disruption to established elites: if one does not hear screaming it means that their attention has not been gained.

Simon Johnson has an article arising from his experience with the IMF. Its in The Atlantic, The Quiet Coup, in which he despairs of the US, but which gives me hope because we are not so big that we can bully our way out of this mess: we have to adapt, they don’t.

” there’s a classic Kremlin bailout technique—the assumption of private debt obligations by the government. Under duress, generosity toward old friends takes many innovative forms. Meanwhile, needing to squeeze someone, most emerging-market governments look first to ordinary working folk—at least until the riots grow too large. …
Almost always, countries in crisis need to learn to live within their means after a period of excess—exports must be increased, and imports cut—and the goal is to do this without the most horrible of recessions. Naturally, the fund’s economists spend time figuring out the policies—budget, money supply, and the like—that make sense in this context….
Yet the economic solution is seldom very hard to work out. …
From long years of experience, the IMF staff knows its program will succeed—stabilizing the economy and enabling growth—only if at least some of the powerful oligarchs who did so much to create the underlying problems take a hit. This is the problem of all emerging markets. …
But there’s a deeper and more disturbing similarity: elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them. …
To paraphrase Joseph Schumpeter, the early-20th-century economist, everyone has elites; the important thing is to change them from time to time. ”

Could we, at some point in the future, look back and say that we recognised the pearl that we have in our land. Let us do the state some service.

“I have done the state some service, and they know’t —
No more of that. I pray you, in your letters,
When you shall these unlucky deeds relate,
Speak of me as I am; nothing extenuate,
Nor set down aught in malice: then must you speak
Of one that loved not wisely but too well;
Of one not easily jealous, but being wrought
Perplex’d in the extreme; of one whose hand,
Like the base Indian, threw a pearl away
Richer than all his tribe;”

@Michael Hennigan

Are you going to spam every thread on this site, no matter how far removed from the issue of university pensions, with the same post about same?

Well I think it is only fair that the people who will be paying these extra taxes should be asked for their consent (through a general election).

It seems the Greens are more interested in ‘consensus’ among politicians rather than consent from citizens.

Also, a plan (whatever it is) that is bought into by the general public will be far more credible to bondholders. There is no point in a medium term plan that is not credible. So I think in this way fairness is a crucial aspect of the fiscal strategy.

Historian Richard Hofstadter wrote on the last three decades of the nineteenth century in the US in his renowned book, The American Tradition, which was published in 1948: “From the business of industry the business of politics took its style. Accumulating wealth and living richly, the industrialists set the model of behavior for the less scrupulous politicians. The wealth they acquired and enjoyed set standards of consumption and emulation; overflowing into politics, it multiplied among politicians opportunities for pecuniary enrichment. Standards of success in politics changed. It was not merely self-expression or public service or glory that the typical politician sought–it was money. Lord Bryce found that the cohesive force in American politics was ‘the desire for office and for office as a means of gain.’ The spoilsmen looked upon political power as a means of participating in the general riches, of becoming wealthy in their smaller ways and by their lesser standards, as did the captains of industry. Never before had the motive been so strong; never before had temptations been so abundant.”

What Hofstadter termed the Age of the Spoilsman could be termed the Age of the Scrounger in modern Ireland.

People who may skin a flea for a ha’penny in their private lives, would have no regard for prudence in spending public funds and bring spouses on foreign trips as if they cannot scrounge enough themselves; the extension to a general cavalier attitude to public funds is not hard to understand.

It’s disgusting and a national shame.

The Sunday Independent has reported that Oireachtas figures show that despite there being no committee hearings in August, as well as no Dáil sittings, 163 members of the lower house claimed €575,000 in expenses during the month.

According to the official figures, 17 TDs claimed in excess of €20,000 between June and September.

@ Conor O’Brien

Germany posted a 15.0% increase in 2008 in food/drinks exports reaching €42.4bn in value; the export ratio of the sector rose from 17% in 1998 to 27.4% in 2008.

In contrast, the Irish food and drink sector, which is the only significant area of export activity that is dominated by indigenous firms, saw exports fall 6.5% in 2008.

@ Ernie Ball

Can you not handle the truth?

i believe politicians expenses are now being paid out as an average over the year. every quarter. so there wouldnt be any deviation just because its the summer months.

@Michael Hennigan

You wrote: Can you not handle the truth?

Nice to see you relying on the justification given by every internet troll and autistic spammer.

We need a decent debate on how to define “fair”, which of course is the intractable problem of welfare economics.

I would maintain that in general usage, “fair” as it relates to fiscal policy means “no less progressive” to the majority of people. That of course gives us a problem. Such a rule will necessarily lead to a narrowing of the tax base and an increase in rates over time. Towhit, true marginal tax rates in Ireland have already passed the psychological 50% at some reasonably modest levels of income. As a thought, how “fair” is the principle that should someone increase their productivity be made to surrender more than half the resulting gain to the rest of society?

@ Geckko

I agree about the need for a debate. However, I think its more a question for philosophy than economics (and for all I know they might already have an answer with Rawlsian type stuff).

Thanks for the comments (mostly).

Not surprisingly, there is a lot of disagreement about meaning of fairness. Given the time and the stakes, I don’t think we have the luxury of debating this too much. We need something that meets some basic standard of reasonableness that most of us can get behind.

Slide 15 (2010 Policy v 7.5% USC . . .) in Callan et al. is worth taking a look at. I would say that at a minimum for the overall package this should have a “picket fence” shape — equal percentage declines. As Calan et al. point out, the adjustment so far has been progressive, not least due to the progressive income levy. Thus I think making the adjustment from here out mildly progressive meets a standard that reasonable people should find hard to object to, even if it falls short of their ideal. This in part takes into account Simpleton’s valid point that marginal tax rates have already risen to quite high levels for medium to higher workers — a fact that would be hard to guess listening to some commentators. If the Universal Social Charge is part of the package, however, I don’t think we can avoid some measures that hit higher earners disproportionately to ensure a the reality and perception of fairness. Reducing pensions tax relief to a common intermeidate rate is definitely a candidate; so too is a valuation-based property tax.

The key fairness issue at present is the widespread public opinion of a bailout of private bank bondholders. The Minister has failed to give a grounded defence of why he is not negotiating more strongly in this area. You can explain to people, ala Colm McCarthy, that they cannot expect the world to keep giving money to finance current expenditure. But it is very difficult to convey the logic of fiscal adjustment at the same time as bailing out investors in banks. In fact, up to now the relative docility of the Irish population may be harming the Minister’s position where there to be any negotiation. In an environment where people were more openly angry it may improve the ability of the Minister to argue that his hands are fundamentally tied by an electorate that simply wont stand for anymore money being transferred to bail out private bank investors. In such a scenario, it may be to the benefit of bondholders to voluntarily accept a reduction in their payout rather than taking their place in the queue if there were an external intervention following a failure to find political consensus on an adjustment.

In general, the idea of relative fairness guiding judgments of acceptability and welfare is a fascinating one from an academic perspective, as is loss aversion which is also guiding the child benefit debate. Sometimes though, people have to ask the question “if it didn’t exist, would you dream of bringing it in”. The idea that we would now chose to set up a transfer to high income parents through the social welfare system would be laughed at if it weren’t for the fact that history has brought us here.

@ John McHale,

Re: Valuation based property tax.

How will the element of trust between property owner and the Revenue be achieved. Let me guess, trust does not matter.

Look at the VRT scam which operates in this country. On importing a car into Ireland you must pay a percentage of the Revenues “Notional Value”, not the real actual market value.

For example if you buy a car for the equivalent of 1000E in the UK, that is what you bought it for. However on importing the vehicle into Ireland you may find that the Revenue in Rosslare have decided that the market value is 5000E. Therefore you could end up paying 1/3 of 5K in VRT (1650E) just to put a irish registration plate on the vehicle. There is an appeal process, which you can start, but only after you have handed over the money. In addition I am not sure just how effective it actually is.

Most people don’t particularly car about importing second hand cars into Ireland. I am making the point that there is a dissconnect between what the reality is and this idea of a Notional value placed on a vehicle.

I recognise Ireland is in difficult times, I recognise that a property tax of some form is inevitable etc etc.

But I also fear that on completion of a National housing database etc, notional values will be placed on our homes, these values will have no connection to the actual market value. So the market value of your house may be 200k, but the notional value has classed your property in a 300k band. Therefore you pay the annual property tax (% of) on 300K instead of a % of 200K.

In some other countries, there is a property tax, but this is paid on completion of the property. Hence if your home’s original design was to have a certain finish (red brick for example), which you failed to complete (deliberately) then it is possible to avoid paying the annual property tax.

Even though you have been living in a property for several years, you avoid paying the annual property tax as the house is still not officially completed.

As a result national property can look a bit rough, on the outside of course.

While I recognise Ireland is in financial difficulty (to put it mildly) I fear that people will be fleeced on annual property tax, just as they are fleeced on cars.

As I have said before, people need to be careful what they wish for, as it just might come true……………..

Fair. Fairness.

How about “The rules are the same for everyone, and the rules are applied and enforced equally on everyone. ”

This would outlaw “progressive” taxation as well as the kind of cronyism that’s too widespread in Ireland.

Imagine, a Republic of equal rights and obligations rather than a squabbling series of warring factions. Everyone would hate taxes equally. Everyone would be entitled to the same supports from the state (with some limits).

The only people entitled to exemption from some of the rules are the physically and mentally handicapped, the sick, the young and the very old.

Of course, in Ireland everyone wants to be special and their group to be special. No-one wants a state where everyone is treated equally…do they? Me..I do.

@JohnMcH
forgive me if I have misunderstood the application of the new levy. Is it 7.5% to replace all existing PRSI & levies? If so, this will reduce mid-to-high earners marginal rate by 0.5% and increase high earners tax rate by 2.5%. Or have i got it wrong?

@Simpleton,

Page 77 of the Callan et al. paper summarises the various taxes and levies. They picture is complicated by different exemptions/ranges for different instruments.

Based on my understanding, a few examples of marginal rates (Income + PRSI + Income + Health = Total):

€50,000: 41 + 4 + 2 + 4 = 51
€75,000: 41 + 4 + 2 + 4 = 51
€100,000: 41 + 0 + 4 + 5 = 50
€125,000: 41 + 0 + 4 + 5 = 50
€150,000: 41 + 0 + 4 + 5 = 50
€175,000: 41 + 0 + 4 + 5 = 50
€200,000: 41 + 0 + 6 + 5 = 52

It should be said that the 7.5% number was chosen by Callan et al. to be revenue neutral. I would think the number would have to be substantially higher than this given the need to raise revenue.

@ Conor O’Brien

‘ We are where we are. The political process is jammed, the civic space is disjointed. This space here has shown a capacity to interrogate difficult questions in a civil manner. There is no alternative space with that capacity’
and
‘To paraphrase Joseph Schumpeter, the early-20th-century economist, everyone has elites; the important thing is to change them from time to time’

+ 1

@ Simpleton

‘Only people who say ‘put my taxes up’ are allowed to say ‘put somebody else’s taxes up’.

When somebody says ‘I am a victim of colonisation/bad luck/bad parents etc’ and should therefore be ‘exempt’ from cutbacks, always ask them what they would cut instead’

+ 1 also. Opportunity cost.

@ Michael H

‘People who may skin a flea for a ha’penny in their private lives, would have no regard for prudence in spending public funds and bring spouses on foreign trips as if they cannot scrounge enough themselves; the extension to a general cavalier attitude to public funds is not hard to understand.
It’s disgusting and a national shame’

Many people feel that way now, but it’s better to light a candle than curse the darkness. Maybe the problem is one of perverse incentivisation. How can we restructure our state, and its fiscal space in such a way as to reward those who contribute to a strengthening in responsibility, both financial and social ? We all have to share this little island/planet.

Getting the best for yourself, and your immediate clan, is not really an adequate goal in thise terms, so it deserves less respect than it gets currently. The top of the greasy pole is a lonely place.

Back to the football.

@Liam Delaney

You make a very important point about the damage the banking bailout has done to the political capacity of push through a tough fiscal adjustment.

Taking it that we agree that we should live up to the guarantee once given, the interesting question is what attitude to take about unguaranteed senior bondholders given the almost unimaginable losses incurred by Anglo. There are about €4 bl. of unguaranteed seniors left. Realistically, only some fraction of this could saved in a loss sharing arrangement given the need to respect creditor rankings (i.e. losses would have to be shared with depositors, with the Government then making depositors whole — effectively the Goverment pays the depositors share).

Critics contend that the amounts are not large enough to warrant risks of induced funding difficulties in the future. I take this argument seriously. What tips it for me towards loss sharing, however, is the political point you make. I think the public needs to see the Government doing everything make sure taxpayers are not underwriting the losses of bank creditors. The anger at the bailout could end up being extremely destructive.

We know from a long literature that sometimes, even with high stakes, people will opt for a lower monetary option rather than be taken for a ride. There is a lot of jargon for this e.g. “money burning”, “betrayal aversion” etc., This is certainly kicking in now in the Irish population. I would have to agree with you John that we are getting to the stage that the risk of public anger making externally unimposed further fiscal adjustments impossible is rising and that publicly making some of the private investors share losses would substantially strengthen the argument of people calling for rapid fiscal adjustment. If people are feeling they are being laughed at, then forget about appeals to reason.

One further point John, and I straying way out of my comfort zone here, is what happens to any government guarantees in the event of us not being able to raise finance in the bond markets next March. Perhaps this has been addressed already on the blog but lets say that the Irish population, through the force of its erstwhile backbench representatives, tell the Minister to eat his four year plan and we are not able to make a fiscal adjustment. Who gets paid in such a situation? Because, if the bondholders are first in the queue then they have nothing to fear from public anger. If they are not then it may be in their interest to help make the situation palatable to the public by sharing some of the losses voluntarily and making it possible to get the ship righted again.

Liam,

In the circumstances you outline, we probably do not make the coupon payments on the bonds…i.e we default. Then the bondholders excercise their right not to finance the ongoing deficit. After that public salaries and pensions do not get paid as the state runs out of money.

Simpleton

I see Old Axel Weber is rattling his sabre again by calling for a withdrawal of the bond purchases and perhaps other monetary stimulus. In effect a massive tightening of monetary policy on top of the tightening of the nominal excahnge rate and the requested tightening of fiscal policy.

Apparantly his fear is that policy is now too loose for Germany. Now is one way out of this for Germany to leave the euro and for the perhiphery to unilaterally restructure its debts to Germany.

@Tull
I have asked the question many times. How are we going to do this against a background of monetary tightening? The ECB has effectively doubled interest rates in the last 4 weeks. What’s it going to do over the next 4 years?

Doesn’t anybody do macro any more?

Liam,

the government’s ‘austerity’ plan is to borrow an extra c. €40 billion over the next four years. The lenders are unwilling and the govt has withdrawn from the bond market for the balance of the year. The guaranteed banks are having to finance roll-overs through the ECB rather than the public markets. Neither the govt nor the guaranteed banks are convincing as borrowers, in a nutshell. That is to say, it is not clear that the austerity programme as currently envisaged can be financed. Unless I am missing something, this means that only a tighter fiscal programme is capable of being financed.

@ Liam Delaney

“In fact, up to now the relative docility of the Irish population”

well then let’s get going:

http://www.facebook.com/home.php?#!/group.php?gid=133903089991951

@ Liam Delaney

publicly making some of the private investors share losses would substantially strengthen the argument of people calling for rapid fiscal adjustment.

We like to say that we differ from Greece; not in terms of dependency on foreign lenders to fund the public debt.

The rate is over 80% compared with 52% for Spain and mid 40s for Italy.

What’s plan b?

@ All

US research shows that Americans making less than $20k incomes per year have an average unemployment rate of about 26% during this recession, which is more like 39% when factoring in the underemployed, while the affluent enjoy full employment.

It is possibly not too different in Ireland that’s why it can be more palatable to deal with the ‘average’.

In testifying before a Congressional committee in the late 1960s on the need for a sub-employment index to capture the high variations in labour market conditions in different neighborhoods and local labour markets, Secretary of Labor Willard Wirtz was asked how workers were doing on “on average”. He reportedly replied, “When you have your head in the freezer and your feet in the oven, on average you are doing Ok.”

We had an interesting example of ‘fairness’ last December, when senior civil servants worked on a memorandum to have sham bonuses treated as income, while Brian Lenihan was in the Mater Hospital .

The concept of ‘expectation’ is an interesting one but can only realistically be applied to select favoured groups.

What’s sauce for the goose is seldom sauce for the gander.

Simpleton,

The reason macroeconomics scenarios are not being gamed out are at least two fold. i) the deficit as it stands is virtually unfundable private markets under any scenario. ii) macro practitioners have lost close to all credibility. They were by an large the dogs that did not bark.

In the meantime, life goes on. Elderfield, Honahan with occasional interjections from Lenihan and the NTMA are still musing on imposing losses on senior bondholders. My Great Aunt Joan was right, you do not hold certain conversations in front of the children. “Loose lips sink ships”.

@ tull mcadoo

“My Great Aunt Joan was right, you do not hold certain conversations in front of the children.”

We are neither children, nor under the thumb of some paternalistic dictatorship. We are citizens with a right to the facts, and a right to determine the future of our country. It is our country after all, not Fianna Fáil’s. Also, many of the people know far more about economics and finance than Brian Lenihan ever will, so maybe he would do well to ask the children for some advice.

I just wish people here would read, mark and inwardly digest the very simple, but brutal, case Colm McCarthy is making. (It must be deja vu in spades for him as I expect many here remember his analysis of the vicious cycle of ballooning public debt following the last period of serious fiscal incontinence from 1977.)

This time the stakes are much higher both in terms of the fiscal adjustment required and the impact Ireland could have on the Euro as an EU political project.

The Government has entered into a Faustian bargain with the political and institutional EU: “If you let us fail we could do serious damage to your project and compel the revelation of the bank system losses that are being hidden throughout the rest of the EZ. And you must allow us a figleaf of sovereignty to secure the voters’ consent.”

However, regardless of the extent of fiscal adjustment Ireland agrees to undergo, the big unknown is the extent to which some players in the bond market will use the NTMA’s next outing as a means to test the resolve of the EU. There will be big money to be made shorting Irish sovs and even more to be made sifting through the subsequent debris.

My view is – and I expect I’m alone on this – that Ireland should not expose itself to this risk to protect the big boys in the EU. Previously (1987-’91) the pain was worth it, because there was a reasonable assurance the vicious cycle would be broken. This time there is a big risk we could still end up in the arms of the EFSF and the internal restructuring of the domestic economy and tackling the vested interests would still have to be addressed – even later in the day.

“If it ’twere done when ’tis done, then ’twere well it were done quickly”

May I again kiss the collective ring of those brave souls who, having not predicted the Bubble, started the blog?

Those contributing, with some exceptions, have realized that Ireland is not perfect and that economics can be misleading. Banking, is inherently corrupting and damaging unless it is conducted within a highly moral environment. Otherwise, the children end up hurt!

Firness is the most important part and believe me, it IS ONLY JUST BEGINNING!

You all will have many bitter years to contemplate your collectve democratic failures. Revenge is best when one’s victims eat cold food? I pointed out that one of Ireland’s great strengths was its relative homogeneity. This before waves of migration. The Cork man, Christy by name, rebuked me! He dwelt upon differences. A trap for tiny minds? Promotion in the civil service is based upon protecting those who can provide promotion. Merit is seldom the primary.

Ireland has no hope of fairness and I wish you Swiftian Justice! Many years to consider how unfairness and corruption was introduced and fostered within the “nomenklatura”! The ECB fed you all masses of Euro, all borrowed and yet you ask for more? You have no conception of fairness, as it is something for the weak minded, not Irish Tigers!!!!

All who earn less than 40,000 are losers, apparently. I first heard that in 2000 or so. What stupid arrogance! May you all stew!

Paul Hunt

I agree that this is very necessary, but I also hope you understand why I also laugh at you! Very rude, but the hope that anything will be done is no longer tragedy, but comedy!

Rotten systems require total destruction. Ask the Germans and Japanese after 1945. They were reconstructed. Like you, I have offered advice about what needs be done and what is coming down the pike.
Unlike you, I relish it. Ireland has lost too much for modification. It requires far more. It appears that others agree with me as they fed billions of Euro into the bubble! How stupidly naive you all are! Everyone loves the Irish! Fools abroad with fat wallets. How does it feel now, boys and girl? Taken to the cleaners? Not yet, but it will happen!

Don’t revile me for laughging at you all! Find out who nbenefits and cease paying them!

Remember the case that the British were fighting a war in NI? Whatever happened to that? Justice delayed …… Make up your minds, Gombeens, you have been under attack ever since 1/1/2000!

@All

Fair play to those engineers in Chile!

In solidarity with the Portugese. Portugal in a spot of bother on its triple-A Austerity Budget (social dems might not support the socialists; Irish Labour take note, and of Greece, and maybe consider ‘waiting’ again …….)

EU Commissioner in Dublin yesterday suggests we adopt the Digital Agenda; e-Gov, etc and broadband ….. head of Eircom chairs the group [Irl not even in top 50 re broadband and what we once owned owes nearly as much as Fingers Folly!] But not to worry:

Minister Ryan is setting up a TASKFORCE, and he is going to CHAIR it himself! The LENNY_nists in Feeling-us-Fall must be thrilled to have co-opted such ‘USEFUL IDIOTS’ to the cause ….

Blind Biddy is actively considering reconstituting The Irish Citizen Army -“I mite be bleed!n blind” says she “but I see more than that shower of sh!tes who intend to strip the last vestiges of decency from the rags left on our backs – what LEGITIMACY have they to do dat? De **&^%%%&^%

….. and now she wants to know if McCarthy is available for the job of Quarter-Master General! Prob best not to read to her any of the papers this morning ……….

@Pat,

I take no offence at your laughter from your antipodean redoubt. I am, at times, amused at the navel-gazing that goes on here and the extent to which people seem to have bought into the spin that the Government’s tactics are preserving Ireland’s sovereignty. The ECB is keeping the liquidity taps on and Ireland is being forced to take the bank losses on the chin to avoid setting off a chain reaction that would lead into the banks of the core EZ countries. The EC is forcing Ireland to slim down to be less of a target for the bond markets. But Ireland is being further weighed down by the vested interests that continue to gouge and spectacular inefficiencies in various domestic sectors. Though it is entirely within Ireland’s power to tackle these problems there is no willingness to do so. And the IMF, the only external body which could do it effectively, is being kept at bay. Indeed it is the fear of the IMF which keep the Dail discipline to vote through whatever fiscal programme the Government comes up with.

It may be possible to sustain this deception – and the deception at the core of the EZ – for some time, but the bond markets will blow it apart eventually. And our dear leaders – thinking they were playing the cute hoors – have put us in the firing line.

@Paul

My word, you do paint a depressing picture. Maybe it will come to pass, but I still think the “managing through” route can work. I admit that this requires that we ulitimately do have the political capacity to push through the fiscal adjustment and that we have a bit of luck in term of global growth (and maybe that we don’t shoot ourselves in the foot with an excessively front-loaded package). Despite the self-interested political posturing of the last week or so, I haven’t given up hope.

I also think you exaggerate the quid pro quo with the “institutional EU.” I don’t see the raft of special measures to benefit Ireland — though the general measures have saved our skin. Ireland is taking advantage of liquidity supports that are available to all eurozone members. (The targeted bond purchases might be an exception to this generality of treatment, but it is not clear what difference they have made. Others might have a stronger view.)

I also think you exaggerate the fear that our European partners have of us imposing losses on bondholders. I don’t think they see us as bringing the system down or somehow opening up some default floodgates by our actions. I would think that given our size, it is not a bad approximation to treat EU policy as exogenous — we really don’t matter that much either way.

@Rory,
We have the right to debtate anything. There are costs and benefits to the alternatives of burning or not burning bond holders. We are free to hold any view. I am of the view that the costs outweigh the benefits, you may be of an opposing view. That is fine. But when the guys charged with implmenting the policy are on the other side of the Atlantic and seem to be debating the issue on a daily basis in the full glare of the media spotlight, it looks downright stupid.
All bond investors want to know is whether they are going to get their money back. The will deal with the consequences of any answer and decide whether or not to keep extending us credit. However, the uncertainty & indecision at every level of ploicy making is now killing us.

@Paul Hunt,
You have more faith than I do in the IMF to deliver a more rational solution. Maybe it is a very low hurdle.

@John McHale,

I accept I may be accused of overegging the pudding in an attempt to provoke some debate – and that the clichéd “a chain is as strong as its weakest link” is a tad trite – but the EU member-states are chained together as sovereign states agreeing to pool their sovereignty via a series of treaties. In the case of the Euro – and the EZ – the treaties did not deliver bank supervision, financial regulation or fiscal governance that were sufficiently robust either to prevent the severity or to deal with the fall-out of the current financial and economic crisis. (I accept that the US and the UK found themselves in a very similar position – and were compelled to apply special measures and to re-invent some regulation that they had previously torched, but the exercise of national sovereignty, not surprisingly, has allowed them to move much faster than the EU.)

The EU’s response is very much a ‘work-in-progress’ and this is causing considerable uncertainty for the international bond market. The markets will keep pressing until this uncertainty is resolved one way or another.

I also realize there is considerable pressure to don the Green Jersey and keep the fingers crossed that Ireland will ‘manage through’. Anyone who highlights the risks or inadequacies of this ‘managing through’ approach is seen as less than patriotic. This approach is also in line with the Government’s overwhelming desire to remain in office until the spring of 2012. Up to now the Government has been successful in setting up and vaulting a number of hurdles – a series of harsh budgets, Lisbon II, NAMA legislation, agreement on bank losses and recap with the Commission, etc. But many of these hurdles have been crossed by putting the fear of god into the Dail lobby fodder on the Government benches (vote for this or the EC/ECB/IMF will be in and we will be in the political wilderness for a generation) – and this is likely to be repeated for the up-coming 4-year fiscal programme and budget.

I see a major risk and a major problem with this approach. The risk is that the markets will hang fire and wait until the NTMA next enters the market to test the EU’s resolve. The height of this hurdle is not in Ireland’s control – or in that of the EU. The problem also arises from the Government’s hurdling approach. When a hurdle is set up – the 4-year fiscal programme and the budget is the next – very little attention is paid to anything else. The markets may applaud the grit and athleticism of the Government and its lobby fodder when this hurdle is crossed, but they will not be unaware of the damage it will do to Ireland’s future debt service capability or of the excessive costs and inefficiencies that are dragging the domestic economy down and damaging its competitiveness.

Tackling these costs and inefficiencies and releasing the equity tied up unproductively in the semi-states would significantly reduce the risk of clattering into the NTMA hurdle next spring, but the political will to do so is absent. Unless these issues are tackled convincingly it would be in Ireland’s interest to avoid the risky NTMA hurdle, apply to the EFSF and allow the IMF to get stuck in.

@Colm McCarthy

I will clarify again that I do not oppose your ideas on fiscal adjustment and I have accepted the logic put forward by you and, in a different sense, Philip Lane since this started. The only deviation I have argued for is greater focus on the composition of spending to shift toward more labour intensive projects to prevent a destruction of the youth labour market. The point of John’s post is that public perceptions of fairness matter. I think you convincingly make the case time and again that the blunt reality of the situation requires a substantial fiscal adjustment. However, it is impossible to argue the fairness of this case with a straight face when the people who pumped enormous amounts of money into Anglo between 2003 and 2007 and bought into a bubble are walking off the pitch intact. You have been hit with this issue a number of times in public debate and it is the only argument that you find difficult to deal with in media appearances. If you read the paper today and listen to anybody in the street, the public perception of this is now a reality that you and others arguing for adjustment need to deal with. Many of the country’s most respected economists have argued time and again that the taxpayer is getting a raw deal from the solution to the banking system. Surely you recognise the damage this causes to people making a fairness case for cutting spending in health, education and welfare.

Since there is a growing savings rate is there a way to encourage spending? This capital is not contributing to govt finances.

How can the savings rate be reduced and spending power increased. I believe a Vat reduction would encourage spending.

Is there any way a Vat holiday could be implented such that it was revenue neutral?

Is this the standard of reason and responsibility that governments and citizens are expected (by Mr Market) to meet ?

http://www.nakedcapitalism.com/2010/10/conversation-on-russia-tv-on-wall-street-conduct-lack-of-reform.html

@tull,

Yes, the bar is very low, but even if it were a bit higher I still think the IMF has the tools and experience to identify why the price level for final household consumption in Ireland remains 16% above the EZ average and to map out a programme to tackle these causes. In Greece, it’s getting stuck in to these areas as the EC and ECB are dealing – not very adroitly – with the fiscal and banking issues.

And whatever about the fairness concerns, the focus should be on the blockages, price-gouging and inefficiencies that prevent the economy absorbing the fiscal adjustment and recovering rapidly.

In any event, the 4-year fiscal adjustment programme and the budget will emerge from a very small pool of politicians, their advisers, senior Irish civil servants and Eurocrats. All the external political or economic comment in the world won’t change one iota – and the lobby fodder in the Dail will vote them through.

Presumably the Government will have the report of the State Asset Review Group by the end of the year and, as the height of the NTMA hurdle becomes more evident, it might get more serious about the deadweight costs imposed by the state, semi-state and private sheltered sectors. FF has shown no compunction in the past about slaying sacred cows when its politcial survival and future viability is at stake.

It’s all good in Biffostan !

@ Paul Hunt
Not a lot to disagree with there. To go down this route though would be better under a new govt. At least it might co-operate in routing out the gougers lingering in the long grass.

Under the current regime, you would have a clique that could bend & distort the implementation of the process to suit their own needs. If we attempted a process of de-FFerisation along with the IMF would we be better off. That is not to say that the alternative would be much better.

@tull,

Since this board is for the economists we won’t get good marks for too much political economy. If the IMF had gotten a phone call at the end of Sep. 2008 – which, of course, the EU would not have countenanced – we’d be 2 years into recovery by now. It’s the slow-motion work-out that’s so debilitating – and will continue to be so.

The Government will try to push the NTMA hurdle as far as possible in to the new year, but the NTMA will have to re-enter the market eventually – and with a fairly big and longish-dated issue. The Government will gample on the NTMA getting one away. It can’t – and won’t – throw in the towel before then. If the NTMA is shut out, it can always blame the markets.

The ability of a government relying solely on its constitutional legitimacy and clearly lacking a popular mandate to do what need to be done is unlikely to covince the markets. The radical, but logical, solution involving Lenihan and Bruton – the two politicians with political and economic credibility – conducting regicide in their respective parties and forming a temporary FG-dominated government might convince the markets and get Ireland over the NTMA hurdle. But that would require two factions putting the national interest before their own, so it will never happen.

The economic cure is going to be long drawn-out, slow and painful.

@Liam
The taxpayer (who you’re correctly concerned about) has gotten a stinking rotten deal from the government over the whole affair and it’s impossible to avoid that fact.

Unfortunately, it’s essentially too late to object to the rottenness of the deal….our government has agreed it already. Any incoming govt will be faced by the fact of the banking guarantee, by the fact of the damage done to the economy by the boom, etc.

Like a broken window, it’s difficult to fix. The fact that our window is broken isn’t changed by the fact that the government didn’t need to break it or that they could have taken steps to protect the window.

The original creditors of the banks, particularly Anglo, have now largely escaped and been replaced by the ECB and others, who have lent money to the banks under a sovereign guarantee. The people who perhaps should have suffered have escaped already. They cannot be recaptured easily or at all. Even chasing the previous managers, while certainly tempting and hopefully possible, could only make a tiny impact on the overall problem.

The main question now is how we reglaze the house. Unfortunately, that’s not gonna be a nice job, but it is possible.

A question is gonna be whether we want a fair society. So far, not much sign.

Will the NTMA hurdle next year be a true market test or is there an expectation that, assuming the government implements the requested 4-year budget plan, the ECB will intervene via the SMP in some way to ensure that the height of the hurdle is such that we can jump over it and allow us to reach the next hurdle?

Blind Biddy agrees:

“But, alas, it seems there is a consensus to ignore much of this, a consensus merely to fix up the old system and then get on with the old system, with a few regulatory tweaks here and there, along with a few optics to give the impression of change. The consensus seems to be that we can fix what is wrong by cutting social welfare some more, possibly by a billion or two; by extending the tax net downwards to those considered too poor until now to be required to pay tax; by closing off a few tax breaks here and there without frightening any horses. Maybe some increase in income tax rates on both the standard and top levels, but again no frightening of the horses. A percentage or two on VAT and keep the fingers crossed.

Lots of guff about protecting “the vulnerable”, masking the further immiseration of the already miserable.”

http://www.irishtimes.com/newspaper/opinion/2010/1013/1224280973733.html

John Grace Says:
October 13th, 2010 at 1:28 pm

John, the idea that spending is good is a falsehood. It may have had some merit when it converted borrowings into revenue which was taxed many times before the effect petered out. Now, savings are going to be the only capital and much of that will be of the “under the bed” variety, as people see banks falling over despite governments efforts to prevent that. Governments have indeed become bloated and that is another result of fiat inflation. It all has to be reversed. Some of this is good news. The developing countries may retain more of their own cpaital and thus improve their lot.

The days of easy revenue for governments has long gone!

Liam,

I agree with you 100%. But be fair – I argued, from the beginning, for a proper Oireachtas inquiry and warned that public acceptance of austerity would be inhibited if the sources of the banking collapse were not explained fully and promptly. The failure to deliver (Nyberg will report only in the new year, two and a half years after the balloon went up) was a mistake. The definitive report on the Irish banking collapse, notwithstanding the Honohan and Regling/Watson reports, is well overdue. The vacuum inevitably gets filled with bullshit.

Tom Garvin has argued over the years that a weakness in Ireland’s political culture is the presumption that the political education of the public does not matter. This is not condescension, according to Tom, but at the heart of lots of our problems. We are humble economists of course – this stuff is well above our pay grade.

How to do a job-friendly (or least-job-destructive) austerity programme? Now that is bang in the middle of our pay grade!

@Colm,

The points you make are unarguable, but, in my view the issue is not the “political education of the public”; it is the requirement for open presentation and consideration of, often conflicting, evidence in advance of the making of policy decisions. Indeed, your persistent demand for a full Oireachtas inquiry into the banking fiasco (which you again have confirmed) is fully consistent with this. But the Oireachtas is not empowered – and has failed to acquire the necessary powers (which it is perfectly entitled to do) – to ensure full consideration of policy options and to hold the Executive properly to account.

Take, for example, the Review Group that, currently, you are chairing. No one doubts that the Group will present a comprehensive analysis of the issues and present solid policy recommendations to Government. But what will happen then? The Ministers immediately concerned, their special advisers and senior Department officials will hammer out a political/policy line behind the scenes and this will be presented to the Oireachtas as a fait accompli.

Laying your Group’s report before an appropriately empowered and resourced Oireachtas Cttee would allow the Government to present its proposed policy approach, submissions and rebuttals to be advanced and heard – and counter-rebuttals as necesaary. The focus would be on the quality and credibility of the evidence presented and the Cttee would make its decision. The Government could revise its proposed policy or drive the original through, but the media and the public would see clearly to what extent the basis for its decision deviate from the evidence presented.

This would not prevent government from governing. Any goverment, commanding sufficient lobby fodder, can enact, subject to legal and constitutional constraints, anything it wants. But any gap between policy and evidence would be clear.

Irrespective of pay-grade – and regardless of however ‘umble we be – I think that a push for reform of the Oireachtas along these lines is something that all economists with an interest in public policy should support.

@Colm
Nearing end of thread but by way of conclusion, no question that you are representing your position on the banking crisis accurately and I wasn’t trying to imply that you were in favour of what happened. This still leaves the question of how to make the argument for a fair fiscal adjustment with the cloud of an unfair banking bailout hanging over everything. I watched the Minister answering this question during his Miriam O’Callaghan interview. Instead of answering directly why bank bondholders needed to be retrospectively guaranteed and then bailed out, he gave her something equivalent to the evil eye and warned of catastrophic consequences if this question is even discussed further in public. That’s just not going to cut it. The banking and fiscal situations need to be explained to the public properly without TINA rubbish or overly emotional language about the reaction of bond markets.

Paul Hunt
“And whatever about the fairness concerns, the focus should be on the blockages, price-gouging and inefficiencies that prevent the economy absorbing the fiscal adjustment and recovering rapidly.
In any event, the 4-year fiscal adjustment programme and the budget will emerge from a very small pool of politicians, their advisers, senior Irish civil servants and Eurocrats. All the external political or economic comment in the world won’t change one iota – and the lobby fodder in the Dail will vote them through.”
Colm McCarthy
“How to do a job-friendly (or least-job-destructive) austerity programme? Now that is bang in the middle of our pay grade!”
Hugh Sheehy
“Like a broken window, it’s difficult to fix. The fact that our window is broken isn’t changed by the fact that the government didn’t need to break it or that they could have taken steps to protect the window.
The original creditors of the banks, particularly Anglo, have now largely escaped and been replaced by the ECB and others, who have lent money to the banks under a sovereign guarantee. The people who perhaps should have suffered have escaped already. They cannot be recaptured easily or at all. Even chasing the previous managers, while certainly tempting and hopefully possible, could only make a tiny impact on the overall problem.
The main question now is how we reglaze the house. Unfortunately, that’s not gonna be a nice job, but it is possible.
A question is gonna be whether we want a fair society. So far, not much sign.”

Paul gives a realistic view of the present budget making process. Colm makes the point that producing a rational job-friendly austerity programme is quite possible. Hugh uses a great metaphor for where we are now: the window is broken, it has to be fixed.
To extend the metaphor, it was the occupants of one richly furnished room who broke the glass in every room except their own. They are still quite comfortable in those rooms.
We have to fix the glass or see our house go to waste.
But I would let it go to waste if I thought that the culprits or their likes were free to shelter in it in the future. I would pay more for the repairs rather than have them involved. They have forfeited my trust and I will always fear that they could revert to type. I wouldn’t even trust them to sweep up the glass because I would spend too much time checking them. Out!
That may sound irrational but trust is of greater value in predicting behaviour than rationality. Economics is there to give us tools that measure how we alter our environment in order to be better able to predict its behaviour. To ignore the importance of trust in rebuilding the state is to condemn us to a repeat.
Colm McCarthy:
“Tom Garvin has argued over the years that a weakness in Ireland’s political culture is the presumption that the political education of the public does not matter. This is not condescension, according to Tom, but at the heart of lots of our problems.”

“this stuff is well above our pay grade.” No, its outside any of our pay grades. But I have always found that if the hunger to get something done is present, either it dies, or it resonates and people will align with almost any action that expresses it.
Do something, move the magnet and see if the forces are aligned. But you will only know that by doing something.

@all

Life as lived is inter-disciplinary.

58 replies on “Fairness and Fiscal Strategy”