Sticking to 2011 Deficit Goal of 10% Requires €7 Billion Adjustment

The banks criminally increased the credit aggregates above the long term growth rates of the economy yet the Exchequer is expected to bail out the risk debt of the banks.
This is the most peverse policey imaginable.
The banks want to run down the productive elements of Industry so that they can become solvent again.
This can be seen everywhere when even prime property in central locations remain vacant to hide the destruction of the banks balance sheets.
If after the banks are wiped out there needs to be more austerity so be it.

But this is putting the cart before the horse.
What we are witnessing is a gigantic wealth transfer experiment overseen by the ECB.

The IMF will be a bigger shock.

Rock meet Hard Place, shake hands lads.

re: Promissary Note. It is possible that the government thought they could roll-up interest in the note by reissuing a supplementary note. This after all would be “developer” type thinking. Otherwise omitting the note interest payable from Govt accounts is more than disconcerting.

Re: Overall deficit. So an adjustment of 4.0 to 4.5 billion will only get us back to a deficit of 12% of GDP. Imagine that from the point of view of national credibility, borrowing capacity or how Europe views our commitment to get back to living within our means. Even as we have the highest paid public (at upper levels) in Europe.

Solution. Go for cuts of 10 billion. Take them from salaries of better off in the public sector, increased taxes and getting rid of all tax breaks.

If Ireland is interested in survival as a nation it needs to get real.
A debate around supposedly savage cuts which only get us back to a 12% deficit is surreal.

@2Pack

Under a normal IMF intervention we would very likely be able to partly default on our sovereign debt. The EFSF/IMF arrangement (and its parent, the Greek rescue) involves no default whatsoever – instead the lucky recipient country is gavaged with more and more (subsidised but expensive) debt to pay off the existing loans as well as the ongoing primary deficit. Thus Greece’s sovereign debt is still rising, and this is all part of the plan. The purpose of this approach – placing most of the cost of the adjustment on the bad debtor and none on the bad creditors – is to perform a concealed bailout of financial institutions in the Eurozone core, and of important persons in the country being “rescued”. Don’t take my word on this: see the former head of the Bundesbank. You might ask why the IMF is willing to go along with this arrangement. Part of the answer is that the current head of the IMF very seriously intends being the next president of France.

So: IMF? We should be so lucky.

Your calculations are not in agreement with ESRI’s. This is what they say in their report published yesterday.

“For 2011, we expect the deficit to be 10 per cent of GDP, based on a budgetary package of €4 billion in savings.”

Of course, you would be perfectly within your rights to say that, since ESRI’s migration forecasts for 2009 and 2010 were way out (see numerous other threads) and their forecasts for export volume growth in 2010 were way out (original 2010 forecast published in summer 2009: 2% fall, latest 2010 forecast published yesterday: +7.5%), you have no faith in their ability to forecast accurately and that your own forecasts are more credible. That would be a perfectly valid point for you to make.

As to who is right and who is wrong in this case, as I posted on other threads, it depends to what extent the lower-than-predicted inflation, that results in lower-than-predicted nominal GDP and lower-than-predicted tax revenues, also results in lower-than-predicted government spending. Again, as I pointed out on other threads, so far in 2010, government spending is around 800m below target, while tax revenues are around 40m below target. This factor needs to be taken into account in all calculations.

@Anonym

Thanks for clearing up the difference between a ‘normal IMF intervention and a joint EU/IMF New Model Intervention

@ Michael Burke

What’s the alternative? Is there any, other than to cut/raise-taxes and hope the world starts buying all things Irish?

@Michael B,

I think I get the gist of your (extended) comment and I also think you are making an important point, viz, that attempting to reduce the deficit at the rate envisaged risks shrinking the economy at an even greater rate. Ergo, the deficit will increase as a % of GDP.

If this is a real possibility – and I would welcome the views of others – is it not time to call for mercy (and directly from the IMF as the EC/ECB seem to be in Teutonic punishment mode)?

@ Michael B

As you note, I didn’t actually assume that the adjustments could occur without knock on effects on GDP.

However, the idea that adjustments simply can’t get the deficit to 10% because of effects on growth doesn’t stack up.

Let’s look at the rough numbers.

Starting Deficit: 22.5
Starting GDP: 160.0
Starting Deficit Ratio = 22.6 / 162.0 = 13.9

Now suppose, as Michael Taft said on the TV last night, that each billion in adjustments reduces GDP by one billion.

Now cut by the 6.5 billion that would be required to get to 10% on a non-GDP-effect basis.

Deficit: 22.5 – 6.5 = 16
GDP: 160 -6.5 = 153.5
Deficit Ratio = 10.4%

You’re nearly there. The point is that the proportional reduction in the deficit is much larger than the proportional reduction in GDP.

Try 7 billion in adjustment
Deficit: 22.5 – 7 = 15
GDP: 160 -7 = 153
Deficit Ratio = 9.8%

Since we’ve debated these issues before, I suppose you’ll say that the multipliers are larger than the one I’m using here. I’d suggest they may be smaller. But you get my drift.

@Michael Burke
“Why would fiscal tightening in 2011 lead to deficit reduction when in failed to do so in either 2009 or 2010?”
1. The wrong trousers were tightened. There’s plenty of other trousers that need to be adjusted that will not damage the real economy.
2. The workoff of bubble GDP had not completed then; I’m not sure whether it has completed now, but JohntheO assures us that exports are booming and that BOP is coming into surplus. Apart from a couple of caveats, I don’t see a reason to doubt these.
3. GNP in current money seasonally adjusted has finally turned positive. It may well be that the tradeable sectors of the economy have bottomed for the moment. Any adjustment that is made must not damage these sectors and ideally would improve their changes.
4. The increase in debt service costs was not factored into previous adjustments. The interest rate the NTMA is paying had not increased appreciably until recently, the quantum of debt had. Increasing the amount of debt will increase the amount of debt service costs. Yes, there’s an element of running to stand still, but how fast do you want to run in two, three, five year’s time?
5. I would like to see some figures as to what generates VAT such that subsistence payment reductions will reduce the tax take. My Lidl receipt helpfully shows a breakdown of the VAT paid. It is zero most weeks. So where does the tax spend go?

@ Karl

Calls for reliance on income tax increases then to keep those multipliers down…

@Maurice O’Leary
“The consequences are too awful to contemplate.”
Unfortunately, the consequences of no/low growth are too awful NOT to contemplate. They should be our baseline scenario with any growth a happy risk. If we get a happy risk, we can adjust down what is required in terms of austerity, but banking on growth is class-A hopium smoking.

@Dreaded Estate.
1. The public sector pay and pension bill is approx 19billion as I understand it. There is plenty scope for for reducing it by €3 billion and not cut anybody below 40,000 pa. I have no time for protecting salaries or pensions of those paid more than that.
2. Cut out all payments for sick days right across public sector. Introduce voluntary subscription based insurance scheme. Savings close to .750 billion?
3. Eliminate all tax breaks including pension breaks. the TASC proposals say that 1 billion could be saved by a reduction to 20% pension relief. Total for complete removal? up to 2 billion.
4. Property Tax. TASC are optimistic in saying €3 billion, about 1.5 billion I would say.
5. Eliminate PRSI ceiling.
6. Introduces Excess Directors Emoluments Tax payable as part of corporation tax. All emoluments in excess of 150,000 pay equivalent in additional corporation tax.
7. Reduce all subventions to State/ semistate by excess remuneration eg RTE licence fee subvention reduced explicitly by total “excess remuneration” paid by RTE.
8. Remove universality of child benefit, ESB, Travel etc.

9. Eliminate concession day payments and all standard holiday pay in excess of 20 days per annum.

No problem whatsoever in finding 10billion from a gross total of somewhere near 70 billion and not cut one home help job or cut the wages of anybody less than €40,000 pa.

@Karl Whelan
“Now suppose, as Michael Taft said on the TV last night, that each billion in adjustments reduces GDP by one billion.”
In a sense, Mr. Taft is correct in his absolute description – each billion of cuts that reduces borrowing by a billion euro reduces government ‘income’.

The problem, though, is that each billion of borrowing effectively reduces GDP by 4% (or whatever average interest we are paying) of one billion in years to come, as interest paid does not generate economic activity. In the past two years, 100 billion has been added to the national debt. This will effectively reduce GDP by 4 bn forever and by more if/when we pay some of the debt back (i.e. by the absolute amount paid back). If we used a ten-year repayment period, the reduction would be over 10 bn a year.

No?

@ hmw: “… … but banking on growth is class-A hopium smoking.”

Ahhhh!

@ MO’L: “Growth, the wonderful get out of jail card for any deficit ridden MoF, will not return in any meaningful sense for a decade.”

Glad to see that other people recognise what the real predicament is. Within the next decade we are due an oil production shock! Growth on the rocks! Kinda bothered that the academic economists not appear (yet anyway) to be discussing the probability of energy (and food) price increases which will derail developed economies.

Brian P

Brian P

@Michael Burke

I think there is a fundamental flaw in your analysis, in that you are assuming that the decline in output is due almost solely due to the fiscal contractions by the government.

Even without any new taxes/cuts I believe that the economy would have continued to decline over that period.

I believe in Zimbabwe they only issue their money from one source – at least they do something right , unlike this cold wet Angola.
The rule of law is over – the moneyed interests have control of EVERYTHING.

@Michael
Again, the economy had started to collapse before spending was cut.

The collapse of the economy was not caused by the spending cuts.

If it is true that the state is dependent on credit from a corporation other then the ECB and the bond markets should it not be front line news of the equivalence equal to the change from the Punt to the Euro.
This corporate state is a fascist state.
This is big news – I am expecting RTE news to have this at the front of the RTE 9 oclock news once this is confirmed………..

@Michael
Yes, the govt purchases from the private sector.

Still, the economy started to collapse before the spending cuts.
The spending cuts did not cause the economy to collapse.

@hogan
On your pension scheme..
So if I want not to pay tax on my pension investments when I have to cash them out I should borrow money to get myself into debt, buy and hold an asset with the money, download my pension savings, pay off the debt with the now tax-free pension money, sell the asset and then I’ve just saved xx% of my pension fund. Cool.

Also, I have to trust the Irish govt to have my pension money in xx years time. On what basis should I trust an Irish govt? Why won’t they just spend my money on TASC induced R&D into Irish based wind energy research, with particular focus on a company that’s owned by a cousin of that well known TD from the 17 seat constituency of South-East Longmeath, Brian Cooper-Lowry-Haughey?

Sorry, I’m a cynic. I particularly struggle to trust lawyers, bankers, priests and governments.

@Hugh
“So if I want not to pay tax on my pension investments when I have to cash them out I should borrow money to get myself into debt, buy and hold an asset with the money, download my pension savings, pay off the debt with the now tax-free pension money, sell the asset and then I’ve just saved xx% of my pension fund. Cool. ”
Ah, sorry I should have said existing debt. Yes, it is unfair on those with no debt. Perhaps capital gains tax could be used as the tax rate? (Which you would be liable to if you did your nifty asset washing. Of course, you could just look for over-rounds and wash it on the horses, I hear it’s popular among the criminal classes).

Anyway, as I say it is unfair on those with no debt. But the purpose of it is to remove the debt overhang on the economy and give the state a cash boost to clean up some of its own mess.

Do I trust them with it? Not the current lot. Do I see any chance they would do it? No. They all have too fat a pension to look forward to. When I say it applies to everyone, I mean everyone. From el Pres down, or up (depending on how you look at these things).

@Michael Taft
Okay, then do tell what the negative multiplier of per % of GDP that leaves the country in interest payments is? And in capital payments?

I don’t see that we can outgrow the rest of the eurozone.
I don’t see that we can outgrow the level of debt we are piling up.
I don’t see that your strategy is much more than jam today – growth now at the expense of growth later. And that the implications for growth later are much more serious than the benefit of growth now (as population ages).

hoganmahew – Unfortunately, the ESRI does not provide a multiplier but warns that both the direct and indirect effect (e.g. effect on output, etc.) will be high. Interesting to note, the risk premium rises as growth is lowered. Given that the impact of sustained contraction will be to deflate growth, we might find the perverse situation that the more we cut the higher the premium. This is a situation we have experienced. The Government cut €12 billion out of the economy (through spending cuts and tax increases) in three budgets in 2009/10. Borrowing costs increased by 50% while now we are entering a second fiscal deficit because on current strategy the deficit would be even higher next year than in the beginning of 2009. Is there a pattern?

But I fear you are right – there will be cuts and deflationary tax increases. The Government doesn’t seem to learn.

@Eureka
The only escape we will have is to be in control of our own destiny. Relying on the interest levying kindness of strangers is not that situation.

@Michael Taft
You have a great way with words…

I put it to you that the negative multiplier of interest payments abroad is at least as high as the highest multiplier you can think of for economic activity in Ireland. This is money that is lost to the economy that will not come back. It is the best of money that is lost.

If 12 bn was cut, how come we are still spending more than we were in 2007? And getting less income? This suggests to me that the multiplier effect of social welfare payments is very low. Rather than them being a support to the economy, they are a drag. Most of what is purchased is imported and is zero-rated. This does not mean they should be lowered, but it does mean that they should be examined closely in the context of automatic stabilisation.

Given that most of what we buy anywhere, anyhow in Ireland is imported (we export stuff that we do not consume), I doubt that tax increases are all that deflationary.

As others have raised the question for Mr. Burke, I’ll raise it for you – what level of GDP do you think accounts for the excesses of the bubble? What do you think the sustainable baseline economic activity in this country would be for GDP?

I plump for 2002. Not adjusted for inflation… we have some adjustment to go yet…

Karl

I really appreciate a genuine engagement with these arguments, which is rare enough.

But, if you don’t mind my saying- you’ve conceded almost everything. ‘My calculation’ was yours, just additionally taking account of an objective DoF (probaby under)estimate of the sensitivity of govt. finances to changes in output.

Even this was implicitly premised on the unlikely idea that the private sector’s output, incomes and expenditure are not at all influenced by public sector spending, your ‘non-GDP effect’ scenario . As before, I’m reasobaly confident you don’t believe that.

Perhaps we could agree, there is a genuine multiplier effect from cuts in govt spending (ie greater than 1). I have pointed to the ONS’s 1.59. The Daniel Leigh/IMF research suggests 2. Both of these are simply first year effects; you seem not to take account of multi-year effects at all.

You ask me to think about my example where the deficit/GDP ratio falls to 12.2%. In reality that’s your logic with the DoF’s 0.6 sensitivity of government finances applied. That amounts to a fall in government spending of 4.4% of GDP to achieve a deficit/GDP of reduction 1.8% of GDP….you see where this logic tends.

As per the last two years, there’s no amount of spending cuts that can deliver the requisite deficit reduction.

But, where cuts in government spending do have a greater impact on output than their own values, and these have an impact on government finances it is entirely possible, even inevitable, that budget deficits will widen following ‘fiscal consolidation’.

There are a number of European countries which temporarily raised government spending in 2009 and their defcits, however measured have fallen.

Now, I know it’s fashionable to assert that their multipliers are much higher as their import ‘leakage’ is lower, but this assertion cannot be sustained.

http://epp.eurostat.ec.europa.eu/portal/page/portal/esa95_supply_use_input_tables/data/workbooks

All EU economies, including this one, have a multiplier greater than one for government spending, as the data above shows. Therefore the damage done to the economy from reductions in government spending is greater than the change in government spending itself.

But if it is argued that some deficit reduction is better than none, with which Iagree – it is necessary to take account both of the economic impact of fiscal contraction and, from that, the likely impact on govt. finances.

Otherwise you are in danger of repeating the 2008 and 2009 nonsense that cuts equal savings. They didn’t equal savings. They led to deficit widening.

Mr Whelan / Mr Burke / Mr Taft

Surely it depends on what government expenditure you cut?

In good economic times, if you let middle income earners keep £1 rather than take it from them in tax to give to someone else, the net result should be no change in GDP and a £1 fall in the budget deficit. The money is still being spent in the economy, just by someone else (the taxpayer, not the erstwhile recipient of the government benefit). (Of course, in present circumstances that may not hold as the taxpayer, if let keep his £1, might choose to save it (or use it to pay off his own debts), whereas the benefits recipient is, presumably, more likely to spend it than save it.)

Where the taxpayer is still taxed the £1 but the government uses the £1 to pay off debt (or to see that the State doesn’t have to borrow as much as it would otherwise have to borrow), there is of course a £1 fall in GDP. The money is not being spent by the erstwhile benefits recipient (or, for that matter, by the taxpayer) but is being used by the State to pay off or avoid debt. But I can’t see a reason why GDP should fall by more than the £1 by which government spending has been cut (in favour of using the money to reduce debt instead).

Of course, the position is much more complex where the government spending concerned is not on giving money to the unemployed or the elderly but on, say, employing a nurse. If the nurse earns say 40k a year but between income taxes, PRSI, levies, VAT and everything else, he pays say 15k in tax a year, the net result of cutting his job will be a 40k fall in public spending but at most a 25k reduction in the deficit. But what if the nurse stays in Ireland but goes on the dole? He will receive at least 10k in benefits. So, on cutting the 40k a year job, GDP reduces by 30k but government spending by only 15k. Thus, it costs you (at least) £1 in lost GDP to reduce the deficit by (at most) 50p.

But Mr Burke must be right that cutting public spending can have a broader impact. It may well be that if the nurse’s post is cut, the broader economy will lose out because, say, some people are off work sick for longer than they would have been if the nurse had been around to help them. So, cutting the nurse might lead to a further fall in GDP and further lost government revenue. So, cutting the nurse’s 40k/year job may lead to a reduction in GDP of, say, 40k and a reduction in the deficit of only, say, £5k. (Of course, I have no idea what the true figures would be and living with 90 nurses when ideally you would have 100 would presumably have much less of this sort of impact than living with 50 nurses when ideally you would have 100.)

Needless to say, the position would be different again if the government expenditure concerned was on, say, nurses’ uniforms and not a nurse. You would have to think through what the likely consequences would be as regards lost tax revenue on the purchase, damage to the seller/ manufacture of the uniforms (at least if Irish-based), their employees etc. etc.

The short point is, however, that if the name of the game is cutting the deficit while keeping the corresponding GDP reduction to a minimum, the cuts will need to be carefully targeted.

2 obvious candidates for cuts fitting the bill (it seems to me as a non-economist putting his oar in) are (a) social welfare spending (because I can’t see why a £1 cut should lose you more than £1 in GDP – you are simply no longer borrowing £1 to give to someone to spend in the economy) and (b) taxes on people would otherwise use the £1 to save or pay off their own debts. Presumably, as regards (b) just mentioned, you are talking about middle to high income earners.

So, if I was Brian Lenihan, I would cut benefits and increase income tax on high and middle income earners (perhaps introducing a 50% band for those earning more than, say, 100k/year).

As regards both options, it is interesting to note the position on the other side of the Irish Sea. The Tory Govt is keeping the 50% tax band and has reduced the maximum amount of higher rate tax relief on pension contributions by almost 80% (from about 250k/year to 50k/year). The basic state pension in the UK is £96.75/week. In Ireland, it is well over 200 euro a week. There is a similar difference is unemployment benefits.

Lastly – Mr Burke, you say:

“In any event, even if both are correct, the net improvement in government finances was marginal. It is more likely that the deficit widened as a result.”

“If fiscal tightening worked in a recession 2009 tax revenues would have increased and expenditures would have declined. Expenditures were flat and taxes plummeted.”

Ireland has no option but to cut government spending (or massively increase taxes, which I suspect would risk disaster – huge numbers of mortgage repossessions (or a need for yet more money to be pumped into the banks), flight of footloose multi-nationals, mass emigration etc). You cannot seriously suggest that the State can spend the country out of recession? Who would lend it the money?

Karl – thanks for that and having re-read your earlier contribution I now see that you referred to a non-GDP effect and further you make the point above that these are accounting calculations. I accept that I didn’t acknowledge this and apologise for the assumption.

Unfortunately, whereas you made that important caveat others in the debate have not. This has led to false conclusions arising from faulty reasoning (I’m not attributing such to you). In a real sense, an accounting approach is the very problem – and my fear is that the Government did just that when it produced its estimates in last year’s budget. We see where that got us. Let’s try to address that. Using the proportions contained in the ESRI’s stylised budget in their Recovery Scenarios Update and their fiscal multipliers in Working Paper 287 we find the following using your €6.5 fiscal contraction, GDP and deficit baselines:

Deficit 22.5 – 3.6 = 18.9
GDP: 160 – 4.4 = 155.6
Deficit Ratio = 12,1 (I note that you used 162 above; if this is the remainder of the underlying growth rate, then the new deficit is 12).

The ratio of contraction to deflation is less than zero but that is because the ESRI’s stylised budget used property tax (which is less deflationary and has a higher deficit reduction ratio than most other fiscal measures; it should also be noted that this formulation assigns a third of contraction to capital spending cuts; the ESRI admits their data underestimates their deflationary impact and, therefore, over-estimates its deficit reduction). In any event, the deficit reduction is only 55% of the fiscal contraction.

If we run these numbers through a GNP-type impact we find the following:

Deficit 22.5 – 2.7 = 19.8
GDP: 160 – 5.8 = 154.2
Deficit Ratio = 12.8 (12.7)

In this formulation, the deficit reduction is 42% of fiscal contraction.

If we use the IMF’s formulation – a 2% GDP deflation to a 1% fiscal contraction, then we’re in serious problems. We get a perverse result – with the deficit rising. I seriously doubt we have yet reached that level of deflationary cascade but we should be mindful that some parts of the economy could be disproportionately hit and that this could accelerate with higher contraction.

Of course, this doesn’t take into account a nominal GDP growth above €2 billion (in the brackets), but with the ESRI projecting that nominal growth will be a mere €3.6 billion after a fiscal contraction of €4.5 billion next year, we shouldn’t expect the numbers to change qualitatively.

That is why it is all important to go beyond accounting approaches and try to get a real GDP effect. None of the above is anything other than indicative but since the Central Bank and the ESRI have been revising downwards both GDP and GNP for this year and next we may be seeing the impact of past fiscal contraction acting on the economy. How further contraction is will impact is difficult to assess with only linear measurements. But clearly cuts do not equal similar levels of savings, while at the same time deflating the economy, increasing unemployment and putting more businesses to the wall. The Government are preparing to roll some pretty heavy dice.

http://www.nakedcapitalism.com/2010/10/guest-post-70-of-all-stock-market-trades-are-held-for-an-average-of-11-seconds.html

OT? The SE has become worse than a casino. Trust not those who ask for OPM!

@Hugh Sheehy.
“Just cutting some high paid public servants and increasing tax doesn’t get your €10 billion. Not by a long way.”
I did outline some ideas above which concentrate on the better off.

I am not an economist but there seems to general agreement with Karl Whelan that the 2011 deficit will be about 12% GDP even with about 4.5 billion cuts. We are not living in the real world if we believe this is sufficient to survival.
There is also a lot of talk of multiplier effects etc. I know little of these except the following.
A person who earns €400 a week will spend all of it. A person who earns €2000 per week in a recession will certainly not spend all of it.
Therefore if the burden of cuts or taxes fall on the low earner, the negative first off spending effect will be 100% of adjustment. If the burden falls on the higher paid the negative first off spending effect will be negligible.
@Michael Taft. I am a bit surprised the The ESRI is forecasting growth of €3.6 billion next year (approx 2%?). I really wonder where this is going to come from. Both Sterling and the dollar have fallen quite a lot against the euro in recent months making it much harder for exports and better for importers. The UK cutbacks will also have a negative effect.
Personally even without cuts or tax increases, I believe that the economy would contract next year and planners should plan for that, not some optimistic wishful thinking growth that will not happen.

@Joseph Ryan
If we want to be better off in the future we have to do something called investing. Investing comes from savings. If all we do is spend money instead of saving it then we have a quick road to the side of the road.

The crash was caused by bad investments, and worse it was borrowed money. The solution cannot be borrowing and forcing people to spend.

Besides, if you tax high earners then the €2000 euro a week may not remain €2000 a week. There will be rational decisions to work less. That deprives the economy of that income, the tax from that income, and the work that would have generated that income. Oh goody!

Also, as I’ll remind people of again, income in the private sector is volatile. Just because someone’s making good money this year is no guarantee it’ll continue. Super taxation of income is simply easily administered theft.

@HS: “Super taxation of income is simply easily administered theft.”

Really? What’s PAYE then – more easily administered theft? NAMA is NOT theft? Not your usual stuff Hugh.

@EB: “Sure. People suddenly stop being acquisitive because their marginal rate has gone up.”

Really? When was the last time you encountered someone (on a pretty good salary) who was ‘rational’ about their income and went about computing their daily marginal rates? Yes, I know New York taxi drivers do it – but they are a tad bizzare anyway!

Set a living wage for two adults and three kids: multiply by 6. This gives you the upper bound. Now, as an emergency measure – say until 201* or whatever – it gets a 100% rate. There must be absolutely no allowances, write-offs, etc. whatsoever. Its on the gross. Suck this and see. You might be agreeably suprised.

Brian P

@bw
Set a living wage for two adults and three kids: multiply by 6. This gives you the upper bound. Now, as an emergency measure – say until 201* or whatever – it gets a 100% rate.

That is the daftest idea yet on this site-and it has a high bar. Who sets the “living wage”-some quango? Then there is the prospect that some of those lucky enough to earn at the top end (hospital consultants, University professors etc, CEOs of quangos) leave. Others will split their time between the black and white economy. You should google the Laffer Curve.

When will the penny drop – we cannot afford to pay through the Euro anymore.
Take someone on €160k per year. The actual wealth generated by the people in this economy is not enough to support that.
Now, if you implement a pay cut in Euro it’s absolute. If you have your own currency you can implement automatic pay cuts but the income of various groups in terms of their purchasing power in the domestic economy remains intact.
Price controls etc would have to be introduced
I haven’t explained this well but we don’t create enough of wealth to use the German-backed Euro.
Hope somebody gets what I mean – can’t explain it properly

@Michael Taft

If 2010 GDP is €160bn and the range of estimates (including the latest ESRI estimate) for GDP growth in 2011 is 2-3% (ie €163-165bn). And you are saying that there is a strong correlation between Dec Budget adjustment and GDP, say it was 1:1 which would mean a €7bn adjustment would by itself reduce GDP to €153bn.

Does that mean under that scenario to get to a 2-3% growth in GDP that we would need a 6.6-7.8% spurt from €153bn to get to €163-165bn? And if so is there any evidence to suggest that what on the face of it looks like major growth is in any way realistic?

By the way, if I understand the IMF correctly they say that on average a 1% downward Budget adjustment equals a 0.5% downward adjustment to GDP over two years. It’s from their recent World Economic Outlook which I can’t find online but Britain’s Telegraph has the story.

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/8039789/IMF-admits-that-the-West-is-stuck-in-near-depression.html

Fasinating arguments. I’d love to be, and yet hate to be in the DoF these days. An old sales codger I used to know said “easier to ask for forgiveness than beg for permission”. Our minds will be concentrated over the next 2 months on problems which seem almost intractable. Perhaps it’s time to step away from looking at the debt and deficit as the primary problems, and instead view them as symptoms.

What would we like to see in two years time? A contry that is growing, not worried about going bankrupt, competitive with neighbours, something like we were around 97.

How do we do that? Government can start by dramatically reducing all costs to doing business, rates, electricity, minimum wage, anything controlled by the government that feeds into costs of doing business, slash…by a lot (I’m thinking at least 30%)

Less revenue for the government, will that be a problem? Maybe, but at least you have set the productive side of the economy on the right track. Then start your cuts, be as vicious as you feel brave enough to do.

If its not enough to bring the deficit down to 10% next year, which is where it surely must be, at least business can do business, and perhaps the government will have to look for [debt] forgiveness.

@BPW
I can give you some anecdotal.

Self-employed marginal rates are now 55% of income (41%+8%+6%). That doesn’t kick in to 174k income. Over 75k, the marginal rate is 53%. Under that, it is 51%. If you are a high-rate taxpaying self-employed, the state take is more than 50% of your higher rate income.

For me, I have reached the point in the year where it is not worth my while to work and hire someone to do jobs for me (gardening, painting, household maintenance, whatever). It is cheaper for me to forego the earnings and do them myself.

So that is what I now do.

Eureka

When will the penny drop – we cannot afford to pay through the Euro anymore.

Until proponents of this move credibly outline how this can happen without collapsing the economy, it will remain in the realm of pub-stool economics.

http://www.finfacts.ie/irishfinancenews/article_1019972.shtml

@ anonym

The EFSF/IMF arrangement (and its parent, the Greek rescue) involves no default whatsoever…

Klaus Regling, chief executive of the European Financial Stability Facility signalled this week support for the German initiative to reopen EU treaties in order to set up a new, permanent bail-out procedure that leans more heavily on private creditors.

The position as agreed in May when there were fears that the sovereign crisis might spread, does not mean that Greek debt will not be restructured in 2012.

It’s common these days for Germany to be singled out for behaving now as we should have had in the recent past, while a poll this week showed that 69% of the French public support the protests against raising the pension age from 60 to 62.

The experience of Japan shows that high standards of living are not guaranteed and the changing model of globalisation shows that advanced economies will have to battle to maintain living standards against the expanding educated populations of the emerging economies.

@ All

A focus on the structure of the economy may be more useful than on multipliers.

About 400,000 net jobs were added from 1998 while the number in the internationally tradeable goods and services sector was 11,000 to 2007.

Simply, almost all jobs growth was built on the property/credit bubble.

With the collapse in tax revenues and over-borrowed households inevitably scaling back on spending and debt, how can the bubble effect be maintained by borrowing overseas at punitive rates?

In the US in the debate on reversing the Bush tax cuts, it has been suggested that the affluent are responsible for 25% of consumer spending.

In Ireland, apart from food, drink and local services, imports account for most other consumption.

So the biggest proportion of property tax revenue, would have little impact on consumption.

“Thousands of people turned out in Belfast this afternoon in protest over cuts announced earlier this week”
What is wrong with us???????
Are we just complete punks screwed by empire, church and Anglo and never say boo.
7 billion is crazy – just plain crazy! And anyone who thinks it isn’t is plain crazy too!

@Ernie Ball
How do you think money circulates? What do you think specialisation is? Come to think of it, what do you think servants are? Is a painter and decorator a servant? Or a landscape gardener? What about someone who does hedge laying? Or someone who fixes computers? Or is it all self-employed people?

@hoganmahew

That particular brand of supply-side, trickle down snake oil proved to be toxic in America in the 1980s and led to the extreme gap between rich and poor that we see to this day there. Given a choice between cutting the pay or jobs of working people in the public sector or increasing taxes on the wealthy, nothing is going to persuade me that we really ought to keep the rates down on the rich because they might grace a few out of work nurses with some nannying jobs. It’s a big lie: people on modest incomes spend more on food than you do on gardeners and chauffeurs.

@Ernie Ball
What are you talking about?

As I say, tell me who you think are servants? Do people who fix computers count as servants? Because that’s what I do. How about plumbers, are they servants? Painters? People who maintain hedges? How about home help or carers? Are they servants too?

I contract in the services of another self-employed person or a small company to perform work for me that it is either beyond my specialisation or that I am too busy earning a crust for me to do. The balance between what it is worth me to spend time doing and what it is not has changed.

My household income is the same as two average incomes. I’m a long way from chauffers and you are a buffoon.

The use of the word servant is unfortunate
It implies somebody who has an unequal right to aspiration as the person being served.
It also invokes class.
We are taking, however, about the trade of services.
It would be good to have non-inflamatory words for:
The person who provides the service (servicer) and
The person who receives the service (servicee) but it can all sound a tad dodgy too – can’t it!

@ Hoganmahew
You are right. The pity is that I was particularly proud of my late night musing and now, I have to take it all back.
Good point re taxation and income too btw.
Problem as I see it is that we have become so poor now that we must accept that we cannot afford to hire the “top” people for our public sector any more.
We are learning a really important lesson in “why it is important to run your country well”. But we are learning it too late. Look at the irish times pic of the Healy-Raes dancing on a road and you’ll see the point.
There comes a time when you have to admit that you have lost – and we have lost. You can continue to play the game (and lose even more) or you can, like a spoilt petulent child throw the board on the ground and start a new game.
Whether we like it or not – we only have the last option open to us.
Nobody will debate this here but we will only survive if we force a European context onto this.
We are not stupid – we are simply too nice to survive in the real world. Our misfortune is that we were colonized by a relatively benign power which sheltered us to some extent from the realpolitik of Prussia/Austrian domination.
So get real here. Colm McCarthy seems to think that the markets are logical and rational -they’re not – they’re profit hungry. You can cut all you want but if they sense a profit in shorting you they will.
The game is up. We have lost. Let’s do the childish thing and tell them all that we don’t want to play anymore. They can heve their pesky Euro.
Unsavoury as it sounds that is the way it is.

Karl – thanks for the explanation and clarity on this. I would add one point: the magic number of 10% GDP budget deficit next year won’t satisfy bond markets. Bond markets will want to see solvency, and the fact is 20% of our GDP belongs to foreigners and pays little tax (and we are terrified to raise the tax on it because they will leave if we do). So our tax base and solvency is linked to GNP. When investors see our budget defict at 10% of GDP = 12.5% of GNP + we have unknown bank exposures paid by the sovereign + we are embarking on a masive fiscal cut in early 2011 to get to this budget target, they will surely refuse to buy our bonds at affordable interest rates. Our net debt may be around 70% of GDP at end 2010, but it is 90% of GNP, and our gross debt is 123% of GNP at end 2010. These are dreadful solvency indicators for a country entering the major fiscal contraction you describe. All that makes our future profile of debt including interest unsustainable. So we need to get on with bringing in the IMF, give up on bond market financing for several years, and most likely (when the EFSF ends, alongside Greece) restructure all our sovereign and bank debts just as we have started to do with Anglo last week.

You’re such an eejit, Ernie, do you know that 😆

Jagdip Singh – apologies for getting back late on this, was away yesterday. First, I believe that Karl used 160 to facilitate his calculations, not as a prediction for 2010, which is fair enough as his calculations (and my subsequent ones) are not altered by minor changes in the baseline.

The ESRI is projecting 2010 GDP to be 157.8 rising to 161.4 in 2011 in nominal terms– a real GDP growth rate of 2.25% (this is pure volume with no price lift). Further, in this projection they have factored in the impact of a €4 billion contraction based on the following: 1.5 taxation, 1 current expenditure on goods and services, 1 capital spending, 0.5 social transfers. Using their fiscal multipliers we can estimate the GDP deflation to be 1.6%.

Were we to increase this fiscal contraction by €7 billion (using the same proportions) we would find economic growth slowing down further. The GDP deflation would be -2.7, resulting in a nominal GDP of 159.5 in 2011. This would probably reduce the real GDP growth rate below 2%, depending on price movements

It should be note, however, that this deflation may not impact on the GDP in the first year – it may lag or it may accelerate. The ESRI makes clear that its fiscal multipliers are best used over a medium-term period. But if all things hold, the deflation will hit sometime.

As to the IMF – the link below will get you to the report. Yes, the IMF estimated a 1:0.5 ratio contraction to deflation. However, this was in the context where interest rates fall and currency is devalued. Therefore, it estimated the impact (using Canada as an open economy proxy) where interest rates have hit a zero floor. In this situation, the ratio becomes 1:1.1. With a zero interest floor and where other countries are in fiscal contraction, the ratio rises to an alarming 1:2. Ireland has an interest rate floor and, now, other countries are starting to fiscally contract.
The ESRI refers to the possibility of serious and embedded deflation. The estimate that a total €15 billion contraction package over the next four years (double what the Government had intended to do) would produce an average real growth rate of 2.25 percent up to 2015. They then state: ‘There is a danger that a growth rate close to 2 per cent, following on a prolonged recession, could send the economy into a period of prolonged deflation.’ As I said in a previous comment: that’s pretty heavy dice to roll.

IMF: http://www.imf.org/external/pubs/ft/weo/2010/02/pdf/c3.pdf

@Pat
“One of the reasons for the credit bubble was the trickle down nonsense. ”
I don’t accept that the credit bubble was fuelled by trickle down nonsense. Ridiculously low taxes on capital, the movement of capital, capital gains, CFDs, shares, dividends ex-state, intellectual property, etc.; those are the result of trickle down nonsense.

In fact, taxes on property transactions (e.g. stamp duty), were contrary to trickle down, mind you, they only applied to residential in any significant way. Commercial transactions could and did avoid stamp and other taxes (resting on contract, for example, or offsetting capital gains).

Finally, I don’t accept that me, or anyone else, buying services has much to do with trickle down. What it does have to do with, though, is multipliers; with the amount of economic activity a unit of income generates.

The bubble in Ireland and Spain and (a different kind of bubble) in Greece was caused by a badly designed Euro.
Karl and Paddy and Jose were three business men in a small town.
Karl sold cars. Paddy designed coputer software and Jose had a really nice restaurant that other people wanted to visit.
Karl was the richest and Paddy and Jose were just about breaking even.
Now Karl was too mean to buy computer software and too frugal to spend any money in Jose’s house but he still needed people to buy his cars.
So Karl gave his excess money to Paddy and Jose and told them to buy cars with it. He told them that they could pay the money back over several years at low interest. And he told them to keep making the software and keep the house open for visitors because, although he wouldn’t be buying them somebody else would.
And Jose and Paddy believed him. And they spent the money he lent them on cars and on other stuff too. Karl didn’t really mind because ultimately he soon realized he wasn’t selling them products any more – he was selling them debt. And it was a great business.
So Karl had no incentive to stop the flow of liquidity to the less productive periphery – he in fact encouraged it.
Now Jose and Paddy are in trouble. They still have things to sell but Karl still won’t buy them. Instead he wants all his money back – fast.
That’s what happened. So Jose and Paddy will soon realize that Karl is not really much of a friend at all. In fact history would show that he isn’t capable of forming meaningful relationships with anybody. And the great monetary union he designed which allowed all this to happen will go. All that matters is how much sacrifices Jose and Paddy will have to make before they’re out of the bind.

@Eureka

Nicely put. When Paddy hit troubled times, Karl fell off his barstool laughing when he learned that one of the stimulus measures introduced was a car scrappage scheme – now he thinks Paddy is insane and not just foolish and irresponsible.

Agree with Ernie….higher earners may well hire a gardener with their extra income and help the economy in a trickle down fashion, but they are also just as likely to find a way to spend that income abroad or save it, more so in fact these days. so our economy gets no benefit. at least by taxation we ensure it all stays here, not just some of it.

@bryan g
govt is in no way serious about doing anything with the public sector, since the pension levy, public sector average weekly wages have fallen by 4.4%…but they are still in receipt of yearly salary increments. so that small 4% reduction wont be long about disappearing thanks to the croke park deal, and all our crowing about being the first to take austerity measures will be shown up for the fallacy it is. the only real genuine cuts the govt has made has been to capital spending…which is in effect their contribution to private sector wages…..no bother to them telling a few hundred thousand young men there is no work so they may just head for the airports..the path of least resistance is always chosen in ireland. want to know why there are no protests here?? come on, public sector are safe after slight cuts on what were already massively high wages compared to elsewhere….private sector workers are so fearful of losing their jobs they just have a head down get on with it policy now….those not falling into either category have left…and those on welfare are probably just glad they live south of the border!

Can anyone, even Brian Cowen will do, explain to me what on earth was going on in INBS? Reading through the stuff in the papers over the weekend about the INBS unique approach to loan approvals had me again tearing at my hair that the taxpayer is on the hook for INBS.

With what measure of integrity can senior government politicians and commentators face the people and declare that bailing out INBS is in the continuing ‘national interest’? How did INBS with its comparatively small though excessive bad debt book become systemically important?

Sorry to raise a political point but the answers aren’t out there in clear view.

@The Alchemist

Re INBS – NONE. It is the baddest little baad-bank in the world – and the serfs landed with an OBSCENE bail-out greater than the amount to be stripped from their backs this December ….

@All

High quality of discourse – morel pls.