Business and Finance Article: Focus on This Budget, Not 2014

Here‘s an article I wrote for Business and Finance on the current budgetary situation (complete with a nice picture of Mrs. Merkel). The article emphasises the importance of getting the upcoming budget right rather than worrying too much about the 3% target for 2014.

56 thoughts on “Business and Finance Article: Focus on This Budget, Not 2014”

  1. The politics of closing ones eyes and hoping for better days have expired.

    White Flag Thursday was momentous in that respect.
    The Successful Bond Auction thread here earlier gave us a bit of light relief but it is likely to be the only one for a long time.

    No wonder the cabinet is meeting nearly every day.

  2. I’m sure Commissioner Rehn will explain the facts of life when he visits Dublin next month. It’s proving damn inconvenient for Chancellor Merkel that some pesky US constitutional lawyers inserted some fairly stringent US-style provisions protecting property rights and preventing ‘taking without due process’ in Germany’s Basic Law after the war, but she seems to have secured agreement on putting the EFSF on a permanent footing accompanied by an orderly debt restructuring process. A limited – and non-referendum requiring – amendment of the TFEU might be sufficient to achieve this, but new provisions to give the SGP some teeth is another matter. And its a long time from here to mid-2013 when all this is expected to be in place. Bond investors may not be that patient.

    Still the EU really, really wants to keep Ireland out of the EFSF treatment room and if we take a big, big dose of rectal fiscitude now there might be no need to cash some of those horribly expensive Anglo promissory notes after 2013.

  3. Karl some might argue that focusing on the short term and lack of planning is what got us here, just saying…

  4. @ Karl

    I have to say you are consistent – you have been beating this drum for a while.

    I agree with your views re 2011 and 2014 but is it not overplaying it to bang on about how the government have been tardy at revising their hymn sheet.

  5. well, there’s the hare. where’s the pack? i’ll check again in the morning to see how many ‘rip up CP’ comments are posted. good article , mercifully brief.

  6. Great stuff, even if we’ve heard it before.

    It is ridiculous that the government and the opposition can get away with ignoring the facts.

    It is obvious that cuts of 6-7bn even with only a sketch for the forthcoming years is going to be much better received than 3-4bn and a detailed plan of what future governments will have to get through the Dail.

    6-7bn will tell the world we are serious; 3-4bn will not.

    The ESRI’s argument about the deflationary effect of big front-loaded cuts is really just a red-herring, as is their gripe about the 3% 2014 target, as they pretty much admitted to in their report.

  7. @martindgl?
    Let me be the first to say it. Rip up Croke Park. At the very least, senior civil servant pay needs to come right down. These boys take on little or no responsibility, there is obviously a culture of little or no accountability (from the top down) and yet we’re paying through the nose for all of them. I personally know of a few guys whose pay-check/work ratio would make Bertie blush.

    Any ‘ 4-year plan’ that doesn’t take on the protected professional classes is also unjust. Why is it I pay €50 to visit my docter, where as the average Swede pays €25. Dito for Dentists. If the answer is rent, then look in to innovative ways for NAMA to be used.

    If deflation is all we have in our monetary bag of tricks, then we best try make it as fair as possible.

  8. Karl, in your article you state that: The focus on the 3% goal for 2014 -prompted by repeated references to this by ICTU and Sinn Féin, and also by recent comments from the ESRI – is misplaced for a number of reasons.

    I think this casts what happened in an unfortunate light as it appears to say that the it was those who had generated the focus on the 3%.

    I think rather they challenged the nostrum of the 3% and as a result we actually had a debate in the public sphere.

    Part of the problem was the failure to have a debate. Now we are having a debate so no bad thing.

    Some good service provided there Karl

  9. One parameter which is relevant to this year’s budget that I don’t remember seeing in the recent discussion of the fiscal multipliers and how the budget will impact the economy is the % of total activity represented by state spending.

    Total debt is considered, openness, exchange rates, etc., but I don’t remember seeing the percentage of total activity represented by state spending in any of the papers. Did I miss it? Aidan Kane recently showed numbers that had state spending hitting 57% of GNP (I use GNP as a better representative of the domestic economy) in Ireland in 2009.

    Is the total share of state activity relevant in talking about multipliers? My intuition says it should be, but I haven’t thought it through yet.

    If you start cutting back on 57% of the domestic economy are you going to see more or less reaction than if you’re cutting back on 35% of the economy?

    I’d suspect you’re going to see more reaction, but also can’t see any way to maintain or increase spending at such levels anyway….not unless you can borrow and we can’t.

  10. @Hugh
    You raise a disquieting question. Should the breakdown be 1/3 tax increases, 1/3 ending of tax breaks, 1/3 spending cuts. If this is the case, does it make sense to do more of the action now rather than later (aim for more than 10%).

    @Karl Whelan
    Yes, there need to be two plans, one an immediate one and one for the next years. There is no reason they have to both be delivered now. For the future adjustment, might I suggest a series of costed and planned measure, a menu of changes? There’s already some elements of this available in the Bord Snip and Commission for Taxation reports. By planned, I mean that an implementation plan is available for each with preconditions, timescales, costings, even sample legislation etc. This would give opportunity for scrutiny and debate.

    Realistically, we should never be surprised (pleasantly or otherwise) by what comes out in the budget. The only question should be the composition of the package, not the elements themselves.

  11. @ wow

    “I think rather they challenged the nostrum of the 3% and as a result we actually had a debate in the public sphere.”

    Yes, I agree and perhaps that particular wording in the article comes across as a bit harsh. However, my point is that the 3% debate has now become perhaps the dominant discussion point and this is being over-done.

  12. Your dam right it’s over done. It’s just some arbitrary figure dreamt up in some think tank in Brussels. A figure that has been broken many a time by those now seeking to punish us debt sinners i.e. the Germans (&French) managing to have their cake and eat it.

    The only thing that matters is whether the 27 year old bond speculators in the City of London (and elsewhere) believe we’re good for the cash come Spring time.

    So far so bad:
    http://www.bloomberg.com/apps/quote?ticker=GIGB10YR:IND

  13. In addition to bond investors being uncontrolled variables,two more variables were added today.
    The german Constitutional court may stop Merkels plans for amendment to the Lisbon treaty and court challenges here in Ireland to prevent the govt. signing onto these amendments without a referendum are also uncontrolled variables.
    They add up to more instability and surely will factor in increasing bond yields.
    What all three variables have in common is either democratic accountability or financial accountability which the masters of the universe in the EU and the corrupted political elite here in Ireland have no power over.

  14. @ Celtic Phoenix

    I personally know of a few guys whose pay-check/work ratio would make Bertie blush.

    I find it hard to believe that blushing would take place in that particular case, somehow (and unless you’re talking about RTÉ stars, then paydays over and above the most gilded ones in Dáil Éireann are surely few and far between).

  15. Ireland is still addicted to borrowing, seeing no evil in it apparently.

    Is it too late to point out what this leads to? The addict who demands just a little more of the fix, just a little more time before they get “straight”. The desire to pander to the perception of those others who broadcast their approval by extending the bonds of debt and slavery to those from whom they make profit.

    What does that scenario seem like to you?

    Sovereignty does not lie with countries and has not done for some time, once they become addicted to credit. Mind you, given the ease with which people surrender their will to addiction, perhaps they are beter off under the sway of those who are clearly stronger?

    Borrow then! Live for today! For tomorrow we die! Someone else can worry about the debt. Once even the most reckless pusher says “no”, what will happen then? The old saw about owing $100 and the banks control you, while owing 100,000,000,000 perhaps you own the banks? Particularly if these banks, the conduits through which pension and insurance assets are channelled, can be pinched out of existence with debt reductions all round? Perhaps by borrowing as much as possiible Ireland will find an even keel faster and with less policy pain? As I see that the political establishment is to blame it requires two elections at least to remove incumbents all more or less active cronies in the system. Addressing the merely financial aspects as some economists are wont, is a clear error. Structural reform is much easier if those removed are not related to those removing?

    Perception is what got Ireland into this mess. Where, is the structure? The reality? The similarity between drugs and credit seems almost cast iron? Wake up, you are dreaming?

  16. @ Karl Whelan

    The minimum goal of any upcoming Budget has to be to reassure bond investors that the budgetary actions taken have reduced the likelihood of default.

    This time next year, if the low growth of 2011 will be followed in 2012 with another period of lowish domestic growth and a deficit above the target in the 4-year plan, then we will begin to run out of ammunition, triggering elevated default fears.

    Two points to keep in mind about the good exports story: 1) The Pharma/medical devices sector, which accounts for 55% of goods exports, has been the bright star of the past 2 years but in that period, jobs announcements by firms in the sector have been mainly about cuts 2) The sector, which in Ireland is dominated by all the big firms, is facing serious challenges with patent expirations and poor results from massive R&D investments.

    FDI related employment is at a 12-year low.

    The CSO presented a rosier picture on Friday with money data for 2009.

    The value of Irish investments overseas increased to almost €190 billion, a rise of almost €70 billion (it does not mean that any of this came from Ireland!) – – whatever about the money transfers, whether from real operations or tax haven related, the impact of export rises in the next 2 years, may have a limited impact on the domestic economy.

    We will gain little from the surging emerging economies.

    Exports from the EU27 to China rose 43% in H1 2010 and Germany accounted for almost half the total. Ireland exported €824m in goods in H1 2010 and imported €772m giving a surplus of €52m.

    Irish exports to China accounted for 1.9% of total Irish merchandise exports in H1 and about 94% of the total would have been exported from foreign firms in Ireland – – decisions on the destination of most Irish exports are generally made overseas.

  17. @sean o’

    You raise what, for me, are the key issues – compliance with established constitutional provisions, democratic accountability and financial accountability. Expanding the debate in this manner does not diminish the thrust – or value – of Karl’s B&F piece; as an economist he is properly focusing on the last one and considering the scale and pace of fiscal adjustment that might be required to satisfy the legitimate demands of prospective external bond investors. My view is that Ireland will have to do what the man from the EU says, because it is the institutional EU that is making the judgement about what will be required to ‘square’ the bond market and keep Ireland out of the EFSF treatment room. Ireland really has no sovereignty regarding the scale and pace of the adjustment. But it does retain sovereignty regarding the composition of the adjustment – which it would retain even if the IMF were in town.

    On your first two points, I don’t think the German Constitutional Court will cut up rough over establishing the EFSF on a permanent basis with an accompanying mechanism for orderly debt restructuring. Nor do I expect the Court to have problems with enhanced measures for fiscal stringency in the EZ. Judges are human too and they will recognise that the dodgy investments buried in the EZ banking and financial system will have to cleaned up at some stage – and they will be confident that Chancellor Merkel will advance proposals that will not pose them problems. And as to fiscal stringency, they may view it as an expansion of German fiscal discipline throughout the EU. The problems here will emerge on the political front. Though some of Germany’s immediate neighbours are probably even more hawkish on this – and have berated Chancellor Merkel for trading some of this hawkishness to get the French on board, problems will arise in the south and the west. This is likely to delay the whole process and test the bond market’s patience.

    Whatever about the EFSF and debt restructuring – which might be dealt with by a narrow TFEU amendment – provisions for increased fiscal discipline (because they unambiguously dilute national sovereignty) will probably need to secure some measure of national consent. In most EU countries, where national parliaments exercise some measure of control over their governments, parliamentary ratification will probably be sufficient – as it was for Lisbon. But in Ireland….

  18. @hogan
    I don’t know if my question is disquieting or not, yet. If spending is 57% of GNP then the impact of cutting spending seems likely to differ from the impact you’d see at a more normal number like 35-40% of GNP (and not just in proportion).

    If, for instance, the high spending had been causing lots of crowding out of private spending then you might not see much of a drop in GDP as state spending drops. If, however, the high spending is all borrowed money being spent in response to an economic collapse then it’s not crowding out anything and reducing spending will cause a large drop in economic activity until a “bottom” is reached….potentially a long way down, but potentially where we have to get to before we can start again.

    Of course, we’ve been around this discussion before. We can’t continue borrowing as much as we are and there isn’t enough of a non state sector left to tax to enable maintenance of spending. This is not news. We may just be in a corner from which there is no easy escape….a sort of Irish asking-for-directions joke where the punchline is “Sure, you can’t get there from here at all at all.”

    I’m merely wondering about the technical issue on multipliers. Is the level of state spending a factor in the multiplier literature? I can’t remember seeing it.

  19. @ Karl Whelan

    “Secondly, we need to focus on the present because we can only take one step at a time: Worrying about the 2014 deficit is akin to setting tactics for how we’re going to score our fifth goal when currently we’re four-nil down”

    …you could argue that a big front loading is obsessing about how to score the first two of the required goals in one impressive trick-shot, so as to stop the neutrals in the crowd assuming you probably won’t score the required five goals.

    and….

    “Is meeting the 10% target for 2011 really necessary if Ireland is to continue borrowing from the bond market? Might an adjustment of €4bn —perhaps getting us to about 12% of GDP—be ok if it was accompanied by an impressive-looking four year plan?

    The answer is we simply don’t know. Missing the 10% target might be shrugged off by the markets. However, given how concerned they have become about the possibility of default, I would be inclined to fear the worst”

    I have been observing bond markets for a long time and two things occur to me.

    First the trendy view (do we want Irl to front-load and show us they mean business, or do we want Irl to commit to the realistic only so we know they mean business) will change over fairly short time frames in an unpredictable way. Ergo, don’t fixat on one view as it may change and you will look silly.

    Second, what will not alter is the fundamental point that the yield will be minimised if the longer term prospects for outstanding and new repayments in full at redemption all along the curve, are maximised. While things were going Irleland’s way scrutiny of the thing that are fundamentally askew in its economy was not worth the effort for foreign investors- the Irish part of the portfolios was just too small, and all seemed hunky dory.

    Increasingly this second point will bring things like the high cost of professional and public services, pension commitments etc into ever sharper focus. A light is going to be shined on the mantras of “ireland is best”, “because were worth it”, “sure, what’s wrong with the fact we all went to the same four or five schools” etc etc.

    None of that is palitable among bright, foreign bond investors who (IDBs and IB Prop. desks apart maybe) are generally thoughtful, sober, stand to loose mandates if they screw up and have comparatively insecure and modest personal incomes in comparison to some of the medeocre big fish in small pond Dublin.

    At the end of the day it is those long term, portfolio investors who will set the price for Irish borrowing, and the long term rationale will not change.

  20. Around 1998 the profile of our bond investors was 80% domestic ,20% foreign. This is now reversed.

    The change in profile started when we became part of EMU and then the eurozone. Fiscal Sovereignty was effectively transferred to foreign bond holders.
    I say this because if we were back in 1998 and faced economic armageddon th govt. would likely have devalued the punt and in effect default on bonds.As the profile then of foreign investment was so small and the fact they knew devaluation was a possibilty legal action was unlikely.

    FDR pursued this policy in the 1930’s ,seizing all gold,devaluing the dollar thereby effectively defaulting on sovereign debt.
    Bond investors who took legal action against the US government failed as the Supreme court held that while Treasury holders had legal right on their side,the survival of the system trumped the legal niceties.

  21. @sean o’

    Agreed. But that was then and this is now. Chancellor Merkel is determined that the EU have the same power viz-z-viz bondholders that FDR exercised. M. Trichet fears that bond investors wil drive up yields to compensate for this risk, but another way of looking at it is they will exercise a lot more due diligence than those who piled into the Irish banks and other periphery sovs. and taxpayers won’t always end up carrying the can. Pres. Sarkozy slapped down M. Trichet and asserted that he was more concerned about the interests of the French public than those of bondholders. A bit of democratic accountability in action!

  22. Karl
    “Is meeting the 10% target for 2011 really necessary if Ireland is to continue borrowing from the bond market? Might an adjustment of €4bn —perhaps getting us to about 12% of GDP—be ok if it was accompanied by an impressive-looking four year plan?”

    The content of your article outlining the EU political background and the governments evasiveness in admitting the truth about the deficit answers the question.
    Anything above a 10% target will shred whatever is left of Ireland’s credibility. If Ireland wants to get back in control of its destiny its needs imaginative taxes and cuts of 10 billion next year. Airey fairy cuts in years three or four are pie in the sky.
    Your football analogy is spot on in that regard.
    If the taxes and cuts are targeted at the better off they need not have the extent of the deflationary impact that some suspect.
    Ireland has one last chance to get control of its destiny. The signs of Ireland taking that chance are not good.

  23. @Paul Hunt.

    The euro has no taxation base,it is based on intergovernment transfers from governments such as our own with little democratic legitimacy.
    There is no Federal fiscal system (EU) running alongside a state system (Ireland).

    In the US each state is a subset of the Federal system.The intersection occurs between the taxing powers of the Federal govt. over all citizens and its mandate to make transfers into States based on a common currency.
    It is a closed system with feedback loops.

    The Euro zone is an open system where the ECB is now effectively acting as a Federal Treasury for German,French banks ,pension funds and trying to impose fiscal authority on individual states as a taxing authority.
    This is illogical ,otherwise we should expect German and euro bond yields to rise but they are nt.

    IMO we cant be part of such an open system (a currency board),either we surrender ourselves to a Federal EU or we go back to the old system.

  24. Any chance the government might factor in rising mortgage rates by the middle to end of next year? If Irish banks continue to pay significant premiums for money, loan rates will rise here (again and again). Latvia-on-the-Atlantic perhaps in a year. Every time I read about government strategy I am reminded of the repair man who only carried a hammer in his toolbox.

  25. @sean o’
    “In the US each state is a subset of the Federal system.”
    I don’t believe this is the case, I think the converse is true – the Federal state is a superset of the individual states.

    I also think you are confusing the roles of the EU Commission and the ECB.

  26. @Joseph Ryan
    “If the taxes and cuts are targeted at the better off they need not have the extent of the deflationary impact that some suspect.”
    You are going to have to come up with some sort of definition of ‘better off’. Personally, I would take median income as a divider. In 2007, it was about 25k…

    You’ll also have to figure out the contradiction between ‘reviving economic activity’ and ‘those who spend money on items that attract VAT’.

  27. @sean o’,

    Agreed. But the EU is incapable of achieving logical purity; it is a glorious, remarkable, but vitally necessary, confection of fudge with 27 ingredients. It is a project worth pursuing; twice last century Europe experienced the carnage generated by two unviable alternatives.

    The reality is that everyone will have to behave more like the Germans. The Dutch, Scandinavians, Austrians and most other eastern member-states accept this to varying extents. The Francophones and the northern Italians are coming to terms with this. The UK, as always, is a law unto itself, but the real problems are in the southern and western periphery.

    National parliaments will need to exercise more restraint over the executive arm and to exercise more restraint, directly or indirectly, over the EU’s institutions. This is happening gradually in the heartland, but, again, the real problesm are in the southern and western periphery.

  28. The danger with a €4bn adjustment is that the deficit will still be left at circa 11%. After 3 years and total adjustments approaching €20bn to be left with a 10%+ deficit for 3 years running is not just disappointing it is scary.

    I think we need to try and get out of the double figures just not sure if it possible for 2011. So if it is almost impossible that we will get below 10% in 2011 and very unlikely we will get below 3% by 2014. A credible 4 year plan becomes critical.

    As Hogan and others have said what we need is a menu of cuts/taxes that adds up to significantly more than €15bn. This would allow the public and the bond markets to see what is likely to happen and that adjustments of that size are even possible. The government and opposition could then pick and choose the options that suit their political views but still get to €15bn.

    Our problem with the bond market are two fold

    1. I am not sure they believe €15bn is possible. A simple menu of 50 options showing that this can be done might go some way to removing their doubt.

    2. And this is more fundamental. Even if the adjustments are made and we get the deficit down to 3% by 2015 or 2016 can Ireland sustain this level of debt?
    I am starting to believe that even after making a massive effort to get to the deficit target by 2015 the accumulated debt will not be serviceable long term. And I think the market may agree with me at the moment.

  29. Karl,
    It’s not just the bond markets, or the powers that be in the EU, or economic experts, who need to be convinced of the credibility of fiscal planning. It’s the people. Attaining the 3% target is in our own best interests as a country, first and foremost. Reassuring the bond markets or meeting EU Stability and Growth Pact requirements may also be essential but these should not be used as a shield by our politicians. All that does is shift responsibility from the requirement to do what is necessary, however unpleasant or immediately unpalatable those actions may be. Thus, the challenge is as much political as it is economic.

    I believe that the forthcoming budget must be placed in a broader context of a four year plan that sets out the road map and the key milestones for reaching the 3% target by 2014 if that budget is to have any prospect of public acceptability. Otherwise, immediately following the announcement of the budget, as happened in 2008, there is the prospect of vested interests using their leverage in the media or with political parties, or the raw bargaining power of street protests, or strikes, to ensure that their patch is protected irrespective of the cost or consequences to the rest of society, or the implications for the creditworthiness of the state as a whole. They may well try to do so, but there is less likelihood of them getting very far if everyone in society is clear that the December budget is part of a four year programme that brings this state to the ultimate destination of restoring stability to the public finances and positioning the country for a return to growth and prosperity in the future.

    The four year plan is also required to dismantle many of the decisions and policies, in taxation and spending , that were introduced particularly in the period 2001-2006. Not all of these changes or reversals of policy can be included in the first budget of the plan period, especially taxation measures like a property tax or water charges, because the infrastructure to implement such regimes is not sufficiently developed, or simply because the order of magnitude of the changes required is so huge.
    Anyone who takes a look at the Dail record for 6 December 2006 can be in no doubt as to the scale of what must be undertaken.

    That Budget debate is worth a read, if only for the sheer insanity on display on all sides of the House. Richard Bruton, incidentally, cut a lonely figure in pointing out “the Government is increasing spending at a rate 50% faster than the growth of national income” and that “spending is increasing far faster than national income and tax revenues and this is posing a threat.” Labour wanted more tax reductions on top of those proposed by Cowen in the Budget.

    No-one, on any side, appeared to think there was anything crazy about taking a further 88,000 earners out of the tax net. Brian Cowen described the achievement of having 846,000 people, or two out of every five earners, outside the tax net as “a very significant development.” As it turned out it was, but not quite in the way he meant.

    Within a matter of weeks of Budget 2007 Labour unveiled its 18% tax rate proposal, besting the insanity of the Budget and firing the first shot in the ‘auction politics’ that characterised the very long drawn out election campaign that followed.

    The four year plan should act as a brake against any such return to ‘auction politics’ by any of the main parties in the next general election, which could take place at any time from early next year. Having the plan in place means that the parameters will be clear and parties will not be able to engage in jiggery-pokery promises to parts of the electorate , at the expense of other parts, without risk of being exposed to ridicule and consequent loss of support. Each party will have to have their own plan proposals, costed and credible, that fit within the overall framework.

    In his Irish Times column this morning, Garrett Fitzgerald points out that even if there were an election called before the budget, or if that budget failed in the Dail causing an immediate election, the incoming administration would have no choice but to run with most of what the previous government had already decided to do. Thereafter, without a four year plan in place and agreed with the EU, they could once again have recourse to pandering to vested interests to secure a second term in office. On past performance, nobody should under the illusion that our political parties will behave any other way.

    For these reasons, I personally think publication of a four year framework that binds them all is essential prior to the budget. The electorate is entitled to no less.

  30. Freedom is just another word for nothing left to loose……. yee guys may still be getting paid nice Euro paychecks and still have skin in the game but what is left of the real economy is dead or dying and I am not talking about Arnotts.

    If the ECB continues with its policey of rent extraction and subsidy of the shadow banking sector then it may be time to kill this favourite creature of the cartel.

    http://www.guitarsolos.com/videos-kris-kristofferson-me-and-bobby-%5BTYt1xvjQ35U%5D.cfm

  31. Pat Donnelly is the only contributor who mentioned ‘reform’ — a strange word in conservative Ireland – – but without it, the long-term outlook is stagnation at best.

    In 1989, at the dawn of the US high-tech boom Intel decided to build a plant in Ireland, which was followed by the other world class US companies.

    In the early 1990s, EU transfers more than offset the interest paid on the national debt.

    In 2013, we will become a contributor to the EU budget for the first time since 1973 while the move away from the conventional model of globalization coupled with the peak in US FDI in Ireland, suggests that a new Irish model is required.

  32. @Michael H,

    ‘Reform’ is out of the question. We both know it won’t happen. Ní hé lá na gaoithe lá na scolb. We didn’t fix the thatch when the weather was fine and sunny; you’ll find no volunteers for roof-duty in the teeth of a howling gale. This Government, and its successor, will seek to exercise the full extent of its executive dominance within the current arrangements for political governance to enforce the fiscal adjustment programme that will be decided. (Heck, these guys can’t find the time to ensure full representation of the people.)

    It would be wonderful if this were done in the context of a radically reformed system of politcial and economic governance, but can you see any individual or group within the political classes with the guts and gumption to make this happen?

  33. @Hoganmahew.

    I agree we need to definitions urgently and indeed actions urgently.

    Regretably I don’t get paid for doing the job of government or advisor to them in coming up with the list of who pays for their recklessness.
    Your median income figure of €25,000 sounds low to start applying the axe. I would have thought €40,000 was more realistic.

    On the Vat issue. I remember the 35% vat rate on luxury items in the 80’s. Not suggesting we go that far but there is scope for a luxury items tax. There is also scope for discontinuing to zero rate some fresh food items such a meat , milk, fish, fruit and veg. After all why should the culinary tastes off many ‘better off’ people not contribute to the exchequer.
    There is an element of ‘universality’ in the zero rate and there has been a lot of reasonable comment that universality should be removed.

    The prior differential with UK vat (3.5%) could also be restored to the standard rate.

  34. @Joseph Ryan
    Well, 40,000 on the 2006 (sorry, it was 2006, not 2007) figures would have fewer than 30% of taxpaying entities (including couples where they are jointly assessed, so realistically speaking 20% of individuals?) providing the grist. It also starts at the income levels that have the highest relative taxation (i.e. tax burden less transfers).

    It doesn’t mean it is the wrong level, but it is going to be hard for those at that level to take that they are making the highest level of contribution relative to their means (a problem that exists if you set a point pretty much anywhere!).

    VAT rates, IIRC, are limited to 25% by EU treaty. I agree with you about the luxury tax rates, though we have to watch out for Newry effects.

    I don’t agree with VAT on particular foods. I don’t see why being of limited means should limit you to tinned or frozen foods. This does not mean that a low flat-rate VAT on food shouldn’t apply, perhaps with artisan exceptions; we do, after all, import most of the food we eat.

  35. @Veronica. Your contribution is thought provoking but sounds very like the consensus type argument that we have been hearing. I cannot but note that in your contribution “Labour started the auction politics in 2007” but the decision and policies in taxation and spending in 2001-2006 are not explicitly attributed to any political party or any particular person within any party.

    If I were in opposition now, I would not agree to anything coming from the people who destroyed the country. At least not until they left office for good.

  36. @Veronia
    Don’t beat yourself about what happened in the past – FF gave the bounty to builders and their foot soldiers , Labour would have given it to the middle class and FG to the Merchant class – all of which would have been spent on some sort of consumption
    Given that Brussels frowns now on creating lasting public utilities and Basel capital requirements are / were small it was best to blow it all and have a good time – MCreavy was right in that regard.
    Irish politicians are almost completly blameless here as I am afraid they are a irrelevance.
    The Banks giveth and the banks taketh away

  37. Sorry, but I have to laugh. People proposing luxury VAT rates! Newry’s Golden Mile would boom and Dublin city centre would die.

  38. @ Veronica

    “If everyone in society is clear that the December budget is part of a four year programme that brings this state to the ultimate destination of restoring stability to the public finances and positioning the country for a return to growth and prosperity in the future.”

    I don’t want a return to prosperity in the future (no fear of that) and neither do a lot of other people in this country until we know precisely “who’s” prosperity is being restored. The problem with the government socializing and underwriting losses while paying out 700 or 800 Euro an hour to insolvency practitioners and barristers (NAMA gravy train) is that the ordinary person now realises that they are merely propping up a rotten edifice. A system so dysfunctional that it does not deserve to be rescued.

    I sincerely hope we are locked out of bond markets and have to run the country on both the financial and moral capital we have as a society. I look forward to some real politik and some real economic debates not the phony transfer of debt to future generations and the surreptitious transfer of sovereignty to supra nationals which Cowen nod nod, wink wink. is already involved in.

    “Parties will not be able to engage in jiggery-pokery promises to parts of the electorate , at the expense of other parts…” Is this not precisely what the Croke Park agreemnet is?

    Is constitutional democracy in Ireland to be waived in favor of Merkel’s problems with her Constitutional Courts?

  39. @ Paul Hunt

    ‘Reform’ is out of the question. We both know it won’t happen.

    The Thomas Gray line, “Full many a flower is born to blush unseen/And waste its sweetness on the desert air” can easily come to mind.

    It does however puzzle me why insiders who have so little to lose are silent at this time of national emergency on remedies that can only impact on themselves and colleagues in a minor way.

    There are insiders who for example could shed light on why the public service reform process is on the proverbial slow boat to China.

    Why do proposals on reform at the universities not come from within?
    It’s not that too much is expected at a time when tens of thousands of fellow citizens will never work again even though they are eager to do so.

    This conservative society needs dissidents and they do not have to take risks on the scale of Nobel Peace Prize winner Liu Xiaobo.

    @ Robert Browne

    I sincerely hope we are locked out of bond markets and have to run the country on both the financial and moral capital we have as a society.

    Next month will mark the 13th anniversary of the establishment of 2 public tribunals, which are still in session.

    Lawyers have become multimillionaires and when they were paid an extra €1m due to a typing error, they were allowed keep it.

    The corrupt land rezoning system remains intact; conflict of interest remains an alien concept and as in the United States, bribery has been effectively legalised.

    @ sean o’

    FDR pursued this policy in the 1930’s ,seizing all gold,devaluing the dollar thereby effectively defaulting on sovereign debt.

    There is much to admire about FDR but his scuttling of the 1933 World Economic Conference in London, by ruling out any discussion on exchange rate stabilisation, put an end to hopes of an agreed international response to the Depression.

  40. @Michael, Veronica, various
    Many on this site have talked of reform. The problem with reform is not the power of established insiders, or the cosy relationships, or a lack of principled Irish people who could run a reformed state. It is that the Irish electorate shows no sign of being interested in it.

    Auction politics works because it attracts votes. People like voting to spend other people’s money without concern for equality or justice. People like getting favours on the small stuff, so cronyism thrives in the big things. The county council TD exists because that’s what attracts votes. Show me any evidence that it doesn’t.

    Lowry and Cooper-Flynn and Healy Rae and Ray Flynn and Willie O’Dea and various others are illustration that the Irish electorate is not reform minded. How many TDs from the last 30 years could be listed as reform candidates?

    Right now, in today’s Ireland, Labour is out there promising arithmetic impossibilities and their popularity soars. FG, the party of “we’d have moral courage if it didn’t require courage”, have Michael Noonan rowing backwards past himself saying that maybe we don’t need to cut back spending since we can imagine high growth rates. Right now you’d almost have to say that FF, the architects of doom and purveyors of catastrophe, are the only party talking sense…and even then it’s only vaguely related to sense and only because they’re getting direct commands from on high.

    Reform requires voter interest in reform. Can anyone say that Irish voters actually want change, or do they just want continued special treatment for themselves and their segment of society at someone else’s expense?

  41. @ Joseph Ryan,

    We all know who was in government and ultimately responsible for calling the shots for the past twelve years.

    Philip Lane and others have pointed out that in times of bumper tax figures governments are subject to pressure from all sides, including the opposition parties and the media, to distribute the largesse. It follows that any government that advocated prudence and counter cyclical policies would have been howled out of office and would certainly have no chance of more than one term in office; or at least, that is what the political parties that dominate our system believed.

    Opposition parties who didn’t have to be responsible for the consequences were hardly going to rock the boat with their own coterie of vested interests either. If you want a specific example, just think about what happened every time in the past decade that a Minister for Education proposed reconsidering free third level fees and the subsequent hue and cry that drowned out any sensible debate on how third level education should be funded.

    FF are toast come the next election and deservedly so. Therefore, how Labour and Fine Gael are likely to behave once in office is deserving of scrutiny and ‘previous’ is a relevant indicator of that. Richard Bruton was alone in pointing out the dangerous ground the state was slipping onto, but he never pressed his argument – it was more ‘by the way’ than shouting ‘stop’. It is unlikely he would have been able to carry his own party with him in any event. Indeed there are examples from a more recent budget where Bruton made suggestions to Brian Lenihan for savings in transport spending, yet as soon as these were included in the Finance Bill they were roundly condemned by his own party spokesperons.

    As FG’s Brian Hayes summed it up in the Dail on Thursday: “This place has been a doss house, effectively, for the past ten years or so, where people cannot speak their minds. Everyone one of us is elected in our own right but there is a dreadful centralisation of power on the other side of the House and on this side. As a result, people cannot speak their minds freely because in some way they will be off message or not exactly close to the position of their party or of the Government. Each of us elected to this House has a mandate in his or her own right to speak our own mind and to break the cosy consensus.”

    The key point of my original comment is that the public deserve better from all our political parties than what we’ve been getting over the past 15 years. It’s not just a matter of substituting one bunch of mealy-mouthed incompetents for another who might like to style themselves as ‘fresh faces’, though they are anything but and their track record as parliamentarians speaks loudly of their own venality and incompetence. But we’re stuck with them. So the very least we are entitled to is to know that once in office they will be bound by the parameters of a four year programme. Within that framework they can make decisions and compromises and enter into bargains with sectoral groups as they see fit and as may accord with their respective ideologies.

  42. @ Hugh Sheehy,

    I agree on all points. However, as a society we’ve already paid a very high price for being lured by the promises of auction politics. If you look at the subtext of recent opinion polls, especially the public level of confidence in the capacity of the opposition parties to deal with the crisis, it indicates that people are not entirely fooled by the fairy tale arithmetics that are put about so blithely. Between now and the election there should be a far greater scrutiny and demand of the political leadership of all parties to justify every position and policy option they advocate. The media have a key role to play in this.

  43. @Michael H,

    “It does however puzzle me why insiders who have so little to lose are silent at this time of national emergency on remedies that can only impact on themselves and colleagues in a minor way. ”

    Given your astute and perceptive analysis and commentary I’m genuinely surprised you’re puzzled. These guys will keep their secure positions and make money irrespective of the size of the economy. Their predecessors did it in the ’50s and many of those around now did it in the ’80s. Those on the outside can take a hike – as so many did in the ’50 (and into the ’60s) and during the ’80s.

    In a perverse way these guys don’t particularly like too much economic growth, innovation and expansion as it attracts new entrants with potentially better skills and new techniques who might show them up and reduce their dominance and ability to gouge profits. It’s far better for them to have a smaller pot with their being assured of getting the lion’s share. It would be nice to see a bit of economic analysis on this. But who would fund it – and, perhaps, those doing it might have to look at themselves?

    @Veronica,

    Your heartfelt and eloquent plea for democratic accountability is timely, but I fear it will fall on deaf ears. Our anachronistic, if occasionally charming and entertaining, political system comprised mainly of two catch-all populist parties and a quaint, incoherent left-of-centre offering is totally unsuited to the current challenge. But those within it are, by definition, incapable of changing it.

  44. @hoganmahew

    Regarding median income. The median is an average which is affected less by large outliers, e.g. bank managers salaries, the taoiseach’s pension and Johnny Ronan’s holiday bonuses. The mean would probably give a larger average for incomes in this country and a better starting point for tax cut offs.

    Median: Value which 50% of the data is at or above.
    Mean: Sum of all data values divided by number of values.

    E.g.
    The median income of 9 people on the dole and the chairman of AIB would be €10,192 (if my dole figures are right)
    The mean income would be €59,172.80

  45. @ Paul Hunt,

    Since politicians, per se, have no shame, they usually have no problem changing tack when it’s put up to them. As well as the mainstream media, internet sites such as this one can do a lot by way of analysis of the policy options on offer to encourage citizens to demand accountability from parties on their policy prescriptions and to threaten rejection at the ballot box if they come up short. Put simply, the media has a responsibility not just to act as a confessor to public angst, or personalisation of the issues, it must demand that politicians justify their stances and expose them when they don’t. The media has no business being the ‘friends’ of politicians or acting as cheerleaders for any party or individual.

    I’m not an idiot so I know it’s not as simple as that, but in principle it’s not a bad place to start from. Further, a more rigorous approach by the media would encourage individuals within parties to demand change within their own organisations. I hold no brief for Brian Hayes, but his description of the Stalinism that prohibits any expression of opinion contrary to the ‘leadership line’ within the major political organisations is stunningly accurate.

  46. @Karl

    I would agree with the substance of your article.

    2014 is a long time away. I dont know of any business that can project line by line Income and Expenditures for 4 years. It is appropriate to have a framework and goal but there is no certainty in anything over that timescale. Anybody that tells you that you can is just a fool that never worked in the real World. We can get out of this mess if the Politicians will bite the bullet and deal with the Expenditure side of the equation starting with themselves by dropping their salaries and perks including Pensions to levels that are paid in the EU to others at the same level. Then move on through the ranks of the Civil Service and Public Sector. I see that Labour have come out of the “closet” to say that the adjustment under their plans will come 50% from increased Taxes and 50% in cuts to Expenditure. These fellas are for the fairies which they will find out about at the end of November 2010 when the Tax Revenue figures for Income Tax and Corporation Tax come in from the CSO.

  47. @TRP

    Remember 2000, we were fairly okay in those halcyon days. Well compare tax today to tax in 2000:

    Customs & Excise 2.1% of GDP less in 2010 than in 2000
    Capital & Stamp 0.9% less
    Income Tax 1.3% less
    VAT 1.0% less
    Corporate Tax 2.3% less
    Total 7.6% less

    So can I suggest that raising taxes over the next few years back to the levels of that halcyon period would go a long way to solving this problem. Just because it is Labour policy does not mean that it is looney.

  48. @Michael H

    Official Ireland has never liked dissidents. Many of the useful ones were run out of the country by the Censorship Board up until the sixties, and even after that a sheep-minded consensus about who could say what, when and where ensured the baton of orthodoxy would be passed on unhindered. The education system was devoted to spirit crushing, producing a doltish reverence for oppressive traditions, and ensuring that the elite deemed fit to rule the country would never be troubled by intellectuals. But speaking practically can an agrarian-afflicted society with 300,000 in the public sector in some shape or form, and almost 500K receiving welfare, one that is very homogeneous by European standards, process any better?

  49. @OMF
    Exactly, that is why I suggest we use the median figures. As you say, the average is severely skewed. Viewing someone earning under 40k as not well off is unsupportable, unless you consider that 70% of the population are not well off. I am relatively agnostic about the percentage, but my current view (“so far” as the man says) is that if you earn more than what half the population earns, you are well off. If you start to earn multiples of this, you go up in scale terms…

    Not that we have any decent current figures about this. We see survey after survey internationally using median figures from other nations, but average figures from Ireland because those are the only ones available. The use of average earnings gives a false impression of both how little many in the state earn and of how grossly overpaid some are.

    Saying someone earns 5 times the average wage doesn’t sound nearly as bad as saying they earn 8 times the median…

    May I politely request that the Revenue pull their finger out and give us some updated numbers… or more likely that their political masters give them permission to publish (since I don’t doubt for a moment that the figures are available).

  50. @TRP
    “2014 is a long time away”
    It’s not much further away than 2007 is distant. And look how far we have come in that time…

  51. @Brian Woods 11

    You compare Tax takes with 2000 and now. That is exactly where we are in business terms – the Year 2000 – so there is nothing new about that and is exactly why the Tax takes are down so much. The local Economy is dead in the water so it cannot sustain any Tax increases unless you know something that I dont know about. This country needs to have it’s Economy stimulated not more Tax increases to get out of this mess having reduced Curent Government Expenditure that is sustainable not the bloated one we are putting up with.

    @hoganmahew

    If you knew anything about business in the current climate it is not possible to predict next month let alone the next four years. If the Government could get one year working to some plan there might be some hope of getting the next three years right.

  52. @TRP
    “If you knew anything about business in the current climate it is not possible to predict next month let alone the next four years.”
    What I know about business in the current climate is that you don’t bank on money fairies to come and bail you out. The government’s last plan was to do just that. The current plan will have to be significantly different. It will have to surprise to the upside, therefore it will have to assume the worst. That is how I run my business. What do you do in yours?

Comments are closed.