His article in the FT is here.
Brian Lenihan on the Plan
- Post author By Philip Lane
- Post date November 24, 2010
- Categories In Bailout, Fiscal Policy
- Tags Lenihan on the plan
- 29 Comments on Brian Lenihan on the Plan
Month: November 2010
Overall, the four year plan repeats many of the things that we have seen before. It is not a new strategy. It is more of the same. The broadening of the tax base and the pension reform are steps in the right direction. Strikingly, there is no culling of quangos and no privatization. There will be a poll tax rather than a property tax. R&D will be stimulated by abolishing the tax exemption for patent royalties.
On energy, there is little to say. Essentially, the intention is to continue to pump billions of euros into renewable energy with the intention to make energy more expensive.
The carbon tax will be doubled between now and 2014, but coal and peat are apparently still exempt, and the subsidies for insulation and renewable heating remain. Doing away with exemptions and subsidies would bring in roughly the same amount of money, and would remove distortions in the economy.
Water charging will be postponed to 2014. That probably means that DEHLG still plans for a 3-year, top-down programme to roll-out water meters, paid by the NPRF! A system with a flat-water-charge-unless-you-install-a-meter-yourself can be up and running in a year.
Tax reliefs will fall for pollution control on farms. REPS payments will fall too.
No specific announcements for waste or transport (but see Hugh Sheehy’s comment #8).
From the perspective of energy and the environment, this four-year plan is the tired repetition of moves.
The plan is here.
Martin Wolf analyses the structural flaws in the design of EMU in this article.
During the discussion of the bailout on Prime Time tonight, the prospect was raised (and not denied by Minister Batt O’Keefe) of the EFSF charging 7% to Ireland for its loans.
It may be worth taking at look at the calculations that I did on this issue a few weeks ago. I worked out the formula for the interest rate at the time as
Effective Interest Rate = 1.2*(3-year swap rate + Margin + Annualised Cost of Once-Off Service Fee)
which worked out at the time as
Effective Interest Rate = 1.2*(1.57 + 3.0 + .167) = 1.2*4.737 = 5.68.
The three-year swap rate is now 1.9%, which would give
Effective Interest Rate = 1.2*(1.9 + 3.0 + .167) = 1.2*4.737 = 6.08.
The government’s most recent projections show the debt-GDP ratio peaking at 106%. This is prior to the admission that large amounts of additional money will be borrowed to recapitalise the banking sector. Piling on an interest rate of even 6.1% onto the likely debt levels would greatly reduce the prospect of Ireland avoiding sovereign default. An interest rate of 7% would be grossly unacceptable.
Put simply, if these reports are true, the government needs to refuse any deal based on such a high interest rate. Indeed, unless the government feel compelled to play their role in a morality play in which Ireland is used as cautionary tale, they should refuse any deal featuring a rate higher than the 5% rate that Greece obtained.
Update: As commenter Tull points out, while we’re drawing down the money over three years, the relevant maturity for the interest rate would be length of time before we have to pay it back. Plug in seven years, for example, and we’d get
Effective Interest Rate = 1.2*(2.67 + 3.0 + .5/7) = 1.2*4.737 = 6.88.