Fiscal Policy

Budget Documents

The budget documents are now online. The server is clearly busy but I just downloaded all the documents.

38 replies on “Budget Documents”

Right at the end of the summary, there is a short blurb stating that the Govt. intends to allow Pension funds to invest in Irish Bonds to boost and to use the higher returns as a basis for their commitment to members.

How reckless is that?

Most pension funds are required to invest in Triple A rated bonds.
Irish sovereign bonds are several rungs down the ratings ladder.

This is not only dangerous for pension funds, but also would make a change of policy ruinous for any future government. It effectively ties the next government to the current policy of not defaulting on sovereign debt. While I don’t agree with defaulting on sovereign debt, I don’t like to inhibit our options in this way.

The text of the document:

“Sovereign annuities
The Irish Association of Pension Funds and the Society of Actuaries put forward a proposal under which Irish pension funds would have the opportunity to invest in longer-term Irish bonds at higher yields than are available elsewhere, and to price their liabilities to pensioners on the basis of those higher yields.
Following extensive consultation with these bodies, the Government has decided to proceed with such a measure.
Accordingly, the National Treasury Management Agency (NTMA) will offer bonds which can be purchased by pension funds or other investors, or used to facilitate the issue of sovereign annuities by the insurance industry which can assist funds in meeting their obligations to pensioners. Changes to the regulations will allow funds to re-price their liabilities to pensioners to the extent that they purchase Irish bonds.
The Minister for Social Protection will be announcing details of the measure and the legislative and other regulatory changes it involves.
The Government is confident that this step will allow pension funds, if they choose, to reduce reliance on equity investment and to gain access to good and secure rates of return through purchase of the new bonds or annuities.”

I notice that all but 5 departments have 40% or more of the cuts in administrative efficiencies – which never come to pass. The only things that you can cut hard in G&A are usually travel and entertainment, and I would hope that most of that is already gone. Administation is mostly payroll, so these cuts look unrealistic.

The departments that do not have 40%+ are even more suspicious. Foreign affairs cut 5M in 2011, but 0 in a full year – why? A large party in 2014? Local government pushes 2/3rd of its cuts into local government to be announced later. Transport seems the most honest, at only 1/4 administrative efficiencies – the rest are real cuts, while Health’s 1/4 efficiencies is spoiled by the 390M (or half the cuts) that come from demand led schemes that never pan out.

Of course, the real cuts are in Social Welfare, (7% efficiencies). Overall, this budget seems to be cuts in social welfare, hope for demand led schemes in Health, and mostly a plan to buy fewer envelopes.

Excluding the above items (efficiencies, demand-led schemes, and other costs pushed out, or to be decided later), I get 813M in cuts in Social Welfare for 2011, and 465M in cuts elsewhere. This seems low given the hoped for 2,192 with these included.

@ Sean

actually, pension funds are usually only restricted by ‘investment grade’, rather than AAA.

@ Ger

most DB pension funds in this country are technically insolvent as is due to the very low discounting rate attached to German bund-based annuities. They’re completely unaffordable. Basically we either change the funding requirements (not gonna happen), change the discounting rate (ie govt plan), or wind them up (eh…). Not a lot of ‘good’ ideas in there, so at least this one has the potential to keep the wheels spinning around. If we default/restructure in the next few years, we’ll have to restructure or wind-up pension funds anyway, so i don’t personally see it as being a big change on that end vs the current situation. If we somehow dont have to restructure, then the pension funds will be on a much firmer foot in 5 yrs. I dont think most people realise how beaten up DB pension funds have become in this country and are going to remain without a radical overhaul.

I don’t seem to see any mention of the property tax, this was supposed to brought in this budget right?

In the 2011 figures onwards, why is the cost of the promissory notes principle (€3,138m) a positive figure?

I understand why they have the €31,375m figure as a negative in 2010 alright.

@Eoin Bond

”actually, pension funds are usually only restricted by ‘investment grade’, rather than AAA.”

Presumably Investment grade for a good Irish company (eg.CRH) has a lower spread against the German bund than an Irish Sovereign bond .
If the country defaults the chances of redeeming the par value of a CRH bond with all interest payments honoured are infinitely greater than full redemtion of an Irish sovereign bond.
So why would a pension fund invest in Irish Sovereign bonds?

Thats interesting what you say about DB pension funds in this country.I did nt know things were that bad.

you say ..”If we somehow dont have to restructure, then the pension funds will be on a much firmer foot in 5 yrs. ..”.

why do you think this will be the case?

Equity in Budget.

I hope I am not too afr off the thread here but lets analyse some of the levy changes in the budget.
I happen to have two adult children who in Jaunary will be earning approx €360 per week or just over €18500 pa. Both will pay an additional levies of 5%.

I am aware of several people, through the media mostly, who will earn in excess of €1900 per week or €100,000. Those people will pay additional levies of 2%.
Both amounts take PRSI into account.

Perhaps somebody in government believes that I am not able to do the maths or indeed to absorb the message of the maths.
I believe they may be wrong on both counts.

@ sean & eoin

What sort of pension funds does the current “investment grade” requirement apply to? Thanks.

Can a self-employed contributor to an existing RAC personal pension scheme not already chose more high risk investments?

The dof expect income tax receipts to go up by 3 bn next year, 20+%?

Administration savings to make up 600mil of total savings.

They are the two biggest numbers included I don’t believe.

Then there is what is missing, if this is a 6bn adjustment, it confirms my view we could have aimed for much much more, perhaps 10bn.

Why rock the boat when you only have a couple of months left I guess, can’t see this budget lasting 6 months.


@ Mr Bond,

Yep, well said about DB schemes. It really is horrifying the way pensions are heading.

I really don’t see a happy ending for a lot of people in the future. It’s just going to be a major car crash.

Re: Stamp duty

The information gathered from this new regime can be used to compile data on house valuations to inform a valuation database. This data will bring a greater degree of transparency to the operation of the housing market that has been previously absent. Markets operate best where buyers and sellers have reliable information available to them.

A house price register has been mooted for months now. What is taking so long?


DB schemes are banjaxed not just because of bund yields. There is also the matter of a 10 year bear market in equities and an ISEQ index stuck around 2600 compared to over 6000 not so long ago. The DB model only works really when you have high interest rates so this is another problem with the Euro.

@Tom Costello.
re I notice that all but 5 departments have 40% or more of the cuts in administrative efficiencies – which never come to pass.

What is an administrative efficiency?

Of course, the real cuts are in Social Welfare, (7% efficiencies). Overall, this budget seems to be cuts in social welfare, hope for demand led schemes in Health, and mostly a plan to buy fewer envelopes.

I agree with you. There has been no effort to tackle PS costs. None. Cut social welfare and increase taxes, and sog it on to the lower paid.

A McCreevy budget right to the unseemly end!

Taking government expenditures as a whole, and revenue from all sources (tax, receipts etc) you get the following (from the Outlook/SPU document). Note these are exchequer balances not GGD ones.

total expenditure 68.8bn (2010) -> 66.0bn (2014)
total revenue 50.0bn (2010) -> 59.4bn (2014)

For expenditure there is a 4.1% decrease (1.6% in first 2 years, and then a further 2.5% in the next 2 years)

For revenue there is a 18.8% increase (5.2% in first 2 years, and then a further 12.9% in the next 2 years)

Now the EU/IMF don’t believe the budgetary projections to 2014, which is one reason why there is no mention of them in the MOU. However it is useful to look at the numbers to see what the thinking is.

Notwithstanding anything that may be said by any government minister, the numbers show that

– the adjustment is very much skewed towards revenue raising and not spending decreases

– the adjustment is very much backend-loaded and not frontend-loaded

@ all,
I disagree. Pensions should be invested in safer places. This is a silver bullet solution which aims to solve the probems simply -by taking on risk. (did someone say bank guarantee)?

This high-risk, high-return strategy is tempting to the industry (obviously), and no doubt they will produce endless and convincing arguments in favour of it, but it is not in the public’s interest. The dramatic falls in the value of DC funds is precisely because Irish pensions already hold too much risky assets in comparison to our European peers, this change will only exacerbate that problem in the long run.

@ Seafoid

true on the poor equity returns of recent years, but for technical solvency requirements DB schemes have to show that they could wind up the scheme tomorrow and buy an annuity for every existing pension recipient (i think). With bund yields at 2.5%, this simply cannot be done in the vast majority of cases, and even the ISEQ at 6000 wouldnt fix this problem (though it would obviously somewhat close the gap).

@ Sporthog

most DB schemes (depending on the exact t&c’s) are costing around 25-30% of gross salary to maintain at the moment, up from a boomtime average of around 7-8%, and a longer term average of around 12-14%. Assuming we are looking at a relatively low(er) growth decade ahead of us, with low interest rates and inflation, DB’s schemes are gonna fall more and more under the water without radical change. People need to start engaging with employers more to figure out fair hybrid schemes that are sustainable, and more people need to consider starting up their own individual DC schemes on the side just in case.

As matters stand an annuity must be purchased on attainment of pension age (for most pensions anyway, I’m leaving ARFs to one side). If the German 10 year yield is used, for example, it would today be based on a return of 2.95%. The seller of that annuity does have a choice of purchasing other than a German bond, but its liability (the annuity) will for P&L purposes be based annually on the then prevailing yield on the Bund, while its asset is marked to market.

In consequence, insurance companies, rather than take the variation that might occur to P&L from the asset performing differently to the liability over the life of the contract, tend to prefer to match exactly, and build their profit margin into the original quote.

Since Germany assumed safe haven status for investors in the eurozone, it’s arguable that German yields have been artificially depressed for the last two years – their 10 year yield hit a low of 2.11% last summer.

It’s worth pointing out that the writer of an annuity does have the freedom, either at the beginning of the contract or at any stage during its life, to purchase higher yielding bonds than that to which the contract is originally referenced – and trouser the increased return. The poor annuitant does not benefit in any way from this, however.

Whether going from the artificially low German market to the outer reaches of eurosovereign creditworthiness will appeal to insurance companies is debatable, but surely there’s a place for annuitants to have some say in the level of risk they might be prepared to take to enhance return. That attention is being focussed on the issue just because of the budget is a bit unfortunate – it’s been kicking around for some time now.

(In the UK annuity, and discount rates, are based on investment grade corporate bonds, not government bonds).

It’s debatable whether the budget proposals will sit well with Solvency II (Basle for InsCos), or whether Solvency II is going to be let quietly slide.

“defaulting on sovereign debt” If Ireland were to default on it’s debt, would it be safe to assume Irish holders would be treated better than foreign holders? Or would they be treated worse?

Perhaps studying Argentina for clues and ideas?

Ireland is not Argentina in that Ireland is intertwined inextricably with its EU, EMU partners. Argentina is fabulously well endowed with good agricultural land, oil, gas, coal, minerals. They can get $4 billion at the drop of a hat by offering China future delivery of soya beans. Admittedly the Argentinians and the Irish people have a lot in common including a deep yearning for poverty in the midst of plenty. I have given it some thought and there is an excess of religiosity in each country and in both countries masturbation is a bigger sin than tax evasion (apologies to Fintan O’Toole).
Will you get a better deal because you finger the rosary beads occasionally, drink five pints a day, go to mass five times a year, unforunately no.

@ Eoin

for completeness there are actually 3 interlinking factors. Bund yields, shocking asset performance and much longer life expectancy due to improvements in mortality at older ages. This increases the duration over which pension annuities are paid . 20 years ago you could assume say 13 years at age 65 and now it is well into the late teens.

Wealthy Irish people have mortality rates less than 50% of those of their poorest compatriots and this is not helping pension schemes. Fag smoking was great for annuities back in the day.

The duration is the difference between 2 numbers, one of which is relentlessly increasing and the other which is fixed (and probably too low !). Add in the low reinvestment yield and you have a massive increase in the pension cost which is then discounted to the present using a very low interest rate et voilà.

Social Welfare appears to have been cut by slightly more than the Government will pay in interest every year on the latest €10bn to be thrown into the black hole of the banks. A very nice fit.

So when the banks need their next dig out will SW get the same medicine again ?

@ BjG

just did the calcs myself on that Taft piece – its spot on. PRSI not levied on non-wage income, so abolishing the ceiling did not affect them at all (assuming that where your income comes from). Unintended or not? Hmmm…


Unintended or not! That is the question! Hard to believe they didn’t work this out first! Or maybe they did and came up with the usual list of reasons as to why this consequence was unavoidable. (They usually have some detailed reasons for these “anomalies”.)

The Government constantly states that the Irish income tax system is ‘highly progressive’. This claim is supported by a very misleading chart in Annex C of “Annexes to the Summary of the 2011 Budget Measures” published by the Department of Finance last night.

You can see criticisms of this chart and a rebuilt version which portrays a completely different picture at:

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