A Jobs and Creditworthiness Special Budget

The new government’s difficult navigation through the crisis took significant steps forward last week with the stress tests and strengthened lender of last resort commitment.   While we can hope for some easing of the bailout terms, the next milestone is likely to be the upcoming “jobs budget”.   For a new centre-right/centre-left coalition government, this will be an opportunity to demonstrate political capacity on the fiscal side.  Unfortunately, market assessments of Ireland’s chances of avoiding default are less favourable than we might have hoped when the EU-IMF programme was agreed (see Colm McCarthy’s post and article below).   With this inescapable reality in mind, it is worthwhile considering case for sending a strong signal on adjustment capacity by accelerating some of the planned deficit reduction. 

I do not make this suggestion lightly.   As Karl Whelan has emphasised, Ireland has already engaged is a truly massive discretionary adjustment (roughly €20 billion euro, or about 13 percent of GDP), involving huge sacrifice.   I have also no doubt that the austerity measures have deepened the recession.  Additional austerity is thus doubly unwelcome.  However, a demonstration of adjustment capacity by a new government that is still being assessed by markets and official funders could be a well-timed “investment” at this stage.   This could be combined with the planned improvement in the mix of policies designed to spur growth and employment, though realistically these measures would probably only the edge off any accelerated austerity.    A “jobs and creditworthiness special budget” (it clearly needs a better name) would allow the new government to show it is taking control of the situation, rather than passively following a course laid down by its predecessor, and build the sense that the adjustment-with-assistance strategy provides a clear path to exiting the crisis. 

66 thoughts on “A Jobs and Creditworthiness Special Budget”

  1. A timely call for a very necessary initiative. But is there a microeconomist in the house? All the fuss and noise is about the monetary aggregates (in particular the ECB support of the banks which is out of our hands and will be resolved over time by some sort of typical EU political fudge) and the fiscal aggregates. On the latter, it is clear that popular resistance to further fiscal deficit reduction is growing. One reason it is growing because the signifciant foscal adjustments to date are casuing the economy to shrink, but the bill for social transfers is increasing and the fiscal deficit is largely unchanged.

    But, perhaps, a more important reason is that prices and costs in the sheltered sectors are still far too high and further cuts in pay and welfare rates will cause real hardship – while, of course, upsetting some very wel-embedded vested interests. But to make progress here requires requires focused attention from microeconomists with detailed knowledge of these sectors – and this obviously does not attract the attention of the high-profile fiscal and monetary aggregate rain-makers.

    Getting these prices and costs down will increase disposable incomes, allow for reductions in social welfare rates and public sector pay that will leave real spending power intact, allow for a rebalancing of taxation and efficient increases in taxation and foster an increase in economic activity.

    All this is really hard work, so it is far easier to keep chuntering about the risk of default/how the EU should be rushing to help us out/how we should burn bank bondholders (take your pick).

    It’s all wonderful displacement activity to avoiding tackling the things that are in our control.

  2. @Aidan R

    That is not what I am saying at all. I am quite Keynesian when it comes to the effects of austerity measures. I have always believed that the key trade-off on the fiscal side is between supporting domestic demand (a proper goal in a severe recession) and protecting creditworthiness. I underestimated how vulnerable creditworthiness was earlier in the crisis management effort. Now that we have lost it, it unavoidably takes centre stage. Of course, the old tradeoff has not gone away, so I don’t make this suggestion likely. But I do think there would be a high payoff to the demonstration of political capacity to see through the adjustment that such a special budget would provide.

  3. It seems to me that any strategy that risks decreasing national output in a context where national debt is set to rise above 111 percent of GDP is a risk not worth pursuing. The cost to the economy, employment and the future of the country is too high.

    Thus, all decisions, fiscal and otherwise, must be evaluated on the basis of whether they increase or decrease output from the domestic economy. Anything that decreases output should be avoided, anything that increases it should be pursued.

    It is time to focus on the ‘GNP side of the debt-GNP equation’. A narrow focus on the underlying budget deficit will not work. This is not to deny it needs to be tackled but it is small fish in a medium term framework aimed at increasing national output. Call it an investment strategy or something else but it is the only thing that will save my generation from a decade of emigration.

  4. There will be no jobs budget. The state is bankrupt and can afford no job creation initiatives or anything of the kind.

    As to “creditworthiness”, what is needed is an immediate and substantial hike in taxes across the board. Income tax must certainly go up well past the 1980s level of 65% if the country is to pay for the bankers gambling debts. High DIRT and savings taxes must also be introduced, particularly for overseas accounts. Additional VAT on luxury items such as cars, televisions, holidays, wines, yoghurts[sic], etc must also come in. Substantial property taxes(indeed the old rate system) must now also be introduced.

    Taxes must go up. That is all there is to it. Placing the entire burden on widows, OAPs, children, the unemployed, etc via cost cutting will not work as these groups simply cannot afford to bail out the banks, in a basic arithmetical sense. One off firesales of state assets will also fall short as it can only provide a temporary respite from the current account deficit and interest repayments.

    Government income is only about €30 billion per year. That’s not enough to run the state and bail out the banks no matter how much is cut. The income side of the equation must be addressed, and so taxes must go up substantially–very substantially.

    If the country insists on honouring the gambling debts of wasters in the banks, then it must be prepared to pay for the privilege of doing so.

  5. Sad but informative slice of reality in the IT. Many country towns are along the same spectrum for better or worse. It will be interesting to see how the government balances further austerity while avoiding ramping up mortgage distress. Of course, it can’t be done. The more the government hoovers up in taxes, the more mortgagees fall over the debt cliff. All the talk about schemes, micro-finance and so forth isn’t unwelcome, there is little salvation in complete pessimism, but needs to be prefaced with the phrase ‘there is a very long road ahead’. And the next election is only 4/5 years away.

  6. Is not the key point that made by Paul Hunt?

    “Getting these prices and costs [in the sheltered sectors] down will increase disposable incomes, allow for reductions in social welfare rates and public sector pay that will leave real spending power intact, allow for a rebalancing of taxation and efficient increases in taxation and foster an increase in economic activity”.

    Broadbrush untargeted actions whether in relation to cutting expenditure or increasing taxation will not work. But not to worry! Brendan Howlin is undertaking a review. All will be right on the night (or, possibly, not).

  7. @ John McHale

    You say:

    “With this inescapable reality in mind, it is worthwhile considering case for sending a strong signal [to whom?] on adjustment capacity by accelerating some of the planned deficit reduction. ”

    I would be very loathe to encourage the state to indulge in more signal-sending at this stage. Policy for the last while has mixed up doing things for the best, with doing things as it creates a ‘message’. The problem is that the government thinks it is sending the message, ‘we are getting our house in order’, but this may well be heard (if the markets are not simply deaf) as ‘hey look, these guys will do anything to make us happy, let’s see what more they’ll do’, or ‘hey look, their economy is contracting even faster than we thought, let’s not go near them’.

    I am firmly of the opinion that domestic economic policy should only be in the best interests of the state, and I think an eventual outcome of this may be revived market interest if things start to improve.

    Within the context of trying to make it work, Ireland is largely stuck with the IMF/EU/ESRF programme. Why not just get on with that, and, as Paul Hunt suggests, put thinking into how economic/reform decisions within the envelope provided can have a positive impact?

  8. As a non-economist reading the posts on Irish Economy, I am often struck by the extent to which policy suggestions seem to be based on guesswork about how ‘the markets’ will interpret and respond to budgetary decisions and so on.

    It makes me wonder: who are the people who are actually making these market decisions? What is their average age category, sex and social background? What kinds of political opinions do they hold? What kinds of state economic policies do they prefer, and crucially I suppose, do their actions match their stated preferences? (And, by the way, how many of them are there?)

    If we knew the answers to these kinds of questions, would we be able to make better choices about which policies to pursue?

  9. @ObsessiveMathsFreak
    In most cases, once you get above average wages, Ireland’s direct taxes are no longer low – not by any stretch of the imagination. Our indirect taxes are actually quite high (VRT, VAT, emergency admission fees), etc. creating a country with taxes that are far from low already.

    If we put up taxes substantially we will kill whatever productive parts of the economy might otherwise survive.

    Have a read of http://adamsmith.org/files/tax-paper-final%281%29.pdf , which is actually quite recent.

    The section on behavioural responses to high taxes is worth thinking about.

    These are the things people will do, and tax take is unlikely to increase. From a purely personal point of view, I’d translate point 1 into “giving up entirely” and point number 2 would be a major problem for many of our exporting businesses.

     Working less and retiring earlier.
     Emigrating to other countries where tax rates are lower.
     Contributing more into their pension or other tax shelters, such as ISAs, VCTs, EIS schemes, etc.
     Incorporating and holding funds within companies, planning to sell companies at a later date at lower rates of capital gains tax.
     Transferring income@producing assets to lower@rate taxpayers within the family.
     Deferring income to later years, e.g. by not paying out bonuses or dividends.
     Investing time and money in more sophisticated forms of tax avoidance.

  10. I note that some people seem to forget that by having more austerity, we will have more mortgage defaults, and more debts put on the back of the state.

    @ ObsessiveMathsFreak

    There will be no jobs budget. The state is bankrupt and can afford no job creation initiatives or anything of the kind.

    We can increase inheritance tax (especially by removing the various allowances) and use the taxes raised to create jobs. There will always be some options left to create jobs, even though the room for manoeuvre has been greatly reduced.

  11. @ Aidan R
    Before we started borrowing to fund our budget deficits in ’08 the interest bill on our debt was around €2B. After the EU-IMF which proposes we try to get our current deficit down to 3% by 2014 (we will still be borrowing) we will have an interest bill in the region of €8B. Continuing to borrow large amounts of money at higher and higher interest rates is unsustainable and as our future interest bill shows – is deflationary of the irish economy.

    I appreciate your view to increase growth in the economy however there are no non-deflationary options open to the irish government.

  12. @John Mchale
    A “jobs and creditworthiness special budget” sounds like a good idea but could you give one example of an item that might be included in it ? I assume it cannot increase the deficit and must produce jobs or increase creditworthiness and also not cost jobs or reduce creditworthness. It sounds like a tall order under current circumstances.

  13. I see ROf has one idea on inheritance tax that might work. Perhaps we should all think of something constructive and send them to the MoF or whoever is the relevant minister.

  14. In most cases, once you get above average wages, Ireland’s direct taxes are no longer low – not by any stretch of the imagination. Our indirect taxes are actually quite high (VRT, VAT, emergency admission fees), etc. creating a country with taxes that are far from low already.

    It doesn’t matter whether they are currently high or low, direct or indirect, compared to anywhere else. And it doesn’t matter what people’s behavioural responses will be. The country must raise more in taxes if it is to pay for the banks. There is no further room for manoeuvre given the latest government decisions on the banks. Taxes will have to go up, well past where there have ever been before.

    We can increase inheritance tax (especially by removing the various allowances) and use the taxes raised to create jobs. There will always be some options left to create jobs, even though the room for manoeuvre has been greatly reduced.

    We must also tax pensions and pension funds, and any other previously sacrosanct caches of income. The government should also consider general wealth taxes, water charges, poll taxes, university fees, sales/use taxes on imports, transaction taxes, spousal transfers and the like, and tolls. A wide net is required, such is the gaping hole in the state finances (~€18 billion per year). DoF officials need to start getting bold and creative in finding sources of income if the country is to survive along with the banks.

    There will always be some options left to create jobs, even though the room for manoeuvre has been greatly reduced.

    I don’t share your optimism. I don’t think that the government has a penny spare after the latest bailout, and certainly nothing of any substance to spend on job creation. The government will instead rely on emigration to solve its chronic unemployment problem.

    Indeed, has relied on it. This latest Irish Times article reveals how the job emigration is not restricted to the young, and does not necessarily lead to people leaving the country. The cases of the two 50 year olds working in the UK and Poland and flying home for weekends are particularly illuminating. It appears people are prepared to do an awful lot to hold on to their mortgages. Then again, with our laws as they are, they can’t actually get away from them.

    It makes me wonder: who are the people who are actually making these market decisions?

    This may be of some interest to you

  15. @ David Mc Manus

    I do not think it is true that there are no non-deflationary options available. What is lacking is the political and economic will to change strategy. Given the perilous state we are in, a change in policy strategy aimed at stimulating growth is not an option but an imperative. Something has to change otherwise the game is up.

    It is a political choice to invest €24 bn into the banks and not the real economy. It is a political choice to use the NPRF to do this. It is a political choice to prioritise insolvent banks over productive investment. It is a political choice to cut expenditure on social services over an increase in corporate tax. It is a political choice by the ECB to adopt a strategy of begger they neighbour over solidarity.

    Nobody denies that the budget deficit has to be tackled. But, given our low tax regime it has to be tackled through a radical restructuring of our tax base. This is common sense to most Europeans. So, if the priority is the fiscal deficit it should be a debate about where to raise revenue not where to cut expenditure. There is simply no meat left on the bone.

    It is time for policy makers to change path and to engage in some serious thinking outside the box. This, however, will require the political courage to change our economic ideas and to start thinking more Euro-Irish than Anglo-Irish.

  16. @John McHale

    As Karl Whelan has emphasised, Ireland has already engaged is a truly massive discretionary adjustment (roughly €20 billion euro, or about 13 percent of GDP), involving huge sacrifice.

    If I am not mistaken, this figure has been questioned in previous blog comments. Has there been a gross reduction in actual expenditure of €20 billion from say 2007 or 2008 to projected 2011? With an analysis of that reduction between current and capital expenditure.

    I do hope that the next round of austerity measures will tackle the better paid public service that have not made any significant contribution to lowering expenditure. To paraphrase Brigid laffan (RTE this weekend) the austerity load balancing between private and public sector workforces has completely broken down.
    In particular I have in mind the top 600 ‘civil servants’, who exempted their royal personages from austerity, presumably on the grounds of past service to the State above and beyond the call of duty.

    That said, you are correct in raising this fundemental point of fiscal rectitude. The State is now on the point of facing into the storm of default with zero prospect of any creditor funding in its wake. Common sense alone should dictate that the hatches be battened down.

  17. @ Kevin O’Rourke

    I would be inclined to agree with Krugman when it comes to the “suits” but it is not the 25 years olds who gambled Irelands reputation and sovereignty September 29 2008, it was middle aged men closer to the current government mean of 57. In any event, the tens of millions handed to Black Rock is a “Krugman” type investment.

  18. The last government and its advisers – irrespective of the possession of certificates that have “I understand macro” written on them – made themselves a laughing stock to all but the Morgan Stanley school of economic analysis when they started banging on about an “expansionary fiscal consolidation”.

    It was one of the thins that got investors attention as to which planet exactly Ireland was located on.

    It is a cheap shot to accuse people who understood how the bond market would work wrt Ireland (ie it was snookered) of either being GOP agents or too stupid to understand macroeconomics. Nor is it helpful to pretend that they deny that from the peak, there have been significant reductions in wages and increases in taxes.

    The politicians will want to follow not lead on this – they are programmed to want to be popular for obvious reasons. Whether they end up following the IMF and Germany lead on this or following a lead from domestic sources with competence in economics is really going to be down to whether anyone except Colm is willing to put their head above the parapet.

  19. An interesting article in the Grauniad re dear old blighty

    There is no getting away from debt.

    http://www.guardian.co.uk/politics/2011/apr/02/family-debt-burden-government-figures

    “The Office for Budget Responsibility has raised its prediction of total household debt in 2015 by a staggering £303bn since late last year, in the belief that families and individuals will respond to straitened times by extra borrowing. Average household debt based on the OBR figures is forecast to rise to £77,309 by 2015, rather than the £66,291 under previous projections. Economists say the figures show that George Osborne’s drive to slash the public deficit and his predictions on growth are based on assumptions that debt will switch from the government’s books to private households – undermining his claims to be a debt-slashing chancellor.”

  20. @Joseph Ryan
    Agree absolutely. Lets start looking at real numbers versus theoretical cuts as a % of GDP. For example can we see the trend in actual currrent spending compared with prior years. My suspicion is that we will see current spending (excluding interest cost) is not showing any significant reduction. Same detail should be looked at on the tax revenue side.
    Along the same lines can we, the public,see the monthly and quarterly data being reported to the EU/IMF by our government? Is this data available on the DoF website or elsewhere?
    At the end of the day we will not make any progress in reducing our deficit until we reduce spending,raise more tax revenue and stop any more borrowing. This is so obvious that I suspect that our government must have a secret plan to continue with the present policy building up further debts and then at some strategic future date to walk away from a big portion of these debts which by then will be owed almost exclusively to the ECB.
    Please professional economists tell me I’m wrong.

  21. @ Grumpy

    An indication of the likely course of events will emerge from (i) the outcome of the discussions on reducing the EFSF lending rate – if the government has not again taken its desires for realities and they are actually taking place – (ii) ditto with regard to the visiting troika and (iii) the emerging statistics on the current state of the patient.

    P.S. Watching the Week in Politics last night made me wonder whether I was actually on another planet. I went to check if I had paid my TV licence. Unfortunately, I had.

  22. @ Jane: Those persons you were enquiring about. Tribe known as The PhilisDines. Their singular attribute being Skilled Incompetence. Very charming, cert par.

    @TP “Secret plan. . .” Yes indeed, but it IS a secret, you know!

    History has a bad way with ‘enthusiastic’ politicians. Vide Ernie (shilling) Blyth! And latterly, Johannes (shoes) Bruton!

    BpW

  23. @Grumpy
    “….following a lead from domestic sources with competence in economics is really going to be down to whether anyone except Colm is willing to put their head above the parapet.”

    A few others have. Jim Power seems to be calling it as it is. Interesting video on FT of Roubini interview. It gives a good overview of worldwide conditions and he opines that Greece, Ireland and Portugal will have to restructure.

    RTE reporting that Fitch saying-
    “But it also warned that a medium-term funding solution may be needed to full restore market confidence in Irish banks, as they were still relying too much on short-term funding from central banks.”

    Now that must be the understatement of the year.

    It would make you wonder what planet they are on.

  24. Richard Bruton said today: “As part of my jobs and growth plan, I am determined to reduce costs, increase access to finance, encourage the development of technology and innovation and ensure that government takes a lead in all these areas. Today’s announcement is one example of how competition can help to push costs down for businesses and consumers.

    “As part of my jobs and growth plan I will be promoting in the context of the upcoming Jobs Budget measures such as:

    A reduction in PRSI costs for employers
    Addressing legal costs for businesses through various initiatives currently in development
    A partial loan guarantee scheme to increase the flow of credit to job-creating businesses
    An end to upward-only rent reviews”.

    We have loads of schemes, incentives etc. but as to how useful many of them are, we don’t know.

    Higher education expenditure on R&D has almost trebled in nominal terms to €900m pa since 2002 – – funding about 6,500 full-time equivalent academic staff and researchers and the metric as a % of GDP (GNP is used for Ireland) is better than for Germany, Japan, France, UK and Korea.

    There is no useful data on outputs and I am aware that not all of this spending can feed into useful metrics but the State has specifically ramped up investment in particular areas with the expectation of having some job impact benefits.

    On a general point, we don’t even have credible data on firm survival rates.

  25. @Ceteris

    Watch out for people like Roubini. One of his less remembered – yet loud, confident and repeated across the airwaves – predictions was that the worldwide market rally in spring 2009 was “A SUCKERS’ RALLY!!”.

    That was a crap piece of analysis and should be weighed against his bubble spotting credentials.

    There comes a point where the symbiosis between pundit and media means that accuracy doesn’t matter that much.

  26. @Grumpy

    Roubini got caught on the suckers rally but then many more examples of same exist. He got the big one right when nobody was listening. Also it must have been difficult to forecast that the Fed would reinflate the market with free money for speculators to the extent it did and continues to do.

  27. From Garret
    “Part of our problem has been, and regrettably still is, the fact that “the markets”, (ie the international firms which evaluate credit risks as well as those which buy bonds issued by sovereign states), lack the capacity to assess adequately the financial situation of smaller states like Ireland. It is only in relation to larger sovereign borrowers that these firms employ specialists with detailed knowledge of the economy of a particular state.”

    From Krugman
    ““the markets” are in reality 22-27 year old business school graduates, furiously concocting chaotic trading strategies on excel sheets and reporting to bosses perhaps 5 years senior to them”

    I presume there will be an 88 post thread excoriating Krugman for implying markets are populated by people who know very little about what they do.

  28. @Ceteris

    There were lots of people listening – and talking too. Believe it or not even CNBC US had a regular opening question “Do you think there is a property bubble?” for months. Most just dismissed the idea – Greenspan especially.

    That 2009 market call was very significant – not because it was very wrong but because of the complete confidence with which it was delivered – over and over. Point is most people who invest actual money spend a lot of their time being very uncertain about most markets, most of the time.

    Actually Krugman understates the position. There are now crazed, hyperactive HFT servers co-located at exchanges trying out very short term trading algorithms and I think they are in combination with the lakes of cheap liquidity, giving a directional bias to most markets. However I am not aware of any evidence that they have a particularly voracious appetite for cocaine and prostitutes.

    This aspect of the markets though is not particularly relevant to the Irish sovereign debt market. There are people over 27 applying human thought processes to that – which is part of the reason the yields have to be so high.

  29. @Tull
    Even Nobel prize winners can look like idiots. But that doesn’t mean all Nobel prize winners are idiots. Ditto for bond market participants.
    The bond Market participants I know are mostly sensible always thoughtful and sometimes dim. But their judgement right now is that ireland’s fiscal and monetary multipliers are reasonably positibv

  30. Oops
    ….reasonably positive. And that we are being hung out to dry, enshrined in legislation, for a post 2013 default.

  31. Simpleton,
    The point, I am stumbling to make it that GF gets excoriated in a thread for stating that we are misunderstood (presumably by idiots) yet Krugman gets praised for implying that market participants are idiots. I surmise that the reason GF gets excoriated is because he dared to utter a view anathema to the consensus on this thread.

    It matters little whether he is right or wrong, it is just that he traduced for being different. The other point that amused me was the strong implication that the bond vigilantes following Ireland could not be misinformed because many of them were reading this site. Well that is it, case proved.

  32. @Simpleton

    It is looking like that all right. I am still trying to figure out how we are going to deleverage the 200 billion that Noonan acknowledged on Friday. Even if the 70b of loans set to be sold off at a 13b loss works, and that is a big if, how do we wind down another 130b. We will be lucky to make it to 2013.

  33. @ Obsessivemathsfreak To paraphrase one of the responses to the NYT piece. It’s clear that the people have failed Ireland and what Ireland needs is a new people. So we must tax them until they leave. I’ll be happy to endorse this policy just as soon as you tell me who ‘we’ is.

  34. RE John McHale:

    “With this inescapable reality in mind, it is worthwhile considering case for sending a strong signal on adjustment capacity by accelerating some of the planned deficit reduction. ”

    In other words more austerity. Well, you have the choice between default slowly or default fast. The more austerity, the more economic damage and the faster you get to default. So go austerity then GNP next year is a further couple of percentage points down with a multiplier for the deflation this will cause, this means more job loss and proportionately more damage to the economy.

    But the best way to look at this is in terms of jobs. Here’s a discussion of this via Schiff/Krugman http://finance.yahoo.com/blogs/daily-ticker/krugman-still-wrong-says-peter-schiff-spending-not-20110328-083253-146.html

    I think though everyone’s right on this one, because yes, austerity is good when the economy is bloated and needs restraint and it needs a get fit regime ( we should have been doing this between 2005-8); but austerity is bad when the patient is on life support, you risk turning off the blood supply.

    The point is austerity is good in certain circumstances, bad in others. At this point in time, giving the 14.5% unemployment rate, further austerity risks instant cardiac arrest for this economy. We need to put people to work building our own Hoover Dam at this point!

  35. What is the point in more cutbacks at this stage all we are doing is making it easier for the IMF clean-up team when Ireland defaults next year or in 2013. Whichever it is it would be madness to further depress the economy only further increasing the GDP/debt ratio. Health cuts etc. we make now will be just be “taken” by the clean up team who will demand a a halving of social welfare and hospital closures.

    Default is now enevitable. No country ever with a 100% + GDP ratio with mainly external debt and a structural deficit of 10%, no capability of printing money and locked into a high exchange rates with no control on interest rates could it. It is a mathematical certainity.

    The markets know it, the ECB knows it and every economist of merit knows it. The only people who are denying it are a few geratric politicians who believe you fill a lead ballon full of hot air and it will float.

    What do you do in that circumstance. The international situation is deteriorating rapidly, high oil prices and supply issues caused by the Japanese disaster are already hitting are export markets making an export led recovery as likely as winning the lotto.

    Alternatively you boost the domestic economy by only cutting were you agreed to keep the cash flowing from the ECB/EMF/EU to pay their banks and finance the deficit in the short-run.

    Doing any other cuts than those already subscribed is madness. It will only further increase the debt GDP/ratio by killing more of the domestic economy. We could shut down all the hospitals, send aunty jane to austrailia, stop our third level, halve teachers salaries and quarter the dole. We would still default QED.

    The governements best stratergy is take whatever liquidity it has that the EMF has overlooked or is not part of the pay the bondholders deal and use for stimulating the domestic and export ecomomy by doubling IDA grants, forcing our banks to put Xbn into SMEs etc.

  36. Probably the most apt quote of the week from SBP-

    “This maybe ‘‘daft’’, as KBC bank analyst Eoin Fahy said last week.

    ‘‘The same people in Germany and the ECB in particular who, on the one hand, are insisting that, in future, any bailouts for countries that get into difficulty must be accompanied by write-offs for sovereign bondholders, are, at the same time, insisting that lenders to banks today which are already insolvent, or close to it, must be paid back in full,” wrote Fahy in a research note. ‘‘It makes no sense, but we are stuck with it.”

    It looks like austerity is working all right. Income tax and vat down by about 5%. Another dose of austerity and we should be able to collect less tax. Hope the multinationals make up the shortfall. It make no sense, but we are stuck with it. 900 hospital beds closed and HSE announce more to come.

  37. The only reason that we are getting such special treatment from the ECB/IMF at the moment is because we are a big problem for the bondholders of German/French and British banks.

    Now a lot of the bondholders have been paid we should expect them to get a lot nastier.

    Contrast our treatement with Latvia. We were allowed run a huge deficit and turn harp bonds into cash in the ECB like there was no tomorrow. For a much smaller sum Latvia was told to balance it book and halve its education budget.

    Beware those people who propose that we should become a smaller problem with no deal on interest rates or haircuts.

  38. Latvia is a good comparison

    http://www.esu-online.org/news/article/6066/181/

    2008, 40% cut in higher education followed by a 40% cut of remainder in following year…

    We’re being led into a similar abyss, they’re being ‘gentle’ (I use this with irony) with us with the bailout mostly going to foreign bondholders and Irish Nama bondholders as quid pro quo for bank losses since we crashed in 2008.

    Bondholders have had their debt restructured to ensure them against losses we might bring against them.

    Plus they’re eyeing remainder of Irish public money or NPRF money in case we make a run for it. Soon as that’s gone, we’ll be like Boxer in Orwell’s Animal farm, heading for the knackers yard to be turned into glue and bone meal:(

  39. @ Jules

    I am sure that it has not escaped your notice that Ireland is in a single currency area and Latvia is not. It is normal in such circumstances that we would be cut some slack. And, of course, you are right about the position of German, French and British banks. But your underlying assumption is that all sectors of the Irish economy are equally productive and all are being hit equally by the reduction in public expenditure which, in turn, is leading to a reduction in tax income.

    But you could look at the matter in another way which would be to say that certain protected sectors of the Irish economy are continuing to live as if nothing had changed – including the windfall beneficiaries of the boom such as retired people who sold property, for example, or continue to benefit from unfunded defined benefit schemes if they are public servants -and that the falling numbers in the productive sector must continue to support the style of life to which they have become accustomed.

    That is the Irish problem!

    The creditor countries of Ireland have had no difficulty in figuring this out. You want them to impose losses on their banks, when they are under no obligation to do so, and force THEIR taxpayers to pay the cost of recapitalising their banks and indirectly allow the party to continue for a certain – and large – sector of Irish society?

  40. @DOCM

    You can play the austerity game with a building a house of cards, keep taking one away, until the house collapses. Then creditor countries have something bigger to figure out!

    However I agree largely with your point. Our society is quite distorted with Nama, the financial services industry, the banks, foreign bondholders, those benefits from high salaries and the Croke Park goodies. So I’ve sympathy with German voters pouring money into that abyss.

    There is but one fair solution for all. That is to do it by a process of burden sharing and receivership/examinership of the banks and a total reset of the economy with a full liquification of losses including firesales. Get rid of Nama and send the toxic rubbish back to the banks to finish the job of deleveraging this country from the bubble.

    But this is not on because of our euro membership and relationship with ECB. So ECB/IMF are running the place lock, stock and barrel. And right now, we’re turning into a ghost shipwreck adrift on the North Atlantic heading for the rocks hoping ECB will rescue us.

    Don’t think so!

  41. @Colm Brazel

    There is a cost to be borne for gaining control of the situation and doing things differently. Why not pay that cost, and set the agenda.

    What that cost is – big public sector pay reductions being the most obvious, along with more mortgage defaults and even less money for the senior bondholders – should logically be weighed against the cost of continuing with current policies.

    People who are convinced current policies are disastrous should investigate the alternatives and choose that route perhaps. Now the election is over and not everyone seems as inclined to “support their team”, there doesn’t seen to be much to stop that debate happening.

  42. @ ceteris paribus

    On Roubini he was not calling it like that back in February ’10 in fact I remember contacting RGE to tell them that they were buying in to government spin hook line and sinker. If you believed what Lehihan was saying you were going to be wide of the mark by a substantial distance.

    Constantin Gurdgiev had a post on Roubini at the time trying to correct his “analysis”. Now, he is repeating what the dogs in the street know. I like him but maybe he has become a victim of his own fame. I don’t follow him much anymore.

  43. @Paul Hunt in search of a microeconomist.

    No humour intended.

    Try stopping at the next bus stop you pass and just talk to anyone there.

    They are ‘micro-economists’.

    Greenspan modeled for 50 years and hadn’t the wit to know what the ‘ordinary man’ was doing !

    If you talk to enough of them, you should have as broad a picture as you need.

  44. @DOCM
    I don’t get it.
    There are people in Ireland and Europe who have done very well out of this crisis.
    If you are advocating that the Irish bear the brunt for the bad decisions made in Ireland you must accept that the Germans bear the brunt for the bad decisions made in Germany.
    Why should European citizens who happen to live in Ireland be held solely responsible for a systemic European banking failure?
    Je ne comprends pas.

  45. Watching Frontline with Alan Shatter and Prof. Richard Portes in the hot seats.
    Mr. Shatter states that they “made an arrangement with the ECB for liquidity that was not there” and later on he went further and stated “the ECB has lent 200b and that is going to continue”

    Michael Noonan said on Friday the he had “in writing” a commitment from the ECB.

    Cliff Taylor in the SBP says that the ECB have not provided an explicit commitment as regards ongoing liquidity.

    Who is wrong? Are we being led up the garden path again.
    How come nobody has picked up on this in the press. Pat Kenny did not query the Minister on this.

    Incidentally, Prof Portes believes we are playing our hand badly. The Minister tried to twist the argument to gambling.

  46. Ah yes, Richard Portes, worth quoting from his letter in the FT in July 2008 re Iceland.

    “Macroeconomics first: annual gross domestic product growth was 5.2 per cent in 2003-07, and registered unemployment is still only 1 per cent. The current slowdown is welcome. There were indeed macroeconomic imbalances, including an overvalued exchange rate. Although the recent depreciation has overshot, it is a normal element of correcting the current account deficit, which will probably fall below 10 per cent of GDP this year. GDP growth 2008Q1 over 2007Q1 was 1.1 per cent, a slowdown but hardly a catastrophe. And Icelanders, now the fourth richest people in the Organisation for Economic Co-operation and Development (PPP-corrected GDP per capita), will survive.”

    Has Iceland returned to ruddy health yet?

  47. Portes came across as a real lightweight and Shatter could easily have been part of the previous administration.

    Talk about bums in Mercs.

  48. @ Aidan R
    “So, if the priority is the fiscal deficit it should be a debate about where to raise revenue not where to cut expenditure. There is simply no meat left on the bone.”
    To raise the €15 in order to bring the deficit down to 3% would require unimaginable tax increases in all areas.
    During the ’80s successive governments avoided making decisions to cut expenditure but increased taxes in order to fund our unsustainable levels of spending that “stimulated the economy”.
    That paralysis changed only when >60% income tax revenue went to pay just the interest on the debt and the Tallaght Strategy was implemented. Currently some of our taxes are too low and some areas of our spending is too high.
    Our taxes should be brought into sync with europe which will be done via USC, residential property tax etc. But we also need to bring our spending into sync as well. Ireland was unique in Europe during the period 2001-2007 where each year the annual increase in spending was in some instances as high as 10%.
    To my knowledge no where else in europe experienced the increases in spending that we did.Of which the same can be said for tax cuts.

  49. I have seen it all now a jobs and creditworthiness budget by a bankrupt government. Incur more debt when we cannot keep up the payments on the current debt. A marked unwillingness to raise taxes and fees and reduce benefits. The strategy, and we must give them the benefit of the doubt that they have a strategy is to dig the hole deeper and then cry to the IMF to pull us out in 2012 or 2013. Our mealy mouthed politicians are ruining the country and are disgracing us before the whole world as they pile incompetence and stupidity ever higher. In time we will recover economically but the damage done to our reputation will last for generations. We went from poverty stricken, hungry losers to thirty years of prosperity under EU tutelage and then we wrecked our economy and what is worse we do not have the foggiest notion of how to effect a salvage. FF pulled the same stunt on its watch, run out the clock and let someone else deal with the problem.

  50. Ireland is still too expensive.

    How do you make beans, jumpers, rent, Corn Flakes, Windows 7, visits to the dentist, cinema tickets, newspapers, legal fees, cosmetics etc…cheaper?

    Seems to me if you could do that you could fix a lot of our problems.

  51. Third world economy on first world wages with commentators on this site sucking from the private sector to pay their inflated salaries and opinions of their intellectual prowess FARCICAL the next twenty years protected elite bankers still in their jobs ps still in their jobs SW still down the pub paid by socializing debt amongs paddy proletariat in private sector 1.3million cannot support all of the above and 200bill soverein debt

  52. @Ordinary Man,

    Competely agree. The knowledge is out there. Getting the broad picture is, of course, necessary, but the challenge is to change it.

    @Celebrity Economist,

    And you’ve got it in one. You could go through the full range of ordinary household expenditure and find so many good and services that are over-priced.

    But it is amazing how quickly ministers in the new government, with such an overwhelming mandate, are being captured by the machinery of the permanent government and embedded vested interests to protect the status quo.

    In the context of this thread, Richard Bruton’s statement yesterday about a planned ‘jobs’ budget’ has been mentioned already:
    http://www.deti.ie/press/2011/20110404.htm
    but there was no mention of his take on the planned price reductions by ESB Electric Ireland. This, of course, is being sold as unalloyed good news, but, for anyone with any knowledge of what has been going on for the last decade, it is both hilarious and intensely frustrating.

    The reality is that in order to convey the optical illusion of competition we have two semi-states bribing consumers with their own money to secure/defend market share in the electricity and gas markets. Despite much flummery about the extent to which the networks (wires for the ESB and pipes for BGE) have been established as business units separate from their energy supply businesses, the reality is that there is no financial ring-fencing of these businesses – as is required in other jurisdictions where optical illusions aren’t sufficient.

    There is a single corporate treasury pot in each semi-state to which each business unit contributes or from which it extracts cash. Both semi-states have generated surplus cash-flows in their regulated network businesses over the last decade – by imposing unjustified additional costs on consumers and the economy. Subsidies from its big corporate pot allowed BGE to offer low electricity prices to consumers switching from the ESB. Because its market share had fallen below 60% the CER has allowed the ESB to retaliate. It is now drawing from its corporate pot to offer low prices to win customers back. BGE’s market share in gas will have to fall some more before it’ll be allowed to dip into its pot to offer lower prices to its has customers.

    But there is a limit to the extent to which both semi-states will raid their corporate pots to provide this largesse. And private sector participants are paying the high network charges that are funding this largesse. Unless they have parents with deep pockets prepared to kick on against the ESB and BGE, they will struggle in the market. Quite clearly, the ESB and BGE are intent on establishing a duopoly in both electricity and gas on the island – though they will allow some private sector players to present the optical illusion of consumer-benefitting competition. They hope to sew the market up and be in a position to repel any serious external boarders who might force some genuine competition.

    It would be churlish to deride the current price reductions – even though those who are in arrears because of previous excessively high prices will not be able to avail of them, but we need to understand the game that is being played – and it is not in the interests of consumers or the economy.

    Though obviously not as economically damaging as the banking and property blow-outs – but still damaging, the energy game in the last decade was a microcosm of the wink and nod policy and regulatory arrangements that fomented these blow-outs. Indeed, it is all part of a seamless garment. And that garment remains intact – and already the government has become enmeshed in its folds to the detriment of all consumers and the economy.

  53. @ Eureka

    The short answer to your question is that we spent the money and the taxpayers in other countries did not.

    There is no systemic banking failure in Europe. There is one in Ireland. It is an unfortunate fact of life that the design of the euro left responsibility for banking supervision with the national authorities. Practically every member country has had to cope with the financial consequences but only in respect of their own banks. They intend to keep it that way.

  54. @john Mchale and Seamus Coffee The government and Prof Honihan and the other austerity plus no/very few bondholders should be burned people.

    I have some questions.
    Given the extra levels of debts you advocate taking on amounts to somewhere between 20 and 100 billion (depending on how generous you think the state should be when deciding to pay bank debt)
    Could you outline the opportunity costs for deciding not to pay this?
    Last week Prof. Honihan outlined that over all the costs of burning seniors outweighs the benefit.
    However he made no attempt to try to quantify these costs. Is this a case of keeping the horrible truth from the people for fear of scaring the markets? Isn’t it a bit late to use that excuse?
    How can people analyse the numbers behind your reasons unless you clearly outline and cost them?
    Isn’t this the least the Irish citizens deserve? To know why the cost of bailing out the bank is worse than letting them all go to the wall and setting up a new state bank overnight? Or god forbid to even tell the Irish people who these bondholders are and break it down. We know from the detailed table of levels of bank holder debt that the Central bank do have or could get this info.

    Perhaps given the obvious imbalance of burden sharing involved as out lined by David McWilliams in his Article in the SBPost you could do a cost benifit analysis of following your policy for.
    a) A highly paid public servant over 45 years of age.
    b) A highly paid bank official.
    c) A low paid (below industrial average) public and private worker over 45
    ) A low paid worker with a mortgage taken out between 2004-2008.
    etc.

    I think the key question here is who benifits from maintaining the status quo and who benifits from a short very painful economic shock that can lead to a new start.

    It is no coincidence that the only people advocating austerity plus no/ as little burning as possible are those who benifit (in the short term at least) by passing the debts on to young and future generations.
    These people captured the last government and they have captured the current one.
    The most important event prior to the last election was not even noticed by most.
    The capture of the Labour party’s banking policy going from somewhere close to Sinn Feins to somewhere even more bond holder friendly than FG.
    What happened?
    Who influenced Labour’s policy before the election and is it any coincidence that a party who looked a certainty in 2010 to be part of the next government had their policy move so dramatically. My opinion is that they were got at. I think they were told the sky would fall down if they continued their policy and they bought it.

    Shame on all you people for letting your fears stop you doing the right thing.
    The morality of the whole situation is shocking. Your ability to park that, is indefensible.
    You are selling out your own children in order to maintain the status quo.
    The ultimate joke of all of this is that you are doing it in vein. How many more quarters of 6-8 billion deficits before we end up with a disorganized sovereign default? My guess is less than 10.

  55. @DOCM

    The short answer to your question is that we spent the money and the taxpayers in other countries did not.

    There is no systemic banking failure in Europe.

    There is no visible systemic failure of the banking system in Europe as Ireland was compelled to prop up the system with taxpayer funds. The contagion of bankruptcy and the required financial reform was avoided by making the forced bailout conditions for Ireland so onerous that no other country would dare to consider it.

    Investors priced risk incorrectly, Ireland gets the blame – moral hazard is for the little people.
    Its

  56. @John @Gavin

    Personally I hope the governnment will be less concerned about “sending a strong signal” and more concerned with tackling core job creation challenges which will get more money circulating in the economy.

    The “smell” of money circulating in the economy will have a better effect than any “signals” we try to send .

  57. @ EM: “Nail on the head”!!!

    But the decision makers have been decisioned (sic). In other words, they enquired ahead of time what would constitute an acceptable response, were informed what that would be, assumed ‘the position’ and obliged. That’s politics, as they say.

    It is certainly not truthful economics nor finance nor anything else remotely close to the appropriate actions necessary to resolve, what is, a massive debt predicament. Eg: If your future income is going to be inadequate, you will not be able to pay. That’s it. QED. However you are prohibited from thinking, believing or even articulating this. Hence, it shall not happen! Get the idea!

    Reality has the unfortunate habit of intruding into virtuality, with unpleasant consequences for the unwise.

    Any citizen who wants to ‘fight’ this betrayal of political trust need only carry out the following actions. Pay down as much of their personal debt as they can manage. Dispose of their credit cards. Keep their non-discretionary spending to necessaries only. Stop all discretionary spending. Saving would be a good idea also, but not with any of the local outfits. These actions will indeed make the roof fall in on the Bailout Building. And its all entirely legal! Oh! – and make friends with someone who has a farm.

    BpW

  58. @ BpW
    I have already taken on all your suggestions. The problem is that the insiders who didn’t get into property are still on the pigs back and are able to live the high life. They could at least have the heart to save a little for their children’s future taxes. But no there are just to many Michelin star restaurants that they have to visit.

  59. @ Seamus Coffey
    Many thanks for the link. Seems to show how difficult it is to achieve an actual reduction in current spending year on year even with so called draconian austerity measures.
    The other data I would really love to see is a benchmarking of outputs v spending in key areas in Ireland compared to selected other small countries such as Finland,New Zealand and Denmark. I wonder is this type of data available in the EU or OECD. It might help give us some objective goals instead of the constant “spending is too high” or “taxes are too low” arguments.

  60. MAKES ME SICK THAT THE GOVERNMENT GET PAID SO MUCH AND STILL LIVE THE HIGH LIFE WHILE THERE ARE FAMILIES GOING HOMELESS OVER THE CUTS…..
    130K KIDS IN POVERTY….
    The number of children living in consistent poverty may have risen by as much as 40,000, barnardos has warned… CSO figures showed there were 90,000, in 2009, but it is feared this will increase to 130,000, when latest stats are released later this month… BARNARDOS has launched its children’s budget appealing to the government not to target disadvantage families,……… CSO fergus finlay said: savings can be made but they can no longer be made at the expence of families whose lives are already being made unbearably difficult by poverty………. so while the government sit on there big pay packets and its them that put this country into the state that it is in kids and families are going homeless and starving… all government wages should be slashed to under half if not more cause they expect families to live on 180 a week id like to see them so called government to try and budget that for a week with a family..

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