Here‘s a link to an article I wrote on NAMA for today’s Sunday Independent.
Author: Karl Whelan
I noted last week that a new talking point about NAMA was emerging which went beyond the old canard that “it doesn’t matter” how much we pay for bad bank assets. The new talking point actually suggests that we will be better off if we overpay for these assets. I found it interesting that the new talking point appeared today in two, highly influential, guises.
The €250 million job subsidy scheme is open for applications from today until the 4th of September. I’m still not a big fan of this scheme, particularly given that it has to fit within overall budgetary parameters and thus necessitates €250 million of spending cuts and tax increases elsewhere. However, it is fair to say that some thought has gone into dealing with the deadweight loss element of the scheme.
Applicants for the subsidy will be scored out of 100 against the following three assessment areas: Credibility of restructuring plan (35 points), viability of the enterprise in the medium term (10 points) and the ratio of supported jobs to committed jobs (maximum score of 55 points).
This worst allowable score for this latter category is a score of 30 for a ratio of 1:1, meaning for each supported subsidised job the applicant would be required to commit to retaining another full time job for the duration of the subsidy (though how a struggling firm could really be made commit to this isn’t clear—what happens if they shut down?)
The best score for this category of 55 is for a ratio 1:10. If I understand this correctly, this means that the subsidy will not be allowed to apply to all employees in a firm and you will be more likely to get the subsidy if you only look for it to be applied to a small fraction of your employees.
In theory, this is good news if you’re worried about deadweight loss because the subsidy won’t end up being applied to all the employees of firms that are actually going to keep most of them on anyway. This element and the other two categories are also designed to avoid the jobs going to no-hope firms and pouring good state money after bad private money.
However, it’s pretty impossible to achieve both of these outcomes and as constructed, the scheme does seem likely to attract reasonably healthy firms, who may not really be planning to lay off many employees, to look for subsidies for a small fraction of their workers, knowing that this will give them a good score and make them more likely to obtain the grants. So one can still see plenty of potential for serious deadweight loss, which could blow up the actual cost of job saved well above the apparent level of €9,100 per employee.
The assessment process will involve Enterprise Ireland, IDA Ireland, Shannon Development and Údarás na Gaeltachta, and without doubt, will be a cheap and efficient process untinged by political interference or corruption related to existing relationships firms have with development agencies.
While there has been a lot of discussion of the draft NAMA legislation’s definition of long-term economic value, there has been very little attention paid to its clause discussing current market values.
There are two interesting aspects to the discussion of market value. First, there is the fact that it is being discussed at all. We know that there is a very limited number of transactions in the current market for development and investment property, so it might have been expected that the government would fall back on the claim that there was no market as a justification for moving straight to the dreaded long-term economic value. (And indeed, the Minister for Finance, did mention illiquidity on Morning Ireland despite its absence from the legislation.)
Second, there is the wording of what is meant by current market value. The legislation defines it as
the estimated amount that would be paid between a willing buyer and a willing seller in an arm’s length transaction where both parties acted knowledgeably, prudently and without compulsion
This sounds eminently reasonable doesn’t it? The parties are acting knowledgeably. They are being prudent. Presumably, then, they are aware of the stuff discussed in the long-term economic value definition—that the current crisis will abate and the financial system will become stable—and are factoring this into their decisions.
The Irish Times reports
Tax revenues collected by the Government up to the end of July are €575 million lower than the Department of Finance expected a little over three months ago, with the shortfall in receipts trebling over the last month.
DoF report here.
This looks like bad news but I have to admit that short-term revenue forecasting spreadsheets are not one of my hobbies. So, anyone with better expertise than me care to weigh in? What’s our 2009 budget deficit looking like after this?