In a year-end interview with Jody Corcoran in the Sunday Independent, the Taoiseach answered questions about NAMA. The relevant passage is below the fold.
Author: Karl Whelan
On budget day, the Minister for Finance announced that civil servants earning between €165,000 and €200,000 would take pay cuts of 12% while those earning over €200,000 would take pay cuts of 15%. Yesterday, with the public focusing on their pre-Christmas preparations, the government announced that this would not be happening after all.
These pay cuts have been rolled back for two reasons. First, the government announced that it was going to take into account the elimination of “performance-related awards” which had averaged ten percent of their salary. As a result it reduced the new pay cuts for some civil service grades to reflect the loss of this ten percent.
Second, it was decided that the differential rates of adjustment, with higher cuts for those over €200,000 would introduce anomalies in which there would be overlaps such that those on higher points in lower scales would have better salaries than those on lower points of a higher scale.
The statement points out the implications of the decisions taken:
The resulting adjustments including the effect of the termination of the scheme of performance-related awards produce reductions in remuneration of 14% in the case of the grade of Deputy Secretary and 11.8% in the case of the grade of Assistant Secretary.
Or, in other words, given that the bonuses were gone already, these measure will imply a cut of only 3% for Assistant Secretaries and only 5.4% for Deputy Secretaries (based on 0.882*1.1= 0.97 and 0.86*1.1= 0.946).
The Irish Times reports that a government statement said that it would have “been unfair” to these grades not to make these adjustments.
A couple of comments about this.
First, these performance-related awards were, as their name suggests, not guaranteed but (at least in theory) related to performance. This move appears to be an effective admission from the government that these payments were not in fact performance-related bonuses but part of the core pay of these civil servants. For a government that claims to be keen to introduce reform into the civil service (something that should include bonuses as incentives for good performance) this is a very unfortunate precedent.
Second, these bonuses were not pensionable. Because civil servants’ pension obligations are still based on the full pre-pension-levy salaries, this means that the pensionable salary of an Assistant Secretary has only fallen 1.8% this year. Senior civil servants close to retirement have been almost completely protected from the consequences of the fiscal crisis.
Third, the Review Body on Higher Remuneration, whose recommendations the Minister had claimed to be implementing, explicitly made its recommended cuts in terms of regular salary. This is not because they were unaware of bonuses. They stated:
the continuation of performance-related awards cannot be justified in the current climate. Having said that, it remains our view that such awards will have an important role to play in the future when economic stability has been restored.
In other words, their recommended cuts were in addition to the suspension of bonuses, which they recommended re-introducing at some point.
Fourth, it appears that senior civil servants are the only group in Irish society that get to count earlier cuts as part of their current cuts. For instance, the cuts to social welfare payments announced in the budget are in addition to the 2% cut related to the elimination of the Christmas bonus. Would the government consider changing its cuts in social welfare rates to take account of this?
Finally, perhaps it is cynical to suggest that this information was released just prior to Christmas in the hope that the public would not notice. If this was indeed the intention, somehow I don’t think it’s going to work.
The executive summary of the ESRI’s latest Quarterly Economic Commentary is available here.
The latest edition of the Economic and Social Review is now available online here. The papers in the edition are as follows.
”Modelling Credit in the Irish Mortgage Market”
Diarmaid Addison-Smyth, Kieran McQuinn and Gerard O’Reilly
”Politics and Fiscal Policy Under Lemass: A Theoretical Appraisal”
Frank Barry
”The Impact of Fiscal Shocks on the Irish Economy”
Agustin Benetrix and Philip R. Lane
”Language and Occupational Status: Linguistic Elitism in the Irish Labour Market”
Vani K. Borooah, Donal A. Dineen and Nicola Lynch
”A Code of Practice for Grocery Goods Undertakings and an Ombudsman: How to Do a Lot of Harm by Trying to Do a Little Good”
Paul K. Gorecki
‘”Income Inequality and Public Policy”
Brian Nolan
A busy day at the Department of Finance as desks get cleared before Christmas. The Department has released its regulations regarding the determination of long-term economic value for assets. These regulations formalise draft regulations that were released here in September. Much of this was published before. One new bit is that the September draft said that assets would be valued using a discount rate such that
“NAMA discount rate” means the Irish 10 year Government Bond rate at the establishment date plus * per cent;
Today’s regulations tell us what the mysterious * is:
“NAMA discount rate”, for bank assets denominated in euro, means the Irish 10-year Government Bond Irish Stock Exchange quoted closing yield at the establishment date plus 0.8 per cent;
For those unfamiliar with asset pricing formulae, the lower the discount rate used, the higher will be the estimate of the asset value. I always suspected that a low discount rate would be part of the NAMA pricing strategy. For instance, just before the draft NAMA legislation was released I wrote:
My point here is that it will be very easy for any NAMA official who wanted to do so, to pluck out an appropriate set of assumptions about the future that will end up delivering whatever haircut is deemed desirable. In particular, I suspect it is possible that the valuations will completely ignore the risk premium element in pricing these assets and will make highly positive assumptions about future cash flows.
Interestingly, the Department’s new best friend, Mr. Seelig from the IMF had suggested to the Department of Finance that they use market rates for property investments or adjust NAMA’s cost of capital to reflect the risks associated with the assets being acquired. The 0.8 percent adjustment is, by any reasonable assessment, well short of the appropriate risk adjustment.
Mr. Seelig would undoubtedly approve of the masterful vagueness of the rest of the document, which is full of stuff about NAMA taking into account “in such manner as it thinks fit, by reference to such of the following as it considers relevant” various factors, i.e. doing whatever the hell they feel like.
One bit I didn’t understand was the following. Having defined the NAMA discount rate, page 6 then states:
The standard discount rate that NAMA shall apply in the calculation of the long-term economic value of all bank assets shall be 2.75 per cent to provide for enforcement costs, and 0.25 per cent to provide for due diligence costs, incurred or likely to be incurred by NAMA over its lifetime in the discharge of its functions.
I couldn’t figure out when this rate would be applied rather than the NAMA discount rate defined above.