IMF Fifth Review

The fifth review of the Extended Arrangement with Ireland can be read here.  The debt sustainability analysis on pages 35-40 shows little changes from that provided in the Fourth Review.

The Baseline Scenario is identical and extends to a projected gross debt ratio of 109% of GDP in 2017 (net debt 101% of GDP).  The growth shock shows that if annual growth is close to zero (0.1% per annum) the debt would be 138% of GDP in 2016 and still rising.

The performance criterion for the end-June 2012 Exchequer Primary Balance remains €9.0 billion.  The outturn to the end-June 2011 was €8.4 billion.

Page 9 shows that we had a €4.3 billion budget last December once the full effect of tax carryover effects are included.

The budget implies a consolidation effort of €4.3 billion (2¾ percent of GDP) in 2012—including the full €1.1 billion carryover from 2011 tax measures—which significantly exceeds the €3.6 billion effort originally programmed.

Box 3 (page 20) on Social Welfare: Scope for Reform is also noteworthy.  The four paragraphs in the section begin:

The Irish state provides significant support to low-income groups.

This protection has come, however, at a high fiscal cost.

Importantly, the current system generates poverty traps for some groups, while providing less targeted support to others.

Potential reform options include moving toward more a means-tested and integrated approach to social welfare payments.

UPDATE: The transcript of the conference call with Craig Beaumont, IMF Mission Chief for Ireland can be read here.  There is also a separate short interview from the IMF Survey Magazine here.

Can Irish Potatoes Save the World Economy?

For no other reason than it has an interesting title.

Can Irish Potatoes Save the World Economy?

A recent trend, a  move back to the way things used to be, might be the best news for Ireland and the world. A bloated worldwide market of institutional products, produced for their economy rather than quality, shipped hither and to in order that some profit, has put our one world economy into a tailspin. Meanwhile, it just may be, you and your next door neighbor are once again, the only ones capable of picking up the pieces.

Over in Ireland, some local hotels, business people, and organizations are showing us all how.

On of the countries hit hardest by this Great Recession, Ireland,  is of particular interest to me. My folks sailed over to America from Kilkenny back when, but this is not the main reason for my concern over the emerald Isle. Besides an affinity for Ireland, there’s another really good reason to pay attention to the Irish. If there’s anybody on Earth that can show us how to get past hard economic times, it’s Ireland. Rain or shine the Irish always seem to come out okay. Part of the reason being, I believe, Ireland is at its heart a local community first.

If you really want to you can read the whole thing.

Mortgage Arrears Update

The Central Bank have published the Q4 2011 update of the mortgage arrears series with the data for the full year also available.  The update shows that 9.2% of mortgage accounts, and more importantly 12.3% of mortgages by value, are in arrears of 90 days or more.

The total amount of owner-occupied mortgages in Ireland is now €113.5 billion, down from €118.7 billion when this series began in September 2009.  This reflects the very slow uptake of new mortgages and also the continued repayments on many mortgages which are not in arrears.

In fact, in the final three months of the year the stock of mortgages fell from €114.4 billion to €113.5 billion, for a reduction of €935 million.  Since September 2009, the amount of arrears owing on mortgages more than 3 monthly payments in arrears has increased from €354 million to €1,117 million. 

At the end of 2010 the Central Bank estimated that about 50% of the arrears were in the covered banks, 40% in the non-covered banks and 10% in other or sub-prime lenders.  It is not clear what has happened to these proportions over the last 12 months.

The rate at which mortgages are falling into arrears does not appear to be slowing.  Any slowdown would first be seen in the 90 to 180 day category but there is no sign of this. The continued entries into this category would be offset by the 6,700 who moved into the 180 day plus category (and a small number who may have exited arrears) but there was still have an increase of 1,200.

Friday Conference: Fiscal Policy

The podcast and slides from the session on fiscal policy at last Friday’s conference are below.


Chair: Dan O’Brien (Irish Times)

Philip Lane (TCD
Ireland and the Fiscal Compact

John McHale (NUIG)
Strengthening Ireland’s Fiscal Institutions

Seamus Coffey (UCC)
Current and Capital Expenditure: Getting the Balance Right (Part 2)

Colm McCarthy (UCD)
Public Investment and Fiscal Stabilisation

Current versus Capital

Here are some quick snapshots from my presentation at Friday’s conference in Croke Park.   Some background information can be found in the following:

From 1983 to 2010 capital expenditure averaged nearly 12% of gross voted expenditure.  In 2011, capital expenditure was 8.1% of gross voted expenditure, the lowest since 1992.

For the four years from 2012 to 2015 it is planned that capital expenditure will be 6.4% of gross voted expenditure.  For every €100 of voted expenditure, €93.60 will go to the current budget (transfer payments, public sector pay, and other non-pay expenditure on goods and services) and €6.40 will go to the capital budget.  Would this satisfy the equi-marginal principle?

Continue reading “Current versus Capital”

Irish Society of New Economists 2012 Conference

The ninth ISNE annual conference is being held in UCC on Thursday 23rd and Friday 24th of August.  This year’s organisers are David Butler, Robbie Butler and Justin Doran.

Researchers wishing to submit their work for consideration are advised to submit an extended abstract (300-400 words) to Applicants are asked to include their name, institute or affiliation, current academic status (PhD, Young Professional, Masters) and JEL code(s) for their research on submitting an abstract.

The deadline for the abstract submission is Friday, 1st of June 2012.
Applicants will receive notification by Friday, 22nd June 2012.

There will be two plenary sessions:

  • Professor Geoffrey Hodgson (University of Hertfordshire) Editor-in-Chief of the Journal of Institutional Economics, and
  • Professor Bernard Fingleton (University of Cambridge) Editor-in-Chief of the Journal Spatial Economic Analysis and formerly co-editor of the Journal Regional Studies and a Fellow of the Regional Science Association International and the Spatial Econometrics Association.

For more details visit

The Exchequer Balance

Yesterday’s release of the end-of-year Exchequer Statement provides the opportunity to update the quick look we gave to the mid-year figures.  The conclusions drawn in July are largely unchanged.  First the overall Exchequer Balance. 

At €24,917 million in 2011, this was the largest Exchequer deficit ever recorded.  The Press Statement released with the figures says that it’s not too bad though.

The Exchequer deficit in 2011 was €24.9 billion compared to a deficit of €18.7 billion in 2010. The €6.2 billion increase in the deficit is due to higher non-voted capital expenditure resulting primarily from banking related payments. The majority of these payments are once-off payments relating to the recapitalisation of the banks  and an exchequer deficit of €18.9 billion is forecast for 2012.

Excluding banking related payments the Exchequer deficit fell by €2¾ billion year-on-year.

Ah, “once-off” banking payments.  Next year’s “once-off” banking payments will be €1.3 billion to IL&P and possibly some further payments to the credit union sector.  So what €8.95 billion of “banking related payments” do we have to remove to turn a €6.2 billion deterioration in the Exchequer deficit into a €2.75 billion improvement?

UPDATE: I had guessed what was included in this calculation but the Department of Finance have posted a useful presentation providing the details.   This is from slide 4.

The issue is the inclusion of the Promissory Notes.  If we exclude this €3.1 billion payment along with all the other banking amounts then the Exchequer Deficit is lower this year. 

We didn’t make a payment on the Promissory Notes last year but we will make this €3.1 billion payment each year to 2023 and lower payments right up to 2031.  From next year there will be accrued interest added to the Promissory Notes that will increase the General Government Debt.  You cannot exclude something that is going to happen for the next two decades as a basis for saying the deficit is getting smaller.

We can strip out a lot of the banking complications by looking at the balance of the Exchequer current account.  This does include the €1.2 billion of income earned from providing the guarantee to the covered banks which is counted as current revenue.

The final outturn and annual pattern of current account deficit has been largely unchanged for each of the last three years.  Between 2007 and 2009 there was a €20 billion deterioration in the current balance.  In the two years since the achievement has been to keep the drop to €20 billion.  There has been no improvement in the current account deficit.

Looking the Exchequer interest payments gives some insight into how this has been achieved.

For a country that has to borrow to fund the deficits shown above it is pretty amazing that the interest expense in 2011 was lower than in 2010.  The explanation is that some of the interest costs were covered from an account other than the Exchequer Account.  Again, the press statement is helpful.

Taking into account the funds used from the Capital Services Redemption Account (CSRA) as well as Exchequer payments, total debt service expenditure was up €1.1 billion year-on-year in 2011, at close to €5.4 billion. This reflects the burden of servicing a higher stock of debt.

For 2011, the Budget target was a General Government Deficit of 9.4% of GDP.  The actual deficit will be around 10.0% of GDP.  This slippage (largely the result of lower than expected tax revenue) was not a significant issue as the deficit limit set by the European Commission was 10.6% of GDP. 

For 2012, the Budget target is a deficit of 8.6% of GDP.  The deficit limit set by the EC is also 8.6% of GDP.  If there is any slippage or lower than expected nominal growth we will not meet the deficit limit.

IMF Fourth Review

The fourth review of the Extended Arrangement  for Ireland can be read here.  This is the updated IMF projection of the general government gross debt up to 2016.

In the third review the IMF had set a target of €7.4 billion for the primary exchequer deficit in June 2012.  This target has now been revised to €9.0 billion. 

The target this year had been €10.1 billion and the June 2011 outturn for the primary exchequer deficit was €8.4 billion.  We can have a €0.6 billion deterioration in the primary exchequer deficit in the first six months of next year and still meet the IMF’s target.

Debt and Interest (update)

A recent post looked at total debt and interest payments in the household, non-financial corporate and government sectors using data from the CSO’s Institutional Sector Accounts. There were some unanswered issues relating to the “interest paid” figure given for the three sectors in the accounts.

A quick query to the CSO has resolved this issue.  The interest paid figure in the ISAs is actually an adjusted amount where the adjustments is for Financial Intermediation Services Indirectly Measured (FISIM).

The interest amount in the ISAs is based on a "risk-free rate" or some variation thereof.  The remaining interest is considered a payment for service and appears elsewhere.  The CSO’s accounts include this adjusted amount as interest paid (D.41).

The actual interest paid (D.41g) is available from the Eurostat database and is used to create this graph.

In 2010, the total amount of interest paid was €16.2 billion.  This was 10.4% of GDP and 12.6% of GNP. 

As interest rates have fallen the interest paid by the household and non-financial corporate sectors have fallen. In 2010, the household sector paid €6.3 billion of interest (and received €1.3 billion).   In contrast the interest paid by the government sector has more than doubled in just two years and is set to be the largest amount in the coming years.

Two tables of comparative EU27 data for 2010 are also provided.

  1. Financial liabilities of household, corporate and government sectors
  2. Actual interest paid by the same sectors (incomplete)

As with the earlier post the measure of debt is the sum of the following liabilities: currency and deposits (F2), securities other than shares (F3) and loans (F4).

As has been stated a number of times (and discussed here) in terms of total debt Ireland is the most indebted country in the EU.  In 2010, the total for the household, non-financial corporate and government sectors is 430% of GDP or 525% of GNP.  No other country is above 400% of GDP and the unweighted average for the EU27 is 245% of GDP.

However, when it comes to actual interest paid Ireland is not such an outlier.  In fact even with incomplete data there are four countries in which the three sectors combined paid more interest than in Ireland.  At 10.4% of GDP the interest paid in Ireland is one-fifth more than the 8.6% of GDP unweighted average for the 20 countries for which 2010 data is available.

The may be a number of reasons why we are paying less interest such as lower interest rates and impairment in the household and corporate sectors.  While the government can try to continually roll over the debt, the household and corporate sectors will try to repay the interest and capital.  The non-consolidated nature of the accounts means that the debt may not be actually owed to third parties.  This may be particularly true of the non-financial corporate sector, the debts of which make up more the half of the total debt figure for Ireland in the usual analysis.

The tables themselves are below the fold. 

Continue reading “Debt and Interest (update)”

Debt and Interest

There has been a lot of focus on the level of debt in Ireland.  The household sector is suffering from a debt overhang as a result of the excesses of the previous decade, the government sector has seen its debt level soar as it tried to cover the losses in the banking sector and continues to run huge deficits, while the level of debt in the non-financial corporate sector appears enormous but seems to require a closer examination.

Using the CSO’s Institutional Sector Accounts it is possible to come with charts like the following (starting from when the dataset begins).

The lines in the chart represent the non-consolidated sum of the liabilities of each sector under three headings.

  • AF2: Currency and Deposits
  • AF3: Securities other than Equity
  • AF4: Loans

The government is the only sector to have liabilities in all three categories as it had retail debt, government bonds and outstanding loans (mainly Promissory Notes) summing to €141 billion at the end of 2010.  The corporate sector has both loan and outstanding debt securities, though loans make up 97% of the €347 billion total.  The household sector has €185 billion of loans outstanding and is the only sector showing a declining level of debt.

The total of these is €673 billion which is equivalent to 430% of GDP or 526% of GNP.  There has been much speculation about where these aggregates are headed over the next few years and whether a default of debt in any or all the sectors is imminent.  A debt level in excess of 500% of GNP does suggest that only one conclusion can be drawn.

However, before declaring that the debt is “unsustainable” and can never be carried it is worthwhile to consider the actual burden that this level of debt is creating rather than simply focussing on the size of the debt.

Again we can turn to the CSO and this time to the Non-Financial Accounts and the interest expense in the Primary Allocation of Interest Account (item D41). 

Two of the lines here appear to make sense.  Household interest expenditure rises with interest rates and debt accumulation and peaks in 2008 at €8.1 billion and then falls as interest rates fell and debt was repaid and was €4.2 billion in 2010.  The interest expenditure of the government begins to rise from 2008 due to well-known reasons and was €4.9 billion in 2010.

The pattern on interest expenditure by non-financial corporations does not present itself to such a straightforward analysis.  This peaked in 2008 at €7 billion but in 2010 had fallen to just €712 million.

At 2.3% of the liabilities from the first chart, the interest for households appears low but the figure for non-financial corporations is startling given that we have just seen that they had €347 billion of potential liabilities requiring interest payments.  Surely firms paid more than €712 million of interest in 2010?

One thing to note is that these accounts are non-consolidated so there could be intra-company loans in the total.  Secondly, firms did make substantial payments in 2010 as distributed income of corporations (€18.0 billion) and as reinvested earnings on direct foreign investment (€14.6 billion).

The interest expense of government is set to increase over the coming years but lower interest rates and continued repayment will reduce the figure for households.  The total for businesses remains an anomaly.

In total in 2010, the three sectors allocated €9.8 billion to interest.  This is equal to 6.3% of GDP or 7.7% of GNP.  Under neither measure does this look like an impossibly large burden but perhaps the discussion will unearth a deeper understanding of these figures.

Mortgage Arrears Data

The latest set of mortgage arrears data has been released by the Financial Regulator.  There are now 8.1% of mortgages in arrears of 90 days or more. 

There have been some suggestions that there is an increased number of “won’t pay” as opposed to “can’t pay” borrowers in the recent increase because of the debate about debt forgiveness and bankruptcy last August and September.  If someone decided not to pay at this time it is unlikely that they would have been 90 days in arrears when the data were collected. 

Most of the current quarterly increase is still likely to be as a result of those in the “can’t pay” category.  This may be different in subsequent updates.  Any change in bankruptcy law is not going to make provision for someone to be declared bankrupt because they won’t pay their debts.

Patterns of Investment

For the past four years domestic economy has been in freefall, which has resulted in nominal domestic demand falling from €172 billion in 2007 to €126 billion last year.  This massive drop has been spread unevenly across the three components of domestic demand:  consumption expenditure is down €11 billion; government expenditure on goods and services is down €2 billion while investment in fixed capital is down €30 billion.

The fall in the domestic economy has been led by the fall in investment, which in just four years has fallen 63% from €48 billion to €18 billion in nominal terms.  The real decrease has been 52%.  There is nothing in this snapshot that we don’t already know.  The pattern of the four components of nominal GDP since are shown here.


Investment rose strongly up to 2006.  It was largely unchanged in 2007 but the rapid fall since then is clearly shown.  Table 15 in the National Income and Expenditure Accounts provides a breakdown of the investment by type.

In 2006, investment was €48.3 billion and €38.0 billion of that was accounted for by the construction and property sectors; dwellings (€22.6 billion), roads (€2.0 billion), other construction (€8.8 billion) and also costs associated with transfer of land and buildings (€4.5 billion) which makes up the bulk of the ‘other’ category in the above graph.  By 2010 these four categories made up €10.7 billion of the €18 billion total. 

The domestic economy has seen a nominal fall of around €46 billion – unsurprisingly 60% of this is due to the collapse of the construction and property sectors. 

The Non-Financial Institution Sector Accounts gives an insight into the breakdown of investment by sector.

The household sector has gone from the largest source of investment as recently as 2008 to the smallest in 2010.   If we use the figure for Consumption of Fixed Capital as provided in the Non-Financial Accounts we can get a measure that could be considered a form of Net Investment.

For the economy as a whole gross fixed capital investment exceeded consumption of fixed capital by less than €2 billion in 2010, with firms having an outturn of negative €2 billion. 

We will get revised macroeconomic projections from the DoF as part of the forthcoming budgetary process.  Their most recent projections are from April’s Stability Programme Update.  Investment is expected to continue to decline in 2011 with a real drop of 11.5%, but minor growth is forecast for 2012.  This growth is expected to quickly accelerate with real growth in investment of 4.5% projected for 2013 increasing to more than 5% for both 2014 and 2015.

There is little sign of this.  The Q2 National Accounts show that real investment in the first half of 2011 was down 11% on the same period last year.  This is in line with DoF projections but there is little to indicate that a turnaround in investment will occur in 2012.  The collapse in household investment has eased but that was all that could occur as the overall drop now exceeds 80%.

The scope for further declines in investment is limited but absent both a willingness to borrow and a willingness to lend the scope for a return to 5% growth rates also appears limited.

Selected Unemployment Rates

Although there are some problems with the aggregate figures estimated by the CSO from the Quarterly National Household Survey, the percentages provided by the survey have continued validity.  In these cases we can expect that the ‘missing’ 97,000 people who were ‘found’ by the Census will affect both the numerator and denominator. 

Here are some unemployment rates from the first quarter of 2006 up to the second quarter of 2011.  The rates are provided by gender, age, region, education and nationality.  When making overall judgements the size and the labour force participation rate of each group should also be considered but those are not the focus here.

1. Overall unemployment rate

2. Unemployment rate by gender

3. Unemployment rate by age

4. Unemployment rate by education

5. Unemployment rate by region

6. Unemployment rate by nationality

Transfer Payments

A previous post looked at the overall government accounts using Table 21 from the CSO’s National Income and Expenditure Accounts.  Here we use the figures from Table 24: Transfer Payments to focus on the largest expenditure item.  As we saw in the previous post expenditure on current transfer payments rose from €21.3 billion in 2006 to €28.9 billion in 2010.

Table 24 provides a breakdown of current transfer payments in 43 different categories.  Here we combine many of them together to form ten main groups.  For example, Pensions includes contributory, non-contributory, retirement and invalidity pensions, Unemployment includes unemployment assistance, unemployment benefit and redundancy payments.  Other transfers such as Child Benefit and the Supplementary Welfare Allowance are used as standalone groups. 

The two largest named categories in the Other Transfer Payments group are the local authority housing rental deficit (€660 million in 2010) and the social employment scheme (€361 million).  Apart from miscellaneous categories all other elements of this group are smaller.

If required Table 24 provides the figures for all 43 categories but the ten categories used here provide sufficient detail for this glance into our transfer payments where the purpose is to inform rather than advocate.  Some details and 2010 figures of the classifications  used by the Department of Social Welfare are available here.

Anyway this is the table produced using the ten groups.

About 40% of the increase since 2006 is as a result of the increase in direct unemployment payments.  The increased level of unemployment will also have led to the increase in other payments.  Pensions form the largest category and account for about one-fifth of the increase.  Child Benefit payments were actually lower in 2010 than they were in 2006.

UPDATE: An extended table with details going back to 1997 can be seen by clicking here.

Government Accounts

The monthly Exchequer Account publications tend to get more attention than they deserve because of the frequency of their release.  Although the Exchequer Account is useful, it is a somewhat distorted view of the overall fiscal situation.  On the revenue side it excludes PRSI and Motor Tax, among others, while the expenditure side is based around the largely meaningless concept of “net expenditure”.

The Exchequer Account gives the misleading impression that the government “spends €50 billion and brings in €30 billion”.  We can get a truer, but less timely, insight into the fiscal situation from the CSO’s National Income and Expenditure Accounts which were published a few weeks ago for 2010. 

Here we focus on Table 21:  Receipts and Expenditure of Central and Local Government.  Tables 22 to 29 provide further details of the aggregate figures provided here.

First, here is government expenditure since 2006.  Item 246: Redemption of Securities and Loan Repayments is excluded from the extract reproduced below.

Grants to Enterprises includes €4,000 million to Anglo Irish Bank in 2009 and  €31,575 million of Promissory Notes issued to Anglo, INBS and EBS in 2010.  These are the only items directly related to the banking bailout in the table.  If these are excluded total expenditure was €71,737 million in 2009 and €69,947 million in 2010. 

Government expenditure in 2010, excluding the banks, was 44.8% of GDP and 54.6% of GNP.

Second, here is government revenue.  Item 236: Borrowings is excluded in this instance.

Government revenue in 2010 was 32.8% of GDP and 39.9% of GNP

Since running close to a balanced budget in 2007, expenditure has increased from €68 billion to €70 billion while revenue has fallen from €67 billion to €51 billion.

In 2010, there was an overall deficit of €18.8 billion.  This is expected to fall to around €15 billion this year.  It has been revealed that a “three-year plan” will be published in the autumn giving outline details of how this will be brought down to €5 billion by 2015.

On the expenditure side the largest items are transfer payments and public sector pay.  The capital budget has already been cut by one-half.  The deteriorations on the taxation side are well known as these are  not clouded by the archaic accounting practices used to generate the Exchequer Account.  

The “low-lying fruit” has been picked and the time for the “heavy lifting” is approaching.

Leaving Cert Results

Here is a quick look at the overall Leaving Cert performance of students taking Economics in the Leaving Cert.  Just over 8% of Leaving Cert students took Economics as a subject.

This year around 3,700 took the Higher Level Paper and it can be seen that the distribution of marks was consistent with the previous two years.    There were 1,063 candidates for the Ordinary Level Paper.

A breakdown of the marks for all 34 Leaving Cert subjects can be seen here.

There were no candidates for Ancient Greek and Hebrew Studies. Of the papers that were taken the lowest number of candidates was the 32 who sat the Higher Level Agricultural Economics paper.  The most attempted paper was the Ordinary Level Maths paper with 37,505 candidates.

The number of students that took the Higher Level Maths Paper did indeed set a record low as was previously discussed here.

Trading Volumes in Irish Bonds

There has been ongoing interest in the yields available on Irish government bonds.  Using actual trades Bloomberg calculate an implied 10-year yield.  This surged to over 14% in the run up to the Brussels summit on the 21st of July.  The yields have fallen on almost everyday since and yesterday finished at 9.5%.

However, little attention has been given to the trading volume on these bonds.  Here is a little insight into trading volumes from the start of the year to August 9th.

For most days the trading volume is very low.  The average daily trading volume for the year is just 0.28% of the total number of bonds outstanding (c.89.6 billion).  For the January 2014 bond the average trading volume in 2010 was six times larger than it has been in 2011.  Trading volumes in Irish bonds in 2011 have generally been very low.

There has been an increase in the time since the EU summit when  yields also began to fall.  The average daily trading volume has been 0.82% since the EU summit.  The other occasion when trading volumes increased slightly was the first two weeks in April.  This was immediately following the March 31st publication of the bank stress tests and again was a time when bond yields were falling.

The Exchequer Balance

The mid-year Exchequer Return released on Monday gives a somewhat noisy insight into the state of the public finances.  It is hard to draw exact conclusions about the behaviour of tax revenue and government expenditure because of the changes introduced in last December’s budget and the reporting of the relatively meaningless ‘net’ expenditure measure which was also affected by the Budget. 

Anyway, in this little poke into the figures we will just look at the Exchequer Balance which allows us to throw all these anomalies into the mix and focus on the final outcome.

Here are the cumulative Exchequer balances for the past five years.

At €10.8 billion, the Exchequer Deficit for the first six months of the year is better only than the €14.7 billion deficit recorded in 2009, but is worse than the €8.9 billion deficit recorded in 2010.  However, the Information Note which accompanies the returns tells us not to worry because:

The year-on-year increase in the deficit was primarily caused by the €3,085 million in non-voted capital expenditure Promissory Note payments to Anglo Irish Bank, INBS and EBS. Excluding these, the deficit fell by over €1 billion.

This is meaningless and should more appropriately be described as misleading. Continue reading “The Exchequer Balance”