The Irish Economy

The Irish Times reports

NEARLY 50 hospital consultants and almost 1,000 nurses of different grades are set to leave the health service before new pension changes come into effect at the end of February, the first official figures show.

and

In other parts of the public service about 1,130 staff in the education sector are understood to have applied to leave

This brings back memories (misty water-coloured memories) of pre-election promises

Additional Reduction in Back-Office Public Sector Numbers: As set out in our Reinventing Government plan, Fine Gael will reduce the size of the public service by 10% – just over 30,000 – without undermining key front-line services in health, policing and education, through over 105 reforms to cut back-office bureaucracy and delivery improved value for money. This means that Fine Gael will reduce back-office administrative positions in the public service by an additional 18,000 over and above the 12,000 reduction partners to seek further efficiencies in work practices

I guess these are back-office consultants, nurses and teachers.

The Minister for Transport, Mr Varadkar, in commenting on whether a referendum will be necessary for Ireland to sign up to the fiscal compact is reported to have made the commonplace point that

There’s only one reason why you have a referendum and that’s where there is a requirement to change the constitution.

Em, not quite.

Apart from a political view that a referendum might be desirable in any event, there is a particular mechanism in the Constitution of Ireland for holding a referendum, even when a measure does not require constitutional amendment. This is set out in Articles 27 and 47, whereby one-third of the Dáil and a majority of the Seanad could petition the President to decline to sign and promulgate a Bill “on the ground that the Bill contains a proposal of such national importance that the will of the people thereon ought to be ascertained.”

The detailed provisions of Article 27 envisage that if such a petition were successful, the will of the people could be ascertained either by referendum (in which at least one-third of those on the register would have to vote “no” in order to veto, by virtue of Article 47) or, in effect, by a general election.

I guess the fiscal compact itself may not in fact be a Bill, but presumably the detailed fiscal provisions of the agreement will have at least that legal form. Apart from whether the required numbers of TDs and Senators would line-up for the petition which Article 27 envisages, whether or not this mechanism will be applicable seems to me, as a non-lawyer, to turn on whether the Bill in question is a “Money Bill”. Money Bills appear to me to exempt from Article 27 (reading back to Articles 23 and 22) but I may be mis-reading that, so perhaps we might get some legally informed views in comments.

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.

Anthony Murphy, now at the Dallas Fed, is a renowned Irish econometrician with a strong research interest in housing markets. Back in 2004 he was commissioned by the National Competitiveness Council to study the competitiveness implications of the housing boom.

The first paragraph of his report read: “Ireland’s booming housing market has attracted and continues to attract a considerable amount of attention, both domestically and internationally. Irish house prices are extremely high by historic and international standards, both in absolute terms and relative to incomes. The strength and duration of the house price boom is unique. Many other countries and regions have experienced large house prices booms. However, at least in the 1980’s and early 1990’s, most of these booms have ended in a house price bust.”

The report, which is here, was obviously written in very judicious language but was highly critical of the fiscal contribution to the boom. (His demolition in Section 3.5 of many of the research papers written on the boom is also well worth reading). The NCC declined to publish it. Though I have a good deal of respect for Forfás and the NCC in general, I am forced to ask: how much attention might it have received, and might it have made any difference, if it had been published?

According to this piece in the Irish Times, the Cabinet have copped on that there is little support for a poll tax. Maybe they have realized too that poll taxes are not terribly smart from an economic perspective either.

An expert group will now be established, to report in Spring. As this discussion is not exactly new, our submission is as good as ready. Ronan Lyons’ has made good progress with his, as has Karl Deeter (also on video). Let’s hope the expert group will take this advice to heart.

Last week, though, I got a number of phone calls from journalists about a plan by the chartered surveyors that everyone should get their house valued by them. That would be an unnecessary transfer of money from the general population to a small group of professionals. There are substantial databases on property values already (CSO, revenue, estate agents, etc).

CORRECTION: The chairman of Residential Agency Practice Group of the Society of Chartered Surveyors Ireland points out that they have never called for all properties to be valued. Apologies to all involved.

Here’s an interesting speech titled “Ireland’s Road Out of the Crisis” by Central Bank Deputy Governor, Stefan Gerlach.

Today’s Euro summit document commits all members to a fiscal rule in which “the annual structural deficit does not exceed 0.5% of nominal GDP.” It also commits to “The specification of the debt criterion in terms of a numerical benchmark for debt reduction (1/20 rule) for Member States with a government debt in excess of 60%.”

I’m on the record as being in favour of numerical benchmarks for debt reduction. Indeed, I argued for a more stringent one than the one-twentieth rule that has been proposed by the Commission and has been adopted today.

However, I wonder whether those proposing the limit of 0.5% of nominal GDP on the structural deficit have thought about what this implies for debt ratios. I take this proposal to mean that the average deficit, going through the cycle, should not be more than 0.5% of GDP.

Now suppose a country consistently ran a deficit of exactly 0.5% of GDP. What would happen to its debt-GDP ratio?

Here’s a little note describing the dynamics of the debt-GDP ratio in a simple world with a constant deficit ratio, d, and a constant growth rate of nominal GDP, g. It shows that the debt to GDP ratio converges over time to (1+g)*d/g. (One could add random fluctuations in the growth rate or the deficit ratio and then the debt ratio would cycle around this long-run average value. Also, the timing assumption could be changed so that the current-period debt is determined by last period’s deficit, in which case the (1+g) would dissappear, but that wouldn’t make much difference to the calculation.)

Let’s assume a modest long-term growth outlook for the Euro area of 3 percent nominal GDP growth, i.e. 2 percent inflation and 1 percent growth in real GDP. In this case, the long-run implication of a 0.5 percent of GDP deficit ratio is a debt-GDP ratio of 1.03*0.005/0.03 = 0.172.

Since 0.5 percent of GDP is to be a maximum for the average deficit, this is a fiscal rule that would see long-run debt-GDP ratios below 17 percent of GDP in all Eurozone member states.

This is, of course, a long way from where we are now in most member states. Many countries currently have excessive debt ratios and there is a need to get debt and deficit ratios down over the medium term. It would take a very long time for countries like Ireland to end up with this very low debt ratio, so these limits may work fine as a medium term rule for high debt countries.

However, taken on its own merits, this rule doesn’t seem to make much sense as a long-run legally binding rule. As an alternative, an average deficit of 1.5 percent of GDP could combine with a nominal growth rate of 3 percent to produce a stable and manageable average debt-GDP ratio of 51.5 percent. This would seem like a more sensible benchmark.

Of course, if a government followed such a policy, normal cyclical fluctuations would likely take the economy above a 3 percent deficit fairly often without in any way jeopardising long-run fiscal stability. So the elevation of a three percent deficit limit to sacred cow status (“As soon as a Member State is recognised to be in breach of the 3% ceiling by the Commission, there will be automatic consequences unless a qualified majority of euro area Member States is opposed”) has little grounding in the actual economics of fiscal stability.

There is little doubt that Europe needs to act to reduce debt levels over the medium term and better institutional fiscal frameworks are required. However, these rules, however much they may appeal to the Swabian housewife instinct, are overly restrictive and have little connection to fiscal arithmetic. They are all the more likely to be flouted in future because of their poor design.

My presumption has been that any set of “fiscal union” measures of the type mentioned here will require a referendum. Far more trivial international agreeements have required them, so surely this would too. Eoin reckons it can be avoided via some Lisbon-related maneuver.

I’m not a constitutional expert but some of our readers must be. What do people think? Can we get some concrete cites to the relevant articles or protocols.

Whatever happens, there’s going to be a lot of Euro summitry in the coming months. It seems clear that Germany is pushing for a swift Treaty change to introduce all sorts of legal limits on debt and deficits as the solution to the debt crisis. (You could argue it’s a bit like a flood defense plan that relies on banning rain.) In return for this, the ECB will agree to provide funds to bail out Italy and others, perhaps via turning EFSF into a bank.

Personally, I still think the economics and politics of the “Debt Treaty” approach are terrible. But it’s probably going to happen.

Given that, what should Ireland’s government do? Most likely, with the EU threatening to pull fiscal and bank funding if they don’t co-operate, our leaders will just agree to sign the dotted line at the relevant EU Council meeting and then see if they can get away with not having a referendum. (Unlikely — an Irish referendum will be one of many banana skins the process could encounter).

So here’s one thing that I think they can do. If the ECB is going to move into uncharted territory, then it’s time to ask for a small favour that will barely register as relevant when compared with a huge sovereign bond purchase scheme: Delaying repayment of the IBRC’s ELA debts. While unimportant in the European scheme of things, it would give Enda Kenny a big political win if he could announce the cancellation of the €3.1 billion March 31 promissory note payment.

If you want to read more about this, here’s a column I’ve written for Business and Finance.

The lead editorial in today’s Sunday Times (not on the web) states

Many in Fine Gael believe it is almost impossible to judiciously — and fairly — cut €2.2 billion from spending if 70% of the total, in the shape of public-sector pay, is protected from further reduction.

Now I know that the Irish government is pretty hopeless at presenting its fiscal accounts but it’s really not too hard to find out the true figures on the shares of expenditure taken up by pay and other elements.

Go to page 49 of this document which we have to send to Brussels on a regular basis and which uses the perfectly sensible approach of reporting all of the government’s spending and revenue, rather than specific sub-components picked out according to some unintelligible criteria. The shares of public expenditure for major categories this year are as follows:

Pay and pensions = 25.5%
Social payments = 37.8%
Intermediate consumption = 11.4%
Interest payments = 8.4%
Capital formation = 6.4%
Other (including subsidies) = 10.5%

So not 70%. Closer to one-third of that figure. And, as I’ve dicussed before, when income taxes paid by public sector workers are factored in, the net cost is significantly less.

I have stated repeatedly that I think further cuts in public sector pay rates are required. However, it is hard to see how any reasonable debate on this issue can be had when so many of our media outlets hopelessly misrepresent the basic facts at hand.

Colm McCarthy and many other commentators want the ECB to print euros to whatever extent is necessary in order to keep essentially-solvent Euro states from being unable to finance their deficits. Colm argues that this ECB-provided unlimited funding back-up can prevent an inefficient coordination-game outcome in which investors flee Euro bond markets … because other investors are doing likewise. Once the unshakeable resolve and money-printing firepower of the ECB is demonstrated clearly, the Euro crisis will diminish, in Colm’s view. Many other commentators, e.g, Gavyn Davies, Mervyn King, numerous Germans, argue that this money-printing solution will just generate an indirect subsidy of wasteful Euro governments by prudent ones, with Euro-wide inflation or eventual ECB capital losses serving as the income-transfer mechanism.
There is some talk in today’s papers of a Eurobond system linked to closer EU control over national finances. The EU’s record for governance of this type of national fiscal oversight is not good, and the core nations are rightly sceptical.
Why not a combination policy? The IMF agrees to run sovereign bailout programmes for any Euro countries as needed, with funding provided via IMF-issued, ECB-purchased bonds. The ECB gets a decent, non-exorbitant yield on all new Euros issued, and the IMF has access to an unlimited supply of Euro funding as needed. The guarantee from the IMF-ECB that Italy, Spain and France could be brought within this bailout process as needed, with no funding limits, would probably eliminate the need to bail them out at all (via the same “good equilibrium” mechanism that Colm suggests). To make it credible this programme would need to be ready to activate as needed without exception. Recalcitrant Euro governments who failed IMF programme criteria would be booted from their bailout programmes in the normal way.

Sean and I have an article on green growth at Vox. It builds on a paper recently published in the Energy Journal. Research funded by the EPA.

Here is a link to the new infrastructure and capital investment programme. There is a lot in there so it will take a little time to digest it.

Some quick points:

- There is a commitment to the National Children’s Hospital;

- There is funding for new schools;

- Luas BXD to go ahead (Metro North and DART Interconnector shelved, Metro West was shelved some time ago);

- the A5 project in Northern Ireland (80 km from the border to Derry) has now also been shelved (in addition to the shelving of 45 other national roads projects announced some time ago);

The Sunday Times reported on a recent paper by Niamh Callaghan and me.

The paper is on the demand for tourism in Ireland by UK visitors. This is relevant because UK tourists make up about 45% of all visitors to Ireland (and because UK tourists are not that different from other tourists).

The paper starts with descriptive statistics. Irish tourism prices have developed roughly in line with prices elsewhere, except in 2008, when Irish prices rose very sharply, and in 2009, when Irish prices fell as the rest of the world raised their prices.

Ireland roughly maintained its market share in UK tourism. The drop in visitor numbers in Ireland seems to be because people take fewer holidays during a recession, rather than because there is something wrong with Ireland as a tourist destination. Ireland does well in the market for secondary holidays (city visits, fishing trips etc) and people economize on that rather than on the main family holiday.

We then estimate the price elasticity of UK tourism demand — that is, the price elasticity across destinations — using twelve years of micro-data from the International Passengers Survey. We use that to run two simulations, abolishing the travel tax and reverting the VAT cut. The results are qualitatively the same for both scenarios. The tax changes have a small impact on the total cost of the trip. With a price elasticity smaller than one, the impact on visitor numbers is small too. Tax cuts bring additional visitors and additional revenue, but all tourists (including those that would have come anyway) pay less tax. The latter effect is larger, so that there is a net loss to the Irish economy.

Tourism tax breaks are like export subsidies. Foreigners benefit. The tourism sector benefits. The overall economy loses out.

Fairly amazing story

The general Government debt is to be written down by 2.3 per cent, or €3.6 billion, following the detection of an accounting error.

The Department of Finance said the National Treasury Management Agency (NTMA) had notified it of a double count brought about a change in its relationship with the Housing Finance Authority.

Does this mean we can cancel the €3.6 billion budgetary adjustment? (Just kidding).  Now if only we could correct the “error” of supplying the IBRC with €31 billion in promissory notes, we’d be saved.

Someone asked me today how a Greek-style haircut for private bondholders would impact on the Irish debt situation if applied here. Without any claim that this is a prediction for what could happen to Ireland, or a policy recommendation, here are the calculations.

While the figure grabbing the headlines is the 50%-60% haircut for private holders of Greek sovereign bonds, it appears that the bonds bought by the ECB will not be written down, nor will the IMF loans. FT Alphaville discuss a UBS report that calculates that a 50% haircut for private bondholders actually implies a 22% reduction in total debt.

In Ireland’s case, the latest EU Commission report estimates (page eight) that our year-end general government debt will be €172.5 billion or about 110 percent of GDP. The report also estimates that by the end of this year, we will owe €38.2 billion to the EU and IMF.  (Table 4 on page 23).

We don’t know how much Irish sovereign debt the ECB own but it’s believed to be a large amount. I do remember a report from Barclay’s claiming they owned €18 billion by June 2010. Let’s say ECB owns €22 billion of Irish debt (that’s just a guess, I really don’t know). Combine that with €38 billion from EU-IMF and you have €60 billion in debt that wouldn’t be getting a haircut. Better guesses of ECB holdings of Irish sovereign debt are welcome.

Now apply a 50% haircut to the remaining €92.5 billion of our debt and you reduce the debt by €46.25 billion, or 29 percent of GDP, getting the debt ratio down to 81 percent. (Of course, we’d still be running large deficits, so it would start increasing again.)

So that’s the answer. Perhaps worth noting, however, is that an alternative method of writing down Ireland’s debt by close to 30 percent of GDP without haircutting private bondholders at all would be to have Anglo’s ELA debt to the Central Bank of Ireland written off.

According to its interim report Anglo owed €28.1 billion in ELA at the end of 2010 but this had risen to €38.1 billion by the end of June. This is because Anglo transferred €12.2 billion in NAMA senior bonds to AIB in February to back the deposits that were being moved out of the bank.

On July 1, Anglo was merged with Irish Nationwide Building Society (INBS) to form what is now called the Irish Bank Resolution Corporation (IBRC). As of the end of 2010, INBS had €7.3 billion in loans from the ECB. However, €3.7 billion of this was backed by NAMA bonds and other assets that were transferred to Irish Life and Permanent. INBS has been in receipt of ELA since February to replace this lost funding. While this has been admitted by a Department of Finance official (see this story) the exact figure has not been released. I assume it is about €4 billion.

So my estimate is that the IBRC now owes about €42 billion in Emergency Liquidity Assistance to the Central Bank of Ireland. If the European authorities ever decide they like the idea of haircuts for Irish debt, it would be fair to ask which of a fifty percent haircut or a write-off of ELA would be more likely to damage Ireland’s reputation or cause financial market contagion.

I’d be interested to know the source of the figures cited in this article by Vincent Browne on income tax rates paid by higher earners. It certainly isn’t the last Revenue Commissioners statistical release on tax payments by income distribution, which relate to 2009. Anyway, it’s interesting to compare the figures reported in the article with the tax payments generated by plugging in the same salaries into this useful online tax calculator.

I was struck by the amount of press coverage of the Cycle to Work scheme (C2W). The Irish Bicycle Business Association (IBBA, which seems to have no website) launched a report (which cannot be found online) praising the virtues of C2W.

The report in the Irish Times is brief. 90,000 bikes have been sold since the scheme was introduced. There is no estimate of how many bikes would have been sold without C2W. The IBBA spokesperson claimed that “cycling journeys have increased by more than 50 per cent”, which may or may not be due to C2W, and may not be true as Irish data on travel and transport are sparse. The Dublin Canal Crossing counts (h/t Ossian Smyth) surely do not support a 50% increase.

RTE, BusinessWorld and the Irish Examiner add that 50 new bicycle shops have been established, and 767 new jobs created. They note the increase in the number of bike-based charitable events. And they cite the example of Temple Street Children’s University Hospital, which apparently has kept excellent records of how its employees travel to work.

SiliconRepublic has the most extensive story. It cites a LSE study that shows the commuting by bike improves your health. Such studies are plagued by endogeneity: Are cycling people fit, or do fit people cycle? McNabola et al. (2008) show, for Dublin, that cyclists (who breathe differently) are particularly exposed to PM2.5 and VOC.

The Irish Independent interviewed a bike shop owner. He notes that, since C2W, people buy more expensive bikes and that the success of his business is due to C2W.

C2W is a subsidy on the purchase of a new bicycle. You would indeed expect that people would then buy more and more expensive bikes, which is good for bike shop owners. C2W was one of the first policies introduced by then-Minister Eamon Ryan, who once owned a bike shop (see here).

C2W is unrelated to the use of the bike. Even without the C2W, bicycles beat cars on cost. I find it hard to believe that C2W has induced many to cycle to work instead, but I am aware that there no data to support this.

Feasta (The Foundation for the Economics of Sustainability) are holding an interesting conference on Thursday and Friday of this week titled National Strategies for Dealing with Ireland’s Debt Crisis: Exploring the Options. The webpage for the conference is here and the conference programme is here.

The annual report of the Comptroller and Auditor General contains lots of useful information. However, one criticism I would level at the report is its use of an accounting framework that differs from the General Government Budget that we report to Brussels.

The report states that “Overall State expenditure in 2010 was €53.8 billion, a reduction of 9.5% on the 2009 level” figures that are being widely reported in the news today. The report also lists “Total Receipts” at €35.6 billion up from €34.7 billion the year before.

However, if one looks at the more comprehensive accounts that we provide to Brussels—and which are used as the basis for reporting and compliance with our EU-IMF programme—one finds (page 49) that total expenditure by the Irish government last year was €103.2 billion while total revenues were €53.2 billion.

The €103.2 billion expenditure figure includes €30.8 billion for promissory notes, and one can understand that there are various possible accounting treatments for these notes. However, that still leaves non-promissory-note spending at €72.4 billion, almost twenty billion higher than reported by the C&AG. So despite the use of “overall” and “total”, it’s pretty clear that these are not overall totals at all.

Some of these differences are accounted for by the exclusion of capital spending and on the tax side there’s differing treatment of PRSI contributions. I could go on listing other differences but, frankly, who cares? The GGB figures provided to Brussels are the most comprehensive indicators of our fiscal position and they are being closely watched by the EU and IMF.

As I’ve written about before, these kinds of figures also mislead the public about key magnitudes, thus undermining public debate about fiscal options. For example, you will hear various expenditure items compared against a total tax revenue figure of €31.7 billion—those who’ve read the C&AG report will think total revenue was €35.6 billion. This usually ends up distorting the actual fraction of revenues devoted to these expenditures.

The government has announced that it will sell a minority share of the ESB. This is welcome news. Privatization of non-core activities is a matter of principle. The ESB has paid poor dividends. It has frequently been used to bankroll projects of dubious commercial (yet clear electoral) value. Selling a minority share is a low risk strategy for price discovery and much better than a fire sale.

So far so good. However, the government also announced that it would keep the ESB “as an integrated utility”. The ESB is a conglomerate. It generates power, it owns the transmission network, it sells electricity, and it provides consultancy services.

The network is a natural monopoly, and should probably not be sold. The rest of the ESB can be safely left to the market (if properly regulated).

As an integrated utility with a natural monopoly, The ESB enjoys considerably market power. The nominally independent transmission system operator, EirGrid, gets electrons from ESB, transmits them over lines owned by the ESB, and delivers them to the ESB (who then retails them). The ESB’s dominant position is the main reason why few companies have entered the Irish electricity market.

Today’s announcement suggests that the government plans to continue the current situation. It would make more sense to sell the network to EirGrid. The price of such a sale matters because the ESB is part-owned by an ESOP; and because the ESB is using the network as collateral for cheap loans.

The future ESB will therefore face three demands, compared to two now. The workers will want well-paid jobs, as they had in the past. The political masters will want their pet projects, as they had in the past. And the private owners will want dividends. The consumer will have to pay for all of this.

Former Bertie Ahern Seanad appointee, Eoghan Harris, writes in the Sunday Independent today that he is confused that I can believe public sector pay should be cut and yet also believe that his newspaper has demonised this issue. His silly comments about academics and the Irish Times aren’t worth responding to but I’m happy to clarify what my position is.

In relation to public sector pay, one can argue until the cows come home about whether public sector workers in Ireland are paid more than private sector comparators or comparable public sector workers in other countries, and about how these premia have been altered by the pay cuts of the past few years. However, that debate doesn’t change the fact that Ireland has a very large budget deficit and every major component of expenditure will need to be cut to put the public finances back on an even keel. And that must include public pay.

I’m sceptical about whether an approach that doesn’t see pay rates cut can deliver substantial savings and would also prefer pay cuts to reductions in numbers of front-line workers that will affect the delivery of key public services. So my position is that public sector pay rates need to be cut.

If that’s my position, then what’s my problem with the Sunday Independent? My problem is its focus on high rates of public sector pay as the single cause of the budget deficit. Its coverage repeatedly gives the impression that “we are borrowing to pay for the public sector”. Other areas of spending such as welfare rates receive comparatively little coverage and topics such as our narrow tax base and generous income tax exemptions receive no coverage at all.

An examination of the figures reveals that a focus on public sector pay as the source of the deficit is misplaced. This year, the government will spend €18.1 billion on pay and pensions for the public sector. The general government deficit is projected to be €15.6 billion.

You might think this means we can eliminate the deficit via an 86 percent cut (0.86=15.6/18.1) in public sector pay. But, even if you did manage to get anyone in the public sector to work for 14 percent of their current salary, this strategy still would not work because public servants pay PAYE, PRSI and a pension levy and most of these payments would have disappeared. (They also pay VAT when they spend their salaries.)

I don’t believe the government releases figures on the net cost of the public sector pay and pensions, subtracting taxes and levies, but I would be surprised if it was more than €11 billion. So you could fire every public servant in the country and still not close the deficit.

Back in the realms of reality, even substantial cuts in pay rates will still leave a yawning deficit. For example, consider a cut of 25 percent in pay rate, reducing gross pay by €4.5 billion. The marginal tax rate on public pay rates above €36,000 is 62 percent. (See tax calculator here) so the deficit would only be reduced about one-third of the amounts cut for people on salaries above this level. I suspect the net reduction in the deficit, before accounting for reduced VAT revenues, would be less than half of the gross amount, i.e. somewhere below €2.25 billion.

So, sadly, if the enormous deficit is to be closed, then other categories have to be looked at. These include spending on social payments (which will cost €26.8 billion this year and are largely exempt from income tax), on capital programmes (which will cost €6.1 billion this year) and on the narrowness of our tax base.

The idea that public sector pay is the source of the deficit has a satisfying ring for many. It means that an identifiable group of “other people” is responsible for all our problems. And it allows people to think that the pain of all the spending cuts and tax increases they are being hit with is unnecessary and is only occurring because public servants are being protected: Nothing sells newspapers quite as effectively as rage. I suspect the commenters on this blog have well above the average level of economic literacy and I can tell from repeated comments that many of them believe the deficit is solely due to high rates of public sector pay. Unfortunately, the arithmetic doesn’t support this position.

So that’s why I dislike the Sindo’s coverage of public sector pay. It leads its readers to believe that there is a simple single bullet solution to the deficit and, via that logic, to a demonisation of a particular group as the cause of our problems. Ultimately, this kind of coverage is unhelpful because it undermines public support for the additional measures that need to be taken, over and above public sector pay cuts, if the public finances are to be stabilised.

No doubt Eoghan would still diagnose my position as being down to status anxiety twitch or some other mysterious condition but I’m happy to take a few shots from the Sindo if the result is a more informed debate about the options for closing the deficit.

The transcripts from last week’s meetings of the Joint Committee on Finance, Public Expenditure and Reform are now online. The transcript for Michael Noonan’s appearance is here. The Honohan-Elderfield transcript is here. I’m happy to say the website has improved since the last Dail and you can now read the transcript for a full meeting without having to hit lots of arrow buttons.

I’ve seen various explanations for the 2008 crisis: global imbalances, dodgy financial innovations, lack of proper financial supervision, the interaction of all of the above. And a few others besides.

But this is a new one to me, I must confess.

I agree with Ryan Avent when he says that “the current situation reinforces the idea that strong, well-anchored automatic countercyclical stabilisers—fiscal and monetary—are the best hope for avoiding prolonged economic crises”.

Unfortunately, these days in the eurozone you are more likely to read stories like this one.

Karl is quoted here as saying that the Franco-German proposal that we insert borrowing limits into the Irish constitution will not solve our current debt problems. This is obviously correct, as is the point that such an amendment would not have made a blind bit of difference during the bubble years.

There is also the point that a constitutional amendment is a much bigger deal in Ireland than in some other countries, since it can only be changed by means of a new referendum.

Here are two questions:

As per Derek Scally in the Irish Times, is this a taste of things to come, or much ado about nothing?

What are the chances of the Irish government winning such a referendum?

If a picture is worth a 1000 words, what’s the value of a video? Google has put some effort into data visualization. This example works in 5 dimensions at once. It’s on government debt in Europe. The kinetics of Turkey and Ireland are astounding.

I had an op-ed in the IT last Thursday. Discussion is not great on their site. Here’s my edit.

The government aims to create a national water utility to install water meters and charge for water use. The general thrust is commendable, but it may become an expensive failure.

Taxes will need to go up and public spending down to close the government deficit. This will hurt the economy. However, consumption taxes do less damage to growth than income taxes. The government is right to introduce water charges.

A flat water charge would be unfair. Exemptions for those unable to pay are crude and expensive to administer. A flat water charge would not induce water conservation. We produce about 450 liters of drinking water per person per day (l/p/d). The average person probably uses some 150 l/p/d. It is not fully known what happens to the remaining 300 l/p/d. Part is lost through leaky mains, part is used illicitly, and part is lost through leaks in the house or garden. Experience in other countries, and in the group water schemes in Ireland, shows that water charges would substantially reduce household water use. People would also press the water providers to reduce wastage in the distribution network. As the number of meters increases, it will be easier to locate leaks and illicit use. The government is right, too, to introduce water meters.

The government wants to install water meters in 2012 and 2013. That is ambitious: 1.4 million meters in two years, 2800 meters per day. There is also a plan to replace all household electricity meters with so-called smart meters. This has been carefully planned and trialed over the last three years. The smart meter roll-out will be done by well-established companies. In contrast, the installation of water meters is to be led by Irish Water, a company that does not yet exist. I would be surprised if there will be a water meter in every home in Ireland by Christmas 2013. Flat charges may be with us for a long time.

In fact, there is a possibility that water meters will follow the path of voting machines, as learning from past mistakes is not the strongest point of the Irish government.

Water meters will be unpopular, as they remind people of water charges. Installers would need permission to put water meters in the home. Some homeowners will withhold such permission. The idea is therefore to install water meters just outside the property boundary. This is easier but much more expensive. 1.4 million connections will need to found, and 1.4 million holes dug. The water meters would be far from the smart electricity meters and therefore need a separate communications network. This may cost up to €800 per meter (€1.1 billion in total) according to one estimate.

There is a simpler and cheaper option that has worked well in other countries. Households can install water meters themselves, or ask their plumber to. Households with a meter would pay whatever water they use. Households without a meter would pay a flat charge. If the flat charge goes up over time, more and more households will install a meter. If the costs of water meters are a concern – a good plumber could install a certified meter for less than €200 – then Irish Water could give a voucher for €200 worth of free water upon registering the water meter.

The government has repeatedly promised that there would be free water allowances. Only excessive water use would be paid for. This is nonsense. It does not promote water conservation, and it is bad social policy. Like water, food is essential, but the government does not hand out sacks of potatoes. Instead, there are benefits for those without income and tax credits for those with. Benefits in cash are better than benefits in kind, because the household can choose what potatoes to buy, or pasta. Similarly, water should be charged from the first liter onwards. The revenue from the first 100 l/p/d or so should be used to increase benefits and tax credits.

The government may also seek to transfer the responsibility for drinking and sewage water from the county councils to a new, semi-state utility called Irish Water. There is merit in this too. Water treatment plants are largely build, designed and operated by private companies, but guidance and supervision by the county councils has not always been up to scratch. A new national water company would professionalize water management. If assets would be transferred from the counties, Irish Water should be able to borrow money at a lower rate than the government.

There are dangers too. In the past, semi-state monopolies have served their employees and their political masters well – but customers and owners got a raw deal. The government should create a Commission of Water Regulation at the same time as it creates Irish Water.

Or maybe sooner. The prospect of digging 1.4 million holes in the ground is great news for the construction industry – and a number of companies are actively trying to convince the government that this is the only option. It is not. It would be better if all options would be considered, and the best one selected after an open debate.

Jacopo Ponticelli and Hans-Joachim Voth have just published a CEPR Discussion Paper looking at the relationship between austerity and social unrest in Europe between 1919 and 2009.

..which is why it makes sense that this article should have appeared in the Telegraph rather than the Guardian (HT FT Alphaville).