We made a submission to the Review Group on State Assets and Liabilities.
We argue for privatisation of everything that is not a natural monopoly, but not without proper regulation first. We also say that the government should stop giving away intangible assets. We cast the net a bit wider than the interim mandate of An Bord Strip.
Today’s banking announcements were marketed as bring finality to the banking crisis but that was always unlikely. The final costs and implications of the crisis still depend on stuff that happens in the future which, word has it, can be tricky to predict. Jagdip has an as-always excellent discussion of the various loose ends here. I think the point that AIB and BoI’s non-NAMA loan books have not been subjected to the same stress tests as Anglo’s is an important point and one that could come back to haunt us again.
On the fiscal front, Minister Lenihan’s announcement of a new four year plan is welcome. Though the official statement didn’t say this, the Minister’s said during his press conference this morning that the plan would detail both expenditure cutting and revenue raising measures which would make it a more credible plan.
That said, the effect of multi-year plan in convincing the bond markets that we are on the road to sustainability will be severely limited by the fact that the government will have at most two budgets, and far more likely one, before the next election.
With the government having taken the decision to stay away from the sovereign bond market until January, there is a strong argument in favour of calling an election to take place in November. Each of the political parties could be given 3 weeks to prepare their own multi-year budget proposals, followed by a 3 week election campaign, giving a new government another four weeks to negotiate a program for government and introduce a December budget.
This course of action would have the following advantages.
1. Because we are on a temporary break from the bond market, the movements in bond spreads that would take place during the campaign would be essentially irrelevant. All that would matter at the end of the day would be the budget and multi-year plan implemented by the new government.
2. The multi-year plan would be seen by the outside world as having political legitimacy. The question of whether the government had a mandate to introduce unpopular measures would disappear. And despite regular claims from journalists that the opposition are irresponsible and have no policies, both Fine Gael and Labour did produce plans last year detailing how they would implement a €4 billion adjustment. Likewise, I would have little doubt that they would be forced to provide multi-year plans to match the government’s and that the election debate would be dominated by the comparison of these plans.
3. The difficult decisions in the upcoming budget would be taken by a new government, most likely with a large majority and not worrying about elections for another five years. Difficult decisions like the introduction of a property tax could be taken without concerns about discontented backbenchers and with the knowledge that the economic situation will look better in 2015.
I’m sure in writing this I’ll get the usual flak from the usual sources, claiming I’m putting this argument purely because I’m a Labour supporter or a Blueshirt or something or other. In truth, I have no affiliations or loyalty to any political party. I just think that there are a number of objective arguments for calling an election now. If the government puts together a concrete multi-year fiscal plan and runs an election campaign on the basis of it, they will have done a considerable service to the country.
Following on from last weekend’s discussion of tax issues prompted by Garret Fitzgerald’s column here‘s an article I wrote on reforming our tax system for the current edition of Business and Finance (Admittedly, I wrote the piece prior to finding out about the omertà code of silence on writing about low taxation. Hopefully, I won’t get mugged on the way home.)
One point that I raise is whether the proposed Universal Social Contribution (USC) is a good idea. In addition to the question of the fairness of raising tax rates on our poorest workers, this proposal may affect work incentives and contribute to rising structural unemployment. An alternative would be raise the standard rate (yes, I’d prefer a flat tax) or to provide a credit against the USC that can get clawed back as incomes rise.
The Irish Times carries an important op-ed by Michael Walsh of Mercer on the crisis in the defined-benefit pension system. Compared to the fiscal, banking and employment crises, the DB pensions crisis is largely below the radar — but still hugely important.
The focus of the article is on the need for policies to ease pressures on sponsoring businesses, and to prevent the more radical response of winding up existing schemes. Of course, the proposals have potentially huge implications for a key component of the wealth of many Irish workers. Unfortunately – but perhaps inevitably in an 850 word article – the actual reforms being proposed are less than clear. I hope the diverse readership of this blog can provide some clarifications and perspective.
There are two proposals:
First:
The Society of Actuaries and the Irish Association of Pension Funds have put a proposal to government to address this issue. It would involve insurers being allowed to sell, and pension schemes being allowed to buy, a new kind of annuity. These so-called sovereign annuities would be directly linked to Irish government bonds. They would therefore be much cheaper than conventional annuities. This would increase the chances that pension schemes can continue to operate and make good current funding deficits over time.
How exactly would these sovereign annuities work? That they lead to cheaper annuities immediately suggests a reduction in the present discounted value of the expected benefit stream – that is, a loss in wealth.
And second:
Our proposal at Mercer is that pension schemes that wind up be permitted to pay lump sums to pensioners instead of buying annuities. The lump sum would be the capital value of the person’s pension calculated on a prescribed basis. The calculation would allow for current life expectancy and expected future mortality improvements together with a specified long-term rate of interest or a rate linked to average euro-zone bond yields. Pensioners could then put the money in an Approved Retirement Fund from which income could be drawn down. Alternatively, they could use the money to buy an annuity, although if this is done at the current time it would likely be for a lower amount than their previous income from the pension scheme.
The proposal as written comes across as relatively painless. But as Michael says, the devil is in the details. What exactly is the “prescribed basis”? Again, there is a presumption that any reduction is the contingent liability of the sponsor is also a reduction in the contingent asset of the member.
Michael Walsh may well be right that, all things considered, such reforms are warranted. But the stakes for many individuals are such that a public debate is crucial, notwithstanding the complexity of the issues involved.
A number of media commentators have drawn a comparison between the present debt crisis and the ERM crisis of 1992/93. Then, the authorities assured markets there would be no devaluation; but the high interest rates needed to defend the peg against sceptical currency traders proved too painful and the government eventually succumbed. Today, sceptical markets are demanding a high risk premium to hold Irish bonds. There is concern that the pain of high interest rates and their impact on debt dynamics will, once again, make market expectations self fulfilling.
I believe it is a mistake to take this comparison too far. The combination of long average maturity, liquid reserves, and the back-ups of the NPRF/EFSF make a forced default in the short to medium run unlikely. Moreover, a cost-benefit calculation for sovereign default for a country that clearly has the capacity to repay suggests a voluntary default is also unlikely.