Notes On The Front

Fiscal Treaty Files: The Minister - There He Goes Again

It is becoming great sport following up the Minister for Finance’s comments.  However, a retraction:  in the previous post I compared the Government’s projections from April 2011 and April 2012 – following on from the Minister’s curious comment that things were better this year.  In that post, I also referred to comments the Minister allegedly made at a Bloomberg conference, suggesting that we should give up simplistic notions of social justice.  It now appears that this was a hoax – as reported by Peter Geoghegan on the London Review of Books blog. 

Apparently the comment could have been inserted by a mischievous hacker.  The problem with this story is that the inserted quote was wholly believable coming from a Minister who opined on the trade relationship between Ireland and Greece being all to do with Feta cheese or who assured poor people that the VAT rises wouldn’t affect them so much because they had little to spend.  Nonetheless, the ‘social justice’ comment appears to be a hoax. The deteriorating Government projections, however, are in black and white – published by the Government itself.

But, wait, the Finance Minister was at it again on This Week:

RTE:  You mentioned we wouldn’t be in the mess we’re in if the Fiscal Treaty had been in some years ago.  This would have saved us from getting into the deficit problems we got into.  But how would have that prevented that given that at the time the IMF and the European Commission were complimentary of our structural deficit?

Noonan:  What I was saying was that if this was a matter of law - Ireland or Spain or Greece or Belgium or Cyprus - if this was a matter of law six or seven years ago and people had to fulfil their obligations to balance their budgets, that’s the point I was making. . . . It’s a straight forward point and without contradiction.

Well, that is pretty definitive.  And pretty wrong.  What were the EU estimates of the structural deficit (it’s proxy – the cyclically-adjusted budget balance) at the end of the speculative boom period?

The exception is Greece – who has had long-term structural problems.  For all the other countries, they were estimated to be in compliance with the Fiscal Treaty.  Ireland, Spain and Belgium were consistently in compliance, with the odd blip.  Cyprus started out in trouble but by 2006 they were in compliance. 

So what is the Minister talking about?  Does he even realise the data contradicts him?  Or does he care?

Of course, this is the Minister who reduced the problems of Greece to feta cheese.  And here he is again on This Week defending his Greek comments:

‘I’m trying to stop contagion.  It’s one of my jobs as Finance Minister to protect the Irish economy.’

How do risible comments ‘stop contagion’?  And wouldn’t he be better off actually describing the reality of the Fiscal Treaty, rather than pretending it would have done something that it never would have done?

Give Up Your Simplistic Notions

This economic debate is getting beyond the beyond.  RTE reported:

‘Speaking at the Bloomberg economic summit in Dublin Mr Noonan said the Irish economy is in a much better position than it was this time last year.’

It now seems that in this debate you can say anything you want without any reference whatsoever to fact, truth, reality, veracity, accuracy.  Just make it up, if it feels good run with it, say anything to fill some column inches and get on the Six-One News.  The Irish economy is in a much better position than it was this time last year?  Why not?  Don’t let the following deter you.  It’s only been taken from the Government projections last April and the Government projections this April.

Wow.  Last April the Government was projecting higher growth rates, higher GDP, higher job creation, lower unemployment, higher real wage growth and lower public debt.

But according to the Minister, we are in a better position this year.

I mean, there’s gloss, and then there’s gloss; and then there’s downright making-it-up.  Of course, we’ve come to expect this from this Government (after all, they refuse to acknowledge that we are back in recession).

However, where is our vaunted corps of economic journalists and commentators who stand ready to challenge Ministers when they come out with this type of manipulation?  Where are the defenders of the public right to know the facts, those who should be holding the Government to account?  Somewhere, I suppose – but not here and not now.

But we are getting used to the Finance Minister’s odd take on all things economic.  He did, after all, assure us that VAT wouldn’t hit ‘the poor’ because they don’t have much money to spend.  Now, courtesy of Dublin Opinion and Paddy Joe, we find a deeper insight into the Minister’s worldview:

‘He [the Minister] also told a Dublin event that no other European country but Ireland would be able to pass a referendum on the fiscal treaty. “In all other countries people are concerned about growing inequality. In Ireland we need to keep focus on more important issues of corporate profitability and tax protection we offer international organisations. This is not the time for drastic moves to the left simply to suit populist demands for simplistic idealism of “social justice”.’

There you have it.  Give up your simplistic notions of ‘social justice’.  Get real.  And don’t mind what we said last year.  Things are better.  And when we revise everything down again next year, it will be better still.

TGIF.

Mandatory Cynicism

It is better not to be cynical.  But this Government is not only making it easy to be cynical, they are practically making it mandatory.  We now read that the Government is preparing the economy for a sustained and substantial investment programme in an anticipation of a U-turn by the EU.  That this has been announced only days before the referendum . . . what timing, what fortune.

‘Government departments have been told to draw up lists of capital projects with potential to create thousands of jobs for which funding would be sought if EU leaders agree on the package at the meeting to be held a week before polling day here.’

‘He (the Taoiseach) is drawing up the list, which would create thousands of jobs on road, rail, housing, school, health, broadband and water projects.’

This will be a new experience.  The Government cut €750 million in capital projects last year.  They intend to cut capital projects by approximately €600 million next year, with an additional €150 million the following year.  Over the lifetime of this Dail, the Government has announced that it will cut public investment by 32 percent in real terms (after inflation).  These cuts, according to the Department of Finance, will slash direct employment by nearly 13,000, not counting the downstream effect.

So at the very same time that the Government is cutting investment and jobs, it is drawing up investment lists to create thousands of jobs.  Anyone think this is contradictory?

What are the sources for all this new funding?  Three have been named.

• The European Investment Bank:  this would certainly be helpful if more capital was pumped into the EIB, which co-finances and provides loans at competitive interest rates for a range of physical and social infrastructural projects.   Whether member-states would put in this capital or the ECB could be induced to do so remains an issue.  However, it should be noted that where the loan is to the state, the state has to put up half the investment (see here for a proposed school building programme) – so extra Exchequer resources will be needed.  It should also be noted that EIB funding can take up to 12 to 18 months from application to  start-up activity with Ireland having to join a queue.  Currently, there is only the one programme being appraised.

• Project Bonds:  This is a pilot-project by the EU and essentially involves supporting private companies tendering from public authorities.  These bonds would replace traditional bank lending.  This would involve public support for the private component in essentially public-private partnerships in commercial activities.  While this could have some impact – especially in commercial telecommunications and energy activities – it will be limited as ultimately intended in getting non-banking private markets to provide debt financing.

• Unspent Structural Funds:  The EU Commission has proposed that €82 billion worth of unspent structural funds be re-allocated and spent.  However, there is a catch – states would only be able to re-allocate the structural funds they themselves did not spend.  It would not be transferable from one state to another (though this could change).  I don’t know how much unspent structural funds Ireland has, but it’s not likely to be much. 

All of this shouldn’t be dismissed but clearly it is limited – both in the scope of activities that can be funded, the amounts involved and the time-lag.  A progressive government would exploit these programmes as ‘additionality’ – additional to a public-led investment programme from our own resources.

And here’s where we get to the root of the Government’s cynicism.  They are pursuing a highly deflationary programme – planning €8.6 billion in cuts and tax increases up to 2015.  They claim they will off-set against this an unknown amount of reflationary investment measures which can only be drawn down over the medium-term under limited conditions (including additional borrowing) and limited scope.  All the while, the Government’s budgets are tearing demand out of the economy now, dampening employment growth now and undermining domestic businesses now. 

The Government is trying to buy the referendum.  However, unlike good ol’ fashion general election buy-outs, we don’t know what electoral brown-envelope contains, if it contains anything.

The Government is robbing impoverished Peter but only giving crumbs to starving Paul. 

Fiscal Treaty Files: Lost in Translation

This debate – you wouldn’t know whether to laugh, cry or bang your head on the asphalt repeatedly.  Following the rejection of austerity parties in Greece and France, the Taoiseach says:

‘I welcome the fact that president-elect Hollande has been talking about growth and investment which is what Ireland has been talking about along with a number of other leaders for the last number of months.’

Indeed, since the Treaty debate began Government Minister have been talking so much stimulus you’d fear that the economy will explode with all that dosh the Government intends to pump in.

The Government says one thing.  And then it does the exact opposite.  Let’s look at what the Government actually intends to do - it is anything but ‘investment and growth’.

First, the Government intends to continue cutting public investment.

The Government cut public investment by three-quarters of a billion Euros last year.  This reduced employment by approximately 7,000 direct jobs (and more when demand is factored in).  Next year they’re going to cut over a half-billion of Euros more from investment and even in 2014, they’ll be hitting it again. In total, that another 7,000 direct jobs cut from the economy over the next two years.

Over the period of 2011 to 2015, the Government intends to cut investment in real terms (after inflation) by 32 percent.  The Taoiseach welcomes ‘talk’ about investment – but at the same time his Government is gutting its own investment budget.  I leave you to find the word to describe that.

Turning to current expenditure, we find even higher levels of austerity being planned.  Please note – there are primarily only two categories of current expenditure:  public services and social protection (there’s also interest payments but there’s not much the Government can do about that short of debt restructuring).  What has the Government in store for us?

 

 In 2012, the Government cut €1,450 million from the current budget.  They intend to increase these cuts in 2013 and increase them yet again in 2014.  Even in 2015 the Government will be cutting.

This will have a major impact on the economy.  The ESRI found that for every 1 job lost in the public sector, the Live Register rose by 1 in the short-term (with the hope that emigration would reduce that impact in subsequent years).  Cuts in private sector procurement contracts could put more pressure on indigenous enterprise and their employees.  Cuts in social protection could feed into rising levels of inequality and reduce demand in the domestic economy. 

Using the Government’s own estimates, the cuts in public investment, current expenditure and tax increases will reduce GDP by over €6 billion by 2015.  Given that GDP is expected to grow by only €22 billion, that’s a big hunk.

So let’s recap:  the Government welcomes French ‘talk’ of investment and growth.  That’s because they, too, are ‘talking’ investment and growth.  Meanwhile, despite all this chatter, the government intends to cut public investment by 1/3 while cutting expenditure on public services and social protection by over €6 up to 2015, resulting in a considerable loss of growth and employment creation.

That doesn’t sound like an investment and growth strategy.  But maybe something got lost in translation.

Fiscal Treaty Files: Will it Cost Us?

This was originally written for Progressive-Economy.ie

Will the Fiscal Treaty – in particular, the notorious structural deficit rule – require additional austerity?  John McHale of the Fiscal Council says it won’t.  He accepts that in 2015 the gap between the Department of Finance’s projected structural deficit (3.5 percent) and the Fiscal Treaty target (0.5 percent) is €5.4 billion.  But then he argues that growth can wipe that deficit out:

‘Growth affects both the denominator and the numerator of the structural deficit as a share of GDP. (For simplicity I assume that actual and potential GDP grow at equal rates post 2015.) The denominator effect is straightforward. For the numerator, we could use the standard coefficient used by the European Commission for Ireland that assumes that the reduction in the deficit is 0.4 times the change in nominal GDP. (This coefficient is usually used for doing cyclical adjustments, but it should also be applicable for measuring the impact of changes in nominal potential GDP on structural balance in the absence of discretionary adjustments to tax and expenditure parameters.)’

On this basis John does some calculations – using a more conservative co-efficient of 0.2.  He finds the structural deficit is effectively wiped out by 2019 / 2020 without any additional austerity because growth has done all the heavy lifting.

I would suggest that this line of argument is flawed.  First, I assume the co-efficient he uses refers to the cyclical sensitivity measurement of 0.4.  This measurement is used to deconstruct the deficit into its ‘cyclical’ and ‘structural’ components.  Essentially, you measure the gap between the real GDP and potential GDP growth and then apply the 0.4 to see how much of the gap is cyclical.

And herein lies the first problem – the 0.4 is an instrument to define the cyclical component of the output gap.  It is not a measurement which defines the relationship between nominal growth rates and deficit reduction – whether it is the general or structural deficit.  It is analogous to using a car clamp to change a light bulb.  It is the wrong instrument.   As the Department of Finance puts it:

‘Indeed, by definition, reducing the structural element of the deficit will require policy action. . . .‘

The whole point of structural deficit measurements is to determine what the deficit will be when the economy returns to full capacity.  If the economy is firing on all cylinders and there is still a deficit, then the Government must take policy action to correct this, because growth cannot.

 In doing his calculations, John assumes that real and potential GDP grow at the same rate.  Never mind that the Government estimates that real GDP is growing at twice the rate of potential GDP in 2015 (yes, I know, this suggest that the economy is ‘over-heating’ – one of the absurdities with the model that the Department of Finance is using).  If the output gap is zero, there is no role for applying the 0.4 co-efficient because there is no cyclical component to measure.

Seamus Coffey does his own calculations based on John’s more conservative co-efficient of 0.2 and applies it to GDP growth (though Seamus does say ‘There is no way of knowing what this’ co-efficient is).  He comes up with a similar result as John.

But there is a problem here.  Why use a conservative 0.2 co-efficient?  If you believe that 0.4 tells the story, go with it.  And why, use a nominal growth rate of 3.5 percent?  The Government claims that in 2015 the nominal growth rate is 4.5 percent.  So let’s go with that.

What do we get?  We find that the structural deficit turns into a structural surplus without doing anything.

And what a surplus!  By 2019 we will have a structural surplus of 2.5 percent.  We outdo even the Germans.  We get to go to the top of the class.

Is this likely?  No.  But we don’t have to argue the toss about cyclical sensitivity measurements or coefficients of elasticity.  We merely have to go to the IMF’s own projection – which helps because (a) they stretch out to 2017 and (b) they assume, like John, no fiscal adjustment after 2015.  What do they find?

In percentage terms, the reduction in the structural deficit is minimal:  less than 0.1 percent of GDP each year.

But why should this surprise us?  If there is deficit left over after the output gap is closed (after the economy returns to full capacity), what remains is the structural deficit which requires ‘policy action’ to reduce it.  (Of course, the very notion of a structural deficit is contested – to the extent that it is not very helpful at all in terms of sound fiscal policy as outlined here).

Political Implications

But there’s more to all this than just duelling statistics.  The Government and their austerity supporters have co-opted the language of progressives to avoid answering a fundamental question:  what the cost of the Fiscal Treaty will be in terms of future austerity measures.  They are now talking about ‘growth’ being the main instrument of deficit-reduction. The Government has even gone so far as to say that investment will grow the productive capacity and, therefore, reduce the deficit.   Some of us have been saying that since the start of the crisis – UNITE and the trade union movement, TASC, contributors on Progressive-Economy; all we got was ridicule and scorn. 

Here’s how the Department of Finance puts it:

‘Indeed, by definition, reducing the structural element of the deficit will require policy action, though not necessarily taxation and expenditure adjustments. Other options are available . . . . Such measures include labour market reforms - some of which are already in train - together with investment in technology and infrastructure to boost the productive capacity of the economy. To this end, the Government has established NewERA and the Strategic Investment Fund . . .

This ambitious programme of microeconomic reforms, by boosting the productive capacity of the economy, is expected to help reduce the structural element of the deficit by the middle part of the decade. For example, reforms along the lines of those set out in the Action Plan for Jobs 2012 and the Pathways to Work initiative, aimed at addressing some of the skills mis-match in the labour market, should help lower the unemployment rate. This would have a structurally beneficial impact on the public finances, on both the revenue and expenditure sides. In other words, the structural fiscal position is set to improve with these microeconomic reforms.’

And, yet, yet – the Government still refuses to provide a projection for this.  If they are convinced that investment and labour market reforms will boost our productivity, they can project this – through the ‘potential GDP’ which measures the contribution of labour, capital and productivity

This is all a charade.  At the same time as the Government is assuring us that growing our potential GDP will reduce the structural deficit, they are actually revising downwards potential GDP.

In the last budget, the Government projected that our productive capacity would grow by 3.4 percent between 2010 and 2015.  Only a few months later, the Government is now projecting growth at 2.4 percent.  This revision downwards reflects their lower GDP projections.

In other words, we are going forward by going backwards.

This is the ultimate game plan.  Stonewall any questions about the cost of the Fiscal Treaty with talk of growing our productive capacity even as you revise downwards our productive capacity.  ‘Prove’ that growth will reduce the structural deficit by using variables that have little reference to structural deficit reduction.  But don’t ‘prove’ it too much because it will look nonsensical.  Ignore what current projections (IMF) have to say about all this.  Even ignore the definition of a structural deficit.   Above all, abandon your austerity clothes and don the robes of an expansionary programme – even as you promise to cut public investment next year and cut spending on public services and social protection by even more than you did this year.

Do all this.  But don’t call it austerity. 

Fiscal Treaty Files: Hey Everybody, Let's Stagnate Together

Understandably, in this referendum we are focused on the impact of the Fiscal Treaty on Ireland.  But this is a Treaty for the Eurozone and the entire EU (with the exceptions of the UK and the Czech Republic, which are pursuing their own home-grown austerity policies).  The Government has made much about how the Fiscal Treaty will introduce ‘stability’ and ‘confidence’ in the Irish and European economies.  So what might we expect from this unique experiment in simultaneous austerity and how might it impact on an open economy like Ireland. Will the Fiscal Treaty actually result in ‘stability’ and ‘confidence’? 

Not according to the Institute for Macro-economic and Economic Research (IMK) based in Germany.  They teamed up with other research institutes in Austria and France to assess the impact of the Fiscal Compact on Eurozone and EU growth.  And the numbers are not good.

The IMF is already projecting that Euro area and EU growth rates will be well below world growth rates.  In a post-fiscal treaty scenario, the IMK projects that European growth rates will be cut further – with Euro area growth rates falling to an insipid ½ percent average annual growth rate.

The IMK also looks at specific countries.

It might surprise some that Germany – the ‘engine of the Eurozone economy’ – is already projected to be a low-growth economy under the IMF projections.  Even by 2016, the IMF expects the German economy to grow by a mere 1.3 percent.  However, given that Germany doesn’t have a significant structural deficit issue, the impact of the fiscal treaty will lower growth only marginally.

However, when it comes to France – which does have a significant structural deficit problem – we see that a low-growth economy will find its growth rate cut in half by the Fiscal Treaty.  As for Italy which, like Germany, doesn’t have a significant structural deficit issue, average growth rates fall into negative territory – from an IMF projection which shows them already flat-lining.

The IMK projections for Ireland don’t really work well because they assume all countries the Fiscal Compact would be implemented will meet the structural deficit target by 2016, whereas Ireland may get more leeway coming out of a programme.  However, if we assume that Ireland must meet the structural deficit target what might we expect?

I have assumed that a further €5.4 billion fiscal adjustment would be necessary to close the structural deficit gap by 2017 (€5.4 billion being the gap in 2015).  This adjustment is to start in 2015.  What we find is that GDP growth stagnates at 2014 levels – with implications for unemployment (which the IMF already estimates at over 10 percent in 2017 with a growth rate in excess of 3 percent), incomes and living standards.

And if the Irish growth rates still look better than other countries in the post-fiscal treaty scenario, we always have to remember that GDP is flattered by a multi-national sector which books profits here and then immediately takes them out of the country in what is essentially an accounting exercise.

So all of this is supposed to instil ‘confidence’ and ‘stability’?  Cutting growth rates even further in Europe which is already looking forward to a low-growth medium-term scenario – far below world growth rates?  How does this promote the confidence necessary to increase investment – when domestic demand is being cut in a number of countries simultaneously?  How does this stabilise public finances when economies are going to find it even more difficult to generate the revenues necessary to repay debt?  And what happens to all this math if Spain falls into bail-out?  

For the Government this is a special problem.  Their recovery strategy is based on an expanding export base.  However, if European countries are simultaneously driving down their demand, our markets for exports will be contracting.  How does reduced demand in Europe impact on our real export growth.

This is not a drive to promote ‘confidence’ and ‘stability’ – this is a dangerous experiment that will produce even greater uncertainty.

This is a recipe for extending and deepening stagnation.

But, hey, at least we’ll be doing it together.  As they say, misery loves company.

Fiscal Treaty Files: We Will Raze Your Homes and Crush Your Dreams - Discuss

The Government is doing everything possible to prevent a debate on the Fiscal Treaty.  The tactic employed is as old as government itself – fear.  It is hard to keep track with all the plagues and maladies that will be visited on this fair land if the people dare vote no in the referendum:  we will be isolated, we will be turned into Greece, hospitals and schools will close down, public sector workers won’t get paid, the elderly will have to beg for alms on the cathedral steps.

The Minister for Finance came out today threatening people with an even harsher budget if they dare vote no.  More tax increases, more spending cuts, more misery to redistribute.  People are not being invited to participate in a debate; they are being bludgeoned.  The Government has turned on its own people.  In such circumstances, debating the Treaty is redundant.

Therefore, there is no room for thoughtful contributions.  Take Seamus Coffey’s recent post.  Seamus is not anti-treaty:

I’m not advocating a ‘No’ vote, and in my opinion “there is little to be gained from rejecting the Treaty.”

Yet, he takes a forensic look at funding options and finds little evidence for the proposition that we will be denied access to a second bail-out in the eventuality of a No vote.  He first cites two statements issued by EU leaders.  The first was issued last July when the European Stability Mechanism was agreed at EU level:

‘We are determined to continue to provide support to countries under programmes until they have regained market access, provided they successfully implement those programmes. We welcome Ireland and Portugal's resolve to strictly implement their programmes and reiterate our strong commitment to the success of these programmes.’

This is unequivocal – support for Ireland will continue until we regained market access.  The only condition, naturally enough, is that we successfully implement ‘those programmes’ (never mind that implementing those programmes is actually pushing us away from regaining market access).

But of course, this was issued before the Fiscal Treaty and the clause that requires us to approve it before we can access the ESM.  That is why the subsequent guarantee is so important:

‘We welcome the latest positive reviews of the Irish and Portuguese programmes which concluded that quantitative performance criteria and structural benchmarks have been met. We will continue to provide support to countries under a programme until they have regained market access, provided they successfully implement their programmes.’

This was issued after the Fiscal Treaty – and the ESM clause – was approved at EU level.  Seamus comments:

‘That seems pretty unequivocal to me and this statement was released after the Stability Treaty was agreed and the so-called ‘blackmail’ clause had been introduced.   It has not been contradicted in any subsequent EU statements, and the applicability of the ‘blackmail’  clause to ‘new’ programmes does leave scope for the current Irish programme to be extended.’

This is crucial.  The ESM Treaty refers to ‘new’ financing.  This reference to ‘new’ means that the current programme can be extended and financed under the ESM itself – because it would not be regarded as ‘new’.  It is merely a continuation of support – support that the EU leaders have already guaranteed.

There is another twist to this – something which Tom McDonnell from TASC and myself addressed: that new, extended or ‘rolled-over’ financing can come from the European Financial Stability Facility up to July of next year.  This further underscores the EU leaders’ guarantee to Ireland.  The argument that the current programme runs out after the deadline for EFSF funding doesn’t stand up.  Greece’s second bail-out programme was introduced after the first one was cancelled before it was completed.  Deadlines, new programmes, cancelling old programmes – this is all part of the process to ensure that no Eurozone member is isolated.

In short, the Irish Government is the only the Government in the EU to claim that Ireland will be isolated. 

But I fear that Seamus’s arguments – like others who have tried to come to grips with this difficult issue – will not be heard in the cacophony of Ministerial threats upon the people.  Since debate is redundant, logical argument becomes a sideshow, an irrelevance, inconsequential. 

But the Government should be warned:  they may well succeed in scaring a portion of the electorate to act in a certain way in the short-term but if they count this as a ‘victory’, they may be severely disappointed.  A government that bludgeons its own people is living on borrowed time.  People will find a way to punish a government that harassed them into a position.

Just remember what happened to Fianna Fail when people finally got a chance to express their opinion at the ballot box.  The current Government may think it’s being tactically clever, but strategically they may be digging its own electoral grave.

Fiscal Treaty Files: Where Will We Get the Money if we Vote No

This following was written with Tom McDonnell, Policy Analyst and Economist with TASC. It originally appeared on Progressive-Economy.ie

In our first post, we outlined some of Ireland’s financing alternatives; namely through the IMF and the European Stability Mechanism. There is, however, a more compelling source of institutional funding in the eventuality of a No vote: the European Financial Stability Facility (EFSF).

The EFSF is one of four external sources of funding for the current Irish bail-out (along with the IMF, the European Financial Stabilisation Mechanism, and bi-lateral loan agreements with the UK, Sweden and Denmark). The EFSF remains a source of funding for all Eurozone countries until the middle of next year.

The EFSF stands apart from the ESM and the Fiscal Treaty. Ireland, and all countries who are members of the EFSF, has access to this fund as of right, depending on the following conditions:

• They cannot access funding at reasonable rates on the international markets
• They have negotiated a Memorandum of Understanding with the EU and the IMF

A further stipulation is unanimous consent from the Finance Ministers of the Eurozone (Eurogroup), which would follow on from an agreement with the EU/IMF. Applications for this funding can be made up to the end of June 2013. After that the EFSF will only administer funding that has already been agreed.

According to the recent Eurogroup statement (the Finance Ministers of Eurozone countries):

‘For a transitional period until mid-2013, it (the EFSF) may engage in new programmes in order to ensure a full fresh lending capacity of EUR 500 billion (for the ESM).’

This is confirmed by the EFSF itself which states:

‘ . . . following the Eurogroup meeting held on 30 March, it was decided that the EFSF would remain active until July 2013 . . . For a transitional period until 2013, EFSF may engage in new programmes in order to ensure a full fresh lending capacity of €500 billion . . . after June 2013, EFSF [will] not enter into any new programmes.’

Therefore, were Ireland to apply for a second bail-out prior to July 1st 2013, it would be granted if such an application were accompanied by a Memorandum of Understanding negotiated between Ireland, the EU and the IMF – similar to the first bail-out. This funding is not contingent upon the ratification of the Fiscal Treaty.

In all probability, funding for Ireland’s second bail-out – whether it approves the Fiscal Treaty or not – will be routed through the EFSF. The EFSF (the temporary bailout fund in place up to July 2013) and the ESM (permanent bailout mechanism) are different companies. The EFSF has €440 billion (see page 1 of the EFSF document) of which €192 billion already committed to Ireland, Portugal and Greece (see the diagram on page 20 of the EFSF document). The remaining lending capacity of the EFSF for programmes initiated before July 2013 is therefore €248 billion. The EFSF will remain in place to manage its existing programmes (see diagram on page 20 of the EFSF document) and any other new programmes approved prior to July 2013, until such time as all these programmes are all wound down.

The ESM itself has €500 billion and is scheduled to enter force on 1 July 2012. As stated above, the intention would be to ensure the ESM retains its full lending capacity of €500 billion. This no doubt refers to the prospect of larger countries, in particular Spain, needing a bail-out. The ESM would require full capacity to accommodate new countries’ need for a bail-out.

Ireland’s continuing access to institutional funding beyond the current bail-out programme has been guaranteed not once, but twice, by the Heads of States and Government; first, on July 21st of last year when the establishment of the European Stability Mechanism was agreed, and most recently on January 30th of this year – after the Fiscal Treaty was signed:

‘We welcome the latest positive reviews of the Irish and Portuguese programmes which concluded that quantitative performance criteria and structural benchmarks have been met. We will continue to provide support to countries under a programme until they have regained market access, provided they successfully implement their programmes.’

This is an important and helpful guarantee. There is no condition set on continued support until we return to the markets – except that we implement agreed programmes. If continued support were contingent upon acceptance of the Treaty, we should have expected it to be highlighted in this statement.

This helps explain another issue we highlighted in the first post. The drafters of the European Stability Mechanism Treaty inserted clauses that provide manoeuvrability in negotiations with any Eurozone country in need of financing, regardless of the Fiscal Treaty. In particular, they inserted references to ‘new programmes under the European Stability Mechanism’, a clause which would have been unnecessary if all financing under the ESM were strictly conditional on a yes vote. They have seemingly factored in a situation whereby a second bail-out for Ireland (and potentially Portugal and Greece) would constitute ‘rolled-over’ financing, rather than ‘new’ financing. This buttresses the guarantee given by the Heads of States and Governments – namely that Ireland will continue to be supported until we return to the markets.

This is an important debate as there is a high probability that Ireland will require a second bail-out. We are expected to return to the markets in late 2013 and fully by 2014. However, the IMF is cautious:

‘Debt sustainability remains fragile, especially with respect to medium-term growth prospects . . . In this context, the prospects for regaining the substantial access to market funding that is assumed in 2013 remain uncertain.’

Were a second bail-out required, we estimate that it could be as large as €45 billion and possibly more for the years 2014 and 2015, taking into account the Exchequer balance and bond redemptions. This does not include bank payments. While this is less than the current bail-out provision it is clear that Ireland, without access to either market or institutional funding, would not be able to cope with this fiscally. We would be heading into a default – quite possibly on both sovereign and banking debt. This would have negative spillover effects for other Eurozone countries.

We reiterate the point from our first post: there is no reason to resort to counter-posing ‘appalling scenarios’. Some argue that Ireland will be frozen out of both market and institutional funding if we vote No. Clearly, this would be an appalling scenario. Others argue that it would never come to this because of the impact on the Eurozone (defaults, contagion) – another appalling scenario.

This is not a satisfactory way to debate this issue. This will trap us in a ‘race-to-disaster’ debate which will be particularly uninformative. We have attempted to outline concrete alternative funding scenarios for Ireland. Whether these would become available is a subject for legitimate debate. However, those who claim that Ireland would be denied access to EFSF funding – or any other funding sources – should provide concrete evidence to this effect. Evidence one way or the other would be a valuable contribution.

The debate over the Fiscal Treaty should be just that – a debate about the provisions of the Treaty. In this respect, it is helpful to note wider European developments. Spain has, unsurprisingly, officially re-entered recession putting at risk their deficit targets; the prospect of a Socialist Party victory in the French second-round Presidential vote raises the prospect of some renegotiation of the Fiscal Treaty; the fall of the Dutch government over failure to agree budget cuts highlights the problems posed by the Fiscal Compact in a major core country.

As Ireland prepares for the referendum vote, the ground under the Fiscal Treaty may already be shifting. Resort to ‘appalling scenarios’ will only confuse the issue when the debate should be focused on whether the provisions of the Fiscal Treaty are good, or even sustainable, for Ireland and the Eurozone.

The Minister Speaks from Fantasy Island

Even when presented with cold hard reality, Government ministers refuse to acknowledge it, preferring to live in a fantasy island.  Spin is one thing, denial is another.

Take Lucinda Creighton on RTE’s This Week programme.  She was being interview with John Douglas, General Secretary of MANDATE on the issue of the Fiscal Treaty.  John was putting the case against the Treaty.  The Minister responded with arguments for a Yes vote. 

Minister:  ‘Since last year, 2011, the economy has returned to modest growth but nonetheless it has emerged from recession. ‘

RTE:  ‘Are you saying that we are out of recession?  But are we technically out of recession?  Surely that is open to dispute.

Minister:  ‘We have emerged . . . ‘

The Minister is clear:  we have emerged from recession and returned to modest growth.  Unfortunately for the Minister, the economic data shows just the opposite.

 

In the last two quarters of 2011 (the last period we have data for), the Irish economy contracted.  Two quarters of negative growth = recession.  In other words, we have entered a double-dip recession after two consecutive quarters of growth (in quarter 1 and quarter 2). 

Strike one against the Minister’s claim that we have ‘returned to growth’ and ‘emerged from the recession’.

 

If GDP figures are bad, quarterly GNP growth is even worse.  Not only did it fall in the last two quarters of last year, it fell in three out of the last four quarters at a faster rate than the fall in GDP.

Strike two, Minister.

 

Worst of all are the domestic demand figures.  In 16 quarters, domestic demand has only been north of zero in three quarters.  The last two quarters show a substantial decline – you’d have to go back to late 2009 to find a worst outturn.  This is not an economy emerging out of anything.

Strike three, Minister.

There is a larger point here than just that a Government Minister refuses to faces up to facts (and to be fair to Minister Creighton, all Ministers spin this same line).  The issue is more fundamental – how can we trust a Government that insists on describing the economy in a way that is completely at odds with the fact.  How can we trust this Government on the issues of the Fiscal Treaty which involves further austerity?  How can we trust a Government to describe adequately the impact of the Fiscal Treaty on the economy when it refuses to describe the economy as it currently exists?

This is not just spin gone ludicrous.  This goes to the heart of an open and honest debate about the Fiscal Treaty and the future of the Irish economy – a debate which the Government refuses to entertain.  The Minister referred to John Douglas's arguments against the Fiscal Treaty as 'fantasy' and went on to say:

‘We have to face up to reality.’

Yes, we do.  Unfortunately, Government ministers insist on delivering exhortations from their own fantasy island.  Meanwhile, the rest of us have to make do on this island - an island that has returned to recession.

Fiscal Treaty Files: The Fiscal Treaty is Unsafe, Uncertain and Unnecessary

The following is my presentation to the Dail Committee on European Affairs.

On behalf of UNITE the Union I would like to put forward seven points regarding the Fiscal Treaty.

1.            The Fiscal Treaty will require substantially more austerity measures in the medium-term.

The Government estimates the structural deficit will be 3.7 percent in 2015.  We will have to reduce this to 0.5 percent.  This could require fiscal adjustments of over €8 billion on top of the current fiscal consolidation schedule. Therefore, we could be looking into a doubling of the austerity measures the Government has planned over the next three years. 

This continued austerity could result in economic growth being cut by over 2 percent of nominal GDP.  This will reduce employment, drive up the Live Register, and cut wages and incomes.

2.            This Fiscal Treaty will depress growth in the Eurozone.  This will have an impact on our external demand.

Most Eurozone countries will have to undergo substantial fiscal consolidation to meet the Treaty’s targets.  The German Institute for Macroeconomic and Economic Research estimates that the effect of this will be to drive down Eurozone growth to a mere ½ percent average annual growth up to 2016, depending on the timing of the fiscal consolidation. 

It is essential, therefore, that the Government provide its own estimate of (a) the additional fiscal contraction to meet the structural deficit target, (b) the impact this will have on the domestic economy, and (c) the impact on our exports, from sustained fiscal consolidation in the Eurozone. 

3.            Even the Government regards the structural deficit as unrealistic. 

The structural deficit is a hypothetical.  It is derived, first, by comparing actual GDP with the hypothetical potential GDP.  From this the output gap is derived – another hypothetical.  Finally, to determine the structural deficit, a cyclical sensitivity measurement is applied – yet, again, a hypothetical.   The structural deficit rests on layers of hypothetical measurements inside a model with variables that cannot be observed in the real world.  This is why it is said that if you ask 10 economists to determine the structural deficit, you will get 20 different methodologies and forty different results.

Little wonder, then, that the Government has labelled the EU Commission’s method for measuring the structural deficit as ‘highly uncertain’ and ‘unrealistic’.  And for good reason.  The EU projects that by 2014, the Irish economy will actually be overheating, that we will back in a boom.  This is not only ‘unrealistic’, it is absurd. 

The government, however, should explain why it is calling upon people to give constitutional force to measurements and hypotheticals which the Government itself has dismissed as ‘highly uncertain’ and ‘unrealistic’.

4.            The Fiscal Treaty will limit the amount of counter-cyclical measures future Governments can employ during downturns. 

Let’s take the example of the Irish economy falling back into a recession later in this decade.  Under the Fiscal Treaty, we would be required to run primary surpluses – that is, a budget surplus excluding interest payments.  Given this constraint, it is unlikely that automatic stabilisers would be allowed to run their full course, never mind allow for pro-active fiscal measures to counter the downturn.

Nor should we rely on provisions for a ‘temporary’ departure in the eventuality of a ‘severe economic downturn’.  Look at Spain.  It is heading back into a full-blown depression; yet no temporary departure is being allowed.  The Treaty has little to do with a sustainable counter-cyclical macro-economic framework and all to do with self-defeating deficit reduction via deflationary fiscal adjustments. 

5.            The Fiscal Treaty will perpetuate instability in the Eurozone.

First, depressing economic growth during a period of stagnation will undermine confidence in an economy’s ability to generate the future revenue needed to repay its debts.  Again, witness Spain – increased austerity measures are only pushing it into, not away from, a bail-out as market confidence is drained.

Second, if a number of ‘temporary’ departures are granted out of necessity, combined with changes in structural deficit measurement so as to allow countries to more easily achieve targets, this will undermine confidence in the actual framework itself.  We witnessed this with the stress-testing on European banks.  Market investors had no confidence in these measurements and eventually the ECB was forced into an unprecedented release of €1 trillion to prevent the European banking system from freezing up.   If investors believe the Fiscal Compact is being similarly manipulated, the process will perpetuate the crisis.

Third the debt-reduction rule will lead to an unsustainably low level of Government debt – falling to levels of 20 percent of GDP or less.  Government debt provides a secure investment for financial institutions – in particular, pension funds.  If this is removed, such funds will be forced to introduce higher risks into their portfolios and may end up creating bubbles in equities and property.

6.            The Fiscal Treaty will undermine productive economic growth.

Let’s assume the Fiscal Treaty was in place at the start of the Irish economic boom.  Between 1990 and 1997, the Irish economy suffered from severe structural deficits –up to 10 times the threshold allowed under the Treaty.  However, during this period, the Government ran budget surpluses and reduced overall debt at a faster rate than required under the Fiscal Treaty.

However, in the period between 2000 and 2007, the Government ran structural balances and even surpluses.  Under the Fiscal Compact rules the Government could have increased public spending and/or cut taxes even further and still remained compliant.  We know the outcome of that.

This clearly shows the incongruity of the Fiscal Compact rules.  During a period of productive economic growth, the Treaty would have depressed growth and employment.  However, this same Treaty would have validated an economy which was over-heating on speculative growth. 

7.            Regardless of a Yes or No Vote, Ireland has guaranteed access to institutional funding

First, the main source of future institutional funding is the programme we are currently in – the European Financial Stability Facility.  Ireland has until July 2013 to make application for a further round of funding.  This legal right to this funding is guaranteed by intergovernmental agreement and reaffirmed by the Heads of Eurozone governments only a few weeks ago when they stated Ireland would remain funded until we return to the market.

Second, though Ireland has exceeded its quota of financing under IMF rules, we comply with all four conditions for an exceptional waiver.  This would clear the way for a second round of funding from the IMF.

Third, the drafters of the European Stability Mechanism Treaty wisely inserted clauses that provide manoeuvrability in negotiations with any Eurozone country in need of financing, regardless of the Fiscal Treaty.  In particular, they inserted references to ‘new’ financing under the ESM, which would have been unnecessary if all financing under the ESM were strictly conditional on a yes vote.  Clearly, they factored in a situation whereby a second bail-out for Ireland would constitute ‘rolled-over’ financing, rather than ‘new’ financing. 

For these reasons – and the obvious one:  namely that European governments are not going to risk the financial stability of the Eurozone by isolating any member-state from both market and institutional funding (for this would contain incalculable contagion effect, even the hint that this might happen would have severe destabilising consequences); for these combined reasons the doubt is not whether Ireland will continue to access institutional funding. 

The doubt is whether we can avoid a second bail-out under the current deflationary policies that the Government is pursuing.  In this regard, the signs are not good.

Thank you.

The Regressive Season

Following on from the Household Charge debacle the Government intends to introduce (a) water meter installation charges, (b) water metering charges, (c) residential property charges.  This is a heavy agenda of new charges and taxes.  Here I just want to explore how ‘fair’ these charges and taxes are likely to be, with what little information we have at hand.  By ‘fair’, I mean how progressive they are likely to be.  Early indications are that they will not be progressive, that they will disproportionately hit those on low and average incomes. 

Regressive taxation seems to be all the rage these days.  Let’s look at the last two budgets. 

 

Regressive taxation made up approximately two-thirds of all taxation raised.  In Budget 2011, regressive taxes include reduction in personal tax credits, the Universal Social Charge and excise taxes.  I have also included the reduction of the standard rate tax band; though the low-paid weren’t affected by this, it had a disproportionate impact on average income earners.  In Budget 2012, regressive measures included the VAT rise, household charge and carbon taxes (while the latter has positive environmental benefits, the ESRI called for social welfare increases alongside carbon tax increases – which didn’t happen).

So what can we expect from water metering charges and property taxes?

Water Charges

User charges for universal services (water, refuse, etc.) are, by their very nature, regressive unless there is some mitigating instrument.  Here are two pieces of evidence.  The first is the impact of refuse charges which is a universal service.

 

According to the Household Budget Surveys – from 2005 and 2010 – refuse charges were more of a burden among the lowest income groups.  One small caveat: the 2010 HBS includes ‘skip hire’ in refuse charges.  This is not likely to have substantially altered the numbers.  Both surveys show that the lowest income groups paid five times more than the highest income groups. 

What can we expect from water charges?  Here’s some numbers from the comprehensive OECD study on the distributional impact of water charges:

 

The impact of water charges is deeply regressive.  In the case of Netherlands, the ratio is between the top and bottom 20 percent – which probably under-estimates the regressive impact between the top and bottom deciles. 

The Government will no doubt claim that the ‘free water allowance’ will help ameliorate this regressive impact.   It might, but if the experience of the Flanders-type free allowance scheme is any guide (Table 3.1 as shown in the report), the ratio of ‘rich-poor’ water bills will shrink only slightly. 

The impact of water charges will be regressive.  How regressive will depend on the design of the scheme.  Not every tax need be progressive.  For instance, the Exchequer’s biggest earner is VAT – one of the more regressive taxes.  One has to look at the total tax package. 

But one also has to examine the context.  After two highly regressive tax budgets, with real wages falling and no signal that social protection rates will be increased in the near future, with unemployment high and households deeply in debt – to impose a tax/charge that disproportionately hits low/average income earners will contribute to further stagnation and social inequity.

Residential Property Taxation

Property taxation, by its very nature, should be progressive.  There is a relationship between property and income – although this can be uneven.  But again much depends on the design of the tax and, here, we find a problem.  For not all property will be taxed.  Only housing assets will be taxed; financial assets or property will be exempt.  Given that financial property (cash, equity, pension/insurance reserves) make up between 40 and 50 percent of all property in the state; and given that most financial property is held by the top income groups – to exempt financial property already begins to skewer the new property tax regime in favour of high earners.

That being said, would a residential property tax regime be progressive?  The evidence is mixed.  Let’s look at the distributional impact of the ESRI’s property tax model. The ESRI designed a property tax based on the following:

• Income earners below €15,000 are exempt
• The rebate is withdrawn at the rate of 20 cent in the euro on income above the exemption limit – thus the “rebate withdrawal rate” or “marginal relief rate” is 20 per cent.
• Property is taxed at 0.4 percent of market value

So how will it impact on different income groups?

 

There is a progressivity of sorts – but only of sorts.  The lowest 30 percent of households are effectively exempt.  However, once households absorb the full impact of the property tax, the 6^th to 9^th households experience a higher take than the highest 10 percent earners.  Indeed, it is the 8^th decile that suffers the highest take of all.  While the ESRI uses an equivalised income scale (taking into account adults and children in the household) according to the latest CSO Income and Living Conditions survey (2010), the average disposable income in the 8^th decile is €55,000 per year for an average of 3 people in the house.  This is hardly ‘rich’.

But there’s another way to measure this – the property tax as a percentage of discretionary disposable income.  What this takes into account is the cost of food, housing and light & fuel.  These are relatively fixed costs which households have little influence over.  Using the Household Budget Survey’s data on these costs and disposable income, a more concerning picture emerges:

 

From the 4^th decile onwards, the property tax could hardly be called ‘progressive’.  The highest earners pay the lowest level of tax.

We have to be careful about this calculation.  There is a bit of apples and oranges about this as the ESRI bases its impact on their SWITCH model using equivalised income whereas the above uses the Household Budget Survey.

So while this should be seen as indicative only, it should be noted that I have only included a limited amount of necessary expenditure.  It excludes things like clothing and footwear, personal hygiene, non-durables, transport etc.

* * *

None of this should be taken as grounds for opposing a property tax or even water metering charges (though the latter is particularly problematic).  What this emphasises is both the design of such taxes; and just as important, data on the impact of households.  Just asserting that a property tax is ‘progressive’ or that a free water allowance will ‘protect the lowest incomes’ is simply not good enough.  There needs to be concrete analysis based on comprehensive surveys.  This is all do-able if the Government wants to do this.

So for opposition TDs and backbench Labour TDs who are concerned with equity and economic efficiency, it is imperative that they demand of Government an evidence-based policy. Until the evidence is presented, property taxes and water-metering charging should be opposed. 

For the last thing the economy needs is more inefficient and socially inequitable taxation.

Welcome to the Inequality Cycle

This was originally written for Progressive-Economy.ie

We are now starting to get data to assess just who in society is getting hit and who is getting by.  Of course, we know about unemployment rates, deprivation rates, and income inequality rates.  But the CSO’s 2010 Survey of Income and Living Conditions gives us an insight as to who has lost how much in the first two years of the crisis, namely 2009 and 2010.  Let’s take a particular look at three deciles – the lowest, the highest and the middle 6^th decile.

First, what levels of income are we discussing within these groups?

• The lowest decile includes households with gross incomes of less than €13,249 or less; or approximately €10,000 per adult in the household.

• The middle decile includes households with gross incomes between €37, 467 and €46,561; or approximately between €18,000 and €21,000 per adult in the household.  (Question:  is this the squeezed middle that the Irish Times series was recently chronicling?).

• The average for the highest household is a gross income of over €171,000; or approximately €62,000 per adult in the household. 

For the lowest decile, income levels are extremely low while in the middle decile, incomes are extremely modest.  Incomes at the higher level are in another place altogether.

Now, let’s look at disposable income – that is, income after tax.

Nationally, weekly income fell by nearly 12 percent on average.  However, as seen the worst hit were those who could least afford it , with the lowest 10 percent income earners experiencing a fall of over 20 percent.  The next biggest decline is found in the middle 6^th decile.  All deciles experienced a fall in double digits with one exception:  the highest earners pretty much escaped the impact of the recession.

However, the story is a little more complicated. 

In 2009, the lowest decile experienced a minimal impact.  It was the middle decile that took the biggest hit with the highest income earners also experiencing a significant decline. However, the picture changed in 2010.  The lowest income groups experienced substantial income decline – in this year social transfers were cut.  The middle income group suffered further decline.  However, the highest income groups returned to growth.

The SILC data shows that income inequality experienced a large rise in 2010, rising from a ratio of 4.3 to 5.5 (the ratio of the income of the top 20 percent to the bottom 20 percent).  This was the biggest single year jump in income inequality experienced in any country since the EU started recording this data.  In 2010, Ireland ranked 9^th in the EU-27 for income inequality.

These trends are likely to continue and may even accelerate.  The 2011 budget saw further cuts in social transfers combined with highly regressive tax measures (the USC and the reduction in personal tax credits).  The 2012 budget – which the ESRI described as the most regressive of all budgets introduced since the crisis began – will further exacerbate this.

So we have a new cycle to discuss – alongside the deflationary cycle, the debt cycle and the long-term unemployment cycle:  the inequality cycle.  And this is likely to be as vicious and socially degrading as the others.

Technical Recession on Lollypop Lane

The headline reads: ‘GDP rises for first time in four years’.  Well, that’s good news. The report goes on:

‘The Irish economy grew in 2011 . . . according to figures released yesterday by the Central Statistics Office. This was the first time since 2007 that GDP grew over the course of a full year.  GDP in 2011 was 0.7 per cent higher than in 2010. This was half the average rate recorded across the euro area as a whole, where GDP growth stood at 1.4 per cent.  The Irish rate of growth was higher than the weaker southern European economies, but well below the stronger economies of northern Europe.’

Ok, could do better.  But after years of brutal austerity and unprecedented bank debt, the little engine that is Ireland is still doing better than other peripheral countries.  Take that Greece, take that Portugal. 

The report goes on though.  GNP measure – not all that good; domestic demand measure – really not all that good.  And then, well down in the story, in the seventh paragraph comes the bucket of water:

‘GDP contracted in both the third and final quarters, by 1.1 and 0.2 per cent respectively. Two consecutive quarters of contracting GDP is the standard definition of an economy being in recession.’

I like that – by the standard definition we are in recession.  By standard definition, you are unemployed (‘wow, so that's why I don't have a job’); by standard definition you are in poverty (‘hey, squire, got change for the bus’); by standard definition you have emigrated (‘I wondered why everyone was talking Dutch’). 

The adjectives and metaphors come flying: ‘technical recession’ and ‘an economy of two halves’ – the latter referring to the fact that the economy grew in the first two quarters only to decline in the last two quarters.

Let’s look at the larger picture.  Irish economic data, always an Alice-in-Wonderland affair with multi-national exports, profit-booking, transfer pricing and profit repatriation, still manages to tell the persistent story – a domestic slump that is continuing.

• Consumer spending fell by nearly 3 percent in 2011 – a much faster rate than the previous year

• Investment fell by nearly 11 percent – a slower rate than previous years but that’s only because it’s hard to see how investment could fall much further without completely disappearing (our investment rate is about half the Eurozone average)

• Government cuts in public services is still taking a toll on the economy

Some commentary has pointed to the slow-down in exports – to explain this ‘economy of two halves’.  Yet exports were higher – in both nominal and real terms – in the second half of the year than the first half.  Ditto for net exports (exports minus imports).  No, it’s not the export performance that has driven us into the standard definition of recession. 

After flat-lining for three quarters starting in late 2010, the decline in domestic demand resumed.  There can be many explanations but a major one is Fianna Fai’s last budget.  Did anyone think that taking €6 billion out of the economy in regressive tax increases and spending cuts would have no effect on the domestic economy?  Maybe it has no impact in Happy Land where we all live in gumdrop houses on Lollypop Lane.  But in the real world it does have an impact – an inevitable negative one.

In fact, the decline in domestic demand in the latter half of last year was the biggest two-quarter fall since late 2009. 

So what can we expect in the short-term, given the last budget which continued regressive tax increases and spending cuts?  Here we have to look at runes:

• Consumer spending:  the Retail Sales Index fell in January this year by the biggest monthly amount since January 2010

• Employment:  the picture is mixed.  There was a welcome increase in employment in the last quarter of 20l11 (though the jobless total still rose).  However, the Department of Social Protection recorded a huge spike in redundancy notices in December 2011 – nearly 7,000.  This was 70 percent higher than the previous 11 months.  So it remains to be seen whether the employment increase recorded in the last quarter will be sustained.

• Exports:  January figures for goods exports look positive – a 9 percent increase on the previous month, seasonally adjusted.  The latest manufacturing PMI (Purchasing Manager Index) still remains in negative territory, however.  The latest services PMI shows positive growth but still shows service companies shedding jobs. 

Business insolvencies are still rising.  Insolvency.ie reports that business insolvencies are up in the first two months of 2012 – 20 percent higher than the same period last year. 

And we know that the Government will still continue to cut public services, though at a less brutal pace than the previous Government.  This will continue to put downward pressure on economic growth.

So heading into 2012, the picture is mixed but in all likelihood we will continue to see a drain on domestic demand, partially compensated by exports – and potentially jobless export growth.

In all this we can only hope that Ministers will start an open and honest dialogue with people.  We need less ‘we’re marching towards recovery’ and ‘the economy is ready to take off’.  The fact is we’re, at best, flat-lining with data suggesting we still have a ways to go before domestic demand bottoms out. 

After all, we’re back in recession – however technical.

Ireland's Funding Options: Time to End the 'Race-to-Disaster' Debate

This post was co-written with Tom McDonnell, Economic Policy Analyst with TASC. This originally appeared on Progressie-Economy.ie

Even before the wording has been published and a referendum date named there is one issue that looks set to dominate the debate over the Fiscal Treaty; namely, what future financing options does Ireland have in the eventuality of a ‘No’ vote.  While we are not taking a position on the substantive issue in this post, the following is intended to aid the debate by helping to answer that question.

The ‘Indispensable’ Condition

First, regardless of the Treaty vote, Ireland is guaranteed funding under the current programme – as long as it meets its targets.  A Yes or No vote will not change this.

In the event of a No vote with Ireland unable to fully return to the markets, what would the situation be? 

‘ . . . the granting of assistance in the framework of new programmes under the European Stability Mechanism will be conditional, as of 1 March 2013, on the ratification of this Treaty by the Contracting Party.’

This clearly states that new financing under the European Stability Mechanism is contingent upon ratification of the Treaty.  However, we would put the following points that suggest that the issue contains potentially significant ambiguity.

First, the text of the European Stability Mechanism Treaty states that there are two conditions for providing support for ESM members:

‘The purpose of the ESM shall be to mobilise funding and provide stability support under strict conditionality, appropriate to the financial assistance instrument chosen, to the benefit of ESM Members which are experiencing, or are threatened by, severe financing problems, if indispensable to safeguard the financial stability of the euro area as a whole and of its Member States.’

The two conditions for support under the ESM appear to be (a) a member-state requires assistance, and (b) such assistance is ‘indispensable’ to the stability of Euro area.  The indispensable clause, not surprisingly, is stated four times in the ESM treaty; unsurprising as this is the purpose of the ESM – to safeguard the Eurozone’s stability. 

For argument’s sake, let’s assume Ireland – a member of the ESM but having voted No in the referendum – is in demonstrable need of financial assistance; and further, it can be objectively established that without such assistance, there is a threat to Eurozone stability (issues of both state and bank default which may arise if assistance isn’t forthcoming).  A literalist reading of the Fiscal Treaty would seem to settle the issue – Ireland, if voting No, would be excluded from the fund.  But how final is this literalism?

‘Indispensable’ to the financial stability of the Euro area does not become less indispensable merely because Ireland, an ESM member, has not incorporated rules (rules that it has already agreed to) into its constitution through a process unique in the Eurozone – that is, a popular referendum.  It is difficult to imagine a situation where the financial stability of the Eurozone (and Eurozone countries from Spain to Germany) is at risk and the resolution of that risk is barred because of a referendum result in a member-state.  This would effectively undermine the intent of the ESM and its ability to respond to financial risks in the Eurozone.

What this crisis has shown is the flexibility of the Eurozone and EU institutions to respond to the crisis, whether we agree with the policies or not.  For instance, the European Central Bank is legally barred from acting as a lender of last resort to sovereign states.  But that did not stop it from, first, participating in the secondary bond markets and, second, from providing over €1 trillion in liquidity to European banks through their Long-Term Refinancing Operations (LTROs). The LTRO was intended to indirectly ease pressure on Spanish and Italian bond yields and was effectively a roundabout method of overcoming the bar to lend to sovereign states.  Both of these were innovative and flexible responses.  This resort to flexibility has implications for Ireland in the event of a No vote.

The Fiscal Compact refers to ‘new programmes under the European Stability Mechanism’.  The ‘new’ may provide some flexibility, especially if Ireland is unable to re-enter the market and seeks a continuation of the current programme.  This could be buttressed by the statement by the EU Heads of State or Government in July of last year.  This, too, is definitive:

‘We are determined to continue to provide support to countries under programmes until they have regained market access, provided they successfully implement those programmes.’

Minister Michael Noonan confirmed this after the summit:

'There is a commitment that if countries continue to fulfil the conditions of their programme the European authorities will continue to supply them with money even when the programme is concluded . . . The commitment is now written in that if we are not back in the markets the European authorities will give us money until we get back in the markets.’

That both the EU leaders commitment and the Minister’s statement followed on from agreement to establish the ESM – with the same clause that disbursement of funds is based on the same ‘indispensability’ condition referred to above – suggests that there is considerable room for all sides to manoeuvre, even in the eventuality of a No vote.  We are not suggesting that this is a definitive outcome.  However, resort to a literal reading could lead us to the conclusion that Ireland, even if voted Yes, could be denied funding under the ESM if it was concluded at EU level that assistance was not indispensable to Eurozone stability.  We seriously doubt this scenario which is why literal readings of one section of one treaty can lead us to unjustified conclusions.  This holds when discussing the outcomes of either a Yes or No vote.

Alternative Sources of Funding

Regardless of the above, there is a credible argument that Ireland, in the eventuality that it needs a second bailout, has access to funding sources apart from the ESM; namely the IMF.  This is the same ‘insurance’ or ‘back-stop’ that all EU countries are entitled to as members of the IMF.   More EU countries have accessed IMF support than EU support in the last decade:  Latvia, Lithuania, Poland, Bulgaria, Romania, Hungary, and Estonia. 

The IMF programmes have recently undergone considerable reform in order to tailor support for the specific need of a country.  Further support from the IMF does not necessarily have to come via the Extended Facility that Ireland currently participates in.  Some of these programmes may even be more suitable to the Irish economy than an ESM programme modelled on the current one.  This is because IMF programmes can provide credit lines on a precautionary basis.  In these circumstances, Ireland may be able to enter the market even on a partial basis but have recourse to the IMF if and when further support is needed.  A particular strength of some of these programmes is that Ireland may not have to draw down any funds (though it would make a ‘down-payment’ to participate in the particular programme). 

There is a range of programmes that Ireland may be able to avail of:

Stand-by Arrangements with high-access precautionary provisions.  The IMF describes this as its ‘workhorse lending instrument’.

The Flexible Credit Scheme which does not carry with it any conditions (and which the IMF claims ‘reduces the perceived stigma of borrowing from the IMF’.

The Precautionary and Liquidity Line is another line of support which provides finance and, according to the IMF, ‘is intended to serve as insurance and help resolve crises’.

Rapid Financing Instrument provides a quick response to an outside shock – including economic shocks. 

These programmes are separate from the current Extended Facility programme we are in.  Some have conditions attached to them; one does not (the Flexible Credit Scheme).  They have a range of participating and payback periods, with provision for roll-over.  We are not suggesting that Ireland would comply with all of the above; however, it shows the considerable potential sources of funding.  There are two issues that might arise in considering these alternatives. 

First, will Ireland be eligible for future financing?  IMF financing is based on quotas assigned to each country with programmes laying down specific amounts that can be lent.  However, all the programmes have exceptional access policy whereby limits are waived – with the exception of the Flexible Credit Line which, in any event, has no cap on funding.

In fact, for many countries there is a natural progression from the type of IMF funding Ireland is currently in (an Extended programme) to the programmes listed above. Poland is an example which started out in an Extended Programme, progressed to a Standby Arrangement and is now in a Flexible Credit Line which has no conditions attached.  Ireland could make a similar progression.

Second, it has been suggested that the IMF actually regards Ireland as a high-risk country and may, therefore, refuse to lend further.  In the first instance this would certainly be curious.  To date, Ireland has abided by the programme that the IMF itself helped design (it’s fairly typical of IMF extended facilities).  If the IMF suddenly claimed Ireland was too risky, this would be tantamount to an admission of their own failure.  Would Ireland be penalised by the IMF for adhering to a programme that the IMF helped designed?  

There is a strong argument that Ireland fulfils all four criteria for an ‘exceptional access’:

(a)          The member is experiencing or has the potential to experience  pressures resulting in a need for Fund financing that cannot be met within the normal limits.

(b)          There is a high probability that the member’s public debt is sustainable in the medium term. However, in instances where there are significant uncertainties that make it difficult to state categorically that there is a high probability that the debt is sustainable over this period, exceptional access would be justified if there is a high risk of international systemic spillovers.

(c)           The member has prospects of gaining or regaining access to private capital markets within the timeframe when Fund resources are outstanding.

(d)          The policy program of the member provides a reasonably strong prospect of success, including not only the member’s adjustment plans but also its institutional and political capacity to deliver that adjustment.

We would draw attention to the condition in (b); in particular where exceptional access is justified if there is a high risk of international ‘spillovers’.  There is a strong argument that Ireland is in such a situation.  That the IMF participated in the current bail-out, despite the staff country report in December 2010 stating that Ireland would entail ‘substantial risks’, only confirms their determination to participate in programmes where the risks of spillovers are significant. 

Another issue is the scale to which Ireland has already borrowed from the IMF.  Currently, Ireland is the third largest debtor to the IMF – behind Greece and Portugal.  Poland has a similar level of contingent debt, while Mexico is much higher – though these countries are in the Flexible Credit Line have not drawn down funds.  There is a limit to which a country can borrow – even if complying with the provisions of the exceptional access.  The IMF has lent a considerable amount to EU countries already and while it still retains considerable reserves, and while further precautionary lending to EU countries would not impact unduly, the possibility of larger countries needing assistance (Spain, Italy) could squeeze available funds to Ireland. 

Taking all of the above on board, that the IMF has decided to extend its assistance to Greece in the form of a second bail-out suggests that Ireland would be a credible candidate for further support if it cannot access the international markets.  If so, this could be a viable alternative to ESM funding. 

Appalling Scenarios and a Legitimate Debate

None of the above can be certain.  But that is no reason to resort to counter-posing ‘appalling scenarios’.  Some argue that Ireland will be frozen out of both market and institutional funding if we vote No. Clearly, this would be an appalling scenario.  Others argue that it would never come to this because of the impact on the Eurozone (defaults, contagion) – another appalling scenario.

This is not a satisfactory way to debate this issue.  This will trap us in a ‘race-to-disaster’ debate which will be particularly uninformative. We have attempted to outline concrete scenarios for Ireland apart from the ESM.  Whether these would become available is a subject for legitimate debate.  The fact that Ireland may have a secure safety net with IMF funding is likely to induce cooperative, if ad hoc, relationships with the EU.  Competing disaster scenarios will only undermine our understanding of these difficult issues.

In one respect, debating non-market funding has an air of unreality about it – if we are to heed the Government’s dismissal of a second bail-out as ‘ludicrous’.  The fact that this issue is being taken seriously is a testament to the common sense of the debate.  While we respect the fact that no Government will intentionally play down the prospect of being able to borrow on the international markets, in our own opinion a second bail-out is a real and probable outcome of current policies.

And this is not in the best interests of the Irish economy, whether that support comes from the IMF, the EU’s ESM , some other ad hoc EU support or any combination of these. 

The Fiscal Treaty Files: Cleaning Up the Debate

This was originally written for Progressive-Economy.ie

In Saturday’s Irish Times Stephen Collins wrote: 

 ‘Far from outlawing Keynesian economics, what the treaty seeks to do is to put an end to the kind of populist and inept fiscal policies that brought Ireland to the brink of ruin. The treaty on its own won’t achieve that objective but it should at least make it more difficult for politicians to behave irresponsibly in the future – and that can only be a good thing.’

Eoin O'Broin has already pointed out the many flaws in Collins’ piece. Here I just want to examine one point – namely, whether the Fiscal Compact would have either ended ‘populist and inept fiscal policies’ or ‘make it more difficult’ to pursue such policies; and to do so from the EU Commission’s perspective. 

Collins is no doubt referring to the structural deficit rule whereby, regardless of a Government’s General Deficit, it must maintain a structural deficit of -0.5 percent or less (-1 percent for countries with a general debt of 60 percent or less).  There is also an assumption that the Government’s fiscal policy during the speculative boom period, while in compliance with the Maastricht guidelines, was running structural deficits.  If so, this would have inevitably led to a mismatch between revenue and expenditure, as the former would have been bloated by the property bubble. 

Therefore, Collins assumes that had the Fiscal Treaty been in place during that period, it would have first, exposed this structural defect and, secondly, required the Government to repair it.

All of this is mistaken - at least according to the EU Commission (see Note at end of post).

According to the EU Commission, Irish Governments ran, on average, both general and structural surpluses, not deficits.   The above estimates come from the latest EU Commission forecasts – not the ones made prior to the recession.

Had the Fiscal Treaty been in place during that period, Ireland would have been allowed a structural deficit of -1 percent since we had a general debt of less than 60 percent of GDP.  But only twice during the 8-year period did Irish budgets run afoul of the structural deficit rule – and in 2003 it was quickly transformed into a surplus.

So according to the EU Commission Ireland’s fiscal performance during the period up to the recession was fiscally responsible.   Had the Fiscal Treaty been in situ it would have made no difference whatsoever to Irish budgetary policy.  Indeed, the ‘inept fiscal policies’ that brought us to ruin would have been vindicated by the Fiscal Treaty. 

This should, of course, lead to questions as to how one can trust this type of formulation since the EU Commission completely missed the speculative bubble in the Irish economy.  And it was a big bubble to miss.  Even years after the fact the EU Commission insists that Irish budgets were fundamentally sound and the economy was performing normally. 

Collins could have brought this easily accessible information to his readers’ attention and pointed out, whether one supports or opposes the Treaty, that these measurements are suspect, to put it mildly.  He could have also brought to his readers’ attention the Government’s own verdict on the EU Commission’s methodology for calculating the structural deficit – namely that it is ‘highly uncertain’ and ‘unrealistic’.  He didn’t.

Instead, he made an assertion that is wholly unsupported by the evidence. 

Unfortunately, we are likely to get a lot of that during the debate.  Therefore, it is imperative when such unfounded assertions are made in the debate, they are quickly challenged.

On this score, we can only hope that the statement that the Fiscal Treaty would have prevented or modified the budgetary policies prior to the recession is never repeated again.

NOTE:  2001 and 2002 structural deficit estimates come from the Spring 2010 EU Commission estimates as they were not available in the current estimate. 

 

In Saturday’s Irish Times Stephen Collins wrote: 

 ‘Far from outlawing Keynesian economics, what the treaty seeks to do is to put an end to the kind of populist and inept fiscal policies that brought Ireland to the brink of ruin. The treaty on its own won’t achieve that objective but it should at least make it more difficult for politicians to behave irresponsibly in the future – and that can only be a good thing.’

Eoin O'Broin has already pointed out the many flaws in Collins’ piece. Here I just want to examine one point – namely, whether the Fiscal Compact would have either ended ‘populist and inept fiscal policies’ or ‘make it more difficult’ to pursue such policies; and to do so from the EU Commission’s perspective. 

Collins is no doubt referring to the structural deficit rule whereby, regardless of a Government’s General Deficit, it must maintain a structural deficit of -0.5 percent or less (-1 percent for countries with a general debt of 60 percent or less).  There is also an assumption that the Government’s fiscal policy during the speculative boom period, while in compliance with the Maastricht guidelines, was running structural deficits.  If so, this would have inevitably led to a mismatch between revenue and expenditure, as the former would have been bloated by the property bubble. 

Therefore, Collins assumes that had the Fiscal Treaty been in place during that period, it would have first, exposed this structural defect and, secondly, required the Government to repair it.

All of this is mistaken - at least according to the EU Commission (see Note at end of post).

Ireland General and Structural Deficits 2000 – 2007
	2000	2001	2002	2003	2004	2005	2006	2007	Average
General Deficit	4.7	0.9	-0.3	0.4	1.4	1.7	2.9	0.1	1.5
Structural Deficit	2.4	0.2	1.5	0.1	1.2	1.3	2.2	-1.4	0.5

 

According to the EU Commission, Irish Governments ran, on average, both general and structural surpluses, not deficits.   The above estimates come from the latest EU Commission forecasts – not the ones made prior to the recession.

Had the Fiscal Treaty been in place during that period, Ireland would have been allowed a structural deficit of -1 percent since we had a general debt of less than 60 percent of GDP.  But only twice during the 8-year period did Irish budgets run afoul of the structural deficit rule – and in 2003 it was quickly transformed into a surplus.

So according to the EU Commission Ireland’s fiscal performance during the period up to the recession was fiscally responsible.   Had the Fiscal Treaty been in situ it would have made no difference whatsoever to Irish budgetary policy.  Indeed, the ‘inept fiscal policies’ that brought us to ruin would have been vindicated by the Fiscal Treaty. 

This should, of course, lead to questions as to how one can trust this type of formulation since the EU Commission completely missed the speculative bubble in the Irish economy.  And it was a big bubble to miss.  Even years after the fact the EU Commission insists that Irish budgets were fundamentally sound and the economy was performing normally. 

Collins could have brought this easily accessible information to his readers’ attention and pointed out, whether one supports or opposes the Treaty, that these measurements are suspect, to put it mildly.  He could have also brought to his readers’ attention the Government’s own verdict on the EU Commission’s methodology for calculating the structural deficit – namely that it is ‘highly uncertain’ and ‘unrealistic’.  He didn’t.

Instead, he made an assertion that is wholly unsupported by the evidence. 

Unfortunately, we are likely to get a lot of that during the debate.  Therefore, it is imperative when such unfounded assertions are made in the debate, they are quickly challenged.

On this score, we can only hope that the statement that the Fiscal Treaty would have prevented or modified the budgetary policies prior to the recession is never repeated again.

NOTE:  2001 and 2002 structural deficit estimates come from the Spring 2010 EU Commission estimates as they were not available in the current estimate. 

Fiscal Treaty Files: The First Question is How Much It will Cost

The very first question that should be answered is how much more austerity the passage of the Fiscal Treaty will mean.   After all, this is a ‘fiscal’ treaty.  It is intended to have an impact on Government budgets.  So the first question should be: what fiscal impact will this fiscal treaty have on Ireland’s fiscal policy.

Answers such as ‘oh, this treaty is about growth, jobs, stability,’ etc. etc.  are not acceptable.  The particular question here is how much more austerity.  It is an issue that can be measured (insofar as measuring structural deficits can be considered reliable).  Let’s see if we can come up with some kind of answer.

By 2015 the Government estimates that the structural deficit will be 3.7 percent of GDP.  The Treaty stipulates a target of 0.5 percent.  That means the Government will have to reduce the deficit by another 3.2 percent. 

In money terms, that amounts to a gap of €5.7 billion in 2015. This need not be addressed in the period up to 2015.  But it would have to be addressed afterwards – meaning at least another two to three years of austerity budgets.

Now here’s where it gets a bit more difficult. 

Even the Government doubts this structural deficit figure of 3.7 percent, because it is based on (in their words) an ‘unrealistic’ scenario and is 'highly uncertain'.  So maybe it will be less.  However, it could be more. 

When we turn to the IMF we get another, more benign estimate.  They claim that the structural deficit will be 2.3 percent by 2015.  That’s significantly less than the Government estimates and indicates that the amount of austerity needed to bring us to the Fiscal Treaty target might not be as much as indicated by the Government.  But there’s a little catch here (besides the obvious – how do you determine policy on a measurement that produces such varying results).

The IMF estimates continue to 2017.  They assume there will be no austerity in 2016 and 2017, since the Government hasn’t announced any.  As a result, the IMF projects little change in Ireland’s structural deficit in 2017 (2.1 percent). 

And when we look at the impact of austerity between 2011 and 2015, we find an interesting ratio:  €1 billion in spending cuts/tax increases coincided with a reduction of the structural deficit by €500 million.  This is not necessarily a cause and effect – much depends on other elements in this ‘abstract’ calculation (potential GDP growth, output gap, etc.).  But let’s run with this ratio.

If applied to the IMF estimate, we may be looking into approximately €5.9 billion in austerity measures after 2015 to reduce the structural deficit to 0.5 percent.  This corresponds with the Department of Finances’ gap of €5.7 billion.

So on the basis of two measurements produced by two agencies we come up with nearly €6 billion in more austerity measures.

Of course, the Government can easily provide its own estimate.  There is no doubt that they are working the numbers now if they haven’t come up with a figure already.  It would be bizarre if they weren’t. 

Industrious TDs should start putting down questions to the Minister – even as a public information service.

Or the Government could produce the numbers when they publish their Stability Programme Update in April – since they would be estimating the structural deficit anyway in this document. 

So while there are many questions to be asked and answered during this campaign, let’s start with the cost.  What is the fiscal impact on Ireland’s fiscal policy – after all, it is a ‘Fiscal’ Treaty.

It deserves to be answered.  And if Government Ministers refuse to answer . . . well, you can draw your own conclusions.

The Fiscal Treaty Files: What the Government Really Thinks About What's in the Treaty

A kind of surprising question, you might think.  Sure, they’re the ones who negotiated it, signed it and now asking people to vote for it.  They must think it’s great.  Yet they publish documents criticising one of the main elements in the Treaty; namely, the structural deficit.  In short, the Government’s position is: ‘these are bad measurements, now please put them into the constitution.’

The structural deficit attempts to tell us how much of the deficit is cyclical (or will disappear when the economy returns to full growth) and how much is structural (will remain with us even after the economy returns to full growth).   A structural deficit means the Government must take action – it must raise taxes, cut spending or do a bit of both to get rid of the structural bit.

It does this by estimating the gap between our actual growth rate and our potential growth rate – this is called the output.  The potential growth rate is estimated on the basis of what our growth rate would look like if we were fully utilising all our capacity (capital, labour, production, etc.).  The higher the gap between the two, the lower the structural deficit; the lower the gap, the higher the structural deficit.  Ok, a bit abbreviated but that’s the gist. 

You can immediately see the problems:  both the structural deficit and the ‘output gap’ are artificial measurements.  You can’t actually measure these, you have to estimate them.  Nothing in principle wrong with that - but not the stuff you’d lay a bet in the bookies.  Indeed, Davy Stockbrokers said:

‘Structural budget deficit target is a poor choice as official estimates differ starkly and are prone to revision over time.  The choice of the 0.5% structural budget target is exceptionally poor . . . as a theoretical concept, the structural budget deficit is unobservable as the estimates are prone to revision and subject to dispute long after the event.’

Hmm.  ‘Exceptionally poor’, ‘theoretical’, ‘estimates differ starkly’, ‘subject to dispute’ – just the thing to stick into our constitution.

The funny thing is that the Government s says much the same thing.  In the last budget, in their Economic and Fiscal Framework, this is what they said about the structural deficit:

‘ . . . the exact size of the structural element is, of course, highly uncertain.’

But that’s the mild bit. When the Department of Finance used the EU’s method of estimating the ‘output gap’ upon which the structural deficit is determined, they found a big big problem.

‘Moreover, further out the forecast horizon, the production function methodology [the EU method] implies a positive output gap – that overheating pressures are emerging, which does not appear realistic.’

The Department used the EU method and found that the economy was overheating by 2015.  Overheating?!  Unemployment is estimated to be 12 percent, GDP has still to return to pre-recession levels, all the components of domestic demand (consumer spending, investment, etc.) are well, well below pre-crisis levels, we have more people – yet the EU says the economy will be overheating. 

No wonder the Department of Finance said it appeared ‘unrealistic’.  That’s diplomatic-speak for 'this is a pile puppy-poo'. 

And yet, the Government – having described one of the main measurements in the Treaty as ‘highly uncertain’ and ‘unrealistic’ – still want us to put this into the constitution. 

Thank god it’s Friday.  I wish everyday up to the referendum was Friday.

 But I fear this debate will be a permanent Monday.

The Fiscal Treaty Files: The OR ELSE Defence

Colm McCarthy was quick out of the traps with an opinion piece on the Fiscal Treaty.  And what does he make of it?

‘As an exercise in addressing the Eurozone's twin banking and sovereign debt crises, the fiscal compact makes no worthwhile contribution.’

Wow, no worthwhile contribution (read: no contribution at all).

‘ . . . the treaty instead addresses a non-problem.’

A non-problem?  But what about the new structural deficit targets we will have to adhere to?  Won’t that help us back to recovery and fiscal stability?

‘The measurement of structural deficits is more or less impossible and the inclusion of an un-measurable concept in an international treaty is a reckless piece of drafting.’

Reckless!  Wow, again.

‘Macro-economic experts have concluded that it is essentially an evasion, designed to provide political cover, particularly in Germany . . .’

This is getting really interesting – an evasion, mere political cover.

‘If the new treaty had been in place since the euro's launch in 1999, would it have prevented the crisis? Will the new treaty prevent a second crisis, assuming the common currency survives this one?  The answer in both cases is no . . ‘

Colm goes on to claim that this a ‘bad treaty for Europe’, it is inadequate, that our European partners ‘behaved in bad faith’, and that ‘the current generation of European leaders are in denial about the genesis of the crisis . . ‘.

Well, Colm has convinced me – this Treaty is really not a good idea at all. 

So should we expect to see Colm chairing the launch of the No Campaign to the Fiscal Treaty?  Well, here’s the funny thing.  Colm, after making a convincing case against the Treaty, recommends that we . . . vote for the Treaty.

‘ . . .  the electorate would be well-advised to swallow hard and vote yes . . .’

Why?

‘There are treaty provisions which could be interpreted as restricting access to the EU's permanent bailout fund to countries which adopt the treaty . . . there is no percentage in running the risk of losing support from official lenders, even if that might not be needed . . . Moreover, a rejection of the treaty would antagonise the ECB . . ‘

So there you have it – the ‘Or Else’ defence.  Essentially, supporters of a yes vote cannot argue the merits of the treaty because, as Colm has so expertly shown, there are no merits.  When considered in its own right, the Fiscal Treaty cannot stand up – either for Ireland or the Eurozone.

The only defence that supporters of the Yes campaign can advance is ‘we either vote for the treaty OR ELSE’.  OR ELSE can mean anything – angering up the ECB, being locked out of the EU’s permanent bail-out fund, annoying partners who have acted ‘in bad faith’, ‘getting kicked out of the Eurozone, the EU, the Federation, etc.

Colm has done the opponents of the Fiscal Treaty a useful service.  He has shown that there is no positive reason to vote for the Treaty.   Indeed, there is no concrete reason at all to vote Yes.  The debate has barely begun and the supporters of the Treaty have conceded considerable and valuable ground.

There is only one reason to vote for the Treaty – a hypothetical OR ELSE.  I will return to analyse this hypothetical.  But in the meantime, thank you Colm – you have provided some of the best arguments for voting No so far in the campaign. 

The Fiscal Treaty FIles: The Start of an Informed, Rational and Tolerant Debate

Now that the referendum has been called I am starting up the Fiscal Treaty Files, a regular commentary on the claims, arguments and assertions that will be made over the coming weeks leading up to the vote.  Let the debate commence.

Hat tip to Brian Lucey, mega-contributor to the twitter-sphere, for designing the first poster of the referendum campaign.  My sense is that Brian is not hopeful the debate will be either informed, or rational or tolerant.  I fear he may be right.  We will be told that if we don’t vote for the Fiscal Treaty we will be kicked out of the Eurozone.  Or that we will be excluded from any further bail-out fund (though the Government has assured us that the very idea that we would need further assistance is ‘ludicrous’).  Or that foreign direct investment will dry up.  Or that jobs well be lost.  Or that locusts will devour the crops and packs of rabid pit-bulls will roam the streets at night.

But mostly we will be told that if we don’t vote YES for the Fiscal Treaty, Kitty will get it. 

So how are we to proceed?  The best way, the only way, is to proceed with evidence, eschewing mantras and mere assertions.  Rhetoric should be met with fact, bombast with information, obfuscation with clarity.

But we should also know this.  Kitty may seem helpless but I have spent time in her company.  She is no innocent.  She is street-wise.  Pit-bulls give her a wide berth.  And her claws are sharp.

One should never threaten a Kitty on the edge.

 

The Triumph of Spin over Substance

The publicity accompanying the latest ESRI Quarterly Commentary was a triumph of spin over substance.  Despite claims of ‘growth’ and ‘austerity is working’ the ESRI describes a domestic economy mired in recession and growing debt until at least 2014.  Let’s go through some numbers before we try to explain why the spin gets hyped while the substance gets ignored.

The ESRI projects that Ireland’s unprecedented domestic-demand recession will continue into 2013. Domestic-demand measures consumer spending, investment and government spending on public services.  I say unprecedented because no EU country has experienced six years of falling domestic demand (though, eventually, Greece will probably achieve this). 

Comparisons with the Government estimates in the last budget show how bad it could be.

As seen, the ESRI projections show substantial slippage from the Government’s projections with all domestic indicators in negative, even in 2013. That government spending on public services (government consumption) will fall is a given, since it is an active policy.  However:

• The Government is hoping that consumer spending will flat-line in 2013; the ESRI claims it will still be falling. 

• The Government is hoping that investment will start rising in 2013; the ESRI projects it will still be in decline.

In all likelihood, the Government will have to revise their forecasts downwards in the Stability Programme Update in the spring – with consequences for public finances.  With the possibility of the domestic demand recession continuing into 2014, it is difficult to describe this scenario as one of ‘growth’ or ‘turning the corner’.  Based on the ESRI projection, the domestic-demand recession will probably bottom-out in the last quarter of 2013 or the first quarter of 2014.  But bottoming-out is not the same as economic recovery – it just means the good ship Ireland has finally sunk to the bottom; it says nothing about getting back to the surface.

Even more worrying are the ESRI projections for employment and wages. 

The ESRI projects employment to fall in both 2012 and 2013.  If their projections hold, there will be 60,000 fewer people at work than the Government is estimating.  On this basis, the ‘jobs-recession’ will continue through this year and next year.

In addition to falling employment, the ESRI is projecting that average real wages per employee (after inflation) will continue falling.

The Government is hoping that real wages will fall by less than half-a-percent over the next years; the ESRI is projecting a fall of 2.7 percent.  Real wage declines will further erode workers’ living standards.  With households deleveraging and the prospect of more taxation and charges, the impact on domestic demand could be substantial as more people reduce their consumer spending and businesses postpone investment plans.

Export growth will provide only statistical comfort as long as that growth is rooted in multi-national sector.  Though new investment (BSkyB, PayPal, etc.) will provide a welcomed fillip, in general most multi-nationals are rooted in capital-intensive sectors which import most of the goods and services they use in producing their products (meaning little downstream benefit).   Even the Department of Finance admits that export growth will not generate much employment in the medium-term or be ‘tax-rich’.

Yet, the ESRI is bullish on the Government’s budgetary targets.  This is curious given that they project GDP and GNP to be lower than Government estimates by 2013 (in particular GNP, which they project will be €3.3 billion lower).  If job creation rates are weak, if real wages are falling, if consumer spending remains in decline putting even more pressure on businesses (Insolvency.ie  claims there were a greater number of corporate insolvencies in January 2012 compared to same period last year) – then it is difficult to see budgetary targets holding.  Of course, the Government can hold back on spending to make up the short-fall (capital projects, current programmes) but this only fuels further deflation down the line.

So what have we got?  All the main domestic indicators are in decline for the next two years, job creation rates are falling well short of Government targets, real wages are falling – how can this be called ‘working’?

One part can be attributed to an ‘escalation of commitment’.  Once you call for a particular strategy to be pursued (in the ESRI’s case – an austerity strategy), it is difficult to extricate yourself from this call when the results are damaging and counter-productive.  Therefore, you end up calling for more, like Boxer in Animal Farm who sees the solution to everything in ‘doing more, harder’.  To question the strategy is a form of self-criticism, something that none of us like to engage in.

Another part of the problem is the conflation of two issues:  ‘is austerity working’ and ‘there is no alternative to austerity’.  Once you state the latter, the question of whether austerity is working becomes almost irrelevant.  Imagine a situation where you affirm that there is no alternative to austerity but also conclude that austerity is a failure.  This no longer constitutes analysis but rather fatalism:  we must do this; it’s bad, it won’t work; but we must do this. 

In one sense, I appreciate the ESRI’s approach.  After all, there is only so much existential economic grief that people can put up with.  To be told the only thing that we can do will fail - that would be the ultimate proverbial ‘straw’. 

But that is a problem only for those who believe there is no alternative.  We don’t have to travel that desultory road.  By walking a different path we are free to look at the ESRI projections with fresh eyes.  And what do we see?

A domestic economy mired in recession with no end in sight until at least 2014.  Does that ‘work’ for you?

Don't Mind the Rhetoric - Privatisation is Being Driven by Fine Gael, Not the Troika

Whatever about the case-by-case merits of the Government’s announcement today to sell-off state assets, we should be clear:  the EU-IMF Memorandum of Understanding does not require privatisation, in whole or in part.  In addition, the discussion of the sale of state assets in the Memorandum does not take place in the fiscal section but rather in the section regarding obstacles to competitiveness.  In other words, if there is to be a sale of state assets, the objective is not to write down debt but to improve competitiveness.  Indeed, it is hardly likely that the Troika would demand that state assets be sold in order to reduce the projected debt of 115 percent in 2015 down to 114 percent (which is what the Government’s announcement today would do). 

The quarterly reviews conducted by the Troika make it clear that the provision for selling state assets did not come from them – it came from the Government and its Programme for Government.  And it was Fine Gael that was the driver of the privatisation provision in the Programme – Labour campaigned against privatisation in the last general election.

What we have had is an elaborate choreography around the issue of privatisation, shifting blame and inventing targets which have had the effect of obfuscating the issue.  Nonetheless, this should not blind us to where the demand for privatisation is coming from.  Senator Shane Ross, writing about the meeting between the Troika and the Technical Group of TDs, reported this exchange on the subject:

‘The troika delegates insisted that they had not prescribed any privatisations. They wanted to see certain semi-states "restructured" and competition in the market. Contrary to media perceptions, they were not pressing the Government to raise any specific amount from the sale of State assets. The figures in the public arena of between €2bn and €6bn did not come from them.’

That this is confirmed by Sinn Fein, from their meeting with the Troika, only reinforces this point. 

The demand for privatisation – and the paying down of debt – does not come from the Troika.  It comes from our own Government.

Below I reproduce the post I wrote back in October - which shows how we ended up with privatisation despite the fact that it is not mandated by the EU-IMF Memorandum of Understanding.

________________

Privatisation is Being Driven by Fine Gael, Not the EU-IMF

The EU-IMF deal does not require the Government to privatise state assets. I’ll repeat that. The EU-IMF deal does not require the Government to privatise state assets. Those who claim otherwise have either not read the EU-IMF Memorandum of Understanding (MoU) and are just repeating what they heard from someone else. Or they are simply misleading people. It’s that simple.

Don’t believe me. Here is the MoU. Go to page 59 (paragraph 27). Here is what it says:

‘Building on the forthcoming report of the Review Group on State Assets & Liabilities the government will undertake an independent assessment of the electricity and gas sectors with a view to enhancing their efficiency. State authorities will consult with the Commission Services on the results of this assessment with a view to setting appropriate targets for the possible privatisation of state-owned assets.’

The MoU sets out a four-step process:

• First Step: Publish the report of the Review Group on State Assets & Liabilities. This has been done.
• Second Step: Undertake an Independent Assessment of the electricity and gas sectors (not done.
• Third Step: Consult with the EU Commission on the results of this assessment (not done.
• Fourth Step: Consider the possible privatisation of state-owned assets.

There are steps the Government must take before they even get to the stage of considering the ‘possible’ privatisation – steps they haven’t taken yet; namely, the independent assessment.

Now we can argue the toss all day but it is difficult to see how this section can be read as a ‘requirement to privatise’.

There’s another aspect to all this. What is the purpose of this process leading to the consideration of possible privatisation? To raise revenue to pay down debt? No. Absolutely not. The paragraph above appears under the heading ‘Raising the Growth Potential’. In this section,the MoU is concerned with

‘. . . removing structural impediments to competitiveness and employment creation.’

It is not about raising revenue. If it was, it would have been placed in the preceding section on ‘Safeguarding Public Finances.’

Indeed, if anything, the Government is not in compliance with the MoU – as they have not yet completed an independent assessment of the electricity and gas sectors, never mind published one.

So, if there is no requirement to privatise public enterprises, if consideration of ‘possible’ privatisation must be about ‘efficiency’ rather than revenue-raising, then how have we ended up with quarterly reviews that refer to privatisation? Ask Fine Gael – for it is they who are driving this agenda.

In the first quarterly review, the reference to the sale of state assets has changed from ‘possible privatisation’ to:

‘Programme for Government and the Review Group on State Assets and Liabilities: The Government is due to consider a potential programme of asset disposals based on the Programme for Government and the Review Group on State Assets and Liabilities. The Government will discuss its plans with the European Commission, the IMF and the ECB when it has finalised its response to the Review.’

In the second quarterly review, the references to the sale of state assets went further:

‘Government will consider options for an ambitious programme of asset disposals, based on the Programme for Government and the report of the Review Group on State Assets and Liabilities.'

In both these references the Government will consider the sale of state assets ‘based on the Programme for Government’. In the first quarterly review, it is a ‘potential’ programme; in the second, it is an 'ambitious’ programme. And who put these in? Michael Noonan and Patrick Honohan. It is part of the letter they wrote to the Troika. In the first quarterly review they state:

‘In the attached Memorandum of Economic and Financial Policies (MEFP), we set out our plans to further advance towards meeting the objectives laid out in our EU/IMF financial assistance programme.’

Not the EU-IMF plans – ‘our plans’, the Government's plans. That’s why the privatisation of state assets is based, not on EU-IMF requirements, but the Programme for Government. What does the Programme say?

‘We will target up to €2 billion in sales of non-strategic state assets drawing from the recommendations of the McCarthy Review Group on State Assets when available. Assets will only be sold when market conditions are right and when adequate regulatory structures have been established to protect consumer interests.’

It should be noted that there is no reference – either in the MoU or in the two subsequent reviews – to ‘non-strategic’ assets. The Government abandoned this concept that was in their own Programme.

Which party demanded that the ‘sales’ of non-strategic assets’ be inserted into the Programme for Government? Fine Gael. This is from their election manifesto:

‘We will sell non-strategic assets such as Bord Gais Energy, ESB Powergen, and ESB Customer Supply.’

Labour, on the other hand, was unequivocally opposed to privatisation:

'Labour is committed to concept of public enterprise, and is determined to ensure that semi-state companies play a full role in the recovery of the Irish economy. Labour is opposed to short-termist privatisation of key state assets, such as Coillte or the energy networks.'

No doubt, in the negotiations in the Programme for Government, Labour felt it had to give way on this issue. But make no mistake – it is a Fine Gael issue. So where does that leave us?

• First, privatisation of state assets is not required by the EU-IMF deal.
• Second, it was inserted in the quarterly reviews by the Government, namely the Minister for Finance.
• Third, this issue is being driven by Fine Gael, not the EU, or the IMF or the ECB – or even by Labour.

Labour backbenchers, in particular, should take note. They, along with the rest of us are being driven into a policy that is mandated by Fine Gael and no one else.

Poorer and More Unequal

At a meeting of Labour Party activists, Dr. Mary Murphy – a leading academic and activist – made the following statement:

‘We may be a poorer country, but that does not mean we must be a more unequal country.’

It is one of those statements that merit considerable attention and investigation.  I’d like to present some evidence that unfortunately shows that we are poorer and more unequal.

No one doubts we are poorer as a nation (though that doesn’t mean everyone is poorer).  In the period between 2007 and 2010, Ireland’s Gross National Income (which reflects our GNP) fell by a massive 21 percent.  So how much more unequal are we? 

The EU’s measure of income inequality is the quintile share ratio – the ratio of equivalised disposal income of the top 20 percent to that of the lowest 20 percent.  As seen, Ireland is in the top five, well above the average of the other EU-15 countries.

What is noteworthy is that in 2009, Ireland’s quintile ratio was 4.2.  The jump to 5.3 a year later represents the biggest single-year increase in inequality of any EU country since this measurement began in the late 1990s.

But inequality ratios only tell part of the story.  We have seen that nearly one-in-four of the population suffers two or more deprivation experiences.  But there are other measurements the EU uses as part of its Europe 2020 strategy for inclusive growth.  In particular, it measures the share of the population that is at-risk of poverty or social exclusion.   This is made up of those who have incomes below 60 percent of median income, suffer at least four out of nine deprivation experiences, or (for those aged below years) live in jobless households.

As seen, Irish rates were above the average of other EU-15 countries in 2007, but not by a significant amount.  However, while EU rates remained the same, Irish rates increased substantially – by 29 percent. 

Households with dependent children are at even more risk of poverty or social exclusion.

We see a similar pattern:  Irish poverty/social exclusion rates are above the average of other EU-15 countries prior to the recession but have increased substantially while the rates in other countries have remained stable.

However, it is single adult households that are really taking the brunt of the recession in Ireland.

Single parents throughout Europe are at high risk of poverty or social exclusion, but Irish rates were not only higher prior to the recession, they increased substantially up to 2010, while EU rates remained broadly the same.  There are nearly two-thirds of single parent households in Ireland at risk – a truly appalling figure.

What has been the current Government’s response to this escalating rise in poverty or social exclusion risk – in particular, for single parents?  They are making it even worse.  The new campaigning group SPARK (Single Parents Acting for the Rights of our Kids) has listed the impact of measures from the last budget on single parents.  Here is just a sample:

• Reduction in income disregard from €146.50 to €130 with plans to lower this to €60 by 2016.
• Abolition of the second child payment to lone parents on Community Employment schemes, amounting to €29.800 per child per week
• The Back to School Clothing and Footwear Allowance has been cut by €50 for primary schools and €55 for secondary school children. 
• The Fuel Allowance has been cut by 6 weeks pa, resulting in a €120 annual reduction (or an annualised €10 per month).
• Rent contributions from tenants under the Rent Supplement scheme has been increased by €6 per week or €312 a year.
• The temporary payment of half of the rate of One-Parent Family Payment where the recipient's earnings exceed €425 per week will be discontinued for new claimants from 5 January 2012.
• Currently people getting One-Parent Family Payment can get half-rate Jobseeker’s Benefit, Illness Benefit or Incapacity Supplement if they satisfy the qualifying conditions. These half-rate payments will cease for new applicants.
• New participants on Community Employment schemes will not be able to claim One-Parent Family Payment at the same time.
• For new and existing claimants, income from employment as a home help funded by the HSE will be assessed in means tests for the One Parent Family Payment, from 1 January 2012.

This constitutes a sustained and substantial attack on family households that suffer the most from poverty and social exclusion.  That this has been done under a Labour Minister is all the more depressing.

This is not only socially obscene, it is economically irrational.  Every Euro taken from low-income groups – in the case of lone parents, ultra-low income – is a Euro reduction in domestic demand.  This, in turn, puts more pressure on businesses, especially businesses in low-income areas.  This pressure can result in reduced payroll (which reduces tax revenue) and even job losses (which increases public expenditure).  At the end of the day, the Government may think it’s ‘saving’ money, but it only ends up robbing both Peter and Paul, leaving all of us the poorer with no appreciable increase in deficit reduction.

And don’t forget, the figures above only go up to 2010.  Budget 2011 contained social protection rate cuts along with cuts to child income support; while the last budget contained more social protection cuts along with regressive tax measures (VAT and Carbon tax rises as well as the flat-rate household charge) that will impact disproportionately on low-income groups.  We should expect these figures to get worse as new yearly data comes on stream.

This is a political outcome.  While recessions, of their very nature, bring job losses and working-income loss, countries can create social structures that ensure that people do not fall into poverty or social exclusion risk with either automatic stabilisers (social protection payments that create a floor against deprivation) or emergency measures that prevent a social slide.

While other EU countries have taken steps to prevent low-income groups from disproportionately suffering as a result of the recession, in Ireland we get poorer and more unequal.

We get both insult and injury. 

The Claim of €600 Million in Social Welfare Fraud is STILL a Fraudulent Claim

Last November I wrote about the fraudulent claim that there was €600 million fraud in the social welfare system.  Now, only a few months later that claim is being made again.  Its bad enough that the Department of Social Protection has not taken on board the criticism of the Comptroller and Auditor General.  What's worse is that a number of media outlets repeat the Department's claim uncritically.

Below I have reposted what I wrote back in November. 

This is getting tiresome.

‘Minister of State Fergus O'Dowd has said that the Government believes it can save €600m by tackling social welfare fraud.’

The claim that the level of social welfare fraud is €600 million is, itself, a fraudulent claim. The level of social welfare fraud is €26 million.  The level of fraud is not €600 million. 

It suits a certain agenda which wants to soften up public opinion for social welfare cuts to claim that hundreds of millions are being lost to frauds and cheats.  We have had television investigations, newspaper headlines, attention-seeking politicians all claiming massive fraud.  But out of a budget of nearly €20 billion, the Department of Social Protection has found only €25 million in fraudulent payments – or about 0.1 percent of the entire budget.  So where did this famous '€600 million’ in fraud come from?  And why is the real level of fraud so much lower?

Control Savings

First, the €600 million figure is not the actual amount of fraud in the social protection system. It is what is known as a ‘control saving’ according to the Deputy Secretary General and the Minister of the Department:

‘Control savings are not actual moneys recovered by the Department . . . ‘ (Deupty Secretary-General)

‘Control savings are not actual monies recovered by the Department . . ‘ (Minister)

What are control savings?

‘This figure is the value of the control activity in the Department and if this work did not take place there would, over time, be a similar increase in total social welfare expenditure.’

In other words, if there were no controls or inspections, there would be over time an estimated €600 million in over-payments.  This is like the Gardai estimating the number of murders that might take place over time if there were no police force.  Or the Revenue claiming the estimated level of tax fraud if there were no audits and checks.  To my knowledge (and I’m open to correction on this) the Social Protection Department is the only agency that uses this type of estimate publicly.

 However, even this estimate is highly constructed and potentially flawed:

‘Control savings are calculated by applying validated multipliers to the difference in the rate of payment before and after the control activity.  Multipliers used in assessing control savings estimate the total future savings to the Department of a revocation or reduction resulting from a control action. The multiplier used is based on the average amount of time the person who ceases to claim will remain off the books before returning. This time varies from scheme to scheme.’

The important point is that the ‘control saving’ is not an actual record of fraudulent payments.  It is based on assumptions and multipliers.  It is not based on one year – but can be spread out over two to three years.

And here, the Comptroller and Auditor General (C&AG) found a number of problems with the amounts claimed to have been ‘saved’ in the control savings.  For instance, an audit of Lone Parent cases found that nearly half of the cases claiming 'savings' were actually mistaken.  The C&AG also felt that over-payments estimates in pensions were themselves over-estimates.  The C&AG concluded:

‘ . . . the Department’s current practice of including all of these over-payments arising from control activity as (bankable) savings is questionable.’

All this suggests that the €600 million – even as a control saving – is not a reliable figure.

Second, the €600 million control saving does not refer specifically to fraud.  It refers to ‘over-payments’.  Over-payments occur when (a) there is a mistake by the applicant/recipient, (b) there is a mistake by the administration, or (c) if there is a fraud.  Fraud makes upon only a minority of over-payments (see below).

In conclusion, when you hear the figure of €600 million fraud being used by a commentator or politician, remember:  it does not refer to actual money the Department expects to find in any one year and only a minority of this highly constructed and, according to the C&AG, highly questionable figure has anything to do with fraud.  To talk of €600 million in fraud is highly fraudulent.

Actual Fraud Levels

So if the €600 million is not a reliable figure on fraud, what is?  The C&AG’s report provides the figures, which is used by the Oireachtas Library & Research Service.

The actual annual level of over-payments is far below the €600 million figure.  They rose from €50 million to €83 million between 2007 and 2010.  But this included all over-payments – including mistakes by recipients and administration.  The figures for fraud are substantially less:

• €21 million in 2007, rising to €26 million by 2010
• The percentage of overpayments due to fraud actually fell during this period – from 42 percent to 31 percent

What a contrast to the nonsense debate we have over the misunderstood, faulty and highly constructed figure of €600 million.  The actual level of fraud that has been identified and recovered is €26 million.

Surveys and Case Reviews

The Social Protection Department periodically conducts surveys of different social protection schemes to project the level of over-payments that might be in the system.  The Department has surveyed eight schemes since 2004.  The average level of over-payments in these surveys was 2.9 percent.  The C&AG calculated that in 2010, this ‘potential’ overpayment would be worth €383 million.  However, we should note two things which suggest this figure is on the high side:

First, the number of case reviews yielding savings has fallen over the last few years.  In 2008, the number of cases yielding savings was 19 percent.  This fell to 9 percent in 2010.   Therefore, surveys going back to 2004 should be treated cautiously. 

Second, the C&AG has identified with the process of case reviews:

‘However, in its present form, it is nonetheless a crude indicator, due to shortcomings in the savings calculation methodology and the fact that reviews of different type and intensity are aggregated.’

But it is important to remember that fraud makes up only 31 percent of actual over-payments.  So even if we accepted the €383 million as a ‘potential’ indicator, the fraud element of that potential is €119 million.  The schemes not represented in these surveys – notably widow’s pensions, jobseekers’ benefit for example – are not likely to yield as much over-payments as they are insurance schemes which don’t have the complexities as means-tested schemes that lead to high levels of mistakes and, so, overpayments.

Does the Government Actually Believe Its Own Claims?

There is a doubt as to whether the Government actually believes its own claims.  If I was Minister and believed there was serious dosh out there among the cheating community (more than the €26 million uncovered last year) I’d employ more inspectors.  More inspectors mean more inspections, more cases covered and exposed.  But there doesn’t appear to be much urgency on this matter.  According to the Deputy Secretary General of the Department:

‘There are over 400 social welfare inspectors, but not all of them are dedicated to fraud and control work. Since the level of unemployment increased, many of them have been involved in the processing of claims from new applicants . . . Over 200 staff are dedicated to carrying out control work. The special investigations unit operates at the high end has approximately 89 staff . . . We are not looking for additional inspectors as such . . .’

So 289 staff is involved.  If another 100 inspectors could help double the level of fraud, they wouldn’t be costing the state money – they would be making the state money.  So why aren’t the Department and the Government employing additional inspectors?  Could it be they suspect that the gains wouldn’t be as high as the headline figure of €600 million suggests? 

* * *

All this leads to a more mundane account of social protection fraud.  Figures produced under ‘control savings’ are constructed, spread out over years, and, according to the C&AG, ‘highly questionable’.  Departmental surveys show a reducing level of cases yielding savings which themselves are 'crude'.

But we do have a concrete number - the actual level of detected fraud.  And it is far, far lower than the numbers being thrown about in the public debate:  €26 million, or 0.1 percent of the entire Social Protection budget.

Unfortunately, this is not a ‘sexy’ figure.  It doesn’t make for screaming headlines and even louder commentators shouting for a crackdown on cheats and layabouts.  It doesn’t make for an anti-welfare agenda.

All it does is make for a more accurate debate.  That should be good enough.

The Finance Bill: To Those that Have . . .

The Finance Bill running to nearly 300 pages is out.  There’s the odd sliver of good news – the 5 percent levy on the sheltered income from legacy property tax relief for those earning over €100,000, for instance.  Otherwise, it’s a pretty grim affair, putting into effect a regressive budget. 

But there are little stories that inform the broad narrative set down by the Government.  Let’s run through four of them.

1.            Special Assignee Relief Programme (SARP):  this is the tax relief for foreign employees coming into Ireland.  This is being sold as an incentive to bring in power-executives with power-projects that can get people back to work; however, this will apply to any employee earning over €75,000.  Will this have any positive impact? 

SARP is an extension of a programme that already exists (a limited programme was established in 2008 and was extended in 2010).  Before launching this current relief, the Department of Finance could have evaluated the results of the programme to date.  Did it have any jobs effect that would not have happened if the programme didn’t exist?  How much did it cost?  What effect did it have on the labour market? 

But Governments don’t evaluate their programmes so we don’t know and we won’t know what the impact will be.  Sometimes these tax incentives are just given out to make it look like the Government is doing something about something.

Still, you might be interested to know that the State will not only be subsidising foreign employees’ salary (30% between €75,000 and €500,000), the state will also allow the employee to write off the fees of sending their children to private schools – up to €5,000.  So we subsidise private fee-paying schools and now we subsidise the actual fees.  Hmm.

2.            While the Bill closes some minor loopholes in the R&D regime, companies will be allowed to assign their 10 percent R&D tax credit to employees who can use it to reduce their PAYE tax liability.  How this incentivises job creation is beyond me.  But it sets up is a situation where key staff (executives, senior professionals, etc.) can now get a tax-subsidised bonus.  Hmm.

3.            Mortgage interest relief is being increased for people who bought a house for the first-time between 2004 and 2008.  This will be given to all households regardless of their income – people who are high earners get the relief despite the fact they have no problems paying their mortgage.  Meanwhile, those who are really struggling with their bills will not benefit at all if their income is below the tax threshold or are unemployed.  Hmm.

So we have three programmes that distribute money to those on high incomes without any assessment of their impact, positive or negative.  Just shovel out the dosh to those with dosh (and they call us progressives ‘spendthrifts’).

But take a look at this section in the Finance Bill that hasn’t got much attention.

4.            Taxing Illness Benefit and Occupational Injury Benefit:  currently, the first 36 days of illness and injury benefit you receive from the Department of Social Protection is exempt from taxation.  Now that exemption is being removed.  So when you get sick or injured on the job, suffering from a fall in income and increased costs arising from the illness or injury, you will now find the social welfare benefit you receive will be taxed.

Sometimes words just fail me.

Let Us Not Worry Our Little Heads

The Minister for Jobs, Enterprise and Innovation Richard Bruton is setting a target of 100,000 net new jobs by 2016 on the eve of the Government’s launch of the Action Plan on Jobs.  Does this mean that the Action Plan will create 100,000 net new jobs by 2016?  No.  Does this mean that without the Action Plan the target of 100,000 net new jobs will be undermined?  If we are to believe Department of Finance projections, no.   So what’s all this about the Action Plan and 100,000 net new jobs?  Good question.  Welcome to the smoke-and-mirrors world of job creation projections and targets.

In the last budget, the Government projected employment would grow by approximately 62,000 between 2011 AND 2015.  These numbers are well below the Government’s projections in the previous April, when 102,000 net new jobs were projected.

Minister Bruton’s new 100,000 projection takes us out to 2016.  The Department of Finance’s estimates only go up to 2015.  But let’s assume that employment growth goes to 2 percent in 2016 (it is currently estimated to be 1.6 percent in 2015, increasing by 0.4 percent in 2013 and 2014). This 2 percent was the projected rate for 2015 in last April’s projections.

So if we assume that employment will grow by 2 percent in 2016 what do we get?  An increase of 100,000 net new jobs.  Okay, you ask – what’s the problem?  The Minister claims 100,000 new jobs by 2016.  My own estimate is 100,000.  There is concord, you might say between the two estimates.

Except for this.  In the budget last year, the Government explained its employment projections:

‘It is to be stressed that these labour market forecasts take account only of policies which have already been announced; they should in no way be seen as Government targets. The Government will publish its first annual Action Plan for Jobs in the New Year which will contain a series of measures to be implemented during 2012 and will provide further support to the labour market.’

In other words, if there we no further job initiatives, employment would grow by 100,000.  So here’s the question.

If in the last budget the Government projected a employment to grow by 100,000 up to 2016 prior to the announcement of the Action Plan for Jobs, and the Minister is projecting that with the Action Plan for Jobs employment will grow by 100,000 – how many extra jobs will be created by the Action Plan for Jobs?

A logical deduction is 0.  No new jobs. 

Will this be the case?  I don’t think so.  I suspect the Action Plan for Jobs – if it comes with some resources and investment – will increase the job creation rate, if only marginally (not substantially because the Government hasn’t yet copped it that jobs will only grow when demand for jobs will grow – but their fiscal consolidation strategy is reducing demand in the economy). 

The point here is the way this Government, like the last Government, is manipulating job creation projections, assuming that people won’t read what they have published before and examine the numbers in some details.

No doubt, when the Action Plan for Jobs is launched there will be great fanfare and the 100,000 target will figure prominently.  This is the same fanfare that accompanied last year’s Jobs Initiative – except that only a few months later the Government revised downwards its own job creation targets.

However, on the Government’s own admission the number of jobs expected to be created by 2016 will be 100,000 without the Action Plan for Jobs.

You could say this is a venial sin, this massaging of numbers for PR impact.  But it’s of a piece and we were promised a different governance when Fine Gael and Labour took office.

For a more egregious sin, check out the Taoiseach’s statement that the Fiscal Treaty will not result in more austerity even though the most ardent proponents of the Treaty accept the downside of more deflationary adjustments. 

But, hey, these are all just numbers on a page. 

Let’s not be worrying our little heads over such minutiae. 

Working Our Way into the Poorhouse

As the Joint Labour Committees legislation wends its way through the Dail – a bill that will lead to less protection for workers in many low-paid sectors – it is timely to look at the growth in deprivation for an increasing number in the workforce; namely the low-paid.  The CSO defines deprivation by reference to eleven categories. 

Two pairs of strong shoes  ·  warm waterproof overcoat  · Buy new (not second-hand) clothes  · Eat a meal with meat, chicken, fish (or vegetarian equivalent) every second day  · Have a roast joint or its equivalent once a week  ·  Had to go without heating during the last year through lack of money  · Keep the home adequately warm  · Buy presents for family or friends at least once a year  · Replace any worn out furniture  · .Have family or friends for a drink or meal once a month  · .Have a morning, afternoon or evening out in the last fortnight for entertainment

If someone is unable to afford two or more the above, then they are classified in the deprivation rate.

So how what is the deprivation rate for those at work?  12.5 percent.  One-in-eight in employment suffered two or more deprivation experiences during 2010.  That is a significant number which has grown considerably since the crisis began.  In 2008 only 6.6 percent of those at work suffered deprivation, increasing to 7.9 percent in 2009.  So the jump to 12.5 percent is significant. 

We should expect another significant jump in 2011 given the fall in personal income, regressive tax increases in Budget 2011 and the rise in arrears.

But this doesn’t tell the full story.  For those households where there is only one person working, the deprivation rate is actually higher than the national average.  But the fact that even the deprivation rate touches 10 percent among two-income households should alert to this social crisis.

A number of factors have contributed to rising deprivation in working households:  falling wages, shorter working hours, increased taxation and charges, rising arrears.  These are factors that are likely to continue and, in some cases, accelerate over the years ahead.

This is the back drop of the Government’s legislation on Joint Labour Committees.  Though the Minister uses the word ‘reform’, the reality is that his proposals are intended to achieve a wage devaluation – a reduction in overall wage levels.  This will bring further downward pressure on the low-paid who are already facing rising deprivation levels.

Let’s bottom-line this:  if anyone thinks that driving more people into deprivation – whether in work or on social protection – will further economic recovery and fiscal stability, they should lie down in a dark window-less basement until that thought passes.  Rising deprivation puts strains on social services, in-work productivity, and the Exchequer (the Government loses revenue every time wages are cut).  Rising deprivation is a terrible burden for a society to carry – socially and economically.

Of course, alternatives are not allowed to be aired (or if they are, they are ridiculed):  increase wages, reverse tax increases on the low-paid, provide more in-work social protection supports, give workers more rights in the workplace (right to collective bargaining, strengthen and extend Joint Labour Committees), etc.   Such policy prescriptions are little short of heresy in the current debate. 

But until we understand that people’s living standards – in particular, the low-paid – are not the problem but an indispensable part of the solution, we will continue to see the deprivation graph rise. 

Last Night the Government Signed Up to €6 Billion More in Austerity Measures

The Government, in signing the Fiscal Treaty, has effectively committed itself to introducing up to €6 billion more in tax increases and spending cuts in the medium-term, over and above what it has already planned.  While the news in the short-term will, understandably, focus on whether a referendum will be necessary, once attention starts honing in on the details of the treaty, we will all come to understand why this agreement has come to be known as the ‘austerity treaty’.

The reason why we will have to endure another round of cuts can be found in the section of the text entitled ‘Fiscal Compact’ (this from a draft a few days old, at the time of this writing the final text has not been published; but there’s no indication this important section has been altered in substance):

The Contracting Parties shall apply the following rules, in addition and without prejudice to the obligations derived from European Union law:

The budgetary position of the general government shall be balanced or in surplus.

The rule shall be deemed to be respected if the annual structural balance of the general government is at its country-specific medium-term objective as defined in the revised Stability and Growth Pact with a lower limit of a structural deficit of 0.5 % of the gross domestic product at market prices.

This new ‘structural deficit’ target has received little attention so far – but it should, and hopefully it will.

We are all familiar with the Maastricht deficit of 3 percent of GDP.  This refers to the Government’s general deficit – the level of spending over revenue.  This is pretty straight-forward.

The structural deficit target in the Treaty is an additional target that must be met.  I will have more to say in future posts about this concept (much more – and it is just that, a concept).  Suffice it to say that it purports to tell us how much deficit will remain even when the economy is running at full potential.  However, it is an artificial measurement – inextricably intertwined with another artificial measurement: attempting to identify what exactly our GDP would be if it were running at full capacity.   It cannot be observed in real life, like the ordinary deficit.  There is no agreed methodology for measuring the structural deficit; it is subject to wide variations and to substantial retrospective revisions.

In short, if you ask 10 economists to come up with the structural deficit, you will get 20 different methodologies and 40 different results.  It is nothing short of inane to put such a woolly, amorphous and erratic measurement into law, never mind the constitution.

 But let’s put those considerations aside for another day.  Let’s take the Department of Finance’s estimate of the structural deficit up to 2015 and see how much more we would need to do to comply with this new fiscal treaty.

Even though by 2015, the Government estimates that the General Deficit will by -2.9 percent - thereby complying with the Maastricht guideline - this new structural deficit target in the Fiscal Treaty means that we are still deep in the woods.

What does this mean in budgetary terms?  It means that the government may have to undertake fiscal adjustments equivalent to 3.2 percent of GDP.  In 2015, this could mean an extra set of spending cuts and tax increases worth €5.7 billion on a simple static estimate.

Under current strategy, the Government will be introducing €8.6 billion in spending cuts and tax increases over the next three years.  Now they are making a commitment to take on board nearly €6 billion more fiscal adjustments to reach this new structural deficit target - a 66 percent increase in austerity measures.

We don’t know yet when this new target will have to be met.  This will be determined by the EU Commission on a country-by-country basis.  It may be 2015; in all likelihood it will be later.  But either way we are facing into more austerity – significantly more. 

The exact amount of additional fiscal adjustment is difficult to estimate in precise numbers.  That’s because the structural deficit will be determined by the EU Commission’s estimate of our potential GDP.  It could actually end up being more – if the fiscal adjustments permanently reduce GDP trend.  But so woolly, amorphous and erratic is this measurement, that were we to go back and ask our 10 economists for a number, you’d get 50 different answers, all replete with caveats, ifs, and buts.

But whatever numbers they did come up with, there is no question we are heading into substantially more austerity stretched out over a longer period – so much so that it might make Richard Tol’s prediction of a decade of austerity seem optimistic.

Boy, do we need a referendum.

Answering the Sceptics

On Saturday, the Irish Times devoted a full page to the question of whether austerity is working, on foot of the letter by 60 prominent public figures. International commentators such as Joseph Stiglitz and Nouriel Roubini and domestic commentators Terence McDonagh from UCG, Brid O’Brien from the Irish National Organisation of the Unemployed and businessperson Brian Donovan were all critical of austerity, calling for an alternative growth and fiscal stability strategy.

Let’s examine, however, the comments of those sceptical of alternative approaches.  If we are to build a political momentum for an expansionary policy, we need convincing responses to criticisms, both legitimate and ill-founded. 

In all this we need to remember, it’s not that austerity policies will fail.  If one believes that ‘in order to save the village, we must destroy the village’, then destroying the village works, regardless of the long-term economic and fiscal impact.  Nor can we automatically assume that expansionary policies will work.  The crisis in the Eurozone and the persistent determination to avoid the real problems (the financial sector, the flawed design of the Eurozone itself) could overwhelm economies regardless of the appropriateness of national policy.

All that needs to be done is to show that expansionist policies based on investment are more likely than austerity to work.

The Primacy of Export Growth

Sceptics refer to the need to expand our export sector.  I don’t know anyone who disagrees with this truism – though it is rightly acknowledged this will depend in large part on external demand.  But would an expansionary investment programme have more success in stimulating greater export growth?  Yes – in two ways.

First, the business sector, including multi-nationals, benefit from a stronger infrastructure.  How much easier would it be for the IDA to win foreign investment if we had a national next generation broadband network or a labour force with higher work and language skills?  Economies with strong infrastructures are likely to have a strong business base.  Therefore, an investment programme aimed at raising the productive capacity of the economy is likely to result in a stronger export platform.

Second, raising domestic demand will also contribute to a stronger export profile; namely, among indigenous companies.  Many indigenous companies start-up in the domestic market and then enter export markets once they built scale and expertise.  However, with domestic demand continuing to fall, indigenous companies won’t be concerned with expanding – they will be desperately trying to survive; and they will be forced to do so by down-sizing (cutting employment, training, R&D, marketing, etc.).  Downsizing firms do not expand.

Conclusion:  an investment-based expansionary programme is more likely to build a stronger export platform for both multi-nationals and domestic firms.

We Need to Reduce the Deficit

The sceptics claim we need to reduce the deficit.   Again, there is no dispute about this.  What is in dispute is whether austerity policies are the most effective means to that end (or, indeed, whether it makes the fiscal situation worse).  Merely stating that we need to reduce the deficit does not answer the question:  how do we reduce the deficit.

The problem for those arguing the austerity route is that after fiscal adjustments of over 15 percent of GDP, the deficit is projected to fall by approximately 3 percent of GDP in the years 2009-2012.  That is a lot of destroying for very little of saving.  Another problem is that debt is still rising even though austerity is being intensified.  In Fianna Fail’s last budget overall government debt was estimated to come in at 105 percent of GDP in 2014.  The Fine Gael/Labour government came in, increased austerity measures by 20 percent and extended the Maastricht target deadline.  But they had to accept that overall debt would now rise to 118 percent.  This should not be surprising – you don’t reduce your debt/GDP ratio by cutting the GDP denominator.

Even more problematic for the ‘cuts equal savings’ argument is that leading forecasters (NCB, Goodbody) are now projecting that current policy will fail to reduce the deficit to sustainable levels by 2015, with debt projected to be exceed 120 percent bringing us dangerously close to the default abyss. 

An expansionary programme starts from the premise that economic growth and deficit reduction are inextricably intertwined.  The letter refers to a two-fold strategy:  increase growth through investment while engaging in growth-friendly fiscal consolidation – namely, increasing taxes on higher income groups in the short-term.  In the first, the Department of Finance shows that every extra €2 of growth, the deficit is cut by €1.  That’s a pretty good return.  Regarding growth-friendly fiscal consolidation, the ESRI has shown twice that tax measures do less damage to the economy and are, therefore, more effective at reducing the deficit.  Targeting tax measures at high income groups is likely to be even less deflationary and more successful at reducing the deficit.

Conclusion:  investment-based expansion that increases growth, combined with tax-based fiscal consolidation, is more likely to result in fiscal stability than cutting investment and demand while pursuing ineffective spending cuts.

Where Will We Get the Money?

This would appear to be the most damning criticism of an alternative strategy.  Even if it were conceded that investment was desirable, the response is likely to be that ‘we’re broke’.  And the Troika is unlikely to provide us the resources.  QED, as they say.

This is not the case.  Ever since the crisis began, Ireland has had the resources to launch investment-based expansion.  Back in 2009, we had between €40 and €50 billion in cash and assets to draw upon.  In the Government’s wisdom a significant amount of this was blown on bank bail-outs, Anglo and the impact of austerity measures. 

We still have resources, though.  The Minister for Finance ha told the Dail there will be between €15 and €20 billion in cash and assets up to 2015.  This could be a start.

But we shouldn’t think that all public sector-led investment must be drawn from the Exchequer. The European Investment Bank, the European Investment Fund, ICTU’s proposal to incentivise private pension funds, public enterprise development potential, etc. are other sources which could contribute.  There is also scope, once we have returned to the market, to sell specific investment or enterprise bonds for commercial-return activities (and to use tax incentives for domestic investors).

Conclusion:  We have the resources for an investment programme.

* * *

More work needs to be done to nail down the superiority of investment-based expansion; namely, to model its effect on GDP and the deficit.  But advocates of expansion will have to address the institutional deficits that exist in the Government’s capital programme (its opaqueness, its hit-and-miss cost-benefit analyses, etc.).  Advocates will also have to construct an alternative programme for public sector reform; or rather, to launch proposals for reform (we don’t actually have a reform programme; we just have a policy of cutting public sector employment – the worst fiscal measure you can take in a recession).

 But in terms of export growth, fiscal consolidation, and resources, the arguments favour the authors of the Plan B letter.

That is a good start. 

26 into 1 Won't Go

This was originally written for Progressive-Economy.ie

Media outlets are reporting a new crackdown on the unemployed.  Apparently, the Department of Social Protection intends to introduce new regulations whereby ‘target-dates’ for exiting the Live Register will be set for different categories of unemployed.  If someone remains on the Live Register past that target-date, they may be subject to a new set of interviews and investigations which could lead to reductions or even ending their unemployment payment.  This, no doubt, reflects the Minister’s description of unemployment as a ‘life-style’ choice for a growing number of jobless, especially young jobless. 

This also reflects a new twist in victimising the unemployed for a crisis not of their making.

This is also reflects a policy mind-set that is detached from the reality of the labour market and even from the Government’s own employment projections. 

First, Eurostat produces a ‘job vacancy rate’ which measures the number of job vacancies in the EU economies.  Using this we can estimate how the number of job vacancies compares with the actual number of unemployed.  What is the ratio of unemployed per job vacancy in Ireland?  26:1. Let’s ‘reflect’ on that for a moment.

• There are 26 unemployed people for every 1 job vacancy.

How do we compare with other EU countries?  The first chart shows the figures for the 23 EU countries whose data are available at Eurostat. The numbers are calculated from the Eurostat data using conservative assumptions that if anything are likely to result in an underestimate of the figures shown.  Ireland is one of the worst performers in the EU.  It ranks 4^th last out of 23 countries reporting, with more than three times the EU-27 ratio of unemployed per vacancy.  The figures for some countries require some qualification, but are mostly accurate enough to provide a reasonable picture across Europe.

However, the crucial point is that one can interview, examine and investigate the unemployed for as long as whenever – if there are 26 people chasing 1 vacancy, then the dole queues will continue to stretch out on to the street.  To threaten reduction or suspension of unemployment payments in such conditions is little short of callous. 

But this is all convenient for the Government because it takes attention away from the driving force behind unemployment – the simple lack of jobs.  It also takes attention away to the Government’s self-admitted losing battle over job creation:

• In April of last year the Government projected that there would be over 100,000 new net jobs in the economy by 2015.
• In the last budget they reduced this job creation projection to 62,000.

This explains why they revised their unemployment projections in 2015 from 10 percent (in April 2011) to 11.6 percent in the last budget.

Indeed, the Government has admitted that there will be no short-term relief from unemployment.  In the Regulatory Impact Analysis in the appendix of the Industrial Relations (Amendment) (No.3) Bill, 2011, the Government openly admits: 

‘Ireland has experienced a very sharp increase in unemployment in recent years, with little prospect of improvement in the short term . . . ‘

So with employment projections shrinking, unemployment projections rising, and a public admission that the jobless situation will not improve in the short-term, the Government thinks it’s a good idea to start targeting the unemployed, rather than the policies that would get them back to work.

No matter what is done using supply-side policies –through training, up-skilling or negative incentives – you cannot squeeze 310,000 unemployed into the approximately 13,000 total jobs that are available (calculated from the most recent Eurostat data, 3rd quarter 2011). Even if all the vacancies are filled instantly, approximately 300,000 will remain unemployed. Essentially, what training does in terms of unemployment in this situation is to change the names of the lucky ones to get jobs.

It has been also argued that the problem is a mismatch between the unemployed and the jobs available. These figures give the lie to that as the central problem. It is true that there are skill mismatches, notably due to the downsizing of the swollen construction sector in the boom. However, the large majority of these workers could be employed in other sectors with a certain amount of re-training - but only if the jobs are there. And herein lies the rub. There are few jobs as the data above show. Punishing people will not solve the problem. Only the provision of jobs will.

Ireland has 59.3% of the unemployed out of work for at least a year, over 180,000 people, and this number has increased sharply, well above that of the EU countries as a whole, as the second chart shows. The reason the unemployed are out of work is due to the lack of jobs, and not a sudden bout of laziness in the population. In the 27 countries of the EU, Ireland has the third highest long-term unemployment share among total unemployment, after Slovakia and Bulgaria, both of which had particular historical problems including the de-industrialisation that followed the shift from Communism.

By delaying the solution to this problem, permanent damage is done to the prospects of many unemployed, as many studies show, referring to a lasting “scarring” effect. Youth unemployment is also particularly high in Ireland compared to other EU countries, coming 6^th last in the ranking with a 30% unemployment rate among youth.

While measures to support the long-term unemployed will certainly be welcomed, Breda O’Brien from the Irish National Organisation of the Unemployed is sceptical:

'Breda O’Brien said the new service would assess people but that the supports offered to those with a higher probability of re-entering employment would be minimal. “The Government has to seriously address this issue. It cannot be threatening people to have their social welfare cut if there is no job there.” '

Reducing or cutting off unemployment pay becomes a matter of punishing the unemployed, something that was supposed to have gone out with the Poor Law of centuries past. Why is policy regressing to this approach of Victorian times? And why are the unemployed being made scapegoats for failing employment policies?

Supply-side policies of any kind – the only ones that are being tried – simply cannot work in this context. Only demand-side policies that actually create the required number of jobs can have an effect on unemployment of any significance.

I am grateful to Ronan O’Brien for his contribution to the data and analysis.

Tin Whistles and Mπουζούκια

Ireland is not Greece:  we get a lot of that from Government ministers, Troika officials and commentators.  This truism, however, says less than it purports to.  Yes, Ireland is not Greece.  Ireland is not Belgium, Romania, Brunei, the Yukon Territory or Idaho, either.  Of course, the message is that Greece is a basket-case that no investor would want to go near for decades; whereas they are ready to queue up to lend to Ireland in bucket-loads.  Therefore, the more we can distinguish ourselves from Greece, the quicker we can get back to business as normal.

But there’s one interesting measurement that shows that Ireland is definitely not like Greece – it’s actually worse.

When one looks at overall Government debt, it seems that, while Ireland is in a bad state, Greece is far, far worse (all estimates are based on Irish Government and IMF projections). 

In 2015 Government Debt as a % of GDP

• Greece:  165 percent
• Ireland:  115 percent

Okay, we’re above the projected Eurozone average (88 percent) but, whew, at least we’re not like Greece. 

However, when we remove international flows (e.g. profit repatriation, etc.) and use GNP, or GNI which is almost the same thing, the comparison alters (Greek GNI is assumed to be the same proportion of the GDP in 2015 as in 2010). 

2015 Government Debt as a % of GNP

• Greece:  168 percent
• Ireland:  145 percent

We’re still not like Greece, but the debt gap is starting to narrow and the instrumental medleys are starting to play in the same key.

But let’s look at one more measurement, to get a sense of how much debt the residents of each country are carrying.

2015 Government Debt per Capita

• Ireland:  €45,004
• Greece:  €34,474

This is quite a turnaround.  Irish residents will be carrying a far heavier load than Greek residents.  We are advantaged that we have a younger population but can we make that advantage work or, as the Minister for Finance suggests, will we have to be content in investing in our children’s education to ensure they have job opportunities in other countries?  We have other strengths – a modern export base, regardless of how detached that may be from the domestic economy; a more efficient public sector, though this is quickly being downgraded with the continuing cuts; and the fact that our debt has not (yet) reached officially unsustainable levels, though that ‘official’ level is opaque and moveable.

All this might be thrown into doubt, though, with the constitutionally mandated austerity pact coming down at us from the Eurozone and the continuing slow bleed of demand in the economy.  It may still be the case that our debt will overwhelm us.

The point here is that mindlessly chanting ‘We are not Greece’ is not a substitute for analysing what exactly we are – a highly indebted country with projected debt levels that grow every time the Government revises its growth projections.  Last year, the Government made three revisions to its 2015 projections for debt to GNP ratio:

• April 2011:          140.2 percent
• November 2011:  143.3 percent
• December 2011:  145.2 percent

We should expect another revision upwards when the Government produces its update in April – with the IMF and independent forecasters projecting lower growth rates for next year.  Worryingly, Goodbody projects that debt as a percentage of GNP will be approximately 155 percent by 2015.  And, of course, none of this includes the extremely high levels of Irish personal debt.

The Greek government is in negotiations with private sector creditors to reduce its debt burden.  Ireland, with a higher debt per capita, is giving full commitments to pay the creditors – not just of state debt but bank debt as well; even banks that no longer exist.

Indeed, Ireland is not Greece.