Category Archives: Articles for SIPTU’s Liberty

Remember the ‘good old days’? When budgets were giveaways, not hairshirts? When politicians ratcheted up the bidding to cut our taxes come election time? Sure, we didn’t need those billions from Stamp Duty. And, wasn’t income tax too high anyway? Yes, remember the good old days the next time you hear someone wax lyrical about why ‘we are where we are’.

So, where are we now then? The economy is still half banjaxed, even if it has been on the mend of late, but no sooner had the Troika rolled out of Terminal 2 than it was like déjà vu all over again. At a time when they’re still planning to make a billion or more in spending cuts at the next budget, government Ministers were hitting the airwaves with variations on the same tax cutting mantra. ‘Middle Ireland’ needs a break, apparently. Well, who doesn’t?
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Writing this time last year, I looked forward with trepidation to 2013 as another ‘year of living dangerously’. Risks abounded. Every silver lining presaged a cloud. The path ahead was strewn with banana skins and danger lurked around every corner. It’s not for nothing they call economics the dismal science!

Confounded by years and years of growth falling short of forecasts, of the recovery on the horizon being just another mirage, economists can be forgiven maybe for feeling that stagnation was the new normal.

But, could this time be different? Continue reading →

Ireland’s 2014 budget was an ode to Janus, the two-faced Roman deity. Not only was it concocted and communicated to simultaneously placate different audiences, it was ostensibly designed to mark the so-called return of sovereignty – peace in our time.

To Ireland’s lenders, current and future, the budget was a clear statement of intent: that the government would continue to meet all its obligations, including a full €3.1bn adjustment in accordance with the letter of the Memorandum of Understanding signed with the troika.

To Ireland’s citizens, it was sold as an alleviation of austerity, a symbol that we will soon have of control over our own destiny. There was ‘only’ €2.5bn in permanent tax hikes and spending cuts, much worse than it could have been. In fact, Ministers Noonan and Howlin announced a mere €1.85bn in ‘new pain’ on budget day – €0.35bn in net new taxes and €1.5bn in spending cuts, a ratio of 4.3 to 1.

Which of these statements are true?

All of them.
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It may not be perceptible to the naked eye, and for most of us it sure doesn’t feel like it, but the Irish economy may be ready to leave intensive care. Make no mistake, a long and difficult period of treatment is in store, but there is mounting evidence that the worst is over.

Certainly, the last set of headline economic growth figures suggested a case of severe winter flu. This was due in large measure to an export engine stalling in the face of weak global demand and an end to patents on some of the blockbuster drugs produced for foreign consumption in our vast pharmaceutical sector.

Over the course of an uncharacteristically sunny Irish summer, however, the economy’s vital signs took a turn for the better. Unemployment fell slowly but steadily to reach 13.4%, improving by roughly 0.1% per month. Nor is this solely down to emigration and people giving up on the job search; 9,000 full-time jobs were being created monthly up to the end of June. Retail sales surged 6.1% in July, in part because the new 132 number plates encouraged people to buy cars in mid-summer rather than wait until January. Continue reading →

The Irish economic model is premised on the ability to attract an out-sized share of Foreign Direct Investment, particularly from the US, and has been for decades. As a result, we have a vibrant multinational sector that directly or indirectly supports hundreds of thousands of jobs. There are many factors at play, but there can be little doubt that our tax regime is the key driver.

Across the political spectrum, there is near unanimous agreement that the 12.5% corporation tax rate, in place since 1998, can’t be touched. It simply isn’t seen as a policy variable. Any suggestions that this may be otherwise are quickly silenced. Moreover, protecting Ireland’s right to set its own rate has long been a diplomatic priority at EU level. Continue reading →

Five years have passed since the Irish economy began contracting. The economy has begun growing again, slowly. Unemployment remains unacceptably high and is likely to remain in double digits for much of the remainder of the decade. Ireland’s banking system is broken, and deleveraging is set to continue for some time. Public and private sector investment is at its lowest level in the country’s recorded economic history, undermining growth and job creation in the short-term, and productivity in the long-term.

Recognizing the challenges imposed by tight fiscal constraints and still-fragile access to sovereign bond markets, it is time to revisit the Labour Party’s pre-election proposal for a Strategic Investment Bank (SIB) to finance investment in infrastructure and lending to SMEs. Using funds from the National Pension Reserve Fund (NPRF), such a bank could off-set austerity without impacting negatively on the budget balance. Every €1bn can support 10-15,000 new jobs.

There are long-standing, successful models of state investment banks the world over, not least in Germany. Chancellor Merkel made KfW central to their economic stimulus efforts immediately after the financial crisis struck. More recently, the UK has set up a Green Investment Bank to finance environmentally friendly infrastructure and is in the process of setting up a Business Bank to finance SMEs. President Hollande established a Public Investment Bank in France soon after being elected, incorporating the Strategic Investment Fund established by his predecessor. President Obama has been a strong advocate of a national infrastructure bank in the US.

Ireland’s Programme for Government includes a commitment to establish an SIB, and many of its building blocks are already in place, notably the nascent Strategic Investment Fund (SIF). The SIF has yet to have a real impact in driving investment. It requires urgent legislative change to clarify its investment mandate. Moreover, €1.15bn, or 50% of the proceeds from the sale of Irish Life and Bank of Ireland bonds, should be allocated to capital investment, in line with the government’s commitment and troika agreement, and could be allocated to the SIF.

Along with such an expanded SIF, and the three new SME funds and one infrastructure fund managed by the NPRF, some €2.5bn of existing funds could be used to capitalize a fully-fledged SIB capable of funding €6bn in assets and ultimately supporting total public and private sector investment of €25bn. In the short term, steps must be taken to free up NPRF funds for productive investment in Ireland rather. In the medium-term, an SIB would add significant value to Ireland’s banking landscape.

Prior to the 2011 general election, opposition parties were falling over themselves telling us how they were going to play hardball with the banks. One senior opposition spokesperson, now a Minister, famously said a new government wouldn’t give the banks ‘another red cent’. Maybe, as another senior Minister in the FG-Labour government has said, that’s just the sort of think you say during an election campaign.

As a parting gift, the outgoing FF-led government decided to postpone publishing the results of the ‘Prudential Capital Assessment Review’ (PCAR). This was carried out by Blackrock Solutions, a credible player in the global financial world. The PCAR was supposed to put a number on the ‘red cents’ the banks would require to ensure they were bullet-proofed against what was supposed to be a worst-case economic scenario. To this end, Blackrock ran a slide rule across the banks’ accounts and loan portfolios and reported back to the authorities.

Fianna Fail clearly didn’t like what they saw. The election happened in February. The PCAR was published in March. The banks got another €24bn to tide them over until 2013. And bondholders continued to laugh all the way to the … well, not to the bank, I suppose. Continue reading →

Five years of perma-crisis has sapped the optimism of many an economist, in Ireland and beyond. Some of these dismal scientists have prospered in one sense however, making a cottage industry out of doom and gloom. Some of the more thoughtful have offered some humility, realizing that the pre-crisis conventional wisdom was, at best, incomplete and, at worst, false.

For normal people, the age of austerity feels like it’s lasting an eternity. With unemployment still high and incomes stagnant, making ends meet is a constant struggle. Emigration is the path of choice for too many of our young people: enough people to fill Croke Park are leaving every year. The huge household and private sector debt burden means a large cohort of people can’t participate fully in our economy and in society. Unfortunately, none of this is going to change dramatically in the near term. Continue reading →

The debate on debt may go down as the defining debate of this decade. Everyone is painfully aware that after a borrowing-fuelled consumption and property bubble, Ireland is now reeling from the hangover.

The government is over-indebted, businesses are over-indebted, and families are over-indebted. Even the banks themselves are over-indebted, mandated by the troika to shrink their balance sheets, reining in credit for everyone else as a result. As a nation, we are among the world’s leaders in the borrowing race, total private sector credit standing at over 300% of GDP, even after IFSC activities are stripped out, and general government debt nearing 120% of GDP.

This debt overhang is undoubtedly undermining investment, job-creation and economic growth. Everyone is spending less, borrowing less, investing less and busy paying down loans to ‘repair their balance sheets’. Even though Ireland’s savings rate has increased markedly in recent years to about 11%, investment as a proportion of GDP is only 10%, near record lows and about half of where it needs to be at to retain and improve the country’s production capacity. Continue reading →