Showing posts with label Irish reforms. Show all posts
Showing posts with label Irish reforms. Show all posts

Tuesday, November 4, 2014

4/11/2014: Prosperity Index 2014: Ireland's Reforms Failing to Produce Strong Socio-Economic Results


Today, Prosperity.com (http://www.prosperity.com/#!/) are publishing the 2014 Legatum Prosperity Index which offers cross-countries' comparable data on how economic, social and governance conditions define socio-economic prosperity around the world.

According to the index methodology, "traditionally, a nation’s prosperity has been based solely on macroeconomic indicators such as a country’s income, represented either by GDP or by average income per person (GDP per capita). However, most people would agree that prosperity is more than just the accumulation of material wealth, it is also the joy of everyday life and the prospect of being able to build an even better life in the future. The Prosperity Index is distinctive in that it is the only global measurement of prosperity based on both income and wellbeing."

This post covers my analysis of the Legatum data for Ireland compared to our European peers, covering two peer groups:

  • Advanced and highly competitive small open economies within the euro area, including Austria, Belgium, Netherlands, Luxembourg and Slovak Republic (SOE EA) and
  • Advanced and highly competitive small open economies outside the euro area, including Switzerland, Denmark, Iceland and Norway (SOE ex-EA).
  • Both peer groups are represented by the simple average ranks achieved in 2012-2014 period.


Overall, 2014 Prosperity Index ranks Ireland as 12th most prosperous nation in the world and 8th in the European region (combining 40 countries). This means that Irish rankings remained unchanged on 2013 levels both globally and within Europe. Over 2013-2014, Ireland's rankings deteriorated by 2 place worldwide.

This is an impressive ranking for Ireland placing us 5 ranks ahead of other small open economies in the euro area countries, SOE (EA), but lagging the average ranking of the ex-euro area small open economies (SOE ex-euro) by 7 places. Significantly, while similarly to Ireland's average ranking for SOE (EA) economies has deteriorated over 2012-2014, the average ranking of SOE ex-Euro group has improved. The gap between Ireland's rank in 2014 and the average rank for non-euro area SOE has widened to 7 points compared to 3 points in 2012 and 6 points in 2013.



Very similar dynamics in Ireland's performance are also evident in almost all of the eight sub-categories of the rankings.

While Irish global ranking in the economy sub-category improved from 33rd in 2013 to 29th this year, the latest ranking remains significantly worse than 2012 Index position (25th). For our peers within euro area, average rankings in 2012-2014 were 21st, 28th and 27th, respectively - a slightly better performance than Ireland's. Meanwhile, our peers' average rankings for SOE ex-euro area have consistently improved from 21st in 2012 to 17th in 2013 to 14th in 2014. Despite the officially-registered booming GDP and GNP growth, Ireland still lags behind both the advanced euro area small open economies average and ex-euro area economies average.

The gap between Ireland's rankings (2012-213 at 14th place, 2014 at 16th place worldwide) in Entrepreneurship and Opportunities sub-category and the performance of the ex-euro area SOE group (average rank of 5th in every year between 2012 and 2014) is getting wider. Significantly, after several years of talking up targeted entrepreneurship policies reforms, Ireland is showing deteriorating performance in this sub-index, with our world wide position falling from better than euro area average 14th place in 2013 to 16th (matching the exact average for the SOE euro area economies) in 2014.



Another area targeted by numerous structural policies in recent years is institutional and governance reforms. 2014 Legatum Prosperity Index ranks Ireland 14the in the world in quality of governance - with no change in the rank on 2012 and 2013 levels. Despite much of an effort to clean up and improve Irish institutional systems, our rankings show identical dynamics as that of our euro area peers. Meanwhile, our non-euro area peers' performance has improved from the average 9th rank in 2012 and 2013 to the average 7th rank in 2014. While slightly outperforming the SOE euro area average ranks (16th), Ireland's gap to non-euro area SOEs has widened from 5 places in 2012-2013 to 7 places in 2014.



In terms of core public services, such as health and education, the picture is more mixed. In education sub-category of the 2014 Legatum Prosperity Index, Ireland ranks respectable 8th, which represents an improvement on 2013 and 2012 positions (11th and 14th respectively). Here we outperform our euro are and non-euro area peers, although the gap in favour of Ireland to non-euro area peers group is closing, falling from 5 places in 2013 to 2 places in 2014 rankings. In contrast, in health services, Ireland's performance is rapidly deteriorating in absolute and relative terms. In 2012-2014, our euro area peers average rank stayed stable at 12th. Ditto for our non-euro area peers, whose average rank remains steady at the 9th place worldwide. Ireland's global rankings slipped significantly, from 11th place in 2013 to 15th in 2013 and 17th in 2014. If in 2012 we outperformed our euro area peers' average by 1 place, in 2014 Ireland showed an underperformance relative to this group of 8 ranks.


2014 Legatum Prosperity Index covers three sub-categories of social performance parameters: Personal Freedom, Social Capital, and Safety and Security. In all of these, with exception of Safety and Security sub-category, Ireland's performance has deteriorated over 2012-2014 horizon in absolute terms, and relative to non-euro area small open economies. On a positive side, our performance relative to the euro area peers remains robust.



While Legatum Prosperity Index rankings are not comparable across 2009-2011 and 2012-2014 years, actual index scores offer some indication of our performance in absolute terms in 2014 period compared to 2009-2011. Chart below shows changes in the index and sub-categories in 2014 compared to peak performance in 2009-2011.


All sub-scores that form the overall Prosperity Index are showing poorer performance in 2014 compared to their peak performance in 2009-2011 period. Index scores are reflective of country own performance, as opposed to country ranks which show relative performance compared to other countries covered in the surveys. As the chart above clearly indicates, in all sub-categories of the Legatum Prosperity Index, Ireland performs poorer today than in 2009-2011. Aside from the economic performance deterioration, Ireland's scores suffered significant declines in health, personal freedom, governance and education - all areas targeted by public sector reforms enacted by the current Coalition.

To summarise: while overall rankings for Ireland present a rather positive picture of our socio-economic institutions and environment compared to other euro area small open economies, two major concerns warrant significant attention of our policymakers:

  1. Ireland remains relative under performer compared the non-euro area small open economies with our gap to this peer group average ranks and scores widening in 2014 compared to 2013 and 2012.
  2. Ireland's reforms are not appearing to yield positive returns compared to 2009-2011 performance across all sub-categories of the index.

Reforms, including structural reforms, enacted from 2012 to-date have broadly failed to significantly alter the our socio-economic competitiveness compared to our core peers.

Sunday, October 27, 2013

27/10/2013: Financial Repression, Economic Suppression & Budget 2014

This is an unedited version of my Sunday Times article for October 20, 2013.


With fanfare of media appearances and fireworks of Dail statements, Budget 2014 was pushed off the dry dock and into the turbulent waters of reality. Full of political sparkle on the outside, overloaded with hidden taxes and charges and yet-to-be-fully-detailed painful cuts on the inside, it sailed off into the future. It will take at least 9-12 months from now to see what adjustments will have to be made in 2015 to compensate for the 'savings' on cuts delivered this week. It will take us longer to find out if the Budget 2014 will have a positive or negative effect on our ability to fund our deficits in the markets.

Yet, one thing is beyond the doubt: Budget 2014 was a significant gamble by the Government that could have done better by avoiding taking any gambles at all. Minister Noonan has decided to buy some political capital in the Budget. This capital came in the form of reduced rate of overall budgetary adjustment, compensated for by the hope-based increases in public sector efficiencies, plus some symbolic handouts to middle class families. Majority, such as the free GP visits for children under the age of 5, were poorly targeted and economically inefficient – extending scarce resources not to where they are needed most (such as, for example, long-term care provision or means-tested provision of health services) but to where political expediency leads. Many fail the core Budget objectives of making our fiscal policies more robust to adverse shocks that may occur in the near-term future.

In the end, Budget 2014 delivered virtually no real departures from the past Budgets. Predictably, there were no 'new' taxes. Instead the Budget put forward a list of new 'revenue raising measures'. The State will claw out of the banks EUR150 million in levies. Given that our banking sector is being reduced to a Three Pillars oligopoly, the levies will come straight from charging customers more for the same services. Pensions funds levy - a form of expropriation of private property - is to raise additional EUR135 million. This is a tax on present income, and in the case of pensions funds levy a tax on current wealth, plus a tax on future incomes foregone due to reduced levels of pensions funds. EUR140 million will be pumped out of the banks’ customers by taxing interest on savings. All in – financial sector will take a hit of EUR425 million on a full year basis, reducing its ability to lend, invest in the economy and to deal with mortgages distress. The measures will also weaken the quality of Irish banks' deposits base by reducing incentives to save. Carmen Reinhart and Kenneth Rogoff aptly termed such measures ‘financial repression’. De facto, we are bailing in ordinary banks customers and savers to pay for the past sins of the banks. Cyprus redux, anyone?

Cuts side of the Budget was also predictable. At the aggregate level, departmental expenditure as the share of GDP continues to run above 1990-2007 average. Instead of real cost reductions in Health we got some EUR250-300 million worth of new charges to be levied on services to insurance holders. And reduced insurance deductibility on the revenues side should do even more to reduce insurance coverage in the market. Net effect will most likely be falling transfers from private patients to public services, and higher demand for public health.

From businesses perspective, whatever the State added on one side of the budgetary equation, the state took out on the other. Thus, for all incentives for construction and building trade, overall capital spending by the Government in 2014 is projected to fall by some EUR100 million. As we stand, in 2013, capital spending by the Government barely covers amortization and depreciation of the total stock of public capital. Next year, things are going to get worse.

Much of the business stimulus schemes are geared toward supports for the property markets, including the incentives for foreign investors to put money into Irish REITs. Aside from the property-related measures, other business stimulus polices are either extensions of the already existent ones or more promise of doing something in the future. One example is the issue of Trade Finance supports. We are now five years into talking about the need to help smaller exporters with the cost of and access to trade insurance and credit.  Still, there is no tangible delivery on this.


However, the real question, left unanswered by Budget 2014 is: what's next for Ireland? The Government is rhetorically focused on our 'exit' from the Troika-led funding programme. This objective is a policy epicycle designed to ease public attention off the realities of bad domestic governance during the crisis. Exit from the bailout, financially, fiscally and economically, means a public recognition that Ireland has run out of funds we can borrow from the IMF and the EU. It also puts forward a commitment that, unlike Greece, we will not be asking for another bailout. Being not Greece does not make us Iceland, however, since Iceland repaid its bailout loans. In contrast, we will be carrying our debts to Troika for years to come.

The Government is promising that once we exit the bailout, we will regain our control over fiscal policies. This is a gross over-exaggeration. Having ratified the Fiscal Compact, Ireland is now subjected to heavy EU oversight as long as our fiscal performance falls short of the targets set in the treaty. It will be long time before we meet all of the conditions.

The scrutiny of our targets will increase, while our performance will remain under serious pressures arising from the crisis. Most recent IMF forecasts assume full EUR5.6 billion adjustments taken over 2014-2015 period, and economic growth averaging over 2.1 percent per annum (almost 6 times the average growth in 2012-2013 period). These forecasts imply that in 2014-2015 Ireland will still face the third highest cumulative deficits in the euro area ‘periphery’. And the debt levels of Irish state are set to continue rising. In 2013, the Department of Finance projects the level of Irish Government debt to be at EUR205.9 billion. By 2018 this is projected to rise to EUR211.6 billion.

And here's another kicker. The Fiscal Compact sets the target for long-term structural deficits (in other words deficits that would prevail were the economy running at its long run sustainable growth potential) at 0.5 percent of GDP. IMF projections out through 2018 put Irish structural deficits declining from 5.1 percent of potential GDP in 2013 to 2.0 percent in 2018. In other words, in 2018 Ireland is expected to be the worst performing 'peripheral' state in terms of structural deficits and operate well outside the criteria set in the Fiscal Compact.

Worse, comes December 15, we will lose a strong supporter of our efforts to restructure legacy banking debts and the only member of the Troika that promotes structurally more important economic and markets reforms.

On foot of our weak fiscal position, the politicisation of the Irish economy is already building up, driven primarily by our European partners and – until December 15 – resisted by the IMF.

The pressure is rising on Ireland's corporate taxation regime. The Government admitted as much by promising to close the loophole that allows some MNCs to nearly completely avoid paying Irish corporate taxes.

The pressure is also growing on blocking Ireland’s chances to restructure legacy banks debts. Germany, the ECB and the Eurogroup are angling to block Ireland's potential access to the European funds set up to deal with the future banking crises.

We are going into 2014 self-funding mode with all the costs of the bailout in place, including the Dvoika (Troika less one) oversight and substantial deficit and debt overhangs. It now appears that there will be no credit line to cover any increases in the cost of borrowing that might arise in the future. There will be no precautionary fund to cushion against any risk to market demand for Irish Government bonds. There will be no system in place to deal with any future banking problems or with the legacy debts should such arise. The ECB, the IMF and our forecasters are all warning us that we still face potentially significant downside risks to growth and banks stability. The IMF has been for months raising the issues of the SMEs insolvencies and poor quality of banks capital.

In other words, we are boxing ourselves into a high-risk game with little to show for this in terms of a positive return from our 'exit' from the bailout.

History suggests that prudence, not pride should be our guide. Back in 2010 we pre-borrowed aggressively in the markets prior to the state finances collapsing under the poorly structured banks bailouts. Now, we are gunning for the 'exit' without having secured any support from our 'partners' once again. The hope is that this time it will be different: the markets will lend us at decreasing costs, while growth lifts the entire domestic economy out of stagnation. This might not be an equivalent of playing Russian roulette, but it is certainly a game of chance with high stakes on the losses side and little tabled on the potential winnings side.




Box-out:
The latest OECD research on basic skills across the advanced economies puts to a serious test our claims to having a highly educated workforce. Ireland ranked eighth in terms of the proportion of younger adults with tertiary education. In terms of problem solving proficiency, both our college graduates and adults with only secondary education rank below their respective OECD averages. In problem solving in a technology-rich environment – a proxy for skills related to internationally-traded services, the sole driver of our economy today – Ireland ranks 18th in the OECD. Our younger workers score below their OECD peers in basic literacy and in numeracy. When it comes to introduction of new processes and technologies in the workplace Ireland is ranked between such premier divisions of the global innovation league as Cyprus and Belgium. Given our poor performance in digital economy-specific skills, exposed in October 2012 report by the OECD and covered in these pages before, it is high time for us to get serious about reforming our education and training systems.

Tuesday, October 8, 2013

8/10/2013: Jokers Burning Money: Public Sector Reforms - Village, October 2013


My article for the Village Magazine on pre-Budget 2014 analysis of health spending in Ireland: http://www.villagemagazine.ie/index.php/2013/10/gurdgiev-on-healthcare-jokers-burning-money/

Thursday, May 16, 2013

16/5/2013: Euro Area 'Austerity' in One Chart

Frankly, folks, there is nothing like making a factual argument across emotive subject lines... I have put up two posts on Euro area 'austerity' - here and here - and the readers want more numbers, usually in hope of finding a hole in my arguments.

Here is, perhaps a better, summary of the Euro area Austerity in its own numbers - in levels of nominal expenditure and revenues:


I hope this settles the issue:

  1. Euro area austerity has meant revenues collected by the governments are up
  2. Euro area austerity has meant that Government spending is up
Tell me if this is a 'savage cuts' story or a 'tax burden rising' story...

Sunday, May 12, 2013

12/5/2013: Much austerity? Not really... & not of the kind we needed

A week ago I published a blogpost exploring IMF data on austerity in Europe, based on a sample of 20 EU countries with advanced levels of economic development (excluding Luxembourg). You can read that post here. The broad conclusions of that post were:

  1. There is basically no austerity in Europe, traceable to either changes in deficits, changes in Government spending or changes in debt. If anything, the European fiscal policies can be characterised by a varying degree of fiscal expansionism during the current crisis, relative to the pre-crisis 2003-2007 period.
  2. This, of course, does not account for transfers between one set of expenditures (e.g. public investment reductions) and other lines of spending (e.g. banking sector measures).
  3. The only area of fiscal policy where austerity is evident is on taxation burden side, which rose in the majority of sampled economies.


The numbers got me worried and in this post I am looking solely on deficits side of Government spending. If there is savage austerity in EU27, so savage it is killing European economies, surely it would show up in General Government deficit numbers. As before all data reported is based on averages and comparatives computed by me from IMF's WEO data as reported in April 2013 edition of the database.

Let's take a closer look.


Only 2 countries out of 20 have recorded a reduction in average deficits during the crisis period (2008-2012) compared to the pre-crisis average (2003-2007). These were Germany, where annual average deficits declined by 0.95 percentage points (pretty significant) and Malta, where annual average deficits fell 0.79 percentage points (also pretty sizeable drop).

On average, EU20 sample annual deficits have increased by a massive 3.44 percentage points over the pre-crisis period. In  non-Euro area states, the average increase was 3.16 percentage points. But in 'savagely austerian' Euro area, the increases averaged 3.51 percentage points.

So far, the Euro area analysts' rhetoric opposing austerity has been focused on 2012 as the year of highest - to-date - cuts. Was this so? Not really:


Again, as above, there is scantly any evidence of deficit reductions, and plenty of evidence that deficits are getting worse and worse. Again, the comparative is not to the absurd levels of spending during peak spending years of the crisis, but to pre-crisis averages. After all, stimulus is not measured by an ever-escalating public spending, but by increase in spending during the recession compared to pre-recession.

The same conclusion can be reached if we look at 2007 deficit compared to 2012 deficit.


In other words, folks, Europe has had, so far, only 3 measurable forms of austerity, none comfortable to the arguments we keep hearing from European Left:

  1. Tax increases (remember, we want to soak the rich even more, right?)
  2. Revenue re-allocations to banks measures (remember, no one on Europe's official Left has come out with a proposition that banks should not be bailed out) and to social welfare (clearly, the Left would have liked to spend even more on this)
  3. Germany
Note: we must recognise the simple fact that social welfare spending will rise in a recession for a good reason. The argument here is not that it should not (that's a different matter for different debate), but that when it does increase, the resulting increase is a form of Government consumption stimulus.

So let's make the following argument: Euro area did not experience 'austerity' in any pure form in the reductions in deficits. Instead, it experienced a 'stimulus' that was simply wasted on programmes and policies that had nothing to do with growth stimulus (e.g. banks supports). Here are two charts to illustrate:


What the charts above clearly show is that Euro area can be divided into three types of member states:
  • Type 1: states where cumulated 5 year surpluses over pre-crisis period gave way to cumulated 5 year deficits. These are: Estonia, Finland, Spain and Ireland.
  • Type 2: states where cumulated 5 year deficits over the pre-crisis period were replaced by more benign deficits over the crisis period period. These are Germany and Malta.
  • Type 3: all other euro area states where cumulated 5 year deficits over pre-crisis period were replaced by even deeper cumulated deficits over the 5 years of the crisis.
The only two types of fiscal policy that Euro area is missing in its entirety is the type where pre-crisis deficits gave way to crisis period cumulated surpluses (no state in the sample delivers on this) and the type where pre-crisis surpluses gave way to shallower crisis-period surpluses (only one European state - Sweden - qualifies here).

Oh, and one last bit relating to the chart above: all of the peripheral countries, save Italy, had a massive increase in deficits on cumulated basis during the crisis compared to pre-crisis period. Apparently this is the savage austerity that has been haunting their economies.


Updated:
An interesting issue raised by one of the readers:
And my response:


Thursday, May 2, 2013

2/4/2013: MDH: Do as I imagine... not as I say or do...


So Irish President Michael D. Higgins has called for a “radical rethink” of the “single hegemonic model”, adding that a “pluralism of approaches” is needed in Europe. He also called for a more active ECB and debt pooling in the eurozone.

wait, what's that? Another statement of plausibly sounding populism with underlying internal contradictions so deep, the whole thing makes no sense? Well, yes.

MDH wants more 'pluralism' in policies then calls for 'more active ECB debt pooling' - which of course is anti-pluralist centralisation of policy. Oh, well, if only MDH actually had an idea what he speaks about beyond the cliches of 'bad capitalism, bad, bad, bad'.

And then to add a  self-insult to his self-injury. MDH penned his name to the IBRC bill which converts promissory notes (the 'pluralist' in nature instrument of quasi-governmental debt) into government bonds (the 'centralised' in nature instrument of pure sovereign liability standardised across all countries).

Is MDH no longer a 'do as I say, not as I do' leader but a 'do as I imagine, not as I say or do' leader?

2/5/2013: Gravy, door, windows... JobBridge

Here's something that can be described as a pricey exemplification of the 'Only in Ireland' policy approach to public institutions:
http://www.independent.ie/irish-news/consultant-report-into-controversial-jobbridge-scheme-recommends-more-reports-29236030.html

That's right: JobBridge 'internships' scheme (or rather 'free labour for few months' scam concocted by the Government to register further 'improvements' in 'labour costs competitiveness') has been assessed by the public sector captive research outfit Indecon (aka ESRI Junior).

And the conclusion of the already pricey report is that we need more and even pricier reports.

Gravy flooding through the door is apparently not enough... need windows access too...

2/5/2013: Austerity... savagely over-hyped?..


It was May 1 yesterday and in celebration of that great socialist holiday, "In Spain, Portugal, Greece, Italy and France tens of thousands of people took to the streets to demand jobs and an end to years of belt-tightening".

Except, no one really asked them what did the mean by 'belt-tightening'. Some, correctly, meant by the term the concept of transfers from taxpayers (usually via higher taxes, rather than spending cuts) to the broken banks, but majority, undoubtedly, we decrying cuts in Government spending. You see, damned austerity is just that (or supposed to be just that): cuts in the levels of expenditure. These can mean reduction in absolute level of spending, or a reduction in spending as a proportion of GDP.

And, you see, not much of that is going on in Europe nowdays, despite all the fierce rhetoric about savage cuts.

Ok, let's do some exercises, using IMF data.

First, consider tax revenues:


In the chart above, I marked with darker columns countries where tax revenues as % of GDP have declined during the current crisis (more precisely, taking average tax revenues fior 2003-2007 pre-crisis boom days and comparing against 2012 outrun). Guess what?
  • In % of GDP terms, savage austerity meant that Government revenues have declined by less than 1 percentage point in Cyprus (-0.89 ppt), Czech Republic (-0.64 ppt) and Portugal (-0.08 ppt), the revenues have fallen by between 1 and 2 percentage points in Ireland (-1.26 ppt) and the UK (-1.68 ppt) and have declined by more than 2 percentage points in Denmark (-2.50 ppt), Spain (-3.28 ppt) and Sweden (-3.15 ppt).
  • All in, only 8 out of the 20 EU countries considered above (these are all advanced economies of the EU, excluding Luxembourg, where data is so dodgy, no meaningful analysis can be made) have managed to post any declines in Government revenues relative to GDP. All other countries have posted increases. Overall, sample average Government revenues as % of GDP stood at 43.04% in 2003-207 period and this has risen to 43.84% in 2012.
  • Now, onto levels of revenues. The sample of countries shown above had combined annual Government revenues of EUR7,791.61 billion in 2003-2007 on average. In 2012 this number stood at a 17.96% premium or EUR9,190.96 billion.
  • Of all 20 countries considered, only one - Ireland - had experienced level reduction in Government revenues, which dropped from an annual average of EUR57.896 billion in 2003-2007 period to EUR55.42 billion in 2012.
  • As I said above, there is only one meaningful form of austerity in Europe today: austerity of higher tax burdens on people.
Now, let's check out expenditure side of Europe's 'savage austerity' story:


Again, chart above highlights in darker color countries where Government expenditure had declined in 2012 compared to 2003-2007 pre-crisis average in % of GDP terms. The picture hardly shows much of any 'savage cuts' anywhere in sight:
  • Of the three countries that experienced reductions in Government spending as % of GDP compared to the pre-crisis period, Germany posted a decline of 1.26 percentage points (from 46.261% of GDP average for 2003-2007 period to 45.005% for 2012), Malta posted a reduction of just 0.349 ppt and Sweden posted a reduction of 1.37 ppt.
  • No peripheral country - where protestes are the loudest - or France et al have posted a reduction. In France, Government spending rose 3.44 ppt on pre-crisis level as % of GDP, in Greece by 4.76 ppt, in Ireland by 7.74 ppt, in Italy by 2.773 ppt, in Portugal by 0.562 ppt, and in Spain by 8.0 ppt.
  • Average Government spending in the sample in the pre-crisis period run at 44.36% of GDP and in 2012 this number was 48.05% of GDP. In other words: it went up, not down.
  • In level terms, things are even uglier for the 'anti-austerians'. Total (for this sample of countries) Government annual spending averaged EUR8,002 billion in 2003-2004 period and this rose to EUR9,941 billion in 2012 a rise in Government spending of whooping 24.2%.
  • In level terms, not a single country in the sample of 20 advanced EU economies posted a decline in Government spending from the pre-crisis period to 2012. All posted increases in overall spending ranging between 88% for Estonia, to 7.76% for Portugal. Of all peripheral countries, not one cut a single cent on 2003-20007 average spending levels, with Cyprus hiking spending by whooping 39.8% in 2012 compared to 2003-2007 averages, France delivering a massive increase of 24.9%, Greece raising it modestly by 8.73%, Ireland by a massive 22.01%, Italy by a relatively benign 14.67%, Portugal by the sample lowest rate of 7.76% and Spain by a jaw-dropping 38.67%.
  • All in, there is no 'savage austerity' in spending levels or as % of GDP.
So what is going on, folks? May be we can find austerity in deficits? Afterall, Paul Krugman & Co are telling us that we need to run deficits in the economy during recessions and this is the leitmotif to all of the anti-austerian policies proposals?

Savage austerity thesis must find at least a significantly large number of countries where there is no deficit financing going on during the crisis compared to pre-crisis activity, or at least a very large number of countries where deficits have declined compared to pre-crisis activity. Is that the case?


Sorry to say it, folks, errr... No. That is not the case.
  • Only three countries in the entire sample of 20 have posted decreases in Government deficits in level and as 5 of GDP terms.
  • In level terms, deficits declined in Germany, Italy and Malta. They rose in all other countries. Overall level of deficits in 20 countries analysed rose from EUR40.07 billion in 2003-2007 (annual averages) to EUR127.79 billion in 2012. In other words, during 'savage austerity' deficits tripled, not shrunk.
  • In terms of relative weight to GDP, deficits also declined only in three countries - the same three countries as above. 
  • Savage austerity meant that deficits increased in all peripheral states save Italy and that across 20 economies, whereas average deficit stood at -1.315% of GDP in 2003-2007 period, that rose to -4.215% of GDP in 2012.
 
As I said above, there are really two reasons for protesting in Europe today against what can very loosely be termed 'austerity':
  1. As taxpayers we should protest against higher taxes & charges levied against us by the States to pay for various banks rescue measures and for continued public spending inefficiencies and private sector subsidies (note: I am not saying that all public sector spending is inefficient, I am alleging that some of it remains inefficient today); and
  2. As taxpayers and residents we should protest about misallocation of scarce resources (including some public spending) from necessities (e.g. social welfare and unemployment protection, health, education, etc) to rescuing insolvent banks and corporate cronies.
Aside from the above reasons, please spare yourselves the blind belief in various Social Partners-produced spin about 'savage cuts'. All they care for is to increase even more state spending on their pet projects.

Tuesday, February 28, 2012

28/02/2012: Reforms in Ireland - at risk? (Sunday Times 26/02/2012)

My Sunday Times article from 26/02/2012 - unedited version.


So far, the explosive nature of Greece’s crisis has been a boon for Ireland, as international perceptions of our economic and fiscal fortunes have turned more optimistic in some analysts’ and investors’ circles. This shift in the sentiment, however, may be threatening to derail the already fragile momentum for economic reforms here.

Irish budgetary dynamics for 2011 were largely on target, although this achievement conceals significant pressures on the tax receipts side and the lack of real progress in tackling runaway spending in three core current expenditure areas – Social Welfare, Health and Education. In fact, much of the previous deficit adjustments have been based on the Governments picking the low hanging fruit of capital spending cuts, administrative savings, and substantial tax increases, soaking the middle and upper-middle classes. Budget 2012 was pretty much the firs attempt by the Irish Government to rebalance the overall budgetary dynamics that, since 2008, have penalized higher-skilled and entrepreneurs. It is hard to see how this approach of piecemeal changes targeting the path of political least resistance can continue delivering ever-rising levels of fiscal adjustments already pencilled in for 2012-2015, let alone maintain the budgetary discipline thereafter.

Accounting for the delayed December 2011 tax receipts that were incorporated in January 2012 figures, the Exchequer deficit in the first month of 2012 was €160 million ahead of that recorded in January 2011. This gap shows that the pressure on Ireland’s fiscal dynamics has not gone away.

There is a more fundamental problem looming on the horizon – the problem of growth. To deflate the public debt that is now well in excess of 107% of our GDP and climbing, we need some serious economic growth. On average, over the next 10 years, we will need growth of over 3% annually over and above inflation in order to bring our Government debt down to 90% of GDP. To sustain some private sector debts deleveraging will require even higher rate of growth. Compare the current situation with that in the 1980s and the maths required for budgetary and households’ deleveraging become dizzyingly high.

In Q3 2011, Ireland registered the twin contraction in GDP and GNP and majority of the analysts expect the same for Q4 figures. For the year as a whole, we are likely to post approximately 0.9% real GDP expansion. Forecasts revisions for Irish economic growth have been driving us beyond the bounds of the fiscal targets we set out for this year. The Budget 2012 assumed economic growth of 1.3% against the IMF, Central Bank, EU Commission, and ESRI forecasts of 0.9-1.1% growth. More recent February forecasts by the markets analysts and ESRI put the range for 2012 growth at -0.5% to 0.9%. Much the same is true for forecasts out to 2015, with Government growth prognoses coming in at a rather optimistic 2.43% annual average against IMF November 2011 projection of 2.25%. Taking the lower range of most current forecasts, the shortfall on Government current assumptions for growth can be as high at €5 billion – a sizeable chunk of change. Under the adverse shock scenario by the IMF, if average growth were to decline to 1% of GDP – a statistically plausible assumption – the shortfall will be close to €10 billion.

This means that the pressure is still very much on to deliver on 2012-2013 fiscal deficit targets of 8.6% and 7.5% respectively. More importantly, the entire recovery framework for Ireland is clearly misaligned. Instead of focusing on the simple short-term targets for fiscal deficits, Irish Government must focus on long-term growth environment. Putting the patient – the Irish economy – ahead of the disease – the fiscal and household debts overhang – is a must.

This puts into the context the events of the last two weeks. Specifically, it highlights the levels of unease with Irish Government plans being expressed, for now rather quietly, by some markets participants. It also underpins the subtle change in the Government own signals to the Troika. And, it is simultaneously contrasted by the Government public rhetoric that has been stressing the PR spin over sombre determination to act. Virtually all recent actions suggest that the Government is hoping that something will happen between now and 2013 to miraculously restore growth, thus alleviating the need for serious corrective measures on the current expenditure side.

First, take the Memorandum of Understanding (MOU). Last week, the Government review of budgetary adjustments targets stated that 2013 fiscal savings will be “at least €3.5 billion” (page 14 of the MOU). The subtle change of language from the November 2011 version of the MOU which did not include the words ‘at least’ in relation to 2013 target might be a sign that the Government is being forced to accept the reality of its multiannual growth projections being overly optimistic in the current global and domestic growth environments.

Yet, when it comes to outlining reforms agenda, the MOU contains nothing new compared to its previous versions. The already inadequate set of measures on dealing with personal debt announced last night is presented as the end-all reform. Dysfunctional energy and utilities sectors are barely covered with exception for one specific measure – creation of the unified water management bureaucracy. Inefficiencies in the domestic services sectors, poor institutions relating to supporting competitive markets in these sectors and labour markets reforms are treated with generalities in place of tangible proposals. Vague promises of reforms of social welfare system and structural reforms in the state enterprises sector and financial services unveiled and partially actioned in the past are simply repeated once again in the current MOU.

In contrast, the Government has claimed this week that it has rather specific targets for yet another spending project – the ‘jobs creation’ efforts to be financed via privatizations returns. In other words, unlike Charlie McCreevy who spent the money he had, Minister Noonan is eager to spend what he hopes to have. To-date, Minister Noonan has managed to spend quite substantial funds on ‘jobs creation’ with various announcements taking potential total bill for these initiatives to well over €1 billion annually. Outcomes? Well, none, judging by the QNHS and Live Register data. The JobBridge programme is a resounding failure with the vast majority of ‘apprenticeships’ in effect displacing real jobs that would have been created through the normal course of business growth. The ‘Vat stimulus’ to tourism and hospitality sector is another failure. Fas restructuring is shambles.

The privatization plans, supported by the ESB and other state monopolies, are clearly designed to minimize any potential disruptions in the status quo of the semi-states-dominated sectors. Thus, privatization-induced changes in the energy and transport sectors will be purely cosmetic, the structure of the regulated markets will remain as anti-consumer as ever. Vast swathes of the domestic economy will remain protected from private investment and enterprises as ever.

Despite major risks present in the global and domestic economic environments, the Irish Government is slipping into the comfort zone of PR exercises, photo opps, and foreign ‘investment missions’.

By postponing the reforms necessary to boost our economic growth potential, the Government currently is putting an undue amount of risk onto the Irish economy. Its gamble is that sometime over the next 9-12 months Irish economy will be propelled to a miraculously higher growth plane and that this growth will be sustained through 2015 and thereafter. In the mean time, the Government will spend its way into jobs creation, while protecting its vested interests of the shielded sectors and avoiding any real structural reforms.

Chart:

Sources: IMF WEO database and country updates


Box-out:
Much of the latest attention paid to the external trade data has been devoted this month to the sudden and rapid slowdown in exports over the recent months. And this analysis is very much correct: in H1 2011, Irish goods exports and trade surplus grew by 6% and 2.5% respectively. In H2 2011, the same rates of growth were 1.9% and 1.5%. However, there are some very interesting trends emerging from the trade statistics by geographical distribution. Using eleven months data for 2011, annual rate of growth in Irish trade surplus vis-a-vis the EU is likely to come in at -1.7%, against the overall annual rate of growth of 1.5%. In contrast, Irish trade balance with Russia is likely to rise a massive 92% in 2011 compared to 2010. Our trade deficit with China is likely to decline by 9%. Although our trade deficit with India is expected to widen by almost 11%, our trade surplus with Brazil is on track to increase by almost 32%. Courtesy of Brazil and Russia, Irish trade surplus with BRICs in 2011 is likely to have reached close to €238 million, first year surplus on record.

Monday, January 16, 2012

16/1/2012: Irish Bailout Redux - Sunday Times 15/01/2012

Several articles in the press yesterday on why Ireland will require / need a second 'bailout' - here's an excellent piece from Namawinelake and here's a piece from Colm McCarthy.

This is an unedited version of my Sunday Times (January 15, 2012) article on the same topic.



In May 2011, as Greece was sliding toward the second bailout, I conjectured that within 24 months, Ireland and Portugal will both require additional bailout packages as well. This week, my prediction has been echoed by the Chief Economist of the Citi, William Buiter.

According to Buiter, the costs of borrowing in the markets are currently prohibitive and the expiration of the €67.5 billion loans deal with the Torika, scheduled for 2014 will see Ireland once again unable to borrow to cover remaining deficits and refinancing maturing bonds. Ireland should secure additional funding as a back up, to avoid seeking it later “in a state of near panic”.

Buiter’s suggestion represents nothing more than a prudent planning-ahead exercise. In addition to Buiter’s original rationale for securing new lending, Ireland is facing significant fiscal and economic challenges that will make it nearly impossible for the State to finance its fiscal adjustment path through private borrowing in 2014-2016.

Speaking to the RTE, Buiter said that although Ireland’s situation was different from that of Greece, the economy remains under severe stress from banking sector bailouts. Addressing this stress should involve restructuring of the promissory notes issued by the state to IBRC, as the Government was hoping to do in recent months. But it also requires anchoring our longer-term fiscal adjustment path to predictable and stable sources of funding at a cost that can be carried by the weakened economy.

The Government will do well to listen to these early warnings to avoid repeating mistakes of their predecessors.

On November 18, 2011, Carlo Cottarelli, IMF Director of Fiscal Affairs Department gave a presentation in the London School of Economics, titled Challenges of Budgetary and Financial Crises in Europe. In it, Mr Cottarelli provided three important insights into the expected dynamics for debt and deficits that have material impact on Ireland.

Firstly, he showed that to achieve the ‘golden rule’ debt to GDP ratio of 60% of GDP by 2030, Ireland will be required to run extremely high primary surpluses in years to come. Only Greece and Japan will have to shoulder greater pain than us over the next 19 years to get public debt overhang down to a safety level.

Secondly, amongst all PIIGS, Ireland has the highest proportion of outstanding public debt held by non-residents (84%), implying the highest cost of restructuring such debt. The runner up is Greece with 65%. In general, bond yields are positively correlated with the proportion of debt held by non-residents.

Thirdly, Cottarelli presented a model estimating the relationship between the observed bond yields and the underlying macroeconomic and fiscal fundamentals that looked at 31 countries. This model can be recalibrated to see what yields on Irish debt can be consistent with market funding under IMF growth projections for Ireland. Using headline IMF forecasts from December 2011, 2014-2016 yields for Ireland are expected to range between 4.7% and 6.5%. Incorporating some downside risks to growth and other macroeconomic parameters, Irish yields can be expected to range between 5.3% and 7.0%.

Even in 5.5-6% average yields range, financing Irish bonds rollovers in the market in 2014-2016 will be prohibitively costly as at the above yields, Ireland's debt dynamics will no longer be consistent with the rates of decline in debt/GDP ratio planned for under the Troika agreement. This, in turn, means that the markets will be unlikely to provide financing in volumes, sufficient to cover debt rollovers. Thus, Ireland will either require new bridging loans from the Troika or will have to extract even greater primary surpluses out of the economy, diverting more funds to cover debt repayments and risking derailing any recovery we might see by then.

What Butier statement this week does not consider, however, are the potential downside risks to the Irish fiscal stability projections. These risks are material and can be broadly divided into external and internal.

Per external risks, the latest CMA Global Sovereign Risk Report for Q4 2011, released this week, shows Ireland as the 6th riskiest country in the world with estimated probability of sovereign default of 46.4% and credit ratings of ccc+. Despite stable performance of our bonds in Q4 2011, CMA credit ratings for Ireland have deteriorated, compared to Q3 2011. And, our 5 year mid-point CDS spreads are now at around 747 bps – more than seven times ahead of Germany. This highlights the effect of a moderate slowdown in euro zone growth on our bonds performance.

Even absent the above risks, Irish debt dynamics can be significantly improved by significantly extending preferential interest rates obtained under the Troika agreement to cover post-2014 rollovers and adjustments. Based on IMF projections from December 2011, such a move can secure savings of some €9 billion or almost 5% of our forecast 2016 GDP in years 2014-2016 alone (see chart).

CHART

Chart source: IMF Country Report 11/356, December 2011 and author own calculations

Looking into the next 5 years, there is a risk of significant increase in inflationary pressures once the growth momentum returns to the Euro area. A rise in the bund rates can also take place due to deterioration in the German fiscal position or due to Germany assuming greater role in the risk-sharing arrangements within the euro area. Lastly, German and all other bonds yields can also rise when risk-on switch takes place in post-recessionary period, drawing significant amounts of liquidity out of the global bond markets. All of these will adversely impact German bunds, but also Irish bonds.
On the domestic front, we should be providing a precautionary cover for the risk of a more protracted slowdown in the Irish economy especially if accompanied by sticky unemployment. The risk of deterioration in Irish primary balances due to structural slowdown in the rate of growth in Irish exports (potentially due to strengthening of the euro in 2013-2016 period or significant adverse effect of the patent cliff on pharma exports) is another one worth considering well before it materializes. Lastly, there is the ever-growing risk that the markets will simply refuse to fund the vast rollovers of debt which is currently being increasingly warehoused outside the normal markets in the vaults of the Central Banks and on the books of the Troika.
Overall, Ireland should form a multi-pronged strategic approach to fiscal debt adjustment. Recognizing future risks, the Government should aggressively pursue the agenda of restructuring the promissory notes issued to the IBRC with an aim of driving down notes yield down to ECB repo rate and push for ECB acceptance of burden sharing imposition on IBRC bondholders to reduce the principal amount of the promissory notes. Pursuit of longer-term objective of forcing the ECB to accept a writedown on the banks debts accumulated through the Emergency Liquidity Assistance lines at the Central Bank of Ireland is another key policy target. Lastly, Ireland needs to secure significant lines of credit with the EU at preferential rates for post-2014 period with longer-term maturity than currently envisaged under the Troika deal.
Given the general conditions across the Eurozone today, the last priority should be pursued as early as possible. In other words, there’s no better time to do the right things than now.


Box-out:
The latest EU-wide statistics for Retail sales for November 2011 released this week present an interesting reading. Retail sector turnover index, taking into account adjustments for working days, shows Irish retail activity has contracted by 0.4% in November 2011 year on year. Overall activity is now down 5.2% on same period 2008, but is up 7.9% on 2005. For all the Irish retail sector woes, here’s an interesting comparative. Euro area retail sales turnover is now down 2.5% year on year and 1.6% on 2005. In terms of overall contraction in turnover, Ireland is ranked 15th in EU27 in terms of the rate of contraction relative to November 2010 and November 2008 and 12th in terms of contraction relative to 2005. Not exactly a catastrophic decline. Once set against significant losses in retail sector employment since 2008, these numbers suggest that to a large extent jobs losses in the sector were driven by lack of efficiencies in the sector at the peak of the Celtic Tiger, as well as by declines in revenues.

Monday, December 5, 2011

5/12/2011: Sunday Times, December 4, 2011

For those of you who missed it - here is an unedited version of my article for Sunday Times, December 4, 2011.


Comes Monday and Tuesday, the Government will announce yet another one of the series of its austerity budgets. Loaded with direct and indirect taxation measures and cuts to middle class benefits, Budget 2012 is unlikely to deliver the reforms required to restore Irish public finances to a sustainable path. Nor will Budget 2012 usher a new area of improved Irish economic competitiveness. Instead, the new Budget is simply going to be a continuation of the failed hit-and-run policies of the past, with no real structural reforms in sight.


Structural reforms, however, are a must, if Ireland were to achieve sustainable growth and stabilize, if not reverse, our massive insolvency problem. And these reforms must be launched through the budgetary process that puts forward an agenda for leadership.

Firstly, Budgetary arithmetic must be based on realistic economic growth assumptions, not the make-believe numbers plucked out of the thin air by the Department for Finance. Secondly, budgetary strategy should aim for hard targets for institutional and systemic improvements in Irish economic competitiveness, not the artificial targets for debt/deficit dynamics.


Let’s take a look at the macroeconomic parameters framing the Budget. The latest ESRI projections for growth – released this week – envision GDP growth of 0.9% and GNP decline of -0.3% in 2012. Exports growth is projected at 4.7% in 2012, consumption to fall 1.5% and investment by 2.3%. Domestic drivers of the economy are forecast to fall much less in 2012 than in 2011 due to unknown supportive forces. This is despite the fact that the ESRI projects deepening contraction in government expenditure from -3% in 2011 to -4% in 2012. ESRI numbers are virtually identical to those from the latest OECD forecasts, which show GDP growing by 1.0% in 2012, but exports of goods and services expanding by 3.3%. OECD is rather less pessimistic on domestic consumption, projecting 2012 decline of just 0.5%, but more pessimistic on investment, predicting gross fixed capital formation to shrink 2.7%.

In my view, both forecasts are erring on optimistic side. Looking at the trends in external demand, my expectation is for exports growing at 2.9-3.2% in 2012, and imports expanding at the same rate. The reason for this is that I expect significant slowdown in public sector purchasing across Europe, impacting adversely ICT, capital goods, and pharmaceutical and medical devices sectors. On consumption and investment side, declines of -1.5-1.75% and -4-4.5% are more likely. Households hit by twin forces of declining disposable incomes, rising VAT and better retail margins North of the border are likely to cut back even more on buying larger ticket items in the Republic. All in, my forecast in the more stressed scenario is for GDP to contract at ca 0.6% and GNP to fall by 1.7% in 2012. Even under most benign forecast assumptions, GDP is unlikely to grow by more that 0.3% next year, with GNP contracting by 0.5%.

Under the four-year plan Troika agreement, the projected average rate of growth for GDP between 2012 and 2015 was assumed to be 3.1% per annum. Under the latest pre-Budget Department of Finance projections, the same rate of growth is assumed to average 2.5% per annum. My forecasts suggest closer to 1.5% annual average growth rate – the same forecast I suggested for the period of 2010-2015 in these same pages back in May 2010.


Using my most benign scenario, 2015 general government deficit is likely to come in at just above 4.0%, assuming the Government sticks to its spending and taxation targets. Meanwhile, General Government Debt to GDP ratio will rise to closer to 120% of GDP in 2015 and including NAMA liabilities still expected to be outstanding at the time, to ca 130% of GDP.

In brief, even short-term forecast changes have a dramatic effect on sustainability of our fiscal path.


Yes, the Irish economy is deteriorating in all short-term growth indicators. The latest retail figures for October, released this week show that relative to pre-crisis peak, core retail sales are now down 16% in volume terms and 21% in value terms. In the first half 2011, nominal gross fixed capital formation in the Irish economy fell 15% on H1 2010 levels and is now down 38% on pre-crisis peak in H1 2007. And exports, though still growing, are slowing down relative to imports. Ireland’s trade balance expanded 5% in H1 2011 on H1 2010, less than one fifth of the rate of growth achieved a year before. More ominously, using data through August this year, Ireland’s exports growth was outpaced by that of Greece and Spain. Ireland’s exporting performance is not as much of a miracle as the EU Commissioners and our own Government paint it to be.

However, longer-term budgetary sustainability rests upon just one thing – a long-term future growth based on comparative advantages in skills, institutions and specialization, as well as entrepreneurship and accumulation of human and physical capital. Sadly, the years of economic policy of hit-and-run budgetary measures are taking their toll when it comes to our institutional competitiveness.

This year, Ireland sunk to a 25th place in Economic Freedom of the World rankings, down from the average 5-7th place rankings achieved in 1995-2007. In particular, Ireland ranks poorly in terms of the size of Government in overall economy, and the quality of our legal systems, property rights and regulatory environments. The index is widely used by multinational companies and institutional investors in determining which countries can be the best hosts for FDI and equity investments.

In World Bank Ease of Doing Business rankings, we score on par with African countries in getting access to electricity (90th place in the world), registering property (81st in the world), and enforcing contracts (62nd in the world). We rank 27th in dealing with construction permits and 21st ease of trading across borders. Even in the area of entrepreneurship, Ireland is ranked 13th in the world, down from 9th last year. This ranking is still the highest in the euro area, but, according to the World Bank data, it takes on average 13 times longer in Ireland to register a functional business than in New Zealand. The cost of registering business here amounts to ca 0.4% of income per capita; in Denmark it is zero. In the majority of the categories surveyed in the World Bank rankings, Ireland shows no institutional quality improvements since 2008, despite the fact that many such improvements can reduce costs to the state.

I wrote on numerous occasions before that despite all the talk about fiscal austerity, Irish Exchequer voted current expenditure continues to rise year on year. Given that this segment of public spending, unlike capital expenditure, exerts a negative drag on future growth potential in the economy, it is clear that Government’s propensity to preserve current expenditure allocations is a strategy that bleeds our economy’s future to pay for short-term benefits and public sector wages and pensions.

Similarly, the new tax policy approach – enacted since the Budget 2009 – amounts to a wholesale destruction of any comparative advantage Ireland had before the crisis in terms of attracting, retaining and incentivising domestic investment in human capital. Continuously rising income taxes on middle class and higher earners, along with escalating cost of living, especially in the areas where the Irish State has control over prices, and a host of complicated charges and levies are now actively contributing to the erosion of our competitiveness. Improvements in labour costs competitiveness are now running into the brick wall of tax-induced deterioration in the households’ ability to pay for basic mortgages and costs of living in Ireland. Year on year, average hourly earnings are now up in Financial, Insurance and Real Estate services (+3.1%) primarily due to IFSC skills crunch, unchanged in Industry, and Information and Communications, and down just 2.6% in Professional, Scientific and Technical categories. In some areas, such as software engineering and development, and biotechnology and high-tech research and consulting, unfilled positions remain open or being filled by foreign workers as skills shortages continue.

By all indications to-date Budget 2012 will be another failed opportunity to start addressing the rapidly widening policy reforms gap. Institutional capital and physical investment neglect is likely to continue for another year, absent serious reforms. In the light of some five years of the Governments sitting on their hands when it comes to improving Ireland’s institutional environments for competitiveness, it is the Coalition set serious targets for 2012-2013 to achieve gains in Ireland’s international rankings in areas relating to entrepreneurship, economic freedom and quality of business regulation.


Box-out:

Amidst the calls for the ECB to become a lender of last resort for the imploding euro zone, it is worth taking some stock as to what ECB balance sheet currently looks like on the assets side. As of this week, ECB’s Securities Market Programme under which the Central Bank buys sovereign bonds in the primary and secondary markets holds some €200 billion worth of sovereign debt from across the euro area. Banks lending is running at €265 billion under the Main Refinancing Operations and €397 billion under the Long-Term Refinancing Operations facilities. Covered Bonds Purchasing Programmes 1 and 2 are now ramped up to €60 billion and climbing. All in, the ECB holds some €922 billion worth of assets – the level of lending into the euro area economy that, combined with EFSF and IMF lending to peripheral states takes emergency funding to the euro system well in excess of €1.5 trillion. Clearly, this level of intervention has not been enough to stop euro monetary system from crumbling. This puts into perspective the task at hand. Based on recently announced emergency IMF lending programmes aimed at euro area member states, IMF capacity to lend to the euro area periphery is capped at around €210 billion. The EFSF agreement, assuming the fund is able to raise cash in the current markets, is likely to see additional €400-450 billion in firepower made available to the governments. That means the last four months of robust haggling over the crisis resolutions measures between all euro zone partners has produced an uplift on the common currency block ‘firepower’ that is less than a half of what already has been deployed by the ECB and IMF. Somewhere, somehow, someone will have to default big time to make the latest numbers work as an effective crisis resolution tool.

Saturday, October 9, 2010

Economics 9/10/10: Path to reforms

This is an unedited version of my column in October 2010 Village magazine:

The events of the recent months have clearly shown that the current policies path leads to a continued status quo. This is the sole and unavoidable conclusion currently being reached by all independent analysts and commentators on either side of ideological divide. It is a non-partisan concern that informs the rising tide of discontent within the Fiana Fail and Green parties, recent changes within Fine Gael, positions of all other opposition parties, and indeed the entire electorate – as reflected in the opinion polls.

At this junction, there is no longer any need to enlist numerous factual manifestations of this reality – they are all around us, expressed by politicians and ordinary citizens. The tide of international opinion concerning the prospects for Ireland should the current policies persist has turned against us. The IMF (since April 2010), the EU Commission (since May 2010), markets makers and participants – all have put out challenging assessments of Irish Government official projections for the recovery. Irish banks – far from being repaired by Nama – just keep asking for more taxpayers bailouts with a frightening regularity of a drug addict returning to a methadone dispensary.

It is, therefore, time to challenge the existent policy consensus. It is the time to put forward proposals for reforms, to debate real alternatives and to provide those political parties and individual politicians willing to champion change with new ideas to energise the electorate.

Here is my own set of ideas – the offshoot of the ongoing ‘Manifesto Project’ I have decided to run on my blog.

To preclude any ‘kill the messenger’ objections, allow me to state that the following is just a set of policy reforms proposals that any party or politician are welcome to adopt in part or as a whole and put to the electorate.

Fine print aside, let me outline the backdrop to the policies – the backdrop of the specific crises we face as a nation. The Irish economy has been hit by a Perfect Storm that combines:
  • a deeply rooted crisis in public finances;
  • a structural collapse of the banking sector;
  • an unemployment crisis stemming from the collapse of employment and jobs creation;
  • a competitiveness crisis that is not limited to wages and labour costs, but the cost of living and doing business;
  • the crisis in the quality and efficiency of domestic services - dominated and restricted by the excessive market power of the incumbent state-owned and state-regulated oligopolies.

These crises have been exacerbated by the Government policies since 2008. These policies have saddled ordinary families and individuals (regardless of whether they work in public sector or private sector, employed or unemployed, young or old) with the full cost of stabilizing vested interests and elites. This manifested itself in rising tax burden, falling provision of public services, lack of reforms in banking and public sectors. The resulting devastation of private entrepreneurship and businesses, contracting investment and availability of operating capital, a catastrophic lack of confidence in economy are the corollaries. The accompanying spikes in unemployment and businesses failures, and a hike in precautionary savings are additional manifestations of these.

The current crisis has clearly shown that the corporatist state - where vested interests, including Political, Business, Social and Environmental collude with the state to set economic and social preferences and priorities - is morally, politically and economically bankrupt. I believe that Irish democracy cannot be surrendered to the vested interests, no matter how broadly-based or highly minded they might be.

There are only two ways forward from this status quo. The first is the path we are travelling – the path of a generations-long and painfully deep crisis of stagnation and declining standards of living. The second one is a path of structural reforms aimed at realigning the current political system to serve the interests of the ordinary citizens and residents of this land.

Such a reform is also a disruptive and a painful one. It can only be achieved by creation of an alternative to the existent policies and structures.

In my view, the agenda for reform should champion the rights of ordinary citizens – consumers and taxpayers – to counterbalance existent system that promotes the interests of the vested pressure groups and elites. It must, therefore, include changes to the state political and governance systems, to the principles governing provision of the public services, to the systems of our private markets and, lastly, to the rebuilding of our financial system. For the sake of brevity, I will focus on the first two objectives.

Changes to political and governance systems


The core changes to the political and governance systems must put transparency and accountability principles of governance to the front. This will require creation of automatic systems of disclosure and control that are not subject to tampering by individual office holders. It also requires ending Social Partnership, delegating all authority, and the responsibility, for developing, implementing and monitoring economic and social policies solely to the Legislative and Executive branches of the State.

In terms of transparency, default setting must be public disclosure and unrestricted free access to all data not subject to the secrecy of the state considerations. Sensitive data should be published with exclusion of sensitive information and identifiers, until the time when it can be published in full.

Accountability requires that performance and productivity metrics should be designed and refined through experience for all branches of public sector. All earnings in the public sector should be linked to individual productivity.

Local authorities must be reformed, reducing the overall number of local authorities to, say, 7, covering: West & North West, South, Greater Cork, Greater Dublin, Greater Limerick, Greater Galway and Border & Midlands.

Seanad should be given real powers of the upper chamber and be elected directly by the people of Ireland, with equal representation for each of the 7 geographic region outlined above. Dail should be reformed by reducing the number of TDs and to cover both local and national mandates. The former will preserve a number of seats allocated locally, while the latter will allocate some proportion of seats based on national polls.

Both chambers along with the Executive should accord no privilege to their members that will put them above the ordinary citizens of the state. This will require abolition of unvouched expenses, enforcement of the Benefit-in-Kind principle of taxation and removal of the un-provisioned pensions entitlements.

All state purchasing should be carried on-line, made public and transparent and subject to annual audits by independent external board.

State services reforms should include the separation of provider of services from the supplier of services. This means that the Irish state should aim to be a purchaser of services, e.g. health care and care for the disabled, for those who cannot afford them. But the State should not own service providers. Instead, public services can be supplied by mutual, private for-profit or non-profit providers. Transition to such an arrangement will require significant training and logistics support for current employees.

Higher education should be based on fees set by universities and overseen by the Department for Education. The State should set up (with participation of charities and other private agencies) a number of funds that will provide financial aid to students based on need (with an objective of creating an equal opportunity for all qualified students to undertake studies) as well as merit (with an objective of rewarding real achievement). A further system of state-guaranteed student loans should be set, subject to independent oversight and audit
.

The state should focus significant resources on the need to improve and strengthen provision of universal early, primary and secondary education in order to achieve maximum equality of opportunity for the children independent of the social and/or economic status of their parents.


Changes to fiscal systems


There is a need to rebalance the burden of taxation in the economy to deliver on three core objectives. First, the taxation system should be fair, transparent and protected from abuse. Second, it should involve participation from all agents in the economy. Third, it should not attempt to pick winners and leave in its wake the losers.

With these objectives in mind, I would suggest adoption of a flat rate income tax system with single personal standard deduction plus a child allowance, potentially linked to the level of unemployment benefits. All discretionary tax breaks should be removed, including any tax incentives for farming and any other economic activity. Non-residency limits should be set to reflect the needs of Irish citizens working abroad and commuting home – e.g. a limit of maximum 124 days annually to cover all weekends plus standard vacation. A move to a single rate income and corporate tax can also be used to deliver full equalization in taxation between workers, entrepreneurs and businesses.

Existent Byzantine system of indirect taxes and levies is to be simplified with a view that all such charges should be based on user fee principle and be fully ring-fenced to finance provision of services covered and mitigation of adverse externalities (e.g. environmental degradation etc) generated by these services.

There is a need for having strong, but life-time capped, welfare provisions. This will provide a sufficient insurance cover for all able-bodied working age adults in the country to a cumulative maximum of 7 years over the life-time. Provision of welfare supports to those unable to work due to health or family circumstances (e.g caring for a disabled relative etc) should be exempt from life-time limits.

The basic social insurance pension reform should ensure that the elderly are covered by s sufficient safety net, but the working-age individuals are encouraged to privately invest in their pensions.

Wages for politicians and senior public servants are to be tied to the National Disposable Income in order to create a direct link to the overall levels of welfare in the society (including that of the unemployed and socially vulnerable). There should be no bonuses or discretionary pay and all public sector pensions should be converted to a Defined Contribution system with generous matching from the employer.

Government spending should be benchmarked to a specific range of GDP (for example – 35-38%). A balanced budget should be maintained over every 3-year period. This allows for small emergency spending boosts in recessions, but prevents spending sprees before the elections and other abuses of the public funds.

All quangoes, except those with immediate independent oversight authority (e.g FR and Competition Authority) are to be abolished and their functions transferred to the respective departments. Responsibility for governance and management must rest with the Government.

There is a need for a fully transparent tax on land values (LVT) in order to finance public infrastructure investments and provision of local services, including environmental protection and improvements. I would suggest that the revenue from LVT should be split 50:50 between central & local authorities. Local authorities should be allowed to vary their rate of LVT within reasonable parameters. For example, if LVT is levied at 1% pa, the local authority can be allowed to charge between 0.25% and 0.5% as it deems suitable, while the central government will collect 0.5%.


After three years of ever-deepening crises in political, economic, and banking spheres, Ireland now faces a stark choice between two alternatives. We can, as a nation, elect to either follow the status quo path that leads to a stagnation. Alternatively, we can choose to challenge the existent policy consensus to champion the rights of ordinary citizens – consumers and taxpayers.