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Government's "Rainy Day" Fund

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In addition to allocating €750 million from the Ireland Strategic Investment Fund to help fund builders, the Minister for Finance has signalled that at least €1.5 billion will be transferred to a 'rainy day' fund next year.

Does he not realise that the 'rainy day' has already arrived in the form of major housing, health and transport investment crises?

Letter published in the Irish Times on 12th October 2017.

Who are the "squeezed middle"?

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In view of current interest in the "squeezed middle" ahead of  the 2018 budget, it has been enlightening to identify this group using taxable income statistics generated by Revenue and published by the CSO.

Based on 2015 data, there were 2.3 million tax cases including jointly assessed married couples and civil partners. They had an average taxable income of €36,800  per annum before deducting normal tax credits.

Because some very high incomes shewed this average, a much lower income of €25,700 corresponded to the true middle where half of all tax cases earned less than this value and half earned more.

Going deeper, if tax cases are divided into three equal ranges, corresponding to lower, middle and higher incomes, the middle range in 2015 was €15,600 to €36,000 per annum. Alternatively, if the cases are divided into five equal ranges each comprising 20 percent of cases, the middle range narrowed to between €20,000 and €31,200 per annum.

This analysis suggests that, even allowing for wage inflation since end 2015, most  middle-income tax cases are well below the current €33,800 threshold for the higher 40 percent tax rate.

On this basis a budget increase in this threshold wouldn't benefit most middle-income cases unless the definition of "squeezed middle" is interpreted to also include upper-middle cases with annual incomes ranging from €31,200 up to €52,500.

Letter published in the Irish Times on 7th October 2017.

Nama and the housing crisis

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The Taoiseach is committing a cardinal management error by planning to repurpose Nama as its primary vehicle for social and affordable house building as structure should follow strategy and role definition rather than precede it. 

A new national agency which could absorb relevant Nama resources would start with a clear focus and without any legacy baggage.. It should act as principal and directly engage contractors to build houses on public-owned land in the larger urban centres and,optionally, play a coordinating role in relation to major schemes in other areas. 

This approach would result in lower costs and more affordable houses than could be achieved by a restructured Nama which simply and expensively co-ordinates profit-seeking developers.

As previously suggested ("Addressing the housing crisis" , Letters 16rh August), it could be part funded by some of the €5.3 billion surplus cash resting within the Ireland Strategic Investment Fund alongside external investment and debt structured to surmount likely EU concerns about breaching national debt limits.

Even with funding in place, it will take time to mobilise resources, undertake design work, issue and place tenders. As the Central Bank has indicated, a major building programme could strain resources and this would further delay progress. To address this and respond appropriately to the crisis, the agency should, for major projects, actively seek participation from well-resourced, major overseas construction firms with appropriate safeguards on labour conditions, quality etc.

Finally, a clear indication from the Government to "the market" that it intends, as is its right, to directly supply large numbers of affordable homes should  cause landowners, speculators and landlords engaged in hoarding or gouging to rethink their greedy plans. And to reinforce this message, it should also signal that it will invoke Clause 2 of Article 43 of the Constitution in relation to private property where the common good, social justice and national housing emergency demand this.

Lead letter in the Irish Times on 21st September 2017.

Funding Solution to Housing Crisis

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As pointed out by Harry McGee ("Government's silver bullets for housing crisis have been blanks", Analysis, August 15th), successive housing ministers have singularly failed to address the housing crisis.

By only tinkering at the edges, ministers may have ignored an enormous funding resource sitting in plan view.

This is the uncommitted €5.3 billion sitting in the Ireland Strategic Investment Fund's Discretionary Portfolio and invested since 2014 in low-yielding international assets.

In the same way that the then-minister for finance directed the ISIF's predecessor, the National Pension Reserve Fund, to invest €21 billion in the failing  banks, so also could the current Minister for Finance set up new institutions to prudently invest the ISIF's massive surplus funds in major initiatives for housing in addition to health and other urgent infrastructure.

For example, a €3 billion development fund to finance social and affordable housing on public- and NAMA-owned land could easily carry an equivalent amount of debt.

This would facilitate the construction of up to thirty thousand public-owned homes for rent or sale and would be infinitely more productive than the short-term, stuttering tactics adopted to date.

Given the scale and urgency of the housing crisis, accelerated provision of these homes should outweigh every institutional, political or ideological impediment.

Letter published in the Irish Times on 16th August 2017.

Economic & Health Statistics

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Introduction by the CSO of a modified version of Gross National Income (GNI) to minimise distortions caused by multinational activities should have a profound impact on planning and performance measurement in Ireland.

The CSO estimates that modified GNI for 2016 was only about 69 percent of Gross Domestic Product (GDP). On this basis, the ratio of government debt to modified GNI was an unsustainable 106 percent in 2016 as compared with a more moderate 73 percent based on GDP.

Drilling down into the economy using modified GNI reveals many other unfavourable ratios. For example, according to the OECD, the ratio of Ireland's health expenditure to GDP was 7.8 percent in 2016 and we ranked 24th highest of 35 countries.

If modified GNI is used instead of GDP, this ratio jumps to 11.4 percent and our cost ranking rises to third place behind the US and Switzerland and ahead of highly regarded German, Swedish and French services.

As anyone who uses our health service knows, this ranking makes little sense and  begs fundamental questions about the sector's costs, efficiency, case mix and underlying demographics.

Letter published in the Irish Times on 18th July 2017.

Straight-forward Solution to Housing Crisis

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With the recent discovery of 26 percent extra economic growth in 2015 and taking account of EU restrictions on national debt, it should be possible for the State to directly fund a massive building programme for social housing  instead of relying on an expensive combination of rent subsidies, public-private partnerships, leasing, off-balance-sheet mechanisms and other devices as per the Rebuilding Ireland report.

Lead letter published in the Irish Times on 21st July 2016.

Here is the text of a letter sent on 28th January 2016 to Dr Mario Draghi, President of the ECB, about quantitative easing:

I am writing to you as an Irish citizen who, like yourself, is concerned about the state of the EU's economy. I refer to your recent statements about extending the ECB's programme of quantitative easing to help stimulate Eurozone growth and inflation.

If I may be so bold to say so, I don't think that simply acquiring financial assets from major institutions will achieve these objectives as your measure is much too remote from the real economy where growth and inflation actually occur. My view is supported by many leading experts (including the Fed) who seem to agree that QE may not be working as intended1

My Tweets about Banking Inquiry

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Here are some of my tweets sent 27th-28th January 2016 following publication of the report by the Oireachtas Banking Inquiry:

  • In fairness, members of #bankinginquiry should be thanked for their hard work done under most ridiculous legal & time constraints.
  • Use of words in main #bankinginquiry report: mistake-16 regret-8 fault-4 fraud-1 corrupt-0 prosecut*-0 crime-0 incompeten*-0 blame-0.
  • Much more time was needed by #bankinginquiry for forensic, indepth questioning of key witnesses who got away much too lightly.
  • Ireland had the EU, euro & US Treasury who were afraid of contagion by the balls but #Noonan let go at the cost of €9 bn.
  • Full cost of banking/building disaster was over €100,000,000,000. 'No blame' #bankinginquiry report results in no sanctions.
  • #bankinginquiry could not say "BOO" to anyone. Spineless responses should not be tolerated in future inquiries.
  • #bankinginquiry proves that, in Ireland, gross incompetence & much worse is rewarded by new jobs, fat pensions & forgiven debts.
  • What happened to "moral hazard"? What will stop the banking/building disaster from recurring unless there are clear sanctions?
  • Incompetence of bankers, developers, regulators, mandarins, advisers, politicians & trioka fully exposed by #bankinginquiry.
  • Irish inquiries & commissions are just ways for establishment to bury scandals, incompetence, corruption & bad news.

Quantitative Easing for All - Release 2.0

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David McWilliams mentioned (15th November) that advisers to UK Labour leader Jeremy Corbyn and US presidential candidate Bernie Sanders had suggested at Kilkenomics that the ECB should switch its massive quantitative easing programme from buying financial assets to gifting cash directly to citizens.

If the ECB adopted this suggestion, about €60 billion of 'free' money could be distributed each month till late 2016 to all EU citizens at minimal cost via tax and social welfare credits. A tax-free gift of €1,400 per person would quickly transform Dr Draghi's problem into one of moderating growth and curtailing inflation.

Letter published in the Sunday Business Post on 22nd November 2015.

Quantitative Easing for All

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The ECB's commencement of quantitative easing will result in it spending over a trillion euro acquiring financial assets held by institutions at the rate of 60 billion euro a month until late 2016. This carries huge risk as most euro economies lack the growth and confidence needed to pull this funding from the newly cash-rich institutions into the marketplace. The danger is that the ECB's initiative will merely inflate asset values mainly to the benefit of the already wealthy.

Surely, it would be much more effective for the ECB to simply gift €3,200 directly to every euro zone citizen over the coming months. We could be much more confident that this windfall would be spent quickly and directly spur much needed growth and inflation. 

Letter published in the Irish Times on 16th March 2015.

GDP versus GNP

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So, having used GDP as a key economic index throughout the boom, the ESRI appears to have switched to GNP because multinational profits are faltering.

Does that mean that, to be consistent, we should also use Debt/GNP (currently 151%) rather than Debt/GDP (124%)  as a key index and do we start measuring per capita prosperity using GNP (€29,600) rather than GDP (€36,900) ?

Letter published in the Irish Times on 19th December 2013.

Budget 2014 - Sharing the Pain?

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The budget indicated that national debt/GDP will remain north of an unsustainable hundred per cent for the foreseeable future. As a consequence, about half of all income tax will be used, possibly for rest of this decade, to meet interest charges on this debt notwithstanding an imminent exit from the bailout.

Against this background, there was no indication in the budget that any new sacrifices are being made by one of the best paid and pensioned cabinets in the world or by their overpaid advisers, senior public servants and wealthy supporters. Where are the moderate salaries, reasonable pensions and equitable taxation that might be reasonably expected as part of an austerity programme which, after several years, continues to be inflicted by the few on the majority?

Letter published in the Irish Times on 21st October 2013.

April and Austerity

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April has been a bad month for the proponents of austerity. Did we really have to wait till April 2013 for the Government and troika to wake up and realise that severe austerity ultimately curtails growth?

  • Early in the month, Ashoka Mody, the IMF's former mission chief to Ireland, stated that reliance on austerity for Ireland was counterproductive and that failure to tackle Irish bank bondholders was a mistake.

  • In midmonth, an academic paper by two eminent US economists Reinhar and Rogoff used to justify austerity measures was found to contain fundamental errors which undermined their proposition that high governmental borrowings (as in Ireland) are necessarily connected to minimal economic growth.

  • On the eve of last weekend's G20 meeting in Washington, EU commissioner Olli Rehn indicated that the euro zone will slow its budgetary belt-tightening because the troika's austerity programmes were having a greater-than-expected impact on growth.

  • On Monday the president of the European Commisssion conceded that austerity wasn't a sustainable policy in the absence of social and political support

Published in Irish Times Readers Comments on 4th May 2013.

Pension Fund Theft?

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There is nothing extraordinary about the proposed Cypriot levy on apparently untouchable deposits. The Irish Government led the way by imposing a 0.6 percent annual levy on similarly untouchable private pension funds. It expects to gather €1.8 billion from this underhand action which provoked minimal opposition or protests unlike developments in Cyprus.

Of course, no similar penalty applied to public sector pensions amidst recent ministerial claims that constitutional property rights preclude the slashing of outrageous pensions being paid to former politicians, mandarins and bankers.

Lead letter published in the Irish Times on 21st March 2013. This follow up letter was published on 27th March 2013.

William J XXX (26th March) stated that I was factually incorrect when quoting me as saying  (21st March) that "no penalty applied to public sector pensions". I actually wrote "no similar penalty" in the context of the Government's raid on private sector pension funds. This is factually correct. 

He goes on to write about public sector pensions being  dependent on employee contributions but ignores the fact that these pensions, particularly at higher levels, are largely financed by private sector taxpayers who could never aspire to secure such attractive pension benefits for themselves.

Exiting the Bailout?

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Notwithstanding years of austerity, Ireland still has some of the most over-borrowed public and private sectors in the developed world and, according to Christine Legarde (IMF managing director), has only completed two-thirds of the current bailout programme. Against this backdrop. there is no way that Ireland will be able to break free from the troika for years to come.

Over the next year or so, we might have to contend with Croke Park chaos, dissent over the property tax, another savage budget just as people are seeing how sneaky the last one was, slow economic growth, large street protests, further Dail defections, local election upsets, foreclosures/evictions, further bank restructuring, surging emigration and other unexpected nasties.

They will all feed into the next Dail elections which could well result in a trouncing of the governing parties and the formation of a very weak, rainbow government. In the absence of strong and decisive national leadership, the troika is likely to demand a continuing supervisory role notwithstanding that its motives and agenda would not be in our national interest.

Letter published in the Sunday Business Post on 17th March 2013.

Promissory notes: Call a Referendum

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I sent the following email about the promissory notes to all TDs and Senators this afternoon:

Hello

I have reproduced below a letter from me published in today's Sunday Business Post advocating non-payment of the promissory notes.

In it, I emphasised that payment would create a cash loss of €30 billion for the State and that non-payment would create NO cash loss for the ECB/ICB. This is a key point which distinguishes the Irish situation from sovereign defaults which have had serious ramifications for the defaulting states.

If the PNs are not paid, do you really believe that the ECB would apply sanctions to the "best boy in the class"? I think not as these would also provoke a huge euro crisis.

A write off of the €30 billion. as distinct from any other deal, would be transformational for the Irish economy whose the debt/GDP ratio is almost120%, or 150% based on GNP when fickle profits of multinationals are excluded. Let us face facts, this level of debt is completely unsustainable and tinkering at the edges will be fruitless.

Personally, I would like to see politicians work together (for once) in order to provoke a referendum on the question of payment of the PNs so as to settle the matter for once and for all for the electorate, EU, ECB and other international interests. This could be achieved by asking the Dail and Seanad to consider a Bill relating to payment and then, in accordance with Article 27 of the Constitution, getting a majority of the Seanad and one-third of the Dail to petition the President for a referendum on the grounds that the Bill "contains a proposal of such national importance that the will of the people thereon ought to be ascertained".

Such an initiative would have the overwhelming support of the electorate, even without anticipating the result of the referendum. It would also evoke a positive response from the financial markets, and even the ECB might get around to understanding that the circumstances surrounding the PNs were absolutely unique and required a euro-wide response.

Brian

[ To see the SBP letter, just scroll down to next entry or click ]

Don't Pay the Promissory Notes

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Professor Morgan Kelly, writing about the Anglo bailout in 2008, suggested that "the money might as well be piled up in St Stephen's Green and incinerated". Well, unless a write-off deal on the promissory notes is struck, that is exactly what will start happening in March, albeit at a different location, when €3.1 billion of "real cash" is passed to the Central Bank where it will disappear in a puff of electronic smoke.

Any deal that replaces notes with bonds is unacceptable as it simply pushes this senseless burning of Irish taxpayers onto another generation. Instead, a full write off must be sought and secured on the grounds that the cost of the bailout of Anglo should not be foisted on blameless Iriish taxpayers,

A write off is entirely within the gift of EU central bankers and, while it might result in a temporary loss of face, no loss of cash would be incurred. In fact, the full €30 billion will be effectively written off irrespective as to whether notes are paid or not.

The Government should stop spinning and whining about unfairness. Instead, it should start playing hardball and show more backbone even at this late stage.

Burning €30,000,000,000 of taxpayers money for no return whatsoever makes no sense and is extortion given that the State is bankrupt.

What exactly would the ECB do if the notes are not paid? Pull the rug from under the Irish economy or just make the "best boy in the class" sit on the bold step for a while?

Lead letter in the Sunday Business Post on 3rd February 2013.

Budget for 2013

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Tables compiled by the Dept of Finance showing the impact of the budget on various incomes say it all. Here is an extract for a married couple with a house, without children and paying full PRSI:

  • On a gross income of €45,000, the reduction in income will be €422 a year (1.2% of gross).

  • On a gross income of €175,000, the reduction in income will be €872 a year (0.9% of gross)

So, for someone earning four times more, the impact of the budget is only doubled. Inequity is even greater for people further down the income scale. How can this budget be viewed as fair?

Letter published in the Irish Times on 7th December 2012.

Constitution and Fiscal Compact

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The constitutional amendment for the Lisbon Treaty made numerous references to our membership of the EU. It also referred to the EU's authority to pass laws alongside other competent bodies under the Lisbon and related treaties.

The proposed amendment for the Fiscal Compact makes no mention of EU or prior treaties and indicates that  unspecified "bodies competent" can pass laws or measures for Ireland. This begs questions as to whether the Fiscal Compact should be viewed as an EU or international  treaty and whether these bodies competent might be same ones that are driving the EU into a depression by insisting that austerity is the only way forward.

It is extraordinary that Ireland eventually agreed to the Lisbon Treaty in a second referendum partly because we were promised a permanent Irish Commissioner. Yet today, the entire Commission seems to have been pushed aside by banking and political forces and we are being urged in the current referendum to deliver key aspects of our Constitution and lawmaking not to the EU but into the hands of an international treaty led by so called bodies competent where our influence is likely to be minimal by comparison with the Commission.

Letter published in the Irish Times on 10th May 2012.

See also:

Mahon Tribunal

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At the same time that the Mahon Tribunal was hearing evidence about corruption and wrong doing, about a 100 people - politicians, bankers, senior administrators and developers - were engaged, directly or indirectly, in stoking a crisis that has brought the country to the edge of bankruptcy. But, instead of being subjects of a major public enquiry and sanctions, these people have secured huge pensions, payoffs and bailouts.

At the very same time that the Mahon Report was published, the Central Statistics Office reported that our national economy (i.e. GNP) has declined by 14.8 percent over the past four years. This points to a continuing deep depression, rather than a mere recession - or even a recovery as some vested interests, here and abroad, would like to spin.

Nothing can change until everything has been changed.

Letter published in the Sunday Business Post on 1st April 2012.

Follow either Greece or Iceland

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Greece has now signed up for a second bailout accompanied by massive haircuts for bondholders, Given that its projected Debt/GDP ratio might decline - with luck - from 160 percent to 129 percent by 2020, a third bailout or even deeper crisis seems inevitable.

Many commentators expect that Ireland, in the absence of a general economic upturn, will also require a second bailout given that our Debt/GNP ratio, which excludes multi-national profits, currently exceeds140 percent.

It is high time to start thinking outside the box and to do a deal with the Devil, i.e. get the more realistic and enlightened IMF to underwrite fully any possible second bailout, instead of relying on the restrictive European Stability Mechanism.

On the foot of this, new terms should be imposed on bondholders and promissory notes, thereby easing the task of sorting out the self-inflicted domestic deficit.

Based on Iceland's rapid recovery from its crisis, we could transform that derogatory phrase -  "The difference between Iceland and Ireland is one letter and six months" - into something much more positive. The alternative seems to be death by a thousand cuts, like Greece, with no certainty of recovery.

Letter published in the Sunday Business Post on 5th March 2012.

Paying Bondholders and Bankruptcy

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Congratulations are due to the National Treasury Management Agency for creating a diversionary bond swap on the very day that it extracts €1.25 billion from our pockets to repay bonds in a defunct bank.

Any chance that Ireland could avail of the new bankruptcy proposals given that it has an unsustainable level of debt and clearly falls into the "can't pay" category?

Letter published in the Irish Times on 27th January 2012.

Taoiseach at Davos

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Given that we haven't yet had a proper enquiry into the banking crisis, I am not surprised that the Taoiseach resorted to blaming "people" at Davos, reinforcing the image of the Irish as feckless and greedy.

Instead, he should have  been upfront and honest by singling out sections of the establishment and business "elite" including ministers, public administrators, bankers, developers and foreign lenders as the greedy incompetents who "went mad"  and failed the "people". However, this would have probably gone down like a lead balloon with the Davos "elite".

Letter published in the Sunday Business Post on 5th February 2012.

Budget for 2012

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Given that the Minister for Finance has claimed on numerous occasions that all the low hanging fruit has been picked, why doesn't he start plucking some of the ripe, plump fruit off the highest branches? He could also give the tree a good shake and make substantial saving by cutting off dead branches and pruning back at all levels.

For example, he could introduce a third tax band for salaries above €100,000, apply a salary limit of €150,000 across the entire public sector and limit pensions in the sector to half that. Such measures would be much fairer than increasing VAT, introducing new stealth taxes and cutting key services and capital expenditure. Given that the country is effectively bankrupt, force majeure should take precedence over legitimate expectations or entitlements and it makes no sense to increase borrowings and pay additional interest simply to allow those at the top of the tree to over-ripen.

Letter published in the Irish Times on 22nd November 2011. A somewhat similar letter was published in the Sunday Business Post on 13th November 2011.

Message to TDs - Don't Pay Anglo Bondholders

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I sent the following message to all TDs this morning:

Dear Deputy

I wish to protest in the strongest possible terms about the proposed redemption at par value of a US$1 billion bond (ISIN ref. XS0273602622) on Wednesday 2nd November by Irish Bank Resolution Corporation, formerly Anglo,

Given that this unsecured and unguaranteed bond recently traded at just 53 percent of par value, why is the Government paying full value when the bond is rated Caa2 by Moody's and viewed as being of "poor standing ... subject to very high credit risk ... extremely poor credit quality"?

To put this in context, the proposed payment is equivalent to the salaries of about 2,500 extra nurses for five years; or one-fifth of the cuts and tax increases planned for the 2012 budget: or the full cost of the new national children's hospital.

Instead, the money will be used to give windfall profits to so-called sophisticated but anonymous bondholders who provided funds at the peak of the boom to a bank which was operating as a casino and which, thankfully, no longer trades.

I don't buy the argument that refusal to pay will cause contagion. It is very evident that contagion is (like taxes) for the "little people". Irish taxpayers don't like being treated like Darby O'Gills and are entitled to expect their public representatives and Government to stand up for their rights.

I have two questions:

1. According to brokers in New York, the bond is expected to be paid in full. Given that the redemption date was settled years ago, why were no steps taken to secure a substantial discount?

2. If the Government is being forced to pay at par to prevent  EU-wide contagion etc., will the IMF. EU and ECB compensate the State for this specific action?

Sick, Tired and Annoyed

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I am sick, tired and annoyed about:

  • Getting patronising pats on the back from international spokesmen while they stick their hands in my pockets to help international banks.

  • Seeing the State give a bailout worth €50 billion to developers while completely rejecting modest bailouts for deeply-troubled mortgage holders.

  • Watching the EU move towards massive write downs on Greek sovereign debt while preventing Ireland from defaulting on private debt owing by a non-bank, namely, Anglo.

  • Being lectured at by grossly over-paid politicians, experts and administrators on austerity while their retiring colleagues get huge pensions and pay offs

A letter based on this entry was published in the Sunday Business Post on 30th October 2011.

Default is Inevitable unless ..

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The EU has forecast that Ireland's Debt/GDP percent will reach 118% next year. This is viewed in most official circles as just about 'manageable' presuming favourable growth rates and adherence to current bailout terms.

However, it ignores the fact that, unlike most other EU states, there is a large divergence between Ireland's GDP and GNP as the former includes the enormous profits of multinationals which are taken overseas and don't really touch the local economy.

If GNP is used instead of GDP, Ireland's forecast Debt/GNP percent for 2012 shoots up to about 144%. Even if account is taken of Irish corporation profits tax paid by multinationals, the ratio hits 139%. This is off the scale and puts Ireland on a par with beleaguered Greece.

An Irish default is almost inevitable unless the EU, IMF and ECB apply much more flexible and realistic bailout terms.

Letter published in the Sunday Business Post on 29th May 2011.

Approach to Bailout is a Disaster

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What part of "disastrous" or "catastrophic" do the Irish Government, EU, ECB and IMF not understand in terms of their approach to Ireland's financial problems? 

Ireland is fighting to retain its Sovereignty against the world's largest financial forces. If Ireland involuntarily defaults the resultant contagion will certainly undermine the euro and EU, and could progressively turn the world's economies into a nuclear wasteland.

Any offer of a minor reduction in the interest rate should be rejected out of hand. Instead, the Government should demand a reduction in the bailout interest to a nominal rate (say, 1%), a payment reschedule spread over decades and an immediate write down of outstanding bank bonds by about 50%. In return, it must adhere to the bailout terms and agree for purely political reasons to a temporary levy of, say, 3% on top of the sacred corporate tax rate.

Letter published in the Sunday Business Post on 15th May 2011. See also Letter to TDs: Take Firm Action or We Default.

I have become so concerned about Ireland's looming economic and social crisis and the absence of any robust response by the Government that I wrote the message below to all TDs on 11th May.

I have highlighted my comments about GDP and GNP because:

  1. Almost uniquely within the EU, GNP is a much better measure of Ireland's economic activity and strength as it excludes profits of multi-nationals which are taken overseas.
  2. According to the ERSI's latest Quarterly Economic Commentary, the gap between GDP and GNP could widen from 22% to 27% by 2012. This makes the situation much worse than that portrayed in my message to TDs.
  3. The EU has today (13th May) indicated that Ireland's debt to GDP could reach 118% by 2012 - a year earlier than estimated the Government in its Jobs Initiative - May 2011.

This reinforces my belief that, unless rescued (rather than punished) by its EU partners, Ireland has no hope of avoiding involuntary default within the next few years with most serious consequences for the State and entire EU.

Here is the message sent to TDs:

Nyberg Report

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The Nyberg Report contained sections entitled The Herd, The Silent Observers and The Enablers. I look forward to a sequel dealing with The Developers, The Politicians, The Professionals, The Spinners, The Cronies, The Eurocrats, The Chancers and The Suckers. Should be a best seller.

Letter published in the Sunday Business Post on 1st May 2011.

In a recent entry Banking Crisis: Help Us or We Default, I suggested that Ireland could introduce a temporary levy on top of its current 12.5% rate for Corporation Profits Tax (CPT) as a quid pro quo for EU/IMF/ECB agreement on restructuring some of its bank bonds and slashing the interest rate applicable to the bailout.

It is apparent that there is substantial resentment within the EU, most notably in Germany and France, about Ireland's low CPT rate. My idea is that an increased rate would help Angela Merkel and Nicolas Sarkozy, Chancellor of Germany and President of France respectively, to "sell" such a deal to their sceptical electorates. 

This entry discusses the Irish CPT issue under the following headings:

      1. Importance of Corporation Profts Tax Rate
      2. Consequences of Increasing the Rate
      3. Threat = Opportunity
      4. Stop Kicking the Can

Banking Crisis: Help Us or We Default

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It is almost two months since my last entry. In the interval:

  • We've had a general election in which the Fianna Fail and Green parties were comprehensively rejected by the electorate in favour of a Fine Gael and Labour Coalition.
  • The Moriary Tribunal has reported and concluded that a former Goverment minister had accepted payments from a Irish businessman in return for helping to influence the outcome of a competition to award his company an extremely lucrative mobile phone licence. 
  • After over two years of drip feeding bad news and "kicking the can down the road", we are now approaching the endgame in relation to the banking crisis with the production of further stress test results.

This extended entry reviews the banking crisis and EU/IMF/ECB rescue package under the following headings:

        1. Depth of the Black Hole
        2. Putting the Cost in Context
        3. No Moral Hazard for Golden Circles
        4. Central Bankers were Asleep
        5. Default is Inevitable
        6. Irish Taxpayers Rescuing Foreign Banks
        7. Ourselves Alone or Kind Strangers
        8. Package Deal including CPT.

This entry conclude that in the absence of basic changes to the terms of the rescue package Ireland will be obliged to default. To prevent this outcome, it proposes changes to the package's interest rate, selective restructuring of outstanding bank bonds and temporary concessions on the politically sensitive, Irish corporation profits tax rate.

Prevent a National Default

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The "worst case" scenario confronting Ireland is default on sovereign or bank bonds (effectively the same thing with no thanks to the 2008 guarantee). IMHO, the chance of default within the next few years is 50/50 if:

  • The EU fails to address the Irish situation immediately;
  • Interest rates rise;
  • There is limited international growth;
  • There are further bank shocks or extensive home mortgage defaults;
  • There is any civil unrest;
  • The new Government makes some initial mistakes or delays decisions;
  • The 2012 Budget is as severe as the 2011 one:
  • National growth fails to return (very quickly) to the levels expected last November.

This is a lot of "ifs" and ducks to line up - bear in mind that Ireland's 10-year bonds are still close to 9%, notwithstanding the National Recovery Plan, and that Ireland's growth projections are being revised downwards rather than upwards. Only a few of these "ifs" need to happen for default to become inevitable. 
 
Given the distinct possibility of default, who is considering the implications and preparing the contingency plans? It is most certainly not the Irish political parties in the midst of an election. Surely, the EU/ECB/IMF, having taken control of the economy, have a responsibily to head off any possibility of default rather than cope with it when it happens?

Bear in mind that the Irish people did not cause the bust. Sure, some of us enjoyed it while it lasted but the culprits were regulators (Irish and EU), Irish Government and EU Commission, Irish and International banks, ECB and a small group of Irish-based developers who ignored virtually every business rule about leveraging and demand cycles.

For a detailed and generally accurate assessment of the "Irish bust", you might lke to read this lengthy article in Vanity Fair entitled When Irish Eyes are Crying by MIchael Lewis (author of Liar's Poker and The Big Short). See also Iceland Shows Ireland Did 'Wrong Things' Saving Banks. There are loads of similar articles including some by Nobel Prize winners (Paul Krugman and Joseph Stiglitz) that can be easily found on the 'Net.

The only way Ireland can prevent a national default is to separate sovereign from bank debt and default on the latter. If this is not done then there is a high chance that Ireland will default on all its debt (for reasons given above) with much more serious consequences for both Ireland and the EU.

Some of my other views are at Saving Ireland and Vote Against IMF/ECB/EU Bailout.

Saving Ireland

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David McWilliams in the Irish Independent on 8th January 2011 had an excellent piece on how he would save Ireland if he ever became Taoiseach. Here is a summary of his ten-step plan:

    1. Hold a referendum to confirm that the people wish to renounce the debts of Irish banks.
    2. Convert Ireland's bank debt problem into a euroland problem.
    3. Rescind the bank guarantee.
    4. Close Nama.
    5. Impose debt-for-equity swaps onto bank bondholders.
    6. Get the ECB to accept that it is unlikely to be ever repaid the €97 billion injected into the Irish banking system.
    7. In due course, convert the funds owing to the ECB into bank equity.
    8. Make domestic mortgages "non-recourse" and simplify the bankruptcy laws.
    9. Extend the vote to all Irish citizens no matter where they live.
    10. Draw on some of the $800 billion deposited in the IFSC to help rebuild a New Ireland. 

These proposals co-incide with views expressed here, for example, close Nama, reject the bailout, terminate the bank guarantee and use debt-equity swaps to recapitalise the banks.

Vote Against IMF/EU/ECB Bailout

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Here is the text of a message sent to all TDs ahead of the Dail debate on the IMF/EU/ECB rescue package on 15th December. This debate lasted two hours and the package was approved by 81 votes to 75.

I would ask you to reject the IMF/EU bale out in the vote on Wednesday on the following grounds:

- Our debt crisis cannot be solved by increasing our national debt.

- Our deep recession cannot be reversed by reducing economic activity.

Please note that the €85 billion rescue package includes €17.5 billion of our own money and up to €35 billion could end up being used to "rescue" major continental banks and the ECB.

It appears to me (and many experts) that Ireland will default sooner or later as the bale out terms are too onerous and growth projections are unrealistic. So, lets nip the problem in the bud as delay will only make matters much worse.

If the bale out is rejected by the Dail, the worst that can happen is that the terms will have to be renegotiated to slash the composite interest rate and restructure senior bank debt. To facilitate the latter, a clear distinction must be made between sovereign and bank debt.

Finally, this is one of the most important votes ever taken in the Dail and I would urge you to vote in the national interest rather than on party lines.

Click the Continue Reading link below to see replies received (as at 21st December):

IMF/ECB/EU Bailout

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If any new EU treaties are planned for the next decade, it is increasingly likely they will be blocked by Irish referenda and there will be no reruns to reverse decisions.

Our debt crisis cannot be solved by increasing debt, and a deep recession cannot be reversed by reducing economic activity.

And can we stop talking about a €85 billion rescue package as €17.5 billion is our own money and up to €35 billion could end up being used to "rescue" major continental banks and the ECB.

Letter published in the Sunday Business Post on 12th December 2010.

Default Expected

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According to the Government, the combined annual average interest rate (for the proposed bale package supported by the IMF/EU/ECB) will be of the order of 5.8% per annum. If we exclude the State's contribution of €17.5 billion which is interest-free then the average interest rate on the borrowed €67.5 billion rises to 7.3%.

If correct***, this rate assumes an even chance of Ireland defaulting on the loans. When is the point of the bale out if there is such a high risk of failure?

Letter published in the Irish Times on 30th November 2010.

*** This was subsequently found to be incorrect, the 5.8% rate applies only to the €67.5 billion. However, this rate includes a risk premium of about 3%.

Reject IMF Baleout of Banks

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The EU is foisting a massive loan (€50+ bn) on Ireland in order to rescue the ECB and major banks which irresponsibly lent to Irish bubble banks. This will only worsen Ireland's position as the principal could amount to about one-third of our GDP and the interest burden could equate to about one-quarter of all income tax receipts. This, on top of everything else, is unsustainable.

The bale out should be rejected. Instead, Ireland must introduce a bank resolution scheme by copying the UK version and secure ECB support to negotiate a deal with bondholders. Meantime, Ireland will pursue a four-year plan to reduce the deficit.  In this way, pain would be shared by all participants and because the Irish banking crisis is exceptional, contagion should be contained.

Letter published in the Sunday Business Post on 21st November 2010.

How to Resolve the Crisis

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The Government should invoke force majeure and immediately introduce legislation to halve the salaries and pensions of all highly-paid people in the public sector and dispense with all special entitlements.

It should signal that it will aggressively contest any attempts to frustrate these actions. They must be fully implemented before the budget to ensure that, unlike previous budget announcements on pay and pension cuts for ministers and senior civil servants, they will not be watered down or reneged on. Such a move, backed by the Opposition, would demonstrate leadership to citizens and financial markets.

From this high moral ground, the government should then negotiate pain-sharing with bondholders alongside the introduction of a bank resolution scheme; nationalise both main banks; pull back on Croke Park Agreement; finalise the four-year plan; secure support for the 2011 budget; and hold a general election. All these things could be done by next spring when Ireland could re-enter the bond market with a much stronger investment case and brighter future.

Lead letter published in the Sunday Business Post on 14th November 2010.

Economic Recklessness

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Through greed, incompetence and negligence a few hundred people have set this country back a decade, or more, in economic and social terms. In the few cases where "sanctions" have been applied, they have amounted to big pensions and fat payoffs instead of sanctions and punishments.

Notwithstanding the magnitude of the crisis, we still see no plans for a comprehensive public enquiry and we know that proving white collar crime can be extremely difficult due to complexity, wriggle room and "lapses of memory".

Given the scale of the economic and social devastation, it is inconceivable that any further painful remedial measures will be accepted by the nation unless firm lessons on "moral hazard" are seen to have been applied.

This could be done by designating economic recklessness (alongside the existing crime of reckless trading) as a crime and setting up a judicial or Dail-based investigation to identify the most culpable organisations within the public and private sectors based on public testimony of experts. The Honohan and Regling scoping enquiries would be relevant inputs regarding developments prior to September 2008.

Having decided which boards and groups of administrators should be examined in detail, the investigation should proceed with public questioning of relevant individuals leading, where appropriate, to files being passed to the ODCE or DPP. The level of proof for economic recklessness convictions should be the civil rather than criminal level to take account of the difficulties associated with prosecuting "white collar" crime.

Penalties for economic recklessness should include lengthy prison sentences, massive fines (linked to the wealth of the convicted) with significant scaling back for those who admit complicity or become whistleblowers.

National Debt

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A table in Cliff Taylor's piece (22nd August) indicates that €32 billion will be needed to service the national debt over the five years to 2014. This amount which will rise due to additional bank bale outs amounts to a full year's tax revenue.

How can it possibly be paid without massive political, economic and social consequences?

Letter published in the Sunday Business Post on 29th August 2010.

Clearly the Minister for Finance's left hand does not know what his right hand is doing. 

On the one hand, he has the National Pension Reserve Fund with €17 billion invested in about 2,900 companies worldwide in addition to €7 billion invested, on his instructions, in the two main banks. Financed mainly by Exchequer borrowings, the Fund has produced a meagre 2.6% annual return since 2001. It now proposes to tilt its portfolio towards riskier investments in the hope of doubling its annual return so as outperform the cost of government debt, currently 5%.

On the other hand, the Minister is investigating the possibility of selling prime State assets to reduce the national debt. Such sales could occur at a low point in the economic cycle and would have to be "priced to go" to deliver profits to investors.

If the Minister joins his hands together, he could direct the Fund to dispose of its overseas investments and lend the proceeds to the Exchequer to generate a risk-free return for the Fund that matches the State's cost of borrowing. Alternatively, the proceeds could be used to make arms-length purchases of suitable State assets or invested in new infrastructural projects in Ireland.

Letter published in the Sunday Business Post on 8th August 2010.

National Solidarity Bond

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Solidarity with who? Arguably, every cent raised by the National Solidarity Bond will be needed to bale out reckless banks and greedy developers rather than improve the infrastructure.

Letter published in the Irish Times on 1st May 2010.

Changing the Irish Constitution

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As indicated in my posting Your Country Your Call, I submitted an idea entitled New Republic - New Constitution proposing that a Citizens' Assembly be established to help prepare a new Constitution to mark the centenary of the 1916 Rising. You can vote for my entry here.

In this posting, I elaborate on the proposal by suggesting some possible changes to the 1937 Constitution, I cannot be too specific as I don't have all the answers and don't even know all the right questions!  Purposefully, I have steered clear of some potentially controversial issues like the status of Irish, religion and the family. Constitutional law can be very technical and it would be important to consult widely via the proposed Citizens' Assembly and to secure the help of experts and other interested parties.

You can view the Constitution or buy a copy in bookshops for under €3. Relevant material on the Internet includes the following:

Of course, the political parties have their own views on possible constitutional changes as do many representative and special interest groups.

Here are my thoughts to get the ball rolling:

Your Country Your Call

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I have submitted a proposal entitled New Republic - New Constitution to the Your Country Your Call competition which was launched by the President of Ireland. You can see my entry and, hopefully vote for it, at http://tinyurl.com/y7en6rh.

It proposes that the Citizens' Assembly mechanism be used to undertake a comprehensive review of the 1937 Constitution with a view to a new Constitution being put to a referendum ahead of the centenary of the 1916 Rising. A New Republic with a New Constitution would be a much more appropriate way to celebrate this than the predictable parades, flags and monuments.

I had been kicking the idea around for some time but was unable to see how it be progressed without being high-jacked by politicians for their own ends. Several references to Citizens' Assemblies in the inspiring Renewing the Republic series (published by the Irish Times during March/April) were the keys to the door!

Here is my full proposal:

The Way Ahead ...

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Here are my proposals to help address some key issues confronting the Nation. They were originally published on 3rd April as a comment in the Irish Times at the conclusion of its wonderful Renewing the Republic series.


1. Introduce a new income levy for high earners on the grounds that they have been the main beneficiaries of the boom. I can think of several memorable names for such a tax.


2. Beef up the prosecution arms of the State to ensure that all possible resources are thrown at the the few hundered or so people who through greed and incompetence created the mess.


3. Have a general election and ensure that those elected agree to root and branch reform of the Dail. Here are some suggestions dating back to 2003 to get the debate started. Only one (related to expenses) has been partly implemented to date (after seven years !!!).


4. Establish a Citizens' Assemby or similar to commence drafting a new constitution with a view to launching a Second Republic to mark the centenary of the 1916 Rising.**

** This suggestion has been submitted as a proposal to Your Country Your Call.

Banking Crisis Comments

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If the Government is powerless to prevent pay increases at the State-owned Anglo Irish Bank, what hope has it of ensuring that the credit policies of the other banks concentrate on helping SMEs rather than bolstering capital bases to benefit owners and bondholders?

Letter published in the Irish Times on 26th March 2010.

Your correspondent Henry Roberts (7th April) makes a good point but has mixed up apples and oranges. The €15.3 billion quoted for California refers to its expected budget deficit for 2010-11 i.e. excess of expenditure over income. The good news is that the €79.3 billion quoted for Ireland relates to our total national debt rather than the budgeted deficit. However, the bad news is that this national debt is about to double thanks to Nama, bank bale outs and ongoing budget deficits.

Letter published in the Irish Times on 8th April 2010.

Cost of Banking Crisis

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Rough calculations suggest that, in the "worst" case, the banking crisis could ultimately cost taxpayers about €35 billion based on €10.8 billion expended to date, €14 billion for further bail outs and partial nationalisations, and a provision of €10 billion to cover Nama losses.

This is equivalent to about three years' income tax receipts, or €17,000 - or six months' average earnings - per taxpayer. Related borrowings would peak at about €79 billion with annual interest of about €3.5 billion either borrowed or paid by taxpayers. It takes no account of broader economic and social consequences.

Given the magnitude of the likely losses, it is truly extraordinary that a full public enquiry is not already well underway. Maybe, this because most of those who created, or failed to prevent, the crisis are still in charge.

Lead letter published in the Sunday Business Post on 22nd March 2010.

Some additional comments:

      1. In a "best" case scenario, triggered by a miraculous resumption of growth, the foregoing cost (€35 billion) might be reduced by two-thirds thanks to Nama achieving better than break even, repayments by some banks and proceeds of bank share sales.

      2. Based on the average of "best" and "worst" cases, the "most likely" direct cost of the banking crisis could be about €24 billion.

For the record, the key assumptions were as follows:

  • €10.8 billion already expended: €3.5 billion to Bank of Ireland and AIB; €3.8 billion to Anglo Irish Bank.
  • €13.4 billion for further bale outs etc.: €6 billion for Anglo; €2 billion for Irish Nationwide and €0.4 billion for EBS; €5 billion in new equity to be shared between Bank of Ireland and AIB.
  • Provision for Nama losses: €10 billion based on 20% of the €54 billion to be paid for loans from the covered institutions.
  • "Best" case provision assumed that all funds (€12.2 billion) to Anglo, Irish Nationwide and EBS are written off; that Nama breaks-even; and that preference and ordinary share investments in AIB and Bank of Ireland are recovered at cost,
  • Peak borrowings comprise cash provided to the covered institutions (€24.2 billion) plus the Nama bonds (€54 billion). This takes account of the fact that any share investments made by the National Pension Reserve Fund are effectively funded by borrowings via the NTMA.
  • Assumed interest rate on these borrowings is 4.5% (current yield on 10-year Government bonds).

The foregoing estimates exclude any possible losses linked to €10 billion provided by the Central Bank to Anglo Irish Bank under Master Loan Repurchase Agreements last March. This is secured against collateral of €14.5 billion provided by Anglo. For more information, see Outsiders Pay for Insiders Greed by David McWilliams in the Sunday Business Post and Anglo's latest fun in the sun by Dr. Constantin Gurdgiev.

 

Stimulating High Tech Industry in Ireland

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Following publication of the Report of the Innovation Task Force in March 2010, I thought it would be interesting to dust off a report entitled Stimulating Indigenous High Tech Manufacturing Industry (SIHTMI) which I wrote back in 1983 for an Education, Innovation and Entrepeneurship Research Programme.

Here is the Full SIHTMI Report  (140 pages) and a Summary.

To place 1983 in context, it was the year that:

  • The domain name system for the Internet was created.
  • Compaq launched the first portable PC.
  • 64k 8-bit memory devices were the norm.
  • Lotus 1-2-3 and the IBM PC XT were launched.
  • World market for NMR imaging machines was only 80 units.
  • UK introduced the Business Expansion Scheme to bridge the "equity-gap".
  • EEC was formulating plans for technology support programmes.
  • The US market for cellular radio services was worth less than US$200 million .

The SIHTMI Report estimated that, at that time, there were about 20-40 indigenous high tech manufacturing firms in Ireland employing between 400 and 800 people. High tech was defined as covering microelectronics, biotech, materials and speciality chemicals, specialised mechanical products and software.

The SIHTMI Report concluded that (despite hype at the time) a high tech sector didn't exist and would not develop without major changes. It indicated a need to create a national policy on high tech; to streamline state support to high tech firms; to pursue strategies based in identified niches; to establish centres of excellence and better HE/industry interaction; to encourage proven entrepreneurs and senior managers to locate to Ireland using tax breaks; to introduce tax incentives to encourage investment; and to improve the general infrastructure, environment and competitveness.

These recommendations, when compared with the Innovation Task Force's, shows just how much (or how little) progress has been made over almost three decades. Chris Horn, a well-known "tech champion" and member of the Innovation Taskforce, identified the following similarities between recommendations in the 1983 and 2010 reports:

  • need for risk capital
  • need to augment domestic entrepreneurs with attracting overseas ones
  • shortage of international commercial skills
  • need for more progressive procurement policies by the State
  • need for oversight committee for the enterprise economy with public and private sector and Ministerial engagement
  • co-ordinated focus around a single enterprise agency for delivery of support and aid
  • grant aid for early stage ventures
  • put "wood behind the arrow" in a few carefully selected market niches
  • tax incentives to foster private risk capital
  • aid, coaching, administrative support from large established companies to younger smaller ones.

This list begs the question as to why it takes so long (27+ years) to fully implement substantial but basic changes in industrial policy in Ireland.

Celtic Tiger pussycats

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When a quarter of Iceland's electorate opposed the payment of €3.8 billion to the UK and Dutch governments arising from its banking crisis, its President refused to sign the relevant bill into law and the matter goes to the people in a referendum.

Meantime, our Government rams Nama down the electorate's throat and bails out banks and developers at a cost of at least €20 billion notwithstanding widespread opposition.

Whereas the Icelandic government resigns, our government clings to power in spite of having presided over the entire crisis.

While Iceland hires a high-powered, international investigator to help investigate possible criminal actions by bankers, our government dithers about even holding an enquiry.

Clearly, the Celtic Tiger has turned the Irish electorate into pussycats.

Letter published in the Irish Times on 15th January 2010.

Budget 2010

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The 2010 budget was extremely one sided as it excluded general tax increases for the high paid who retain existing after-tax incomes and additionally benefit from deflation. At the other end of the spectrum, social welfare recipients and lower-paid public sector workers are experiencing cuts on account of the same deflation.

Letter published in the Irish Times on 10th December 2009.

It is truly extraordinary that the Minister presented a budget detailing cuts of €4 billion but failed to state that he had recently gifted a similar amount to Anglo Irish Bank for absolutely no return and will probably flush a further €4-6 billion down its plug hole. This is on top of €7 billion provided to the main banks and possibly to be followed by billions more during 2010. Nor did he mention Nama's planned overpayment of €7+ billion for property loans and resultant €54 billion increase in national debt. Talk about ignoring elephants in the room.

Letter published in the Sunday Business Post on 20th December 2009.

Measuring the Economy

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The CSO's recent review of economic and social progress for 2008 incorporates EU-wide comparisons based on GDP (Gross Domestic Product) and GNI (Gross National Income). For Ireland, these measures differ by about 14 percent. In many situations, the lower GNI is the most appropriate measure of Ireland's output as it excludes the huge profits generated by multinationals. However, comparative studies by the EU, OECD, IMF etc. are based on GDPs which for many countries are very close to their GNI values. Consequently, their findings over- or understate Ireland's true performance as illustrated by the following examples derived from the CSO's review and covering the 27 EU states:

  • Ireland ranked second place in terms of purchasing power per person based on GDP but fell to fifth place based on GNI.
  • For capital investment, Ireland jumped from 16th place based on GDP to a much more favourable 8th position based on GNI.
  • Social protection expenditure based on GDP placed Ireland in 20th place. This improved to 15th based on GNI.
  • For public expenditure on education, Ireland ranked 15th based on GDP but rose to a commendable 7th place for GNI.
  • Ireland's ranking for public health expenditure jumped from 17th place when related to GDP to an above-average 11th place for GNI.

Surely, domestic and international studies should assess Ireland's performance based on GNI as well as GDP, even if only in footnotes. For example, the projected exchequer deficit for 2009 is 10.8 percent of GDP and extraordinarily high by international standards. If based on GNI, it rises to 12.7 percent and points to an even more serious position.

Letter published in the Sunday Business Post on 13th September 2009. The five examples were edited out for space reasons. 

Minimum Wage

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Calls for a review of the minimum wage should be placed in context.

According to the 2007 National Employment Survey 14 percent of all employees in the State had hourly earnings below €10 while a similar percentage had earnings above €40 per hour.

When account is taken of hours worked, employees earning less than €250 a week account for only 4 percent of the national wage bill as compared with a 13.5 percent share for those earning over €1,500 a week. A ten percent reduction in wages for all 233,000 employees earning less than €250 a week would reduce the national payroll by 0.4 percent whereas a similar reduction for the 233,000 highest paid employees would reduce the national payroll by eight times as much.

For maximum impact, any campaign to improve national wage competitiveness should start with high-paid employees, directors and self-employed rather than the lowest paid. To show leadership, our politicians should take substantial reductions in salaries which, even after minor tweaking, are still amongst the highest in the world.

Letter published in the Sunday Business Post on 16th August 2009. 

Unemployment Crisis

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The Minister for Finance told the Dail on Wednesday last that the unemployment rate will hit 15.5 percent next year. This compares with 11.4 per cent last month and just 5.4 percent for April 2008. Unemployment is expected to reach 366,000 during 2010. This is almost 60% higher than the highest level encountered during the dark eighties - it can be no consolation to the unemployed that the labour force has increased substantially in the interval.

If public sector employment remains steady at 360,000 then private sector will continue to bear the brunt of unemployment. This will bring the sector's unemployment rate to almost 19% notwithstanding across-the-board wage freezes and reductions, impaired pensions and substantial rationalisation.

It begs the question as to why, in this unprecedented crisis, the public sector continues to enjoy a substantial like-for-like wage premium, excellent pension arrangements (notwithstanding the recent levy) and near absolute job security. Surely, it is time for the entire public sector to engage, without preconditions, in a major programme of reform and productivity improvement to align itself more closely with the private sector.

For its part, the Government and opposition should set aside their petty party differences and lead an immediate action plan to contain unemployment, reduce public expenditure, unblock the banking system, protect the least well-off and restore medium-term confidence and competitiveness.

In parallel, the social partners parties must get off their ideological high horses; accept that a substantial across-the-board decline in living standards is inevitable; and start working with the Government to ensure that the major surgery needed to restore the economy's health is executed as fairly as possible. The quicker this is done the sooner the recovery can start.

Get the Government We Deserve

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This Government is quite clever in the way that it periodically creates smoke screens to distract from underlying issues. The latest example is reshuffling junior ministers to hide gross excesses in the remuneration and expenses of politicians. Clearly, the Government has used a feather duster instead of a chain saw notwithstanding that it promised in the last budget to "lead by example".

Of course, this is not surprising given that, apart from a few sacrificial lambs, none of the hundred or so individuals in the public and private sectors who led the economy over a cliff have suffered meaningful sanctions or even offered unqualified apologies.

All the signs are that the economy will decline by about 14% between mid-2008 and 2010 and that only about one-third of this decline may have already occurred. This is confirmed by the expectation that the tax increases announced in April will have to be repeated, in one form or another, in budgets for 2010 and 2011.

On this basis the worst has yet to come. The Government's most recent initiative has been to scuffle a few meaningless jobs instead of showing real leadership to drive through root-and-branch changes to reduce public expenditure, sort out the banking system and restore medium-term confidence and competitiveness. When those fortunates with jobs see the impact of higher levies on their pay slips at end May, they will be in no mood to tolerate a Government that pussy foots around the excesses of the Celtic tiger and fails to "lead by example".

A rout of the governing parties in the local and European elections could easily provoke a crisis of confidence within the Dail and lead, for better or worse, to an early general election. This time around, the electorate should ensure that it votes for a government that leads from the front and is both firm and fair.

Economy & Taxation

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Last year the Minister for Finance advanced the 2009 budget by three months as the Government's main response to the emerging economic crisis. He indicated in his budget speech that the economy would decline by less than one per cent and unemployment would average 7.3 per cent in 2009.

If these figures justified an early budget, surely the expected 6+ per cent decline in the economy for 2009 and an actual unemployment rate of 7.7 per cent for last December justify immediate budgetary action rather than a fifteen month gap to the next budget.

Much play has been made by the Government that top earners pay the most tax and that huge numbers don't pay any tax. According to Revenue's Statistical Report for 2007, 661,000 tax cases had gross incomes of less than €15,000 a year and, as might be expected, paid minimal taxes totalling €14 million on gross incomes of €4,744 million.

If, ignoring the social consequences, their effective tax rate of 0.3% could be increased by 10% to 10.3%, an additional €474 million would be raised. At the other end of the spectrum, 81,000 people had gross incomes in excess of €100,000 a year and paid taxes totalling €4,353 million on gross incomes of €16,065 million. If their effective tax rate of 27% increased by the same 10% to 37%, a total of €1,606 million could be raised.

Surely, it is unnecessary to wait for the Commission on Taxation's report to see that, in this time of crisis, tax rates should be increased as soon as possible for those with the highest after-tax incomes.

Letter published in the Irish Times on 4th March 2009.

Proposals on Crisis

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The following proposals are aimed at those in leadership positions and the higher paid. While small in number, they are hugely important for setting example, restoring fairness to the tax system and contributing to the national finances and competitiveness.

  1. Salaries, pensions and expenses of ministers, TDs and senators should be reduced by, at least, one-third and instead of being pegged to overblown civil service scales, their salaries should be linked to those of politicians in other states of comparable size and status, and having similar parliamentary sitting days.

  2. Salary scales of senior administers and professionals across the public sector should also be benchmarked against opposite numbers in other comparable countries and linked to the average industrial wage. In the interests of fairness, the proposed pension levy should be restructured as was done for the income levy.

  3. As applies in the US, exceptional salaries in the private sector should be funded by shareholders rather than subsidised by taxpayers. Accordingly, any elements of total salary, bonus and pension contribution exceeding €200,000 should cease to be deductable for corporation tax purposes.

  4. The conditions applicable to non-residency for tax purposes should be reviewed so that non-residency means exactly what it says or tax exiles pay up like every other citizen. For starters, tax should be changed on worldwide incomes of tax exiles pro-rate to days (or part of) spent in the state.

  5. Having been introduced to encourage greater participation in the work force, tax individualisation should be phased out to help distribute scarce jobs across more households. Dual-income households with high mortgages that voluntarily become single-income should get special tax credits or be able to extend the term of their mortgages.

  6. A new tax rate of 48% should be applied to the 60,000 tax payers with incomes above €100,000 a year. The annual yield would be about €800 million, and could be higher if allowances for "top-hat" pensions, investments etc. are reduced. If applied immediately for the next five years, these changes could cover about a quarter of the projected €16 billion shortfall.

Letter published in the Irish Times on 10th February 2009.

Facing Reality

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Nothing illustrates the Government's weak-kneed approach to the crisis more clearly than the fact that on the same day that President Obama demanded that US companies receiving bailouts should limit executive salaries to US$500,000, our Taoiseach who earns more than President Obama merely urged top executives in banks covered by tax payers' guarantees to take 25 per cent salary cuts. Arguably, a maximum salary of about €200,000 would be appropriate for Irish bank executives when account is taken of their size relative to their US counterparts

Supplementary Budget

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Here are some suggestions for the Minister for Finance to consider when he is obliged by circumstances to present a supplementary budget early in the new year in response to the disastrous economic downturn which is still gathering momentum.

They should be implemented in the context of a realistic, attainable five-year plan for which the support of the social partners and opposition should be sought. Given that these are unlikely to acquiesce even though they offer no alternatives other than to strut, whine and oppose, the government should, for once, show real leadership and forge ahead on the grounds that there is no alternative and early action is crucial. Most people will accept pain provided it is seen to be fairly distributed and there is hope at the end of the tunnel. The alternative is much higher unemployment, cutbacks, emigration and extreme hardship which will take a decade to unwind.

As those who gained most from the Celtic Tiger should pay the most, the income levy percentages should be extended on a sliding scale from 0% for the lowest paid up to, say, 10% for those on the highest incomes. Alternatively, a new higher tax rate should be introduced for those earning more than, say, double the average industrial wage.

Given that payroll costs account for half of all public sector expenditure where salary rates are well ahead of equivalents in the private sector and internationally, the Government should roll back the first benchmarking exercise and plead "inability to pay" other than to the lowest earners under the new national wage agreement. It should only recommence payment of increases once major reforms have been confirmed by An Bord Slash.

Taxpayers can no longer be asked to subside "gold plated" pensions for politicians and public servants when the value of their own pensions (if they have one) is dropping through the floor. The Government should establish a realistically funded contributory pension scheme in lieu of the present prohibitively expensive and inequitable "pay-as-you-go" arrangement. As a stop gap, full PRSI should be applied across the public sector and, in recognition that PRSI is income tax in all but name, earnings limits should be removed for all workers in the private sector.

The foregoing measures will arrest the catastrophic deterioration in public finances and enable the new standard VAT rate of 21.5% to be reduced substantially. This will help the lower paid as well as assisting tourism and curtailing cross-border shopping.

Finally, the Dail should immediately start sitting for four full days every week for at least forty weeks a year. To ensure genuine debate and better decision making, backbenchers should be pressurised by constituents to exercise greater freedom of expression in Dail debates, and voting linked to constituents' needs rather than party loyalties should become the norm rather than the exception.

Lead letter published by Irish Times on 8th December 2008.

Guarantees for Banks

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The value of the proposed bale out in the US is equivalent to US$2,000 per US citizen. The Irish bale out could be worth up to €125,000 per man, woman and child. If US citizens won't accept their bale out, why should we accept something a hundred times larger?

The Government's action is nothing more or less than a huge reward, underwritten by taxpayers, to banks for foolish lending, to the Regulator for failing to regulate, and to its beloved construction industry.

It does absolutely nothing to address the underling problems which the banks, government and construction industry jointly created over the last five years by building, selling and financing grossly over-priced houses and commercial property.

This is the AIB and ICI rescue repeating itself. Where are the restrictions on bankers remuneration? Where are the equity stakes? Why should Irish taxpayers guarantee to bale out a bank that stupidly financed an overpriced property development in Dublin, London or Germany or made billions by conspiring with house builders to lock hundreds of thousands of young purchasers in huge mortgages for the rest of their working lives?

Irish households are amongst the most heavily borrowed in the world and, instead of helping them, the Government gives guarantees worth a multiple of the Irish economy's annual output to the Irish banks.  This, on top of the hammering that households can expect in the forthcoming budget.

Lead letter published in the Irish Times on 1st October 2008.

National Wages Analysis

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The proposed new national wage agreement continues the practice of awarding percentage increases "across the board" with only a token nod to the lowest paid. This has helped make our ministers, TDs, and highest earning public sector managers and professionals amongst the best paid in the world and has progressively widened the income gap between low and high paid.

Using data from the CSO's National Employment Survey for 2006, the proposed agreement's impact on employees who account for 82% of the work force can be assessed as follows:

  • Gross earnings of 1.7 million employees amounted to €63 billion and the proposed agreement would increase this by €3.8 billion (6.1%) if applied to all employees. 
  • Because the proposed increases are percentages, lower paid employees would receive much smaller monetary gains. This means that about 233,000 workers earning less than €13,000 a year would share an increase of €173 million whereas the 75,000 employees earning over €75,000 a year would share about €466 million. Put another way, the lowest paid workers (14% of all employees) would get 5% of the cake while the much less numerous highest paid (4% of total) would get a 12% slice.
  • The 0.5% "bonus" for the low-paid employees would be worth less €2 a week per worker. It would apply to about 500,000 workers but account for a mere 1% of the total proposed increase.

Aside from being inequitable, the proposed agreement ignores the fact that world economies are facing a possible serious recession and that, thanks to the excesses of the Celtic Tiger, our open economy has become completely uncompetitive. Given that the global credit crisis has yet to reach our real economy, a much more radical agreement is needed. For example, to restore competitiveness and social equity, the proposed percentages could be reassigned so that the lowest paid get the 6% and the highest get the 0.5% over the agreement's life. If applied on a sliding scale to all workers, the cost would be about €2 billion, just over half that of the proposed agreement.

House Prices

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Five years ago you published a letter from me about house prices (28th October 2003) which stated that "rising interest rates could move many recent and future buyers with large mortgages into negative equity and expose their lenders to defaulting loans. It could also mean that many houses acquired as investments might be offered for sale to lock in gains or to cut losses. This would further depress prices. Can nothing be done to prevent this calamitous event from happening?".

Clearly, very little was done. If a mere letter writer could foresee this crisis, why didn't the Government?

The best thing the Government can do now to assist the beleaguered building industry is absolutely nothing! House prices should be allowed continue their rapid descent to a point where people and lenders become confident that they have finally reached a reasonable and sustainable level.

There should be no dig outs or artificial schemes as these will merely defer decisions by those who would wish to purchase a quarter of a million houses over the next five years. The return of affordable housing for all would be real shot in the arm for society and the economy.

To consolidate this, the Government must introduce much-discussed controls on the price of building land and, in conjunction with the Central Bank, implement measures which curtail inflationary lending for house purchases.

Letter published in the Irish Times on 10th September 2008.

Pension Fund Strategies

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The National Pension Reserve Fund has lost about €3 billion (15% of value) over the past four quarters as a consequence of the international credit crisis.

In these circumstances, it makes no sense for the Exchequer to continue borrowing about €1.6 billion a year from abroad for the Fund to continue to making risky overseas investments while cutting back on domestic investment and turning to expensive Private-Public Partnerships and massive tax breaks to progress critical national projects.

This nonsense is compounded by the fact that the Fund must achieve a return on its investments in excess of the cost of borrowing "to wash its face". It is noteworthy that the NPRF is one of the few funds in the world not financed by oil and commodity revenue surpluses. Has the government forgotten the rules about never borrowing money to buy shares or investing what you cannot afford?

Surely it makes more sense for borrowings earmarked for the Fund to be redirected immediately to finance much-needed, major infrastructural projects now instead of being used to make overseas investments for pensions payable decades hence. This could be done simply by legislating a "contributions holiday", say, for three-years to free up about €5 billion.

This would enable critical projects to be progressed more quickly and kept in public ownership. For example, the eight co-located hospitals which will cost the taxpayer a fortune and further fragment our two-tier health service could be progressed in public ownership using a fraction of these liberated funds.

By 2025, the NPRF could be valued €80 billion at current prices (€150 billion at 2025 prices). Given that every taxpayer and consumer will have contributed to the Fund, what guarantees can be offered that payments out of the Fund after 2025 will be equitably distributed and not skewed towards increasingly unsustainable, unfunded "gold-plated" pensions for politicians and the public sector at the expense of much more numerous, poorly pensioned citizens in the private sector?

For example, the NPRF has indicated that public service pension costs will reach 3.7% of GDP by mid-century while social welfare pensions for a far larger number of people will only rise to 10.1%. 

As contributors to the Fund, we should be given absolute assurances that future governments will not treat the Fund as a massive "slush fund" to support vested interests as done with decentralisation, benchmarking etc.

Lead letter published in Irish Times on 26th July 2008.

Responding to Recession

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Here are three proposals which could help negotiations on a new national wage agreement, claw back some of the excesses of the Celtic Tiger, improve equity within society, generate additional funds for the Exchequer, and enhance national competitiveness:

  1. Apply wage increases under the next agreement on a sliding scale, for example, 3% p.a. on the first €30,000, 2% on the next thirty and 1% on the balance. As wage increases, in the absence of growth, are mainly intended to compensate for basic cost increases, there is no case for automatically offering the same proportional increases to those already enjoying high incomes. 
  2. Either introduce an additional tax rate (say 45%) for those earning over, say, €100,000 or ensure that those on the 41% rate actually pay tax at that rate on their incremental earnings by scaling back allowances for "top-hat" pensions, investments etc. It is inequitable that someone earning €60,000 a year pays tax at 41% while a person earning five times more can pay tax at a lower effective rate.
  3. Drop the standard VAT rate to, say, 18%. This would reduce the cost of living and help redress the imbalance between low direct taxes (which benefit the better off) and indirect taxes which fall most heavily on the less well off.

The figures are illustrative but basic analysis would identify the ideal combination to achieve all the aforementioned objectives.

Lead letter published in the Irish Times on 28th June 2008.

Next National Wage Agreement

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Dr X's call for a pay freeze (4th May7 2008) is unlikely to secure much support in the talks on a new national wage agreement on account of our high inflation etc. However, here are three proposals which taken together could enhance national competitiveness, protect living standards, claw back some excesses of the Celtic Tiger, improve equity within society and generate additional funds for the Exchequer:

  1. Wage increases under the next wage agreement should be applied on a sliding scale e.g. 3% p.a. on the first €30,000, 2% on the next thirty and 1% on the balance. As wage increases are mainly intended to compensate for basic cost increases, there is no case for automatically offering the same proportional increases to those already enjoying high incomes. 

  2. Either introduce an additional higher tax rate (say 45%) for those earning over, say, €100,000 or ensure that those on the 41% rate actually pay tax at that rate on their incremental earnings by scaling back allowances for "top-hat" pensions, investments etc. It is anomalous that someone earning €60,000 a year pays tax at 41% while a person earning five times more can pay tax at a much lower effective rate.

  3. Lower the standard VAT rate to, say, 19%. This would reduce the cost of living and help redress the imbalance between low direct taxes (which benefit the better off) and indirect taxes which fall most heavily on the less well off.

Figures are illustrative but basic financial modelling would identify the ideal combination to meet all the aforementioned objectives which, presumably, are reasonable and desirable.

Lead letter published in the Sunday Business Post on 11th May 2008.

Funds for Infrastructure

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I wish to link Minister Dempsey claim that the Exchequer doesn't have a "red cent" for a much needed hospital in the north east to Richard Curran's report (6th April) that the National Pension Reserve Fund is the 15th largest sovereign investment fund and one of the few funds not financed by rising oil and commodity revenues.

The National Pension Reserve Fund secures 1% of GNP each year to help fund pensions after 2025. Valued at €21.3 billion at end 2007, it lost 1.8% of its value in the final quarter of 2007 and probably lost a multiple of this in the most recent quarter. More discerningly, the Fund, as recently as December 2007, was increasing its investments in volatile emerging markets, property and overseas private equity from 7% to 21% of the Fund's overall value by end 2009.

All this begs the question as to why the Government is borrowing well over a billion euro a year specifically for the Fund to make risky overseas investments and, at the same time, deploying expensive Private-Public Partnerships and massive tax breaks to help finance critical national projects. This is analogous to a heavily-mortgaged householder borrowing further money to invest in risky overseas shares for pension purposes while using a reduced salary to pay a premium price for essential roof work on top of an ongoing annual toll to the contractor.

This makes absolutely no financial or economic sense. Surely it would be better to legislate a "contributions holiday" for the Fund and divert future payments €1.6 billion a year of "red cents") towards much-needed, major infrastructural projects that could be progressed more quickly and kept in public ownership where they ultimately belong.

This letter was published in the Sunday Business Post on 13th April 2008.

Taoiseach's Salary

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How can a prospective salary of €310,000 for the Taoiseach be justified when the UK's Prime Minister only earns €270,000 (€187,611) and the US President gets €281,700 ($400,000) ? Is it any wonder that Ireland is losing its competitiveness and public sector costs are surging when people at the top so blatantly ignore the need for pay restraint.

Letter published in the Irish Times on 30th October 2007.

Celtic Nightmare

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Does projected economic growth of 5% a year mean, for example, that we'll have:

  • 5% more cars on the road each year for the foreseeable future?
  • 5% more children trying to get into schools every year?
  • 5% more people crowding each year into our hospitals?

Will this growth continue to undermine our national competitiveness as has happened during the recent years? If so, the net result will be that cars will be barely usable due to congestion, more children won't get places in schools, the health service will implode and no one will want our overpriced exports. Surely this is a Celtic nightmare and absolutely unsustainable or undesirable.

Will some politician please stand up and articulate a vision of Ireland which allows the country to consolidate and draw economic breath.

Peak Interest Rates ???

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Two major Irish banks have recently suggested that interest rates in the euro zone could peak before the end of this year at 4.25%. How much credence can be given to this when no one can possibly foretell what will happen to Iraq, German economy, oil prices, US dollar, Russian gas supplies and so on? Furthermore, interest rate trends does not suggest any peaking of euro rates as might be the case for US rates. Do these banks know something the rest of us don't know or do they just have thicker brass necks or bigger crystal balls?

Letter published in the Sunday Business Post on 29th July 2007. 

Taoiseach and the Economy

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Only weeks after stuffing the electorate with promises of lower taxes and better services, the Taoiseach tells us (7th June) that we are entering a period of challenging economic conditions and that it is important to focus on restoring and renewing competitiveness across all dimensions. Isn't it really strange that this is the second occasion that conditions have deteriorated immediately following an election?

In fact, absolutely nothing has altered during the past month to justify this about face. However, if the Taoiseach believes what he says then he could lead by example and slash the inflated salaries of ministers/TDs who are amongst the best paid in the World. He should then shake up the public sector to bring it into line with performance and pay norms in the private sector and ensure that lump sum wage increases rather than socially-device percentage increases are applied in future national wage agreements.

Unless measures along these lines are taken to restore our increasingly unbalanced, uncompetitiveness, overpriced and overborrowed economy, we will see a continuing deterioration. Action now would be less painful than the appalling prospect of having to abandon the euro for a floating Irish pound in order to recover the levers of economic management. This would improve competitiveness but at the expense of even higher prices and interest rates.

Letter published in the Irish Times on 13th June 2007. 

For Richer or Poorer

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Mr X quoted EU statistics (Letters, 5th June) to suggest that Ireland has become more equitable since Bertie Ahern came to power. He indicated that the gap between the incomes of the top 20% of the population and bottom 20% declined from 5.1 times to 5.0 between 1995 and 2005, an improvement of 2%.

It is a pity he did not look more closely into the figures as he would have found that EU countries improved their overall score over the same period from 5.1 to 4.8, a 6% improvement; Ireland's score improved by 12% from 5.1 in 1995 to 4.5 in 2001 and deteriorated by 11% to 5.0 over the subsequent four years; and Ireland had the tenth widest gap between rich and poor out of 28 countries in 2005.

Ireland's score would need to fall to 4 to match the equalities in most Northern Europe states. At the current rate of progress, this will take a hundred years.

Letter published in the Irish Times on 7th June 2007.

Towards 2016 - Towards Greater Inequity

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The recently approved Towards 2016 agreement is, like its predecessors, unbalanced and inequitable. Based on data abstracted from the recently published National Employment Survey, total national earnings amounted to approximately €42 billion in 2003. On this basis, the 10% increase under Towards 2016 would be worth €4.2 billion and, if distributed equally, would equate to €2,900 a year per worker.

Because increases are applied on a percentage basis, workers at the lower end of the scale receive much smaller monetary increases. This means that the 233,000 workers earning less than €250 a week are likely to share about €256 million whereas the 145,000 workers earning more than €1,000 a week will share about €1,100 million. On this basis, the 10% of the highest paid workers will secure about a quarter of the total increase and the 16% of lowest paid will get just 6%. Furthermore, the extra 0.5% negotiated for low paid could cost about €25 million and amount to considerable less than one percent of the total value of the agreement.

What is so disconcerting about national agreements is the cumulative effect of awarding percentage increases across the board. This only serves to widen the gap and perpetuate inequities. Is it any wonder that, notwithstanding the size of the State, our political and administrative leaders are, thanks to these increases, amongst the best paid in the world? Towards 2016 should be viewed as a national disgrace rather than a national agreement. If the State can afford a wage increase of €4.2 billion, why can't it be distributed more fairly?

Letter published in the Sunday Business Post on 17th September 2006.

Toll Roads

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Judging by their silence, motorists don't give a hoot about the recent increases in the East and West Link tolls. If they made enough noise, I'm sure that they could force a roll-back of the recent increases along with commitments to limit future price rises and measures to ease the congestion.

This instance of highway mugging begs the question as to why the Government and NRA are pursuing plans to toll further roads notwithstanding that Public Private Partnership funding is minor in the context of the total investment in infrastructure; that toll operations represent additional cost burdens; that the State can raise finance on better terms than any private operator; and that profits must be generated to remunerate the private partner.

Surely, it is time for the Government, NRA and NTR to recognise that they are killing their "golden goose" in the same way that Eircom's floatation and subsequent history have constrained any future privatisations.

Letter published in the Sunday Business Post on 23rd January 2005.

Flawed International Comparisons

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Most international studies use Gross Domestic Product (GDP) as the basis for comparing the economic performances of countries. In Ireland's case, GDP is a poor basis for comparison as it includes profit repatriations by multi-nationals. Gross National Product (GNP) is a much better measure of income and wealth as it excludes these repatriations which exceed €20 billion a year.  In 2003, Ireland's GDP exceeded GNP by 19% while GDPs and GNPs of the other 24 EU States diverged in most cases by less than 1%.

Use of GDP as the basis for comparison leads to over- or understate Ireland's performance as the following examples illustrate:

  1. The recent OECD Report on Education indicated that Ireland ranked 23rd out of 30 countries in terms of public expenditure as percentage of Gross Domestic Product (GDP). If this data is rebased to use GNP, Ireland jumps to a more respectable joint 18th place.

  2. A recent Central Bank report indicated that Ireland had the sixth highest private sector credit as % GDP for euro countries. After rebasing to GNP, Ireland jumps to third position and this puts our national borrowing in a completely different and more serious context.

  3. The latest UN Human Development Report indicated that public expenditure on health in Ireland was 4.9% of GDP and lowest for fifteen countries listed. When rebased using GNP, Ireland's percentage rises to 6.1% and its ranking improves to joint 8th place. This is distinctly better than being "paddy last" and begs additional questions about use of resources in this key area.

International statistics should always carry a "wealth warning" but those used to measure and compare Ireland's performance need special care. While international organisations are unlikely to revise their data to take account of Ireland's unique circumstances, data published in Ireland or used for policy development should be correctly based. A simple rule of thumb is to add a quarter to recent GDP-based statistics to rebase them to GNP and reflect Ireland's underlying performance.

House Prices: The Real Financial Scandal

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It is a pity that outrage over AIB's overcharging and NIB's transgressions is not being directed also at the fact that house buyers were obliged to borrow €17 billion last year to acquire overpriced houses. Arguably, if house prices had been, say, 10% lower, these new borrowings might have been reduced by as much as €2 billion and interest payments would have been lower for new and recent borrowers throughout the life of their mortgages.

Having ceded control over interest rates to the European Central Bank, the Government tried, and failed, to contain house prices by tinkering at the edges - mainly by encouraging the building of even greater numbers of overpriced houses. It has ducked real issues such as land prices and hoarding, excessive lending, inflationary tax incentives, profiteering, overcharging and tax gouging. As a consequence, hundreds of thousands of house buyers will be making excessive loan repayments amounting to billions of euro for decades to come.

Given that house prices have escalated to such a degree, containment of price inflation is no longer adequate. It is small consolation to see a slow down in price increase when current prices should never have been reached in the first instance. Instead, what is needed is a substantial reduction in house prices to bring them back to levels that make them sustainable when interest rates rise and economic growth moderates.

To start this process, the Government should immediately establish a Task Force to implement key suggestions in the All Party Committee on the Constitution's progress report on private property. If the Government fails to unwind the house price problem in an orderly way, then its much-beloved "market forces" will do the job with consequences that will be many orders of magnitude greater than the current financial scandals.

Lead letter in the Sunday Tribune and published in Sunday Business Post on 8th August 2004.

Face Reality

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Things have reached a stage that we as a nation need to take stock and start facing some home truths about our State, its management and direction:

  • We have a booming economy for which everyone takes credit for but which is based largely on inappropriate cheap credit rates ordained from outside the State.
  • We have completely inadequate services in health, law and order and for the disadvantaged and deprived but unending promises of improvement that are rarely delivered.
  • We have a strong foreign industry base thanks to transfer pricing, generous tax rates and light regulation but stagnating indigenous industry due to escalating costs and lack of development.
  • We have a service sector that is manifestly over-pricing in many areas which blames everyone but its own greed for causing the high prices.
  • We have a Government  that is unwilling to raise taxes to improve services but very willing to give tax breaks to wealthy tax payers and impose stealth taxes.
  • We have a public sector that accepts politically-inspired benchmarking awards but offers little in return other than interest in further similar awards.
  • We have an administration that expends enormous sums on capital projects but is incapable of managing them on budget and time without selling major rights to private interests.
  • We have a national pension fund which sucks up 1% of national wealth every year to invest throughout the world but is unwilling to make any significant investments in Ireland.
  • We have a political philosophy which seeks to impose greater use of our historic language in Ireland and the EU but fails to adequately protect our heritage, constitution and nationhood.
  • We have a Cabinet that is unable to make timely decisions on key issues - airport terminal, health service reform, housing, traffic and social equality - but very fast to decide on unimportant matters like post codes, decentralisation and e-voting.
  • We have politicians who transfer hundreds of millions of tax receipts to lawyers to probe corruption and wrongdoing but who are unable to accept their responsibilities and often pay scant regard to the truth and ethics.
  • We have a legislature which generates noise and spin but operates for less than half the year and, even then, is very poorly attended and regularly ignored by its proponents.
  • We have an "establishment" which pursues a liberal economic agenda but fails to appreciate that the economy is only one element of a strong, satisfied State.

House Prices & Interest Rates

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The likelihood that the Bank of England may increase interest rates for the first time in three years should be a salutary warning to the overheated Irish housing market. Where the "Old Lady of Threadneedle Street" goes, other Central Banks are sure to follow either sooner or later.

In the current low-interest climate, many first-time buyers are very stretched to meet mortgage repayments. In a higher rate environment, their capacity to meet larger repayments is unlikely to increase and, depending on other economic factors, may even fall. If interest rates should rise by 2% over the next three years, then repayments on a 90% thirty-year mortgage at 3.5% p.a. for a €300,000 house would increase by 23%. On this basis, house prices would need to decline by about 18% for the monthly repayments to stay at their current level.

Rising interest rates could move many recent and future buyers with large mortgages into negative equity and expose their lenders to defaulting loans. It could also mean that many houses acquired as investments might be offered for sale to lock in gains or to cut losses. This would further depress prices. Can nothing be done to prevent this calamitous event from happening?

Letter published in the Irish Times on 28th October 2003.

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