A nuclear strike to the heart of the private sector economy in Ireland?

Constantin Gurdgiev, adjunct lecturer in finance at Trinity College Dublin and ex-editor of Business & Finance Magazine is scathing on yesterdays budget. Once again he argues the government’s forecasts are too rosy and that the exchequer will fail to hit deficit targets – he predicts a deficit for 2009 of between 12 and 13%. Yesterdays budget attempted to bridge the ballooning deficit by increasing taxes rather than spending cuts. Constantin predicts that one side-effect of this will be to send more shoppers and money north, costing the state more lost VAT and excise revenues. Similarily Gerard O’Neill, an economist fond of the Austrian School, puts forward the view that the increases in taxes for middle-income families with children will make two-income families uneconomical. Laffer will will have the last laugh as parents retreat from the workplace, depriving the government of yet more revenue. In the medium term this may hold true. For now because we’re entering a depression with unemployment over 11% and rising, the fear of job loss will keep both parents working in many households – whatever the cost. Given that we are closer to the start of this crisis than the end the average PAYE worker in the private sector, and her family, must be looking to the future with fear and foreboding – tax rises, pay cuts, redundancies, negative equity. Bleak indeed.

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For me, the steps taken yesterday needed to be taken, but we’re not out of the woods yet. There will be more harsh budgets over the coming years. In global and European terms Ireland still remains a low tax country, but is the future to be more of the same with the burden falling ever heavier on middle income tax payers? Or, will the government have the balls to seriously tackle public spending too?

Milton Friedman famously said “There’s nothing so permanent as a temporary government program”, and today the government announced that the temporary income levies are in fact permanent. Public sector pay

To be fair, Brian Lenihan did at least hint at dealing with the €50,000 question, that is public spending and public sector salaries. From his speech –


I have asked the Review Body on Higher Remuneration in the Public Sector to undertake a fresh review of top level pay rates to take account of the changed budgetary and economic circumstances, and the changed private sector pay environment and to benchmark rates against those of other EU countries of comparable scale. This Review will be completed by July. I believe pay at leadership levels in the public sector should be more in line with pay in other countries rather than with top level private sector pay in this country which had become over-inflated in recent years and is now falling in any event.

It sounds like he does intend to cut pay at the top-end, however it is the overall spend that matters and tokenism won’t make any real difference. The cuts have to be deep enough to significantly reduce the average and the widening 30% differential with average private sector pay.

Social welfare

€21 billion of current government spending is projected to be spent on welfare. Making cuts here is a real political hot-potato. Even if we can’t afford it, I have real qualms about cutting payments to workers who contributed to the growth of the state, just when their need is greatest. At least one of those cuts, the cut in rental allowance should not adversley impact those on social welfare. Rental allowance is actually a payment to landlords (rather than to the social welfare recipent), and with a guaranteed government pay out rental allowance actually represents a floor for prices in the massively oversupplied Irish rental market. Rental supply has increased by a factor greater than 5 in the last 3 years. So, if you feel exceptionally generous, pity the poor lumpen-Irish-landlord, not only are rents falling with no end in sight, but the government is rescinding more of their tax reliefs – mortgage interest rate relief chopped by 25%. It’s easier to be more concerned about householders generally, as Brian Lenihan has clearly telegraphed the imposition of a property tax. Personally I think an annual tax on property to cover the cost of providing state services to that property is fair – but beware the backlash of those who have paid huge Stamp Duty cheques in the recent past.

The banks

While the government, for now, appears to have taken the easy route with tax rises rather than spending cuts (still waiting on An Bord Snip, I presume?), they did announce their solution to Ireland’s most pressing problem, the issue of the insolvent banks. Personally I am not at all happy with the Irish taxpayer being lumbered with the bad debts of deliquent property developers, investors and bankers. I’d like to see the government nurse the banks until the end of the guarantee and then let them go bust, protecting depositors but wiping out shareholders and the banks’ creditors – clearing the way for more competent banks to purchase the old banks assets and serve the Irish market in a more prudent manner. That is a pipe dream unfortunately and even worse the taxpayer may be lumbered with dealing with bad loans of around €80bn secured against assets worth a fraction of this (apparently 1/6 of these toxic loans are in the north, 1/3 in total are external to the state!). It’s still unclear what the actual cost to the taxpayer will be. The budget includes the possibility of the taxpayer recouping some losses via a levy to be paid years from now, that idea is not without it’s critics either. Where will the money to fund the National Asset Management Agency come from? Constantin Gurdgiev thinks he has the answer – the ECB.

No bio, some books worth reading – The Rational Optimist: How Prosperity Evolves – Matt Ridley .

Crisis Economics: A Crash Course in the Future of Finance -Nouriel Roubini, Stephen Mihm