They could have called it the “Enda Kenny has no willy plan” or the “Bertie Ahern – unappreciated in his own lifetime plan” but they didn’t. They called it the “National Recovery Plan” and that’s what most media seemed self-compelled to call it yesterday and although it was being referred to as the more neutral “Four Year Plan” late last night, it seems that today we’re back to the more subjective moniker.
The Plan of course is our blueprint for getting our nation’s revenues back in equilibrium with its costs. During the boom years up to 2007, the nation’s coffers were bulging with tax receipts from the domestic construction boom, and its trickle down effect into practically all sections of the economy. And whilst the State did create a rainy day fund – the National Pension Reserve Fund (value today €25bn though some €11bn of that is earmarked for/invested in AIB/BoI) – the approach was, as articulated by our former Finance Minister Charlie McCreevy, “if we have it, we’ll spend it” and indeed we did – social welfare, state pensions, public sector headcount and salaries, capital programmes, reductions in tax – funding these rose in line with income. Sadly the construction and property bubble burst cataclysmically and suddenly and so we’re left with an imbalance – some 12% of GDP this year and the Plan published yesterday maps out how we will get back to 3% by the end of 2014. It’s a major adjustment but it really just contains the bread-and-butter tools to adjust the levers of financing the day-to-day running of the State.
Calling it the “National Recovery Plan” was the first indication of partiality but that could be forgiven. References to “a small increase in GDP” in 2010 might seem trivial but in the government’s minds this marked a “turning of the corner” and “stabilisation”. It may well be that GDP does increase slightly in 2010 though the most recent ESRI forecast in October 2010 and a Reuters poll of economists a couple of weeks ago both put GDP in 2010 in negative territory (my own forecast is that the government will be right on this one). It was an unfortunate co-incidence that S&P downgraded the country’s credit rating yesterday and gave their own forecast for GDP in the next four years – “”nominal GDP would be “close to flat” over the next two years” and growing 2% in 2013. The anchor to the Plan is that we will see an average of 2.75% growth in GDP in the next four years – without such growth we’ll still have an estimated deficit:GDP of 7% in 2014. That is probably the shakiest assumption in the plan itself.
The measures outlined in the Plan can be debated. The usual advice for fiscal adjustments is that they be timely, efficient and fair. I noticed that many measures are being pushed out to 2012 and beyond (VAT, property tax, water charges) and I think the government is going to face a challenge in coming up with a €6bn adjustment in the 2011 Budget which will be debated in two weeks time in the Dail. There is a ruthless efficiency in levying a round €100 flat-rate tax on property and reducing the minimum wage by round €1 (not strictly part of the fiscal adjustment but an element of the plan as regards competitiveness) but efficiency was less evident in reductions in public sector wage costs – if the recent unfocussed €400m redundancy/early retirement scheme in the HSE is anything to go by, then we should be concerned at how further reductions in the cost of the public sector will be handled. “Fairness” is a tricky topic, though imposing the same property tax in 2012 on a €100,000 terrace in Tallaght as a €20m house on Shrewsbury Road doesn’t seem very fair though there is an indication that the tax will eventually become more progressive. Increases to VAT disproportionately affect the less well-off. Whilst it is clear that lowering the threshold at which tax becomes payable on wages from €18,300 to €15,300 will increase the tax burden at the lower level it wasn’t clear how salaries at higher levels would contribute on a progressive basis.
Overall, the four year plan didn’t strike me as particularly innovative. In terms of optics we’re likely to keep our Taoiseach as one of the Top 5 best paid heads of state in the world which doesn’t seem fair even if it’s a relatively tiny cost in the overall scheme of things and the impression given was that fundamental non-marginal reform of the public sector was to be avoided. Some changes flagged had the ring of being rushed about them – why a €1 change to the minimum wage, why a €100 property tax. Quangos seem to have escaped scrutiny and there was no reference to privatizations (energy, transport, port and airport authorities). The competitiveness section seemed to lack detail on the comparisons used and I think some businesses will be skeptical at the conclusion that we are competitive in the cost of energy and communications.
However, the glaring omission from the four year plan was the ongoing cost of the banking crisis which frankly has the potential to render practically meaningless and farcical any debate about this fiscal adjustment because the exposures and landmines in the banking sector may be multiples of €15bn. Minister Lenihan yesterday seemed specific in saying the four year plan accounted for the situation in the banks as at the end of September 2010 – remember the Big Bang announcements intended to give certainty and finality to the cost of our bailouts. But has the outlook changed since September 30th? It seems, from recent days, that AIB and BoI are to receive additional capital – the Financial Regulator said that this will be to “overcapitalize” the banks, others say that unprovisioned future losses could be another €20bn+ and will that additional €5.3bn flagged in the worst case scenario be needed for Anglo and EBS? How will the withdrawal of ECB emergency liquidity assistance affect our finances? How will the exceptional measures by our own Central Bank be reined in? In the four year plan interest on the national debt is put at €8.4bn in 2014 – but calculations on here yesterday put the interest estimate from €7bn (5% of €140bn) to €32bn (9% of €350bn) with a more central scenario (and arguably more realistic one) of €15bn (6% of €250bn). The difference essentially comes down to the banks.
So we have a four year plan for running the country – arguably it’s not great but it’s adequate in itself. The plan will be debated in the Dail (though not voted upon) and can apparently be changed by an incoming government in agreement with our rescuers in the EFSF/IMF. But without a four year plan for the banks, we’re essentially arguing over necessary minutiae but ignoring the potentially far bigger picture.
NAMA Wine Lake 
The plan is grossly unfair and should be rejected on the streets and in the Dail. If the budget does not address this unfairness it should be rejected as should any bank plan which does not provides for significant defaults, debt/equity swaps and purges of senior management. The choice is whether we amputate our limbs with the festering sores or wait till they spread and kill us all along with our EU “partners”.
The bond markets have judged the plan. It’s a failure before it begins.
I believe the government knew what it was doing when it declared Irish bank debts part of sovereign debt as this made it more likely to receive German and French support to protect their bond holders i.e german and french banks.
The British have done likewise with their 7B
A new government should renegotiate on the grounds that these banks gambled on the Irish boom and should pay part of the price.
The four year plan’s failure to mention privatisation is a good thing .
That would only encourage carpet baggers, likely enough to be the same people who got Ireland into the mess.