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Archive for December 11th, 2011

What response? There hasn’t been one, but shouldn’t there be? Take a look at what the Council says about itself

“The role of the Council is to independently assess, and comment publicly on, whether the Government is meeting its own stated budgetary targets and objectives. It will measure the appropriateness and soundness of the Government’s macroeconomic projections, budgetary projections and fiscal stance. The Council will also examine the extent of compliance with the (forthcoming) legislated fiscal rules. The Council will report on its findings at least three times per year.”

So last week, the Government announced Budget 2012 over two days and indeed there had been a month of publications which preceded the Budge which aimed to set out the general framework for the economy, the capital programme and the public sector.

And the response from the Council? Nada, so far.

In the UK, the equivalent of the Council is the Office for Budgetary Responsibility (OBR) which was set up in 2010. Like the Council, it is independent of Government and like the Council it comments on the outlook and direction of fiscal policy as outlined by the Government. For example, on 29th November, 2011 when the Chancellor of the Exchequer (finance minister) George Osborne issued his Autumn Statement, the OBR was making statements as soon as the Chancellor sat down having made his speech in the House of Commons.

Maybe the Council is still finding its feet; after all, it is only five months old and its role has yet to be fully set out in law in the Fiscal Responsibility Bill which was supposed to have been published by the end of 2011. Tick tock…
What might the Council have said about Budget 2012?

(1) Growth. Whilst none of us has a crystal ball and events outside Ireland effectively beyond our control may unsettle any forecast, it is a fact that the Government’s forecasts as set out at the start of November 2011 and which formed the basis of the overall scale of the adjustment in Budget 2012 are more optimistic than two recent forecasts – one by the ESRI and one by the OECD. Forecasts come and go of course, and the ESRI doesn’t have the best record. But there haven’t been any other recent forecasts of note, and the similarity between the OECD and ESRI forecasts should at least set up an authority which needs to be answered by the Government. What would the budget adjustment have needed to be if the Government adopted the ESRI adjustment? The projection on here would be €4bn+ in 2012.

(2) Debt sustainability. Whether or not Ireland is facing unsustainable debt is arguable.Italy andJapan live with similar ball-park debt levels on a GDP basis.Ireland has a debt:GDP similar to today’s in the 1980s and recovered so that by 2007 our debt:GDP was a paltry 25%. But there are many who argue that a 140% debt:GNP in a common currency, with less productivity gains to be made compared to the 1980s and with a large part of the debt attributable to saving banks, at the behest of the ECB, there are strong arguments that the debt is not sustainable. Either way, the Council should be issuing its own determination, and the effect of the Budget 2012 on that debt.

(3) Commentary on the Budget 2012 details. The Council should be commenting on the measures taken in the budget. It should be commenting on the fact that most of the tax adjustment comes from front-loading a VAT increase. It might also comment on the Department of Finance approach to the calculations which is understood to take no account of price elasticity – in other words, if a TV costs €299 now and rises to €304 in January 2012, then that should tend to depress demand for TVs. The extent to which demand is affected by price is called “elasticity” and the Department of Finance is understood to have ignored it. The Council might comment on the wisdom of cutting the capital budget whilst leaving the Croke Park Agreement untouched.

Truth be told, and assuming the economy holds up, the view on here is that there will be a need to widen the tax net, increase income taxes and cut public sector pay. The Council should be forward-looking and examining the even-more unpalatable options in Budget 2013, and that’s assuming things turn out as planned in 2012.

And speaking of out-turns, the income tax-take in November 2011 was 6% below November 2011 profile, and the Council might issue a warning about the feasibility of the estimate of the income tax in 2012 being 10% greater than 2011.

If the Council hasn’t issued a commentary by the time our missionaries arrive back in town in January 2012 for their next review, then it seems justified that the Troika be challenged on Ireland meeting its commitments in respect of having an independent fiscal council.

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Given the repeated claims – for example in the David Drumm interview with IrishCentral.com – that Ireland’s financial regulator was aware of key transactions at Anglo Irish Bank, it is perhaps surprising that Patrick Neary has not had his collar felt by our boys (and girls) in blue, in the same way that former Anglo chairman, Sean Fitzpatrick and former Anglo finance director, Willie McAteer have (twice, in both cases). Criticism of bank regulation comes today from a novel ource.

Yesterday, a profile and interview with the NAMA CEO, Brendan McDonagh was published in Britain’s Telegraph newspaper (owned by Frederick and David Barclay, to whom NAMA sold €800m of Maybourne hotel group loans earlier this year). In this interview, journalist James Quinn concludes that Brendan doesn’t appear to blame the banks “per se” but rather the regulatory environment. “I think there was a failure of regulation, but that’s spilt milk” according to Brendan, speaking to the predominantly non-Irish readership of the Telegraph.

The banks themselves are seen to be behaving like goal-orientated businesses, the goal being to book as much new business as possible to enable targets to be met. Whilst the developers too are seen as goal-orientated creatures borrowing as much as they could, from whatever source they could. It was a failure in regulation that lay at the heart of the bubble and collapse. Which is probably as good an analysis as you’ll get – after all, if banking was so systemic to our economy, then it fell upon the shoulders of those responsible for the governance of our economy to regulate it. And it did just that with a central bank and financial regulator.

Elsewhere in the interview, we get a couple of snippets that you mightn’t have come across before. “Personal research” by the NAMA CEO concluded that Anglo’s balance sheet quadrupled between 2003 and 2008, whilst AIB and Bank of Ireland’s only doubled. That Anglo gave loan decisions in 24 hours, AIB in 48 hours but Bank of Ireland took a tardy six days, but fast[forward to today and the prudence of Bank of Ireland has shone through by that bank avoiding majority state control.

And as regards Ireland’s property market, Brendan says “people say, ‘Do I need to get in now or do I need to go a little bit further?’ That’s the call people are making now, and I think it’s probably that much [he pinches his fingers] away from that” Brendan thinks that the attractive yields available for Irish property and the oversupply being less than many people think, make Ireland an attractive proposition at present. Hmmm, if One Warrington Place has sold at a 7% yield and there is still 20%-plus vacancy in Dublin overall, I wonder if yields are particularly attractive or if there are imminent stock shortages – on the latter point, you can’t help but be impressed by the way CBRE has wallpapered central Dublin in green “for sale” and “to let” posters at present.

Lastly the interview touches on a curious aspect of Ireland’s property market – “what is also a real problem is that because of Ireland’s domestic property boom in the decade that preceded the crash, international investors felt somewhat shut out, and so have been reluctant to return” Hmmm, profit-orientated investors reluctant to return even though yields are attractive and there might be imminent stock shortages….

UPDATE: 11th December, 2011. The Financial Times is now reporting on Brendan’s big day out in London in which he advocates the transformation of part of NAMA’s portfolio into a Real Estate Investment Trust (REIT). REITs were to be introduced in Ireland by Fine Gael but alas it hasn’t yet gotten around to that manifesto commitment yet. REITs allow investors to buy stakes in a pooled property investment and are praised for their tax efficiency and a means to invest in property funds without the risk of investing in an individual property. Elsewhere Brendan gave for what the FT describes as the “first time”, a breakdown of NAMA’s €10.5bn (at NAMA values) UK portfolio though it stumbles by saying €6bn is in London and the “remaining” €5.7bn is in the rest of the country. Hmmm 6 + 5.7 = 10.5 at the FT? Lastly Brendan pooh-poohs any suggestion of an early sell-off of NAMA as suggested by media last week following sight of the Geoghegan report.

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