This article appeared in Irish Examiner July 11th

Nobody but nobody can possibly argue against the thesis that the Irish economy badly needs as much stimulus, consumer spending and employment support and creation as possible. This is particularly true in the area that surrounds Croke Park, which is a pretty deprived inner-city area that badly needs as much economic activity as possible. Consequently, it does seem strange that some residents in the area, with the support of Dublin City Council, are prepared to give their two fingers to five concerts that would have accommodated 400,000 visitors over a five-day period. If one assumes that on average each concert attendee engaged in additional expenditure of €100 per head, then these concerts would have given rise to expenditure of €40 million in Dublin and in the environs of Croke Park that in the absence of the concerts would not have occurred.


The decision to prevent this from happening has deprived Dublin of a massive injection of expenditure, particularly as a significant part of the expenditure would have come from outside the state.  At a recent Bob Dylan concert in Dublin I was struck by the number of overseas tourists, including Japanese, who attended it. This should not have surprised me as I have in the past travelled overseas to see acts such as the Rolling Stones and Bob Dylan. The reality is that events such as concerts and sporting events have become a key part of the global tourism offering. Another reality is that those who attend a concert or a sporting event from overseas will normally hang around for a few days and make a bit of a holiday out of it.


Who exactly is to blame for the fiasco is really hard to know. Presumably the blame has to be apportioned to the GAA, the Concert Promoter, the Gareth Brooks organisation, Dublin City Council and last but not least the residents of the area around Croke Park. There is little point in playing the blame game however. The fact is that a major economic opportunity would appear to have been missed and many people will be left worse off as a result, unless sanity prevails.


I can sympathise to some extent with the residents of the Croke Park area.  I live and work just beside a primary school and three times a day, there is a half hour period when the whole neighbourhood becomes chocker block and getting in and out of my house becomes a logistical nightmare. Women have been known to park their 4x4s across my entrance and parking on double yellow lines is a right, which the forces of law and order choose to ignore. Does this give me the right to try to prevent those children from attending school? I don’t think so, and I don’t thing that I would succeed in taking out a court injunction preventing the school from opening. In any event, when I bought the house, I knew exactly what it was beside. Tough luck!


In these very deprived times, accepting short-term inconvenience for the greater good is a price worth paying. The economic impact of the concerts and the utility that 400,000 people would derive from attending, have got to be important considerations.


This debacle does not exactly enhance Ireland’s aspiration to becoming the best small country in the world in which to do business, putting it mildly.  However, we now have quite a track record in this country of allowing small groups of people acting in a manner that is not in the interests of the greater good. We have the examples of the disruption caused in the Corrib Gas Field in Mayo; the marches against wind farms around the country; the opposition to oil exploration in Dun Laoghaire; the attempts to prevent workers from installing water meters in certain areas; and of course the attempts by some farmers in Waterford to prevent the development of the Deise greenway. The list goes on and on, but the net results are the same.


The spirit of nimbyism is alive and well in this country. In the case of wind farms and the like, the impact on the lives of opponents is semi-permanent but in the case of the Croke park concerts, it is just a fleeting inconvenience that will be soon forgotten. Sanity should be allowed prevail in such circumstances.


This article appeared in July 17th 2014


By Jim Power

Most sensible people would recognise that a functioning economy needs a functioning property and construction sector. After a dramatic collapse since 2008, Ireland’s property and construction sector has been decimated and although slightly better than in recent times, it is still in a very perilous state. Consequently, it is imperative that measures are taken to re-build a sector that has been decimated and stripped of a vital skills base. The government launched its latest blueprint for the sector in recent weeks, titled Construction 2020. This report contains 75 action points for the sector, but underlying it all is a clear recognition that it is essential to re-build the sector as quickly as possible.

Action point No. 51 recommends that consideration be given to the concept of a universal mortgage insurance scheme, which would allow banks share the risk of mortgage lending, either with the public sector or with private insurance companies. The key aim of the proposal would be to increase bank lending in general or increase lending to specific target groups. However, it is essential that if demand is to be given a boost, there must be sufficient supply to meet that demand. If not, any demand-side measures would just lead to undesirable house price inflation.

The Department of Finance is currently finalising its thoughts on the topic of universal mortgage insurance. It remains to be seen what it will advise the Government, but there is reasonably compelling international evidence that it has a key role to play in a functioning mortgage market. Canada is a good example.

Mortgage lenders here in Ireland are under significant pressure to re-build profitability, reduce the size of the balance sheet and hold adequate levels of prudential capital. High LTV mortgages are in theory more risky than low LTV mortgages, and so they may require higher capital provisioning or may creation the perception of a more risky loan book, which could influence the ability of banks to raise capital. It is in this context that mortgage insurance could play a significant role.

At the moment there is some evidence that worthy borrowers with strong repayment capacity based on actual and potential earnings are having difficulty raising a deposit of sufficient size to bridge the gap between the mortgage they are being offered and the price of the house they want to purchase. However, there is not a strong incentive for lenders to engage in such high LTV lending, so some aspiring home owners may be prevented from getting on the property ladder.

Mortgage insurance could play a role here. Mortgage Insurance is a risk mitigation product that is used to protect mortgage lenders (originators, and/or underwriters) by transferring mortgage risk, and notably tail risk, from lenders to insurers.

The creation of a universal mortgage insurance model would impose a mandatory requirement for all lenders providing high LTV mortgages to put mortgage insurance in place. This would oblige the financial institutions to insure the portion of the high LTV mortgage above a certain level, such as 75 per cent. This would mean that the financial institution would not have to hold expensive capital and thereby would be in a position to offer lower interest rates to borrowers over the lifetime of the mortgage.

Under such a model, the insurer would have an external role in assessing the mortgage transaction, thereby creating better oversight; lenders would not have to hold expensive prudential capital and could offer lower interest costs; higher lending standards would be enforced through the higher level of oversight; the solvency of the financial system would be helped through greater risk diversification; and most importantly first-time buyers in particular would be helped on to the housing ladder, which is important from a social cohesion perspective.

It would not make sense for the State to guarantee any component of the mortgage as this would just serve to increase contingent liabilities on the banks’ balance sheet. This should be left to the private sector through a mortgage insurance model. There are arguments for state intervention in the market in order to help that who cannot get housing, but not in guaranteeing lending where the private sector is already prepared to do so.

It would not be prudent to introduce mandatory mortgage insurance for first-time buyers only who are buying a new house. The reality is that not all first-time buyers want to buy a new house. By concentrating only on first-time buyers, important segments of the market would be ignored. The mortgage insurance model should ideally be applied to all high LTV lending. This more holistic approach would help get the overall market functioning more efficiently and more effectively.

Arguably in mortgage insurance had been in place over the past decade, mortgage lending would have been more prudent and the dramatic losses in the financial sector might have been avoided. However, mortgage insurance is not a panacea for all ills. Rather, it should be part of a mortgage model that is characterised by sustainable debt service coverage ratios, effectively reviewed at regular intervals of time; appropriate LTV ratios combined with a prudent approach to property appraisals; prudent loan to income ratios; effective verification of the borrower’s underlying income capacity; comprehensive file documentation of all loan originations kept over time; and effective collateral management and sound appraisal standards.

Rebuilding a functioning property, construction and mortgage sector would pay huge dividends in terms of economic activity, employment, labour market mobility, financial stability & sustainability, and social cohesion.



This article appeared in Irish Examiner July 18th 2014


By Jim Power


Ireland’s export statistics have become very volatile in recent times. The patent issue has had a dramatic impact on the value of Chemical & Pharmaceutical exports over the past couple of years and from month to month one never knows what the number is going to be like. This issue will eventually work its way through the system and when it does it will become very apparent that the Irish export model is purring very smoothly despite serious issues in some of our main export markets, particularly in the Euro Zone.


Last year the total value of exports out of the country reached 184 billion, which represented growth of just 0.9 per cent on 2012 levels. Merchandise exports, or physical stuff we sell, declined by 5.4 per cent, while service exports expanded by 7.9 per cent. The sharp decline in merchandise sales was primarily due to the patent issue, but its real economic impact in terms of important variables such as employment was pretty modest, because the business models of the affected companies had been adjusted in advance and new investments and new business activities were developed. Other export sectors such as food did very well, expanding by over 10 per cent.


One of the notable features of Ireland’s export structure in recent years has been the growth in the importance of service exports. Last year these exports accounted for just over 50 per cent of the total. It is not particularly easy to get a real handle on what is happening on the service side. Incoming tourists to the country is the easy bit to understand. Over 6,700 overseas tourists visited Ireland last year, representing growth of 6.7 per cent on the previous year. This activity was valued at €3.4 billion. Other service exports include royalties and licenses, insurance, financial services, computer services and other business services. Many of these activities are focused on IFSC type companies and are really difficult to interpret and evaluate their real economic contribution, but we are assured they are important and employ a lot of workers.


Personally I prefer to focus in on tourism and the exports of physical goods. They are more tangible and their real, as distinct from their accounting value is easier to evaluate.


Earlier this week the CSO released the merchandise trade numbers for May. They were pretty good. During the month we sold €7.8 billion in goods to overseas customers, which was more than 9 per cent higher than the same month last year. Interestingly, the value of exports from the Chemical & Pharmaceutical sector was almost 12 per cent higher than May of last year. This is reassuring, and is particularly good news for the cluster based around the Cork area. Exports of Food & Live Animals expanded by 7.9 per cent.


For the first five months of the year the value of exports at just over €36 billion, was 0.3 per cent higher than the same period last year. Chemicals & Related Products were 1 per cent lower than last year; Machinery & Transport Equipment, which includes output from the IT sector declined by 10.2 per cent; but Food & Live Animals expanded by 10.7 per cent. From a geographic perspective the Euro Zone is the biggest market and accounted for 35.4 per cent of total exports in the first five months; the US accounted for over 23 per cent; and the UK accounted for just under 15 per cent.


All in all, Ireland’s export model is still functioning very well, but there are certain strains and structural changes occurring that will have to be monitored and managed very carefully. It will be vital to maintain cost competitiveness in the face of a recovery in the labour market in particular. It would be unwise to allow the economic recovery to erode cost competitiveness, but all other costs of doing business will also have to be managed very carefully. The multi-national sector will remain a major part of the export model, as will the large food companies such as. Dawn Meats, Glanbia and Kerry. However, a major challenge will be to continue to strive to build up the export capability of the smaller indigenous companies. This is not an easy task, but the reality is that it would prove very difficult to grow an indigenous company to a large scale by focusing on the small domestic market. Export growth will have to be the key focus for those companies who want to get big.

Growth Picture Getting Better


This article appeared in the Examiner July 4th 2014

Following the disastrous election results in May, the Government is now under considerable pressure with less than two years to go to a general election. The most immediate issue to be faced up to is the budget this October and whether an adjustment of €2 billion will be required or not. The next big issue to be then faced is seeking to ensure that the general economy and particularly the labour market are in a better place in the months leading up to the election. These are difficult questions to answer because the one thing we should have learned from recent experience is that the economic future is nigh on impossible to predict with any degree of confidence, and is always potentially vulnerable to shocks that we not yet have thought about.

Be that as it may, economic data releases over the past week will provide the beleaguered government with hope. The labour market is continuing to gradually move in the right direction; the public finances are better than expected; and the growth numbers for the first quarter of the year are certainly suggesting an improving picture.

Yesterday the Central Statistics Office (CSO) published revised historical data on the economy. This is normal because as the CSO gathers additional information from different sources on the millions of transactions that occur in the economy over the course of a quarter or a year, it will have to revise previous estimates. However, this time the CSO in line with new international standards, has sought to measure illicit activities such as drugs and prostitution, and also to change the manner in which it accounts for expenditure carried out by companies on Research & Development (R&D).

One of the many criticisms of GDP as a real measure of what is going on in the economy is that is does not capture the informal or ‘black’ economy, as it has traditionally been called. Whatever we may think about activities such as drug dealing and prostitution, they do represent economic transactions and should be measured for economic activity purposes. By definition, this is very hard to do, but the CSO yesterday sought to do so and this has added to gross domestic product (GDP), albeit in a modest fashion. However, the change to the treatment of R&D is more significant. Previously it was regarded as a business expense and formed part of intermediate consumption in the economy and did not really constitute GDP. Now based on international best practice, such spending is regarded as business investment, and hence contributes directly to GDP. In 2013 for example, illegal economic activities added 0.72 per cent to GDP, but the capitalisation of R&D added 4.1 per cent. As a consequence of these changes and other revisions, GDP actually expanded by 0.2 per cent last rather, rather than contracting by 0.3 per cent as had been previously suggested.

This is now of historical interest in the main, but the data for the first three months of this year are of more immediate interest. The good news is that all of the components of economic activity showed decent year-on-year growth in the first quarter. In real terms, consumer expenditure increased by 0.2 per cent, investment increased by 2.9 per cent; exports expanded by a strong 7.4 per cent; and imports increased by 5.9 per cent. This resulted in an increase of 4.1 per cent in GDP and 3.1 per cent in the more important measure of economic activity, gross national product (GNP).

Obviously these data are provisional and are subject to later revision, and quarterly data do tend to be very volatile from quarter to quarter, but the clear picture emerging is that the recovery which commenced in a very gradual and modest fashion during 2013, is now gathering some momentum.

The upward revision to historical GDP and the stronger than expected growth in the first quarter, when combined with the public finances for the first half of the year, are suggesting  that Michael Noonan could actually bring in borrowing close to 4 per cent of GDP rather than 4.8 per cent this year. This in turn would suggest that a budget adjustment of less than €1 billion would be more than adequate to hit a borrowing target of less than 3 per cent of GDP in 2015. It is still too early to be too definitive about this, but the omens are getting better. How to translate this into political popularity is a different matter, however. Who would be in politics?

Like it or not, the budget debate is on. Let’s start by getting the sums right.


This article appeared Sunday Business Post July 6th 2014

We are now moving into the depths of the summer silly season, with our political classes either heading off to vent at the various summer schools and/or heading off on their summer holidays. The imminent cabinet re-shuffle and the banking enquiry will probably be the key topics of conversation over the coming weeks, but once we return to the harsh realities of back to school rituals and such like in late august, the annual budget will be just over six weeks away. Consequently those poor souls who are involved in the framing of the October document cannot wait until September and will be engrossed in the fractious process of building the budget over the coming weeks.

It is never an easy process, but is probably more complicated than normal this year. The political landscape for the government parties is not particularly favourable at the moment, and having implemented such a savage fiscal adjustment since 2008, all of the low-hanging fruit is now well gone and we are really up in the thick and prickly branches. The marginal pain inflicted by additional budget measures at this stage of the fiscal adjustment cycle is always going to be pretty severe and there are no easy choices. From a political perspective it seems clear that if more pain is to be doled out, it should be done so in a manner that will cost as few votes as possible. The moral, social and economic perspective may be very different, but political considerations generally hold sway in this country.

The debate to date has really been focused on the EU-imposed 3 per cent budget deficit target that is to be achieved by the end of 2015 and the €2 billion fiscal adjustment that was committed to some time back. This €2 billion adjustment figure will most likely dominate budget debate over the coming weeks, but this is missing the point. In the first place a 3 per cent budget deficit target has no scientific basis and was a figure that was effectively pulled out of the air by Ruairi Quinn and his colleagues back in the 1990s when the very flawed Stability & Growth Pact was negotiated. Secondly, the figure of €2 billion is being latched on to by both sides of the divide. Rather than focusing on 3 per cent target and fiscal adjustments of €2 billion, it would be much better to see a debate on the quality of the fiscal parameters rather than the quantity.

Taking €2 billion out of the economy next year will satisfy the fiscal hawks if it gets borrowing down to 3 per cent or lower next year, but we need to consider at what cost. Public expenditure is bad if it is wasteful, in the sense that value for money is not achieved. On the other hand, public expenditure is good if it focuses on the concept of value for money and creating positive structural change. So for example, the politically motivated benchmarking of public sector pay more than a decade ago was wasteful in the main and was not affordable even at the time. Did we get value for money? I think not.

On the other hand expenditure on areas such as IT infrastructure or education and training can improve the longer-term growth potential of the economy and is good expenditure. Likewise expenditure on measures that tackle crime, anti-social behaviour, the quality of healthcare, substance abuse, and social housing shortages can make a very positive contribution to the quality of life if well targeted.

It is clear to me that over the coming weeks we need to consider if we are able to spend public money wisely, and also to think more about outputs than inputs. We do not have a good track record in that regard. On the taxation front, we also need to consider if revenue raising measures would do more harm than good.  It would be good to see more debate on the quality of spending and taxation, rather than getting hung up on spurious targets.


The past week has been a good one on the economic data front. The live register experienced a further decline; the Exchequer returns surpassed expectations in the first half of the year; first quarter national accounts showed impressive year-on-year growth rates in all of the key components of expenditure; and thanks to changes in the treatment of R&D expenditure and illicit activities such as prostitution and the illegal drugs trade, 4.7 per cent was added to GDP in 2012 4.82 per cent was added to GDP in 2013. Given that that GDP is the metric against which various debt and borrowing ratios are leveraged off, this is good news. Furthermore, we now know that GDP expanded by 0.2 per cent last year rather than the previously reported decline of 0.3 per cent.

The Exchequer returns for the first half were good.  They showed another significant improvement in borrowing and the tax take is running €221 million ahead of target. When delays in receipts due to SEPA are taken into account, the overshoot is closer to €500 million. Seven out of nine tax headings registered stronger than anticipated. On the expenditure side, net voted expenditure is running €119 million lower than expected. Extrapolating trends such as these is a hazardous exercise, but it could result in spending and revenues numbers up to €1 billion better than expected this year, assuming nothing untoward happens in the second half of the year.

It is certainly possible that the deficit could come close to 4 per cent of GDP this year, rather than the targeted 4.8 per cent. For next year, it could rather comfortably come in under 3 per cent. So while we will continue to debate the €2 billion, we can still achieve the targets we committed to with well less than half that adjustment. Michael Noonan might just be in a position to stand up in October and deliver the least severe budget since 2007. That would be welcome respite for hard-pressed taxpayers.  Meanwhile, it is good to see most economic indicators moving in the right direction. There are obviously still many obstacles to overcome on the road to redemption, but it is getting better.

Many Economic Trends Inconsistent with Political Dissatisfaction

This article appeared in Sunday Business Post on 3rd July 2014

This week a new leader of the Labour Party will be elected and next week a re-shuffle of the Cabinet will be announced. These two developments spring from the disastrous election results for the government parties in the two May elections and the ongoing decline in the popularity of the government. I recently spent a couple of months doing some door-to-door election canvassing and so it comes as no surprise to me whatsoever that the government is under so much pressure, at least  based on the feedback I was getting on the doorstep.

At one level this is not too difficult to understand. After all, this government has basically carried on with the fiscal adjustment programme inherited from the last government and laid down by the Troika. It has introduced a residential property tax, which is something that would traditionally have been regarded as political suicide, and later this year water charges will be introduced. These are two developments destined to make people very angry, and so it is turning out. There is also a strong sense that despite promises about a ‘democratic revolution’, the current political landscape is anything but. This government is making appointments to state boards on the basis of political loyalties rather than ability to do the job, or at least that is the perception. This is something that the last few governments were absolutely lambasted for, but this government appears to have picked up the baton with some aplomb and has if anything carried on in an accelerated fashion from its predecessors.

On the economic front, it is less easy to understand just how unpopular the government has become. The reality is that back in 2011, it inherited an absolute basket case of an economy that was going nowhere fast. Over the past three years people have taken a lot of further pain and the economic environment on the ground has been very tough and challenging. However, there are palpable signs that things are getting gradually better, in the aggregate at least.

The live register yesterday showed a further improvement in the labour market situation. In June the number of people signing on the live register fell by a further 4,400 to reach 386,200. Over the past year it has declined by 35,600 and has declined by 52,100 over the past two years. Granted, the Live Register is not intended to be a measure of unemployment, but it does reflect what is going on in the labour market. More importantly, the decline in the numbers signing on is consistent with clear signs of job creation in many parts of the economy. Just talk to the majority of recruitment consultants at the moment!

On the consumer expenditure side, there is also evidence of an improvement. In the first 5 months of the year, the value of retail sales was 4.8 per cent higher than the same period in 2013, and the volume of sales increased by 7.0 per cent. However, when the motor trade is excluded, the retail sales performance was somewhat less impressive, although stronger than in previous months. Excluding cars the value of sales increased by 1.4 per cent and the volume of sales increased by 3.3 per cent.

The reality is that while consumer spending is strengthening, the auto industry continues to be the key driver of consumer spending. In the first 6 months of the year new car registrations totalled 65,705, which was 23.4 per cent higher than the first half of 2013. This is a positive trend that is having a very beneficial impact on the public finances.

Consumer confidence has been trending upwards over the past couple of years, and in April reached the highest level since January 2007. However, it dipped in May, suggesting that there is still a significant level of fragility in the strained personal sector. May was the month when local and European elections were held and issues such as the Local Property Tax (LPT) and the water service charge became prominent in public discourse. Consumer confidence dipped as a consequence. However, the overall trend in consumer confidence improved during the first half of 2014. The challenge for policy makers is to convert the improvement in confidence into an even more meaningful recovery in consumer spending activity and more importantly an improvement in the political fortunes of the government. .

Finally, the Exchequer returns yesterday provide further confirmation of improved conditions in the economy. In the first half of 2014, an Exchequer deficit of €4.9 billion was recorded, which was €1.65 billion lower than the first half of 2013. Tax revenues were running €221 million ahead of target and €868 million ahead of the first half of last year. Overall gross Government expenditure was running €95 million lower than expected, with current spending accounting for an over-shoot of €10 million and capital spending accounting for an under-shoot of €105 million. Net voted government expenditure was €119 million lower than budgeted for, with the current spend accounting for an under-shoot of €20 million and capital spending accounted for an under-shoot of €99 million. The government is controlling expenditure and tax revenues are strengthening. This is good.


At the end of June, 7 out of the 9 tax headings were running ahead of target. The overall taxation data are consistent with an ongoing improvement in many aspects of the economy. The income tax take is €64 million ahead of profile and is €539 million ahead of last year. This reflects the stronger labour market. The VAT take is €113 million ahead of profile and is €379 million ahead of last year. This reflects stronger consumer spending, but particularly on cars.


In overall terms, the Exchequer data for the first half of the year are reflecting reasonable tax revenue buoyancy on the back of a stronger economy, and continued tight control over expenditure. The Minister for Finance remains well on track to deliver a deficit equivalent to 4.8 per cent of GDP, down from 7.2 per cent in 2013.


If one believes in the old and oft-quoted adage that ‘it is the economy stupid’, then the fortunes of the government should be better and its prospects more positive than they currently appear. One is inclined to think that ‘it is more than the economy stupid’ is a more accurate quotation.