In relative terms, the Government is being inundated with good news on the economic and financial front at the moment. Most economic indicators in recent months have been moving in the right direction, and the news from the two main banks for the first half of the year has been more positive than we have seen for quite some time. Given that we are now well into the second half of the electoral cycle this does represent good news for the parties of government, and provided the recent trends are maintained or built upon over the remaining lifetime of the government, there might just be a relatively positive backdrop as they face into what could be a very politically tricky plebiscite.

What the government does or does not do in the remaining budgets could play a key role in influencing voter choices. Taxpayers have obviously taken a serious battering over the past six years, and the payment of the full-year property tax is hurting badly this year. At the moment we are being treated to a very damaging debate about the likely burden of the water charge next year. The sort of speculation and uncertainty that abounds at the moment in relation to the water charge is very destabilising as it is fostering fear and undermining confidence. There is nothing as dangerous as uncertainty, and the Minister with responsibility needs to create certainty as quickly as possible. At least if people have a clear idea of what the cost is likely to be, then they can plan with some level of certainty.

In terms of additional budgetary changes that might be implemented over the likely remaining two budgets of this government, the pressure is clearly starting to ease. Notwithstanding the fact that we are still borrowing too much as a country and that the level of outstanding debt is dangerously high, the public finances are gradually moving into a better place.

The Exchequer returns earlier this week showed that an Exchequer deficit of €5.18 billion was delivered in the first seven months of the year. This is €25 million higher than the equivalent period last year. However, last year’s figure included the proceeds of the sale of Irish Life and Bank of Ireland Contingent Capital Notes. When these non-recurring revenue items are excluded, the underlying deficit this year is almost €2.3 billion lower than the same period last year. Tax revenues are running €548 million ahead of expectations, and are 6.4 per cent up on last year. The three biggest revenue areas are performing very strongly. Income Tax receipts are 7.6 per cent ahead of last year and €54 million ahead of expectations; Excise Duties are 5.6 per cent ahead of last year and €132 million ahead of target; and VAT receipts are running 7.2 per cent higher than last year and €242 million ahead of target. These items are reflecting the improvement in the labour market and stronger consumer spending, particularly on new cars. It just goes to prove that economic growth is good for the public finances.

On the expenditure front, the Government is also maintaining tight control. Net voted expenditure is €172 million lower than last year and is €73 million lower than targeted. The current expenditure component is just €24 million higher than expected, while the capital expenditure component is running €97 million lower than expected.

This all suggests that the government remains well on track to improving upon the Exchequer borrowing target of €9.6 billion for the full year, and a General Government Deficit equivalent to 4.8 per cent of GDP. Granted, there is still five months left in the year with the biggest revenue collection month included, but based on current trends it is certainly possible that the deficit could come in up to a billion euro lower than expected and the deficit could hit 4.3 per cent of GDP.

Should it so desire, this would give the government scope to deliver a total budget adjustment of less than € 1 billion euro in October, which would necessitate marginal changes once the water charge receipts are taken into account. I believe it would be pre-mature for government to contemplate a tax cutting budget. That should be left for Budget 2016, which will likely be the final one before the general election. Assuming the government survives its full term, a relatively generous budget in October 2015 would be likely to give maximum political advantage to the parties of government.


This Article appeared in the Irish Examiner August 1st 2014

The key to Ireland’s future is to build a sustainable diversified economic model, and not end up putting most of our eggs in one basket, as we did in the not too distant past. Sectors such as agri-food, tourism, fisheries, indigenous medical devises and IT companies, and the arts can all play a significant role in Ireland’s future if properly managed. The sector I have ignored thus far is the foreign owned sector. It currently plays a key role in the economy and hopefully will continue to do so.

The facts about foreign direct investment in Ireland are very impressive. At the end of 2013, the IDA had over 1,100 client companies in Ireland, directly employing 161,112 people. The IDA has also taken responsibility for 55 companies in the Shannon region, bringing total direct employment up to 166,184. This is equivalent to more than 8.7 per cent of total employment in the economy. Of course those companies buy goods and services in the local economy and so are directly responsible for many more indirect jobs. The IDA estimates that for every 1 job in a multi-national company, another 0.7 of a job is supported elsewhere in the local economy. This phenomenon was highlighted in very stark fashion in Limerick a few years back when Dell re-structured its operations, with very negative consequences for haulage companies and the like who were heavily dependent on the company for its business. Of course retail and hospitality businesses are also heavily dependent on a large employer in an area. Based on the IDA’s employment multiplier, another 116,000 jobs are supported by IDA client companies, bringing total direct and indirect employment up to over 282,000 jobs, or almost 15 per cent of total employment in the economy. This is very significant and needs to be protected and nurtured to the greatest extent possible.

In the first six months of this year, over 100 investments were secured by the IDA. This represents an increase of over 40 per cent on the first half of last year. Over 40 per cent of the investments secured are from companies investing here for the first time, with the remainder coming from existing companies. It is estimated that those investments will lead to more than 8,000 extra direct jobs in the economy.

Some observers have a tendency to denigrate the role of multi-nationals in the economy, based on the amount of profits they repatriate back to the home country. They do repatriate profits, but an assessment of what they contribute in terms of direct and employment; payroll taxes; corporation taxes; non-wage expenditure in the local economy; and work practices is very worthwhile. Multi-nationals represent a very significant and valuable part of Ireland’s economy, and if for some reason, the positive investment trends of recent years were to be reversed, Ireland would be in a very dark place.

For multi-national investment in Ireland, the biggest threat is posed by the issue of corporation tax. The OECD is currently undertaking a Base Erosion and Profit Shifting (BEPS) exercise to see exactly how companies pay and avoid tax. Amongst others, Ireland is a key focus of attention, given the whole debate about effective tax rates and various taxation practices that are very difficult to understand. The OECD’s task is not an easy one, but at the end of the whole process it is likely that there will be a much greater focus on ensuring that tax is paid in the jurisdiction where the economic activity occurs. That is only fair, but it will not work to Ireland’s advantage. How much damage might be done to Ireland is anybody’s guess at this juncture because the issues involved are very difficult to comprehend, not least by the OECD. Apparently the Revenue Commission and Department of Finance are inputting strongly to the whole exercise.

The message for Ireland seems clear to me – it would not be sensible to build our FDI model on a continuation of the current taxation system. It will be eroded to some extent and one way or the other, Ireland’s situation will be less advantageous than it is at the moment. It is really just a question of degree. Consequently, we must ensure that other key attributes for attracting investment are nurtured. These attributes include the quality of the education system and the labour force it produces; physical and IT infrastructure; suitable high-quality commercial accommodation; the quality of public services such as health and education; and the personal tax burden. At a general level we need to be as open and pro-business as possible, and easy legitimate access to those in power should be preserved.

Ireland is still punching way above its weight in terms of attracting FDI, but inevitably we will have to run faster to stand still in the future.


This article appeared in the Sunday Business Post August 3rd 2014

In recent days somebody whose views I deeply respect suggested to me that official data releases and general popular discourse are not fully capturing and reflecting the magnitude of the real upturn in the fortunes of the economy. This view resonates with my sense of what is going on around the country. Whatever about official economic data releases which I believe, have been very positive in recent months, many businesses I deal with and speak to have been suggesting to me in recent times that there is a very noticeable improvement in conditions. Granted, this view tends to be more prevalent in the greater Dublin area than elsewhere, and is very relative, given the low base from which many businesses are now operating.  Be that as it may, there is an inevitability about recovery starting in the capital city and its environs, and  it is very reassuring that the precipitous decline in economy activity from 2008 onwards has stabilised over the past couple of years and there is now a very real recovery starting to build. The perennial pessimists and sceptics, and those who advised us to follow the Argentinian route may find this difficult to stomach, but the recent evidence is pretty compelling.

Despite the collapse in our banking system and its’ still pretty dysfunctional characteristics, the results from our two biggest banks over the past week have been relatively positive.

In the first half of this year AIB returned to profit for the first time in six years. It delivered a pre-tax profit of €437 million, which was well ahead of any analyst forecasts that I am aware of. The bad debt provisioning has been reduced considerably; operating expenses continue to fall; and total income rose by 36 per cent. Furthermore, its Chief Executive David Duffy has reassured the taxpayers of   Ireland that his bank will return all bailout funding of €20.8 billion received from the state since 2009. For a bank that is 99.8 per cent owned by the state, this is good news. Meanwhile over at Bank of Ireland, a first-half pre-tax profit of €399 million was announced.

This week’s news from the banks is unambiguously positive. Whatever we may think about banks and bankers, it is an irrefutable fact that for an economy to function properly, its banking system must be functioning properly. The role of a bank is primarily to act as a trustworthy intermediary to attract deposits and channel credit into the real economy. Since 2008, the Irish banks have not been meeting these criteria, but with a return to profitability, this looks set to change over the next couple of years. A functioning banking system will help accelerate the return to a properly functioning economy.

On the real economic data front, the news is also generally positive.

Earlier in July, national accounts data for the first quarter showed that GDP expanded by 2.7 per cent during the quarter, and was 4.1 per cent higher than the same quarter in 2013. Real GNP increased by 0.5 per cent during the quarter and was 3.1 per cent higher than the first quarter of 2013. This represented a very positive start to the year, and the good news is that the recovery has subsequently gathered pace.

Consumer confidence is at more than seven-year highs, but consumer spending is also gradually gaining traction. In the first six months of the year the value of retail sales was 4.4 per cent higher than the same period in 2013, and the volume of sales increased by 6.5 per cent.  However, when the motor trade is excluded, the retail sales performance was less strong, although more vibrant than in previous months. Excluding cars the value of retail sales increased by 1.5 per cent and the volume of sales increased by 3.4 per cent. We know that the number of new cars registered was 23.4 per cent higher than the first half of 2013. Indeed after 9 days of July, car sales for the year to date surpassed total sales for 2013.

On the export front, the news is also positive. In the first 5 months the value of merchandise exports was 0.3 per cent higher than last year.  Exports of Chemicals & Related Products declined by just 1 per cent (the patent issue), but exports of Food & Live Animals increased by 10.7 per cent. The volume of manufacturing output is 21.8 per cent higher than last year. Irish industry is clearly moving again.


The labour market also continues to improve. In July, the number of people signing on the live register was 37,461 lower than a year earlier and has fallen by 55,800 over the past two years. Most recruitment consultants will tell you that there is a marked pick-up in demand for labour. The IDA also continues to deliver.  In the first six months of this year, over 100 investments were secured, which represents an increase of over 40 per cent on the first half of last year. Over 40 per cent of the investments secured are from companies investing here for the first time, with the remainder coming from existing companies. It is estimated that those investments will lead to more than 8,000 extra direct jobs in the economy.

The final piece of the jigsaw is in the housing market. According to the CSO, national average property prices have increased by 12.5 per cent in the year to June and are now 13.9 per cent off the low point seen in March 2013; Dublin prices have increased by 23.9 per cent over the past year and are now 30.2 per cent off the low point in August 2012; and Outside of Dublin, property prices have increased by 3.4 and are now 5.6 per cent off the low point in March 2013. While this strong pick up in house prices will not please all, it does help remove thousands from a negative equity situation and does indicate a greater level of confidence out there.


All in all, I find the evidence of economic recovery very compelling, and hopefully it should continue to build from here. This is not to suggest that it will be plain sailing. It most definitely will not. There are still many obstacles to overcome, including the continued pressure on discretionary incomes; public and private debt; credit availability; housing market issues; and the fragile nature of the banking system. However, economic growth will make all of these problems more manageable, and it is very clear that this is starting to happen.  Hopefully, Michael Noonan will deliver a modest budget correction in October, and this should reinforce the more positive vibes in the economy and in business.


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.

Some Upside to Rising House Prices

Sunday Indo June 2014 by Jim Power

It has traditionally been the case in Ireland that the first thing most of us want to do once we go into paid employment is to buy our own house and spend the next 25 or 30 years paying back the mortgage. Such behaviour might seem irrational in a European context, where there is typically much more of an appetite to rent rather than own. Spending one’s life paying back a mortgage does tend to soak up a lot of financial resources that could be used for other more productive purposes. However, we are what we are and it is likely to remain the case that most of us will desire to own our own home once we can remotely afford it. Personally, I bought my first house when I was 23 and had to sell my car in order to service the mortgage, but being typically Irish, I felt that was a price worth paying to own my own bricks and mortar. The creation of a properly functioning rental market where rent controls are in place and where there is real and decent regulation might possibly change our attitude towards owning and renting, but that appears some distance away.

Whether we own or rent where we choose to live does matter. The high level of home ownership has its advantages in a rising property market. As home owners become wealthier on paper, the positive wealth effect encourages more spending and creates a virtuous cycle. This wealth of course is just on paper and is not real as it cannot be realised unless one trades down or exits home ownership altogether. Hence there are dangers involved in spending and borrowing on the back of paper gains. However, the flipside is also true. As house prices fall, there is a negative wealth effect which depresses consumer spending and economic activity. This becomes a particular problem when the value of the property falls below the level of the outstanding mortgage, or in other words, when one moves in to a negative equity situation. At one level, negative equity is not a problem unless one is forced to sell the property, in which case the negative equity loss is crystallised. However, in a real sense going around realising that your mortgage is bigger than it should be and that your mortgage repayments are larger than they should be, is a horrible feeling and one that will undoubtedly impact on one’s economic behaviour in a negative manner.

One of the problems with any analysis of the Irish housing market is the lack of a proper data set, particularly in relation to regional property markets around the country. However, it is still a very interesting exercise to try to analyse the impact that rising property prices will have on the negative equity situation.

According to CSO data, which are based on houses that have sold and on which a mortgage has been granted, national average property prices have increased by 8.5 per cent in the year to April and are now 9.4 per cent off the low point seen in March 2013. Outside of Dublin, property prices have increased by 1.3 per cent in the year to April and are now just 2.6 per cent off the low point in March 2013. Property prices in Dublin have increased by 17.7 per cent in the year to April and are now 20.9 per cent off the low point in August 2012. Hence any discussion of the impact that rising property prices have on negative equity is really only relevant in Dublin at this juncture.

According to the CSO data, average residential property prices in Dublin Declined by 57.2 per cent between the peak of the market in February 2007 and the low point in August 2012. This dramatic decline in prices pushed a lot of mortgage holders in to a negative equity situation. Just how many is difficult to calculate based on data availability, likewise just how many have been lifted out of negative equity since the recovery commenced in August 2012 is also difficult to calculate. However, if one makes certain assumptions, estimates can be made.

I have looked at mortgages taken out by First Time Buyers, Investors and Movers based on IBF data. I have assumed an average Loan to Value (LTV) of 90 per cent between 2003 and 2011, and 80 per cent since 20111; based on Census data I have assumed that 30 per cent of new mortgages drawn down were in Dublin; I have applied a representative mortgage rate to calculate how much of the decline in the outstanding mortgage is due to normal repayment. Based on these and other assumptions, I estimate that the negative equity mortgages peaked at just over 94,000 in 2011 and have subsequently fallen by around 24,000 to stand at around 70,000 at the moment. If one uses different assumptions one will come up with different answers, but it is clear that the trend in house prices in Dublin is lifting a lot of mortgage holders out of a negative equity situation. This is good.

Such a reduction in negative equity is obviously good news for those involved and will have some positive wealth effect on consumption. For the balance sheets of the banks it also represents good news as it does reduce potential loan loss pressures. However, for those who want to buy a house in Dublin, the magnitude of current price rises is not good news. A strong supply side response is necessary in Dublin, but that will be slow to materialise. Hence in a market with significant pent up demand and limited supply, the risk to prices appears to be on the upside over the next couple of years. The good news is that if the price appreciation seen since August 2012 were to be repeated over the next couple of years, the number of mortgage holders in negative equity in Dublin could be almost halved.