Wednesday, 5 August 2009

Social welfare cuts and NAMA

Peter Connell: Brian Lenihan is quoted in Saturday’s Irish Times as insisting that the banking crisis is ‘entirely separate’ to the financial crisis. This is patently untrue. It represents an attempt to decouple the two issues as the government realises that the simultaneous cuts in public spending that will form a large part of the December budget, and the bailing out of the banks via the NAMA gamble, will be politically toxic.

What links the financial and banking crises (Lenihan omitted to mention the crises in unemployment, growing poverty and plummeting GNP and domestic demand) is the fiscal deficit and the national debt. The government, with the support of the Dublin Consensus, regard these as setting the framework for all policy discussion relating to how the country can emerge from the crisis. Colm McCarty has helpfully provided the media with a shorthand for describing this with his pithy ‘€400 million a week’ catchphrase. David Murphy, RTE’s Business Correspondent, simplified things even further for us by stating that the government is ‘losing €400 million a week’. On the same Morning Ireland programme, he suggested we’re in the same position as a spendthrift teenager blowing his pocket money. The bond markets (our parents!) look on and are not impressed. Add in the wheeze of publishing ‘Ireland’s Debt Clock’, where ‘you can see Ireland’s debt mount before your own eyes’, and the case for slashing public spending seems irrefutable.

One of the saner voices in the national media over the past few weeks has been Dr. Michael Somers, director of the NTMA. The NTMA’s annual report for 2008 makes for very interesting reading and, in some respects, is a useful antidote to the wilder outpourings of the dismal scientists. The report doesn’t underestimate the scale of the rapid growth in the state’s indebtedness. What it does do, though, is set this financial crisis in context. Here are a few snippets from the report that are worth airing:
• the National Debt increased from €37.6 billion at end 2007 to €50.4 billion at end 2008. The National Debt/GNP ratio increased from 23.3 per cent at end 2007 to 32.2 per cent at end 2008.
• the General Government Debt/GDP ratio stood at 43.2 per cent at end 2008, up from 25 per cent at end 2007. This was well below the euro area average of 69.3 per cent. The General Government Debt measure does not allow the €21.4 billion in Exchequer cash balances (more than 10 per cent of GDP) to be offset against the gross position.
• deducting the value of the National Pensions Reserve Fund and other funds managed by the NTMA from the gross debt would give a Debt/GDP ratio of around 33 per cent at end 2008. Subtracting Exchequer cash balances reduces the ratio further to 23 per cent. (None of this is reflected in our debt clock).
• forecast debt ratios for 2009–2013, accepting for the moment the figures set by the Department of Finance in the April budget, would see the Gross Debt/GDP ratio rise to 77% (or 73% allowing for cash balances). Both of these figures would be well below the EU average.
• interest payments on the debt were 3.8 per cent of tax revenue in 2008; the equivalent figure was 26.7 per cent when the NTMA was established in 1990. In 2009 the forecast is for 9.4 per cent of tax revenue, reflecting higher interest costs on a larger debt and lower tax revenues. While the interest burden will increase substantially over the period 2009–13, it will be no greater than the levels experienced in the mid-1990s.

Allowing for the fact that the government’s projections for economic growth and tax revenue are almost certainly optimistic, it’s quite clear that the scale of the debt, while serious, is manageable in the medium term. And this is according to Michael Somers.

On the other hand, the Dublin Consensus and the ‘€400 million a week brigade’ insist that our international credit rating is slipping and point to reports issued over the summer by Standard & Poor’s, Moody’s and others, using this as a rationale for swingeing cuts in public spending. What’s interesting in these reports is the focus on the banking crisis and NAMA. Standard & Poor’s very explicitly links the downgrading of Ireland’s rating from AA+ to AA to the enormous risks associated with NAMA – ‘We consider that NAMA's ability to meet its financial objectives is uncertain because of the risk that cash flows from its assets could fall below its funding costs if their underlying performance worsens compared with NAMA's expectations at the time of purchase. At the same time, we believe the recently announced losses (for the six months to the end of March 2009) at nationalized Anglo Irish Bank Corp. Ltd. (A-/Watch Neg/A-1) highlight both the continued fragility of the Irish banking sector and its reliance on the government for ongoing financial support.’

As the government formulates the December budget during the autumn, and we’re repeatedly told that the country can no longer afford current levels of welfare spending, ministers will desperately seek to disguise the fundamental link between our fiscal and banking crises. And if the budget does implement those cuts then a bright light needs to shine on that grubby transaction that will see money taken from the unemployed to prop up our profligate banks.

1 comment:

Michael Taft said...

What's interesting is that while the three ratings agencies were downgrading our credit rating, our bond yields improved, substantially narrowing the gap with German bonds. On that basis, maybe we could get the rating agencies to downgrade us again, so that we can reduce the cost of our borrowing even further.

Based on the data you presented, Peter - we could borrow up to €15 billion over the next two years above Government targets and still remain below the Eurozone average. With that extra money, we could invest in our infrastructure and public services (both need it badly) and in the meantime create thousands of jobs. This would reduce the annual deficit by generating more tax revenue and reducing social welfare expenditure. This may be a bit simplified but no more than metaphors about teenagers and international bond markets.