Monday, April 30, 2012

The Structural Deficit Rule

Here is an extract from a Department of Finance document:
“The underlying (structural) budget balance […]  respects the terms of the Stability and Growth Pact, and is consistent with a medium-term objective of keeping the budget close to balance”
This document set Ireland’s medium term budget objective as a structural budget balance of 0% of GDP, i.e. balanced.  This document was the December 2005 Stability Programme Update published with Budget 2006.  The quote is from page 5.

It is nearly six and a half years since Ireland first announced the target of a budget with a structural balance of 0% of GDP.  In fact, most EU countries set similar targets in 2005.  This table is taken from page 47.

Country Specific MTOs

The range of medium-term budget objectives is from a low of –1.0% to GDP for four countries to balanced or “close to balance” for Ireland and eight other countries, up to a high of +2.0% of GDP for Sweden.  These are all in line with the provisions in the Fiscal Compact component of the Treaty on Stability, Cooperation and Governance agreed in January of this year.

As part of the 2005 revision of the Stability and Growth Pact, Council Regulation 1055/2005 was introduced in June 2005 which augmented the original Stability and Growth Pact with the following:
“Taking these factors into account, for Member States that have adopted the euro and for ERM2 Member States the country-specific medium-term budgetary objectives shall be specified within a defined range between – 1 % of GDP and balance or surplus, in cyclically adjusted terms, net of one-off and temporary measures.”
The original SGP from 1997 merely said that countries were “to adhere to the medium term
objective of budgetary positions of close to balance or in surplus” (Council Regulation 1466/97).  The structural deficit variation of the rule was introduced in 2005.

There is nothing new in the ‘balanced-budget rule’ in the Fiscal Compact.  Of course, just because something is already in place does not mean it is correct.  But if it is wrong why has it taken seven years for those who object to the balanced budget rule to voice their concerns?  A short chronology of the changes to the Stability and Growth pact is provided here.

Access to Official Funding

The issue of whether Ireland will have access to official funding after the current €67.5 billion of loans from the EU/IMF have been drawn down continues to get a lot of attention.  We first looked at this when the referendum was first announced and the conclusion remains the same.  The evidence suggests that Ireland will have continued access to EU funding until we have regained market access regardless of the outcome of the forthcoming referendum as long as we meet the terms of the programme.

The debate is centred around the so-called ‘blackmail’ clause that is included in both the Treaty on Stability, Coordination and Governance (The Fiscal Stability Treaty) and the European Stability Mechanism Treaty.   We don’t need to repeat both so here is the one from the ESM Treaty:
“It is acknowledged and agreed that the granting of financial assistance in the framework of new programmes under the ESM will be conditional, as of 1 March 2013, on the ratification of the TSCG [Treaty of Stability, Cooperation and Governance] by the ESM Member concerned and, upon expiration of the transposition period referred to in Article 3(2) TSCG on compliance with the requirements of that article.”
The process that saw this clause inserted into the Treaty at the start of February, even though the Treaty was originally agreed last July, has generated plenty of heat.  However, it seems reasonable if someone who is lending money wants to apply conditions to those who are trying to get access to that money.

One potentially crucial word is that it only applies to ‘new’ programmes from the 1st of March 2013.  Ireland is already in a programme and there already have been substantial changes to it. 

Initially €17.5 billion of the €67.5 billion to be provided by the EU/IMF was set aside for the banks.  After last March’s stress tests the drawdown for the banks was around €7.5 billion and the remaining €10 billion was shifted to provide additional funding for the day-to-day running of the State.  Could there be a further increase?

As the previous post pointed out this was actually agreed last July when the EU leaders announced that:
“We are determined to continue to provide support to countries under programmes until they have regained market access, provided they successfully implement those programmes. We welcome Ireland and Portugal's resolve to strictly implement their programmes and reiterate our strong commitment to the success of these programmes.”
This may not be the most tenable basis on which to believe that Ireland will have access to EU funds after the full amount of current loans have been drawn down but it is what the EU agreed.  It was reiterated as recently as the EU summit of the 30th of January when the statement of the EU leaders said that:
We welcome the latest positive reviews of the Irish and Portuguese programmes which concluded that quantitative performance criteria and structural benchmarks have been met. We will continue to provide support to countries under a programme until they have regained market access, provided they successfully implement their programmes.
That seems pretty unequivocal to me and this statement was released after the Stability Treaty was agreed and the so-called ‘blackmail’ clause had been introduced.   It has not been contradicted in any subsequent EU statements, and the applicability of the ‘blackmail’  clause to ‘new’ programmes does leave scope for the current Irish programme to be extended.

Poul Thomsen, an IMF Deputy Director in the European Department is of the view that the programme can be extended.  In a recent IMF seminar on Greece, Ireland and Portugal he said:
“The key here is, of course, that Europe has underscored, European leaders have emphasized that Europe stands ready to support these countries for as long as it will take to bring them back to market, provided, of course, that there’s steady progress under these programs. That is clearly unprecedented.”
Although only an observer, last week the ratings agency Standard and Poors released a short statement when the maintained their BBB+ investment grade rating of Irish government bonds.  In it they said:
However, we currently expect that the rating would remain investment grade following such an outcome. This is based on our expectation that even if the electorate were to reject the constitutional amendment in the May 31 referendum, political negotiations with Ireland's European partners could lead to official funding continuing beyond the current program that ends in 2013. If we were to conclude that Ireland would be effectively excluded from future official funding before regaining reliable access to market funding, we could lower the rating to speculative grade.
It is possible to find quotes in the S&P statement that are almost in contradiction to this.  The reason of course is that there are no absolutes in relation to this issue as the decisions are political. 

It is interesting to hear the couched words by many of those discussing this issue.  A rejection of the Treaty will have clear implications if Ireland requires assistance at some future date but from what I can see there is little to prevent Ireland’s current programme with the EU being extended in 2014. 

Thursday, April 26, 2012

Social Welfare Payments

In preparation of a recent discussion I went looking for the rates of social welfare payments over the past few years.  These are usefully provided as part of the supplementary documents produced with the Budget.

Here are social insurance payments (made from the Social Insurance Fund into which PRSI contributions are paid) from the 2007, when the economy and tax revenue peaked, right through the current rates in 2012.  The table just provides the personal rates.

Social Insurance Payments

All Social Insurance payments are higher than they were in 2007.  For Pensions this is as much as 10%, but for Illness, Jobseeker’s, Injury and other Benefits that increase is a much more modest 1%.  All of the payments increased between 2007 and 2009, and while some have of them have subsequently been reduced none are below their 2007 levels.

Here are the Social Assistance payments (made by the Department of Social Protection and funded from general taxation).  Again only the personal rates are provided.

Social Assistance Payments

Again most payments are above the 2007 levels.  The exceptions are Jobseeker’s Allowance for the under 24s and Child Benefit for all children with the reduction for the third child being the greatest.

A full list of the all the payments and rates for qualified adults/children can be read here.

It is also  important to factor in inflation to determine the real changes in the rates.  For example, in December 2007, the CPI excluding mortgage interest was at 103.1 (using the 2006 base).  In December 2011 this index was at 104.2.  That is a rise of 1.1% over the four years. 

Here are changes that have taken for some of the main commodity groups in the CPI over the same period.

Commodity Groups

In the first three months of 2012, the CPI excluding mortgage interest has risen 1.9%.


Today’s meeting of the Oireachtas EU Affairs sub-committee on the Stability Treaty had Sinn Fein leader Gerry Adams in front of it to present the views of his party.  I’m sure the session covered lots of interesting facets of the debate but an exchange Mr. Adams had with Fine Gael deputy Paschal Donohue has been picked up by most of the coverage of the session. See here, here and here.

The exchange focused on a leaflet Sinn Fein has produced on the Stability Treaty referendum.  The full leaflet can be seen here and this is the part that was in question today.


The comments focused on the sources of the quotes used from some “experts”.  Karl Whelan (an expert without the quotation marks) had already flagged this as early as last Thursday.  Here is a video showing today’s discussion courtesy of

It is an entertaining exchange but it doesn't add a huge amount to the debate on the actual issues relating to the Treaty. The Sinn Fein leaflet quotes me as saying:
“Had the Fiscal Compact being in place since 1999 it would not and could not have prevented the crisis in Ireland”
This quote is 100% accurate and, of course, is true.  It is taken from my opening presentation to the Joint Oireachtas EU Affairs Committee meeting from the 22nd of February (transcript) and is also referred to in my written submission to the Committee.  Here is some of the text from the transcript surrounding the quote.
However it must be acknowledged that it is not just the treaty that will impact on countries. An important change during the past couple of months has been the adoption of the six pack, which has not received sufficient attention. Had the fiscal compact been in place since 1999, it could not and would not have prevented the crisis in Ireland because we would have satisfied the structural deficit and debt break rule during the last five or six years prior to the crisis. As such, it would not have helped us in terms of avoiding the crisis.
Some elements of the six pack are important and may have to some extent alleviated the crisis in which we now find ourselves.
I repeated the view in bold as quoted in the leaflet towards the end of my remarks.
The fiscal compact would not have prevented the Irish crisis. While there are issues about the flexibility it offers, the so-called six pack and the further measures in place would have, if applied retrospectively, had an impact.
These measures are the government expenditure rule and the Macroeconomic Imbalance Procedure both of which now form part of the toolkit to be used when fiscal and economic performance in EU members is being assessed but are not included in the Stability Treaty.
In his questioning of Gerry Adams, Paschal Donohoe quoted me as saying:
“If the Treaty is rejected we will be forced to adhere to the budgetary rules anyway but will be denied access the new European Stability Mechanism (ESM) bailout fund.  We cannot avoid the fiscal rules in the Treaty.  All in all there is little to be gained from rejecting the Treaty.”  
Again this quote is 100% accurate.  This is extracted from the final paragraphs of a recent article I wrote for The Evening Echo.
If the Treaty is rejected we will be forced to adhere to the budgetary rules anyway but will be denied access the new European Stability Mechanism (ESM) bailout fund. This will have no impact on the current EU/IMF programme we are in and, if necessary, this programme can be extended.  However if Ireland needs to enter a new programme of assistance at some time in the future we will not be granted assistance via EU loans and may be left in a vulnerable funding position.
There is little that is new in the Treaty, and some of the rules governing fiscal policy in the EU have been left out altogether.  It is hard to know why this Treaty is necessary, apart from appeasing voters in France and particularly Germany.
We cannot avoid the fiscal rules in the Treaty.  We cannot avoid the measures necessary to bring our deficit under control.  The Treaty may be part of a long-term move for a more fiscally-integrated Europe.  This would be a real change and one we should be part of.  All in all there is little to be gained from rejecting the Treaty.  
The parts in bold were used by Paschal Donohue today.   All in all, it is a little ado about nothing. 
There are many strands to the EU response to the current crisis.  They won’t all be right but they should not be considered in isolation.  Focusing on short, and sometimes abridged, quotes can provide some entertaining parlour games but does not get us any nearer a full understanding of the issues involved.

Tuesday, April 17, 2012

IMF Projections for Ireland

The IMF have released the April 2012 Update of the World Economic Outlook.  The following table extracts some of the updated projections of the IMF for Ireland up to 2017.

IMF WEO Projections

Thursday, April 12, 2012

Distributional effects of direct taxes and social transfers

Chapter 16 of this 2010 publication from Eurostat has some interesting results based on the EU-SILC (Survey of Income and Living Conditions).  The findings are based on 2007 data but are worth considering.

Table 16a

Original income is defined as:

Core inflation jumps higher

This morning’s release of the March Consumer Price Index by the CSO shows that the headline rate of inflation edged higher rising from 2.1% in February to 2.2% in March.  A measure of “core” inflation excluding mortgage interest and energy products reveals a different pattern.  The measure of inflation represents about 85% of the overall index.

Core Inflation March 2012

Core inflation jumped from 0.7% in February to 1.3% in March and this is the highest this measure has been since January 2009.   Annual inflation in mortgage interest turned negative for the first time in almost two years in March and the contribution of rising energy prices to the CPI also fell slightly.

Wednesday, April 4, 2012

First Quarter Exchequer Returns

The Department of Finance have released the end-March Exchequer Returns.  The relevant documents are:

The Department have improved their presentation of the tax receipts data and much of the analysis that was previously provided here is now included in the release.  This is a welcome development.

Another welcome development is the new Department of Finance Databank which gives monthly Exchequer tax receipts back to 1984.  Expenditure figures are provided in the Department of Public Expenditure and Reform Databank which has been available for some time.

On the whole, the results seem slightly positive.  Tax revenue is up on the year but a lot of that is due to delayed receipts from 2011 and some reclassifying issues between Income Tax and PRSI.  Even accounting for these, tax revenue seems to be performing as expected though there is an unusual dichotomy between the performance of VAT (up) and Excise Duty (down).

The Current Account Balance is a useful indicator of the performance of the public finances.  On first glance this would appear to be getting worse.  In the first three months of 2011 there was a Current Budget Deficit of €4,177 million.  So far this year we have accumulated a Current Budget Deficit of €4,918 million.

There are three factors to note before jumping to the conclusion that the Current Deficit is continuing to deteriorate:

  1. The Sinking Fund Contribution of €646 million has already been made for 2012.  In 2011 this transfer of €683 million from the Current to Capital Account did not take place until November.  A year-on-year comparison is unfair on 2012 because it includes a payment that was not made by March of last year.
  2. Last year the debt interest cost for the first quarter of the year was €1,425 million, but €577 million of that was paid from the Capital Services Redemption Account with the remaining €848 million coming from the Exchequer Account.  In 2012 all the debt interest bill of €1,658 million was paid from the Exchequer Account.
  3. This year’s receipts include €231 million of Corporation Tax which should have been collected in 2011 but a delay meant it was instead included in the January 2012 receipts.

To account for these we will subtract the Sinking Fund contribution from the 2012 deficit, add the interest paid from the CSRA to the 2011 deficit and subtract the delayed Corporation Tax receipts that have been added to this year’s revenue..

That means the comparison is between a deficit of €4,754 in 2011 and one of €4,503 million.  So far in 2012, the Current Budget Deficit is about €250 million better than it was at the same time last year.  It is not clear how much of this is down to timing and whether it will be continued into the second quarter, but it is positive that the current budget deficit is smaller (even if it is only marginally so).

Monday, April 2, 2012

Mortgage Arrears in the Covered Banks

The release over the past few weeks of the Financial Reports of the covered banks has given a useful insight into the mortgage books of the covered banks.  All have generally followed the same template and have provided similar detail.

Here is a summary of the headline figures.


The full market figures come from the Financial Regulator’s Mortgage Arrears release.  The figure for the non-covered banks (Ulster Bank, National Irish Bank and other lenders) is the residual after the reported totals for the covered banks are subtracted.

It can be seen that there is a wide variation in the loan book performance for owner-occupied mortgages in Ireland across the covered banks.  AIB report the lowest level of arrears of 90 days or more with the highest level by far in the mortgage book of Irish Nationwide which has been subsumed into the Irish Bank Resolution Corporation.

The loss provisions follow a similar pattern with AIB allowing for a loss equal to 1.6% of the mortgage balances at the end of December.  The IBRC have allowed for a loss of over 20% on its owner-occupied residential mortgage book.

The level of arrears is higher in the non-covered banks and they make up about 35% of the market by mortgage balance.

Here is the projected stress-case loss rates from last March’s stress tests and the losses covered under the Central Bank’s three-year loss forecast on which the €24 billion recapitalisation sum was based.  Note that the figures in the stress tests relate to the 31st of December 2010 rather than the end of 2011 as with the figures above.

Mortgage Balances

There is some disagreement between the tables.  Outside of the Irish Nationwide loans, AIB has the highest projected loss rate.  The projected losses are still significantly above the provisions currently being made by the banks.

Daft Report

The Q1 2012 Report on house prices was released this morning.  I provided the introductory commentary to the report which can be read here.

Sunday, April 1, 2012

The ‘New’ Bond

The  €3.5 billion increase in Ireland’s government bonds as a result of the Promissory Note transactions announced last Thursday can be seen here.

Outstanding Bonds 30-03-12

The change is in the March 2025 bond which now has €11.7 billion in issue rather than €8.3 billion on the last occasion we looked at the Daily Outstanding Bonds Report.

The total amount of bonds in issue has increased to €83.1 billion and when/if the Bank of Ireland component of the announced transactions is put into place, the covered banks will be holding around €16 billion (one-fifth) of these.