THIS Budget is unfortunately without any real merit, apart from the national recovery bond idea which is interesting and shows an ability to think logically about where we are at this stage.
But the net result of this Budget will be to make the economy contract more, to make people spend less and gradually to drive this Government further up the economic cul de sac which they have chosen.
Let’s begin with the panglossian world view of the Department of Finance, where the minister said the worst was over. He predicates this view on the ability of the great forecasters of the Department of Finance who have got everything wrong in terms of forecasting the economy since 2000. Why should anyone believe these guys now when they neither foresaw the boom nor the bust?
Yet we are supposed to believe them today when they say that the economy will recover next year and the year after. Can we do a little bit of basic economic forecasting to unravel this nonsense and then see whether the Government’s efforts yesterday will make things better or worse for growth and employment.
At its most basic, the way we calculate economic growth is by adding together four variables: consumption, investment, government spending and exports and then subtracting imports. According to the Government’s figures (www.budget.gov.ie/Budgets/2010/Documents/Final%20SPU.pdf) the economy will turn in the second half of next year.
This means that consumption, investment, exports or government expenditure will rise next summer. But where is the logic of this? We know that far from rising, government spending in the economy will fall by billions. So growth won’t come from there.
We also know that investment in the economy will not rise because investment is driven by the return on equity which is the return that an investment in Ireland will give an investor over and above what they can get elsewhere. For Ireland to achieve this state, the productivity of Irish workers has to rise dramatically (which won’t happen) or the price of Irish workers (our wages) has to fall dramatically, which again isn’t going to happen, to bring us in line with our competitors. So why would there be a surge in investment here next summer?
So, the other bit of the equation that could rise is consumption. The mandarins seem to think that when faced with pay cuts and the insecurity of unemployment, we the punters will go out and spend. But the opposite is more likely. We will continue to save and wait until the worst has passed before we spend.
The final piece of this particular spending jigsaw is credit. It takes credit in an economy to get people to spend to generate the growth rates which generate the tax revenue which allows the Government to get the budget deficit under control. But our banks are actively taking credit out of the economy because they are having to increase deposits and reduce lending to make sure that their capital ratios are sufficient. If they are not, the Government will have to come in and buy more of their stock, inject state capital and, in short, nationalise them.
The State doesn’t want to do that, so barring some dramatic change in international market sentiment towards the Irish banks the Government will either have to nationalise them or, if it doesn’t, the marginally private banks will retract credit from the system. In so doing, they will dampen spending, making rubbish of the minister’s claims that the economy will turn next summer.
Finally, exports from Ireland may rise. But as exports didn’t fall in the bust, this can hardly be the turnabout factor. Yes imports into Ireland will fall, but just to show the myopia and inconsistency of the Budget, the car scrappage scheme will increase imports of cars which will cause the import part of the growth figures to rise, reducing the overall growth figure!
So, where does this whole thing make sense? Will it cause a reduction in the central government balance? Will it, in other words, bring us closer to solvency?
The charitable interpretation is that it will bring us a bit closer but the €3bn in savings have already been cancelled out by the €4bn we injected into Anglo Irish Bank. And, obviously, some €6bn more will have to be injected to keep that basket case from folding. So, as long as the banks are still insolvent the prospect of NAMA 2, 3 and 4 is out there because of widespread defaults on mortgages, car loans, credit cards and the like.
Put simply, we are in a debt trap. This means that because prices are falling here by 5pc to 6pc; and interest rates, if you want a loan, are 5pc, the real rate of interest is more than 10pc. When the economy is contracting, this means that the debt dynamics are moving against us.
We need to reflate, either by inflation or growth, but neither is likely. So there is a real danger that the tax take falls further, expenditure rises even after the cuts and the so-called stabilisation of the finances fails badly.
The most important thing about economics is to join the dots. You need to know how everything is related in order to make a definitive statement about how the place runs and is likely to function in the future.
There is little point talking about one bit of the economy without making the links to the other bits.
Yesterday’s Budget was an exercise in this one-sided approach. The minister avoided talking about the elephant in the room, which is the broken banking system. Without making the connection between credit and the rest of the system, we only get a one eyed-view of what is going on.
Plato said that in “the land of the blind, the one eyed-man is king”. Maybe this is precisely what our ambitious minister is hoping for.
David, this is spot-on. The only caution I can offer is that it may be even worse than the “one-eyed” problem. I saw Cowen being interviewed last night on TV and he bounced in his chair as he said, “What we want is confidence, confidence, confidence!”. That may be the idiotically simple explanation for Lenihan’s assertion that “The worst is over”. These two gentlemen appear to be of the view that a simple confidence-trick will fix the economy that their slash-and-burn policy has sent deeper down the spiral. With €2 billion taken out of the economy last April, the defecit… Read more »
Fianna Fail are beyond hopeless. They just keep digging
Eddie Hobbs mentioned on Newstalk that if anyone was going to invest in the bond, they need to ensure returns are linked to inflation – cause he reckons inflation will go crazy from 2011
Personally I wouldn’t put a cent into Ireland inc regardless of the promised return
Brian Lenihan is the first recorded Slave Trader in recent Irish History and his Budget is a Pipers Dream .He is a Fudger and a ditherer and his procrastination is a dancing act .He is surrounded by dangerous people that we have not really found out and he is protecting their NAMA .
[…] More at http://www.davidmcwilliams.ie/2009/12/10/minister-and-his-mandarins-forecast-neither-boom-nor-bust-… […]
David says: “At its most basic, the way we calculate economic growth is by adding together four variables: consumption, investment, government spending and exports and then subtracting imports.” This omits the key variable in present circumstances, which is the public sector borrowing requirement. Lenihan too, carefully avoided much discussion of this subject in his budget speech: “Some have argued we should continue to borrow and wait for the economy to grow again before tackling the budget deficit. There are three reasons why this is not a viable proposition. First, we know from the 1980s how large deficits, left unchecked, can… Read more »
You don’t mention the amounts to go out of the country servicing the debt of all sectors, or the extent of personal indebtedness constraining further borrowing for consumption, conspicuous or otherwise. Any prudent family will batten down the hatches, and save every cent by any means, whether going across the border or purchasing online from the UK. Lenihan is looking good, and trying to show he is in charge, so once again the people can be satisfied that someone has taken charge and will deliver relief for their multifarious demands. Public service bashing will continue like a purge with more… Read more »
If only this budget were to turn things round but David is right, and also Macolm above. I have come to the conclusion that economics is more art (joining the dots) than science and all the models and data in the world will find it hard to convince me otherwise. The economics profession just didn’t see this coming so massively discount what they say. As for the media cheerleaders I have this image of earnest but unimaginative leaving cert students, ‘worthy but dull’, trotting out pieties and cliches to impress .. well ‘who?’ is an interesting question in its own… Read more »
David. It’s a relief too see somebody in the meeja tackling head on the ‘inverted robin hoodism budget reality for what it actually is. You call it spot on using the term ‘panglossian’. I’d go further and call it ‘dr.strangelove magical thinking’. We / Irish society, what’s left of it post paedo cleric’s, porno property profiteering, bankster state takeover of tax revenues and power transfer too NWO masters at ECB, apart from all that, we are witnessing a meltdown in D4 / official ireland community contact in ‘reality’. To say the ‘budget’ is going to get the economy back on… Read more »
I run a business and I don’t think its that different to running a country ( I have no ambition to run a country ) Anyway in business I must take in more than I spend . I must have good cashflow , get paid on time and I must have orders with a good margin . If I have a cashflow problem but I have orders well I have to tackle the cashflow problem . Cut costs , tighter credit , hound my clients for payment etc . If I have no cashflow and no orders then I am… Read more »
You don’t have to have a degree in economics to know that the banks have massive personal debt on their books which is going to screw them . What kind of bank lends to business in a recession / depression ? Not only are Irish people credit junkies but a lot of irish businesses are as well . I always ran my business with little credit in that as far as possable I owned my plant and machinery and was not working to repay the banks but in the last 15 years banks were throwing credit at business . When… Read more »
Alan42, I agree with you on this; I run a business, too. I have two people who “operate for me” as “sub-contractors”; (that’s a funny-lttle-Irish way of avoiding the 12.5% employers’ PRSi – which should be scrapped, as it is a dis-incentive to employment). If I treated them the way that the public-sector workers have been treated by their employer, they would never work for me again. (and they would be right!). Why should anyone continue to work for “an employer” who screws them? I make sure that the sub-contractors who make money for me are happy. That is in… Read more »
Oh, oh! Look:
http://meganmcardle.theatlantic.com/archives/2009/12/greece_threatens_bankruptcy_an.php
David summed it all up tonight on the panel when he quipped ” The next train to Dublin is a Bus”,
Fianna Fail have lined the pockets of their mates.
The “Opposition” are positioning themselves for a new coalition.
The Bishops won’t resign.
All out strikes by February.
And We’re going counting Frogs
Diddley Diddley times are here again.
Christ, Ireland is up a dogs arse.
subscribe.
wills, agreed, all!
Just answer me this: why ddi the entire Labour Party (when they could have brought-down the currrent govetnment,) abstain from the vote on Carbon taxes?
The population will feel further betrayed as an understanding of the emptiness and deception at the heart of Government promises of recovery slowly dawns on them. Expect massive societal change in the next few years as people and corporations come to terms with limits. Limits to self-realisation and personal freedom. Limits to individual and corporate resource use and control of assets. Limits to debt burden. It seems to me that the Lenighan government has finally painted itself into a corner and been forced to apply the logic of the ECB. Hence the trimming of the socio-economic ‘overhead’ that is the… Read more »
Tuaithe De Danann – A new order is now been recalled from the past to sit itself in the present and to denounce our peeonage of serfdom and the pillaging of our national wealth and dignity. This new Army of righteous restorers are surfacing from deep under the earth tunnels to once more save our past to bring us to the present and leads us to the future.The instigators of this national movement are our Lepracauns who are low on members due to recent emigration with their masters .Secret gatherings are now emerging and more will become frequent as they… Read more »
Time to raise coorporation tax, simple as…
I’ve just been listening to some updates on the recent success of the financial services sector in the US political arenas.
You can imagine the arguments that took place on Easter Island when someone suggested that building stone heads was not a sound basis for an island economy.
I have been looking at the interchange between Wills and Alan42. The two are 100% correct. Alan42 family runs a business ethically. Credit is obtained on the basis of assets available. The business decides what it can afford rather than what it can get from the bank. There is clear concern that debts need to be paid off and that assets perform well. Wills proposition is that we have different rules for different people in relation to credit and debt servicing. While the Alan42s of this world will perform, there is a group of Alan42 competitors who have failed and… Read more »
Hi David, Yes, agree that its hard to believe the forecasters, but hey, isnt economics at the best of times guessing the future as there are just too many variables? eg: how many people will up sticks and emigrate, thus saving on social welfare costs, etc. Its a guess. Last year we were guessing how much the government overspend would be in 2009. Its ending up at about 22 billion, with 55 billion in spending at 33 billion in revenue. My guess back in Oct 2008 was 16-18 billion. But I am in the same boat as everyone else, I… Read more »
After Capello, Trappatoni is the second highest remunerated international football coach on the planet.Shows how far Irish wages /costs are out of line with the real world.
Lenihan’s budget is a confidence trick. In fact everything that Brian Lenihan has tried since he became Minister for Finance has been a confidence trick. This is a man who has total faith in his officials. And the officials are all amateurs. The overriding aim of the budget was to get young people in the private sector go form a herd of lemmings again and get stuck into the property market. In fact everything from this government is about the property market. They still think that they can rebuild the euphoria. They are looking for something for nothing. The government,… Read more »
Hi Deco, I dont know if what Lenihan has done is a confidence trick per se, as there would be only a minority of people that would at this stage support him fully in all his and the government’s actions. Deco > there is a belief in Ireland that authority gives you imunity from ever having to be accountable in any way. we actually need to build the intellectual basis for reform in the public arena I agree that authority by and large is authoritarian in nature to dictatorial levels. I’m not sure of the social reasoning for this, but… Read more »
The BIG problem I see with this budget is the level uncertainty it has created. If Lenihan had say halved social welfare, fired 50% of the PS, hiked taxes by 30% and then said….OK…That’s it. Investors may have had some basis of putting a peg in the ground and calculating a return. The problem is that the current Budget does not allow anyone with money to calculate that return. Lenihan is still stuck in notional estimation land like the notional values of property in NAMA and so on. We know there will be more cuts next year .We do not… Read more »
The storm clouds haven’t gone away – David’s solution through exiting the Euro may very well come true – the vultures are circling – today’s indo – http://www.independent.ie/business/irish/standard-bank-ireland-may-exit-euro-region-in-2010-1972016.html
Posters –
Lets not forget these figures when dissecting the ‘budget’.
Anglo Irish Bank taken from taxpayers 4.0 billion euro’s
A.I.B / B o I taken from taxpayers 7.0 billion euro’s
E.B.S taken from taxpayers .4 billion euro’s
Nationwide taken from taxpayers 2.0 billion euro’s
Anglo Irish Bank taken from taxpayers 6 billion euro’s
A.I.B / B o I taken form the taxpayer 7.2 billion euro’s
NAMA taken from taxpayers overdraft facility at ECB 55 billion euro’s.
Now, what was BL saying the budget’s cut’s had to be done for ???????
Hidden Treasures ( quoted from gazzette national de tuath 11th decembre, 2009 ) Jews worldwide are nervous that ‘the invisible people ‘ of tuath de danann are marching to the Hill of Tara soon to retrieve the lost treasures of the Lost Arc buried deep under and undetected since Queen Tea of Babylon arrived with the Arc to save it from the forces ransacking her city then.A secret tuath parliament has been in session for the last few days assessing the outcome of the government ‘budget de guerre” and are satisfied this document has failed in their expectations and are… Read more »
Oh, Dear! 5 attempts to log-in here, again. Anyway folks, as an educator, I feel a certain vicarious or collective responsibility for the ignorance of Mr Gogarty TD as to acceptable decorum and acceptable parliamentary language.
In reparation, I offer this instructive link:
http://bit.ly/ip9p0
[…] article from David McWilliams. Â While he makes some valid points he does not offer any alternatives to the […]
Why did the Entire Labour Partry “abstain” from the vote on “Carbon-Taxes”?
(One vote forces a General-Election).
Posters –
Question : Now that all bank debts and property debts passed too taxpayers and budget nailing it all down, one is pondering the following.
With Iceland and then Dubai de – faulting on its obligations and Greece on the brink of following suit will Ireland be next?
http://www.nytimes.com/2009/12/12/world/europe/12greece.html?ref=europe
New Glue –
The ECB is presently formulating a new stronger super glue that will not fail to become a Monetary Adhesive that will ensure that the Twins of France and Germany are forever entwined .And that rest are ‘gogartised’ away from the center of activity to meditate on their future directions without they casting a virus all over the existing dysfuntional monetary family as it is at present.Expect this new Market Launch to be anounced at a cinema near you SOON.
Gogarty displays a parliamentary ‘blue moment’ to add to the passing season .
Folks, we must dig-up some info on this here: from Nouriel Roubini, via twitter at 21:21 tonight,
“if you want protection against inflation risk stock up on Spam that you can at least eat rather than Gold that has no intrinsic value or use”
I have been stock-piling a bunker, but am surprised to see an economist of his stature recommending same.
What has he just learned?
Let’s keep at it!
Maybe this link here may shed a little light.
According too the WSJ Golden sacks much more closely intertwined with AIG and heavily heavily further involved with the mortgage insurance fraud in USA than they cared to tell the truth on back in 2008.
http://online.wsj.com/article/SB10001424052748704201404574590453176996032.html?mod=WSJ_hpp_LEFTWhatsNewsCollection
Tim, here is an article roubini scribed for FT in November. It analysis the carry trade on dollar and subsequent the ‘mother of all asset bubbles’ which he predicts is going too burst and with it us all take a fall.
So, perhaps he see’s this asset bubble about to pop.
http://www.ft.com/cms/s/0/9a5b3216-c70b-11de-bb6f-00144feab49a.html?nclick_check=1
A blunt bludgeon of a budget, but if the only tool you have is a hammer, then everything looks like a nail and you just bang away. Until you realise you should have thought it through , used screws and rawlplugs, now the shelf won’t stay on the wall. So you grab at the tube of grab adhesive and just sit back and hope the yoke doesn’t collapse when you put your Idiot’s Guide To Economics textbook on it. No, Lenihan is not exactly the sharpest tool in the box. If fact he appears to have no grasp of linking… Read more »
Folks, Gogarty makes the msnbc in America:
http://www.msnbc.msn.com/id/3036697/#34385135
Folks, Ireland 2009:
http://www.timesonline.co.uk/tol/comment/article6954443.ece
Poster :
This Bowz Gogarty voted for NAMA.
This ‘father jack’ epo is an attempt to gouge himself out of personal guilt over selling Ireland ‘out’ to a criminal banking syndicate casino gambling outfit.
What is about the Irish banks/finance institutions, self regulation, the same old faces and regulation ? Who should be put in charge of the investors watchdog “The Irish Association of Investment Managers” IAIM ? We need a “safe pair of hands” ! Yes, when looking for somebody to do this important job – the phrase “SAFE PAIR OF HANDS” is going around inside the heads of those who nominate. http://www.independent.ie/business/irish/watchdog-played-key-role-in-secret-836475bn-anglo-deal-1973119.html So there you go. Senator Ross is telling us that one of the financial engineers behind the loan to make Anglo Irish Bank look solvent (and thereby fool the ANIB… Read more »
Some day the NAMA debacle will be a blockbuster movie with a cast of bankers, politicians, and of course -developers.!
Of course the saga is only beginning:
http://www.youtube.com/watch?v=wXMmgLukDcQ
There is one person who really scares Fianna Fail, that’s Brendan Ogle, I heard him on radio yesterday and one thing is for certain, the ESB workers will not be taking a pay cut
http://www.independent.ie/national-news/ministers-back-off-in-semistate-pay-battle-1975096.html
Lets look at the variables, David Consumption – so low in 2009 as it was such an uncertain year for people. As people are regaining more certainty (however low), I believe that people will spend more in 2010 Exports – Ireland doesn’t operate in a bubble of its own. The country is connected to the rest of the world in terms of trade. As the international economy picks up, you have to expect that our exports will too. Investment – Ireland is still a rich country. People with money are presumably going to want to invest when the right opportunity… Read more »