Tuesday, 22 December 2009

The real trend of Tory support - by John Ross

Iain Dale in his Tory diary recently asked the question why the Conservatives are having worse results in actual elections than in opinion polls - seeking an explanation from his readers. As Iain Dale put it:

‘Jonathan Isaby has posted last night's local election results on Conservative Home and described them as "disappointing". Indeed. OK, you might think, what do the results of a few council by-elections matter? And in some ways you'd be right. But these results are not isolated. There have been many similar results over the last few weeks. Invariably, Conservative vote shares are down and the party seems to be losing more seats in by-elections than it gains. Clearly, there can be peculiar local circumstances at play, but in seats like Wyre Forest, Tavistock and Weymouth & Portland (all parliamentary marginals), the Conservative should be gaining seats not losing them. Anyone got any light to shed?’

Others have commented on the fact that despite the extreme unpopularity of measures taken by the government in the last year, and Labour’s collapse in the polls, the Conservatives have been unable to raise their level of support, even in opinion polls, above the low 40 percents level -when at similar periods of extreme unpopularity of a Tory government Labour stood at 48% or even higher.

To aid Iain Dale, even although he won’t like the answer, Figure 1 below shows the Tory party percentage of the vote at every general election since 1931. The voting trend evidently shows a party in long run and unambiguous decline in support.

Figure 1

Naturally in the short run, which in these terms is a five to ten year period, the Tory vote swings around from defeat to victory, but the overall trend is unambiguously downwards. In particular, with the exception of the immediate post-World War II period, when the Tory Party vote was particularly depressed due the massive defeat of 1945, each Conservative victory was secured on a lower proportion of the vote than previously.

Taking Tory victories after the immediate post-World War II period the Conservative percentage of the vote was 49.6% in 1955, 49.4% in 1959, 46.4%, in 1970, 43.9% in 1979, 42.4%, in 1983, 42.2% in 1987, and 41.9% in 1992. This trend would imply a further Tory fall, to slightly above or below 40% at an election held in 2010.

Such a vote is, of course, entirely consistent with approximately where the Tories are at present in the polls. Therefore it is important to stress that these calculations are not based on these polls and they are the results of actual elections and not surveys of opinion. Nor were they made after the event. The graph is simply updated from the author’s book Thatcher and Friend’s, the Anatomy of the Tory Party. Published in 1983 its analysis of the social bases of the decline of Tory Party support were scarcely believed by most politicians at the time with one exception. Ken Livingstone was convinced by the data and this is how the author met him.

However evidently the disintegration of Tory support, and the consigning of the party to almost a decade and a half in the political willingness after 1992, was not a surprise in such an analysis. Nor, therefore, is the current confinement of the Tory Party, in what is a good period for it, to the low 40s in the opinion polls. Such figures are not accidental, nor can they be easily reversed, but are part of the long term falling trend of Conservative social support.

It would take too much space here to analyse the full social reasons for the Tory decline. For that readers are referred to the book in which the long term social analysis, not of course the contemporary commentary, remains entirely relevant. But in essence the Tory Party was born in the rural and prosperous suburban South East, gradually expanded out of it in the late 19th and early 20th centuries, and has gradually declined back into it. This explains why, of course, David Cameron as been almost totally unsuccessful in expanding the Conservatives outside their southern redoubt. It also explains why even when the Tories are ahead in the polls they are not liked by the electorate - as the latest poll in The Independent confirms again. It is simply that Labour has regrettably created a situation whereby for the electorate it is even more unpopular than the Tories.

There are, of course, direct political implications that flow from such a real trend of support - as opposed to myths. The Tory Party is not 'the wave of the future,' it is a historically declining party. In particular it is extremely difficult for the Tory Party to raise its support.

It is evident Labour does not have to worry about a surge in support for the Conservatives, nor has Thatcherism, factually, ever been popular with the electorate – the Thatcherite victories in the 1980s and 1992 were won on the lowest shares of the vote for a Conservative government in the 20th century. What Labour has to worry about is building its own support. It shows clearly why there is no popular enthusiasm for the Tory Party even when there is massive discontent with the Labour government.

Second these facts show that Labour has strategically lost no support to the Tories in the entire post-war period – the entire loss has been to the Liberal Democrats, Greens and others. The Tories have simply not proved attractive to former Labour voters whereas the Liberal Democrats and to a lesser extent the Greens have.

The analysis presented here of the trend of the underlying social decline in Tory Party support has been factually vindicated by the results in six general elections, over a 26 year period, since it was written. It continues to explain the latest opinion polls and by-election results. Its consequences are clear. The Tories, a party in long term decline, cannot by their own efforts win the general election. Labour can merely lose it. Labour need not worry about the attractiveness of Tory ideas - they have been shown by real elections not to be attractive.

What are the implications for politics? First that, as is now being realised, given the long term trend of Tory decline the general election is not a simple foregone conclusion. As the Tories cannot lift their support, due to deep seated social processes, they have to rely on Labour remaining hugely unpopular - which of course can happen. Second, even if the Tories do win the election that will not halt their historical social decline. If the Liberal Democrats enter a coalition with the Tories, as is Clegg's evident present intention, they will be tied to a party declining in support and become unpopular with them.


A few second hand copies of Thatcher and Friends, The Anatomy of the Tory Party, which contains a much more detailed historical analysis of Tory support, can still be obtained second hand on Amazon

Monday, 14 December 2009

The Real Cause of the Sell-Off in British Government Debt - by Michael Burke

British government bonds came under selling pressure last week, the one in which the Chancellor delivered his Pre-Budget Report (PBR). Over the course of the week, yields on 10-year gilts rose by 0.24%, or 24 basis points (bps) [1]. The yield differential, or spread, versus compared to yields on comparable German bonds rose by 22bps, demonstrating that this was not just a generalised fall in bond prices, which causes yields to rise. The sell-off is a negative factor for British taxpayers, increasing the cost of government borrowing and has negative knock-on effect for most other borrowers, from commercial enterprises to mortgage borrowers.

The Financial Times was in no doubt, the culprit for the sell-off was Chancellor Darling’s failure to make sufficiently savage cuts in public spending to reassure bond investors. 'Investors took fright at the perceived timidity of the government's plans to balance the books with one of the biggest sell-offs of British gilts this year.'

But that verdict is simply and demonstrably untrue. SEB has previously shown, by analysing European government bond markets, that there is a preference for lending to economies where there is a reflationary policy. This is simply because, from the perspective of the bond market, government spending to boost the economy, especially investment, improves the chances of getting your money back.

There were some very poor choices made in the PBR. Among the worst was the decision to increase spending for the war on Afghanistan by £2.5bn. At the same an increase in National Insurance Contributions will allegedly increase revenues by £1.9bn (although no account was taken of the depressing effects on activity of this tax increase). It seems that borrowing is possible to fund disastrous and increasingly unpopular foreign wars, but tax increases on the low-paid are imperative.

Yet, although there were many changes announced by Darling, the net change in the fiscal position was close to zero (Afghan spending aside). According to the PBR, there was just £415mn of fiscal tightening announced, all of which was more than accounted for by the projected take from taxing bankers’ bonuses (£550mn). In the next year, the Chancellor estimates a loosening of £1.24bn and only in later years does net fiscal tightening begin in earnest, £3.5bn and £5.1bn in 2011-2013 - see the Chancellor’s Table. 1.2.

SEB can agree with the FT that this inaction is the cause of the sell-off in gilts. But with exactly the opposite meaning. The sell-off in gilts arises not because the Chancellor is delaying cuts, but because he has stopped trying to reflate the economy.

How is it possible to be so certain of something which flies in the face of virtually all the market commentary of the last few days? Simply because the PBR was a change in government policy away from reflation (the previous policy included a VAT reduction, corporate tax holidays, brought forward capital spending, etc.). When that policy was being pursued gilts did not sell-off. A year ago British government 10-year yields were 29bps lower and the yield spread with Germany was 31bps lower.

For confirmation of this view, we can look to Ireland. The day following the PBR the Irish government enacted its own Budget. Budget cuts there of €4bn were described by the FT as “brutal” and even “masochistic” and included public sector pay, jobseeker’s allowance, even disability benefits. The British Tory Party and their supporters in the media have lauded the ‘resolute action’ of the Irish Finance Minister Lenihan. George Osborne is preparing to emulate him. But yields on Irish 10-year government are now even higher than those on British government debt at 4.87%, and now stand at 187bps over German bunds, compared to 66bps for Britain, even though the two have similar of government deficits, close to 12% of GDP.

But what of the European benchmark, surely German yields are low because of they are pursuing a policy of fiscal retrenchment, as recommended by virtually all the commentators? German debt yields remain the benchmark low in Europe, all the while the new German government continues to reflate the economy through increased government spending, which of course is financed in the first instance by increased borrowing.

This is not simply a case of investors flocking to the traditional German safe-haven bond market, although that is often a factor. Other bond markets have avoided a sell off, and maintain tight spreads to Germany, notably France and Belgium. What all three economies have in common is that they have been engaged in fiscal expansion to lift their economies.

The commentary from the Financial Times and most bond analysts can be discounted as it does not conform to reality. The actions of bond investors illuminate the real picture; inactivity is better than fiscal contraction, but reflation is better than both..


1. Financial Times, December 14, Table ‘Bonds - Benchmark Government’, p.27

Wednesday, 9 December 2009

‘Austerity programmes’ and the financial markets, the disastrous lessons of Ireland - by Michael Burke

Financial markets have a great many faults. But they can frequently provide a signal of their participants’ collective thinking with much greater clarity than their cheerleaders and ideologues. This is especially the case currently, with regard to the alleged ‘risks’ of increased government spending.

Most governments are currently engaged in a policy of reflation and fiscal stimulus. Yet there are already parties seeking office, in Britain and elsewhere, who favour a policy of fiscal contraction. It is therefore instructive to look at Ireland where the ‘Party of Austerity; is already in power.

We are frequently told that bond market investors are demanding Ireland’s unique ‘austerity; experiment, and that otherwise they will refuse to purchase government debt. Finance Irish Minister Lenihan has said that that taking ‘decisive action’ on the budget deficit was a priority for the Government and it would “signal to international investors that the Irish Government possesses the ability to take the necessary action’. Music to the ears of the British Tory front bench who are delighted to see the progress of Irish Thatcherism.

We will ignore here the impositions of the Maastricht Treaty’s 3% borrowing and 60% debt in relation to GDP limits. - every other country in Europe has as they go about attempting to reflate their economies. Instead, for bond investors, it is easy to put a number to the fear and greed that drives financial markets. For the latter, greed, it is what they demand in the form of the yield on government debt at auction. For the former, fear, it concerns the risk to the principal sum in the form of default. The two are related.

Yields on benchmark Irish government debt were 4.85% as of close of business on Friday December 4 (all yields from Financial Times, December 7). That’s considerably below the peak of 6.02% in January of this year. That must surely mean that the bond market is reassured by the austerity measures to date? Well, no. The first ‘decisive’ austerity measures from the FF/Green government were in October 2008, and yet yields soared in January of this year.

It can be useful, in judging the financial market impact of policy, to look at yield spreads. The riskier the asset, the higher the spread, and movement in the spread signals a change in the perception of that risk (the fear/greed factors again). The yield spread of Irish 10 year debt over the European benchmark German debt is a very sizeable 1.62% (or 162 basis points, bps in the jargon). That represents a very large, additional cost to the Irish taxpayer and compares to the next highest yield spread of Italy of 0.79%. Only Greece has a higher spread in Europe, of 1.71%.

But a key fact is that this yield spread has been widening against Irish taxpayers. Over the past 12 months German yields have risen by 0.19%, while Irish yields have risen by 0.62%.

Now, against a possible charge of unfairness, it should be admitted right away that, if financial markets are in a panic, the riskier asset will be harder hit than the safer one. In this case the riskier asset would be Irish debt and the safer one German debt. But we have already seen that the big sell-off occurred in January, and in fact most yields have been declining since.

It is possible to develop this point further, by using a more direct parallel with Ireland’s debt. A comparison with Belgium is a very useful one because:

a. Belgium is a middling Euro Area economy, with its yield spread close to the average of the Euro Area, below Italy, Spain, Portugal, and others, and above that of France, The Netherlands, Austria;

b. Belgium has a much higher government debt than Ireland but a much lower current budget deficit, and, crucially,

c. For virtually the whole of 2008, the yield spread between Belgium and Ireland was, for the reasons in (b.) almost identical, usually within or 1 or 2 bps of each other.

However, that is no longer the case. Belgium’s yield spread over Germany is now 0.33%, or approximately one-fifth of Ireland’s. The Irish government’s Pre-Budget Outlook estimates an increase in net debt this year of €26bn. With Belgian, rather than Irish yields at that maturity, Irish taxpayers would save approximately €340mn next year, and every year for the lifetime of the debt.

But there is a striking feature of this divergence in Belgian and Irish benchmark yields. The thrust of fiscal policy for the two economies has been diametrically opposed. Belgium, in common with the overwhelming majority of leading economies in the Euro Area and elsewhere, has been attempting to reflate its economy with a combination of increases in government spending and temporary tax cuts, amounting to 3.6% of GDP. The judgement in Belgium is that the former are likely to be more productive.

But Ireland has engaged in a unique contractionary experiment, amounting to 6.4% of GDP once the December 2009 Budget is included. This as we have seen, was claimed to be to reassure bond markets. Yet the verdict seems clear. Irish yields have risen compared to Belgian yields. As far as the bond markets are concerned, Ireland has become a relatively riskier bet because of its austerity policy, not despite it.

In case there should be any doubt, a closer examination of the Belgian/Irish yield spread confirms this analysis. As mentioned previously, for nearly the whole of 2008 the yields were almost identical. However, they began to part company in October 2008, precisely at the time of the first Irish austerity budget, which was brought forward to ‘reassure financial markets’. From a yield spread of zero at the beginning of October 2008, it began to move against Irish taxpayers, to 0.25% at the end of that month, to 0.75% by the middle of December, to 1.30% currently.

Now, if you ask most bond investors and certainly most government bond analysts (as they are asked, daily, in all the media outlets) they will say the Irish government is doing the right thing, biting the bullet, upfront pain, and so on. All this proves is you don’t need to be well-versed in accurate economic theory to buy a bond, nor to be employed at a stockbroker which sells them. But it helps if you can see what’s actually happening.

Belgian reflation has led to falling forecasts for the deficit (because of stronger growth), while Irish fiscal contraction has led rising deficit forecasts (because of weaker growth). According to the European Commission, the difference between Ireland’s and Belgian’s budget deficits in 2008, when yields were the same, was 6% of GDP (Ireland 7.2%, Belgium 1.2%) and is now expected to be 9% in 2010, with Ireland’s rising and Belgium’s falling. At the same time Irish yields have been rising compared to Belgium’s.

The market verdict is clear. Reflation and stimulus is the route back to government solvency; fiscal contraction increases costs and can lead to disaster.

Thursday, 3 December 2009

Why Has a Huge Hole Appeared In UK Public Finances? - By Michael Burke

Ever since the Tory Party conference it has been clear that there there are plans for a ferocious attack on public sector pay and social welfare benefits after the next general election. The main media outlets greeted the pronouncements from David Cameron and George Osborne with almost universal acclaim, although opinion polls suggest the public is far less enthusiastic. Quite why the poor and the lowly paid are in line to pay for the disastrous decisions of the extremely rich is never explained. It seems that the culprit for the credit crunch in Britain is now identified, it was the unemployed, low-paid and pensioners, in league with fat cat nurses, doctors and teachers. As Nick Clegg summed it up, they are all in line for “savage cuts”.

However, less frenzied commentary would show that not only is reducing the benefits of the most vulnerable and cutting the pay of the lowest paid morally indefensible. It is also economically illiterate. A savage attack on public sector pay and the provisions of the welfare state fails to address the underlying causes of the enormous rise in government deficits and debt precisely because there is no crisis of government spending. At the same time, a sharp reduction in government spending in these areas will threaten any nascent recovery and could have the effect of inducing a ’double-dip’ or ’W-shaped’ recession. Finally, it is also possible to confidently state that the proposed cuts will not yield any significant narrowing of the UK government deficits.

Sudden Impact

It is important to gauge both government spending and revenue in relation to GDP. The UK’s level of spending and revenues would seem pitifully small, say, in relation to the size of the US economy but would be utterly gargantuan relative to Monaco‘s GDP. In addition, as the cost of running a hospital will tend to rise both with population growth (more treatments) and inflation (the cost of those treatments), it makes sense to speak of both sides of the public sector accounts in their relation to GDP, to gauge real change.

Using this measure, for the last financial year (which ended in at the beginning of April 2009), there was no obvious crisis of public sector finances. As shown in the UK Treasury databank, public sector current spending was 39.4% of GDP in Financial Year (FY) 2008/09, up from 37.8% of GDP in the prior FY. This compares to a high of 42.2% and a low of 34.4% over the last 25 years [1]. Therefore, in the two most recent FYs public sector current spending has been in line with medium-term parameters and averages.

The chart below shows the trend in net public sector debt as a proportion of GDP. This includes all levels of UK government debt, not just central government. The chart shows that debt levels were stable until the beginning of 2008, when they began to climb rapidly.

Chart 1

Government finances were in reasonable health until very recently. It is also clear that it is the recession and the financial crisis that have produced the huge deterioration in them. Chart 2 below pinpoints the effect of the recession on government finances. The debt level as a proportion of GDP is shown versus the quarterly percentage change in GDP. Government finances began to slump at precisely the time the economy began to contract, at the beginning of 2008.

Chart 2

It is clear that the deterioration in government finances is recession-related. This is to be expected. Widening public sector deficits have occurred in every recession and under any UK government since World War II. It is the great severity of this recession that has driven the deficit wider at an unprecedented pace in peacetime.

Collapse In Revenues

A closer examination of the most recent period reveals the pace of the deterioration in the public finances, as well as beginning to identify its sources. The table below shows public sector expenditure and government sector net debt for the previous two financial years as well UK Treasury’s projections for the current FY, which we are halfway through.

Table 1. UK Public Sector Expenditure & Debt (% GDP)

There is a sharp rise projected in public sector net debt, from 36.5% to 55.4%, a rise equivalent to 18.9% of GDP in just 2 years. The projections from UK Treasury are not unreasonable ones, based in large measure on extrapolation of trends already apparent. If anything, they may be overly optimistic as we discuss below.

The ‘public sector current spending’ measure of government finances excludes some important items, which are especially significant in the current debate, as we will demonstrate below. But here it is important to note that it does include the two key items under threat of savage attack, welfare spending and public sector pay.

While it is true that public sector expenditure will rise as a proportion of GDP in that time, it is clearly not the primary source of the deterioration. Public spending is rising but this contribution is just 5.3% of GDP, compared to the aggregate rise in the debt level of 18.9%. This rise in spending is largely an automatic and inevitable rise in government expenditures under the impact of recession (for reference, during the milder Thatcher recession of the early 1980s, public sector current expenditure rose by 4.2% of GDP between 1980 and 1983). Therefore, it cannot possibly be true that “Gordon Brown’s overspending” on these areas has led to the crisis in government finances, or that, heading into the crisis, there was already a ‘structural deficit’ that the Institute for Fiscal Studies has constructed, following the UK Treasury’s lead. [2]

The slump in government finances is not caused by welfare spending or public sector pay, so there must be another cause of the unfolding crisis.

The primary source of the deterioration in government finances is the collapse in government receipts. The driving force is lower taxation receipts, as shown in the table below. Rising expenditures have played a role in the widening of the deficit, but a minor one. Partly this collapse in revenues is related to the slump in economic activity and in part it is a function of government stimulus measures which can and will be reversed. These include corporate tax holidays and the temporary VAT reduction.

Table 2. Change In Central Government Accounts 1st half Financial Year
2009/10 Compared to 1st half 2008/09 (£billion)

The most recent data on public finances highlight this precipitate decline in taxation revenues, already worse than UK Treasury projections, down 10.3% in nominal terms from the same period a year ago. [3] Taxes on income and wealth have fallen by £14.4bn in the first half of the current FY. In addition, taxes on production have fallen by £7.8bn over the same period. Taken together, these last two items account for £22.2bn of the entire fall of £25.1bn in central government receipts. In turn, this fall in taxation revenues accounts for the overwhelming bulk, two-thirds of the widening of the budget deficit over the period, which amounts to £37.8bn.

Neither excessive public sector pay nor welfare spending are the causes of the crisis of government spending, because there is no crisis of government spending. The crisis arises from the slump in receipts, which only a revival of economic activity can correct.


SEB has previously noted that two key components of GDP have recently moved in opposite directions in the UK and in most other OECD economies. Government spending has risen in response to the recession, and partly offsets it. It as an automatic rise in the form of increased welfare spending, although it should be noted that in the UK this increase in ‘net social benefits’ in the first 6 months of this financial year is just £7.4bn, compared to a total increase in central government borrowing of £40.1bn over the same period. At the same time the key component of GDP that has driven total economic activity lower is the outright collapse in investment.

Given that investment is the key determinant of future prosperity these two components of GDP cannot move in diametrically opposite directions over a sustained period. Either government spending must fall, as financial resources eventually run dry, or an increased level of investment revives economic activity and the tax base, thereby allowing government spending to be maintained at current or higher levels.

A stark policy choice is therefore posed. The prescription can be followed that cuts pay and welfare spending which will leave the economy on a long-term trajectory of lower growth, worse services and increased poverty. Or the government can rescue the economy by increasing investment where private operators fail to do so. In fact the government has made some effort to do this, but on a scale that is not commensurate with the crisis. Public sector net investment was 2.6% of GDP in the last FY, and is due to rise to 3.5% this year before falling back to 2.5% next year. [5] This does not address the severity of the crisis and is paltry by historical standards. Before Thatcherism, for the entire period 1963-1979 the average level of public sector net investment was over 5.2% of GDP per annum. [6]

The Treasury’s own macroeconomic model points the way. [7] Its empirical studies of the UK economy over time suggest that an increase government spending is by far the most effective means to revive economic activity. Of course, the reputation of statistical economic models based on current orthodoxies is not as high as before the crisis. However, it is the Treasury’s best estimate of the effects changes in fiscal policy and will inform the working assumptions of all economic policymaking, both Government and Opposition.

The model assumes that the multiplier effect from a change in UK government spending are 1.1 times in the first year and 1.4 times in both the second and third years. This is a far higher multiple than other fiscal measures as highlighted in the table below. Furthermore, the Treasury suggests that the multiplier effects are likely to be higher in periods where private access to credit is constrained, which is one of the defining features of the current crisis.

Table 3 Fiscal Multipliers in the UK Treasury Model -
Source UK Treasury

The Elephant In the Room

Throughout this discussion we have tended to refer to public sector current spending (which includes all levels of government), as well as government net investment. However there is one exceptional item in the public finances not included in either of these totals. In recent UK Treasury publications it is usually referred to as the costs of ’financial sector interventions’, that is the costs to the taxpayer of the bailout of bank share and bondholders. They are mind-bogglingly large and they must of course be paid for by government borrowing.

The words of the UK Treasury can speak for themselves. “At end September, the contribution to public sector net debt (PSND) from financial market interventions amounted to £142bn“.[8]. Worse this does not yet include the interventions in RBS, Lloyds and HBoS, but only includes £111bn to bail out the bondholders of Northern Rock and Bradford & Bingley, £9bn to compensate bank depositors from failed institutions as well as other items. When, later this year, the Treasury gets to grips with the large and complex losses at Royal Bank of Scotland and Lloyds Bank, the additions to this debt mountain will increase enormously. Taking these bailouts into account brings net public sector debt to 59.0% of GDP compared to 48.9% without it. This level will rise too as the other bank bailouts are finally accounted for.

Chart 3

To date, despite much gleeful anticipation in Opposition circles and widespread sections of the media, there has been no failure to fund these deficits. At the beginning of October this year UK 10-year government bonds yielded 3.22%, the same as the US and compared to 3.13% for Germany. [9] The global decline in yields characteristic of recessions allows governments to borrow and invest more cheaply. As a result of lower interest rates the UK’s net debt interest payments are actually £5bn lower in the first 6 months of this FY compared to a year ago (shown in Table 2., above). [10]

However the scale of debt and its trajectory provide no guarantee that this will continue to be the case. Global bond investors have, in effect, staged buyers’ strikes before now. In any event, the ever-increasing level of debt will provide a heavy interest burden on taxpayers for years to come, diverting tax revenues away from productive uses.

Cuts Are Not Savings

The crisis in UK government finances is not caused by either excessive public pay or welfare payments. It is caused by two factors, the collapse in business activity and the consequent slump in taxation revenues, as well as the cost of the bank bailout.

Those arguing for an effort to balance the budget via welfare and pay cuts have learnt nothing from history. They are simply what JK Galbraith has dubbed ’the custodians of bad memories,’ speaking of those who prolonged the Great Depression by welfare cuts.[11]

In fact economic history is littered with examples of governments who made swingeing cuts to socially useful public spending and public sector pay, only to find that their deficits continued to rise. This occurs because the cuts themselves depress activity and taxation receipts, in the jargon, they trigger ‘reverse multiplier effects‘. In a different context, Michael Taft details the counter-productive nature of cuts currently being enacted in Ireland, and highlights the simple but devastating truth: Cuts Are Not Savings. Those fiscal multipliers cited above also work in reverse; cuts in government spending will not lead to commensurate savings as they depress economic activity and the fiscal receipts which are generated by it. SEB will return to this topic in a future posting.

Instead, what is required is twofold: first, the government could engineer an economic recovery by a sizeable increase in the pace of its own investment. Second, the government should make an elegant exit from the huge costs incurred through the operations to support failed financial institutions, letting their share and bondholders enjoy the fruits of the free markets they have extolled for so long.

* This piece was begun under the guidance of Redmond O’Neill, who died on October 21st. All errors are mine, but the inspiration was from him. He was the finest socialist I have known.


1. UK Treasury databank, Tab B2, http://www.hm-treasury.gov.uk/d/public_finances_databank.xls#'C1'!A1)

2. IFS, Britain’s Fiscal Squeeze: the Choices Ahead, Briefing Note BN87, http://www.ifs.org.uk/publications/4619

3. ONS, Public sector finances, September monthly bulletin, table, p.13, http://www.hm-treasury.gov.uk/Search.aspx?terms=public+sector+finances

4. 'The Outlook for Public Finances', p.3,

5. UK Treasury databank, B2

6. UK Treasury databank, B2

7. UK Treasury, Fiscal Multipliers in Macroeconomic Models, Statistical Annex p.102, http://hm-treasury.gov.uk/fiscal_stabilisation_and_emu.htm

8. ONS, public sector finances, September monthly bulletin, (p. 5, point 6), , http://www.hm-treasury.gov.uk/Search.aspx?terms=public+sector+finances

9. Financial Times, October 5 2009, table p.27, Bonds-Benchmark Government

10. ONS, September, p.3

11.’The Great Crash’, JK Galbraith, Penguin, p.201

Friday, 9 October 2009

Ireland - The nature of the crisis

by Michael Burke

Ireland is experiencing one of the most severe crises of any country in the OECD . From its peak level at the end of 2007, real GDP had fallen by 10.4% in the first quarter of this year, according to CSO data. Serious forecasters are projecting a calamitous decline in aggregate economic activity. The well-known Economic and Social Research Institute estimates that the total decline in output will be just under 12% to the end of 2010, a sharper decline than in any industrialised country since the Great Depression.

Socialist Economic Bulletin has previously noted that, like many other economies, the downturn in
Ireland has been concentrated in an extremely severe collapse in investment. But the slump in Irish investment almost makes declines elsewhere look mild by comparison. From its peak level at the beginning of 2007, Ireland's gross fixed capital formation has fallen by 42.6%. For comparison, this is nearly 3 times as great as the decline in investment in the UK and US, almost 4 times that of Germany. In this sense, the ESRI's prognosis is not a forecast at all. The current decline in investment in Ireland is already of a similar magnitude to that of the US during 1929-1931.

In monetary terms, the fall in investment from its peak level has amounted to 6.1bn Euros in real terms. This is greater than the peak to trough decline in real GDP, which has amounted to 5bn Euros. Certain other components of GDP have also been marked by sharp declines, notably a 13.7% cumulative fall in personal consumption, amounting to 3.3bn Euros. Yet government spending has actually risen during the slump, as the automatic effects of welfare state provisions kick in. In addition, net exports have also risen, as import demand has slumped. Therefore, the entirety of the decline in
Ireland's GDP to date is more than accounted for by the slump in gross fixed capital formation. Ireland's slump is an investment slump. Any policy aimed a economic revival must begin by addressing this factor.

There are three key sectors which have seen exceptionally sharp declines in investment activity. The CSO does not permit detailed reproduction of the data, arguing that it is not statistically robust enough to allow publication. However the general trends are clear.

First, investment in dwellings has slumped by approximately 3.5bn Euros since the peak in mid-2006. This sector has provided the earliest and most decisive contribution to the collapse in economic activity, and represents a staggering fall of a just under 68%.

Second, a sharp decline in investment in machinery and equipment followed suit in the second quarter of 2007. By the last quarter of 2008, this sector had declined by 2.86bn Euros, or by over 67%, matching the decline in investment in dwellings. There was a rebound of sorts in investment in machinery at the beginning of this year. This probably reflects a subsiding of the outright panic among purchasing managers. Even so, this still leaves investment in machinery and equipment 38.5% below its peak level.

Third, other building activity, not including dwellings but including many large scale private sector developments, turned sharply lower at the beginning of 2008 and continues to decline. The total decline in investment in this sector 1.9bn Euros, representing a fall of 47.4%.

Other investment sectors, other transport (mainly airplanes) or building improvements have either not declined at all, or have declined by relatively insignificant amounts.

The slump in the Irish construction sector is well-known and has been widely discussed. It is also a key component of the financial crisis which has engulfed the major Irish banks. But for now, it is important to register that the building slump, combined with the decline in investment in machinery and equipment, is the two-pronged fork aimed at the throat of the Irish economy.

This collapse in investment is a private sector response to the crisis. From the perspective of potential profitability it is entirely rational, if economically ruinous. It amounts to an investment strike.

From a different perspective, that of optimising the level of output for the whole economy, the rational response is to take control of the main levers of the key economic sectors to ensure a resumption of investment activity. Only the state can replace the investment that private operators now refuse to make. And, as investment is decisive to future prosperity in doing so, it can ensure the future well-being of the entire economy and its citizens.

Ireland's banking crisis

It is clear that the crisis in the Irish economy is driven by the slump in investment. In addition, the scale of this investment slump is comparable to that of the US Great Depression, as shown above.

Ireland's version of the international banking crisis is particularly severe. The IMF estimates that the losses accumulated by the Irish banking sector will be around 35bn Euros to the end of next year, equivalent to over 20% of GDP. Finance Minister Brian Lenihan has described the IMF's economic as 'realistic'. For its part, the IMF makes no projection beyond that time and further losses are possible.

Yet, even this could be a significant underestimate, given the scale of the debt.
Ireland's total bank lending to the private sector almost doubled in the years between 2002 and 2007. By the end of that year it stood at over 200% of Ireland's GDP. By comparison, even though there was also a surge in lending in other countries, Ireland's ratio of banks' private sector debt to GDP was the highest of 11 countries surveyed by the IMF. The debt/GDP ratio was also over twice that of the US, France and Germany at the end of 2007. It was significantly greater even than the level recorded in the UK, where the rapid rise in indebtedness is thought to be unprecedented [1].

Even if the IMF's estimate of bank losses proves to be accurate, the damage to the Irish economy is set to be enormous. Given that the total working-age population (that is, including all those employed, as well as those not in work or looking for work, including students) is fractionally over 3.5mn [2.], the calculation is simple. The IMF's estimate of bad debt is equivalent to Euros 10,000 for every worker in
Ireland. Of course, this burden will automatically rise if either the current scale of bad debts is worse than the IMF estimates, or if the economy performs even more poorly than forecast.

Structure of the debt

While there is barely a banking institution in
Ireland not caught up in the crisis, over half of the entire banking sector's lending to the private sector comes from just two institutions, Allied Irish Bank and Bank of Ireland.

If we take AIB as an example we can get an insight to the general crisis of the sector. The recently published half-year accounts give an indication of both the scale of the crisis and the pace at which it is deteriorating. At the end of June 2008 AIB's assessment was that it had Euro 10.2bn in problem loans (which they call criticised loans) in 3 different categories, indicating the likelihood of default. The worst of these is 'impaired loans'. According to banking terminology, impaired loans are where the borrower has not only stopped payments, but the bank feels obliged to write off all or part of the loan from its balance sheet. One year later, the total of these problem loans had risen to Euros 33.4bn, while impaired loans had risen to Euros 10.8bn [3].

So in just 12 months, AIB's problem debt level has tripled. The total of 'impaired' loans as of June this year now exceeds the assessment of all the identified potential problem loans of a year earlier, Euros 10.8bn, compared to Euros 10.2bn in June 2008. Crucially, AIB's deteriorating loan book of Euros 33.4bn is now almost equivalent to the IMF's assessment of the entire losses for the Irish banking sector of Euros 35bn.

This situation is mirrored elsewhere in the sector. Bank of Ireland's impaired loans have risen from 0.78% of total lending to just under 4% of total loans in the year ended in March 2009, from Euros1.1bn to 5.3bn [4]. It is therefore possible that the IMF's assessment may well be an underestimate.

The potential losses are highly concentrated both geographically and by sector. 75% of all AIB's problem loans are in the
Irish Republic, with a further 15% accounted for in the UK. At the same time, loans to the property and construction sector account for 72% of the increase in problem loans in the 12 months to the end of June 2009.

It is important to be clear about the nature of these loans. House prices have fallen sharply and repossessions have increased in
Ireland as homeowners have struggled to meet mortgage repayments. But this is not the source of the crisis. First, the bulk of lending is to commercial, not residential development. As AIB's accounts show, Euros 28.8bn has been lent to the commercial property sector, either as investments or as development finance, while considerably less, Euros 19.3bn has been lent to the residential sector. Second, the losses are overwhelmingly concentrated in the commercial, not the residential sector. Again, this is clear at the Bank of Ireland, where impaired residential mortgage lending accounts for just 10% of total impaired loans (Accounts, p.13), while the remaining 90% is accounted for by loans to commercial developers.

So, just as the Irish economic slump is a crisis of capital investment, the Irish banking crisis is due to a collapse of the property and construction sectors, mainly commercial property. Therefore, it should be possible simultaneously to alleviate the economic crisis and to resolve the worst effects of the crisis in the financial system. But to do this, bold and decisive steps would be required to take control of the property and construction sectors and direct them towards renewed activity.

The Global Crisis In

The economic crisis in
Ireland is very severe, even by current international standards. Socialist Economic Bulletin has previously shown how the collapse in Irish investment, the biggest contributor to the recession, is on a par with that of the slump in US investment in the Great Depression 1929-1931. It is also the case that the downturn in Ireland began earlier than elsewhere, at the beginning of 2007 compared to the beginning of 2008 for the EU as a whole.

Despite all this Irish exports have held up relatively well in an environment where international trade has experienced a slump. In the latest preliminary monthly data,
Ireland's exports totalled Euros 7.5bn, compared to Euros 7.2bn in June 2008, a rise of 4.2%. The equivalent data for imports shows a sharp decline, from Euros 4.9bn to Euros 3.7bn, a fall of 24.5%. As a consequence the trade surplus has widened over the same period from Euros 2.9bn to Euros 3.8bn, providing total GDP with a statistical cushion against the precipitate fall in investment.

This trend in export growth is well-established, with
Ireland's Central Statistical Office pointing out that exports in the first five months of this year are 2% higher than in the same period in 2008, while imports are 21% lower. It is therefore a misjudgement, at least, for the IMF to argue in its latest Country Report on Ireland that one of the key causes of the severity of the downturn in Ireland, as well its early arrival, was a growing lack of competitiveness. This is not borne out by the evidence of the trade data.

Instead, the forces affecting the global economy should be analysed for the specific way in which they have driven the Irish economy into a deep crisis. In this way, it is possible to highlight some of the structural factors affecting
Ireland's economy and suggest the policies needed to address them.

Patterns of Trade

Ireland has long been an exceptionally open economy, with foreign trade providing a very large contribution to overall economic activity. In the current crisis, the slump in GDP combined with the modest rise in exports means it has become even more so, with exports at the end of 2008 equivalent to 50% GDP. That this openness has not led to a slump in exports comparable to other economies may on the surface seem a surprise. Instead, it is Ireland's domestic economic woes which have led to a collapse in import demand.

As we have shown above, the slump in the Irish economy is led by the outright collapse in investment activity, primarily in the construction and property sectors, but also other fixed investment. In addition, we have shown that the collapse in this sector is also the driving force behind the crisis in the banking sector. It comes as no surprise then to see that the sharp downturn in imports is also based on plummeting demand for capital goods. The CSO has provided data on the decline in a range of imports in the 5 months to May, compared to a year ago. The biggest percentage declines are ranked in Table 1. below.

Table 1. Decline in Imports Jan-May 2009 vs Jan-May 2008 (% change)

Road vehicles


Iron and steel


Specialised machinary


Petroleum products


Industrial machinary


Electrical machinary


Source: CSO monthly trade data

Therefore, it can be seen that the decline in imports is also primarily a fall in the demand for investment or capital goods, and is directly related to the decline in investment.

In terms of exports, which have held up well in the face of a global downturn, the sectoral breakdown and their trend growth is revealing. Just 3 categories of exports, chemicals, machinery and transport equipment, and manufactured articles account for 84.5% of total exports and within those sectors, organic chemicals and medical and pharmaceutical goods account for nearly half of all exports [5]. Of these, all but machinery and equipment have continued to rise through the global economic crisis. This suggests a high and successful degree of specialisation in the traded goods sector, which, for the time being at least, has alleviated some of the worst affects on Ireland from the slump in global trade.

The geographical distribution of Irish exports is also unusual, and the trends highly varied. Table 2. below shows the change in exports to important destinations in the first 5 months of 2009 compared to the same period a year ago. We have included only the biggest changes.

Table 2.
Ireland's Export Growth By Destination Jan-May 2008 vs. Jan-May 2009 (% change)















N. Ireland


Source: CSO monthly trade data

This very high variability in export performance belies the idea of uncompetitiveness (or even currency fluctuations, as there are sharp rises and falls in
Ireland's exports to countries both within and outside of the Eurozone). Nor can the variability of export growth rates be explained by different levels of demand in the destination economies, with the US and Belgium exhibiting strong demand for Irish goods even while they have been experiencing their own recessions. Instead, a combination of factors have probably played a role. But it seems clear that one of those factors is a high degree of specialisation, which has previously brought Ireland strong export performance and is now providing some immunity from the worst of the slump in world trade.

Ireland also has unusual trade patterns, especially compared to other EU and Eurozone member economies. Only 41% of Ireland's exports are destined for other Eurozone economies, with the bulk of exports destined for economies outside the Eurozone, compared to over 50% for the Eurozone as a whole [6]. The biggest single export destination is the US, accounting for 22.6% of the total, while Great Britain now accounts for just 14.7% of total exports. Even within the Eurozone, Ireland is highly unusual in that Belgium is by far its biggest export destination (17.1% of total exports), outstripping Germany and France combined, largely as a result of the trade in chemical products.

Similarly, imports from the Eurozone account for only 23.3% of
Ireland's total imports, and only a little more than from the US. And, in a potential reversal of historical trends, Ireland may soon no longer export more to Great Britain than it imports (the surplus was just Euros 55mn in the first 5 months of this year). Table 3. shows the regional distribution of Ireland's exports and imports in the first 5 months of 2009.

Table 3.
Ireland's Distribution of Imports and Exports By Region, Jan-May 2009 (Euros, bn)






-of which Eurozone












Source: CSO monthly trade data

Ireland was and remains an exceptionally open economy, not wholly dependent either on the Eurozone economies nor on demand in Great Britain. It is also an economy whose specialisation in key areas has not only led to an enormous export sector, but has also allowed it to weather the worst of the global downturn in trade. There is no doubt an argument in favour of greater diversification into other sectors. But Ireland's export performance in traded goods is a success story.

Capital Outflows

Ireland's exceptionally strong export performance is only one component of the current account balance, which is the primary measure of an economy's business transactions with the rest of the world. The other main component of the current account is investment income, mainly dividend payments on equities owned by foreigners or debt interest owed to foreigners. In the 1990s, the current account was broadly in balance, as the surplus on the trade balance was more or less matched by the deficit on the investment income account. This is shown in the chart below.

However the chart also shows that the total current account balance has gradually slipped into deficit, with a deficit of Euros 2.5bn recorded in the first quarter of 2009, or 6% of GDP. This is represents an improvement from the deficit of Euros 4.2bn at the beginning of 2008, which was 9.1% of GDP. But a trend widening in the current account deficit became apparent in 2004, and the latest narrowing of the gap is wholly related to the collapse in import demand. In the national accounts, imports declined by Euros 2.7bn in the first quarter of this year compared to a year ago, more than the entire improvement of Euros 1.7bn in the current account deficit. Therefore any rebound in Irish demand for imports is likely to produce a renewed and unsustainable widening in the current account deficit.

We know that export performance has been strong and the trade surplus has been rising as a proportion of GDP. Therefore, the deficit on the investment income account must have been rising at an even faster rate to produce such a calamitous widening in the current account deficit. This is indeed the case and is shown in the chart below.

Ireland's deficit on its investment income account was wholly a function of payments to foreign owners of Irish equities. So, in the first quarter of 1998, a trade surplus of Euros 3.8bn was almost matched by a deficit of just over Euros 3bn on the equity investment income account alone. Taking all the other sources of income together produced a net current account deficit of just Euros 173mn, that is, broadly in balance.

However the situation had been transformed for the worse. The current account data for the first quarter shows that a deficit of Euros 2.5bn has arisen despite a trade surplus of Euros 8bn. The deficit on the equity investment income account has risen significantly, to Euros 7.4bn. But another slug of the deficit was created, Euros 3.1bn, by the deficit on what is known as 'portfolio investment income', that is, purely speculative transactions.

New Gombeen Men

We have highlighted above the IMF Country Report on
Ireland which showed Irish bank lending to the private sector at 200% of GDP, the highest proportion of 11 economies surveyed. It is this activity, the failed speculative activities of Irish-based financial institutions and their clients, which has created the gaping hole in the current account balance.

When the new gombeen men* began to chart this course for
Ireland's economy, not only were they flying in the face of economic logic, but also of history. Ireland maintains a structural deficit on its investment income account. This is a function of Ireland's economic history.

Unlike the G7 countries,
Ireland has no net stock of foreign assets it has acquired over a great number of years. Instead, there is a tendency for net economic assets in Ireland to be owned by overseas capital. This ownership entails payments, either through debt interest or via equity dividend payments. It is this permanent net outflow of capital which is one of the chief characteristics which is common to countries without an imperial past. This is irrespective of the relative wealth of an economy, say, measured by per capita GDP (and Ireland's was well above the OECD average). Instead, it is related to Ireland's historically-determined relationship to the global economy and to global capitalism.

The bloating of the Irish banking sector has necessarily been accompanied by a huge outflow of capital overseas.
Ireland, unlike countries such as the US, Japan, Germany Britain and others, has no historically accumulated stock of assets that it owns overseas. A rapid rise in speculative lending had to be financed by foreign borrowing. So, a build-up of foreign indebtedness accompanied the surge in the size of the banking sector. At the end of the first quarter of 2009, Ireland's gross external debt amounted to Euros 1,693bn [7], over 10 times the size of GDP. Of this total over 79%, Euros 1,343bn were the liabilities of the monetary financial institutions and other private sectors.

Now, it is quite true that liabilities alone do not give a true picture of any balance sheet, including that of a whole economy and its balance with the rest of the world. And the latest available data, for end-2007 shows that, including assets and liabilities, the net position is that Ireland's external debt is a less eye-watering Euros 31.4bn [8], which was at that time 16.5% of GDP. (Data showing the position at the end of 2008 will be available later this year). Crucially, though, the assets for this net assessment are valued at banks' and other financial institutions own estimate of their worth, which is now well-known to have been wildly over-optimistic. As a result, the foreign indebtedness of the Irish economy seems set to rise dramatically under the impact of the collapse in the value of banks' overseas assets. The only mitigating factor will be the simultaneous collapse in the value of Irish assets owned by foreigners. The Irish Independent, in a series of reports, has shown that of the assets that may be bought by the proposed National Asset Management Agency (NAMA), Euros 32.3bn are loans for property developments in the UK, US, Russia, France and Germany [9].

The crisis of the economy and of the banking sector, as well as a potentially looming crisis in the balance of payments all have the same primary source. Bank lending to private sector developers and other speculators has brought about a ruinous situation for the Irish economy, its banks and the level of its foreign debt. These issues need to be confronted head-on, and any policy prescriptions which do not are sure to end in failure.

Irish Government's Response to the Crisis

The coalition government of the
Irish Republic, comprised of Fianna Fail and the Green Party, has set out its policy response to the economic and banking crisis. Perhaps it is the catastrophic scope of recent of events which has led policy in a Biblical direction. Whatever the cause, the government's stance is summarised in Matthew 4:25, "For whoever has, to him more shall be given; and whoever does not have, even what he has shall be taken away from him."

The thrust of policy is to bail out bank shareholders and large-scale property developers by using taxpayer funds. This represents a transfer of wealth from the poor to the rich, on a very large scale. The two planks of the policy have been an austerity Budget and the proposed establishment of the National Asset Management Agency (NAMA). This Agency will purchase banks' bad debts owed by property developers and speculators, paid for by issuing bonds, ultimately covered by Irish taxpayers.

The two aspects of the government's stance are clearly linked. Their main aim is to rescue the greatest possible amount of private capital from the economic and financial wreckage, with Irish taxpayers picking up the bill. At the same time, the enormous levels of debt associated with NAMA (at least Euros 54bn in bond issues have been suggested) are offered as justification for large-scale cuts in government spending, including on social welfare and other provisions.

Austerity Budget

The Emergency Budget unveiled in April focused on reducing social spending in a series of measures that included a raid on state employees' pensions, pay cuts, job losses and reductions in welfare spending. At the same time, taxes were also increased. As outlined above, the automatic increase in government spending was one of the few bright spots on the economic horizon.

Now, to replace that with an austerity budget in the depth of recession is, at least, a high risk strategy. According to Finance Minister Lenihan, the combined total of spending cuts in the Emergency Budget and previous public sector pay cuts amounts to Euros 3.3bn. In addition, tax increases announced in April amount to an estimated Euros 1.8bn [10]. This represents a fiscal tightening of 3% of GDP. Given that the economy is already contracting at double digit rates, this represents a gross overreaction, effectively ensuring that the 'cure' is as bad as the disease. Worse, the tax increases are not progressive ones, aimed at higher income groups or the wealthy, but aimed at the poorest in society (along with a halving of the jobseekers' allowance, which is explicitly aimed at young workers).

While these policies could easily be criticised in terms of morality or justice, they also make no economic sense. If it is accepted that taxes have to rise at some point to stabilise government finances, it is imperative now that these do not fall on the poor, as they have a far greater propensity to consume their income, which is precisely what is needed during recession. By contrast, sheltering the rich from tax rises merely increases their ability to save, or to purchase luxury goods.


The leadership of the FF/Green coalition government has argued that the austerity budget is a necessary measure to stabilise government finances. But the proposed NAMA legislation threatens to overwhelm government finances entirely.

The outline of the plan is reasonably straightforward. At the time of writing the proposed legislation is being debated in the Dail. The government intention is that NAMA will be established in order to purchase up to Euros 77bn in bad debts from the banks, relieving them of this burden on their balance sheets. For reference, Euros this is over 42% of
Ireland's 2008 GDP, and, given the contraction in the economy, will be a greater proportion of 2009 GDP. The government will issue at least 54bn in bonds to pay the banks for these bad debts, that is, the debt will owed by Irish taxpayers. The government claims that this discount or 'haircut' represents a potential bargain for taxpayers, while admitting that it is overpaying for the assets by at least Euros 7bn. Of this Euros 54bn total, the government admits that Euros 9bn will be eaten up by loans where the borrowers have already defaulted. The plan is highly controversial because many commentators expect the eventual losses to be much greater, leaving the bill with taxpayers. It has also been suggested that the resources of the National Pension Reserve Fund be used in part to fun NAMA.

Yet, as we have previously shown, it would be possible to restore a function banking system and to alleviate the worst effects of the downturn by taking control of the leading elements of the property and construction industries. In this way it would be wholly unnecessary to compensate either bankrupt property developers or bank shareholders in order to revive economic activity and restore the provision of credit to viable businesses. As even the big home builders have pointed out, NAMA does nothing even to ensure that builders have any working capital over the next 6 to 9 months. NAMA is a gargantuan error, completely missing the main transmission processes which could restore economic and financial stability.

Who Benefits?

George Bernard Shaw once said, "a government that robs Peter to pay Paul can always depend on the support of Paul". It is instructive to examine the limited constituency which actually supports the propose legislation. Bank shareholders benefited from a rise of over 20% in their share prices on the announcement of the details of the NAMA proposals.

The Green Party, the junior partner in the coalition government along with Fianna Fail seems poised to vote for the NAMA legislation, with Green Party Cabinet Ministers arguing that the Agency will not overpay for the stricken assets and that the losses will be incurred by the banks and the speculators. Green Party TDs have come under intense pressure from Party members to vote against the legislation [11]. In addition, 2 FF TDs resigned the party whip on separate matters in early August, potentially leaving government and opposition parties tied with 82 votes each.

Outside of government circles, there is only limited support for its polices. The Irish Business and Employers Confederation has given a guarded welcome to the NAMA proposals [12], while a Director of the Irish Home Builders' Association has expressed concerns about the lack of working capital as bank loans are transferred to NAMA, while also criticising the powers of the Agency to seize profitable developments [13].

The head of the Irish Association of Investment Managers has argued that the government's key audience is not taxpayers, but international financial markets, and urged the government to pay a full price for the bad loans [14]!

The largest opposition party Fine Gael has said it will vote against the establishment of NAMA in the Dail, and has proposed a alternative 'Good Bank' to provide credit, arguing that the troubled banks should return to their own share and bondholders in order to restore their capital levels [15]. FG's Good Bank proposal is premised on the privatisation of currently profitable government enterprises in order to fund it. This would only provide a temporary 'fix', while increasing the long-term outflow of capital overseas, which we have highlighted above.

That the government's NAMA proposal represents a huge and unproductive shift of wealth from taxpayers to lenders and property speculators has drawn fire from a wide array of forces. A group of 46 academic economists and business lecturers across the political spectrum signed an article in the Irish Times of August 26 arguing that the government is poised to overpay the banks and the speculators, representing a huge subsidy from taxpayers [16]. The academics argue that, in paying up to Euros 60bn for impaired loans, NAMA will have overpaid by around Euros 30bn compared to real market prices. This estimate is reinforced by analysis form Davy stockbrokers suggesting that the fall in development land and commercial property prices will be approximately 70%. Instead, the academics' alternative is threefold:

1. The equity value of the banks should be recognised for what is in reality, that is, zero.

2. As this alone would not be enough to recapitalise the banks sufficiently, banks' bondholders must also be forced to accept some losses (and the government's negotiating hand is a strong one, as most of the debt is not supported by government guarantees after 2010)

3. Finally, new stringent international capital requirements mean that banks need an increase in capital, which can only come from a nationalisation of the banks, if only on a temporary basis.

The Irish Labour Party is a key potential ally for those leading the opposition to the government response. Party leader Eamon Gilmore has argued against the implementation of the NAMA scheme and for an alternative proposal based on temporary nationalisation of the banks [17]. As long ago as November 2008, the Irish Congress of Trades Unions published Nationalise the Banks and has since forcefully argued that, through NAMA, "The Government has socialised bank risks and allowed for the privatisation of gains" [18].

The ICTU’s criticisms are the same terms in which Sinn Fein has accurately described the NAMA proposal. It has also called for a referendum on the NAMA legislation, in order to build popular opposition to the scheme [19].

The crisis in the economy, the banking sector, and, potentially, the balance of payments, all have the same source. Investment has collapsed as a result of the difficulties of private property speculators and others, creating a huge hole on the banks’ balance sheets. At the same time, the situation is so grave that only a complete reorientation of policy can halt the crisis. The government and its allies have chosen to bail out bank shareholders and their property speculator debtors. Neither will provide the investment that is required to revive economic activity or shore up banks’ balance sheets. Instead, taxpayers will be burdened with astronomical debts to prevent outright bankruptcy of the banks and the big developers.

An alternative is readily apparent, which could restore rapidly economic activity. But to do so would require taking control of the main levers of the economy. Only the state can do that. At a minimum, the nationalisation of the leading elements of the banking, property and construction sectors, as well as a repudiation of some or all of their accumulated debts, can lay the basis for an economic recovery in

* gom·been· (man) (gäm bēn')
a shopkeeper who engages in usury on the side

an avaricious and opportunistic businessman, entrepreneur, etc., Webster's Dictionary


1. IMF Country Report 09/195. June 2009. p.4

2. CSO, http://www.cso.ie/statistics/empandunemplo.htm

3. AIB interim results, June 2009, http://www.aibgroup.com.servelet/ContentServer?pagename=AIB_Investor_Relations/AIB_Report/aib_d_reports&cid=1201859759654&channel=IRFP , p.11

4.Bank of Ireland Annual Report and Accounts, 2009, http://hemscottir.com/ir/bir/ar_2009/ar.jsp , p.13

5. CSO monthly trade data, 26 August 2009

6. Eurostat monthly trade data,
17 August 2009

7. CSO quarterly external debt report,
30 June 2009

8. CSO, Annual International Investment Position report, 2008

9. Irish Independent,
19 August 2009, 25 August 2009

10. Statement of the Minister of Finance,
April 7 2009, http://budget.gov.ie/2009SupApril09/en/FinancialStatement.html

11. Irish Independent,
August 26, 2009, http://www.independent.ie/national-news/greens-urge-party-tds-toreject-nama-1869138.html

12. Sunday Business Post, June 28, 2009, http://www.ibec.ie/IBEC/Press/PressPublicationsdoclib3.nsf/vPages/Newsroom~time-for-honest-appraisal-of-economy---danny-mccoy-28-06-2009?OpenDocument

13. http://www.cif.ie/asp.selection.asp?s=1637

14. Bloomberg news,
August 12, 2009. http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a754bScIRqvg

15. Speech by Enda Kelly, http://www.finegael.org/news/a/903/article/

16. Irish Times,
26 August, 2009, http://www.irishtimes/newspaper/opinion/2009/0826/1224253267074.html

17. Press release, http://www.labour.ie/press/listing/125292933184136.html

18. ICTU, Report of the Executive Council, biennial delegate conference,
July 7-10, 2009, p.14

19. http://www.sinnfein.ie/contents/17215