In yesterday's post, I looked at the impact of shaving off €15bn the exchequer's finances through reductions in government pay and pensions bills, and in service provision, as well as capital expenditure.
I made no mention of increasing other taxes like VAT, excise, income tax, or introducing property taxes, water taxes, carbon taxes to help reduce the gap between state income and state expenditure.
I did so because these considerations essentially cloud the argument.
We are reduced to hair-splitting over which unpleasant choice of taxation instrument one prefers. So it is best to look at the simplest case of taking it all off the expenditure side, as this will allow us to see a cleaner picture, and also a worst case, wheels-off-the-bus type scenario.
I should also say this isn't an anti-Morgan Kelly series of posts.
I respect and admire the man's work. It's an attempt to get a rough sense of what might happen if we follow his advice. There's no value judgment being applied one way or the other.
Stephen what is so bad about prices falling? Why can't we allow the market decide on what the prices of houses say for example should be, rather than allow the government to interfere and try and put a floor on prices?
Mossy when sustained price falls happen in highly indebted economies they kick off debt-deflations. I have a go at explaining why this matters here: http://vimeo.com/7706128
Thanks for the Vimeo link. I'll have a look at it some time.
Stephen,
Perhaps what Morgan Kelly is suggesting, is that in order to reset the whole system, and do something which Ireland has never, ever done at all, since the early days of the NTMA creation as an entity outside of the department of finance - is that we begin to borrow as a sovereign entity for the first time, without any complications and vicarious backdoor processes to fund the same sovereign entity, of Ireland. Clearly, what was happening during the Ahern years of the 2000s, was there was a turf war going on between the Irish department of finance and the NTMA body. Where the department of finance re-asserted their primacy over the NTMA, and began to fund the Irish government via their own in-direct way, through their relationship with the Irish bank institutions. I mean, lets face it. For all of the Ahern/McCreevy years, the NTMA's duty was downgraded to that of a cash hoarding entity. The really bacon was brought home via the department of finance, through the transactional property taxes, and directly from European private credit markets.
Daniel Gros writes,
"The Republic of Ireland can no longer raise funds on the capital market and has had to accept a bail-out financed jointly by the IMF and the European Financial Stability Facility or EFSF (the EU’s rescue fund)."
I have a genuine question for the Irish Economic community, which I hope that people may not find too silly. I wish to know, exactly when in the last decade or more, did Ireland as a sovereign nation fund itself on the capital markets? I have listened to this discussion in Ireland for a year and more, about how Ireland can regain entry back into the sovereign debt markets. I would ask the question to the Irish Economic community, apart from an experiment conducted by the National Treasury Management Agency, during the 1990s, which subsequently continued under the Ahern years of the 2000s as a cash hoarding exercise primarily, when exactly was Ireland engaged with sovereign debt markets to fund itself? Everyone assumes that Ireland has this pool of very loyal sovereign debt holders, which have stood by Ireland for so long. But I would argue that Maarten van Eden’s article in the Irish Times today, can provide clues, that it may be a myth.
The problem I have, is the presentation of the narrative, that is ONLY RECENTLY that the Irish government used the leveraging of Irish banks to fund itself. When we clearly know it to be the case, that the Irish government has always used the Irish banks to fund itself, in express preference to obtaining credit on it’s own account. In fact, that has been the distortion in Ireland for the last decade or so. That Ireland as a sovereign nation has not been 100% in the market to fund its own debts for quite some time. But rather, the Irish government has tried to mask itself, behind the Irish banking system, and behind the property asset price explosion. Quite frankly, I am tired of this narrative, that it is only recently that Irish citizens have begun to pay for the cost of the same disfunctionality. When it has clearly been the case, that mortgage owners in Ireland have been leveraging themselves up on behalf of the government and its spending programs for over a decade now. The international markets are honestly tired of this lack of differentiation also. They have no idea what they are funding. They had no idea before the 2008 crash, and they have much less idea today. We talk about the vanilla Irish sovereign debt holders, as if that was the only source of sovereign debt funding in Ireland before 2008. But that was clearly not the case, as the Irish government was employing the Irish banks as its off-balance sheet creation. The Irish banks in turn were employing the property developers as its off-balance sheet creation(s). The Irish citizens in turn, through their own personal borrowings were expected to keep the whole ridiculous hierarchy in motion, for much longer than the last couple of years, and that is the real fallacy about all of the discussion in my view. Now we are surprised that all of the above items are sandwiched together into one entity, and we take the view, that this is incorrect. But perhaps, it could also be argued, that sandwich-ing the whole lot together, merely expresses in plain terms, what was the reality all along, and puts an end to the constant posturing and use of Chinese walls, between stuff, that existed in Ireland for a decade or longer.
Good post