Economic Policy Overview – April 2014

We have a clear plan to guide the Economy to better times.
We exited the EU/IMF bailout as planned, without needing a new precautionary credit line.
Now, our medium term economic plan has two connected targets:1. To reduce the Government deficit to under 3% of GDP by 2015 and to eliminate it by 2018

2. To replace all 330,000 jobs lost during the recession with new jobs by 2020.
These aims are based on 3 pillars: continued responsible management of the public finances, banking reform and creating more jobs.

 

The Economy has Stabilised
The economy has returned to growth, with 3.4% GNP growth in 2013 & 1.8% in 2012.  This compares well to the euro area where GDP fell by 0.4% in 2013.
Real GDP growth was 2.2% in 2011 but flat over 2012-2013 due to the pharma patent cliff.  GDP measures the output of a region; GNP measures the income of residents in a region.

 

Employment is Increasing
Employment increased by 61,000 jobs in 2013.  Ireland has the highest annual employment growth in both the EU and the OECD.
Private sector jobs are increasing by over 1,200 per week.  This contrasts with 1,600 private sector jobs lost per week in the 3 years before this government took office.
The unemployment rate is down to 11.8%, the lowest in 5 years, from a peak of 15.1% in Feb 2012.  The number on the Live Register is below 400,000 for the first time since 2009.
IDA has had three record years, with over 20,000 net new jobs in supported companies since the Government was formed.  New jobs were created in companies like PayPal, Sky & Apple.
Enterprise Ireland reports over 6,000 net new jobs since the Government was formed.

 

International Confidence has Returned
In March 2014, the NTMA raised €1bn in their first bond auction since September 2010 at a historically low rate of 2.967% for our 10 year benchmark bond.  The compares to 15% yields in July 2011, showing the renewed strength of Ireland’s international reputation.
The Irish State is now rated at investment grade by all three rating agencies.
In January 2014 the NTMA sold €3.75bn of bonds maturing in March 2024, showing that Ireland has fully exited the EU–IMF bailout.

 

Budget / Fiscal Policy
Our 2013 exchequer deficit of €11.5bn is an improvement of €3.4bn on the 2012 deficit of €14.9bn.  We are confident that the 7.5% of GDP target for general govt. deficit will be met.
Exchequer returns are on target for Q1 of 2014, with income tax & VAT receipts up 3.5% & 6.4% respectively reflecting the improvements in the domestic economy.
Budget 2014 was a fair budget:

  1. Reduced the tax & spending adjustment to €2.5bn; a €600m lower consolidation.
  2. No increases in income tax, USC, VAT rates, or excise on petrol or home heating fuel
  3. Maintained core social welfare rates of jobseekers benefit, carers’ allowance, and state pension — as well as class sizes and child benefit.
  4. Fair tax increases: a bank levy; no tax relief for super-pensions; DIRT increase.

 

Public Sector Reform Policy
Public service numbers have been reduced by more than 30,000 (almost 10%) from a peak of 320,000 in 2008, to less than 290,000 in 2014.
The Exchequer pay bill has decreased by €3bn from €17.5bn in 2009 to €14.1bn in 2013 (net of Pensions Related Deduction). Haddington Road will save a further €1 billion by 2016.

 

Policy on Debt & Europe
The Government achieved greater than expected savings of circa €9bn from reduced interest rates on funding from the troika, in Summer 2011.
The Eurogroup agreed a framework for the ESM to recapitalise European banks (June 2013) including “potential retroactive application … on a case-by-case basis and by mutual agreement.” The joint Communiqué from the Taoiseach and Chancellor Merkel (21st Oct 2012) states that “Ireland is a special case” with “unique circumstances.”
In June 2013, the extension to the maturities of our EFSF & EFSM loans was formally agreed. The changes will reduce our market refinancing requirement by €20bn from 2015-2022.

 

Banking Policy
The cost of bank recapitalizations was limited from an initial €35bn (troika programme) to €16.5bn, through junior bondholder burden-sharing and securing private capital investment.
The State has generated €1.8bn by selling preference shares in Bank of Ireland (Dec 2013).
Anglo Irish Bank and Irish Nationwide Building Society (IBRC) have been closed down.
The promissory notes were exchanged for long-term government bonds, reducing Ireland’s borrowing need by €20 billion over the next 10 years.
NAMA has met its key target of redeeming €7.5 billion of Senior Bonds by the end of 2013.
Irish banks can access private markets: both Bank of Ireland and AIB raised €500m in 3 Year senior unsecured funding (in May and November 2013 respectively).
Access to credit for SMEs has increased: €850m of National Pension Reserve Fund for SMEs; €700m seed & venture capital; €450m credit guarantee; and €225m in development capital.

 

Mortgage Arrears Policy
The number of primary home mortgage accounts in arrears decreased by 3% in Q4 2013.
54,000 mortgages were permanently restructured by Jan 2014; a 19% increase on Q3 2013.
  1. Resolution strategies: the Central Bank has published specific, time-bound targets for the banks to propose sustainable mortgage solutions for distressed borrowers.

The CBI will consider regulatory action (e.g. additional capital requirements) if necessary
  1. The new Personal Insolvency Bill has been passed. The Insolvency Service of Ireland has been established and has approved its first Personal Insolvency Arrangements (PIAs).  Automatic discharge from bankruptcy has been reduced to 3 years from 12 years.
  2. Advice: a ‘Mortgage Arrears Information & Advisory Service’ was launched in 2012, & a website ‘keepingyourhome.ie’ was launched in June 2012 with over 177,000 hits to date.
  3. The mortgage to rent scheme has over 1,000 cases being progressed.

 

Jobs Policy
NewERA provides €6.4 billion for a stimulus in the economy, using the National Pensions Reserve Fund’s remaining ‘discretionary’ funds (the Fund excluding the stakes in the banks).
Budget 2014 contained a €500m jobs package of 25 measures: retention of 9% VAT rate; reduction of air travel tax to 0%; home renovation incentive; CGT relief for reinvestment of previous asset disposals; ‘start your own business’ exemption from income tax.
The 2014 ‘Action Plan for Jobs’ contains 385 job creation measures, building on the more than 500 measures already implemented through APJ 2012 and 2013.  These include 3 new high-impact ‘Disruptive Reforms’ in entrepreneurship, FDI and manufacturing.
Improved our competitiveness — “best place in the world to do business”, Forbes Magazine
Under the JobsPlus scheme, launched in July 2013, the State will pay €1 of every €4 of the employer’s costs, when they recruit someone who is long-term unemployed (over 12 mths).