Economic Policy Overview – November 2013

The Economy has Stabilised
The economy has returned to growth, with 0.4% GDP growth in Q2 2013.
Ireland was one of a minority of Eurozone countries to achieve two successive years of economic growth in 2011 and 2012.  Real GDP increased by 2.2% in 2011 & 0.2% in 2012.
In 2012 real GDP increased by 0.2%, while GNP increased by 1.8%.  This compares to an average GDP growth rate of -0.6% in the euro area for 2012.

 

Employment is Increasing
Employment increased by 34,000 jobs in the last 12 months.  Q2 2013 was the fourth quarter in a row that employment has increased, on a seasonally adjusted basis.
Private sector jobs are increasing by 3,000 per month since the launch of ‘Action Plan for Jobs’ (Feb 2012).  This contrasts with 7,000 private sector jobs lost per month in 2008-2010.
The number on the Live Register has dropped below 400,000 for the first time since 2009.And the unemployment rate has decreased to 13.2% from a peak of 15.1% in Feb 2012.
IDA has had two record years, with a net increase of 12,500 in employment in supported companies in 2011 and 2012.  New jobs were created in companies like PayPal, Sky & Apple.
Enterprise Ireland reports a net increase of 3,800 jobs in Irish exporting companies in 2012.

 

International Confidence has Returned
The yield on Ireland’s 2020 bond is now under 4%, down from over 15% in July 2011.
In March the NTMA raised €5bn with a new benchmark Treasury Bond maturing in March 2023 at a yield of 4.15%. This was the first new 10-year issuance since before the bailout.
In the second half of 2012, the NTMA raised over €7bn in the markets with a further €2.5bn raised through a ‘syndicated tap’ on 8th January 2013 at a low yield of 3.3%.

 

Budget / Fiscal Policy
Ireland’s general government deficit (adjusting for banking measures) decreased by €2bn in 2012 to €12.5bn. At 8.2% of GDP it is well within the programme target of 8.6%.  Exchequer returns for the first 10 months of 2013 are in line with budgetary targets.
Research shows that expenditure-led adjustment, like the government’s plan has a less damaging effect on economic growth & employment (e.g. Irish Fiscal Advisory Council).
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 are now nearly 30,000 or 9% below the peak of 320,000 in 2008, with 290,000 employed at the end of 2012. This is comparable to 2005 staffing levels.  By 2015 public service numbers will be at 282,500, an overall reduction of 37,000 or 12%.
The Exchequer pay bill has decreased by €3bn from €17.5bn in 2009 to €14.1bn in 2013 (net of Pensions Related Deduction). This is expected to reduce to €13.7bn (net of PRD) by 2015.

 

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.
Renegotiations with the troika allow reinvestment of half of the proceeds from the sale of State assets for job creation.  A €2¼ bn infrastructure stimulus was announced in July 2012.
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.
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.
The Bank Guarantee Scheme has been brought to an end.
Bank of Ireland raised €1 billion of unguaranteed secured debt, the first Irish bank to borrow in the public markets in more than two years.  And AIB then raised €500m (both Nov 2012).
The two pillar banks exceeded their €3.5bn SME lending targets in 2012.
By end 2013, there will be new schemes worth €2.5bn in new lending to business: including €850m of National Pension Reserve Fund for the SME sector; €700m seed & venture capital scheme; €450m credit guarantee scheme; and a €225m development capital scheme.

 

Policy on Mortgages
79,000 mortgage accounts have already been restructured by Q2 2013 (Central Bank).
  1. Resolution strategies: the Central Bank has published specific, time-bound targets for the banks to propose sustainable mortgage solutions for distressed borrowers. Targets are 20% of distressed borrowers by end-June 2013, 30% by Sept 2013, 50% by end 2013.

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 began taking applications from the public in Sept. 2013.
  2. Advice: a ‘Mortgage Arrears Information & Advisory Service’ was launched in 2012, & a website ‘keepingyourhome.ie’ was launched in June 2012 with over 63,000 hits to date.
  3. The mortgage to rent scheme has been available since June 2012.

 

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 2013 ‘Action Plan for Jobs’ contains 333 job creation measures.  These include 7 high-impact ‘Disruptive Reforms’ aimed at areas such as ICT skills and retail.
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).