Economic Policy Overview – September 2013

 

The Economy has Stabilised
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 1.4% 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 now increasing by 3,000 per month since the launch of ‘Action Plan for Jobs’ (Feb 2012).
We inherited a jobs market in free fall with 250,000 private sector jobs lost in 2008 – 2010.
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 approx. 4%, down from 15.1% 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 7.6% of GDP it is well within the programme target of 8.6%.  Exchequer returns for the first 8 months of 2013 are in line with budgetary targets.
Most of the heavy lifting of budget consolidation has already been done. €28.5bn worth of measures have now been implemented from 2008 to 2013, with €5.1bn to come by 2015.
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 2013 was a fair budget:

  1. Maintained current income tax rates, bands & credits and core social welfare rates.
  2. Over €500m of high earner and capital measures (3% USC increase on over 70s; PRSI now payable on unearned income; 3% increase in CGT, CAT & DIRT).
  3. Raised expenditure ceilings in DSP and Health by €150m each, above planned.
  4. More expensive houses pay more LPT & a ‘mansion tax’ on houses worth > €1m.

 

Public Sector Reform Policy
Public service numbers are now 29,000 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 €14.4bn in 2012 (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 €10bn 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
  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 will commence 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).
The Government halved the 8.5% lower rate of employers’ PRSI (2011 Jobs Initiative).
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.  In the 2012 ‘Action Plan for Jobs’ 249 measures were implemented (out of 270).
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).
Budget 2013 contained a SME 10 point tax reform plan: reform 3 Year Corporation Tax Relief for Start Up Companies; increase cash receipts basis threshold for VAT from €1m to €1.25m; amend R&D tax credit by doubling the amount of eligible expenditure to €200,000.