Economic Policy Overview – May 2013

 

The Economy has Returned to Growth
Ireland has experienced two successive years of economic growth in 2011 and 2012.  We are one of a minority of Eurozone countries to achieve this.
In 2012 real GDP increased by 0.9%, while GNP increased by 3.4%
In 2011 real GDP increased by 1.4%, the first annual increase since 2007. Whereas between 2007 and 2010 real GDP decreased by 8.2%.

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Employment has Stabilised
Employment increased by 7,700 in Q1 2013.  This is the third quarter in a row that employment has increased on a seasonally adjusted basis.This is an increase of 20,500 jobs in the 12 months since Q1 2012 and the second successive quarter showing an annual increase in employment.
We inherited a jobs market in free fall with 250,000 jobs lost in the private sector 2008 – 2010. Jobs now increasing by 2,000/month since launch of Action Plan for Jobs (Feb 2012).
There was a net increase of 6,570 jobs in IDA companies in 2012, after an increase of 6,000 jobs in 2011.  This was driven by 12,700 new jobs in 2012 including PayPal, Sky & Apple.
Enterprise Ireland reports a net increase of 3,800 jobs in Irish exporting companies in 2012.
International Confidence has Returned
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%.
The yield on Ireland’s 2020 bond is now approx. 4%, down from 15.1% in July 2011.
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 four months of 2013 are broadly 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 joint Communiqué from the Taoiseach and Chancellor Merkel (21st Oct 2012) states that “Ireland is a special case” with “unique circumstances” and “reaffirmed the commitment from June 29th” which agreed the possibility of the ESM recapitalising European banks.
In April it was agreed to extend the maturities of our EFSF & EFSM loans. The proposed changes should push back a market refinancing requirement of €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 €2.5 billion in new lending to business: €850m of National Pension Reserve Fund for the SME sector; €700m seed & venture capital scheme; €450m credit guarantee scheme; €225m development capital scheme; €120m second call under Innovation Fund Ireland; €90m microfinance scheme.
Policy on Mortgages
The  Government’s  strategy has four strands:
  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 June 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
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.  Under the JobsPlus scheme, the State will pay €1 of every €4 it costs an employer to recruit a long-term jobseeker. In the 2012 ‘Action Plan for Jobs’ 249 measures were implemented (out of 270).
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.