Transcript 4 billion - DCU Moodle 2011

Reading the Irish Economy
Dr. Mary Ann Kenny
Five-part Crisis (www.nesc.ie)
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Economic crisis
Public finance crisis
Banking crisis
Social crisis
Reputational crisis
“these five crises have their origin in a complex
set of global, international, European and
national imbalances and events” NESC Report,
p.3
The Celtic Tiger Years
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1993 – 2007
Unique period in the history of Ireland
Ireland’s economic miracle compared to the Tiger economies of Asia
GDP growth of up to 11% per year
Unemployment fell from 15% in the early 1990s, to an average of 4.3% from 2001 to 2007.
Population growth for the first time since the 1970s – returning emigrants and immigration
from Eastern Europe and elsewhere
Real wages grew by an average of 5.6% annually during the period
Ireland became one of the ten richest countries in the world in terms of GDP (or two
richest?)
Housing boom - House prices rose for 17 years in succession. Between 1996 and 2006 a 283%
increase in national average house prices and 366% increase in average house prices in
Dublin. Housing construction grew from approx. 20,000 units in 1993 to 90,000 units in 2006
Expectations of future house price increases began to drive house prices (speculative bubble)
‘the steepest and longest of the several national property bubbles around the world in the
late 1990s and early 2000s’ (Honohan, 2009)
1. Economic Crisis
• One of the worst recessions experienced by an
industrialised country since World War II
• Decline in economic growth
• Decline in exports
• Housing market correction
• Decline in competitiveness
• Job losses
• Company closures
• Decline in consumption
• Debt problems amongst firms and households
Output - Summary Table (ESRI)
Annual % Change in Real GDP or
Output Growth (1970 to 2010f)
Annual % Change in Real GNP or National
Income Growth (1970 to 2010f
Decline of the Property market
• Low interest rates and tax incentives made property
attractive to invest in during the Celtic Tiger years
• Residential construction peaked at almost 90,000 units
in 2006
• As few as 16,000 units may be completed in 2010
• A surplus of 300,000 dwellings by 2010.
• 621 ghost estates
• A drop of 30% - 40% in prices since the peak in 2006.
• Surplus of offices and hotels
Home Ownership by Country
Annual Residential Construction (19702010f
House Prices
Ghost Estates
Zombie Hotels
• Additional 27,000 new hotel bedrooms built
between 1999 and 2008
• Excess capacity in the hotel sector of between
12,000 and 15,000 rooms
• ‘Zombie hotels’ are hotels that are run by banks,
or where the ownership of the businesses has
been taken over by banks
• Tax breaks are special tax incentive schemes that
allow an individual or organisation to reduce the
amount of tax that they would normally pay
Discontinued Tax incentives
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1. Urban renewal scheme
2. Town renewal scheme
3. Rural renewal scheme
4. Living over the shop scheme
5. Registered holiday cottages
6. Multi-story car parks
7. Hotels accelerated allowances
8. Registered holiday cottages
9. Student accommodation
10. Third-level educational buildings
11. Sports injuries clinics
12. Private hospitals
13. Nursing homes and convalescent facilities
14. Residential units attached to nursing homes
15. Medical health centres
16. The park and ride scheme
17. The general rental refurbishment scheme
18. Measures in respect of greyhound and stallion stud fees
19. VRT relief in respect of short-term car hire
Importance of Property Sector to Irish
Economy
• Employment in construction – 112,000 in
2006 down to just over 75,000 today
• Dependency of public finances on propertyrelated taxes – stamp duty, capital gains tax,
VAT (the latter also a tax on consumption) Property related taxes accounted for 17% of
total tax receipts in 2007
• Construction accounted for 24.5% of GNP in
2006
Employment in Construction
Decline in Property Tax Receipts
Declining Competitiveness
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A result of the prolonged boom during the Celtic Tiger years
From 2001, a shift in what was driving the Irish economy from exports to
construction activity and private consumption
Export growth fell from an annual average of 17% between 1994 and 2000 to
under 3% between 2000 and 2007
Growth in construction surged to a high of 24.5% of GNP in 2006
Deterioration of current account balance – near balance from 1998-2004, deficit of
6.4% of GDP in 2007 and 6.5% of GDP in 2008.
Banks importing funds on a large scale to provide mortgages to house buyers and
loans to builders
Export business also affected by fall in the value of sterling
Ireland’s price level rose significantly over a 14 year period. Below average for EU15 in 1996; 14% higher in 2001 and 19% higher in 2007
Cost of rents, business services, utilities, wages have become more expensive at a
pace which increasing productivity could not compensate for.
As a result, between Jan 2000 and Sept 2008 Ireland had experienced a 32% loss in
international price competitiveness
Contribution of Exports to Economic
Growth 2001 - 2009
5%
0%
-5%
-10%
Net Exports
Investment
Government
Consumption
-15%
2001
2002
2003
2004
2005
2006
2007
2008
2009 H1
Price Competitiveness Indicator
Growth in Labour Costs
2. Public Finance Crisis
• 30 percent decline in tax revenues during the period 20072009– dependence on property-related and consumption
taxes
• Increased expenditure – on unemployment benefit, increased
interest payments. For example, debt interest will account for
8.5 percent of tax revenue in 2009, up from 3.5 percent in
2007
• €400m shortfall each week
• Current deficit of 12% of GDP (as of April 23, this figure has
been adjusted to14.3% due to injection of €4 billion into
Anglo-Irish Bank). Highest in euro zone
• Objective of a deficit of GGB of below 3.0 % in 2014
• Measures: cut spending, increase taxation, increase
borrowing
Total Exchequer Tax Revenues 2005 2009
Public Finance – Summary Table (ESRI)
Debt repayments as percentage of tax
take
The PIIGS
Measures taken on Public Finances
since July 2008
• July 2008: expenditure reductions with full year value of €1 billion
in advertising, public relations and procurement
• October 2008 Budget: €2 billion tax increases, income levy, VAT and
capital gains tax
• February 2009: expenditure reduction of almost €2.1 billion
including pension levy on public servants with gross value of €1.4
billion
• April 2009 Supplementary Budget: Tax increases with a full year
value of €3.6billion; Current expenditure savings €1.2 billion;
capital expenditure savings of €576 million
• October 2009 Budget: €4 billion cut in public expenditure including
€1.4 billion in pubic service pay, €1.3 billion in social welfare, €1.3
billion in services
• Negative effects of all of this on consumption, tax receipts,
employment levels
Murphy Report and Commission on
Taxation
• Special Group on Public Service Numbers and
Expenditure Programmes Chaired by Colm
McCarthy
• Identified expenditure savings of €5.3 billion
primarily in three departments: Social and Family
Affairs (€1.8 billion), Health (€.2 billion) and
Education (€0.7billion)
• ‘An Bord Snip’
• Report not implemented to date but it softened
up people for a tough budget in December 2009
3. Banking Crisis
Banking during the Celtic Tiger Years
• Irish financial institutions sourcing increasing volumes of funds on
the interbank market in order to lend to developers and housebuyers
• By the end of 2005, the net import of funds by these institutions for
such purposes amounted to 41 per cent of GDP, a rise from 10 per
cent just two years earlier
• The annual growth in the balance sheet of some banks frequently
passed the 20 per cent rate (Anglo Irish Bank averaged an annual 36
per cent growth rate between 1998 and 2007)
• Warning signs ignored by the banks and by the regulators
• Light approach to financial regulation motivated by a desire to
present Ireland as an attractive place from which to export
innovative financial services (‘Liechtenstein on the Liffey’)
Timeline of the Banking Crisis
• September 2008: collapse of Lehman Brothers; global financial crisis;
credit crunch
• Irish banks no longer able to roll-over large volumes of short-term
borrowing which they had loaned long-term for property-related
transactions
• Sept 2008: State Guarantee to safeguard all deposits and loans at the six
main Irish-owned financial institutions: AIB, Bank of Ireland, Anglo Irish
Bank, Irish Life & Permanent, EBS and Irish Nationwide
• Dec 2008: Decision to re-capitalise Anglo Irish Bank, AIB and BOI
• Jan 2009: Nationalisation of Anglo Irish Bank
• Feb 2009: Recapitalisation of AIB (€3.5bn) and BOI (€3.5bn)
• May 2009: The government announces that it will pump €4 billion into
Anglo.
• September 2009: The Minister for Finance unveils the Nama bill: the state
will pay around €54 billion for loans that the state currently values at €77
billion.
National Asset Management Agency
(NAMA)
• Bad bank – acquiring property development
loans in return for government bonds
• The aim – to improve the availability of credit in
the Irish economy.
• How will it do this?
• 1. take "bad" loans from the banks
2. restore the banks’ balance sheets to good level
3. restore the banks’ AAA+ credit rating to enable
cheaper interbank lending
4. free up lending to SME’s
5. free up lending for mortgages
Government Support to Banks
4. Social Crisis
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Unemployment
Income loss
Fall in wealth
Cuts in benefits and welfare payments
Mortgage and other personal debt
Pensions crisis
Live Register
Irish Unemployment Rate
Ireland/Euro zone comparison
Income per capita/Unemployment
Household borrowing
5. Reputational Crisis
• Perception that Ireland’s public finances are
vulnerable to default
• Perception that Ireland (and other countries) had
a lax system of regulation of the financial sector
• Perception that Ireland’s response to the banking
crisis may not include sufficient change in
governance and personnel.
• Result of the loss of reputation? Increase in the
premium payable on Irish government bonds
• In addition: lower market valuation of Irish banks
10-year Bond yield – Ireland/Germany
10 year bond spread PIIGS/Germany
Online Sources
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Derek Brawn website: http://www.derekbrawn.com/
The Economic and Social Research Institute www.esri.ie
FinFacts Ireland: http://www.finfacts.com/
Honohan (2009), ‘Resolving Ireland’s Banking Crisis’, Paper
presented to UCD/Dublin Economics Workshop, 12 January,
available at, www.irisheconomy.ie
The Irish Times www.irishtimes.ie
The Irish Independent www.independent.ie
The National Competitiveness Council
www.competitiveness.ie
The National Economic and Social Council www.nesc.ie
Other Sources
• Brawn, D. (2009) Ireland’s House Party. What the Estate
Agents don’t want you to know. Gill & Macmillan.
• Cooper, M. (2009) Who really runs Ireland? The story
of the Elite who led Ireland from Bust to Boom and
back again. Penguin.
• McDonald, F. (2009) The Builders: How a Small Group
of Property Developers Fuelled the Building Boom and
Transformed Ireland. Penguin
• O’Toole, F. (2009) Ship of Fools: How Stupidity and
Corruption Killed the Celtic Tiger. Faber and Faber
• Ross, S. (2009) The Bankers: How the Banks Brought
Ireland to Its Knees. Penguin