Saturday, December 29, 2012

Irish Examiner 22/12/12

The unedited text of an article that appeared in The Irish Examiner recently is continued below the fold.

We need to face up to the repossession crisis

According to the latest mortgage arrears statistics there are 33,000 households in arrears of between 90 and 360 days and a further 35,000 households in arrears of more than 360 days. Both figures continue to rise. There is an expectation that they will level off in the middle of next year but we will have to wait for evidence of that to emerge.

Beneath this there are 39,000 households in early arrears of less than 90 days and a further 34,000 households who have had their mortgage restructured but are not in arrears. Across all levels there are around 150,000 households showing some sign of mortgage distress from very mild to very severe levels.

Research by the Central Bank shows that 44% of borrowers who fall into 90 day arrears return to performing mortgages over time. It is likely that 100,000 households need some form of intervention.

Thursday, December 20, 2012

Taxing with the best of them

Ireland continues to face a massive budget deficit.  In 2013, the deficit is forecast to be 7.5% of GDP which will be the largest in the EU.  There are almost incessant arguments on how best to close the deficit. One common refrain is that Ireland is a “low-tax economy” and that the gap should be closed with tax increases, in particular increases in income tax on the “rich”.

When it comes to income tax, there is not much evidence at an aggregate level to support the thesis that Ireland is “low-tax”.  In fact as a percentage of GDP, Ireland collects the eighth highest amount of income tax in the EU and is equal to the EU average.  Here are 2011 figures from Eurostat on personal income tax as a percent of GDP.

Individual Income Tax EU

Ireland’s social contributions rates are low and on a combined measure of income tax and employee social contributions Ireland ranks 13th in the EU on 10.5% of GDP below the EU27 average of 13.0%.  Table here. (Though the Irish figure is 12.7% of GNP).

Income Tax plus Social Contributions

In 2013, it is projected that there will be a general government deficit of €12.7 billion.  Around one-ninth of this will be because of the deficit in the Social Insurance Fund.  It is forecast for 2013 that there will be €7.1 billion of PRSI contributions, while there will be €8.6 billion of claims on the Social Insurance Fund.  More PRSI is needed to fund the expenditure of the social insurance fund but the deficit is a little less than 1% of GDP.

We could choose to move higher in the above table using employee social contributions.  However, as this table (excel) from the OECD shows, all 34 countries in the OECD adopt a flat-rate system for employee social contributions.  This approach may not be attractive to all owing to the lack of progressiveness in the measure.  The deficit in the Social Insurance Fund could be closed by upping the employee PRSI contribution rate from 4% to 7%. 

However, the main hole in the public finances is for expenditure financed out of general taxation.  Of course, there could be further increases in employee PRSI contributions beyond that necessary to close the deficit in the SIF up to say the 12.5% average for the OECD-EU21, with scope to also increase employer and self-employed social contributions.   Such an increase could be accompanied with the transfer of the funding of certain expenditures from the Exchequer to the Social Insurance Fund, thereby reducing the need for tax increases. 

Accepting that is possible, let’s assume that tax-funded expenditure continues to be tax funded and we are looking to raise additional tax revenue, and in particular income tax revenue.  Let’s see how some of those countries with higher income tax receipts than Ireland manage it.  This table (excel) from the OECD gives effective income tax rates at different income levels.

For Ireland, it gives effective income tax rates and tax bills (income tax plus USC) for a single person with no children at the following wage levels:

  • 67% of Average Wage: €22,000 = 8.8% with €1,900 tax
  • 100% of Average Wage: €32,800 = 14.9% with €4,400 tax
  • 167% of Average Wage: €55,000 = 28.1% with €15,400 tax

Ireland has a progressive tax system.  In fact it is the second most progressive in the OECD and the most progressive in the EU.

The following table shows what happens to personal tax bills if we apply the effective income tax rates of the six EU countries who collect more than 10% of GDP from personal income tax.  These countries are Denmark, Sweden, Finland, Belgium, Italy, the UK.  In the table their effective tax rates (as well as their mean) at 67%, 100% and 167% of the average wage is applied to those wage levels in Ireland? 

Tax system are complicated so this crude analysis may miss some of the finer points of each system but it gives a good impression what would happen if the effective tax rates from the top income-tax-collecting countries were applied in Ireland.

Tax Bills

Ouch!  Unsurprisingly, 20 out of 21 of the country rates result in an income tax increase.  The only reduction is in the case of the UK effective tax rate for those earning 167% of the average wage.

The arithmetic average of the effective income tax rates for the six countries implies tax increases at all three income levels, but the size of the tax increases varies hugely.  If applied those on €22,000 would see their tax bill more than double, those on €32,800 would see their tax bill increase by half and those on €54,800 would see their tax bill rise by around one-twelfth. 

In proportionate terms the hit would be 13 times greater for those on €22,000 than those on €54,800.  The extra tax on €22,000 would around €170 a month, the extra tax on €54,800 would be €95 a month.  And increases in flat-rate employee social insurance contributions might be dismissed because they are not progressive!  Adopting the average effective tax rates of these six countries for single people with no children would be monstrously regressive.

We can collect as much income tax as Denmark, Sweden and Finland but let’s be clear how they do it.  Countries with higher tax income revenues as a percentage of GDP than Ireland do not achieve it by levying more taxes on higher incomes (€55,000 would be in the top quintile of earnings in Ireland), they do so by levying more taxes on average incomes and much more taxes on lower incomes.

An equivalent table for married couple with two children looking at the effective income tax rate less child-related transfers is below the fold.

Wednesday, December 19, 2012

Some Trends in Expenditure

Chapter 21 of the 2011 Comptroller and Auditor General’s Account of Public Services includes the following chart on trends in welfare expenditure.

Trends in Welfare Expenditure

The figures since 2008 used in the above table are in the first section of this table.

Trends in Welfare Expenditure Table

The 2012 figure is an estimated based on voted allocations at the time of the report (Sep 2012).  Since then there has been a supplementary estimate for the Department of Social Protection of €685 million, of which €264 million was due to more than anticipated expenditure on Jobseeker’s Allowance.  Thus the 2012 total for support for ‘people in the labour market’ will be around €5,200 million and the overall total for the table close to €21,000 million, with little overall change from 2011.

The trends in the chart are easily identifiable.  There have been falls in the aggregate financial support provided to ‘families and children’ and to ‘people in the labour market’.  Support for ‘people with disabilities’ fell in 2010 and 2011 but is due to rise very slightly in 2012.  Support for ‘older people’ continues to rise year-on-year with a rise of around €1 billion since 2007.  A more detailed breakdown of the expenditure under each category is in tables below the fold at the end of the post.

Here is a table taken from the Analysis of the Exchequer Pay and Pensions Bill published by the Department of Public Expenditure and Reform.

Exchequer Pay and Pensions

It can be seen that the gross Exchequer pay and pensions bill is forecast to rise in 2012, though only by €16 million or 0.09%.  The subsequent column show the breakdown of this.  The Exchequer pensions bill will rise by €285 million, while the gross pay bill will fall by €269 million.

The Exchequer net pay bill is the gross bill less employee pension contributions in the civil service, health, education, guards and army of €536 million which are used to fund other expenditure and the employee deductions for the public sector pension levy of €930 million across all departments which are also used to fund other expenditure.  Some other minor employee contributions bring the total to €1,509 million.  In essence, this is money that forms part of the gross pay bill but is deducted. 

The Exchequer net pay bill is expected to fall by €266 million this year to €14,402 million.  PRSI, Income Tax and the USC will be further collected on this to reflect the net pay measure from the employee’s perspective.

The fall in the pay bill in 2012 (both gross and net) was more than offset by the rise in the pensions bill which has risen €1 billion since 2007.

Since 2007, the social welfare bill for state pensions and the exchequer pensions bill has risen by around €2 billion.  Many of the reductions in current expenditure elsewhere are being consumed by increases here. 

Of course, this is mainly because of demographic factors rather than policy changes.  The number of people aged 65 and over increases by around 20,000 per annum as entrants to this category is greater than the death rate, while the number of public sector pensioners is rising by around 8,000 per annum.

Tuesday, December 18, 2012

Q3 National Accounts

The CSO have published the Quarterly National Accounts and Balance of Payments for Q3 2012.  It is estimated that real GDP rose 0.2% in the quarter while real GNP fell –0.4% in the quarter.

The first estimates of the Q2 2012 changes provided in September have both been revised up, from 0.0% to 0.4% for GDP and from 4.3% to 4.7% for GNP.

Personal Consumption Expenditure rose 0.5% in the quarter, Investment rose 8.5% with a 0.3% quarterly fall in the measure of Government Expenditure included in the accounts.  For the first time in seven quarters Consumption shows an annual rise.  The measure of Final Domestic Demand rose by 1.9% in real terms in the quarter and shows an annual increase of 0.3%.  This is the first annual rise in 18 quarters for Final Domestic Demand (back to Q1 2008).

In 2010 prices, GDP in the first three quarters of 2011 was €119.3 billion.  For the first three quarters of 2012 the equivalent figure is €120.2 billion.  This represents an annual growth rate of 0.8%.  The equivalent figure for GNP is 3.0%.

For Maastricht criteria buffs, nominal GDP in the first three quarters of 2012 is estimated to be €123.3 billion, compared to €119.1 billion in 2011, for a nominal GDP growth rate of 3.5%.

Quarterly GDP rose less than Final Domestic Demand because of a fall in the in the balance of trade.  In real terms, seasonally adjusted exports rose 0.3% in the quarter but imports rose by more with an increase of 2.1%.

In the Balance of Payments the estimated surplus for the first three quarters of the year is 4.3% of GDP up from 0.0% last year.

A‘Low-tax’ or ‘Low-insured’ Economy?

Ireland is commonly cited as a ‘low-tax’ economy with support coming from charts such as this from Eurostat based on 2010 data.


Ireland is in a class of EU countries with government revenue below 30% of GDP, 10 points below the EU average.  The other EU countries in this group are Bulgaria, Latvia, Lithuania, Romania and Slovakia.

Graphs such as this are worth some closer study.  For a start the graph is in terms of GDP, whereas for Ireland a comparison to GNP may be a better reflection of the tax burden, though both have merits.  It may also be the case that Ireland is not a ‘low-tax’ economy but more a ‘low-insured’ economy. 

The following table includes 2011 data from Eurostat and gives government receipts as a percentage of GDP for the EU27, the EU 15 and Ireland with a GNP comparison for Ireland in the final column.

Government Receipts 2011

In GDP terms tax receipts in Ireland are a couple of percentage points below the EU averages, but when done in GNP terms, tax revenue in Ireland is above both EU averages.  The reason Ireland appears to be ‘low-tax’ is not to do with tax at all; it is to do with social insurance contributions.  Social contributions in Ireland were always well below the EU average, but with the abolition of the Health Levy in 2011, social contributions in Ireland are now less than half the EU averages. 

In GNP terms employer social contributions are about 55% of the EU average, employee contributions are about 40% of the EU average and self-employed contributions are about 12.5% of the EU average.

Any intention to increase general government receipts in Ireland up to the EU average can propose to either push tax receipts further above the EU average or bring social insurance contributions up closer to the EU average.

Below the fold is a table extracted from the OECD’s Taxing Income publication which looks at effective tax and social contribution rate for different wage levels in 34 OECD countries.

Wednesday, December 12, 2012

Carryover Effects

Here is an extract from Table 2.1 from the Medium Term Fiscal Statement published before Budget 2012 last year.

2012 Consolidation

The 2012 Budget a few weeks later outlined the €1.45 billion of current expenditure cuts and the €1 billion of taxation increases.  With pre-announced cuts in capital expenditure and the taxation carryover effects from 2011 the total added to €3.8 billion.  There also was €0.4 billion of revenue carryover effects for 2012 from the introduction of the USC in 2011 but these were excluded in the table.  The total could then be put at €4.2 billion as was done by both the EU and IMF.

The €1.45 billion of new current expenditure measures is confirmed in table 5 on page 13 of the Economic and Fiscal Outlook released with the Budget.

Here is the equivalent, though slightly modified, table for Budget 2013.

2013 Consolidation

The total sums to €3.5 billion but the “Tax” heading is replaced by “Revenue”.  This is because PRSI was moved from Expenditure to Revenue in the 2013 table. (PRSI is a departmental receipt (appropriation-in-aid) which reduces net expenditure).  Other revenue raising measures such as the third-level registration fee and charges for private patients in public hospitals remain under the “Expenditure” heading.

While in Budget 2012, €1.45 billion of current expenditure cuts were included in the table and subsequently introduced (though not necessarily implemented), for Budget 2013, €1.44 billion of current expenditure cuts were included in the table but €1.02 billion of current expenditure cuts were included in the budget.  This can be seen from Table 7  on page 14 of the Economic and Fiscal Outlook released with the budget. 

The €1.44 billion figure in the table for current expenditure cuts is reached with the inclusion of €0.42 billion of “carryover” effects from measures announced in previous budgets.  That is, the full-year effect of earlier measures won’t be felt until 2013 and these will serve to reduce expenditure in 2013.

However, for 2012 no expenditure carryover effects from the impact of measures announced in previous budgets were included.  The expenditure carryover effect was left out of the calculation of the total consolidation effort for Budget 2012, but included in the calculation of the total consolidation effort for Budget 2013.  Were there no expenditure carryovers coming into 2012 while there was €0.4 billion of them for 2013?

The inclusion of “Increased Dividends” as a consolidation measure also seems unusual and wasn’t included in this graph of Fiscal Consolidation 2012-2015 included as part of the IMF’s Fourth Review (page 13):

2012-2015 Fiscal Consolidation

There is no distinction made between the current spending measures for 2012 and 2013, and as seen the €3.5 billion total for 2013 includes €0.4 billion of expenditure carryovers rather than being entirely new measures.  This was what was included in relation to Budget 2013 in the IMF’s Seventh Review released in September:

On the basis of the aggregate budgetary projections set out in the Medium Term Fiscal Statement (MTFS) of November 2011, consolidation measures for 2013 will amount to at least €3.5 billion. The following measures are proposed for 2013 on the basis of the MTFS:

    • Revenue measures to raise at least €1.25 billion[2], including:
      • A broadening of personal income tax base.
      • A value-based property tax.
      • A restructuring of motor taxation.
      • A reduction in general tax expenditures.
      • An increase in excise duty and other indirect taxes.
    • Expenditure reductions necessary to achieve an upper limit on voted expenditure of €54 billion, which will involve consolidation measures of €2.25 billion on the basis of the MTFS, including:
      • Social expenditure reductions.
      • Reduction in the total pay and pensions bill.
      • Other programme expenditure, and reductions in capital expenditure.

[2] Inclusive of carryover from 2012.

Carryover effects are included for revenue but not expenditure.  It can also be seen than a €54 billion limit for voted expenditure in indicated.  This was not adhered to in the budget:

  • Gross voted current expenditure: €51,070 million
  • Gross voted capital expenditure: €3,435 million
  • Gross voted expenditure: €54,505 million

The excess over the limit is not very different from the level of carryover effects in the current expenditure consolidation effort included in the budget, but is more than likely because the current expenditure ceilings for 2013 laid out last year were increased.

One final point on carryovers relates to the tax carryovers in 2014.  Last week’s budget contained a lot of tax measures which will not come into full effect until 2014. Some of the main measures are:

  • Full introduction of Property Tax less NPPR: €180 million
  • Taxation of maternity benefit: €25 million
  • Removal of PRSI allowance: €26 million
  • Removal of PRSI block exemption: €24 million
  • Changes to maximum allowable pension fund: €250 million

These sum for more than €0.5 billion, though some reduced taxation measures will reduce the full carryover effect to close to €0.45 billion.  If €1.1 billion of tax consolidation is required in Budget 2014, then €0.65 billion of new measures will be required.

Friday, December 7, 2012

New Budgetary Measures

The following table summarises the new measures included in Budget 2012 and Budget 2013 that impact on the White Paper ‘no policy change’ figures released the Friday before each budget. 

Most of the figures come from the Economic and Fiscal Outlook released with each budget (Table 5 for 2012 and Table 7 for 2013).  The current expenditure figures for each Vote are taken from the Expenditure Allocations (2012 and 2013).

BUdgetary Measures

The new Property Tax is expected to raise €250 million but as it replaces the Household Charge a figure of €90 million is included here.  

The total for 2013 is more €726 million than the total for 2012.  This is because of a lower capital reduction in 2013 and also because the White Paper for 2013 was done on the basis of expenditure ceilings which were issued with last year’s budget as part of the Comprehensive Expenditure Review.

The level of current expenditure savings  included in Budget 2013 is comparable to those in Budget 2012, but increases in the current expenditure ceilings for most votes partially offsets the impact of the savings.  A table that compares the expenditure ceilings for each vote as announced last year and adjusted this year is below the fold.

Thursday, December 6, 2012

The General Government Accounts

The Economic and Fiscal Outlook released with yesterday’s budget presents a useful table of the general government accounts.  This is the accruals-based set of accounts by which the Excessive Deficit Procedure limits under the Maastricht Treaty are set.  It is the deficit on these accounts that must be reduced to below the 3% of GDP limit by 2015. Click to enlarge.

General Government Receipts and Expenditure

The €13.4 billion deficit for 2012 is the result of expenditure at €69.1 billion and income at €55.6 billion.  When the projected deficit gets below the 3% of GDP limit in 2015 it will still be €5.3 billion and this will be the result of expenditure at €68.4 billion and income at €63.1 billion.

In nominal terms over the next three years general government expenditure is projected to fall by 0.9% with nominal general government revenue due to rise by 13.3%. 

With inflation and rising GDP, real expenditure will fall while there will be a slight rise in real income.  As a percentage of GDP, expenditure will fall from 42.3% in 2012 to 37.7% 2015.  On the revenue side, the change will be from 34.1% of GDP in 2012 to 34.8% of GDP in 2015.  As shown below this is projected to bring the deficit to 2.9% of GDP by 2015.

Underlying General Government Balance

Excluding interest payments, it can be seen that the projected improvement in the primary balance is even greater.  This means that although overall nominal expenditure might remain largely unchanged there will be changes in the composition of expenditure with interest consuming a greater amount and standard government expenditure a lower amount.

Wednesday, December 5, 2012

How unequal?

Quote One:

“We were one of the most unequal societies in the western road according to the OCED, during the boom years. The most, … , only two or three countries …”

Really?  In the OCED’s ‘mid-2000s’ table of Gini coefficients Ireland ranked 22 out of 30 countries.   This data is taken from Growing Unequal?: Income Distribution and Poverty in OECD Countries, released in 2008.

OCED Income Inequality

New Zealand, the UK, Italy, Poland, the US, Portugal, Turkey and Mexico all had higher rates of income inequality than Ireland.  Ireland was in the bottom half but there were eight countries with higher gini coefficients, not “two or three”.

Quote Two:

“2008 we were much worse than the EU average”

Really?  This is a table of Gini coefficients based on the 2008 EU-SILC (page 97).  Ireland’s gini coefficient of 29.9 was below the average for each of the EU-27, EU-15 and Eurozone countries.

2008 EU SILC Gini

Ireland ranked 15 out of the EU-27.  All of Bulgaria, Germany, Estonia, Greece, Spain, Italy, Latvia, Lithuania, Poland, Portugal, Romania and the UK had higher Gini coefficients (more income inequality) than Ireland.  Ireland was not “much worse” than the EU average.

Quote Three:

“Are you surprised then at how little we do about it [inequality]?

Really?  This is from the same 2008 OECD report which provided the data used above.  Which country had the third best reduction in the Gini coefficient (reduction in income inequality) from the mid-1980s to the mid-2000s?

Trends in Income Inequality

Yes, IRL = Ireland.

The final graph is from Chapter 16 of a Eurostat report based on the 2007 EU-SILC.  Which country had a system of direct taxes and cash benefits which had the second largest impact on reducing income inequality.

Figure 16.2

In a related table it can be seen that Ireland’s cash transfers reduced the Gini coefficient on original income of 47.2 (the highest in the EU) to 37.7 for gross income (the seventh highest in the EU), while Ireland’s direct taxes further reduced that to 32.4 (the eighth highest in the EU).  These reductions are reflected in the above graph.

Tuesday, December 4, 2012

The Promissory Notes and the Deficit

The impact of the €30.6 billion of Promissory Notes provided to Anglo and INBS, now merged as the IBRC, on the public finances is massive, but is often misstated.  Over the weekend Stephen Donnelly wrote:

Over the course of 2010, the Fianna Fail Government invented a loan from the people of Ireland to Anglo and INBS. They essentially wrote a €31bn IOU, promising to pay it to the bank and building society over the following 20 years. In 2013, we are due to make our third payment on this, of €3.1bn.

But it gets worse. Now that we 'owe' them this €31bn, we must also pay them interest. This amounts to an additional €17bn over the 20 years. In 2013, the interest payment is €1.9bn. So contained in the 2013 forecasts is a payment of €5bn to Anglo and Irish Nationwide – two dead casinos, both under investigation on numerous fronts.

It is expected that Ireland will have a general government deficit of €12.6 billion, a €0.8 billion reduction on 2012.  In an earlier paragraph it is claimed that the 2013 deficit should actually be €15.7 billion.

It is true that the headline figure looked at by the troika will fall by about €800m. But due to some accounting wizardry, a full €3.1bn of the €5bn to be paid to IBRC isn't included. When you add that in, the deficit will in fact grow, by a whopping €2.3bn.

As discussed below this is a mis-interpretation of the impact of the Promissory Notes on the deficit.

Monday, December 3, 2012

Evening Echo 28/11/12

The text of a recent article for The Evening Echo is below the fold.

Thursday, November 29, 2012

Stamp Duty versus Mortgage Interest Relief

Here is a table of the amount of revenue raised from Stamp Duty on residential property and the amount of tax relief granted to residential mortgage holders for the past decade.

Stamp versus MIR

The figures for Stamp Duty are taken from here and relate only to Stamp Duty paid on residential property transactions, while the figures for mortgage interest relief are taken from here including the estimate for 2012, with a full-year 2011 figure here.  The amount of income tax relief granted to mortgage holders is equivalent to nearly 75% of the revenue received from Stamp Duty on residential property.

The two columns do not reflect the same groups of people but there is likely to be very significant overlap.  The Stamp Duty column will include duty paid by investment buyers who are not entitled to mortgage interest relief (but do get a separate relief).  If investors paid a quarter of the Stamp Duty and were omitted the sums of two columns would be almost identical.  The Mortgage Interest Relief column will include people who bought before 2002, though these will be smaller mortgages and many will have been repaid by the end of the period, and also first-time buyers who bought in the period in question but were exempt from Stamp Duty.

Although the Exchequer did collect significant revenue from the purchase of residential property by households in the last decade, the Exchequer has also lost significant revenue by awarding income tax relief for mortgage interest to households.

Retail Sales rise again, but…

The release by the CSO of the October Retail Sales Index contained one predictable result: the sales of Electrical Goods rocketed (in advance of the shutdown of the analogue broadcast signal for television).
Electrical Goods Index to October 2012
This increase will distort the changes in broader measures of retail sales.  A core measure of retails sales excluding the motor trades rose in October.  The motor trades category has a weight of 18.2% in the October index so this represents 81.2% of the index.
Ex Motor Trades Index to October 2012
In October, the electrical goods category makes up 4.9% of this core measure of retail sales so comprise about one-twentieth of the total above.
One an annual basis core retail sales have been showing positive changes for three months but the jump in October to a 4% annual rise by value and 3.5% by volume was significantly boosted by electrical goods.
Annual Change Ex Motor Trade Index to October 2012
On a monthly basis core sales in October rose by around 1.3% in both value and volume terms. 
Monthly Change Ex Motor Trade Index to October 2012
The 25% rise in electrical goods means that this category alone would have contributed almost all of the monthly rise in October. [On a very crude basis the rise in electrical goods multiplied by its weight in the core index gives 0.25 x 0.05 = 0. 0125, or 1.25%.  All the series in the dataset are individually seasonally adjusted so such a comparison is not sound].
But assuming that the jump in electrical sales hadn’t happened and further assuming that the index had remained at its September level, then both the volume and value indices would be showing an annual rise of around 2.3% in October.  This is only a modest rise in comparison to the drops that preceded it, and since the positive rise in July retail sales have been relatively static since (excluding the electrical goods bounce in October with a more minor impact on September).
The arithmetic average the value and volume indices for the first ten months of 2012 is almost identical to the same measure from 2011.  Stabilisation? Yes. Improvement? Not yet.

Wednesday, November 28, 2012

Collecting more Income Tax?

The pre-budget submission of the Irish Tax Institute contains the following:

The income tax yield in 2011 exceeded that for 2007, despite the dramatically reduced number of people in employment. The revenue from income tax (including USC) in 2012 is projected to be the highest ever (€15.3 billion) despite the ongoing high unemployment levels.

Here is a table of annual tax yields from the Databank of the Department of Finance.  Click to enlarge.

Annual Tax Revenues

It can be seen that the Income Tax in 2011 of €13.8 billion is indeed more than the €13.6 billion collected in 2007.  However there is an element of comparing apples and oranges in the figures used the Irish Tax Institute, who you’d think would know their onions on this.

Here is a table that sets out the various deductions on income made since 2007.

Income Deductions 2007-2011

In 2011, the Universal Social Charge (USC) replaced the Income and Health Levies and all income from the USC is counted as Income Tax.  The Health Levy, as an appropriation-in-aid, was paid directly to the Department of Health and is counted as a social contribution.

A like-for-like comparison between 2007 and 2011 would be to sum the following receipts, such that they are, in each year

Income Tax + DIRT + Income Levy + Health Levy + Universal Social Charge

For 2007 this would give a total of €14.9 billion and for 2011 a total of €14.1 billion.  Although there have been significant tax increases in recent years the €15.3 billion that is projected to be collected in 2012 is not significantly higher than the €14.9 billion collected in 2007 but there is a dramatically reduced number of people in employment.

Thursday, November 22, 2012

Taxing Wealth, er… Income

This week Sinn Fein released their budget proposals in a document called ‘Making the Right Choices’.  It contains a package similar in scale to the €3.5 billion of ‘adjustments’ proposed for Budget 2013. 

There are €2,758 million of proposed tax increases and €705 million of net expenditure ‘savings’ (though €433 million of those come from increased revenue measures in health (recouping the full cost of private beds from private patients)).

One of the tax initiatives is a new wealth tax.

POTS: RAISES €800million

Sinn Féin’s proposal is to introduce a 1% tax on all assets over €1million net of all liabilities, including mortgage and other debts. The tax would not be levied on 20% of the family home, the capital sum in pension funds, business assets or agricultural land.

It would apply to the global assets of those domiciled or ordinarily resident in the state and domestic assets only for those who are resident in the state for tax purposes.

Two examples are provided to illustrate how the proposal might work.  (Click to enlarge).

Wealth Tax Examples

Here is a summary of Example B:

Wealth Tax Example

Of course, the first item on this list is not a typical component of wealth.  Wealth is usually defined as a stock measure of the difference between assets and liabilities at a particular point of time.  Income is a flow over a particular period of time.

We have taxes for income through Income Tax, USC and PRSI.  The above case would be subject to Sinn Fein’s proposed 48% rate of Income Tax on incomes above €100,000.  It also appears to be the case that those who are subject to the wealth tax will be subject to an additional 1% income tax on some measure of ‘net’ income.  Thus, the proposal is part wealth tax, part income tax.

If income was excluded from the base for the wealth tax (as would be expected) then the tax liability in Example B would be €5,150.  Raising €800 million from a wealth tax such as that would require the equivalent of 160,000 Ciarans.  A newspaper report of the proposal says:

Mr Doherty claimed that financial management company Merril Lynch had estimated there were 18,100 people living in the State with assets of more than $1m (€778,000).

Taxing Income (again)

A couple of previous posts have looked at the implications of changes to income tax, here and here.  A recent parliamentary question provides some details of what would happen if:

  1. the marginal rate of tax on Income Tax was increased to 71% for very high earners or
  2. if the effective tax rate of Income Tax + USC + PRSI was increased by nearly a third for high earners. 

The answers to these questions were provided in a recent PQ set by Socialist Party TD Joe Higgins.  The emphasis was on tax cases with incomes over €100,000.   The marginal rate of tax for PAYE employees in this category is 52% (41% Income Tax + 7% USC + 4% PRSI).  For self-employed/non-PAYE earners the marginal rate is 55% as there is an additional 3% USC levy for non-PAYE earnings over €100,000.

The question set looked for the impact of marginal rates ranging from 48% up to 78% on different income ranges excluding PRSI.  With a 7% USC rate the proposed income tax rates start with the existing 41% rate up t0 71%.

Nominal Tax Rates

Unsurprisingly the proposed 48% raise no additional revenue as that is identical to the existing rate.  There is a minor gain from the 50% rate and from 55% up the suggested impact of the new tax bands and rates can be seen.  The largest amount of additional tax revenue is in the widest band between €250,000 and €1 million with over €400 million raised from a new 75%. tax rate. 

The marginal tax rate of 78% on earnings over €1 million raises just €110 million.  This is because there are so few people earning this amount.  The 2011 tax distribution statistics from the Revenue Commissioners show that just 636 tax cases reported an income of greater than €1 million.  It is not clear how many individuals have incomes in excess in €1 million.

If there was 636 such people they would face an extra tax bill of around €175,000 from the 78% rate alone.  The increased rates on lower income bands would mean the overall tax increase for such earners from these measures would be larger.

In total nine proposed new tax bands with a top marginal rate of 78% would raise a little over €850 million.  This would help close a budget deficit of €13.5 billion but makes clear that increased taxes on high earners alone falls far short of the eliminating the deficit.

The second set of proposals had to do with increased effective or average tax rates for earners in similar income ranges used above.  For incomes over €90,000 the proposal would see the overall effective tax rate rise from 34.6% to 40.2%, with an effective tax rate of 50% or more for all incomes over €300,000.

Effective Tax Rates

In total these increases would raise €1,337 million which is equivalent to around 10% of this year’s deficit.  This is similar to an earlier proposal from NERI but gives specific effective rates for each income range.  It differs in that the proposed tax increase is about twice as large and focussed on a third as many people.  In both cases no specifics are given on how implementing these effective tax rates would actually be achieved.

Tuesday, November 20, 2012

Unmodified Mortgages

The latest mortgage arrears statistics from the Financial Regulator show that there were 83,000 mortgage accounts in arrears of 90 days or more in June 2012.  The numbers on modified mortgages show that 45,000 of these have been adjusted in some way.  We looked at those in an earlier post and saw that around 75% of modified loans are meeting the revised commitments under the restructuring.

What about the other 38,000 of mortgages with 90 day arrears, those that are in arrears but haven’t being restructured?  Is anything being done for them?

From the way the arrears statistics are presented it is impossible to tell how much distress these accounts are in.  As the explanatory notes say:

The arrears figures denote the value of arrears (payments not received by the contractual due date) expressed as equivalent days past due. Partial payments received from borrowers will be credited to the oldest arrears amount which will have the effect of reducing the balance of arrears.

Arrears of over 90 days past due do not necessarily signify that borrowers have not made mortgage repayments for the last three months. For example, a borrower can be making partial repayments on a monthly basis but may still be in arrears of a value equivalent to over 90 days past due. In the same way, arrears of over 180 days past due does not necessarily signify that borrowers have not made mortgage repayments for the last six months.

At the recent Finance Committee sessions with the AIB and BOI the emphasis of the mortgage arrears discussions was on modified mortgages as highlighted in the earlier post.  The 38,000 unmodified loans are likely to contain some borrowers who have entered arrears by missing some payments in the past, but have now resumed making full payments without clearing the accumulated arrears.  This might describe some of the cases but it could be very few.

Here are some indicators on the mortgages that are more than 180 days in arrears.

Arrears 180 Days Plus

The number of accounts in this category has increased each quarter since the statistics began.  The inflow peaked in Q4 2011 at 6,749 and has fallen slightly in each of the last two quarters.

Unsurprisingly, as the number of accounts in this category has increased the total amount of arrears owing on them has increased and is now nearly €1.4 billion.  However, the pattern in the average arrears owing per account is less consistent.  By Q2 2011 the average arrears was nearly €21,500.  This group are significantly behind on their mortgage payments and these arrears cannot be allowed to accumulate indefinitely.

The question is whether these arrears are still accumulating. In 2010 and up to the middle of 2011 the average arrears amount was showing an annual increase of around 10%.  Since then this is moderated significantly and in the past two quarters there has been a annual reduction in the average arrears amount.

What does this tell us about mortgages in this category?  Very little.  The average arrears will be brought down by the new entrants to the category who will have arrears just over the lower limit of six months, while continued deterioration in the performance of those already in the category will push the average arrears up. 

It is also the case that the most extreme cases could have had their arrears capitalised into the principal.  In June 2011 there were 8,994 mortgage accounts that had arrears capitalisation applied to them.  By June 2012 that had increased to 10,228.

Also it is clear that something happened in Q4 2011 when the increase in arrears was €80 million.  In each of the three preceding quarters and in the two subsequent quarters the increase averaged €130 million.

The key point is that the arrears statistics don’t tell us what is happening to mortgage accounts now.  The overall trend clearly indicates that things are getting worse, and they will continue to do so, but it impossible to gauge from the arrears statistics how many borrowers are in distress now. 

We know that around 75% of the 85,000 modified mortgages are performing in line with the new arrangements provided for them.  We don’t know anything about the performance of the 38,000 mortgages with 90 day arrears that have not being modified.

What we need is a measure that tells us whether the monthly interest charge on the mortgage is being covered now, not a historical measure of performance relative to somewhat arbitrary contract obligations.  The “who is in arrears?” question in this post highlights the problems with using arrears as a measure of distress.

Monday, November 19, 2012

A Year of Bond Yields

This time last year doubts about Spain were a factor in driving up sovereign bond years for the ‘peripheral’ Eurozone countries.  The Irish nine-year government yield as calculated by Bloomberg rose from just over 8% up to near 10% in a couple of days.

Bond Yields 1Y 19-11-2012

Since then, for one reason or another, the path of the yield has been consistently down.   By dropping below 4.7% in the past few days the yield is at levels not seen since the summer of 2010 and well below the 7% levels that emerged in the weeks leading up to Ireland’s entry into an EU/IMF rescue programme in November 2010. 

Here is the range of Irish yields along the yield curve provided by Bloomberg:

A ‘Special Case’ in Statistics

Ireland is in the midst of a crisis that should not be under-estimated.  However, for some reason there are many people who go to great lengths to overstate it.  A piece in yesterday’s Sunday Indpendent  contains the following section in relation to Ireland’s status as a “special case”.

Well, Mr Rehn, we've seen a huge rise in deaths by suicides recently in Ireland, many shown to be connected to austerity. Between 2009 and 2011, 1,563 people in the Republic took their own lives, nearly three times as many as died in traffic accidents. Does this make us a special case?

Unemployment (at 14.8 per cent and rising) is considered "increasingly structural in nature" and more than 150,000 people have emigrated in the past three years. Emigration is the only career choice for the majority of our highly educated young people who have no future in their economically destroyed country. Does this make us a special case?

So many mortgages are in trouble that Fitch, the rating agency, believes at least 20 per cent will default sooner rather than later. Reports also suggest that 1.8 million Irish adults have less than €100 at the end of the month after all the bills are paid. Does this make us a special case?

Suicide, unemployment, emigration, household debt and poverty are all very serious problems which deserve serious attention.  They do not get it in the above paragraphs.  Some reasons for this are explored below the fold.

Wednesday, November 14, 2012

Modifying Mortgages

The latest mortgage arrears statistics from the Financial Regulator show that 84,941 of mortgage accounts have had their terms modified in some way.  Of these, 40,221 of these are recorded as not being in arrears and 44,720 are listed as being in arrears.  The numbers here are taken from slide 9 from Fiona Muldoon’s recent presentation to the Irish Banking Federation.

Modified Mortgages

It is commonly stated that this means that the almost 45,000 mortgages recorded as being in arrears after a restructuring "have fallen back into arrears" post the restructuring.  There  are many examples of reports like the following:

Monday, November 12, 2012

Interest Expenditure in Ireland

The non-financial institutional sector accounts include items for ‘interest paid’ and ‘interest received’.  However the number reported by the CSO is the total after adjustment for FISIM (financial intermediation services indirectly measured).  

The purpose of this is to try and account for financial services that are not paid for directly but are paid for indirectly via the gap between deposit and lending rates of financial institutions.  Thus a part of interest expenditure is to pay for the cost of the money provided and a part of it is to pay for the cost of financial services provided.  This latter part is included in consumption for households and as part of intermediate consumption for non-financial businesses.

The release last week by the CSO includes interest figures but these are after the adjustment for FISM has been carried out.  However, eurostat publish item D.41(g) which is “total interest before FISIM allocation” which allows us to produce the following table.

Interest paid by sector 2011

The total amount of interest paid was nearly €20 billion or 12.4% of GDP. 

If we were to assume an average interest rate of 4.0% that would imply a total debt of around €500 billion.  At 4.5% the debt would be around €440 billion.  These figures give the ballpark for what the aggregate debt burden of the government, household and non-financial corporate sectors is.

The FISIM adjustment for the household sector seems ‘large’.  For all years from 2002 to 2008 it was below €2 billion but from 2008 to 2009 it jumped from €1.6 billion to €4.3 billion.  It has remained high since then.  The FISIM for the non-financial corporate sector similarly rose in 2009 but it has fallen back since then.

A table of total interest paid since 2002 and some further details on FISMIM are below the fold.

Government Sector Non-Financial Accounts

The non-financial general government accounts in the Institutional Sector Accounts give a cash-based view of the general government sector which is more complete in scope than the Exchequer Accounts.  The general government accounts used for the Excessive Deficit Procedure are accruals-based.

Below the fold are the current accounts of the general government sector since 2007 (noting that the figure for ‘Value of Output’ is the sum of subsequent items in the accounts rather than a starting input, as most government output is non-market).

Flows in the Household Sector

A couple of recent posts have looked at the financial stocks of assets and liabilities in the household sector.  The second part of the Institutional Sector Accounts is that which looks at non-financial flows; earnings, income, consumption and savings, investment and depreciation.

First, here are the figures for the household sector current account for the past four years.

Household Sector Non-Financial Accounts

For most of the aggregates there was very little change in 2011 on the 2010 figures.  The large drops seen in 2009 and 2010 eased somewhat in 2011, but there is little sight of a comeback in these numbers.

Production (value of output) in the household sector rose slightly in 2011 leading to a small rise in the operating surplus of the sector (+1.6%).  Wages paid to households (including employer’s PRSI) from the government, business and household sectors all declined in 2011, though at 1.3% the drop was the lower than previous years. These and other minor changes led to a decline of 1.3% in the Gross National Income of the household sector.

The aggregate that shows the largest change is "Taxes on Income and Wealth” which increased by 22.1% on the year.  However, much of this is a reclassification change rather than an increased tax burden on households.  In 2010, €2,018 million was collected via the Health Levy which was classified as a social contribution.  For 2011, the Health Levy was abolished (along with the Income Levy) and replaced by the Universal Social Charge and all the revenue collected under the USC is classed as a tax rather than a social contribution.

Reflecting this social contributions paid to the government sector from households fell 10.7%.  In 2010, social contributions paid to the government (all by the household sector) were €11.5 billion.  For 2011, this was €10.3 billion.  The remainder of the social contributions paid by the household sector were made to the financial sector (private pension contributions). 

These were largely unchanged on the year at €4.3 billion.  Social contributions to and from the household sector will be related to non-profit organisations which are included in the household sector.

In 2010, the total of income and wealth taxes and social contributions from the household sector paid to the government sector was €23.9 billion.  For 2011, this increased to €25.4 billion.  Social contributions paid from the government sector to the household sector were €23.8 billion, an increase of 2.5% on 2010.

The sum of these changes meant that the gross disposable income of the household sector declined from €86.2 billion in 2010 to €84.2 billion in 2011, a fall of 2.3%.  From this household consumption was €77.5 billion, a decline of 0.8% on 2011.

Here are the capital accounts of the household sector.

Household Sector Non-Financial Capital Account

The household sector has moved from being a net borrower to a net lender.  This is largely as a result of the collapse in investment in non-financial assets by the household sector (buying new houses).

In 2008, gross capital formation by the household sector was €17 billion.  This itself was down from €26 billion in 2006 and the fall continued through to 2011 when investment by the household sector was just over €4.7 billion.  With depreciation of existing household capital slightly under €4.7 billion, the net capital formation of the household sector in 2011 was just €44 million.  Repair of existing capital and investment in new capital barely covered the depreciation of existing capital.

The household sector is not using its gross savings to invest in fixed capital.  Nor is the sector using it to build up deposits; it is going it to pay down debt.

Sunday, November 11, 2012

Mortgage Arrears as a Measure of Distress

There are 22% of mortgage accounts exhibiting some form of difficulty according to the latest mortgage arrears statistics published by the Financial Regulator.

Mortgage Arrears June 2012

The mortgage crisis a huge problem (c. 130,000 households) and is not new, but 78% of mortgage borrowers are meeting their mortgage commitments according to the original terms.  These number almost 470,000 households.   The number of households in the table above is estimated using the fact that the average number of mortgage accounts per household with a mortgage is 1.27.

There are also 580,000 households who own their homes outright with no mortgage liability and 450,000 who rent from local authorities or private landlords.  Of the 1,700,000 million households in Ireland, around 1 in 13 are in mortgage difficulty.

From the bank’s perspective the key measure is not the number of households but the proportion of the loan book that is in distress.  It can be seen that over 27% of mortgages by balance have been modified or are in arrears.

Here is a set of five representative borrowers who each begin the year with a starting balance of €100,000 on their mortgage. 

Who is in arrears

They all have loans with an interest rate of 4% resulting in an opening monthly interest charge of €333.  The borrowers are making monthly repayments of nil to €823.  The closing balance is the principal after 12 months and the current monthly interest is the monthly interest charged on their mortgages after 12 months of these repayments.

Which of these borrowers is in the most mortgage distress?  Which of these borrowers are in mortgage arrears?  Are these the same question? Look at the five borrowers above and then check below the fold to see who is in arrears.

Reducing Mortgage Balances

The previous post looked at the household balance sheet and the declining levels of household debt in particular.  At the end of 2011, the household balance sheet has €179 billion of loans.  This can roughly be broken down as:

Household Sector Liabilities

One aside of the above table relates the graph of debt-to-gross disposable income for the household sector at the end of the previous post.  As can be seen above about one-fifth of the debt in the household sector relates to buy-to-let mortgages.  These debts are not dependent on gross disposable income to be serviced; they are dependent on rental income.  These are not typical household debts; they are business or investment debts.

The buy-to-let sector will come into focus in the next few weeks with the first official release of arrears statistics from the central bank.  The sector is apparently in turmoil (see slide 7).  Apparently, because in Census 2006 there were 145,000 recorded as renting from private landlords while in Census 2011 the equivalent figure is that 305,000 households are now renting from private landlords.  There are more thoughts in the BTL sector in this comment.

The focus here is on the largest item of household debt; owner-occupied residential mortgages.  The Financial Regulator has been providing mortgage arrears statistics since the third quarter of 2009.  The following table combines this with data on mortgage lending from the Irish Banking Federation.

Mortgage Balances, Repayments  and Arrears

At the start of the mortgage arrears statistics in the Q3 2009, the aggregate balance on all owner-occupied mortgages was €118.7 billion.  In the 11 quarters since this balance has fallen by €6.7 billion to €112.0 billion.

This alone does not reflect capital repayments by borrowers as additional lending by new and existing borrowers will offset these repayments.  The IBF dataset breaks down owner-occupied mortgage lending into four categories.  Here they are with the amount of lending that has taken place since Q4 2009:

  • First-time buyers: €4.3 billion
  • Mortgage top-ups: €0.9 billion
  • Mover-purchasers: €3.4 billion
  • Remortgages: €0.9 billion

The first two are unambiguously new lending and are summed in the column labelled ‘New’ lending in the table.  Payments by existing borrowers must exceed these new drawdowns to reduce the overall balance outstanding.

The latter two are less clear cut. It is impossible to tell if mover-purchasers lead to an increase in mortgage debt.  This depends on whether they sell they existing home and on whether the new loan is greater than than the original loan.  Remortgages won’t reduce the amount of debt but it is impossible to tell if they increase it.   These are summed in the column labelled ‘Other’ lending and to be conservative it is assumed that they add nothing to new lending.

The Capital Repayments column is thus made up of the reduction in the overall outstanding balance and new lending to first-time buyers and top-ups.  With no allowance made for mover-purchasers or remortgages this is likely to be lower limit of actual repayments.

In this case there has been nearly €12 billion of capital reducing payments made in less than three years, an average rate of almost €1.1 billion per quarter.

At the start of the arrears statistics in Q3 2009, the total amount of arrears that had accumulated at that time was €354 million.  Since then it has risen to €1,439 million, an increase of €1,084 million.

The €1.1 billion rise in arrears in the 11 quarters since Q3 2009 is equivalent to the average amount of capital repayments that takes place in one quarter.  Also, the arrears figure includes arrears on capital and interest repayments on the mortgage.  Using the retail interest rates data from the Central Bank we can roughly gauge the interest component on mortgage repayments:

Mortgage Balances, Interest and Repayments

We can see that since September 2009 households have made repayments of around €21 billion on their home mortgages.  This is 20 times greater than the arrears that have accumulated over the same period.

This is not to dismiss the severe distress that thousands of households are suffering as a result of excessive mortgage debt.  There are huge difficulties and addressing these has to be a priority.  But there are many more households meeting their mortgage commitments.

Saturday, November 10, 2012

The Household Sector Financial Balance Sheet

Here is a summary of the 2011 financial balance sheet of the household sector from last week’s Institutional Sector Accounts.

Household Balance Sheet 2011

The numbers are little changed from 2010 when a net financial wealth of €118 billion was reported.  The main reason for the slight increase in net financial wealth is the continued reduction in household loan liabilities.  The total wealth of the household sector would need non-financial assets (property, land and valuables) added to this €117 billion figure.  The value of houses owned by the household sector is probably around €300 billion.

One notable feature of the balance sheet of the household sector is the declining level of loan liabilities.  According to the CSO data, this peaked at €203 billion in 2008.  Since then it has fallen by €24 billion.

Household Loan Liabilities

The fall in short-term loans may hit a lower bound but the drop and long-term loan liabilities has averaged around €6 billion per year and if current repayment and drawdown patterns remain this is likely to continue.

There is massive debt in the household sector in Ireland but it is clear that there are massive repayments being made.  The reduction to €179 billion is significant but the end-2006 figure was €169 billion so the progress in unwinding the huge borrowing of the boom is still small.  The 2002 figure was €110 billion.

Reductions in household gross disposable income means that the drops in the level of debt are not reflected in drops in the key debt-to-disposable income metric for the household sector.  This is reflected in this chart from the CSO.

Household Debt to Income

Consolidated Loan Liabilities

The release on Thursday of the 2011 Institutional Sector Accounts by the CSO gives an insight into the financial stocks (assets and liabilities) and non-financial flows (income, consumption and savings) of the main sectors of the economy.  One addition to this year’s release is the inclusion of ‘consolidated’ tables for the financial tables.  As the release says:

This year both consolidated and non-consolidated tables are presented for the first time for the Financial Accounts.  The consolidated analysis allows a clearer view of transactions and balance sheet positions between institutional sectors. Transactions between entities in the same institutional sector are netted out in this consolidated presentation.

The end of year (consolidated) stock of financial assets and liabilities is shown excluding stocks which exist between units within the same sector. This view of the accounts can be very useful when analysing financial instruments such as loan liabilities as the consolidated view removes inter-sectoral balances.

Here are the consolidated debt liabilities of the household, government and non-financial corporate sectors at the end of 2011.

Consolidated Liabilities

The differences between the non-consolidated and consolidated figures for the household sector are zero, while there are about €5 billion of extra liabilities on the government’s non-consolidated accounts (likely related the Housing Finance Association).  

The big difference is for the NFC sector where the consolidation reduces the liability figure by €45 billion.  These are liabilities owed by the resident NFC sector to other counter-parties in the resident NFC sector, i.e. domestic intra-company loans.

A recent table from the IMF which included the following 2012 totals for the gross, non-consolidated debts of the three sectors as a percent of GDP got a lot of attention, including in The Wall Street Journal.

  • Household: 117%
  • NFC: 258%
  • Government: 118%

It can be seen that the figures for the household and government sectors reconcile roughly with those in the above table.  The 2012 deficit and return to bond markets of the government sector explain the increase that will be seen in 2012.  The figures that can’t be similarly reconciled are those for the NFC sector.

The 258% of GDP figure used by the IMF is a much greater than the 168% of GDP figure consolidated figure now provided by the CSO.  Some of the difference is due to the consolidation that removes domestic intra-sectoral balances.  It is also the case that the CSO have revised down the earlier figures. 

When they first reported the 2010 non-consolidated loans figure for the NFC sector it was €337 billion.  In this year’s release that figure has been revised to €298 billion.

It will also be the case that a significant proportion of the consolidated loan liabilities of NFCs are to the Rest of the World - predominantly the borrowings of foreign multinational
corporations resident in Ireland.  Thus the 168% of GDP figure in this week’s release is still an exaggeration of what might be considered “Irish” corporate debt, which is some level less that 168% of GDP.

According to data from the Central Bank lending from Irish-resident banks to Irish-resident NFCs peaked at €175 billion in the third quarter of 2008, of which €115 billion was to property-related sectors.  The lending to the property-related sectors is a mess and huge amounts of it won’t be repaid.  Transaction data shows that the €60 billion of non-property related lending to Irish NFCs has declined by the €6 billion in the interim.

The figure for “Irish” NFC debt will be high at the moment but it is still the case that much of the NFC loans are delinquent property-related loans that will not be repaid.  A large portion of these remain to be resolved but this process will reduce the NFC debt figure.

This process also means that the total of household, government and NFC debt results in some double-counting.  There are around €50 billion of property-related loans now controlled by NAMA in the NFC figure and the government loans figure includes the €25 billion of Promissory Notes to the IBRC to cover the losses on these loans. 

Either the developers will repay the loans they have taken out (they won’t) or the government will repay the Promissory Notes (they will).  They won’t be paid twice.  The government debt figure also includes monies for the recapitalisation of the pillar banks.

The most recent recapitalisation from March 2011 provided money to cover losses on household and business lending that the banks will incur before the end of 2013.  This has added to the government debt figure but when these inevitable losses are (eventually) resolved they will reduce the household and NFC debt figures.

Both the household and Irish NFC sectors have seen reductions in the amount of debt they are carrying for the past four years.  This process will continue through repayments and the eventual writing down of unpayable debts.  The ongoing deficits mean that the debt of the government sector continues to increase.

Ireland has a massive debt problem, and this top-level analysis does not reflect the huge difficulties faced by individual households and businesses, but the problem is not intractable.  The level of debt is probable somewhere around €500 billion.  This is three times GDP and four times GNP.

Tuesday, October 30, 2012

Defusing ‘The Mortgage Timebomb’

In this weekend’s Sunday Business Post, commentator David McWilliams has an article under the title “It’s time to defuse the mortgage timebomb”.  The piece concludes with:

“In addition, the longer this goes on, the more the banks become zombie banks incapable of breathing credit into the market.  A deal must be done right now.

The banks set aside €16 billion in the last capitalisation round to cover bank loans in the residential market.  Taking the total mortgage lending book of €112 billion, the implied total default on the entire book is where we are now in terms of arrears, 16 per cent.  However, not all these arrears will be total write-offs, so there is enough cash in the tank now to do a debt for equity at 50/50 right now.  The gives the punter a break and the bank an upside option over time.

But maybe the reason the banks have been tardy in moving – after all, they were dressed down by the Central Bank last week – is that they think €16 billion isn’t enough.  If it isn’t, we need to go back to Frankfurt and come up with a figure that covers all bases and say to the ECB: “We need more cash and you will have to cough up”.

We know the Germans need a success in Ireland.  We know that we can only have success if the total banking problem is solved, and we know that the pending mortgage crisis has not been addressed yet.

Wouldn’t it be sensible to put it all in one big bang solution?”

The trouble with “big bang” or soundbite solutions is that they are rarely effective for complex problems.  At the top-level it seems the problem in the residential mortgage crisis is simple – too much debt – but there are a number of subtle complexities that mean top-level solutions will be ineffective.