McCarthy’s millions…€400 million? €450 million? €480 million? July 30, 2009Posted by WorldbyStorm in Economy, Irish Politics.
Here’s a puzzle here, at least for me.
The week the McCarthy Report was released we heard this.
ECONOMIST COLM McCarthy, architect of the “Bord Snip Nua” proposals, presented the measures as a central strand of the Government’s four-year plan to rebalance the public finances and reduce the requirement to borrow €400 million a week to run the State.
Arguing that the Government was paying the penalty interest rates on its borrowings – in excess of two percentage points above the rate Germany pays for equivalent 10-year loans – he said the current dependence on international capital markets “can’t go on”.
It was not possible, he said, to continue borrowing at that rate and “very, very dangerous”. Stating that it was wrong to conclude that the credit crisis was over, he said there was no guarantee that any government could sail through borrowing at the current level without encountering hiccups on the bond markets.
“The idea that the measures taken to date are going to get us out of the woods is just not an option,” he said.
The corrective measures taken to date had reduced this year’s deficit to a little above 11 per cent of gross domestic product (GDP) from a potential 15 per cent. However, it would be very unwise to attempt a repeat of the practice in the 1980s when governments borrowed the equivalent of 10 per cent or 11 per cent of GDP for the best part of a decade.
On Monday McCarthy said on RTÉ:
…that it was difficult to know when the IMF would move in, if corrective measures were not taken.
The Government, he added, was borrowing nearly €400 million a week. This had to be reduced, and there was a risk that the Government would find difficulty borrowing if it was not done.
Then we read from Vincent Browne:
Of course we have got to stop borrowing at the rate of €450 million a week and we have got to cut back significantly on our spending. But there is another way of looking at this and one such way which is to see this as a communal problem.
‘…nearly’ €400 million, €400 million, €450 million?
And then last week in a discussion on our borrowing requirements Donal O’Mahoney of Davy, under the heading Ireland Inc performs strongly in a crowded debt market and the subheading… True: there has been too much scaremongering…
With the State borrowing €480 million a week just to make ends meet, it is the collective task of the Government, Opposition parties and social partners to ensure that the forthcoming reform of Irish public expenditure and taxation is not only fair and equitable, but also of sufficient scale to ensure fiscal stabilisation in the medium term.
€480 million. €480 million?
Thing is… even taking the original figure there are problems.
One is that McCarthy doesn’t quantify the impact of the savings that he’ll make in relation to the €400 million and the vagueness of the text in the Report leaves a lot to be desired. Granted there is a breakdown of the projected figures he arrives at to calculate the debt, or rather the figures he was given and you’ll find them in the first five or six pages of Vol. 1. And yes, they do seem to support the €20 billion or so which would lead to outgoings of €400 million per week. But they are based on our situation in April 2009.
The Report doesn’t mention the €400 million figure at all and is surprisingly coy about the effects of the savings. Which, as noted by Michael Taft, is a curious omission since he has had every opportunity to do so.
We know that the savings that McCarthy recommends are of a scale of €5.3 billion. Except they’re not since they couldn’t be realised in a single year and many couldn’t, for either political or structural reasons, be realised ever. So let’s take the ball park as suggested by the Irish Times editorial, €3.0 billion, to be conservative. That’s higher than the Government says it seeks, but lower than the figures the media are arguing for (actually the ESRI came out at the weekend looking for a somewhat smaller €2.5 billion).
That, mapped across a year, which again is a fairly pointless exercise because precisely the same political and/or structural reasons come into play, would leave us with €57 million less spent per week. The result being?
We’d no longer be seeing €400 million go out in borrowings per week, it’s now… €343 million. Okay. That seems substantial, but one has to wonder if it’s worth the cost.
Thing is it’s not correct. We don’t actually make those savings.
Michael Taft has taken the ESRI report projections – which one can argue are the closest to a serious economic analysis of impacts – to map the McCarthy figures and he comes out at a rather smaller figure, presumably through lowered economic activity, etc that would see us ‘reduce our borrowing requirement by 0.9%’.
And the figure that would require on a weekly basis?
€29 million. Which would leave us still paying €371.
But if we then map those savings onto the figures offered by Browne and O’Mahoney… well… we arrive at savings that would seem to indicate that our true situation even after the McCarthy Report were implemented would leave us above the figure that he argues is untenable.
In the case of Browne we’re talking about €421 and in the case of O’Mahoney we’re talking about €451. So O’Mahoney’s figure even if McCarthy’s savings are factored in would still be higher than the original McCarthy figure and that of Browne.
Frankly, scary as €400 million is, well, €480 million is considerably more scary. Now, why would McCarthy seek to minimise that figure?
The only answer I can come up with is that the lower the figure he chooses, the greater the savings appear to be. So €29 million from €400 million is obviously more impressive than €29 million from €480 million.
Of course maybe O’Mahoney got it wrong. Perhaps he made a mistake. Not so, according to Noel Whelan, fresh from the MacGill Summer School, and, by the by, of a mood to rhetorically slap George Lee around the head related how…
A figure cited most often by speakers at the summer school, and seized upon by audience contributors, was that Ireland is currently borrowing €480 million a week. This figure was parsed repeatedly, into amounts per day, per hour and per minute. One questioner even pointed out how much Ireland had borrowed during the time it took to hear one particularly lengthy speech from the platform.
So, even at that gathering of the great and the good of our econometariat that figure had some currency, so to speak. I mean these are economists…. fer’ Christ’s sake. They may not know everything, but one would expect them to know something.
And all this, all this, as I noted previously to achieve savings that would be by any yardstick less than stellar, even if we accept McCarthy’s original figures.
Add to that the fact, again, that the ESRI at the weekend sought €.5 billion less in cuts than that €3 billion figure Michael Taft suggests with the knock-on reduction in the savings made from implementing the McCarthy proposals. So we’d be looking at less than €29 million. Perhaps closer to €22 million. Astounding stuff, I think you’ll agree.
And in a way the actuality of it isn’t the core issue. It’s that we have supposedly authoritative voices issuing two divergent (or is three?) figures into the public domain and expecting us to take them all seriously.
I would suggest that this divergency demonstrates the fuzziness of the arguments being made and the positions being taken. If there is such imprecision on the part of economists (let’s put Browne to one side, but let’s remember his figure is lower than that used by O’Mahoney) as to the figures how can we take entirely seriously their absolutism as to the supposed potential outcomes.
As ever I have to add a necessary caveat. This isn’t to underplay the seriousness of the situation we find ourselves in. But it is to posit that the choices that are being made appear, from this remove, to be much more arbitrary than I, for one would like. And those choices have actual impacts outside the pages of both McCarthy and our media.
For €29 million, or is it going to be €22 million per week we lose, as I listed previously, a tranche of child benefit, free third level education, garda stations, a brace of museums and cultural institutions funded under the D4 Budget of the Department of Arts, the SEI initiative, rural transport, the Western Corridor and so on and so forth.
And note that McCarthy himself isn’t above a bit of scare-mongering when it suits him. His rhetoric about the IMF ‘moving in’ is directly undercut by that of Michael Somers of the NTMA who noted last week that:
…there had never been any question that the State would not repay what was borrowed. Part of the reason for the change in sentiment was the fact that the NTMA has kept a “huge mountain” of €25 billion in cash available meaning it can easily meet any repayment demands.
Think about that… there ‘had never been any question’ that the State would default. That’s what bankruptcy means. That or near-bankruptcy would be the circumstances that would trigger the IMF arriving on our doorstep (indeed much of what I’m reading seems to suggest that it would be the ECB that would act, albeit through local proxies – which actually in a way is precisely what we see already).
And let us return to the IT editorial the day before yesterday which represents something of an epiphany as regards these matters:
Fears of debt default, and suggestions that Ireland might be forced to seek sanctuary with the International Monetary Fund (IMF) may well have seemed greatly exaggerated, given Ireland’s low level of government debt. Nevertheless, at times of great financial and economic uncertainty, markets may be moved as much by sentiment as by more fundamental concerns.
Is the €400 million figure and the scary rhetoric about the IMF part of that ‘sentiment’?