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McCarthy’s millions…€400 million? €450 million? €480 million? July 30, 2009

Posted by WorldbyStorm in Economy, Irish Politics.
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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.

And…

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.

And…

“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’?

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Comments»

1. Longman Oz - July 30, 2009

The NTMA’s stated borrowing target for the year is €25 billion. Divided by the number of weeks in a year, that is €480 million a week. I presume that this is where Vin B/Davy’s are deriving their figure from.

However, I would imagine that the NTMA also has to consider a liquidity cushion and that the amount of cash to be carried into 2010 is therefore also built into its 2009 borrowings. In other words, intuitively, I would have thought that the cash balance to be carried forward this year will be higher than any in recent years…

By the way, all of the talk is about plugging the 2009 deficit, which Davy’s reportedly forecast earlier this month will come in around €24.5 billion for the year (or €470 million a week!). However, what about funding the deficits of the years to come? They will require more borrowing and more interest cost and this is all before we start to think about financing NAMA.

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WorldbyStorm - July 31, 2009

You’re more than likely right. That’s very interesting your second point.

Re the third, some of McCarthy’s cost savings will be built in so they’ll have an effect in future years. Whether we’ll see privatisations, etc, is an question for another day.

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2. alastair - July 31, 2009

The weekly borrowing bill, and ambiguity about how much it actually amounts to isn’t any mystery. It’s perfectly reasonable that it shifts with lending rates, new debt and changed outgoings, evolving economic metrics. If one person can give a clear calculation as to the exposure and cost of the NAMA arrangements (and consequent borrowing overhead), they managed to keep it under their hat. Projected social welfare overhead for the next couple of years? Again a rather grey area – with figures floating about the same sort of wiggle room as the borrowing figures.

It’s also strange to ask McCarthy to quantify the value of his proposed savings in relation to weekly borrowing requirements – how is he to know what that borrowing is directed to any more than the rest of us? He’s been asked to find cuts that amount to value x, and provided a shopping/axeing list that could achieve that goal. The big ticket state expenditure items are mostly off limits to his report – bank bailouts, salaries and pensions.

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3. WorldbyStorm - July 31, 2009

Didn’t use the word ‘mystery’ (and btw, what is it with the outbreak of literalism in the comments and the inability to see rhetorical usage of words? Between aspirant Éirígí members etc…). Just sought to tease out some obvious contradictions.

McCarthy is unambiguous in asserting that €400 million pw is ‘unsustainable’, his words, not mine. That would suggest, at the least, that he has some idea as to what is sustainable, and indeed at the macro he does, hence pp 1-4, Vol I, but he doesn’t break it down and instead mutters about €400 being unsustainable here there and everywhere.

I think it’s entirely reasonable, particularly as I’m a taxpayer, to then point to how the actual figure is now agreed to be a significant level above the figure he considers unsustainable and that any future savings on foot of his Report will still leave us hugely above the ‘currently unsustainable figure’.

What the implications of that I leave to others.

Incidentally, the big ticket expenditure item of pensions certainly wasn’t off limits (or if it was McCarthy chose to ignore said limit), and McCarthy says ‘the cost implications of PS pensions, both in the shorter and longer terms, are an area of concern to the Group’ and the report devotes two pages (pp7-8) on the matter. A fascinating contrast is with the area of Capital expenditure which gets… all of a paragraph, the excuse being that the Report doesn’t deal with it (although in real terms the report engages and dices aspects of the Capital budget).

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4. alastair - July 31, 2009

I think it’s entirely reasonable, particularly as I’m a taxpayer, to then point to how the actual figure is now agreed to be a significant level above the figure he considers unsustainable and that any future savings on foot of his Report will still leave us hugely above the ‘currently unsustainable figure’.

If the point of that exercise is to throw hands up in the air and suggest ‘there’s no point so’, well I’m not buying that. It should have become clear to everyone by now that there’s three dynamics to the current economic mess: There’s a substantial shortfall in national income, there’s a substantial hole in our economic capacity to fill that shortfall in the medium term, and there’s serious lack of clarity about the cost of bailing out the banks and how that will impact on all other economic activity. All the key players are at best throwing out guesstimates, and it’ll take some time to firm those guesses into something less ambigious.

McCarthy says €400 m a week isn’t sustainable? Well that’s fair enough – and presumably that’s a figure he was given at some point. Time and outgoings have moved on, and perhaps that figure is higher or lower than today’s estimates. It’s not in McCarthy’s manadate to break down the impact of his suggested cuts on any weekly borrowing figure though – all he can do is present a menu of options to the government and indicate what the saving per cut would be. He’s provided a list of cuts that he reckons would save a figure above what he’s been asked to, if there’s a shortfall and we’re still in unsustainable territory, then the same logic of how to get out of that situation would apply. It’s not like a bigger debt changes the dynamics of the situation fundamentally (though a smaller debt obviously would).

Incidentally, the big ticket expenditure item of pensions certainly wasn’t off limits (or if it was McCarthy chose to ignore said limit), and McCarthy says ‘the cost implications of PS pensions, both in the shorter and longer terms, are an area of concern to the Group’ and the report devotes two pages (pp7-8) on the matter.

They were off limits. He didn’t include any recommendations on their reform/reduction, and made clear that his brief didn’t allow him to make recommendations on salaries, pensions or capital expenditure.

Quote:
The terms of reference of Bord Snip Nua excluded consideration of three vital areas of public expenditure. The public capital programme, levels of public sector pay and pensions of public personnel were off-limits. This year these respective items individually cost €7.3bn, €17.5bn and €2.3bn. This political exclusion was unfortunate, unnecessary and unwise.

Read more: http://www.irishexaminer.com/opinion/columnists/ivan-yates/scrooge-must-wrest-control-of-civil-service-from-the-big-spenders-97080.html#ixzz0Mr5SdAT9

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5. WorldbyStorm - July 31, 2009

Which makes it near inexplicable that he actually recommends a number of ways forward for pensions, doesn’t it? And the two pages from the actual report as distinct from an opinion piece start with the line…

“The cost implications of public service pensions, both in the shorter and longer terms, are an area of concern to the Group”

and further on it continues…

“A review of the pensions area is beyond the scope of the Group’s exercise. However, the Group urges that all of the above options be pursued and implemented. It would also add a number of
other considerations and alternative / modified reform options that are appropriate in light of the
dramatically worsened position of the public finances since the Green Paper was published:
• it seems prudent to reinstate a mandatory retirement age and not run the risk that lowperforming
members of staff would end up being retained indefinitely;
• the ages at which people qualify for pension in both State occupational and social welfare
schemes should be revised upwards, taking account of the significant recent increases in
longevity;
• better transparency should be brought to bear on the true cost of accrued pensions
arrangements, and accelerated arrangements should be phased out or eliminated as soon as
possible; and
• there should be a move as soon as possible away from full earnings-linking of pensions to
include an element of inflation-indexing, as in some other EU countries.
The Group also notes that, apart from the Defined Benefit pension model (in which all of the affordability risk in borne by the employer / the State), other models are in place across the private sector, including Defined Contribution systems (in which the scheme beneficiary bears the risk), or hybrid arrangements to allow for balanced risk-sharing.”

Sure looks like they were far from ‘off-limits’.

And if McCarthy is running around as recently as this last fortnight quoting a specific figure then I think it’s beholden on him to provide support for that. Particularly when reputable sources are quoting another one which points to a major discrepancy. Now I think that’s a cause for some concern… particularly when the report he has produced argues for cutting child benefit, closing a large number of garda stations, etc, etc.

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6. alastair - July 31, 2009

And if McCarthy is running around as recently as this last fortnight quoting a specific figure then I think it’s beholden on him to provide support for that.

Why? Let’s say his figure is out of date. If the real figure is smaller than he’s stating, then he’s obviously open to accusations of Henny Pennyism. But he’s (presumably) quoting the figures he was given by the government at some point. If his figure is too low, then the argument he makes for all the cuts (child benefit included) are just amplified.

In any case, he doesn’t pretend to be the definative source for where our weekly borrowing stands from day to day – he’s simply re-iterating the information he was supplied with in setting out to reduce expenditure. Don’t hang the man for something that he’s not qualified to speak to.

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7. WorldbyStorm - July 31, 2009

I’m not hanging him at all, I’ve actually stated areas of considerable agreement with him. I’m suggesting that using a figure that is smaller than the figure others use is an issue. I also think it has significant political implications. Where and how are the cuts to come from ? Is it feasible to do so given the sustainability issue, is it even possible in societal terms? And I think given that I take a view on this whereby I’d seriously question huge aspects of what we’ve been told in the recent and not so recent past I’d be a right fool not to continue to question what is being said and what it means.

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8. Makes no sense at all… « The Cedar Lounge Revolution - September 16, 2009

[...] I’ve noted that there’s some disagreement about that figure. But what I’ve also noted is that even if we take that figure as accurate [...]

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9. Mea culpa, mea culpa, mea maxima culpa… we’re not quite hearing that from our beloved leadership. Not yet, anyhow. « The Cedar Lounge Revolution - May 19, 2010

[...] Meanwhile, a small thought. Last year we were told that spending €400m per week was an unsustainable figure. An array of figures lined up to tell us this [...]

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