http://www.centralbank.ie/polstats/stats/cmab/documents/ie_table_a.6_loans_to_irish_residents_-_outstanding_amounts_(incl._securitised_loans).xls
In a sea of confusing data, a significant trend is going largely unreported. With our national fixation on the appalling accumulation of public debt, we are largely ignoring the even greater reductions in private debt held by Irish individuals.
In the last 12 months, over 50bn euros of private debt has been repaid by irish individuals (18% of total private indebtedness). This reduction in debt is even larger than the accumulation of debt by the State and shows that Ireland is indeed mending its position -albeit slowly and with immense pain. This builds on reductions in previous years so that our levels of private indebtedness have fallen from 348bn in 2008 to 255bn today -almost a third of all private debts have been repaid or settled in the last 3 years.
There is hope then that pretty soon, private individuals will have run down their debts and may begin to divert their income from debt repayment to investment, consumption or saving -any of which will be beneficial to our economy and/or banks. If 50bn euros a year is being found for debt reduction, then once our debts fall to a lower level we can expect this flow of money to be diverted back to the real economy, providing a welcome lift to our slumped economy.
However, the picture is not as simple as all that. Within the figures for debt reduction, it is clear that it is businesses and not households that are repaying all this debt. Despite bleating from the faux-tycoons that seem to have taken over all media in the last few years, it is clear that Irish businesses are not just profitable, but are highly profitable and increasingly debt free.
Household indebtedness: Peak 178bn Today 165bn (7% reduction)
Business indebtedness (excl. banks): Peak 170bn Today 90bn (47% reduction)
It is clear from these figures that although private debt reduction continues to happen at an astonishing rate, household indebtedness has hardly fallen at all through the years of recession, and has actually grown as a proportion of income. Given this stubbornly high level of household debt, all talk of a consumer recovery next year (for instance by cutting VAT to high-end goods) is misplaced. Our recovery simply cannot come from a return to the shops as advocated by Michael Noonan -and even if it could, it is foolish of him to encourage highly indebted households to spend more.
Based on these trends, it seems likely that the recovery will happen in business, primarily business that does not depend for its livelihood on selling to Irish households (especially exports). As they run down their debts, businesspeople will increasingly look for alternative uses for their income, whether investing in new fixed assets, expanding their businesses, taking on new staff or saving their cash in financial products. All of these outcomes would be good for the economy in the long run, but in the short run we desperately need to encourage business to hire and save -alleviating our unemployment and banking crises respectively.
Unfortunately, my hunch is that such efforts will fail and business will instead concentrate on upgrading assets and expanding markets. Though this is good, and will stand to us in future, it is not our immediate requirement. This "jobless recovery" seems inevitable based on these figures and the general business outlook and means that we are now facing a situation where business is likely to boom in the near future while households face years of austerity and unemployment.
Which brings me to an unpalatable problem, the inequitable burden of taxation on households by comparison with the low rate of Corporation Tax payable by business has always had its detractors, however now it seems that we are facing a bleak period of rising inequality where a debt-free, lightly-taxed and highly profitable business sector will be coexisting with households plagued by indebtedness, public service reductions, and a likely increasing tax burden.
The obvious solution (unfortunately no Irish politician can even mention this without inviting scorn) is to increase business taxes and use the funds to alleviate the positions of households to allow for a more balanced recovery where households would be given space to reduce their debts to the same extent as business. Given the depth of our problems it is vital that all sections of society bear a share of the necessary burden of adjustment. While we can be relieved that businesses have found the cashflow to reduce their debts, we should be extremely alarmed that in spite of years of austerity, Irish households have not found the surplus funds to reduce their indebted positions. Their should be red warning lights flashing all over policy circles to sound the alarm that despite a consumption slump, households' position has hardly improved at all. We urgently need to rebalance the burden of adjustment (particularly that of taxation) so that our blessedly vigorous businesses start to contribute to our recovery in line with the contributions already made by households.
However, in Ireland, we have developed an unhealthily debate-free credo of low Corporation Taxation. Even though it is now clearly in our economic interest to raise Corporation tax, to promote balanced growth, this topic is off-limits and instead the Government has just delivered a tax cut to restaurants and newspapers in some sort of bizare plan to create employment.
We are rapidly reaching a point where Corporation Tax must be increased or inequality will spire alarmingly. We need to treat this tax rate as it is -a simple revenue raising measure with economic import- instead of the Holy Cow we have allowed it to become.
The situation has not been helped by the invasion (for invasion it is) of a new proto-business commentariat, feeding an industry of armchair tycoons and self-congratulatory professionals. Business and enterprise are now viewed not as mere economic activities, but increasingly also as moral virtues and ends in their own right. While I find this new romantic vision of the world of business (espoused by a host of glitterati who could not possibly be more remote from real business -including comedians, politicians, academics, chiefs of Semi-State bodies etc.) to be somewhat less harmful than other crude ideological prisms which we have popularised over the years to explain a frustratingly complex world, it would nonetheless be extremely harmful if we allowed it to get in the way of the necessary decisions regarding our economic recovery. We cannot allow the burden of adjustment to fall exclusively on households, which clearly are unable to improve their desperate positions despite greatly reduced consumption patterns. High levels of debt interest repayment, increased household taxes and service cuts are obviously depriving them of the ability to run down their debts -all the while as business escapes such measures and is increasingly debt-free. That is a recipe for eventual disaster as household debt is every bit as unsustainable as business debt was at the outset of the crisis.
We need to bypass this body of mindless ideology that has taken over the debate about business taxes and form policies with recovery -not the Sindo- in mind. We cannot allow ourselves fall hostage to blowhards who evaluate problems based on ideology rather than substance. Noone can be spared, not even the well connected and (depending on your views) not even the virtuous.
In a sea of confusing data, a significant trend is going largely unreported. With our national fixation on the appalling accumulation of public debt, we are largely ignoring the even greater reductions in private debt held by Irish individuals.
In the last 12 months, over 50bn euros of private debt has been repaid by irish individuals (18% of total private indebtedness). This reduction in debt is even larger than the accumulation of debt by the State and shows that Ireland is indeed mending its position -albeit slowly and with immense pain. This builds on reductions in previous years so that our levels of private indebtedness have fallen from 348bn in 2008 to 255bn today -almost a third of all private debts have been repaid or settled in the last 3 years.
There is hope then that pretty soon, private individuals will have run down their debts and may begin to divert their income from debt repayment to investment, consumption or saving -any of which will be beneficial to our economy and/or banks. If 50bn euros a year is being found for debt reduction, then once our debts fall to a lower level we can expect this flow of money to be diverted back to the real economy, providing a welcome lift to our slumped economy.
However, the picture is not as simple as all that. Within the figures for debt reduction, it is clear that it is businesses and not households that are repaying all this debt. Despite bleating from the faux-tycoons that seem to have taken over all media in the last few years, it is clear that Irish businesses are not just profitable, but are highly profitable and increasingly debt free.
Household indebtedness: Peak 178bn Today 165bn (7% reduction)
Business indebtedness (excl. banks): Peak 170bn Today 90bn (47% reduction)
It is clear from these figures that although private debt reduction continues to happen at an astonishing rate, household indebtedness has hardly fallen at all through the years of recession, and has actually grown as a proportion of income. Given this stubbornly high level of household debt, all talk of a consumer recovery next year (for instance by cutting VAT to high-end goods) is misplaced. Our recovery simply cannot come from a return to the shops as advocated by Michael Noonan -and even if it could, it is foolish of him to encourage highly indebted households to spend more.
Based on these trends, it seems likely that the recovery will happen in business, primarily business that does not depend for its livelihood on selling to Irish households (especially exports). As they run down their debts, businesspeople will increasingly look for alternative uses for their income, whether investing in new fixed assets, expanding their businesses, taking on new staff or saving their cash in financial products. All of these outcomes would be good for the economy in the long run, but in the short run we desperately need to encourage business to hire and save -alleviating our unemployment and banking crises respectively.
Unfortunately, my hunch is that such efforts will fail and business will instead concentrate on upgrading assets and expanding markets. Though this is good, and will stand to us in future, it is not our immediate requirement. This "jobless recovery" seems inevitable based on these figures and the general business outlook and means that we are now facing a situation where business is likely to boom in the near future while households face years of austerity and unemployment.
Which brings me to an unpalatable problem, the inequitable burden of taxation on households by comparison with the low rate of Corporation Tax payable by business has always had its detractors, however now it seems that we are facing a bleak period of rising inequality where a debt-free, lightly-taxed and highly profitable business sector will be coexisting with households plagued by indebtedness, public service reductions, and a likely increasing tax burden.
The obvious solution (unfortunately no Irish politician can even mention this without inviting scorn) is to increase business taxes and use the funds to alleviate the positions of households to allow for a more balanced recovery where households would be given space to reduce their debts to the same extent as business. Given the depth of our problems it is vital that all sections of society bear a share of the necessary burden of adjustment. While we can be relieved that businesses have found the cashflow to reduce their debts, we should be extremely alarmed that in spite of years of austerity, Irish households have not found the surplus funds to reduce their indebted positions. Their should be red warning lights flashing all over policy circles to sound the alarm that despite a consumption slump, households' position has hardly improved at all. We urgently need to rebalance the burden of adjustment (particularly that of taxation) so that our blessedly vigorous businesses start to contribute to our recovery in line with the contributions already made by households.
However, in Ireland, we have developed an unhealthily debate-free credo of low Corporation Taxation. Even though it is now clearly in our economic interest to raise Corporation tax, to promote balanced growth, this topic is off-limits and instead the Government has just delivered a tax cut to restaurants and newspapers in some sort of bizare plan to create employment.
We are rapidly reaching a point where Corporation Tax must be increased or inequality will spire alarmingly. We need to treat this tax rate as it is -a simple revenue raising measure with economic import- instead of the Holy Cow we have allowed it to become.
The situation has not been helped by the invasion (for invasion it is) of a new proto-business commentariat, feeding an industry of armchair tycoons and self-congratulatory professionals. Business and enterprise are now viewed not as mere economic activities, but increasingly also as moral virtues and ends in their own right. While I find this new romantic vision of the world of business (espoused by a host of glitterati who could not possibly be more remote from real business -including comedians, politicians, academics, chiefs of Semi-State bodies etc.) to be somewhat less harmful than other crude ideological prisms which we have popularised over the years to explain a frustratingly complex world, it would nonetheless be extremely harmful if we allowed it to get in the way of the necessary decisions regarding our economic recovery. We cannot allow the burden of adjustment to fall exclusively on households, which clearly are unable to improve their desperate positions despite greatly reduced consumption patterns. High levels of debt interest repayment, increased household taxes and service cuts are obviously depriving them of the ability to run down their debts -all the while as business escapes such measures and is increasingly debt-free. That is a recipe for eventual disaster as household debt is every bit as unsustainable as business debt was at the outset of the crisis.
We need to bypass this body of mindless ideology that has taken over the debate about business taxes and form policies with recovery -not the Sindo- in mind. We cannot allow ourselves fall hostage to blowhards who evaluate problems based on ideology rather than substance. Noone can be spared, not even the well connected and (depending on your views) not even the virtuous.
You need to look at the business debt reduction numbers as it includes the Nama affect. Consider also the huge reduction in business deposits and shift in business borrowing profile to short term debt. These are indicative of cash flow constraints - burning up excess cash and borrowing short - gambling for recovery before the inevitable insolvency. Also consider business loan facilities include stocking finance which is usually repaid within a year - if business is down then the level of stocking finance will drop - while it appears debt is being repaid what's happening is the use of debt is reducing.
ReplyDeleteThank you for your interest, but unfortunately I disagree with these points.
ReplyDeleteFirstly, on the NAMA effect, the figures I quoted exclude financials.
The use of savings to reduce debt merely underscores the ability of business to run down their debts in a way that households clarly have not been able to.
The movement to short-term debt (I will have to take your word on this, I have no figures to refer), while clearly a problem for business, does not change the fact that business indebtedness has reduced dramatically. Even if debts are now more short-term, nothing can disguise the massive reduction in the level of those debts.
Likewise, business loan facilities -reducing the use of credit for stocking is simply another form of debt reduction. While the convenience of stocking on credit may be lost because of credit issues, or simply because the recession has reduced demand -that does not mean that debt has not been repaid. Prefunding stocks will be expensive for business, but given the figures quoted above, it will not be long before they have overcome this problem.
http://www.independent.ie/business/irish/inflows-ease-deposit-crisis-in-banks-but-lending-is-still-falling-3096196.html
ReplyDeleteTHE deposits crisis in Ireland's banks eased markedly in March but lending woes continued as banks suffered another monthly contraction in their loan books.
The contrasting deposit and loans trends were revealed in the Central Bank's monthly money and banking statistics, while a separate Department of Finance statement claimed deposits at the bailed-out banks rose €2.1bn in March.
Irish institutions have seen their deposit bases decimated since the crisis hit, with total deposits in the 'domestic' banks plummeting from €552bn in September 2008 to €326bn by February 2012.
The 'covered banks' -- bailed- out Bank of Ireland, AIB, Permanent TSB and Irish Bank Resolution Corporation -- have seen an even sharper fall as deposits dropped 67pc from September 2008 to about €253m this February.
Encouraging
"The most positive aspect of today's release . . . is confirmation that household and non-financial corporation deposits increased by €779m in March," said Goodbody's chief economist Dermot O'Leary.
"This is the largest monthly increase since October 2009."
Separate figures from the Department of Finance, compiled using a different methodology, claim deposits at the bailed-out banks actually rose €2.1bn in March, the largest rise since September 2011.
About half this increase came from Ireland, it said, describing this as an "encouraging trend".
Despite the higher level of deposit funding, the amount of central bank money supporting the domestic banks rose from €71.3bn to almost €75bn. This was largely because the ECB's second whack of three-year liquidity flowed into the banking system in March.
On the lending side, domestic banks' outstanding loans to Irish residents fell for the fourth month in a row, dropping from €331.9bn to €328.3bn, while loans to non-residents remained virtually unchanged.
The Central Bank paper said household credit was down 3.9pc year-on-year, while business credit was down 2.3pc, a rate of decline similar to that seen in previous months.