"In any set of data, the fact that is most undoubtedly true, beyond all need of measurement, is the mistake".
It has been a truism for over a decade now that the Asian tigers (especially China) are on the rise and the old Western powers are in decline. Certainly there is more than ample empirical evidence for this. China's growth rates have outstripped the West's by a multiple, they have industrialised vast areas and vast numbers of their population. They have made some (though not very impressive) advances on moving up the economic value chain, they have gained new technologies by means fair or foul (depending on who you listen to). The list is endless, but the narrative is the same -China vigorous, West sclerotic. The evidence seems to be overwhelming.
Yet it does not feel right. There are a limited number of doubters of this hypotheses (Chris Patten and Will Hutton for starters), but they are held out as rather fringe views. Nonetheless, there are questions to be answered about financial lending practices, poorly developed financial systems, political stability, income inequality, a credit boom and above all -demographic projections. The customary response to any such query usually takes the line that China is different, that it has a track record of defying Western maxims and that it is simply not possible to assess China by the same criteria as other countries.
It does not ring true.
In recent weeks there have been (very muted) articles warning about a high inflation rate, exposure to Western sovereign crises, the imminent peaking of the demographic dividend, the Chinese Government's unhappy choice between curbing inflation or killing growth etc.. Though it seems unlikely that these are the harbingers of a full-blown economic/political upheaval in China, nonetheless, it does not seem possible that the People's Republic can continue to defy gravity indefinitely.
Indeed I would go further than this. In my view, demographic input to China's development is being dramatically underestimated (ditto for Ireland during the Celtic Tiger years). Much of their growth story can be attributed to their (now reversing) demographics, a transitory benefit that will soon be militating against them. Besides demographics, a chronically loose monetary policy (which includes lending targets for banks and massive export subsidies in the form of currency manipulation) has supercharged the economy -but this too can only be a transitory advantage. Indeed the Chinese financial bubble might have burst long ago if it did not have the demographic trend underpinning it all along.
China, like Ireland has had very favourable demographics and a loose monetary policy which delivered consistently high, but ultimately illusory growth rates. Ireland came back to earth with a bump, but is too small to really damage the global economy. However, needless to say that an Irish style recession in China would really make waves in the global economy.
I feel sure that such a reverse is coming. If it came now while Western powers were still sorting out the financial crisis, then it would really put the tin hat on this recession. But regardless of when it happens, it will be a huge upheaval.
Showing posts with label Economics. Show all posts
Showing posts with label Economics. Show all posts
Friday, August 12, 2011
Friday, July 22, 2011
A plan to save Euros
http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/123978.pdf
Well, I certainly can't remember a more anticipated EC. But ultimately I'm disappointed with this document.
The big headline outcomes are a new bailout for Greece, voluntary private sector involvement in Greece's debt crisis is to be pursued, extension of the loan-terms for all 3 program countries, as well as a loosening of EFSF rules to allow it provide support to countries that are not in a program.
Extending the terms of the loans was regretfully necessary. The idea that the program countries will be going back to the markets in the next couple of years has lost all credibility. This much I concede was unavoidable.
The involvement of the private sector is a good idea (if it is done with a moderate hand). European Governments (and especially the program countries) are financially exhausted and it is important to ease the pressure somewhat by shifting some of this assumed responsibility back to the original risk-takers. Besides, after 4 years of turbulence, anyone still holding Greek bonds is probably a speculator anyway and it is highly unlikely that any truly fragile financial institution is still exposed to a Greek default. We will probably find that a moderate default will have very little financial impact. However, I find the part of the document dealing with private sector involvement vague. It states that private sector involvement will be voluntary, citing willingness on the parts of investors to roll over Greek debts. But it is doubtful that they are volunteering to do anything greater than this. Rolling over debts is well and good, but frankly it doesn't really relieve the Member States.
However, my greatest problem with the deal is in its loosening of the rules of the EFSF/ESM. The idea of lending to countries that are not in a recovery program seems obviously silly -all the expense and none of the reform -who could argue that's a good idea? A reform program is the necessary exit strategy from providing support to Member States. It is indispensible. If Member States have to be bailed out, then we need to map a route for them to stand on their own feet again, or else we will end up with a proper transfer union.
I doubt that will ever be allowed to happen, neither the lenders nor the borrowers want it. So it appears to me that this is some sort of a PR stunt to reassure markets that IT and ES will be allowed access EFSF funding without having the humiliation or terms of a bailout. These countries may gain some short-term, pre-crisis credibility because of the access to credit this brings, but noone could argue this would be a good idea if we decided to do it in practice. Not only would we be sacrificing the reforms that rightly come with access to bailout money, but this change could (and I stress could) create expectations of the EFSF being used as a mechanism for some sort of transfer union.
The whole idea of the ESM was to create a mini-IMF for the Eurozone, bailing out countries on the condition of mending their credit positions. This proposal nominally drifts way beyond this. This is not rehabilitation, it is artificially cheap credit -the source of all our woes. Taxpayers may be willing to assist their neighbours to turn around their situations, but they will quickly squash any notion of paying for the indebted countries to carry on with business as usual. Frankly I'm surprised it has been even made it onto this document.
There is also provision for the ESM to dabble in secondary markets. This could be a very useful policy tool if it is used to involve the private sector in debt reductions, but seemingly it is only permissible with the agreement of each MS and the ECB. One must wonder then why it was necessary to include it in this document if it can only be used when everyone is in agreement -more spindoctoring?
Finally, the new Greek bailout. Unavoidable in my opinion, but it has to be properly funded. While the document promises big on the involvement of the private sector, I have already expressed some doubts about this. I will go further. The document also calls on the IMF to participate in the new bailout. I do not think it is incredible to suspect that the IMF may decline to involve itself without more private sector involvement. That would be a quite incredible humiliation for everyone involved, but right now, I would not rule it out.
So my verdict is that the only people that got what they wanted were the Irish. The concessions on our interest rate and also on the term of our loans, alongside the modest burning of financial bondholders, fiscal austerity and the gradual recapitalisation of our banks means that Ireland is now in a much better position than 3 years ago. Though it is not smooth sailing from here, it is likely that Ireland will begin to make a recovery in the next 2 years and recover strongly soon after. Doubtless the banks will still require more capital (even though we have sworn on our honour that we tested them properly this time), but the whole mess seems more manageable these days. Economic reforms scheduled under our bailout deal will go further to getting us out of Dodge.
But the concessions to the program countries on the terms of their loans, does not in any way compensate for the lack of hard details on the Greek bailout, or the fudging of the role of the EFSF. Though markets have reacted well today, I am not satisfied with this deal and fear it is based substantially on wishful thinking and fuzzy economics. Frankly, we need to cluck at this text and tell them all to try again.
Markets are not the measure of these deals. Markets rise and fall on the self-interest of investors. Rising markets in response to more public stimulus is unsurprising -not a true yardstick of the effectiveness of policy.
TEXT of the Deal:
Well, I certainly can't remember a more anticipated EC. But ultimately I'm disappointed with this document.
The big headline outcomes are a new bailout for Greece, voluntary private sector involvement in Greece's debt crisis is to be pursued, extension of the loan-terms for all 3 program countries, as well as a loosening of EFSF rules to allow it provide support to countries that are not in a program.
Extending the terms of the loans was regretfully necessary. The idea that the program countries will be going back to the markets in the next couple of years has lost all credibility. This much I concede was unavoidable.
The involvement of the private sector is a good idea (if it is done with a moderate hand). European Governments (and especially the program countries) are financially exhausted and it is important to ease the pressure somewhat by shifting some of this assumed responsibility back to the original risk-takers. Besides, after 4 years of turbulence, anyone still holding Greek bonds is probably a speculator anyway and it is highly unlikely that any truly fragile financial institution is still exposed to a Greek default. We will probably find that a moderate default will have very little financial impact. However, I find the part of the document dealing with private sector involvement vague. It states that private sector involvement will be voluntary, citing willingness on the parts of investors to roll over Greek debts. But it is doubtful that they are volunteering to do anything greater than this. Rolling over debts is well and good, but frankly it doesn't really relieve the Member States.
However, my greatest problem with the deal is in its loosening of the rules of the EFSF/ESM. The idea of lending to countries that are not in a recovery program seems obviously silly -all the expense and none of the reform -who could argue that's a good idea? A reform program is the necessary exit strategy from providing support to Member States. It is indispensible. If Member States have to be bailed out, then we need to map a route for them to stand on their own feet again, or else we will end up with a proper transfer union.
I doubt that will ever be allowed to happen, neither the lenders nor the borrowers want it. So it appears to me that this is some sort of a PR stunt to reassure markets that IT and ES will be allowed access EFSF funding without having the humiliation or terms of a bailout. These countries may gain some short-term, pre-crisis credibility because of the access to credit this brings, but noone could argue this would be a good idea if we decided to do it in practice. Not only would we be sacrificing the reforms that rightly come with access to bailout money, but this change could (and I stress could) create expectations of the EFSF being used as a mechanism for some sort of transfer union.
The whole idea of the ESM was to create a mini-IMF for the Eurozone, bailing out countries on the condition of mending their credit positions. This proposal nominally drifts way beyond this. This is not rehabilitation, it is artificially cheap credit -the source of all our woes. Taxpayers may be willing to assist their neighbours to turn around their situations, but they will quickly squash any notion of paying for the indebted countries to carry on with business as usual. Frankly I'm surprised it has been even made it onto this document.
There is also provision for the ESM to dabble in secondary markets. This could be a very useful policy tool if it is used to involve the private sector in debt reductions, but seemingly it is only permissible with the agreement of each MS and the ECB. One must wonder then why it was necessary to include it in this document if it can only be used when everyone is in agreement -more spindoctoring?
Finally, the new Greek bailout. Unavoidable in my opinion, but it has to be properly funded. While the document promises big on the involvement of the private sector, I have already expressed some doubts about this. I will go further. The document also calls on the IMF to participate in the new bailout. I do not think it is incredible to suspect that the IMF may decline to involve itself without more private sector involvement. That would be a quite incredible humiliation for everyone involved, but right now, I would not rule it out.
So my verdict is that the only people that got what they wanted were the Irish. The concessions on our interest rate and also on the term of our loans, alongside the modest burning of financial bondholders, fiscal austerity and the gradual recapitalisation of our banks means that Ireland is now in a much better position than 3 years ago. Though it is not smooth sailing from here, it is likely that Ireland will begin to make a recovery in the next 2 years and recover strongly soon after. Doubtless the banks will still require more capital (even though we have sworn on our honour that we tested them properly this time), but the whole mess seems more manageable these days. Economic reforms scheduled under our bailout deal will go further to getting us out of Dodge.
But the concessions to the program countries on the terms of their loans, does not in any way compensate for the lack of hard details on the Greek bailout, or the fudging of the role of the EFSF. Though markets have reacted well today, I am not satisfied with this deal and fear it is based substantially on wishful thinking and fuzzy economics. Frankly, we need to cluck at this text and tell them all to try again.
Markets are not the measure of these deals. Markets rise and fall on the self-interest of investors. Rising markets in response to more public stimulus is unsurprising -not a true yardstick of the effectiveness of policy.
TEXT of the Deal:
Greece:
1. We welcome the measures undertaken by the Greek government to stabilize public finances
and reform the economy as well as the new package of measures including privatisation
recently adopted by the Greek Parliament. These are unprecedented, but necessary, efforts to
bring the Greek economy back on a sustainable growth path. We are conscious of the efforts
that the adjustment measures entail for the Greek citizens, and are convinced that these
sacrifices are indispensable for economic recovery and will contribute to the future stability
and welfare of the country.
2. We agree to support a new programme for Greece and, together with the IMF and the
voluntary contribution of the private sector, to fully cover the financing gap. The total official
financing will amount to an estimated 109 billion euro. This programme will be designed,
notably through lower interest rates and extended maturities, to decisively improve the debt
sustainability and refinancing profile of Greece. We call on the IMF to continue to contribute
to the financing of the new Greek programme. We intend to use the EFSF as the financing
vehicle for the next disbursement. We will monitor very closely the strict implementation of
the programme based on the regular assessment by the Commission in liaison with the ECB
and the IMF.
3. We have decided to lengthen the maturity of future EFSF loans to Greece to the maximum
extent possible from the current 7.5 years to a minimum of 15 years and up to 30 years with a
grace period of 10 years. In this context, we will ensure adequate post programme monitoring.
We will provide EFSF loans at lending rates equivalent to those of the Balance of Payments
facility (currently approx. 3.5%), close to, without going below, the EFSF funding cost. We
also decided to extend substantially the maturities of the existing Greek facility. This will be
accompanied by a mechanism which ensures appropriate incentives to implement the
programme.
4. We call for a comprehensive strategy for growth and investment in Greece. We welcome the
Commission’s decision to create a Task Force which will work with the Greek authorities to
target the structural funds on competitiveness and growth, job creation and training. We will
mobilise EU funds and institutions such as the EIB towards this goal and relaunch the Greek
economy. Member States and the Commission will immediately mobilize all resources
necessary in order to provide exceptional technical assistance to help Greece implement its
reforms. The Commission will report on progress in this respect in October.
5. The financial sector has indicated its willingness to support Greece on a voluntary basis
through a menu of options further strengthening overall sustainability. The net contribution of
the private sector is estimated at 37 billion euro.
underpin the quality of collateral so as to allow its continued use for access to Eurosystem
liquidity operations by Greek banks. We will provide adequate resources to recapitalise Greek
banks if needed.
1 Credit enhancement will be provided to 1
debt buy back programme will contribute to 12.6 billion euro, bringing the total to 50 billion
euro. For the period 2011-2019, the total net contribution of the private sector involvement is
estimated at 106 billion euro.
Taking into account the cost of credit enhancement for the period 2011-2014. In addition, a Private sector involvement:
6. As far as our general approach to private sector involvement in the euro area is concerned, we
would like to make it clear that Greece requires an exceptional and unique solution.
7. All other euro countries solemnly reaffirm their inflexible determination to honour fully their
own individual sovereign signature and all their commitments to sustainable fiscal conditions
and structural reforms. The euro area Heads of State or Government fully support this
determination as the credibility of all their sovereign signatures is a decisive element for
ensuring financial stability in the euro area as a whole.
Stabilization tools:
8. To improve the effectiveness of the EFSF and of the ESM and address contagion, we agree to
increase their flexibility linked to appropriate conditionality, allowing them to:
- act on the basis of a precautionary programme;
- finance recapitalisation of financial institutions through loans to governments including
in non programme countries ;
- intervene in the secondary markets on the basis of an ECB analysis recognizing the
existence of exceptional financial market circumstances and risks to financial stability
and on the basis of a decision by mutual agreement of the EFSF/ESM Member States,
to avoid contagion.
We will initiate the necessary procedures for the implementation of these decisions as soon as
possible.
9. Where appropriate, a collateral arrangement will be put in place so as to cover the risk arising
to euro area Member States from their guarantees to the EFSF.
Fiscal consolidation and growth in the euro area:
10. We are determined to continue to provide support to countries under programmes until they
have regained market access, provided they successfully implement those programmes. We
welcome Ireland and Portugal's resolve to strictly implement their programmes and reiterate
our strong commitment to the success of these programmes. The EFSF lending rates and
maturities we agreed upon for Greece will be applied also for Portugal and Ireland. In this
context, we note Ireland's willingness to participate constructively in the discussions on the
Common Consolidated Corporate Tax Base draft directive (CCCTB) and in the structured
discussions on tax policy issues in the framework of the Euro+ Pact framework.
11. All euro area Member States will adhere strictly to the agreed fiscal targets, improve
competitiveness and address macro-economic imbalances. Public deficits in all countries
except those under a programme will be brought below 3% by 2013 at the latest. In this
context, we welcome the budgetary package recently presented by the Italian government
which will enable it to bring the deficit below 3% in 2012 and to achieve balance budget in
2014. We also welcome the ambitious reforms undertaken by Spain in the fiscal, financial and
structural area. As a follow up to the results of bank stress tests, Member States will provide
backstops to banks as appropriate.
12. We will implement the recommendations adopted in June for reforms that will enhance our
growth. We invite the Commission and the EIB to enhance the synergies between loan
programmes and EU funds in all countries under EU/IMF assistance. We support all efforts to
improve their capacity to absorb EU funds in order to stimulate growth and employment,
including through a temporary increase in co-financing rates.
Economic governance:
13. We call for the rapid finalization of the legislative package on the strengthening of the
Stability and Growth Pact and the new macro economic surveillance. Euro area members will
fully support the Polish Presidency in order to reach agreement with the European Parliament
on voting rules in the preventive arm of the Pact.
14. We commit to introduce by the end of 2012 national fiscal frameworks as foreseen in the
fiscal frameworks directive.
15. We agree that reliance on external credit ratings in the EU regulatory framework should be
reduced, taking into account the Commission's recent proposals in that direction, and we look
forward to the Commission proposals on credit ratings agencies.
16. We invite the President of the European Council, in close consultation with the President of
the Commission and the President of the Eurogroup, to make concrete proposals by October
on how to improve working methods and enhance crisis management in the euro area.. COUNCIL OF
THE EUROPEAN UNION
Brussels, 21 July 2011
STATEMENT BY THE HEADS OF STATE OR GOVERNMENT OF THE EURO AREA
AND EU INSTITUTIONS
We reaffirm our commitment to the euro and to do whatever is needed to ensure the financial
stability of the euro area as a whole and its Member States. We also reaffirm our determination to
reinforce convergence, competitiveness and governance in the euro area. Since the beginning of the
sovereign debt crisis, important measures have been taken to stabilize the euro area, reform the
rules and develop new stabilization tools. The recovery in the euro area is well on track and the euro
is based on sound economic fundamentals. But the challenges at hand have shown the need for
more far reaching measures.
Today, we agreed on the following measures:
Monday, July 4, 2011
Household V. Business debts -policy implications
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.
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