Ireland is bankrupt

Added on January 24, 2011
Yesterday, the Green Party pulled out of the governmental coalition. Brian Cown with his Fianna Fail has indeed failed. Early elections even earlier than March are looming.

Added on January 23, 2011
Although he had announced early elections for March 11, 2011 the Irish Prime Minister Brian Cowen remained under pressure. On January 22, several of his party members asked him to step down as party chairman. The same day, Brian Cowen announced to step down as chairman of his Fianna Fail party. As prime minister, he will have to face another no-confidence vote on January 26.

Added on January 19, 2011
Prime Minister Cowen has survived a confidence vote. Subsequently, his internal rival, Michael Martin, stepped down. A few weeks before the banking bailout loan, Cowen had played golf with the bosses of the Anglo Irish Bank. Public suspicion has it that Cowen, his Fianna Fail party, the banks and speculators were all hand in glove.

Added on December 15, 2010 at 16:41 Swiss time
Today, the Irish Dáil (lower house of parliament) has approved the EU / IMF bailout deal for Ireland by 81 votes to 75.

Added on December 8, 2010 at 15:45 Swiss time
In a WSJ article published today, the Irish Prime Minister Brain Cowen mentions that eight of the world's ten leading pharmaceutical companies are already present in Ireland. Some 600 U.S. companies use Ireland as a hub. The Irish competitiveness and productivity have already improved. Structural and labor market reforms will bring the economy back to sustainable growth. Cowen is convinced that his government has taken the right decisions.

The Irish austerity budget - A first vote in parliament won with 82 votes to 77
Article added on December 8, 2010  
The Irish have been living above their means for about a decade. Ireland is bankrupt. Therefore, on December 7, Ireland's finance minister Brian Lenihan unveiled an unprecedented austerity budget. The 2011-budget is €6bn smaller than the previous one. The recipe is a mix of harsh spending cuts (€4.5 billion) and tax hikes (€1.5 billion). The Irish government plans a €15 billion deficit reduction over the next four years. In short, another €9 billion in spending cuts and tax rises will follow in the years 2012 to 2014, at least according to this plan. It remains unclear whether Ireland will be able to reduce its deficit to the Eurozone limit of 3% by 2015.

Around midnight, the Irish government has won a first budget vote in parliament with 82 votes to 77. At least three more debates and votes will follow in the coming days and weeks before the snap elections announced by the Irish Prime Minister Brian Cowen for February 2011. The aim is to tap the €85 billion bailout loan for Ireland by the EU and the IMF signed by the EU governments on December 5; Ireland will contribute €17.5 of the €85 billion through the Treasury cash buffer and investments of the National Pension Reserve Fund. The loands will be used to recapitalize Irish banks, for contingency reserve and to cover the Irish budget.

In 2010, the Irish public deficit skyrocketed to 32% of GDP. Saving the private banks may not have been such a great idea. The EU Maastricht criteria of a 3% budget deficit is a far away goal for Ireland.

The austerity budget measures in detail

Among the measures proposed by Brian Lenihan are a €10 reduction in Child Benefit and an additional €10 reduction for the third child. Public service pensions over €12,000 will be cut by 4%. New entrants to a public service will suffer a 10% pay cut. The Carer's Allowance for those aged under 66 will be cut by €8 to €212 a week. The Disability Allowance will be cut €8 to €186 a week. The austerity budget calls for a €10 cut in the personal weekly rate of Supplementary Welfare Allowance, a €6 reduction in Jobseeker's Allowance and Supplementary Welfare Allowances for those aged 22-24. VTOS and FÁS Training Allowances will be reduced from €31.60 to €20 per week. The maximum personal rate of payment for all weekly social welfare schemes will be reduced by €8 from January.

Day-to-day funding for all schools, colleges and other education providers is to be cut by 5%. School transport charges for post-primary level students will rise to €350. There will be a 9% cut for school building at primary level, a 20% cut at second level, and a 51% cut at third level. Drugs Task Force funding is to be cut by 63%. The Educational Disadvantage Fund is to be cut by 60%. The €500 Student Services Charge will be replaced with a flat higher education student contribution of €2,000. Student grants will see a cut of 4%. The ealth budget will be cut by €700m to €14.1 billion. The capital provision expenditure for national roads will be reduced by €394 million to €720 million. The state car fleet will be reduced by a third by 2013.

The public sector salary will be capped at €250,000. The wages of the Irish president and of the Irish judges will be capped at €250,000. The prime minister's salary will be cut by €14,000 (6%) and fall to €215,000; in 2008, it was at €285,000. Ministers will see their paycheck cut by (another) €10,000.

The income tax bands and credits will be lowered by 10%, bringing 139,500 people into the tax net and moving 91,000 people from the standard rate of 20% to the higher rate of 41%. The income levy and health levy will be replaced with a universal social charge: 2% on incomes of €4,004-€10,036, 4% on €10,037 to €16,016, 7% on incomes above €16,016. Pension contributions will be subject to PRSI and Universial Social Charge. The employee PRSI contribution ceiling will be removed. The PRSI incentive scheme will be extended until the end of 2011. The employee PRSI/health levy pension relief will be abolished. A total of 25 tax reliefs will be abolished or restricted. All property based tax reliefs will be terminated by 2014. DIRT will be increased by 2% to 27% on ordinary accounts, and to 30% on longer term deposit accounts.

A flat rate stamp duty of 1% on property transactions up to €1m and of 2% on transactions over €1m is applicable from today, December 8. Stamp duty exemptions will be abolished.  The tax-free threshold on the Capital Acquisitions Tax will be reduced by 20%. Among the tax hikes are also an increase in petrol prices by 4% and in diesel prices by 2%, enforced from today on, December 8. The tourist tax will be reduced from €10 to €3 from March 2011. Will it boost tourism? The car scrappage scheme, introduced in 2009, will be extended for further six months to June 30, 2011. Is this an intelligent reallocation of wealth? The tax relief for trade union subscriptions will be abolished. The Rent Relief will be phased out over the next eight years. A 1% betting tax will apply to online betting. A four-year National Solidarity Bond will be introduced.

The top marginal tax rate and corporation tax will remain unchanged. There is an extension of the three-year corporation tax exemption for start-up firms. From 2011, the Section 23 relief will be restricted to income from Section 23 property. Sporting bodies and agencies will receive lower funding. The austerity budget will provide a €40 payment for fuel allowance recipients and €200m to create 15,000 training and internship positions for Ireland's 450,000 unemployed.



The Celctic Tiger

The Celtic Tiger is not dead. Already on November 24, the Irish cabinet decided to maintain its comparative advantage, the 12.5% corporate income tax rate. Presenting the austerity budget, Finance Minister Brian Lenihan said the top rate of the income tax will remain at 52%. However, many tax reliefs will be restricted or abolished.

Unlike Greece, Ireland made real progress. After joining the European Community in 1973, Ireland started to grow. In 1987, the ruling Fianna Fail party modernized the economy by cutting taxes, reducing public spending, promoting competition and advocating a social partnership between employers and trade unions. Multinational companies including, Intel, Microsoft and Google invested in Ireland. In 1987, the Irish GDP stood at 69% of the EU average. In 2003, the Irish GDP reached 136% of the EU average.

Only well after the introduction of the Euro in 1999 and the arrival of cheap money, almost everyone started to participate in the real estate speculation. Ireland became a giant casino from 2002 onwards. From 2000 to 2006, the Irish real estate prices doubled. The banking supervision and regulation was extremely poor. In the end, the Irish banks lost some €80 billion on property loans. On September 30, 2008 the Irish government made the crucial mistake of guaranteeing the debts of the Irish banks. The comprehensive guarantee, backed by taxpayer funds, covers all deposits, retail, ommercial, institutional and interbank, covered bonds, senior debt and dated subordinated debt. In 2010, the Irish government committed some €45 billion to bail out Irish banks, while collecting only €31 billion in taxes.

Who has saved whom?

It was heartwarming when the British Chancellor of the Exchequer George Osborne said that he had been one of the “fiercest critics” of a possible Euro entry of the UK, but that “I told you so” was not an option, that it was in the UK's best interest to support Ireland, and that Ireland was “a friend in need”. He forgot to mention that, as with Greece, in Ireland, foreign banks played an important role too. Both UK and German banks each hold some 20% of the Irish debt [added on January 11, 2011: in relative terms, in comparison with its GDP, Belgium institutions are the most exposed to the Irish debt]. By supporting the Irish, the British finance minister supported British banks. UK banks already had to be nationalized. The British Pound has lost a lot of its value. I remember when £1 was CHF2.30, currently the pound trades at CHF1.55.

In 2008, the Irish public debt was only 43.9% of GDP. In 2010, the Irish public debt will almost reach 100% of GDP. The outlook is grim with the Irish unemployment rate standing at 13.5%. The Irish government “saved” the Irish banks with their 2008-guarantee. In 2010, the Irish banks “passed” the European stress test, just to collapse a few months later. It is evident that the Irish banks made fraudulent statements about their health. The Irish government should probably revoke its banking guarantee, given under false assumptions, let the banks go down and then restructure the sector. Right now, the banks, the government and the Irish people are all highly indebted. A haircut is needed, otherwise the debt will sink Ireland.

The Irish Prime Minister Brian Cowen has served as finance minister from 2004 to 2008. He is one of the key players in this mess. Having done nothing to prevent the real estate bubble from growing even bigger and having co-decided an unsustainable bailout of the failed Irish banks, he won't politically survive the early elections he called for February 2011. The same will apply to his party, Fianna Fail (the Republican Party), which has been in power for 53 of the 84 years of independent Ireland.

Until about 2002, Ireland was a real Celtic Tiger, before succombing to the temptation of easy money. It may take the island quite some time to bounce back.

Thomas Bartlett's Ireland: A History. Order it from Amazon.co.uk or Amazon.com. Order Irish sheet music.