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Irish Drivers of Recession

Irish Drivers of Recession. (And the EU funding). Rejection of Lisbon treaty  crisis in relations with EU Aug 2008 Budget deficit about 6% GDP 2009 Unemployment to raise sharply… Reducing spending €440m and 2008 and €1bn 2009 Political Years of government largesse have come to an end…

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Irish Drivers of Recession

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  1. Irish Drivers of Recession (And the EU funding)

  2. Rejection of Lisbon treaty  crisis in relations with EU • Aug 2008 • Budget deficit about 6% GDP 2009 • Unemployment to raise sharply… • Reducing spending €440m and 2008 and €1bn 2009 • Political • Years of government largesse have come to an end… • Tax and spend trade-offs • Needing a second referendum on the treaty or potential issues…

  3. Falling tax receipts • Curbing spending growth… • Official forecast dropped 6% GDP • 2008 general budget deficit will breach the 3% GDP ceiling for Euro Area countries under the Stability and Growth Pact • Working against the government will be the charge that it is the author of much of its own fiscal misfortune, not least as a result of large pre-election spending increases.

  4. ECB raised financing rate in Aug 4% to 4.25% • Ireland’s property market went up faster than anywhere else – inflated by growth in income, employment and population… • But there was also concurrent massive increase in supply of housing – 5 times more than in the 1990s…

  5. FT Article • Bad start to the year • Waterford Wedgwood – into receivership • Dell from Limerick to Poland • Anglo-Irish Bank third-largest lender • Struggling with rising unemployment and spiralling budget deficit • Iceland cf Ireland  1 letter and 6 months

  6. 1980s • National debt quadrupled • Economic reforms provided a platform for growth • 82 – diagnosis, 87 – action (ESRI) • During 1980s, 1/5 unemployed, 10% emigrated, top tax rate 70%

  7. Celtic Tiger • 2006 - Higher income per capita than any of the EU apart from Luxembourg • EU funding support • Low corporate taxes • Increase in population of working age • Key target for US foreign investment into EU • Every 5th job created was in Ireland

  8. 1990s - Export growth and convergence • Recently – Construction investment and low interest rates • Property market growth • Housing boom lead to increased tax receipts • Property taxes increased from 6.9% 1998 to 15.7% 2006 • Government spending increased • Consumers became indebted €36,500 twice Eurozone average

  9. Recession • 88000 completions in 2006 to 30000 2008 • Interpreted the boom as permanent • First Eurozone economy in recession in September • Government guaranteed the €440bn liabilities of financial institutions • Budget brought forward • Protests at cuts

  10. €5.5bn recapitalisation • including €1.5bn for Anglo-Irish • Government popularity falling • Ireland is considered a credit risk • Debt outlook downgraded from Stable to negative • Suggestions of calling in the IMF

  11. What went wrong • “Consumed by consumerism” • Deficit 9.5% GDP including €2bn savings might reach 11 to 12% by 2013 • Increased borrowing to finance the deficit will mean debt-to-GDP will jump from 24.7% in 2007 to 80%! • Short-term resolution – cuts in public pay bill • Opposition pay will not support pay cuts apart from in those earning more than €100k • Cuts are likely to lead to strikes

  12. Ireland’s competitive advantage is at risk • 32% loss of cost competitiveness between 2000-08 due to wage inflation compared to trading partners and Euro appreciation • Ireland has an underlying competitiveness problem • Economic contraction can be mitigated by currency devaluation, but that is not possible for Ireland with the Euro

  13. Low inflation will mean there is a need for wages to fall in nominal and absolute terms • Political issues – Ministers 10% pay cut, private companies ending bonuses, influencing unions

  14. Banks • Banks inadequately capitalised and dependent on wholesale funding • … but not overly exposed to subprime • High risk lending at home • Lending to residential developers with unsold houses • Institutions Allied Irish Banks, B of I and Anglo Irish were forecasting lower bad debts than analysts • Recapitalised to €5.5bn - €2bn to AIB and BoI and €1.5bn to Anglo Irish • But they underplaying risk? • Between 2005-2008 112 properties repossessed but unemployment is expected to rise to 12% by 2009, so will lead to more home repossessions and higher write-offs

  15. EU Reform Treaty • EU Lisbon treaty may be more appealing to voters in crisis • Voters rejected Lisbon in June • Opposition remains strong • Argued that it will reduce Ireland’s influence • Undermine social ethos and military neutrality • EU membership could be at risk after a 2nd no vote – end up like Iceland?

  16. IMF - briefing • “Ireland faces a difficult economic situation and will need to take steps to manage the financial sector and fiscal risks” • …But Ireland won’t need IMF financing

  17. Celtic Tiger • May 2007  people were sending delegations and students to compare Ireland to other countries • EU enlargement in 2004  Ireland held EU presidency  what could new Eastern European states learn from Irish model?

  18. How do they do it? • Inappropriate policies in the past leading to 1980s issues • A “partnership process” of government, employers, unions and farmers addressed sustainability in the 1980s • Prior to growth of 90s, Ireland suffered from high unemployment, high emigration and loss of skills

  19. Government policy • Support from the EU • Importance of young, well-educated, English speaking population • FDI, esp from US helped….

  20. Tax policies • Corporation tax – 12.5% low • Income tax rates have been cut

  21. Current issues • GDP 7.5% contraction in fourth quarter 2008 • Annual GDP growth rate -2.3% - worst since 1983 • Collapse of housing boom • Open economy whose major trading partner – the UK has devalued its currency savagely and cut VAT • Rise in cross-border shopping to N. Ireland • Relatively large size of banking sector and the need to recapitalise it

  22. Industry • Machinery and equipment • Computers • Chemicals • Pharmaceuticals • Animals

  23. Imports/Exports 2007 (CIA Factbook) • Export partners • UK 18.7% • US 17.9% • Belgium 14.5% • Germany 7.4% • France 5.8% • Import Partners • UK 38.3% • US 11.3% • Germany 9.7% • Netherlands 5% • France 4.2%

  24. Financials • GDP - $285bn (2008) • Stock of FDI - home $216bn (2008) • Stock of FDI – abroad $149.1bn

  25. Economy of Ireland • 1922-1990 poverty and emigration • 1990s Celtic Tiger  last two decades Irish government aiming to curb inflation, ease tax burden, reduce gov. spending as % of GDP, increase labour force skills and promote foreign investment • Join Euro in 1999 • Global slowdown 2001  due to high tech exports • Growth of 6% 2001-2

  26. Infrastructure • 1993, road transport coordinated by National Roads Authority • Rail network is run by a semi-state body • Efficiency of train network is poor  rolling stock acquired and since 2004 beginning to expand capacity • Well served by relatively cheap air transport • Several ports • Deregulated Telecommunications market – 32% share from licensed operators • 2007 – DSL available to 88% of homes and business • Broadband 15.4% penetration 2007 • 2008 – Every household to be capable of 100mb broadband by 2012

  27. Energy • Overreliance on fluctuations on access to fossil fuels  98% fossil fules • Sustainable Energy Act 2002 • Energy Production by source • Oil 55.8% • Natural gas 24.3% • Coal 12.9% • Peat 3.8% • Renewables 2.2%

  28. Monetary System • Euro • CB and FSA of I is an agent for ECB • Low interest rates of ECB have helped sustain growth • Inflation of housing from IRE£9k (€11430) in 1973 to €220k in 2004 • Big four credit institutions • AIB, BoI, Ulster and National Irish

  29. Sectors • Primary • 5%GDP and 8% employment • Agriculture - €7.15bn agri-food and drink • EU Common Agricultural Policy is expected to lead to a decline • Overfishing on coastline • Secondary • 46% GDP and 29% labour force • Initially dominated by textile companies • Now largely high-tech multinationals, Dell, Intel, Pfizer and IBM • Confectionaries • 25% of Europe’s computers are made in Ireland • Software – World’s largest exporter of software • Increasing competition from Poland and Asian countries • Particularly in low skill areas, e.g. confectionaries • Tertiary • 49% GDP and 64% Irish Employment • Driver of Celtic Tiger • Accountancy, legal, call centres, finance and stock broking, catering and tourism • IFSC created 14000 jobs in 1990s – high value finance and legal sectors

  30. State Ownership • Ownership of most bus and all rail • Ownership of much of power gen and transmission – Electricity Supply Board – considering part privatising ESB • Radio and Television broadcast sector • Monopoly on Light mail • Aer Lingus privatised in 2006

  31. Taxation • 1997-onwards – low taxation encouraging FDI • Opposing EC moves to restrict tax competition • Corporation tax reduced from 32% 1998 to 12.5% 2003 • In the rest of Europe, between 15-60% • 2 tax bands on income levels 20% and 41%, but the tax credits system reduces taxation to between 4-12% and 35% respectively • Much burden comes from 21.5% VAT

  32. Education • Comparatively very good • Maths, science and tech high • State virtual monopoly in higher education

  33. Economic ties • US • $33bn trade between Ireland and US (2003) • $25.7bn exports to US (500% increase since 1997) • US FDI has aided growth since 1980 • Ireland is attractive to US for mfg in the EU • EU • EU = 63.3% of exports and 57.4% imports • Joined EU in 1973

  34. 21% population at risk of relative poverty in 2004 • Poorest members of society entirely dependent on welfare payments • Inequality of income distribution on Gini coefficient was 30.4 • Ireland has high rates of home ownership (80%) • €8.5bn gov. investment in 34,000 social housing units

  35. Minimum Wage • €8.65/hr minimum wage (one of the highest in the world) • Income below €17.6k not taxed

  36. Welfare benefits • Unemployment benefits was 3rd highest in OECD • Jobseeker’s benefit is €197.80/week cf £60.50 UK • Pensions are relatively generous

  37. Recent Developments • Falls in property values • Large reductions in activity and employment • Impact of credit crunch & higher inflation (energy fuel costs)

  38. Financial Crisis 2008 • International credit crunch • Sub prime • Fall off in liquidity • Irish banks reliant on wholesale markets • Bank solvency • Solvency is related to the Irish property bubble • Exposure to property developers with oversupply in the face of a demand drop • Property developers speculatation

  39. Social Partnerships • Between employers, unions and the government offering wage restraint in exchange for tax cuts – providing stability in the business environment

  40. Export diversification • Government provided financial and fiscal support to indigenous and foreign owned businesses

  41. Deregulation of Airlines • Airline deregulation – first step in the Celtic Tiger phenomenon • Allowed the reduction of cost of travel • Highly dependent on aviation for trade and tourism • Previously national airlines controlled aviation at the expense of consumers • New market entrants were excluded and price competition prohibited • Irish economy heavy emigration -1970s and 1980s • Regulatory capture, weak regulatory authority, weak consumer interests and protectionist era dogma blocked market forces

  42. Impact of Irish airline deregulation on transport and wider economy • 1994 – green paper on aviation policy estimated that airline deregulation had generated 60% increase in visitor numbers • Additional tourism earnings of €711m • 25k additional jobs between 1987-93 • Volume of outward business travel increased 50% • Impact of deregulation was to increase competitiveness of Irish economy • Sea fares fell by 40% between 1987-95

  43. Uneuropean Approach to Tax policies

  44. Abi - Points • Tax Cuts • 1998  32% • 2001  20% • 2002  16% • 2003  12.5% • 2004  10% (wanted to but denied) • Income Tax 20%, 41%, €17.6 • Promoting and encouraging investment and growth

  45. Employment • 12.6% construction industry • 9.4% GNP  dependent on construction… • Gov. Revenues  based around construction… • Collapse in housing prices • 2007-2008  9% drop in properties • Demand was dropping, unemployment increasing • Sustainability of the Construction economy… • Declining domestic demand…

  46. Unemployment drove retail sales volume trend down… • 2008 - Q1 – -0.2% • 2008 – Q2 - -4.5% • 2008 – Q3 - -5.7% • Average growth in retail sales Europe • 0.5% down…

  47. Foreign Trade • Exports • 2007 - €200bn • Current account registered deficit • To private company not govenrment

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