IMF report – Unemployment to hit 15%
Read more about: Economy, Ireland, News, Policy, Social Policy, Taxation 
If you’ve just sat down after a slap-up dinner and thought “hmm, I wonder what the International Monetary Fund have said about Ireland in their latest Staff Report” and considered jumping across to IMF.org, don’t bother. I’ll sum it up here for you.
Note: This was a staff report – the IMF has a staff and a board of directors, they always note that a staff report does not necessarily reflect the views of the directors (though it usually does). You can read the directors’ conclusions here, it’s short and in readable language. You can also watch a rather unprofessionally made and inadvertently funny video of the Mission Chief for Ireland’s take on the staff report here.
Back to the details: The IMF staff think the Government are doing the right things for the most part. But they did a lot wrong in the past. It can, and will, be spun positively by both the Government and Opposition. They support the implementation of the National Assets Management Authority though warn that nationalisation of more banks may also become necessary…
…but should be seen as complementary to NAMA. Where the size of its impaired assets renders a bank critically undercapitalized or insolvent, the only real option may be temporary nationalization. Recent Fund advice in this regard is: “Insolvent institutions (with insufficient cash flows) should be closed, merged, or temporarily placed in public ownership until private sector solutions can be developed … there have been numerous instances (for example, Japan, Sweden and the United States), where a period of public ownership has been used to cleanse balance sheets and pave the way to sales back to the private sector.”
However the IMF staff note that ‘The Authorities’ -read: Government- disagree on this (as we know):
The authorities prefer that banks stay partly in private ownership to provide continued market pricing of their underlying assets. They disagreed with the staff’s view that pricing of bad assets would be any easier under nationalization. They were also concerned that nationalization may generate negative sentiment with implications for the operational integrity of the banks. Staff emphasized nationalization would need to be accompanied by a clear commitment to operate the banks in a transparent manner on a
commercial basis.
So basically, as far as I can see, the IMF are saying “Fianna Fáil, lads, I mean, we think ye’re doing okay now… but throw an ear to your man in Labour there when you can… and while ye’re at it, a bit of legislative reform to ensure the like of that FitzPatrick character don’t pop up again, yeah?”
They also advise the Government to ensure that NAMA has a broad scope, not simply covering loans relating to property development…
If the banks are not fully relieved of their impaired assets—are not “cleaned up”—their return to normal functioning will be delayed. As such, a full scoping out of the likely distress is needed and a flexible legislative authorization and operational approach should permit NAMA to deal with further deterioration in bank balance sheets. For these reasons, staff advised that the authorities not
restrict the focus of NAMA on property-development loans.
However, as The Irish Times notes, it doesn’t look good in the short term. The report makes tough reading for people like myself who have recently graduated…
From 2008 through 2010, the Irish economy is projected to contract by about 13½ percent. Following a decline in GDP of 2¼ percent in 2008, staff projects that GDP will shrink by 8½ percent in 2009 and by a further 3 percent in 2010 (Table 4)… the smaller volume of exports will add to unemployment, which is expected to exceed 12 percent by end of 2009 and reach 15½ percent in 2010. Some discouraged workers are simply leaving the labor force. These employment trends, along with the anticipated additional decline in nominal wages and the high degree of uncertainty, are expected to pull consumption down sharply.
But the general tone of the report makes good reading for the Government and economic advisors in some ways, given that it accepts they are moving in the right direction. In other areas it points out their past indiscretions. Of course, there are caveats – this is economics. A lot will come down to the success of NAMA which in turn relies on “safe exit from the guarantee to creditors and depositors”. Economists (I am not one) will tell you that the exit time from such guarantees can range from two years to two decades. Another key aspect to the success of NAMA will be the price at which the Government buys the assets – the IMF include this as caveat to Ireland’s return to success mediocrity…
[the prices] will determine the extent to which banks’ losses are transferred to the taxpayer. Since price determination is a major challenge, risk-sharing structures could be usefully explored. For example, if sold at a price that is clearly lower than the expected eventual recovery value, bank shareholders could be given a share in the upside. Similarly, the government could be given an opportunity to participate in the upside of the residual healthy bank.
In the part of the report entitled “Achieving Fiscal Credibility” (AFC) there are some interesting paragraphs [See the whole PDF document here, AFC starts on page 23]. The AFC part of the document is in turn split in two, A: Consolidation Objectives and Debt Dynamics, and B: Consolidation Strategies. In the B part 38 [Page 28 of the PDF] there is a paragraph that opens “Social welfare expenditures must better target the vulnerable” – here it is in full.
The authorities recognize that it will be necessary to articulate a strategy that moves away from universalism in social welfare to one that relies more on targeting and incentives. In this regard, means testing or taxation of child benefits is under discussion. Consideration could also be given to earned income tax credits as a way of supporting lower income families, as also to the
indexing of benefits to more appropriate price baskets. Also, a more nuanced minimum wage structure that allows, for example, for age-related differentials could help competitiveness and also reduce social transfers.
Public Servants may also be on even shakier ground. The report gives FF something to cite when looking to further reduce not alone public sector wages but also the number of public sector employees…
Despite the recent reduction further cuts in the public service wage bill are likely to be inevitable. Public sector remuneration now lies above private sector levels in most areas. In 2006, the Economic and Social Research Institute concludes, the public sector pay premium was above 20 percent. International comparisons also suggest that public sector wages in Ireland are higher than in other advanced economies. The authorities noted that an effective wage reduction of 7.5 percent was undertaken earlier this year by the application of the pension levy, and a wage freeze is in effect through 2010, but agreed with staff that consolidation on the scale needed is unlikely to be accomplished without a further lowering of the public wage bill…the authorities agreed that evaluating the scope of government provision and its cost effectiveness is called for. More generally, greater efforts to obtain value for money are going to be important.
The report also advises a widening of the tax base while noting that “the [overall] task ahead is formidable”.
Formidable is a nice way of putting it.
Young fellas like you will do grand, Mark. In order to pay the Leech bills and cut back to compensate for declining advertising revenues, the meejah will fire every hack over 30, replacing them with bright-as-a-button graduates on the new IMF-recommended downwardly flexible minimum wage. After all, aren’t you blogger types used to writing for half-nothing anyway?
Don’t get too down. If I could survive the 80s, you’ll survive the Great Recession.
Hah, there’s a difference between writing and working!
You say that now, but wait til they unveil the new five-year internships.
Gerard,
In a humorous way, you make an essential point, and one that’s too often overlooked in the copious analyses of our current predicament – the ingenuity of people to adapt and survive even in the most challenging circumstances.
For third and fourth level graduates out there employment prospects look very bleak at the moment. Worse, expectations they may have had of getting a good job on graduation have been squashed. The ‘traditional safety valve’ of emigration in search of opportunities to build a career abroad, to which so many had resort in the ‘eighties, just doesn’t exist to the same extent now. In the past, governments tended to expand public sector employment to mop up the excess, but that’s not possible now either.
One of the most worrying aspects of proposals advanced to provide opportunities for unemployed graduates is that they are piecemeal in nature and do not fit into any overall strategy for dealing with rising unemployment within the broader context of fixing the economy, the banks and the public finances, which are the things we have to do if our economy is to stand any chance of avoiding a total crash. You’re spot on too about expanding role of ‘internships’, which is a grandiose term for working for nothing for the sole benefit of unscrupulous employers, particularly in the high value service sectors. All that does is displace existing and potential jobs; the losers are the interns who get turfed out when the period of internship comes to an end, only to be replaced by a fresh batch.
The whole intervention system is far too ‘top down’ in its approach. Far better to construct initiatives around graduate ‘networks’ or high quality business training for graduates, start-up enterprise grants and so on, that would allow people to harness their own creativity and channel it into doing something that is their own choice rather than something that’s been cooked up as the solution by a centralised administration.
Gerard, you raise another point that I’ve been wondering about. This seems like more than a recession but not yet a depression and you can have only one Great Depression after all. (I wonder how veterans of the Great War felt when it was down graded to merely WWI). So do we call it the decession or the repression? Or is it to be GDII?
I remember one commentator about nine months ago suggested the Great Crash. No doubt historians will eventually settle on a label.
The general public are more up to date with economic crises…unemployment up to 15%, small business’s winding up, its all to late ..the economy will enter total melt down before the end of this year..what can the government do to advert this nothing because they are doing nothing..we were living in a false ecomony living well beyon our means.and all this was being fueled by the government, banks, speculaters…who reaklessly gambled and ignored the wellfare of irish people.
I have little faith in the IMF’s opinions considering their devotion to light touch regulation, which got us into this mess in the first place, and their relentless push for privitisation and deregulation in the developing world, which it seems to me, has been disastrous. Also, I don’t understand why the notion of nationalising a back is something that we should be “warned” about, or why it’s seen as a last-case-scenario.
And I wouldn’t even call myself a real lefty, you know.
Brian, you touch on an interesting point in that everyone is talking about getting the larger fiscal situation right and that this will allow the economy to grow again. What is being ignored is the micro economic situation which is that many, many people borrowed money to buy things at prices they couldn’t not really afford. They were in part aided in taking out these loans because they were getting paid for work they were doing that should really have been left to be done in the future. Now that we are in the future that work is no longer here to be done, people going to be earning less no matter what happens and they still owe shed loads of money.
So once the banks are sorted out (or stabilised at least) we will still have huge chunks of the consumer base who are saddled with debt that they can barely about to service on their reduced earnings, why or how would they be able to fuel a spending boom? It is their debts not the debts of the banks that will prevent a speedy recovering. It is only by finding some mechanism to shift that debt burden off their day to day living that we will start to get things moving again. And the best way to do that is what I would term a process of deferred debt recovery, PODDeR. It would involve a large portion of their debt principle being taken over by an NAMA equivalent body and it is later recovered from their assets upon their demise. It’s a long term plan and it will mean that many of the current generation of children will not have a large inheritance coming to them down the line but it would ease (though not eliminate) the debt servicing burden from their parents. And it ensure that people don’t go all smart on us and try to die with no assets the debts will be intergenerational, i.e. passed onto their children directly.
Brian,
If the “the general public are more informed about economic crises” sentence was in reference to the IMF – it is worth noting that the research on the report ended on May 20th, anything that has happened between now and then is not taken into account.
If it was in reference to me, huh, you may well be right!
I love when the comments section goes off-topic but remains informed like this…
Daniel,
I take it you are joking? ‘Deferred debt recovery’ is about the maddest idea I’ve heard since FG proposed compensation for the taxi drivers and the poor eejits who’d lost money on their eircom shares. It’s nanny- stateism gone totally doolally and it’s economically insane.
At that rate of going I’m off to buy a fur coat on my credit card. After that I’ll empty my meagre savings account, book a cheap flight to Las Vegas and have a whale of a time on the one armed bandits. When I run out of cash I’ll slink home and whinge and moan about how I can’t pay my mortgage any more or my credit card debts and sure the State will pick up the tab… after I’m dead! Of course, when I tell my relatives, neighbours and friends they’ll all do much the same, happy in the knowledge that future generations will pay for it all – because at that rate of going the country will have defaulted on its debts several times over by the time I kick the bucket and any assets I leave after me won’t be worth tuppence anyway.