icai practice day presentation

CSCA – Annual Practice Day Conference

“Ireland – From Poorest of the Rich to Europe’s Shining Light –

But What’s Next?” Seamus Coffey, Dept of Economics, UCC

Explaining The Tiger

Distinguish between pre-boom factors:

1. Foreign direct investment.– Industrial policy– Corporation tax

2. External assistance.

3. Investment in education.

Explaining The Tiger

And factors that combined to ignite the boom:

4. Centralised wage bargaining.

5. Fiscal policy.

6. Upturn in World (US) economy.

7. Achieving EMU entry criteria.

8. Exchange rate policy.

9. Small is beautiful.

10. ????

Are we all out of luck?

Sub-Prime Crisis

• Ninja Loans => Rising Defaults

• Transmission Mechanism

– Collaterised Debt Obligations (CDOs)

– Credit Default Swaps (CDSs)

– The US is paying for the same mortgage three times!

Bail out of Wall Street

Bail out of the Insurers (AIG)

Proposed bail-out of homeowners

– Crisis of Confidence => Risk Premium Increase

– Treasuries & Gold Price up

Iceland and Ireland

Country Vulnerability Scorecard

Government Debt/GDP

Private Sector

Debt/GDP

Bank Loans/ Deposits

Banking Assets/ GDP

Credit Rating

1. Iceland 122% 435% 204% 1002% BBB-

9. UK 64% 187% 187% 400% AAA

10. US 78% 227% 227% 161% AAA

11. Ireland 41% 186% 186% 266% AAA

37. China 19% 123% 60% 126% A+

Source: Credit Suisse Global Equity Strategy

The Public Finances

Source: Dept of Finance

The Public Finances

Source: www.irisheconomy.ie

Source: Goodbody Stockbrokers

Built on Construction

Source: Goodbody Stockbrokers

Making Forecasts

The following are four estimates for the revenue from Stamp Duty in 2008.

• €3.055 billion – Budget 2006

• €4.125 billion – Budget 2007

• €2.855 billion – Budget 2008

• €1.780 billion – Budget 2009

These are all estimates of what should be the same figure!

The forecast from Budget 2008 was still 73% above the actual figure for 2008 of €1.650 billion..

Jan-Dec 2007 Jan-Dec 2008

Value Added Tax

Income Tax

Excise

Stamps

Corporation Tax

Capital Gains Tax

Customs

Training & Employment Levy

Unallocated

14,496,588

13,572,410

5,837,878

3,185,602

6,390,625

3,105,495

265,904

2,501

0

13,429,602

13,176,857

5,443,338

1,650,792

5,065,894

1,430,080

248,001

1,032

0

Total 47,249,352 40,777,196

Tax Revenue

Source: Dept of Finance

Expenditure

Vote or Group of Votes 2007 2008

Health & Children 12,448,835 13,745,317

Social & Family Affairs 8,180,934 9,399,098

Education & Science 8,443,974 9,031,516

Other 15,534,992 17,136,863

Total 44,608,735 49,312,794

Source: Dept of Finance

The Public Finances

The 2008 outturn and five year projected figures for the General Government Balance in millions are (with % of GDP in brackets)

2008: -€11,796 (-6.3%) 2009: -€17,165 (-9.5%)2010: -€16,271 (-9.0%)2011: -€12,092 (-6.4%)2012: -€9,443 (-4.8%)2013: -€5,537 (-2.6%)

The total shortfall over the six year period is €70 billion.

This is after annual “adjustments” of €16.5 billion have been achieved.

The Public Finances

Here are the projected adjustments for each year.  Note that the adjustment in one year is expected to carry over to all subsequent years.

2009: €2 billion

2010: €2 billion + €4 billion

2011: €2 billion + €4 billion + €4 billion

2012: €2 billion + €4 billion + €4 billion + €3.5 billion

2013: €2 billion + €4 billion + €4 billion + €3.5 billion + €3 billion

Add all these up and you get €48 billion on top of borrowing €70 billion. And we already need another €4.5 billion from the April mini-budget.

With planned expenditure of about €50 billion tax revenue will have to hold up in 2009. Based on the figures for the first two months of the year this may be as low as €30 billion!!

Jan&Feb08 Jan&Feb09

Receipts

Tax Revenue

Non-Tax Revenue

Sinking Fund

Other Capital Receipts

Total

7,561,700

25,102

449,360

802,612

8,838,774

5,758,841

60,431

0

757,802

6,577,074

Expenditure

Voted

Sinking Fund

Non-Voted Current Expenditure

Non-Voted Capital Expenditure

Total

7,878,440

449,360

635,663

66

8,963,529

8,008,614

0

634,680

18,540

8,661,834

Exchequer Surplus (Deficit) (124,755) (2,084,760)

Exchequer Statement for Period Ended 31 December 2008, €000

Source: Dept of Finance

Jan-Dec 2007 Jan-Dec 2008

Value Added Tax

Income Tax

Excise

Stamps

Corporation Tax

Capital Gains Tax

Customs

Training & Employment Levy

Unallocated

2,698,714

2,245,397

922,649

372,077

651,752

515,689

46,366

218

46,934

2,246,771

2,080,153

619,622

153,505

410,795

141,135

37,510

145

26,892

Total 7,561,700 5,758,941

Tax Revenue for Period Jan&Feb 2009, €000

Source: Dept of Finance

Any Good News?

Source: Central Bank of Ireland