Saturday, April 18, 2009

Blowing the Budget

Eoin ó Broin writes every two weeks in an phoblacht so I'll post his articles here because I like them. If 44 want to stop me, well bring it on.

Blowing the Budget

I DON’T understand the proposed National Asset Management Agency. I have listened carefully to Finance Minister Brian Lenihan and his chief adviser, Peter Bacon. I have read all the news reports. I have gone online to read background information on the theory and practice of bad banks and toxic debts.

And still I just don’t get it.I understand that we have a problem with our economy. I understand that 100,000 small and medium-sized enterprises, employing 400,000 people, can’t get credit from our banks. I understand that the reason that they can’t get the credit is that our banks have huge liabilities (risky loans) on their books and international banks won’t lend Irish banks their money because of these liabilities. I understand that if our banks can’t lend to our small and medium-sized enterprises then some will go out of business, others will reduce output, and in both cases more jobs will be lost.

But I thought that the bank guarantee scheme agreed last October was going to provide the necessary support to our banks to enable them to borrow on the international financial markets.

I thought that the recapitalisation scheme announced in December would provide our banks with the necessary capital to lend to Irish business.

Yet, since the start of 2009, one thousand jobs have been lost every single day. Unemployment is now at 11 per cent and rising. That’s less people earning wages, less people spending money, less people paying taxes (PAYE and VAT) and more people claiming social welfare.

All of this means less money for the Government to spend on providing public services and growing the economy. This is why, in his Budget speech last week, Brian Lenihan announced €4.5 billion of spending cuts and tax hikes.

But then, after outlining who was to pay more tax and who was to get less benefits the minister announces a National Asset Management Agency.

Minister Lenihan said that the Government is going to set up a new bank (NAMA) and that, using taxpayers money, they will buy all of the risky loans from Irish banks. In turn, international banks will start lending to our banks again, who will start lending to small and medium-size businesses.

While he’s not completely sure, he estimates that there may be as much as €90 billion worth of these risky loans to be bought up. He tells us that NAMA will buy these loans at a discount and either attempt to make the loans good or sell them on to financial speculators at a further reduced rate.

And this is what I don’t understand. Encouraged by Fianna Fáil tax incentives, reckless developers borrow huge sums of money from reckless bankers. Their collective behaviour is one of the causes of our recession. Thousands of people lose their jobs. And the Government announces a scheme that lets the developers and the bankers off the hook while asking the taxpayer to foot the bill.

And the worst thing is that there is no guarantee that Minister Lenihan’s new plan will work. In fact, some economists think it may bankrupt the state. Can this government really get any worse?


  1. I should have written thisin teh introduction to the piece, but hey i'll put it here.

    This article is great and clearly in line with a great deal of the stuff we have been putting out on the economy. Our jobs proposal document is excellent, our budget submission was excellent etc. Our proposals have received good reviews in places like Michael Taft's notes on the front blog

    Also on progressive economics blog

    Yet, like it or not the media is ignoring us and our message is not getting out there.

    There is a masive need for local cumman to try and remedy this by being active, but what is HQ doing. Surely they can see what is happening and the fact that we need to change our approach to getting our message out.

    But I am seeing nothing new. We need to do somethig quick or the locals and europeans will not be what we hoped for

  2. its going to be a long hard slog a chara. The difficulty is that we need to have a certain mass so as to be able to command attention and we then need to be very strong on economic detail so that people will think okay SF - they are strong on the economy. Bit radical but they definitely know there stuff. While the strength on detail is coming through its the mass is now holding us back.



    Possible related post:

    Eoin o'Broin made several reference to the SME sector. its a place where we are perceived as being weak, that somehow we are anti-business. This baffles me as its the rawest type of socialism to ensure that ordinary people have an opportunity to create wealth and support themselves.
    As a republican I am not frightened to say I am pro-business. How could I not be:

    I am against a new wave of Emmigration;
    I am against wasteland estates;
    While supporting the Multi-nationals I am scared by the over-dependence shown by the southern state on them.

    Its therefore clear to me that allowing ordinary people take ownership of their future via their own businesses is a step forward.

    On that note I cobbled together some thoughts on what can be done to help Irish people back to work via their own businesses.

    Aiding the SME sector in the south of Ireland.

    The thoughtful Sinn Fein Jobs Creation and Retention strategy focused attention on the need to support the small to medium Enterprise sector by rethinking the state’s enterprise development strategy and infrastructure. There were some good points made specifically the need to evaluate the effectiveness of the aid provided and also the need to lower the entry threshold by creating one-stop enterprise business points.

    These ideas piqued my interest so I thought I would briefly:
    (1) Review similar one stop points in Europe and consider the start-up threshold in Ireland and how it compares to other states EU and wider
    (2) Ignore the externalities and examine whether there are specific factors in the Irish business environment that need to be tackled to aid Irish business.

    (The tables are readable but posts dont take HTML so they aint perfect)

    (1) Starting a business. How do we compare?
    Generally Ireland is well placed regarding the registration of start-ups. However there is clear room for improvement and while good we are not in the top rung. There is no excuse as to why that should be. If we are to believe that we are losing competitive advantage because of our minimum wage then its hardly plausible not to examine what administrative weaknesses are also holding us back.

    The registration of a company in the south compared to several EU countries (time and cost):

    Variable | Ireland |Belgium |Denmark |Portugal |Britain
    COST (€) | €50 |€ 0 |€ 0 | €0 | €54
    DAYS |2-5 days | 1.5 days | 3 days | 1 days | 1 days

    While we should feel some satisfaction about the general rapidity of the registration we should be somewhat concerned that other countries are not only providing a more rapid service but doing it for free. Is €50 a meaningful cost. Can we discount it or is it emblematic of a business environment where the govt. does not strive hard enough to reduce the business start-up threshold.

    Its hard to quantify the effects of a one-stop shop however we can consider some examples. Consider Slovenia . By the end of 2007 they had simplified business start-up support into one stop shops, reduced start up times and made the decision to drop the cost of registering a start-up from €250 to €0.

    While the cost was initially high can that alone account for the fact that between 2005-08 there was an average per-annum increase of about 37% in business start-ups. While credit-access may have had a factor to play its clear that the Slovenian govt. worked hard to create a pro-business environment that gave the small enterprise a chance. For the Slovenian SME sector this yielded a saving of €10.2 million a year. Not an inconsiderable sum in a country striving to develop a home-grown business culture.

    So while our registration times are not so bad in the south of Ireland and the costs are below the EU average we have to ask can we not do more? Its important to note that while the registration times are fast that this is only for those companies using the CRO disk registration system and using a company promoter. Also while the start up times (for private ltd I hasten to add) may look good there is also some efficiency to be gained on the VAT registration times.

    Broadening my view I looked at the World Bank’s reports on doing business as this would take into account global standards as well.

    Their interesting report detailed the no of steps required to set up a business. The more hoops you must jump through the higher the effective threshold. Simply put the more red tape the less gets done. .
    Their report on starting a business in Ireland highlights some interesting points. At the risk of over writing this post I include their table summarising the costs and procedures associated with starting a private limited liability company in Baile Atha Cliath in the south of Ireland.

    Registration Requirements:

    No: Procedure Time to complete: Cost to complete:
    1 The founder swears before a Commissioner for Oaths - 1 day - €10

    2 File necessary materials with the Companies Registration Office (CRO) - 10 days € 50

    3 Get a company seal - 1 day -€20

    4 Register for corporation tax, social insurance (PAYE/PRSI) and VAT with the Revenue Commissioners -1day - €0

    My first comment would be to notice that the cost begins to drift up from the EU reported cost of € 50.. Our pro-business environment may not be as pro as we had hoped.
    Its also worth noting that the expedited approval route is usually only accessed via professional agencies. For those interested I recommend that you review the report to see how registration costs and duration can vary widely (sometimes understandably under the sth Irish system). Its also worth noting that the time line of 1 day for PRSI/PAYE registration is somewhat misleading, as noted by the report, re, VAT which can take up to 10 days.

    As a summation on south Ireland’s start-up support mechanism I have to say that while we may feel self-congratulatory we must be cognisant that we are not at that top of the class and continue to raise small, meaningless, barriers to the sth Irish SME sector. Is that tenable in a state seeking to lead its post-depression (lets not kid ourselves with recessionary talk) bounce back via indigenous companies. The south of Ireland needs to streamline its support mechanisms and administrative procedures regarding start ups by introducing a one stop system and reducing the administrative costs liable to start-ups.
    But, as always, there is more.

    (2) If we cant control the externalities what can we control ( or seeking efficiencies in the business environment)

    While there is little that we can do as Republicans to influence factors outside of sth Ireland we should be able to examine internal obstacles and propose some solutions that will allow Irish SME‘s to prosper.

    Having briefly looked at the time and cost required to set up a business in the sth of Ireland I’d like to consider some day to day operational obstacles where efficiencies are waiting to be delivered.

    Firstly I’d like to focus on Contract enforcement times. While its easy to draft a contract that envisages all risks its often quite difficult enforcing the remedies. The greater the cost associated with enforcing those remedies provided for in a Contract the less effective that contract is on a day to day basis.
    With that in mind its useful to review how the south of this Island ranks in terms of Contract enforcement globally. This is a critical point in developing a pro-business environment. How can we encourage SME’s if we cannot guarantee timely and cost effective enforcement of a contract. This point will resonate, I believe, with every business person who wrote of a debt because it was not worth pursuing or who accepted ad/hoc terms outside the agreed contract because they had no recourse.

    So how does the southern part of Ireland rank according to the World Bank in Contract Enforcement.
    Well its actually only 39th in the world, sandwiched between the tiger economies of Cape Verde (40) and just above Bhutan and Mongolia(38). Yes apparently its more effective to go through the courts in Mongolia than in sth Ireland Now that’s something to consider.

    If we look at the top countries then we have Hong Kong, Luxembourg, Iceland, Latvia, Finland, US, Norway, Korea, Germany, and New Zealand (11). I include NZ as being more typical of the common law used in sth Ireland. Other notable common lay countries are Britain, including the north 24th‘’ and Australia - 20th. This is worth dwelling on. While Brian Lenihan may foolishly talk about lost VAT revenue to a company operating in Newry he typically makes no mention on why the south is 15 places behind the north when it comes to ease of enforcing a contract. Is this good enough. I Partisanly note that little FF does is good enough

    Just to lay the ground work note that this deals with the ease or difficulty of enforcing commercial contracts by examining the evolution of a payment dispute and tracking the time, cost, and number of procedures involved from the moment a plaintiff files the lawsuit until actual payment. Claim assumed to be equivalent to 200% of income per capita. Big but not huge. Probably typical actually for most SME´s.
    Briefly lets examine their findings. Looking firstly at duration until enforcement and procedures required for the best ranked in the world and some other interesting comparisons for sth Ireland.

    State |Procedures |Filing & Service |Trial |Enforcement | Total Days
    HongKong | 24 | 5 days |76 days |130 days | 211 days
    Luxembourg 26 | 21 days |240 days|60 days |321 days
    Germany |30 | 29 days |310 days|55 days |394 days
    GB&n.Irl. | 30 | 35 days |313 days|56 days |404 days
    sth Ireland |20 | 60 days |365 days|90 days |515 days

    These figures are not acceptable are they. How can it be acceptable for a company to wait up to 515 days. Is this judicial system geared to aiding or hindering business?

    And then cost of enforcement which is related to time:
    Costs stated as a % of total claim value.

    State | Total-Cost | Attorney | Court | Enforcement
    Hong Kong |14.5% | 12.7% | 1.5% | 03%
    Luxembourg| 8.8% | 6% |1.9% |0.87%
    Germany |14.4% |8.78% | 3.2% |2.4%
    GB&nIrl |23.4% |19.6% |2.6% |1.22%
    Sth Ireland |26.9% |18.8% |2.3% |5.8%

    I feel little need to expand on these figures. Its clear that we are not top of the class. Business does not care what excuses sth Ireland has. Excuses don’t cut it do they. It would seem apparent that there is a need for reform in our legal system if we are to be a entrepreneurial country.

    If sth Ireland gears itself for a strategy of recovery via exports based on a strong competitive basis then its going to have to do more than relentlessly focus on the minimum wage. In Ireland we often focus on straw-men at the expense of the real problems. There are indications that we are not providing a pro-business environment and also worryingly evidence that we are needlessly hindering small businesses by having an inefficient contract enforcement record. Is that acceptable when companies are struggling to recover costs. I have tried to highlight that the points made in the Sinn Fein Jobs Retention and Creation strategy highlight that there are definite steps that can be taken to improve the operating environment facing our business sector. These are just some thoughts on those points. I am not a member of any party and welcome any fair criticism.

    Some links as references

  3. Sorry Jer, i realsise the second part is an idea for an article. Apologies to all those that read through the comment as I'll be reposting it again.

    in relation to this post i still would be interested in how you think we can build the mass. Are HQ doing enough? Should the cumman be doing more?

  4. Hi,

    I think you must imagine me as being very verbose. I only seem to write long posts :)

    On the issue of whether HQ and the respective cumainn should be doing more I have to answer in two parts. Firstly I am not a member and secondily yes of course they should :)

    Briefly on the idea of a mass party. I think mass on its own is not key, rather its also the distribution. Having the party central in a number of areas across the southern state is the first step. An important requirement would then to start building clusters in new areas, locations that had not seen SF candidates in 90 yeard, running candidates across districts with no apparent SF vote because even in areas regarded as dry wells there is going to be a 3-4% (IMHO) pool of votes. Obvious point I know but I am trying to suggest that for every new member or supporter the party will pull in Kerry of Louth or Donegal or Dublin or C/M there needs to be a drive to break out of these areas.

    On that note and thinking a bit of the wall here I wonder is it possible to idedntify 20-25 candidates across the southern state in areas that might have some potential but not regarded currently as Republican strongholds. Make those people full time activists with defined targets and goals to meet as regards membership, organisation of new cumainn etc

    I see this idea falling down as regards cost though. 20 people times 40k adds up. Maybe the approach is already in place on a smaller scale. Maybe its not the best approach or use of resources.

    Alternatively I think the party should look to identify 50-60 or many more activists and give them Politics 101. I guess thats part of the education dept.'s function but conducting politics is quite a harsh game nowadays and would it be worthwhile targeting a large pool of key activists for teaching in Economics, Law, Statistics, Social Policy, Organisational techniques, teach them about issues that will allow them to effectively operate as community activists. Help train members in research methods demonstrating how to source information relating to specific areas i.e Arklow SF members would be advised on how to identify facts and figures, tailor responses suitable for Arklow etc. Maybe this is something thats already been done and I am sure that alot of this is not new but I am writing it thinking aloud so to speak.

    However I think that considering the complexity of issues now inherent in politics it makes sense to use the intelligence and drive of regular activists. Skill the ordinary members up even further and set them loose so to speak. There are only so many paid activists any party can have. And paid activists are necessary no doubt about it but SFs strength to my eyes has always been the selfless commitment of the party members.

    That talent base and commitment is the party's greatest strength. Reliance on it alone would be a mistake but its a huge asset. Invest in the members and then SF will grow. Committed activists will gain from support and the party will gain many times over, in increased commitment and in a flexible activist base capacble of shaping events locally.

    One of the most popular trends in politics has of course been the surge in online politics ever since Dean and Obamamania.

    Its all the go now and probably a bit of a fad. I suspect that it may not be as relevant in Irish politcs as elsewhere.

    However I do think that the online world is one where supporters and activists can create some critical mass for the party by
    (1) engaging in wide ranging debate on many issues that develops our ability to shape issues
    (2) forming a community that allows others to engage with SF and become acquainted with the party.

    The online community is one area that activists can make a huge contribution.

    I think that also SF could also use a members portal on its website. An area where members could discuss issues. I would love to see something where enthousiastic supporters or members could submit research proposals or ideas for community review. I.e an economics student does a report on unemployment in Wicklow or a guy in Dublin figures out unemployment in South Dublin is spiking and members can discuss. Does nt need to be cutting edge policy but an area where knnowledge can be shared.