Irish Examiner 22/12/12

The unedited text of an article that appeared in The Irish Examiner recently is continued below the fold.

We need to face up to the repossession crisis

According to the latest mortgage arrears statistics there are 33,000 households in arrears of between 90 and 360 days and a further 35,000 households in arrears of more than 360 days. Both figures continue to rise. There is an expectation that they will level off in the middle of next year but we will have to wait for evidence of that to emerge.

Beneath this there are 39,000 households in early arrears of less than 90 days and a further 34,000 households who have had their mortgage restructured but are not in arrears. Across all levels there are around 150,000 households showing some sign of mortgage distress from very mild to very severe levels.

Research by the Central Bank shows that 44% of borrowers who fall into 90 day arrears return to performing mortgages over time. It is likely that 100,000 households need some form of intervention.

The figures show that nearly 65,000 households have had their mortgages restructured by their banks. Details provided by the banks indicate that 75% of these borrowers are meeting the terms of the restructured loans.

Many of these are a switch to interest-only repayments but this is only a short-term solution which will not be sustainable in the long run. A mortgage must be paid back at the end of the term and unless the borrower is making capital and interest payments they may not be in a position to do so at the end of the term.

A widespread debt forgiveness scheme for mortgage debt has very little going for it. For all borrowers in mortgage distress the goal should be to get them on a sustainable path of making capital and interest repayments.

A crisis of mortgage debt is not unique to Ireland and it is not a solely recent phenomenon. We can borrow from the solutions used elsewhere. In the 1930s, the US set up the Home Owners Loan Corporation (HOLC). The objective of this programme was to get borrowers back on a sustainable path. The target was to reduce the monthly mortgage repayment to 33% of gross income with the repayment comprising both interest and capital.

The payment reductions were achieved through two means: term extensions and permanent interest rate reductions. To date, term extensions have already been granted to 10,000 households here but permanent interest rate reductions have not been widely used.

A structured programme to try and reduce mortgage repayments to 33% of gross income for those who cannot return to their original repayment should be introduced. A borrower repaying a reduced-interest, 35-year loan is a better outcome for the bank than the borrower defaulting.

There will be many borrowers for whom such a restructure will not be able to reduce their repayment to 33% of gross income. This will be because the borrower’s income does not recover, the capital amount is so large that a term extension is ineffective or because the borrower is already on a very cheap tracker rate removing the possibility of an interest rate reduction.

In the US in the 1930s the HOLC took on the responsibility for 1 million mortgaged households. By restructuring the terms of the loans they were able to help 800,000 of these households. The other 200,000 loans were unsustainable and were foreclosed on. We have to accept in Ireland that foreclosures and repossessions are part of the solution to a mortgage debt crisis.

There is no point tinkering around with mortgages that will never be repaid. In the case of completely unsustainable mortgages the house should be repossessed and set against the capital on the mortgage. If there is still a balance outstanding, as will be the case for those in negative equity, the borrower should make a small contribution for three years of, say, 8% of gross income.

After three years these payments should stop and any remaining debt should be simply written off. The borrower will lose possession of the house but they will also lose the burden of an unsustainable debt that they could never repay. The bank will make a loss on the unpaid debt but that is the consequence of lending money to people who cannot pay it back.

There are probably 20,000 households who have unsustainable mortgages. This is the group that needs the most dramatic intervention, but is the group that has got the least attention. There is some provision for these in the Personal Insolvency Act but it does not go far enough.

People with unsustainable mortgages need to be given the chance to make a fresh start. The houses should be repossessed and after three years any remaining debts should be simply written off. The repossession can occur under a mortgage-to-rent type scheme where the former homeowner is facilitated in renting the house back from a housing agency.

It should be as simple as that. We do not need to complicate the issue with debt forgiveness, split mortgages and debt-for-equity swaps. If these were useful solutions to this problem they would have been used elsewhere but they have not.

We face a crisis that other countries have and are going through. What has been used is forbearance for those with sustainable mortgages and foreclosure for those with unsustainable mortgages.

In the US 1 million houses were foreclosed on in 2010 and 800,000 in 2011. The figures for the UK were 40,000 and 35,000. Translated into Irish terms the US figure for 2011 would imply 12,000 repossessions a year. The UK figure would be the equivalent of around 3,000 repossessions a year here. In Ireland there were 600 repossessions last year and nearly two-thirds of them were voluntary surrenders.

The repossession rate here is one-fifth that of the UK and one-twentieth that of the US. If the UK repossession rate was applied here for a few years it would clear many of the unsustainable mortgages. We do not need to do anything that hasn’t been done elsewhere, but we do need to face up the problems that are here.

Taxing with the best of them

Ireland continues to face a massive budget deficit.  In 2013, the deficit is forecast to be 7.5% of GDP which will be the largest in the EU.  There are almost incessant arguments on how best to close the deficit. One common refrain is that Ireland is a “low-tax economy” and that the gap should be closed with tax increases, in particular increases in income tax on the “rich”.

When it comes to income tax, there is not much evidence at an aggregate level to support the thesis that Ireland is “low-tax”.  In fact as a percentage of GDP, Ireland collects the eighth highest amount of income tax in the EU and is equal to the EU average.  Here are 2011 figures from Eurostat on personal income tax as a percent of GDP.

Ireland’s social contributions rates are low and on a combined measure of income tax and employee social contributions Ireland ranks 13th in the EU on 10.5% of GDP below the EU27 average of 13.0%.  Table here. (Though the Irish figure is 12.7% of GNP).

In 2013, it is projected that there will be a general government deficit of €12.7 billion.  Around one-ninth of this will be because of the deficit in the Social Insurance Fund.  It is forecast for 2013 that there will be €7.1 billion of PRSI contributions, while there will be €8.6 billion of claims on the Social Insurance Fund.  More PRSI is needed to fund the expenditure of the social insurance fund but the deficit is a little less than 1% of GDP.

We could choose to move higher in the above table using employee social contributions.  However, as this table (excel) from the OECD shows, all 34 countries in the OECD adopt a flat-rate system for employee social contributions.  This approach may not be attractive to all owing to the lack of progressiveness in the measure.  The deficit in the Social Insurance Fund could be closed by upping the employee PRSI contribution rate from 4% to 7%. 

However, the main hole in the public finances is for expenditure financed out of general taxation.  Of course, there could be further increases in employee PRSI contributions beyond that necessary to close the deficit in the SIF up to say the 12.5% average for the OECD-EU21, with scope to also increase employer and self-employed social contributions.   Such an increase could be accompanied with the transfer of the funding of certain expenditures from the Exchequer to the Social Insurance Fund, thereby reducing the need for tax increases. 

Accepting that is possible, let’s assume that tax-funded expenditure continues to be tax funded and we are looking to raise additional tax revenue, and in particular income tax revenue.  Let’s see how some of those countries with higher income tax receipts than Ireland manage it.  This table (excel) from the OECD gives effective income tax rates at different income levels.

For Ireland, it gives effective income tax rates and tax bills (income tax plus USC) for a single person with no children at the following wage levels:

• 67% of Average Wage: €22,000 = 8.8% with €1,900 tax
• 100% of Average Wage: €32,800 = 14.9% with €4,400 tax
• 167% of Average Wage: €55,000 = 28.1% with €15,400 tax

Ireland has a progressive tax system.  In fact it is the second most progressive in the OECD and the most progressive in the EU.

The following table shows what happens to personal tax bills if we apply the effective income tax rates of the six EU countries who collect more than 10% of GDP from personal income tax.  These countries are Denmark, Sweden, Finland, Belgium, Italy, the UK.  In the table their effective tax rates (as well as their mean) at 67%, 100% and 167% of the average wage is applied to those wage levels in Ireland? 

Tax system are complicated so this crude analysis may miss some of the finer points of each system but it gives a good impression what would happen if the effective tax rates from the top income-tax-collecting countries were applied in Ireland.

Ouch!  Unsurprisingly, 20 out of 21 of the country rates result in an income tax increase.  The only reduction is in the case of the UK effective tax rate for those earning 167% of the average wage.

The arithmetic average of the effective income tax rates for the six countries implies tax increases at all three income levels, but the size of the tax increases varies hugely.  If applied those on €22,000 would see their tax bill more than double, those on €32,800 would see their tax bill increase by half and those on €54,800 would see their tax bill rise by around one-twelfth. 

In proportionate terms the hit would be 13 times greater for those on €22,000 than those on €54,800.  The extra tax on €22,000 would around €170 a month, the extra tax on €54,800 would be €95 a month.  And increases in flat-rate employee social insurance contributions might be dismissed because they are not progressive!  Adopting the average effective tax rates of these six countries for single people with no children would be monstrously regressive.

We can collect as much income tax as Denmark, Sweden and Finland but let’s be clear how they do it.  Countries with higher tax income revenues as a percentage of GDP than Ireland do not achieve it by levying more taxes on higher incomes (€55,000 would be in the top quintile of earnings in Ireland), they do so by levying more taxes on average incomes and much more taxes on lower incomes.

An equivalent table for married couple with two children looking at the effective income tax rate less child-related transfers is below the fold.

The result is generally the same, though the increases in income tax are even greater.  The increases are not as regressive as for a single person with no children.  The increase in tax on a low-income couple (one earner at the average wage) is almost three times greater than a higher-earning couple (two earners one, at 100% and one at 67% of the average wage).

Some Trends in Expenditure

Chapter 21 of the 2011 Comptroller and Auditor General’s Account of Public Services includes the following chart on trends in welfare expenditure.

The figures since 2008 used in the above table are in the first section of this table.

The 2012 figure is an estimated based on voted allocations at the time of the report (Sep 2012).  Since then there has been a supplementary estimate for the Department of Social Protection of €685 million, of which €264 million was due to more than anticipated expenditure on Jobseeker’s Allowance.  Thus the 2012 total for support for ‘people in the labour market’ will be around €5,200 million and the overall total for the table close to €21,000 million, with little overall change from 2011.

The trends in the chart are easily identifiable.  There have been falls in the aggregate financial support provided to ‘families and children’ and to ‘people in the labour market’.  Support for ‘people with disabilities’ fell in 2010 and 2011 but is due to rise very slightly in 2012.  Support for ‘older people’ continues to rise year-on-year with a rise of around €1 billion since 2007.  A more detailed breakdown of the expenditure under each category is in tables below the fold at the end of the post.

Here is a table taken from the Analysis of the Exchequer Pay and Pensions Bill published by the Department of Public Expenditure and Reform.

It can be seen that the gross Exchequer pay and pensions bill is forecast to rise in 2012, though only by €16 million or 0.09%.  The subsequent column show the breakdown of this.  The Exchequer pensions bill will rise by €285 million, while the gross pay bill will fall by €269 million.

The Exchequer net pay bill is the gross bill less employee pension contributions in the civil service, health, education, guards and army of €536 million which are used to fund other expenditure and the employee deductions for the public sector pension levy of €930 million across all departments which are also used to fund other expenditure.  Some other minor employee contributions bring the total to €1,509 million.  In essence, this is money that forms part of the gross pay bill but is deducted. 

The Exchequer net pay bill is expected to fall by €266 million this year to €14,402 million.  PRSI, Income Tax and the USC will be further collected on this to reflect the net pay measure from the employee’s perspective.

The fall in the pay bill in 2012 (both gross and net) was more than offset by the rise in the pensions bill which has risen €1 billion since 2007.

Since 2007, the social welfare bill for state pensions and the exchequer pensions bill has risen by around €2 billion.  Many of the reductions in current expenditure elsewhere are being consumed by increases here. 

Of course, this is mainly because of demographic factors rather than policy changes.  The number of people aged 65 and over increases by around 20,000 per annum as entrants to this category is greater than the death rate, while the number of public sector pensioners is rising by around 8,000 per annum.

Q3 National Accounts

The CSO have published the Quarterly National Accounts and Balance of Payments for Q3 2012.  It is estimated that real GDP rose 0.2% in the quarter while real GNP fell –0.4% in the quarter.

The first estimates of the Q2 2012 changes provided in September have both been revised up, from 0.0% to 0.4% for GDP and from 4.3% to 4.7% for GNP.

Personal Consumption Expenditure rose 0.5% in the quarter, Investment rose 8.5% with a 0.3% quarterly fall in the measure of Government Expenditure included in the accounts.  For the first time in seven quarters Consumption shows an annual rise.  The measure of Final Domestic Demand rose by 1.9% in real terms in the quarter and shows an annual increase of 0.3%.  This is the first annual rise in 18 quarters for Final Domestic Demand (back to Q1 2008).

In 2010 prices, GDP in the first three quarters of 2011 was €119.3 billion.  For the first three quarters of 2012 the equivalent figure is €120.2 billion.  This represents an annual growth rate of 0.8%.  The equivalent figure for GNP is 3.0%.

For Maastricht criteria buffs, nominal GDP in the first three quarters of 2012 is estimated to be €123.3 billion, compared to €119.1 billion in 2011, for a nominal GDP growth rate of 3.5%.

Quarterly GDP rose less than Final Domestic Demand because of a fall in the in the balance of trade.  In real terms, seasonally adjusted exports rose 0.3% in the quarter but imports rose by more with an increase of 2.1%.

In the Balance of Payments the estimated surplus for the first three quarters of the year is 4.3% of GDP up from 0.0% last year.

A‘Low-tax’ or ‘Low-insured’ Economy?

Ireland is commonly cited as a ‘low-tax’ economy with support coming from charts such as this from Eurostat based on 2010 data.

Ireland is in a class of EU countries with government revenue below 30% of GDP, 10 points below the EU average.  The other EU countries in this group are Bulgaria, Latvia, Lithuania, Romania and Slovakia.

Graphs such as this are worth some closer study.  For a start the graph is in terms of GDP, whereas for Ireland a comparison to GNP may be a better reflection of the tax burden, though both have merits.  It may also be the case that Ireland is not a ‘low-tax’ economy but more a ‘low-insured’ economy. 

The following table includes 2011 data from Eurostat and gives government receipts as a percentage of GDP for the EU27, the EU 15 and Ireland with a GNP comparison for Ireland in the final column.

In GDP terms tax receipts in Ireland are a couple of percentage points below the EU averages, but when done in GNP terms, tax revenue in Ireland is above both EU averages.  The reason Ireland appears to be ‘low-tax’ is not to do with tax at all; it is to do with social insurance contributions.  Social contributions in Ireland were always well below the EU average, but with the abolition of the Health Levy in 2011, social contributions in Ireland are now less than half the EU averages. 

In GNP terms employer social contributions are about 55% of the EU average, employee contributions are about 40% of the EU average and self-employed contributions are about 12.5% of the EU average.

Any intention to increase general government receipts in Ireland up to the EU average can propose to either push tax receipts further above the EU average or bring social insurance contributions up closer to the EU average.

Below the fold is a table extracted from the OECD’s Taxing Income publication which looks at effective tax and social contribution rate for different wage levels in 34 OECD countries.

Unsurprisingly, Ireland is below the OECD and OECD-EU averages at each of the income levels used.  At 67% of the average wage, Ireland has the 8th lowest combined income tax/social contribution burden as a percentage of labour costs.  At the average wage Ireland also ranks 8th, and then falls to 14th with the higher burden at 167% of the average wage.  

The 2011 average wage figure used by the OECD for Ireland was €32,800.  This puts the 67% level at €22,000 and the 167% level at nearly €55,000. 

A crude measure of progressiveness is also calculated which  takes the ratio of the burden at 167% of the average wage to the burden at 67% of the average wage.  Using this measure Ireland has the second most progressive system for the group shown.

Relative to the unweighted average for the OECD-EU-21, the Irish levels shown in the above table for the combined income tax/social contribution burden for single people from total labour costs are:

• 67% of Average Wage: 56%
• 100% of Average Wage: 64%
• 167% of Average Wage: 84%%

All of below the OECD-EU average and the gap is greatest at lower income levels.  If we limit the comparison to the income tax burden on gross wages between the OECD-EU average and Ireland the figures are.

• 67% of Average Wage: 75%
• 100% of Average Wage: 90%
• 167% of Average Wage: 121%

Ireland has a lower income tax burden than the OECD-EU average on lower wages, close to, but still below, the OECD-EU average for average wages and a higher income tax burden than the OECD-EU average for higher wages.

Finally here are Irish employee social contributions for single people from gross wages relative to the OECD-EU average:

• 67% of Average Wage: 31.9%
• 100% of Average Wage: 32.7%
• 167% of Average Wage: 35.4%

At each income level the employee social contribution is about one-third of the OECD-EU average.  The changes to PRSI announced in Budget 2013 will flatten the slightly increasing pattern seen above.

All the OECD data used are available here.

Carryover Effects

Here is an extract from Table 2.1 from the Medium Term Fiscal Statement published before Budget 2012 last year.

The 2012 Budget a few weeks later outlined the €1.45 billion of current expenditure cuts and the €1 billion of taxation increases.  With pre-announced cuts in capital expenditure and the taxation carryover effects from 2011 the total added to €3.8 billion.  There also was €0.4 billion of revenue carryover effects for 2012 from the introduction of the USC in 2011 but these were excluded in the table.  The total could then be put at €4.2 billion as was done by both the EU and IMF.

The €1.45 billion of new current expenditure measures is confirmed in table 5 on page 13 of the Economic and Fiscal Outlook released with the Budget.

Here is the equivalent, though slightly modified, table for Budget 2013.

The total sums to €3.5 billion but the “Tax” heading is replaced by “Revenue”.  This is because PRSI was moved from Expenditure to Revenue in the 2013 table. (PRSI is a departmental receipt (appropriation-in-aid) which reduces net expenditure).  Other revenue raising measures such as the third-level registration fee and charges for private patients in public hospitals remain under the “Expenditure” heading.

While in Budget 2012, €1.45 billion of current expenditure cuts were included in the table and subsequently introduced (though not necessarily implemented), for Budget 2013, €1.44 billion of current expenditure cuts were included in the table but €1.02 billion of current expenditure cuts were included in the budget.  This can be seen from Table 7  on page 14 of the Economic and Fiscal Outlook released with the budget. 

The €1.44 billion figure in the table for current expenditure cuts is reached with the inclusion of €0.42 billion of “carryover” effects from measures announced in previous budgets.  That is, the full-year effect of earlier measures won’t be felt until 2013 and these will serve to reduce expenditure in 2013.

However, for 2012 no expenditure carryover effects from the impact of measures announced in previous budgets were included.  The expenditure carryover effect was left out of the calculation of the total consolidation effort for Budget 2012, but included in the calculation of the total consolidation effort for Budget 2013.  Were there no expenditure carryovers coming into 2012 while there was €0.4 billion of them for 2013?

The inclusion of “Increased Dividends” as a consolidation measure also seems unusual and wasn’t included in this graph of Fiscal Consolidation 2012-2015 included as part of the IMF’s Fourth Review (page 13):

There is no distinction made between the current spending measures for 2012 and 2013, and as seen the €3.5 billion total for 2013 includes €0.4 billion of expenditure carryovers rather than being entirely new measures.  This was what was included in relation to Budget 2013 in the IMF’s Seventh Review released in September:

On the basis of the aggregate budgetary projections set out in the Medium Term Fiscal Statement (MTFS) of November 2011, consolidation measures for 2013 will amount to at least €3.5 billion. The following measures are proposed for 2013 on the basis of the MTFS:

• Revenue measures to raise at least €1.25 billion[2], including:
• A broadening of personal income tax base.
• A value-based property tax.
• A restructuring of motor taxation.
• A reduction in general tax expenditures.
• An increase in excise duty and other indirect taxes.
• Expenditure reductions necessary to achieve an upper limit on voted expenditure of €54 billion, which will involve consolidation measures of €2.25 billion on the basis of the MTFS, including:
• Social expenditure reductions.
• Reduction in the total pay and pensions bill.
• Other programme expenditure, and reductions in capital expenditure.

[2] Inclusive of carryover from 2012.

Carryover effects are included for revenue but not expenditure.  It can also be seen than a €54 billion limit for voted expenditure in indicated.  This was not adhered to in the budget:

• Gross voted current expenditure: €51,070 million
• Gross voted capital expenditure: €3,435 million
• Gross voted expenditure: €54,505 million

The excess over the limit is not very different from the level of carryover effects in the current expenditure consolidation effort included in the budget, but is more than likely because the current expenditure ceilings for 2013 laid out last year were increased.

One final point on carryovers relates to the tax carryovers in 2014.  Last week’s budget contained a lot of tax measures which will not come into full effect until 2014. Some of the main measures are:

• Full introduction of Property Tax less NPPR: €180 million
• Taxation of maternity benefit: €25 million
• Removal of PRSI allowance: €26 million
• Removal of PRSI block exemption: €24 million
• Changes to maximum allowable pension fund: €250 million

These sum for more than €0.5 billion, though some reduced taxation measures will reduce the full carryover effect to close to €0.45 billion.  If €1.1 billion of tax consolidation is required in Budget 2014, then €0.65 billion of new measures will be required.

New Budgetary Measures

The following table summarises the new measures included in Budget 2012 and Budget 2013 that impact on the White Paper ‘no policy change’ figures released the Friday before each budget. 

Most of the figures come from the Economic and Fiscal Outlook released with each budget (Table 5 for 2012 and Table 7 for 2013).  The current expenditure figures for each Vote are taken from the Expenditure Allocations (2012 and 2013).

The new Property Tax is expected to raise €250 million but as it replaces the Household Charge a figure of €90 million is included here.  

The total for 2013 is more €726 million than the total for 2012.  This is because of a lower capital reduction in 2013 and also because the White Paper for 2013 was done on the basis of expenditure ceilings which were issued with last year’s budget as part of the Comprehensive Expenditure Review.

The level of current expenditure savings  included in Budget 2013 is comparable to those in Budget 2012, but increases in the current expenditure ceilings for most votes partially offsets the impact of the savings.  A table that compares the expenditure ceilings for each vote as announced last year and adjusted this year is below the fold.

The General Government Accounts

The Economic and Fiscal Outlook released with yesterday’s budget presents a useful table of the general government accounts.  This is the accruals-based set of accounts by which the Excessive Deficit Procedure limits under the Maastricht Treaty are set.  It is the deficit on these accounts that must be reduced to below the 3% of GDP limit by 2015. Click to enlarge.

The €13.4 billion deficit for 2012 is the result of expenditure at €69.1 billion and income at €55.6 billion.  When the projected deficit gets below the 3% of GDP limit in 2015 it will still be €5.3 billion and this will be the result of expenditure at €68.4 billion and income at €63.1 billion.

In nominal terms over the next three years general government expenditure is projected to fall by 0.9% with nominal general government revenue due to rise by 13.3%. 

With inflation and rising GDP, real expenditure will fall while there will be a slight rise in real income.  As a percentage of GDP, expenditure will fall from 42.3% in 2012 to 37.7% 2015.  On the revenue side, the change will be from 34.1% of GDP in 2012 to 34.8% of GDP in 2015.  As shown below this is projected to bring the deficit to 2.9% of GDP by 2015.

Excluding interest payments, it can be seen that the projected improvement in the primary balance is even greater.  This means that although overall nominal expenditure might remain largely unchanged there will be changes in the composition of expenditure with interest consuming a greater amount and standard government expenditure a lower amount.

How unequal?

Quote One:

“We were one of the most unequal societies in the western road according to the OCED, during the boom years. The most, … , only two or three countries …”

Really?  In the OCED’s ‘mid-2000s’ table of Gini coefficients Ireland ranked 22 out of 30 countries.   This data is taken from Growing Unequal?: Income Distribution and Poverty in OECD Countries, released in 2008.

New Zealand, the UK, Italy, Poland, the US, Portugal, Turkey and Mexico all had higher rates of income inequality than Ireland.  Ireland was in the bottom half but there were eight countries with higher gini coefficients, not “two or three”.

Quote Two:

“2008 we were much worse than the EU average”

Really?  This is a table of Gini coefficients based on the 2008 EU-SILC (page 97).  Ireland’s gini coefficient of 29.9 was below the average for each of the EU-27, EU-15 and Eurozone countries.

Ireland ranked 15 out of the EU-27.  All of Bulgaria, Germany, Estonia, Greece, Spain, Italy, Latvia, Lithuania, Poland, Portugal, Romania and the UK had higher Gini coefficients (more income inequality) than Ireland.  Ireland was not “much worse” than the EU average.

Quote Three:

“Are you surprised then at how little we do about it [inequality]?

Really?  This is from the same 2008 OECD report which provided the data used above.  Which country had the third best reduction in the Gini coefficient (reduction in income inequality) from the mid-1980s to the mid-2000s?

Yes, IRL = Ireland.

The final graph is from Chapter 16 of a Eurostat report based on the 2007 EU-SILC.  Which country had a system of direct taxes and cash benefits which had the second largest impact on reducing income inequality.

In a related table it can be seen that Ireland’s cash transfers reduced the Gini coefficient on original income of 47.2 (the highest in the EU) to 37.7 for gross income (the seventh highest in the EU), while Ireland’s direct taxes further reduced that to 32.4 (the eighth highest in the EU).  These reductions are reflected in the above graph.

Bad Credit Unsecured Loans

If your credit history is considered poor and you wish to apply for a loan, there are some lenders who will work with you to secure an unsecured loan. However, with an unsecured bad credit loan, the amount you borrow will be low, and the lender will first have to see just how bad your credit is before making a decision on an exact amount.

There are a couple of reasons why it is a good idea to apply for an unsecured loan if your credit is poor. The first is that you can apply for the loan that you need. Second, by making payments on time, your credit score will go up. When your credit score goes up, you become less of a credit risk. In order to apply for a bad credit unsecured loan, you must be 18 years old, be in a job for at least three months and have a good repayment record on your credit ratings for at least six months. The interest rate would depend on how much you borrow and the period you plan to pay it back over.

Bad credit unsecured loans are good for a couple of reasons. First, you have the opportunity to apply for the loan you need. Secondly, by making regular payments on your loan, you begin to repair your credit score proving to any future financial lenders that you are not posing a risk to them. In order to apply for a bad credit unsecured loan, you might be 18 years old, be in a job for at least three months and have a good repayment record on your credit rating for at least six months. The interest rate would depend on how much you borrow and the period you plan to pay it back over.

Unsecured Loans Are Popular And Easily Available

Unsecured loans are those loans that do not necessitate the need of offering any sort of collateral in form of security to the lender. In other words unsecured loans are provided by a lender to a borrower without the assurance of any asset. In fact these loans are meant for tenants and those homeowners who do not want to risk their property. Those who do not possess any property to be offered as collateral are benefited with unsecured loans.

Due to their short term and risk free nature unsecured loans are very popular in the UK. Many people prefer these loans because they want to pay off the loan amount as early as possible in order to avoid paying excessive interest. Also, one doesn't have any risk of repossession of property unlike secured loans where your property is seized by the lender in case of defaults.

Unsecured loans are taken for a variety of purposes. You can avail such a loan for buying a car, holidaying, home improvement, debt consolidation, marriage, education etc. The interest rates are a bit high and the repayment duration is short in these loans. But, there are some advantages also. Unsecured loans are processed very fast because of the absence of collateral. Since there is no involvement of collateral, there is no valuation of property and less documentation work. Therefore it takes much of your time and efforts.

Applying online for an unsecured loans is the best option these days. There are scores of websites that provide services in the field of money lending. You just need to fill up an online loan application form furnishing all the necessary details and you'll find a number of lenders approaching you with a variety of loan quotes.

The Promissory Notes and the Deficit

The impact of the €30.6 billion of Promissory Notes provided to Anglo and INBS, now merged as the IBRC, on the public finances is massive, but is often misstated.  Over the weekend Stephen Donnelly wrote:

Over the course of 2010, the Fianna Fail Government invented a loan from the people of Ireland to Anglo and INBS. They essentially wrote a €31bn IOU, promising to pay it to the bank and building society over the following 20 years. In 2013, we are due to make our third payment on this, of €3.1bn.

But it gets worse. Now that we 'owe' them this €31bn, we must also pay them interest. This amounts to an additional €17bn over the 20 years. In 2013, the interest payment is €1.9bn. So contained in the 2013 forecasts is a payment of €5bn to Anglo and Irish Nationwide – two dead casinos, both under investigation on numerous fronts.

It is expected that Ireland will have a general government deficit of €12.6 billion, a €0.8 billion reduction on 2012.  In an earlier paragraph it is claimed that the 2013 deficit should actually be €15.7 billion.

It is true that the headline figure looked at by the troika will fall by about €800m. But due to some accounting wizardry, a full €3.1bn of the €5bn to be paid to IBRC isn't included. When you add that in, the deficit will in fact grow, by a whopping €2.3bn.

As discussed below this is a mis-interpretation of the impact of the Promissory Notes on the deficit.

The recapitalisation of Anglo/INBS in 2010 could only be achieved with the transfer of an asset to the banks to support their balance sheet.  The government didn’t have €30 billion of cash lying around, had little potential to borrow it, so an asset was created for the banks.

The Promissory Notes are recorded as a loan asset on their balance sheets.  The repayment of the Promissory Notes is the repayment of this loan from Anglo/INBS to the state. However, unlike typical loans the in this instance the borrower (the state) is repaying a loan without receiving any of the money in the first place.

By viewing the Notes as a loan from Anglo/INBS to the state it is easier to see that the repayment of the Notes do not increase public debt.  If the repayments are made from current resources the level of debt will fall; if the repayment is made with borrowed money the level of debt is unchanged.  The latter is definitely the case.

For 2012, Ireland will have a general government deficit of around €13.4 billion.  The impact of the Promissory Notes on this is nil.  The annual €3.1 billion payment was made at the end of March (a government bond was issued to BOI to get the cash from them).  This simply swapped one form a debt (the loan liability to IBRC) for another form of debt (the bond liability to BOI).

The capital amount of the Promissory Notes was recorded in full in the 2010 general government deficit when Ireland ‘borrowed’ the money from Anglo/INBS.

As the Promissory Notes are a loan the value of the asset on the balance sheet must reflect the value of the loan.  A €31 billion loan to be repaid over 20 years would not be worth €31 billion if there was no interest on the loan.  The book value of a €31 billion zero-interest loan would not have been sufficient to recapitalise these bust banks.  They needed an asset worth €31 billion so an appropriate interest rate had to be applied to the loan.

As the money was being ‘lent’ to the government over a long period the interest rate chosen was the equivalent-term government bond yield from the secondary market on the day the Promissory Notes were issued.  Here are the rates on the four tranches.

As can be seen the interest charged on the loan in 2011 and 2012 was zero.  There was an ‘interest holiday’ built into the loan for those years for some reason (probably to improve the aesthetics of the annual deficits).  There is a higher coupon from 2013 on to make up the shortfall generated by this interest holiday.

Interest will resume being charged on the loan from the first of January.  In 2013 the interest bill on the Promissory Notes will be around €1.9 billion.  However, it is important to note that this is accrued interest and is added to the capital amount of the loan rather than being paid.

The annual €3.1 billion payment does not change because of the end of interest holiday.  This is still made and the current structure is that this will be paid each year up to 2023.  What changes is the reduction in the capital amount effected by the payment as some of this is consumed by the interest.  This is shown in the following table.

The “Interest Due” is the amount of accrued interest charged on the loan over the 12 months to the end of March each year.  The interest charged against the 2011 payment relates to the amount issued during 2010 prior to the start of the interest holiday.  The interest charged against the 2013 payment will reflect the interest accrued from the first of January to the end of March next year.

Whereas the 2012 payment reduced the Promissory Note debt by virtually the entire €3.1 billion payment, the 2013 payment will reduce the debt by €2.6 billion.  The March 2014 payment will be preceded by a full year of accrued interest and will reduce the debt by €1.2 billion.

This distinction between capital and interest doesn’t matter.  Each year the IBRC will get €3.1 billion from the government.  Just like all loan repayments the money doesn’t come under different headings.  It is just a loan repayment. 

Also, as the IBRC is 100% state-owned the transfer to the IBRC doesn’t make a difference to the overall position of the state.  What really matter is when the IBRC uses the money to meet its own liabilities.  The structure of the Promissory Notes makes absolutely no difference to value of these and these are the ultimate liabilities that have to be covered.  The Promissory Notes are just a conduit to provide the money to cover these.

The main liability of the IBRC is now the Exceptional Liquidity Assistance (ELA) it has drawn down from the Central Bank of Ireland which it obtains at an interest rate of around 2.5%.  Prof. Karl Whelan has shown that the IBRC will be able to repay its ELA liabilities using its own assets (proceeds/repayments from remaining customer loans) and the annual payments on the Promissory Notes by 2022.  There will be no need for the subsequent payments.

Based on current interest rates the IBRC needs €31 billion at around 2% to repay its ELA obligations.  The fact that it received €31 billion at around 6% means that the IBRC will be able to repay the ELA faster than the government has to repay the capital on the Promissory Notes.  Once the ELA is paid off the remaining Promissory Notes can be cancelled.

When the IBRC repays the ELA it has drawn down from the Central Bank the money repaid goes out of existence and is “burned”.  Most of the interest paid by the IBRC to the Central Bank is a profit for the Central Bank (they just created the money) and this is circulated back to the government via the payment of Central Bank Surplus to the Exchequer Account.

There will be around €0.5 billion of interest added to the Promissory Notes by the time the €3.1 billion annual payment is made next March.  For the full year to December the amount of interest accruing on the Promissory Notes will be around €1.9 billion and this will be added to the General Government Deficit. 

This is summarised in this table from the last page of the recent Medium Term Fiscal Statement. Click to enlarge.

As explained above the interest costs after 2022 are unlikely to happen.  The problem is the interest cost now.  The €1.9 billion interest cost for 2013 is added to the deficit but we are not really paying it.  We are paying for the cost of the Anglo/INBS disasters and whether the money given them is labelled interest or capital does not change the size of the hole to be filled.

Some of the interest will circulate back to the government via the IBRC and the Central Bank.  Another portion will be used to repay the IBRC’s ELA liabilities which means the Promissory Notes can be cancelled some time around 2022.  Very little of the interest is lost. 

The net external interest cost of the Promissory Notes/ELA construction is the ECB’s main refinancing rate (currently 0.75%) which the Central Bank pays to the Eurosystem as a payment for creating the money used for the ELA.

The figure to focus on is the final cost of the Anglo and INBS disasters.  This is going to be more than €30 billion and is an unbelievable waste of money.  It is money that went to depositors.

As Patrick Honohan said recently:

“It would have been better had Anglo and INBS been put into resolution as soon as it became clear that their capital was going to be wiped-out by unavoidable losses on developer loans.  This should have been evident before September 2008, but was not, leading the Government of the day to include these two failed entities in its blanket guarantee.”

Repaying those deposits is costing us dearly.  A change to the Promissory Note arrangement by March is possible but getting one that results in substantial savings is improbable.

Evening Echo 28/11/12

The text of a recent article for The Evening Echo is below the fold.

The last year in which the government’s accounts were in balance was 2007.  In that year, both government revenue and government expenditure were around €68 billion, but as we know with hindsight this position was very fragile.

This year is the first year since 2010 that direct payments to the banks will not form part of the deficit.  The deficit this year will be almost €14 billion, the gap between government revenue of €56 billion and government expenditure of €70 billion.

Compared to 2007, it is evident that the deficit was caused by a collapse in tax revenue.  The level of government expenditure is slightly up on 2007 but government revenue is down significantly.  This is the hole created by the stamp duty, capital taxes, VAT, and income tax which was pouring into the government’s coffers from the construction and property sectors.

Most of this money was borrowed money.  From 2004 to 2007, the impact of bank lending was to pump an average of €3.5 billion a month into the economy and about a third of this found its way to the government.

The only way to close the deficit is for expenditure to fall and/or taxation to rise.  In good times, a country could watch as economic growth would do a lot of the work.  Early plans to close the Irish deficit were predicated on a strong return to growth within two years.  However, as 2009 became 2010 and 2010 became 2011 the return to strong growth was, and still remains, two years away.

With the precarious state of the public finances the only way to close the deficit is through explicit expenditure cuts and tax increases.  Next week, ministers Michael Noonan and Brendan Howlin will present a budget which will include €3.5 billion of budgetary adjustments.

It should be noted that this adjustment to take money out of the economy over a year is equivalent in size to what the banks were previously pumping into the economy in a month.  The Irish economy is not in the ruined state it is in because of austerity.  The Irish economy has gone cold turkey because it has lost the monthly adrenaline shot of a €3.5 billion monthly injection of bank lending.

Ireland’s budget deficit opened in 2008 and by 2015 it is envisaged that it will still be around €5 billion.  Over this period, the excess of normal government expenditure over government revenue will add around €100 billion to the national debt.  We have poured €64 billion into the banks, but face the prospect of getting at least some of that back. 

The borrowed money that has been spent on funding public sector pay, social welfare, government services as well as the interest on money borrowed for previous deficits is gone forever.  Since 2007 we have built up a huge national debt.  Most of this has been because the deficit.  The deficit must be closed.

Next week’s budget will be another step in that direction.  People will argue about the measures being introduced but there is no argument over the need to close the deficit. 

One approach to take would be to try to do so through taxation.  The problem is that there is no pot of money out there just waiting to be taxed.  We have a €14 billion deficit.  In the run up to the budget there have been proposals from elements of the opposition that suggest that taxation along can bridge the gap.  It can’t.

There is an uncosted Sinn Fein proposals for a wealth tax which uses very unsteady assumptions to argue that €800 million a year could be raised.  The Socialist Party have examined the benefits of increased income taxation.  One of their costed proposals is for incremental increases in the rate of income tax on very high earners up to 78%.  Analysis  presented by the Minister for Finance shows that this would only raise €850 million.

There is the potential to raise additional tax revenue from the wealthy and the high earners but they can only every go a small way towards addressing the huge deficit we face.  The Sinn Fein wealth tax would be applicable to fewer than 15,000 people while the Socialist Party tax increases would be applied to just over 5% of earners.  After these taxes have been introduced the bulk of the deficit will remain.

We can try to raise a lot of money through large tax increases on a very small number of people but the reality is that more revenue will be raised with small tax increases on a very large group of people.  Next week we are likely to see lots of small increases in tax rather than one big taxation measure.

The biggest will likely be the property tax which will aim to raise an extra €300 million on top of the money collected by this year’s temporary household charge.  This will be around €200 per household.  There will be some changes to excise duties such as cigarettes and motor tax.

Although changes to income tax have been ruled out, there may be some changes to the Universal Social Charge which is an income tax in all but name.  Other changes will include reductions in pensions reliefs and increases in capital taxes but the gains from these will be relatively minor. 

All told, around €1 billion of new taxation measures will be announced.  On the expenditure side there will be more than €2 billion of cuts and this is where most of the interest will lie.

There will be debate and arguments and the reason for this is that we still have autonomy over the particular measures that are used to reduce the deficit.  The EU/IMF have set deficit targets but they don’t dictate how those are achieved.  They simply want to see Ireland get back on a sound macroeconomic footing. 

Ireland is making steady, but slow, progress in emerging from the carnage left behind by mismanagement of the economy culminating in bursting of the property bubble.  Next week’s budget can be another step in this direction. 

There will be difficult, and unpopular, choices.  Few politicians want to be increase taxation and reduce expenditure.  The current government knew what they were getting into when they joined forced in early 2011. 

We cannot avoid the pain of closing the deficit and the best we can hope is that they try to choose the right balance between workers, retirees, students, employers, the unemployed and the infirm.   It’s not easy but we’re getting there.