Will a ‘Yes’ Vote Cost €6 billion?

The cost of a ‘Yes’ vote as a result extra austerity that will be forced on us if the Treaty on Stability, Cooperation and Governance has been a main plank of the ‘No’ campaign.  Some of these claims are made on the basis of the application of the debt brake rule but they are little more than scaremongering.

The last week or so have seem the claims move to faux outrage to the impact of the structural deficit rule.  As per the Treaty, this will require Ireland to move to a structural deficit of no more than 0.5% of GDP over a timeframe to be agreed with the European Council.

The largest party of the ‘No’ campaign regularly claim:

“The Governments campaign is based on fear and evasion. They are asking us to sign up to new rules and regulations that will cost every single voter but refuse to tell us how much. They are asking us to write a blank cheque knowing that the cost will be at least €6 billion.

To ensure that this is quoted accurately you can see more here, here, here and here:

“The Government has a responsibility to explain to people the cost of a Yes vote. If the Treaty is passed we will have to reach a structural deficit of 0.5% after we exit the current Troika austerity programme in 2015.
“According to the Department of Finance’s own Spring Forecast published last week the structural deficit in 2015 will be 3.5%. The gap between this figure and the new 0.5% rule is equivalent to approximately €6 billion.

The figures come from the Stability Programme Update released a few weeks ago.  The projections of the structural budget balance are on the last page which has a table which shows that using the methodology applied by the European Commission it is projected that there will be a structural deficit of 3.5% of GDP in 2015.  Just a few pages earlier it can be seen that the projected nominal GDP for 2015 is €178,850 million.
It can be seen that the 3 percentage point gap is equivalent to €5,365.5 million.  There must be some imprudent application of the rounding rule being used to bring this to the €6 billion figure used above.

At this remove it is impossible to know what the structural deficit will be in 2015 (will we ever know?) and suggesting that there is a €5.4 billion gap to be filled may be an accurate representation of the situation.  This is not what is being claimed though and there is repeated reference to “€6 billion of cuts” but the claim that this is based on the upcoming referendum are very wide of the mark.  We cannot just vote away the necessity to reduce the budget deficit.

The structural deficit can be reduced through a combination of three factors:

• economic growth
• structural improvements in labour and capital
• fiscal consolidation

No allowance is being made for the first two to assist in reaching the target.  Of course, the important point is that this target is not new and will be unaffected by the outcome of the referendum.  As we have pointed out before there has been a EU regulation (equivalent to national law) that governments run a balanced budget since 1997 and that this was restated using the structural deficit in 2005.

In December 2005 the Department of Finance decided that Ireland would set itself a Medium Term Budget Objective (MTO) in terms of the structural deficit that would be “close to balance”, that is 0% of GDP.
The Stability Programme Update released with Budget 2010 in December 2009 contains the following useful section on page 32:

Review of Ireland’s medium-term budgetary framework and proposed reforms
In considering improvements, it is important to note the procedures already in place. Ireland’s budgetary process is already conditioned by various rules and requirements:

Under the Stability and Growth Pact,

• There are ceilings of 3 per cent of GDP for the general government deficit and 60 per cent of GDP for gross government debt.
• Medium-term budgetary objectives for the structural balance of the public finances.

Under the Excessive Deficit Procedure,

• The Irish authorities have made commitments aimed at reducing the general government deficit below 3 per cent of GDP by 2014 – with implicit strictures on taxation and expenditure.
• The EU’s fiscal surveillance process calls for improvements in national fiscal governance arrangements capable of improving the sustainability of public finances.
• There is an obligation to make annual improvements of 0.5 per cent of GDP towards structural balance after the excessive deficit has been corrected.

This was published two and a half years ago and clearly states that Ireland has the “obligation” to move to a “structural balance” after we exit the EDP (which was subsequently extended to 2015).  This is actually more stringent than the –0.5% of GDP limit placed on the structural deficit in the Fiscal Compact.

In the April 2011 Stability Programme Update (which is still seven months before the Fiscal Compact came into being) the Department of Finance announced a revised Medium Term Budget Objective on page 39:

In October 2007, the ECOFIN Council agreed that long-term fiscal  sustainability, notably the future impact of ageing, should be better taken into account when Member States are determining their medium-term budgetary objectives (MTOs). The subsequent EU Commission document “Modalities for the implementation of the new MTOs” set out the methodology for doing so. In the Irish case, the findings suggest an MTO of -½ per cent of GDP, which allows for 33 per cent of the likely cost of ageing to be covered.

In April 2011, without any recourse to a treaty, the Department of Finance announced that we were changing our MTO to –0.5% of GDP.  We were obliged to achieve what is set out in the Fiscal Compact long before this campaign begun.  How come it took until the announcement of a referendum to generate such interest in something the Department of Finance have been discussing and committing us to for six and a half years?

This was re-emphasised on page 31 in the most recent Stability Programme Update a few weeks ago:

As discussed in last year’s SPU, Ireland’s ‘medium-term budgetary objective’ (MTO) currently stands at -0.5% of GDP. This objective was set well in advance of the Inter-Governmental Treaty on Stability, Coordination and Governance in the Economic and Monetary Union (the ‘Stability Treaty’). Ireland is making progress towards the achievement of its MTO, with further progress to be made in the post-2015 period on a phased basis, in accordance with a timeline to be agreed.

The “timeline to be agreed” will be in line with the Code of Conduct of the Stability and Growth Pact as revised by Council Regulation 1055/2005 and the application of this will not be changed by the referendum result.  The regulation states that:

The Council, when assessing the adjustment path toward the medium-term budgetary objective, shall examine if the Member State concerned pursues the annual improvement of its cyclically-adjusted balance, net of one-off and other temporary measures, required to meet its medium-term budgetary objective, with 0,5 % of GDP as a benchmark. The Council shall take into account whether a higher adjustment effort is made in economic good times, whereas the effort may be more limited in economic bad times.

This means we could have up to six years to move from a structural deficit of 3.5% of GDP to under the 0.5% of GDP limit.  As we are a high-debt country we will probably be asked to achieve that more quickly but even four years would give plenty of opportunity for economic growth and structural improvement to contribute to the effort.

The fiscal rules in the Treaty are not “new” and we cannot avoid them by voting ‘No’ in the referendum.  There maybe reasons for rejecting this Treaty but a claim that it will cost €6 billion in extra cuts and taxes has very little going for it.  In fact, you could say that compared to what were committed to in December 2009, the Treaty will actually save us something.

The General Government Debt

At the end of 2007, the gross general government debt was €47.2 billion.  The recent Eurostat debt and deficit release showed that this has increased to €169.3 billion at the end of 2011.  That is an increase of an incredible €122 billion in just four years.  We can use the previous post on the general government accounts to see how that has come about.

There we saw that from 2008 to 2011 Ireland ran underlying primary deficits summing to €48.5 billion.  Interest expenditure over the four years was €15.4 billion.  At the same time temporary or once-off measures totalled €41.4 billion, with bank-bailout payments making up the bulk of this.

These three items sum to €105.3 billion.  To get to the full €122 billion increase we must account for some stock/flow adjustments.  In the main this is an increase in borrowings to build up a cash buffer.  Details from the NTMA show that balances of €17.8 billion “were held
in Departmental Funds + other Accounts, including the Exchequer A/c.” at the end of 2011.  At the end of 2007 these cash balances were just €4.4 billion.

Here is a summary table of the changes in the debt since 2007.

The largest single item is the €48.5 billion of primary deficits run since 2008.  This is the excess of government expenditure on public sector pay, social welfare, services and investment over government revenue. 

The next largest item is the €47.2 billion of debt we carried into the crisis in 2007.  This debt is largely the residual of the last great crisis in the public finances from the 1980s.  Data from the NTMA show that in 1994 (commonly taken as the start of Celtic Tiger Mark 1) the general government debt was €41.7 billion.  It hardly changed over the next 13 years.

Temporary and once-off measures account for €41.4 billion of the increase in the general government debt.  The vast majority of this is the bank payments and of that the bulk is the €30.85 billion of Promissory Notes used to recapitalisation Anglo, INBS and to a lesser extent EBS in 2010.  Once-off measures (though they seem to be happening a lot) account for 34% of the increase in the debt over the past four years and 25% of the stock of debt at the end of 2011.

There is a big drop them to the final two items.  Over the four years interest expenditure was €15.4 billion.  In 2007, interest expenditure was €1.8 billion so if the 2007 debt and interest rates had been maintained interest would still have consumed €7.2 billion over the four years.  The extra debt added about €8.2 billion of additional interest costs over the four years and the bulk of that is due to the primary deficits rather than the once-off measures.  From the last post we saw that social transfers-in-cash totalled €96.7 billion over the four years.

The final item is the stock/flow adjustment that is mainly an increase in borrowing by the NTMA in 2008 and 2009 to build up cash balances.  The NTMA borrowed far more than was needed to fund the deficits and a cash buffer was built up that has been maintained as part of the EU/IMF programme.  The general government debt is a gross measure so no allowance is made for assets even though this cash could be used almost immediately to reduce the debt by that amount.

The composition of the general government debt was provided in this recent PQ to Michael Noonan.

The General Government Accounts

There are a number of measures of government revenue and expenditure.  The Exchequer Accounts tend to get a lot of attention as they are released on a monthly basis but they only give a partial picture of the government sector.  The general government accounts give a far better overview of the impact of the government sector on the economy. 

These are not produced on a regular basis but the requirements of the Stability and Growth Pact means a useful table is included in the Stability Programme Updates which are now published each April.  The general government accounts are not perfect but they are far more useful than the Exchequer Accounts.

The general government sector includes central government, local government and the Social Insurance Fund.  It does not include semi-state companies, state-owned banks or NAMA.

The ‘underlying’ general government balance, which is the overall balance net of temporary measures, is the benchmark used in the Excessive Deficit Procedure and it is this that must be reduced to under 3% of GDP by 2015.  The following table gives the overall and underlying general government balances from 2006 to 2012, and by subtracting interest expenditure from the latter the underlying primary balance.

As a result of the effect of the bank-bailout payments, which form the bulk of the temporary measures that occurred between 2009 and 2011, it is difficult to determine what direction the public finances are going.  The underlying deficit peaked at 12.2% of GDP in 2009, fell in the next two years and is projected to continue falling in 2012.

The primary deficit measures the excess over revenue that the government is spending on providing goods, services and transfers to Irish people.  The underlying primary deficit also peaked in 2009 and when it hit 10.2% of GDP.  Since then it has declined and it is expected to be 4.5% of GDP in 2012.

The improvement in the primary balance is greater because of the impact of our increased interest expenditure on the underlying balance.  Interest expenditure was 4.1% of GDP in 2012.  More than one-quarter of this was carried into the crisis and in excess of a half of it was due to the underlying deficits that ballooned in 2008 and 2009.  Interest on the bank bailout forms a very small part of the 2012 interest expenditure.

The trend is clear.  Since 2009,  both the underlying balance and the underlying primary balance have been declining, though both still remain excessively high.

The following table gives the euro-equivalent of the GDP proportions in the above table.

The underlying balance has improved from €19.6 billion in 2009 to €13.7 billion in 2012.  By applying the temporary measures (the largest of which are the bank-bailout payments) to total expenditure we can get a crude measure of ‘underlying expenditure.

The excess money we are spending on ourselves as measured by the underlying primary balance has fallen from €16.4 billion to 2009 to a projected €7.2 billion this year.  In 2007 the general government ran a surplus of almost €2 billion.  Of the deterioration of more than €18 billion that occurred over the following two years, one-third was due to the an increase in expenditure and two-thirds was due to a drop in revenue. 

It can also be seen that interest expenditure is projected to be €6.5 billion this year and that it was almost €2 billion in the run-up to the crisis.  Finally, we will look at the breakdown of revenue and expenditure provided in the general government accounts.  Click to enlarge.

The reason for the drop in revenue can be easily noted in the main revenue columns of ‘taxes on production and imports’ and ‘current taxes on income and wealth’.  After bottoming out in 2010 revenue has risen slightly in the past two years.

In the expenditure table the figures for compensation of employees and intermediate consumption were not provided separately until 2010.  Since then the combined figures have been €27.7bn, €26.5bn, and €26.6bn.  Cash transfers peaked at €25 billion in 2009 and are expected to be €24 billion this year. 

The named column that shows the largest reduction is gross fixed capital formation or investment.  Investment from the general government sector (central and local government) was almost €10 billion in 2008 but this has been cut to just €4 billion for 2012.  It is the cuts in capital expenditure that have brought expenditure down.

Current expenditure has remained largely unchanged over the past five years.  It is up about €1.5 billion since 2008 but the composition of the total has changed.  There has been an increase of around €4.5 billion in interest expenditure since 2008 which has been partially offset by a €3 billion reduction in primary current expenditure.

Looking at the gross expenditure figures can be slightly misleading and there are some important reasons why they should not be considered in isolation.  One such caveat is the Public Sector Pension Levy which raises around €1 billion a year.  When this was introduced government gross expenditure was unchanged and the impact of the “pay cut” was seen as an increase in revenue.

Even taking into account this it is still the clear that only a relatively small portion of the improvement in the public finances has taken place via current expenditure/revenue which is by far the largest area of expense.  A greater amount of ‘improvement’ has come from the huge reductions in capital expenditure.  In 2012, out of primary expenditure of €64 billion, just €4 billion or 6% will be on capital investment.  Around 94% of expenditure will be current.

Cork Independent 17/05/12

A short article I wrote on the Treaty on Stability, Coordination and Governance for The Cork Independent can be read here.

Bond Yields

After three months with barely a budge the Irish government 9-year bond yield as calculated by Bloomberg jumped back over 7% in the last few days.

The yield did rise as high as 7.7% earlier but is now back to around the 7.4% level it began the day at.  There have be no domestic changes to explain the move in recent days and the driver is uncertainty in Greece.  On this day last year the equivalent yield was 11.2%.

Get a $5,000 Personal Loan With Bad Credit: Three Creative Options

Everyone will come to a time in their life when the need for money is so great they feel like they have no options. At times like this, a $5,000 personal loan would solve a lot of their problems and help them to get on the right path. Yet for those with bad credit, $5,000 personal loans seem about as likely as a fairy godmother appearing next to a crying Cinderella - only a story.

However, there are ways for people with bad credit to get $5,000 personal loans if they are willing to be creative with their avenues. Depending on your situation in life, $5,000 personal loans with bad credit are not as impossible as they seem.

Students Are in a Great Spot

As a college student, the pressures of school along with the rest of life can get to be too much.

Working, taking care of a family, and social obligations on top of classes, reading, and papers is a lot for anyone to handle. That is why student loans exist. These loans are designed to help college students, regardless of their age, take care of their lives outside of school. Student loans are given in the form of a check and can be used for tuition and books or for living expenses. If you are a college student, look into getting a student loan for $5,000. There are options through both the government and private lenders that will not take bad credit into account.

Personal, Personal Loans

Another option when you are in a real pinch for money is to look outside of traditional lenders and lending institutions to get a personal, personal loan. That is, look for a person, either a family member or a friend, who will be able to lend you $5,000 for a short while.

Make sure that the person you ask has the money to lend and that you take care to draw up a repayment plan designed to prevent bad blood. Make sure you can reasonable repay this loan without ruining the relationship.

Payday Loans Are a Last Resort

In times of absolute emergency, there is one other option on the table for $5,000 personal loans with bad credit. That is a payday loan, or two. These loans, also called no credit check loans or cash advance loans, are given to people based on their income rather than their credit score. Generally, the max amount you can expect from a payday loan is $1,500. This means that getting a $5,000 personal loan through payday loans will take more than one lender.

Also, it's important to note that payday loans are often only offered for a very short period of time and never more than 90 days. These loans are meant as temporary solutions only and generally carry a higher rate of interest than any other loan on the market.

Getting Emergency Cash

If you have bad credit, your options for emergency cash are limited. However, you can get a $5,000 personal loan with bad credit by being creative. You can also combine some of the options above to meet your needs so long as you plan to repay all the money you take in a responsible and timely manner.

$25,000 Personal Loans With No Credit Check: Some Factors to Consider

When applying of for a loan to aid in the management of bills and debt, there is no shortage of options. But not all of them are ideal, and when bad credit histories are involved there is a preference for loan which require no checks. To this end, a $25,000 personal loan with no credit check is perfect.

The growing number of people who have suffered financial bad luck is extremely high these days. So much so, that even some who were considered ideal customers by banks, now have fallen behind in loan and mortgage repayments, and now have low credit scores. To get approval despite bad credit is not easy, but there are options out there.

Online lenders are becoming much more popular, offering more accessible personal loans despite bad credit. However, they also offer no credit checks with their loan applications, which is another major attraction.

Why No Check Loans?

There are a myriad of situations where an applicant would prefer if the lender did not check their credit history. It is usually because there is a bankruptcy ruling, a loan default or some other kind of credit trouble detailed in the credit report.

Any of these would be enough to disqualify them under normal circumstances. Applying for a $25,000 personal loan with no credit check at least gives them a chance of being approved.

The chances of getting approval despite bad credit from traditional lenders are very slim, especially when the sum is large and the credit history is poor. So, by offering no credit check loans, specialist lenders attract a large number of disenfranchised consumers.

The upshot for lender is that the consumers are willing to pay extra in interest rates, while the consumers are happy to get assessed on their current status, not their past.

As with any form of personal loan, however, there are some rules regarding criteria that must be considered if there is to be any chance of approval.

Factors of No Credit Check

There are pros and cons connected to loans that require no credit checks. It may seem ideal when applying for a $25,000 personal loan with no credit check but there are some compromises that need to be made too.

The pros include the increased likelihood of approval despite bad credit, and the speed with which the application can be processed. This means even those with the worst credit history can access loans, though there may be a limited sum available. However, it still makes a significant difference to those who secure the loan.

The cons include the higher interest rate that needs to be paid, in compensation for the lender forgoing their right to check on the background of applicants. There is also an increased risk in taking on their personal loans.

The Online Lending Option

Finding the right lender is as important as any other aspect of the application process. But when large sums of money with no questions asked are needed, like $25,000 personal loans with no credit checks, the online lending option is generally the best to go for.

Online lenders have made it their business to develop loan packages that are suited to applicants with poor credit histories, who are recovering their financial status. For this reason, the structure of the loans are better than those from traditional lenders, and the chances of approval despite bad credit are much higher. All that they really want to know is that the income is large enough, and employment is secure.

But as with everything else on the internet, it is important that applicants check out lenders online before agreeing a personal loan. Visit the Better Business Bureau website to check on their reputation.