IRELAND…Never was a silk purse!

Happy 2012 and good riddance to 2011. That seems to be the consensus of most economic journalists. The consensus seems to be that yes things will get worse in the first half but light can clearly be seen and by the latter stages of this new year, all will be fine and dandy.

As you might have guessed I beg to differ. 2011 as for several years prior, saw a 10% increase in global public debt. Various estimates put it at around $54 trillion. The thing to remember is that this has grown from around $20 trillion in 2000. There can be only one response to that degree of debt build up, GROWTH. And by George did we get it in the bucket load. To highlight just what happened on a more macro scale I am highlighting a small country which benefited significantly and in turn helped drive the world economy even faster.

IRELAND (Rep. of) It could be in worse than Greece.

Widely regarded as an economic miracle back in 2007, it is still a miracle. A miracle that people in power both political and business could be so stupid. The story started so well and with very good economic management following a crazy spend too much and then tax too much period (1977-81 debt binge 1981-1986 tax binge). Following a currency devaluation (ERM terms) in 1986 (Mainly due to the weakness of Sterling, Ireland’s biggest trading partner)  tough spending restraint was implemented to bring down borrowing. A wage/tax agreement meant wage growth stabilized. All this was agreed whilst the UK boosted consumption with heavy tax cutting. The real growth in the economy did not appear however, until 1993. Following a stormy entry and subsequent exit of the ERM by Sterling, Ireland needed another devaluation in 1993. From then on its economic performance was on a meteoric path. The large sums being donated by the European Structural Fund equivalent to 3% of GDP were helping to vastly improve infrastructure. Unemployment went from 16% to 4% by 2000. As the decade progressed and the 1999 EMU launch looked more certain, overseas investment piled into the high interest rate countries, Ireland Spain etc. Given that real interest rates in Ireland averaged 7% prior to the EURO and minus 1% from 1999 to 2007 you can see why. Government spending doubled between 1995 and 2007. GDP grew by 10%+ between 1995 and 2000, averaging 6% 1993 to 2007. Perhaps the most important change was in migration. Long known for high emigration and population decline the economic miracle drove the population higher via immigration, both returning migrants and overseas workers.

All this was of course great news to the Irish Exchequer. Tax revenue soared helping to fuel the machine. Sadly, this is where one of the early mistakes was made. The huge rise in cyclical tax revenue, stamp duty rose 1300% from 1993 to 2007, was seen as structural and its abundance was used as an excuse to reduce real structural taxes eg Income related. Housing starts went from 30,000 in 1995 to 93,000 in 2006. House price inflation between 1996 and 2007 was 330%. Car sales from 64,000 in 93  to 186,000 2007.

Sadly that is all in the past. The last few years have been well documented. 2012 could actually be even worse. Fiscal measures for 2012 include a 2% VAT increase. Motor tax rise between 7 & 30%,  a one off 100 euro household tax, Toll road duty up by 10% on many routes. Bus fares up by approx 10%. Additionally many local authority charges are being raised like a 50-100% increase in burial fees (certain areas).

Given the over reliance on cyclical taxes in the past, the likelihood is that these tax changes will only drive revenues lower not higher. Housing starts are likely to be below 1995 for some time due to a glut of unsold properties. House prices have dropped 47% from peak. Car sales could well be lower in 2012. January is responsible for 25% of annual sales and Q1 50%. The second half (traditionally vey low volume) of 2011 saw a 40% decline over 2010. If January continues this trend, expectations could be for a figure close to 2009 when total sales fell below 1993. The various tax increases applicable to motoring coupled with a decline in the Euro (1/3 of sales from US/Asia) could well confirm the worse. Average car age is only just getting close to long term trend (8 1/2 yrs) having been driven lower (5 1/2) during the boom times. Consumption comparisons got a boost in December from last year due to better weather and discounting. This has not stopped further closures in the retail market.

All things being equal the long term trend toward net migration, which has returned, will continue. More importantly, if the EU carries out its plan to change corporation tax rates to point of sale not production, Ireland will once more return to an Agri based economy. Non Agri employment as a % of the workforce went up 50% during the boom.

Why does history keep repeating itself. Ireland has assumed all the debt of its banking industry which centres mostly on the housing bubble. Its debts are unsustainable and as 2012 brings weaker consumption coupled with higher unemployment, the reality will finally dawn…

Warren Buffett once said `Only when the tide goes out can you see who is swimming with no trunks on` …well, until global public debt starts to decline the tide will not go out. So many naked bathers are yet to be discovered. 2012 could well be the year to cover up the eyes of the young and innocent.

Tags: , , , ,

Monday, January 2nd, 2012 Consumer Debt, Debt, Euro, GBP, GDP, National Debt

3 Comments to IRELAND…Never was a silk purse!

  1. […] […]

  2. America breaks records…Swinter in USA | Finance Reaper on April 3rd, 2012
  3. […] […]

  4. Are Steel Producers a Buy? | Finance Reaper on May 7th, 2012
  5. […] will happen. Firstly, it will see its already huge budget deficit start to grow again …see IRELAND… Never Was a Silk Purse!.. bringing about a second crisis, and Secondly, a sharp reduction in the demand for British goods. […]

  6. UK Trade Figures Shine Poor Light On Ireland. | Finance Reaper on March 12th, 2013

Leave a comment

You must be logged in to post a comment.

free counters

Search

 

Markets

error : cannot receive stock quote information

Posts by Date

March 2020
M T W T F S S
« Feb    
 1
2345678
9101112131415
16171819202122
23242526272829
3031  

Blogroll