Ireland: NAMA To Purchase Loans from the banks with bonds secured by the Irish taxpayers

NAMA is a semi state body set up by the government to purchase commercial and development property loans from the banks. NAMA will purchase the loans using government bonds. In short the Irish taxpayer secures the bonds.
The Irish government, under the aegis NAMA, will pay interest on these bonds to the Irish banks at initial rate of 1.5 % interest.

NAMA will pay somewhat more to the banks for the loans than their current market value, by endeavouring to estimate what the property underlying the loans will worth in five to seven years’ time, by which time it is anticipated that a recovery may have set in. The current “market value” (the actual value) is €47 billion. But the State is going to pay €54 billion - some €7 billion on top of the current market value and 70 per cent of the book value. The problem with this is that the property market may fall further. It is also possible that the property market may not recover for a prolonged period of time. If this transpires the banks will have been overpaid for the loans and the taxpayer will be left with assets, which are worth much less than it paid for them.

The ECB will lend to the Irish banks. The government-backed bonds will secure this lending. In short the Irish taxpayer provides the collateral. The taxpayer is liable for the principle and interest on these bonds.

The ECB will NOT lend to NAMA. To do so would contravene Article 101. Sean Fleming TD-on Six One News and Willie O’Dea Minister for Defence on Morning Ireland have claimed that the ECB is funding NAMA. Their assertions are factually incorrect.
The Irish taxpayer is taking the lions share of the risk. This has the potential to go seriously wrong. Quite frankly the state will pay too much for the assets. Already Bank of Ireland and AIB shares have risen sharply today with Mr Lenihan's announcement. Good news for the banks. But what about the poor taxpayer?

According to Richard Bruton:
“The Minister is asking us to give a commitment of €54 billion, €30,000 for every household in the State,” “The taxpayer is being asked not just to buy impaired loans from the banks. We are being asked to pay billions more than the market value for them. Remarkably this extraordinary act is being done without any forensic analysis of the costs and benefits, of the risks and threats.”

Ireland-Nama:Text of Letter from Richard Bruton TD to Brian Lenihan Minister for Finance August 25, 2009

August 25 2009
Dear Brian,
I am writing to you in response to your recent letter asking for comments and observations from Fine Gael on the draft NAMA Bill in order to facilitate a discussion at the Oireachtas Joint Committee on Finance and the Public Service on August 31.Fine Gael Concerns about NAMAAs you are aware, Enda announced last Friday that Fine Gael does not support the Government's approach to resolving the banking crisis. Our concerns about the NAMA Bill arise from its potentially colossal cost, from its uncertain benefits and from the evident unfairness of asking taxpayers to take responsibility for the reckless behaviour of developers and banks. In particular, we are concerned at:

* The likelihood of over-payment by taxpayers to bank shareholders and bondholders for toxic bank assets of highly uncertain value. The distinction in the draft Bill between current "fire sale" market prices for bank assets and their underlying property collateral and their long-term economic value has some valid theoretical underpinnings, but in practice the latter is impossible to estimate. The banking and property crashes in other countries such as Japan should be a cautionary tale for those who believe that the price for certain types of property will inevitably recover from current market prices. Given the scale of this venture, over-payment could hobble the public finances for a decade;

* The doubtful impact of NAMA on the current lack of bank credit for businesses and households; and

* The wisdom and fairness of transferring responsibility to the taxpayer for the collection of troubled developer debts, and the terrible incentives this creates for repeated reckless behaviour by banks at some future date.
A Fine Gael Alternative

As you know, Fine Gael has, as far back as last April, offered a two-track alternative to NAMA that we believe addresses these problems.

Under Track 1, we propose to ensure improved credit availability for businesses by the establishment a wholesale "Good Bank", or National Recovery Bank, capitalised by the State and further leveraged by the ECB and funding markets using the "asset covered bond" model that is well-established in other EU countries.

In parallel, under Track 2, the banks would be given until the end of the Guarantee period in September 2010 to pass a rigorous "stress test" to show that they had repaired their own balance sheets by selling assets (such as foreign subsidiaries), raising more deposits and negotiating down their own liabilities to long-term providers of risk capital and funding.

In the event that the banks cannot pass such a Stress Test by the end of the Guarantee period, Fine Gael's proposal is to split each failed bank into two, leaving the assets with the most uncertain values (the developer loans) in legacy property management companies owned largely by the shareholders and other classes of risk investors.

Deposits, other short-term liabilities, easy-to-value loans like mortgages and business overdrafts, the branch networks and the vast majority of the staff would all move safely and seamlessly into a new, going concern "clean bank", initially owned and guaranteed by the taxpayer. These new "clean banks" would be well capitalised with a clean balance sheet and fully open to resume lending.

We are confident that this break-up procedure would never prove necessary for most of the banks, as they and their investors would have every incentive to avoid it. All the major banks have already announced plans to buy back debt from their bondholders at a discount in a way that generates capital to absorb future losses. These types of "debt buybacks" and debt-to-equity conversions would accelerate dramatically under our policy and at greatly discounted prices.

The advantage of this model over the current NAMA proposal is that the risks and responsibilities associated with working out distressed developer-related loans would remain with those professional bankers and investors that funded the loans and that are best placed to recover them. While the taxpayer may have to have some participation in the legacy property management companies, their losses will only be incurred after the private investors. Private investors would employ the best skills and judgement to recover as much of the money as possible, and there would be no public disquiet about a soft-touch approach for the well-connected developers.

I am, of course, aware of your oft-stated concerns regarding the implications of our proposal for financial stability. But it is international best practice for risk investors in the banks, including some classes of bond-holders, such as owners of subordinated debt, to absorb loan-related losses ahead of taxpayers. This, after all, is the nature of capitalism.Financial stability would also be maintained during this process by extending the Guarantee as necessary on debt roll-overs and all new funding coming into the banks until the sufficient recapitalisation has been achieved and confidence restored.

The Need for a Full Debate on Alternatives to NAMA.

It is disappointing that, given the enormity of the decisions we face over the coming months, that the Government has facilitated so little considered and objective evaluation of the benefits and weaknesses of the NAMA proposal vis--vis the alternatives. To justify its assertion that there is no workable alternative to NAMA, the Government to date has published nothing more than an 11-page summary of a report by Peter Bacon.

I would respectfully suggest that this has not been a formula for generating cross-party or widespread public support for any proposal to deal with the banking crisis. The draft NAMA Bill should now be delayed. In September, the Oireachtas Joint Committee on Finance and the Public Service should hear testimony from international and domestic experts of the pros and cons of the NAMA proposal vis-a-vis the alternatives that have been presented by other Parties and experts.

Detailed Observations on NAMA.

As I hope you appreciate, Fine Gael's preferred approach to resolving the bank crisis is based not on a dogmatic attachment to a particular model, but rather on a set of core principles: protecting the taxpayer from huge, unmanageable risks; minimising and ensuring a fair distribution of the losses associated with reckless lending by the banks and reckless investments by developers; and improving financial stability and credit availability for struggling businesses and families.

Notwithstanding our deep concerns about the principles underlying the Government's proposed approach to resolving the banking crisis, I am nonetheless concerned to submit detailed observations on how the draft NAMA Bill might be radically overhauled in order to protect the taxpayer and the wider economy.

Below I set out nine specific issues on which I would welcome further detailed engagement by the Minister at the Oireachtas Committee with a view to agreeing amendments to the draft Bill on which I hope all Parties might agree.

1. We want to explore how the Bill could be re-drafted to protect the taxpayer from over-payment to the banks by NAMA by minimising political interference in the process and by establishing a fully independent appeals mechanism that could also hear appeals against high valuations by NAMA.The Government had claimed prior to the publication of the draft Bill that the valuation process would be immune from political influence. But the draft Bill gives the Minister very substantial influence on the "adjustment factors" that NAMA must take into account when estimating the "long term value" premium over current market prices. Valuations and payments by NAMA to the banks can be over-ruled and increased by the Minister, while there is no corollary provision for independent or Ministerial challenge for over-payment by NAMA for bank assets.

2. We want to explore how the NAMA Bill could be re-drafted to ensure that owners of risk capital (both equity and subordinated debt) fully share in the losses resulting in write-downs by NAMA.In particular, we want further clarity as to what status the stated Government policy of avoiding nationalisation of the banks plays in the valuation process. We also want to understand the mechanisms for ensuring losses are absorbed by owners of non-equity risk capital (subordinated debt) in the event that the write-downs by NAMA more than wipe out all the equity in the banks.

3. We want to explore how the NAMA Bill could be re-drafted to allow for risk-sharing between the taxpayer and risk investors in the banks in the future work-out of the bad loans, as has been recommended by the IMF. We do not accept that the bank levy promised by Government to recover NAMA losses is a credible mechanism for risk-sharing between taxpayers and investors.In this regard, we would welcome your views on Professor Patrick Honohan's recommendation that NAMA should pay the banks less than fair value for bad loans, but in return give owners of bank equity and subordinated debt an ownership share in NAMA with upside potential.

4. We want to explore how the Bill could be re-drafted to re-assure the taxpayer that the over-riding objective of NAMA is to maximise the returns to taxpayers on assets purchased by collecting as much of the debts owed as possible, and to put in place the necessary clarity of mandate, robust incentives to achieve this objective, and set benchmarks of comparison. It is not appropriate that this be left to unpublished guidelines.

Only last November, the IMF finished a study on banking and property busts in seven other countries where the NAMA approach was adopted, and concluded that "Government-owned asset management companies appear largely ineffective in resolving distressed assets, largely due to political and legal constraints."

In layman's terms, the IMF believes that state quangos are much less skilled than private bankers at recovering loans from well-connected borrowers. In France, a similar state-owned asset management company in the 1990s lost a total of EUR18 billion (including funding costs) out of EUR28 billion of assets purchased from Credit Lyonnais.

In this regard, a major weakness in the draft Bill is the absence of any principles to guide its relationship with the developers, such as the policy on foreclosures, bankruptcies, work-outs or any of the other hard-nosed aspects of asset management which must be present to protect taxpayers. For example, without explicit protections, there is a very real prospect that in a few years' time, these same individuals will pop up again to buy these assets at an enormous discount, only this time they will be backed by funding from the same banks whose liquidity problems are now being eased. This will not, in my view, be acceptable to the public.

It is not conducive to public confidence that this be left to unpublished, future guidelines to be drafted by the Minister. The "rules of engagement" between NAMA and developers in default of their loans must be clarified in advance.

5. We want to explore how the Bill could be re-drafted to deliver new innovative mechanisms for political oversight, transparency and accountability of this extraordinary agency. These would include giving the Oireachtas an oversight and approval role for the appointment of the directors and CEO, providing "whistle-blower" protections for insiders exposing mal-practice and ensuring detailed oversight and reporting to the Oireachtas by experts appointed by the Office of the Comptroller and Auditor General of all key stages in the NAMA process, such as loan valuation and asset recovery.

6. We want to explore how the Bill could be re-drafted to require banks that participate in the Scheme to use a proportion of the extra ECB liquidity generated to support bank lending to SMEs and households. There is a danger than banks will use the extra ECB funding only to build up their cash reserves or to pay down other inter-bank or market liabilities.

7. We want to explore how the Bill could be re-drafted to deliver new supports for home-owners at risk of repossession, such as a Scottish-style equity purchase scheme by NAMA for householders facing repossession from mortgage lenders designed to bring their debts down to manageable levels (combined with some mortgage debt write-down by the banks).

8. We need further clarity on the method of payment for loans by NAMA, with particular regard to the coupon to be paid on NAMA bonds in short and long-term and other terms and conditions. We need greater clarity on the agreement with the ECB on NAMA bonds, including whether the ECB has committed to accepting NAMA bonds as collateral for liquidity operations over full duration of life of NAMA.

9. We want to explore how the Bill could be re-drafted to establish the principles under which NAMA will manage the property market (in which it will be a weak monopoly seller) in Ireland's long-term economic interests.I look forward to further engagement and debate on this most important issue for the country over the coming weeks.
Sincerely,
Richard Bruton T.D.

Video: Brian Lenihan, Minister for Finance, and Richard Bruton, Fine Gael Finance Spokesman, discuss the supplementary Budget-7/4/09

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Ireland: Supplementary Budget speech of Minister for Finance Brian Lenihan-April 7th 2009

STATEMENT OF THE MINISTER FOR FINANCE
MR BRIAN LENIHAN, T.D. 7 APRIL 2009

INTRODUCTION
A Cheann Comhairle,
As your Minister for Finance for the past ten months I have submitted one Budget and two rounds of Expenditure Adjustments to this House. Economic turmoil globally and in Ireland dictated these measures. The measures that I am bringing forward today will complete this process for 2009. I want to assure the Irish people that we have the capacity and your Government has the will to bring us out of this period of severe economic distress. We can work our way through our problems. We have faced adversity in the past - and we have prevailed.
Many of the factors that made us an economic success story in recent years are still with us: social cohesion, political stability, a young, well educated, flexible workforce, a pro-enterprise, export oriented economy. All of this remains intact. What is wrong in our economy, we can fix if we take the right course of action now and if each one of us signs up for that course of action.
The economic boom this country has enjoyed in recent decades brought a remarkable rise in our living standards. Rapid growth in the early years was driven by exports. As in many other countries, the later stages were accompanied by a property bubble, fuelled in part by very low interest rates and the ready availability of credit. Some did warn that the housing market was unsustainable. Plenty did not. The consensus view suggested a soft landing. That prediction proved wrong. With the benefit of hindsight, it is clear that more should have been done to contain the housing market. We became too reliant on the construction sector for growth and tax receipts.
If all our difficulties related to the recent construction boom in Ireland, I would not be before you this afternoon. We are the living witnesses to the most dramatic collapse in the world financial order since 1929. We are a small open economy with a huge exposure to international economic trends. Our confidence, our finances, our exports and our banks have been dented. The depreciation in the value of the currency of our nearest neighbour has compounded this adverse international picture.
Recent data show that GNP declined by 3% last year. A more substantial contraction of the order of 8% is in prospect this year. This is a serious decline in national living standards: the sharpest fall on record.
Forecasts for 2010 are not as severe. But we must place our performance in context. Economic activity is shrinking in almost all of our main trading partners. In the OECD area which covers most high-income countries, incomes will decline by 4¼% this year. The slowdown has been sharper in Ireland, reflecting the contraction of the property sector, and the openness of our economy.
Last October, forecast inflation for 2009 was 2½%. Like many forecasts this prediction has seen radical revision. It is expected that consumer prices will fall by close to 4% this year. As consumers, we are accustomed to rising prices. But prices of goods and services are now falling, moving back toward levels pertaining in other eurozone countries.
These declines in prices mitigate the effects on real household incomes of falling nominal wages and higher taxes on incomes.
With falling costs our economy is displaying remarkable agility. This will strengthen us in the eurozone. I am confident that sooner than many observers expect, we will position ourselves to take full advantage of a global upturn. This adjustment in our cost structure sows the seed for export-led economic recovery.

SIX ESSENTIAL STEPS TO RENEWAL
There are six steps we must take to restore and renew this economy.
First, and most urgent, we must stabilise our public finances.
Until we show that we can put our own house in order, we cannot expect those who have invested here and who might invest here in the future to have confidence in us.
Second, we must restore our damaged banking system to ensure credit flows to businesses and consumers. Credit is the life blood of the economy. Unless we take radical and bold action to resolve the crisis that has staunched the flow of credit, this economy will not recover.
Third, we must regain the competitiveness we have lost through over-reliance on domestic spending during the boom. The future of our economy lies in exports. We must work harder to gain market share. We must drive down our costs and improve the quality of our products so that we are well placed to gain when the tide changes.
Fourth, we must protect the jobs we have and invest in retraining those who have lost jobs. Already this year, 80,000 additional people have gone on the live register. At the end of the last year, there were 2 million people employed in this economy but this is falling and we must take all possible and sensible measures to protect and support existing jobs.
Fifth, we must support and stimulate economic confidence as much as we can within the resources available. But as I said earlier, stabilising our public finances is crucial to the recovery of confidence among investors, consumers and businesses.
Finally, we must restore our reputation abroad. We have been badly damaged by the actions of some in our financial sector. We have been damaged by our rejection of the Lisbon Treaty. We must show our EU partners that we, who have gained so much from the European Union, want to remain at its centre. We must show the world that our financial system is soundly based and governed by the highest standards of regulation.
I believe if we follow the six steps I have outlined we are well on the road to economic renewal.

FAIRNESS
Fairness must be the cornerstone of all our efforts to achieve economic renewal. Everyone wants fairness but there is less agreement about what it means. For many, it means the next person should pay. But the reality is everyone must give according to their means. Those who have most must give most. But before we ask anyone else to give, we in this House and in this Government must examine our own costs. Those of us in politics have been entrusted with a great privilege by the people. We must lead by example.
The Government has decided to introduce a number of additional changes to the remuneration of Deputies and Senators.
There will be a 10% reduction in all expenses other than mileage rates where a 25% reduction has already taken place.
Deputies will no longer receive long service payments or increments.
The arrangement whereby former Ministers are paid Ministerial pensions while they are still members of the Oireachtas will be discontinued.
Oireachtas members who are on paid leave of absence as teachers may no longer avail of the arrangement whereby they can keep the difference between their teachers’ salary and the cost of employing a replacement.
The allowances paid to Oireachtas Committee chairs will be halved and the payments to whips and vice-chairs are to be abolished.
The Oireachtas Commission has put forward its own proposals for a reduction in the number of Committees and I am happy to leave that matter to these Houses.
Some of these changes will require legislation which will be introduced shortly.
The members of this Government reduced their salaries by 10% last October. Ministers of State made a similar reduction. The public service pension levy was applied to members of the Government and Ministers of State. As a result, Ministers have seen a reduction of one fifth in their incomes.
I have asked the Review Body on Higher Remuneration in the Public Sector to undertake a fresh review of top level pay rates to take account of the changed budgetary and economic circumstances, and the changed private sector pay environment and to benchmark rates against those of other EU countries of comparable scale. This Review will be completed by July. I believe pay at leadership levels in the public sector should be more in line with pay in other countries rather than with top level private sector pay in this country which had become over-inflated in recent years and is now falling in any event.
Yesterday, the Taoiseach announced that the number of Junior Ministers will be reduced from 20 to 15.
In framing this Budget, the Government has been guided by the principle that everyone should contribute according to their means. Tax increases are required and they will not be easy to accept but the measures I am announcing today are progressive. Those who can best afford it will pay most.
For example, as a result of the changes proposed today, a person earning the minimum wage, which is about €17,500 per year, will be asked to pay €350 per annum or €7 per week, representing 2% of their wages.
A person earning €50,000 per year will pay €1,500 or €29 per week, which is 4% of their income.
A person earning €300,000 per year will pay €15,655 or €300 per week, or 9% of their income.
Fairness requires that the real value of Social Welfare benefits should be protected as far as possible at this stage of the economic crisis.
It is for the Government and this House to adjudicate on fairness. But we all have a responsibility to accept a proportionate share of the burden of adjustment needed in this economy.

STABILISING OUR PUBLIC FINANCES

The Financial Context
The Pre-Budget data published last week show a €5 billion widening from the budget deficit projected this January.
A correction of this amount in a full year approximates to a €3¼ billion adjustment in the part of this year which remains.
The Government recognises that part of this shortfall relates to the global economic cycle. It is reasonable to expect part of the shortfall to disappear as economic activity recovers here and abroad. However, part of the gap between spending and revenues, derives from structural problems in the public finances. We must take firm actions to eliminate these problems within a reasonable period of time.
Our approach is rooted in a determination to control our own destiny. We cannot control developments abroad, and we cannot control what others think of us. But we can take decisive actions to put this economy on the road to renewal and demonstrate that we have the ability to make the right choices for everyone in this country.
The problem is our expenditure base is too high and our revenue base is too low. If we fail, refuse or neglect to address this structural problem we will condemn our generation and the next to the folly of excessive borrowing. Already, the share of tax revenues that go to service the national debt has risen from 5% in 2007 to more than 11% this year. As we accumulate more and more public debt, this figure increases. This is dead money that should be used to improve vital public services.
Without this supplementary Budget the general government deficit would have been 12¾% of GDP reflecting the large gap needed to fund the difference between spending and revenue. In the prevailing economic circumstances the natural preference should be to leave expenditure and taxation as they stand. This is not an option for this Government or this House because of the scale of the deterioration of the public finances. A difficult balance must be struck between the need to show a credible way forward on our structural problems and the need to protect our economy as far as we can this year. It is the considered view of the Government that a borrowing target of 10¾% strikes the correct balance.
To date this year, the Government has reduced public expenditure by €1.8 billion primarily through a reduction in the public service pay bill. Measures announced today will result in a further reduction of nearly €1.5 billion in gross public expenditure and additional revenue of €1.8 billion.
The scope for additional expenditure reductions at this stage of the year is limited. Further immediate reductions in expenditure today would have necessitated additional pay cuts for public servants, reductions in the rates of payments for welfare recipients and the cancellation of all contractually uncommitted investment projects.
The deterioration in tax revenues from €47¼ billion in 2007 to €40¾ billion in 2008 to an envisaged €34½ billion this year is a far greater decline than the decline in the economy. This illustrates that in recent years our tax system became over reliant on fast growing, construction heavy economic activity. As we move to the next stage of our economic development, we must restructure our tax system to suit an export led economy growing at a more sustainable pace.
Multi-Annual Plan
Last January, the Government proposed to the European Commission that we could fulfil our obligations to secure stability and growth over a 5 year period. I am glad to report to this House that following intensive discussions with the European Commission, agreement has been reached with the Commission that 5 years is the appropriate timeframe for addressing our structural problems. I want to express my gratitude to Commissioner Almunia and my colleagues amongst the eurozone Member States who have been supportive of our efforts to stabilise the public finances.
To bring sustainability to the public finances, the Government is today announcing the necessary multi-annual consolidation plan. In 2010 and 2011, the plan envisages greater reductions in expenditure than increases in revenue. I want to stress that the expenditure figures are the minimum that must be achieved and the figures mentioned for tax are the very maximum that can be imposed.
Spending reductions that the Government has decided on for 2009 to 2011 will have a cumulative full year effect on current spending of €2.7 billion in 2010 and €4.2 billion in 2011. Reductions in capital spending will accumulate to €1.3 billion in 2010 and €2.4 billion in 2011. The policy decisions underlying these reductions are already in train. They entail further reductions in pay costs, programmes and numbers. There is no provision for extra social spending, other than dictated by demography and unemployment. There will be a cap on capital spending and efficiencies will be found throughout the public sector.
Savings on day to day spending will be made through more targeted welfare provision and further reductions in public service costs and numbers and the wider application of charges. Sharper targeting of programme spending and more efficient use of resources across the board will be required. Difficult decisions in all areas of policy are in prospect.
In 2010, we will seek up to an additional €1.75 billion from taxation. In 2011, the target will be to raise up to an additional €1.5 billion. Options to raise this may include the taxation of Child Benefit, the introduction of a Carbon Tax, a form of property tax and significant further base broadening through the elimination of unnecessary reliefs and a review of all areas of tax exempt incomes.
Over the later years of the 5 year plan, further adjustments will be required. The scale and nature of these measures will depend to a great extent on the strength of the economic cycle. If growth is better than forecast, less will need to be done at that stage.
Public Spending
Public expenditure can be divided into four parts. The public sector payroll at €20 billion and welfare spending at €21 billion account for two-thirds of all spending. Non-pay programmes cost €15 billion and public investment will amount to €7.3 billion this year.
Public Sector Payroll
The Government has decided that a permanent reduction in the cost of the public payroll is an essential element of this plan. In February 2009, we introduced the Public Sector Pension levy which resulted in an average deduction of 7½% from the salaries of public servants delivering savings of €1.4 billion this year. This is a considerable contribution by public servants to the unavoidable economic adjustment. It is also necessary to control public sector numbers which have grown by 11% in the last five years alone.
A key part of such a policy is the ban on recruitment and promotion, with certain exceptions, announced by me on 27th March last.
Today, I am announcing a scheme whereby, in those areas of the public service where permanent reductions need to be brought about, staff aged 50 or over may retire from the public service without actuarial reduction of pension entitlements they have accrued to date. Ten per cent of the relevant lump sum will be payable immediately with the balance paid later at the normal retirement age of 60 or 65 without actuarial reduction and subject to current tax law provisions.
This scheme will be open to applications from the 1st May and will be subject to local management arrangements to ensure that the scheme operates in an orderly manner. Those leaving under the scheme will not be replaced except in specific cases or circumstances sanctioned by my Department. The continued availability of the scheme will be reviewed in the Budget for next year. The Government sees no scope for introducing other, more generous Early Retirement schemes in present budgetary circumstances.
The Commission on Taxation is examining various aspects of pension tax treatment including the treatment of lump sums and I expect to be dealing with their recommendations in the 2010 Budget next December.
Social Welfare Spending
Over the last decade, we have been able to provide very significant increases in welfare payments. For example, the payment of Child Benefit has increased from less than €44 to €166 per month. The State contributory pension has gone from around €113 to more than €230 per week. And the weekly rate of long-term job seekers allowance was raised from €93 to €204. These payments compare very well internationally, particularly with payments in Britain and Northern Ireland.
It was right that when times were good, we increased payments to those who are vulnerable. Now that we are in recession, we must look at how we can use the €21 billion welfare budget to afford maximum protection to those most in need.
The Government has examined very carefully how we might make savings in welfare. In the Budget last October, we increased payments by around 3%. Notwithstanding the fall in consumer prices which we expect to be close to 4% this year, we have decided not to reduce welfare rates in this Supplementary Budget. However, it may be necessary to review rates of payments in future years if reductions in the cost of living materialise.
However, we do need to make some savings in order to absorb the additional expenditure of over €2.8 billion due to the sharp rise in unemployment since December. For this reason the Government is not in a position to pay the December bonus which it has been able to deliver in previous years.
We are also making limited changes in eligibility to certain benefits. Specifically, jobseekers allowance for the under twenties will be halved to €100 a week so as to incentivise the young unemployed to participate in training programmes. Payments under the rent supplement scheme will be reduced to reflect the fall in prices in the rental market. We will also intensify the campaign against welfare fraud by allocating increased staff to the Department and by targeting, in particular, the fraudulent claiming of Child Benefit and other payments by those who are no longer resident in this country.
We will continue to target the available resources on those most in need. The Government does not think that it is fair to pay the same level of benefit irrespective of the level of income of the recipient. For that reason, the Government has decided that Child Benefit will be means tested or taxed in the Budget for next year.
Programme Spending
The scope for changes in expenditure programmes in mid year is limited. Changes over the next three years will be informed by the Report of the Special Group on Expenditure and Numbers which is currently evaluating all programmes. We need to achieve better results with fewer resources. One example of how this has been done in this Budget is the changes we have introduced to the Early Childcare Supplement. This scheme was introduced to help people with the cost of childcare at the height of the boom. While appropriate to the time, it cost the State €480 million last year.
The Programme is now being replaced by a free Early Childcare & Education year for pre-school children at an estimated cost of €170 million. Pre-primary education significantly enhances the subsequent educational achievement of students and in turn increases the return for State investment in education generally. The free preschool year will start next January. The existing rate of Early Childcare Supplement will be halved with effect from 1st May next and abolished at end 2009. More details are set out in the Summary of Budget Measures.
This is an example of how a programme can be reshaped and made more effective at a lower cost to the taxpayer. We need to see more such initiatives in the public sector.
The other elements of spending reductions are set out in the Summary of Budget Measures. These reductions affect a broad range of vote headings so as to spread the burden of adjustment as fairly as possible.
Capital Spending
The Government is determined to maintain high levels of public investment. However, spending cannot be maintained at the levels envisaged when the economy was in rapid expansion. We must progress projects that maximise economic and social returns. The Government has decided to set the Exchequer capital allocation at €7.3 billion for 2009, which is greater than 5% of projected GNP.
The Government has also fixed the overall Exchequer capital allocation for public investment for the next four years
€6.6 billion in 2010,
€5.5 billion in 2011 and
€6 billion in 2012 and 2013.
This represents an average of 4% of projected GNP over the period out to 2013. Significant reductions in tender prices mean that we will be able to deliver a very large part of the NDP programme within the envisaged timescale. The Government has already re-allocated money to more labour intensive areas and will be putting in place further measures to prioritise the more productive and more labour intensive elements of capital investment.
Details of the revised capital envelope are set out in the Summary of Budget Measures.
I believe that there is scope to access significant private funds for infrastructure projects in order to sustain as many construction jobs and as much activity as possible. Discussions are in train with the pension industry about an initiative that seeks on a value for money basis to unlock additional private capital to complement debt financing provided by banks and the capital markets. This would support existing PPP projects and other projects previously funded by the Exchequer.
We need to explore all options to fund our infrastructure needs including the disposal of assets, sale and leaseback arrangements, franchising arrangements and the proposal from ICTU for a National Recovery Bond. My officials have been asked to examine these options with the relevant Departments and agencies.
The total reduction in gross spending for 2009 comes to €886 million in current spending and €576 million in capital. This is equal to €1.8 billion in a full year. Further savings of €4.8 billion will be required over the period 2010-2011.
TAXATION
We need to broaden our tax base so that everyone makes a contribution. We will remove unjustified reliefs and we will ensure that capital is taxed in a fair manner. We will retain our 12.5% corporation tax rate as a key aspect of our inward investment strategy.
A key structural weakness of the Irish taxation system is the narrow base. Too many people did not pay tax at all and there were too many ways in which those who had wealth could shelter their income. Many of these reliefs were abolished in 2006 by my predecessor, An Taoiseach. Today I will continue this process by reducing those tax expenditures that can have an impact this year.
I propose to reduce the level of tax relief investors can claim on the interest for mortgages and loans on residential rental properties to 75% of the interest with immediate effect.
I propose to abolish the current special 20% rate applied to the trading profits from residential development land and restrict the treatment of trading losses. The profits will be charged at the relevant marginal rates of income tax or at the 25% rate of corporation tax.
I will terminate the property-related accelerated capital allowance schemes in the Health Sector. This scheme covers private hospitals, registered nursing homes, convalescent homes and associated residential units as well as mental health centres. Schemes for palliative care units and childcare facilities will remain in place.
The Government has decided that from the 1st of May, Mortgage Interest Relief for principal private residences should only be available for the first seven tax years of the mortgage. I believe this move is justified given the significant recent reduction in interest rates and in house prices. The relief will now be targeted on those who bought their homes when prices were at their peak. It will also support those who now wish to move, improve or buy for the first time. As house prices fall the provision of mortgage interest relief will be kept under review with a view to eventual abolition. In this regard, I look forward to the recommendations of the Commission on Taxation which I will receive later this year. I would like to take this opportunity to thank the Commission for their work.
At this stage of the annual tax year it is not possible for technical reasons to restrict or abolish further reliefs. It is the intention of the Government to continue to remove unnecessary reliefs and shelters from the tax system in successive budgets.
Capital Taxes and Savings
It is important that we treat all sources of income in a similar manner. I am increasing the rates of Capital Gains Tax and Capital Acquisitions Tax to 25% with immediate effect. In the light of declining asset values, I am reducing the CAT thresholds by 20%. The details are contained in the Summary of Budget measures.
I am increasing the DIRT rate on ordinary deposit accounts to 25% and to 28% on certain other savings products.
The existing 2% levy on non-life insurance premiums will increase to 3% and I am also introducing a new levy of 1% on life assurance policies.
Income Tax
In good times, it was possible for us to keep minimum wage earners outside the tax system. This is no longer sustainable. With up to 40% of income earners paying no income tax at all, we can no longer meet our fiscal needs. The challenge is to spread the burden in a fair manner to a wider range of income earners while avoiding economic disincentive effects.
The scope for income tax changes half way through the income tax year is limited. To raise the necessary revenues, the Government must use the various levies and charges already established in the tax code.
Accordingly, the Government has decided to double the rates of the Income Levy and to reduce the entry points for each rate. The new rates will be 2%, 4% and 6%. The new entry points will be €15,028, €75,036 and €174,980 per annum, with the weekly equivalents being €289, €1,443 and €3,365 respectively.
Health Levy rates will also double to 4% and 5% and the entry point for the higher rate will be reduced to €1,443 per week which is €75,036 per annum.
Finally, the PRSI ceiling will be raised to €1,443 per week or €75,036 per annum.
These measures will reduce all our living standards. I am acutely aware of that. The Government has taken care to ensure they are fair, equitable and highly progressive. I would point out that notwithstanding all the increases made today, Ireland will continue to have one of the lowest tax wedges within the OECD. All of these measures will take effect from 1st May 2009.
I indicated previously that I was prepared to review the operation of the public service pension levy to address any issues of fairness. Taking account of the impact of the tax measures which I have now announced, I am proposing a slight recasting of the structure of the levy to reduce somewhat the impact on the lowest paid public servants with a small increase at the higher levels. The net cost of this is €100 million in 2009.
Excise
From midnight tonight, excises on cigarettes will go up by 25 cent per packet of 20 and on auto-diesel by 5 cent per litre. These excise changes are VAT inclusive. There is no scope for increases in excise duties on alcohol or petrol because of the substantial risk of loss of revenue by the purchase of these items in Northern Ireland.
Full details of all of these and other taxation measures are contained in the Summary of Budget measures. The total tax and levies measures will raise €1.8 billion in 2009 and over €3.6 billion in a full year.
The measures I have outlined have necessarily concentrated on income. I am now giving notice that, in 2010 and 2011, I will turn to other areas of taxation to achieve the necessary adjustment in later years.
RESTORING THE CREDIT SYSTEM
The global financial crisis has caused extensive and rapid government interventions across the developed world. Governments have intervened time and again to preserve financial stability and maintain their banking systems. Here in Ireland, through the bank guarantee, bank recapitalisation and the protection of public ownership, we have provided very substantial support to the banking sector.
Our sole objective is to ensure that householders can access credit for homeloans and consumer credit, that small and medium sized business can fund their enterprises, that deposit-holders have confidence that their money is secure and protected, and that international investors are satisfied about the stability of our banking system.
A key pillar in our economic renewal is a well regulated financial system. This is essential for domestic and international confidence and credibility. The actions of those who have tarnished the reputation of Ireland will be dealt with through the appropriate processes.
The role of the Central Bank of Ireland will be reformed to place it at the centre of financial supervision and financial stability oversight, providing for full integration and co-ordination of the prudential supervision and stability of individual financial institutions with that of the financial system as a whole. The Central Bank of Ireland will in the future be headed by a Commission, chaired by the Governor.
These important structural changes will be complemented by significant new resources and additional expert staff, to widen skill sets and enhance market-based knowledge.
I have asked the former Deputy Governor of the Bank of England and former member of the UK Monetary Policy Committee, Sir Andrew Large, to advise on the process to select a new Head of Financial Regulation within the new institutional structure. This search will be wide ranging and the person chosen will be of the calibre, reputation, experience and expertise to lead the reforms of financial regulation that I have outlined.
The Government also believes that further radical action is necessary to stabilise the banking system and ensure the supply of credit to the real economy. Cleansing and repairing the banks’ balance sheets is considered fundamental to achieving a sustained recovery of the banking system.
The Government has decided to bring forward measures to address the issue of asset quality in the banking system. A National Asset Management Agency will be established on a statutory basis, under the aegis of the National Treasury Management Agency. Assets will be transferred from the banks to the new National Asset Management Agency with the purpose of ensuring that banks have a clean bill of health, their balance sheets are strengthened and uncertainty over bad debts is reduced. This will ensure a sustained flow of credit on a commercial basis to individuals, households and businesses in the real economy. The Agency will have a commercial mandate and will have the central objective of maximising over time the income and capital value of the assets entrusted to it.
Because it is clear that the principal uncertainties in relation to asset quality in the Irish banking system lie in the banks’ land and development loans and in the largest aggregate associated exposures in the banks, these will be transferred to the Agency. These assets pose the main systemic risk to the banking sector in Ireland and the most significant obstacle to the recovery and restoration of lending by the banking system.
The Agency will purchase the assets through the issue to the banks of Government bonds. This will result in a very significant increase in gross national debt, to be offset of course by the assets taken in. The cost of servicing this debt will be offset, as far as practical, from income accruing from the assets of the new Agency. The debt will be repaid from funds raised through the realisation of those assets over time.
The potential maximum book value of loans that will be transferred to the Agency is estimated to be in the region of €80 to €90 billion, although the amount paid by the Agency will be significantly less than this to reflect the loss in value of the properties. In the longer term, if the Agency were to fall short of recouping all of the costs, the Government intends that a levy should be applied to recoup any shortfall.
All borrowers will be required to meet their full legal obligations for repayment. There will be a hardening of the approach to these borrowers – taxpayer’s money is at stake, and the Agency will be expected to protect it in a commercial way and with an independent remit.
It is important to note the State will not assume all of the risk in the acquisition of these assets. The assets will be valued on a basis which is sustainable for the taxpayer. This will entail an assumption of losses by the financial institution whose assets are removed. The State has already capitalised the Bank of Ireland for a 25% stake and is completing a due diligence of the Allied Irish Banks prior to capitalisation for a similar stake. If the crystallisation of losses at any institution requires additional capital the State will insist on participation by way of ordinary shares in the relevant institution.
This initiative will be developed and implemented within the common EU framework detailed in the European Commission Guidance on the Treatment of Impaired Assets, working closely with the European Commission to obtain prior State aid approval. By drawing on the best advice and experience available internationally, we are committed to ensuring that this very significant measure will be an example of best practice and meets all of the objectives that the Government has set for it.
The Government also intends in line with its previous indication to put a State guarantee in place for the future issuance of debt securities with a maturity of up to five years. Access to longer-term funding in line with the mainstream approach in the EU - consistent with State aid rules – will contribute significantly to supporting the funding needs of the banks and to securing their continued stability.
The Government is determined through these reforms to restore our banking system and the reputation of our regulatory and supervisory structures. We want to send a strong signal that the types of practices followed in some of our institutions are unacceptable, that the regulatory structures will be strengthened, that decisive action is being taken to repair banks’ balance sheets but that Ireland remains committed to the continued development of a soundly based, well-regulated and competently supervised financial services sector.
RESTORING COMPETITIVENESS
Our economy must return to being driven by sustainable export-led growth, rather than by domestic demand. To do so our price and cost structure must fall relative to our trading partners.
Private sector wages need to adjust and are adjusting. I am hearing examples every day of companies and employees reducing costs and changing work practices in order to safeguard employment.
It is this flexibility that will restore our competitiveness and provide the basis for future prosperity.
With the introduction of the pension levy, the public sector is also lowering its costs but much more is required in terms of changing work practices and driving efficiencies.
One of the main drivers of growth in output and employment in Ireland from the mid-1990s was flexibility and adaptability in the labour market. The willingness of employees to embrace change allowed a rapid reallocation of skills, expertise and knowledge to expanding economic sectors. Looking to the future, we need to recreate the same commitment to embrace change in the public service no less than in private enterprises.
As Minister for Finance, I must allocate and redeploy staff in the civil service to areas of highest priority. I have already made additional staff available to the Department of Social and Family Affairs to meet the needs of the growing numbers on the Live Register. I will use the same powers to redeploy staff to other priority areas in the future.
I will ensure that the redeployment of staff will be done with due consideration to geographical constraints and in a consistent and fair way.
I know that all those employed in the public service share the common goal of delivering excellent services.
We must also reduce costs in regulated sectors where we can.
The Government expects to see reductions of about 10% in energy costs for electricity and gas consumers by September. The Minister for Communications, Energy and Natural Resources will be seeking ways to lower costs further on an ongoing basis.
PROTECTING JOBS AND HELPING THOSE WITHOUT JOBS
Minimising the level of joblessness is crucial to the Government’s integrated approach.
Enterprise Stabilisation Fund
The Government can help with the process of supporting employment by a redirecting of the NDP to support employment and enterprise.
The broad cost of each 1000 people who lose their jobs is now estimated at about €21 million. In order to support employment, the Tánaiste and Minister for Enterprise, Trade and Employment will set up an Enterprise Stabilisation Fund worth €100 million over two years. In conjunction with the banking sector this fund will provide direct financial support to eligible internationally trading enterprises.
Smart Economy
The Government will also implement measures to support the “Smart Economy” through investment and incentives to reach an R & D target of 2½% of GNP by 2013. We have already trebled our economy wide R&D spend over the last decade. It is now around €2.5 billion of which some two thirds comes from the enterprise sector. It is not just a matter of saving jobs where we can but of re-orienting the economy to produce the export-led growth we must achieve.
Activation through Training, Education and Work/Employment Experience
Increased unemployment carries a heavy human cost for individuals and families and threatens the aspirations of all our citizens. We must support those who have lost their jobs through retraining and further education. As an initial response, the Government has already introduced a number of measures in these areas.
Notwithstanding the pressures on the public finances, I am now announcing a further range of activation measures which will:
support individual enterprise through enhanced access to the Back To Work Enterprise Allowance Scheme, which will facilitate some 1,400 additional claims;
encourage further education through earlier eligibility for the Back To Education Allowance;
facilitate work experience through a new scheme, to include placement of graduates, which will cater for 2,000 people;
expand activation opportunities for over 14,000 people;
support redundant apprentices to receive additional training in the education sector – for up to 700 people;
enable participation in further and higher education for over 6,000 people; and
initiate pilot training schemes for workers on a three-day week.
The Tánaiste, the Minister for Social and Family Affairs, and the Minister for Education and Science will provide details on the initiatives in their respective areas.
The overall cost of this wide range of measures will be met through the reallocation of current resources towards supporting unemployed people. The full year cost of providing close to 25,000 additional places will be in the order of €128 million. Within available resources, the Government will continue to pursue the introduction of further training and education services.
CONFIDENCE AND STIMULUS
The most effective way to build confidence in this economy is to show that we can restore order to our public finances.
Measures to help Stimulate the Economy
Notwithstanding the increases today, our tax system remains competitive and pro-enterprise in character. Last October, I introduced a considerable enhancement to our R&D tax credit regime. I also mentioned the increased importance globally of intellectual property. Accordingly, I propose to introduce a scheme of tax relief for the acquisition of intangible assets, including Intellectual Property as a means of supporting the Smart Economy. The details of the scheme will be worked on by my Department, in conjunction with the Revenue Commissioners, and will be published in the legislation giving effect to the Budget provisions. This measure will help to attract high quality employment to this economy.
To address the overhang of unsold properties, I am proposing to establish a Stamp Duty “trade-in” scheme. This will enable a person purchasing a new house or apartment to trade-in their previous property with the seller who will not be liable to Stamp Duty until they subsequently sell the traded-in property on at a later stage. Full details of this initiative will be contained in the forthcoming Finance Bill and it is envisaged that the scheme will apply from the date of publication of the Finance Bill to 31 December 2010.
I am also changing the way in which car dealers can account for VAT on second hand cars from July next.
RESTORING OUR REPUTATION
As a small open economy, our reputation abroad matters in terms of our ability to attract foreign investment. Recent banking scandals have sullied our good name and may have prompted some investors to think twice about investing here. Measures presented in this Budget send a strong message around the world that we are determined to restore our reputation. The actions I outlined earlier to repair banks’ balance sheets and the proposed reforms of our regulatory and supervisory regime are aimed at rebuilding confidence in our financial system. The resolute actions we are taking to reduce the budget deficit and to boost competitiveness by driving down costs, prices and wages are needed to restore the confidence of prospective investors and foreign lenders. To reinforce these messages, I plan to visit financial capitals around Europe over the coming weeks along with representatives from the National Treasury Management Agency. These visits will give me the opportunity to communicate more effectively with foreign investors about our plan for renewal.
It was only last June when we surprised our EU partners by rejecting the Lisbon Treaty. Looking back, it would appear that economic success had fostered a false sense of invincibility. A lot has changed since then. Events over the past year have underscored how interdependent the world is and have reminded us that our fortunes are deeply intertwined with those of our European partners. We are a small trading nation on the edge of Europe, but our best interest is served by remaining at the heart of Europe.
CONCLUSION
A Cheann Comhairle, I want to acknowledge the serious and constructive documents put forward by the two main opposition parties in advance of this Budget.
Both documents contained good ideas, some of which we have adopted.
Let me say this: while there are many differences between us, there is also some important common ground. That in itself sends out a powerful signal to the rest of the world that we can overcome our difficulties.
As the many interest groups prepare, as is their right and duty, to defend their sectional interests in this Budget, I ask them to pause for thought. We are now facing the challenge of this nation’s life. This is a time to set aside those narrow, sectional interests. Yes, we must be fair and I believe we have been fair. But now is the time for the common good to prevail.
In our short history as a nation, we have demonstrated our capacity to overcome economic adversity. We have worked together to build this economy into one of the most successful in the world. We must now work to save it from a downward spiral.
Even with a crisis, opportunities arise. As we recast and restructure our fiscal policy, we can transform the way in which we do business in this country in the public and private sectors.
As I said at the outset, a Cheann Comhairle, we can work our way through this time of economic distress. More than that, we can be strengthened by it. Today, we have set out our plan for the renewal of our economy over the next five years. We are asking this House and the people we represent to work with us in its implementation. I commend these measures to the House.

Ireland:Government nationalises Anglo Irish Bank-Plan to inject €1.5bn into the bank dropped

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The Government has announced plans to take complete control of Anglo Irish Bank, saying its previous plan to inject money into the bank is not the best way to secure its viability....
The Government had planned to inject €1.5bn into the bank, taking 75% of the voting rights in the process...The bank will continue to operate as normal and depositors and creditors should continue to transact as normal.. The Government statement said shareholders' rights would be respected, and that legislation will outline plans for compensation.(RTE)

Fine Gael has issued the following statement:

Anglo U-turn the Correct Decision but Latest in Long Line of Climb downs
The Government have been forced to abandon their own recapitalisation plan for Anglo Irish Bank and have directly adopted the plan set out by Fine Gael in this regard just yesterday, according to Fine Gael Deputy Leader Richard Bruton T.D. He was speaking after the Government announced the nationalisation of Anglo Irish Bank this evening.

"In December Fine Gael said it was not appropriate for the Government to pour taxpayers' money in to a recapitalisation plan for Anglo Irish Bank, given the information that had emerged regarding Anglo's lending practises. We formed the view that the public were entitled to have trust and confidence in the banks that they were being asked to recapitalise. This trust and confidence was clearly not there for Anglo. The Government, however, regardless of the advice offered ploughed on with a plan to put €1.5bn of taxpayers' money in to Anglo.

"Tonight the Government have finally been forced in to recognising their mistaken approach to this bank. They have adopted the plans set out by Enda Kenny yesterday in relation to Anglo Irish Bank, the latest Fine Gael proposal that they have been forced in to adopting. The handling of this issue confirms, once again, that the Government are all at sea on economic policy and are lurching from one u-turn to the next. First it was the multiple u-turns on the Budget, then the requirement for recapitalisation of Irish banks, then the idea of a pay freeze, and then finally their u-turn on Anglo Irish Bank's entitlement to be included in the recapitalisation programme.

"This latest of u-turns, while the correct decision that will help protect the viability of the remaining banks, does not bode well for the steady and assured management of the economy in the future. Finally, the Government needs to clarify if today's announcement has the effect of extending the State guarantee to any additional liabilities of the bank, including the owners of €2bn in perpetual preference shares."

Ireland:Government plans public sector pay cuts-5% reduction likely with further cuts to follow

2008 Exchequer figures released yesterday confirm a 12.7 billion euro deficit in the public finances after the tax take came in 8.1 billion euro less than what was predicted for the year. Last year's tax revenues fell to levels last seen in 2005. At the height of the construction and property boom in 2006, the Government took in €10bn on property-related taxes, almost a quarter of all tax revenues. The government allowed public expenditure to grow by 25% in 2006 and 2007. This rate of public expenditure growth was patently unsustainable. However it helped FF to return to power in the 2007 general election. FG Finance Spokesman Richard Bruton in 2006 and 2007 warned the government of the likely consequences of this policy. These dire consequences have come to pass. Unfortunately the property boom on which this public expenditure splurge was based could not be expected to continue forever.

The crash in Irish building and construction has decimated property taxes. Unemployment is heading for the 300,000 mark further straining government finances. The rise in the value of the euro is increasing pressure on Irish exporters whilst the international recession is further depressing the economy. In 2009 it is likely that Ireland will have a negative growth rate of around -4%. Ireland is now caught between its own internal economic problems and the international recession.

It is anticipated that the deficit could reach 21 billion euro in 2009 without further remedial action. A public sector pay cut is a certainty. 5% is regularly mentioned as a likely figure. It is more likely to be at least 10% in the longer term. Finance Minister Brian Lenihan and Taoiseach Brian Cowen intend to consult with the social partners. Decoded this means a public sector pay cut with the blessing of the unions.

Government Announces Recapitalisation of AIB, Bank of Ireland and Anglo Irish Bank (Cost €5.5 billion)

From the Department of Finance

......In relation to Anglo Irish Bank, the Minister for Finance announces an initial investment of €1.5 billion of core tier 1 capital to assist in restructuring the bank’s capital. The Government will continue to reinforce the position of Anglo Irish Bank and will make further capital available if required so that it remains a sound and viable institution. The investment will be in the form of €1.5 billion of perpetual preference shares with a fixed annual dividend of 10%. The preference shares carry 75% of the voting rights of Anglo Irish Bank. The investment is subject to the approval of the ordinary shareholders at a general meeting which will be convened as soon as possible. On the basis of positive contact with the European Commission, the Minister said he was confident that the Anglo proposal will meet with EU State Aid requirements when formally notified in due course.

Good progress continues to be made in the capital discussions with other institutions. In particular, subject to shareholder and regulatory approval, the Government has agreed with Bank of Ireland and Allied Irish Banks plc that they will each issue €2bn of perpetual preference shares to the State with a fixed annual dividend of 8%. These shares will have voting rights in respect of change of control and any changes in the capital structure. They will also confer 25% of the voting rights in respect of appointments of directors and 25% of the directors on the board, currently including any directors to be appointed in connection with the Government’s Guarantee Scheme.

All the institutions may redeem the preference shares within 5 years at the issue price or after 5 years at 125% of the issue price. The preference shares are non-convertible and will be treated as core tier 1 capital by the Financial Regulator and are replaceable only with other core/equity tier 1 capital.
The capital injection for Anglo Irish Bank is likely to take place following an Extraordinary General Meeting in mid-January, and for Allied Irish Bank and Bank of Ireland, by the end of the first quarter of 2009.

The Government has a substantial pool of additional capital available to underwrite and otherwise support the issuance of core tier 1 capital by the relevant institutions.The Government need not be the principal source of this additional capital and encourages each institution to access private sources of capital. Nonetheless, the Government is prepared to underwrite further issuance of core tier 1 capital and both Allied Irish Banks plc and Bank of Ireland have indicated an interest in such an underwriting in an amount of up to €1 billion each.
The measures announced today have been designed having regarded to the recent European Commission Recapitalisation Communication and are subject to State aid approval....

Ireland:Government announces €10 billion fund to recapitalize financial institutions (Banks and Building Societies)

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Text of Statement by the Government on the Recapitalisation of Credit Institutions

The Government has today decided on an approach to the recapitalisation of credit institutions. The Government’s objective is to ensure the long-term sustainability of the banking sector in Ireland and to underpin its contribution through the availability of credit to individuals and businesses in the real economy. This initiative will help to foster and encourage the flow of funds to the economy, and limit the impact of financial market difficulties on businesses and individuals.

The Government noted that recapitalisation is recognised by the European Commission as one of the key measures that may be used by Member States to preserve stability and proper functioning of financial markets, and that it believes that in current market conditions even fundamentally sound banks may require additional capital to respond to widespread market perception that higher capital ratios are appropriate for the sector internationally.

The Government decision followed the Minister for Finance’s statement of 28 November 2008 which confirmed the State’s willingness to supplement and encourage private investment in the recapitalisation of credit institutions in Ireland with State participation.
In that context, the Government has decided either through the National Pensions Reserve Fund or otherwise and subject to terms and conditions, to support, alongside existing shareholders and private investors, a recapitalisation programme for credit institutions in Ireland of up to €10 billion.

The State’s investment may take the form of preference shares and/or ordinary shares and the State may where appropriate participate on an underwriting basis. In principle existing shareholders will be expected to have the right to subscribe for new capital on the same terms as the Government.
A key principle in the operation of such a fund will be to secure the interests of the taxpayers through an appropriate return on, and appropriate terms for, the investment.

The next step in this process will be for the Minister for Finance to initiate detailed engagement with the credit institutions themselves in respect of specific proposals.
In order to safeguard fully the interests of the taxpayer, State investment will be assessed on a case-by-case basis in an objective and non-discriminatory manner, having regard to the systemic importance of the institution, the importance of maintaining the stability of the financial system in the State, and the most effective and economical use of resources available to the State and each credit institution’s particular requirement for capital. Any State investment will be undertaken in line with best practice in the EU and elsewhere and consistent with EU State aid rules and in particular the recent European Commission communication on recapitalisation.
Recapitalised institutions may be required to comply with such requirements as to transparency and commercial conduct as the Minister sees fit.

The National Pensions Reserve Fund Act, 2000 will be amended, as necessary.
Discussions with the relevant credit institutions are ongoing, and the institutions continue to progress proposals for private investment. Institutions are being asked to submit their proposals by early January.
The Government guarantee Scheme remains in place.
14 December 2008

Ireland – Tax Revenue shortfall for 2008 to reach €8 billion plus (The 2009 current deficit is likely to come in at around €8 billion)

Figures released show a massive shortfall of close to €7.5 billion in the amount of tax revenue collected by the Government during the first 11 months of the year. Already revenue projections in the October budget are seriously out of line. The October budget forecast a total tax shortfall for 2008 of €6.5 billion. It is now probable that the shortfall for the year could exceed €8 billion. Tax revenue is 16 per cent behind projections made at the start of the year. VAT is €2.1 billion below expectations, capital gains tax is down €1.7 billion and stamp duty is €1 billion below target.

The 2009 Exchequer deficit appears headed for €16.5 billion and the associated General Government Deficit is likely to be 8% instead of the 6.5% projected in the recent Budget. The 2009 current deficit is likely to come in at around €8 billion.
These are horrific figures, which rule out the possibility of a financial injection by the government to reflate the economy. The government has absolutely no leeway. The over expansionary budgets in 2006 and 2007 by the FF/PD government led to an increase in public expenditure of 25% and also fuelled inflation. This was tantamount to pouring petrol on the raging fires of economic growth at a time when it was necessary douse the flames. This spending was supported by revenue from an unsustainable property boom.

The government is now trapped. It lacks the financial wherewithal to boost the economy. Internal revenue sources are shrinking. The property bubble has burst. Unemployment has reached 251,000 and will continue to rise sharply.

The FF/Green government will endeavour to tackle the problem by a combination of further public expenditure cuts and a reduction of public service numbers. It may also target public service pay. In a doomsday situation a 10% pay cut could not be ruled out.

Ireland-Government rocked by groundswell of opposition to medical card proposals forced to backtrack

No sooner had Minister for Finance Brian Lenihan completed his budget speech than Government deputies from FF, Greens and PDs broke out in thunderous applause. However opposition deputies on the FG and Labour benches had already spotted serious flaws in some of the proposed health and education cutbacks.

The Government's decision to end universal medical card provision for people over 70 lit the fuse. The opposition in the Dail was apoplectic with rage. Enda Kenny and Eamon Gilmore spearheaded the attack. Yet Brian Cowen, Mary Harney and Mary Coughlan strongly defended the proposal. Government TDs were slow to react.

Grey voters vented their spleen with a display of ferocity seldom seen in Irish politics. Many elderly people have been stunned and frightened by the proposals. All organs of the media were utilized. Now many backbench FF, Green and Independent TDs supporting the government have begun to rebel. Independents such as Michael Lowry and Finian McGrath have come out strongly in opposition
Today Wicklow TD Joe Behan resigned from the Fianna Fáil party in protest at the Budget citing not alone cutbacks in health but also in education. Mr Behan has accused the Cabinet of being out of touch with the electorate.

Just one question for many of these backbench FF deputies. Why did they not shout stop when the FF/PD government allowed public expenditure to rocket by 25% in the two years leading up to the 2007 general election. The property boom bubble supported this growth in public expenditure. It was clearly unsustainable. Many of these deputies won their seats on the back of benign budgets. It is possible that the outgoing government would have been re-elected without such a massive growth in public expenditure.

Four years ago Richard Bruton FG Finance spokesman warned of the unsustainability of the public expenditure splurge and spoke continuously about the inevitable consequences.. Economists such as George Lee, Dr Alan Ahearne and David McWilliams warned about a property boom crash. They were accused of talking down the economy.

The present Medical Card proposals would not get through the Dail. Any effort to force them through would tear the FF Party asunder. The Independents and Greens would probably desert. Tonight on RTE Taoiseach Brian Cowen announced that he would set up a process to deal with the problem. The Government intends to try and renegotiate with the IMO with a view to securing savings.

It is likely that the proposals will be substantially amended or parked. However FF backbenchers, Green Party and Independent TDs had better get used to bad news. Indeed a supplementary budget cannot be ruled out in July 2009 (after the Local Elections) to arrest the slide in the public finances. In addition there may be at least two more harsh budgets one in December 2009 and the other in December 2010. The Government has scored a huge political own goal. Happy are those sitting on the opposition benches.

Irelands Harshest Budget in living memory-Taxpayer and Consumer blues.

This budget was set against the background of a horrific deterioration in the public finances caused by the bursting property bubble in Ireland and by international factors. In the two budgets prior to the 2007 general election the FF/PD government allowed public expenditure to grow by 25%. This growth in public expenditure was supported by huge tax inflows from the property sector. Now that these have largely dried up the Government was left high and dry. The Government is now heist on its own petard.
This was an accident waiting to happen. Taxes from the property market are notoriously unreliable.

This is the harshest budget in living memory. Even to outline some of the harsh measures sends a chill through the bones.
There are some minor beneficial changes in Social Welfare Payments and Tax Bands allied to provisions geared towards innovation and R and D. There are some aids for the property market. However this is a TAKE budget which will raise an extra €2 billion in taxes. Government Borrowing is forecast at 6.5% of GNP. This is much too high. The EU requirement is 3%. In essence the Government must borrow €13 billion.

Income tax has been increased. A levy of 1% has been placed on all income up to €100,000 and at 2% on earnings over €100,0000. This is an income tax rise by another name. The PRSI ceiling has been raised also. Mortgage relief for non-first time house buyers has been cut from 20% to 15%. A €200 tax has been introduced on all benefiting from employer provided car parking in urban areas. Motor Tax rises by 4%/5%. Those who own a second property face a new € 200 tax. DIRT ,Capital Gains Tax and VAT have been raised.

The government has cut back financial support to local authorities so a massive hike in commercial rates and water rates will filter through.

Automatic entitlement to a Medical Card for all over 70s has been withdrawn. There is to be a 20 % increase in private and semi-private bed charges in public hospitals and Accident and Emergency charges are to increase by 50% from €66 to €100 for non medical card holders who attend A&E departments without a letter from their GP. The Drug Payment Scheme (DPS) threshold is being increased from €90 to €100 per month which, the Government says, will lead to savings of €15 million in drug costs.

The Registration Charge for Universities has been raised from €900 to €1500. The pupil teacher ratio in schools has been increased.
Petrol will rise by 8 cent per litre.
The budget will cost middle-income families an average of €2,500 per annum. There will be a €10 airport charge for passengers.
There are also some social welfare cutbacks.
The hair-shirt is back in Irish politics with a vengeance. It is likely that consumer confidence has been severely dented. In addition it is probable that two more harsh budgets may be in the offing.

Irish Government decision to guarantee Irish banks' deposits and debts for two years stabilises banking system

Yesterday Irish banking shares imploded. It was not unreasonable to expect a large run on the banks today if the Government had failed to act. The Financial Regulator and Governor of the Central Bank warned the Government that immediate action was necessary to safeguard the Irish financial system.Hence the Governments decision. The decision has the broad support of the opposition.

The Government decision to offer a guarantee of 400 billion euros will last for two years and covers liabilities at AIB, Bank of Ireland , Anglo Irish Bank, Irish Life and Permanent, Irish Nationwide Building Society and EBS. The guarantee covers retail, commercial and inter-bank deposits as well as covered bonds, senior debt and dated subordinated debt. The Irish approach contrasts strongly with that adopted in Belgium and the U.K., where governments have injected capital into individual banks, or seized them.

Assets of Irish banks are estimated at 500 billion euro whilst liabilities amount to 400 billion euro. If the guarantee were called in, in full-unlikely ever to happen- 37 years income tax receipts would be required to pay it off. Naturally enough there is concern among tax payers that those who may have behaved irresponsibly have been insulated. Money was doled out often irrationally by banks to elements in the Irish property sector. Whilst Irish banks have sizeable exposure to the property market,the problems in the Irish banking sector appear to be relatively minor. Subprime lending is not a major problem. Banks are highly profitable.

Naturally enough with this announcement bank shares rebounded today.

FG has posed the following questions:
1. What is the total exposure of the Irish taxpayer for providing this guarantee and how will the taxpayers' interest be protected?
2. What new regulations are being implemented immediately that will ensure that Irish banks will not be using the new guarantee to continue engaging in risky lending or derivative trading? The onus is now on the Regulator to ensure that the banks lending capacity is used to provide credit to sound Irish enterprises.
3. What return will the taxpayer get for providing this guarantee? What charge will the banks pay for this new facility?
4. What new oversight powers will the Government have on behalf of the Taxpayer to monitor the activities of Irish banks and is there any requirement for new legislation?
5. Has the Government satisfied itself that the banks have come clean about bad debts on their books and that banks are adequately capitalised?
6. What limits have been put on the pay and bonuses of senior executive of the banks who will avail of this facility?

Irish Government plans €440 million in public expenditure cuts

Today Finance Minister Brian Lenihan announced plans to cut public expenditure by €440 million.
Effectively decentralisation appears to have been shelved. Manning levels in the HSE are to be reduced. All Departments, State Agencies and Local Authorities - other than Health and Education - will be required to reduce their payroll bill by 3% by the end of 2009. But is Education really excluded? FG spokesman on Education Brian Hayes has issued the following statement "...Brian Lenihan said that the Department of Education would be excepted from reducing its payroll bill by 3% but in his very next sentence he said that 'the parameters for this exception are to be agreed by the Departments concerned with the Department of Finance.' This means that Education is not exempted at all from payroll cutbacks and has to negotiate with regard to what cuts it faces...." This caveat applies also to Health.

I suspect that the Government is angling for a public sector pay pause in 2009. The Minister expects a shortfall of €3bn in tax revenue this year. To say the least this is in my view highly conservative. I suspect it may be €4 billion at least. An interesting question arises. What will fund manpower reductions in the public service? Many of those made redundant will be entitled to state benefits.
So the Government will gain with one hand and lose with the other. In addition there is potential for serious conflict in the Health sector. Frontline services in the Health sector will inevitably suffer from cut backs.

Much of what is announced today is aspirational and the details remain to be fleshed out. At last the FF/PD/Green Government appears to accept that we have a crisis. Prior to this critics were accused of talking down the economy. Interest in the next few weeks and months will focus on the actual details of the cuts. As usual the devil will be in the detail. Much of this could have been avoided by prudent action in the last two budgets.

Key points of Minister's Speech:

'The Exchequer returns published by my Department last week confirm we are facing a shortfall of €3bn in tax revenue this year.
'Government expenditure is running at 11% ahead of the same period for last year. And there are a number of spending pressures due mainly to higher unemployment.
Accordingly the Government has decided that all of the pending increases for Ministerial and Parliamentary office-holders and for other senior public servants, recommended by the Review Body on Higher Remuneration in the Public Sector will not be implemented.
'The issue will be reviewed in September 2010 but without commitment at this stage to the outcome.
'To meet current expenditure pressures, the following measures will be taken:

* All Departments, State Agencies and Local Authorities - other than Health and Education - will be required to reduce their payroll bill by 3% by the end of 2009 through all appropriate measures identified by local management in the light of local circumstances. The parameters of this exception for the health and education sector are to be agreed by the Departments concerned with the Department of Finance.

* All expenditure by Departments and Agencies on Consultancies, Advertising and Public Relations will be significantly reduced for the remainder of this year and by at least 50% in 2009.

* Further savings in 2008 and in 2009 are to be secured by a range of measures including those identified as a result of the Budget day efficiency review initiated by my predecessor.

* All of the above efficiencies will apply equally to State Agencies. In addition, I have asked that these agencies be reviewed to examine whether they can share services, whether it would be appropriate to absorb some of their functions back into their parent Departments or whether some agencies should be amalgamated or abolished. The outcome of this will be considered by the Government in the Autumn.

* Capital investment will remain a top priority. Capital projects will be examined and prioritised to ensure that resources are targeted in the first instance at construction-related investment in core economic infrastructure that adds to productive capacity.


* The Government has also decided, in the light of the current Exchequer position, that further expenditure for the acquisition of accommodation for decentralisation will await detailed consideration of reports from the Decentralisation Implementation Group.


* Minister of State Martin Mansergh will head up a joint public procurement operation between OPW and the Department of Finance to drive a programme of reform and to produce a business plan for purchasing savings to be achieved by Departments and other public bodies in 2009. Minister Mansergh will report to me in the Autumn with specific proposals to target at least €50m savings in 2009 on this front.


* Given the projected revision to GNP and other factors, there will be savings in Overseas Development Assistance of some €45 million this year. The revised total contribution in 2008 will be over €200 per citizen, totalling around €900 million. Ireland will still be far ahead of almost all other developed nations in our rate of ODA.

'In addition to these measures, the Department of Finance and the Department of Health and Children will draw up proposals for a targeted scheme to reduce surplus staff in the HSE as soon as possible. We will also consider extending this scheme on a selected basis to other public service agencies where staff surpluses are identified.
'In respect of the Tribunals of Enquiry given that they have indicated their intention to conclude their public hearings this year, the costs of their operations will be reviewed by the relevant Ministers as part of the overall review of spending so that expenditure is minimized, both in the remainder of 2008 and residual costs arising in 2009.
'The Government is determined to achieve the savings required. All Departments have been directed to stay within budget.
'These measures are designed to minimise the effects on users of services in the areas of Health, Education and Social Welfare. They seek to protect the vulnerable. But they are the minimum we need to get back on track as soon as possible.
'The savings are estimated to deliver €440m in 2008 and €1,000m in 2009. Even with these savings, the fiscal position in 2009 will be demanding and all spending will have to be rigorously controlled. In framing the 2009 Budget the Government is determined to maintain the right economic and fiscal conditions for sustainable growth.

Ireland-Exchequer deficit is €5.65bn for first six months as recession looms.

The Exchequer returns show a deficit of almost €5.65bn for the first half of the year (2.75% of GDP). Tax Receipts at €19.127 billion are €1.45bn lower than anticipated for the first six months of the year. The lower tax receipts are due mainly to the poor performance of VAT and capital gains tax. The tax shortfall for the full year is expected to come in at €3bn. The collapse in the house-building sector has impacted strongly on tax receipts. Only 40,000-45,000 new houses will be built this year. The folly of over reliance on this sector is plain for all to see.

Total current receipts in the first half of 2008 were €19.525 billion compared to receipts of €21.124 billion for the same period in 2007.
Non-tax revenue in the first six months of 2008 was €398 million. This compares to €310 million for the same period last year.

Brian Cowen’s Government must administer some harsh medicine. The country faces swingeing public expenditure cuts and huge rises in stealth taxes as Finance Minister Brian Lenihan attempts to grapple with the problem. Increased exchequer borrowing will also help plug the gap. In addition interest rates will remain high as the European Central Bank grapples with inflation. Increasing interest rates at this time is economic lunacy and will serve to strengthen the Euro further. This will reduce exports from the Euro zone. Irish exports have begun to lag. Much of the Euro inflation has resulted from higher oil prices. So it is arguable that interest rates should not be increased.
Tightening of lending policies by the banks will hinder investment.

Pay rises below the rate of inflation will take further steam out of the economy. There is a danger of stagflation if public expenditure cuts are too severe.
In addition unemployment has risen rapidly in recent months. It broke the 200,000 barrier last month and currently stands at c207,000. Where is the purchasing power to come from if the consumer lacks sufficient disposable income?

In recent tears public expenditure has galloped out of control. It rose by 13% in 2007 in the run in to the General Election and by 50% over four years. Huge tax receipts from the then booming building sector funded much of this. The FF/PD Government erred in not restraining public expenditure. Excessive public expenditure fuelled inflation in an economy that was already growing strongly.
It threw petrol on the fires of economic growth. Restraints in public expenditure in good times would have provided the Government with some leeway.

There has been a tendency to dump on economists who warned that this scenario would unfold. David McWilliams, Alan Aherne and George Lee in particular have come in for strong criticism. Richard Bruton FG Spokesman on Finance has long criticised Government policy. Critics were accused of talking down the economy. Of course this is utter nonsense
Interestingly George Lee was referred to today on an RTE programme as George Gloom. Attack the messenger when you do not like the message. What utter nonsense. It is time for realism.
Some debate has cantered on the dreaded “R” word. The country is either in recession or about to enter a recession. It can weather the storm.