THERE IS further scope to reduce public spending and raise tax revenues, Minister for Finance Brian Lenihan told an audience of bond investors in New York yesterday.
“Half of income earners pay no income tax,” he said in a presentation on “Prospects for the Irish Economy”. “Ireland has no property tax or water charges. The tax base needs to be broadened.”
He noted that Ireland’s “public sector pay and welfare surged during the boom years”, adding that capital spending (on infrastructure such as roads, rail, water treatment, schools and hospitals) was twice the euro zone average.
Mr Lenihan used the occasion at the New York Palace Hotel to cast the best possible light on the Irish economy in remarks to more than 200 fund managers.
GDP will grow between 2 and 3 per cent next year, Mr Lenihan said, emphasising that Ireland is the only state in the euro zone where labour costs are falling, and that the export of goods and services has recovered almost to pre-crisis levels. Ireland’s balance of payments is moving into surplus, Mr Lenihan added.
“The plan for economic recovery is working. Ireland is restoring order to the public finances, repairing the banking system and regaining competitiveness,” the Minister said.
The Government strategy to “restore the banking system to health” relied on the creation of the National Asset Management Agency (Nama) “to clean up banks’ balance sheets”, recapitalisating the banks, restructuring the banking system and reforming the regulatory system.
On average, Nama was paying only 42 per cent of the nominal value of loans, “aggressive valuations” that have “forced the banks to acknowledge reality and recognise their losses”, he said.
Total capital requirements for Anglo Irish Bank and INBS will be €35 billion. This represented 22 per cent of GDP, a “large but manageable amount”. There will be burden sharing with subordinated bondholders, “but there is no question of imposing losses on senior debt”, Mr Lenihan said.
Speaking to the Financial Times on Monday, the Minister said he was open to the idea of Anglo Irish Bank and Irish nationwide Building Society opening “amicable discussions” with senior debt holders “for mutual advantage”.
Mr Lenihan promised that the budget deficit will reach the magic figure of under 3 per cent – as required by the European Stability and Growth Pact – by 2014. A “more ambitious plan for fiscal consolidation is needed to achieve this target”, he said. “We are fully committed to this goal.”
Mr Lenihan was accompanied to the US by delegations from the Department of Finance and the National Treasury Management Agency (NTMA). Representatives from NTMA have called on investors and the primary dealers from the big bond trading houses, both in Washington and, over the past two days, in New York.
Yesterday’s presentation was “a chance to articulate our story”, to counteract negative headlines, said an NTMA official. “It’s always easier to do that face to face rather than through the media . . . We emphasised that there is an economy in Ireland outside the construction sector, and we are managing it, although there’s some pretty tough medicine.”
To the surprise of the Irish delegation, no one asked about payments to subordinated bondholders, or for more details on upcoming budget cuts. Investors’ questions focused on how growth can increase rapidly enough to stabilise debt, the corporate tax rate, Ireland’s interest costs in the future and the temporary withdrawal from the bond market.
Mr Lenihan said that, as a percentage of GDP, interest on Government debt is much lower than it was in the 1980s. “The yield on (Irish Government) bonds is falling. It’s a real long-term thing that you have to chip away at,” said an Irish participant.
Investors will have adequate time “to digest information” from next month’s four-year plan and the December budget before Ireland returns to the bond market next year. The Minister again stressed that the government was “fully committed to retaining 12.5 per cent corporation tax”.
