The Irish government are planning to introduce a “mandatory” supplementary pension scheme for all workers who are over the age of 22, and earning over a certain threshold. The full details aren’t yet concrete, but the general idea is to try and force the employed population of Ireland to save more money for their retirement and not depend solely on the government supplied pension.

The scheme isn’t actually mandatory - it’s more of a constant nag. Employees may opt out of the scheme, but will be auto-enrolled every two years, meaning if you don’t want in, you’ll have to opt out manually every two years.

While I applaud the idea - we all should be trying to put aside money to live on when we finish work - the execution leaves a lot to be desired. I am planning for my retirement, but haven’t yet started a pension. Instead, I’m managing money for myself and my family in various savings and investment accounts to try and get the best return on the money. I don’t appreciate the nanny-state forcing me into a pension scheme I don’t want to be in every two years.

Economically, I see a lot of fallout from this decision also. On the consumer side of the equation, I can see our already high pension fund fees increasing. The pension funds will have a captive market and not much competition meaning they can all steadily increase their fees. All this will achieve will be the passing of considerable amounts of money from lower and middle class working families to upper class financial “gurus” (who proved their recklessness in search of profits can bring entire industries to the brink of collapse, only to survive by being bailed out by taxpayers).

Another effect of this legislation that’s immediately obvious to me is that employer pension scheme incentives will likely decrease to the 2% minimum over a number of years. If your current employer is generous enough to match your pension contributions above 4% of your salary, why would they continue this when the government says they’ll share the load with employers at 2% each if you put 4% into your pension? So to those who are saving through an employer pension scheme, this will reduce the overall amount being put aside for your retirement

While it seems that some employers can save money by reducing the amount they have to put into employees’ pensions, any employers not already doing so will be required to pay into them. This will increase the labour cost in our already uncompetitive economy, and will be a further burden on small & medium sized businesses (on top of tax and social contributions).

As well as all this, the government say they’ll contribute an amount equal to 2% of the employee’s salary to the pension scheme. Dare we ask where the government will get the money to make these contributions going forward? Will it be another case of money going to the National Pension Fund, which is then plundered for political requirements (eg. bailing out insolvent banks)? Will the money actually be there when it comes to retirement time? If the government are to meet these future obligations, the most likely method is tax increases - eg. a 2% increase on income tax will cover it, but it just means you’re putting 6% of your salary into your pension and your employer is putting in 2%. And, while the government probably won’t be as blatant as an income tax increase, the tax increases will come in somewhere, and you’ll end up paying for it in some way.

So, what a great deal our nanny-state has come up with for us! Auto-enrol us every two years into a scheme where we pay 4% of our salary in fees to some financial “guru”, pay an extra 2% in taxes and your employer must also contribute an amount equal to 2% of your salary to the financial “guru”. Hopefully, some of this money will make it into a retirement account earning some miniscule percentage so that, when you retire, you can supplement the measly government pension with a further measly amount from your “mandatory” supplementary pension.

But, on the bright side, at least the pension fund managers will have a nice comfortable life and a happy retirement with your money!

I just e-mailed the below to the five TDs representing my constiuency (Limerick East). I suggest anyone opposed to the NAMA legislation do similar. We need to voice our opposition to those charged with representing us.

The below may be used in full, or in part, by anyone wishing to contact their TDs. You can find a list of all TDs email addresses here.

Dear Sir / Madam,

As a resident of your constituency, I’m writing to ask you to oppose the forthcoming vote on the National Asset Management Agency (NAMA) legislation. I believe this legislation is bad for Ireland and the Irish taxpayer, and will end up costing us more than we will gain from it.

NAMA is to be charged with relieving the banks of this country of the impaired loans they are holding, in the hope that this will allow the banks to recommence lending to businesses and consumers. Unfortunately, this is based on assumptions that I believe will not unfold as the Government expects.

Firstly, in purchasing the impaired loans, a price will have to be agreed. It has already been stated that NAMA will purchase the loans at above-market prices. However, the market for the properties has collapsed, meaning finding the current market price is difficult enough, without trying to estimate a future value for the assets. Since prices haven’t yet stabilised, current market prices are likely to be biased towards the inflated valuations of the last number of years, without giving full consideration to the (very likely) scenario where valuations fall below a fair value before recovering to a fair market price. The amount paid for impaired loans can only have one winner - either NAMA purchases the loans at a discount, allowing it to profit from the sale of the assets; or, NAMA purchases the loans at a premium, allowing the banks to minimise their losses (or possibly make a profit) but increasing the loss incurred by NAMA and the Irish state.

Secondly, the assumption that banks will recommence a similar degree of lending as that leading to the property bubble is nothing but a dream. The banks caused their current grief by not adequately vetting borrowers before lending them money. This goes for both business and consumer lending. Does the Government really think that, once freed of their current basket of impaired loans, the banks will swiftly commence populating a new basket?

Lastly, with rock bottom interest rates being held by central banks, and quantitative easing occuring globally, inflation, possibly hyper-inflation, is just around the corner. We are meant to believe that the leaders of our various fiat currencies are connected enough to see the inflation coming and quickly stamp on it before it gets out of hand. I, personally, see much higher inflation rates before the excess liquidity is absorbed back into the central banks. This will only serve to give the illusion of profit in the NAMA portfolio, since our media report only the simple “facts” of economic situations. In fact, we will have lost money on these assets due to the erosion of the purchasing power of our money through inflation. This simplified situation doesn’t even consider the cost of running NAMA.

The major correction currently underway consists of two parts. First, over-indebted people are reducing their debt load; and second, house prices are returning to a fair value. Over the last 10 years it became increasingly more difficult for the average person or family to purchase their average home. This could not continue forever. And, because people are now spending less, the consumer economy is contracting, causing job losses. This enters an infinite loop of spending decreases, job losses and debt defaults which will not be fixed quickly. This problem has to work itself out. By preventing the necessary business closures and bankruptcies (through legislation like NAMA), we are only prolonging the pain and pushing the recovery date out further.

I hope the above gives you some food for thought. Please don’t accept the Government’s estimates at face value. Rather, look at the overall trends, and notice that NAMA can only be a good deal for the Irish taxpayer if the loans are purchased now at a steep discount.

Regards,

John Madden.

I read a lot of news articles, blogs and email newsletters relating to the economy and investing. Recently, Ireland has been mentioned more and more often. The general opinion outside of Ireland seems to be that we’re balancing on the edge of a cliff, and looking more likely to fall off than regain our balance.

Everyone has heard about the banking system collapse in Iceland, followed by protests and riots, the demise of the country’s currency and eventually the dissolution of its government. You’d think Ireland must be in a better position than this - after all, we’ve yet to even have the public services go on strike! But, as it turns out, Iceland’s estimated 2008 current account deficit is $3.25 billion; Ireland’s is over $8.6 billion (information taken from the CIA Rank Order - Current account balance). Out of a total of 188 countries ranked, Ireland comes in in 167th place.

So far in 2009 we’ve seen Anglo Irish Bank nationalised, followed by a spate of controversy over concealed director’s loans and loans to investors from Anglo Irish used to purchase shares of Anglo Irish. Whatever about the controversy, this piles another huge amount of debt onto the Irish current account, pushing our deficit even further. Following this, we’ve seen downgrades of Irish bank debt (eg. Irish Life & Permanent), further recapitalisation of Bank of Ireland and AIB and a letter from the former chairman of Nationwide Building Society saying the institution cannot survive without Government support.

On top of this, the European Commission has criticised the Government’s recovery plan, calling it too optimistic and saying it lacks clarity. The commission is recommending that Ireland face excessive deficit procedures, which amounts to a kind of peer pressure imposed by the rest of the EU on Ireland to sort out its balooning deficit. The two largest economies in the EU, France and Germany, believe they may need to bail out some of the smaller more “cash-strapped” members (one of those being Ireland).

What got us here, I believe, can not just be blamed on the worldwide credit bubble which built up after the dot-com crash. I believe blame lies also with a loose fiscal policy by the ECB coupled with a greedy Government that did nothing to subdue a rampant housing market. As well as this, the money the Government made from allowing this boom to continue was wasted (eg. Electronic Voting Machines, among other half-baked badly researched plans), and now when we need it, we don’t have it.

In the last few days I saw another article about Bank of Ireland offering low rates for the first year for first time buyers. Though not specifically stated in this article, I believe this decision was influenced by the agreement on the €7 billion bailout agreed with the Government. What happens after the first year, when the interest rate “would increase by a minimum of 75 basis points”? What happens over the next few years as inflation really takes hold, and we see interest rates above 5 and 6 percent? It looks to me like we’re just setting up the next round of foreclosures. After all, in America they called these “Alt-A Mortgages”. You get reeled in by the attractive rate for the first year or two, then get hit with much higher payments when the interest rates reset. We’d be better off leaving the market to decide a more appropriate price for our houses than trying to sustain a level of pricing above fair value by attracting people into the market. Anyone considering buying a new house should feel confident that they’ve paid a fair price for what they got and ignore what it was worth at the peak of the market. Just because you got something for half the price it used to be doesn’t mean you got a good deal!

I also believe that the bank rescues are a bad deal for taxpayers. Our Government has already shown that it can’t manage money well, by wasting billions of euro over the last 10 years. What makes them think they can run a profitable bank? And, of course, if they can’t (that should be when they can’t), it’s the taxpayer who has to support it. The banks should be let fail, and the viable parts sold off to pay off some of the bondholders. The shareholders and bondholders knew, or should have known, the risk they were taking in buying the shares and bonds. They should have to realise the loss from their bad investment decision, not be supported by taxpayers.

As a last point on this, I think the Government’s method of trying to recoup some money by imposing a pension levy on public service workers is unfair. The public service in Ireland, by and large, is badly run. The proper levels of accountability are not present, allowing people to get a “job-for-life” in the public sector, and do very little work. I believe if there was proper accountability, from the level of minister down to desk-jockey, we’d have a better run and cheaper public service. I do believe that the public service pension is a huge bonus (I heard figures quoted to say a private sector employee would pay 25% of their pay for a similar pension plan) and should either be taxed or removed, but the way the Government is implementing this now is wrong. They’d be better off to reduce numbers and improve productivity in the public sector. The pension levy can then be included in future employment contracts, and can be made sustainable through the contributions of those who will be receiving it.

This rant has been building for a while - apologies for the length of this post! If you have any comments on it, email them to me. I’ll update the post with any comments I receive.

Today, Bloxham Stockbrokers released 10 policy options for the Irish government to “protect the domestic economy while positioning Ireland for future sustainable growth”.

While I agree with most of them, points 1 through 3 I don’t agree with. These are

1. Cut taxes. (only way to boost consumer confidence is through increased disposable income)
2. Restore confidence in the housing market. (cut stamp duty further)
3. Remove the logjam in the banking system. (get NTMA to fund cheaper mortgages)

These three points focus on trying to sustain, and further inflate, an unsustainable bubble. The economic growth of the last number of years has been built on cheap and accessible credit, and on everyone spending themselves into large amounts of debt.

Bloxham want to give consumers more disposable income, in the hope that it’ll trigger them back into a spending spree. The US tried this with a tax rebate, and it hasn’t reignited their economy. I think, however, that the recent economic downturn will prompt people to be more prudent with their money. I suspect many of them would use it to pay down debt, and I doubt it would prompt people back into a debt-fuelled spending frenzy.

When Bloxham talk above about restoring confidence in the housing market, what they’re really saying is to give potential house buyers more money now so they pay elevated prices for property. The housing market in Ireland, as in the US, Spain, the UK and elsewhere, is deflating. Trying to keep house prices artificially high by enticing people to buy now will only serve to prolong the pain. House prices need to fall to more reasonable levels before people will have the confidence to buy into the market again.

The last point above, having the National Treasury Management Agency fund mortgages, will only serve to increase the national debt and leave Irish tax payers covering the defaults. There’s good reason why people can’t get large mortgages - the lender doesn’t think they can repay it. Over the last number of years, mortgages were given out to people without their income being properly stress tested. Banks are now imposing more stringent checks before handing out the cash. By making mortgages easier to get, these checks would become more lax, and we’d end up with the same problem we have now in another few years time.

Luckily, the rest of Bloxham’s points should serve to strengthen our economic position. I’m not sure if selling state assets to cover current expenses is a great idea, but since they didn’t expand too much on the points, I’m not sure if this was their intention.

Last Thursday, June 12th 2008, the Irish people voted on the Lisbon Treaty. The outcome was 46.6% in favour of ratification, and 53.4% against. What this means for Ireland and the EU is yet to be seen.

I believe the primary reason behind the “No” vote victory is down to the complete lack of transparency in the treaty. It’s 287 pages of legal babble! Combine this with the “Yes” camps ineffectiveness in explaining the issues clearly and concisely, and the majority voted to maintain the status quo.

I voted no because, despite spending time trying to completely understand the issues, I could not get a complete picture of what the ratification of this treaty would mean for me, for Ireland and for Europe. The “Yes” camp spouted crap about “Good for Ireland; Good for Europe” while the “No” camp threw out paranoid arguments about losing our neutrality and legalising abortion. Neither focussed on the treaty and explained its benefits or drawbacks.

My previous post on this topic focussed on the economic consequences of giving the EU control over our taxation. On reading further on the treaty, taxation is still to require unanimous agreement for changes, meaning Ireland should be able veto any attempt at altering our tax rates.

Whether or not my no vote was correct based on the contents of the treaty is still debatable. However, I believe it was correct as a message to our government (who all bar one party supported a “Yes” vote) and to Brussels that, if you want to pass legislation to govern people, then the people should be able to understand that legislation. Brussels legalese should be scrapped and simpler language should be used instead.

I’ve just read up on some of the Lisbon treaty. Ireland are the only country in Europe that will be holding a referendum on this treaty. It’s due to take place on the 12th of June.

One major issue I have with this treaty is giving the EU power to set our taxation levels.

The European Central Bank (ECB) already controls our money supply and interest rates, as it does for all countries in the euro zone. Currently, inflation in the euro zone is at 3.6%. However, inflation in Ireland is currently at 5%. Our economy is not tightly linked to that of mainland Europe.

We’ve lost control of our money supply, by joining the euro. It essentially leaves us with taxation to attempt to control money circulating in our economy. I know taxation is a very political issue, and is only altered once a year during the government’s annual budget. But, increasing tax will reduce money circulation, reducing tax will increase it.

A topical example to illustrate this : if the government were to increase tax on petrol and diesel, it could aid in reducing inflation. Initially, it would cause an increase in inflation, but as people felt the pinch, they’d use cars less, buy less fuel and, over the medium to long term, lead to a reduction in inflation.

I, personally, would not like to see the last semblance of monetary control we have handed over to Europe.

The Irish Minister for Finance, Brian Cowen, yesterday revealed his 2008 government budget. In general, it’s nothing surprising - he hasn’t undertaken anything really major.

I’m glad to see the National Development Plan is being prioritised. Irish infrastructure is woefully inadequate for the current population, and its improvement will be paramount to attracting future investment in business here.

Another reform I’m glad to see is that of stamp duty. However, this reform really is a year too late, and should’ve been tackled at the start of the slowdown in the housing market. As it is, it’s a welcome reform, but, combined with uncertainties in the financial markets and the likelihood of further euro zone interest rate hikes to keep inflation under control, it’s not going to vitalise the housing market. It will remain stagnant until sellers and developers realise that they can’t sell their houses at the high prices of recent years, cut those prices to move the stock, and get the market breathing again.

On the income tax side of things nothing great was done. Tax credits have been increased, tax bands have been widened - all the usual stuff really to deal with inflation. Essentially, for most working people, this budget represents a net loss due to the hefty increase in motor tax.

Another essential item has been overlooked again though, and that’s to encourage R&D. Without attracting R&D, Ireland cannot proceed to the knowledge based economy that we have to achieve. The government needs to attract businesses into the country for R&D, which requires an available skilled workforce (ie. investment in education), relatively easy immigration procedures for skilled people wishing to move to Ireland and better tax incentives for both businesses and employees than other countries looking to do the same! I think investment in university research programmes should be increased heavily to attract people into doing research. Also, further investment and tax breaks for companies formed out of university research would help create more highly skilled jobs, and keep our economy going forward. Without this, we’re going to fall behind as an overpriced manufacturing economy, multi-national business will go to cheaper countries and indigenous startups won’t get the support they need to get from an idea to a productive company.

So, overall, the major reform is late and the rest of the changes are nothing spectacular. We’re depending on the National Development Plan and Education investment for our future economic well-being, so let’s hope it’s enough.

Aer Lingus, Ireland’s recently privatised national airline, has decided to drop a route between Shannon airport in the southwest of Ireland and Heathrow airport in London. It argues that a route between Belfast airport, in the northeast of the island in Northern Ireland, and London Heathrow would be more profitable.

As a private company, it is now answerable to its shareholders, and no longer to the Irish government (excepting that the Irish government is a shareholder). As a resident of Limerick, I’m sure the removal of a Shannon - Heathrow route will affect tourism and business in the area. However, this leaves an opening for another airline to fill this profitable route.

The latest twist in this tale is that Aer Lingus pilots are going to strike for two days next week. They’re unhappy that Aer Lingus will be hiring staff under different terms and conditions in Northern Ireland as those under which they hire pilots in the Republic of Ireland. There was mention also on the news this evening that Aer Lingus want pilots that they currently employ to re-apply for their jobs when Aer Lingus move to Belfast.

Whatever case the unions think they have, I do not think they have any right to force their employer to use the same employment conditions across country boundries.

Lately, when the trade unions have made it into news reports, it looks more like they’re trying to prove they’re worth the subscription fees than actually fighting any just fight. The case here is the same. The pilots’ trade union has no jurisdiction in Northern Ireland, but they’re trying to force Aer Lingus to use the terms and conditions agreed for the pilots Aer Lingus hired in the Republic of Ireland for the pilots they plan to hire in Northern Ireland. And, to do this, they’re upsetting the travel plans of 50,000 people due to travel with Aer Lingus next Wednesday and Thursday.

Basically, I understand the requirement for trade unions under unfair employment regimes. However, these employees are being treated and paid well. The unions have become too powerful, and are simply wielding strike threats to force the hand of employers to do what they want. Often times this is looking for large pay increases or reduced working hours (or both, like the nurses!). Now they’re trying to force employers to deal with staff in other countries under their terms and conditions.

It’s gone too far. In my opinion, trade unions in Ireland aren’t worth the money. Take your subscription fees, save for a while and take a holiday or something! Just don’t allow these institutions to wield this power for no good reason.

The count is in, the seats are filled, and all that’s left is for the government to be formed. The official tally at the end was

• Fianna Fáil 78 seats
• Fine Gael 51 seats
• Labour 20 seats
• Progressive Democrats 2 seats
• Green Party 6 seats
• Sinn Féin 4 seats
• Independents 5 seats

So, once again, it looks like the majority of the country have turned to Fianna Fáil for government, though why I cannot fathom. What remains to be seen in the short term is who they will go into government with, and over their next five years in power, how they will deal with the increasing problems in the country, and the economic slow down which has started.

What is heartening though is that nearly half the country voted against the outgoing government and voted for the alliance of Fine Gael and Labour. If nothing else, it’s a positive indication for the next election, if they can hold that momentum.

The major questions I see for Ireland going forward are initially the health system and infrastructure, and longer term how to increase the knowledge base in the country and attract and fill high worth jobs.

The health system is currently under a lot of pressure. Ireland has seen a massive amount of immigration over the last number of years, and this has increased demand for hospital beds and for A&E services. Neither the nurses nor the consultants are happy with their lot, and both have undergone industrial action in the last couple of months. They aren’t happy with their work conditions or with facilities. The Progressive Democrats, whose previous leader, Mary Harney, was the Minister for Health, want to apply a quick fix and allow private hospitals to be set up on public land, co-located with public hospitals. They claim this will quickly free up 1,000 beds in public hospitals, and will essentially be the same situation as we have now, where a certain percentage of beds in public hospitals are given to private patients. However, this doesn’t take into account staffing of both hospitals side by side, and the increased distinction between those who can afford health care and those who rely on the public system. This division is already there, but private co-located hospitals would certainly increase the visibility of it, and I’d hazard a guess that working in the private hospitals would probably have better conditions and pay than the public ones, eventually leading to a more Americanised system where the wealthy get the best care and the underpriviledged fight for the scraps left over.

The infrastructure in the country is slowly improving, but is still (in my opinion) very Dublin focussed. Even the new motorways being built at the moment are between Dublin and somewhere else (eg. Galway - Dublin, Limerick - Dublin and Cork - Dublin). What we need is increased development of the infrastructure around the other cities, ports and airports in the country to entice a better spread of industry across the country. What would result from this is a slowdown, and possibly a reversal of the overpopulation of the Dublin area, and all the problems it has brought with it.

What also needs to be dealt with is the provision of local services in the areas where large housing estates have cropped up over the past number of years, but where services weren’t required alongside them. So, schools, recreational facilities and planning for retail outlets all needs to be looked at.

Lastly, since Ireland has become an increasingly expensive place to do business, the government needs to work on upskilling a large proportion of the workforce in order to attract the high worth jobs which our “knowledge based” economy will require to keep going. This means increased funding for FÁS and other such organisations, incentives to employees and employers to upskill themselves and their staff, increased funding for research in universities and companies and a concerted effort to attract research and development jobs into Ireland.

So, it remains to be seen what parties will make up our next government, but at least in five years time, we can look back on this post and decide if the government that was formed managed to keep the country going forward, or if we’re in the same state again!

I just read this article titled “Call for improved infrastructure for Dublin”. In general, I would agree that the infrastructure across the enitre country does need improvement and extending.

But, in the article are the following two paragraphs

The chamber says there is an anti-Dublin bias in Government funding.

It says, because it provides half of all national output, the greater Dublin area should get half of the country’s capital investment under the National Development Plan.

This quote is attributed to the Dublin Chamber of Commerce.

In recent years Dublin has gotten both the Luas and the Port Tunnel. It has the only two commuter light-rail services in the country (the Dart and the Luas), and plans are underway to install a metro service also. It has the most extensive commuter bus network in the country, it is the primary railway hub, has the central bus station and has hundreds of kilometers of motorway leading into, and around, the city.

Meanwhile, the rest of the country has had to put up with substandard national roads, under-equipped and not very punctual commuter bus services and pathetic commuter rail services. Yet, there is an “anti-Dublin bias” in the Government.

If there was as much investment in the infrastructure of the rest of the country, then Dublin wouldn’t need “half the country’s capital investment” because businesses would have other choices on where to locate. By focussing infrastructure investment on Dublin, you are only increasing the scale of the problem. The better Dublin’s infrastructure becomes, then the more likely businesses are to locate in the area rather than elsewhere in the country. This causes the knock-on effect of requiring yet greater infrastructure to cope with the increased traffic. And so the cycle continues, to the detriment of the rest of the country.

Obviously, Dublin’s infrastructure isn’t perfect - in fact, it’s far from it. It will require investment and updating. However, if the Government put more emphasis on relocating, and attracting, businesses to other areas of the country, it would take some of the strain off the Dublin infrastructure. This would allow a gradual upgrading of the infrastructure around Dublin to meet its requirements while increasing jobs and productivity elsewhere in the country. This would then have a knock-on effect of improving the infrastructure around other cities in Ireland, and eventually lead to a somewhat decent country-wide infrastructure for commuter, pleasure and business travel.

Now, if you’ll excuse me, I’ve got a flying pig to catch for breakfast!