Perhaps the least fashionable policy idea at the moment, apart from mandatory bankers’ bonuses, is “light touch” regulation. To quote from an international source (BWCS): “Light touch regulation is dead. It was a bad idea from the start and deserves to be buried.” Closer to home, a post on Public Inquiry highlights “a light touch regulatory regime – as little red tape as possible” as on a par with Charlie Haughey as items of ridicule in a PD policy paper from 2006.

Developing countries, however, don’t seem to be getting the message. Since the start of the recession, Rwanda, for example, which seems hell-bent on developing its business environment and its attractiveness as an investment location, slashed the number of procedures required for starting a business from 8 to 2 and reduced associated costs by over 90%. It also took numerous other “light touch” steps, such as reducing the number of days to register property by 75%. As a result, its World Bank Doing Business rank improved by 76 places globally in one year, to 67th in the 2010 rankings. It’s now in the top five locations for doing business in sub-Saharan Africa, a table headed by the relatively prosperous  countries of Mauritius and South Africa.

What this shows is how a concept – efficient regulation, i.e. doing the job required for the minimum fuss necessary – gets abused and twisted to mean something completely different, i.e. doing the job badly. It was twisted by one set of vested interests in the run-up to the recession: “You don’t need to regulate us. Sure, isn’t everyone going light touch now? We know what we’re doing.” It is now being twisted by those of a certain ideological persuasion and those who fear the changes that may result from greater transparency and efficiency: “Efficient regulation? Sure that was the problem all along. We need strong government and strong regulation.”

The danger is that, with “strong regulation” so much en vogue, and with the public baying for blood, governments will confuse efficient regulation with bad regulation and decide that “strong regulation” is the way forward. Governments need to set the objectives of regulation first and then work backwards from there to find out the least costly way of achieving the goals of regulation. Much of the problem of the financial crisis was that the regulation was not “light touch”, it was simply bad regulation. A good regulatory system means that everyone can act as much in their own interest as they’d like, and the economy and society benefit. That is certainly not the economic system that prevailed in the 2000s.

From a competitiveness point of view, but also from the point of preventing needless waste of time and money, governments must remember that regulation can be both strong (i.e. regulate what needs to be regulated) and efficient (i.e. as little red tape as possible) at the same time. Fortunately, the European Commission is keeping “light touch” regulation on the agenda, despite the political whims of the recession, as a report published last month by the CSO on their compliance with “Better Regulation” shows. In the words of the Commission:

Administrative costs are important since businesses across the EU are required to spend considerable amounts of time filling in forms and reporting on a wide range of issues. By reducing unnecessary reporting requirements company employees can spend more time on core business activities which may reduce production costs and allow additional investment and innovation activities to materialise, which in turn should improve productivity and overall competitiveness.

In plain English, this comes down to freeing up people from filling out forms so they can do things of real value.

Four years ago, based on a Dutch and British methodology which looks at how real businesses spend their time, the European Commission produced estimates of the “administrative costs” that exist in each member state, as a percentage of the total economy. It also produced ballpark figures for the kind of economic stimulus that would occur if governments, including the Commission, reduced their “administrative burden” by 25%, through “cutting red tape”. The graph below shows these costs – and this economic stimulus – for different EU countries.

The cost of red tape, and the economic boost from reducing it 25%, by country (% of GDP)

It varies from country to country. As one might expect, economies that have had to work with more businesses over the years have less inefficient regulation than other economies (compare the UK and Sweden to Greece or Portugal). But the economic benefits of a 25% reduction in red tape – changing not what regulation aims to do but how it’s done – are substantial for all economies.

The annual economic stimulus for the whole EU from this step towards “light touch” regulation is estimated to be about €150bn… that’s the equivalent of adding another economy about the size of Ireland! Unfashionable as it may be, perhaps we should be  looking to “light touch” regulation to kickstart the economy. Put antoher way, “light touch” regulation was not part of the problem and it’s actually part of the solution.

Below is a slightly extended and revised version of the op-ed piece I had in yesterday’s Sunday Independent.

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Almost two years into the rescue of our financial system, and practically all the analysis of NAMA and the bank bailout so far has been about monetary, rather than real economy, aspects of the rescue of our financial system – for example, the total amount of money being given to the banks or the percentage “haircuts” on NAMA-bound loans. Just this week, there was huge focus globally on whether the amount Ireland is borrowing for the bank bailout is sustainable, given the Government is already overspending by €20bn a year in its day-to-day expenditure. This focus on money matters is understandable, not only because it’s our money as taxpayers that’s being spent but also because the original purpose of NAMA and the broader bank bailout was to save our financial system, not the wider economy.

At some point, though, the focus will have to turn to the potentially huge issue of NAMA’s impact on the wider economy. Very little has been said about what economists would call the “real economy” effects of NAMA and the bank bailout. Over the past few months, however, we have begun to see the first signs, with developments at Quinn Insurance and Arnotts and, just last week, the worries expressed by Ireland’s hoteliers about the effect of NAMA on their industry. The upcoming court case between NAMA and Paddy McKillen is, at least in part, about the same thing.

Essentially it comes down to what NAMA is all about. When NAMA was set up, it had just one goal – repairing Ireland’s financial system. However, it has failed dismally, as the huge amounts having to be pumped into all the Irish banks above and beyond NAMA show. With NAMA 1.0 a failure, NAMA 2.0 has its own singular goal: to not make a loss under any circumstances. On the face of it, this doesn’t sound like the worst outcome from the taxpayer’s point of view. If you told the man on the street that NAMA was going to pay €40bn plus interest, and over the next decade recoup that money, he would probably take it. However, lettting an organisation as large as NAMA loose in the Irish economy with no other aim than to break even will have huge consequences for the “real economy”, away from the balance sheets and haircuts. Over the coming decade, we will see this time and again across a range of markets.

The most direct impact that NAMA will have on the real economy will be on the property market. NAMA will have what EU competition law would most likely describe as a dominant market position in the Irish property market – not quite a monopoly but still wielding huge market power.

Consider commercial property. NAMA is taking on loans with underlying commercial property in Ireland worth about €8bn at the peak. Property services firm CBRE estimates that the entire value of all commercial property transactions in Ireland in the decade 2001-2010 was only about €11bn, and the bulk of that was during 2005-2007, a time of vastly inflated prices. The graph below shows the annual transactions in commercial investment properties in Ireland from 2001 to 2010, based on CBRE figures. It also shows an approximate level of transactions that NAMA alone would have to bring about if it wanted to shift its loans by 2020, for two price levels the peak (approximately) and 65% below the peak. Even at 65% below, NAMA will be effectively flooding the market each and every year until 2020.

A comparison of the boom-time commercial investment market and what NAMA will have to shift over the coming decade

Remember that it’s the aim of NAMA to wind itself down within a decade. This means that it could find itself flooding the commercial property market – and indeed the markets for development land and residential property – each and every year for the next decade. What role for the private sector, and the jobs it supports, in a country where you have a multi-billion euro property monster loose?

There are wider implications than just the property market, though. How NAMA operates will have repercussions in the jobs market also. The argument made last week by hoteliers is a case in point. Their point was that zombie hotels which were completely unviable and should never have been built are currently being propped up by banks and that NAMA will sustain these businesses at the expense of more established hotels.

This may be just the tip of the iceberg. The upcoming court case between NAMA and Paddy McKillen needs to be closely watched. One of McKillen’s arguments is that, in a normal financial system, he would now be extending his Wagamama and Captain America franchise further, as profitable recession-proof businesses. This could potentially create hundreds of jobs around the country.

However, “NAMA 2.0” is only concerned about one thing – not making a loss. It views assets such as McKillen’s, which are mostly outside Ireland and performing, as excellent sources of revenue in its early years. NAMA is not interested in talk about new ventures and new jobs. Therefore, the banks are not interested in new business plans as this just muddies the waters with NAMA. It is telling that the recently opened McKillen franchises in the Blanchardstown Centre were done without the support of Ireland’s financial system.

As the decade unwinds, this type of story will happen again and again, unless we change what NAMA is set up to achieve. In its current guise, its only goal is to not make a loss and we are therefore effectively pretending that NAMA will not have any impact on the real economy. Such a pretence may be politically expedient now, as the Government prepares for an election within the next 18 months or so and would love to show NAMA bringing in cash when it goes for re-election. But the new Government, whichever parties it comprises, will not have the same option.

There are many beneficial wider economic effects that NAMA could have, if put to the benefit of the Irish people. For example, owning so much land that is otherwise useless, it could become a significant generator of renewable energy, through windfarms or biofuels. Alternatively, in control of so much empty commercial and residential property, NAMA could play a huge role – along with IDA Ireland and Enterprise Ireland – in using very cheap accommodation for workers and for business to attract foreign business and develop local business.

These are just two examples – there are surely many more. I’d welcome your thoughts in the comments below. But we can only exploit these opportunities if we change NAMA from the break-even monster we’ve created.

Last Thursday, the day after Leaving Cert results came out, the latest Daft Rental Report was released. The full report including a commentary by Gary Redmond, President of USI, is available over on daft, but to me, there were five interesting things that came out of the report:

1. Accommodation costs for new and returning students vary significantly across the country. Page 5 of the report outlines the current costs faced by students in the markets close to all major universities and ITs. A double room ranges in cost from €500 a month in Dublin city centre to €220 a month in Letterkenny. Similarly a three-bed house in Dublin city centre costs €1,500 a month compared to €600 a month or less outside the major cities.
2. There is plenty of good news for landlords, as rents barely budged in the second quarter of the year. The average rent in the second quarter was just 0.9% lower than in the first quarter, making it the second period in a row of essentially stable rents. A year previously, the equivalent figure had been 5.4%, so assuming no “double dip”, the rental market is close to stabilisation.
3. In a healthy market, the quarter on quarter change is less relevant than the annual change, because of seasonal ups and downs (and because people tend to rent in 12 month installments). Since late 2007, it’s been all one-way though, hence the focus on quarter-on-quarter recently. But recent stabilisation means we can start looking at the year-on-year change in rents again – at -7%, rents are definitely still be reviewed when renewed but it’s the slowest rate of falls in rents since late 2008.
4. This review of rents is most definitely good news for students, because it’s the third year in a row that students start their hunt for accommodation knowing rents are lower than the previous year. Those who will appreciate this best are those who rented in the 2007/08 academic year. Over the course of the coming academic year, students around the country could save between €1,500 and €4,000, compared with 2007/08 costs.
5. Due to oversupply, however, the rental market remains fragile. Ultimately the rental market – like any – is about supply and demand. Supply remains high – 20,000 units were available to rent across the country on August 1. I don’t believe for a minute that this has to return to pre-2007 levels (5,000) for the market to stabilise. But if rents are to stabilise – and this is the first part of a return to normality for house prices too, remember – supply and demand have to balance. Currently, the market is processing around 14,000 units a month. This suggests there’s still an overhang but where this oversupply is may be mismatched compared to where demand is. In Dublin, for example, the 6,000 units available to rent is very close to monthly demand but in other parts, the gap is much bigger.

Over on Manyeyes, I’ve mapped the change in rents over the last three years at a county level. I’ve also put in a live visualisation below. Give it a try if you can – for example, by clicking two maps (not one) and choosing to align map scales, you can map 2007 and 2010 rents by county. You’ll see, for example, that rents in Dublin’s most expensive commuter county, Wicklow, are now below what they were in Dublin’s cheapest commuter county, Louth, in 2007:

Another thing to check out in the visualisation is the fall in rents. Even using percentages rather than euro amounts, urban areas (specifically Cork and the greater Dublin area) still look to have fallen the most. Given that these were the most expensive areas, it could very well be the case that “the bigger they are, the harder they fall”.

However, there is an alternative explanation. The greater reduction in these areas has coincided with a better matching of supply and demand. It might just be the case that the larger rental markets (in volume terms) have been able to find a new sustainable level of rents faster.

The next 12 months will probably tell us which of these explanations is more correct. If it does, it may have significant implications for what our expectations should be about prices in the sales segment, where a similar pattern is emerging.

This article originally appeared in Sunday’s Business Post and is a joint effort with Professor Brian Lucey of the Business School in Trinity College.

The EU has approved a further injection of taxpayers’ money into additional capital for Anglo Irish Bank. This brings the total now to almost €25 billion. This is money going into a bank that will essentially be in wind down over the coming decade, money that the Irish citizens and taxpayers will not see again, as it is shoring up the balance sheet of a bank that had too much imaginary wealth. Many fear that is not the end of the money.

So just how much is €25 billion that we are having to borrow for Anglo? In one way, it’s small change, compared to what will possibly be €200 billion in borrowings by the state to fund the non-banking deficit between the onset of the crisis and 2020. But to any rational mind, €25 billion is still a mind-bogglingly large amount.

The state has borrowing capacity limited to what the taxpayer can repay. In putting €25 billion into Anglo, the government, on our behalf, has spent money that cannot be used for other projects. Here are 100 other ways to spend €25 billion.

Ireland could make a major contribution to fight global poverty:

€25bn against global poverty

100 Buy enough malaria nets to protect the entire malaria-affected population of the world (half a billion people) for 80 years
99 Fund the World Food Programme for five years
98 Repair – twice over – the damage done to Haiti in last January’s earthquake
97 Fund enough clean water and infrastructure projects to meet the Millennium Development Goals in those areas
96 Buy up and extinguish the national debt of Bangladesh
95 Fund the Unesco ‘Information for All’ project for 1,200 years
94 Provide food aid to Niger for 1,000 years
93 Asphalt every trunk and regional road (110,000km) of substandard countries in sub-Saharan Africa

Ireland could become a world science and technology hub:

€25bn on science and technology

92 Start our own space programme, with 20 €1.2 billion space shuttles
91 Foot the bill for a century of global research into nuclear fusion (the current 30-year global ITER project is expected to cost between €5 billion and €10 billion)
90 Research and develop 5,000 new drugs . . . one of them’s bound to be useful
89 Construct six Large Hadron Colliders, one for each Green Party TD
88 Build five James Webb Space Telescopes (the successor to Hubble) and revolutionise astronomy
87 Build two magnetoplasma space vehicles which, in theory, could get to Mars in 40 days
86 Build a space elevator (also known as  Sky Hook!)
85 Build two ITER nuclear fusion reactors and provide the world with cheap, abundant energy

We could decide to give ourselves a break:

84 Pay the interest on everyone’s mortgage for four years (€147 billion of mortgages at 4 per cent is €5.88 billion a year)
83 Abolish income tax for two years (based on 2009 government income tax receipts of €11.8 billion)
82 Offer everyone on the Live Tegister €100,000 to emigrate (we could afford a 50 per cent take-up by the 466,000 on the dole)
81 Abolish VAT for two and a half years (based on 2009 receipts of €10.8 billion)
80 Remove excise duty from fuel, tobacco and alcohol until 2015 (based on exise receipts of €4.7 billion a year)
79 Pay the grocery bills of everybody in the country for 2.5 years
78 Scrap fares on all forms of public transport, intercity and commuter trains and buses for 33 years

We could treat ourselves:

€25bn on black!

77 Run the world’s best ever lottery – every Irish citizens is entered into a draw where 25,000 people become millionaires
76 Give every OAP a pension of €55,000 for a year
75 Fly the adult population of Ireland to Las Vegas, and give everyone €10,000 to gamble with
74 Give every person in the country €5,555.56
73 Buy half a million eco-friendly Nissan Leaf cars and have enough for a 5GW nuclear power station with the cash left over
72 Provide a new laptop every year to every second-level student for 147 years
71 Buy a 32GB iPhone, a 64GB iPad, a 13’’ 2.13GHz MacBook Air and a 27inch iMac for every person living in Ireland

We could treat the world – it might make the rest of the world like us more:

€25bn can buy friends

70 Buy 6.7 billion copies (one for everybody in the world) of Joyce’s A Portrait of the Artist as a Young Man
69 Buy a pint of Guinness for everyone in the world to celebrate Arthur’s Day (and it would count as exports)
68 Buy every child in the world a 99 ice-cream cone every day for a week
67 Send every adult in the world on an MSc in Social Media in NCI
66 Send 225,000 people to do the Harvard MBA

We could truly become the world’s biggest sports fans:

€25bn to make us a sporting hub

65 Buy the world’s 20 most valuable football clubs, worth €9.6 billion, wipe out their debt (€2.3 billion) and move them to Ireland, building each a 75,000 seater stadium (€600million each, based on cost of Aviva Stadium)
64 Host two Olympics Games, based on the London 2012 cost of €11.2 billion
63 Buy Tonga and Fiji, which would have obvious rugby advantages
62 Construct 25 Bertie Bowls (one for each county except Dublin)
61 Buy 83,300 McLaren supercars
60 Buy the entire stock of tickets and merchandise for all premier league clubs for the next 12 years

We could decide to become a major player on world markets. Banking and finance got us into this mess. Surely they can get us out . . .

59 Buy €600 billion in credit default swaps on Ireland (could pay off nicely in the next few years)
58 Buy two of Asia’s largest banks – Bank Central Asia and Malayan Banking
57 Recapitalise all the banks in Europe that failed the stress tests
56 Purchase Monsanto, as a present for the Green Party, or buy Nokia as a present for Ivor Callely
55 Give each of the 10,000 most senior bankers a round of golf at Old Head, Kinsale, the most expensive course in Europe, every day for 20 years, and hope that they come up with some ideas
54 Subsidise the US postal service for ten years
53 Allow the Italian government to scrap its three-year austerity plan
52 Pay the salaries of TCD and UCD academics for 100 years

We could just do it because we can . . . ten ways to really spend €25 billion:

€25bn like you've never seen it spent before

51 Buy Steve Jobs (€25 billion is the actuarial value on his life) and get him to work for Ireland Inc
50 Buy gold plating 1.75mm thick for O’Connell Street
49 25,000 carats of red diamond, enough to encrust a Mercedes
48 Build a shed 10km long by 4kmwide and put it around Tullamore
47 Buy every one of the 5.8 million cattle in the country and, to keep their little feet cosy, two pairs of Jimmy Choos each
46 Detach the People’s Republic of Cork from the Republic of Ireland, by constructing a ten-metre wide moat – the per-kilometre cost of the new Gothard Tunnel in Switzerland suggests this may cost €30 billion, but we could haggle them down in a recession
45 Cover the entire county of Dublin a foot deep in corn
44 Hire Bertie Ahern to speak for 95 years
43 Purchase carbon credits to allow us to burn 3,000 square miles of hardwood forest
42 Build 20 copies of the Burj Khalifa Dubai, the world’s tallest building

We could just splash the cash

41 Buy 1,000 luxury yachts to kick-start the Upper Shannon Rural Renewal Scheme (78-footers, 2ndtierRussian oligarch standard)
40 Buy over one third of Denmark, 10 per cent of France or three Luxembourgs, based on 2008 land costs
39 Send 833 people into space (or perhaps just 1,666 one way trips . . . )
38 Stay in the most expensive hotel room in the world for 3,400 years (it’s the Atlantis resort in the Bahamas, in case you were wondering)
37 Build 50 cruise liners akin to Carnival Splendour or Queen Mary 2
36 Make 100 films like Avatar which, remember, made back its money four times over at the box office

€25bn being lavish

35 Buy every TD a Boeing Dreamliner, ideal for those trips to Glenties
34 Purchase 35 of the world’s most expensive mobile phone (goldstriker iPhone 3GS supreme) for every member of the Oireachtas
33 Build four Libraries of Alexandria in each county
32 Endow one university to the level of Harvard
31 Tile Dun Laoghaire-Rathdown in nice porcelain
30 Buy five Nimitz Class nuclear supercarriers to scare the bejaysus out of the Spanish trawlers
29 Or buy 17 Virginia Class nuclear attack submarines, if we wanted to sneak up on the Spanish trawlers instead
28 Supply the water needs of Galway city, for a year . . . with Perrier water
27 Purchase four Birkin Hermes bags for every adult female in the country, one for each season’s wardrobe
26 Buy and install 100 square yards of parquet flooring in every single dwelling in the country
25 Fill the Jack Lynch Tunnel with Midleton Single Cask whiskey
24 Purchase 225,000 kg of the most expensive truffles in the world
23 Buy every house and apartment listed on Daft.ie and still have €12 billion left to refurbish them

We could transport ourselves out of this mess With €25 billion in our back pockets, all those pie-in-the-sky superprojects would no longer be pie in the sky. Here are ten ways Ireland could put itself on the global superproject map:

€25bn on superprojects

22 Construct our own channel tunnel from Rosslare to Pembroke (based on the cost of the Jack Lynch Tunnel)
21 If we didn’t want a tunnel we could build five Oresund-style 20km long bridges (Denmark to Sweden: €5 billion)
20 Build 1,000kmof highspeed rail, serving all major coastal cities on the island (based on recent costs in Spain)
19 Build 11,150miles of dual carriageway
18 Construct a 400-station metro (if we could build it for the cost of Porto’s metro)
17 Start a Maglev train service from Belfast to Cork via Dublin
16 Build our own Three Gorges dam, complete with turbines
15 Build 12 new Luas lines
14 Build just short of two Hong Kong International Airports (€15 billion each)
13 Build 12 New York-style ‘Freedom Towers’ at €2 billion each

We could pay for improved public services – here are some slightly more practical ways to spend €25 billion:

12 Build 75 new 50-teacher schools and run them for 75 years
11 Build 35 children’s hospitals (based on the €700 million cost of a new children’s hospital in Dublin)
10 Pay for an extra 5,000 hospital consultants for 62.5 years, based on the Finnish wage (or for 29 years based on Irish wages)
9 Pay for cervical cancer vaccines for every girl going into first year for the next 8,333 years
8 Reduce the pupil-teacher ratio in primary schools to 1:10 for the next 20 years
7 Give an ultra-high-speed fiberoptic broadband connection to every single house (including those in ghost estates)
6 Buy 8,500 years of private speech and language counselling and really help autistic and speech-problematic children
5 Introduce free pre-schooling for 32 years, based on an average cost of €700 a month for two years of 10 months, for all 110,000 children in the country
4 Make education properly free – the current cost from primary school to degree graduation is €70,000 per child. €25 billion would put nearly 400,000 students through their entire education
3 Give medical cards to everyone for 25 years, based on €500million cost in 2009 to cover 1.5million people
2 Renew and replace the drainage and water systems of all main cities

Or spend it on this... (Image: Ciaran Cuffe)

1 Or we could buy one broken bank. Oh, hang on. . .

* Ronan Lyons and Brian Lucey would like to thank all the dwellers in Twitterland for these and other more unprintable suggestions. Particular thanks to Lorcan Roche-Kelly and CS for good ideas well costed. We are open to more suggestions… feel free to use the comments section below!

For the vast majority of the fifty years since T. K. Whitaker convinced Seán Lemass that Ireland was better off embracing rather than shunning the world economy, Ireland as a whole has been acutely aware that, as a small open economy, whether it thrives or not depends on its ability to sell on world markets. The only time we seem to have forgotten this was in the last days of the Celtic Tiger, when we convinced ourselves we could get rich selling properties to each other.

Now we’re out the other side, where does Ireland’s international competitiveness stand? At this point, many people reach for the latest IMD or WEF rankings. These rankings certainly have their uses. Particularly for countries that do not have comprehensive statistics services, surveying the opinion of executives can usefully highlight strengths and weaknesses. However, for OECD countries in particular, I think the debate can be informed by a much higher level of statistical rigour.

One I pay a lot of attention to is the IBM Global Location Trends Annual Report. The report uses FDI announcements globally to build up a picture of what companies are setting up what operations where, and with how many jobs. The 2009 report reveals that Ireland created more jobs per capita through FDI than any other country in 2008, with 225 jobs per 100,000 people, more than any other country including long-standing FDI rival Singapore and more recent competitors Bulgaria and Slovakia.

The IBM report is very much results-focused. A manager will also want to understand what is driving those results, however. To that end, last month, the National Competitiveness Council published The Costs of Doing Business in Ireland 2010. The aim of the report is to analyse Ireland’s relative cost competitiveness performance across four key business inputs, labour, property, utilities and business services. The NCC’s study is based on analysis of KPMG’s “Competitive Alternatives 2010” report, which looks at seven main cost headings: labour, property, utilities, transport, interest and depreciation, total taxes (net of grants), and location-insensitive costs (e.g. machinery).

For anyone interested in Ireland’s competitiveness, the NCC report is compulsory reading. Here are five things from that report that I think could do with being understood better in public debate:

1. Costs set locally, not globally, are more important now than ever.
2. The cost of utilities like electricity and broadband doesn’t matter as much as you might think.
3. Especially when it comes to services, labour costs really really matter.
4. Of other local costs, property costs matter most.
5. Even with recent taxes levies, Irish workers are well paid.

Locally-determined costs matter a lot

Every set of facts about Ireland’s trading sector, from export statistics to the IBM report above, is telling the same story: Ireland is a services hub. “Servicization” is a global trend, with technology enabling a range of new business activities to be traded internationally. And in the next year or two, Ireland will become the first major economy in the world to have more than half of its exports come from services. (In fact, it has already happened briefly, in the final quarter of 2009.)

Given the growing importance of services for Ireland’s future, the chart of page 17 of the NCC report takes on a greater significance. The chart shows the relative weight of each cost heading across manufacturing, services and R&D operations. In manufacturing, over half of all costs are “location insensitive”, i.e. raw materials or machinery whose price is set on world markets, not locally. In services and R&D, however, barely 10% of costs are “location insensitive”. The vast majority of costs for FDI operations in services and R&D are determined locally.

In a €10m manufacturing operation, if local costs rise 10% over three years, that results in higher costs of about €500,000. In a €10m services operation, 10% higher local costs means a rise of €1m. The importance of our cost competitiveness is becoming amplified.

The cost of utilities doesn’t matter that much

Earlier this week, when the Government announced it was introducing its public service obligation levy on electricity, thereby increasing the price by 5%, there was much talk of how this would cost Ireland jobs. Naturally, lower costs are more attractive than higher ones. But of the four main headings in local costs (labour, transport, property and utilities), based on the mix of FDI that Ireland attacts, utilities matters least.

I’m not saying the higher price of utilities will be good for Ireland’s competitiveness. The cost of utilities is a factor but its importance should not be overstated. The price of utilities matters most in chemicals and even then it is a distant fourth in local costs, after wages, taxes and interest/depreciation.

Labour costs really really matter

Taking into account the whole cost profile, both locally and globally set costs, labour costs make up about one quarter of all costs in the typical manufacturing operation. For services and for R&D, labour costs are three quarters of all costs. At the risk of over-simplification, for Ireland’s cost competitiveness in the 2010s, what level of wages we seek is three times as important as it was during the 1980s and 1990s.

Pages 26-29 of the NCC report compare salary levels in Ireland for various occupations with other countries, from skilled and unskilled production operatives through IT and engineering managers to head of finance. Across all eight occupations, (gross) wages in Ireland are almost always very close to the eurozone average. The more general picture given on page 24 has average labour costs per person in Ireland as 10th highest in the OECD and about 10% above the eurozone average.

Property costs matter

The importance of property costs varies across different types of operation. As a general rule, the KPMG report suggests that property costs form about 5% of all local costs for manufacturing and for services, and about 10% in R&D projects. Over the coming decade, the mix of Ireland’s FDI projects will probably be something in the region of 50% services, 25% R&D and 25% manufacturing. Taking that mix, property becomes the (distant) second most important cost for Ireland’s competitiveness after labour.

Pages 33-35 of the NCC report go through the recent changes in commercial property costs in Ireland and how these costs now compare with other countries. It shows how the adjustment in Ireland’s commercial property market has helped boost our competitiveness in the last three years.

Of all four property costs shown (buy/rent a industrial unit/office), the most relevant for Ireland – given our likely FDI profile – is the cost of renting an office. Rents per square metre were €500 in 2009, a significant fall from the €800 or so in 2006 and 2007. €500 per square metre is not dissimilar to a range of other countries, including Germany, the Netherlands and Spain – and not too far off prime office space in China (about €400). The adjustment in Singapore – from almost €1,000 down to €450 – has been greater than in Ireland, though. It will be interesting to see how 2010 figures – and beyond – compare with those for 2009.

Irish workers are still well paid

Page 24 of the report has one of the most important perspective-giving graphs in the whole report. It is tempting to think, given what we were taking home in pay during the 2000s, that the recent increases in taxes/levies and falls in wages, have turned us into one of the poor-men of Europe. In fact, in 2009, Ireland had the fifth highest net wage in the OECD-28 (i.e. the OECD excluding Mexico and Turkey), with typical earnings more than 35% above the OECD-28 average.

Much as it may make anyone who points it out unpopular, Irish people still enjoy higher than average wages and lower than average taxes.

I’ll finish with a graph. It compares the cost of a hypothetical mix of FDI plants – one half services, one quarter each manufacturing and R&D – in Ireland with the big eurozone four (Germany, France, Spain and Italy). It accounts only for differences in labour, property and utilities costs, as documented in the NCC report and uses headline figures for each. Thus, it’s only meant to be indicative, not authoritative.

I’ve presented two scenarios: one with wage restraint, the other with no increase in the cost of utilities. In “Ireland A”, labour costs grow at 1% a year until 2012, while the cost of utilities grows 5% (the levy mentioned above). In “Ireland B”, there is no levy on electricity but labour costs grow at an average of 3%. (In both, a further fall in office rents of 20% is assumed.) This is set along side the same hypothetical mix of plants in the eurozone four, where labour costs are assumed to grow at an average of 2.5% a year (their recent norm) and property at 3% a year.

Ireland's competitiveness compared: a hypothetical mix of FDI projects

The gap between Ireland and the average of the big eurozone four in 2009 was driven by labour costs. Through wage restraint, this gap could halve in the next couple of years, boosting Ireland’s competitiveness in the age of services-driven FDI. If instead we get distracted on to things of lesser importance for competitiveness, like utilities, the gap could be every bit as big.

Last year, I pointed out an important distinction between public and private sectors. In downturns, the private sector tends to make its adjustment by cutting hours worked, not pay rates. With permanent contracts in place for the vast majority of its staff, Ireland’s public sector is not in a position to do the same. Therefore, when looking to make savings, it has to adjust pay rates, not numbers. (Indeed, given the severity of Ireland’s private sector jobs depression, even if the public sector were in a position to cut jobs not rates, it probably would not want to do so.)

However, the apparatus for how the public sector labour market works means that adjustment is like moving a liner at sea. Things happen very slowly and even after the captain changes course, the liner will continue to drift in the previous direction for some time. Nowhere is this more evident than in the adjustments to payroll made by the public sector, when compared to the rest of the economy.

Earlier this month, the CSO published figures on hours worked and earnings, for different sectors of the economy, for the second half of last year. The graph below shows the adjustment made by each sector in the third and final quarters of 2009. The final quarter will not necessarily be representative of the rest, as it will include bonus payments, for example – but for that very reason, it’s important to look at it as well as a more regular quarter like Q3. The percentage given is the change in the total paybill in a quarter compared to the year before.

Year-on-year change in total wage bill, by sector, 2009

A very clear picture emerges if one thinks about the economy in four parts:

• construction, which is in severe adjustment
• finance, which is in limbo (or purgatory or something like that)
• the public sector (civil service, education, health, Gardaí, army, etc)
• the rest of the economy (manufacturing, ICT, professional services, etc)

The adjustment in the construction sector’s paybill in the second half of 2009, compared to a year previously, was a pretty astonishing 36%. In finance – perhaps initially surprising but on reflection maybe just as one might expect of a sector in limbo – there had been no change to its overall paybill.

The telling figures come from looking at the public sector and the rest of the private sector, however. In the private sector, the adjustment in the wage bill has been on average 13%. Only in manufacturing did it differ substantially – there the adjustment has been just 9%. However, in the public sector, there has – despite all the cuts – still been no downward adjustment in its overall pay bill. Indeed, the pay bill actually increased by 1.4% in the third quarter.

In one sense, you can’t blame the Minister for Finance. In relation to public sector pay, he’s done all that could be expected of him in a short space of time. In particular, he has made inroads into two unsustainable inequities in the Irish labour market, by making public servants contribute slightly more to their pensions and by bringing their core pay slightly closer in line with their private sector counterparts.

But the CSO figures show that this will not be enough. They highlight how important transformation – rather than additional incremental reform – of Ireland’s public service is, if things are to change enough to keep the Government deficit and debt at sustainable levels, and if we are to prevent this from ever occurring again.

The central determination of pay scales and employment numbers – combined with a culture of increments – has left the public service with a complete disconnect between what they do and how they pay for it. Ireland needs to have a public service populated by a new type of organisation. That organisation will understand what benefit it brings to society, and thus will know what money it needs to raise to fund its service. And the organisation will have much greater control over accessing the skills it needs. This means breaking down barriers between the public and private sectors and indeed within the public sector. It also needs to be able to reward those who excel at their jobs – and only those.

So much of this is elementary to those in the wider economy who are responsible for the financial and human capital at their disposal. And yet, as the CSO figures show, the public service remains in a different world.

I recently attended a talk given by Olivier Blanchard, Chief Economist at the IMF, on the economic impact of the recession. In addition to being a very interesting talk, it gave me a confidence boost. A key variable Blanchard used – and had to subsequently justify to some skeptical economists – was the change in expected GDP growth across issues of the IMF’s World Economic Outlook, a variable I had used myself independently late last year, hence the confidence boost! He argued that the change in this growth rate captures better than any other measure out there the change in an economy’s circumstances. This is particularly important for understanding what happened in the Great Recession of 2008/09… as well as what is happening in its aftermath, particularly the rebound in economic activity the world is currently seeing.

With the first World Economic Outlook of 2010 published, it is now possible to compare the first year of the economic crisis, when world economic output contracted 2.6%, with the second year, when it grew by 4.4%. Below, I examine who has been hit worst by the recession, and who has rebounded fastest. I do this by looking at an economy’s expected growth rate for 2010-2013. The main finding is that while it’s possible to characterise the type of economy that was hit worst (and not) by the recession, the same exercise is much more difficult to do with economies that have rebounded. With many different types of economy rebounding, this suggests that the recovery is relatively broadly based, which is surely good news.

The Impact of the Recession

So, with the dust settling, what happened the world economy in 2008 and 2009? It is probably no surprise that of the 180 economies in the IMF’s World Economic Outlook, only 23 saw higher growth in 2008-2009 than had been expected in early 2008. Most of those – including the largest surprise growers Iraq, Afghanistan, Lebanon, East Timor and Kosovo – can be explained by recovery from conflict or other unusual circumstances. What might be a surprise, though, is that a pretty long list of countries, about 65 in total, were only mildly affected by the recession, i.e. whose growth in 2008-2009 was at most 5 percentage points less than expected. The list of countries here includes some richer countries, such as the USA, Norway, Austria and Portugal, as well as some key developing countries, including China, India and Brazil.

At the other end of the scale, though, there were about forty countries severely affected by the recession, i.e. their growth over the two years was at least ten percentage points less than had been expected. Most of the worst affected were former Soviet states, “the Russia effect”, including all but two of the ten worst affected countries. Unlike the other BRIC countries, Russia finds itself among the worst affected countries. Another way of looking at this is openness: Hong Kong and Singapore, for example, both saw almost ten percentage points knocked off their 2008-2009 growth.

That has been the short-run impact. The focus now, however, is turning to the medium-term impact of the recession. What is interesting is that the WEO figures suggest – even before the recovery in world GDP in the middle of 2009 – that the medium-term impact of the recession would be milder than its short-run impact. To examine this, one can look at the total growth projected for the period 2010-2013. Doing this, one finds thirty-five countries whose fundamentals have actually improved during that time. There are some surprising inclusions on the list: I’d be curious to hear thoughts on why Ghana also made the list, while also on the list is Japan, whose growth propsects for 2010-2013 have improved by 0.5% a year.

At the other end of the spectrum, about fifty countries saw their growth rate for 2010-2013 reduced by two percentage points a year or more. It would be tempting to think that they were the same countries that were worst hit immediately. However, only five countries were among the worst twenty affected both immediately and in the medium-term: Russia, Estonia, Lithuania, Ireland and Moldova. Clearly, the immediate impact is not the full story. Egypt, for example, largely escaped the ravages of the recession, with very healthy growth growth of 12% in 2008-2009, just a little below the predicted 14%. However, its 2010-2013 growth rate was revised down by more than three percentage points in early 2009. It is a similar story for Vietnam, another FDI hotspot, and for fuel exporters Qatar and Ecuador.

The Impact of the Rebound from Recession

Since early 2009, when global GDP was contracting at a rate of 2.6% a year, economic conditions have improved considerably. The world economy is now expanding at a rate of 4.4% a year, its highest rate since early 2008 and close to its anticipated equilibrium rate. With such a swift rebound to growth, which economies have turned around fastest? Again, the appropriate indicator is the change in expected growth in a country, not its absolute growth as each country has its own healthy level of growth. To do this, one can use the difference between the IMF’s April 2009 and April 2010 World Economic Outlooks. The 2009 WEO captures growth prospects for 2010-2013 at the height of the recession, while the 2010 WEO will capture the revisions to those growth prospects.

Overall, the rebound has boosted the growth prospects of over one hundred countries. Many of the economics that have benefited most are resource-dependent ones, such as Qatar and Turkmenistan who have both seen about four percentage points added to their expected growth rate over coming years. Others are trade centres: Taiwan’s expected growth is 2.5% higher, while Singapore’s is 1.6% higher.

But perhaps the most encouraging thing is that there is no one type of economy that has strengthened in the last year. In addition to resource exporters and trade engines, you can find large developing countries, such as India (+1.6%) and Indonesia (+2.0%), OECD countries such as Australia (+1.3%) and Switzerland (0.9%). You can also find sub-Saharan countries like Chad (+2.2%) and Congo-Brazzaville (+1.9%) and Latin American countries such as Uruguay (+1.1%) and Brazil (+1.5%). Most developed countries – and China – have seen boosts to growth of less than 0.5% but that still represents an improvement in economic conditions, compared to what was expected a year ago.

The Overall Economic Impact of 2008 and 2009

The first set of figures presented showed the impact of the first twelve months of the recession on a country’s growth prospects. The second set of figures showed the revisions due to the global economic rebound in the last twelve months. Overall, though, what have the past two years done to the world’s economies? The graph below shows the number of weeks of economic activity lost as a result of the recession in a selection of European and OECD countries.

Weeks of 2008-2013 economic activity lost in the Great Recession

All the data discussed above are available over on Manyeyes. I’ve put up a visualisation on Manyeyes too, which you can interact with below. The default is 2008-2013 overall impact, but you can pick just the 2008-2009 impact or the 2010-2013 impact, or indeed compare both. You can also zoom in to particular regions. All numbers are changes to a country’s annual economic growth rate, so 2008-2009 is comparable with 2010-2013.

The experience of Iceland – whose economic growth prospects were revised up between the 2008 and 2009 WEO, due to its swift action during the crisis, only to be revised substantially down in the 2010 WEO – is a useful caution about the limit of these figures. Nonetheless, they represent the closest thing we have to what economists would call a “counterfactual” about a world where the Great Recession didn’t hit. And the news from the last 12 months has been good!

Each I time I look at the figures behind NAMA, I have two reactions: Firstly, “Why, oh why, can’t they standardise their accounting headings?” And secondly, “Wow, and I thought they gave us hardly any information LAST TIME!”

Yesterday, NAMA released its latest figures, this time for the second tranche of loans it is taking from the banks under its care. And, once again, I had both reactions above. The amount of information they are giving us this time is truly scandalous. The only figures in the one-page press release this time around are the totals for each bank… and even then, EXCLUDING Anglo, whose loans comprise more than half of the second tranche! Compare that with last time around, when they had seven pages of tables. What seemed at the time a paucity of information, given the sums involved, would now be a treasure trove of figures, compared to the latest release.

Perhaps it’s my economic history upbringing with Kevin O’Rourke, but I remained undeterred that something could be gleaned from a remarkably small set of numbers. I’m not the only one, as Karl Whelan leads a discussion of the latest information over on irisheconomy.ie. Let’s start with what we know.

So what are we taking on again?

It’s no harm recapping the basics, otherwise the figures below won’t make much sense.

• There is a total of €77bn worth of core loans that NAMA is taking over, based on €88bn worth of property (at the peak).
• About €49bn of loans is in the form of land and development, while the other €28bn is in associated loans (chiefly, it seems, property-related investments).
• There was also an interest roll-up last Autumn of €9bn. Somehow, €77bn and the interest roll-up of €9bn adds up to a total expected transfer from the banks to NAMA of €81bn. (Answers on a postcard or in the comments below…)

In September 2009, NAMA gave figures for land, development and interest roll-up (i.e. excluding associated loans) for each of the banks. In terms of NAMA-related assets:

• AIB owned €23bn, three quarters of which were Irish loans,
• Anglo owned €18bn in loans, about 60% of which was Ireland-based
• The other large bank, Bank of Ireland, owned €12bn in relevant loans, 57% of which was Irish.
• The remaining loans were mostly Irish Nationwide, €5.6bn (about half Irish, half UK), with EBS making up the final €500m, almost all of which was related to Ireland.

The total by that September 2009 breakdown: €59bn.

What about the rest?

Ah, I’m glad you asked that. The total expected transfer to NAMA is, of course, €81bn, as per the March 2010 breakdown. Where does this other €22bn come from? These are associated loans, mainly investment properties.

• AIB and Bank of Ireland seem largely free of these – or at least they are not being transferred to NAMA – as their September 2009 and March 2010 breakdowns of €23bn and €12bn match (in a round number sense).
• The small size of EBS makes it difficult to tell whether investment loans are a worry… but in the grand scheme of things, its €1bn in property loans is small change.
• It is Anglo and INBS, however, where the investment loans are most definitely a concern. Loans worth €45bn are being tranferred from these two institutions. But land, development and interest roll-up only account for €23bn, which means that the other €22bn from these institutions – over €18bn of it Anglo lending – is in the nebulous associated loans/investment property category.

OK, and what happened in Tranche 1?

In Tranche 1, the biggest 1,200 loans worth €15bn were transferred to NAMA. The bulk of this, €9bn, was Anglo loans, with AIB making up over half the remaining €6bn. At time, NAMA provided its stakeholders, the citizens of Ireland, with a pretty small set of figures on which to analyse the job it was doing. Still, there was a breakdown by geography and by loan type (although not subdivided by bank), as well as estimates of long-term economic value relative to current market value.

The important take-away from Tranche 1 was that it was disproportionately Anglo (whose haircut was given as a very round 50%), disproportionately investment properties, and (perhaps surprisingly) disproportionately UK: 40% British, compared to 20% overall for NAMA.

What’s new in Tranche 2?

We literally only know the top-level figures for the second tranche. In fact, as we knew the loans to be transferred in Tranche 2 from earlier information, the only new information is the “hair-cut” being applied to the second tranche loans. First some basics about Tranche 2.

• The total: Tranche 2 involves the transfer of €13bn of loans in total. The press release only makes mention of about €5bn of loans, though, almost all of which are AIB and BOI loans, as – for some reason – Anglo Irish Bank loans are not ready to be transferred.
• Where’s Anglo? Not to worry, we can work out at least some of what’s going with Anglo through changes NAMA has made to its files. The Tranche 1 file I mentioned above has been updated since it was first released. The change is that €0.7bn of Anglo loans that had been scheduled for transfer in Tranche 1 will now occur during Tranche 2 (or at least so goes the plan). If this happens, Anglo Irish Bank will again account for about 60% of loans transferred in the Tranche, in this instance €7.3bn.

How tight are the new haircuts?

Quite a good bit tighter, actually.

• In Tranche 1, AIB’s haircut was 43%, now it’s 49%.
• Bank of Ireland’s was 35%, now it’s 38%.
• For what it’s worth, given the relatively small sums involved, EBS’s was 36% and is now 46%.
• But it’s INBS which is generating the headlines. Its average haircut had been a pretty drastic 58% in the first tranche. In the second tranche, however, its haircut is 72%. The summary is that, excluding Anglo, the average haircut has worsened from 42% to 45%.
• We really have no way of knowing what’s going on with the Anglo loans. Now that it’s part of the State apparatus, it seems exempt from the same reporting procedures as the rest of the banks. However, suppose its haircut for the first tranche actually was the 50% reported and worsens at the same rate as the rest of the banks for tranche 2. This means Anglo’s haircut would be 53% on average in Tranche 2.
• Due to Anglo’s large size in the first tranches, this would increase the average haircut in Tranche 2 to 51%, up from 47% in Tranche 1.

The overall haircut for the €28.5bn in the first two tranches – including Anglo loans yet to transfer – would be 49%.

How much more of this will there be?

Anglo is the worst of the three large banks. So the good news is that after tranche 2, about half of its loans will have been transferred. Bank of Ireland and AIB have transferred between a quarter and one third of their loans, while INBS and EBS have transferred about 15% of their loans.

As mentioned above, the first tranche in particular was unrepresentative. (A side-note: despite this, NAMA’s revised business plan was based entirely off first tranche figures.) Future tranches will contain much more land, the vast bulk of which will be generating no income and some of which will be worth close to zero, as developments less than 30% complete will have to be destroyed before it can even be sold as agricultural land.

I don’t want to overstate this point – only €28bn of loans are for land, so there are other things in the loan books that may cause one to be more optimistic, particularly the 28% of the loan book not on the island of Ireland. But the point is still important: a full €28bn of loans is backed against land and nothing else, the vast bulk of it Irish land.

A reasonable projection is that the three percentage-point slide upwards in the haircut between tranches 1 and 2 would continue into remaining tranches. Should this continue, the final haircut will likely be 53%, not 39% as originally estimated last September. This means the total payment by NAMA to participating institutions for loans on property worth originally €88bn would be as low as €38bn. This sliding value of NAMA’s underlying collateral, property, is shown in the graph below.

Value of NAMA's underlying property assets, at various dates (€bn)

The good, the bad and the neutral

All of these means that there is good news, bad news and neutral news for the taxpayer in the latest figures from NAMA.

• The good news is that, for the set of property loans we’re taking over, we’re paying a smaller price, reducing our exposure to losses. Paying €38bn for property originally worth €88bn means factoring in a fall in property values of 57% from the peak.
• The bad news is because for Anglo and INBS, it looks as though the taxpayer will be funding their capital shortfall either way. So for those two institutions, we’re hit either way.
• The neutral news reflects that fact, counterintuitive at first, that the smaller price paid doesn’t increase NAMA’s chance of making a profit. NAMA hasn’t changed the faulty assumption at its core, i.e. that long-term economic value is 11% above November 2009 prices. Instead, we have an uneasy balance between that assumption and the EU, which via its inclusion of costs and discounting has effectively struck off long-term economic value. If NAMA decides to pay less for the properties than originally estimated, that’s because the ability of these loans to ultimately generate income is less than they thought.

The latest Daft.ie House Price Report was released this morning. Its headline finding is that asking prices fell by a further 4% during the second quarter of the year. Overall, prices are now 40% below the peak in Dublin and 34% below the peak elsewhere.

Three years into the property downturn, how should we take its findings? Economists think about prices and quantities. On both prices and quantities, pessimists and optimists will find fodder. In relation to prices, pessimists will point out that this is a larger fall than what was seen in the first three months of the year. Optimists will point out that the falls in 2010 are smaller (in percentage and in euro terms) than those seen in late 2008 and throughout 2009.

Prices are just one half of the equation. While there is plenty of debate about whether the sustainable level of prices is above or below where we are now, everyone is I’m sure in agreement that the sustainable level of transactions is well above what we’re currently seeing. If a steady volume of transactions is good news, optimists will point to the fact that one in four properties posted in April is already either sold or sale agreed, while about half of properties listed in January are already sold or sale agreed. Pessimists, however, will point to the total stock of properties for sale – over 60,000 – and point out as well that the stock for sale has risen again since the start of the year.

Here are couple of other facts that strike me about the latest report:

• Falling (more) slowly: The year-on-year rate of falls, while still sharply negative (-16.4%), is at its slowest in 15 months.
• On again, off again: In a number of parts of the country, sellers seem to have adopted a strategy of cut-twice-a-year, with substantial cuts in one quarter followed by largely static prices in the next. This quarter, prices in Laois, Offaly, Clare, Cavan and Donegal fell, after being largely stable in the first quarter. Meanwhile, Carlow, Louth, Tipperary and Galway are taking relative breathers in their descent, following sharpers falls in the first quarter.
• Culchies vs. jackeens: Prices in Dublin city centre are now almost 50% down from peak levels – the full average fall is 48.4%. By contrast, asking prices in many rural parts of Munster are down just 26% from peak levels. This suggests that Dublin and its relatively more active market may be acting as a national pace-setter. It also strengthens my suspicion that Dublin in particular and the cities in general will bottom out before other parts of the market.

The commentary on the report is given by Jim Power. Jim gives a frank assessment of the challenges facing the Irish economy. In particular he talks towards the end about the need for a property tax, a phrase that seems to send shivers down the spines of many in Ireland. Based on what was reported last week, Chris Andrews, a Fianna Fail TD representing some of the wealthiest citizens in the country, appears to have convinced the Government to shelve their plans for a property tax to replace stamp duty.

Those arguing against a property tax are essentially saying that the Government should not respond to the virtual disappearance of what was at the peak close to €10bn in revenues from the property market, across VAT, stamp duties and capital taxes. The graph below shows estimated tax revenues from the property market from 2001 to this year. Revenues rose from €3bn in 2001-2002 to €9bn in 2006-2007. Since then, they have collapsed and look like coming in below €2bn this year. The graph also shows an estimate of the all-in income tax rate in Ireland over the same period.

Tax revenues from the property market and all-in income taxes, 2001-2010

It’s worth recapping what the over-reliance on property tax revenues did for the rest of the taxation system. Each year, the OECD calculates the all-in average tax rate for workers, across four stylised households all earning the median industrial wage (single no kids, single two kids, married no kids, married two kids). In 2001, the average tax paid by those four households in Ireland was just under 9%. With the OECD average at over 20%, this made Ireland a very attractive place to work. Over the coming years, however, Ireland’s taxation system went from attractive to kamikaze. By 2007, the average tax rate paid by our four households was negative: -0.2%! While people often talk about having to bring the low paid back into the tax net, really the focus should be on ensuring those on average pay in Ireland contribute. It looks like the crisis has finally woken the Government up to this.

The reason that the Government was in a position to do this was because Ireland’s property-led boom was masking the increasing unsustainability of Ireland’s income tax system. Property-related tax revenues increased by almost €7bn between 2001 and 2006. Income tax, which gave three times as much revenue to the State at the start of the decade, increased in the same period by only half that amount. The result was that, of the €45.5bn taken in in taxes in 2006, property taxes contributed almost as much as income taxes!

This is clearly no way to run a taxation system. Naturally, there is going to be some element of cyclicality about taxes. In fact, a well designed taxation system will have some element of automatic stabilisation, where tax revenues fall in hard times to give the economy some breathing space. However, a collapse of €8bn in tax revenues from the property market is a signal, if ever we needed one, that we got it wrong.

Let’s leave VAT revenues from the property market aside for the moment. (That should have been a lot more stable than it was – but for a completely different reason, namely better management of Ireland’s housing output.) Figures from the OECD suggest that a little less than 10% of core tax revenues (excluding social insurance) comes from property taxes in most developed countries.

I think it’s reasonable to say that the government’s aim should be to get the Irish government finances looking a little more like a regular OECD economy’s, over the coming five years. Also, it will be trying to raise its core tax revenues up from their current 2003 level of €31bn to perhaps €40bn, which is more or less the 2005 level. Therefore, bearing in mind the contribution that capital taxes could make in a healthy market (probably about €0.75bn), we should be looking to have a property tax contribute somewhere close to €3bn.

A year ago, I outlined a number of reasons why Ireland should adopt an Obama-esque “Yes We Can” attitude to property taxes – as well as how to deal with issues like those who have paid a lot in stamp duty recently. At the time, I made a case – based on the sheer arithmetic of it all – for a very straightforward tax on the value of a property. The Department of Finance is understood to favour a variant of such a tax, namely a set tax for prices within particular bands. One argument against property taxes is that they would take a long time to implement. This type of tax could realistically be put in, complete with valuation website where people can find out an estimate of how much their property is worth right now, in the space of a week.

My opinion now, though, is that Ireland needs to put in place a smarter tax, one that doesn’t mess with the incentive people should have to invest in their home and make it worth more. For this, Ireland needs to put in place a land value tax. A land value tax, where you pay an annual amount based on the value of the land you hold, not the value of what’s on the land, is the fairest way of implementing a tax. It also prevents land-hoarding and should reduce the likelihood of further property bubbles. A land value tax could be brought in perhaps not overnight, but also relatively quickly.

There are a range of other reasons why Ireland needs a property tax sooner, rather than later.

• For example, if people suspect a property tax will come in, they are more likely hold off buying property, raising the prospect of a longer than necessary hiatus in Ireland’s property market and even over-shooting of prices on the way down.
• Secondly, money is limited and if the Government doesn’t bring a property tax in, the money has to come from elsewhere – even higher income taxes or more cuts to public expenditure.

Ultimately, people should be suspicious of TDs in wealthy constituencies calling for no property taxes. If we don’t bring in a property tax, the rest of the country will essentially be subsidising a small pocket of voters in the most affluent areas of Dublin.

As I mentioned at the start of the year, 2010 should be the year that Ireland’s policymakers – as well as economists and journalists – re-balance their focus away from NAMA, with potential losses in the billions, in favour of the deficit certainly but also an equally sizeable long-run problem, Ireland’s unemployment crisis, which will bring costs in the tens of billions over the next decade.

For context, the average number of people signing on in 2006 was just over 157,000. In 2007, it had risen slightly to 162,000. After that, it increased with speed. By mid-2008, it had risen to just short of 200,000. By the end of 2008, the number signing on was almost 300,000. By June 2009, it was over 415,000. At that point, the annual rate of change in signers on was almost 100%. In the month just gone, June 2010, there were over 450,000 signing on. So the bad news is that the number is still getting higher, quarter after quarter. The good news is that the overall trend is one of slow stabilisation, with the number of people signing on about 10% higher than a year ago, rather than 100%.

The news from the last couple of months has not been good, though. About a year ago, I highlighted two important new trends in Ireland’s unemployment: gender and cities. The gender point remains valid. Whereas almost all of the increase in unemployment in 2007 and 2008 was male, in the first half of 2009, over one third of new unemployed were female. But between August and November last year, the number of women signing on fell by 10%. Since then, however, the number has crept back up and in June this year, it reached a new high.

Earlier this year, I highlighted an even more worrying trend: the lack of jobs for young men. In mid-2006, 175,000 young men were at work, a number that had fallen to less than 100,000 by the start of 2010. In an economy where about 10% of people had lost their job, more than half of jobs for young men had disappeared. To come with county-level estimates, those figures use Live Register numbers – which correspond more to the sum of unemployment and underemployment, rather than just unemployment – as well as Quarterly National Household Survey data on labour force participation.

Updating those figures on un/der-employment gives the following results:

• The national unemployment rate for men under 25 has risen from about 10% pre-crisis to almost 45%. For young women, the unemployment rate is also very high, at an estimated 28% in Q2 2010. This compares to 23% for men over 25 and 14% for women over 25.
• In Donegal and Louth, the proportion of young men signing on is almost three quarters. In a further eleven counties, concentrated in three regions – Border, Midlands and South-East – the estimated number of young men signing on is between one half and two thirds. In only nine counties, including Dublin and its three neighbouring counties, is the proportion below 40%.
• There is a very high correlation between unemployment rates across the four age-gender groups (close to or above 90% in each case).

Visualising the crisis

The map below, using IBM’s Manyeyes tool, shows how unemployment rates for young men now compared with early 2006.
A second way of visualising the scale of the problem is to use Google’s Motion Charts technology. A motion chart is a very good way of showing data across a number of dimensions. Two dimensions are unemployment rates for men under 25 and women over 25. A third dimension is time, which you can manage by using the bar along the bottom (or just pressing play). A fourth is the size of a county’s labour force, represented by the bubble size. The final dimension is region, represented by the bubble colour.
I’ve tried to include the motion chart above – if it doesn’t work, you can access it here, via Google Docs (which may require you to sign in). The motion chart highlights the following findings:

• Until late 2007, female over-25 (FO25) unemployment in all parts of the country was below 10%, while male under-25 (MU25) unemployment stayed below 20%.
• Over the course of 2008, while FO25 unemployment did not increase substantially, staying below 14% in all parts of the country, MU25 unemployment had already started to increase dramatically, reaching 45% in some counties and 20% or more in almost all counties.
• Female unemployment hit in early 2009, with some counties seeing one in five women sign on.
• The last two or three quarters have seen mixed signals, with unemployment rates falling then rising. The high correlation between the different types of unemployment is evident throughout.
• The regional nature of Ireland’s unemployment crisis is apparent. Assuming that people from Northern Ireland signing on is not a significant issue, three regions make up the 12 worst affected counties – Border, Midlands and South-East. The only exceptions are Sligo (which acts more like its Western brethren) and Kilkenny. The Mid-East, Dublin, West, South-West and South-East have been less affected.

Implications for policy

For me, the latest unemployment trends highlight the importance of mobility in its broadest sense. This includes mobility between jobs and sectors, as if you look at unemployment by sector, very few people have lost their jobs outside of industry (including construction) and retailing. Finding new jobs for people coming out of posts that won’t be replaced any time soon means making sure they have the right skills. In that sense, I’d rather have 50% of 15-24 year-olds unemployed than 50% of 45-54 year-olds.

It also ties in with mobility between towns and regions and the issue of negative equity and the property market more generally. People who bought homes in Longford when they had jobs there are less able to move to new jobs in (say) Kildare than those renting. The topic of negative equity mortgages has come up recently. This will be of no use to those who have no job. Instead, the focus should be on two things. First, IDA Ireland and Enterprise Ireland need to factor in Ireland’s excess property into their plans. For them, it is a good thing, as vacant commercial property beside those stuck in Section 23 developments means much lower office costs for companies setting up. Secondly, the government should explore schemes that will help those with a mortgage rent out their home in one location and become a tenant elsewhere, closer to employment.