# Budget Deficit - When is it going to reduce?



## nconroy

I may be missing something; hopefully someone on e Askabutmoney will put me right.

For the last three years we have been told that the budget deficit is 18 to 20 billion Euros, it is the same figure each year.

We are also being told that the tough budgets over the same period were necessary to reduce the budget deficit.
If I remember correctly, the total amount withdrawn from the economy over the last three years is at least 12Billion Euros, yet the deficit remains the same. What’s going on?

To reduce our budget deficit by 2013, going on the current deficit the next two budgets will need to take 8 to 10 billion each year out of the economy, plus pay the interest on ECB/IMF loans of around 8 billion.

Am I massively misinformed, or is there a magic formula at work that will make all this right by 2013?


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## Brendan Burgess

No, you are not massively misinformed. 

The rough plan is to cut the deficit but also to grow GDP so that the deficit as a percentage of GDP will be reduced to acceptable levels. 

It's hard to see it happening though. 

Brendan


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## DerKaiser

These exchequer statements are great for the real anoraks.

http://www.finance.gov.ie/documents/exchequerstatements/2011/exstatejunefinal.pdf

The deficit to the half year is actually €2bn worse than last year but it includes a promissory note to the banks of €3bn, so the true deficit is €1bn better than this time last year.

This improvement is pretty much coming from additional income taxes.

Spending is broadly unchanged but this disguises reductions in capital expenditure offset by increases in social welfare payments.

There has been an inevitable massive increase in social welfare, and with all the extra borrowing to fund the banks and the deficit the cost of servicing our debt will now increase. 

Without really significant cuts to social welfare and public pay, the deficit is not going to go anywhere fast but the dilemma is whether these cuts can be absorbed by a very weak economy right now.


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## Chris

I think that there is a lot of political and media deceit in talking about 3 years of budgetary cuts. When you look at government spending figures you will notice that spending actually increased from 2008 to 2009 by €1.4bn (http://www.finance.gov.ie/viewdoc.asp?DocID=5750). Of course this was at a time when politicians tried to tell the public that because Ireland was the first EU country officially in a recession, it would be the first country out of the recession.
What baffles me even more is page 5 on this document: http://www.finance.gov.ie/documents/pressreleases/2010/bl159.pdf
It shows that the deficit is expected to increase again this year to over €22bn. This all smells of Orwellian newspeak to me. At the same time I heard Joan Burton on the radio yesterday morning saying that the deficit will not be such a big problem once the economy grows again; she said something to the tune of when GNP goes from €100bn to €105bn this will quickly solve the deficit problem. Does anybody actually believe these people? Do they have any idea that there is no recovery and that GNP actually shrank and did not grow by 5%? ([broken link removed])
I agree with DerKaiser, without BIG cuts in welfare and public pay there is no way the deficit will be brought under control.


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## nconroy

So, things are not looking too bright. 
Back of envelope calculation, based on GNP 5% improvement (a miracle, I know). 
This is  €5Billion national income, after tax may give the Gov €750Million.
€8Billion in interest, less €6Billion (2011 Budget) = An additional €2Billion in the red.
Less the €0.75Billion from tax on 5% GNP growth = and additional €1.25Billion in the red.

So despite the savage budget for 2011, we will have a budget deficit of at least €1.25Billion higher starting in year 2012. 

Iagree with Chris and DerKiser, I suspect there are some really savage cuts to come in the next few budgets, they will need to be much worse than any of the previous budgets. The Government is using the slow cook method to introduce the various measures. To introduce them too quickly would kill the patient.


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## DerKaiser

DerKaiser said:


> These exchequer statements are great for the real anoraks.
> 
> http://www.finance.gov.ie/documents/exchequerstatements/2011/exstatejunefinal.pdf
> 
> The deficit to the half year is actually €2bn worse than last year but it includes a promissory note to the banks of €3bn, so the true deficit is €1bn better than this time last year.
> 
> This improvement is pretty much coming from additional income taxes.
> 
> Spending is broadly unchanged but this disguises reductions in capital expenditure offset by increases in social welfare payments.
> 
> There has been an inevitable massive increase in social welfare, and with all the extra borrowing to fund the banks and the deficit the cost of servicing our debt will now increase.
> 
> Without really significant cuts to social welfare and public pay, the deficit is not going to go anywhere fast but the dilemma is whether these cuts can be absorbed by a very weak economy right now.



Q3 figures are out.

Again, the underlying improvement is completely driven by the extra income levies.

No progress is being made in spending. This is really disappointing.  

Health spending is actually up €1bn year on year - that is a scandal.  

We need a serious move from Brendan Howlin in December.


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## csirl

This deficit figure includes some of the bank recapitalisation costs - which are once off payments (we hope!).

What is the deficit when payments to banks are excluded? - this is the real deficit - the gap between public income and expenditure on public services.


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## DerKaiser

csirl said:


> This deficit figure includes some of the bank recapitalisation costs - which are once off payments (we hope!).
> 
> What is the deficit when payments to banks are excluded? - this is the real deficit - the gap between public income and expenditure on public services.


 
The deficit is up €7bn.

There have been €10bn in bank recapitalisations that didn't happen in 2010 and there has been a net increase in the bank guarantee fees collected of €1bn i.e. a €9bn banking drain over and above 2010.

Therefore the underlying deficit is €2bn lower. The good news is that the state is at least benefitting from the income levy, social protection costs appear to be stabilising and it looks like the costs of borrowing won't be as bad as anticipated.

The Croke Park agreement has yielded nothing, however. The only spending reductions are on capital projects and there is no evidence that efficiencies are being found in public spending. This severely weakens the argument against uniform cuts across the board.


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## Chris

I agree DerKaiser, these are really scandalous figures. There is no end to funds flowing onto banks, we have now heard that €1bn will have to be pumped into Credit Unions. The total deficit is simply not decreasing fast enough to to even come close to the government's calculation of €190bn total state debt by 2014 (or was 2013?).
Maybe it's tactical, if you are going to default you might as well make sure you have plenty of debt to default on.


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## onq

So the government policy stands revealed at last!
Borrow for the rest of our lives to keep the banks and the public pay bill afloat, and hope the economy recovers.

But the economic recovery is being hampered by the banks not providing the liquidity the economy needs to preserve existing businesses.
Do you know what a representative of the bank told a recent B2B group - they were looking for venture capital investment opportunities - the gambler's choice again!

Why are the banks still not lending into our economy and given that the aren't why aren't they being forced to play their role of credit provider, the role they were supposed bailed out for?
Last year they were approving one in ten loans and this year apparently it is half that again, so the lending level is one in twenty.
What is going on with our banks and why isn't our government doing anything to get them moving/lending again?

And I heard recently that the Director General of our great financial regulator is jumping ship!
Is this an inside move to benefit us, or a hands in the air move to save herself?


ONQ.


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## DoctorEvil

*It's alright Dept of Finance found 3.6bn down back of the couch!*

This would be hilarious if it wasn't true.

What are we going to do with this money!

http://www.rte.ie/news/2011/1101/finance.html


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## onq

Mines a cappuccino!


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## Purple

Break out the breakfast rolls, good times are here again!


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## Jim2007

onq said:


> Why are the banks still not lending into our economy and given that the aren't why aren't they being forced to play their role of credit provider, the role they were supposed bailed out for?



The banks can't lend what they don't have!  When the banks were taken over by the government that amount of capital pumped into them was enough to give them credibility among their peers and to enable them withstand one more blow if necessary and that is about it.  The stress tests done earlier this year show that that has been achieved, but that is all.  

There is very little spare capital in any of the banks right now, so before they can start lending they first need to acquire cash to bring their ratios up to a level that would allow them to do so.  There is basically three possibilities to do this:

Increase Deposits - The money pumped into the banks plus the guarantee should have been enough to encourage people to start depositing again but it has not.
Raise New Capital - Since the taxpayer it the biggest shareholder, it is going to be a tall order, unless the tax payer is willing to pump in more money.
Borrow - But with all the talk of us defaulting on bonds, I can't see anyone being happy to lend us money
At this point of time, I'd say the Irish banks are capable of providing standard transactional services, a small amount of lending and that is about it.

The other thing to remember is that lending to businesses, especially start ups is a very high risk activity, much more so that lending to home owners - most risk models I've seen assume that at least *90%* of the funds given to a new business will not be paid back!!!  It really is hard to see how a government owned institution with little capital can play a major part in this.

The idea of bringing a venture capitalist into the equation, the bank's participation might encourage a venture capitalist to get involved and at the same time the bank would have a partner who is will to take a major hit in the event of it all going wrong.  It's worth a try given that the other three options and not likely to work out in today's climate.

Jim2007


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## onq

Hi Jim,

I'm afraid I cannot accept that. 

I find the argument that the banks don't have enough to lend specious - if they don't lend they will go under, because they will not make progress and prosper - IOW they are dysfunctional.

I said at the start of this dog's dinner of propping up the banks that we needed a bad bank to go belly up and a new commercial lending bank.

We got neither and we are not well served with what we have left.

Not good enough.


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## RMCF

To be honest a lot of this economic mumbo-jumbo baffles me.

We have been hit hard for 3 yrs so far and apparently the austerity measures in Ireland have been among the toughest ever imposed, anywhere. And they will continue.

We have also been told that we are doing well, and things are improving.

Yet others come on shows like Prime Time etc and say that its only a matter of time before Ireland defaults as well.

So one side is going to be wrong. Is one side fooling us to keep us as happy as possible, or is the other just trying to create panic for a good story?


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## onq

The one thing that hasn't happened is a reduction in the gap between our tax take and what it costs to run the country.

To reduce the numbers on the welfare we need jobs and to create jobs you need both enterprise and sources of liquidity.

The traditional source of liquidity - the banks - has dried up, so until we find alternatives, there will be no growth in jobs and no recovery.

This is something that will bring down the current government in less than a year.


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## DerKaiser

RMCF said:


> To be honest a lot of this economic mumbo-jumbo baffles me.
> 
> We have been hit hard for 3 yrs so far and apparently the austerity measures in Ireland have been among the toughest ever imposed, anywhere. And they will continue.
> 
> We have also been told that we are doing well, and things are improving.
> 
> Yet others come on shows like Prime Time etc and say that its only a matter of time before Ireland defaults as well.
> 
> So one side is going to be wrong. Is one side fooling us to keep us as happy as possible, or is the other just trying to create panic for a good story?


 
In truth no one can be sure. 

There are many people who are happy to lend money to the Germans for 10 years+ for a return of 2%. 

If Ireland could convince the money markets that we were as unlikely to default as the Germans, we too could borrow money over durations so long that we would effectively be not paying back the capital and the interest rates would be so low that we would have no trouble paying them.

The money markets, however, are very fickle and volatile. 

If we can convince them that we can balance the budget in a matter of a few years we could end up with affordable interest-only debt repayments (maybe €7bn p.a. on €180bn debt).

If we can't, no one will give us more money.

Once we wade through all the mumbo-jumbo, the one thing we know is that we need to be in a situation where tax revenues pays for day to day government spending if we're to have any hope. That is an area we still have control over.

The capital costs of propping up the banks is the other major issue, but we have no choice in this as long as we wish to be part of the EU. It's an ugly situation, but that's life.


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## 44brendan

DerKaiser said:


> The money markets, however, are very fickle and volatile. .


 
Acknowledged. However the whole basis for the prolonged austerity and the repayment of unsecured Bonds is to convince the money markets that we are well behaved responsible citizens (unlike those irresponsible Greeks) who are deserving of credit at an affordable price. Our difficulty is that we have no idea whether this strategy will actually work. We are reliant on rating agencies whose mechanisations for credit rating are both unreliable and historically proven to be inaccurate.
The Government strategy is a gamble and ultimately we don't know how it will play out over the long term.


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## onq

Austerity is one thing, but the banks to lending is quite another.

The racket promoted by the ratings agencies to push up interest rates is yet another loaded scam.


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## Sunny

onq said:


> Austerity is one thing, but the banks to lending is quite another.
> 
> The racket promoted by the ratings agencies to push up interest rates is yet another loaded scam.


 
Why do the rating agencies want to push up interest rates?


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## onq

So their pals the international financiers can charge more for their services!
The Ratings Agencies were utterly discredited in a bi-partisan review of their performance during the financial crisis
Reduced ratings is claimed that high risk applies - higher risks allows the financial vampires to apply higher rates of interest on loans.

http://www.youtube.com/watch?v=eYdTnNzttxk

"The credit rating agencies are; Moody's, Standard and Poors, and  Fitch....QUOTE: _"Concluding a two-year bipartisan investigation, Senator  Carl Levin, D-Mich., and Senator Tom Coburn M.D., R-Okla., Chairman and  Ranking Republican on the Senate Permanent Subcommittee on  Investigations, today released a 635-page final report (PDF, 6MB) on  their inquiry into key causes of the financial crisis.  The report  catalogs conflicts of interest, heedless risk-taking and failures of  federal oversight that helped push the country into the deepest  recession since the Great Depression.""

_As for the Elephant in the Room - Goldman Sachs -

http://www.rollingstone.com/politics/news/the-people-vs-goldman-sachs-20110511

_"Defenders of Goldman have been quick to insist that while the bank may  have had a few ethical slips here and there, its only real offense was  being too good at making money. We now know, unequivocally, that this is  bull****. Goldman isn't a pudgy housewife who broke her diet with a few  Nilla Wafers between meals — it's an advanced-stage, 1,100-pound  medical emergency who hasn't left his apartment in six years, and is  found by paramedics buried up to his eyes in cupcake wrappers and pizza  boxes. If the evidence in the Levin report is ignored, then Goldman will  have achieved a kind of corrupt-enterprise nirvana. Caught, but still  free: above the law."_
Read more: http://www.rollingstone.com/politics/news/the-people-vs-goldman-sachs-20110511#ixzz1cZFA9QvH


ONQ.
​​


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## Sunny

We all know about the Rating Agency and their failings but I think you are taking the whole conspiracy thing a bit too far. Basically what you are doing is saying Rating Agencies downgrade ratings so investment banks can make money by charging higher interest rates. And yet, the Rating Agencies were heavily criticised for giving AAA ratings to high risk products with very low yields. Which is it?

And of course, higher risk=higher interest rates. That's banking.


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## onq

There is no either-or issue as you seem to be suggesting. 

You gull people into investing in high risk products to steal their money.

You drop a country's rating to increase your income due to interest charged.

Two sides of the same coin and no, its not a conspiracy - they _*all*_ engage in it!


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## Sunny

onq said:


> There is no either-or issue as you seem to be suggesting.
> 
> You gull people into investing in high risk products to steal their money.
> 
> You drop a country's rating to increase your income due to interest charged.
> 
> Two sides of the same coin and no, its not a conspiracy - they _*all*_ engage in it!



But how does dropping a rating increase income for a rating agency? How does it increase income for holders of the debt? Just because yields rise after a ratings downgrade doesnt mean holders get more income. The interest rate they receive remains the same but the price of the debt falls. How do rating agencies benefit from this? With regards new debt issued, yes the interest rate charged will be higher but that's because investors are demanding higher interest rates to compensate for higher risk.  And these investors include pension funds and insurance companies. Are they in on this racket too?


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## Sunny

Actually completely off topic so don't worry about it!


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## Chris

onq said:


> So the government policy stands revealed at last!
> Borrow for the rest of our lives to keep the banks and the public pay bill afloat, and hope the economy recovers.


Yup, that is pretty much the pathetic plan they have brought us.



onq said:


> But the economic recovery is being hampered by the banks not providing the liquidity the economy needs to preserve existing businesses.
> 
> Why are the banks still not lending into our economy and given that the aren't why aren't they being forced to play their role of credit provider, the role they were supposed bailed out for?


Banks are illiquid, they barely have enough reserves to cover the stress tests, which, let us remember, did not include a scenario of sovereign default. 
The reason there is no lending going on in Ireland is twofold, (1) there are boot enough loanable funds and more importantly (2) because Ireland is way too far in debt. The total level of private and public debt is so high that there simply is no room for further debt to be issued.
Debt was the cause of this crisis, it is not going to be the solution.




onq said:


> I find the argument that the banks don't have enough to lend specious - if they don't lend they will go under, because they will not make progress and prosper - IOW they are dysfunctional.


Banks did enough lending in the last 10 years to cover decades. Most of those loans are still performing and creating some level of income. The problem at the moment is still the non-performing part, and the solution for this is not going to be taking on further risk by making large amounts of loans



Sunny said:


> We all know about the Rating Agency and their failings but I think you are taking the whole conspiracy thing a bit too far. Basically what you are doing is saying Rating Agencies downgrade ratings so investment banks can make money by charging higher interest rates. And yet, the Rating Agencies were heavily criticised for giving AAA ratings to high risk products with very low yields. Which is it?
> 
> And of course, higher risk=higher interest rates. That's banking.


Absolutely agree. Rating's agencies got it wrong before the crisis, but they are actually starting to get things right now.


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## onq

Chris said:


> The reason there is no lending going on in Ireland is twofold, (1) there are boot enough loanable funds and more importantly (2) because Ireland is way too far in debt.



(i) funds are created by the fractional reserve banking system - they don't "exist" in reality. The fractional reserve system is a gamble on how many people will demand their money back at any one time. We are talking about ratios and runs on banks.

(ii) you cannot make a generalized statement like that. There are areas of the economy where debt is high, mainly in the private property portfolio section. Are you suggesting that Irish business _per se_ is over-borrowed?


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## onq

Sunny said:


> With regards new debt issued, yes the interest rate charged will be higher but that's because investors are demanding higher interest rates to compensate for higher risk.



Are we all so far gone that we just accept this form of loan sharking by banks what we own without questioning the actual basis for us being bled dry? Who are these nameless investors, or are we just being manipulated by the people who manipulate the investments funds?


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## Sunny

onq said:


> Are we all so far gone that we just accept this form of loan sharking by banks what we own without questioning the actual basis for us being bled dry? Who are these nameless investors, or are we just being manipulated by the people who manipulate the investments funds?


 
We are running a huge budget deficit, have a crippled banking sector, large unemployment and a housing crisis. Is that not the case or have the rating agencies, banks and investment funds made all that up so they can charge higher interest rates which by the way doesn't automatically lead to higher profits. You are approaching LOS territory to be honest.


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## Sunny

onq said:


> (i) funds are created by the fractional reserve banking system - they don't "exist" in reality. The fractional reserve system is a gamble on how many people will demand their money back at any one time. We are talking about ratios and runs on banks.
> 
> (ii) you cannot make a generalized statement like that. There are areas of the economy where debt is high, mainly in the private property portfolio section. Are you suggesting that Irish business _per se_ is over-borrowed?



Banks still need actual cash to lend. The fractional reserve system allows them to lend more money than they have taken in deposits but they still have to borrow the cash to lend. They dont just 'create' cash. And no-one is lending to them. 

Chris is right about the economy being highly indebted. And that includes some Irish companies.


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## DerKaiser

Getting back on subject.

http://www.finance.gov.ie/documents/exchequerstatements/2011/octobernote.pdf

The deficit is up €8bn.

There have been €10bn in bank recapitalisations and the sale of state holdings in BOI has netted €1bn i.e. a €9bn banking drain.

*Therefore the underlying deficit is €1bn lower than 2010.* 

Spending is neutral with increases of €1bn in the health budget offsetting decent savings elsewhere.

Taxes are up €2bn, most likely from the levies. The €460m raid on pension funds is in there somewhere, but is simply offsetting the loss in VAT.


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## Sunny

DerKaiser said:


> The €460m raid on pension funds is in there somewhere, but is simply offsetting the loss in VAT.


 
Out of curiosity, does anyone know where this money is allocated to if anywhere? Thought some of it was supposed to be used to fund job creation but the Department of Jobs, Enterprise and Innovation seem to have spent less this year than last year??? So much for the importance of job creation then!


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## Chris

onq said:


> (i) funds are created by the fractional reserve banking system - they don't "exist" in reality. The fractional reserve system is a gamble on how many people will demand their money back at any one time. We are talking about ratios and runs on banks.


Fractional reserve means that you keep less cash on your books than you owe to the creditors, with the cash in excess of reserves being lent out. There simply is no excess cash to lend out.



onq said:


> (ii) you cannot make a generalized statement like that. There are areas of the economy where debt is high, mainly in the private property portfolio section. Are you suggesting that Irish business _per se_ is over-borrowed?


Yes, the Irish business community has too much debt in general. There are still loans being made to businesses, and those that get loans are businesses that have little or no debt on their books. Bottom line is that Ireland has too much debt and everything should be done to reduce that, not increase it.


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## Purple

Chris said:


> Yes, the Irish business community has too much debt in general. There are still loans being made to businesses, and those that get loans are businesses that have little or no debt on their books. Bottom line is that Ireland has too much debt and everything should be done to reduce that, not increase it.



I strongly agree with this. We have no business debts, short or long term and fund capital purchases out of cash reserves (the bit we haven’t moved to Germany). Our bank has called offering us credit. I know of businesses that are borrowed massive amounts of money to expand, in effect they have taken a punt on things working out according to plan. That’s fine as long as you can take the hit if it doesn’t work out but many of them will go bust if their gamble doesn’t work out. Crazy stuff; people are treating bank loans like venture capital and expecting the banks to be OK with that.


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## Firefly

Chris said:


> The reason there is no lending going on in Ireland is twofold, (1) there are boot enough loanable funds and more importantly (2) *because Ireland is way too far in debt. *The total level of private and public debt is so high that there simply is no room for further debt to be issued.



A big +1 to that. We operate in a free market for goods and capital. There is nothing stopping european banks from setting up their stall here and providing loans. The reason they're not is because they don't see a return. By forcing "our" banks to lend we are forcing an unprofitable outcome which will only be bailed out by the taxpayer again. Imagine any of us won 100m in the lotto tomorrow and we wanted somewhere to invest it...how many people would be willing to lend it to small to medium businesses in this country?


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## 44brendan

Like everything there is a happy medium here. Business lending does serve a useful purpose if properly assessed. I agree that many businesses are over-borrowed but proper credit assessment should ensure that credit is only advanced where risk is at an acceptable level. I am involved in this business all my working life and apart from the madness that took place in the early part of this century bad debt experience has been acceptable.


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## Firefly

Purple said:


> I strongly agree with this. We have no business debts, short or long term and fund capital purchases out of cash reserves (the bit we haven’t moved to Germany). Our bank has called offering us credit.



I can echo that. My wife opened her own business last week which required an initial capital injection. Based on our circumstances our bank offered us credit which we kindly refused. When enough businesses/people have reduced their debts the banks will start lending again on a wider scale. Like a previous poster pointed out lending in itself isn't bad and is actually quite good if it is financing something which will produce a return. Sadly, given the general level of debt here at the moment any new credit would probably only be used to service existing debt or to pay for the wages.....the sad thing is that the country's finances are in the same state...borrowing to fund current (non capital) expenditure...


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## onq

Chris said:


> Fractional reserve means that you keep less cash on your books than you owe to the creditors, with the cash in excess of reserves being lent out. There simply is no excess cash to lend out.



Fractional reserve banking isn't about lending out "excess cash".

It allows a bank to lend a multiple of its cash reserves, previously circa maintaing a 10% reserve of the total lending.

Money was created out of nothing using the relevant reserve formula.

The system trades on the fact that depositors are unlikely to require all their monies at one time.

ONQ.


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## Purple

onq said:


> Fractional reserve banking isn't about lending out "excess cash".
> 
> It allows a bank to lend a multiple of its cash reserves, previously circa maintaing a 10% reserve of the total lending.
> 
> Money was created out of nothing using the relevant reserve formula.
> 
> The system trades on the fact that depositors are unlikely to require all their monies at one time.
> 
> ONQ.



That's been going on since god was in short pants. It didn't create our current problems.


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## Chris

onq said:


> Fractional reserve banking isn't about lending out "excess cash".
> 
> It allows a bank to lend a multiple of its cash reserves, previously circa maintaing a 10% reserve of the total lending.
> 
> Money was created out of nothing using the relevant reserve formula.
> 
> The system trades on the fact that depositors are unlikely to require all their monies at one time.



You are misunderstanding the point and the problem that banks are facing. Let's say Bank A takes deposits of €1000 and is required to hold 10% reserves. It can then lend out €900, which effectively increases the money supply from €1000 to €1900. That's the magic/fraud/fault of fractional reserve banking.
Now let's say that Bank A gets into trouble and it's reserves fall to €50 and it is recapitalised back to €100. This is effectively what has happened with Irish banks. That bank can now not lend out more money unless it takes in more deposits, i.e. cash in excess of its reserve requirements. If the bank manages to attract deposits worth €100, it can make another loan for €90. The problem is that Irish banks cannot even convince Irish people to deposit their money with them. Therefore it is not possible to expand credit without either (a) increasing deposits or (b) reducing reserve requirements.


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## onq

I don't think we're arguing here Chris.
The issue is Irish banks not lending, not that Ireland is over-borrowed.

You've already read of Purple's happy position of being cash rich and not over-borrowed.
Is his company the only one in Ireland in that happy position? I don't think so.

People may be _personally_ indebted in relation to mortgages and credit cards.
(we're not over-borrowed BTW, we could just do with a bit more work)
This doesn't automatically imply that _businesses_ are over-indebted.

At a recent B2B we were informed by an AIB representative that money was available for new business ventures, so what's that about in the context of your comments?
Contrary to your assertion that there is not enough money to lend in the banks there seems to be money available to invest in one of the riskiest market sectors!

I'm not suggesting your dissembling - we are working from different sources - but there is a disagreement in the facts available.


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## Firefly

onq said:


> People may be _personally_ indebted in relation to mortgages and credit cards.
> (we're not over-borrowed BTW, we could just do with a bit more work)
> This doesn't automatically imply that _businesses_ are over-indebted.



That may be true, but unless the business in question is export-related, then it's customers are here and they're indebted...


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## T McGibney

onq said:


> At a recent B2B we were informed by an AIB representative that money was available for new business ventures, so what's that about in the context of your comments?
> Contrary to your assertion that there is not enough money to lend in the banks there seems to be money available to invest in one of the riskiest market sectors!



But they always say that. Doesn't necessarily mean its 100% true.


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## Purple

Firefly said:


> That may be true, but unless the business in question is export-related, then it's customers are here and they're indebted...



I would add, though this is off topic, that many businesses in both the domestic and export sectors have burned through their cash reserves over the last 2-3 years in order to stay in business and maintain employment/capacity during the world-wide recession. Because of this their ability to self fund investment/expansion/modernisation is severely restricted. In a very high labour cost economy such as this one it is essential that wages as a proportion of overall unit cost are minimised. This can only be achieved by continuous investment in plant, IT, Training etc. Without cash reserves banks are the only source available to most businesses to fund this. Therefore we may see a slippage in our competitiveness over the next few years, despite the downward pressure on wage level. This of course could cause further downward wage pressure thus dampening domestic demand.


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## onq

+1 what purple has written about the difficulties facing Irish business who have relied on their cash reserves to help them through the last three years of the doldrums.



Purple said:


> Without cash reserves banks are the only source available to most businesses to fund this.



This is the whole point, and where our government has failed us - not WILL fail us - HAS failed us!

I don't accept the excuses being offered why Banks cannot lend.

Either the Banks we have must start to lend again into this economy, where as Purple suggests, a demand will arise following the burning through of cash reserves, or else, what I have been saying for months must occur - 

WE NEED A _NEW_ COMMERCIAL LENDING BANK!

End of.

This is not off topic - unless liquidity is provided to business and unless the economy recovers, we will not see our deficit reduce.
This is not brain science, its is axiomatic, and I fail to see why we are trying all the other measures and not this obvious one.

It seems that our government and Europe are together trying to pressure us all into a higher tax regime in Ireland.
We know from the 'Eighties that high tax regimes funding high public wage bills are a huge drag on the economy.

Yet the current crop of "leaders" seem quite happy to accept platitudes about our banks inability to lend.
We seem on a race to the bottom led by inept people who couldn't start a drinks party in a wine shop.

So either we have a functioning commercial lending sector or we won't see the deficit reduce.


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## onq

T McGibney said:


> But they always say that. Doesn't necessarily mean its 100% true.




No argument there T McGibney!

Just reporting what the man said.


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## Chris

ONQ, you are still failing to understand how it is that banks can lend out money. Irish banks have had to increase their reserves significantly in last years, this means that all the money that has been pumped into the banks has gone into the reserves. If you want the banks to lend out more money then either (a) more money has to go into the banks through bonds or deposits, or (b) you reduce the reserve requirements. It is as simple as that. And the problem is that Irish banks cannot attract more deposits that they could use to lend out. Those are the *facts*, there simply is no untouched pot of loanable funds.

As for Irish businesses not being able to borrow I agree with Purple's comments. There are businesses that do not have problems getting credit; these are export companies that have no or very little debts. Companies that are not getting credit are the ones that already have large amounts of debts or those that have depleted cash reserves. Why would a bank lend to a company that has depleted its cash reserves over several years and still needs more? It is a very good indication that the business may not be viable.

What this country needs more than anything is to reduce debt and save money. But unfortunately the political consensus is that we need to repay all debt in full and discourage savings by taxing interest. It is totally paradoxical.


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## Purple

I agree with Chris’s  point about why banks cannot lend. Them’s the facts and no amount of talking or wanting or wishful thinking will change that. 
I agree with ONQ that lack of credit is causing and will continue to cause a reduction in economic activity. It will also kill off businesses that have survived the last few years and are still viable or at least would be if they had cash.

I don’ know enough about banks and banking to offer an opinion on what the solution is.


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## Firefly

onq said:


> WE NEED A _NEW_ COMMERCIAL LENDING BANK!
> 
> End of.



If the Irish banks cannot lend due to deposit ratio restrictions then the market is wide open for foreign banks to enter and provide as much lending as they wish. The fact that they're not here (and more significantly that those that were have pulled out) speaks volumes. Our debt is simply to high at all levels...personal, business and government. The more I think about it I cannot see any other way out except a default of government debt....this will allow tax rates to be dropped and will encourage job growth.


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## onq

Chris said:


> If you want the banks to lend out more money then either (a) more money has to go into the banks through bonds or deposits, or (b) you reduce the reserve requirements. It is as simple as that. And the problem is that Irish banks cannot attract more deposits that they could use to lend out. Those are the *facts*, there simply is no untouched pot of loanable funds.



So you're confirming that the past and present government have lied to us about the reasons why we the taxpayers put BILLIONS of EUROS into the banks?
Hint: it WASN'T so they could sit there like well-fed turkeys clucking at each other - it was so they could LEND MONEY!
All your assertions are doing is getting me angry at these serial liars we have running the country.

As for your comments that businesses seeking money may not be viable, this is the same self-perpetuating stuff the banks were spouting when we first spotted they weren't lending.
Irish businesses are going to have to reinvent themselves to become exporters to replace local demand.

This will cost money and they only place this can be got is the banks.
There is no reason they cannot return to profitability following this.

There is every chance they will fail if this doesn't happen.
This is a TRANSFORMATIONAL process that needs funding.
Saying they're not viable NOW is not a useful assessment.

As for your comments that Banks have no surplus money, could you post some proof - figures, commentaries etc?
There is a big difference between them _choosing_ to hoard their wealth and them _not being able_ to lend.


ONQ.


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## Chris

onq said:


> So you're confirming that the past and present government have lied to us about the reasons why we the taxpayers put BILLIONS of EUROS into the banks?
> Hint: it WASN'T so they could sit there like well-fed turkeys clucking at each other - it was so they could LEND MONEY!
> All your assertions are doing is getting me angry at these serial liars we have running the country.


Technically yes, but ultimately the recapitalisation was to bail out the creditors, the "get banks lending again" mantra was total and utter nonsense.



onq said:


> As for your comments that businesses seeking money may not be viable, this is the same self-perpetuating stuff the banks were spouting when we first spotted they weren't lending.
> Irish businesses are going to have to reinvent themselves to become exporters to replace local demand.


I absolutely agree with this.



onq said:


> This will cost money and they only place this can be got is the banks.
> There is no reason they cannot return to profitability following this.
> 
> There is every chance they will fail if this doesn't happen.
> This is a TRANSFORMATIONAL process that needs funding.
> Saying they're not viable NOW is not a useful assessment.


This is true. However, there is no simple solution, and especially not one that uses government intervention. Government can only reallocate money, i.e. take money from one part of the economy to give to another. At the very best this would result in no net gain, and ultimately someone is losing out.
Above that government is the single worst institution to adequately assess the viability of potential investments. When you use other people's money, that you can appropriate at will, then you have no skin in the game, and thus don't care about the level of risk. The other problem is that lobbying results in very skewed decisions being made.
Look up two of the most disastrous "investments" made by the US government in the companies Solyndra and EnerDel. Both companies could not get loans, so the US government stepped in to fund what was termed a no-brain investment in the green energy industry. $700m have been wasted as Solyndra has declared bankruptcy and EnerDel is scaling back operations to avoid bankruptcy.
Burt Folsom has some quick commentary about this:






onq said:


> As for your comments that Banks have no surplus money, could you post some proof - figures, commentaries etc?
> There is a big difference between them _choosing_ to hoard their wealth and them _not being able_ to lend.


This statement is based on the latest round of recapitalisations that were required after the stress tests in order to meet the new reserve requirements. If there was excess reserves then there would not have been the same need for funds. If there were excess reserves then there would not be the requirement for the amount of overnight funding from the ECB either.
You would have to probably delve into the annual statements of the banks, but maybe Sunny has a better idea where to get this info.


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## DerKaiser

http://www.independent.ie/national-...ake-comes-in-lower-than-expected-2953050.html

_The massive €8bn increase was mainly due to the €10.6bn pumped into the banking sector in various rescue measures.

Excluding those banking-related payments and a €1bn bonus to the State after the sale of some Bank of Ireland shares, the Exchequer deficit fell by about €1.6bn year-on-year.

The total amount of tax collected in the first 11 months of the year stood at €31.8bn, which is 7.9pc more than in the same period last year.

The main reason for the increase was the introduction of the Universal Social Charge.

Stamp duties surged 52pc following the Government's controversial levy on pension funds to pay for job measures in a mini Budget following the general election._


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## DerKaiser

http://www.finance.gov.ie/documents/exchequerstatements/2011/enddecexcheqstat.pdf

The year end figures are in. Compared to 2010, we basically we spent €1.5bn more on health and collected €2.5bn more in taxes (due to the USC) knocking over €1bn off the current budget deficit.  In addition, a further €1.5bn was saved on capital expenses.

With the banking recapitalisations complete (hopefully) and capital expenditure cut to realistic levels, the challenge is to reduce the €11.5bn current budget deficit to zero by 2015. That looks pretty tough at the moment.


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## caliban

*With the banking recapitalisations complete (hopefully) *and capital expenditure cut to realistic levels, the challenge is to reduce the €11.5bn current budget deficit to zero by 2015. That looks pretty tough at the moment.[/QUOTE]

Bank recapitalisations are not complete...the government have to pay 3.1billion every 31 March in relation to IBRC i.e. Anglo up until 2023. Some commentators are saying that the net 9.7billion paid in 2011 in relation to banks is a "one-off". Not true - 3.1billion of it is recurring expenditure.


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## velosolex

*Give it to me straight.*

Massive figures! but could one of you breakdown the financial state of the nation as a figure which relates to the person on the average industrial wage? whatever that is.
ie: Debt, deflect, debt repayments, GDP, export figures, unemployment & social welfare cost, health and all other department spend individually.
Basically I would like to know a breakdown of where my tax (Paye Prsi VAT etc.) and what percentage of my income is being used.


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## mainasia

Firefly said:


> If the Irish banks cannot lend due to deposit ratio restrictions then the market is wide open for foreign banks to enter and provide as much lending as they wish. The fact that they're not here (and more significantly that those that were have pulled out) speaks volumes. Our debt is simply to high at all levels...personal, business and government. The more I think about it I cannot see any other way out except a default of government debt....this will allow tax rates to be dropped and will encourage job growth.


 

I don't know, I think moneylending will occur as long as there is a sufficient return. With a high enough interest rate Ireland would be an attractive market for NEW entrants. I can only surmise that most of the banks in Europe are already overleveraged otherwise Ireland should be a good market to lend into given the lack of lending but relatively high incomes here.


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## DerKaiser

velosolex said:


> Massive figures! but could one of you breakdown the financial state of the nation as a figure which relates to the person on the average industrial wage? whatever that is.
> ie: Debt, deflect, debt repayments, GDP, export figures, unemployment & social welfare cost, health and all other department spend individually.
> Basically I would like to know a breakdown of where my tax (Paye Prsi VAT etc.) and what percentage of my income is being used.



Good question

Of the taxes paid by the average person, the big ticket items are

36% on health spending
36% on social welfare
22% on Education
11% on interest repayments on past borrowings
8% on law and order
5% on transport
4% on environmental protection/local government

Not exhaustive, but you can see that it adds up to well over 100% as we are borrowing so much for these day to day costs


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## Chris

mainasia said:


> I don't know, I think moneylending will occur as long as there is a sufficient return. With a high enough interest rate Ireland would be an attractive market for NEW entrants. I can only surmise that most of the banks in Europe are already overleveraged otherwise Ireland should be a good market to lend into given the lack of lending but relatively high incomes here.



The reason there is very little lending is because Ireland as a whole is way too deep in debt. Per capita Ireland is the second most ideated nation on earth, and the only reason Luxembourg is ahead is because of their financial services. 
http://en.wikipedia.org/wiki/List_of_countries_by_external_debt


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## Firefly

Chris said:


> The reason there is very little lending is because Ireland as a whole is way too deep in debt. Per capita Ireland is the second most ideated nation on earth, and the only reason *Luxembourg is ahead is because of their financial services. *
> http://en.wikipedia.org/wiki/List_of_countries_by_external_debt


 
Hi Chris,

I hope this applies to the UK also, as their external debt is half that of the US!!!

Aren't New Zealand in a good position?!


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## Chris

mainasia said:


> I don't know, I think moneylending will occur as long as there is a sufficient return. With a high enough interest rate Ireland would be an attractive market for NEW entrants. I can only surmise that most of the banks in Europe are already overleveraged otherwise Ireland should be a good market to lend into given the lack of lending but relatively high incomes here.





Firefly said:


> Hi Chris,
> 
> I hope this applies to the UK also, as their external debt is half that of the US!!!
> 
> Aren't New Zealand in a good position?!



Not as much on a per capita basis for the UK and  the US. For a country the size of Luxembourg it has a huge level of corporate financial debt. New Zealand and Australia have quite low public debt, but they do have quite a bit of private debt, but nothing comparable to Ireland.
Here are the per capita numbers:
IRL: $519,070
UK: $144,338
AUS: $52,596
NZ: $50,260
US: $47,568

Of Ireland's $2.4tr external debt, I believe about $800bn is financial services related, but you can't strip all that out, as the taxpayer is liable for a lot of that. Nevertheless, the numbers pretty much speak for themselves; Ireland has too much debt at public and private level and therefore the Irish people and state should not be given more debt.


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## Firefly

Chris said:


> Not as much on a per capita basis for the UK and the US. For a country the size of Luxembourg it has a huge level of corporate financial debt. New Zealand and Australia have quite low public debt, but they do have quite a bit of private debt, but nothing comparable to Ireland.
> Here are the per capita numbers:
> IRL: $519,070
> UK: $144,338
> AUS: $52,596
> NZ: $50,260
> US: $47,568
> 
> Of Ireland's $2.4tr external debt, I believe about $800bn is financial services related, but you can't strip all that out, as the taxpayer is liable for a lot of that. Nevertheless, the numbers pretty much speak for themselves; Ireland has too much debt at public and private level and therefore the Irish people and state should not be given more debt.


 
I agree, but personal debt in the UK is 3 times higher than in the US and total external debt is half the US...this is pretty alarming to me I must say. I wonder what George Soros would think!


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## Chris

Firefly said:


> I agree, but personal debt in the UK is 3 times higher than in the US and total external debt is half the US...this is pretty alarming to me I must say. I wonder what George Soros would think!



It is definitely difficult to be a judge in an ugly contest. Also keep in mind that none of these figures include unfunded liabilities for public promises of future payments. For the US I have seen figures of $60tr to $140tr. Only way out will be very high inflation, which they are trying their damnedest to achieve, or outright default and cutting back on promises, which we have seen to be a political unacceptability.


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## DerKaiser

http://www.finance.gov.ie/documents/exchequerstatements/2012/excheqstatMar.pdf

No signs whatsoever of the current budget deficit closing. 

It's going to be a struggle!


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## Chris

It truly is shocking and a perfect example that all politicians are incompetent.
Here the deficit numbers for the past couple of years:
2008: €12.614bn
2009: €11.367bn
2010: €12.580bn
2011: €11.224bn
2012: €4.918bn

So far this year the deficit is up €741mn on the same period last year. I'm starting to think that Constantin Gurdiev's estimate of an eventual €250bn total debt is somewhat optimistic.


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## Chris

I did a bit more digging into the governments published exchequer reports.

Based on the government's own figures there has been no reduction in total government spending:


Year|Revenue|Difference|Expenditure|Difference|Deficit/Surplus|
2006|€46,144,943||€36,99,4242||€9,150,701|
2007|€47,887,003|3.78%|€40,889,646|10.53%|€6,997,357
2008|€41,624,098|-13.08%|€44,692,803|9.30%|€-3,068,705
2009|€33,879,322|-18.61%|€45,248,110|1.24%|€-11,368,788
2010|€34,441,190|1.66%|€47,021,054|3.92%|€-12,579,864
2011|€36,801,181|6.85%|€48,024,974|2.14%|€-11,223,793
Now these figures do include all the money spent on banking sector recapitalisation past and present. As there are two distinct problems in Irish public finances (a) too much money spent on bailouts and (b) too much money spent on government we should certainly separate the two.

The next table uses data from the same government exchequer data, but this time only taking departmental current and capital spending into account.



Year|Revenue|Difference|Dep Expenditure|Difference|Deficit/Surplus
2006|€46,144,943||€39,391,170||€6,753,773|
2007|€47,887,003|3.78%|€44,608,735|13.25%|€3,278,268|
2008|€41,624,098|-13.08%|€49,312,794|10.55%|€-7,688,696|
2009|€33,879,322|-18.61%|€47,163,274|-4.36%|€-13,283,952|
2010|€34,441,190|1.66%|€46,434,206|-1.55|€-11,993,016|
2011|€36,801,181|6.85%|€45,710,605|-1.56|€-8,909,424|
At first glance this table seems to show that government spending is down a "whopping" €3.6bn since 2008, but in my opinion the figures paint an entirely different picture. In 2007 all the signs were there that a crisis, big or small, was looming. Despite this the government of the day, with a massive give-away-budget, increased spending for 2009 by 10.55%, which resulted in a massive deficit for that year.

Therefore, a more adequate comparison is between the last deficit free year (2007) and 2011. So, how much has spending been cut back since then? It hasn't!!! Spending is up by 2.47%.

My conclusion:
Spending has not been cut in any meaningful way, not by any stretch of the imagination, while taxes have been cripplingly increased. It is about time that an end is put to this madness.


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## callybags

Is it not the case that the small increase in spending is down to the huge increase in unemployment, and therefore spending in other areas has actually been cut?


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## Chris

callybags said:


> Is it not the case that the small increase in spending is down to the huge increase in unemployment, and therefore spending in other areas has actually been cut?



That is entirely possible, but you cannot go around saying that spending has been cut when at the bottom line no such thing has happened. A slower increase and an actual decrease are two completely different things.


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## 44brendan

> It is about time that an end is put to this madness.


 
But should the question not be to firstly identify the capacity to reduce spending without driving people into further social deprevation and damaging our core public services?
Politicians have shied away from addressing the single biggest contributor to spending;- Public service remuneration. I acknowledge the difficulties in doing this.
Health, Education & SW are the top expenditure contributors. There is little scope for savings in the first 2 areas without pay cuts and it must be difficult to tackle SW in any meaningful way without penalising those on marginal incomes. 
Obviously there is potentially still a significant level of waste in the expenditure, but in the context of the major cuts needed, this is likley to somewhat less significant.
So, what should be done? Perhaps someone has a rational proposition!


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## DerKaiser

Chris said:


> My conclusion:
> Spending has not been cut in any meaningful way, not by any stretch of the imagination, while taxes have been cripplingly increased. It is about time that an end is put to this madness.


 
Taxes have been dramatically increased and have yielded significant additional revenues from an ever narrowing base of those on mid to high incomes, that is an absolute fact.

As you say, there has been no such proportionate fall in spending. Social welfare and old age pensions have been untouched or only had minor tweaks.  Public service salaries have given up some of the gains enjoyed over the last 10 years, but are a long way ahead of where they were - even taking the cost of living into account. 

In many cases the cost of living has come down over the last decade, but somehow public servants and people on social welfare are not being asked to see if they could return to standards of living from a decade ago.

The deflationary argument is bogus, it applies equally to taxes and with taxes you also get the disincentives. 

We can also not run €10bn current deficits forever.

So the only obvious answer is to cut wages and social welfare and try deal with the fallout of mortgage defaults, etc in a targetted way.


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## Firefly

44brendan said:


> But should the question not be to firstly identify the capacity to reduce spending without driving people into further social deprevation and damaging our core public services?
> Politicians have shied away from addressing the single biggest contributor to spending;- Public service remuneration. I acknowledge the difficulties in doing this.
> Health, Education & SW are the top expenditure contributors. There is little scope for savings in the first 2 areas without pay cuts and it must be difficult to tackle SW in any meaningful way without penalising those on marginal incomes.
> Obviously there is potentially still a significant level of waste in the expenditure, but in the context of the major cuts needed, this is likley to somewhat less significant.
> So, what should be done? Perhaps someone has a rational proposition!


 
What should be done and what will be done are two entirely different things.

The public sector has swelled in the past decade and now represents a large, organised and unionised group...just look how the OAPs got themselves what they wanted when the OAP was going to be cut as an example. I think we will just see more taxes ( as a roundabout way to reduce public sector wages ) that will further harm the real economy along with cuts to services. More "charges" and "levies" and when these have finally been exhausted, the tax credits will be reduced and finally the marginal rates increased. Good luck trying to keep people working here with these measures.
Once the banking side of our problem has been fixed, the focus will then have to turn to the budget deficit. I think that any big changes here will have to come from the Troika as no political party will want to be the party in government who slash public sector number/salaries...this way they can say their hands were tied. In the meatime, successive governments will be praying for employment in the private sector to pick up....this will solve a nice problem for them....how to cut spending without aggrivating anyone...more people working means more in tax revenue along with less dole...a double whammy. A little bit of inflation with a freeze on public sector pay too would be nice for the coffers.

What should be done in my opinion is to follow what Chris posted here several times....whole areas controlled by the government should be shut down and/or privatised. I would start by looking at those new organisations created during the bubble as IMO a lot are "nice to haves" that can't be afforded. I would also look at more establised functions of the state....e.g ( and I don't know the answer to this)...do we need a navy? Why not just contract the services from the UK or another country? 
The dole should be cut via a sliding scale where those on longterm unemployment are paid less. Along with this I would look to reduce taxes so that those on the dole would be incentivised to seek employment/start their own business/re-educate themselves. 

I'll probably get lambasted for these opinions but what else can be done (apart from continiung to lump more debt on our children)???


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## Chris

I agree that what needs to be done is politically not palatable, but that doesn't mean it cannot be achieved. I believe that a slash, cut and amputate approach to public spending would have serious short term effects that would be overcome before the next election. History has proven that economies can recover very quickly, even from serious downturns, when government gets out of the way. However, I do not believe that any such voluntary and proactive approach will happen here.


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