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Ireland Now Borrowing €400m A Week

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'We're now borrowing €400m a week. Something has to give'

McCarthy says we'll all have to work harder, longer and for less money

Friday July 17 2009

THE Government will have to examine increasing the retirement age in a bid to deal with rapidly escalating pension costs, An Bord Snip chairman Colm McCarthy warned yesterday.

The sharp increase in life expectancy is becoming "hugely costly" and creating "huge problems" for State pension schemes, the economist said.

"What people have concluded is that something's got to give," he added.

"If you suddenly have a big increase in longevity, either you have to have higher taxes to finance the schemes, much higher saving rates across the sector in pension schemes or an increase in the retirement age.

"You've got to have one of those three, so schemes don't go bust," Mr McCarthy said.

His 221-page report did not recommend a new retirement age, but the chairman stressed: "It's all very well saying 'Let's all retire at 65' and the State will pay the pensions for a few years afterwards.

"If people used to snuff it at 70, but have decided to snuff it at 85 and 90, well then something's got to give.

"There either has to be huge increases in taxes to pay for this or huge increases in saving rates in private funded schemes. If people are unhappy with either of those, it seems to be the obvious alternative is an increase in retirement ages."

Outlining his €5bn cutbacks blitz yesterday afternoon, Mr McCarthy said there had been a period of "extraordinary increases" in public spending, with the budgets increasing by 138pc in real terms.

The Government is now borrowing €400m a week to maintain current level of spending, the chairman said.

"Even after [last year's corrective measures by the Government], we're going to borrow through the balance of this year at the rate of €400m a week. That's what we've been borrowing in 2009 . . . and we've been borrowing it at a penalty interest," he said.

"Ireland is now paying the highest margin over Germany of any Eurozone country, recently we've been paying 220 basis points, which is two and a bit percent more than Germany on 10-year bonds. A couple of years ago we were paying the same as Germany on 10-year bonds. The penalty interest rate that we're now paying is bigger than anybody else's."

Having recommended up to €1.8bn in social welfare cutbacks, the economist claimed it was "not true" to argue that social welfare cuts only affect the poorest in society.

Child benefit payments, costing over €2bn per annum, go to everybody regardless of income.

"The Irish social welfare budget is not a silver bullet that's targeted at the very poorest people. That's a myth," he said at a briefing in the Department of Finance.

Defending his decision to recommend a 5pc cut across the board in social welfare payments, in a bid to save €850m, Mr McCarthy said that when a 3pc increase was announced in October, the Minister for Finance had estimated a rate of inflation of around 2.5pc.

But the cost of living has fallen since then, so reducing the rates of social welfare will simply bring them back to the levels of summer 2008, he said.

On the subject of selling off any State properties that are surplus to requirements, Mr McCarthy claimed the Government should have flogged the properties at the height of the property boom in 2006.

"We had a credit-fuelled property bubble which is now over . . . but that doesn't mean they shouldn't flog them (the properties) now," he said.

In proposing a culling of 17,000 public service jobs, the economist claimed there was a need for greater flexibility in staff redeployment.

He said he was not suggesting that someone working in Wexford should be obliged to move to Donegal and claimed that, in some cases, workers wouldn't move two blocks up the road for a different job.

During its "long and hard" discussions about axing the number of TDs, Mr McCarthy said the committee had been conscious of the "anti-politics attitude" which now exists in the country.

His cost-cutting committee had to stand back from the "populist mindset" in assessing the numbers and decided against recommending a decrease. But Mr McCarthy said abolishing the Seanad would result in savings of €25m and was an "option".

Equally, in deciding against a reduction in the number of cabinet ministers, he said 15 was not a large number when compared to other countries. But with some departments "fire-fighting" and taking on huge responsibilities, other departments were not not as demanding and needed to be reshaped.

http://www.independent.ie/national-news/we...ve-1826445.html

:ph34r:

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Ah, sure that's nothing - they can just MEW it ... oh right ... they're buggered then ... :P

Trouble is I suspect our own dear government will also let things drag on until the market or whoever effectively tell them they have to cut costs dramatically...... I am afraid it ever was thus with politicians, such is their desire to cling to power that none of them seem to be bale to deliver the only solution which is to cut national expenditure dramatically... lost public sector jobs, reduced benefits, cut back the pensions are not things they are seemingly willing to consider... even the tories if elected will not bring themselves to do nearly as much as is needed.

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My own take on it...

such is their desire to cling to power that they will invade foreign countries on false pretexts

Hmm, politicians - bastards the lot of them!

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Don't think the government here have the balls to face down the public sector unions. I would suspect soft targets will be cut - social welfare and schools mainly. Anyone interested in the Bord Snip Nua (aka Special Group on Public Service Numbers and Expenditure Programmes) report can read it here: http://www.rte.ie/news/2009/0716/Volume%201.pdf

Anyone wondering what An Bord Snip is can read about it here: http://en.wikipedia.org/wiki/Bord_Snip

Edited by An Bear Mór

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"If you suddenly have a big increase in longevity, either you have to have higher taxes

to finance the schemes, much higher saving rates across the sector in pension schemes or an

increase in the retirement age.

He forgot to mention the other possibility which in the end will be the main way:

the real value of annual pensions will be reduced (whether by inflation or nominal reductions.)

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Where the hell is that bloody tiger. He's the saviour.

It's all so pitiful when an entire economy is built on property speculation. We should know.

Fools, fools and more fools. :rolleyes:

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So they weren't rich after all?

Oh dear.

You only have wealth if you have the right to acquire stuff. Usually money, and investments, allow you to buy lots of stuff.

In a recession, factories close, shops close, etc, and there is less stuff to buy. It is this that causes the fall in real wealth, not movements in money.

A couple of years ago, Ireland as a nation, could buy a lot of stuff. They cant buy quite so much stuff now.

Interesting what that guy said in the interview.

THE Government will have to examine increasing the retirement age in a bid to deal with rapidly escalating pension costs, An Bord Snip chairman Colm McCarthy warned yesterday.

The sharp increase in life expectancy is becoming "hugely costly" and creating "huge problems" for State pension schemes, the economist said.

"What people have concluded is that something's got to give," he added.

"If you suddenly have a big increase in longevity, either you have to have higher taxes to finance the schemes, much higher saving rates across the sector in pension schemes or an increase in the retirement age.

One of those three options is wrong. You cant all save more for retirement. Keynes showed us the Paradox of Thrift. An individual can save, and it helps make us that person a bit wealthier in the future. But if we all save together, the economy collapses as capacity contracts to meet demand, and we all end up much poorer.

So I guess the Irish will plump for saving more.

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"If you suddenly have a big increase in longevity, either you have to have higher taxes to finance the schemes, much higher saving rates across the sector in pension schemes or an increase in the retirement age."

Suddenly? SUDDENLY??!?

What, did people overnight 'suddenly' start living to 100 when the day before they were living to 70?

:blink:

Or, is it really the fact that they've just noticed and/or forgot to plan for this.

Hmmmm

:rolleyes:

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One of those three options is wrong. You cant all save more for retirement. Keynes showed us the Paradox of Thrift. An individual can save, and it helps make us that person a bit wealthier in the future. But if we all save together, the economy collapses as capacity contracts to meet demand, and we all end up much poorer.

So I guess the Irish will plump for saving more.

You understand the paradox western societies face. We can't all save and pay down debt(or invest as a society for pensions).. or it leads to the deflationary death spiral.

Edited by aa3

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One of those three options is wrong. You cant all save more for retirement. Keynes showed us the Paradox of Thrift. An individual can save, and it helps make us that person a bit wealthier in the future. But if we all save together, the economy collapses as capacity contracts to meet demand, and we all end up much poorer

yet another statement by keynes that defies common sense

it is true in the short term

but if people and the economy have savings then these savings are used to invest in capital to increase future productivity

when the flaws in keynes theories were pointed out to him that they wouldnt work in the long run he replied in the long run were all dead

never mind future generations then after the idiots have bankrupted the country

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and

link

However, we need to remind ourselves that we are hearing myths that not only represent wrongheaded economic thinking but that are also driving the US economy into a deep depression through reckless spending and resource destruction. The actions of Obama and the Beltway are political in nature, but they have the veneer of economic "theory."

If I can put the whole Keynesian set of fallacies into one statement, it would be this: the modern Keynesians believe that the economy operates like a perpetual motion machine, with government spending being the "grease" that keeps it from slowing down. The "friction" in this economic machine, according to the pundits, is private saving. Eliminate it, and the economy goes on forever, adding energy and expanding indefinitely.

Such a notion, of course, is nonsense and dangerous and delusional. In fact, everything Gross says about the economy represents a view that becomes destructive when carried into policy. Therefore, it is imperative that we lay out what the real foundations of an economy are and point out that the present behavior by consumers is badly needed if there is to be an economic recovery.

The first thing to do is to explain that the "paradox of thrift" is simply wrong. This "paradox" is based upon the belief that if people increase their savings during an economic downturn, they consume even less, thus driving the economy further down. People respond by saving even more until the economy implodes into a perverse "equilibrium" of high savings, low spending, and widespread unemployment.

Such a viewpoint is based upon the theory of the "perpetual motion" of an economy in which there is a "circular flow": individual households combine with firms and government to produce goods that, in turn, are consumed by individual households. As long as this flow goes on unimpeded (or as long as consumers spend as much as they can), the economy will perform admirably with full employment.

However, if consumers save or "hoard" some of their money, then there will be a "leakage" from the system, which means that households cannot "buy back" the products they have produced. The unpurchased goods then pile up in the inventories, so businesses must then cut back production and lay off workers. This further triggers consumer uncertainty, which means they save even more money, and we are off to the downward races. Paul Krugman writes,

One way to look at the international situation right now is that we're suffering from a global paradox of thrift: around the world, desired saving exceeds the amount businesses are willing to invest. And the result is a global slump that leaves everyone worse off.

So that's how we got into this mess. And we're still looking for the way out.

To combat this evil, government must fill the spending hole until savers realize that they can have confidence to become reckless spenders again. However, if government fails to act, then the economy will fall into an even deeper hole.

Such a view is hardly the product of modern intellectuals. Nearly three centuries ago, Bernard Mandeville wrote the "Fable of the Bees," which is an intelligent way of phrasing the economic doctrines championed by Keynes and Krugman. Likewise, others have claimed that unless consumers are forced to spend and spend, the perpetual motion machine known as an economy will grind to a halt, done in by the friction of what Karl Marx called the "internal contradictions" of capitalism.

Yet there is another view that has been well stated by Austrian economists such as Ludwig von Mises, F.A. Hayek, and Murray Rothbard. In the present era, investment analyst Peter Schiff has been carrying a lot of the water. After having been scorned for years on the financial talk shows, he is finally receiving a small amount of respect.

In this view, the economy grows because the very structure of production — the mix of capital goods, resources, and labor — is put in line with the patterns of spending and saving by consumers and households. This is not a circular activity in which production is propped up by spending and cheap credit that accrues back to the households. Instead, the act of saving provides a means for producers to obtain capital, and capital goods are then used to produce more goods using fewer resources so that the newly freed resources can be used to produce those things that were unavailable before.

This is a viewpoint that recognizes the law of scarcity. It also recognizes that more consumption is made possible only by more production, but production that is done in line with both the spending and saving patterns of individuals in the economy. If lines of capital are created that are not compatible with saving and spending patterns set by consumers, then the capital is malinvested.

Malinvestment does not occur by accident. It happens because the government, through monetary authorities, has suppressed real interest rates and has touched off a credit-inspired boom that cannot be sustained. We first saw that in the stock-market bubble and then later in the housing bubble. In both cases, the monetary authorities chose to hold down rates of interest to below-market levels and then to encourage people to borrow, borrow, borrow.

Both the stock market and housing "booms" made it seem like the economy was in great shape. (Arthur Laffer told Peter Schiff in 2006 something akin to "the American economy has never been better," while excoriating Schiff for saying that the US economy was teetering on the brink of disaster.) In his book about the Clinton administration, Paul Begala declared that the economy during Bill Clinton's years in power was "the best economy ever." Indeed, booms are fun while they last, but they must always end.

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