The Irish Independent reports that half the planned €4bn in spending cuts in next month’s Budget will go towards interest payments on the swelling national debt, pre-Budget figures reveal.
The toughest Budget on record will only prevent the public finances from getting worse, according to figures in the Department of Finance’s pre-Budget Outlook.
By 2010, one euro in every six collected in tax will go on interest payments rather than government services – ratios not seen since the mid-1990s.
Borrowing will remain close to €20bn next year. It is being held down by a significant fall in capital spending, which is €3bn less than was planned before the crisis broke.
Finance Minister Brian Lenihan warned the €4bn in cuts were necessary to put the country on the road to recovery.
He also indicated cuts in public sector pay and social welfare rates were on the way, saying that to do nothing would increase borrowing from 12pc of national production (GDP) to 14pc of GDP – equivalent to €22bn. Without corrective action, the national debt would stand at around €100bn by the end of 2010, the Outlook says.
A significant part of those cuts will come from the €21bn social welfare bill.
Taoiseach Brian Cowen yesterday gave the first hint of a possible child benefit cut of 11pc.
He claimed the Opposition's plans to pay the social welfare Christmas bonus and not cut child benefit would cost another €500m. "If that were to be the case, the correction would be €4.5bn, rather than €4bn," Mr Cowen said.
Since the Christmas bonus costs €223m, the balance of €277m could come in the form of child benefit cutbacks -- about 11pc of the total -- with bigger cuts for the better-off, and lower-income families getting cash back to compensate.
However, Mr Lenihan attempted to play down Mr Cowen's remarks, saying no final decision on the size of the child benefit cut had been taken, but insisting there was justification for social welfare cuts.
He said that payments were now worth 4-7pc more than last year due to the drop in the cost of living. And he pointed out that they had been increased by 3pc in last year's Budget. Inflation figures yesterday showed prices down more than 6pc on last year.
"You cannot constantly escalate the cost of public services at the expense of everybody else in the community," he said.
Despite insisting there was no need to cut child benefit payments, Fine Gael leader Enda Kenny yesterday refused to commit to reversing such a move if his party got into power.
"You face each circumstance as you find it," he said.
The pre-Budget report says that the public-sector pay bill has more than doubled to €20bn since 2000, with numbers in the health and education services increasing by 40pc, and the size of the Garda Siochana increasing by a quarter. Over 70,000 extra government workers were hired in the period and only the Defence Forces are smaller than eight years ago. Mr Lenihan said he had made no secret of his view that scope for increased taxation was "very limited", given that higher earners were paying up to 55pc in tax and that bringing lower paid workers into the tax net would have "severe consequences" for them.
In a video on the Fianna Fail website last night, Mr Cowen also ruled out higher taxes on the wealthy, saying raising taxes could be deflationary and put jobs at risk.
The pre-Budget Outlook said the only new tax proposed was the carbon tax, and expected tax revenue to fall again next year. It estimates revenue of €31bn, compared with €32.2bn this year, although much will depend on this month's tax payments from the self-employed.
Fine Gael finance spokesman Richard Bruton said the pre-Budget Outlook suggested there was no end in sight to the recession with the Government expecting a further 72,000 job losses next year.
Labour's Joan Burton said the pre-Budget figures confirmed the "appalling result of Fianna Fail's mishandling of the Irish economy".
In line with other forecasts, the Department of Finance is more optimistic than at the time of the emergency Budget in April.
It expects the economy to shrink by 7.5pc this year, but by .5pc in 2010, versus a 3pc forecast In April.
The Outlook expects unemployment to peak at 13.75pc next year -- lower than the previous 15.5pc.
Brendan Keenan: Running faster to stand still -- welcome to the debt trap
The Irish Independent also reports that Irish companies should be cautious about expanding into emerging markets and focus instead on big and developed markets, according to several senior executives who run some of the country's most successful companies.
"More fortunes have been lost than made by getting in too early," former CRH boss Liam O'Mahony yesterday told a UCD conference on making businesses international.
Mr O'Mahony, who ran the world's second biggest building materials company from 2000 to 2008 and now chairs cardboard maker Smurfit Kappa, said Irish companies should consider expanding into the US, UK and other mature markets before looking at countries such as China. "Some of these markets are very large and there is still scope to grow as long as you have value propositions," he said.
Mr Mahony's advice was repeated by Glanbia chief executive John Moloney and Glen Dimplex boss Sean O'Driscoll. "China is a long-haul, a slow-burn," Mr O'Driscoll said.
All three praised the work of Irish diplomats and their ability to crack open new markets. Embassies were often more useful than trade missions or government agencies, the men said. They also noted that foreign embassies here could help companies that wanted to expand.
As for firsthand experience, Glen Dimplex's O'Driscoll said executives from the privately-owned electrical appliances company had gone to Japan on a government-sponsored trade mission and concluded that the world's second largest economy was not a suitable place for the company to expand.
A few years later, Glen Dimplex's people travelled to Japan on their own, met with 28 Japanese companies in five days with the help of Enterprise Ireland, and decided to start doing business there which has since become successful. The three business leaders also agreed that it was important to send company officials to run overseas businesses initially. Only people who had worked within a company understood that company's needs, they said. "You have to make a commitment of bodies to the ground," Glanbia's Moloney said.
The three business leaders complained it had become harder to get Irish people to take foreign postings. Mr O'Mahony said they were essential to a company's success.
Company bosses "need to have the hard conversation (with employees and tell them) 'if you're not prepared to be mobile you won't progress'," Mr Moloney added.
The Irish Times reports that the Government and the country have no option but to face up to the need to save €4 billion in the budget, Minister for Finance Brian Lenihan said last night.
Speaking at the publication of the pre-budget outlook, he said there was a duty on all those in public life to outline how they would deal with the need to restore order to the public finances.
“I welcome the broad support for the need to make an adjustment of €4 billion next year, because taking decisive action now will bring immediate benefits to our economy,” said Mr Lenihan. He emphasised the task facing the country was to stabilise the national debt so that it did not grow to unsustainable levels.
“There is an onus on all citizens and all political parties to reflect on these realities,” said the Minister, who repeated the Government’s commitment to finding the bulk of the €4 billion from spending cuts.
Mr Lenihan said Ireland was not the only country with severe problems and he pointed out the European Commission had identified the UK, Spain, Latvia and Greece as states with similar problems to Ireland.
“We are in a group of five countries that are seen to have critical problems at present,” said the Minister, who added the actions proposed in the budget would lead to improvements from the middle of 2010.
Responding to questions about potential cuts in social welfare, he said there had been a full discussion in the Fianna Fáil parliamentary party and he expected his party’s TDs and Senators would support whatever measures emerge.
Mr Lenihan pointed out that figures from the Central Statistics Office yesterday confirmed there had been a substantial drop in the cost of living over the past year, including basic items like food and clothing.
The pre-budget outlook from his department forecast that the Irish economy would contract by 1½ per cent next year following a decline of 7½ per cent this year, with unemployment predicted to peak at an average of 13¾ per cent of the labour force next year. This forecast is lower than the 15½ per cent rate contained in the April supplementary budget, but Mr Lenihan said the downward revision left no room for complacency and creation and protection of jobs remained the over-riding objective .
“The last year or so has been exceptionally difficult for us all. And there are significant challenges ahead. But I am pleased to note that the outlook for the economy is now improving. The consensus now is that positive growth will return during 2010, although it will be 2011 before we experience positive growth for the year as a whole. My department’s pre-budget outlook outlines the emerging macroeconomic and fiscal outlook for the coming years.”Mr Lenihan said the Government would take the necessary decisions in the budget .
“Our resolve as a Government to do the right thing has boosted international confidence in Ireland. Without international confidence, our economy will not recover.”
The Minister stressed his determination to stabilise the budget deficit in order to limit the increase in public debt, restore confidence in our public finances and stop the drain on scarce resources by an ever-increasing interest burden.
“Now is the time to stabilise the deficit: falling prices and lower interest rates are cushioning the impact of the necessary adjustments on families. The decline in prices this year and the prospect of a further, albeit more modest, decline next year is restoring our international cost competitiveness. Nominal income levels must be seen in the context of declining prices.”
Taoiseach Brian Cowen also referred yesterday to the impact of falling prices. “The latest inflation figures out today show that prices fell by 6.6 per cent in last 12 months. This means that the real value of take-home incomes has increased by that amount.
“If prices had increased by that amount, there would be loud calls for compensatory pay increases. Equally, the fact that prices are falling must be taken into account when assessing the potential impact of wage and welfare adjustments."
The Irish Times also reports that developer Noel Smyth has borrowings of almost half a billion and rental income of just €13 million arising from his planned €300 million development of The Square shopping centre in Tallaght. The development has been allegedly thwarted by three other developers including Liam Carroll, a judge was told yesterday.
Under cross-examination by Hugh Mohan, for Mr Carroll, Mr Smyth denied he was the “luckiest man alive” because his development had not proceeded. “That is exactly what Liam Carroll said when I spoke to him. He decided I was lucky because he stopped me.” Mr Mohan said a development of the magnitude proposed by Mr Smyth’s Jersey-registered company Redfern would, like many others, be “significantly under water” at this point.
Mr Smyth, who is also a solicitor, said part of the development would have gone ahead and would have increased the footfall in Tallaght. He denied his plans conflicted with the local area plan for Tallaght and would not have secured permission. Counsel could not compare the situation now, where the property market is in “a tailspin”, with “Celtic Tiger days” a few years earlier, he said.
He agreed the only bank prepared to fund his scheme was Anglo Irish Bank. Because of previous borrowings with Anglo, it was the “obvious” lender and Anglo was confident about the planned development “on a long-term basis”, he said.
Denying suggestions that he would never have secured bank financing for the proposed phases three and four of the Tallaght development, he said he believed the banks, in certain circumstances, would loan further funds.
Yesterday was the 21st day of the action before Mr Justice Brian McGovern by Redfern Ltd, which alleges that developers Larry O’Mahony and Thomas McFeely broke a binding agreement of August 2005 with Redfern for the proposed Tallaght development by, unknown to Redfern, entering a secret deal with Mr Carroll, who had a rival development in Tallaght.
Mr Smyth agreed yesterday he committed to €320 million for the Tallaght development when he had no funds actually in place, and on the basis of a 2.9 per cent return. He had spoken to Anglo, and it was understood they would commit “to do something for us”.
He had not anticipated difficulties which arose, including difficulty securing control over adjacent plots – known as the Lowe licence – necessary to secure access to large areas of The Square centre, he said. It was Mr Carroll who had stopped his development “dead in our tracks”. It was being suggested his side should have foreseen “an economic tsunami” but it was Mr Carroll who“started the circumstances”.
Mr Smyth is claiming damages of €140 million against Mr O’Mahony, Mr McFeely and Mr Carroll and various companies. He said he is suing because“whatever way I turn, I cannot get Mr McFeely and Mr O’Mahony to complete the Redfern agreement because they have been taken off the pitch by Mr Carroll”.
Redfern claims it was in a key position to develop The Square centre some years ago but needed ownership of the Lowe licence, later bought by Mr McFeely and Mr O’Mahony for €55 million and held through Aifca Ltd.
Redfern claims a binding agreement of August 2005 involved the disposal of the Lowe interest to Alburn, a subsidiary of Redfern, and a joint-venture development of the centre, but that Mr O’Mahony and Mr McFeely secretly brokered a deal with Mr Carroll causing Aifca’s shares in Lowe to be transferred to Tafica Ltd, controlled by Mr Carroll.
In separate defences, the defendants allege Redfern failed to complete the August 2005 agreement, causing serious financial difficulties for Mr O’Mahony and Mr McFeely and leading to their agreement with Mr Carroll to refinance their borrowings. Mr Carroll and his companies deny any liability under the August 2005 agreement as they were not party to it.
The Irish Examiner reports that Irish exports could grow by 10% if the Government invests in nanoscience, according to the organisers of Nanoweek.
The event aims to raise awareness about the role of nanoscience in industries such as ICT, medical devices and biopharmaceuticals.
Ireland is ranked sixth in the world for our work in the area and nanoscience is used to generate €15bn of exports every year.
General Manager of Intel Ireland Jim O'Hara said the Government "needs to invest strategically in this growing area".
The Financial Times reports that Alistair Darling is expected to present a less rosy outlook for the British economy than that forecast by the Bank of England when he delivers his pre-Budget report next month.
The chancellor, not known for his exuberant optimism, was said to have been somewhat surprised this week when Mervyn King, the governor of the Bank of England, projected growth of 4 per cent in 2011.
Mr Darling has little interest in fuelling expectations of a strong recovery when he presents his autumn statement on December 9; government officials expect little change from the forecasts he gave in his Budget in April.
He is expected to leave any significant upgrades to the forecasts until next spring’s Budget, providing Labour with something of a lift ahead of an expected election on May 6 next year.
Mr Darling’s Budget forecasts were greeted with mocking laughter from Tory MPs when he forecast growth of 1 to 1.5 per cent in 2010 and 3.25 to 3.75 per cent in 2011.
Those projections look less outlandish now that the Bank has issued growth forecasts for 2.1 per cent and 4 per cent respectively.
Although the chancellor may tweak his original forecasts slightly upwards, he believes that “uncertainty” remains – a view shared by Mr King.
Mr Darling may have another reason not to echo Mr King’s bullish growth forecasts: if the economy is set on a strong growth path, George Osborne, the shadow chancellor, will feel he can decisively tackle the deficit without stalling the recovery.
As chancellor, Mr Osborne would introduce a tough early Budget, putting in place tax rises and spending cuts. He hopes the pain would be forgotten – and the recovery would be fully under way – by the time of the following election.
Most political and economic observers say that even if Mr King’s forecasts for the next two years turn out to be correct, the winner of the next general election will still face difficult choices on taxation and spending.
Mr Darling will use his pre-Budget report to give more detail on how he intends to halve the deficit from 12.4 per cent of national output now to 5.5 per cent in 2013-14.
He is expected to map out “priorities” for the future – likely to include areas such as social care, front-line teaching and healthcare – giving a broad hint about less essential areas where cuts may be made. Mr Darling will also give an indication of programmes he intends to cut.
Carl Emmerson, deputy director of the Institute of Fiscal Studies, says the government’s deficit reduction plan will be aided by lower-than-expected unemployment and the stock market rally – shaving about 0.3 per cent of gross domestic product off the total.
But he says even if Mr King’s growth forecast for 2011 materialises and turns into sustained high levels of growth, there would be little political gain for the winner of the election.
“You might have six years of pain instead of the eight projected by the Treasury,”Mr Emmerson says. “I’m not sure that’s all that fantastic. There is no doubt it’s a great big hole and we need policy action to deal with it.”
Vince Cable, the Liberal Democrat Treasury spokesman, argues the economy will be sluggish for some time to come as households and businesses rebuild their balance sheets.
He says tough spending cuts are needed, but says the winner of the next election should not endanger the recovery by cutting too drastically now.
John McFall, the Treasury committee chairman, said: “I think the economy has a way to go yet. The social aspects of this crisis, including rising unemployment, are still being felt.”
The FT also reports that industrial production in the eurozone has risen for the fifth consecutive month, sparking hopes that GDP figures to be published on Friday could be higher than originally expected.
Although more modest than some observers had expected, the rise consolidated predictions that third-quarter GDP estimates would be positive, bringing five quarters of economic contraction to an end.
The Commission expects a 0.5 per cent GDP growth.
Martin Van Vliet, economist at ING, said: “September’s further increase in eurozone industrial production will likely bolster speculation that tomorrow’s eurozone third-quarter GDP figures could surprise on the upside.”
Industrial output is still 12.9 per cent below last year, but the five-month positive run points to successes in eurozone governments’ fiscal stimulus measures to help bolster the economy.
Industrial production accounts for about one-sixth of eurozone GDP. Other indicators such as retail sales have also improved in recent months, but the outlook remains uncertain because unemployment rolls are still rising.
The September data were underpinned by growth in the production of capital goods and non-durable consumer goods, with durable consumer goods and energy production both retreating.
The underlying situation remains uneven across Europe, as per previous quarters. Ireland’s production grew 11 per cent, Germany’s 3 per cent and non-eurozone UK increased 1.5 per cent.
Italy, Portugal, Spain and France were among those countries whose production retreated.
The New York Times reports that Wall Street stocks fell on Thursday as investors reacted with caution to a drop in the price of oil. An announcement by President Obama of a job creation initiative failed to motivate investors.
They dumped shares of oil stocks after the Energy Information Administration said that large amounts of petroleum were going unused as businesses and consumers reduced their use of oil. The report said refineries had eased production to the lowest levels since September 2008. As a result, oil fell to $76.64 a barrel, down from $79.28 on Wednesday.
President Obama, speaking at the White House before departing for a weeklong tour of Asia, announced that he would convene a summit meeting in December to examine the state of unemployment. Mr. Obama said he was open to any “demonstrably good idea” that would spur job growth.
“We have an obligation to consider every additional responsible step we can to encourage and accelerate job creation in this country,” he said.
In response, shares on Wall Street made modest gains early but spent most of the day in retreat. At the close of trading, the Dow Jones industrial average was down 93.79 points, or 0.91 percent, at 10,197.47. The broader Standard & Poor’s 500-stock index was down 11.27 points, or 1.03 percent, at 1,087.24 and the Nasdaq composite index fell 17.88 points, or 0.83 percent, at 2,149.02.
“There isn’t enough conviction there to slough off a bad economic number,” said Uri D. Landesman, head of global growth at ING Investment Management. “There really is significant debate and disagreement over what the rate of improvement of the economy is going to be.”
The day began when the Labor Department announced that new filings for unemployment insurance dropped last week to a seasonally adjusted 502,000, from an upwardly revised 514,000 the previous week.
While the broader economy has shown signs of health since the near collapse of the financial system last year, the United States has continued to grapple with high levels of unemployment. Last month, the unemployment rate reached 10.2 percent, a 26-year high.
Shares of Advanced Micro Devices shares surged after Intel said it would pay A.M.D. $1.25 billion to settle antitrust and patent disputes. A.M.D.’s stock climbed 21.8 percent to $6.48, while Intel shares fell by 0.8 percent.
Other technology stocks also rose. Hewlett-Packard’s announcement on Wednesday that it would acquire 3Com, a provider of computer network equipment, for $2.7 billion sent 3Com’s stock up 31.1 percent, though H.P. declined 0.6 percent.
The dollar, which had dropped to a 15-month low on Wednesday, showed signs of strengthening. At the market’s close, it was trading at slightly more than $1.48 against the euro, which could explain some of the drops in stock prices as investors redirected their funds to currency markets in hopes of strong returns.
Wal-Mart, the nation’s largest retailer, reported on Thursday that its third-quarter profit had risen 3.2 percent from the previous year, though sales at stores open at least a year fell 0.4 percent. Its stock rose modestly on Wednesday, but analysts said its report still raised questions about how much consumers would spend this holiday season.
Quincy Krosby, a markets strategist at Prudential Financial, said that the market was still hesitant and that investors expected a significant upturn when the S.& P. 500 reached the 1,100-point threshold. That level is significant, she said, because it would be a return to the days before the financial crisis and could motivate skeptical traders on the sidelines to enter the market.
“This is more of a struggle in the market, an inflection point, as to whether or not investors see the push toward the end of the year having any ammunition,” she said. “It’s psychological. Investors will go in regardless of whether they believe the fundamentals of the economy are strong.”
European stocks were mixed, with the DAX in Germany down 0.1 percent, the CAC in France down 0.2 percent, and the FTSE in Britain up 0.2 percent.
The Treasury’s 10-year note rose 10/32, to 99 13/32. The yield fell to 3.44 percent, from 3.47 percent late Tuesday.
The NYT also reports that from the edge of the Thames River in New London, Conn., Michael Cristofaro surveyed the empty acres where his parents’ neighborhood had stood, before it became the crux of an epic battle over eminent domain.
“Look what they did,”Mr. Cristofaro said on Thursday. “They stole our home for economic development. It was all for Pfizer, and now they get up and walk away.”
That sentiment has been echoing around New London since Monday, when Pfizer, the giant drug company, announced it would leave the city just eight years after its arrival led to a debate about urban redevelopment that rumbled through the United States Supreme Court, and reset the boundaries for governments to seize private land for commercial use.
Pfizer said it would pull 1,400 jobs out of New London within two years and move most of them a few miles away to a campus it owns in Groton, Conn., as a cost-cutting measure. It would leave behind the city’s biggest office complex and an adjacent swath of barren land that was cleared of dozens of homes to make room for a hotel, stores and condominiums that were never built.
The announcement stirred up resentment and bitterness among some local residents. They see Pfizer as a corporate carpetbagger that took public money, in the form of big tax breaks, and now wants to run.
“I’m not surprised that they’re gone,” said Susette Kelo, who moved to Groton from New London after the city took her home near Pfizer’s property. “They didn’t get what they wanted: their development, their big plan.”
Ms. Kelo lived in a small pink house in the Fort Trumbull section that was square in the sights of city and state officials who wanted to revitalize the area. The city had created the New London Development Corporation to buy up the nine-acre neighborhood and find a developer to replace it with an “urban village” that would draw shoppers and tourists to the area.
Economic development officials in Connecticut used that plan — and a package of financial incentives — to lure Pfizer to build a headquarters for its research division on 26 acres nearby. With an agreement that it would pay just one-fifth of its property taxes for the first 10 years, Pfizer spent $294 million on a 750,000-square-foot complex that opened in 2001.
By then, Ms. Kelo, the Cristofaros and several neighbors had sued the city to stop it from using its power of eminent domain to take their property. The lawsuit, Kelo v. New London, wound up at the Supreme Court in 2005 as one of the most scrutinized property-rights cases in years.
In a 5-to-4 decision, the high court ruled that it was permissible to take private property and turn it over to developers as part of a plan to bolster the local economy. Conservative justices, including Clarence Thomas, dissented. Justice Thomas called New London’s plan “a costly urban-renewal project whose stated purpose is a vague promise of new jobs and increased tax revenue, but which is also suspiciously agreeable to the Pfizer Corporation.”
The decision was widely criticized, and spurred lawmakers across the country to adopt statutes to prevent similar uses of eminent domain. Scott G. Bullock, senior attorney at the Institute for Justice, a libertarian group in Arlington, Va., said that 43 states had moved to protect private-property rights since the Kelo decision. New York and New Jersey are among the seven that have not, he said.
Mr. Bullock, who represented the landowners in New London, said Pfizer’s announcement“really shows the folly of these plans that use massive corporate welfare and abuse eminent domain for private development.”
“They oftentimes fail to live up to expectations,”he added.
For its part, Pfizer said it had no stake in the outcome of the Kelo case nor any interest in the development of the land that was acquired by eminent domain, according to a statement provided by a spokeswoman, Liz Power.
After Pfizer completed its $67 billion acquisition of Wyeth, another drug giant, in October, Ms. Power said, “We had a lot of real estate that we had to make strategic decisions about.” She said Pfizer would try to sell or lease its buildings in New London and would “continue to pay our taxes to the city as scheduled.”
The complex is currently assessed at $220 million, said Robert M. Pero, a city councilman who is scheduled to become mayor next month. The company pays tax on 20 percent of that value and the state pays an additional 40 percent, Mr. Pero said. That arrangement is scheduled to end in 2011, around the time Pfizer, which is currently the city’s biggest taxpayer, expects to complete its withdrawal.
“Basically, our economy lost a thousand jobs, but we still have a building,”Mr. Pero said. Then again, he added, “I don’t know who’s going to be looking for a building like that in this economy.”
Some residents said they expected Pfizer to seek a revaluation of its buildings if they wind up vacant in two years; Ms. Power declined to comment.
Mr. Pero said that he was offended that Pfizer did not notify city officials about the decision before Monday or give them a chance to argue against it or even fully understand it. But he said he did not regret the decisions he and other elected officials had made to bring Pfizer to New London for what they had hoped would be a long and fruitful stay.
“I’m sure that there are people that are waiting out there to say, ‘I told you so,’ ”Mr. Pero said.“I don’t know that even today you can say, ‘I told you so.’ ”
But Mr. Cristofaro and Ms. Kelo both said just that.
Ms. Kelo, a nurse who works in New London and Norwich, Conn., said she was still bitter about the loss of her house, which she sold for $1 to Avner Gregory, a preservationist. Mr. Gregory dismantled the house and moved it across town. It now stands as a bright-pink symbol of the divisive dispute that drew so much attention to New London.
“In all honesty, I’m not happy about what happened to me,”Ms. Kelo said. But, she added, “With 43 states changing their laws, in that sense I feel we did some good for people across the country.”