Good economic news dampened by water issues

The Irish Water debacle has left Ministers on the defensive as they struggle to bed down the contentious new regime. For all the complaints of political incompetence, a fresh batch of positive economic news yesterday provides further evidence that economic recovery is taking hold.

The National Treasury Management Agency sold 15-year debt for the first time since 2009; new exchequer returns indicate tax revenues will come in well ahead of target by the end of the year; and the European Commission pinpointed Ireland as virtually the only bright spot on an arid euro zone landscape in a new forecast.

If the Government’s prime difficulty these days is that many people see little evidence of a turnaround in their daily lives, a drop in consumer sentiment last month points to a sense of caution on the street. Even with a modest tax cut to come in January, such data suggests uncertainty over the extent of the water charge still weighs heavily on consumers.

In the outside world, however, the picture is brighter. Ireland last sold 15-year debt five years ago at the midway point between the bank guarantee and the EU/IMF bailout. The yield on the €3.75 billion raised today was 2.487 per cent, a record for bonds of that duration. Current market prices suggest the NTMA would pay less than 2 per cent on 10-year debt.

The additional interest burden, however, is the cost of pushing maturity of the debt out to the summer of 2030, thereby smoothing out long-term peaks in debt repayments.

The auction proceeds will be used to start paying back the IMF debt. Although the Government had planned to retire €6.1 billion by the end of the year, Taoiseach Enda Kenny told Bloomberg of a new €10 billion target. Leaving aside the €3.75 billion bond proceeds, it now appears the Government will dip into its cash reserves for the balancing €6.25 billion.

Reduced costs

These benefits go beyond the lower debt servicing costs on the newly sold bond, whose interest is below the effective average rate of 3.47 per cent on Ireland’s IMF loans. Not only will the deployment of cash to hand reduce the debt-to-GDP ratio, it will also reduce the carrying cost of that cash, which earns less interest for the Government than the interest it pays on the national debt.

Exchequer returns for October show the Government has paid €7.39 billion to service the debt so far this year, which is as vivid an illustration as any of the burden left on the State in the wake of the crash.

Still, the figures show total tax returns in the year to date are now running almost €1.1 billion ahead of target. This follows a 14.3 per cent surge above profile in October, although the bulk of the €389 million increase was attributed to the delayed receipt of €220 million outstanding from the September pension levy. The levy aside, other revenues were €169 million or 6.2 per cent ahead of profile.

While none of that comes as a major surprise, the figures show the Government continues to benefit from increased employment in the economy and increased consumer spending. Although income tax receipts were 5.4 per cent below profile last month, the Department of Finance attributes that to weak DIRT returns. Rising VAT receipts, up 3.8 per cent on profile in the year-to-date, reflect an improvement in retail sales.

Euro zone threat

Separately, the European Commission upgraded its growth forecasts for Ireland and said the economy was “displaying significant momentum cross the board”. Encouraging as that no doubt is, the increase in the projection for Ireland came as the commission downgraded its forecast for the wider euro zone, with figures for

Germany

,

France

and

Italy

all on the slide.

Although the Irish economy continues to benefit from resurgent growth in the US and UK, the bleak European picture and the threat of a deflationary spiral in the euro zone constitute a serious risk.

Ireland's growth might be the envy of Europe, but the ructions over water show that public patience with the recovery effort is stretched to the very limit.