They’ll balance the books by 2025? I’ll believe it when I see it

The latest Department of Finance estimates on the economy remind me of a CV you might stick in with a job application. The art of the CV is to put your best foot forward. Make things look the best they can.

In this case, the forecasts were submitted to Brussels as a Stability Programme Update.

The most arresting line is that without increasing taxes or decreasing public expenditure, the expected bounceback in the economy would be enough to balance the Exchequer books by 2025.

Of course, the Government is not saying that it won’t put up taxes or increase spending.

No, it points to a spreadsheet exercise, which shows that – in theory, by changing nothing – we would eliminate the Exchequer deficit by 2025. Just three-and-a-half years from now.

What about the growth in population, the enormous spending commitments already made which have to be funded, and the optimistic assumption that growth will take care of itself?

In one way, it is a testament to the health of aspects of the Irish economy that such a possibility could be scoped at all – albeit as a set of numbers on a spreadsheet.

But there are numerous challenges ahead. Put it in perspective. In 2019, the last full year before the pandemic struck, the State collected €22.9bn in income tax and USC. The health budget for 2021 is estimated to run to nearly €21bn.

Assume an overrun, and the cost of the health service alone in 2021 will be equivalent to every euro collected in income tax and USC in 2019.

Health spending is penciled in to increase by €3.5bn this year compared to 2020. Naturally there are huge costs associated with dealing with the pandemic and saving lives. However, €1.8bn of the increase in health spending this year is non-Covid related.

The problem with big spending departments is that once they get the budgets in place, it is very hard to take the money back.

Public Expenditure Minister Michael McGrath has indicated that he doesn’t expect to be introducing austerity budgets in the next couple of years anyway.

Perhaps the health service needs every euro of the €21bn. But surely, if anything, that bill will only get higher in time.

The Government’s assumptions about the corporation tax take are also interesting.

They have penciled in a €2bn hit on this front in their calculations, but actually reckon it could rise slightly in the coming years.

This is very different to the scenario described by the former governor of the Central Bank, Patrick Honohan, who suggested that our corporation tax take could fall off a cliff at some point in the future.

In 2019 the State took in €10.8bn in corporation tax.

Given the changes taking place in the EU around a digital tax, the OECD principles around an agreed new multilateral approach to global corporation tax, and the shapes being thrown by Joe Biden’s new administration in Washington, the Department of Finance estimates might be rather generous.

There is no doubt that parts of the exporting economy have been incredibly resilient.

Continued growth in those sectors of the economy, combined with a short-term consumer spending splurge (which is likely when it is safe to spend money) place the Exchequer in a better position than many would have feared.

But other parts of the economy will be slower to recover. We are also likely to see persistently high unemployment rates for some time. This all carries a cost for the Exchequer.

Of course it would be great if we could just sail through the choppy waters that lie ahead.

Maybe the assumptions about growth will come to pass? Historically low borrowing rates have bought the Exchequer time and allowed the State to fund badly needed short-term measures.

Weaning everybody off this practically free cash will be harder said than done.

Perhaps we don’t need to balance the books in three or four years’ time. Some economists believe the new monetary policy world order represents a new paradigm, in which creating all the money you need can be done without longer-term consequences.

I’ll believe it when I see it.

Is FBD getting set up for a Scandi thriller?

Over the last year FBD has not done itself any favours in its response to pubs which were decimated by the pandemic, but which had taken out business disruption insurance with the group.

The high cost of settling these cases will be mitigated substantially by its re-insurers – but the brand took a real pounding.

Bad enough to force several of its customers to take a High Court action to get fair play – but the insurer is now reported to be trying to offset settlement amounts by taking account of the supports publicans received from the State.

Perhaps they wouldn’t have needed state supports if their insurer had paid up.

Either way, do the Norwegians see something in FBD that other institutional investors, who have reduced their stake, do not?

It is reported that institutional shareholders were disgruntled at the lack of a dividend. With no dividend on the horizon for now anyway, why would a Norwegian insurer want a 6pc stake?

Surely it would make more sense for it to go further and launch a bid for FBD?

It has been suggested that a bid is not on the cards from the Norwegians, given that they operate a commercial insurance model and the Irish business would not make a good fit.

Any bid for FBD would have to take account of the fact that Farm Business Developments plc and the FBD Trust Ltd hold 32.8pc of the ordinary shares. When other preference shares are taken into account, the two entities control 45pc of the voting rights.

Farm Business Developments, which is steeped in farming heritage and has multiple shareholders, might not be too pleased about the reputational damage done to FBD by the plc’s stance on Covid business disruption policies.

But it certainly is not a body that is into major change. It has a board of 12 – and one of its directors, who resigned last summer, had been a director for 30 years.

Perhaps the Norwegians are simply looking at share price upside? 

FBD shares were trading at €12.60 three years ago. Just before Covid, they were going at €8.86 and are now running at around €7.70. The company says its net asset value per share is €10.95.

Bear in mind that recent changes to personal injury awards and other sectoral reforms may play well for insurers.

Whatever Protector Forsikring’s intentions are, they have become the largest shareholder in FBD Insurance outside of the Farm Business Developments and FBD Trust entities.

Watch this space.

 

Dimon backs Dublin in post-Brexit fallout

JP Morgan chief executive Jamie Dimon spooked the City of London somewhat last week with ominous predictions about the financial hit the bank will take following Brexit.

So far, the financial hit has been real, but modest. However, without a clear services deal with the EU, the City may get a little jittery in the uncertainty. 

Dimon, who is not a fan of Brexit, name-checked EU cities he believed would benefit even further, including Amsterdam, Paris, and... you guessed it, our very own Dublin.

Hope he is right.