ECONOMIC POLICY MEMORANDUM:THE DEAL with Europe and the International Monetary Fund is designed to "snap the pernicious feedback loop" between the crises in banking, the economy and the public finances.
An expeditious programme outlined in the deal aims to restore domestic and external confidence, according to the Memorandum of Economic and Financial Policies published yesterday.
The programme is to have four key elements: the downsizing and reorganisation of the banking sector; fiscal consolidation; economic growth and substantial external assistance.
The document envisages the economy expanding in the 2011- 2014 period, with the recovery being primarily export driven. “We recognise that the risks in the short term are tilted to the downside and in particular, the headwinds from fiscal consolidation on domestic demand could be larger than anticipated.”
Inflation in Ireland will remain low, which will improve competition but keep real debt burdens high.
The deal envisages the foundations of the plan for the banking sector being laid very quickly. The key component will be the substantial downsizing of the banks and the isolation of the non-viable parts of the system. Revised proposals for Anglo Irish Bank and Irish Nationwide will be submitted to the European Commission by the end of January next.
Banks will be required to submit deleveraging plans by the end of February next.
By the end of the following month the Central Bank will have prepared an assessment of the banks’ restructuring plans.
AIB, Bank of Ireland and EBS are to be directed to improve their capital positions by the end of next February. Irish Life and Permanent is to do so by the end of May.
The programme will involve the injection of fresh capital of €7 billion. Also, all land and development loans not already moved to Nama are to be moved, bringing the final recapitalisation bill to €10 billion.
Legislation that would provide for forced burden sharing with subordinated debt is being prepared.
New measures to allow financially responsible people get through bankruptcy more quickly and at less cost are to be introduced.
Mortgage interest relief for people having difficulty repaying mortgages is to be retained and the administration of the scheme is to be centralised so as to ensure “a more consistent application”.
Restoring order to the public finances will involve a budgetary correction equal to 9 per cent of gross domestic product.
“While the debt-to-GDP ratio will remain at high levels for the next few years, it is projected to decline thereafter, underpinning debt sustainability.”
If savings from public services and through the expected reduction in staffing do not occur, the plan envisages other measures being taken.
An income-tax-led revenue package, bringing in more than €2 billion in a full year, will involve the lowering of tax bands and credits by 10 per cent and the reduction of pension and other tax reliefs.
The broadening of the tax base will include funding local authorities through a residential-property-based site-value tax.
“Multi-year expenditure ceilings” for the various government departments or vote groups will be published through to 2014.
“We are also planning to move towards full cost recovery in the provision of water services and ensuring greater student contribution towards tertiary education.”
The changes to banking and the public finances will improve the prospects for economic growth, the plan says, and remaining structural impediments to competitiveness and employment growth will be removed.
Competition in the services sector will be promoted in part through new measures allowing for financial and other sanctions in civil law cases involving competition.
A process to examine efficiency in the electricity and gas sectors and the potential for selling State assets is included in the plan, as is the intended reform of the welfare benefits system and changes to the minimum wage.
Drawings from the funds associated with the plan will be pari passu (equally divided) between IMF and European money, and on an as-needed basis.