Consumer spending cannot afford another hit
The banking system is being forced to reduce the ratio between loans and deposits, which in effect means it is not in a position to lend very much.
The State is approaching the closing stages of a massive fiscal adjustment intended to reduce the annual borrowing requirement to under 3% of GDP by 2015.
The latest data shows credit outstanding to households fell by 1.5% in the first quarter of this year and was down by 3.7% in the year to the end of March; loans for house purchase were down by 1.9%; and deposits held by private households stood at €87.2bn at the end of March, representing an annual increase of 0.3%.
This all suggests that the Government is taking more and more out of the economy, the banks are lending less and less, and scared citizens are saving.
What all of this means is that money is being withdrawn, or more precisely is not being spent in the real economy.
For businesses this is not good news, and is reflecting itself in particular, in dreadful car sales.
The latest shock to purchasing power is coming in the form of the property tax. At the end of May, €121m had been paid and by Jul 1, over €250m will have been paid out, or committed to by those who are going to pay the latest tax on a phased basis.
While this represents a massive shock to spending power, there is much worse to come. By Jan 1 next, homeowners will have to cough up more than €500m for the full year’s tax. Imagine withdrawing €500m in purchasing power, or after-tax income, in the busiest shopping month of the year?
God only knows what impact that might have on consumer spending.
For the motor trade, the prospects are particularly awful, because the reality is that car purchase is a discretionary form of expenditure, and barring some government initiative to stimulate demand for cars, 2014 looks like being an even worse year for the motor trade, than this year.
Of course the various tax raising measures, particularly the property tax, will take from other forms of expenditure and will undermine other revenues. The VRT and Vat take on car sales has fallen sharply over the past couple of years, despite the inspired decision to increase VRT in last year’s budget, and a real collapse is likely next year based on current trends, and this will make a large hole in the take from the property tax.
Joined-up thinking appears to be in scarce supply amongst officialdom.
Personally, I am becoming increasingly worried about the longer-term impact of all of the de-leveraging that is going on in the economy. We badly need to see some effort to inject a bit of real stimulus. People buying cars create jobs, tax revenues, and a feel good factor; people spending in our shops do likewise, but both are sadly lacking in the economy at the moment. Michael Noonan, the finance minister, has to do something brave in October, or else we will be doomed to another year of depression.
Finally, the absolute cock-up made by the State Examination Commission in the Leaving and Junior Certificate examinations has to be acknowledged. As a father of two doing both exams, I have witnessed first-hand the stress caused by these awful exams in the first place, but when this stress is compounded by a series of errors, stress levels really go through the roof.
We boast about having a top-class education system, but if we cannot get even setting the exams right, then what does that say about the system? Education Minister Ruairi Quinn has to take responsibility for this mess and make sure it never happens again. It will be interesting to see if there is any semblance of accountability in the public sector as a result of this latest fiasco.
