When we look back at 2011 we find that in terms of the strength of the economy, the first half of the year was on the upside. The incredibly strong export performance to which Mr. Butler referred was the key factor driving this economic growth. However, the third quarter figures published in the week before Christmas were very disappointing. We must always be careful not to read too much into growth numbers for an individual quarter because they tend to be exceptionally volatile given the nature and structure of the economy. It is clear, however, that while exports are continuing to grow, we will not have the same pace of growth as we had in the past two years. This will make it much more challenging to keep the economy out of recession and maintain economic growth.
In addition, strong export growth has not delivered the type of employment boost we desperately need. With close to 300,000 people unemployed, the need for some type of stimulus to the domestic economy to get spending going again and return people to work is more urgent than ever. This issue has been placed in focus again by the downturn caused by the eurozone crisis.
The economy needs an injection of confidence and cash, both capital and liquidity, and scale is needed in terms of where this cash will come from. Mr. Butler mentioned that the Exchequer is not in a position to provide that cash, so where else can it come from?
We identified three areas. The first issue is credit. I will talk a little in a moment about that issue of credit because it is absolutely crucial in terms of supporting normal demand and activity in the economy.
The second is this issue of the savings. Again, we see a macroeconomic number of a savings ratio of approximately 10%. Many people will say that within that number, there is a lot of debt repayment. There is a considerable amount of debt repayment within that savings ratio but as Mr. Butler mentioned, there are two key age cohorts which are increasing real savings. For the under 35s and the over 50s, real money in bank accounts is going up in double digit terms.
The third area is whether we can get money from outside the country. Pension funds is one example. Can we bring back some of that money? Can we put it to work? Can we allow people to draw down some of the pension funds they hold in terms of supporting spending in the economy? Another area where one could get money from outside the country in terms of a cash injection for the economy would be in regard to infrastructure - looking at other ways to fund infrastructure through public private partnership projects, for example.
I refer to the credit issue and understanding this relationship between the flow of credit and demand in the economy. I will give one number on it. In 2006, the relationship between the banks and the households was a net flow from the banks to the households of €30 billion. By 2010, we had seen a full reversal of that and there was a net flow from the households back in the doors of the banks of €10 billion. That was the credit flow. That is a net credit adjustment. People are deleveraging because they must do so. It is perfectly understandable that people who face mortgage pressures are probably paying down those mortgages as quickly as they can but the problem is that we are not seeing enough new credit going into the economy. That swing from that €30 billion positive flow into the economy and into the households to a negative €10 billion back into the banks more than anything probably explains the repressed nature of domestic demand in the Irish economy.
In terms of some of the particulars around incentives and some of the specific measures we recommend, we acknowledge the fact the Exchequer does not have the funds to support a stimulus package. Any economist will say that what Ireland desperately needs is some form of injection - some form of stimulus activity in the economy. Where could that come from? On the issue of pensions, the first issue at which we have looked, approximately €70 billion in pension funds is invested outside the country. The Minister for Finance alluded to this in his budget speech that the Government is keen to look at that again in terms of whether we can incentivise some investment of those funds in infrastructure or venture capital funds. We think a lot can be done there.
I refer to another issue at which we have looked in terms of the pensions. These occupational pensions are approximately €70 billion but we also have what we call "additional voluntary contributions" and personal pension schemes. They total approximately an extra €20 billion. We think there is considerable merit in looking at a proposal to allow individuals, many of whom would be in very changed economic circumstances from where they were when they put that money into those pensions five or ten years ago, to draw down a proportion of their pension pots before retirement in order to put stimulus demand activity into the economy. Our suggestion is that we would allow people the opportunity to draw down up to approximately 25% of the pots they have in these additional voluntary contributions and personal pension schemes.
We do not think it would make sense to allow people to start to tap occupational schemes because we have a whole range of problems in terms of the under-funding of occupational schemes and the adequacy issues around occupational schemes. In terms of these AVCs and personal pension pots, there is strong logic to look at them and to allow people to get early access to them and to encourage some of that money to be spent in the economy. We could get quite a significant stimulus out of that money if it was spent.
Again, the key in all of this would be to frame a two or three year window of opportunity to try to get some of that money drawn down and as Mr. Butler said, to try to bring forward some of these investment and consumption decisions which will eventually happen anyway.
The second area at which we have looked is that of home improvements. Again, it is incredibly important now in terms of its contribution to the construction sector. There was a time when the home improvement sector was probably 10% to 15% of new house build. Now it is the same value. Approximately €2.5 billion per year is being spent on home improvements so it is still a very important sector of the economy.
What we have seen since the downturn is a significant increase in informal activity - shadow economic activity in the home improvement sector. We think there is considerable merit in the Government trying to frame a timebound incentive - a short window of opportunity of two or three years - and giving a grant or a tax credit for people who do certain home improvement works. One could spec out what the budget would be - for example, investments between €3,000 and €20,000. One would bring it into the formal economy and one would get accreditation and PPS numbers of construction workers. One will achieve two things. People will do additional work and will bring forward the decision to do that work. One will also see a shift from the informal economy to the formal economy, hence it will not cost the Exchequer anything. One will get more activity and, more important, the Exchequer will get a lot more taxes out of it. This type of thing has worked well internationally and one can do it at no cost to the Exchequer. That is the crucial point. One could have the scheme for two or three years. The home energy schemes have worked very well in terms of the kind of stimulus they have brought about.
Crucially, with this type of scheme, one gets a really good regional distribution of the activity. It goes right across the country. As an aside, one of the real challenges we face at the moment is that the Dublin economy seems to be bounding back reasonably strongly. We see that in terms of internationally traded services. That is a big growth sector in the economy but it is all Dublin-based. The regions are really struggling. Any measure that will give us a good regional spread deserves additional attention.
The whole area of property transactions is crucial in terms of demand, activity and employment in the economy. It is obviously very closely related to the flow of credit in the economy. Again, the measures we saw in the budget were quite innovative. In terms of trying to bring forward a window of opportunity and timebound measures, now is a good time to start to move in regard to considering a home purchase decision. That is what we are focusing on here, namely, the purchase of homes, because there is considerable pent-up demand. Essentially, people have not bought family homes for four or five years. In 2006, 80,000 people bought homes. These were not speculators, property developers or buy to rent. These were 80,000 mortgages for first-time buyers and mover uppers. Last year, that was down to 10,000, so people are not buying family homes.
Obviously, with the deterioration of macroeconomic circumstances and employment, there is less demand but that demand is not as low as 10,000, so there is considerable pent-up demand. There are large numbers of people sitting on the fence waiting for prices to fall further. That is perfectly sensible if one is in that situation but one is also struggling to get credit. Whatever we do in terms of the housing market - what was done in the budget was sensible - one needs to bring that forward in unison with the measures to improve the availability of credit.
We have some suggestions around potentially looking at the stamp duty regime again. What was done in the budget was sensible. We have some ideas in that we think the stamp duty on property transactions is too low. If one pre-announced an increase in stamp duty rates to 2013 and 2014, one could bring forward some activity but again it is quite similar to what the Government did in the budget. We think we could build on that but crucially, we need to drive the credit availability as well.
Another specific proposal we have made in terms of these measures is around the issue of child benefit payments. We are paying €2.2 billion in child benefit payments. It is equivalent to approximately 3% of consumer spending, so it is exceptionally large and is effectively within the social welfare scheme. Our main concern is that money is not all being spent in the economy. We have seen recent market research which shows that €0.5 billion of that is going straight into savings accounts. Given that this is a universal payment, everyone gets it irrespective of their income or need. Obviously, there are many hard-pressed families which desperately need this money to support their children and they are spending it. However, because it is a universal payment, there are large numbers of middle to high income families which do not need this money and are not spending it.
We have seen from market research that €0.5 billion of our child benefit payments are going directly into savings accounts. Our proposal is that we would have a payments card which would effectively act as an incentive to spend that money rather than save it. We have heard of the complexities around means testing and taxing the child benefit and that is being worked on by various task forces at the moment. Our solution is to bring forward an incentive for this money to be spent. An electronic payment card could be used for the purchase of any goods or services in the State and the people who would use it would be better off than with their current payments because the retailers could build in discounts through the use of this card. People who still want to opt for a cash payment would be entitled to do so but at a reduced level of 25%. We focused on that particular payment because so much of it is being saved and it is such a large payment. However, this could be expanded to other payments, again with the objective of trying to get more spending activity in the Irish economy. Those are just some of the particulars on which we are happy to have debate, questions and comment.
