The Budgetary Outlook and the Government’s Plan

The government has published a stability program update with new projections for the economy and for the budgetary situation.  Projections are provided for the general government balance under current policies as well as under a multi-year adjustment plan.

The government now project declines in GDP of 4% in 2009 and 0.9% in 2010 and unemployment is projected to average 9.2% in 2009 and 10.5% in 2010.  Without changes in policy, the general government balance is projected to be in deficit to the tune of 11%-12% of GDP every year out to 2013.

The govenment has decided to address the fiscal situation gradually over the next five years.  The report states: “Restoring sustainability to the public finances can only realistically involve a period of adjustment of up to five years. Taking action over a shorter period of time, given the scale of the emerging position, would impose substantial economic and social costs and would not be sensible or appropriate.”

An adjustment of €2 billion is proposed for this year, still leaving a budget deficit of 9.5%.  Subsequent adjustments of €4 billion in 2010 and 2011, €3.5 billion in 2012 and €3 billion in 2013 will gradually reduce the deficit over time to 2.5% in 2013.

No details are provided as to how these adjustments will be made.  Worth noting, however, is that the adjustments total €16.5 billion.  Given that the total bill for public sector pay and pensions is currently about €20 billion, it should be clear that despite the regular media focus on public sector pay cuts, restoring fiscal balance will require many other adjustments.

7 replies on “The Budgetary Outlook and the Government’s Plan”

Karl : Agree, the focus needs to widen. But, we must remember that our discipline is Political Economy. Thus, the PS must be seen to take a hit, for political buyin from the other sector. The fact that a 10% cut would do little or nothing for the problem after tax etc is factored in is not the real issue : if economic prescriptions are to be taken seriously we need to recognise that this is as much a political and PR problem as a fiscal problem.

Thanks, Karl. Looks like a plan. What’s needed now is political commitment and courage to follow through.

Now, Karl, if this were a Monday before Greenbook, and we were kicking the forecast’s tires, and I were allowed only one comment, I’d question whether the eye-popping projection of an output gap around 9 percent until 2013 (Table 8, page 11) is consistent with a positive (albeit low) inflation rate of 2 percent (Table 2, page 5). Following on from that, if a projection of significant deflation for the next 5 years is more reasonable, then the nominal GDP figures (on which the fiscal ratios are calculated) would need to be revised.

Yes, Karl, this is a very helpful comment. I haven’t gotten to the newsagent yet but will be interested to see how many of today’s Sunday papers will have been capable of grasping this basic and crucial arithmetic point.

Thanks Karl,

Looking at the Update over the weekend and the dynamics of the public finances contained within it does seem optimistic on the nominal price deflation. In 2009 the assumption of unchanged interest rates (understandable as a forecasting assumption for State forecaster) is probably some explanation for it.

Just before Christmas 21/12 we at IBEC produced our Quarterly Review ( and forecast that the nominal value of economic output would be 11% lower in 2010 than it was in 2007.

The Domar Debt Sustainability arithmetic would mean more severe nominal deficit ratios as Alan implies in that context. Our numbers require a combination of €5n expenditure cuts and taxation revenue increases of €4bn over a four year period to reduce GGD below 3% in 2012. To Karl’s point it is wider than the paybill but we believe a €3.5bn immediate cut would be required. Cannot all be on current either.

This does raise the fundamental question of whether this is a severe cyclical downturn around a trend growth of 1.5 to 3% (as Update uses for potential GDP) for the Irish economy or have we a structural break to a lower growth path.

In my opinion, lower long run growth, for two reasons. First, capital-inflow-fuelled bubble growth is now over. Second, even aside that, once you have converged on the technological frontier, you can no longer benefit from catch-up growth, and regular frontier growth is slow by recent Irish standards. Cormac and I made the latter point back in 2000, but we didn’t foresee the bubble.

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