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 (http://www.ibec.ie/ibec/press/presspublicationsdoclib3.nsf/wvPolicyNews/33380559CE5376FD802575270031F6DD?OpenDocument) 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.

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.