In terms of the adjustment in billions, I assume a nominal GDP of 167.2 billion in 2009 (a 10 percent fall from 2008). The total deficit would be 21.3 billion. The structural-cyclical split would be 17.1/4.2.

If we return to the original goal for this budget — correcting for the slippage relative to the Stability Programme — but use a structural deficit rather than total deficit target, the required adjustment is 2.15 percent of 167.2 billion, or 3.6 billion. The question then is: How much of the additional structural deficit reduction should the government do this year? I still think the government should tread carefully here, but I do see it is big gap to close — over 7 percent of GDP by 2013 to hit the 3 percent of GDP target — so I understand why others believe we should get on with the job. One alternative is to front load the strucural deficit reduction, but do a partial offset it with temporary stimulus measures (there is some of this in the expanded Fine Gael plan).

Mathematicians define division for every real number except zero. It’s possible to write a computer program to perform division that does not check that the divisor is non-zero but the person running the program has to do this check manually first. In other words the program makes certain assumptions that have to be verified externally.

Similarly with projections and estimates in the current circumstances. The banks are not working anything like normally, for example. People don’t absorb the figures in the various media reports about the economy but they get the message: things are bad, they are getting worse and they will continue to get worse for some time. The pronouncements of economists - and others - from their projections and estimates affect people’s behaviour and are dragging the economy down. (That’s a straightforward comment and not an attack on anyone.)

I like the mention of “error bars”. It’s not a concept you will hear in the media. I would say that the current circumstances are so unusual and that so many of the assumptions underlying quantitative economic analysis and models are invalid that it would be better either to abandon quantitative analysis temporarily or else to qualify its results very heavily when presenting to the general media. And good luck with the latter!

Updating the Commission’s projections: Starting from a 8.1%/1.4% structrual-cyclical split with a total deficit of 9.5% and a growth rate of -4.0%, the new split with the revised numbers is 10.25%/2.5%. (This uses the standard budget sensitivity parameter of 0.4 that Jim fairly questions.)

The adjustment required to hit the original structural deficit target is now 2.15% of GDP.

I hold no candle for the Commission’s analysis, and agree their estimate of potential output looks very pessimistic. I also agree with Brendan that any estimate of potential output or the structural deficit in the current environment must come with very wide error bands. (One challenge here is that there are likely to be both level and growth effects on potential output given the significant restructuring of the economy.)

My point in the last post was just that it is important for the government and the commission to be on the same page if the structural-cyclical distinction is to be made central to the fiscal plan. Otherwise there is likely to be yet more confusion, leading to further deterioration in government credibility.

“With both labour supply and capital stock endogenous, concepts like potential output get very slippery. It is conceptually, never mind empirically, difficult to disentangle structural and cyclical components of the deficit in these circumstances. The smaller the economy and the more open, the harder it gets. It’s not just that Irish net migration has swung round recently, so has the BOP and the counterpart on the capital account. Potential output as conventionally measured is policy-influenced. Philosophical quagmires abound.”

The mention of philosophy reminds me of St Augustine’s famous prayer: da mihi castitatem et continentiam, sed noli modo. There is a risk that the distinction between the two sources of the deficit will be used as an excuse for procrastination.