Garrett FitzGerald and the Budget Deficit

On Morning Ireland today, Garrett Fitzgerald again criticised the opinion article signed by the 46 economists. However, rather than focus on the article’s principle arguments about the government’s banking policy, Dr. Fitzgerald concentrated on what was essentially a parenthetical comment about the budget deficit. Among other things, he said:

Moreover, the statement made that we’re moving towards a deficit of €30 billion was quite irresponsible and that destroyed my confidence in the 46 economists.

Even leaving aside that the fact that the size of this year’s deficit is nowhere near the key issue in the 46 economists piece, is it indeed the case that this figure was irresponsible? One way to check is to look at the forecasts of that highly responsible body, the Economic and Social Research Institute. Their most recent Quarterly Economic Commentary, based on data available through July 9th, predicts an exchequer deficit of €25.7 billion.

Since then we have had the publication of the July exchequer returns (Irish Times story here) which saw tax revenues falling behind the targets set in the April budget. It would certainly not be extreme to add another billion or so to the projected deficit forecast on the basis of these figures, putting it at about €27 billion. To the extent that these shortfalls relate to unanticipated weakness in the economy, it is likely that social welfare payments will also come in ahead of target, perhaps pushing the projected deficit up to €28 billion.

Even ignoring the fact that deficit forecasts have been coming in too low now for some time, it seems to me that this is already enough evidence to justify the statement in the 46 economist piece that

We now look to be on course for a Government deficit of close to €30 billion.

Note incidentally, the sentence is projecting a deficit “close to” not “equal to” €30 billion.

I’m afraid here that, as with Dr. Fitzgerald’s claim that the piece failed to distinguish between different classes of bank debt, this criticism seems to be largely unwarranted.

The pity, of course, is that far more people read the Irish Times and listen to Morning Ireland than will ever read this blog. So, unfortunately, the damage to professional reputations done by being branded “irresponsible” and “destabilising” by a respected public figure will not be easy to undo.

ECB Opinion on NAMA

During today’s Oireachtas Committee meeting, the Minister for Finance referred to a formal ECB opinion document on NAMA and that it was being published this afternoon. Well, lo and behold, here it is.

I haven’t had a proper chance to read this but two sections jumped out. First, on valuation of assets being transferred:

Although the measures contemplated by the draft law should restore confidence in the Irish banking system, the ECB considers it important, in line with previous opinions that the pricing of acquired assets is mostly risk-based and determined by market conditions. The preference expressed in the draft law for the long-term economic value of assets, rather than current market values, requires careful consideration in this context. In particular, it should be ensured that the assumptions to determine the long-term economic value of bank assets will not involve undue premium payments to the participating financial institutions to avoid creating inappropriate incentives from their side as regards the use of the scheme.

And on nationalisation:

the ECB notes that the Irish Government shares the guiding principle that the preservation of private ownership is preferable to nationalisation. If the NAMA scheme will be successful in this respect, this strategy should help to avoid, in the short-term, the high costs involved in nationalisations and, in the medium-term, the risk of banks’ objectives being diverted from profit maximisation to alternative goals that might distort the market structure and jeopardise the level playing field.  

The opinion is silent on what should happen when their preference for pricing that is “mostly risk-based and determined by market conditions” comes into conflict with their preference for preserving private ownership.

Guest Post: International Credibility Does Not Need NAMA; It Needs Determination

Here is a guest post from Ciarán O’Hagan (fixed income strategy, Société Générale, Paris). Ciarán had submitted some of this material as a comment on an earlier post but we thought they were worth giving their own dedicated thread. Text below the fold.

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Draft submission to Innovation Task Force

The Innovation Task Force was appointed to advise the government on how to turn Ireland into an international innovation hub and to support the development of a smart economy. It’s easy to be cynical but better to be constructive. The ITF has issued a call for submissions on its terms of references:

  • to examine options to increase levels of innovation and the rates of commercialisation of research and development on a national basis with a view to accelerating the growth and scale-up of indigenous enterprise and to attract new knowledge-intensive direct investment;
  • to bring forward proposals for enhancing the linkages between institutions, agencies and organisations in the public and private sectors to ensure a cohesive innovation and commercialisation ecosystem;
  • to identify any specific policy measures which might be necessary to support the concept of Ireland as an International Innovation Development Hub including in the areas of legislation, educational policy, intellectual property arrangements, venture capital and immigration policy.

Here is my draft submission. All comments welcome. I’ll acknowledge your input by something like “A draft of this submission was posted at and substantially improved as a result of the discussion there. Comments by Malle Appie were particularly helpful.”

High wages require high labour productivity. High productivity requires excellent skills and creativity. Ireland can only maintain its position at the forefront of economic development if it fosters innovation and commercialization. Innovation is a creative process, however, and therefore cannot be mandated by government policy. The government can only create the conditions under which innovation and commercialization are likely.

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