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.

46 thoughts on “Garrett FitzGerald and the Budget Deficit”

  1. Karl,

    Which is the appropriate measure of the Government deficit, the Exchequer Balance or the General Government Balance?

  2. Of course we are on track for a 30bn deficit. The last time Dr. FitzGerald was in power Jan ’87 unemployment had sky rocketed to 18% and interest rates rose to 14% the highest in the Western industrialised world.

    It is not like Dr. FitzGerald does not make mistakes. Imagine, Thatcher getting involved once more and delivering homilies on the British Toxic Asset Insurance Scheme, it would be quite bizarre and inappropriate.

  3. It (coyness aside) depends on what the purpose of the measure is. Though given the text of the letter I would have thought the GGB was more appropriate:

    “Nama has unfolded against the slow but steady deterioration in the State’s finances. We now look to be on course for a Government deficit of close to €30 billion. In short, this means that for every €1 the State spends, it takes in tax only 50 cent.”

    I’m not sure how big an issue this is, and perhaps this could be classed as a distraction rather than a core issue.

  4. Ah Ronnie, it’s a bit late at night for playing word games. Government, Exchequer. The principal difference here is the 4bn that the government put into Anglo. Do you think we’ll see a cent of that back? For thinking about the underlying fiscal position we’re in, the EBR seems like the right one.

    But, look, even if it’s not — do you think using EBR instead of GGB makes someone “irresponsible” and “destabilising”?

  5. @ Karl

    There is probably more of it to come.
    The letter represents a political force that from a political mindset needs to be overcome using political means.

    I did notice every presenter on the radio stations today gave those that did a free ride to do so. This might not be deliberate. Each shows segment can only last so long and therefore go so deep.

    Good night
    Al

  6. Did Fitzgerald consider that Corporation Tax receipts will collapse this year.

    Has Lenihan considered this.

    The banks/developers/retailers/airlines etc are not making money. (A bit of a sweeping statement perhaps…however).

    I think Corporation Tax last year delivered €3.5Bn.

    Whose going to pay that this year?

    The same applies to the self employed.

    Preliminary filings are due at the end of October.

  7. @ Karl

    most people would assume the government deficit to be the basic receipts minus expenditure equation, and as things stand the bank recapitalisation funds are treated outside of this as investments. As such, if you are so concerned about the damage done to the professional reputations of the 46 signators in the public eye, then i would think there is an onus on you, or at least an argument of such, to fully explain the 30 billion figure more clearly in your original piece, expecially when you admit, above, that even this figure is a close on 17% increase on your own reference material. You could as easily have said “close to 21.4 billion”.

    While Dr Fitz’s criticism may be unfair on your opinion piece, picking a loose and eye catching deficit figure, in what was always going to be a controversial article, allows for an easy and valid opportunity to shoot down your argument right from the get-go without ever having to criticise many of the actual valid arguments you brought up within it.

  8. I will be returning zero income tax this year, down from 70k plus in the mad years. I’m not alone. Most self employed are either paying no tax, or looking for refunds. October will be interesting.

  9. “We now look to be on course for a Government deficit of close to €30 billion”, is actually a doubly qualified observation, which has an awful lot more to back it up than the Nama valuations. If the €4 Billion thrown in to the Anglo Irish money pit is being omitted by the critics that is ridiculous. If they will be gracious enough to concede the inclusion of the above how much would Alan Aherne and Garret Fitzgerald bet on the deficit being closer to €20 Billion than €30 Billion?

  10. Garret Fitzgerald is demonstarting that his political skills are still sharp in seizing on this point. Sadly Nama dissidents like yourselves can expect a lot more abuse from the Government/Bank/Property Market complex. Expect a lot more debating tricks, innuendo, released hares and demand for birth certificates before this ends. The complex have too much to lose for the fight not to get dirty. Also, bear in mind that people are clever enough to see that this is now a political issue. They will rightly discount the critics as politically motivated.

  11. The message is simple . ‘ The situation is grim , do not talk about it as the international markets may notice ‘ Although in an Australian broadsheet there was a full page article titled ‘ A Tiger Tamed ‘ There was a photograph of the famine sculpture and interviews with people at a soup kitchen in Dublin .
    We are one year into this banking crisis . Yet NAMA is being pushed through and any serious debate is taking place through the media . We are coming close to a dictatorship with talk of national interest , patriotism and a submissive media . Any serious government would have al least seeked advice or debated in private the very serious and expensive issue that is NAMA of well qualified and vocal critics such as B Lucy and K Whelan .
    This tunnel vision thinking that they are engaged in is reallly very frightening .

  12. Dr. FitzGerald’s main point appears to be that our main focus should be on the internatinal view of Ireland’s current state. To give a figure which is rounded up then is considered irresponsible as is defeating the Nama proposal or changing government at present. I think the true ‘merit’ of this piece is in the idea that it is better to go ahead with a potentually very flawed NAMA than to risk destability – ignoring the fact that NAMA itself is unlikely to do our image any favours.

    I was also a bit puzzled about his comment about the absence of certian big name sigatures from the 46 economists piece – I’ve no idea whom he’s referring to and I think it may be an attempt to undermine it and that this may be noted by FF and often repeated now without ever mentioning who these people are – the implication being that the 150 odd economists that didn’t sign it are of a higher calibre and also agree with NAMA [as the IMF and OECD do ;)]

    As for your professional reputation Karl, I would hope that the work that yourself and Brian have done in clarifying NAMA and the issues at stake has enhanced your reputation to such a degree that such comments from a politician could not significantly impact it – though of course it is highly insulting nonetheless!

  13. It is, of course, impossible to predict the deficits in 2010. Only time will tell whether GFG or the 46 economists are correct. However, its a bit dishonest to cite ESRI’s forecast of an exchequer deficit of €25.7 billion in 2009 as evidence that the 46 economists are correct on 2010 since, on the very same page that ESRI publish this forecast, ESRI also forecast an exchequer deficit of just €19.3 billion in 2010. The full set of deficit forecasts published by ESRI are as follows:

    exchequer deficit:

    2009 €25.7 billion
    2010 €19.3 billion

    general government deficit:

    2009 €20.1 billion
    2010 €18.3 billion

    So, clearly ESRI agree with the Government and GFG and not with the 46 economists. It doesn’t mean, of course, that the Government, GFG and ESRI will be proved correct and the 46 economists wrong. But, it was the latter’s spokesman who introduced ESRI forecasts into the debate, saying: “One way to check is to look at the forecasts of that highly responsible body, the Economic and Social Research Institute.”. Well, if you are going to look at them, you should look at them all.

  14. As I already said weeks ago, not only will profits be down, losses will mean last years tax will now be claimed BACK! Terminal losses will result in even bigger repayments …… !
    But CT is designed to be a low impost. To attract profitable businesses.

    We can expect more companies fleeing other tax jurisdictions. Hardies from Australia may start a trend. They have a massive profile here as they have been poisoning Australians since the 1960s knowing that asbestos which they no longer use, was toxic. It has recently turned up in carpet underlay, made up from hessian which transported raw blue asbestos. So all news viewers know that Hardies are cutting their tax bill by moving to Ireland! Silver linings!

    And some more refugees from the Bahamas and London an the Caymans. Still, it will take time for the taxes to flow into the coffers.

  15. @John

    I’m well aware that there are (at least) two definitions of the deficit and the ESRI forecast the GGB as well as the EBR.

    Can you explain to me why we should have focused on the smaller figure? Or more to the point, can you explain to me why focusing on the EBR is illegitmate?

    And how exactly have you concluded “clearly ESRI agree with the Government and GFG and not with the 46 economists.” I just don’t see how anything you have provided demonstrates this. Yet again, we are back to argumentation by assertion.

    And yes, please, there is no spokesman for the 46. Disagree with me if you want but don’t imply that I’m speaking for anyone but myself.

  16. @Karl W: on anglo, we’ll get the money back when they re-privatise! 🙂
    that bank is resulting in a pure transfer from taxpayer to depositor and should be closed asap.

    I’ve said it on this blog before – that NAMA is taking centre stage while the deficit is put to the side, perhaps some balance focus on both issues would be of benefit.

    @tony: I would wager he is referring to patrick honohan who has spent his life studying banking economics, he is cited internationally as an expert on the topic and wasn’t one of the signatories.

    separately – i’m kind of surprised at the chagrin of many posters here, Fitzgerald was in power during an equally difficult time for the irish economy in the 80’s. I think that when it comes to understanding crises some of you should be more mindful of the fact that he lead the country through one in the past, something which nobody else here has personally done. instead of picking holes in his statements why don’t ya sharpen up your own.

  17. the motto of the vested interests is if you can’t convince confuse. as was mentioned above fitzgerald’s era wasn’t exactly the years of wine and roses. but this dosen’t seem to matter.

  18. As Taoiseach, Garrett Fitzgerald lead a government which failed dismally to meet the fiscal challenge inherited in 1982 – ineffectually tackling the deficit by a pointless hiking of tax – succeeding only in doubling the National Debt in the four wasted years of 1982 to 1986. His current view – not that NAMA should be supported on its merits – but should be supported for fear of causing a fall in the government and a consequent closing down of our access to the Sovereign Debt Market – is at least consistent for one so attached to a Tax and Borrow approach to a fiscal crisis …

  19. 4.30 p.m. tomorrow afternoon should give us a better idea where the deficit is going.

    If the decline seen in July relative to the DoF end of April projections is continued into August, then “close to 30 billion” may well turn out to be a good estimate.

    The NAMAphiles might have to re-issue their talking points.

  20. Can I make a few points here?

    The figure of 30 billion is a bit of a red herring. Putting an actual figure in the letter was maybe a mistake as it led to undue attention being focussed on the figure in question as opposed to the key issues regarding NAMA and the implications of overpayment.

    Regarding Garret FitzGerald’s comments that many notable names were absent from the letter, as has been pointed out before not signing the letter did not mean non-support for its main points. From the admittedly small and probably biased sample of people I have talked to, those who were asked to sign but did not were not in disagreement with the main points (too many negatives there!). While Garret may not have recognised many of the names who did sign it is possible that he is not familiar with the names of some of the younger generation of economists.

    Two bits of economic history: re Garret’s own performance when Taoiseach in the 1980s, I can recall much of his government’s policy thrust as I was working on the ESRI Quarterly Commentary at the time. His government inherited a pretty appalling situation and definitely made genuine attempts to reduce the deficit. But the composition of the Coalition he was in (a Labour Party much more left-wing than today) made it difficult to take difficult decisions on spending and there is no doubt the high taxation route was probably easier to get through Cabinet in the short term. But of course it was a misguided approach (and in fairness I think FitzGerald has since acknowledged this) as high taxation strangled the economy and it was not until the change of government and McSharry (aided by the Tallaght Strategy and Nigel Lawson) that progress was made.

    Secondly, while some references have been made to the 1980s the current NAMA debate (in terms of how arguments are being put and the actors involved) actually reminds me more of the Currency Crisis of 1992/93. Recall the government line that devaluation was simply not an option and all the damage it would do. Media coverage showed poor understanding of the issues – recall the Irish Times came out with a now infamous editorial concerning the sanctity of the currency. Billions of pounds were spent defending the currency, interest rates were raised (some mortage rates went up to 17%!) and when at last the government bowed to the inevitable, the cost to the country was in the hundreds of millions. Yes, the actual issues involved are different but the mantra-like way in which we are being told there is no alternative is eerily familiar.

  21. @ John Looby,

    I guess you are implying that since Garret displayed such lousy judgement in the 1980s he opinion on NAMA should be treated with scepticism.

  22. @Maurice O’Leary

    … but I guess if the Germans can massage (with part time working packages instead of being fired, etc.) their unemployment figures out today to make a 25k rise look like a 1k fall just before their election then it can’t be beyond the realms of possibility that others can keep the lid on things before nama and the Lisbon re-run? Especially when you have a tame media feeding government press releases to the masses unedited and unchallenged.

  23. @john looby: saying he failed is like giving a guy a shovel and wheelbarrow then claiming fail if he can’t construct a computer out of them, he didn’t exactly have the tools for the job to start with.

    even if your hypothesis holds, he still has first hand experience of a country in crisis, and i would think that (if i was to agree with you outright) if he made a mess of it, then one would think he learned a few things in the process which still gives him greater authority on handling a live crisis than anybody here.

  24. @Karl Deeter

    “I think that when it comes to understanding crises some of you should be more mindful of the fact that he lead the country *through one* in the past”

    Perhaps the phrase you’re looking for there is not so much “he led the country through one” but rather that “he sleepwalked the country deeper into a needlessly extended one”.

  25. Contrast the 46th’s €30bn with governments chief valuer’s “seven year 88% bounce from trough and property always recovers” and €90bn being a useful figure to inform discussion etc

  26. Once again, I think we are working in the dark on some of the figures. In the comments of an earlier post Mr. McCarthy helpfully gave the full government expenditure figures as 76.3bn (not the 60odd bn that is in the budget). But I haven’t been able to find the government’s full income figures anywhere. The budget figures only include tax income.

    Will the real income figures for the government (including PRSI and health levy) please stand up?

  27. 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.

    @ Karl, I agree with you but keep things in perspective. Dr. Fitzgerald has truly impressed me as an economic commentator over the past 13 years. I recall a column in early 1996 that highlighted the fact that the state would have the resources from the expansion that was then underway to effect a significant reduction in poverty. Looking back, it seems that was a choice we as a nation decided to pass on. As he mentions in his column, he has stressed repeatedly the damage that was done to our competitiveness since 2000 by McCreevy, Cowan and Ahern’s policies.

    However, as a politician, who held significant sway over how the resources of the state were applied, Dr. Fitzgerald was less impressive. I recall that when venerable institutions to which he may or may not have had some attachment came under threat, he felt compelled to use the state’s resources to fix the problem (AIB shareholders at the time of the ICI debacle, and, more amusingly, Bewley’s).

    I think that the IT readership and MI listernship will be able to use whatever recollections they have of the early and mid-eighties experience to appropriately weigh Dr. Fitzerald’s views against those of the 46.

  28. @jl & Karl deeter,

    It’s beyond debate that the 1982 to 1986 government 1) inherited a fiscal mess 2) included a minority-partner beholden to the narrow interests of Public Sector Unions and 3) faced a populist and ‘irresponsible’ opposition in FF – none of which absolves the then Taoiseach from the damaging route of Tax, Borrow and Hope – which he is again endorsing (to the point, as I said, of being prepared to swallow NAMA not on its merits but on the ‘need’ to keep the government in place to keep the debt-tap running), in opposition to those whose preffered road might be called ‘Building on Reality’ …

  29. In Dr. Fitzgerald’s article, the core of his argument is:

    “I am concerned – whether because of loss of nerve or because of failing to secure Dáil support for these two key elements of its programme – that the Government may fail to get through the Dáil by early December either or both its budgetary proposals and its measures to deal with our banking crisis. This could undermine our capacity to borrow the huge sums we need to keep going. After these two measures have been successfully implemented, if the Dáil or the electorate so decided, there could then safely be a change of government. But in my view it would not be helpful for that to happen within the crucial three months ahead.”

    On the 30 June the NTMA held balances of €28.9 billion.
    Some of it may be needed to cover debt that is maturing shortly.
    But to suggest that even if the capital markets were spooked by a general election before NAMA and the budget are passed, that we would run out of cash before a new government were in power and had a new strategy based on an electoral mandate is irresponsible.

  30. @karl d
    For gods sake Garrett Fitzgerlad couldn’t manage his own finances let alone the countries. Have you forgotten the debacle of GPA in the 90s, when he borrowed 200,000 to invest at it’s flotation, only to lose the lot and have to be bailed out by – was it AIB? (Did he ever pay tax on that bailout btw?) Statistician he might be, but hardly a financial guru.

  31. Come on, guys. Let’s ease off on Dr. FitzGerald. He’s entitled to his opinion. And we have to admit that the intervention of the “forty six” could be viewed as a concerted effort to derail NAMA when there’s no fully worked out alternative that’s in a position to garner majority support in the Dail and, more importantly, to receive due consideration – and guarded sign-off – by the EU Commission or the ECB.

    It might make sense to look at the bigger picture. The bank guarantee bought the Government some time and space to work up a resolution to the banking debacle. The EU Commission, the major member-states and the ECB have been supportive – and Lisbon II may have had an impact. The time and opportunity to force the pace on a more sensible approach to a resolution of the banking crisis was at the beginning of this year before NAMA started to take shape. That opportunity is gone and I suspect that that is what Dr. FitzGerald is highlighting.

    The continuous scrutiny of various aspects of NAMA as proposed on this site has extracted some limited, but very necessary, clarifications. And it is certainly worthwhile to continue this effort. But there is a fine line between scrutiny to encourage modificiations that are in the public interest and a perceived campaign to derail NAMA and it may be that, in the perception of some commentators and political participants, that line has been crossed.

    But the scrutiny should continue and, in my opinion, it would be beneficial to have the constitutionality of NAMA assessed by the Supreme Court. In that way the Executive’s proposal on NAMA would be subject to scrutiny and decision both by the Legislature and the Judiciary.

  32. @Paul Hunt.

    I don’t think you need to be too worried about us mugging Dr. Fitzgerald. His article includes many more political swipes at opponents of NAMA than economic arguments. He hasn’t lost his political skills. He didn’t quite accuse the 46 of having a flawed pedigree, but he clearly thought they were a very mongrel lot.

    There was no widespread discussion about NAMA, no hearings worthy of the US Congress, no engagement with the opposition from a “my way and no other way” government. NAMA emerged fully formed from Dr. Bacon’s cookbook, albeit the recipe seems to have been pre-determined.

    Minister Lenihan has professed an openness to accept some amendments, but this is essentially a political position designed to ensure the passing of NAMA, not a discussion of its technical merits.

    But discussing amendments is also to accept the premise on which NAMA is built which transfers all risk to the taxpayer and is tailored to defend the interests of share and bondholders.

    Considering the magnitude of the free gift to these risk investors, it is remarkable to describe continued opposition to NAMA in terms of “lines being crossed”, an expression that will be forever associated with Ray Burke.

    There are massive vested interests at stake here who have a proven ability to manipulate the levers of governemnt. Why should those of us who regard the policy as lunacy fall into NAMA group think?

  33. @M O’L

    I think we’ve both strayed – and have been accused of straying – into political territory. And that is where NAMA will be decided. My point is that the economics-based scrutiny of NAMA from a public interest perspective on this site has some value – even if I am sceptical about its ultimate impact.

    And I detect from Karl W’s latest post some sense that even he is getting weary.

    I also am aware that you have cast doubt on an earlier suggestion of mine that it would be worth while to explore ways of securing a Supreme Court assessment of the constitutionality of NAMA. Nevertheless it would bring a scrutiny to bear on the Minister that would be well in excess of that applied by Richard Bruton – despite the quality of his interrogation – at the Oireacthas Finance and PS Cttee.

    I believe the Judiciary may be the last line in the defence of rationality.

  34. @ Paul Hunt

    It doesn’t matter what the rescue vehicle is called. Call it NAMA. Call it Resolution Trust. Call it Securum. A rescue vehicle is required. That could be achieved by temporary nationalisation and the subsequent ring-fencing of failed credit.

    What matters is that Fianna Fail & the Green Party would have the citizen undertake all of the risk for none of the reward.

    Here’s a modification. Warrant’s for 40% of the equity of every participating credit institution.

    There seems to be a broad PR campaign not to dilute the shareholders or bondholders of failed banks. I know it is now a cliché but this is privatising gains and socialising losses.

    How does this make sense in a capitalist system?

    Of course we need banks. We don’t need the current shareholders and the bondholders can be offered a debt for equity swap.

    Was Peter Bacon instructed to protect the shareholders and bondholders? Is his report flawed by its own terms of reference?

  35. @Greg,

    Valuation and allocation of the losses are the key issues. There is no definitive evidence to support your contention, but from many years observing these players in action I have a gut feeling you may be correct – and have indicated so previously. On these substantive issues I would refer you to Karl W’s 1st Sep post on his parsing of the Minister’s statements to the Oireachtas Finance and PS Cttee and the comments on his post.

    I also have a feeling that the Dail (and Seanad) debates will not compel much more clarity on these issues. Big set-piece debates rarely exhibit the forensic decomposition and examination of proposals by the Executive that is required.

    That is why I believe, if at all possible, the Supreme Court should be involved.

  36. The SC should be asked to consider the legislation if signed bny the president, given the scale of exposure involved. That deals with the issue of locus standi. Will the president so act?

  37. I had to keep turning it off and on again. It was like listening to your parents arguing. Stop!! Let’s all be friends! Garret was very cross! Most uncharacteristic.
    And hey, stop knocking him for the 80’s – he had Labour crying and moaning about cuts every day and Charlie across the floor being utterly irresponsible on everything from abortion to the North.

  38. @Pat Donnelly

    SC =The Supreme Court ?

    There would have to be a question of the NAMA legislation possibly contravening some constitutional provision. I haven’t seen any plausible suggestion to that effect.

  39. Garret wiped the floor with Karl.
    Karl behaved himself and was polite but naive. Garret played dirty and avoided any discussion of the key Nama issues. It is very had to avoid coming to the conclusion that the game plan was hatched in advance.
    The inability of Eamon Keane to spot what was going on, largely because he doesn’t seem to really understand the arguments, contributed to the whole mess.
    I think Karl should have given the two of them a bit of a verbal lashing and demanded that they focus on the important Nama issues rather than Garret’s red herring.

  40. @Ramanujohn
    “Garret wiped the floor with Karl.”
    Even from my admittedly somewhat biased perspective (i really liked and admired GF….) I dont see that. GF sounded petulant, technocratic, and unwilling to see the wood for the trees.

Comments are closed.