Fiscal Consolidation II – Lessons from the Last Time Post author By Philip Lane Post date October 19, 2009 Colm McCarthy’s Kenmare paper is now available as Irish Economy Note No.8. Categories In Economic Performance, Fiscal Policy Tags Colm McCarthy, DEW Kenmare, Irish fiscal policy 26 Comments on Fiscal Consolidation II – Lessons from the Last Time ← Special Pleading from Yet Another Interest Group → Reminder: Keep It Civil! 26 replies on “Fiscal Consolidation II – Lessons from the Last Time” His box on the 4 stadia that we nearly had is an instant classic. Read the assurance with which the consultants pushed the new stadium and think of the assurance with which NAMA is now pushed by officialdom. Scary. Jeepers it’s grim stuff. What about a joke? Even Shakespeare had one. Mind you, as Frank Galton says, the 4 stadia pretty much qualifies! Anyway, I recommend it to the audience. We are a year into the crisis. Two years really, because only the intellectually indigent could have thought that what was happening at the end of 2007 was going to pass us by. And nothing has been done… (Sorry forgot my final sentence!). @yoganmahew ‘What about a joke?’ A number of (proprietary) jokes were included in the oral presentation. Written jokes don’t work in this business. @colm Ah, intellectual property? Still at least it’s tax free… Any chance the actual presentations will be on youtube/vimeo? RTE were obviously there, but the mice seem to have gotten at their tape between the six o’clock and the nine o’clock noise… The government projections for 2010 to 2013 look very optimistic given the latest tax figures. Is the decision to build a stadium for international soccer and rugby, holding only 50,000 (a tiny number compared with England, Scotland or Wales), really that bright an idea? I foresee two scenarios: (a) The GAA allow soccer and rugby to continue indefinitely at Croke Park. In which case, virtually every soccer and rugby international will continue to be played there. The Landsdowne Road dinky stadium might be suitable for holding friendly matches v some tiny former Soviet Republic that no one has ever heard of. But, for a match of any importance in either soccer or rugby, public demand for tickets will ensure its moved to Croke Park. In this scenario, what is the point of the Lansdowne Road stadium? It will be a White Elephant. (b) The GAA evict soccer and rugby from Croke Park. In which case, demand for tickets for important soccer and rugby matches will far exceed supply, prices on the black market will go through the roof, and 30,000 fans will no longer be able to see these matches. Imagine a Grand Slam decider between Ireland and England or a World Cup qualifier play-off between Ireland and France being played at 50,000 capacity Lansdowne Road. Tickets will be fetching 1,000 euros on the black market. In this scenario, I hope that those economists, who ensured that we ended up with such a tiny stadium, will forego their right to tickets. @John the Optimist The point I have been labouring is that we will have two stadiums, clearly could have got by with one, but nearly ended up (courtesy B. Ahern and the FAI) with four! ‘…those economists who ensured that we ended up with such a tiny stadium…’ There are none such to my knowledge. Various economists campaigned hard against the Bertiebowl, the phrase was invented by one of them, and M. McDowell, to his eternal credit, finally scuppered it, saving the taxpayer 1 billion. McDowell’s political career has been written off as a failure, lost his seat, PDs wound up etc. At 1 billion a pop, we could do with some more failures. @JohntheOptimist At one stage, one of those promoting Bertie Bowl argued, publicly, that it was needed because floodlights could not be installed in Croke Park! (As originally built, Croke Park did not have flood lights, would you believe?) Can we be sure that this plain downright sycophancy does not dominate the decision-making processes at present? It would be good if you could provide the rest of us with some basis for believing that such whimscal thinking is no longer active or if it is, that it is not influential among those in power. @colmmccarthy Whether or not ‘we clearly could have got by with one (stadium)’ is entirely dependent on the GAA. If they DO allow soccer and rugby at Croke Park indefinitely, then this statement (that we could have got by with one) is clearly TRUE. But, in that case, why build a second smaller one at Lansdowne Road? Just having Croke Park would be the optimum solution, but its entirely dependent on the GAA. I might be wrong, but I was under the impression that the GAA had an agreement with local residents to limit the number of events at Croke Park and that their derogation from this, to allow soccer and rugby matches there, was only temporary while soccer and rugby were homeless. Even if this is not the case, the GAA might well decide for its own reasons not to allow soccer and rugby there. I’d be disappointed if they so decided, but it would be perfectly understandable from their point of view. If they DON’T allow soccer and rugby at Croke Park indefinitely, then this statement (that we could have got by with one) is clearly FALSE. But, in that case, my main point is that the second one should have been large enough to cater for the sort of attendance that international soccer and rugby matches attract, ie. around 80,000. Such a stadium needn’t have been built at Abbotstown. I’m no expert on Dublin geography, but I’m sure there are 100 locations in Dublin where it could have been built. If I recall correctly, the 1 billion figure was because there were lots of additional facilities planned, such as velodromes etc. An 80,000 stadium on its own wouldn’t cost that much more than a 50,000 stadium. A bit more, certainly, but not 8/5 times more, as there are lots of overheads. I predict that the Lansdowne Road stadium will be knocked down in a few years either because (a) its not used, if the GAA continue to allow soccer and rugby at Croke Park OR (b) its found to be too small, if the GAA don’t continue to allow soccer and rugby at Croke Park. Regarding third and fourth stadia, it clearly would be absurd to have these, but I don’t think it was ever seriously intended. The Abbotstown one would have been a replacement for Lansdowne Road (which I assume would have then been converted to office blocks). The Eircom one was proposed a few years before the Abbotstown one and would certainly have been dropped if the Abbotstown one had gone ahead. To clarify, I’m not in any way hooked on the Abbotstown stadium or all the additional things like velodromes that were planned there. I’m merely saying that, if we need a second staium (which is entirely dependent on the GAA decision regarding Croke Park), then it should have been built to hold 80,000, not 50,000. If the GAA do evict soccer and rugby from Croke Park, its going to look awfully embarassing in a few years when they play Six-Nations matches in London, Paris, Edinburgh and Cardiff, all with 75,000 to 80,000 watching, but the ones in Dublin with only 50,000 watching. @colmmccarthy again I know its a bit off-topic from the main theme of your excellent paper, which is mainly comparison between now and the 1980s, and I have no wish to divert the thread to focus on the stadium issue only. However, I do see a connection. In the late 1990s and early 2000s, we were left with a hopelessly inadequate infrastructure (roads, airport etc) because at the end of the 1980s, governments made decisions that were based on economists’ predictions that the population would fall throughout the 1990s and into the 2000s. The reverse happened. I foresee the same with the Lansdowne Road stadium, although its obviously not so important. @JohntheOptimist Just how many 80,000 seater stadia can a island with under 6m people actually use? Yes, the GAA own Croke Park. However, it could not have been financed without large Government grants, with little or no conditions regarding the number, type or timing of events, as far as I know. It was so badly planned that absolutely no provision has yet been made to make access, by public transport, easier. Nor was the GAA asked to make any arrangement whatsoever on the provision of car-parking facilities for the up to 80,000 people that attend Croke Park! Let me put on record a rumour that at one stage, the banks were watching every cent spent on Croke Park, until the Government solved funding problems with non-repayable grants. Perhaps this influenced the banks to lend to whoever, sensing that the Government would “see them right”, with the results we now have to live with and work our way out off. Is is not typical of how we do things here that we are sidetracked, by a telling example, from the real points of Colm’s main arguments? I’m as interested in sports stadia as the next failed hurler/footballer, but I think Colm McCarthy did have more substanial points to make. The serious point is that the presentation looks at the 1980s debt ratios (on whichever measure) from the wrong end of the telecope. It is granted that the severe cuts in govt. capital expenditure (-18% from 1982-87) ‘were in retrospect a mistake’. Indeed. The positive multiplier effects of increases in government investment are widely accepted, but more frequently, it seems, forgotten. The attempts to cut public spending proved counter-productive not only in terms of activity but also in their own, far narrower terms. The deficits continued to rise. From this, Colm McCarthy tries to rewrite history, claiming there were no cuts. Yet Mac the Knife’ was no figment of the imagination. There was in fact a series of cuts, but, crucially, no savings. This is because reverse multiplier effects operate, cuts in government spending depressed activity and the tax base with it. That’s the real lesson of the 1980s. Cuts don’t produce savings. Let’s return to Colm McC’s point about the stadium. He quotes part of the evaluation criteria The National Sports Stadium Complex would be an icon for Ireland and Irishness It would have been an icon for that era of Irishness, for sure. Personally I’d rather have the 1 billion than the icon. This comment is a stadium-free zone 🙂 @ColmMcCarthy, In your paper you wrote: “Bluntly, this means that the markets are not convinced that Irish debt is free of risk, and countries with higher debt ratios than ours, and no greater liquidity, enjoy narrower spreads.” So other countries, in worse condition, are enjoying better borrowing terms. Why is that? Are these creditors afraid of NAMA? Are they afraid of competence of our leaders? Are they afraid that the unreasonable (in my opinion) stance of the EU/EC/ECB about running deficits going to leave our backing high and dry (it certainly makes one wonder what good it is to be part of this monetary union if its Central Bank is so punitive)? Whatever it is, from this I take it that it is not the actual numbers alone, or we wouldn’t be charged a premium, yes? And if it is one of the factors listed above, then why are we all marching in lockstep over FF’s appointed cliff? Most of yall seem employed. I am not, and from the looks of things not likely to be. I’ve gone from over €50,000 p/a to €9600 p/a and you want to cut that. If I become homeless I will make a point of sleeping on your doorstep. @JohnTheOptimist “I predict that the Lansdowne Road stadium will be knocked down in a few years […].” Gracious. Are you channelling Morgan Kelly? bjg @Marise Not meaning to answer for Colm but… I think the main reason Irish debt costs are higher than other countries with lower national debts is due to the speed at which we are pilling up the debt. Running deficits of 14% of GNP, GNI or GNDI for even a few years means we will very quickly run up national debts bigger than most other European countries. @ Dreaded_Estate Honestly feel you’ve not satisfactorily answered Marise’s pertinent question, since the US Federal budget deficit was 9.9% of GDP in latest FY, UK’s heading for 11% of GDP and Germany’s circa 4%. Yet their bond yield spreads are compressed together, while Ireland’s are off the chart. The UK and US have budget deficits closer to ours than they are to Germany, plus they both have a falling currency versus the Euro, which would normally introduce a further risk premium. Yet the premium on their debt yields is negligible compared to Ireland’s. Could it be that the financial markets understand something that our green shirt-wearing political rulers and their economic boosters don’t? That it is our banking debt at 232% of GDP, more than the next 4 worst Eurozone economies put together, which has introduced the risk of debt default. And the yield premium Ireland is obliged to pay is not a function of those who refuse to wear the green shirt and speak the truth, it’s a function of bailing out the banks’ creditors. No amount of (pointless and counterproductive) cuts in welfare spending or public sector pay is going to plug that gap. @Mark, Thanks for that, the educated folks here are helpful, as I often cannot frame my concerns so intelligently. I do feel that there is some factor not being explored surrounding our particular debt situation. @Dreaded_Estate Although I agree with Mark that my question wasn’t quite answered by you, your answer does help me learn, and give me new things to think about @All And I apologise to all, including Dr. McCarthy, if I sound strident. Please understand that it is very real fear, not any anger or begrudgery. It’s just that in my situation, one looks upon the upcoming budget like a sentencing hearing. Please don’t take it to heart. @Marise The source of the deficit is another important factor IMO. The US and the UK have deficits after massive stimulus packages. Ireland has a 14% deficit even after some serious cutbacks. I also think the Irish losses from the banking crisis will be a much higher percentage of GNP than any of the other countries. You are again, all, missing the point. There is only one point. Government. Economics politics and philosophy are all related academically. Maths has crept into modern government and economics and has come to dominate. A lack of an ethical foundation to Ireland has ensured enormous overhead costs on all projects and projects that never made economic sense. NAMA is just the worst example. Government is a club and is closed off. This is not a democracy, it is I declare it! a kleptocracy. The primary reason for NAMA is to earn secret commissions on the loans and to hide what went on in Anglo-Irish bank et al. What a tangled web we weave. Without reform of government, possibly at the point of a gun, Ireland will find many things happening, much of which will appear inexplicable, while the elephant grows larger all the time. The intellectual content of this blog appears to be declining, more than just as a result of my posts. What happened after Haughey, the thief and traitor, was revealed as such? Italy has been at least struggling to deal with Berlusconi. I met a member of the Italian Financial Brigade. They are military and have a place in the army. They are quite a serious bunch. They had allowed corruption to take root centuries ago and are still trying to rid themselves of it. Ireland appears permanently drunk and incapable of addressing corruption. This thread is mere prattle while spreads get worse and we have yet to borrow the 54,000,000,000 capital for NAMA. Then for the period while FF are in office we must borrow more to keep NAMA running. I confess to being SHRILL on this point and make no apologies. Those who do not condemn the lack of anti-corruption machinery in this joke republic are part of the problem. And I include those who are silent! @ Mark You are right, the source of the deficit matters to bond yields. Ireland has a bank bailout programme equivalent to 232% of GDP, the UK 74% of GDP, US 60% of GDP. But their deficit position is not a million miles from Ireland’s, as above 9.9% & 11% compared to our 14%). Consider this, the international markets are more comfortable with US & UK deficits (and allow lower bond yields) BECAUSE they have engaged in a fiscal stimulus, not despite it. Fical stimulus does what it says, stimulates so that the economy grows, tax receipts rise and, yes, international bondholders can see the way clear to getting their money back. They seem much more twitchy about bailing out failed property speculators; where’s the fianncial (or economic) return on that? sorry should be @ Dreaded_Estate agreeing with my on contributions now.Doh! @Pat Donnelly “Those who do not condemn the lack of anti-corruption machinery in this joke republic are part of the problem. And I include those who are silent!” We have plenty of people condemning many aspects of government here – in learned articles, editorials, the commentariat and the public in various ways in the media, blogs, web-sites and pubs! As you said, Shrill! If you do not mind my saying so, I am clearer about what you are against than what you are in favour of – at least in terms of mechanisms to limit the scope for excess by the powerful (elected and appointed, public and private) The real issue is how to engineer the introduction of a system of check and balances on how power is exercised in this Republic. This is the political aspect of economic management which is the main topic of this web-site. Another web-site explicitly focused on political reform has been started recently http://politicalreformireland.wordpress.com/about/ As encouragement to those who are trying to find ways of changing the way we govern ourselves – for what we think will be better, bear in mind that “Bíonn gach tosnú lag” and also Saint-Exupéry’s comment that “Dans la vie, il n’y a pas des solutions. Il n’y a que des forces en marche: il faut les créer et les solutions suivent.” Colm I read your paper with great interest. I think it would perform a very useful public service if you produced an article for the IT or the SBP focusing on the adjustment period/economic stimulus issues on which a fundamental divide is crystallizing between the trade unions, allied with so-called ‘left’ parties, and the approach favoured by the current government parties. People simply don’t understand the full implications for piling up national debt and the costs of debt servicing of a protracted delay in tackling the fiscal imbalance. In other words, they don’t appreciate that in the longer run it will cost them a lot more in jobs, taxes and the likelihood of any sustainable economic recovery in the medium term. And yes, I know it’s all been said before but that doesn’t mean it’s not worth repeating at this critical juncture. Like Mark and Marise above, I cannot accept that there were few expenditure cuts in the ‘Mac the Knife’ period – certainly in my own experience of those times I’m pretty sure there were some drastic cuts in health and education expenditure – and not just on the capital side – relative to what was required to maintain services to people who needed them. Your analysis of what brought the whole sorry ‘eighties saga to an end is very illuminating. It begs teh question as to what extent the ‘black economy’ flourished throughout the 1980s. Surely the success of the tax amnesty demonstrates that the money was always there anyway; it just didn’t find its way to the government coffers because people were seeking to evade what they perceived as punitive rates of taxation? Then there is the issue of pent up demand – by the late eighties/early nineties this had grown to such levels, as had personal savings, that Ireland’s long recession would have come to an end anyway? One thing I note that you don’t mention in the paper is the influence of EU transfers as a stimulus to the Irish economy in that period also. Did they have a discernable influence on the rate of recovery? @Marise While the explanations put forward by Dreaded_Estate and Mark have a considerable element of truth, I don’t see how they can be the full truth. Their expanations don’t explain why the gap in yields between Irish and German bonds (which relates directly to your original question on borrowing terms) has come right down since early 2009. In March, the gap was 300bps, by July it was 200 bps, and now it is 100bps. So, why has it been falling steadily all year? It can hardly be because the outlook for borrowing is better. The projected budget deficit for 2009 is much as it was in March, maybe even slightly worse. Likewise with the banking debt that Mark referred to. So, what has improved since March that has caused the bond yield gap (and therefore differences in borrowing costs) to fall from 300bps to 100bps. I’d say it is the outlook for economic growth in Ireland. Back in March it was being widely predicted that GDP in Ireland would fall by 15% between 2007 and 2010, followed by very slow recovery. This compared with a fall of 4% to 5% in the EU over the same period. Now, however, while the EU forecast figure is pretty much the same as it was in March, the forecasts for Ireland are much better. The average of recent forecasts is for a 10% fall in GDP between 2007 and 2010 (Davy, BOI, NIB put it below this – ESRI, CenBank above). In addition, more and more economists are predicting rapid economic growth from 2011 on. Davy predict 4%, ESRI predict 5.6%. I’d say it is this improved outlook for economic growth in Ireland that has reduced the gap from 300bps in March to 100bps now. However, the remaining 100bps might well be due to the reasons Dreaded_estate and Mark gave. Comments are closed.