Pre-Budget Outlook

The Department of Finance has released its pre-budget outlook: you can download it here.

One striking projection:  GNP will shrink by 10.5 percent in 2009 [the contraction in GDP will be 7.5 percent].

17 replies on “Pre-Budget Outlook”

I know brevity is appreciated in reports and all but, Christ, they don’t half-skimp over that one.

The report forecasts a fall in GDP in 2010 of 1.5 per cent. I really can’t see where they get that figure from. Barring a double-dip global recession, I think its highly unlikely. Of course, their previous forecast, made just a few months ago, was for a fall in GDP in 2010 of 3.0 per cent. So, they are not exactly masters of precision. Most other forecasters are more optimistic – for example: ESRI -1.1%, Goodbody -1.1%, NCB -0.3%, BofI 0.0%, Davy +0.7%. The average of these other forecasters is for a fall in GDP of just 0.4 per cent in 2010, comapred with the DoFinance’s 1.5 per cent.

I have no wish to start a debate on economic forecasts for 2009 and 2010(as pointless as starting a debate on forecasts for the big football matches this weekend). But, just for the record, my own forecasts for GDP growth in 2009 and 2010 are:

2009: -5.9% (v DofFinance -7.5%)
2010: +2.8% (v DofFinance -1.5%)

@ JohnTheOptimist

Are you taking account of defaltionary budgets in the future?

As far as I know the EU didn’t.

@ JohnThe Optimist

Davys had their take on it out this morning – they reckon the govt is being overly bearish on the economic forecasts, particularly on the unemployment expectations of an average of 13.75% for 2010; Davys reckon it wont even spike their on a monthly basis.

I tend to take what the stockbrokers say with a pinch of salt whether it be about shares or the economy. They have a particular interest in persuading the share buying public (of which I’m one) that all is now fine whether it is with a particular company or the economy as a whole. I have rarely seen them caution on an individual company’s share price even when it is fairly obvious the share is overvalued. They manage to accentuate the positive and usually ignore the negative.

The real answer is we don’t know what GDP growth will be like next year. You have to use a figure to base your budget on and the government have picked theirs. I would prefer them to be cautious. I hope they have been. But there are a few factors out there that should make us wary:
1. Ireland still hasn’t taken its medicine. Little has been done in the past 12 months to realign the country’s finances with the new reality. Budget 2010 is going to take €4b out of the economy.
2. The banks have not foreclosed on loans (business and personal) in the way they would normally do in a recession presumably so they can keep some level of respectability about their balance sheets. They are delaying the inevitable which will delay the recovery.
3. Price deflation. Maybe an economist can help me out here but if we have deflation of 6-7% won’t this affect GDP in value terms.
4. World recovery. What happens when we get to the anniversary of governments pumping billions into their economies. They’re not going to do it again so won’t that impact on world GDP?
5. Emigration. As far as I know we have no idea how many people left the country so far in 2009 to escape the recession. If it is a significant figure then this will impact on consumer spend in 2010.

I run a business, I hope we have bottomed but I’m not about to take any brave steps until I see how things are going over the next 3-6 months. I doubt there are many who will. The recession has had a stark impact on the psyche, it may take a little longer for most of us to start risking capital again.


Once again you’ve improved on my general education by posting the link to the DOF document. Normally, I would not read the original document, instead lazily relying on media and poltical commentary for information and analysis of what the DOF want us all to do next. Rather than the dry and turgid analysis I anticipated, the document impressed me as a very political statement of our current state of affairs; probably deliberately so.

The DOF effectively dismantle ICTU’s preferred approach, and that of their political fellow-travellers, to dealing with the financial crisis by deferring action to correct the public finances to 2017 and beyond. It’s hard to argue with the statement that “mounting debt interest would ulimately represent a drag on medium and long-term growth with the result that much harder decisions would be inevitably required in the future to deal with the problem.” Or that ” the window of opportunity to take action to stabilise the deficit is now – at a time of falling prices and low interest rates, the impact of reduicing spending is less…” Even at that, we will be only ‘running to stand still’ as DOF put it; a phrase they might have employed as a fitting sub-title for their document.

What was most intriguing was the statement that tax revenue has dropped to the levels of 2003, yet expenditure (and employment levels) in key departments vastly increased in the intervening period, by as much as 70% overall. The high spending Departments show increases, for example, of 77% in Health and Children; 96% in Social Welfare; 59% in Education, with 36% in ‘others’. The reality is that we could never afford the 2,500 or so extra gardai that were appointed, or the 20,000 plus extra staff in the health area or the teachers or civil servants and so on, in the first place. Their employment and remuneration relied on ‘construction bubble’ taxes, now gone in the bust and unlikely ever to return. Reading through that section prompted the cynical thought that as a nation we’ve clearly been a lot sicker and more lawless than I had ever imagined!

The ‘killer punch’ in the DOF analysis is that if we let this opportunity pass, national debt will rise to 175bn by 2013 and servicing that debt would cost between 25-30% of then tax revenue. So even if John the Optimist’s comment is right and they’re being a bit too bearish about the economic forecasts, it’s difficult to find arguments against making a 4bn adjustment now. At least politically, the DOF have set out a strong case.

The pre-budget reports raises questions of not only what ought to be done but also what is doable in a political sense. A recent analysis of ‘Public Spending in Hard Times’ by Christopher Hood and colleagues contrasts periods in which UK governments have cut public spending back significantly with others, including the 1976 crisis when the IMF were called in, when the most that could be done was to put a brake on public expenditure. You can read it here – .

@ Eoin

Davy’s Rossa White has forecast a 4% rise in GNP in 2011.

Maybe or maybe not.

I prefer the way the ECB gives a range when forecasting.

It has a lot more credibility as pinpointing a specific figure 2 years ahead may be better than astrology, but not much.

There is so much punditry but nobody keeps the score.

It often strikes me when watching CNBC that a brass neck is a lot more important than prescience.

This gem from Bank of Ireland Private Banking, May 2008: “Whilst we are undoubtedly in one of those periods where investor confidence will tend to override investment rationality, the effect of this is that investors will miss out on the very best days. Private investors always look for too much evidence that the recovery is underway and thus miss the best returns. Missing the best 10 days can mean missing out on a third of the returns if history repeats.”

If the two remaining Irish Banks have used the QE money to invest in the Far-East to bolster their Tier One, when the ASEAN asset bubble bursts, any DoF forecast will become irrelevant.
Methinks humbly.

@ Michael and Stuart

i agree we shouldnt follow the Davys stuff by jumping in with both feet. But we shouldnt dismiss it in entirety either. And i personally believe Donal O’Mahony to be the best of the current set of Irish economists given his track record in previous years (granted these were generally aimed at market prices rather than underlying economic activity). And they’ve also given a fairly short term specific opinion on unemployment peaking below 13.7% next year, something which even in the next few months will be fairly easy to tell how their forecast is doing.

@Stuart Blythman “The banks have not foreclosed on loans (business and personal) in the way they would normally do in a recession presumably so they can keep some level of respectability about their balance sheets. They are delaying the inevitable which will delay the recovery.”

Sounds like a nightmare waiting to happen.

Anyhow, I always thought sensible forecasts showed a likely range rather than just a single figure.

I am certainly not an economist but I find it somewhat irrelevent whether the economy contracts by 1% or 3% when the reality is that a whole generation will have seen their real incomes fall by 20% plus and be mired in negative equity for years to come.

I’ve a proposal to allow us to do pseudo-currency devaluation :

– The government to put in place an across the board levy on all of all employee’s earnings
– The government would immediately rebate this to the employers
– It would instruct semi-states to cut prices (e.g. ESB)
– Also it would monitor the self employed , asking them to prove they used it to cut costs (though they’d likely be forced to do same by others)

Firms which felt they were competitive already: could pass the rebate back to employees

Perhaps the levy could be order 10%.

Obviously this would boost competitiveness and thus defend existing (FDI, tourism, exports etc) and allow us to grow on the back of the impending global recovery

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