My Fiscal Nightmares

As suggested by one of the readers,  this is an interesting article on UK fiscal policy by the well-known development economist Paul Collier: you can read it here.

14 replies on “My Fiscal Nightmares”


Many thanks for highlighting Prof. Collier’s op-ed piece. I recognise there are major data problems, but are you aware if any work is being done by our small, but highly competent, macroeconomics fraternity on the balance sheet of the Irish state?

I think the best response to this article was by a commenter, kyoto, on the cif site. I’m reproducing it here. A lot of the issues below are relevant to the Irish situation as well though unemployment benefits are certainly much more generous here – even after taking the higher cost of living into account. And of course Ireland does not have huge and stupid defence expenditure.

“Could you reclassify the House of Lords, the MPs, the quangoes, the FSA and the top tier of council CEOs as benefits please ? If you capped council pay at 80,000 and gave no bonuses or golden goodbyes, how much would you save ? Deal with the glaring, ugly inequalities before you start trying to trim money off the unemployed ? Do you know what unemployment benefit is ? Have you ever tried to live on such an amount of money ?

Incidentally could the fees for management consultants and peak time public information campaigns be reclassified as corporate charity and discontinued ? Save a few bob too.

How about getting rid of the well-intentioned NVQ and apprentice schemes which also end up as charity for those with degrees in box checking ?

Can you think how to recalibrate the economy into one which is likely to compete ?

What does your food and energy policy amount to ?

Is there going to be any banking reform ? Do you agree with Gordon Brown on trying to reinflate the property bubble ?

Why should all capital expenditure be protected ? Is Trident a good thing ?
And speaking of defence, how about calling time on the Afghanistan fiasco ?

How about trying to reform National Insurance and VAT to encourage employers to take on more staff ?

I am not an expert and probably wrong on many things, but have any of you got the slightest clue ?”

Ireland and Greece (more belatedly) have undertaken significant fiscal adjustments during the recession and this has been judged the correct procedure by many.

Then we have an (addmittedly vague and wishy-washy) innovation taskforce telling us to spend more on investment which was highly criticised in some quarters (see Colm McCarthy’s stinging response last Sunday’s SBP) for being unrealistic with regards the finances facing the country.

Should Ireland be striking a better balance between fiscal restraint and capital investment as well or is Britain simply not yet in as bad a shape as us?

Paul, answer is yes. Governments generally are just terrible at balance sheets, Ireland no worse than average. De-leveraging includes Govt and cannot be sensibly approached without some system-wide balance sheet overview. There is work planned on this.

Rob S, Ireland’s public investment ratio is high by historical standards, and on international comparisons. I think policymakers understand that slashing the Exchequer capital programme is a temptation to be resisted, although it probably cannot be sustained as a % GNP without overbuilding some infrastructures – demand is down, cf T2 at Dub airport. But even a trimmed programme would be higher than UK, and higher than we spent during the late 1980s fiscal correction, when capital was cut too much.

Paul Collier’s piece is fine but silent on a critical issue: what supply of sovereign credit to the UK can be assumed, at what price, over the next decade? Someone is headed for a disaster in the bond market, and Greece is not the only candidate.


Many thanks. I know you’re looking at this area, but was trying to gauge whether or not there was a broader interest. And, as I suspect you are well aware, getting a reasonable piece of work done – given the data limitations – is a challenge, but getting some traction for this effort in the small coterie – comprising the Minister, special advisers and senior DoF officials – where most policy of this nature is generated far away from the public gaze is probably a far greater challenge.

I also agree with your take that the infrastructure deficit Britain is facing is far greater, proportionally, than Ireland’s. Financing of investment is the big problem. Financial engineering and arbitraging of the regulatory weighted average cost of capital by the private equity ghouls has hollowed out the balance sheets of many of the infrastructure companies and retail competition in a number of the traditional utility sectors has destroyed the long term commitment to pay of captive customers that used to secure recovery of investment – at a low cost of capital – in specific, long-lived assets.

However, that does not mean that Ireland should not seek to shift the composition of demand – as Paul Collier proposes for the UK – away from expenditure on entitlements to capex. There should be scope for a rational combination of public and private financing and sensible regulation, but Ireland seems to lack the ability to achieve both.

And finally, the UK has borrowed longer than most developed economies, so there will be limited roll-over demand during the next decade. Both Labour and the Tories, irrespective of who plucks the short straw in May, are gambling that they can reduce the demand for new credit fairly rapidly over the next few years and avoid the attention of the bond vigilantes.

@Paul Hunt & Colm McCarthy
“the infrastructure deficit Britain is facing is far greater, proportionally, than Ireland’s. ”

One question I have on this – renewal of existing infrastructure, does that have a value as an investment or is it part of the original investment value? What I mean is if, say, a railway line is in place and carrying to capacity, but needs to be renewed because the rails are worn, does the renewal count as new ‘investment’ or as care&maintenance?

It seems to me that the infrastructure deficit that Britain faces is also likely to be less productive in the future?

Now now, Paul, no digs at the bond vigilantes, they are doing God’s work. There is a nice piece about UK energy infrastructure problems by Dieter Helm in recent Oxford Jnl Economic Policy.


Colm’s reference to Dieter Helm’s paper may help to answer your questions. Dieter has helpfully published this paper and others that should be equally relevant and interesting at this link:

The analysis is excellent, but I’m not entirely convinced about the solutions he proposes. Dieter, like so many economists, appears unwilling to accept the downsides of retail competition in electricity and gas (and in other sectors) and the detrimental impact it has on the financing of investment, the cost of capital and on final consumers.

In Ireland, on the other hand we have policy and regulation applied to gouge consumers in some sectors to finance all sorts of hare-brained schemes, while much more necessary and productive investment in other sectors remains unfinanced.

But should we be surprised?

@ garo


The problem is to be fixed by squeezing the squeezable. Measures impacting certain types and classes are off the agenda. Understand this and accept it or go away. People are hard at work.

Side. Bread. Buttered.

It’s amazing that the UK debate is still taking place in the abstract. Most proponents of cuts have yet to put forward a cogent plan about where the axe should fall. Opponents of cuts have yet to say why said axe should not come down bar vague talk of provoking a ‘double dip’.

We’ll know the debate is real when we hear about the nitty-gritty.

The proximity of the election is interfering with effective fiscal policy. A touch of brinkmanship allied to a desire to thoroughly destroy capital still extant in the wrong hands. There will be much drama soon enough. This may have a negative effect on GDP and GNP in Ireland.
Some of the infamous bondholders from the UK may be eager to settle once it is underway but delay always helps those who do not intend to fully pay their debts. Owe 10,000 and the bank owns you. Owe 100,000,000,000 and you own them as the Icelanders have established.
The apparent ascent of the $AUD is annoying. In fact it merely reflects the drop in value of the major currencies. Gold is an appealling purchase for those resident in these areas, but bot for Australians, yet. Steve Keen still suggests that there is a correction coming in the Au property market.
Soon world wide interest rates will be increasing. Fiscal nightmares are merely timing differences as taxation and spending lags. The reality is that all the wealth we have been seeing for the last twenty years, increasing all the time, is about to be revealed to be an empty promise, based on borrowings from the future we must now live through. Chastening. Governments will survive to blight our future but jobs will wither and incomes disappear, leaving basic living costs looming ever large. Basic living costs. Fiscal? Just juggling. Real social impact. The time to gather rose buds is gone.

@John McHale,

I would also suggest relating the figure you highlight to the Fig. B in the box on the distributional impacts on page 25. Within the apparent net increase in real current expenditure those of pension age have gained while the young unemployed have lost out. So the bulk of the fiscal adjustment is reflected in significantly reduced investment in physical capital and in young human capital. This is the very thing Paul Collier counsels against in the UK. Doesn’t bode well for the future, does it?

Thank heavens for the ESRI since when it conducts this type of analysis it does it well, but, unfortunately, the Dail is wholly impotent to consider and act on these findings. And there is a clear political message here. While those in the higher reaches of the banking and professional sectors, civil service and quangocracy, not surprisingly, are well able to protect their positions, only those of pension age, alone among all segments of the wider society, mounted a concerted public effort to force a change of tack by the Government.

Everyone else seems to be disenfranchised, so, perhaps, it’s not surprising that many young people are voting with their feet.

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