More on the Revised GGB

The Department of Finance explains the data revision here.  In terms of the GGB in 2010 and subsequent years, there is an interesting set of communication issues.  As per the DF note,  one approach is to make a sharp distinction between the ‘headline’ and ‘underlying’ GGB with the difference consisting of the ‘unrequited’ capital transfers into Anglo-Irish etc. (as opposed to the equity-type investments in AIB and Bank of Ireland).  This distinction may be effective if the bank-related capital transfers are a ‘once off’ event or a “twice off” event (ie 2009 and 2010) but may lose its force in relation to a steady sequence of capital transfers over the next decade.  To the extent that the promissory notes spread out the capital transfers over a long period,  this may be a downside to this approach relative to making a larger-but-final capital transfer in 2010.

Update/clarification:  The promissory note approach will not affect the timing of when capital transfers hit the GGB  (once the capital transfer is decided, it hits the GGB in that year in line with accruals accounting) or when the fiscal cost of bank re-capitalisation hits the gross government debt (again, it hits the gross debt at the time of the commitment, since the liability has been accrued).  Moreover, the impact on the gross debt happens immediately even if it takes time (as in the 2009 case) to determine whether the re-capitalisation is an equity-type investment or a capital transfer. The promissory note approach just spreads out the timing of the cash payments.

28 thoughts on “More on the Revised GGB”

  1. The question of whether or not the €4bn associated with Anglo should be included in the government deficit is important.

    But surely a bigger question is “why are we using GDP rather than GNP as the denominator to measure the size of the deficit?” Even if we ignore Anglo (a very big “if”) 2009’s deficit of 11.8% GDP translates into a deficit of about 15% of GNP. Scary.

    Consider what the deficit would have been without the budgetary adjustments already made. Based on data on page C.36 of the Budget 2010 document, the 2009 deficit would have been some €8.5 billion greater without the medicine we have taken. Pre budgetary adjustments, that means that our 2009 deficit would have been about 21.5% of GNP. Mind-blowing.

    That is the scale of the distortion which EMU unleashed. And that’s before we start counting in Anglo.

  2. So how do you think Eurostat will rule on the €12bn Anglo and almost €3bn INBS money committed this year.

    Will it be spread over 10 year or will it all hit this year.

    Wouldn’t it would be better for us to get it all into 2010 rather than adding 1% to the deficit for the next 10 years.

  3. Brian,

    We’ve had systemic distortion over the years.

    Whenever somebody wants to make a figure look small (be it the Government looking at deficit levels today or Fr Sean Healy looking at state spending levels yesterday) they use GDP as the denominator. Strengthening the argument means everything. Economic logic means little.

    By the way … on the Government’s own budget figures, this year’s (2010) General government balance (pre-banking rescue) would reach nearly 27% of GNP if the various budgetary retrenchments had not taken place. Here are the figures:

    General government balance = -€18.7b
    Budgetary adjustments to date (2010) = -€15.9b
    GGB without retrenchment = -€34.6b
    GNP (current market prices) = €129.1b
    GGB without retrenchment = 26.8% GNP

    Conclusion: even before we consider the outlandish cost of bank rescue / recapitalisation, the scale of our budgetary problem is truly horrifying.

  4. @Cormac,

    So what is the govt commiment in the CP deal worth. Clearly, public expenditure is still way too high and the capacity to tax all but exhausted. Greece is on the cusp of renegotiation/rescheduling of its debt. When do we follow suit?

  5. looks like 3% deficit by 2014 is off the table then. Remind me why were pumping billions into Anglo again?

  6. Nothing will come of this if there is no justice or liberty. Restitution needs to be paid by those who profitted from the fraud that was and is being imposed on the people. Restructuring of the leadership – apply restraint on their pay and authority, outlaw income tax and all other taxes that are unjustly imposed on the people, Outlaw paper money and monoply money changers, establish just weights and measures (gold and silver for example) as the currency, …

    “Justice removed, then, what are kingdoms but great bands of robbers?” Augustine, The City of God

  7. @ Brian

    The prospect of a mid-year mini budget depends on course of tax revenues. The Dept seems happpy with them to date but they (especially VAT) look low compared to prior year figures especially when one considers that there was no 2-week national stoppage due to snow in 2009.

    Another factor will be bond markets. In the last two days our 10-year bond yield has shot from 4.56% to 4.78%.

    @ Tull

    CP deal is just a truce and not a peace treaty. The union leaders needed to restore their leadership so government threw them a few morsals. But the membership is wholly divorced from economic reality. They genuinely believe that restoration of recent pay cuts is on the agenda. That is a mark of how poorly the scale of our problems has been communicated to the general public. Government comments that “the worst is behind us” permit this delusionary thinking.

    The possibilities for Ireland are:

    a. exit Euro and devalue – highly unlikely given (insurmountable?) institutional hurdles well articulated elsewhere on this site.
    b. continued retrenchment and debt deflation – this is where we are now.
    c. debt default – this is the only real alternative to current policy.

  8. @ Cormac,

    its more likely that we and other Euro states pursue option b and hope an export led recovery and inflation bails us out. That either works or it does not. In the event that it does not, we then go to option c in two years time.

    The odds marginally favour a) at the moment. Global economic activity and inflation are picking up. However its a close run race.

  9. @Brian Lucey “What odds on an emergency budget in June?”

    As I predicted back in January. Mind you, I also predicted that Leinster would win the Heineken cup again this year but that away draw to Toulouse looks a bit tough.

    It’s got to be on the cards though (an emergency budget). I don’t think they will be able to wait until they return after the summer recess. I bet there are still some nasties lurking in the tax take predictions.

    @Cormac Lucey – “They genuinely believe that restoration of recent pay cuts is on the agenda.”

    I’m not sure that applies to the ‘professional’ classes of the public sector. I was talking to some this week (solicitors, number-crunchers, IT, etc.) and they didn’t seem to believe that was the case. The thing repeated most often though was that they didn’t really have the stomach for a fight – and possibly more pay cuts as a result of fighting. I suspect Cowen et al know that.

    Whether the average ‘front-line’ work believes that I couldn’t say at the moment but will try and find out next week. My observation is that the unions don’t seem to be communicating very much (or very well) at all just now. Too busy looking over their shoulder at a dwindling power base.

  10. A deepening depression. Capital being destroyed and still no fundamental economic or fiscal reforms.

    The absence of intellectual economic leadership, recognizing the reality of a 1st world depression, since 1999, means that really effective action is delayed and deferred because there is no real debate. Thos who grasp the reality can pretend to others whatever suits them while withdrawing their capital etc.

    Normal for a kleptocracy, of course. Why change that? Who cares about those who are going to experience greater loss as a result? Save yourselves! Head for the best lifeboat, with allies.

  11. http://www.irishexaminer.com/ireland/taxes-of-euro222m-written-off-last-year-over-failed-businesses-117960.html

    http://www.irishexaminer.com/ireland/quarter-of-tax-take-to-service-debt-117957.html

    Fewer audits, more defaults. A prediction. Telephone calls will be called audits …. to try to cover up! Revenue is now so efficient that it can really only deliver to fully compliant taxpayers. Qualified Tax Inspectors have left in droves. Those left behind are mainly untrained or engaged in tracking foreign deposits.

    If the taxpayers involved take good advice they will keep their $ offshore and join it! The economy has been so badly managed that there is no jam left in it. Only those in their forties face a choice, given the length of time economic recovery will take. What is the statute of limitations on tax debt? Usually six years unless there is a court judgement, then 12 years. They can return in a decade or two if they manage their affairs well, content that they have pulled off another stroke! Just in time to buy up property as it recovers, slowly.

  12. Comment on PS unions: trying to look two ways at once, fire and brimstone for the membership, while knowing that pay cuts cannot be rescinded. A dilemma for them. Some members are asking why they pay E400 in subscriptions. Jack O’ Connor’s position is revealing – reality is beginning to bite. The noise from the banking crisis doesn’t help in getting people to see awful reality.

    Amongst teacher unions (my gang), there’s no stomach for strikes, people can’t afford it, especially the young ones. And most teachers like their jobs and students too much. Yes, it’s true! Teacher unions were a bit of an embarrassment during the conference season, though. But that’s just the old folks.

    Re the Anglo thing: I thought we were told that there’s no connection between the banking crisis and the fiscal crisis. So now it’s actually real money they’re (I mean “we’re”) giving to Anglo.

  13. @Dreaded_Estate
    Are we not committed to some amount in stumpy-uppy cash this year for Anglo and INBS (as a result of NAMA) and the promissory notes? Can’t remember how much is this year, with 2 bn a year (ish) for the next ten years. Anyway, as KW says, the sensible method is accrual accounting. After all, it might not happen…

  14. I don’t follow the logic of saying the “once-off” nature of the transfers to Anglo justify their accountancy treatment.

    Any given expenditure item can be seen as a “once-off” transfer.

    Insofar as these transfers represent money down the hole as opposed to investment – and this is certainly the case – the net effect of this money is that the Irish government is borrowing against taxpayers future earnings in order to pay debt obligations which arose due to a transfer to certain sellers of land and business parties (those who sold land during the bubble).

    I fail to see why this debt deserves any kind of special accountancy treatment. If the Irish govt were to just hand a few billion to these same people (instead of using as an intermediary its bankrupt lender Anglo), the fact that this hand-out were a “once-off” event would not shield it from accounts.

    I am reminded of the petulant 14 year old daughter: “Mom, can I have €299 to buy a designer handbag?”

    “No. Your father and I don’t have that kind of money.”

    “But Mom, it’s only a ‘once-off’ expense.”

  15. It is hard to argue that money gone into Anglo should not be included in ou national debt after what we have heard over the last few weeks. We have been clearly told that we are involved in a hole filling exercise, nothing more.

    Eurostat cannot be blamed for the reclasssification. We should not shoot the messenger. However, the question now arises as to whether the EU will exacerbate the situation by threatening to fine us. Given the German national mood, this is very possible. The EU needs to take a look at its role in this:

    1. EMU created structural problems for national economies. We were stuck with inappropriate low interest rates. Whereas it is common cause that the system had flaws there is no sense of common reponsibility.
    2. The deposit insurance scheme was wholly inadequate to protect against the risk of cross border retail banking.
    3. EU wide banking regulation was a problem generally with the EU financial crisis severely prejudiced how we dealt with our domestic crisis. Our crisis had in turn been supercharged by the flaws in EMU.
    4. EU watchdogs failed to bark in their analysis of our national economy in the years leading up to 2007.
    5. When the crisis came, the ECB encouraged us to save our banks in the interest of the entire European Union. Not letting a bank go down was a stated policy position of the EU leaders acting in “solidarity”.
    6. The bank guarantee was there to help pension holders from other EU countries, including in particular Germany.
    7. The stability and growth pact, which is now the major stick with which were are being beaten, has been shown to be wholly ineffective and inappropriate metric.
    8. National political landscapes in Europe are becoming very fraught.

    The EU is a political organisation designed to promote peace and prosperity in Europe. Is it achieving its goal? Not in my opinion.

  16. Not hold on, zhou…

    …blaming the EU for Ireland’s current pickle is a bit rich. Interest rates were a bit low for the Tiger, true, but nobody in Brussels or Frankfurt forced Irish financial regulators to abandon mortgage lending guidelines.

    Nobody in Brussels made the introduction of a residential property tax ‘political suicide’, as it was so often described in the early naughties.

    Nobody in Brussels encouraged a structural deficit from 2002 to 2007.

    This was all done right here at home.

    And – I might add – Ireland had every opportunity to remain in a currency area with its biggest trading partner, but chose to align its currency with the distant D-mark. Nobody in Brussels forced Ireland to do that either.

  17. @Pat Donnelly:
    “Qualified Tax Inspectors have left in droves.”

    Haven’t Inspectors been abolished? Or at least redesignated as HEOs?

    bjg

  18. BJG
    Were you the chap who turned up in a WWI helmet when told off for leaving the training school early?

    I still have a commission as an iot. Others have too. The grades of CS may have been amalgamated, ap etc but some actually were commissioned for passing exams, by the Min for Fin. But then they decided that professionalism was no longer needed ……. Too many able to follow money laundered??

  19. Zhou
    You are for once or twice, perfectly correct!

    This was entirely foreseeable and foreseen, by many.

    Now what do you think!?

    The Irish were still greedy, lazy and stupid, but they were ushered into the tent just in time to catch the full deal!

    No warnings of overheating, from Brussels? I wonder why not? Always a good idea not to waste a good crisis. Perhaps the next stages are closer integration and higher tax rates?

  20. @Pat Donnelly:
    “Were you the chap who turned up in a WWI helmet when told off for leaving the training school early?”

    WWII. I left the whole thing after 10 months, finding tax boring (and thus missing out on opportunities for untold wealth on the Dark Side).

    Ah, those fond memories of hunting mice (with umbrellas) in Hammam Buildings ….

    I agree with you about the professionalism aspect. I can’t imagine what the Revenue Commissioners were thinking of. Admittedly some graduate-entrant trainee Inspectors (such as myself) were a waste of space, but that’s a problem of poor recruitment and selection rather than of poor grade definition. Linking IoT to HEO (Warrant Officer rather than Commissioned Officer, I’d have thought) was, I think, a bad idea.

    bjg

Comments are closed.