No Planned Revision to 2010 GDP

PS thanks for the clarification.

Imagine a world where you have now effectively linear credit growth and exponential interest rates and bonds that cannot default – eventually this model becomes a train wreck – it just needs for debt to go vertical on the graph.
Now imagine a island that has static or declining credit and debt that is not destroyed but whose interest on debt continues to compound.
This islands train will come early for a change.
Talks and action on fiscal cuts is on a level of insanity beyond any medications ability to treat and shows the psychopathic nature of a banking/ goverment apparatus that has lost all touch with even the most basic of maths.
Now focus on the health minister (a microscope is not necessary) – she wants to cut expenditure and life expectancy to service a debt that is mathematically impossible to service.
I would like to think that her conservative catholic understanding of money is behind her stupidity but given her friedmanite pedigree I have my doubts.
I call on any patriots left the Dail- a dirty dozen will suffice, to break from their party consensus and explain to the populace the futility of these cuts and the real motivation of this transfer scheme is to create a new feudal vassal state with no republican legacy.
While I do not expect Irish TDs to change the nature of the monetory system , if they are patriots among them then they need to exert their political power and set up a movement to default on all Irish private debt.

This will be a form of warfare against the square mile and Frankfurt but it would be a war with limited objectives and therefore after much violence our political system may come to a gentleman’s agreement with the monetory priesthood.
Why do this ?
This may buy us time before a new monetory system is created and therefore will protect Ireland in the near future as the present banking establishment are prepared to torch us before they are forced to comply with the laws of nature.
Please do this before the ineviatable physical violence follows this monetory malice – your our ownly hope before this society fractures into ghosts and demons.

There seems to have been a deliberate and concerted attempt in today’s Irish media to generate the impression that the government’s budget targets have slipped and that the deficit is turning out to be worse in 2010 than predicted, due to growth being lower than predicted. Today’s Irish Times says this, almost word-for-word. The problem is that there is no evidence whatever to support it. Just part of the usual brain-free scaremongering that the monumentally useless Irish media constantly indulges in.

Let’s look at real GDP growth first.

In the Stability Programme set out last December, which Karl Whelan has suplied a link to on the other thread, the D of Finance were predicting then that GDP would fall by 1.3% in 2010. The document also gives predictions for other forecasters back then, and most predicted that GDP would fall by more than 1.3% in 2010. The Central Bank are quoted in the Stability Programme as predicting back then a 2% fall in GDP in 2010.

But, it is now clear that GDP will rise in 2010. By how much, we don’t yet know. The latest Central Bank forecast is for 0.2% GDP growth in 2010. I personally think it will be a lot more, and that the Central Bank were daft for revising their forecast down to 0.2% from the 0.8% that they were predicting in summer. However, leave my opinion aside. Simply on the basis of their own current forecasts, GDP will grow by 1.5% to 2% more in 2010 than either the D of Finance or the Central Bank were predicting last December, when the Stability Programme was set out.

So, clearly, in relation to real GDP growth, growth is not turning out lower than expected, but higher than expected. The principal reason being the hopelessly pathetic forecasts that both the D of Finance and the Central Bank made for export growth in 2010. In the same Stability Programme document of last December, which Karl Whelan has suplied a link to on the other thread, there is a forecast that export growth in 2010 will be 0.4%. In fact, it is now looking like it will be a minimum of 7.2%. That’s what it would be even if there was no further growth in exports in Q3 and Q4. But, there very likely will be, as indicated by the July merchandise exports figures and the rebound in tourism in H2 from its disastrous level in H1.

Let’s look at nominal GDP growth next.

Inflation is turning out lower than expected. Now, although it is real GDP growth that is the important thing as far as economic activity, living standards, employment, migration etc are concerned (which is why net emigration in the year to April 2010 turned out to be a lot lower than ESRI forecast), a good case can be made for saying that it is nominal GDP that is more important as far as tax revenues are concerned. Fair enough! But, it cuts both ways. If lower inflation reduces tax revenues, thereby cancelling out the boost in tax revenues resulting from higher real growth, it also reduces government expenditure because the things that government expenditure are purchasing are falling in price. More bangs for the government buck.

So, to summarise:

real GDP is growing by around 1.5% to 2% faster than forecast in the Stability Programme last December, which should give a boost to tax revenues

however,

inflation is lower than expected last December, cancelling out any effect of real GDP growth on nominal GDP growth, and cancelling out any boost to tax revenues from real GDP growth, but, critically, also having the effect of reducing government expenditure

Just looking at things theoretically, we could reasonably expect that this combination would have the following results: (a) real GDP being above what was forecast last December (b) nominal GDP being close to what was forecast last December, with the increase in real GDP being cancelled out by lower inflation (c) tax receipts being close to what was forecast last December, again resulting from the combination of higher real growth and lower inflation (d) government expenditure being significantly below what was forecast last December, both because of real growth being higher and inflation being lower than forecast back then (e) the combination of nominal GDP and tax receipts being close to what was forecast and government expenditure being significantly below what was forecast leading to the budget deficit as a percentage of GDP being below what was forecast back then – ie exactly the opposite of what is being claimed in today’s Irish media.

All the above is theory. Let’s see how it is turning out in practice. These are the figures for how much the government was behind target (profile) for both tax receipts and expenditure at end-March, end-June and end September:

end-March:

tax receipts 3.6% behind target, or 266m euros behind
expenditure 2.1% behind target or 225m euros behind

net loss: 41m euros

end-June:

tax receipts 1.6% behind target, or 227m euros behind
expenditure 2.3% behind target or 505m euros behind

net gain: 278m euros

end-September:

tax receipts 0.2% behind target, or 42m euros behind
expenditure 2.5% behind target or 833m euros behind

net gain: 791m euros

In other words, the budget outlook has been improving all year, exactly in line with the theoretical analysis given above. Tax receipts are closing in on target, as the higher-than-forecast real growth cancels out the lower-than-forecast inflation. Expenditure is significantly below target, as the higher-than-forecast real growth combines with the lower-than-forecast inflation.

If Q4 follows the same trend as Q1, Q2 and Q3, the budget deficit will be lower as a percentage of GDP in 2010 than forecast in the last budget, not higher as today’s Irish media are all claiming. Note the words: “If Q4 follows the same trend as Q1, Q2 and Q3…”. Obviously, this is important. The one thing that could scupper it is various departments, seeing that their expenditure is coming out below what was forecast because inflation is lower (as I said above, more bangs for the government buck), might decide to go on a splurge in the final quarter and spend the money anyway, rather than passing back to the exchequer the savings resulting from the lower inflation. It is up to the Minister for Finance to ensure that this doesn’t happen. If he does so, the budget deficit will be lower as a percentage of GDP in 2010 than he forecast in the last budget, not higher.

John the “only a flesh wound” is back one sees….things must be dire. Still, John, the cuts are a coming from the (i suspect you thought it was bottomless) public purse of the UK to the north as well. Grim times all round.

@Brian Lucey

Still, John, the cuts are a coming from the (i suspect you thought it was bottomless) public purse of the UK to the north as well. Grim times all round.

JTO again:

I’m in favour of cuts in principle everywhere. I want to see smaller state sectors. I’m especially in favour of cuts in the GB subvention to the north (as you call it), since this will speed up the end of the artificial partition, and increase the necessity for an integrated island-wide wealth-generating economy, leading quickly to political reunification. The GB subvention is now the only thing keeping the north tied to Mother England. On the day of reunification, we shall erect a statute to George Osborne.

@Dreaded_Estate

The vast majortity of government spending is inflation-linked, either directly or indirectly. In the case of government purchases of goods and services, the link is direct. The prices of these fall, and the government pays less for the same volume of goods and services. In the case of social welfare, the link is indirect. That is, the government actually has to make a decision (which is what they are paid for) about what rate to set social welfare benefits at, based on the inflation rate. If inflation is +2pc, for the government to keep social welfare benefits constant real terms, it needs to raise them by 2pc. If inflation is -2pc, for the government to keep social welfare benefits constant real terms, it can cut them by 2pc. Of course, it does help if the D of Finance employs economists who can forecast inflation in the year ahead accurately. Alas, this was not the case in Budget 2008. The D of Finance forecast then that inflation would be +3pc in 2009, and social welfare benefits for 2009 were raised by that amount in the 2008 budget. In the event, inflation was -2pc in 2009. So, that error unnecessarily added a few billion to government spending in 2009. So, in that case we didn’t get the benefit of the negative inflation impacting on the socila welfare component of government spending. To that extent, you are correct. But it is not the theory I expounded on above that was wrong in that case, merely yet another example of incompetence by D of Finance economists.

Regarding 2010, the proof of the pudding is in the eating. As I posted above, largely due to inflation being lower than forecast, government spending is coming out lower than target by much more than tax receipts are coming out lower than target, giving a net gain of 791m euros at end-September. That was my main point: namely, at end-September the budget deficit is heading to be below target, not above, as all the media were saying yesterday. As I said, the important thing now is that these savings in spending are maintained until the end of the year, and that various Departments, seeing their spending below target because of the lower inflation, are not allowed to go on a spending splurge in the finaql quarter of 2010, which they have a nasty habit of doing.