I’m having trouble making sense of most of the reporting of the budgetary discussions.
Two issues are particularly puzzling. The first is the consistent referencing of the idea that the higher requirement for budgetary adjustment is due to a relatively recent worsening in the forecasts for the Irish economy. (Indeed, a number of government politicians have also made reference to the idea that this worsening stems from a recent downgrading of the outlook for the international economy.)
The second is the dismissal of the €7 billion figure for budgetary adjustment mentioned by Michael Noonan and the lack of reference to the 10% deficit target that had been set for 2011.
Starting with the idea there has been a sharp recent worsening in the budgetary figures, this story is puzzling because, as far as I understand it, the main reasons for the worsening in the budgetary outlook have been known to the government since early summer. Here’s another one of my spreadsheets with budgetary calculations (apologies if I’m being a bit repetitive for those who read my previous posts on this issue.)
The single largest upward adjustment to the required budgetary adjustment has stemmed from the fact that the €30 billion or so of promissory notes carry an interest rate of 5% and hence there will be €1.5 billion in promissory note interest payments that will count against the general government deficit in 2011. The government issued most of these notes by May of this year, so one would have to assume that they have been aware since this time that this would add to the required adjustment for 2011.
In addition, there was a downward adjustment of €5 billion to 2009’s level of GDP in the CSO’s summer annual revision. Even if the government’s growth forecasts for 2010 and 2011 were held to, this would have implied a reduction of €5 billion in the projected value for GDP in 2011. Hitting the target of a deficit of 10% of GDP would have required an increase of €0.5 billion in the amount of adjustment required. Indeed, the July Central Bank Bulletin showed a level of GDP that was €6 billion lower than the December 2009 budget projections. Combined with the promissory note interest payments, this would have brought the adjustment required to meet the 10% target to €5.16 billion.
Since the summer, there has been some negative news such as the publication of the decline in GDP in the second quarter. However, the overall effect on the Central Bank’s October projections was pretty small. GDP in 2011 was €8 billion less than the December 2009 budget projections. Thus, the changed forecast from July to October only raised the required adjustment to €5.33 billion.
Now, of course, these calculations are very static. Worsening growth projections for 2011 have probably added a billion or so via assumptions of lower tax revenues and higher welfare payments. However, for example, the transition from the last budget’s forecast of 3.3% real GDP growth in 2011 to the 2.8% in the July Central Bank forecast to the Bank’s more recent 2.4% has been a very gradual one.
In addition, the contractionary effect of having to cut more than the originally assumed €3 billion, will have raised the adjustment required to hit the 10% target in 2011 to at least €6.5 billion and perhaps €7 billion. All of this must have been known by early September and yet the government was clinging to the €3 billion adjustment figure.
I suspect it is the rapid change from this official line to a quite different one that has convinced the media that something dramatic happened to the adjustment requirements during September. However, this does not appear to be the case.
Turning to the reporting of the €7 billion figure, there’s plenty of evidence to suggest that this is exactly the amount of adjustment that will be required to hit the 10% of GDP target that the government had previously indicated to the EU that it would meet in 2011. Not least of this evidence is Michael Noonan’s statement after his meeting with the Department of Finance.
Despite Noonan’s statement, however, almost all the recent media reports have dismissed the idea of a €7 billion, instead focusing on the idea that the adjustment planned in the upcoming budget will be about €5 billion. But I have yet to see a report that notes that this adjustment is unlikely to meet the 10% deficit target that had been previously set out or explores the implications of the failure to meet this target.