A Discouraging Dail Debate

Yesterday’s Dail debate shows that Fine Gael’s approach to the upcoming budget and four-year plan debates appears to be to emphasise the idea that economic growth may be higher in future years so that €15 billion in cuts will not be needed.  The ESRI’s high growth scenario gets a lot of play in these discussions.

From Enda Kenny’s speech in the Dail:

There are better possible outcomes. For instance, if the ESRI’s updated high-growth scenario of an average growth of 4.5% were to materialise, a smaller package of fiscal measures would be needed to hit the 3% target by 2014.

That is why Fine Gael believes it is necessary, over the coming weeks, to put a relentless focus on the ways to support growth and jobs as the country attempts to repair its public finances. That is why Fine Gael believes that any fiscal plan has to operate in parallel with a credible growth and jobs plan to turn the present downward vicious cycle into an upward virtuous cycle. We have a different approach from the Government. Fine Gael offers real hope that we can rebuild our economy and restore trust in politics and in Government.

This was backed up by Michael Noonan, who was pretty clear about the political costs to the opposition of agreeing to the €15 billion figure:

When the €15 billion is a forecast and when minor adjustments in the growth rate can make such vast variations, would we not be desperate clowns to tie ourselves in to the Minister’s figure, especially when the Taoiseach could not answer Deputy Gilmore this morning when he asked what was factored into the estimate of growth?  …. The key element is the forecast for growth and there is a vast variation between Davy’s forecast, which would take us over €20 billion, and the ESRI high growth forecast, which would bring us down to €9 billion.  The Minister is on the mid point so maybe he is right, but we are not buying in. We need more information.

I’m pretty sure that Fine Gael are aware that the previous budget’s growth projections are now considered to be highly aspirational by the European Commission and that any plan that is agreed will have to be on the basis of lower growth figures than contained in the ESRI’s high growth scenario.

You can call this unfair if you want (and some will—no doubt we’ll have comments here about the need to wear shades due to the brightness of our economic future.) However, that’s the way things are going to work and with the EFSF waiting in the wings to bail us out, the government probably doesn’t have a lot of bargaining power to make the case for a more optimistic scenario.

Indeed, I’m sure even the ESRI don’t believe that their high-growth scenario is the appropriate basis for fiscal planning over the next few years. Recall that the Recovery Scenarios document gingerly raised the question as to “whether a more rapid fiscal adjustment than currently planned would have a more beneficial outcome for the economy.” Note also that, on its own, the news about €1.5 billion per year in promissory note interest would take us to €9 billion even on the basis of the government’s December 2009 calculations. 

What this emphasises, I’m afraid, is that the current political situation makes a cross-party consensus on multi-year budgeting essentially impossible. Opposition parties do not want to campaign at the next election on the basis of €15 billion in adjustments and who can blame them?  However, this will gravely undermine the credibility of any four-year plan introduced by the government and will also worry financial markets. 

16 thoughts on “A Discouraging Dail Debate”

  1. Swedish Finance Minister Anders Borg has said that it is important not to base actions on optimistic forecasts because of the damage it does to market confidence when those forecasts prove inaccurate and goals are not achieved.

    After Varadker and Noonan recently suggesting €6bn and €7bn in cuts respectively, they now seem to be getting the willies about what needs to be done and their old incoherency is re-emerging. We also have heard nothing in the news from their Oxbridge economist Richard Bruton.

  2. If I were a bond trader I would give no credibility to a consensus agreed by parties outside govt. and parties in a govt. in terminal decline. Why would the markets give it weight. I don think this is unreasonable. Its a thyumb tack approach solely designed to give the current Govt. more time in office.

    The only way that this a plan can have credibility over 4 years is if its contiguous with one govt.

  3. The government would have a chance of more consensus around the €15 billion if they could explain where it came from and why it seemed to come so suddenly, as per Karl’s earlier post. It’s interesting to see Dan O’Brien attribute it to a mixture of DoF incompetence and a recent mandate from Ollie. Neither of which the government is likely to admit to.

  4. Karl
    I don’t think political party on either side of the house will be able to stomach 7 billion between taxes and cuts this year.

    After Eamonn Gilmore’s comments in the Dail yesterday I think the basis is there for 5-6 billion (half cuts half tax) agreement between FG and Labour. The change of government with a 5 year term would also help with Bond market uncertainty.
    A general election is required now.

  5. Why should we accept that, just because Irish economists are a lot more gloomy than a year ago, that this corresponds to reality? What is there in their forecasting record over the years that suggests we should believe in their infallibility?

    Can they give us any scientific or statistical basis for their belief that the growth outlook for Ireland is less good than it was when the Stability Programme was launched a year ago?

    Simply repeating over and over again that it is less good and that the outlook for growth is worse than it was a year ago isn’t enough. We need some real hard evidence, based on the most up-to-date economic indicators. Can they provide it? If they can’t, they should clear off. That’s what would be required in other countries. Real hard evidence that the growth projections contained in the Stability Programme are falling behind target and are therefore less likely to be achieved than was believed last December.

    This is what the Stability Programme contained last December:

    forecasts for Ireland in 2010:

    personal consumption: -3.0%
    investment -19.2%
    government consumption: -3.0%
    exports: +0.4%
    GDP: -1.3%

    And this is what the latest Central Bank report, published a few weeks ago, contains:

    forecasts for Ireland in 2010:

    personal consumption: -1.1%
    investment -20.9%
    government consumption: -2.0%
    exports: +5.4%
    GDP: +0.2%

    In what way are the latest Central Bank forecasts worse than those contained in the Stability Programme? Could some economist explain to us simpleton non-economists excatly in what way the latest forecasts show growth slipping behind the projections in the Stability rogramme? Apart from the small slippage in investment, they are all well ahead of target. Even personal consumption, currently the weakest aspect of the economy, is doing much better than the 3% fall forecast in the Stability Programme. And even the Central Bank forecasts are likely to be under-estimates. Export growth in 2010 will clearly be well above the 5.4% they forecast, probably close to 10%. But, even the 5.4% growth in exports is 13.5 times faster than the growth in exports projected in the Stability Programme. So, how exactly does discovering that your exports are growing at 13.5 times the rate you forecast a year ago (more likely 25 times) indicate that the outlook is worse than a year ago? Answers on a postcard, please.

    The Stabiliy Programme also contained forecasts for GDP growth in 2010 in other countries, Ireland’s main trading partners. These were:

    US +2.2%
    Germany: +1.2%
    France: + 1.2%
    Italy: +0.7%
    UK: +0.9%

    But, the latest IMF report, published a few weeks ago, contains the following forecasts for GDP growth in 2010 in the same countries:

    US +2.6%
    Germany: +3.3%
    France: + 1.6%
    Italy: +1.0%
    UK: +1.7%

    Each and every one revised up.

    So, how exactly is the growth outlook for Ireland now worse?

  6. @Karl,

    You write: “Opposition parties do not want to campaign at the next election on the basis of €15 billion in adjustments and who can blame them?”

    So they’re entitled to play fast and loose with the facts to ensure they win loads of extra seats on the basis of political dishonesty? Of course they will be the sole beneficiaries of such chicanery whilst the people suffer on.

    As John Gormley pointed out yesterday to his parliamentary colleagues, all the major parties have succumbed to auction politics in every general election since 1977. Auction politics is ingrained in our political culture and in its incremental effects over the past three decades are largely responsible for creating the dire situation in which the country currently finds itself, Gormley argued, and he was making more than a fair point.

    Our political system is failing dismally to get to grips with the difficulties facing the country because the leadership of all the major parties can’t unlearn their best learned behaviour, as exemplified in most of the contributions to the Dail debate over the past two days. I think this also explains, at least in part, why three quarters of the electorate in opinion polls have no more faith in the capacity of the main opposition parties to make a better fist of handling the crisis than they have in the present government. It’s said that a functioning banking system is essential in order to have an economy; equally the confidence of the people in a functioning political system is essential to democracy. Right now, it seems to me, we’re in the very strange and scary place where we have neither.

  7. The only thing that can be said for Noonan is that we are in an election period and all election-time statements can be discarded later as being inoperative.

    Now he tries to play cute hoor and says that if the growth rate is 4.5% then only 9 billion in cuts will be needed. When will he realise that after the mother of all property bubbles and the greatest bank collapse of all time, excepting Iceland, that all you get is a decade of stagnation.
    Even with the competitiveness reforms that FG champion, we will be lucky to get 2.75%, so great has been the success of FF policies to destroy the country.

    To attain the government average 2.75% a year over the next 4 years if we have to take 10% out in order to get to a 3% deficit means that we have to average 5.25% growth before taking the tax/services out of the economy. There is no reason to believe that we can achieve that.
    All precedent shows that we will be lucky to bounce along at ZERO net growth (2.5% per year in the real economy – 2.5% fiscal contraction).

    FF have wiped us out – no wonder only 25% of people believe that FG/LP can improve the economy.

  8. Well, well. It looks like no one wants to answer the questions that I posed above. Ask a serious question on this site, and you wait in vain for an answer.

    @Maurice O’Leary

    so great has been the success of FF policies to destroy the country.

    we will be lucky to get 2.75%

    JTO again:

    What absolute twaddle!

    At the bottom of the recession in 2009, GDP in Ireland was 75% higher than in 1997. No other developed country comes near that. German GDP is about 15% higher than in 1997.

    Average EU15 GDP growth for the past 20 years is barely above 1%. A 2.75% GDP growth rate in Ireland would leave us the richest economy in the EU.

    @Eamon Moran

    A general election is required now.

    JTO again:

    You hit the nail on the head. All the fake hyped-up pessimism of the past couple of months, just when the economy is showing clear signs of improvement, is not about serious statistical analysis of the economy, but about trying to panic the country into an election, 18 months before the government’s mandate run out.

  9. @JohntheO
    The time-dependent nature of forecasts seems to elude you.

    The SPU projected GDP to fall from 164,600 in 2009 to 160,925 in 2010, a decline of -1.3%

    Since then, GDP for 2009 has been revised to 159,647.

    Growth of 0.2% between 2009 and 2010 would give a figure of 159,966 for 2010 GDP
    (all figures current prices)

    Now, I don’t know about you, but the revised forecast figure is giving a lower final GDP for 2010 than the original figure. To me that says the outcome is predicted to be worse. The good news is growth from a lower than expected base. The bad news is more growth required.

  10. @ JtheO
    “Average EU15 GDP growth for the past 20 years is barely above 1%. A 2.75% GDP growth rate in Ireland would leave us the richest economy in the EU.”
    Well doesn’t that make a growth rate of 2.75% just seem less likely and possibly result in larger requirement for cuts and taxes?

    The most important statistic to come out of the Government in the last few weeks is the requirement for 15billion rather than 7 billion in taxes and cuts.
    All of the other numbers you give above pale in comparison to this.

  11. So the government has woken up to the need for €15 billion in cuts over four year! What brains!.
    To my simple mind, the current deficit is close to €20 billion, and as any growth figure is aspirational, the figure needed in cuts and taxes is close to €20 billion.

    One does not need to seat heater turned on the Mercedes to figure that out!

    On a political level, €15 billion means nothing to the man in the street except to stop him or her spending. It is the government responsibility to spell out the detail and the budget should be brought forward as a matter of urgency. Any responsible government would have had a budget and already called an election.
    The 15 billion cuts is not a plan, it is hot air until the detail is spelled out.

    Question
    What was Mary Hanafin talking about when she said that over €14 billion had been “taken out” in cuts so far. Has this reflected itself in a reduction government expenditure of 14 billion to date? Is this correct? Has anybody questioned it? Am I living in the real world?

  12. @Joseph Ryan
    I keep questioning it, I don’t hear any answers. Ms. Hannafin’s assertion was that we had already cut 14.5 bn so we are already half-way there. From peak, government spending is down 1.5 bn… austerity? Not much yet.

    If you look at the SPU, the plan was to increase government current spending every year… (Table 10, page 20). Growth was to do, not just the heavy lifting, but all the lifting.

  13. @Hoganmahew. Thanks for that- I did’nt know the exact figures but I was fairly sure she was wrong. How wrong surprises me!

    If any prospective bond buyer is as up to date as you and hears a government minister coming out with the above, I don’t think they will ever again buy Irish bonds.

  14. @Joseph
    The problem, though, is that the government is counting anything they didn’t spend as saving. So they didn’t give themselves a pay rise in 2009, that’s a massive amount saved. It’s the financial equivalent of holding it in and jigging about to delay an embarrassing outpouring…

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