With consensus on the likely size of a four-year adjustment unlikely to emerge (and perhaps not particularly relevant anyway) the key fiscal policy question for now is what the size of the adjustment is going to be in the upcoming budget.
Yesterday’s Fine Gael Dail questioning on this subject was interesting. Deputy Noonan:
Now that we have agreed that 3% in 2014 is the finish of the race, what is the Minister’s starting point on 7 December? Will he go soft? Will the budget deficit be 11%, 11.5% or 10.5% of GDP? Will he go below 10%? He needs to come up with this figure pretty quickly. I will not press him any harder on this; I am simply speculating. I have no information as to his thinking on this but this is an essential piece of information. Unless we know the starting point we do not know where the Minister is going.
I’m pretty sure that Noonan knows that an adjustment of €7 billion would be required to reach the 10% target but hasn’t yet said that he would support it. His lack of enthusiasm for the €15 billion four-year adjustment figure suggests he wouldn’t be too keen.
However, others in Fine Gael are calling for the 10% to be met. Here’s Simon Coveney
My understanding from the briefing from the Department of Finance is that the key requirement from bond markets to allow Ireland to issue bonds is that we will need to bring our deficit below 10% of GDP next year from our current position. No Government speaker, including the Taoiseach and the Minister for Finance, addressed that issue as to what figure will be necessary in the 2011 budget to bring down the deficit to 10% or less of GDP. That is the guideline figure we have been given to issue bonds and raise money in order that we can keep Ireland functioning and keep our economic and political independence in terms of budgetary decision-making.
And here’s a bit of cat-and-mouse play from Damien English
Deputy Coveney is correct in stating that we must bring the deficit down below 10% of GDP next year, and I ask the Government to give us the figure now. Tell us what it is, whether it be €5.5 billion, €6 billion, €5 billion or €4.5 billion, and let us work to that.
Well, Deputy English, it’s not going to be €4.5 billion!
Labour’s participants in this debate seem to have stayed away from this issue. However, on the Vincent Browne show last night, Pat Rabbitte indicated he wouldn’t support more than €4 billion in adjustments. If this is the party line, then it means that Labour are not supporting reaching the 10% target.
10 replies on “Dail Exchanges on Upcoming Budget”
Isn’t it somewhat reckless for FG and to publicise the 10% adverted to in confidential briefings and then to attack the cuts saying growth may be higher than expected. Have they turned a DoF estimate of what needs to be done into an absolute necessity. Who will buy our bonds if we don’t do what our own DoF suggests needs to be done? Fair enough if FG are totally committed to hitting the 10%, but it appears that they are more interested in siding with the ‘Confidence Fairy’ so derided by Eamonn Gilmore.
Wouldn’t it be better to wait and see what the budget deficit will be in 2010 before calculating what is necessary to bring it down to 10% in 2011?
At the start of the year the Dept of Finance forecast that it would be 11.6% in 2010, on the basis of an assumption that GDP would fall by 1.3% in 2010. We now know that real GDP in 2010 will do much better than this, so there is no reason why the budget deficit in 2010 should not be lower than the predicted 11.6% in 2010, provided (and this is important) the Dept of Finance keeps the savings in expenditure that are resulting from lower-than-predicted inflation. In July, August and September, tax revenues were above target and government spending below target, partly the result of the higher-than-predicted growth in real GDP in 2010 that I have referred to. I have no idea whatever whether or not the trend apparent in July, August and September will continue in October, November and December. But wouldn’t it make sense to wait to find out before caculating what adjustment is necessary to bring the deficit down to 10% in 2011?
We’d also need, of course, the GDP figures for Q4, which won’t be published until March. I can’t predict Q4 GDP at all, as no data is in yet for for Q4, but I confidently predict that GDP for Q3, both real and nominal, will be much higher in Q3 than the Dept of Finance or the Central Bank are currently predicting. This is based on figures allready published, mainly the merchandise exports/imports figures for July and August, the industrial output and turnover figures for July and August, the agricultural output and terms of trade figures for July and August, tourist numbers for Q3, and new car sales for July, August and September. But, with the budget in the first week of December, we won’t even have the Q3 GDP figures by then, so all the estimates the budget contains for 2010 will be mere guesses. We won’t have December’s tax revenue or December’s government spending figures by then either. Last year, tax revenues in December came in 500m euros higher in December than was estimated in the December 2009 budget, which is a hefty 0.3% of GDP, That’s quite an error for a forecast made just 3 weeks before the end of the year in question.
Based on this, I would like to make the following radical proposal.
Postpone the budget until 1st April, by which time all the figures for 2010 will be in. It used to be in April, if my memory serves me right. The decision to move it to December was daft. The UK budget is in March or April. It makes perfect sense. By that date, all the figures for the year just ended are in. Having it in December is daft, since half the figures for the year about to end are not in by then, and we are relying on economists’ forecasts for them. And, as I have showed repeatedly, Irish economists’ forecasts are generally very poor.
Developing Noonan’s metaphor. We know we have to land our plane in 7 hours time at JFK. A key factor in knowing how much throttle we should apply is what will be the prevailing winds over the flight. Currently they look like they are going to be strongly against us so we mut plan to give it lots of welly. But if during flight winds start to change in our favour we can ease off on the earlier planned throtte.
In other words the 15bn should be IF growth turns out to be X% but is not cast in stone, only our ETA is that. What there could be consensus on is:
1) Our ETA (I think most sign up to the 3% by 2014)
2) The starting position i.e. 2011 adjustment
3) The future years on the ASSUMPTION that growth continues as per some guesstimate, but fully flexible in the light of experienced changes in growth.
Listening to the debate yesterday on the Vincent Browne show with regard to the relevance of the Dail or other some such nonsense.
The executive have no control of events so why should a TD be arsed to debate in a chamber not only empty of Parlimatarians but also of power and substance.
When the discussion got down to the TDs making another sacrifice in the interest of cohesion it got really funny.
Unthinkable , incomprehensible appalling ……..
What lucky bag did we get these Gombeen men from.
I think we should follow the William Pitt approach of abolishing the exchequer and while we are at it the Dail and give our tax direct to the ECB and let them give us priestly advice from their fiscal pulpit.
It would certainly be a more efficient mechanism and give people a true understanding of the chain of command rather then this farcical circus of flying monkey men.
Listening to the debate yesterday on the Vincent Browne show with regard to the relevance of the Dail or other some such nonsense.
The executive have no control of events so why should a TD be arsed to debate in a chamber not only empty of Parlimatarians but also of power and substance.
When the discussion got down to the TDs making another sacrifice in the interest of cohesion it got really funny.
Unthinkable , incomprehensible appalling ……..
What lucky bag did we get these Gombeen men from.
I think we should follow the William Pitt approach of abolishing the exchequer and while we are at it the Dail and give our tax direct to the ECB and let them give us priestly advice from their fiscal pulpit.
It would certainly be a more efficient mechanism and give people a true understanding of the chain of command rather then this farcical circus of flying monkey men.
@JtO
Suspending the budget until April would be suicidal IMO.
Bond yields are already above 7% and there is no way we would be able to return to the bond market in the new year without a credible budget.
In April our cash reserves would be down to just a few months.
And at the risk of sounding like a broken record, the under spend had nothing to do with lower than expected inflation. It is entirely on the capital side and according to the DoF is simply due to the timing of projects
The debate is about the scheduling of cutbacks which have been universally accepted by the political establishment (not by the people).
They (politicians) do not seem to factor in possibility of failure to meet the 2014 deadline or the possibility that the people may revolt.
The establishment should ,IMO, be planning for the arrival of the IMF and other scenarios such as exit from the eurozone and possibly the EU.
The failure to plan for the above means a vacuum across the political spectrum will emerge overnight as no useful function will be left for any of the agents in our current political system.
The only agents who count are the fifteen members of government – sitting as a glorified committee of pro-consuls for the EC/ECB – and their special advisers and senior DoF officials. The basic deal on offer, but which can’t be spelled out publicly, is for Ireland to take its lumps (we don’t want you in the EFSF) and agree (with all the others) to an amendment of the Lisbon Treaty to allow permanent establishment of the EFSF and orderly debt restructuring so that, eventually, some of the promissory notes issued to Anglo/INBS will not be cashed.
@Zhou
i dont often agree with Arthur Morgan (last night on VB), or rather it is not often that Arthur Morgan espouses FG policy that budget secrecy is a totally bankrupt concept and that the budget should be discussed for months before being finalised.
The opinion by D/Finance “experts” that a sub 10% 2011 deficit is necessary before we attempt to return to the capital markets is scarely on a par with the nuclear launch codes.
All the discussion about cutting budget deficits to 3% of GDP by 2014 or cutting the 2011 deficit to 10% of GDP is designed ultimately to satisfy the bond markets that Ireland can be trusted to repay its debts. But what happens if, after publishing our 4-year budget plan and after presenting a severe budget for 2011, the bond markets are not convinced about our ability to actually deliver the target figures, and the interest rate for Irish debt continues to climb?
We are then facing into a situation where we will be unable to raise new debt next April or May at any interest rate that we can afford. To complicate matters further, we will almost certainly be in the throes of a general election next Spring, with no indication that the (presumably) Fine Gael/Labour Coalition will have policies that go any closer to satisfying the bond markets.
Indeed, the very prospect of this uncertainty will attract the interest of speculators who will drive the price of government bonds even lower. The inevitable consequence is that we will be forced into seeking the help of the IMF and/or the EU stabilisation fund in a crisis situation.
I would suggest that our strategy should be to take the initiative and approach the IMF in advance of that crisis, i.e. within the next few days. The IMF has two loan facilities available to its members called the Flexible Credit Line (FCL) and the Precautionary Credit Line (PCL). We should seek a loan of about 20 billion euro under the one or other of these facilities, to be drawn down during 2011 or 2012 only if we cannot access funds from the bond markets at reasonable rates. The IMF would want to be satisfied that we are taking all reasonable actions to address our budget deficit, but the proposals in our 4-year plan should satisfy their requirements. That is why I am suggesting that we shoulsd approach the IMF immediately, so that the 4-year plan we announce is compatible with their requirements.
If we were granted this facility, the very fact that the IMF was willing to support us in this way would calm the markets and re-assure them that the corrective budgetary measures we are taking are adequate, and have a good chance of being realized. This should reduce predatory speculation in Irish bonds and bring interest rates down to more manageable levels.
We cannot leave ourselves at the mercy of the bond markets and the speculators. We must take pre-emptive action, and the IMF has facilties designed to do just that. Better to go to them of our own free will, rather than be forced into their hands in a crisis later.
David Buttimer
2nd November 2010