Month: October 2010

Government Statement: €15 billion target

The government statement reads:

The Government has today decided that an overall adjustment of €15 billion over the next four years is warranted in order to achieve the target deficit of 3% of GDP by 2014. The key reasons for the significant increase from the figure announced in Budget 2010 are lower growth prospects both at home and abroad and higher debt interest costs.

The purpose of the Four Year Plan for Budgets and Economic Growth is to chart a credible way forward for this country. The size of the adjustment for 2011 and the distribution over the remaining years will be announced in the Four Year Plan. The Plan will contain targets for growth and strategies for the achievement of those targets.

The Government realises that the expenditure adjustments and revenue raising measures that must now be introduced will have an impact on the living standards of citizens. But it is neither credible nor realistic to delay these measures. To do so would further undermine confidence in our ability to meet our obligations and responsibilities and delay a return to sustainable growth and full employment in our economy.

Our obligations are clear. We must demonstrate that we are bringing sustainability to our public finances. We must stabilise our debt to GDP ratio over the period of the Plan. And we must set out our strategy for returning our economy to growth.

Business schools and scholars (2)

I decided to give an interim update of the assessment of business schools and scholars on the island of Ireland, because things have changed. Latest results are here.

The records of 18 people have been double-checked and corrected where appropriate. More significantly, I had overlooked a department in Maynooth which has been added. Another department employs two high performers without listing them on their front page.

As a result, the preliminary ranking has changed: TCD, (UCD, QUB), (NUIG, UU, NUIM), (DCU, UL), DIT, NCI. Brackets indicate institutions whose performance is similar.

Note that Cork is still missing.

I’ve added sex and rank where known. The sex results are not good. The rank results are roughly as they should be: professor > reader > senior lecturer > lecturer > junior lecturer.

There are two exceptions, however: Associate professors perform on par with full professors, and post-docs perform on par with lecturers. I would expect there to be progression from the former to the latter.

While looking at the ranks, I came across all sorts of weird stuff. Full professors without a doctorate. Teaching assistants with a doctorate. Lecturers of French (in a business school!). Senior teaching assistants. And one of the department runs a restaurant — ostensibly for experimental purposes.

Puzzling Budgetary Reporting

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.

Continue reading “Puzzling Budgetary Reporting”

How Big (Small?) are Fiscal Multipliers?

Ethan Ilzetzki, Enrique G. Mendoza and Carlos A. Végh provide new empirical evidence (using a different method to the recent IMF study). The paper is here and the abstract is below.

Abstract: We contribute to the intense debate on the real effects of fiscal stimuli by showing that the impact of government expenditure shocks depends crucially on key country characteristics, such as the level of development, exchange rate regime, openness to trade, and public indebtedness. Based on a novel quarterly dataset of government expenditure in 44 countries, we find that (i) the output effect of an increase in government consumption is larger in industrial than in developing countries, (ii) the fiscal multiplier is relatively large in economies operating under predetermined exchange rate but zero in economies operating under flexible exchange rates; (iii) fiscal multipliers in open economies are lower than in closed economies and (iv) fiscal multipliers in high-debt countries are also zero.


Self-defeating deficit reduction?

Karl’s post yesterday led to an important exchange about the possibility of self-defeating deficit reduction, with particularly important contributions from Michael Burke and Michael Taft.   If multiplier and automatic stabiliser effects are sufficiently large, the understandable concern is that cuts in the discretionary deficit could actually raise the deficit overall.  We end up with the worst of both worlds – a deeper recession and a larger deficit. 

Effectively, the argument is that the deficit reduction measures slow the economy, and this leads to automatic stabiliser effects (falling tax revenues and rising expenditures) that offset the discretionary effect (i.e. the underlying change in the deficit holding GDP constant).  

While plausible, I believe the claims for self-defeating deficit reductions are wrong – or at least wrong in the context of the simple (and I believe essentially correct) model that I think all the main participants in the debate are using.   I sketch this model here.   Using the model, it can be demonstrated that a discretionary deficit cut will lower the overall deficit for any (non-negative) values of the deficit multiplier and automatic stabiliser coefficient.   Moreover, it can be shown that the deficit as a share of GDP also falls with a reduction in the discretionary deficit, even as this reduction slows the economy through a multiplier effect. 

Of course, a simple model cannot provide the last word on the issue.   But hopefully it will at least help us pinpoint better the sources of the disagreement. 

Those arguing against the need for austerity point out that the underlying deficit has grown with previous rounds of austerity.   While I agree that these measures have slowed the economy, I do not believe that they have actually caused the deficit to rise.   Unfortunately, there are other contractionary forces at work, not least the overhang of debt that is curbing business and household spending and also bank lending.   With bond yields where they are, I assume we all agree that we cannot avoid a bailout/default without putting the deficit quickly on a downward path.   I don’t see we have any choice now but to pursue tough deficit reduction measures.   It is not going to be pleasant.