The Four-Year Fiscal Plan

The fiscal plan is due to be published tomorrow.  In this article, I look at some of the key issues.

36 replies on “The Four-Year Fiscal Plan”

Philip

Thanks for the link. The EU wants to get the budget deficit down to 3% by 2014. Bondholders want their money back. Do you believe that the plan to cut 15bn which is designed around the arbitrary date of 2014 will deliver the projected economic growth as well as those 2 goals ? What, if any, sort of stress testing has been done on the numbers?

It strikes me as highly significant that the bailout proposes billions in funds for the sick banks but nothing for economic stimulus. This is of course deeply ideological from the same school of thinking that says the price of a bank crisis must be borne by the taxpayer. If we add another 30bn to the debt for the banks what is the ideological case against a smart stimulus plan costing say 5bn? Run by people who know what they are doing. Or are we all doomed regardless?

There appear to be 2 challenges- structural reform of deadweight sectors in the economy and reforms to deliver economic growth. If these are incompatible in the context of a 6bn cut to spending does anyone in the economics community have a plan B to deliver growth ?

Why is Cowen calling opposition leaders late at night with offers to ‘see the books?’

I thought they already had? Please don’t tell me there’s a second set of books!

The big question for me is along the lines of: “Is this 4 year plan based on the truth (reality of our situation) or are there some other things out there that haven’t come to light yet and may scupper this plan anyway?”

@Philip Lane,

You mention the benefits of tackling monopoly power in the sheltered sectors and public sector reform, but assert that “the overall growth payoff will only occur over a long period”. In some cases this may be true, but it provides an excellent cop-out for politicians who will expend political capital only if the payoff is rapid.

In a comment on your post on the latest IMF paper I list 10 network activities where significant reforms could be made to generate rapid benefits and where we currently have:

1. comprehensive, if entirely dysfunctional and economy-damaging, regulation based on licensing for the electricity and gas networks,
2. 30+ local authorities doing their own thing, badly, for the water and waste water networks,
3. inefficient competition in the market for refuse collection,
4. a Government Minister undermining government policy on waste disposal,
5. a wide variety of inefficient arrangements for the national road network,
6. an over-geared, under-capitalised entity responsible for the fixed-line telecomms network,
7. a total lack of joined up thinking (and gloriously inefficient investment) for the rail, light-rail and tram networks,
8. Government sponsored preference for the state-owned incumbent providing bus services,
9. a state-owned broadcaster relying on both commercial advertising revenue and a mandatory licence fee on all TV owners/users, and
10. the costs of surplus airport terminal capacity being imposed on outgoing and incoming travellers.

Tackling these areas immediately would increase household diposable incomes and business profits leading to increases in consumption and investment. And even more could be done in the other sheltered sectors.

Philip Lane writes:

For this reason, the government must perform a balancing act – the scale and design of fiscal tightening in the 2011 budget must be sufficient to show real progress in reducing the structural deficit, while not being so large as to drive financial distress in the private sector to unsustainable levels.

All very sensible stuff indeed but what hardhats want are hard figures — indeed almost anybody could support ‘reform’ etc at that level of abstraction.

So come out of your foxholes and make some nasty, real-world proposals:

– public sector pay cuts of 10% with repudiation of Croke Park deal?
YES OR NO

– reduction of minimum wage to (say) 4 euro?
YES OR NO

etc.

@Joseph

I am not saying what I would or would not support — just wondering what kind of cuts will be required by the troika. This is not so much a moral issue as a question of feasibility.

Perhaps the troika will be happy with 5.5 euro, but I really haven’t a clue. What you think?

@ Carolus

15bn in cuts over 3 years will be insufficient if another bank bailout funded by debt at 5% costs 3-4bn a year in extra debt interest all because the EU hasn’t got the balls to tell the markets to chip in in their own long term interest.

http://www.ft.com/cms/s/0/0aa791c4-f6e3-11df-8feb-00144feab49a.html#axzz16730s4lW

Portugal’s state deficit widened in the first 10 months of 2010, according to government figures showing that austerity measures designed to ease financial market concerns have so far had little impact on public spending.

According to government figures, Portugal’s core state deficit rose to €11.885bn for the first 10 months of 2010, up €215m ($292bn) on the same period last year. A 4.6 per cent increase in tax revenue proved insufficient to offset a 2.8 per cent increase in state spending.

The government said such state spending had increased despite a 17.3 per cent cut in public investment and an increase in value-added tax, largely because of a 4.9 per cent increase in the cost of interest paid on public debt.

Min wage should be cut to same level as UK immediately which is EURO 6.93 (even though some will debate the f/x rate). Public sector has to be slashed by 50%, through immediate redundancies (not just voluntary), freeze all hiring, and cut public sector pensions by at least 30%. As Lane states in his excellent newspaper piece domestic demand will suffer less than expected as external demand is booming (and should remain strong as global GDP will be >4% over each of the next few years). Re-direct employment to the sectors neglected over the past decade. Key to all fiscal decisions is to increase the competitiveness and productivity levels of all sectors (which are clearly inadequate now in the public sector). Follow Cameron’s example and close all quangos before year end.

Just out folks…

*IRISH 4-YEAR PLAN SAID TO ENSHRINE 12.5% TAX AS POLICY PILLAR
*IRELAND SAID TO ANNOUNCE EU800 MLN IN 2011 WELFARE CUTS
*IRISH 4-YEAR PLAN SAID TO ANNOUNCE 12% CUT TO MINIMUM WAGE

Also

*IRISH NATIONWIDE BONDHOLDER LAWSUIT DISMISSED BY JUDGE

Assume the government goes for the throat now.

who the hell are you Jack O Shea. Its people of your ilk that drives the free market and it in turn has got us into this mess. This is a society we live in in case you have,nt noticed. People are entitled a respectable standard of living being citizens of this state. Also, this obession with productivity is a complete fudge as the great economist John Kenneth Galbrait comments on. your approach is depression economics.

Note This blog is getting too cosy for me, so I,ll be signing off for good.

Posted this on another thread

14:22 23Nov10 RTRS-DUTCH FINANCE MINISTER SAYS SHAREHOLDERS, BONDHOLDERS IN IRISH BANKS “WILL HAVE TO BLEED” IN CONSOLIDATION
14:23 23Nov10 RTRS-DUTCH FIN MIN SAYS COULD BE THAT RAISING OF VAT WOULD BE BETTER THAN RAISING CORP TAXES

@Carolus – “What you think?”

I think they will cut both minimum wage and social welfare payments gradually, over the course of the 4 years. Front-loading it will have too many people out on the streets. I can see them lowering it to €7’ish an hour for 2011 and 5%’ish off social welfare payments and then similar cuts over each of the following 3 years.

Losing your job (which I’m sure will happen to even more over the next year or two) or being unskilled is about to get a whole lot worse. Being in that position doesn’t exactly provide you with a nice life in Ireland (regardless of the actual amounts paid) as it is undoubtedly one of the most expensive countries I know in Europe – and I’ve lived and worked ina few of them. The cost of living needs to come down here – not just property prices.

Christmas celebrations anyone?

I think Fianna Fáil should get a good frontloading that puts them out of action at least until things recover to the point where they can do no more damage.

Nov. 23 (Bloomberg) — Ireland risks a “major bank run”
unless European officials act quickly to calm the financial turmoil in the nation, Pacific Investment Management Co. Co- Chief Investment Officer Mohamed A. El-Erian said.
El-Erian made the comments in an interview on “Bloomberg Surveillance” with Tom Keene.

@Paul,

Desire I would say. For all the talk of politicians across Europe, I have yet to see one concrete suggestion.

PIMCO’s El-Erian just now…

*RESTRUCTURING OF IRISH DEBT NEEDS TO BE DISCUSSED: EL-ERIAN
*WORST THING FOR EUROPE IS GERMANY TO BE CONTAMINATED: EL-ERIAN
*BANK RUN WOULD HURT PROSPERITY FOR A GENERATION, EL-ERIAN SAYS
*DEPOSITS LEAVINNG THE IRISH BANKING SYSTEM, EL-ERIAN SAYS
*IRELAND RISKS A `MAJOR BANK RUN,’ PIMCO’S EL-ERIAN SAYS
*EUROPE NEEDS TO QUICKLY CALM THINGS IN IRELAND, EL-ERIAN SAYS
*PIMCO’S MOHAMED EL-ERIAN COMMENTS ON BLOOMBERG RADIO
*PIMCO’S EL-ERIAN SAYS IRISH BANKING SYSTEM ‘BLEEDING DEPOSITS’
*PIMCO’S EL-ERIAN SAYS IRELAND ‘GETTING CLOSE TO MAJOR BANK RUN’

The Doomsters’ corner (where off-topic is always on-topic):

Greece’s Government May Shut Down on Cash Shortage, High Frequency Says

Excerpt:

“With a big tax revenue shortfall, cash requirements are surely greater than the 6.5 billion euros ($8.95 billion) Athens was meant to receive next week,” Carl B. Weinberg, chief economist at Valhalla, New York-based High Frequency wrote in a note to clients today.

“Unless the government gets funds soon after Nov. 30, it will run out of cash,” Weinberg said. “If so, the government will have to shut down, at least in part.”

http://www.bloomberg.com/news/2010-11-22/greece-s-government-may-shut-down-on-cash-shortage-high-frequency-says.html

WSJ

“Dublin’s most recent budget plans envisioned government debt peaking at
106% of gross domestic product in 2012. That already looked tough,
requiring Dublin to implement 15 billion euros of budget cuts next year.
But that budget forecast relied on no further capital being injected into
the banks, which already have swallowed 35 billion euros, or 21%, of
GDP. Yet Barclays Capital estimates the major banks could need another
22 billion euros to cover potential losses and to raise core Tier 1 capital
ratios at viable banks to at least 12%, a level that might allow them to
regain access to private-sector funding.”

Anyone doing any stress scenarios on the debt to GDP ratio ?

*IRELAND RISKS A `MAJOR BANK RUN,’ PIMCO’S EL-ERIAN SAYS

2 years on from the guarantee and still the bank run is there in the background. I think contributors to the site should reappraise RTE’s coverage in the light of its principal role which is to keep the populace calm enough so that the bank run doesn’t happen. Now, anyone interested in
“X Factor’s Aiden doesn’t ‘hate’ Katie” ?

http://www.rte.ie/ten/2010/1123/xfactor5.html

@ Philip

Sorry Philip, ‘Stabilisation vital for future’ you might as well be addressing the mechanics of kid’s bicycles. The vagueness of title is matched by the policy wonk aimlessness of the article. As we stand on a precipice ‘a failure to deliver fiscal and banking stabilisation carries many risks to the future prospects for the Irish economy’ is exasperating to read. The time for real debate on the facts and articulation of concrete reforms is long overdue.

@Carolus
that is a good article from Matthew Lynn – in particular

“Second, the EU-IMF rescue looks like financial methadone. It numbs the pain and gets you off drugs, but it’s addictive. The cure can be worse than the disease. Months have passed since the Greek bailout, and there isn’t much sign of Greece accessing the capital markets. The yield on Greek bonds remains more than 11 percent. It’s a “Hotel California” package: You can check out anytime you like, but you can never leave.

Third, this is mostly about rescuing EU financial institutions. It is the Irish banks that are in trouble, and if they go down, it will cause massive losses at other European lenders. But why should the Irish people worry about that? If French, German or British banks suffer big write-downs, let their governments deal with them. Ireland could just close its banks — such a small country doesn’t need its own finance industry any more than it needs its own carmakers. “

@Carolus Galviensis

re:- public sector pay cuts of 10% with repudiation of Croke Park deal?
YES OR NO.

NO-far too easy.
Reductions based on increment above 40,000 pa.

40-50K 10% ie Reduction €1000 on 50,000 or 2.5%
50-60K 20% ie. Reduction €3000 on 60,000 or 5%
60-70K 30% ie. Reduction €6000 on 70,000 or 8.5%
70-80K 40%
80-90K 50%
90-100K 60%
100-110 70%
110-120 80%
120-130 90%
130-140K. 100% Pay Cap.

Apply to all public sector pay scales & corresponding pension pay scales right across public sector, semi-states and any body fully or partially funded by Government. That includes Central Bank, Regulator, Nama etc.
No more feather beds.

When all that is complete, reduce social welfare and pension and minimum pay.

If public service affected by the above don’t like it tell them to find another teat to suckle at.

@jr
I wonder if the reason behind reluctance to go back to the public sector is that it may further destabilize the banks.
I mean each guard must have at least 5 houses…

@JR
The Government should invoke force majeure and immediately introduce legislation to halve the salaries and pensions of all highly-paid people in the public sector and dispense with all special entitlements.

It should signal that it will aggressively contest any attempts to frustrate these actions. They must be fully implemented before the budget to ensure that, unlike previous budget announcements on pay and pension cuts for ministers and senior civil servants, they will not be watered down or reneged on. Such a move, backed by the Opposition, would demonstrate leadership to citizens and financial markets.

More at
http://www.planware.org/briansblog/2010/11/how-to-resolve-the-crisis.html

In Europe or out?

The failed leadership and opposition were all on a gravy train in Europe. Can we get a better leadership than them? Leaving is an option.

If we cannot do any better then we must stick with Europe and start enforcing laws.

Big changes in Ireland!

Hello, I’m a 3rd level student trying to understand this whole mess – How would you propose we fix the public finances? No one seems to agree with the government so what else could be done??

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