… happy!
So I thought I would share my thoughts on how the Irish are faring on this front.
‘Tis the Season to be ….
- Post author By Brendan Walsh
- Post date December 8, 2011
Month: December 2011
The Examiner has a story on the proposed LNG terminal at Tarbert in the Shannon estuary. This is a privately funded project and a welcome stimulus for North Kerry. As long as the developers play within the rules, public policy analysts should have no opinion on such matters. But as the gas market is so heavily regulated, private actors affect the public good. The LNG terminal would, for instance, improve the security of supply, which is very valuable.
Minister Rabbitte argues that Shannon LNG would increase the price of gas. This is absurd at first sight. Increased competition should reduce the price. The minister is right, though. To see why, we need to consider the gas interconnector from Scotland that lands in Gormanston in Co Meath, or rather the way in which its price is regulated: The annual cost of the pipe is distributed over the gas it carries.
The interconnector is a competitor’s wet dream. If you capture a small part of the gas market, the interconnector will increase its price — because its annual cost is distributed over a smaller volume. You can then increase your price to just below that of the interconnector and gain yet more market share. And the interconnector will raise its price again.
The solution surely is to change the regulation of the interconnector rather than to block the LNG terminal. The current regulation, which may date back to the days of Minister Woods or Fahey, is a neat example of something that makes sense in the short run only.
Note the separation of powers. Minister Rabbitte is the executive branch of government and an influential part of the legislative, he appoints and controls the budget of the regulator, and he is the trustee for the shareholders (us) of the dominant company in the market.
On the budget documents is The Economic and Fiscal Outlook. This goes beyond the details of the 2012 Budget and provides guidance on the government’s medium-term plans and projections out to 2015.
Some of the noteworthy details in this publication include
- pages D16-D17 show how the government intends to meet its revenue targets without raising income tax rates or touching income tax bands or personal credits (and also no more increase in the top VAT rate). What is required is a big increase in local charges (property tax etc) and other measures to broaden the tax base (cutting back on various income tax reliefs, reduction in tax related costs of private pension provision, broadening of PRSI base).
- Table 11 on page D19 shows the evolution of various expenditure and revenue categories over 2010-2015
- total revenue very flat as a ratio to GDP (34.6 percent of GDP in 2010 and 2015)
- government consumption down from 17.0 percent of GDP in 2010 to 13.7 percent of GDP in 2015
- public investment (row 21) down from 3.7 percent of GDP in 2010 to 1.4 percent of GDP in 2015
- social transfers (row 18) down from 18 percent of GDP in 2010 to 13.6 percent of GDP in 2015
- interest payments up from 3.1 percent of GDP in 2010 to 5.7 percent of GDP in 2015
- Table 14 on page D23 shows the decomposition between cyclical and structural components. Here, the government is using the official EU estimate of Ireland’s level of potential output and, as in previous publications, is quite critical of this measure, especially since it implies that Ireland will be operating above potential in 2014 and 2015. It would be desirable for the government to also report its own preferred measure of potential output, since the split between structural and cyclical imbalances is so critical in interpreting the fiscal position. Going further, it would be desirable for the government to indicate the role of ‘special factors’ in determining the underlying structural fiscal balance. Just as the property boom, relatively high inflation and the large current account deficit led to a revenue windfall during the boom, the usual relation between the fiscal balance and GDP is distorted during this adjustment phase due to deleveraging, the under-shooting of construction adjustment, real exchange rate depreciation and external rebalancing.
- Page D15 outlines risks to the outlook. Under the Troika MoU, the fiscal targets are minimum thresholds. It would be interesting to know the contingency plans in the event that an undershooting of GDP requires further spending cuts or tax increases. (That said, it is possible that the existing spending and revenue targets have implicit built-in contingency allowances on a prudential basis.)
David Gardner writes an extensive article on the Irish situation in the FT Analysis slot today.