The new IMF press release is available here. An important segment is
At the same time, the challenges Ireland faces have intensified since the outset of the program, with growth expected to ease to about ½ percent in 2012 owing to a slowing in trading partner activity. The Irish authorities have responded by raising the fiscal consolidation effort adopted in Budget 2012, and the budget remains on track to meet an unchanged general government deficit target of 8.6 percent of GDP. If growth should weaken further, the automatic stabilizers should be allowed to operate to help avoid jeopardizing the fragile recovery.
This point has also been raised in this blog’s discussion of the new Fiscal Compact. If the government implements €X of discretionary fiscal adjustments in a given year T, the realised deficit/GDP ratio in year T will also depend on what type of (positive or negative) cyclical shocks affect GDP in year T (in addition to the direct impact of fiscal policy on GDP). Just as positive cyclical shocks would deliver an ‘over-performance’ in terms of the deficit/GDP ratio, so negative cyclical shocks would deliver an ‘under-performance’. The spirit of the Fiscal Compact is that such deviations should average out to zero over time, rather than being eliminated within-the-year through mini-budgets.
In the current Irish case, there are some extra considerations:
- spending/revenue plans for this year might include some implicit contingency funds, so that the 8.6 percent target can be attained even in the event of an under-shooting of GDP
- given the downside risk, the government might have explicitly planned a larger fiscal adjustment, with the consequence that that the 8.6 target could be met even in the event of an under-shooting of GDP
14 replies on “IMF: Ireland and Automatic Stabilizers”
Philip the staff report should be out inside a week and will have much more on this, plus debt sustainability metrics.
Philip, no link to IMF above.
General point: “automatic stabilisers” can be and should be supported politically and intellectually – but in a way which does not allow that argument to be hijacked in defense of near non-reform of the PS or the continuing choice by politicians to pretend there is no “get out clause” they can avail of in Croke Park.
Perhaps I’m missing something, but the fiscal compact specifies a maximum structural deficit of 0.5%, while our current structural deficit looks to me to be about 8% or 9%. Surely our big issue in complying with the compact is about moving urgently to sort out the monster structural deficit, rather than micro-tuning things to compensate for relatively small cyclical fiscal variations imposed on top of it.
I know the macroeconomists get all excited about this fiscal stuff and the impact of GDP failing to measure up, but there won’t be any growth in the domestic economy unless some serious reforms are pursued. On an earlier thread Gavin Kostick encouraged me to examine this latest IMF statement and what I wrote there should also be relevant here:
“These reviews, statements, press releases, etc are just part of the narrative of what I call the official ‘bullshit-honey’ story. This is the key passage:
“Steps to support growth and job creation are being put in place. Reforms of sectoral wage agreements have been submitted to parliament to make wage-setting in occupations hard hit by recession more responsive to economic conditions. The authorities are also strengthening the effectiveness of activation and training policies to help job seekers get back to work. The government recently announced the disposal of €3 billion in state assets to enhance competitiveness while securing value for the state and reinvesting one-third of the proceeds.”
This deserves a bit of parsing to scrape away, archeology-style, the layers of political, self-serving cant and hypocrisy. The main thing to note is the espousal of this ‘labour theory of cost’. It is an a priori assumption that labour is the dominant factor of production and that the labour market is the only factor market that is subject to egregious inefficiencies and rigidities. The markets in all other factors of production are generally fine – and, insofar as they mightn’t be, all they need is a few tweaks here and there.
Therefore, growth-enhancing increases in efficiency and productivity may be secured primarily in the labour markets by battering workers. If workers didn’t have this unfortunate habit of demanding a living wage and were prepared to accept much lower wages and work harder and longer then there would be huge increases in output and plenty of work for everybody.
This is total and utter bollocks. But, unfortunately, it appears to be how the Washington Consensus has mutated during this crisis – and it seems to have quite a following among professional Irish economists. There are, of course, inefficiencies in the labour market, but they exist as a result of workers defending their pay and conditions to compensate for inefficiencies and excessive costs in the other factor markets that massively reduce their disposable incomes. Genuine, self-sustaining growth will come only from increased productive, allocative and dymanic efficiencies in all sectors and in all factor markets. Singling out the labour market is totally counter-productive and self-defeating. Labour cannot – and should not – be expected to respond to changed economic circumstances (in terms of price and supply) at the same pace as other factors of production. The sequence is simply totally wrong. Sort the other factors of production first and then sort labour.
The final assertion in this passage that the proposed €3 billion disposal of state assets will enhance ‘competitiveness’ is final proof, if any is needed, that all of this ist total bollocks. These privatisation proposals have been crafted with huge effort behind the scenes – squaring all the narrow sectional economic interests – to ensure that the existing inefficiencies and dysfunction will remain intact.
I once looked forward to the IMF getting stuck in to the dysfunction in the sheltered sectors. Now they have become part of the problem.”
I find the concept “automatic stabilisers” to be particularly odious in regard to our treatment by the troika. As I understand this, this means under the aegis of the Troika we can lobby the Troika in technical discussions on whether taking too much tax or cutbacks eg in the public health system is counter productive and damaging to the economy. So the Troika are a bit like an economic anaesthetist to a patient in a coma on an operating table. Presumably if there is growth, the whole question is of not great consequence as debts will be covered. But if there is low growth, who decides the bar? There is no automatic right to not only decide not to increase taxes further, or halt further slashing, but no right to defer PN’s or renegotiate loans..
Also re “with growth expected to ease to about ½ percent in 2012” …what indices for growth are being used there; how about employment, GNP instead of rubbish GDP that doesn’t give a true picture.
Growth is not easing its heading quickly towards deep recessionary minus figures in spite of opposite messaging from Government.
21st February 2011
Dear Mr Corcoran
“I am very aware of the strength of feeling on the subject of commercial rents and Fine Gael has addressed this subject in our manifesto as part of a drive to cut business costs by strengthing competition in sheltered sectors.
Specifically, in our manifesto we have committed to pass legislation to give all tenants the right to have their commercial rents reviewed in 2011 irrespective of any upward-only or other review clause.
Please do not not hesitate to contact me if you have any queries in this regard.”
Sean Barrett TD
Automatic stabilizers? Why not some http://en.wikipedia.org/wiki/Classical_conditioning
An euro country runs a deflict over limits agreed by Eurozone members… or a bailed out country is not holding up their side of the bargain… dock the pay and pensions of all elected politicians in the errant country by a predefined amount… no need to fine countries millions or billions…
I am amazed there is no challenges to the IMFs temporal power withen the various states of Europe & North America.
Their great “wisdom” is merely accepted as fact.
This is the chief difference between this depression and the last – the existence of at least 3 cross border monetory religions (BIS 1930) , with the general destruction of the nation state as a viable political unit.
Its clearly a spiritual , unscientific but very dangerous cross border organistion albeit with its roots in the NYFR /US Treasury system.
Yet not even a hint of schism exists withen the walls of its absurd artifice.
Perhaps these events take many decades or indeed centuries to play themselves out.
The situation with regard to the Spanish deficit will impact on the attitude adopted by the countries of the EA. As per press reports;
“Madrid. Spain overshot its deficit-reduction target by 2.5 percentage points last year, strengthening the administration’s argument that Brussels should soften the agreed goal for this year, Spanish El Pais daily writes. The figures presented by Finance Minister Cristóbal Montoro on Monday showed the shortfall in the government’s finances in 2011 came to 8.51 percent of GDP, well over the target of 6 percent, and above the estimate of 8 percent given by the Popular Party (PP) government in December.
The central administration’s deficit last year was only 0.3 percentage points above its target of 4.8 percent of GDP, while the Social Security system booked a slight shortfall of 0.09 percent of GDP when it was expected to post a surplus of 0.4 percent. The main culprit was the regions, whose combined deficit of 2.94 percent of GDP was more than double the target of 1.3 percent”.
The phenomenon to which Paul Hunt refers is alive and well in Spain, an economist commenting from Madrid on RTE recently remarking that the easy bit for the new conservative government – reform of the labour laws – had been done but nothing much had happened with regard to long overdue reforms elsewhere in the economy.
Quentin Peel had a very interesting comment on the likely sequence of events with regard to developments in the position being adopted by Berlin in today’s FT as does Robert Reich under the title “Housing is the rotten core of the US recovery” (which might equally well have been about Ireland). These can be read in conjunction with the piece by Charlie Fell in the IT where he makes the point that ECB LTRO funding facility is not enough for long-term stability.
The topics may seem unrelated but, if one accepts that the key to what happens in the months ahead depends on on reducing the level of the downturn in the countries with the most difficulties, action on all fronts will be required. It is increasingly obvious that the fiscal pact is an irrelevancy. Whether Ireland agrees to ratify it or not is also of little import, other than that the confused and almost certainly highly acrimonious debate about the subject may cause some damage as far as market perception is concerned. This seems, however, unlikely.
with growth expected to ease to about ½ percent in 2012
The use of the word “ease” to describe a halving of predicted growth deserves a prize for Austerian newspeak. Employment enjoyed negative growth.
given the downside risk, the government might have explicitly planned a larger fiscal adjustment, with the consequence that that the 8.6 target could be met even in the event of an under-shooting of GDP
Well, it has worked well thus far. Right? I mean things are improving, are they not? Especially they must be improving as compared to the policies implemented in other jurisdictions to suggest we implement them more ruthlessly.
In a not unrelated post by Paul Krugman This Tribal Nation he remarks on the right in America becoming less amenable to accepting objective reality as their levels of education increased.
There is simply no amount of evidence that can change a US republican’s mind on anthropogenic climate change or “socialized medicine”, their powers of argument serve to keep them from having to acknowledge reality and the more intellectual fire power they can bring to bear the more evidence they can dispute.
In Europe the cult of hard currency neoliberalism, with the austerity needed to enable it and the the contrafactual economic theorizing needed to justify it, holds a similar place in the right wing psyche to birtherism and climate change denialism in the US. It is not, for instance, that Schauble is incapable of understanding Keynesian economic theory, the economic history of similar historical crises or the central role of the global financial crisis but instead that he invests considerable mental effort in creating a narrative that denies it.
Krugman’s article finishes “This debate isn’t going to be won by rational argument.”.
@ Shay Begorrah
At a town hall meeting held by Rep. Robert Inglis (R-SC):
Someone reportedly told Inglis, “Keep your government hands off my Medicare.”
“I had to politely explain that, ‘Actually, sir, your health care is being provided by the government,'” Inglis told the Post. “But he wasn’t having any of it.”
At a town hall meeting held by Rep. Robert Inglis (R-SC):
Someone reportedly told Inglis, “Keep your government hands off my Medicare.”
In the developed world we have a greater problem with clever fools and unapologetic liars – Inglis’s unfortunate constituent may well have been made a fool by Fox News rather than it being an accident of birth.
Economists and thinkers outside the Eurozone are torn between pity and contempt for us as our ideologically set elite remain committed with strong determination to keep their dignity by not deviating from wrong headed policies. I really never expected the EU to end up like this.
This is the long run, Keynes is dead and we’re all f****d.
There is a limit to the extent to which the national common bond may be stretched to pay for increased expenditure by the state – and to the extent to which external lenders will be prepared to finance this largesse. It would also be nice, hello Prof. Krugman, to be able to issue debt dominated in the international reserve currency.
And, yes, the national common bond has been really stretched in many countries to pay for the unwinding of this disastrous Faustian pact with the banking and financial sectors, but citizens and residents always pay the price for the ineptitude of politicians, regulators and policy-makers. It’s just that the price was particularly steep in this instance.
In Keynes’s day there was huge scope to expand and extend the national common bond to pay for a huge expansion in the state’s role in society and the economy – and to secure external financing. Keynes made the politically-convincing policy case to exploit this scope to save capitalism and the mixed economy from the depradations of the nutter Anglo-Saxon right and of corporatist fascist, on one side, and communist totalitarianism, on the other. But that was then. This is now.
Prior to this crisis the limits were being approached – and exceeded – in some countries. Paying to clean up some of the mess created by the bankers’ grred and folly – fully authorised and sanctioned by governing politcians of all complexions and regulators and policy-makers – has pushed many economies beyond these limits.
Some balance must be secured and the search-light is swiveling on to the sheltered sectors. But this apparent consensus on the ‘labour theory of cost’ must be resisted. Focus on the real causes of inefficiency – while recognising that many of the ‘aristocrats of labour’ – those in secure, well-rewarded, infuential positions in the state and state-owned sectors – have become more capitalist than the capitalists themselves.
The pursuit of economic efficiency may not charge the blood, but it is the only means of getting Ireland on to the path of economic recovery.
In relation to the PNs, the treatment of which will, one assumes, impact on the budgetary formulae to which so much importance appears to be attached, this press release by the ECB regarding Greece is of considerable interest.
As is also the recent speech by the ECB’s new chief economist, Peter Praet (Belgian).
The first is an indication of the continued dilatory approach of the governments of the EA, the fire brigade role of the ECB and the use of ELA.
The second is notable for the comments on the need for firewalls and its acceptance of macro-economic imbalances as a major source – if not, the source – of the crisis.