Some Budgetary Arithmetic for Fiscal Rules

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The voting public must be getting frustrated with the wildly conflicting claims of politicians and economists on consequences of accepting/rejecting the Fiscal Treaty. As some of the consequences are genuinely uncertain – notably access to funding if the Treaty is rejected – conflicting assessments of consequences are not really surprising. But the public are also being subjected to some wild claims relating to the budgetary arithmetic of meeting the fiscal rules – rules already in place under the revised Stability and Growth Pact. It might be worthwhile to take a closer look at the numbers.

To get a sense of the likely additional fiscal effort required to meet the 1/20th and structural balance rules, a useful starting point is the most recent Government projections for the period to 2015 just published in the Stability Programme Update (SPU). Of course, as these are just projections; the actual situation in 2015 may be quite different. But examining what extra discretionary adjustment effort would be needed helps identify a rough order of magnitude, and hopefully weed out some wilder assertions. For reference, details of the implementation of the Stability and Growth Pact rules are available here.

The 1/20th Rule

The actual application of the rule uses both backward and forward looking averaging. To keep things as simple as possible, I will just look at the rate of debt reduction in the current year.

The change in the debt/GDP ratio is given by a simple formula:

Δd = [(i – g)/(1 + g)]d-1 – ps,

where d is the debt/GDP ratio (in percent of GDP), i is the average nominal interest rate on outstanding debt, g is the nominal growth rate, d-1 is the previous year’s debt/GDP ratio, and ps is the primary surplus (in percent of GDP).

We can use the projections in the just published SPU to get a sense of the projected underlying rate of debt ratio reduction in 2015. The lagged debt/GDP ratio (2014) is 119.5 percent of GDP, the nominal interest rate is 0.049, the nominal growth rate is 0.045, and the primary surplus is 2.8 percent of GDP. This yields a projected underlying fall in the debt/GDP ratio of 2.3 percentage points of GDP in 2015. (The actual fall projected in the SPU is 2.1 percentage points due to a stock-flow adjustment.) This suggests a further total improvement in the primary surplus equal to 0.7 percentage points of GDP would be sufficient to achieve the required 3 percentage-point reduction rate [(1/20)(119.5 - 60)]. Moreover, all else equal, the primary surplus as a share of GDP required to meet the rule declines as the debt/GDP ratio declines.

The Structural Balance Rule

The structural balance rule requires the structural deficit to be brought down to 0.5 percent of GDP. The Stability Programme Update projects a structural deficit of 3.5 percent of GDP in 2015. The implied nominal structural deficit is €6.3 billion. The nominal structural deficit consistent with the 0.5 limit (Ireland’s Medium-Term Budgetary Objective, which is the operational definition of structural balance) is €0.9 billion. The difference – €5.4 billion – might seem to suggest a large additional adjustment is required. But this ignores the impact of growth in nominal potential/actual GDP in subsequent years in bringing down the structural deficit in the absence of any discretionary adjustments.

Growth affects both the denominator and the numerator of the structural deficit as a share of GDP. (For simplicity I assume that actual and potential GDP grow at equal rates post 2015.) The denominator effect is straightforward. For the numerator, we could use the standard coefficient used by the European Commission for Ireland that assumes that the reduction in the deficit is 0.4 times the change in nominal GDP. (This coefficient is usually used for doing cyclical adjustments, but it should also be applicable for measuring the impact of changes in nominal potential GDP on structural balance in the absence of discretionary adjustments to tax and expenditure parameters.) However, to err on the conservative side, I assume a coefficient of just 0.2 for the calculations. The SPU projections imply a nominal growth rate for potential GDP of 3.16 percent in 2015. Assuming this growth rate remained constant for subsequent years (which again seems conservative), even with no further post-2015 discretionary adjustments the structural deficit as a share of GDP is projected to fall to 0.8 percent of GDP in 2019 and to 0.2 percent in 2020.

There’s many a slip twixt cup and lip – but hopefully these benchmark calculations can help identify some of the wilder budgetary arithmetic.

48 Responses to “Some Budgetary Arithmetic for Fiscal Rules”

  1. The Dork of Cork Says:

    All of these fiscal “efforts” are made to save catostrophic bank credit investments …. this tactic of preventing the money flow is merely serving to depreciate the physical & human stock that can be saved.
    Yee guys hope more oil will come on line to waste … like the old days. ,it does not look good I am afraid.

    Even I am surprised the price has not collpased already.
    We have wasted 5 years to save a Hypothetical construct !!
    I am afraid once the credit fraud is exposed it is extremely difficult to extract a surplus from the remaining stock of bread baskets although yee guys are trying valiently with generous amounts of Bullshit.

    There is no such thing as a structual defecit in a full money economy.
    Bank Credit growth fueling growth is a illusion , its reversal is merely a question of when.

    For God sake let the money / oil flow.

  2. David O'Donnell Says:

    On the particular arbitrariness of one over a score …

    http://www.irisheconomy.ie/index.php/2012/05/02/alternative-economic-models-and-the-treaty/#comment-276089

    @JMcH

    Ta for the equation; take out the vichy_debt and I might even think about working it out!

  3. Ordinary Man Says:

    My apologies John if you feel this is off post but and interesting speech to NY Fed Res. by Jim Grant on the bigger structural picture.

    Something in it for everyone, gold, accountability, fiat money and Ireland gets the parting shot from the ‘Rebel County’ just for DOD and the Dork

    http://mbd.scout.com/mb.aspx?s=159&f=2545&t=8949176

    http://www.grantspub.com/

  4. Paul Ferguson Says:

    That’s the best explanation I’ve read of both the 1/20th rule and structural balance rule.

    Looking at the bigger picture though runaway national debts aren’t the source of the problem.

    When we hear of Governments collecting money through taxes and spending it back into circulation it seems to make sense that a Government can’t continuously borrow money. Otherwise it’s ‘living beyond its means’.

    However the analysis changes when you bear in mind where money comes from.

    Money comes from bank loans and so any money which businesses and households have has a matching debt. If the Government collected perhaps 5% of the money supply the population would have 95% of the money and 100% of the debt. We don’t trade well together under these conditions.

    Runaway national debts have been necessary in recent decades because any money introduced to the economy through the national debt can feel like debt-free money. It’s money which businesses and households haven’t had to borrow into existence through bank loans and yet it circulates between them.

    Far from being the source of any problems runaway national debts have been a factor in keeping this system, of creating money through loans, going.

    Solving the debt crisis at the root of the problem would involve controlling the creation of money through loans and introducing a debt free source of money to replace it.

  5. Seamus Coffey Says:

    @ John

    I think this may be a case of ‘there is none so blind as those who will not see’.

    We won’t be subject to the numerical requirement of the debt reduction rule until three years after we leave the Excessive Deficit Procedure. Thus the rule will likely apply from 2018. It is likely that by then little or no extra effort would be required to meet the debt reduction requirement.

    The the planned fiscal adjustment programme is set to bring the deficit to a level that will satisfy the debt reduction requirement anyway. There are many who like to think otherwise but the debt rule is actually relatively benign. A month or so ago Colm McCarthy usefully referred to it as the ‘glidepath’.

    Your calculations on the balanced budget rule are very interesting. If the structural deficit was to fall from 3.5% of GDP in 2015 to 0.8% of GDP by 2019 simply as a result of growth and no additional fiscal effort, it is likely that this rate of progress would be enough to satisfy the Stability and Growth Pact.

    That is an average improvement of around 0.7% of GDP per annum. When the balanced budget rule was written in terms of the structural deficit in 2005 the following provision was made in Council Regulation 1055/2005:

    “The Council, when assessing the adjustment path toward the medium-term budgetary objective, shall examine if the Member State concerned pursues the annual improvement of its cyclically-adjusted balance, net of one-off and other temporary measures, required to meet its medium-term budgetary objective, with 0,5 % of GDP as a benchmark. The Council shall take into account whether a higher adjustment effort is made in economic good times, whereas the effort may be more limited in economic bad times.”

    If our structural balance is improving at by 0.7% of GDP per annum that is in excess of the 0.5% of GDP annual improvement required by the Stability and Growth Pact. The SGP does require that ‘high debt’ countries make extra effort to reach their medium term budgetary objective but it is not clear how much extra would be required.

  6. The Dork of Cork Says:

    @Ordinary man.
    Over the years I have grown more & more sceptical of the Gold standard crew…..remember what happened in 1914 ?
    The only guy I read now is FOFOA who is a free golder.
    You need a undisputed superpower to hold a Gold standard and even then its a fiction.
    Besides gold is a credit inflated asset – its a option for the bankers to use it to fill the vast waste void on their precious double entry books but they don’t really print anything – they accept collateral.

    At this stage I think its the duty of responsible Kings to produce pure fiat to crowd the bankers out of the monetary distortion business and cut them off from the tax base by making their so called sovergin debt a historical curiousity.
    Of course we won’t see it this side of the coming Dark Age.
    I am afraid this is really really fall of Rome stuff.
    Your deposits are being extracted via tax to bail out commercial banks catostrophic “investments”
    They have completly privatised money – it is no longer even pretending to be a coin of the realm.

  7. David O'Donnell Says:

    @Ordinary Man

    enjoyed that final line from Jim Grant’s speech in New York:

    ‘Concerning little Grant’s and the big Fed, I will quote in parting the opening sentences of an editorial that appeared in a provincial Irish newspaper in the fateful year 1914. It read: “We give this solemn warning to Kaiser Wilhelm: The Skibbereen Eagle has its eye on you.”

    @Dr Merkel

    In contrast to Kozy, The Skibbereen Eagle hasn’t gone away you know!

  8. David O'Donnell Says:

    CARTOON OF THE DAY

    EUROPE’S STRUCTURAL DEFICIT AFTER THE DEBT BREAK

    http://www.presseurop.eu/en/content/cartoon/1845561-austerity-trap

  9. ibis Says:

    It would be useful, I think, to see the glide path in a worked example with reasonable assumptions. What kind of growth levels do we need over the next couple of decades to bring debt back within the fiscal limits?

  10. The Dork of Cork Says:

    Why the Eurozone is destined to fail
    Billy Blog…..

    bilbo.economicoutlook.net/blog/?p=19247

  11. Seamus Coffey Says:

    @ ibis

    Try this. You should be able to change the assumptions (starting GDP & debt and then growth and inflation) on the left hand side.

    The key column is Column Q which gives the allowable balance as a % of GDP. Using reasonable numbers you are unlikely to get a positive number (surplus) in this column. You can change the interest rate but that only affects the required primary balance.

  12. The Dork of Cork Says:

    @Seamus
    Europe – a economy that needs a series of larger and larger credit “growth” inflation’s to pay off a stock of exponential “sovergin debt”

    A continent with no purpose but extraction – it was always so I imagine.
    But what happens when its all extracted out ?
    You subtract the money supply of course.

    A very Sick system me thinks.
    Europe and the countries withen it is must darker then many of us even dared to imagine.

  13. ibis Says:

    Cheers Seamus!

    Now I just need to work out where that connects to the ordinary man in the street, to whom Column T will be a bit of a “wha’?”.

    In other words, I’d need to work out what this means in terms of the government’s budget, taxes, and spending, to see whether the charges of ‘perpetual austerity’ have any foundation.

  14. Michael Hennigan - Finfacts Says:

    @ ibis

    It would be useful, I think, to see the glide path in a worked example with reasonable assumptions.

    You make a reasonable point.

    It would be useful to use average GNP growth of 0% in a scenario for the period 2013-2015.

    Is that a realistic scenario? Certainly yes.

    The ESRI seems to have given up on recovery scenarios. HERMES appeared to have been in denial in 2009 after the optimism of boom times and the average annual GNP growth forecast for the period 2010-2015 was in the range 4.7 to 5.4%.

    The Irish Exporters Association is estimating that all the export growth in Q1 came from services at 8.1% – - likely all from dodgy MNC accounting.
    Should we even believe the PMI services data out this morning?

    On dodgy figures, I have noted in the past week that the departments of Finance and Enterprise have both said FDI accounts for 250,000 jobs in the economy. This comes from the IDA.

    There are about 145,000 employed in full-time permanent jobs in foreign firms which are supported by the 3 State enterprise agencies. There are an additional 15,000 part-timers. Tesco and a few other foreign owned operations hardly accounts for the other 90,000.

    Indirect jobs should not be used in official data as it is based on guesswork.

  15. Con Moriarty Says:

    Thanks Prof. McHale for a useful and informative post. Also some excellent comments – this is the sort of discussion I always hope to see on this blog, but am invariably disappointed; good to see a return to form.

    If I might attempt a translation to layman’s language: the 1/20th rule will be easy-peasy, once a bit of growth returns to the economy (as most respected observers assume it will); and the structural balance rule will cause no difficulties, except to eggheads and econo-geeks.

    Of course, the slightly tricky part will be getting us down from a deficit of over 8% to balance – that will require swingeing cuts, hefty taxes, and/or robust growth over each of the next 4-5 years – and the first two (cuts and taxes) militate heavily against the last (growth). Quite a conundrum.

  16. eamonn moran Says:

    I have two problems with the assumptions in this post.

    First “The SPU projections imply a nominal growth rate for potential GDP of 3.16 percent in 2015. Assuming this growth rate remained constant for subsequent years (which again seems conservative)”
    3.16% seems conservative? when the whole continent is in austerity mode?

    As Michael Hennigan says 0-1% till 2015 is not even pessimistic.

    The second problem is that it is all well and good focusing on structural deficit reductions and I know that it what the troika seem to be concerned about right now but if non structural elements of the deficit are ballooning while the structural deficit is going down this matters a lot. We pay interest on all our debts and it the growing annual interest payments that are swallowing any structural deficit reductions.

    There are growing calls for fair play play for Ireland from lots of different respected financial media institutions on the Bank debt issue but it seems the ECB are aware they dont have to listen right now. Getting this injustice to be discussion point one at every European political meeting should be the No 1. priority of all Irish politicians and all economists. Nothing will have a bigger impact on reducing our chances of avoiding default and re entering the markets. A 30-40 billion write off given on the condition of being the best best boy in Europe (this includes reducing the salaries of top and middle ranking civil servants) would probably bring our bond yields back below 5%

  17. bazza Says:

    @John McHale

    Thanks for your effort to flesh out the workings of the treaty.

    The fact that an adjustmemt of “only” 3.5% in 2015 depends on a growth rate of 4.5% really highlights the absurdity of the treaty.

    If anyone really believes there will be nominal growth of 4.5% in 2015, then I think they should see a shrink.

    In order for such high growth to come to pass we would have to assume something like the following set of circumstances:

    - given the level of household indebtedness, we have to assume that ECB rates remain extraordinarily low.
    - We in turn have to assume that inflation in the Euro area remains extremely low.
    - Low inflation and low ECB rates in the EZ would be either as a result of a continuation of the crisis or due to low growth in the Eurozone overall.

    All this means we are predicting a boom in Ireland delivering 4.5% nominal growth while the rest of the EZ languishes in a recession or in a financial-Euro mess. How is this supposed to happen? Are we factoring in the striking of oil off the west coast?

    Its time to pull our heads out of the sand. The high levels of both private and public debt and the hawkishness of the ECB means that we will be lucky to achieve 2% nominal growth in the next 10 years. Have you looked at the Japanese experience in the 90s?

    If a more realistic, but still optimistic 2% growth is factored in to the 1/20th rule, then the required adjustment in 2015 will be 6.5% of GDP!!! That is not going to happen.

  18. Brian Woods II Says:

    @ JMcH

    Your sums actually scared me. Like bazza the thoughts of 4.5% growth (albeit nominal) seem so fanciful at this vantage. I took some comfort from Seamus Coffey’s post that we won’t actually be subject to the rule until 2018, if I interpret him correctly.

    As to the main issue, we just must vote Yes. The fiscal treaty calculus is almost irrelevant, the rules will be twisted if they turn out to be silly. To vote No will completely isolate us leaving such things as our Corporation Tax rate fair game. And I have no doubt that we would not have access to any official funds post this bail out.

    Yes, it is a gun to the head. But if I was in a moment of madness preparing to jump off a cliff and try to fly, I would want somebody to point a gun to my head.

  19. The Dork of Cork Says:

    @Bazza
    The Jap experience was not too bad as they introduced some base money into the system for infrastructural projects and the like.
    This kept the system afloat.
    GDP increased especially in $ terms…..it has done far better then the US since 1990 in $ terms for example.
    The Euro system is much worse – Finance is not captured , it can refuse to lend and crush even large formally powerful countries.

    We are dead in the water withen the eurozone – we have at least some chance outside it.

  20. David O'Donnell Says:

    Breaking Newz

    Comedian breaks the code on the Fiscal Compact; IrishEconomy Economists in absolute Awe! Student of “Q” speechless … muttering that Ó Briain must be a marxist …

    Raise a cheer for Dara Ó Briain. The comedian, a graduate in mathematics and theoretical physics from University College Dublin, has somehow persuaded the Dave channel to produce a show built around the solving of mathematical conundrums.

    http://www.irishtimes.com/newspaper/weekend/2012/0428/1224315282161.html

  21. Yields or Bust Says:

    @Brian Woods

    “..As to the main issue, we just must vote Yes. The fiscal treaty calculus is almost irrelevant, the rules will be twisted if they turn out to be silly. To vote No will completely isolate us leaving such things as our Corporation Tax rate fair game. And I have no doubt that we would not have access to any official funds post this bail out..”

    Why oh why is the prospect of hard coding silly rules into the Constitution suddenly seen as the right thing to do? Seamus Coffeys recent post has already answered the question of funding – if we can’t get access to markets we get it from the current sources – otherwise we leave the zone and cause mayhem – eh in Blind Date speak – the choice is yours. So my personal belief is that the funding issue is a complete non issue.

    As you suggest yourself the rules are inherently silly. Forget about the isolation bit because that’s just talk – supposedly the UK is now isolated yet I don’t see too many UK citizens suffering pangs of guilt as a result. In other words as in most things in the EZ debate we have a tendancy to over state the consequences.

    The key issue here is growth and there is only one way to solve that problem and thats a debt write off solution. All other roads eventually lead to that same issue – households can’t fix the govts the banks and their own balance sheets at the same time. We have pretended we can since 2008 and now the time has come to make the hard choice. Voting Yes or No is almost irrelevant to the household debt question.

  22. John McHale Says:

    @Yields or Bust

    Really, at this stage in the debate there is little excuse for believing that the referendum “hard codes” fiscal rules into the constitution.

    The purpose of the referendum is to ensure there is no constitutional bar to the Treaty.

    The wording of the referendum states:

    The State may ratify the Treaty on Stability, Co-ordination and Governance in the Economic and Monetary Union done at Brussels on the 2nd day of March 2012. No provision of this Constitution invalidates laws enacted, acts done or measures adopted by the State that are necessitated by the obligations of the State under that Treaty or prevents laws enacted, acts done or measures adopted by bodies competent under that Treaty from having the force of law in the State.

    There would be no constitutional prohibition to withdrawing from the Treaty.

  23. Seamus Coffey Says:

    @ bazza

    If anyone really believes there will be nominal growth of 4.5% in 2015, then I think they should see a shrink.

    In order for such high growth to come to pass we would have to assume something like the following set of circumstances:

    - given the level of household indebtedness, we have to assume that ECB rates remain extraordinarily low.
    - We in turn have to assume that inflation in the Euro area remains extremely low.
    - Low inflation and low ECB rates in the EZ would be either as a result of a continuation of the crisis or due to low growth in the Eurozone overall.

    We need “extremely low inflation” for 4.5% nominal growth. Huh? I think there is a lot of confusion between real and nominal growth figures emerging.

    We could get a nominal growth of that level with inflation alone. It wouldn’t be of much benefit without some real growth but low inflation is not a pre-requisite for such a moderate nominal growth rate. In fact a higher inflation rate would give a bounce to nominal growth and make hitting the fiscal targets somewhat easier (and reducing the debt burden you mention). See John McHale’s most recent post.

  24. Yields or Bust Says:

    @JMcH

    So let me understand what you’re now saying namely its OK to vote in favour of this nonsense because if at some point we don’t like it we can vote again to reverse ourselves out of its terms.

    So I should tell my children its OK to take drugs because if you don’t like the feeling following a weekend on the tear then just go back to living your normal life. Now if I went with that logic they’d be contacting the Social Services themselves and the’d be requesting that either they are allowed to leave the homsstead or I should be comitted. I’d contend it’s probably better not get involved at all in drugs. Wouldn’t you?

    Is this constitutional vote choice you present to me any different than the drugs scenario? What you’re suggesting is a suck it and see option. I say nonsense. Its bad economics, its badly drafted (the 1/20th rule is it the excess debt of the full debt?) and provides absolutely no basis for any growth bias into the future i.e. exactly what the EZ requires. Importantly the recent IMF paper suggests that even the calculation of GDP is open to significant variation and accounting manipulation. Why is Gods name should any citizen put their ‘signature’ to this dross? The lame hope of being able to reverse out of its rules is a very poor sales pitch. No thanks.

  25. John McHale Says:

    @Yields or Bust

    I just pointed out the rules themselves will not be in the constitution. (Don’t forget though, that the rules — including the 1/20th rule — are already there under the SGP. Not much changes in terms of constraints on fiscal policy; a lot may change in terms of our access to funding.)

  26. Ceterisparibus Says:

    @John McHale

    “…prevents laws enacted, acts done or measures adopted by bodies competent under that Treaty from having the force of law in the State.”

    It’s this bit that worries me. Not enough thought has been given as to what future acts or measures may be applied by “bodies competent” without our consent which would, on the face of it, be constitutional.
    This is far too wide ranging for insertion into our Constitution.

  27. Aisling Says:

    @Ceterisparibus I’m going to try to paraphrase this.

    1. The Irish Government may ratify the treaty.
    2. If they ratify it then nothing in the constitution shall render its provisions invalid BUT
    3. A subsequent Oireachtas may rescind our membership of the treaty at which point in time it is no longer binding on us at all.

    All the provision is saying is that the constitution can’t render the treaty invalid if we pass the referendum. Nothing at all about the Oireachtas having that power (as they do and as they will retain).

  28. Aisling Says:

    @Ceterisparibus for Government in 1 read Oireachtas – so easy to forget that the two aren’t technically the same.

  29. Shay Begorrah Says:

    @aisling

    A subsequent Oireachtas may rescind our membership of the treaty at which point in time it is no longer binding on us at all.

    Now that is intellectually dishonest Aisling.

    All of the EMU related treaties have been constructed as traps and to suggest that countries Eurozone-wide would have been bullied into accepting the harebrained Fiscal Compact at a constitutional level if it were practical to leave it as soon as the government changed is beneath you. With accepting the FC comes accepting unlimited liability for the financial sector and with that comes the necessity of ESM access. Even more than now Ireland’s economy would be devoted to keeping the Eurozone financial sector cosseted.

    Mammon sunt servanda.

  30. Brian Woods II Says:

    @ JMcH

    Interesting clarification of what we are actually voting on. But does that not mean that a No vote is equally insipid. Seems to me that a No vote does not prohibit the Government signing the Treaty (haven’t they already done so?) and does not prohibit the passing of laws enacting these fiscal rules.

    In short, if the vote is entirely vacuous and therefore merely an opinion poll on our participation in the EZ/EU, all the more reason to vote Yes.

  31. Aisling Says:

    @Brian Treaties are a bit like house buying. Many stages involved after the signing of the contracts before you actually don’t own the house.

    Step one is the signing of the contracts.

    Step two is the ratification procedure, which will depend on the domestic law of the country involved, in our case the A-G has decided that a referendum is required to permit the Oireachtas to ratify it.

    Step three is effectiveness. Any treaty will provide for the conditions under which is it effective. The TSCG provides that once 12 States have ratified it (under their domestic law) and deposited certain instruments then that treaty is effective and applies to those States who have ratified it and lodged the documents.

    So even if we vote yes, the Oireachtas still has to complete the ratification procedure. And the Government still has to lodge the documents. But if 11 other Governments don’t lodge their documents then the treaty never actually comes to life.

    As you noted the Government can still agree to adhere to the treaty by passing an Act of the Oireachtas which enshrines the terms of that treaty into our domestic law (albeit subject to repeal by a subsequent vote of the Oireachtas), but we still can’t access ESM funding unless we allow our Government ratify the treaty.

    Interestingly, this referendum doesn’t ask us to allow them to post the necessary ratification papers, which are technically what wuld make our ratification of the TSCG binding on us under that treaty (tax adviser in me sees loopholes before I even understand the rules I’m seeing the loopholes in).

    But they haven’t asked us to allow them to ratify yet not post the docs, they’ve just asked us to allow them to ratify (with the assumption that once they ratify they will post the docs).

  32. Colm Brazel Says:

    Very useful post by John. But oh G.

    Re “But this ignores the impact of growth in nominal potential/actual GDP in subsequent years in bringing down the structural deficit in the absence of any discretionary adjustments.”

    Yes, it does ignore potential falls in GDP due to our vulnerability to global slowdown in the world economy. It ignores the negative effects of austerity in Ireland and Europe.

    The real problem with these figures is how easy it is to wire growth projections that will change the dynamics of any formula.

    I’m taking the meaning of nominal growth rate to be the real growth rate less inflation. What factors are being used to measure inflation/deflation?

    The reality is growth rates are being revised downward as the real effects of our debt burden and austerity begin to kick in. Draghi’s austerity will not lead to growth.

    The biggest problem is the burden of bank debt contributing as much as 40% of our debt/gdp ratio. Growth in the economy will not pay for this. Our growth rates under our weight of debt are being driven downward and we are in negative GNP already.

    Unfortunately LB/FG have failed to address their failure to achieve significant reductions on our odious debt levels and will use facetious figures like the above re debt sustainability to once again try to prove the Irish economic Titanic is not heading for Davy Jones’s locker and con the Irish electorate they should sign up for an even more miserable set of austerity rules.

    Do you have link to “projections in the just published SPU”

    There’s discussion here as well re deficit rules from Constantin G and Karl W

    with update from this document nb from KW

    http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2011:306:0033:0040:EN:PDF

  33. Colm Brazel Says:

    http://trueeconomics.blogspot.com/

  34. Bond. Eoin Bond... Says:

    @ Colm B

    “I’m taking the meaning of nominal growth rate to be the real growth rate less inflation.”

    Eh, no, real growth PLUS inflation. Nominal GDP growth of 4.9% is the IMF long term forecast for Ireland (ie 2.9% real + 2% inflation)

  35. Colm Brazel Says:

    @ Aisling

    So even if we vote yes, the Oireachtas still has to complete the ratification procedure. And the Government still has to lodge the documents. But if 11 other Governments don’t lodge their documents then the treaty never actually comes to life.

    As you noted the Government can still agree to adhere to the treaty by passing an Act of the Oireachtas which enshrines the terms of that treaty into our domestic law (albeit subject to repeal by a subsequent vote of the Oireachtas), but we still can’t access ESM funding unless we allow our Government ratify the treaty.

    You are making this more complicated than it actually is. Forget the papers and the Oireachtas if Y is cast. The other 11 countries if they have not already signed up and registered the docs required will be joined asap by our Govt following the vote.

    Re “but we still can’t access ESM funding..”

    I think there is a misguided notion regarding ESM funding. Firstly, there is no entitlement to further bailout from ESM. There is entitlement to join the queue for ESM bailout should this be required. The terms and conditions are likely to be very severe and at the behest of ESM committee; but only if they decide and on past performance conditions are likely to be more severe than those to be obtained from the IMF.

    Secondly, as I keep trying to point out, we are already in a programme under EFSF that can and is at present being renegotiated. Our negotiating team should stick with the purpose of negotiating down our obligations under the present bailout either by way of a new EFSF bond that should include writing down and burden sharing of the odious IBRC ELA/PN programme or burden sharing by other means. The notion that we would find the debt sustainability levels of our present bailout unsustainable and seek to get another bailout under ESM to pay for the present EFSF bailout is farcical.

    I’ve even seen it suggested recently this new ESM bailout would even generate a surplus in year one that would wipe out the fiscal deficit and be a crock of gold windfall that we could use to invest in the economy to create jobs. The notion is as farcical as the view we can grow our way out of our debt lockdown at 120% GDP without burden sharing.

    The documents you refer to, refer to the link I’ve given above and would merely give binding, legal commitment to the Treaty changes outlined above.

    But here’s the problem and its a very big problem and one people should be aware of:

    Act of the Oireachtas which enshrines the terms of that treaty into our domestic law (albeit subject to repeal by a subsequent vote of the Oireachtas)

    It cannot be fully repealed. Arguably it cannot even be marginally repealed. Consider the following scenario somewhat similar to Argentina’s current effort to nationalise its oil revenues and give the revenue to its citizens.

    Suppose, the Oireachtas at some future date sees the tax marrow dried from the bone, state assets being grabbed to make up for the loss of tax revenue to pay debt, Corporation Tax disappearing, severe taxation burdens on the population similar to Romania under Ceaucescu, and Oireachtas tries to repeal the ‘Compact’ because of its severity? Perhaps a situation similar to the Ukraine where only females can work as teachers because the salary does not allow a man to raise a family; for females, work is very poorly paid and part time?

    Sure, go ahead and do that ?

    Fact is it will be too late. The International court of Justice has binding legal documents protecting its debt. They can impose heavy sanctions if they dont get their money back. We could go to the IMF and The International Court of Settlements and say we want out of the euro, or we demand burden sharing. NO use, they have secured their debt against any outcome like this. The European Court of Justice with heavy penalties will ensure this does not happen.

    I believe this is the singlemost important purpose of the bankers/ECB/ESM in regard to the Compact. They are terrified one or other of the peripherals will threaten to leave the euro, declare default leaving them to share in the burden of such a default. So, they have the ‘Compact’ for stability. The only thing it stabilises is their IOU’s against odious ELA/PN’s and the loans they’ve given to the periphery they worry about not getting back.

    Vote No.

  36. Colm Brazel Says:

    @ Bond,

    Good point if correct, can you point me to the IMF doc where they define where, real, nominal, inflation relationship definitions occur.

    I used the definition of nominal growth here which growth less inflation. I would like to see if IMF definition is different.

    http://www.investopedia.com/terms/e/economicgrowthrate.asp#axzz1ttXwrRJx

  37. Colm Brazel Says:

    is growth less inflation

  38. Colm Brazel Says:

    Seamus Coffey and John McHale both rely on this panacea of growth. The IMF position is that our debt is unsustainable at .5%; our current forecast for this year is .7% and its on a downward pattern.

    We’ve had these optimistic growth projections before to justify NAMA and to try to justify the penal debt burden imposed on us. Unfortunately, such figures damage our negotiating position and may even encourage our lenders to adopt a more severe position in negotiations.

    John McHale “There would be no constitutional prohibition to withdrawing from the Treaty.”

    Nope, but the European Court of Justice would be after you for every penny you owe them with documents that would stand up in any International Court of Settlements, who would determine you are on the hook to pay back every penny, debt write down is not on the cards, no burden sharing. You would be in a far weaker position.

    One can be blinded by optimism. If there’s no petrol in the car, it simply wont go.

  39. Bond. Eoin Bond... Says:

    @ Colm B

    “can you point me to the IMF doc where they define where, real, nominal, inflation relationship definitions occur.

    I used the definition of nominal growth here which growth less inflation. I would like to see if IMF definition is different.”

    re your link – you appear unable to read. “Adjust” does not equal “minus”. The IMF does not have it ‘own definition’ for nominal GDP growth. Whoever invented maths basically came up with the definition. Its not exactly rocket science. Nominal GDP equals ‘real GDP’ + inflation. This is not conjecture, this is fact. Stop making yourself look silly.

  40. Colm Brazel Says:

    @ Bond

    Your arrogance combined with immature tetchiness is amusing :-) So you can’t point me to where the IMF define their terminology, I’ll look it up :-)

    Nominal is not a term in mathematics, you’ve obviously not studied the subject :-)

    “GDP that has not been adjusted for inflation” If you did study mathematics, you would be aware that Nominal GDP

    “if the gross GDP was calculated to be 6% higher than the previous year, but inflation measured 2% over the same period, GDP growth would be reported as 4%,”

    The relationship between GDP and inflation is further discussed here and is as I’ve defined it.

    Read more: http://www.investopedia.com/articles/06/gdpinflation.asp#ixzz1ttoL8Zaj

    Silly boy :-)

  41. Bond. Eoin Bond... Says:

    gross GDP = nominal GDP Colm….

  42. Bond. Eoin Bond... Says:

    Please read…

    http://www.investopedia.com/terms/n/nominalgdp.asp#axzz1ttqNZ200

    “Similarly, if the nominal GDP figure has shot up 8% but inflation has been 4%, the real GDP has only increased 4%.”

  43. Colm Brazel Says:

    @ Bond

    Ok, I’ll give you

    ‘gross GDP = nominal GDP Colm….’

    But note term GDP is given already adjusted for inflation. From link above,

    “GDP
    Gross domestic product in the United States represents the total aggregate output of the U.S. economy. It is important to keep in mind that the GDP figures as reported to investors are already adjusted for inflation. In other words, if the gross GDP was calculated to be 6% higher than the previous year, but inflation measured 2% over the same period, GDP growth would be reported as 4%, or the net growth over the period.”

    Plus Bazza/Coffey discussion above and your “Its not exactly rocket science” The term ‘nominal’ is often used rather too loosely in economics, perhaps an index of terms on documentation?

    “We need “extremely low inflation” for 4.5% nominal growth. Huh? I think there is a lot of confusion between real and nominal growth figures emerging”

    Ta for the bit of focus on that to keep me sharp :-)

    Read more: http://www.investopedia.com/articles/06/gdpinflation.asp#ixzz1ttwAkXSI

  44. Bond. Eoin Bond... Says:

    @ Colm

    “The term ‘nominal’ is often used rather too loosely in economics, perhaps an index of terms on documentation?”

    No, its not. Its a very clear and unambiguous term. “GDP growth” almost always refers to “real GDP growth”, that is GDP growth adjusted for the effect of inflation, ie Gross or Nominal GDP minus inflation. There is no discussion here, this is a fact. The IMF has a structural real GDP growth forecast of 2.9% for Ireland. Their nominal GDP forecast would therefore be around 4.9%. On a balanced budget, we need approximately 2.3% nominal GDP growth in 2018 to meet the 1/20th debt rule. Like i said, facts, not made up crap or completely misunderstood (again) crap.

  45. Patrick Says:

    Colm stop. For the love of God stop.

    If you can’t get past the difference between nominal and real there isn’t much hope for you understanding the rest of the Treaty.

  46. David O'Donnell Says:

    @Bond Eoin Bond

    An anonymous source wonders if you might consider giving a brief seminar to the mathematically challenged within the Fine Gael gene pool. Nominally, this should Really be conducted by one of the well known professors of economics; in this instance, however, all claim to be unavailabe as (i) there is a rumour that Lucinda is requesting a one-on-one tutorial on the social scientific economic validity of the contraints [0.5, 60, 1/20] within the fiscal corset or (ii) it could be that “Q” appears to find no trace of such validity anywhere in the universe and professors don’t like awkward questions. An Taoiseach would also like to sit in at the back of the class – but purely in an observer capacity.

    Should you be successful, which other anonymous pundits deem to be highly unlikely, then a seat on a state board of your choice should ensue in due course.

  47. Irish Left Review · Fiscal Treaty Files: Will it Cost Us? Says:

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