New SPU Post author By Philip Lane Post date April 30, 2013 30-4-2013 Department of Finance Publishes the Irish Stability Programme April 2013 Update 30-4-2013 Stability Programme Update – April 2013 Categories In Uncategorized 26 Comments on New SPU ← Guest Post: The Payments Molehill → The Future of EMU 26 replies on “New SPU” Oh Lordy. Suddenly the irisheconomy.ie can do embedded video links. But really, Oh Lordy. It’s a step by the Department of Finance. With respect and not being cynical about the effort. @ Shane Enright I think they hung you out to dry there. It’s you out on all those screens and I’d suggest you ask for: * Instruction/practise on autocue. * A decent sound person. * Decent camera/make-up. * A script you can believe in: are you fully behind the core retails sales segment? Or the odd shift from what has happened to focus on predictions for employment? * If the aim is to communicate: help us understand what exactly are ‘services’? I think people get what goods exports are but are not so clear as to what services means. * I see GDP growth is estimated at 2.8% for 2015 and 2.7% for 2016. Have you any idea how nuts, I mean problematic, that kind of forecasting is? When you say “slight downward revision in the headline figure” it reads as “scream and run from the room”. * “is set to turn positive in 2014” – when I look forward to you arguing it is time to get the hell out of the euro. * 123.3%. Communication problems again. To people at home, what does that even mean? I think you’re trying to hint something. Isn’t 60% is the limit and the country has to go down to that? Why 60%? Why any %? 90% was the problem level until two weeks ago. Is 120% the end of the road? Where does that come from? Shall we bet on 123.3% being the actual percentage? Overall, well done for going for it but if your name is to be stuck on it (forever) then I’d hope you push for more control over the technical and have more belief in the substantial. Anyone told the public sector unions yet that the “compensation of employees” line item is planned to drop by 10% (from 18.7bn to 16.9bn) between 2013 and 2016? Also it confirms that 0% will be the new 3%, as the MTO for the structural balance seems to be 0%. This target will kick in after 2015. As a result the GG defict continues downwards to less than 1% by 2019. The equivalent primary surplus figures aren’t listed but look to be in the 4 to 5% range. Sustainable in Ireland? I doubt it. Here’s what one university professor thought of the Croke Park II negotiations looking to achieve a fairly modest 300m in savings: “This was the equivalent of somebody in a lane holding a knife up to your throat and saying I’m going to take your money however, I’d like to be your friend, so if you give me your money we can both walk away very happily,” he said. Perhaps an emergency “Economics 101” class needs to be organized for the university professors? @ Bryan G The econ professor was more or less correct. The right way to do this sort of thing was demonstrated by Fianna Fail during Croke Park I, i.e. first impose pay cuts and then ask people to vote for “no more pay cuts”. Everybody votes yes and we all go home friends. I guess the Labour party felt that approach was too dishonest for a genuine socialist party like themselves. As a non public sector worker I would like to be given a chance to vote on any future tax increases. I’ll be your friend if you let me. @skeptic01 The “Hands off my money” approach reminded me of USA Republicans carrying placards saying “Keep your government hands off my Medicare”. I’d agree there isn’t very much to “negotiate” with regards to pay cuts. Either Ireland stays in the Euro and conforms to the rules it has agreed to conform to, or arranges an exit in the medium term and reverts to having a wider range of financial and political instruments to manage its own affairs. Even with optimistic growth forecasts the “staying in the Euro” option is going to require a 4 to 5% primary surplus, which IMHO is simply not achiveable. I don’t know along which faultline things will eventually crack, but the status quo is not sustainable. Expecting the Euro architecture itself to “soften” (Eurobonds, fiscal transfers, joint-and-several liability etc.) to relieve some of the pressure would be against all the available evidence. If employee compensation is to be reduced by 10% in a period when nominal GNP will grow by about 15%, then perhaps the economics professor does have a point when he or she reckons that he is getting the thin end of the wedge. For clarification the source of that quote appears to be a geography professor rather than an economics one. However if you are, as the government is, *required by law* (that was a key point of the Fiscal Compact Treaty which the country voted for last year, wasn’t it?) to reduce the GG deficit to zero and beyond in order to meet its structural deficit obligations, then a 10% reduction should come as no surprise to anyone as part of that deficit reduction trajectory. The GG deficit has to go from -12.5bn in 2013 to surplus in 2019. Hands up who thinks growth alone will be enough for this to happen? In addition, the Fiscal Compact requires an automatic correction mechanism to be put into place (by Jan 1, 2014 I think), should the actual trajectory deviate from the planned one. It all seems very quiet on that front. Anyone know how this is progressing? If you vote for an ordo-liberalism inspired treaty then surely you need to accept the consequences of doing so… Universities sell many services in the open market and so their income does not need to entirely connected to the public deficit, if they are free from political manipulation. Any country whose universities are playthings of corrupt politicians will never succeed. Of some interest….. http://www.reuters.com/article/2013/04/30/us-ireland-economy-idUSBRE93T12H20130430 Impressive surely that the magic 2.8% GDP growth figure in 2015 results in an undershoot of the EU’s 3% Excessive Deficit Procedure (EDP) budget target by 0.1%! This Update is basically a fairytale as there was no growth in 2012 and spending cuts and tax changes to raise €3.1bn in 2014 will be followed in 2015 with a €2bn adjustment. Today, manufacturing PMI data shows a sharp slump due to drug patent expirations and services exports could also face a similar sharp fall in future. The Update drops claims made as recently as March by Minister Noonan at a Bloomberg event in London that the surge in computer services exports by 15% in 2012 reflects ‘competitiveness’ rather than diversions of revenues for tax purposes from other countries to Ireland by the big US services giants. We have sought support for this claim from the DoF without success. However, one of the Troika chiefs have signalled their concerns to us against a backdrop of international moves to curb such tax avoidance. The Update says: “services exports performed strongly in 2012 – growing by 8.9% – led by increased exports of business and IT services. This gave rise to two interesting developments: firstly, the value of services exports exceeded that for goods exports for the first time and secondly, services exports exceeded services imports, thereby reversing the traditional deficit on services trade. Looking ahead, some of these service sectors appear relatively insulated from global demand conditions, and Ireland continues to attract FDI in these sectors.” However the surplus in services in 2012 was likely a timing issue as companies such as Google and Microsoft usually offset the revenues booked from other countries with offsetting charges in their accounts. GDP growth to 2015 can depend on whether transfers overseas are booked as imports e.g royalties and business services charges, or dividends. The latter would impact GNP, which is not the metric that matters internationally. The jobless rate is forecast at a very high 12.8% in 2015. There is an acknowledgement that “some of the improvement also reflects falling labour supply, due to outward migration and falling participation.” Net annual emigration to April 2012 was 34,400. MH, why major pharma and biotech patents which are manufactured here have expired in recent months or are set to expire in the near future.? See table A1.2, line D1 Compensation of employees, due to fall from 18,784m in 2012 to 16,880m by 2016. That’s a 1,904m cut. Note that the plan is to cut 1bn or 1000m from the public payroll in each year 2014 and 2015, with a slight rise into 2015. Now the Govt are looking for a 300m cut this year………………………………. There are approx. 280,000 public servants plus ?? public pensioners. That’s a cut of 6,800 per current PS worker. @ Bryan G “Expecting the Euro architecture itself to “soften” (Eurobonds, fiscal transfers, joint-and-several liability etc.) to relieve some of the pressure would be against all the available evidence.” Paul de Grauwe has an excellent crack in Paper 491 ‘Design Failures in the Eurozone – can they be fixed’ at this on the next post up. At least he has a road map. Also worth reading, in case you missed it, G Soros’s comment reply to an article by HW Sinn. http://www.project-syndicate.org/commentary/should-germany-exit-the-euro-by-hans-werner-sinn “It all seems very quiet on that front. Anyone know how this is progressing?” The Fiscal Treaty was always a bit contradictory. It says it is automatic,. then says it is flexible. It does attempt to take the decision out of national hands whilst insisting that nations then give it ‘decomcratic legitimacy’ by voting as instructed. FWIW, here’s where I am in very rough terms. Commission now knows its a disaster all round but the thought of writing a letter to P Krugman saying so is intolerable so they have to change course whilst sticking to to the following: * What we did first was right * What we doing now is right * We have always been flexible * The mass unemployed of Europe don’t know whats good for them (because they’re thick or something) * Ergo, where we’ve failed is in communication, not policy, hence Olli Rehn’s blog (take that Krugman. Er, Comments Closed). The smaller bailout countries can have their toes held to the fire. However, Spain and now probably Italy are saying, eh, you know what, we don’t fancy this Fiscal Treaty any more as (a) it’s eating our countries alive, and (b) we reckon the ECB’s OMT means we aren’t going to bust – you wouldn’t let us go bust would you? So we’ll politely ignore it. I’m not sure what happens next. I believe the EU Commission are supposed to report each October as to whether countries are ‘in compliance’, but it looks increasingly like that will be honoured in the breach. With any DoF document It’s never made that easy to answer the simple question – how much will the government spend and take in in the years ahead. My calculations show the following from years 2012 – 2019 Expenditure: 69.0, 71.3, 69.0, 68.1, 69.0, 70.3, 70.6, 71.0 Revenue: 56.6, 58.8, 61.4, 63.2, 65.8, 67.7, 70.0, 72.7 Thus expenditure bounces around the 70bn mark within 2-3% variation. Revenue increases by nearly 30% over the same timeframe. The government can claim the fiscal consolidation ends in 2016, notwithstanding the MTO target, by keeping subsequent expenditure flat and bumping up the growth forecasts (to 4.8% in 2019). Since the interest burden will continue to rise this means useful expenditure will need to fall. And should growth “unexpectedly disappoint” the gap will need to be made up with more austerity measures. But remember the magic 4%+ growth rates are only (and always) two years away. In 2010 it was forecast that things were really going to be rockin’ and rollin’ in 2013 (over 6% growth), and by 2011 this was reduced to a mere 4% growth. @ Michael Hennigan “Impressive surely that the magic 2.8% GDP growth figure in 2015 results in an undershoot of the EU’s 3% Excessive Deficit Procedure (EDP) budget target by 0.1%!” That’s incorrect. The forecast deficit for 2015 is 2.2%, so an undershoot of 0.8%. @ all Michael Noonan has made a statement saying that if there is leeway in the finances come budget time, he would rather use it to increase capital spend on labour intensive projects. Anyone have any opinion (or research) on what the best course of action would be for the government in that scenario? Options include: 1. Spend it on capital projects as suggested 2. Reduce otherwise planned expenditure cuts 3. Reduce income tax (USC being the obvious target) 4. Send a cheque for a couple hundred euro to every household with the proviso that it must be spent within a certain time frame 5. Any other suggestions? That would be an interesting question for the Fiscal Advisory Council to consider for its next report I think. @ Bryan G This is the automatic correction mechanism which was introduced as part of the Fiscal Responsibility Bill 2012. 6.—(1) If the Commission addresses a warning to the State under Article 6(2) of the 1997 surveillance and coordination Regulation or if the Government consider that there is a failure to comply with the budgetary rule which constitutes a significant deviation for the purposes of Article 6(3) of that Regulation, the Government shall, within 2 months, prepare and lay before Dáil Éireann a plan specifying what is required to be done for securing compliance with the budgetary rule. (2) The plan shall— (a) specify the period over which compliance with the budgetary rule is to be achieved, (b) if that period is longer than a year, specify annual targets to be met in moving towards such compliance, (c) specify the size and nature of the revenue and expenditure measures that are to be taken to secure such compliance, and (d) outline how any revenue and expenditure measures that are to be taken will relate to different subsectors of the general government. (3) The provision made by the plan shall be consistent with— (a) the rules of the Stability and Growth Pact, (b) any recommendations made to the State under the Stability and Growth Pact in relation to the period over which compliance with the budgetary rule is to be achieved and the size of measures to be taken to secure such compliance, and (c) the current stability programme. (4) If the Government consider that exceptional circumstances have arisen during the period specified in the plan, the things specified in the plan are no longer required to be done; but when the Government considers that the exceptional circumstances have ceased to exist, the Government shall, unless there is no longer a failure such as is mentioned in subsection (1), within 2 months prepare and lay before Dáil Éireann a new plan under that subsection. (5) If the Government consider that a failure to comply with the budgetary rule is likely to occur the Government may, within 2 months, prepare and lay a statement before Dáil Éireann outlining the steps the Government intends to take to avoid such a failure. @GK Paul de Grauwe has an excellent crack in Paper 491 ‘Design Failures in the Eurozone – can they be fixed’ at this on the next post up. At least he has a road map. Also worth reading, in case you missed it, G Soros’s comment reply to an article by HW Sinn. There’s no shortage of earnest proposals to “fix” the Euro, but I’d stand by my claim that there’s no evidence that it will be fixed. Will expand later. @ Carson That’s incorrect. The forecast deficit for 2015 is 2.2%, so an undershoot of 0.8%. The forecast I referred to is 2.9%. Ex-bank support is 2.2%. @Seamus Coffey Thanks for that. I guess what is considered “exceptional circumstances” remains to be seen. @ GK Paper 487 “The Political Economy of Structural Reform and Fiscal Consolidation Revisited” is the only one on the list that makes a stab at setting the broader context (touching in the process on many of the themes that have been debated on this blog). @ BrianG “Expecting the Euro architecture itself to “soften” (Eurobonds, fiscal transfers, joint-and-several liability etc.) to relieve some of the pressure would be against all the available evidence.” The trouble with this view, and that of Soros, IMHO, is that it poses the problem in terms that are too black and white. There is clearly a tug-of-war going on between (i) Germany moving “to relieve some of the pressure” on the creditor side of the piepwork and (ii) those subjected most to it taking the necessary steps to ease it on their side with the ECB caught in the middle. And against an increasingly fraught electoral background in Germany. Gavyn Davies has an exceptional series of blog posts on the possibility of emergency interventions by the ECB given the political stand-off. http://blogs.ft.com/gavyndavies/2013/05/01/what-the-ecb-can-and-cannot-do-to-heal-the-eurozone/ @DOCM Good article by Gavyn Davies but, as he points out, most of the thing that should be done are in the ‘cannot’ be done column. The definitions of cannot, could not or will not would make for a long debate. The bank crisis could of course be resolved at a stroke, by the ECB taking a mandatory sizable (say 25%) preferential equity stake in all EZ banks, with money printed for such a purpose. All countries would benefit in proportion to the size banking sector. That of course will not be done; at least not yet! @ tullmcadoo System wouldn’t accept reply on patent expirations — maybe some other time! @ tullmcadoo http://www.finfacts-blog.com/2013/05/ireland-and-big-pharmas-patent-cliff.html Ft highlighting our Corp tax rate http://www.ft.com/intl/cms/s/0/c638f73a-978f-11e2-97e0-00144feabdc0.html#axzz2S3OdCNiB My goodness. Can you just imagine the fight in the department to be the new official fresh face presented to the public. As opposed to the older crowd desperately trying to stop an enquiry into the bank guarantee. @ gavin If a presentation has to be done, it is done. The production values match the level of the analysis. Naurally. Booms and busts happen in that outer world, outside the DART window. There have always been individual civil servants who would wish to change things, but utopian impulses are inexorably eroded over the years. I would imagine it’s a closed, comfortable world, where private cultural interests offer a fairly satisfactory palliative for ennui. Flann O’Brien is a good example, but there is an entire genre http://en.wikipedia.org/wiki/The_Overcoat Naturally Comments are closed.