Simon Wren-Lewis on the measurement of structural balances Post author By John McHale Post date October 18, 2013 Simon has an interesting post on the EU measurement of output gaps and structural budget balances. See: here. Categories In Uncategorized 30 Comments on Simon Wren-Lewis on the measurement of structural balances ← Reminder: DEW 2013 → NYT Profile of Ignazio Angeloni 30 replies on “Simon Wren-Lewis on the measurement of structural balances” The structural balance concept is never mentioned by Irish finance ministers and the documentation on Budget14 does not include an update on the estimates of cyclical developments last published in April, although the official belief that the fiscal deficit is virtually all structural has hardly changed one would think. In time the structural balance will become a key constraint on fiscal policy and the estimate of potential output in Ireland a hot topic but in the short term the stated driver is the need to reduce the headline deficit and get the debt ratio on a downward path. On that front the main surprise in the Budget was the non-appearance of a primary surplus as it had been well flagged by the Minister. Ireland’s debt interest rate exceeds the projected GDP growth rate and the debt ratio would actually rise further in 2014 if the deficit was funded with new borrowing, so the projected fall in the ratio reflects the use of NTMA cash balances. The shadow economies in Spain and Italy are estimated to be about 20% of GDP. Spain’s full-employment rate in early 2007 was at over 8%, the lowest in modern times. What is the output gap? This comment Simon Wren-Lewis strikes me as being right on target. However, the assessment of the Commission’s position seems based on a misunderstanding of its role and powers. “So the Commission will go on making estimates that it knows are overestimating structural budget deficits, because of ‘concern in some capitals’ about the implications of using better estimates! None of this does the Commission any good in terms of its competence to help determine national fiscal policy. (Of course nothing can top the incompetence recently shown by the US congress, but that is no excuse.) ” The Commission will continue to apply a model agreed by the member countries until they agree another. It does not have the power AFAIK to agree an alternative on its own. However, the basic recommendation made with regard to a wider involvement of fiscal councils is sound. Indeed, it is hard to see how the rules can be applied with some level of uniformity otherwise. The 2013 report of Ireland’s council has the added value of flow charts which make a very complicated set of procedures somewhat clearer to the layman (at least this one). http://www.fiscalcouncil.ie/wp-content/uploads/2013/04/3_Rules.pdf While having a sound basis for assessing the extent to which countries are abiding by their commitments is obviously vitally important, it is secondary to the political reforms required with regard to deciding the fiscal framework. If there was any doubt as to the need for these reforms, the preparation of the 2014 budget must have surely removed it. As Chris Johns comments in today’s IT (in the context of the US budget crisis). “Our own little budgetary circus this week adds to an overriding impression that something is fundamentally wrong with whole process: it is crying out for reform. At the very least, consideration should be given to abandoning the annual set-piece. Within a medium-term framework, the tweaking of fiscal and spending decisions should be a continuous, through-the-year process. The quality of both debate and decision-making would be enhanced by a calmer structure.” From yesterday’s Dáil record. Deputy Lucinda Creighton: I appreciate the difficult task the Government faces and the significant strides which have been made. While I am deeply concerned about certain aspects and individual elements of the budget – I will work to change some of them – I will not vote against any of the measures contained in the budget. I strongly support the overall objective of getting Ireland back on a sound fiscal footing. However, I worry a great deal when I hear Ministers such as the Tánaiste this morning on RTE radio pretending that this is the end of the difficult budgetary choices we face as a nation. That is simply not the case and it is irresponsible of senior Ministers to make such misleading statements. Irish citizens have been disappointed by political leaders often enough. It is time there was much greater truth and honesty on the part of the Government and Ministers with the people. The reality is that we still have a long way to go to get the public finances on a sound and sustainable footing. That is the mandate the Government has and it cannot afford to drop the ball midway. It is worth remembering that Ireland is not projected to exit the European Union’s excessive deficit procedure until 2016, for example; therefore, a great deal more work has yet to be done. This budget was introduced on 15 October because of the new EU budgetary procedures which were agreed in the past two years or so. It is right that we share information with other EU member states and that the European Commission has a much more interventionist approach in vetting budgetary measures in all member states. It is not right, however, that our draft budget figures are shared with the European Union, the IMF, the ECB and, on occasion, other EU member states before there is any substantive discussion in this Parliament. Prior to 2011, it was a frequent demand of the then Opposition of Fine Gael and the Labour Party that the budgetary process begin in the Dáil and Oireachtas committees long before budget day. This would be the mature, transparent and democratic way of approaching our budgetary planning. In 2009 Deputy Richard Bruton said in Business & Finance magazine that a Fine Gael Government “will make the budgeting process much more transparent and give the Dáil a clear and meaningful role. The current budget set-piece debate is little more than political theatre. The budget is presented to the Dáil in December as a fait accompli to be rubber-stamped by the Oireachtas. It commits taxpayers to huge spending programmes without any information as to what this spending will achieve and no targets as to how the spending will be judged.” I agree with the sentiments expressed by the Minister, but, unfortunately, nothing has been delivered to honour this commitment. Instead, once again, elected parliamentarians must hear of budget measures via the Irish Independent. We are forced to race into the Dáil Chamber to participate in limited debates, with little or no information, and then vote on measures that are to become law at midnight. We have no opportunity to offer constructive alternatives or suggestions. Is this a reasonable, rational and responsible way to plan how best to spend taxpayers’ money or to hit vulnerable taxpayers at a time of great stress? I believe this is not the way to do it. The worst example in yesterday’s budget was the reduction in tax relief for medical insurance premiums. We were told in the Dáil by the Minister for Finance that this would only hit wealthy people with gold-plated insurance schemes. Virtually no reliable information was made available to the House but we have since learned that the measure will lead to a net increase in insurance premiums for up to 90% of policy holders, affecting up to 1.8 million people. The claim that only gold-plated policies are affected is nonsense and misleading. What are we to do? The measure entered into force at midnight after a mere 55 minutes of debate in the House. It is far from a transparent and open process and our citizens deserve better. Die Welt links to WSJ Germany on Apple in Ireland along with a tax table, the giants along with Ireland and Bermuda. Steuerlast is tax burden. We are getting coverage where it will be noticed. http://www.wsj.de/article/SB10001424052702303680404579139184052920424.html?mod=WeltFeed @ Mickey Hickey FYI http://www.kpmg.com/global/en/services/tax/tax-tools-and-resources/pages/corporate-tax-rates-table.aspx Clicking on the footnotes column gives the detail. The tax table shown in your link is misleading in respect of Germany. If it were correct, Germany could hardly object to the Irish tax rate which, unlike the German, is entirely transparent. The most notable trend is the overall reduction in corporate tax rates, especially in the UK. “If the Commission underestimates the output gap because it overestimates the natural rate of unemployment, then it will overestimate the structural budget deficit, and the country concerned will come under considerable pressure to undertake further austerity” 2 snippets from 2010 for a bit of context http://archives.tdg.ch/actu/economie/charles-wyplosz-reaction-marche-risque-dette-souveraine-injustifiee-2010-02-05 “Selon le professeur Charles Wyplosz, exiger aujourd’hui des plans de rigueur relève d’un non-sens économique. Le problème de la dette croissante est à régler sur au moins trente ans. ” “Christine Lagarde, a precise, mardi 2 fevrier (2010) a la commission europeenne le chemin qui va emprunter la France pour reduire de plus de 5 points don deficit et le ramener des 2013 sous la barre des 3% du PIB. The debt problem is going to take 30 years to fix. And Christine thought France would be out of the merde by 2013. The latest date is 2015* (*subject to weather conditions) There is a quicker route to redemption and that is to leave the Euro, devalue, restructure the debt to the ECB and cut social spending so as to move to a primary surplus. @ Tull there’d still be all the personal debt, wouldn’t there ? @ Mickey Hickey, I became more aware via looking things up via your wsj link, that our wiki/Körperschaftsteuer_(Deutschland) is only 15%, so no big deal to irish 12.5%? Point is, corporations also pay the wiki/Gewerbesteuer_(Deutschland), which is, dependent on the Hebesatz, and adds another 7 -12% on top of that, going to the locality. What I see in general, is a trend to “harmonize” this via corporate taxes, taxes on dividends, capital gains, somewhat north of 27%, and reduce the tax arbitrage, and the social waste of the business associated with that. That does cost me some 15% more of my base load income, but I kind of expected that in decisions I took back around 2003, and I did and do not lament. The country needs money for social goodies, and it has to come from somewhere. Fixing Tull’s quote for him/her: “There is a quicker route to redemption and that is to leave the Euro, devalue, restructure the debt to the ECB and cut increase corporate and personal taxation rates so as to move to a primary surplus.” Ernie , Sorry the world does not work that ways. I might agree to maintaining social programmes if I could close down the social science faculty of various Irish universities and clear out a few Kulaks. The question really is whether the financial circumstance of the country will force a change in the behaviour of Irish politicians who are responding, in turn, to the majority demands of the electorate. http://www.irishexaminer.com/opinion/columnists/michael-clifford/an-unhealthy-price-paid-for-entitlements-246798.html The jury is still out. The following from page 8 of the Fiscal Advisory Council is of interest in this respect. “The Budgetary Rule must be met each year. Compliance is assessed based on data published in the following year (released alongside Department of Finance forecasts). Given this sequence, the mandate means that the Council assesses compliance with rules after the event (ex post compliance). Given the lags involved, the Council will monitor the likelihood of compliance with the Budgetary Rule on a forward-looking basis based on available information. This should be useful in setting policy to ensure that the rules are met”. Indeed! However, the bottom line is whether politicians and electorate will succeed in emerging from their mutual reciprocal deception and agree to consider policy options on an”evidence-based” foundation. DOCM, We need someone with your chrisma and intellect to save us. I would like to send 20 euro to your campaign fund for the next GE in cork NW @ TMD Why do you not stand yourself and sell your permanent solution to Ireland’s problems (and see how far it gets you)? “There is a quicker route to redemption and that is to leave the Euro, devalue, restructure the debt to the ECB and cut social spending so as to move to a primary surplus.” @DOCM Michael Clifford is right about entitlement but that should be the least of our concerns. Comments expressed by a senior economist in Limerick this evening, suggest that if further bank recapitalisation is necessary following ECB stress tests, there is a view that we should or might ‘lob’ the 25 billion cash reserve into the banks. It was not clear if that was his recommendation, but he believed it was possible that it could happen. This country appears stuck in a condition of insanity, that shows no sign of abating. DOCM, I might take you up on that. Perhaps we could run in the same constituency . Me on an independence ticket you on a quisling platforn Interesting discussion/debate here… http://krugman.blogs.nytimes.com/2013/10/19/do-currency-regimes-matter/?_r=0 Michael Clifford raises an important point, but he could have said a bit more about the free barrels of beer. The global drinks industry engages routinely in predatory marketing, designed to make brand loyalty part of the third level curriculum. As the student societies have fallen into the hands of cynical opportunists and party hacks, the exercise is like taking pennies from blind man. Meanwhile the most powerful third level institutional guardians were so focussed on exploiting the opportunities for patronage, contract fixing, and ‘networking’ that they have failed to take basic steps to protect the student body from exploitation. There has been a gross failure of governance in both private and public sectors, as may be expected when the main players are in bed with each other. The entitlement issue is a central one, but, but any analysis which purports to reduce governance issue to one solely involving politicians and voters is a neoliberal creation. That approach can only serve to misrepresent, and perpetuate, our current dilemma. JP Morgan will pay the 13bio, because it is only money, and that can always be regained. What Wall St won’t do is give up its control of Washington, and of Main St. Michael Clifford concludes his piece: Isn’t it amazing, that despite all we’ve been through in recent years, how so little has changed? In The Irish Times Noel Whelan writes on Michael Noonan’s speech at a tax conference as a ‘tour de force’ and looking at the two ministerial budget speeches this week, they were competently delivered but this contrasted with a reality: the poor software (not a reference to computer code) with an accounting system unfit for purpose, poor policy development and implementation and on accountability, a fiscal council structure that is designed to create little trouble. Contrast that with Canada’s equivalent: The mandate of the Parliamentary Budget Officer is to provide independent analysis to Parliament on the state of the nation’s finances, the government’s estimates and trends in the Canadian economy; and upon request from a committee or parliamentarian, to estimate the financial cost of any proposal for matters over which Parliament has jurisdiction. The office was created in 2006 and the first PBO brought the government to court seeking documents on spending cuts as explanations were deemed inadequate. There are further battles ahead but it will be positive for taxpayers in the long run. The Wall Street Journal piece on corporate taxation has little that has been known for a long time. As recently as early Nov 2012, the Irish conventional wisdom was that there was no risk of any downsides to facilitating massive tax avoidance. The WSJ reference should be “little that has not been known…” @ Michael Hennigan When the Sindo leads with the comment that ministers, post budget, are “fighting like cats and dogs”, a question mark must be raised even in their own minds with regard to continuing with the traditional budgetary procedure. As Chris Johns pointed out in his IT column “Within a medium-term framework, the tweaking of fiscal and spending decisions should be a continuous, through-the-year process.” The pressures on spending in the health area are bound to make this de facto the case, especially if there is no pick-up in growth. Countries such as Canada, and Sweden, did not reach the current level of reform in their budgetary procedures overnight. I agree, however, that antiquated accounting procedures are a major constraint. The resources devoted to a mindless management approach, attempting to aggregate public services when dis-aggregating them and adapting management to departments’ disparate requirements should be the objective, could usefully be devoted to improving these accounting procedures instead. Again, gaining control of the runaway behemoth that is the health sector may prove to be the catalyst. It is also far too early IMHO to give up on the Fiscal Council. Its 2013 report is a very educational read – indeed, a model of its kind – and it does not shy away from raising questions with regard to the agreed procedures, whether Irish or EU. @tull Maybe you’ve got some books you’d like to burn while you’re at it? Ernie, No. Has anybody ever bought a copy of one of your books, other than to pass pen of your exams? Tull, OK, so I’ve got it. No book burning. That would be bad. But wiping out whole areas of study from the university is A-OK. Ernie, Good idea. It is my understanding that the application of leeches, phrenology, creationism and the notion that the earth is flat are no longer part of the curriculum. Indeed. Which is as good a reason as any I’ve heard to replace Philosophy and History with Departments of Innovation and Excellence. WSJ piece on this-shout out to the fiscal council too…good links embedded. http://www.bruegel.org/nc/blog/detail/article/1176-blogs-review-the-structural-balance-controversy/ WSJ link “But the figures for Ireland are equally strange. The commission estimates are that almost all of Ireland’s actual deficit is structural, attributing just 0.6 percentage point of the overall 7.5% deficit to cyclical factors. The country’s current unemployment rate, 13.3%, is actually below the commission’s estimate of the natural rate, 14%. And the economy is seen running at full capacity, with almost no output gap. Next year, the commission predicts the Irish economy will actually be operating above capacity.” http://blogs.wsj.com/brussels/2013/10/23/surpise-eu-estimates-see-irish-economy-close-to-full-capacity/?KEYWORDS=ireland The ILO have been doing work on this for quite some time. See macroeconomics beyond the NAIRU: http://www.amazon.com/Macroeconomics-Beyond-NAIRU-Servaas-Storm/dp/0674062272 Comments are closed.