Latest Irish Fiscal Advisory Council report out

Here.

It is summarised in the FT by Vincent Boland, and the detailed appendices are worth reading, particularly the discussion of the estimation of potential output.

Comments

comments

Author: Stephen Kinsella

Senior Lecturer in Economics at the University of Limerick.

19 thoughts on “Latest Irish Fiscal Advisory Council report out”

  1. The council says there are three main reasons to stick to the €2bn adjustment plan that has been agreed by the bailout troika: (i) to reduce risks surrounding debt sustainability by putting the debt-to-GDP ratio on a firm downward path; (ii) to help to ensure that Ireland successfully exits the Excessive Deficit Procedure in 2015; and (iii) to protect hard-won gains in borrowing capacity.

    There are three main reasons for Minister Noonan to ignore the recommendation: (i) the pasting the governing parties got in the May elections and the Labour Party facing the grim reaper will insist on some relief on taxes and spending even at a cost of Fine Gael having to raise taxes on its core tax base (excluding farmers of course); (ii) taxes have risen by 2.9% in the year to May and the increase in jobs and construction activity is likely to maintain that trend; (iii) Noonan has spoken about adjusting tax bands so often, he would look stupid now if he abandoned that promise.

    The more interesting but related story is not only the IMF cutting its US GDP forecast to 2% for 2014 but it said: “Potential growth is forecast to average around 2% for the next several years.”

    The US economy grew an average inflation-adjusted 3% between 1948 and 2007 – the 1% difference is huge over time.

    Every new year since the end of the recession in mid-2009, there has been some grounds for optimism that the recovery would hit a sustainable path and then it fades.

    So coupled with the Eurozone’s dismal outlook, keep the champagne on ice folks. 🙁

  2. The fiscal adjustment is meant to be a residual required to meet a given deficit target and not a target in itself , although the latter has become the norm, so leading to government spin about the actual degree of adjustment imposed in a given Budget. This is an even odder approach given that Ireland has largely surpassed the deficit targets in recent years by a combination of overestimating debt interest and capital spending and underestimating non-tax receipts, notably from central bank profits and fees from the ELG scheme.
    So it makes little sense at this point (when we do not even have data on GDP for q1) to say that a €2bn adjustment is definitely required for 2015 or that we can get away with a lower figure.

  3. Dan,
    given your logic why is the fiscal council staking its reputation on a 2bn adjustment. If “below 3%” required an adjustment of say 1bn what is the point of doing 2bn? What is the incremental gain to “credibility” of doing the full amount?
    Equally, if it worked the other way and 3bn was required to hit a target, do you retain cred by only doing 2b?
    And finally, if Draghi is going to do all it takes to save the euro, what is the point of a fiscal adjusment at all?

  4. The core question, if one accepts the pragmatism of reasonable fiscal prudence, is HOW it is done?

    On the HOW, the present somewhat ideologically oriented IFAC has no mandate.

    We need an independent Citizenry-oriented FAC with a mandate on the HOW.

  5. Interesting report from Ian Traynor of the Guardian on the state of play with regard to the nomination of a new president of the Commission, the outcome of political process associated with which is likely to set the context for Ireland’s October budget.

    http://www.theguardian.com/world/2014/jun/17/italian-pm-renzi-austerity-juncker-europe

    It seems unlikely that there can be an agreement except in the context of a package deal on various nominations, including that of President of the European Council (the post being vacated by Van Rompuy) and the allocation of the senior portfolios in the Commission.

    On the other hand, it is hard to see what country or leader would benefit from seeing the current dispute fester over the summer months.

  6. @Michael
    From 48 to the late 70s the Americans rolled out petrol and the infrastructure that went with it. Nothing ever grew economies long term like petrol. Now it’s all baked in to the model. Nothing ever replaced it. Financialisation became the driver and it does generate growth but with shocking hangovers.

  7. Once again no comment about the overly optimistic govt projections. The FC is a toothless, only conservative quango.

  8. The whole point about the 2 b target is, that if that is not kept, people would take bets, in terms of rate spreads, when the Troika comes again to Dublin.

    Michael,

    the difference between the 3 and the 2% is just the growth of the US working population, then and now. This is perfectly normal.

    DOCM,

    Cameron had long enough time to organize a blocking minority against Juncker, and it seems he has failed.

    Why Renzi believes that Germany would have to spent 2 cents of political capital on Juncker, baffles me.

    guardian “That’s Renzi’s condition for agreement on any [commission] candidate,” said Hannes Swoboda”

    Both are delusional. Neither of them has any veto rights, voting in the European Council is exactly defined, and the grandstanding of the stupid little criminal twits is just hilarious.

    On the side,

    remember the AfD with the 4 economics professors on the european list? One of them (Henkel) signing Kevin O’Rourkes manifesto.

    Well, today, one of her poster girl entrepreneurs, Frauke Petry, Saxony had to sign for personal bankrupcty http://www.zeit.de/politik/deutschland/2014-06/privatinsolvenz-frauke-petry-afd

    reminds me of the 2 false doctors, the FDP had in the last EP, Greek Jorgo Chatzimarkakis, and Silvana Koch-Mehrin

  9. Whatever your economic _ism, it has to be hauled by a locomotive. That locomotive is called ‘Permagrowth’ and this loco is powered by hydrocarbon fossil fuels (either directly or indirectly).

    I believe we may be having a problem with the fuel supply – since about 2005 or so. This results in a faltering of economic ‘growth’ – that is, the loco slows down. You want the loco to go faster? Then you need a lot more fuel. And of course, the quality of that fuel matters – a lot.

  10. Brian,

    I think, GDP growth is pretty limited by the tiny technological progress of 0.5 – 1%/a, and the demographics, which will not change for good reasons.

    There are also non-hydro carbon fuels, which are exspecially very important in central Europe and China, and

    From the central european point of view we have decoupled our economic growth from energy consumption since the 1970ties, but I would be interested if you show us a plot or data table, that refutes that claim.

    Carbon consumption has to be reduced massively in the long run, because it most likely causes global warming and is a massive risk for more drastic climate changes.

    China must reduce, because it causes massive smog, and denser populated India can never ever get to such a usage per capita.

    And for all, fuel quality is of course an important consideration, but national security of the energy supply at least as much.

  11. francis, thanks for that.

    “From the central european point of view we have decoupled our economic growth from energy consumption since the 1970ties …”

    Really? Now if you had allowed that we had ‘offshored’ a significant proportion of that economic growth: I’m with you. Of course if you also mean the ‘financialization ‘ of European economies. I’m with you also.

    The trend lines for the increases in global population growth; food production and energy use are all exponentials. None are sustainable in a physical system. But the PR wallahs say otherwise. So Carpe Diem!

    Forget about this climate nonsense. Observe closely what the energy production companies are doing. They must invest or go out of business. Global investment needs for the energy industry are approx $ 2.5 trillion (trillion!) per annum – to maintain our existing energy output and to discover new resources and bring them to production. Whose got $ 2.5 Trill, then? Central Banks have. And to whom are they giving it? It sure ain’t the energy producers.

    Its not exact, but close enough to be uncomfortable. For each unit of reduction in fossil fuel consumption, your economic output will decline proportionately. Its reversing down that exponential I mentioned above.

    This nasty pfennig will eventually tinkle on the marble tiles. And when it does – watch out!

    Cheers.

  12. @ Francis

    “From the central european point of view we have decoupled our economic growth from energy consumption since the 1970ties”

    Hasn’t Germany, like the rest of the rich world, outsourced a good whack of its manufacturing to China? Where is all the crap sold by Tchibo and H&M made ? Is it Oberbayern ?

  13. Brian Woods Snr. , seafoid

    What part of outsourcing to China and Eastern Europe could not be revitalized within 6 month in the father land, if there would be a need?

    Your “crap sold by Tchibo and H&M” is bought by conscious, repeat customers, who certainly do not need your lecturing. I also recently bought a Dacia, and not a 50% more expensive Volkswagen, or 100% more Mercedes. Everybody makes his own decisions.

    Let’s do the relevant numbers first
    Germany has reduced its CO2 output from 1990 – 2011 by 25.6% .
    (http://www.umweltbundesamt.de/daten/klimawandel/treibhausgas-emissionen-in-deutschland)
    That is about 1.2% per year. The target is to be “carbon neutral” by 2050, requiring 74% / 39 years, just to make the calculation understandable, or 1.9% per anno. Maybe it takes a few years longer.

    Oil prices rise by 8% nominal per year, minus 2% inflation, 6% net. In former times gas prices were formally coupled to oil. Now that was abandoned and prices cut.

    GDP per capita growth of Germany was within the numerical noise the same for us and the rest of the western world, especially the US.
    And I care very little about GDP numbers.

    Energy companies I Germany are actually pretty frustrated and dealt with beyond borderline unfairly (disclosure: I have and keep some token invest <1% to get the yearly statements and on principle)

  14. “Global investment needs for the energy industry are approx $ 2.5 trillion (trillion!) per annum ” may look like a big number for you, it it about 10x the Irish GDP

    but, first rule, compared to what?

    From the top of my head (go to CIA world fact book for specific numbers), global GDP is 90 t(rillion), about 20% of this is investment/replacement, and 15% of that going to energy is ZERO problem.

    We dont have pfennigs here anymore, and I dont give a damn about the marble tiles in my kitchen, if the african german friendship club again gets noisy at 3 am, waking me from sleeping with an open window.

  15. Billionaire Wilbur Ross invested €290 million in Bank of Ireland shares in 2011. He sold his shares this year, making a profit of €500 million. That is just how the system works.

    In Dublin, entire families have to live in a hotel room and more and more people are forced to sleep on the street because they are too poor to be able to pay for accommodation. That is just how the system works. The same system.

    The 85 richest people on the planet own as much wealth as the poorest 3,500,000,000. That is what happens when the system works.

    There is something radically wrong with the system.

    http://www.irishtimes.com/news/social-affairs/power-and-privilege-how-the-wealthy-church-and-global-capitalism-hold-sway-1.1838379

  16. @David O’Donnell

    “Billionaire Wilbur Ross invested €290 million in Bank of Ireland shares in 2011. He sold his shares this year, making a profit of €500 million. That is just how the system works.”

    Any news on whether the Irish State will get 33% Capital Gains Tax on that €500 million Wilbur gain. €165 million exchequer receipt would be nice, if we get it!!!

  17. Michael,

    a higher debt level produces an extremely compounded higher interest to be paid, for many years.

    Every time we phase out a 6.25% old 30-year Bund, and replace it with a smaller, new 2.5% (that is 1.7 % after tax, and minus 0.3% after inflation) I celebrate

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