NERI Summer 2014 Quarterly Economic Observer


5 replies on “NERI Summer 2014 Quarterly Economic Observer”

The NERI forecast is around consensus for this year and next but differs in terms of fiscal policy, with a belief that the deficit is largely cyclical and not structural as proposed by the EU. The net €800mn fiscal adjustment for 2015, as quoted in media headlines, is predicated on an additional €1bn stimulus , funded off balance sheet.

The strategy proposed by NERI makes a lot of sense.
No tax cuts, fiscal adjustment to comprise €800 made up of tax expenditure removal and related, a fund to stop parts of Ireland becoming skid-row country and an investment package (that would hopefully not be mangled by skimmers and favoured contractors).

[Not everybody might agree that Ireland’s Debt/GDP needs to be reduced. Why, for instance, should Ireland’s Debt/GDP be lower than that of Italy. The whole EZ focus on reduction of Debt/GDP in a crisis situation has continually made the situation worse.]

Also of interest is chart 2.5, that outlines labour’s share of GDP, which struggles to get above 50% of GDP, except at the height of the crisis when presumably profits, rents and self-employed incomes were low. So have profits, rents and incomes now recovered so that they are back to normal business while workers compensation permanently stuck at the 50% mark?
In other words, is private sector profitability being achieved and enhanced on the back of low wages and no wage increases?
Never waste a good crisis!

There seems to be a fair degree of consensus that Italy’s debt/GDP ratio should preferably be far lower than it is now. It would be odd to argue that Ireland should dig its way into a hole of similar dimensions.

It is worth observing that as a relatively large economy Italy is caught in a trap that affects a small open economy such as Ireland’s much less severely.

The GDP multiplier on government deficit spending in large and closed economies tends to be much greater and longer lasting than for SOEs. The effects of cuts in government spending on the debt/GDP ratios of large economies tend to be cancelled out to a great extent by reductions in GDP, making it very difficult for countries like Italy to cut and tax their way to healthy public finances.

This effect is much weaker for SOEs like Ireland, so while spending cuts and tax increases do feed back into lower GDP it is actually possible to cut and tax our way to a balanced budget or whatever other target we may want to hit. The cumulative cuts and tax increases that we have to make to achieve this are much greater because we have spread the adjustment over several years and still greater because we have bailed out investors in Irish banks. Spreading the process out over an even longer period seems unwise, unless we anticipate a crisis allowing us to abandon some of our debt load.

“There seems to be a fair degree of consensus that Italy’s debt/GDP ratio should preferably be far lower than it is now…”

That is true but why the need for everybody to reduce Debt/GDP to much lower than the present average in the midst of a crisis. Would it not be better for the outliers to reduce first, while the other maintain a stable ratio.
The point I am trying to get at is that the whole Debt/GDP reduction impetus is above all else a creditors agenda; and not an agenda that is the interests of the all. I do however accept that we bound hand and foot by this agenda, at least until 2017 when matters in the UK may force a change of policy on Ireland.

I also note from Appendix 7.1 that average weekly earnings in both the public and private sectors fell in 2013. Why is this? I would have thought that basic rates of pay had stopped falling and that, in the private sector at least, some increased hours at overtime rates was beginning to happen.
Is this reduction in weekly a function of the move to part-time work at lower wage rates?

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