SGP Revised – again

The latest playbook for the Stability and Growth Pact has been published by the European Commission.  Here is a link to the document along with two related press releases.

We now have this little matrix:

The Commission’s methodology puts Ireland’s output gap at close to zero so we are in “Normal times".  With public debt above 60 per cent of GDP this means that an improvement of greater than 0.5 per cent of GDP in the structural balance is required.

The numbers released with October’s budget would suggest that Ireland is on schedule to achieve this.

This shows an average annual improvement in the structural balance out to 2018 of just over 1.0 per cent of GDP. But these numbers come with a massive health warning.  The projections in the outlook are set in terms of the following qualification:

As there are still uncertainties with regard to the interpretation and implementation of the fiscal rules, there is a technical assumption that voted expenditure ceilings remain fixed at 2015 levels. Similarly, taxation measures for the outer years are not embedded in the budgetary numbers at this stage.  Priorities, which have been outlined in the Budget and Expenditure Report, will be addressed in subsequent Budgets when there is technical clarity around the quantum of fiscal space.

So no provision has been made for the promised tax cuts and expenditure increases that are being wheeled out on a regular basis.

The Commission document has lots of stuff on how they intend to account for the unknown impact of future reform measures on the unknowable structural balance. If there are going to be new caveats and qualifications every time a country is close to breaching the rules there is a risk that the SGP might become complicated!

From Ireland’s perspective it must be realised that while rules can be good they can never be perfect and there appears to be a risk that our fiscal policy becomes fixated on doing just enough to satisfy the SGP rules.  There are frequent references to the amount of “fiscal space” that is available.  This will be set relative to the Expenditure Benchmark which is likely to get increased attention when we become subject to it in 2016 upon leaving the EDP.

However, with a continuing deficit and a debt north of 100 per cent of GDP there is close to no fiscal space.  In the run-up to the crisis Ireland’s budgets satisfied the rules that were in place at the time. We reached and then stayed at the MTO of a balanced budget but that was no protection against the budgetary collapse that occurred. 

The updated rules might be better but there is no evidence that they are a panacea. If they were they wouldn’t need constant updating.

8 replies on “SGP Revised – again”

@Seamus Coffey

‘… no evidence that they are a panacea.’

No evidence that such ‘subjective rules’ of an anti-empirical ordo-liberal swabian housewife’s thumb are anything other than dangerous ideological nonsense.

Table 12 may be a good illustration of the adage that economic forecasting is a close substitute for astrology!
However, the message seems to be that Irish taxpayers will be expected to pay an increasing share of GDP for servicing national debt while spending on public services continues to decline. I wonder if those growing primary surpluses will be politically sustainable.

The main problem with the 60% focus was that it disregarded the build up of private sector risk which ended up on the sovereign tab. And the markets are aware of that. Credibility requires honesty about the state of affairs.

Is there some sort of omertà on this?: http://on.ft.11312581

Is This just another case where you hope that left-wing policy proposals will disappear if you ignore them (because you never encountered such ideas while you were boning up on the fine points of Milton Friedman)?

Given the (limited) influence of this site, why is there nothing on your front page about the Syriza proposals? If they are flawed, let that come out on the comments? What are you afraid of?

Ernie, the first link does not work, the second brings not much enlightenment – from a political economy perspective. The omerta you allude to is more obvious on the UNITE site – not here.

We entered a new (quite un-enlightened) era of politics some time back. The olde concept of Right + Left is gone. The Right saw the light and embraced crony Capitalism – as did the clever Left. It resembles a Viking-like rape, loot and pillage raid on the state revenues paid over by taxpayers. It has been a brilliant and heroic success. And, regrettably, is set to continue for some time since organized labour is one of the useful idiot supporters* of this fiscal looting. Very inconvenient that.

The author is living in a time-warp. His economic policy ideas are just as daft as Milton’s. Social transfers are essential to prevent outright poverty and destitution. Times were that capitalism was able to provide a genuine surplus, some of which could be captured by the state by way of taxation, and re-distributed. Those days are long over. Crony capitalism provides only a surplus of debt, so the state has to BORROW to pay the welfare transfers since so many are demanding (and the government are promising) reductions in taxes and charges. So, whence the state’s income? New borrowing (including the ReFi of existing) is the exact mathematical equivalent of reducing your future income, not increasing it. That’s guaranteed. What’s not guaranteed is the steady advance in economic activity and output such that it trumps the debt.

Who are the complete idiots here? Who are the mendacious knaves?

* IFA; IBEC, ICTU, etc., etc., etc. The list is a long and sad one.

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