The Irish Economy
Commentary, information, and intelligent discourse about the Irish economy
The June 2015 Fiscal Assessment Report from IFAC is here.
The report argues that the proposed 0.3% adjustment in the forecast structural deficit in 2016 is too low and in any case includes ‘tax buoyancy’ which is against the ‘letter and spirit’ of EU rules. IFAC also point out that the Government’s medium term projections , showing substantial falls in the structural deficit , are not consistent with stated plans for spending and taxation, nor with the demographic pressures on certain expenditure categories.
There is an inconsistency in IFAC’s view on the fiscal stance. On current EU estimates the economy is operating above potential (the output gap in 2016 is forecast at 1%) which argues against any fiscal stimulus. Yet IFAC believes that the economy is still operating below potential ( a reasonable assumption one would think given the unemployment rate) which makes it problematic to oppose a modest stimulus against a backdrop of a falling debt ratio.
Thank you, Seamus, for providing this link. It’s amazing how much administrative and intellectual effort is devoted to (and, in effect, wasted on) these fiscal contortions. If a small fraction of this effort were devoted to developing simple income and funds flow statements and balance sheets we’d all be better informed and far better off. Instead we get a variety of fiscal corsets depending on the alleged fiscal obesity of the subject country. All governing politicians, and particularly those facing election, have incentives to game this system and to loosen stays that will maximise short-term popular appeal. The European Commission contributes to this by identifying stays such as the ‘investment clause’ and the ‘structural reform clause’ that may be lossened conditionally.
I know we live in a pretend democracy, but this technocratic and intellectual arm-waving is moving fiscal policy even further from any effective democratic scrutiny, restraint and accountability.
I was also bemused by the box on the statistical treatment of Irish Water (IW) – p41. The estimates of household and non-household revenues and the government subventions appear to be broadly in line with the revised IW revenue model issued by the CER at the end of March. But I’m at a loss to understand how IFAC gets the GGB impact by subtracting IW’s total operating and capital expenditures from the total of the revenues and subventions. I’m assuming the difference is between what the impact would be if Eurostat were to remove IW from the government’s books and the current situation in advance of Eurostat’s decision.
The direct subventions won’t be counted in the GGB if Eurostat gives the thumbs up, but this money will be provided by general taxation. In addition, taxpayers have taken a hit by exempting IW from commercial rates. And funding of capital injections in excess of net borrowing will surely be equity injections funded by taxpayers. And taxpayers are funding the €100 water conservation grant to all households (this could cost €160 million a year) which everyone will use by rushing out to buy water butts and to install low water use loos.
It will be surprising if housholds will end up paying as much as a net €150 million a year (out of a total estimated IW revenue requirement of almost €1 billion). The CER’s credibility is totally in tatters. It would be impossible to devise a more inefficient and inequitable system of water charges. And I’m not sure the fiscal impact is being properly quantified – though I’m open to enlightenment on that front.
IFAC makes two good points:
The government has played fast and loose with the actual requirements on transparency; it is required to provide ‘no policy change” and separate ‘policy envisaged’ projections so that the voters can see what they assume and what they intend. But this has not been done. Maybe there is an election coming.
Secondly, there is in effect no provision at all for inflation in the provision of public services including total PS pay, just €300mn to take account of increased demographic requirements (growing & ageing population). IFAC reckons this shortfall is up to 4% of GDP. This might be overstating the case. Even so, these are big, real terms cuts per capita in the pipeline, not ‘protected’ services as claimed.
But as, Dan McLaughlin notes, IFAC wants to have its cake and eat it on the need for cuts. The low level of capacity utilisation means there is no prospect of overheating (except in house prices in and around the capital, which is a function of lack of supply). Government investment is projected to fall close to 1% of GDP, not even matching the capital consumption rate.
Government investment would sustain the recovery in a more balanced way, removing shortages in areas such as housing and infrastructure and so produce a more stable tax base.
Fiscal rules that even trained economists have difficulties in interpreting are, almost by definition, neither adequate nor appropriate given the need to convince ordinary punters of the necessity for them. At least one IMF staffer agrees; and almost certainly the organisation itself.
The Government “is not fully compliant with the rules [EU fiscal rules] and as we look further there isn’t really a plan at all,” Prof John McHale, the IFAC chairman, said.
This report is welcome as I had said in 2011 that Michael Noonan had created an “intellectual ornament” with no powers that could only be a nuisance for Dept of Finance mandarins. However credit where its due and whether right or wrong on some issues, it has established credibility by daring question the sartorial state of little emperors.
For too long there has been reluctance to deliver bitter truths — it’s good to see a change of tune.
The Council suggests that the Department of Finance economists are either incompetent or doing the bidding of their political superiors. After the bubble had bust in 2009, the late Garret FitzGerald, former taoiseach, had called on the Department to hire a team of economists to ensure that credible data was available to policy makers — and maybe it was in this case but was binned?
It says in respect of the Stability Programme Update (SPU) 2015 which is a report required by the European Commission annually, that the current report’s “forecasts indicate that the fall in the structural budget deficit in the Government’s plan falls short of the requirements of the European Commission’s Budgetary Rule in 2016 on a forward-looking basis.
“Compliance with the Expenditure Benchmark (EB) would also be called into question if tax buoyancy arising from the proposed budgetary package for 2016 is excluded. The inclusion of such buoyancy appears to go against the letter and spirit of the EB rule…Revenue growth based on temporary demand effects of an expansionary fiscal package does not meet this criterion.
“The Council is strongly of the view that Government plans should be based on expected compliance with the fiscal rules and that the reasons for any deviation should be clearly explained,” the Council says.
It adds that “the forecasts for government spending in SPU 2015 do not present a full picture of the likely costs of demographic ageing and cost pressures in delivering existing public services. Published tax revenue forecasts do not take into account Government commitments to reduce taxes.
Given these shortcomings, the deficit projections in SPU 2015 do not provide a useful picture of the fiscal position after 2016. Realistic medium-term budgetary projections are essential to underpin budgetary planning and to avoid a repeat of past mistakes.
“Non-interest government spending is projected to fall by over 5 percentage points of GDP between 2015 and 2020. This would appear very challenging to achieve while maintaining current services and meeting demands for increases in public services. The budgetary position would be less favourable if the Government’s projections are adjusted to reflect stated policy intentions. Under the Budgetary Frameworks Directive, plans should be provided both on a no-policy change basis and also based on ‘policies envisaged’ by the Government.”
Contrary to Dan, I think IFAC’s approach to economic potential is correct. My perception is that most of our unemployment is now structural, in the sense that it is not due to normal cyclical factors, but that the structural deficit is being resolved surprisingly quickly by growth in exporting employment and consequential growth in indirect and induced employment in domestically traded sectors. If the employment deficit is structural, then stimulus is an inappropriate response, no matter how high unemployment is.
The IFAC are being a bit niggardly in conceding only that the deficit is on target to be under 3% in 2015.
The budget target for 2015 is 2.7% (set in October last).
In the first 5 months of 2015, tax receipts were 734 million euros above target (profile) and spending was about 300 million euros below target (profile), resulting in the deficit being almost 1,050 million below target (profile).
Even if there is no further improvement in the rest of 2015, the deficit in 2015 will be about 2.1%. If the improvement in the first 5 months of 2015 is maintained for the rest of the year, the deficit will be about 1.5%.
The deficit is now so far below profile that it isn’t a deficit – we ran a decent surplus for the first 5 months of the year.
Is the IFAC a feasible organisation in a country like Ireland? The pattern of wild unpredictable changes in our fiscal fortunes is now so entrenched that any sort of macroeconomic planning beyond what happened 6 months ago seems impossible.
“we ran a decent surplus for the first 5 months of the year.”
is that right? has that been reported more widely?
Of interest in the context of this thread, a report on EU arrangements by the IMF.
It’s all at the above link. Remarkable turnaround from same period last year.
Yes, the exchequer ran a surplus of €640mn to end- May. However, there are a number of one -off capital receipts involved, amounting to €2.1bn, reflecting the sale of Permo notes and equity plus the delayed transfer from the NPRF of the proceeds from the sale of BOI notes. The Central Bank surplus is also bigger than projected.
The current budget ran a €1.5bn deficit. Finance has already revised down the expected current deficit for the year, in part due to a forecast €1bn overshoot in tax receipts.
Itr’s amazing that any discussion emerges in the comment threads when comments are kept in the moderation queue for days. It’ll be interesting to see how long this one is held. Though on second thoughts it might disappear as other have. I realise we’re dependent on the goodwill of the proprietor, but I think this board has outlived whatever limited usefulness it might have had. The usual powerful and influential special interest groups, having been through a bit of a white-knuckle ride on occasions duing the last 7 years, are back in charge (and their lackeys, useful idiots and cheerleaders are once again in their well-padded seats). There’s a bit more money flowing through the system again and, for the majority of households, the endemic and pervasive gousging by the special interest groups is a bit more manageable. Until the next blowout.
Of course, now that the EZ Powerz have agreed to write off the 40% segment of the 42% expropriated from the humble Hibernian serfs, 2% of EZ ECB cap., the numbers in Angela’s non-theoretical anti-empirical Fiscal Corset, will change wonderfully.
Comments are closed.