Draft SPU Update: Risks

The Department of Finance has released a Spring-less Statement (.pdf), showing some interesting debt dynamics projections and a really nice risk-assessment section (see page 26) and their likely impacts on the Irish economy. Brexit figures highly, as one might imagine, but so do other external demand shocks and domestic issues, and the fiscal risks associated with not meeting our climate change targets. The Department writes:

There are fiscal risks associated with a legally binding EU Effort Sharing Decision on climate change covering the 2013-2020 period. Ireland is obliged to achieve a 20 per cent Greenhouse Gas emissions reduction (compared to 2005 levels) in certain sectors. Current EPA projections estimate that Ireland will not achieve this reduction and failure to comply may incur costs of hundreds of millions through the purchase of carbon credits until such time as the target is complied with. Similarly, further new costs may arise in the context of a new EU climate and energy framework for the period 2020-2030, which will set new emissions reduction targets.

Scary stuff.

By Stephen Kinsella

Senior Lecturer in Economics at the University of Limerick.

19 replies on “Draft SPU Update: Risks”

I wonder what advice, if any, was given to Alan Kelly about the cost implications for future affordable housing – presumably passivhaus tendencies will add substantially to the cost.

Wouldn’t it save money longer term? I don’t know why nobody has thought of fixing the pensions and social housing problems by getting in pension money to fund the stuff at a decent rate say 5% that could be used to discount liabilities. Bonds are a waste of time.

The risk assessment matrix is crap. The US cannot generate inflation. Neither can Mario.
Risk of a second crash is elevated.

Debt as % gdp from 93% to 68% by 2021 looks v optimistic. Who was it that said no plan survives contact with reality?

Upside risks? Why are beneficial outcomes which presumably have their own probability distributions described as risks? Personally, I’d love to be exposed to no end of these “risks”. Most of the text in this report is the kind of jargon-filled, imprecise, news-speakish bumph that Orwell loathed and which deliberately numbs, dulls and dampens any public discourse.

But, occasionally, there is a shaft of light, as in the extract Stephen has highlighted. These occasional shafts glisten because in most instances they highlight outcomes that are, or will be, the inevitable result of the political over-riding of previous policy advice provided by officials.

The almost certain future cost of the bulk purchase of CO2 emission allowances should be described as the “Eamon Ryan Legacy Cost”. FF was so delighted to be in power after the 2007 election with Green support that it gave them almost everything they wanted. The 20% EU-wide emission reduction by 2020 was agreed by all member-states, but it should have been reviewed following the Great Recession. However, it was total madness for Ireland to consent to achieve this reduction by seeking to generate 40% of electricity from renewables.

But that’s what the FF-led government from 2007 signed up to to keep the Green fanatics on side. We can be almost certain that DoF officials highlighted this madness when it was being advanced more than 8 years ago. They, or their successors, are probably experiencing some grim satisfaction highlighting the almost inevitable costly outcome of this madness now.

Perhaps the most interesting aspect of the SPU 2016 is the reference on the cover “for discussion in Dáil Eireann in advance of submission to Commission”. This should prove interesting. Especially as the document is clear and readily accessible with little bumph (other than in Chapter 5 on the “Quality of Public Finances”).

Continuing to look on the bright side, the incredible saga of the handling of Irish Water by Irish politicians, and the apparent populist concession to suspend charges, is certain to have two impacts (i) it will run into legal opposition from Europe and (ii) it must, finally, bring home to the Irish electorate that there is an overall envelope available for public expenditure, a fact that it has to this point being unwilling to admit.

Some associated reading – from the IMF – on the benefits of top-down budgeting, the only approach that will allow any incoming minority government to survive for any length of time.



Re Irish Water, you appear to be regurgitating what I call the “establishment consensus”. However, this consensus conveniently ignores what had really annoyed, and continues to annoy, so many ordinary voters. As I pointed out on another thread, these voters, for the first time in more than a generation, had seen aspects of the establishment of a semi-state entity which was being conducted in an extremely cunning fashion to square a number of powerful special interest groups and to meet political objectives – and they had glimpsed the division of the spoils and the sense of entitlement of well-positioned insiders in the sheltered private, public and semi-state sectors at their expense. They were, quite understandably, disgusted and angered.

It would be difficult to assert that the current composition of the Dáil was unaffected by this fully justified disgust and anger when voters marked their ballot papers. And FF, irrespective of how it might be castigated for the exercise of its characteristic opportunism and self-serving behaviour, is genuinely responding to this disgust and anger in its negotiations on this issue with FG. If this proposed statutory oversight board is established it would make sense to re-establish IW as a separate entity outside of Ervia. It was never fully integrated in any event and it might be possible to re-generate its balance sheet to include the €6-7 billion of net assets that simply vanished when it was transferred for free to the then Bord Gáis. And it will be interesting to see what shape this proposed independent commission will take. But the intent is to kick this issue in to the long grass.

However, the use of the CER to extract additonal investment financing from utility consumers that governments instead should be financing is well past its sell-by-date. The CER has being doing this to fatten up the ESB since 1999 and BGE since 2003 at the expence of electricity and gas consumers, but the water fiasco has totally blown its credibility.

And I expect the mood of voters isn’t lifted when they observe the ministers responsible, Hogan and Rabbitte, respectively enjoying a lucrative Brussels sinecure and a well-padded retirement.

It is called “throwing the baby out with the bathwater”.
A more pathetic performance by elected representatives than that presented by the various spokespersons in the Dáil today could hardly be imagined. There were two exceptions; the leader of the Greens and; Fianna Fáil!
Respect for the law is more deeply embedded than many imagine, whether created at a national or an EU level. (It is worth noting, in this respect, that practically all the EU legislation adopted in relation to resolving the euro crisis has been by way of Regulation i.e. that which becomes directly implementable in the member countries on a par with national legislation).
Caught between Sinn Féin and the traditional enemy, the contradictions involved in “facilitating” a minority government may, however, be too much even for this particular Corkonian. It is doubtful whether most of his possible future front bench, seasoned and newly hatched, have even grasped them.

Not, of course, forgetting the acting Minister for the Environment.
Putting the sums together, and filling the gap if this daft FF/FG agreement comes to pass, would be a better use of the time of the Irish Fiscal Advisory Council rather than having it debate the finer points of how to assess the implementation of EU rules in an Irish context. This boils down to observing the form while largely avoiding the content.


You’re on a sticky wicket on this one. The way the enabling legislation was guillotined through the Dáil, provoking a walk-out by the opposition parties, was a clear harbinger of doom that was ignored. The 2014 local election results were another. The widespread public protests following the publication of the charges by the CER not only blew its credibility, but should have been a clear signal to the Government that it was in a serious hole and that it should stop digging. Instead, it doubled down and continued digging even more furiously. It then tried to bully Eurostat – and compromised the CSO in the process, but failed. Finally it sent loyal TDs in to battle and took major losses on 26 Feb.

One should discount the combination of dishonesty, disingenuousness, hypocrisy and delusion of the 39 so-called left-wing or pseudo left-wing TDs who supported the motion seeking the abolition of water charges. That leaves 118 TDs who might be prepared to consider a variety of more sensible options. However, they will have to confront the reality that the policy and regulatory arrangements governing the provision of infrastructure and utility services is totally dysfunctional and is imposing excessive costs on service-users and the economy. However, it is unlikley that many will – and the circus of stupidity will continue.

I am not a defender of Irish Water but of the polluter pays principle (with, luckily, not just Europe, but the entire international community, to my back in the matter). Incidentally, I agree with your conclusion below in response to MH but not as a confirmation of the wisdom of the Irish electorate. Given our unique system of election (shared only by Malta, it seems!), it is impossible for it to produce anything much beyond a summation of parish pump issues. These may occasionally sum up to the broader national interest but this is largely accidental.
If credit is to be given by history on what is now transpiring, most of it should go IMHO, to Micheal Martin.
A “new regulatory oversight process”? Does anyone have any idea what this means? For the Dáil? Regulatory bodies?


You appear to ascribe a level of sophistication to voters that may not be warranted.

Irish people appear to like stealth taxes rather than getting lump-sum payment demands: rates were abolished in 1977; water charges were abolished in 1997; property tax 95 or 96?; and no doubt a feeble government will not raise valuation levels for property tax in 2019.

The car tax was also abolished in 1977 and replaced with a car registration fee of £5. By 1981 the fee had risen to £20.

The set-up of Irish Water was shambolic and sometimes it’s forgotten that there had to be an Irish solution for an Irish problem — there was a 12 year contract with local authorities to keep their existing structures as jobs were guaranteed. In effect the agency was starting life herding over 30 existing water services.

Kenny and Hogan should have remembered the campaigns against bin charges and cries of double taxation — as if that was something novel.

People want good services but where is the pressure from politicians + public, to get value for money and positive outcomes from the second most expensive health service in the developed world? Ditto for the system that makes land scarce and among the most expensive in the world, in a country that is 4% urbanised??

I’m not basing my assertions on any ascription of sophistication. It’s just simple, messy democracy. When people are fully free to decide by whom and how they are governed the millions of individual decisions they make, for all sorts of reasons, will almost always generate an outcome that competent politicians should be able to make sense of and provide some sensible governance. If not the people will have to have another go.

It’s surprising the number of what one would normally consider to be intelligent and level-headed people who despair of this system. But it’s the best system we’ve got and it works – even if occasionally a tad slowly. As I’ve pointed out previously, a majority of voters decided to give FF and the Greens a well-deserved electoral kicking in 2011. A majority decided to give FG and Labour a similar, though not perhaps as severe – but still well-deserved, electoral kicking on 26 Feb. Neither of the previously dominant parties that used to lead government or opposition now has the ability to form a government without the consent or support of the other. They’ve spent most of the last two months going through the motions to demonstrate incontrovertibly that this is the case.

Now they’re finally getting to grips with what needs to be agreed.

Hi DOCM, “… (ii) it must, finally, bring home to the Irish electorate that there is an overall envelope available for public expenditure, a fact that it has to this point being unwilling to admit.”

Can one ‘admit’ to something – if’n one is unaware? Interesting. Informing and educating our tax-paying electorate to the idea of a ‘balanced budget’ (in respect of day-to-day public expenditure) has so far eluded most of our party and non-party elected reps – both at national and local levels. Its a very bad news story. Best not tell it.

The Greenhouse emissions issue may become slightly self-solving. Demand – hence consumption of fossil fuels may slowly and steadily decline due to the unaffordability of some services and goods which rely on fossil fuels, if overall consumer incomes either stagnate or decline. And/or, the fossil fuel producers are forced to reduce their overall, annual outputs; prices will then rise sharply and the consumers will have no choice but to reduce their consumptions. The market prices for fossil fuels are no longer valid economic ‘signals’. Rather its what the domestic consumer will be able to afford to pay. This developing situation is kind of serious, both politically and economically. I’d keep a close watch.

It is also worth recalling that, while Greece has slipped from the headlines, the country is, again, facing bankruptcy and a repeat of the drama of 2015 (and previous years).
The situation in which that country finds itself underlines a major point i.e. that the EU fiscal rules, while they apply to all countries (with the exception of the UK), in theory, they apply in very, very rigourous practice to countries that are in, or have emerged, from a programme i.e. who owe other countries a lot of money, a point which unavoidably also surfaces in Ireland’s SPU.

Seán Barrett, the Trinity economist who lost his Seanad seat, is reported by The Irish Times as saying that “he encountered a very despondent electorate while canvassing. Large numbers of young graduates had emigrated he said, while many older people were struggling with trying to pay property tax out of their pension.”

Maybe a bit grimmer than reality?

The SPU of course has to have its usual fairytales.

1) A rise in drugs exports would have no material impact on the economy;
2) Rises in ICT exports are mainly tax avoidance related;
3) The current account surplus is before adjustment for redomiciled/ tax inversion firms;
4) PMI (purchasing managers indexes) reports include tax avoidance stuff as do the production statistics.

By contrast, high frequency data for the opening months of the year (e.g. purchasing managers indexes, monthly trade and production statistics) point to relatively good export growth. This is partly attributable to the sectoral composition of Irish exports – in recent years Ireland has benefited from the high share of exports accounted for by pharmaceuticals and ICT services, sectors that have recorded an increased share in global trade. This has helped to drive Ireland’s export performance in excess of the growth in import demand of key trading partners. While sector-specific developments are difficult to project, taking all factors into account an export growth rate of 8 per cent for this year seems reasonable. [ ] A surplus of 4.4 per cent of GDP was recorded on the current account of the balance of payments last year – the largest surplus on record. A current account surplus means that the nation as a whole is reducing its net international liabilities…

Regardng the ECB line on water charges above, whether or not legal opposition appears from Europe is a political matter with no certainty whatsoever either way. There is a reasonable case that the exemption from the obligation to impose water charges has not been exhausted by the failed endeavour to introduce them. If the Commission does not wish to alienate an even larger share of the Irish population from the EU, it will leave well enough alone.

On a positive note….

Of 101 middle income economies in 1960, only 13 became high income by 2008 — Equatorial Guinea; Greece; Hong Kong, Mainland China; Ireland; Israel; Japan; Mauritius; Portugal; Puerto Rico; Republic of Korea (South Korea); Singapore; Spain; and Taiwan.

Puerto Rico which became rich thanks to mainland US multinationals, now is enduring a serious crisis.


Re climate targets it always comes down to how we measure things and what we target. And our metrics do not consider climate. The US economy has stagnated in Q1 of the last 4 years due to climate but there is nothing to see , folks. The system is designed to shunt money upwards which is why the taxpayer was stiffed for Anglo and why the EZ does not have bank resolution.
When the system next crashes macroeconomics will remove its debt loaded wonder bra and economic activity will probably contract by around 20% so the climate targets will be easier to hit. Hello boys!

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