Report of the Fiscal Council

Is here (.pdf). A few days late to this, so apologies, but just one thought:

Think how far our budgetary institutions have evolved. From Charlie McCreevy getting up on Budget Day in the early 2000s and announcing measures his own cabinet hadn’t heard of, to today’s fiscal council reports, Spring Statements, National Economic Dialogues, to the design of new structures like the Budget Oversight Committee, reviews of the process of national budgeting (.pdf), a Parliamentary Budget Office to cost the figures independently, and an agreed spending envelope by the public, a lot has changed in 15 years.

Despite the annoyance it generated during the election, the ‘fiscal space’ is a well recognized academic idea dating back to the 1990s, and the fact that the entire debate took place using broad parameters everyone serious agreed upon is a very good thing. We actually had a debate in Ireland, messy and all as it was, on whether to spend more on services, or give back more in tax cuts. Thus informed, the public chose the former in large numbers. They want a recovery in services.

Comments

comments

Author: Stephen Kinsella

Senior Lecturer in Economics at the University of Limerick.

18 thoughts on “Report of the Fiscal Council”

  1. Your conclusion is a bit rosy-tinted, I regret to say. The history of governance in Ireland is littered with all the right actions, on the form, and zero on the substance. Or, as Arthur Beezley puts it in today’s IT, it remains to be seen if the new politics, budgetary included, is not just more blather.
    Some more useful links to help bloggers decide.
    http://www.oireachtas.ie/parliament/oireachtasbusiness/committees_list/abs/
    http://www.finance.gov.ie/news-centre/press-releases/government-submission-select-committee-arrangements-budget-scrutiny
    http://www.oireachtas.ie/parliament/media/housesoftheoireachtas/libraryresearch/lrsnotes/LRSNoteBudget_process_and_documents_140422.pdf
    There is no real evidence that the political parties, or DOF/DPER, have any clear idea of where they are headed in budgetary matters. IFAC have drawn uncomfortable attention to this fact in certain areas, notably with regard to the lack of any meaningful adherence to a meaningful Medium Term Budgetary Framework (MTBF).
    This is not something that either should or need be dictated from outside. It is a sine qua non if the errors of the past are not to be repeated.
    Nor is it mainly a question of the balance between increases in public services (aka – mainly – pay increases) and cuts in taxation but in the correct management of the overall economy, including maintaining the proper level of state investment, points to which IFAC also draws attention.
    Meshing the old and the new budgetary procedures will only be real when the necessary legislative changes have taken place. It remains doubtful whether this will actually happen. Or whether DOF/DPER yet recognise that their role in relation to control of public expenditure is more than using crude control instruments e.g. requiring individual expenditure sanctions, introducing staff embargoes etc. when there are overruns and collecting, rather than managing actively, expenditure and taxation data.

  2. Some interesting things in this Report. On growth, the Council points out that given the very strong end to 2015 the Department of Finance’s 2016 forecast of a 4.9% rise in GDP implies a big quarterly slowdown. That may happen, of course, but given the strength of the carryover this year, IFAC’s own forecast is 6%, which seems a large enough deviation from that of Finance to raise questions, but nonetheless is deemed to be ‘within an endorsable range’.
    IFAC also raise questions about the Department’s Budget forecast for 2016, which was unchanged in the April update, despite evidence that taxes are running well ahead of profile, yet Finance also flagged the likelihood of some significant spending overruns, and IFAC query if population pressures are being underestimated.
    The absurdity of the EU rules are noted, in that last year’s AIB share transaction is counted as part of General Government expenditure, hence raising the base for the allowable increase in 2016, but the transaction is excluded from the calculation of the underlying structural fiscal balance.
    Finally, I wonder if IFAC is being consistent. It has repeatedly questioned the wisdom of past fiscal adjustments, generally arguing they are too generous, yet they also believe that the economy had far more spare capacity that estimated by the European Commission. However, although they still query the size of the (now positive) output gap they accept it has closed significantly, which begs the question as to why they now feel that a proposed €1.8bn fiscal adjustment in 2017 is appropriate.

  3. Yes, thankfully we have come a long way from the budgets of McCreevy to the current approach and whether one agrees with them or not, the fiscal council under John McHale, has stuck to its task.

    I do not fully understand the obsession with debt reduction. Ireland’s net debt is now surely lower than many EU countries. If one factors in the debt held by the central bank, it must be lower still. Can we see the comparative debt figures with other EU countries (I only read as far as page 20).

    However for me, the comment below , reiterated a number of times in the IFAC report, stood out . I had been inclined, or possibly led to, believe that the state could not spend more money than planned in its expenditure plans (MTOs or whatever). But the following comment (p12) seems to negate that view:

    “The Expenditure Benchmark essentially says that annual expenditure growth should not exceed the medium-term rate of potential GDP growth, unless the excess is matched by discretionary revenue measures.”

    So it appears that the state can spend more money, it just needs to raise the additional revenue. Correct?

    If correct, this is relevant in relation to many items of necessary or foreseeable government expenditure, including housing, or indeed ‘restoration’ of pay.
    Do the necessary expenditure, but raise the revenue to pay for it.

    Figure 1.7 is an interesting chart and does not inspire confidence, but failure to forecast expenditure is not disastrous in itself. The delay in raising revenue to compensate is where the damage is done. Would it be better to have an automatic tax adjustment rachet, built into the budget each year, to adjust tax during the year, in cases where either expenditure or revenue varies above defined parameters.

    As for growth projections, I take all these with a pinch of salt. Anybody who thinks that the projected growth percentages can be achieved, while a housing crisis in Dublin continues to suck the spending power out of the pockets of working people and creates a multitude of uncertainties for them, is seriously out of touch with how far an average weekly wage stretches. And there are people out there, who do actually get paid weekly.

    1. JR

      Debt is lethal in a deflating system. 4 months ago there was $7 tn in sovereign debt with negative yield. Today there is more than $10tn. The lower yields go the higher the value of debt.
      Ireland needs to reduce debt and start generating value.
      Global growth projections are nonsense. There is no investment. Value extraction is the name of the game.

  4. I think it was Colm McCarthy who made the essential point that the discussion on the fiscal rules is largely about whose forecasts are right i.e. with regard to the availability of spending money in the future which may, or may not, materialise.
    How the current – Dutch – EU Presidency views the situation!
    https://www.rijksoverheid.nl/documenten/kamerstukken/2016/04/14/bijlage-7-presidency-paper-simplification-sgp
    The Reuters summary!
    https://www.businessworld.ie/european-news/-Expenditure-rule-considered-by-EU-563866.html
    The outcome of the discussions is, as yet, unknown or, at least, not public.
    One can surmise that European politicians are not totally unhappy with the current situation; after all, they negotiated it. It consists of complex attempts at an upper limit on what they can spend – always useful when it comes to getting re-elected – but says little or noting about proper economic management which, for most, requires that they save. (This saving should be in the form of a proper “cruise control”, adapted to economic road conditions, not an emergency glass to be broken in the form of a “rainy day fund”).

  5. I think it’s probably fair comment to contend that a majority of voters opted for more spending on public services rather than tax cuts. But I’m not sure to what extent this decision was informed by whatever debate took place on fiscal and budgetary issues. I suspect many voters may not be aware of JK Galbraith’s aphorism about the function of economic forecasting, but I have little doubt that they don’t pay much attention to, or ascribe much credibilty to, the macroeconomic or fiscal prognostications of the various “serious people”. In most economies this makes sense. But it makes even more sense in Ireland when these variables are even more volatile than in other economies. And to crown it all, very few of these “serious people” pay any attention to what is going on under the bonnet in terms of microeconomic, sectoral analyses. There is very little public understanding of how the proceeds of endemic and pervasive rent-seeking impact on the distribution of income and expenditure – mainly because those who have the knowledge and competence to inquire and investigate have compelling incentives not to. And this adds to the volatility of macroeconomic and fiscal variables.

    So I would contend that the plurality in favour a preference for public spending over tax cuts came from a sense that the money is there to pay for these services – without perhaps understanding how it is, and will be, generated – and a genuine expression of a collective social conscience.

    FF, in its usual fashion, cottoned on to this public sentiment quite early. FG paid dearly electorally for not detecting it and for not suppressing some of its viler green Tory instincts. Many of the independent TDs are well aware of this sentiment. And of course about a quarter of the Dáil have a genuine or confected allegiance to deluded left-wing tax and spend policies.

    So, apart from the quintessentially Irish and jesuitical dancing on the hid of pin by the IFAC (or the comhairle comhairleach) on the EU’s asinine fiscal rules and the ducking and diving being performed by the DoF, the only issue of substance for me was its highlighting of the huge shortfall in public capital expenditure. It chimes neatly with this piece:
    https://www.theguardian.com/world/2016/jun/11/why-german-trains-dont-run-on-time-any-more
    which shows how the Germans are suffering from their anally-retentive obsesssion with the “schwarze null”. It’s bad enough that they’re doing this to themselves, but it is both stupid and evil to impose it on other members of the EZ.

  6. Economic averages are quite unreliable quantitative metrics – especially if you are attempting to front-run the future outcome of a highly complex, politically controlled enterprise. Somewhat inconvenient that. Though there appear to be no shortage of experts, sages and charlatans who enthusiastically insist on pronouncing solemn forecasts about future economic ‘growth’ – forecasts which eventuate to be correct and incorrect in equal measure. Not funny that.

    The available economic estimates indicate that global, regional and national (aggregate) economic acumulations (aka; growth) have, in the past four decades, exhibited a slow, annually compounding decreasing trend-line, down from a long-term average of +3% to an average of +1.2% (give or take the odd % – the actual GDP measurement process being healthily unreliable). This trend has been nicely paralleled by sectoral increases in income equality – especially between the 90 and 80 percentiles and the 70 and lower percentiles – the latter being representative of the majority of domestic consumers. Stagnant (or reduced) incomes translate into lower levels of domestic consumptions. Now, consumptions makes our economic world go around; reduce those consumptions, and things (economical), go flat. Like now?

    The significant expansions of the Asian and partially-developed economies since the 1980s, whilst quite impressive, are ‘one-off’ affairs since they operated on the premise that their national manufacturing outputs would be fully purchased by the developed economies, whilst these latter ran-down their own national manufacturing enterprises in parallel. The under developed and partially developed economies thrived (in a relative economic sense); the developed economies regressed*.

    Given that the Irish economy has an alleged economic rate-of-growth of 5% – or whatever, would someone like to enlighten me as to what we are producing and exporting in such prodigious quantities so as to explain this (extraordinary) elevated figure. If you subtract out the economic activity of the Dublin region (30% of population and 50% of the employments) from the overall national estimate, then my guess would be that the other regions are, at best, stagnating. How is it proposed that we fund annual cost increases in health, education and welfare? With more (invisible) borrowing? With real tax increases? Perhaps Paul Hunt may be correct; the Irish voters are slowly cottoning on to the fiscal charade.

    * Regressed in the sense that the accumulation of greater and greater levels of future income obligations (debts) has to be mathematically a negative rate-of-growth quantity, which requires an unachievable annualized rate of physical economic accumulation in order to attain an economic rate-of-growth which is capable of both re-paying those debts plus their annual compounding interest, and, providing an additional annually compounding rate of positive economic accumulation. If economic debt burdens increase (which they have) then axiomatically economic physical rates-of-growth must increase proportionally – which they have not. Interesting time.

  7. @docm

    “…but says little or noting about proper economic management which, for most, requires that they save.”

    There is less issuance by governments, the ECB are hoovering up any safe asset that isn’t nailed down. Many private pension funds are effectively going bust by virtue of the discount rates this results in, there is a demand deficit in Europe and in the West generally there is a shortage of capital expenditure – which investors would fall over themselves to finance (assuming the ECB didn’t elbow them out of the way first).

    I think you may be over-simplifying things a tad.

    1. Not a bit! I am referring to the specific case of Ireland, not to the wider issue of European and global economic growth or, rather, the lack of it. I would, for example, be wholly in favour of increasing capital expenditure which our current political masters have every intention of not doing i.e. preferring, instead, to buy votes (aka the vacuous “public services/tax cuts” formula), especially given the uncertain future of the current government. And to look for an easy excuse/escape route!
      http://www.irishtimes.com/news/politics/kenny-concerned-by-hazard-posed-from-eu-investment-rules-1.2681835
      There is no hazard other than to the re-election prospects of individual TDs. (The move is also, as is often the case, not very clever, one of the few substantive changes with regard to EU collective management of their economies being the acceptance, in the sense of its decisions not being open to question, of the independence of Eurostat, now legally also firmly bedded).
      The Irish political class is one of the least impressive anywhere among modern democracies, an opinion that would not be widely challenged. It is events that are driving possible improvements. And it is much wider than just the issue of the EU fiscal rules. Two links which help illustrate the point.
      http://www.per.gov.ie/en/civil-service-accountability-consultation-process/
      The consultation paper makes for an invaluable read in that it shows up the lack of any real modernisation of the civil service proper or, as the document itself puts it (page 34),
      “8.10. In this area, the scale of civil service reform in Ireland has not been as extensive
      as in other jurisdictions. Indeed, Ireland does not feature largely in comparative research
      on public service reform. This in part is due to the ‘once-off’ and ‘stop-start’ nature of the
      civil service reforms undertaken. Reform projects in other jurisdictions remain an
      ongoing process and the extent to which they have realised their objectives remains an
      active source of debate among expert researchers and commentators. ”
      In short, there is nothing for others to study as nothing sufficiently radical has happened.
      There is, moreover, no evident intention to actually change direction i.e. by recognising that modern government is heterogeneous in character and any attempts to apply homogeneous management across the civil service is doomed to failure (as the current Public Services Management Act amply illustrates).
      Instead, the Oireachtas is also to take a hand cf. also DOF/DPER submission!
      http://www.oireachtas.ie/parliament/media/housesoftheoireachtas/libraryresearch/spotlights/20160128SpotlightParliamentaryscrutinyofgovernmentperformancefinal.pdf
      The shadow cast by the Westminster Model is long and there is no sign of the country escaping from it. A breakout attempt was made half a century ago in the proposals contained in the Devlin Report which went to the heart of the matter i.e. to separate policy formation from executive implementation. That it works is not in doubt; if done properly! We are, however, to continue with the two mixed up, and, inevitably, the familiar situation where everyone is in charge and no one is responsible.

      1. You will have as much success seeking to change the weather as you will have advocating changes that will curtail the ducking and diving you describe. (And I accept it is identical to the possibility of any reduction in the malign impacts of the pervasive and endemic rent-seeking I seek to highlight.) All of these things are simply part of what we are. They will take generations to change. And the taking of umbrage when external parties seek to curtail the opportunities for ducking and diving is part of the same behaviour. (The failed attempt, last year, to browbeat and bully Eurostat when it refused to swallow the nonsense about Irish Water the then government compelled the CSO to submit was something to behold.)

        We elect TDs who, in the main, can’t see a rule or a regulation without examining the potential to bend or break it. And that’s the way the majority of voters want it.

        Of course, it doesn’t help when some of the rules and regulations are badly designed or enforced arbitrarily on occasion. That gives the duckers and divers a licence for their antics.

        Change will come slowly, but it will come. We can only hope the costly impacts of any turbulent events that might force necessary changes will not outweigh the benefits generated by the changes. We may see evidence of such an unfortuate outcome nearby and soon as Britain, driven by a surge of misdirected popular disgust and anger, slouches towards Brexit.

    2. @grumpy,

      Thank you. You’ve hit more than one nail on the head. I find it hard to believe that governing politicians and senior policymakers in the advanced economies are not aware of the reality you describe. But the politicians and policy-makers in the major economies with a pressing demand for infrastructure investment and an ability to finance it at minimal cost are determined not to do so – because, for example, of either a whiggish ideological desire to shrink the state (George Osborne), or an anally retentive fixation on the “schwarze null” (Wolfgang Schäuble) or a recalcitrant, know-nothing Congress (Barack Obama). This appears to coincide with the short-term objectives of the dominant rent-seeking special interest groups in these economies. The situation is more nuanced in the other so-called “debtor” economies, for example, Spain and Italy. There is a conflict between the rent-seeking special interest groups with some adopting the stance of their peers in the US and Britain, but with others aching for unending fiscal incontinence.

  8. “I would, for example, be wholly in favour of increasing capital expenditure…”

    Such as? To whom would the ‘expenditure’ go? The financials got negative interest rates, QEs and the purchase of all sorts of crappy assets. The nett economic outcome? – ZIP! What’s your beef about politicians seriously seeking power giving ‘buying’ support? What else should they do?

    “The Irish political class is one of the least impressive anywhere among modern democracies, an opinion that would not be widely challenged.”

    Really? Like as in, “You can’t be serious!”. How about ‘Borgen’ and ‘Blue Eyes’? Fantasy stuff? Take it easy. Anyhows, Civil Services rarely do reformy stuff. Well, stuffs that are actually challenging and genuinely different? Not good for morale.

    “But the politicians and policy-makers in the major economies with a pressing demand for infrastructure investment and an ability to finance it at minimal cost are determined not to do so -”

    Paul, ‘pressing infrastructure investment’ is whose definition? Whose priority? It surely is not a priority for those citizens who have either no (or reduced) waged-labour opportunities to provide them with adequate incomes to raise families or who experience the slow erosion of their social fabrics (not for lack of investment) but because they would be unable to afford to pay the amount of taxes needed to maintain the levels of these services – which they enjoyed precisely because previous cohorts of politicians recognised that the provision of better, extended or even altogether new services were needed in order for an advancing developed economy to be more and more productive. A workforce that is better paid, better housed, better fed and clothed and has positive expectations both for themselves and for their children is a ‘better’ workforce. Those days are now over.

    Calls for increased investing in infrastructure is a political and psychological ‘cop-out’. Sure, industrial and commercial infrastructures were essential to drive a productive economy. But a consumer economy where the production has been shifted elsewhere? And the expected economic return are most likely negative – except for those few with their snouts in the trough of taxpayers funds. “Rent seeking abu!”

  9. There is very little evidence to support some of the figures in this report. Falling into this category are:

    (a) The report predicts a negligible improvement in the public finances in 2015 after excluding one-off figures relating to banks (from a 1.3% to 1.1% deficit). But, the figures already published for Jan-May 2015 show a far more rapid improvement, to the extent that, if it continued for the rest of 2016, Ireland would be in surplus in 2016. Even on the more pessimistic predictions in this report, government debt as a percentage of GDP (or GNI) will fall very rapidly over the next few years.

    (b) The report predicts Ireland’s growth rate will fall continuously from a peak in 2015 down to 2.9% in 2021. There is no evidence whatever to suggest that this will happen. In both Ireland’s preceding booms (1958 to 1982 and 1986 to 2007), growth continued at an average rate of 4.5% to 5% for almost two decades. Indeed, between 1994 and 2004 growth averaged over 6% for a decade before slowing. There is nothing to suggest that this boom will be different.

    If we look at the Irish economy in 2016, the main features are (a) growth 2011-2015 has been heavily export-led, resulting in Ireland currently having a huge balance-of=payments surplus (b) investment has grown at a far faster rate than consumption – the form of this investment is immaterial – investment in software is just as productive as investment in machinery (c) building, in particular house-building, has lagged far behind the rest of the economy, with obvious potential to catch up (d) employment growth and the fall in unemployment have actually accelerated in 2016, completely contradicting Dept of Finance and Central Bank forecasts that both would slow in 2016 (e) growth in wages has lagged far behind growth in profits (which partly explains (a), (b), (c) and(d). All of these strongly indicate that recent high rates of growth will continue for quite a number of years. As the economy nears full employment (defined as 5% – which may come as early as September 2017), I’d expect wages to start growing more rapidly, leading to consumption taking over as the main driver of growth. Of course, 2015 had a one-off windfall factor in that the price of oil fell 50%. This won’t be repeated so the value of GDP 2016-2021 may not rise at the astronomical rate it did in 2015, but the volume of GDP may well do so.

    The contrast with the UK economy is stark. The UK budget deficit is stuck at 5%, its debt/GDP ratio is rising, it has a balance-of-payments deficit of 7% and its investment/GDP ratio and productivity levels are abysmal. Given all these, the overwhelming probability is that the Irish economy will grow at 2 or 3 times the rate of the UK economy for the next 4 or 5 years at least, and probably much longer.

    Of course, it is foolish to be dogmatically certain about these things. There is always the possibility of a rosy outlook being scuppered by some malevolent external event, such as disruption to oil supplies as a result of a Middle-East war or some such like. More realistically, Brexit (if it occurs, which at the moment seems 50/50) could affect Ireland’s short-term growth prospects. While Ireland could actually benefit in the long-run from Brexit, there might be short-term damage due to investor uncertainty etc. But, whatever the result of Brexit, this should be temporary.

      1. @Seamus Coffey

        I just checked. You are correct about the sources. But, just to be clear, I didn’t actually attribute the forecasts to the authors of the IFC report I said ‘figures in this report’.

        The fact that they emanate from the Department of Finance, as you correctly point out, hardly adds to their credibility. The April 2014 Department of Finance forecast for GDP growth in 2015 was 2.7%. (link below)

        http://www.finance.gov.ie/sites/default/files/Ireland%27s%20SPU%202014%20Final%2029%20April%202014.2.pdf

        The actual outcome was 7.8% GDP growth. So, if in April 2014 they couldn’t forecast to the remotest degree of accuracy GDP growth a year ahead, what reason is there to treat seriously their April 2016 forecasts for up to five years ahead?

        I’m not criticising them for getting it so wrong. We all get forecasts wrong. I lost £10 today to Paddy Power on a bet that Wales would beat England. My point is that they should acknowledge that it is impossible to predict the future and stop trying to give their reports a veneer of scientific respectability by filling them with predictions for years ahead that amount to no more than plucking figures out of thin air.

    1. @Thats Legal

      I couldn’t honestly say. I have high regard for the CSO and have no evidence to doubt their annual inter-census population estimates, although estimating population growth in between census is extremely difficult (for all countries).

      Having said that, every census since the 1970s has revealed the population to be higher (and net emigration lower) than that previously estimated. In most cases the difference has only been a few thousand. But, in two census (1979 and 2011) the difference was 100,000. I honestly don’t know if we’ll see similar this time. If I was absolutely forced to make a prediction (and I’d rather not be), I’d say the census will reveal the population to be significantly higher (and net emigration significantly lower) than that previously estimated, but with the difference being much less than that for the 1979 and 2011 census.

      I’d be more confident about predicting the trend than the total amount of net emigration over the period 2011-2016. It should show that net emigration peaked in 2012-2013 and has been falling sharply since, with Ireland coming close to having net immigration again in the year to April 2016.

      1. Thanks. Most stats on Ireland seem to be surprising on the upside in the last few years, in some case dramatically. I’m bullish too, based on my extremelly tiny sample size of friends/family in their early/mid 30s, college educated early career professional Irish nationals, 4 out of 10 have returned home, a further 2 are making plans to, 2 want to but feel the rent as a proportion of their expected net income would be too high (Dublin) and 2 never plan on doing so. I know 0 planning on leaving, but perhaps if I was in my mid 20s I would.

        Here’s hoping the Irish economy continues to surprise on the upside for the forseeable future. It’s great seeing friends and family coming back home.

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