Fiscal Assessment Report

The latest Assessment Report of the Fiscal Council is available here.

9 replies on “Fiscal Assessment Report”

“Under the new budgetary framework, current projections indicate that any further increases in expenditure in 2017 for higher public sector pay will have to be offset by lower pending in other areas or higher taxes.”

Basically, state expenditures are constantly more than its income. But using borrowing (as an income supplement) to pay for day-to-day expenditures is the accounting equivalent of reducing your future income. The problem then, is for any elected politicians who support the government, that either increasing taxation or reducing spending are guaranteed vote losers for them and probable vote gainers for opposition politicians. And the problem becomes more acute for those deputies with thin vote margins.

“The system of multi-year expenditure ceilings …… is not working effectively due to continuous upward revisions to spending.”

What else do sentient folk expect? The majority of our working-age population (wage and salary earners) and their dependents, have accepted either a reduction or a stagnation of their incomes for the last 7 or 8 years and now want those situations reversed. And they have the political muscle to achieve this – and are putting it bluntly to our governing politicians, “Increase (or restore) our incomes – or else!”

The situation is no longer the traditional political contest of Righty v Lefty, but one where there is a glaringly unequal flow of income to the top 10% of income earners versus the lower 90%: that is, political contestation has metamorphosed and it is now the Upper 10 (minority) v the Lower 90 (majority). There was a seismic political re-alignment after 1918 when universal suffrage was introduced. History about to rhyme?

A significant proportion of the Lower 90 are (or were) conservative, centre-right voters. They can, and will, and have, shift(ed) their voting allegience when they become convinced that the unequal income flows are neither being addressed nor adjusted on a more equitable basis, such that income re-alignments more correctly represent their actual economic circumstances. (So also will a proportion of their political centre-left opposites in that Lower 90 cohort.) Both of these Lower 90 groups may be quite averse to a forced re-distribution of wealth (as advocated by the IMF) – but they sure as hell will not longer tolerate the disparity in income flows. Think, #ourincomes.

In politics, as in life, the possibles become inevitables – and this seems to have now happened in both the UK and US. It will come here also? Italy next? Then France? Going to be a mighty interesting time in politics.

Great comment. But don’t forget the age element to all this – the extent to which younger people have been screwed since 2008 (public sector pay and jobs, housing policy, welfare changes, emigration) is outrageous.

A lot of useful information and commentary in the Report but I wonder if the Council should have been more consistent in its views over recent years. Ireland was running a negative output gap up to 2015, according to the EC (and Finance), and the Council often argued that the level of spare capacity in the economy was if anything larger than official estimates, yet it consistently urged the Government to bring in a more contractionary fiscal package than the EU rules allowed. Ireland is now deemed to be running above capacity , so it makes more economic sense now for the Council to urge restraint.

The difference between planned budget spending and the outturn is also worth noting, as illustrated on page 55, showing a 7% gap over the three years to 2016 between what the State had said it would spend and what it actually did. The Council also sets out ( page 60) the spending required over the next 5 years to maintain real services ( i.e. accounting for inflation) and taking on board demographic pressures. It might serve the electorate better if in future political parties were to set out spending plans and to distinguish between volume growth and higher pay for the existing workforce.

Finally the document notes that Ireland breached the existing SGP rules in 2016 and 2017, although not on a scale to warrant sanctions. One wonders now if the EC will ever impose any on anyone, , given the current political mood across Europe.

Dan O’Brien presents some useful observations:

As always political exigencies will drive the fiscal chicanery, but the space for the usual ducking and diving has been curtailed by DG EcFin, even if it is reluctant to enforce the sanctions available to it. The Government will always push things to the limit and dare DG EcFin to respond – and be quite confident that it won’t. IFAC serves a useful purpose for DG EcFin since it relieves it of the requirement to examine and highlight the Government’s fiscal chicanery. If DG EcFin did so itself it might feel obliged to do something. IFAC might be all mouth and no trousers, but DG EcFin can hide behind it.

It also looks like the Government will have to find €150 million or so to refund the households who paid (or part-paid) their water charges. However, the indications are that the MoF is confident these monies will be found and allocated. It is seen as a small price to pay to remove one issue that’s causing angst to quite a few voters – in particular FG supporters. But this won’t make water charges go away. In some respects the Expert Commission on Domestic Water Charges (which has just lodged its report with the Oireachtas) by raising the issue of penalising wasteful consumption has opened the can of worms even wider.

All those involved, in particular the various pampered and influential special interests in parts of the sheltered private, public and semi-state sector – and the flunkies and functionaries they retain, fully deserve the grief that has been visited upon them. But, as usual, it appears that absolutely nothing of lasting benefit has been learned. The main lesson learned by the pampered special interests appears to be: “Don’t ever again allow ordinary voters get a glimpse of how we’re ripping them off.”

Nevertheless, despite all of the huffing and puffing, two, not insignificant, benefits have emerged. First, irrespective of how badly structured, ineptly managed, ineffectively regulated or inefficiently and excessively resourced Irish Water might be, it is still a major improvement on the costly antics of 34 local authority water and waste water service providers. Secondly, having an entity, Irish Water within Ervia, that can borrow on its own account – similar to other semi-states – to part-finance investment reduces the requirement to finance investment on a pay-as-you-go basis from central funds. The reduction is significantly greater than the increased debt servicing provided from central funds.

The evidence for a post-Brexit slowdown in the Irish economy is very patchy to say the least. It has certainly been exaggerated in the sensation-seeking Irish media (although not necessarily in this IFC report).

Immediately post-Brexit Ireland’s manufacturing PMI took a hit and in July was just slightly above 50 (the dividing line between expansion and contraction). However, it has since rebounded and November’s figure (just out this morning) showed it surging and higher than in the months before Brexit.

Some things obviously will take a hit, at least in the short-term. The 10%-15% fall in the £sterling v the euro will affect retailers, esp in border areas. However, all past experience indicates that this hit will be eroded by lower inflation in Ireland and higher inflation in the UK resulting from the exchange rate movement. Indeed, this is already happening. Since June inflation in Ireland has been -1.3% v +0.6% in the UK, a competitiveness gain for Ireland of about 0.5% a month. This can be expected to continue until the competitiveness loss for Ireland resulting from 10%-15% fall in the £sterling v the euro is more or less wiped out. Of course, versus the $dollar the euro has actually fallen since Brexit, so there is no loss of competitiveness there.

A much-lower-than-expected inflation rate in Ireland (resulting from the fall in £sterling) could also reduce tax receipts somewhat. However, it also reduces the price of many items of government expenditure. A significant chunk of government expenditure is on items purchased from the UK. These have now tumbled in price, so its incumbent on the government to reduce its spending accordingly. If it doesn’t, then its actually increasing spending in real terms.

The best news post-Brexit is on unemployment. The rate of fall seems to have accelerated sharply since Brexit. Its now down to 7.3%. If it continues to fall at it its current rate (which no one can predict), it will hit 5% by the end of 2017.

The fall in Ireland’s unemployment rate between June and November was well over 3 times its fall between June and November last year. Probably due partly to rapid expansion in the construction sector. Construction is one of the sectors that could be expected to benefit from Brexit as its not exposed to competitive pressure from the UK and the fall in the £sterling will lower its cost base. Its a complete myth that a rise in the exchange rate (within reason), such as that of the euro v £sterling since Brexit, is damaging to employment. It is damaging for some sectors (e.g. retailing in border areas), but is actually beneficial for employment in other sheltered sectors as it increases real incomes.

It also seems that the widely-predicted post-Brexit armageddon for the UK economy has failed to arrive. Growth and unemployment have continued along the same trajectory as they were pre-Brexit. While forecasts for Eurozone and U.S. growth in 2017 and 2018 have recently been revised up and growth in both these areas is now forecast to be higher than in 2016.

The euro is the currency that has been hammered by Brexit and Trump. Euro-sterling is now close to 0.83 – would not be shocked to see it go lower than its pre-Brexit levels. This should not come as a surprise to anyone – Brexit was a hammer blow to the long-term prospects of the EU. Who honestly rates the long-term growth prospects for the EU in its current guise?

Since Brexit sterling has taken a far bigger hit than the euro. Its now about 0.85. Before Brexit it was in the region 0.75-0.77. So, its down about 10%-12% v the euro since Brexit. It has, however, rallied in the past few weeks. It was close to 0.90 a few weeks ago. I have no idea what way its going to move in coming months. No one has. Anyone who can accurately predict exchange rate movements shouldn’t be posting here but out making themselves rich in the markets. But, on balance, since the euro commenced sterling has been on a downward trend (long periods pf falling interspersed with shorter periods of rising). I have no idea if this trend will continue.

Just prior to the commencement of the euro in Jan 2002 the rate was 0.62. Since then sterling is down nearly 40%. Just prior to the onset of the global recession in 2007 the rate was 0.68. Since then its down nearly 25%. Anyone in Ireland who moved their savings to the UK in 2007, in anticipation of the economic armageddon predicted by some economists for Ireland, would have taken a huge hit. They’d have been much better off keeping their money under the mattress or betting it on horses. In contrast, anyone in the UK who moved their savings to Ireland in 2007 would now be making a huge profit. If I’d gone to the Ulster Bank in Strabane in late 2007 and asked for a loan of £10 million sterling and told them I was simply going to deposit it in a bank a mile down the road in Lifford, they’d have had me certified as insane. But, actually it would now be making a fantastic profit and I’d be a millionaire several times over.

Re that Expect Group report on Irish Water.

Anyone know how households are going to pay for excess water consumption, which is recommended, in the absence of metering. The Report states that ‘If it is decided to proceed with the metering programme, consideration should be given to an approach that is more aligned with the proposals in this report, with a focus on metering of buildings in the case of
multi-occupancy or metering of households on request.’

The report is heavy going for the non-economist but the message is unequivocal i.e. the government is obeying some of the detail of the fiscal constraints imposed by membership of the EU and the Euro Area but not the spirit.

If the definition of insanity is repeating the same actions but expecting a different result, it – the government – may be about to prove it. The IFAC reports will provide the most trenchant and detailed account of how this proof came about.

The biggest failure is to abide by the – nominally – fixed Ministerial expenditure ceilings. One is left with the impression of a Department of Finance – both parts – still in the grip of the outmoded Westminster model of budgetary management.

The positives are as before (i) the departures from the proper path are serious but not – yet – terminal (ii) the international context remains benign, at least for the moment and (iii) the general mood in the EU and internationally is to cut all governments some slack.

Maybe enough for some to hang themselves.

One assumes that an intensive debate is taking place within the Irish economic policy community on the issues posed. But where?

Comments are closed.