The latest issue of Finance&Development is now available online – inequality is a main theme for this issue.
Author: Philip Lane
This article is in today’s Sunday Business Post (link tomorrow) and released here with kind permission of its editor.
There has been an intensification in the debate over Ireland’s fiscal strategy over the last couple of weeks, with Minister Noonan’s recent appearance before the Joint Committee on Finance, Public Expenditure and Reforms, the political party think-in events during this past week and the preparations for the imminent new Oireachtas session.
It is important to realise that Ireland retains considerable fiscal autonomy under the EU/IMF programme, such that there are genuine and substantive issues to be decided by the government during the coming weeks. The programme sets down a set of minimum targets for the overall pace of fiscal adjustment but there is considerable latitude in determining the appropriate mix of spending and taxation measures. Moreover, the government is free to pursue more ambitious targets that exceed the lower bounds that are specified in the programme.
For 2012, the government is required to introduce fiscal consolidation measures of at least €3.6 billion (importantly, including the carryover impact of the tax changes introduced in 2011). In addition, it is required to deliver a general government deficit that is no larger than 8.6 percent of 2012 GDP. Indeed, at the time of the deal in November 2010, the assumptions concerning the projected growth of the economy and the projected interest rate on the government debt meant that fiscal consolidation of €3.6 billion would deliver the minimum target of a general government deficit of 8.6 percent of GDP in 2012.
A closer look at the makeup of the overall target balance of 8.6 percent of GDP shows that it consists of three components. According to the Department of Finance’s Stability Programme Update (April 2011), the target overall balance is the sum of a cyclical budget deficit of 0.5 percent of GDP, debt servicing costs of 4.7 percent of GDP and a structural primary (non-interest) balance of 3.4 percent of GDP. (This breakdown does not allow for temporary or one-off factors that can be quite considerable in any given year.)
The statement is here.
Update: from Reuters, German Deputy Finance Minister Joerg Asmussen will replace Juergen Stark on the executive board of the European Central Bank, a source familiar with the plan said Friday.
(Asmussen was heavily featured in the recent VF article on Germany by Michael Lewis.)
This paper by Andy Haldane provides an interesting analysis of the role of macro-prudential policies during periods in which risk aversion dominates market sentiment.
The Rugby World Cup is putting the media spotlight on New Zealand. The New Zealand macroeconomic experience is fascinating – very similar to Ireland in some respects but also with major differences in terms of its exchange rate and banking-sector policies. In this new paper, I examine the New Zealand situation, with a particular focus on its external imbalances.
Abstract
This paper argues that large external imbalances pose significant macroeconomic risks for New Zealand. While New Zealand has coped well in recent years, the global financial crisis has underlined the vulnerability of deficit countries to financial shocks. New Zealand can draw important lessons from the global crisis by adjusting its macroeconomic policy framework to further mitigate the risks embedded in its international balance sheet.