Author: Seamus Coffey

Irish Society of New Economists 2012 Conference

The ninth ISNE annual conference is being held in UCC on Thursday 23rd and Friday 24th of August.  This year’s organisers are David Butler, Robbie Butler and Justin Doran.

Researchers wishing to submit their work for consideration are advised to submit an extended abstract (300-400 words) to isne2012@gmail.com. Applicants are asked to include their name, institute or affiliation, current academic status (PhD, Young Professional, Masters) and JEL code(s) for their research on submitting an abstract.

The deadline for the abstract submission is Friday, 1st of June 2012.
Applicants will receive notification by Friday, 22nd June 2012.

There will be two plenary sessions:

  • Professor Geoffrey Hodgson (University of Hertfordshire) Editor-in-Chief of the Journal of Institutional Economics, and
  • Professor Bernard Fingleton (University of Cambridge) Editor-in-Chief of the Journal Spatial Economic Analysis and formerly co-editor of the Journal Regional Studies and a Fellow of the Regional Science Association International and the Spatial Econometrics Association.

For more details visit www.isne2012.com

The Exchequer Balance

Yesterday’s release of the end-of-year Exchequer Statement provides the opportunity to update the quick look we gave to the mid-year figures.  The conclusions drawn in July are largely unchanged.  First the overall Exchequer Balance. 

At €24,917 million in 2011, this was the largest Exchequer deficit ever recorded.  The Press Statement released with the figures says that it’s not too bad though.

The Exchequer deficit in 2011 was €24.9 billion compared to a deficit of €18.7 billion in 2010. The €6.2 billion increase in the deficit is due to higher non-voted capital expenditure resulting primarily from banking related payments. The majority of these payments are once-off payments relating to the recapitalisation of the banks  and an exchequer deficit of €18.9 billion is forecast for 2012.

Excluding banking related payments the Exchequer deficit fell by €2¾ billion year-on-year.

Ah, “once-off” banking payments.  Next year’s “once-off” banking payments will be €1.3 billion to IL&P and possibly some further payments to the credit union sector.  So what €8.95 billion of “banking related payments” do we have to remove to turn a €6.2 billion deterioration in the Exchequer deficit into a €2.75 billion improvement?

UPDATE: I had guessed what was included in this calculation but the Department of Finance have posted a useful presentation providing the details.   This is from slide 4.

The issue is the inclusion of the Promissory Notes.  If we exclude this €3.1 billion payment along with all the other banking amounts then the Exchequer Deficit is lower this year. 

We didn’t make a payment on the Promissory Notes last year but we will make this €3.1 billion payment each year to 2023 and lower payments right up to 2031.  From next year there will be accrued interest added to the Promissory Notes that will increase the General Government Debt.  You cannot exclude something that is going to happen for the next two decades as a basis for saying the deficit is getting smaller.

We can strip out a lot of the banking complications by looking at the balance of the Exchequer current account.  This does include the €1.2 billion of income earned from providing the guarantee to the covered banks which is counted as current revenue.

The final outturn and annual pattern of current account deficit has been largely unchanged for each of the last three years.  Between 2007 and 2009 there was a €20 billion deterioration in the current balance.  In the two years since the achievement has been to keep the drop to €20 billion.  There has been no improvement in the current account deficit.

Looking the Exchequer interest payments gives some insight into how this has been achieved.

For a country that has to borrow to fund the deficits shown above it is pretty amazing that the interest expense in 2011 was lower than in 2010.  The explanation is that some of the interest costs were covered from an account other than the Exchequer Account.  Again, the press statement is helpful.

Taking into account the funds used from the Capital Services Redemption Account (CSRA) as well as Exchequer payments, total debt service expenditure was up €1.1 billion year-on-year in 2011, at close to €5.4 billion. This reflects the burden of servicing a higher stock of debt.

For 2011, the Budget target was a General Government Deficit of 9.4% of GDP.  The actual deficit will be around 10.0% of GDP.  This slippage (largely the result of lower than expected tax revenue) was not a significant issue as the deficit limit set by the European Commission was 10.6% of GDP. 

For 2012, the Budget target is a deficit of 8.6% of GDP.  The deficit limit set by the EC is also 8.6% of GDP.  If there is any slippage or lower than expected nominal growth we will not meet the deficit limit.

IMF Fourth Review

The fourth review of the Extended Arrangement  for Ireland can be read here.  This is the updated IMF projection of the general government gross debt up to 2016.

In the third review the IMF had set a target of €7.4 billion for the primary exchequer deficit in June 2012.  This target has now been revised to €9.0 billion. 

The target this year had been €10.1 billion and the June 2011 outturn for the primary exchequer deficit was €8.4 billion.  We can have a €0.6 billion deterioration in the primary exchequer deficit in the first six months of next year and still meet the IMF’s target.

Debt and Interest (update)

A recent post looked at total debt and interest payments in the household, non-financial corporate and government sectors using data from the CSO’s Institutional Sector Accounts. There were some unanswered issues relating to the “interest paid” figure given for the three sectors in the accounts.

A quick query to the CSO has resolved this issue.  The interest paid figure in the ISAs is actually an adjusted amount where the adjustments is for Financial Intermediation Services Indirectly Measured (FISIM).

The interest amount in the ISAs is based on a "risk-free rate" or some variation thereof.  The remaining interest is considered a payment for service and appears elsewhere.  The CSO’s accounts include this adjusted amount as interest paid (D.41).

The actual interest paid (D.41g) is available from the Eurostat database and is used to create this graph.

In 2010, the total amount of interest paid was €16.2 billion.  This was 10.4% of GDP and 12.6% of GNP. 

As interest rates have fallen the interest paid by the household and non-financial corporate sectors have fallen. In 2010, the household sector paid €6.3 billion of interest (and received €1.3 billion).   In contrast the interest paid by the government sector has more than doubled in just two years and is set to be the largest amount in the coming years.

Two tables of comparative EU27 data for 2010 are also provided.

  1. Financial liabilities of household, corporate and government sectors
  2. Actual interest paid by the same sectors (incomplete)

As with the earlier post the measure of debt is the sum of the following liabilities: currency and deposits (F2), securities other than shares (F3) and loans (F4).

As has been stated a number of times (and discussed here) in terms of total debt Ireland is the most indebted country in the EU.  In 2010, the total for the household, non-financial corporate and government sectors is 430% of GDP or 525% of GNP.  No other country is above 400% of GDP and the unweighted average for the EU27 is 245% of GDP.

However, when it comes to actual interest paid Ireland is not such an outlier.  In fact even with incomplete data there are four countries in which the three sectors combined paid more interest than in Ireland.  At 10.4% of GDP the interest paid in Ireland is one-fifth more than the 8.6% of GDP unweighted average for the 20 countries for which 2010 data is available.

The may be a number of reasons why we are paying less interest such as lower interest rates and impairment in the household and corporate sectors.  While the government can try to continually roll over the debt, the household and corporate sectors will try to repay the interest and capital.  The non-consolidated nature of the accounts means that the debt may not be actually owed to third parties.  This may be particularly true of the non-financial corporate sector, the debts of which make up more the half of the total debt figure for Ireland in the usual analysis.

The tables themselves are below the fold. 

Continue reading “Debt and Interest (update)”

Debt and Interest

There has been a lot of focus on the level of debt in Ireland.  The household sector is suffering from a debt overhang as a result of the excesses of the previous decade, the government sector has seen its debt level soar as it tried to cover the losses in the banking sector and continues to run huge deficits, while the level of debt in the non-financial corporate sector appears enormous but seems to require a closer examination.

Using the CSO’s Institutional Sector Accounts it is possible to come with charts like the following (starting from when the dataset begins).

The lines in the chart represent the non-consolidated sum of the liabilities of each sector under three headings.

  • AF2: Currency and Deposits
  • AF3: Securities other than Equity
  • AF4: Loans

The government is the only sector to have liabilities in all three categories as it had retail debt, government bonds and outstanding loans (mainly Promissory Notes) summing to €141 billion at the end of 2010.  The corporate sector has both loan and outstanding debt securities, though loans make up 97% of the €347 billion total.  The household sector has €185 billion of loans outstanding and is the only sector showing a declining level of debt.

The total of these is €673 billion which is equivalent to 430% of GDP or 526% of GNP.  There has been much speculation about where these aggregates are headed over the next few years and whether a default of debt in any or all the sectors is imminent.  A debt level in excess of 500% of GNP does suggest that only one conclusion can be drawn.

However, before declaring that the debt is “unsustainable” and can never be carried it is worthwhile to consider the actual burden that this level of debt is creating rather than simply focussing on the size of the debt.

Again we can turn to the CSO and this time to the Non-Financial Accounts and the interest expense in the Primary Allocation of Interest Account (item D41). 

Two of the lines here appear to make sense.  Household interest expenditure rises with interest rates and debt accumulation and peaks in 2008 at €8.1 billion and then falls as interest rates fell and debt was repaid and was €4.2 billion in 2010.  The interest expenditure of the government begins to rise from 2008 due to well-known reasons and was €4.9 billion in 2010.

The pattern on interest expenditure by non-financial corporations does not present itself to such a straightforward analysis.  This peaked in 2008 at €7 billion but in 2010 had fallen to just €712 million.

At 2.3% of the liabilities from the first chart, the interest for households appears low but the figure for non-financial corporations is startling given that we have just seen that they had €347 billion of potential liabilities requiring interest payments.  Surely firms paid more than €712 million of interest in 2010?

One thing to note is that these accounts are non-consolidated so there could be intra-company loans in the total.  Secondly, firms did make substantial payments in 2010 as distributed income of corporations (€18.0 billion) and as reinvested earnings on direct foreign investment (€14.6 billion).

The interest expense of government is set to increase over the coming years but lower interest rates and continued repayment will reduce the figure for households.  The total for businesses remains an anomaly.

In total in 2010, the three sectors allocated €9.8 billion to interest.  This is equal to 6.3% of GDP or 7.7% of GNP.  Under neither measure does this look like an impossibly large burden but perhaps the discussion will unearth a deeper understanding of these figures.