How much of Ireland’s “fiscal space” will climate inaction consume?

Here’s a guest post on the very important potential fiscal costs of climate mitigation by the IIEA’s Joseph Curtin. 


The basic imperative to reduce emissions is easily understood. From March 2015 to July 2016, in each successive month the previous highest global temperature for that month was broken. July 2016 was the warmest of any month on record in the period of historic measurement. Given this record goes back roughly 160 years, the odds of this occurring without man’s input in the form of greenhouse gas emissions is infinitesimally small.

Reducing emissions is a political challenge that is difficult to grapple with, in Ireland as in many other countries. In welcome developments, we now have a Government Department with “Climate Action” in its title, and the newly established citizens’ assembly was given the goal of exploring “how the State can make Ireland a leader in tackling climate change”.fig1.png

But on the ground there are few examples of “action” and “leadership” to draw upon. There has been no plan to reduce emissions since the previous strategy expired 4 years ago. As we can see from the EPA’s latest inventory report, since the end of the recession in 2011 Irish emissions have more or less flat lined. In fact emissions will probably increased in 2015 (although EPA data have not yet been published) and are projected to continue increasing in the years ahead.

Continue reading “How much of Ireland’s “fiscal space” will climate inaction consume?”

Brexit Flu?

The latest exchequer returns are in, and are a bit down relative to trend and to target month-on-month. From the release:

July 2016 Outturn
July 2016 Target Excess/Shortfall (€m) Excess/Shortfall (%)
Income tax 1519 1522 -3 -0.20%
VAT 1766 1830 -61 -3.30%
Corp. Tax 116 139 -23 -16.50%
Excise 482 507 -25 -5%
Stamps 114 111 3 2.30%
Capital Gains 14 8 6 67.40%
Capital Acquisitions 19 17 2 13.80%
Customs 26 29 -4 -13%
Levies 0 0 0 0.00%
LPT 21 23 -2 -6.60%
Unallocated 9 0 9 0.00%

The two numbers everyone will focus on are the 13% drop in customs taxes and the 16% drop in corporation tax.

In terms of money in the door up to July, the State is still up 8.5% on last year, so we shouldn’t be too worried about the supply of sweeties come Budget day just yet. The other important thing to note is just how volatile these data are–they bounce around a lot, and you can read very little into one month’s data. So please, before everyone runs off saying Brexit is killing the Irish economy, it isn’t. Or perhaps more accurately, it isn’t just yet.

Another interesting piece of data shows Irish consumers are a bit put off but unlikely to develop Brexit flu from contact with their nearest neighbour.

While UK PMI data is nose-bleed inducing, the recently-released KBC consumer sentiment index shows that Irish consumer sentiment declined in July, but the scale of the drop was relatively modest when measured beside its UK equivalent, as the chart below shows.

csijul16d02So what do we see? We see a bit of concern, and bit of a wobble, but that’s all, up to now. Hold fire on the pronouncements of doom for a few more months at least.

Thinking a little about indexation

The Minister for Social Protection wants to index many social protection payments to a cost of living index as an anti-poverty measure. This makes sense on the face of it, as long as that cost of living index is going up, and as long as the level of benefits fall when the cost of living falls. It’s also worth thinking about the virtues of indexation, as this was one of the main criticisms IFAC had of the fiscal space calculations during the last election.

Let’s say you index benefits to the consumer price measure of inflation.

Here’s what happened to that reading over the longer run.

Screen Shot 2016-07-22 at 11.29.28Just messing about with the idea a little more, imagine we ‘begin’ the Irish economy in year 1 with a CPI reading of 100, and grant benefits of €100. Then we can add in (say) the last 20 years of real CPI data from 1995 to 2015 to get a sense of what would have happened to benefits in a year-on-year basis as a result.

The line is the increase in benefits as a result of the indexation, and the bars are the changes in euros to the benefits as a result of the cost of living increase or decrease, measured on the right hand axis. The excel sheet I used to knock this up is here.


Hopefully you can see two things. First, the measure is highly pro cyclical. Precisely when we want benefits to decrease a bit, because the economy is growing strongly, they go up, and when we want benefits to increase a bit to cover the cost of living during a crash, they go down. Second, in recent years inflation has either stagnated, or fallen, so you wouldn’t see a huge increase or decrease in benefits either way. Now you could smooth out some of these effects out with a moving average of, say, 3 years, but this little exercise shows, I think, that it’s worth looking carefully at indexation proposals.

(Updated with thanks to commenter Tony_Eire.)