Category: Fiscal Policy

About The €7.5 Billion Cumulative Adjustment Figure

There has been a lot of reporting about how the cumulative adjustment for the next few years is going to be higher than €7.5 billion and how this was the figure that was announced at the time of the last budget.

I was a bit puzzled by this reporting because I had been under the impression that the figure for cumulative adjustments was €8.5 billion. Here’s why. Here’s the Stability Programme Update released at the time of last year’s budget, which is the document provided to the European Commission to illustrate the details of our multiyear plan.

Click on the document and go to page 19. Table 9 describes €3 billion per year in additional measures to be “delivered” in 2011 and 2012 as being made up of €1 billion per year in capital program adjustments that were “already identified and incorporated into the base” and €2 billion per year of additional adjustments.

For this reason, page 20’s description of the adjustments in future years shows €2 billion in 2011, €2 billion in 2012, €1.5 billion in 2013 and €1 billion in 2014, which adds up to €6.5 billion. However, since Table 9 tells us that an additional €1 billion a year in capital adjustments had been identified and incorporated into the base, I had believed the profile for total adjustments planned was €3 billion in 2011, €3 billion in 2012, €1.5 billion in 2013 and €1 billion in 2014, which adds up to €8.5 billion.

However, it turns out that the baseline for capital spending is a continuation at prevailing levels. Table 10 shows Gross Voted Capital falling from €6.445 billion in 2010 to €5.5 billion in 2011 and staying there afterwards. You can add this €1 billion cut in 2011 to the €6.5 billion identified elsewhere in the table to get to the €7.5 billion.

What about the additional €1 billion of capital spending cuts that Table 9 tells us had been identified and incorporated into the base from 2012 onwards? Apparently, the 2012 element of these “identified cuts” doesn’t exist. (It appears that someone in Finance mixed up their levels and changes.)

So, €7.5 billion is indeed the correct figure. However, those of you who, like me, had thought that the government had been planning €3 billion in adjustments in 2012 haven’t had it right.

Sovereign Wealth Funds and the Crisis

This analysis piece in the FT provides an interesting overview of the role of SWFs during the crisis (including Ireland’s NPRF).

Fiscal Adjustment After a Banking Crisis

This new IMF paper studies fiscal adjustment in the wake of banking crises. One empirical finding is that large fiscal gap require increases in revenue in addition to expenditure cuts.

Summary: This paper analyzes the experience of 99 advanced and developing economies in restoring fiscal sustainability during 1980 – 2008 after banking crises, which led to large accumulation of public debt. It finds that successful debt reductions have relied chiefly on generation of large primary surpluses in post-crisis years through current expenditure cuts. These savings have been accompanied by growth-promoting measures and a supportive monetary policy stance. While these results are consistent with the existing literature, the paper finds that revenue-raising measures increased the likelihood of successful consolidation in countries that faced large adjustment needs after the crisis. This reflects the fall in effectiveness of spending cuts when deficit reduction needs are large independent of initial tax ratios.

TASC Proposals for Budget 2011

The TASC think tank has produced its proposals for Budget 2011 (a mix of suggested tax and spending proposals, plus recommendations to improve the quality of publicly-available information): the full document is here and the executive summary is here.

Fairness and Fiscal Strategy

In addition to the budgetary strategy itself, I hope the Government are hard at work on the political strategy for the four-year plan.   Unfortunately, it seems chances are fading of a limited degree of political consensus to support the credibility of the plan.   As I have written before, I think it will be essential that people focus on the overall fairness on the package rather than on individual measures that particularly target them — there will be lots of the latter for all of us.   The ESRI’s SWITCH model is the best tool available for establishing the allocation of burdens for the plan as a whole.   Tim Callan and co-authors show the power of the model at today’s Budget Perspectives conference:  paper here; slides here.

In the UK the new government appear to realise the importance of the overall perception of the fairness of package, and the debate there is more advanced.   Philip Stephens has a nice piece on the politics of fiscal adjustment today’s FT.   (As a read it, it is hard not to think of the damage done by Mr. Sutherland’s fly-in pontificating.)  Using the example of changes to child benefit, Stephens captures well the challenges involved with coming up with a package that is widely viewed as fair:

Fairness, of course, lies in the eye of the beholder. Though it might seem entirely reasonable to most people that those earning more than £44,000 a year or so should lose child benefit, the anomalies thrown up as between two- and single-earner couples appear less so. What will ultimately matter, though, is how the nation comes to see the spending package as a whole.

We may know more after the weekend. The title of Brian Lenihan’s Keynote Address at the DEW 33rd Annual Economic Policy Conference in Kenmare is “Current Issues in Political Economy”.