The IMF has released three major studies on the fiscal situation in advanced economies.
The summary is here, while the papers are available at:
Category: Fiscal Policy
Jean Claude Trichet’s Jackson Hole speech is here. This bit caught my eye:
The economy, it is sometimes argued, is at present too fragile and thus consolidation efforts should be postponed or even new fiscal stimulus measures added. As I pointed out recently, I am sceptical about this line of argument. Indeed, the strict Ricardian view may provide a more reasonable central estimate of the likely effects of consolidation. For a given expenditure, a shift from borrowing to taxation should have no real demand effects as it simply replaces future tax burden with current one.
The written version of the speech cites two papers by Robert Barro as supporting evidence for this position.
I think it’s worth noting that the Ricardian equivalence idea put forward by Barro—that consumers see deficits and taxes as basically the same thing—has been tested many many times. And the general consensus on this, as I understand it, is that there is very little evidence to support the idea.
Moreover, though the idea works in one very simplified model set up, there are lots of reasons why the proposition does not hold in reality (liquidity constraints, people having finite lives, people not having rational expectations, uncertainty about the path of government spending—see this extract from David Romer’s textbook.) Very few economists emerge from graduate schools believing in the Ricardian equivalence idea.
There are, of course, lots of arguments in favour of European governments setting out their long-term plans for the restoration of fiscal stability. However, it is a pity to see economic theories that are known to have little support regularly rolled out as arguments for fiscal austerity.
Trichet follows up on his Ricardian equivalence comments by arguing that expansionary fiscal contractions “are not just a theoretical curiosity” with the footnotes citing the old Giavazzi and Pagno paper with its two examples: Denmark in the mid-1980s and, of course, Ireland in the late 1980s. I’ve already said my bit about this, so I won’t repeat it. Suffice to say, this is pretty weak evidence that Trichet is serving up.
The Irish Times reports:
For example, the latest official breakdown on the 423 highest earners in the State showed that for 189 individuals who earned €500,000 or more in 2008, the average tax rate was 19.86 per cent.
I’m afraid this isn’t true. This report does not relate to the 423 highest earners in the State, as I’ve written about here, here and here. It only relates to a subset of the highest earners who would have paid less than 20 percent because of tax loopholes but who are not doing so now because of the introduction of a minimum rate.
To be fair, I don’t blame the journalists because the relevant document is so poorly written. At this point, however, I really think the folks in the Department of Finance responsible for this report should consider issuing an official clarification.
Update: In comments, Joseph O’Toole reckons I’m being mean to the Department of Finance because this is a Revenue Commissioners report. Well, I found the report here on the Department’s website, which suggests that they are responsible for its release. But, yes, the report is put together by Revenue Commissioners staff. So let me rephrase my point: Whoever is responsible for this report might think about issuing a clarification.
De Volkskrant has a piece on Ireland, transgoogled here.
They start by saying that Ireland was a role model for austerity at the start of the year, but is now a reason for concern. They give two reasons, the first of which is the unknown but large cost of saving the banks. Secondly, they do not believe that the government will deliver in the next budget.
Standard and Poor‘s have downgraded Irish sovereign debt from AA to AA- and their outlook for the rating (not the economy) is negative. S&P cite the rising cost of the banking bailout as in their statement and project a debt-GDP ratio of 113% in 2012.
On the banking costs, they state
We have increased our estimate of the cumulative total cost to the government of providing support to the banking sector from about €80 billion (50% of GDP; see “Ireland Rating Lowered To ‘AA’ On Potential Fiscal Cost Of Weakening Banking Sector Asset Quality; Outlook Negative,” published June 8, 2009, on RatingsDirect), to €90 billion (58% of GDP) …
We have increased our estimate of the cost to the Irish government of recapitalizing financial institutions to €45 billion-€50 billion (29%-32% of GDP) from €30 billion-€35 billion (19%-22% of GDP).
Our estimate includes two main components: the upper end of our estimate of the capital we expect to be provided by the Irish government to improve the solvency of financial institutions, and the liabilities we expect the government to incur in exchange for impaired loans acquired from the banks.
Irish ten year bond yields have risen above 5.5 percent this morning and the spread against their German equivalent, at about 340 basis points, is the highest it has been in recent years. The NTMA have objected to the downgrade, arguing that S&P were using an “extreme estimate” of the cost of the banking bailout.