Ireland’s Fiscal Strategy

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.)

ECB Statement: Jürgen Stark resigns from his position

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.)

EU Commission Review

The latest EU Commission Review of Ireland can be read here.

Higher education and research

Higher education and research was again in the news today.

The latest batch of bad news on the labour market in Waterford seems to have triggered a decision to establish Waterford University. I am not convinced that universities are necessarily good for regional development. Some universities sure have a positive impact, but I don’t think this holds for any university. With the newly build highways, Waterford is closer to Cork and Dublin, taking away some of the would-be benefits of a local centre of learning and research.

Furthermore, Ireland has plenty of universities already. The largest university has 18,000 students (UCD, 2009) — which puts it below average in the Netherlands,  60th in the UK,  38th in Germany, 35th and just above average in France. Ireland has the 8th highest number of universities per capita in the world already. (A new university would not change the latter rank, just push us closer to Norway.) This matters for two reasons. There is a fixed cost in running a university. International rankings are not normalized for size; small universities cannot do well.

The 2010 annual report of Science Foundation Ireland also made the news today. The press release emphasizes collaboration, which has increased with both researchers abroad and companies in Ireland. This is not a measure of success. It may just reflect the changing nature of SFI funding and its increase in size. The annual report itself has more indicators, but is annoyingly glossy for an academic organization. We learn that SFI-funded researchers have published 22% more papers in 2010 than in 2009, but we are not told the number of researchers. We learn that Ireland has gone up 16 places in the citations-per-paper ranking (36th in 2003, 20th in 2010), but for all we know that may be because of the social sciences and humanities (who are not supported by SFI).

The SFI 2010 Census has more numbers. Two things stand out: Few patents, few spin-outs. Emigration numbers are high: 47% for all, 66% for non-Irish (post-doc and below). SFI’s mission is to bolster innovation in Irish manufacturing.

Risk Off

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.