http://www.ucd.ie/t4cms/WP12_02.pdf

and in another that Croatia, which voted to join the EU a couple of weeks back, should think carefully about joining the currency union as currently constituted:

http://www.ucd.ie/t4cms/WP12_03.pdf

It would be nice to get solemn acknowledgement all round that fiscal rectitude is a good thing. It would be even nicer if some political attention could focus on what kind of EMU 2.0 might actually work in the long term.

Abstract:

The Swedish Fiscal Policy Council (FPC) set up in 2007 is one example of the recent international trend to create independent fiscal watchdogs. The FPC has established itself as an important participant in the Swedish economic policy discussion. The FPC has small resources and a broad remit including employment, growth, income distribution and monitoring of how well the government explains its policies in addition to evaluation of fiscal policy. The reason why it can work is that the FPC acts as a complement to other institutions. The interaction between fiscal policy and other policy areas as well as the possibility to exploit the council’s expertise in several areas are arguments in favour of the broad mandate, but at the same time there could be a risk that interest is diverted away from fiscal issues. The FPC’s experiences illustrate the time inconsistency issues involved in establishing a fiscal council: a government has an incentive to create such a body as a signal that it will pursue responsible and rational policies, but it also has an incentive to constrain the council’s activities once government policies are criticised.

Is this a good idea? Anyone know of any empirical evidence on the effectiveness of these types of tax breaks (assuming that they exist elsewhere)?

The minister has also indicated that inspections of septic tanks will be “risk-based”, and has redefined that concept as “if pollution is found nearby”. Commonly, risk is an ex ante concept. Inspections are supposed to prevent pollution.

Article 13 of the waste directive (2006/12/EC) specifies that inspections be periodic. Unless the department intends to periodically find pollution near each and every septic tank, the proposed inspection regimes will breach EU law.

That would not be a first. Friends of the Earth reviews the history of Irish waste water and EU law. Ireland has been in breach of EU waste law since the original waste directive (75/442/EEC) of 1975. No wonder that the Commission is seeking to impose fines.

UPDATE: The minister is in a particularly generous mood this week: There will be grant aid to upgrade faulty septic tanks.

[The compressed nature of an op-ed means that I did not cover all issues relating to the fiscal compact - my Croke Park presentation touched on some other dimensions.]

Podcast

Chair: Dan O’Brien (Irish Times)

Philip Lane (TCD
Ireland and the Fiscal Compact

John McHale (NUIG)
Strengthening Ireland’s Fiscal Institutions

Seamus Coffey (UCC)
Current and Capital Expenditure: Getting the Balance Right (Part 2)

Colm McCarthy (UCD)
Public Investment and Fiscal Stabilisation

On December 9, Herman van Rumpoy said

our first approach to PSI, which had a very negative effect on debt markets is now officially over.

It was being replaced with the following

from now on we will strictly adhere to the IMF principles and practices

Sure enough, the new ESM Treaty states

In accordance with IMF practice, in exceptional cases an adequate and proportionate form of private sector involvement shall be considered in cases where stability support is provided accompanied by conditionality in the form of a macro-economic adjustment programme.

Some are arguing that this is effectively a commitment to limit PSI to Greece. I don’t see how this is a tenable assumption. As this FT Alphaville post discusses, there is no sense in which IMF procedures rule out PSI. Furthermore, bond markets are also clearly not interpreting the new ESM treaty in this fashion since Portuguese bond yields are still effectively pricing in a default.

It’s very hard to see how, if the stars end up aligning sufficiently badly for Ireland, that “an adequate and proportionate” haircut won’t get applied to private sovereign bond holders.

Colm Keena reports on the committee proceedings here. The transcript of the discussion will be up here fairly soon. Update: Karl’s remarks are here. Update 2: Tom’s remarks are here. The divergence in viewpoints is fairly obvious from the reporting, with Alan and John thinking the fiscal compact is the way forward, Karl thinking in practice it’s a done deal anyway and even though rule sets like this make little sense (which Colm McCarthy hacked away at in a previous post), we should sign it. Tom didn’t think it was a good idea at all.

Karl’s point on macroeconomic thinking is worth expanding upon. He is quoted as saying

“What is noteworthy about the new EU fiscal compact, however, is that it does not correspond to mainstream thinking among economists as to how an ideal fiscal policy framework should operate.”

“Structural deficits were a theoretical phenomenon and establishing legally binding rules about impossible to measure quantities was sure to create trouble sooner or later. He thought the rules would lead to more austerity across Europe than was required.”

It is acknowledged and agreed that the granting of financial assistance in the framework of new programmes under the ESM will be conditional, as of 1 March 2013, on the ratification of the TSCG by the ESM Member concerned.

Viewers of the Vincent Browne show take heed!

PodcastChair: Constantin Gurdgiev (TCD)

Brian Lucey (TCD)
Banking in Ireland: Back to the Future

Karl Whelan (UCD)
The IBRC, ELA, Promissory Notes and All That…

Frank Barry (TCD)
Rectifying Design Flaws in the Euro Project

Podcast

Chair: Kevin Denny (UCD)

Orla Doyle (UCD)
Early Educational Investment as an Economic Recovery Strategy

Alan Barrett (ESRI/TCD)
The Costs of Emigration to the Individual: Evidence from Ireland’s Older Adults

Brendan Walsh (UCD)
Well-being and Economic Conditions in Ireland

Podcast

Ronan Lyons (Oxford)

Residential Site Value Tax: Valuation, Implementation & Fiscal Outcomes

Michelle Norris (UCD)
Pathways Through Mortgage Arrears

Rob Kitchin (NUIM)
Prospects for the Irish Property Market

A very central theme of the presentations and discussions was how reform might stimulate growth and thus reduce the costs of austerity.

Part of Doug Andrew’s presentation on governance is related to the privatisation thread already on the blog here. And, as regulated firms engage in investment, Colm McCarthy’s presentation on investment here could be read alongside some of the presentations from this session.

Although there are no slides from John Fingleton’s talk on competition, there is is a link to a closely-related paper, and you may, in any case, listen to the podcast of his (impassioned) speech, which is to be found from about 24.00 minutes into the recording.

Chair: Cathal Guiomard (CAR)

Podcast

Richard Tol (Sussex)
Energy Policy and Economic Growth

John Fingleton (UK OFT)
Economic Growth - How Can Competition Policy Help?
No slides but related paper here

Doug Andrew (consultant, ex-airport regulator)
Ownership, Governance and Reform

I’d note that the materials released all point to the need to implement the structural deficit rule at “constitutional or equivalent level” while the Independent reports that “preferably constitutional” is in the final draft.

If indeed it turns out that we need a referendum, this is a pretty bad start.

Update: The EU Council have finally released the text here. Anyway, “preferably constitutional” has been retained, which begs the question as to what van Rompuy and his officials were up to with their statements about “constitutional or equivalent level”.

Not only is there a lack of clarity about the companies to be sold and the timing of any sales, but it has also emerged that there are significant differences between the Government and the troika on the role privatisation should play in contributing to any economic recovery. These differences do not bode well in terms of making the best decisions about the future ownership of critical infrastructure industries.

At this stage, two key points of difference between the Government and the troika can be discerned. First, the drip-feed of information provided during the latest visit indicates that the troika views privatisation as a structural reform issue that should be implemented to improve the overall competitiveness of the economy. The Government, meanwhile, appears to be focused on privatisation as a means of raising exchequer revenues.

The second point of difference concerns how the proceeds from privatisation should be used. Whereas the Government wants to direct revenues towards job creation, the troika views proceeds as a means of paying down the national debt.

The troika’s view of privatisation as a tool for reducing costs and improving competitiveness is an orthodox proposition that is traditionally associated with multilateral organisations such as the International Monetary Fund but it is one that can be readily challenged.

Palcic and Reeves finish by making an important point about the dangers of short term political thinking applied to long term strategic assets. This problem is rarely discussed, as far as I can see, in Irish public policy. Hopefully we’ll see some more discussion in the comments about this problem.

(Angela Merkel, quoted here, poo-pooing the notion that French voters might have any say over whether the next government ratifies this treaty or not.)

Words fail me, but they’re hardly necessary,

• Patterns of Investment
• Investment, Depreciation and the Capital Stock
• Investment in EU Countries

From 1983 to 2010 capital expenditure averaged nearly 12% of gross voted expenditure.  In 2011, capital expenditure was 8.1% of gross voted expenditure, the lowest since 1992.

For the four years from 2012 to 2015 it is planned that capital expenditure will be 6.4% of gross voted expenditure.  For every €100 of voted expenditure, €93.60 will go to the current budget (transfer payments, public sector pay, and other non-pay expenditure on goods and services) and €6.40 will go to the capital budget.  Would this satisfy the equi-marginal principle?

In 2012, it is planned that gross voted capital expenditure will be €3.9 billion.  If the €55.5 billion allocation for gross voted expenditure was adhered to, but capital expenditure was set at the long-run average of 12% of voted expenditure, then capital expenditure in 2012 would be €6.6 billion.  To stay within the spending ‘envelope’ this would require a reduction of €2.7 billion in current expenditure.

Since the beginning of the CSO’s Institutional Sector Accounts in 2002 there has been a gap between investment in fixed capital and consumption of fixed capital by the government sector.  This peaked in 2008 but has dropped considerably since then.

We can see that over the next few years that planned capital expenditure will converge on the depreciation line.

This is confirmed in the Infrastructure and Capital Investment 2012-2016 programme which in relation to local and regional roads, for example, says “At present over 85 percent of investment is targeted at maintenance and rehabilitation work and this trend is expected to continue.”

Table 25 of the National Income and Expenditure Accounts provides a breakdown of government investment by use.

By 2013 this total will be down to around €3.5 billion and is planned to remain there until at least 2016.

There are also some non-voted sources of public investment.  In 2012 it is forecast that semi-state companies, the housing finance agency and some other non-commercial state agencies will have a capital expenditure of €2.7 billion.  Of this, €1.7 billion will come from their income/own resources and €1.1 billion will come from borrowings/EU receipts (including through PPPs).  In 2010, these sources provided close to €4.0 billion of investment.

The Infrastructure and Capital Investment Programme states:

The large gap that still exists between Government spending and revenue must be closed. Continuing to run considerable deficits and borrowing to fund them is simply not viable. It is clear that the Public Capital Programme must make a further contribution to budgetary consolidation.

Thus far, the Public Capital Programme has made the only contribution to narrowing the gap between revenue and expenditure.  In a recent look at the end-of-year Exchequer Returns we saw the following.

The deficit on the current account in 2011 (blue) was almost identical to the deficit on the current account in 2009 (green).  Unless there is a significant improvement in the current account we are not going to be in a position to increase borrowings for capital purposes in the medium to long term.

In its autumn review of Ireland (page 25) the European Commission  made reference to “the Government’s preference for taking politically easier measures”.  Both the current and previous government have set out a deficit reduction programme that is broadly two-to-one in favour of expenditure cuts over tax increases.  However, by 2011 gross voted current expenditure was still at 99% of its 2008 level, while gross voted capital expenditure had fallen to 54% of its 2008 level over the same time.

[Aside: Gross expenditure does not have Departmental receipts or ‘appropriations in aid’ (A-in-A) netted against it.  The main A-in-A is PRSI for the Department of Social Protection but there are many more charges and fees levied by Departments which they get to retain.  One such A-in-A is the Public Sector Pension Levy.  There is about €1 billion collected via the Levy.]

Due to the easily identifiable expenditures and outcomes a lot of attention is given to the effectiveness of capital expenditure projects.  One such instance is the €106 million spent on the Ennis-to-Athenry section of the Western Rail Corridor and the annual €3 million subsidy required to keep it open.  There is no doubt that this is an inefficient use of public money and does little to improve the productive capacity of the State.

In 2012, gross voted current expenditure is projected to be €51,880 million.  That is enough to build and run 475 Ennis-to-Athenry type railways.  We don’t need those but there are roads, schools, hospitals, water works and other projects which we do.