Okay, here’s a real treat for all our fans of all things promissory-note related. A classic Burton-Lenihan exchange in the Dail today. My favourite bit:
Deputy Joan Burton: We need a PowerPoint presentation on this.
Deputy Brian Lenihan: We do not.
Deputy Jim O’Keeffe: We need lots of money for this.
Full text below the fold.
The main article in today’s Irish Times highlights the gap between the GDP estimates in the December 2009 plan and current thinking:
The department confirmed last night that it believed gross domestic product (GDP) this year would be 2.5 per cent below its projected level at the time of the last budget.
In December 2009, the Government believed that spending in the economy, or GDP, would amount to €161 billion this year.
Owing to statistical revisions to GDP for 2009 and 2010, it now believes that the figure this year will be €4 billion lower, at €157 billion.
This means that without any change in the budget deficit in absolute terms, the deficit will be higher than projected when expressed as a percentage of GDP.
The department also confirmed that its July 2010 GDP growth projection of 1 per cent has been revised downwards to “marginally” above a no growth position of 0 per cent. Servicing cost of the bank bailout at about €1.5 billion a year will add to the problem.
What explains this gap?
1. In December 2009, the plan forecast that nominal GDP would be €164.6 billion in 2009 and €161 billion in 2010. These forecasts were fairly close to the projections in the ESRI’s Autumn 2009 QEC (released on October 13 2009).
2. The first preliminary data from the CSO on 25th March 2010 put 2009 nominal GDP at €163.5 billion.
3. The revised data from the CSO on 30th June 2010 put 2009 nominal GDP at €159.6 billion. This is the ”news” event.
4. The July 7 2010 mid-year update from the Department of Finance does not discuss the revision to the 2009 GDP figure. In line with general views at the time, it improved its 2010 forecast for real GDP growth. It also highlighted that the GDP deflator was undershooting and pointed out that nominal GDP growth would be adversely affected – but did not quantify this effect. It also re-iterated that real GDP growth of 3.25 percent in 2011 was attainable and that an average real GDP growth of 4 percent during 2011-2014 was viable. It did not discuss prospects for nominal GDP over 2011-2014.
5. The Article IV IMF report on Ireland was published in July 2010. It reported negative nominal GDP growth of 10.1 percent in 2009 and projected negative nominal GDP growth of 2.6 percent in 2010.
6. The Summer QEC from ESRI was published on 14 July 2010. It projected 2010 nominal GDP at €158.9 billion.
7. On October 4 2010, the Autumn Bulletin from Central Bank projected 2010 nominal GDP at €157.018 billion.
Summary: the downward revision to 2009 GDP has been known since end June 2010. The €157 billion projection for 2010 was announced in the October 4th Central Bank bulletin and is in fact a bit more optimistic than the nominal GDP projection in the July IMF report.
An central element in the new 2011-2014 fiscal plan will be to provide a reasonable estimate for nominal GDP growth over this period. This involves two components – prospects for real GDP growth and prospects for the GDP deflator. Providing a detailed explanation for these projections will be an important element in communicating the plan.
I don’t have time to write about this in detail now but reports that Germany and France are pushing forward with the idea of an amendment to the Lisbon Treaty are an important development (news story here and a nice article by Arthur Beesley here). Apparently they want to use a new Treaty to formalise the sovereign bailout fund that is currently set to expire in 2013 and to formalise sanctions for states that break new EU budget rules.
These announcements appear to hijack what was an ongoing process involving the Commission and a task force chaired by EU President Herman van Rompuy. This process had just arrived at this package of significant reforms, which the accompanying press release had emphasised were “compatible with the existing Treaty of Lisbon”.
I’m pretty unenthusiastic about this. I don’t see why Treaty reform is required to formalise a sovereign bailout fund, when the thing is currently up and running without any Treaty change. The political sanctions element doesn’t strike me as desirable. And the whole idea seems to underestimate the complete lack of appetite of the European public for more Treaties and referenda.
Given that this would require a referendum in Ireland and what would be on offer would be the possibility of political sanctions for Ireland, one might imagine the people who worried about us potentially losing a Commissioner under Lisbon might also get a bit excited.
It was always going to be unlikely that the process of briefings for opposition parties would be kept secret. However, with what appears to be authoritative and pretty detailed information all over today’s Irish Independent, it may just be best if the Department of Finance publicly released the briefing information it provided to the opposition politicians yesterday.
One of the more mysterious aspects of the budgetary finances is the magic promissory notes. By my count, we will have issued about €30 billion of these by the end of the year: About €25 billion to Anglo and about €5 billion to INBS.
In this post earlier today, I pointed out that while the principal payments on these notes didn’t count against the general government deficit (because these will all be registered as part of this year’s deficit) they will still be part of our ongoing financing requirement in the coming years.
I didn’t write earlier about interest payments on these notes (the figures I was writing about were just my guess about the annual principal payments). One reason I didn’t discuss interest payments is that I wasn’t sure there were any: They could just be zero coupon bonds. However, it looks as though they are not. On Prime Time this evening, Joan Burton and government junior minister Billy Kelleher agreed that the annual interest cost of the promissory notes was going to be €1.5 billion. With €30 billion or so in notes issued, it now appears that the notes have an interest rate of 5%.
Now, as far as I know (and I’m happy to be corrected) these promissory note interest payments of €1.5 billion a year will count against the general government deficit.
Here I’ve updated the calculations from my Irish Taxation Institute presentation to incorporate the “if the promissory notes pay 5%” scenario. The bottom line? If one adjusts last year’s budget projections for (a) New projections from the Central Bank for nominal GDP (b) A projected decline in revenue of €1 billion (c) €1.5 billion in promissory note interest payments, then the starting point for this year’s budget prior to any adjustments would be a deficit of €22.5 billion or 13.9% of GDP.
Note that even if one didn’t factor in negative effects of fiscal adjustments on GDP, then with a Central Bank GDP projection of €162 billion, hitting the original deficit target for 2011 of 10% of GDP would require adjustments of €6.3 billion (162*0.039). Factoring in the contractionary impact of budget cuts on GDP, it would likely take €7 billion in adjustments to get to a 10% target.
As I say, these calculations are based on a 5% interest rate on the promissory notes. My interpretation from Minister Kelleher’s apparent confirmation of Burton’s comments is that this is the correct rate. However, I think it’s time for the government to fully clarify the terms of these notes as soon as possible.
There have been a number of comments over the last few days regarding CSO revisions to nominal GDP. This has been explained in the Irish Independent today as resulting from a change in the way CSO calculate the size of the economy. Apparently, there were other comments at Kenmare over the weekend also
suggesting that a downward revision to GDP for 2010 is being contemplated by CSO.
I have been talking to CSO and they inform me that there has been no change in how they estimate GDP. CSO has already published the first two quarterly estimates for GDP in 2010. Q3 is scheduled for 16 December.