The Economics of “Don’t Scare the Horses”

I spent lunchtime at Newstalk defending the 46 guys article on the budget deficit against Dr. Garrett Fitzgerald. Podcast available here.

What it set me thinking about though was the following. As I’ve said, I think the statement in the article about the deficit is accurate and wholly defensible. However, what if it wasn’t? What if it was as badly thought out as Dr. FitzGerald seemed to think on Monday morning?

Would such an intervention actually cause problems for Ireland in the sovereign bond market as Dr. FitzGerald believes? The argument in favour of this position is something to do with its effect on “investor sentiment.” The argument against is that the sovereign bond market is populated by hard-headed individuals who rely on expert analysts that do their sums on revenues, expenditures and fiscal sustainability for every country and won’t pay any attention if some group of idiot economists put out a bad forecast.

I’d be interested in the thoughts of those who read this blog and have a closer connection to these markets than I do.

More generally, I do wonder whether “Don’t Scare the Horses” is just another version of the regular exhortation not to “Talk Down the Economy.” My feeling is that consumer and investor sentiment play a role in the economy but that this can never justify calls to limit free speech regarding economic fundamentals.

Update: A report on the latest Exchequer statement on the websites of both the Irish Independent and Irish Examiner states “The figures, published this afternoon, show a budget deficit of €18.7 billion for the first eight months of the year, compared to €8.4 billion for the same period last year.” Does this mean that the Independent and Examiner are now also being irresponsible and destabilising for referring to the Exchequer deficit as the budget deficit?

Garrett FitzGerald and the Budget Deficit

On Morning Ireland today, Garrett Fitzgerald again criticised the opinion article signed by the 46 economists. However, rather than focus on the article’s principle arguments about the government’s banking policy, Dr. Fitzgerald concentrated on what was essentially a parenthetical comment about the budget deficit. Among other things, he said:

Moreover, the statement made that we’re moving towards a deficit of €30 billion was quite irresponsible and that destroyed my confidence in the 46 economists.

Even leaving aside that the fact that the size of this year’s deficit is nowhere near the key issue in the 46 economists piece, is it indeed the case that this figure was irresponsible? One way to check is to look at the forecasts of that highly responsible body, the Economic and Social Research Institute. Their most recent Quarterly Economic Commentary, based on data available through July 9th, predicts an exchequer deficit of €25.7 billion.

Since then we have had the publication of the July exchequer returns (Irish Times story here) which saw tax revenues falling behind the targets set in the April budget. It would certainly not be extreme to add another billion or so to the projected deficit forecast on the basis of these figures, putting it at about €27 billion. To the extent that these shortfalls relate to unanticipated weakness in the economy, it is likely that social welfare payments will also come in ahead of target, perhaps pushing the projected deficit up to €28 billion.

Even ignoring the fact that deficit forecasts have been coming in too low now for some time, it seems to me that this is already enough evidence to justify the statement in the 46 economist piece that

We now look to be on course for a Government deficit of close to €30 billion.

Note incidentally, the sentence is projecting a deficit “close to” not “equal to” €30 billion.

I’m afraid here that, as with Dr. Fitzgerald’s claim that the piece failed to distinguish between different classes of bank debt, this criticism seems to be largely unwarranted.

The pity, of course, is that far more people read the Irish Times and listen to Morning Ireland than will ever read this blog. So, unfortunately, the damage to professional reputations done by being branded “irresponsible” and “destabilising” by a respected public figure will not be easy to undo.