As we all know, this country is facing into a very challenging three years as we try to close the gap between the tax generated in the State and the cost of welfare, public sector and interest on our massive debt. No-one should be surprised by the overall adjustments that will be set out in Budget 2013, Budget 2014 and Budget 2015 because the adjustments are set out in black-and-white in the Memorandum of Understanding which Ireland signed with the bailout Troika of the IMF/EU and ECB. We have in store €19bn of adjustments in 2013, 2014 and 2015 with 2015 alone being €8.6bn or €5,000 per average household. It is going to be difficult and an attempt was made on here recently to provide some clarity on the challenges and options.
So for any economist or politician or citizen considering the future of the country, they would at least like to know the basis on which the next three years projections have been prepared. After all, circumstances change for the better and worse, and we would like to have a sense of the impact of those circumstances on our deficit.
One of the key components of our deficit is the amount of interest we have to pay each year on our national debt, and remember that our gross government debt is set to rise to over €190bn next year according to official sources. And we know we will need find funding of about €40bn in 2014-2015 in deficits and rolling over maturing debt. Seamus Coffey sets out here our deficits for 2014-15 here which shows €8.3bn of cash interest payable in 2014 and €8.5bn in 2015. When you consider our deficits overall are projected to be €8.3bn in 2014 and €5bn in 2015, you can appreciate that the interest payable is significant. But what interest rate assumptions underpin the projections?
In the Dail on Tuesday, the Sinn Fein finance spokesperson Pearse Doherty asked the Minister for Finance Michael Noonan to set out the interest rate assumptions in the projection of our deficit. A fair enough question, you might think in an economy where even small differences to the interest payable can have a big impact on the budget adjustment comprising new taxes and spending cuts. But alas, Minister Noonan is of the opinion that letting us know the interest rate assumptions would be “unwise”. The full exchange is here (with emphasis added)
“Deputy Pearse Doherty: the projected interest rates used in his Department’s April 2012 Stability Programme Update for new debt issued by the State in each of the years 2013, 2014 and 2015. [27957/12]
Minister for Finance, Michael Noonan: Having consulted with the National Treasury Management Agency (NTMA), I am of the view that it would be unwise to outline the interest rate assumptions underpinning new debt issuance over the period 2013 – 2015 as this would compromise the State’s ability to access funds at the most competitive rate possible. As the Deputy is aware, the majority of the State’s financing needs to the end of 2013 will be met through the funding provided under the EU/IMF programme of assistance. However, the NTMA is planning to return to the markets before the end of the term of the programme once conditions have become more receptive.
The NTMA is in constant contact with market participants and will advise me when it feels that the time is right to re-enter the markets. The NTMA will also advise me in relation to the interest rates that it feels are appropriate.”
Despite Minister Noonan’s refusal to provide what is a key assumption in our projections – we need to issue about €18bn of debt to cover our needs for 2014, and there is a €180m annual difference for each 1% that we need pay on that issuance – we can have a stab at the overall interest rate by dividing the interest payable by the estimated debt. So in 2014 we expect to pay €10bn on debt of about €200bn. And it works out at a shade under 5%. It would be good to know the assumptions though, because if the ESM is actually available at 3% then we might have perhaps €400m extra in 2014 to either accelerate the budget adjustment or to cushion the austerity.
The question seems to be either admit we will be in a bailout from 2013 onwards or guess the bond yields available to Ireland in those years.
Not entirely unreasonable to refuse imo.
You keep repeating a mistake about the amount of tightening required, confusing cumulative figures with those for each year. For example, for the years 2013 to 2015 COMBINED there will be “adjustments” (tax increases and/or spending cuts) of €8.6bn. But in 2015 the adjustment is “only) 2.0bn, not the €8bn you quote. The table on page 6 of the Stability Programme Update is quite clear on this – if you don’t believe this pick up the phone and ask the DoF or any economist familiar with these numbers. The adjustments in all three years are far smaller than those in the last few budgets, so if you believe the figures (a big if, perhaps), future budgets will be far less tough than in the past.
@preacher, you’re wrong :-)
In 2015 the annual adjustment is €2bn, that is true, but that is compared to 2014.
In 2014 the annual adjustment is €3.1bn, that is true, but that is compared to 2013
In 2013 the annual adjustment is €3.5bn, that is true but that is compared to 2012.
So in 2015 – compared with 2012 – the adjustment is €2bn PLUS €3.1bn PLUS €3.5bn or €8.6bn
So in 2014 – compared with 2012 – the adjustment is €3.1bn PLUS €3.5bn or €6.6bn
So in 2013 – compared with 2012 – the adjustment is €3.5bn
But you didn’t say that the 8bn was for for whole period 2012-2015, you said it was for 2015 ALONE. For example, a reasonable person reading your entry would assume that the 2015 budget will contain 8bn of adjustments, not 2bn. If you include the word “cumulative” in the sentence, it would be far clearer and more correct.
By the way, and sorry for opening another can of worms, but you really, really, REALLY can’t add the cumulative 2012-2013 tightening to the cumulative 2014-2012 tightening to the cumulative 2015-2012 tightening to get your 19bn total tightening over the three years. That is double counting on steroids. The correct number for the 2012-2015 tightening is, as you said in your reply, 8.6bn
@preacher, I’m afraid I need disagree with you again. Compared to today (in 2012,just to drive the point home) the annual adjustment in the 12 months of 2015 is €8.6bn. Compared to today the annual adjustment in 2014 is €6.6bn. And compared to today, the annual adjustment in 2013 is €3.5bn.
The word “cumulative” can be ambiguous in describing the budget adjustment. You could correctly say the cumulative *annual* adjustment is €8.6bn by the time we get to 2015 but you could also say the cumulative adjustment from 2013-2015 is €18.7bn being €3.5bn in 2013, €6.6bn in 2014 and €8.6bn in 2015.
These are very important points and your comments are welcome, because it seems that many people think that “oh, the adjustment in 2014 is €3.1bn and in 2013 it is €3.5bn, so that means in 2014 the Government will cut taxes and increase welfare, public sector by €0.4bn in 2014″ This is rubbish and it is important to be honest with people and explain that we face three years (at least) of ever increasing taxes and cuts.
So 8.6bn less then. Where are the cost reductions which would allow this to happen relatively painlessly. I’ve not seen much of a reduction in anything defined as a ‘need’ since all this began. Yes, I’ve see hotels, spa’s and even offers for skydiving.
Assuming no losses in excess of those allowed for at INBS, are the payments on PNs not circular? (or is that reflected in the ‘primary balance’).
Interesting figures and interesting ‘non responses’ in the national parliament to important questions. Which highlight how we do things as a country. If those questions were asked in the bundestag he would be given chapter and verse. In Ireland we get answers from some DoF manderins who could not even calculate our national debt.
This is not just about closing gaps. It’s about they type of society we want and how we choose to close gaps. Our academics wanted to close it using the academic equivalent of “heads on pins” and as a result, of that and the government’s refusal to face reality, Ireland is set to further explode as a country of disparity and while industrial unrest has been bought by Croke Park at an unbelievable cost, it has been at the expense of everyone else and some would even argue our economic sovereignty.
Our “best boys and girls in the class” act and our most obedient country in the EZ strategy has failed miserably. The extend, pretend and pray for growth policies, has only postponed the day of reckoning by substituting more debt and another bailout. This, instead of, the structural reforms needed to pull this society out of an economic and social cataclysm.
I see this phase of the crisis coming to an abrupt end next year.
The reaction to all the ineffectual policies and betrayals has to come from outside the intelligentsia and cosseted sectors but it will be a much stronger reaction for that very reason.
Apologies for going back to this NWL but I think your figures are very misleading and I agree with preacher on this.
If, let’s say, I’m currently taking home €100,000 per annum (for the sake of simplicity) and, through increased taxes and charges, in the 2013 budget my take home decreases to €96,500, in 2014 it decreases to €93,400, and finally in 2015 it decreases to €91,400 then, after 3 years of cuts and increased charges, I am now taking home €91,400 compared to the €100k I was taking home in 2012 then that is a cumulative decrease of €8,600. The cumulative decrease is not €18,700 which would suggest my take-home pay would be €81,300 at the end of 2015.
I am not disputing that we are in for severe cutbacks and I know that the budget adjustments are probably based on unrealistic growth assumptions – not to mention the probably need for further bank capital injections or a bailout for NAMA. At the same time though I am surprised by this lapse in logic by NWL and I do think it is misleading to continue to post such figures.
@Bunbury, in your above example, what would the cumulative total of decreases to your salary be in 2013-2015? By how much over that period would you be worse off by?
Have to agree with Bunbury on this one. If that was rewritten in a newspaper then many would think there is going to be an 8.6bn adjustment for budget 2015.
@Rob, fair enough but it was expressed as follows:
“We have in store €19bn of adjustments in 2013, 2014 and 2015 with 2015 alone being €8.6bn or €5,000 per average household.”
Again, by reference to 2012 (today!) the adjustment in 2015 is €8.6bn.
You’re welcome to suggest a more descriptive or less confusing form of words!
@ NWL
How about saying “In total, €8.6bn will be taken out of the economy over the next three budgets through expenditure cuts, increased taxes, and new charges”? Is that accurate?
Don’t get me wrong. This blog is my first ‘port of call’ for information on the economy but, as Rob S says, it did previously seem to me that you were saying that in 2015 €8.6bn alone would be taken out of the economy in that single year.
@Bunbury, I am delighted it is you that is engaging thusly in this matter because you are a stickler for grammatical and semantical correctness!
By reference to 2012 (today!) the annual correction in 2015 is €8.6bn
By reference to 2012 (today!) the annual correction in 2014 is €6.6bn
By reference to 2012 (today!) the annual correction in 2013 is €3.5bn
So again, what is the cumulative total correction in 2013-2015?
And again, what is the annual correction in 2015 alone, by reference to life today in 2012?
@ NWL
I see exactly what you mean in the above example but we will have to differ on our use of the word ‘cumulative’. I would argue that your use of this word is not how most people would use it in day-to-day speech. For example, if I get 3.5 penalty points on my licence in 2013, 2.1 penalty points in 2014, and 2 penalty points in 2015 I would say that, cumulatively, I now have 8.6 penalty points and I am getting close to paying exalted insurance premiums or even losing my licence.
In my simple example earlier of take-home pay I am looking at being cut to €91,400 by 2015. I accept that in your definition – and in harsh reality – I have actually ‘cumulatively’ handed over €18,700 in those three years. Psychologically though, I am just looking at the €91,400 figure and working out how I’ll cut €8,600 from my expenses over the next three years. This is probably completely irrational but didn’t Kahneman and Tversky (among others) become famous for working out how humans think about gains and losses and finding out that we weren’t terribly rational?
@Bunbury,
I would take issue with your example of penalty points because penalty points have no generally accepted annual significance. Income or costs however are routinely referred to in annual terms.
So if I donate €3,500 to charity in 2013
And €6,600 to charity in 2014
And €8,600 to charity in 2015
And if you were asked for the cumulative total 2013-2015, what would the response be? I’d suggest it would be €18,700,
And separately, if you were asked how much you gave to charity in 2015, would you say “well I gave €2,000 more than I gave in 2014”? I don’t think so, I think you would say €8,600
@NWL
We’re going to have to agree to disagree!
In your example above, what I would say is that I gave €2,000 to charity in 2015 (from an annual income that was reducing). I don’t believe anyone would say they had given €8,600 unless they were trying to claim tax relief greater than they were entitled to or to exaggerate their philanthropy. I think on this one NWL you are wrong and that was a particularly bad example to use.
In your example the donor would qualify for 2015 tax relief of €2,000 and I would be amazed if the Revenue accepted that you had actually donated €8,600 in that year.
@Bunbury,
I don’t think we are disagreeing. If Rob S, yourself and preacher are having issues with the presentation, then I’m not disagreeing that the information is being poorly communicated. On the other hand, the aim is to accurately inform people in 2012 of the adjustment or “austerity” that lies ahead in the existing Memorandum of Understanding, because I have come across people who look at the annual adjustments of €3.5bn, €3.1bn and €2bn in 2013, 2014 and 2015 and think that after next year, there will be a giveaway of €0.4bn in 2014 and a giveaway of €1.1bn in 2015. Or in other words once we get 2013 over and done with, we’ll be in clover. Which is not the case.
Another way of expressing the adjustment is
In 2013 it will be €3.5bn more than in 2012
In 2014 it will be €3.1bn more than in 2013
In 2015 it will be €2bn more than in 2014
Again, I think it’s accurate to say that in 2015, the annual adjustment is €8.6bn compared with today (2012!)
And I think it’s accurate to say that the cumulative total adjustment in 2013-2015 is €18.7bn.
If the nation was collectively saving for a €30,000 car at the end of 2015 and was earning enough in 2012 to put €10,000 aside for that purchase, then the budget adjustments required would reduce your income by €3,500 in 2013, €6,600 in 2014 and €8,600 in 2015 or a total of €18,700 in total. So instead of having €30,000 to buy that car in 2015, we’d only have €11,300. The cumulative total taken from our income is €18,700. In 2015 alone, we’re losing €8,600 from our income.
As we head into Budget 2013, this arithmetic and analysis will become more significant because skins and feathers will fly in Budget 2013 and it will be progressively more difficult in Budget 2014 and Budget 2015.
Do we need help from OMF here? ;-)
I believe the answer is as plain as a pikestaff. Call it charity, school fees, anything you like, but it is obvious that in year 2015, that by reference to 2012, we will be paying €8.6 billion per annum more in that one year alone and will have paid €18.7 billion in the period 2013 to 2015 inclusive. And if it remains unadjusted at the end of the period we will be paying another €8.6 billion in 2016, making a cumulative additional payment of €27.3 billion to 2016 – All by reference to what is being paid annually in 2012.
One is an annual payment, the other is a cumulative total. What’s the issue?
@ NWL
I have never met anyone who thinks there will be a giveaway in 2014 but maybe that’s only because I didn’t ask. I agree with you though that there is huge ignorance out there and, on a personal level, I had to learn to shut my mouth when talking about the increased taxes and charges to come lest I be seen as a prophet of doom in my workplace. As an example, in the IMF MOU there is mention of cutting the tax relief on pension contributions. As a public servant I pay approx. 14% of my salary as a pension contribution and I get tax relief on this. I have no choice in the matter of paying 14% and, if this 14% were going to a private pension fund – Ireland Inc. – I would definitely stop it as I believe the pension fund is insolvent! Anyway, at a work coffee break with a number of people in which the issue of austerity came up, I mentioned this issue of reducing tax relief on pension contributions and a senior HSE manager (responsible nationally for a major part of the HSE’s activities) dismissed this as having no effect on public sector employees if it were introduced. He believed (vehemently) that such a change would have no effect whatsoever on PS workers as they were in an entirely different scheme. So I had to shut up or spoil the coffee break for everyone.
@WSTT
Getting back to the substantive point: I think the ‘issue’ is that of ‘sunk costs’ or the equivalent thereof. For example, if I am currently earning €100k and my income is reduced by €3.5k in the December 2012 budget then I am earning €96.5k on 01 January 2013 and that is my level of income on which I base my decisions throughout 2013. If this is cut a further €3,100 in the December 2013 budget then, personally, I compare this to my €96.5k salary and not my original €100k salary as I have (psychologically) already made the adjustment. Now this might sound an esoteric point but, in my experience, people adjust to each new reality and very quickly forget about what they were earning at the peak of the boom. I destroyed all my pre-2008 payslips to avoid being reminded of what I was actually taking home in those years! I have participated in loads of conversations with people who marvel at how they wasted money during the boom years on frivolous items or not looking for value for money. My personal vices were expensive wine and purchases of CDs which I never got around to listening to and donated to the local charity shop after 6 months sitting unopened in a drawer. After taking some wine courses (and getting an ‘A’ is the Wine Board exams!) I came to the conclusion that what the French need is for the Australians and the Chileans to come teach them how to make drinkable wine at an affordable price of €10-€15 per bottle.
@Bunbury,
We might have taken this exchange as far as it can go for now, and I will have a look to see if there is any better way of explaining or quantifying the budget adjustment that is committed to in the existing Memorandum of Understanding from the first bailout.
I would say to you that the objective on here is to explain clearly to people generally the scale of the adjustment that lies in store. And to base that, not on any crystal ball foretelling but on what we have committed to in black-and-white with the Troika. I would suggest that there is a difference between an employee making annual adjustments to reflect lower pay, as in your example and a nation and society that needs to figure out where the adjustment over three years should be made.