This morning the Fiscal Council has issued an important report which comments on the Government’s projections of economic growth and which also recommends accelerated measures to bring our budget back into balance. There is a thread on the report on IrishEconomy.ie. This blogpost just focuses on the overall budget adjustment which is only one aspect of the Fiscal Council’s report. It should be said that the Council believes that there is downside risk to the Government’s projections of GDP growth.
The Fiscal Advisory Council is a new body set up last year and which will be placed on a statutory footing once the Fiscal Responsibility Bill is enacted into law shortly. The role of the Council is to comment on Budget measures in the context of how those measures will return Ireland to fiscal health – “fiscal health” is where the taxes earned by a country are in balance with what that country spends on its public sector and welfare. The Council has five appointed members who don’t draw a wage but the Council has an annual budget of around €600,000 for support.
The table below shows the budget adjustments by year between 2013-2015 as (a) set out in the Memorandum of Understanding with the bailout Troika and (b) as recommended this morning by the Council.
Ireland had a deficit of about €13bn in 2011. This year it will be about the same. This is obviously an alarming state of affairs which will result in disaster if nothing is done, and the Government plans to bring the deficit annual deficit down to €5bn in 2015 – in other words we still plan to spend €5bn more in 2015 than we collect in taxes.
Whenever the subject of annual budget adjustments is brought up on here, there is debate about the numbers, and I hope the above table helps explain the three sets of numbers – the first is the additional annual measures and in 2013, for example, we are to have €3.5bn of additional measures which, for sake of argument, might be €500m from a new property tax, €700m from increases to PRSI, €300m from reduction in tax allowances for pension contributions, €500m from means-testing allowances, €500m cut from capital programmes and €1bn cut from the cost of running the public sector. In 2014, using the Government’s plans we will need adjust an ADDITIONAL €3.1bn so property tax might be increased from €500m in 2013 to €1bn in 2014 and we will need find €2.6bn of remaining measures. In 2015, again using the Government’s projections, we need adjust an ADDITIONAL €2bn. So in 2015 compared with today, we will need adjust €8.6bn in that one year alone. That is a HUGE figure but remember our annual deficit is presently an even BIGGER figure of €13bn. And the cumulative total that the Government intends taking out of the economy in 2013-2015 is €18.7bn. Again a colossal number, but that is the reality.
The Council recommendation is the same as the Government’s in 2013 but the Council wants to see a faster balancing of the books and therefore recommends higher adjustments in 2014 and 2015 that are contained in the Memorandum of Understanding. The Council recommendation will see an annual adjustment of €10.5bn in 2015 compared to today and would remove a total of €21bn from the economy in 2013-2015. Again, an absolutely colossal number.
How did it get so bad? The collapse in our economy took place in 2008 with property-related income plummeting whilst welfare and public sector costs were left high and dry. Since then the Government has increased taxes and reduced spending, but five years into the crisis, we still have an annual deficit of €13bn. Some of the deficit is attributable to the cost of bailing out the banks, but most is down to the boring fact that our annual taxes plummeted.
On a political note, the Council’s recommendation this morning will ensure that Budget 2014 and Budget 2015 are just as tough as An Taoiseach’s Enda Kenny’s “toughest budget of this administration” in Budget 2013. At the end of 2015, Ireland is going to be a very different place to the Ireland of today.
As previously opined on here, Ireland doesn’t have natural enemies with whom war is a possibility, so we don’t have a strategic military threat, but we do have a strategic economic threat in that we are spending FAR MORE than we earn, and the sooner that threat can be eliminated or at least minimised to a relatively harmless level the better. On the other hand, if we take too much too soon out of our economy, we can destroy our economy and society. It’s a balancing act and this morning’s report from the Fiscal Advisory Council is a courageous attempt to deal with the biggest threat facing this State.
“So in 2015 compared with today, we will need adjust €8.6bn in that ONE YEAR ALONE (my emphasis).”
You are still not phrasing it very well!
In December 2014, all going to plan, there will be a budget announcing €2bn worth of cuts for 2015.
@Rob, am open suggestions with phrasing, I hoped the table would help. With respect in the budget for 2015, the ADDITIONAL annual cuts will be €2bn. The annual cuts in 2015 compared to today will be €8.6bn.
Actually, looking at your table.
What do you mean by annual adjustment? Surely this should be the same as additional adjustement?
@Rob, “annual adjustment” means the adjustment in the year shown compared to 2012. So in 2013 we know we need made a €3.5bn adjustment compared with 2012. But in 2014 the annual adjustment compared with 2012 will be €6.6bn comprising the additional adjustment that will be introduced in Budget 2014 in December 2013 AND a continuation of the €3.5bn adjustment being introduced in Budget 2013 in three months.
How is it “annual” then?
I think for clarity something like “difference between budget 2012″
@Rob, I think we might have taken this exchange as far as it can go. I will put a note on the table to emphasise that the “annual adjustment” is by reference to 2012. I am being pedantic on this because it is important to stress that we are presently spending €13bn per year more than we earn. So we need to close a gap of €13bn A YEAR, and the €8.6bn in 2015 only gets us to within €5bn of that. The figures are colossal and scary but that’s the point of the blogpost, to convey the scale of the adjustment ahead.
I remember the issue last time you brought it up alright. I know that we are all understanding the same point, its just last time it kept sounding like you were saying there would be a (for example) 8.6bn adjustment in 2015.
The table is very helpful – I’m just being pedantic.
P51 of the report is interesting. It discusses the pro/cons of using GNP/GDP as denominators when measuring debt etc. There is some theoretical (well it has to start somewhere and thats what the council is for) disucssion on the possbility of a ‘hybrid’ measure that lies somewhere between the two.
Only a crowd of academics would have the neck to demand cuts for everyone else while increasing the council’s spending by 50% to €650,000!
€650 grand worth of advise. Has anybody worked out the cost per word!
Lets look at the wise persons, all well paid academics who will pay no fees to have their children university educated by the state. Their university sector is inefficient, over paid, overmanned and has long championed open market for increased fees to add to their largesse.
I think the first order of business for this council should be to write a report on how to reduce the cost of University education in Ireland.
It’s so easy to tell the blind, disabled, unemployed, and poor that they need to make a sacrifice when you know it will never really impact you or your family.
Economics is political. There right wing economists and left wing economists but there are no politically free economists.
This council has a smell of Sir Humphrey about it: put together a group of right economists and make the government cuts look better.
I’m sure I could easily put together a group of economists which would give exactly the opposite advise.
This insurance proposal is directly opposite to Paul Krugman’s Keynesian economic advise. Taking money out the economy when the private sector is spending jilch is hardly lightly to help.
And Krugman does have that Nobel prize in economics.
I’m not sure how “courageous ” this proposal is, it look Machiavellian to me.
They have admitted that it has little of chance of been adopted so the council can sit it’s ivory tower and have all the options covered.
If things gets worse, they are covered.
If things get better nobody will care.
So how about that first order of business for the council how to reduce the cost of University education in Ireland by say 25%……
Then I might put some store on their advise.
@paddy19
“This insurance proposal is directly opposite to Paul Krugman’s Keynesian economic advise. Taking money out the economy when the private sector is spending jilch is hardly lightly to help. ”
Could you direct me to a source from which Paul Krugman suggests Ireland could obtain the money the Keynesian exonomic advice would require?
Last time I checked, Paul seemed aware that the US could have its central bank backstop away any default risk and so borow money almost for free, wheras, without leaving the Euro, Ireland cannot do that. It cannot leave the Euro without first balancing its budget deficit though, and it could onl;t print money for its own Keynesian policies after leaving the Euro by incurring even more currency depreciation and import price inflation.
The fiscal Council does not have it within its power to force Europe’s creditor countries to follow Paul Krugman’s advice.
With regard to your observations about the pay and conditions of Irish university staff, you might notice the report calls for further reductions in public sector payroll costs.
The mere existence of what is yet another quango says a lot about the general problem with Ireland – namely, the lack of opportunity on a remote, sparsly populated island.
Whether it’s the swollen number of mid-high ranking civil servants, NAMA’s expanding staff waistline, or indeed why we need both NAMA and Anglo/IBRC, there is no shortage of faux middlemen functionaries in Ireland.
The opportunity for real promotion is limited, so a culture of creating various artificial positions (with appropriate renumeration, of course) comes into being.
“Could you direct me to a source from which Paul Krugman suggests Ireland could obtain the money the Keynesian exonomic advice would require?”
No problem!
The central issue here is that the council is recommended that more money be taken out of the economy, in tax and cuts, than present government policy. An insurance policy!
Krugman has always recommended that Kenysian policies should be followed. Don’t cut governmental spending in bad times. Cut it in good times. It’s not a question of getting more money the council is to the right the government in policy terms.
I note you ignore the point that all economics are political: so a right wing kabal will always want to cut and burn. It has never worked. Maybe Ireland will be the first to cut and burn our way out of trouble……another great theory just like Jim Power’s famous soft landing.
Re: the university sector: It’s easy to talk in generalities it’s much harder to recommend specific efficiencies in your own back yard.
Spending 650 grand on a think tank looks like a crowd of academics pontificating on what others should do while ignoring the beam in their own eyes.
I stand by my call ….report on how your own academic sector should act and then you have some credibility.
Now that would be truly courageous!
With a 15% efficiency saving out of that 650,000 budget they would have plenty of euros to spare to pay for an efficiency expert .
For a 100 grand you could have a queue of experts with lots of good recommendations.
Don’t hold your breath, assume the usual academic inflation, with increasing budgets every year.
Happy days, another expensive quango rises…..
I have a real problem with the credibility of this guy.
“Alan Barrett is a Research Professor with Trinity College Dublin where he is the Project Director with The Irish Longitudinal Study on Ageing (TILDA). He holds this post while on secondment from the Economic and Social Research Institute. He is a Research Fellow with the Institute for the Study of Labor (IZA) in Bonn, Germany, and is also an associate editor of the Economic and Social Review. Alan was formerly lead author of the ESRI’s Quarterly Economic Commentary (2005-2010), and has worked as a senior economist in the Department of Finance (2001-2003). He received his Ph.D. in Economics from Michigan State University in 1994.”
@paddy19
““Could you direct me to a source from which Paul Krugman suggests Ireland could obtain the money the Keynesian exonomic advice would require?”
No problem!
The central issue here is that the council is recommended that more money be taken out of the economy, in tax and cuts, than present government policy. An insurance policy!
Krugman has always recommended that Kenysian policies should be followed. Don’t cut governmental spending in bad times. Cut it in good times. It’s not a question of getting more money the council is to the right the government in policy terms.”
Let me see if I have read you comment correctly. You appear to be saying the Irish state can engage in a more Keynesian approach right now (in the midst of a balance sheet recession) than its official (foreign) funders will supply funds for because it can do it without funding and because the Fiscal Council is made up of economists who have a right wing political bias?
Is that about it?
Good Morning All,
Our Advisors’ report would be far more persuasive if the writers could recognise the irrelevance of income which is earned and then promptly remitted abroad as dividends by multinational companies – that is, factor income with the rest of the world, the element which explains the excess of GDP over GNP. Such dividends make no contribution to our economic effort and need not be counted in any meaningful reckoning of our National Income.
Reinforcing this reality, within their own Figure .4.3. our Advisors show the level of domestic demand as closely corresponding to the level of GNP throughout the period from 2007 to date. Consider the following passage drawn from their opening observations:
“Debt sustainability remains fragile and judgements on this issue are coloured by whether it is believed GDP or GNP provides the most appropriate measure of Ireland’s fiscal capacity. Each of these measures has limitations. Recognising this, the Council explores a “hybrid” measure that puts differential weight on the fiscal capacity of a euro of GNP and a euro of the GDP-GNP excess……………. ”
Their “hybrid measure” is devised on the assumption that dividends paid abroad by foreign multinational companies working in Ireland, contribute to some extent to tax revenues in the year in which they are remitted. This is not so. Such dividends comprise the residue of retained earnings AFTER payment of corporation tax. In any event, corporation tax is levied in the year in which profits are earned, not the year in which they are remitted to the home country. There need not be a co-incidence of year.
The relationship deduced by our Advisors out of their “adjusted R squared” is not well founded. It might be, for example, that both such dividend payments and government revenues are driven by the same exogenous factors, for example, GDP in the USA. Or indeed, as in recent times, the need to flush out retained profits might well be driven by the degree of confidence prevailing in our domestic financial institutions.
Most often, such profits arise out of transfer pricing, policies devised mindful of just how much of a corporation’s global profit can be “covered” within the Irish operation. In this sense, Irish corporation tax is merely an overhead of sorts, a necessity in aid of avoidance of home country (often USA) taxes.
However you think about it, nothing of this factor income outflow makes the least contribution to our affairs nor does it reflect, in any sense, any “earning” activity which might turn to better effect in future years. The thing is a gigantic tax dodge.
So, one might ask, why the controversy ? Why not simply concentrate upon GNP as an appropriate commentary upon our performance. The reason often given by official sources is that GDP is the common measure within the EU. Okay, so, let us give those EU babies what they want and then, let us look the real facts in they eye for ourselves. Let us use GNP.
Hmmm. Good point. Ah but, let us now read the balance of the passage quoted above from our Advisors’ report. It continues:
“………….The required fiscal adjustment appears challenging under all three measures, and most so under GNP.”
Put another way, viewed in the context of our true “earning power” as a nation, our Public Debt position is even more “challenging” that we might otherwise have been led to believe. Courageous my foot !
All the best to all,
Sincerely,
Eric.
Professor John McHale (Chairman) …ex consultant to the World Bank
Mr Sebastian Barnes ..ex….Bank of England
Professor Alan Barrett …ex…Department of Finance
Dr Donal Donovan …former IMF staff member
Dr Róisín O’Sullivan ex Central Bank of Ireland
I wonder have any of them ever been
on the dole,
on social welfare,
poor,
lived on 130 a week,
worked a zero hour txt contract,
had to use a money lender,
lived beside a drug dealer,
been scared to open their door,
had their bathroom searched by social welfare in case they might
be claiming single allowance illegally,
queued for Supplementary Welfare Allowance,
interrogated about getting a job with 400,000 unemployed,
If I’d been lucky enough not to have experienced any of the above I hope I’d feel slightly embarrassed recommending cuts to poorest in our society.
Maybe I wouldn’t, maybe when you become an economist you are trained not to do embarrassed.
I just wondered……
I don’t think your really engaging with grumpy’s point there paddy . We can’t do QE and we can’t borrow at sustainable interest rates. Now at different junctures different policies were possible , but given the realities stated above the only issue is how to distribute the pain. I’m all for progressive taxation etc but it seems unrealistic that there’ill be no cuts in public services and welfare spending , given the size of the spending gap.
Ps the interest rate on us debt is negative ( when accounting for inflation) ,it’s a completely different situation. The debtor countries are genuinely revenue constrainted. That most Irish economist are dismal, right wing wa**ers is basically irrelevant .
In fairness Ciaran,Grumpy also ignored a key point made by paddy19,why spend 650,000 on advice and suggestions,if the Govt. ridicules that advice and ignores it.If its for a bunch of overpaid underworked academics to discuss and debate it over tea in the commons room,or on the irisheconomy.ie.
How Irish uni’s doing in those world rankings again,which are critical to attracting international students?
In fairness 600, 000 is basically a rounding error in the greater scheme of things.
The key question to address is “HOW?”
It is possible – but too many vested and protected interests in the upper echelons appear to be untouchable. Thus far the adjustment is heavily skewed towards the lower middle, average working class, and workers on the dole.
HOW about a decent debate and discussion on an excellent paper that has been completely ignored by the Irish media and “academics”!
http://www.shelltosea.com/booklet
Ray Burke nuff said.
Paddy19 highlighted the dismal self serving nature of Irish academics and economists.There is an old joke in NY that Salman Rushdie would attend the opening of an envelope.
The ubiquitous doyen of Irish economists Karl Whelan can now be found pontificating for “Forbes” all alone Karl,averaging one r two comments per post.
His most recent post was on Clinton’s Budgets,thankfully sans “fan” charts.
Unlikely,he will have any radical views on the ridiculous generous deals struck with oil companies in Ireland,now Karl we can’t upset the advertisers after all Forbes is almost BK, after the family grabbed 100mil from Elevation Partners.
http://articles.businessinsider.com/2011-07-28/tech/30035397_1_forbes-media-elevation-partners-forbes-family
Perhaps,the six hundred grand on a stating the bleeding obvious report would be better spent on formulating a decent policy for the Irish people regarding THEIR natural resources,w/o fan graphs and esoteric discussion of the crap nature of forecasts,really !
“Ireland’s system of managing its oil and gas resources is dysfunctional; out of step with the rest of the world; and heavily skewed in favour of private companies to the detriment of Ireland’s public interest. Ireland’s only means of extracting revenue from oil or gas – its 25% tax on profits – puts us at the bot- tom of the international league table, while extraordinarily generous tax write-offs mean that the State ‘take’ as a percentage of rev- enue is likely to be far lower: as low as 7% ac- cording to figures extrapolated from a report commissioned by Shell.”
http://www.shelltosea.com/sites/default/files/images/LiquidAssets.pdf
Cant wait catch up on Krugermans Baltic Problems or that vulgar odious Soros’s musings.
Shame on Irish academics and economists for ignoring this excellent ground breaking report.
Good Afternoon All,
As a serial-strayer-off-the-point-er I hesitate to, but in the ultimate will not flinch(!) from suggesting that others may have caught my bug. Perhaps it would be useful to revert to the IFAC’s paper, and thence herein once more.
All the best to all,
Sincerely,
Eric.
Agreed Eric,paddy19 is a regular commentator on here,perhaps he did not articulate his point the best,it was a little unsporting to be having such a pop at him,will stay on topic,regards.
Good Afternoon Paddy and John,
No, I would never wish to “have a pop” and would apologize to anybody herein who might have taken it so. Thinking in particular of Paddy’s abridged Advisor CVs and following questions, I happen to agree with the underlying sentiment. However, my dentist, God bless her, tells me that if I grit my teeth much more I can look forward to a life contract with Steradent.
All the best to all,
Sincerely,
Eric.
It’s just a flesh wound….
The headline above and the national reaction brings a famous monty python to mind,.
Seriously though it is amazing how little is made of the fact that budget 2 ,3 and 4 are yet to come…look what’s happened already.
They can fix and break whatever they like with the budgets, but the economy needs Spending and Saving, not throwing money into negative equity black holes if it is to move forward.
Spending and saving :good
Hard earned money into black hole: bad
And again
Spending and saving :good
Hard earned money into black hole: bad.
Will the budgets reflect this?
Meaning no disrespect, but I doubt that these “advisors” have ever created a job between them – and with these recommendations they never will. As I have written before, the solution lies in widening the tax base through increased employment, not by increasing the burden on existing taxpayers.
Growth of tax receipts involves a fusion of capital, technology and human talent. In other words, it involves the encouragement of entrepreneurship. There is nothing in this report that addresses this ingredient in any meaningful way. It is an accountant’s “balance sheet” document, devoid of hope or creativity. – It’s no wonder I’m leaving, I find myself agreeing with the “Shinners” more every day.
Further, until the leg of the problem that represents the underwater mortgage issue is addressed, academia can write all the reports it likes advocating more austerity, but it will not produce a solution – more poverty, but no solution.
The problem is that there are no easy answers to the biggest problem that the nation has – the mortgage crisis. Bill Clinton, put his finger on the problem and gave us his opinion and advice for nothing. Nobody seems to have been listening. There is no trade in the economy and the roots lie in the fact that the consumers are heavily underwater in their main asset. Their homes are no longer assets, they are liabilities. We need to consider solutions to this issue before we start increasing the burden on the taxpayers.
I have made suggestions that a debt for equity swap programme could help alleviate the millstone around mortgagors’ necks. It is not the only solution.
It is essential to provide an incentive to halt the ongoing defaults by those that can no longer cope and to stop the downward spiral of house prices and hence the economy. The government could source ECB funds for say 20% to 30% of every homeowner loan that has an underwater mortgage and give the mortgagor the opportunity to replace that percentage of their mortgage with a “not-for-profit” low interest loan that reflects our new lower ECB rate.
The banks would be required to accept this partial mortgage pay-down and to reduce the monthly interest and principal by the same percentage. That mortgage replacement loan would not be collateralised by the house but would be a loan over an extended period (say 20 to 30 years) that the government could enforce by lodging a claim on an individual who did not pay, by garnisheeing wages through the Revenue system.
This replacement loan, combined with a further government enforced write down (if necessary) by the banks would mean that people who now have a mortgage equal to 100 per cent plus of their house value would see that mortgage fall to a manageable percentage of the house value and take those individuals out of negative equity.
I am sure that there are many other remedies and if the advisors had come up with a report that suggested a fiscal stimulus solution along these lines, I would doff my cap to them. Instead we just get more of the same dismal austerity thinking. Completely without creativity. Bet not one of them has any artistic tendencies (never mind entrepreneurial skills).
BTW, Limiting the destruction of homeowners’ wealth would help to maintain consumer spending, boosting production and employment. And stabilising the value of mortgages would strengthen the banks, increasing credit flows that would further stimulate the economy.