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Monday, May 21, 2012

Irish economy outlook to 2020: The figures and the real world

The Irish Department of Finance has published updated projections for the public finances. The current deficit reduction plan rests on relatively small additional budgetary adjustments (€7.8bn) through 2013-2015 compared with the €25.0bn of expenditure cuts and tax rises since July 2008. However, the plan also rests on a robust pick-up in the nominal growth of GDP (gross domestic product) to 3-4% by 2013. Should Irish nominal GDP growth disappoint by just 1 percentage point (pp) per annum, the ratio of gross government debt to GDP could  be 10pp higher than expected by 2015.

Last month, the Department of Finance said that while taxation receipts in 2012 are projected to be just above 2004 levels, the gross voted expenditure of Government Departments and Offices in 2012, at an estimated €56bn, is projected to be 37% above the level it was in 2004, despite the very significant adjustments to both revenues and expenditure since mid-2008.

The Department said [pdf] that while the gap between the State’s revenues and expenditure is clearly on a downward trajectory, it remains at an elevated level and it will need to continue to be addressed by economic and fiscal policy over the coming years.

A report from Davy Stockbrokers [pdf] published on Thursday says the important figure is "net debt," after allowing for assets held by the government, such as the pension fund, and Ireland's favourable net position is often ignored.

Our current Davy forecast is for the debt/GDP ratio to rise to 122% in 2013, a little higher than the official projections for debt to peak at 120%.

Prof John McHale of NUI Galway and chairman of the Irish fiscal council, which is an independent body which issues reports on government budgetary policy.

On the Irish Economy blog, Prof McHale presented a scenario on the outlook to 2020 for the Irish economy.

Michael Hennigan's posts:

Post 1
I think it would be wiser to focus on real world scenarios rather than metrics for the EU and the markets. 
This is comparable with an Excel template for a business plan and the tweaking can produce the desired result but it may not be a realistic one.
The Department of Finance says in its Stability Update last month that while taxation receipts in 2012 are projected to be just above 2004 levels, the gross voted expenditure of Government Departments and Offices in 2012, at an estimated €56bn, "is projected to be 37% above the level it was in 2004, despite the very significant adjustments to both revenues and expenditure since mid-2008." 
The DOF projects a fall of  €5bn in gross voted expenditure between 2012 and 2015: from where will these cuts come from? 
Minister Howlin has touted cuts in the central government paybill by 2015 (note pensions excluded). If 2006 is the benchmark and public staff pensions are included, there will be ZERO savings compared with 2006, the peak year of the boom. 
Conall Mac Coille of Davy says a 1% annual shortfall in the nominal GDP to 2015 would add 10% to the gross debt/GDP ratio. 
You assume spending rising at half the rate of nominal GDP but there are no reforms to suggest that this outcome is credible. 
There is no obvious jobs engine and unemployment will remain very high for years; how realistic is annual capital expenditure of just €3bn in the remainder of the decade? 
There is a growing young population coupled an expanding dependent population. 

In an internal debate, GNP growth and the debt/GNP ratio should be used even though GNP also reflects MNC accounting manipulations.
Post  2
We will have 8 years of cuts by the time the ‘fiscal consolidation’ works! 
A 40% cut in the public procurement budget — legal firms, DPP contractors, IT contractors, doctors, health insurance payments, severance payments and in respect of pay, that percentage would apply above a threshold for current and former civil servants — should have been introduced in the first year of the crisis. 
That would have required ministers in giving up scandalous bonanzas — too much to expect.
Was life that bad in the late 1990s that we could not use it as a base? 
During the bubble, the outsize gains in private sector areas were in business sectors where public contracts were available. 
The State pays half a billion euros annually to lawyers. Does it have to? Is there such a market demand to justify the current rates? 
We need to get real about what can be afforded in order to build a sustainable economy.
Ireland: GDP or GNP? Which is the better measure of economic performance?

Irish Economy 2012: At least a third of value of Irish services exports is overstated

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