7/10/2013: Taking an Easy Road Out of Budget 2014? Sunday Times, September 22

This is an unedited version of my Sunday Times column from September 22, 2013.


The upcoming Budget 2014 will be one of the toughest since the beginning of the crisis in terms of the overall levels of cuts and tax increases. It also promises to cut across the psychological barrier of austerity fatigue. The latter aspect of Budget 2014 is more pernicious. Two other factors will add to the national distress, comes October 15th. Reinforcing our national sense of exhaustion with endless austerity, this week, the IMF published a staff research paper on fiscal adjustments undertaken during the current Great Recession. According to some, the IMF study reinforces the argument that Ireland should have been allowed to spread the austerity over a longer period time. In addition to this, Ireland’s planned 2014 cuts are set to be well in excess of the deficit reduction targets for any other euro area country.

The superficial reading of the IMF statement, the nascent sense of social distress brewing underneath the surface of public calm, and the tangible and very real pain felt by many in the society suggest that the Government should take it easier in 2014-2015. The policy option, consistent with such a choice would be to cut less than committed to under the multi-annual fiscal plans agreed with the Troika. This is being proposed by a number of senior Ministers and TDs, the Opposition and the Unions.

Alas, Ministers Noonan and Howlin have little choice when it comes to the actual volumes of fiscal adjustments they will have to implement next year. Like it or not, we will need to stick very close to the EUR3.1 billion deficit reduction targets irrespective of the IMF working papers conclusions, or the volume of outcries coming from the Government backbenchers and the opposition ranks.

Here's how the brutal logic of our budgetary position stacks up against an idea of easing on deficit reductions.

If everything goes according to the plan, Ireland will end 2013 with a second or a third highest deficit in the EU, depending on how we account for the one-off spending measures across the peripheral states. We will also have the second highest primary deficit (that is deficit excluding cost of interest payments on Government debt) in the euro area. In 2014 this abysmal performance will replay once again, assuming we meet the targets. Greece and Italy are set to finish 2013 with a primary surplus. Portugal is expected to post a primary deficit of less than one half that of Ireland's. Should Ireland deliver on the targets for 2014, our gap between the Government revenues and spending will still stand at around 4.3-4.6 percent of GDP at the end of December 2014. Not a great position to be in, especially for a country that claims to be different from the rest of the euro periphery.

In this environment, talking about any change in the course on austerity or attempting to enact a fiscal stimulus will be equivalent to accelerating into a blind corner on a one-lane road.

In order to stabilise government debt, Ireland will require cumulative deficits cuts of 11.6% of GDP between January 2013 and December 2018 with quarter of these cuts scheduled for 2014-2015. This is the largest volume of cuts for any economy in the euro area - more than 20 percent greater than the one to be undertaken by Greece and more than 50 percent in excess of Spain’s requirement.

Any delay in cuts today will only multiply pain tomorrow with higher debt to deflate in 2016-2018. As things stand under the agreed plans, Ireland will be spending 4.9 percent of its GDP annually on funding debt interest payments from through 2018. This is more than one and a half times greater than what we will be allocating to gross public investment. The interest bill, over the next five years, will be at least EUR46 billion. Lowering 2014 adjustment target by EUR1 billion can result in the above cost rising to over EUR50 billion, based on my estimates using the IMF forecast models.

The reason for this is that any departure from the committed fiscal adjustment path is likely to have consequences.

Firstly, with the ongoing sell-offs of bonds in the global investment markets, it is highly likely that the cost of funding Government debt for Ireland will rise over the medium term even absent any delays in fiscal adjustments. The long-term interest rates are already showing sharper rising of yields on longer maturity bonds compared to short-dated bonds. Year to date, German 10-year yields are up 64 basis points, UK are up 105 bps and the US ones are up 111 bps. The effects of these changes on Irish debt and deficit dynamics are not yet fully priced in the latest IMF forecasts. A mild steepening of the maturity curve for Ireland can significantly increase our interest bill. This risk becomes even more pronounced if we are to delay the Troika programme.

Secondly, failure to fulfill our commitments is unlikely to help us in our transition from Troika funding. Ireland will require a precautionary standby arrangement of at least EUR10 billion in cheaply priced funds. The European Stability Mechanism (ESM) funds to cover this come on foot of good will of our EU 'partners'. These partners, in turn, are seeking to redraft EU tax policies, as well as banking, financial and ICT services regulations. In virtually all of these proposals, Ireland is at odds with the European consensus. Good will of Paris and Berlin is a hard commodity, requiring hard currency of appeasement. Whether we like it or not, by stepping into the euro system, we committed ourselves to this position.

The long run financial arithmetic also presents a major problem for those who misread the latest IMF research on austerity as a sign that the Fund is advocating easing of the 2014-2015 adjustments for Ireland. The IMF clearly shows that Ireland has already delayed required fiscal cuts more than any other euro area economy. In all euro area peripheral economies, other than Ireland, fiscal adjustments for 2014-2015 are set at less than one fifth of the total adjustment required for 2010-2015 period. In Ireland they are set at one third. Which means that, having taken more medicine upfront, Italy, Greece, Portugal and Iceland can now afford to ease on cutting future primary imbalances.


With this in mind, there is not a snowballs chance in hell that we can substantively deviate from the plan to cut EUR3.1 billion, gross, from 2014 deficit without facing steep bill for doing so. Which leaves us with the only pertinent question to be asked: how such an adjustment should be spread across three areas of fiscal policy: Government revenues, current expenditure and capital expenditure.

This year, through August, Government finances have been running ahead of both 2012 levels and we are perfuming well relative to what was planned in the budget 2013 profile. However, the headline numbers conceal some worrying sub-currents.

This year's current primary expenditure in 8 months through August stood at over EUR36.6 billion, more than targeted in the 2013 profile and ahead on the same period last year. This deterioration was caused by the one off payment made on winding down the IBRC, plus the increase in contributions to the EU budget. Nonetheless, while tax and Government revenues increases in the 8 moths of 2013 were running at almost EUR3.4 billion compared to the same period of 2012, spending reductions are down only EUR823 million.

To-date, only 17 percent of the entire annual adjustment came via current voted spending cuts and over 57 percent came from increases in Government revenues. The balance of savings was achieved by slashing further already decimated capital investment programmes.  Given the overall capital investment profile from 1994 through forecast 2013 levels, as provided by the Department of Public Expenditure and Reform, this year's net capital spending is likely to come below the amount required to cover amortisation and depreciation of the current stock of Government capital. Put simply, we are just about keeping the windows on our public buildings and doors on our public schools in working order.

In this environment, Labour Party and opposition calls for undoing 'the savage cuts to our frontline services' - or current spending side of the Government balance sheet - are about as good as Doctor Nick Rivera's cheerfully internecine surgical exploits in the Simpsons.

The adjustments to be taken over the next two years will have to fall heavily on current spending side. This is a very painful task. To-date, much of the savings achieved on the expenditure side involved either transforming public spending into private sector fees, which can be called a hidden form of taxation, or by achieving short term temporary savings.

The former is best exemplified by continued hikes of hospitals' charges which have all but decimated the markets for health insurance. The result is a simultaneous reduction in health insurance coverage, an increase in demand for public health services and costly emergency treatments. The 'savings' achieved are most likely costing us more than they bring in.

The latter is exemplified by temporary pay moderation agreements and staff reductions in the public sector. This presents a problem to be faced comes 2015-2016: with growth picking up, many savings delivered by staff reductions and pay moderation measures will be the first to be reversed under the pressure from the unions.

In short, the Government has no choice, but to largely follow the prescribed course of action. Like it or not, it also has no choice but to cut deeper into current spending. This is going to be an ugly budget by all measures possible, but the real cause of the pain it will inflict rests not with the Troika insistence on austerity. Instead, the real drivers for Ireland’s deep cuts in public spending are the internal imbalances in our public expenditure and the lack of deeper reforms in the earlier years of the crisis.

Via @IMF

Box-out: 

Recent data from the CSO on Irish goods exports painted a picture of significant gains in one indigenous economy sector: agri-food exports. The exports of Food and live animals increased by EUR101 million or 15 percent in July 2013, compared to July 2012. In seven months from January 2013, agri-food exports rose to EUR4,911 million, up 8.8 percent. Most of the increases related to exports of animals-related products, live animals, eggs and milk. The new data caused a small avalanche of press releases from various representative bodies extolling the virtues of agri-food sector in Ireland and posting claims that the sector is poised to drive Ireland out of the recession. Alas, the data on agricultural prices, also covering the period through July 2013, released just three days after the publication of exports statistics, poured some cold water over the hot coals of agri-food sector egos. From January through July 2013, the main driver for improved exports performance of our agriculture and food sectors was not some indigenous productivity growth or innovation, but the price inflation in the globally-set agricultural output prices. On an annual basis, the agricultural output prices rose 10.7 percent in July 2013. Over the same period of time, the agricultural input price index was up 5.2 percent in July 2013. This means that Irish exports uptick in 2013 to-date was built on the pain of consumers elsewhere. So good news is that our agri-food exports were up. Bad news is that we have preciously little, if anything, to do with causing this rise.

20/12/2011: The end of Neo-Keynesianism

I have recently written about the lack of debt reductions under the 'austerity' packages in Europe (see link here). Now, Washington Post weighs in with an excellent note on the demise of the Neo-Keynesian doctrine of unlimited borrowing-based deficit financing - link here. It is, therefore, perhaps befitting to note that today's Le Monde quotes Professor Jean-Marc Daniel of ESCP saying that "without doubt we are living in the last hours of a European Social model". The article, cited in the eurointelligence.com briefing note, but not linked, also cites absurd abuses of the Social Contract in Greece and other PIIGS.

This, of course, is a logical conclusion to the economically illogical proposition that states with severe debt overhang (in excess of 80% of GDP or GNP for public debts) can borrow their way out of the debt crisis.

But the problem goes deeper than that. Europe 2020 - the only growth policy platform for the EU27 - relies extensively on the Social Model as the core driver for growth, both in terms of justifying subsidies and transfers that are represented as 'socially productive' even if they are economically dubious in nature, and in terms of justifying more significant role for public investment in driving future growth capacity.

Neo-Keynesian doctrine of continued and accelerating deficit financing in the face of public debt overhang is now pretty much dead. Next step - the idea of 'Social Economy' that is based on achieving equality of outcome by transfers of income and wealth, both intra- and inter-temporal. States do run out of borrowing capacity, folks. And it doesn't matter a bit whether this happens when you need to run a deficit or not.

13/12/2011: Sunday Times 11/12/2011

The unedited version of my Sunday Times article from December 11, 2011.

Billed as the Budget that will fundamentally change our fiscal policy over the long-term, the documents released this week have managed to make history. Indeed, Budget 2012 was a record-breaking one in three ways.

Firstly, Government’s retreat over the issue of disability payment cuts for the younger beneficiaries has to mark the fastest policy reversal ever achieved by the State. Secondly, by labelling new revenue measures in health services as expenditure cuts, Minister Howlin has managed to perform a minor miracle of transfiguration – transforming sweat and labours of ordinary insurance card holders who will now pay higher services charges into a Public Sector reform.

Thirdly, the Government set another speed record that will be hard to match. Within just 9 months after coming to power, the Coalition has magically morphed into a Fiana Failesque clone, replete with Bertie-style creative thinking which equates economic growth with property incentives.

The 2012-2015 profiling of spending and tax measures, released by the Department of Finance clearly shows that this Government has adopted Brian Cowen’s approach to crisis management. Tax measures are frontloaded into 2012 and 2013 at €2.85 billion out of the total €4.65 billion. The bulk, or €5.55 billion, of the spending cuts out of the total of €7.75 billion were delayed until 2013-2015. Within spending reductions planned, capital cuts are frontloaded into 2012-2013, while current spending reductions are pushed back. In other words, the Government is delaying the painful reforms in a hope that something turns up to rescue the Exchequer revenues.

This much is clearly reflected in the Department of Finance’s overly optimistic outlook for growth. The Budget estimates appear to reflect the Department November 2011 forecast for 1.6% 2012 growth in GDP. Subsequent revision downward to 1.3% projected GDP growth in 2012, revealed on Tuesday, seems to be a window dressing to suggest caution as they clearly were introduced sometime around December 5th and 6th – with no time alter core budgetary estimates. Afterall, the Department Monthly Economic Bulletin, released this Monday continues to project 2012 growth at 1.6%. Even at that, the Department projections exceed most recent forecasts by the ESRI (0.9% GDP growth) and OECD (1.0% growth).

Past 2012, medium-term projections envision 2014-2015 growth coming in at a lively 3.0% per annum, boosted by booming exports and investment assumptions. Balance of payments, the metric that reflects economy’s overall ability to generate external growth, will skyrocket more than seven-fold from 0.5% this year, to 3.7% in 2015.

The country drowning in the sea of middle class debt, collapsed domestic investment, crashed consumption, rampant emigration, skills drain due to excessive taxation and exploding growth in the black markets, in the view of the Department of Finance economics experts will shrug off the depression and get back to the business of filling Government’s coffers with cash.

Incoherent numbers set the stage for incoherent policies.

The Government that is concerned with deposits stability in the Irish banking sector and talks about the need for investment is frontloading capital cuts and has introduced three measures on DIRT, CGT and CAT that will do exactly the opposite of what it tries to achieve. The Government that incessantly drones about jobs creation has managed to publish a budget that will further depress investment, reduce disposable incomes and increase costs of doing business in this country. To make things worse, the Budget also made hiring workers more risky by increasing the future cost of redundancies. With measures like these, the only jobs creation that will be taking place in Ireland for the foreseeable future is going to be taking place in the Fas-run schemes.

The Government that talks about exports-led recovery has managed to introduce not a single measure to help exporters. An exports credit guarantee scheme and ringfencing of new tax incentives for marketing Irish goods and services abroad would have helped. As would a scheme to encourage technical skills importation in the sectors where such skills cannot be found locally. None came.

Plagued by declining tax revenues the Budget unveiled three measures – VAT, fuel and tobacco taxes increases – that will see Black Market economy booming once again at the expense of legitimate businesses.

On the expenditure side, the very same Government promising deep reforms loaded the Budget with small-scale measures that neither address the issues relating to the value-for-money in public services delivery, nor achieve substantive real savings, nor improve productivity in the sector.

Take one of the largest ‘reforms’ – the reduction in the numbers employed in the public sector. At 6,000 planned reductions in 2012, the target is un-ambitious. More importantly, it marks the very same ‘extend-and-pretend’ approach to change that is traceable across the entire Budget. Instead of taking the medicine upfront and setting a target at 12,000-15,000 reductions, the Government opted to increase uncertainty about future positions and promotions for those who stay in their jobs. The fact that even the shallow target is to be achieved solely through early retirement adds insult to the injury. Early retirement schemes solemnly lack any connection between employees’ suitability for their jobs, their performance on the job, and other meritocratic metrics. As the result, early retirement schemes will not enhance overall levels of productivity in the workforce.

Minister Howlin, and with him the rest of the cabinet, simply appear to be unaware of what reforms are supposed to achieve. What is really needed is a comprehensive independent review of all positions across all departments and subsequent involuntary removal of those who are unsuited for their jobs.

There is also no joined-up thinking on welfare system reforms. For example, introducing a refundable tax credit per child at a mid-range rate of, say, 20%, would make the credit automatically means-tested. This would also make the scheme virtually self-administered for the majority of the recipients and allow to focus more resources on the cases where special help is needed most.

There is a virtually hit-and-run feel to the Government’s grasp of what constitutes long-term change. At this stage in the crisis, it is clear that sooner or later, the sacrosanct basic rates of social welfare as well as the unlimited nature of benefits will have to come to the chopping block. There is no economic growth path that can get us out of this painful corner.

Yet, instead of tackling the problem head on, the Government attempted once again to move along the margins, selecting individual sub-groups of aid recipients in a hope of ‘striking gold’ – finding the least vociferous ones for the hit. This is done in a naïve belief that the loudness of the group complaints is somehow proportional to the need for assistance. The end result is that those most in need, but are present in smaller numbers, got the stick, while the able-bodied adults with lesser merit claim to help are getting their carrot.

There are no reforms of the public sector pay and pensions in the Budget. The gargantuan bill for new and existing state retirees will fall this year by just €500,000 and is expected to decline by less than 2.3% in years ahead.

With social welfare fraud rampant Minister Joan Burton cheerfully reported back in August this year that her Department delivered €345 million worth of savings tightening enforcement of the welfare payments in just 7 months of 2011. Why is then Budget 2012 aiming to generate just €41 million in new fraud reduction-related savings for the entire 2012?

Despite the rhetoric, Budget 2012 was another windows-dressing for avoiding painful reforms. The new curtains of ‘austerity’ will now adorn the rotten façade of state finances until the whole structure crumbles over the next 2 years under the weight of our debts and structural recession.

Box-out:

Back in July 2010, the Minister for the Environment published a relatively un-ambitious Report of the Local Government Efficiency Review Group. The report reviewed the cost base, expenditure of and the numbers employed in local authorities in Ireland. It identified some marginal savings to the tune of €511 million comprised of €346m in efficiencies and €165m in improved cost recovery and revenue raising to be gained from introducing very moderate set of reforms, such as joint administrative areas for some sets of counties; reductions in senior management and other staffing levels; greater efficiency in procurement; more use of shared services, such as joint inspectorates and regional design offices; and better financial management. None of these suggestions have made it into specifically costed savings under the Budget 2012. Which begs a simple question – why?

5/12/2011: Two 'Austerity' charts

In previous two posts we covered Exchequer revenues and balance. Here is an interesting follow-up chart showing the dramatic swing in spending priorities of the Irish state:

And a neat chart summarizing the extent of our and indeed global 'austerity' (this one is courtesy of the OECD):

Pretty darn clear, no?

5/12/2011: Exchequer balance: November

In the previous post we looked at the Exchequer receipts. Now, let's take on Exchequer deficit.

Based on data through November 2011, Exchequer deficit stands at €21.37bn in 2011 against the same period 2010 deficit of €13.35bn. However, netting out banks recapitalizations and the sale of stake in BofI, Exchequer deficit on comparable basis was €11.72bn in 11 months of 2011 or €1.63bn below that in 2010.

Factoring in the pensions levy (temporary measure), savings to-date amount to €1.18bn on 2010 period.

Anti-climatic? You bet. Chart below breaks down the 'savings' achieved, with data reported for annualized rate of spend based on January-November 2011 receipts. Voted current expenditure for 2011 rose from €36.39bn in 2010 to €37.59bn in 2011 (data through November for both). Voted capital spending fell from €4.26bn in 2010 to €3.08bn in 2011 (again, data through November). So all of the above 'savings' come from tax increases and capital cuts. Again, when it comes to current spending (Government services), there is no austerity on the aggregate. In fact, there is ever-increasing profligacy. Once again, keep in mind, this does not mean there is no pain. It's just that the pain we have is really in the form of robbing Peter to pay Paul.

05/10/2011: Ireland's 'Sustainable' Deficit through September

With Exchequer results for September (see earlier posts on the details of tax returns and tax burden), here's the update on overall Exchequer deficit for nine months through September 2011.

Overall 2011 Exchequer deficit currently stands at €20.66bn with ex-banks deficit at €12.31bn, implying net reduction in deficit ex-banks of €1.069bn on 2010 levels and absent pensions levy / expropriation 'measure', the deficit reduction achieved through September is now just €612mln.

This hardly represents a significant drop in our overall fiscal imbalances. Cumulative deficits for 2008-present are now at €76.76bn or €42,146 per each employed person or €54,990 per each full-time employed person in Ireland (per Q2 2011 QNHS numbers, not counting Nama debts, Government promisory notes and interest on these soon to be due). 

So a run-of-the-mill family of 2 full-time employed workers is now facing, on top of massive mortgage and Government-monopolized/regulated utilities and services bills, plus gargantuan costs of childcare, education, and health care, an additional debt pile of €109,000 on average, courtesy of the serial failure of the state to control its own spending habits. 

As the 'Green Jersey' crowd would say: "It's all sustainable" cause 'exports will save us' and we have 'jobs programmes' alongside 'homes retrofitting'/'windmills-potential' economy. Sure...

25/08/2011: National forecasts and systemic upward biases

New research, published today by NBER shows that national growth and budget forecasts in the Euro area tend to overestimate growth and revenue stability than in other advanced economies and are prone to provide more biased estimates in the period of economic expansion.

The paper, titled Over-optimism in Forecasts by Official Budget Agencies and Its Implications, and authored by Jeffrey A. Frankel of the Kennedy School of Government, Harvard University and published as NBER Working paper 17239 (link here):
"... studies forecasts of real growth rates and budget balances made by official government
agencies among 33 countries.

In general, the forecasts are found: (i) to have a positive average bias, (ii) to be more biased in booms, (iii) to be even more biased at the 3-year horizon than at shorter horizons.

This over-optimism in official forecasts can help explain excessive budget deficits, especially the
failure to run surpluses during periods of high output: if a boom is forecasted to last indefinitely, retrenchment is treated as unnecessary."

In contradiction to the Franco-German recent mantra on fixed and centralized budgetary systems, the author states that: "Many believe that better fiscal policy can be obtained by means
of rules such as ceilings for the deficit or, better yet, the structural deficit. But we also find: (iv) countries subject to a budget rule, in the form of euroland’s Stability and Growth Path, make official forecasts of growth and budget deficits that are even more biased and more correlated with booms than do other countries. This effect may help explain frequent violations of the SGP."

In contrast, own budgetary discipline and honesty in forecasts pays off: "One country, Chile, has managed to overcome governments’ tendency to satisfy fiscal targets by wishful thinking rather than by action. As a result of budget institutions created in 2000, Chile’s official forecasts of growth and the budget have not been overly optimistic, even in booms. Unlike many countries in the North, Chile took advantage of the 2002-07 expansion to run budget surpluses, and so was able to ease in the 2008-09 recession."