Paul Sweeney: The OECD has relentlessly pursued a neo-liberal taxation policy. It seldom uses the word taxation without the appendage “burden” For its tax department, tax is not a “charge” or a “payment”, but nearly always a “burden”. On taxation, the OECD seemed like a Koch Brothers’ funded think-tank rather than one funded by governments. So when it revises its thinking in a new paper, it has to be welcome.
Showing posts with label economic growth. Show all posts
Showing posts with label economic growth. Show all posts
Wednesday, 27 July 2016
Friday, 16 December 2011
Monday, 12 September 2011
Depleting the economy and the alternative
Michael Taft: Philip Lane’s thoughtful article in the Sunday Business Post helps clarify the debate. For while he argues for further fiscal contraction, this should not distract us from the underlying point of difference between those who support (more) austerity, and those who support an expansionist approach. Disputes over fiscal policy can mask more fundamental differences in economic and political outlook. Let’s examine the root issue as Philip defines it, and see where those differences lie.
Philip points out that, notwithstanding the reduction in interest rates which should boost the prospect of hitting the -8.6 percent deficit target next year, problems arise from lower GDP growth. At the time of the EU-IMF deal, the last Government projected nominal GDP growth to be 6.9 percent over 2011 and 2012. Last April the current Government revised that growth downwards to 4.5 percent (and revised the deficit upwards). Recently, the ESRI and the Central Bank have projected nominal growth over this period at 3.3 and 2.5 percent respectively; a long way from the original projections underpinning the EU-IMF deal.
This is important as Philip notes:
‘A lower GDP make it more difficult to hit targets that are expressed as ratios to GDP; lower GDP also means a loss in tax revenues and an increase in welfare payments.’
However, Philip responds to this issue in a far more sophisticated manner than most commentators, making a clear distinction between ‘cyclical’ and ‘structural’ factors:
If the lower GDP forecast is classified as a temporary cyclical factor, then it means a widening in the cyclical component of the budget deficit but does not adversely affect the structural component that is the main concern in international policy and investor circles. A cyclical decline in the budget balance of itself does not call for additional austerity measures, since subsequent economic recovery will fix the cyclical component of the deficit.
Alternatively, if the lower GDP forecast is classified as a reduction in the long-term potential output level of the economy, then the implication is that the structural budget deficit has deteriorated, since cyclical recovery in the economy will not be enough to restore budget balance. If that is the case, then the government will need to plan for larger fiscal consolidation measures over the next number of years in order to achieve the sizeable improvement in the structural balance that is required for fiscal sustainability.
There is a lot of meat here so let’s chew slowly for the existence, extent and measurement of the structural deficit is a highly contentious issue, never mind how we go about eliminating it.
Potential output is the level of GDP if the economy was operating at full capacity and all factors of production are being fully utilised. However, when wealth is permanently destroyed, the potential level falls so that, even when the economy is at full tilt, it cannot generate enough tax revenue (or reduce unemployment) to balance the books. Hence we need to engage in fiscal adjustments, i.e. austerity.
There are a number of issues here. First, measuring potential output, or natural GDP, is a highly tenuous exercise. Ask 10 economists to measure potential output and you’ll get twenty different methodologies and forty different answers. Potential output is not something observable like unemployment or the retail sales index. It is estimated, and such estimates widely diverge. Therefore, extrapolating the potential output and, from that, a structural deficit can sometimes be a shot in the macroeconomic dark.
Second, there is a fine line, and sometimes no line at all, between the cyclical and the structural. Is there a point at which a temporary, cyclical dip becomes structural? Let us take the example of an export-oriented company in a high value-added sector employing a high-skilled, well-paid workforce. This company has been years, if not decades, in the making. When external and domestic demand falls for their product in the recession (accompanied by a credit freeze), the company could go bust. However, after the recession the plant is rebuilt into a shopping mall and all the redundant employees are rehired in the shops. Full capacity has been restored (land, buildings, labour) but the output has been reduced from export, high-valued added activities to low value-added and low-waged work with all the fiscal impact that has.
And herein lies the problem. Full capacity has been restored but not the same level of economic output. And because the economy is not generating the tax and export revenue, the Government cuts its spending (or household spending through tax increases) – which exacerbates the cyclical element of the deficit, which in turn can aggravate future potential output.
Indeed, the pursuit of fiscal adjustments aimed at the ‘structural deficit’ can damage parts of the economy that would otherwise help us overcome structural problems. How many companies, which might otherwise grow – possibly into export markets – will be hit to the point of liquidation by the government cutting its own consumption (i.e. cutting contracts for public services or investments)? What will be the impact of emigration on our skill base, or the early retirement of public sector workers on the public sector skill base? What will be the future economic and social cost of letting too many people spend too long on the dole queues – structural, long-term unemployment? How will education cuts affect knowledge capital in the future?
What Philip does is take the lower potential output as a given and then, like a procrustean bed, cut the balance sheet to fit which, in turn, puts more downward pressure on future output. It’s a vicious cycle which will end up with an exhausted economy.
There is a better approach. If there is a structural deficit arising from lower potential output – fix the problem: which is the level of productive capacity itself. This calls for investment in key sectors to raise productivity and create a platform which increases the trend growth of potential output. How much would a next generation broadband network, pre-primary education, a state of the art water & waste system, one-on-one tutorials to improve literacy and numeracy skills, a network of free primary health services, electricity generation from ocean and tidal (the list goes on and on) – how much would any or all of these boost potential growth? We can argue the quantitative math but not the qualitative outcome.
And, has been pointed out and measured on numerous posts on Progressive-Economy and other sites, such investment generates employment in the short-term and higher growth (especially through the supply-side impacts) in the future.
And what about the structural deficit? Well, here’s the real benefit. Growth reduces the structural deficit –just as argued above, lack of growth can exacerbate it. The ESRI, working with x amount of fiscal adjustment, showed that under a low-growth (i.e. 3 percent) medium-term scenario we wouldn’t overcome the structural deficit. However, using the same fiscal adjustment, they showed that higher growth would actually reduce the structural deficit. In other words, the key is not fiscal adjustment, but growth.
This is not to say that fiscal adjustments will not be necessary. But that is a political choice, as Professor John Fitzgerald has pointed out. If we want European level of public services and social protection, we will need European levels of taxation. That, however, is another argument – and requires a detailed discussion of fiscal strategies that get us there without hitting domestic demand or undermining investment streams.
For the situation is deteriorating when viewed through the lens of the domestic economy. When the EU-IMF was signed nominal GNP for 2011 and 2012 was projected to grow by 5.6 percent. The Central Bank and ESRI have radically revised this into negative territory. With even the Government conceding that we will be in a domestic-demand recession next year, the only question is will that situation persist into 2013?
Ultimately, the argument does not boil down to spending cuts vs. tax increases, or the optimal level of (downward) fiscal adjustment. The issue is how we address the productive capacity of the economy. Philip argues that we should drive down our balance sheet to fit a low-growth scenario. The alternative rejects this self-defeating fiscal pessimism.
If we are heading into more difficulties arising from lower future growth, the solution becomes obvious: engage in strategies – namely, investment (public investment which can ‘crowd-in’ additional private investment) - to increase output and productivity.
For if we continue, never mind increase, austerity we will continue to destroy wealth – just as we have done in the last three years. We will end up with a depleted economy, incapable of rising to the new technological challenges facing us. And we will find the goal of fiscal stability as elusive as ever.
Philip points out that, notwithstanding the reduction in interest rates which should boost the prospect of hitting the -8.6 percent deficit target next year, problems arise from lower GDP growth. At the time of the EU-IMF deal, the last Government projected nominal GDP growth to be 6.9 percent over 2011 and 2012. Last April the current Government revised that growth downwards to 4.5 percent (and revised the deficit upwards). Recently, the ESRI and the Central Bank have projected nominal growth over this period at 3.3 and 2.5 percent respectively; a long way from the original projections underpinning the EU-IMF deal.
This is important as Philip notes:
‘A lower GDP make it more difficult to hit targets that are expressed as ratios to GDP; lower GDP also means a loss in tax revenues and an increase in welfare payments.’
However, Philip responds to this issue in a far more sophisticated manner than most commentators, making a clear distinction between ‘cyclical’ and ‘structural’ factors:
If the lower GDP forecast is classified as a temporary cyclical factor, then it means a widening in the cyclical component of the budget deficit but does not adversely affect the structural component that is the main concern in international policy and investor circles. A cyclical decline in the budget balance of itself does not call for additional austerity measures, since subsequent economic recovery will fix the cyclical component of the deficit.
Alternatively, if the lower GDP forecast is classified as a reduction in the long-term potential output level of the economy, then the implication is that the structural budget deficit has deteriorated, since cyclical recovery in the economy will not be enough to restore budget balance. If that is the case, then the government will need to plan for larger fiscal consolidation measures over the next number of years in order to achieve the sizeable improvement in the structural balance that is required for fiscal sustainability.
There is a lot of meat here so let’s chew slowly for the existence, extent and measurement of the structural deficit is a highly contentious issue, never mind how we go about eliminating it.
Potential output is the level of GDP if the economy was operating at full capacity and all factors of production are being fully utilised. However, when wealth is permanently destroyed, the potential level falls so that, even when the economy is at full tilt, it cannot generate enough tax revenue (or reduce unemployment) to balance the books. Hence we need to engage in fiscal adjustments, i.e. austerity.
There are a number of issues here. First, measuring potential output, or natural GDP, is a highly tenuous exercise. Ask 10 economists to measure potential output and you’ll get twenty different methodologies and forty different answers. Potential output is not something observable like unemployment or the retail sales index. It is estimated, and such estimates widely diverge. Therefore, extrapolating the potential output and, from that, a structural deficit can sometimes be a shot in the macroeconomic dark.
Second, there is a fine line, and sometimes no line at all, between the cyclical and the structural. Is there a point at which a temporary, cyclical dip becomes structural? Let us take the example of an export-oriented company in a high value-added sector employing a high-skilled, well-paid workforce. This company has been years, if not decades, in the making. When external and domestic demand falls for their product in the recession (accompanied by a credit freeze), the company could go bust. However, after the recession the plant is rebuilt into a shopping mall and all the redundant employees are rehired in the shops. Full capacity has been restored (land, buildings, labour) but the output has been reduced from export, high-valued added activities to low value-added and low-waged work with all the fiscal impact that has.
And herein lies the problem. Full capacity has been restored but not the same level of economic output. And because the economy is not generating the tax and export revenue, the Government cuts its spending (or household spending through tax increases) – which exacerbates the cyclical element of the deficit, which in turn can aggravate future potential output.
Indeed, the pursuit of fiscal adjustments aimed at the ‘structural deficit’ can damage parts of the economy that would otherwise help us overcome structural problems. How many companies, which might otherwise grow – possibly into export markets – will be hit to the point of liquidation by the government cutting its own consumption (i.e. cutting contracts for public services or investments)? What will be the impact of emigration on our skill base, or the early retirement of public sector workers on the public sector skill base? What will be the future economic and social cost of letting too many people spend too long on the dole queues – structural, long-term unemployment? How will education cuts affect knowledge capital in the future?
What Philip does is take the lower potential output as a given and then, like a procrustean bed, cut the balance sheet to fit which, in turn, puts more downward pressure on future output. It’s a vicious cycle which will end up with an exhausted economy.
There is a better approach. If there is a structural deficit arising from lower potential output – fix the problem: which is the level of productive capacity itself. This calls for investment in key sectors to raise productivity and create a platform which increases the trend growth of potential output. How much would a next generation broadband network, pre-primary education, a state of the art water & waste system, one-on-one tutorials to improve literacy and numeracy skills, a network of free primary health services, electricity generation from ocean and tidal (the list goes on and on) – how much would any or all of these boost potential growth? We can argue the quantitative math but not the qualitative outcome.
And, has been pointed out and measured on numerous posts on Progressive-Economy and other sites, such investment generates employment in the short-term and higher growth (especially through the supply-side impacts) in the future.
And what about the structural deficit? Well, here’s the real benefit. Growth reduces the structural deficit –just as argued above, lack of growth can exacerbate it. The ESRI, working with x amount of fiscal adjustment, showed that under a low-growth (i.e. 3 percent) medium-term scenario we wouldn’t overcome the structural deficit. However, using the same fiscal adjustment, they showed that higher growth would actually reduce the structural deficit. In other words, the key is not fiscal adjustment, but growth.
This is not to say that fiscal adjustments will not be necessary. But that is a political choice, as Professor John Fitzgerald has pointed out. If we want European level of public services and social protection, we will need European levels of taxation. That, however, is another argument – and requires a detailed discussion of fiscal strategies that get us there without hitting domestic demand or undermining investment streams.
For the situation is deteriorating when viewed through the lens of the domestic economy. When the EU-IMF was signed nominal GNP for 2011 and 2012 was projected to grow by 5.6 percent. The Central Bank and ESRI have radically revised this into negative territory. With even the Government conceding that we will be in a domestic-demand recession next year, the only question is will that situation persist into 2013?
Ultimately, the argument does not boil down to spending cuts vs. tax increases, or the optimal level of (downward) fiscal adjustment. The issue is how we address the productive capacity of the economy. Philip argues that we should drive down our balance sheet to fit a low-growth scenario. The alternative rejects this self-defeating fiscal pessimism.
If we are heading into more difficulties arising from lower future growth, the solution becomes obvious: engage in strategies – namely, investment (public investment which can ‘crowd-in’ additional private investment) - to increase output and productivity.
For if we continue, never mind increase, austerity we will continue to destroy wealth – just as we have done in the last three years. We will end up with a depleted economy, incapable of rising to the new technological challenges facing us. And we will find the goal of fiscal stability as elusive as ever.
Wednesday, 7 September 2011
The more things don't change, the more things don't
Michael Taft: The ESRI has produced a report on deficit and debt levels up to 2015 which has moved many to claim if we just stay the austerity course we will emerge from the forest of fiscal dark into the valley of economic repose. If you haven’t yet, first read Michael Burke’s critique of the ESRI report Here, I want to focus on a small little item (which is actually a big item): their assumptions on growth.
Read the rest of the post here:
Read the rest of the post here:
Austerity is not working
Paul Sweeney: As Michael Burke says in his post yesterday, the ESRI’s forecast is based on some outstanding optimism. It seems that the Institute has turned into a surprisingly optimistic body. The fragrant air it is breathing is not in Ireland. Those exports will have to do a lot more “heavy lifting” to compensate for the 21% collapse in domestic demand over the past three years.
There is more realism abroad. Here is an interview with the FT’s Martin Wolf on Austerity vs Stimulus. It is part of that paper’s debate on the subject. Unlike most of the Irish media, the FT gives two sides. Wolf in an article says Britain is in the worst depression since the Great Depression of the 1930s. I’m sure the figures are similar for Ireland. The 1950s were bad, but were they as bad as now on the length and especially the depth of the Depression? I suspect so, but don’t have the data.
He is quite critical of policy and thinks “the forecasts are hopelessly rosy”. He says we are heading for “a historic disaster.”
Also, Wolfgang Munchau of the same paper, the FT, had a piece on Monday 5th September which argued that the worst of the crisis is yet to come. Why? Because “all countries are deflating simultaneously.”
And even small Ireland contributes to this downward spiral. There is a growing nationalism in the Irish business and economic establishment which is developing further in response to the crisis. It is a “beggar thy neighbour” attitude on our exports doing the “heavy lifting.” This Green Jersey line is similar to the establishment’s autarkic view of our low corporation tax.
Munchau argues that “The very least one should expect is for the eurozone to abandon all austerity programmes with immediate effect and to return to a fiscally neutral stance, allowing the automatic stabilisers to kick in fully.”
He continues: “At present, such a shift is not even on the agenda. As is so typical in the eurozone, each country behaves like a small open economy at the edge of the world. Each assumes its actions have no impact on the others.”
On the opposite side, we have German Finance Minister Wolfgang Schauble of Germany arguing for Austerity. Here we have John Fitzgerald, Philip Lane and most Irish academics arguing for more Austerity. Interestingly, however, on the ground, groups like Congress and IBEC are argueing for less austerity in the forthcoming Budget. If we go for a package of as high as €4bn, there will be no growth (GNP) again next year, the fifth year of our Depression!
Munchau concludes by saying that, when the downturn hits the eurozone, the crisis will “turn ugly.”
Ugly? Looking out the window I see “real ugly” already. If our soothsayers have their way, Ireland’s Five Year Depression will become like Japan’s – A Ten Year Depression!
What is really surprising is that the penny has not dropped yet on the ineffectiveness of the Irish Austerity Programme. It will have taken a staggering €20.6bn out of the economy by year end. All indicators show it is much too severe and is killing off domestic demand. To take a further €4bn our in the next Budget, as the Macho Economists demand, will be real folly.
It should be far less and must include a real “Jobs Programme.” It will cost money, but we have some left in our Pension Fund.
There is more realism abroad. Here is an interview with the FT’s Martin Wolf on Austerity vs Stimulus. It is part of that paper’s debate on the subject. Unlike most of the Irish media, the FT gives two sides. Wolf in an article says Britain is in the worst depression since the Great Depression of the 1930s. I’m sure the figures are similar for Ireland. The 1950s were bad, but were they as bad as now on the length and especially the depth of the Depression? I suspect so, but don’t have the data.
He is quite critical of policy and thinks “the forecasts are hopelessly rosy”. He says we are heading for “a historic disaster.”
Also, Wolfgang Munchau of the same paper, the FT, had a piece on Monday 5th September which argued that the worst of the crisis is yet to come. Why? Because “all countries are deflating simultaneously.”
And even small Ireland contributes to this downward spiral. There is a growing nationalism in the Irish business and economic establishment which is developing further in response to the crisis. It is a “beggar thy neighbour” attitude on our exports doing the “heavy lifting.” This Green Jersey line is similar to the establishment’s autarkic view of our low corporation tax.
Munchau argues that “The very least one should expect is for the eurozone to abandon all austerity programmes with immediate effect and to return to a fiscally neutral stance, allowing the automatic stabilisers to kick in fully.”
He continues: “At present, such a shift is not even on the agenda. As is so typical in the eurozone, each country behaves like a small open economy at the edge of the world. Each assumes its actions have no impact on the others.”
On the opposite side, we have German Finance Minister Wolfgang Schauble of Germany arguing for Austerity. Here we have John Fitzgerald, Philip Lane and most Irish academics arguing for more Austerity. Interestingly, however, on the ground, groups like Congress and IBEC are argueing for less austerity in the forthcoming Budget. If we go for a package of as high as €4bn, there will be no growth (GNP) again next year, the fifth year of our Depression!
Munchau concludes by saying that, when the downturn hits the eurozone, the crisis will “turn ugly.”
Ugly? Looking out the window I see “real ugly” already. If our soothsayers have their way, Ireland’s Five Year Depression will become like Japan’s – A Ten Year Depression!
What is really surprising is that the penny has not dropped yet on the ineffectiveness of the Irish Austerity Programme. It will have taken a staggering €20.6bn out of the economy by year end. All indicators show it is much too severe and is killing off domestic demand. To take a further €4bn our in the next Budget, as the Macho Economists demand, will be real folly.
It should be far less and must include a real “Jobs Programme.” It will cost money, but we have some left in our Pension Fund.
Tuesday, 6 September 2011
This time, it's different
Michael Burke: The ESRI’s latest research paper, ’Irish Government Debt and Implied Debt Dynamics: 2011-2015’ has received much coverage. Commentary has focused on the projected stabilisation of the overall debt in relation to the economy; the debt/GDP ratio or the debt/GNP ratio. From this, some more excitable commentary has suggested that this is a vindication of the broad-based attack on living standards, increased taxes on working people (but not on corporates) and public spending cuts euphemistically known as ‘austerity’ policies.
However, this last contention, that ‘austerity works’, is not supported by the authors’ findings themselves. To quote their own summary of their paper, ‘[Our projected debt ratios are] much lower than had been projected in official figures earlier in the year, partly because the cost of the bank recapitalisation was much lower than anticipated and also because of the reduction in EU interest rates’.
So, the lower projections are based on the lower level of bank recapitalisation and lower rates for bailout funds for those recapitalisations. According to the authors’ abstract of their own findings, none of the projected improvement is attributable to ‘austerity’ measures.
Quality of Forecasts
But how ‘good’ are these forecasts, in both senses? First, what is the quantum of improvement that is being forecast by the ESRI? Secondly, how likely is it that these forecasts will prove correct? The debt ratios forecast by the ESRI are set out in the table below:
Debt Ratios, % GDP
Source: ESRI, Eurostat, IMF databank, Euro Area Spring Forecasts
The first point to note is that the ESRI is not projecting any reduction in the level of government debt over the period 2010 to 2015. Over that period, debt will rise from 94.9% of GDP to a projected 106.2%. It is in effect projecting a deterioration in the debt level to next year, then stabilisation and then a reduction. Both the IMF and Eurostat forecasts are much worse.
This disparity is a function of two factors. First, the Eurostat and IMF forecasts were made before the reduction in interest rates and before the lower projections for the level of the bank bailout were made. Secondly, the ESRI has stronger real growth projections than either Eurostat or the IMF.
Before dealing with the substantial point of how large the bailout and interest rate savings are, it is worth highlighting the main source of the discrepancy in growth forecasts. In effect, ESRI has a much larger growth forecast of +1.8% real GDP in 2010 than either Eurostat (+0.6%) or the IMF (+0.5%). The difference arises because whereas the IMF and Eurostat both have prices rising by 0.6% in 2010 to reduce real GDP by that degree, the ESRI projects falling prices of 1.1% (implied from the gap between real and nominal GDP (Table 7). Given that deflation both reduces the nominal level of taxation revenues while also increasing the ratio of existing debt to nominal GDP, there can be little argument that this ‘stronger’ growth forecast is responsible for the ESRI’s more optimistic debt/GDP forecasts.
Instead, it is the combination of lower interest rates and a lower projected bank bailout cost which is responsible for the projections of a substantially improved debt outlook. On the former, the consensus appears to be that the annual saving will be in the order of €1bn per annum, perhaps slightly more. Implicitly the ESRI authors assume a saving of €1.125bn per annum, on the basis of a former interest rate of 6% (p.20, point 2.). Compounded, this saving over a 5 year period amounts to €8.5bn or approximately 4.6% of the GDP level projected for 2015.
On the lower bank bailout costs, the international bailout of creditors to Irish banks in November 2010 included €10bn of immediate bank recapitalisation plus another contingency amount of €20bn. To date, of this a total of €17bn has been provided by the State (banks funding €7bn themselves in the financial markets for a total of €24bn). The ESRI authors expect €3bn to be repaid to the State by 2014. This ‘saving’ of €13bn also incurs interest. However, the authors now argue that funding from the Troika will be needed in 2014, even though the terms of the original bailout were that the government would return to the financial markets in 2013. Therefore, there will be no net interest saving, based on the authors’ projections. Instead, there will be an additional cost of approximately €0.5bn (based on the 3.5% interest rate, rather than a projected interest rate of 6% in the financial market borrowings that are also assumed in the ESRI paper). As a result, the projected saving from a less onerous bank bailout is a net €12.5bn.
Taken together the actual interest rate saving of €8.5bn and projected saving on the bank bailout of €12.5bn combine for a total €21bn. This is equivalent to 11.4% of projected 2015 GDP.
Without these actual and projected windfalls, the ESRI forecast would otherwise have been 117.6% of GDP in 2015. This compares to a debt/GDP ratio of 94.9% in 2010.
Debt Dynamics
The idea that there will be no more bank bailouts has firmly taken hold and is largely responsible for the specific rally in Irish government debt in recent weeks. This is despite the fact that the EBA’s stress tests were widely discredited by the failure of two small Spanish banks shortly after publication, with total losses exceeding the EBA’s estimate of EU-wide recapitalisation requirements.
It may be the case that further losses do not require further recapitalisations. But the key exposure of the Irish banks is to the domestic economy, which continues to deteriorate on all forecasts, including those of the ESRI. This has an impact on the banking sector. Currently, this is most evident in the rise in the rate of mortgage defaults.
This highlights a key misconception regarding the relationship between the banking sector, government finances and the real economy. It is assumed that, if the banking sector is stabilised to the extent that it requires no further taxpayer funds, this will restore government finances to health, as long as public spending is reduced towards the level of taxation revenues (sufficient to provide a ‘primary surplus’, that is before interest payments are included). It is argued that, if all three occur, bank stabilisation, no more bailouts, a swing toward a primary surplus, then the crisis ‘will be over in 3 years’.
This is the premise that underlies a section of the ESRI paper dealing with debt dynamics. It is not denied that significant remedial action was required to resolve the crisis in the banking sector, even while many argue that a bailout of all their creditors was one of the least effective means of doing so. But, ever-greater contraction of the domestic economy can only be fatal to any ambitions to remove the banking sector from the life support it has been given by taxpayers. In effect, the ESRI and many others look through the world through the wrong end of the telescope. Neither banks’ balance sheets nor government finances can be restored to health until and unless there is an economic recovery.
The authors argue that, absent any further negative ‘shocks’, the debt/GDP ratio will begin to fall from 2013 onwards. The horizon for an imminent improvement never seems to alter. It is always 18 months hence. But the Irish economy received no external shocks in the way that economists use the term. The recession began here nearly a year before it began in the world economy, the slump in investment also a year earlier (which preceded the recession in both cases).
Three years ago in the Autumn 2008 Quarterly Economic Commentary the ESRI was forecasting a general government debt of 47.5% of GDP in 2009 and was fully supportive of government efforts to cut the deficit, in particular urging cuts in public sector pay. But this contractionary fiscal policy was a shock to the economy and the effect was slower growth, rising unemployment and falling tax revenues.
In the event, the debt/GDP ratio was 65.6% of GDP, not 47.5% in 2009, even while the government implemented ‘austerity’ measures equivalent to 9.1% of GDP. In effect the ESRI was forecasting a near-term deterioration in the debt level followed by stabilisation and then reduction, based on ‘austerity’. In fact a trawl through the QECs since 2008 shows that this debt profile is what the ESRI has been forecasting since 2008.
The authors clearly haven’t asked themselves the key question, so we must: Why will it be different this time?
However, this last contention, that ‘austerity works’, is not supported by the authors’ findings themselves. To quote their own summary of their paper, ‘[Our projected debt ratios are] much lower than had been projected in official figures earlier in the year, partly because the cost of the bank recapitalisation was much lower than anticipated and also because of the reduction in EU interest rates’.
So, the lower projections are based on the lower level of bank recapitalisation and lower rates for bailout funds for those recapitalisations. According to the authors’ abstract of their own findings, none of the projected improvement is attributable to ‘austerity’ measures.
Quality of Forecasts
But how ‘good’ are these forecasts, in both senses? First, what is the quantum of improvement that is being forecast by the ESRI? Secondly, how likely is it that these forecasts will prove correct? The debt ratios forecast by the ESRI are set out in the table below:
Debt Ratios, % GDP
Source: ESRI, Eurostat, IMF databank, Euro Area Spring Forecasts
The first point to note is that the ESRI is not projecting any reduction in the level of government debt over the period 2010 to 2015. Over that period, debt will rise from 94.9% of GDP to a projected 106.2%. It is in effect projecting a deterioration in the debt level to next year, then stabilisation and then a reduction. Both the IMF and Eurostat forecasts are much worse.
This disparity is a function of two factors. First, the Eurostat and IMF forecasts were made before the reduction in interest rates and before the lower projections for the level of the bank bailout were made. Secondly, the ESRI has stronger real growth projections than either Eurostat or the IMF.
Before dealing with the substantial point of how large the bailout and interest rate savings are, it is worth highlighting the main source of the discrepancy in growth forecasts. In effect, ESRI has a much larger growth forecast of +1.8% real GDP in 2010 than either Eurostat (+0.6%) or the IMF (+0.5%). The difference arises because whereas the IMF and Eurostat both have prices rising by 0.6% in 2010 to reduce real GDP by that degree, the ESRI projects falling prices of 1.1% (implied from the gap between real and nominal GDP (Table 7). Given that deflation both reduces the nominal level of taxation revenues while also increasing the ratio of existing debt to nominal GDP, there can be little argument that this ‘stronger’ growth forecast is responsible for the ESRI’s more optimistic debt/GDP forecasts.
Instead, it is the combination of lower interest rates and a lower projected bank bailout cost which is responsible for the projections of a substantially improved debt outlook. On the former, the consensus appears to be that the annual saving will be in the order of €1bn per annum, perhaps slightly more. Implicitly the ESRI authors assume a saving of €1.125bn per annum, on the basis of a former interest rate of 6% (p.20, point 2.). Compounded, this saving over a 5 year period amounts to €8.5bn or approximately 4.6% of the GDP level projected for 2015.
On the lower bank bailout costs, the international bailout of creditors to Irish banks in November 2010 included €10bn of immediate bank recapitalisation plus another contingency amount of €20bn. To date, of this a total of €17bn has been provided by the State (banks funding €7bn themselves in the financial markets for a total of €24bn). The ESRI authors expect €3bn to be repaid to the State by 2014. This ‘saving’ of €13bn also incurs interest. However, the authors now argue that funding from the Troika will be needed in 2014, even though the terms of the original bailout were that the government would return to the financial markets in 2013. Therefore, there will be no net interest saving, based on the authors’ projections. Instead, there will be an additional cost of approximately €0.5bn (based on the 3.5% interest rate, rather than a projected interest rate of 6% in the financial market borrowings that are also assumed in the ESRI paper). As a result, the projected saving from a less onerous bank bailout is a net €12.5bn.
Taken together the actual interest rate saving of €8.5bn and projected saving on the bank bailout of €12.5bn combine for a total €21bn. This is equivalent to 11.4% of projected 2015 GDP.
Without these actual and projected windfalls, the ESRI forecast would otherwise have been 117.6% of GDP in 2015. This compares to a debt/GDP ratio of 94.9% in 2010.
Debt Dynamics
The idea that there will be no more bank bailouts has firmly taken hold and is largely responsible for the specific rally in Irish government debt in recent weeks. This is despite the fact that the EBA’s stress tests were widely discredited by the failure of two small Spanish banks shortly after publication, with total losses exceeding the EBA’s estimate of EU-wide recapitalisation requirements.
It may be the case that further losses do not require further recapitalisations. But the key exposure of the Irish banks is to the domestic economy, which continues to deteriorate on all forecasts, including those of the ESRI. This has an impact on the banking sector. Currently, this is most evident in the rise in the rate of mortgage defaults.
This highlights a key misconception regarding the relationship between the banking sector, government finances and the real economy. It is assumed that, if the banking sector is stabilised to the extent that it requires no further taxpayer funds, this will restore government finances to health, as long as public spending is reduced towards the level of taxation revenues (sufficient to provide a ‘primary surplus’, that is before interest payments are included). It is argued that, if all three occur, bank stabilisation, no more bailouts, a swing toward a primary surplus, then the crisis ‘will be over in 3 years’.
This is the premise that underlies a section of the ESRI paper dealing with debt dynamics. It is not denied that significant remedial action was required to resolve the crisis in the banking sector, even while many argue that a bailout of all their creditors was one of the least effective means of doing so. But, ever-greater contraction of the domestic economy can only be fatal to any ambitions to remove the banking sector from the life support it has been given by taxpayers. In effect, the ESRI and many others look through the world through the wrong end of the telescope. Neither banks’ balance sheets nor government finances can be restored to health until and unless there is an economic recovery.
The authors argue that, absent any further negative ‘shocks’, the debt/GDP ratio will begin to fall from 2013 onwards. The horizon for an imminent improvement never seems to alter. It is always 18 months hence. But the Irish economy received no external shocks in the way that economists use the term. The recession began here nearly a year before it began in the world economy, the slump in investment also a year earlier (which preceded the recession in both cases).
Three years ago in the Autumn 2008 Quarterly Economic Commentary the ESRI was forecasting a general government debt of 47.5% of GDP in 2009 and was fully supportive of government efforts to cut the deficit, in particular urging cuts in public sector pay. But this contractionary fiscal policy was a shock to the economy and the effect was slower growth, rising unemployment and falling tax revenues.
In the event, the debt/GDP ratio was 65.6% of GDP, not 47.5% in 2009, even while the government implemented ‘austerity’ measures equivalent to 9.1% of GDP. In effect the ESRI was forecasting a near-term deterioration in the debt level followed by stabilisation and then reduction, based on ‘austerity’. In fact a trawl through the QECs since 2008 shows that this debt profile is what the ESRI has been forecasting since 2008.
The authors clearly haven’t asked themselves the key question, so we must: Why will it be different this time?
Monday, 4 April 2011
Affordable, manageable and sustainable
Michael Taft: Some commentary has suggested that Black Thursday wasn’t all that bad; in particular the bail-out won’t add much to our general debt. Therefore (and this is a curious QED) the debt remains sustainable. Phew. I was worried there for a moment. In our own little bubble, we can content ourselves with the notion that our debt is ‘affordable, manageable and sustainable’.
It is difficult to say how much of the €24 billion bail-out will find itself in general government debt. Government sources claim only €2 billion – but even then, this depends on how Eurostat categorises the ‘expenditure’. So let’s factor in this marginal increase. What follows projects debt-to-GDP and GNP ratios – but this is not the only ‘sustainability’ measurement (the other measures interest rates, primary balances and growth).
If we use the last Government’s overly-optimistic growth (and, so, deficit) projections our debt will have to be revised upwards to 104 percent due to the poor 2010 GDP outcome.
However, let’s substitute the more sober IMF’s projections for growth and the deficit up to 2014. They project that growth will be an annual 2 percent; this contrasts with the last Government’s 2.7 percent; regarding the deficit, the IMF projects that the balance will be -5.1 percent; the last Government hoped to reach -2.9 percent (but that’s gone by the boards under the new Government).
If we use the IMF’s projections, we find the Government debt rising to 113 percent by 2014. How does this compare to the IMF’s projections for EU countries by that year?
We will be well above the EU average, behind dysfunctional Greece and long-time high-debt Italy (which relies on domestic savings to support its debt).
But let’s look at this from another perspective – debt as percentage of GNP (or Gross National Income).
If we take the Government’s optimistic projections, we’re still far in excess of the EU-15 average, coming second in the table.
However, if the IMF projections hold, we will top the league – ahead of even insolvent Greece (note, however, that the Greek numbers will probably rise as their austerity programme is driving down growth and increasing the debt burden; just like Ireland).
With the markets convinced that Greece will default, how far behind can Ireland be? And this assumes that not one extra cent, as Minister Leo would put it, finds its way on to the state books. What odds on that not happening?
But even though we may be heading towards Greek levels of debt, we won’t have to worry. It will all be ‘affordable, manageable and sustainable’.
Just as long as we keep cutting (and cutting and cutting) social welfare, public services and investment.
It is difficult to say how much of the €24 billion bail-out will find itself in general government debt. Government sources claim only €2 billion – but even then, this depends on how Eurostat categorises the ‘expenditure’. So let’s factor in this marginal increase. What follows projects debt-to-GDP and GNP ratios – but this is not the only ‘sustainability’ measurement (the other measures interest rates, primary balances and growth).
If we use the last Government’s overly-optimistic growth (and, so, deficit) projections our debt will have to be revised upwards to 104 percent due to the poor 2010 GDP outcome.
However, let’s substitute the more sober IMF’s projections for growth and the deficit up to 2014. They project that growth will be an annual 2 percent; this contrasts with the last Government’s 2.7 percent; regarding the deficit, the IMF projects that the balance will be -5.1 percent; the last Government hoped to reach -2.9 percent (but that’s gone by the boards under the new Government).
If we use the IMF’s projections, we find the Government debt rising to 113 percent by 2014. How does this compare to the IMF’s projections for EU countries by that year?
But let’s look at this from another perspective – debt as percentage of GNP (or Gross National Income).
If we take the Government’s optimistic projections, we’re still far in excess of the EU-15 average, coming second in the table.
However, if the IMF projections hold, we will top the league – ahead of even insolvent Greece (note, however, that the Greek numbers will probably rise as their austerity programme is driving down growth and increasing the debt burden; just like Ireland).
With the markets convinced that Greece will default, how far behind can Ireland be? And this assumes that not one extra cent, as Minister Leo would put it, finds its way on to the state books. What odds on that not happening?
But even though we may be heading towards Greek levels of debt, we won’t have to worry. It will all be ‘affordable, manageable and sustainable’.
Just as long as we keep cutting (and cutting and cutting) social welfare, public services and investment.
Friday, 25 March 2011
Pavlov's dogs and barking mad economics
Michael Burke: Ivan Pavlov and his work are widely misunderstood. In English he is most usually associated with the phrase ‘Pavlov’s Dogs’ , used to imply an unthinking and customary response, a conditioned reflex. In fact, the great physiologist’s work was both extensive and groundbreaking in a number of areas.
Even in the caricature of his work, what conclusions could have been drawn from research which showed the dogs still panting for food after the twelfth time when the whistle had blown and there was no food?
The question came to mind in relation to the preview of the GDP data over on Irish Economy where characteristically strong opinions were not matched by strong convictions about growth. This was just as well. In real terms, GDP fell by 1.6% in the quarter and is 14.6% below its peak level prior to the recession – 3 years ago.
For 12 quarters mainstream and official economic opinion has expected government spending cuts to produce growth. It has produced contraction. ‘Pavlov’s dogs’ were smarter.
This is a new low-point for the economy - and for mainstream economic thinking. Some may be inclined to designate this a ‘double-dip’, but in reality this is just an accounting quirk. The positive quarter of growth sandwiched either side of contraction implicit in the phrase is a mirage – entirely accounted for by a rise in unwanted inventories in Q3, as was argued at that time.
Instead, some may be inclined to see a chink of light from the GNP data. Real GNP rose for the third consecutive quarter, up 2%, and now stands 2.7% higher than a year ago – although it is still 14.1% below its peak. But this too is more an accounting function than any reflection of rising domestic activity. The key components of growth fell- personal consumption -0.4% in Q4 to a new low, 11.1% below its peak. Investment (gross fixed capital formation) also fell 2.3% in Q4 to a new low, 60.7% below its pre-recession level. The total decline in investment from peak is now €27.6bn, which is the same as the total decline in GDP (€27.7bn) and exceeds the decline in GNP (€22.8bn). The entire slump is accounted for by the investment collapse. Inventories also fell once more.
So, where does rising GNP come from? Current government spending rose by an annualised €72mn in Q4, but in a €138.4bn domestic economy that really doesn’t add up to much. Infamously, government spending in this economy is falling- a quarterly rise a blip, when the numbers forced onto welfare rise at a faster rate than the welfare entitlements are cut. Maybe they got complacent when unemployment ‘steadied’ at 13.7%. If so, the surge to 14.7% will have them looking for the axe once more.
In any event, government spending has been in a downtrend since mid-2008 and fell by 2.1% while GNP was rising. Therefore all the activity components of GNP have been falling, personal consumption, investment, inventories and government spending.
The reason GNP has risen is because Net Factor Income from the Rest of the World has been rising. More accurately, the drain on growth from this source has been falling. This outflow has declined by over €7bn this year alone (annualised), much greater than the €5.3bn rise in GNP from Q1 to Q4. The reduction in this outflow is that Irish residents (ie Irish banks) are paying less interest to overseas residents. There is simple reason for this- overseas residents have taken their money out of Irish banks. They are too risky. This will probably continue, and so boost GNP artificially. But the real indicators of activity are all still contracting.
Yet this does not correspond to the dominant mainstream view. We have been repeatedly told that spending cuts would restore confidence both at home and abroad and so lead to a recovery. We were also told that cuts were a matter of urgency, to restore that confidence. But what immediately happened was that the economy contracted further and government finances collapsed as a result.
Now, the new government is about to embark on a repeat of the experiment which has already failed- 12 times. Pavlov’s dogs were smarter.
Even in the caricature of his work, what conclusions could have been drawn from research which showed the dogs still panting for food after the twelfth time when the whistle had blown and there was no food?
The question came to mind in relation to the preview of the GDP data over on Irish Economy where characteristically strong opinions were not matched by strong convictions about growth. This was just as well. In real terms, GDP fell by 1.6% in the quarter and is 14.6% below its peak level prior to the recession – 3 years ago.
For 12 quarters mainstream and official economic opinion has expected government spending cuts to produce growth. It has produced contraction. ‘Pavlov’s dogs’ were smarter.
This is a new low-point for the economy - and for mainstream economic thinking. Some may be inclined to designate this a ‘double-dip’, but in reality this is just an accounting quirk. The positive quarter of growth sandwiched either side of contraction implicit in the phrase is a mirage – entirely accounted for by a rise in unwanted inventories in Q3, as was argued at that time.
Instead, some may be inclined to see a chink of light from the GNP data. Real GNP rose for the third consecutive quarter, up 2%, and now stands 2.7% higher than a year ago – although it is still 14.1% below its peak. But this too is more an accounting function than any reflection of rising domestic activity. The key components of growth fell- personal consumption -0.4% in Q4 to a new low, 11.1% below its peak. Investment (gross fixed capital formation) also fell 2.3% in Q4 to a new low, 60.7% below its pre-recession level. The total decline in investment from peak is now €27.6bn, which is the same as the total decline in GDP (€27.7bn) and exceeds the decline in GNP (€22.8bn). The entire slump is accounted for by the investment collapse. Inventories also fell once more.
So, where does rising GNP come from? Current government spending rose by an annualised €72mn in Q4, but in a €138.4bn domestic economy that really doesn’t add up to much. Infamously, government spending in this economy is falling- a quarterly rise a blip, when the numbers forced onto welfare rise at a faster rate than the welfare entitlements are cut. Maybe they got complacent when unemployment ‘steadied’ at 13.7%. If so, the surge to 14.7% will have them looking for the axe once more.
In any event, government spending has been in a downtrend since mid-2008 and fell by 2.1% while GNP was rising. Therefore all the activity components of GNP have been falling, personal consumption, investment, inventories and government spending.
The reason GNP has risen is because Net Factor Income from the Rest of the World has been rising. More accurately, the drain on growth from this source has been falling. This outflow has declined by over €7bn this year alone (annualised), much greater than the €5.3bn rise in GNP from Q1 to Q4. The reduction in this outflow is that Irish residents (ie Irish banks) are paying less interest to overseas residents. There is simple reason for this- overseas residents have taken their money out of Irish banks. They are too risky. This will probably continue, and so boost GNP artificially. But the real indicators of activity are all still contracting.
Yet this does not correspond to the dominant mainstream view. We have been repeatedly told that spending cuts would restore confidence both at home and abroad and so lead to a recovery. We were also told that cuts were a matter of urgency, to restore that confidence. But what immediately happened was that the economy contracted further and government finances collapsed as a result.
Now, the new government is about to embark on a repeat of the experiment which has already failed- 12 times. Pavlov’s dogs were smarter.
Wednesday, 2 February 2011
Where did it all go wrong?
Michael Burke: The Central Bank’s latest Quarterly Bulletin contains a sharp reduction in its growth forecasts.
It is now forecasting 1.0% GDP in 2011 and -0.3% GNP. Previous forecasts were 2.4% GDP and 1.7% GNP. The media coverage of the downward revision almost completely neglected the reason for the increased pessimism, and over at the Irish Economy blog there has also been a discussion of the Bulletin without ever referring to the cause of the lower forecasts.
So, here is the Central Bank’s own rationale for lowering its forecasts:
"These projections represent a significant downward revision to those published in the last Quarterly Bulletin, which were compiled on the basis of a much smaller €3bn fiscal consolidation in 2011 than the one currently budgeted, and on the basis of continued market access to funding on reasonable terms.”
The point on reasonable funding terms seems misplaced. The average interest rate on the EU/IMF debt to bail out Europe’s banks is no greater than market rates that obtained when he prior Bulletin was published. On 1 October 2010 Irish 10yr yields were 6.6% and 4yr yields were 5.25%.
Therefore, the real change in circumstances is the much larger ‘fiscal consolidation’ in 2011; €6bn in spending cuts and tax increases rather than the anticipated €3bn. This is a rare explicit official admission that the cuts’ policy has a depressing effect on activity, with obvious implications for the entire logic of the policy. If an extra €3bn in fiscal measures can depress GDP by 1.4% and GNP by 2%, what will be the impact of a €15.8bn ‘fiscal consolidation’? In reality, as the central bank points out €700mn of the 2011 measures are non-recurring asset sales and similar (p.29) - which will not affect growth.
Therefore the additional measures affecting growth amount to €2.3bn. And the impact on the economy? GNP will be €2.6bn lower than previously forecast (Table 1).
Now, of course this doesn’t mean that the central bank has joined the investment, not cuts camp. The intellectual contortions required to accept that cuts are necessary even while identifying the damage arising from them is not confined to the central bank.
But what is the fiscal impact?It is commonplace to assert that lower growth will lower taxes by 30%, as that is the proportion of tax revenues relative to GDP. This nonsense is recycled by many who should know better. First, total government revenues (including social security and other items not in the Exchequer Statements) are overwhelmingly derived from GNP and in 2010 were 43.8% of it. Secondly, the sensitivity of taxation revenues is greater still. Sensitivity is not taxation/output but the change in taxation revenues/change in output.
Some leading commentators – advocates of ‘fiscal consolidation’ – seem wholly unaware of this sensitivity of taxation, which the DoF puts at 0.6. Thirdly, the sensitivity of government finances also includes outlays, ie of output falls and unemployment rises social welfare outlays will rise even if welfare entitlements are cut. Usually, these are neglected in the debate but they are about half the size of the tax impact.
So, we reach a situation where, according to Central Bank analysis, a €2.3bn fiscal tightening leads to a fall of €2.6bn in output. According to DoF analysis this will lead to a €1.56bn in fall in tax revenues. Standard assessments of the impact on government outlays would suggest a rise of €780mn, for a total deterioration in government finances (combining falling taxes and rising outlays) of €2.34mn. That’s €4mn more than the ‘fiscal consolidation’.
So, the deficit is being entrenched and consolidated, along with Depression and unemployment. That’s how we got here. Getting somewhere else still requires a different path.
It is now forecasting 1.0% GDP in 2011 and -0.3% GNP. Previous forecasts were 2.4% GDP and 1.7% GNP. The media coverage of the downward revision almost completely neglected the reason for the increased pessimism, and over at the Irish Economy blog there has also been a discussion of the Bulletin without ever referring to the cause of the lower forecasts.
So, here is the Central Bank’s own rationale for lowering its forecasts:
"These projections represent a significant downward revision to those published in the last Quarterly Bulletin, which were compiled on the basis of a much smaller €3bn fiscal consolidation in 2011 than the one currently budgeted, and on the basis of continued market access to funding on reasonable terms.”
The point on reasonable funding terms seems misplaced. The average interest rate on the EU/IMF debt to bail out Europe’s banks is no greater than market rates that obtained when he prior Bulletin was published. On 1 October 2010 Irish 10yr yields were 6.6% and 4yr yields were 5.25%.
Therefore, the real change in circumstances is the much larger ‘fiscal consolidation’ in 2011; €6bn in spending cuts and tax increases rather than the anticipated €3bn. This is a rare explicit official admission that the cuts’ policy has a depressing effect on activity, with obvious implications for the entire logic of the policy. If an extra €3bn in fiscal measures can depress GDP by 1.4% and GNP by 2%, what will be the impact of a €15.8bn ‘fiscal consolidation’? In reality, as the central bank points out €700mn of the 2011 measures are non-recurring asset sales and similar (p.29) - which will not affect growth.
Therefore the additional measures affecting growth amount to €2.3bn. And the impact on the economy? GNP will be €2.6bn lower than previously forecast (Table 1).
Now, of course this doesn’t mean that the central bank has joined the investment, not cuts camp. The intellectual contortions required to accept that cuts are necessary even while identifying the damage arising from them is not confined to the central bank.
But what is the fiscal impact?It is commonplace to assert that lower growth will lower taxes by 30%, as that is the proportion of tax revenues relative to GDP. This nonsense is recycled by many who should know better. First, total government revenues (including social security and other items not in the Exchequer Statements) are overwhelmingly derived from GNP and in 2010 were 43.8% of it. Secondly, the sensitivity of taxation revenues is greater still. Sensitivity is not taxation/output but the change in taxation revenues/change in output.
Some leading commentators – advocates of ‘fiscal consolidation’ – seem wholly unaware of this sensitivity of taxation, which the DoF puts at 0.6. Thirdly, the sensitivity of government finances also includes outlays, ie of output falls and unemployment rises social welfare outlays will rise even if welfare entitlements are cut. Usually, these are neglected in the debate but they are about half the size of the tax impact.
So, we reach a situation where, according to Central Bank analysis, a €2.3bn fiscal tightening leads to a fall of €2.6bn in output. According to DoF analysis this will lead to a €1.56bn in fall in tax revenues. Standard assessments of the impact on government outlays would suggest a rise of €780mn, for a total deterioration in government finances (combining falling taxes and rising outlays) of €2.34mn. That’s €4mn more than the ‘fiscal consolidation’.
So, the deficit is being entrenched and consolidated, along with Depression and unemployment. That’s how we got here. Getting somewhere else still requires a different path.
Tuesday, 1 February 2011
Cometh the hour...
Slí Eile: If the experience of the past 30 months has shown us anything it is how unstable, unpredictable and volatile the domestic economy is and, along with it, domestic politics. The range in GDP or GNP forecasts is one such indicator. It is easy (and convenient for some) to forget about 'turning the corner' and 'green shoots' around this time 12 months ago. Times move on. In terms of GNP the latest forecasts from the IMF indicate continuing contaction all the way up to early 2012 where they forecast an extremely modest growth of 0.8%. The Central Bank is more upbeat projecting 1.5% growth in GNP in 2012 following more contraction this year. Behind this headline figure are three significant underliers:
* Falling consumer demand up to the end of 2011 followed by scarcely any volume growth in 2012 (+0.2%).
* According to the Central Bank investment (Gross Fixed Capital Formation) will slump in 2011 and decline modestly in 2012 and
* government consumption will continue to decline in 2011 and 2012. All of this is according to the Great Four Year Plan.
You have guessed where the leap comes from - exports. They are set to grow by around 5-6% per annum this year and next following a big spurt in 2010 at 8%. This is very much driven by a recovery in world trade - at least for now.
Economic policy has become a one-hand-clapping strategy = WAGE CUTS = COMPETITIVENESS = EXPORTS = ECONOMIC RECOVERY. That's the message plain and simple. Sorry about unemployment, poverty and emigration. There is no alternative. And silly any politician who tries to negotiate on the overall size of the deflationary strategy (as distinct from the composition and timing of this) - the received wisdom is that beggars cannot be choosers and we have no cards left to play. We just have to take it on the chin and keep driving wages and public spending down until market confidence is restored. But, you can fool some of the markets all the time and all the markets some of the time. But, you can't fool all the markets all of the time. Hello Eurozone crisis II.
If the IMF and Central Bank (and ESRI) happen to be right then the prospects for employment and consumer spending and infrastructual investment look very bleak indeed - and these along with exports are vital to recovery and debt-reduction in the long-run. In political terms the authorities have chosen to 'default' on the home labour market with high numbers out of work and emigrating rather than 'default' on private debt now transferred to citizens' debt.
To argue, as some do, that deposits and bonds are on an equal footing in Irish law is outrageous, If this stands up in any court then change the law. People as in children, the sick, the young unemployed as well as everyone else come before man-made laws.
In relation to forecasts, it would be more accurate to describe these as technical working scenarios based on a particular set of assumptions (which are not always spelt out in public). In other words, the foreseen future is based on past relationships and future extrapolations based on particular chosen assumptions. Nothing fundamentally wrong with that - but lets not imagine that anything in this world quite behaves and reacts like the way macro-economic forecasting says it must. Markets, Governments (and the weather!) have a mind of their own. And so do voters later this month.
What is so desperately needed now, today is a coherent set of agreed policies on a wide range of key issues that can command a progressive consensus. Such a consensus needs to spell out the 'non-negotiables' - the red line issues beyond which no party to the agreement will go into Government or support a Taoiseach. One may not transform Ireland in four years and achieve well-being, prosperity and fairness all at once - but it is the direction of movement that matters and the soundness of any strategy to address the twin scourges of unemployment and debt (all types of debt and not just governmental and corporate-banking).
* Falling consumer demand up to the end of 2011 followed by scarcely any volume growth in 2012 (+0.2%).
* According to the Central Bank investment (Gross Fixed Capital Formation) will slump in 2011 and decline modestly in 2012 and
* government consumption will continue to decline in 2011 and 2012. All of this is according to the Great Four Year Plan.
You have guessed where the leap comes from - exports. They are set to grow by around 5-6% per annum this year and next following a big spurt in 2010 at 8%. This is very much driven by a recovery in world trade - at least for now.
Economic policy has become a one-hand-clapping strategy = WAGE CUTS = COMPETITIVENESS = EXPORTS = ECONOMIC RECOVERY. That's the message plain and simple. Sorry about unemployment, poverty and emigration. There is no alternative. And silly any politician who tries to negotiate on the overall size of the deflationary strategy (as distinct from the composition and timing of this) - the received wisdom is that beggars cannot be choosers and we have no cards left to play. We just have to take it on the chin and keep driving wages and public spending down until market confidence is restored. But, you can fool some of the markets all the time and all the markets some of the time. But, you can't fool all the markets all of the time. Hello Eurozone crisis II.
If the IMF and Central Bank (and ESRI) happen to be right then the prospects for employment and consumer spending and infrastructual investment look very bleak indeed - and these along with exports are vital to recovery and debt-reduction in the long-run. In political terms the authorities have chosen to 'default' on the home labour market with high numbers out of work and emigrating rather than 'default' on private debt now transferred to citizens' debt.
To argue, as some do, that deposits and bonds are on an equal footing in Irish law is outrageous, If this stands up in any court then change the law. People as in children, the sick, the young unemployed as well as everyone else come before man-made laws.
In relation to forecasts, it would be more accurate to describe these as technical working scenarios based on a particular set of assumptions (which are not always spelt out in public). In other words, the foreseen future is based on past relationships and future extrapolations based on particular chosen assumptions. Nothing fundamentally wrong with that - but lets not imagine that anything in this world quite behaves and reacts like the way macro-economic forecasting says it must. Markets, Governments (and the weather!) have a mind of their own. And so do voters later this month.
What is so desperately needed now, today is a coherent set of agreed policies on a wide range of key issues that can command a progressive consensus. Such a consensus needs to spell out the 'non-negotiables' - the red line issues beyond which no party to the agreement will go into Government or support a Taoiseach. One may not transform Ireland in four years and achieve well-being, prosperity and fairness all at once - but it is the direction of movement that matters and the soundness of any strategy to address the twin scourges of unemployment and debt (all types of debt and not just governmental and corporate-banking).
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