Download Colm McCarthy - The Irish Economy

Stabilising the Public Finances
Colm McCarthy
(School of Economics UCD)
McGill Summer School, July 21st. 2009.
Fiscal Consolidation in Context…..
• There are four priorities in macro policy.
• Restore fiscal balance…..
• Resolve the banking crisis….
• Restore competitiveness….
• De-leverage the national balance sheet
Managing the Balance Sheet
• The private sector now owes c. €400 bn to the banking
system, one of the highest ratios to GNP in the world.
• De-leveraging seems to have commenced
• It requires not just an increase in private saving but asset
disposal nationally to reduce debt
• The State is also funding a book of assets and it may
need to de-leverage too
De-Leveraging under way…..
• Net Foreign Liabilities of Banking System
60
% of GDP
50
40
30
20
10
0
Personal Sector Debt Repayments to Income
25%
10% more disposable income
eaten up in debt repayments
than seven years ago
20%
15%
10%
5%
0%
2000
2001
2002
2003
2004
2005
2006
2007
2008F
Bank Lending to Property
120000
100000
30%
Lending to construction
development and investment up
€100bn in seven years
25%
80000
20%
60000
15%
40000
10%
20000
0
5%
Q1 1997 Q1 1998 Q1 1999 Q1 2000 Q1 2001 Q1 2002 Q1 2003 Q1 2004 Q1 2005 Q1 2006 Q1 2007 Q1 2008
Lending to construction and real estate activities (lhs, €m)
% of total private sector credit (rhs)
Tiger Checked out around 2002
1995 to 2002
• Real GDP
• Real GNP
• Real GNDI
(Adjusted for terms-of-trade)
8.6
7.2
7.0
2002 to 2008e
5.3
5.1
3.5
Property-Related Taxes led the Collapse….
9000
20%
8000
18%
16%
7000
14%
6000
12%
5000
10%
4000
8%
3000
€6bn drop in direct
property-related revenue
in three years
2000
6%
4%
1000
2%
0
0%
1997
1998
1999
2000
2001
2002
Property revenue (€m, lhs)
2003
2004
2005
2006
Property revenue % of total tax revenue (rhs)
2007F
2008F
2009F
The Budget Gap…..
Government spending and revenues
80,000
€ million
70,000
60,000
Revenues
50,000
Spending
40,000
30,000
2000
2001
2002
2003
2004
2005
Year
2006
2007
2008
2009(f)
The Fiscal Deterioration…..
 GGB Deficit = 10.75% in 2009 after four sets of policy
changes since July 2008
 Would exceed 10% for some years thereafter without
further measures.
 GGB Gross debt 41% of GDP at end 2008, will exceed
50% at end 2009.
 Without bank rescue costs, annual borrowing at 10%+ is
dangerous. Bank rescue costs could add two years’
borrowing at this rate, or even more.
Raise Taxes or Cut Spending?
• Real Total Exchequer spending rose c. 5.7% in
2008
• Will rise even faster in 2009 with negative
inflation.
• Significant tax increases have already been
imposed
• The Govt is anxious to avoid heavt further tax
increases.
Total Exchequer Spend % GNP
trends in government spending
60.0
Gross Voted Current Expenditure
Central Fund Services (Current)
Total Expenditure
Exchequer Capital Expenditure (excl. NPRF)
NPRF Contribution
50.0
30.0
20.0
10.0
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
0.0
1983
per cent of GNP
40.0
Exchequer Spend excl Debt Service, % GNP
trends in government spending
50.0
Gross Voted Current Expenditure
Exchequer Capital Expenditure (excl. NPRF)
45.0
40.0
30.0
25.0
20.0
15.0
10.0
5.0
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
0.0
1983
per cent of GNP
35.0
Real Growth, Total Exchequer Spending
Year
2000
2001
2002
2003
2004
2005
2006
2007
2008e
2009f
Spend % Chg
CPI %
% Real Growth
10.4
16.1
11.0
7.7
6.2
11.1
10.6
11.8
9.8
6.9
5.6
4.9
4.6
3.6
2.1
2.5
3.9
4.9
4.1
-3.8
4.8
11.2
6.4
4.1
4.1
8.6
6.7
6.9
5.7
10.8
Budget Balance in the 1980s, % GNP
0
1980
-2
% of GNP
-4
-6
-8
-10
-12
-14
-16
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
Bord Snip’s Proposals….
• A set of options for Government
• Must be seen against background of
-
borrowing almost €400m. per week
-
already paying penalty interest rate
-
difficult borrowing markets
-
inflation has turned negative
Jan-09
Jul-08
Jan-08
Jul-07
Jan-07
Jul-06
Jan-06
Jul-05
Jan-05
Jul-04
Jan-04
Jul-03
Jan-03
Jul-02
Jan-02
Jul-01
Jan-01
Jul-00
Jan-00
Jul-99
Jan-99
CPI Inflation
8
6
4
2
0
-2
-4
-6
-8
Fiscal Consolidation is Unavoidable
• Borrowing at 10% of GDP for any length of time
is risky, even in benign credit markets
• The credit markets are less borrower-friendly
than at any time since WWII
• Borrowing needs to be contained in 2009 and
reduced decisively in 2010.
• Cuts in current and capital spending are
required, and further tax measures cannot be
ruled out.