Wednesday, 11 November 2009

Home truths from abroad

Michael Burke: It’s in the nature of a globalised economy that all economies tend to exhibit a specific combination of global trends. For a small extremely open economy such as Ireland, this is an inescapable truth. It is especially true in a period of crisis. So, despite widespread claims to the contrary, there is little that is unique in the current Irish crisis. And there is nothing which justifies the uniquely pro-cyclical fiscal policy that is currently being implemented. Instead, to treat the Irish patient, what must be diagnosed is the specific combination and strength of the widespread virus that it has acquired in the current pandemic.

The European Commission’s latest biannual economic forecast for the European Union is useful in this respect. It shows, amongst other things, what is and what is not unique about the current situation in Ireland. In doing so, it helps to undermine some the myths that have grown up regarding the features of the current crisis. Below are some of the key issues for Ireland that are worth highlighting:-

* Ireland’s bloated public sector: Before the current recession Ireland’s government spending as a proportion of GDP was the lowest of any economy in the Euro Area, 33.6% in the years 2002-2006, compared to a Euro Area average of 47.4% (Table 35, p.205). A number of countries, France, Belgium and Austria, have a public sector which is proportionately 1½ times greater than Ireland, at over 50% of GDP.

* There is no scope to raise taxes: In the same 2002-2006 period Ireland’s tax take was also the lowest of any Euro Area economy, at 34.9% of GDP compared to Euro Area average of 44.9% of GDP (Table 36).

* Ireland has a uniquely high level of public debt: Even with the disastrous and counter-productive policies currently being pursued, the Commission forecasts that Ireland’s public debt level will rise to 96.2% of GDP in 2011, compared to 135.4% for Greece, 117.8% for Italy, 104% for Belgium and a Euro Area average of 88.2% (Table 42). Shifting the goalposts a bit, it is also often claimed that Ireland’s export successes should be ignored in calculating debt ratios (even though exports can provide part of the taxes to fund deficits). But even if GNP is used, Ireland’s debt ratio is still the second lowest in the Euro Area at 38.4% of GDP, and still way below the average.

* There’s no scope for fiscal stimulus: Ireland’s output gap relative to potential GDP is expected to be up to 8.5% of GDP in 2009 and will still be as high as 5.4% of GDP in 2011, the largest in the Euro Area and compared to averages for the Euro Area as a whole of 3.6% this year and 2.5% in 2011 (Table 13).

* Ireland has become uncompetitive internationally: In the years 2002-2006, the price deflator for Ireland’s exports fell at an annual average rate of 2.7% and the price deflator for imports fell at an annual average rate of 2.3%, compared to Euro Area average rises of 0.5% and 0.7% respectively (Tables 18 & 19). In addition, Ireland’s growth of per capita labour productivity was an annual average 2.2% compared to just 1.2% for the Euro Area, and 1.6% for Britain and 2.1% for the US (Table 26).

Absolute, historical and relative comparisons are all useful to establish context. It is certainly the case that the pace of the rise in Ireland’s public deficits is the most dramatic of all the OECD economies. According to the EU, there has been a deterioration in public debt equivalent to 12.3% of GDP in just two years, compared to a Euro Area average of just 4.7% (Table 37).

But, as shown above, this had nothing to do with the entirely false assertion that Ireland has a bloated public sector. Instead, it relates to two genuinely unique factors in Ireland, in addition to the very small and narrow tax base which has exacerbated the rising public deficits.

The first unique factor is the depth of the recession itself, a forecast decline of 13% in GDP over the recession and more than double the average decline in the Euro Area (Table 1). This has driven down taxation revenues as well as forcing welfare spending higher. The second is the bank bailout, which at 232% of GDP is greater in Ireland than the next worst 4 Euro Area economies put together.

In relative terms, compared to the Euro Area economies, Ireland is unique in these two particulars; a uniquely severe downturn, as well as a uniquely dysfunctional banking sector which is sucking the lifeblood from the economy. The scope of the economic decline would require uniquely dramatic stimulus measures to revive it, while a rapid exit strategy from the policy of bailouts for bank bond and shareholders is also urgently needed.


Proposition Joe said...

"Before the current recession Ireland’s government spending as a proportion of GDP was the lowest of any economy in the Euro Area, 33.6% in the years 2002-2006"

You might as well quote the stats for Outer Mongolia, for all the relevance of the 2006 GDP to our current situation.

That figure was massively inflated, both by borrowing from the future in form of construction activity above-and-beyond true levels of demand, and also by pure vapour in the form of the transfer-pricing activities of MNCs (our "export successes").

The crucial number for our current situation is 2009 public spending as a percentage of the 2009 GNP. When all is said and done this could end up as high as 55%. I'd suspect that would bring us right to the head of the European league table.

Nat O`Connor said...

"The first unique factor is the depth of the recession itself, ... The second is the bank bailout"

It seems reasonable to suggest that a large element in both of these unique factors was the housing/property/construction bubble. The national finances took a double-hit from the housing bubble bursting more or less at the same time as the global financial crisis hit.

But the Government hasn't disowned the policies that underpinned our housing bubble - including extravagent, pro-cyclical tax incentives. There is a real risk that they haven't learned from their failure. Only this week the Construction Industry Federation called for tax breaks for first time buyers in an attempt to re-inflate the market.

Michael Burke said...

@ Proposition Joe

Another scary number, to prove nothing will work except an attack on the public sector? This falls in the be uber-afraid method of discourse identified elsewhere by Michael Taft .

The EU (not me) chose 2002-06 precisely because it aggreagates the period before the recession began in any of the EU economies (with Ireland the first). It allows baseline assessment across all economies, surely required if the argument is to be advanced that Ireland uniquely requires fiscal shock-therapy, or not.

In the first 10 months of this year, Ireland's current expenditure was €38.6bn compared to €37.3bn in the same period in 2008, a rise of just 3.5%. Rising current expenditures are the inevitable response to recession, and given the severity of the Irish recession, the rise is expcetionally modest.

Total expenditure (including capital outlays) rose from €44.5bn to €51bn. But the bulk of this increase was a €4bn handout to the shareholders of AIB. This rather makes the point that funds are available for rescue operations- just that the government chooses to rescue bank share and bondholders, not the economy.

Yet, even accepting the GNP measure, which was €70.4bn in H1, a truly astonishing rise in the pace of government spending would be required to reach the 55% spending/GNP level.

And, of course, all Euro Area economies, including those engaged in far-reaching fiscal stimulus measures, will have seen their deficits rise too from an average starting-point of 47.4%.

So, no, it is quite impossible to justify a uniquely deflationary fiscal policy in Ireland by asserting that it heads a suspected league table of public sector spending.

@ Nat O'Connor

You are correct, that the collapse in the building/property sectors is the source of both the severity of the recession and the banking crisis. But other Euro Area economies experienced a similar property bubble, eg. Spain. What they avoided was the scale of the bank bailout in Ireland, and they are not engaged in a deflaionary fiscl policy.

Michael Taft said...

A timely contribution, Michael, and also quite novel - suggesting that we actually look up the facts for ourselves rather than leaving it to the orthodoxy to digest and interpret them for us.

There are many points that could be developed from your post but two strike me immediately - the relationship between the output gap and debt levels. Without getting into the 2013 numbers (and its a brave person who would too much on such forward projections in these volatile times) but next year Irish debt levels will be substantially below the Eurozone average, while our net debt levels are even further below (a net debt of 61%). Our deficit is a mess but our debt profile is relatively healthy. Surely this begs the policy of using that debt profile to address our output gap - to lessen the impact and shorten the duration of the cyclical deficit. In other words, we have the need and we have the resources; what's the hold-up?

Even more interesting is your take on competitiveness. A large part of the deflationary agenda is to cut wages to restore competitivness. Regardless of how often it is shown that (a) we have relatively low wage levels and(b) that cuts in wages have little impact on enterprise costs - especially in our export platform; we are told that to restore competitivness we must cut wages.

Your take, however, suggests that problems may be more endemic. That, in fact, in terms of cost, our exports are quite competitive. If so, are we actually looking at the problem of a weak idigenous base/over-reliance on FDI, but interpreting it wrong. I certainly hope you can follow up this line - if not in a comment but in another post. I am becoming more sceptical about this competitivness line - at least in the way it is being presented to us.

Proposition Joe said...


"The EU (not me) chose 2002-06 precisely because it aggreagates the period before the recession began in any of the EU economies (with Ireland the first). It allows baseline assessment across all economies ...."

You seem to be saying that we must go back before this once-in-a-generation recession in order to establish a baseline, right?

Yet in 2006, Ireland was far from any sort of equilibrium position and instead was at the height of a once-in-a-century bubble.

So the 2006 numbers are absolutely no basis to form a future strategy around. The GDP number used to make our public spending seem low was *an entirely artificial construct*. It hid a massive structural deficit built up as public spending significantly outgrew (the already artificially inflated) growth in GDP *every single year this decade*, apart from the first. That was utter Alice in Wonderland stuff, and if we insist on designing future policy on such misleading data, we are doomed to fail.

"a truly astonishing rise in the pace of government spending would be required to reach the 55% spending/GNP level."

The 55% of GNP figure I quoted was calculated by Ronan Lyons (chief economist with


"... debt levels will be substantially below the Eurozone average, while our net debt levels are even further below"

Its not so much the current debt-ratio we need to be worried about, rather its *trajectory*.

A snapshot of an accelerating number can give a false sense of security, we will over-take that European average so fast, it'll make our heads spin. After that little lies between us and the chronically indebted levels of the Med countries.

Mack said...

Michael (either/both) -

What do you make of Spirit Of Ireland, as fiscal stimulus? Eddie Hobbs mentioned them again on the Late Late on Friday just gone?

Michael Taft said...

Mack - I've followed the debates but don't know enough about the technology and its commercial application. But if this is a runner, it is something that should be publicly supported. Even if it takes a while to become an energy exporter (much will depend on the capacity of inter-connectors) there is no doubting the medium-term practicality of producing our own energy - thus reducing the cost of energy imports and creating jobs and domestic spin-offs. There should be a concerted and integrated strategy bringing together all players in new energy technologies - public enterprise, private enterprise, state funding agencies, academics, strategic partnerships with foreign companies, etc. - to exploit our natural resources and entrepeneurship. I don't get a sense that there is the urgency one should expect of a sector that is waiting to be exploited. If the Spirit of Ireland is technological runner - why aren't we running with it?

That is the principle of prioritising investment, ideas and growth.

Proposition Joe - couldn't agree more. All the more reason why we must abandon the Government's current fiscal strategy (now is not early enough).

Michael Burke said...

@ Proposition Joe

I don't know what source Ronan Lyons is relying on, nor when his own forecast was made. But as he says himself, he's comparing apples and oranges as the only country he makes a projection for in 2009 is Ireland.

But to your point that the only baseline you would use is 2008; this distorts all comparisons as:

1. It's a single year's data rather than a series
2. That year was unique in that Ireland had already entered recession, whereas most other economies had not.

If we assume a €140bn outturn for 2009 GNP (representing a small contraction in H2)the level of public spending in the last 2 months of this year would have to be over half the total of the preceding 10 months, €26bn versus €51bn, to reach the dreaded 55% of GNP.

Even in such outlandish circumstances it still would not put Ireland at the top of any league table, as Ronan Lyons' own graph demonstrates. Why? Because Sweden, France, Denmark and Belgium were already just about there in 2008, even before their recessions began.

But, rather than simply look backwards, an examination of the 2009 trends in the deficit is just as revealing, current spending is up just 3.5% (the bit with the 'bloated public sector' in), while total expenditure is up 14.6%. But that's a function of the bank shareholder bailout costs €4bn and a €3bn top-up of the NPRF.

Mack said...

@Michael Burke -

Do your figures for expenditure include capital spending? A forecast by Goodbody's Stockbrokers concurs with Ronan Lyon's figures (includes capital spending figures).

Bank recapitalisations, NAMA etc aren't included in any of these analyses..

Slí Eile said...

No less than Garret Fitzgerald argues that

"But we have also been taxing ourselves too little. And what I find absolutely unacceptable is that because of what seems to be universal cowardice about the need to tackle our unsustainably low level of income taxation – in most cases at a level which no other developed country in the world would ever even contemplate – we are currently prepared to tolerate cuts in our health services that threaten the lives of our people, including in particular our children, as well as some cuts that will weaken our already grossly under-funded education system."

Michael Burke said...

@ Mack

The Goodbody's chart is reproduced from the Dept. of Finance in July. Since that time we have had both the Q2 GDP/GNP data as well as public finance data for the first 10 months of this year, so my assessment is not a forecast like theirs, simply a rcord to date and the arithmetic required to get to 55% of GNP.

The capital expenditure is included in the gross assessment I have discussed, as the capital + current expnditure amounts to €51bn . I have highlighted current exenditure as well, because this is the alleged source of the bloated public sector, to demonstrate that it is nothing of the sort.

Capital expenditure in the first 10 months of 2009 did include a €4bn handout to BoI shareholders.

None of this is to downplay the size of the current deficit or the pace of its growth, nor the consequences of a potential funding crisis. But a sober analysis of its dimensions, as well as its sources, is required in order to resolve the situation.

Mack said...

@Sli -

Certainly some people are lightly, others aren't. Large numbers appear to pay no tax (at either end of the spectrum), are we unique in the Western world in not having an annual property tax.


Thanks for the figures and the reasoning. Agree 100% is very important to get the facts and have a sober analysis.

I am surprised the descrepancy (between the forecast for spending, and the reality) is so large. Is it possible for the government to implement €10bn in non-deflationary cuts without us noticing? Or did the layoffs stop entirely? To be honest, I'm also slightly sceptical that tax receipts could have collapsed simultaneously, in proportion, such that we still have an approx €10bn budget deficit in the current account?

Is it possible that this discrepancy is due to an accounting issue? Or were the original spending estimates produced in error?

Proposition Joe said...


If I was costing the tax-payer well over 300k a year (between pension, state car and two full-time Garda drivers) ... I'd be arguing for tax rises too.

Michael Burke said...

@ Mack

That's difficult to say as I wasn't responsible for the forecasts and don't really know how they were compiled. The data on actual expenditure is the DoF release for October, which I have cited above.

When foreasting a ratio of two variables, in this case GDP(/GNP) and the deficit I think it's always best to be cautious. Revisions and the variability of the underlying components can make fools of us all.

But the bigger fool is the one that asserts an outlandish outcome, insists that it is uniquely bad, and then insists on a uniquely foolish response to it.

Mack said...

@Michael -

I largely agree with your comment above - but would point out that the estimates for GNP all concur (relatively easy to calculate).

I wouldn't rule out spending @ 55% of GNP, just yet. I think we can say the discrepency is due to one of three causes -

1. The government has managed to find approx €10bn of un-deflationary cuts without informing us (incredibly unlikely?)

2. The forecasts were completely off-the-wall (possible, but why has no-one noticed until now?)

3. There is significant spending as-yet-unbooked in the year-to-date figures (a possibility?)

I'll post a comment up on Ronan Lyon's blog to see if he can shed any light. We'll find out for sure in a couple of months, I guess.

Mack said...

Just another info update on this - the spending data in the Goodbody's report likely came from the McCarthy Report.

Table 1.1 Projected Government Finances 2009 (as per Supplementary Budget April 2009)

McCarthy's figures include €6.9bn in interest payments and NPRF payments that may explain part of the difference..

Michael Burke said...

@ Mack

You are right, nothing ruled out. But I would point out that the McCarthy Report figure is 51% of GNP (p.2)for this year. High admittedly, but not the touted 55%. Remember too this is a projection for Ireland in 2009. Yet we are invited to believe this is a scary number, signifying bloated public spending, when it is the same as Sweden, France, Denmark and Belgium in 2007, that is, before their recessions had even begun!

On the GDP/GNP controversy: the GDP denominator is not chosen by me, but is of course the limit set out in the Maastricht Treaty, AND accepted by the Irish government;

"The Government indicated at the time of the April 2009 Supplementary Budget that it envisaged a return to the deficit of 3% of GDP by end-2013 at the latest" (McCarthy Report, p.3).

So, why choose a lower GNP denominator, especially when exports are taxable and could contribute to the deficit? Unless the aim is to scare taxpayers into an unnecessary and otherwise unpalatable course of action.

Whatever the outturn, which will only be known well after the Budget is adopted, the key point is this: The idea of an economy that looks, operates and feels more like Sweden/France/Denmark/Belgium, with their 'bloated' public sectors is not scary at all, except if you are a latter-day Thatcherite.

Mack said...

@Michael -

I'll respond in more detail tomorrow - but just a short comment to highlight we have neither the services of Sweden, Denmark or France or France or Sweden's military capabilities. (Don't know much about Belgium).

Tax the multi-nationals too heavily and they'll be gone. We take in proportionally more Corpo tax than many other states despite it's low rate.

Michael Burke said...

Mack, yep that's right.

We don't have their services because we don't tax or spend for the services of Sweden, Denmark, France or Belgium. Which is where we came in.

But it's hard to believe they represent Armageddon. In fact, to most Irish working there, they would feel, well, better serviced.

There is an alternative, I must admit. Thatcher's Britain; low wage, deregulation, low investment, low skills would be the epitome. One commentator called it, "Welcome to Slumsville".

Proposition Joe said...

Here's another curve-ball on the 55% of GNP debate ...

On Tonight with Vincent Browne from Nov 10th, both Jim O'Leary and Leo Varadkar repeat this statistic before being challenged on it by VB. But rather than justifying the 55% in terms of an expectedly high level of spending, they both seem to claim that actual GNP for 2009 will be only €120bn (as opposed to the €140bn referred to in the comments trail above).

You can watch the episode here:

but unfortunately you'll have to suffer through a bunch of hysterical emoting from VB and his other guest before getting to the GNP discussion.

Michael Burke said...

@ Proposition Joe

Thanks for that. That was scary, and not long before bedtime too. Perhaps a nightlight is in order.

By the way, the McCarthy Report implicitly assumes €143bn (p2). I assumed €140bn.

Given that H1 GNP was a fraction over €70bn, the economy would have to decline by 29% in H2 to get down to €120bn for the year as a whole.

This seems designed to scare the population into accepting the current policy. I'm scared by the extent of the self-deception that can lead to such gross distortions.

Mack said...

@Prop Joe -

GNP was €154.5bn in 2008 (CSO -

Central Bank forecast a decline of 9.4% of GNP in July (

= €140bn approx.

This is being sustained by over €20bn of government borrowing, so maybe that is where they are getting their €120bn figure.

Mack said...

@Michael -

We clearly have Scandinavian spending, but not services. Given that economy is being artificially inflated by large scale government borrowing (which is being spent, but not on deliverying services), and that the Swedes spend a good portion on their military & have an older population - is this not more worrying?

I posted on a previous thread, that we could cut salaries and increase employment. That could be a path to the Scandinavian model. If it's done right, and garners public support, that's not something I'd particularly object to.

However - I read a Swedish commentator somewhere recently who said that in Sweden they'd cut salaries first and protect services. We don't currently have a culture in Ireland that ruthlessly promotes and protects services above all other interests. I suspect, that trying to sustain government spending where it is would lead to an Argentine economy rather than a Swedish society...

Michael Burke said...

@ Mack

Ireland has neither Sweden's spending nor its services.

In the 3 periods identified by the EU Commission (92/96, 97/01 & 02/06) the profile of Ireland's total government expediture as a % of GDP was, 39.4, 34.0 and 33.6. Sweden's was 64.4, 57.9 and 55.5.

There was no sudden burst of welfare spending here. In fact the Jobseekers' Allowance has been cut, pensions raided, etc, remember. Government current spending is up a very modest 3.5% this year.

But still, predictably, the deficit/GDP ratio keeps rising because the denominator has fallen; GDP has collapsed. And all the cuts, including planned job/wage cuts will only increase the downward pressures on growth.

There is another way. Sweden (amongst many others) has deployed stimulus measures to revive activity And it's working.

"Prime Minister Fredrik Reinfeldt’s government will cut taxes and raise spending on schools, hospitals and measures to support the unemployed before the elections next September. A package of new and previously announced stimulus measures will contribute 1.7 percentage points to economic growth next year, the budget forecasts, after Sweden’s worst economic decline in at least 15 years in the first half of 2009."

Mack said...

Michael -

You are missing the bubble in that analysis. There was a _huge_ credit bubble. The money supply in Ireland was growing at up to 35% p.a. according to Derek Brawn.

GDP/GNP was inflated, way, way beyond were it would have been without such a bubble. It is only being held up where it is today thanks to large-scale public borrowing. If you factor in spending as a proportion of what the real size of our economy was, it would have been much higher for most of our recent history.

As for stimulus measures - yes I agree. As long as it's not the Keynesian-make-work of burying bottles of cash in mines throughout the country ;-)
Business activity is not fungible (although it may appear so to macro-economists). And supporting some sort of stimulus package doesn't mean I agree that our day-to-day spending is not completely out-of-whack with reality...

Martin O'Dea said...

From my perspective this is the nub of the arguement, the bubble's impact on govt. revenue and the sustainablility of those revenue levels.

Mack, I agree that the levels of income from stamp duty etc. cannot be maintained, however, I feel that they can be replaced and surpassed with coming technologies and technology revolutions.
The truth seems to indicate that in ten years time we may have employment for vast tracts of the population in fields in which they are not yet familiar with, not to mind holding certificates in competence.

Of course, europe urges caution, it is effectively our bank, and traditional banking suggests you don't advocate risks for you debtor.

However, the pace of change in the world increases, practically everyone else invests, and we stall. This time the stalling may not be about deficits but about repositioning in a new global economy.

Michael Burke said...

@ Mack

Even in 1992? That would make the Irish economy the most enduring bubble in economic history, from 1992 to 2007.

If you had to mark the beginning of the bubble 2003 might be right, "Since 1 January 2003, a Corporation Tax rate of 12.5% has applied to trading profits in all sectors in Ireland, marking a 300% reduction on the rate of 40% in 1992," then Finance Minister Brian Cowen, speech on Thanksgiving Day 2004.

The period from 1992 onwards is medium-term and the data demonstrates that Ireland's recent history is one of a low-tax, low spend economy.

The distortion is created by those comparing a snapshot in time of a recessionary Ireland with economies that were not then in recession.

Borrowing can be highly productive, especially in the current environment. All governments are doing it, many on a par with Ireland's 12.5% of GDP this year; Greece 12.7, Spain 11.2, Britain 12.1, US 11.3.

The alternative, a drive to create balanced budget in the teeth of a recession, was one of the key factors which turned a deep recession into the Great Depression.

Mack said...

Martin -

I think you are right & I suspect energy security is going to become a big issue. But if we get it wrong, and over-invest in the wrong areas or don't execute properly - we'll blow our children's futures entirely. As a word of warning, the Japensese debt-to-gdp ratio is approaching 200% after two decades of Keynesian-bridge-to-nowhere-fiscal stimulus.

John Kay has a good article on market economies, and their advantages over centrally planned ones in experimenting and evolving new technologies in entreprises :-

to quote -

"Centralised systems experiment too little. They find reasons why new proposals will fail – and mostly they are right. But market economies thrive on a continued supply of unreasonable optimism. And when, occasionally, experiments succeed, they are quickly imitated.

If market economies are better at originating and diffusing new ideas, they are also better at disposing of failed ones. Honest feedback is not welcome in large bureaucracies, as the UK government’s drug advisers can testify. In authoritarian regimes, such reporting can be fatal to the person who delivers it."

Mack said...

Michael -

"The period from 1992 onwards is medium-term and the data demonstrates that Ireland's recent history is one of a low-tax, low spend economy. "

That period 1992-2003 almost perfectly correlates with the export-led Celtic Tiger growth period (really to 2000/2001). And imho, rightsized taxes and spending to the levels of service provided.

What preceeded it? Spending well in excess of 50% in the late 1980's, again without an appropriate level of service delivery.

What replaced it? A credit bubble and a big ramp up in government spending.

Take a look at the bar chart on the Goodbody's report.

Mack said...

Spending will be over 55% of GNP this year.

The prebudget submission has been released today.

Calculations -

GNP - €138.3bn - based on last years GNP of €154.5bn * 10.5% drop reported in pre-budget submission


Gross Current Expenditure = €61,234
Gross Capital Expenditure = €15,169

Total = €76.4bn

Per cent of GDP = 55.3%

If I've made a mistake, I'm open to corrections..

Michael Burke said...

@ Mack

I don't know what you're suggesting. Is it that the entire Celtic Tiger is a myth, and all the wealth, jobs, etc. (and the data) associated with it are illusory? And that 2008 is the 'real' Irish economy? If so, welcome to the 1930s.

Nothing wrong with the maths. But you have used Gross, not Net expenditures. The latter are €16.1bn lower, equivalent to 11% of GNP.

Throughout the Pre-Budget Report the govt. refers overwhelmingly to debt in relation to GDP, not GNP.

Even if the (higher) Gross numbers and the (lower) GNP forecast are used, this still does not put Ireland at the head of any table of spending/GNP ratios as many other EU economies

* Already had debt/GDP ratios over 50%

* Have subsequently gone into recession, and

* Have stimulated activity by increased spending

Crucially, the PBR identifies the source of the problem too, and it isn't a 'bloated public sector', "The deterioration in the budget outlook largely reflects the poorer than expected tax returns" (p.19).

With a collapse in GDP of 13% the official expectation was that tax revenues would fall by 14.3%. Instead they declined by around 32% in 2007/09 (p.20), suggesting a too-narrow and too low tax base.

Mack said...

@Michael -

I think most of the growth from 2001 onwards was illusory.

Incidentally, I'm not opposed to properly targeted stimulus programs (building out infrastructure that we will get a return from).

Surely your last two paragraphs are an explanation for the widening of the deficit, rather than the problem itself?

Ronan Lyon's made his calculations based on Eurostat data and found Ireland came out ahead on that basis (like-for-like across Europe). I accept your point that we could well have net spending at 43% GNP or thereabouts. But unless Ronan's got his calculations completely wrong - he shows we are up at the top of the pack?
And the Goodbody report shows us like-for-like back at the 1980s?

(Unless everyone is at 6's and 7's here..).

Michael Burke said...

@ Mack

There's no point quibbling about when the bubble began. Bubbles are a process not an event. My rough guess is 2003, but readily admit elements were there as early as 2001, and before.

The issue is whether the entire period of strong growth that preceded it should be written off as a bubble, whereas 2008 is regarded as a 'clean' baseline. Given that was perhaps the worst growth year in the history of the State, certainly since WWII, I think that's unreasonable.

Ronan Lyons has made honest calculations based on reputable data. He also makes the absolutely correct and very welcome point that it is important to use cross-country sources, not national ones, to compare apples with apples.

In that light, by his calculation, not mine, showed Ireland as a middling debt/GNP countryin 2008, even though by then it alone was in recession. Yet the projection made to 2009 is solely for Ireland, and begs the obvious question; what happened to all the other EU deficits meanwhile, as their recessions began?

To pose the question is to answer it; they will have risen dramatically. Still leaving Ireland as a middling economy, despite the unusually severe nature of its recession.

As per the PBR, the problem of a widening deficit is a problem of falling revenues. Policy should therefore be aimed at reviving activity, and the revenues they produce.

To be honest, not sure that the Goodbody's chart (from the DoF) adds very much to the debate. Obsessing about the deficit/GDP(GNP) ratios and falsely asserting they are unique to Ireland is a cul-de-sac.

Mack said...

@Michael -

I actually agree with a lot of the above and appreciate your optimism.

I'm slightly sceptical that Ireland won't have climbed significantly in the Spending-GNP ratios - after all we went from low tax /spending relative to nominal GNP to middling very quickly and prior to the steepest contractions (2.5% decline in GNP in 2008 cf 10.5% in 2009) in the economy and sharpest rises in unemployment.

I think the DoF chart has some value, as along with Ronan Lyons figures, they do show some comparative value in the Gross Spending to GNP ratio - what people make of that is another matter - and I appreciate your interpretation of it (although I am more pessimistic on our economy I think).

Michael Burke said...

@ Mack

Ireland probably will have risen in those terms, precisely as you say, because of the severity of the decline in output. But not because the public sector was 'bloated'.

And even a relative rise would not put us at the head, still less at an extreme, used to justify an extremist policy of deflation.