Tuesday, 6 July 2010

What's €4 billion here or there?

Michael Taft: In all the discussion over the CSO’s recent National Accounts release for the first quarter this year – the one that shows that the Irish economy is ‘emerging from recession’ – one critical figure was over looked: the substantial revision downwards of GDP for 2009.

The CSO had previously estimated 2009 GDP to be €163.5 billion in current terms. This was slightly better than the ESRI’s estimate but slightly down on the Government’s own projection. However, the CSO’s projection earlier this year was preliminary. When they produced their final figures for 2009, GDP was down substantially – by nearly €4 billion. The final outcome is €159.6 billion.

The downward revision is due to exports. Previously, the CSO projected exports to be €148.5 billion. Now its €144.8 billion (there were slight downward revisions for investment and Government consumption). In other words, the CSO had previously estimated exports to be higher last year than what they actually were.

Why should this be of concern? First, it means we must be guarded about reading too much into quarterly figures. The CSO, of necessity, is dependent upon less reliable data when they produce quarterly figures – data that is open to large variations, particularly in multi-national export figures. It is only when the National Income and Expenditure report is published that we get solid numbers.

Second, it shows up our deficit and debt figures in even a worse light. The Department of Finance informed Eurostat that our General Government Balance (our deficit for the purposes of Maastricht calculations) for 2009 was €19.3 billion. Using their own GDP projections, our ‘underlying’ GGB was -11.8 percent (with the Anglo bail-out it was -14.3 percent).

Overnight, our deficit has worsened. For 2009 our ‘underlying’ deficit is now -12.1 percent. This, too, went unreported in the wave of green-shoot journalism and the Government spinners desperate to show their policies are working. Our GDP fell by €4 billion and our deficit increased but none of this was, apparently, worth commenting on.

This is about par – especially in terms of the new deficit numbers. Over the last year, the Government has missed every deficit target they set for themselves. At every turn, the Government got it wrong. This is called ‘getting public finances under control’. In most other lexicons, this would be called a failure.

To highlight this failure all one needs to do is refer to the Finance Minister’s own warnings when he proposed the April emergency budget. He was concerned that the deficit would exceed -12 percent and even head towards -12.7 percent. Therefore, he had no choice but to increase income and health levies (cutting disposable income and, so, demand) and slash current expenditure (social welfare for young people, the Christmas bonus, etc.) by nearly €1 billion in the year. And so he did. What happened? The deficit exceeded -12 percent. Cutting spending and people’s disposable income during a recession is like running in quicksand.

But there is another unnerving statistic that went unremarked. While 2009 GNP figures were not significantly revised in the latest CSO release, there was a substantial drop in nominal GNP for the first quarter this year. Again, we have to be careful: not only are quarterly projections open to wide variations; GNP numbers are highly sensitive to multi-national repatriation activities.

Nonetheless, the drop is significant. While in real terms, the quarterly GNP fall was -0.5 percent, the nominal fall was nearly -7 percent. Is this a case of multi-national activities; or is the CSO picking up the first impact of the highly deflationary measures in the 2010 Budget. We can’t be definitive at this stage – especially as we don’t have deflators. But following the last budget, forecasters revised downwards their GNP projections for this year.

Deflation comes with a very high price – one of them is that it increases the deficit and debt burden. A comparison of the Exchequer Balance in the first quarters of 2009 and 2010 highlights this:

• Q1 2009: -11.2 percent of GNP
• Q1 2010: -13 percent of GNP

The reason for the deterioration is not the amount of deficit but rather the falling value of GNP. If GNP nominal value remains sluggish throughout the year, we may find an ever increasing deficit and debt burden, especially as GDP growth will not be, as the Department of Finance describes it, ‘tax-rich’ due to low corporate tax.

This is not what a real recovery is supposed to look like.

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