Friday, 11 May 2012

The structural deficit just got worse

Michael Taft: The latest EU Commission projections are out and, if anything, they show an even higher structural deficit than what the Government is projecting. This provides a perspective on what additional austerity might be in store for us under the Fiscal Treaty.

The EU Commission’s Spring Economic forecasts shows Ireland‘s structural budget balance to be far and away the highest in the Eurozone – at 7.9 percent for 2013. The Eurozone average is 1.8. We are much higher than Greece (4.5 percent), Spain (4.8 percent) and Portugal (4.6 percent).

The EU projection compares unfavourably to the Government’s own projection of 6.9 percent for 2013. In nominal terms, the EU is projecting a structural deficit over €1.6 billion higher than the Government for next year.

What is particularly noteworthy is how sluggishly the deficit is falling. Between 2011 and 2013, factoring in €7 billion worth of fiscal adjustments, the structural deficit falls by a mere 0.5 percent. The Government is hoping for a fall of 1 percent.

The EU doesn’t make projections outward to 2015. However, if we were to take 2013 as the starting point and use the Government’s pace of deficit reduction, we’d find a structural deficit of 4.5 percent for 2015. If this holds, the structural deficit has deteriorated and the gap between the EU projection and the Fiscal Treaty target has now widened to €7.2 billion. The Government estimated that it would be €5.4 billion.

To date, the Government has refused to engage with this issue. Instead, it insists that increased investment and micro-economic reforms will raise our productive capacity and that this will be enough to close the structural deficit gap without any further fiscal adjustments. However, whatever about the talk of growth and investment, the Government is doing the exact opposite as discussed here.

This is, of course, all a bit speculative as we don’t have EU projections out to 2015. But, with the new EU projections, we could now be facing into a higher structural deficit than that projected by the Government with a much slower decline. All things remaining the same, this means that the gap between the structural deficit and the Fiscal Treaty target just got larger. And, potentially, the amount of austerity needed just got greater.

1 comment:

Paul Hunt said...

It's even worse than that. Without any supporting evidence the growth projections are just fantasyland stuff - and are likely to be revised down.

With a continuation of current policies - as confirmed in the DoF Strategy document, where is this growth in private demand and gross fixed capital formation going to come from? The ‘Pillar Banks’ are still deleveraging furiously. Is this Strategic Investment Fund going to bankroll all sorts of whizzo schemes? Irrespective of how or where it raids, begs, borrows or steals - or what it sells - to generate these funds, if the Government wants to keep it off its books the amounts invested will have to generate a return on investment and an annual depreciation charge. Apart from the share of output exported from these jolly ventures, that means more revenue extracted from businesses and households. I expect it’ll be the usual “don’t worry about the cost/benefit; just feel the width”.

Yes, I know that, despite emigration, the demographics are favourable, but households and businesses are braced for more pain. Inflation may be low, but the principal source is increases in already excessively high sheltered sector fees, charges and prices - and property and water charges are going to be layered on. How can households increase demand when disposable incomes are already excessively squeezed and falling?

It's no surprise that, in addition to the permanently deluded, increasing numbers of normally sensible people are vowing to vote 'no'.

The irony is that releasing the huge volume of state equity tied up, unproductively and inefficiently, in NewERA, behind the walls of ths NTMA, restructuring and re-financing the semi-states and reforming regulation could give the domestic economy a significant kick-start.

However, refusing to countenance this is probably the one thing that would unite most of those proposing to vote 'yes' and probably all of those proposing to vote 'no'.

Welcome to Ireland. The country that wants everyone else to solve its problems - and to solve them NOW.