Colm Mc Carthy Limerick Feb 2009

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Colm Mc Carthy Limerick Feb 2009

  1. 1. Expenditure Control and Fiscal Consolidation Colm McCarthy (School of Economics UCD) University of Limerick, February 20th. 2009.
  2. 2. 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
  3. 3. 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
  4. 4. 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
  5. 5. Bank Lending to Property 30% 120000 100000 Lending to construction 25% development and investment up €100bn in seven years 80000 20% 60000 15% 40000 10% 20000 5% 0 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)
  6. 6. Tiger Checked out around 2002 1995 to 2002 2002 to 2008e • Real GDP 8.6 5.3 • Real GNP 7.2 5.1 • Real GNDI 7.0 3.5 (Adjusted for terms-of-trade)
  7. 7. Quarterly Numbers signalled downturn in ’07…
  8. 8. Property-Related Taxes led the Collapse…. 20% 9000 18% 8000 16% 7000 14% 6000 12% 5000 10% 4000 8% 3000 6% €6bn drop in direct property-related revenue 2000 in three years 4% 1000 2% 0 0% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007F 2008F 2009F Property revenue (€m, lhs) Property revenue % of total tax revenue (rhs)
  9. 9. The Fiscal Deterioration….. GGB Deficit > 10% in 2009 without policy changes And likely to exceed 10% for some years thereafter on the same basis. GGB Gross debt 41% of GDP at end 2008, heading for c. 50% at end 2009. Without policy change, and even without bank bail-out costs, annual borrowing at 10%+ brings 100% debt into view fairly quickly, the lesson of the 1980s.
  10. 10. Raise Taxes or Cut Spending? • Real Total Exchequer spending rose c. 6.5% in 2008 • Without policy change, will rise > 6% in 2009. • Significant tax increases have already been imposed • Ireland will enjoy the fiscal stimulus packages of our trading partners
  11. 11. Comparisons with 1987… • Far less low-hanging fruit back then • Exchequer spending had been tightly controlled in early and mid- 1980s • Real cuts in 1987 to 1989 were small and mainly capital; current spending never fell in nominal terms. Year % Chg Current % Chg TES CPI 1987 4.1 2.7 3.1 1988 1.0 -1.3 2.1 1989 0.8 0.5 4.1 1990 6.6 7.0 3.3
  12. 12. Total Exchequer Spend as % GNP…… GNP 2008/9 = ESRI estimates, spend 2009 = Budget trends in government spending 60.0 gross current expendiure exchequer capital expenditure total government expenditure 50.0 40.0 per cent of GNP 30.0 20.0 10.0 0.0 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
  13. 13. ….separating out Debt Service… trends in government spending 60.0 G ro ss V oted Cu rren t Expen ditu re E xcheq uer Capital Expend iture Cent ra l Fund Services (Curre nt) Tot al E xp enditure 50.0 40.0 per cent of GNP 30.0 20.0 10.0 0.0 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1995 1996 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 1994 1997
  14. 14. Real Growth, Total Exchequer Spending Year Spend % Chg CPI % % Real Growth* 2000 10.4 5.6 4.8 2001 16.1 4.9 11.2 2002 11.0 4.6 6.4 2003 7.7 3.6 4.1 2004 6.2 2.1 4.1 2005 11.1 2.5 8.6 2006 10.6 3.9 6.7 2007 11.9 4.9 7.0 2008e 10.7 4.2 6.5 2009f 4.3 -2.0 6.3 * Deflator = CPI; CPI 2008/9 = ESRI; Spend 2009 = Budget
  15. 15. 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. • Economies in current and capital spending are required, and further tax measures cannot be ruled out.

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