Virtual meeting of the PBO Network - Session 1

1. IFIs and the Covid-era:
Fiscal Policy Issues
Challenges to date and looking ahead
10 September 2020
Sebastian Barnes
Chairperson
www.FiscalCouncil.ie

2. Strong interest in IFI analysis around COVID-19
2
633
404
314
245
362
268
534
589
0
100
200
300
400
500
600
700
Apr 13
FAR
Jun 14
FAR
Jun 15
FAR
Jun 16
FAR
Jun 17
FAR
Jun 18
FAR
June 19
FAR
May 20
FAR
Website views on day of publication of
report on SPU
Number of views
Note: Figure shows data for unique user views on website Fiscalcouncil.ie on
day of release of report.
0
5000
10000
15000
20000
25000
30000
35000
40000
45000
Sep-14
Jan-15
May-15
Sep-15
Jan-16
May-16
Sep-16
Jan-17
May-17
Sep-17
Jan-18
May-18
Sep-18
Jan-19
May-19
Sep-19
Jan-20
May-20
Twitter Impressions

3. Huge uncertainty:
3 health/economic scenarios to 2025
3
60
70
80
90
100
110
120
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2019 2020 2021 2022 2023
Counterfactual
Mild
Central*
Severe
2008
Financial
crisis
Underlying domestic demand (Index: Q4 2019 = 100)
Sources: Department of Finance; and Fiscal Council workings.
Note: * The Central forecasts are a replica of the official Department of Finance projections published in SPU 2020 (see Box D of the FAR).
https://www.fiscalcouncil.ie/fiscal-assessment-report-may-2020-2/

4. Fiscal implications:
high debt GNI* ratio, deficit would remain significant
4
Budget balance
% GNI*
Sources: SPU 2020 and Fiscal Council workings.
-21
-18
-15
-12
-9
-6
-3
0
3
Severe
Central
Mild
Sources: CSO; Department of Finance; and Fiscal Council workings.
Note: Scenarios are consistent with the macroeconomic and fiscal assumptions set out in
Boxes D and I. The Severe + scenario includes a financial sector shock that assumes a
recapitalisation of domestic banks equivalent to 10 per cent of the value of their assets
(€27.8 billion) in 2021.
Debt ratios
% GNI*
0
20
40
60
80
100
120
140
160
180
2015 2017 2019 2021 2023 2025
Severe + financial
sector supports
Central
Mild
Severe

5. Falling interest rates will help to
finance higher debt
5
Interest payments
€ billions, general government basis
Sources: Department of Finance.
2
3
4
5
6
7
8
9
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Budget 2019
SPU 2019
Budget 2020
Council’s Central
Scenario
SPU 2020

6. 6
Phase 1
• Immediate crisis => support measures
Phase 2
• Recovery => sizeable stimulus;
• On-going sectoral challenges
Phase 3
• New steady state => fiscal adjustment
The appropriate fiscal stance:
a state-contingent approach

7. Some fiscal adjustment likely to be needed,
but no return to “severe austerity”
7
Sources: NTMA; Department of Finance; and Fiscal Council workings.
Note: Unlike the consolidation amounts during the financial crisis, the amounts set out for scenarios are relative to a situation where public sector wages and welfare
payments are assumed to rise in line with general wages. The adjustments also take place over a shorter time period (three years as compared to seven years). And
they take place at a stage when the economy is assumed to be growing relatively fast again.
Fiscal adjustment relative to business as usual needed
to achieve 3pp GNI* annual debt reduction by 2025
€ billion total
6.0
9.7
14.0
29.8
0 10 20 30
Mild
Baseline
Severe
Financial Crisis (2008-
2014)

8. Ageing and climate change challenge add
to pressures at the same time
8
Source: Climate Action Plan 2019.
Levels of greenhouse gas emissions
Mt CO2eq
Source: Fiscal Council projections.
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
2021 2026 2031 2036 2041 2046
Demographics Indexation
Public Sector
€ bn
Pensions costs

9. Auscarity ?
9
https://medium.com/@higginsdavidw/auscarity-3bfa2b269730

10. Debt dynamics are currently very supportive
due to low interest rates, risks in the long run
10
0
20
40
60
80
100
120
140
160
180
200
19501960197019801990200020102020203020402050
Actual Projected
Higher
interest
Baseline
A percentage-point upward shift in the risk-
free yield curve would increase Ireland’s
debt ratio
% of GNI*
Sources: CSO; Fiscal Council calculations. Sources: CSO; Fiscal Council calculations.
-20
-15
-10
-5
0
5
10
15
20
25
30
1970 1990 2010 2030 2050
growth
interest
Actual Projected
The interest-growth differential is
expected to be favourable
%

11. “High-altitude” debt dynamics
• i < g means that higher D/Y implies faster d(D/Y)
• i has generally fallen
• Greater sensitivity to any changes in parameters
11
𝐷𝑒𝑏𝑡𝑡
𝑦𝑡
−
𝐷𝑒𝑏𝑡𝑡−1
𝑦𝑡−1
=
𝑖 𝑡 − 𝑔𝑡
(1 + 𝑔𝑡)
𝐷𝑒𝑏𝑡𝑡−1
𝑦𝑡−1
− 𝑃𝐵𝑡/𝑦𝑡
𝑃𝐵𝑡
∗
/𝑦𝑡 =
𝑖 𝑡 − 𝑔𝑡
(1 + 𝑔𝑡)
𝐷𝑒𝑏𝑡𝑡−1
𝑦𝑡−1
https://voxeu.org/article/insights-post-covid-19-fiscal-policies

12. The debt-stabilising primary deficit is
larger in the post-Covid-19 era
12
Pre- and Post-Covid-19 fiscal balances
% GDP
-5
-4
-3
-2
-1
0
1
2
3
4
5
IRL
(GNI*)
PRT SVN FRA BEL SVK ESP DEU GRC NLD FIN ITA
Post- debt interest effect
Reduction from pre- debt
interest effect
Pre-growth effect
Additional post- growth effect
Pre- debt stabilising primary
balance
Post- debt stabilising primary
balance
Post- debt stabilising headline
balance
Source: Authors’ calculations based on forecasts and data from OECD Economic Outlook database. Post-Covid-19, it
is assumed that interest rates in all countries converge to 1 per cent and medium-term growth rates remain at pre-
Covid-19 estimates.

13. Challenges for IFIs
• Uncertainty, lack of data, velocity, lack of policy detail
• Stimulus size/instruments
– Exit from emergency measures
– Design of stimulus
– Assessment of micro-support measures, sectoral issues
– Political Economy
• Application of fiscal rules in a new environment
• The high debt ratio
– Norms for levels/reduction speed poorly defined
– Low interest rates are key: unchartered territory
13

14. Opportunities for IFIs
• Scope for insightful analysis
• Can add credibility to policy choices
• Inform public debate, reduce uncertainty
• Opportunity to show that not “austerity hawks”
14