1/12/2009

UCD School of Economics/Dublin Economics Workshop

Expenditure Control and

Fiscal Consolidation

Colm McCarthy
(School of Economics UCD)

‘Responding to the Crisis’, January 12th. 2009.

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Fiscal Consolidation in Context…..

• There
Th are four
f priorities
i iti in i macro policy.
li

• Restore fiscal balance…..

• Resolve the banking crisis….

• Restore competitiveness….

• De-leverage the national balance sheet

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Managing the Balance Sheet

• Th
The private
i t sector
t now owes c. €400 b bn tto th
the b
banking
ki
system, one of the highest ratios to GNP in the world.

• De-leveraging seems to have commenced

• It requires not just an increase in saving but asset

disposal to reduce debt

• The State is also funding a book of assets, principally the

NPRF equity
it portfolio
tf li and
d St
State
t commerciali l company
shares.

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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

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Bank Lending to Property

120000 30%

100000 Lending to construction 25%

development and investment up
€100bn in seven years
80000
20%

60000

15%
40000

10%
20000

0 5%
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)

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State Balance Sheet……

• As well as focussing on the GGB and net debt,
policy needs to consider measures to de-
leverage the State balance sheet

• There is also a debt-selection issue

• For the private sector, it is worth considering

whether there are policy actions which would
help accelerate the de-leveraging process

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The Tiger Checked out 2002

(Assuming zero growth for all aggregates in 2008)

1995 to 2002 2002 to 2008

• Real GDP 8.6 5.5

• Real GNP 7.2 5.3
• Real GNDI 7.0 3.7
(Adjusted for terms-of-trade)

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Quarterly Numbers signalled downturn in ’07…

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Property-Related Taxes led the Collapse….

9000 20%

8000 18%

16%
7000

14%
6000
12%
5000
10%
4000
8%
3000
€6bn drop in direct 6%
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)

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The Fiscal Deterioration…..

¾ GGB D
Deficit
fi it c. 10% iin 2009 without
ith t policy
li changes
h

¾ And likely to be 10 to 12% for some years thereafter on

the same basis.

¾ GGB Gross debt 41% of GDP at end 2008, heading for

c. 50% at end 2009.

¾ Without policy change, and even without bank bail-out

costs,
t annuall b borrowing
i att 10% + b brings
i 100% d
debt
bt iinto
t
view fairly quickly, the lesson of the 1980s.

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Raise Taxes or Cut Spending?

• Real Total Exchequer spending rose c. 6.5% in 2008

• Without policy change, will rise c. 6.3% in 2009.

• Significant tax increases have already been imposed

• Ireland will enjoy the fiscal stimulus packages of our

trading partners

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Comparisons with 1987…

• F less
Far l low-hanging
l h i ffruit
it b
back
k th
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

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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

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Real Growth, Total Exchequer Spending

Y
Year Spend
S d % Ch
Chg CPI % %R
Reall G
Growth*
th*

2000 10.4 5.6 4.8

2001 16.1 4.9 11.2
2002 11.0 4.6 6.4
2003 7
7.7
7 3
3.6
6 4
4.1
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
10.7
7 4
4.2
2 6
6.5
5
2009f 4.3 -2.0 6.3
* Deflator = CPI; CPI 2008/9 = ESRI; Spend 2009 = Budget

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Debt Selection and Balance-Sheet Management

• Ireland has never issued index-linked gilts.

There may be sense in doing so over the
next few years.

• Asset disposals do not help the GGB

deficit, but they help de-leverage.
Candidates include financial assets,
commercial semi-States and real property.

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