Saturday, October 5, 2013

5/10/2014: Why the News of Budget 2014 'Easing' Is a Daft Idea

The reports are out about the IMF 'agreeing' to Government taking shallower adjustment in Budget 2014 are so far not based on IMF statements of record. In its latest review, published yesterday and amended to reflect the latest data, IMF clearly states that we still need a full EUR5.1bn adjustment to be taken over 2014-2015.

Irish Times reports undisclosed sources claiming that the IMF is now not opposing a shallower adjustment in 2014 in exchange for steeper adjustment in 2015. This might be so. But there are several things you should consider before taking this as some unambiguous positive for Budget 2014.

Firstly, if true, this means that Ireland 'easing on austerity' in Budget 2014 to accelerate into 2015 adjustment will be equivalent to a household taking a 1 year mortgage relief in the form of reduced principal repayment relief (sort of a 'interest plus partial principal payment') that has to be recovered in full comes the following year. Even Irish Central Bank would not suggest this would be a meaningful relief to the borrower. In a sense, Irish Government will be taking a gamble if it reduces the EUR3.1 billion adjustment target - if growth undershoots the Budget 2014 projects or revenues slack or unexpected expenditure increases take place or any other possible risks arise, we will face more austerity in 2015 and possibly into 2016. All for a short-term small 'relief'?

Secondly, there are more reasons for being sceptical about the latest Government 'breakthrough':

  1. Relief to be gained from such a transaction is not worth much - at most EUR300-400 million 'savings' to be immediately swallowed up by the 'black hole' of Government 'investment' - I wrote about this in my Sunday Times column on September 22nd. 
  2. Much of this is unlikely to impact directly in 2014 due to time lags.
  3. Much of the 'investment' will go to funding building activities in politicised constituencies. Remember primary care centres locations selection fiasco? The modus operandi that produced them is still here with us. 
  4. The 'savings' will be terminated in 2015 as EUR5.1bn required total adjustment will have to erase fully the 'savings' generated in reduced adjustment for 2014. In short - we will get more waste, more future pain; and
  5. Relief comes at a price of increased uncertainty into the Budget 2015 just at the time when we are heading into even more uncertainty of having to fund ourselves in the markets (keep in mind - our 2014 borrowing requirements are largely already covered by NTMA pre-borrowing, so real uncertainty over funding will coincide with the need for larger fiscal adjustment in 2015). This uncertainty is likely to result in Troika monitoring extending into 2016 and beyond, instead of Ireland gaining any meaningful clearance from Troika cover with 2015 fiscal adjustment. I covered this in the said Sunday Times article as well.
Oh, and one more little point: there is absolutely nothing new in the IMF taking such a position on Irish budget. IMF operates on the basis of longer-term targets and greater flexibility in adjustment than our EU 'partners'. IMF has signalled on a number of other occasions the same. 

So what exactly does the IMF 'support' for Budget 2014? Not much at all so far. And the risks from it, as noted above, are almost codified.

"The review had preliminary discussions on fiscal consolidation in Budget 2014. The Irish authorities are firmly committed to meeting the 5.1 percent of GDP ceiling on the deficit in 2014. They note some room to meet this ceiling with a smaller consolidation effort than the €3.1 billion (1.8 percent of GDP) set out previously, but have deferred a decision on the amount of adjustment in 2014 until closer to Budget 2014. [IMF] ...staff stressed the importance of delivering the planned cumulative consolidation in 2014–15 of €5.1 billion (2.9 percent of GDP). Under the revised macroeconomic projections, this amount of cumulative consolidation is also consistent with reaching a deficit within the EDP target of less than 3 percent of GDP by 2015." 

Note any statement about a 'relief'? I don't see one... But: "In this context, it was agreed that the authorities will publish Budget 2014 on October 15 with fiscal targets until 2016 fully in line with the 2010 Council Recommendation under the EDP, including the required fiscal consolidation effort until 2015, and national fiscal rules (proposed structural benchmark, MEFP)." Meanwhile, "the specific consolidation effort for 2014 will be discussed with the EC, ECB and IMF staff taking into account budgetary outturns in the first three quarters of 2013 and further information on growth developments and prospects." 

The IMF reiterates the same position of serious ambiguity on Budget 2014 and strict clarity on 2014-2015 adjustments targets throughout the entire Review. The Fund also clearly states where the thrust of 'savings' should be delivered: "An expenditure-led consolidation remains appropriate, including improved targeting of social supports and subsidies while protecting core public services and the most vulnerable."

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