22/6/15: IMF Review of Ireland: Part 1: Growth & Fiscal Space

IMF published conclusions of its Third Post-Program Monitoring Discussions with Ireland.

The report starts with strong positives:

"Ireland’s strong economic recovery is continuing in 2015, following robust growth of 4.8 percent in 2014. A range of high frequency indicators point to an extension of the solid recovery momentum into 2015, with growth increasingly driven by domestic demand as well as exports. Job creation continued with employment growth of 2.2 percent year-on-year in the first quarter of 2015, bringing the unemployment rate down to 9.8 percent in May."

Actually, based on EH data from CSO, employment growth was even stronger: 2.67% y/y in 1Q 2015 (see here: http://trueeconomics.blogspot.ie/2015/06/20615-irish-employment-by-sector-latest.html). The survey data is slightly different from the QNHS data.

"Tax revenues rose 11 percent year-on-year during the first five months of 2015, while spending remained within budget profiles, so the fiscal deficit for 2015 is expected to be 2.3 percent of GDP, outperforming the budget targets."

"Banks’ health has improved, but operating profitability remains weak and, despite the recent progress in the resolution of mortgages in arrears, 17.1 percent of mortgages have been in arrears for over 90 days, and of these, almost 60 percent have been in arrears for over 2 years."

All so far known, all so far predictable.

Here is what IMF thinks in terms of forward outlook.

On Fiscal side: "The deficit is likely to come in well below budget again in 2015. This welcome progress should be locked by avoiding any repeat of past spending overruns. The deficit reduction projected for 2016 is too modest considering Ireland’s high public debt and strong growth, making it critical that revenue outperformance— which appears likely— be saved as the authorities intend."

Wait, Spring Statement by the Government clearly does not suggest 'saving' of revenue outperformance as intended policy objective. If anything, spending these 'savings' is on the cards. So a bit more from the IMF:

"Medium-term spending pressures related to demographics and public investment indicate a need to build revenues and it is critical that any unwinding of savings in public sector wages be gradual. Tax reforms should be focused on areas most supportive of job creation and productivity while protecting progress achieved in base broadening."

Again, this does not bode well with the Spring Statement intentions to unwind, over two years, reductions in public sector earnings costs, and reducing tax burden at the lower end of the tax base. Whether these measures are right or wrong, IMF seems to ignore them in their analysis, as if they are not being planned.

And slightly adding depth: "Staff estimates that improvement in the primary balance in structural terms is modest in 2016, at about ¼ percent of GDP, as the reduction in the overall deficit partly reflects an expected decline in the interest bill and a narrowing of the output gap." In other words, efforts / pain are over. We are cruising into improved performance on inertia. IMF does not exactly like that: "A stronger adjustment, of at least a ½ percent of GDP, would also be appropriate in 2016 in view of Ireland’s high public debt and strong growth, implying an overall deficit target of about 1.5 percent of GDP. However, it appears most likely that revenues will exceed official projections, which are for tax revenue growth before measures that is significantly below nominal GDP growth, and also given that revenue outperformance has underpinned Ireland’s track record of over delivering on fiscal targets for a number of years." Wait, what? Not spending cuts drove Irish effort? Revenue outperformance? Aka - taxes and indirect taxes and hidden charges.

So the good boy in the back of the classroom needs to get slightly better: "The commitment of the Irish authorities to comply with their obligations under the Stability and Growth Pact, including the Expenditure Benchmark, means that revenue outperformance in 2016 and later years will not be used to fund additional expenditure; the need for a change from the past procyclical pattern of spending the revenues available was a key lesson drawn from the crisis that is firmly embedded in their new fiscal policy framework."

Yeah, that in the year pre-election? Are they mad, or something?

Just in case anyone has any illusions on what the Fund thinks about the forthcoming injections of pain relief planned by the Government, here it is, slightly hidden in the lengthy discourse about longer-term risks. "Looking to the medium term, sizable adjustment challenges indicate a need to build revenues while the limited fiscal space should be used to support durable growth. The authorities’ expenditure projections account for demographic pressures as growing cohorts of both young and old increase demands for education and health services. …Staff recommended that the authorities consider steps to raise revenues to help address these pressures…"

More revenue to be raised. And yet the Government aims to cut taxes. Oh dear...


Back to the positives: IMF upgraded its growth projections for short-term forecasts:

"Compared with the 2015 Article IV consultation concluded in late March, growth projected for 2015 is revised up to almost 4 percent from 3½ percent, with a more modest increase in 2016." 2016 growth is now projected to be at 3.3% from 3.0% projected at the end of March 2015. 2017 growth forecast was lifted from 2.7% in March to 2.8% now. However, 2018 forest was balanced down to 2.5% now from 2.6% in March report.

Back in March, private consumption was expected to grow 1.5% in 2015, 1.6% in 2016, 2.0% in 2017. This is now revised up to 1.6% in 2015, 1.9% in 2016, with 2017 remaining at 2.0%.

However, IMF revised down its projections for gross fixed investment growth. In March report, the Fund forecast investment to grow 9.5% in 2015, 7.5% in 2016 and 6.0% in 2017. This time around, IMF expects investment growth of 9.2% in 2015, 7.3% in 2016 and 5.5% in 2017.

Interestingly, IMF also introduced some modest upgrades to Irish net exports, though it noted that given exceptionally high rates of growth in goods exports in recent months, even the upgraded forecast might be too pessimistic.

However, with all said and done, the IMF still produces a slightly cautious medium-term outlook: "Staff’s medium-term outlook is little changed from that in the 2015 Article IV consultation, with medium-term growth on the order of 2½ percent being similar to the 3 percent projected by the Irish authorities in their recent Stability Programme Update (SPU)." Which means that, in basic terms, Irish official forecasts are probably within error margin of the IMF forecasts, but are a bit more optimistic, nonetheless.

Quite interestingly, IMF finds no substantive risks to the downside for Ireland, going effectively through motions referencing Greece and domestic debt overhang. Even interest rates sensitivity of the massive debt pile we carry deserves not to be cited as a major concern.

4/6/15: Irish Fiscal Spring: Village, April-May

My recent article for the Village Magazine [April-May edition] on Irish economy is now available on-line: http://www.villagemagazine.ie/index.php/2015/05/spring-unsprung/ 

28/4/15: There is a Spring... There was a Statement...

This Spring Statement was a lengthy and over-manned delivery of the vintage "A Lot Done. More to Do." 2002 FF slogan. As such, it is inevitable that the Statement ended up sounding like a self-congratulatory pre-electioneering platform announcement with some promises for the future. And you can read the Department document here: http://budget.gov.ie/Budgets/2015/Documents/SPU%20for%20Web.pdf in its full glory.

'Entrepreneur' or 'Entrepreneurship' are words not mentioned in the document. Self-employed are cited only once, in reference to timing of tax receipts the Government expects from them. Part-time workers - the crucial category that can drive up ranks of early stage entrepreneurs and can be a source for huge gains in productivity if their skills are increased forward - deserves only two mentions, both relating to the unemployment reductions trends to-date. Quality of jobs creation is un-addressed. And so on...

In his speech, Mr Noonan said the government is in a position to implement another expansionary Budget this year and every year out to 2020 “if this is deemed prudent and appropriate.” The "if" part - crucial as it may be - is hardly enforceable, once the train of spending rolls out into the station.

The Government deserves credit. The national deficit was reduced from €15 billion to €4.5 billion over 2011-2015. This was achieved with less tax increases and expenditure cuts than forecast at the onset of 2011. Minister Noonan is correct. But much of this was down to good fortunes from abroad. And still is. And, based on the Department of Finance projections still will be, if one to trust their outlook for the exchange rates, exports growth and jobs growth.

Per Minister Noonan, the state has, this year “fiscal space of the order of € 1.2 billion and up to € 1.5 billion… for tax reductions and investment in public services." So, “the partners in Government have agreed that [this] will be split 50:50 between tax cuts and expenditure increases …in Budget 2016.”

Does that make much sense? Well, no. 2014-2015 cumulated decrease in deficit can be broken down into:
- 50% from increased tax revenues,
- 14% to GDP growth,
- 9% to reduction in net Government expenditure and
- 27% other factors.
Jobs creation and wealth creation both require reducing burden of State and taxation on self-employed and early stage entrepreneurs. Who, both, went totally unmentioned in the Spring Statement. Domestic demand growth - that supposed to contribute 2/3rds of 2015 growth and more than 3/4 of 2016 growth - requires reducing household and corporate debt and stimulating domestic investment - preferably not in property sector. These too went un-mentioned in the Spring Statement.

Instead, we got Minister Howlin watershed discovery that the Government creates wealth.

Which is scary and even scarier in the context of missing real wealth creators in the Statement: the Government's role in wealth creation should be to remove itself from managing it as much as possible. But see more on this below.

Minister Noonan warned that returning to the days of “if I have it I’ll spend it” or the “even if I don’t have it I’ll spend it” policy stance taken by the opposition over the past four years, was by far the biggest risk to economic growth and job creation. He might be right, but his plan for expansionary Budgets into 2020 is more of a policy stance consistent with "I might have it, so I'll spend it".

“We must never again repeat the boom and bust economic model. Over the remainder of this decade we expect all sectors of the economy to contribute to growth and employment.”

He is right on this and the Government said much the same over and over again. But it is hard to see any coherent strategy emerging from the Government's numerous reiterations of Jobs and Growth plans and white papers on how broad growth can be delivered. To-date, the Government projected the same policy approach to growth as its predecessor - targeted supports and tax incentives. Not levelling the playing field, getting rid of state inefficiencies, political interference and tax-and-spend redistribution of resources. Note: this is not about redistribution of income. It is about allowing the economy to grow without political meddling and favouritism.

The Spring Statement was not much of a departure from the same. In the statement, the Minister mentions just one 'red line' policy item - the 12.5% corporation tax. Everything else is more of an IOU based on "if - then". Which suggests that this Government has little in terms of new economic growth ideas beyond corporate tax measures.

Mr Noonan said the mistakes that left the country on the verge of bankruptcy in 2010 must never again be repeated. Which begs a question: does Minister Noonan recognise the mistakes, linked to 2010, that this Government also participated in - willingly or not? Banks recapitalisations were carried out in 2011 on foot of 2010 policy decisions. Troika MOU - shaped in 2010 - was implemented by this Government. Bondholders bailouts were completed by the present Government on foot of mistakes made by the previous one.

Minister Noonan also referenced a promise to "give people security around their income and their pensions". But it is very hard to see how this can be achieved, given lack of any serious progress on dealing with legacy debts and the 50:50 split between tax reductions and expenditure increases in Government budgets forward. And on the point of debt, we do have a massive Government debt, now being augmented by the quasi-Government non-Government debt of the likes of Irish Water et al. Remember, expenditure increases do not improve people's incomes and pensions, except for the select few in State employment and contracting. Nor do they improve Government ability to deleverage its own debt.

And on that note, the Department of Finance says little about actual interest rates, but does project relatively benign debt-related costs through 2020. Which might be tad optimistic, given we are currently scraping the bottom of the historical rates barrel. The Department says that "While unlikely in the short term, higher policy-induced interest rates would have a dampening impact on Ireland’s economic activity. Simulations suggest that a 1 percentage point increase in policy interest rates could reduce the level of GDP by almost 2½ percentage points by 2020. This effect is especially pronounced given the large debt overhang. Such a deterioration in the economy would add almost 1 percentage point to the budget deficit by 2020". I know we all 9ok, not 'we' but almost 'all') expect the current interest rates to stay here forever, because, obviously the ECB is not going to raise them any time in the future under the 'new normal' of complete oblivion to the reality. But here's a bad news: current ECB rates are some 300bps below the pre-crisis average. And if we are moving out of crisis, that average is moving closer and closer in time. So for testing that 100 bps rate rise that the DofF did in the Spring Statement: try 300 bps next. And see the whole promise of the golden future go puff in a cloud of smoke.

Moving on through the Statement: it is also hard to spot any serious momentum for pensions reforms that can really be productive in restoring some capability of the private sector workers to secure pensions. The Government has all but abandoned the idea of pensions reforms in the public sector - the biggest drain on pensions resources in the country.


In summary, the Spring Statement is a call to the voters to support the status quo based on the idea that 'our continuity is less painful than opposition's change'. Which, of course, is an equivalent to giving a granny a choice of being mugged by the "Thank you, Mam" lads with school ties or by the rude villains in clowns' wigs. It is a choice. Just not the one many would order on their elections' menu after six years of economic and social bloodletting. 

Irish Times summed this up as "The spring statement can be seen as a political exercise in which Fine Gael and Labour adopt a common fiscal plan for the election campaign to come." (see http://www.irishtimes.com/business/economy/spring-statement-analysis-assumption-nothing-goes-askew-1.2191971?utm_content=sf-man) and my favourite political analyst in this country, summed it up much better: http://thejacktrack.blogspot.ie/2015/04/michael-noonans-2-billion-return-to.html?spref=fb who says: "there was a haunting echo of Bertie Ahern and Charlie McCreevy resonating through the halls of his Department, and with it the emergence of a disturbing - if hardly, at this stage, surprising - sense that in Ireland there is no such thing as a lesson learned, only a lesson observed."