|Table 1 from Davy Research's commentary on Budget 2011 summarises the broad developments between 2000 and 2007: Over that seven-year period, public expenditure more than doubled, with similar increases across a broad range of categories, including the pay and pensions bill. That compared with an increase of 30% in consumer prices over that period. Public spending was growing at a rate in excess of 10.5% per annum while prices were increasing at an annual rate of less than 4%.|
True revenue did increase rapidly over that period as well as a buoyant economy swelled the coffers of the Exchequer - - but not as rapidly as spending did. So the overall government balance went from being in sizeable surplus (almost 5% of GDP) in 2000 to being just about in balance in 2007. At the height of the boom we were allowing ourselves a very modest cushion indeed.
Davy says what happened in the following two years is in many ways even more remarkable. As we all now know, tax revenues collapsed with the collapse of the building sector and a sharp weakening in the economy as a whole. But expenditure continued to increase, partly as a result of a first injection of €4bn in capital into Anglo Irish Bank. That left the government with an overall deficit of over €23bn, more than 14% of GDP.
Irish Economy 2011: Budget 2011 forecasts a deficit in 2011 of €17.7bn and public debt as a ratio of GDP
(gross domestic product) will rise to 99%. This article provides more economic
analyses on the outlook for the economy.
Davy Research in its
Budget report (pdf) says current spending (excluding interest payments) is
set to fall by 12%, although within that the pay bill is set to fall by just 5%.
The big axe falls on capital spending, down another 43% over the period, having
already fallen by over 30% between 2008 and 2010. By 2014, capital spending will
have fallen by 61% from its 2008 peak.
On the tax side, receipts are expected
to increase by 35% over the period. About half of this will come from specific
tax increases and a similar amount is expected to come from the buoyancy of the
Public sector pay and pension payments amounted to
almost €18.8bn in 2010, representing almost 35% of gross current expenditure.
This comprises €16bn in public sector pay and €2.8bn in pension payments.
Public sector staff numbers are forecast to decline by just over 3%
during 2011 from 309,851 at the end of 2010 to 300,308 by the end of
On the outlook for the economy, Davy says that after stagnating in GDP
terms in 2010, the economy is expected to grow again next year and to be
expanding at a 3%+ pace by 2012. That is seen as sufficient to result in
employment growth resuming and the unemployment rate falling to less than 10% by
The commentary says on the face of
it, these seem like optimistic projections given the magnitude of the fiscal
correction that is underway. But the expectation for 2011 is in line with
Davy says beyond that, a number of points should be
borne in mind:
The UK is proposing a similar fiscal
consolidation over the next few years and it expects decent economic growth over
the period. That expectation is not hugely contested by the international
Last year, the
budget correction in Ireland amounted to €4bn, yet it appears that the economy
managed to stabilise during the year.
Back in 1987,
public expenditure was reduced by 7% in real terms, yet the economy was growing
at a rate of 6% within two years.
Finally, the overall debt ratios in
Ireland are undoubtedly demanding but they were higher in the 1980s and the
economy survived. In the 1980s, the debt/GDP ratio reached almost 120%. This
time, it is expected to peak at around 100%.
However, Davy says in the 1980s, private sector debt was about 50% of
GDP; now it is close to 200% of GDP. As a result, the overall debt ratio is
almost twice what it was in the 1980s.
Hence, the most important influence on whether the
current fiscal journey is successful or not will probably be how soon and how
well the authorities achieve their aim of downsizing and finally fully
recapitalising our banking system. In that respect, the early months of 2011
will tell a lot.
Davy Research Summary:
The arithmetic is clear enough
There was little
new in yesterday's budget. The recently published National Recovery Plan and the
memorandum of understanding agreed with the EU and IMF had already revealed what
the government intended to do to restore balance to the public
Over the next four years, there will be cumulative
'adjustments' of €15bn in budgetary measures: €10bn in spending cuts and €5bn in
This amounts to a cumulative reduction of 12% in
nominal terms in current spending and a whopping 43% reduction in capital
spending. Tax revenues meanwhile are slated to increase by 35%.
But can the economy handle it?
numbers into columns and rows is straightforward enough, but is it reasonable to
expect the economy to grow in the face of such fiscal retrenchment?
It is certainly
possible. The UK is attempting a similar mission and the international
forecasting community still expects reasonable growth there over the period. And
Ireland itself did it before in the 1980s.
difference this time around is the mountain of private sector debt and a
dysfunctional banking system. Hence, the need to follow these fiscal plans with
measures to downsize and re-capitalise the banking system must now take top
Bank of Ireland chief
economist, Dan McLaughlin, said with a €17.7bn deficit projected for 2011, it will be €1bn lower in cash
terms than this year’s, and somewhat different in composition; the current
budget deficit is projected to fall to €11.5bn from €13.1bn, while the capital
deficit rises to €6.1bn from €5.6bn, reflecting the impact of additional
borrowing to fund the promissory notes issued to the state owned banks. The EBR
(Exchequer Borrowing Requirement) total of €17.7bn amounts to a forecast 11% of
GDP although the General Government deficit declines to 9.4% of GDP (€15.2bn)
from 31.9% in 2010 (€50.1bn), the latter figure including direct government
support for the state-owned banks. In the absence of corrective measures the
2011 EBR would have risen to €22.5bn.
McLaughlin says Ireland’s general
government debt has risen substantially since 2007, although at 65.5% of GDP in
2009 was still below the euro average (79.1%). The Irish figure is now likely to
reach 94% this year (the euro average is forecast at 84.1%) and is projected to
rise further in 2011 to 98.6%. Nominal GDP is projected to rise by 2.5% but the
average interest rate exceeds this, at 3.5% (defined as interest payments in the
current year divided by the previous year’s debt total) implying that Ireland
would have to run a primary surplus equivalent to 1% of GDP to prevent the debt
ratio rising. In the event a primary deficit of 6.2% of GDP is forecast, thereby
pushing the debt ratio up to over 101% but the Government is projecting a figure
of 98.6% as it intends to run down cash balances.
…spending accounted for
two-thirds of the fiscal adjustment…In the absence of any budgetary
changes the EBR would have risen to €22.5bn, and the Government announced a €6bn
fiscal package to bring the deficit down to under €18bn. This involved a €1bn
tax package, largely centered on income tax, a €300m increase in PRSI and €3.9bn
in spending cuts, including €2.1bn in current spending with the balance on the
capital side. Some €660m was raised via other measures including asset disposals
with the total package dampening growth by over 2% and hence reducing tax
receipts by €1.2bn, giving a €4.7bn net impact.
Ulster Bank economists, Simon Barry and Lynsey
Clemenger, commented:"From a financial markets perspective, there were a
couple of noteworthy elements. First, on the issue of burden-sharing of the
costs of bank losses, the Minister reiterated that senior bondholders will not
play a role. He made it clear that in his view such a course of action was not
an option given the banks’ dependency on international investors. But perhaps
more tellingly, he was explicit in stating that 'unilaterally reneging on senior
bondholders' as he put it was against the wishes of our European partners and
the European institutions, underlining again that this particular issue was
non-negotiable from the European point of view as part of the terms of Ireland’s
package of assistance. However, he said there would be further burden-sharing by
subordinated bondholders (whose total exposure to Irish banks amounts to around
€17bn), and that enabling legislation will be submitted to the Dáil next
Second, the Minister announced that the
Government will be proceeding with a proposal put to it by the Irish Association
of Pension Funds and the Society of Actuaries. The idea is that Irish pension
funds can invest in longer-term Irish bonds (which offer higher yields than
currently available elsewhere), and price their liabilities to pensioners on the
basis of those higher yields.
fund managers who may opt for such investments, this would have the effect of
reducing the present value of such liabilities, albeit with some degree of
additional market risk, while for the Government it offers a potentially helpful
source of additional domestic demand for new debt issuance at a time when many
foreign investors have turned 'Ireland-shy'."
Ulster Bank Budget Commentary
including Table of Main Changes
Finfacts Budget 2011 Page