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Economic and Fiscal Outlook
John McHaleNational University of Ireland, Galway
Irish Fiscal Advisory Council
October 3, 2013
12th Annual IUA HR Conference ~ Ag Breathnú Romhainn ~
~ Looking Forward ~
Banks Public Finances
Real Economy
Bank Bailout Costs
Lost Credibility of Guarantees
AusterityBudgetary CostsAsset ValuesCredit Availability
Dealing with a crisis
Real aggregate activity
19 19 19 19 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 200
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
Quarterly GDP and Total Domestic Demand, Constant Prices, Seasonally Adjusted
Real GDP
Total Domes-tic Demand
Real aggregate activity
19 19 19 19 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 200
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
Quarterly GDP, GNP, and Domestic Demand, Constant Prices, Seasonally Adjusted
Real GDP
Real GNP
Total Domes-tic Demand
Components of domestic demand
1997Q1
1998Q2
1999Q3
2000Q4
2002Q1
2003Q2
2004Q3
2005Q4
2007Q1
2008Q2
2009Q3
2010Q4
2012Q1
2013Q20
5,000
10,000
15,000
20,000
25,000
Components of Domestic Demand, Constant Prices, Seasonally Adjusted, 1997Q1- 2013Q2
Consumption
Investment
Government Spending (Current)M
illio
ns o
f Eur
o
Retail sales
2005M012006M032007M052008M072009M092010M112012M012013M0380
85
90
95
100
105
110
115
120
Retail Sales, Volume, Seasonally Adjusted
Retail Sales, Exclud-ing Motor Trades
All Retail Sales
Inde
x, 2
005
= 10
0
Real exports and imports
1998Q1
1998Q4
1999Q3
2000Q2
2001Q1
2001Q4
2002Q3
2003Q2
2004Q1
2004Q4
2005Q3
2006Q2
2007Q1
2007Q4
2008Q3
2009Q2
2010Q1
2010Q4
2011Q3
2012Q2
2013Q1
-30,000
-20,000
-10,000
0
10,000
20,000
30,000
Quarterly Exports and Imports of Goods and Services, Constant Price, Seasonally Adjusted, 1998Q1 to 2013Q2
Exports of Goods
Exports of Services
Imports of Goods (-)
Imports of Ser-vices (-)
Mill
ions
of E
uro
Employment developments
1998Q1
1998Q4
1999Q3
2000Q2
2001Q1
2001Q4
2002Q3
2003Q2
2004Q1
2004Q4
2005Q3
2006Q2
2007Q1
2007Q4
2008Q3
2009Q2
2010Q1
2010Q4
2011Q3
2012Q2
2013Q10
500
1,000
1,500
2,000
2,500
Quarterly National Household Survey: Total Employment and Employees, 1998Q1-2013Q2
Total Em-ployment
Employees (in-cluding schemes)
Thou
sand
s
Crisis → Massive debt shock
2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 20
20
40
60
80
100
120
Perc
ent o
f GDP
24.6 percent of GDP, 2007Q2
Source: Central Statistics Office
And a large underlying deficit
2008 2009 2010 2011 2012 2013 2014 2015 2016 -
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
62,996.5
54,442.0 53,817.255,852.7 56,593.0
58,740.061,420.0 64,035.0 65,760.0
76,135.872,910.6 71,600.3 70,559.0 69,053.0
71,245.068,960.0 67,985.0 68,950.0
13,139.3
18,468.5 17,783.114,706.3
12,460.0 12,505.0
7,540.03,950.0 3,190.0
Underlying General Government Deficit
Underlying General Government Expenditure
General Government Revenue
Deteriorating creditworthiness led to the need for a bailoutJa
n/20
07M
ar/2
007
May
/200
7Ju
l/200
7Se
p/20
07N
ov/2
007
Jan/
2008
Mar
/200
8M
ay/2
008
Jul/2
008
Sep/
2008
Nov
/200
8Ja
n/20
09M
ar/2
009
Jun/
2009
Aug/
2009
Oct
/200
9D
ec/2
009
Feb/
2010
Apr/
2010
Jun/
2010
Aug/
2010
Oct
/201
0D
ec/2
010
Feb/
2011
Apr/
2011
Jun/
2011
Aug/
2011
Oct
/201
1Ja
n/20
12M
ar/2
012
May
/201
2Ju
l/201
2Se
p/20
12N
ov/2
012
Jan/
2013
Mar
/201
3M
ay/2
013
0
2
4
6
8
10
12
14
Ireland
Germany
%
Ten-Year Bond Yields
Source: Datastream
A huge fiscal adjustment has been requiredBillions of Euro
July 2008Expenditure adjustments
1.0
Budget 2009 (October 2008)Revenue raising measures
2.0
February 2009Expenditure adjustments
2.1
Supplementary budget (April 2009)Revenue-raising & expenditure-reducing measures
5.4
Budget 2010 (December 2009)Revenue-raising & expenditure-reducing measures
4.1
Budget 2011 (December 2010)Revenue-raising & expenditure-reducing measures
6.0
Budget 2012 (December 2011)Revenue-raising & expenditure-reducing measures
3.5
Budget 2013 (December 2012)Revenue-raising & expenditure-reducing measures
3.5
Planned Adjustments: 2014 – 2015Revenue-raising & expenditure-reducing measures
5.1
Total actual and planned adjustment 32.7 (≈ 20 % of GDP)
A difficult balancing act
• Recognition that fiscal adjustment measures will slow the economy in the short run
• Key question: Is austerity working to stabilise the public finances and restore the creditworthiness/borrowing capacity of the State?
Actual vs. counterfactual: The primary deficit
2009 2010 2011 2012 20130
2
4
6
8
10
12
14
16
9.3
7.5
5.8
4.0
2.5
13.9 14.014.8 14.3 14.0
Actual Scenario No Adjustment Scenario
Perc
ent o
f GD
P
Actual vs. counterfactual: The overall deficit
2009 2010 2011 2012 20130
5
10
15
20
25
11.4 10.79.1
7.6 7.4
15.817.2
18.2 18.419.9
Actual Scenario No Adjustment Scenario
Perc
ent o
f GD
P
Actual vs. counterfactual: The Debt/GDP ratio
2009 2010 2011 2012 20130
20
40
60
80
100
120
140
160
180
64.8
92.1
106.4117.6 123.3
67.7
100.1
121.4
141.5
157.9
Actual Scenario No Adjustment Scenario
Perc
ent o
f GD
P
Significant improvement in creditworthiness Ja
n/20
07M
ar/2
007
May
/200
7Ju
l/200
7Se
p/20
07N
ov/2
007
Jan/
2008
Mar
/200
8M
ay/2
008
Jul/2
008
Sep/
2008
Nov
/200
8Ja
n/20
09M
ar/2
009
Jun/
2009
Aug/
2009
Oct
/200
9D
ec/2
009
Feb/
2010
Apr/
2010
Jun/
2010
Aug/
2010
Oct
/201
0D
ec/2
010
Feb/
2011
Apr/
2011
Jun/
2011
Aug/
2011
Oct
/201
1Ja
n/20
12M
ar/2
012
May
/201
2Ju
l/201
2Se
p/20
12N
ov/2
012
Jan/
2013
Mar
/201
3M
ay/2
013
0
2
4
6
8
10
12
14IrelandGermany
%
Source: Datastream
Should we proceed with planned adjustments?
• Current plans are for additional adjustments of:– €3.1 billion in 2014– €2.0 billion in 2015
• Risks around growth mean it is wise to continue to plan for these adjustments– Possible scope to relax plans as the picture becomes clearer
• Hard-won credibility would also be put at risk by not following through on planned adjustments
Light at the end of the tunnel?
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019-4-202468
1012 10.5
4.16.0
3.8 3.5 3.12.0
-0.2 -0.7 -1.0 -1.5
Required discretionary adjustment to ensure com-pliance with all fiscal rules
Billi
ons
of E
uro
Distributional effects of Budgets, 2009-2013
Cumulative Percentage Change in Disposable Income
Source: ESRI
Education spending is falling
2006 2007 2008 2009 2010 2011 2012 20130.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
Education Spending, 2006-2013
CapitalNon PayPay and Pensions
Billi
ons
of E
uro
Source: DPER, Databank
Final thoughts• How can the third-level sector defend its research
mission?
• Current model focused on discrete outputs for industry– Patents; start-ups; PhDs . . .
• Might be better to focus on a human-capital model– Research-based teaching → Equip graduates with the
analytical skills to work at the technological frontier
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