Mccarthy Crisis
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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.
1
1/12/2009
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
2
1/12/2009
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 commercial i l company shares.
3
1/12/2009
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
4
1/12/2009
Bank Lending to Property 30%
120000
100000
Lending to construction development and investment up €100bn in seven years
25%
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)
5
1/12/2009
State Balance Sheet…… • As well as focussing on the GGB and net debt, policy needs to consider measures to deleverage 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
6
1/12/2009
The Tiger Checked out 2002 (Assuming zero growth for all aggregates in 2008)
1995 to 2002
• Real GDP • Real GNP • Real GNDI
8.6 7.2 7.0
2002 to 2008
5.5 5.3 3.7
(Adjusted for terms-of-trade)
7
1/12/2009
Quarterly Numbers signalled downturn in ’07…
8
1/12/2009
Property-Related Taxes led the Collapse…. 9000
20%
8000
18% 16%
7000
14%
6000
12% 5000 10% 4000 8% 3000
6%
€6bn drop in direct property-related revenue in three years
2000
4%
1000
2%
0 1997
0% 1998
1999
2000
2001
2002
Property revenue (€m, lhs)
2003
2004
2005
2006
2007F
2008F
2009F
Property revenue % of total tax revenue (rhs)
9
1/12/2009
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.
10
1/12/2009
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
11
1/12/2009
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 mid1980s
•
Real cuts in 1987 to 1989 were small and mainly capital; current spending never fell in nominal terms. Year 1987 1988 1989 1990
% Chg Current 4.1 1.0 0.8 6.6
% Chg TES 2.7 -1.3 0.5 7.0
CPI 3.1 2.1 4.1 3.3
12
1/12/2009
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
30.0
20.0
10.0
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
0.0 1983
per cent of GNP
40.0
13
1/12/2009
Real Growth, Total Exchequer Spending Y Year 2000 2001 2002 2003 2004 2005 2006 2007 2008e 2009f
Spend S d % Ch Chg 10.4 16.1 11.0 7 7.7 7 6.2 11.1 10.6 11.9 10 10.7 7 4.3
CPI % 5.6 4.9 4.6 3 3.6 6 2.1 2.5 3.9 4.9 4 4.2 2 -2.0
%R Reall G Growth* th* 4.8 11.2 6.4 4 4.1 1 4.1 8.6 6.7 7.0 6 6.5 5 6.3
* Deflator = CPI; CPI 2008/9 = ESRI; Spend 2009 = Budget
14
1/12/2009
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.
15
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.
1
1/12/2009
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
2
1/12/2009
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 commercial i l company shares.
3
1/12/2009
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
4
1/12/2009
Bank Lending to Property 30%
120000
100000
Lending to construction development and investment up €100bn in seven years
25%
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)
5
1/12/2009
State Balance Sheet…… • As well as focussing on the GGB and net debt, policy needs to consider measures to deleverage 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
6
1/12/2009
The Tiger Checked out 2002 (Assuming zero growth for all aggregates in 2008)
1995 to 2002
• Real GDP • Real GNP • Real GNDI
8.6 7.2 7.0
2002 to 2008
5.5 5.3 3.7
(Adjusted for terms-of-trade)
7
1/12/2009
Quarterly Numbers signalled downturn in ’07…
8
1/12/2009
Property-Related Taxes led the Collapse…. 9000
20%
8000
18% 16%
7000
14%
6000
12% 5000 10% 4000 8% 3000
6%
€6bn drop in direct property-related revenue in three years
2000
4%
1000
2%
0 1997
0% 1998
1999
2000
2001
2002
Property revenue (€m, lhs)
2003
2004
2005
2006
2007F
2008F
2009F
Property revenue % of total tax revenue (rhs)
9
1/12/2009
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.
10
1/12/2009
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
11
1/12/2009
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 mid1980s
•
Real cuts in 1987 to 1989 were small and mainly capital; current spending never fell in nominal terms. Year 1987 1988 1989 1990
% Chg Current 4.1 1.0 0.8 6.6
% Chg TES 2.7 -1.3 0.5 7.0
CPI 3.1 2.1 4.1 3.3
12
1/12/2009
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
30.0
20.0
10.0
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
0.0 1983
per cent of GNP
40.0
13
1/12/2009
Real Growth, Total Exchequer Spending Y Year 2000 2001 2002 2003 2004 2005 2006 2007 2008e 2009f
Spend S d % Ch Chg 10.4 16.1 11.0 7 7.7 7 6.2 11.1 10.6 11.9 10 10.7 7 4.3
CPI % 5.6 4.9 4.6 3 3.6 6 2.1 2.5 3.9 4.9 4 4.2 2 -2.0
%R Reall G Growth* th* 4.8 11.2 6.4 4 4.1 1 4.1 8.6 6.7 7.0 6 6.5 5 6.3
* Deflator = CPI; CPI 2008/9 = ESRI; Spend 2009 = Budget
14
1/12/2009
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.
15
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