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Is it really €2.5 billion ?

Posted on October 13, 2013 by Tom Healy

Tom Healy, Director NERI
Tom Healy, Director NERI

Having spent 5 years now in the austerity trenches another few hundred yards seems surmountable especially when the casualities are counted as €2.5 billion instead of €3.1 billion in 'fiscal adjustments' (cuts to spending or increases in tax neither of which is nice). But, €2.5 billion is still €2.5 billion. In other words around 1.5% of GDP in an economy already on its knees in terms of retail sales, employment and debt.  A smaller casuality hit is welcome. But it depends very much on the detail of what is announced next Tuesday in Budget 2014.

More importantly it depends on what is actually carried through in the coming months and years as cuts to allowances, withdrawal of benefits, increases in eligibility thresholds, increases in charges, increases in the pension age take effect - gradually - over time. And this is in addition to the impact of debt, unemployment and falling real incomes on many households struggling to make ends meet. What's a billion when you might have only €25 to spare after all the bills are paid at the end of a month?

Governments have their own strange ways of measuring things. Budgets are no exception. Every year the Minister for Finance announces a 'fiscal consolidation' of a given amount. So, for example, last year the Government signalled a consolidation of €3.5 billion of which €2.25 billion was in (lower) spending and the rest in (higher) revenue. Many of the changes announced in last December's budget took effect more or less immediately from 1st January 2013. Other changes kicked in more gradually over this year and into next. For example, measurse to increase tax take from 'super pensions' announced in December 2013 are not supposed to take effect until January 2014 at the earliest.  In the course of this year other measures emerged such as the public sector pay deal 'Haddington Road' which is supposed to lead to a 'saving' of very roughly €300 next year and more again the following year (2015).

The total planned 'consolidation' does not attract that much attention as the details of tax, welfare and other changes impact on families and individuals. This year it is a little different. Because of the significant reduction in interest payments by Government to the now defunct Anglo-Irish/INBS (IBRC) zombie bank Government has scope to 'ease' the 'consolidtion' by up to €1 billion in 2014. Expectations were high in the first flush of the 'Promissory Note' deal in February of this year. Ever since February of this year expectations have been gradually eroded as the deficit hawks have warned against loosening the budget purse 'just in case' growth slips. 

More recently a smaller 'consolidation' of around €2.5 billion has been mentioned in media reports. We await next Tuesday before seeing the detail. Caution is warranted before a partial victory on fiscal 'easement' is declared. A little known and a little commented on feature of Government financial reporting since 2011 has been the following:

  1. Government measures to increase taxes are 'carried forward' into the next year and reported in the next year as part of next year's fiscal consolidation. Hence, additional Local Property Tax to be collected in 2014 as the full tax takes effect is reported as a 'new measure' in Budget 2013 and again in Budget 2014 as part of Budget 2014 fiscal adjustment.
  2. Government spending cuts decided in budget 2013 and destined for implementation in 2014 are not typically reported in Budget 2014 figures. At least this is the way it was in Budget 2012 and Budget 2013 documentation. The full-year effect or carry over to 2014 was shown in the detailed documentation but not in the summary headline fiscal adjustment. The reason for this has never been satisfactorily explained. 

Does it matter? It does in so far as (i) the total fiscal adjustment in a given year may be somewhat more than the total which does not include carry-over impacts from previous years (e.g. the impact of the additioanal €250 student registration charge at third level this Autumn) and (ii) the reported split between spending and revenue changes (the famous 2:1 ratio agreed by the current Government) is not correctly reported to the extent that revenue carry-overs are included each year but not spending carry-overs. The impression given is that fiscal consolidation is not as big as it really is and its composition is not as heavy on spending as on revenue.

This is known as a statistical mental reservation.

Lets see on Tuesday what the true extent of 'consolidation' is before getting carried away with Peace-In-Our-Time victory over €2.5 billion versus €3.1 billion.

At the end of the day the best fiscal consolidation is:

  • investment in human and social and 'hard' infrastructure
  • money and hope in the pockets of consumers.

TWO POSTSCRIPTS:

1 It is important to distinguish between:

  • A Announced fiscal effort (e.g. €3.5 billion in Budget 2013) for a given Budget
  • B Actually implemented fiscal effort in a given year (usually less than the 'full year' impact.
  • C Actual fiscal outcome as measured by the fall in the government deficit.

When under pressure Governments may be tempted to sell a painful fiscal correction by mixing up A, B and C. This is understandable as many stakeholders have to be humoured including the 'markets' and the Troika.  Hence, the difference between B and C may be assigned to some €600 million dividend from sale of (profitable) State Assets or lower than expected unemployment or lower interest on debt accounted for as a result of the February 2013 debt deal on Promissory Notes. The claim is that €2.5 billion 'is as good as' €3.1 billion'. This latter case mixes up fiscal effort and fiscal outcome. On another example Government may announce with great enthusiasm measures to increase taxes on the wealthy via reform to pension relief for earners above €60,000 a year (as they did in December 2013). The reform was not to take effect until 2014 and current indications are that the amount yielded will be less. Tax consultants and the pension industry had 12 months notice. In this latter example A and B are mixed up. The matter is compounded when 'revenue carry over' is included in summary fiscal consolidation tables as it was in Budget 2012 and Budget 2013 but 'expenditure carry over' is not included. This results in optical illusion whereby the total consolidation announced is heavier on tax than is really the case.  So, for example, having agreed to a 2:1 ratio of spending cuts to tax rises in the Programme of Government the Budget 2013 announcement in December 2012 looked like something closser to 55:45 except that it was not because substantial carry-overs under Local Property Tax and deferred reform of pension tax for higher earners were counted into the overall fiscal correction reported (€3.5 billion at the time) but expenditure carry-overs were not. in the summary headline tables.

2 Going by data cited in the latest ESRI Quarterly Economic Commentary last week (Table 7, page 25) it emerges that Government may need to adopt only €1.1 billion in 'new' fiscal measures. The ESRI estimate a total of around €1.4 billion in spending/revenue measures already announced (including Haddington Road). That leaves only €1.1 billion to reach the magical €2.5 billion (except of course the ESRI researchers would prefer a full blood letting of €3.1 billion 'just in case' the doctors come back looking for more blood next year because the patient is weaker). Now if the 'new measures' would need to be €1.1 billion 'only' then Budget 2014 doesn't need to be that harsh .... Sssh don't tell anyone.

Posted in: Government SpendingTaxation

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