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Transcript of Economic and Fiscal Outlook: Growth, Risks and Sustainability Thomas Conefrey TASC Seminar, 21...
Economic and Fiscal Outlook: Growth, Risks and Sustainability
Thomas ConefreyTASC Seminar, 21 January 2016
IFAC: SOME BACKGROUND
MANDATE OF THE COUNCIL:
9th Fiscal Assessment Report
Five-member Council
Six-member Secretariat
ASSESSMENT OF FORECASTS
COMPLIANCE WITH RULES
FISCAL STANCEENDORSEMENT
OF MACROECONOMICFORECASTS
INDEPENDENT ECONOMIC
ANALYSIS
Outline1. Economic review and outlook.2. Recent fiscal performance and outlook (IFAC
Fiscal Assessment Report, November 2015).3. Risks and imbalances.4. Public finances in the medium term.
REAL GDP, REAL GNP AND EMPLOYMENT GROWTH
(% CHANGE Y-Y)
STRONG RECOVERY AND CENTRAL GROWTH FORECASTS
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021-10
-5
0
5
10
15
Real GDP Real GNP
Employment
% C
hang
e Y-
Y
Sources: Department of Finance (Budget 2016); CSO.
Increasing contribution of domestic demand to recovery
Source: CSO.
2010 2011 2012 2013 2014 2015-10
-5
0
5
10
15
20
9.4
8.8
18.2
Cumulative Contribution to Real GDP Growth Since Trough
Residual Domestic DemandNet Exports Real GDP
% G
row
th S
ince
Tro
ugh
in Q
2 20
09
Evidence of rebalancing
1998
1998
1998
1998
1999
1999
1999
1999
2000
2000
2000
2000
2001
2001
2001
2001
2002
2002
2002
2002
2003
2003
2003
2003
2004
2004
2004
2004
2005
2005
2005
2005
2006
2006
2006
2006
2007
2007
2007
2007
2008
2008
2008
2008
2009
2009
2009
2009
2010
2010
2010
2010
2011
2011
2011
2011
2012
2012
2012
2012
2013
2013
2013
2013
2014
2014
2014
2014
2015
2015
0%
5%
10%
15%
20%
25%
30%
35% % of Nominal GDP
Investment
Net Exports
Source: CSO.
Current account near balance excluding re-domiciled PLCs
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014-8
-6
-4
-2
0
2
4
6
-0.4 -0.6-1.0
0.5-0.1
-3.3
-4.9
-6.1 -5.8
-4.1
-0.8-1.2
-1.5
3.13.6
-5.1
-3.9-4.5
-5.7
-0.2
Current Account Balance
Adjusted for Re-domiciled PLCs
% G
DP
National Income and Consumption per Head
19951996
19971998
19992000
20012002
20032004
20052006
20072008
20092010
20112012
20132014
20152016
20172018
20192020
202110
15
20
25
30
35
40
45
50
55Macro indicat ors per head, rea l
Consumption GDP GNP
€ ,0
00
Sources: CSO and Department of finance forecasts.
Sharper downturn + recovery than trading partners
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 201660
65
70
75
80
85
90
95
100
105
110Real GDP per capita
IE UK
US EA
Inde
x: 2
007
= 10
0
Sources: CSO; IMF and internal calculations.
Employment Rate
19921993
19941995
19961997
19981999
20002001
20022003
20042005
20062007
20082009
20102011
20122013
2014
2015 (latest)
40
45
50
55
60
65
70
75
80 Employment rate, % of 15-64 population
Ireland United Kingdom
%of
15-
64 p
opul
ation
Source: CSO and Eurostat.
Challenges with interpreting the National Accounts
• Patent cliff
• Contract manufacturing
• Re-domiciled PLCs
• Treatment of profits in IT sector
• Aircraft leasing
But high-frequency data show expanding economy
• Employment
• Unemployment
• Industrial production
• Retail sales / consumer confidence
• Exchequer returns
Vacancy Rate
2008Q1
2008Q2
2008Q3
2008Q4
2009Q1
2009Q2
2009Q3
2009Q4
2010Q1
2010Q2
2010Q3
2010Q4
2011Q1
2011Q2
2011Q3
2011Q4
2012Q1
2012Q2
2012Q3
2012Q4
2013Q1
2013Q2
2013Q3
2013Q4
2014Q1
2014Q2
2014Q3
2014Q4
2015Q1
2015Q2
2015Q30
0.2
0.4
0.6
0.8
1
1.2
per c
ent
Industrial production volumes strong, including traditional sector
Source: CSO.Notes: Traditional sector excludes all modern sectors (i.e. Chemicals and pharmaceuticals; Computer, electronic, optical and electrical equipment; Reproduction of recorded media; and Medical and dental instruments and supplies) but may still include activities with a high concentration of MNCs.
-20
-10
0
10
20
30
40
50
60
Manufacturing
Modern
Traditional
Good growth in retail sales augers well for consumption
Source: CSO. Note: Core retail sales excludes motor trades.
-25
-20
-15
-10
-5
0
5
10
15
7.38.2
Core Retail sales Total Retail Sales
% c
hang
e Y/
Y (3
Mon
th M
ovin
g Av
erag
e)
Growth Benefitting the Public Finances
Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15-500
0
500
1000
1500
2000
2500
3000
3500
4000
Taxes and PR SI R elative to Cumulative Profile
Income Taxes VAT Excise Duties Corporation Tax Capital Taxes Stamp Duties "Other" PRSI
€ m
illio
n
Note: These overruns are relative to Budget profile. SPU anticipated taxes and PRSI coming in
Exchequer Tax Revenue
Jan-95
Nov-95
Sep-96
Jul-97
May-98
Mar-99Jan-00
Nov-00
Sep-01
Jul-02
May-03
Mar-04Jan-05
Nov-05
Sep-06
Jul-07
May-08
Mar-09Jan-10
Nov-10
Sep-11
Jul-12
May-13
Mar-14Jan-15
Nov-15 - 5
10 15 20 25 30 35 40 45 50
Annualised Exchequer Tax Receipts 1995-2015
€ bi
llion
Source: Department of Finance.
EXCESSIVE DEFICIT CLOSED IN 2015
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016-14
-12
-10
-8
-6
-4
-2
0
2
4
0.3
-7.0
-11.5 -11.0
-8.4-7.9
-5.7
-3.9
-2.1 -1.2
Primary BalanceInterestGeneral Government BalanceEDP Ceiling
% o
f GDP
Source: CSO; Budget 2016.
GENERAL GOVERNMENT BALANCE (% GDP)
REAL GDP FAN CHART BASED ON BUDGET 2016 PROJECTIONS (TO 2016)
BUT SIGNIFICANT RISKS AROUND CENTRAL FORECASTS
2008 2009 2010 2011 2012 2013 2014 2015 2016-6
-4
-2
0
2
4
6
8
80% likelihood range60% likelihood range40% likelihood range20% likelihood rangeOfficial Outturns / Central Forecasts
% C
hang
e Y-
Y
Sources: CSO; Department of Finance; internal IFAC calculations.Note: Distributions or 'fans' around historical growth estimates are based on previous revisions to real GDP data. Both forecast errors and revisions are based on 1999-05 sample.
CRISIS LEGACY OF HIGH DEBT AND ASSOCIATED RISKS
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 20210
20
40
60
80
100
120
140
160
76.0
84.2
62.5
69.3
Gross Debt (% GDP)Gross Debt (% Hybrid)Net Debt (% GDP)Net Debt (% Hybrid)
Sources: Department of Finance; internal IFAC calculations. Note: Changes in EDP debt instrument assets for forecast years are assumed to be in line with Budget 2016 projected changes in cash balances.
GENERAL GOVERNMENT DEBT
Risks and Imbalances• Internal– Credit growth– Property prices / construction– Competitiveness
• External– Emerging market slowdown– Brexit– Euro Area recovery
New mortgage lending rising from low base
2006 2007 2008 2009 2010 2011 2012 2013 2014 20150
10
20
30
40
50
60
70
80
90
100
0
5
10
15
20
25
87.7
22.8
19.2
4.3
Number of loans, '000s
Value of loans, €bn (RHS)
Source: IBF/PwC Mortgage Market Profile.Notes: Both series cover first-time buyer and mover purchaser loans (moving 4-quarter sum).
Construction shares of GNP below long-run averages
19701972
19741976
19781980
19821984
19861988
19901992
19941996
19982000
20022004
20062008
20102012
20140
2
4
6
8
10
12
14
16
14.1
2.3
Dwellings
Roads
Other B&C
% G
NP
Source: CSONote: Respective long-run median (in same colours) of each series shown in horizontal lines.
Dublin City & Suburbs
Cork City & Suburbs
Galway City & Suburbs
Limerick City & Suburbs
Waterford City & Suburbs
Kilkenny City0
2
4
6
8
3.3
1.2
0.60.3 0.2 0.2
2.9
1.40.9
0.6 0.50.2
7.5
0.90.5 0.5
0.1 0.2
Housing Completions and Requirements (000s)
Completions (2014) Completions (2015)
Estimated Housing Requirement p.a. (2014-2018)
Units
(000
s)
Significant supply shortfall in Dublin
Source: Housing Agency; DoECLG.Note: Completions cover rural + urban settlements (private and social); requirements only cover urban settlements of 1,000+ persons.
Debt deleveraging continues
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 20150
50
100
150
200
250
Household D ebt
HH Debt: PDI HH Debt: GDP HH Debt: GNP
%
Source: CSO; Central Bank of Ireland.
Openness makes the economy vulnerable to external shocks
China / Emerging Markets US monetary policy normalization Euro Area stagnation Brexit Long term growth slowdown / secular stagnation Geopolitical Risks “Unknown unknowns”
US
Australia UK
Italy
Canada
Mexico
Finland
Portugal
Romania EU
Euro area
Germany
PolandKorea
Iceland
Cyprus
Bulgaria
Slove
nia
Netherlands
Czech
Rep.
Hungary
Ireland
Luxe
mbourg0
2
4
6
8
10
12
0
50
100
150
200
250
112
Expo
rts a
s % o
f GDP
Source: AMECO.
Growing dependence on certain sectors
19721975
19781981
19841987
19901993
19961999
20022005
20082011
20140
10
20
30
40
50
60
70
Chemical and Related Products as % Total Goods Exports
%
Sources: CSO.
19982000
20022004
20062008
20102012
20140
5
10
15
20
25
Computer & Financial Services as % Total Services Exports
%
Corporation Tax: Top 10, 20 & 50 Companies
Source: Pigott and Walsh (2014); authors’ analysis of Revenue data.
Top 10, 20 and 50 Companies€bn unless
stated % of Total
Total Corporation Tax 4.1
Top 10 Companies CT Paid 1.0 24%
Top 20 Companies CT Paid 1.3 32%
Top 50 Companies CT Paid 1.9 46%
CORPORATION TAX PAYMENTS (ANNUAL AVG. 2008-2012)
2008 2009 2010 2011 20120%
10%20%30%40%50%60%70%80%90%
100%
Corporation Tax Payments (% of Total)
Top 10 Companies CT Paid Companies 11 - 20 CT PaidCompanies 21 - 50 CT Paid All other companies CT Paid
Euro Area challenges
20002002
20042006
20082010
20122014
20162018
20200.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
2.22.4
2.32.1 2.2 2.2 2.2 2.2
3.3
0.3
1.6
2.72.5
1.3
0.4
0.1
1.01.2
1.41.5
1.7
Euro Area: CPI Inflation
% C
hang
e Y-
Y
20002002
20042006
20082010
20122014
20162018
2020-5-4-3-2-101234 3.8
2.1
0.9 0.7
2.21.7
3.2 3.0
0.5
-4.5
2.01.6
-0.8-0.4
0.81.5 1.7 1.6 1.6 1.6 1.5
Euro Area: Real GDP Growth (% Y-Y)
% C
hang
e Y-
Y
Source: IMF (Latest World Economic Outlook).
Pattern of Euro Area growth downgrades
2010 2011 2012 2013 2014 2015 201697
98
99
100
101
102
103
104
105
106
Euro Area: Real GDP (European Commission Forecast Vintages)
Spring 2015
Winter 2015
Autumn 2014
Spring 2014
Winter 2014
Autumn 2013
Spring 2013
Winter 2013
Autumn 2012
Spring 2012
Inde
x (B
ase:
201
0 =
100)
Sources: European Commission Forecasts, Different Vintages.
Lessons from the crisis
• Difficulty of avoiding pro-cyclical policies in times of strong economic growth
• Importance of risk management– Looking beyond central scenarios
• Significant crisis-induced institutional reforms– Banking– Fiscal
European/Domestic fiscal rules
Domestic
European
Corrective Armof SGP
Preventive Armof SGP
3% Deficit Rule
1/20th Debt Rule
MTO / Adjustment path to MTO
Expenditure benchmark
Domestic Budgetary
Rule
Domestic Expenditure
Ceilings
Domestic Budgetary Rule Consistent with Preventive
Arm of SGP
Domestic Expenditure Ceilings Consistent with Expenditure Benchmark
Complementary domestic and European elements
Effectiveness of Domestic Framework
Effectiveness of European Framework
Monitoring, peer pressure and possible sanctions of the European framework enhances the effectiveness of the domestic framework
Domestic ownership adds legitimacy to the European rules
Deviations from Expenditure Plans
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2009* 2010 2011 2012 2013 2014 2015-10%
-5%
0%
5%
10%
15%
20%
25%
30% Gross Current Expenditure, % Deviation from Forecast
Yr1 % Deviation Yr2 % Deviation
Yr3 %Deviation Real GDP growth
% d
evia
tion
Budget Year
Source: Department of FinanceNote: * denotes the Supplementary budget in 2009. Bars show the forecast error for 1 year ahead, 2 years ahead and 3 years ahead. Latest figures for 2016 to 2018 (used in calculation the latest deviation from Budget 2015 years 2 and 3) are adjusted by €1 billion to reflect the change in the treatment of the HSE from 2015. This adjustment is made for comparison purposes.
2013 2014 2015 2016 2017 201844000
45000
46000
47000
48000
49000
50000
51000
52000
53000
54000
Budget Year
€ bi
llion
Source: Department of Finance.
Budget 2012
CONTINUOUS REVISIONS TO MULTI-YEAR EXPENDITURE CEILINGS
CHANGES TO CURRENT EXPENDITURE CEILINGS
Budget 2013Budget 2014
Budget 2015
Budget 2016
USE OF UNEXPECTED INCOMING REVENUES TO FUND A LARGE INCREASE IN SPENDING IN 2015
Increase in expenditure, SPU 2015 to Budget 2016 Increase in tax revenue, SPU 2015 to Budget 20160.0
200.0
400.0
600.0
800.0
1,000.0
1,200.0
1,400.0
1,600.0
1,800.0
1,490.0 1,395.0
194.0
Corporation tax Other tax revenue
€ bi
llion
s
Source: Department of Finance and internal IFAC calculations.Note: The increase in expenditure between SPU 2015 and Budget 2016 (grey column) refers to total gross voted current and capital exenditure. Tax revenue (right hand column) is the sum of Exchequer tax revenue plus PRSI.
REVISIONS TO EXCHEQUER EXPENDITURE AND TAXES FOR 2015
Medium-Term Fiscal Plan in Budget 2016
• Budget 2016 medium-term fiscal projections include:– €0.4 billion per annum for demographic pressures– Cost of Lansdowne Road Agreement until 2018
• Tax forecasts allow for indexation but assume no change in policy, despite stated commitments to reduce taxes.
• Medium-term plans imply over-compliance with fiscal rules although stated policy is for minimum compliance.
• Develop an alternative medium-term expenditure scenario for 2015-2021
• Scenario takes into account estimated demographic changes and assumptions on the cost of providing public services based on Budget 2016 macro projections.
Budget Projections imply Steep Fall in Primary Spending
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 202120
25
30
35
40
45
Government Revenue and Pr imary Expenditure, % of GDP
Primary expenditure/GDP Revenue/GDP
Primary expenditure/GDP, IFAC Scenario
% o
f GD
P
Note: Chart shows Exchequer revenue and primary expenditure as a share of GDP. Source: Budget 2016 and internal IFAC calculations.
Comparison of Expenditure Scenarios
2015 2016 2017 2018 2019 2020 202120%
22%
24%
26%
28%
30%
32%
Primary expenditure, % of GDP - Budget 2016 Primary expenditure, % of GDP - IFAC Scenario 1
Primary expenditure, % of GDP - IFAC Scenario 2
% o
f GDP
Note: Scenario 1 allows for demographic change with no indexation. Scenario 2 allows for demographic change plus indexation.Source: Internal IFAC calculations.
COMPARISON OF PRIMARY EXPENDITURE UNDER ALTERNATIVE SCENARIOS
Capital Expenditure
19831985
19871989
19911993
19951997
19992001
20032005
20072009
20112013
20152017f
2019f2021f
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%D epa rtmenta l Capita l Expendit ure, % of GD P
Capital spending, % of GDP
Average 1983-2015
grow
th in
spen
ding
Source: Budget 2016, Budget and Economic Statistics (Department of Finance).
Expenditure Scenario and Estimated Fiscal Space
2017 2018 2019 2020 20210.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
Estimated Expenditure Pressures Compared With Allowable Expenditure Growth
Allowable Expenditure Growth Expenditure Pressures
grow
th in
spen
ding
Source: Internal IFAC calculations.Note: Expenditure pressures are estimated under the assumptions outline in Box E. Allowable expenditure refers to expenditure growth that would be compliant with the Expenditure Benchmark. The calculation of allowable expenditure growth assumes indexation of the income tax system. If the Government decides not to fully index income tax bands, this would create additional fiscal space.
Conclusion• Significant progress made in resolving Ireland’s fiscal
crisis.• Encouraging central scenario for projected growth.• But significant risks around that scenario in environment
of elevated uncertainty.• Institutional reforms should help avoid repeat of past
mistakes.• Important to address weaknesses with the Government’s
medium-term fiscal plans beyond 2016 and with implementation of multi-year expenditure ceilings.