Economic and Fiscal Outlook Growth Risks and Sustainability
Economic and Fiscal Outlook: Growth, Risks and Sustainability Thomas Conefrey TASC Seminar, 21 January 2016
IFAC: SOME BACKGROUND MANDATE OF THE COUNCIL: 9 th Fiscal Assessment Report FISCAL STANCE ASSESSMENT OF FORECASTS INDEPENDENT ECONOMIC ANALYSIS Five-member Council Six-member Secretariat COMPLIANCE WITH RULES ENDORSEMENT OF MACROECONOMIC FORECASTS
Outline 1. 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.
STRONG RECOVERY AND CENTRAL GROWTH FORECASTS R EAL GDP, R EAL GNP AND E MPLOYMENT G ROWTH (% C HANGE Y-Y) 12 10 8 % Change Y-Y 6 4 2 0 -2 -4 -6 -8 -10 Real GDP Real GNP Employment 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Sources: Department of Finance (Budget 2016); CSO.
% Growth Since Trough in Q 2 2009 Increasing contribution of domestic demand to recovery Source: CSO.
Evidence of rebalancing % OF NOMINAL GDP 35% 30% 25% 20% 15% 10% Investment 5% Net Exports 0% 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: CSO.
Current account near balance excluding re-domiciled PLCs 6 4 3. 1 3. 6 % GDP 2 0. 5 0 -0. 4 -0. 6 -0. 1 -0. 8 -1. 0 -2 -1. 5 -0. 2 -3. 3 -4. 1 -4 -4. 9 Current Account Balance -6 -6. 1 -3. 9 -5. 8 -5. 1 -4. 5 -5. 7 Adjusted for Re-domiciled PLCs -8 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
National Income and Consumption per Head Macro indicators per head, real 55 50 Consumption GDP GNP 45 € , 000 40 35 30 25 20 15 10 199519961997199819992000200120022003200420052006200720082009201020112012201320142015201620172018201920202021 Sources: CSO and Department of finance forecasts.
Sharper downturn + recovery than trading partners R EAL GDP PER CAPITA 110 Index: 2007 = 100 90 80 IE UK US EA 70 60 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Sources: CSO; IMF and internal calculations.
Source: CSO and Eurostat. 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 (latest) %of 15 -64 population Employment Rate 80 Employment rate, % of 15 -64 population 75 70 65 60 55 50 Ireland United Kingdom 45 40
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
08 Q 20 1 08 Q 20 2 08 Q 20 3 08 Q 20 4 09 Q 20 1 09 Q 20 2 09 Q 20 3 09 Q 20 4 10 Q 20 1 10 Q 20 2 10 Q 20 3 10 Q 20 4 11 Q 20 1 11 Q 20 2 11 Q 20 3 11 Q 20 4 12 Q 20 1 12 Q 20 2 12 Q 20 3 12 Q 20 4 13 Q 20 1 13 Q 20 2 13 Q 20 3 13 Q 20 4 14 Q 20 1 14 Q 20 2 14 Q 20 3 14 Q 20 4 15 Q 20 1 15 Q 20 2 15 Q 3 20 per cent Vacancy Rate 1. 2 1 0. 8 0. 6 0. 4 0. 2 0
Industrial production volumes strong, including traditional sector 60 50 Manufacturing 40 Modern 30 Traditional 20 10 0 -10 -20 Jan 2007 Jan 2008 Jan 2009 Jan 2010 Jan 2011 Jan 2012 Jan 2013 Jan 2014 Jan 2015 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.
Good growth in retail sales augers well for consumption % change Y/Y (3 Month Moving Average) 15 10 8. 2 7. 3 5 0 -5 -10 Core Retail sales Total Retail Sales -15 -20 -25 Jan 2009 Jan 2010 Source: CSO. Note: Core retail sales excludes motor trades. Jan 2011 Jan 2012 Jan 2013 Jan 2014 Jan 2015
Growth Benefitting the Public Finances T AXESAND PRSI R ELATIVETO Income Taxes VAT Excise Duties C UMULATIVE P ROFILE Corporation Tax Capital Taxes Stamp Duties "Other" PRSI 4000 3500 3000 € million 2500 2000 1500 1000 500 0 -500 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Note: These overruns are relative to Budget profile. SPU anticipated taxes and PRSI coming in Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15
Exchequer Tax Revenue € billion ANNUALISED EXCHEQUER TAX RECEIPTS 1995 -2015 50 45 40 35 30 25 20 15 10 5 Jan No Sep Jul- Ma Ma Jan No -95 v- -96 97 y- r- -00 v- -01 02 y- r- -05 v- -06 07 y- r- -10 v- -11 12 y- r- -15 v 95 98 99 00 03 04 05 08 09 10 13 14 15 Source: Department of Finance.
EXCESSIVE DEFICIT CLOSED IN 2015 G ENERAL G OVERNMENT B ALANCE (% GDP) 4 2 0 0. 3 % of GDP -2 -2. 1 -4 -1. 2 -3. 9 -6 -5. 7 -8 -7. 0 -8. 4 -10 -12 -11. 5 Primary Balance -7. 9 Interest General Government Balance -11. 0 EDP Ceiling -14 2007 2008 Source: CSO; Budget 2016. 2009 2010 2011 2012 2013 2014 2015 2016
BUT SIGNIFICANT RISKS AROUND CENTRAL FORECASTS R EAL GDP F AN C HART B ASED ON B UDGET 2016 PROJECTIONS(TO 2016) 8 % Change Y-Y 6 4 2 0 80% likelihood range 60% likelihood range 40% likelihood range 20% likelihood range Official Outturns / Central Forecasts -2 -4 -6 2008 2009 2010 2011 2012 2013 2014 2015 2016 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 160 G ENERAL G OVERNMENT D EBT 140 120 100 84. 2 80 76. 0 69. 3 60 40 Gross Debt (% GDP) 62. 5 Gross Debt (% Hybrid) Net Debt (% GDP) 20 Net Debt (% Hybrid) 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Sources: Department of Finance; internal IFAC calculations. Note: Changes in EDP debt instrument assets forecast years are assumed to be in line with Budget 2016 projected changes in cash balances.
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 100 90 25 87. 7 80 70 20 19. 2 Number of loans, '000 s 60 15 Value of loans, €bn (RHS) 50 40 10 22. 8 30 20 5 4. 3 10 0 0 2006 2007 2008 2009 2010 2011 2012 Source: IBF/Pw. C Mortgage Market Profile. Notes: Both series cover first-time buyer and mover purchaser loans (moving 4 -quarter sum). 2013 2014 2015
Construction shares of GNP below long-run averages 16 14. 1 14 12 % GNP 10 Dwellings Roads Other B&C 8 6 4 2. 3 2 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 0 Source: CSO Note: Respective long-run median (in same colours) of each series shown in horizontal lines.
Significant supply shortfall in Dublin 8 HOUSING COMPLETIONS AND REQUIREMENTS (000 S) 7. 5 Units (000 s) 6 Completions (2014) 4 Completions (2015) 3. 3 Estimated Housing Requirement p. a. (2014 -2018) 2. 9 2 1. 4 0. 9 0. 6 0. 9 0. 5 0. 3 0. 6 0. 5 0. 2 0. 5 0. 1 0. 2 0 Dublin City & Suburbs Cork City & Suburbs Galway City & Suburbs Limerick City & Suburbs Waterford City & Suburbs Kilkenny City Source: Housing Agency; Do. ECLG. Note: Completions cover rural + urban settlements (private and social); requirements only cover urban settlements of 1, 000+ persons.
Debt deleveraging continues Household Debt 250 200 % 150 100 50 HH Debt: PDI HH Debt: GDP HH Debt: GNP 0 2002 2003 2004 Source: CSO; Central Bank of Ireland. 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
1 1 1 Ø Ø Ø Ø China / Emerging Markets US monetary policy normalization Euro Area stagnation Brexit Long term growth slowdown / secular stagnation Geopolitical Risks “Unknown unknowns” 1 Source: AMECO. 150 112 0 100 50 0 0 Exports as % of GDP 0 US Japan Australia Turkey UK France Italy Spain Canada Greece Mexico Albania Finland Norway Portugal Montenegro Romania EU-15 EU Serbia Euro area Sweden Germany Croatia Poland Macedonia FYR Korea Austria Iceland Denmark Cyprus Latvia Bulgaria Switzerland Slovenia Lithuania Netherlands Belgium Czech Rep. Estonia Hungary Slovakia Ireland Malta Luxembourg Openness makes the economy vulnerable to external shocks 250 200
Growing dependence on certain sectors COMPUTER &FINANCIAL SERVICES AS % TOTAL SERVICES EXPORTS CHEMICAL AND RELATED PRODUCTS AS % TOTAL GOODS EXPORTS 70 25 60 20 50 15 % % 40 30 10 20 5 10 0 Sources: CSO. 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 0
Corporation Tax: Top 10, 20 & 50 Companies C ORPORATION T AX P AYMENTS (% OF T OTAL) C ORPORATION T AX P AYMENTS (A NNUAL A VG. 2008 -2012) Top 10, 20 and 50 Companies Total Corporation Tax €bn unless stated % of Total 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% 0% 0% 2008 Source: Pigott and Walsh (2014); authors’ analysis of Revenue data. 2009 2010 2011 2012 Top 10 Companies CT Paid Companies 11 - 20 CT Paid Companies 21 - 50 CT Paid All other companies CT Paid
Euro Area challenges Euro Area: CPI Inflation Euro Area: Real GDP Growth (% Y-Y) 2 1 3. 5 3. 2 3. 0 2. 2 2. 1 0. 9 0. 7 2. 0 1. 7 1. 5 1. 7 1. 6 1. 5 1. 6 0. 8 0. 5 0 -1 -0. 8 -2 -0. 4 3. 3 3. 0 2. 5 2. 7 2. 4 2. 2 2. 5 2. 3 2. 2 2. 1 2. 2 2. 0 1. 6 1. 3 1. 5 1. 0 -3 0. 5 -4 -5 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 -4. 5 Source: IMF (Latest World Economic Outlook). 0. 3 1. 2 1. 4 1. 5 1. 7 0. 4 0. 1 0. 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 % Change Y-Y 3 3. 8 % Change Y-Y 4
Pattern of Euro Area growth downgrades Index (Base: 2010 = 100) Euro Area: Real GDP (European Commission Forecast Vintages) 106 Spring 2015 105 Winter 2015 104 Autumn 2014 103 Spring 2014 102 Winter 2014 101 Autumn 2013 100 Spring 2013 99 Winter 2013 98 Autumn 2012 97 Spring 2012 2010 2011 2012 Sources: European Commission Forecasts, Different Vintages. 2013 2014 2015 2016
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 European Domestic Corrective Arm of SGP Preventive Arm of SGP Domestic Budgetary Rule Consistent with Preventive Arm of SGP 3% Deficit Rule MTO / 1/20 th Debt Rule Adjustment path to MTO Expenditure benchmark Domestic Expenditure Ceilings Domestic Budgetary Rule Domestic Expenditure Ceilings Consistent with Expenditure Benchmark
Complementary domestic and European elements Domestic ownership adds legitimacy to the European rules 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
Deviations from Expenditure Plans GROSS CURRENT EXPENDITURE, %DEVIATION FROM FORECAST 30% 25% Yr 1 % Deviation Yr 2 % Deviation Yr 3 %Deviation Real GDP growth % deviation 20% 15% 10% 5% 0% -5% -10% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009* 2010 2011 2012 2013 2014 2015 Budget Year Source: Department of Finance Note: * 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.
CONTINUOUS REVISIONS TO MULTI-YEAR EXPENDITURE CEILINGS C HANGESTO C URRENT E XPENDITURE C EILINGS Budget 2016 Budget 2015 Budget 2013 Budget 2014
USE OF UNEXPECTED INCOMING REVENUES TO FUND A LARGE INCREASE IN SPENDING IN 2015 1. 8 R EVISIONSTO E XCHEQUER E XPENDITUREAND Corporation tax 1. 6 Other tax revenue 0. 2 1. 4 € billions T AXES FOR 2015 1. 2 1. 0 0. 8 1. 5 0. 6 1. 4 0. 2 0. 0 Increase in expenditure, SPU 2015 to Budget 2016 Increase in tax revenue, SPU 2015 to Budget 2016 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.
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 Government Revenue and Primary Expenditure, % of GDP 45 40 % of GDP 35 30 Primary expenditure/GDP 25 Revenue/GDP Primary expenditure/GDP, IFAC Scenario 20 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 2021 Note: Chart shows Exchequer revenue and primary expenditure as a share of GDP. Source: Budget 2016 and internal IFAC calculations.
Comparison of Expenditure Scenarios COMPARISON OF PRIMARY EXPENDITURE UNDER ALTERNATIVE SCENARIOS 32% 30% % of GDP 28% 26% 24% 22% 2015 2016 2017 Primary expenditure, % of GDP - Budget 2016 2018 2019 2020 2021 Primary expenditure, % of GDP - IFAC Scenario 2 Note: Scenario 1 allows for demographic change with no indexation. Scenario 2 allows for demographic change plus indexation. Source: Internal IFAC calculations.
Capital Expenditure Departmental Capital Expenditure, % of GDP 7. 0% growth in spending 6. 0% 5. 0% 4. 0% 3. 0% 2. 0% 1. 0% Capital spending, % of GDP Average 1983 -2015 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 f 2017 f 2018 f 2019 f 2020 f 2021 f 0. 0% Source: Budget 2016, Budget and Economic Statistics (Department of Finance).
Expenditure Scenario and Estimated Fiscal Space Estimated Expenditure Pressures Compared With Allowable Expenditure Growth 4. 5% Expenditure Pressures 4. 0% growth in spending 3. 5% 3. 0% 2. 5% 2. 0% 1. 5% 1. 0% 0. 5% 0. 0% 2017 2018 2019 2020 2021 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.
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