Stabilising the Public Finances Colm McCarthy (School of Economics UCD) McGill Summer School, July 21 st

Fiscal Consolidation in Context….. There are four priorities in macro policy. Restore fiscal balance….. Resolve the banking crisis…. Restore competitiveness…. De-leverage the national balance sheet

Managing the Balance Sheet The private sector now owes c. €400 bn to the banking system, one of the highest ratios to GNP in the world. De-leveraging seems to have commenced It requires not just an increase in private saving but asset disposal nationally to reduce debt The State is also funding a book of assets and it may need to de-leverage too

De-Leveraging under way….. Net Foreign Liabilities of Banking System % of GDP

Personal Sector Debt Repayments to Income

Bank Lending to Property

Tiger Checked out around to to 2008e Real GDP Real GNP Real GNDI (Adjusted for terms-of-trade)

Property-Related Taxes led the Collapse….

The Budget Gap…..

The Fiscal Deterioration…..  GGB Deficit = 10.75% in 2009 after four sets of policy changes since July 2008  Would exceed 10% for some years thereafter without further measures.  GGB Gross debt 41% of GDP at end 2008, will exceed 50% at end  Without bank rescue costs, annual borrowing at 10%+ is dangerous. Bank rescue costs could add two years’ borrowing at this rate, or even more.

Raise Taxes or Cut Spending? Real Total Exchequer spending rose c. 5.7% in 2008 Will rise even faster in 2009 with negative inflation. Significant tax increases have already been imposed The Govt is anxious to avoid heavt further tax increases.

Total Exchequer Spend % GNP

Exchequer Spend excl Debt Service, % GNP

Real Growth, Total Exchequer Spending Year Spend % Chg CPI % % Real Growth e f

Budget Balance in the 1980s, % GNP % of GNP

Bord Snip’s Proposals…. A set of options for Government Must be seen against background of -borrowing almost €400m. per week -already paying penalty interest rate -difficult borrowing markets - inflation has turned negative

CPI Inflation Jan-99 Jul-99 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09

Fiscal Consolidation is Unavoidable Borrowing at 10% of GDP for any length of time is risky, even in benign credit markets The credit markets are less borrower-friendly than at any time since WWII Borrowing needs to be contained in 2009 and reduced decisively in Cuts in current and capital spending are required, and further tax measures cannot be ruled out.