Wednesday, September 5, 2012

Is the current budget deficit improving?

At first glance the answer to this question is no as the year-to-August figures for current budget deficit in the Exchequer Account are:

  • 2011: -€8,824 million
  • 2012: -€9,458 million

The Exchequer Account current budget deficit is an important measure of the health of the government finances and the headline figure is a year-on-year deterioration of around €600 million.  However, there has been a number of changes and complications that need to be considered before a useful comparison between the two years can be made.  We have addressed some of these before.

  1. The Sinking Fund Contribution of €646 million has already been made for 2012.  In 2011, this transfer of €683 million from the Current to Capital Account did not take place until November.  A year-on-year comparison is unfair on 2012 because it includes a payment from the current to the capital side of the Exchequer Account that was not made by August of last year.
  2. Last year the debt interest cost for the eight months of the year was €3,031 million, but €577 million of that was paid from the Capital Services Redemption Account with the remaining €2,454 million coming from the Exchequer Account.  In 2012, all the debt interest bill of €4,021 million was paid from the Exchequer Account.
  3. This year’s receipts include €231 million of Corporation Tax which should have been collected in December 2011 but a delay meant it was instead included in the January 2012 receipts.

To account for these we will remove the effect of the Sinking Fund contribution and the delayed Corporation Tax receipts from the 2012 deficit, and add the interest paid from the CSRA to the 2011 deficit.  So we have:

  • 2011: -€8,824 million - €577 million = –€9,401 million
  • 2012: -€9,458 million + €646 million - €231 million = -€9,043 million

On a like-for-like basis the Exchequer current budget deficit is €358 million improved this year.  On a primary basis (excluding debt interest) the improvement is an impressive-sounding €1,348 million.  However, the source of this improvement will not be permanent.

After a number of years of decimating the public finances, the banking measures introduced to rescue the covered banks are now skewing the current budget deficit to make it look temporarily good.  Here are the 2011 and 2012 banking-related revenues in the current account.

  • Central Bank Surplus: €671 million versus €958 million
  • Bank Guarantee Fees: €599 million versus €799 million
  • Contingent Notes Interest: zero versus €300 million

The 2011 banking related revenues contributed €1,270 million to the Exchequer current account; for 2012 the receipts have been €2,057 million.  Receiving more than €3 billion from the banks should not be downplayed but these receipts are not permanent.

The primary current budget deficit is €1,348 million better when compared to 2011, but this is in large part because of a €787 million increase in temporary banking-related revenues meaning the actual improvement is around €561 million .  The primary current deficit is declining (slowly) but this is more than offset by the €990 million increase in debt interest costs.

All told, in the first eight months of 2012 the overall current budget deficit is €429 million bigger than it was last year.

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