Wednesday, December 1, 2010

More sums

Making projections of Ireland’s National Debt must be very hard.  This week’s projection comes from an article in today’s Irish Examiner.  I cannot find an online version of the article but a copy of it can be read here (pdf).

In it Tom O’Connor predicts that our National Debt in 2019 will be €264 billion.  Here are his sums.

O'Connor Sums

This figure is lower than some other projections but €264 billion is a massive amount of money and is a debt burden from which we are unlikely to escape.  However, we may not need to. 

Here are some of the errors in the piece:

  1. The EU/IMF package is for €67.5 billion not €69 billion.
  2. The interest figure is on the full amount (the €69 billion!) for nine years.  The deal actually lasts for seven and a half years.  Also we cannot draw the money immediately.  It can only be drawn down in quarterly tranches.  Finally it is not certain we will use all of the money.  Calculating an interest bill over nine years on the full amount is a gross exaggeration.
  3. Our existing National Debt is €89.8 billion not €100 billion.
  4. €50 billion is a nice number to pull out of thin air but it means nothing unless we know what it’s for.
  5. There are five years in the period 2015-2019, not four.
  6. We are unlikely to have zero inflation in the same five-year period.

There are more but that will do for now.  Below the fold is a letter I wrote to the editor of the Irish Examiner.  I do not expect it to be published for a number of reasons, one of which is that it is too long.  I reproduce here as my editorial policy does not inhibit length!


Your paper ran an article (€85bn deal is economically unrealistic and impossible burden on country, Irish Examiner 29/11) on the ‘Implications of the IMF deal’ which claimed that the deal should be filed as a “fairy story”. This article was full of errors and in this time of uncertainty was a disservice to your readership, and by extension, to the country.

The article was based on economic projections out to 2019. We have no consensus on the position of the Irish economy in 2012 never mind, what will be the state of things at the end of the decade. Under examination it is Mr. O’Connor’s claims which should be filed alongside the Brothers Grimm. A central claim of the article, that the interest cost of the IMF/EU deal will be €45 billion over the nine years to 2019, is wrong.

Firstly, we do not know when the money will be drawn down so we do not know when to start calculating the interest from. The article assumes the money will be drawn down immediately, but it also points out, the NTMA has close to €20 billion on deposit so we do not need the IMF/EU funds in the immediate term.

Secondly, we do not know if all of the money will actually be drawn down. Certainly, a lot of it will be used but we may not necessarily need it all. Interest will only be liable on the amount we use for the time we use it. The imputed interest figure of €45 billion is a substantial over-exaggeration and the final interest bill will be well below this.

Mr O’Connor projects Ireland’s National Debt in 2019 to be €264 billion. This is a huge figure and it is a debt burden the State would unlikely be able to carry. This figure is a work of fiction. It is like a recent analysis by Prof. Brian Lucey on our likely future National Debt which was described as “incompetent” by Colm McCarthy. These analyses are solely designed to scaremonger and convince people that we cannot get out of the current crisis. We can and we will.

To get to the debt figure of €264 billion the article starts with the total amount of the IMF rescue plan of €69 billion. Of course, this figure is actually €67.5 billion but what’s €1.5 billion when you’re trying to create a stir. To this the incorrect total interest figure of €45 billion is added.

From here we are told to begin with the €100 billion of debt that “already exists”. Details from the NTMA indicate that existing government bonds amount to €89.7 billion. I have no idea where the extra €10 billion come from. Mr O’Connor’s running total so far is €69b + €45b + €100b = €214 billion. All of these figures are wrong.

To get to the final figure we are then told “a further €50 billion will be added”. We are not told what this €50 billion is, what it will be used for or where it will come from. There is no way to verify its validity but given the pattern seen in the figures used so far it is highly likely that this is also wrong.

The article then uses this incorrect total to calculate that we will have a debt/GDP ratio of 129% in 2019. Notwithstanding the folly of making such long-term economic forecasts, the forecasts here appear particularly wonkish.

The article starts with the Department of Finance’s nominal GDP assumption of €183 billion for 2014 and then assumes a 3% growth rate for each year to 2019. When calculated correctly this would give a nominal GDP of €212.1 billion in 2019 and not the €205 billion quoted in the article. Another error, which appears to come from the belief that 2015 - 2019 is a four-year period when it is, of course, a five-year period.

The article also excludes the effects of inflation on nominal GDP. John Fitzgerald of the ESRI has said that 3% real GDP growth is possible for the Irish economy in the medium term. This is growth above the inflation rate. Either Mr O’Connor assumed some highly improbable zero inflation rates for Ireland in the period 2015 to 2019 or he forgot to include it in his calculations. If we take a moderate rate of inflation of 1.5% for the period in question this suggests that nominal GDP in 2019 could be €228 billion, well ahead of the €205 billion figure used. I will not offer a projection of nominal GDP in 2019 but I would not place much store in a projection which forgets a year and omits the effect of inflation.

The ratio of the incorrect €264 billion debt figure to the incorrect €205 billion GDP figure is 129%. Naturally this ratio is also incorrect. This would be a huge burden for the State to carry and one which would not hold out much hope for the success of the National Recovery Plan and the IMF/EU deal. However, the analysis to reach these figures is wrong. The debt figure is too high and the GDP figures are too low.

This article claimed to examine the implications of the IMF/EU deal and provide information to the public. However, the author was not interested in an honest analysis of the situation but merely concocted figures to support a pre-conceived opposition to the National Recovery Plan and the IMF/EU deal. Analysis by economists of the National Recovery Plan and the IMF/EU deal are useful but should only be provided if they are undertaken competently and honestly.

Finally, in another article by Mr O’Connor in your paper (Economic growth still the only solution to our current crisis, Irish Examiner 13/11) he claimed that unemployment had risen from 198,000 at the end of 2007 to 437,000 at the end of 2009. Someone should get over to Mahon quickly and tell the CSO to update their figures. They give the level of unemployment at the end of 2009 as 267,400. Did the CSO overlook nearly 170,000 unemployed people in their analysis? Of course they didn’t. Mr O’Connor quoted the number of people on the Live Register which the CSO clearly state on all their releases is not a measure of unemployment.

The country is facing a huge economic crisis. It would be a useful and worthwhile contribution if the economists funded by the state provided some accurate analysis for people who may be overwhelmed by the rapid developments in our economy. Outside of a small number of exceptions, I am largely appalled by the media commentary provided by my profession.

Seamus Coffey

Lecturer in Economics, UCC

The same edition of the Irish Examiner ran this apt photo.



  1. *titter*

    One possibility for the 50 bn in other is NAMA. Which will not be 50 bn either...

    On the national debt, 89.x billion is the amount of long-term debt outstanding, but there is another 20 bn of shorter term debt which is offset by cash balances. So GGD should be about 110 bn not 100 bn.

    There's 27 bn of long-term debt to be refinanced by January 2014. I can't quite believe a plan would be put in place that does not take account of this, so even if the full sum is drawn down, one must assume it intends to refinance all that debt, so the 67.5 bn is reduced by that amount to about 40 bn. Even assuming zero growth, a 15 bn adjustment will see us move from a 19 bn deficit to a 4 bn deficit over 5 years and will add 39 bn in new debt...

    Mind you, this doesn't allow for the standby facility for the banks, unless you add in the 15 bn cash on hand and the remainder of the NPRF...

  2. A while ago I wrote to CIT asking to know Tom O'Connor's qualifications. I was particularly interested in his qualifications as an economist, since many of his public statements seemed to me to be economic nonsense.

    I didn't think there'd be any problem, since he lectures at a public college. The college refused to tell me. They told me I'd need to do a Freedom of Information request and that would be considered. I never got around to it. I must go back and do that.

  3. So, can you give us some idea of the economists whose commentary you would commend ?

  4. Hi Fergus,

    I referred to media commentary which tends to really raise my ire. A lot of articles published in our main newspapers and the soundbites of many of the talking heads that make radio and television appearances are full of basic errors. This is most frequent among private sector economists, who generally have a song to sing, but some academic economists are also prone to buying into some popular misconceptions.

    I have followed Constantin Gurdiev and have generally found his analysis to be excellent. Unfortunately, as he says himself, a lot of his forecasts hasve come to pass. I was surprised that as Ireland's "most right-wing economist" (per Irish Times profile) he was part of the group that proposed a mortgage debt forgiveness scheme.

    Karl Whelan has been excellent on the banking crisis. I am not well versed in the ways of banking and finance but it has been an education to follow his analyses. Again, many of his forecasts have been borne out.

    I always enjoy Morgan Kelly's infrequent forays into the public sphere, even if I leave them with a sense of foreboding.

    At the moment I am appreciating the "glass half full" analysis of John McHale. It is a worthwhile contribution to the debate. There might be a lot of "ifs, buts and maybes" involved but he is adding a necessary variety and who knows, he might be right!