Monday, May 9, 2011

Getting the Public Debt number is hard

One thing that has continually persisted in this crisis is the inability to be accurate with numbers.  After two days examining public debt figures I was somewhat taken aback to see the following headline in the business section of Saturday’s Irish Examiner.

National debt ‘set to hit €173bn’

All evidence had led me to believe that the General Government Balance at the end of this year would be €159 billion. Until I looked for the source of the story.  The Examiner story comes from this BOI report which states that:

Ireland’s debt ratio is set to rise further, however, and recent developments mean that the debt burden may now peak at a higher level than previously projected, as outlined in a revised Stability programme published recently by the Department of Finance. The Department had expected the debt ratio to rise to 99% this year and to peak at 103% in 2013, but now forecasts 111%, rising to a peak of 118%. In cash terms the debt total is forecast to end the year at €173bn, or €25bn higher than 2010, reflecting the Budget deficit and some €10bn to cover the costs of additional bank recapitalisations.

I have tried to figure out what this is based on and here is the April 2011 Stability Programme Update.  In table 11 on page  26 it does indeed indicate that the GGD will be 111% of 2011 nominal GDP, which is forecast to be €156.1 billion (bottom of page 50). It is true that 111% of €156 billion is €173 billion.

Yet, back last March (only nine weeks ago) the DoF forecast that that the GGD for 2011 would be €159 billion not €173 billion as it seems to now indicate .  See page 2 in this document

So how did the end-2011 debt forecast go from €159 billion to €173 billion in a matter of weeks?  Page 20 of the Stability Programme Update provides the answer.

The requirement for additional capital for the banking sector, arising from the results of the PCAR/PLAR process, was announced on 31 March and this will also impact on the overall Exchequer position in 2011.

The results of that process show that a further €24 billion is required by the banking sector. It should be noted that €5.3 billion of this €24 billion represents a buffer over and above the requirements of the stress test. Moreover €3 billion of this figure will represent contingent capital.

€10 billion of the €24 billion will be provided from the National Pensions Reserve Fund (NPRF) and thereby has no impact on the Exchequer position.

This was already included in the budgetary forecasts published in December 2010. Of the remaining €14 billion that is required, a substantial element will come from the Exchequer but there are a number of mitigating factors - such as burden sharing and capital generating asset disposals - which will help reduce the Exchequer funding requirement and alleviate the burden on the domestic taxpayer. For the purpose of the fiscal and debt projections contained in this Update, it is assumed that Exchequer funding in the order of €10 billion will be required. However, the actual amount to be sourced from the Exchequer will become clearer in the coming months in the context of the amount raised from the mitigating factors.

This clearly indicates that €10 billion will be required from the Exchequer to fund the €24 billion recapitalisation of the banks.  The other €4 billion will come from the sale of Irish Life and haircuts to subordinated bondholders in the banks.  I had previously assumed that half of this €10 billion would be drawn from the existing cash balances of the State and thus would not increase our borrowings.  At the end of March these were €22.4 billion.  As it now seems that we are going to leave these cash balances intact are we going to borrow all the recapitalisation money?

The end-2011 GGD should not have been increased by €14 billion. That is a mistake.  At a maximum it should be increased by €10 billion.  The other €4 billion is a mystery.  This brings our end-2014 debt forecast up to €205 billion but also means we have an extra €5 billion of cash to use.  The effect on the net position is zero.

Here are the DoF projections of the GGD for the next few years.

  • 2011: €173 billion
  • 2012 €190 billion
  • 2013 €198 billion
  • 2014 €202 billion
  • 2015 €203 billion

There are still getting to a total of around €200 billion but in a slightly accelerated fashion.  The €14 billion has no increased the debt beyond the projections we have been using so perhaps it is due to the accelerated drawdown on the EU/IMF funds in 2011.  No additional €4 billion of expenditure has been announced.

No other reason is given for the €14 billion increase in the GGD from €159 billion to €173 billion, yet it is clear that only a maximum of  an additional €10 billion will be borrowed for the €24 billion recapitalisation.  The Department’s documents say as such.  At a time when we are scolding others for incorrect debt estimates (as far away as 2014) it is unusual that we would have to provide a similar scolding to the DoF for estimates that are only seven months from coming to pass but they seem to be more measured when it comes to forecasting the end-2014 debt level.


  1. re: the missing 4 bn
    Is it anything to do with investment?

    The investment number isn't part of the deficit figure, but it is money that needs to be borrowed.

    Where does it sit in the debt pile?

    (I had been trying to find the SPU yesterday as I'm sure my back of the envelope got to 240 bn excluding NAMA losses based on the SPU %ages with a zero growth assumption - unfortunately the DoF managed to lose the document. Thanks for the relink).

  2. Hi yoganmahew,

    I really don't know. I cannot find anything to suggest we are going to be spening an extra €4 billion this year above what has already been committed to.

    What type of investment do you think it might be?

    At this stage I think we have just borrowed the money at bit early. We have more than €22 billion on deposit! And are going to spend this at the same rate planned previously. I'm not sure why we have drawn it down early though.

    It took me a while the find the SPU as well. All the links were broken!

  3. The capital investment program - it is not part of the structural deficit, so it in not in the General Government Deficit, is my understanding.

    It is still borrowed, though, so it has to show up somewhere?

  4. Hi yogan,

    Capital expenditure is included in the GGB. If not, we could just "hide" all our expenditure in there and the 3% target would be a piece of cake!

  5. Yep, I see the inclusion of capital spend now. I think I am still losing the plot from the Garret Fitzgerald/Brian Lucey spat.

    I agree that none of the figures in the SPU make sense.

    Depending on what year's debt-to-GDP I start from, I get figures for gross debt in 2012 ranging from 202 bn to 212 bn!

    (Using projected GDP, projected debt-to-GDP and GGB).

    So what are we left with? Perhaps a reclassification of some of the NPRF's holdings in the banks? I just can't credit that such an important document could have such a large mistake.

    I also can't reconcile the real GDP growth numbers with the GDP figures ( (p) from table 5c)- the projections appear to be for sub-1% inflation?

  6. Does this help

  7. Hi Dreaded_Estate,

    I have just been going through it!!

    I don't think there anything in it that we didn't already know and they are also going for something in around €200 billion for the 2014 GGD, but most of this comes from the SPU.

    Do the NTMA issue this 'Information Note' regularly? Or is it in response to the recent furore?

    Section 3 about the holdings of Irish government debt seems like a direct response to me.

    If would be nice if they had provided a projection net asset position for future years as well.

    It the seems the additional €4 billion increase in the GGD this year is due to the intent on maintaining our cash balances at their current levels. No cash will be used for the bank recapitalisation as was indicated at the time of the stress test.

    We will still have €15 billion of cash on deposit at end 2011.

  8. Haven't seen a note like this before Seamus

  9. This is a really interesting blog. Intelligent analysis and not derivative of other people's analysis or based on groupthink. Also you communicate very clearly.