Saturday, May 21, 2011

Medium Term Debt Projections are all the same

We now have updated versions of the medium term projections of the Irish Economy from our own Department of Finance and externally from the European Commission and International Monetary Fund.  The relevant documents are:

Here we will focus on the medium term government debt projections of the three bodies.  The following table gives their General Government Debt (GGD) projections up to 2015.

General Government Debt Projections

It is evident that up to 2013 the forecasts for the three bodies are closely aligned with just 1% between the forecast levels.  Over the next two years, though the forecasts diverge substantially and by 2015 there is a €13 billion gap between the DoF forecast at the lowest level and the IMF forecast at the highest.

What is driving this change?  The next table looks at the forecasts provided for the annual General Government Balance (GGB) over the same period. Note that the 2011 figures exclude the money required for the bank recapitalisations but these are included in the total debt figures above.

The figures in this table represent the gap between government revenue and expenditure that is added to the general government debt.  

General Government Balance Projections

It is is immediately obvious that these figures are very similar right up to 2014.   This is not true for 2015 when the IMF have a forecast GGB of €8 billion as opposed to around €5 billion for the other two organisations.

In fact over the five years from 2011 to 2015, the cumulative general government balances are €55 billion for the DoF, €58 billion for the EC and €60 billion for the IMF (with most of this increase accounted for in the 2015 figure).

Although there is a €13 billion gap between the highest and lowest GGD figures for 2015 there is “only” a €5 billion gap between the highest and lowest cumulative general government balances up to 2015.

The IMF project that funding the government balance from 2012 to 2015 will require €43 billion and they add this full amount to the debt (216 – 173 = 43).  The DoF have a funding requirement of €39 billion for the same period (the difference again mainly being the 2015 figures) and they add €30 billion of this to the debt level (203 – 173 = 30).  It seems the DoF are €9 billion short in their forecast of the debt increase or they are getting €9 billion from somewhere other borrowing to provide the full €39 billion required (30 + 9 = 39).

So have the DoF lost €9 billion of debt?  No, they are using the fact that we had €16 billion of cash we have on deposit at the end of 2010.  See Table 2 in the recent Information Note from the NTMA.  The use of this money will reduce the necessity for borrowing.

The difference between the debt figures is not because of any differing views on the medium term projection of the Irish economy (in fact up to 2014 the projections of all three bodies are virtually identical).  The difference between the figures is down to the treatment of the cash balances we have built up.  The DoF are forecasting that we will use €9 billion of them; the IMF are forecasting that we will use none.  The IMF might have a higher debt figure but in their scenario we will also have higher cash balances.  The net effect is pretty much identical (apart from in 2015).

Of the €13 billion gap in the 2015 debt levels between the DoF and the IMF, €9 billion can be accounted for by the use of cash balances, €3 billion for the difference in the 2015 government balance figure and just €1 billion for differences in the general government balances between 2011 and 2014.

The DoF, EC and IMF debt projections between now and 2014 are very closely aligned (and none of them approach €250 billi0n.)  The projection on this site of a 2015 GGD of €211 billion before the use of cash balances is also consistent with these.

The last thing we’ll look at is why there is a €3 billion difference between the DoF and IMF figures for 2015.  To be fair, projections for five years from now will have a large margin of error but there may be some interest in seeing what factors underlie the difference between the forecasts without necessarily put huge stock in the forecasts themselves.  Then again there may not be, so this is below the fold.

Here are the DoF and IMF government accounts for 2015.

2015 Government Accounts

It is clear that revenue does not explain the €3 billion difference as the total revenue figures are very close.  It is likely that differences on the definitions of the components of revenue explain the differences between Social Contributions and Other Revenue.

The €3 billion difference is explained by expenditure.  The IMF are forecasting the government expenditure in 2015 will be €3.5 billion higher than that forecast by the DoF.  Up to that year the expenditure forecasts had been pretty much identical.  From this remove we are not focussing on the actual forecast levels of expenditure but for the reason for the differences in the 2015 figures.

Looking at the breakdown of expenditure it again suggests there may be some differences in the definitions used but the big difference can be seen when it comes to social and transfer payments.  The IMF are forecasting that social welfare payments will be higher in 2015.  I think it is unusual that the difference can be attributed to just one factor. 

Again because of issues of definition we cannot assign the difference in the level entirely to different forecasts but here we give the forecast annual change in transfer payments for the DoF and IMF.  Here the definition doesn’t matter as this is the percentage change in the same figure.

Transfer Payment Projections

Up to 2014 the cumulative changes from 2010 are almost identical (-12% for the IMF and –11% for the DoF).  However after being identical for four years, in 2015 there is a huge gap between the forecasts.  The D0F forecast that transfer payments will decline by a further 2%.  The IMF forecast can our largest expenditure item will increase by 6% in 2015.

The DoF are forecasting that transfer payments will fall by €0.5 billion in 2015 while the IMF are forecasting that they will rise by €1.6 billion.  I haven’t looked in depth but I can find no reason for this forecast increase in the IMF document.  Are lots of people about to turn 65 in 2015?  Are they expecting an acceleration of the baby boom?  They do expect the unemployment rate to drop from 12.3% in 2014 to 11.3% in 2015 so this sudden increase in transfer payments in 2015 is hard to follow.

Aside from this one number the IMF and DoF forecasts for 2011 to 2015 are very closely aligned.  It seems everyone is now on the same page as we move to resolving this crisis.  The €3 billion difference for 2015 is unusual and what is even more unusual is that it can be “explained” by just one factor.


  1. On the difference in the 2015 figures, please see the footnote to the IMF's table 3.

  2. Seamus

    If you put your end 2007 to 2014 data together from your may 6th blog, with a column analysing to total between deficit, bank and other, it would make for easier understanding of the dangers inherent in running deficits. It might also bring home the point more clearly that whereas the bank debt imposition was morally wrong, possibly legally wrong and definitely reprehensibly wrong, that the deficit is the bigger on going issue.

    PS. So there was a 'workable out' end 2014 cash figure after all!

    PPS: Finally managed to get an account name sorted.

  3. Where do transfers to the EU budget fit into this form of the national accounts?

  4. Seamus,
    Sorry, I had not realised you had done a spreadsheet on an earlier blog showing movement from 2007 to 2015.

  5. This European Council recommendation of 7 December 2010 is instructive on this issue, especially recommendation 2a:

  6. @ Anonymous (1)

    That note, which I have reproduced below, is useful but I'm not sure it offers the explanation I had hoped. Did the IMF just add €3 billion to the Social Welfare total because they wanted to add €3 billion in somewhere? Why are they not articulating the reasons for this deterioration?

    1/ In line with the initial program, the baseline projections incorporate the fiscal consolidation measures for 2011-14 that were approved by government in late 2010. Staff and the authorities project that additional measures will be required to meet the Stability and Growth Pact deficit target of 3 percent in 2015. For comparability of treatment with other European countries, this target is not reflected in the Fund’s medium-term projections as the underlying measures are not yet articulated.

    @ Dreaded Estate,

    To be honest I don't know where they are. I assume they are in 'Other Revenue' but that's only a guess.

    @ Anonymous (2)

    What is instructive about this recommendation? Are you suggesting that all the projections are the same because they all assume the targets will be met, particularly up to 2014, and hence they have to be the same? Now there's a thought.

    Anyway, here is recommendation 2a:

    (a) implement measures such that the general government deficit does not exceed 10,6 % of projected GDP in 2011, 8,6 % of GDP in 2012, 7,5 % of GDP in 2013, 5,1 % of GDP in 2014 and 2,9 % of GDP in 2015, where the projected annual deficit path does not incorporate the possible direct effect of potential bank support measures in the context of the government's financial sector strategy as set out in the Memorandum of Economic and Financial Polices and specified in the Memorandum of Understanding to be signed by the Commission and the Irish authorities. Ireland
    should stand ready to take additional consolidation measures to ensure reducing the deficit to below 3 % of GDP in 2015 in case downside risks to the deficit targets materialise. Further, this path is consistent with the preliminary view of the Commission (Eurostat) on the ESA95 accounting treatment of time of recording of interest payments on promissory notes payable to Anglo Irish Bank, such that a revision of that view would result in a revision of the deficit path;