Tuesday, December 13, 2011

Do we want miss the budgetary targets?

The measures put together for last week’s budget(s) has the stated aim of getting the General Government Deficit down to 8.6% of GDP.  Although we know neither the final deficit nor the nominal GDP figure it is currently forecast that the deficit will be around 10.1% of GDP this year. 

The original Four-Year Plan published last November targeted a 2012 deficit of 7.0% of GDP but this was based on very optimistic assumptions which had the deficit falling to below 3% of GDP by 2014.  When the EU/IMF deal was brokered a few weeks later the timeframe for getting the deficit under 3% was pushed out to 2015 and at the ECOFIN meeting of 7 December 2010 a deficit limit of 8.6% of GDP for 2012 was set.

The 2011 Budget was announced the same day and still forecast a deficit for 2012 of 7.3% of GDP.  It wasn’t until the Stability Programme Update in April of this year that the 8.6% deficit figure for 2012 made an appearance in Irish documents.

Much has been made of the fact that at 10.1% of GDP the deficit for this year has come in “below target”.  This was not so much below target as below the 10.6% limit set by the ECOFIN meeting last December.  The target from last year’s budget was that this year’s deficit would be 9.4% of GDP.  The deficit is very much larger than the target.

This year the deficit limit was 10.6% of GDP, the target was 9.4% of GDP and the outcome will likely be somewhere in the middle.  Next year the limit is 8.6% of GDP and the target is also 8.6% of GDP.  While there was room for significant slippage this year (and the GGD is almost €800 million larger than forecast in last year’s Budget) there is absolutely no room for slippage next year.

If growth is slightly lower than expected or the measures introduced don’t have the anticipated impact than it is very likely that the deficit will come in above 8.6% of GDP.  This year we had the capacity to absorb such downward developments; next year we have none.

The reduction in the EU interest rates agreed last July will make reaching the 8.6% target a little easier.  These are estimated to save around €900 million in 2012.  If these were applied statically to the projections from the April SPU then the deficit target for 2012 would be around 8.0% of GDP.  This would have been a better target for 2012 but slippages elsewhere have fully absorbed the interest rate gains. Even with €900 million of savings announced in July the deficit target for 2012 is still at the 8.6% of GDP it was last April.

As a result of the interest rate savings we might be able to get fairly close to the 8.6% of GDP limit set by the EC.  How we will fare on the IMF targets are less clear.  The IMF does not make targets based on the overall general government balance and does not make them very far in advance.

The IMF budgetary targets are in terms of the primary exchequer deficit.  This is the deficit on the Exchequer Account excluding interest payments.  The IMF’s Third Quarterly Review (table 2, page 54) sets an indicative target for the end-June 2012 primary exchequer balance of €7.4 billion.  Up the the end of June 2011 the primary exchequer balance was €8.4 billion (exchequer deficit of €10.8 billion less €2.4 billion of exchequer interest payments).

The IMF targets are not affected by the interest rate reductions announced last July.  The primary exchequer deficit has to improve by €1 billion in June 2012 relative to its performance 12 months previously.

In last December’s budget tax revenue was forecast to be €34.9 billion for 2011.  It is now clear that tax revenue of around €34.2 billion will be achieved. And this was only possible with the addition of €0.5 billion from the private sector pension levy announced in the May Jobs Initiative.  On a ‘like-for-like’ basis, tax revenue for 2011 is around €1.2 billion behind last December’s target.

Just like the EC limit there was significant room for slippage when it came to the IMF target.  Last June when the primary exchequer balance was €8.4 billion, the limit set by the IMF was €10.1 billion.  We were well within the limit and had enough room to absorb the deterioration seen in tax revenues in the final quarter.  Once again we have decided to eliminate this capacity and made the limit our target.  The margin for error on the downside is zero.

Some of the numbers in last week’s budget do not stack up.  The Minister for Finance admitted that the 2% VAT increase would not bring in €670 million over a full year because the estimate did not account for a fall in demand.  The is an extra €160 million forecast to be brought in as a result of changes to CGT and CAT.  This is equally unlikely.  The €200 million gain from increases in Excise Duty also seems optimistic.  These make up the bulk of the €1,000 million of new tax measures announced last week.  

Many of the expenditure measures are equally woolly.  Here is a list of “savings” included in the €1,400 million of current expenditure cuts from the Summary of Budget Measures.

  • Enhance fraud and control activity.
  • Continued focus on delivering reductions in the price and volume of goods and services procured by the health services.
  • Savings from anticipated lower disease incidence and operational changes.
  • Miscellaneous Savings on the Vote
  • Achieve a reduction in non-pay administration costs through increased efficiencies.
  • Reduce costs associated with operation of the Mahon Tribunal.
  • Efficiencies and changes to business processes.
  • Streamlining the State’s employment rights bodies.
  • Rigorously review of every area of expenditure.
  • Introduce new efficiencies mainly through the use of IT.
  • Programme savings through efficiencies.
  • A range of measures to improve programme efficiency are being considered.
  • Introduction of efficiencies.
  • Efficiency measures in Revenue, Office of Public Works and savings in legal fees in Law Offices.
  • General savings in Departments of Arts, Heritage & the Gaeltacht and Communications, Energy & Natural Resources.

The arithmetic might add up to a budget with €3.8 billion of “adjustments” but the reality is likely to be somewhat different.

After a year of being “the best in the bailout class” are we actually looking to exceed the deficit limits set down by our external funding partners?  Is there political capital to be gained from missing these targets?


  1. Good post. My initial feelings after the budget was that there would have to be a mini budget in 2012 to achieve targets.
    In addition to you above comments there were 'full year USC carry over' enhancements to the 2011 tax figures (I forget the exact figure) but I recall thinking that they were overestimated and plain wrong in the sense that the most that could be carried over was one month USC.
    Target of €7.4 billion primary deficit in 2012 is very discouraging. I assume interest for the six months is ~3.5, therefore the deficit is ~11 billion for six months. I assume this includes the 3.1 PN??? and the 1.5 billion Irish Life payment???
    And on the VAT issue (as you would be aware) the biggest VAT month (Nov-Dec 2012) carries over until January 2013.

  2. That should read:
    Target of €7.4 billion primary deficit for first six months of 2012 is very discouraging.

  3. Hi Joseph,

    The IMF have pushed the primary deficit target for June 2011 primary deficit out to €9.0 billion. That is a 20% increase. It is almost as if they don't want us to miss their targets.

    I think the IMF's primary deficit calculation is simply exchequer deficit minus exchequer interest. The Promissory Notes are included in the exchequer deficit but not in the exchequer interest total. So their revised €9 billion target includes the Promissory Note payment, so is equivalent to a deficit of €6 billion for the first six months excluding interest and the Promissory Notes. We'll surely manage that!

    The 8.6% overall deficit to GDP limit from the European Commission will be more challenging.