Monday, March 26, 2012

Presentation to Social Media Conference

The European Commission Representation in Ireland organised a conference for social media practitioners on ‘The Economic Challenges Facing Ireland’ that was held in NUIG on Saturday.  Here are the slides used for a presentation on Ireland’s Public Debt Crisis (pdf here).

UPDATE: A video of the presentation can be viewed here.


  1. Seamus - Surely the key to debt sustainability will be the interest rate charged together with the ability to roll it over.

    In our case an interest rate of say 5% (a figure which seems to have magical powers in the eyes of Mr. Noonan) is not sustainable. .

    Assuming GDP is €170,000M and our GNP is €136,000M in 2015, Interest @ 5% on €210,000M would be 6.18% of GDP & 7.72% of GNP. Debt would stand at 123.5% of GDP. We would also be obliged to start reducing our debt towards 60% of GDP, requiring a reduction of (123.5-60)/20 or a reduction of 3.175% of GDP or 4.15% of GNP or in money terms €5,397M.

    Clearly running a primary surplus of this size or even half of it is not really possible in the real world. Has the Government of any (non oil) country ever consistently run a surplus of this size?

    Is some form of debt forgiveness not inevitable? And surely we should get it over with now rather than in four or five years time?

    1. Hi Niall,

      The interest rate is important but in the sense of how it compares to the sum of the growth and inflation rates. With a primary balance, an interest rate of 5% would be 'sustainable' with 3% growth and 2% interest provided we can get someone to lend us the interest and roll over the maturing of existing debt.

      If we could run a primary surplus the debt ratio will fall. We are due to start running a primary surplus by 2014.

      We won't be subject to the numerical requirement of the debt brake rule until 2018 at the moment so it is not something that is of immediate concern. Eliminating the primary deficit has to be the first objective. This year it will be 4.4% of GDP. Once we get a primary balance we will be in a far better position.

      With a primary balance we just need the sum of the growth and inflation rates to be equal to the interest rate to stop the debt ratio increases. This seems like a forlorn hope now but we are moving to primary balance. Even if the interest rate exceeds the sum of the other two we can still stabilise the debt ratio with a large enough primary surplus. We should find ourselves in that position by 2014 and definitely by 2015.

      Forecast average interest rate: 5.2%
      Forecast growth and inflation rates: 3% + 2% = 5%

      It would only take a small primary surplus to stabilise the debt ratio under these circumstances. Current forecasts are that Ireland will have a primary surplus of 2.8% of GDP in 2015. This is more than enough the bring the debt ratio down and would get close to satisfying the debt brake.

      Here are the IMF's forecasts for primary balances in the Eurozone in 2012 (% of GDP)

      Austria -0.9
      Belgium 0.0
      Finland -0.2
      France -2.1
      Germany 0.8
      Greece 0.8
      Ireland -4.4
      Italy 2.6
      Luxembourg -2.2
      Netherlands -1.2
      Portugal 0.1
      Slovak Republic -1.9
      Slovenia -3.2
      Spain -3.1

      Greece, Italy and Portugal are all set to run primary surpluses. No prizes for seeing who has the largest primary deficit. There were numerous eurozone countries running primary surpluses in excess of 3% of GDP in the run-up to the crisis.

      Some form of debt forgiveness is still not inevitable, though assistance on interest rates and/or the promissory notes would decrease the still significant likelihood of such an event coming to pass.

  2. Seamus Thanks for your prompt response. As you rightly point out the debt is possibly manageable with growth plus inflation.

    However I would suggest that the discrepancy between GDP growth and GNP may create a further problem. Superficially the debt to GDP figure may look manageable in the future, however the tax yield which arises from the difference between GDP and GNP is surely far less than that generated from economic activity that stays completely within the State. Therefore we may see the headline figures i.e. debt to GDP improve, yet there is an inability to pay the interest and maintain services. Our existing tax to GDP rate looks very low, but of course if you substitute tax to GNP you get a slightly different picture.

    Inflation is also a double edged sword. In relation to GNP, the most important economy as far as any improvement in Irish GNP is concerned is the UK. In Euro terms UK prices are back at their 1999 levels and both the current and the previous UK Governments have been ruthless in their willingness to use devaluation. Even a 2% rate of inflation may be far too high to regain/retain competitiveness in that market, particularly if devaluation is used again by the UK authorities.(Ir£1 - £1.062 stg this morning.)

    In relation to running a primary surplus, this assumes that the continued financial repression on wages and pensions can continue. I am reliably informed that the Public Service is finding it impossible to fill many specialist posts sanctioned. The Revenue Commissioners for example only filled 10 of 30 posts recently advertised at graduate recruitment level (AO)and that Clinical Nurse Specialist posts approved cannot be filled. In both cases pay is said to be the problem (particularly with the pension levy)as suitable applicants have moved abroad or found better paid posts here.

  3. Hi Niall,

    The divergence between GNP and GDP is important. We have some ability to tax the difference between the two but as you say it is not huge.

    It is very difficult to ascertain the direction of the 'Irish' economy from the National Accounts. GNP gets a lot of attention but that is only GDP minus net factor income from abroad. The difference between the two is determined by the actions of the MNCs as much as the performance of the domestic economy.

    For example in the most recent Quarterly National Accounts GNP fell 2.2% in real terms in the quarter. This is a large fall.

    However, at the same time perconal consumption rose 0.5% and investment rose 14%. In fact the release shows that Total Domestic Demand rose 2.4% in real terms in the quarter.

    GNP fell because the Q4 fall in the Net Factor Income outflow was not as large as it usually is so the seasonally adjusted GNP figures reflect this rather than a continued deterioration in the domestic economy.

    Inflation is a solution to a debt problem but it opens up many other problems elsewhere. There is no silver bullet solution.

    I have seen that "financial repression" phrase alright. I think it has been more on the wages rather than pension side, though both have clearly been hit. I'm unaware of the specific cases in the Revenue and HSE. Perhaps it is a function of the education system providing a sufficient number of qualified people as much "as suitable applicants have moved abroad or found better paid posts here." But as I said I don't know.

  4. Seamus Thanks again for your prompt attention.

    To finish, there does seem to be issues around specific skill sets. As a member of a secondary school Board of Management experience suggests that there is no shortage of highly qualified French & English teachers, but a huge shortage of qualified Maths, Physics & Chemistry teachers. There are lots of applications for certain posts, but far less for Maths & Science teachers, where graduates appear to have more choices.

    Again the Revenue and nursing positions seem to fall into the same category. There is I am informed an added reason for the shortage of nurse specialists, Canada & Australia will give their spouses work permits. A serious issue if he is not working.

    Thank you again for your time.