Saturday, October 12, 2013

Deficit Effect of Recent Budgets

The White Paper with the Estimates of Receipts and Expenditure released at midnight last night shows that in a “do nothing” scenario the Department of Finance estimate that the 2014 general government deficit would be 5.8% of GDP (with the 2013 deficit now projected to be 7.3% of GDP)

In advance of Tuesday’s budget Minister for Finance, Michael Noonan has said that the projected deficit for 2014 will be 4.8% of GDP.  Therefore the projected effect of the measures to be announced on Tuesday is a 1 percentage point of GDP reduction in the deficit. 

How does this compare to recent budgets?

Budget Impacts

The “do nothing” scenario sees the deficit fall from 7.3% of GDP in 2013 to 5.8% of GDP in 2014.  Around three-quarters of the improvement can put down to three factors:

  1. The February 2013 liquidation of the IBRC required a €1.1 billion (0.7% of GDP)  payout under the Eligible Liabilities Guarantee (ELG) which will not happen in 2014.
  2. The 9% temporary VAT rate for the tourism sector introduced in July 2011 automatically expires on the 31st of December 2013.  This will increase VAT receipts by around €360 million (0.2% of GDP).
  3. The full-year roll-out of the Local Property Tax is expected to generate an additional €250 million (0.2% of GDP) of revenue in 2014.

That only leaves 0.4 percentage points of the “do nothing” deficit improvement to possible growth effects (and there are other minor carry-forward effects that kick-in in 2014).

If the deficit outturn for 2014 is the 4.8% of GDP that means a 1.9 percentage point of GDP improvement in the deficit would be required in 2015 to keep in line with the limits set out under the Excessive Deficit Procedure (an EDP limit of 2.9% of GDP has been set for the deficit in 2015). 

Nominal GDP growth in 2015 may be a little faster than in 2014 but probably not by much. The current DoF forecasts is for nominal growth of around 3% in 2014.  If that was repeated in 2015, NGDP in 2015 would be around €175 billion.  The April 2013 SPU forecast was that it would be €182 billion. 

Those figures indicated that with slightly higher nominal GDP growth and a €2 billion package of adjustments in Budget 2015 that the deficit was expected to fall by 2.1 percentage points of GDP.  To get under the 2015 EDP limit that is pretty much what is required. 

However, with lower nominal growth and possibly smaller carryforward effects from next week’s Budget then the level of adjustments necessary to hit the 2015 deficit limit may have to rise above the €2 billion that has been pencilled in.  Reducing the cuts in next week’s budget may merely be delaying for 12 months the effort that has to be put in to bringing the deficit down.  Of course, the growth fairy may arrive over the next 18 months in time for 2015.  Hasn’t a return to growth always just been 18 months away?

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