Thursday, July 3, 2014

Revised National Accounts and Fiscal Targets

The CSO have published the 2013 National Income and Expenditure Accounts along with this explanatory note highlighting the impact of some of the methodological changes.

Real GDP growth in 2013 was 0.2 per cent which is a revision of the previous estimate of –0.3 per cent. Nominal GDP has gone from a first estimate of €164 billion to a revised and updated estimate of €175 billion which is a very significant increase for the fiscal targets.

Here are the main fiscal aggregates as presented in April’s Stability Programme Update.

SPU Main Aggregates

If we leave everything unchanged except the 2013 NGDP (i.e. use the same nominal growth rates and same fiscal projections) we get the following:

SPU Main Aggregates - Revised

The changes are pretty clear.  The end-2013 debt ratio has changed from 123.7 per cent of GDP to 116.1 per cent of GDP even though the debt and the economy which has to service it is exactly the same – it is just measured differently.

The projections used in the SPU now result in a 2015 deficit of 2.8 per cent of GDP (and an ‘underlying’ deficit of 2.7 per cent of GDP which is the one that has been used up to now as the metric for the EDP targets).

The revisions and updates published today by the CSO mean that a larger deficit of around 0.2 per cent of GDP (c.€350 million) is allowable while still targeting the ceiling set for the deficit in the EDP – if that is what one wishes to do.

A second helping factor (and one that actually reflects economic performance rather than statistical revisions) is the revenue buoyancy that is evident in the Exchequer Returns for the first six months of 2014.  The budget day projection for general government revenue in 2014 was €60.9 billion.  This was unchanged in April’s SPU.

SEPA issues aside it seems that tax revenue is ahead of the DoF’s projections by around €500 million.  PRSI contributions are about €100 million ahead of the projection while the surplus from the Central Bank is around €200 million larger than expected.

There are some offsetting factors on the expenditure side – main health overrruns and a larger than expected contribution to the EU Budget.  Voted Capital Expenditure is “behind profile” but that could due to timing issues.

For recurring or standard items the fiscal position is probably around €500 million (c.0.3 per cent of GDP) better than was expected when the Budget and SPU projections were made.  This means the 2014 deficit outturn could be around 4.2 per cent of GDP if these improvements from H1 are just held and maybe even close to 4 per cent if the improvements continue to accumulate.

If the objective is to draft a budget targeting a 3 per cent deficit the fiscal effort required to so might be little more than the introduction of water charges.

PS Is there any indication somewhere of the budgetary impact in Ireland of the changes to the EU 6th VAT Directive that are due to come in force in January 2015?  That is the change that means the VAT payable on, for example, television subscriptions will be collected in the country of the customer rather than the country of the supplier.  

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