economic and fiscal outlook: growth, risks and sustainability thomas conefrey tasc seminar, 21...

Economic and Fiscal Outlook: Growth, Risks and Sustainability

Thomas ConefreyTASC Seminar, 21 January 2016

IFAC: SOME BACKGROUND

MANDATE OF THE COUNCIL:

9th Fiscal Assessment Report

Five-member Council

Six-member Secretariat

ASSESSMENT OF FORECASTS

COMPLIANCE WITH RULES

FISCAL STANCEENDORSEMENT

OF MACROECONOMICFORECASTS

INDEPENDENT ECONOMIC

ANALYSIS

Outline1. Economic review and outlook.2. Recent fiscal performance and outlook (IFAC

Fiscal Assessment Report, November 2015).3. Risks and imbalances.4. Public finances in the medium term.

REAL GDP, REAL GNP AND EMPLOYMENT GROWTH

(% CHANGE Y-Y)

STRONG RECOVERY AND CENTRAL GROWTH FORECASTS

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021-10

-5

0

5

10

15

Real GDP Real GNP

Employment

% C

hang

e Y-

Y

Sources: Department of Finance (Budget 2016); CSO.

Increasing contribution of domestic demand to recovery

Source: CSO.

2010 2011 2012 2013 2014 2015-10

-5

0

5

10

15

20

9.4

8.8

18.2

Cumulative Contribution to Real GDP Growth Since Trough

Residual Domestic DemandNet Exports Real GDP

% G

row

th S

ince

Tro

ugh

in Q

2 20

09

Evidence of rebalancing

1998

1998

1998

1998

1999

1999

1999

1999

2000

2000

2000

2000

2001

2001

2001

2001

2002

2002

2002

2002

2003

2003

2003

2003

2004

2004

2004

2004

2005

2005

2005

2005

2006

2006

2006

2006

2007

2007

2007

2007

2008

2008

2008

2008

2009

2009

2009

2009

2010

2010

2010

2010

2011

2011

2011

2011

2012

2012

2012

2012

2013

2013

2013

2013

2014

2014

2014

2014

2015

2015

0%

5%

10%

15%

20%

25%

30%

35% % of Nominal GDP

Investment

Net Exports

Source: CSO.

Current account near balance excluding re-domiciled PLCs

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014-8

-6

-4

-2

0

2

4

6

-0.4 -0.6-1.0

0.5-0.1

-3.3

-4.9

-6.1 -5.8

-4.1

-0.8-1.2

-1.5

3.13.6

-5.1

-3.9-4.5

-5.7

-0.2

Current Account Balance

Adjusted for Re-domiciled PLCs

% G

DP

National Income and Consumption per Head

19951996

19971998

19992000

20012002

20032004

20052006

20072008

20092010

20112012

20132014

20152016

20172018

20192020

202110

15

20

25

30

35

40

45

50

55Macro indicat ors per head, rea l

Consumption GDP GNP

€ ,0

00

Sources: CSO and Department of finance forecasts.

Sharper downturn + recovery than trading partners

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 201660

65

70

75

80

85

90

95

100

105

110Real GDP per capita

IE UK

US EA

Inde

x: 2

007

= 10

0

Sources: CSO; IMF and internal calculations.

Employment Rate

19921993

19941995

19961997

19981999

20002001

20022003

20042005

20062007

20082009

20102011

20122013

2014

2015 (latest)

40

45

50

55

60

65

70

75

80 Employment rate, % of 15-64 population

Ireland United Kingdom

%of

15-

64 p

opul

ation

Source: CSO and Eurostat.

Challenges with interpreting the National Accounts

• Patent cliff

• Contract manufacturing

• Re-domiciled PLCs

• Treatment of profits in IT sector

• Aircraft leasing

But high-frequency data show expanding economy

• Employment

• Unemployment

• Industrial production

• Retail sales / consumer confidence

• Exchequer returns

Vacancy Rate

2008Q1

2008Q2

2008Q3

2008Q4

2009Q1

2009Q2

2009Q3

2009Q4

2010Q1

2010Q2

2010Q3

2010Q4

2011Q1

2011Q2

2011Q3

2011Q4

2012Q1

2012Q2

2012Q3

2012Q4

2013Q1

2013Q2

2013Q3

2013Q4

2014Q1

2014Q2

2014Q3

2014Q4

2015Q1

2015Q2

2015Q30

0.2

0.4

0.6

0.8

1

1.2

per c

ent

Industrial production volumes strong, including traditional sector

Source: CSO.Notes: Traditional sector excludes all modern sectors (i.e. Chemicals and pharmaceuticals; Computer, electronic, optical and electrical equipment; Reproduction of recorded media; and Medical and dental instruments and supplies) but may still include activities with a high concentration of MNCs.

-20

-10

0

10

20

30

40

50

60

Manufacturing

Modern

Traditional

Good growth in retail sales augers well for consumption

Source: CSO. Note: Core retail sales excludes motor trades.

-25

-20

-15

-10

-5

0

5

10

15

7.38.2

Core Retail sales Total Retail Sales

% c

hang

e Y/

Y (3

Mon

th M

ovin

g Av

erag

e)

Growth Benefitting the Public Finances

Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15-500

0

500

1000

1500

2000

2500

3000

3500

4000

Taxes and PR SI R elative to Cumulative Profile

Income Taxes VAT Excise Duties Corporation Tax Capital Taxes Stamp Duties "Other" PRSI

€ m

illio

n

Note: These overruns are relative to Budget profile. SPU anticipated taxes and PRSI coming in

Exchequer Tax Revenue

Jan-95

Nov-95

Sep-96

Jul-97

May-98

Mar-99Jan-00

Nov-00

Sep-01

Jul-02

May-03

Mar-04Jan-05

Nov-05

Sep-06

Jul-07

May-08

Mar-09Jan-10

Nov-10

Sep-11

Jul-12

May-13

Mar-14Jan-15

Nov-15 - 5

10 15 20 25 30 35 40 45 50

Annualised Exchequer Tax Receipts 1995-2015

€ bi

llion

Source: Department of Finance.

EXCESSIVE DEFICIT CLOSED IN 2015

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016-14

-12

-10

-8

-6

-4

-2

0

2

4

0.3

-7.0

-11.5 -11.0

-8.4-7.9

-5.7

-3.9

-2.1 -1.2

Primary BalanceInterestGeneral Government BalanceEDP Ceiling

% o

f GDP

Source: CSO; Budget 2016.

GENERAL GOVERNMENT BALANCE (% GDP)

REAL GDP FAN CHART BASED ON BUDGET 2016 PROJECTIONS (TO 2016)

BUT SIGNIFICANT RISKS AROUND CENTRAL FORECASTS

2008 2009 2010 2011 2012 2013 2014 2015 2016-6

-4

-2

0

2

4

6

8

80% likelihood range60% likelihood range40% likelihood range20% likelihood rangeOfficial Outturns / Central Forecasts

% C

hang

e Y-

Y

Sources: CSO; Department of Finance; internal IFAC calculations.Note: Distributions or 'fans' around historical growth estimates are based on previous revisions to real GDP data. Both forecast errors and revisions are based on 1999-05 sample.

CRISIS LEGACY OF HIGH DEBT AND ASSOCIATED RISKS

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 20210

20

40

60

80

100

120

140

160

76.0

84.2

62.5

69.3

Gross Debt (% GDP)Gross Debt (% Hybrid)Net Debt (% GDP)Net Debt (% Hybrid)

Sources: Department of Finance; internal IFAC calculations. Note: Changes in EDP debt instrument assets for forecast years are assumed to be in line with Budget 2016 projected changes in cash balances.

GENERAL GOVERNMENT DEBT

Risks and Imbalances• Internal– Credit growth– Property prices / construction– Competitiveness

• External– Emerging market slowdown– Brexit– Euro Area recovery

New mortgage lending rising from low base

2006 2007 2008 2009 2010 2011 2012 2013 2014 20150

10

20

30

40

50

60

70

80

90

100

0

5

10

15

20

25

87.7

22.8

19.2

4.3

Number of loans, '000s

Value of loans, €bn (RHS)

Source: IBF/PwC Mortgage Market Profile.Notes: Both series cover first-time buyer and mover purchaser loans (moving 4-quarter sum).

Construction shares of GNP below long-run averages

19701972

19741976

19781980

19821984

19861988

19901992

19941996

19982000

20022004

20062008

20102012

20140

2

4

6

8

10

12

14

16

14.1

2.3

Dwellings

Roads

Other B&C

% G

NP

Source: CSONote: Respective long-run median (in same colours) of each series shown in horizontal lines.

Dublin City & Suburbs

Cork City & Suburbs

Galway City & Suburbs

Limerick City & Suburbs

Waterford City & Suburbs

Kilkenny City0

2

4

6

8

3.3

1.2

0.60.3 0.2 0.2

2.9

1.40.9

0.6 0.50.2

7.5

0.90.5 0.5

0.1 0.2

Housing Completions and Requirements (000s)

Completions (2014) Completions (2015)

Estimated Housing Requirement p.a. (2014-2018)

Units

(000

s)

Significant supply shortfall in Dublin

Source: Housing Agency; DoECLG.Note: Completions cover rural + urban settlements (private and social); requirements only cover urban settlements of 1,000+ persons.

Debt deleveraging continues

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 20150

50

100

150

200

250

Household D ebt

HH Debt: PDI HH Debt: GDP HH Debt: GNP

%

Source: CSO; Central Bank of Ireland.

Openness makes the economy vulnerable to external shocks

China / Emerging Markets US monetary policy normalization Euro Area stagnation Brexit Long term growth slowdown / secular stagnation Geopolitical Risks “Unknown unknowns”

US

Australia UK

Italy

Canada

Mexico

Finland

Portugal

Romania EU

Euro area

Germany

PolandKorea

Iceland

Cyprus

Bulgaria

Slove

nia

Netherlands

Czech

Rep.

Hungary

Ireland

Luxe

mbourg0

2

4

6

8

10

12

0

50

100

150

200

250

112

Expo

rts a

s % o

f GDP

Source: AMECO.

Growing dependence on certain sectors

19721975

19781981

19841987

19901993

19961999

20022005

20082011

20140

10

20

30

40

50

60

70

Chemical and Related Products as % Total Goods Exports

%

Sources: CSO.

19982000

20022004

20062008

20102012

20140

5

10

15

20

25

Computer & Financial Services as % Total Services Exports

%

Corporation Tax: Top 10, 20 & 50 Companies

Source: Pigott and Walsh (2014); authors’ analysis of Revenue data.

Top 10, 20 and 50 Companies€bn unless

stated % of Total

Total Corporation Tax 4.1

Top 10 Companies CT Paid 1.0 24%

Top 20 Companies CT Paid 1.3 32%

Top 50 Companies CT Paid 1.9 46%

CORPORATION TAX PAYMENTS (ANNUAL AVG. 2008-2012)

2008 2009 2010 2011 20120%

10%20%30%40%50%60%70%80%90%

100%

Corporation Tax Payments (% of Total)

Top 10 Companies CT Paid Companies 11 - 20 CT PaidCompanies 21 - 50 CT Paid All other companies CT Paid

Euro Area challenges

20002002

20042006

20082010

20122014

20162018

20200.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2.22.4

2.32.1 2.2 2.2 2.2 2.2

3.3

0.3

1.6

2.72.5

1.3

0.4

0.1

1.01.2

1.41.5

1.7

Euro Area: CPI Inflation

% C

hang

e Y-

Y

20002002

20042006

20082010

20122014

20162018

2020-5-4-3-2-101234 3.8

2.1

0.9 0.7

2.21.7

3.2 3.0

0.5

-4.5

2.01.6

-0.8-0.4

0.81.5 1.7 1.6 1.6 1.6 1.5

Euro Area: Real GDP Growth (% Y-Y)

% C

hang

e Y-

Y

Source: IMF (Latest World Economic Outlook).

Pattern of Euro Area growth downgrades

2010 2011 2012 2013 2014 2015 201697

98

99

100

101

102

103

104

105

106

Euro Area: Real GDP (European Commission Forecast Vintages)

Spring 2015

Winter 2015

Autumn 2014

Spring 2014

Winter 2014

Autumn 2013

Spring 2013

Winter 2013

Autumn 2012

Spring 2012

Inde

x (B

ase:

201

0 =

100)

Sources: European Commission Forecasts, Different Vintages.

Lessons from the crisis

• Difficulty of avoiding pro-cyclical policies in times of strong economic growth

• Importance of risk management– Looking beyond central scenarios

• Significant crisis-induced institutional reforms– Banking– Fiscal

European/Domestic fiscal rules

Domestic

European

Corrective Armof SGP

Preventive Armof SGP

3% Deficit Rule

1/20th Debt Rule

MTO / Adjustment path to MTO

Expenditure benchmark

Domestic Budgetary

Rule

Domestic Expenditure

Ceilings

Domestic Budgetary Rule Consistent with Preventive

Arm of SGP

Domestic Expenditure Ceilings Consistent with Expenditure Benchmark

Complementary domestic and European elements

Effectiveness of Domestic Framework

Effectiveness of European Framework

Monitoring, peer pressure and possible sanctions of the European framework enhances the effectiveness of the domestic framework

Domestic ownership adds legitimacy to the European rules

Deviations from Expenditure Plans

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2009* 2010 2011 2012 2013 2014 2015-10%

-5%

0%

5%

10%

15%

20%

25%

30% Gross Current Expenditure, % Deviation from Forecast

Yr1 % Deviation Yr2 % Deviation

Yr3 %Deviation Real GDP growth

% d

evia

tion

Budget Year

Source: Department of FinanceNote: * denotes the Supplementary budget in 2009. Bars show the forecast error for 1 year ahead, 2 years ahead and 3 years ahead. Latest figures for 2016 to 2018 (used in calculation the latest deviation from Budget 2015 years 2 and 3) are adjusted by €1 billion to reflect the change in the treatment of the HSE from 2015. This adjustment is made for comparison purposes.

2013 2014 2015 2016 2017 201844000

45000

46000

47000

48000

49000

50000

51000

52000

53000

54000

Budget Year

€ bi

llion

Source: Department of Finance.

Budget 2012

CONTINUOUS REVISIONS TO MULTI-YEAR EXPENDITURE CEILINGS

CHANGES TO CURRENT EXPENDITURE CEILINGS

Budget 2013Budget 2014

Budget 2015

Budget 2016

USE OF UNEXPECTED INCOMING REVENUES TO FUND A LARGE INCREASE IN SPENDING IN 2015

Increase in expenditure, SPU 2015 to Budget 2016 Increase in tax revenue, SPU 2015 to Budget 20160.0

200.0

400.0

600.0

800.0

1,000.0

1,200.0

1,400.0

1,600.0

1,800.0

1,490.0 1,395.0

194.0

Corporation tax Other tax revenue

€ bi

llion

s

Source: Department of Finance and internal IFAC calculations.Note: The increase in expenditure between SPU 2015 and Budget 2016 (grey column) refers to total gross voted current and capital exenditure. Tax revenue (right hand column) is the sum of Exchequer tax revenue plus PRSI.

REVISIONS TO EXCHEQUER EXPENDITURE AND TAXES FOR 2015

Medium-Term Fiscal Plan in Budget 2016

• Budget 2016 medium-term fiscal projections include:– €0.4 billion per annum for demographic pressures– Cost of Lansdowne Road Agreement until 2018

• Tax forecasts allow for indexation but assume no change in policy, despite stated commitments to reduce taxes.

• Medium-term plans imply over-compliance with fiscal rules although stated policy is for minimum compliance.

• Develop an alternative medium-term expenditure scenario for 2015-2021

• Scenario takes into account estimated demographic changes and assumptions on the cost of providing public services based on Budget 2016 macro projections.

Budget Projections imply Steep Fall in Primary Spending

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 202120

25

30

35

40

45

Government Revenue and Pr imary Expenditure, % of GDP

Primary expenditure/GDP Revenue/GDP

Primary expenditure/GDP, IFAC Scenario

% o

f GD

P

Note: Chart shows Exchequer revenue and primary expenditure as a share of GDP. Source: Budget 2016 and internal IFAC calculations.

Comparison of Expenditure Scenarios

2015 2016 2017 2018 2019 2020 202120%

22%

24%

26%

28%

30%

32%

Primary expenditure, % of GDP - Budget 2016 Primary expenditure, % of GDP - IFAC Scenario 1

Primary expenditure, % of GDP - IFAC Scenario 2

% o

f GDP

Note: Scenario 1 allows for demographic change with no indexation. Scenario 2 allows for demographic change plus indexation.Source: Internal IFAC calculations.

COMPARISON OF PRIMARY EXPENDITURE UNDER ALTERNATIVE SCENARIOS

Capital Expenditure

19831985

19871989

19911993

19951997

19992001

20032005

20072009

20112013

20152017f

2019f2021f

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%D epa rtmenta l Capita l Expendit ure, % of GD P

Capital spending, % of GDP

Average 1983-2015

grow

th in

spen

ding

Source: Budget 2016, Budget and Economic Statistics (Department of Finance).

Expenditure Scenario and Estimated Fiscal Space

2017 2018 2019 2020 20210.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

Estimated Expenditure Pressures Compared With Allowable Expenditure Growth

Allowable Expenditure Growth Expenditure Pressures

grow

th in

spen

ding

Source: Internal IFAC calculations.Note: Expenditure pressures are estimated under the assumptions outline in Box E. Allowable expenditure refers to expenditure growth that would be compliant with the Expenditure Benchmark. The calculation of allowable expenditure growth assumes indexation of the income tax system. If the Government decides not to fully index income tax bands, this would create additional fiscal space.

Conclusion• Significant progress made in resolving Ireland’s fiscal

crisis.• Encouraging central scenario for projected growth.• But significant risks around that scenario in environment

of elevated uncertainty.• Institutional reforms should help avoid repeat of past

mistakes.• Important to address weaknesses with the Government’s

medium-term fiscal plans beyond 2016 and with implementation of multi-year expenditure ceilings.