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8/14/2019 McCarthy Crisis
1/15
1/12/20
UCD School of Economics/Dublin Economics Workshop
Expenditure Control andFiscal Consolidation
Colm McCarthy(School of Economics UCD)
Responding to the Crisis, January 12th. 2009.
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Fiscal Consolidation in Context..
ere are our pr or t es n macro po cy.
Restore fiscal balance..
Resolve the banking crisis.
Restore competitiveness.
De-leverage the national balance sheet
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Managing the Balance Sheet
e pr va e sec or now owes c. n o e an ngsystem, one of the highest ratios to GNP in the world.
De-leveraging seems to have commenced
It requires not just an increase in saving but assetdisposal to reduce debt
The State is also funding a book of assets, principally theequ y por o o an a e commerc a company
shares.
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Personal Sector Debt Repayments to Income
15%
20%
25%
10% more disposable income
eaten up in debt repayments
than seven years ago
5%
10%
0%
2000 2001 2002 2003 2004 2005 2006 2007 2008F
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Bank Lending to Property
80000
100000
120000
20%
25%
30%
Lending to construction
development and investment up
100bn in seven years
20000
40000
60000
10%
15%
0
Q1 1997 Q1 1998 Q1 1999 Q1 2000 Q1 2001 Q1 2002 Q1 2003 Q1 2004 Q1 2005 Q1 2006 Q1 2007 Q1 2008
5%
Lending to construction and real estate activities (lhs, m) % of total private sector credit (rhs)
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State Balance Sheet
As well as focussing on the GGB and net debt,policy needs to consider measures to de-leverage the State balance sheet
There is also a debt-selection issue
For the private sector, it is worth considering
help accelerate the de-leveraging process
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The Tiger Checked out 2002
(Assuming zero growth for all aggregates in 2008)
1995 to 2002 2002 to 2008
Real GDP 8.6 5.5
Real GNP 7.2 5.3
Real GNDI 7.0 3.7(Adjusted for terms-of-trade)
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Quarterly Numbers signalled downturn in 07
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Property-Related Taxes led the Collapse.
6000
7000
8000
9000
12%
14%
16%
18%
20%
1000
2000
3000
4000
2%
4%
6%
8%
10%
6bn drop in direct
property-related revenue
in three years
0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007F 2008F 2009F
0%
Property revenue (m, lhs) Property revenue % of total tax revenue (rhs)
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The Fiscal Deterioration..
e c c. n w ou po cy c anges
And likely to be 10 to 12% for some years thereafter onthe same basis.
GGB Gross debt 41% of GDP at end 2008, heading forc. 50% at end 2009.
Without policy change, and even without bank bail-outcos s, annua orrow ng a + r ngs e n oview fairly quickly, the lesson of the 1980s.
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Raise Taxes or Cut Spending?
Real Total Exchequer spending rose c. 6.5% in 2008
Without policy change, will rise c. 6.3% in 2009.
Significant tax increases have already been imposed
Ireland will enjoy the fiscal stimulus packages of ourtrading partners
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Comparisons with 1987
ar ess ow- ang ng ru ac en
Exchequer spending had been tightly controlled in early and mid-1980s
spending never fell in nominal terms.
Year % Chg Current % Chg TES CPI
1987 4.1 2.7 3.1
1988 1.0 -1.3 2.1
1989 0.8 0.5 4.1
1990 6.6 7.0 3.3
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Total Exchequer Spend as % GNPGNP 2008/9 = ESRI estimates, spend 2009 = Budget
trendsin overnment s endin
40.0
50.0
60.0
gross current expendiure exchequer capital expenditure total government expenditure
20.0
30.0
percentofGNP
0.0
10.0
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
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Real Growth, Total Exchequer Spending
ear pen g ea row
2000 10.4 5.6 4.8
2001 16.1 4.9 11.2
2002 11.0 4.6 6.4
. . .
2004 6.2 2.1 4.1
2005 11.1 2.5 8.6
2006 10.6 3.9 6.72007 11.9 4.9 7.0
. . .
2009f 4.3 -2.0 6.3
* Deflator = CPI; CPI 2008/9 = ESRI; Spend 2009 = Budget
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Debt Selection and Balance-Sheet Management
Ireland has never issued index-linked gilts.There may be sense in doing so over thenext few years.
Asset disposals do not help the GGB
deficit, but they help de-leverage.
commercial semi-States and real property.