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The real bad news in the Commission forecast

Read more about: Economy, Taxation, Unemployment     Print This Post

Most of the reaction to the latest EU Commission forecast for the Eurozone and Ireland focuses on the unemployment prediction (16%) and the fact that their growth forecast is somewhat worse than the government’s.  But in a sense, we knew those numbers already.  The ESRI from last week was pretty dire, and for 2009 forecasters are mostly in a race downwards as more bad data comes in and they try to catch up with it.  We’re already one third way through 2009 and many of the policy decisions have been taken.  Now we wait.  But 2010 is still up for grabs.  So take the EC forecast for Irish public finances next year.

And now things get interesting.  The Commission says the budget deficit next year will be 15.5% of GDP on a “no policy change basis” which means including Brian Lenihan‘s supplemental budget but excluding NAMA and any potential calls on the liability guarantee.  But Mr Lenihan’s budget did include a forecast for the 2010 deficit: 10.75% of GDP.  This is identical to the 2009 forecast which the Commission also contradicts (12% of GDP).  Now, some of the difference can be explained.  The Dept of Finance is counting for 2010 expenditure and revenue measures which they intend to take but the EC only looks at implemented policies.  But that’s an informative distinction.  It tells us that for the 2010 budget, the government has to find 5 percentage points of GDP in new revenue or expenditure measures.  That’s huge.   It’s about 8 billion euro on top of all the stringent measures already taken.

And among the worrying things is that what’s driving such a continued deterioration is unemployment and rising debt service costs, the noxious 1980s mix.

Is there anything concrete to contribute to all this pessimism?  How about some political pressure on the government to explain precisely what its revenue raising and expenditure cutting measures for 2010 are?  Don’t we need a real debate as soon as possible if there’s so much further cutting ahead of us.  And in particular, don’t we need a real discussion of how exactly the country intends to cope with 16% unemployment?  It’s not one of those bridges that you plan on crossing when it comes.

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3 Responses to “The real bad news in the Commission forecast”

  1. # Comment by Michael Taft May 5th, 2009 09:05

    This is a crucial observation. The Minister, in his April budget, announced further ‘adjustments’ of €4 billion which will include €1.75 billion in tax increases, €1.5 in current spending cuts and €750 million in capital spending cuts. Given that EU Commission report notes the new borrowing levels as announced in the April budget, their ‘unchanged policy’ may incude the announcements of further adjustments going forward. Even if this is not the case, there will still be a huge hole to plug.

    Indeed, it is this ‘pluggig the hole’ that is now open to question. The Governnment has been taxing and cutting since the October budget but the deficit only worsens. The policy of fiscal contraction is a major contributor to economic contraction which, in turn, is exacerbating the fiscal deficit. Deflationary budgetary strategies are, quite simply, not working and cannot work. Unfortunately, the opposition parties have, too, bought into the necessity for fiscal contraction (though there are debates over the ‘balance’ between tzx increases and spending cuts, and ‘the fairness’ factor) so we are in a policy cul de sac with no route out coming from any quarter. That is the real bad news coming from the Commissio forecast.

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