| 2.9°C Dublin

Seamus Coffey: No room for error or slippage if we are to meet 2011 targets for vigilant Troika


Finance Minister Michael Noonan poses with the Budget for 2012 outside Leinster House

Finance Minister Michael Noonan poses with the Budget for 2012 outside Leinster House

Finance Minister Michael Noonan poses with the Budget for 2012 outside Leinster House

WE are less than a week into 2012 and already the media are turning attention to Budget 2013, which will not be delivered for another 11 months. Last month we had a two-day production from the coalition that led us through €3,800 million of budgetary "adjustments".

On the expenditure side, much of the focus was on the cuts to the social welfare budget. Although €475m of measures were announced it is forecast that social welfare expenditure in 2012 will be €20,544m. In 2011, expenditure was estimated to be €20,621m.

In 2012 social welfare expenditure will be €77m lower than it was in 2011. The social welfare budget is 99.6pc intact. There have been some changes, but cuts and reductions in expenditure in some areas are being offset by increases in expenditure elsewhere.

As has been the case for most of the recent austerity drive most of the actual reductions in expenditure have been concentrated in the capital budget. In 2008, public capital expenditure by the Exchequer on infrastruture such as roads, schools and hospitals was €8,915m. For 2012 it is forecast to be €3,935m. The capital budget has been slashed by almost 60pc.

Over the same period current voted expenditure will have been reduced by less than 3pc. The current budget covers public sector pay, social welfare and other day-to-day items of expenditure.

The fact that next year’s budget will have another €3,500m of adjustments has created a bit of a stir. However, the nature of Budget 2013 has been known since at least November 2010 when the last government published its National Recovery Plan. This proposed €3,100m of adjustments for 2013 and gave outline details of the proposed tax increases and expenditure cuts to be introduced.

The current government published its own Medium Term Fiscal Statement early last November and outlined its budgetary projections right up to 2015. Although not as detailed as the National Recovery Plan it indicated that there would be €3,500m of adjustments in 2013 with €2,250m of this coming from expenditure cuts and €1,250m from taxation with €950m of tax increases (as there is a €300m carry-forward from measures introduced this year). In magnitude terms next year’s budget will be very similar to this year’s.

It has been claimed that the Troika have prescribed specific measures how this will be achieved. In their latest quarterly reviews published in December, the European Commission (EC) and the International Monetary Fund (IMF) took the details from the National Recovery Plan and the Medium Term Fiscal Statement and incorporated it into their reports.

The EC and the IMF are not prescribing us to introduce specific budgetary measures. Previous reports from the Troika indicated that this year’s budget would have income tax increases and cuts to core social welfare rates. The Programme for Government agreed between Fine Gael and Labour ruled these out and they were not part of last month’s budget. This did not break the terms of our agreement with the EC and the IMF.

The EC and the IMF have set budgetary targets that determine whether they will forward the next tranche of funding as part €67,500m loan agreement we have with them. This year’s budget was designed to reduce the government deficit to 8.6pc of GDP.

Michael Noonan and Brendan Howlin were free to introduce whatever measures they wish as long as the deficit was not forecast to exceed this limit. Although we will be under the 10.6pc of GDP limit set for 2011 it is not clear how successful Budget 2012 will be in bringing the deficit down to 8.6pc of GDP. The initial signs are not good but it will be much later in the year before this will be known for certain.

In his final budget speech last December, the late Brian Lenihan announced that he was targeting a budget deficit of 9.4pc of GDP. Even with the €6,000m of measures introduced in that budget it is likely that the final outcome will be a budget deficit of around 10.1pc of GDP.

This slippage was not an issue because the target set for us by the EC was a deficit of 10.6pc of GDP. Even with a deficit that was €800m larger than the budget-day forecast we still came in below the EC limit.

This year the deficit limit is 8.6pc of GDP and the budget target is also 8.6pc of GDP. While there was room for significant slippage in 2011 there is absolutely no room for slippage next year. If growth is slightly lower than expected or the measures introduced don’t have the anticipated impact than it is very likely that the deficit will come in above 8.6pc of GDP. In 2011 we had the capacity to absorb such downward developments; next year we have none.

In the December 2010 budget, tax revenue was forecast to be €34,900m for 2011. It is now clear that tax revenue of around €34,200m will be achieved. It should be noted that this was only possible with the addition of €500m from the 0.6pc private sector pension levy announced in the May Jobs Initiative. On a ‘like-for-like’ basis, tax revenue for 2011 is around €1,200m behind last December’s target. We do not have a good record of meeting targets in the current crisis and any continuation of this in 2012 will put us in real danger of missing the 8.6pc of GDP deficit limit.

For 2013, the EC require that the deficit be reduced further to 7.5pc of GDP and all the way down to 2.9pc of GDP by 2015. It is with these limits in mind that the amount of expenditure cuts and tax increases in our budgets are framed.

For Budget 2015, the Medium Term Fiscal Statement indicates that €2,000m of measures are needed with a two-to-one split between expenditure cuts and tax increases. Even if everything goes to plan we will still be running a deficit of close to 3pc of GDP in 2015. It will take a few further years until the deficit is brought to zero.

The budget deficit is likely to remain a policy target rather than a policy instrument until at least 2017. Beyond 2017, a balanced budget will be a minimum target given the huge debts the State has accumulated during the current crisis.

Seamus Coffey is a lecturer in economics at UCC and a blogger at http://economic-incentives.blogspot.com