Everything depends on growth
THE success or failure of a budget, if measured in terms of achieving the targets set out in relation to expenditure and revenue, is largely dependent on the economic assumptions underlying the financial calculations and how realistic they turn out to be. When growth is stronger than expected, tax revenues will automatically increase and pressure on expenditure will tend to ease, and the overall borrowing targets can be surpassed. On the other hand, if growth disappoints on the downside, tax revenues will tend to be weaker, pressure on expenditure will be greater, and the deficit will tend to be wider.
In Budget 2012, delivered last December, the Department of Finance based its budgetary calculations on GDP growth of 1.3% and GNP growth of 0.7%.
In Wednesday’s budget, the department estimated GDP had expanded by 0.9% in 2012, and GNP had expanded by 1.4%. So in other words, GDP has turned out weaker than expected and GNP stronger than expected. These differences reflect changes in the composition of growth, but interestingly both consumer expenditure and investment have turned out weaker than expected.
Despite this, the Government managed to deliver a general government deficit of €13.3bn (8.2% of GDP), compared to the target of €13.65bn (8.6% of GDP) set in last year’s budget.
Tax revenues are expected to come in just €210m behind target for the full year, minimal in the context of estimated tax revenues of €36.2bn in 2012. In summary, the growth forecasts for 2012 made last December were not wildly inaccurate and hence the fiscal targets were pretty much achieved.
However, as we know, the past is not necessarily a good predictor of the future and also we know that the future is by definition very difficult to predict with any degree of accuracy, because “events” happen and can blow the most scientific forecasts off track.
The economic assumptions underlying Budget 2013 and the updated medium-term fiscal plan out to 2015 are based on GDP growth of 1.5% in 2013, 2.5% in 2014, and 2.9% in 2014. GNP growth is forecast at 0.9% in 2013, 1.7% in 2014, and 2.1% in 2015.
While these forecasts are not exactly of the “blow the lights out variety”, they do suggest a steady improvement in the economic environment out to 2015.
After contracting by another 0.5% in 2013, consumer expenditure growth is projected to reach 1% in 2014 and 1.2% in 2015.
Business investment and exports are also expected to rebound quite strongly and record positive growth from 2013 to 2015 inclusive. Based on these economic forecasts and assumptions, tax revenues are expected to grow by 4.9% in 2013 to reach €37.95bn.
Gross current expenditure is expected to expand by just 0.6% to reach €60.79bn. The net result is that the general government deficit is projected to come in at €12.65bn, equivalent to 7.5% of GDP.
Relative to where we have come from since 2008, the projected growth rates look extremely ambitious, but coming from a base as low as we are coming, they do not appear overly so. However, the ability to attain the tax revenue, expenditure, and borrowing targets will be totally dependent on achieving the projected growth.
At this juncture the risks would appear to be biased towards the downside rather than the upside. There are two key considerations that will influence this — namely the performance of the global economy in 2013 and the impact that this week’s tough budget will have.
The global economic outlook is not terribly compelling for 2013. Excessive sovereign debt will haunt the developed economies and ensure that fiscal consolidation will have a major bearing on economic performance. Within Europe, the very uncertain trajectory of the eurozone crisis is the key risk.
From Ireland’s perspective, two of our most important export markets — the UK and eurozone could struggle next year and consequently the export performance looks vulnerable and will need to be monitored carefully. Domestically, the removal from €3.5bn in budget adjustments will exert a significant negative influence on the economy. The key hope for the economy in 2013 and indeed out to 2015 is that some alleviation of our sovereign debt burden will be achieved.
If we accept that the short-term future is very difficult to forecast, not to mention the medium-term future, the growth assumptions for Ireland are demanding but not heroic or wildly optimistic.
However, in the event that growth does turn out weaker than expected, it is inconceivable that a mini-budget would be introduced during 2013 or that more than €3.1bn will be extracted from the economy in Budget 2014 next December.
We, and our international partners, would just have to accept an overshoot on budget targets. The current and planned levels of fiscal correction out to 2015 are incredibly onerous, and anything greater would be economic madness.
© This appeared in the printed version of the Irish Examiner Friday, December 07, 2012