1. Expenditure Control and
Fiscal Consolidation
Colm McCarthy
(School of Economics UCD)
University of Limerick, February 20th. 2009.
2. Fiscal Consolidation in Context…..
• There are four priorities in macro policy.
• Restore fiscal balance…..
• Resolve the banking crisis….
• Restore competitiveness….
• De-leverage the national balance sheet
3. Managing the Balance Sheet
• The private sector now owes c. €400 bn to the banking
system, one of the highest ratios to GNP in the world.
• De-leveraging seems to have commenced
• It requires not just an increase in private saving but asset
disposal nationally to reduce debt
• The State is also funding a book of assets and it may
need to de-leverage too
4. Personal Sector Debt Repayments to Income
25%
10% more disposable income
eaten up in debt repayments
than seven years ago
20%
15%
10%
5%
0%
2000 2001 2002 2003 2004 2005 2006 2007 2008F
5. Bank Lending to Property
30%
120000
100000 Lending to construction 25%
development and investment up
€100bn in seven years
80000
20%
60000
15%
40000
10%
20000
5%
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
Lending to construction and real estate activities (lhs, €m) % of total private sector credit (rhs)
6. Tiger Checked out around 2002
1995 to 2002 2002 to 2008e
• Real GDP 8.6 5.3
• Real GNP 7.2 5.1
• Real GNDI 7.0 3.5
(Adjusted for terms-of-trade)
8. Property-Related Taxes led the Collapse….
20%
9000
18%
8000
16%
7000
14%
6000
12%
5000
10%
4000
8%
3000
6%
€6bn drop in direct
property-related revenue
2000
in three years 4%
1000 2%
0 0%
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007F 2008F 2009F
Property revenue (€m, lhs) Property revenue % of total tax revenue (rhs)
9. The Fiscal Deterioration…..
GGB Deficit > 10% in 2009 without policy changes
And likely to exceed 10% for some years thereafter on
the same basis.
GGB Gross debt 41% of GDP at end 2008, heading for
c. 50% at end 2009.
Without policy change, and even without bank bail-out
costs, annual borrowing at 10%+ brings 100% debt into
view fairly quickly, the lesson of the 1980s.
10. Raise Taxes or Cut Spending?
• Real Total Exchequer spending rose c. 6.5% in 2008
• Without policy change, will rise > 6% in 2009.
• Significant tax increases have already been imposed
• Ireland will enjoy the fiscal stimulus packages of our
trading partners
11. Comparisons with 1987…
• Far less low-hanging fruit back then
• Exchequer spending had been tightly controlled in early and mid-
1980s
• Real cuts in 1987 to 1989 were small and mainly capital; current
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
12. Total Exchequer Spend as % GNP……
GNP 2008/9 = ESRI estimates, spend 2009 = Budget
trends in government spending
60.0
gross current expendiure exchequer capital expenditure total government expenditure
50.0
40.0
per cent of GNP
30.0
20.0
10.0
0.0
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
13. ….separating out Debt Service…
trends in government spending
60.0
G ro ss V oted Cu rren t Expen ditu re E xcheq uer Capital Expend iture
Cent ra l Fund Services (Curre nt) Tot al E xp enditure
50.0
40.0
per cent of GNP
30.0
20.0
10.0
0.0
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1995
1996
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
1994
1997
15. Fiscal Consolidation is Unavoidable
• Borrowing at 10% of GDP for any length of time
is risky, even in benign credit markets
• The credit markets are less borrower-friendly
than at any time since WWII
• Borrowing needs to be contained in 2009 and
reduced decisively in 2010.
• Economies in current and capital spending are
required, and further tax measures cannot be
ruled out.
