Fiscal Assessment Report November 2017 28th November 2017 IFAC - - PowerPoint PPT Presentation

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Fiscal Assessment Report November 2017 28th November 2017 IFAC - - PowerPoint PPT Presentation

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Fiscal Assessment Report November 2017 28th November 2017 IFAC IFACs Approach to Fiscal Risks IFAC: Some Background Mandate of the Council: Assessment of Forecasts Independent Endorsement Fiscal Stance Economic of Macroeconomic 13 th

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SLIDE 1

Fiscal Assessment Report November 2017

IFAC IFAC’s Approach to Fiscal Risks

28th November 2017

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SLIDE 2

IFAC: Some Background

Irish Fiscal Advisory Council (IFAC) Fiscal Assessment Report, November 2017 November 2017

Mandate of the Council:

13th Fiscal Assessment Report

Five-member Council Six-member Secretariat

Assessment of Forecasts Compliance with Rules Fiscal Stance Endorsement

  • f Macroeconomic

Forecasts

Independent Economic Analysis

2

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SLIDE 3

Key Messages (1)

Irish Fiscal Advisory Council (IFAC) Fiscal Assessment Report, November 2017 November 2017

The Council assesses the Government’s stance as set out for next year in Budget 2018 to be conducive to prudent economic and budgetary management

– Government increased spending at faster pace than initial limit permitted under domestic/EU fiscal rules by introducing revenue-raising measures. – Followed through on its own plans to stay within available gross fiscal space for 2018 of €1.7 billion (Council had recommended it adhere to these plans). – Plans also allow for gradual debt reduction; moderate increases in current spending; and a ramping up of public investment to rates among highest in EU, while complying with fiscal rules.

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SLIDE 4

Key Messages (2)

Irish Fiscal Advisory Council (IFAC) Fiscal Assessment Report, November 2017 November 2017

However, there is a risk that the economy may experience overheating in coming years.

– This could happen if a rapid – albeit necessary – response from construction sector to persistent supply shortfalls were to arise, not offset by countercyclical measures elsewhere. – Any temporary revenue inflows should then be used to reduce debt at a faster pace or to build up buffers against future shocks.

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SLIDE 5

Key Messages (3)

Irish Fiscal Advisory Council (IFAC) Fiscal Assessment Report, November 2017 November 2017

The Government should set out a credible plan for the medium term so that a procyclical pattern of budgetary increases does not occur as has often been the case:

(i) firmer commitment to the spending rule as an anchor for fiscal policy (ii) strengthening proposed Rainy Day Fund so that it achieves countercyclical effects and is adequate in size (iii) developing toolkit for assessing cyclical position of the economy (iv) adhering to a target for public investment spending over the medium term

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Commit to Spending Rule Strengthen Rainy Day Fund Develop Toolkit for Assessing Cycle Public Investment Target

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SLIDE 6

Irish Fiscal Advisory Council (IFAC) Fiscal Assessment Report, November 2017 November 2017 6

Continued Strong Growth Forecast

2.3

  • 6
  • 4
  • 2

2 4 6 2011 2013 2015 2017 2019 2021

3.8

  • 6
  • 4
  • 2

2 4 6 2011 2013 2015 2017 2019 2021

2.3

  • 6
  • 4
  • 2

2 4 6 2011 2013 2015 2017 2019 2021

4.5

  • 5

5 10 15 2011 2013 2015 2017 2019 2021

% change volumes unless stated

  • A. Employment
  • B. Underlying Domestic Demand
  • C. Personal Consumption
  • D. Nominal GNI*

Sources: CSO; Department of Finance (Budget 2018); and internal IFAC calculations.

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SLIDE 7

Irish Fiscal Advisory Council (IFAC) Fiscal Assessment Report, November 2017 November 2017 7

Economy Close to its Potential

  • 8
  • 6
  • 4
  • 2

2 4 6 8 10 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 IFAC Range IFAC Mid-Range DoF (CAM-Based Estimates)

But path for CAM estimates is implausible Figure 1.2: Ireland’s Output Gap Estimates

Percentage of potential output

Sources: Department of Finance (Budget 2018); and internal IFAC calculations.

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SLIDE 8

Debt levels remain high

Irish Fiscal Advisory Council (IFAC) Fiscal Assessment Report, November 2017 November 2017 8

241.7 63.7 92.8

400 350 300 250 200 150 100 50 50 100 150

Korea Turkey Switzerland Czech Republic Canada Latvia Iceland Slovak Republic Poland Germany Mexico Netherlands Slovenia Austria Israel Ireland (GDP) Hungary United Kingdom United States Spain France Belgium Ireland (GNI*) Portugal Italy Japan % Revenue % GDP or GNI*

OECD Countries Net Government Debt (Top 25 Countries)

End-2016 net general government debt as % revenue (LHS); and as % GDP or GNI* (RHS)

Sources: IMF; OECD; Eurostat; CSO.

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SLIDE 9

Primary Balance Changes Slowing

Irish Fiscal Advisory Council (IFAC) Fiscal Assessment Report, November 2017 November 2017 9

Level and Annual Changes in the Primary Balance

% of GNI*, general government basis 2.7 2.9

  • 4
  • 2

2 4 2013 2014 2015 2016 2017 2018 2019 2020 2.3 3.2 1.9

  • 0.3

0.6

  • 0.1
  • 0.1

0.4 2013 2014 2015 2016 2017 2018 2019 2020

  • 4
  • 2

2 4

  • A. Level of Primary Balance
  • B. Annual Changes (percentage points)

Sources: Department of Finance (Budget 2018); CSO; and internal IFAC calculations.

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SLIDE 10

Budget sticks to €1.7 billion fiscal space

Irish Fiscal Advisory Council (IFAC) Fiscal Assessment Report, November 2017 November 2017 10

Gross Fiscal Space and Budgetary Measures

€ billions Yield Cost Total Starting Point Gross Fiscal Space 1.7 Pre-Committed Spending

  • 0.9

Carryover Costs of Budget 2017

  • 0.65

Non-Indexation of Tax System +0.5 Nominal Resources for New Measures Prior to Budget 2018 0.65 Budget Package New Current Expenditure

  • 0.87

New Capital Expenditure

  • 0.22

USC

  • 0.18

Income Tax

  • 0.16

Stamps +0.38 Corporation Tax +0.15 Compliance +0.10 Other +0.20 Total Budget 2018 Package +0.83

  • 1.43
  • 0.60

Sources: Department of Finance (Budget 2018); and internal IFAC calculations.

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SLIDE 11

Medium-Term Objective

Irish Fiscal Advisory Council (IFAC) Fiscal Assessment Report, November 2017 November 2017 11

Structural Balance

% potential GDP (based on Commonly Agreed Methodology)

  • 9.9
  • 0.5
  • 12
  • 10
  • 8
  • 6
  • 4
  • 2

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Sources: CSO, Budget 2018; and Internal IFAC calculations. Note: The structural balance is the general government balance net of one-off items as a share of GDP, adjusted for the impact of the business cycle. The above estimates are based on CSO Government Finance Statistics, Budget 2018 forecasts and IFAC assessments of one-off items.

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SLIDE 12

Commercial Property

Irish Fiscal Advisory Council (IFAC) Fiscal Assessment Report, November 2017 November 2017 12

Irish Commercial Property Investment Turnover

€ billion

Source: CBRE.

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SLIDE 13

Real GDP Growth Forecasts

Irish Fiscal Advisory Council (IFAC) Fiscal Assessment Report, November 2017 November 2017 13

Real GDP Growth Forecasts

Percentage change, year-on-year 4.3 4.9 5.0 4.1 4.8 1 2 3 4 5 6 Budget CBI ESRI IMF EC

2017

3.5 3.9 4.0 3.4 3.9 1 2 3 4 5 6 Budget CBI ESRI IMF EC

2018

Sources: Budget 2018; ESRI (Quarterly Economic Commentary, Autumn 2017); IMF (World Economic Outlook, October 2017); Central Bank Quarterly Bulletin, October 2017; and European Commission (European Economic Forecast, November 2017).

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SLIDE 14

Changes in Real GDP Growth Forecasts

Irish Fiscal Advisory Council (IFAC) Fiscal Assessment Report, November 2017 November 2017 14

Changes in Real GDP Growth Forecasts

Latest Forecasts – Spring Vintages

  • 0.4

0.4 0.8 1.2 1.6 DoF CBI ESRI IMF EC

2017

  • 0.4

0.4 0.8 1.2 1.6 DoF CBI ESRI IMF EC

2018

Sources: Budget 2018; SPU 2017; ESRI (Quarterly Economic Commentary, Spring 2017 and Autumn 2017); IMF (World Economic Outlook, April 2017 and October 2017); Central Bank Quarterly Bulletin, April 2017 and October 2017; and European Commission (European Economic Forecast, May 2017 and November 2017).

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SLIDE 15

Underlying Investment

Irish Fiscal Advisory Council (IFAC) Fiscal Assessment Report, November 2017 November 2017 15

Underlying Investment

Percentage of GNI* 5 10 15 20 25 30 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Average (1997 - 2016)

Sources: CSO, Budget 2018; and Internal IFAC calculations. Note: Underlying investment excludes investment in aircraft and intangibles. GNI* is assumed to grow at the same rate as GNP, the dashed line represents Budget 2018 forecasts.

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SLIDE 16

Forecasts of the Public Finances

Irish Fiscal Advisory Council (IFAC) Fiscal Assessment Report, November 2017 November 2017 16

Primary Expenditure, Total Revenue and the Primary Balance

Percentage change year-on-year (Panel A); % of GNI * (Panel B)

  • A. Primary Expenditure and Revenue
  • B. Primary Balance
  • 15
  • 10
  • 5

5 10 15 20 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 Primary Expenditure excluding one offs Revenue excluding one offs

  • 14
  • 12
  • 10
  • 8
  • 6
  • 4
  • 2

2 4 6 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021

Sources: Department of Finance (Budget 2018); and internal IFAC calculations.

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SLIDE 17

Tax and PRSI Performance

Irish Fiscal Advisory Council (IFAC) Fiscal Assessment Report, November 2017 November 2017 17

Tax and PRSI Performance

Cumulative Outturn-Profile (2017), €billion

  • 0.8
  • 0.6
  • 0.4
  • 0.2

0.0 0.2 0.4 0.6 0.8 Jan Feb Mar Apr May Jun Jul Aug Sep Oct

Sources: Department of Finance; and internal IFAC calculations.

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SLIDE 18

Income Tax and PRSI

Irish Fiscal Advisory Council (IFAC) Fiscal Assessment Report, November 2017 November 2017 18

Income Tax and PRSI

Index of 12-month rolling sums of Income Tax and PRSI, January 2014=100 100 105 110 115 120 125 130 135 140 Mar May Jul Sept Nov Jan Mar May Jul Sept Nov Jan Mar May Jul Sept Nov Jan Mar May Jul Sept 2014 2015 2016 2017 Income Tax PRSI

Sources: Department of Finance; and internal IFAC calculations.

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SLIDE 19

Gross Current Spending

Irish Fiscal Advisory Council (IFAC) Fiscal Assessment Report, November 2017 November 2017 19

Gross Current Expenditure Relative to Budget 2017 Profile

€ millions

  • 400
  • 300
  • 200
  • 100

100 200 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Other Education Health Social Protection Total

Sources: Department of Finance; and internal IFAC calculations.

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SLIDE 20

Exchequer Tax Forecasts

Irish Fiscal Advisory Council (IFAC) Fiscal Assessment Report, November 2017 November 2017 20

Exchequer Tax Revenue Forecasts 2019-2021

€ billion 2019 2020 2021 Tax Revenue 56.4 59.1 62.0 Income tax 22.5 23.7 25.1 VAT 15.0 15.8 16.6 Corporation tax 8.9 9.2 9.6 Excise duties 6.0 6.2 6.3 Other 4.0 4.2 4.4

Sources: Department of Finance (Budget 2018).

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SLIDE 21

Corporation Tax Receipts

Irish Fiscal Advisory Council (IFAC) Fiscal Assessment Report, November 2017 November 2017 21

Corporation Tax Receipts as a Share of Revenues

% Total Exchequer Tax Receipts 16.4 15.8 2 4 6 8 10 12 14 16 18 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Sources: Department of Finance (Budget 2018); and internal IFAC calculations.

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SLIDE 22

Scenario for Full Use of Fiscal Space

Irish Fiscal Advisory Council (IFAC) Fiscal Assessment Report, November 2017 November 2017 22

Full Use of Fiscal Space Scenario (2019–2021)

Percentage of GNI*, general government basis

  • A. Budget Balance
  • B. Gross Debt
  • 0.3

1.3

  • 2.5
  • 2.0
  • 1.5
  • 1.0
  • 0.5

0.0 0.5 1.0 1.5 2.0 2015 2016 2017 2018 2019 2020 2021 Scenario Baseline 95.7 93.1 90 95 100 105 110 115 120 2015 2016 2017 2018 2019 2020 2021 Scenario Baseline

Sources: Department of Finance (Budget 2018); CSO; and internal IFAC calculations.

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SLIDE 23

Recap of Key Messages

Irish Fiscal Advisory Council (IFAC) Fiscal Assessment Report, November 2017 November 2017

The Council assesses the Government’s stance as set out for next year in Budget 2018 to be conducive to prudent economic and budgetary management. However, there is a risk that the economy may experience overheating in coming years. The Government should set out a credible plan for the medium term so that a procyclical pattern of budgetary increases does not occur as has often been the case.

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