Fiscal Assessment Report November 2017 28th November 2017 IFAC IFAC’s Approach to Fiscal Risks
IFAC: Some Background Mandate of the Council: Assessment of Forecasts Independent Endorsement Fiscal Stance Economic of Macroeconomic 13 th Fiscal Assessment Forecasts Analysis Report Compliance Five-member Council with Rules Six-member Secretariat Irish Fiscal Advisory Council (IFAC) Fiscal Assessment Report, November 2017 November 2017 2
Key Messages (1) 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. Irish Fiscal Advisory Council (IFAC) Fiscal Assessment Report, November 2017 November 2017 3
Key Messages (2) 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. Irish Fiscal Advisory Council (IFAC) Fiscal Assessment Report, November 2017 November 2017 4
Key Messages (3) The Government should set out a credible plan for the medium term so that a Commit to Spending procyclical pattern of budgetary increases Rule does not occur as has often been the case: (i) firmer commitment to the spending rule as an Strengthen Rainy Day anchor for fiscal policy Fund (ii) strengthening proposed Rainy Day Fund so that Develop it achieves countercyclical effects and is Toolkit for adequate in size Assessing Cycle (iii) developing toolkit for assessing cyclical position of the economy Public Investment (iv) adhering to a target for public investment Target spending over the medium term Irish Fiscal Advisory Council (IFAC) Fiscal Assessment Report, November 2017 November 2017 5
Continued Strong Growth Forecast % change volumes unless stated A. Employment B. Underlying Domestic Demand 6 6 3.8 4 4 2.3 2 2 0 0 -2 -2 -4 -4 -6 -6 2011 2013 2015 2017 2019 2021 2011 2013 2015 2017 2019 2021 C. Personal Consumption D. Nominal GNI* 6 15 4 2.3 10 2 4.5 0 5 -2 0 -4 -6 -5 2011 2013 2015 2017 2019 2021 2011 2013 2015 2017 2019 2021 Sources: CSO; Department of Finance ( Budget 2018 ); and internal IFAC calculations. Irish Fiscal Advisory Council (IFAC) Fiscal Assessment Report, November 2017 November 2017 6
Economy Close to its Potential Figure 1.2: Ireland’s Output Gap Estimates Percentage of potential output 10 IFAC Range 8 IFAC Mid-Range DoF (CAM-Based Estimates) 6 4 2 0 -2 -4 But path for -6 CAM estimates is implausible -8 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 Sources: Department of Finance ( Budget 2018 ); and internal IFAC calculations. Irish Fiscal Advisory Council (IFAC) Fiscal Assessment Report, November 2017 November 2017 7
Debt levels remain high OECD Countries Net Government Debt (Top 25 Countries) End-2016 net general government debt as % revenue (LHS); and as % GDP or GNI* (RHS) Japan Italy Portugal Ireland (GNI*) 241.7 92.8 Belgium France Spain United States United Kingdom Hungary Ireland (GDP) 63.7 Israel Austria Slovenia Netherlands Mexico Germany Poland Slovak Republic Iceland Latvia Canada Czech Republic % Revenue % GDP or GNI* Switzerland Turkey Korea 400 350 300 250 200 150 100 50 0 50 100 150 Sources: IMF; OECD; Eurostat; CSO. Irish Fiscal Advisory Council (IFAC) Fiscal Assessment Report, November 2017 November 2017 8
Primary Balance Changes Slowing Level and Annual Changes in the Primary Balance % of GNI*, general government basis A. Level of Primary Balance B. Annual Changes (percentage points) 4 4 3.2 2.9 2.7 2.3 1.9 2 2 0.6 0.4 0 0 -0.1 -0.1 -0.3 -2 -2 -4 -4 2013 2014 2015 2016 2017 2018 2019 2020 2013 2014 2015 2016 2017 2018 2019 2020 Sources: Department of Finance ( Budget 2018 ); CSO; and internal IFAC calculations. Irish Fiscal Advisory Council (IFAC) Fiscal Assessment Report, November 2017 November 2017 9
Budget sticks to € 1.7 billion fiscal space 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 0.65 Budget 2018 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. Irish Fiscal Advisory Council (IFAC) Fiscal Assessment Report, November 2017 November 2017 10
Medium-Term Objective Structural Balance % potential GDP (based on Commonly Agreed Methodology) 0 -0.5 -2 -4 -6 -8 -9.9 -10 -12 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. Irish Fiscal Advisory Council (IFAC) Fiscal Assessment Report, November 2017 November 2017 11
Commercial Property Irish Commercial Property Investment Turnover € billion Source : CBRE. Irish Fiscal Advisory Council (IFAC) Fiscal Assessment Report, November 2017 November 2017 12
Real GDP Growth Forecasts Real GDP Growth Forecasts Percentage change, year-on-year 2017 6 6 2018 5 5 5.0 4.9 4.8 4.3 4 4 4.1 4.0 3.9 3.9 3.5 3.4 3 3 2 2 1 1 0 0 Budget CBI ESRI IMF EC Budget CBI ESRI IMF EC 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). Irish Fiscal Advisory Council (IFAC) Fiscal Assessment Report, November 2017 November 2017 13
Changes in Real GDP Growth Forecasts Changes in Real GDP Growth Forecasts Latest Forecasts – Spring Vintages 2017 2018 1.6 1.6 1.2 1.2 0.8 0.8 0.4 0.4 0 0 -0.4 -0.4 DoF CBI ESRI IMF EC DoF CBI ESRI IMF EC 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). Irish Fiscal Advisory Council (IFAC) Fiscal Assessment Report, November 2017 November 2017 14
Underlying Investment Underlying Investment Percentage of GNI* 30 25 20 Average (1997 - 2016) 15 10 5 0 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 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. Irish Fiscal Advisory Council (IFAC) Fiscal Assessment Report, November 2017 November 2017 15
Forecasts of the Public Finances 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 6 20 Primary Expenditure excluding one offs 4 Revenue excluding one offs 15 2 0 10 -2 5 -4 0 -6 -8 -5 -10 -10 -12 -14 -15 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 Sources : Department of Finance ( Budget 2018 ); and internal IFAC calculations. Irish Fiscal Advisory Council (IFAC) Fiscal Assessment Report, November 2017 November 2017 16
Tax and PRSI Performance 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. Irish Fiscal Advisory Council (IFAC) Fiscal Assessment Report, November 2017 November 2017 17
Income Tax and PRSI Income Tax and PRSI Index of 12-month rolling sums of Income Tax and PRSI, January 2014=100 Income Tax PRSI 140 135 130 125 120 115 110 105 100 Mar May Nov Mar May Nov Mar May Nov Mar May Jul Sept Jan Jul Sept Jan Jul Sept Jan Jul Sept 2014 2015 2016 2017 Sources : Department of Finance; and internal IFAC calculations. Irish Fiscal Advisory Council (IFAC) Fiscal Assessment Report, November 2017 November 2017 18
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