European Commission Spring Forecast

Économiste Monétaire

The EU Commission released its Spring Economic Forecast today.

Relating to Ireland:
http://ec.europa.eu/economy_finance/eu/forecasts/2010_spring/ie_en.pdf

Irish Summary:

| 2008| 2009| 2010| 2011
GDP growth (%, yoy)| -3.0| -7.1| -0.9| 3.0
Inflation (%, yoy)| 3.1| -1.7| -1.3| 0.8
Unemployment (%)| 6.3| 11.9| 13.8| 13.4
Public budget balance (% of GDP)| -7.3| -14.3| -11.7| -12.1
Current account balance (% of GDP)| -5.2| -2.9| -0.9| -0.6

Euro Area:



Full Document (pdf).

ardmacha

The projected deficit shown here on a no policy change basis. What does this mean exactly, unchanged taxes etc? So if property taxes etc are introduced the deficit will be lower?

Économiste Monétaire

Our existing tax and expenditure policy. They don't attempt to project what a government might or might not do with taxes, social welfare, et cetera.

noodler

Économiste Monétaire wrote: »

Our existing tax and expenditure policy. They don't attempt to project what a government might or might not do with taxes, social welfare, et cetera.

So it is overly optimistic essentially.

Économiste Monétaire

noodler wrote: »

So it is overly optimistic essentially.

Why do you think that?

noodler

Because if it is not taking into account €1bn in cuts to capital and current expenditure(€2bn) and €1bn in tax that are incoming?

Not to mention those we do not know of.

That was my initial reading of it in any case.

Économiste Monétaire

noodler wrote: »

Because if it is not taking into account €1bn in cuts to capital and current expenditure(€2bn) and €1bn in tax that are incoming?

Not to mention those we do not know of.

That was my initial reading of it in any case.

If you're talking about the budget, then that would imply an overly pessimistic number? The overall effect on GDP would depend on the marginal multiplier of government expenditure, and that would vary by wage and non-wage expenditure. I suppose it's an ecumenical question, then .

noodler

Hmm, I don't see how it could be argued that €3bn taken from the economy could not affect the growth figures?

I understand the trade-off argument you are making but if multiple forecasters (ESRI, CB, Davy etc etc)are making predictions based on the on the idea the Gov will take €3bn from the economy in the next budget and then another makes a more optimistic prediction assuming a constant budget (and comes up with more optimistic figures) then surely we can say it is being optimistic?

Perhaps, you could go into a little detail about some of the trade-offs for the sake of argument? (in the morning even!)

Économiste Monétaire

I didn't say it wouldn't affect GDP growth, I was saying that the notional effect would be a near-religious question, depending on your (economic) beliefs . It doesn't assume a constant budget, it assumes constant policy, i.e. tax rates won't change, but tax intake could vary depending on unemployment, et cetera. I believe the EU's QUEST III model gives something like a 0.5 multiplier on government consumption shocks in the first year.

It depends how the forecasters model the effects of those changes, especially as the details of the budget haven't been released. A change in social welfare (government transfers) won't have the same effect as a change in public sector pay (wage consumption). We don't know which the government will hit. The effect of reduced investment will have a lagged effect to a greater degree than consumption. You'll also have to take into account that people know these cuts are coming, and in our economics world, they've adjusted consumption accordingly .

The authors acknowledge the point you're making, though.

[T]he bulk (around 1.2% of GDP) of the consolidation effort for 2011 announced in the December 2009 stability programme update was not taken into account in the forecast as the underlying measures are still to be specified in the budget for 2011 (the exception is the announced retrenchment of public investment). Depending on the specific consolidation measures that are eventually implemented, a dampening effect on domestic demand cannot be excluded.

About half of the predicted growth in 2011 will comes from exports rising faster than imports.

noodler

Thanks for indulging me.

I would say that consumer expectations never (rarely) fully take into account changes that are coming.

The exports thing has been flogged to death but surely it can be agreed that any
attack on an already struggling domestic demand would be bad.

I don't see how the tax take from employment could really change for the better with one of the real, almost to the digit, consensus from all forecasts is that the rate we have will be with us more or less for the next 12-18 months.

I know we are only talking about differences in growth rates by 0.1-0.5% etc but even still I find it hard to argue overall that there would not be a net negative to growth rates by taking €3bn from the economy.

I like the report though - I mean someone has to do it this way - kind of like a seasonally unadjusted forecast!

Économiste Monétaire

They're probably will be a negative effect on growth from reducing expenditure. Of what order, I don't know. There are also the medium-term considerations like the real exchange rate. A reduction in public-sector pay will probably help Ireland's competitiveness; there are also behavioural economics arguments here, like reference effects and loss aversion. Something that has me puzzled on trade is that every Western government is citing how their economies will 'export' their way out of recession.

Take the forecasts with a pinch of salt, especially when they're point estimates. I put it up because people are usually interested when a reputable body gives an opinion on the future; even when that opinion is based on limited information/dubious assumptions.

noodler

The reduction in PS pay is already in this forecast's predicitons though.

Does Germany, France and the UK argue they will export their way out of the recession?

Regardless, thet are important to everyone but ours are 80% of growth aren't they?

noodler

By the way, quick Exchequer question.

Total Revenues was = €9,005
Total Expenditue was = €16,816

The Deficit was = €6,961

Now €9,005 - €16,816 = -€7,811 (A difference of €850m)

What is this €850m?

Économiste Monétaire

I was referring to more paycuts. Exports as a proportion of GDP is around 84%, but net exports is what contributes to GDP growth. I think you're referring to April's tax numbers? Tax and non-tax revenue came in at €9,165 million. Current expenditure was €16,096 million and a net capital account figure of €29 million. €9,165 - (€16,096 + €29) = -€6,960 (rounding error on the 1).

noodler

What are the figures for Tax and Expenditure I am quoting then?

I mean what is my tax take missing? (€9,165-€9,005) I the different here just non-tax revenue?


And what is making my expenditure bigger? (€16,816 - €16,096)

Économiste Monétaire

You need to add non-tax revenue to get the overall receipts number for the current account. I don't know where your expenditure figures are coming from, though.

http://www.finance.gov.ie/documents/exchequerstatements/2010/endAprilexeqstat.pdf

Économiste Monétaire

(9,005,134 + 159,433) - 16,096,297 + (1,491,045 - 1,520,251) = 6,960,937

noodler

This is the Pat McCardle table from the Times last week I was looking at.

Économiste Monétaire

Not particularly surprising that McArdle can't do basic arithmetic. He's leaving out non-voted expenditure, non-tax revenue and capital receipts. Read the main document for the figures.

noodler

Excellent.

Thanks for that.