Demographic Change and Projections for the Public Finances over the Medium Term Thomas Conefrey NERI Economics Seminar, 13 January 2016 1
IFAC: S OME B ACKGROUND M ANDATE OF T HE C OUNCIL : A SSESSMENT OF F ORECASTS 9 th Fiscal Assessment I NDEPENDENT E NDORSEMENT Report F ISCAL S TANCE E CONOMIC OF M ACROECONOMIC F ORECASTS A NALYSIS Five-member Council Six-member Secretariat C OMPLIANCE WITH R ULES 2
Outline • Review of recent macroeconomic and fiscal performance (IFAC Fiscal Assessment Report, November 2015). • Rationale for medium-term fiscal forecasts. • Estimating medium-term demographic change and implications for public spending. • Assessment of medium-term budgetary forecasts. 3
European/Domestic fiscal rules European Domestic Corrective Arm Preventive Arm of SGP of SGP Domestic Budgetary Rule Consistent with Preventive Arm of SGP 3% Deficit 1/20 th MTO / Expenditure Domestic Domestic Rule Debt Rule Adjustment benchmark Expenditure Budgetary path to MTO Ceilings Rule Domestic Expenditure Ceilings Consistent 4 with Expenditure Benchmark
Complementary domestic and European elements Domestic ownership adds legitimacy to the European rules Effectiveness Effectiveness of Domestic of European Framework Framework Monitoring, peer pressure and possible sanctions of the European framework enhances the effectiveness of the domestic framework 5
STRONG RECOVERY AND CENTRAL GROWTH FORECASTS R EAL GDP, R EAL GNP AND E MPLOYMENT G ROWTH (% C HANGE Y-Y) 12 10 8 6 4 % Change Y-Y 2 0 -2 Real GDP -4 Real GNP -6 -8 Employment -10 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Sources : Department of Finance (Budget 2016); CSO. 6
Increasing contribution of domestic demand to recovery C UMULATIVE C ONTRIBUTION TO R EAL GDP G ROWTH S INCE T ROUGH 20 18.2 Residual Domestic Demand 15 % Growth Since Trough in Q2 2009 Net Exports Real GDP 8.8 10 5 9.4 0 -5 -10 2010 2011 2012 2013 2014 2015 Source: CSO. 7
Evidence of rebalancing % OF N OMINAL GDP 35% 30% 25% 20% 15% 10% Investment 5% Net Exports 0% 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: CSO. 8
Current account near balance excluding re-domiciled PLCs 6 3.6 4 3.1 2 0.5 % GDP -0.1 -0.4 -0.6 0 -0.8 -1.0 -1.2 -1.5 -0.2 -2 -3.3 -4.1 -4 -4.9 -3.9 Current Account Balance -5.8 -4.5 -6.1 -5.1 -6 -5.7 Adjusted for Re-domiciled PLCs -8 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 9
National Income and Consumption per Head Macro indicators per head, real 55 50 Consumption GDP GNP 45 40 € ,000 35 30 25 20 15 10 Sources: CSO and Department of finance forecasts. 10
Sharper downturn + recovery than trading partners R EAL GDP PER CAPITA 110 105 100 Index: 2007 = 100 95 90 85 IE UK 80 75 US EA 70 65 60 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Sources: CSO; IMF and internal calculations. 11
%of 15-64 population Source: CSO and Eurostat. 40 45 50 55 60 65 70 75 80 1992 1993 1994 1995 1996 1997 Employment Rate Employment rate, % of 15-64 population 1998 1999 2000 2001 2002 Ireland 2003 2004 2005 2006 United Kingdom 2007 2008 2009 2010 2011 2012 2013 2014 2015 (latest) 12
Growth Benefitting the Public Finances T AXES AND PRSI R ELATIVE TO C UMULATIVE P ROFILE Income Taxes VAT Excise Duties Corporation Tax Capital Taxes Stamp Duties "Other" PRSI 4000 3500 3000 2500 € million 2000 1500 1000 500 0 -500 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Note: These overruns are relative to Budget profile. SPU anticipated taxes and PRSI coming in 13
€ billion 10 15 20 25 30 35 40 45 50 - 5 Jan-95 Source: Department of Finance. Nov-95 Sep-96 Jul-97 May-98 A NNUALISED E XCHEQUER T AX R ECEIPTS 1995-2015 Mar-99 Exchequer Tax Revenue Jan-00 Nov-00 Sep-01 Jul-02 May-03 Mar-04 Jan-05 Nov-05 Sep-06 Jul-07 May-08 Mar-09 Jan-10 Nov-10 Sep-11 Jul-12 May-13 Mar-14 Jan-15 Nov-15 14
E XCESSIVE D EFICIT C LOSED IN 2015 G ENERAL G OVERNMENT B ALANCE (% GDP) 4 2 0 0.3 -2 -1.2 -2.1 % of GDP -4 -3.9 -6 -5.7 -8 -7.0 Primary Balance -7.9 -8.4 Interest -10 General Government Balance -12 -11.0 -11.5 EDP Ceiling -14 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: CSO; Budget 2016. 15
B UT SIGNIFICANT RISKS AROUND CENTRAL FORECASTS R EAL GDP F AN C HART B ASED ON B UDGET 2016 PROJECTIONS ( TO 2016) 8 6 4 % Change Y-Y 2 0 80% likelihood range -2 60% likelihood range 40% likelihood range -4 20% likelihood range Official Outturns / Central Forecasts -6 2008 2009 2010 2011 2012 2013 2014 2015 2016 Sources : CSO; Department of Finance; internal IFAC calculations. Note: Distributions or 'fans' around historical growth estimates are based on previous revisions to real GDP data. Both forecast errors and revisions are based on 1999-05 sample. 16
C RISIS L EGACY OF H IGH D EBT AND ASSOCIATED RISKS G ENERAL G OVERNMENT D EBT 160 140 120 100 84.2 80 76.0 69.3 60 62.5 Gross Debt (% GDP) Gross Debt (% Hybrid) 40 Net Debt (% GDP) 20 Net Debt (% Hybrid) 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Sources : Department of Finance; internal IFAC calculations. Note : Changes in EDP debt instrument assets for forecast years are assumed to be in line with Budget 2016 projected changes in cash balances. 17
Outlook Short Term Policy vigilance and economic growth have helped to improve • the public finances – But significant risks surround the forecasts. – Importance of prudence to ensure sustainable growth. Medium Term Key weakness remains the absence of realistic medium-term • projections for the public finances. Projections for expenditure, tax revenue, deficit and debt based • largely on technical assumptions. With period of crisis management and repair coming to an end, • opportunity to re-focus on medium term. 18
Why are Medium-Term Budgetary Plans Important? • Budgetary process has focussed attention excessively on one-year ahead. • This has contributed to pattern of procyclicality in Irish fiscal policy. • Medium-term fiscal plans are required in order to: – Provide a medium-term anchor for the public finances and avoid the risk that incoming cyclical revenues are spent. – Increase the predictability of the budgetary planning process. – Provide a link between resource allocation and Government policy and priorities. • Key theme of recent Fiscal Assessment Reports 19
Deviations from Expenditure Plans G ROSS C URRENT E XPENDITURE , % D EVIATION FROM F ORECAST 30% 25% Yr1 % Deviation Yr2 % Deviation 20% Yr3 %Deviation Real GDP growth 15% % deviation 10% 5% 0% -5% -10% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2009* 2010 2011 2012 2013 2014 2015 Budget Year Source: Department of Finance Note: * denotes the Supplementary budget in 2009 . Bars show the forecast error for 1 year ahead, 2 years ahead and 3 years ahead. Latest figures for 2016 to 2018 (used in calculation the latest deviation from Budget 2015 years 2 and 3) are adjusted by €1 billion to reflect the change in the treatment of the HSE from 2015. This adjustment is made for comparison purposes. 20
C ONTINUOUS REVISIONS TO M ULTI - YEAR EXPENDITURE CEILINGS C HANGES TO C URRENT E XPENDITURE C EILINGS 54 53 Budget 2016 52 51 50 Budget 2015 € billion 49 Budget 2014 48 Budget 2013 47 Budget 2012 46 45 44 2013 2014 2015 2016 2017 2018 Budget Year Source: Department of Finance. 21
Medium-Term Fiscal Plan in Budget 2016 Budget 2016 medium-term fiscal projections include: • – €0.4 billion per annum for demographic pressures – Cost of Lansdowne Road Agreement until 2018 Tax forecasts allow for indexation but assume no change in • policy, despite stated commitments to reduce taxes. Medium-term plans imply over-compliance with fiscal rules • although stated policy is for minimum compliance. Develop an alternative medium-term expenditure scenario for • 2015-2021 Scenario takes into account estimated demographic changes and • assumptions on the cost of providing public services based on Budget 2016 macro projections. 22
Budget 2016 Projections imply Steep Fall in Primary Spending Government Revenue and Primary Expenditure, % of GDP 45 40 35 % of GDP 30 25 Primary expenditure/GDP Revenue/GDP 20 1996 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 Note: Chart shows Exchequer revenue and primary expenditure as a share of GDP. Source: Budget 2016 and internal IFAC calculations. 23
Methodology: Steps 1. Produce baseline demographic projections using Cohort Component Method. 2. Demographic scenario with projections of population by age used as input into long-term fiscal model. 3. Volume of public expenditure linked to demographics, price indexed to relevant deflators. 4. Compare resulting scenario to Budget 2016 projections and estimates of fiscal space. 24
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