June 2018 Press Briefing, 5th June 2018 IFAC IFACs Approach to - - PowerPoint PPT Presentation

Fiscal Assessment Report June 2018

Press Briefing, 5th June 2018

IFAC IFAC’s Approach to Fiscal Risks

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Some Background

IFAC’s Mandate:

3 Assessment of Forecasts Compliance with Rules Fiscal Stance Endorsement

• f Macroeconomic

Forecasts

Independent Economic Analysis

IFAC and the Fiscal Assessment Report:

• IFAC consists of a Five-Member Council
• and a Six-Member Secretariat
• IFAC’s Fiscal Assessment Reports assess the

Government’s budgetary stance; macro forecasts; and compliance with fiscal rules. This is our 14th Fiscal Assessment Report.

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Key Messages

(1) There is no case for additional fiscal stimulus in 2019

• The Government should at least stick to its plans for 2019. Anything

more expansionary is not likely to be appropriate.

• An appropriate policy would be to increase spending in line with

sustainable long-term growth. – Implies limit for spending increases or tax cuts of up to €3½ billion (“gross fiscal space”): starting point for Budget 2019.

• Previously announced measures – including sharp increases in

public investment – mean that the Government’s scope for new initiatives in Budget 2019 will be limited.

• Unexpected increases in tax revenues or lower interest costs should

not be used to fund further budgetary measures.

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(2) Improving the budget balance by more than planned would be desirable

• It would be desirable for the Government to improve the budget

balance by more than planned.

• This would recognise the risks of overheating and the opportunity

provided by favourable times.

• Revenues from a faster-than-expected recovery in housing

construction should be used to build buffers either through: – additional Rainy Day Fund contributions – faster debt reduction

• Spending should not be allowed to continue to drift up as

unexpected – and likely cyclical or transitory – revenues arise.

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(3) The Government needs a credible plan for the medium term

• Focusing on the right budgetary stance and being prepared to be

more cautious than the fiscal rules allow is the correct approach for the Government to follow.

• Yet there is a danger that the current policy framework is

insufficiently equipped to prevent a return to procyclical fiscal policy. – Sensible tools such as the Rainy Day Fund and a medium-term debt target need more development if they are to be effective. – A working paper accompanying this report shows how a countercyclical Rainy Day Fund could work with modest changes to the fiscal rules.

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Macroeconomic Context

The Macro Context:

• A rapid cyclical recovery has taken place since at least

2014 and this is continuing at a strong pace.

• There is much uncertainty, yet most coherent estimates

suggest that the domestic economy has been growing faster than its potential growth rate since 2014.

• Estimates suggest that the economy is producing close

to its medium-term potential in 2018 and will move beyond it next year and after.

• The Council welcomes the Department’s publication of

alternative estimates of the cycle to help to provide a sound basis for setting the economy and the public finances on a sustainable path.

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Employment

% change y/y, volumes

• 6
• 4
• 2

2 4 6 2011 2013 2015 2017 2019 2021

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Underlying Domestic Demand

% change y/y, volumes

• 6
• 4
• 2

2 4 6 2011 2013 2015 2017 2019 2021

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Personal Consumption

% change y/y, volumes

• 6
• 4
• 2

2 4 6 2011 2013 2015 2017 2019 2021

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Nominal GNI*

% change y/y, nominal

• 2

2 4 6 8 10 12 2011 2013 2015 2017 2019 2021

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Ireland’s Cyclical Recovery

Output gap estimates (percentage of potential output)

• 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 (GDP Mid-Point)

Short term: upside risks from housing

• There are also burgeoning pressures in the housing

sector, where persistent undersupply has been evident.

• Faster-than-assumed growth in housing output –

although needed – could prompt overheating pressures unless offsetting measures are taken elsewhere.

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Medium term: downside risks

• Negative shocks will inevitably occur in future years.
• There are clear downside risks over medium term:

– Brexit – US trade policy – International tax environment

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Impact of a large, foreign-owned multinational firm exiting Ireland

• The IFAC report highlights how corporation tax receipts

would be particularly vulnerable to an exit of a large, foreign-owned multinational firm.

• This reflects the high concentration of payments among

the top ten contributing firms.

• Corporation tax receipts are forecast to remain at

record high levels and near their peak share of Exchequer taxes.

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Direct Effects on Taxes, Earnings and Economic Activity in Ireland

€ million unless stated Typical Large Firma Total Large Firm Share (per cent of Total) Taxes and Earnings Corporation Tax 276 7,353 3.7 Employee Taxes/PRSI 62 15,997 0.4 Employee Net Earnings 79 30,419 0.3 Economic Activity Gross Value Added 4,975 255,294 1.9 Employment (thousands) 2 2,133 0.1

Sources: CSO; Revenue Commissioners; and internal IFAC calculations. Notes: aThe direct impacts of a typical large foreign-owned multinational firm on GVA, employment and employee taxes/PRSI and net earnings are estimated using the relative size of corporation tax payments for a top-ten firm compared to a top 96 foreign-

• wned firm ranked by corporate tax payments made in 2016.

20 16.4 16.2 2 4 6 8 10 12 14 16 18 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020

Sources: Department of Finance; and internal IFAC calculations. Note: Dark bars show outturns for 1984–2017; light bars show SPU 2018 forecasts for 2018–2021.

Corporation tax receipts are forecast to remain at record high levels

% of total Exchequer tax revenue

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Fiscal Context

Debt remains high and improvements on the budgetary front have stalled since 2015

• Ireland’s debt burden is still among the highest in the

OECD and is understated by standard GDP comparisons. – Set against a comparable measure of national income like GNI*, the net debt burden is equivalent to 87 per cent, the sixth highest in the OECD behind

• nly Italy, Portugal, Belgium, France and Japan.
• A strong cyclical recovery has taken place – one

reinforced by a number of favourable tailwinds. Despite this, the Government’s primary balance has barely improved.

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OECD Countries’ Net Government Debt

End-2017 net general government debt as % revenue (LHS); and as % GDP or GNI* (RHS)

228.4 460.5 58.8 86.7 153.0 300 250 200 150 100 50 50 100 150 Korea Czech Republic Turkey Switzerland Canada Latvia Iceland Slovakia Germany Poland Netherlands Mexico Slovenia Austria Israel Ireland (GDP) Hungary United Kingdom United States Spain Ireland (GNI*) France Belgium Portugal Italy Japan

% Revenue % GDP or GNI*

24 86.7 76.3 58.9 51.6 20 40 60 80 100 120 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 % GNI* % GDP

Ireland’s Net Government Debt Levels

% GNI* and % GDP, General Government basis

25 1.7 1.2 1.0 1.1

• 12
• 10
• 8
• 6
• 4
• 2

2 4 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Primary Balance Structural Primary Balance

Ireland’s Primary Balance Has Barely Improved Since 2015

% GDP, General Government basis

Spending Drift

• The report highlights how Spending Drift has been a

key contributor to the stalling in improvements to the Government’s primary balance.

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Successive Forecasts of Expenditure Have Risen

General government expenditure, € billion €72bn €80bn 66 68 70 72 74 76 78 80 82 2014 2015 2016 2017 2018 Budget 2015 SPU 2015 Budget 2016 SPU 2016 Budget 2017 SPU 2017 Budget 2018 SPU 2018

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So that planned primary balances have shown little change even as revenues rises

Primary balance, € billion

• 2

2 4 6 8 10 2014 2015 2016 2017 2018 Budget 2015 SPU 2015 Budget 2016 SPU 2016 Budget 2017 SPU 2017 Budget 2018 SPU 2018

Sensible tools need development to prevent a return to procyclical fiscal policy

• Sensible policy tools such as the Rainy Day Fund and a

medium-term debt target, which were set up to help with medium-term budgeting need more development if they are to be effective.

• The shortening of the horizon in the Government’s

most recent projections from five to three years ahead is not compatible with the aim of achieving medium- term fiscal stability.

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Rainy Day Fund

• A working paper accompanying this report shows how

a countercyclical Rainy Day Fund could work with modest changes to the fiscal rules.

• It explores how such funds can be used

– (i) to address procyclical bias in measurements of the cycle, which underpin the EU fiscal rules; and – (ii) to enhance the scope for fiscal stimulus in future downturns while also making it more desirable to set aside savings in good times.

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The speed limits for government spending are rising as the economy grows fast

31 1 2 3 4 5 6 7 8 9 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 Implied Reference Rate Actual Real GDP growth (10yr avg)

Procyclicality of Allowed Spending Growth Rates (Reference Rates) under the Fiscal Rules

% change y/y

Sources: European Commission (Autumn 2017 estimates); own workings. Note: Data show the implied Reference Rates based on ten-year averages of the estimated potential output growth rates, which are derived using the commonly agreed methodology.

Recap of Key Messages

• (1) The Council assesses that there is no case for

additional fiscal stimulus in 2019 beyond existing plans.

• (2) Improving the budget balance by more than

planned would be desirable, especially given risks of

• verheating and favourable times.
• (3) The Government needs a credible plan for the

medium term. – Focusing on the right budgetary stance is the correct approach. Yet the current policy framework is insufficiently equipped to prevent a return to procyclical fiscal policy.

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