Economic and Fiscal Outlook John McHale National University of Ireland, Galway Irish Fiscal Advisory Council October 3, 2013 12th Annual IUA HR Conference.

Economic and Fiscal Outlook

John McHaleNational University of Ireland, Galway

Irish Fiscal Advisory Council

October 3, 2013

12th Annual IUA HR Conference ~ Ag Breathnú Romhainn ~

~ Looking Forward ~

Overview

• Economic outlook

• Fiscal outlook

• Implications for higher education sector

Economic outlook

Banks Public Finances

Real Economy

Bank Bailout Costs

Lost Credibility of Guarantees

AusterityBudgetary CostsAsset ValuesCredit Availability

Dealing with a crisis

Real aggregate activity

19 19 19 19 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 200

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

Quarterly GDP and Total Domestic Demand, Constant Prices, Seasonally Adjusted

Real GDP

Total Domes-tic Demand

Real aggregate activity

19 19 19 19 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 200

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

Quarterly GDP, GNP, and Domestic Demand, Constant Prices, Seasonally Adjusted

Real GDP

Real GNP

Total Domes-tic Demand

Components of domestic demand

1997Q1

1998Q2

1999Q3

2000Q4

2002Q1

2003Q2

2004Q3

2005Q4

2007Q1

2008Q2

2009Q3

2010Q4

2012Q1

2013Q20

5,000

10,000

15,000

20,000

25,000

Components of Domestic Demand, Constant Prices, Seasonally Adjusted, 1997Q1- 2013Q2

Consumption

Investment

Government Spending (Current)M

illio

ns o

f Eur

o

Retail sales

2005M012006M032007M052008M072009M092010M112012M012013M0380

85

90

95

100

105

110

115

120

Retail Sales, Volume, Seasonally Adjusted

Retail Sales, Exclud-ing Motor Trades

All Retail Sales

Inde

x, 2

005

= 10

0

Real exports and imports

1998Q1

1998Q4

1999Q3

2000Q2

2001Q1

2001Q4

2002Q3

2003Q2

2004Q1

2004Q4

2005Q3

2006Q2

2007Q1

2007Q4

2008Q3

2009Q2

2010Q1

2010Q4

2011Q3

2012Q2

2013Q1

-30,000

-20,000

-10,000

0

10,000

20,000

30,000

Quarterly Exports and Imports of Goods and Services, Constant Price, Seasonally Adjusted, 1998Q1 to 2013Q2

Exports of Goods

Exports of Services

Imports of Goods (-)

Imports of Ser-vices (-)

Mill

ions

of E

uro

Employment developments

1998Q1

1998Q4

1999Q3

2000Q2

2001Q1

2001Q4

2002Q3

2003Q2

2004Q1

2004Q4

2005Q3

2006Q2

2007Q1

2007Q4

2008Q3

2009Q2

2010Q1

2010Q4

2011Q3

2012Q2

2013Q10

500

1,000

1,500

2,000

2,500

Quarterly National Household Survey: Total Employment and Employees, 1998Q1-2013Q2

Total Em-ployment

Employees (in-cluding schemes)

Thou

sand

s

Fiscal outlook

Crisis → Massive debt shock

2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 20

20

40

60

80

100

120

Perc

ent o

f GDP

24.6 percent of GDP, 2007Q2

Source: Central Statistics Office

And a large underlying deficit

2008 2009 2010 2011 2012 2013 2014 2015 2016 -

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

62,996.5

54,442.0 53,817.255,852.7 56,593.0

58,740.061,420.0 64,035.0 65,760.0

76,135.872,910.6 71,600.3 70,559.0 69,053.0

71,245.068,960.0 67,985.0 68,950.0

13,139.3

18,468.5 17,783.114,706.3

12,460.0 12,505.0

7,540.03,950.0 3,190.0

Underlying General Government Deficit

Underlying General Government Expenditure

General Government Revenue

Deteriorating creditworthiness led to the need for a bailoutJa

n/20

07M

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Jan/

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2

4

6

8

10

12

14

Ireland

Germany

%

Ten-Year Bond Yields

Source: Datastream

A huge fiscal adjustment has been requiredBillions of Euro

July 2008Expenditure adjustments

1.0

Budget 2009 (October 2008)Revenue raising measures

2.0

February 2009Expenditure adjustments

2.1

Supplementary budget (April 2009)Revenue-raising & expenditure-reducing measures

5.4

Budget 2010 (December 2009)Revenue-raising & expenditure-reducing measures

4.1

Budget 2011 (December 2010)Revenue-raising & expenditure-reducing measures

6.0

Budget 2012 (December 2011)Revenue-raising & expenditure-reducing measures

3.5

Budget 2013 (December 2012)Revenue-raising & expenditure-reducing measures

3.5

Planned Adjustments: 2014 – 2015Revenue-raising & expenditure-reducing measures

5.1

Total actual and planned adjustment 32.7 (≈ 20 % of GDP)

Is austerity working?

A difficult balancing act

• Recognition that fiscal adjustment measures will slow the economy in the short run

• Key question: Is austerity working to stabilise the public finances and restore the creditworthiness/borrowing capacity of the State?

Actual vs. counterfactual: The primary deficit

2009 2010 2011 2012 20130

2

4

6

8

10

12

14

16

9.3

7.5

5.8

4.0

2.5

13.9 14.014.8 14.3 14.0

Actual Scenario No Adjustment Scenario

Perc

ent o

f GD

P

Actual vs. counterfactual: The overall deficit

2009 2010 2011 2012 20130

5

10

15

20

25

11.4 10.79.1

7.6 7.4

15.817.2

18.2 18.419.9

Actual Scenario No Adjustment Scenario

Perc

ent o

f GD

P

Actual vs. counterfactual: The Debt/GDP ratio

2009 2010 2011 2012 20130

20

40

60

80

100

120

140

160

180

64.8

92.1

106.4117.6 123.3

67.7

100.1

121.4

141.5

157.9

Actual Scenario No Adjustment Scenario

Perc

ent o

f GD

P

Significant improvement in creditworthiness Ja

n/20

07M

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007

May

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7Ju

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Jan/

2008

Mar

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Jul/2

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Sep/

2008

Nov

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Jun/

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Feb/

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Apr/

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Jun/

2010

Aug/

2010

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Feb/

2011

Apr/

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Jun/

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Aug/

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Oct

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Jan/

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0

2

4

6

8

10

12

14IrelandGermany

%

Source: Datastream

On track to bring the deficit below 3% by 2015 . . . but uncertainty remains

Should we proceed with planned adjustments?

• Current plans are for additional adjustments of:– €3.1 billion in 2014– €2.0 billion in 2015

• Risks around growth mean it is wise to continue to plan for these adjustments– Possible scope to relax plans as the picture becomes clearer

• Hard-won credibility would also be put at risk by not following through on planned adjustments

Light at the end of the tunnel?

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019-4-202468

1012 10.5

4.16.0

3.8 3.5 3.12.0

-0.2 -0.7 -1.0 -1.5

Required discretionary adjustment to ensure com-pliance with all fiscal rules

Billi

ons

of E

uro

Distributional effects of the crisis and the policy response

Impact of the crisis on inequality

Source: OECD

Distributional effects of Budgets, 2009-2013

Cumulative Percentage Change in Disposable Income

Source: ESRI

Evolution of inequality over the crisis

Source: CSO, Survey of Income and Livings Conditions

Implications of the adjustment for Education

Significant reduction in pay bill and numbers

Education sector is second largest employer

But strong demand pressures

Education spending is falling

2006 2007 2008 2009 2010 2011 2012 20130.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

Education Spending, 2006-2013

CapitalNon PayPay and Pensions

Billi

ons

of E

uro

Source: DPER, Databank

Higher education taking a disproportionate hit

Source: DPER, Revised Estimates

Final thoughts• How can the third-level sector defend its research

mission?

• Current model focused on discrete outputs for industry– Patents; start-ups; PhDs . . .

• Might be better to focus on a human-capital model– Research-based teaching → Equip graduates with the

analytical skills to work at the technological frontier