Monday, March 26, 2012

The changing nature of our budget deficits

From 2008 to 2015, Ireland is set to rack up around €100 billion of general government deficits excluding direct payments made to the banks and the initial creation of the Promissory Notes in 2010.  These are detailed here.  The following is a table that provides some insight into the deficits excluding the bank payments.

Underlying Deficits

The “underlying deficits” (deficits excluding direct payments to banks) from 2008 to 2010 are taken from this PQ and the figures for 2011 to 2015 are taken from the Economic and Fiscal Outlook published with last December’s Budget.  These sum to over €103 billion but as can be seen not all deficits are created equally. 

The sum for the four years to 2011 is €64 billion with the cumulative deficits over the coming four years forecast to be about 40% lower at €39 billion.  However for the first four years the sum of the primary deficits was €49 billion; for the next four the cumulative primary deficit will be just €3 billion.

We borrowed huge amounts between 2008 and 2011 as a result of the collapse in tax revenue that followed the bursting of the property bubble.  In these four years we lived beyond our means to the tune of nearly €50 billion.  This has been reducing and by 2014 it is envisaged that we will be running a primary surplus for the first time since 2007.

Over the first four years interest expenditure summed to over €15 billion; for the four years from 2012 to 1015 it will be €35 billion.  It should be noted that the large jump in our interest costs in 2013 (of €2.5 billion) is due somewhat to the end of the “interest holiday” on the Promissory Notes

Although calendar year figures are not available it is likely that this interest will add €1.8 billion, €1.7 billion and €1.7 billion to the interest bill in the years 2013 to 2015.  These interest payments add to the general government deficit as the IBRC is currently not classified as part of the general government by Eurostat.  The IBRC is state-owned so the money does not leave the government unless the IBRC spends it.  The interest on the public debt over the next four years excluding the Promissory Notes will be around €30 billion.

Over the entire eight-year period we will have generated general government deficits of €103.3 billion.  Using current forecasts and the existing structure of the Promissory Notes it can be seen that €51.6 billion of this is due to primary deficits (government expenditure exceeding government revenue) and €51.6 billion is due to interest costs (the legacy of government expenditure exceeding government revenue).

It is extremely difficult to identify the portion of the interest cost which is due to the bank bailout.  The Promissory Note interest is a standalone feature but the interest on the direct payments we have made to the banks and the annual payments on the Promissory Notes is hard to determine.

In 2007, the general government debt was €47 billion and this generated the €2.4 billion interest payment we carried into the crisis in 2008.  €52 billion of primary deficits, €46 billion of injections to the banks, and €52 billion of interest payments (from a combination of the debt we started with, the large primary deficits of the last few years and the injections into the banks) means our expenditure will have generated around €196 billion of debt by the of 2015.

By 2014 we will have returned to living within our means with a small primary surplus.  In the absence of a significant increase in growth and/or inflation we will have to go beyond that and run large primary surpluses in order to control the debt ratio because of the interest burden the massive borrowing we have undertaken will have created.

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