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.


  1. do you actually believe that the government will return to living within its means by 2014?

    1. Hi AL,

      We're getting there. The 2009 primary deficit was €16 billion following the collapse in tax revenue; this year it is forecast to be €7 billion.

      It is likely that the measures that have been introduced over the past few years will have some carryover in 2013 that will further improve the primary deficit. Any measures introduced in next year's budget will add to this.

      The experience of the household charge will deter the introduction of new taxes and a shift back to income taxes is possible. For similar reasons expenditure cuts may be seen as easier to implement though with capital expenditure cut to the bone the changes here will have to be on the current side.

      The government's plan is to introduce a budget for 2013 with €3.5 billion of expenditure cuts and tax increases. There will be €0.3 billion of new measures so there will be €3.2 billion of new measures, though €0.6 billion of this comes from the stalling of the capital programme. Taxation and current expenditure need to deliver €2.6 billion. The current expenditure cuts are due to be greater than those introduced this year with slightly smaller increases in taxation, though this is subject to change.

      Of course, whether this will get the primary deficit down to €3 billion in 2013 depends hugely on the growth outcome. No one knows how this will fare out though cutting expenditure and raising taxes will not help the growth rate.

      The primary balance will have improved by 2014; it is still far from certain that it will be in surplus.

  2. Could explain briefly how the repayment of bondholders in AIB appear on the balance sheet? thanks

    1. Hi Anonymous,

      These are the government accounts. The banks pay the bondholders not the government. Since 2009 the government has provided around €64 billion to the banks. These payments are not included in the above figures.

  3. Thanks for the reply,

    I have a very limited understanding of this subject as you may have already gathered. Is it the case that the only impact the banks should have on the government accounts in future is the interest on monies previously borrowed to recapitalise them? not including the Anglo promissory notes. And if there is a deal done regarding the banks, how positively (if at all) will this reflect on the governments books. Obviously this depends on the type of deal agreed but your best guess?

  4. It proves Morgan Kelly's point made in 2008 (I believe) that spending/costs should be slashed to half, tomorrow. Now, there is little chance of ever getting out of this. The burden of interest and capital is just to great. We will end up with the worst of everything due to political cowardness, no services (or all private and costly) and back breaking debt (and so taxes)

  5. The public sector pay bill should of been slashed in 2009, but they sacrificed the rest of the country at the proverbial altar to spare themselves.

    Now there is no one left to rob.

    1. I'm afraid there and I through inflation and tax increases. The 'governments' (if you want to call them that) only hope is to deflate your savings value/income thorough price inflations, stagnant pay and tax increases.

      Watch tax paid for based services head towards zero, and inflation to set in.

  6. Agreed Anon - but i think taxes are about as high as they can be already -

    the private sector has been decimated and we have massive migration of the youth and skilled.

    any further increases in tax will result in a lower tax take as evidenced by increases in alcohol/tobacco... i would be interested to see the tax take for income tax, car tax and VAT this year if it has decreased too.

    the only places left to make meaningful cuts is the public sector - pensions and pay!! it is just a shame they decided to spare themselves when the crisis hit instead of "sharing the burden" - as myself and many others in the private sector have nothing but contempt for these selfish people now. The bail out of higher education pensions was particularly sickening and is one of many examples of special interests saving themselves.

    worst leadership crisis the country has ever experienced.

    1. High taxes? sorry, I beg to ain't seen anything yet. People think they are taxed high, thats very different to actually been taxed high. I pay 16k on 50. I expect that to go to about 22K in 50.

      Health insurance, local taxes, Vat, duty, just wait.....must happen if we have any chance.

  7. you forget people get nothing in return for taxes in Ireland compared to other countries, so yes taxes are high!
    once you hit 32K your tax rate goes to 55%+!
    talk about a disincentive to work.

    what do you mean "any chance?" for what? no economic recovery i have ever seen has been done by taxing people to death... i can't see what will make Ireland different.

    the only chance of recovery is if spending is massively cut back - that means sacking thousands of useless people in the public sector, cutting the very generous public sector pensions,. slashing welfare and time limiting it.

    all difficult political decisions - hence they will only happen when there is a huge crisis - good luck to you - bags are packed - find some other mug to pay.