Hopeless Forecasts

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Forecasts are never the most important part of Budget process.  Although the natural tendency to focus on projections of growth and the deficit is magnified now by a widespread hope that there might be an end to economic misery, Budget forecasts are not the place to look. Currently the Department of Finance is forecasting that in 3 year’ time GDP will almost be back to where it started 8 years previously in 2007. But GNP will still be more than 4% below its pre-recession peak, according to official forecasts.

How much credence should be given to official projections? Not much. The chart below is taken from September’s Fiscal Assessment Report (FAR) and shows the level of forecast error for GDP in official presentations two and three years hence. The official record on forecasting GNP is much worse, as the domestic economy has parted company from the MNC profits-inflated level of GDP.

Likewise with projections of a fall in the deficit. To give just one example, not the most egregious, the Addendum to SPU of January 2009 forecast that the deficit would be eliminated altogether in 2012.

It seems more likely that Budget documents serve a political rather than a forecasting purpose. Certainly, no business presenting its accounts would be allowed to routinely begin its table of data from a year that is not yet complete- in this case 2012- without reference to the actual outturn in the previous year. Yet this is the norm (although it must be sad, not solely in Ireland).

Successive governments have long abandoned any notion that policy is about fostering growth but repeatedly insist instead that it is about reducing the deficit. Yet according to the Budget documents the deficit (General Government Balance as per EU accounting rules) was 8.2% of GDP. This is almost 1% of GDP higher than the deficit in 2008, when austerity began.  According to the government’s own White Paper on estimates for 2013, without the further fiscal tightening of the Budget the deficit would rise to 8.9% of GDP. Any deficit which requires constant application of new measures can hardly be said to be on a sustainable downward trajectory.

Of course, absent any further bank bailouts the deficit will not return to the colossal levels of 2010. But there is also good reason to believe it will not be lower than the 3% threshold of GDP by 2015 either. Total expenditure equivalent to 8.6% of GDP on bank recapitalisation and ‘other expenditure’ fell out of government spending in 2012 compared to 2011 (Medium-Term Fiscal Statement, Table 1, p.87). Yet the deficit fell by only 5.2% of GDP (13.4% to 8.2%).

Crucially, between 2008 and 2011 the government’s own investment (Gross Fixed Capital Formation) fell by over €5.5bn. Including the likely outturn in 2012 the total decline in government GFCF was at least €6bn. Without this hugely destructive decline in investment, the effects of which are likely to be registered over decades, the deficit in 2012 would have been €19.3bn or 11.9% of GDP.

In reality ‘austerity’, which is supposed to be an attack on the level of government current spending is not producing any improvement in government finances. The trend decline in the deficit is actually a combination of wishful thinking, continuous impositions on the population and the effects of the bank bailouts diminishing over time. Most importantly, the claims to deficit reduction rely on slashing capital spending, which degrades the long-term potential of the economy, its infrastructure and the quality of its education.

Economic policy should be aimed at the optimal sustainable increase in the living standards of the population. Current policy is the opposite. In the government’s Medium-Term Fiscal Statement income taxes will rise by 2.4% of GDP from 2011 to 2015. Compensation of public sector workers will fall by 2% of GDP and yet taxes on production will fall by 0.3% of GDP.

‘Austerity’ is not really aimed at improving government finances at all. It is in fact a transfer of income from labour and the poor to capital and the rich.

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