How do we compare?
by Economics Correspondent Seán Whelan
As we glide into the Irish Budget for 2014, its easy to forget that we are not the only country facing a big fiscal challenge, and making significant budget adjustments.
Our adjustment – now confirmed at €2.5 billion – is roughly 1.5% of GDP. The IMF’s annual Fiscal Monitor, just published, sets out what other high debt countries are doing to close their fiscal deficits. And yes, we do figure in their top ten list.
This year the average fiscal deficit of advanced economies is set to narrow by 1.5% of GDP. This is the fastest pace since consolidation efforts started in 2011.
But Fiscal tightening is due to moderate significantly next year as a large part of the consolidation has already taken place, or is close to completion.
Here is what the other high debt, high deficit countries are doing:
United States – The IMF warns starkly that the US is closing its deficit too quickly – due to the failure of the Congress to agree a proper budget plan. The blunt instrument of the sequester means the US cyclically adjusted balance will improve by 2.5% this year and 0.75% next year.
UK – Cyclical balance forecast to improve by 2% this year and 1% next year programmed.
France – “Fiscal withdrawal” of 1.5% of GDP this year – mostly through taxes. Next year the adjustment is 0.5%, mainly from spending cuts.
Portugal – Consolidation of 1.25% this year and 1% of GDP next year. Hitting the target depends on implementing measures contained in a review of public spending.
Greece is expected to achieve a primary balance this year (something Ireland will not attain until next year). Planning further measures out to 2016 equivalent to 3.5% of GDP.
Italy – Underlying consolidation of 1% of GDP this year is expected to bring the structural balance close to zero, but paying off public sector arrears, the sub to the ESM and the weak economy will mean the debt level will still rise.
Spain – IMF staff say Spain has measures in train that will lead to an adjustment equivalent to 0.75% of GDP this year, and the same again in 2014. But this is before additional measures that may be contained in the 2014 budget (draft to Brussels next week, like the other euro zone states).
There are also a small group of lucky states that have been able to ease back in 2013, because their books are in such a good condition. Chief among them is Sweden, where the structural deficit is going up by 0.5% this year – thanks to a large cut in corporation tax. Budget 2014 is expected to be neutral, following recently announced measures to support growth and employment, including additional income tax credits and measures to tackle youth unemployment. Fiscal tightening is not expected before 2015.
Germany has already met its deficit goals under the debt brake rule – ahead of schedule! A small loosening is expected this year, and only a small tightening next year.
Germany and the US are the notable exceptions to a general trend of countries where fiscal developments have failed to match plans drawn up back in 2011.
The IMF notes that the countries making adjustments have increased tax more than originally planned, and failed to curb spending. Indeed European states on average are spending more now than they did before the crisis.
It notes that adjustment has relied more heavily on taxation than initially planned “with tax changes mostly guided by expediency rather than efficiency”.
The Fund notes disapprovingly that “expenditure ratios have stayed high – particularly in Europe, where they exceed 45% of potential GDP and remain some 1% higher than pre-crisis levels on average”.
The good news is that the back has been broken on the level of adjustment needed to reach targets for debt sustainability for the most indebted states. On average two thirds of the adjustment required to reach medium-term targets has been achieved in the ten most highly indebted countries – with the big exception of Japan.