The Governor writes…
You wouldn’t expect the Governor of the Central Bank to recommend the Government does something wacky in the Budget, and in his pre-budget letter to the Minister for Finance, the governor doesn’t disappoint.
His key recommendations are, firstly a long-term need to reduce debt well below the 60% limit set by the Maastricht Treaty and, secondly any budget-day help for first time buyers should not make things worse.
The Governor would like to see long-term budgetary targets that can “act as an anchor” for the annual budget decisions.
A crucial target is the debt-to-GDP ratio. We know we have to get the number down over time to 60%, under the EU treaties.
The Governor argues for a ratio well below that limit, saying the volatile nature of the Irish system and the history of crises means Ireland should have a debt ratio significantly lower than the one that works for large, stable economies.
The thinking here is that if the State has a very low debt stock as a share of GDP, it will find it easier to run a big deficit to cope with a future economic shock.
Remember, we went into the last crisis with a gross debt ratio of 26% of GDP (14% net debt).
This was the second lowest level in the EU. It very rapidly became one of the highest in the EU.
But if it had been high to start with, we could have ended up with a Greek-style disaster on our hands.
This suggests the Central Bank would like a long-term policy of getting the debt ratio back down, not just to 60% of GDP, but well below it.
As the Governor’s letter puts it, “the greater the commitment to attaining the long-term targets, the more it is possible to run a flexible, counter cyclical policy in response to temporary shocks”.
As it happens, the ratings agency Fitch put out a note today as well, on the fiscal implications of the Apple ruling.
It puts the potential haul (excluding interest) of €13 billion as being worth about 5.2% of 2015 GDP, which if used to pay down debt would accelerate the improved debt dynamics.
It expects the debt ratio to fall to 63.7% in four years’ time (the rapid improvement the result of those statistical revisions that recorded turbocharged growth of 26% last year). (Regarding the ruling, it thinks the risk of multinationals leaving as a result is low, but the Government divisions it revealed increase political risk here).
But the trouble with the “Leprechaun Economics” of those spectacular GDP numbers means that the debt-GDP ratio itself is suspect.
Governor Lane says the standard debt-GDP indicator needs to be supplemented by a locally developed indicator that will be “robust to statistical issues” – in other words, Leprechaun-proof.
As for this year’s Budget and the “microeconomic level”, the Governor offers his two cents worth on the Government’s plans for helping first-time buyers get on the property ladder/saddled with debt.
He says the plans should be “sufficiently targeted to avoid material aggravation of current distortions of the residential property sector”.
In other words, the current situation is bad – don’t make it worse with short sighted schemes that are open to abuse.
Comment via Twitter: @seanwhelanRTE