This 2.75%/year growth prediction

wylo

Im just wondering could someone explain this prediction?
Firstly how exactly is economic growth calculated?
Secondly is this prediction completely off the walls or is it something that could genuinely happen?

Cavehill Red

It's makey-uppy obviously.

Could it happen? Sure it could happen, but it's hardly likely. Furthermore, even if it did happen on paper, it would likely be in such a way as not to benefit the vast majority of citizens, ie by creating wealth for the few rather than meaningful numbers of jobs.

johnnyskeleton

My understanding is that it was based on estimates in 2008 of how they could get back to deficit of 3% of GDP by 2012. They worked this out based on what they thought they could cut and then the GDP figure was magically plucked out of nowhere to plug the remaining hole.

As things deteriorated, the level of GDP growth was revised upwards rather than cuts being increased.

There was a thread here some time ago about an Economist article that cast doubt on the level of predicted growth.

Bob_Latchford

http://www.rte.ie/news/2010/1126/eurozone-business.html

Analysis by Euroframe - a consortium of ten independent research organisations including Ireland's ESRI - forecasts growth for the euro zone as a whole will be 1.6% next year and 1.7% in 2012.

Its euro wide growth but even with optimistic outlook you would have to say Ireland would be doing well to achieve the euro average

wylo

So is it a reasonal assumption to make that this 4 year plan will stretch out longer if we do not get to those growth levels?
My question is, how are they intertwined? How would have having a growth level of 1% for instance affect our tax intake and our deficit.

Bob_Latchford

Would be interesting to see how the calculations differ for different growths but I dont know what they are. Would it be as simple as saying half the growth double the time?? really dont know

Hayte

Growth rate is what we produce as a nation. i.e. Its the total value in US dollars of all the goods and services we make, divided by population size. The idea is that we need to sell more than we borrow and make a surplus. The surplus we need to use to pay down our national debt. The sooner we pay down our debts the less interest we have to pay on those debts.

Tax is a way for governments to pay for public services and infrastructure that is necessary for us to efficiently produce goods and services (i.e. roads and transportation for people to get to and from work and allow more of the population to be more productive). Right now the government has one other big expenditure which is bailing out Irish banks because their investments went south. It does this by borrowing money from the European Central Bank to pay off Irish Bank creditors and bondholders who are owed money and interest. It is doing this so that foreign investors will look at investments in Ireland and feel safe that they will get a return on investment because no matter what, the government will guarantee against systemic defaults.

Ireland right now is like a conduit for foreign companies because of our incredibly low corporate tax rate and foreign companies account for the vast majority of our exports. If any recovery is going to be export led, we still want those companies in Ireland.

Thats about as simple as I think I can boil the relationship down to anyway. Corrections and additions if applicable are welcome. The reality of it is vastly more complicated and has mucho accounting gymnastics to make everything work but the underlying logic still applies.

The growth rate of 2.75% is optimistic because as mentioned its vastly higher than the EU average and the austerity measures are quite draconian so its possible that they will have the opposite effect. i.e. rather than making the people of a nation more efficient, make us produce the same or more or less cost, they are just as likely to crush us and make us less efficient. Thats one reason why the IMF in conjunction with the government is exploring other ways to spread Irish bank debt amongst bondholders and what not. It will ease bank debts meaning that the government can be less harsh on taxpayers but it has to do this in a way that won't make Irish investment look like a bad deal. i.e. it has to be by agreement.

cavedave

Dr Bacon was on newstalk this morning predicting growth in GDP of around 0% for 2011

Standard & Poor's now expects close to zero nominal GDP growth for 2011 and 2012. We do not envisage GDP exceeding 2% a year in real terms before 2013.

Saadyst

Good questions OP, and I'll try to follow up with another question: Have FF shown any real strategy for growth, or where they expect the predicted growth to come from?

Bob_Latchford

Think we are just wondering given a realistic growth rate, will Ireland be able to reach its 3% gdp in 2014.

Then it follows if the forecast growth is difficult to achieve how inportant is stimulus now or can the 3% target be kicked out a few more years to 2016-18 etc

Nijmegen

Bob_Latchford wrote: »

Think we are just wondering given a realistic growth rate, will Ireland be able to reach its 3% gdp in 2014.

Then it follows if the forecast growth is difficult to achieve how inportant is stimulus now or can the 3% target be kicked out a few more years to 2016-18 etc

The growth figure is based on a lot of things, from internal demand to growth in the US, UK, Europe, oil prices, etc.

Any of those are off and the growth rate is off. Naturally, you can see there's more things to go wrong than right. And internal demand is the first thing to be kept down by austerity.

You're thinking linearly about extending austerity over more years. We will either need bigger cuts in the four years, or we'll need to default, or we'll need a bigger bailout at more favourable conditions.

The markets don't want to lend to us over that period of time with austerity killing demand.

It's a circle of death for the economy.

later12

Saadyst wrote: »

Have FF shown any real strategy for growth, or where they expect the predicted growth to come from?

Well in fairness to the current administration, leaving corporation tax at current low levels amid an economic climate which is seeing a rising dollar (and will likely continue to do so) is an excellent beginning.

Otherwise, they have been pretty depressing. Austerity measures are all well and good, in fact they are wonderful, until they start eating into your GDP, and in my opinion, that is something the Government are not taking into enough consideration.

Sticky_Fingers

later10 wrote: »

Well in fairness to the current administration, leaving corporation tax at current low levels amid an economic climate which is seeing a rising dollar (and will likely continue to do so) is an excellent beginning.

Otherwise, they have been pretty depressing. Austerity measures are all well and good, in fact they are wonderful, until they start eating into your GDP, and in my opinion, that is something the Government are not taking into enough consideration.

A rising dollar? Its strong against the Euro at the moment because we are currently in the eye of a poop storm. The dollar is on life support and with QE2 making its way through the system its not going to get much better.

later12

Sticky_Fingers wrote: »

A rising dollar? Its strong against the Euro at the moment because we are currently in the eye of a poop storm. The dollar is on life support and with QE2 making its way through the system its not going to get much better.

Yes a rising dollar, financiers and economists are at pretty much concnsus level about that.
Most people are slightly more pessimistic about the euro, we are not just in the eye of the storm, we are reeling from its aftermath and will continue to do so well into 2013 or beyond. The US is a safe haven right, hence the continued investor move to US treasuries which is not expected to change anytime soon. The dollar will grow at a far greater rate than we will both in ireland and in the SEC area - these may very well become different entities, hence the distinction.