Where is Ireland currently at VS limits imposed by the treaty.

Stabshauptmann

Article 3
From 2015 Ireland would have to run a structural deficit no greater than 0.5% of GDP.

I have heard that we currently have a deficit of approx 5%, working towards reducing that to 3% under existing IMF deal. Is that correct?

Article 4
From 2018 Ireland must ensure national debt is below 60% of Gross Domestic Product (and if not reduce the national debt by 5% p.a).

I have heard figures for our debt:GDP of between 100% and 1000%.
What is Ireland current debt relative to GDP?


Since the only way to meet this limits will be through increased austerity, I want to know how big a gap there is to bridge

Scofflaw

Stabshauptmann wrote: »

Article 3
From 2015 Ireland would have to run a structural deficit no greater than 0.5% of GDP.

I have heard that we currently have a deficit of approx 5%, working towards reducing that to 3% under existing IMF deal. Is that correct?

Not quite, I think, in that it might be confusing two rules. There is a 3% deficit rule and a 0.5% structural balance rule.

Of the two, only the 3% rule currently triggers any external action in the form of an "excessive deficit procedure" where you have to demonstrate that you're working towards getting your deficit within those limits, and can (eventually) be fined if you're not doing anything about it. Ireland is currently in an excessive deficit procedure, as are a lot of other countries.

The 0.5% structural balance limit is rather fuzzier - under the current rules, a failure to run a positive or small structural balance means, effectively, nothing at all - it doesn't result in an excessive deficit procedure.

Under the proposed Fiscal Treaty rules, the structural limit still won't kick off an excessive deficit procedure or any external action. Instead, it will kick off a domestic "correction mechanism" intended to reduce that structural deficit.

Stabshauptmann wrote: »

Article 4
From 2018 Ireland must ensure national debt is below 60% of Gross Domestic Product (and if not reduce the national debt by 5% p.a).

The first bit is right, but the 5% idea is based on an estimate of Irish debt levels plus a misunderstanding of the 1/20th rule in the Treaty.

Stabshauptmann wrote: »

I have heard figures for our debt:GDP of between 100% and 1000%.
What is Ireland current debt relative to GDP?

Currently around 108%, expected to continue to rise for the next couple of years, to reach a maximum of about 115% according to current IMF projections.

There's a tendency to take "120%" as a figure, and it's what your "5% reduction annually" is based on, as far as I can tell.

The actual requirement is 1/20th of the outstanding excess debt should be reduced annually. What that actually means is:

1. Let's say Ireland's excess debt might be 120% in 2018 - more likely to be around 105-110%, but we'll go with 120%.

2. The excess there is 60% (120% minus the 60% maximum).

3. So we need to reduce that by 1/20th in 2018. That's 60% divided by 20 = 3% debt reduction (not 5%).

4. That gives us a debt of 117% in 2019. 1/20th of the excess has to be reduced -> 57% divided by 20 = 2.85% reduction.

5. That gives us a debt of 114.5% in 2020. 1/20th of the excess has to be reduced -> 54.15% divided by 20 = 2.701% reduction.

And so on - the full reduction from 120% to 60% takes approximately 2 centuries assuming nothing else happens:

Year|Debt/GDP|Excess|Reduction
2018|120.00%|60.00%|3.00%
2019|117.00%|57.00%|2.85%
2020|114.15%|54.15%|2.71%
2021|111.44%|51.44%|2.57%
2022|108.87%|48.87%|2.44%
2023|106.43%|46.43%|2.32%
2024|104.11%|44.11%|2.21%
2025|101.90%|41.90%|2.10%

Stabshauptmann wrote: »

Since the only way to meet this limits will be through increased austerity, I want to know how big a gap there is to bridge

If the only way we could reduce our debt ratio was paying back debt capital - that is, our nominal GDP never changed from its 2011 value of €156.4bn, then the amounts needing to be dedicated to debt reduction would be:

Year|Debt/GP|Excess|Reduction|Cost €bn
2018|120.00%|60.00%|3.00%|4.69
2019|117.00%|57.00%|2.85%|4.46
2020|114.15%|54.15%|2.71%|4.23
2021|111.44%|51.44%|2.57%|4.02
2022|108.87%|48.87%|2.44%|3.82
2023|106.43%|46.43%|2.32%|3.63
2024|104.11%|44.11%|2.21%|3.45
2025|101.90%|41.90%|2.10%|3.28


Note that the above applies whether under the proposed Fiscal Treaty rules or the existing rules - there is no difference. As you can see, that's pretty much the sort of figures being bandied about as "extra austerity".

However, the table misses out two important variables - GDP growth and inflation. The debt/GDP ratio is a ratio - you can reduce it by reducing debt or increasing GDP. And it's based on nominal GDP, that is, GDP adjusted for inflation, which means that the GDP denominator increase by inflation each year even without real growth. So, actually, the position looks a bit more like this, assuming we end 2017 with 120% debt/GDP on a GDP the same as 2011:

Year|GDP growth|Inflation|Nominal GDP|Debt €bn|Ratio|Target|“Austerity”|Reduction €bn
2018|0.50%|1.75%|159.92|187.68|117.36%|117.00%|0.36%|0.57
2019|0.50%|1.75%|163.52|187.11|114.43%|114.15%|0.28%|0.45
2020|0.50%|1.75%|167.20|186.65|111.64%|111.44%|0.20%|0.33
2021|0.50%|1.75%|170.96|186.32|108.99%|108.87%|0.12%|0.20
2022|0.50%|1.75%|174.80|186.12|106.47%|106.43%|0.04%|0.08
2023|0.50%|1.75%|178.74|186.04|104.09%|104.11%|-0.02%|-0.04
2024|0.50%|1.75%|182.76|186.08|101.82%|101.90%|-0.08%|-0.15
2025|0.50%|1.75%|186.87|186.23|99.66%|99.81%|-0.15%|-0.28

So...those are pretty conservative. Real GDP growth of 0.5% is way below what we managed in the bad years of the Eighties. The 1.75% inflation is based on the ECB target of slightly under 2%.

Yet, even based on that, the reduction in debt/GDP ratio that results purely from GDP growth plus inflation rapidly overtakes any actual need for austerity, and by 2023 you can afford to borrow.

How the calculation works:

1. GDP growth = real growth, economic expansion.
2. Inflation is inflation.
3. Nominal GDP = the previous year's GDP, with growth and inflation
4. Debt €bn = the outstanding capital amount of debt
5. Ratio = ratio of (4) over (3) - this is the figure that needs to be reduced to 60%
6. Target = the target ratio of (5), based on the 1/20th reduction rule
7. "Austerity" - the gap between the target and the change in debt that results from GDP growth & inflation
8. Reduction €bn = the amount of debt capital repayment required to cover the gap at (7)

With a more realistic growth figure of 2%:

Year|GDP growth|Inflation|Nominal GDP|Debt €bn|Ratio|Target|“Austerity”|Reduction €bn
2018|2.00%|1.75%|162.27|187.68|115.66%|117.00%|-1.34%|-2.17
2019|2.00%|1.75%|168.35|189.85|112.77%|114.15%|-1.38%|-2.32
2020|2.00%|1.75%|174.66|192.17|110.02%|111.44%|-1.42%|-2.47
2021|2.00%|1.75%|181.21|194.64|107.41%|108.87%|-1.46%|-2.64
2022|2.00%|1.75%|188.01|197.29|104.93%|106.43%|-1.50%|-2.81
2023|2.00%|1.75%|195.06|200.10|102.58%|104.11%|-1.53%|-2.98
2024|2.00%|1.75%|202.37|203.08|100.35%|101.90%|-1.55%|-3.14
2025|2.00%|1.75%|209.96|206.22|98.22%|99.81%|-1.59%|-3.34

Oh look...we don't actually have any austerity. The fiscal limits do restrict our extra borrowing to the figure shown, though - so in 2018 we can borrow a maximum of €2.17bn to add to our national debt. That's based purely on the 60% rule...but if you divide that extra borrowing by the nominal GDP, it will tell you the maximum deficit the government can run. Surprise...it's 3%.

cordially,
Scofflaw

carveone

It also means all those 'economists' writing in the papers that 1/20 of outstanding per year obviously means a period of 20 years should go back to school and learn some maths. Starting with compound interest which should give them the basics

Scofflaw

carveone wrote: »

It also means all those 'economists' writing in the papers that 1/20 of outstanding per year obviously means a period of 20 years should go back to school and learn some maths. Starting with compound interest which should give them the basics

It's a bit disturbing, really!

disturbed,
Scofflaw