| |
Ireland - Stability Programme
December 2002 Update
This document updates Ireland's Stability Programme and includes macroeconomic
projections to 2005. It also takes account of the measures adopted in Budget
2003.
This Update has been prepared in conjunction with Budget 2003 and is being presented
to Dáil Éireann on Budget Day, 4 December 2002. As such it also
provides an economic background to Budget 2003.
It has been prepared in accordance with Council Regulation (EC) No 1466/97 which
sets out the rules covering the content of Stability Programmes, and conforms
with the revised Opinion on the content and format of Stability and Convergence
Programmes agreed by the EU Economic and Financial Committee in June 2001.
1. Overall Policy Framework and Objectives
2. Economic Outlook
2.1 Summary
2.2 The Economy in 2002
2.3 Macro-economic Projections: 2003-05
2.4 Inflation
3. General Government Balance and Debt
3.1 Summary
3.2 Policy Strategy
3.3 Actual Balances and implications of forthcoming budget
3.4 Structural balance and fiscal stance
3.5 Debt levels and developments
3.6 Balance by sub-sectors of general government
4. Sensitivity Analysis and Comparison with Previous Update
4.1 Summary
4.2 Alternative scenarios and risks
4.3 Sensitivity of budgetary projections to different scenarios and assumptions
4.4 Comparison with previous update
5. Quality of Public Finances
5.1 Summary
5.2 Revenue Strategy
5.3 Changing Sources of Government Revenue
5.4 Durability of Revenue Measures
5.5 General Government Expenditure
5.6 Infrastructural Investment
6. Sustainability of Public Finances
6.1 Long term budgetary prospects, including the implications of ageing
7. Horizontal Issues Affecting Public Finances
7.1 Summary
7.2 Expenditure Review Initiative
7.3 Revisions to the Estimates/Budgetary Process
7.4 Independent Estimates Review Committee
7.5 Management Information Framework
7.6 Commission on Financial Management and Control in the Health Service
7.7 Public Service Benchmarking Body Report
7.8 National Development Finance Agency
Annex
Basic Assumptions
Chapter 1 - Overall Policy Framework and Objectives
Government Objectives
The Government's economic and budgetary strategy is designed around the aim of
sustaining economic growth and maintaining full employment as the basis for building
a fair society of equal opportunity and sustained prosperity. The key strategic
objectives of the Government in this regard are:
- concentrating resources, within budgetary constraints, on improving
the quality of public services and delivering further real improvements
to pensioners and people on low incomes;
- addressing the infrastructural deficit in a coherent and structured
way; and
- sustaining the public finances in a healthy state while pursuing
a fiscal policy stance that safeguards the competitive position of
the economy
while honouring Ireland’s commitment to respect the Stability and Growth
Pact, which provides the overall framework for the Government's budgetary policy.
Economic Outlook
The international economic outlook – critical to the progress of Ireland’s
open economy - remains characterised by a high degree of uncertainty. The economic
upturn which had been anticipated to take hold through this year has not materialised.
A broadly-based economic upturn now appears unlikely to set in before mid-2003,
and even then the risks as to its timing and pace remain clearly on the downside.
Reflecting the prospect of a delayed global economic recovery, Irish GDP is forecast
to increase at an annual average rate of 4.2% over the three years 2003-2005
compared with estimated annual growth of 6.7% in 2000-2002. GNP growth, a more
accurate reflection of national income in Ireland, is anticipated to average
3% over the forecast period.
Employment may increase by more than 1% on average over 2003-2005, compared with
a 2.9% average over the last three years. Unemployment is expected to be 51/4%
next year, but to decline towards 5% by 2005. Consumer price inflation is forecast
to remain broadly unchanged next year at 4.8% - and with easing domestic price
pressures in particular, to decline to around 21/2 % by
2005. As measured by the EU’s HICP, inflation should ease by about half
a point, to 41/4%, next year.
Budgetary Stance
The projected budgetary position over the period 2003-05 reflects an
expectation of more limited increases in the overall revenue yield, combined
with a desire to sustain infrastructural investment focussed on improving
the productive capacity of the economy, and to target expenditure increases
otherwise at social concerns and at enhancing the quality of key public
services. The outlook (summarised in Table 1 below) is for a “headline” General
Government budget deficit of 0.7% GDP in 2003 followed by deficits of
1.2% of GDP in both 2004 and 2005. The underlying (structural) budget
balance, improving from a small deficit in 2003 to a small surplus in
2005, respects the terms of the Stability and Growth Pact. Consistent
with the need to maintain a focus on the longer term – and the
consequences of ageing societies - the budgetary strategy also envisages
that the ratio of Debt to GDP will remain below 35%.
Table 1 - General Government Balance and Prospective Debt Ratio (%
of GDP)
%
of GDP
|
2002
|
2003
|
2004
|
2005
|
General
Government Balance
Cyclically-adjusted Balance
Debt Ratio (year end)
|
-0.3
-1.0
34.1
|
-0.7
-0.4
34.0
|
-1.2
-0.2
34.5
|
-1.2
+0.1
34.9
|
Source: Department of Finance
Chapter 2 - Economic Outlook
2.1 Summary[1]
Against the background of a weak global economy, GDP growth this year is estimated
at this stage at 4.5%, and GNP at 1.8%, with the pace of expansion remaining
sluggish through the year.
GDP is forecast to expand by 3.5% next year, with GNP growth picking up to 2¼%.
Relatively moderate growth is anticipated in the first half of the year, followed
by some acceleration in the second half in line with an assumed improvement in
global economic activity. There are, however, significant downside risks attached
to this forecast. For instance, the assumed international recovery may be more
muted or may occur later than currently forecast.
Employment is forecast to rise by little more than 1/2%
in 2003, a significantly lower rate of increase than in recent years. Some increase
in unemployment appears to be in prospect since the labour force will continue
to expand, albeit more slowly than hitherto. Inclusive of the budget’s
impact, consumer prices as measured by the CPI are forecast to increase by 4.8%
although, on the HICP measure, inflation is projected to decline by about 1/2%
to 41/4%.
2.2 The Economy in 2002
Against the background of a weak global economy, the moderation in Ireland's
growth which began during the second quarter of 2001 continued this year. Quarterly
National Accounts show that GNP rose by 2.0%, year-on-year, in the first half
of 2002. Available data and survey indicators for the period since then are consistent
with a continuation of weak growth in the second half of the year.
Table 2 - Economic and Budgetary Indicators:
1997-2002
%
volume change (except where otherwise stated)
|
|
|
|
|
|
|
1997
|
1998
|
1999
|
2000
|
2001
|
2002
|
GNP
|
9.5
|
8.2
|
8.8
|
10.7
|
4.6
|
1.8
|
GDP
|
10.9
|
8.8
|
11.1
|
10.0
|
5.7
|
4.5
|
|
|
|
|
|
|
|
Personal
consumption
|
7.2
|
7.6
|
9.3
|
9.0
|
5.1
|
2.8
|
Public
consumption
|
5.3
|
6.5
|
6.6
|
7.5
|
10.8
|
8.9
|
Fixed
investment (including stocks)
|
21.0
|
17.0
|
6.9
|
8.1
|
-2.1
|
-0.4
|
Exports
of goods and services
|
17.4
|
21.0
|
15.2
|
20.6
|
6.7
|
4.6
|
Imports
of goods and services
|
16.8
|
25.8
|
12.0
|
21.2
|
6.1
|
3.3
|
|
|
|
|
|
|
|
Consumer
prices (% change) ^
|
1.5
|
2.4
|
1.6
|
5.6
|
4.9
|
4.7
|
GDP
deflator (% change)
|
4.1
|
6.2
|
4.1
|
4.2
|
5.2
|
4.9
|
Unemployment
(% of labour force)
|
10.3
|
7.6
|
5.6
|
4.3
|
3.9
|
4.5
|
Employment
(% change)
|
3.9
|
8.3
|
6.3
|
4.7
|
2.9
|
1.0
|
Employment
change (‘000)
|
51.4
|
114.6
|
95.2
|
76.7
|
49.1
|
18.0
|
|
|
|
|
|
|
|
General
Gov. Balance (% GDP) *
|
1.2
|
2.4
|
2.1
|
4.4
|
1.6
|
-0.3
|
General
Gov. Debt (% GDP)
|
65.0
|
54.9
|
49.3
|
39.3
|
36.7
|
34.1
|
^ Consumer Price Index.
* Deficit (-) / Surplus (+).
Labour market data for 1997 - 98 refer to April. For later
years, full - year data are used.
Source: CSO and Department of Finance
Given Ireland’s deep integration into the global economy, the international
slowdown was the most important factor influencing the pace of growth. This in
turn reflected a number of factors, including political uncertainty and associated
rising oil prices, concerns about corporate governance and the related difficulties
in global equity markets, a deterioration in consumer confidence and continued
excess capacity in the ICT sector. The ongoing difficulties in the ICT sector,
given its importance in Ireland, have particularly affected confidence and employment
here.
External Developments
2002 was a difficult year for the world economy, with all major regions experiencing
below trend growth. In the US, while consumer demand was buoyed up by low interest
rates employment declined marginally and, reflecting geo-political uncertainty
and the adverse impact of weak equity markets, private investment contracted
for a second year. The European Commission estimates GDP growth in the US at
2.3% for the year as a whole. The muted expansion in the US spilled over into
the rest of the global economy. Weak domestic demand, combined with an appreciation
of the euro against the dollar in particular, and against sterling, resulted
in a deceleration in growth in the euro area to an estimated 0.8% in 2002. At
the same time, the economic difficulties in Japan showed little sign of dissipating.
In the UK, the destination for a significant proportion of Irish exports, particularly
from the indigenous sector, GDP expanded by an estimated 1.6% in 2002. The OECD
economy as a whole is estimated to have grown by 1.5% in real terms in 2002.
In an environment of slowing world demand growth, a deterioration in
competitiveness due to a combination of continued relatively high wage
and price growth and the appreciation of the euro, the rate of export
growth in Ireland slowed markedly from those experienced in recent years.
While merchandise export volumes were 1.3% higher over January-August
than in the same period of last year, a large part of this growth was
attributable to a small number of mainly chemical-related sectors where
very strong rates of increase were recorded. Elsewhere, very weak – and
in some cases negative – growth was recorded. Exports of services
remained relatively strong, rising by 24% in value, year-on-year, in
the first half of 2002. In the same period, the volume of goods and services
exports rose by 5.2%. Leading indicators of export performance point
to no significant improvement in the second half of 2002, so that the
volume of goods and services exports is estimated to rise by 4.6% over
the year as a whole.
Domestic Demand
Quarterly National Accounts point to a further moderation in the growth
of personal consumption this year. Household expenditure rose by just
under 3.0% year-on-year in real terms over January-June. This compares
to growth of 5.3% in the first half of 2001. A number of factors appear
to have weighed on consumer expenditure this year. In particular, a decline
in consumer sentiment associated with a number of high profile job losses
and a small rise in unemployment, is likely to have been a major factor
underlying slower personal consumption growth. Slower employment growth
and lower growth in real disposable incomes have also contributed. Available
indicators point to further moderate growth in personal consumption in
the second half of this year. Retail sales data, for instance, show that
the volume of retail sales in the third quarter was 2.3% higher than
in the same period a year earlier. New car sales, after declining over
the first half, remained at the same level as in 2001 in the third quarter.
But consumer sentiment remains weak. Taking all of these factors into
account, personal consumption is estimated to rise by 2¾% in 2002.
Labour market conditions were somewhat less favourable than in recent years.
Employment rose by 1.5% in Q1 to Q3 of 2002 from last year, much more slowly
than in recent years, with a noticeable deceleration as the year advanced. Moreover,
a significant proportion of this year’s growth was concentrated in the
public sector. In the important manufacturing sector employment declined by 13,000
(4%), year-on-year, in the same period. For the year as a whole, employment growth
is likely to average 18,000 (1.0%). Slower employment growth led to a small rise
in unemployment, albeit from a very low level, with unemployment averaging 4.4%
over the first three quarters. The unemployment rate is estimated to average
4½% this year, compared to 3.9% in 2001.
Sectoral earnings data point to a slowing in the rate of wage increases this
year. The most pronounced deceleration thus far occurred in the business and
distribution services sector, where weekly earnings were 2.7% higher, year-on-year,
in the first half (compared to a rise of 8.0% for the full year 2001). Available
data suggest that the rates of increase in earnings have not slowed to the same
extent elsewhere. Nevertheless, they are expected to moderate over the second
half of the year, in line with the slowdown in demand growth and the easing of
labour market conditions.
Available data are consistent with essentially unchanged investment this year.
Quarterly National Accounts show that total investment in the first half was
nearly 3% lower in real terms, year-on-year, than in 2001. The components of
investment, however, show divergent trends. Building and construction investment
continued to expand, reflecting continued implementation of the National Development
Plan and a 5.2% annual increase in house completions over January-June. Investment
in machinery and equipment, however, remains very weak, reflecting the uncertain
global environment and, possibly, domestic cost developments. Capital goods imports – a
useful proxy for imports of machinery and equipment – were very weak, declining
by 10.8% in value in the year to July. Primarily based on building trends, investment
is estimated to decline slightly, perhaps by ¼%, over the year as a whole.
Final Demand and Imports
Taking developments in all of these components together, final demand is estimated
to increase by almost 3% in 2002, compared to 5.5% in 2001. The volume of goods
and services imports rose at an annual rate of 1.6% in the first half of 2002.
Merchandise import volumes rose by 1.8%, year-on-year, to end-August. For the
year as a whole, imports of goods and services are estimated to increase by 3¼%,
a sharp deceleration from the 6.1% increase of 2001.
Balance of payments figures for the first half of the year show a marginal current
account deficit of just €2 million, with a merchandise surplus of €19,080
almost equal to the invisibles deficit. In relation to the latter, income outflows
in the first half rose very strongly compared to the same period in 2001. For
the year as a whole, a current account deficit of the order of ½% of GNP
is projected.
Gross Domestic Product and Gross National Product
On this basis, GDP is estimated to expand by about 4½% in 2002. Given that
a significant part of this growth is attributable to a few sectors dominated
by foreign-owned multinationals, the associated profit outflows are likely to
result in a significant gap with the GNP measure, which is estimated to increase
by 1¾% in 2002.
Table 3 – Economic Indicators
2002: Budget Forecast and Estimated Outturn
|
2002 Forecast (Dec' 2001)
|
2002 Outturn (Dec' 2002)
|
GNP
(% volume change)
|
3.5
|
1.8
|
GDP
(% volume change)
|
3.9
|
4.5
|
Consumer
prices (% change)
|
4.2
|
4.7
|
Unemployment
rate (% labour force)
|
4.7
|
4.5
|
Employment
growth (‘000)
|
24
|
18
|
Employment
growth (%)
|
1.4
|
1.0
|
Source: Department of Finance
2.3 Macroeconomic Projections: 2003 -05
As a small country which is highly integrated into the global economy in terms
of trade and investment links, economic conditions in Ireland are crucially determined
by the international economic environment and our ability to trade in this environment.
The forecasts for Ireland over the period 2003-05 in this Stability Programme
Update are based on a scenario in which the global economy picks up during next
year. They incorporate the technical assumptions that interest and exchange rates
stay at present levels and the expectation that Ireland, by maintaining its international
competitiveness, remains positioned to take advantage of the anticipated pick-up
in global economic activity.
External Outlook
The international economy is assumed to develop as forecast by the
European Commission in its latest forecasts. While there is considerable
uncertainty about the timing
and extent of a recovery in global economic activity, the consensus view – which
the Commission shares – is that activity will pick up during 2003. The
Commission’s forecasts for GDP growth in key economies are set out in
Table 4 below. It projects that demand in Ireland's export markets will grow
by 5.6%
next year, compared to an estimated 1.4% this year. Bearing in mind, however,
that rising investment is a key element in the foreseen international pick-up
and that capital goods production is not a mainstay of manufacturing here,
this export market growth is unlikely to be fully reflected in Irish export
performance.
Accordingly, exports of goods and services are forecast to rise by 5% next
year. Export growth is assumed to accelerate through 2003, in line with the
assumed
recovery in our main trading partners.
Table 4 – Real GDP Growth in Ireland’s
Main Trading Partners
|
2002
|
2003
|
2004
|
Germany
|
0.4
|
1.4
|
2.3
|
France
|
1.0
|
2.0
|
2.7
|
Italy
|
0.4
|
1.8
|
2.4
|
Euro
area
|
0.8
|
1.8
|
2.6
|
UK
|
1.6
|
2.5
|
2.7
|
EU15
|
1.0
|
2.0
|
2.6
|
US
|
2.3
|
2.3
|
2.8
|
Japan
|
-0.6
|
1.2
|
1.4
|
Source: European Commission Autumn 2002 Economic Forecasts
Domestic Demand
The outlook for investment is more uncertain than in recent years. While some
pick-up in machinery and equipment investment seems likely after this year’s
decline, the uncertainty surrounding the global economic outlook means that there
is little prospect of a strong recovery. In the building and construction sector,
housing output is expected to moderate from the very strong level of output emerging
this year. Continued implementation of the National Development Plan will support
construction activity to some extent, but overall output from the sector is likely
to decline by 2% or more next year. Total investment, therefore, is forecast
to contract by close to 1% in 2003.
Public consumption will expand very modestly following a strong expansion in
2002. Personal consumption is forecast to rise by close to 3% in 2003, based
on a further moderation in both employment growth and wage developments combined
with improving confidence as global conditions improve. In these circumstances,
employment growth is forecast at little more than ½%, a significantly lower
rate of increase than in recent years. The labour force seems likely to continue
expanding and, as a result, the unemployment rate appears likely to rise – perhaps
to 5¼%. These slightly less favourable labour market conditions, allied
to the slower evolution of demand growth, should result in a moderation in wage
increases next year.
Final Demand and Imports
Final demand is forecast to increase by 3½%. Imports of goods and
services are projected to rise by about 3½% also. Taking into account
a further decline in current transfers from the EU, and slower growth
in profit repatriations by the foreign-owned multinational sector in
the context of a better-balanced export performance, the current account
of the balance of payments is not forecast to record a deficit much different
from this year’s – at a little above ½% of GNP.
GDP, GNP and Risks
Taking all these components together, GDP is forecast to grow by 3½%
in 2003. On the basis of more balanced growth in the export sector and,
accordingly, slower growth in net factor outflows, GNP is forecast to
expand by 2¼%. Relatively moderate growth is anticipated in the
first half of the year, followed by some acceleration in the second half
in line with the assumed improvement in global economic activity.
Economic activity should pick up over the later years of the forecasting period,
as the assumed global recovery matures and facilitates strengthening investment
in, and exports from, Ireland – with the prospect that growth will be returning
to its potential rate in the later part of the period. On this basis, GDP growth
is projected to average 4½% over 2004/05 with GNP expanding by close to
3½% on average.
There are, however, very significant downside risks attached to this forecast.
For instance, the assumed recovery in the global economy may be more muted or
may occur later than currently forecast. International developments could impact
on oil prices, or business and consumer sentiment. In addition, there remains
a risk that Ireland could lose some of its ability to supply goods and services
to, or to secure inward investment from, the rest of the world, due to adverse
competitiveness developments. This could occur, for example, if expectations
in relation to wages fail to adapt to the less favourable economic climate. Moreover,
a sudden sharp appreciation of the euro exchange rate could pose significant
difficulties for many firms, particularly those in the indigenous sector, which
is more labour intensive than the high-technology sector.
Table 5 - Growth and Associated Factors
|
2002
|
2003
|
2004
|
2005
|
GNP
growth at constant market prices
|
1.8
|
2.2
|
2.9
|
3.8
|
GNP
level at current market prices (€)
|
103,900
|
110,300
|
117,600
|
125,600
|
GDP
growth at constant market prices
|
4.5
|
3.5
|
4.1
|
5.0
|
GDP
level at current market prices (€)
|
125,600
|
134,600
|
144,600
|
155,800
|
GDP
deflator
|
4.9
|
3.5
|
3.3
|
2.6
|
HICP
change
|
4.7
|
4.2
|
3.0
|
2.1
|
CPI
Change
|
4.7
|
4.8
|
3.5
|
2.6
|
Employment
growth
|
1.0
|
0.6
|
1.3
|
1.6
|
Unemployment
Rate
|
4.5
|
5.3
|
5.3
|
5.1
|
Labour
productivity growth [2]
|
0.9
|
1.7
|
1.7
|
2.4
|
|
% Volume Change
|
Private
consumption expenditure
|
2.8
|
2.9
|
3.6
|
4.0
|
Government
consumption expenditure
|
8.9
|
0.6
|
0.5
|
0.3
|
Gross
fixed capital formation
|
-0.3
|
-0.7
|
1.5
|
3.1
|
Exports
of goods and services
|
4.6
|
5.0
|
6.1
|
6.8
|
Imports
of goods and services
|
3.3
|
3.6
|
5.2
|
5.6
|
|
Contributions to GDP growth
|
Final
domestic demand
|
2.5
|
1.3
|
2.1
|
2.6
|
Change
in stocks
|
0.2
|
0.2
|
0.2
|
0.2
|
External
balance of goods and services
|
1.8
|
1.9
|
1.7
|
2.2
|
Source: Department of Finance
2.4 Inflation
Developments in 2002
Inflation, as measured by annual changes in the Consumer Price Index (CPI), remained
very high this year despite the moderation in demand growth. A number of factors
impacted on price developments, including higher oil prices reflecting political
uncertainty and administered price increases in a number of sectors. Services
sector inflation continued high and contributed disproportionately to the increase
in the CPI. In the first ten months of the year, inflation averaged 4.6%. For
the year as a whole, CPI inflation is likely to average 4.7%. As measured on
the EU harmonised basis inflation in Ireland, at an estimated 4.7%, was the highest
in the euro area in 2002 with the Irish rate exceeding the euro area average
by around 2.4 percentage points.
Prospects for 2003 and Beyond
While the outlook is for a marginal increase in the CPI next year, to
4.8%, consumer price inflation as measured by the EU HICP is expected
to fall by ½% to 4¼% - and the CPI exclusive of the impact
of this year’s tobacco excise increase is also projected to decline
by ½% to about 4.2%. These projections make the technical assumption
of unchanged interest and exchange rates and commodity prices (see table
5). A number of factors support this analysis. On the external front,
assuming unchanged exchange rates, import prices are likely to benefit
somewhat from the lagged effect of the appreciation this year of the
euro against both sterling and the dollar. In addition, the overhang
of global excess capacity this year is likely to result in muted external
inflationary pressures into next year. On the domestic front, reflecting
the projected loosening of labour market conditions and the more moderate
evolution of demand, service sector inflation is forecast to ease somewhat,
although it is expected to continue to exceed the headline figure.
The Government is committed to supporting and maintaining
competitiveness and to enhancing the conditions for economic growth through
structural reform of product, capital and labour markets, details of
which are set out in the 2002 Progress Report on Reforming Product and
Capital Markets[3] and the
2002 National Employment Action Plan[4].
Competitiveness issues will also be a key concern
in the negotiations on a new social partnership agreement which are now
under way. National pay policy has been set within the context of national
agreements with the Social Partners since 1987, during which time Ireland
has experienced rapid economic growth and development. Any new agreement
will need to recognise the changed economic and budgetary environment
since the last national agreement was negotiated, and the need to avoid
a loss of competitiveness. This is all the more crucial in the light
of the developments of recent years when, as illustrated in Chart 1,
Irish costs rose more rapidly than those of all of our main trading partners.
Source: European Commission Autumn 2002 Economic Forecasts
Independent Forecasts
The following table compares the Department of Finance forecasts with
those of other organisations. In some instances the assumptions underpinning
the forecasts may be different, and this must be borne in mind when making
comparisons.
Table 6 – Comparison of Macroeconomic
Forecasts for Ireland in 2003
Annual
% change
|
GDP
|
GNP
|
CPI
|
Employment
|
Department
of Finance (Budget 2003)
|
3.5
|
2.2
|
4.8
|
0.6
|
European
Commission (Autumn 2002)
|
4.2
|
--
|
3.8*
|
1.4
|
OECD
(November 2002)
|
3.6
|
2.5
|
4.3*
|
--
|
Central
Bank of Ireland (Autumn 2002)
|
4.75
|
4.25
|
4.25
|
1.2
|
ESRI
(October 2002)
|
4.2
|
3.3
|
4.0
|
1.4
|
*HICP
Chapter 3 - General Government Balance and Debt
3.1 Summary
The Government's economic and budgetary strategy is designed around the aim of
sustaining economic growth and maintaining full employment as the basis for building
a fair society of equal opportunity and sustained prosperity.
Reflecting the very gradual nature of the international recovery, the outlook
is for a “headline” General Government budget deficit of 0.7% GDP
in 2003 followed by deficits of 1.2% of GDP in both 2004 and 2005. The underlying
(structural) budget balance, improving from a small deficit in 2003 to a small
surplus in 2005, respects the terms of the Stability and Growth Pact. The debt/GDP
ratio is projected to remain below 35% to end-2005, far below the present EU
average debt level of around 62% of GDP.
3.2 Policy Strategy
Following national elections, a new Government took office on 6 June 2002[5].
The new Government Programme[6] restates
the commitment to respect the Stability and Growth Pact which, the Programme
states, "provides the overall framework" for the Government's budgetary policy.
The three key objectives of the new Government with regard to budgetary and economic
policy are:
- concentrating resources, within budgetary constraints, on improving
the quality of public services and delivering further real improvements
to pensioners and people on low incomes;
- addressing the infrastructural deficit in a coherent and structured
way; and
- sustaining the public finances in a healthy state while pursuing
a fiscal policy stance that safeguards the competitive position of
the economy.
3.3 Actual Balances and Implications of Forthcoming Budget
A deficit of 0.3% of GDP on the general government finances is currently projected
in 2002, compared with a surplus of 1.6% in 2001 and a planned surplus of 0.7%
for 2002 at the time of last year’s Budget. The 2002 Broad Economic Policy
Guidelines called on Ireland to ensure that the budgetary stance for 2002 is
broadly neutral and to ensure continued compliance with the close to balance
requirement of the Stability and Growth Pact after 2002. While the outturn now
foreseen is 1% below the Budget 2002 expectation, a Eurostat decision that proceeds
associated with the change-over to the euro should be excluded in determination
of government balances accounted for about 0.5% of GDP of the deterioration.
The adverse revenue effects of slower domestic demand growth, largely attributable
to the effects of the international economic slowdown on the Irish economy, accounted
for the balance of the difference between the planned general government balance
and the outcome.
A “headline” General Government deficit of 0.7% of GDP is planned
for 2003, with deficits of 1.2% of GDP anticipated for each of 2004 and 2005.
The corresponding structural (cyclically adjusted) General Government balances,
estimated in accordance with the methodology of the Commission, are -0.4% of
GDP in 2003, -0.2% in 2004 and +0.1% in 2005.
The gross debt/GDP ratio is expected to remain below 35% out to 2005. Not less
than 1% of GNP will continue to be set aside annually for the pre-funding of
pension liabilities, building up assets to help address costs associated with
ageing in future decades. This pre-funding does not affect the General Government
Balance.
In response to the infrastructural needs of the economy, capital expenditure
will average 5% of GNP over the Programme period, in line with the National Development
Plan. The provisions for day-to-day spending will, at the same time, underpin
substantial progress across the broad range of social and other objectives. More
detailed information in relation to Government expenditure and revenue issues
is set out in Chapter 5.
Table 7 - General Government Budgetary Developments in % of GDP
|
2001
|
2002
|
2003
|
2004
|
2005
|
General
government balance
|
1.6
|
-0.3
|
-0.7
|
-1.2
|
-1.2
|
Central
government
|
1.1
|
0
|
-0.7
|
-1.4
|
-1.4
|
Local
government
|
-0.1
|
-0.1
|
-0.2
|
-0.2
|
-0.2
|
Social
security funds
|
0.6
|
-0.2
|
0.2
|
0.3
|
0.5
|
Total
receipts
|
35.8
|
35.0
|
34.4
|
33.5
|
32.9
|
Total
expenditures
|
34.2
|
35.3
|
35.1
|
34.7
|
34.1
|
Budget
balance
|
1.6
|
-0.3
|
-0.7
|
-1.2
|
-1.2
|
Net
interest payments
|
0.2
|
0.2
|
0.3
|
0.4
|
0.4
|
Primary
balance
|
3.1
|
1.2
|
0.9
|
0.3
|
0.4
|
|
Components of Revenue:
|
Taxes
|
25.3
|
24.5
|
24.6
|
24.0
|
23.8
|
Social
contributions
|
6.1
|
6.1
|
5.9
|
5.9
|
5.8
|
Interest
income
|
1.4
|
1.3
|
1.3
|
1.1
|
1.1
|
Other
|
2.9
|
3.1
|
2.7
|
2.5
|
2.3
|
Total
receipts
|
35.8
|
35.0
|
34.4
|
33.5
|
32.9
|
|
Components of Expenditure:
|
Collective
consumption
|
5.5
|
5.8
|
6.0
|
5.9
|
5.7
|
Individual
consumption
|
9.2
|
9.6
|
9.8
|
9.7
|
9.5
|
Social
transfers in kind
|
1.3
|
1.4
|
1.4
|
1.4
|
1.3
|
Social
transfers other than in kind
|
8.6
|
9.1
|
9.1
|
9.2
|
9.3
|
Interest
payments
|
1.6
|
1.5
|
1.6
|
1.5
|
1.5
|
Subsidies
|
1.1
|
0.9
|
0.8
|
0.8
|
0.7
|
Gross
fixed capital formation
|
4.3
|
4.4
|
4.1
|
4.1
|
4.0
|
Other
|
2.6
|
2.5
|
2.3
|
2.1
|
2.0
|
Total
expenditures
|
34.2
|
35.3
|
35.1
|
34.7
|
34.1
|
Source: Department of Finance; preliminary ESA'95 basis; rounding may affect
totals.
3.4 Structural Balance and Fiscal Stance
By subtracting the estimated cyclically induced variation in the Budget from
the observed budget balance, the Cyclically-Adjusted Budget Balance (CABB) can
be calculated. Comparing Cyclically-Adjusted Balances from year to year can give
an indication of the discretionary changes in the Government's fiscal position
but the precision of CABB changes in estimating the overall fiscal stance is
subject to the caveats expressed in previous updates.
Estimates of the cyclically-adjusted balance are presented overleaf. The estimates
are based on the economic and budgetary projections set out in this Stability
Programme Update, and use the methodology of the European Commission. Calculated
on this basis, as indicated in Table 8, the cyclically-adjusted balance points
to an expansionary fiscal stance in 2002. However, on the basis of the technical
assumptions underpinning the budgetary position going forward (which include
contingency provisions of 0.4% and 0.8% of GDP for 2004 and 2005, respectively),
the methodology points to a fiscal tightening over the period ahead - with the
cyclically-adjusted balance estimated to improve from a deficit of 1.0% of GDP
this year to a surplus of 0.1% in 2005.
Table 8 - Cyclical Developments
%
of GDP
|
2001
|
2002
|
2003
|
2004
|
2005
|
GDP
growth at constant prices
|
5.7
|
4.5
|
3.5
|
4.1
|
5.0
|
Actual
balance
|
1.6
|
-0.3
|
-0.7
|
-1.2
|
-1.2
|
Potential
GDP growth
|
7.5
|
7.0
|
6.5
|
6.3
|
5.8
|
Output
gap (% potential output)
|
4.4
|
2.0
|
-0.9
|
-2.9
|
-3.7
|
Cyclically-adjusted
balance
|
0.1
|
-1.0
|
-0.4
|
-0.2
|
0.1
|
Change
in Cyclically adjusted GGB
|
--
|
-1.1
|
0.6
|
0.2
|
0.3
|
Source: Department of Finance
3.5 Debt Level and Developments
As indicated by Chart 2, Ireland has one of the lowest debt/GDP ratios in the
EU, and has achieved the greatest reduction in its debt/GDP ratio between the
onset of stage 3 of EMU in 1998 and 2002.
Source: European Commission 2002 Autumn Economic Forecasts
This improvement extends the long-standing decline in Ireland's debt/GDP ratio,
which has seen the cost of interest payments on the national debt per person
at work fall from the equivalent of 45 days' earnings for an average manufacturing
worker in 1987 to 12 days' earnings in 2001, as Chart 3 shows.
Source: Department of Finance
Over the Programme period as a whole, the gross debt level is expected
to remain below 35% of GDP. When account is taken of the build-up of assets in
the National Pension Reserve Fund, the net debt to GDP ratio is considerably
lower than the gross debt levels set out in Table 9. At end 2001, it was well
below 30% of GDP.
Table 9 - General Government Debt Developments
%
of GDP
|
2001
|
2002
|
2003
|
2004
|
2005
|
Gross
debt level
|
36.7
|
34.1
|
34.0
|
34.5
|
34.9
|
Change
in gross debt level
|
-2.6
|
-2.6
|
-0.1
|
0.5
|
0.4
|
Primary
balance
|
-3.1
|
-1.2
|
-0.9
|
-0.3
|
-0.4
|
Interest
payments
|
1.6
|
|
