Budget 2016
Budget g 2016 2nd Consecutive Modest Stimulus as Focus of Irish Fiscal Policy Shifts from Correction to Prevention Simon Barry Chief Economist Republic of Ireland Conor O’Driscoll Research Assistant October 2015
A stronger stronger-than-expected than expected improvement in the economic environment is providing a very helpful backdrop to the Irish public finances…
Budget 2015
SPU 2015* 2015
Budget 2016
October 2014
April 2015
October 2015
Real GDP % Growth 2015
3.9
4
6.2
2016
34 3.4
38 3.8
43 4.3
Nominal GDP % Growth 2015
5.3
6.9
11.2
2016
5.1
5.4
6.2
*Stability Programme Update 2015
Slide 2
…and and has seen the tax take exceed expectations by Eur1.7bn (5.8%) so far this year (to Sept)… Ireland Tax Receipts vs Ireland, vs. Nominal GDP GDP, y/y % 20
20
15
15
10
10
5
5
0
0
-5
-5 2015 tax receipts are up 9.5% y/y in the year to September
-10
-10
-15
-15
-20
-20 2006
2008
2010 Nom GDP
2012
2014
Tax Revenues Source: UB / Macrobond
Slide 3
…meaning meaning that Ireland is poised to deliver a fifth consecutive year of fiscal outperformance vs. target…
Slide 4
Getting the deficit back below 3% this year sees Ireland leave the ‘corrective’ arm of the SGP and enter the ‘preventative’ arm •
Getting the deficit back below 3% by 2015 2015, as required by the Stability and Growth Pact (SGP), has been the key anchor for Irish fiscal policy since 2011
•
The expected general government deficit of 2.1% confirms that Ireland will eliminate its ‘excessive deficit’ this year
•
This means Irish budgetary g yp policy y will no longer g be set with reference to delivering a required deficit target, but rather set to satisfy conditions laid out in Ireland’s new budgetary framework which incorporates European and Domestic elements
•
New framework aimed at avoiding: • • • • •
repeat of past mistakes pro-cyclicality li lit in i good d times ti spending growth in excess of the economy’s potential growth rate large, forced adjustments in bad times g fiscal spillovers p across countries negative Slide 5
The Medium-Term Medium Term Objective is now the key anchor for fiscal policy •
Ireland, like other countries in Europe, Ireland Europe is now subject to a MediumMedium Term Objective (MTO)
•
Ireland s MTO is to achieve a balanced budget in structural terms Ireland’s (i.e. having adjusted for the cyclical position of the economy and the impact of any one-offs; in other words the balance that would prevail if the economyy was operating p g at its full capacity) p y)
•
Until the MTO is reached (estimated to happen in 2019), the government is required to: • Reduce the structural deficit by 0.6% of GDP each year • Ensure compliance with the Expenditure Benchmark (EB), which sets a limit on allowable expenditure growth
•
Note: Estimating structural balances (especially for small, open economies like Ireland) can be problematic and the EB calculation is complex so implementing this framework is not straightforward Slide 6
Budget 2016 satisfies the new rules rules… •
The April Government Spring Economic Statement / Stability Programme Update (SPU) claimed compliance with the new requirements and identified fiscal space in 2016 of Eur1.2-1.5 bn
•
The Irish Fiscal Advisory Council subsequently challenged the extent of SPU compliance with the structural adjustment and Expenditure Benchmark requirements, q , but ultimately y endorsed the Eur1.2-1.5 bn package as “within the range of prudent policies from an economic perspective”
•
The projections in Budget 2016 look to be in compliance with the new rules: • •
Projected change in the structural balance = 0.8% of GDP Nominal spending growth (just!) within the permitted 1 1.8% 8% ii.e. e the budget uses up the entire amount of estimated fiscal space
Slide 7
…while while at the same time delivering a modest loosening of the fiscal stance… 2016 General Government Deficit, % of GDP Previous Budget (2015)
1.8
SPU (April 2015)
1.7
(based on 2016 package of €1.2bn)
Pre-Budget 2016
0.8
(based on no new measures)
Slide 8
…while while at the same time delivering a modest loosening of the fiscal stance… 2016 General Government Deficit, % of GDP Previous Budget (2015)
1.8
SPU (April 2015)
1.7
(based on 2016 package of €1.2bn)
Pre-Budget 2016
0.8
(based on no new measures)
Budget 2016
1.2
(i.e. an additional €900m in borrowing relative to pre budget position)
Rather than bank the savings and achieve a faster pace of deficit and debt reduction, the government has chosen to use all of the available fiscal space to modestly ease policy.
Slide 9
…incorporating incorporating ca ca. Eur1 Eur1.5 5 bn of tax/spending measures (i (i.e, e at the upper end of the indicated range, as widely leaked) B d t 2016 P Budget Package k
€ €m
% off ttotal t l
Revenue
-690 -595 595 -35 -55 -45 -20 20 60
47
770 795 -25
53
1,460
100
Income Tax (including DIRT) Corporation Tax Capital Taxes Motor Tax PRSI Excise Duty (including VRT) Expenditure p Current Expenditure Capital Expenditure
Total Budget 2016 Package
Slide 10
During g the crisis,, the bulk of the outright g declines in spending p g fell on the capital p side;; after a 65% fall from peak in gross capex, net capex spending (i.e. after depreciation) was zero in 2013&14!
Ireland, General Government, Capital Expenditure 10
EUR, billion
8 6 4 2
EUR, billion n
0 7 5 3 1 -1 1 1985
1990
Depreciation
1995
2000
Gross Capital Expenditure
2005
2010
Net Capital Expenditure
Source: UB / Macrobond / Dept. of Finance
Slide 11
While the increase announced in the September p capital p spending p gp plan is welcome,, we think the Exchequer needs to prioritise capital spending to a greater extent Ireland, Government Capital Spending, % of GDP 5.5 5.0 4.5
Calculated using Dept. of Finance GDP forecasts provided id d iin relevant l documents
4.0 3.5 3.0 2.5 2.0 1.5 1985
1990
1995
2000 SPU 15
2005
2010
2015
2020
Budget 2016 Source: UB / Macrobond
Slide 12
While the debt/GDP ratio remains uncomfortably high high, it is now clearly declining, as is the associated servicing burden…
Slide 13
… with favourable international developments (including the ECB’s QE programme) combining with firm belief in the robustness of Ireland’s creditworthiness taking Irish sovereign borrowing costs to all-time record lows this year; Ireland’s sovereign now trades much closer to France than to Spain & Italy…
Slide 14
Debt levels look set to continue to decline into the medium-term, medium term, but sustainability remains vulnerable to shocks and downside risks
GENERAL GOVERNMENT DEBT PATHS
130
Generaal Government D Debt (% GDP)
120 110 100 -1.5 -1
90
-0.5
80
Baseline Scenario - minimum rule compliance 0.5
70
1 1.5
60
2012
2013
2014 2015f 2016f 2017f 2018f 2019f 2020f
Sources: Depa rtment of Finance, internal IFAC calculations based on the Council's Fiscal Feedbacks Model. Published as part of IFAC Pre‐Budget 2016 s ubmission in September 2015. Notes: The fi gure shows alternative projections of the debt‐to‐GDP ra tio based on GDP growth forecasts that deviate from SPU Real GDP projections by 0.5, 1.0 a nd 1.5 percentage points i n either direction. The illustrative "baseline" s cenario assumes Department of Finance SPU 2015 projections for 2016‐2020 a djusted for minimum compliance with the Budgetary Rule.
Slide 15
The international outlook still looks broadlyy favourable from an Irish perspective, p p , though downside risks, including those posed by emerging markets (and Brexit & Grexit), have risen...
Average GDP Growth, 2007-16 3.0 2.5 2.0 1.5 10 1.0 0.5 0.0 -00.55 -1.0 -1.5
Source: Bloomberg, Consensus Economics
US 2007-08
UK 2009-10
2011-12
EZ 2013-14
2015-16f
Slide 16
…nonetheless,, the strengthening g g and broadening g of the Irish recovery y is very y encouraging
Slide 17
Ireland’s recoveryy momentum also looks highly g y impressive p on a relative basis;; growth has been outperforming main trading partners for over 18 months
Slide 18
The strength g of employment p y trends p provides important p corroboration of the signals being sent by the strong headline growth figures; the labour market in and outside Dublin (including the Midlands) continues to register healthy improvement …
Slide 19
Consumer spending p g and confidence trends continue to be underpinned p by y the robust jobs market performance
Slide 20
Sustained rapid p g growth in commercial vehicle sales is an important p sign g of a return of animal spirits in the business sector, though a loss of momentum in home-building has been an unwelcome downside surprise
Slide 21
While headline export growth rates have been flattered by a surge in pharma output growth (and are likely to weaken in the short term reflecting a cooling of pharma growth from unsustainably rapid rates), the ongoing acceleration in ‘traditional’ (i.e. indigenous) sectors points to an ongoing underlying pick-up…
Slide 22
While there can be no room for complacency (or unrealistic expectations) given our status as a highly indebted small open economy, current estimates indicate that the public finances are likely to continue to improve and that further modest easing of fiscal policy is likely to be possible in the years ahead
Future Fiscal Space, Eur bn 2017 2018 2019 2020 2021 Adjusted Fiscal Space
1.4
2
2
3.6
3.7
Net Fiscal Space remaining
0.5
1.1
1.3
2.7
2.9
Slide 23
This document is intended for clients of Ulster Bank Limited and Ulster Bank Ireland Limited ((together g and separately, p y, "Ulster Bank")) and is not intended for any other person. It does not constitute an offer or invitation to purchase or sell any instrument or to provide any service in any jurisdiction where the required authorisation is not held. Ulster Bank and/or its associates and/or its employees may have a position or engage in transactions in any of the instruments mentioned. The information including any opinions expressed and the pricing given, is indicative, and constitute our judgement at time of publication and are subject to change without notice. The information contained herein should not be construed as advice, and is not intended to be construed as such. This publication provides only a brief review of the complex issues discussed and recipients should not rely on information contained here without seeking specific advice on matters that concern them. Ulster Bank make no representations or warranties with respect to the information and disclaim all liability for use the recipient or their advisors make of the information. Over-the-counter (OTC) derivates can involve a number of significant and complex risks which are dependent on the terms of the particular transaction and your circumstances circumstances. In the event the market has moved against the transaction you have undertaken undertaken, you may incur substantial costs if you wish to close out your position. Ulster Bank Ireland Limited. A private company limited by shares, trading as Ulster Bank, Ulster Bank Group and Banc Uladh. Registered in Republic of Ireland. Registered No 25766. Registered Office: Ulster Bank Group Centre, George’s Quay, Dublin 2. Member of The Royal Bank of Scotland Group. Ulster Bank Ireland Limited is regulated by the Central Bank of Ireland. Ulster Bank Limited. Registered in Northern Ireland. Registration Number R733 Registered Office: 11-16 Donegall Square East, Belfast BT1 5UB. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority, and entered on the Financial Services Register (Registration Number 122315) except in respect of our consumer credit products for which Ulster Bank Limited is licensed and regulated by the Office of Fair Trading. Member of The Royal Bank of Scotland Group. Calls may be recorded.
Slide 24
A stronger stronger-than-expected than expected improvement in the economic environment is providing a very helpful backdrop to the Irish public finances…
Budget 2015
SPU 2015* 2015
Budget 2016
October 2014
April 2015
October 2015
Real GDP % Growth 2015
3.9
4
6.2
2016
34 3.4
38 3.8
43 4.3
Nominal GDP % Growth 2015
5.3
6.9
11.2
2016
5.1
5.4
6.2
*Stability Programme Update 2015
Slide 2
…and and has seen the tax take exceed expectations by Eur1.7bn (5.8%) so far this year (to Sept)… Ireland Tax Receipts vs Ireland, vs. Nominal GDP GDP, y/y % 20
20
15
15
10
10
5
5
0
0
-5
-5 2015 tax receipts are up 9.5% y/y in the year to September
-10
-10
-15
-15
-20
-20 2006
2008
2010 Nom GDP
2012
2014
Tax Revenues Source: UB / Macrobond
Slide 3
…meaning meaning that Ireland is poised to deliver a fifth consecutive year of fiscal outperformance vs. target…
Slide 4
Getting the deficit back below 3% this year sees Ireland leave the ‘corrective’ arm of the SGP and enter the ‘preventative’ arm •
Getting the deficit back below 3% by 2015 2015, as required by the Stability and Growth Pact (SGP), has been the key anchor for Irish fiscal policy since 2011
•
The expected general government deficit of 2.1% confirms that Ireland will eliminate its ‘excessive deficit’ this year
•
This means Irish budgetary g yp policy y will no longer g be set with reference to delivering a required deficit target, but rather set to satisfy conditions laid out in Ireland’s new budgetary framework which incorporates European and Domestic elements
•
New framework aimed at avoiding: • • • • •
repeat of past mistakes pro-cyclicality li lit in i good d times ti spending growth in excess of the economy’s potential growth rate large, forced adjustments in bad times g fiscal spillovers p across countries negative Slide 5
The Medium-Term Medium Term Objective is now the key anchor for fiscal policy •
Ireland, like other countries in Europe, Ireland Europe is now subject to a MediumMedium Term Objective (MTO)
•
Ireland s MTO is to achieve a balanced budget in structural terms Ireland’s (i.e. having adjusted for the cyclical position of the economy and the impact of any one-offs; in other words the balance that would prevail if the economyy was operating p g at its full capacity) p y)
•
Until the MTO is reached (estimated to happen in 2019), the government is required to: • Reduce the structural deficit by 0.6% of GDP each year • Ensure compliance with the Expenditure Benchmark (EB), which sets a limit on allowable expenditure growth
•
Note: Estimating structural balances (especially for small, open economies like Ireland) can be problematic and the EB calculation is complex so implementing this framework is not straightforward Slide 6
Budget 2016 satisfies the new rules rules… •
The April Government Spring Economic Statement / Stability Programme Update (SPU) claimed compliance with the new requirements and identified fiscal space in 2016 of Eur1.2-1.5 bn
•
The Irish Fiscal Advisory Council subsequently challenged the extent of SPU compliance with the structural adjustment and Expenditure Benchmark requirements, q , but ultimately y endorsed the Eur1.2-1.5 bn package as “within the range of prudent policies from an economic perspective”
•
The projections in Budget 2016 look to be in compliance with the new rules: • •
Projected change in the structural balance = 0.8% of GDP Nominal spending growth (just!) within the permitted 1 1.8% 8% ii.e. e the budget uses up the entire amount of estimated fiscal space
Slide 7
…while while at the same time delivering a modest loosening of the fiscal stance… 2016 General Government Deficit, % of GDP Previous Budget (2015)
1.8
SPU (April 2015)
1.7
(based on 2016 package of €1.2bn)
Pre-Budget 2016
0.8
(based on no new measures)
Slide 8
…while while at the same time delivering a modest loosening of the fiscal stance… 2016 General Government Deficit, % of GDP Previous Budget (2015)
1.8
SPU (April 2015)
1.7
(based on 2016 package of €1.2bn)
Pre-Budget 2016
0.8
(based on no new measures)
Budget 2016
1.2
(i.e. an additional €900m in borrowing relative to pre budget position)
Rather than bank the savings and achieve a faster pace of deficit and debt reduction, the government has chosen to use all of the available fiscal space to modestly ease policy.
Slide 9
…incorporating incorporating ca ca. Eur1 Eur1.5 5 bn of tax/spending measures (i (i.e, e at the upper end of the indicated range, as widely leaked) B d t 2016 P Budget Package k
€ €m
% off ttotal t l
Revenue
-690 -595 595 -35 -55 -45 -20 20 60
47
770 795 -25
53
1,460
100
Income Tax (including DIRT) Corporation Tax Capital Taxes Motor Tax PRSI Excise Duty (including VRT) Expenditure p Current Expenditure Capital Expenditure
Total Budget 2016 Package
Slide 10
During g the crisis,, the bulk of the outright g declines in spending p g fell on the capital p side;; after a 65% fall from peak in gross capex, net capex spending (i.e. after depreciation) was zero in 2013&14!
Ireland, General Government, Capital Expenditure 10
EUR, billion
8 6 4 2
EUR, billion n
0 7 5 3 1 -1 1 1985
1990
Depreciation
1995
2000
Gross Capital Expenditure
2005
2010
Net Capital Expenditure
Source: UB / Macrobond / Dept. of Finance
Slide 11
While the increase announced in the September p capital p spending p gp plan is welcome,, we think the Exchequer needs to prioritise capital spending to a greater extent Ireland, Government Capital Spending, % of GDP 5.5 5.0 4.5
Calculated using Dept. of Finance GDP forecasts provided id d iin relevant l documents
4.0 3.5 3.0 2.5 2.0 1.5 1985
1990
1995
2000 SPU 15
2005
2010
2015
2020
Budget 2016 Source: UB / Macrobond
Slide 12
While the debt/GDP ratio remains uncomfortably high high, it is now clearly declining, as is the associated servicing burden…
Slide 13
… with favourable international developments (including the ECB’s QE programme) combining with firm belief in the robustness of Ireland’s creditworthiness taking Irish sovereign borrowing costs to all-time record lows this year; Ireland’s sovereign now trades much closer to France than to Spain & Italy…
Slide 14
Debt levels look set to continue to decline into the medium-term, medium term, but sustainability remains vulnerable to shocks and downside risks
GENERAL GOVERNMENT DEBT PATHS
130
Generaal Government D Debt (% GDP)
120 110 100 -1.5 -1
90
-0.5
80
Baseline Scenario - minimum rule compliance 0.5
70
1 1.5
60
2012
2013
2014 2015f 2016f 2017f 2018f 2019f 2020f
Sources: Depa rtment of Finance, internal IFAC calculations based on the Council's Fiscal Feedbacks Model. Published as part of IFAC Pre‐Budget 2016 s ubmission in September 2015. Notes: The fi gure shows alternative projections of the debt‐to‐GDP ra tio based on GDP growth forecasts that deviate from SPU Real GDP projections by 0.5, 1.0 a nd 1.5 percentage points i n either direction. The illustrative "baseline" s cenario assumes Department of Finance SPU 2015 projections for 2016‐2020 a djusted for minimum compliance with the Budgetary Rule.
Slide 15
The international outlook still looks broadlyy favourable from an Irish perspective, p p , though downside risks, including those posed by emerging markets (and Brexit & Grexit), have risen...
Average GDP Growth, 2007-16 3.0 2.5 2.0 1.5 10 1.0 0.5 0.0 -00.55 -1.0 -1.5
Source: Bloomberg, Consensus Economics
US 2007-08
UK 2009-10
2011-12
EZ 2013-14
2015-16f
Slide 16
…nonetheless,, the strengthening g g and broadening g of the Irish recovery y is very y encouraging
Slide 17
Ireland’s recoveryy momentum also looks highly g y impressive p on a relative basis;; growth has been outperforming main trading partners for over 18 months
Slide 18
The strength g of employment p y trends p provides important p corroboration of the signals being sent by the strong headline growth figures; the labour market in and outside Dublin (including the Midlands) continues to register healthy improvement …
Slide 19
Consumer spending p g and confidence trends continue to be underpinned p by y the robust jobs market performance
Slide 20
Sustained rapid p g growth in commercial vehicle sales is an important p sign g of a return of animal spirits in the business sector, though a loss of momentum in home-building has been an unwelcome downside surprise
Slide 21
While headline export growth rates have been flattered by a surge in pharma output growth (and are likely to weaken in the short term reflecting a cooling of pharma growth from unsustainably rapid rates), the ongoing acceleration in ‘traditional’ (i.e. indigenous) sectors points to an ongoing underlying pick-up…
Slide 22
While there can be no room for complacency (or unrealistic expectations) given our status as a highly indebted small open economy, current estimates indicate that the public finances are likely to continue to improve and that further modest easing of fiscal policy is likely to be possible in the years ahead
Future Fiscal Space, Eur bn 2017 2018 2019 2020 2021 Adjusted Fiscal Space
1.4
2
2
3.6
3.7
Net Fiscal Space remaining
0.5
1.1
1.3
2.7
2.9
Slide 23
This document is intended for clients of Ulster Bank Limited and Ulster Bank Ireland Limited ((together g and separately, p y, "Ulster Bank")) and is not intended for any other person. It does not constitute an offer or invitation to purchase or sell any instrument or to provide any service in any jurisdiction where the required authorisation is not held. Ulster Bank and/or its associates and/or its employees may have a position or engage in transactions in any of the instruments mentioned. The information including any opinions expressed and the pricing given, is indicative, and constitute our judgement at time of publication and are subject to change without notice. The information contained herein should not be construed as advice, and is not intended to be construed as such. This publication provides only a brief review of the complex issues discussed and recipients should not rely on information contained here without seeking specific advice on matters that concern them. Ulster Bank make no representations or warranties with respect to the information and disclaim all liability for use the recipient or their advisors make of the information. Over-the-counter (OTC) derivates can involve a number of significant and complex risks which are dependent on the terms of the particular transaction and your circumstances circumstances. In the event the market has moved against the transaction you have undertaken undertaken, you may incur substantial costs if you wish to close out your position. Ulster Bank Ireland Limited. A private company limited by shares, trading as Ulster Bank, Ulster Bank Group and Banc Uladh. Registered in Republic of Ireland. Registered No 25766. Registered Office: Ulster Bank Group Centre, George’s Quay, Dublin 2. Member of The Royal Bank of Scotland Group. Ulster Bank Ireland Limited is regulated by the Central Bank of Ireland. Ulster Bank Limited. Registered in Northern Ireland. Registration Number R733 Registered Office: 11-16 Donegall Square East, Belfast BT1 5UB. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority, and entered on the Financial Services Register (Registration Number 122315) except in respect of our consumer credit products for which Ulster Bank Limited is licensed and regulated by the Office of Fair Trading. Member of The Royal Bank of Scotland Group. Calls may be recorded.
Slide 24
