Davy Research |
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Deficit reduction plan
Updated plan dependent on robust nominal growth, but net debt position is under-appreciated
17 May 2012
Conall Mac Coille, Chief economist |
Deficit reduction plan is based on benign macro outlook
Ireland's updated deficit reduction plan is based on €7.8bn of budgetary adjustments through 2013-2015, far smaller than the €25bn of expenditure cuts and tax increases implemented since July 2008.
The deficit reduction plan is based on nominal growth in the economy exceeding 3% by 2013 and 4% from 2014 onwards.
Less optimistic scenarios highlight the fragility of the official projections for the gross debt/GDP ratio
A 1% shortfall in nominal GDP growth could lead the debt/GDP ratio to rise 10 percentage points above the budgetary plans by 2015 without further cuts.
A 1% shortfall could still be consistent with some pick-up in real and nominal GDP given official projections for a robust recovery to 3-4% nominal growth from 2013 onwards.
Ireland's net debt position is under-appreciated
Excluding Ireland's liquid assets (close to 12% of GDP), net debt is expected to peak at 110% of GDP.
Debt sustainability should be judged against net debt as liquid assets can earn a return to offset debt interest.
Ireland's debt position will ultimately depend on the realisable value of financial sector assets; transfer of loss-making mortgages to a warehouse vehicle could improve banks' profitability
The Irish Life insurance company and contingent capital and equity stakes in Bank of Ireland represent assets with a realisable value in the medium term.
Clearly, realising value from financial sector assets will depend on economic prospects.
However, in the absence of a strong recovery in the euro area economy, a transfer of loss-making tracker mortgages to a warehouse vehicle could enhance banks' profitability.