Odds on the Government doing what it said it would do in the budget have shortened considerably
THE WHITE Paper is a constitutional document so it must be prepared in advance of the budget. Since time immemorial, it issues at midnight on the Friday before the budget. This is, without doubt, the most awkward release time for any budget document. So my first comment is that any budgetary reform should change this Edwardian procedure.
That said, it is a pretty straightforward document. It is produced on a no-policy change basis. This means that all the spending and tax estimates in it are on a strict (well fairly strict) no-change basis. It also means that the economic forecasts on which it is based are prepared on a similar basis. This can cause traps for the unwary.
The figures in the White Paper are little different from those in the Pre-Budget Outlookreleased a few weeks ago.
Then, the 2009 general government deficit was projected at 10.9 per cent, now it is estimated at 10.75 per cent. It could even turn out to be a shade less but that is irrelevant as the budget will be based on the White Paper estimates.
The important thing is that the Government delivered. The 2009 deficit was capped albeit with difficulty. It did not rise to 12.5 per cent as forecast by the EU, nor did it escalate like the Greek one (where the numbers were falsified). This will help restore our credibility abroad.
The 2010 opening deficit is 13.5 per cent. This is as expected.
The positive aspect of the breakdown of the pay talks is that the certainty surrounding the 2010 budget is much greater. We now know that the Government will cut spending by the guts of €4 billion of which €1.3 billion will come from pay and pensions.
Of course this will have a knock-on impact on both the economy and the tax take. The Government will cut spending by 2.5 per cent of GDP but the deficit will fall by less.
Assuming that the Government does what it says it will, and the odds on this have shortened considerably, the budget-day general government deficit will be 11.75 per cent, ie it will have been stabilised at the 2009 level.
Yesterday’s White Paper gives us that bit more confidence that this will be achieved. This is no mean feat and implies, for example, that our deficit will be below that of the UK. Again, this is an important message for the markets.
The tax revenue estimates are down 2 per cent in line with the projected fall in nominal GDP and so are hard to criticise. The only tax that is up in 2010 is stamp duties but this does not reflect a projected improvement in the property or stock markets; rather it is a technical consequence of recent legal changes which mean that life-assurance-related receipts now come in as stamp duties rather than income tax.
The other notable feature is debt service which is projected to rise by a cool €2 billion in 2010, reflecting recent borrowings and, possibly, an assumption of rising interest rates as the year wears on. This is greater than the putative savings on pay and illustrates both the need for action and the dangers of any delay in tackling the deficit.
Finally, for Nama followers, there is no new information in the White Paper. In 2009, banks were recapitalised from the National Pensions Reserve Fund and the exchequer. Neither of these impact on the general government deficit.
However, the 2009 exchequer balance was boosted by the €4 billion Anglo Irish injection and also by the bringing forward of the 2010 exchequer contribution to the Pension Fund (€1.5 billion). The result was an unusually high exchequer deficit of €25.3 billion.
The 2010 accounts contain no provision for further recapitalisation as amounts will depend on private capital raised. However, they do include income of €1 billion from the banks on foot of assistance given – the first sign that traffic is not all one way.