Economic and Fiscal Outlook John McHale National University of Ireland, Galway Irish Fiscal Advisory Council October 3, 2013 12th Annual IUA HR Conference.

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Presentation transcript:

Economic and Fiscal Outlook John McHale National University of Ireland, Galway Irish Fiscal Advisory Council October 3, th Annual IUA HR Conference ~ Ag Breathnú Romhainn ~ ~ Looking Forward ~

Overview Economic outlook Fiscal outlook Implications for higher education sector

Economic outlook

BanksPublic Finances Real Economy Bank Bailout Costs Lost Credibility of Guarantees Austerity Budgetary Costs Asset Values Credit Availability Dealing with a crisis

Real aggregate activity

Components of domestic demand

Retail sales

Real exports and imports

Employment developments

Fiscal outlook

Crisis → Massive debt shock Source: Central Statistics Office

And a large underlying deficit

Deteriorating creditworthiness led to the need for a bailout Source: Datastream

A huge fiscal adjustment has been required Billions of Euro July 2008 Expenditure adjustments 1.0 Budget 2009 (October 2008) Revenue raising measures 2.0 February 2009 Expenditure adjustments 2.1 Supplementary budget (April 2009) Revenue-raising & expenditure-reducing measures 5.4 Budget 2010 (December 2009) Revenue-raising & expenditure-reducing measures 4.1 Budget 2011 (December 2010) Revenue-raising & expenditure-reducing measures 6.0 Budget 2012 (December 2011) Revenue-raising & expenditure-reducing measures 3.5 Budget 2013 (December 2012) Revenue-raising & expenditure-reducing measures 3.5 Planned Adjustments: 2014 – 2015 Revenue-raising & expenditure-reducing measures 5.1 Total actual and planned adjustment32.7 (≈ 20 % of GDP)

Is austerity working?

A difficult balancing act Recognition that fiscal adjustment measures will slow the economy in the short run Key question: Is austerity working to stabilise the public finances and restore the creditworthiness/borrowing capacity of the State?

Actual vs. counterfactual: The primary deficit

Actual vs. counterfactual: The overall deficit

Actual vs. counterfactual: The Debt/GDP ratio

Significant improvement in creditworthiness Source: Datastream

On track to bring the deficit below 3% by but uncertainty remains

Should we proceed with planned adjustments? Current plans are for additional adjustments of: – €3.1 billion in 2014 – €2.0 billion in 2015 Risks around growth mean it is wise to continue to plan for these adjustments – Possible scope to relax plans as the picture becomes clearer Hard-won credibility would also be put at risk by not following through on planned adjustments

Light at the end of the tunnel?

Distributional effects of the crisis and the policy response

Impact of the crisis on inequality Source: OECD

Distributional effects of Budgets, Cumulative Percentage Change in Disposable Income Source: ESRI

Evolution of inequality over the crisis Source: CSO, Survey of Income and Livings Conditions

Implications of the adjustment for Education

Significant reduction in pay bill and numbers

Education sector is second largest employer

But strong demand pressures

Education spending is falling Source: DPER, Databank

Higher education taking a disproportionate hit Source: DPER, Revised Estimates

Final thoughts How can the third-level sector defend its research mission? Current model focused on discrete outputs for industry – Patents; start-ups; PhDs... Might be better to focus on a human-capital model – Research-based teaching → Equip graduates with the analytical skills to work at the technological frontier