ECONOMICS:Its inadequate analysis to date will not have much influence on the budget. Is the council poorly composed?

THE ANNUAL budgeting season will be more intensive than usual this year with several new reports due in coming weeks. It kicked off recently with the first report of the new Irish Fiscal Advisory Council published on October 12th.

With the 2012 budget imminent, the council set out to assess the fiscal stance. It found that everything was hunky dory but went on to advise the Government to go for €4.4 billion of cuts next year instead of the €3.6 billion signalled in the last budget, to get the deficit down more quickly.

The Government promptly dismissed this suggestion, as did the troika, so one is left wondering about the role of the council.

Moreover, to add injury to insult, the council’s first report was marred by several elementary errors. Post-publication, it made two attempts to correct this, first posting a revised (and misleading) version on the web without owning up to what they were doing before finally coming clean on October 25th.

The original report stated: “The underlying deficit has declined from 14.3 per cent of GDP in 2009, to 12 per cent in 2010 and to a projected 10 per cent this year” with a footnote explaining that the concept used excluded “promissory note payments and assistance to Anglo Irish Bank in 2010”.

Anyone with even a nodding acquaintance of the public finances would have spotted immediately that the underlying deficit in 2009 was not over 14 per cent. The first capital injection into Anglo which was in 2009 (not 2010 as stated in the report) was reclassified after the event and was a major news item because it boosted the 2009 deficit substantially. The council missed this completely and the figure published for 2009 overstated the position by €4 billion or 2.5 per cent.

The sorry saga of the attempts to correct this has been chronicled by Michael Taft of Unite (who makes a few factual errors of his own) and I will not add to it other than to say the latest correction is still not quite accurate after two attempts and several weeks delay.

For the record, the original sentence should have read: “The underlying deficit has declined from 11.7 per cent of GDP in 2009, to 11.5 per cent in 2010 and to a projected 10 per cent this year.”

Before, dear reader, you accuse me of pettiness, let me point out that the revised data paint a very different picture as regards the pace of decline of the deficit. The council sought to maintain that the sharp underlying decline was evidence that fiscal policy was working whereas the actual rate of decline is rather pedestrian. Moreover, the report contained a second error which got the debt- to-GDP ratio in 2030 wrong by a not-insignificant 12 percentage points.

All this got me thinking about how such elementary errors could occur in the first place and, even more importantly, be left stand uncorrected by the board members who presumably read the document prior to issue.

Surely it is standard practice for draft papers to be circulated for comment by the Department of Finance. I had intended to say that it was inconceivable that anyone in the department who read this paper would fail to spot the errors – but that was before news of the €3.6 billion overstatement of the national debt broke. Then I reflected on the council’s membership.

A quick search revealed no one on the council or in the secretariat is a fiscal expert – they are all general economists and, as far as I can see, none has written on fiscal policy, much less done the number-crunching that is second nature to a fiscal expert.

A paper by Lars Calmfors and Simon Wren- Lewis shows that Ireland followed the continental model in stuffing the council with academics. The Anglo-Saxon approach, by contrast, blends the academics with administrative and financial experts, thereby securing a better balance.

The British experience is illuminating. The Office for Budget Responsibility, which has wider responsibilities, has a staff of 16, many of them ex-treasury with numerous years of fiscal experience. The Irish operation, by contrast, has a couple of staff seconded from the Economic and Social Research Institute and the Central Bank.

However, it is when you come to the British council members that the difference is starkest. The chairman is Robert Chote, who was director of the Institute for Fiscal Studies from 2002 to 2010. He has committed to spend five days a week on the job for which he receives £142,000. Steve Nickell, an academic who served on the bank of England Monetary Policy Committee, devotes three days a week to the OBR in return for £69,000.

The third member, Graham Parker, is the archetypical insider, having spent 13 years on forecasting and policy costing in the inland revenue service plus nine years as head of the public sector finances team in the treasury.

The office members include genuine fiscal experts; they are treated like directors and paid accordingly; they commit significant amounts of time to the job and they are assisted by a sizeable experienced staff.

By contrast, the Irish operation runs on a shoestring; the members are not fiscal experts and they all seem to have full day-time jobs. They presumably do their fiscal council work in their spare time, which is far from ideal.

Moreover, they operate on a pro bono basis (this is laudable and sounded good when first announced but now looks like a mistake) and the staff is seconded from organisations that have no fiscal mandates. This puts the Irish members in an impossible position.

The Minister would be well-advised to revisit the drawing board before introducing permanent legislation. A rethink is needed anyway, as the recent euro summit decision that national budgets should be based on independent growth forecasts has significant potential implications for the council.

I was also taken aback by the inadequacy of the council’s analysis of the 2011 budget. Given that the pension levy was not in the original budget estimates, it follows that tax receipts are overstated by about €400 million relative to target, ie underlying tax revenue was 1 per cent below target in September and 2.2 per cent below in October.

I reckon that taxes will undershoot the budget day target by up to a billion and a half euros. And if I can spot this, surely the council should be able to, yet there is no mention of it. Strange.