I may allocate some of the questions as we go along, the harder ones. I thank Deputy McGrath for his important questions. With regard to the budgetary projections, I will give the Deputy some idea of how we came to our particular projections and how things have changed as a result of the recent Maastricht returns. The projected deficit for 2011 in budget 2012 was 10.1% of GDP. When writing our report, there was already information available that things had turned out somewhat better than that and our projection at that point for the deficit for 2011 was 9.9% of GDP. We made the assumption, based on the information we had, that this improvement would carry forward to future years. However, then we had to factor in the clear evidence of lower growth. We used the most recent growth projections at the time, which came from the IMF. The combination of the somewhat better starting point and the deterioration of the growth projections led us to project that everything else being equal, the deficit for 2012 would be 8.8% of GDP. We believed there were likely to be buffers built into the Government's projections and even though on the day the report was launched we were saying Government's projections would be missed, we recognised the buffers were likely to be there. Therefore, we would not have been calling for a mini budget as an immediate reaction to missing the 8.6% target. We believe that meeting the programme targets is very important to the Government's credibility, but it was going to be later in the year before we had a good sense of whether additional actions needed to be taken to meet the target of 8.6%.
There is both good news and bad news in the Maastricht returns. The bad news is not any great surprise as we knew that at least a portion of the injections into the banking system that took place in 2011 - €16.5 billion had to go into the banks - would be reclassified as a deficit creating capital injection. That led to the headline deficit for 2011 rising to 13.1% of GDP. The good news is that as a result of some other revisions, particularly relating to dividends from the National Pensions Reserve Fund and revenues from the banking guarantees, the projection for the underlying deficit for 2011 was reduced to 9.4% of GDP. Therefore, there was a better starting point. Based on the nature of those revisions, we do not see a strong reason to carry them forward to future years so that when we then make our growth revision - I note the Maastricht returns are still based on the old growth numbers - we project the deficit for 2012 coming out at approximately 8.6% of GDP. This shows the buffers were there, but we can now be a bit more explicit about what the buffers were. Essentially, our revisions in terms of the bank guarantee related revenues and the dividends are offset by the changed growth outlook. That is the finishing point of our analysis.
It is true that nominal growth is very important for the budgetary projections, but real growth and employment is what matters for people's lives. One of the key points we make in the report - this is theme running through the different chapters - is the importance of the uncertainty around the growth outlook. There is always uncertainty around the growth outlook, but in the post bubble Irish economy that uncertainty is particularly heightened. We discuss the various elements of that uncertainty in our report. Based on that uncertainty, it is prudent to look at different scenarios for how the budgetary projections would unfold under the different macroeconomic outcomes. We see quite a range of possible budgetary outcomes, depending on how things work out on the macroeconomic side. As the Deputy mentioned, one of the scenarios we look at is that the nominal growth rate is one percentage point less per annum out to 2015. In that scenario, the debt to GDP ratio reaches approximately 125% of GDP by 2015 and, more important, has not stabilised and is still on an upward trajectory. This shows the fragility of the situation we face currently and the difficult balancing act involved in setting fiscal policy in the current environment. In an economy in deep recession and having a shockingly high unemployment rate, the last thing we want to do is to put a further drag on the economy through additional fiscal adjustment.
On the other hand, the debt situation is very fragile. Ireland's underlying debt sustainability is very fragile. Although its credit worthiness has improved substantially since last July, longer term bond yields, even though they are now below 7%, are still too high to return to the market on any sustainable basis. Given that Europe's crisis regulation mechanisms are still somewhat in flux there is also uncertainty in terms of access to official funding. In terms of our market creditworthiness and official funding creditworthiness there are vulnerabilities.
We can help to improve both with a somewhat more ambitious fiscal adjustment. Longer term, there are issues related to how a heavy debt overhang affects growth. There is growing international evidence from a number of papers that show debt-to-GDP ratios of over 90% of GDP have a noticeable drag on growth. There are also issues of intergenerational fairness, in that the more we allow the debt to build now the greater the burden were are putting on future generations.
One thing we did not mention in the report but is important to note is that the more we allow the debt to build now the larger the interest burden that will exist in the future and the harder it will be to fund non-interest related government expenditure in the future. It is another factor which needs to be taken into account. It is a difficult dilemma in terms of setting the appropriate fiscal stance.
Based on that and given the vulnerabilities related to debt sustainability and credit worthiness, some moderate amount of additional fiscal adjustment to 2015 would give us a little insurance against some negative shocks and we could still remain on a sustainable debt path. It is a difficult decision. We can understand how other people could weigh that dilemma and come to a different outcome.
In the report we said the Government's strategy of targeting a deficit of 3% of GDP by 2015 is within the range of appropriate actions but our judgment is that some additional insurance, through some additional adjustment, would bring down the debt-to-GDP ratio to 1.7% of GDP and, probably more importantly, run a primary surplus of about 4% of GDP which puts the debt ratio on a reasonably firm downward path. It would probably decline at a rate of about three percentage points of GDP per year if we were to achieve that, as opposed to the current plan which would leave the debt to GDP ratio on a much shallower reduction path. It is clearly a balancing act to get that right.
A Deputy also asked about stimulus. We have to be careful. If one is engaging in fiscal adjustment and reducing the deficit, one is not engaged in a stimulative fiscal policy. It is worth considering what could be done to lessen the growth reducing effect of any fiscal adjustment. I am a bit sceptical about whether innovative financing mechanisms can achieve very much but I am not saying they are not worth careful consideration.
Taking money from the National Pensions Reserve Fund is not very different to allowing gross debt to accumulate. In terms of the real measure of the debt burden of the country, the net debt subtracts from the value of the financial assets in the fund from the gross debt which is the real measure of the debt burden. One does not achieve much by moving such figures around. Measures such as using commercial semi-State bodies can be examined but it is difficult to make substantial breakthroughs by using alternative funding mechanisms.
Something which may have more scope and was recently emphasised by the Nevin Economic Research Institute is the mix of spending. For instance, one could sustain capital spending beyond what one might have otherwise have done by using revenues from privatisation while at the same time making a strong commitment to permanent fiscal adjustments on the tax and other expenditure side.
On the one hand one is retaining credibility because one is showing that one is on a path to debt sustainability well on the other providing immediate, if temporary, spending power to the economy through increased capital spending. It is worth thinking hard about innovative things which can be done that retain credibility and support growth in the economy. Essentially, it involves looking for ways to try to improve the trade-off I mentioned which, unfortunately, is there. We cannot wish it away. It will be a difficult balancing act. We would strongly support anything we can do to support that trade-off. We are examining those issues.
