Stability plan revises growth down by 0.25%

Stability Pact: The Stability and Growth Pact may have been forgotten but it is not quite gone. Long after its budgetary targets were abandoned by many EU governments, one of its stipulations has managed to live on. Each government is still obliged to present a detailed economic forecast alongside its budget.

This must be done according to a convenient and readable format.

The effect is to give the interested reader a dashboard of economic indicators relating to the economy, the Budget and the links between the two. Unlike the pact's defunct 3 per cent limit on government deficits, it doesn't prevent government misbehaviour, but it makes it a lot easier to spot.

The first thing a stability programme must assess is how realistic the government's plans are. In his recent pre-budget report UK chancellor of the exchequer Gordon Brown was forced to admit that the UK economy would grow by less than half the rate he expected earlier this year.

Brian Cowen is in no such position. His latest stability programme does revise growth for next year downwards, but only by a modest quarter of one per cent. The forecast revenue growth, around 7 per cent, is broadly consistent with this, given that revenue growth tends to equal real economic growth plus inflation.

Next on the checklist is Cowen's budgetary stance. That does not refer to how he stands in the Dáil chamber while delivering his speech. Budgetary stance deals with how the government's budgetary position is changing from one year to the next. But before we can fairly measure this, we need to strip out the effect of unexpectedly good or bad economic growth. A government might plan to run a surplus, but end up with a deficit because of unforeseen disasters. Or it might have its profligacy masked by unexpected good fortune.

To expose its true intentions, economists use the concept of the output gap. A positive output gap implies that actual growth exceeds potential growth. Revenue is accordingly higher - and expenditure lower - than would otherwise be the case, thus flattering the actual budgetary position. A negative output gap implies the opposite; that the budgetary outturn looks worse than it really is.

By adjusting the actual budgetary balance for the output gap we get the "cyclically adjusted budget balance" which more fairly measures of government budgetary behaviour.

Next year, the government plans to run a general government deficit of 0.6 per cent of gross domestic product (GDP). Compared to the modest surplus of 0.3 per cent this implies a loosening of the public purse to the tune of 0.9 percentage point of GDP. But next year's "cyclically adjusted" surplus will be 0.2 per cent of GDP. Last year's surplus was 0.8 so the deterioration is 0.6 per cent.

The Government's looseness is not quite as heinous as it seems. The significance of a government's stance is that if the output gap is positive, the government should not be loosening its underlying budgetary position. To do so is inflationary and the stability pact was designed by central banker types who want to prevent that kind of thing. But next year the output gap is projected to be negative, so its modest loosening could be forgiven.

The stability programme asks how vulnerable the government's position is to shocks. The range for budgetary outcomes for Ireland is very safe. In the worst case scenario we might hit a budget deficit 1.3 per cent of GDP in 2007. And chart 1 of the programme shows that, as a proportion of GDP, our level of debt is small by EU standards. Only four other countries - all of them recent, eastern European, entrants into the world of public borrowing - have lower debts that we do. How did we get to be this boring?