On Saturday morning, the Department of Finance was projecting a small budget surplus of €640m at the end of next year. By Tuesday lunchtime, that had shrunk to €75 million. What happened to the surplus? The Budget – that’s what happened.
According to the Department of Finance's estimated impact of the Budget, net current spending increases by €1,135bn. This is partially offset by a net current revenue increase of €570m, leaving a gap of €565m. Subtract that from the surplus of €640m and you are left with €75m.
And that, by the tightest of margins (allowing for rounding errors and little else) is a balanced budget. At least it is in terms of the headline deficit.
The structural deficit, which attempts to strip out the effects of extra revenue from the upswing in the economic cycle, is 0.7%. It was supposed to be 0.5% under the European Commission’s country specific recommendations.
The Department’s Economic Analysis book states "on the basis of projections for actual GDP set out in this document, a structural deficit of 1.0% is in prospect for this year (2018), closing to 0.7% of GDP next year".
Back in October 2017, when this year’s Budget was set, the view on the structural deficit was as follows: "On the basis of the projections for actual and potential GDP set out in this document, a structural deficit of 1.1% of GDP is in prospect this year (2017), closing to 0.5% of GDP next year (2018)."
Okay, the structural balance is notoriously difficult to calculate accurately, and the EU rules do give some wiggle room of 0.25% - so the Budget may get past the commission next month.
The Irish MTO (medium term objective – the target of a structural deficit of no more than 0.5%) is due for recalculation next year, based on a three-year average of economic data. But it is still an official EU indicator.
And somebody might start looking more closely at those indicators and making decisions based on them. Without knowing the subtle ins and outs of the Irish economy, that makes it a pretty difficult indicator to calculate.
The reason for a potential closer interest – from financial markets – is the real budget headache for the EU, and that of Italy. Its draft budget for next year projects a headline deficit of 2.4% of GDP. It was supposed to be 0.8% of GDP, but the new government wants to spend more.
Financial markets have been getting nervous, selling off Italian government bonds, pushing the yields higher. Outspoken remarks from the leader of the League party, Matteo Salvini, have helped push yields higher. They hit 3.6% on Monday after he declared the European Commission to be the "enemies of Europe".
Italian ten-year bond yields are now about 3.6% - compared with an Irish yield of just over 1% and a German yield of a little over 0.5%.
The spread – the difference between German bonds (seen as the safest) and other sovereign bonds - shows what the market thinks of the risks involved in lending money to a government inside the Euro area.
For France, the spread is around 30 basis points. For Ireland, it is about 50 basis points. For Italy, it is 300 basis points. For Greece, it is 400.
When we are back writing about rising bond yields and spreads in the Euro area, it is not good. The Italian budget confrontation is one to watch in the weeks ahead. If it sparks jitters in the sovereign bond market, it might be bad news for Ireland.
For although the Government is no longer planning to borrow to meet its headline deficit, which is now planned to be a "black zero" balanced budget, the National Treasury Management Agency (NTMA) - the State’s debt management office - has to redeem some €34 billion in debt over the next two years.
And that is done by refinancing – borrowing a new €34 billion to pay off the old bonds. Remember, when the economy tanked in 2008/2009, a government that had become over reliant on revenues from stamp duty and VAT on property transactions had to fill in a massive budget deficit by borrowing.
It issued ten-year bonds, in 2009 and 2010 (up until the point the market wanted a 7% yield). Guess what – the ten years are up and the lenders want their money back. So the NTMA needs to raise the money.
Okay, it has €13bn in cash already, as it likes to be pre-funded for at least half a year ahead. But if the Italian situation pushes borrowing costs higher, the contagion could spread here. Italy is after all a G7 economy, number three in the Euro area. A crisis there and questions will again be asked of the stability of the Euro area, likely pushing our cost of borrowing up too.
Just to add spice to the mix, the ECB is due to stop its bond buying programme in December, which has helped keep borrowing costs down. And Brexit is happening, in some form, in March. A bad Brexit could also spark nervous reactions in bond markets, again making borrowing a costly thing for governments (and by extension the banks, and ultimately all of us).
And why not kitchen-sink this malign scenario, and go the full Trump trade war on it? Ireland’s biggest single-country trade partner going to (economic) war with the other two big economies of the globe, China and the EU, would depress global trade – the lifeblood of the Irish economy.
With such scary prospects, there is every reason to wish for the most robust public finances possible – to withstand as much as possible of the potential external shocks, and not have to go back into cutback mode.
A measure of that robustness is a capacity to borrow in the financial markets to fund a deficit, so spending programmes can be maintained in a downturn. That’s why some economists are disappointed there is not a significant budget surplus by now, despite the strong economic and employment growth of recent years.
The point of a budget surplus – and actual debt reduction – is not about hitting targets for the sake of hitting targets. The point is to buy some protection.
It is a bit like insurance for your house or car – you hope you never have to use it, but you tend to sleep better if you have bought it.