Report issued on fiscal consolidation efforts in eurozone

The Irish Central Bank yesterday issued a report into the efforts to fiscal consolidation among the eurozone bailout countries including Ireland.

In a dense 15-page report, it concluded that “the burden of consolidation [a policy intended to reduce deficits and the accumulation of debt] can at times be high relative to the aspired pay-off in terms of improvement in the debt.

“In terms of how effective consolidation efforts are in bolstering more stable debt dynamics, the lever over which discretionary fiscal policy has direct control — the primary balance — plays just one part.”

The report notes that debt dynamics are determined by a number of factors. However, gross general government debt levels are expected to peak in programme countries next year.

Despite efforts to bring them under control, they will remain at elevated levels thereafter.

However, “fly-away interest-growth dynamics and other factors” contributing to overall debt levels can at times dwarf government’s consolidation efforts.

Mostly importantly, debt sustainability hinges on growth levels matching forecast levels between now and 2015.

Moreover, debt sustainability would also be greatly enhanced by bank debt restructuring and other growth enhancing measures.

The report found that, overall, fiscal consolidation can be best achieved by putting the emphasis on expenditure cuts rather than tax increases.

Of the 27.3% increase in Irish debt-GDP ratio, 22.5% related to bailing out the banking system.

Moreover, the consolidation efforts started earlier in Ireland than the other programme countries with 13.5% of GDP frontloaded between 2008 and 2011.

However, a total consolidation of 21% of GDP has to be achieved by 2015.

By the end of 2011, 9% of GDP of the consolidation efforts had come from trimming expenditure.

Although Ireland plans an overall 21% of GDP consolidation programme by 2015, it will “remain some way off achieving its medium term objective of a -0.5% GDP structural balance by 2015.”


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