Morgan Kelly’s figures edited by the Leddin and Walsh. I know what I believe.

The Irish Times – Friday, May 20, 2011

Clarity needed when figuring out Government debt

ECONOMICS: THE DEBATE about Ireland’s economic and financial prospects has become fractious. Morgan Kelly’s contribution in this paper (May 7th) was laced with sarcasm and provocative claims, while Antoin Murphy supplied some witty ripostes in the Sunday Business Post (May 15th).

Between them, these pieces generated over 700 comments on the widely-read, many far less civilised than the original contributions. Acres of space have been devoted to discussion of the topic.

At the heart of this confrontation has been the issue of the actual and projected levels of Government indebtedness. Anyone who has waded through the attempts to establish a definitive figure will be forgiven for concluding that economists are a confused lot, incapable of agreeing some basic numbers.

However, the issues at stake are, as Kelly said, less a matter of economics than of arithmetic or, better, accountancy. And whatever about the scientific credentials of economics, readers will not need to be reminded the accountancy profession is capable of a high level of obfuscation.

An unhelpful aspect of the debate is the poor presentation used by many to argue their case. It is unhelpful to eschew the use of tables when arguing about double-entry book-keeping. Nothing is better calculated to induce confusion that a paragraph of prose littered with conflicting numbers referring to poorly defined accounting entities. The failure to distinguish clearly between gross and net magnitudes has also added to the confusion.

In this setting, the three-page Information Note on Ireland’s Debt released by the National Treasury Management Agency (NTMA) on May 10th was a model of clarity, setting out in three short tables: (1) the general Government’s debt (gross); (2) the Government’s assets and liabilities; and (3) the ownership of Government bonds.

While praising the NTMA’s contribution to the debate in terms of clarity, we are not necessarily endorsing the validity of its projections. But we do use its framework to pinpoint the grounds for the discrepancy between the estimates it provides and those published by Kelly in this newspaper.
As the accompanying table shows, Kelly starts from a gross general government debt (GGD) of €190 billion at end of 2014. To this, he adds another €45 billion for Nama liabilities and €35 billion for further bank recapitalisation.

This brings the total gross debt to €270 billion. He then subtracts €50 billion for Nama assets and the likely value of the banks to obtain a net figure of €220 billion.

For undisclosed reasons, he feels the resulting figure is too optimistic and adds a further €30 billion as a contingency provision. This brings his projection of the gross GGD to €250 billion at the end of 2014.
As the table shows, the NTMA starts from a gross GGD figure of €202 billion in 2014. Nama liabilities of €30.7 billion are projected to equal Nama assets and hence do not contribute to overall indebtedness.

The NTMA has a zero entry for further bank recapitalisation as this is already included in its GGD figure for 2014. Kelly’s inclusion of €35 billion under this heading is double counting. The NTMA puts a figure of €9.4 billion on the likely value of the banks. This is actually the National Pension Reserve Fund’s investment in the banks in 2010 and is likely to be a significant underestimate. It adds €31.2 billion for the non-bank financial assets of the State, ignored by Kelly.

Finally, excluding Kelly’s “contingency provision”, net GGD comes to €161.4 billion or 92.4 per cent of the NTMA’s projection for nominal GDP in 2014. While the NTMA result is still enormous, and based on projections subject to a high degree of uncertainty, it is well-below the peak of 117 per cent of gross national product reached in 1987.

It is also considerably less alarming than the quarter of a trillion figure suggested by Prof Kelly, which infers a debt-GDP ratio of 143 per cent on the basis of the NTMA 2014 projection. This suggests his recommendation that the Government bring the budget immediately into balance is based on very shaky foundations.
There is an urgent need for the protagonists in this debate to try to reconcile their numbers and to present as accurate a picture as possible of the challenges facing Ireland.

Kelly  NTMA

 Gross general govt debt in 2014            190       202
 Plus NAMA liabilities                            +45 30.7
Further bank recapitalisation                   35 Zero
Minus value of NAMA assets and value of banks  -50 -40.1 (30.7 + 9.4)
minus nonbank financial assets   0 -31.2
 Plus contingency provision 30 Zero
Net general govt debt 2014    250 161.4
%GDP 143%  92.40%