 So thank you very much for the invitation. It is incredibly well timed since we really just launched ourselves to the public last week with our first report. So this is a great opportunity to look at some of the sort of the longer term issues surrounding the council and I will actually say a little bit about the first report as well. So I'm going to talk a little bit about the role of fiscal councils hopefully in preventing the kind of problems that arose in Ireland, the particular design of our council. I'm going to talk a little bit about our first fiscal assessment report and then look to the challenges facing the council. So the starting point is really the principles of good fiscal policy and the first thing I want to stress is that we really are looking at it from a macroeconomic perspective. We're not sort of getting into the issue of what's the right size of government which is something that really beyond a council these are very much sort of political decisions but in terms of good macroeconomic fiscal policy management in terms of the size of the deficit and the debt really that is our space. So there's a I understand that most of you here are economists so you'll be sort of well aware of the very active debate in the economics literature about what good fiscal policy is and sort of a starting point for many of the discussions is this idea of the irrelevance of deficits which would surprise non-economists. So there is a sort of belief in the certain conditions that really deficits and debt really don't matter and this is an idea associated sort of most recently with the Harvard economist Robert Barrow. But the reason it's sort of useful is that when you see the assumptions required for deficits not to matter you realize that deficits are likely to matter a great deal. So the assumptions required that people have sort of infinite horizons that capital markets work perfectly. There's no concerns about the government not defaulting and so on. When you relax these assumptions you see that deficits and debt can matter a great deal. And I think there is a growing consensus about what good fiscal policy is or some sort of broad principles of sound fiscal management and these principles are that you have a stable fiscal system which could be sort of captured by tax rates being reasonably stable over time. We don't want to tax rates to have to rise a lot in the future for instance to pay for the cost of an aging population or higher healthcare costs. So for reasons of intergenerational fairness but also just for reasons of economic inefficiency we want a reasonably stable system not only for tax rates but also for benefits rates such as sub pension rates so that people can sort of plan for their retirement and sort of believe that those pensions will be there. Another important principle is that we need to maintain creditworthiness something that would have been sort of taken for granted up until quite recently but we certainly need to manage fiscal policy to make sure that creditworthiness is retained and finally that we need to have enough fiscal space to engage in counter-cyclical fiscal policies when needed. So this is sort of I think a set of principles that sort of broadly agreed within the economics profession in terms of what sound fiscal policy management is but and this is not meant to be in any way specific to Ireland the literature has very much focused on the idea that there are political biases of various kinds in the making of fiscal policy that will often move us away from these principles of sound fiscal management and these biases can take various forms many of them can be sort of grouped as resulting from conflicts of interest of various types there's the common pool problem where various interest groups control or influence spending in particular areas and don't worry about the the externality that their push for spending has in terms of the need for higher taxes or potentially higher deficits to pay for that spending so you basically have this collective action problem that leads to essentially excess deficits in the economy you can also have short political time horizons governments are only in power for a certain length of time and not surprisingly not going to be that concerned or as concerned about what happens when they leave office so again you can have this bias towards deficits and debt accumulation you can also have strategic deficits I don't think this is a big issue in the Irish case but I think it's a huge issue in the US case particularly when you have administrations of different ideological leaning following one another so the Bush tax cuts could have been seen as an effort to actually constrain future democratic administrations by having big deficits building up debt and making it harder for future democratic administrations to maintain spending so this can again lead to a bias towards deficits and debt and finally there is the fact that people are not equally well informed you could have the government been quite well informed about what it needs to do but dealing with a relatively uninformed population and then if you have various sort of populist media media or populist politicians can make it very hard for the government to stay in power doing the right thing but you could also have a populist government sort of willing to sort of exploit the fact that the population is not fully informed to pursue policies that may be good politically in the short term but not good for the for the longer term so all of these sorts of conflicts of interest lead to this this bias towards deficits and debt and then I think very importantly there's an additional political problem that again the economist among you will be very familiar with this idea of time inconsistency and the commitment to problem associated with it and it comes really in this context from the fact that default is there as an option but expectations of default lead to a higher risk premium and they can maybe lead to come to market exclusion completely and there's a danger of falling into this bad equilibrium where the markets come to expect default push-up interest rates and because of the higher interest rates default actually happens and the the reason this is sort of stemming from a problem in politics is that if governments could actually commit and really convince the markets that default would be an absolutely last resort they could avoid getting into this cycle of expectations becoming self-fulfilling but because it can't make those commitments they these expectations develop and you can sort of fall into the kind of traps that we've been seeing at the moment so a starting point is that under democratic politics again it's nothing iris specific there are problems with the formulation of fiscal policy and then the idea is that fiscal institutions of various kinds can be designed to improve fiscal policy sort of moving us towards those seven principles that I talked about earlier and the institutions can be really fiscal processes sort of strong departments of finance that can solve this common pool problem that I talked about before the literature shows actually that strong departments of finance don't tend to work that as well in the context of coalition governments so the new institutional innovation of actually having both coalition partners being sort of part of finance with this new department of public expenditure and reform seems like a sort of very good innovation in terms of dealing with that sort of moving in the direction of meeting term frameworks and sort of longer term commitments to good fiscal policy and there's a movement around the world towards this idea of fiscal charters that really allow the government to really commit to pursuing sound fiscal policy management so there's been important innovations in countries like New Zealand, Australia and recently the UK in putting these fiscal charters in place and I think this is something that could be considered I think will be considered in the context of the upcoming fiscal responsibility bill here. Another part of the fiscal institutions is to put in place fiscal rules that really raise the costs of pursuing bad fiscal policies because to pursue the bad fiscal policies you essentially have to break the fiscal rule and there's just more attention drawn to the poor fiscal performance of the government. A problem with fiscal rules however is that the ideal fiscal rules require a lot of flexibility to deal with shocks that hit the economy that maybe need to pursue counter-cyclical policies to deal with the recession so it can be very hard to see if the fiscal rules are really being followed when you allow for the flexibility around that rule so there's been a little bit of the satisfaction with fiscal rules as a way to solve the problem and so there's been a move in the literature and actually around the world in terms of actual fiscal policies to increase the role of what I refer to here as fiscal agencies sort of model a little bit on the idea of independent central banks which have sort of very clear objectives and are considered to have sort of to provide sort of a good balance between rules on the one hand and the need for discretion on the other and often fiscal agencies sort of focused on the implementation of fiscal rules that combination where they complement each other can be a particularly good combination so fiscal agencies can take really different forms fiscal authorities would actually give the agency powers over fiscal policy for instance the power to decide what the deficit should be and that's again somewhat like an independent central bank that has the power to actually set the interest rate but I think there's for the most part a consensus not a complete consensus but sort of a reasonable agreement that in a democracy the nature of fiscal policy is such that you don't want to delegate to an independent agency even for something like the deficit that these are there's disagreement first of all in terms of what optimal fiscal policy is and these issues are intensely redistributional and for that reason these are decisions that should be made by elected representatives not appointed officials so then there's this idea of a fiscal council which is sort of a soft version of the fiscal agency and the idea is that the fiscal council would be more advisory really focusing on assessing and importing in terms of its analysis into the fiscal policy process but ultimately recognizing that these fiscal policy decisions are decisions that have to be made by by governments so the basic rationale then for fiscal councils would be on the one hand better analysis so identifying what good fiscal policy is or what appropriate fiscal policy is and also to try to reduce these various political biases that I talked about before essentially by raising the costs of running inappropriate fiscal policy there are varieties of fiscal councils around the world they really go back to the 1940s and fiscal council wasn't called a fiscal council but very much functioning as a fiscal council in the Netherlands the the US put effectively a fiscal council in place with its congressional budget office in the 1970s they've also been important councils operating for some time in countries like Belgium and Denmark and in recent years there's been growing interest in fiscal councils so the UK has put a fiscal council in place Sweden has done so Slovenia Canada so they're becoming a more and more accepted part of the overall fiscal architecture around the world and they come in in very different forms and do very different things often responding to different problems that exist in different countries so in the case of the UK which is the one we're probably most familiar with here it's a it's in the news a lot so they had this new office of budgetary responsibility it is responsible for actually making the government's macroeconomic forecasts and budgetary projections so there was this concern that that process of making forecasts and projections have become politicized under the the previous labor government and so they got that particular responsibility which is actually a very resource intensive activity they also have the role of checking the consistency of government policies with the government's own fiscal rules interestingly they're not mandated to provide an assessment of the overall fiscal stance so they don't have this normative role on the other hand in Sweden without going into the details of what the Swedish fiscal policy council do they do have this normative mandate to actually assess the appropriateness of the fiscal policy that the government is pursuing so our mandate is actually more like the Swedish mandate we are not given the the job of actually making the government's macroeconomic forecasts and budgetary projections but we are given the the job of assessing the the soundness of of those forecasts and projections and the the methods being used to actually produce them but what's particularly distinctive about our role is that we do have this normative element to our mandate to assess the appropriateness of the overall fiscal stance that the government is pursuing and with the new fiscal responsibility bill and eventual act that is meant to be the bill is meant to be published by the end of the year there will be new fiscal rules put in place and part of our mandate will be to assess the consistency of the government's policies with those with those rules and the minister can also add additional jobs to to the list as well but hopefully he won't for the moment because we still are quite small so the council who are we so the idea was to bring international expertise into this so the council was made up of Sebastian Barnes who is a long-term fiscal expert or an expert on long-term fiscal issues in the in the OECD you probably know Alan Barrett who was the editor of the quarterly economic commentary for some time but also his main research is very much looking at long-term fiscal issues. Donald Donovan again many of you will know who is currently an adjunct professor at the University of Limerick and formerly a deputy director at the at the IMF there is me and the chair of the council and we've also Roshina Sullivan who is a professor at Smith's College in Massachusetts and has worked a lot in the area of monetary policy on the design of good institutions to make monetary policy work better so she brings a lot of expertise in terms of institutional design. We have a small secretariat headed by Dermot Smith who's on the common from the from the central bank and you can see our resources are fairly thin given the quite extensive mandate that we have and I can assure you everybody is extremely busy. I should say that the council are essentially volunteers these are in addition to our real jobs the non-public sector members of the council receive a small stipend but the members of the council that actually work in the public sector which is myself and and Alan do not get compensated for our work here. So in terms of delivering on the mandate so that we can actually do what we're meant to do and play the the important role that fiscal councils can play the what I see as being critical is that we have to have the technical competencies to do the analysis credible analysis and and to bring that to the public so we're building those technical competencies competencies at the moment. I'm a little bit concerned that we really don't have the resources and the resources haven't planned for us to play the role that we we need to play so that's something that I think that will have to be looked at critically is the perception of our independence that's our independence from finance there's a balancing act here in the sense that we need information from finance we need data we need to understand methodologies but at the same time we absolutely have to prevent any sort of capture of finance of the activities of the council so we keep our interactions with finance to an absolute minimum and very much sort of based on sort of technical questions and given that independence is is so critical we also have to think about accountability but we want that accountability to be as divorced as possible from finance itself so for instance we will be making appearances before relevant to rock this committees we're going to be having peer review of activities and so on to actually have our first appearance before the joint rock this committee on finance public expenditure and reform next week on the first report and public visibility will be absolutely critical which is why I am very happy to do events such as this so we are a public watchdog and we're not going to be sort of working through back channels to finance in terms of our assessments there are going to be very much public assessments and we try to get off to a good start last week by getting as much sort of public visibility to our first assessment report as possible so the permanent design of the council will be determined in this new fiscal responsibility bill so we're just currently operating on an interim basis and we're one of the things we're doing at the moment is really trying to figure out how we need to be designed to ensure that we have the resources that we need to function properly that we are independent we have this public visibility and so on so key outputs we will be reporting at least three times per year we will have these biannual fiscal assessment reports we will also have an annual report which will probably be more focused on on longer term fiscal issues and shorter supplementary supplementary commentaries as required since the response to the budget and response to the publication of the pre-budget outlook and so on and at the moment we're working very hard in terms of our input into the fiscal responsibility bill which is following on from the department of finance discussion document which laid out that the government's plan in this particular area and we'll be reporting again publicly in terms of our advice for the design of the bill shortly the real value of the council is for the for the long term to prevent the kind of crisis that we're still trying to find a way out of so it really is a surveillance role to make sure that these vulnerabilities that led to the crisis are not allowed to occur again but we're also sort of importing into sort of the medium term fiscal strategy and that's really what our first assessment report was all about this is a sort of a critical moment in the making of our fiscal policy there's going to be a new essentially four-year plan as part of the pre-budget outlook T-shirt was actually talking about the the timing of that looks like it's going to come out in early November so we actually accelerated our activities a bit to make sure that we could get our first assessment report out early enough before the decisions were made so that we could actually have an input into the making of the medium term fiscal strategy as you know the Troika have been in town so lots of decisions are going to be made sort of around now or probably have been made but I think we were able to get in sort of early enough that our analysis could actually have some impact in those liberations so how am I doing on time okay so I'm just going to say just a little bit about the the fiscal assessment report itself so again this was sort of mainly focused on on what the government's median term fiscal strategy should be and in terms of the existing fiscal strategy we took as our starting point the stability program update that was published in April which really lays out the government's fiscal targets so you see here the projections for the debt to GDP ratio that it would sort of peak in 2013 and then we come then start coming down but still remain at a very high level well over 100% of GDP by 2015 and really the strategy is a set of targets so you've been hearing a lot about the target for next year of 8.6% general government deficit with the plan to bring that deficit down below 3% of GDP by 2015 and this last line shows the discretionary fiscal adjustments that will be required or estimated to be required to actually hit these targets so the another number that's been in the news a lot is the need for a 3.6 billion adjustment in 2012 and there's been sort of debate about whether that would be enough to hit this particular target of 8.6% of GDP so one of the things we did in the report is to assess the budgetary projections themselves in terms of whether they seem to be to be valid we found that they were sort of broadly appropriate at the time of the SPU we could find no sort of obvious biases in the way those projections were made since then we know that the extractor returns have been pretty close to target but there have been a number of developments since the SPU was published including the reduction in official interest rates which is substantially reduced the average interest rate and outstanding debt looks like for this year alone will reduce that average interest rate by about three tenths of a percentage point and by more than half a percentage point between 2013 and 2015 and that again is the average interest rate on the total outstanding debt including the official and non-official loans also the anticipated cost of bank recapitalization has been somewhat less than was projected earlier in the year so it looks like the cost to the state of the bank recapitalization is now going to be about 3.5 billion less because of greater than anticipated loss sharing with junior bondholders and also the success of Bank of Ireland in actually raising private capital and then there has been also developments in terms of GDP 2010 GDP was revised upwards but the growth for GDP for 2011 and 2012 the projected growth has been revised downwards which is the big sort of negative in all of this so most of these developments have been positive the downward revision of growth in particular in relation to the softening of global growth prospects has been has been negative so really what we're what we're doing here is just allowing for these post-SPU developments and not that we're making really alternative projections from the government but in order to be able to assess their fiscal stance we really needed to know where things stood at the moment given these developments and it's a sort of a pity in a way that much of the coverage last week was sort of focusing on different estimates that we've come to in terms of what's going to sort of happen in terms of these key fiscal variables out over the next number of years to 2015 that was simply where the main media focus was so we've developed what we call a fiscal feedbacks model which allows us to make these projections so it's sort of based on the SPU but allows us to run sort of alternative scenarios through it to see what the effect of alternative fiscal policies would be so that's where these results are coming from so when we allow for all these various developments we estimate that the deficit would be 8.8% of GDP next year if the government still followed its plans but very interestingly if it if it followed its plans it would still actually hit the 2.8% of GDP target for 2015 so the problem is really just really a problem for for next year missing the 8.6 target for 2012 when we put all these things together the government is still on track to hit the target of getting the deficit down below 3% of GDP by 2015 so the additional adjustments required to hit the 8.6% of GDP target essentially an extra 400 million in adjustments bringing the overall adjustment required for 2012 to to 4 billion but again this is not really the I think the main value of the council it but it's just that we needed to know where things stood at the moment as we looked at the overall fiscal stance itself so in terms of the assessment of the fiscal stance which we're taking here to be the actual targets for the general government deficit out to 2015 and particularly that target of bringing it down below 3% of GDP so it's clearly a difficult balancing act in terms of these principles of good fiscal management that I talked about before on the one hand the public finances need to be rebuilt the debt is still incredibly high and falling quite slowly there are as you know huge funding vulnerabilities both for market funding and official funding I'll talk about that more in just a second and then of course we have to be concerned about the effects of austerity on the economy which we believe will be will be negative for the economy so we don't believe in this idea of the expansionary fiscal contraction that austerity actually increases growth so the real trade-offs here and identifying the proper fiscal stance is is really a matter of judgment and a difficult balancing act but the big question we're asking ourselves is there an argument for more ambitious targets this graph just shows the fragility of our debt sustainability on current plans it does look like we will stabilize the debt of GDP ratio it will slowly begin coming down if nominal GDP growth is one percentage point less than forecast it will still stabilize without a substantially higher level about 120 percent of GDP if nominal GDP came in two percentage points less which is conceivable you can see that the the debt we sort of remains on an explosive path certainly over the period that we're looking at here also if we do if we follow the the current strategy once we get essentially to 2015 the debt will be on a very slow downward path so even by the time we go out to 2030 we're still far from the 60 percent master target for the debt to GDP ratio so we'd be continue to have huge vulnerabilities over this period and also putting a big burden onto future generations in the process so this essentially assumes that the primary surplus that's achieved by 2015 is held constant so there's sort of no further fiscal adjustment beyond that point and we're assuming a one percentage point gap between the between the interest rate and the and the growth rate there are also huge funding vulnerabilities so a very uncertain external environment the European crisis resolution policies are still very much in a state of flux and what we see is that there's increasingly sort of a distinction made between countries that are considered insolvent particularly Greece and countries that are considered illiquid which for the moment really the list is Italy and Spain and then Ireland can kind of fall but in one group or the other and it's still very much to play for and depending on which an analyst is talking they can actually lump Ireland in with Greece and possibly Portugal and other analysts say Ireland is being more of a sort of illiquid and the way the policies are shaping up is that the illiquid countries will get the backstop that they need which will be critical to getting back into the market while default will essentially be imposed in countries that are considered to be insolvent and we can certainly see Greece going in that direction so there's a lot to play for and there is a huge return to really being on the right list in terms of the country that's considered to be illiquid and will get the support that it needs to avoid default I won't go into sort of issues about default but I think that would be incredibly costly long term to the to the Irish economy credit worthiness is just a very valuable asset to an international trading nation such as Ireland that would be severely damaged by any sort of official default so there's a lot to play for and it just increases the return to following a strategy that both convinces markets that Ireland is a good bet and also keeps the official funding in place so that even if we do need an additional program after 2013 that funding will come without debt restructuring being imposed upon us and the anticipation that debt restructuring will be imposed upon us will mean that we wouldn't get back into the market so again you have this sort of feedback effect working through expectations so again I think this these funding vulnerabilities sort of movies in the direction of doing a bit more being a somewhat more ambitious in terms of the fiscal strategy that has to be weighed of course as I said against the negative effects of austerity so for this report we reviewed much of the literature and the size of fiscal multipliers this as you probably know there's huge uncertainty about that but our literature suggests using sort of the best studies that are out there that under current Irish conditions multipliers deficit multipliers what while positives in other words cutting the deficit will slow the economy they are likely to be relatively small and also this idea that fiscal adjustment will be self-defeating in the sense that as you engage in discretionary fiscal adjustments that the because you slow the economy so much that the deficit might actually go up we don't find evidence of that and the most basic evidence is that the deficit is coming down in the Irish case even as we pursue these these big discretionary adjustments and even as domestic demand has actually been declining for reasons other at least in part other than the fiscal adjustment itself so maybe we could go into that more in more detail in questions but this idea that fiscal adjustment is actually self-defeating in its own terms is not born by the evidence so our basic assessments is that the current fiscal stance being pursued by the government we consider it to be a defensible policy it's within the range of what we consider appropriate fiscal policy stance this is not obviously inappropriate again this is the goal of getting the deficit to below three percent of GDP by 2015 we see no case whatsoever for relaxing the targets and that's not just because of external commitments made very much the credibility of the government is now around at least meeting these targets and on balance and this was the main recommendation of the report and one that certainly didn't find favor with everyone but on balance when we put all the various principles of good fiscal management together we see a strong case for more ambitious targets and actually bringing the general government deficit down to one percent of GDP by 2015 which would effectively sort of eliminate the underlying structural deficit in the economy by that point so this will put the debt ratio on a strong downward path and I'll show you a graph of that in a second it gives us a certain degree of insurance against shocks and I think it would be a timely signal of political capacity for a coalition government and this is not meant to be any negative comment on the present government but any new government and particularly any new coalition government there will be doubts about its actual capacity to make the difficult choices to impose losses on specific groups and going a little bit further sort of even in the upcoming budget I think would be a strong signal that it has the capacity to see the adjustment through which was largely behind our recommendation that even in the upcoming budget that the target be moved from 8.6 percent of GDP to 8.4 percent of GDP beginning that process of moving the overall deficit down to one percent of GDP. Again I do understand the criticisms from the government as easy for us to say this to throw out these numbers when you're sitting at the cabinet table and having to make these very difficult decisions to find an extra 400 million of cuts so I absolutely see that but I think again putting it all together that the returns to these additional actions are quite high so with the amended stability program update these adjustments I talked about made and with the revised targets we see that based on our simulations we would get the deficit down to one percent of GDP by 2015 and you can see here the overall discretionary adjustments that would be required to actually do this in the context of the model that we're using so that's the key here and very importantly the primary deficit would actually be a primary surplus of close to five percent of GDP by 2015 under the current plan the primary surplus is only 2.9 percent of GDP so even though the actual debt numbers don't look dramatically different the key is I'll just skip this this diagram is key in terms of even if no additional fiscal adjustment was done the economy is on a much steeper downward path of the GDP ratio and even though it still takes a long time to get it below 60 percent of GDP we do sort of reach that sometime before 2030 but it's just a very different time path so we will have essentially achieved an awful lot more by getting to this larger primary surplus by 2015 so maybe I've just just mentioned here what this means in terms of additional adjustments overall there would be 4.4 billion of adjustment required in 2012 and substantially bigger adjustments than planned for additional years as well so these are the overall additional adjustments that will be required both to essentially both as a result of the amendments that we made to the stability program update itself and these more ambitious targets so somewhere we have the first report then the basic projections were fine we really didn't see any problem with that we do believe that the 2.8 percent target for 2015 is still achievable but based on our estimates the 8.6 percent of GDP target would not be achievable for next year without additional adjustments but the basic message the basic recommendation from the report is that there is this case for more ambitious targets in terms of bringing the deficit target down from 3 percent of GDP to 1 percent of GDP so next up for the council we're now working hard in terms of our input into the fiscal responsibility bill and given that it needs to be published by the end of the year and of course Christmas comes before that and everything this being a lot of pressure put on us to produce our input quickly so we just drawn a breath from getting the first report out and we've had to turn to these these other incredibly important issues very quickly of course we're going to be engaging in ongoing fiscal surveillance including of the upcoming pre-budget outlook and the budget itself but the most important thing that this first council hopes to do is to bequeath an actual strong fiscal institution that will be a sort of an important pillar of islands fiscal policy architecture so that we build up our technical competencies that we really develop this reputation for independence and that we're firmly established as a public watchdog and the the public is aware that we're there and trusts us to be keeping a close eye on fiscal policy development so if we can achieve that as a first council we will feel that we have done our job but very much look forward to your question thank you very much