Thursday, September 3, 2009

Economics 03/09/2009: Irish Exchequer - Sliding into an Abyss of 'Positive' Group-think

The Exchequer results are in and some analysts – the usual suspects – are saying all’s well, we are hitting the target (set in April Budget). Well, not so fast. August showed some improvement, fully due to the outlandishly rising corporate tax receipts. These, of course, might be due to the forwarding of the returns, or they might be due to increased flow of transfer pricing. So either we are becoming an accountancy trick economy (with constantly changing dates of filings to suit the Master Cowen’s whims) or we are more and more of a banana island (with increasing dependency on multinationals booking more profits through this ‘non-tropical paradise’). Take you pick.

But on the net, headline figure is that we are now 2% below the April 2009 target on overall tax – an improvement on 3% in July 2009, but still worse than 1.2% in June. Go figure what the headline tells us.

Here are some trends.

Chart above shows clearly that ALL tax heads, save for Corpo and Capital Acquisition Tax are still heading down relative to the April target. Income tax has gone from -2% below target in June to -2.8% in July and -3.5 in August. VAT from -3.5% in June to -6% in July to -5.7% in August. Excise was 3.9% ahead of target in June, then 4.4% in July before collapsing to +3.1% in August. Stamps shortfall on the target was -10.3% in June, -17.3% in July and is now -24.4%. For an economy that used to be run off this completely absurd tax, this is as quick sand territory. Customs progressively slumped from 7.4% deficit on the target in June to 12% deficit in August. Improvements, my eye, are evident everywhere. If, that is, you are a hired gun for one of our clientelist organizations of the State.

Chart 2 shows year on year changes.

May be here we can find some improvements, for August 2008 was a full-crisis year and Messrs Cowen and Lenihan have been at pains telling us that we have bottomed out? Ok, let us put this one into a table to see better
Three heads improving, five heads are still getting worse. Judge for your self if we should sound the trumpets of a ‘bottom’s here’ march, yet.

Of course, the main figures are: how much we spend over what we bring in (aka our deficit) and how much we borrow to finance, in effect, massive waste of public resources on unreformed and uncontrollable public sector. Chart 3 below shows these two series.

Look at the two green lines: the solid one is our borrowing so far this year (cumulated) and the dashed one is our borrowing in 2008. Any questions? For those who are so ardently happy to argue pro-Government positions, we are now borrowing more and at a faster rate than in 2008. How on earth can this be if Messrs Cowen and Lenihan have declared the ‘bottoming out’ back in May 2009? Well, only if they themselves do not believe their own spin.

Looking at the two red lines, deficits cumulated from January for 2008 and 2009, it is absolutely clear that the rate of deficit increase has not slowed down since June, but actually accelerated! In August, the deficit increases were outpacing those in August 2008. And we thought that August 2008 was pretty bad.

Now, may be Fionnan Sheehan of the Indo can go now declaring that the Government has carried out some sort of a new policy Blitz, but to me the Irish State remains insolvent and it actually is getting worse, rather than better.

Chart 4 above shows clearly how on earth can our ‘bottoming out’ economy be performing so much worse in fiscal terms even after massive tax hikes and fig leaf decorations of ‘cuts’. The answer is in the distances between solid and dashed lines. While total receipts have fallen year on year in 2009 (and this process is actually accelerated in August 2009, despite of and contrary to the analysts and Government’s cheerleading), total spending has been running well above 2008 levels and the rate of total spending increases is running stronger than in 2008 since the end of April.

Allow me to sum up the situation:

  • Receipts are below 2008 and falling faster than in 2008;
  • Expenditure is above 2008 and rising faster than in 2008;
  • Capital spending has been dramatically cut, so the expenditure increases are all due to two factors:
  1. a rise in unemployment and social welfare claims – something that is a fault, to some extent, of the Government’s failure to introduce proper economic policies aimed on supporting Irish employers (lowering cost of doing business in this country and reducing taxes on producers and consumers); and
  2. lack of real reforms in the public sector pay, pensions and perks, as well as employment numbers.

Doing some real sums, per Exchequer end-of-August 2009 statement,

  • Irish public spending (gross) was, in 2008, €29.7bn on current expenditure side, plus €5.5bn on capital side, to a total of €35.2bn total gross spending. Tax receipts were €24.8bn. Total deficit (not counting in double-trip tax clawbacks and other ‘non-tax revenue’ that is a pure accounting procedure by the Government) was €10.4bn.
  • Gross Irish public spending in 2009 was €30.7bn on current expenditure side, plus €10.8bn on capital side, to a total of €41.5bn total gross spending (a rise of 18percent yoy). Tax receipts were €20.8bn (a fall of 16% yoy). Total deficit (not counting in double-trip tax clawbacks and other ‘non-tax revenue’ that is a pure accounting procedure by the Government) was €20.7bn a rise in deficit of 99% yoy.
  • 2008 deficit by August 31 has reached 6.65% of 2008 GNP and 5.55% of 2008 GDP; this year, by the end of August our deficit has reached 14.38% of projected GNP and 12.11% of GDP. Now, Dr Garett Fitzgerald might think it is irresponsible to look at our figures from different angles, but you tell me what’s more irresponsible – to deny there is a massive problem in the way we run this country, or to highlight these figures from various perspectives?
Note: I use gross deficit figures, but these are only slightly worse than the net figures.

This is the direct outcome of the courageous and resolute actions taken by this Government in its April 2009 & October 2008 Budgets, the necessary reforms of the public sector enacted by Messrs Cowen and Lenihan, and wondrous pro-business policies implemented by Mary ‘Have you Heard of Her Lately?’ Coughlan.

Now, allow me to conclude by saying the following. What the exchequer figures continue to show is that the fiscal policy in this state remains on the path of insolvency. Alan Ahearne, other advisers to the Minister for Finance, are either not doing their jobs or are ineffective in doing their jobs. I will let them take a pick as to which option they prefer. Brian Cowen and Brian Lenihan can score as many brownie points with the journalists as they would like, but – clearly people like Fionan Sheehan are beyond the point of understanding this simple reality – the question as to whether the deficit is going to be €20bn or €30bn this year is secondary to the facts that:

  1. The Irish state is insolvent and cannot be made solvent by increases in taxation;
  2. The Government cannot be trusted to balance its own books, let alone to ‘invest’ €60bn-plus of our money into high risk junk-investment schemes, like Nama;
  3. Whether they are on balance sheet of the state or on the balance sheet of NTMA (which is, of course, the state), Nama costs will only exacerbate our status as an insolvent nation.

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