Wednesday, August 5, 2009

Economics 05/08/2009: Irish Exchequer - back into the furnace for a fresh meltdown

On to the Exchequer Returns for July 2009, then. As I predicted well back in February-March 2009, we are on track to reach the milestone of the total tax receipts falling below €31-32bn for 2009. I have not changed this prediction and I am still sticking to it.

The latest data is a disaster across the board:
  • Tax Revenues are down 17.57% yoy in nominal terms, total revenue down 16.82% due to the increase in non-tax revenue, constituting, among other things a massive rip off of Irish consumers at the Dublin Airport and Dublin Port;
  • Total current expenditure is up 4.55% yoy in nominal terms;
  • As a percentage of GDP, tax revenue used to be 12.19% in 2008, now it is down to 10.99% thanks to the fall off in tax receipts, but overall current receipts declined from 12.41% of GDP to 11.29% - a bit shallower, as the Government continues to squeeze consumers and businesses for non-tax cash;
  • Current expenditure has gone through the roof - rising from 14.18% of GDP in 2008 to 16.21% in 2009 - the real cost of public sector excesses (once social welfare increases are factored out);
  • Current account deficit ballooned to €8.364bn in January-July 2009, an increase of 155% yoy. This used to account for 1.76% of the nation GDP in 2008. Now it is 4.92% and rising;
  • Capital account deficit has gone to €8.075bn in January-July 2009 up 135.3% yoy, and as a share of GDP reaching 4.75% so far, as compared to 1.85% in 2008;
  • Subsequently, overall Exchequer Deficit now stands at a whooping €16.44bn - up almost €10bn on 2008, or 145%. The ED now accounts for 9.67% of GDP, up from 3.61% in 2008. Remember that wishful thinking of a single-digit deficit for 2009? Gone in a blink of an eye;
  • As a percentage of GDP our total annual borrowings have reached 14.72% in January-July 2009, up from 5.8% in 2008.
Table below summarizes these gruesome stats, but what is already clear from this data alone is that despite Mr Lenihan and other officials heralding the turn around in Irish public finances that was 'recognized by international markets', their own data shows that this turnaround was about as real as Mars Attacks was a documentary.
Now onto details.

Tax Heads:
  • Customs, Excise, VAT and CAT down 21-26% yoy;
  • Income tax and VAT - two taxes paid by consumers - are rising in overall share of total tax revenue, as Mr Lenihan loads the burden of his Government's unwillingness to cut public sector waste onto the shoulders of average families;
  • CGT down a whooping 69.35% yoy despite resurgent markets;
  • Stamps down 64.12% yoy predictably;
  • Unallocated tax receipts up 55% - presumably on the back of the Revenue going after middle classes to milk out every single penny left in their accounts - anecdotal evidence shows exactly such a predatory behaviour with Revenue officers querrying any out of line items such as medical expenses from families with 3-4 kids;
  • Corpo tax is up stron 31.55%, but not because of any green shoots on business front - simply due to changes in the scheduling.
Table below illustrates
Now departmental expenditure (voted only):
  • Clownish numbers from D of Agriculture - spending up 35.12% yoy as the country is going into tail spin. Agriculture used to account for 2.3% of total voted expenditure. It now holds a 3.08 share. Soon, we will have agriculture - contribution to GDP 3%, as a burden on the Exchequer 6%;
  • Only 5 departments show double digit reductions on 2008 spending - the minimum target for any serious fiscal stabilization programme in my view. Significantly, CMNR - down 32.16% on 2008, FA - down 19.28%, Transport - down 14.87% and AST down 14.51% are the only ones close or at the target (my minimum target for cuts is in the order of 15-20%);
  • CRGA is down 6.05%. When this Government came to power, Brian Cowen has promissed the nation to put Irish at the heart of this Government's policies. Clearly, he is not too enthused about the objective... And yet, seriously speaking, the Department is miles away from serious change: at 6.05 reduction in expenditure, it is 9th ranked in taking appropriate measures out of 13 departments (15 less SFA and H&C);
  • Incidentally, H&C are doing their job - they are up only 1.5% yoy despite having to face more demand for free medical services, defaults on medical payments and beraing some of the social welfare costs increases too - Mary Hearney is doing her job;
  • Neither Finance Grou (down 9.06% only) nor D of Taoiseach (down 10.25%) are leading in the right direction.
Table illustrates
Non-voted current expenditure is often overlooked by analysts, but the figures relating to the burden of our debt (just 18 months into the fiscal 'solutions' to our crisis) are telling. Interest on bonds now accounts for 10.2% of our entire tax revenue (up from 6.32% in 2008). Total cost of financing these bonds now amount to 13.55% of entire tax intake (up from 8.46% in 2008). We are already drowning in a sea of debt.

Two other notables in the table above:
  • Total non-voted current spending rose 19.24% yoy, with elections cost up 7.54% in 2009 and Oireachtas Commission costs up 6.69% - someone is living large out there in the public sector la-la-land;
  • Nat Devel Finance Act spending is also up - 125%, now that is a current expenditure item, not a capital one.
Finally, let us take a look at the tax heads performance against the April Budget 2009 profile (remember - the profile is only just 3 months old, so you shouldn't expect much deterioration in the calm and more predictable summer months, if, that is DofF can actually do forecasting). Ahem, not really good:
  • Income Tax 2.8% behind target, with a shortfall (cumulative) of €185mln;
  • VAT is 6% behind target (as one could have predicted in the wake of our disastrous policy proposed and pushed through by the DofF boffins of raising VAT in a small open economy with competitive retail just across the border;
  • Corpo and Excise are ahead of target because the boffins cannot forecast the least volatile and inter-linked (via imports of inputs) tax heads;
  • Stamps 17.3% below target - which is predictable, unless you are DofF forecaster. You see, they think, alongside with our bankers, that people will simply bottom-out of not buying property etc. Alas, the bottom in the markets for investment and consumption is a Zero expenditure at home. We have some room to travel there still;
  • CGT and CAT heads are now 16.7% and 14.4% below target; so
  • Across CGT, CAT and Stamps, DofF boffins average monthly error under Budget 2009 (April) estimates is now around 6.1% per month! Wow - and that is for very well paid job-secure workers who have no other responsibilities aside form Budgetary estimates?
  • So total tax receipts are now 3% below target. Linear projection implies another 5.2% in deterioration over DofF projections through December - an annual fall off the target of ca 8%, bringing tax revenue to €31.6bn not €34.4bn as envisioned in DofF's April 2009 framework.
Table below illustrates

And now to the conclusion: it is simply impossible to believe that these numbers can be interpreted by anyone - international or domestic markets participants, shy of the DofF own employees and the delusionary Government we have - as a confirmation that this Government has done anything to address the fiscal crisis. The July stats are simply a loud confirmation of what we knew all along - taxing yourself out of the fiscal overhang does not work! Never will!


Philip said...

As ever, all we are seeing is a negative feedback on growth - grow or generate business mean attracting debilitating taxes. There either seems to be a belief in government circles that people will take whatever pain is needed without protest (recent history seems to bear this out).

The problem is that we have no recent (or not so recent) history for a full scale economic blowout -which this is becoming. Come september, as people get back to work, there will be new rash of decisions on redundancies and whether or not to stay in Ireland. Execution of any workplan to stem any further losses had in this country will be effected before the year end. I see no reason whatsoever why we will not be approaching 20% unemployment within a year.

Something has to give or someone needs to wise up in government before it's too late.

Paul MacDonnell said...

I'm getting worried about Brendan Keenan's commentary in the Indo. Normally he's quite sound but I think his analysis is the dog that's not barking. Take his reaction to today's news. The dilemma is what to do about this shortfall.

He writes 'Should the Government try to make it up with yet more spending cuts or tax rises this year?' - Spending cuts? What spending cuts?

'...The reason for the slippage is not government spending, which is on target, but the fact that the economy is doing even worse than feared in April.'

- for heaven's sake. That's straight out of ICTU. 'We're not spending too much: we're just taking in too little money in taxes'.

'Even though its targets have not been met, the fact is that the Government has applied an astonishing €9bn fiscal correction, or 6.5pc of national income (GNP) since October..

'Of course this depresses the economy further. But opposition politicians, trade union leaders, commentators -- and, perhaps, pharmacists -- might like to note that, had it not been done, the IMF would be running the show by now.'

- and that would be worse in what particular way?

This is group think and it's worrying that B Keenan is falling into it.

Another John M said...

The numbers are awful but this one is just mind boggling:
"Total current expenditure is up 4.55% yoy in nominal terms."
We've had to listen to all kinds of shouting and roaring all year about "cutbacks" and current expenditure is still up?!

Philip said...

If the tax take is x% below target, increasing tax to compensate will cause it to fall faster. It's a bloodbath out there! No one is spending and jobs are evaporating.

Cashflow has to be an issue. Where is the cash coming from? ECB is not going to feed this furnace for much longer. Is there any way to predict when this cash may dry up? I'd like to see someone try answer this. What are the emerging external pressures that could force the government's hand and can we put a timeline on these externals?