Saturday, December 5, 2009

Economics 05/12.2009: Budget 2010 Estimates

The Department of Finance has published estimates of income and expenditure for next year on Friday. These form the DofF outlook for 2010 before incorporating any Budget 2010 changes.

The format in which the estimates are published is such that one cannot operate standard Adobe pdf features and requires by-hand copying of data in order to transpose the table into the Excel or any other database. One can only speculate why this is done by DofF, but any economist out there can probably wish that someone obliges the DofF to start publishing things in modern documentary formats and provide separate excel files suitable for analysis.

So here is the data with my own parallel estimates. As with DofF, my estimates do not include any promised or signaled ‘savings’ and ‘tax increases’ that might be announced in the Budget 2010.

The main table:
The above shows that DofF projects a rise in current spending next year of over €5bn, (higher social welfare and debt service costs). My projection is for a rise of under €6bn (because of even higher social welfare costs, plus an increase debt-raising fees, but no difference on DofF’s estimate of debt financing cost). Details are, of course, to follow below.

So what do these estimates (My v DofF) suggest:
  • On Current Receipts side, tax revenue differences are explained below, as are non-tax revenue differences, all in these allow for some €2.4bn discrepancy between my estimates and DofF estimates;
  • On Current Expenditure side, my view is that net voted expenditure is underestimated by DofF, primarily in terms of social welfare increases and some crime-related increases (I believe we will see growing number of criminal convictions for acts against property), plus the Government is underestimating the scale of costs which will be involved in dealing with households defaulting on mortgages and going to courts against the banks. I also think the Government has no idea just how expensive litigation relating to Nama will be;
  • So deficit on Current Account is much wider – by €2.6bn;
  • On Capital account (see below) the main difference is driven by my view that Anglo will require €2bn in 2010 and that other banks will also swallow the same amount via NPRF ‘investment’ or something of the sorts. This is atop the similar spending via Nama issuance of new own bonds;
  • So deficit on Capital Account is now €5.7bn wider in my case than in the case of DofF estimates.
  • Net effect, Exchequer balance is, in my view, heading for a deficit of €30.4bn in 2010, up on €25.3bn in 2009 and up on DofF estimate of €21.9bn for 2010. Do tell me if you think things will improve so significantly on 2009 once January 2010 arrives as to justify DofF’s optimism.

Receipts side:

The differences between my and DofF estimates come from my view that:
  • shopping to Northern Ireland will not decelerate, assuming no change in our VAT relative to UK and no changes in the FX rate
  • no redundancy payments windfall and lower self-employment taxes will mean lower income tax
  • MNCs transfer pricing will slow down due to investment by MNCs outside Ireland picking up
  • lower deposits with CB will arise due to lower loans levels, depressing CB income
  • lower dividends activity due to semi-states slowdown and arrears build up;
  • lower pay out under Guarantee scheme due to creation of the Third Force, decline in banks returns on loans and Anglo fall-off.

All in, total Tax and non-Tax revenue will be lower by €1,039mln and €571mln respectivel

Next, let’s look at the detailed expenditure lines as stipulated above.
My main concerns (driving the differences to DofF estimates) are:
  • Social welfare costs will be much higher due to transition to welfare from long-term unemployment;
  • DETE will be more involved in artificially creating ‘training’ jobs for unemployed;
  • Health will also see increases in costs due to welfare cost rising;
  • All organizations dealing with crime will experience an increase in costs due to rising number of crimes against property;
  • Internal public sector employment conflicts will be driving costs of arbitration and conflicts resolutions;
  • Rising numbers of households insolvencies will be pushing up courts and related costs;
  • Costs of Nama and Banks supervision/oversight will also rise, etc.

Net impact, I expect costs to rise by €1.1bn more than DofF does.

Details of non-voted current expenditure below:

No major differences here between mine and DofF estimates. Unlike in the case of non-voted capital expenditure:

Of course, this table incorporates my view that Anglo and other banks will swallow some €4bn in 2010 in new capital. This already assumes that most of the funding for other banks will come via Nama issuing new Nama-own bonds that the Government will attempt to keep off its own balancesheet. Of course, this is a bogus accountancy trick, but let us entertain it as the Government insists we should.

This pretty much finishes my analysis of the Exchequer estimates. If the Government does not attempt to dramatically reduce its own spending in the next Budget, we might see our annual deficit rising to over 16% of GDP. Even if DofF is correct and the deficit will be 13.5%, this does not change the bleak reality that some 9% of this figure is a purely structural deficit. In other words, no matter what, we will have to shave off ca €15.4bn worth of spending in the next 2-3 years. No other way about it.


Holbrook Fields said...

I have nothing to add on the economics of your post but I think your comment about data not being provided in a user friendly format is very true. Amidst all the talk of a smart economy it irks me that so many Government documents do not take advantage of basic IT tools such as having Tables of Contents that use hyperlinks.

Joseph said...

A very interesting and very dark picture sir. I would go along with it. But only 4bn into the banks next year? We must be getting off lightly!

artied said...

Dear Constantin.

A wonderful post as usual. However, can I point out that by posting data in PNGs you commit the crime that you accuse others of.....

I should like to some work on the data myself. Any chance you can set a good example and pass on the 'raw' stuff....

Tks in advance


TrueEconomics said...

Dear Arthur - would love to post in more interactive format, but I cannot figure out a way of posting readable pdfs or excel files on this page. All it allows for me to do is png or jpeg. One day - once richer - I will launch a website with more freedom to link data files... Of course, DofF have a website and an army of IT staff to go with it.