Economics 7/10/10: Irish Government Spending habit

Our leadership - from the Minister for Finance to the heads of the Central Bank and various quangoes, to the affiliated leading business figures are keen on pointing the finger for Ireland's troubles at the banks. While the banks are certainly responsible for much of the problems we face, there are other troubles, of an equally pressing nature, that besiege our economy courtesy of the direct decisions taken by the Government.

Exchequer problems ex-banks are a good starting point for taking a closer look at our grave condition.

Irish Exchequer is expected (by the DofF) to bring in some €32 billion in Tax Revenues this year. The Government is expected to spend some €19 billion or 59.4% of the total tax take on its Wages and Pensions bill.

Imagine a household that is paying almost 60 percent of wages earned by those of its members working to purchase household services. Alternatively, imagine a household with a single earner where a person working earns, say €50,000pa and has a spouse who is engaged in full time household work. The implicit cost of such household work (labour alone) to this family, using our Government's metrics, would be €30,000 net of tax.

What would any household do in these circumstances? Of course - send the spouse into workforce and hire substitute services (childcare, cleaning, cooking etc)... What does the Irish state do? It signs a multi-annual agreement with the unions that ensures that the taxpayers will see no reprieve on wages and pensions bills they pay for Public Sector.

Now, let's put things into perspective. 2003 Exchequer Tax Revenues were at the same (nominal) level as the expected revenues this year - €32 billion. Exchequer Pay and Pensions bill was €13 billion or 40.6% of the total tax take.

So between 2003 and today, Irish Exchequer has managed to increase its exposure to public sector pay and pensions costs by a massive 46.2%. In the mean time, due to increased private sector competition (despite such competition being retarded by our regulatory regimes) and continuously improving demographics (younger population and a rising share of population with access to superior foreign public services, such as health - aka the immigrants), the overall public sector responsibilities in terms of services provision have actually declined.

Back to household analogy here - we've got a houseworker in the family who is now armed with newer technology, reducing time and effort input into work, as the cost of such houseworker to the family is rising by almost 50%.

Recap the top-line figures: pay and pensions bills of our sovereign are up 46%. Ex-exports, our domestic economy income is down 34.4% (see here). A country where 1.4 million private sector workers are forced to living beyond our means to pay the wages and pensions for some 470,000 public sector employees?

Mad stuff, but then again, Irish Public Sector is more like a WAG in its expectations of pay and performance, than a Cinderella.

Economics 4/7/10: Exchequer receipts: not a sign of any recovery

From my previous posts on the Exchequer deficits, you have probably guessed that unlike other economists, especially those from the official commentariate, I am not too fond of comparing current receipts to 'targets' set out by DofF. This aversion to focus on how closely the receipts are running relative to targets is driven by two factors:

1. I don't care for DfoF targets. What matters is how the economy performs in reality, not how closely it resembles someone plans;
2. I don't think that DofF targets have much meaning - real world deficits have two sides to them: receipts and expenditure. In receipts, tax collections signal the extent of economic activity. And changes in receipts year on year also signal future economic capacity. Full stop. Targets are irrelevant here.

So I've done some homework - manually (because DofF is incapable of delivering usable databases) trolling through Exchequer Statements, and compiling my own database of tax receipts. From now, this will form a stable feature of monthly Exchequer Statements analysis.

Here are some startling revelations from the latest results released on Friday.
Income tax receipts are currently running behind all years from 2007 on. This is a clear indication that our income tax policy has collapsed. If in June 2009 income tax receipts were -9.02% below June 2007, by June 2010 this difference has widened to -16.82%. And this is despite (or may be because of) higher taxes imposed in Budgets 2009-2010. Mark my words - should the Government increase income tax rates or shrink income tax deductions in the Budget 2011, this effect will most likely increase once again.

Vat has performed just as poorly so far this year, despite all the parroting going on amongst commentariate about improving retail sales etc. In June last year, Vat receipts were off 23.48% on 2007. This year this difference expanded to -29.63%. And this is despite significant weakening in the Euro and with price wars amongst the retailers. Let me ask Irish banks' economists so eager talking up our consumers' return to the shopping streets.

Corpo tax is doing slightly better so far, but there are timing issues here, plus there is an issue of profits booking by the MNCs - rather spectacular in June 2010. Overall, corporate receipts are subject to a massive uncertainty until November figures come out, so let's wait and see.

Excise taxes are clearly settling into a new equilibrium, way below 2007 and 2008 figures. June 2007-June 2008 the returns on this line were down -26.04%. This year, the decline is -27.97%.

Stamps are next: some spectacular rates of deterioration here. June 2007-June 2009 = -79.72%, to June 2010 = -83.55%.
Capital gains tax - should be booming, according to the 'Green Jersey' squads. After all, allegedly we are doing so well now in terms of equity markets that Ireland is having a booming number of millionaires. Remember that claim? Well, CGT shows none of this 'boom' and, of course, QNA shows continuous deterioration in our investment position. So between June 2007 and June 2009, CGT receipts fell 80.98%, by end of June 2010 they declined 89.10%. Surely, things are booming as we roared out of the recession...
Almost the same story for Capital Acquisition Tax, with this category performance being only slightly better year to date on the back, potentially, of something really strange going on in the Exchequer own capital spending and automatic stabilizers (timing?).

Customs duties are also down, tracing the trajectory of consumption excises.

So let's take a look at the total receipts:
Again, I am failing to see any sort of 'stabilization' in public finances (receipts are running behind 2009 levels), or any significant uplift in economic activity relating to Q1 2010 'exit from the recession'. We apparently had full 6 months of 'recovery' and there's not a blip on the tax receipts radar screen.

So my advice to the 'official IRL economics squad' out there - stop chirping about 'tax heads running close to target'. Look at the actual numbers!

Economics 2/7/10: Exchequer's sick(ly) arithmetic

Exchequer statement is out today. As usual, for the sake of the markets and the media - right before the closing of the working day. It's either a pint with friends, a dinner with the family, or dealing with Brian Lenihan's problems. Forgive me, the first two came ahead of the third one.

Mind you, not because Mr Lenihan's problems are getting any lighter. They are not. Second month running, tax receipts are under-performing the target. Sixth month in a row, the only saving grace to the entire shambolic spectacle of 'deficit corrections' is the dubious (in virtue) savaging of capital investment spending.

Let's take a look at the details: there was €80 million shortfall in June tax take. All tax heads receipts came roughly in line with the DofF monthly plans, except for income taxes (off €84 million behind expectations).

To hell with 'expectations', though, look at the reality
Tax receipts dipped below down-sloping long term trend line. Which is seasonally consistent. The deviation from the trend line was small, compared to previous 2 years. These are the good news. Total spending is below the flat trend line and roughly seasonally consistent. Given the scale of capital budget savaging deployed this year, this is not the good news. You see, it appears that the Government has back-loaded capital spending while front-loading capital receipts. If that is true, expect serious explosion (hat tip to PMD) of deficit in Autumn. If not,m and the cuts to capital budgets are running at the real rate observed so far, expect mass-layoffs by late Autumn. Either way - things are not really as good as they appear on the surface (more on this 'capital' effect later).

and back to the receipts: H1 2010 so far, income tax receipts are down €227 million cumulatively. Other tax heads are running €76 million above plan. Vat is actually improving, backed by falling value of the Euro and serious cuts in prices by retailers. There is a tendency to attribute this to 'improved retail sales', but in reality most of this 'improvement' is simply due to better weather and smaller savings margins to be had in Newry. Not exactly a graceful cheering point for Ireland Inc... but let's indulge:
€1 billion cut was applied to the expenditure side. Or so they say... Deficit on current account side is now €8.045 billion, up on 2009 €7.212 billion. Vote capital expenditure is down from €1.844 to €2.870 billion. But, wait, in 2009 (well, after Eurostat caught the Government red-handed mis-classifying things) there was €6.023 billion drain on Exchequer 'capital' side from Nama and the banks. This time around, the Exchequer posted only €500 million worth of banks measures on its balance sheet. Something fishy is going on? You bet. Anglo money are not in the Exchequer figures. At least not in six months to June. So things are looking brilliantly on the upside.
Hmm... but what about Anglo? and AIB? BofI? All the banks cash that flowed since January? Well, for now, this remains off-balance sheet. And, there's missing (we actually spent it last year forward) NPRF contribution. Were these two things to be counted, as they were in 2009, the true extent of cuts, the Government has passed through would be revealed. And, fortunately, we can do this much. Take a look at what our cumulative balance looks like to-date, compared with 2008 and 2009.

First - absent adjustments for the banks:
And now, with banks stuff added in:
Notice how all the improvement in deficit to-date gets eaten up by the banks? Well, this is simply so because when we are talking about the improvement on 2009, we are really comparing apples and oranges. Ex-banks in both years, there is virtually no improvement. Cum-banks both years - there is no improvement. But Minister's statement today compares cum-banks 2009 against ex-banks 2010...

Net voted expenditure by departments is running €141 million below expectations for June. Cumulatively, H1 2010 is below expected Budgetary outlook by some €500 million - 2.3% savings on the Budget 2010. Even more impressively, it is now 6.2% behind 2009, 'saving' us €1.4 billion. Not exactly the amount that gets us out of the budgetary hole we've dug for ourselves, but...

I'd love to stop at this point for a pause to enjoy the warm rays of achievement for Ireland Inc. But I can't - it's all due to cuts in capital spending - running some €609 million below Budget 2010 plan for the first xis months of the year. €400 million plus of this comes out of DofTransport budget. All in, current cuts to capital budget represent whooping 36% reduction on 2009 levels. Surely, this will cost many jobs in a couple of months ahead.

And on the other side of this equation - current spending is actually running ahead of Budget 2010 forecasts (actually made in March 2010, so no - DofF has not improved its forecasting powers, it simply is missing targets closer to its own estimation date). And this is true for the second month in the row. Overall, we are now in excess of forecasts by 0.5% and only 1.9% behind comparable figures for H1 2009.

Last few charts:

Now, keep reminding yourselves - the last chart above does not include banks funding in 2010 to-date... Your final tax bill - will. Get the picture?

Economics 02/02/2010: Turning the corner

So we've turned the corner... err... our economy it is... only to discover that, behind that corner the same tumbleweeds keep on rolling across the Exchequer accounts.

It was worth a wait, folks, and January figures for Exchequer returns have shown that, as predicted, the deterioration in our public finances will continue despite Minister Lenihan's efforts in the Budget 2010.

A chart is worth a thousand words:
Tax receipts down on January 2009 by almost 18%. They were down 19% in January 2009 relative to January 2008. Spending, meanwhile, is down 7.5% on January 2009, but... there's always 'but': current expenditure is down by a much lower 5.59% and the slack is picked up by a whooping 21.1% decline in voted capital expenditure (the stuff that is supposed to provide stimulus to our economy through strong public investment programmes).
Check out monthly receipts above and spot the odd on - right, there has been an extraordinary increase of ca 50% (or 250 million) in January 2010 capital receipts. This, of course, is thanks to a massive hold-back on public investment programme in 2009.

What's going on?
Receipts side is clearly gone into a deep red - all, without an exception - lines of tax revenue have underperformed January 2009. Corporate tax has decreased to a third. Stamps - already miserable performer in 2009 are now 41% down on that. Capital gains also sunk by almost a quarter. Income tax, down a massive 9.72% is the best performer. This is dire, folks!

But expenditure side is also showing some poor performance:
Ok, I understand Social Welfare spending increasing 15.76% yoy, but agriculture? ETE is a mixed bag. But, get your thinking going. We are in a recession and in a third year of a fiscal crisis. Over the last two years, we have managed to reduce our spending by a miserable 6.9% or less than 3.4% annualized savings. And that was achieved with a Draconian Budget 2010. what will it take to cut our spending by 25-30% off the peak levels consistent with a structurally balanced budget?

Last picture...

But here is a different way of looking at the expenditure side:
Take the entire set of departments and divide them broadly speaking into primary (vital, if you want) and secondary (supportive) in terms of their roles. Guess which group has manged to achieve greater savings (in percentage terms) out of its budget?

Efficiently run Government would require the secondary set of departments to cut by at least 3-4 times the rate of cuts in the essential departments. Under the above, we'd have cuts of up to 60% in the total spending segment of €660million, or effective savings of €392 million more than has been achieved in one month, or roughly €1.8-2 billion in one year.

Not enough to decrease our massive deficit, but...

Economics 16/12/2009: Budget 2010 Analysis

As promised - here is my more in-depth view of the Budget 2010. This is an un-edited version of the Sunday Times (13/12/2009 issue) article.

After weeks of leaks, speculations and over-dramatized Partnership talks, this week Brian Lenihan has delivered the final move in the Government v Economy chess game. Lisbon, Nama and the Budget 2010, we were promised, were all that the Cabinet had to do in 2009 in order to manage the nation through the worst economic storm in its history.

In its last stance of 2009 the Government has reluctantly and belatedly recognised the reality of the crisis we face. Thus, the Budget has done just about enough to delay our descent into the nightmarish company of Greece. For this Brian Lenihan deserves praise.

A Chance at Reforms - Missed

But the net outcome of the Budget 2010 is that we are now entering the third year of recession with virtually no reforms that can support future growth.

There is no real stimulus to the rapidly contracting private sector. Cost efficient and much needed export credits are not in and neither are foreign exchange risk supports – the two cornerstone policies for sustaining exports, especially for indigenous companies.

Taxes remain regressively skewed toward ‘soaking the rich’, by which the Government means the middle class. As in 2009, the burden of taxation in 2010 will be borne squarely by those in the most productive employment with above average skills and aptitude. If a combination of consumption and income taxes accounted for under 68.9% of total tax revenues in 2009, by the end of the next year these taxes will account for 70.3% of total tax take.

Today, some 40% of Irish households deliver 90% of non-corporate dosh for the Exchequer. By the end of 2010, given current trends in unemployment and wages, this ‘honor’ will befall just 37% of households. This is hardly a sign of resilience in the economy.

In 2009, 4% of top earners – many of whom are wealth and jobs creating entrepreneurs and business owners – pay 50% of total income tax. Next year, we are risking to hike this share to 55%. This is hardly a sign of the economy promoting jobs growth.

Should Ireland-based multinationals reduce their transfer pricing activities in 2010 – a prospect consistent with a possibility of a restart of new investment cycle in Asia and the US – an even greater share of the burden of paying for public sector expenditure will be falling onto the shoulders of rapidly thinning minority who still have higher value-adding jobs.

Cuts to unemployment benefits in excess of reductions to social welfare imply that Budget 2010 only strengthened the incentives to transfer from unemployment benefits roster onto social welfare for anyone in long-term unemployment. This will lead a decline in labour force participation rates throughout 2010. Paradoxically this will result in lower official unemployment but a higher cost to the taxpayers.

Uncompetitive Costs Base - Remains Intact

The Budget has done nothing to address the issue of uncompetitive costs imposed onto businesses by our state-owned utilities and suppliers of services. It also did nothing to address excessively high local authorities’ charges and rates.

A net positive of the Budget was honorable mentioning of the internationally trading financial services. However, it remains to be seen what exactly will be done on this front.

Brian Lenihan missed another chance of reforming our business-crippling quangoes. In doing so, the Budget failed to recognize the real damages state and local authorities’ costs inflation poses to the survival of both domestic and exporting companies. If anything, the Budget further expanded the Fas empire – an unchecked state behemoth that yields dubious benefits and wastes hard cash in truckloads. The policy, it seems, is to shove more unemployed into perpetual training programmes with little hope of gainful employment in the foreseeable future.

A failure to introduce university fees means that our education system will spend another year mired in funding uncertainty. It will also mean that many graduating students will desperately cling to education for another 1-2 years. For some, this is a productive opportunity to invest further into their future skills. For many, however, it is an unnecessary extension of studies that will not lead to any meaningful skills augmentation but will consume precious resources. Classroom sizes will rise, international rankings will be threatened, but we will increase output of devalued in quality degrees, certificates and diplomas.

Retaining prohibitively high rates on PRSI, health and income will undoubtedly keep jobs growth on ice. Other, so-called soft labour costs, could have been tackled through simple measures, such as for example abolishing risk equalization scheme in health insurance to lower the costs of employees benefits. These opportunities were missed.

Banking Sector Costs - Unpriced

There are no provisions whatsoever for the banking sector in the Budget. Yet, two future developments with respect to the sector are now virtually assured for 2010.

First, we are likely to see significant demands from the banks for new capital. My estimates suggest that our six banking institutions will need €9.7-12.4 billion in capital post-Nama. If even a half of this falls in 2010, Budget deficit risks reaching 14.5% of GDP. The only way to avoid such a debacle will be to use Nama as a vehicle for issuing even more State-guaranteed bonds. This will make Ireland even more dependent on ECB’s good will.

Second, the Minister has introduced a set of new conceptual frameworks for using Nama to apply pressure on lenders to increase funding for SMEs and distressed households. All are ambivalent, although well-meaning, and all are regressive when it comes to securing stable future for our banking system. None will actually expand real lending.

Structural Deficit - Unaddressed

The Budget has failed to significantly tackle our structural deficit. The pre-Budget projections suggested that Brian Lenihan was facing €14-16 billion worth of structural deficit. The Budget promises to reduce this number to €10-12 billion. Even if this comes to pass the Government is now facing two stark choices. One – hope for a spectacular recovery from the crisis with an average rate of growth in the economy of over 5% per annum over the next 5 years. In this case, the Government will need to cut some €4-6 billion more in 2011 and 2012. Two – take the medicine and cut at least €8 billion in 2011. We have clearly opted for the first option to the detriment of the future growth.

Carbon Tax - More of the Same

Carbon tax introduction is a purely revenue raising and economically distortionary measure. In theory, carbon tax should alter environmentally harmful behavior of consumers and producers, pushing them to adopt cleaner technologies and habits, thus gradually reducing carbon tax revenue. Alas, in the case of Ireland, years of poor planning and zoning, successions of absurd spatial development plans and politically motivated capital investment programmes have resulted in a situation where many Irish consumers and producers have no room for altering their choices. Living and working in the Greater Dublin area often means no alternative but to use a car to commute to work, or even to visit grocery stores. The same can be said about all other parts of the country. Our family structures – with high fertility and dispersed households – mean that many of us have no choice but to do school runs in a car, to undertake international air travel and to deal with employment patterns that do not favor efficient time management that can be conducive to reducing emissions. Ireland’s shambolic (in quality and scope) public transport system simply compounds the lack of choices.

Hence, despite its ‘Green Policy’ label, carbon tax is nothing more than an extension of an income tax with all the associated disincentives when it comes to higher value-added jobs creation in Ireland. Irony has it, transforming this economy into more human capital intensive and thus environmentally cleaner ‘knowledge’-based one is an objective poorly served by the carbon tax introduction.


On the net, Budget 2010 turned out to be more a whimper than a bang. Whether or not it will pave the way for economically more constructive policies in 2010 remains to be seen. But the task left unfinished is daunting – Ireland will need to cut some €10-12 billion more off the Exchequer annual bill in 2011 through 2012. So far, we’ve only made a first step in a longer journey.


Box out:
In light of this week’s events, it worth quickly revisiting one aspect of our budgetary trends – their frightening stickiness to historic targets that runs contrary to any change in the underlying economic realities. Looking at Budget 2007 estimates, one gets a sense of history playing a cruel trick on Department of Finance forecasting section. Back then, the Department projected a steady rise in spending from ca €45.5 billion to ca €58 billion in 2009. In line with this, the revenue was expected to rise from ca €47 billion in 2006 to roughly €58 billion in 2009. What actually happened between then and now is that the expenditure has shot up, settling at above €60 billion in 2009, while revenue has fallen to below €35 billion. Thus, Department for Finance forecasters were almost 97% right on the expenditure forecast side, but some 60% wrong on their revenue predictions. This implies an error swing of some160 points for the Department of Finance. A random error would be consistent with a 50-point range between two calls. In household economics such accuracy of forecasting could earn one a trip to a debt court. In public sector it guarantees the job for life and a nice tidy pension at the end of an errors-prone journey. Accountability is not really a strong point of Ireland Inc.

Economics 09/12/2009: Budget 2010 - first shot at numbers

I will be blogging on the Budget 2010 over the next few days, but here is the main point:

The Budget did not deliver a significant adjustment to our structural deficit.

1. Claimed adjustments to the deficit totaling €3,090 million on current expenditure side and €961 million on capital side. These are gross figures which imply that we can expect net adjustments of ca €2,600 and €800 million each to the total deficit reduction of no more than €3,400.
2. Per table below, the Exchequer deficit will likely stand at €21,400 million in 2010 and not anywhere near the projected deficit of €17,760 million.
3. Stabilization of deficit is not happening on a significant downside, but in a marginal fashion, which is simply not good enough.

The main conclusion here is that the Budget has not gone far enough in reducing the structural deficit. There is another €10-12 billion worth of cuts looming for 2011-2012. It would be dangerous to assume that this can be corrected for through re-jigging tax system in 2011 as Minister Lenihan appears to imply.

At this junction, I simply cannot see how the Budget delivered anything more than a breathing period for Ireland before we resume our slide toward Greece. 12.4% deficit before we factor in demand for capital from Irish banks is just not enough. Full stop.

The Minister is now talking about €3 billion cut in 2011, then €5 billion cut in 2012-2013. This implies that from next year's standing position we are looking at a deficit of well over €9-13 billion in 2014. Assuming economy grows at a robust 2.5% every year from 2011 through 2014, this would imply a deficit of 4.9-7% of GDP - way long of the SGP-required 3%. If economy grows at even briskier pace of 3% per annum over the same period, the resultant deficit will be around 4.8-6.9%. Again, not much of a fit for our promises to the EU...