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.

Economics 10/05/2009: Next Budget and other business

Given the latest Exchequer results - i.e lack of any improvement in performance - and a combination of (anecdotally evident) acceleration of lay-offs in the financial, legal and accountancy services, recently on NewsTalk 106FM I predicted that we are going to see a July mini-Budget.

My logic was based on the following confluences of 'stars':

1. Local elections will be over;
2. H1 Exchequer returns will be in;
3. Tax and Spend an boards will have some papers on the table by then, so a host of new taxes will be ready to roll out, while a host of new measures to evade cutting public spending (i.e various buy-outs and hand-outs and 'fairness' proposals) will also be at hand.

Some internal sources (hat tip to B) are now indicating that this indeed is being considered - or 'lightly penciled in' as I was told. In other words, we are in the stage of contingency planning for another raid by Genghis Brian Khan. The problem is that all the indication I am getting is that our an board chainsaw/snip is coming back with a whimper: to the question "Can we save some dosh?" the snappers will answer Bob-the-Builder-like "Yes we can", but to the question "How much?" they will have a goldfish-like response "O*o*p*o*gh*ph" and a bubble of air emanating out of the fat lips. The reason for this is that An Board Snip-identified 'savings' are now rumored to amount to nothing more than cutting temp contracts, which have to be honoured until maturity. In other words, not much of saving is possible in 2009...

Of course, to save big one needs: political will to break the unions and a reform plan to break the hysteresis in spending. But who has that? Brian? The other Brian? of Mary? In the mean time, there will be plenty of small scratches - €1-5mln here and there, but with a hole of some €30bn to be plugged this year alone, you have to do something BIG.

Now comes another new rumor - that a birdie chirped at my windowsill: the Revenue are now starting to worry that smelling the (rotten) rat from the Upper Merrion Street, our wealthy (what's left of them) are moving assets off-shore faster than Brian can shout 'Tax!" There is a rumor now, allegedly at the Dublin Castle gates, that CGT might come in at or near zero in the nominal terms in H2 2009 and this might even imply - considering bookings on CGT losses for 2008 - a negative CGT return! Now, that would be a nice lesson for the Government and for the likes of Fintain O'Toole and Vincent Browne - tax liquid wealth and see it evaporate.

Here's how it might turn out to be: charts below show my projections for CGT and CAT heads under 3 scenarios.

Scenario 1 assumes that the rest of 2009 will see replay of the same changes as happened between 2007 and 2008. This is a clearly optimistic scenario for H1 2009 projections (remember, H1 2008 fall-off relative to H1 2007 was much smaller than what we are already seeing in Jan-April 2009 relative to Jan-April 2008), but it is probably pessimistic for the last 2 months of 2009. So it might be a wash then across the year.

Scenario 2 assumes that the 2007/2008 dynamics apply to the trend that was established in 2009 to date. This is more pessimistic for CAT, and the intermediate scenario on CGT.

Scenario 3 assumes the same as Scenario 1 except I also consider the possibility of zero monthly returns on CGT in October-December 2009. How can I justify this assumption? Well, in 2008 for the same period, the Revenue collected €626.4mln in CGT. Suppose that this year, by October 2008 some €3.13/2=€1.55bn of Irish capital were to be 'B&B'ed abroad, with owners declaring a loss on these, writing off some €311mln. This will drive the CGT revenue to zero, even if the last year's performance were to be repeated.

Now the two charts for the picture is worth a 1,000 words...
Of course, the problem could have been avoided should we chose to tax illiquid/immobile asset base - i.e land... in the long run, or should we have cut the idiocy of raising taxes in a recession... in the short run.

Daily Economics 02/04/09: Exchequer Receipts

And so the numbers are out (here) and we are off with a race for quick analysis.

Albert Einstein once said “The definition of insanity is doing the same thing over and over again and expecting different results”. By this criteria, our two Brians are heading for a loony house at an ever increasing rate. And large swaths of Opposition that is calling for increasing levies and taxes even further are there already. Why? Well, they've been raising taxes now since October 2008 (in reality, they have de facto raised taxes by pre-announcing October Budget two months before). The end result:

All the tax heads are down on the receipts side, with a new dramatic fall-off in Corpo Tax - a clear sign that the killing fields of Brian^2+Mary Ireland Inc are now starting to get covered with the bloodied bodies of Irish companies. Well done, Brians! More tax increases is what we need next to finish off the private economy.

On the net, and I will be redoing the whole balance sheet over the weekend, tax take is now dangerously close to dipping below €30bn for 2009 as a whole. Can't say much about the exact deficit for now - until mini-Budget, but in terms of DofF forecast from January 2009 that would imply a current account deficit of €16bn and with the capital account deficit of over €6bn we are now in the territory of the combined General Gov deficit of over €22bn or almost 13% of GDP. Well done, Brians! Now is the time to raise more taxes - it has been working for the two of you so well to date.

Debt servicing costs are double year on year to cool €298mln and fees to our heroic Santa's Lille Helpers of the primary placement brokers are more than double too. Well done, Brians! Now is the time to raise some additional taxes - piling on national debt is just so much better than taking a knife to your spending plans.

Only motoring fines and national lottery fund are showing gains.

But the real scandal is on the spending side of things:

• Agriculture & Food up from €186mln in 2008 to €350mln in 2009;
• Community, Rural and Gaeltacht Waste (oops, Affairs, that is) up from €109.2mln in 2008 to €119.6mln in 2009. Last year, taking his high office, Brian Cowen has promised to put Gaelic Language at the heart of Gov policies. He is now clearly doing the job, so well done Brian - the Gaelic knowledge economy is just around the corner to save us all;
• Environment, Heritage & Loc Gov up from €596.1mln to €682.5mln - the dolphins and rare boffins (in the DofF and other Gov Buildings, I presume) are grateful to you, Brian.
• Total Voted Exp is up from €11.14bn to €11.82bn - an increase of 6.1% on 2008. Time to hike taxes on ordinary families, Brians, we've got expenses to cover!

We did find money, at this time of a plenty to contribute to the Carbon Fund Act 2007 - some €18.45mln. And non-voted salaries, pensions and allowances were up. Oirieachtas Commissions costs shot through the roof increasing by 16.5%.
The Exchequer deficit now stands at €3.72bn - up from €354mln in 2008 or a whooooping 951% up! Time to raise taxes, Brians, for this is what our academic economists and the ESRI are telling you to do, and since you are paying them a pretty penny, they gotta know, don't they?

Few more points: Pre-Supplementary Budget Aggregates since Budget 2009 also published by the DofF provide the following inputs into the mini-Budget
Of import is a more realistic assessment of the economy at -6.75% for GDP. However, this is still excessively optimistic, setting the stage for a small further reduction in the mini-Budget next week. I expect DofF to come down to -7% growth in GDP. Again, in my view, a -8.0-8.5% figure is probably closer to what will happen. On the Gen Gov Deficit, -12.75% is well in excess of my own earlier estimates of 11.76% (here). But my forecast has built in assumption that we actually save on target for 2009. Thus, I am probably closer now to the mini-Budget outcome than to what DofF is doing here. Tax revenue of €34bn is now looking optimistic. It is likely that tax situation going to deteriorate further as returns lag receipts across many main tax heads.

"The savings agreed by Government on February 3, together with other minor estimating adjustments, lead to further savings in 2009 of €437 million in Gross Voted Current expenditure and €300 million in Capital. In Net terms, which reflects the savings from the pension-related levy, the Current reduction is €1.45 billion. These reductions are offset by additional expenditure pressures of €1,387 million of arising from the further deterioration in the labour market. Receipts from the Health Levy are also been forecast to fall by €160 million in this context. Taken together, these factors lead to a pre-Supplementary Budget figure for Gross Voted Total
expenditure of €65.4 million [sic] (a 4.8% year-on-year increase), or €49.4 million [sic] in Net terms (a 0.2% increase). This corresponding increases for Gross Current and Net Current expenditure are 7.5% and 2.7% respectively."

This is a really telling paragraph. It shows that even having pre-committed itself to €2bn in savings this year as far back as July 2008 and having repeated this target on many public occasions, the Government is still incapable of delivering this much. In the mean time, the spending continues to rise, rapidly.