8/9/2013: Priory Hall Is Enda Kenny's Problem to Solve

Gene Kerrigan in the Sunday Independent has a very passionate column on the relationship between the Government leadership and the case of the Priory Hall residents.

The column is here.

On foot of my tweets earlier today, few of you asked to get my response on the issue. Here is the summary in the form of my earlier tweets:

Economics 05/06/2010: Exchequer returns May 2010

May tax revenues are behind Budget plan, as talk about recovery is intensifying.

Recall, April was the month of allegedly improved (aka above the plan) tax revenues. May came in, bringing about a double whammy:

1. cyclical components were trending tax revenue down. As normal and forecasted by the DofF;
2. non-cyclical trend was also down, which was not predicted by DofF.
   

Oops. Tax revenue came up to €3.11bn in May or €141mln behind the target. This brought the annual (to-date) position on revenue side to some €148mln below target. Annualized rate of revenue decline is down to 10.4% (massive, still) from 10.8%. Budget assumes that tax revenue for 2010 will be 6% behind 2009 - €31.05bn instead of €33.04bn collected for 2009. I don’t want to venture a forecast here, but we are clearly in the uncharted waters of volatile bottom bouncing.

Here are my charts, per usual:
Chart above highlights seasonal cyclicality: Tax revenue up in May – just as it done in 2008 and 2009, but the swing is shallower than in previous 2 years. Total revenue uptick in May is better than in 2008 (when there was actual slight decline in the series), but the same as in 2009. Total expenditure is down, just as it did in May 2008 and 2009, although decline in 2008 was stronger. So we are somewhere in-between in terms of dynamics – neither 2008 with its calmer Exchequer conditions due to lags on revenue side, and the extremely disastrous 2009.

To-date, 2010 is shaping out to be on a slightly better local trend than the linear trend line for 2008-present, when it comes to tax receipts, although the local trend is still downward. Ditto for the upward trend in expenditure. Notice that we undershot expenditure trend by about as much as in 2008 and there is a significant improvement on 2009.

In short, there is no dramatic change between previous years and today. The crisis is still in full bloom, folks.

Some annual comparisons due:
You can clearly see how in comparative terms, monthly receipts so far been coming in at below 2009 levels except in March. Was that a boost due to scrappage scheme and the combined effect of 2010 license plates luring in the silly vanity buyers (we still do have folks who think a lower range car with 2010 plates beats a higher range one with 2007 ones – the Celtic Hamsters, as I would call them: stripes and all, but clearly short of Tigers. Also, notice that May 2009 uplift in receipts brought the monthly figure closer to May 2008 than current uplift shifted us toward May 2009.

Here is a crude comparative to the ‘target line’ – drawn based on the basis of -6% deviation in receipts. Now, these are monthly receipts, so it is not exactly coincident with the ‘real’ DofF target line (which, frankly, I can’t be bothered to trace as it is irrelevant, as long as the annual target is set at 6%). If you assume that there will be a pick up in revenue (outside the seasonality factors) in the second half of the year, hold your hopes for the annual figure to come on-target. However, my ‘target’ line is telling:
We are clearly underperforming the ‘target’ so far, although we are moving close to it. Another interesting feature is the comparative between the ‘target line’ and 2008 revenue, clearly showing that we are in for another shocker of a deficit even if we hit the target. The reason is simple – our current expenditure is not really declining significantly relative to 2008. Which means that unless revenue surprise in H2 2010 will be a massive one, the deficit is going nowhere compared to the 7-9% objective set out by our counterparts in the PIIGS.

Chart above shows another set of comparatives. This time on the expenditure side and deficit. On the expenditure side, we are running much closer to 2008 figure this year than in 2009. But we are still above the 2008 level. On deficit side, we are better off than in 2009 since March, but still worse than in 2008, although the gap is closing in May relative to January-March. One wonders what will happens once the latest Live Register changes hit the unemployment rolls and their income taxes stop flowing in, over months ahead. Remember, there are lags here as some of the redundancy payments are taxable.

Now, look at cumulative receipts to date:It is clear just how resilient our underperformance, relative to 2009 and 2008 is over the 5 months of 2010. Take a look next at total receipts, with the aforementioned ‘target line’ in:
Again, underperformance is evident. What is dramatic, however, is that after rounds upon rounds of various tax increases, charges, duties etc rises, we are still nowhere near seeing an uplift in tax revenues. A Laffer curve? Perhaps. Alternatively – collapse of the tax base? May be both. It is, nonetheless clear that following the Unions-suggested path of ‘tax em, don’t cut spending’ is not an option.

Total expenditure comparatives. There has been much said – domestically and internationally – about dramatic cuts in public spending. Really, folks?
Tell me if I am not seeing something, but the yellow line is not showing any really dramatic cuts – not the ones you’d expect for a country with 14% deficits.

Suppose we decided to cut half of our deficit out of expenditure side alone (presuming the other half comes out of increased revenue – despite this being unrealistic, entertain such a possibility). Let’s call this scenario ‘½ target line’. Alternatively, suppose the entire adjustment to 3% deficit was to be carried out of expenditure side – call this scenario ‘full target line’. The following will be consistent with an expenditure target, relative to 2009:
So we are doing no too poorly in terms of ‘half-target’ line, implying that the Government is aiming to either dramatically raise taxes (and hope that it will result in a significant revenue uptake), or they are hoping to discover some sort of precious metals deposits somewhere in the bogs, perhaps at the end of a rainbow. Otherwise, we are not on track to any fiscal recovery, just to a moderate decrease in the deficit.

To Government’s credit, however, let us note that spending is down 8.9% yoy over the first 5 months. Then, of course, to their discredit – most of this decline came out of cuts to capital spending. Note also, reductions in spending are running on 2009 figures. That means that yoy we are currently saving some €1.7 billion (over 5 months) – a sizable chunk. Capital side of spending accounts for €890mln of that. Sounds like pretty fair? Well, not really – capital spending last year was held back until later in the year. Which means that in real terms, capital spending in the first 5 months of 2010 is a whooping 36% down on the same period in 2009 and is running at roughly 20% below 2009 annualized rate of spend. And the source of these capital savings? Oh – DofTransport and DofEnvironment – the two account for some 70% of the cumulative 5-months shortfall.

So the strategy might be: cut spending on roads and transport, charge people more for poor quality commute (‘carbon’ tax and fuel excises) and replenish the coffers… In other words, don’t dare call it a tax on income, but the twin contraction in investments in improving transport and expansion of taxes on commute are in the end exactly that. Unless, of course, you are in the Dail or Seanad – in which case, it’s Alice in Wonderland life for you, courtesy of commuting subsidies.

Current spending is only 5% below last year’s, generating savings of €850mln – bang-on with expectations. This masks two sub-trends:

• There has been 10.5% drop in overall current spending outside the Dof Social Welfare/Protection; and
• DofSocial Protection is running up 13.1% on current expenditure. Wait, as I’ve said before, until the latest additions to Live Register kick in and before a significant wave of long-term unemployed start getting into much more extensive social welfare benefits.
  

Final comparatives, therefore:
Yes, the deficit is improving on cumulative basis and on 2009. But we are far off the deficit figures for 2008 and our dynamics are pointing to no convergence toward 2008. Now, recall that in order to return back to 2008 deficits we need to also take into account that since 2008, Irish economy has contracted significantly. In other words, the task of restoring 2008 deficit levels (not spectacular either) will take even more cuts out of us today than we are so far willing to deliver.

Economics 12/10/2009: Green Party 'Programme' - a bark without a bite?

First Update: see second section below

It is time now to start chipping at the latest Programme for Government published this weekend.

First, the Programme was clearly written in haste. Forget its economic thesis that fails in its entirety to recognise the scale of the crisis we face. It is simply written in haste: page 1, just above the signatures of Mr Cowen and Mr Gormley reads "It was negotiated prior to the worst to the worst global downtown (sic) since the 1930s."

Now to the core of the 'Programme' itself.

Introduction: "The time for crisis management is over. Now we must set about re-creating the Republic. This Renewed Programme sets out the Government’s vision of national renewal and economic."

This statement is truly extraordinary for several reasons.

Firstly, neither our fiscal nor financial nor economic data show that 'the time for crisis management is over'. If anything, given that this Government is appealing to the EU to extend its holiday from the Stability and Growth Pact (SGP) compliance beyond 2013, the country is yet to face the stage of the real 'crisis management'. GP leadership is simply in the state of an even deeper denial than their FF colleagues.

In fact, the Green Party leaders are now firmly in the denial of economic reality as outlined by

• Jean-Claude Trichet last week when he said that the crisis is far from over,
  
• the IMF as outlined in their World Economic Outlook and GFSR reports from two weeks ago where the Fund economists warned of the upcoming second wave of financial, fiscal and economic crises;
• the OECD which late last month has warned that the Eurozone economies are facing renewed pressures on exports and growth;
• the Bank for International Settlements which, also last month, warned that more banking sector woes are inevitable for the Eurzone (to which we, of course, belong and of which we represent the sickest member state);
• the ESRI which forecasted prolonged recession through 2010 and anaemic recovery through 2013.
  

Second, a promise of 're-creating the Republic' is not a matter for the competencies of the Government (it is rather a matter of an entirely separate mandate which has to be explicitly delivered to the Government and cannot be assumed by the bi-laterally negotiated Programme for Government).

Third, the Programme must have far reaching, wide ranging economic, social and political reforms in order to live up to the promise of 're-creating the Republic'. As all analysis to date shows, it fails to do so, qualifying more as an interim shopping list for a minority partner in an unstable and unpopular coalition than an ambitious 're-creation of the Republic'.

I am amazed that the above-average educated Green voters were actually willing participants to this ridiculous posturing by the party leadership that also reaches beyond their democratic and, potentially, legal mandate. Can the premise that the GP-FF deal attempts to 're-create the Republic' be challenged legally, one wonders? If the claim is a statement of true intent, the Programme is a constitutional challenge to the status-quo. If it cannot be, then it is simply a case of grandiose over-hype - a crime of sick marketing over-reach, perhaps. Let the GP leaders make their choice...

"Any wrongdoing will be uncovered by the institutions of the state and brought to its logical conclusion. We cannot accept a return to the old ways and we will simply not allow this to happen." I would like to point out, to the GP leadership two facts. First, it was not the institutions of the state that unearthed all recent expenses scandals and all past over-spending scandals, the white elephants and corruption scandals. Instead, it was private sector media that did their jobs. Second, there is absolutely nothing neither in the Programme, nor in the conduct of the GP leadership to date that indicates the GP position of a watchdog over ethics and legality of Irish economic and political elites conduct. Nothing whatsoever. What the GP had, so far, contributed to the 'governance' or the banks, for example is a sweetly irrelevant promise to replace the boards of the banks within 2 years of Nama initiation. Given that countries change their entire governments within a span of several months post election, this is a puzzling anaemic 'watchdog' effort by the GP.

"The credit crisis hit more than our banking system. It is hurting homeowners and those in arrears. Government will support families having difficulties with their mortgage payments." Again, a bark that is not matched by any bite whatsoever in the Programme. There are no envisioned supports for the defaulting homeowners, no measures to address the issue of real debt rising in light of negative equity and tax increases. If anything, the Government (and the Programme re-enforces this effect) so far has been at the forefront of increasing financial strains on homeowners.

" Moving to a low-carbon economy, we will take advantage of our own natural resources in energy, forestry and food. " Another statement that is not grounded in reality. For example, Ireland is the least forested country in Europe and as such has no natural resources in this area. We have one of the most expensive food production sectors in the OECD, reliant more than any other OECD country on subsidies for agriculture. Our energy sector is at best can be described as a failure. The GP has neither the capacity to recognize these realities, nor to address them.


Update 1: Economic Policies (Section 2)

Economic policies, section 2: this and section 3 following it are the rehashing of the already woefully outdated and thin on reality December 2008 Smart Economy platform.

“We will introduce a new national performance indicator… formulated … with other quality of life measurements”. In other words, given that we already have non-descriptive stats, such as GDP-based measures that do not reflect our true income, the GP is offering more smoke to cover up the real rate of economic decay in this country. This fits well with their claims that the party stands for more transparency. For example, the new indicator can simply induce an artificial rise in the standard of living by assuming that our public sector spending (all of it, including wasteful pay and pensions practices) yields significantly higher multiplier than 1.

Even more worrisome in this is the possibility that such a ‘cover-up and pretend all is going on swimmingly’ approach to statistical valuations can be used to ensure that Nama yields a ‘success’ in some future. Thus, the new Programme for Government has started the process of politicization of Nama - the process that the Government was explicitly trying to avoid.

What is even more egregious in the GP policy platform is that it cuts across Brian Lenihan's (unbelievable, nonetheless explicit) promise of no new taxes in Budget 2010. The entire Programme's outlook on public finances is more resembling of the 2004 Social Spending Boost programme rather than anything even theoretically close to what will have to be done to return Ireland to some sort of fiscal solvency.

While re-affirming the Government commitment to bring deficit to 3% of GDP levels by 2013, the Programme for Government envisions more than Euro1.5-2bn annually in new spending and not a single cut to the existent spending. This would imply that reaching the SGP target by 2013 will require freezing all expenditure at the current level and yielding real economic growth of 4.21% per annum on average in real terms over the next 3 years. This is simply an unrealistic assumption of highest order.

"The future of the economy lies in exports... we must drive down our costs..." It is amazing that the focus on exports does not really figure whatsoever in the entire programme, apart from a sickly Euro100mln mixed-used (not exclusive to exports) support fund (see below) - which was already announced back in the beginning of 2009. If the future of our economy does lie with exports, why is the entire Green Party platform focusing on domestic energy independence and broadband and knowledge economy development?

As far as driving down costs - the GP does absolutely nothing (other than very generalist aspirations for productivity improvements in the public sector) to reduce the greatest historical drivers of inflation in the country - public services and state-monopolized or controlled sectors.

Tax Reform section explicitly ignores the need to grow the real economy, focusing exclusively on 'Green and Smart Economy', thus betraying deeply rooted inability of the authors to understand the issues of economic growth.

Serious contradictions emerge in the treatment of income tax policies. The first bullet point claims that the Programme aims to "Abolish the employee PRSI ceiling in parallel with the reduction of the temporary income levy in order to remove the inequity whereby higher paid employees pay proportionately less of their income for social insurance than low paid employees." Several things are simply out of order in this statement:

1. PRSI is paid by self-employed and sole proprietors as well as PAYE workers, yet the former have no access to PRSI-financed benefits. What inequity is the Green Party platform removing here?
2. PRSI and Income Tax are largely paid in this country by those with incomes in excess of 70,000 per annum. Given that some 80% plus of our tax revenue comes from these employees and business owners, what inequity is the Green Party aiming to remove by levelling even higher tax on them?
3. The statement explicitly states that the income levy is viewed by the Green Party as temporary. Will abolition of PRSI ceiling be temporary as well in line with income levy? Not a word on this in the document, implying that the GP wants to replace a temporary levy with a permanent tax increase which will disproportionately adversely impact those on wages in excess of 52,000 per annum and who are already bearing the disproportionately higher tax bill and many of whom have not even a theoretical chance of benefiting from PRSI-financed services.
   

The last point is important, as in the second bullet point of the section, the document states: "simplification and rationalisation of the various levies into the income tax system beginning in 2010". Now, once again, levies were set by the Budget 2009 explicitly as a temporary measure. The Government at the time advocated this approach precisely because they did not want to raise taxes permanently. Now, the Green Party is pushing for a permanent increase in taxation.

The third bullet point is simply an example of 'redistributive' quasi-socialist policies that the Green Party leaders are pursuing across their platform. Imagine two individuals - one earning 50,000 per annum, another 30,000 per annum. If the first person saves 10,000 in a pension fund, her tax reduction will amount to the same 3,000 as that of the second person. Net marginal tax paid by each person will thus be: +2,000 for the first saver and -1,200 for the second one. In effect, the first person will subsidise the second person's pension and consumption to the tune of 2,200 (assuming both share equally in the benefits of general tax revenue). Why? What does this have to do with any notion of fairness? Have Messrs Boyle, Ryan and Gormley think any of this through?

Taxation for sustainable development is perhaps the only thought through section of the entire document. However, on Business Taxes and Local Taxes the GP is once again goes flat.

Overall, GP's platform on economic policies is un-ambitious, unimaginative, poorly thought through and outright destructive to the real economy.


Stand by for further detailed analysis of the Programme