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 15/12/2009: Denmark cuts 2010 deficit by almost 50%

An interesting way of dealing with deficits: Denmark shows the way to lower taxes and deferred tax liabilities, while restructuring public expenditure away from direct spending to more pro-business, growth oriented spending. Read the details here.

Another interesting key fact: "The general government budget balance is estimated to decrease by DKK 154bn from 2008 to 2010. This corresponds to a reduction of 8.9 per cent of GDP of which one third reflects the loosening of fiscal policy... Measured by the fiscal effect fiscal policy is estimated to stimulate economic activity by 1.0 per cent of GDP in 2009."

So run this by me again? Cut balance by 8.9%, of which roughly 3% of GDP goes to fiscal spending to generate growth of ca 1%. suggested multiplier? Lowly 30cents on the euro... or rather DKK... not exactly a big bang for a buck, given that over 5 years interest alone would eat up some 15.8 cents out of this amount.

Another crucial bit: "The deficit on the central government net balance, which is essential for the central government debt, is estimated at DKK 141½bn in 2009 and 74½bn in 2010." Implied cut in deficit 2009 to 2010 is 49.6%. Irish Government approach to the cuts (see my estimates here) is to cut 15.2% of the deficit (if no banks recapitalization is taken into the account) or under 1% reduction (if banks recapitalization is factored in at €4 billion in 2010). DofF own rosy projections imply a cut in the deficit of 29.7%, which is still shallower than Denmark's.

So, the Siptunomics is not what Denmark subscribes to when it comes to fiscal discipline.

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...

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.

Economics 01/12/2009: A real breakthrough of Mr Cowen

So per latest reports, the nation is saved. Facing a systemic deficit of €14bn per annum, the leaders of the Social Partnership have been contemplating a dramatic reduction in the cost of Government business. The dramatic news from the Government buildings, suggested a pay cut for public sector workers of 5% gross, or less than 3% net, delivering something to the tune of €836mln in gross savings (as claimed by the unions). Which, of course, will be clawed back to less than €600mln through automatic stabilizers (taxes on earnings paid through taxes and so on - per reported estimates by the DofF). For a moment, it all looked like our Taoiseach Brian Cowen reigned over the business-as-usual at the Partnership Table.

Credit for derailing this 'savings' deal goes to the public outcry, the media, a handful of backbenchers, the Department of Finance and also to Brian Lenihan - all of whom have managed to restore our policy back to senses. The numbers bandied around by the unions' heads were simply not adding up.

For a moment - it all looked like:
As one fellow economist described the 'New Deal' to me: “a Dora the Explorer bandaid on a shark bite”. Optimist he is – more like a prehistoric shark bite, judging by its gaping size.

Now recall, Brian Lenihan has promised three things to the nation and the EU:

1. cut €4bn in deficit this year and the same next;
2. no new taxes (except for carbon tax and, may be, higher taxes on the so-called 'rich');
3. cut €1.3bn in public sector spending
   

As long as the talks with the Partners are dragging on, this is becoming an impossible trinity of policy objectives. Will Joseph Brodsky's ending for his Elegy serve as a perfect descriptor of the Government's real legacy in the history of Ireland?

... And it says on the plinth
'commander in chief'. But it reads 'in grief', or 'in brief'
or 'in going under'.

Oh, and one last thingy - if you think that €600mln in 'savings' ever had a chance of materialising, think of public sector workers taking a 14-day holiday who will have an option to do agency work to replace their own jobs... earning a nice tidy premium...

Economics 27/10/2009: Recessions, Busts and Crunches

I am back from a very enjoyable (as always) trip to Paris and some 150km beyond. Superb retrospective of Pierre Soulages' work in Pompidou - a real master of true dynamism. A mouthwatering Hans Hartung print (some examples here) and two lovely Soulages' prints as well - all in my favorite gallery Paul Proute SA - were hard to resist, but given we are in a depression, while the French art market seems to be only in a recession, judging by prices, resistance was a-must.

One telling tale - at a lovely dinner with a small group of friends in the countryside, conversation took a quick turn to corrupt politics. Our French hosts were lamenting about the state of their country politics by pointing to a scandal surrounding Nicolas Sarkozy's plans to appoint his failed-lawyer son to head the Epad, the development corporation of La Défense (see a note here). Epad is a state-sponsored body and the French nation was literally lifted to its feet when nepotist Sarko tried to push his baby-faced offspring into the CEO seat. In return, I recalled for our friends the story of Bertie Ahearne arrogantly telling the nation that he gave state jobs to his cronies not because they provided him with money but because they were his friends. My French hosts couldn't believe that such a statement did not cost Bertie his job leading to years of public investigations and pursuits through courts. Nor could they believe that Bertie's friends are still, mostly, in their places of power.


Now, a couple quick notes relating our own troubles.

Stijn Claessens, M. Ayhan Kose and Marco E. Terro have published their excellent paper "What Happens During Recessions, Crunches and Busts?" (I wrote on it before based on the working paper version here) in Economic Policy, Vol. 24, Issue 60, pp. 653-700, October 2009. Here are couple interesting illustrations:
So per above, combined duration of contractionary segment of the credit crunch and housing price bust can be expected (on average) to last approximately 30 quarters (timing the current Irish crisis to last from Q1 2008 through Q2 2015 if the rate of house price bust and credit contraction here in Ireland was close to an average of the countries surveyed by the paper).

The latter 'if' is a serious assumption to make. Claessens, Kose and Terro show that the average bust/contraction is associated with a roughly 18% fall in credit supply and 29% decline in house prices. Of course, in Ireland, we are already seeing a 70% decline in credit supply and a 40-50% decline in house prices. So make a small adjustment - back of the envelope - to account for these and you get expected the current contraction/bust crisis to last more than 52 quarters, taking us well into the beginning of 2020 before the recovery truly takes hold.

And this dynamic is seemingly also in line with Claessens, Kose and Terro data on the impact of crises on GDP. 2008-2010 Irish GDP is expected to fall by some 13.5-15%. This is approximately 2.5 times the depth of the average adjustment associated with credit crisis and house price bust per Claessens, Kose and Terro, as illustrated in their chart reproduced below:
Oh, and for those 'advisers' who are telling Minister Lenihan that Ireland will recover from this crisis along the same trajectory as the 'average' OECD economy (the same advisers who are talking of 8-year cycles in property prices), here is how average Irish crisis is compared to the rest of the modern world history:
Only 4 countries so far have experienced a combination of Asset Price Bust + House Price Bust + Credit Crunch.


My second note of the day is about the effectiveness of fiscal spending as 'get-us-out-of-recession' stimulus. Given that the Government is now pre-committing itself to not cutting public sector pay, it is worth quickly mentioning that the Unions-supported idea that cutting public expenditure is only going to make our recession worse is simply untrue. A recent (July 2009) note by Fabrizio Perri of University of Minnesota, Federal Reserve Bank of Minneapolis titled "Comment on: Planning to cheat: EU fiscal policy in real time by Roel Beetsma, Massimo Giuliodori and Peter Wierts" provides an estimate of the fiscal expenditure multiplier for European economies. The number is 0.85... or, significantly less than 1. This suggests that cutting public spending will lead to a proportionately smaller reduction in GDP than the savings to be generated.

Here is an additional (excellent) note on the whole mess of fiscal multipliers. Adding to this, one has to recognise that Irish public spending is far less effective as a stimulus to the economy, as it is accounted for (to the tune of 70% of the total expenditure) by social welfare and wages - i.e. non-productive components. Thus, one can expect the above 0.85 multiplier estimated for Europe as a whole to be around 0.26-0.0.29. Which, in turn, means that any fiscal contraction in today's Ireland will likely result in a medium-term expansion of our economy. Then again, we already know this much from the 1980s experiences, don't we?

In reality, of course, taxing private economy amidst credit and asst price crises to continue wasting money on the current public expenditure is a sure way to extend and to deepen the recession, as:

• Our public expenditure level was not sustainable for this economy even at the times of growth, let alone at the time of a severe recession;
• Ireland is now likely to be on a path of permanently lower post-crisis potential GDP/GNP growth, so the cuts in public spending will have to take place no matter what delay in public expenditure adjustment the unions will force onto this Government;
• We are facing the fastest and the longest increase in public debt (ex-Nama) in the OECD over the next 5 years and an additional open ended liability under Nama, both of which make it virtually certain that Ireland will emerge from this crisis as a fully insolvent nation.

Economics 18/09/2009: Idiot's guide to the Galaxy

One of my favorite books in the Universe, The Hitchhiker's Guide to the Galaxy has been surpassed, if only momentarily, by a publisher in Ireland producing this superb Idiots' Guide to Science and Economics. Behold, the front page of today's Indo:
Of course, Mary Coughlan's theory of Relativised Evolution or Evolutionised Relativity and the absolutely unfortunate nature of the venue at which she managed to live up to her well-deserved name 'Calamity Coughlan' are straight out of the chapter 'National Embarrassment Exemplified'. It is a serious public blemish on an otherwise worthy event of IDA launching a serious campaign to attract more FDI into Ireland that I wrote about before (here). No need to detail much here, Indo's article speaks volumes, one can wonder now as to what evolutionary process can lead to the emergence of the species so ignorant of basic knowledge as Mrs Coughlan. One note worth making - the fiasco perfectly exemplifies Kevin Meyers' excellent argument in the same paper today (I might not agree with it myself, but Mrs Coughlan has made his case iron-clad).

But Brian Lenihan's lack of grasp of simple realities of public finances and economics is as breathtaking as Mrs Coughlan's lack of basic erudition. After weeks of being fed drivel of FF backbenchers' and hacks' version of economic ("Nama bonds are not debt", "We will get cheap money from ECB", "ECB supports us" etc), it seems our own Finance Minister got convinced that there is such a thing as a Free Lunch. Per Indo's article here, Lenihan "gave his firmest pledge yet that there would be no tax hikes in the December Budget. And Mr Lenihan challenged anyone who doubted him to "watch my lips"... Mr Lenihan said he was committed to introducing a carbon tax... But he gave his clearest indication yet that the Government would not bring in a property or water tax this year. "I am not aware of any other (new tax hikes)," he said.

Ok, three Indo reporters (including senior ones) failed to actually query the details of this statement the Minister made. But the very fact that Lenihan actually said what he did is a testament to the fact that this Government has no real financial brains in the Cabinet at the time of fiscal and financial crises. None at all.

Per statement itself, Minister Lenihan obviously does not consider introduction of the Carbon tax to be a new tax. Presumably, he lived so long outside the real world, in the world of chauffeur driven Mercs and vast taxpayer-paid perks that he might be under the impression that Carbon tax already exists, so 'introducing' it will not constitute an imposition of a new charge on taxpayers.

The Minister also indicated that he has seen no other tax proposals (other than the Carbon Tax and Property Tax). Has he read his own Commission for Taxation voluminous report? Or has it escaped his field of view as the Lisbon Treaty volume had escaped Brian Cowen's view earlier?

Finally, the Minister has to be living in the surreal world where a €20bn-plus shortfall between tax receipts and liabilities can be covered by something other than taxes. Indo's journos refer to the possibility of €4bn savings on the expenditure side as the means for avoiding new taxes. Have they done a simple sum ever before? Has Minister Lenihan done a simple sum ever before?

Even if the Government does deliver on €4bn in savings, and even if part-year measures announced in April 2009 budget continue through the full year 2010, the entire savings will not be able to cover a quarter of the fiscal spending gap. If the Government commits to fully ending all capital expenditure in 2010 and if the economy grows by 5% in 2010, the expected fiscal gap will still be in excess of €8bn in 2010.

This money will have to be borrowed in the international markets. The roll-over of a vast sea of short-term debt issued in 2008-2009 will have to happen. Is Minister Lenihan really buying the idea that these state liabilities - some €30bn worth already accumulated, plus Nama's €54bn expected plus the ones awaiting NTMA's printing press on the back of long term unemployment increases into foreseeable future can be 'deflated' away at the current rates of spending and taxation without raising new taxes?

Well, only in the world where Einstein authored On the Origin of Species, perhaps?