A Patent Lie: Ireland's Capital Investment Stimulus

In its April 2008 review of Ireland's economy, seen by the Government some 5 months prior to its publication, OECD has identified two salient medium term problems linked to the twin crises we are currently experiencing:

Reforming the taxation of housing. "...the unusually favourable tax treatment increases the role of housing in the economy and adds to volatility in the housing market. There should be a gradual move towards a more neutral system of housing taxation," said OECD. Thus, even assuming its ignorance prior to the OECD report, the Government had at least 15 months since to design a functioning system of either land-value or property taxation, there by reducing the impact of the house prices slowdown.

Public spending needs to slow. "Fiscal performance has been strong in recent years but revenue growth has moderated as the economy, particularly the housing market, has weakened. Public expenditure is set to slow but it is important to avoid locking-in expensive commitments, particularly on public sector pay. As spending rises more slowly, improving public services will have to rely more on undertaking further reforms to public sector management and getting better value for money." Once again, nothing has been done in over 15 months to address these recommendations.

Chart below - taken from the OECD report, illustrates the extent of the problem.
However, a closer examination of the components of the public expenditure in Ireland show even more dramatic failure by the Irish Governments to stop the gravy train of wasteful expenditure.

Consider the following chart plotting actual net current expenditure against capital expenditure, incorporating my own forecast for fiscal consolidation in 2009-2010 and DofF January 2009 forecasts for the same period.
Two features can be glimpsed from the chart:

1. Over the last decade, there has been a steady, unrelenting rise in the current expenditure - largely reflecting social welfare spending and the wage bill increases in the public service.
2. Even before the mini-Budget this month, our capital expenditure has peaked in 2008. Recall that Brian Cowen and Mary Coughlan are endlessly repeating that in 2009-2010 NDP-linked capital investments will act as a stimulus to the economy. Either they have not seen their own Government projections, or cannot comprehend the reality. During the recessionary 2009-2010, Ireland Inc is planning to spend decreasing net amounts of funds on capital programmes. If the Government can think of the NDP (created two years ago) as a recession-busting stimulus, then it has fired virtually all of its ammunition in 2008. And, of course, that has made no difference to the recession, as we all know.

But there are more sinister trends in the expenditure figures. The DofF does not provide a historical data set for budgetary dynamics over time. Instead, possibly to keep the taxpayers in the dark about the real nature of our spending, DofF produces a multitude of largely useless, technologically backward annual reports. A troll through these reveals the following.

Chart below shows the net current and capital expenditures as a percentage of GDP.
According to this chart, the economically unproductive spending which is largely absorbed into public sector wages and social welfare subsidies (our current expenditure):

• has grown virtually exponentially as a share of economy, whilst the capital investment programmes have bounced along a declining trend, and
• has far outstripped capital investment in terms of its role in the economy.

This blows apart Governments' arguments that since the beginning of this century Ireland Inc was aggressively investing in the productive capacity of its economy. Instead, it shows that we were 'investing' in wages, perks and working conditions of our public sector 'servants' and in welfare subsidies at the time of unprecedented growth in prosperity and low unemployment. First Bertie & Cowen and now Cowen & Lenihan have engaged in a classic tax-and-spend banquet where the already-stuffed were getting fatter and fatter on taxpayers cash.

Should you wonder how high were the rates of growth in current and capital expenditure over the last decade, chart below shows that in 2000-2009, even by DofF own (excessively optimistic) projections for this year, cumulative capital investment's importance in overall economy will decline by 39%. In contrast, cumulative current expenditure growth will reach +27%.In short, the above figures show that:

• Our leaders have deceived us about the importance of capital investment in the economy: between 2000 and 2009, capital expenditure share of GDP has actually fallen, while the current expenditure share of GDP has risen much faster than the GDP itself;
  
• Since 2000, our Governments have misled the public about the nature of Exchequer expenditure growth by stressing less rapidly expanding investment portion of the budget and downplaying a rampant expansion of payoffs to the public and social welfare sectors promoted by the Social Partners;
• Our current leadership is now deceiving the country and the markets by referring to a falling capital-spending programme as economic stimulus. That 'stimulus' applied to 2008 and not 2009-2010 and even in 2008 it was relatively small, compared to the current spending waste;
  
• Our Governments since at least 1999 have engaged in reckless and unsustainable increases in the current expenditure - in 2000-2009, current spending has grown in nominal terms by 138%, outstripping almost 2:1 the rate of growth in the nominal GDP (72%). Meanwhile capital expenditure has grown by 57% - over 2.5times slower than the current expenditure.
  

Mr Cowen and the rest of the Government should stop talking about Ireland's plans to invest in infrastructure and knowledge economy. They should come clean on the fact that their leadership has left the country with a current spending bill well beyond our means.

Insanity of our policies

Limbering through crises since the end of 2007 (for its was painfully clear, following the credit markets stalling in July-August 2007, that the near future promises no prospect of continuity of the orgy of credit and debt that we partook in from the beginning of this century) we now have reached that state of nature where the Government is, once again, embarking on an effort to 'do something' about the economy. The latest promise is that of a mini-Budget 2009 by the end of this month.

It reminds one of a famous fable about Albert Einstein's last exam. Upon being told that his final pre-retirement term paper in physics contained the same questions as those posited on the previous year exam, Einstein remarked: "Ah, yes, the questions are the same. The answers, however, have changed".

And so it is with Ireland Inc. The questions, or rather the issues faced by us are painfully the same as we faced before:

• Public spending that is running at ca 38% (current expenditure) ratio to GNP - the same as in the early 1980s;
• Businesses insolvencies and personal bankruptcies rising like an unstoppable tide - too great to see it before it breaks over our heads;
• Financial system that is facing ruin in real terms and a currency that is no longer offering any comfort;
  
• Collapsed taxes (some 25% down y-o-y already and counting) drawn out of a folding economy (having contracted ca 4-5% to date, heading for triple that rate in cumulative terms over 2009-2011);
• Rising tax burdens amidst shrinking economic activity and private sector incomes;
  
• A specter of mass emigration (with net outflows of workers out of Ireland recorded in 2008 already) and double-digit unemployment (expected to reach 14% this year);
• Public sectors war against the rest of society waged to ensure that the privileges - in employment, monopoly power, wages etc - of the few will be protected even at a cost of sacrificing the prosperity of the many;
• Corruption (this time - primarily of legal nature) led by the interest groups that stand close to the center of power;
• Elites, incapable of any new thinking, neurotically running for cover of failed ideologies;
• Academia that is so far removed from reality that its practitioners forget ABCs of their own disciplines (finance and economics) in their desire to embrace the consensus;
• Desperate electorate that, in a Stockholm Syndrome moment of truth, are begging their captors - the State and its leaders - to 'do something', 'anything', 'to present a plan for the future'; and so on.

The issues are, frighteningly, the same - beyond any doubt, despite repeated assurances by the Government to the contrary - we are now in the §980s Redux scenario. But have the answers changed?

Sadly, not. The menu of economic policy potions on offer from the Government and academe is:

• Conviction-driven hikes in direct income and consumption taxation (Priority 1);
• Ideologically motivated (the ideology of public greed) hikes in indirect taxation so desperate in their scope that we are now facing a prospect of a tax on text messages and a clawback of pension deductions (Priority 2);
  
• Ambiguous & vague promises of some current expenditure cuts (Priority 3);
• Empty & often outright senile promises of an NDP stimulus packaged along with a pork train of 'knowledge' economy, 'green' economy and 'social' politics measures (Priority 4).

In other words - continued waste, new waste and taxes is what passes for leadership in Irish political environment: Government and Opposition alike.

Has anyone noticed that having raised VAT in October, we are seeing continued collapse in VAT revenue? Having raised income tax from January on, we are seeing continuous deterioration in the income tax receipts? Having implemented not a single pro-growth policy since the beginning of 2008, we are seeing real costs of living and working in this country remaining stubbornly high and real returns to work depressingly declining?

How long will it take? How many homes will have to be repossessed? How many personal bankruptcies and corporate insolvencies declared? How many of us and our children will have to emigrate out of here before our policy idiocy will lead us to the conclusion that you cannot tax yourself out of a recession?

Some years before his final exam, Einstein remarked that "Insanity is doing the same thing over and over again and expecting different results".

For now our politicians soldier on, with Unions whistling in step, back into the 1980s. Back into the 1980s answers to the 1980s-like problems. Stop cheering them on!