3/8/17: The tale of Irish tax receipts tails

My article for the Sunday Business Post  on the latest trend in the Irish Exchequer receipts and how it stacks up against Budget 2018 prospects for tax cuts. Link here: https://www.businesspost.ie/opinion/not-much-powder-left-honeymoon-budget-2018-394678.

18/2/16: Fiscal Space By Numbers: Village Magazine January 2016

This is an unedited version of my column for Village Magazine, December 2015.

Two recent events highlight the true nature of the ongoing Irish economic recovery.

Firstly, ahead of the infamous Ireland-Argentina Rugby World Cup match, the press office of the main Irish governing party, Fine Gael, produced a rather brash inforgraphic. Charting projected growth rates in real GDP for 2015 across all Rugby World Cup countries, the graph put Ireland at the top of the league with 6.2 percent forecast growth. “FACT: If the Rugby World Cup was based on economic growth, Ireland would win hands down,” shouted the headline.

Having put forward a valiant performance, Irish team went on to lose the game to Argentina, ending its tour of the competition.

Secondly, within weeks of publication, Budget 2016 – billed by the Government as a programme for the ‘New Ireland’ – has been discounted by a range of analysts, including those with close proximity to the State as representing the return of the fiscal policy of electioneering. Worse, judging by the public opinion polls, event the average punter out there has been left with a pesky aftertaste from the political wedding cake produced by the Merrion Street on October 13^th.

Tasteful or not, the public gloating about headline growth figures and the fiscal chest-thumping that accompanied the Budget 2016 did not stretch far from reality. Official growth is roaring, public finance are in rude health, and the Government is back in business of handing out candies to kids on every street corner. The air is so filled with the sunshine of recovery, the talk about the Celtic Tiger Redux is back on the chatter menu for South Dublin partygoers.

Ireland by the numbers

Irish Government is now projecting full year 2015 inflation-adjusted growth to come in at 6.2 percent followed by 4.3 percent in 2016. Less optimistic, the IMF puts 2015-2016 growth forecasts for the country at 4.9 percent and 3.8 percent, respectively. Still, this ranks Ireland at the top of the advanced economies growth league, with second place Iceland set to grow by 4.8 percent and 3.7 percent over 2015 and 2016, respectively. The only other advanced economy expected to post above 4 percent growth in 2015 is Luxembourg. Which is a telling bit: of all euro area member states, the two most exposed to tax optimization schemes are growing the fastest. Though only one has a Government gushing publicly about that fact. No medals for guessing which one.

The problem is: the headline official GDP growth for Ireland means preciously little as far as the real economy is concerned. The reason for this is the composition of that growth by source and, specifically, the role of the Multinational Corporations trading from Ireland. We all know this, but keep harping about the said ‘metric’ as if it mattered.

Based on the figures for the first half of 2015 (the latest available through the official national accounts), Irish economy grew by EUR6.4 billion or 6.9 percent in terms of real GDP compared to the first half of 2014. Gross National Product, or GDP accounting for the officially declared net profits of multinational companies, expanded by a more modest 6.6 percent over the same period.

Other distortions arising from this structural anomaly at the heart of Irish economic miracle are the effects of foreign investment funds and companies on capital side of the National Accounts. Back in 2014, the European Union reclassified R&D spending as investment, superficially inflating both GDP and GNP growth figures. Since then, our investment has been booming, outpacing both jobs creation and domestic public and private sectors’ demand. In more recent quarters, capital investment has been outperforming exports growth too. Which begs a question: what are these investments about if not a tail sign of corporate inversions past and the forewarning of the changes in the economic output composition in anticipation of our fabled ‘Knowledge Development Box’?

Beyond this, the legacy of the financial crisis adds to artificial growth statistics. Irish ‘bad bank’, Nama, and its vulture funds’ clients are aggressively disposing of real estate loans and other assets bought at a cost to the taxpayers. Any profits booked by these entities are counted as new investment here. Once again, GDP and GNP go up even if there is virtually nothing happening to buildings and sites being flipped by these investors.

And while we are on the subject of the old ways, last month Ireland became a domicile of choice for an upcoming merger between Pfizer and Allergan – two giants of the global pharma world. Despite numerous claims that Ireland no longer tolerates so-called ‘tax-driven corporate inversions’ (a practice whereby U.S. multinationals domicile themselves in Ireland for tax purposes), it appears that  we are back in the same game. Just as we are apparently back into the game of revenue shifting (another corporate tax practice that sets Ireland as a centre for booking global sales revenues despite no underlying activity taking place here), as exemplified by the Spanish Grifols announcement earlier in October.

All of these growth sources also benefit from weaker euro relative to the dollar and sterling, courtesy of the ECB printing presses.

Looking at the national accounts for January-June 2015, Gross Fixed Capital Formation accounted for EUR3.8 billion or almost 60 percent of total GDP growth over the last 12 months, or nearly 3/4 of all growth in GNP.

In simple terms, the real economy in Ireland has been growing at closer to 3.5 or 4 percent annual rate in 2015 – still significant, but less impressive than the 6 percent-plus figures suggest.

Kindness for the Exchequer

Still, the above growth has been kind for the Irish Government. In the nine months though September 2015, Irish Exchequer total tax receipts rose strong EUR2.75 billion, or 9.5 percent year-on-year. Just over 45 percent of this increase was due to unexpectedly high corporate tax receipts that rose 45.7 percent year-on-year. Vat receipts increased EUR742 million or 8.3 percent year-on-year, while income tax posted a more modest rise of EUR677 million up 5.7 percent. While both VAT and Income Tax receipts came in within 1-2 percentage points of the Budgetary targets, Corporation Tax receipts over-shot the target by a massive EUR1.21 billion or 44.2 percent.

As chart below shows, in the first nine months of 2015, Corporation Tax receipts have not only outperformed the previous period trend for 2007-2014 and the historical average for 2000-2014, but posted a massive jump on the entire post-crisis ‘recovery’ period.  Both the levels of tax receipts and the rate of annual growth appear to be out of line with the underlying economic performance, even when measured by official GDP growth.

CHART: Corporation Tax: Cumulative Outrun, January-September, Euro Millions

Source: Data from Department of Finance

                              

This prompted the by-now-famous letter from the outgoing Governor of the Central Bank, Professor Patrick Honohan to the Minister for Finance in which Professor Honohan politely, almost academically, warned the Government that a large share of the current growth in the economy is accounted for by the “distorting features” – a euphemism for tax optimising accounting. Per letter, “Neglecting these measurement issues has led some commentators to think that the economy is back to pre-crisis performance”.

Professor Honohan’s warning reflects the breakdown in sources of growth noted earlier, with booming multinationals’ activity outpacing domestic economic expansion. The same is confirmed by the recent data from labour markets. For example, whilst official unemployment in Ireland has been declining over the recent years, labour force participation rates have remained well below pre-crisis averages and are currently stuck at the crisis period lows.  In simple terms, until very recently, jobs creation in Ireland has been heavily concentrated in a handful of sectors and professional categories.

Of course, this column has been saying the same for months now, but for Irish official media, the voice of titled authority is always worth waiting for.

The Revenue attempted to explain the Exchequer trends through October, but the effort was half-hearted. Per Revenue, the UER800 million breakdown of Corporation Tax receipts outperformance relative to target can be broken into EUR350 million of the “unexpected” payments; EUR200 million to “early” payments; and EUR200 million to ‘delayed’ repayments. Which prompted a conclusion that the surge in tax receipts was “sustainable”.

Turning back to fiscal management side of accounts, Irish debt servicing costs at end of 3Q 2015 fell EUR296 million or 5.9 percent compared to January-September 2014. The key driver of this improvement was refinancing of the IMF loans via market borrowings and, of course, the ECB-driven decline in bond yields. Neither are linked to anything the Government did.

Spurred by improving revenue side, however, the Government did open up its purse. Spending on current goods and services (excluding capital investment and interest on debt) has managed to account for just under one tenth of the overall official economic growth in the first half of 2015. In other words, even before the Budget 2016 was penned and the print of improved revenues was visible on the horizon, Irish austerity has turned into business-as-usual.

Talking up the future

As the result of the tangible – albeit more modest than official GDP figures suggest – economic recovery, Budget 2016 unveiled this month marked a large scale U-turn on years of spending cuts and tax hikes.  Even though the Government deficit is still running at 2.1 percent of GDP and is forecast to be 1.2 percent of GDP in 2016, the Government has approved a package of tax cuts and current spending increases worth at least EUR3 billion next year. The old formula of ‘If I have it I spend it’ is now replaced by the formula of ‘If I can borrow it I spend it’.

Which means that in 2016, Ireland will run pro-cyclical fiscal policy for the second year in a row, breaking a short period of  more sustainable approach to fiscal management. Another point of concern is the fact that this time around, just as in 2004-2007, expansionary budgeting is coming on foot of what appears to be one-off or short-term boost to Exchequer revenues. Finally, looking at the composition of Irish Government spending plans, both capital and current spending sides of the Budget and the multi-annual public investment framework include steep increases in spending allocations of questionable quality, including projects that potentially constitute political white elephants and electioneering.

In short, the Celtic Tiger is coming back. Both – the better side of it and the worst.

13/9/2014: Irish tax System: Less Balance, More Burden

Remember the booming tax receipts and corporate tax returns? So what is really booming in the Exchequer accounts in Ireland?

Chart above shows that:

1. As proportion of total tax receipts, Income Tax and Levies now account for 42.84% of all tax receipts (data for January-July 2014) against 42.52% in 2013. This is the third highest proportion (in 1987 it reached 43.48% and in 1988 it was 43.62%) on record since 1984.
2. VAT, also predominantly paid by consumers (or households) now accounts for 31.76% of the total, up from 27.34% in 2013.
3. Meanwhile, booming corporate tax receipts accounted for just 9.48% of total tax take in the seven months of 2014, down from 11.30% in 2013. Controlling for timing of taxes, and thus excluding the result for 2014 to-date, 2013 marked the second lowest year for corporation tax receipts since 1995 (the lowest was 2011 at 10.34%). So far, through July, 2014 corporation taxes as a share of total tax paid in the country are at their lowest levels since 1992.

So as Irish media lauds Government efforts to rebuild the Exchequer balancesheet as some sort of a great achievement for the economy, keep it in mind - mortgages arrears, anaemic domestic demand, low household investment, pensions under-provisions, health insurance drop outs, utilities arrears, defaults on car and road taxes, and a myriad of other problems are being made worse by the fact that we have prioritised taxing families as the means for achieving the necessary objective of 'fiscal stability'.

4/10/2013: IMF 11th review of Ireland: Banks & Exchequer

IMF released its 11th review of Irish economy under the Extended Arrangement for funding. I covered growth-related issues arising from the IMF release here: http://trueeconomics.blogspot.ie/2013/10/4102013-imf-11th-review-of-ireland.html

Now, some other topics, namely banks and the Exchequer.

Per IMF: "Ireland is expected to return to reliance on market financing in 2014, yet further European support could make Ireland’s recovery and debt sustainability more robust. Irish banks face weak profitability that hinders their capacity to revive lending. European support to lower banks’ market funding costs could help sustain domestic demand recovery in the medium term, protecting debt sustainability and financial market confidence."

What's that about? Here are two charts:

IMF: "The recent retracement of Irish sovereign bond yields has been broadly consistent with the experience of other countries in the euro area periphery." [But wait, what about Ireland's unparalleled success in fiscal adjustments and 'best-in-class' status? Are the IMF saying that Enda did not singlehandedly deliver huge improvements in Irish bonds yields? How can this be the case, unless the Irish Government uses 'we' as denoting 'Peripheral Countries' collective in claims that the Govenment has delivered stabilisation of Government funding costs.]

"After touching record lows in early May, the 10 year yield has risen 56 basis points, to 3.98 percent as of September 11. Market tensions dissipated in July after the settlement of the political crisis in Portugal and recent turbulence in emerging markets has had limited effect on Irish bond yields. No new bond has been issued by the Irish sovereign since the €5 billion ten-year issue in mid March." The latter, of course simply means that lower supply of new bonds (lack of it since mid-March) and now the new announcement by NTMA that it will not be tapping the markets any time before official exit from Troika supports, are keeping things steady in yields terms. Otherwise… well… logic suggests, at least speculatively, they can be higher.

And on banks: "From a trough in mid-May, yields on Bank of Ireland (BoI) and Allied Irish Banks (AIB) 3 year covered bonds have edged up some 40 basis points as of September 11. Since its May 30 issuance, the yield on BoI’s 3 year senior unsecured bond has been more volatile, but overall has risen by 62 basis points, to 3.37 percent."

Bah! Two things to say about the above:

1. Banks bonds still tracing sovereign risks and that holds even for covered bonds! Not a good sign for the banking sector. The explicit guarantee is gone, so now it is don to the implicit guarantee and the state simply cannot shake off the baggage of the original 2008 Guarantee. Irish banks are still too-big-to-fail and Irish state is still a too-small-to-bail-in banks lenders.
2. For an army of bonds sales-desks analysts out there pontification on Irish economy, I am yet to see their honest analysis on what is happening with banks funding costs and sovereign funding costs. They are a bit too keen talking about the economy and too little about debt markets. Which is sort of 'your dentist is football analyst' analogy...

"Deposit rates continued to inch downward, however, and ECB borrowing by domestic banks fell from €39.6 billion at end March to €33.4 billion at end August, reflecting a paucity of new lending, further noncore asset deleveraging, modest amounts of new market funding, and a broadly stable deposit base."

So cheap funding dissipating, deposits (stable funding) still anaemic or declining… Happy times, folks. Stabilisation bites. Come back and argue that when businesses and households are croaking under the weight of interest on their debts with the above 'improvements'.

Why wait, however, let's take a look at IMF-reported 2009-2013 data:
Banks non-performing loans (vs provisions) as % of total loans: 2009=9% (4%) or 44.4% cover, 2012 = 11.3% (5.4%) or 47.8% cover, 2013 = 11.5% (4.5%) or 39.1% cover. So cover is shrinking! Meanwhile, personal lending rates have gone up (as ECB repo rate went down) from 11.1% in 2009 to 11.6% in 2013, and SVR mortgages rates have gone up from 3.3% in 2009 to 4.4% in 2013. Government bond yields are down from 4.9% in 2009 to 4.2% in 2013. What's happening folks" The state credit costs are being dumped onto mortgagees. The 'rescue' of the banks and subsequently the rescue of the state has been loaded up onto the borrowers from the banks.


On the positive side, Exchequer performance was good. Not spectacular, but fine - in line with (and slightly better than) budgetary targets:

Do note the caveats listed below the charts - it would be nice were the Irish authorities actually provided a clear, consistent and well-defined map of all one-off payments and receipts… but then the picture of the fiscal adjustment would not have been as pretty as our politicians like to claim. Still, the picture is broadly fine.

Crucially, the above is not sufficient for us to rest on our laurels. For a number of reasons, but chiefly for the reason not even mentioned in the IMF note: has anyone looked at how sustainable, over the medium (2015-2020) term the fiscal savings delivered by the Government are? I mean: we know that pay moderation agreements with public sector unions are not sustainable and even subject to automatic reversals in 2015-on, right? We also know that much of health system 'savings' are not sustainable, since these come on foot of extracting more and more cash out of ever-dwindling supply of private insurance holders. Right? What else is not sustainable? How much? What is the risk down the line? Is corporate tax revenue uplift we have seen over the last 24 months or so sustainable? Much of it seems to have come from MNCs booking more transfer pricing profits into Ireland. Is that 'sustainable'?

IMF does some 'sustainability' tests in its analysis and here is a scary chart:

Basically, note the path of the gross financing needs for Ireland through 2018. This returns us, under baseline (no new shocks) scenario back to the situation in 2018 where financing needs of the Exchequer are slightly above the needs in 2013. This is assuming GDP is growing 2.5% annually in real terms 2015-2018. And this is incorporating the 'savings' achieved from the Promissory Notes. And this is after we impose agreed target cuts of 2014-2015. We are swimming faster and faster to be thrown back, not even to stay put.

Now, tweak few assumptions:

So in Constant PB Scenario, the change is with no 2014-2015 'austerity' factored in, which is boring stuff. But the exciting stuff is the 'Historical Scenario' where things slide back to 'normal' on growth and government deficits:

 The outcome of the above in two charts:
1) Public debt explodes

2) Financing needs of the Government explode too

Care to argue now we can afford a 'stimulus'? As Harry Callahan put it: "Go on, punk, make my day!"

20/12/2012: Pensions, health costs & education fees for 2014-2015

Staying with the IMF report on Ireland, and with the theme of 2014-2015 adjustments, here's again what the IMF had to say on what we should expect from the Government:

"The authorities should outline the remaining consolidation measures for 2014–15 around the time of Budget 2013 (MEFP ¶8). The program envisages additional consolidation of 3 percent of GDP over 2014–15. Taking into account the measures already specified for these years (such as on capital spending), and carryover savings from earlier measures, new measures of about 1½ to 2 percent of GDP remain to be identified for 2014-15."

I wrote about the above here. But there's more:

"To maximize the credibility of fiscal consolidation, and to reduce household and business uncertainties, the authorities should set out directions for some of the deeper reforms that will deliver this effort. These could include, for instance, on the revenue side, reforming tax reliefs on private pension contributions; and on the expenditure side, greater use of generic drugs and primary and community healthcare, and an affordable loan scheme for tertiary education to enable rising demand to be met at reasonable cost."

Further, per box-out on Health costs overrun: "there is scope for increased cost recovery in respect of private patients‘ use of public hospitals"

Hence, per IMF, the Government should hit even harder privately provided pensions (on top of the wealth tax already imposed), thus undermining even more private pensions pools and increasing dependency on state pensions. For those of us with kids, IMF - concerned with already unsustainably high personal debt levels - has in store more debt. This time to pay for our kids education. And for those of us with health insurance, there is more to pay too.

The above combination of measures is idiocy of the highest order. Per IMF, Irish economy is suffering from private debt overhang which leads to more deleveraging, less consumption and less investment. And these lead to lower growth. I agree. But what IMF is proposing is going to:

• Increase private debts and reduce the speed of deleveraging, and
• Raise the demand for already stretched public services.

This is the Willie Sutton moment for Ireland: the state (with the IMF blessing) is simply plundering through any source of money left in the country is a hope of finding a quick fix for Government insolvency. Now, with low hanging fruit already bagged, this process is starting to directly impact our ability to sustain private debts. But no one gives a damn! As Sutton, allegedly claimed, it makes sense to rob banks, because that is where the money are. Alas, with banks out of money, the Government, prompted by the IMF 'advice' is going to continue robbing us.

So a message to our Pensions industry, which hoped that going along with expropriation of customers' funds via pensions levy would allow the industry to avoid changes to tax incentives on pensions (the blood of the sector demand). Prepare for tax reliefs savaging. Once you fail to stand up to the bullies and protect the interests of your customers, you deserve what you are going to get. Every bit of it.

19/12/2012: Fiscal Issues, flagged by the IMF

Keep on reading the IMF report, folks. Nice little bots on offer regarding the fiscal programme performance.

Platitudes abound, well-deserved, but...

"A combination of slower growth, higher unemployment, and the over-run in health spending, have dimmed prospects for any significant fiscal over performance in 2012. Indeed, given the weak economic conditions, only about half of the 6 percent of GDP consolidation effort over 2011-12 has translated into headline primary balance improvement. [Meaning that we've been running into a massive headwind, with pants caught on rose bushes behind us...] Nonetheless, the authorities‘ consistent achievement of the original program fiscal targets despite adverse macroeconomic conditions gives confidence in their institutional capacity and commitment to consolidation."

Question is, when will rose bushes thorns get our fiscal pants shredded? We don't know, but here's the road ahead:

Of course, we knew this before, but it is a nice reminder that Enda Kenny's claim that Budget 2013 is going to be the hardest of all budgets is simply bull - the above figures have to be delivered on top of Enda's 'hardest' Budget 2013. Per IMF, however:
"The program envisages additional consolidation of 3 percent of GDP over 2014–15. Taking into account the measures already specified for these years (such as on capital spending), and carryover savings from earlier measures, new measures of about 1½ to 2 percent of GDP remain to be identified for 2014-15.

"To maximize the credibility of fiscal consolidation, and to reduce household and business uncertainties, the authorities should set out directions for some of the deeper reforms that will deliver this effort. These could include, for instance, on the revenue side, reforming tax reliefs on private pension contributions; and on the expenditure side, greater use of generic drugs and primary and community healthcare, and an affordable loan scheme for tertiary education to enable rising demand to be met at reasonable cost."

In other words, the Government will have to find somewhere around €3-3.2bn more cuts/tax hikes in 2014-2015 on top of those already factored in for 2013.

Now, in spirit with IMF paper, let me reproduce for you a box-out from IMF report on public sector wages in Ireland:

Enjoy the above - you can enlarge the text by clicking on the images.

5/12/2012: Pre-Budget 2013 tunes

Ireland's pre-Budget 2013 arithmetic:

• Budget 2013 Cuts & Tax hikes = €3.5 billion
• IL&P (bust state-owned 'bank') bonds repayments January 2013 = €2.45 billion
• Promo Note (IBRC - toxic loans dump) repayment March 2013 = €3.1 billion
• Interest on Government debt: 2011 = €3.9 billion, 2012 = €5.7 billion, 2013 = €8.1 billion, 2012-2013 increase of €2.4 billion
• Adding things up: -€3.5 billion adjustment + €5.55 billion 'banks' wastage + €2.4 billion increase in Ireland financing for "our partners' help" = net €4.45 billion will be sucked out of this economy by pure policy psychosis.
• 69% of the entire annual adjustment on fiscal side, even assuming it will be delivered in the end, will go to fund increases in Government debt servicing in 2013 compared to 2012. These funds will be largely remitted to Ireland's new 'best friends' - the Troika and Franklin Templeton funds.

Now, good luck listening to today's Budget 2013 announcements by our Minister for 'Friends' Finance.

4/12/2012: Irish Exchequer Returns Jan-Nov 2012

So 2013 Budget will be expected to deliver 'cuts' and 'revenue measures' to bring fiscal stance €3.5 billion closer (or so the claim goes) to the balance. Which prompted the Eamon Gilmore to utter this:
"It is the budget that is going to get us to 85% of the adjustment that has to be made, and will therefore put the end in sight for these types of measures and these types of budgets".

Right. €3.5 billion will be added to the annual coffers on expectation side comes tomorrow. €3 billion will be subtracted on actual side comes March 2013 for the ritual burning of the promo notes repayments, and IL&P - the insolvent zombie bank owned by the state - will repay €2.45 billion worth of bonds using Government money comes second week of January. I guess, something is in sight, while something is a certainty-equivalent. €3.5 billion 'adjustments' vs €5.5 billion bonfire.

Six years into this shambolic 'austerity heroism' and we are, where we are:

1. On expectations forward, the Government will still have fiscal deficit of 7.5% of GDP in the end of 2013, should Gilmore's 'end in sight' hopes materialise. That is set off against pre-banks measures deficit of 7.3% in 2008. In fact, the 'end' will not be in sight even into 2017, when the IMF forecasts Irish Government deficit to be -1.8% - well within the EU 3% bounds, but still consistent with Government overspending compared to revenues.
2. Overall Government balance ex-banks supports in Ireland in 2012 will stand around 8.3% of GDP. In 2013 it is expected to hit 7.5% of GDP. The peak of insolvency was 11.5% of GDP in 2009, which means that by 2013 end we have closed 4 percentage points of GDP in fiscal deficits out of 8.5 percentage points adjustment required for 2009-2015 period. In Mr Gilmore's terms, we would have traveled not 85% of the road, but 47% of the road.

But wait, there's more. Here's a snapshot of the latest Exchequer returns for January-November 2012:

• Government tax revenue has fell 0.5% below the target with the shortfall of €171 million and although tax revenues were €1.96 billion ahead of same period (January-November) 2011, stripping out reclassifications of USC and the delayed tax receipts from 2011 carried over to 2012, this year tax receipts are running up 4.5% year on year.
• Keep in mind that target refers not to the Budget 2012 targets, but to revised targets of April 2012. 
• Meanwhile, Net Voted Government Expenditure came in at 0.6% above target. 
• So in a sum, on annualized basis, expenditure running 1.03% ahead of projections and revenue is running 0.86% below target. All of the sudden, the case of 'best boy in class' starts to look silly.

Things are even worse when you look at the expenditure side closer.

• Total Net Voted Expenditure came in at €40,635 million in 11 months through November 2012, which is €26 million above last year's, and  is 0.6% ahead of target set out in April. In other words, Ireland's heroic efforts to contain runaway public sector costs have yielded savings of €26 million in 11 months through November 2012.
• All of the net savings relative to target came in from the Capital side of expenditure, which is 20.5% below t2011 levels(-€629 million). Now, full year target savings on capital side are €562 million, which means that capital spending cuts have already overcompensated the expenditure cuts by €67 million. 
• On current expenditure side things are much worse. Relative to target, current spending is running at +1.7% (excess of €654 million). It was supposed to run at -1.6% reduction compared to 2011 for the full year 2012, but is currently running at +1.6% compared to Jan-Nov 2011. The swing is over €1.2 billion of overspend.
• Recall that in 2011 Irish Government expropriated €470 million worth of pensions funds through the 0.6% pensions levy in order to fund its glamorous Jobs Initiative. It now has cut €629 million from capital spending budget or €405 million more than it planned. In effect, thus, the entire pensions grab went to fund not Jobs Initiative, but current spending by the state.
• The savage austerity this Government allegedly unleashed saved on the net €26 million in 11 months. Pathetic does not even begin to describe this policy of destroying the future of the economy to achieve effectively absolutely nothing in terms of structural adjustments.
• The overspend took place, predictably, and at least to some extent justifiably by Health and Social Welfare. However, two other departments have posted excess spending compared to the target: Public Expenditure & Shambles-- err Reforms -- posted excess spending overall, while Transport, Tourism and Sport has managed to overspend on the current spending side of things.

On the balance side of things, stripping out banks measures and capital cuts, but retaining reclassifications of revenues and carry-over of revenues from 2011 into 2012, overall current account balance deficit was €9.626 billion in 2012, contrasted by the deficit of €9.712 billion in 2011. This suggests that the Government has managed to reduce the deficit on current account side by €86 million,

Laughable as this sounds, stripping out carry over revenues from 2011, the deficit on current side of the Exchequer finances was €9.45 billion in 2011 and that rose to €9.97 billion in 2012. Which means that the actual current account deficit is not falling, but rising.

Now, let's control for banks measures:

• In 2011 Irish state spent €2.3 billion bailing out IL&P, plus €3.085bn repaying promo notes for IBRC and €5.268bn on banks recaps. Total banks contribution to the deficit was thus €10.653 billion, This implies that overall general government deficit ex-banks was €10.716 billion in 2011.
• In 2012 we spent €1.3 billion propping up again IL&P (this time - its remnants) which implies ex-banks measures deficit of €11.668bn
• Wait a second, you shall shout at this point in time - 2012 ex-banks deficit is actually worse, not better than 2011 one. And you shall be right. There are some small items around, like our propping up Quinn Insurance fallout cost us €449.8mln in 2012 and only €280mln in 2011. We also paid €509.5 million (that's right - almost the amount the Government hopes to raise from the Property Tax in 2013) on buying shares in ESM - the fund that we were supposedly desperately needed access to during the Government campaign for Fiscal Compact Referendum, but nowadays no longer will require, since we are 'regaining access to the markets'. We also received €1.018 billion worth of cash from our sale of Bank of Ireland shares in 2011 that we did not repeat on receipts side in 2012. And more... but in the end, when all reckoned and counted for, there is effectively no real deficit reduction. Nothing dramatic happened, folks. The austerity fairy flew by and left not a trace, but few sparkles in the sky.
• Aside note - pittance, but hurtful. In 2012 Department for Finance estimates total Irish contributions to the EU Budget will run at €1.39 billion gross. For 2013 the estimate is €1.444 billion. That is a rise of €59 million. Put this into perspective - currently, the Government has run away from its previous commitment to provide ringfenced beds for acute care patients at risk of infections, e.g. those suffering from Cystic Fibrosis. I bet €59 million EU is insisting this insolvent Government must wrestle out of the economy to pay Brussels would go some way fixing the issue.

In the mean time, our interest payments on debt have been steadily accelerating. In January-November 2011 our debt servicing cost us €3.866 billion. This year over the same period of time we spent €5.659 billion plus change on same. Uplift of 46.4% in one year alone.

So here you have it, folks. This Government has an option: bring Irish debt into ESM, for which we paid the entrance fees, and avail of cheap rates. Go into the markets and raise the cost of funding our overall debt even higher - from €6.17bn annual running cost in 2012 to what? Oh, dofF projects 2013 cost to be €8.11 billion - a swing of additional €1.94 billion. So over two years 2012 and 2013, Irish debt servicing costs would have risen by €3.89 billion swallowing more than 1/2 of all fiscal 'adjustments' to be delivered over the same two years.

At this stage, there is really no longer any point of going on. No matter what this Government says tomorrow, no matter what Mr Gilmore can see in his hazed existence on his Ministerial cloud cuckoo, real figures show that Europe's 'best boy in class' is slipping into economic coma. 

4/10/2012: Investor's Daily: We've been telling you porkies

In the previous post I tried to make some sense out of the headline numbers from the Exchequer returns through Q3 2012. This time around, let's take a look at the overall Exchequer balance.

Headline number being bandied around is that overall exchequer deficit stood at €11,134 mln in January-September 2012, down €9,526 mln on same period in 2011 (an impressive drop of 46.1%). Alas, that is a pure hog wash. Here's why.

In 2011, Irish state assumed banks recapitalizations and insurance shortfalls funding spending of €10,653 mln, this time around, the Government allocated only €1,775 mln to same.

Adjusting for banks recaps, therefore, Exchequer deficit stood at €10,007 mln in January-September 2011 and it was €9,359 mln in the same period this year, implying deficit reduction of €647.5 mln y/y - a drop of 6.47%.

But wait, in both 2011 and 2012 the state collected extraordinary receipts from banks recapitalization and guarantee schemes - the receipts which, as the EU Commission warned us earlier this year are likely to vanish over time. These amounted to €1.64bn in 2011 and €2.06bn in 2012 (January-September figures).

Subtracting these from the balance we have: exchequer deficit ex-banks recaps and receipts in 2011 was €11,650mln and in 2012 it was €11,417mln. In other words, the State like-for-like sustainable deficit reductions in the 9 months through September 2012 compared to the same period in 2011 were… err… massive €233.7 million (2%).

Let's do a comparative here: Budget 2012 took out of the economy €3.8 billion (with €2.2 billion in expenditure measures and €1.6 billion in taxation measures). On the net, the end result so far has been €233.7 million reduction of like-for-like deficit on 2011. How on earth can the Troika believe this to be a 'best-in-class' performance?

Or alternatively, there's €9.36 billion worth of deficit left out there to cut before we have a balanced budget. At the current rate of net savings, folks, that'd take 40 years if we were to rely on actually permanent revenues sources or 14 years if we keep faking the banking system revenues as not being a backdoor tax. Either way… that idea of 'under 3% of GDP' deficit by 2015 is… oh… how do they say it in Paris? Jonque?

And just so I don't have to produce a separate post on this, the Net Cumulated Voted Spending breakdown is also worth a line or two. You see, the heroic efforts of the Irish Government to support our economy have so far produced a reduction of €474 million on capital investment budget side y/y. But, alas, similarly heroic efforts at avoiding real cuts to the current spending side also bore their fruit, with current voted expenditure up year on year by €369 million in 9 months through September 2012.

So the bottom line is - savage austerity, tears dropping from the cheeks of our Socialist err… Labour TDs and Ministers… has yielded Total Net Voted Spending reduction cumulated over January-September 2011 of a whooping €105 million… And that is year on year. extrapolating this to the rest of the year implies that in 2012 we can expect roughly to cut our Net Voted Expenditure by a terrifyingly insignificant pittance amount of €140 million.

Yep… Jonque!

2/8/2012: Irish Exchequer Fog: Reality Isolated?

Let’s take a look at the Exchequer numbers for January-July period out today.

Tax revenue shows an increase from €18,633 mln in January-July 2011 to €20,313mln in same period 2012. 

This is primarily accounted for by increases in Income Tax (which are running pretty much in line almost exactly with what the USC reclassification would have yielded). The Department states that "Income tax is €159 million (2.0%) ahead cumulatively and is over 11% up on the same period last year on an adjusted basis. This is a strong performance." However, as far as I can understand the numbers, the adjustment only includes PRSI and does not cover reclassification of the entire USC (Health Levy). Which suggests that even 2% might be questionable. Per April note (link here) PRSI reclassification was 'estimated' by the department to run €300 million in 2012. It could be, in the end, 280mln or 330mln - take our guess, but it is significant.

Another 'major' factor is a rise in corporation tax of some €400 million of which more than half is accounted for by carry-over of tax from 2011 into 2012, not new tax receipts. Here's the Department note from April (linked above): "The Department is also taking this opportunity to adjust the corporation tax profile for the €251 million in receipts which were  expected in December 2011 but were  only received into the Exchequer account in January 2012". So setting aside timings of the corporation tax and netting out €251 million of carry-over, how much is corporate tax really up? The answer is - we do not know. But not by much enough to be excited about this.

There was a €200 mln odd rise in VAT - the real impact of the Budget 2012. Which means that on the net, there are very few real increases in revenues. Total taxes went up by €1,680mln odd, but on a real comparable basis, they went up less than €1,254mln over seven months! Again, this is before we clarify what exactly happened with the Health Levy. With Health Levy effects, the impact would have been probably closer to €250mln (I am using here 2009 figures for Health Levy and PRSI to estimate).

Non-tax income rose from €1,545mln to €2,355mln – of which almost €300mln is accounted for by increased revenues by the Central Bank and another €200mln odd is from the stronger receipts on the Banks Guarantee. There was €300mln interest on Contingent Capital Notes - also from banks. Sort-of the zombie giving back odd €800mln to the town it is killing. This is the 'reforms' the Government instituted to correct for the fiscal imbalances? Not quite: earlier this year the EU warned Ireland to not consider these 'revenues' as a part of long-term adjustment as they are bound to disappear in time.

Voted Current Expenditure – the stuff that this Government is supposedly cutting back – has actually increased – from €24.008bn in 2011 to €24.563bn in 2012.

Non-voted current expenditure is up more than €2 billion: from €3.556bn in 2011 to €5.573bn in 2012 – primarily driven by increases in the cost of servicing Ireland’s debt from €2.426bn in 2011 to €3.801bn in 2012. Timing effect on sinking fund contribution of €646mln also put a dent.

This means total current expenditure rose (not fell) from €27,564mln in 2011 to €30,136mln in 2012. This is very poor performance, folks.

Thus, current account deficit also increased in January-July 2012 from €7,386mln to €7,468mln.

Sinking fund transfer debit above was offset by credit to the capital receipts, which has meant that capital-related exchequer receipts rose to €1.454bn in 2012 compared to €789.9mln in 2011. Again, there is nothing miraculous here – the state simply transferred funds from one pocket to the other.

On the capital expenditure side, however, there are – on the surface – huge ‘savings’ year on year. Total capital spending amounted to €12,298mln in January-July 2011, but that was ‘cut’ to €3,112mln in same period 2012.

How were such miraculous savings achieved? Well, simple, really. In 2011 the state spent €10,655mln on “Non-Voted (Expenditure charged under particular legislation)” items and in 2012 this line of spending was only €1,775mln. 99% of these expenditures in both 2011 and 2012 relate to banks recapitalizations (and in 2012 added insurance fund support loan of €449.75mln). So the entire savings delivered by the Government amount to putting less money into Irish banks recapitalizations.

Here’s the summary of these ‘savings’.

TABLE

But wait, things are even worse! In 2011 Irish Government paid down the promissory note to the Anglo-Irish Bank in the amount of €3.085bn. This increased Government spending in that year. This year, the Government had converted the note into Government debt, and thus got to claim that there was no payment made, so instead of €3.085bn in spending, the State registered just the cost of conversion €25mln this time around.

All in, of the entire deficit reduction claimed by the media, full €8.9 billion of the ‘savings’ are simply what the Irish Government (rightly) claimed a year ago to be ‘temporary’ one-off measures. In other words, there is no reduction in deficit via expenditure side.

Let's do one final exercise: if we subtract one-off measures from the capital side, total - current and capital accounts exchequer deficit in the first seven months of 2011 was €8.24bn, in the same period of 2012 it is €7.35bn adding to it the reclassification measures and corporate tax carry over implies like-for-like deficit in 2012 of €7.78bn. Which means 'savings' of ca €426mln. 

Of these €306mln is accounted for by timing differences and cuts to voted capital spending which the Government is going to more than undo using the latest 'off-balancesheet' stimulus. And an unknown amount is due to Health Levy reclassification, let's say ca €250mln so far (an under-estimate for 2009 figures, but...) for which the Department does not appear to adjust the numbers. All in, Irish Exchequer finances have most likely deteriorated on comparable terms by around €80million in 7 months through July 2012 compared to 2011.

These are then the colossal savings that the headlines like "Ireland Cuts Deficit in Half" simply mis-represent.


Update: Someone highlighted that the Health Levy was incorporated into the PRSI receipts. My view of the Health Levy is based on this document.

24/6/2012: Sunday Times June 17, 2012

This is an unedited version of my Sunday Times column from June 17, 2012.

The current Government policy, and indeed the entire euro area crisis ‘management’ is an example of ‘the lesser of two evils’ con game. The basic set up involves presenting the crisis faced by the euro area or the Irish economy as a psychological construct, e.g. ‘We have nothing to fear, but fear itself’. Then present two options for the crisis resolution, similar to the choice given to Neo by Morpheus in the Matrix. You can take the blue pill, the surreal world you currently inhabit will continue unabated (the ATMs will keep working, the banks will be repaired, the economy will turn the corner, etc) but a cost of complying with the demands of the system (the banks bondholders and other lenders must be repaid, the EU systemic solutions must be embraced, confidence in the overall system must continue). Take the red pill, you go to the Wonderland and see how deep the rabbit-hole (of collapsed banks, wiped-out savings, destroyed front-line services, vulture-funds circling their prey, etc) goes.

Unlike in the Matrix, it’s not a strong, cool, confident Morpheus who’s offering the option, but Agent Smith, aka the Government and its experts. And, unlike in the Matrix, we are not heroic Neo, but scared humans, longing for stability and certainty in life. This disproportionality of the power of the State as the offerer of the false choice, and the powerlessness of the society assures the outcome – we take the blue pill and go on feeding the Matrix of European integration, harmonization, and self-validation. The very fact that the blue pill choice leads to the ever-accelerating crisis and ultimate demise of the entire system is irrelevant to our judgement. We are in a con-game.

How I know? I was told this by the Government own statistics.

We all agree that our real economic performance is abysmal. Take unemployment – officially, it rose to 14.8% in Q1 2012, unofficially, broader measure of unemployment – that including those recognized as being under-employed – is hovering over 22%.

But to-date, our fiscal performance has been so stellar, we are ‘exceeding Troika targets’. Right?

Ireland’s Exchequer deficit for the period from January 2012 through May was €6.5 billion or €3.7 billion below the same period last year. This ‘improvement’ in our deficit is due to €1 billion transfer from the banks customers and taxpayers (via banks holdings of Government bonds) to the Central Bank of Ireland that was paid out by the Central Bank to the Exchequer. Further ‘improvement’ was gained by the ‘non-payment’ of the €3.1 billion due on the promissory note, swapping one government debt for another.

Underlying day-to-day Government spending (ex-banks and interest payments on debt), meanwhile, is up year on year. Tax receipts are rising, up €1.6 billion, but if we take out the USC charge which represents reclassified non-tax receipts in the past currently being labelled as tax revenues, the increase shrinks to €726 million. In the mean time, interest costs on Irish national debt rose €1.3 billion on same period of 2011, wiping out all gains in tax revenues the Government has delivered on.

Take that blue pill, now and have a 15% increase on the 2007 levels of budgeted Government spending (protecting ‘frontline services’, like HSE senior executives payouts in restructuring and advisers salaries), or a red pill and face Armageddon. Yet, the red pill in this case would lead us to the realization that the entire charade of our reforms and austerity measures is nothing more than a false solution that risks making the crisis only worse.

This week, Professor Karmen Reinhart of the Kennedy School of Government, Harvard University was dispensing red pills of reality at the Infiniti 2012 conference over in Trinity College, Dublin. Her keynote address focused on the area she knows better than anyone else in this world – debt overhangs and the pain of deleveraging in resolving debt crises. The audience included many central bankers and monetary and fiscal policy experts from around the world, including even ECB. No one from the Irish Department of Finance, the NTMA or any branch of the Irish Government, save the Central Bank, showed up. Blue pills crowd don’t do red pills dispensations.

Professor Reinhart spoke extensively about Europe and, briefly, about Ireland. In our conversation after the speech, having met senior Irish Government decision makers, she reiterated that, like the rest of the euro area, Ireland will have to face up to the massive debt overhang in its fiscal, corporate and household sectors and restructure its debts or face a default. In 26 episodes of severe debt crises in the history of the world since the early-1800s she studied, only three were corrected without some sort of debt restructuring, and in all three, “the conditions that allowed these countries to resolve debt overhang problems absent debt restructuring are no longer present in today’s world”.

Worse than that, Professor Reinhart explicitly recognized that “Ireland has taken debt overhang to an entirely new, historically unparalleled, level”. She also pointed out, consistent with this column’s previously expressed view, that in the Irish case, it is the household debt that “represents the gravest threat to both short-term stability and long-term sustainability of the entire economic system”.

Per claims frequently made by the Government that debt deleveraging is on-going and progressing according to the policymakers’ expectations, Professor Reinhart stated that “in the US, deleveraging process had only just begun. Despite the fact that house foreclosures and corporate defaults have been on-going since 2008, the amount of deleveraging currently completed is not sufficient to erase the build up of debt that took place over preceding decades. With that, the US is well ahead of Europe and Ireland in terms of what will have to be achieved in terms of debt reductions.” Furthermore, “structural differences in personal and corporate insolvency laws between the US and Europe imply the need for even deeper debt restructuring, including direct debt forgiveness and writedowns in Europe. And, once again, Ireland is in the league of its own, compared to the European counterparts on personal bankruptcy regime.”

But don’t take Professor Reinhart’s and my points of view on this. Take a look at the forthcoming sixth EU Commission staff report on Ireland, leaked this week by the German Bundestag. The Troika is about to start dispensing its own red pills of reality to the Irish Government.

According to leaked report, the IMF and its European counterparts are becoming seriously concerned with two key failings of our reforms. The first one is the delay in putting in place measures to address – on a systemic basis, not in a case-by-case fashion as the Government insists on doing – the problem of households’ debts. Incidentally, this column has warned about this failure repeatedly since mid-2011. The second one is the rising risk that accelerating mortgages defaults pose to banks balancesheets. Again, this column covered this risk in April this year when we discussed the overall banks performance for 2011.

From independent analysts, to world-class researchers like Professor Reinhart, to Troika, red pills of reality are now vastly outnumbering the blue pills of denial that our Government-aligned experts are keen at dispensing. The problem is – no one seems to be capable of waking up inside the Matrix of our doomed policymaking.

To put it to the policymakers face, let me quote Professor Reinhart one more time: “Europe’s solution to the crisis, focusing on austerity instead of restructuring household and sovereign debts will only make the crisis worse. The pain of deleveraging is only starting. …Europe’s hope that growth can help in addressing the debt crisis is misplaced, both in terms of historical experiences and in terms of European economic realities.” And for our home-grown Mr Smiths: “Ireland’s current account surpluses [or exports growth] are welcomed and will be helpful [in deleveraging] but are not sufficient to avoid restructuring economy’s debts.” So fasten your seatbelt, Dorothy, cause Kansas is going bye-bye…

Charts:

Sources listed in the charts

Box-out:

Few months ago I highlighted in this very space the risks poised to the Irish banks and Nama from the excessive over-reliance, in the pre-crisis period on covered bonds and securitization-based funding. The core issue, relating to these two sources of funding, is the on-going deterioration of the quality of the collateral pools that have to be maintained to sustain the bonds covenants. Things are now going from bad to worse, and not only in Ireland. Per latest Moody’s Investors Service report, across Europe, 79 percent of all loans packaged into commercial mortgage-backed securities rated by the agency that came due in Q1 2012 were not repaid on time. Three years ago, the non-repayment rate was only 35 percent. Per Moody’s, “real estate with mortgages that match or exceed the value of the property… suffered defaults in nearly all cases in the first quarter. About a third of borrowers with LTV ratios of up to 80 percent didn’t pay on time.” If this is the dynamic across Europe as a whole, what are the comparable numbers for Ireland, one wonders? And what do these trends imply for the Irish banks and Nama?