Economics 4/10/10: Tax receipts & burden

Second installment of analysis of tax receipts. Starting from the top:
As I noted in the first post - there's no evidence of any recovery when it comes to total tax receipts. There is, of course, a significant lag to any recovery translating into tax revenue, especially across the income tax receipts. But the same is not true for capital taxes (investment recovery usually predates employment recovery), VAT (consumption pick up shows up also earlier in the recovery cycle) and a host of other smaller tax heads (excise etc).

Year on year dynamics are also quite depressing:
Not a single core tax head is in positive growth territory, although excise is getting closer to hitting an upside.
In smaller categories, customs duties are posting positive growth - helped by car sales and imports by MNCs. Stamps show the extent of sell-off of shares in August on the back of renewed weaknesses in financials, plus some accountancy moves.

Now to the worrisome picture: tax burden distribution.
Back in the dark ages of the 1980s, PAYE taxpayers carried some 70% of the tax burden. Guess what, we are back to that territory now - all consumption and income tax heads are now accounting for roughly 79% of the total tax take. The Government policy of making taxpayers pay for everything - from banks to Croke Park agreement - is really starting to show.

Illustrated differently:

Lastly, receipts performance against DofF target.
Customs and Corpo are showing significant improvement. Income tax and Vat are poor cousins. Overall, total tax take is getting closer to target, but still runs below the DofF projections. Again, Q4 will be the crucial quarter here.

Economics 4/10/10: Exchequer receipts

High level view of Exchequer receipts paints a continuation to the depressing picture. If there is any stabilization in the economy, this stabilization is yet to be seen on the tax receipts side of things.
Income tax above is tracing neatly below the returns for the last year. Good news, September 2009 slight slowdown was avoided so far. But the real direction of tax receipts on income side is in going to be revealed in the current Q4. Same is true for VAT:
September 2010 VAT receipts are even more disappointing given all the noises about the pick up in retail sales. Going back to school, while yielding a small uptick in volume of sales, clearly was erased in terms of value of sales as deflation in core retail sectors continues.

Corporation tax is struggling to stay above 2008 - a clear sign that economy is still sick:
Core months here are however ahead of us.

Excise and Stamps taxes are almost bang on with 2009, which isn't much of an achievement.

Capital taxes clearly showing no improvement in investment in this economy:

Customs duties moving upside - in part clearly on the back of exporters robust performance so far, plus car imports mini-boom (well, relative to previous years)
Total tax receipts are therefore running well below their levels in 2009:
I never was a fan of the "receipts to target" metrics, primarily because real numbers/levels speak to me much more than imaginary numbers DofF produces our of its excel spreadsheet forecasts. However, to keep up with the fashionable 'economists' from our banks and brokerages - stay tuned for that analysis to follow.

Economics 2/9/10: Exchequer results - tax receipts

So folks, with some trepidation - given the ambitious statements concerning yet another 'turnings of the corner' by Minister Lenihan in today's 'Voice of the Irish Civil Services Gazette' (err... commonly known as The Irish Times) - I awaited the August Exchequer results.

The surprise, I must say, is all my, at least on the tax take side. Things have improved... dramatically... by what I would described as a 'nil change'. In other words, there is no improvement on the tax side.
Total tax take is now moving deeper down relative to 2009 and is nowhere near 'turning around'. It is not even stabilizing on the downward trajectory. Year-on-year total tax take is down 9%. End of July the same figure was 8.2%. Oops...

Income tax and Vat two mega tax heads:
The two are 8.2% and 6.4% behind January-August figures for 2009. A slight improvement on the gap in 7 months to July (8.4% and 6.9% respectively), but not that much of an improvement.

Corporate and excise taxes:
Corporate tax take is now on a trend of erasing the surplus on 2008 accumulated since June. This is bad, folks. In 7 months to July 2010, corporate tax receipts were 13.8% behind 2009 figure. In 8 months to August 2010 these are a massive 24.1% behind. As far as excise tax goes - receipts in 7 months to July 2010 were -3.3% behind corresponding period for 2009, by August 2010 8-months cumulative receipts gap to 2009 period shrunk to 2.7%. Good weather and more partying at home (instead of taking vacations) means booze is being consumed, while euro weakness relative to 2009 means we are buying more of it at home instead of N Ireland.

Next the 'Celtic Tiger Taxes', aka Stamps:
No sign of a serious improvement on abysmal 2009 here either. Poor showing continues with receipts down 18.2% on 2009 in seven months to July and down 11.1% on the first 8 months of the year in August. Let's see what happens in the big boost month of September.

Capital gains:
CGT was down on 2009 in the first 7 months of the year by 44.1% and down on the first 8 months of the year by 42.6%. Marginal gain in relative performance is clearly not enough to bring us even close to the extremely poor performance of 2009.

Summarizing year on year changes in all tax heads:
And to entertain our 'official analysts' favorite pass time: performance relative to targets
One noticeable and real change in monthly returns is the share of the burden that befalls our ordinary incomes:
Table below summarizes:
Nothing really to add to this except this: Minister Lenihan clearly thinks we are seeing improvements on the fiscal side. I see continuously increasing burden of Minister Lenihan's deficits on the ordinary taxpayers and consumers. In my economics books, this is bound to add pressure on Irish growth. Severe pressure.

Economics 4/8/10: Exchequer July results

Exchequer figures for July 2010 are out. Here are trends and some details. Analysis of revenue (by line) will follow later tonight.

Month on month changes first:
Notice seasonality. Seasonally adjusted surplus/deficit is not replicating the V-patterned change over three months. Instead, we are showing persistent worsening of the deficit. This is not due to a surprise expenditure deterioration, as current expenditure side held quite well relative to 2008 (down from €27,565mln to €27,039mln).

One interesting feature, however, on expenditure side is that May-July 2010 saw a net rise in overall expenditure, while same period in 2009 saw a contraction.

Convergence of tax and total receipts was in line with previous years:
This was achieved primarily by relative under-performance of tax revenues, down from €18,689mln in same period of 2009 to €17,153mln this year, plus slowdown in capital receipts mom (although still up yoy cumulatively). Automatic stabilizers are now in action.

Putting receipts against deficit:
Total receipts are persistently down in the last 3 months, and with them, exchequer deficit is rising. This again runs counter to the seasonal trends. Notice also that mean reversion on receipts side is now completed, while deficits are trending still above the long term trend line, primarily due to the fact that 2009 figure includes banks recapitalization costs, but 2010 figures so far do not account for these in full (more on this below).

The broken seasonality pattern on receipts side is evident in the chart above.

On to cumulative results for the year:
Tax revenue is significantly under-performing 2009, let alone 2008. Remember, with all tax increases on 2009 we should have been somewhere between the red and blue lines. Is this suggesting that higher taxes (certainly on the books for Budget 2011) might be counterproductive to revenue objectives?
Total receipts are still coming out slightly above 2009 - thanks to stronger performance in June.

Total cumulative expenditure is running below 2008 levels. That's thanks to cuts in capital spending and under-provisioning for banks in year to date 2010 (more on this below).

Now, deficits:
For a moment there, it looked like we were heading toward abysmal 2008 levels (but not as abysmal as 2009). That's because the Government booked all its capital spending savings into April-June. With these savings now exhausted, our deficit has taken a nose dive.

Shall we compare with banks in across the board?
Hmmm... were capital expenditures (inc banks supports) through 2010 so far running at 2009 levels, we would be worse off in terms of spending than last year.

Now, remember, we (well, actually IMF) were promised by the DofF that the bank recapitalization funds since January 2010 "are now reflected in deficit projections for the year". Actually - they are not. Not 6 in the Exchequer Statement details what is covered in banks recapitalization to date:So in brief - no actual capital injection of any variety is covered in Exchequer data. No purchases of equity in AIB and BofI are covered either. It looks like the Government might be waiting to push these numbers through at the last minute, say forcing recognition into December 2010. Such a move would allow it to pre-borrow funding from the markets without anyone raising too much fuss about contagion from banks balance sheets to the sovereign. Once 2011 arrives, the Government can turn to the markets and say 'Well, that was one-off stuff. Business as normal now."

One way or the other - look at the 2009 figure in the table above: that's the benchmark for our real performance.

Economics 4/7/10: Burden of the state & tax system changes

Some more insights from the Exchequer figures. Over the last three years, Government budgetary policies have resulted in a dramatic shift of the burden of this state onto the shoulders of ordinary families.

Income tax accounted for 25.05% of tax revenue at the start of 2007, rising to 28.70% by the end of 2007. 2008 Q1 revenues from income tax accounted for 28.07% of the total, rising to 32.31% by year end. In 2009 the corresponding figures were 34.23% and 35.82%. So far this year, Q1 2010 income tax revenue accounted for 36.10% of total revenue. Q2 2010 figure is 35.49% - higher than corresponding Q2 2009 figure of 35.23%. Chart below illustrates:
In year-end terms:
One can (roughly, as an approximation) split taxes into the following three categories: business-related (corporate, excise -

• attributable to business (Corporate & Vat - adjusted for the share of non-household consumption);
• attributable to households (income tax, Vat adjusted for personal consumption share of total expenditure), and
• transactions taxes - Stamps, CGT & CAT

When one realises that less than 50% of those working in the State pay income tax and majority of them barely avail of much of the public services, this really does put into perspective the burden of the state spending on our more productive middle and upper-middle classes.

Economics 4/7/10: Exchequer receipts: not a sign of any recovery

From my previous posts on the Exchequer deficits, you have probably guessed that unlike other economists, especially those from the official commentariate, I am not too fond of comparing current receipts to 'targets' set out by DofF. This aversion to focus on how closely the receipts are running relative to targets is driven by two factors:

1. I don't care for DfoF targets. What matters is how the economy performs in reality, not how closely it resembles someone plans;
2. I don't think that DofF targets have much meaning - real world deficits have two sides to them: receipts and expenditure. In receipts, tax collections signal the extent of economic activity. And changes in receipts year on year also signal future economic capacity. Full stop. Targets are irrelevant here.

So I've done some homework - manually (because DofF is incapable of delivering usable databases) trolling through Exchequer Statements, and compiling my own database of tax receipts. From now, this will form a stable feature of monthly Exchequer Statements analysis.

Here are some startling revelations from the latest results released on Friday.
Income tax receipts are currently running behind all years from 2007 on. This is a clear indication that our income tax policy has collapsed. If in June 2009 income tax receipts were -9.02% below June 2007, by June 2010 this difference has widened to -16.82%. And this is despite (or may be because of) higher taxes imposed in Budgets 2009-2010. Mark my words - should the Government increase income tax rates or shrink income tax deductions in the Budget 2011, this effect will most likely increase once again.

Vat has performed just as poorly so far this year, despite all the parroting going on amongst commentariate about improving retail sales etc. In June last year, Vat receipts were off 23.48% on 2007. This year this difference expanded to -29.63%. And this is despite significant weakening in the Euro and with price wars amongst the retailers. Let me ask Irish banks' economists so eager talking up our consumers' return to the shopping streets.

Corpo tax is doing slightly better so far, but there are timing issues here, plus there is an issue of profits booking by the MNCs - rather spectacular in June 2010. Overall, corporate receipts are subject to a massive uncertainty until November figures come out, so let's wait and see.

Excise taxes are clearly settling into a new equilibrium, way below 2007 and 2008 figures. June 2007-June 2008 the returns on this line were down -26.04%. This year, the decline is -27.97%.

Stamps are next: some spectacular rates of deterioration here. June 2007-June 2009 = -79.72%, to June 2010 = -83.55%.
Capital gains tax - should be booming, according to the 'Green Jersey' squads. After all, allegedly we are doing so well now in terms of equity markets that Ireland is having a booming number of millionaires. Remember that claim? Well, CGT shows none of this 'boom' and, of course, QNA shows continuous deterioration in our investment position. So between June 2007 and June 2009, CGT receipts fell 80.98%, by end of June 2010 they declined 89.10%. Surely, things are booming as we roared out of the recession...
Almost the same story for Capital Acquisition Tax, with this category performance being only slightly better year to date on the back, potentially, of something really strange going on in the Exchequer own capital spending and automatic stabilizers (timing?).

Customs duties are also down, tracing the trajectory of consumption excises.

So let's take a look at the total receipts:
Again, I am failing to see any sort of 'stabilization' in public finances (receipts are running behind 2009 levels), or any significant uplift in economic activity relating to Q1 2010 'exit from the recession'. We apparently had full 6 months of 'recovery' and there's not a blip on the tax receipts radar screen.

So my advice to the 'official IRL economics squad' out there - stop chirping about 'tax heads running close to target'. Look at the actual numbers!

Economics 05/06/2010: Exchequer returns May 2010

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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