Economics 03/09/2009: Irish Exchequer - Sliding into an Abyss of 'Positive' Group-think

The Exchequer results are in and some analysts – the usual suspects – are saying all’s well, we are hitting the target (set in April Budget). Well, not so fast. August showed some improvement, fully due to the outlandishly rising corporate tax receipts. These, of course, might be due to the forwarding of the returns, or they might be due to increased flow of transfer pricing. So either we are becoming an accountancy trick economy (with constantly changing dates of filings to suit the Master Cowen’s whims) or we are more and more of a banana island (with increasing dependency on multinationals booking more profits through this ‘non-tropical paradise’). Take you pick.

But on the net, headline figure is that we are now 2% below the April 2009 target on overall tax – an improvement on 3% in July 2009, but still worse than 1.2% in June. Go figure what the headline tells us.

Here are some trends.
Chart above shows clearly that ALL tax heads, save for Corpo and Capital Acquisition Tax are still heading down relative to the April target. Income tax has gone from -2% below target in June to -2.8% in July and -3.5 in August. VAT from -3.5% in June to -6% in July to -5.7% in August. Excise was 3.9% ahead of target in June, then 4.4% in July before collapsing to +3.1% in August. Stamps shortfall on the target was -10.3% in June, -17.3% in July and is now -24.4%. For an economy that used to be run off this completely absurd tax, this is as quick sand territory. Customs progressively slumped from 7.4% deficit on the target in June to 12% deficit in August. Improvements, my eye, are evident everywhere. If, that is, you are a hired gun for one of our clientelist organizations of the State.

Chart 2 shows year on year changes.
May be here we can find some improvements, for August 2008 was a full-crisis year and Messrs Cowen and Lenihan have been at pains telling us that we have bottomed out? Ok, let us put this one into a table to see better
Three heads improving, five heads are still getting worse. Judge for your self if we should sound the trumpets of a ‘bottom’s here’ march, yet.

Of course, the main figures are: how much we spend over what we bring in (aka our deficit) and how much we borrow to finance, in effect, massive waste of public resources on unreformed and uncontrollable public sector. Chart 3 below shows these two series.
Look at the two green lines: the solid one is our borrowing so far this year (cumulated) and the dashed one is our borrowing in 2008. Any questions? For those who are so ardently happy to argue pro-Government positions, we are now borrowing more and at a faster rate than in 2008. How on earth can this be if Messrs Cowen and Lenihan have declared the ‘bottoming out’ back in May 2009? Well, only if they themselves do not believe their own spin.

Looking at the two red lines, deficits cumulated from January for 2008 and 2009, it is absolutely clear that the rate of deficit increase has not slowed down since June, but actually accelerated! In August, the deficit increases were outpacing those in August 2008. And we thought that August 2008 was pretty bad.

Now, may be Fionnan Sheehan of the Indo can go now declaring that the Government has carried out some sort of a new policy Blitz, but to me the Irish State remains insolvent and it actually is getting worse, rather than better.
Chart 4 above shows clearly how on earth can our ‘bottoming out’ economy be performing so much worse in fiscal terms even after massive tax hikes and fig leaf decorations of ‘cuts’. The answer is in the distances between solid and dashed lines. While total receipts have fallen year on year in 2009 (and this process is actually accelerated in August 2009, despite of and contrary to the analysts and Government’s cheerleading), total spending has been running well above 2008 levels and the rate of total spending increases is running stronger than in 2008 since the end of April.

Allow me to sum up the situation:

• Receipts are below 2008 and falling faster than in 2008;
• Expenditure is above 2008 and rising faster than in 2008;
• Capital spending has been dramatically cut, so the expenditure increases are all due to two factors:
  

1. a rise in unemployment and social welfare claims – something that is a fault, to some extent, of the Government’s failure to introduce proper economic policies aimed on supporting Irish employers (lowering cost of doing business in this country and reducing taxes on producers and consumers); and
2. lack of real reforms in the public sector pay, pensions and perks, as well as employment numbers.
   

Doing some real sums, per Exchequer end-of-August 2009 statement,

• Irish public spending (gross) was, in 2008, €29.7bn on current expenditure side, plus €5.5bn on capital side, to a total of €35.2bn total gross spending. Tax receipts were €24.8bn. Total deficit (not counting in double-trip tax clawbacks and other ‘non-tax revenue’ that is a pure accounting procedure by the Government) was €10.4bn.
• Gross Irish public spending in 2009 was €30.7bn on current expenditure side, plus €10.8bn on capital side, to a total of €41.5bn total gross spending (a rise of 18percent yoy). Tax receipts were €20.8bn (a fall of 16% yoy). Total deficit (not counting in double-trip tax clawbacks and other ‘non-tax revenue’ that is a pure accounting procedure by the Government) was €20.7bn a rise in deficit of 99% yoy.
• 2008 deficit by August 31 has reached 6.65% of 2008 GNP and 5.55% of 2008 GDP; this year, by the end of August our deficit has reached 14.38% of projected GNP and 12.11% of GDP. Now, Dr Garett Fitzgerald might think it is irresponsible to look at our figures from different angles, but you tell me what’s more irresponsible – to deny there is a massive problem in the way we run this country, or to highlight these figures from various perspectives?
  

Note: I use gross deficit figures, but these are only slightly worse than the net figures.

This is the direct outcome of the courageous and resolute actions taken by this Government in its April 2009 & October 2008 Budgets, the necessary reforms of the public sector enacted by Messrs Cowen and Lenihan, and wondrous pro-business policies implemented by Mary ‘Have you Heard of Her Lately?’ Coughlan.

Now, allow me to conclude by saying the following. What the exchequer figures continue to show is that the fiscal policy in this state remains on the path of insolvency. Alan Ahearne, other advisers to the Minister for Finance, are either not doing their jobs or are ineffective in doing their jobs. I will let them take a pick as to which option they prefer. Brian Cowen and Brian Lenihan can score as many brownie points with the journalists as they would like, but – clearly people like Fionan Sheehan are beyond the point of understanding this simple reality – the question as to whether the deficit is going to be €20bn or €30bn this year is secondary to the facts that:

1. The Irish state is insolvent and cannot be made solvent by increases in taxation;
2. The Government cannot be trusted to balance its own books, let alone to ‘invest’ €60bn-plus of our money into high risk junk-investment schemes, like Nama;
3. Whether they are on balance sheet of the state or on the balance sheet of NTMA (which is, of course, the state), Nama costs will only exacerbate our status as an insolvent nation.

Economics 04/06/2009: Exchequer returns for May

First order of business today is to say "Happy Birthday, Jen" to my (much) better half - "I miss you here in Moscow!"

Second order of business is the Exchequer release from yesterday. As my access to data and software is somewhat more restricted here, it is a short analysis:

January-May 2009 tax receipts are in and they are down €3.6bn y-o-y – 21%, slightly better than –24% decline in January-April. Uncork that vintage Dom, Brian? Not yet…

Budget expectations are for 15.6% decline in the entire 2009. Not likely at the current rate. So far we have: 5 months receipts accounting for 39% of the total of projected annual intake of €34.4bn. Annual projection from here suggests that we are going to see around €32-33bn assuming all goes as planned.

Good news, in 2007 we also had 39% collected by the end of May. Bad news is – we had a very robust flow of business for SMEs and self-employed – all of whom force tax payments into the end of the year. Now, recall that we are going to see two things around October-November: (1) tax returns reconciled for 2008, (2) tax returns estimates for 2009. On (1) we can assume that estimates made, say in October 2008 did not fully take in the carnage of November-December, so estimated payments back in October 2008 will be erring on higher side, implying that the actual returns filed in autumn 2009 might be much weaker. On (2), given the current tax measures in place, businesses and self-employed will do everything possible to reduce and delay payments, so estimates will be erring on a lower side and tax deductions will be used to the max. I am not sure that a combination of (1) and (2) will not provide for relatively poor showing in autumn returns.

Current moderating is most likely reflective of the fact that the first half of 2008 was relatively buoyant, so the corresponding period in 2009 is going to register steeper declines. This will moderate into the second half of 2009, naturally, but it will mean preciously little, because any decline on the debacle that we witnessed in H2 2009 is going to be a disaster reinforced.

Another issue to keep in mind: current figures include two rounds of tax increases – Budget 2009 and, partially, Supplementary Budget 2009 – some €230mln added in 5 months. So one can expect further push on tax receipts side. The fact that it is not very impressive is telling me that tax measures are not working and tax substitution and minimization are now working their way through the economy.

To see how bad the new tax measures are at raising revenue – consider the fact that tax receipts in April were 1.7% below the tax profile published on April 28. In other words, within days, the receipts have already slowed down 1.7% relative to what DofF expected. May figures were 1.9% ahead of the profile: Corpo Taxes came in €155mln ahead of profile, Excise and Income taxes were ahead by €48mln and €39mln, respectively. VAT was down €139 million on profile in the month. So, ok – we are now bang on the target when it comes to profile.
Note: the source for the above table is Ulster Bank, with minor adjsutments by me.

But Income tax receipts were driven by new taxes, as are Excise duties, and the two will see some new pressure per optimising households and businesses. Corpo tax can surprise on the upside, assuming the US MNCs continue to book profits here – that is the big unknown in my view. CGT is also a candidate for downgrades as investors are shifting out of Ireland, booking losses here. In general, apart from income tax, other revenues were down 27% in May – a moderation of sorts on 32% decline in April, but the flattening out of the tax decreases curve is not anything to cheer about – it is simply the nature of any asymptotic dynamics: the closer you get to absolute zero, the slower the pace.

So back to income tax measures: €48mln monthly gains in May suggest that the income tax measures to date are yielding: 48mln*5/0.39=615mln in revenue, assuming that income tax follows the same path over the year as total tax receipts. A far cry from €1.5-2bn envisioned and very much close to what myself and other observers were expecting back in April.

In the mean time, spending races ahead: current expenditure was up 4.3% (in April it was up 4.5% but the latest ‘moderation’ is still placing current spending at an insolvency levels and the decrease was due to factors other than demand for social welfare and public sector wages). Capital spend continues to fall - down 6.3% year-on-year. Some suggested that there are timing issues delaying capital spending boost, but we are now 5 months into the year and this leaves me wondering – what sort of timing are we talking about?

On the net, therefore, May figures are no real improvement: receipts are flattening at a very slow rate, we might be closer to target here than before, but this only means a difference of €1-2bn on revenue side – a chop-change for our public sector wasters. On expenditure side, we are now 10 months past the July 2008 promises by the Government to introduce real savings, and… zilch, nada, none, nyet, can’t find any no matter how hard I am looking… If a rapidly decaying alcoholic were to be the allegory for the Exchequer balance sheet, we are past the gulp stage and into a burp moment. The hand with a bottle is rising once again, drawing closer and closer to the mouth. How long can this last? Your guess is as good as mine, but a friend today suggested that 6 weeks from now the Government will say, “Whoops, due to international economic conditions (WHICH HAVE NOTHING TO DO WITH THE LAST 12 YEARS OF FIANNA FAIL RULE) our readiness for rebound which was most certainly there when we said so has now disappeared. Not our fault, mate.”

Sounds about right…

Economics 06/05/2009: NAMA & Bananas for Brian

January-April tax receipts are down 24% y-o-y or €3.2 bn. Same as in February, but erasing a slight gain (-23% y-o-y deterioration) in March. Some say this is good. I am not sure what they have in mind:

1. the fact the we are back on a steeper February downward curve rather than on an imperceptibly flatter March one; or
2. the fact that we are not down 50%?
   

Worst performing tax heads are in bold in the table above. But seasonality matters, so we compare monthly changes in the shortfalls this year so far against the average monthly shortfall for 2008 for the same period of January-April.
Red marks subheads that deteriorate in performance from month to month, relative to previous year. In other words, red numbers represent the cases where y-o-y shortfalls increase from one month to the next. Several conclusions worth making:

• Compared to average shortfall in 2008, April 2009 is much worse across all, but two categories: CGT and Stamps. This, of course, is just due to the fact that once you have fallen through the basement ceiling, there isn’t much room left to fall further;
• Overall, shortfall in April 2009 is worse than the monthly average for 2008 period;
• In April, shortfall has improved relative to March in Customs, Excise, Stamps, Corporation Tax, VAT and Total Taxes; it has worsened in Income Tax (despite the levies), CAT and CGT;
• VAT leads as a main cause of the overall shortfalls – down €1.043bn – ca 33% of the total shortfall – this, in part, is because of the reckless VAT hikes, not despite them;
• Another 26% of the shortfall came from Stamps and CGT both property related taxes, were down €838 million, making up a further 26% of the shortfall.
  

Now to the deficit matters: in April Budget, tax shortfall for 2009 is estimated at €34.4bn – 15.6% decline on 2008. We are now at a 24% decline in annualized terms, suggesting DofF is waiting for some miracle to significantly raise revenue. What this might be?

Speculation 1: another mini-Budget post local elections with a massive tax hike - doubling income levies and doing some nuclear work on PRSI; or
Speculation 2: Pfizer, Dell, Glaxo, Apple, Microsoft, Google and the rest of the world producing a rescue package for Ireland that is massive and has no lags to build; or
Speculation 3: in response to President Obama threat to tax US MNCs based here, we impose a tax on Irish-Americans.

Looks to me like Speculation 1 is the winner.

Now to the expenditure side:

• Current spending was up 4.5% in the first four months, down from the 8.2% rate of increase in March. Factoring deflation, this is still a hefty increase;
• Capital spend was down 14.5% on April 2008, so no stimulus, Brian, despite all the promises;
• Service of national debt is up from €1.262bn in Jan-April 2008 to €1.501bn this year so far. Total debt management costs along with sinking fund: up from €1.736bn to €2.108bn a rise of 21.4% y-o-y;
• Agriculture & Food – up cool €145mln y-o-y - pork dioxins scare, I presume;
• Community, Rural and Gaeltacht Areas – up minor €5.6mln y-o-y;
• Education & Science down €173mln, so Government priorities on who gets dosh first are pretty clear – building the knowledge economy out on the farms;
• Environment, Heritage & Local Government is being beefed (or biffoed?) for local elections with a juicy €30.1mln increase on 2008;
• Other increases are linked to social welfare and other spending that is most likely unemployment-related;
• Overall, voted Government spending is up €275mln or 1.8% in nominal terms, roughly 5% in real terms – some fiscal crisis they are having…
  

If the last bullet point isn’t enough, public sector salaries, pensions and allowances are up from €16.477bn in the first months of 2008 to €16.69bn in 2009. Now that is an interesting number. Up 1.3% y-o-y in nominal terms, 4.5% in real terms. And one has to recall that 2008 includes the six months of Government’s denial that we are facing a crisis and six months of promises to cut public spending!

But wait, there is more fun in the numbers. We dumped €19.04mln into Carbon Act 2007 Fund in the last 4 months – a 100% increase on 2008. We also managed to stuff more cash - €396mln to be precise – into the NPRF, aka public sector pension piggy bank.

Yes folks, we are still broke, but don’t tell it to the public sector employees. For them, the party is just keeps rolling on. So taxes for us, baNAMAs for Brian and some champagne for public sector workers. Sharing the pain...


NAMA has an 'interim' head... and he, as expected,

• is independent,
  
• is experienced in the private sector and management of stressed assets on a large scale,
  
• is an outsider with no links to the civil service or to the good old boys networks in the public sector
  
• has no past policy fiasco on his report card.
  

Brendan McDonagh is currently director of finance, technology and risk at the NTMA (not many degrees of separation from the public sector here).

He works for NTMA which never did stressed assets management although it does a good job at raising debt - so NTMA is a borrower, and Brendan will be running a Lender. Wolves guarding sheep... or is it the other way around?..

There is no real separation from the DofF / the Government, since NTMA is the financing branch of the DofF / the Government.

This 'outsider' to the old boys network is originally from ESB - that pillar of private sector excellence in Ireland.

I am sure he is an excellent accountant and a good treasurer and a great technology officer (though judging by the NTMA website, there is work left to be done on that front)... But here are some crucial questions to be asked:

• is he any good at investment and risk strategy? (I presume he has a worldwide following amongst asset managers for his strategy insights into asset markets, risks pricing etc. He handled treasury, audit and accountancy for ESB and largely the same for NTMA, but there was some risk management part to his role);
  
• is he any good at portfolio management? (I presume he has managed some real asset portfolios long and short, yield and CG, fixed income and equities, private equity and partnerships, for it will take a lot more than a chartered management accountancy qualification to understand and manage €80-90bn worth of portfolio assets. Does he have vast experience in dealing with diversified (internationally and instrumentally) financial products under macro and micro-economic stress?);
  
• is he any good at saying No to political classes pushing for political payoffs from NAMA - a certain to take place in months to come? (I presume he earned such fierce independent reputation at NTMA which is happy to borrow short (3mo-9mo) to finance our deficit even as the OECD and IMF warn the world not to test their luck and borrow long);
• is he any good at preparing assets for sale and liquidation via private markets (for this is what NAMA will have to do in years time)?

... ah... well, we wouldn't know, because we don't get CVs of the career public servants released to us, but on the last point we actually have some past performance record: http://www.finance-magazine.com/display_article.php?i=3879&pi=162 (here). Mr McDonagh it turns out was instrumental in one 'successful' long-term financial engineering project - privatization of Eircom. That was a resounding success that all of us wish onto NAMA too, don't we?

In reality, Mr McDonagh may or may not be a right candidate for a job. We do not know. And past performance with Eircom privatization is not necessarily an indicator of future performance either. This would be unfair to him had he be given a chance of defending his application for the position in front of us...But Brendan never did defend his candidacy in front of anyone so lowly as us, people whose money he will be taking. Incidentally - was his position advertised in line with the EU law for public appointments?

As I said, it is my money and yours that Brendan will be spending and managing. And we need to know, for when we do not know, we are asked to trust the appointing authority. Do we trust Brian Lenihan? With some €80-90bn worth of our last pennies? It is that simple.

Daily Economics 02/04/09: Exchequer Receipts

And so the numbers are out (here) and we are off with a race for quick analysis.

Albert Einstein once said “The definition of insanity is doing the same thing over and over again and expecting different results”. By this criteria, our two Brians are heading for a loony house at an ever increasing rate. And large swaths of Opposition that is calling for increasing levies and taxes even further are there already. Why? Well, they've been raising taxes now since October 2008 (in reality, they have de facto raised taxes by pre-announcing October Budget two months before). The end result:

All the tax heads are down on the receipts side, with a new dramatic fall-off in Corpo Tax - a clear sign that the killing fields of Brian^2+Mary Ireland Inc are now starting to get covered with the bloodied bodies of Irish companies. Well done, Brians! More tax increases is what we need next to finish off the private economy.

On the net, and I will be redoing the whole balance sheet over the weekend, tax take is now dangerously close to dipping below €30bn for 2009 as a whole. Can't say much about the exact deficit for now - until mini-Budget, but in terms of DofF forecast from January 2009 that would imply a current account deficit of €16bn and with the capital account deficit of over €6bn we are now in the territory of the combined General Gov deficit of over €22bn or almost 13% of GDP. Well done, Brians! Now is the time to raise more taxes - it has been working for the two of you so well to date.

Debt servicing costs are double year on year to cool €298mln and fees to our heroic Santa's Lille Helpers of the primary placement brokers are more than double too. Well done, Brians! Now is the time to raise some additional taxes - piling on national debt is just so much better than taking a knife to your spending plans.

Only motoring fines and national lottery fund are showing gains.

But the real scandal is on the spending side of things:

• Agriculture & Food up from €186mln in 2008 to €350mln in 2009;
• Community, Rural and Gaeltacht Waste (oops, Affairs, that is) up from €109.2mln in 2008 to €119.6mln in 2009. Last year, taking his high office, Brian Cowen has promised to put Gaelic Language at the heart of Gov policies. He is now clearly doing the job, so well done Brian - the Gaelic knowledge economy is just around the corner to save us all;
• Environment, Heritage & Loc Gov up from €596.1mln to €682.5mln - the dolphins and rare boffins (in the DofF and other Gov Buildings, I presume) are grateful to you, Brian.
• Total Voted Exp is up from €11.14bn to €11.82bn - an increase of 6.1% on 2008. Time to hike taxes on ordinary families, Brians, we've got expenses to cover!

We did find money, at this time of a plenty to contribute to the Carbon Fund Act 2007 - some €18.45mln. And non-voted salaries, pensions and allowances were up. Oirieachtas Commissions costs shot through the roof increasing by 16.5%.
The Exchequer deficit now stands at €3.72bn - up from €354mln in 2008 or a whooooping 951% up! Time to raise taxes, Brians, for this is what our academic economists and the ESRI are telling you to do, and since you are paying them a pretty penny, they gotta know, don't they?

Few more points: Pre-Supplementary Budget Aggregates since Budget 2009 also published by the DofF provide the following inputs into the mini-Budget
Of import is a more realistic assessment of the economy at -6.75% for GDP. However, this is still excessively optimistic, setting the stage for a small further reduction in the mini-Budget next week. I expect DofF to come down to -7% growth in GDP. Again, in my view, a -8.0-8.5% figure is probably closer to what will happen. On the Gen Gov Deficit, -12.75% is well in excess of my own earlier estimates of 11.76% (here). But my forecast has built in assumption that we actually save on target for 2009. Thus, I am probably closer now to the mini-Budget outcome than to what DofF is doing here. Tax revenue of €34bn is now looking optimistic. It is likely that tax situation going to deteriorate further as returns lag receipts across many main tax heads.

"The savings agreed by Government on February 3, together with other minor estimating adjustments, lead to further savings in 2009 of €437 million in Gross Voted Current expenditure and €300 million in Capital. In Net terms, which reflects the savings from the pension-related levy, the Current reduction is €1.45 billion. These reductions are offset by additional expenditure pressures of €1,387 million of arising from the further deterioration in the labour market. Receipts from the Health Levy are also been forecast to fall by €160 million in this context. Taken together, these factors lead to a pre-Supplementary Budget figure for Gross Voted Total
expenditure of €65.4 million [sic] (a 4.8% year-on-year increase), or €49.4 million [sic] in Net terms (a 0.2% increase). This corresponding increases for Gross Current and Net Current expenditure are 7.5% and 2.7% respectively."

This is a really telling paragraph. It shows that even having pre-committed itself to €2bn in savings this year as far back as July 2008 and having repeated this target on many public occasions, the Government is still incapable of delivering this much. In the mean time, the spending continues to rise, rapidly.