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.

Economics 02/03/2010: Exchequer (still) Singing Blues

Exchequer returns are in for February (DON'T PANIC sign on the cover) - and things are going just as poorly as was predicted. Well, slightly worse, actually. Few charts to illustrate the trends:

Monthly receipts and expenditures are showing divergent trends. While receipts are showing some improvement relative to 12 months ago, expenditure is showing deterioration. Worse - January 2010 improvement on January 2009 is now gone and February numbers have fallen below long run trend line.

Similar trend on receipts above, but now also adding tax receipts - a relatively hefty deterioration in seasonally adjusted terms (January 2009 to 2010 and February 2009 to 2010 comparatives).

Total expenditure is improving. But exchequer surplus is deteriorating.

What's going on?

At €1.66 billion, receipts in the month were a modest €64 million or 1.3% behind DofF budget forecast. On annualized basis this means something to the tune of €455 million shortfall… small stuff… but.

February income taxes are tanking – down 11.8% on 2009 (-€246 million).

But wait, this was actually the second best performing tax head of all… Table below illustrates

Now, February, seasonally is a low tax revenue month – accounting for around 5% of annual revenue. But this time around, February total tax receipts were down 17.8% on 2009. In two months of the year, the same figure is 17.7% - not much of a change… certainly not enough to say things are improving. Oh, sorry, no – they are actually deteriorating!

How come DofF can be happy about these dismal results? Well, for the first time in over 2 years of this crisis, DofF estimates are sticking! Even if only for two months so far. Budgetary projections assume tax revenue of €31.05bn in 2010 or 6.02% below 2009 figure. So far, seasonally-speaking, we have seen roughly 15% of annual tax revenue coming in at roughly speaking 18% below 2009. So should the trend continue flat from here on, we have lost 2.7% or almost half of the allotted annual deterioration! Slightly better than Nama spending its entire legal costs allowance for the year in two months of work, but still... not a record to be proud of.

And on the spending side things are a bit bleak and bleaker: most of the spending decline to date has been on the capital side. In fact, capital expenditure – remember, Brian Cowen and Brian Lenihan have both claimed in 2008 that capital spending will be our stimulus – is down 25% in February (annual terms). In January, this decline was 21%, so the drying up of the ‘stimulus’ is accelerating.

Of course, it is current expenditure where most of fiscal waste rests and where the entire structural deficit is hidden. So one would assume that here, there should be some sizeable cuts. In January 2010, in order to, presumably, impress ‘international markets’, DofF cut current spending by 12% in year-on-year terms. Happy times? Not really – in February this figure eased back to 8%. Even at a half this rate of a ‘forward retreat’, we will end 2010 with spending well in excess of 2009 total.

But, so far, through February 2010 total savings on current spending side add up to €567mln. Now, our structural deficit is roughly 8-9 percent after the Budget 2010 measures take place. Which means we need to cut roughly €5.5 billion in annual spending. At the rate of current cut-backs we are achieving €3.4 billion, under very optimistic assumptions that the current rate of cutbacks will be sustained.

Economics 05/01/2010: Exchequer tale of excesses amidst the hardship

New Exchequer figures clearly show that the crisis is not over!

Before the updated charts, from the first reading of the figures, it is patently obvious that

• while the expenditure side of the Exchequer balance remains barely on target - only 0.5% below the supplementary Budget 2009 estimates (with current expenditure running 0.6% below April 2009 budgeted levels, while capital spending running 0.3% ahead);
• the receipts side continues downward trend: despite an improvement in the shortfall registered in November 2009, December figures still represent the second worst month in 2009.

Further per more detailed breakdown, on the current expenditure side, Community, Rural & Gaeltacht (+0.3% relative to target), Finance (+3.3% on target), and Justice (+1.5% on target) were the three non-social welfare or health-related departments that managed to overspend their targets.

Now, charts to illustrate:
Relative to April 2009 targets, the chart above shows the shortfalls for receipts by main headings. Corporation tax is ahead the forecast - say thank you to MNCs booking more transfer pricing through Ireland this year to reduce their tax liabilities - but this position is still below 5% at the year end.

CGT is shorting the target again after improvement in November. Capital acquisition tax is down for the second month running. Customs show very shallow upturn - most likely due to motor imports flowing to restock for New Year and some replenishment of supplies on alcohol, tobacco and food for Christmas season end.

Year-on-year changes: corpo tax has fallen precipitously and is staying relatively flat now. Total tax is barely up relative to 2008 dynamics, but still below 2008 levels by double digit percentage - it was down 20.8% in November and now improved to down to 19% in December - in yoy terms - the second worst performance in the H2 2009 (it was down massive 21% in May).
In addition to the above trends, VAT down 20.60% yoy in December - an improvement on -20.80% performance in November and the sixth consecutive month of improvements , Income tax flat relative to November - the latter reflecting the lack of end-of-year bonuses. The former shows extremely weak retail sales dynamic. Stamps & CGT - two investment related taxes are obviously improved. After a 26-30% rallies in S&P, European, UK and Irish stock markets - any wonder?


Next, Exchequer deficit - still wider than annual average, though slightly better than in November. The gap between end-2008 borrowing position and today is €6bn - more Bonds! and Pints! for Q1 2010, then.
Deficit in 2009 relative to 2008:Not a pretty sight - December marks second worst month of 2009 in terms of deficit performance compared to 2008. The big question in this picture is whether this does mark some sort of a return to falling deficits? Well, not really - look at the picture above the last one. There was a seasonal improvement in November - due to the inflow of self-employment receipts for 2008 and estimates for 2009, but it was much weaker in 2009 than in 2008 in part due to the exhaustion of the severance packages, in part due to further jobs destruction for contractors. Apart from this, in October 2009 cumulative deficit was €11.7 billion greater than that registered in October 2008. In December 2009, the same figure was €11.9 billion. I wouldn't call this an improvement or an upturn.

Now, expenditure v receipts dynamics for 2009 and 2008:Pretty obvious stuff here. Vertical distance between 2 solid lines is deficit in 2009, vertical distance between two dashed lines is 2008 deficit. Any improvement would require for the solid lines to move closer to dashed ones.

Slight catching up with 2008 in terms of spending in the last month of the year is still not enough to bring spending down to 2008 level. All in (capital and current spending added), the Exchequer burned through an impressive €60 billion in 2009 - up from hardly insignificant €55.7 billion in 2008. But on receipts side, no improvement is visible. Actually matters are getting worse, with total 2009 receipts (capital and current) adding to less than €35.3bn while 2008 receipts came in at €43.1 billion.

Total tax receipts are now at €33.4 billion. Now, that is - oh miracle! - bang on with Budget 2010 estimate. DofF also predicted a General Gov Balance of €25.261 billion and it came in at €24.641 billion, or €620 million short of the 'forecast'.

Are we supposed to be impressed? Not really - these 'forecasts' were made less than a month ahead of the Christmas break. When one looks back -

• in April 2009DofF forecast a deficit of €20.35 billion. My forecast was €23.35-24.225 billion (see here)
• in February 2009 (here) DofF projected "budgeted expenditure to be in the region of €49bn and receipts in the region of €37.7bn" and deficit of €17.98bn. My forecast then suggested that exchequer tax receipts will add up to €33.6bn for 2009 for a General Gov deficit of €23bn.

Now, I do not have a massive forecasting department staffed with highly paid civil servants and tea/coffee/biscuits deliveries twice daily. I am not even being paid to do any forecasting at all. Per DofF own staffing review, the forecasting powers unleashed by the department on the economy are costing taxpayers a mint.

Their and my error margins for 2009 Deficit estimates are:

• Dof F: 17.4% miss in April and 27.03% miss in February;
  
• my: 1.69% miss in April and 6.65% miss in February.

But you do not have to be an Einstein to see that things are not improving, folks. The is no pulse and the patient has flat-lined. Full stop. Have April Budget been successful in delivering stabilisation of the budgetary dynamic? Not really. Stabilization would imply that we would trend along with the 2008 dynamics of the deficit starting with May 2009. Chart below shows this not to be the case:
Overall, some observers have argued that there is a substantial improvement on Budget 2010 targets. Well, of course there was. The problem here is that one cannot willingly adopt targets that suit one argument. April 2009 set the benchmarks to deliver and by these benchmarks, 2009 turned out to be worse than projected on revenue side. 3.9% worse or cool €1.357 billion - more than double the net savings announced from public sector pay adjustments in Budget 2010.


PS: Amidst all this talk from banks and brokerage economists about 'improving' Exchequer outlook based on 'too pessimistic DofF projections', my fear is that the Government is being prepped by the DofF (via severe overshooting in the Budget 2010 forecasts) to claw back on some of the cuts planned for 2011. In other words, the DofF might be readying to make a call in the beginning of H2 2010 to cull the cuts if returns shows 'improvements' on its own excessively pessimistic forecast targets. Then again, they might be not pessimistic enough...

Economics 03/11/2009: Exchequer drama continues

So Exchequer returns for October are in. As usual, charts illustrate:

The miracle of 'stabilising revenues' first. Per above chart, stabilisation, across some categories, has been achieved simply by choosing an unrealistically conservative target for October revenue. The reasons for this conservatism are a matter of guess, but:

• DofF undoubtedly knew that there will be gains in revenue in October due to seasonality, yet they opted to neglect these;
• There was, most likely, an expectation that improved October returns relative to target will provide Government with some added cushion for the Budget day; yet
• Because receipts have deteriorated so far throughout the year, the DofF 'piggy bank' lowering of the target for October was not enough to generate a surplus over the target.

The Grand Plan backfired:

As charts above highlights, tax heads are performing worse and worse relative to 2008 across the board. Worryingly - Corpo taxes and Income taxes are tanking once again and this is before self-assessed tax forms poured in.

Hence, measured in terms of their respective contributions to meeting the tax profile set out in April 2009 Budget, we are now down to just two tax heads with net positive contribution - Corpo (which will see its positive effect eroded as timing changes imply that Corporation Returns are now all but exhausted for the rest of this year) and a tiny positive contribution from Excise that is about to turn negative. In short, it looks like by November all tax heads will be underperforming targets - which will be a real feat of forecasting, then. 

Subsequently, no one should be surprised by the fact that Exchequer deficit is widening on 2008 figure. Borrowing is once again diverging beyond 2008 levels (chart above). And the gap between total receipts and total expenditure is widening (chart below)

Couple more charts: one below showing just how conservative was October target and how this has led to the so-called 'improvement' in on-target performance.

And the following chart shows that the data does not support an assertion that April Budget was successful in arresting or stabilising the expansion of our deficit:

So much, then, for all the brave proclamations about 'making necessary adjustments' and 'taking the right medicine'...

Economics 03/10/2009: Exchequer receipts - bad news redux

Another month, another set of Exchequer returns and another prediction of mine confirmed: Exchequer revenue is not stabilizing. A second wave of downgrades for Income Tax and VAT, as well as the adverse timing effects on Corpo Tax are now appearing.

This time around, the prediction was not only made on this blog (here), but was also elaborated in my Business & Finance magazine column. A combination of poor forecasting (overestimating the extent of seasonality on tax revenue in August, while underestimating the impact of seasonality on other months revenue) and of a naïve belief that things can’t get much worse from April 2009 Supplementary Budget position are now at play.

In other words, it now appears that summer months’ targets were seasonally adjusted in a simplistic linear fashion. August out-performance by actual returns looks like a DofF failure to see that in a recession more people will be taking forced ‘time-off’ in summer months and that this can boost, temporarily, spending. The DofF also dramatically underestimated the extent of forward payment of corporate taxes, which automatically means that they overestimated corporate revenue expected in the future months.

During the boom, underestimated revenue projections by DofF were routine. Nay, they were annual regularity, so much so that the Government came to depend on these ‘windfall revenues’ as a sweetener to various Social Partnership deals – a little annual bonus for cronies. This time, looking to September, the DofF folks grossly underestimated the extent of the recession impact on income and thus the direction of the income tax. Having stabilized and even improved (very slightly) through July on the back of new levies, Income Tax has since taken a dive again. The implicit assumption that ‘things always improve in September might hold at the times of a boom, when July and August mark mass exodus of consumers from Ireland, while September marks return of the school year and back-to-work spending rises. But it will not hold in a recession, where economic activity remains slow in September or even falls (due to falling tourism and recreational spending).
For some inexplicable reasons, DofF set targets for income tax to rise through September at a constant rate of roughly €1bn per month from May on. Given timing of self-employed filings and seasonalities in their incomes (with many taking unpaid ‘holidays’ during the summer), plus given the fact that the numbers of self-employed are rising due to redundancies and high unemployment, such an assumption of relatively static growth in Income Tax revenues is a bit amateurish.

The same factors have a knock on effect on VAT revenues. As income falls, consumption drops. As people get more leisure time, they tend to shop for cheaper goods and might take two trips up North instead of one. All point to the significant possibility that VAT receipts will be losing ground in summer months. Furthermore, the DofF forecasters also missed the effect of unemployment and falling incomes on parent’s willingness to spend vast fortunes of kids ‘back-to-school’ shopping. More importantly, what DofF clearly had no idea about is the psychology of ‘bundled shoppers’ – parents going to buy kids school-related items. If in Celtic Tiger days such a shopping outing was bound to end in a department store where parents can indulge in some compulsive shopping of their own, this year back-to-school shopping took them more likely to Aldi and Lidl, with only compulsive co-purchases taking place relating to the luxury items of, say, a box of chocolate biscuits. Not exactly an item where 21.5% tax rip off means much.
To be fair to DofF folks, they don’t really have much data to go to get an accurate model working. But to assume that July-September 2009 tax receipts will be directly proportionate (at a virtually constant rate) to those in 2008 is, at very best, naïve. Yet, per chart below, this was simply 'assumed'…
Now, September numbers confirmed more than just a shoddy quality of forecasting by the DofF (with an accumulated error for just 5 months-ahead forecast now standing at 3.91% we really do have a shoddy quality forecast here). Instead they show that all tax heads (apart from artificially inflated by timing changes) tax heads are tanking through 2009 relative to the already crisis-ridden 2008. Chart below and table illustrate:
As far as state solvency goes, there is surprising one off change in our borrowings, which have apparently fallen back by some €5.2bn in September. I have no explanation for this, other than potential maturity of some earlier issued bonds or an error in reporting of the figures. Meanwhile the deficit trend continues to diverge from last years in the direction of further widening in fiscal deficit this year. Chart below illustrates.
Income and expenditure gap is also still widening as the chart above shows. But there is something else that can be glimpsed from the data. Remember that in May 2009 this Government started a campaign to assure the markets and domestic taxpayers that their policies are working, that the worst is almost over and that the economy is in the state of having ‘bottomed out’. Chart below shows that even in the Government’s own back yard such statements were completely unjustified. Suppose that May did mark a month of arrested downward slide in this economy. One would expect at the very least that Government finances will not continue deteriorating at a greater rate than before April Budget. The path of fiscal deficit that is traced out by the black arrows in the chart below corresponds to exactly such an assumption.
It is clear that we are not, currently, anywhere near the state of ‘improvement’ in the economy (as far as the Exchequer figures are concerned), or even the ‘bottoming out’ stage. We are still in a relative free-fall stage.

And this clarity is magnified by the expenditure side of the Exchequer balance sheet. Per Ulster Bank research note, the chart below shows the break down of the excessive spending by two main categories:Minister Lenihan is more than willing to cut into Government's only official stimulus to the economy - capital spending. This is a right way forward as much of our capital 'investment' was, in reality, simply masked-up wasteful current expenditure on soft targets like 'training & education', 'social cohesion' etc. But the chart above shows that current spending cuts to date have been extremely shallow. This is not a policy consistent with the claims of rigorous addressing of the deficit - cyclical or structural.
Table above clearly indicates the following facts about our Exchequer's spending side:

1. Capital spending is down significantly, at -13.1% yoy, but not really enough still - cutting capital spending back by 50% would do a better job;
2. Current spending is still rising +0.7% yoy in September (and no, increased social welfare and unemployment payments are not the only story here);
3. Waste on current spending side is still abundant - table shows those articles of reductions where cuts in spending for each department are the deepest. Predominantly, these cuts are on the capital side and not on the current expenditure side;
4. Increased spending on social welfare is now clearly indicating that early job cuts in 2007 are now translating into people signing off unemployment benefits and onto the dole - a move that is likely to lead to a very long-term dependency on social welfare.
   

The verdict from all of this is a simple one - this Government is not doing enough to correct for structural and cyclical fall off in revenue. Tax increases and levies passed in October 2008 and April 2009 are not working. While cuts promised since July 2008 are not forthcoming. We are still on a path to state insolvency.