11/7/2013: Assessing 2 years of Irish economic performance since Q1 2011

Currently, the Dail is debating around the clock one of the most important pieces of legislation: The Protection of Life During Pregnancy Bill 2013 (see my post on the core ethical issue involved in the actual vote here: http://trueeconomics.blogspot.ie/2013/07/972013-voting-on-conscience-vs-voting.html). The Government is unhappy with the possibility that it might lose several very high profile TDs on the issue.

In the background, Irish economy is appearing to gather more and more supporters of the thesis that things are getting better under the stewardship of the Government. Are they? Let's take a look at the Q1 2013 data from the Quarterly National Accounts.

Quick guide: I take four metrics of economic health: GDP, GNP (which is GDP less net transfers of profits and earnings abroad), Final Demand (private and public investment and spending on goods and services) and Total Demand (Final Demand less changes in stocks of inventories). To be more precise: Final Demand = Personal Consumption of Goods and Services + Net Expenditure by Central & Local Government on Current Goods & Services + Gross Domestic Fixed Capital Formation).

Also, consider the above variables in terms of current prices (including inflation effects) and in constant prices (controlling for inflation), as well as seasonally-adjusted and not seasonally-adjusted.

Here are three summary tables. Red marks cases of decline (in percentage terms) in excess of 1%, Green marks cases of increase in excess of 1%.

Remember - these are 2 years cumulated changes.

First GDP and GNP not seasonally-adjusted:

Second GDP and GNP seasonally-adjusted:

 Last, Final and Total Demand:

In the first two tables, I also showed the changes in GNP that accrue to changes in MNCs decisions to either retain earnings or expatriate them (Factor Payments). Whenever GDP is down and GNP is up, this effect is solely due to decline in transfers by MNCs of profits abroad or higher returns from Irish investments abroad repatriated into Ireland or both.

Another quick explanation: I reference both Q1 2011 to Q1 2013 change, as the Government officially took over the economy at the end of Q1 2011. But since economic activity is 'sticky' (and does not immediately respond to changes in Government policies) and since any Government requires some transition to power, we can treat both Q1 and Q2 2011 as basically being determined by the previous Government. Hence I am also showing comparatives for Q1 2013 relative to Q1-Q2 2011 average.

Draw your own conclusions.

19/02/2011: Paying down our debt out of Exports

Let's do a quick exercise. Suppose we take our current account - defined as the sum of the balance of trade (exports minus imports of goods and services), net factor income (such as interest and dividends) and net transfer payments (such as foreign aid and remitted profits). Suppose every year we use the current account balance solely for the purpose of repaying our Government debt. How long will it take us to do so.

Let us start with some notes on methodology.

Our current account is in deficit - since 2000, there was only one year - 2003 - when we had a surplus in the current account (charts below), which really means our external trade was not enough to generate a surplus to the economy. So let us assume that the we can reverse this 180 degrees and that the deficits posted in 2009-2010, plus those projected by the IMF to occur in 2011-2015 are all diverted to pay our Government debt.
Notice - this is impossibly optimistic, as our Government does not own current account, but suppose, for the sake of this exercise that it can fully capture net profits transfers abroad and cut the foreign aid to zero, plus divert all interest payments on own debt and private external debts to repayment of the principal on own debt.

Secondly, assume that only Government debt is taken into the account (in other words, we assume away Nama debt, some of the quasi-sovereign financing of the banks resolutions, and all and any potential future banks and spending demands in excess of the EU/IMF assumptions, as well as all future bonds redemptions - the latter assumed to have a zero net effect at roll-over, so no added costs, no higher interest rates, etc).

In other words, here is what we are paying down in this exercise:

Now, suppose we take current account balances for 2009-2015 (projected by IMF) as the starting point. The reason for this choice of years is that they omit fall-off in our exports in 2008 and also the bubble years of 2004-2007 when our current account imbalances were absurdly large due to excessive outward investment and consumption of imports.

Next, assume:

• We deal with present value of the debts
  
• We apply an average 3% annual growth rate to repayments we make (current account transfers grow 3% on average per annum)
  
• Currency effects are removed (so we use flat USD1.33/Euro FX rate throughout)

So here is the result:
And the conclusion is: if Ireland diverts ALL of its net current account (2009-2015 IMF projections taken at 3% average growth rate forward) to pay down Gov debt, it will take us until 2064 to reach 2007 level of official (ex-Nama+banks) Government debt.

Note: incidentally - the charts tell couple of interesting side-points based on our historical debt path:

The Government told us that we are not in the 1980s - as we had much higher levels of debt then. Ok, the figure above shows that as of 2010 - we ARE back in the 1980s: 2011 debt will equal as a share of GDP that attained in 1989. According to IMF database, our debt has peaked at 109.241% of GDP back in 1987. It is projected to be 104.7% in 2013. Not that much off the peak.

But, of course, in the 1980s there was no quasi-Governmental debt - the debt of Nama, some of the banks recapitalization measures and the debts that still might arise post-2013 from the Government banks Guarantees and resolution schemes. If we add Nama's 31bn worth of debt issued, this alone will push our 2011 debt levels to 121.8% of GDP and factoring in coupon rate on these, but 2015 our Official Gov Debt + Nama will stand (using IMF projections again) at 124.8% of GDP - well in excess of the peak 1980s levels of indebtedness.

Secondly, despite what any of us might think about the Celtic Tiger years, the Government never paid down the old debt, it simply was deflated by rising GDP. Which suggests that even during the Celtic Tiger boom years - our exporting economy was NOT capable of paying down actual debt levels.

Economics 2/11/10: Spot the odd ones out

As of yesterday's close, implied probability of default based on CDS spreads and spreads themselves are:
Source: CMA.

Economics 30/05/2010: A gargantuan task ahead

As the Government continues to insist that the worst is over for Ireland Inc, let us consider some headline numbers on the structure of our public spending.

The figures reported below refer to 2008 comparisons, so they omit most of the horrific fall-out from the current economic crisis. as such, these comparisons relate more to the structural imbalances our state is running, not to the recessionary effects. This is worth keeping in mind, for it means that the differences between Ireland and other states reported below, as well as the adjustments required for us to reach sustainable long term equilibrium on spending and taxation sides will have to be put in place no matter what happens to our economy in years to come. It is also worth keeping in mind because the figures reported below underestimate the extent of our post-2008 imbalances compared to other countries that had experienced much less pronounced crisis over 2009.

All data is taken from the publicly available sources - the IMF and CSO - so the Government and our tax-and-spend crowd of Unions-led economists are fully aware of these. Plausible deniability does not apply, therefore, when it comes to our Government pronouncements about its policies and the current position of the Irish economy on international competitiveness scale.

Chart above plots Ireland's position vis-a-vis its peers in the developed world in terms of the overall size of the primary (non-capital) share of public expenditure in the economy. Two facts worth highlighting here:

• Ireland's Government spending as a share of our real economic income (GNP) is the second highest of all countries in the group, and is well in excess of the average for small open market economies (SOME). It is in excess of Germany (Berlin) and well ahead of the US (Boston).
  
• By this metric, Ireland simply does not qualify as a 'market' economy, as domestic private sector accounts here for less than 47% of GNP! In the USSR of the 1980's, private economy (black market) accounted for around 40% of the total GNP. Get the comparison?

Chart above shows that Irish public sector is clearly one of the most lavishly paid one in the entire developed world. In fact, our public sector wages and earnings swallow over 14.4% of our national income, making Ireland's PS workers the 5th highest paid (on aggregate) in the advanced world. The gap between Irish public sector earnings bill and that for the average SOME is a massive 4.47% of our GNP. Roughly speaking Irish public sector wages bill contains a roughly speaking 48% premium relative to the PS counterparts in similar economies around the world. Clearly, even the reductions in overall take home pay imposed on PS in Budgets 2009-2010 has not erased this premium, especially when one recognizes that since 2008 our GNP has contracted almost in line with the decline in PS pay.

Chart above maps Ireland relative to the US (Boston) and Germany (Berlin) to show just how absurd the whole notion of Ireland Inc being positioned between Boston and Berlin is in the real world. In reality, just one parameter - Social Benefits as a share of GDP/GNP - marks our relative position as being between Boston and Berlin. In every other parameter, we are a basket case of excessive public spending and taxation relative to both the US and Germany.

With the above data in mind, what adjustments in the budgetary positions will be required to bring Ireland into the exact position of being between US and Germany to reflect our stated competitive benefit of being an economy that can facilitate trade and investment flows between the two giants - the EU and US?
To restore our competitive balance we need:

• A cut of €23 billion in gross annual primary spending by the state (current expenditure) - some 14.7% of our GNP. Not €3bn as Brian Lenihan is doing, or €3.5bn as An Bord Snip Nua was suggesting. A whooping €23 billion, folks!
• The cut above cannot come from the capital budget side - where most of the cuts so far took place. It has to be cut from the current expenditure. The reason for this is simple - capital spending is one-off item of expenditure and it is associated, in theory, with a net positive return on investment. Current spending is permanent and yields no financial return.
  
• The cuts must include at the very least a €9.3bn reduction in the wages and pensions bill in the public sector (5.9% of GNP or almost 44% cut in the total PS wages bill, achievable through both reductions in numbers employed and wages paid and pensions benefits entitlements).
• Social benefits, at least in the long run, actually are in line with us being smack between Boston and Berlin, so no adjustment is needed here in the short term (given further deterioration in the fiscal position in Ireland since 2008, I would actually recommend a temporary cut here. Also, longer term reforms, to change the structure of welfare benefits and state pensions must be enacted, but for the reasons different from the budgetary considerations).
• Instead of raising tax revenue, Irish Government should engage in a dramatic reduction of tax burden on the economy. Generally, total tax take in the Irish economy exceeds the average Boston-Berlin position by 6.5% of GNP, requiring a reduction in overall tax burden of €10.3bn on 2008 numbers.
• This reduction in the tax burden should include a cut in personal income tax, CGT and personal gains/profits taxes of 2.1% of GNP or €3.3bn.

There is absolutely no ground for our Government and policy leaders' claims that Ireland is strongly positioned between the low(er) tax US and high(er) tax Germany as a competitive destination for exports and investment arbitrage. In fact, due to the Government-own policies, fiscal and tax imbalances created in this economy mean that we are, at a macroeconomic level, grossly uncompetitive relative to

• both the EU and the US,
  
• as well as relative to our main competitors world wide - the small open market economies.

Economics 17/05/2010: Jose Maria Aznar's proposals that ireland should adopt

When Spain beats you in a race of setting out pro-market reforms, can you still claim you are open for business? Well, that's a conundrum Ireland is likely to face. For 'all talk, no action' Messrs Cowen & Lenihan, here's a proposal from Spain's José Marià Aznar - a rather sensible list of reforms Spain needs to adopt in the next few years, published in FT:

1. Large-scale labour reform to transform collective bargaining (equivalent to killing off our own Social Partnership to which Messrs Cowen & Lenihan seem to be totally wedded), deregulate labour recruitment services (which is now out of reach for Ireland since Messrs Cowen & Lenihan subscribed to the Croke Park deal) and, lower taxes on employment (which is, of course, an impossibility for Ireland as we continue destroying our domestic and exporting capacity by saddling workers with the bills for banks and public sector rescues) and encourage the unemployed into work (a possible by-product of the next wave of public spending cuts, but not a concerted effort that pairs both negative and positive incentives and access to training and entrepreneurship resources for the unemployed);
2. a new energy policy to avoid the shutdown of nuclear plants, deregulate markets and cut subsidies on inefficient renewable energy sources (which, of course, would run counter to our Government's insistence on preserving ESB's market power and building windmills to escape modernity. Do note that our refusal to properly deregulate energy distribution rests on the Government continued protection of the ESB trade unions' interests in maintaining their ownership of the national grid);
   
3. a bank shake-up, including authorising the investment of private capital in savings banks (yeah, right, as if we really have a chance of reforming our banks with Nama assuring they will remain zombie lenders for a good part of the next 10 years);
   
4. sweeping reforms to reduce the size of regional administrations and create a viable and efficient state (again, we have no reform agenda on local authorities, and no reform agenda on creating any meaningful efficiency gains in the public services);
   
5. changes to the state pension system to guarantee its mid-term and long-term sustainability (in Ireland's case, this is equivalent to the earlier Government promise to... create a new compulsory quasi-tax on our incomes that would underpin state-controlled, privately supplied pension system, while maintaining the status quo of inefficient, and politically manipulated social security);
   
6. deregulation to increase competition, including reforms to the welfare state and further privatisation of public companies (Messr Cowen & Lenihan have not got this far, and are unlikely to get there in the future. Instead of stimulating private growth by opening state-controlled markets to competition and breaking up Government near-monopolies, our Government is keen on actually providing more cash for semi-states to engage in 'investment' which normally - DAA, anyone, or ESB - yields no real returns to the economy, but always acts to increase market power of these semi-states);
   
7. tax reform to foster competitiveness (again, not a peep on this one from Messrs Cowen & Lenihan. Instead of tax reforms, we have Commission on Taxation report and a promise of pushing tax rates even higher in the next couple of years. Take a wild guess which 'programme' will this Government pursue).
   

That's right, folks. Our ex-politicians now line up to take state jobs at the insolvent banks. Spain's ex-leaders are trying to design new policies. Any idea who's got a better shot at a recovery?

Economics 27/04/2010: Greece & Ireland - tied by the risk of contagion

As the Greek, Portuguese, Italian and Irish bonds are melting in the markets' gaze at the countries fundamentals, one quick reference number is worth repeating. Per Chapter 1 of the latest Global Financial Stability Report from the IMF (linked here), the overall risk of contagion from a systemic crisis in one Euro area country to another (as measured by the percentage point contribution to total distress probability) for Greece was:

Contagion from Greece to:
October 2008-March 2009

• Portugal = 9.8%
  
• Italy = 9.9%
  
• Ireland = 12.5% (highest of all Euro area countries)
  
• Spain = 9.0% (in line with the Euro area total)
  
• Euro area as a whole = 8.8%

October 2009-February 2010

• Portugal = 23.6% (in line with the Euro area total) - up 13.8 pps
  
• Italy = 24.2% - up 14.3pps
  
• Ireland = 31.3% (highest of all Euro area countries) - up 18.8 pps
  
• Spain = 23.9% (in line with the Euro area total) - up 14.9 pps
  
• Euro area as a whole = 21.4% - up 12.6 pps
  

So spot the odd one here. As the crisis evolved, despite our Government's talk about 'Ireland turning the corner' and 'doing the right thing', our economy became actually closer and closer linked to Greece. More so than any other member of the PIIGS club. Some achievement that is...

Now, spot the similarity in responses to the crisis in Greece (here) and Ireland (here) and tell me - are we really that much better off in terms of macro fundamentals than Greece, especially given that Greek policymakers are at the very least not held hostage to a Social Partnership in which the likes of Tasc-informed Unions have a direct say?

Economics 12/10/2009: Green Party 'Programme' - a bark without a bite?

First Update: see second section below

It is time now to start chipping at the latest Programme for Government published this weekend.

First, the Programme was clearly written in haste. Forget its economic thesis that fails in its entirety to recognise the scale of the crisis we face. It is simply written in haste: page 1, just above the signatures of Mr Cowen and Mr Gormley reads "It was negotiated prior to the worst to the worst global downtown (sic) since the 1930s."

Now to the core of the 'Programme' itself.

Introduction: "The time for crisis management is over. Now we must set about re-creating the Republic. This Renewed Programme sets out the Government’s vision of national renewal and economic."

This statement is truly extraordinary for several reasons.

Firstly, neither our fiscal nor financial nor economic data show that 'the time for crisis management is over'. If anything, given that this Government is appealing to the EU to extend its holiday from the Stability and Growth Pact (SGP) compliance beyond 2013, the country is yet to face the stage of the real 'crisis management'. GP leadership is simply in the state of an even deeper denial than their FF colleagues.

In fact, the Green Party leaders are now firmly in the denial of economic reality as outlined by

• Jean-Claude Trichet last week when he said that the crisis is far from over,
  
• the IMF as outlined in their World Economic Outlook and GFSR reports from two weeks ago where the Fund economists warned of the upcoming second wave of financial, fiscal and economic crises;
• the OECD which late last month has warned that the Eurozone economies are facing renewed pressures on exports and growth;
• the Bank for International Settlements which, also last month, warned that more banking sector woes are inevitable for the Eurzone (to which we, of course, belong and of which we represent the sickest member state);
• the ESRI which forecasted prolonged recession through 2010 and anaemic recovery through 2013.
  

Second, a promise of 're-creating the Republic' is not a matter for the competencies of the Government (it is rather a matter of an entirely separate mandate which has to be explicitly delivered to the Government and cannot be assumed by the bi-laterally negotiated Programme for Government).

Third, the Programme must have far reaching, wide ranging economic, social and political reforms in order to live up to the promise of 're-creating the Republic'. As all analysis to date shows, it fails to do so, qualifying more as an interim shopping list for a minority partner in an unstable and unpopular coalition than an ambitious 're-creation of the Republic'.

I am amazed that the above-average educated Green voters were actually willing participants to this ridiculous posturing by the party leadership that also reaches beyond their democratic and, potentially, legal mandate. Can the premise that the GP-FF deal attempts to 're-create the Republic' be challenged legally, one wonders? If the claim is a statement of true intent, the Programme is a constitutional challenge to the status-quo. If it cannot be, then it is simply a case of grandiose over-hype - a crime of sick marketing over-reach, perhaps. Let the GP leaders make their choice...

"Any wrongdoing will be uncovered by the institutions of the state and brought to its logical conclusion. We cannot accept a return to the old ways and we will simply not allow this to happen." I would like to point out, to the GP leadership two facts. First, it was not the institutions of the state that unearthed all recent expenses scandals and all past over-spending scandals, the white elephants and corruption scandals. Instead, it was private sector media that did their jobs. Second, there is absolutely nothing neither in the Programme, nor in the conduct of the GP leadership to date that indicates the GP position of a watchdog over ethics and legality of Irish economic and political elites conduct. Nothing whatsoever. What the GP had, so far, contributed to the 'governance' or the banks, for example is a sweetly irrelevant promise to replace the boards of the banks within 2 years of Nama initiation. Given that countries change their entire governments within a span of several months post election, this is a puzzling anaemic 'watchdog' effort by the GP.

"The credit crisis hit more than our banking system. It is hurting homeowners and those in arrears. Government will support families having difficulties with their mortgage payments." Again, a bark that is not matched by any bite whatsoever in the Programme. There are no envisioned supports for the defaulting homeowners, no measures to address the issue of real debt rising in light of negative equity and tax increases. If anything, the Government (and the Programme re-enforces this effect) so far has been at the forefront of increasing financial strains on homeowners.

" Moving to a low-carbon economy, we will take advantage of our own natural resources in energy, forestry and food. " Another statement that is not grounded in reality. For example, Ireland is the least forested country in Europe and as such has no natural resources in this area. We have one of the most expensive food production sectors in the OECD, reliant more than any other OECD country on subsidies for agriculture. Our energy sector is at best can be described as a failure. The GP has neither the capacity to recognize these realities, nor to address them.


Update 1: Economic Policies (Section 2)

Economic policies, section 2: this and section 3 following it are the rehashing of the already woefully outdated and thin on reality December 2008 Smart Economy platform.

“We will introduce a new national performance indicator… formulated … with other quality of life measurements”. In other words, given that we already have non-descriptive stats, such as GDP-based measures that do not reflect our true income, the GP is offering more smoke to cover up the real rate of economic decay in this country. This fits well with their claims that the party stands for more transparency. For example, the new indicator can simply induce an artificial rise in the standard of living by assuming that our public sector spending (all of it, including wasteful pay and pensions practices) yields significantly higher multiplier than 1.

Even more worrisome in this is the possibility that such a ‘cover-up and pretend all is going on swimmingly’ approach to statistical valuations can be used to ensure that Nama yields a ‘success’ in some future. Thus, the new Programme for Government has started the process of politicization of Nama - the process that the Government was explicitly trying to avoid.

What is even more egregious in the GP policy platform is that it cuts across Brian Lenihan's (unbelievable, nonetheless explicit) promise of no new taxes in Budget 2010. The entire Programme's outlook on public finances is more resembling of the 2004 Social Spending Boost programme rather than anything even theoretically close to what will have to be done to return Ireland to some sort of fiscal solvency.

While re-affirming the Government commitment to bring deficit to 3% of GDP levels by 2013, the Programme for Government envisions more than Euro1.5-2bn annually in new spending and not a single cut to the existent spending. This would imply that reaching the SGP target by 2013 will require freezing all expenditure at the current level and yielding real economic growth of 4.21% per annum on average in real terms over the next 3 years. This is simply an unrealistic assumption of highest order.

"The future of the economy lies in exports... we must drive down our costs..." It is amazing that the focus on exports does not really figure whatsoever in the entire programme, apart from a sickly Euro100mln mixed-used (not exclusive to exports) support fund (see below) - which was already announced back in the beginning of 2009. If the future of our economy does lie with exports, why is the entire Green Party platform focusing on domestic energy independence and broadband and knowledge economy development?

As far as driving down costs - the GP does absolutely nothing (other than very generalist aspirations for productivity improvements in the public sector) to reduce the greatest historical drivers of inflation in the country - public services and state-monopolized or controlled sectors.

Tax Reform section explicitly ignores the need to grow the real economy, focusing exclusively on 'Green and Smart Economy', thus betraying deeply rooted inability of the authors to understand the issues of economic growth.

Serious contradictions emerge in the treatment of income tax policies. The first bullet point claims that the Programme aims to "Abolish the employee PRSI ceiling in parallel with the reduction of the temporary income levy in order to remove the inequity whereby higher paid employees pay proportionately less of their income for social insurance than low paid employees." Several things are simply out of order in this statement:

1. PRSI is paid by self-employed and sole proprietors as well as PAYE workers, yet the former have no access to PRSI-financed benefits. What inequity is the Green Party platform removing here?
2. PRSI and Income Tax are largely paid in this country by those with incomes in excess of 70,000 per annum. Given that some 80% plus of our tax revenue comes from these employees and business owners, what inequity is the Green Party aiming to remove by levelling even higher tax on them?
3. The statement explicitly states that the income levy is viewed by the Green Party as temporary. Will abolition of PRSI ceiling be temporary as well in line with income levy? Not a word on this in the document, implying that the GP wants to replace a temporary levy with a permanent tax increase which will disproportionately adversely impact those on wages in excess of 52,000 per annum and who are already bearing the disproportionately higher tax bill and many of whom have not even a theoretical chance of benefiting from PRSI-financed services.
   

The last point is important, as in the second bullet point of the section, the document states: "simplification and rationalisation of the various levies into the income tax system beginning in 2010". Now, once again, levies were set by the Budget 2009 explicitly as a temporary measure. The Government at the time advocated this approach precisely because they did not want to raise taxes permanently. Now, the Green Party is pushing for a permanent increase in taxation.

The third bullet point is simply an example of 'redistributive' quasi-socialist policies that the Green Party leaders are pursuing across their platform. Imagine two individuals - one earning 50,000 per annum, another 30,000 per annum. If the first person saves 10,000 in a pension fund, her tax reduction will amount to the same 3,000 as that of the second person. Net marginal tax paid by each person will thus be: +2,000 for the first saver and -1,200 for the second one. In effect, the first person will subsidise the second person's pension and consumption to the tune of 2,200 (assuming both share equally in the benefits of general tax revenue). Why? What does this have to do with any notion of fairness? Have Messrs Boyle, Ryan and Gormley think any of this through?

Taxation for sustainable development is perhaps the only thought through section of the entire document. However, on Business Taxes and Local Taxes the GP is once again goes flat.

Overall, GP's platform on economic policies is un-ambitious, unimaginative, poorly thought through and outright destructive to the real economy.


Stand by for further detailed analysis of the Programme