14/5/2012: De List of Mr Enda

In the world of totally planted and utterly absurd stories, this one takes at least an honorable mention prize. Now, just think - a secret meeting in the back of the pub. A 'source' - a 'Government source' - confiding to the author about the 'list' of 'special projects' to milk the EU subsidies into the sunset. You have to laugh... or cry... 

7/1/2012: Irish Exchequer Results 2011 - Shifting Tax Burde

In the previous 3 posts we focused on Exchequer receipts, total expenditure by relevant department head, and the trends in capital v current spending. In this post, consider the relative incidence of taxation burden.

Over the years of the crisis, several trends became apparent when it comes to the shifting burden of taxes across various heads. These are summarized in the following table and chart:

To summarize these trends, over the years of this crisis,

• Income tax share of total tax revenue has risen from just under 29% in 2007 to almost 41% in 2011.
• VAT share of total tax revenue has fallen, but not as dramatically as one might have expected, declining from 30.7% in 2007 to 29.7% in 2011
• MNCs supply some 50% of the total corporation tax receipts in Ireland. And they are having, allegedly, an exports boom with expatriated profits up (see QNA analysis last month). Yet, despite this (the exports-led recovery thingy) corporation tax receipts are down (see earlier post on tax receipts, linked above) and they are not just down in absolute terms. In 2007-2011 period, share of total revenue accruing to the corporation tax receipts has fallen from 13.5% to 10.3%. So if there is an exports-led recovery underway somewhere, would, please, Minister Noonan show us the proverbial money?

 So on the tax side of equation, the 'austerity' we've been experiencing is a real one - full of pain for households (whose share of total tax payments now stands at around 58% - some 12 percentage points above it levels in 2007) and the real sweet times for the corporates (the ones that are still managing to make profits to pay taxes, that is). This, perhaps, explains why even those working in protected sectors are talking about their biggest losses coming from tax changes.

20/12/2011: IMF IV Review of Ireland Programme: part 2

This continues my review of the IMF's 4th review of Ireland. The previous post (here) covered the findings concerning mortgages arrears and property markets.


"Budget execution remains on track despite weakness in revenues linked to domestic demand. ...Excluding net banking sector support costs, the January–October Exchequer primary deficit was €12.1 billion, 0.8 percentage points of GDP narrower than the authorities’ profile after allowing for the impact of the Jobs Initiative introduced in May 2011." [In other words, folks, allowing for pensions levy hit]

"The smaller deficit primarily reflects tight expenditure control; net current spending undershot budgetary allocation by 1.6 percent (0.4 percent of GDP), while capital spending was below profile by 17.2 percent (0.8 percent of GDP)." [This further shows that the smallest positive impact on deficit was derived from the largest area of expenditure - current spending, with capital spending cuts acting as the main driver, once again, of budgetary adjustment. This, of course, has been highlighted by me on numerous occasions.]

"Overall revenues remained on track, with shortfalls in taxes such as VAT due to weak domestic demand offset by higher than budgeted non-tax revenues, such as bank guarantee fees." [That's right, folks, one-off hits on income and wealth are 'compensating' for tax revenues fall-off in income tax, VAT and corporation tax. Again, keep in mind that IMF analysis is based on data that excludes the largest revenue generating month of November.]

But here's an interesting note: "The cumulative Exchequer primary balance through end-September 2011 was -€18.3 billion, above the adjusted target of -€20.2 billion. Central government net debt was €111.7 billion, below the adjusted indicative target of €115.9 billion" [One might ask the following question, is that target of €115.9bn - set in December 2010 - reflects the €3.6bn error found in Q3 2011? If not, then, of course, our 'outperformance of the target shrinks to a virtually irrelevant €500mln which, itself, can be fully covered by capital expenditure shortfall on the target mentioned above. In other words, when all is factored in, are we really outperforming the target set, or are we simply overestimating the target and ignoring expected spending?]

The IMF catches up to that:
"Program ceilings for fiscal indicators at end-2011 are expected to be observed. Although spending will pick up toward year-end, and a funding need of 0.2 percent of GDP is expected in relation to the failure of a private insurance company, the end-December performance criterion is projected to be achieved."
[In other words, the State will have to cover €300mln of Quinn Insurance losses in 2011 and then another €400mln of same in 2012. Alas, due to the accounting trick, since these losses will be recovered by the State through an insurance levy - to be paid by the completely innocent dopes (aka, us, consumers of insurance products in Ireland), the whole thing is not counted as Government debt, even though the State will be borrowing these funds.]

"Similarly, the general government deficit is projected at 10.3 percent of GDP, within the European Council’s ceiling of 10.6 percent of GDP. The 2011 consolidation package of €5.3 billion (3.4 percent of GDP) is expected to reduce the primary deficit to 6.7 percent of GDP, representing a €3.1 billion (2 percent of GDP) year-on-year reduction." [Now, note the maths - 6.7% primary deficit remains to be closed before we can begin net debt repayments. Last year, we've closed - and that is based on pre-November 2011 pretty disastrous numbers - 2%, so 2/9th down, 7/9th still to go, roughly-speaking]

Crucially: "The realized increase in the primary balance will thus likely amount to only about three-fifths of the consolidation effort, which reflects the adverse impact of the contraction in domestic demand and the rise in unemployment, highlighting the challenge of implementing large fiscal consolidations when growth is weak." [Here's what this means - due to the adverse effects of lower growth and higher unemployment, some 40% of this year's adjustment has gone on fighting the rising tide of economic crisis, not on structural rebalancing of fiscal deficit. In other words, if this situation of fiscal targets set against unrealistic expectations for growth were to continue in 2012 and through 2015, we will get a deficit to GDP ratio of closer to 5.5-6% not 2.9% as envisaged. Now, think about this in the following terms - Budget 2012 assumes growth of 1.3% next year - although I have some questions as to whether that is indeed the number, given that a day before the Budget 2012 was published, the Department of Finance quoted the figure of 1.6% - and the expectations of ESRI, OECD, the EU Commission and the IMF are now for 0.9-1%... hmmm... realistic expectations, targets and outcomes risks are now pretty clear...]

As is, the IMF report shows progress achieved. But it also raises a number of questions:

• Is this progress - 2% adjustment of which 2/5ths are simply gone to cover lost ground - sufficient?
• Is this progress sustainable (see next post)?
• Is this progress being achieved through structural reforms (current spending cuts and sustainable revenue raising) or through capital expenditure cuts and one-off tax measures?

The following post will cover the IMF analysis of the future outlook for the Irish economy.

08/12/2011: Budget 2012: Irish Daily Mail

Here is an unedited version of my article in the Irish Daily Mail covering Budget 2012.

Budget 2012 was billed as a path-breaking departure from the previous budgets. Quoting Minister Brendan Howlin, “Our budgetary process, …is about to change fundamentally.” The Government has been quick to stress the key concepts, that, in its view, were signaling a departure from previous 3 years of failed policy of capital cuts and tax increases, that yielded stillborn recovery we allegedly enjoy today.

Yet, in the end, Budget 2012 came down to a familiar hodgepodge of picking the proverbial low hanging fruit and covering up painful hit-and-run measures with platitudes. Once again, the nation is left with neither a long-term’, nor a ‘strategic’ model for fiscal sustainability.

We knew who were to be hit the hardest by this budget before our value-for-money busting duo of overpaid ministers set out to speak this week. The budget came down hard on the marginal groups across the less well-off: single parents, students, those reliant on public health. Old story by now. A well-tested strategy of Brian Cowen’s cowardly ‘leadership’: hit the smaller minorities as a token of ‘reforms’ and then decimate the silent majority of the middle class at will. At any cost, avoid taking on directly large vested interests.

And so, Budget 2012 cut into what effectively constitutes the largest tax rebate for the middle class – child benefit. And then it raised taxation on ordinary households. Healthcare costs – public and private went up - dressed up as 'savings' in the ministerial  speeches. Fuel taxes, VAT, DIRT, tobacco prices, household charge – you name it. Old story, once again: there is no change, no strategic approach, no long-term thinking.

Middle class that will see cuts to child benefits are ‘the new rich’, who also pay extortionary childcare costs and health insurance and after-school costs, all linked to having a real family. They finance mortgages that sustain the zombie zoo that is our banking sector. Although we did get some long overdue tax relief increases for mortgage interest for properties bought in 2004-2008, the measure is too little and too late to help the younger families pushed against the wall by the other budgetary measures.

Even adjustments in USC threshold came at a cost of applying cumulative basis to the levy on ordinary earners, implying higher tax clawback for the middle classes.

The new household charge, like the USC charge before it is not ring-fenced to cover any specific services the state might provide to the households. It is a pure tax, designed to finance pay increments to the public sector, pensions schemes rewarding early retirements in the civil service, dosh for advisers who help devise these policies of systematic impoverishment the middle class, the wasteful quangoes that the coalition is afraid to tackle.

The reductions of 6,000 via voluntary early retirement are both excessively costly and absurd from the point of view of improving public sector productivity. There are no reforms paths and no value-for-money benchmarks. The reduction target falls on those with more seniority on the job, not on those with lower ability or willingness to perform it. Good workers can be incentivised to leave their jobs, while bad workers can be encouraged to stay put.

And there is not change to the very source of our serial failures to reform Public Sector – the Croke Park agreement. Having delivered no change in the operations of the sector in two years of its existence, this deal has shown itself to be the core obstacle to reforms. But the Government continues to drone on about the inviolability of this compact with the largest vested interest group in the economy.

In the end, the only ‘fundamental change’ in the pages of the first FG/LP Budget is the clear departure from the numerous pre-election promises the coalition showered upon the gullible electorate.

08/12/2011: Budget 2012: Irish Examiner

This is an unedited version of my article for the Irish Examiner (December 8, 2011) covering Budget 2012.

As Peter Drucker once said  “Effective leadership is not about making speeches or being liked; leadership is defined by results not attributes.” By Drucker’s measure of leadership, Budget 2012 is a complete failure.

The Budget was launched with much pomp and circumstance. But in the end, the highly emotive language of ‘change’, ‘long-term thinking’ and ‘fundamental reforms’ served to cover up the return to the failed policies of the previous Government. No real change took place, and no real reforms were launched.

While much of the media attention is focused on the specific headline measures, especially those applying to the poor and the unemployed, very little analysis has been deployed to cover the budgetary dynamics – the very raison d’etre of the current austerity drive. Let’s take a closer look at what the Budget 2012 promises to deliver on the fiscal consolidation front and what it is likely to deliver in reality.

According to the Budget 2012 Ministerial Duet of Brendan Howlin and Michael Noonan, public expenditure reductions envisioned under the budget will amount to €1.4 billion in current spending and €755 million capital investment cut. These are gross savings, that will have second round effects of reduced associated tax revenues and thus their impact on deficit will be lower than envisaged.

Capital savings will come from mothballing a handful of white elephants carried over from the Bertie Ahearn’s era, but these will cost jobs and neglect in existent capital stock. Coupled with changes to CGT and CAT and Dirt, these measures will further depress investment in the economy that continues to experience collapse in this area. Yet, absent investment, there can be no jobs.

Perversely, the FG/Labor government thinks that the only capital investment worth supporting is that in property. The economy based on high value added services and knowledge and skills of its workforce is now fully incentivised for another property boom and fully disincentivised to invest in skills and entrepreneurship. The latter disincentives arising from the upper marginal income tax rate of 53% for all mortals and a special surcharge to 55% on self-employed. Never mind that self-employment is usually the first step toward enterpreneurship and business investment.

Short-termist reductions in one-parent family and jobseekers benefits are counterproductive to supporting large group of single parents in their transition to work. In the place where real reforms toward workforce activation should have been deployed, we now have a “all stick and no carrot” approach.

Health budget is one of the three mammoths of the fiscal ice age, with total spending this year projected to reach €12.83 billion this year, up 10.5% on 2010 levels. Instead of rationalising management systems at the HSE, the area where the bulk of waste resides, the Budget is achieving ‘savings’ by charging middle class insurance holders more for the very same services. A new tax, in effect, is now called ‘savings.

This Cardiffescue approach to accounting for sovereign funding and expenditure flows creates an illusion of something being done about the constantly rising current expenditure, while avoiding challenging operational and structural inefficiencies in public sector spending.

Budget 2012 is a mini-insight into a collapsed capability of a leadership system unable to cope with fiscal pressures and incapable of change.

Nothing else highlights this better than the host of new taxes that accompany the incessant drone of ‘jobs, jobs, jobs’ refrain from the Government.

Take the illogical hikes in VAT and fuel-related taxes. A 2% increase in the cost of shopping in Ireland, coupled with increase in the cost of petrol and diesel and a massive increase in tobacco taxes here will create tripple incentives for consumers to flee Irish retail sector in favour of Northern Ireland and to transact in the Black markets. None of these substitution effects are priced into Government budgetary projections, despite the fact that an error of omitting direct substitution effects of tax increases would have been a fatal one for an undergraduate student of economics.

The entire exercise looks like the repeat of Brian Cowen’s Grand Strategy of waiting until something turns up and rescues us. Thus, behold the rosy budgetary projections for 1.6% GDP growth in 2012, published just days after OECD confirmed its forecast for 1.0% growth and ESRI published its outlook with 0.9% growth projection.

These differences are material. Should the Budgetary assumptions on growth fail to materialize, the cuts and revenue measures envisioned by the Government will fall far short of what will be needed to keep the headline general government debt to GDP ratio at bay.

Karl Marx famously remarked that history repeats itself twice, first as tragedy, second as farce. Based on Irish Governments’ policies over the last 4 years, history ultimately blends into a farcical tragedy once leadership failures become a norm. Welcome to the farce of the long-term fundamental non-reforms of this new Government.

5/12/2011: Sunday Times, December 4, 2011

For those of you who missed it - here is an unedited version of my article for Sunday Times, December 4, 2011.


Comes Monday and Tuesday, the Government will announce yet another one of the series of its austerity budgets. Loaded with direct and indirect taxation measures and cuts to middle class benefits, Budget 2012 is unlikely to deliver the reforms required to restore Irish public finances to a sustainable path. Nor will Budget 2012 usher a new area of improved Irish economic competitiveness. Instead, the new Budget is simply going to be a continuation of the failed hit-and-run policies of the past, with no real structural reforms in sight.

Structural reforms, however, are a must, if Ireland were to achieve sustainable growth and stabilize, if not reverse, our massive insolvency problem. And these reforms must be launched through the budgetary process that puts forward an agenda for leadership.

Firstly, Budgetary arithmetic must be based on realistic economic growth assumptions, not the make-believe numbers plucked out of the thin air by the Department for Finance. Secondly, budgetary strategy should aim for hard targets for institutional and systemic improvements in Irish economic competitiveness, not the artificial targets for debt/deficit dynamics.

Let’s take a look at the macroeconomic parameters framing the Budget. The latest ESRI projections for growth – released this week – envision GDP growth of 0.9% and GNP decline of -0.3% in 2012. Exports growth is projected at 4.7% in 2012, consumption to fall 1.5% and investment by 2.3%. Domestic drivers of the economy are forecast to fall much less in 2012 than in 2011 due to unknown supportive forces. This is despite the fact that the ESRI projects deepening contraction in government expenditure from -3% in 2011 to -4% in 2012. ESRI numbers are virtually identical to those from the latest OECD forecasts, which show GDP growing by 1.0% in 2012, but exports of goods and services expanding by 3.3%. OECD is rather less pessimistic on domestic consumption, projecting 2012 decline of just 0.5%, but more pessimistic on investment, predicting gross fixed capital formation to shrink 2.7%.

In my view, both forecasts are erring on optimistic side. Looking at the trends in external demand, my expectation is for exports growing at 2.9-3.2% in 2012, and imports expanding at the same rate. The reason for this is that I expect significant slowdown in public sector purchasing across Europe, impacting adversely ICT, capital goods, and pharmaceutical and medical devices sectors. On consumption and investment side, declines of -1.5-1.75% and -4-4.5% are more likely. Households hit by twin forces of declining disposable incomes, rising VAT and better retail margins North of the border are likely to cut back even more on buying larger ticket items in the Republic. All in, my forecast in the more stressed scenario is for GDP to contract at ca 0.6% and GNP to fall by 1.7% in 2012. Even under most benign forecast assumptions, GDP is unlikely to grow by more that 0.3% next year, with GNP contracting by 0.5%.

Under the four-year plan Troika agreement, the projected average rate of growth for GDP between 2012 and 2015 was assumed to be 3.1% per annum. Under the latest pre-Budget Department of Finance projections, the same rate of growth is assumed to average 2.5% per annum. My forecasts suggest closer to 1.5% annual average growth rate – the same forecast I suggested for the period of 2010-2015 in these same pages back in May 2010.

Using my most benign scenario, 2015 general government deficit is likely to come in at just above 4.0%, assuming the Government sticks to its spending and taxation targets. Meanwhile, General Government Debt to GDP ratio will rise to closer to 120% of GDP in 2015 and including NAMA liabilities still expected to be outstanding at the time, to ca 130% of GDP.

In brief, even short-term forecast changes have a dramatic effect on sustainability of our fiscal path.

Yes, the Irish economy is deteriorating in all short-term growth indicators. The latest retail figures for October, released this week show that relative to pre-crisis peak, core retail sales are now down 16% in volume terms and 21% in value terms. In the first half 2011, nominal gross fixed capital formation in the Irish economy fell 15% on H1 2010 levels and is now down 38% on pre-crisis peak in H1 2007. And exports, though still growing, are slowing down relative to imports. Ireland’s trade balance expanded 5% in H1 2011 on H1 2010, less than one fifth of the rate of growth achieved a year before. More ominously, using data through August this year, Ireland’s exports growth was outpaced by that of Greece and Spain. Ireland’s exporting performance is not as much of a miracle as the EU Commissioners and our own Government paint it to be.

However, longer-term budgetary sustainability rests upon just one thing – a long-term future growth based on comparative advantages in skills, institutions and specialization, as well as entrepreneurship and accumulation of human and physical capital. Sadly, the years of economic policy of hit-and-run budgetary measures are taking their toll when it comes to our institutional competitiveness.

This year, Ireland sunk to a 25^th place in Economic Freedom of the World rankings, down from the average 5-7^th place rankings achieved in 1995-2007. In particular, Ireland ranks poorly in terms of the size of Government in overall economy, and the quality of our legal systems, property rights and regulatory environments. The index is widely used by multinational companies and institutional investors in determining which countries can be the best hosts for FDI and equity investments.

In World Bank Ease of Doing Business rankings, we score on par with African countries in getting access to electricity (90^th place in the world), registering property (81^st in the world), and enforcing contracts (62^nd in the world). We rank 27^th in dealing with construction permits and 21^st ease of trading across borders. Even in the area of entrepreneurship, Ireland is ranked 13^th in the world, down from 9^th last year. This ranking is still the highest in the euro area, but, according to the World Bank data, it takes on average 13 times longer in Ireland to register a functional business than in New Zealand. The cost of registering business here amounts to ca 0.4% of income per capita; in Denmark it is zero. In the majority of the categories surveyed in the World Bank rankings, Ireland shows no institutional quality improvements since 2008, despite the fact that many such improvements can reduce costs to the state.

I wrote on numerous occasions before that despite all the talk about fiscal austerity, Irish Exchequer voted current expenditure continues to rise year on year. Given that this segment of public spending, unlike capital expenditure, exerts a negative drag on future growth potential in the economy, it is clear that Government’s propensity to preserve current expenditure allocations is a strategy that bleeds our economy’s future to pay for short-term benefits and public sector wages and pensions.

Similarly, the new tax policy approach – enacted since the Budget 2009 – amounts to a wholesale destruction of any comparative advantage Ireland had before the crisis in terms of attracting, retaining and incentivising domestic investment in human capital. Continuously rising income taxes on middle class and higher earners, along with escalating cost of living, especially in the areas where the Irish State has control over prices, and a host of complicated charges and levies are now actively contributing to the erosion of our competitiveness. Improvements in labour costs competitiveness are now running into the brick wall of tax-induced deterioration in the households’ ability to pay for basic mortgages and costs of living in Ireland. Year on year, average hourly earnings are now up in Financial, Insurance and Real Estate services (+3.1%) primarily due to IFSC skills crunch, unchanged in Industry, and Information and Communications, and down just 2.6% in Professional, Scientific and Technical categories. In some areas, such as software engineering and development, and biotechnology and high-tech research and consulting, unfilled positions remain open or being filled by foreign workers as skills shortages continue.

By all indications to-date Budget 2012 will be another failed opportunity to start addressing the rapidly widening policy reforms gap. Institutional capital and physical investment neglect is likely to continue for another year, absent serious reforms. In the light of some five years of the Governments sitting on their hands when it comes to improving Ireland’s institutional environments for competitiveness, it is the Coalition set serious targets for 2012-2013 to achieve gains in Ireland’s international rankings in areas relating to entrepreneurship, economic freedom and quality of business regulation.

Box-out:

Amidst the calls for the ECB to become a lender of last resort for the imploding euro zone, it is worth taking some stock as to what ECB balance sheet currently looks like on the assets side. As of this week, ECB’s Securities Market Programme under which the Central Bank buys sovereign bonds in the primary and secondary markets holds some €200 billion worth of sovereign debt from across the euro area. Banks lending is running at €265 billion under the Main Refinancing Operations and €397 billion under the Long-Term Refinancing Operations facilities. Covered Bonds Purchasing Programmes 1 and 2 are now ramped up to €60 billion and climbing. All in, the ECB holds some €922 billion worth of assets – the level of lending into the euro area economy that, combined with EFSF and IMF lending to peripheral states takes emergency funding to the euro system well in excess of €1.5 trillion. Clearly, this level of intervention has not been enough to stop euro monetary system from crumbling. This puts into perspective the task at hand. Based on recently announced emergency IMF lending programmes aimed at euro area member states, IMF capacity to lend to the euro area periphery is capped at around €210 billion. The EFSF agreement, assuming the fund is able to raise cash in the current markets, is likely to see additional €400-450 billion in firepower made available to the governments. That means the last four months of robust haggling over the crisis resolutions measures between all euro zone partners has produced an uplift on the common currency block ‘firepower’ that is less than a half of what already has been deployed by the ECB and IMF. Somewhere, somehow, someone will have to default big time to make the latest numbers work as an effective crisis resolution tool.

5/12/2011: Two 'Austerity' charts

In previous two posts we covered Exchequer revenues and balance. Here is an interesting follow-up chart showing the dramatic swing in spending priorities of the Irish state:

And a neat chart summarizing the extent of our and indeed global 'austerity' (this one is courtesy of the OECD):

Pretty darn clear, no?

5/12/2011: Exchequer balance: November

In the previous post we looked at the Exchequer receipts. Now, let's take on Exchequer deficit.

Based on data through November 2011, Exchequer deficit stands at €21.37bn in 2011 against the same period 2010 deficit of €13.35bn. However, netting out banks recapitalizations and the sale of stake in BofI, Exchequer deficit on comparable basis was €11.72bn in 11 months of 2011 or €1.63bn below that in 2010.

Factoring in the pensions levy (temporary measure), savings to-date amount to €1.18bn on 2010 period.

Anti-climatic? You bet. Chart below breaks down the 'savings' achieved, with data reported for annualized rate of spend based on January-November 2011 receipts. Voted current expenditure for 2011 rose from €36.39bn in 2010 to €37.59bn in 2011 (data through November for both). Voted capital spending fell from €4.26bn in 2010 to €3.08bn in 2011 (again, data through November). So all of the above 'savings' come from tax increases and capital cuts. Again, when it comes to current spending (Government services), there is no austerity on the aggregate. In fact, there is ever-increasing profligacy. Once again, keep in mind, this does not mean there is no pain. It's just that the pain we have is really in the form of robbing Peter to pay Paul.

05/12/2011: Government Book of Estimates 2012 - latest comic from DofF

So the book of estimates is out pre-Budget 2012 and there are some notable numbers in it. Let's run from the top:

• Table 1 projects Current Receipts of  E38,081mln in 2012 or E1,344mln of 'natural increases' in tax receipts, presumably from roaring economic growth
• Table 1 also projects capital receipts falling by E660mln due to lesser tax on tax (aka banks measures 'returns')
• Table 1 projects increase in total revenue of E683mln to E39,905 - where this will come from, one might wonder. Table 2 shows that all of these increases will come from tax revenues growth - remember, estimates do not include any new measures to be passed in Budget 2012. In particular, DofF assumes that tax revenues will rise 4.13% yoy in 2012. Why? How? On back of 1.3% growth - the rosiest forecast we've had so far? How much do they plan to extract from value-added o get these figures? Suppose economy expands by 2.2 billion in 2012 (ca 1.3%), tax revenue is supposed to grow by E1.41 billion, so 'extraction rate' is over 64%. That is the full extent of our assumed upper marginal tax rate pre-Budget 2012 measures, folks. Either we are worse than France (the highest full economic tax rate) or the DofF estimates are a bit shambolic.

On the austerity side, there are some notable features of the 'estimates':

DofF assumes interest payments on Government debt of E7.488bn in 2012, up on €4.904bn in 2011. That means that we will be spending

• 71% more on payment on our debt, including that to our 'European Partners' than we will be spending on capital investment, or
• 21% of all our tax receipts will be going to finance interest on government debt
• Given projected yield from Income tax of E15.09bn in 2012 (do forget for the moment that this is basically a form of numerical lunacy, not a hard number, as there is absolutely no reason why income tax next year will be at these levels), our Government debt interest bill will account for 49.6% of our entire projected income tax revenue.

Remember, this all is sustainable, per our Green Jersey 'experts' and we haven't even reached the peak of our debt, yet...

And, yes, there's Austerity... after three years of 'cuts' we have:

• Current spending is expected to rise from E48.148 bn in 2011 to E51.233 bn in 2012, so that
• General Government Deficit will reach E16.2 billion or E600 million ABOVE 2011 level.

At last we have our truth - in the numbers of even overly optimistic Government own projections - there is no austerity, folks. There is re-arrangement of spending chairs on Titanic's deck. Painful for many, to be true, whose services and subsidies are being cut, but certainly not visible in terms of actual fiscal balance.

So how rosy are Government figures on those projections side? Government 'estimates ' assume that in 2012 Irish GDP will stand at E162 billion, which is a whooping 4.88% above 2011 levels. Right, someone has been drinking that lithium-laced water that the nation should get per our Buba Doc proposals aired last week - GDP growth in 2012 will be 4.88% nominal per DofF.

Bonkers! QED.

07/11/2011: Is Ireland a Poster-Boy for "Austerity & Growth" paradigm?

My article on the real dynamics in Irish economic 'recovery' and 'austerity miracle' is available on LISWire: http://liswires.com/archives/1359. 

07/10/2011: Tax returns - truth and DofF-ised surreality

In his statement, following the publication of Exchequer returns for September (here), Minister for Finance, Michael Noonan stated (emphasis mine): "Tax receipts in the period to end-September were 8.7% above the same period in 2010 and slightly ahead of expectations. Although the minor surplus is due to some favourable timing factors and receipts from the Pension Levy introduced to fund the Jobs Initiative, it is encouraging that overall tax revenue is growing again. Individual tax-head performance has been mixed. VAT receipts are weaker than expected but income tax is performing well." The Minister further positioned improved tax and fiscal performance within the context of Irelands 'return to economic growth'.


Note: there is an excellent post on this topic available from Economic Incentives blog (here), although our numbers do differ slightly due to my numbers resting on explicit model for Health Levy revenues and some rounding differences. In addition, my post focuses on comparatives, including to pre-crisis dynamics and returns. I also attempt to cover slightly different questions as outlined below. Furthermore, Economic Incentives blog post also covers the issue of distorted timing on DIRT payments in April and July that I omit in the following consideration.


Another note: over the last 4 years we became accustomed to brutish spin from the previous Government when it comes to painting the tape on Ireland's 'progress' and 'recovery'. The current Government, however, is much more subtle in presenting the positive side of the 'recovery' and Minister Noonan's statement quoted above shows this. However, the real issue here is that in the name of transparency, DofF should be reporting actual figures that are comparable year on year. It's their job and they are failing to deliver on it.


The above statement, of course, raises the following three questions:

1. Did Ireland's tax revenue performance for 9mo through September deliver a significant enough change on 2010 and/or pre-crisis performance to warrant the above optimism?
2. Is Ireland's tax revenue performance attributable to 'return of growth'? and
3. Are the overall tax revenues really 'growing again' in any appreciable terms worthy of the Ministerial claim?

Table below summarizes the data on tax revenues through September 2011, including adjustments to tax heads that reflect:

• USC charge conversion from Health Levy to Income Tax measure: prior to 2011, health levy was collected within PRSI contributions, without being classified as Income Tax. In 2010, the levy collected amounted to €2.02bn for the year as a whole. Using distribution of income tax revenues across months for 2008-2010 average, I estimate that 65.9% of Health Levy would have been collected through September 2011 and account for this in the Income Tax ex-USC line. This is an imperfect estimate that errs on the downside of the overall USC impact as it disregards changes to the Health Levy rates & bands applied. In other words, my estimate assumes that USC incorporated into Income Tax today carries within it unchanged revenues from the Health Levy as per 2010.
• Pensions levy of €457mln is aggregated in the official figures into Stamp Duty returns and the table below provides for this in the line on Stamps ex Pensions levy. Note that the target for Pensions levy receipts was set at €470mln, so there is a shortfall on the target of €13mln which I do not account for in the relevant figures, making my ex-levy estimates erring on cautious side.
• Lastly, the total tax revenue ex-USC Health and Pension Levies incorporates the €122mln delayed payment

So let me run through the above:

• Income Tax revenues, once the Health Levy is factored out (revealing better comparatives to 2010 and before) are up 7.65%, not 25.7% in January-September 2011 compared to same period of 2010 that the DofF claims. Compared to 2009, Income tax revenues are up just 0.6%, not 17.5% implied by DofF numbers. See any significant uptick in the economy feeding through to significant rise in tax revenues? Well, stripping out tax rates increases and tax bands widening, I doubt there is anything but continued contraction in like-to-like revenues here.
• VAT is still tanking compared to 2010 (-2.0%) and to 2009 (-7.7%) as correctly reflected by DofF data. And VAT revenue gap is widening from H1 2011 to Q3 2011 as compared against 2010.
• Corporation tax revenue is falling - down 6.1% on 2010 and down 21% on 2009 and that is amidst historically record levels of exports! So if you know some evidence that 'exports-led recovery' is taking place, it is not showing up in the Exchequer receipts.
• Excise is down 1.4% on 2010 and 2.5% on 2009 and that dynamic is worsening from H1 2011 to Q3 2011.
• Stamps are down 1.4% once we factor out the hit-and-run on Pensions, not up 58.7% as DofF claims.
• CGT, CAT are down in double digits
• Customs are up as DofF shows.
• So total tax revenues are up 1.17% in comparable terms to 2010, not 8.7% as DofF claims and relative to 2009 total tax receipts are down 5.37%.

Relative to target figures are also severely skewed by USC reclassifications and Pension Levy receipts and show, in the end, that in comparable terms we are not delivering on targets. Of course, USC reclassification is reflected in the targets, so without netting out USC, total tax receipts are 0.69% behind the target as set in the Budget, not 0.7% ahead of it as DofF claims. And that is inclusive of timing error of €122mln and excluding USC reclassification change.

So what about our cumulative 'progress' since the crisis on-set in delivering on fiscal stability? Let's compare each year achievements to 2007 levels of total tax revenues:

Again, per table above, the entire set of draconian, growth-retarding tax hikes that have hit households since 2008 delivered virtually no improvement on the crisis dynamics. The shortfall on tax revenue for 9 months January-September period relative to same period pre-crisis (in 2007) in 2010 was €9,290mln and it currently stands at €9,030mln - an improvement of €260mln or less than €30mln per month!

Can anyone still claim that Ireland's public finances are on track to achieve some meaningful targets whatsoever? As Seamus Coffey (in the blog post linked above) points out: "I must say that I cannot see the justification for greeting the figures in such glowing terms" as those used by Minister Noonan and the DofF. I agree.

11/08/2011: Exchequer balance for July 2011

Staying on the topic of Exchequer performance - the theme is (see earlier post here) "The dead can't dance". This, of course, refers to our flat-lined economy and the ability of the Government to extract revenue out of collapsing household incomes, wealth and dwindling number of solvent domestic companies.

Let us now briefly cover the remaining parts of the Exchequer equation: spending and overall balance position.

Overall, the Exchequer deficit at end-July 2011 was €18.894bn compared to a deficit of €10.189bn in the first seven months of 2010. The increase reflects a number of things.

The Government has issued back in March this year some €3.085bn worth of bank promisory notes to the larks of Irish banking: Anglo, INBS and EBS, all of which have since ceased to exist. On top of that the Government showered some €5.241bn of taxpaers cash onto the elephants of the Irish banking system: AIB (the Grandpa Zombie) and BofI (the Zombie-Light). To top things up, the Exchequer pushed some €2.3 billion of taxpayers funds into IL&P (the msot recent addition to the Zombies Club).

Controlling for banks measures, 2011 deficit through July stands at €8.241bn which represents savings of €1.449bn on same period of 2010. So, now recall - tax receipts went up by €1.48bn in total. Ex-banks deficit shrunk by €1.45bn in total... which, of course, strongly suggests that the "Exchequer stabilisation" so much lauded by our Government was achieved largely not due to some dramatic reforms or austerity, but due to old-fashioned raid on taxpayers' pockets.


Aptly, folks, austerity is not to be found in the aggregate figures. Per DofF own statement, "total net voted expenditure at end-July, at €25.7 billion, was €224 million or 0.9% up year-on-year. Net voted current spending was up €813 million or 3.5% but net voted capital expenditure was €589 million or 26.4% down. Adjusting for the reclassification of health levy receipts to form part of the USC which has the effect of increasing net voted expenditure, it is estimated that total net voted expenditure fell 2.6% year-on-year." Hmm... ok, there seems to be some austerity, but on capital spending side.

The main culprit for this is the continuous rise in Social Protection spending and low single-digit decreases in spending in some other departments. Hence, unadjusted for changed composition:

• Communications, Energy and Natural Resources spending declined just 8.1% on 2008 levels for the period January-July 2011
• Education and skills - by just 8.2%
• Health - by only 4.3%

While Social Protection spending rose 49.7% on 2008 levels and Department of Taoiseach is up 1%.

It is worth noting that lagging in cuts departments account for ca 49.12% of the total spending by the Government, while Social Protection accounts for 30.07%.

We might not want to see the above areas cut severely back, but if we are to tackle the deficit, folks, we simply have to. Why? Because our debt is rising and this debt is fueled largely by the deficit.

And this means that our debt servicing costs are also rising. Total debt servicing expenditure at end-July, including funds used from the Capital Services Redemption Account was just over €3 billion. Per DofF statement, "Excluding the sinking fund payment which had been made by end-July in 2010 but which has not yet been made in 2011, debt servicing costs to end-July 2010 were some €21⁄4 billion. The year-on-year increase in comparative total debt servicing expenditure therefore was €3⁄4 billion." One way or the other, we are paying out some 12% of our total tax receipts in debt interest finance. That is almost double the share of the average household budget that was spent on mortgages interest financing back at the peak of the housing markets craze in December 2006 - (6.667%).

05/07/2011: Irish Exchequer Expenditure: H1 2011

Previous posts on the H1 2011 Exchequer results covered Exchequer balance, Tax Burden composition, and Exchequer Receipts. This post will cover Exchequer Expenditure side of the balance sheet.

Please note: cross annual comparisons are distorted by the changes in departments compositions and remits. Nothing we can do about this.

Top level numbers for H1 2011.

Agriculture, Fisheries and Food (accounting for 1.8% of the total Net Voted Expenditure - NVE) spending stood at €388 million in H1 2011, down 28.9% on the same period for 2008 and down €79 million or 16% yoy, though all of the savings came from the capital side, with current spending up €87 million yoy (+44%).

Art, Heritage & Gaeltacht (0.5% of total NVE) managed to spend €108 million in H1 2011, down 67.3% on 2008. Spending here is down 68% yoy (saving €158 million) with most of savings coming from the current side, although in proportional terms capital savings are on par with current savings.

Communications, Energy & Natural Resources (0.4% of NVE) spending in H1 2011 was €98 million, up €13 million (+15%) on 2010. Increases in spending took place on current side (+€11 million or 28%) and capital side (+€2 million or 4%). Relative to H1 2008 spending is down 14.9% which is 7th lowest rate of savings amongst the departments.

Community, Equality and Gaeltacht Affairs (0.5 of NVE) - no, don't ask me why is Gaeltacht having itself spread over 2 departments - spent €105 million, down €79 million (-43%) yoy. This time around, most of the savings in volume came from the current spending side, but in relative terms, capital spending is down 77% while current spending is down 36% yoy. Department spending has fallen 53.9% on comparable period in 2008.

Defence (1.9% of NVE) spent €419 million, which is down 13% on comparable period in 2008, making the department 6th lowest saver in the entire voted expenditure set. Department spending was up €4 million yoy with all of the increase accounted for by current spending.

Education and Skills spent €4,066 million in H1 2011 which is €171 million above H1 2010. Capital side increased by €59 million (+58% yoy) and current side was up €113 million (+3%) yoy. The department is the third largest of all Government Departments, accounting for 18.6% of NVE. Overall austerity has resulted in a 4.8% decrease in Department spending through H1 2011 compared to H1 2008, making the level of savings achieved the fourth lowest of all departments.


Jobs, Enterprise, Trade & Innovation (1.5% NVE) spent €336 million in H1 2011, down 48% on H1 2008. Compared to H1 2010, department spending fell €219 million (39% drop yoy) with current spending falling €245 million (-62%), while capital spending rose €26 million (+16%). Much of the capital side increases across the departments is attributable to the timing of spending with previous Government actively delaying paying on capital projects until later in the year. At least, with the current Government, contractors might be getting paid more on-time for their work.

Environment, Community & Local Government (2.6% of NVE) spent €561 million in H1 2011, down 52.8% on H1 2008. Spending was down €200 million yoy (-26%) with capital savings of €119 million (-32%) and current savings of €81 million (-21%).

Finance (2.3% NVE) managed to spend €510 million in H1 2011, down 20.3% on 2008 and achieving savings of a miserly €4 million yoy, with €20 million saved on current spending side and a deficit on 2010 of €16 million on capital side.

Foreign Affairs and Trade (1.6% of NVE) spending of €342 million is down €61 million (-15%) yoy, with €59 million of the savings coming from the current side. Relative to H1 2008, current year performance is delivering savings of 29.7%.

Health (the largest of all departments, with 30.9% of NVE, although Social Protection is coming close second and is bound to overtake Health by year end) spent €6,757 million in H1 2011, up a massive €666 million yoy of which €662 million came from the current spending side. With all of this, Health spending is now down 0.8% on H1 2008. The figures are obviously distorted by the introduction of USC, but as of H1 2011, the department has achieved 3rd lowest rate of savings of all departments.

Another billionaire department: Justice & Equality (4.9% of NVE) had total spending of €1,081 million in H1 2011, up €32 million on H1 2010 (+3%), with deficit coming at €56 million on current side, offset by savings of €24 million on capital side. Department spending is down 12.2% on H1 2008 - 5th lowest rate of savings across all Departments.

Social Protection (soon to be the largest spending department in Ireland but in H1 2011 accounting for 29.8% of NVE) spent €6,517 million - up 10% or €589 million yoy, with €587 million of this increase coming from the current side. Compared to H1 2008, H1 2011 spending rose 49.5% making it the worst performing department when it comes to savings.

Taoiseach (0.5% NVE) came with a bill of €108 million in H1 2011, which was 23.1% above comparable period in 2008. More than that, the department managed to increase its spending on 2010 as well, with cost rising by €20 million (+29%) yoy all of which came from current spending increases.

Transport, Tourism & Sport spending of €593 million in H1 2011 was 187 million down on H1 2010 (-24%) with savings of €240 million achieved on capital side and current side yielding an overrun of €53 million on 2010. The department accounts for 2.9% of NVE and spending here is down 53.8% on H1 2008.

So the top of the line numbers are: in H1 2011 Total Net Cumulative Voted Spending stood at €21,898 million or which €20,547 million were accounted for by current spending and €1,351 million by capital spending. Overall expenditure is now €399 million above H1 2010 (no sign of austerity here, if anything, spending just rolls on at the aggregate) - an overspend of 1.9%. On Current expenditure side things are even more 'boomish' with overspend relative to 2010 at €892 million (+4.5%). Capital took another hit of real austerity with spending here coming €493 million below H1 2010 (-26.8%).
The above clearly shows that while austerity has caused some real pain in specific departments, it has not been successful in reducing total spending. This is even more worrisome, when one recognizes that by now, capital account has been drained with no sizable potential future savings to be achieved on this side. On the current expenditure side, austerity so far has meant taking spending on one side of the Exchequer shopping list and spending it on the other. One way or the other, this is not austerity, folks. It's reallocation of expenditure priorities.

Now, recall, in H1 2011 we spent total of €21,898 million. That is just €804.5 million in savings relative to H1 2008 (or 3.54% improvement) - after 3 austerity budgets!

So what do these figures look like in dynamic setting - month-to-month?
And where do we take money from and reallocate to?
No need for another comment here.

04/07/2011: Exchequer balance: H1 2011

Exchequer results are in for June and in the previous two posts I discussed tax receipts (here) and overall distribution of taxation burden across various tax heads (here). In this post, I will be quickly covering Exchequer balance/deficit for H1 2011.

Overall tax and non-tax revenues came in at €16,744.6 million against €15,298 million in H1 2010 with both tax revenues and non-tax receipts on current side coming upside. However, total voted current account expenditure came in at €20,547 million in H1 2011, up on €19,655 million. This hardly amounts to 'austerity' working (more on expenditure analysis in the later blogpost).

Non-voted current expenditure came in at €3,375 billion, similar expenditures for 2010 over the same period were €3,071 million. Banking measures in H1 2011 accounted for €3,085 million against comparable period 2010 official (see below) figure of zero.

Overall, Exchequer deficit for H1 2011 stood at €10,828.5 million against 2010 figure of €8,887 million. Excluding banking measures H1 2011 deficit stood at €7,743, while excluding banking measures accumulated over 2010 and backed-out to June 2010, the ex-banks deficit for H1 2010 was around €7,590. Note - this imperfectly takes into account variable timing for deficit increases due to banks measures.

Here's the chart:
Again, I am not seeing any dramatic improvements here on 2010 performance.

It is worth noting - remember that department expenditure will be covered in the later post - that national debt interest and management expenses through H1 2011 have risen to €2,501 million from €2,231 million in H1 2010. Thus interest and debt management cost are currently running at 16.36% of total tax receipts.

Through H1 2011 we have borrowed €11,370 million from EFS, €7,178.5 million from IMF and €3,659.6 from EFSF, so total borrowings rose from €7,589.6 million in H1 2010 to €16,653 million in H1 2011. Of the money we borrowed (at more than 5.8% pa), €10,277.5 million is still held in deposits with Irish banks at, oh, maximum rate of ca 1.4-1.5% (see here) implying an annualized cost of this shambolic support for Irish banks to the Exchequer of ca €450 million - oh, about the amount of money the Government is clawing out of the pensions levy?..

17/06/2011: Irish Exchequer Expenditure - May

A late catching up on the recent Exchequer figures for May. In the earlier post (here) I covered receipts side of the figures. Now, time to update the expenditure side as well. I was reluctant to write much about expenditure and revenue sides of the fiscal crisis in previous months, since early months show very little in terms of comparatives. By the end of May, however, almost 1.2 a year has gone by and some trends can be established, albeit of course with caution.

Total net spending by the Government for January-May 2011 was €18.364bn up on €17.867bn for the same period in 2010. Overall, spending fell 3.67% on the same period for 2008 (€699.5mln saved) but is up 2.78% on 2010 (dis-savings of €497.3mln).

This is not encouraging.
As chart above shows, the expenditure is now running between 2010 and 2008 levels. Sounds ok? Not really. Ireland will have to cut another ca 6% (based on rather rosy plans set out by the Troika back in November) in years to come. So far, we only managed to cut 3.67% relative to 2008 after three ‘savage cuts’ budgets.

The reason is that our 'cuts' were not really that deep, per se, but that they were transfers of expenditure from the capital side and some departmental current spending to Social Protection and Education & Skills. Here are two charts:


Here are some relative slippages (bear in mind that departments responsibilities and names have changed since 2008):
Social Protection spending rose 47.33% over the same period.

These were offset by above average (simple average of -20.69% decline across all departments) declines in spending levels in:

• Tourism, Culture and Sport – down 49.58%;
• Community, Equality & Gaeltacht – down 48.77%;
• Enterprise, Trade & Innovation – down 45.58%
• Environment, Community & Local Government – down 52.24%
• Foreign Affairs – down 28.93%
• Transport, Tourism and Sport – down 56.56%
  

Below average declines took place in:

• Agriculture, Fisheries and Food department spending declined 7.49% in January-May 2011 compared to the same period of 2008;
• Comms, Energy and Nat Resources – down 13.34%;
• Defence – down 15.69%;
• Education & Skills – down just 2.52%;
• Finance – down 17.925;
• Health & Children – down 1.75;
  

• Justice & Equality – down 15.525;
• Taoiseach’s – down 1.75%

Large fraction of these reductions is explained by the capital cuts (a subject for my future post) and by the timing of expenditure (we do not know if payments lags are rising in the public sector or not, and we do not know if capital spending is being delayed to generate positive news momentum).

But it is worth noting that some of the departments show deterioration in performance on the expenditure side relative to 2009-2010 (as opposed to 2008) base. Again, some of these are due to re-arranging of the departmental responsibilities, but in the end, what matters is that to-date, through the first 5 months of the year, Irish Exchequer expenditure cuts and tax increases have yielded just €699.5mln in savings on the 2008 levels.

Furthermore, we should note that promissory notes paid out to the banks in March are not factored into the overall voted expenditure, so the comparatives on the spending side are clearly showing that fiscal consolidation is not working so far. Which brings us to the following ‘rumour’ I heard from a senior governing coalition member. Allegedly, all indications are, Budget 2012 will be, to quote my source, “so bad, it’ll push thousands currently at the margin of leaving the country into booking their tickets out of Ireland this side of June 2012”. And this was in relation to the tax burden measures.

So lastly, lets take a look at year-on-year savings generated by all the austerity measures. The chart below shows that:

1. Savings generated earlier in the year in 2010 were driven primarily by the delays in payments and other temporary measures. Having started at a robust saving of 12.95% in January 2010, the Ex chequer allowed slippage of cuts to net a miserably low rate of overall expenditure reductions of just 1.55% for the year.
2. Both, in 2009 and 2010, by May, Exchequer spending was either contracting of rising at a much slower pace year on year.
3. The pattern for expenditure this time around – in 2011 – is strikingly different from that in either 2010 or 2009.
   

15/01/2011: Austerity and structural deficits

In recent days, there have been some questioning responses to a series of posts I did earlier this month on Irish Exchequer results for 2010. In particular, some queried my concerns with the long-term deficits and the dynamics of Irish Exchequer deficit.

Well, here's an EU official confirmation of my analysis: "As displayed in Graph 12, the distance of the deficit – corrected for the business cycle and one-off measures, i.e. structural deficit – from the medium-term budgetary objective (MTO) is particularly large (more than five percentage points of GDP) in twelve Member States." (from Brussels, 12.1.2011 COM(2011): GROWTH SURVEY, ANNEX 2, MACRO-ECONOMIC REPORT)

As the chart below clearly shows - Ireland's structural - recession effects-adjusted - deficits are in the league of their own:
Austerity, folks, or not - we are still living beyond our means when it comes to public expenditure. And when it comes to our austerity metrics (the blue bar), it is clear that much more remains to be done and that the worst Budget is yet to come.

Economics 5/12/10: Debt, debt, debt... for Irish taxpayers

I decided not provide any analysis of the figures below. These figures speak for themselves. To explain their purpose: I have computed the expected burden on current and future taxpayers from the total ex-banks debt carried by Ireland Inc as:

• Households debts (mortgages, car loans, personal loans, credit cards, etc);
• Government debt (inclusive of quasi-Governmental debt undertaken under the EU/ECB/IMF loans and Nama).
  
• I also incorporate total corporate sector debts, including non-financial corporations debt and debts entered into by non-banking financial corporations. However, the corporate debt DOES NOT form the part of taxpayers liabilities, although at least some of it will have to be repaid out of our (taxpayers) pockets one way or another.

All figures input into calculations were taken from CSO and Central Bank of Ireland databases. All core assumptions are outlined in the second table.

Finally, note - the total figures of debt per taxpayer are for Household Debts and Government (including Nama & ECB/EU/IMF loans) debt. Do not, please, confuse them with the official Government debt alone.

So here are two tables. Interpret them as you wish:


PS: some people accused me of double-counting:

• banks debts and mortgages/households debts. I am not - banks debts are excluded from the above considerations;
• Government bonds outstanding and rolled over. I am not - the only net increase between 2010 and 2014 in Government debt due to roller overs of existent (pre-2011) bonds is due to an increase in the interest rate taken on rolled over bonds at 1% (again, conservative, as per ECB/EU/IMF deal we will be paying 1.13% over the current average rate of interest on already issued bonds).
  

Economics 31/10/10: €15bn in cuts will not be enough

This is an unedited version of my article in yesterday's Irish Examiner.

The last three days have seen dramatic volatility and extreme upward pressures on Irish, as well as Greek and Portuguese Government bonds. Briefly, early on Thursday morning, Irish 10 year bonds have set a new all-time record with yields reaching North of 7.07%. Much of these changes have been driven by the budgetary news from all three countries.

First, Greece and Portugal have shown the signs of increasing uncertainty about projected tax revenues and ability to deliver on ambitious austerity programmes.

Then, Ireland came into the line of fire.

Back in December 2009, the Government outlined a plan for piecemeal cuts in deficits over 2011-2014 that added up to a gross value of €6.5 billion (with at least €3 billion in tax measures). This was supposed to get us from having to borrow €18.8 billion in 2010 to a deficit of ca €9 billion in 2014. All courtesy of robust economic growth of more than 4% per annum penned into the Department of Finance rosy assumptions for 2011-2014.

This week, the Minister for Finance had to come down from the lofty heights of the “now you see the deficit, now your don’t” estimates by his Department. Courtesy of continuously expanding unemployment, declining tax revenues, plus ever-growing interest bills on Government debts, the headline gross savings target for 2011-2014 has been increased to €15 billion.

Dramatic as it might be, this figure is still far from being realistic – the fact that did not escape the bond vigilantes and some analysts. More than that, it represents the very conservative ethos of the Department of Finance and the Government that got us into a situation where three years into the crisis Ireland is still light years away from actually doing anything serious about correcting its fiscal position.

Let me explain.

First of all, take the actual announced plans for cuts in public spending. Over two months ago I have argued in the media that to get us onto the track toward reaching the goal of 3% to GDP deficit ratio, we need ca €7 billion in cuts in 2011, followed by €5 billion in 2012. The grand total of gross deficit reductions from now through 2014 adjusting for the effects of these cuts on our GDP and unemployment, plus steeper cost of financing Government debt, excluding new demand for funding from the banks is not the €15 billion, but €19-20 billion. In other words, once fiscal stabilizers (automatic clawbacks on Government spending) are added in, to achieve 3% target requires more than 33% deeper cuts than Minister Lenihan announced this Wednesday.

The markets know this. Just as they know that given the Government record to date there is very little chance that even €15 billion in cuts will be delivered. This mistrust in Government’s capacity to actually administer its own prescription is manifested most explicitly by the Croke Park agreement that effectively put one third of the current public expenditure out of reach of Mr Lenihan’s axe. It is further highlighted by the fact that this Government has failed to
substantially reduce public spending bills from 2008 through today. Back in 2008, net government spending stood at €55.7 billion. This year, we are likely to post a reduction of just €2.4 billion on 2008, all of which is accounted for by cuts in capital investment programmes.

Third, the markets also understand long-term implications of deficits. Even if the Irish Government manages to bring 2014 deficit close to 3% target, our Sovereign debt will grow by over €5 billion in that year. At this pace, Irish Exchequer is likely to be on the hook for a debt to GDP ratio of 125% by the end of 2014 reaching over 140% if expected additional banks liabilities materialise in 2011-2014. And all of this after we account for Mr Lenihan’s €15 billion cuts planned for 2011-2014.

Fourth, Government budgetary arithmetic falls further apart when one considers economics of the proposed deficit reduction measures. So far, the Government has planned for €3 billion increase in taxes on top of tax revenues gains due to rosy economy growth expectations between now and 2014. €15 billion target announcement raises this most likely 2-fold.

I have severe doubts that this economy has capacity left for tax revenue increases. Signs are, households are struggling with personal debts and their disposable after-tax incomes are barely sufficient to cover day-to-day spending. Credit card debts and utilities arrears are rising, savings are falling – all of which points to growing stress. Weakening sterling is pushing more retail sales out into the North just in time for Christmas shopping season. Cash economy – judging by
anecdotal evidence and corporate tax revenue in light of booming exports sectors – is expanding. The tax base is shrinking due to unemployment, underemployment and falling earnings.

Again, any rational investor will look at this as the evidence that the Government has run out of capacity to tax itself out of the fiscal corner.

But wait, this is only half of the story. The other half relates to the banking side of consumer affairs. In 2011 we can expect significant increases in mortgages costs as Irish banks once more go rummaging through the proverbial couch in search for a new injection of pennies. Bank of Ireland’s bond placing this week, with a yield of 5.4%, suggests a bleak future for lending markets. Any increases in mortgages costs will hike Government expenditure (by raising the cost of interest subsidies), hammer revenues (by reducing household consumption) and trigger new demands from banks for capital (to cover defaulting mortgages).

None of which, of course, appears to be attracting much attention from the Upper Merrion Street. At least judging by the budgetary projections released so far. At the same time, these numbers are impacting our long term growth potential and increasing the probability that Ireland, in the end, will have to restructure its public debt.

This week, similarly brutal arithmetic concerning Greek fiscal situation has prompted Professor Nouriel Roubini to make a dire prediction of the inevitable default by Greece on its Sovereign debt. Given Minister Lenihan’s recent statements and his boss’ staunch unwillingness to scrap the Croke Park agreement, it is hard to see how the forthcoming budgetary framework for 2011-2014 can get us out a similar predicament.