14/5/18: Irish Tax Avoidance Machine and the Balance of Payments

One blog post and one paper tackling one of the greater mysteries of the Irish National Accounts, the Balance of Payments, peeling the layers of tax avoidance onion:

• Tax Avoidance and the Irish Balance of Payments paper: https://www.cfr.org/blog/tax-avoidance-and-irish-balance-payments?utm_medium=social_share&utm_source=tw;
• The 2017 Balance of Payments post: http://economic-incentives.blogspot.com/2018/04/the-2017-balance-of-payments.html.

Both worth digesting.

18/8/2012: What the IDA forecasts don't tell us?

I waited for several days before posting about the latest mystery of Irish statistics. 

This presentation from IDA contains the following chart:

Now, IDA is correct in highlighting the Current Account as a key to our recovery 'policies'. For a number of reasons:

1. In virtually all debt overhang recessions in the past, return to positive surpluses on current account were required as a necessary, albeit not always sufficient, condition to restore economy to a stable path
2. In Ireland, we have witnessed some significant improvements in the Current Account so far during the Great Recession

Alas, the above chart is a mystery to me. Let me explain.

Firstly, it cites CSO as the source of the chart. I have contacted CSO about their 'forecasts' for 2012-2017 period for the Current Account and their reply was: 

"Having consulted with my colleagues they assure me that they do not produce forecasts, let alone five year forecasts. Furthermore, my colleague suggested that the figures might be derived from a paper published by the Dept. of Finance (page 9): http://budget.gov.ie/budgets/2012/Documents/Economic%20and%20Fiscal%20Outlook.pdf It should be stressed, however, that these figures are the department's and not the CSO's."

Now, here are two forecasts for Ireland's Current Account known to me, sourced from the updated IMF database (July 2012 update to WEO database) and the above link from the Department of Finance:

Clearly, no source, bar IMF projects anything beyond 2015. Also, clearly, even the IMF projections appear (one can't really properly read IDA chart) to be as 'upbeat' as IDA's chart in 2013-2017 projections range. 

But wait, recall that IMF is providing a forecast, based on their central tendency scenario. They also provide useful assumptions and data that went into their scenarios assessments which allow us to compute historical confidence intervals for their own forecast. And, ahem, it turns out the IMF 'central' tendency forecast - illustrated above - firmly falls outside the reasonable 90% single tail confidence interval (adjusting for sample size, but caveating this). In other words, it is improbable, were historical Irish performance on current account balance to be out guide. The same applies to the stress-testing metric on current accounts used by the IMF - the primary current account balances (current account ex-interest payments).

So the IMF forecasts above assume massive change in Irish current account performance relative to history, the change that - may be IDA can expand on this - is supposed to come in the environment of adverse global trading conditions, pharma cliff hitting Irish exports, and re-orientation of trade flows worldwide away from North-South shipments of higher value added goods and services toward South-South flows.

But wait, things are actually worse than that. DofF forecasts deviate from the average for the above sources ex-DofF by a cumulative 1.7% of GDP and from those by the IMF by a cumulative of 2.5% of GDP for the period 2011-2015, which means that DofF forecasts are even less probabilistically likely to materialise than those for the IMF.

Even were the IMF to materialise, Ireland's current account surplus in 2012-2017 will be 2.78% of GDP on average - an impressive swing from a recent historical performance, yet contrasted by the economy with ca 120% debt/GDP metric on Government side alone! Anyone out there really thinking this is going to be a silver bullet for our economy?

So things are a bit less rosy than the IDA seems willing to admit to the prospective Foreign Direct Investors and the media. 

Economics 30/06/2009: Growth Collapse, Balance of Payments, Travel tax; Public earnings

Above figure shows that our GDP/GNP growth continued to deteriorate dramatically in Q1 2009, with GDP shrinking a whooping 8.5% at constant prices and GNP falling 12%.
Consumer spending in volume terms was 9.1% lower in Q1 2009 compared with the
same period of the previous year. Capital investment, in constant prices, declined by 34.1% in Q1
2009 compared with Q1 2008. Net Exports in constant prices were €2,814mln higher in Q1 2009 compared with Q1 2008.

The volume of output of Industry (incl. Construction) decreased by 10.5% in Q1 2009 compared with Q1 2008. Within this the output of the Construction sector fell by 31.4%, output of Distribution, Transport and Communications was down 10.9% while Output of Other Services was 3.5% lower in Q1 2009 compared with the same period of last year.
Note declines in GVA above - we are not getting any better on value extraction either, with exception of 'other services' sector...

Domestic activity simply collapsed, as evidenced by the expanding GDP/GNP gap. More taxes, please, Mr Cowen!



Today's Fáilte Ireland May traffic figures confirmed the accelerating nature of collapse in air passenger traffic. In May, traffic fell by 15%, following a 10% decline of the first four months to April. Since the Government’s €10 tax was introduced on April 1st, the rate of traffic decline and tourism collapse has accelerated. The most significant fall was in arrivals to Ireland (down 19%). See Balance of Payments figures below for more details. Since the beginning of 2009, Belgian, Dutch, Greek and Spanish governments have all scrapped tourist taxes and/or reduced airport charges to zero. In contrast, our pack of policy idiots in the Leinster House decided that taxing tourists is just fine, as, apparently, they believe that Germans, Italians, Spaniards, Chinese, Americans and other nationals have no choice but travel to this global epicenter of cultural life and history that is Ireland. Time to call for an encore, Mr Lenihan.


Per CSO release today, the gross external debt of all resident sectors (i.e. general government, the monetary authority, financial and non-financial corporations and households) at the end of Q1 2009 stood at €1,693bn, an increase of €32bn on Q4 2008. The increase arose from a combination of exchange rate effects and the availability of new data.
Per CSO, "the liabilities - mostly loans - of monetary financial institutions (i.e. credit institutions and money market funds) amounted to €723bn. This was €56bn lower than for end-December and, at 43% of the total debt, was a smaller share than in the previous quarter. The decrease was due to a large reduction in debt liabilities, particularly short-term loans, and is to an extent reflected by an increase of over €50bn in Monetary Authority liabilities to the European System of Central Banks (ESCB) including balances in the TARGET 2 settlement system of the ESCB." General Government liabilities increased to €60bn driven by long-term bond issues more than offsetting a reduction in short-term money market instrument issues.

In other words - all's grand in the ZanuFF land: the banks are getting better and the taxpayers are getting deeper into debt.


And if debt figures are not bad enough, here are the latest Balance of Payments data - courtesy also of CSO release today: "The Balance of Payments current account deficit for Q1 2009 was €2,530m, over €1.6bn lower than that of €4,175m for the same period in 2008". Sounds good? Not really.

Due mainly to much lower imports:

• Q1 merchandise surplus of €8,020m was over €3.7bn higher yoy;
• The invisibles deficit increased by almost €2.1bn to €10,550m;
• Services (€2,180m) and income (€7,586m) deficits were both about €1bn higher.
  
• Total service exports at €16,050m dropped €360m largely due to insurance and financial services.
  
• Service imports at €18,230m were up over €600m due mainly to higher royalties/licences and miscellaneous business services.
• Tourism and travel receipts (€640m) and expenditure abroad (€1,324m) were down.
  
• The higher income deficit results largely from reduced profits and interest earnings by Irish-owned businesses abroad (€1,808m) along with increased outflows of profits and interest from foreign-owned enterprises in Ireland (€8,631m).
  
• Interest outflows on Government External Debt also increased.
  
• In the financial account, Irish (mostly IFSC) residents redeemed €40bn of foreign portfolio assets and repaid €27.8bn of portfolio liabilities.
  
• Inward direct investment was low at €794m and was similar to outflow.

Not too good for an exporting nation? You bet.


Of course, reasoned our seasoned policy morons, we simply have no alternative to raising taxes everywhere, for the public sector wages must be paid at an increasing rate. Never mind recession and Government promises to cut the public sector excess fat - if anyone had any mistaken beliefs that this Government is serious about tackling our state of public sector insolvency, hold your hope no longer. CSO figures for public sector employment and earnings released yesterday show once again that Brian Cowen is hellbent on robbing the ordinary taxpayers to pay for public sector cronies' privilege to earn lavish wages and perks. Public sector wages rose 3.4% yoy last month and public sector employment was up 1,000. So let's tax and borrow our way to pay public sector wages and pensions, should we? Irish Economic Model (as opposed to a real economic model) at last.