15/5/2014: Universal Health Insurance: Fake Treatment for a Fake Disease

This is an unedited version of my Sunday Times article from April 13, 2014.


According to Ambrose Bierce’s Devil’s Dictionary, “revolution is an abrupt change in the form of misgovernment”. From this point of view, Irish health system reforms proposals, published by the Government earlier this month are revolutionary in nature.

To prove the above conjecture, one needs to establish two facts. First, that the existent system is a misgoverned one, as opposed to being simply erroneous by accident. Second, that the changes to Irish healthcare being proposed are likely to result in a newly misgoverned system.


The systemic failings of Irish healthcare system are well documented and require no proof. But the fact that these failings are an outcome of the policy choices made by our public office holders and senior civil servants is less obvious. Until, that is, one considers the specific policies of the recent past.

Take our State’s approach to funding healthcare. Under the so-called two-tier system, Irish taxpayers pay four times for the same service: twice for services provision to themselves and then again for the services provided to non-taxpayers. Payments for both services take place via purchases of private insurance, with funds used by hospitals to underwrite their non-fee paying customers, capital stock and employment of staff, and via general taxation, which co-underwrites the same.

Thus, far from being subsidised by the public purse, private insurance holders in Ireland are subsidising public services. In exchange for paying more for healthcare, majority of insurance holders do not necessarily get any better quality or greater quantity of services. Sometimes, they get to jump a queue for some services ahead of public patients. Sometimes, they get better rooms to stay in. But they are not guaranteed such access in all cases. In fact, majority of insured patients in Ireland purchase insurance to achieve some security in being diagnosed and treated should the need for an assessment or a treatment arise.

It is that simple – faced with mismanaged, politicised and state-controlled healthcare, people pay over the odds to get necessary treatments and still bear uncertainty of whether they can secure such treatments.

In terms of economics and simple logic, it is not possible to subsidise someone who pays for the same service twice. Let alone someone who pays for that service for themselves and for someone else. Instead, the entire claim of a subsidy made by a myriad of our public officials, analysts and politicians is based solely on the armchair socialism belief in the existence of the proverbial free lunch.

Under normal conditions, any Government running healthcare with limited resources and under constraints of public finances in peril should treasure those residents who diligently pay for services that others get for free. But in a misgoverned service system, things are different from the norm.

In Budget 2014, Irish Government put forward expenditure adjustment measures relating to health amounting to the full year ‘savings’ of EUR666 million. Just over a half of these measures relate to shifting costs from public purse to the patients. While both public and private patients are being hit, majority of these costs hikes befall private insurance holders.

In the last three Budgets health related revenue and expenditure measures increased the cost of services provision by around EUR670 per insured person. Thanks to the State policies, a family of four on a health insurance plan is now some EUR4,000 poorer in terms of their pre-tax income. This amount represents some 6 percent cut to annual average earnings for a family with two working adults.

Irish families did not get any new or better services in exchange for this loss. But they certainly got plenty of abuse. The latest policy documents from the Department of Health charge the insurance holders with obtaining a state subsidy, and taking away resources from and undercutting access to healthcare for those in need. One gets an impression that private and semi-private patients in Ireland are attending spas co-located with public hospitals, not seeking basic health services.

Thus, few in the Government decry the fact that, based on CSO data, since the end of 2010, Irish health insurance costs rose 56.5 percent, against the overall inflation of just 3.9 percent. This trend compounded already significant cost hikes sustained by consumers under the previous Government. Set against December 2008, February 2014 prices across the entire economy were flat. Over the same period, health services costs rose 8%, hospital services are up 25.5 percent and health insurance costs more than doubled. Since the onset of the crisis, health insurance inflation has outstripped increases in the cost of home and motor insurance by a factor of 6 and 7, respectively.

Undeterred by the absurdity of the state policies toward those purchasing health cover, back in early 2012, the Minister for Health established the Consultative Forum on Health Insurance "with a view to generating ideas which would help address health insurance costs". The forum deliberates while the Government continues to pile up new and higher charges and costs to the already hefty burden of paying for healthcare. Not surprisingly, two years into its existence, the trend for health insurance prices is still up, undeterred by the wise men and women populating the Forum.

The end-game: since 2008, some 245,000 people have dropped their insurance cover, with total numbers covered by insurance down to 2,052,000 in December 2013, according to the Health Insurance Authority. And the above numbers are expected to get worse, not better, over the next nine months.

In short, there is little but misgovernment that is evident in our current public policies on health.


This misgovernment is now being counterpoised by the promise of the new reforms. Per the Department of Health’s latest white paper on introduction of the Universal Health Insurance (UHI), published earlier this month, Ireland is to move toward a cut-and-paste carbon copy of the Dutch system. The reform promises a free healthcare with uniform access for all.

In truth, the system is not free. Setting aside Minister for Health guesstimates of the final cost of the Government proposals, the Dutch UHI system costs more on per capita basis than our existent system. And the Dutch healthcare costs inflation is higher than here, once we strip out ‘austerity’ measures imposed on public and private health. Since 2008, Dutch UHI costs rose by some 40 percent, while the patients faced a reduction in the basic package contents.

But UHI is not the only cost relating to health services in the Netherlands. Dutch families purchasing the UHI also face significant costs under the Exceptional Medical Expenses Act (EMEA). The EMEA covers care for disabled and elderly, partial cover for psychiatric care and other similar expenses. On top of that, under the Dutch model, access to a range of services and treatments falls outside the UHI cover. These include, amongst other, such necessities as ulcer drugs, tranquillisers and anti-depressants.

2011 assessment of the system, by the Dutch Association for Elderly Care Physicians puts total annual cost of healthcare provision in the Netherlands at EUR7,400 for a family of two adults with two children on a combined family of EUR60,000. Pair this cost with a likely loss of tax deductibility under the UHI, Dutch pricing of UHI applied to Ireland can lead to the annual costs of EUR8,800-9,000 per average household.

We can delude ourselves into dreaming up schemes that can beat Dutch efficiency, but in our hearts we know that the HSE in its current form is unlikely to become a benchmark for healthcare management in Europe. We can further imagine that the Dutch model’s successes are down to the introduction of the UHI, but that too would be a stretch of imagination.

For example, the Dutch are one of the top performers in the OECD in reduction in mortality from heart disease. Yet much of this improvement took place well before the introduction of the UHI. On the other hand, in recent years, the Dutch posted 7th highest rate of mortality from cancer in the OECD. In this area, Ireland actually outperforms the Netherlands. Slower rates of improvement in cancer treatments in the Netherlands have been associated with more recent years, under the UHI cover, as opposed to earlier years, prior to the UHI coming into force.

As per access, based on 2013 OECD review of healthcare systems around the world, Dutch system delivers relatively mediocre performance when it comes to the patients perceptions of equitability of health outcomes based on individual income.

Quality of care is also a concern in the case of a UHI model.  In 2010, Dutch Healthcare Performance Report found that absent price-differentiation under the UHI, hospitals tend to compete for patients on the basis of quantity, not quality of services provision. This reduces times spent on hospital beds, but increases re-admissions to hospitals. Cost containment measures are also often resulting in reduced compliance with treatment plans, which is increasing the risks for patients with chronic diseases and long-term conditions.

In the case of GPs access, flat fees, combined with cuts to capitation spending, UHI can result in shorter consultations and fewer conditions being addressed during each consultation.


The main advantage of the UHI system is that it separates provider of services, such as hospitals and medical practitioners, from payer for services, e.g. the state and insurance companies. In Irish context, this means drastically reducing HSE’s power in managing the health system. Thus, absent a deep, structural reform of the HSE, current insurance holders can simply expect to pay more for even lesser services of lower quality under the UHI.

All of this clearly suggests that latest plans propose a new form of misgovernment being introduced into the already misgoverned system of public health. A Biercean revolution in policy formation.

box-out:

IMF's latest Fiscal Monitor released this week makes for an uncomfortable reading for anyone concerned with public finances in Ireland. The Fund sets out an exercise of estimating the fiscal efforts needed to drive down Government debt across the advanced economies to their target levels by 2030. In the case of Ireland, this envisages a reduction in debt from 123.7 percent of GDP forecast for 2014 to a 2030 target of 64.8 percent. To achieve this, the IMF estimates that Ireland will need to deliver average annual surpluses net of interest costs on public debt of 6.3 percent of GDP over the next 17 years. This is slightly below Spain's, but well ahead of Portugal's and Italy's. Iceland, hit by a crisis as severe as ours, will require only 1.1 percent average surpluses to deliver on a debt reduction from 91.7 percent of GDP in 2014 to 43 percent of GDP in 2030. One of the drivers for this bleak outlook for Ireland is the Fund estimation that we will run second highest level of average fiscal deficits in 2014-2030 in the euro area. Another reason is that by IMF analysis, Irish economy has been a relative laggard in the group of crises-hit advanced economies. IMF reports a Cyclically Adjusted Primary Balance (CAPB) - a measure of public deficit stripping out the temporary effects of the recession on public finances and interest payments on Government debt. This year Ireland will reach a cyclically adjusted primary surplus for the first time since the onset of the crisis. Iceland has done the same two years ago, as did Greece. Portugal recorded its first CAPB surplus in 2013. Italy has posted surpluses in every year since 2006. Only Spain is expected to under perform Ireland on CAPB basis. For all the talk about tax cuts in 2015, it looks like the IMF might have some tough questions for the Government before the Budget Day.

26/10/2013: Europe's Structural Deficits & Ireland's Headache...

As you know, I prefer not to blog extensively on economics matters over the weekend. However, due to work time constraints this week, I have accumulated lots of interesting material that requires some catch up blogging... so here are some new posts on economics matters...

First up: an interesting chart summarising neatly the problem of Irish fiscal consolidations to-date and the reasons why we are not out of the woods yet.

The above plots structural deficits in the EU (in other words the deficits that would have prevailed if the economy was not in a cyclical recession or downturn), as estimated by the EU Commission. Less questionable are those deficits derived using the IMF methodology:

According to IMF estimates, Ireland's structural deficits are the fourth largest in the EU and are second highest amongst the 'peripheral' states.

For comparative, consider also the primary deficits (removing the cost of interest on government debt):

Ireland is the worst performer in 2013 in the EU (this might improve to the second worst given reclassification of EUR700 million in licenses sales from 2012 into 2013). Notice that Greece is already running primary surplus, while Italy is close to doing so.

The above clearly shows that the Exchequer in Ireland is far from achieving sustainable deficits trajectory and that any claims that Ireland is close to completing fiscal adjustment required to restore its public finances to health should be subject to serious reservations.

4/10/2013: IMF 11th review of Ireland: Banks & Exchequer

IMF released its 11th review of Irish economy under the Extended Arrangement for funding. I covered growth-related issues arising from the IMF release here: http://trueeconomics.blogspot.ie/2013/10/4102013-imf-11th-review-of-ireland.html

Now, some other topics, namely banks and the Exchequer.

Per IMF: "Ireland is expected to return to reliance on market financing in 2014, yet further European support could make Ireland’s recovery and debt sustainability more robust. Irish banks face weak profitability that hinders their capacity to revive lending. European support to lower banks’ market funding costs could help sustain domestic demand recovery in the medium term, protecting debt sustainability and financial market confidence."

What's that about? Here are two charts:

IMF: "The recent retracement of Irish sovereign bond yields has been broadly consistent with the experience of other countries in the euro area periphery." [But wait, what about Ireland's unparalleled success in fiscal adjustments and 'best-in-class' status? Are the IMF saying that Enda did not singlehandedly deliver huge improvements in Irish bonds yields? How can this be the case, unless the Irish Government uses 'we' as denoting 'Peripheral Countries' collective in claims that the Govenment has delivered stabilisation of Government funding costs.]

"After touching record lows in early May, the 10 year yield has risen 56 basis points, to 3.98 percent as of September 11. Market tensions dissipated in July after the settlement of the political crisis in Portugal and recent turbulence in emerging markets has had limited effect on Irish bond yields. No new bond has been issued by the Irish sovereign since the €5 billion ten-year issue in mid March." The latter, of course simply means that lower supply of new bonds (lack of it since mid-March) and now the new announcement by NTMA that it will not be tapping the markets any time before official exit from Troika supports, are keeping things steady in yields terms. Otherwise… well… logic suggests, at least speculatively, they can be higher.

And on banks: "From a trough in mid-May, yields on Bank of Ireland (BoI) and Allied Irish Banks (AIB) 3 year covered bonds have edged up some 40 basis points as of September 11. Since its May 30 issuance, the yield on BoI’s 3 year senior unsecured bond has been more volatile, but overall has risen by 62 basis points, to 3.37 percent."

Bah! Two things to say about the above:

1. Banks bonds still tracing sovereign risks and that holds even for covered bonds! Not a good sign for the banking sector. The explicit guarantee is gone, so now it is don to the implicit guarantee and the state simply cannot shake off the baggage of the original 2008 Guarantee. Irish banks are still too-big-to-fail and Irish state is still a too-small-to-bail-in banks lenders.
2. For an army of bonds sales-desks analysts out there pontification on Irish economy, I am yet to see their honest analysis on what is happening with banks funding costs and sovereign funding costs. They are a bit too keen talking about the economy and too little about debt markets. Which is sort of 'your dentist is football analyst' analogy...

"Deposit rates continued to inch downward, however, and ECB borrowing by domestic banks fell from €39.6 billion at end March to €33.4 billion at end August, reflecting a paucity of new lending, further noncore asset deleveraging, modest amounts of new market funding, and a broadly stable deposit base."

So cheap funding dissipating, deposits (stable funding) still anaemic or declining… Happy times, folks. Stabilisation bites. Come back and argue that when businesses and households are croaking under the weight of interest on their debts with the above 'improvements'.

Why wait, however, let's take a look at IMF-reported 2009-2013 data:
Banks non-performing loans (vs provisions) as % of total loans: 2009=9% (4%) or 44.4% cover, 2012 = 11.3% (5.4%) or 47.8% cover, 2013 = 11.5% (4.5%) or 39.1% cover. So cover is shrinking! Meanwhile, personal lending rates have gone up (as ECB repo rate went down) from 11.1% in 2009 to 11.6% in 2013, and SVR mortgages rates have gone up from 3.3% in 2009 to 4.4% in 2013. Government bond yields are down from 4.9% in 2009 to 4.2% in 2013. What's happening folks" The state credit costs are being dumped onto mortgagees. The 'rescue' of the banks and subsequently the rescue of the state has been loaded up onto the borrowers from the banks.


On the positive side, Exchequer performance was good. Not spectacular, but fine - in line with (and slightly better than) budgetary targets:

Do note the caveats listed below the charts - it would be nice were the Irish authorities actually provided a clear, consistent and well-defined map of all one-off payments and receipts… but then the picture of the fiscal adjustment would not have been as pretty as our politicians like to claim. Still, the picture is broadly fine.

Crucially, the above is not sufficient for us to rest on our laurels. For a number of reasons, but chiefly for the reason not even mentioned in the IMF note: has anyone looked at how sustainable, over the medium (2015-2020) term the fiscal savings delivered by the Government are? I mean: we know that pay moderation agreements with public sector unions are not sustainable and even subject to automatic reversals in 2015-on, right? We also know that much of health system 'savings' are not sustainable, since these come on foot of extracting more and more cash out of ever-dwindling supply of private insurance holders. Right? What else is not sustainable? How much? What is the risk down the line? Is corporate tax revenue uplift we have seen over the last 24 months or so sustainable? Much of it seems to have come from MNCs booking more transfer pricing profits into Ireland. Is that 'sustainable'?

IMF does some 'sustainability' tests in its analysis and here is a scary chart:

Basically, note the path of the gross financing needs for Ireland through 2018. This returns us, under baseline (no new shocks) scenario back to the situation in 2018 where financing needs of the Exchequer are slightly above the needs in 2013. This is assuming GDP is growing 2.5% annually in real terms 2015-2018. And this is incorporating the 'savings' achieved from the Promissory Notes. And this is after we impose agreed target cuts of 2014-2015. We are swimming faster and faster to be thrown back, not even to stay put.

Now, tweak few assumptions:

So in Constant PB Scenario, the change is with no 2014-2015 'austerity' factored in, which is boring stuff. But the exciting stuff is the 'Historical Scenario' where things slide back to 'normal' on growth and government deficits:

 The outcome of the above in two charts:
1) Public debt explodes

2) Financing needs of the Government explode too

Care to argue now we can afford a 'stimulus'? As Harry Callahan put it: "Go on, punk, make my day!"

2/2/2012: Exchequer non-returns from January

Exchequer returns pose no surprise - and none were expected, given this is just January - so no point of updating the detailed data sets.

Some top figures.

On tax receipts:

• Income tax revenues are up at €1,260mln in January 2012 over €987mln in January 2011 as USC kicks in full tilt this year.
• VAT is at +3% yoy to €1,725mln in part boosted by small gains in sales over Christmas period in terms of volumes.
• Corporation tax is up to €271mln from €72mln a year ago, but €250mln of this was due to delayed receipts from December 2011, so in reality, Corpo is down on 2011. 

None of the above are really significant as timing might have been a factor in all of these. It will take through March to see the real changes in the underlying numbers.

Exchequer deficit is at €393.7mln down from €483.2mln a year ago. So now, deduct that €250mln from the receipts side and you get Exchequer deficit at €643.7mln or some €160mln ahead of January 2011. Not pretty, eh?

Of course, as I said above, there is no point of doing any analysis on returns for just one month, so take the above comment with a huge grain of salt.

23/11/2011: A longer term view of Ireland's structural deficits

Someone recently requested the analysis of structural deficits for Ireland. So here's a quick note. All data is taken from IMF WEO database for September 2011. IMF estimates 2011 deficit and forecasts deficits for 2012-2016. All frequencies and cumulative data calculations are my own.

Let's start with graphing our structural deficits. Remember, these are measured as % of total potential GDP, omitting the effects of business cycles on volatility in GDP. This makes structural deficits to be less precise than actual deficits, but useful in so far as they tell us the story of the long-term sustainability of the Exchequer spending.

Chart 1 below shows the overall structural deficits expressed as the percentage of potential GDP and in absolute national currency terms.

In the nutshell, the above chart shows that Ireland remained structurally insolvent for the entire history of the series since 1980 through 2010 and is expected to remain insolvent through 2016. It also shows that:

• Ireland was least insolvent in 1997-200 when the average structural annual deficit was just -0.65% of potential GDP
• The closest we came to structural balance was in 1997 when structural deficit hit -0.394% and in 2000 when it was at -0.209%
• Our peaks of insolvency were 1981 (-14.034%) and 2008 (-13.323%)
• Our worst periods of insolvency were the early 1980s, when 1981-1986 average annual deficit stood at -12.125% and 2007-2010 when structural deficits averaged -10.555% annually (omitting 2007 raises this to -11.266%)
• In 2011 we are expected to run structural deficit of 6.761% and in 2012-2015 we are expected to run average structural deficits of -3.753%.

All of these deficits add up to a nifty number. Chart below shows cumulative structural deficits. Per this, by the end of this year, our structural deficits since 1980 on will be adding up to €162.3billion. By 2016 these numbers are forecast to rise to €193.6 billion.

In terms of the frequencies of various solvency performance conditions, Irish structural deficits historically exceeded 3% per annum in 26 out of 32 years, implying a 84% chance of excessive unsustainable structural deficits. In contrast, relatively safe deficits (<2%) occurred in only 4 years in 36 years of history plotted above: 1997-2000. Thus, Ireland was close to sustainability only 13% of the time.

Economics 17/11/10: The road we traveled

Amidst this crisis, it is worth taking a look back at the road that we have traveled on our way to the current predicament. It is fashionable today to make claims that the past - the recent past in fact - has been a place of greater fiscal responsibility, the age of 'sustainable' public finances. But is the claim true? Have lost our way all of a sudden around 2005-2007, or have we always been traveling along the same route.

Here are few charts looking back to 1983...
In absolute levels terms, spending and tax receipts have clearly grown dramatically over the years. These are nominal figures, of course. But notice that total expenditure line almost invariably exceeds total receipts levels. The chart also shows pretty dramatic changes that took place since 2007.


Now, let's take a look at the decomposition of the Exchequer balance sheet:
Clearly, gross current spending has been a core of the overall Exchequer financing. The most dramatic departure from 'investment' focus toward current spending focus took place around the turn of the century. Looking at the comparatives across the shares of GNP taken up by capital and current spending shows this even more dramatically. If during 1985-2000 period current expenditure declined as a share of GNP, capital spending first fell (through 1988) then stagnated (through 1997), and then rose through 2002. Capital spending stagnated in the boom years of 2003-2007 and then rose again (due to contraction in GNP) through 2009. However, from 2006 through today, current spending went through the roof.

Another interesting feature of the chart above is that during the current crisis there was not a single year when the current expenditure declined - either in terms of absolute level of spending or in terms of spending relative to GNP.

Total government spending both in levels and as a share of GNP is expected to fall this year for the first time since the beginning of the crisis. This, of course, is driven solely by the decline in capital spending, as charts above indicate.

Now, let us plot primary Exchequer balances - the difference between the total receipts and expenditure.
In broad terms, over the long run, Irish Exchequer has been historically on a non-sustainable path. In only 3 years since 1983 did our total receipts cover total expenditure: 1999, 2000 and 2006.

It is worth noting that we are, despite what Minister Lenihan says, firmly back into the 1980s territory:

• Our current expenditure will stand around 48.7% of GNP this year - a level consistent with 1986-1987 average
• Our capital expenditure as the share of GNP is now 5.7% - the level also attained in 1986
• Our total government expenditure stands at 54.4% this year - the level close to the one last seen in 1986 (54.7%)
• In 2008 our balance was -9.8% which was between 1986 and 1987 levels of balance
• In 2009-2010 we have posted worse deficits than in any other year recorded in the abvoe charts.

So what about good cop - bad cop game of blame going across the Dail isles?
It turns out that on average annual basis, Brian Cowen leads the recent history team of profligate Taoisigh with a whopping (albeit obviously crisis-related) average annual shortfall of €26.5bn so far. Together - Bertie & Cowen come distant second with €5.5bn in annual shortfalls. But overall, there is not a single Toiseach in the modern history of Ireland who managed to balance the books at the primary level. Hardly a sign of any fiscal 'golden age' in the past.

Economics 5/8/10: Good news - we might be 'one-off' broke?

Good morning, folks. As a day starter, please take a note: We are bust! Yesterday’s Exchequer returns are a worthy reading on the theme of the day and hence I am writing a third post on the subject. Let me recap where we are at:

Tax receipts are now under €17.2bn cumulative for the first seven months of the year. As far as our ‘ever optimistic’ official analysts go, things are going on swimmingly. But in reality, we are on track to meet my December 2009 forecast for a shortfall of €500-700mln on the year. And that despite the fact that Ireland has ‘turned the corner’ on growth – highlighting the fact that the read through from GDP to tax revenue is not a straight forward thing. Of course, most of the shortfall is due to our real economic activity – as measured by GNP – is still tanking.

So relative to profile, here’s the picture:Good news on expenditure – overall voted expenditure was 2.6% below anticipated for the period to July. But this ‘achievement’ was driven solely by the cuts to capital spending. Thus, net voted capital expenditure for the first seven months of the year now stands at €2.2bn – full €660mln (-23%) below target. Net voted current expenditure is so far on target, while national debt is costing us slightly less (-€213mln) than DofF anticipated.

So overall, we are on track to deliver the Exchequer deficit of ca €19bn in 2010, close to the target €18.78bn, as capital spending accelerates in H2 2010. But we won’t reach the overall target to GDP. Most likely, we are going to see a 12% deficit to GDP ratio.

And this does not include the full extent of funding for Anglo and INBS. Brian Lenihan has already committed the state to supply €22bn to Anglo alone, of which €14.2bn was already allocated, but only ca €4bn went on the Exchequer accounts. Of the still outstanding €7.8bn, the question is how much of this amount is going to be directly shouldered by official deficit figures. The second question is – will €22bn cover Anglo demand for capital post Nama Tranches II and III transfers – recall that Anglo is yet to move loans for Tranche II. The third question now relates to AIB – given its interim result announced yesterday, one has to wonder if the bank will need more capital. What is beyond question now is that the State will be standing buy with a cheque book ready, should AIB ask for cash.

All in, Ireland Inc’s sovereign accounts this year are likely to come out with a 20% plus deficit relative to GDP. That’s a massive number implying that over a quarter of domestic economy will be accounted for by the shortfall in public finances. Our debt can easily reach over 87% of GDP and close to 110% of GNP (and that’s just including the full Anglo amount of €22bn and excluding Nama and the rest of recapitalizations liabilities).

Scary thought. But don’t worry – the Government will come out to say that it was all due to one-off measures. One-off in 2008, 2009, 2010, and one can rationally expect 2011 and even possibly 2012. By which time Nama liabilities will begin to unwind… serializing the one-offs into the future.

Economics 4/8/10:Exchequer July receipts

Note: Corrected version - hat tip to Seamus Coffey!

As promised in the previous post (which focused on the Exchequer balance, here), the present post will be focusing on actual tax receipts.

I have resisted for some time the idea that Budget 2010 targets are somehow analytically important. Hence, you will not find targets-linked analysis here. But the main tax heads - their comparative dynamics over 2008-2010 to date are below.

First, take a look at the actual cumulative to date levels.Overall tax receipts are now running below 2009 numbers, and are still way off 2008 numbers (off €1,536mln on 2009 and €5,520mln on 2008). This means we are now 8.22% below 2009 and 24.35% on 2008.

Two largest contributors to the receipts are Vat and Income Tax:Vat is now €483mln below 2009, and still €2,453mln behind 2008, which means we are now 6.9% down on 2009 and 27.5% behind 2008. One wonders how much of this Vat intake in 2010 is due to automotive sales increases driven (as I explained in earlier posts) predominantly by the 'vanity plates' with '10' on them. Income tax shows a similar pattern: down €537mln on 2009 (-8.45%) and €1,060 on 2009 (-15.4%).

Corporate tax and Excise are the next largest categories.Cumulative year to date, corporate tax receipts are performing weaker than in 2009 (-€260mln and -13.8%) and ahead of 2008 (+€192mln and 13.4%), but this is due to timing issues and financial markets recoveries in H1 2010. Excise taxes are still under-performing: down €87mln on 2009 (-3.37%) and €773mln (-23.7%) on 2008.

Stamps
Transactions taxes are not faring well. Stamps are down €75mln on 2009 (-18.3%) and down €808mln on 2008 (-70.7%).

Surprise surprise, Capital Gains Tax is singing similar song:
So CGT is down €89mln (-44.3%) on 2009 - despite being beefed up by bull markets in financial assets, and is down €544mln (-83%) on 2008.

Year on year changes show stabilisation around 2009 levels.
Usually, the Exchequer returns publications now days provoke a roaring applause from our banks and other 'independent' analysts and the remarks about 'turning a corner'. This time - no difference. Nope, folks - let me stress - there is not even a stabilization around horrific results for 2009. Exchequer revenues are heading south. We haven't gotten anywhere close to resolving the crisis.

But let me show you what this bottom will look like, once we are there.
It is a horrific place in which personal income and consumption-related taxes bear roughly 75.2% of all tax burden (up from 62.5% in 2008 and 68.6% in 2009). Meanwhile, physical capital taxes contribution to the budget have shrunk from 14.7% in 2008 to 9% in 2009 and 4.2% in 2010. Corporate tax, despite the robust performance now contributes only 9.5% of total tax receipts down from 2009 level of 12.4% and 2008 level of 13.5%.

In other words, those who benefit less of all demographic and economic groups, from public services - the upper middle classes - are now paying more than 50% of the total tax receipts bill. This, in the words of some of our illustrious guardians of social justice is called 'protecting the poor'. In other times, in other lands, it was also called 'taxation without representation'.

I would rather call it a tax on human capital - the very core input into 'knowledge economy' that we need to get us out of the long term economic depression.

Economics 4/8/10: Exchequer July results

Exchequer figures for July 2010 are out. Here are trends and some details. Analysis of revenue (by line) will follow later tonight.

Month on month changes first:
Notice seasonality. Seasonally adjusted surplus/deficit is not replicating the V-patterned change over three months. Instead, we are showing persistent worsening of the deficit. This is not due to a surprise expenditure deterioration, as current expenditure side held quite well relative to 2008 (down from €27,565mln to €27,039mln).

One interesting feature, however, on expenditure side is that May-July 2010 saw a net rise in overall expenditure, while same period in 2009 saw a contraction.

Convergence of tax and total receipts was in line with previous years:
This was achieved primarily by relative under-performance of tax revenues, down from €18,689mln in same period of 2009 to €17,153mln this year, plus slowdown in capital receipts mom (although still up yoy cumulatively). Automatic stabilizers are now in action.

Putting receipts against deficit:
Total receipts are persistently down in the last 3 months, and with them, exchequer deficit is rising. This again runs counter to the seasonal trends. Notice also that mean reversion on receipts side is now completed, while deficits are trending still above the long term trend line, primarily due to the fact that 2009 figure includes banks recapitalization costs, but 2010 figures so far do not account for these in full (more on this below).

The broken seasonality pattern on receipts side is evident in the chart above.

On to cumulative results for the year:
Tax revenue is significantly under-performing 2009, let alone 2008. Remember, with all tax increases on 2009 we should have been somewhere between the red and blue lines. Is this suggesting that higher taxes (certainly on the books for Budget 2011) might be counterproductive to revenue objectives?
Total receipts are still coming out slightly above 2009 - thanks to stronger performance in June.

Total cumulative expenditure is running below 2008 levels. That's thanks to cuts in capital spending and under-provisioning for banks in year to date 2010 (more on this below).

Now, deficits:
For a moment there, it looked like we were heading toward abysmal 2008 levels (but not as abysmal as 2009). That's because the Government booked all its capital spending savings into April-June. With these savings now exhausted, our deficit has taken a nose dive.

Shall we compare with banks in across the board?
Hmmm... were capital expenditures (inc banks supports) through 2010 so far running at 2009 levels, we would be worse off in terms of spending than last year.

Now, remember, we (well, actually IMF) were promised by the DofF that the bank recapitalization funds since January 2010 "are now reflected in deficit projections for the year". Actually - they are not. Not 6 in the Exchequer Statement details what is covered in banks recapitalization to date:So in brief - no actual capital injection of any variety is covered in Exchequer data. No purchases of equity in AIB and BofI are covered either. It looks like the Government might be waiting to push these numbers through at the last minute, say forcing recognition into December 2010. Such a move would allow it to pre-borrow funding from the markets without anyone raising too much fuss about contagion from banks balance sheets to the sovereign. Once 2011 arrives, the Government can turn to the markets and say 'Well, that was one-off stuff. Business as normal now."

One way or the other - look at the 2009 figure in the table above: that's the benchmark for our real performance.

Economics 28/04/2010: 'Duin de rite ting'

A brilliant chart from one of the readers (hat tip to Jonathan):
May Toyota forgive me a pun, but is this a stuck (downward) accelerator problem?.. After all the 'right things' done to our economy, why are we still leagues away from even our fellow PIIGS travelers?

Economics 05.03.2010: Greeks are paying the price

So you've heard by now that Greece 'escaped' the wrath of the market yesterday by placing €5bn worth of 10-year bonds. But don't be fooled - Greek's escape was nothing more than a respite: Greek taxpayers are now on the hook for paying a 6.3% yield on the 10-year paper - in line with near junk status of the bonds. This marks the highest spread for Greek debt since 2001.

Despite the issue being covered at 3x, there is a possibility for prices to tumble in the secondary markets (as happened with their 5-year paper last month) and there is an added concern that demand was underpinned by speculative investors with short-term horizons, as 'hold-to-maturity' types of investors (e.g insurance companies and pension funds) are cutting back on their holdings of PIIGS bonds. If the latter is true, then we can expect a serious pressure on yields to emerge in the next few days, with subsequent noises from the EU authorities about 'speculators' profiteering.

Big - albeit artificial - test for the euro will be March 16th when the EU Commission will rule on Greek fiscal consolidation plans. Expect approval, enthused speeches, and backroom talks on how to proceed forward with the country that

• plans to cut 2% of its GDP-worth off the deficit this year, but
  
• is unlikely to deliver on this target, whilst
• needing to cut a whooping double the planned amount just to stay afloat toward the 3% deficit goal for 2014-2015.
  

Meanwhile, Jean Claude Trichet went out of his way yesterday to tell the Greeks not to invite the IMF. During his press conference, Trichet repeatedly stressed that Europe has its own safety net for defaulting states (well, not quite in these terms) so no need to call in the big boys from the IMF. One wonders, what is Mr Trichet talking about. Papers quote Trichet saying that it is absurd to envisage scenarios of Greek exit from the euro.

All of this resembles the debates in the Afghan government in 1979 - to invite the Soviets or not... And the really, really, really funny thing is - IMF is EU-led organization (of the two supernationals: the World Bank is traditionally reserved as the leadership game for the Americans, while the IMF leadership goes to the EU appointees). While the Greek taxpayers are now set to pay over ten years €184.22 per each €100 borrowed last night - a steep price for not calling in 'Your Own Bad Guys' from Washington.

Now, put the Greek pricing into a perspective. On 14 January 2010 the NTMA issued €5 billion of a new bond, the 5% Treasury Bond 2020. If Irish debt was priced at Greek yields, the total cost to Irish taxpayer from this deficit financing would have risen €21.33 from €62.89 per €100 borrowed. In other words, our expected annual deficit for 2010 alone would be some €4,050 million more expensive over 10 years.

Economics 20/01/2010: Long term comparatives for Ireland

Some time ago I promised to publish some long term macroeconomic comparatives for Ireland relative to other small open economies of Europe. Here they are (all data is courtesy of the IMF's Global Economic Outlook dataset with some forecasts adjusted to reflect Government own forecasts in Budget 2010):

First output gap as percent of potential GDP

There is really no doubting who's worse off in this picture. And notice how much more dramatic is our output gap volatility compared to, say, Austria - another small, but more stable economy, despite it having a massive exposure to high growth and high volatility Eastern and Central European countries.

Next, we have GDP per capita.

Several features of the chart are worth highlighting.

Obviously, Iceland is now on the path, per IMF to close the gap between themselves and us in terms of GDP per capita. Dynamics-wise, it is expected to do better relative to Ireland than it ever did in the period since the late 1990s through the bubble. Taking medicine on time and in full, obviously pays for Iceland. Back in 1999 Ireland moved onto a path of GDP per capita in excess of Iceland. In 2009 it moved on the path of GDP per capita converging with Iceland.

Who's doing better here? By the end of 2014, Iceland is expected by the IMF to fully recover from the crisis, reaching peak GDP per capita once again, after a shorter recession than the one enjoyed by Ireland. And Iceland will do so with faster growth in population than Ireland will (see later charts).

Under DofF dreamy assumptions, Ireland too will reach its pre-crisis peak by 2014, but it would have taken us a year longer to get there than Iceland. And this is under DofF assumptions.

Now, I also provide my own forecast - somewhat gloomier than that of the Government - which implies that i do not expect Ireland to reach the pre-crisis peak income per capita any time soon. And this dynamic will be paralleled by a slower growing population.

Also, do remember - our GDP is not a measure of our income (GNP is), while for Icelanders the two measures are more closely related.

Next inflation as measured by CPI:
Do tell me we are just fine with 5% deflation in the current cycle. Not really, folks. In order to get us back to price levels that imply competitiveness, we need a good 40% deflation if not more.

Unemployment - the one that we are being told is getting better now that 'the worst is already behind us' per official Government view:
Again, think Iceland and Greece. Greece is a good one in particular - their unemployment was high since the late 1980s. Ours was low since the mid 1990s and sub-zero since 2001. But, thanks to our 'head-in-the-sand' economic policies during the current crisis - we are now at the top of the league.

Demographics - some say this is our saving grace, the golden 'get-out-of-the-slump' card:
Nothing spectacular that I can spot here. And these are IMF projections that lag in incorporating what we, on the ground already know - the rapid depletion of our foreign workers' population and waves of young Irish people leaving the country.

Let's take a look at employment (as opposed to unemployment) as % of the total population. basically, the higher the number, the lower is the country dependency ratio (in other words, the greater is the number of people working than the number of people they support):
We were doing pretty well - just below Iceland and Switzerland. Post crisis, Iceland will retain its second best position, but we will slide below Lux. Again, this is in the environment where our population will be growing slower than that of Lux...

General Government Balance:
Well, yes - per Brian Lenihan we have taken the necessary steps... Did we? How is fooling who here? Iceland will be ahead of us with default and without a mountain of international bondholders' and depositors' liabilities on the shoulders of its people. We will both, destroy our public finances and our private households' finances as well. All for what? To make sure we do not upset banks bond holders? But wait - these figures do not reflect Nama and its cost. They do not reflect future bank recapitalisations. Were they to do so, our Government Balance would have fallen way beyond 16-18% mark.

But let us take a different look at the same figure:
Now, remember all the talk about Charlie McCreevy being a profligate spender as the Minister for Finance. Actually, not really. Over his tenure - longer than that of his successor, McCreevy presided over relatively mild deterioration in fiscal position. Primary balance under McCreevy in cumulative terms was close to break even. Under Minister Cowen things spun out of hand. Noticeably, Minister Lenihan is doing a much better job than his predecessor, although it is hard to say whether he is doing it because he actually believes in some sort of fiscal discipline or because he simply cannot borrow all the money he would like to borrow.

Current account balance:
For an economy that is staking its survival on exports (and we really do not have much of hope of doing otherwise), we are not looking all too strong in 2010-2014 projections by the IMF. Iceland, in contrast, is looking mighty alright relative to us, having undergone massive devaluation. Again, our deflation at home is simply not enough to compensate for the fact that we cannot devalue the grossly expensive euro.

Let me take you through more comparatives. Back to Government deficits. Now, recall there are two components to deficit - structural (due to chronic overspend) and cyclical (due to a recession).
Again, notice how Greece and Austria are on virtually identical path, although Greece is above Austria. This means that on average, the share of their overall deficit that is structural is relatively the same. If Greeks were to cut their structural deficit relative to its position today, their overall deficit will decline by a lower percentage than the same drop for Ireland. In Ireland's case, we have smaller cyclical deficit than the Greeks do, but greater structural deficits. Relative to Austrians, we are simply a drunken sailor hitting the first pub on the shore.

Take a closer look at the Irish data alone:
In the 1980s through late 1990s - much lower structural deficits than since 1998. Why? I guess Bertie really was a profligately spending socialist of the old variety.

Last chart: just to drive home the same point as before: Note the dramatic deterioration in structural balances under Mr Cowen - throughout his years as Minister for Finance, he was spending not only the money he had (shallower surpluses than his predecessor), but also the money he did not have (deeper structural deficits), leveraging lavishly future generations' wealth. Mr McCreevy, in contrast, really was spending what he had, with structural deficits starting to cause problems in his tenure only around 2002.
And one last point to make - notice how our structural deficit has caught up with its 5-year moving average line. This suggests that even in the Budget 2010 we still did not do enough to reverse longer term trend leading us deeper and deeper into permanent insolvency.

Paraphrasing Fianna Fáil's 2002 general election slogan: "A Little Done, More To Do"...