09/01/2011: Exchequer returns - Part 6

This is the sixth post on Exchequer returns for 2010 (previous parts are here: part 1, part 2, part 3, part 4 and part 5).

This time around, I am going to take a closer look at the incidence of taxation across various tax heads and agents of economy.

During the year, I have been consistently highlighting the problem of rising burden of taxation for the households - the core agency of any economy. In particular, the rising burden of income taxation. Here are two charts - one comparing 2007-2010 at H1 end and another comparing same years at year end:

Table below summarizes:
Interestingly, Minister Lenihan in his address relating to the release of December returns has gone out of his way to highlight two things:

• Increase in corporate tax returns, and
• Decrease in income tax returns

Minister Lenihan would be better served if he were to look at the 2007-2010 comparatives, which clearly show that his Government's policies have shifted massive new burden for carrying public expenditure onto the shoulders of ever-shrinking (remember latest Live Register results?) pool of working households. At the same time, corporate tax contributions to overall tax receipts have declined on 2007 (albeit insignificantly).

Let's highlight this for him, taking into account that both businesses and households are paying more than just corporate and income taxes:

No comment needed!

09/01/2011: Exchequer returns - Part 5

In a follow up to the previous 4 posts on Exchequer returns (part 1, part 2, part 3 and part 4), let me update my own earlier charts on receipts to cover 2007-2010 horizon. There are some striking comparatives to had out of these.

First by tax head:

Now, totals
And now, let's carry out two exercises. First, consider changes year on year and over 2007-2010 horizon:
The second exercise is in the bottom section of the table above. Suppose we fix tax revenues at the levels of 2007 (case 1) and at 85% of 2007 (case 2) levels. The choice for 85% is warranted as it roughly speaking represents a 50% moderation in housing price growth activity on 2005-2007 - not a housing recession, but slower rate of growth. In other words, this is equilibrium effect. What would have been the Exchequer shortfall in funding given the path of expenditure taken by the Government over 2007-2010?

As shown above, between 2008 and 2010 the Government would have to cut expenditure by some €10.3 billion in order to bring fiscal balance to the receipts fixed annually at 85% of 2007 levels. And these are net cuts! Alternatively, only €13 billion of the total cumulative 2008-2010 deficits of €49.1 billion can be accounted for by a decline in tax revenue below equilibrium level. The rest, my friends, is due to over-spending...

08/01/2011: Exchequer returns - part 4

Corrected - hat tip for an error to Seamus Coffey.


In Part 1 of the post on 2010 Exchequer returns I looked at a couple of headline points relating to the issue of Ireland's fiscal policy performance in 2010 (here). Part 2 of the post dealt with my forecasts and longer term analysis of fiscal environment in Ireland (here). Part 3 focused on the expenditure side of the Government balancesheet (here).

In this part, let's tackle the issues relating to tax receipts.

Again, the main headline picture first:

As the chart above clearly shows, the idea of 'stabilizing' tax revenue relates to the Government view that replicating previous year performance - albeit at a slightly lower levels - is somehow a good thing.

Amazingly, 2010 absolute underperformance of the already abysmal 2009 comes after a host of tax hikes and levies introductions by the Budgets 2009 and 2010. Minister Lenihan has been pushing ever increasing tax burden onto the Irish economy, while getting less and less revenue in return.

Relative to 2009 and 2008:

• Income tax was down 4.72% and 14.43% respectively
• VAT is down 5.33% and 24.79% respectively
• Corporate tax - the one Minister Lenihan has been singing praises about this week - is up 0.606% on 2009, but down a massive 22.55% on 2008

Here are few charts by main tax heads:

Of course, given investment and housing markets performance, stamps, CGT, CAT etc are showing continued strain as well:

Of course, CGT is a reflection of economy's performance on investment side. Here, there is clearly no recovery in sight.

Dynamics year on year:

All of which means that year on year performance is now 'stabilizing' around 2009 dynamics. Again, one might say the glass is 1/10th full (things are not getting much worse than 2009) or 9/10ths empty (things are not getting any better).

One thing that remains stable throughout the crisis is Government's determination to load the burden of fiscal adjustment onto ordinary taxpayers:

Table below summarizes the above point:

And, for conclusion, let's indulge in the Government's own fetish of focusing on performance relative to target (not that there is much of an economic meaning to this):

06/01/2011: Exchequer Returns - part 3

In parts 1 and 2 (here and here) I've dealt with some longer term issues relating to the general Exchequer performance figures. In the following two posts I will update specific expenditure (current post) and tax receipts (next post) data.

First, total expenditure:
Two things worth noting here:

• Up until November, total spending side of Exchequer returns was performing relatively strongly, with year on year savings of 4.22%. These savings were significantly reduced in December, with full year savings performance of just 1.55% on 2009.
• The reductions in 2010 have been achieved solely on the back of capital expenditure cuts. Year on year, current spending rose by €261mln or 0.6% in 2010, while capital spending was cut by 14.3% or €990mln
  

You can see the dynamics of reductions over the year in the following two charts:
Combined savings by each department head per quarter end:
Feel free to interpret the above, but what interested me much more is just how stable are the Government's spending priorities over time. To see this, I plotted annual shares of each department head as a percentage of total spend (note - this exercise is not a perfect comparison as departments' responsibilities have changed over time).
The chart above suggests strongly to me that the Government, despite all the criticism it deserves in managing the crisis, has so far elected to cut largely discretionary spending. This is a rational response to the early stages of the crisis, but it is clearly insufficient to deliver stabilization of public finances, let alone their restoration to health.

06/01/2011: Exchequer Returns - Part 2

In Part 1 (here) I raised couple of specific points concerning the latest official claims over Irish Exchequer returns for December. Here, I follow up on the first point raised earlier and then post on longer term trends in Government spending, including my forecasts for fiscal performance in 2011-2014.

First, relating to the point raised in yesterday's post: Minister Lenihan stated that
"On the spending side, overall net voted expenditure at €46.4 billion was over €700 million below the level recorded in 2009, reflecting the ongoing tight control of public spending. While day-to-day spending was marginally ahead of target in the year, this is due to a shortfall in Departmental receipts rather than overruns in spending."

As I outlined earlier, I beg to disagree with the Minister on the claim of 'tight control'. Let me add to the reasons for my disagreement:

• The Exchequer Returns show that the Government had an overall budget deficit of €18,745m in 2010,
  
• On the surface, this appears to be ,896m lower than the deficit in 2009, which stood at €24,641m.
  
• However, deficit 2009 included a €3bn payment to the National Pensions Reserve Fund as part of the banks recapitalization plus a €4bn re-capitalization injection into Anglo Irish Bank
  
• Deficit 2010 does not include bank recapitalization measures.

This implies that the Exchequer deficit was:

• 2010 = €18,745m
• 2009 = €17,641m

And thus Minister Lenihan's tightly controlled public spending measures in 2010 have managed to increase Government deficit by €1,104m on 2009 levels.


Next, let's take a look at the annual data for Irish Exchequer over the recent years, incorporating latest release.

First, receipts v expenditure over time - for 1983-2011 and on with my forecasts. All data is annual:
Notice that with exception of 3 points - all observations fall to the right and below the 45 degree blue line. Also notice that the trend over time has been toward greater excess expenditure. Overall, however, 'when I have it, I spend it' relationship really does hold - the RSq is high 0.9413.

Latest figures show that in 2010 the Government has savaged capital investment side of its balancesheet and failed to curb current spending. This too is consistent with long term trends:
The age of Brian Cowen 'stimulus' (remember - he did say that we are going to have recession stimulus in the form of large capital investment) is now over and, despite Minister Lenihan's claims that we are not in the 1980s... guess what - 2010 we landed right into pre-1989 era.

Lastly, on to forecasts for the future:
Above chart clearly shows why I am with the IMF on the deficit outlook for 2014, and not with the Government. Apart from slightly higher total expenditure outlook than that of DofF, I expect slightly lower tax take and non-tax returns, but then I also expect the remaining costs of banks and subsequent increased interest repayment burdens to come due in 2011-2014 as well.

05/01/2011: Exchequer returns - part 1

So the Exchequer returns are out and I will blog on these in detail over the next couple of days with in-depth annual data analysis. In the mean time, let's take a quick look at the official statement. Couple of things - other than headline figures - come to the forefront:
1) Minister Lenihan statement, and
2) Nama news

First, Minister statement (emphasis and commentary are mine):
"On the spending side, overall net voted expenditure at €46.4 billion was over €700 million below the level recorded in 2009, reflecting the ongoing tight control of public spending. While day-to-day spending was marginally ahead of target in the year, this is due to a shortfall in Departmental receipts rather than overruns in spending.

[In fact, DofF data shows that overall spending savings this year relative to 2009 were €729mln, consisting of a cut of €990mln on capital spending side and an overspend of €261mln on current spending side. This, by any possible means, does not constitute any real 'tight control' over public spending. In fact, the net savings achieved in 2010 on 2009 amount to 0.463% of GDP. Given the Government is aiming to cut some 7% off 2014 GDP in deficit reductions through 2014, this means that at the pace of 2010 'tight control' savings, Minister Lenihan's budgetary measures can be expected to deliver 3% deficit in 20.1 years or by 2031, not by 2014.

Or let my suggest the following arithmetic Minister Lenihan should have engaged in in judging his own performance (remember, 'tight control' is something he was supposed to deliver over the last 3 years and 4 Budgets): if we take an increase from the average bond yields of 2009 to the average bond yields of 2010,

• In the course of 2010, the interest cost of financing our 2010 deficit, rose by ca €750mln;
• In the course of 2010, Minister Lenihan achieved net savings of €729mln
• Conclusion: Minister Lenihan's 'tight control' doesn't even cover the rising interest rate bill on our deficits, let alone our debt!]
  

... The Government has consistently identified export-led growth as the strategy that will return this economy to growth and generate jobs. This strategy is working thanks to the improvement of competitiveness, and the flexibility and adaptability of the Irish economy. Exports in 2010 were at an all time high and represented growth of 6.2% on 2009. This strong performance was particularly positive in the manufacturing and agri-food sectors.

[So Minister Lenihan has 'identified' export-led growth as the strategy to deliver on 2014 fiscal targets. This is true. Achieving 3% deficit in 2014, per Government own white paper for 2011-2014 (I refuse to call this fiction a National Recovery Plan), will require creation of 300,000 exporting jobs. Now, using past historical data, creation of 300,000 exporting jobs in 4 years will require a 50% increase in overall exports, implying an annual average growth rate in exports of ca 10.8%. Every year, folks. Not 6.2% achieved in 2010 that delivered historically high levels of exports of €161 billion, but 10.8%. You be the judge how realistic Government's fiction is.]

Now on to Nama-related news.

Cornerturned blog has posted on the change in Nama ownership from 49% State-owned to only around 33% State-owned. This constitutes a public asset give away to private shareholders in Nama SPV - aka 3 Irish banks. Nama is now maximising returns rather than repairing the banking system, this implies that the latest change of ownership structure is indeed a transfer of an asset.

However, even more revealing is the charade that this latest twist in Nama situation reveals. Per latest change, Nama is now owned (67%) by banks, of which one is outright owned by the taxpayer, another has significant taxpayer stake and the third - well, the third will probably also require taxpayer equity injections at certain point in time. Two of these banks have received state aid which was also used to 'invest' in Nama SPV. Hence we have:

1. Taxpayers pay banks to 'invest' in Nama SPV and 'invest' in the SPV directly as well via Exchequer 49% stake;
2. Nama uses taxpayers money to 'repair' the banks;
   
3. Taxpayers write off part of their share in favor of banks which are themselves on life support courtesy of taxpayers funds;
4. Banks - not taxpayers - will reap any potential upside from the SPV.

Which means, really, that in Nama SPV we have an Enron-ized Parmalat - dodgy accounting tricks used to conceal the real nature of ownership leading to a reverse commissariamento disclosed today... Well done, lads.

Economics 5/12/10: Default, debt and 'Rescue of Ireland' deal

Today's Sunday Independent article on inevitability of default, with comprehensive figures on the impact of the IMF/ECB/EU deal for ordinary Irish households and the levels of our indebtedness. Link here.

Economics 5/12/10: Links to recent articles on irish economy

Here is the link to my article in Saturday Irish Independent on the topic of FG and Labor 'alternative' Budget 2011 proposals: here.

Here is the link to another article from Saturday, this one from the Irish Examiner on the topic of banks debt default as an option for Ireland: here.

Economics 4/12/10: Exchequer expenditure side

Let's take a look at the dynamics of the Exchequer expenditure, building on the data released for November earlier this week.

First the total expenditure:
On total spending side, November 2010 posted improvement of €1.795 billion year on year or 4.22%, and €2.867 billion on November 2008, or 6.57%. Much of this came out of the capital investment cuts, but even putting this aside it is clear that adjustments on the spending side of Exchequer balance sheet have been too slow to reach the levels required (ca 20-25%).

Next, by separate departments.
A cut of 28.53% on 2009 levels in November.
Chart above shows bizarre reality of our budgetary allocations. Arts, Sport and Tourism gobbled up some 2.2 times more resources than Communications, Energy and Natural Resources in November 2010. This was 2.67 times in 2008, and 2.26x in 2009. No one is to say that Arts, Sport and Tourism are not important, but does anyone feel we've got some priorities screwed up pretty solidly here?
Community, Rural and Gaeltacht Affairs - with a budget 1.97 times (November 2010) greater than that of the Communications, Energy and Natural Resources has also been one of the core laggards in delivering savings. Presumably because it finances such vital economic activities as delivery of Irish language translations of the speeches of our Dear Leaders. Again, anyone seriously thinking that our priorities should be in spending double the amount we spend on communications, energy and natural resources on rural supports schemes and Gaeltacht subsidies?
Education - despite what we might have heard - is one of the least affected spending departments, compared to others. Year on year November 2010 delivered cuts of 4.3%, while 2 year cuts amounted to 3.2%. This does look like at least some priorities might be right. In contrast, ETE saw cuts of 26.9% over 2009-2010 span (November to November) and 26.2% of these came in 2008-2010.

Just in case if you think we were already spending enough on preserving various arts, linguistic and other cultural values, here comes Environment, Heritage and Local Government (of course, I am being slightly sarcastic, as it also provides funding for Local Government):
Environment, Heritage and Local Government delivered the largest cuts of all departments year on year - at 36.3% through November. It also delivered the largest cut on 2008 - 44.1%. In contrast, boffins at Finance are still lagging the average cuts with 2009-2010 reductions of just 4.3% and cumulative 2008-2010 cut of 17.7%.
Foreign Affairs are down 26.7% on 2008 levels and most of this came in in 2009, so 2009-2010 November to November figures are -4.8%. Health - a giant of all departments with a budget of 26.2% of total spending in November 2010 and 27.1% for the full year 2009 and 27.9% in 2008. Notice that as with Education, the priority of inflicting least cuts in Health is also held steady. Overall Health is down 15.3% on 2008 and 11.2% on 2009.
Social Welfare accounted for 22.3% of total departmental spending in the full year 2009 and 19.1% in 2008. These figures rose to 28.65% in 11 months through November 2010. In fact, the department is the only one where the expenditure has risen steadily in 2009 and 2010, for quite apparent reasons. Total rise was 40% over the last 2 years and 21.8% of that came in 12 months since November 2009.

Like Finance, Taoiseach's Group is enjoying shallower cuts than other departments:
So far, Taoiseach's Group lost 17.8% of its 2008 level spending, while Transport lost 30.1%. In part, this reflects differences in the size of capital budgets for two departments, but in part it also represents the skewed priorities of this Government when it comes to cutting current spending, especially within core civil service numbers.

Table below summarizes these results of annual comparisons:

Next, lets plot levels and percentages of reductions in total expenditures, year on year:
Notice the decline in 2009-2010 savings in relative terms over the course of the year. This can be explained in part by the often mentioned, but never confirmed, delays in payments by the Government to suppliers and a lag in capital expenditure.

Chart below summarizes the 2008-2010 changes in spending by quarter (with 4th quarter reflected as to-date figures through November):

Now, for the last bit - the deficit:
Notice that the above is not including banks measures in 2010, but does include bank measures in 2009, which of course, obscures the true extent of our savings. But that is a matter for another post.

Economics 4/10/10: Exchequer deficit

Lastly, it's time to put the sums together.

Despite the heroic efforts of the Government and the Public Sector Unions, Exchequer deficit continues to trace out the exactly same path as 2008. And this is ex-banks:
As I pointed out in the previous post, we are 'saving' €1,562 million January 2010-September 2010 of which €1,406 million came from the capital budget cuts (the so-called investment (dis-)stimulus that Brian & Brian have promised to deliver in Budget 2009, then Budget 2010 and in all of their 'growth strategies' since the beginning of the crisis). Only miserly €156 million of savings came out of the public sector current spending, less than 1/10 of the total cuts.

More worrying is the fact that much of the capital cuts came in at the beginning of the year, and since July, these cuts are getting smaller and smaller as a share of overall capital budget allocation. Meanwhile, current spending cuts are becoming virtually invisible with time as well.

In June this year, capital budget was down 36% yoy. Today this decline stands at 32.1%. In January, we posted an impressive 11.9% cut, yoy, in current spending. This has steadily declined to 1.6% by August 2010 and finally to 0.5% in September 2010. Let's take a look at the latter number: current spending by the Government €30,088 mln through September, which is 1/2 of 1 percent lower than it was in the first 9 months of the disastrous 2009! Does anyone still wonder why the capital markets don't buy the story that Irish Government is capable of controlling its spending habits?

Let's cut to the chase. Despite all the rosy, warmly glowing reports about "yet another month of improved fiscal performance" it looks like we are turning yet another corner - the corner of rapidly evaporating savings. Next intersection: Disaster Avenue?