26/9/2013: Framing Budget 2014: Village Magazine September 2013

This is an unedited version of my column in the Village Magazine, August-September 2013


With early Budget looming on the horizon, the circus of the 'austerity is overdone' politics has rolled into town. The Labour and the FG backbenchers are out in force trying desperately to salvage the little popular support they still might command in the streets. Not to be outdone, Fiana Fail, freshly converted into the Church of Socialistas has been unleashing torrents of newly-discovered social consciousness. Things are getting so hot on the anti-austerian' speaking circuit that Siptu was able to get even Jack O'Connor a gig. Their star performer was last seen thundering at the MacGill Summer School a potent brew of outlandishly misinformed comparatives between the European and the American policies for dealing with the Great Recession and calls on the imaginary Government to… no prizes for guessing… end 'human rights-violating' austerity.

Problem is, once you come back from all of the highs of this Keynesian Lollapalooza, Irish Government continues to run an insolvent state with spending not matched to revenues and with the expenditure programmes outcomes not matched to the needs of the society at large. Delivering neither fiscal sustainability, nor growth, nor value for money, our fiscal house is grossly out of shape five years into various reforms. Worse, the fiscal mess we are in has nothing to do with the lack of economic growth and everything to do with the policy institutions that the current Government inherited from the decades of political clientelism presided over by its predecessors.


Let us look at some numbers.

In the first six months of 2013, Irish State has managed to spend EUR27.12 billion on current expenditure, just EUR352 million shy of the level of spending in the same period of 2012 and EUR3.2 billion more than we spent in the six months through June 2011. Meanwhile, tax revenues rose from EUR15.3 billion in January-June 2011 to EUR17.6 billion this year. Crunchy austerity based on savage cuts, five years in still looks more like a tax squeeze and spending re-allocation from one programme to another.

Meanwhile, Department of Health spending is now running at EUR6,539 million for H1 2013, down on EUR6,754 million in H1 2011 - a whooping reduction of EUR215 million. Do keep in mind that 2011-2012 increases in the cost of beds charged to the private insurers (aka to ordinary insurance purchasers) have more than offset the above reductions in spending. Net current (ex-capital) spending on health has shrunk by just EUR128 million over the last two years.

The Department of Health is a great example to consider when dealing with the failure of our reforms. It is a frontline service by definition - the one we all are willing to pay for. Yet, it is also a symbolic dividing line between the poor (allegedly having no access to the services) and the rich (allegedly all those who hold health insurance and as 'private' patients overpopulate public wards preventing the poor from getting necessary hospital beds). Healthcare was also an epicenter of rounds of reforms over decades, including the decades of rapid economic growth and prosperity. And it is one of the two largest departments by voted spending, with budget only slightly behind the EUR6.545 billion spend in H1 2013 at the Department of Social Protection.

For this spending we - the middle classes and other payers - get little value for money in services. Over 35% of Irish households have to purchase private insurance to access any meaningful level of health services. In case you still rest in the camp of those who believes that such purchases of insurance are purely voluntary and constitute luxury, Irish Government is considering making health insurance purchasing purely obligatory.

Even with this expenditure, access to basic, quality of life-improving procedures and healthcare maintenance is shambolic. While run of the mill emergencies are getting reasonably decent attention, complex and time-sensitive treatments are wanting. Thus, Ireland ranks at or below the European averages in treatment of majority of chronic and long-term diseases, before we control for differences in population demographics. Our primary care and access to specialist consultants is pathetic outside the emergency rooms and hospitals' ICUs. Despite seeing the fastest rise in the healthcare expenditure per capita over 1997-2007 period in the entire EU27, per EU assessment, Irish healthcare expenditure increases have made only "a modest contribution to [improved mortality], substantially less than one third of the total, and possibly only a few percentage points".

In reality, of course, Irish healthcare is run for the benefit of Irish healthcare staff. In 2005-2007 pay and salary bill for HSE stood at an average 50.7% of the entire HSE non-capital budget. In 2009 it was 50.1%. In 2010, Irish salaries (excluding other income) for medical specialists were the highest in the EU, with the second highest paid cohort of physicians (in the Netherlands) coming at an average salary discount of roughly 25% relative to their Irish counterparts. These salaries were not inclusive of the Irish doctors earnings from private patients.

Per EU 2012 assessment, 33% of Irish people find access to hospitals unaffordable (8th highest in EU27) and the same find access to GP out of their financial reach (4th highest in EU27), while 53% claim that they cannot afford medical or surgical specialists (8th highest).

This is hardly surprising. Between December 2005 and mid-2012, Irish consumer price inflation (CPI) on cumulative basis has hit 9.5%. Health CPI over the same period totalled 21.4% - more than double the rate of overall inflation. Of EU15 states, Ireland and Holland were the only states where health costs were rising faster than general inflation in the last 7 years. 2005-2011 inflation run at 47.3% in Hospital services (state-controlled charges), followed by dental services 28.6%, Out-patient services 23.5% and Doctors' fees at 21.3%. This inflation took place from the already high cost base present in Ireland at the end of 2005.

By international comparisons, from 2005 through mid-2012 Ireland had the lowest rate of inflation in the EU15, while our health services inflation was the second highest after the Netherlands.

Austerity, it seems, has been a boom-time for healthcare costs. Or put differently, while the rest of the world defines efficiency-improving reforms as changes in delivery of services that reduces the cost of services given fixed or improving quality of delivery, in Ireland we define efficiency gains as providing fewer services at a higher cost.

Despite this, in Irish media and policy circles, assessment of healthcare systems performance starts and ends with the comparatives on public spending levels. Good example of such assessment was the 2010 report to the Oireachtast, titled "Benchmarking Ireland’s Health System". A foreigner reading this report can easily conclude that (a) Irish healthcare is run on a shoestring, (b) achieves great outcomes in terms of reduced rates of prevalence of and mortality from key diseases, and (c.) is delivered to the middle class and the rich, bypassing the poor.

In reality, of course, the inequality of access to Irish healthcare system means that the middle and upper-middle classes are required to buy expensive insurance to gain access to health services. Our achievements in combatting key diseases are primarily driven by our younger (and thus healthier) demographics.

And when it comes to access, only 17.2% of all non-maternity related hospitals admissions in 2011 (the latest for which we have data) were for private patients, with the balance going to public patients. On average, people on private insurance had 2.4-2.6 visits to GP in 2007-2010, while those on medical cards had 5.3-5.2. In 2012, the rich-favouring distribution of access to Irish healthcare so often decried by the media and politicians meant that 39% of population or just under 1.8 million people had access to medical cards, more than the number of private health insurance holders.

Health spending represents the case where we have at least some indications and metrics concerning the inefficiency of services provision. In contrast, in other major areas of state expenditure, there is no basis for efficiency assessments and none are being developed.

Irish welfare system is absurdly complicated, and unbalanced - providing potentially excessive services for able-bodied adults on long-term dependency and insufficient services for adults in temporary need of supports and to people with severe disabilities. Related services - in particular in the areas of skills development and training, placement supports for the unemployed - are glaringly out of touch with reality of the labour market demands. Over the last five years, Irish economy produced ever-increasing shortages of skills in several areas, most notably internationally-traded ICT services, financial services, and back- and front- office support services. Yet Irish system of unemployment supports, planned by Forfas and managed by Fas/Solace, failed to reflect these long-term trends. By the time state training behemoths turn around to face the music, the demands for skills will change again.


Irish state spending - with or without austerity - is a rich sprinkling of waste over a thin layer of substance. And it remains such in the face of five years of boisterous pro-reform rhetoric.
Irish austerity has failed, so much we can all agree on. But the real failure is not in cutting spending too much, but in failing to deliver any real gains in efficiency of public services provision or quality of these services. And it failed in containing the costs of the State, especially if we are to use long term sustainability as the benchmark for assessing the reforms.

The likes of Jack O'Connor and Fiana Fail ‘Nua’ might have discovered a magic trick for conjuring economic growth out of public spending, but reality is that the actual working population is by now sick and tired of being taxed to fund the perpetuation of the public sector mess, best exemplified by our healthcare.

19/1/2013: Ireland's cost of funding

An interesting chart in today's IMF review of Greece:

Now, that's right - prior to Bailout 2.0, Greece led the euro area in terms of its overall Government debt financing burden as % of GDP and Ireland ranked 3rd in these dubious (in virtue) rankings. After Bailout 2.0, Greece funding costs are now below euro area average (ranked 7th) and Irish ones are ranked 2nd highest after Italy.

Now, note that this means that Ireland has the highest debt financing costs of all countries in Troika bailouts. In other words, with hefty subsidy to our cost of funding via EFSF et al, we are coming out very poorly. What will happen if we 'regain access to the markets' at costs higher than those under the Troika bailout?..

Although approximate, a deal to bring Irish debt financing costs to euro area average would see the Government benefiting from savings of ca 2.3% of our GDP annually or ca EUR3.73 billion making measures passed in Budget 2013 in their entirety unnecessary.

2/10/2012: Irish Exchequer Receipts Q3 2012

Headline figure on Tax Receipts is €26,118mln collected in Q3 2012 against profile of €25,733mln a surplus over the profile of 1.5%. However, in January-August  2012 the same surplus was 1.7% and January-June 2012 it was running at 3.1% surplus on target. In other words, target is being met, but performance is deteriorating and the Department is correct to sound cautiously here, constantly reiterating the importance of Q4 in terms of receipts delivery. The cushion as it stands at the end of September was €385 million on profile.

Year on year headline figure shows improvement in 9 months through September (up 8.4% on unadjusted basis, and up 6.2% on adjusted basis) compared to 8 months through August (7.7% on unadjusted basis and 5.2% on adjusted basis). This is the good news for the Exchequer.

On adjusted basis, tax revenues are up €1,491 mln in Q3 2012, having been up €1,063 mln in 8 months through August. This suggests that September monthly performance was pretty robust even once we adjust for the various reclassifications of tax revenues.

Now, let's try to see what is going on behind the headlines.

Adjustments - covering reclassifications of USC and delayed accounting for corporate tax receipts (carryover from 2011) - were running at €511 million in 8 months through August 2012. In Q1-Q3 2012 these were booked at €529 million - a suspiciously low differential for the whole month. I noted the same suspicion back in August. 

In addition, the Department seemingly does not account for reclassification of the Corporate Tax receipts from 2011 to 2012 in full. Instead, the Department does subtract the revenues booked in 2012 due to carry over from 2011 from 2012 figures, but it does not add these carry over amounts back into 2011 comparative Corporation Tax figure.

On non-tax revenues side, banking-related receipts are running at €2.057bn in 9 months through September 2012 against €1.643bn in the same period 2011.Semi-states dividends (another indirect tax on the economy) are at €88mln against €31mln in 2011. Pensions levies are at €11mln against €8.6mln in 2011. Adjusting for banks receipts alone (see my August note as to why such adjustments are warranted), total current receipts (tax and non-tax) are at €26,471mln in January-September 2012 against €24,455 in the same period 2011 (+8.25% y/y). 

Now, adding to these adjustments on tax revenues (explained above), total adjusted current receipts are up 6.1% y/y, not the 9.3% headlined in the exchequer figures.

Excluding the Sinking Fund transfers (deficit neutral), Capital Receipts are down at €813 mln in 9 months through September 2012 compared to €1,038mln in the same period 2011.

Let's combine all receipts ex-Sinking Fund receipts:

• Official numbers are: Total tax and Non-Tax Current and Capital Receipts amounted to €29.342bn in January-September 2012, up 8.13% on the same period 2011 (€27.136bn).
• Adjusting for Banks-related receipts and adjusting for tax revenues reclassifications, total receipts amounted to €26.755bn in 2012 and €25.655bn in 2011 (January-September periods), a rise of 4.29% y/y or €1.1bn.
• The above is still an impressive performance, given stagnant economy, but it is a far cry from what is needed to close the funding gap for the Exchequer.
• Critically, while tax performance cushion on target is getting thinner, it is still positive and is likely to stay non-negative through Q4 2012. In other words, it appears that we will deliver on targets on tax revenue side. This represents the reversal to some threats emerging in July-August.

4/9/2012: Six Key Facts About Irish Government Spending: August 2012

In the previous post I looked at the receipts side of the Exchequer returns for January-August 2012. Now, let's take a quick tour through the expenditure side.

In January-August 2012, the Government total Net Voted Expenditure stood at €29,593 million or €244 million (0.8%) above the same period of 2011. In other words, the Government is spending more in 2012 than it spent in 2011 on the expenditure side that it actually controls. In July 2012, the overrun was €138 million or 0.5%.

Fact 1: things are getting worse month on month, not better, on the spending side

Fact 2: things are getting worse year on year, not better, on the spending side

Current Net Voted Expenditure rose €444 million (+1.8%) y/y in January-July 2012 compared to same period of 2011. In August, this figure went up to €659 million (+2.4%).

Fact 3: the core driver for rising Government spending is Current Expenditure, and the increases in spending in this area are getting worse, not better, with time. 

On the total expenditure side, the Government is now exceeding its target for 2012 (these are revised targets published in May, so the overruns are compared for just 4 months running) by 1.1%, and on current expenditure side these overruns are at 1.6%. In July 2012 the same figures were +0.8% and +1.3% respectively.

Fact 4: even by revised targets the Government is already behind its set objectives, just 4 months into running and the set-back is accelerating month to month.

In July 2012, five departments exceeded their targets on current expenditure side, including (as expected) Health (+1.0%) and Social Protection (+4.4%). In August 2012, six departments were in breach of their targets on current spending, with Health performance deteriorating (+1.5%) while Social Protection performance showing shallower miss on target (+4.2%).

Fact 5: More departments are slipping into underperformance relative to target in August than in July.

In August, five departments posted increases y/y in Current Net Voted Expenditure, in July there were seven departments in the same position.

Fact 6: year on year cuts in spending in smaller departments are not sufficient to offset increases in spending in larger departments. 

Capital expenditure has fallen €415 million (down 20.9%) y/y and is now €120 million (7.1%) below the target. In an ironic twist, these 'savings' will be totally undone through the Government capital expenditure boost once privatization process gets underway. 

However, annual estimates assume 13.4% or €562 million reduction in capital spending. With 74% of thse already delivered on, it is hard to see how the Government can extract more savings from this side of the balancesheet to plug the widening gap on the current expenditure side.

To summarise, therefore, the Irish Government continues to increase, not decrease the overall Exchequer expenditure year on year and is now behind its own targets. 

Neither the receipts side of the fiscal equation, nor the expenditure side are holding.

4/9/2012: The Fog of Exchequer Receipts: August 2012

The Exchequer receipts and expenditure figures are out for August and the circus of media rehashing that way and this way the Department of Finance press releases is on full blast.

From the way you'd read it in the media outlets, tax receipts are up, targets are met, deficit is down, spending is down. The problem is that the bunch of one-off measures conceals the truth to such an extent that no real comparison is any longer feasible for year on year figures. The circus has painted the Government finances figures so thickly in a rainbow of banks recaps, shares sales receipts, tax reclassifications, tax receipts delays and re-bookings etc that the Government can say pretty much whatever it wants about its fiscal performance until, that is, the final annual figures are in. Even then, the charade with promo note in March will still have material influence on the figures, as will tax reclassifications and delayed tax receipts booking.

With this in mind, let's try and make some sense out of the latest Exchequer receipts results, first (expenditure and balance in later posts).

Take total tax receipts for January-August 2012. The official outrun is €22.076bn which is 1.7% ahead of target set in the Budget 2012. Alas, monthly receipts of €1.763bn is 7.1% short of target. In July 2012, monthly tax receipts were 0.2% below target. So:
Point 1: As a warning flag: revenues are now running increasingly below target levels.

Year on year tax receipts were down 1.7% in July on a monthly basis and were up 9% on aggregate January-July basis. Year-on-year receipts were down 5.7% in August on a monthly basis, and were up 7.7% on January-August aggregate basis.
Point 2: As another warning flag: tax receipts are now running for two months under last year's and this is even before we adjust for 2011-2012 reclassifications and delayed bookings of some receipts.

Now, the Department of Finance states in the footnote to its tax receipts analysis that: "Adjusting for delayed corporation tax receipts from December 2011 and the techncial [sic] reclassification of an element of PRSI income to income tax this year, aggregate tax revenues are an estimated 5.2% year-on-year at end-August, coproration [sic] tax is up 6.7% and income tax is up just under 10%". What does it mean? this means that by Department estimates, the two factors account for roughly €511 million in combined bookings into 2012 that are not comparable to 2011 figures.

Subtracting €511 million our of the total cumulated receipts implies tax receipts for January-August 2012 of €21.565bn which would be 0.7% below the Budget 2012 target. Thus,
Point 3: Tax receipts, on comparable basis, are running at below target, not ahead of it, albeit the difference is still materially small.

Here's what else is interesting, however, at the end of June the Department provided an estimate for the above adjustments of ca €472 million, at the of July it was €467 million and now at €511 million. Even allowing for rounding differences on percentages reported this looks rather strange to me.

On non-tax revenues:

• In 2011 the Government collected €233 million from selling its shares in Bank of Ireland. This year - nil booked on that. Which largely accounts for the capital revenues being down from €1,036 million in 2011 to €813 million in 2012.
• Again on the capital receipts side, total EU contributions to Ireland in January-August 2012 stood at €68.401 million against €43.671 million a year ago.
• Total non-tax revenue on the current line of the balancesheet is €2.403 billion in January-August 2012 and this is up 49.4% on the same period in 2011.
• Of the increase registered in 2012 compared to 2011, €487 million came from increases in clawbacks from the banks and Central Bank of Ireland remitted profits. In other words, that was roughly half a billion euros that could have gone to writing down mortgages, but instead went to the Government. €302 million more came from the Interest on Contingent Capital Notes, which is the fancy phrase to say it too came from the banks. Thus, all in, current non-tax revenues increases of €794.1 million were almost fully accounted for by the increases of €789 million in the state clawbacks out of the insolvent and semi-solvent banks that the state largely owns.

Point 4: Unless you believe that the banks conjure money out of thin air, any celebration of non-tax receipts improvements in January-August 2012 compared to 2011 is a celebration of Pyrrhic victory of the Exchequer witch craft inside our (as banks customers and mortgage holders) pockets.

Now, let's add all receipts together:

• Total Exchequer receipts in January-August 2012 stood at €25.937bn against €23.146bn in 2011. 
• The 'rise' in total Exchequer receipts of €2,791 million in 8 months of 2012 compared to the same period in 2011 includes €511 million in tax adjustments (re-labeling) and carry over from 2011, plus €789 million in new revenues clawed out of the banks. In addition, €645.7 million is booked on receipts side via the Sinking Fund transfer (which is netted out by increased expenditure).
• So far, over the 8 months of 2012, the actual net increase in total (tax, non-tax current and non-tax capital) receipts is ca €845 million, or 3.7%.

Point 5: Disregarding expenditure effects (to be discussed later), Irish Exchequer has managed to hike its policy-controlled receipts by 3.7% y/y over the January-August period. Better than nothing, but a massive cry from the headline figure of 7.7% increase in total tax receipts and 12% rise in total receipts.

16/1/2012: Irish Bailout Redux - Sunday Times 15/01/2012

Several articles in the press yesterday on why Ireland will require / need a second 'bailout' - here's an excellent piece from Namawinelake and here's a piece from Colm McCarthy.

This is an unedited version of my Sunday Times (January 15, 2012) article on the same topic.

In May 2011, as Greece was sliding toward the second bailout, I conjectured that within 24 months, Ireland and Portugal will both require additional bailout packages as well. This week, my prediction has been echoed by the Chief Economist of the Citi, William Buiter.

According to Buiter, the costs of borrowing in the markets are currently prohibitive and the expiration of the €67.5 billion loans deal with the Torika, scheduled for 2014 will see Ireland once again unable to borrow to cover remaining deficits and refinancing maturing bonds. Ireland should secure additional funding as a back up, to avoid seeking it later “in a state of near panic”.

Buiter’s suggestion represents nothing more than a prudent planning-ahead exercise. In addition to Buiter’s original rationale for securing new lending, Ireland is facing significant fiscal and economic challenges that will make it nearly impossible for the State to finance its fiscal adjustment path through private borrowing in 2014-2016.

Speaking to the RTE, Buiter said that although Ireland’s situation was different from that of Greece, the economy remains under severe stress from banking sector bailouts. Addressing this stress should involve restructuring of the promissory notes issued by the state to IBRC, as the Government was hoping to do in recent months. But it also requires anchoring our longer-term fiscal adjustment path to predictable and stable sources of funding at a cost that can be carried by the weakened economy.

The Government will do well to listen to these early warnings to avoid repeating mistakes of their predecessors.

On November 18, 2011, Carlo Cottarelli, IMF Director of Fiscal Affairs Department gave a presentation in the London School of Economics, titled Challenges of Budgetary and Financial Crises in Europe. In it, Mr Cottarelli provided three important insights into the expected dynamics for debt and deficits that have material impact on Ireland.

Firstly, he showed that to achieve the ‘golden rule’ debt to GDP ratio of 60% of GDP by 2030, Ireland will be required to run extremely high primary surpluses in years to come. Only Greece and Japan will have to shoulder greater pain than us over the next 19 years to get public debt overhang down to a safety level.

Secondly, amongst all PIIGS, Ireland has the highest proportion of outstanding public debt held by non-residents (84%), implying the highest cost of restructuring such debt. The runner up is Greece with 65%. In general, bond yields are positively correlated with the proportion of debt held by non-residents.

Thirdly, Cottarelli presented a model estimating the relationship between the observed bond yields and the underlying macroeconomic and fiscal fundamentals that looked at 31 countries. This model can be recalibrated to see what yields on Irish debt can be consistent with market funding under IMF growth projections for Ireland. Using headline IMF forecasts from December 2011, 2014-2016 yields for Ireland are expected to range between 4.7% and 6.5%. Incorporating some downside risks to growth and other macroeconomic parameters, Irish yields can be expected to range between 5.3% and 7.0%.

Even in 5.5-6% average yields range, financing Irish bonds rollovers in the market in 2014-2016 will be prohibitively costly as at the above yields, Ireland's debt dynamics will no longer be consistent with the rates of decline in debt/GDP ratio planned for under the Troika agreement. This, in turn, means that the markets will be unlikely to provide financing in volumes, sufficient to cover debt rollovers. Thus, Ireland will either require new bridging loans from the Troika or will have to extract even greater primary surpluses out of the economy, diverting more funds to cover debt repayments and risking derailing any recovery we might see by then.

What Butier statement this week does not consider, however, are the potential downside risks to the Irish fiscal stability projections. These risks are material and can be broadly divided into external and internal.

Per external risks, the latest CMA Global Sovereign Risk Report for Q4 2011, released this week, shows Ireland as the 6^th riskiest country in the world with estimated probability of sovereign default of 46.4% and credit ratings of ccc+. Despite stable performance of our bonds in Q4 2011, CMA credit ratings for Ireland have deteriorated, compared to Q3 2011. And, our 5 year mid-point CDS spreads are now at around 747 bps – more than seven times ahead of Germany. This highlights the effect of a moderate slowdown in euro zone growth on our bonds performance.

Even absent the above risks, Irish debt dynamics can be significantly improved by significantly extending preferential interest rates obtained under the Troika agreement to cover post-2014 rollovers and adjustments. Based on IMF projections from December 2011, such a move can secure savings of some €9 billion or almost 5% of our forecast 2016 GDP in years 2014-2016 alone (see chart).

CHART

Chart source: IMF Country Report 11/356, December 2011 and author own calculations

Looking into the next 5 years, there is a risk of significant increase in inflationary pressures once the growth momentum returns to the Euro area. A rise in the bund rates can also take place due to deterioration in the German fiscal position or due to Germany assuming greater role in the risk-sharing arrangements within the euro area. Lastly, German and all other bonds yields can also rise when risk-on switch takes place in post-recessionary period, drawing significant amounts of liquidity out of the global bond markets. All of these will adversely impact German bunds, but also Irish bonds.

On the domestic front, we should be providing a precautionary cover for the risk of a more protracted slowdown in the Irish economy especially if accompanied by sticky unemployment. The risk of deterioration in Irish primary balances due to structural slowdown in the rate of growth in Irish exports (potentially due to strengthening of the euro in 2013-2016 period or significant adverse effect of the patent cliff on pharma exports) is another one worth considering well before it materializes. Lastly, there is the ever-growing risk that the markets will simply refuse to fund the vast rollovers of debt which is currently being increasingly warehoused outside the normal markets in the vaults of the Central Banks and on the books of the Troika.

Overall, Ireland should form a multi-pronged strategic approach to fiscal debt adjustment. Recognizing future risks, the Government should aggressively pursue the agenda of restructuring the promissory notes issued to the IBRC with an aim of driving down notes yield down to ECB repo rate and push for ECB acceptance of burden sharing imposition on IBRC bondholders to reduce the principal amount of the promissory notes. Pursuit of longer-term objective of forcing the ECB to accept a writedown on the banks debts accumulated through the Emergency Liquidity Assistance lines at the Central Bank of Ireland is another key policy target. Lastly, Ireland needs to secure significant lines of credit with the EU at preferential rates for post-2014 period with longer-term maturity than currently envisaged under the Troika deal.

Given the general conditions across the Eurozone today, the last priority should be pursued as early as possible. In other words, there’s no better time to do the right things than now.

Box-out:

The latest EU-wide statistics for Retail sales for November 2011 released this week present an interesting reading. Retail sector turnover index, taking into account adjustments for working days, shows Irish retail activity has contracted by 0.4% in November 2011 year on year. Overall activity is now down 5.2% on same period 2008, but is up 7.9% on 2005. For all the Irish retail sector woes, here’s an interesting comparative. Euro area retail sales turnover is now down 2.5% year on year and 1.6% on 2005. In terms of overall contraction in turnover, Ireland is ranked 15^th in EU27 in terms of the rate of contraction relative to November 2010 and November 2008 and 12^th in terms of contraction relative to 2005. Not exactly a catastrophic decline. Once set against significant losses in retail sector employment since 2008, these numbers suggest that to a large extent jobs losses in the sector were driven by lack of efficiencies in the sector at the peak of the Celtic Tiger, as well as by declines in revenues.

13/1/2012: The need for political reforms

An interesting paper from the World Bank (linked here), by Torgler, Benno, titled "Tax Morale and Compliance: Review of Evidence and Case Studies for Europe" (December 1, 2011). World Bank Policy Research Working Paper Series, 2011 (World Bank Policy research Working Paper 5922) presents an overview of the literature on tax morale and tax compliance. Perhaps unsurprisingly, it finds that accountability, democratic governance, efficient and transparent legal structures, and crucially, "trust within the society" are important in enforcing tax compliance and tax morale.

Which offers an interesting point for observation: in 2011, trust in Irish system of government as measured by the Edelman Trust Barometer stood at 20%, against the average of 52% for 23 countries surveyed in the report, making Ireland the lowest ranked country in the study. 


But things are even worse than the above number suggests: 

• Ireland ranks lowest 23rd in terms of average trust measures across four institutions of government, media, business and NGOs
• The above result is driven by: high trust in NGOs at 53%, although this is still below global trust in NGOs at 61%, high trust in business at 46% against global trust in business at 56%, low trust in media at 38% and abysmally low trust in government.

So may be, just may be, folks, in order to improve our fiscal performance we need deep political and leadership changes at least as much as tax increases and spending cuts? Perhaps, one of the problems with Irish fiscal crisis response to date is that the current Government and its predecessor are not doing enough to make Ireland's elites more accountable, more transparent, and better governed? There's an old Russian saying that every fish rots from the head (although Chinese, British and other nations claim the origin of this phrase as well).

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.

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.

Economics 6/11/10: Private sector response to DofF estimates

Yesterday’s morning note from Eurointelligence.com – a politically neutral economics site read: “A really bad day for European peripheral bond markets, as market participants realise that the Irish recovery plan is a pile of baloney, based on wishful thinking and unrealistic forecasts (which are shocking also believed by private sector forecasters in Ireland). The assumption is essentially that the crisis has no real GDP effect. This is the Irish government’s official forecast for the growth, inflation and unemployment for the next four years, contained in the Irish budget plan."

Summary here:

Their analysis is illustrated by a chart from Calculated Risk showing scary dynamics:


But the ‘happy-to-parrot DofF’ quasi-official analysts of IRL Inc took a different view of the numbers. So was Eurointelligence right in being sarcastic about ‘private sector forecasters’ misfiring in their enthusiasm for DofF numbers?

Per one ‘research note’ Irish deficit problems are attributable, at least this year, to things like ‘decrease in GDP’ (apparently, something no one could have foreseen). And palatable comparisons are being made between the UK adjustments planned ahead (less than 6% of GDP over next 5 years) and Irish adjustments envisioned by DofF (9.5% of GDP through 2014), without actually bothering to check what’s happening between Euro and Sterling lately, or possibly worse – without understanding the relationship between currency value and deficits.

One of our most cheerleading ‘analysts’ remarked that markets “may take some consolation from the depth of next year's adjustment, which is at the high end of expectations” obviously confusing their own sales pitch to the clients with the market view. Markets promptly corrected this by bidding up our bond yields.

Defending DofF ‘forecasts’ was done on a reference to a single figure that almost matches this broker’s view and a claim that we can’t really tell much about their realism because there isn’t enough detail provided by DofF. It sounds like an argument that famines are caused by the lack of food. The entire point of the DofF 'forecasts' was to provide certainty. The fact that the Department failed to do so escaped the broker.

Funny thing – the same broker lauded the details provided on interest payments from the recapitalization promissory notes. “The general government balance will reflect no promissory interest charge until 2013, when the charge will be €1.75bn for two years, reducing thereafter. Alleviating uncertainty around these charges is a positive but also reinforces the reality of a challenging fiscal situation.” Alleviating uncertainty? Did anyone notice the fact that DofF is projecting forward 4.7% interest rate – the average for 2009 – despite the fact that the entire universe expects ECB rates to rise by 2013? You’d expect the brokers to understand that no yield curve in this world remains flat for 5 years. Then again, may be this is not something our official ‘economists’ are aware of.

Another broker produced an equally priceless analysis: “The revised forecast [of 1.75% real growth next year] is below the median projection of 2.0% growth in the latest Reuters monthly Irish economists’ poll.” Oh, mighty, that wouldn’t be the same economists’ poll that missed the Great Recession and predicted soft landing for the property markets, failed to detect the beginning of collapse in Exchequer revenues and spot a market crash. Oh, and just in case you still doubt the powers of the Reuters ‘Irish economists’ poll’ – the poll covers only the 'economists' who thought Irish banks shares back in 2007 were not overvalued and Anglo was a great little bank besieged by bad short-sellers…

About the only research note on Irish Government announcement that didn’t cause a severe tooth-ache like reaction when I read them was NCB’s note.

The prize for the least readable (and least informative) commentary goes to Goodbody’s note, which spots a host of typos, grammatical errors, confusion and absolutely ludicrous assertions that “recent bond market jitters have been caused by factors outside of Ireland’s control, namely the fear that some European nations are considering a mechanism for restructuring of euro-area member’s sovereign debt at some stage in the future.” I mean what can you make of an ‘economics’ analysis that claims that ‘factors outside’ country control can override the fact that we have 32% deficit this year?! To me, it looks like a worldview which would miss a nuclear blast for a match strike.

Economics 4/11/10: Early DofF Estimates for Budget 2011

DofF has published some preliminary projections for Budget 2011 tonight, titled "Information Note
on the Economic and Budgetary Outlook 2011 – 2014 (in advance of the publication of the Government’s Four-Year Budgetary Plan)". Catchy, isn't it?

Here's my high-level read through:

1) pages 2-3 (note DofF couldn't even number actual pages in the document) present some rosy scenarios concerning growth. Most notably, DofF doesn't seem to think that Dollar is going to devalue against the Euro significantly in 2011. As if QE2 will have no effect or will be offset, under DofF expectations by a QETrichet. This is non-trivial, of course. Price of oil is expected to rise by 10.4% over 2011, but dollar will devalue by just 3.7% and sterling by 2.3%. Absent robust demand growth (per DofF-mentioned global slowdown) what would drive oil up at a rate more than 4 times dollar devaluation? This is non-trivial - any devaluation of sterling and dollar will impact adversely our exports and will increase our imports bills, chipping at GDP and GNP from both ends.

2) "in overall terms, real GDP is projected to increase by 1¾% next year (GNP by 1%). This takes account of budgetary adjustments amounting to €6 billion, which are estimated to reduce the rate of growth by somewhere in the region of 1½ - 2 percentage points. Nominal GDP is set to grow by 2.5% in 2011, implying a GDP price deflator of ¾%." Errr... ok, I can buy into low inflation, but... folks - DofF is talking tough budget. which will mean inflation on state-controlled sectors is going to be rampant. To keep total inflation at just 0.75%, you have to get either a strong revaluation of the euro (ain't there, as we've seen in (1)) or a strong deflation in the private sectors (possible, but if so, what would that do to Exchequer returns and to domestic activity? Interestingly, DofF refer to HICP, not CPI when they talk about moderate inflation of 3/4%. Of course, they wouldn't dare touch upon the prospects of our banks skinning their customers (err... also shareholders, rescuers etc) with mortgage costs hikes.

3) Now, consider that 1.75% growth in real GDP and 1% growth in GNP. Where, exactly will this come from? IMF projection for WEO October 2010 (before Government latest adjustment in deficit announcement) factored in 2.277% growth in constant prices GDP for 2011. DoF says that the reduction in Government consumption will amount to 1.2-2% point in the rate of growth. This is, I assume, before factoring in second order effects of higher taxation measures - just a brutal cut. So IMF, less DofF estimate leads to growth rate of 0.227-1.077%, which is less than what DofF assumes. Of course, that range - with a mid-point of 0.652% still does not capture the adverse effects of increased taxes and other charges, which - if we are to take €6bn headline figure for deficit reductions, applying 1.2-2% of GDP net adjustment on expected Government consumption side and factoring in stabilizers of 20% implies that DofF is aiming to get well in excess of €1.9-3bn in new revenues in 2011. Of these, maximum of €1.1-1.2 billion can be expected to arise from DofF forecast growth, leaving €0.8-1.9bn to be raised from tax increases and other charges. Apart from being optimistic, it does look to me like DofF didn't factor the effects of this into their growth projections.

4) About the only realistic assumption that DofF makes is that investment will contract by far less next year than in 2010. The reason is simple - stuff is going to start falling apart in private sector, so companies will have to replace some of the capital stock sooner or later. I can tell from here whether investment will fall 6% (as DofF assume) or 10%, but I doubt there is much upside from DofF assumption. The problem is that if you expect investment goods decline to be reversed on plant and machinery side (continuing to allow for investment to fall further on housing and construction sides) you are going to get an increase in imports, as we import much of equipment we use. So I suspect imports are going to rise more than 2.75% that DofF factored into their estimates.

5) I also think DofF are too optimistic on the employment contraction side. The Department assumes -0.25% change in overall employment levels in the Republic. I would say that several longer term trends are going to push this deeper into the red: pharma sector restructuring, continued shutting down of MNCs-led manufacturing, declines in public contracts etc.

6) All of the above is crucial, as per Table 3 we can see that even with the €6bn taken out, 2011 Exchequer balance will be exactly the same as in 2010: €19.25bn deficit in cash terms. In other words, folks - of the total €6bn in cuts almost €3.1bn will go to cover... errr... you've guessed it - BANKS! another €1.25bn to cover interest on the BANKS rescue notes (net under Non-voted expenditure). More bizarre, unless you understand our Government's logic, which escapes me - our Current Expenditure will not fall next year at all. Instead it will rise from €47.25bn in 2010 to €49.75bn in 2011, while Current Revenue will fall by €500mln, leaving our Current Budget Balance at -€16.25bn - deeper than -€13.5bn achieved this year. Under this arithmetic, the only way this Government can claim that it will be on any track in the general direction of 3% deficit by 2014 is by building in some mighty optimistic assumptions on growth side, plus projecting no further demands for funding from the banks.

7) Now, let me touch upon the last part of the concluding sentence in (6) above. Oh, boy. The Government, therefore is reliant on €31bn in promisory notes to cover the entire rescue of the banking sector. Yet, not reflected in any of DofF estimates, AIB's latest failure to raise requisite capital is likely to cost this Government additional €2bn on top of already promised funds. Toss into the mix expected losses for 2011-2012 on all banks balancesheets, and you get pretty quickly into high figures. Let's suppose that the whole banking sector will cost the state ca €60bn (this is well below my estimate of 67-70bn, Peter Mathews' estimate of 66.5bn, etc). The state will be on the hook for some €29bn more in 'promisory' notes. Suppose none are redeemed and no new borrowing against them takes place. The gross cost per annum of these notes will be roughly at least what DofF estimated for €31bn or €150mln in 2011, while the borrowing requirement for the state will have to go up by €2.9billion annually (if structured as previous promisory notes).

Overall, I have significant doubts that the numbers presented in these early estimates will survive the test of reality. However, the Department of Finance seemed to have gotten slightly more realistic in these estimates, when compared to the stuff produced a year ago. It remains to be seen if the learning curve is steep enough to get them to reach full realism by the Budget 2011 day.

Economics 1/8/10: California's lesson for IRL?

Last week the State of California declared official emergency in relation to its fiscal shortfall. The problem, you see, is that torn between various vested interests, California's legislature is unable to approve a new budget for 2011. The State deficit is currently running at $19bn, which represents 22% of the general budget fund. As a part of emergency declaration, Governor Schwarzenegger ordered three days off without pay per month beginning in August for tens of thousands of state employees to preserve the state's cash to pay its debt, and for essential services. Now, 3 days out of each month represents roughly speaking a 14% straight cut across all lines of wages, pensions liabilities, overtime etc. A bit more dramatic than Irish Government 2-year old programme of cutting PS pay by an average of 5-7%.

May be the depth of California's crisis is that much (say 2.5 times?) deeper than the fiscal crisis in Ireland?

Well, let's compare, shall we? To do so, I took budgetary projections (latest available) for California and Ireland and put them side by side. I computed the extent of expected and planned deficits in both locations as a share of the net Government expenditure.
It turns out that in its state of emergency, 'insolvent' California is not 2-3 times worse off than Ireland. It is the 'turning the corner' Ireland that looks 1.5 times worse off than California. And not just now - all the way through the next 4 years.

So California - its Governor and Legislature - are at the very least trying to work through the summer to hammer out some sort of a resolution. Our own legislators and Government are out to enjoy a spot of recreation. And why not, you may ask, if the economy has finally turned the corner... err... sort of... for the 15th time since May 2009 that is...