Economics 2/12/10: Exchequer returns - Burden of taxation

Let's take a quick look at the tax burden incidence as per latest Exchequer results.
Proportionally, the burden of taxes paid continues to rise (year on year) for Income Tax, VAT (although VAT burden increases have eased a little bit) and Excise Tax. The burden has been falling for CGT and CAT, Stamps and Customs. It is flat for Corporation Tax.
This goes back to the arguments I made recently - no matter whether it is the Exchequer who assumes new debt, or the banks (under the Guarantee and protection extended to them by the Exchequer), the taxpayers are the ones who will be on the hook to repay it all.

Economics 2/12/10: Exchequer returns - tax receipts

The mixed bag - aka Irish economy - story of the Live Register from yesterday is continuing into today. The Exchequer results for November are being heralded by many 'official' analysts as a sign of significant improvement in the economy.

Are they? Really? Let's update my charts on the matter.

Top level view: tax receipts through end of November totaled €29.489 billion in 2010. This is some €470 million of 1.6% ahead of the DofF projections. Happy times? In 2008 they were €38.86 billion and in the "terrible year" of 2009 they were €30.75 billion. So the good news is that we are still in the worst year of the crisis when it comes to total tax receipts.

I guess I am just not buying the story of 'close to target' being a net positive signal for the economy. It might be a net positive for the DofF - who's forecasts are now accurate (after 3 years worth of trying). But for the rest of this economy, things are worse today - as tax revenues go - than they were a year ago.
Now, November is the month when tax receipts accelerate dramatically. Good news, this year was no worse in the rate of increase than last, even a little better. Bad news, acceleration from October to November has been slower in this year than in 2008. Glass is half full on dynamics.

For 11 months of 2010, all tax heads, except for income tax are on target or ahead of target. Again - good news for DofF forecasters, but not great news for the economy.
You can see how both income tax and VAT are performing poorer in 2010 than in 2009 and 2008. I'll summarize all these differences in a table below. But for now - all other tax heads in charts:
Corporate tax is performing 'spectacularly' better than target +19.1% - sizzling. But year on year it is still 2.2% lower in 2010 than in 2009 and a whooping 26.3% below the levels of 2008. Errr... you see, targets don't really matter, reality does. Ditto for Excise tax: down 0.2% on 2009 and 19.9% on 2008.

Next, then:
Stamps perform better in 2010 than in 2009 so far. This is the one tax head of two that has shown an improvement year on year - plus 7.55% on 2009 and yet still -43.8% on 2008.
CGT... oh, what the hell - you can see, the story is the same as for all other tax heads save for stamps and customs.

Here's a summary table: performance to target (the DofF Delight special):
Charted over the year above.

Now, relative to previous years (the Real McCoy):

Year-on-year rates of change in charts now:

As noted before: with exception for two, by now pretty minor tax heads, accounting for just 2.9% of total tax revenue (Stamps) and 0.7% (Customs) of total tax revenue, everything else is performing worse this year than in 2009. I guess the only good news is that they eprforming not as badly as they could have were the things to completely collapse. Some solace then.

Economics 4/7/10: Burden of the state & tax system changes

Some more insights from the Exchequer figures. Over the last three years, Government budgetary policies have resulted in a dramatic shift of the burden of this state onto the shoulders of ordinary families.

Income tax accounted for 25.05% of tax revenue at the start of 2007, rising to 28.70% by the end of 2007. 2008 Q1 revenues from income tax accounted for 28.07% of the total, rising to 32.31% by year end. In 2009 the corresponding figures were 34.23% and 35.82%. So far this year, Q1 2010 income tax revenue accounted for 36.10% of total revenue. Q2 2010 figure is 35.49% - higher than corresponding Q2 2009 figure of 35.23%. Chart below illustrates:
In year-end terms:
One can (roughly, as an approximation) split taxes into the following three categories: business-related (corporate, excise -

• attributable to business (Corporate & Vat - adjusted for the share of non-household consumption);
• attributable to households (income tax, Vat adjusted for personal consumption share of total expenditure), and
• transactions taxes - Stamps, CGT & CAT

When one realises that less than 50% of those working in the State pay income tax and majority of them barely avail of much of the public services, this really does put into perspective the burden of the state spending on our more productive middle and upper-middle classes.

Economics 30/01/2010: Eurocoin and Obama's new-old plans

Two topics worth covering: the Eurozone leading indicator issued last week and President Obama’s new ‘Tougher on taxes’ talk to the Congress…


First, the usual monthly update on Eurocoin – a comprehensive leading indicator for Euroarea growth. After straight 12 months of rising, the indicator is now standing at the level not seen since March 2007.
This is consistent with a strong growth signal for months ahead for the Euroarea core economies.


Now to the story of the week that was not covered (at least not from this angle) in our press. In his State of the Union speech this Wednesday, President Obama said,
“To encourage ... businesses to stay within our borders, it is time to finally slash the tax breaks for companies that ship our jobs overseas, and give those tax breaks to companies that create jobs right here in the United States of America...”

Oh, boy – this is turning into one of those typically European sagas: occasionally, the EU is prone to produce daft laws and proposals – the Insurance Gender Directive is a good example of one, the Lisbon Agenda is another. In a typical EU-fashion, bad ideas never die. They just get dragged into the closet, rested for a couple of years and then unleashed again. Until even the daftest policies pass into power.

Well, now it is starting to look like the Obama Administration is taking the same approach.

Under current law, income earned abroad is taxed according to two separate categories: general and passive. Passive income covers capital gains, dividends, and other returns on investment. What’s left is general income and it is subject to a higher rate of tax – the corporate tax.

Under the Obama proposal, a US corporation will have to compute its foreign tax credit on an aggregated basis – taking all foreign earnings and profits of all its foreign subsidiaries and subtracting total foreign taxes paid. If that isn’t bad enough, subsidiaries in higher tax countries will face a ceiling on how much credit they can claim against their earnings for the purpose of the Federal tax liability.

There is absolutely no reason for this, and in fact it is arguably a discriminatory policy, but hey – when it comes to ‘tax and spend’ madness, no one can beat the Democrats – the Feds are estimating the net revenue from the measure to reach between USD24.5bn (US Treasury estimate) and USD45.5bn (JC Committee on Taxation).

And all of these taxes will apply before the companies actually repatriate earnings back to the US.

Now, all of this has some connection to Ireland Inc. We’ve heard before some experts (usually from the companies that can’t really tell us what they think in fear of upsetting Government officials) saying that Obama Plan is not a biggy threat to Ireland. That, you see, our MNCs are here because our workforce is packed with Nobel Prize winners (we are that good at education!) and our energy/water/communications/transport/etc infrastructure is so world class. They are, the MNCs that is, here not because of tax arbitrage… But seriously – we do depend critically on US MNCs operations in the country.

Here is an interesting comment on the Obama speech from an Indian specialist site dealing with outsourcing:

“A tax expert from one of the top four auditing firms, who did not wish to be identified, said: "I think Obama is talking about the same thing when he took over as President. The way this works is; captive units of US firms in any other geography (it could be India, Philippines, China, etc.) are considered different entities under US tax rules. US firms pay tax on the income from these subsidiaries only when they repatriate these earnings (profits) to the US. Firms need to pay 34 to 35 per cent of federal tax on these earnings. In most cases, US firms do not send the money back to the US as they continued to invest this money in expansion and other operations. Now the US government is saying it will match deduction and income together, so they will not get the tax benefits," he said.

The thing is – India and China and many other locations will probably be ok, because they provide high productivity relative to low cost base. Ireland doesn’t do either. So what will keep the MNCs here if Obama gets his wish? For the next 5 years – the capital already sunk here. But after that? Not much. No, really, not much…

Economics 09/10/2009: A small win for free trade?

Per our stockbrokers report this am: government commissioned report from the Tourism Renewal Group stated that Minister Lenihan should repeal the Air Passenger Departure tax because of its damage to the tourism industry.

In what was termed, by the Irish Times editorial a 'Gurdgiev-Ryanair' (Irish Times editorial term) campaign (see here) sane economists and industry participants have waged consistent analysis-based factually grounded argument against the tax-driven protectionist scheme that was conceived to support domestic tourism. The scheme, harking back to the dark age of protectionism was aiming to force more Irish people to stay at home instead of traveling abroad. It did not work. Instead, the numbers of Irish people vacationing at home has continued to decline, while the number of foreign visitors to this country has collapsed - tourism is now down 20% in Ireland, while tourism is down under 10% across Europe. More businesses clawed back on international travel amidst recession. All decisions, on margin, were not helped by a completely gratuitous Departure tax.

The Tourism Minister (I am not sure why even have one) now says that the government “will consider its response within the wider context of fiscal sustainability”.

Bloxham's description of the tax effects: "the domestic tourism industry has been disemboweled by a consumer recession, strong euro and this Monty Python air tax... Someone replaced their brain with an abacus to invent this moronic tax (aping the UK) for an island economy dependent on tourism. It requires an adult to stop it. Instead of considering, fiscalising and consulting the Minister needs about one minute to conclude that this regressive tax, that harms lower income passengers most, deserves the boot. It might even re-ignite services to Irish airports, some of which (Cork ?) appear to have been hit by a neutron bomb (undamaged and pristine buildings, no people)."

One fact: the BAA reports a -5.7% year-to-date decline in volume in September at its seven UK airports, compared to 15% decline in Dublin Airport traffic to August 2009 (here).

'Gurdgiev-Ryanair' campaign check-mate to a ridiculous tax policy? One hopes.

Economics 18/09/2009: Idiot's guide to the Galaxy

One of my favorite books in the Universe, The Hitchhiker's Guide to the Galaxy has been surpassed, if only momentarily, by a publisher in Ireland producing this superb Idiots' Guide to Science and Economics. Behold, the front page of today's Indo:
Of course, Mary Coughlan's theory of Relativised Evolution or Evolutionised Relativity and the absolutely unfortunate nature of the venue at which she managed to live up to her well-deserved name 'Calamity Coughlan' are straight out of the chapter 'National Embarrassment Exemplified'. It is a serious public blemish on an otherwise worthy event of IDA launching a serious campaign to attract more FDI into Ireland that I wrote about before (here). No need to detail much here, Indo's article speaks volumes, one can wonder now as to what evolutionary process can lead to the emergence of the species so ignorant of basic knowledge as Mrs Coughlan. One note worth making - the fiasco perfectly exemplifies Kevin Meyers' excellent argument in the same paper today (I might not agree with it myself, but Mrs Coughlan has made his case iron-clad).

But Brian Lenihan's lack of grasp of simple realities of public finances and economics is as breathtaking as Mrs Coughlan's lack of basic erudition. After weeks of being fed drivel of FF backbenchers' and hacks' version of economic ("Nama bonds are not debt", "We will get cheap money from ECB", "ECB supports us" etc), it seems our own Finance Minister got convinced that there is such a thing as a Free Lunch. Per Indo's article here, Lenihan "gave his firmest pledge yet that there would be no tax hikes in the December Budget. And Mr Lenihan challenged anyone who doubted him to "watch my lips"... Mr Lenihan said he was committed to introducing a carbon tax... But he gave his clearest indication yet that the Government would not bring in a property or water tax this year. "I am not aware of any other (new tax hikes)," he said.

Ok, three Indo reporters (including senior ones) failed to actually query the details of this statement the Minister made. But the very fact that Lenihan actually said what he did is a testament to the fact that this Government has no real financial brains in the Cabinet at the time of fiscal and financial crises. None at all.

Per statement itself, Minister Lenihan obviously does not consider introduction of the Carbon tax to be a new tax. Presumably, he lived so long outside the real world, in the world of chauffeur driven Mercs and vast taxpayer-paid perks that he might be under the impression that Carbon tax already exists, so 'introducing' it will not constitute an imposition of a new charge on taxpayers.

The Minister also indicated that he has seen no other tax proposals (other than the Carbon Tax and Property Tax). Has he read his own Commission for Taxation voluminous report? Or has it escaped his field of view as the Lisbon Treaty volume had escaped Brian Cowen's view earlier?

Finally, the Minister has to be living in the surreal world where a €20bn-plus shortfall between tax receipts and liabilities can be covered by something other than taxes. Indo's journos refer to the possibility of €4bn savings on the expenditure side as the means for avoiding new taxes. Have they done a simple sum ever before? Has Minister Lenihan done a simple sum ever before?

Even if the Government does deliver on €4bn in savings, and even if part-year measures announced in April 2009 budget continue through the full year 2010, the entire savings will not be able to cover a quarter of the fiscal spending gap. If the Government commits to fully ending all capital expenditure in 2010 and if the economy grows by 5% in 2010, the expected fiscal gap will still be in excess of €8bn in 2010.

This money will have to be borrowed in the international markets. The roll-over of a vast sea of short-term debt issued in 2008-2009 will have to happen. Is Minister Lenihan really buying the idea that these state liabilities - some €30bn worth already accumulated, plus Nama's €54bn expected plus the ones awaiting NTMA's printing press on the back of long term unemployment increases into foreseeable future can be 'deflated' away at the current rates of spending and taxation without raising new taxes?

Well, only in the world where Einstein authored On the Origin of Species, perhaps?

Economics 16/08/2009: A tax too far?

Here is a nice one from the Sunday Papers. Sunday Times "In Gear" supplement is featuring tow different cars: a Devon Motorworks GTX, 8,354cc V10 650bhp super-car that goes 0-60 in 3.5 sec and costs £300K (pages 4-5) and Mazda MX-5 1,999cc 4-cylinders, 158bhp ordinary bloke/gal car, priced at estimated €37,000 pages 14-15. Guess why am I writing about them?

Well, Devon's in the UK road tax band M, which sets you back £405pa, or €470.06pa, Mazda is in Ireland's rod tax band E, which sets you back €630pa.

Assuming that

• a 'sensible' consumer would tend to purchase a car for about 7-12% of their income;
  
• hold it for 7-10 years;
• sell at the end of the holding period of 50% or 20% of the value, then
  

the following table shows just how close our road tax policy comes to highway robbery:
Yes, you are reading it right -

• a buyer of a small middle class car in Ireland will pay between 1.4 and 2.1 percent of their annual income per annum in road tax;
• a buyer of a large super car in the UK will pay between 0.14 and 0.315 percent of their income in annual road tax.

And I know what you are going to say - the UK is closer to meeting its Kyoto Protocol commitments than we are, and it has better roads than we do.

Where is our National Consumer Agency in all of this? Oh, well, busy counting Government payoffs for staying quiet on the rip-off culture of our public policies...

Economics 26/06/09: US Personal Income

US Personal Income increased $167.1bn, (+1.4%), and disposable personal income (DPI) increased $178.1bn, (+1.6%) in May, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $25.1bn, (+0.3%). In April (revised estimates), personal income increased $78.3bn, or 0.7%, DPI increased $140.0bn, or 1.3%, and PCE increased $1.0bn, or less than 0.1%. But don’t hold your breath for the trumpets of recovery: per BEA “the pattern of changes in personal income and in DPI reflect, in part, the pattern of increased government social benefit payments associated with the American Recovery and Reinvestment Act of 2009”.

How big is this ‘in part’? Provisions of the Act reduced personal current taxes and increased government social benefit payments. The ARRA of 2009 provides for one-time payment of $250 to eligible individuals receiving social security, supplemental security income, veterans benefits, and railroad retirement benefits. These benefits boosted the level of personal current transfer receipts by $157.6bn at an annual rate in May.

Excluding these special factors, which are discussed more fully below, DPI increased $20.6bn, or 0.2%, in May, following an increase of $101.3bn, or 0.9%, in April. So things are getting worse not better. Uncle Sam is doing the job (no hope here for Ireland), but any real (non-fiscal stimulus) growth is still way off.

• Private wage and salary disbursements decreased $12.4bn in May, compared with a decrease of $0.7bn in April = DOWN trend
• Goods-producing industries' payrolls decreased $12.9bn, compared with a decrease of $12.2bn = DOWN trend;
• Services-producing industries' payrolls increased $0.5bn, compared with an increase of $11.5 bn = DOWN trend.
• Government wage and salary disbursements increased $3.9bn, compared with an increase of $5.7bn = DOWN trend.
• Supplements to wages and salaries increased $3.3bn in May, compared with an increase of $3.9bn in April = DOWN trend.
• Proprietors' income increased $0.4bn in May, compared with an increase of $3.1bn in April = DOWN trend.
• Nonfarm proprietors' income decreased $0.2bn, in contrast to an increase of $0.5 bn = DOWN trend.
• Rental income of persons increased $5.2bn in May, compared with an increase of $4.9bn in April = UP trend.
• Personal income receipts on assets (personal interest income plus personal dividend income) increased $2.5bn, compared with an increase of $2.6bn = slight DOWN trend.
  

Good news, Americans are paying less in taxes: Personal current taxes fell $11.1bn in May, compared with a decrease of $61.6bn in April. The Making Work Pay Credit provision of the ARRA of 2009 (allowing a refundable tax credit of up to $400 for working individuals and up to $800 for married taxpayers filing joint returns) reduced personal current taxes by $49.8bn at an annual rate in both May and April, and $11.2bn in March.

Thus, disposable personal income (DPI) -- personal income less personal current taxes -- increased $178.1bn (+1.6%) in May, compared with an increase of $140.0bn (+1.3%) in April. So here we do have a meaningful improvement.

And that was reflected in personal outlays too. Personal outlays increased $17.9bn in May, in contrast to a decrease of $6.3bn in April. PCE increased $25.1bn compared with an increase of $1.0bn.

Personal saving -- DPI less personal outlays -- was $768.8bn in May, compared with $608.5bn in April. Personal saving as a percentage of disposable personal income was 6.9% in May, compared with 5.6% in April. Precautionary savings motive is still working through American balance sheets, but consumption is sloping up and loans repayments are going on still at a healthy rate. America is saving, deleveraging and getting better, although for now primarily thanks to tax-cutting and stimulus spending Federal Government…

Mini-Budget 2009: A 'Fail' Grade

To summarize, mini-Budget failed to deliver the substantial public expenditure savings promised. As a result of destroying private wealth and failing to cut public sector waste, instead of reducing the Gen Government Deficit to 10.75% of GDP as claimed in the Budget (Table 5), Minister Lenihan has left a Deficit of -12.5% to -13.0% of GDP in 2009. Details below.

The mini-Budget 2009 Part 1 is in and the Government has done exactly what I've expected it to do - soaked the 'rich'. This time around, the 'rich' are no longer those with incomes in excess of €100K pa, but those with a pay of €30K pa. We are now in the 1980s economic management mode, full stop.

Microeconomic Impact: Households

• The heaviest hit are the ordinary income earners and savers: Income levies up, thresholds down. Impact: reduce incentives for work at the lower end of wage spectrum and generate more unemployment through adverse consumption and investment effects. Before this budget, it would have taken a person on welfare living in Dublin ca €35-37,000 in annual pre-tax wages to induce a move into job market. Now, the figure has risen to over €40,000. PRSI ceiling is up a whooping 44.2% to €75K pa. This is jobs creation Lenihan-style;
• DIRT is up from 23% to 25% and levies on non-life and life insurance are up. CGT and CAT are up from 22% to 25%. The CGT is a tax stripping off the savers/investors protection against past inflation, so Mr Lenihan is simply clawing back what was left to the investors after his predecessors generated a rampant inflation. This is savings and investment incentives Lenihan-style;
• Mortgage interest relief is cut and will be eliminated going forward (Budget 2010) - I hope people in negative equity losing their jobs will simply send their mortgage bills to Mr Lenihan. Let him pay it;
  
• Interest reliefs on investment properties and land development are down. The rich folks who bought a small apartment to rent it out in place of their pension (yes, those filthy-rich Celtic Tiger cubs who saved and worked hard to afford such 'luxury' as a pension investment) are getting Lenihan-styled treatment too.These measures, adopted amidst a wholesale collapse in the housing sector, are equivalent to applying heavy blood-letting to a patient with already dangerously low blood pressure.

Microeconomic Impact: Businesses

• Providing no measures to support jobs creation or entrepreneurship, Lenihan managed to mention only his Government's already discredited programme for 'knowledge and green' economy creation from December 2008 as a road map for what the Government intends to do to stimulate growth;
• No banks measures announced or budgeted for, implying that an expected budgetary cost of ca €4-5bn in 2009 due to potential demand for new banks funds is simply not factored into our expenditures. Neither are there any costings or provisions for the 'bad' bank;
• No credit finance resolutions, PRSI cuts for employers, minimum wage reductions etc;
• CAT and CGT taxes up, income of consumers down, insurance levies up... Lenihan-styled treatment for business support is so dramatic that it is clear we have a Government that only knows how to introduce pro-business and pro-growth policies for their own cronies.

Microeconomic Impact: Public Sector
The only clear winners in the Budget were public sector workers. They face no unemployment prospect, no imposition of any new levies or charges, no cuts in salaries or indeed no changes to their atavistic, inherently unproductive, working practices.

Yet, they can retire earlier with a tax-free lumps sum guaranteed. And no actuarial reduction for shorter work-life, implying that the cost of the Rolls-Royce pensions to all of us has just risen by a factor of at least 1/3! Happy times skinning the taxpayers to pay the fat cats of the public sector elites? Lenihan-styled sharing of pain.

Pat McArdle of the Ulster Bank in an excellent late-night note on the Budget said: "Our main quibble with the Budget is with the split of the burden between tax and spending. ...contrary to the recommendation of practically every economist in the country, they opted for a 55% to 45% split in favour of taxes".

This is correct. On the morning of the Budget day, Mr Lenihan told the nation that not a single economic adviser was suggesting that the Budget impact should fall onto expenditure side. Clearly, he was either incapable of listening or simpy arrogantly ignorant.

Adding insult to the injury, Lenihan also ensured that majority of cuts were to befall the already heavily hit middle classes. Microecnomically speaking, Minister Lenihan has just dug the private sector grave a few feet deeper. It was at 6ft before he walked into the Dail chamber. It was at 10ft once he finished his speech.

Macroeconomic Impact: When Figures Don't Add Up
In Macroeconomic terms, we are no longer living in Ireland. We are living in Cuba where numbers are fudged, forecasts are semi-transparent and the state knows better than the workers as to what we deserve to keep in terms of the fruits of our labour. Mr Lenihan has torn up any sort of social contract that could have existed between the vast majority of Irish people and this Government.

All data is from DofF Macroeconomic & Fiscal Framework 2009-2013 document.
More realistic assessment of the GDP collapse in 2009 is being met with a relatively optimistic assumption that GDP contraction will be only 2.9% in 2010. Even more lunatic is the assumption that Ireland will return to a trend growth of ca 4% in 2012-2013. So my assumptions are: -8-8.5% fall in GDP in 2009, -3.5-4% fall in 2010, +1% growth in 2011, +2% in 2012 and +2.2% in 2013. This will be reflected in my estimate of the balance sheet below.

Another thing clearly not understood by the Government is the relationship between income, excise and import duties. Imagine a person putting together a party for few friends. She had before the Budget €100 to spend on, say, booze. Now she has €90. Her VAT, excise, import duties on €100 of spend would have been ca €66. Now she goes off to Northern Ireland with her €90. Does the Government lose €66? No. It also looses other (complimentary) goods shopping revenue. Say that the cost of party-related goods is €250 worth of purchases at 21% VAT, 10% duties. Total cost of a €10 generated by Lenihan in income tax levies is a loss of over €140 in revenue. Good job, Brian. Your overpaid economic policy advisers couldn't see this coming?

Notice investment figures in the table above? Other sources of GDP growth? Well, DofF did apply a haircut on its projections in January 2009 update, but these corrections are seriously optimistic on 2011-2013 tail of the estimates. This again warrants more conservative estimates.
Judging by the inflation figures estimates, the DofF believes that the era of today's low interest rates is simply a permanent feature of the next 5-year horizon. Again, this is too optimistic and should it change will imply much deeper economic slowdown in 2010-2013 period.

Now to the estimates Table below summarizes the estimated impact of the measures.
Per DofF estimates, the Exchequer deficit drops, post mini-Budget-1, by ca €2.7bn in 2009 or 2% of GDP. This is rather optimistic. In reality, this estimation is done on a simple linear basis, assuming no further deterioration in receipts and a linear 1-to-1 response in tax revenue to tax measures. This also assumes the macro-fundamentals as outlined in the Table 2 discussed earlier.

Now, building in some of my outlook on the budget side and GDP growth side, Table below reproduces DofF Table 5 and adds two scenarios (with assumptions listed): From the above table, we compute the General Government Deficit (the figure that is the main benchmark for fiscal performance) as in the following Table:
This speaks volumes. The Government promised in January 2009 the EU Commission to deliver 9.5% deficit in 2009. It has subsequently reneged on this commitment, producing an estimated Gen Gov Deficit of 10.75% today. However, stress-testing the DofF often unrealistic assumptions provides for the potential deficit of 12.5-13.0% for this year.

But there is a tricky question to be asked. Has Lenihan actually gone too far on the tax increases side? Note that the estimated gross impact of the overall budgetary measures is €3.3bn for the remaining 8 months of 2009, implying an annual effect of €4.95bn in fiscal re-balancing. This is ca 2.9% of GDP - a sizable chunk of the economy. From that figure, per Table 5 above, the implied net loss to the economy from the Government measure (estimated originally at -1% of GDP) should be closer to 1.5-1.7%. This in turn implies that instead of an 7.7% contraction in GDP, the DofF should have been using a 9.2-9.4% contraction. In today's note, Ulster Bank economics team provides a revised estimate of GDP fall for 2009 at 9.5% for exactly this reason.
Mr Lenihan and his advisers simply missed the point that if you take money out of people's pockets, you are cutting growth in the economy. Of course, our Ministers, their senior civil servants and advisers would not be expected to know this, given they lead such sheltered life of privilege.

If the above estimates were to reflect this adjustment, we have: 2009 GDP of €168.2bn;General Government Deficit of 11% for DofF estimates, and 12.7-13.25% for my scenarios. I will do more detailed analysis for 2010-2013 horizon in a separate post, but it is now clear that the Government has not achieved its main objective of an orderly fiscal consolidation to 9.25% deficit. Neither has it achieved an objective of supporting the economy through the downturn.

Conclusions
Today's Budget delivered a nuclear strike to the heart of the private sector economy in Ireland. It furthermore underscored the Government commitment to providing jobs and pay protection for public sector workers regardless of the cost to the rest of this economy. We are in the 1980s scenario facing years of run-away, unsustainably high public spending and no improvements in public sector productivity amidst severe contraction in demand and investment at home and from abroad.

Minister Lenihan has promised to go on a road show selling Ireland Inc. I wish him good luck and I wish his audiences a keen eye to see through the fog of demagoguery this Government has produced in place of sensible economic policies. If they do, their response to Mr Lenihan's approaches is likely to be "Thank you, Minister. We don't need to invest in the economy that taxes producers, savers and consumers to protect public sector waste. Thank you and good by."
From an investment case point of view - they will be right.

PS: As the first fall-out from the Budget, Moody's downgraded Irish banks (here)... More to come.

Heard enough? Part 1: Mr Lenihan's cheap talk

In a series of 3 post I will look at the speeches delivered by Brian Lenihan, Mary Coughlan and Brian Cowen to their party ardfheis this weekend.

Tax increases part of economic solution - Lenihan
Based on Irish Times report from February 28, 2009, 20:31


“Higher taxes for everybody will be introduced in Ireland, the Minister for Finance, Brian Lenihan has declared, ‘Yes, the wealthy groups will have to pay. But everybody will have to pay something,’ the Minister told the Fianna Fáil ardfheis.”

Back in August 2008 and later in the annual edition of Business & Finance, I predicted exactly this outcome and timing for the tax increases announcement.

The sad part, of course, is that were we to cut the waste choking our public sectors, we would have had no need to raise taxes. Once again, since late July 2008 I offered proposals that would have provided requisite and ample capital repairs to the banks while reducing the burden of this recession on the households. Brian Lenihan decided instead to sacrifice the financial security of private sector workers in order to appease his protected constituency around the Liberty Hall.

There was one truth in what Mr Lenihan was telling his party: no matter how much he taxes the rich (aka anyone earning over €100,000), the tax impact of such measures will be minimal.

Why?

Firstly, per Minister Lenihan, “two in every hundred people earn more than €200,000 a year, and they pay 28 per cent of all the taxes; while six in every hundred earn over €150,000, and they contribute 28 per cent of the total; while 6 per cent earn more than €100,000, and they pay nearly half of the Exchequer’s returns." Raising their tax bill by 10% will yield less than 3-4% of the current returns, or around €1.4bn. A chop change for Mr Lenihan’s public sector cronies. At the rate of spending to which our public sector became accustomed, the entire 10% tax hike would evaporate in 24 days!

Secondly, any tax increases will lead to a wholesale tax optimization drive by anyone outside the PAYE system – and that covers the majority of the Lenihan's ‘rich’. Taking an assumption that some 3/5 of the 'rich' own their business or professional practice and they can reduce their tax exposure by a modest 20%, a draconian 10% hike in taxes will yield well below €1bn in added revenue.

One should acknowledge the fact that after some 8 months of continuous failure to govern, Mr Lenihan finally offered a flaccid apology to his party (the country is still waiting for one, Brian): “if we could have foreseen the extent of the international crisis, we would have done things differently… There is little to be gained in beating ourselves up over this."

But he reversed even this attempt at humility by charging the country for the deficit financing that he and his predecessor in DofF have pursued. Let's be honest, Minister, it was you and Brian Cowen who decided to award lavish wage increases to the public sector. The country did not ask for the wages of the ESB workers to be hiked to above €80,000 pa on average. Nor did it ask for e-voting machines, €250K+ contracts for consultants, pay rises for Ministers and senior civil servants, an army of paper pushers you've hired for HSE, billions wasted on white elphant projects around the country in attempts to buy votes in advance of each election, and so on. The blame for this mess is your Government's.

"We have to get on and do what we can and do it in a united way.” Oh yes, Minister. United we stand: you with your aristocratic salary, drivers, cars, pensions and so on, your colleagues and immediate subordinates enjoying most of the same, and the people you are going to tax out of their homes, childcare and schooling money, the elderly whose meagre incomes you are going to butcher with higher VAT and other charges. Spare us your whingeing, Brian – take a pay cut yourself! A 50% cut would restore your wages and pension in line with those in other advanced democracies.

“We have an €18 billion hole in the public finances,” said our well-informed Minister. Actually, the hole is more like €21bn and that was before we add new unemployed to welfare rolls. NTMA admitted this much when it said last week that we will have to borrow up to €25bn in 2009. Where were you, Minister, when they made this announcement?

“The world is looking on,” said the Minister. It no longer does. Last Friday the world sold some 90mln shares in BofI and AIB. The world holds no belief in you and your Government and neither does the country. Why? You did nothing to address the real crises for some 8 months since you took the reigns of the Exchequer in July 2008. Between July 2008 and today you've repeatedly insisted that your Government will implement at least €2bn in savings this year. Your Department has built this into the budgetary forecasts for 2009-2013. To date, you've deliverd a puny €1.1bn in savings. The world is no longer willing to be fooled by you!

“We need to persuade those who might invest here that we are capable of taking the tough decisions now to get our house in order.” Too late to sob, Brian. The numbers of those who would consider investing in this country is now standing so dangerously close to nill that even companies with substantial capital already allocated to these shores are cutting their operations and laying off workers. After years of your and your colleagues waffle about 'competitiveness', 'productivity', 'education', 'knowledge economy' they have no trust in this Government.

He went on: “We voted through the Bill that gives effect to levy that will see public servants pay on average 7.5 per cent to the cost of their pensions. …The public service pay bill accounts for one third of all expenditure”. So let’s do the maths. That 7.5% levy, net of tax deductions, is going to take only 1.5% of the total Exchequer expenditure or ca €700mln. But in July, September, October, December 2008, January and February 2009, you, the Minister, went on the record claiming the cuts will add up to €2bn on top of €440mln that you promised to save (and also did not deliver) in 2008!

What a farce!