Daily Economics 09/04/09: Riches in peril

Today's statement by Peter Sutherland on RTE radio concerning the alleged riches of Irish households is misleading in so far as it focuses on two mis-interpreted claims:

1. Irish GDP per capita is still on of the highest in the OECD; and
2. Irish wealth is well underpinned even despite the ongoing crisis.
   

I will tackle these in order.

Per Irish GDP per capita:

Ireland's GDP is expected to be €170-171.5bn(my forecast and DofF April 2009 forecast) in 2009. Our GNP is €142-144bn (as above). The GDP-GNP gap is standing at 16-16.5% and it is accounted for by the transfer pricing of multinational companies located in Ireland. In other words, the Dells and Intels of this world take inflated price of inputs they import into the country and then inflate value added in this country so they book more profits here. Precious little of the actual activity takes place here, but accounting shows it to be Irish-generated. This then goes into our figures for GDP. GNP excludes multinational transfers, so it is a cleaner measure of what we actually do produce in Ireland (inclusive of the real production by the multinationals).

Now, per CSO data for April 2008 - the latest we have - total population of Ireland is 4,422,100, which implies that 2009 GDP per capita is €38,443 and GNP is €32,111. There is an added trick. This does not take into the account the relative cost of living in Ireland, compared to the rest of the world. This is done by applying Purchasing Power Parity (PPP) adjustments. I don't have much recent data on PPP rates of exchange, but it does not change dramatically our position in the world rankings.

For example based on 2007 data - the latest for which global comparisons are available - we were still ranked the 3rd highest PPP-adjusted GDP per capita. However, taking PPP- adjustments to GNP and comparing ourselves with the rest of the world shows that Ireland ranked 14th in terms of PPP-adjusted GNP per capita in the world in 2007, which is, incidentally exactly where we were ranked in terms of our PPP-adjusted per capita consumption as well.

This shows two things:

1. using an actual measure of our income (GNP) instead of a bogus measure (GDP) implies that we are scoring below (in order of ranking): US, Iceland, UK, Norway, Canada, Austria, Switzerland, Netherlands, France, Australia, Sweden, Belgium, Germany and Denmark in terms of our income, and
2. that GNP per capita is reflective of our true consumption and investment positions, unlike GDP per capita.
   

Now to the second point concerning our wealth
In March issue of Business & Finance magazine I gave a detailed analysis of the wealth destruction that hit Ireland since 2008. Here is an excerpt.

“The bursting of the property bubble and of the equity bubble… showed that most of the ‘wealth’ that supported the massive leverage and overspending of agents in the economy was a fake bubble-driven wealth; now that these bubbles have burst it is clear that the emperor had no clothes…” said Nouriel Roubini in a recent update on the US economy. The same rings true for Ireland.

Two years ago, the Irish media was full of self-congratulatory patter about our riches. Our social welfare NGOs were using this myth as the grounds for demanding more welfare increases to offset the allegedly growing ‘relative poverty’. At the time just a handful of economists, this column included, were warning that our wealth was excessively geared toward one asset class – property. This lack of diversification, coupled with a lazy and often inept management of investment portfolios by the majority of Irish investors – from the most influential ones, like Sean Quinn, down to the 3-bed-semi families – is now coming to haunt us.

Nursing Real Losses
Majority of us are, by now, aware of the deep declines in housing (minus 30% plus relative to peak already and counting) and commercial (down 15% and still dropping like a stone) property values, and share prices collapse (off ca 70-80% depending on the index used). But few understand that our investments performance to date relative to other countries’ investors has been even more abysmal. This is true because of the opportunity cost of not actively managing our portfolios.

Per July 2007 Bank of Ireland report Wealth of the Nation (based on 2005 data) an average Irish investor held some 70% of gross assets in housing, 10% in cash, 8% in pension funds and 5% in business equity. Direct ownership of equity, investment funds shares and commercial property accounted for 2-3% allocations each. My own study, conducted in February 2007 on the basis of a sample of some 1,200-plus actual and potential high net worth individuals produced very similar results. In addition, it also showed that majority of Irish investors (over 72%) do not actively manage their own portfolios. Some 65% reported zero willingness to let professionals handle their investments. Instead of seeking proper advice (only 30% of Irish investors sought investment advice outside real estate agents’ offices) and acting upon well-researched information (only 43% of our savers actually searched around for best financial product offers), majority of Irish investors were keen on simply leveraging their assets as much as possible and dump most of it into high-risk property and shares deals.

Even less important for Irish investors was the idea of sectoral and geographical diversification. According to my data, only 10% of Irish retail investors held any exposure to non-property asset classes with allocations outside Ireland. Just 8% had more than 25% of their equities in non-property linked plcs.

2008 was a pivotal year in terms of changes in the Irish investment markets. Since then, factoring in the declines in asset values, the composition of the Irish wealth has been changing.

One important aspect of this change is that residential property share of overall wealth is poised to decline from ca70% in 2005 to ca55% in 2010. The latter figure is still roughly 38% above the OECD average, but the dynamic of change suggests some diversification out of property. Does this mean we are getting wiser with our money? Recently, a senior financial services professional suggested to me that because of the large pools of wealth we have allegedly held in the past, once the upturn occurs, cash will be available for investment in shares and financial funds. Sadly, I do not share his optimism.

Most of this diversification away from bricks-and-mortar is happening not because we somehow wised up to the need for diversification, but due to attrition in property values and lack of transparency in business equity valuations. In the longer term, most of this diversification will be going into increasing the importance of cash deposits implying excessively low yields in years ahead. Direct equity, investment and pensions funds and other asset classes that give investors exposure to the potential upside due to active management will remain the poor cousins of property and cash.

Using the changes in values for the main categories of assets held by Irish investors, I estimate that in 2008 Ireland’s total net private wealth has contracted by ca €150bn – from €712bn in 2005 (€805bn in 2006) to €559bn today. By my estimates, the current trend may see private net worth in this country shrinking to €307bn by the end of 2010 – a total loss of a staggering €405bn on 2005 figures. Adjusting for inflation, the total loss in wealth between 2007 and the end of 2010, by my estimates, will equal to roughly €470bn. Assuming marginal propensity to consume out of wealth of, say 3-3.5% (for US, this value is around 5%, so ours is a conservative estimate for Ireland), such wealth destruction will imply a fall-off in overall annual consumption of ca €4.8-5.5bn in 2008-2010, with a knock on loss to the VAT revenue of €900-1,100mln per annum.

A hefty opportunity cost
But this would be only half of the problem, were Irish investment portfolios actively managed through the downturn. During the current contraction cycle equity and property markets have posted unambiguously deep declines in all developed and middle-income economies around the world. However, several other highly liquid asset classes have shown relative gains. Prior to Autumn 2008, a number of international Exchange Traded Funds (ETFs) with commodities and fixed income exposures have recorded double digit dividends that would have seen the returns on these investments offsetting some of the short-term capital losses. Since late 2008, fixed income ETFs focusing on some corporate and public debt have continued to produce strong yields. Other classes of debt were also providing upsides. In many cases, such ETFs offer capital gains potential in the medium term similar to the fully diversified equities-based portfolios, but unlike equities, they pay strong current yields.

So what does this mean in practical terms? Over a dozen balanced managed portfolios blending ETFs, corporate and sovereign fixed income and actively managed money markets funds that I reviewed in recent months have been trading since September 2008. On average, this class of products has delivered a yield of ca 6-7% pa and a capital loss of 2-4%, when traded on a higher frequency basis. Compared to NASDAQ’s – 6% year to date slide, S&P500’s -13%, ISEQ’s -10.4%, accounting for re-invested dividends, some managed non-equity portfolios are returning a premium of 6-17% on average US, Asian, UK, EU and Irish indices.

In terms of the losses in Irish wealth, a switch of personal investment allocations into the actively managed asset classes (pensions and investment funds) and reversal of the direct equity holdings into an actively managed non-equity, yield-generating strategy could have saved some €1.2-3.4bn pa in wealth that is being lost due to asset allocations imbalance in Irish investment portfolios between 2009 and 2010. This is far from chop change. More active management of portfolios can generate enough savings on the investors’ balance sheets side to offset over 30% of the expected fall in our national income between these years. It can also, potentially, generate some €200-570mln in Exchequer revenues annually. The latter, of course, requires for such investment management to take place in this country – a proposition that is not exactly likely, given our poor tax treatment of investment markets and investors.

And the cost of poor governance
So enter our Government’s latest attempt at economic policy – the mini-Budget 2009 Part A. Why part A? Well, having predicted in this very column last year that we will face a new Budget by the end of Q1 2009, I can pretty much with certainty predict that whatever comes on April 7 will not be sufficient to plug the hole in the public deficit. Expect Part B some time before the end of the summer.

April’s mini-Budge will attempt to soak any PAYE earner with income above €60,000. The Government will do absolutely nothing to stimulate new investment and savings in this country. This, in turn, will lead to a double blow to our economy. First, in a series of straight jabs rapid flight of private investors’ capital out of the tax-choked economy will lead both to falling national wealth and further shortfalls in the Government revenue. Second, an uppercut of collapsing wealth will hammer pension funds across Ireland, as retail investors lose incentives to save at home and shift their longer term assets to jurisdictions with better management and more economically literate Government.

Should such scenario unfold, we’ll be lucky if our total national net assets pool does not fall below €200bn mark by the end of this recession.

Peter Sutherland is simply wrong to stress our relative wealth - just as the NGO were wrong to stress the importance of the relative poverty. The latest CSO stats on CPI - issued today - show that we are now worse off in real income terms than we were in August 2006.

Daily Economics 08/04/09: Toxic Fumes from Toxic Bank

First a bit of news
A birdie in front of my window has just chirped (hat tip to the birdie) that the ECB has tentatively signaled to the Irish Government that it will finance (largely? or in full?) the 'bad bank'. Under such an arrangement, the state will issue a sea of bonds - say €30-60bn to cover €50-90bn of impaired loans floating out there - and swap these for freshly printed cash from the ECB. Taxpayers get debt. Government gets pile of assets with default rates of, ughh say 20-25% (?). Banks get cash.

Why would the state go for this? Because if we price this junk at a fair market value, taking it off the banks will still leave us exposed to the need to recapitalize the banks. As they write down their assets after the transfer, the value of an asset will drop - from its current risk-adjusted (if only bogus) valuation of, say €0.90 per €1 in face value, to a fair value of, say €0.50, implying a loss of €0.40 per €1 in face value. This will chip into banks' capital reserves, driving down their core capital.

So the state will pay over the odds for the default-ridden paper to avoid the follow-up recapitalization call. This will sound like a right thing to do, but given that the taxpayers will be holding highly risky debt for which they have overpaid, it is not.

Second source of added liability comes from the nature of assets transferred to the bad bank. Banks have an incentive to transfer impaired consumer loans - the loans on which they have hard time collecting. So the state impaired assets pool will be saddled with near-default mortgages and credit cards debt. This is political dynamite, for no state organization will enforce collection on these voters-sensitive assets.

So the taxpayers will end up banking with the state. The fat cats of the public sector will end up banking with BofI and AIB.

Why would the banks go for this? While getting rid of the troublesome assets, the banks will get capital injections and no equity dilution. The bondholders will be happy too - lower risk base, higher risk cushion imply lower spreads and thus higher prices. The taxpayers will have to get a second round of squeezing as repayment to the state will be required to compensate for losses generated by the overly-generous original pricing scheme. These will take form of 'Guarantee' dividends to the Exchequer which, alongside with existent preference shares, will lead to a widening in lending spreads and banking fees. Customers will have to pay the Government via the banks.

Why would the ECB go for this? Ah, the birdie told me that the ECB, desperate to find some solutions to similar banking problems elsewhere, is keen on using Ireland as a sort of policy lab. Given it's newly acquired mandate to print cash in quantitative easing exercise, this means the price of such Social Laboratory Ireland is low enough for them to deal on Irish 'bad' bank.

All happy, save the soon-to-be-stuffed-again taxpayers...


A follow up on the Budget
Following the Budget last night, Irish media has gone into an overdrive. The simplistic terminology and naive analysis dominate the space between print, radio and TV with commentators heralding the Budget as:

• 'tough' - nothing tough about slicing off an odd €3bn off a deficit that is so vast. We will have to borrow half of our annual spending requirement this year - primarily, to pay welfare rates and public sector wages. In family economics, such budgeting is known as 'reckless' or 'subprime'. In Lenihanomics it is known as 'making hard choices' (at the expense of others);
• 'fair' - there is nothing fair about the budget that has taken the pain of adjustments required by the serial failure of this Government (in its various past incarnations) to reign in its own cronies' spending and dumping it all onto the population at large. Nothing can be further away from being fair than an idea that you soak the private sector to insulate and even gold-plate more the lives of the true Irish elite - the public sector dons;
• 'timely' - there is nothing timely about the Budget that delivers in April 2009 the corrections promissed in July 2008;
• 'far-reaching' - aside from 'deep-reaching' into yours and my pockets, the Budget failed to deal with the most pressing issues at hand. The actual deficit problem remains unaddressed. Reform of public sector - unaddressed. Economic stimulus - unaddressed. Banks financing - unaddressed. You name the topic.

For anyone who still needs a more down-to-earth explanation of the budget, here is an illustration
The media reaction to the Budget is hardly surprising.

Irish intellectual milieu is based on a vicious pursuit of any independent analysis and thought with a goal of eliminating any possibility of serious dissent. Anyone with a point of view departing from the consensus is left jobless and/or branded as a hack or a generally diseased mind.

How many dissenters are ever asked to advise or brief the policymakers? None. How many non-consensus economists work for the Government? None. In our Universities? A handful and then only on junior posts. How many differing opinions does the Irish Times feature in its main pages? Virtually none, unless they can be comfortably pigeonholed into some agenda slot.

Hence today's reaction. But also the continuous drift of consensus opinion to the La-La land of pseudo intellectualism of some of our left-of-centre pontificates. This is not reflective of any public opinion in the streets, but it is reflective of the incestuous nature of our public policy discourse.

At least in the Soviet Union they respected dissidents enough to physically hunt them. Here, we are simply growing immune to independent thinking.


And the best non-economist analysis of the state of our affairs

The piers are pummelled by the waves;
In a lonely field the rain
Lashes an abandoned train;
Outlaws fill the mountain caves.

Fantastic grow the evening gowns;
Agents of the Fisc pursue
Absconding tax-defaulters through
The sewers of provincial towns.

Private rites of magic send
The temple prostitutes to sleep;
All the literati keep
An imaginary friend.

Cerebrotonic Cato may
Extol the Ancient Disciplines,
But the muscle-bound Marines
Mutiny for food and pay.

Caesar's double-bed is warm
As an unimportant clerk
Writes I DO NOT LIKE MY WORK
On a pink official form.

Unendowed with wealth or pity,
Little birds with scarlet legs,
Sitting on their speckled eggs,
Eye each flu-infected city.

Altogether elsewhere, vast
Herds of reindeer move across
Miles and miles of golden moss,
Silently and very fast.

W.H. Auden 'The Fall of Rome'

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.

Daily Economics 07/04/09: Lenihan's McHammer Land

I have posted a set of presentation slides on Irish Economy on my partner blog: Long Run Economics. Feel free to check them out.

(scroll for Ireland note below)

Junk-bonds default rates: Per Bloomberg (here) ca 53% of US companies that issued high-risk, high-yield bonds will default over the next five years. Jim Reid, head of fundamental credit strategy at Deutsche Bank AG, further argued in his note yesterday that the recovery rate on this paper will be around 0%. This compares with 31% 5-year default rate in the two previous recessions and 45% in the Great Depression. “...40% high-yield defaults over five years seems to be a minimum starting point for this default cycle,” Reid wrote, with 50% rate being “not unrealistic.”

According to Moody’s Investors Service note from March, the 12-month default rate will rise to 22.5% in Europe and 13.8% in the U.S. by the end of the year. Moody’s forecast the 5-year default rate to be about 29% by February 2014, according to the report.

Reid's forecast is driven by continuously falling property markets and he sees another 16% declines due for the US and 30% in further falls in the UK property markets. And this leaves us here in Ireland in a dust. Reid-assumed implicit cumulative property declines over the 5-year horizon are:

• per Case-Schiller in the US: 32.8% peak to trough fall, and
  
• per Halifax index in the UK: 44% peak to trough fall;
• per Daft.ie index in Ireland (my estimates consistent with Reid's assumptions on the US & UK dynamics): a whooping cumulative implied contraction of 43% peak to trough.
  

This is pretty bad. How bad - consider some mitigating possibilities:

• Things might be not as bleak if one were to take into account Reid's most contentious assumption of the zero recovery rate. Standard assumptions assign ca 20% recovery rate for senior junk-grade paper. Times are not exactly standard, so, say, we get this down to 10%. This will comfortably bring Reid's numbers to the range of Great Depression, but not to the range of the last two recessions.
  
• Now, take a knife to his housing markets forecast. Although extremely tenuous at this moment in time, the US housing market (and indeed the UK market) is starting to show some early signs of stabilization. Suppose that home prices were to bottom at the OECD latest projection: US at -20% and UK at -34% (for Ireland, -38% drop).
  

Combined, these 'rosier' scenarios do imply a possibility of the US reaching the average ca 30-33% default rate on junk bonds this time around. We might be not as bad off as in the Great Depression after all... and we are certainly not as bad off as the equity markets in some jurisdictions (e.g Ireland) where shareholder wealth destruction has been much deeper than 30%, or indeed, 53%. So assumptions are the key and comparatives are the lock-in!

But what Reid's analysis shows is the dire need for stronger credit risk assessment of the fixed income portfolios traded, including in the ETFs universe. Seniority is the king, plus Government underwriting.

Junk estimates default rates: there are new 'estimates' of the Exchequer receipts being floated around today by Brian Lenihan (here): €33bn in tax revenue for 2009. This is about as realistic of an assessment as a snail's own worldview stuck atop a bullet train. The state will be lucky to pluck €30-31bn out of this economy comes December, simply because whatever the boffins of DofF are forecasting today for increased revenue from the mini-Budget tax hikes - all will be undone tomorrow by business and income tax receipts from sole traders and SMEs.

“Two-thirds of our spending is now welfare payments and payments to public servants. If you want an adjustment on the spending side you have to cut pay for public servants or cut rates for social welfare,” he told RTÉ News. “I have not seen many people advising me to do that. Let’s get real where the balance has to be struck here. Anyone who suggests that this cannot be done without tax is deceiving themselves.” Well, Minister, this is what happens when you surround yourself with lackeys for advisers. If 2/3rds of your household bill goes to pay servants and your non-working extended family, you are in an MCHammer-land: fat trousers and bankrupt estate.

My advice to our Minister-in-Charge-of-Bankrupting-Ireland is to get his head of the sand: cut 20% of the public pay bill by laying off some, trimming wages of others and scaling back pensions to those retired will be a good start. Follow it up with welfare spending cuts and stronger enforcement of welfare standards: unemployment benefits down by 5%, social welfare rates down by 15%.

Otherwise, Mr Lenihan's default rates on Budget forecasts will exceed those of the US junk bonds... Then again, it is hard to tell right now which paper is of higher quality.
Capital flows and Irish Capital Acquisitions Data:
Per mu post yesterday, here are two charts (from Follow the Money)showing US financial and trade flows dynamics and an even faster fall off in the capital formation. Clearly, our yesterday's CSO data is somewhat different, which suggests to me that Irish stats on relatively slow-declining capital acquisition in the industrial sectors are linked to some accounting trickery more than to real acquisitions. If the rest of the world is falling through the basement, how can Ireland still be hanging around in its first floor bedroom?

Over5seas Travel Data from CSO is out: predictably, the number of trips abroad by Irish residents fell by 13.4% to 474,000 in February 2009 compared to 547,600 a year ago. February 2009 overseas trips to Ireland were down 5.5% to 445,200 from the same month in 2008. Visits from the UK fell by 15,000 (5.8%) to 244,800. Trips from Other Europe increased by 1% to
149,100 while those from North America fell by almost 20% to 37,500. Chart below (courtesy of CSO) illustrates:
In 2009 to date, trips abroad by Irish residents are down by almost 11% to 976,100, "a complete reversal of the growth rate achieved in 2008". Overseas trips to Ireland are down 4.3% to 869,400 compared to an increase of almost 1% in 2008.

Daft, Capital, I-Stocks: Daily Economics 06/04/09

Update: This country is in a crisis. The Government is about to put out a major Budget. It itself is in crisis facing the questions as to whether they have a mandate to rule. And amidst all of this, Mr Cowen puts forward Willie O'Dea to advocate Cabinet's positions on the economy? banks? public finances? What O'Dea has shown in this performance - a mixture of remarkable ineptitude (in addressing the real issues faced by the economy) and arrogance (in espousing the belief that his Government can get away with the squander of funds and disastrous policies have marked and still mark years in power) - was embarrassing and insulting. It is time for this Government to resign. Now! No renewal or regeneration or recovery of any kind can take place as long as the failed leadership and ministerial 'talents' like Willie O'Dea and Mary Coughlan remain in place.


Daft.ie report is out on house prices and given that the media has covered the results, I would just post the link to the report (here).

Liam Delaney has an excellent essay/intro commentary to the report. Here is a quote:
"This report - combined with the recent labour force figures - indicates considerable hardship for those in once solid middle-class jobs that are now facing a potential double-whammy. People will inevitably feel even worse when they see neighbours and friends who are in better situations. Consider the position of a college graduate who purchased in Dublin in 2006, based on the income from his financial services job (now gone), to the position of his neighbour who secured a public sector position on leaving college and purchased in 2001. While neither is laughing, the latter must at least be considering himself the better off of the two. They are certainly not in the same boat and the widening rift in society being generated by asset price decline and employment uncertainty is the defining theme of our time."

All I can add to this is that of course the public sector worker is also protected by Messrs Cowen and Lenihan who are working hard to make sure the unions are pleased and appeased. The private sector worker is screwed. Most likely, due to her high income in the past, she is considered rich by our Government and given that she worked in the financial services she is described as pariah by the unions and the Left. Monetary loss, job loss, tax hikes, moral abuse by the Fintain O'Toole-Joe Higgins crowds, and negative equity... and more tax hikes... this is her lot in the 'Fair Society' that is Ireland of Brian, Brian, Mary and the Bearded Men of SIPTU/ICTU.


Capital Assets Acquisitions (CAA) report was out today from the CSO, showing that industry CAA in Q4 2008 reached €1,298.2m down on €1,441.3m in Q4 2007.

Machinery & Equipment acquisitions led with €779.1m in Q4 2008, down on 2007 level of €933.5m. Electricity & Gas Supply category accounted for almost a half of the entire pool of acquisitions in this sector - €376.7m in Q4 2008. Surprisingly, Land & Buildings acquisitions were €291.0m, up on €232.3m in the Q4 2007. In a potential sign that some companies are in distress, total Capital Sales were €112.2m, compared with €73.4m in Q4 2007.

Capital Acquisitions of Computer Hardware & Software in Industry were down from €217.1m in the full year 2007 to €146.4m in 2008. Machinery & Equipment went from €3066.5m in 2007 to €3,136.0m in 2008. Land & Buildings acquisitions were up from €671.4 in the entire 2007 to €1,198.1m in 2008. Vehicles & Other Assets fell from €538.1m to €499.7m between 2007 and 2008. How can this discrepancy - declining productive capital acquisitions and rising property/land acquisitions - be explained?

Here we have to speculate, but Publishing & Printing and Chemical Products were the only two sectors with significant new acquisitions over 2008. Now, the former is small in absolute terms, the latter is not. Both are not exactly the sectors where large land banks held off-the-balance sheet could have been brought back via an acquisition. Both sectors, however recorded no matching increases in other capital acquisitions. So this not a story of growth either. I would suspect that on Chemical Products sector side, there could be some capital plays involving transfer pricing.

Industrial Stocks data was also out today. Chart below (courtesy of CSO) illustrates the rate of production slowdown catch up with demand collapse in Q4 2008.
Notice a distinct ramp up in total industrial stocks between Q1-Q3 2008? This was the denial stage - companies kept churning out vast amounts of stuff that found fewer and fewer buyers. Then Q4 2008 hit - jobs cuts, shorter work days etc and you have a fall off in stocks. Now, this is clearly not a leading indicator of things to come, but... the thing to watch is whether the stocks recover to positive growth territory in Q1 2009. If they do, given the levels of layoffs in January-February 2009, there will be no quick rebound in the economy, as return to positive growth in stocks would imply that diminished productive capacity is not restoring supply-demand equilibrium. A strong bounce in Q1 2009 will potentially signal further layoffs down the road...

Public Sector's Missing 'Pains'

Charts below are self-illustrative:

• Public Sector Employment is up,

• Public Sector Wages are up,

• Public sector wages dispersion is extremely low across all categories, so Unions' claim that in some sectors wages are too low simply does not add up (per above and below)

• Cost Savings promised in July 2008, September 2008, October 2008, November 2008, December 2008, January 2009, February 2009, March 2009 and that will be promised comes next week's Mini-Budget are nowhere to be seen.

A lesson to be learned by Brian^2+Mary: you can announce vacuous plans but we'll catch you.

A lesson to be learned by voters: they (Brian, Brian & Mary) don't give a damn if we know or not.

Live Register Details: March 2009

Per my earlier post today, here are some charts and trends for the Non-Irish contingent of the Live Register.
In terms of numbers on Live Register numbers, Accession States (EU27 less EU15) are by far predominant of all Non-Nationals. Some reasons why, apart from the obvious one that there is simply more of them than of other Non-Nationals, are:
(1) These are workers with less tenure (many came after 2004) and thus are cheaper to lay off. They might not be the least productive, but given our daft labour laws according protection by tenure, not merit, they are the first ones to go.
(2) Many of these workers are employed as quasi-skilled - they are still in on--the-job training and/or still developing their language skills.
(3) Obviously, majority were employed in Construction, Hotels and Hospitality, Retail Services - all sectors that experienced the heaviest fall off in employment.
Chart above shows totals of all Non-Irish Nationals against the Irish Nationals. Not much to comment here, except that I would suspect that tenure-adjusted, unemployment rates amongst non-Irish nationals are much closer to the Irish nationals than these numbers suggest.
Finally, the last chart shows monthly rates of growth in Live Register signees. Again, all Accession States (EU27 less EU15) lead in rates of growth and in some cases - Q1 2008 being one example - with massive spikes. These are the signs of who is being let go first in this economy. Notice convergence of all categories to trend in March 2009. This is cyclical - following massive layoffs of January-February 2009 and will not hold in months to come as the next wave of layoffs is already ongoing. The next, most troublesome sub-category is EU15 (ex Irish and UK nationals) - the French, Germans, Italians, Spaniards and so on. These groups were not known to be occupied with 'dirty' work, preferring instead cushy jobs in professions, even public sector, and of course that welfare-heaven - EU jobs. They are being laid-off ahead of 'Others' (which includes Americans, Russians, Ukrainians, Chinese - all the 'rif-ruf' according to our immigration laws). Now, the 'Others' category does not cover students here, who are doing their post-graduate degrees and working part time, but do not qualify for unemployment assistance. Others, as well as the UK nationals are actually holding to their jobs pretty much as well as Irish nationals.

So, see, not all Non-Nationals are identical... an obvious conclusion.

Housekeeping: Daily Economics 02/04/09

So per your comments, let's start from the top.

First comment by the Anonymous:

I do not anticipate any significant reduction in the social welfare. Social welfare, from my point of view is divided into 2 parts:

• unemployment benefits - which should be fully replaced with private unemployment insurance (competitively supplied and paid for by transferring PRSI into a mandatory insurance purchase). This will automatically restrict access to benefits to those who actually worked in the state. Under the current PAYG system, a cut in the benefit should not exceed 5-7% as people are losing their job and they do need assistance;
• long-term welfare benefits - which include housing assistance, direct payments etc. These have to be cut by 20-25% to bring them closer to the UK levels. The benefits should have a life-time cap of, say, 10 years. Of course, exceptions, e.g lifetime disability, apply. Several reasons for doing so include: aligning the incentives to work and reducing incentives for people from elsewhere in Europe to migrate under our welfare umbrella. Social welfare recipients must be required to perform civic duties - cleaning up graffiti and parks, for example, which can total 5-10 hours per week. Welfare assistance to families with children should be conditional on children staying in school and not committing social order offences.
  

"(a)the DIRT rate 23% ceiling removed i.e. make it subject to income tax (bye bye billions of savings!!!) not to mention it wont actually raise any money as rates collapse and returns are made in Nov 2010 - but it will scare the big money overseas." This is a scary possibility. The Government simply does not understand the basics of saving-investment relationship and sees any surplus income (income over and above that which is required to keep ourselves alive) as being a form of 'excess wealth'. In fact, if you recall the idiotic banks' reports in 2006-2007 about the wealth of this nation, they too treated surplus income as wealth. So to Cowen and Lenihan, what's left in our pockets after we bought groceries and petrol and paid mortgages is a fair game for taxing. So let them do this! Let's see more corporate money leave Ireland, because until this happens, our Government will not even pause to think about their actions.

"(b) The PRSI ceiling lifted - hitting the middle/upper income bracket with a stealth 4% tax on top of levies up to 6% - Bye Bye wealth creators, entrepreneurs and prospective international employers". Distinctly possible - trade unions will buy this and for the Government this is a soft target. The measure will disproportionately hit those who are self-employed and/or employ others. In a labour-intensive world of services based economy, this will be a disaster.

"(d) announce property tax on private residence for next year: this is the most insane of all so it warrants further analysis: We have plenty of evidence from our pre-98 property tax days - it was a disaster which produced no net income... - do we honestly think people who paid huge stamp duty and saddled with big management fees and mortgage costs will do their patriotic duty and pay? ...This property tax will cost too much to collect; it will be political dynamite - up for abolition at every election. Contrary to David McWilliam's view that it is not a tax on work and therefore should be pursued I would strongly disagree. For instance who does he think would be asked be pay such a tax? ...in fact it would be yet another tax on work NOT to mention further damaging the already crippled property sector. Which by the way we own through our guarantee of the banking system. The time to consider this type of annual property tax is (if ever) only when we see clear signs of recovery so it can be truly counter-cyclical, but not beforehand."

A lot is going on this point. Some property tax will be introduced, undoubtedly, later this year. And property-linked tax is, in my view, needed. I believe it should be based on land value of your property, not property itself - for many reasons which I will explain over time, so keep reading this blog in the future. Your arguments against property tax above are related to three main points: (1) cost and efficiency of administration; (2) incidence of taxation burden; and (3) timing.

On (1), I agree, our clowns will have hard time coming up with anything serious. Most likely, replacement of the half-brains we have with more half-brains that are lurking behind them - i.e our glamorous Opposition - is not going to solve this problem. But at least we can try. And the cost of setting up an LVT system does not need to be high - Daft.ie can run the entire housing market off a laptop, so can Land Registry Office, especially if we leave one chap/gal working there and tell them: "do it, or you are out of the job..."

On (2) land value tax will not have the same adverse effects as a property tax. First, LVT will not affect disproportionately those with higher mortgages, because their properties were mostly bought at the height of Celtic Tiger and are, therefore, located on poorer quality land (e.g bedroom communities, rather than D4). It will actually have a stronger impact on those who bought many years ago and who are now net recipients of transfers from improved land around them. This said, transition to LVT must take into account stamp duty paid, say in the last 7-10 years. It also should replace the stamp duty, in a revenue neutral way at the start. As far as who pays LVT - of course it will be the middle class and the 'rich' - there is no way around this. But some cash-poor, asset rich folks - families on social welfare that have inherited large homes - will be forced to trade down. This is good news. They under utilise their assets and thus should be given an incentive to trade these assets to improve their own income stream and improve the prospects of higher economic returns to resources. This is not a direct tax on labour and it does not discourage more effort/investment in human capital. In fact, it encourages the latter by bringing closer to reality the artificially depressed rates of return to higher education in Ireland.

On (3) - timing. It does not matter much when you introduce LVT, because you would set it on the basis of 2-3 year average valuation of land, not on the basis of an immediate land value. Depressing the returns to land - which LVT will do - will amplify the returns to adding value to that land through quality development, so you can think of LVT as being stimulative of good development and depressive of the overall sunk cost of development. It is, therefore, an expected support to the construction and property sector, but only in the area of added value, not speculative land banks holding.

"(f) reduce tax breaks on redundancy payments (excusing it by saying it will only affect to 'rich' i.e. payments above €100k - of course these unfortunates wont be rich for long as there ain't any jobs left and the banks will want this €100k to payback loans/mortgages etc." Yes, this will be damaging to the economy and the more vulnerable people who lose their better paying (and more productive) jobs. Given the structure of layoffs - with younger workers getting axed first - courtesy of our Unions'-sponsored idiotic labour policies - this measure will put extremely severe pressure on the households with greatest mortgages exposure, inducing a spike in mortgage defaults.

And per your intention to find a better location for your business - spot on. Your civic duty is to look after your own rate of return to your own talents and work. It is not to provide Cowen and the rest of the goons in the Leinster House with cash to waste. All I would ask of you is to send a Christmas postcard to your local TDs and to Cowen saying "Thanks to you, I am living outside Ireland now! Because of this, this year you will not be getting my taxes."

Per Fintan's comment:

"I wonder are we cynically waiting for the IMF to come in and force us to finally slash the untouchable public and social welfare bill? Sadly I think this government will try to play to gallery and therefore put most of the burden on the dwindling higher earners and naively expect this shrinking group to remain in Eire. They will not - this group is much more mobile than the govt thinks." Yes, Fintan, I agree with you. One small caveat - remember that when they tax higher earners - many of the PAYE higher earners are actually public sector employees... and the Government ministers etc.

Per third comment - by Anonymous:

I agree that one of the critical subheads is social welfare. It is a form of modern day slavery in so far as it locks potentially productive lives into a state of perpetual dependency. Higher taxation burden on lower income earners will indeed incentivise more transition out of work, so a cut in social welfare is needed urgently, especially as wages are falling.

Per immigrant labour: I am not sure you are right that we "had hundreds of thousands of immigrants paying little or no tax". Many of these immigrants were not aware of the tax deductions and did not avail of these, so while some have probably paid no tax (being out of tax net on the basis of their income or registered as sole-traders or employed via Northern Ireland-based subcontracting firms - practices well established in the construction sector), many were overpaying tax. In addition, thousands that went back home are now out of our pensions and welfare nets. On the net, I still believe immigration has contributed to the economy.

I warned (here) that our immigration flows since 2004 were of much lower (Human Capital-wise) quality and that this will end up costing us in terms of economic efficiency. A simple selection bias model would show that immigrants with above-average skills and aptitude are more likely to leave Ireland once they become unemployed, save for the social welfare generosity here. So the increases in the Live Register due to immigrants here are reflective of two things: (1) lower quality migrants choosing to stay here; (2) people who actually anchored themselves to Ireland (negative equity, family ties etc).

A friend of ours was made redundant this week - a Polish national who lived in Ireland over 10 years now and who was never redundant before. Professional girl, with good education (some of which she completed here, having paid out-of-EU tuition back before 2004). Should she be allowed access to unemployment benefits? Hell, yes. Should she be allowed this access ahead of a native person who have not contributed as much to the economy over the last 10 years, having, say, tapped the system of welfare instead of working? Yes, again.

What I mean here is that we have to be careful not to throw baby with the bath water - some (many) immigrants are very productive, very much contributive economically, socially, culturally to this country. They must not be bunched with the loafers and low-quality workers we have been attracting as well.

Over 20% of immigrants are unemployed and now on social welfare.As all the other tax revenue sub heads are down ,income tax is the only one they are going to target to pay for this.
This means immigration has been a burden on the Irish taxpayer.This ,in my opinion will have a negative effect on sentiment towards immigration.

It might be a selfish statement - coming from myself - given that I am a foreigner (having come to Ireland from the US and being a Russian and an Armenian), my wife is a foreigner (being an Italian and a Native American) and my son is somewhat a foreigner (Irish, American, Russian and Italian - some mix of nationalities he has). Even my dog is bloody American... But the facts are very simple - there are here foreigners who are world class workers and citizens. I know several Russians, Georgians, Serbs, Czechs, Ukrainians, you name it, in Trinity who either worked in the past or can work now in Yale, Princeton, Harvard, Chicago - you name it. They are obviously not a problem. On the other hand, I see hundreds of Eastern Europeans hanging about cash machines begging for money.

"More PPS numbers were issued to Non nationals in February and March than were issued to Irish people. Its hard to credit that all these new non nationals are taking up jobs here in this savage downturn. Something is not right. Is it possible some are somehow coming here and immediately going on social welfare?"

I have not seen the latest PPS numbers. But remember - PPS numbers are an opportunistic measure of actual employment. They might be a signal of an intention to seek employment, but they do not tell us whether a person was seeking long-term employment or just a summer (or even shorter) job, whether they were actually doing any labour search or whether they stayed in the country at all. Fortunately, our idiots in the Leinster House did set out a requirement that an Accession States citizens must work in this country for a number of years (in some instance, though - months) before accessing welfare system. You can see some of the details here. At the time of the Citizenship Referendum, I argued that the 2 years requirement (most extensive benchmark for accessing the welfare) is too short and should be extended to 5 years, with no exemptions for any forms of welfare. Of course, BBC, Irish Times and the rest of the 'Left' have accused me at the time of being anti-immigrant, even racist... Alas, in the end we opted for a shorter period.

"Why is rent income supplement being paid out when there are 250,ooo empty houses in the State? There is an oversupply of accommodation.Rent should be on the floor. Instead the taxpayer is subsiding landlords. I think the figure for this is around a Billion euros a year." Spot on - it is too costly and too loosely administered scheme that does not encourage tenants on assistance to seek cheaper accommodation. Cut assistance back by 20% to reflect the actual drop in rents and index future payments to average rents. We have social welfare recipients affording life in D4, while families that pay taxes cannot afford renting accommodation in D24! I would also remove social welfare housing out of Dublin City Center altogether (with exception of the elderly) and make the land available for development to accommodate families that actually work in the city. It is absurd that for the sake of 'maintaining community' we encourage city center residency for those who do not work (and who often contribute to social problems in the areas), while we require people who pay for this luxury to commute hours on end.

As Yeats said.. ''...things fall apart,the centre cannot hold...'' The middle classes cannot hold in this madness. Yes, it is time to send Cowen a note saying 'We are not paying your taxes anymore - get stuffed!" from each and everyone of us!

Daily Economics 02/04/09: Exchequer Receipts

And so the numbers are out (here) and we are off with a race for quick analysis.

Albert Einstein once said “The definition of insanity is doing the same thing over and over again and expecting different results”. By this criteria, our two Brians are heading for a loony house at an ever increasing rate. And large swaths of Opposition that is calling for increasing levies and taxes even further are there already. Why? Well, they've been raising taxes now since October 2008 (in reality, they have de facto raised taxes by pre-announcing October Budget two months before). The end result:

All the tax heads are down on the receipts side, with a new dramatic fall-off in Corpo Tax - a clear sign that the killing fields of Brian^2+Mary Ireland Inc are now starting to get covered with the bloodied bodies of Irish companies. Well done, Brians! More tax increases is what we need next to finish off the private economy.

On the net, and I will be redoing the whole balance sheet over the weekend, tax take is now dangerously close to dipping below €30bn for 2009 as a whole. Can't say much about the exact deficit for now - until mini-Budget, but in terms of DofF forecast from January 2009 that would imply a current account deficit of €16bn and with the capital account deficit of over €6bn we are now in the territory of the combined General Gov deficit of over €22bn or almost 13% of GDP. Well done, Brians! Now is the time to raise more taxes - it has been working for the two of you so well to date.

Debt servicing costs are double year on year to cool €298mln and fees to our heroic Santa's Lille Helpers of the primary placement brokers are more than double too. Well done, Brians! Now is the time to raise some additional taxes - piling on national debt is just so much better than taking a knife to your spending plans.

Only motoring fines and national lottery fund are showing gains.

But the real scandal is on the spending side of things:

• Agriculture & Food up from €186mln in 2008 to €350mln in 2009;
• Community, Rural and Gaeltacht Waste (oops, Affairs, that is) up from €109.2mln in 2008 to €119.6mln in 2009. Last year, taking his high office, Brian Cowen has promised to put Gaelic Language at the heart of Gov policies. He is now clearly doing the job, so well done Brian - the Gaelic knowledge economy is just around the corner to save us all;
• Environment, Heritage & Loc Gov up from €596.1mln to €682.5mln - the dolphins and rare boffins (in the DofF and other Gov Buildings, I presume) are grateful to you, Brian.
• Total Voted Exp is up from €11.14bn to €11.82bn - an increase of 6.1% on 2008. Time to hike taxes on ordinary families, Brians, we've got expenses to cover!

We did find money, at this time of a plenty to contribute to the Carbon Fund Act 2007 - some €18.45mln. And non-voted salaries, pensions and allowances were up. Oirieachtas Commissions costs shot through the roof increasing by 16.5%.
The Exchequer deficit now stands at €3.72bn - up from €354mln in 2008 or a whooooping 951% up! Time to raise taxes, Brians, for this is what our academic economists and the ESRI are telling you to do, and since you are paying them a pretty penny, they gotta know, don't they?

Few more points: Pre-Supplementary Budget Aggregates since Budget 2009 also published by the DofF provide the following inputs into the mini-Budget
Of import is a more realistic assessment of the economy at -6.75% for GDP. However, this is still excessively optimistic, setting the stage for a small further reduction in the mini-Budget next week. I expect DofF to come down to -7% growth in GDP. Again, in my view, a -8.0-8.5% figure is probably closer to what will happen. On the Gen Gov Deficit, -12.75% is well in excess of my own earlier estimates of 11.76% (here). But my forecast has built in assumption that we actually save on target for 2009. Thus, I am probably closer now to the mini-Budget outcome than to what DofF is doing here. Tax revenue of €34bn is now looking optimistic. It is likely that tax situation going to deteriorate further as returns lag receipts across many main tax heads.

"The savings agreed by Government on February 3, together with other minor estimating adjustments, lead to further savings in 2009 of €437 million in Gross Voted Current expenditure and €300 million in Capital. In Net terms, which reflects the savings from the pension-related levy, the Current reduction is €1.45 billion. These reductions are offset by additional expenditure pressures of €1,387 million of arising from the further deterioration in the labour market. Receipts from the Health Levy are also been forecast to fall by €160 million in this context. Taken together, these factors lead to a pre-Supplementary Budget figure for Gross Voted Total
expenditure of €65.4 million [sic] (a 4.8% year-on-year increase), or €49.4 million [sic] in Net terms (a 0.2% increase). This corresponding increases for Gross Current and Net Current expenditure are 7.5% and 2.7% respectively."

This is a really telling paragraph. It shows that even having pre-committed itself to €2bn in savings this year as far back as July 2008 and having repeated this target on many public occasions, the Government is still incapable of delivering this much. In the mean time, the spending continues to rise, rapidly.

Daily Economics 31/03/2009

Irish external debt stats for Q4 2008 are out and, guess what, things are looking worse than before. Here is the CSO table:
Now, the Gross External Debt itself is up for the year as a whole: from €1.579 trillion (yes, trillion) in Q1 2008 to €1.661 trillion in Q4 2008. But look closer to the details (see chart below for illustration):

• Gen Government Debt is obviously up - we are borrowing sh***t loads of money. But, GG short-term liabilities are also taking off, which confirms my argument: we are increasingly borrowing short, frontloading future deficits. This is before we factor in the Q1 2009 seriously aggressive short-term debt raising.
  
• Monetary authorities debt is going ballistic - all of this is in short term liabilities.
• Monetary financial institutions (financial sector etc) is declining overall, but slowly, and the short-term debt is rising - gain, trouble ahead refinancing this 'oxygen'.
• Other sectors - the real economy - debt is up and short-term liabilities are also up.
  

So, despite CSO's brave claims - the title of today's note is Ireland’s External Debt decreases to €1.66 trillion at end December - in reality, the debt mountain is still growing (in yearly comparisons) and the nasty short-term debt overloads are getting heavier.

Now, think, what will happen if the Government was successful in restarting banks lending?

Per one of the readers comments, here is the table with actual nominal increases in various debt headlines.

OECD report blasts Irish policies

Now, that the FT busted out the OECD report released today, I can do the same. I gave it a quick preview in this yesterday's post (here) so now let's get down to the details.

Here is what I said about it's findings yesterday:
"...compared to other developed countries around the world, Ireland finds itself as:

• the worst economically governed in the world;
• in deepest trouble when it comes to housing markets declines to date;
• the country that is applying all the wrong (uniquely Irish) remedies to its fiscal problems; and
• the country that is least well positioned to come out of this recession any time soon."

In effect, OECD's report, that does not focus on Ireland alone, provides a somber assessment of Irish Government policies, exposing their complete and total failure in addressing the crisis to date. And here are the actual details per each point.

Point 1: The worst economic governance in the world:
Table 3.4:
So per the above numbers:

• Ireland has the fastest rising debt in the OECD;
  
• Ireland has the worst primary imbalances in the OECD. The US is catching up in 2010 projections, though the cumulative impact of primary imbalances over 2008-2010 will still remain the highest in Ireland (by over 1% point). Furthermore, the US imbalances are sourced from rapid fiscal spending expansion - wasteful, but nonetheless stimulative, while Irish primary imbalances arise from over bloated current expenditure - the purest form of public sector waste of all;
• Ireland has the highest fiscal gap in the OECD in both 2008 outrun and 2010 projections.

Next, move up to Figure 3.3 (below) which shows that we have blown fiscal spending policies not on healthcare or long-term care provisions, but on something else.
Ireland is managing to achieve the third highest projected spending rises through 2050 of all OECD states (after catch-up Korea and Greece), but lions share of that is being consumed by growth in pensions exposure. Why? How else do you think are we supposed to pay for Rolls-Royce pensions provisions in the public sector?

Point 2: Ireland is applying the uniquely wrong measures to addressing our fiscal and economic problems:
This is a point that links to point 1 above, so let us deal with it now. Table 3.2 below gives the data on different measures and their incidences and impact on the sectors of economy as adopted by various OECD governments.
Ireland clearly stands out here as:

• The only OECD country that, unconstrained by the IMF austerity measures, is facing a rising burden of the state (positive net effect of fiscal austerity for 2008-2010 period);
• One of only three OECD countries (Italy and Mexico being in our company) that is raising taxes (and here we are facing tax increases that are 12 times more severe than Italy and over 4 times more severe than Mexico, before the April 7 Mini-Budget hammers us even more);
• One of only two countries (Iceland being another country, but it is constrained by the IMF conditions) to raise individual taxes (our tax increases are twice those of Iceland). What is even more insulting is that our individual tax increases are by far the biggest source of fiscal burden of all other fiscal policies Messr Cowen and Lenihan are willing to adopt;
• One of only 3 countries (the IMF-constrained Hungary, and Italy being the other two) that is raising consumption taxes, with increased consumption tax burden being 5 times greater in Ireland than in Italy;
• A country with the heaviest burden of fiscal policies on households - with combined effect of individual, social security and consumption tax increases of +3.7% - 12 times the rate of tax burden increases in Italy and almost 4 times the rate of total household tax burden increases in Iceland and Hungary;
• Our fiscal expenditure measures are second worst only to IMF-constrained Iceland.
  

Figure 3.2 below illustrates, although one has to remember that Israel scores next to us because it actually has rising tax revenue and is facing the unwinding of some of the exceptional spending that occurs during military campaigns.
Another interesting aspect of the OECD findings relates to the sources of our fiscal imbalances. Figure 3.1 shows these:
Notice that according to the OECD chart, the cyclical component of the debt increases for 2008-2010 is only roughly 26% of the entire debt levels. The ESRI (see here) says it should be around 50%. I estimated (here) that it should be around 21% (here).

Point 3: The scope for recovery:
According to the OECD "On this basis, the countries with most scope for fiscal manoeuvre would appear to be Germany, Canada, Australia, Netherlands, Switzerland, Korea and some of the Nordic countries. Conversely, countries where the scope for fiscal stimulus is very limited would include Japan, Italy, Greece, Iceland and Ireland." We are in a good company here, indeed.

Point 4: Housing troubles:
Finally, Table 1.2 below illustrates my housing crisis point.
Yes, no comment needed here.