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

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

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

Economics 4/12/10: Exchequer expenditure side

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

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

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

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

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

Table below summarizes these results of annual comparisons:

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

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

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

Economics 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 2/12/10: What PMIs tell us about the job market

An interesting additional point of view on jobs market. Today's Manufacturing PMIs suggest no improvement in November jobs outlook in Manufacturing sectors:
So far, there are absolutely no signs of jobs creation here with employment PMIs indicators:

• Services - October reading (latest so far) at 46.2 - well below expansion 50+) and declining on September reading of 49.8; and
• Manufacturing - November reading at 49.3, signaling worsening performance from already contractionary 49.8 in October.
  

Economics 1/12/10: Live Register

Live Register data was out today, throwing some positive news into the generally adverse newsflow. The headline figure is that November LR has declined 4,200 in seasonally adjusted terms month on month.

This follows declines of 5,400 in September and 6,200 in October. In 11 months through November we are still clocking and increase of 9,900. Expressed in weekly terms, chart below illustrates the dynamics.


Now, net average and monthly changes:
Seasonally-adjusted implied unemployment rate dipped slightly again, for the third month in the row:
Unemployment, as estimated by the LR, now stands at 13.5%, having slipped from the high of 13.8% back in August. It is impossible to tell, based on LR, whether the moderation is driven by contracting labour force (with LR dropouts) or emigration (ditto) or outflow of LR recipients to education, or all three. However, some reduction in new jobs destruction can be expected over a period of time of 3-5 months, given the level of jobs destruction prior to mid 2010. Whether this is sustainable trend or a 'dead cat bounce' effect is a matter of time.

One possible glimpse at what is going on relates to the males LR numbers, which has fallen by a larger proportion than female in November. Males unemployment was much faster to rise and started to do so earlier in the cycle, which means that males are now more likely to come off LR and also to emigrate. However, the emigration story might be overplayed here. There was a monthly decrease of 4,698 (-1.3%) in Irish nationals on LR and an increase of 147 (+0.2%) in non-Irish nationals. So, with non-nationals more likely to emigrate (return migration or movement to another third country for employment), these numbers suggest that emigration is most likely not a significant contributor to the LR changes.

On the other hand, based on occupational groups, the encouraging signs are clearly evident:

• The largest percentage decrease was in the Professional group (-6.0%), followed by the Clerical and secretarial group (-3.9%) - potentially, a sign that professional services are starting to stabilize

In contrast,

• In the year to November 2010 the largest percentage increase was in the Other occupations group (+11.2%), while the next largest increases were in the Personal and protective service (+8.8%) and Sales (+7.1%) groups.
  
• The largest percentage decrease was in the Managers and administrators group (-3.7%).
  

So overall, the numbers would be cautiously optimistic, at least as far as potentially signaling a bottoming out of the jobs destruction cycle.

One point of pressure that remains is the duration of unemployment:

• There was a monthly unadjusted decrease of 7,270 (-2.6%) in short term (less than one year) claimants on the Live Register in November, while the number of long term claimants increased by 2,719 (1.8%). This clearly shows that transition into long-term unemployment continues.

Likewise of concern is the quality of employment (although, of course, having at least a part-time job is much better than none at all):

• In the year to November 2010 the number of casual and part-time workers increased by 6,578 (+8.9%).

Economics 26/11/10: Contagion is spreading to Spain & Italy

Another day, another spike of contagion from Ireland's Sovereign bonds to other Eurozone countries:
Yesterday's closing bell marked another day in which markets have completely disagreed with the EU officials and Irish Government view of the reality of our and PIIGS' ability to weather out the current crisis.

Economics 23/11/10: How much will Government need to borrow in 2011

So we topped the European chart again today:
And a quick one for the start of the day tomorrow:

Let's do some arithmetic again:
Leni's Proposition 2: Through 2011 IRL Gov will need

• €18bn in deficit financing +
  
• €30-40bn in deposits shoring +
  
• €15bn in banks capital (note - some this can be spread over couple of years)+
  
• Banks losses cover of, say, another €10bn =
  
• Grand Total of 73-83bn.
  

Check: is that right, Leni? No answer so far... oh, well... we did the sums, as he asked.

Economics 22/10/10: Bailout that is losing steam by an hour

The immediate fallout from the Irish bailout package is:

• short sales closing on Irish sovereign markets means profit booking, yields down (although surprisingly slightly -0.323%)
• Germany gets relief (Irish-German spread is actually up 0.503%) and
  
• short seller moving on to new targets: the rest of the PIIGS:

Makes you wonder if Portugal, Italy and Spain bonds brokers have been pushing their clients into losses as hard as our own did...

Contagion is clearly far from over, which simply exposes the fact that EU's EFSF and IMF short-ending for the insolvent sovereigns is not a solution to the PIIGS problems and that the EU has no plan B.

Economics 22/11/10: November 12 - on the record re 'bailout'

This is an unedited version of my November 12 article in the Irish Examiner. Of course, since then the events have taken over the core premises of the article, but for archival purposes and also to posit the article into the context (at the time of print, the official position was 'we don't need a bailout'), I am posting this here.

Despite all the intensifying talk about the EU support, despite the growing number of assurances from the various officials and social partners that we can ‘grow out of our difficulties’, this week has clearly shown that Ireland is nearing the end game of the crisis. Tellingly, even the usual official policies cheerleaders, our stockbrokers, have by now one by one deserted the State-side of the arguments. As one analyst from IFSC put it earlier this week: ‘you know the game’s up when you can’t round up your own sales team to sell Irish bonds’.

The game is almost up. Were we to go into borrowing today, Irish debt will be more costly to finance than that of any other developed country, save Greece. On the assumption of a 70% recovery rate, the Irish 10 year Credit Default Swaps imply an 85% probability of Ireland defaulting sometime in the next 10 years. This, of course, is not the real probability, but an estimate. However, in comparison, even countries that availed over the last 3 years of IMF assistance, including Iceland, are enjoying much greater confidence of the markets.

We all know how we got into this predicament. Three years into the crisis, Irish Government continues to spend well beyond its means. Our current spending keeps rising. Tax revenue, despite significant tax hikes, is running below 2008 levels.

The markets know that the Irish Government has by now exhausted all means for extracting more cash out of this devastated economy. If, as expected, Minister Lenihan hikes taxes in the Budget 2011 again, he will be shifting more of our economic activity into the grey market where the taxman is a distant and powerless overlord.

Much anticipated Budget 2011 is unlikely to solve this problem. Cuts of €6 billion from the deficit this year will do very little to restore any credibility to the Government policy. As anyone with an ounce of common sense will know in the current conditions, the whole exercise will be equivalent to taking money out of one pocket – Government total spending – and putting it in the other – the banks, bondholders, social welfare and pay and pensions bill.

By avoiding soaking the bondholders from the start of this crisis, the Government has boxed itself into a proverbial corner. Instead of standing on a morally and economically high ground and soaking the bondholders early on in the crisis, as Iceland did, we have created a full-blown contagion from the banks to the sovereign. With liquidity evaporating from the shorter end of the banks funding market, this contagion is now a two-way street. Untangling this today, without going into a renegotiation of the sovereign bonds and/or guarantees, cannot constitute a credible policy position.

All of this comes before we even consider the real economy-side of the matters. With private investment on its knees, and companies, starved of trade and operational credits, operating outside the realm of normal corporate finance, can anyone really claim that we have a private sector capacity to escape a restructuring of the private or public or both debts?

Irish families are now so deep in debt and negative equity that consumption and household investment stalled, while deposits are vanishing to pay rising state and semi-state bills. Squeezed on both ends of their incomes – by falling earning and rising taxes and charges – these very households cannot be expected to provide more funding for our fiscal policy pyramid scheme.

But the final straw that broke the proverbial camel’s back is the belated realisation that the EU has no plan B for dealing with this crisis. In fact, it doesn’t even have a plan A. This was made absolutely clear by the vacuous nature of statements issued by the EU Commissioner Olli Rehn during and after his visit to Dublin this week.

The fundamental EU problem is that the much-lauded EFSF (European Financial Stabilization Facility) – the fund used to put Greece into a bond markets deep-freezer earlier this year – is not designed to address the problems we face. EFSF is designed to help cash strapped governments for a period of 3 years at ‘near market’ rates. Ireland is not cash-strapped. Nor are ‘near-market rates’ a sustainable lending option for us.

We are plain insolvent when one takes three to five years forward view. Our sovereign debt to GNP ratio is likely to exceed 140% by the end of 2015 and this is before we factor in the highly probable wave of mortgages defaults. Our household and corporate debts are more than double those of Greece. And we are staring at the abyss of rising interest rates and strong euro into the next 3-5 years.

EFSF is simply not fit for the purpose of rescuing Ireland.

At current yields, Ireland will need to grow its economy at some 6.5-7% on average annually for the next decade to counterbalance the mountain of debt we are carrying. At the ESFS rates – at ca 4.5%. Anyone expecting this to happen without radical and extremely painful structural reforms of the economy (not just budget cuts) should really go back to the basics of economics. With exception of exporting sectors our economy has slipped into a coma. Jolting it out of this state will require complete rethinking of our fiscal and economic policies.

As an optimist, I can tell you that this can be done. As a pragmatic observer of the current policy and economic environment, I have little hope that it can be done without restructuring our debts – either public or private or both – and issuing a new policies mandate for the political leadership.

Economics 21/11/10: How much funding will we need?

I've run through some figures for the expected amount of bailout drawdown for Ireland. Here are the sums:

• 2011-2014 deficit financing: €17bn in 2011 (accounting for expected increase in interest payments), €16bn in 2012-2014 annually (allowing for €15bn adjustment in 2011-2014 framework to be published by the Government) = €65bn
• Banks capital demand: €37bn in residual capital losses including Nama and incorporating expected mortgages defaults of €12bn
• Bonds redemptions forthcoming (hat tip to Brian Lucey): commercial paper =€ 6.4bn in 2011, redeemable out of IMF loan and thus non-replicative over 2012-2014, bond issues €4.4bn in 2011, €5.6bn in 2012 and €6bn in 2013, to the grand total of €22.4bn
• Banks liquidity supply - immediate draw on IMF funds - €28-35bn

Adding these up: total demand for funds in the amount of €152.4-159.4bn

Government has available ca €20bn (nominal) reserves from NTMA and ca €12bn in liquid funds from NPRF that can be accessed, implying net demand on IMF/ECB funding is €120-127bn.

Assuming the expected haircut on all bondholders in Irish 6 covered institutions implies additional savings of ca €10bn not factored in the above. However over the years 2012-onward I expect Nama to start showing losses. In addition, I suspect that the Exchequer will have to cover losses in the Central Bank of Ireland relating to their lending to the Anglo, which can be in excess of €10bn.

Interest charge on the IMF/ECB loan is likely to be around 5%, providing for a demand for €6bn in annual interest repayments.

Economics 20/11/10: Irish labour taxes are too restrictive

We often think of Ireland as low tax economy. We also think of ourselves as inhabiting flexible labour markets and enterprising world of work-hungry people.

Here is an interesting angle from which we can look at the labour markets. Suppose the cost of labour for an hour of work goes up 1% - due to an earnings increase or benefits rise. What does a worker get to keep out of this?

The higher the number is, the greater is the incentive to supply labour post wage/earnings or employer social security tax increases. The lower it is, the lesser are the incentives to work in the face of rising earnings or social security contributions.

Ex-ante, we would expect Ireland to see significantly higher returns to workers efforts from rising earnings and/or social security (PRSI) contributions by employers (reduced burden on employees and higher expected future benefits of PRSI funding). This, however, is not true.

Here are few charts from the latest OECD data set - for 2009, so not reflective of the Budget 2010 changes in taxes.

OECD defines the main parameter under consideration as: "Net income is calculated as gross earnings minus personal income tax and employees' social security contributions family benefits. The increase reported [in charts below] represents a form of elasticity. In a proportional tax system the plus elasticity would equal 1. The more progressive the system at these income levels, the lower is the elasticity."

Now, as you look at these charts, remember, the Irish Times crowd love droning on about the lack of 'progressive' tax system in Ireland.

First chart shows single person returns to 1% increase in labour costs with 3 sub-groups identified by their earnings:
AW refers to average wage.

Clearly, single people in Ireland have little incentives to supply more labour in response to an increase in their earnings. Alternatively, we do have a severely progressive system of taxation for labour when it comes to single individuals. Actually, for a single person earning 100% of average wage, Ireland is second to Hungary in the OECD in terms of progressivity of our labour income taxes. That's right - we have second lowest incentives to supply more labour (or in other words, we keep second lowest amount of added cost of labour in our pockets) in the entire OECD. For a higher earners (167% of AW) the picture is not much better - we are actually fourth from the bottom of the OECD league (or 4th highest degree of progressivity).

Now on to families with 2 kids:
Here, we have a slightly improved picture. For a family with 1 earner bringing in 100% of AW, we are ranked 16th in the OECD in terms of incentives to provide more work in return for increased earnings or contributions. For a family with one earner on 100% AW and another on 67% of AW, the same rank is 14th. Progressivity of our labour taxes in all 3 scenarios in the chart above is still above the average for the OECD.

Now on to comparing single person with no children and a family with 2 children:
Doesn't look like there's a great deal of premium to being married in Ireland, does it? Nope. If labour costs go up by 1 Euro, a single person on 167% of AW would keep 74 cents, a family with 2 kids with exactly same combined income will keep 80 cents. Both are worse off in Ireland than their counterparts in 27 countries (single person with no children) and 13 countries (married couple with two earners and 2 kids). Again, much of Irish Times-loved progressivity in either household income taxes.

What if we take lower earning individuals for the above comparison?
Here, the picture changes - average wage earners face much smaller progressivity of tax system than higher earners (notice, this is 'smaller progressivity', not 'smaller burden of tax').

But does having children actually help or penalises working households? Take a look below:
So working households with both parents working and 2 kids are allowed by our tax system to keep less of their higher income than their childless counterparts and single childless earners. That's really does begin to look like a perverse system of income tax 'justice'.

Let me summarise the data in a handy table:
By all metrics and for all categories, Ireland simply qualifies as a country where

• labour income taxation is significantly more progressive (in 7 out of 8 categories of earners it is more progressive than OECD average, 5 out of 8 than EU15 average and 5 out of 8 than advanced economies average)
• labour income taxation is significantly more restrictive of incentives to supply labour in response to higher earnings than the OECD or EU15 average

Not exactly a flexible market with great incentives to work, is it?