15/01/2011: Austerity and structural deficits

In recent days, there have been some questioning responses to a series of posts I did earlier this month on Irish Exchequer results for 2010. In particular, some queried my concerns with the long-term deficits and the dynamics of Irish Exchequer deficit.

Well, here's an EU official confirmation of my analysis: "As displayed in Graph 12, the distance of the deficit – corrected for the business cycle and one-off measures, i.e. structural deficit – from the medium-term budgetary objective (MTO) is particularly large (more than five percentage points of GDP) in twelve Member States." (from Brussels, 12.1.2011 COM(2011): GROWTH SURVEY, ANNEX 2, MACRO-ECONOMIC REPORT)

As the chart below clearly shows - Ireland's structural - recession effects-adjusted - deficits are in the league of their own:
Austerity, folks, or not - we are still living beyond our means when it comes to public expenditure. And when it comes to our austerity metrics (the blue bar), it is clear that much more remains to be done and that the worst Budget is yet to come.

15/01/2011: EU's claim to fame in 2010

I promised some time ago to post on EU's marvelous youtube video (here) which talks about all the things that the EU allegedly did for its citizens in 2010 (hat tip to the OpenEurope.org).

As you would notice - watching the official video - there some pretty good things that the EU delivered in 2010, although many of these, such as the EU work in the areas of justice are long running themes. But one cannot avoid several absolutely ludicrous claims.

Here's the biggest whooper:
One doesn't need a PhD in Finance or Economics to understand that 2010 was the year of:

• Jobless and anemic recoveries across a number of EU states;
• Continued recession across a number of other EU states;
• Acute and still ongoing crisis in sovereign debt markets; and
• Virtually EU-wide austerity marking the unsustainable nature of European economic model

Actually, one only needs to read through EU-own flagship policy document from 2010 - Europe 2020 (here) - to see that (quoting from the preamble):
"2010 must mark a new beginning... The last two years have left millions unemployed. It has brought a burden of debt that will last for many years. It has brought new pressures on our social cohesion. It has also exposed some fundamental truths about the challenges that the European economy faces. And in the meantime, the global economy is moving forward... The crisis is a wake-up call, the moment where we recognise that "business as usual" would consign us to a gradual decline, to the second rank of the new global order. This is Europe's moment of truth."

So if anything, per EU own admission, the crisis is not over and for EU, the wake-up call from the crisis is yet to arrive. Note that what Europe 2020 refers to the 'moment we recognize the business as usual would consign us to a gradual decline' as timed beyond June 2011 when the Commission expects European Parliament's and Member States approval of its agenda.

But here's EU Commission own assessment of EU's progression toward 'securing a sound economy' - quoting directly from Europe 2020:

• Europe's average growth rate has been structurally lower than that of our main economic partners, largely due to a productivity gap that has widened over the last decade. Much of this is due to differences in business structures combined with lower levels of investment in R&D and innovation, insufficient use of information and communications technologies, reluctance in some parts of our societies to embrace innovation, barriers to market access and a less dynamic business environment.
• In spite of progress, Europe's employment rates – at 69% on average for those aged 20-64 – are still significantly lower than in other parts of the world. Only 63% of women are in work compared to 76% of men. Only 46% of older workers (55-64) are employed compared to over 62% in the US and Japan. Moreover, on average Europeans work 10% fewer hours than their US or Japanese counterparts.
  
• Demographic ageing is accelerating. As the baby-boom generation retires, the EU's active population will start to shrink as from 2013/2014. The number of people aged over 60 is now increasing twice as fast as it did before 2007 – by about two million every year compared to one million previously. The combination of a smaller working population and a higher share of retired people will place additional strains on our welfare systems.

So no sight of 'secured sound economy' in sight here. And as far as financial markets go, here is an article summarizing the four scenarios for the Euro that FT Deutschland published last month. You judge if having any one of the four outlined by the FT:

• Continued crisis, or
  
• A de jure and de facto two speed Europe, or
• A break up of the EU into two blocks precipitated by a Lehmans-like event in European sovereign debt markets, or
• A total collapse of the Euro

constitute a 'secured stronger financial market'.

Now on to the second most outlandish claim made in the video:
The very same - yet to be fully approved and implemented - Europe 2020 agenda is focused heavily on the need to:

• create new jobs and
• boost small businesses

If this was already achieved by the EU in 2010 as Commission video claims, why, may I ask, should the EU worry enough about these objectives to plan to deliver on them by 2020?

Here's what Europe 2020 says: "Europe must act:

• Employment: Due to demographic change, our workforce is about to shrink. Only two-thirds of our working age population is currently employed, compared to over 70% in the US and Japan. The employment rate of women and older workers are particularly low. Young people have been severely hit by the crisis, with an unemployment rate over 21%. There is a strong risk that people away or poorly attached to the world of work lose ground from the labour market.
  
• Skills: About 80 million people have low or basic skills, but lifelong learning benefits mostly the more educated. By 2020, 16 million more jobs will require high qualifications, while the demand for low skills will drop by 12 million jobs. Achieving longer working lives will also require the possibility to acquire and develop new skills throughout the lifetime

Does the above quote suggest that in 2010 the EU has 'created new jobs'? Not really.

Here's Eurostat's latest data release: "The euro area (EA16) seasonally-adjusted unemployment rate3 was 10.1% in November 2010, unchanged compared with October. It was 9.9% in November 2009. The EU27 unemployment rate was 9.6% in November 2010, unchanged compared with October. It was 9.4% in November 2009." So recap - through November, 2010 marked a yar of rising unemployment across the EU and the Euro zone. What 'new jobs created'?

Eurostat puts some more real numbers on the EU claim: "Eurostat estimates that 23.248 million men and women in the EU27, of whom 15.924 million were in the euro area, were unemployed in November 2010. Compared with November 2009, unemployment rose by 606 000 in the EU27 and by 347 000 in the euro area." So year on year, some 606,000 jobs were destroyed on the net across Europe, not 'new jobs created'.

Here's the chart:
But may be, just may be the EU did deliver on some other economic performance indicator in 2010?

How about inflation? Eurostat again: "Euro area annual inflation was 2.2% in December 20102, up from 1.9% in November. A year earlier the rate was 0.9%. EU annual inflation was 2.6% in December 2010, up from 2.3% in November. A year earlier the rate was 1.5%." Oops.

External trade? Eurostat nails it: "The first estimate for the November 2010 extra-EU27 trade balance was a €14.7 bn deficit, compared with -7.3 bn in November 2009 [worsening deficit on trade account year on year]. [and also worsening trade account month on month] In October 2010 the balance was -7.9 bn, compared with -6.4 bn in October 2009. In November 2010 compared with October 2010, seasonally adjusted exports rose by 0.3% and imports by 6.1%."

But wait - what about growth? Eurostat: "In comparison with the same quarter of the previous year, seasonally adjusted GDP rose in the third quarter 2010 by 1.9% in the euro area and by 2.2% in the EU27, after +2.0% in both zones in the second quarter." So yes, growth returned, but it was extremely anemic and what's worse - in the Euro area it has deteriorated in Q3 2010 relative to Q2 2010. At any rate, the Commission can't relaly make any claims about 2010 growth because the numbers for Q4 are not in yet and Q3 numbers are still provisional.

"Stop", you shout - "they made a claim about small businesses boost - address that!" Can't and neither can the EU Commission, since

• Eurostat's latest data on "SMEs - Annual enterprise statistics broken down by size classes - industry and construction" only covers year 2008.
• Eurostat's latest publication on SMEs development in Europe, dates back to 2009 and - per it's title - covers SMEs were the main drivers of economic growth between 2004 and 2006
  

Notice that the database for SMEs page was last updated by the Eurostat on 14.10.2010. And that's despite EU Commission setting strategic priority in early 2010 to significantly increase growth amongst SMEs in 2011-2020.

In other words, the EU's claim of boosting small business in 2010 is, folks, non-falsifiable, or translated from the philosophy of science language - pure fiction.

As an indicator strongly instrumental for SMEs, let's take a look at entrepreneurship. Here is a useful link to OECD analysis, conducted jointly with Eurostat.

Couple of charts from November 2010 OECD publication on the topic (notice these cover data through Q2 2010):
Clearly, with exception of the UK and Denmark, no EU country posted an increase in entrepreneurship rates in 2010.

And for the laughs, here's No Comment claim to EU fame
Now, we are truly saved!

15/01/2011: Capex in Irish Industry

Capital acquisitions in industry in the third quarter of 2010 were €572.0m, compared with €735.6m in the third quarter of 2009 per CSO's latest data released this week. The main contributors to capital acquisitions were sectors:

• Food products with €69.2m.
• Pharmaceutical products and preparations with €49.3m.
• Other Manufacturing with €38.5m.

In 2009, the main contributors to capital acquisitions were:

• Basic pharmaceutical products and preparations €581.1mln
• Food Products €264.5mln
• Machinery and equipment n.e.c. €258.5mln

Total acquisitions in 2009 were €3126.4mln and Q1-Q3 2009 total was €2,438.9mln against €1,577.1mln for Q1-Q3 in 2010, implying a decline of 35.3% yoy.Clearly, no investment / capex restart anywhere in sight:

15/01/2011: Consumer Sentiment in Ireland

Per this week's data release by the ESRI, Irish consumer confidence suffered another set back in December 2010 - updated chart:
Overall, Consumer Sentiment Index declined to 44.4 in December from 48.4 in November, and relative to 53.3 in December 2009. The November reading remains above the all time low in July 2008 of 39., but way below 67.9 local peak achieved back in July last year.

The decline in index was across the board with

• a strongly negative move in the Index of Current Conditions - to 68.5 in December, compared with 76.6 in November, and
  

• Expectations index staying at 28.1, down from 29.4 in November.

According to the ESRI: “The majority, over 70 per cent [would have been nice to put an exact number here, but what can you expect - it's ESRI], of reported that their finances had worsened rather than improved during the past year.”

All thanks for that to Leni & Co for spectacularly reducing middle class' disposable incomes to bail out systemically unimportant banks and public sector elites.

15/01/2011: Family and siblings achievements

Correlations in achievement between siblings in general reflect the impact of family and community on individual outcomes. More importantly, since the siblings achievements are contemporaneous, these correlations can tell us much more about social and family effects than intergenerational correlations, since the latter effects are clearly a function of constantly changing circumstances.

An interesting paper from Swedish researchers (What More Than Parental Income, Education and Occupation? An Exploration of What Swedish Siblings Get from Their Parents, by Anders Björklund, Lena Lindahl, and Matthew J. Lindquist – available here) looked at the determinants of siblings performance in terms of future earned income.

Estimates of such siblings-linked correlations in income, per Björklund et al show that more than half of the family and community influences shared by siblings are independent of parental income. This is a powerful result as it suggests that:

• within-family and within-social group factors determining the outcomes for siblings are more important than much-talked about income poverty; and
• positive effects of the family on raising children can potentially partially (but with strong effect) offset adverse effects of income poverty.

“Measures of family structure and social problems account for very little of sibling similarities beyond that already accounted for by income, education and occupation.” In other words, it appears that the measured aimed at directly influencing the actual form of the family structure (a traditionalist family focus etc) and the core social welfare policy instruments (policies aimed at alleviating social disadvantages) hold little promise in enhancing future performance of children beyond the already recognized income and education components.

Unless, that is, these policies are incentivising more parental inputs into raising children: “…when we add indicators of parental involvement in schoolwork, parenting practices and maternal attitudes, the explanatory power of our variables increases from about one-quarter (using only traditional measures of parents’ socio-economic status) to nearly two-thirds.”

09/01/2011: Exchequer returns - Part 6

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

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

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

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

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

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

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

No comment needed!

09/01/2011: Exchequer returns - Part 5

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

First by tax head:

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

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

08/01/2011: Exchequer returns - part 4

Corrected - hat tip for an error to Seamus Coffey.


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

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

Again, the main headline picture first:

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

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

Relative to 2009 and 2008:

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

Here are few charts by main tax heads:

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

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

Dynamics year on year:

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

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

Table below summarizes the above point:

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

06/01/2011: Exchequer Returns - part 3

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

First, total expenditure:
Two things worth noting here:

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

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

06/01/2011: Exchequer Returns - Part 2

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

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

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

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

This implies that the Exchequer deficit was:

• 2010 = €18,745m
• 2009 = €17,641m

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


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

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

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

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

05/01/2011: Exchequer returns - part 1

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

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

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

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

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

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

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

Now on to Nama-related news.

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

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

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

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

05/01/2011: PMIs and employment trends - December 2010

This is the last post in the series of three covering PMIs. The first two covered two sectors of the economy: Manufacturing and Services. As before, the data was released by the NCB Stockbrokers.

As I mentioned in the first post, PMIs serve important function - they act as close-lead indicators of economic activity ('close' referring to short lags between PMIs and economic performance). One of the most pressing issues in Irish economy today is unemployment and PMIs provide employment outlook that signals (albeit imperfectly) where we are heading in terms of jobs creation. Here are the two series for PMIs

and the same for employment:
So while Manufacturing is signaling weak growth across both output and employment, Services are showing neither:
Weighted (by economy weights) average of the two points in the chart above places December squarely into the Recession Area along the axis that barely enters Optimal Growth Area. It is worth noting that longer-term trends (and these are strong with 0.847 RSq for Services and even stronger 0.892 for Manufacturing) do not support Jobless Recovery. In contrast with historical experience, this is exactly where we are heading in Q1-Q2 2011 per chart above.