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.

The cost of Ministerial chatter: Irish credit ratings

After a week of incomprehensible gibberish coming out of the Government statements on:

• borrowing restraints (here);
• receipts shortfalls (here and here);
• 'painful' solutions (aka destruction of private sector economy via fiscal policy - here);

and months of policy wobbles, two things came to their logical conclusion today.

The first one - reported (for now in very oblique terms - I will put more flesh on it when the embargo on the documents I received expires) here.

The second one - the S&P downgrade of Irish sovereign credit ratings.

Now, S&P is not known for being the quickest or the sharpest analysis provider on the block (I wrote about the need for a downgrade for some three months now), but at last they have moved, if only a notch, lowering Ireland's ratings from AAA to AA+ and retaining negative watch outlook (meaning more downgrades await).

I was neither surprised nor impressed by the S&P statement:

"March 30 - Standard & Poor's Ratings Services today said it had lowered its long-term sovereign credit rating on the Republic of Ireland to 'AA+' from 'AAA.' At the same time, the 'A-1+' short-term rating on the Republic was affirmed. The rating outlook is negative"

So far so good. Except in my view, a combination of the depth of our crisis, the severity of our economic policy failures and the lack of realism on behalf of this Government, pooled together with Cowen's unwavering determination to 'soak the rich' (middle and upper classes) to protect his cronies in the public sector - all warrant at the very least a downgrade to an A level. Given the structural nature of our deficits and Cowen's willingness to flip-flop on policy - an A- rating will be also justifiable.

Ok, back to S&P statement: "The downgrade reflects our view that the deterioration of Ireland's public finances will likely require a number of years of sustained effort to repair, on a scale greater than factored into the government's current plans," Standard & Poor's credit analyst David Beers said. As I said - lack of realism on behalf of the Government is costly. I have mentioned some recent evidence I got from the Partnership Talks (here). Telling... But what is also telling is the shade of realism that is being brought to the policy discussion table by the S&P, which is completely missed by the quasi-state ESRI (see here) who expect swift (2-3 year time horizon) action on closing structural deficits by increasing taxes.

The S&P is also referencing their belief that there will be further need for additional support for banking sector. I agree. And the Government has been boasting to the Partnership folks that it has resolved the banking crisis...

But here is a really good piece - bang on in line with what I've been warning about for a long time now. Despite our Government's senile belief that soon - a year or two from now - we are going to return to strong growth, S&P clearly states: "We expect that the Irish economy will materially under perform the Eurozone economy as a whole over the next five years, recording minimal growth in real and nominal GDP, on average, during the period. As a result, we believe that Ireland's net general government debt burden could peak at over 70% of GDP by 2013, a level we view as inconsistent with the prospective debt burdens of other small Eurozone sovereigns in the 'AAA' category."For comparison, here is the table from the DofF Junior Nostradamus's' January 2009 Update (below). This shows that our boffins are thinking we will be churning out 2.3% GDP growth in 2011, with 3.4% in 2012 and 3.0% in 2013...

Yeah, may be if we get Michael O'Leary to run this country...

"The medium-term prospects for the Irish economy are constrained by three interrelated factors: first, the impact on domestic demand as the private sector reduces its high debt burden, which stood at 280% of GDP in 2008; second, the scale of the deterioration of asset quality in the banking sector and possible need for additional capital; and, third, the support from external demand Ireland can expect as global economic conditions improve."

Ont the first point, I am again delighted that S&P decided to look beyond their naive insistence on focusing on public debt alone. Private debt mountains choking Ireland Inc (and soon to be added public taxation concrete weighing the economy down as we sink deeper into a recession) have been something I warned about for some time now.

On the second point, it is important to recognise that this Government has done virtually nothing to help repair the banks balance sheets and is not forcing households deeper into financial mess. Banking sector and real economy are linked.

• When a bank gets capital injection, but sees more mortgage holders defaulting because the Government has sucked their cash dry, what happens to banks assets?
  
• When a bank gets a deposits guarantee scheme at a cost to the system of €226mln since inception, but it costs the Exchequer twice as much due to higher cost of borrowing, what happens to the financial system's ability to provide credit finance?
  
• When a bank gets a promise to be rescued in some time in the future, but sees corporate deposits dry out today because the Government actually taxes companies (and sole traders) in advance of their receiving payments on overdue invoices, what happens to bank's capital?

Has Mr Lenihan bothered to take Level I CFA exams, he would have probably understood these brutal A-B-Cs of macrofinance. Alas, he didn't.

Now, next, the S&P avoids falling back into its comfort zone: "The government has already taken steps to contain the budgetary impact of these pressures, and further adjustments in taxation and spending, amounting to 2%-2.5% of GDP, are expected to be announced in next month's supplementary budget. At best, however, these measures will contain this year's general budget deficit to around 10% of GDP and lay the basis for a slow reduction in nominal budget deficits in future years. We are concerned, however, that a credible multi-year fiscal consolidation strategy will not emerge until after the next general elections, due by 2012. Accordingly, on current trends, we believe Irish net general government debt will likely exceed 70% of GDP by 2013 before beginning to trend downwards."

True that, as they say in the USofA. True that. Can you close your eyes and imagine Brian Cowen telling public sector unions that he is going to cut numbers of paper pushers employed in the public sector? or to trim their pay? or to eliminate our overseas aid budget? or to cut our defense spending by half to reflect the real might of our armed forces? or to privatize health care delivery (not access to services - delivery)? or to introduce efficient system of education fees? or that he will switch all public sector employees of age 45 and less into defined contribution private pension schemes? or that he will no longer automatically index pensions to already retired public sector workers to future wage increases in the sector? or that the corporatist model of centralized wage bargaining is done and over for ever? or that he will impose restrictions on striking activities in the public sector and will end job-for-life conditions of employment in the sector?

No? Neither do I. And neither does the S&P - at last.

Cowen is just 3 weeks behind this blog?

When I was updating my budget deficit forecasts last week, I noted that the Government has been catching up quickly with my predictions from December, followed by February forecast for a shortfall in revenue.

Now, like Ireland behind Iceland (with an alleged 3-months delay), our Government is about 3 weeks behind this blog. Today's papers report that Brian Cowen now expects a tax revenue of €32bn in 2009. Well, I'll be damned... see my latest update here projecting €31.4bn in revenue.

Of course, a speculation is due - the results are to be released on the 3rd of April. Last month, Biffo didn't bother to read these in advance, nor did anyone else in the Government. This ended up looking like the Government that can't handle its own figures (which, obviously, the can't) let alone deal with the crisis in the entire economy (ditto). Maybe this time around Brian^2+Mary decided to set aside some time to govern? Fat chance. I think the entire drip-feeding of new - downward - figures is designed not for the public consumption but for the clandestine Partnership Talks going on.

Per information I gathered from the sources at that Partnership Table, last week, the Government managed to present a half-baked argument that things have bottomed out in the economy already. Improvement is around the corner and thus we can borrow our way through this. Documents I have seen - given to the Partners - showed relatively rosy forecasts for 2009 and 2010. The Government, it appears, also believes that it has resolved successfully the financial institutions crisis via a mix of past policies and the forthcoming scheme for dealing with 'bad' loans. It further claimed that it will be delivering a stimulus package, icnlsuive of some enterprise credit support measures - alongside the mini-Budget next week.

Well the latter might have something to do with a forthcoming document from one serious international organization that we are the members of which (later this week) will show that 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.

Incidentally, the same document will show that some 90% of the bonds spreads for the developed countries is explained by the underlying risk of debt default... Hmmm... should we send our DofF 'commentators' (see here) back to school?..

But back to our Taoiseach's pronouncements on fiscal policy matters. At the same time as delivering 'good' news, keeping public pressure on the Partners by sending 'bad news' messages is a relatively unsophisticated practice that our Triumvirate is well capable of. So go figure.

By all measures to date, however, it looks like the March Exchequer returns are going to be very bad, even by our recent standards. Remember - you have read it first here. Biffo is still 3 weeks behind...

ESRI's latest outlook: more waffle, less real news

The ESRI - a largely Government-sponsored quasi-official 'research' institute has issued another of its macroeconomic updates. This one is available here.

In case some people have not noticed it yet (presumably, someone employed in a state-sponsored organization might be detached from everyday reality of our economic collapse), ESRI opens its latest missive with the following statement:
"The combination of the domestic housing bubble unwinding and a world financial crisis has particularly unpleasant consequences for the Irish economy. However, while the bursting of the property bubble makes things much worse ... up to a half of Ireland’s current problems with the public finances and in the labour market arise from the global financial and economic crisis – they would have happened anyway no matter how appropriate fiscal policy had been over the last decade."

So let us get things right here: according to ESRI, at least half of our problems are attributable directly to the Government fiscal policies. Out of the other (at the most) half, domestic housing bubble is not attributable to the Government fiscal policies. So, dear ESRI 'researchers', narrowly targeted tax breaks for developers and property purchases, over-stimulation of construction in the areas with no demand (National Spatial Strategy, hotels, various tax-sections apartments etc), linkages between tax revenue being raised out of property transactions and fiscal spending - these are not related to our fiscal policies and 'would have happened anyway'? How? By spontaneous self-combustion?

ESRI goes on: "The structural [fiscal] deficit is relatively invariant to short term fluctuations in the outside world and is, thus, a more certain and appropriate target for fiscal policy. Our research suggests that the structural deficit this year is of the order of 6-8% of GDP... If Ireland did not currently face a structural deficit, then the appropriate public policy response would have been to let the “automatic stabilisers” work. ... However, we do have a serious structural deficit, which became apparent early last year. This problem, together with the severity of the recession and uncertainty about when a recovery can be expected, means that there is no option but to take severe action to substantially reduce that structural deficit."

Several things here:

1. The structural deficit in fiscal policies has become apparent to the ESRI only at the beginning of last year. They could not see the structural problems emerging since 2004 when the Irish Exchequer chose to pump vast amounts of stamp-duty and other property tax revenues surpluses into current expenditure, permanently raising the latter despite a temporary nature of revenue collected. Indeed, the ESRI has for years egged the Government to raise spending. They issued dozens of papers on 'relative' poverty, the need for more 'investment' in public services, denied for years that there was a significant surplus in public sector remuneration and so on. Now they tell us that the structural deficits are a recent thing?
   
2. The ESRI, despite stating that only 'up to a half' of fiscal problems is due to fiscal policies misfires, still manages to attribute jobs losses and unemployment to world recession. Yet, most of our unemployment increases in 2008 were driven not by the IFSC layoffs (which are attributable to global crisis in financial services) but by contraction in domestic construction. Surely this was not due to something that was happening in Bear Sterns or Lehmans?
3. Note that the ESRI implicitly assumes that global economic recovery will lead to a recovery in Ireland - an assumption that is simply undefended in their analysis.

"Before taking account of measures to be announced in the budget on the 7th of April, the general government deficit in 2009 is likely to substantially exceed 10 per cent of GDP." Well, at last, this blog's forecasts are being followed by ESRI (see here), albeit with almost two months delay!

Back to the structural deficits: "It would probably be appropriate for fiscal policy this year and next year to work to roughly halve the structural deficit by the end of 2010. As the economy recovers in 2011 and in subsequent years, further action of a less draconian nature would be needed to reduce the structural deficit to below 3 per cent of GDP by 2013 and to eliminate it by around 2015."

Note my emphasis - up until yesterday, the Government was targeting the total deficit reduction to 2.5% in 2013. Now, ESRI is telling us that we should reduce the structural deficit (which is by their estimate accounting for roughly 7% out of ca 12% total deficit) to below 3%. So do the math - the overall deficit for 2013, according to the ESRI should be somewhere around 4-5% - well above the 3% EU limit.

So how can we do this? According to the ESRI: "In making cuts in expenditure, priority should be given to areas where services are inefficient or of low value. If the public wishes to preserve the current level of public services, then revenues will have be to be raised to between 35 per cent and 40 per cent of GNP. Under these circumstances it seems likely that a substantial increase in tax revenue, combined perhaps with more user charges, will be required to restore the public finances to a sustainable growth path. In choosing the mix of sources of additional revenue it will be important to take account of the likely effects of higher taxes on the labour market. This would argue for developing new sources of revenue such as taxes on carbon and on property."

Ok, I agree with property tax - although it should be structured not as a function of property value (as this will discourage property upgrades and will do nothing to improve land-use efficiency), but as a value of the land on which the property is located, as this will encourage more efficient use of land and will remove distortionary subsidy to developers.

But what about 35-40% of GNP as a tax base? If you consider my budgetary update from this morning (here), you can see that assuming GNP falls 8% this year, this target implies tax revenue of €56.6bn in 2009 - or ca 77% more than the Government is likely to collect under Budget 2009 provisions. How on earth will the Government be able to raise such taxes? In December 2008 report, total tax revenue for 2008 was shown at €40.8bn, total 2007 revenue was €47.9bn. So in effect, the ESRI gang is suggesting we raise tax revenue in excess of pre-crisis levels by some18.2%?

This is mad, irresponsible and dangerous. And this is what informs Government decisions in this country!