Economics 4/10/10: Exchequer Expenditure for September

Exchequer expenditure in details.

Starting from the top, the same picture as in August remains true - capital spending cuts drive overall performance on expenditure side, while current spending cuts are extremely shallow:
Notice also that both cuts are getting shallower as the year progresses. In months ahead, delayed payments to contractors will have to be settled, implying that it is likely that current spending is going to break the contraction cycle by the year end, while capital side savings are going to get shallower. It is, therefore, highly unlikely that overall year on year performance in terms of Exchequer spending will post a decline greater than 2% of overall spending in the end.

Detailed expenditure by department, year on year:
So where's the money being spent?
And how does it compare to the DofF targets?
Again, let's exclude capital spending and focus on current spending:

So for all the hoopla about draconian cuts and great courage of our public sector (remember, the Croke Park agreement claimed that €3 billion has been cut out of public sector wages alone), we have saved (January-September 2010) a miserly €1,562 million. Oh, about 5 weeks worth of our state borrowing so far or 3 weeks of our borrowing year to date. But even that number conceals the truth. Year on year, just €156mln - miserly number indeed - was cut out of current expenditure. That's right, folks, for the state that borrowed €16 billion this year so far, we managed to save less than 1/2 a week worth of what we issued in fresh bonds since January 1.

Put this into Croke Numbers perspective, at the rate things go, it will take 19.2 years for us to reach the magic 3 billion in savings number cited by the Bearded Ones.

Economics 4/10/10: Tax receipts & burden

Second installment of analysis of tax receipts. Starting from the top:
As I noted in the first post - there's no evidence of any recovery when it comes to total tax receipts. There is, of course, a significant lag to any recovery translating into tax revenue, especially across the income tax receipts. But the same is not true for capital taxes (investment recovery usually predates employment recovery), VAT (consumption pick up shows up also earlier in the recovery cycle) and a host of other smaller tax heads (excise etc).

Year on year dynamics are also quite depressing:
Not a single core tax head is in positive growth territory, although excise is getting closer to hitting an upside.
In smaller categories, customs duties are posting positive growth - helped by car sales and imports by MNCs. Stamps show the extent of sell-off of shares in August on the back of renewed weaknesses in financials, plus some accountancy moves.

Now to the worrisome picture: tax burden distribution.
Back in the dark ages of the 1980s, PAYE taxpayers carried some 70% of the tax burden. Guess what, we are back to that territory now - all consumption and income tax heads are now accounting for roughly 79% of the total tax take. The Government policy of making taxpayers pay for everything - from banks to Croke Park agreement - is really starting to show.

Illustrated differently:

Lastly, receipts performance against DofF target.
Customs and Corpo are showing significant improvement. Income tax and Vat are poor cousins. Overall, total tax take is getting closer to target, but still runs below the DofF projections. Again, Q4 will be the crucial quarter here.

Economics 4/10/10: Exchequer receipts

High level view of Exchequer receipts paints a continuation to the depressing picture. If there is any stabilization in the economy, this stabilization is yet to be seen on the tax receipts side of things.
Income tax above is tracing neatly below the returns for the last year. Good news, September 2009 slight slowdown was avoided so far. But the real direction of tax receipts on income side is in going to be revealed in the current Q4. Same is true for VAT:
September 2010 VAT receipts are even more disappointing given all the noises about the pick up in retail sales. Going back to school, while yielding a small uptick in volume of sales, clearly was erased in terms of value of sales as deflation in core retail sectors continues.

Corporation tax is struggling to stay above 2008 - a clear sign that economy is still sick:
Core months here are however ahead of us.

Excise and Stamps taxes are almost bang on with 2009, which isn't much of an achievement.

Capital taxes clearly showing no improvement in investment in this economy:

Customs duties moving upside - in part clearly on the back of exporters robust performance so far, plus car imports mini-boom (well, relative to previous years)
Total tax receipts are therefore running well below their levels in 2009:
I never was a fan of the "receipts to target" metrics, primarily because real numbers/levels speak to me much more than imaginary numbers DofF produces our of its excel spreadsheet forecasts. However, to keep up with the fashionable 'economists' from our banks and brokerages - stay tuned for that analysis to follow.

Economics 3/10/10: Construction sector - destruction continues

Nothing exemplifies the collapse of the Celtic Tiger than the fate of our indigenous 'flagship' sectors: Banking and Construction. The two fates, linked at the hip, got some very different treatment in the media this week. Banks received all the attention, yet Construction suffered a total neglect. Yet, last week CSO published Q2 2010 data for Construction sector.

Undoing any damage to the Construction sector's reputation as the 'leading newsflow' sector of Ireland Inc, let's update the data. Here are the charts, most of which, as often is the case, speak for themselves.

First volume and value in all sectors ex-Civil Engineering:
Next: Civil Engineering:
Interestingly, if you recall, since Budget 2009, this Government has consistently claimed that Ireland is getting a significant stimulus in the form of public investment - which, of course, in Government's parlance always means 'building stuff'. In fact, even after the imposition of the latest cuts in the Budget 2010, Civil Engineering spend (ok, investment) declined at the rates greater than the Government has planned for.

Residential and Non-Residential:
To see the real extent of our crisis in the Construction and Building sector, compare ourselves to the European counterparts:
And what about our previous claims that we don't belong to PIIGS?
What's amazing, of course is that despite this massive contraction, our housing and property markets continue to free-fall while employment in the sector continues to contract.

Economics 3/10/10: The real stress in Euro area banks

"A picture's worth a 1,000 words" an old proverb goes. So here's a couple of pictures from the latest GFSR analytical papers issued by the IMF last week:

Remember the favourite EU leadership myth: "The Americans caused this crisis". Ok, if so, one would assume that EU banks are in a better position through the crisis than their US counterparts.
If the assertion above was correct, why would the demand for CB financing be so much greater in the EU both in terms of banks demand for liquidity prior to the crisis and after the crisis?

Charts above are confirmed by the even more dramatically divergent case of the banking sectors exposure to the repo operations:
The magnitude of European banks internal sickness in structuring funding - from their chronic dependence on CB funding even at the times of plentiful liquidity, to their massive exposures to repo operations in general is stunning.

If you want to see the really frightening summary of this analysis, here it is, courtesy of the GFSR:
Notice the disproportional over-reliance of Euro area banks on short-term funding (the infamous maturity mismatch) and non-deposits-based long-term funding (the infamous liquidity and counterparty risk-linked bit). Now, check out the healthy US side of deposits finance - you'd think that the picture should be inverted, given Europe's demographics, but no - heading into the massive explosion of retirement age population in EU, our savings play so much smaller of a role in funding our banks, one must wonder: What happens when German consumers start drawing down their deposits to finance their retirement consumption? Will there be anything else left for the future of the continent other than sales of Mercs and BMWs to China?

Economics 2/10/10: Brian Lucey's comment on Minister Lenihan's statement

In rare occasions, I re-print here some comments made available to me by other economists and analysts. This is the full text of Professor Brian Lucey's comment in yesterday's Irish Examiner (not available on the newspaper website):

"THE Government yesterday engaged in a series of interventions, announcements, and actions which in my opinion have brought the prospect of an intervention from the IMF or the European Union significantly closer.

The major announcements were threefold: the announcement of the losses of Anglo, the bombshell in relation to Allied Irish Banks, and the startling admission that the Government was voluntarily withdrawing from international markets. Let us examine all three of these.

In relation to Anglo Irish Bank, we finally begin to see clarity and reality from the Government; for the first time in two and a half years estimates begin to overlap. The worst-case scenario that the Government has put forward is that Anglo will lose €35 billion. This is the average estimate. We must take this government figure with a very large pinch of salt. The Government over the last two years has given us at least four “final” figures for the total cost of Anglo. God be with the days when it was only €4.8bn. It remains highly likely in my view and in the view of independent analysis external and internal to the country, that the Anglo losses could stretch towards €40bn.

That is an eye-watering amount of money, equivalent to nine months’ total government expenditure. While this on its own is bearable, what is unbearable, and should not be borne, is that once again bondholders take precedence over citizens.

The only rationale for having such an extensive guarantee in 2008 was that over the period of time the banks would be cleaned of their bad loans, the banks would be cleaned of their bad management, and the bondholders would be dealt with. Subordinated bondholders should get nothing, senior debt holders should have been faced with a stark choice; either take an offer of perhaps 30 cent on the euro or take their chances on the market place. A debt-for-equity swap should also have been considered.

On all three of these issues the Government has failed. We are told that instead of NAMA taking loans in excess of €5 million, it will only take loans in excess of €20m; this leaves a large amount of impaired and toxic loans on the balance sheet of the banks. It is these very toxic loans that imperilled the banks in the first place and which will make it next to impossible for the banks to engage in any meaningful credit creation.

As if Anglo were not enough, we are also told that AIB will require an additional €3bn. The state will end up with 70%+ ownership of AIB; this will rise as AIB will find it difficult to raise the required funds from the markets or from asset disposals and will consequently have to ask the taxpayer to invest further. The ludicrous situation is that the taxpayer will be taking ownership of a much weaker bank than had this been done two years ago. AIB has sold the jewel in its crown, the Polish operation, and is actively selling its US and British operations. We will own a bank which has sold off its profit-making arms and will be left with a carcass.

Finally, it appears, in so far as one can glean from the gnomic and somewhat confused utterances of Eamon Ryan, that the Government were told that the National Treasury Management Agency (NTMA) did not feel they could raise funds in the markets. The Government has therefore locked itself out of the markets until early 2011. Presumably, the hope is that by 2011 a miraculous change in Irish and world economic conditions will have occurred.

What remains absolutely unclear is what plans, if any, the Government has for a situation where in 2011 the NTMA finds it either impossible to raise funds or finds that those funds are prohibitively expensive. There are in excess of 5bn of Irish government bonds maturing in 2011, these will have to be rolled over or repaid. What if we cannot raise these funds?

In that case the Irish Government will have to raise funds from the International Monetary Fund or from European funds, and this of course ignores the tens of billions of debt which the banks have to roll over on a regular basis. In my view we have moved closer to the end game of losing national economic sovereignty.

Brian Lucey is associate professor in finance at Trinity College Dublin. "

Irish Examiner 1/10/2010