10/1/2012: Entrepreneurship and Chaos

In a slight departure from macroeconomic focus of the blog, here are two links to, in my view, pivotal articles on business and entrepreneurship. Pivotal not because they provide the answers, but because they raise questions I suspect will be the most important ones in years to come.

So enjoy:
http://www.inc.com/eric-schurenberg/the-best-definition-of-entepreneurship.html
and
http://www.fastcompany.com/magazine/162/generation-flux-future-of-business

And I would be interested in your views on these as well.

9/1/2012: Week opener: Merkozy continuing to ignore Greek realities

Today's meeting between Sarkozy and Merkel is being framed in the context of continued pressures across the euro area (see report on the meeting here). More ominously - within the context of the euro area leadership duet ignoring the latests warning signs for Greece.

Per Der Spiegel report, IMF has changed its analysis of the Greek rescue package agreed in July 2011 in-line with IMF changes in forecasts for Greek economy in the latest programme review in December 2011. Specifically, IMF lowered its forecast for growth from -3% to -6% GDP.

Der Spiegel cites IMF internal memo in claiming that the Fund is viewing existent Greek programme (including to 50% 'voluntary' haircut on Greek bonds currently under negotiations) as insufficient to stabilize the Greek economy and fiscal situation. The Fund is, reportedly, considering 3 possible options to alleviate the latest set of growth pressures:

• New austerity measures for Athens - a measure that in my view will only exacerbate immediate pressures on Greece and will lead to dangerous destabilization of political situation in the country, leading to even more second order adverse effects on growth (e.g. prolonged strikes and rioting);
• Deeper haircuts on Greek debt held by private institutions - in my opinion this will lead to more contagion from Greece to euro area banks and sovereigns and should be, instead complemented by writedowns of Greek debt held by the ECB, to match existent private sector arrangements;
• Increase in the euro zone bailout funds - in my view, this measure is currently outside the feasibility envelope for Europe and, if attempted, will lead to increased cost of euro area borrowing and have a knock on effect of higher cost of lending to countries currently in the Troika programme. It is also important to note that the EFSF head Klaus Regling is aiming to raise EFSF guarantees to foreign investors to 30%, thus reducing the leverage ratio from 4-5 times to 3 times. This will lower EFSF's theoretical borrowing capacity even further.

The IMF note reports are effectively matched by the statement from the senior Germany Finance Ministry adviser made Saturday, who tole the Greek press that a 50% haircut on Greek debt will not be enough to restore sustainability to Greek fiscal dynamics.

In effect, three of out three IMF 'options' cited will exacerbate the crisis, not resolve it. And there is no Option 4 on the books.

8/1/2012: Irish property prices - History, Equilibrium & Directions to Nowhere Fast

A quick footnote to Brian Lucey's post on house prices:

I often hear people referring to 'historical averages' as price equilibrium indicators. Hmmm... historical and histrionic - here's a snapshot from The Economist data plot:

That pretty much does the trick for anyone still saying we have crossed some sort of the long term equilibrium level... 

7/1/2012: Irish Exchequer Results 2011 - Shifting Tax Burde

In the previous 3 posts we focused on Exchequer receipts, total expenditure by relevant department head, and the trends in capital v current spending. In this post, consider the relative incidence of taxation burden.

Over the years of the crisis, several trends became apparent when it comes to the shifting burden of taxes across various heads. These are summarized in the following table and chart:

To summarize these trends, over the years of this crisis,

• Income tax share of total tax revenue has risen from just under 29% in 2007 to almost 41% in 2011.
• VAT share of total tax revenue has fallen, but not as dramatically as one might have expected, declining from 30.7% in 2007 to 29.7% in 2011
• MNCs supply some 50% of the total corporation tax receipts in Ireland. And they are having, allegedly, an exports boom with expatriated profits up (see QNA analysis last month). Yet, despite this (the exports-led recovery thingy) corporation tax receipts are down (see earlier post on tax receipts, linked above) and they are not just down in absolute terms. In 2007-2011 period, share of total revenue accruing to the corporation tax receipts has fallen from 13.5% to 10.3%. So if there is an exports-led recovery underway somewhere, would, please, Minister Noonan show us the proverbial money?

 So on the tax side of equation, the 'austerity' we've been experiencing is a real one - full of pain for households (whose share of total tax payments now stands at around 58% - some 12 percentage points above it levels in 2007) and the real sweet times for the corporates (the ones that are still managing to make profits to pay taxes, that is). This, perhaps, explains why even those working in protected sectors are talking about their biggest losses coming from tax changes.

7/1/2012: Irish Exchequer Results 2011 - Capital v Current Spending Trends

In the previous posts we considered Exchequer results for 2011 for tax receipts and headline expenditure items. In this post we look at the capital and current spending composition breakdown for total spending.

One core assertion that was made in the previous posts is that capital spending carried the main load of Exchequer spending adjustments in 2011. Overall, year on year, total net cumulative voted spending by the Irish state declined 1.6% or €721 million. At the same time, current expenditure went up by 2.2% or €903 million. Capital expenditure dropped 27.4% year on year in 2011 or €1,623 million.

Table below highlights the yearly changes over the crisis period:

The table above clearly shows that while during the crisis Net Voted Current Spending went up by €663 million, capital spending has declined by €4,265 mln on aggregate. The table also shows that despite all the austerity discourse, our Net Current expenditure was rising in 2010 and 2011, while our capital expenditure was declining to compensate for these increases.

In addition, the table highlights the trend that shows current expenditure rising at accelerating rate in 2010 and 2011 and capital expenditure falling at accelerating rate in 2011 relative to 2010.

If capital spending by the state constitutes either a 'Keynesian' stimulus (as claimed by the Governments over the years) or an investment in future productive capacity of our economy (as also claimed by the Governments in the past), we are now into a third consecutive year of bleeding the economy dry.

And the dynamics are best illustrated by referencing to the longer time horizons:

So current expenditure share of total spending by the Government now stands at 90.6%, up from 2010 level of 87.3% and 1998-2002 average share of 82.3%. On the other hand, capital investment share of total Government spending has dropped from 21.7% average for 1998-2002 period to 21.0% in 2008 and to 14.6% in 2010. In 2011 this share declined to below 10.4%.

 Between 2000 and 2010, Irish State invested in new capital stock some €66.26 billion of funds. Assuming 8% combined amortization and depreciation on this stock implies the need for continued gross investment of ca €5.3 billion annually. This means that 2011 Net Capital Spending fell some €1.01 billion short of covering the depletion of the state-financed capital stock.

The above, of course, is a rather crude calculation, since amortization and depreciation are at least in part covered from the current spending and since we use net voted capital spending figure for the capital stock measurements, but it does clearly suggest that current rates of capital investment cannot be sustained in the long term. And hence, much of the savings that have driven our Exchequer deficit improvements to-date are not sustainable either.

7/1/2012: Irish Exchequer Results 2011 - Expenditure

In the previous post I looked at the tax revenues side of the Exchequer figures for 2011. The core conclusions emerging from that analysis was that:

Irish Exchequer tax receipts did not perform well in 2011 compared to both 2010 and the target, with most of the improvement (some 80%) accounted for by reclassification of the Health Levy as tax revenue and addition of the temporary, extra-Budget 2011 Pensions Levy.

Irish Exchequer tax revenues for 2011 cannot be interpreted as being indicative of any serious improvement. Factoring in Pensions Levy and delayed receipts (Corporation Tax receipts for December carried over into 2012), overall Exchequer revenue fell 3.1% short of the target set in Budget 2011, not 2.5% claimed by the Department of Finance.

The above shortfall amounts to 0.66% of the expected 2011 GDP and 0.81% of our expected GNP and comes after significant increases in taxation burden passed in the Budget 2011, suggesting that the economy’s capacity to generate tax revenues based on the current structure of taxation is exhausted.

Subsequent posts on the topic of Exchequer balance will focus on overall balance, capital spending dynamics and relative distribution of tax burdens. This post focuses on the expenditure side of the Exchequer balance.

In general, there are good reasons as to why discussion of the expenditure side of the Exchequer balance is a largely useless exercise, rendered such by:

-       Constant re-alignment and renaming of departments, and

-        Changes in the departmental revenues (as in the case with the Health Levy reclassification) impacting the Net Voted Expenditure on Health

Here’s a good post on the above caveats from Dr Seamus Coffey which is worth a read.

So let’s consider some of the higher level figures.

Overall Net Voted Expenditure for 2011 came in at €45.711 billion, or €723 million (-1.56%) below 2010 levels and with a savings of €3.602 billion (-7.3%) on 2008. The target for 2011 expenditure was set at €46.022 billion and the end outrun implies that the Government has under-spent the target by €311 million. Note: I am referencing the original Budget 2011 target, as referenced, for example, in End-June 2011 - Analysis of Net Voted Expenditure. The Department for Finance reference figure for the annual 2011 target is €46.151 billion or €129 million ahead of the original estimate. This discrepancy is reflected in part in the capital carryover figures for 2010-2011 and 2011-2012.

Year on year, 2011 marks the third year of declining cuts. In 2009 yoy spending fell €2.150 billion, in 2010 it declined by €0.730 billion and in 2011 the drop was €0.723 billion. In proportional terms, expenditure declined 4.56% in 2009, 1.57% in 2010 and 1.58% in 2011. Cumulated net expenditure ‘savings’ since 2008 are now standing at a miserly €3.602 billion. Given that over the same period we accumulated €81.017 billion of deficits clearly shows the inadequate extent of cost reductions in the public services. Whichever way you spin it, to cover just ½ of already accumulated deficits out of cost savings achieved so far would take decades, and that before we factor in interest payments and the fact that much of the ‘savings’ delivered to-date comes out of temporary cuts to capital spending. More on this in the forthcoming analysis of capital and current spending.

Now, since we cannot clearly de-alienate actual spending, let us at the very least consider the spending priorities. These have changed over the years and changed in the direction that, while inevitable in the current crisis, is worrisome nonetheless.

Please keep in mind that although I did try to adjust as much as possible for changes in departments compositions, the data below is not fully reflective of these. Nonetheless, it does present some interesting changes in the overall spending dynamics.

As shown above,

-       Agriculture, Food and the Marine net voted spending constituted 3.36% of the total spending in 2008. This now has fallen to 2.28%.

-       Tourism, Culture and Sport accounted for 1.43% of the total spending in 2008 and is now down to 0.60%.

-       Communications, Energy and Natural Resources share actually rose from 0.54% in 2008 to 0.55% in 2011.

-       Defence saw a relatively shallow decline from 2.16% in 2008 to 1.93% in 2011.

-       Education and Skills – the third highest spending department in 2008 and 2011 – remained relatively static with 18.31% of total spending in 2008 and 18.07% in 2011.

-       Jobs, Enterprise and Innovation share of total spending fell from 2.94% in 2008 to 1.73% in 2011.

-       Environment, Community and Local Government spending fell from 6.41% in 2008 to 3.39% in 2011 – the drop that largely reflects changes in the departmental composition.

-       Finance share of spending declined from 2.83% in 2008 to 0.75% in 2011 – a dramatic fall.

-       Foreign affairs and Trade, despite gaining a new function of Trade have seen their share of spending decline from 1.99% in 2008 to 1.51% in 2011.

-       Health – the largest spender in 2008 at 27.45% dropped to the second place in spending distribution with 28.25% in 2011 despite having lost a number of functions. Adding back Children function to the DofH, the department spending share rose to 28.7% in 2011.

-       Justice and Equality accounted for 5.25% in 2008 and this dropped to 4.84% in 2011.

-       Social Protection rose from being the second highest spending department in 2008 with 19.06% (virtually identical share to that of Education) to the first highest spending department in 2011 with 29.16%.

-       Public Expenditure and Reform – a new department that, at least in my opinion is failing to show much value for money so far – has managed to rake in spending amounting to 1.71% of total net voted expenditure in 2011 – higher spending priority than Foreign Affairs and Trade, almost identical priority to Jobs, Enterprise and Innovation, more than double the spending priority of the Department of Finance. Let us presume - for a moment - that the Department has two important, related, but not fully coincident functions: bring down current spending (since bringing down capital spending is no-brainer) and produce longer-term reforms of public services (which is not all about cuts, of course). Given the numbers achieved to-date - see forthcoming post on capital and current expenditure reductions - one should have serious questions about the new department value for money.

-       Taoiseach group saw its spending priority virtually unchanged over the years, declining marginally from 0.38% in 2008 to 0.37% in 2011.

-       Transport – the department with significant compositional changes – has seen its spending share decline from 6.47% in 2008 to 4.18% in 2011.

So overall, top 3 departments accounted for 64.83% of total net voted spending in 2008 and this figure rose to 75.48% in 2011. The rate of increase in these expenditure shares has accelerated over the years. Year on year, share of the three top spending departments in overall expenditure rose 2.97 percentage points in 2008-2009, 3.80 percentage points in 2009-2010 and 3.89 percentage points in 2010-2011. Once Children function is added back to Health, the rate of increase in 2010-2011 jumps to 4.34 percentage points.

Top 4^th and 5^th ranked departments (Justice and Equality and Transport) saw their combined share of spending declining from 11.71% in 2008 to 9.02% in 2011. This largely reflects changes in composition of the Department of Transport.

Together, Social Protection, Health and Children accounted for 46.51% of the spending in 2008 and this now is up at 57.88% in 2011. In other words, almost €6 per every €10 spent by the state goes to finance the two functions that constitute in traditional nomenclature social welfare benefits and social benefits (note that private spending on health is netted out via departmental receipts in the net expenditure figures). Education accounts for roughly the same share – ca 18% of total spend – in 2011 as in 2008. Economic sectors departments (other than Transport) used to account for 6.84% of the total spend in 2008 and this is now down to 4.56% in 2011.

In short, the priority of the Government spending over the years of the crisis has shifted firmly away from supporting economy’s productive capacity and delivering structural subsidies to ‘social and environmental pillars’, to serving social welfare functions and preserving as much as possible public health spending. It is worth noting that the latter, of course, has been achieved by shifting more costs burden onto the shoulders of health insurance purchasers.