Wednesday, July 19, 2017

So, what’s going on with the Current Account?

Last week the CSO provided the first insight into the new * variables that will hopefully address some of the distortions in the National Accounts that have been created by PLCs who have redomiciled to Ireland and offshore activities relating to assets owned by Irish-resident companies linked to aircraft leasing and intangible assets. 

While much of what was published was a useful step in the right direction a clearer view of what is happening in the Current Account of the Balance of Payments was not provided.  The problems with the official measure of the Current Account are evident below.

Balance of Payments Current Account Annual

After moving into deficit in the period from 2004 to 2007 the current account began to improve in 2008 but the improvement in 2009 and 2010 was much greater than the underlying performance of the economy would suggest.  The recent volatility is clear and this largely relates to the impact of the onshoring of intangible assets to Ireland.

To improve things we have been provided with a modified Current Account, termed CA*, that makes a number of important adjustments.  Per the CSO:

CA* is the current account balance (CA) adjusted for the depreciation of capital assets sometimes held outside Ireland owned by Irish resident foreign-owned firms, e.g. Intellectual Property (IP) and Aircraft Leasing, alongside the repatriated global income of companies that moved their headquarters to Ireland (e.g. redomiciled firms or corporate inversions).

The impact of the factors on the current account are shown in this table.

Globalisation Impacts on the Irish Current Account

The rise in the income accruing the redomiciled PLCs which drove the rapid improvement in the current account in 2009 and 2010 can be seen while the huge jump in the depreciation related to MNC owned intangible assets that caused in the recent volatility in the Current Account is also readily seen.

So what happens if we exclude the income of redomiciled PLCs, or equivalently consider them to flow out as a factor outflow to their foreign shareholders, and treat the depreciation on certain IP and aircraft assets as an outflow as this arises from gross profits that accrues to non-residents and is linked to assets that may have no direct link with the Irish economy?  Making these adjustments gives us this:

Modified Current Account Annual

Hmmm.  That’s not very good at all.  Yes, we do see some moderation of the improvement in 2009 and 2010 but recent figures do not make sense.  We would possibly have expected continued improvement in the Current Account for the last few years while the huge drop to a deficit of almost €30 billion in 2016 is not reflective of any underlying trend in the Irish economy.

So what are we missing?  Or maybe more accurately was remains in the modified Current Account that continues to distort the figures?  Adjusting for the depreciation of certain IP and aircraft assets is correct but no adjustment is made for their acquisition. 

Sometimes this assets are added to Ireland’s capital stock through a balance-sheet relocation (which has no impact on the current account) but other times the assets are acquired by an Irish-resident company and this transaction is recorded as an outflow in the balance of payments.  There is little doubt that the deficits shown in the modified measures for recent years are, in whole or in part, due to these acquisitions. 

Making an adjustment for the depreciation on these assets is appropriate for when these assets are here but we should also make an adjustment for how those assets get here if that has an impact on the Current Account.  So we need the net outright purchases in the balance of payments of the assets we are making a depreciation adjustment for.

We can get this from new Annex 4C of the Quarterly National Accounts.  This gives a modified Gross Fixed Capital Formation (in nominal terms) where the GFCF excluded from the modified measure are aircraft related to leasing and the onshoring of IP assets.  For some years the split between the two isn’t provided (as some quarters are suppressed) but we have their sum from the difference between the official and modified versions of GFCF.

Investment related to Aircraft Leasing and Purchase of Intellectual Property Assets

We should get a better picture of the current account if we make an adjustment for the fact that all of this investment in aircraft for leasing and the purchase of IP assets will have required them to be imported and therefore counted as an outflow in the Balance of Payments.  Now, there may be some differences in how these transactions are valued for National Accounts versus Balance of Payments purposes but any differences won’t materially change the result. 

So lets make an adjustment to the modified Current Account published by the CSO last week to take account of the purchase of aircraft for leasing and certain IP assets.

Adjusted Modified Current Account Annual

That seems much better.  We have the deterioration from 2004 to 2007 and a fairly steady improvement before return to a small surplus in 2014.  The figures since then seem questionable with a rapid move to a large surplus with this measure showing a surplus of €13 billion in 2016.  If this is true then we are in a very strong position but it does seem implausibly large.

Here is this approach applied above to getting an underlying Current Account as a percentage of GNI*.

Adjusted Modified Current Account Annual over GNI star

Are we running a current account surplus of seven per cent of national income?  It’s seems high.  A Current Account measure that seems to fit the underlying performance of the Irish economy up to 2014 but doesn’t thereafter isn’t of much use.  We want to know what is happening now.

The improvement in 2015 is likely partly due to €2.3 billion increase in Corporation Tax receipts seen that year, of which around 80 per cent was due to MNCs.  Corporation Tax did not grow to the same extent in 2016 so that cannot explain the continued improvement shown in this version of the Current Account.

There may be something happening within the income flow figures.  For example, the retained earnings of direct equity investment attributed to Irish residents increased by almost €3 billion in 2016 (from €10.9 billion to €13.8 billion) but as shown in the first table above the net foreign income of redomiciled PLCs only increased by €1 billion in 2016.  The impact of this €2 billion difference on the Current Account balance produced here is unclear. 

The 9.4 per cent nominal growth rate for GNI* also seems a bit high but it is probably not that far out of the ballpark.  It could be that there is another distortion on the income side that we need to be made aware of or it could be that our current external balance (along with our national income) really is improving at the rapid rate shown here but at least we’re only quibbling over a couple of percentage points of national income.  The figures published last week by the CSO allow us to get closer to what is really going on and it is a step to be welcomed.  More please.

Thursday, July 6, 2017

Some other trends in government revenue

The last post looked at the question as to whether the slow down in the growth of Exchequer tax revenue is reflective of underlying trends in the economy.  The conclusion was that while there has been a slow down in the growth of tax revenue it is due to factors that do not reflect underlying trends in the economy such as the 2015 level-shift in Corporation tax, the 2016 spike in Excise Duty and €2.2 billion of revenue reducing measures over the past three budgets.  Any concerns about the slowdown in tax revenue growth should be limited to the impact on the public finances rather than what it might imply for the economy in general.

Of course, Exchequer tax revenue isn’t the only source of government revenue though for a variety of reasons it attracts the most attention.  A broader measure of government revenue would include PRSI, other appropriations in aid collected by government departments and Exchequer non-tax revenue such as the Central Bank surplus, semi-state dividends, capital resources and income related to banking measures such guarantee fees and interest and dividends from certain banking assets.  So what is happening to these?

Central Government PRSI and Other Revenue

We have a divergent picture.  PRSI receipts have been growing steadily and in June recorded growth on a 12-month basis of 8.4 per cent.  For the year-to-date PRSI is 2.5 per cent or €116 million above profile in contrast to Income Tax which is €214 million behind profile.

The sum of Exchequer non-tax revenue and other appropriations-in-aid has been declining since the final quarter of 2014.  In November 2014, the 12-month sum of these revenues was €7.5 billion while for June 2017 the total was €5.0 billion.

This is due to falls in most of the items that are included in the category.  The surplus from the Central Bank with a general government impact was €1.4 billion in 2014 but was less than €1 billion this year.  €420 million of bank guarantee fees were collected in the year to January 2014 while the current total is less than one-tenth of that.  Around €500 million of dividends were collected by the Exchequer in both 2014 and 2015, last year it was less than €200 million.  Capital resources were boosted in 2014 by the €335 million received from the sale of Aer Lingus shares.  Other appropriations-in-aid have fallen from €4 billion to €3 billion though it is not clear why this is so or how it is linked to the expenditure of those departments.

The takeout is that while Exchequer tax revenue and PRSI receipts are growing, Exchequer non-tax revenue is falling.  This is a not surprise though.  Exchequer non-tax revenue to the end of June was €1,309 million compared to a profiled amount of €1,310 million.  Other appropriations-in-aid are also down year-on-year but are in line with expectations.

An issue may be when the growth rate of net expenditure is compared to the growth rate of taxation when it is known that non-tax sources of revenue are falling.  Using broader measures of central government revenue and expenditure may capture more information.

Central Government Revenue and Primary Expenditure

Monday, July 3, 2017

Should we be concerned with the slowdown in tax revenue growth?

Exchequer tax revenue bottomed out in the middle of 2010 and has been on a fairly steady upward trend since then.

Exchequer Tax 12-Month Rolling

There has, however, been a bit of attention given to the “flattening out” that has occurred since the middle of 2016.  This is more apparent if we look at the annual changes in the moving sum depicted in the chart above:

Exchequer Tax 12-Month Rolling Annual Change

Here we can see that tax revenues recorded their fastest recent growth in early 2015 (13.6 per cent in February) and while it was still above 10 per cent in mid-2016 there has been a steep fall in the growth rate since then with growth down to 3.5 per cent in May 2017.  Should we be concerned about this fall in the growth rate of tax revenues?

There are three reasons that can serve to ameliorate our concerns:

  1. The level shift in Corporation Tax receipts in 2015,
  2. A spike in Excise Duty receipts in early 2016,
  3. The impact of €2.2 billion of revenue-reducing budgetary measures (of which €1.8 billion relate to Income Tax)

Corporation Tax revenues began to rise in the middle of 2014 but really ramped up in the second half of 2015. 

Exchequer Corporation Tax 12-Month Rolling

A level-shift from €4 billion to €7 billion occurred in a very short period of time and for the past 18 months or so receipts have been relatively stable at the new level.  This will obviously have had a dramatic impact on the annual growth rates.   The growth of Corporation Tax exceeded 50 per cent towards the end of 2015 and was still above 40 per cent in June 2016.  Since then the growth of Corporation Tax has fallen markedly as the rise to the new level washes out of the annual growth rates.

The other tax exhibiting a strange recent pattern is Excise Duty.  If we truncate the vertical axis we can highlight this.

Exchequer Excise Duty 12-Month Rolling

Excise duties rose unexpectedly in early 2016 and have returned to somewhere near where they might have been had the steady upward trend seen since the middle of 2013 continued at the same rate.  The reason given for the spike is that excise duty from cigarettes increased markedly in advance of the expected introduction of plain packaging legislation.  The pattern for new car sales will also have contributed to the Excise Duty outturn.  The nature of the spike in early 2016 means that the annual changes in Excise Duty have turned negative.

Here are the annual changes in 12-month rolling sums of Corporation Tax and Excise Duty receipts:

Exchequer CT and Excise 12-Month Rolling Annual Change

What we see is that the growth rate of both have been falling since the middle of 2016 though obviously much more markedly in the case of Corporation Tax.  It is likely that these are driving the similar trend we see in overall Exchequer Tax receipts.  So let’s look at the growth of Exchequer tax revenue excluding these Corporation Tax and Excise Duty (notwithstanding that they are two of the big four ‘tax heads’):

Exchequer All and Ex CT and Excise 12-Month Rolling Annual Change

The navy line is the pattern that has caused some recent concern.  The maroon line is the annual change excluding Corporation Tax and Excise Duty, and while this did fall during 2015 it has been relatively stable for the past 18 months or so, generally showing growth of between four and six per cent.  All the recent slowdown in the growth of Exchequer Tax revenue is due to Corporation Tax and Excise Duty.  Are the 2015 level-shift in Corporation Tax and the 2016 spike in Excise Duty reflective of underlying trends in the economy?

One tax that may reflect the underlying trends of the economy is Income Tax and this appears to have flat lined recently.  This was growing at between eight and ten per cent through 2015 and up to the end of 2016 but the improvement slowed in 2017 to less than half that amount.  The latest Fiscal Monitor shows that Income Tax to the end of May is only up 2.5 per cent on the same period of 2016.

May Exchequer Tax

One reason not to be concerned with this is that around €1.8 billion of measures reducing Income Tax were introduced across Budgets 2015, 2016 and 2017, of which the bulk related to the Universal Social Charge.  One way to assess this could be to compare the growth rate of PRSI (which hasn’t had significant policy changes from a revenue perspective in recent budgets) to the growth rate of Income Tax (which has). 

Income Tax v PRSI

We see a large gap opening up in the past six months or so.  PRSI receipts have grown between eight and nine per cent year-on-year.  Income Tax revenues were growing at close to that level up to late last year but the growth has fallen to around three per cent now.  If this drop was reflective of underlying trends in the economy we could expect both Income Tax and PRSI to be similarly affected. 

The fact that they are not points to something else and the eight per cent growth of PRSI receipts reflects the underlying strong growth in the economy.  And in replying to a PQ the former Minister for Finance indicated that the PAYE component of Income Tax was up eight per cent in the first third of the year compared to the same period of 2016.  Again, this is in line with what we see in the labour market.

On the other side, VAT seems to be growing a little stronger than the underlying trends in the economy would suggest.  It might be something we come back to. As shown below, the growth of VAT on a rolling 12-month basis jumped at the start of 2017 and is now growing at nearly ten per cent.  Although seemingly positive maybe this is the one we should be concerned about.

Exchequer VAT 12-Month Rolling Annual Change

Wednesday, June 21, 2017

Where are the vulture funds?

On the 20th of June, the Oireachtas Finance Committee held a meeting on the National Co-Op Housing Bill.  One of the proponents of the Bill is Edmund Honohan, the Master of the High Court.  A report on the meeting is available here.

Let’s just consider one extract:

Mr Honohan also said his “overwhelming impression anecdotally” was that individuals before the courts in relation to these matters were sub-prime borrowers “who should probably never have been given mortgages in the first place”.

Anything that is based on someone’s “overwhelming impression anecdotally” probably doesn’t have much going for it to begin with.  The piece later says:

Mr Honohan said the “flattish level” of repossessions at 150 per quarter until the beginning of 2014 “doubled overnight” to in excess of 300. “I can think of no significant factor which might account for this sudden change other than the sudden arrival of vulture funds into our distressed mortgage mess,” he said.

“If that is so, you must presume that if the banks are now proposing to finally sell off their huge numbers of deeply indebted loans to the private sector, perhaps increasing the non-bank proportion of non-performing housing loans fivefold from less than 10 per cent to over 50 per cent, we can expect a further significant jump in possession cases.”

We’ll come back to this one. But let’s start with the “overwhelming impression anecdotally” that it is borrowers from sub-prime lenders who are before the courts.

We can check the plaintiffs in civil possession cases in the legal diary notices published on the Courts Service website.  Most mortgage repossession cases are listed on the civil lists of the County Registrars in the Circuit Courts. 

As of today (21/06/2017) there are 45 County Registrar lists that contain cases involving mortgage repossession.  These are for various dates in May, June and July and cover all eight circuit court districts and almost all counties within each circuit.  In total, it was possible to identify almost 1,900 repossession cases on the legal diary for County Registrars.  This is not all repossession cases before the courts as cases not listed for a sitting around this time will not be on the legal diary.  There are probably 10,000 to 12,000 mortgage repossession cases ongoing.  So we have maybe one-fifth of them in the sample extracted today.

Here are two pieces of information on these 1,900 cases.  The year represents the year the proceedings were submitted to the court and the plaintiff is the entity taking the case and seeking the possession order.

Circuit Court Repossession Cases

The 1,874 cases are split into lenders and those who have acquired loans, i.e. vulture funds.  These funds make up 15 per cent of the cases in the lists extracted and the year in which these cases were initiated can also be seen.

Let’s consider another group taking repossession cases. Let’s include AIB, BOI, EBS, PTSB, KBS and Ulster Bank and make a bit of a leap that we can exclude them from the class of subprime lenders that the under the “overwhelming impression anecdotally” are bringing repossession matters before the courts.

Well, between them these six lenders have 76 per cent of the cases on the list.  I don’t know what an “overwhelming impression anecdotally” is but in this case it does not appear to be based on evidence.  It seems to be just a wild claim aimed to gather attention.  That it should be coming from the Master of the High Court is alarming. 

Where did I go to find the evidence to refute this wild claim? The Courts Service website.  Is the Master of the High Court familiar with the Legal Diary?  It only took a short while to gather the figures in the above table.  Surely it would be better to rely on evidence rather than an “overwhelming impression anecdotally”?  But the role of evidence in the ongoing mortgage arrears crisis was sidelined a long, long time ago.

Maybe vulture funds will lead to a big jump in mortgage repossessions.  If they want to execute repossessions they will have to get a court order first but so far there hasn’t been a surge of cases from vulture funds on the court lists.  If anything, they seem underrepresented given the proportion of long-term arrears mortgages they hold.  Where are the vulture funds?

At the end of Q1 2017 unregulated loan owners held 5,085 mortgage accounts that were more than two years in arrears.  The average balance on these accounts was €256,300 with average arrears of missed payments of €121,100. 

We have been told that a tsunami of repossessions has been on the way since at least 2010.  To date, there has been no evidence of its appearance and repeatedly warning of its impending arrival does not appear to be costly. 

These warnings have surely added unnecessary stress and worry to already stressed borrowers.  These warnings have been proved wrong time and time again.  Banks may have a issued thousands of proceedings seeking orders for possession but the Irish courts are not bent to granting them.  This is a fact borne out from observation of the process.  But hey, who needs evidence, let’s propose a multi-billion scheme on the basis of one’s “overwhelming impression anecdotally”.

Monday, June 12, 2017

Trade in cranes as an indicator

This table summarises exports and imports for SITC 744.34: Tower Cranes and the first quarter and full year outcomes since 2010.  The units are tonnes.

Tower Cranes

Back in 2010 we were exporting cranes with nearly 2,500 tonnes of them leaving the country.  These exports have fallen off in recent years and in the first three months of 2017 there have been no exports in this category.

On the other side there were limited imports up to 2010 but this began to picked up in 2015 and 2016 and for the first quarter of 2017 imports are up 50 per cent on the same period last year.

The amounts of money involved tend to be relatively small.  The average price involved is generally around €5,000/tonne but the nature of the changes is pretty clear.  Though we do remain a long way from this:

Cranes in Dublin

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