Tuesday, July 6, 2010

Exchequer Balance Improves (sort of – again!)

We saw a €3 billion ‘improvement’ in the Exchequer Balance in May 2010 compared to last year.  This was attributable to the frontloading of a €3 billion contribution to the National Pension Reserve Fund to finance the recapitalisation of AIB and BOI.
The June Exchequer Returns that have just been released indicate a further €3 billion ‘improvement’ in the state of the public finances.
Exchequer Balance to June
Can we explain why the red line for 2010 is outperforming the green line for 2009?  We haven’t turned that big a corner. 
As with the May ‘improvement’ the June equivalent is easy to explain.  In June 2009 we poured €3 billion into the nationalised Anglo Irish Bank.  This was included in the June 2009 Exchequer Statement.  We are continuing to pour money into Anglo but this is under the contrived construct of Promissory Notes and does not appear on the Exchequer Accounts (yet!). 
The EU Commission may yet rule that these transfers to banking sector have to be included in the Exchequer Accounts and the improvement shown above will instantly evaporate.
The creative accounting techniques used in the overall Exchequer Balance mean it is of little use in analysing the state of the public finances. A more instructive measure, and one slightly less open to manipulation, is the Exchequer Current Account Balance.  How has that been faring out given the steps that have been taken to restore order to the public finances?
Cumulative Current Account Balances to June
That does not look good. The Current Budget Deficit up to June 2010 is €831 million or 11.5% worse than it was by the same time last year (a deficit of €8,045 million in 2010 versus one of €7,213 million in 2009).  The public finances continue to deteriorate.
Last June there was a monthly current budget deficit of €767 million.  This year the equivalent monthly deficit was slightly worse at €803 million.  With tax revenue up on the same month last year, this increase in the deficit is due to an increase in current expenditure.
Last June, Current Expenditure was €2,930 million while this year it was €3,403 million.  Timing issues allays the weight we can put on these monthly comparisons.  In the first six months of the year Current Expenditure was €19,655 million.  This is only 1.9% or €376 million below the 2009 figure of €20,031 million.
Of this €19.7 billion in Current Expenditure some €5.9 billion or 30% of the total has been current Social Welfare Expenditure.  This is the only area to show an increase in current expenditure.
Cumulative Current Social Welfare Expenditure to June
This graph does not compare like with like, as a March reorganisation of government Departments saw the budget of the state training agency, FAS, come under the remit of the newly named Department of Social Protection.  Even before this change current social welfare expenditure was rising but the surge in the past few months is due to the reorganisation rather than a further acceleration of social welfare spending.

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