Bond Yields continue to soar

Breaking through 6% in the middle of September was significant, breaking through 7% a week ago was significant but now it seems we’re hurtling towards 8%, and no Information Note seems to be stemming the tide.  Here’s a few screenshots lifted from Bloomberg.

Markets were closed by the time the four year adjustment and growth projections were released yesterday.  How has the reaction been in this morning’s early trading?

It is that this report posed to the FT website last night didn’t help.

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Getting back to reality?

The 10-page Information Note on the Economic and Budgetary Outlook 2011-2014 has caught the media attention.  The key issues have been the commitment to a budgetary of adjustment of €6 billion in the December Budget (with €3 of spending cuts for every €1 of tax increases) and the postponed of interest payments on the Promissory Notes issued as part of the bank recapitalisation programme. 

Although the note lacks specifics on budgetary actions it does give an insight into the assumptions and predictions the DoF is using for it’s budgetary analysis.  The most recent set of forecasts came from last December’s Stability Programme Update and we considered these in a recent post.

One of our main beefs was with the “positive macroeconomic forecasts” used.

The DoF has now brought their growth forecasts back a little closer to reality and we have the following updated projections.

Laying these on our previous graph gives us the new growth path.

The downward drop in the 2009 figure to the end of the solid lines is attributed to “revisions by the CSO to the level of GDP in 2009 and to previous years (a methodological change)”.  The dashed lines form the DoF projections and they are now clearly lower.  So the DoF must have a closer grasp of reality and on which to base their analysis.  Or maybe not.

For 2010 the DoF is now projecting nominal GDP of €157.3 billion and a growth of ‘just’ 0.25%.  However, half year figures for 2010 have already been released.  These tell ue that nominal GDP for the first six months of the year was €78.1 billion.  To get the annual forecast of the DoF, nominal GDP in the last six months of the year has to be €79.2 billion.  While an annual growth forecast of 0.25% might seem modest this actually needs a growth of 1.4% in the last six months of the year relative to the first six months.  This might happen (driven mainly by chemical exports) but is an accelerated growth rate for the latter half of this year nonetheless.

Moving to 2011 we see that the DoF has ‘slashed’ its real growth forecast from 3.3% to 1.75%.  Again it might appear that this more modest growth forecast is appropriate.  However, the December 2009 forecast was based on a 2011 budget ‘adjustment’ of €2 billion.  We are now told that this will be €6 billion.  The extra €4 billion adjustment, if fully implemented, will act as a considerable drag on the growth rate.  Determining the exact growth effects of this austerity is not an exact science, but assume the effect of it could possibly be of the order of a 2% reduction in the growth rate.  [This would happen if the €4 billion fiscal adjustment resulted in a drop in GDP of about €3 billion, which in itself may be optimistic depending on how the additional adjustment is achieved – tax or spend].

Anyway let’s assume the €6 billion package cuts a further 2% off the growth rate.  This means that the updated growth forecast could be 3.3% minus 2.0% equal to 1.3%.  This would be with no revision whatsoever of the underlying growth prospects.  The actual updated growth forecast for 2011 is 1.75%.  The DoF hasn’t forecast a fall in the growth rate for 2011 – it has just forecast an increase!! But the increase is camouflaged by the impact of the additional €4 billion adjustment just announced.

Back to reality? Not quite.

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Oops!

The Minister for Finance in last December’s Budget said:

“A Cheann Comhairle, the worst is over. The international economy has exited recession. Recent indicators suggest that economic activity in this country is turning the corner, and my Department is now expecting a return to positive growth within the next six to nine months.

The effort demanded of every citizen in this Budget is substantial, but it is the last big push of this crisis. Further corrections will be needed in the coming years, but none as big as today’s.”

This “last big push” was a total ‘adjustment’ of €4 billion.  It has just being announced that the targeted ‘adjustment’ in the upcoming Budget will be of the order of €6 billion. 

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October Exchequer Returns

The tax returns for October were released earlier today.  The relevant documents are:

• Exchequer Statement
• Analysis of Taxation Receipts
• Analysis of Voted Expenditure
• Information Note

The early headlines are positive with the information note from the DoF stating that “the overall Exchequer position for the first ten months of the year means that the Budget Day targets remain valid.”  At first glance it does appear that the possible good news we saw in September’s figures has carried through to October.

The drop in tax revenue relative to last year continues to ease and at 5.3% was the lowest annual drop seen this year.  When looking at the monthly revenues, we can see that October followed on from September’s increase and was €135 million or 5.6% on the tax revenue collected in the same month last year.

By looking at the performance of the individual tax heads we can see the breakdown of the €1.4 billion tax shortfall relative to last year.

All the main tax heads (Income Tax, VAT, Corporation Tax, Excise Duty) are down on last year.  The largest absolute drops are in Income Tax and VAT which combined are over €1 billion down on last year.  Of the top four tax heads the largest relative decline is in Corporation Tax which is 7.3% down on last year.  Excise Duty has the smallest absolute and relative declines of the main tax heads and is still clinging to last year’s levels.

So where did the €135 million increase in tax revenue for October come from?

This doesn’t paint the positive picture the aggregate figures suggest.  The key driver of the upturn in October was a surge in Corporation Tax receipts which were 92% ahead of the 2009 figure.  If we exclude Corporation Tax the other seven tax heads shown a decline of €83 million or 3.8% of the €2.2 billion they brought in last year.

This is the second month in a row in which Corporation Tax receipts were 90% ahead of the 2009 figure. See here.  It is difficult to determine if these increases will transfer into an increase in the amount of Corporation Tax corrected for the year or whether they are down to timing issues as companies make their preliminary tax returns.

In September, monthly Income Tax receipts has shown the first annual increase for 2010.  However, this was quickly reversed in October and as we can see Income Tax receipts were 5.0% down on last year’s figures. See full table here.

As per usual, much of the focus will not be on the true comparison of 2010 tax revenues to 2009 revenues, but on the false comparison of 2010 tax revenues to the Department of Finance forecasts.

And indeed it is true.  Tax revenue is now €243 million or 1.0% ahead of Department of Finance targets.  Every time you hear this remember that compared to last year tax revenue is down €1.4 billion or 5.6%.  Here are the monthly figures that have gotten us to the ‘positive place’

Tax revenue has been ahead of Department forecasts for each of the past three months which has brought about the 1.0% increase.  If we sum the past three months, the DoF predicted that tax revenue would fall by 4.7% compared to last year while the outturn has revealed that for these three months revenues rose by 1.9% compared to last year.

The main reason for taxes coming in ahead of target is the unexpected surge in Corporation Tax receipts which are now 22% ahead of target.  Five of the eight tax heads are now ahead of target with the notable exception being the poor performance recorded by Income Tax.

In October alone Corporation Tax was €238 million (121%) ahead of target.  See here.  Excluding Corporation Tax the other sum of the other seven tax heads is behind target and we do not yet know how permanent these increases in Corporate Tax revenues will be.

The Information Note provided by the Department states that “a shortfall in DIRT receipts in the month of October accounts for a large proportion of the overall income tax shortfall.”  Income Tax is €361 million behind target.  I cannot see how DIRT receipts in October can have much to do with that.  To September, Income Tax was already €337 million behind target.   We do not have details of these DIRT receipts in October but their impact on the “shortfall” of Income Tax receipts must be limited when 93% of the shortfall had occurred before the start of October.

[A report by Sean Whelan on RTE news stated that the shortfall in DIRT receipts was of the order of €150 million.  If this is true it would suggest that Income Tax receipts outside of DIRT, performed quite well possibly maintaining September’s gain.]

Here are the graphs (click smaller images to enlarge):

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Where did the money go?

As we saw in an earlier post the CSO’s Institutional Sector Accounts revealed that households saved just over €11 billion in 2009.  What was done with this money?

To get a brief insight into this we can turn to the Financial Data on the household sector provided by the Central Bank.  Table A11.1 provides the figures for deposit by Irish residents by sector and category.  Here are the endpoints of 2009 (in €millions). 

Month	Deposits from Irish Households	Change
Jan 2009	97,684	-
Dec 2009	99,148	+1,464

At the start of 2009, Irish households had €97.7 billion on deposit.  During the course of a year in which €11 billion was saved, deposits of Irish households increased by just €1.5 billion.

Although the level of deposits remained relatively unchanged in 2009, there was some change in the type of deposits used by Irish households.


Over the year deposits in accounts with a maturity of up to two years fell from €37.1 billion in January to €31.5 billion.  At the same time deposits in accounts with notice periods of three months or less rose from €7.8 billion to €13.6 billion.  It seems households want to be in a position of having quicker access to their deposits.

So if households didn’t put the money that wasn’t spent on deposit where did it go?  To answer this we can turn to Table A5.1 with gives details of loans to Irish households.  Here again are the endpoints of 2009, in €millions.

Month	Loans to Irish Households	Change
Jan 2009	151,209	-
Dec 2009	140,085	-11,124

The total value of loans extended to Irish households fell by over €11 billion in 2009.  This €11.1 billion reduction was split across loans for house purchases (down €5.3 billion to €110.2 billion), consumer credit (down €5.2 billion to €23.8 billion), and other loans (down €0.7 billion to €6.1 billion).  The largest proportionate decrease was in consumer credit which fell by 17.9%, loans for house purchases fell 4.5% and other loans were down 10.4%.  It is likely that a significant portion of these reductions is due to repayments by households but some may be due to revaluations and write-offs.

Still, the pattern is pretty clear.  Most of the money saved in 2009 as indicated by the Household Sector Accounts was not used to build up deposits but was used to pay down debt.

If we extend this analysis through to the most recent September 2010 data we see that the patterns seen in 2009 have not carried through to 2010.

Month	Deposits from Irish Households	Change		Loans to Irish Households	Change
Dec 2009	99,148	-		140,085
Sep 2010	96,221	-2,927		139,096	-989

It appears, in fact, that the overall saving trend has reversed.  In 2010, household deposits have fallen by €2.9 billion while household loans have fallen by close to €1 billion.  This is indicative of dissaving rather than saving. 

The jump in the savings rate seen in 2009 may prove to be only a transitory effect.  And with retail sales now below last year’s level this suggests that household disposable income has dropped significantly in 2010.

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