Saturday, October 30, 2010

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). 

Deposits from Irish Households
Jan 2009
Dec 2009

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.

Household Deposits
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.

Loans to Irish Households
Jan 2009
Dec 2009

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.

Deposits from Irish Households
Loans to Irish Households
Dec 2009
Sep 2010

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.

Friday, October 29, 2010

Retail Sales continue to fall

After five months of reasonably steady increases in retail sales from December 2009 to April 2010, the five months have seen a return to the decline that marked retail sales during 2008 and 2009.

The figures come from today’s release of the September Retail Sales Index from the CSO.  As is usual with our analysis, we will focus of the patterns of the sales index that excludes the impact of sales in the motor trades. 

The value and volume retail sales indices excluding motor trades since January 2008 are shown below.  The all-business equivalent can be seen here and it has been steadied by the strong performance in new car sales this year.  The remainder of the index (c.80% in September) is once again heading south.

Ex Motor Trades Index to Sep

The ‘turning the corner’ momentum that was heralded at the start of the year has evaporated.  The gap between the value and volume series that emerged through 2009 has not narrowed as some downward pressure on prices still remains.  In fact, if we look at the annual change in the indices we see that the annual fall in the value index has been consistently lower than the fall in the volume index for the past two years.  Consumers are buying less and paying lower prices for what they do buy.

Annual Change Ex Motor Trade Index to Sep

The monthly changes are no less glum.  The batch of positive monthly changes that were seen during the early part of the year have been replaced by negative monthly changes.   The monthly changes in the value and volume indices have been negative for four of the past five months, and the August exceptions barely carried in to positive territory.

Monthly Change Ex Motor Trade Index to Sep

In the five months since April, the value of retail sales excluding motor trades has fallen 4.4%, with the volume of retail sales falling 4.1% in the same period.  This was the fastest five-month drop in volume since May 2009 (-4.9%) and the fastest five-month drop by value since December 2009 (-4.9%).  The does not bode well for upcoming VAT receipts.  By comparison the five-month changes recorded to September 2009 were –3.3% for value and –0.9% for volume.  

Next we provide some brief details on the sub-indices produced by the CSO

Household Income, Spending and Savings

The CSO have released the Non-Financial Institutional Sector Accounts for 2009.  These give an insight into the financial transaction with the corporate, government and household sectors of the economy.  In this short analysis we will focus on the figures provided for the household sector.

The headline grabbing figure has been the large increase in the household savings rate.  This has gone from essentially 0% in 2007 to 12.3% in 2009.

Household Savings Rate

An increase in savings is not necessarily a bad thing, particularly if incomes are rising.  However the Irish economy is going through a severe contraction and it is clear that incomes are falling.  In fact, in 2009, net household income contracted by €8.2 billion from €98.3 billion to €90.1 billion. 

This represents a fall in household income of 8.2%.  This is a significant fall in household income.  Most of this drop can be attributed to the drop in wages earned by household which fell by €6.4 billion, from €79.3 billion to €72.8 billion.

To find net household disposable income we must subtract taxes and social contributions paid by households and add social benefits paid to households.  In 2009 taxes paid by households on their income and wealth fell by 14.8% from €15.4 billion to €13.1 billion.  Social contributions fell by 9.7% from €17.5 billion to €15.8 billion. 

Taxes and Social Contributions

Although aggregate household income fell by €8.2 billion in 2009 this €4.0 billion drop in taxes and social contributions insulated net household disposable income from much of the drop.

As the same time that taxes paid by households were falling, social transfers paid to households were rising, further increased net household disposable income.  In 2009 social benefits paid to households rose by 7.5% from €24.5 billion to €26.4 billion.  This further added €1.9 billion to net household disposable income.

Social Benefits

To net effect of this reduction in taxation paid and increase in benefits received (and some other miscellaneous transfers) is that, although net household income saw a significant fall of 8.2%, the impact on net household disposable income was less severe and only experienced a drop of 2.3% falling from €91.7 billion to €89.6 billion.   At the aggregate level the decrease in household disposable income has not been as severe as the fall in the overall economy.  However, this may not last as increased taxes and reduced social benefits will see aggregate disposable income fall.

Net Household Income

Net disposable household income as a proportion of net household income was around 90% for the period 2002 to 2007.  In 2008 this rose to 93.3%, while in 2009, disposable income was 99.4% of net income.

Finally, we turn to expenditure.  In 2009, household consumption expenditure fell by an alarming 11.3%, from €91.2 billion to €81.0 billion. 

Household Expenditure

This represents a consumer withdrawal of more than €10 billion from the economy.  With net disposable income down ‘only’ €2.1 billion, it is clear that the balance of the reduction in household consumption expenditure is being saved.

Household Savings

Consumers are observing what his happening in the economy (and to net household income) and, those who can, are engaging in precautionary savings on a large scale.  At the aggregate level net household disposable income is being supported by the drop in taxes collected and the increase in benefits paid.  With the precarious state of the public finances, households are taking the rational view that the drop seen in net household income will soon become evident in net household disposable income, as taxes rise and benefits are cut.

Of course, all these figures are aggregates.  We cannot infer anything about individual cases from them.  We do not know the distribution of the reduction in wages and taxes or the distribution in the increase in social benefits.  It is only at the aggregate level that we can say that households have experienced a minor drop in disposable income and large increase in savings.  It is evident there are many individual households who are far from this relatively benign scenario.

A table with the data used in this post for 2006-2009 is available below the fold.

Thursday, October 28, 2010

Bond Yields

Irish bond yields have been creeping up over the last few days and are now are highs for the current crisis.  Here is a 12-month graph of the yields on Irish 10-year government bonds taken from Bloomberg.

Bond Yields to Oct27

The short-lived surge in May was due to the Greek debt crisis.  Yields dropped down below 5% once that abated but over the last few months have risen to beyond the May levels and broke through 7% this morning.

Bond Yields Oct28

We see this in the graph on the right which shows the yields for this morning.  From the opening the yields rose (the price fell) and hit 7.06% and have now dropped back to 6.94%.

There has been little domestic news to suggest a deterioration in the Irish economy that bond markets are responding to.  There was a minor flap about the redemption of nearly €9 billion of Anglo Irish bonds that briefly caused a stir on the newswires but it seems to have been much ado about nothing.  You can follow the story and the chief protagonists of it on here.  This is not the cause of the surge in Irish bond yields though other difficulties with Anglo may be involved.

Some have attributed the increase to uncertainty in the ability of the minority Portuguese government to get a budget passed and that this is generating contagion to other ‘periphery’ countries.  You can track Portuguese 10-year bond yields here.  After rising in early trades they have fallen below their opening levels and are now (12pm) at about 5.94%.

All in all it is hard to pinpoint the drivers of the current swings in bond yields.  The people to suffer this morning are holders of Irish bonds, as the price of the asset they are holding has declined.  Ireland does not have to pay any additional interest on the bonds we have issued but if yields stay at this level into the new year we will be faced with a very high cost for new debt.

Taxing Times and the ‘Double Irish’

This piece from Bloomberg last Thursday hit the newswires and generated a front page story in Friday’s Irish Times with further analysis on Monday here.  These most recent pieces focus on the accounting practices of Google but this isn’t the first time that the ‘Double Irish’ manoeuvre has received some coverage.  Bloomberg had an excellent (though long) article back in May that tracked the proceeds of a pharmacy sale back in May. See here.

The articles on Google reveal that the company had an effective corporate tax rate on it’s profits of 2.4%, far below the 35% corporate tax rate in the US and less than a quarter of the 12.5% corporate tax rate in Ireland.  The first Bloomberg article contains plenty of references to Ireland and is worth a detailed read

Google 2.4% Rate Shows How $60 Billion Lost to Tax Loopholes

The earlier piece from May on Forest Laboratories is worth equal consideration. Two paragraphs from the pieces highlight the “productivity” of Irish workers.

On Google:

That licensee in turn owns Google Ireland Limited, which employs almost 2,000 people in a silvery glass office building in central Dublin, a block from the city’s Grand Canal. The Dublin subsidiary sells advertising globally and was credited by Google with 88 percent of its $12.5 billion in non-U.S. sales in 2009. Allocating the revenue to Ireland helps Google avoid income taxes in the U.S., where most of its technology was developed. The arrangement also reduces the company’s liabilities in relatively high-tax European countries where many of its customers are located.

On Forest Laboratories:

Overall, Forest’s Irish operations, which employ about 5 percent of its 5,200 workers, reported $2.5 billion in sales during fiscal 2009, the most recent year for which figures are available. That equals about 70 percent of the parent company’s $3.6 billion in net sales. Lexapro alone generated $2.3 billion in revenue in 2009, according to company filings.

Ireland is credited with 88% of Google’s non-US sales and the 5% of Forest Laboratories workforce based in Ireland account for 70% of total company sales.  Of course, we have been happy enough to turn a blind eye to this chicanery as the companies provide employment and pay corporation tax on their profits earned here – a couple of thousand jobs and 12.5% of profits is better than no jobs and 40% of no profits.

But do these companies actually pay much tax in Ireland.  According one of The Irish Times pieces linked to above “Google paid taxes of €18.3 million in Ireland last year, up from €8.1 million in 2008”.  Google might have billions of euro flowing through Ireland but very little of it seems to generate corporate tax revenue for The Exchequer.

The most recent corporation tax distribution statistics from the Revenue Commissioners are for 2007.  These show that there was €56.8 billion in corporate income booked in 2008 and that €6.3 billion in corporation tax was paid on this.  This gives an effective tax rate of 11.1%.  The statistics do not provide a breakdown between indigenous and foreign-owned firms but we can see that €4.5 billion (71.2% of all corporation tax) was paid by the 570 companies (1.0% of total companies filing) which had net trading incomes of more than €10 million for reported year-ends in 2007.

We can compare the corporate income reported by the Revenue Commissioners (which is for the entire economy) to the level of repatriated profits reported by the Central Statistics Office in the Balance of Payments.  The 2007 figures can be seen here.

The most recent revision of this figures show that €112.7 billion left the country as income paid abroad in 2007.  Opposed to this €84.9 billion of income flowed into the country.  The balance between these two figures is “net factor income for abroad” which accounts for the nearly €30 billion gap between GDP and GNP in Ireland in 2007.

The CSO provides a breakdown of the €112.7 billion which left the country. €1.2 billion was to labour in the form of wages.  The remaining €111.5 billion was investment income.  This total is divided into three categories (and is net of any tax charged in Ireland):

  1. Direct Investment Income (€37.0 billion) covers income accruing to a foreign direct investor from  their ownership of (correspondingly) a direct investment enterprise located in Ireland
  2. Portfolio Investment Income (€42.4 billion) covers income receivable and payable to non-direct investors on their holdings of equity and long and short-term debt securities. 
  3. Other Investment Income (€32.2 billion) covers interest on loans, deposits and trade credits.

There is a huge amount of income leaving Ireland.  The figures do not tell us who gets it but it is clear that we are not even collecting 12.5% on a lot of this income. 

As the Bloomberg articles suggest a lot of money is also flowing out of the country in the form of royalties and licenses.  In 2007 the Balance of Payments shows that we received €865 million in royalty payments while making payments of €18.6 billion.

These flows cause a substantial difference between the GDP and GNP measures of national income in Ireland and create difficulties when making international comparisons based on GDP as we saw here.  A further difficulty emerges as it is unclear as to whether we are capturing significant tax revenue from the huge income flows that create the wedge between GDP and GNP.

A certain attractiveness to business is undoubtedly a good thing but do we want to be seen as too “friendly”?

Friday, October 22, 2010

External Trade

The CSO released the latest External Trade figures today giving details of our merchandise trade to August.  There was a monthly drop in total exports in August (-3.6%) and added to the monthly increase in imports of 2.8%, our overall monthly trade surplus fell by 9.3%.

Here is a graph of our monthly exports and imports.  The fall in both exports and imports that was seen towards the end of 2009 has been reversed.

Exports and Imports

Here is the trade balance (exports – imports) over the same period.  This has been one of the few positive indicators as Ireland has been dragged through the economic mire over the last two years or so.

Trade Surplus

The €28.4 billion trade surplus recorded in the first seven months of 2010 is over 50% larger than than the €18.7 billion surplus recorded in the equivalent period in 2007.  However, as we have examined before the basis of this increased trade surplus is subject to some doubt.

The CSO provides data on the categories of our exports.  Here is a comparison of the January to July period for 2008, 2009 and 2010.

Exports by Category to Jul

The stand-out figure is that more than 60% of our exports come from a single category – chemicals and related products.  In fact with chemical imports of €5.0 billion to July it is clear that this category accounts for most of our trade surplus.  The trade balance excluding this single category is not as impressive.

Trade Balance excluding Chemicals

Excluding chemicals we struggle to record a trade surplus and this is even with the more than 25% drop that has been recorded for imports since 2008.  The imports version of the above trade by categories table can be seen here.  Imports excluding the chemicals and related products category are down more than 30%.  The non-appearance of a trade surplus excluding chemicals in light of such a drop in imports suggests that the performance of exports excluding chemicals has not been stellar.

Exports excluding Chemicals

Our export performance is being masked by increases in chemical exports.  And in this category the performance of pharmaceutical products has bucked all international trends.

Pharmaceutical Exports

The pharmaceutical sector is becoming ever more dominant as a proportion of Irish exports.  Since 2007 exports in this category have increase from being 15% of total exports to nearly 30% of total exports. See graph here.  In fact, July 2010 saw record exports of pharmaceutical products with exports of €2,339.2 million.

The final issue we will consider is that of our trading partners.  We looked at this using data to the end of 2009 here.  There has been little to change the conclusions we drew then.

Exports by Country to July

Although there has been a 6.5% drop in 2010, Belgium remains our largest EU trading partner.  We’ve sold about €1.3 billion more goods to Belgium than Great Britain.  Belgium’s population of less than 11 million have bought more of our exports than the combined 193 million population of Germany, France and Spain.

Tuesday, October 19, 2010

Have things just gotten a whole lot worse?

The fallout from the commotion in the Department of Finance yesterday continues.  On exit, Michael Noonan announced that “the the adjustment required in the Government's four year budgetary plan will be 'significantly higher' than the €7.5 billion figure previously mentioned”.

This €7.5 billion adjustment over the period 2011-2014 was a figure that surprised me. I thought it was more.  Karl Whelan provides the answer.

The analysis of the economy and how we were due to reach the 3% deficit target by 2014 was provided in the December 2009 Stability Programme Update produced with the Budget.  Here are the General Government Deficit Projections from that document (Table 1, page 6).

As if by magic, the numbers produced in the Update lead us to a General Government Balance of –2.9% of GDP in 2014 – just where we want to be.  Getting below the key 3% level is based on two elements:
  1. Projected GDP growth in the economy
  2. Cumulative fiscal adjustments in the government accounts.
The details of these is provided in Table 10 on page 20.  This was to be the plan to get us out of the crisis in the public finances.  This is now the plan that is ‘very challenging’.

We already know that the above deficit figures for 2009 and 2010 are misleading as they exclude the costs of the banking bailout.  The 2009 deficit was 14.3% of GDP and the projected deficit for 2010 is over 32% of GDP!  The hope is that the costs of the banking bailout will be once-off (though they will leave a debt interest legacy) and that over the next four years we can turn to dealing with the structural deficit.

Here was how we planned to narrow the gap.

Projected Income and Expenditure to 2014
The actual projected amounts (in €millions) are shown below.

Projected Income and Expenditure Amounts to 2014
It is clear that the ‘strategy’ was two-fold
  1. Try to taper the nominal increases in expenditure, while using cuts to bring expenditure as a percentage of GDP down from nearly 47% to 40%,
  2. Hope for substantial buoyancy in revenues of existing taxes with government revenue as a percentage of GDP increasing by only two percentage points from 35% to 37%.
This increase in revenues, with little increases in taxation, would have to be driven by growth in the economy.  This is where the original plan was coming unstuck.  These growth projections and associated tax revenues were never going to happen.  From Table 4 on page 10 we can see these projections.

GDP                                 (current prices)
Growth                         (constant prices)

Graphing these numbers shows just how much of a dramatic turnaround the Department was hoping for.

Dof GDP Projections
This isn’t an economy “turning the corner”, it’s  more akin to “reaching lift-off”!  These growth projections are wildly optimistic and we didn’t need clandestine briefings in the Department of Finance to tell us that.

The EU Commission pointed this out back in March (report here). As we noted at the time the Commission concluded:
The budgetary outcomes could be worse than targeted throughout the programme period, mainly due to
  1. The fact that the consolidation efforts planned after 2010 are not underpinned by broad measures and are of an indicative nature only;
  2. The programme's favourable macroeconomic outlook after 2010; and
  3. The risk of expenditure overruns in 2010 and also beyond, to the extent that the still to be spelled out strategy should rely on expenditure restraint.
So back in March, the EU Commission clearly believed that the outcomes could be worse than the projections and in point 2 clearly point to the “favourable macroeconomic outlook” in the programme.  Yet, this seemed to come as a surprise to everyone this week.

In fact, we didn’t need the EU to tell us that these projections were fanciful.  The DoF analysts who wrote the Stability Programme Update knew as much and included a paragraph warning so on page 9 of the document.  It stated (emphasis mine):
The forecasts covering the period 2011 – 2014 are based on an assessment of the economy’s potential growth rate. Taking into account the underlying growth in labour supply and productivity, it is tentatively estimated that the Irish economy can expand at an average rate of 3 per cent per annum (there is, of course, considerable uncertainty surrounding this estimate given the openness of the Irish economy). Given significant under-utilised capital and labour at present (i.e. a negative output gap), the economy can grow above trend as these under-utilised resources are brought back into productive use (i.e. as the output gap closes). In these circumstances, an annual average growth rate of 4 per cent over the period 2011 – 2014 is assumed.
This was a pipe-dream from the start and they knew it.  This wasn’t a projection of the actual growth rate, it was some potential growth rate only possible if some factors A, B and C all fell into place.  We know that things haven’t fallen into place and we are now left to face up to reality.

The bottom didn’t suddenly fall out of the economy this week and things are no worse today than they were at the start of the week.  All that has changed is a realisation among some that things actually are as bad as they are.

So how do we close the gap?

Monday, October 18, 2010

Merrion Street today

There has been a constant flow of people in and out of the Department of Finance in Government Buildings on Merrion Street today.  Joan Burton was first in this morning, to be followed by Michael Noonan.  Arthur Morgan is next in line.

Reports suggest that the finance spokespeople for the main opposition parties are getting “confidential data concerning the state of the economy and the expected cost of servicing the national debt”. 

A report on the exit of Joan Burton went

Labour Party finance spokeswoman Joan Burton has described as “very challenging” the information provided at the first Department of Finance briefing for Opposition politicians on the state of the country’s finances.

Ms Burton emerged from the Department in Merrion Street in Dublin shortly after 11am, having gone in at 8.45am.

She said while much of the information had been given on the condition of confidentiality, departmental officials had expressed concern that income tax receipts would be lower than had been expected previously.

“What they told us was very challenging,” Ms Burton said.

We’re not told what she means.  Could "very challenging" be Exchequer tax receipts less than €30 billion?

Also what "confidential data" are they getting?  Why can't the rest of us have it?  Why does it need to be confidential?

The Department of Finance doesn't actually produce any of these figures.  The “state of the economy” can be determined from the National Accounts and other statistical releases (Retail Sales, External Trade etc.) from the CSO.  Debt service costs are provided by the NTMA.  This isn't confidential data and is widely available. 

In fact,  the DoF provide an excellent monthly summary of all this data.  The most recent version from last week is here.  This provides an excellent snapshot of the state of the economy and level of public debt.

I presume they mean confidential projections that have been produced by the DoF.  But why should Noonan and Burton assume that the DoF projections are any more accurate than the projections provided by other analysts? 

It looks like a bit of a publicity stunt on all sides.

Friday, October 15, 2010

The CPI and “state-controlled” sectors

We have given a quick look to the September CPI release and concluded that the deflationary pressures in the economy have not disappeared, even if the headline rate of inflation has been positive for the past two month.

A feature of the commentary on the CPI is that it is supposed to give an indication of rising costs and inefficiency in the “state-controlled” sectors of the economy.

For example a piece in The Irish Times includes

Responding to the figures, Fine Gael spokesman on enterprise Richard Bruton said there was no sign consumer confidence had returned, while it was sectors where prices are regulated by the Government that continued to see upward pressure on prices.

The Small Firms Association (SFA) and the Irish Small and Medium Enterprises Association (ISME) criticised the Government for not tackling costs in the business sector and said further jobs would be lost if they are not brought under control.

Similarly from an article in The Irish Examiner:

Director of the Small Firms Association Avine McNally said the September inflation figures show inflation is being driven by increases in public utility costs, such as housing, water, electricity and gas.

And not leaving out this piece from The Irish Independent:

Avine McNally, director of the Small Firms Association, said public utilities were still driving up overall costs.

"Irish small businesses have taken harsh steps to regain cost-competitiveness, but any gains are negated by the costs imposed by the Government-administered sector," she said.

ISME, the Irish Small and Medium Enterprises Association, said state costs are continuing to cripple companies.

Chief executive Mark Fielding said: "It is vitally important that the root causes of the dramatic increases in production costs witnessed over the last number of years, including Government-controlled costs, are brought under control or else we run the risk of continuing to price ourselves out of the market.

And they are lots more piece like that out there.  I gave a brief response to commentary like this when considering last January’s CPI release.  The mistruths have continued.  In the blogosphere Constantin Gurdgiev has a post on “Rip-off Ireland is Rearing it’s Ugly Head”.  Constantin concludes that the numbers in the CPI:

are all signaling that we are living in a public sector boom times, as the Government seemingly pushes forward with the agenda of beefing up semi-states revenues at our expense.

I think there are lots of reason to discredit the public and semi-state sectors, but there is little evidence from the CPI to do this.  I posted a comment to Constantin’s original post but given the further commentary published to today I feel compelled to add a bit more, but most of this comes from my contribution on Constantin’s excellent site.

For the business lobby above I will make one retort.  The CPI is the Consumer Price Index, not the Business Cost Index.  The CPI measures the prices consumer’s pay not the costs incurred by businesses.  There may be some relationship between them but it is not accurate to draw the conclusions suggested above.  The CPI is a weighted index based on the expenditure patterns of households.  It does not reflect the spending or mix of spending of businesses. 

Thursday, October 14, 2010

September CPI release

The CSO have just published the September CPI figures.  The headline figure is that annual inflation is now running at +0.5%, up from +0.2% in August which was the first positive annual inflation figure since December 2008.

As has been our habit we give a quick look to two inflation figures.

  1. Overall inflation rate for all items
  2. ‘Core’ inflation rate which excludes mortgage interest and energy products.

Our measure of core inflation has stubbornly remained in deflationary territory.

Core Inflation September

Core annual deflation is running at –1.41% in September, which is a slight slowing of the rate of deflation from August when it stood at –1.66%.

Mortgage interest decreases (following the ECB interest rate reductions beginning in October 2008) pushed down the overall inflation rate into negative figures earlier than the core inflation rate. Core deflation did not come to pass until May 2009.

In more recent times, mortgage interest increases (following the increases in standard variable rates by Irish banks beginning early this year and the removal of tracker rate mortgages as an option of new customers) have pulled the overall rate back into positive figures earlier than the core rate.  Of the annual inflation rate of +0.5% in September, mortgage interest (6.66% of the overall index) contributed +1.25% to the annual inflation rate.  Excluding mortgage interest alone gives an annual deflation rate of –0.75%.

We further exclude energy prices as they are influenced by factors that do not necessarily reflect the general price trend in the economy.  Energy prices are influenced by:

  • International factors that cause the price of our imported energy to change
  • Tax changes such as the recent imposition of the Carbon Tax on fuels.

Energy (7.77% of the overall index) contributed +0.66% to the annual rate of inflation.  Again, it can be seen that the annual inflation rate excluding this category is negative at –0.16%.

Removing the combination of mortgage interest and energy products turns the overall positive annual inflation rate of +0.50% to an annual deflation rate of –1.41%.

Thursday, October 7, 2010

New Car Sales continue at pace

Figures from the Society of the Irish Motor Industry (SIMI) show than new car sales continue to outpace 2009 levels.  In September, over 4,300 new car were sold, up about 93% on the 2,200 sold in September of last year.  This follows an annual increase in August of 110% (5,000 versus 2,400)

Car Sales to August

When the July figures were released we wondered if the growth on the 2009 levels would continue in the normally quieter second half of the year.  In the last six months of 2009 just over 10,800 new cars were sold.  In 2010, the period July to September alone saw sales of over 15,700.  Figures for 2010 are already 45% on the second half of last year and there are still three months of this period to go.  It is likely we will see a growing divergence between the red and green lines above.

Wednesday, October 6, 2010

Closing the Gap

In 2009, using eurostat figures Irish government expenditure was €77.3 billion.  The compares to tax revenue of €54.4 billion.  This represents a fiscal deficit of €22.8 billion.

Annual Tax and Spend euros

We have undertaken a quick analysis of Irish tax revenues and government expenditures relative to the EU averages.  Using figures relative to Gross National Income this analysis suggested that Irish tax revenue is below the EU average (4th lowest) and that Irish government expenditure is above the EU average (the highest!).  This situation is unsustainable and resulted in a general government deficit to GDP ratio (GGD/GDP) of 14.3%.

It is suggested that relative to 2009 levels the fiscal deficit should be closed by a combination of a €6.6 billion increase in tax revenue and an €11.0 billion reduction in government expenditure.  This roughly suggests that the necessary fiscal adjustment should be one-third tax increases, two-thirds expenditure cuts, but it should be noted that the 2009 expenditure total excludes money used for the bailout of our ailing banks.  These payments will not be recurring (hopefully!) and will provide a large chunk of the necessary expenditure cuts.

If tax and expenditure had been at these proposed levels in 2009, the fiscal deficit would have been €5.3 billion (€66.3 billion expenditure versus €61.0 billion tax revenue).  This gives an implied GGD-to-GDP ratio of 3.3% – just above the Stability and Growth Pact limit of 3%.

Our immediate targets should be a tax-to-GNI ratio of 46% and spend-to-GNI ratio of 50%. At the current GDP/GNI ratio these equate to a tax/GDP ratio of 38.2% and a spend/GDP ratio of 41.5%.  There still would be a fiscal deficit but one that would manageable compared to the current crisis and once this passes there would be ample time to restore long-run equilibrium to the public finances.  Now if only we could find a map!

A High-Spend Economy?

After some analysis of the claim that Ireland is a low-tax economy we now turn to the government spend side of the equation.  Again the source of all the numbers used here is eurostat.

Per eurostat the weighted average (government) spend-to-GDP in the EU 27 member states for 2009 was 50.7%.  The equivalent figure for Ireland was lower at 48.4%.  This equates to a government expenditure level of €77.3 billion.  This is higher than than the €72.1 billion given by the Department of Finance (page 44 here) but this may because of differing definitions of what classifies as government expenditure and whether the monies used as part of the bank bailouts are included.  Here is the trend for the past decade.  The recent convergence of the series is due to the money spent on Anglo Irish Bank in 2009.

Ireland and EU Annual Spend Proportion

Anyway it would appear that Ireland is a low-spend economy and that an increase in government expenditure of about €4.2 billion would have been needed in 2009 to bring us up to the EU average.

Ireland has the 14th highest spend-to-GDP ratio in the EU.  The countries with lower levels of government expenditure are Germany (47.6%), Cyprus (46.4%), Czech Republic (46.1%), Spain (45.9%), Estonia (45.4%), Poland (44.5%), Malta (44.3%), Lithuania (43.0%), Latvia (42.9%), Luxembourg (42.4%), Slovakia (40.8%), Bulgaria (40.7%), and Romania (40.4%).

As with the tax analysis, a major issue in the Irish case is the growing divergence between our GDP and GNI figures.  For most EU countries these measures of National Income are equivalent.  As we have seen this is not the case for Ireland with GNI only 83.1% of GDP

In terms of GNI the average spend-to-GNI ratio in the EU ratio is 51.0% (again not much different from the average spend-to-GDP ratio of 50.7%).  For Ireland the spend-to-GNI ratio is 58.3%.  This is the highest level of government expenditure in the EU. Yes, by this measure Ireland has the highest rate of government expenditure in the EU.

The countries that approach the Irish level of government expenditure are Denmark (57.2%), Finland (56.0%), Sweden (55.8%), France (55.1%), and Belgium (53.8%).  As a percentage of GNI, Ireland has more government expenditure than all of these countries.  If we take the Department of Finance’s expenditure figure for 2009 of €72.1 billion (which excludes the bank bailout monies) we get a spend-to-GNI ratio of 54.3% – fifth ranked in the EU and still above the EU average of 51.0%.  Here is the spend-to-GNI ratio to Ireland for that past decade.

Ireland and EU Annual Spend GNI Proportion

For government expenditure, it would seem appropriate that Ireland should have a spend-to-GNI ratio of close to the EU average.  In my view a spend-to-GNI ratio of 50% is appropriate for Ireland.  This relates government expenditure to the income of Irish residents rather than to the measure of GDP which is inflated by the presence of foreign multinationals in Ireland.  This would bring Irish government expenditure relative to Irish income to a level comparable to that in other EU countries.  In terms of GDP this gives a spend-to-GDP ratio of 41.5%.

To satisfy this equates to a government expenditure level in 2009 of €66.3 billion.  This would mean a reduction in the 2009 expenditure level of about €11.0 billion.

The 2009 figures used in this post are available below the fold.

A Low-Tax Economy?

The ongoing economic crisis facing the country has brought much commentary from home and abroad.  One of the more significant contributions came last week from European Commissioner for Economic and Monetary Affairs, Olli Rehn.  In a press conference he said:

“It is a fact of life that Ireland will no longer be a low-tax economy over the next ten years after what has happened.

I do not rule out any option since we know that Ireland in the coming decade will not be a low tax country, but it will rather become a normal tax country in the European context.”

These comments have attracted lots of attention, with much of the focus on Ireland’s 12.5% rate of Corporation Tax.  The first issue to be addressed is whether Ireland actually is a low-tax economy.  The weighted average tax-to-GDP ratio across the 27 members of the eurozone is 44.9% of GDP.

The usual source for tax revenue in Ireland is the Exchequer Returns.  For 2009 these tell us that the Exchequer collected €33.0 billion in tax.  We can get our GDP figures from the CSO.  According to them GDP in current market prices in 2009 was €159.6 billion.  Using these two figures gives a tax-to-GDP ratio of 20.7% – less than half of the EU average.  This suggests that if our taxes were at the EU average of 44.9% rate tax revenue would be €71.6 billion.  This potential extra tax revenue of €38.6 billion would eliminate an budgetary crisis.

However, there are a number of major problems with this simplified analysis.  The primary problem is that Exchequer Revenue does not equate to tax revenue.  The Exchequer collects tax under eight tax headings (2009 receipts in brackets).

  • Income Tax (€11.8 billion)
  • Value Added Tax (€10.7 billion)
  • Excise Duty (€4.7 billion)
  • Corporation Tax (€3.9 billion)
  • Stamp Duty (€0.9 billion)
  • Capital Gains Tax (€0.5 billion)
  • Capital Acquisitions Tax (€0.3 billion)
  • Customs Duty (€0.2 billion)

The sum of these gives the €33.0 billion collected by the Exchequer in 2009.  Ireland, however, has numerous taxes that are not collected by the Exchequer that must be included in a measure of the total tax take.  These figures are available from the CSO’s National Income and Expenditure Results.  Some of these are (with 2009 receipts in brackets).

  • PRSI Contributions (€8.9 billion)
  • Rates (€1.4 billion)
  • Motor Tax (€1.1 billion)
  • Broadcasting Licence Fee (€24 million)

The existence of these taxes means that the tax take in Ireland in substantially higher than suggested by a glance at the Exchequer Returns.  The EU Commission is well aware of these taxes and includes them in it’s measure of the tax burden in Ireland.  The official eurostat figure for the tax-to-GDP ratio in Ireland for 2009 is 34.1%.  With eurostat also reporting an 2009 Irish GDP figure of €159.6 billion, this means the total tax take in Ireland in 2009 was €54.4, over €20 billion more than the Exchequer tax receipts.

A tax-to-GDP ratio of 34.1% still puts Ireland well below the EU average of 44.9% and does little to belie the view that Ireland is a low-tax economy.  Here are the Irish and EU rates for the past decade.

Ireland and EU Annual Tax Proportion

The next issue to consider is the burden of tax on Irish residents.  For most of the EU the distinction between GDP and GNP is of little significance.  Figures from eurostat reveal that for the EU27, the aggregate GDP of the EU was €11,787,279 million (€11.8 trillion).  Separately eurostat reports that the aggregate Gross National Income (GNI, which bar a minor adjustment is the equivalent of GNP) was €11,748,223 million (€11.7 trillion).

Across the EU as a whole the GNI-to-GDP ratio is 99.7% – both measures of national income are essentially the same.  The is not the case with Ireland.  There is a substantial difference between GDP and GNI in Ireland because of the substantial outflow of profits by multinational firms.  These profits form part of Irish GDP as they are based on economic activity in Ireland, but they do not form part of GNI, as the income does not accrue to Irish residents.

Using eurostat’s figures for 2009 the Irish GNI-to-GDP ratio for 2009 was 83.1%.  This is a clear outlier.  Nearly 17% of “National Income” flows out of the country and because it is taxed at a low rate it can distort the view of the tax burden on Irish residents.   Using the GNI figures available the next lowest ratio is Portugal’s at 96.6%.

For most countries the tax-to-GDP ratio and the tax-to-GNI ratio are very similar.  The one outlier is Ireland.  Across the EU, the average tax-to-GNI ratio is 44.5%, not much different from the tax-to-GDP ratio of 43.9%. 

Across the EU, Ireland (34.1%) has the fourth lowest tax-to-GDP ratio and is substantially below the EU average. Only Latvia (34.0%), Romania (32.1%) and Slovakia (34.0%) have lower ratios.  In terms of tax-to-GNI Ireland comes 13th of the 27 EU members.  Ireland is pretty much the median EU tax-to-GNI ratio.  For Ireland that tax-to-GNI ratio in 2009 was 41.0%, pretty close to the EU average of 44.5%.  This does not suggest that Ireland is a low-tax economy but is closer to a “normal tax economy” referred to by Rehn.  Here is the tax-to-GNI ratio for Ireland for the past decade.

Ireland and EU Annual Tax GNI Proportion

The amount of tax paid in Ireland as a proportion of the income of Irish residents is only slightly below the EU average.  Of course, the total tax take is bolstered by the tax collected on multinational profits before they are repatriated.  As we know these profits (and all business profits) are taxed at 12.5% and this rate is unlikely to be increased.  If additional tax is to be collected it will have to come from Irish residents.

Those countries which had a lower tax-to-GNI ratio in 2009 than Ireland were Bulgaria (36.9%), Cyprus (40.3%),  Czech Republic (40.3%), Greece (37.9%), Latvia (31.5%), Lithuania (33.9%), Malta (40.5%), Poland (37.4%), Romania (32.1%), Slovakia (34.4%), Spain (34.7%) and the United Kingdom (39.6%).

The unique features of the Irish economy make these comparisons difficult.  Due to the large number, and impact,  of foreign multinationals in Ireland it is appropriate that Ireland’s tax-to-GDP ratio be below the EU average.  However, when it comes to the tax-to-GNI ratio Ireland should be above the EU average.  This is the reflect the tax paid by Irish residents on the income they earn (as measured by GNI), and the tax paid by foreign multinationals on the profits they repatriate from Ireland (that do not form part of GNI).

With a tax-to-GNI rate below the EU average it does suggest that we are undertaxed (41.0% versus 44.2%), but does not support the assertion that we are a low-tax economy.  The tax-to-GDP ratio (34.1% versus EU average of 43.9%) supports this low-tax theory but may not be the most useful comparison for Ireland.

In my view, it is likely that the appropriate tax-to-GNI ratio for Ireland is around 46.0%.  In 2009 this would have required an increase in tax revenue of about €6.6 billion to €61 billion. This would equate to a tax-to-GDP ratio of 38.2%. 

Ireland’s tax revenue has fallen, as the tax base was too heavily weighted towards construction and property transaction taxes.  Some adjustment is necessary but the premise that Ireland is a low-tax economy should not be the starting point.

The 2009 data used in this post are all taken from eurostat and are available below the fold

Monday, October 4, 2010

September Exchequer Returns: Good News?

The Department of Finance has just released the Exchequer Statement for September.  The relevant documents are:

The Minister for Finance is buoyed by the latest figures.

In the period to end-September, tax receipts were on target, at €22.2 billion. As anticipated, the year-on-year rate of decline in tax revenues has continued to ease since the end of 2009. At end-September, tax revenue is down 6.5% year-on-year.

The Exchequer figures show the public finances have stabilised due to the decisions taken by the Government. Stabilising the public finances is essential if we are to protect existing jobs and create new ones.  Today’s Exchequer figures show we are on the right path towards economic recovery.”

While the year-on-year comparison is still negative, it is true that the relative decline on 2009 is at its lowest level all year.

Cumulative Tax Revenue to September

The rapid declines of over 17% seen in the first two months of the year have gradually eased as the year has progressed.  The annual decrease to September of –6.5% is actually better than the Department’s overall predicted drop for the year of –7.1%.  This is shown in the graph below.  The red dashed line represents the Department’s 7% predicted drop in tax revenue.  The green dashed line is my (now pessimistic?) predicted drop of just over 10% in tax revenue.

Annual Changes to September

The positive turn on these figures comes from what appears to be a strong performance of tax revenue in September.  Whereas August was €330 million or nearly 16% down on the same month last year, September recorded an offsetting increase of €333 million or over 11% on the same month last year.

Monthly Tax Revenues September

Before looking for the source of this increase we will give a look at the performance of the individual tax headings for the first nine months of the year.

Cumulative Tax Revenues to September

The €1.5 billion drop in tax revenue compared to last year is driven by three of the four main tax headings: income tax, VAT and Corporation Tax.  Of the big four only excise duty is hanging on to last year’s levels (which were pretty abysmal to begin with).  The tax heads up on their 2009 returns are stamp duty and customs duty and these are relatively insignificant rises.

So why was September’s tax revenue up 11% on last year?

Monthly Tax Revenues for September

This is as positive as this monthly comparison has been all year.  After been behind for each of the first eight months of the year, September was the first month this year when Income Tax receipts were up on 2009.  Even with this gain Income Tax is still over half a billion down on last year.  See table here

Half of the €333 million increase for September is due to Corporation Tax which was up €167 million or  over 90% on the amount collected in September of last year.   Corporation Tax receipts have yo-yoed in recent months and in August were over 60% down on the 2009 figure.  For the year to date Corporation Tax is still over €400 million down on last year.  See table here.

Relevant as all of this might seem, much of the media focus will be on the performance of tax receipts to the Department of Finance ‘targets’.  This is comparing a real number to an imaginary number.  The headline is that “tax take on target after nine months”.  This is actually true but this is a low hurdle to begin with.

Tax Forecasts to September

By the end of September tax revenue is ‘only’ €42 million or 0.2% behind the Department of Finance forecasts.  The monthly forecasts from these figures can be seen here.  Tax revenue for August and September has been ahead of the Department’s forecasts.

While the overall forecast is pretty much spot on, the Department’s forecasts of the individual taxes that make up the total are a bit more erratic.

Tax Forecasts to September2

At €337 million, Income Tax is substantially behind the projected figure but more than two-thirds of this is offset by the 12% or €235 million gain on Corporation Tax compared to it’s target.  It is noteworthy that €159 million of the excess Corporation Tax collected came in September when Corporation Tax receipts were 83% ahead of the forecast amount.  See table for monthly September forecasts here. In August Corporation Tax was another €48 million or almost 30% ahead of forecast.  Table here

It is these Corporation Tax receipts that are giving the overall tax revenue figures their positive sheen (when compared to targets).  It is hard to know if these increases will be maintained. They could be down to timing issues as companies pay their preliminary tax and we could see reduced Corporation Tax revenues paid in the next few months as companies may have already paid most of their 2010 tax liability.  Of course, it could be that the Department just made overly pessimistic forecasts for August and September and that comparisons to these numbers are largely meaningless (which they are!). 

Corporation Tax is over €400 or 16% down on last  year so there is not much reason to be cheerful because we are ahead of target.  The timing issue may not be completely irrelevant as Corporation Tax is actually €65 million or 3% ahead of the equivalent 2008 figure, when every other tax head is down in this comparison and total tax revenue down over 20%.  Table here.

One final actual comparison we can do with the September figures is to make a quarterly comparison as we now have the numbers up to the end of the third quarter.

Quarterly Tax Revenues for Q3 2010

Again, the overall figure is down on last year as was the case in both the first quarter and second quarter.  However, most of the decline in the third quarter can be attributed to Corporation Tax.  Again, it is hard to know whether this reflects timing issues or a continuing deterioration in Corporation Tax receipts.

One pattern worth noting over the first three quarters of the year is the relative easing in the rate of decline in Income Tax receipts.  For the first quarter of 2010, Income Tax was 10.4% down on 2009, in the second quarter this had slowed to 6.5% and as we can see above in the third quarter Income Tax was “only” 1.9% down on last year.  Thus, while Income Tax is down €513 million on last year, €466 million of this drop occurred in the first six months of the year.

Here are the graphs for those fatigued of tables.  Click smaller images to enlarge.

Tax Revenues to September

 Income Tax Revenues to SeptemberVAT Revenues to September

Excise Duty Revenues to September Corporation Tax Revenues to SeptemberStamp Duty Revenues to September CGT Revenues to September

Customs Duty Revenues to SeptemberCAT Revenues to September