Tuesday, July 8, 2014

Some factors affecting the fiscal arithmetic

The debate around October’s budget has been heightened recently with the positive results in the half-year Exchequer Returns and the large upward update of nominal GDP by the CSO.  The impact of these was explored in this recent post.

There are other factors that will feed into the fiscals sums for 2015.  It is not clear what affect they will have but they may come to prominence over the coming months.  The first is recurring but small, the second is large but once-off and the third is large and recurring (for a while) but seems unlikely to happen.

1. Changes to the EU VAT Directive

From the first of January 2015 “VAT on telecommunications, broadcasting and electronic services supplied by a supplier established within the EU to non-taxable persons established within the EU will also be charged in the Member State where the customer belongs.”  See here.  It is not clear what impact this will have on VAT revenues but one would think it will be positive, though will probably be small. 

The most visible change will probably be in relation to subscriptions paid to BSkyB the VAT on which will now be payable in Ireland.

2. Return payment under the ELG from IBRC liquidation

When IBRC (formerly Anglo and INBS) was liquidated in February 2013 there was just over €1 billion of state-guaranteed liabilities remaining in the zombie bank.  These were covered under the Eligible Liabilities Guarantee that was introduced in early 2010.  When the liquidation was announced the guarantee was triggered and the guaranteed liabilities were immediately paid with €1 billion from the Exchequer.  After making the payment the ELG scheme took the place of the covered liabilities on the balance sheet of the IBRC but as an unsecured and unguaranteed creditor.  When the liquidation is concluded the proceeds of the sales (minus costs) will be divided between the remaining creditors at the time of the liquidation.  Creditors will be repaid based on their status but it does seem that there will be funds to make a payment to unsecured creditors.

It is not clear when this will be made or how much this will be.  If the proceeds are sufficient the amount returned could be close to the €1 billion paid out under the ELG. This is a once-0ff receipt relating to the public interventions in the banking sector.  Ireland has been in the Excessive Deficit Procedure since 2009 but the “once-off” payments to the banks were omitted to give the “underlying” deficit when examining whether Ireland had satisfied the limits set out under the EDP.

If there is a repayment from the IBRC under the ELG then it could be that the “underlying” deficit will be greater than the overall deficit.  Is it only payments to the banks that are excluded to get the “underlying” deficit?  If receipts from the banks are excluded maybe 2015 would be an opportune time to start measuring our performance to the EDP limits with the headline deficit?

3. Early repayment of IMF loans

The benefits of this were discussed here and here back at the start of the year.  The issue arose in a PQ to the Minister for Finance again last week.  He repeated the position that all the programme loans have to be repaid in equal proportion.  Repaying the IMF loans means repayments also need to be made to the EFSF, EFSM and bilateral loans.  But loan agreements can be renegotiated and the Minister outlined how much such a renegotiation would be worth:

It is the obligation to pay everybody if we pay one and makes it not worth pursuing. However, there may be ways around that and it is still worth pursuing that aspect. At present rates in the market and with the rate we are paying on the IMF loan, it is worth about €20 million for every €1 billion we financed. We have about €18 billion of that type of loan from the IMF.

€20 million times 18 equals €360 million – though it will be phased-in in a sense as the IMF loans are amortised (repaid in instalments) over the next few years.  But how long will the Ireland 10-year yield stay below 2.5 per cent?

So we have a small effect that definitely will happen (VAT), a large once-off effect that will happen but mightn’t be counted (ELG) and a large recurring effect that mightn’t happen at all (IMF).  In an imaginary world where they all fell right the 3 per cent of GDP deficit in 2015 should be easily achievable.

1 comment:

  1. Item 3 is back in the news today. It illustrates how mistaken the widespread view of the IMF as a "good cop" was. The contrasting costs of the various loans should allow for a calculation of the amount of the concessionary element in those from the EU!