I just think that it’s a lowball target to predict GNP to fall 3% for the full year and tax revenues to then fall by 6%.

I too have worked in the MNC sector, in finance. And I know to prepare a budget to achieve political objectives. If, as BL asserted when he was presenting the last budget, we had “turned the corner”, one would expect tax revenues to rise or at least to stabilise.

What I resent is the attempt by BL to verbalise something (recovery) that his figures deny. Instead we got a lowball tax revenue estimate, whose non-attainment can’t be recognised until year-end as the scheduling of expected receipts is back-ended.

Time will tell whether the full year tax targets are met. I contend that the evidence suggests that they will not be met.

The y-o-y fall in tax revenue to July was 8%. The y-o-y fall to August (as you corectly point out) was 9%. Unemployment is ahead of target. Core retail sales have fallen in three of the last four months. The ISEQ index is down 20% since April. Despite the recent rise in sterling against the Euro (and reports that the volume cross-border shopping has abated) VAT receipts are down by 7%.

Even if our tax revenue targets were met, should we cheer when tax revenues fall 6% given the scale of our problems?

I don’t understand your point about the fall in tax revenue. Are you saying that, because it was down 9pc in the first 8 months (to August, not July) of 2010, the government target of being down 6pc in the full year (to December) 2010 is unattainable? But, this ignores the fact that the fall over the corresponding period of 2009 has been getting progressively less as the year has gone on. The y-o-y fall in the first 3 months of 2010 was 15pc. Now, it is 9pc in the first 8 months. A continuation of that trend will see the target of a 6pc fall in the year as a whole being hit. It may come out a fraction below or a fraction above 6pc, but few economists now doubt that it will be very close to the 6pc the government targetted. As spending has also been cut, this will be sufficient to stabilise or even reduce the deficit slightly.

Regarding the contrast between the buoyant export economy and the flat domestic economy, what you say is correct for 2010. Manufacturing output and exports have risen sharply. As employment in these sectors is still down on 2009, productivity in both of them has skyrocketed. I calculate that productivity in manufacturing industry is up close to 15pc in the first half of 2010. Despite that, employees’ wages in manufacturing industry have been cut. As a result, there has been a huge drop in unit wage costs in the manufacturing and export sectors of the economy, at a time when these costs have risen in most competitor contries.

This has its advantages and disadvantages. The advantage is that Ireland’s manufacturing and export base is becoming very competitive again. It never was uncompetitive, but in 2007 it was less competitive than it was in 1998. Now, it is fast approaching its 1998 level of competitiveness again. So, as you say in your post, that sector is likely to do very well in coming years. The disadvantage is that little of the growth in manufacturing and exports will work its way into consumer spending in 2010. GDP growth will be greater than GNP growth and the profits of MNCs (I work for one myself, so I am not anti-MNCs) will increase sharply. That much I agree with you on for 2010. However, the key point is that there is no reason why this should be repeated year after year. The sharp increase in competitiveness in these sectors only needs to be a one-off. There is no need for unit wage costs in these sectors to be reduced by 15pc every year, especially as they normally rise in other countries every year. Once these sectors are at a competitive level, which they clearly now are, wages can be increased in line with productivity growth as they historically have been, which will then feed into consumer spening. The scenario of the manufacturing and export sectors growing strongly, but with none of that growth working its way into the domestic economy, is implausible over the medium- and long-terms, although it is plausible over the short-term as the one-off massive increase in competitiveness occurs.

The government’s budgetary adjustment programme is predicated on annual tax revenues increasing, as a result of economic growth, from €31.1b (2010) to €39.5b (2014).

But where are the signs of that economic growth?

Unemployment has already reached 13.8% in July even though the government predicted it only to reach a rate of 13.2% by year-end. Core retail sales fell in July, the third such fall in the last four months. The seasonally-adjusted volume of retail sales was lower in July than in January. Mortgage arrears continue to increase.

And where is the economic growth to generate these revenue increases going to come from if the domestic economy is trapped in debt-deflation?
The export sector can help but it comprises a relatively small proportion of overall economic activity. Even if it were to do very well (very likely given domestic cost deflation), that would not compensate for a domestic economy that was doing very badly.

“How can JTO’s assertion that tax receipts are on target and Cormac Lucey’s that they are 9% below last year’s be consistent ?”

Answer: because the government has set low-ball tax revenue targets for the full year that feature tax revenues picking up in the latter half of this year.

At the last budget, Brian Lenihan projected that GNP would drop 3% this year but that tax revenues would drop 6%. In addition to putting in a lowball estimate of tax receipts, Lenihan backended his schedule of expected tax receipts. That is to say the pattern of expected tax receipts in 2010 is skewed more towards the end of the year than the pattern of actual tax receipts in 2009.

It is in this way, despite tax revenues being down 9% YTD compared to 2009, that the government can assert that tax revenues are “broadly on target”.

As a simple person, I focus on the facts that I can easily comprehend:
a. the government forecast that GNP growth would be -3% for the year.
b. the government forecast that tax revenue growth would be -6% for the year.
c. tax revenue growth to the end of July was -9%.

For me, fact c. is the salient fact. How the Department of Finance schedules their tax targets within the year is of no interest to me unless there is a technical reason (change of tax rates/payment deadlines) to justify it.

How can JTO’s assertion that tax receipts are on target and Cormac Lucey’s that they are 9% below last year’s be consistent ?

JTO again:

Seafod, it is because the government’s target is for a 6pc fall in 2010 as a whole (ie in year to December). And, as Eoin says, they also have a target to cut spending by that amount roughly as well. So, if tax and spending both hit target, the deficit should be down a fraction in 2010.

If the year ends with tax receipts more than 6pc down on 2009, then they are below target. If the year ends with tax receipts less than 6pc down on 2009, then they are above target. At the start of the year, they were 17pc down on 2009. Now in the first 8 months to August, its 9pc. So, its closing in on the target of 6pc by December. Touch and go whether it makes it. Dept of Finance estimate they are 0.7pc behind target in August, but it was 1.6pc behind in June. All we can say at this stage is that they will be very close to the government target of a 6pc fall. Possibly a little below, possibly a little above. But, only about a couple of hundred million either way. The point I made about the medium-term requirement being to cut the deficit by about 12 billion rather than the 20 billion Cormac Lucey said is much more important.

“How can JTO’s assertion that tax receipts are on target and Cormac Lucey’s that they are 9% below last year’s be consistent ?”

Cos we’re expecting less than last years (but we’re spending less as well).

He quotes Pimco as saying Greece is insolvent and the PIIS as close behind. Also the european banks stress tests were applied to only some of the libilities and that other liabilities seem to have been hidden. No details.

?Derivatives?

ABC TV in Oz.

Your calculation over-states the problem by a factor of almost 2.

(a) ESRI forecast the exchequer deficit in 2010 at 17.6 billion, not 20 billion. Of course, if you add in all the bank stuff, its 31.3 billion, which is the general government deficit. However, regardless of whether one thinks that should be included or not, its a one-off and drops out of the calculations in later years. ESRI put the general government deficit next year at 16.5 billion. So, the starting-point is not 20 billion, but around 17 billion.

Of course, ESRI might be wrong. Their forecast depends on tax revenue coming in on target. So far in 2010, it more or less is on target.

(b) There is no requirement whatever to eliminate the budget deficit completely. Most countries have never come within a sniff of having a budget suplus. Most countries run budget deficits each and every year, and always have done. The question is: what size of deficit? Under the Stability Pact, the only requirement is to get the deficit down to 3pc of GDP, which equates to about 5 billion. All but a handful of countries are way above 3pc at present.

So, the gap that has to be closed is about 12 billion (from around 17 billion to around 5 billion), not 20 billion.

a. bringing the ongoing public finances back into balance; and
b. plugging the hole in the banking system.

Simultaneously, Ireland faces a major economic challenge:

c. debt-deflation (a la Irving Fisher) at a time when we don’t have the monetary tools to address this and are being forced to turn off the fiscal tools which might ameliorate it. Every single one of Fisher’s debt-deflation characteristics are at loose in Ireland today.
http://en.wikipedia.org/wiki/Debt_deflation

Looking at the three problems in turn …

a. Ongoing Public Finances

The government is spending about €50b each year while it takes in about €30b in taxes. The government projects (Budget 2010 documentation published last December) that annual tax revenues will grow by about €2b each year for the next four years (i.e. by about €8bn over that entire period).

Yet tax revenues are currently running at 9% below last year’s levels. With ongoing debt-deflation in the domestic economy, I find it very hard to see where tax revenue growth will come from. (Perhaps I’m being overly pessimistic).

But suppose I’m right … that would mean that the budget adjustment of circa €20b would have to be nearly entirely financed by cuts. If one were to bridge the €20b gap overnight, here is what might be required:
i. property tax based on square footage: €1b
ii. higher tax of lower paid: €1b
iii. slash capital budget from €6b to €2b: €4b
iv. apply those McCarthy recommendations not yet implemented: maybe €2b
v. that leaves €12b to be financed through welfare cuts and public sector pay and pension cuts of the order of 30%

It is highly questionable whether this is politically possible.

b. Plugging the Hole in the Banking System

The NAMA model of LTV is highly questionable when one considers (i) that we are coming out of one of the largest financial bubbles in human history (in terms of credit growth/GNP) and (ii) the scale of physical oversupply in every property class at a time of debt-deflation, parlous economic growth and renewed emigration.

NAMA is serving a purpose in avoiding a fire-sale of Irish property assets. But it is doing that with the taxpayer taking over the equity risk in property assets which continue to fall and - in my opinion - have much further down to go. And what about Irish banks’ mortgage loans and loans to commercial companies which are dependent on the health of the domestic economy?

Constantin Gurdgiev has estimated that the entire Irish banking system rescue may cost 35% of GDP this year. I think it will cost more as the interaction of three crises (government finances, banking and EMU-induced debt-deflation) will act in a thoroughly toxic way here (in a manner which will be the inverse of the benign interaction of these factors between 1997 and 2007).

c. Debt Deflation

These are the steps which Fischer identified as comprising debt-deflation:

“Assuming, accordingly, that, at some point of time, a state of over-indebtedness exists, this will tend to lead to liquidation, through the alarm either of debtors or creditors or both. Then we may deduce the following chain of consequences in nine links:

1. Debt liquidation leads to distress selling and to
2. Contraction of deposit currency, as bank loans are paid off, and to a slowing down of velocity of circulation. This contraction of deposits and of their velocity, precipitated by distress selling, causes
3. A fall in the level of prices, in other words, a swelling of the dollar. Assuming, as above stated, that this fall of prices is not interfered with by reflation or otherwise, there must be
4. A still greater fall in the net worths of business, precipitating bankruptcies and
5. A like fall in profits, which in a “capitalistic,” that is, a private-profit society, leads the concerns which are running at a loss to make
6. A reduction in output, in trade and in employment of labor. These losses, bankruptcies and unemployment, lead to
7. pessimism and loss of confidence, which in turn lead to
8. Hoarding and slowing down still more the velocity of circulation.

The above eight changes cause

9. Complicated disturbances in the rates of interest, in particular, a fall in the nominal, or money, rates and a rise in the real, or commodity, rates of interest.”

They are all present in Ireland today but we lack access to the remedies which Fisher suggested:

“Unless some counteracting cause comes along to prevent the fall in the price level, such a depression as that of 1929-33 (namely when the more the debtors pay the more they owe) tends to continue, going deeper, in a vicious spiral, for many years. There is then no tendency of the boat to stop tipping until it has capsized. Ultimately, of course, but only after almost universal bankruptcy, the indebted-ness must cease to grow greater and begin to grow less. Then comes recovery and a tendency for a new boom-depression sequence. This is the so-called “natural” way out of a depression, via needless and cruel bankruptcy, unemployment, and starvation.

On the other hand, if the foregoing analysis is correct, it is always economically possible to stop or prevent such a depression simply by reflating the price level up to the average level at which outstanding debts were contracted by existing debtors and assumed by existing creditors, and then maintaining that level unchanged.”

We cannot avail of the remedy. We cannot reflate the price level up and we will be constrained by the EU in how much fiscal relief we can apply. We are stuck in debt-deflation.

Bottom Line

We make an intellectual error in examining each problem in isolation from the others. They are interdependent and they are interacting in a toxic manner.

I cannot see how it could be politically possible for an Irish government to fix both our public finance problem and our banking system under the current conditions of debt-deflation.

Something must give.

As of closing last night, the spread between Irish and German 10-year govenrment bonds implied a market expectation of a 28% loss on Irish bonds.

It is unlikely that there will be a total loss to Irish bond-holders. So the expecation of a 28% loss is unlikely to represent an expectation that there is a 100% probability of a 28% loss. It more likely that current bond prices represent a 50% expectation of a 56% loss. That is how serious things are.

The market believes that something must give. Normally when the market believes that, something does give.

The bonds due April 2021 were issued at an average yield of 5.973 percent. That compares with an average yield of 4.171 percent at a previous auction of the same-maturity debt on March 10. Today’s auction attracted bids for 2.6 times the amount offered, compared with a bid-to-cover ratio of 1.6 in the March sale.

‘The management reserves the right to refuse admission’

It is their blog, not ours. We are but creatures of the internet

Would it not be better if certain sentences were censored / deleted rather than the entire comment? Would that not be fairer?

This site has contributors and commentators. Both need each other. This site requires both.

If however comments which have taken considerable time to type in are deleted because of one caustic sentence then the incentive to post here will be reduced.

I agree we all require to be civil when on this forum, however when blogging in public one has to be able to adopt a thicker skin, to take the rough with the smooth at times.

But I would ask you to remember that there is a symbiotic relationship between contributors and commentators, both require the other. If you are going to kill off / discourage certain commentators then you may very well end up inadvertently killing this site as well.

Just a thought.

The INBS issue looks like a ‘phantom security’

There is a post here on Alphaville explaining their use with the BoE http://ftalphaville.ft.com/blog/2010/06/14/259136/the-phantom-securities-which-haunt-the-boe-quantified/

Interestingly, Lehman bros was doing the same thing for the fed in 2008.

Comments complaining about having your comments deleted will also be deleted. Honestly, don’t waste your time.

http://www.irisheconomy.ie/index.php/2010/09/05/a-comment-on-comments/

Time to recall Dail and show Irelands serious about tackling its banking and deficit problems.

Isn’t the INBS move just the next logical step from Anglo repoing promissory notes through the CB?

It is either genius or desperation.

If you accept JTO’s analysis (and not everyone does) you then have to find another explanation for the yields.

Part of the explanation, in my opinion, is the media. The Irish media has been particularly negative, far more negative than the international media. However, the international media cannot ignore what is said here. In particular it cannot ignore calls for what is in effect a sovereign default by economists in reputable newspapers (The Irish Times, Irish Independent and Sunday Business Post). As Keynes pointed out investors not only respond to objective economic reality, but also to how they think such economic reality will be perceived.

A second factor, and maybe a much more important element, is the fact that there is an international financial (maybe also political) interest in destabilising the Euro. The way to attack the Euro is to speculate against what are perceived as the most vulnerable economies within the Euro zone. Unfortunately, this country has been placed in that category.

Our ability to access international finance capital has been one of the factors that has facilitated spectacular economic growth, but unfortunately it turns out that it is also our Achilles heal.

“EU/ECB will not let any sovereign (particularly the smaller ones like us, Greece and Portugal) default until the crisis is well and truely over.”

We’re back into chicken/egg territory here. As I see it the markets view the ‘crisis’ in terms of the short- to medium-term economic stability and viability of the PIGS - in particular their ability to service growing sovereign debt. Since they can’t achieve this entirely on their own, the question is: What is the institutional EU/IMF going to do about it? The institutional EU is leaving that question hanging by kicking the can down the road and the markets will keep pressing for a definitive answer.

And yes, as Brian Lucey points out we shouldn’t do ‘the sovereign equivalent of living on the overdraft’ (or ‘borrowing to buy ice-cream’ as I recal one of the contributors here observing this behaviour a quarter of a century ago), but it seems to be a ‘ways and means’ exercise that is consistent with the can-kicking. The hope is that some clarity on the banks and the swallowing of another does of rectal fiscitude will calm the markets and they will smile on us in the spring.

And, to an extent, I agree with JtO. The domestic economy has changed out of all recognition in the last 20 years and has a resilience to bounce back. I also expect there is huge activity in the grey and black economy. But it is being weighed down by the costs of serious inefficiencies in the state and semi-state sectors and the lack of genuine competition in the private sheltered sectors.

We need to focus on these deadweight costs before the markets force us to do so. At the very least, while the State Asset Review Group is conducting its work, the energy policies being pursued by Minister Ryan should be put on hold and subjected to a detailed cost/benefit analysis.

€4bn for INBS

(net of haircut in ECB repo window or gross, nobody said…someone should ask ….non?)

€??bn for Anglo … swap out €6bn of subbies too maybe ??
€??bn for AIB

Possibly (as a seemingly automatic backstop to market funding operations)

€?bn for BoI
€?bn for IL&P
€?bn for EBS

Add that lot to the €90bn odd of NTMA declared GGD and what have we got ? €115bn of government guaranteed and incurred debt in an economy with a GNP of between €130bn and €140bn…and by end 2010.

Then we must add the desperation factor, at what premium are the ‘covered’ institutions issuing these instruments.

Then one asks, if the bulk of issuance in Q3/Q4 2010 is by ‘covered’ institutions what implication will this have for the large NTMA syndications due in H1 2011.

Budget cutbacks of €3bn in December 2010 completely wiped out by INBS in one simple book keeping operation and nobody even gets to vote on it in the Dáil, what a democratic play

But debt issued before the ELG isn’t covered after September 29th?

So only a forward looking version has been extended surely.

http://www.irishtimes.com/newspaper/finance/2010/0908/1224278447479.html

IRISH NATIONWIDE has issued €4 billion of Government-guaranteed bonds effectively to itself.

What the hell is going on?

I would like to address some of the points you made above.

For sure public current debt to GDP/GNP does not look too bad relative to peers; but private debt is the elephant in the room. Mortgage debt alone is above 115% of GNP. According to 2Pack on the propertypin total public + private debt will equal somewhere between 225% and 250% of GDP by the end of 2011 vs the 1987 figure of 150%.

The deficit has stabilised. Perhaps it has, but it is still a substantial and it is still a deficit. At least two more deeply unpleasant budgets await us. What will further fiscal contraction do to the economy I wonder?

Your point in interest payment is a fair one but what we are paying relative to the Germans is reflective of genuine concerns about our taxpayers to repay all of the public and private debt we owe.

The decline in the number of announced redundancies is hardly a turnaround.

Competitiveness - I fully agree with you here! I would even go further and say that the housing bust is supporting this process through lower rents and lower absolute house prices. Compared to where I live in London, parts of Dublin are beginning to look like good value.

We over-built for at least five years so don’t count on housing starts (or indeed private sector construction) to add to economic growth in a material way for a number of years. Ironically, the overbuilding may create maintenance work for the sector (how long does can a property remain empty before it needs to be torn down?) but we need another way to soak up the umemployed.

Well said.

The current issue being discussed is just another symptom of the failed governance system and the popular tolerance of it.

Slow-motion government: Main operating rule: only respond to a pressing issue when it has mutated into a crisis…sorry…a dire crisis.

So this is the official or fairytale version of the Irish:

The Irish Mind. An abundant supply of that rare commodity you’ll need to bring your business to peak performance. The Irish. Creative. Imaginative. And flexible. Agile minds with a unique capacity to initiate and innovate without being directed. Always thinking on their feet. Adapting and improving. Generating new knowledge and new ideas. Working together to find new ways of getting things done. Better and faster.

This flexible attitude pervades the ecosystem. Nowhere else will you find such close, frequently informal, links between enterprise, education and research facilities and a pro-business government. Connected by a dynamic information infrastructure. In Ireland, everything works together . © IDA Ireland

Mind the gap

Can we handle the truth?