The Irish Economy
Commentary, information, and intelligent discourse about the Irish economy
The end-year numbers are out: the statement is here.
Tax revenue is now coming in consistently above target, which implies that the economy is growing faster than was predicted at the time of the December 2009 budget. Tax revenue has been well above target in each of the past 5 months. At end-July, tax revenue was 270m behind target, but by end-December it was 703m above target. In December alone, tax revenue was 233m above target. This equates to 11.5 per cent above target in December, which is a very sizeable amount. In December, not only was Corporation Tax way above target, but so was Income Tax. Corporation Tax has been coming in consistently above target for months, as output in the wealth-producing export sector is growing strongly, but Income Tax coming in well ahead of target in December (to the tune of around 10 per cent on my quick calculations) is very surprising. I don’t know if that one is a freak or not.
So far, so good. But, it is deplorable that government spending has hardly been cut at all, despite the fact that Ireland has had negative inflation since early 2008. For all the media sob stories, and all the Opposiution clamour, about how spending cuts are devastating the poor and huddled masses, there haven’t actually been any cuts of much significance, when averaged over all sectors. The reality is, that when one takes account of the fact that cumulative inflation in the UK has been 10 to 12 per cent higher than in Ireland since 2007, the real cuts in welfare spending there have actually been greater. This is deplorable. Given the negative inflation of the past few years, there should have been sizeable cuts.
Two dumb question:
Why is it considered an achievement to have revenues down by over 1 billion?
If you want to come in ahead if target all the time don’t you just have to set low targets?
So almost 60 billion of total voted and non-voted current+capital expenditure in 2010, down about 100 million from last year
/sarcasm hurray we turned a corner!
Spending was down for all departments except Social Welfare. The obvious reason for that would be that the number of social welfare recipients went up.
Some perspective on our 18.7 billion euro deficit…
California has an 18 billion dollar deficit. and a 1.7 trillion dollar economy.
Is California now an independent country? Strange, I was there not too long ago and I didn’t notice it. I must be more observant in future. Assuming it is still part of the US, I’m afraid that you’d have to include California’s share of the Federal Deficit as well. When you do that, its budget deficit as a percentage of GDP is very similar to Ireland’s.
I wonder why I don’t see hordes of people emigrating from CA to IRL then.
Are receipts from the Income Levy included in with (conventional) income tax? If so, does this mean that the reduction in income earned is greater than the figures suggest, i.e. the imposition of the Income Levy has increased the tax take as a percentage of income earned?
I suspect too that the pension levy is “income” rather than a reduction in expenditure.
I’m happy to be corrected but total tax take seems to be off around 4%. Counterbalancing non tax take is up 220% but is made up of contributions which arise from the banking debacle.
Interest on the national debt seems to be up 60%, and, given the sorry state of said banks, non-voted capital expenditure is likely to be painful once more in 2011.
Sure things are just dandy – now that the clowns have picked a low enough number to meet and beat all is rosy again in the garden. Never mind the deficit of some 18bn on a tax take of 31bn, not to mention the ever increasing interest bill. I am so excited about what 2011 will bring – break out the champagne!
Happy New Year to one and all!
Agree with you on the lack of actual cuts to spending. Its been spin over substance there and we have been largely deluding ourselves (and the world i might add) in that regard for 2 years now.
I only posted that article regarding california because i thought it was interesting to see how they were dealing with a similar issue. I dont know in how many ways ireland and california would differ as far as making a comparison goes, but for the separate contribution they are making to the federal deficit…you could take the separate contribution ireland is making to prop up our banks.
my opinion has always been that the actual “cuts” we have made to spending in the last 2 and a half years have been negligible and that is a big reason why our budget deficit has barely changed in that time.
It’s the old irish failing of saying we are going to do all sorts of things…and then we inevitably do sweet FA.
Like Tommy Cooper, its the way you tell ’em. Or was that Frank Carson?
Income tax for Dec is up 102million or 12.7% on profile but it seems to me that the profile of 803 million in income tax for Dec was extremely low, possibly in error.
Vat however for Nov/Dec together is down 1.6% with Dec down 22.3%. The January VAT returns will now be very significant.
Cannot agree with you on social welfare cuts. Try living on it. It is usually not a lifestyle choice. Reasonable progress is being made on current spending reductions but it appears to be in front line services as distinct from the real lard which is at or close to the top. Witness today with over 500 people on trollies/chairs. Now that is deplorable!
Not sure I can agree on the cuts issue. Drive on a pothole puckered road to an overcrowded A and E and I dunno!
The money is being cut alright
Did the fact that we stopped borrowing at the end of 2010 and that the money to Anglo was paid in 2009 have any impact on the figures? And is there any significane in the NPRF figures?
i think it is being cut in some easy to cut areas…but the opposite is happening in other areas…and the net effect is standing still.
The idea that there were vast areas of easily identifiable waste that could be cut by an act of will was always a fantasy. Much of the civil and public sector was already understaffed before the crash. The fact is that public sector spending didn’t keep up with either the size of the economy or the size of the population during the boom years.
@Noel – “now that the clowns have picked a low enough number to meet and beat all is rosy again in the garden”
I think you hit the nail on the head. The spin push has been on ‘the new reality’ – let’s ignore what we did or what we should really be taking in and instead focus on the newly moved goalposts. People en masse are so easy to fool. We need to pay more taxes in Ireland and cut more fat/spending. Simple as that (and I include corporation tax in that statement).
The two worrying figures on the expenditure side are the increase in Social welfare of 2.7 billion and the increase in national debt interest payments of 1.55 billion.
The national debt interest has more than covered for the huge 1.2 billion (10%) cuts in Health.
No doubt the interest will increase by at least the same amount next year (more likely to be much more) So what large expenditure dept will take up that slack this year?
The good news is that social welfare is not going to increase by that amount again this year. My guess is that it will be flat or even come down a little.
I think what the figures are suggesting is an extrapolation of what some commentators have been saying for a while.
This level of deficit is not getoutable without debt forgiveness/bondholder burning/restructuring.
It is also important to remember that due to our Enron style accounting the Nama stuff is not even included.
@ Eamonn Moran
The numbers come out slowly but they will show eventually that the debt servicing costs and the cuts required to pay for them are strangling the economic growth required to get out of the debt deflation hole that the country now finds itself in.
70% of Health spending is salary related and that can’t be cut under Croker. Until when?
Back in October Irwin Stelzer put it to FF minister Martin Mansergh that austerity on the scale that FF was committed to had sent the economies of other countries on a similarly shaky scraw into a downward spiral and he was told that this would not happen in Ireland.
What was that about negative inflation meaning we should have even greater cuts?
Anyone who lives in the real world knows that the cost of living is only going in one direction and that’s up. Petrol? Car insurance? House insurance? Contents? Food? You name it, it keeps going up.
Everybody seems to be missing the elephant here. At the start of last year USD/Euro was about 1.40 and now it about 1.31.
With a large percentage of Irish exports in USD and costs mainly in euro for the international sector you expect to see a big increase in sales and profitability of the internationally traded sector. Which is what we saw.
This is nothing to do with “stabilisation” as the previous words used by this administration the words become so over used they cease to have any meaning. Words such as “manageable” and “systemic” now mean nothing and can be dropped into an Economic argument and just become waffle. How an administration that is spending about 3 euros for every 2 euros revenue can call that “stabilisation” is beyond me and is a classic from the Muagbe school of economics. Eventually stabilisation will become to mean we are well are truely in the S*** or whatever you like yourself minister.
As for this comparison with California the US has a very similar problem to Ireland coming down the line and they would be in same boat as us at the moment only that they allowed some banks to fail. It is only a matter of time as Obhama has done little to tackle the fiscal deficit and has responded only by printing dollars. Comparisons with CA are facile as you need to project a year or two into the future to see what happens when the Chinese decide they have enough American paper
America is in a major quandry alright. Very hard to call all this in two years. Possible the markets will manipulate a crisis before the Presidential elections to get in a Republican.
I know every generation tends to think it’s in peril but there’s quite alot of geopolitical instability to factor in too.
The Exchequer Accounts are useful in some ways but they leave a lot of important information hidden.
The Exchequer Account does not give a full measure of tax revenue. Motor Tax, Rates and, most importantly, PRSI contributions are not included. These came to €11.5 billion in 2009 but we have little information on their performance in 2010.
On the expenditure side we only get a partial picture into social welfare expenditure. The total social welfare bill for 2010 will be around €20.5 billion. The Exchequer Accounts show expenditure by the Department of Social Protection of €13.2 billion. The remaining social welfare expenditure comes from the Social Insurance Fund (SIF), into which PRSI contributions are paid.
At the end of 2008 the SIF had a surplus of €3.4 billion. Two years later and that surplus has been wiped out and more. In fact, €1.5 of the increase in expenditure by the Department of Social Protection is due to a transfer to the SIF to ensure that the fund can meet it’s payment obligations. The Social Insurance Fund is bust!
California is hamstrung by its political system. Any attempt to raise taxes has to go to a referendum, IIRC.
Republican greed is going to destroy the US.
@JTO It seems, from looking at Dr. Gurdgiev’s blog, that all the money Lenihan has ‘saved’ by cutting spending and raising taxes is about the same as the increase in debt that will be paid due to the increased cost of gov’t borrowing in the period since the crisis began – an increase not unrelated to his – er – management of the economy. There is surely life in the exporting economy but that’s not going to be nearly enough to get us out of this.
@Jules – “With a large percentage of Irish exports in USD and costs mainly in euro for the international sector you expect to see a big increase in sales and profitability of the internationally traded sector. Which is what we saw. ”
Are you trying to suggest that our dear leaders are trying to bamboozle us with smoke and mirrors and waffle-words and this isn’t the wonderful recovery we have all been promised? Surely not?
I see the jobless figures were up in December. Which is a bit worrying given how many people on the dole took temporary employment over Christmas. At least all those who said, “I’m just having Christmas in Ireland then I’m off abroad” will keep the figures down in the New Year.
Trebles and mass migrations all round.
I am very surprised at the lack of debate on these figures between the various academic economists who were such entertaining protagonists in the run-up to the budget. If I recall, John McHale from NUI Galway took a quite optimistic line in regard to reducing the budget deficit, while many others took a much more pessimistic line. In so far as they are of value, these figures clearly support the John McHale line. They don’t show with any certainty that he will be proved correct, as it is early days yet, but they point in that direction. This is my brief analysis of them.
First, as I predicted at the time, the Dept of Finance’s upward revision in early October last to their 2010 budget deficit forecast, from 11.6% of GDP to 11.9% of GDP, has proved completely wrong. When they made this upward revision on 3rd October 2010, they called in the world’s financial media to inform them of it, and it made headline news across the world, leading to an immediate increase in interest rates on Irish Government bonds (anyone interested in seeing how the news was received worldwide, google: “Ireland’s budget deficit revised up to 11.9 per cent of GDP”). The upward-revision to the deficit forecast triggered a thread on this site and was reported in the FT as follows:
At the time, the explanation given by the Dept of Finance was that the economy had slowed during the summer and that, consequently, tax revenue would fall short. I challenged the Dept’s upward revision to the deficit forecast on this site a couple of days later in a thread called ‘Death by a Thousand Cuts’ opened by John McHale.
This is what I posted on John McHale’s thread (on 5th October 2010):
“Any continuation of the trend of Q2 and Q3 into Q4 will lead to tax receipts in 2010 being above target, not below, as every commentator has claimed in recent months.”
Yesterday’s exchequer returns show that my forecast was correct. Tax revenues ended up over 700m above target. As spending was virtually on target, the deficit has also ended up about 700m lower than the Dept forecast on 3rd October last, putting it in the range 11.4%-11.6% of GDP, not the upwardly-revised 11.9% of GDP that the Dept of Finance predicted then.
The reason we can not be completely precise yet about the budget deficit as a percentage of GDP is that GDP figures for 2010 Q4 have not yet been published. We know the size of the deficit in 2010 in money terms but not yet nominal GDP in 2010 in money terms. In its deficit forecast of 3rd October 2010, the Dept of Finance assumed that nominal GDP in 2010 would be 157,300bn. If that proves accurate, the budget deficit will be 11.6% of GDP, and not 11.9%. However, there is a reasonable chance (not a certainty) that GDP in 2010 will be higher than this. The seasonally-adjusted figures for nominal GDP for the first 3 quarters of 2010 are as follows:
If Q4 nominal GDP was to be the same as in Q3, then nominal GDP in 2010 would be 157,702bn, not 157,300bn. That would leave the budget deficit in 2010 at 11.5% of GDP, fractionally lower than in 2009.
If Q4 nominal GDP rises by 2.6% or more over Q3, the budget deficit in 2010 then comes out at 11.4% of GDP.
If Q4 nominal GDP falls by 0.9% or more over Q3, the budget deficit in 2010 then comes out at 11.6% of GDP.
Anything in between, and it stays at 11.5% of GDP.
So, as of now, the most likely outcome for the budget deficit in 2010 is 11.5% of GDP, with smaller likelihoods of it being 11.4% of GDP or 11.6% of GDP. I have made no allowance for any CSO revisions to allready-published figures for nominal GDP. Sometimes nominal GDP is revised up, sometimes it is revised down, sometimes it is left unchanged. One of the site organisers (Philip Lane, I think, but I might be wrong, posted on this site back in November that he had contacted the CSO and they had informed him that they had no plans to revise the allready-published figures for GDP in 2010. So, I have worked on that assumption.
The bottom line is that the deficit in 2010 has turned out to be significantly lower than the Dept of Finance was telling the world’s financial media in early October last. Once again, their incompetence has proved damaging to international sentiment regarding the Irish economy. The least they can do now is call in the same financial journalists that they called in on 3rd October last and inform them that their earlier forecast has proved inaccurate.
So, it looks now as though the budget deficit as a percentage of GDP in 2010 will be fractionally lower than in 2009. If we consider only the full year 2010 compared with the full year 2009, the fall is tiny, perhaps 0.1% or 0.2% of GDP, hardly worth bothering about. But, the trend during the course of 2010 is also important. Unlike some countries, the Dept of Finance does not publish seasonally-adjusted quarterly figures for the budget deficit. All we have is the full year figure. But, if it did publish seasonally-adjusted quarterly figures for the budget deficit, it is very likely that they would show the deficit significantly above 11.6% of GDP in the first half onf 2010, but significantly below 11.6% of GDP in the second half of 2010. This is fairly claear from the figures for tax revenue in each quarter of 2010 over the corresponding quarter of 2009. For full year 2010, tax revenue was down 3.9% on 2009, but taken quarter-by-quarter the figures are:
Q1 2010: tax revenue DOWN 15.0% on Q1 2009
Q2 2010: tax revenue DOWN 1.4% on Q2 2009
Q3 2010: tax revenue DOWN 2.0% on Q3 2009
Q4 2010: tax revenue UP 2.6% on Q4 2009
So, clearly an improving trend as the year progressed. In addition, seasonally-adjusted nominal GDP also increased as the year progressed. In Q1 2010, it was 3.2% higher than in Q4 2009; in Q2 2010, it was 0.2% higher than in Q1 2010; and in Q3 2010, it was 0.8% higher than in Q2 2010 (bringing the total increase between Q4 2009 and Q3 2010 to 4.1%). So, although nominal GDP in full year 2010 won’t be much different to full year 2009, it will be significantly higher in Q3 and Q4 2010 than in Q3 and Q4 2009.
So, the bottom line is that the deficit as a percentage of GDP peaked at significantly above 11.4%-11.6% of GDP in the first half of 2010, but had fallen to significantly below 11.4%-11.6% of GDP by the second half of 2010.
Let’s now turn to the outlook for 2011.
A reasonable assumption is that the government will stick to its spending targets. They did so for 2009 after the April 2009 budget, and they did so in 2010. Government spening in 2010 was almost bang on target. I was disappointed that it wasn’t below target in 2010 because of the lower-than-predicted inflation, but it wasn’t above target either. So, I’m assuming that the same will happen in 2011.
If so, then to reduce the budget deficit to 9.4% of GDP in 2011, the government must achieve its target for tax revenue in 2011. In the recent budget, the government estimated tax revenue in 2010 at 31,530bn. Its target on a like-for-like basis for 2011 is 32,900bn. That means that the target it has to achieve to get the deficit down to 9.4% of GDP in 2011 is an increase in tax revenue of 4.3% in 2011 over 2010 (as estimated in the budget). That is hardly a very ambitious target.
However, the matter doesn’t end there. Little noticed in the exchequer figures for December is that tax revenue in December was 223m higher than the Dept of Finance forecast in the budget in early December. So, tax revenue in 2010 turned out to be 31,753bn, and not the 31,530bn estimated at budget time. So, the increase in tax revenue required to be achieved in 2010, to get the budget deficit down to 9.4% of GDP, is not now 4.3%, but just 3.6%, an even less ambitious target. As the quarterly figures given above showed, by Q4 2010, tax revenue was allready running at 2.6% above the level of a year earlier, a much improved situation from Q1 2010, when it was running at 15% lower than a year earlier. So, all that is required is a relatively small further improvement.
At this stage, any reasonable analysis would have to conclude that John McHale was correct in saying back in December that government targets for the budget deficit (down to 9.4% of GDP in 2010) were realistic. There is, of course, no certainty that they will be achieved. Things can go wrong. But, at this stage, they are clearly within the bounds of what any reasonable analysis would conclude was highly realistic.
Apologies for zeroing in on what is a minor detail (in the overall scheme of things) of the Exchequer Statement but it seems that the DoF has changed its classification for its €49m funding of NAMA from “shareholding” to “loan”.
In the Nov 2010 statement, there were three entries on the Statement for NAMA – a recoupable loan of €250m, a receipt (repayment) from NAMA of that loan of €250m and “Share Capital Acquired in State Sponsored Bodies” of €49m.
In Dec 2010 the DoF show a receipt (repayment) from NAMA of that loan of €250m (same as Nov) but show €299m as a loan to NAMA. On the face of it therefore a shareholding has been reclassified as a loan.
When contacted on a query on the Oct 2010 Statement (interest on the NAMA loan), DoF responded immediately but they have not responded to a query on the above two days later. Holidays, priorities etc perhaps but is there something of more significance.
Lorcan Roche Kelly first raised this matter on his blog
Any ideas on why there was a reclassification?
While some might be looking for optimism in the figures, it is hard to see this if we just look at the Current Account. Most of the budgetary action has occurred in the Capital Account but our ongoing deficit will be determined by the Current Account which is made up of four elements, three of which deteriorated in 2010.
1. Tax Revenue fell by €1,291 million
2. Non-Tax Revenue rose by €1,851 million
3. Voted Net Current Expenditure rose by €261 million
4. Non-Voted Current Expenditure rose by €1,468 million.
All told the deficit on the Current Account was €1,213 million higher in 2010 than in 2009. Graph here. This is after two years of so-called ‘adjustments’.
And things would have been worse again only for the rise in non-tax revenue. This was mainly down to an increase in the Central Bank Surplus of €415 million and receipts from the institutions covered by the Bank Guarantee Schemes of €1,333 million. Without these receipts the Current Account Deficit would have been even worse. Yet we’re led to believe that the ‘public finances have stabilised’.
Because Seamus is too moest to post, here’s a link to exchequer returns:
more to follow…
Drat, one link limit, not too…
Repost, apologies for the dupe:
Because Seamus is too modest to post, here’s a link to exchequer returns:
All with excellent graphs for us hard of attention people…
Thank you for that post. I found the charts very interesting. It is good the see the gross expenditure figures, which are rarely quoted in commentary.
Don’t thank me, thank the Coffey 😳
One interesting point from the Annual Exchequer Returns is the level of Corporation Tax at E3.9 Billion. If you assume an average CT rate of 12.5% (probably higher) then this gives Corporate Profits before tax of around E31.2 Billion a figure not dissimilar to the total of the Government Receipts for 2010. Does not say much for the ability of our Government in running the country with the aid of 100s of 1000s of employees !!!!!!!
Your analysis is over-pessimistic on several grounds:
(1) You state that Tax Revenue fell by €1,291 million in 2010.
True, but nearly all of this (€1,275) occurred in Q1 2010. After Q1 2010, in line with the improving economy, Tax Revenue was virtually the same as in the 2009, and by Q4 it was running 2.6% higher than in 2009.
(2) The budget deficit in 2010 as a percentage of GDP (11.5%-11.6%) has turned out to be virtually the same, possibly a fraction lower, than in 2009 (11.6%), and significantly lower than what the DoF and Eurostat forecast in October/November (DoF: 11.9%, Eurostat: 13%). Therefore, Minister Lenihan is perfectly justified in using the term ‘stabilisation’.
(3) Tax Revenue has been well ahead of target every month since August. In December alone, it was 11.5% ahead of what the DoF forecast in the budget in early December, meaning that the increase in Tax Revenue in 2011, needed to meet the Government’s 9.4% budget deficit target in 2011, now falls from 4.3% to 3.4%. Given that it was allready increasing year-on-year by 2.6% in Q4 2010, this is clearly a realistic target, although naturally, at this early stage in the year, it is not a cast-iron certainty.
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