New from Department of Finance Post author By Philip Lane Post date October 10, 2013 10-10-2013 Working Paper No.1 THE IMPACT OF THE PATENT CLIFF ON PHARMA-CHEM OUTPUT IN IRELAND 9-10-2013 Budget 2014 – Endorsement letter from the Irish Fiscal Advisory Council Categories In Uncategorized 18 Comments on New from Department of Finance ← Honohan: Adverse selection and moral hazard in forecasting and limiting arrears and loan losses on mortgages → Google’s Tax Planning 18 replies on “New from Department of Finance” The new website of the Irish Government Economic and Evaluation Srvice (IGEES) is at http://igees.gov.ie/ “The Irish Fiscal Advisory Council endorses as within the range of appropriate projections the set of macroeconomic projections prepared by the Department of Finance for Budget 2014 for the years 2013 and 2014 provided to the Council on 30 September 2013. ” Sounds like J-Lo’s criteria for endorsing…. So, would a 2014 real GDP growth projection of 1% have been “within the range of appropriate projections” or 3%. What criteria does the Fiscal Council use? This would be funny if it did not risk becoming tragic. As “benchmarking” is one of the buzzwords of the age, why not do it – solve the crisis in Ireland – by reference to what other countries that have experienced a banking crisis have done? How the Danes are doing it! http://www.evm.dk/publikationer/2013/~/media/oem/pdf/2013/2013-publikationer/18-09-13-rapport-fra-udvalget-om-finanskrisens-aarsager/conclusions-and-recommendations.ashx See page 18. “Hence, the Danish Budget Act (budgetloven) has introduced caps on government, municipal and regional spending. Due to these caps, the planned and actual development in spending in each individual year has been restricted, as the caps for the following year must be reduced if exceeded by a corresponding amount. To provide the right incentive to stay within the financial limits, including complying with the caps on spending, municipal and regional sanctions have been introduced. These rules make collective and individual off-setting against the block grant possible. The Budget Act also implements the provisions of the fiscal compact on a budget balance rule and an automatic correction mechanism. The budget balance rule is deemed to have been complied with if the annual structural deficit is at the same level as the Danish medium-term budgetary objective, however with a lower limit for the structural deficit of 0.5 per cent of GDP. In case a deviation from the rule is deemed to exist, such deviation must be corrected. Moreover, legislation stipulates that The Economic Council must be an “independent watchdog” in relation to fiscal policy and caps on spending. Hence, The Economic Council must assess, on an ongoing basis, whether the caps on spending are balanced with the medium-term projection and whether the caps on spending are exceeded.” How the Swedes did it. http://www.bportugal.pt/pt-PT/OBancoeoEurosistema/Eventos/Documents/LJonung_paper.pdf Pages 9 and 10. “Eventually, as a lagged response to the crisis, a fiscal framework was constructed in a rather lengthy political and administrative process. Actually, this process still continues. A first step was a report published in 1992 by ESO, a think-tank of the Ministry of Finance. This report, put together by non-political experts and civil servants, recommended a top-down approach in the Parliament for the government budget, a stronger position for the Prime Minister’s office and the Ministry of Finance in the internal budgetary process and full coverage for the financing of government expenditures. The report was inspired by a study by Jürgen on Hagen demonstrating that the Swedish budgetary process was one of the weakest in the EU, next to that of Italy. The ESO report contributed to a parliamentary reform in 1994 encompassing a top-down approach where the Parliament first decides the total volume of expenditures and then the distribution of expenditures across 27 specific expenditure areas. The calendar year became the basis for the budget. From January 1997 an extended fiscal framework was put in place, including a central government expenditure ceiling designed to cover three years ahead, a budget margin serving as a buffer between the expenditure ceiling and the expenditure appropriations, all decided by the parliament, abolishment of open-ended appropriations and monthly auditing of government expenditures relative to budget decisions. In 1998, a surplus target for general government net lending was introduced to be implemented from 2000. Public finances are required to show a surplus of 1 per cent over the course of a business cycle for the whole public sector. The surplus target is commonly viewed as a buffer for economic fluctuations and demographic changes. In 1999 a balanced budget requirement for local governments was made into law to be implemented from 2000. The next building block of the fiscal framework was put in place in 2007 when a fiscal policy council was established by the center-right government that came into power in the election in the fall of 2006. The process of developing the fiscal framework has continued. In 2010 a new budget act stipulated that the use of the expenditure ceiling and the surplus target was mandatory.” Sweden was not, of course, a member of a monetary union. To all intents and purposed, Denmark is as it is in the ERM II stage i.e. the Danish krona fluctuates within very narrow margins relative to the euro. The banking bust in neither country is in any way comparable to what has happened in Ireland in terms of severity. The Swedes conceded that there budgetary process was the worst in the EU. And Ireland’s? For “there” in final sentence, read “their”. @ Kevin Denny The underlying assumption in this new service is that there exists something called “government” with fixed and immutable parameters. This may well suit those presently benefiting from this fiction. There are many activities undertaken by government the justification for which is tenuous, to say the least. @Jagdip Funny stuff! First, given the difficultly of forecasting the Irish economy (indeed any economy), not having a range for endorseable forecasts would be absurd. Based on past forecast errors, the liklihood that the forecasts for real GDP for the year ahead are beyond +/- 0.7 percentage points of the central forecast is 80 percent! Similar results apply if the forecasts are from the CBI, ESRI, OECD, IMF etc. This should also give pause in using just central forecasts in considering whether key budgetary targets as a percentage of GDP will be met. Second, on reporting the endorasable range we use, my initial thought was that we should report the range, anticipating exactly the objection you raise. However, wiser heads convinced me that this could open the endorsement process to a risk of gaming, should a future DoF be so inclined. I should also note that our endorsement exercise goes beyond an analysis of the numerical forecasts and includes a evaluation of the forecasting methods used and the internal consistency of the forecast set. We will be providing an overview of the endorsement process we used as well as an assessment of the forecasts in the next Fiscal Assessment Report. As alway, thanks for your continuing interest. It is important that the overseers are overseen. @ John McHale With all due respect, what is the Fiscal Council overseeing? Forecasts? http://www.ft.com/intl/cms/s/0/9431c222-3108-11e3-b991-00144feab7de.html#axzz2gsBksVLR DOCM: I have no idea what you mean, if anything. @ kevin denny Let me put it like this! I invite others to consult the link you provided and ask themselves what is meant by “government” in the references therein. The tasks of modern government are multifarious and not suited to any form of standard evaluation. I quote; “The Irish Government Economic and Evaluation Service (IGEES) is being developed as an integrated cross-Government service to enhance the role of economics and value for money analysis in public policy making.” This is entirely the wrong approach; a fact reflected in the sums of money spent annually on outside “consultants”. @ kevin denny I should add that, if we are looking for the right approach, we should look to the Scandinavian countries where the distinction between public and private sector is not even up for discussion because the basic guaranteed employment conditions in both are similar and there is free interchange between them. @ All FYI an interesting link posted by john gallaher on how Ireland’s parlous finances are figuring in the efforts to build a coalition in Germany. http://www.sueddeutsche.de/wirtschaft/direkte-bankenhilfen-irland-als-koalitionshindernis-fuer-grosse-koalition-1.1791400 From wandering horses to wandering camels; the development of Dublin under global warming and austerity! http://www.irishtimes.com/news/ireland/irish-news/escaped-camels-recaptured-in-north-dublin-1.1556350 Cartoon of the day Sakharov Prize: Courage recognised 10 October 2013 Al-Mustaqbal Beirut http://www.presseurop.eu/en/content/cartoon/4219611-courage-recognised @ All FYI http://www.irishtimes.com/news/politics/eu-support-for-ireland-becomes-sticking-point-in-german-coalition-talks-1.1556619 Michael Hennigan has a lot to answer for. I read the DoF Working Paper but it appears to me to be confused. For example, let’s take two scenarios: (1) Multinational Company X employs 1,000 people in Ringaskiddy and produces a patented drug ACME for high blood pressure which sells at €20 per prescription. X sells its output into international supply chains and, for tax advantages and unrelated to production costs, values its sales at €1bn. This €1bn is included in Irish export statistics and could show up as an export to either Armenia or Zambia depending on where the HQ in the US decides that the product is to be shipped to. Some tax is paid on the profits declared in Ireland by the multinational. (2) ACME comes off patent and must now compete with generics and can only sell for €5 per prescription. Company X continues to employ 1,000 people in Ringaskiddy paying them the same wages and using the same shipping services and all other services (electricity, water, rates, etc. ) but now exports ACME and MAY OR MAY NOT continue to value its output at €1bn. If Company X values the output at less than €1bn this is apparently the ‘patent cliff’ and the value of Irish exports reduce. Less corporation tax may or may not be paid but the essential point is that no employees have been laid off nor has Company X lessened its spending in the local economy. For some reason – unknown to me – this is apparently of interest to economists. It’s certainly not of concern to the 1,000 employees in Ringaskiddy nor for the various other companies providing services to Company X. Is it possible that the multinational sector and globalisation in general has rendered meaningless much of international trade statistics and particularly any attempt to analyse the ‘patent cliff’ as it applies to Ireland? I suspect the only real measures of economic activity in Ireland are (a) the numbers in paid employment; (b) the number of people actively seeking work, and (c) the actual tax collected each year. The latter has the advantage of capturing activity in the black economy since even the plumber getting cash in hand for his work still has to buy diesel for his van and spend his money on various goods and services for which he cannot avoid tax. As every business knows ‘Cash is king’ and actual tax collected each year is probably the best indicator of what is really going on in the economy. @ Elia Jobs data certainly help to counter the fairytales and the biggest prize should go to last week’s fantasy from the American Chamber of Commerce: more investment in 5 years than in the previous 58 and just 3,300 jobs added. The patent cliff paper is surreal. The patent expiries resulted in GDP falling by up to 1% annually while not only have services produced by digital accounting transactions at big multinationals not offset this but: “The current growth in services exports points to the capacity for considerable change in the export mix over time.” The economists use merchandise goods data before an adjustment of €5.6bn by the Central Statistics Office (CSO) when it calculated 2012 Balance of Payments (BOP) data. The difference of €5.6bn — equivalent to one-third of the annual value of indigenous tradeable exports – – relates to an adjustment for double-counting and mispricing on the original value of €92.0bn for merchandise exports. The CSO says exports may be valued using a preliminary price at the time of shipping, with the market price agreed in a later period, and adjustments are made to exports in the BOP to account for this practice where known. The other factor is that in the External Trade statistics record all goods that pass the border at the reported value, whereas merchandise in the BOP is adjusted to remove any exports / imports from External Trade statistics that have passed the border without change of ownership e.g imports that become intermediate exports and are re-imported and exported again. Most of the adjustment relates to ex-EU27 trade. The economists also say: “Ireland’s economy is particularly open and several large structural changes have been observed in recent decades. For example, computer, electronic and optical products shrank from 3.8% of GVA (gross value added) in 2001 to 1.8% in 2011. By contrast computer programming, consultancy and information service activities grew from 1.5% of GVA in the 1990s to just under 3% in the years to 2011. The potential for growth in one sector to substitute for loss in another is very real over the medium to long term.” Really? However, while Enright and Dalton reflect the official line that a jump in computer services exports by 15% in 2012 reflected improved “competitiveness” the truth is that it reflects tax avoidance and is not “very real.” It is a fantasy. Google diverted 41% of its revenues to Ireland in 2012 — a rise of 25% in revenues and its Irish “exports” while Microsoft diverted 24% of its global revenues to Ireland resulting in a 37% jump in Irish revenues and “exports” in 2011/12. If the OECD makes headway on its corporate tax reform project and the G-20 countries accept the main proposals, in future years the DoF will publish a paper on the shock fall in Irish services exports or maybe a black hole – another case of déjà vu all over again! @ John McHale John, Are you allowed to give an opinion on the components of the forecast? I assume that yo can ask for details? For example in 2014, the net exports relies on services and just 4 firms account for almost 40% of services “exports” as they are termed! @John, Thanks John, perhaps J-Lo is less discerning in what she puts her name to! Can we ask you about the Memorandum of Understanding which you signed with the Department of Finance in August, which binds you to secrecy in terms of certain information that might be provided to you by the Department of Finance. That Memorandum is here: http://www.finance.gov.ie/documents/publications/mou/mouaug2013fiscalcouncil.pdf Obviously, we couldn’t expect you to break that agreement, but are you able to confirm if, this year, the Department of Finance has indicated if any information provided to the Council in the context of its endorsement function is confidential. And in general, what types of information would be confidential. There was a time when a decent profit could be made on off patent generics. India has now entered the generic drug market and is under cutting the established generic drug producers in NAFTA. The majors are fighting back on the lack of supervision and quality assurance (FDA) at plant level without success. It gets even worse when individual US citizens are ordering Indian produced drugs online from Canada at prices negotiated by Canadian public health authorities (socialism). Some US state health authorities are encouraging their clients to buy direct from Canada. The USA is waking up to the rip off which means the gravy is going to be scarce in the prescription drug trade henceforth. @ All While the spectacle of Ireland’s “budgetary process” plays itself out, the practice in another country closer in terms of administrative history but on the other side of the world, New Zealand, may be of interest. http://www.treasury.govt.nz/budget/process Page 23 of Chapter 3 on “Planning and Budgeting”, “Putting it together; an explanatory guide”. “Ministers are expected to keep total expenses for each Vote within approved levels. These levels, called baselines, contain amounts for the coming year and the following two years. However, the mix of outputs purchased may be changed so long as total expenses do not exceed approved baselines. This baseline system avoids small incremental increases in costs adding up to signiﬁcant additional spending, which may undermine the Government’s agreed ﬁscal and policy objectives. The baseline system also provides greater certainty for medium-term planning by departments.” The role of the relevant committees of the parliament may also be noted. Comments are closed.