25/8/2012: August 2012 MOU - a base PR touch with little substance

The new installment of the Comics, known as Ireland's MOU (Memorandum of Understanding) with Troika was quietly released yesterday, without so much as giving the media an embargoed copy or a prior notice of forthcoming release (see The Irish Times article on this).

The document was (once again) released in a pdf format that is unmanageable in the Professional version of the software, cannot be searched, cannot be easily scrolled through and loads partially possibly due to non-optimized version saved by the Department of Finance. In simple terms - the release was antediluvian in presentation - a veritable embarrassment to the Government that keeps talking about modernization in the Civil Service etc.

In terms of content, there are some comical moments of  a truly priceless nature. In the week that saw publication of the Central Bank report on Irish banks lending to the SMEs, identifying Ireland as the second worst performer in this area after Greece, the MOU opens up with the following statement, concerning targets delivery by the end of Q3 2012 [emphasis mine, throughout]:
"The authorities... will assess banks' deleveraging ... in line with 2011 Financial Measures Programme. Fire sales of assets will be avoided, as will any excessive deleveraging of core portfolios, so as not to impair the flow of credit to the domestic economy."

Furthermore, in light of the abysmal Q2 2012 data for mortgages arrears and defaults, also released this week, the MOU states: "The authorities will provide staff of the EU Commission, the IMF, and the ECB with their assessment of banks' performance with the work-out of their non-performing mortgage portfolios in accordance with the agreed key performance indicators." One wonders if the 'assessment' of performance will reference the fact that more than 1/2 of all restructured mortgages are now back in arrears (see details here).


As far as a pertinent or substantive part of the 'Financial Sector Reforms', the MOU lists (should we be surprised) only one real tangible measure to be delivered on: "The authorities will also adopt regulations underpinning the Resolution Fund Levy to recoup Exchequer resources provided for the resolution of troubled credit unions." Congratulations to the Government on consistent continuation of the core 'reforms' policy in all spheres of the Irish economy - identification of new taxes/levies/charges to milk the taxpayers. Incidentally, the Levy was not mentioned under the respective heading in MOU from May 2012.


Structural reforms section of the MOU is worth some attention, as always, if only for the complete waffle it contains. Promises to monitor, to report are thick on the paper, but details of any actual reforms are thin. As always, the MOU is really about managing PR for Ireland-Troika relations, not for actual reporting (which takes place much more via ongoing monitoring and Troika reviews).


On personal debt issues, "the authorities will ensure that a programme to facilitate access by distressed borrowers to professional advisory services, funded by banks, will be operational". Of course, not a word on such services needing to be independent of banks in the front section of the MOU, although the said reference is contained in the latter sections. In addition, one has to wonder - the scheme is not operational now and how it can be made operational between last Friday and next Thursday is anybody's guess.


On social 'support' scheme efficiencies (aka social welfare): the set of reporting targets is identical to that provided in May 2012 and majority of these targets remain unaddressed, judging by the CSO data. For example, the MOU promises progress on "Reducing the average duration of staying on the live register." The said duration is continuing to increase. MOU claims to report progress on "Increasing the fraction of vacancies filled off the live register", but there is still no actual data on this reported by the CSO - the official source for Live Register stats. "Increasing the number of unemployed referred to training courses and employment supports" in reality, per latest CSO data, is met with decreasing numbers of those in state training schemes. As per "Providing data on live register broken down by continuous duration, and probability of exit by various durations"... well, the former is normally supplied by the CSO (so no need for MOU-linked reporting) and the latter... oh, may be the Department of Finance can point me to where that has been supplied. Data 'per exit destination' from the unemployment supports - promised by the MOU - is still nowhere to be seen, as far as I know.

Since May 2012, the state was tasked to provide simple stats on evaluation of activation and training policies. As far as I know, this still has not been fully complied with.


When it comes to fiscal 'reforms' there are no new targets for either numerical tax increases (still set at "at least €1.25bn") nor for voted expenditure "consolidation measures" (still at €2.25 bn). Some folks have suggested that the numbers represent scaremongering by the Government in advance of the Budget 2013, but I must disagree - the targets were set ages ago and so far these have not changed.

There is an interesting change of course on the state asset disposals procedures for Q4 2012 MOU compliance plan, which now reads "Government will complete, if necessary, relevant regulatory, legislative, corporate governance and financial reforms required to bring to the point of sale the assets it has identified for disposal". The new bit here is the insertion of "if necessary" clause in place of March 2012 version which read "...will complete the identified regulatory..." In other words, the Government is seemingly lowering the bar for compliance with normal disposal practices.


Despite having more staff per supervised institution than any other Central Bank in the developed world, the Irish Central Bank gets 5 days extension on regular submissions of two core datasets: set C3 and C7 relating to detailed financial and regulatory information on domestic individual Irish banks etc, and deleveraging reports. Surely, not a good sign for the CBofI productivity...


Some of the best examples of the Government spin and distortion of reality are, as always, found in the Attachment 1. Memorandum of economic and Financial Policies.

Take these for examples:

• The Government reports the return of economy to growth in 2011, but, given this is now August, mentions nothing about the economic decline in Q1 2012 or about the economic conditions since.
• The Government reports a current account surplus in reference to GNP, but does not reference growth rates in GNP terms.
• The Government states that "domestic demand continues to decline - albeit at a slowing pace - owing to continuing household balance sheet repair and the still weak labour market." It fails to include in the causes of the domestic demand decline Government-own taxation policies and inflationary pressures from state-controlled sectors. That said, the Government does admit that 'administered price increases' have lifted HICP to 1.8% in H1 2012.
• The MOU states that "weak trading partner growth dampening export demand eve as further competitiveness improvements cushion this effect". This statement is pure spin, as the declines in our exports are registered in the pharma and related organic chemicals sectors where not the demand weakness, but patents expiry is the core driver. Our competitiveness gains have been flattening out or declining on productivity side, but are improving on forex side.

The MOU now explicitly references only two targets for 'addressing banks-related debts' legacy - Anglo promo notes and PTSB, which has been flagged as a scaling back of Government expectations post June 29 summit announcement already, so no surprise there.

Aside from the above, I can spot no significant changes in the current MOU compared to May 2012 MOU. The same applies to small / marginal changes in the technical MOU. Here is an example where the larger scale changes can be found (although even these are very insignificant):

13/1/2012: The need for political reforms

An interesting paper from the World Bank (linked here), by Torgler, Benno, titled "Tax Morale and Compliance: Review of Evidence and Case Studies for Europe" (December 1, 2011). World Bank Policy Research Working Paper Series, 2011 (World Bank Policy research Working Paper 5922) presents an overview of the literature on tax morale and tax compliance. Perhaps unsurprisingly, it finds that accountability, democratic governance, efficient and transparent legal structures, and crucially, "trust within the society" are important in enforcing tax compliance and tax morale.

Which offers an interesting point for observation: in 2011, trust in Irish system of government as measured by the Edelman Trust Barometer stood at 20%, against the average of 52% for 23 countries surveyed in the report, making Ireland the lowest ranked country in the study. 


But things are even worse than the above number suggests: 

• Ireland ranks lowest 23rd in terms of average trust measures across four institutions of government, media, business and NGOs
• The above result is driven by: high trust in NGOs at 53%, although this is still below global trust in NGOs at 61%, high trust in business at 46% against global trust in business at 56%, low trust in media at 38% and abysmally low trust in government.

So may be, just may be, folks, in order to improve our fiscal performance we need deep political and leadership changes at least as much as tax increases and spending cuts? Perhaps, one of the problems with Irish fiscal crisis response to date is that the current Government and its predecessor are not doing enough to make Ireland's elites more accountable, more transparent, and better governed? There's an old Russian saying that every fish rots from the head (although Chinese, British and other nations claim the origin of this phrase as well).

7/1/2012: Irish Exchequer Results 2011 - Expenditure

In the previous post I looked at the tax revenues side of the Exchequer figures for 2011. The core conclusions emerging from that analysis was that:

Irish Exchequer tax receipts did not perform well in 2011 compared to both 2010 and the target, with most of the improvement (some 80%) accounted for by reclassification of the Health Levy as tax revenue and addition of the temporary, extra-Budget 2011 Pensions Levy.

Irish Exchequer tax revenues for 2011 cannot be interpreted as being indicative of any serious improvement. Factoring in Pensions Levy and delayed receipts (Corporation Tax receipts for December carried over into 2012), overall Exchequer revenue fell 3.1% short of the target set in Budget 2011, not 2.5% claimed by the Department of Finance.

The above shortfall amounts to 0.66% of the expected 2011 GDP and 0.81% of our expected GNP and comes after significant increases in taxation burden passed in the Budget 2011, suggesting that the economy’s capacity to generate tax revenues based on the current structure of taxation is exhausted.

Subsequent posts on the topic of Exchequer balance will focus on overall balance, capital spending dynamics and relative distribution of tax burdens. This post focuses on the expenditure side of the Exchequer balance.

In general, there are good reasons as to why discussion of the expenditure side of the Exchequer balance is a largely useless exercise, rendered such by:

-       Constant re-alignment and renaming of departments, and

-        Changes in the departmental revenues (as in the case with the Health Levy reclassification) impacting the Net Voted Expenditure on Health

Here’s a good post on the above caveats from Dr Seamus Coffey which is worth a read.

So let’s consider some of the higher level figures.

Overall Net Voted Expenditure for 2011 came in at €45.711 billion, or €723 million (-1.56%) below 2010 levels and with a savings of €3.602 billion (-7.3%) on 2008. The target for 2011 expenditure was set at €46.022 billion and the end outrun implies that the Government has under-spent the target by €311 million. Note: I am referencing the original Budget 2011 target, as referenced, for example, in End-June 2011 - Analysis of Net Voted Expenditure. The Department for Finance reference figure for the annual 2011 target is €46.151 billion or €129 million ahead of the original estimate. This discrepancy is reflected in part in the capital carryover figures for 2010-2011 and 2011-2012.

Year on year, 2011 marks the third year of declining cuts. In 2009 yoy spending fell €2.150 billion, in 2010 it declined by €0.730 billion and in 2011 the drop was €0.723 billion. In proportional terms, expenditure declined 4.56% in 2009, 1.57% in 2010 and 1.58% in 2011. Cumulated net expenditure ‘savings’ since 2008 are now standing at a miserly €3.602 billion. Given that over the same period we accumulated €81.017 billion of deficits clearly shows the inadequate extent of cost reductions in the public services. Whichever way you spin it, to cover just ½ of already accumulated deficits out of cost savings achieved so far would take decades, and that before we factor in interest payments and the fact that much of the ‘savings’ delivered to-date comes out of temporary cuts to capital spending. More on this in the forthcoming analysis of capital and current spending.

Now, since we cannot clearly de-alienate actual spending, let us at the very least consider the spending priorities. These have changed over the years and changed in the direction that, while inevitable in the current crisis, is worrisome nonetheless.

Please keep in mind that although I did try to adjust as much as possible for changes in departments compositions, the data below is not fully reflective of these. Nonetheless, it does present some interesting changes in the overall spending dynamics.

As shown above,

-       Agriculture, Food and the Marine net voted spending constituted 3.36% of the total spending in 2008. This now has fallen to 2.28%.

-       Tourism, Culture and Sport accounted for 1.43% of the total spending in 2008 and is now down to 0.60%.

-       Communications, Energy and Natural Resources share actually rose from 0.54% in 2008 to 0.55% in 2011.

-       Defence saw a relatively shallow decline from 2.16% in 2008 to 1.93% in 2011.

-       Education and Skills – the third highest spending department in 2008 and 2011 – remained relatively static with 18.31% of total spending in 2008 and 18.07% in 2011.

-       Jobs, Enterprise and Innovation share of total spending fell from 2.94% in 2008 to 1.73% in 2011.

-       Environment, Community and Local Government spending fell from 6.41% in 2008 to 3.39% in 2011 – the drop that largely reflects changes in the departmental composition.

-       Finance share of spending declined from 2.83% in 2008 to 0.75% in 2011 – a dramatic fall.

-       Foreign affairs and Trade, despite gaining a new function of Trade have seen their share of spending decline from 1.99% in 2008 to 1.51% in 2011.

-       Health – the largest spender in 2008 at 27.45% dropped to the second place in spending distribution with 28.25% in 2011 despite having lost a number of functions. Adding back Children function to the DofH, the department spending share rose to 28.7% in 2011.

-       Justice and Equality accounted for 5.25% in 2008 and this dropped to 4.84% in 2011.

-       Social Protection rose from being the second highest spending department in 2008 with 19.06% (virtually identical share to that of Education) to the first highest spending department in 2011 with 29.16%.

-       Public Expenditure and Reform – a new department that, at least in my opinion is failing to show much value for money so far – has managed to rake in spending amounting to 1.71% of total net voted expenditure in 2011 – higher spending priority than Foreign Affairs and Trade, almost identical priority to Jobs, Enterprise and Innovation, more than double the spending priority of the Department of Finance. Let us presume - for a moment - that the Department has two important, related, but not fully coincident functions: bring down current spending (since bringing down capital spending is no-brainer) and produce longer-term reforms of public services (which is not all about cuts, of course). Given the numbers achieved to-date - see forthcoming post on capital and current expenditure reductions - one should have serious questions about the new department value for money.

-       Taoiseach group saw its spending priority virtually unchanged over the years, declining marginally from 0.38% in 2008 to 0.37% in 2011.

-       Transport – the department with significant compositional changes – has seen its spending share decline from 6.47% in 2008 to 4.18% in 2011.

So overall, top 3 departments accounted for 64.83% of total net voted spending in 2008 and this figure rose to 75.48% in 2011. The rate of increase in these expenditure shares has accelerated over the years. Year on year, share of the three top spending departments in overall expenditure rose 2.97 percentage points in 2008-2009, 3.80 percentage points in 2009-2010 and 3.89 percentage points in 2010-2011. Once Children function is added back to Health, the rate of increase in 2010-2011 jumps to 4.34 percentage points.

Top 4^th and 5^th ranked departments (Justice and Equality and Transport) saw their combined share of spending declining from 11.71% in 2008 to 9.02% in 2011. This largely reflects changes in composition of the Department of Transport.

Together, Social Protection, Health and Children accounted for 46.51% of the spending in 2008 and this now is up at 57.88% in 2011. In other words, almost €6 per every €10 spent by the state goes to finance the two functions that constitute in traditional nomenclature social welfare benefits and social benefits (note that private spending on health is netted out via departmental receipts in the net expenditure figures). Education accounts for roughly the same share – ca 18% of total spend – in 2011 as in 2008. Economic sectors departments (other than Transport) used to account for 6.84% of the total spend in 2008 and this is now down to 4.56% in 2011.

In short, the priority of the Government spending over the years of the crisis has shifted firmly away from supporting economy’s productive capacity and delivering structural subsidies to ‘social and environmental pillars’, to serving social welfare functions and preserving as much as possible public health spending. It is worth noting that the latter, of course, has been achieved by shifting more costs burden onto the shoulders of health insurance purchasers.

Economics 1/8/10: California's lesson for IRL?

Last week the State of California declared official emergency in relation to its fiscal shortfall. The problem, you see, is that torn between various vested interests, California's legislature is unable to approve a new budget for 2011. The State deficit is currently running at $19bn, which represents 22% of the general budget fund. As a part of emergency declaration, Governor Schwarzenegger ordered three days off without pay per month beginning in August for tens of thousands of state employees to preserve the state's cash to pay its debt, and for essential services. Now, 3 days out of each month represents roughly speaking a 14% straight cut across all lines of wages, pensions liabilities, overtime etc. A bit more dramatic than Irish Government 2-year old programme of cutting PS pay by an average of 5-7%.

May be the depth of California's crisis is that much (say 2.5 times?) deeper than the fiscal crisis in Ireland?

Well, let's compare, shall we? To do so, I took budgetary projections (latest available) for California and Ireland and put them side by side. I computed the extent of expected and planned deficits in both locations as a share of the net Government expenditure.
It turns out that in its state of emergency, 'insolvent' California is not 2-3 times worse off than Ireland. It is the 'turning the corner' Ireland that looks 1.5 times worse off than California. And not just now - all the way through the next 4 years.

So California - its Governor and Legislature - are at the very least trying to work through the summer to hammer out some sort of a resolution. Our own legislators and Government are out to enjoy a spot of recreation. And why not, you may ask, if the economy has finally turned the corner... err... sort of... for the 15th time since May 2009 that is...

Economics 03/02/2010: International hype around Ireland's Fiscal Policies

Nouriel Roubini - an economist I would regard extremely highly, writing today in the Financial Times (a paper I would regard extremely highly) clearly illustrates the point that to international observers, Ireland is hardly important enough to actually engage in fact-checking (here).

"The best course would be to follow Ireland, Hungary and Latvia with a credible fiscal plan heavy on spending cuts that government can control, rather than tax hikes and loophole closures that depend on historically weak compliance. ...This approach is working in Ireland – spreads exploded as public debt ballooned to save its banks, but came back in as public spending was cut by 20 per cent."

Really? We haven't noticed. And neither did the Department of Finance.

First off - Irish fiscal adjustment to date is approximately 50:50 split between higher tax burden and spending savings.

Second, there has been no net reduction in public expenditure in Ireland since 2008. None, folks. Let's face the music performed for us by the Department for Finance. No spin from me. In its "Ireland – Stability Programme Update, December 2009" available to all (including Professor Roubini here) DofF provide some stats.

Start from the top: page 14 of SPU:
Clearly, no sign of decreasing expenditure in sight. Of course there are many reasons for this, but hey, where's that 20% cut? Or 1% cut? None through 2009.

But may be Prof Roubini is talking about future cuts of 20%? Ok, page 20 shows future expected expenditure figures per Budget 2010.
So clearly, neither Gross, nor Net current expenditure are set to fall from 2009 through 2014. Not on a single occasion.

On Capital expenditure side, there are severe cuts. So much is true. But a cut between 2009 and 2010 is just 10.7%, not 20%. The cut between 2009 and 2011 is 23.8% but that is only accounting for 3.11% of the total Net expenditure of the state in 2011. Where's that 20% cut in total expenditure coming from, folks?

DofF plans for a 2.8% cut in the General Government Balance in 2010, not a 20% cut either, and that will leave us (per their rosy forecasts on growth and tax revenue) at 11.6% deficit relative to GDP, down a whooping 0.1 percentage point on 11.7% deficit achieved in 2009.

Oh, yes, while Anglo Irish Bank transfers in 2009 (to the tune of €4 billion) enter the DofF estimates for General Government Balance, there are no provisions for the same anywhere in DofF projections for 2010 (see Table 1c, page 38). So pencil that in and you have No Reduction in Deficit in 2010! In fact, with banks supports still required, 2010 is likely to see an increase in deficits.

Take a look for yourselves:Notice that pesky number on borrowing requirement rising in 2010 on 2009? If Prof Roubini is correct, why would the Government that managed to cut its spending by 20% increase its borrowing by 3%? Unless the revenue side is expected to fall by more than 20%! But no, DofF expects total tax revenue to decline by 4.7% in 2010 (Table 1b, page 37).

Finally, Table 1d on page 40 shows that spending adjustments per Budget 2010 amount to the net of €-4,051,059. Of course, since then we have learned that some of the cuts will not be implemented, reducing this number to some €3.3 billion. But even at a higher level, estimated by the DofF, the adjustments add up to only 8.55% of the Net Voted Total Expenditure, or 6.42% of the Gross Total Expenditure in 2009.

Not even a half of Prof Roubini's 20%!

Hmmmm... someone has been fooled by the PR machine statements coming out of Dublin.

Economics 18/09/2009: An Illustration to the Idiot's Guide to Economics

Per chart below, average monthly bond spreads for Irish Government 10-years paper for the last 8 months.We've read Brian Lenihan's lips and here is what he said:

August 2009 (here): "The proposal to establish a National Asset Management Agency has been widely supported internationally by bodies such as the IMF and the OECD and tellingly since
the announcement of the establishment of Nama in April, bond spreads above the German benchmark for Irish sovereign debt have halved, from almost 3 per cent over 10 year German Bonds to now just 1.5 per cent. Irish 10 year bond yields are now 4.8 per cent."

August 2009 (here): "Indeed, during May I had to undertake a tour of EU financial centres to correct misinformation that existed about Ireland. This tour had a positive impact and there has been a significant reduction in the spreads on the State’s borrowing."

Plenty more to be found in the same vein. So per chart above, we've read your lips, Minister and... they produce gibberish so far. As I have remarked on many occasions, Irish bond spreads decline was

• in line with other countries (and in particular - with APIIGS);
• had more to do with the global change in appetite for risk and little-to-nothing to do with Minister Lenihan's decisions or policies;
• lastly, per chart above, while Minister Lenihan was trying to sell his disastrous policies to the nation on the back of declining bond spreads, Ireland has moved from the already dubiously distinctive position of being the second most screwed up economy in the Eurozone after Greece prior to May 2009 to being the worst economy in the Eurozone in terms of its bonds spreads over German bund since Minister Lenihan (per above quote) undertook his courageous road show to Europe.
  

Per one observer comment on this: "we are now the largest pig in the APIIGS pen" - welcome to Lenihanomics?

And on a funny note (credit here)and courtesy of bocktherobber :

Economics 18/09/2009: Idiot's guide to the Galaxy

One of my favorite books in the Universe, The Hitchhiker's Guide to the Galaxy has been surpassed, if only momentarily, by a publisher in Ireland producing this superb Idiots' Guide to Science and Economics. Behold, the front page of today's Indo:
Of course, Mary Coughlan's theory of Relativised Evolution or Evolutionised Relativity and the absolutely unfortunate nature of the venue at which she managed to live up to her well-deserved name 'Calamity Coughlan' are straight out of the chapter 'National Embarrassment Exemplified'. It is a serious public blemish on an otherwise worthy event of IDA launching a serious campaign to attract more FDI into Ireland that I wrote about before (here). No need to detail much here, Indo's article speaks volumes, one can wonder now as to what evolutionary process can lead to the emergence of the species so ignorant of basic knowledge as Mrs Coughlan. One note worth making - the fiasco perfectly exemplifies Kevin Meyers' excellent argument in the same paper today (I might not agree with it myself, but Mrs Coughlan has made his case iron-clad).

But Brian Lenihan's lack of grasp of simple realities of public finances and economics is as breathtaking as Mrs Coughlan's lack of basic erudition. After weeks of being fed drivel of FF backbenchers' and hacks' version of economic ("Nama bonds are not debt", "We will get cheap money from ECB", "ECB supports us" etc), it seems our own Finance Minister got convinced that there is such a thing as a Free Lunch. Per Indo's article here, Lenihan "gave his firmest pledge yet that there would be no tax hikes in the December Budget. And Mr Lenihan challenged anyone who doubted him to "watch my lips"... Mr Lenihan said he was committed to introducing a carbon tax... But he gave his clearest indication yet that the Government would not bring in a property or water tax this year. "I am not aware of any other (new tax hikes)," he said.

Ok, three Indo reporters (including senior ones) failed to actually query the details of this statement the Minister made. But the very fact that Lenihan actually said what he did is a testament to the fact that this Government has no real financial brains in the Cabinet at the time of fiscal and financial crises. None at all.

Per statement itself, Minister Lenihan obviously does not consider introduction of the Carbon tax to be a new tax. Presumably, he lived so long outside the real world, in the world of chauffeur driven Mercs and vast taxpayer-paid perks that he might be under the impression that Carbon tax already exists, so 'introducing' it will not constitute an imposition of a new charge on taxpayers.

The Minister also indicated that he has seen no other tax proposals (other than the Carbon Tax and Property Tax). Has he read his own Commission for Taxation voluminous report? Or has it escaped his field of view as the Lisbon Treaty volume had escaped Brian Cowen's view earlier?

Finally, the Minister has to be living in the surreal world where a €20bn-plus shortfall between tax receipts and liabilities can be covered by something other than taxes. Indo's journos refer to the possibility of €4bn savings on the expenditure side as the means for avoiding new taxes. Have they done a simple sum ever before? Has Minister Lenihan done a simple sum ever before?

Even if the Government does deliver on €4bn in savings, and even if part-year measures announced in April 2009 budget continue through the full year 2010, the entire savings will not be able to cover a quarter of the fiscal spending gap. If the Government commits to fully ending all capital expenditure in 2010 and if the economy grows by 5% in 2010, the expected fiscal gap will still be in excess of €8bn in 2010.

This money will have to be borrowed in the international markets. The roll-over of a vast sea of short-term debt issued in 2008-2009 will have to happen. Is Minister Lenihan really buying the idea that these state liabilities - some €30bn worth already accumulated, plus Nama's €54bn expected plus the ones awaiting NTMA's printing press on the back of long term unemployment increases into foreseeable future can be 'deflated' away at the current rates of spending and taxation without raising new taxes?

Well, only in the world where Einstein authored On the Origin of Species, perhaps?