Sheila Killian: In the Central Bank’s most recent Quarterly Bulletin, released today, Mary Everett does a good analysis of the impact of multinational investment in Ireland. It includes a really useful discussion of the difficulties in extricating the real underlying economic activity from the tax-based money-moving of multinational firms. There’s a particular focus on the Shire effect – the way some multinational firms moved their headquarters here in order to avoid adverse taxes elsewhere.
Everett notes that:
“While these types of companies have large balance sheets, their contribution to the local economy in terms of employment tends to be limited.”
While it’s well worth reading in full, one highlight to ponder is the depressing statistic that 15% of inward direct investment and 21% of outward direct investment moves between Ireland and Bermuda. Hardly a traditional trading partner, this is a strong indication of the sort of aggressive tax planning outlined here, and indicates that for all serious purposes, our GDP is a far less realistic measure of real economic activity than GNP.
Showing posts with label GNP. Show all posts
Showing posts with label GNP. Show all posts
Thursday, 5 April 2012
Thursday, 11 August 2011
Is Ireland heading into a slowdown, too?
Michael Taft: The global recovery is now expected to ease off in the latter half of this year with a range of data suggesting a slowdown in the manufacturing sectors. This is not good news for Ireland as external demand has been one of the few lights in the recessionary darkness. Exports have held up well during the crisis. However, in line with the global easing, we may find that this section of the economy may not be making the contribution to growth we need to compensate for domestic demand that is still in decline.
The CSO’s recent Industrial Production Index gives some clues. Manufacturing production mirrors goods exports. In 2010 production in the ‘modern’ sector (primarily multi-nationals in the capital intensive sectors such as chemicals/pharmaceuticals) increased by nearly 11 percent in volume, while the ‘traditional’ sector, where indigenous enterprises are strongest, experienced a more sluggish 2 percent increase.
Since December of last year, however, production has been sluggish:
In volume terms there has been little change. When we look at the turnover (or value) index we find as similar small drop-off from December in both the modern and traditional sectors.
The CSO also provides a ‘New Orders’ index which measure trends in new orders accepted in the manufacturing sector, including those received and filled during the last month. Between December 2009 and June 2010, new orders increased by nearly 17 percent, reflecting the strong performance last year. However, for the same period this year, new orders have not increased at all.
For those ‘banking’ on an export-led jobs recovery, it’s not likely to be driven by the goods sector. Looking at the provisional figures for production and employment growth between 2009 1st quarter and 2011 1st quarter we find the following:
• Modern Sector: volume production increased by 6.1 percent but employment fell by 9 percent, shedding over 6,000 jobs
• Traditional Sector: volume production fell back fractionally while employment also fell by 9 percent, shedding over 12,000 jobs in this more labour-intensive sector.
These are all just snapshots of the situation today so we must be cautious in extrapolating over the year. Goods exports are still expected to put in a good performance next year, though its impact on the domestic economy is a little more debatable. But with European, US and global forecasts easing off, we shouldn’t expect Ireland to escape unscathed. Already, the Central Bank is revising downwards its manufacturing output projections for this year and next, compared to what they were estimating six months ago. This mirrors their downward revisions of GDP and GNP growth for next year.
If the European and US recoveries begin to stall (and already the US has experienced the weakest recovery since the Great Depression), our open economy will be affected. And with domestic demand continuing to struggle, the last thing we need is to catch a cold from the sneezes coming from the global economy.
The CSO’s recent Industrial Production Index gives some clues. Manufacturing production mirrors goods exports. In 2010 production in the ‘modern’ sector (primarily multi-nationals in the capital intensive sectors such as chemicals/pharmaceuticals) increased by nearly 11 percent in volume, while the ‘traditional’ sector, where indigenous enterprises are strongest, experienced a more sluggish 2 percent increase.
Since December of last year, however, production has been sluggish:
In volume terms there has been little change. When we look at the turnover (or value) index we find as similar small drop-off from December in both the modern and traditional sectors.
The CSO also provides a ‘New Orders’ index which measure trends in new orders accepted in the manufacturing sector, including those received and filled during the last month. Between December 2009 and June 2010, new orders increased by nearly 17 percent, reflecting the strong performance last year. However, for the same period this year, new orders have not increased at all.
For those ‘banking’ on an export-led jobs recovery, it’s not likely to be driven by the goods sector. Looking at the provisional figures for production and employment growth between 2009 1st quarter and 2011 1st quarter we find the following:
• Modern Sector: volume production increased by 6.1 percent but employment fell by 9 percent, shedding over 6,000 jobs
• Traditional Sector: volume production fell back fractionally while employment also fell by 9 percent, shedding over 12,000 jobs in this more labour-intensive sector.
These are all just snapshots of the situation today so we must be cautious in extrapolating over the year. Goods exports are still expected to put in a good performance next year, though its impact on the domestic economy is a little more debatable. But with European, US and global forecasts easing off, we shouldn’t expect Ireland to escape unscathed. Already, the Central Bank is revising downwards its manufacturing output projections for this year and next, compared to what they were estimating six months ago. This mirrors their downward revisions of GDP and GNP growth for next year.
If the European and US recoveries begin to stall (and already the US has experienced the weakest recovery since the Great Depression), our open economy will be affected. And with domestic demand continuing to struggle, the last thing we need is to catch a cold from the sneezes coming from the global economy.
Friday, 1 April 2011
Tell me: Are we out of recession yet and what can be done?
Tom O'Connor: The banking crisis is topical. Unemployment isn't and hasn't been in the last three years. This blindness towards unemployment and monopolisation of everybody's efforts solely on the banks, needs to stop. Human misery, suicide, emigration and economic recession should not be displaced from the top of the agenda by anything. Unemployment should and can be dealt with in advance of a banking solution. Last week's Quarterly National Income figures demonstrate that Unemployment cannot wait. It has been waiting since 2008 until the banking mess has resolved.
A plan and a concrete investment strategy funded from our own unborrowed resources within the NPRF and NTMA needs to happen mow. What is happening now and in the last two years is that governments, most economists and the media have all but ignored unemployment, given the urgent necessity to fix the banks. Can I suggest that unemployment is even more urgent? It should have been, and should now be, dealt with, even before this banking crisis is resolved.
Most people will not read last week's CSO figures on economic growth which are designed to tell us whether or not we are still in recession. However, people in pubs, shops, clubs and workplaces really do want to know whether we are or not. They are hanging on for dear life and their children are emigrating. Will there be an improvement? If not, they want to know why not, and what is the Government going to do about it?
Let’s look at the figures: Based on the whole of 2010, they tell us we are still in recession because both measures of economic growth fell. GDP fell by 1% and GNP by 2%. This is bad news. But, policy makers will say that we are either out of recession or coming out of recession. Why? Because they will say that GNP grew by somewhere between 0 and 2% in each of the last three quarters of 2010.
People will say, however, that they can still really feel the recession and it’s not getting any better. The truth is that we are not out of recession! This indeed is also borne out by the figures for GDP, which fell by 1.6% in the last quarter of 2010. Ah, but policy makers will say that GNP is a better measure for Ireland, so that doesn’t matter!
They would be very wrong. During this recession, the GDP figures are a far better indication of whether or not the economy is out of recession. It is a better indicator of how many jobs are being lost and created. It is a better indicator of how much money people have in their pockets and also how many people will emigrate.
The figures tell us why: firstly, the fact that GDP has fallen by 1.6% in the last quarter of 2010, and GNP rose by 2%, is explained mainly by the profit repatriation practices of multinational companies. Essentially, some of the 2% growth in GNP in the last quarter of 2010 is a statistical aberration, and happened mainly because multinationals didn’t repatriate as many profits as normal in that quarter!
Nonetheless, much of the GNP increase has been fuelled by real exports which in gross terms rose by 13.6 billion from 2009-2010 and when imports are subtracted grew by 5.7 billion. This growth arose from the multinational sector in the main, which accounts for up to 90% of Irish exports. However, the jobs dividend from this growth will be very little. Why?
Much of the work on these exports has already been done in Bermuda or elsewhere and is only registered as an Irish export to take advantage of the low 12.5% corporation tax. Multinationals' employment levels have been relatively stable over that last number of years, fixed at around 100 to 120,000 workers. The new technology which continues to revolutionise these companies also reduces the numbers employed.
But hold on, there are 2 million people needing jobs! There are 444,000 people on the live register of unemployment. The figures tell us the continuingly depressing story of the demise of these people. We knew already that 150,000 have lost their jobs in construction or construction-related work.
The big drivers in creating Irish jobs have always been based on what people produce domestically. However, the figures tell us that all domestic output fell, apart from business output which rose, and which is strongly influenced by multinationals. For example: the value of building and construction to the Irish economy fell from 8.4 billion to 5.7 billion from 2009 to 2010; the value of agriculture and fishing has fallen by 227 million; the distribution, transport and communication sectors fell by 336 million; the value of other services fell by 2 billion. Incidentally, in 2007 the value of construction output stood at 13.6 billion compared to 5.7 billion at the end of 2010.
Taking all the above into consideration, the clear message is that the loss in jobs in the Irish economy, which is reflected in the fall of GDP in 2010 and particularly in the fourth quarter of 2010, is indicative of a deep recession. Apart from multinationals, Ireland is haemorrhaging jobs out of its economy and driving up emigration.
Examining the expenditure economic growth figures, the overall demand in the economy has fallen by 7.9 billion. The fact that multinational net exports grew by 5.7 billion makes little difference as it produces few extra jobs. It does nothing to improve the catastrophic effects of the loss of jobs in the sectors of the Irish economy mentioned above which actually do provide jobs, and which have all fallen.
The current GNP figures only statistically mask this huge problem which is obvious from the fall in GDP of almost one billion in the last quarter of 2010 alone. The masking of this by a statistical increase of over 2 billion in GNP terms, based on lower repatriation of multinational profits, shows that the GDP figures are giving the correct picture.
Last year I warned against trusting the predictions of a strong economic recovery at the end of last year and the dangers of growing unemployment and emigration. Unemployment has increased to 444,000 at present, and emigration is running at 80,000 a year. The reasons are obvious from the above. Unemployment and recession will not be solved by any government which lies to the population by quoting GNP figures. They mislead the people by promising that the economy is out of recession; that it has ‘turned the corner’; or that unemployment will drop significantly going forward.
As I have stated since June 2008, the government needs a sustained set of stimulus packages to provide job beneficial growth. It needs three stimulus packages worth 8 billion over two years and includes: A state development bank to lend money to viable businesses coming from the un-borrowed cash reserves of the government at the National Treasury Management Agency and at the National Pension Reserve Fund. This is crying out to happen as money invested by businesses fell by a staggering 27% in 2010 according to the current figures. This needs to prioritise indigenous business by investing 3 billion in social partner-vetted business growth and new ventures.
A further 2 billion needs to be invested in hundreds of new schools, primary care health centres and mental health facilities; finally, 100,000 houses need to be bought by the state at never-to-be-repeated bargain basement prices which would cost 3 billion in net terms. Through low cost affordable housing and social housing with reasonable rents, thousands can be taken out of unemployment traps and the black economy, and with economic stimulation, be brought in to taxpaying real jobs, also taking them off social welfare.
This piece is written from an ideological position that the economic consensus that operating up to now, called variously by terms such as total free market philosophy, has failed. In the words of a book by Paul Krugman, Nobel Prize Winner for Economics in 2008, “A Country is not a Company”. Each business leads its own business only; the government needs to lead overall. The current debacle will continue to fail as long as there is a failure by the state to lead economic development. The direction of change at this point should be firmly rooted in a new and lean Keynesian economic model.
A plan and a concrete investment strategy funded from our own unborrowed resources within the NPRF and NTMA needs to happen mow. What is happening now and in the last two years is that governments, most economists and the media have all but ignored unemployment, given the urgent necessity to fix the banks. Can I suggest that unemployment is even more urgent? It should have been, and should now be, dealt with, even before this banking crisis is resolved.
Most people will not read last week's CSO figures on economic growth which are designed to tell us whether or not we are still in recession. However, people in pubs, shops, clubs and workplaces really do want to know whether we are or not. They are hanging on for dear life and their children are emigrating. Will there be an improvement? If not, they want to know why not, and what is the Government going to do about it?
Let’s look at the figures: Based on the whole of 2010, they tell us we are still in recession because both measures of economic growth fell. GDP fell by 1% and GNP by 2%. This is bad news. But, policy makers will say that we are either out of recession or coming out of recession. Why? Because they will say that GNP grew by somewhere between 0 and 2% in each of the last three quarters of 2010.
People will say, however, that they can still really feel the recession and it’s not getting any better. The truth is that we are not out of recession! This indeed is also borne out by the figures for GDP, which fell by 1.6% in the last quarter of 2010. Ah, but policy makers will say that GNP is a better measure for Ireland, so that doesn’t matter!
They would be very wrong. During this recession, the GDP figures are a far better indication of whether or not the economy is out of recession. It is a better indicator of how many jobs are being lost and created. It is a better indicator of how much money people have in their pockets and also how many people will emigrate.
The figures tell us why: firstly, the fact that GDP has fallen by 1.6% in the last quarter of 2010, and GNP rose by 2%, is explained mainly by the profit repatriation practices of multinational companies. Essentially, some of the 2% growth in GNP in the last quarter of 2010 is a statistical aberration, and happened mainly because multinationals didn’t repatriate as many profits as normal in that quarter!
Nonetheless, much of the GNP increase has been fuelled by real exports which in gross terms rose by 13.6 billion from 2009-2010 and when imports are subtracted grew by 5.7 billion. This growth arose from the multinational sector in the main, which accounts for up to 90% of Irish exports. However, the jobs dividend from this growth will be very little. Why?
Much of the work on these exports has already been done in Bermuda or elsewhere and is only registered as an Irish export to take advantage of the low 12.5% corporation tax. Multinationals' employment levels have been relatively stable over that last number of years, fixed at around 100 to 120,000 workers. The new technology which continues to revolutionise these companies also reduces the numbers employed.
But hold on, there are 2 million people needing jobs! There are 444,000 people on the live register of unemployment. The figures tell us the continuingly depressing story of the demise of these people. We knew already that 150,000 have lost their jobs in construction or construction-related work.
The big drivers in creating Irish jobs have always been based on what people produce domestically. However, the figures tell us that all domestic output fell, apart from business output which rose, and which is strongly influenced by multinationals. For example: the value of building and construction to the Irish economy fell from 8.4 billion to 5.7 billion from 2009 to 2010; the value of agriculture and fishing has fallen by 227 million; the distribution, transport and communication sectors fell by 336 million; the value of other services fell by 2 billion. Incidentally, in 2007 the value of construction output stood at 13.6 billion compared to 5.7 billion at the end of 2010.
Taking all the above into consideration, the clear message is that the loss in jobs in the Irish economy, which is reflected in the fall of GDP in 2010 and particularly in the fourth quarter of 2010, is indicative of a deep recession. Apart from multinationals, Ireland is haemorrhaging jobs out of its economy and driving up emigration.
Examining the expenditure economic growth figures, the overall demand in the economy has fallen by 7.9 billion. The fact that multinational net exports grew by 5.7 billion makes little difference as it produces few extra jobs. It does nothing to improve the catastrophic effects of the loss of jobs in the sectors of the Irish economy mentioned above which actually do provide jobs, and which have all fallen.
The current GNP figures only statistically mask this huge problem which is obvious from the fall in GDP of almost one billion in the last quarter of 2010 alone. The masking of this by a statistical increase of over 2 billion in GNP terms, based on lower repatriation of multinational profits, shows that the GDP figures are giving the correct picture.
Last year I warned against trusting the predictions of a strong economic recovery at the end of last year and the dangers of growing unemployment and emigration. Unemployment has increased to 444,000 at present, and emigration is running at 80,000 a year. The reasons are obvious from the above. Unemployment and recession will not be solved by any government which lies to the population by quoting GNP figures. They mislead the people by promising that the economy is out of recession; that it has ‘turned the corner’; or that unemployment will drop significantly going forward.
As I have stated since June 2008, the government needs a sustained set of stimulus packages to provide job beneficial growth. It needs three stimulus packages worth 8 billion over two years and includes: A state development bank to lend money to viable businesses coming from the un-borrowed cash reserves of the government at the National Treasury Management Agency and at the National Pension Reserve Fund. This is crying out to happen as money invested by businesses fell by a staggering 27% in 2010 according to the current figures. This needs to prioritise indigenous business by investing 3 billion in social partner-vetted business growth and new ventures.
A further 2 billion needs to be invested in hundreds of new schools, primary care health centres and mental health facilities; finally, 100,000 houses need to be bought by the state at never-to-be-repeated bargain basement prices which would cost 3 billion in net terms. Through low cost affordable housing and social housing with reasonable rents, thousands can be taken out of unemployment traps and the black economy, and with economic stimulation, be brought in to taxpaying real jobs, also taking them off social welfare.
This piece is written from an ideological position that the economic consensus that operating up to now, called variously by terms such as total free market philosophy, has failed. In the words of a book by Paul Krugman, Nobel Prize Winner for Economics in 2008, “A Country is not a Company”. Each business leads its own business only; the government needs to lead overall. The current debacle will continue to fail as long as there is a failure by the state to lead economic development. The direction of change at this point should be firmly rooted in a new and lean Keynesian economic model.
Friday, 25 March 2011
Pavlov's dogs and barking mad economics
Michael Burke: Ivan Pavlov and his work are widely misunderstood. In English he is most usually associated with the phrase ‘Pavlov’s Dogs’ , used to imply an unthinking and customary response, a conditioned reflex. In fact, the great physiologist’s work was both extensive and groundbreaking in a number of areas.
Even in the caricature of his work, what conclusions could have been drawn from research which showed the dogs still panting for food after the twelfth time when the whistle had blown and there was no food?
The question came to mind in relation to the preview of the GDP data over on Irish Economy where characteristically strong opinions were not matched by strong convictions about growth. This was just as well. In real terms, GDP fell by 1.6% in the quarter and is 14.6% below its peak level prior to the recession – 3 years ago.
For 12 quarters mainstream and official economic opinion has expected government spending cuts to produce growth. It has produced contraction. ‘Pavlov’s dogs’ were smarter.
This is a new low-point for the economy - and for mainstream economic thinking. Some may be inclined to designate this a ‘double-dip’, but in reality this is just an accounting quirk. The positive quarter of growth sandwiched either side of contraction implicit in the phrase is a mirage – entirely accounted for by a rise in unwanted inventories in Q3, as was argued at that time.
Instead, some may be inclined to see a chink of light from the GNP data. Real GNP rose for the third consecutive quarter, up 2%, and now stands 2.7% higher than a year ago – although it is still 14.1% below its peak. But this too is more an accounting function than any reflection of rising domestic activity. The key components of growth fell- personal consumption -0.4% in Q4 to a new low, 11.1% below its peak. Investment (gross fixed capital formation) also fell 2.3% in Q4 to a new low, 60.7% below its pre-recession level. The total decline in investment from peak is now €27.6bn, which is the same as the total decline in GDP (€27.7bn) and exceeds the decline in GNP (€22.8bn). The entire slump is accounted for by the investment collapse. Inventories also fell once more.
So, where does rising GNP come from? Current government spending rose by an annualised €72mn in Q4, but in a €138.4bn domestic economy that really doesn’t add up to much. Infamously, government spending in this economy is falling- a quarterly rise a blip, when the numbers forced onto welfare rise at a faster rate than the welfare entitlements are cut. Maybe they got complacent when unemployment ‘steadied’ at 13.7%. If so, the surge to 14.7% will have them looking for the axe once more.
In any event, government spending has been in a downtrend since mid-2008 and fell by 2.1% while GNP was rising. Therefore all the activity components of GNP have been falling, personal consumption, investment, inventories and government spending.
The reason GNP has risen is because Net Factor Income from the Rest of the World has been rising. More accurately, the drain on growth from this source has been falling. This outflow has declined by over €7bn this year alone (annualised), much greater than the €5.3bn rise in GNP from Q1 to Q4. The reduction in this outflow is that Irish residents (ie Irish banks) are paying less interest to overseas residents. There is simple reason for this- overseas residents have taken their money out of Irish banks. They are too risky. This will probably continue, and so boost GNP artificially. But the real indicators of activity are all still contracting.
Yet this does not correspond to the dominant mainstream view. We have been repeatedly told that spending cuts would restore confidence both at home and abroad and so lead to a recovery. We were also told that cuts were a matter of urgency, to restore that confidence. But what immediately happened was that the economy contracted further and government finances collapsed as a result.
Now, the new government is about to embark on a repeat of the experiment which has already failed- 12 times. Pavlov’s dogs were smarter.
Even in the caricature of his work, what conclusions could have been drawn from research which showed the dogs still panting for food after the twelfth time when the whistle had blown and there was no food?
The question came to mind in relation to the preview of the GDP data over on Irish Economy where characteristically strong opinions were not matched by strong convictions about growth. This was just as well. In real terms, GDP fell by 1.6% in the quarter and is 14.6% below its peak level prior to the recession – 3 years ago.
For 12 quarters mainstream and official economic opinion has expected government spending cuts to produce growth. It has produced contraction. ‘Pavlov’s dogs’ were smarter.
This is a new low-point for the economy - and for mainstream economic thinking. Some may be inclined to designate this a ‘double-dip’, but in reality this is just an accounting quirk. The positive quarter of growth sandwiched either side of contraction implicit in the phrase is a mirage – entirely accounted for by a rise in unwanted inventories in Q3, as was argued at that time.
Instead, some may be inclined to see a chink of light from the GNP data. Real GNP rose for the third consecutive quarter, up 2%, and now stands 2.7% higher than a year ago – although it is still 14.1% below its peak. But this too is more an accounting function than any reflection of rising domestic activity. The key components of growth fell- personal consumption -0.4% in Q4 to a new low, 11.1% below its peak. Investment (gross fixed capital formation) also fell 2.3% in Q4 to a new low, 60.7% below its pre-recession level. The total decline in investment from peak is now €27.6bn, which is the same as the total decline in GDP (€27.7bn) and exceeds the decline in GNP (€22.8bn). The entire slump is accounted for by the investment collapse. Inventories also fell once more.
So, where does rising GNP come from? Current government spending rose by an annualised €72mn in Q4, but in a €138.4bn domestic economy that really doesn’t add up to much. Infamously, government spending in this economy is falling- a quarterly rise a blip, when the numbers forced onto welfare rise at a faster rate than the welfare entitlements are cut. Maybe they got complacent when unemployment ‘steadied’ at 13.7%. If so, the surge to 14.7% will have them looking for the axe once more.
In any event, government spending has been in a downtrend since mid-2008 and fell by 2.1% while GNP was rising. Therefore all the activity components of GNP have been falling, personal consumption, investment, inventories and government spending.
The reason GNP has risen is because Net Factor Income from the Rest of the World has been rising. More accurately, the drain on growth from this source has been falling. This outflow has declined by over €7bn this year alone (annualised), much greater than the €5.3bn rise in GNP from Q1 to Q4. The reduction in this outflow is that Irish residents (ie Irish banks) are paying less interest to overseas residents. There is simple reason for this- overseas residents have taken their money out of Irish banks. They are too risky. This will probably continue, and so boost GNP artificially. But the real indicators of activity are all still contracting.
Yet this does not correspond to the dominant mainstream view. We have been repeatedly told that spending cuts would restore confidence both at home and abroad and so lead to a recovery. We were also told that cuts were a matter of urgency, to restore that confidence. But what immediately happened was that the economy contracted further and government finances collapsed as a result.
Now, the new government is about to embark on a repeat of the experiment which has already failed- 12 times. Pavlov’s dogs were smarter.
Friday, 1 October 2010
At least we're not Iceland
Michael Burke: Over on Irish Economy, Kevin O'Rourke has criticised the Finance Minister for arguing that not allowing a default of bank debt had been a positive - the example given where that had happened being Iceland.
The are two aspects to this strange official boast.
The first is to do with the banking policy, where Iceland could not prevent its banks from bankruptcy and default. It is a simple matter of fact that as a result Iceland does not now have an additional millstone of bank debt tied around the neck of all future taxpayers. However, the country itself was bankrupted and required funds from the IMF and Nordic neighbours. I know of no-one who believes that this State is currently insolvent. The Finance Minister seems to believe that it would have been- had fewer liabilities accrued to the State with no bank bail-out and their default. The example cited is usually Lehmans, but this is incorrect. Lehman's balance sheet was a multiple of the entire Irish banking system combined, and its trading interrelationships vastly greater. Even so, when it went under, it took other financial institutions with it, but no sovereign borrower. The Iceland/Lehman example does not stand up.
However, many observers suggest that the 'final' bill for the bank bailout here is up to €50bn. This may be an underestimate. The stress test on the portfolio of loans applied was 70%, and it is taxpayer's capital which is filling the breach. But NAMA is already applying losses to loans it is purchasing of 67%. So this doesnt' look like a very stressful test.
If further cuts are in the pipeline, the economy will not revive significantly and the loan losses may continue to mount. This is a situation worse than Iceland, created by policy.
The other aspect of the boast is an economic one, which has more exercised the contributors over at IE. On a national accounts seasonally adjusted basis Iceland’s GDP indeed peaked in Q3 2007 and has fallen by a cumulative 16.3%, in line with the OECD data cited, and compared to a 13.4% decline here.
But there is a strange tendency in economic debate to treat Ireland as if it is an economy sui generis. So, it is insisted that, as GDP data is distorted by MNC transfer pricing, GNP should be the real reference for the economy. Agreed. But other countries have an external sector too. Ireland’s GNP should properly be compared to Iceland’s GNP. This contracted in Q2 by 7.7% q-o-q and by 7.8% y-o-y. A link to the actual data can be found via this quirky piece. This shows that the latest decline is driven by an extraordinary run-down in inventories, which reduced GDP by 5% in the quarter.
In current prices, not s.adj., Icelandic GNP fell by 11.8% from its peak, compared to a 26.3% fall in Irish GNP (or 17% in real terms). This nominal measure is crucial regarding taxation revenues, since, unfortunately taxes are paid in current, not 2008, Euros. It is from current taxes that existing debt interest payments as well as principal repayments must be made. But on either measure, the Irish position is much worse.
The new Icelandic government has increased taxes, so that revenues are 9.4% higher in the year to August, compared to 2009. Tax revenues fell here by 19% in 2009 and are down 9% in the year to August.
So the Minister is right. Ireland is not Iceland. It’s much worse.
The are two aspects to this strange official boast.
The first is to do with the banking policy, where Iceland could not prevent its banks from bankruptcy and default. It is a simple matter of fact that as a result Iceland does not now have an additional millstone of bank debt tied around the neck of all future taxpayers. However, the country itself was bankrupted and required funds from the IMF and Nordic neighbours. I know of no-one who believes that this State is currently insolvent. The Finance Minister seems to believe that it would have been- had fewer liabilities accrued to the State with no bank bail-out and their default. The example cited is usually Lehmans, but this is incorrect. Lehman's balance sheet was a multiple of the entire Irish banking system combined, and its trading interrelationships vastly greater. Even so, when it went under, it took other financial institutions with it, but no sovereign borrower. The Iceland/Lehman example does not stand up.
However, many observers suggest that the 'final' bill for the bank bailout here is up to €50bn. This may be an underestimate. The stress test on the portfolio of loans applied was 70%, and it is taxpayer's capital which is filling the breach. But NAMA is already applying losses to loans it is purchasing of 67%. So this doesnt' look like a very stressful test.
If further cuts are in the pipeline, the economy will not revive significantly and the loan losses may continue to mount. This is a situation worse than Iceland, created by policy.
The other aspect of the boast is an economic one, which has more exercised the contributors over at IE. On a national accounts seasonally adjusted basis Iceland’s GDP indeed peaked in Q3 2007 and has fallen by a cumulative 16.3%, in line with the OECD data cited, and compared to a 13.4% decline here.
But there is a strange tendency in economic debate to treat Ireland as if it is an economy sui generis. So, it is insisted that, as GDP data is distorted by MNC transfer pricing, GNP should be the real reference for the economy. Agreed. But other countries have an external sector too. Ireland’s GNP should properly be compared to Iceland’s GNP. This contracted in Q2 by 7.7% q-o-q and by 7.8% y-o-y. A link to the actual data can be found via this quirky piece. This shows that the latest decline is driven by an extraordinary run-down in inventories, which reduced GDP by 5% in the quarter.
In current prices, not s.adj., Icelandic GNP fell by 11.8% from its peak, compared to a 26.3% fall in Irish GNP (or 17% in real terms). This nominal measure is crucial regarding taxation revenues, since, unfortunately taxes are paid in current, not 2008, Euros. It is from current taxes that existing debt interest payments as well as principal repayments must be made. But on either measure, the Irish position is much worse.
The new Icelandic government has increased taxes, so that revenues are 9.4% higher in the year to August, compared to 2009. Tax revenues fell here by 19% in 2009 and are down 9% in the year to August.
So the Minister is right. Ireland is not Iceland. It’s much worse.
Thursday, 23 September 2010
Q2 GDP - The Irish Depression
Michael Burke: The Q2 GDP data published today do little to alleviate the gloom surrounding economic prospects. Both measure of output contracted in the quarter, GDP by 1.2% and GNP by 0.3%, in real seasonally adjusted terms. GDP has now contracted in 11 of the last 14 quarters, while GNP has contracted for 9 consecutive quarters, that is, the domestic economy has begun its third straight year of contraction. This compares to an Euro Area average contraction of 'only' 4 quarters, which ended a year ago.
The scale of the decline is also well above that in the Euro Area, where the economy contracted by 4.4%. From its peak in 2007, this GDP has contracted by 13.4% in real terms while GNP has fallen by a staggering 17.3%. Worse, in nominal terms GDP has declined by 19.5% and GNP by 24.1%. This measure, GNP at current prices, is decisive with regards to taxation revenues, whose slump is the overwhelming source of the widening public sector deficit. Taxes are paid in cash terms, unreflective of real terms changes in the price level.
As has been pointed out previously, this deflationary economic trend, which seems to be welcomed by many commentators, is actually disastrous for government finances because it erodes the current level of taxation while the debt stock is unchanged. The debt burden, and the activity required to service interest on it, is rising in real terms. Depending on which measure of output is used, the price level has fallen by between 5% and 9% since 2008. Since virtually all taxes derive from the domestic sector, the decisive measure of deflation for these purposes relates to GNP, where prices have fallen 9.2% since the end of 2008. In the US, many commentators fret that that a hollowed banking system and low growth could lead it into a Japan-style lost generation of deflation and rising real debt levels. For this economy that threat is a current one.
In terms of the components of growth, personal consumption fell again in Q2, down 1.6% from the same period a year ago. This repeats a pattern seen in 2009, as the government's attack on welfare and public sector pay feeds directly into lower consumer demand. Government spending on its own account also continues to detract from growth, a real decline of €2.5bn since austerity policies were introduced. Net exports subtracted from growth in the quarter, hence the greater decline in GDP than in GNP, as import demand rose.
It is possible that this rise in imports is partly associated with the modest rebound in investment (gross fixed capital formation) in the quarter, at an annualised rise €2.4bn, which was the one bright spot in the report. However, the rise in imports was than double the rise in investment and, since all other components fell, personal and government consumption as well as inventories, it is more likely that the rise in imports was due to an autonomous rise in the activities of multi-national corporations and their accounting practises.
These universal falls in demand, and modest export growth in the quarter, suggest that the investment uptick has little to sustain it. Even now, investment remains 52% below its peak level. The decline in investment has driven the recession, beginning 3 quarters earlier which is now €27.4bn below its peak, compared to declines of €27.6bn and €22.8bn for GNP and GDP respectively. This remains an investment recession.
Until policymakers recognise that fact, and that government investment must rise to off-set that decline, the effects of this Irish Depression will persist.
The scale of the decline is also well above that in the Euro Area, where the economy contracted by 4.4%. From its peak in 2007, this GDP has contracted by 13.4% in real terms while GNP has fallen by a staggering 17.3%. Worse, in nominal terms GDP has declined by 19.5% and GNP by 24.1%. This measure, GNP at current prices, is decisive with regards to taxation revenues, whose slump is the overwhelming source of the widening public sector deficit. Taxes are paid in cash terms, unreflective of real terms changes in the price level.
As has been pointed out previously, this deflationary economic trend, which seems to be welcomed by many commentators, is actually disastrous for government finances because it erodes the current level of taxation while the debt stock is unchanged. The debt burden, and the activity required to service interest on it, is rising in real terms. Depending on which measure of output is used, the price level has fallen by between 5% and 9% since 2008. Since virtually all taxes derive from the domestic sector, the decisive measure of deflation for these purposes relates to GNP, where prices have fallen 9.2% since the end of 2008. In the US, many commentators fret that that a hollowed banking system and low growth could lead it into a Japan-style lost generation of deflation and rising real debt levels. For this economy that threat is a current one.
In terms of the components of growth, personal consumption fell again in Q2, down 1.6% from the same period a year ago. This repeats a pattern seen in 2009, as the government's attack on welfare and public sector pay feeds directly into lower consumer demand. Government spending on its own account also continues to detract from growth, a real decline of €2.5bn since austerity policies were introduced. Net exports subtracted from growth in the quarter, hence the greater decline in GDP than in GNP, as import demand rose.
It is possible that this rise in imports is partly associated with the modest rebound in investment (gross fixed capital formation) in the quarter, at an annualised rise €2.4bn, which was the one bright spot in the report. However, the rise in imports was than double the rise in investment and, since all other components fell, personal and government consumption as well as inventories, it is more likely that the rise in imports was due to an autonomous rise in the activities of multi-national corporations and their accounting practises.
These universal falls in demand, and modest export growth in the quarter, suggest that the investment uptick has little to sustain it. Even now, investment remains 52% below its peak level. The decline in investment has driven the recession, beginning 3 quarters earlier which is now €27.4bn below its peak, compared to declines of €27.6bn and €22.8bn for GNP and GDP respectively. This remains an investment recession.
Until policymakers recognise that fact, and that government investment must rise to off-set that decline, the effects of this Irish Depression will persist.
Tuesday, 6 July 2010
What's €4 billion here or there?
Michael Taft: In all the discussion over the CSO’s recent National Accounts release for the first quarter this year – the one that shows that the Irish economy is ‘emerging from recession’ – one critical figure was over looked: the substantial revision downwards of GDP for 2009.
The CSO had previously estimated 2009 GDP to be €163.5 billion in current terms. This was slightly better than the ESRI’s estimate but slightly down on the Government’s own projection. However, the CSO’s projection earlier this year was preliminary. When they produced their final figures for 2009, GDP was down substantially – by nearly €4 billion. The final outcome is €159.6 billion.
The downward revision is due to exports. Previously, the CSO projected exports to be €148.5 billion. Now its €144.8 billion (there were slight downward revisions for investment and Government consumption). In other words, the CSO had previously estimated exports to be higher last year than what they actually were.
Why should this be of concern? First, it means we must be guarded about reading too much into quarterly figures. The CSO, of necessity, is dependent upon less reliable data when they produce quarterly figures – data that is open to large variations, particularly in multi-national export figures. It is only when the National Income and Expenditure report is published that we get solid numbers.
Second, it shows up our deficit and debt figures in even a worse light. The Department of Finance informed Eurostat that our General Government Balance (our deficit for the purposes of Maastricht calculations) for 2009 was €19.3 billion. Using their own GDP projections, our ‘underlying’ GGB was -11.8 percent (with the Anglo bail-out it was -14.3 percent).
Overnight, our deficit has worsened. For 2009 our ‘underlying’ deficit is now -12.1 percent. This, too, went unreported in the wave of green-shoot journalism and the Government spinners desperate to show their policies are working. Our GDP fell by €4 billion and our deficit increased but none of this was, apparently, worth commenting on.
This is about par – especially in terms of the new deficit numbers. Over the last year, the Government has missed every deficit target they set for themselves. At every turn, the Government got it wrong. This is called ‘getting public finances under control’. In most other lexicons, this would be called a failure.
To highlight this failure all one needs to do is refer to the Finance Minister’s own warnings when he proposed the April emergency budget. He was concerned that the deficit would exceed -12 percent and even head towards -12.7 percent. Therefore, he had no choice but to increase income and health levies (cutting disposable income and, so, demand) and slash current expenditure (social welfare for young people, the Christmas bonus, etc.) by nearly €1 billion in the year. And so he did. What happened? The deficit exceeded -12 percent. Cutting spending and people’s disposable income during a recession is like running in quicksand.
But there is another unnerving statistic that went unremarked. While 2009 GNP figures were not significantly revised in the latest CSO release, there was a substantial drop in nominal GNP for the first quarter this year. Again, we have to be careful: not only are quarterly projections open to wide variations; GNP numbers are highly sensitive to multi-national repatriation activities.
Nonetheless, the drop is significant. While in real terms, the quarterly GNP fall was -0.5 percent, the nominal fall was nearly -7 percent. Is this a case of multi-national activities; or is the CSO picking up the first impact of the highly deflationary measures in the 2010 Budget. We can’t be definitive at this stage – especially as we don’t have deflators. But following the last budget, forecasters revised downwards their GNP projections for this year.
Deflation comes with a very high price – one of them is that it increases the deficit and debt burden. A comparison of the Exchequer Balance in the first quarters of 2009 and 2010 highlights this:
• Q1 2009: -11.2 percent of GNP
• Q1 2010: -13 percent of GNP
The reason for the deterioration is not the amount of deficit but rather the falling value of GNP. If GNP nominal value remains sluggish throughout the year, we may find an ever increasing deficit and debt burden, especially as GDP growth will not be, as the Department of Finance describes it, ‘tax-rich’ due to low corporate tax.
This is not what a real recovery is supposed to look like.
The CSO had previously estimated 2009 GDP to be €163.5 billion in current terms. This was slightly better than the ESRI’s estimate but slightly down on the Government’s own projection. However, the CSO’s projection earlier this year was preliminary. When they produced their final figures for 2009, GDP was down substantially – by nearly €4 billion. The final outcome is €159.6 billion.
The downward revision is due to exports. Previously, the CSO projected exports to be €148.5 billion. Now its €144.8 billion (there were slight downward revisions for investment and Government consumption). In other words, the CSO had previously estimated exports to be higher last year than what they actually were.
Why should this be of concern? First, it means we must be guarded about reading too much into quarterly figures. The CSO, of necessity, is dependent upon less reliable data when they produce quarterly figures – data that is open to large variations, particularly in multi-national export figures. It is only when the National Income and Expenditure report is published that we get solid numbers.
Second, it shows up our deficit and debt figures in even a worse light. The Department of Finance informed Eurostat that our General Government Balance (our deficit for the purposes of Maastricht calculations) for 2009 was €19.3 billion. Using their own GDP projections, our ‘underlying’ GGB was -11.8 percent (with the Anglo bail-out it was -14.3 percent).
This is about par – especially in terms of the new deficit numbers. Over the last year, the Government has missed every deficit target they set for themselves. At every turn, the Government got it wrong. This is called ‘getting public finances under control’. In most other lexicons, this would be called a failure.
To highlight this failure all one needs to do is refer to the Finance Minister’s own warnings when he proposed the April emergency budget. He was concerned that the deficit would exceed -12 percent and even head towards -12.7 percent. Therefore, he had no choice but to increase income and health levies (cutting disposable income and, so, demand) and slash current expenditure (social welfare for young people, the Christmas bonus, etc.) by nearly €1 billion in the year. And so he did. What happened? The deficit exceeded -12 percent. Cutting spending and people’s disposable income during a recession is like running in quicksand.
But there is another unnerving statistic that went unremarked. While 2009 GNP figures were not significantly revised in the latest CSO release, there was a substantial drop in nominal GNP for the first quarter this year. Again, we have to be careful: not only are quarterly projections open to wide variations; GNP numbers are highly sensitive to multi-national repatriation activities.
Nonetheless, the drop is significant. While in real terms, the quarterly GNP fall was -0.5 percent, the nominal fall was nearly -7 percent. Is this a case of multi-national activities; or is the CSO picking up the first impact of the highly deflationary measures in the 2010 Budget. We can’t be definitive at this stage – especially as we don’t have deflators. But following the last budget, forecasters revised downwards their GNP projections for this year.
Deflation comes with a very high price – one of them is that it increases the deficit and debt burden. A comparison of the Exchequer Balance in the first quarters of 2009 and 2010 highlights this:
• Q1 2009: -11.2 percent of GNP
• Q1 2010: -13 percent of GNP
The reason for the deterioration is not the amount of deficit but rather the falling value of GNP. If GNP nominal value remains sluggish throughout the year, we may find an ever increasing deficit and debt burden, especially as GDP growth will not be, as the Department of Finance describes it, ‘tax-rich’ due to low corporate tax.
This is not what a real recovery is supposed to look like.
Thursday, 7 January 2010
A long time in the hole
Michael Taft: I’ve touched on this subject before but given the New Year and the apparent ‘green shoots’ that are emerging (or the alleged sightings of green shoots), it seems timely to return to this theme; namely, how long will we be in recession?
The economy, barring something unforeseen, will trough sometime this year. This will be given statistical spin (‘we’re out of recession and back on the growth path’). This will also be given a political spin (‘due to the tough, courageous decisions of the Government, the economy is starting to recover’ – or something like that), There will be so much spinning we will be in danger of getting dizzy, stumbling around drunken-like at the post-recession party.
So let’s ground ourselves. Measured in terms of GDP this recession will, on the Government’s own optimistic growth figures, last until 2013. Measured in terms of GNP this recession will last until 2015. The post-recession party will have to be put on hold.
The issue is very simple. The economy will be ‘recessed’ until it reaches the level at which it entered the recession. In 2007 the economy peaked at €189.8 billion. Such was the severity of the decline, the economy will not return to that level until sometime in 2013.
But strip out the multi-national element, and the time-scale for the GNP will be even longer. In 2007, GNP peaked at €161.2 billion. GNP, in percentage terms, collapsed even more. Therefore, we won’t return to pre-recession levels until much later.
Government projections only go up to 2014 – the new target date for Maastricht compliance. Even so, we will not have returned to pre-recession levels. It won’t be until 2015 that the domestic economy emerges from recession.
We shouldn’t confuse growth with ‘the end of the recession’. Two examples will illustrate this. First, starting in 1933 the US economy grew every quarter for the next three to four years. Yet no one would say that in 1935 the US – after two years of positive growth - was ‘out of the depression’. Indeed, officials at the time made the mistake of thinking the economy was and took their foot off the monetary and fiscal pedal in 1937. The result was a ‘recession in a depression’ – as Paul Krugman warns may be happening today.
On a more everyday level, if you fall into a hole you will eventually hit the bottom. Just because you start climbing back up doesn’t mean you are out of the hole. You’re out of the hole when you return back to ground level – the point at which you fell into the hole.
So – 2013 or 2015, depending on which measure you use: there is one caveat. These ‘out of the recession’ dates are dependent upon the Government’s growth figures which could come true or may not. The Government is projecting a return to GDP growth in 2011 of 3.3 percent, peaking in the following year at 4.5 percent before settling back to 4 percent by 2014 (GNP growth is slightly less as the domestic economy trails further behind the multi-national sector). However, if these figures are even 1 percentage point off, the recession will last another year – well into 2014 by GDP measurement.
Even if the Government projections hold – unemployment and poverty will be hanging around for a while. In 2014, just as the economy is returning to 2007 levels, unemployment is still estimated to be 9.5 percent. That’s after emigration has hollowed out significant sections of our skill and knowledge labour base. Yet, that will still be more than twice the level as of 2007.
We are in a hole – a deep hole. Hopefully, we’ll start to climb out sometime this year. But it will be a slow climb. We won’t get back to ground level for a few years yet. And all the while, the economy will be carrying a heavy burden – the effects of the government’s deflationary measures.
The climb may be longer than we think.
The economy, barring something unforeseen, will trough sometime this year. This will be given statistical spin (‘we’re out of recession and back on the growth path’). This will also be given a political spin (‘due to the tough, courageous decisions of the Government, the economy is starting to recover’ – or something like that), There will be so much spinning we will be in danger of getting dizzy, stumbling around drunken-like at the post-recession party.
So let’s ground ourselves. Measured in terms of GDP this recession will, on the Government’s own optimistic growth figures, last until 2013. Measured in terms of GNP this recession will last until 2015. The post-recession party will have to be put on hold.
The issue is very simple. The economy will be ‘recessed’ until it reaches the level at which it entered the recession. In 2007 the economy peaked at €189.8 billion. Such was the severity of the decline, the economy will not return to that level until sometime in 2013.
But strip out the multi-national element, and the time-scale for the GNP will be even longer. In 2007, GNP peaked at €161.2 billion. GNP, in percentage terms, collapsed even more. Therefore, we won’t return to pre-recession levels until much later.
We shouldn’t confuse growth with ‘the end of the recession’. Two examples will illustrate this. First, starting in 1933 the US economy grew every quarter for the next three to four years. Yet no one would say that in 1935 the US – after two years of positive growth - was ‘out of the depression’. Indeed, officials at the time made the mistake of thinking the economy was and took their foot off the monetary and fiscal pedal in 1937. The result was a ‘recession in a depression’ – as Paul Krugman warns may be happening today.
On a more everyday level, if you fall into a hole you will eventually hit the bottom. Just because you start climbing back up doesn’t mean you are out of the hole. You’re out of the hole when you return back to ground level – the point at which you fell into the hole.
So – 2013 or 2015, depending on which measure you use: there is one caveat. These ‘out of the recession’ dates are dependent upon the Government’s growth figures which could come true or may not. The Government is projecting a return to GDP growth in 2011 of 3.3 percent, peaking in the following year at 4.5 percent before settling back to 4 percent by 2014 (GNP growth is slightly less as the domestic economy trails further behind the multi-national sector). However, if these figures are even 1 percentage point off, the recession will last another year – well into 2014 by GDP measurement.
Even if the Government projections hold – unemployment and poverty will be hanging around for a while. In 2014, just as the economy is returning to 2007 levels, unemployment is still estimated to be 9.5 percent. That’s after emigration has hollowed out significant sections of our skill and knowledge labour base. Yet, that will still be more than twice the level as of 2007.
We are in a hole – a deep hole. Hopefully, we’ll start to climb out sometime this year. But it will be a slow climb. We won’t get back to ground level for a few years yet. And all the while, the economy will be carrying a heavy burden – the effects of the government’s deflationary measures.
The climb may be longer than we think.
Wednesday, 24 June 2009
The burdens of a low tax society
Sli Eile: Received wisdom in political economy establishment thinking here in Ireland is that taxes are a ‘burden’ (in other words not nice and to be avoided if you pardon the pun) and that the way out of the present calamitous budgetary situation is via spending cuts more than tax hikes (which, it is claimed, would further damage competitiveness, work incentive and add to deflationary pressures).
Writing in the Irish Times, recently, Ray Kinsella asserted that:
So, the elephant is the public sector wage bill which equals numbers employed (including most professional economists) multiplied by average salary per unit. This assumes a number of things including:
Our public sector is ‘bloated’ in terms of unproductive workers; and
Pay, on average, in the public sector is too high to allow the private (especially traded) sector to regain competitive advantage.
Suffice it to say that the evidence for a bloated public sector in Ireland is very thin indeed. The OECD Review of the Irish Public Service published in 2008 found that the overall level of public sector employment and spending was modest in Ireland compared to other OECD countries.
But, the real elephant in the parlour is taxes. There is, I would argue, considerable scope for raising taxes as one part of an overall strategy to re-start (and reform) the economy? Colm Keenan reports that Irish taxes as % of Gross Domestic Product are low by EU standards:
The ratio for Ireland was 31.2% in 2007 compared to a (weighted) EU average of 39.8%. You can download the tables in Excel here
and the full Report there
It may be objected that comparing taxes to GDP is inappropriate for Ireland since we have on the highest gaps between GDP and GNP arising from profit repatriation (and transfer-pricing of multinationals). Even if this argument is accepted (which I don’t) taxes as % of GNP in 2007 in Ireland was 36.9 – still below the EU average in 2007.
However, it is not legitimate in my view to base total tax comparisons on GNP since all of GDP including profits of multinational companies can be taxed by Irish public authorities. Alternatively, if people insist on using GNP for comparisons of tax take as % of national income then they should deduct corporate taxes paid by MNCs. You can't have it both ways.
Expect a lot more hot air on taxes with the publication of the long-awaited Commission on Taxation soon as the ground is prepared for more public spending cuts in December and further tax hikes on PAYEE earners.
Writing in the Irish Times, recently, Ray Kinsella asserted that:
Now let’s examine revenue, which has collapsed over the last two years. Let’s assume that it will grow by 2 per cent on average for the next five years. That’s pretty generous for an economy dependent on international recovery and a domestic economy that is running on empty. This would result in revenue of about €38 billion after five years.Kinsella, in common with most other economists, does not see raising taxes to any significant extent as part of a recovery-with-fairness strategy. In fact, he states
this will require cuts in public expenditure, not the kind of counter-productive and socially insensitive cuts which we have had to date. Somebody is going to have to ask the elephant, very politely, to leave the room. For elephant, read size of public sector.
So, the elephant is the public sector wage bill which equals numbers employed (including most professional economists) multiplied by average salary per unit. This assumes a number of things including:
Our public sector is ‘bloated’ in terms of unproductive workers; and
Pay, on average, in the public sector is too high to allow the private (especially traded) sector to regain competitive advantage.
Suffice it to say that the evidence for a bloated public sector in Ireland is very thin indeed. The OECD Review of the Irish Public Service published in 2008 found that the overall level of public sector employment and spending was modest in Ireland compared to other OECD countries.
But, the real elephant in the parlour is taxes. There is, I would argue, considerable scope for raising taxes as one part of an overall strategy to re-start (and reform) the economy? Colm Keenan reports that Irish taxes as % of Gross Domestic Product are low by EU standards:
The ratio for Ireland was 31.2% in 2007 compared to a (weighted) EU average of 39.8%. You can download the tables in Excel here
and the full Report there
It may be objected that comparing taxes to GDP is inappropriate for Ireland since we have on the highest gaps between GDP and GNP arising from profit repatriation (and transfer-pricing of multinationals). Even if this argument is accepted (which I don’t) taxes as % of GNP in 2007 in Ireland was 36.9 – still below the EU average in 2007.
However, it is not legitimate in my view to base total tax comparisons on GNP since all of GDP including profits of multinational companies can be taxed by Irish public authorities. Alternatively, if people insist on using GNP for comparisons of tax take as % of national income then they should deduct corporate taxes paid by MNCs. You can't have it both ways.
Expect a lot more hot air on taxes with the publication of the long-awaited Commission on Taxation soon as the ground is prepared for more public spending cuts in December and further tax hikes on PAYEE earners.
Saturday, 18 April 2009
Analysing credit
An Saoi: Let us assume that the Irish economy will decline by more than 10% in 2009 and that the consumer price index will also fall by around 7%. Without any increase in nominal debt, the value of the debt as a percentage of economic activity will increase by close on 20%.
The CSO has provided us with a reasonable picture of the position in 2008, which is set out in constant (2006) prices and at market prices. Click here to see my estimate of GDP & GNP figures using the above estimates of decline in the economy and the drop in prices.
The level of debt however has moved in a totally different direction, leaving all extremely more likely to default on their debt.
Private debt at 31st December 2008 stood at €424,865M or €344,277 M net of financial intermediation. Assuming that the level of debt remains the same, the debt to GDP ratio would move from 185% to 229% and perhaps more crucially from 220% to 263% when you use GNP. Click here to view a table showing private sector credit / GDP (GNP for Ireland) ratios, taken from Deleveraging the Irish Economy, Goodbody Stockbrokers, Oct. 2008.
Personal debt stood at €172,331M at 31st December 2008, or approx. 50% of total private (non financial intermediation) debt. While this may not increase in nominal terms, the decline in the size of the economy and in its value will dramatically increase it as a percentage of net disposable income.
While the decline in prices may seem extreme, there are substantial drops yet to be seen in the CPI. These include,
- Utility costs, e.g. ESB & gas.
- Imported goods from sterling area have more capacity to fall
- Rent reductions as more and more surplus accommodation chases fewer tenants
- Most recent interest rate cuts
- Falls in commercial rents being passed on.
- Greater competition in the retail sector
- Services sector falls in areas such as hotels, restaurants etc.
There is a great irony in this decline in prices. Ireland needs to get its costs down in comparison to its European competitors, yet the drop in prices is going to create massive other problems. The decline in the year to March has been 2.6%.
Effectively 50% of the commercial private sector debt will be transferred to State by way of NAMA. However the decline in personal income, whether it is caused by unemployment or declining incomes, is going to create a crisis separate from that caused by the developer loans. The balance outstanding on personal credit cards has increased from 2.96 times monthly expenditure in Feb 2008 to 3.8 times monthly expenditure in Feb 2009.
From this we should expect that the Government’s projections of increasing personal consumption from 2010 on will be seriously undermined by the extra debt burden and people’s attempt to deleverage. If this is the case, then their overall GDP/GNP growth projections contained in the recent budget will have to be revised downwards, with all the consequences that will mean for unemployment, investment and the fiscal deficit.
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