April tax figures - not as good as they look

An Saoi: At an initial examination the April figures appear to be very good. However, at closer examination I think that there are a number of specific reasons - administrative and technical - explaining why the underlying figures tell another story.

The Income Tax figure looks excellent at first view. However, the estimate for April appears to have been far below the underlying liability. March involved five pay weeks for those paid weekly, and three pay fortnights. The estimate was just €1,080M - just €100M over the previous month, while €1,271M was actually paid. The profiler clearly did not get out his diary and calculate the full effect of the additional pay weeks.

Bi-monthly VAT returns are not due in April and the net VAT paid for April was €287M well in excess of €205M profiled. This is probably a reflection of delays in VAT repayment claims due to staff shortages, rather than additional taxes paid. The Revenue does not publish any details of repayment claims on hands at the end of the month therefore we can only guess what the actually position is. There have been strong rumours that the Revenue has been staggering large repayments over a longer period because of staffing and cashflow problems. The real test will occur with next month’s figures, which will include the March/April VAT returns. March spending on credit cards published by the Central Bank last week reflected very poor consumer activity in the month, and suggests that the VAT returns will be poor. Add to this the processing of the balance of the repayment claims arising from earlier periods and

Corporation Tax for the month was on target and remains ahead of target. May is a crucial month for Corporation Tax. Companies with account years ending 30th November & 30th June must make payments. In Ireland this includes Microsoft, Pfizer, Oracle & Diageo (Guinness). Last month I commented as follows on Corporation Tax,

“Little or no Corporation Tax is now paid by Irish owned businesses, while a very small proportion of the net yield is accounted for by those multi nationals actually trading in the Irish economy, e.g. Vodafone & O2. The increase in yield from Corporation Tax reflects the activities of multinationals in Ireland, using Ireland as their point of sale for goods and services. The annual target for Corporation Tax of €4,020M is likely to be comfortably exceeded. The net target for March was just €10M compared to €111M actually received. Such a monthly discrepancy needs some explanation, which was not forthcoming from Dept. of Finance.”

Corporation Tax bears no relation to actually Irish economic activity rather it is paid by multi-nationals for Ireland facilitating their activities.

Excise, which includes VRT is slightly below target in April (€406M versus profile €420M), however remains slightly ahead of target. Ongoing car sales are helping to keep figures up. The real test will occur after 30th June and the scrappage scheme ends. The continuing collapse of major garages such as Maxwell Motors would suggest that without this crutch, trade will collapse in the second half of the year.

Customs Duties are collected by the Irish Revenue on behalf of the European Union. The increase in yield is down to large multi-nationals using Ireland as their point of entry on imports from outside of the European Union and is irrelevant to the Irish Exchequer.

I made a technical error last month in relation to CAT which of course was brought into the pay and file system in Finance Act 2010. We will therefore have to wait until later in the year before we can make any real comparison. Stamp Duty & CGT are both running marginally below their very low targets.

However, I would hold with my tentative projection of March, which you can access here. Real cutbacks have not yet been felt, despite what people may think. Substantial losses of jobs will continue in the Public Sector and in Construction. The May figures should enable us to make more confident predictions for the final outcome.

Credit cards in December

An Saoi: The Central Bank provides an analysis of credit cards as part of its monthly statistical report. It is the very final Table in the monthly report. It is of interest because expenditure on credit cards follows the trend of movement in retail sales, excluding motor vehicles (a person is unlikely to buy a car on a credit card.).

The December figures don't disappoint, and reflect the trend CSO estimates for December (Table 2). Helpfully, the report provides a split between cards held personally and those held for business purposes. The new expenditure on business cards is holding steady, but expenditure on personal cards fell by 11.3% against December 2009 & 27.5% against December 2007, when the Irish recession was getting going. Seamus Coffey has a vey good review, complete with numerous graphs, of the December retail sales available here.

The report also shows an extraordinary decline in the number of personal credit cards issued in Ireland, a drop of 36,000 cards in just one month and a drop of 103,000 in the last twelve, leaving just 2,072,000 in use, still a huge number by continental European standards. This fall is significant in itself as it reflects the closing off of access to short-term borrowing for a very large number of people.

New personal expenditure on the cards has fallen back to the levels of December 2004 and indebtedness is also falling albeit at an excruciatingly slow pace. The balance outstanding (owed) is now “just” 3.37 times the monthly expenditure
It would be interesting to know how many of the cards were cancelled by the issuer or voluntarily handed back. Also how much outstanding debt was written off or converted or “consolidated” into loans on cancellation.

However if we look at the trend, then it is clear that activity in the economy will continue to fall for sometime yet. Credit cards are used by many Irish people for their regular out of pocket purchases. This is called "Froopp" in the language of Eurostat (Frequent Out Of Pocket Purchases), which represent a large proportion of personal expenditure. A drop in credit card activity represents a decline in overall consumer activity. A decline in credit card numbers represents a serious decline in the confidence levels of both the issuing banks and consumers for the future.

Credit card spending is not restricted by weather, indeed bad weather is a boon for internet shopping, for which a credit card is a pre-requisite. The bad weather should be reflected by greater use of credit cards, not less as people used the internet instead of venturing from their homes.

Unless we see some upturn in the domestic economy very soon, the Central Bank's recent gloomy forecasts will begin to look overly optimistic.

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.

Budget 2009: A budget destined to deflate

Peter Connell: Over the past few weeks, the debate regarding the scale of the fiscal deficit that the government should aim for in today’s budget has been joined by economists and commentators of all persuasions. They seemed to range from those like Brian Lucey of TCD on the one hand who, on Monday night’s Questions and Answers seemed to argue for a package that would take €6 to €9 billion out of the economy, through to those on the left arguing for a smaller correction such as the Labour Party’s €2.8 billion package, and those arguing for a stimulus package mirroring policies in many other developed countries.

Seen in the context of this range of views, today’s budget with spending cuts and tax increases adding up to €3.3 could be viewed as falling somewhere in the middle. Quite a few commentators this evening are suggesting that the government may have got the balance more or less right by avoiding excessively deflationary measures and have avoided ‘killing the patient’.

That, I think, remains to be seen. A cursory examination of the projected impact of the tax increases (and cuts to the Early Childhood Supplement scheme) on low and middle income families presented on the Department of Finance website suggests that consumer spending is destined for further very sharp falls in the coming months. We know that about 35% of all income is earned by those earning between €20,000 and €40,000 a year. And we can be pretty sure that most of that income totalling about €37 billion is spent – on food, rent, mortgages, clothing, transport, household goods. A married couple, one in employment with two children under 5 and an income of €30,000, will have over €100 a month less to spend from May onwards – assuming the earner doesn’t loose their job due to the deflationary spiral this budget seems destined to exacerbate.

On that basis the Minister for Finance shouldn’t be surprised if his tax take from VAT and Excise turns out to be rather less than he anticipates.