Saturday, June 13, 2009

Department of Finance Fairy Tales: June 2009

This is a copy of presentation sent out by the Department of Finance to various finance bodies in Ireland and, to my knowledge, circulated abroad. I am omitting only title slides. I will be working on the commentary to these slides throughout this weekend, so do come back.

And: I have an article commenting on these 'forecasts' coming out in Business & Finance magazine on June 18 which I will not repeat in these comments, so do read B&F too.

Section 1: Successful Transition
A section fully devoted to the past with no references to the actual sources of data, no clear definitions of what these numbers stand for and without any attempt to actually tell us, why should we care about these descriptors of the bygone era when, according to the title we are supposedly reading about the Irish economy in perspective, not in retrospective...
No explanation as to what 'income per capita' does DofF have in mind, although it is fairly clear it is GDP per capita, not GNP per capita - a difference of roughly 18% to our real income... Another fallacy is to compare ourselves to the EU15 (note to the slide contains explanation that it is EU15 indeed) (presumably) average income per capita. Why? Why not the US?Yes, this is all true. But we are comparing to 2009, so why not take 1999 as a mark for comparison? And what does this mean? That we used to be an even worse basket case than we are today, so let's live off our achievements of the past? Or that we should be grateful to out civil service masters for the blessing of not living in 1987 anymore?Sorry, but why are we using 2007 as a benchmark? If you and I were still living in 2007, would DofF need to produce this presentation? I don't think so. So why not be honest and produce a 2009 economic conditions slide instead of 2007?I do some of the analysis of this slide and what it means for the future growth potential in Ireland in the next week's Business & Finance magazine.Notice that there is no bullet point for:
  • Public expenditure got out of hand;
  • Salaries and perks in the public sector employment grew exponentially;
  • Tax revenue became wholly dependent on property markets and financials;
  • Domestic development became so closely linked to the clientilist Government that banks and developers effectively merged into one uninterrupted line of quasi-corrupt money lending;
  • Subsidies to quasi-independent state sectors: welfare, health, education, rural affairs and so on became so endemic that Ireland of today no longer has organizations independent from the Social Partnership-embodied corruption of policy and executive power.
It is not explained in the above slide, but HCI stands for Harmonised Competitiveness Index. Per latest data available, chart below plots actual HCI numbers from the Central Bank site (here)
Two things are worth noting above, that are not mentioned in the DofF presentation. DofF data is heavily smoothed, implying that one cannot tell much from their chart about more recent changes in HCI. Second, instead of improving competitiveness in the downturn, as all real economies do, Ireland is actually experiencing further deterioration in competitiveness since the beginning of 2008! Clearly this shows that Irish Government policies aimed at improving competitiveness - the favorite buzzword of Mary Coughlan and the rest of the economic illiterates occupying highly paid ministerial seats in this country - are not working!

Section 2: Current environment challenging (sic)

Again, I am simply amazed that the challenges listed do not include:
  • Public finances crisis;
  • Public sector inefficiency, overpay and waste
  • Grossly costly state employment;
  • Collapse of the Social Partnership-led policies on wages, labour costs, taxation, spending, state incentives for development, social welfare and so on;
  • Collapse of Irish banking sector - also in part linked to state and local polices.

Again, what the above slide clearly shows is that not a single on of our major trading partners has experienced such a deep collapse of growth as Ireland did. In the past I have produced several estimates of the split between domestic and foreign sources of this depression. I found that at most 40% of our economic troubles can be attributed to foreign shocks and at least 60% are attributed to purely domestic shocks. DofF is simply deceiving its audience when they disproportionately stress the issues of external shocks.
These and most other numbers in this presentation are repeats of the Supplementary Budget 2009 estimates. I commented on these before and I continue to hold that DofF projections for 2009-2013 are exceptionally optimistic. What is even more interesting is that this presentation was prepared in late May 2009, which means that DofF has done no work revising its own forecasts between end of March 2009 and end of May 2009 - full two months. Chart below highlights it again as it plots unemployment to March 2009, when we already have April and May figures available to us.
Note that the above chart asserts that employment levels will remain high after failing to tell us that it is a forecast not the actual data that show this. Furthermore, DofF does expect a decline of 7.5% in employment levels in 2009... High? Again, read my Business & Finance article next Thursday.

Section 3: Ireland's strengths
Two points worth raising in relation to the above slide:
  1. Our low burden of taxation implies that this year we will be spending some 45% of our entire economy-s output in public expenditure... low, eh?
  2. Our outward oriented economy is not a strength, but a necessity and it is certainly not the outcome of some miraculously prudent economic policy. With just 4.5mln in population, it is hard to see how Ireland could have remained anything but 'outward oriented'.
The claim is that if we are falling in unit labour costs by 7%, we are showing improving competitiveness and evidencing Irish economy's superior flexibility. This is simply idiotically simplistic interpretation of the data. First, it is important to understand that our unit labour costs are falling from already sky-high base, so a 7% fall does very little to bring us in line with EU unit labour costs. Second, this data refers primarilly to manufacturing, while over 70% of our economy is in services. Third, this data is based on GDP measure of output, which, as mentioned earlier, is a completely irrelevant measure for overall output of an economy built on tax arbitrage.
Once again, DofF is presenting its own forecasts as if it represents an achieved reality. It is an open question whether or not our external position will move into surplus in 2010. Even if it does, it can do so on the back of decimated imports, not because of robustly growing exports.

Section 4: Policy Responses
I am commenting on the above slide's ludicrous assertion concerning rapidly adjusting public sector wages in my article in Business & Finance. Needless to say - this is simply referring to a 7.5% pensions levy, which I do not consider a wage cut, but a delayed payment for pensions benefits. In fact, the payment is still only partial.

As far as other points go:
  • Maintaining favourable tax system - this refers solely to the corporate tax, with all other taxes climbing up and some being already at the forefront of high tax economies (VAT, stamps, excises and so on). DofF is simply economically illiterate enough to think that corporate tax is all that matters in an economy.
  • Per investment in infrastructure, to date in 2009 there has been no allocation of actual investment. Furthermore, as I noted before, capital spending by the state has declined in real terms, not increased at the time of economic recession.
  • Per investment in education and skills - I cannot agree with a premise that waste of taxpayers money on FAS programmes - with no real accountability for outcomes or cost-benefit analysis of these programmes constitutes investment in skills.

So Irish banking sector is just a poor victim of the international turbulence, international capital markets and property lending? Ok... forget our developers, forget close links (via Social Partnership and the state/local authorities policies) between the developers and the banks, forget the mismanagement by the Financial Regulator and the Central Bank of the entire regulatory system of this state... what about those 'international capital markets'? If DofF sees international capital markets as a problem for Irish banks, I have two follow up questions:
  1. Where, if not on international capital markets, does DofF think we can raise funding for the banking sector? In Bord Na Mona's pit bogs?
  2. If international capital markets access is a problem for DofF, while the same access is part and parcel of our economy's outward openness, how does this assessment square against DofF's assertion that the Irish economy's openness is a strength for our economy?
I am also concerned with the idea of parading our 'low levels of government' debt as a strength. For several reasons. First, our debt is about to go stratospheric with NAMA and other banking sector commitments - factoring all known commitments, we are looking at breaching 120% of GDP level of public debt before 2013. Hardly a low figure. Second, our overall economy's debt is one of the highest in the world. Third, most of our debt is acquired in the process of wasting billions of euros on excessive social welfare spending and wages increases for public servants, so regardless of how low this debt is, it is certainly not going to yield and public returns at any time in the future.
What does 'Credit Package' mean above? And on the €376bn in guarantees - this excludes €90bn guarantees under Deposit Protection Scheme that covers deposits up to €100K. Bank recapitalization also fails to mention the special deposits placed with Anglo by the state to prop-up, artificially, bank's balance sheet.
The last point is a real nuke here - in effect, DofF has pre-committed in May 2009 - before any public recognition of this commitment by any politician in the country - to extend banks guarantees for long-term debt, thus saddling our children's generation with an open-ended insurance bill for future bank failures and giving banks a blank cheque to write their future borrowings on. I do not know about you, but bureaucrats acting like tzars with taxpayers money is what happens in totalitarian societies, not in parliamentary democracies. The slide also does not mention future recapitalisation rounds, covering the latest demands from Anglo and expected future demands from NAMA-participating banks.This slide is beyond any level of rationality. To call the deepest collapse in public finances in Europe as 'difficulties but starting point is favourable' is simply an understatement that betrays either the lack of honesty on behalf of the DofF or their complete detachment from the real world. Take your pick.I show conclusively in my Business & Finance article that fiscal conslidation claimed by DofF to have covered 5% of GDP is barely stretching to 2% of GDP. I would also suggest that we should stop the farce of identifying as 'spending cuts' reductions in planned, but not disbursed spending. It is also worth noting that all of the above measures on taxation and spending cuts have been shown to yield expected savings or revenue increases well below those claimed in the slide.I don't really want to comment on these figures again, as I have done so following the Supplementary Budget - from which these figures were simply cut and pasted into this presentation.

Note the year of comparison...

Section 5: Long term responses
So 'responses' are:
  • Favourable demographics - a 'response' to crisis that has taken place some 20 years before the crisis? Some foresight by the Government, I would presume. It takes roughly 20 years for a person to be born, grow up and be eligible for an entry into the labour force. So per DofF, two people conceiving a child say 20 years ago were preparing a 'response' to the current crisis? Truly, a Borat School of Economics has taken hold of our DofF 'forecasters'.
  • Highly educated? Per all statistics I am aware of, Irish total labour force (not just 25 year olds and under sub-category of it) is average by EU comparisons.
  • Potential growth of any % pa is not a 'response' but an outcome of the responses.
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