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Whistling past the economy… April 6, 2011

Posted by WorldbyStorm in Economy, Irish Politics.
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Here’s an interesting statement:

Total exchequer revenue (tax and non tax) grew by 2.1 per cent on the first quarter of last year. Although slightly below official projections, this was the fourth consecutive quarter when total revenues were either expanding or stable compared to the year-earlier period. As the chart shows, the free-fall of the previous years is over.
About the worst news on taxes related to value added tax. While it was the largest source of revenue in the first quarter, raking in €3.1 billion, it was down more than 3 per cent on a year earlier. The fall reflects consumer inability and unwillingness to spend.
The second largest source of revenue was income tax (which includes the Universal Social Charge). The large rate hikes contained in budget 2011 resulted in a revenue increase of almost 10 per cent year-on-year in the first three months of the year.
That, however, was below official expectations. The mandarins had believed that such hefty rate hikes would generate an increase closer to 15 per cent. This adds to the body of evidence suggesting that taxing your way out of a big budget deficit is less effective than wielding a scalpel on spending.

Why interesting? Because it points to a disconnect between what might economically be ‘efficient’ and what is societally ‘efficient’. I’ve referenced data from the IMF research which suggests that the differences between tax increases and spending cuts are quite minimal in such situations with – perhaps – a slight edge on spending cuts, but little more than that.

The central point there is that given that choice a left of centre approach would be one that attempted to protect expenditure, not least given that (see below) those are the very areas that tend to have to increase during a recession (putting to one side our demographic situation).

But there’s more, of course. The economy is still in decline.

About the worst news on taxes related to value added tax. While it was the largest source of revenue in the first quarter, raking in €3.1 billion, it was down more than 3 per cent on a year earlier. The fall reflects consumer inability and unwillingness to spend.

Who, other than those with significant savings and the prospect of retaining same, is going to spend now in a context of reduced wages, increasing interest rates, the threat of unemployment (for both private and public sectors) and so on?

And this leads us straight back to the tax/spend argument. In a context where…

…once taxes linked to the property market flooded into the exchequer, they now just trickle. Stamp duty and capital gains tax combined generated a mere €195 million in the first three months of the year. This was below the department’s already low expectations and represents a fall of more than one-fifth year-on-year.

Figures on the state of the property market, also released yesterday by daft.ie and myhome.ie explain this. By both organisations’ reckoning, property prices continue to slide in early 2011, with no let-up in the pace of decline.

So much for the empty boosterism of certain parts of the press over the last year. One of the most telling indications for me living in East Wall was going past an estate agents in Fairview at the weekend and seeing that the range of property prices were just barely above the 1999-2000 levels. Some way yet to fall it would seem.

On the expenditure side, the cost of taking on the losses of Anglo Irish Bank began kicking in when measured by the exchequer cash flow figures – they were fully accounted for last year in the EU compatible set of figures, which are produced with a long lag.

Most areas of current expenditure fell year-on-year. But the biggest spending departments recorded sizeable increases – Health and Children, Social and Family Affairs, and Education and Science.

Well now, why would that be? Could it be our increasing population, particularly that of school-going age? Could it be the swelling ranks of the unemployed?

And none of this addresses a central problem. Government debt is inexorably rising under the pressure of the banking bailout towards 120 per cent of GDP.

There’s no end of commentators both here and abroad who are willing to point out what happens to economies where Government debt tips 100 per cent.

Yet all the above seems to be like whistling past the graveyard hoping to ignore the disturbing shuffling sounds behind the walls.

Given that the gate’s are open that’s not going to help much.

If at all.

Comments»

1. Michael Taft - April 6, 2011

It is hard to know where to begin with this careless analysis (not yours, WBS, but what you quoted). First, what little body of evidence we have for Ireland shows that spending cuts have a more harmful effect than tax increases. The ESRI estimates that €1 billion in income tax increases reduces the deficit by 0.4% while property tax cuts the deficit by 0.5%. Now compare €1 billion cuts in public sector employment: 0.2%; and public sector wages: 0.3%. Why is this? Because spending cuts are more deflationary. Okay, this is only a model – but to ignore two studies by the ESRI into this issue can only be described as convenient.

Of course, there are income tax increases and there are income tax increases. The last budget targeted low and average income earners: the USC, cuts in personal credits (effectively, a flat-rate tax increase), cuts in the standard rate tax band which hit below-average wage earners harder than those on high incomes: all in all a more regressive tax budget you couldn’t find. And what a surprise – consumer spending, retail sales index and VAT all down.

Evidence? In Budget 2010, the Government introduced €4 billion in spending cuts and no tax increases. They projected GDP to stand at €161 billion. Instead, the GDP turned out to be €154 billion. So much for a scalpel or a bone-cutter or sledge-hammer.

We can go through these numbers all day but when the sun goes down all we are left with is Boxer-type exhortations, ‘I will cut harder’.

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2. EWI - April 6, 2011

This adds to the body of evidence suggesting that taxing your way out of a big budget deficit is less effective than wielding a scalpel on spending.

Michael Taft is correct – perhaps in the imaginary Ireland which exists in the Irish Times offices, there have been no cuts in spending (the proles don’t count?), but it’s a very different story out in the real world.

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3. Pope Epopt - April 6, 2011

I’d suggest that it is leaving political hostages to fortune to state the left of centre approach “as one that attempted to protect expenditure”. We’ve all seen cases where expenditure doesn’t translate into wellbeing, and instead becomes captured by financial and professional elites.

Instead the emphasis in the messages going out should be on protecting a) the social wage – the common wellbeing delivered through public services regardless of wealth – and b) the vitality and resilience of the local and national economy.

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Worldbystorm - April 6, 2011

Very fair point I was sort of thinking as I wrote of this from an LP point of view, ie one would expect even a mild centre left approach to at least try to protect expenditure, but that is an excellent point nonetheless and you point up the danger of looking for too little.

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4. Jim Monaghan - April 6, 2011

McWilliams states that we are in denial. That we are now Championship rather than premier to use a football analogy. I have to say that I am not convinced that a reformist solution would work in an open economy. Even burning the bondholders would not be enough. I am now moving to a solution of heavy wage cuts at the top of the public service. I think a 100 grand is enough for a senior public servant. As an be seen in the latest scandel where the top awarded themselves huge leave and where we had garda drivers retiring with pensions close to superintendents, it is obvious that a culture of self entitlement and waste prevaeds the top of the tree.Those who actually do the work were oblivious to this. Protect those who actually do the work.
Even with massive cuts I cannot see how a default can be avoided. The country is bankrupt and as long as we are in denial it will get worse.
I do not see how we can be Keynesian while the rest of teh world is monetarist.We are too small and open.

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5. FergusD - April 7, 2011

A bit late for this discussion and perhaps not quite relevant but I had to post this from the BBC site about Portugal:

“The UK has said that it will not be extending the sort of bilateral loans it offered to the Irish Republic, because it does not have such a close relationship.”

Close relationship – bullshit!! It’s because UK banks are massively exposed to Irish bank failure, and not to Portuguese banks!. Lend the money to the RoI so UK banks are saved and get the Irish to pay for it (they’ll pay interest) – brilliant!

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Pope Epopt - April 7, 2011

And by extension, the ECB involvement in the rescue or condemnation to eternal debt slavery (depending on your point of view) of Ireland was all about avoid facing up to the insolvency of some major French, British and German banks.

The admission of Portugal into the club of debtors seems to me an ideal time for Ireland to become part of a debtors union of nations within the EU, and negotiate collectively. This is very improbable for a number or reasons, misplaced national pride being one of them.

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