Friday, February 26, 2010

Trading partners

Following on from a look at export levels here, we can also use the latest CSO External Trade release to look at Ireland’s trading partners.
The following table gives the top 12 destinations of Irish exports in millions of euro, along with the remaining exports to other EU countries and other worldwide countries.  The table gives the percentage change from the same period in 2008 in exports to this country and the proportion of total exports that go to that country.
CountryJan-Nov 2008Jan-Nov 2009% Change% of Exports
Great Britain13,108.411,233.4-14.3%14.5%
Northern Ireland1,451.21,157.1-20.3%1.5%
Other EU4,596.03,912.3-14.9%5.0%
Other countries8,649.07,692.7-11.1%9.9%
After the US, the biggest destination of Irish exports is Belgium, taking nearly 18% of the total exports.  Belgium is the biggest destination of Irish exports in the EU, overtaking Great Britain and is more than three times greater than either France or Germany.  Exports to Belgium also show strong year-on-year performance with a 22.1% increase on the same period in 2008.
This is likely related to pharmaceutical exports, with manufactured products from Ireland exported to central distribution hubs in Belgium.  Again it is likely that the size and increase of this flow is due to transfer pricing behaviour rather than real changes in output and employment.

Thursday, February 25, 2010

An Export-Led Recovery?

On Tuesday the CSO published the latest release of the monthly external trade statistics.  As with many recent patterns from the Irish economy, the data do not paint a positive picture.  At first glance it may seem that all is not too bad as our overall trade balance increased through 2008 and most of 2009.
The following graph gives our trade balance from the start of 2005 through to November 2009.
trade balance
The trend has turned slightly downward over the past few months, but our trade balance is still substantially higher than it was two years ago.  If we break down the balance into its constituent elements of imports and exports we see that the trade balance is improving because of the rapid fall in imports.  We are buying less stuff from abroad. This is shown in the following graph

After a prolonged period of stability exports have now began to trend downward.  This is counter to the predictions of an “export-led recovery” that have come from many sources (see here for an example). Looking at the source of our exports also leads to some concern. 

The following table shows the source of exports for the first 11 months of 2009.  The table gives the value of exports from January to November in ten different categories, the proportion of total exports that these categories comprise, and the percentage change in these categories from the same period in 2008.

Value of Exports
(€, millions)
% of Exports
Change on 2008
Food and live animals5,695.17.35%-12.90%
Beverages and tobacco981.41.27%-14.64%
Crude materials (inedible except fuels833.71.08%-32.78%
Mineral fuels 552.00.71%-30.65%
Animal and vegetable oils17.70.02%-55.64%
Chemicals & related products44,388.857.25%+8.40%
Manufactured goods 1,144.21.48%-26.79%
Machinery & transport equipment12,530.916.16%-25.18%
Miscellaneous manufactured goods8,374.210.80%+3.27%
Other and unclassified3,015.13.89%+20.36%

Almost 60% of Ireland’s exports come in one sector: chemicals and related products.  This category is one of only three to show an increase in exports of the 2008 figure.

This category in itself is dominated by two commodities  – organic chemicals (20% of total exports) and medical & pharmaceutical products (27% of total exports).  The performance of medical & pharmaceutical exports from Ireland has been remarkable given the global collapse in trade.

Pharma Exports
Pharmaceutical exports  in September 2009 were 50% higher than they were in September 2007.  This strong growth has tapered somewhat recently. In fact the annual growth rate pharmaceutical exports in November 2009 was –1.2%.  This is the first time this has been negative since February 2009.  The strong performance in this sector masks the weak performance of exports in other sectors. 

However, one would probably have to question the reality of this large increase in pharmaceutical exports.  There is little  evidence that pharmaceutical companies have been increasing output.  There is little evidence that pharmaceutical companies have been taking on additional workers.  There is little evidence that pharmaceutical companies have been expanding their manufacturing facilities.  How have exports in this sector risen by over 50% in the last two years? 
It could be that much of it is simply down to increased transfer pricing behaviour of multinational pharmaceutical companies in Ireland to avail of our relatively low rate of corporation tax.  The relative stability of Irish exports in the current recession may not be so real after all.

The category ‘machinery and transport equipment’ is symptomatic of what is happening to real Irish exports.

Seven of the ten categories of exports are showing declines, and all seven are showing double-digit declines in line with experiences other countries.  It appears our export performance isn’t so strong after all.

Friday, February 19, 2010

Why isn't the corporate income tax progressive?

The equity principle that underlies most tax system suggests that those who have a higher income should pay a greater proportion of their income in tax.

This progressivity is clear if we consider income tax, but absent for corporation tax.  Using data from the Revenue Commissioners 2008 Statistical Report we can draw the following graph.

Tax Rates

This gives the effective tax rate on labour on wages up to €200,000 (lower axis) and the effective tax rate on corporations on profits up to €10,000,000 (upper axis).  We see that the tax rate on labour rises with income, from 0% up to about 28%, while the tax rate on corporations is around 11% for all profit levels.

Why should a company that earns a profit of ten thousand pay the same rate of tax as a company that earns a profit of ten million?  Why is the corporation tax not progressive?

Andrew Chamberlain provides the answer:
So here's a question. If graduated tax rates on people are fair, are they also fair for corporations?  Even if we enthusiastically embrace progressive income taxes on people, progressive taxes on corporations don't follow at all.
Let's start with a simple example. Imagine two companies. One is a start-up that makes high-tech satellites. Like most start-ups, it's well-financed but earns no profits. It has rich customers, highly-paid employees, and very rich venture-capitalist shareholders.
Now consider a second company. It's a large big-box retailer. Like most big companies, it earns handsome profits. Most of its thousands of employees earn low wages, and so do its customers. Its stock is publicly traded, and shares are mostly held by mutual funds feeding 401(k) retirement plans of workers, many of whom fall in the middle of the nation's income distribution.
Question: which of these two companies should pay a higher corporate tax rate, given their ability to pay?
At first this seems easy. The one with higher profits should pay higher rates. But look closer. What do you mean by the company's ability to pay?
Every freshman economics class teaches companies can't bear taxes, only people can. Companies are just legal fictions that shove off taxes onto customers, employees and shareholders. The firm itself pays nothing. And so the age-old notion that we should hammer rich companies because "they can afford it" is really based on a simple misunderstanding.
Back in our two-company example, one earns zero profits but has well-paid workers, rich shareholders and wealthy customers. The other earns huge profits but has low-wage workers, poor customers and middle-income shareholders. How can a progressive corporate tax be fairly applied here? What's the logic in taxing poor folks who work and shop at profitable companies with a 39 percent rate, while rewarding wealthy employees and customers of unprofitable start-ups with a 15 percent rate?
So progressive corporate tax rates that treat companies like people aren't just silly, they're unfair. And unfair in an especially capricious way that should infuriate people who really care about tax fairness.
Sam Walton was rich. But the poor families who bought jeans at Wal-Mart this morning aren't. Why soak them for shopping at a profitable company? Why not tax the Waltons directly, and forget the rococo con game of corporate taxes altogether?

Confusing Income and Wealth

It is very common to see income (a flow measure) confused with wealth (a stock period).  Wealth is accumulated through a period of high income. High income alone does not indicate wealth.  Wealth is accumulated with persistent levels of high income.

This reached a peak when after 2006 among non-oil economies Ireland was declared “the richest country in the world”.  A piece in The Irish Independent declared that “Ireland is rated sixth richest country in global wealth league”.  The piece declared:
IRELAND is now the richest non-oil country in the world, apart from the small financial hubs. With the exception of world financial centres like Liechtenstein and Bermuda and the oil kingdoms of Norway and Qatar, Ireland is now the world's richest country with an average income of €44,000.
The Standard & Poor's agency ratings show Ireland lying in sixth position for the second year in a row, easily beating the likes of the US and the UK, who took 11th and 18th places respectively. Ireland's average income has risen from €39,335 last year to a new high of €44,000. The increase in wealth is reflected in spending both on property and on the high street.
There it is in black and white - “Ireland is now the world’s richest country”.  Everyone bought into it.  A couple of good years and we’re suddenly declared the richest country around.  We started in 1995.  Some countries have a head start on us at wealth accumulation of hundreds of years yet we’re supposed to have wiped that out, and more, in a decade.

This report from National Irish Bank provides an interesting analysis of wealth in Ireland.  Maybe we’re not as “rich” as we thought we were.

Today Davy Stockbrokers have released a report of their own which does not confuse income with wealth.  They analyse what we have done with the money we earned during the high income period from 2000-2008.  Their opening remark is stark.
Ireland ranks reasonably well in income tables, but it is not
a wealthy country; high income in 2000-2008 largely wasted.
The report makes for interesting reading and the conclusion is clear.  Here it is in black and white.
We blew the boom!

Saturday, February 13, 2010

Does Debt Matter?

On his ever interesting blog Steven Landsburg has posted a short piece on Debt and Taxes.  With attention around the world focusing on the debt and deficit problems of governments, Landsburg argues that it is not debt that is the problem but spending.  He concludes
This is why it’s so frustrating to hear talk of blue ribbon commissions assigned to the task of “debt reduction”. “Debt reduction” can mean less spending, or more taxes, or some combination thereof. But to raise taxes solely for the purpose of debt reduction is to mask the problem, not to solve it. Debt is not the problem; spending is. Hysteria about the debt is misdirection.
Read the whole thing.

Deflation Nation

On Thursday the CSO released the January update of the Consumer Price Index.  The figures reveal that the annual rate of inflation -3.9%, the highest (least negative) it has been since April 2009.  However, if we look at a measure of 'core inflation' we actually see that the inflation rate is still declining.

Here core inflation is the CPI excluding mortgage interest and energy.  The prices of these goods are largely external to the Irish economy.  Here is a graph of the overall CPI and core inflation annual rates.  Click to enlarge.

While the overall rate is trending upwards, the core rate, which is driven largely by domestic prices is falling at ever faster rates.  The overall rate is rising as the ECB interest rate cuts beginning in October 2008 are now falling out of the 12-month rate.

The general reaction to the figures has been along predictable lines.  A common theme when the CPI figures are released is that it serves to highlight so-called 'government inefficiency'.  In The Irish Examiner we have:

The small business group, ISME, warned however that while some costs are coming down, the price of many state costs are rising.   Opposition politicians echoed these warnings and attacked the Government for failing to rein in state-controlled costs.

The CSO figures show that rail travel increased by 0.3% over the year while bus fares were up 4.4%. Education costs were also up 11.3% while health costs rose by almost 2% in the year.
Here is a piece on last month's CPI release that uses comments made by Patricia Callan, director of the the Small Firms Association :
Callan called on the government to start taking the issue of restoring national cost-competitiveness seriously, in particular in the sectors where it has direct control over pricing. CSO figures show that the overall increase in the CPI from 2005 to 2009 was 8.4%, yet the equivalent rises in Education costs was 24.4%, House, Water, Electricity, Other Fuels was 19.4% and Health was 17.9%. “The Government needs to take firm action to bring the costs it imposes on the economy back in line with the CPI, so that it is not having knock-on negative impacts on small businesses who are fighting for survival”, commented Callan.
She called on the Government to immediately impose a price freeze on all publicly administered services for 2010 and specifically to instruct all local authorities to decrease commercial rates by 10% in 2010. These increased on average by 2.7% in 2009, despite annual deflation of 4.5%, and have vastly exceeded the inflation rate for many years. “When public sector inefficiencies are passed onto the rest of the economy in the form of indirect tax increases and charges, competitiveness deteriorates and jobs are lost. Our inflation rate is a key component in regaining lost competitiveness.”
These theme can be found from lots of commentators.  However, it is a load of rubbish!  From the "turning the corner" paper we can see why from the following section. Click the tables to enlarge.

The CPI measures consumer prices. For most of the public services provided in health and education, a direct money price is not charged; hence these are not included in CPI calculations. For example, the Education group which makes up 2.04% of the CPI are described in Table 3.1.

The state does not set prices in the primary or secondary sectors even though it is the main provider. Other education and driving tuition are private sector activities. The CPI Education Group tells us little about public sector provision of education as, third level aside, the consumer is insulated from cost as prices do not exist.
Although slightly more involved, a similar analysis is provided for the Health sub-group in Table A.5 in the appendix. Again the conclusion is that the CPI numbers indicate little about public sector provision of health with at least 70% of the Health sub-index made up of private sector prices.

There may be inefficiencies in the public sector but any claim of such based on CPI data are wide of the mark.

Tuesday, February 9, 2010

Car Sales Speeding Up?

We have been hearing positive vibes from the motor industry with sales figures for January released last week.  RTE tell us that there are more people buying new cars
The number of new cars registered last month is up 5% on January 2009, according to new figures from the Society of the Irish Motor Industry.  16,595 new cars were registered in January 2010, compared to 15,799 in January last year. This is the second consecutive month showing an increase.
See also reports in The Irish Times and The Irish Independent.  But as with so much economic commentary (spin?) things are not always as they appear to be.

It is true that 5% or 796 additional new cars were registered in January 2010 compared to Januray 2009, the total amount of cars registered in the month actually fell by 1,905 or 9%.  Registered cars includes new cars and the import of second hand cars.

The number of second hand cars imported in January 2010 was down 46% on the figure for Januray 2009, a drop from 5,889 to 3,188.  This means that the total number of car registration was 19,783 down from 21,688 -  a drop of 9%.  The data are provided by the Society of the Irish Motor Industry (SIMI) and can be accessed here.

To know the total number of car sales we would have to know the number of second hand sales but SIMI do not provide this information.  Without this figure it is hard to know what the outturn of total car sales figures was, but for the two figures we do know (new and second hand imports) car sales are down 9% on the same month last year.

And even for new cars the recovery isn't that impressive when we look at the data for a  few years.

Figures for the registrations of second hand imports are only available for Januray 2010 so we cannot include them. However, with car registrations down (new plus second hand imports) we can safely say that Vehicle Registration Tax (VRT) and VAT income for the Exchequer will be down. And with the government offering €1,500 scrappage for cars ten years or older to buyers of "low emissions" cars, there is no gain for the Exchequer from the motor trade. Indeed with reports that 71% of the new cars sold in January were in the "low emissions" category (less than 141g/km) these will be subject to lower VRT and Road Tax rates.

Still, it is likely that the "Big Freeze" had a negative impact on many retailers with test drives likely to be heavily hit. Therefore it is probably better to wait until the February figures to make a full pronouncement of the health or otherwise or motor sales.

Retail Sales Data not "Turning the Corner"

This morning the CSO published the Retail Sales Index for December.  The release gives the final retail sales figures for November and preliminary estimates for Decemeber.  As with many other indicators the data show the rate of decline in the economy accelerating.  Here is a graph of the annual change in the value index excluding motor sales for the past two years.

The annual decline accelerated in December to -11.6% after being -11.0% in November.  See the downward trend in the actual index in this graph. No sign of any corner being turned here.

By volume the rate of decline accelerated from -5.9% to -6.7%.  Graph here. Volume is falling at a slower rate than value as retailers are reducing prices to try and increase the quantity of sales.  They are failing.

The best example of this can be seen if we compare the value and volume sales indices for Department Stores.

Department Stores make up about 5% of the Retail Sales Index and 70% of that is clothing. It is clear that there has been a huge divergence between the quantity of sales (volume) and the revenue earned (value). While both recovered somewhat in December, volume is still down 5% over the two years and value is down by over 20%. The larger drop in value is due to heavy price discounting.

Women and Men in Ireland 2009

The CSO have released theie latest version of the Women and Men in Ireland publication.  The release provides some interesting statistics across a range of areas: population, employment, lifestyles, education, health, crime and transport.

From a third level education perspective there are some interesting patterns.  Here is a graph of the percentage of the population aged between 25 to 34 who have a third level qualification. Click to enlarge.

The percentages were almost identical in 1999: men 26.7% and women 27.5%.  Although the percentage has been rising for both genders there has been a huge divergence in the series since 1999.  As of 2009, 51% of women in the 25-34 age category had a third level qualification as to only 38.7% of men.

Monday, February 8, 2010

Tax Revenue for 2010 will fall below €30 billion.

As of today (08/02) I predict that Exchequer tax revenues for 2010 will be less than €30 billion for the first time since 2002 (€29.3 billion).  This was fine to fund 2002 expenditure but not for the 2010 expenditure which is nearly twice as big.  The Department of Finance still believe the figure will be above €31 billion but are getting closer to the truth.

A week before December's Budget the Department released the Book of Estimates for 2010. In this short document the Department give their forecasts for the coming year under the prevailing policies.  On page 5 the prediction for tax revenue for 2010 is given as €31.9 billion - a drop of just 4.5% on the 2009 outturn.

At this point it may be worth noting the uselessness of Department of Finance predictions. 

When the Book of Estimates was released in December it also contained a forecast for the full-year tax revenue for 2009 of €32.6 billion.  This was a forecast of tax revenue after 11 of the 12 months of 2009 had passed.  Some three weeks later when the actual outturn of €33.4 was released by the Department, we were told that this was further evidence of the economy "turning the corner" as tax revenue came in ahead of forecast.   For example the Irish Times has a piece that includes lots of bad news but does say that "tax revenues in 2009 came in €473 million higher than was forecast in budget 2010."  There is also a paragraph that goes:
"Department of Finance official Michael McGrath said the department would not be changing its budget day tax forecasts, despite the “slight improvement” in revenues in December. The Government said last month that it expects to receive €31.9 billion in tax receipts during 2010."
The only "improvement" was relative to the low forecast the Department gave three weeks earlier.  Tax revenue for the year was down 19% on the previous year.

Anyway back to our forecasts for 2010.  We can see from the quote that at the start of January the Department was still predicting tax revenues of €31.9 billion.  Last week the Department published the Exchequer Statement for January.  This shows that tax revenues are down 17.7% on the same month last year.  This is a bit more than 4.5%. 

At the same time the Department released a Profile of Tax Revenue for 2010.  With little fanfare we see than the Department has revised downward its forecast of tax revenue by some €880 million to €31.05 billion.  This gives a predicted drop in tax revenue of 7%. [Further exploration reveals that this figure also appeared on page 47 of the December release of Stability Programme Update.]

As the year progresses (and more evidence emerges) it is likely that the Department will continue to scale down their forecasts of tax revenue for 2010.  By the time of the Book of Estimates for 2011 we may see a forecast of closer to €29 billion.  When the actual figure emerges a few weeks later we may hear further cries of tax revenue coming in ahead of forecast. Oh brother!

Here are some estimates of 2009 tax revenue from the Department of Finance website.  The actual outturn was €33.4 billion.

Forecast Error
Budget 2007
(Dec 2006) Page 2
€56.3 billion-€22.9 billion
Budget 2008
(Dec 2007) Page 2
€51.8 billion-€18.4 billion
2009 Book of Estimates
(Dec 2008) Page 4   
€41.2 billion-€7.8 billion
Budget 2009
(Dec 2008) Page 2
€42.8 billion-€9.4 billion
Supplemental Budget
(April 2009) Page 13
€34.4 billion-€1.0 billion
2010 Book of Estimates
(Dec 2009) Page 5
€32.6 billion+€0.8 billion

[Note: I have made a small bet with a colleague on the tax revenue outturn.  €10 to me if the figure is below €30 billion.  I'll be down €10 if the figure is above €30 billion.  As of now I like the odds based on the trend we recently discussed.]

Saturday, February 6, 2010

Good Copy, Bad Copy

Courtesy of Google Video here is a good documentary on the current state of copyrights in the world. I presume the creators have ceded the copyright on the documentary.

There is an interesting post from the blog Marginal Revolution on the issue of fixed costs and marginal cost pricing.  Some of the comments are particularly incisive. 

Friday, February 5, 2010

They Like Us. They Really Like Us. But why?

The Economist carries a piece that considers the fiscal crises facing many eurozone countries.  They put particular emphasis on Greece and in doing so provide a contrast to the Irish situation.
The planned cuts to the public-sector wage bill look small when set against such a large budget deficit. They also look timid when compared with the much bolder action taken in Ireland, another cash-strapped euro member. In December the Irish government announced big reductions in civil servants’ pay, only months after it had introduced a “pension levy” that cut public-sector wages by 7%. Its courage has been rewarded with lower borrowing costs.
There is also this.
Ireland is small, too, but its government has shown itself willing to take unpopular decisions to right its public finances. The Irish economy is more flexible so its medium-term prospects seem brighter. The economy grew slightly in the third quarter of last year. There are even signs that tax revenues are recovering.
So everything must be hunky dory so.  Not so I'm afraid. 

The Exchequer returns to January show that tax revenues in this first month of this year were 17.7% down on tax revenue in the same month last year.  Every tax head is down.  See this table.  

Here's a graph of monthly tax revenues for the Exchequer since January 2006 with a quartic polynomial trend line included. The trend since the middle of 2007 has been down. Tax revenues for January in each year are marked in red. Click to enlarge.

To see what the Department of Finance predicts will happen to tax revenues in the next 11 months see this graph.  It is clear that they are ignoring the current trend and are predicting tax revenues to "turn the corner" for the rest of the year.

Nouriel Roubini also thinks things are getting rosy in the Irish garden in a recent piece in The Financial Times.
A credible austerity plan would restore solidarity with EU countries that are adjusting, improve the rhetoric of the European Central Bank and key member states, and bring Greek bond spreads back to earth. This approach is working in Ireland - spreads exploded as public debt ballooned to save its banks, but came back in as public spending was cut by 20 per cent. But it is no cakewalk: Portugal has been deflating to boost competitiveness for a decade. Harsh medicine is best ingested quickly.
Net current expenditure by the Irish government in 2009 was €45.5 billion.  The Department of Finance forecast for 2010 is €47.1 billion.  Not quite a 20% decrease. How are we getting away with this?

Update: Not everyone has been bought in by the spin.  Writing in The Guardian Larry Elliot gives an alternative perspective.
Unlike Britain, the United States, France, Germany, China and the rest of the G20, Ireland has not rediscovered Keynes. It has spurned counter-cyclical budgetary policy and instead has been raising taxes and cutting spending in a series of budgets and mini-budgets that have sucked demand out of the ­economy. Lenihan has cut child benefit by 10%, public-sector pay by up to 15%, and raised prescription charges by 50%.

 One eighth of the working population has no job, yet unemployment benefit is being cut by 4.1%. For the young ­unemployed, the measures are even more draconian: the dole has been slashed by 50%.

The consensus view in the markets is that Ireland will be rewarded for its prudence. Bond yields will come down because investors will grow less anxious about a default. The ratings agencies will think again about downgrading ­Ireland's credit rating.

This, though, is by no means guaranteed. Ireland has experienced near-depression conditions over the past 18 months, and the expectation that budget cuts will lead to spontaneous recovery through which the private sector will compensate for the retreat of the public sector is unproved. Indeed, there is a considerable risk that removing spending power from the economy will lead to more companies going bust and deter the survivors from investing more.
Of course he's not right either as the spin has caught him.  Tax revenue is falling and current expenditure is rising.  Aren't falling taxes and rising expenditure exactly what Keynes would have proposed?

Comedy and Economics - Not the Best Bedfellows

Best viewed in full screen (button third from the left at the bottom).

The Irish Economy Going into 2010: Turning the Corner?

Back on the 11th of January I gave a one-hour seminar to the Faculty of Commerce in UCC called The Irish Economy Going into 2010: Turning the Corner?  The slides using in the seminar were posted here previously.

An draft of the paper presented was submitted to the Department of Economics Working Paper Series. A pdf of the paper is available here.

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