Unsecured Loans: Exchequer Returns

Showing posts with label Exchequer Returns. Show all posts

Wednesday, July 4, 2012

Mid-Year Exchequer Returns

The end-June Exchequer Statement was released yesterday. Here are the relevant documents.

The media reaction to the release has been glowing with examples of headlines being:

RTE: Exchequer Returns ahead of target to end of June
Irish Times: Latest Exchequer Returns €500 million ahead of target
Irish Independent: Half year tax take €500 million ahead of expectations
Irish Examiner: Exchequer figures better than expected
Journal.ie: So far in 2012…tax take €500 million ahead of target

The Department of Finance are pretty upfront about all this and do provide all the necessary information required to explain why tax revenue is ahead of profile. What is absent in all the media reports is any explanation as to why revenue is up.

If this excess was completely unanticipated it would be a very positive development. There have been a number of factors such as delayed Corporation Tax receipts and reclassified PRSI contributions that slightly complicate an analysis of the 2012 tax figures

Each year a monthly profile of tax revenue for the year is provided by the Department of Finance and the Tax Profile for 2012 that was published on the 10 February. By the end of June it was expected that tax receipts would have accumulated to €16,025 million.

As a result of a delay meaning that some 2011 Corporation Tax was actually paid into the Exchequer Account in 2012 and the reclassification of some PRSI receipts as Income Tax a revised profile was released in early May. The updated figure was that €16,507 million of tax would be collected by June with the increase accounted for by the Corporation Tax and PRSI issues.

Just two months later we have learned that the actual amount of Exchequer tax revenue to the end of June is €17,014 million. The difference is the €507 million excess referred to in the media. However, given that the Department’s revised tax profile began in April it seems unusual that tax revenue for the next three months has come in €507 million ahead of target. Or this is how it might appear.

In the original profile it was expected that €8,136 million would be collected between April and June. In the revised profile the equivalent figure was actually slightly lower at €8,112 million. The outturn shows that €8,293 million was actually collected between April and June.

Tax revenue in the period since the new profile was released is €181 million ahead of target. So how come it is being reported that tax revenue is €507 million ahead of profile?

To the end of March the actual amount of tax collected was €8,722 million. As the March Exchequer Statement was released on the third of April we can assume that this fact was known when the revised tax profile was released a month later on the second of May. This revision indicated that April was expected to see €2,059 million in tax collected. Adding this forecast for April to the March outturn would give a cumulative forecast to the end of April of €10,781 million. The revised profile actually has a figure of €10,430 million.

So the Department knew that €8,722 million had been collected by the end of March and expected that €2,059 million would be collected in April but included a figure of €10,430 million in the revised profile. It seems that the revised profile was based on a cumulative figure to the end of March of €8,396 million rather than the €8,722 million that was known to be collected; a difference of €326 million.

Adding this to the €181 million that tax in the April-June period actually was ahead of profile gives the €507 million ‘excess’ reported today. Of the excess €326 million was completely anticipated because it arises from using a figure at the start of the profile that is lower than reality.

This is not to say that tax revenue is not performing well; it is. The budget had a 2012 forecast of €35,825 million (up on the €34,027 million collected in 2011). Because of the corporation tax and PRSI issues this was revised up to €36,375 million. The performance in the first six months of the year suggests that this can be achieved.

In fact, using actual the March figure (€8,722 million) and the revised total for April to December (€28,005 million) means that the Department of Finance now expect tax revenue in 2012 to be €36,727 million. This is a good performance but why not come and say that this is what they expect?

When the revised profile was released on May 2nd it seems reasonable to suggest that this would be based on the known figures at that time. By May 2nd the March tax return was known (and the April figure was also released the same day). Starting a profile that is €326 million below the known figure for March is a little odd but lowering the bar in this manner does mean we can expect to hear plenty of “tax revenue is ahead of target” for the next few months. Tax revenue is rising but, at this stage, most of it is anticipated..

Thursday, January 5, 2012

Expenditure in the Exchequer Statements

We seem to spend an inordinate amount of time going through every possible representation of the tax revenue figures in the Exchequer Statements. The latest post is a good example of this. Why not devote even a fraction of this attention to the expenditure figures in the Exchequer Statements?

The answer of course is that the Exchequer Statements do not contain expenditure data that can be analysed in any meaningful fashion. The appendix with the Analysis of Net Voted Expenditures shows that net voted expenditure was €45,711 million in 2011; in 2010 it was €721 million higher at €46,432 million. What does this mean?

It is very hard to say. Net voted expenditure is gross expenditure adjusted for departmental receipts (known as appropriations-in-aid). If net expenditure changes it can be difficult to determine if this is as a result of expenditure changes or changes in departmental receipts.

This leads to statements like the following in the Information Note to this month’s Exchequer Statement:

The underspend on the Social Protection Vote was due to higher than expected PRSI receipts, which more than offset overspends on a number of schemes, including Jobseekers Allowance.

Huh. Spending is down because receipts are up. Underspending and overspending in the same sentence. All in all it is almost impossible to tell if spending is up or down. There are changes and adjustments in the tax revenue figures but in general they are easier to track, and more information is presented, than those in the expenditure figures.

Note 4 in the Exchequer Statement indicates that expenditure in health has increased to €12,897 million from €11,578 million in 2010. In the current era of austerity and expenditure cuts it seems unusual to suggest that expenditure in health increased by 11.4% in the last year. Of course, this is nonsense but that is what the Exchequer Statement shows.

The reason for the change is the abolition of the Health Levy. In 2010, the Health Levy was a departmental receipt for the Department of Health. The receipts of €2,018 million were subtracted from gross expenditure to get the net expenditure figure for health reported in the Exchequer Statements.

Although net voted expenditure for health has risen we cannot use this to say that we are spending more money on health. We don’t get monthly updates of actual (i.e. gross) expenditure in the Exchequer Statements but we can get the annual figures from the Databank provided by the Department of Public Expenditure and Reform.

Gross expenditure in health fell from €15,169 million in 2010 to €14,316 million in 2011. There was a 5.6% reduction in expenditure in health in 2011 but it is impossible to determine this from the monthly Exchequer Statements. It would be extremely useful if the gross expenditure figures were also provided in the monthly Exchequer Returns.

As it is the best we can do are annual tables like the following for the Health Group.

Reporting net expenditure figures as is done in the Exchequer Statement has no impact on the reported Exchequer balance but we do not see how the figure is reached. Even if monthly gross expenditure figures were provided for every department there would still be difficulties due to the abolition and creation of some departments and changes in the functions and responsibilities of others.

Anyway, the conclusion is that expenditure in health fell in 2011, particularly non-pay expenditure of the HSE (-8.5%) and the Office of the Minister for Children (-45.3%) even if the Exchequer Statement is reporting an increase in “net” expenditure. As a result of issues like this there is little value in spending much time exploring the expenditure figures in the Exchequer Statements.

Wednesday, January 4, 2012

End of Year Tax Receipts

The Department of Finance have released the end of year Exchequer Statement for 2011. The relevant documents are:

Here we will have a look at the figures in the usual detail. First up cumulative tax revenue by month.

Cumulative tax revenue has been ahead of the 2010 outturn for every month of the year. The increase peaked in September at 8.7% (when the new pension levy was collected) and has eased since then to finish the year up €2.3 billion or 7.2%. This has been hailed as the first rise in tax revenue in three years.

By looking at the individual tax heads we can see that virtually all of this increase is due to Income Tax.

The CSO reports that employment fell 46,000 in the year to September and that average weekly earnings rose 1.4% over the same period. These do not seem like labour market indicators that support a 22.4% rise in Income Tax. Budget 2011 contained a series of measures that were forecast to bring in about an extra €1 billion of Income Tax in 2011. So where did the other €1.5 billion come from?

It came about as a result of the reclassification of the old Health Levy into the new Universal Social Charge. The Health Levy was a departmental receipt collected by the Department of Health and did not appear in the Exchequer Account. All money collected under the Universal Social Charge enters the Exchequer Account and is included under the Income Tax heading.

In 2010 the Health Levy raised €2,018 million. This money was collected again in 2011 but under the guise of the Universal Social Charge in Income Tax receipts rather than as a receipt for the Department of Health. There might have been an increase in tax revenue in the Exchequer Account but there was little or no increase in government revenue.

The other tax showing a strong increase on 2010 is Stamp Duty. As we said when the September Exchequer Statement was released:

This again is not the positive sign the bare numbers would suggest. Stamp Duty is only up because the €457 million collected as a result of the Pension Levy introduced in May’s “Jobs Initiative” is included here. If we compare like-for-like Stamp Duty revenue is performing just like every other tax – i.e. worse than last year.

VAT is down €360 million but about one-third of that is due to the reduction in the 13.5% to 9% for certain goods and services in the same Jobs Initiative.

On a monthly comparison every month was ahead of the 2010 equivalent bar one: the last one. Tax revenue for December 2011 was €51 million lower than in December 2010.

If we look at the individual tax heads we can see the causes of this.

The standout figure is obviously the 96% drop in Corporation Tax receipts. The Information Note offers an explanation for this:

[…] some €261 million in corporation tax receipts due for receipt in December were not received into the Exchequer account in time to be accounted for in 2011. The bulk of these receipts have since been received and will form part of the January 2012 tax revenue outturn.

It is not really clear what has happened but this will add a bit of new year ‘pep’ to the Exchequer Returns in 2012.

If we just look at the last quarter of 2011 the picture is a little more benign.

Apart from the continued weakness in VAT receipts and the glitch in Corporation Tax all tax heads in the final quarter of 2011 are ahead of their performance from 2010. The 40% rises in Capital Gains and Capital Acquisitions Taxes are noteworthy, but the contribution of these taxes to total tax revenue remains small (just 5.8%).

No analysis of Tax Revenue is complete without investigating whether receipts are “on target” which were published last February. They’re not.

Tax revenue in the final quarter of the year might be up on its 2010 performance but it is clear that the Department of Finance was expecting a much greater bounce. Over the last three months of the year tax revenue went from being €160 million ahead of target to €873 million behind target. If we omit the measures introduced in the Jobs Initiative that did not exist when these targets were set it is likely that tax revenue is around €1,200 million or 3.5% below target.

In each the last three months of the year tax revenue was more than €330 million behind the DoF forecast. It was hoped that there would be a rise of €1,383 million to €10,962 million of tax receipts in the final quarter. It is not clear why the DoF expected a 15% rise in tax revenue in the final quarter of the year but receipts were actually €9,929 million, almost 10% below target.

For the year as a whole three of the four main tax heads are significantly below their target and the overshoot in Excise Duty is a relatively inconsequential €3 million.

The tax to strongly outperform the target for it set last January is Stamp Duty and this is only because €457 million was collected from a 0.6% private sector pension levy that was only introduced in May. On that basis of what was to be collected at the time the forecast was made Stamp Duty is also below target.

If we look at the last quarter of the year when it all went wrong.

There is some cover for the almost 25% underperformance of Corporation Tax, but even if the €261 million of delayed receipts are added in Corporation Tax receipts would still be 10.8% behind the target for the quarter. The largest taxes for the quarter were forecast to be Income Tax and VAT and these were both almost 10% below target.

To be fair the performance in December was slightly better.

Although there is plenty of red in the table most of the shortfall is due to the Corporation Tax issue. There is no such explanation for the large undershooting of tax receipts in October and November that is reflected in the quarterly table above.

For 2012 the Department are forecasting a 5.3% increase in tax revenue.

This is largely based on a €1.2 billion increase in Income Tax receipts during the year. Budget 2012 contained no Income Tax measures so this €1.2 billion increase will have to be the result of the carryover from the measures introduced in the 2011 Budget (estimated at €600 million) and a general upturn in Income Tax receipts (accounting for the remaining €600 million). I can’t say that I can see that coming down the track.

Tuesday, October 4, 2011

Tax returns flatter to deceive

The Department of Finance have released the September Exchequer Return which provides details for the first three quarters of the year. The relevant documents are:

As per usual we will focus on the tax figures in the Exchequer Statement as most of the expenditure figures are based on the rather meaningless “net expenditure” concept. The general reaction to the tax figures has been rather positive. Here are the relevant stories from two of the broadsheets.

Irish Times: Tax take ahead of target
Irish Independent: Good news for government as tax returns on the up

I must say that I cannot see the justification for greeting the figures in such glowing terms. The headline figure is positive as the table here shows but when we work through the detail the sheen washes off somewhat.

Tax revenue is now almost €2 billion up on last year, which is supportive of the positive view given above. Monthly tax revenue in 2011 has been ahead of 2010 for each of the nine months to date.

The three noteworthy months are April, July and September. Tax revenues in April and July were higher this year because of earlier than expected receipts of DIRT tax. This was expected in October so we can expect some drop back then. In July there was also a bump in Corporation Tax due to timing issues. The reason for the September increase will be explained below.

This chart shows the performance of the eight tax heads for the year to date.

We can see that the “increase” in tax revenue is down to Income Tax and Stamp Duty. VAT, Corporation Tax, Excise Duty, CGT and CAT are all lower than they were last year.

Income Tax in the Exchequer Account might be up nearly €1.9 billion on last year but it must be noted that the government is not collecting €1.9 billion of extra revenue as a lot of this is simply a reclassification.

In the last December’s Budget the Income and Health Levies were replaced by the Universal Social Charge (USC). While the Income Levy was included under Income Tax in 2010, the Health Levy was actually an “appropriation-in-aid” for the Department of Health and Children and did not enter the Exchequer Account.

Money raised by the Health Levy went directly to the Department of Health. In 2010, the Health Levy generated €2,018 million in revenue. It is likely that at least €1.2 billion of that would have been collected by September. Under the USC this money now enters the Exchequer Account. A substantial portion of the increase in Income Tax is due to this reclassification. Tax revenue is “up” because we are now calling an existing revenue stream tax.

Once account is taken for these issues and the tax credit and tax band changes introduced in the Budget it is probably that Income Tax is performing just like the other five main tax headings – i.e. worse than last year.

The other tax showing an increase is Stamp Duty. This again is not the positive sign the bare numbers would suggest. Stamp Duty is only up because the €457 million collected as a result of the Pension Levy introduced in May’s “Jobs Initiative” is included here. If we compare like-for-like Stamp Duty revenue is performing just like every other tax – i.e. worse than last year.

The key increases are Income Tax and Stamp Duty which as we know are largely the result of a reclassification and a levy that was only announced in May. The apparent poor performance of Excise Duty is explained in the Information Note:

However, it should be noted that this is not a true reflection of the position as there was a delay in the transfer of some €112 million in receipts from this source proper to September into the Exchequer account. These receipts were not received in time to benefit the end-September figures.

Although VAT is lower than last year no mention is given of the rate reduction for certain goods from 13.5% to 9.0%. This could explain up to half of the drop in monthly VAT revenue seen in September as this measure was expected to cost €120 million in 2011.

A similar pattern emerges if we look at tax revenues in the third quarter.

Take out the effects of the reclassification (Income Tax) and the Pension Levy (Stamp Duty) and it is hard to see how these tax returns are “good news”. Also remember that any bump in tax revenue as a result of the Pension Levy will be offset by the expenditure increases also announced in the “Jobs Initiative” which was ‘budgetary neutral’.

In fact it was expected that the Pension Levy would raise €470 million; €457 million was collected. What odds that the expenditure measures will be over budget?

Coverage of the Exchequer Returns seems to give inordinate attention to whether tax revenue is “on target”. The 2011 revenue targets were released by the Department of Finance back in February and have not been updated since.

Tax revenue is €160 million ahead of forecast, but this forecast was made before the government expected to collect €470 million from a 0.6% levy on private pension funds. With other changes announced in the “Jobs Initiative” it is likely that by September tax revenue should be around €300 million greater than was forecast in February. If this is included tax revenue is actually “below profile”. This is clear if we look at the profiles of the individual tax headings.

The only significant increases are for Income Tax and Stamp Duty. Stamp Duty is €384 million ahead of profile but this does not account for the €457 million collected from the Pension Levy – Stamp Duty revenues are below forecast levels.

Income Tax is ahead of profile but this is primarily because of timing issues due to DIRT and this is helpfully explained in the Department’s Information Note:

Income tax is €147 million (1.6%) above target. Excluding the beneficial impact of earlier than expected DIRT payments in April and July, which were originally profiled for collection in October, income tax is just 0.9% below target after nine months of the year. Given the very large target set in the Budget and the introduction of such significant revenue raising measures, this is an encouraging performance.

The last sentence is staggering. It is “encouraging” that Income Tax revenue is “just 0.9% below target”. The author of the note is definitely one who believes that the class is half full.

Aside from April and July which had bumps due to DIRT receipts, monthly tax revenues have been below the DoF forecasts for seven of the nine months so far this year. Incredibly, tax revenue for September was €44 million below target even though €457 million of Stamp Duty was not included when the forecast was made. What did they miss? Almost everything.

In September three-quarters of the tax heads came in below forecast. Stamp Duty was up €256 million but this was only because €457 million was collected in a Pension Levy which did not exist when the forecast was made. In reality Stamp Duty on the original levies was more than €200 million lower than the forecast revenue of €360 million. The only "good news” in the September figures relative to the D0F forecast was that €16 million more was collected in Income Tax. Everything else was in the red.

If we exclude the €1.2 billion added to tax revenue because of the reclassification of the Health Levy into the Universal Social Charge and the €0.5 billion collected as part of the Pension Levy then it is likely that tax revenue is running pretty close to last year’s levels even with the revenue raising measures introduced in last December’s budget. It is also likely that tax revenue is running below forecast if the forecasts had been updated for the tax changes introduced in May’s “Jobs Initiative”.

At best I would consider these a fair set of Exchequer Returns. Tax revenue appears to have flattened out but “good news” based on tax buoyancy remains absent.

Wednesday, July 6, 2011

Mid-Year Exchequer Returns

The Exchequer Returns covering the first six months of the year have been released by the Department of Finance. Here are the associated documents.

Here we will focus on the performance of tax revenue for the first six months of the year. Tax revenue is up on 2010 but the rate of increase is lower than the 6.7% seen in April. By the end of June, tax revenue was €847 million ahead of last year but as we will see below this is likely to an illusory increase.

Every month this year has seen an increase in tax revenue compared to the same month last year. The increase was largest in April and we explored the reasons for that here.

Here is a look at the revenue by the eight main tax heads reported in the Exchequer Account. It is clear that all of the €847 million increase in tax is attributable to tax collected under the Income Tax heading. The key barometer tax VAT is down on last year.

According to the QNHS employment in the first quarter of last year was 1,857,600 and this had fallen to 1,804,200 in the same quarter this year. The Earnings and Labour Costs Survey has average weekly earnings falling €683.43 to €674.56. So the two key measures that feed into income tax, the number of workers and their earnings, are both down on last year. It is pretty evident that it is not a labour market improvement that is driving the increase in Income Tax.

Income Tax is up just over €1 billion, but the €2 billion that was previously collected by the Department of Health as the Health Levy is now included under the Income Tax heading in the Exchequer Account following the introduction of the Universal Social Charge. It is pretty clear that if a like-for-like comparison was made with last year that Income Tax revenue would be down.

It is only because of changes in the system of public finances that it appears to be up. We continue to collect less tax revenue rather than more. Changing the name of money previously collected as a levy to a tax does not mean that more money is being collected.

You can read some of my views on the overall Exchequer Balance in this post over on The Irish Economy blog.

Friday, May 6, 2011

The Exchequer Balance

Here are the cumulative monthly Exchequer Balances from 2007 to 2011. The running deficit of €9.9 billion this year is the worst yet!

The Information Note from the Department tells us that everything is ok because this is in line with expectations.

The Exchequer deficit at end-April 2011 was €9.9 billion compared to a deficit of just under €7 billion in the first four months of 2010 and was in line with Department of Finance expectations. The Department will continue to monitor the emerging data closely and will present a view on the likely outturn for the year as a whole at the mid-year Exchequer Returns Press Conference in early July.

The year-on-year increase in the deficit of just under €3 billion was primarily due to the €3,060 million in non-voted capital expenditure payments to Anglo Irish Bank and INBS in March which relate to the first instalment of the Promissory Notes committed to these institutions in 2010.

Ah, it’s all Anglo’s fault! If we just look at the Current Account Balance we can get a picture of the day-to-day accounts of the government. We have already looked at the revenue side and saw that the story was not as rosy as it was made out to be. It’s a bit of a waste of time looking at the expenditure figures in the Exchequer Account because of the nonsense that is “net voted expenditure”. Anyway here are the current accounts balances going back to 2007.

This is much better. Things are only equally as bad as they were last year! We must be due to turn that corner soon. Not quite. Although looking at the current balance does net out the effects of “appropriations in aid” and “net voted expenditure” it can’t account for things that are left out of the Exchequer Account altogether.

Here are the Debt Interest costs incurred over the past four years.

For a country accumulating debt at the rate we are it is remarkable that the 2011 interest cost is so close to the 2010 cost. What is even more remarkable is how low the interest bill was in the first two months of the year – practically zero. We were paying interest during this time but not from the Exchequer Account. Again the Information Note provides the answer.

Total debt servicing expenditure in the first four months of the year, including funds used from the Capital Services Redemption Account (CSRA) – which do not impact the Exchequer – was €2.7 billion. Adjusting for the sinking fund payment which had been made by end-April in 2010 but which has not yet been made in 2011, debt servicing costs in the first four months of 2010 were just over €1.8 billion. The large year-on-year increase in debt servicing expenditure reflects the cost of servicing a higher debt burden.

If the true debt interest costs were included in the Exchequer Account then the Current Account Balance would not be close to last year’s level it would be about €0.7 billion worse!

Thursday, May 5, 2011

April Exchequer Returns: Illusion and Reality

We now have the Exchequer Returns for the first third of the year. While things do not appear to be getting worse, it is still clear that there is a way to go before things start getting better. The public finances are a mess. Here are the April documents.

As a result of the changes announced in December’s Budget we have to be careful about making direct comparisons between the 2010 and 2011 figures. As it stands tax revenue is now 6.7% up on 2010.

Tax revenue is up just over €600 million on last year but most of this can be attributed to a “bump” in April. It is not clear that this will be maintained and the DoF Information Note suggests that some of this can be attributed to the early receipt of DIRT payments.

We can get a better picture if we look at the changes by the main tax headings.

The increase, such that it it, is entirely due to the 20% increase in Income Tax collected. The first thing to note is that some of this is not actually an increase at all, just a reclassification.

In the Budget the previous Income and Health Levies were replaced by the Universal Social Charge (USC). While the Income Levy was included under Income Tax, the Health Levy was actually an “appropriation-in-aid” for the Department of Health and Children and did not enter the Exchequer Account.

Money raised by the Health Levy went directly to the Department. In 2010, the Health Levy generated €2,018 million in revenue. It is likely that at least €400 million of that would have been collected by April. Under the USC this money now enters the Exchequer Account. A substantial portion of the increase in Income Tax is due to this.

There also appears to be some timing issues with DIRT with about €120 million paid earlier than expected. We can expect subsequent Income Tax receipts to be lower because of this. The DoF Information Note does provide one year-on-year comparison that can be made.

PAYE receipts show the impact of the Budget 2011 income tax measures but as they do not include receipts from the USC, they allow for a comparable year-on-year analysis to be made. PAYE receipts in the first four months of the year amounted to €2.8 billion, a 4.9% increase on the same period in 2010.

It would be good if the Department provided the breakdown of Income Tax revenue that they obviously have but they give us this little titbit. This suggests that PAYE receipts are up about €130 million on the year. This is not because of any labour market or employment improvements.

In last December’s Budget, tax credits were reduced to bring more people into the tax net and tax bands were reduced so that people begin to pay the top rate of 41% at a lower level. All told these changes were expected to bring in over €850 million in extra revenue in 2011. It is pretty much a guess on my part as we do not know how much of this €850 million would derive from the PAYE sector, but I would guess that after a third of the year it would be more than €130 million.

I think it is pretty clear that once we account for the reclassification of Health Levy receipts, the once-off bounce in DIRT receipts and the expected changes in tax credits and bands that Income Tax is performing worse than it was last year and that any rise in receipts is illusory rather than reality.

Thursday, March 3, 2011

Public Finances (do not) improve

The February Exchequer Returns seemed to suggest that there was an improvement in the public finances. RTE led their story with:

The latest Exchequer figures from the Department of Finance show a deficit of €1.945 billion up to the end of February. This compares to a deficit figure of €2.407 billion the same time last year.

This would suggest that there has been a €462 million improvement in the public finances and that the tax and expenditure measures introduced over recent budgets are bringing the deficit under control. Not so fast! Most of the "improvement" of €462 million in the Exchequer Deficit is due to a sleight of hand by the Department of Finance.

In the first two months of 2010, the Exchequer spent €363 million on servicing the National Debt. For 2011 the figure is €104 million - some €259 million lower! With our rate of borrowing our debt servicing costs are rising not falling.

According to the DoF "the majority of the funds used to service the national debt in the early months of 2011 are coming from the Capital Services Redemption Account (CSRA) rather than the Exchequer." I had never heard of the CSRA but it strikes me as unusual that an account with Capital in the name is being used to meet Current expenditure needs. A query by a colleague of mine to the Department yielded this response.

According to the Department’s Information Note, the full debt service cash cost for the first two months of 2011 was €626 million. This is €522 million higher than the total given in the Exchequer Account.

If we use the correct figure for debt interest we can see that the public finances didn't improve by €462 million in the year to February - they deteriorated by a further €60 million. Oh, for a transparent system of the public accounts.

Wednesday, February 2, 2011

January Exchequer Returns

The first Exchequer Returns of the year have been released by the Department of Finance. Here are the key documents.

You can find a comparison of the performance of tax receipts for the eight tax headings for January 2010 and 2011 in the Analysis of Tax Receipts document linked above. Here is a table that goes back to 2007.

Although the annual comparison is positive (+€57 million or +1.9%) if we look over a longer time frame we can see the scale of the collapse in Irish tax revenues (-€1,614 million or –34.0% since 2007).

As could be expected a lot of this fall is due to the virtual disappearance of revenues from our the largely property-dependent transaction taxes (Stamp Duty, CGT and CAT) which have fallen from a combined total of €556 million in 2007 to a paltry €66 million in 2011. However, this only accounts for one-third of the fall in tax revenue.

Although Income Tax continued to show annual declines in 2011, it is ‘only’ €120 million (but still 10.8%) down on the 2007 level. The bulk of the drop in January Tax revenues is accounted for by our consumption taxes (VAT and Excise Duty). These brought in €2,798 million in 2007, but only raised €1,955. This €843 million fall (or 30.0%) in these two tax heads accounts for more than half of the total drop seen in January tax receipts since 2007.

The 39.7% drop in Excise Duty revenues has come in the face of increases on duties on fuels via the Carbon Tax in two recent budgets (though there was an offsetting reduction in duties on alcohol). Our VAT rates have remained unchanged, receipts are down 28.2%. This is likely driven by the grounding of the construction sector to a virtual standstill and a reduction (as well as a reorientation) of consumer spending.

Thankfully, in January we do not get the charade of having the real tax returns compared to the artificial forecasts of the Department of Finance. Expect this to resume in February as today also saw the release of the Profile of Tax Revenues for 2011 which provides details of the monthly and cumulative expected receipts across the eight tax heads.

Here is a simple comparison of the cumulative total tax revenue forecasts for 2011 to the 2010 performance.

Even with the changes announced in the recent budget tax revenues in the early part of 2011 are expected to be very similar to those seen in 2010. It is only from July onwards that any improvement is forecast. [The DoF forecast does not seem to account for the change in the ‘Pay and File’ deadline that went through with the recent Finance Bill (Act?).]

On the expenditure site is it noteworthy that Current Expenditure continues to rise (up €24.4 million to €3,722.1 million this year from €3,697.8 million last year. As a result of the reorganisation of Government Departments last March it is hard to identify the source of this increase and given the smoke and mirrors of the Irish system of public finances the DoF Information Note attributes this increase in expenditure “to the reclassification of health levy receipts”. Expenditure is up because receipts have been reclassified. Huh? More on this here.

Capital expenditure is down €220.8 million but the bulk of this is due to a fall in capital receipts to the Exchequer from EU Agriculture programmes and an associated drop in capital payments.

On the non-voted side the stand-out figure is the huge drop in interest payments which fell from €311 for January 2010 to €32 million. Has someone done a stellar job in renegotiating the EU/IMF interest rate? Of course not, and with our increased borrowings or debt service costs must surely be higher than 12 months ago. What has actually happened is that debt interest in the early part of the year is been paid for from something called the Capital Services Redemption Account (no, me neither). Unlike the Exchequer Account, this CSRA does not need a monthly return published so we will be in the dark on our debt interest costs for a while and annual comparisons will be difficult though we do know that this source will fund €600 million of debt interest.

Overall, the Exchequer Account shows a lower deficit of €483 million for January 2011 compared to €778 million in 2010. However, of this €295 million we can immediately account for €228 million due to the re-categorisation of debt servicing costs. And if debt interest costs are higher than last year (which they undoubtedly are) it is probable that all of this €295 million ‘improvement’ is eliminated.

Thursday, January 6, 2011

Austerity?

We have now had three years of so-called austerity budgets in Ireland that have focussed largely on expenditure cuts. So how much has expenditure being cut by? Lets start with gross expenditure by central government.

At first glance it would appear as if the austerity measures are beginning to bite. After showing a continual rise to 2009, gross central government expenditure fell from €75.3 billion in 2009 to €69.1 billion in 2010. However let’s break this down by Voted and Non-Voted expenditure. Voted expenditure is essentially the money allocated to government departments and offices. Non-voted expenditure is money that is spent under specific legislation and does not require a separate ‘vote’.

Since 2008 the increase in voted expenditure has moderated and actually decreased slightly in 2010. However, most of the decrease in gross expenditure that occurred in 2010 is due to non-voted expenditure. So called ‘budgetary cuts’ on voted expenditure have had little effect so far in tempering expenditure, with any reduction seen mainly in voted capital expenditure as shown in the next graph.

In fact, if we look at breakdown of total expenditure into current and capital expenditure we see that all of the decrease can be attributed to capital expenditure. There has been no year when day-to-day or current expenditure has fallen. None.

When looking at non-voted expenditure it is clear there has been no actual cuts in expenditure. It is the result of some once-off events in non-voted capital expenditure.

Non-voted current expenditure (mainly interest payments on the National Debt) has been increasing since 2008. The apparent reduction in non-voted expenditure seen in 2010, is simply due to the once-off increase in non-voted capital expenditure that occurred in 2009. In 2009 there was €4 billion transferred to Anglo Irish Bank and €3 billion paid to the NPRF to fund the recapitalisations of AIB and BOI. These payments did not occur in 2010 (and most bank recapitalisations since have been off-balance sheet).

On the current side there has been some reduction in voted current expenditure but this has been more than offset by the increase in interest payments that is pushing up non-voted current expenditure. Any ‘savings’ being made on current expenditure are more than offset by expenditure increases elsewhere.

The one area where there has been actual reductions is in capital expenditure. We saw above why non-voted capital expenditure spiked in 2009 and fell sharply in 2010. Voted (or departmental) capital expenditure has been cut sharply since 2008 and in two years has been reduced from €9.0 billion to €6.4 billion.

Cutting, or just hiding, capital expenditure is the ‘low-lying fruit’ of an austerity package. It does not offer sufficient long-term reductions if order is to be restored to the public finances. Closing a €19 billion budget deficit requires expenditure cuts and tax increases. Thus far we have grasped neither nettle properly.

Delaying capital projects like road improvements, new railways, metros and other public construction projects does not ‘save’ money as most of these are projects will have to undertaken at some point in the future anyway. A properly implemented austerity programme has to look to cut current voted expenditure. The main elements of this expenditure are transfer payments, public sector pay and pensions, and expenditure on goods and services. The 2010 figures suggest we have seen little austerity so far and it is too early to forecast the impact of the changes announced in Budget 2011.

The budget deficit remains (and is actually getting bigger!). Is there anyone who will grasp the painful nettle?

Understanding the Public Finances is hard

The Irish system of Public Finance is extremely difficult to get a complete handle on. Here is a 382-page ‘outline’ that explains it all!

The degree of complexity can be seen from the following sentence from the Minster’s press release that was issued with the 2010 Exchequer Accounts yesterday.

While day-to-day spending was marginally ahead of target in the year, this is due to a shortfall in Departmental receipts rather than overruns in spending.

Come again? Spending is up because receipts are down. My head hurts.

Current Account continues to deteriorate

Although the press statement released with the Exchequer Accounts this week indicates that Minister Lenihan believes “that our public finances have stabilised” it is hard to find the reality that ties in with this view.

Here is just one snapshot of the state of our public finances – the balance on the current account (the day-to-day expenses of running central government).

The highest ever current budget deficit was recorded in 2010 at €12.6 billion. The overall exchequer deficit is down from €24.6 billion to €18.7 billion and might grab some headlines. Graph here. However, this is entirely due to “savings” on the capital account.

Capital expenditure was further reduced by about €1 billion in 2010 (projects postponed), and the €4 billion injection into Anglo Irish and €3 billion frontloaded contribution to the NPRF (for the AIB and BOI recapitalisations) that were part of the 2009 deficit did not occur in 2010. (Or rather there was further bank recapitalisations in 2010 but we have used some accounting magic to keep them off balance sheet.)

The truest barometer of the state of the public finances is the current account deficit. This is the balance of revenue (primarily tax revenue) against voted current expenditure (wages, pensions, transfer payments, goods and services) and non-voted current expenditure (mainly debt interest). This does not paint a pretty picture.

Tax revenue fell €1, 291 million
Voted expenditure rose €261 million
Non-Voted expenditure rose €1,468 million

Not much sign of stabilisation here. The current account would be in continued freefall but was supported be €1,851 million increase in non-tax revenue. This was mainly down to an increase in the Central Bank Surplus of €415 million and receipts from the institutions covered by the Bank Guarantee Schemes of €1,333 million. Without these receipts the Current Account Deficit would have been even worse.

2010 Exchequer Returns

The end-of-year Exchequer Returns have been released and we can update our analysis from November. Also remember that the Exchequer Account is not the Public Finances!

For the full year tax revenue came in at €31.75 billion, ahead of both the Department’s forecast and my own, but still down on the 2009 tax take.

As has been the trend since September the annual rate of decline eased again in December and for the full year tax revenue was €1.3 billion or 3.9% behind last year’s level. However, when compared to the same month last year, tax revenue in December was just under 1% lower than in December 2009. This is the first time this comparison has been negative since August.

Somewhat worryingly most of the €1.3 billion decline in tax revenue relative to 2009 can be attributed to two of the ‘barometer’ tax headings – Income Tax and VAT. Both of these for more than €500 million behind their 2009 levels.

Of the four main tax heads, only Corporation Tax came in ahead of the 2009 number and that was by a paltry €24 million. The picture is not quite so bleak if we do a fourth quarter comparison across the two years. Q4 tax revenue is actually €242 million ahead of the equivalent 2009 figure.

However, this is directly attributable to a 33% surge in Corporation Tax receipts. Although slightly moderated the decline in Income Tax and VAT continued with no other significant gain outside of Corporation Tax. But at least it is better than this.

Although December isn’t a hugely significant tax month, accounting for only 7% of annual tax revenue, for completeness we will isolate the monthly figures.

You can track the performance during the year of the four main tax heads by clicking on the list below.

December was only the second time in 2010 when monthly Income Tax receipts were ahead of their 2009 equivalent. December is not an important VAT month but monthly receipts were still down over a quarter on 2009. More important, as can be seen by clicking the link above, VAT receipts in all of the main VAT payment months (Jan, Mar, May, Jul, Sep & Nov) were behind their 2009 equivalents.

The late increase in Corporation Tax receipts meant that December was the first month when the cumulative comparison was positive. By August Corporation Tax receipts were €582 million behind the amount collected at the same time in 2009. However, the monthly increases seen in every month since then has meant that this deficit was completely wiped out (even if the swing to positive was only by €24 million).

Excise Duty did not display much volatility. The monthly comparisons to 2009 were positive for five months and negative for seven, and for the year as a whole Excise Duty was only €24 million or 0.5% behind the 2009 level. This was likely aided by the introduction the Carbon Tax on different fuels throughout the year and the increase in new car sales throughout the year that would have boosted Vehicle Registration Tax receipts.

Here are the graphs. Click smaller images to enlarge.