September Exchequer Returns: Good News?

The Department of Finance has just released the Exchequer Statement for September.  The relevant documents are:

• Exchequer Statement
• Analysis of Taxation Receipts
• Analysis of Voted Expenditure
• Press Statement

The Minister for Finance is buoyed by the latest figures.

In the period to end-September, tax receipts were on target, at €22.2 billion. As anticipated, the year-on-year rate of decline in tax revenues has continued to ease since the end of 2009. At end-September, tax revenue is down 6.5% year-on-year.

The Exchequer figures show the public finances have stabilised due to the decisions taken by the Government. Stabilising the public finances is essential if we are to protect existing jobs and create new ones.  Today’s Exchequer figures show we are on the right path towards economic recovery.”

While the year-on-year comparison is still negative, it is true that the relative decline on 2009 is at its lowest level all year.

The rapid declines of over 17% seen in the first two months of the year have gradually eased as the year has progressed.  The annual decrease to September of –6.5% is actually better than the Department’s overall predicted drop for the year of –7.1%.  This is shown in the graph below.  The red dashed line represents the Department’s 7% predicted drop in tax revenue.  The green dashed line is my (now pessimistic?) predicted drop of just over 10% in tax revenue.

The positive turn on these figures comes from what appears to be a strong performance of tax revenue in September.  Whereas August was €330 million or nearly 16% down on the same month last year, September recorded an offsetting increase of €333 million or over 11% on the same month last year.

Before looking for the source of this increase we will give a look at the performance of the individual tax headings for the first nine months of the year.

The €1.5 billion drop in tax revenue compared to last year is driven by three of the four main tax headings: income tax, VAT and Corporation Tax.  Of the big four only excise duty is hanging on to last year’s levels (which were pretty abysmal to begin with).  The tax heads up on their 2009 returns are stamp duty and customs duty and these are relatively insignificant rises.

So why was September’s tax revenue up 11% on last year?

This is as positive as this monthly comparison has been all year.  After been behind for each of the first eight months of the year, September was the first month this year when Income Tax receipts were up on 2009.  Even with this gain Income Tax is still over half a billion down on last year.  See table here. 

Half of the €333 million increase for September is due to Corporation Tax which was up €167 million or  over 90% on the amount collected in September of last year.   Corporation Tax receipts have yo-yoed in recent months and in August were over 60% down on the 2009 figure.  For the year to date Corporation Tax is still over €400 million down on last year.  See table here.

Relevant as all of this might seem, much of the media focus will be on the performance of tax receipts to the Department of Finance ‘targets’.  This is comparing a real number to an imaginary number.  The headline is that “tax take on target after nine months”.  This is actually true but this is a low hurdle to begin with.

By the end of September tax revenue is ‘only’ €42 million or 0.2% behind the Department of Finance forecasts.  The monthly forecasts from these figures can be seen here.  Tax revenue for August and September has been ahead of the Department’s forecasts.

While the overall forecast is pretty much spot on, the Department’s forecasts of the individual taxes that make up the total are a bit more erratic.

At €337 million, Income Tax is substantially behind the projected figure but more than two-thirds of this is offset by the 12% or €235 million gain on Corporation Tax compared to it’s target.  It is noteworthy that €159 million of the excess Corporation Tax collected came in September when Corporation Tax receipts were 83% ahead of the forecast amount.  See table for monthly September forecasts here. In August Corporation Tax was another €48 million or almost 30% ahead of forecast.  Table here. 

It is these Corporation Tax receipts that are giving the overall tax revenue figures their positive sheen (when compared to targets).  It is hard to know if these increases will be maintained. They could be down to timing issues as companies pay their preliminary tax and we could see reduced Corporation Tax revenues paid in the next few months as companies may have already paid most of their 2010 tax liability.  Of course, it could be that the Department just made overly pessimistic forecasts for August and September and that comparisons to these numbers are largely meaningless (which they are!). 

Corporation Tax is over €400 or 16% down on last  year so there is not much reason to be cheerful because we are ahead of target.  The timing issue may not be completely irrelevant as Corporation Tax is actually €65 million or 3% ahead of the equivalent 2008 figure, when every other tax head is down in this comparison and total tax revenue down over 20%.  Table here.

One final actual comparison we can do with the September figures is to make a quarterly comparison as we now have the numbers up to the end of the third quarter.

Again, the overall figure is down on last year as was the case in both the first quarter and second quarter.  However, most of the decline in the third quarter can be attributed to Corporation Tax.  Again, it is hard to know whether this reflects timing issues or a continuing deterioration in Corporation Tax receipts.

One pattern worth noting over the first three quarters of the year is the relative easing in the rate of decline in Income Tax receipts.  For the first quarter of 2010, Income Tax was 10.4% down on 2009, in the second quarter this had slowed to 6.5% and as we can see above in the third quarter Income Tax was “only” 1.9% down on last year.  Thus, while Income Tax is down €513 million on last year, €466 million of this drop occurred in the first six months of the year.

Here are the graphs for those fatigued of tables.  Click smaller images to enlarge.

 

Ireland’s export performance

One of the stand out features of the political commentary on our economic woes has been references to our ‘strong export performance’.

If we look at the most recent set of figures from the CSO’s Quarterly National Accounts this seems to be supported.

There is little evidence of a contraction here.  Ireland’s export performance in 2009 was comfortably the best in the EU.  Figures from Eurostat in table here.  Ireland’s exports in 2009 were very favourable in comparison to Germany (-16.9%), the UK (-18.3%), France (-15.4%) and non-EU countries such as the US (-9.7%), Japan (-21.3%) and Norway (-22.3%).  Ireland’s exports for the first half of 2010 are about 6.7% ahead of the 2009 figure.
In response to the latest National Accounts figures, Brian Lenihan said

“The figures for exports are strong and I am encouraged by this, the necessary competitiveness improvements are working. We must export our way out of our current difficulties, there is simply no other way."

So is our export performance as strong as the headline figure suggests and is this the way out of our current difficulties?

Our exports are approximately made up of 55% merchandise and 45% services.  See table here.  We can get details of our merchandise or goods exports from the monthly Trade Statistics bulletin produced from the CSO.  Here are our monthly imports and exports since 2006.

The pattern of the goods exports above is little different from the pattern of the total exports in the first graph.  The Trade Statistics give details on the type of goods being exported according to the NACE classification.

The importance of the Chemical and Related Products category to Irish exports is clearly visible.  In 2009 this sector made up 57.5% of total merchandise exports and grew by 8.5% while seven of the ten categories showed double-digit declines.  This category itself is dominated by two subcategories; organic chemicals (21.2% of total goods exports) and medicinal and pharmaceutical products (25.5% of exports).

One quarter of all Irish exports are derived in the medicinal and pharmaceutical products category.  Even in the face of the global downturn in 2009 this sector managed to show a 26.8% increase on the 2008 figure.  Here is the monthly pattern of pharmaceutical exports since 2006.  The “strong” performance is very evident.

Over the last few years the relative importance of this category to Ireland's exports has increased from just over 15% of total goods exports to over 25% now.  Graph here. I may be mistaken but I cannot recall the project announcements, facility extensions and new jobs that have allowed our pharmaceutical exports to increase from about €1.2 billion a month to close to €2 billion a month.

If we exclude this one category from a graph of Irish exports what pattern do we see?

This is much more representative of the export pattern that has been seen in most countries. Excluding medicinal and pharmaceutical products, Irish exports in 2009 were down 9.2%.  Exports for the first six months of 2010 are down 4.6% on the equivalent six-month figure for 2009.  The performance of the medicinal and pharmaceutical products sector is masking the true reflection of Ireland’s export performance.

However the drop in 2010 compared to 2009 is driven by a fall in one category – machinery and transport equipment.  For the first six months of 2010 this category is down almost €2 billion or 27% on the equivalent figure for 2009.  The 2010 figure for all other categories is ahead of their 2009 levels.  Exports may have fallen during 2009 but a recovery of sorts seems to be underway in 2010 supporting claims by Enterprise Ireland that “70% of orders lost in 2009 have been recovered”.  See table here.

The drop in machinery and transport equipment has been ongoing for a number of years and is been driven by a rapid fall in computer exports.   See graph here.  At one stage this category comprised over 25% of total goods exports.  For 2010 the relative importance of the chemicals and related products category has now risen to nearly 60% of our total goods exports.

One final issue worth considering before finishing on our merchandise exports is the number of jobs in these sectors.  These can be roughly approximated from the CSO’s Industrial Production releases which give some details of employment in the "modern” sector.  The data is not very precise but we can look at employment numbers in two categories.

The sector which includes chemicals and pharmaceuticals has seen a 12.3% increase in employee numbers between 2008 Q1 and 2009 Q2.  The sector which includes computers has seen a 33.5% reduction in the number of employees in the same time.

Between the same quarters exports of pharmaceuticals have increased by 29.8% while exports of computers have decreased by 38.3%.  It seems the reduction in jobs in computers is closely related to the reduction in exports.  However, the large increase in exports in pharmaceuticals has not been translated into an equivalent increase in jobs.  In fact the 5,600 increase in employment in first sector above is more than offset by the 8,300 decrease in employment in the computer related sector.

Chemical and pharmaceutical exports have been keeping our export figures looking “strong” but are having little impact on employment figures.  A sector which now makes up nearly 60% of our total goods exports (by value) and has increased by more than a third in the last couple of years, has added very few jobs.  In the face of an unemployment total of 293,600 this cannot be the “way out of our difficulties”.

We now turn to our service exports which make up about 45% of our total exports. Details of our service exports can be found in the CSO’s Balance of Payments releases.  Here again the overall export position appears strong.

The pattern of the services exports above is little different from the pattern of the total exports in the first graph of this post.  The Balance of Payments give details on the type of services being exported.

In this instance we can see that the dominant sector is Computer services which made up 36.4% of our total service exports in 2009 and grew by 1.5% on the 2008 figure.  Overall, our total service exports declined by 1.9% in 2009 with declines reported in seven of the 11 reported categories.

Mirroring the situation with pharmaceutical products in our goods exports, computer service exports have been the stand out performer among our service exports.

The proportion of our service exports coming from computer services has also been increasing though not to the same extent as pharmaceuticals in our goods exports.  In 2007 computer services comprised 32.0% of our service exports.  By 2009 this had risen to 36.4%. In the first six months of 2010 computer services comprised 38.7% of service exports, though there does seem to be a seasonal drop in computer service exports in the third quarter. Graph here.

In total Ireland’s service exports in 2008 were virtually unchanged on the 2007 figure.  However, if we exclude computer services, the total for the remaining categories was down 4.6%.  For 2009, service exports excluding computer services were down 3.8% compared to the total services drop of 1.8%. Graph here.

There are some similarities between the impact of the pharmaceutical sector on Ireland’s goods exports and the impact of computer services on Ireland’s services exports, however the impact is far more pronounced on our goods exports.  There are a range of services included in “computer services” (see background notes here) and the hardware and software support areas may be labour intensive.  The inclusion, and increasing returns to scale, of computer software sold electronically suggests that some of the increases in computer service exports may not be generating extra jobs.

Brian Lenihan may feel that “we must export our way out of our current difficulties, there is simply no other way”, but our export figures have held up and have been of little use in getting us out of our difficulties. An export-led strategy is worthwhile, but not one that is masked by the high-value output from the pharmaceutical and computer software sectors.

Negative Growth Returns

Thursday’s Quarter National Accounts release from the CSO have shown that the economy contracted in the second quarter of this year, after recording positive (GDP) growth in Q1.  Technically the economy is not in a recession, but another negative growth figure in Q3 will confirm the ‘double-dip’.

We are now in a position where GDP has contracted for 11 of the last 13 quarters.  Table here.  GDP is now 13.4% below the level seen in the final quarter of 2007.  With one definition of a depression being a 10% reduction in the size of the economy this puts is firmly into that realm. Graph here.
The return to negative growth has been attributed to a number of factors.  Reacting to the release, Minister for Finance, Brian Lenihan said

"The second quarter figures are affected by a spike in imports in part resulting from an increase in royalty payments that depressed the overall GDP figure," he said. “The figures for exports are strong and I am encouraged by this, the necessary competitiveness improvements are working. We must export our way out of our current difficulties, there is simply no other way."

I will return to the exports element of this quote shortly, but let’s begin with the elements that make up the overall GDP figure: GDP = C + I + G + (X – M)

Consumption + Investment + Government + (Exports – Imports)

The Minister’s assertion is that the “spike” in imports has dragged down the GDP figure.  Imports in the second quarter were €32.8 billion (Table 2).  The Balance of Payments Q2 release (Table 2a) shows us that there was €12.0 billion in merchandise imports and €20.7 billion in service imports.  Of this €20.7 billion in service imports, approximately €7.6 billion was accounted by royalty and licence payments to foreign holders of intellectual property rights.  This was indeed a record total for this figure which has risen almost  €2 billion on the Q3 2009 figure but is still only €400 million ahead of the Q4 2008 total.

The seasonally adjusted increase in imports in constant prices from Q1 to Q2 of €1.4 billion (Table 6) is only partially offset by the €0.6 billion increase in the equivalent export figure so it is not unreasonable to suggest that the GDP drop is partially explained by trade changes.
Both Consumption and Government expenditure showed relative small declines of about €50 million each, and there was a surprising €600 million jump in Investment expenditure.  However, investment is still 49.6% below the equivalent Q2 figure from 2007.
And the Minister still hasn’t given up on his ‘turning the corner’ metaphor.

"I agree that these are not encouraging figures but we have moved from a position of a very sharp steep decline to a position where we've stabilised.  That is a turning of a corner that hasn't been seen in very many economies in the world."

As one of my colleagues noted, this feels more like a roundabout!

CSO Data September

There have been a number of releases from the CSO this week.  These include.

• Quarterly National Accounts Q2 2010
• Quarterly National Household Survey Q2 2010
• External Trade July 2010

Here is an update of a series of graph we put together for similar statistical releases by in March.

CSO Data September 2010

Buying Irish Banks on CNBC

Inflation once again?

The CSO have just released the CPI for August and they figures show a positive overall rate of annual inflation for the first time since December 2008.  An annual deflation rate of –0.2% in July reverted  to an annual inflation rate of +0.1% in August.
However looking at our measure of core inflation, excluding energy and mortgage interest, we see little or no chance in the level of deflation in August.  The rate was –1.72% in July and this has only eased slightly to –1.66% in August.

The measure of core inflation included here accounts for 85% of the overall CPI index so is reflective of what it happening to prices in general.  The prices excluded are mortgage interest, which makes up 6.67% of the overall index, and is up 10.0% on the month and 24.4% in the year.  Energy prices make up 7.77% of the index and are up 7.9% on the year.
Mortgage interest is up because our ailing banks are jacking up variable rate mortgages in a bid to raise revenue and offset some of their loss-making tracker rate mortgages.  The huge variation in mortgage interest inflation can be seen here.   In August last rate the annual change was –48.4%.  This year there has been an annual increase of 24.4%.

Energy prices are up largely because of increases in excise duty through the introduction of the carbon tax.  This was added to the price of petrol and diesel last December and to the prices of other fuels from the first of May this year.  These are not part of the general price trend in the overall economy.

The increase in mortgage rates has contributed 1.21% to the overall CPI inflation rate.  The increase in energy prices (taxes) has contributed 0.66% to the overall CPI inflation rate.  Subtracting the sum of these from the overall rate of +0.21 gives the core inflation rate used here of –1.66%.
The headline figure of inflation may have turned positive and the 0.7% increase in prices in August may have been the largest monthly increase in prices going back 27 months to May 2008 but it is still too early that consumer prices in general are rising.  Of the 0.7% increase in prices recorded in August, the increases in mortgage interest contributed 0.56% of the increase.  Prices in all other categories were largely unchanged.  It is still a bit early to be singing inflation once again.

August Exchequer Returns

The Exchequer Returns for August have just been released and the official response to them is nothing short of amazing (amazingly wrong!).  The fanfares are blowing because a predicted drop of 20.7% in monthly tax revenues for August is being compared to an actual drop of “only” 15.7%.

The following is extracted from this piece which welcomes this 15.7% drop in monthly tax revenues.

The figures show that the budget is on target and economic growth is returning, Minister for Finance Brian Lenihan insisted tonight.

Mr Lenihan said that the exchequer returns were on target and showed that the budget forecasts had held up.

“It is very important in terms of the kind of commentary we have seen in recent weeks which suggests that this country is in real financial jeopardy. The financial administration of the country is on target," he said.

Mr Lenihan added that financial stability was essential for economic growth and the early signs of growth where there. “Irish growth is on the way and will continue,” he added citing today’s upgraded forecast for growth by the European Central Bank.

He also said that unemployment had now virtually peaked. “We are at the bottom of a very difficult recession but the early tentative signs of growth are there and will continue.”

This month we’ll start with a graph and easily illustrates how much rubbish is spouted above.  It’s a simple graph of cumulative monthly taxes for the past four years.

The stark reality is that the red line for 2010 is moving further and faster away from the green line for 2009.  Tax revenue is deteriorating and is getting worse at a faster rate.  Let’s bring out the tables.

After a number of months where the decline relative to last year eased the rate of decline in August accelerated.  Here is the same data in a graph.  The red dashed line represents the Department’s 7% predicted drop in tax revenue.  The green dashed line is my predicted drop of just over 10% in tax revenue.

If we look at the monthly revenues we see that tax revenue in August was over 15% behind the amount collected in the same month last year.

If we turn to the individual tax heads the picture remain as grim.  All the main tax heads are down and the only tax that is ahead of 2009 is Customs Duty which brings in the smallest revenue.

If we look at the monthly revenues for August we can quickly identify the cause of the €330 million drop compared to August of last year

There's even a few black figures in this table!  However, the stand-out figure is the €322 million drop in the amount of Corporation Tax collected this August compared to August last year.  The other seven tax heads combined are down only €7 million
The Department of Finance forecast of tax revenue for August was out by 6.4% but this was only the second month when they under-forecast tax revenue.

Here is the table that gives the headline figure that tax revenues are only 0.7% behind D0F forecasts.  Of course, this is a relatively meaningless comparison.

Although the forecast of total tax revenue is out by 0.7%.  This does not hold for the forecasts made for the individual tax heads.  This is the table the Department likes to focus on.  It is clear that the continued downturn in Income Tax receipts has not been forecast.

It is somewhat interesting to note that seven of the eight tax heads (including Income Tax) came in ahead of the monthly DoF forecasts for August.

It is clear that the drop in Corporation Tax was forecast. In fact the Department predicted a much greater fall.  There was €533 million of Corporation Tax collected in August 2009.  For August 2010 the Department forecast that only €163 million would be collected (a drop of 69.4%).  In fact €211 million of Corporation Tax was paid this August (an  actual drop of 60.4%).