Tuesday, 2 February 2010

Where have all the taxes gone?

An Saoi: Today’s tax figures were a shock, even to me. Perhaps I shouldn’t have been so surprised as the Central Bank’s report for December had already told us that spending on credit cards was over 14% below the 2008 level. This is reflected in the nearly 18% decline in VAT. As taxes are paid in arrears, these figures give us a snapshot of the economy to December and do not reflect activity in January.

All through December we were fed a bunch of misrepresentations by the Irish media, which was so succinctly described by David McWilliams in last Sunday’s Business Post. Newspapers & RTÉ happily talked up an economy, which we now see is still in tatters.

Looking at the detailed figures, we see a consistent pattern of decline. On the consumption side, Customs duties down 17%, Excise down 16% & VAT down 18%. On the taxes on income side, the year on year decline in Income Tax of just 10% was helped by the Income Levy. The cuts in Public Sector pay will feed into considerably lower tax payments from next month. The 66% decline in Corporation Tax may be down to pre Christmas refunds and it is hard to draw any conclusions from it. Next month’s figures are far more important. The fall away of CAT is not surprising given the state of the housing market. The declines in Stamp Duties and CGT are slightly surprising as they had been quite good in December. I mentioned last month that the introduction in E-Stamping by the Revenue had perhaps energised many solicitors into getting their affairs in order.

However there remain two imponderables, which may have made a material difference to this month’s figures.

1. We have no idea as to the levels of unpaid taxes and by how much they are increasing each month.
2. There is no summary of outstanding repayments. Delaying or expediting large repayments from month may affect the monthly outcome. This is particularly true for VAT return months such as January.

Delaying repayments may partially explain the better than expected figures in December. However this is a very dangerous game as anyone who has juggled paying their bills and credit cards knows.

The figures suggest that the Government will struggle to achieve their very modest targets, which it should be noted are below those of 2003. February will tell us far more about the state of the economy. The Government published their 2010 Tax Profile today and are expecting February 2010 to come in at €1,726M, €298M below Feb. 2009.

Within the global figure, they are expecting Income Tax to come in close to 2009 figure, €891M against €915M, which seems very optimistic. Corporation Tax is expected to come in at just €90M against €290M last year. This is partly down to the change in preliminary tax rules, but there must be some big losses also expected from companies with a 31st March accounts year. It is not a VAT return month with just VAT collected by Direct Debit and on imports due. A bounce is expected in Excise, which includes VRT increasing from €310M in 2009 to €344M this month. Time will only tell. I will make my estimate of the end of year outturn after the March figures, but it is hard at this stage seeing the figures break €30,000M by year-end.


Anonymous said...

David McWilliams was spot on. I just heard a commentator on RTE describe us as Europe's poster boy for our handling of our finances. This is straight out of Pravda in the early eighties.

Anonymous said...

In this country our establishment are treating the whole population like we're insane. Even in the Soviet Union they only did this to the dissidents. The segment on RTE's Drivetime called "Mindtime" may be a rare example of the government reacting to a disaster they caused. As usual they have chosen the wrong solution.

Michael Burke said...

An Saoi

Good post, and a strong couterweight to the argument that 'we have to cut spending to cut the deficit'. These tax numbers reflect the cuts as well as the effects of recession, and are abysmal.

The contrast with Reflationary Europe could not be starker. There, governments have overwhelmingly adopted reflation. None has adopted Ireland's unique experiment in fiscal contraction. So according to orthodoxy in Ireland, they should be experiencing worsening deficits, right? Wrong.

According the EU Commission, the average budget deficit in the Euro Area was estimated to be 5.3% of GDP in 2009, and forecast rising to 6.9% in 2010 and falling to 6.5% in 2011. The comparable data for Ireland are 12% in 2009, and 14.7% in both 2010 and 2011. (Source EU Commission, Euro Area Report, Statstical Annex Table. 37).

So, whatever the motives of those looking to slash and burn public spending, deficit-reduction is not one of them. The verdict is in. Austerity is a disaster for government finances because it's also a disaster for the economy. Reflation works.

Tomaltach said...

It is the magnitude of our deficit and the wholly unsustainable path of our finances that separates us from our main eurozone partners. To equate Ireland's position with that of France of Germany - as you do when you compare with eurozone averages - and argue we should adopt the same approach is delusional.

Rory O'Farrell said...

@ Tomaltach

In contrast to France and Germany we are suffering from two recessions. Part of our downturn is due to the popping of the bubble, and part due to the financial crisis reducing demand.

We should not try reinflate the bubble, but should counter the loss in demand due to the international crisis.

The normal response to the bubble would be to cut day to day spending. This can be done with a modernisation agenda in the public service. To counteract the slump due to international factors, capital spending should be increased to boost demand.

So we can have an expansion in capital spending, and a reduction (through modernisation) in day to day spending.

Tomaltach said...

If modernisation means anything it means to make modern, to make something have the characteristics of the present or recent time. There is no harm in asking, how in God's name did we tripple our public spending and end up with something that is, by its proponents own admission, not modern. That is truly shocking to me.

Donagh said...

@Tomaltach s As Michael Burke’s post on the Greek crisis illustrated, the legacy of the previous Greek government was a substantially lower tax regime than France and Germany. Without suggesting here that those who were taken out of the tax net in Ireland through the social partnership process should be put back in, the legacy of relatively low taxation is part of our history too, and this weakness was completely exposed when the collapse in the property bubble occurred. Again, as Michael B’s Tribune article (http://www.tribunemagazine.co.uk/2010/01/29/taking-the-wrong-road-to-recovery/) argues, the hollowing out of taxation revenue was a collapse in investment – not a spiralling of government spending, which you suggest when you use the phrase the “unsustainable path of our finances”.

So the size of our deficit is due to the legacy policies of our current government and accounts for the difference between us and those other larger economies in the EU who taxed higher earners more. To suggest that the ‘magnitude’ determines that there is only one way to resolve it and that is to reduce investment further is both ignoring the cause and exacerbating the problem further.

Michael Burke said...


You seem to be confusing quantitative issues (the relative or absolute size of the deficit) with qualitative issues (the policy prescription to revive the economy and close the deficit). The correct approach on the latter will yield positive results irrespective of the the magnitude of the former. As far as deficit-reduction is concerned (which is, in any event, a symptom, not a cause of the crisis), reflation clearly acts to correct the deficit, whereas Ireland's unique experiment in fiscal contraction has only acted to push the deficit higher.

The proof is that deficits elsewhere are predictably stabilising and then falling where reflation has been adopted, as was predicted by its advocates. The Irish government and its supporters have instead attacked an area which could have acted as an automatic stabiliser, public spending. And the effect has been to push the deficit higher.

To take Germany, which has now had fiscal stimulus equivalent to 4% of GDP, the EU Cssn. outlined path of its deficit for 2009/10/11 is 3.4% of GDP, 5.0% and 4.6% (all data Table 37 as above).

Ireland, which has had a fiscal contraction equivalent to 6.4% of GDP, has a comparable path for its deficits of 12.5%, 14.7% and 14.7%. It is clear which policy prescription is working.

I don't accept the point that Ireland's higher deficit invalidates this approach, even the DoF now accepts fiscal multipliers ave not been banished from Ireland.

But let us take a country where the deficit was even higher than Ireland at the outset, poor benighted Greece. The Cssn. forecasts for its deficit were made before the latest disgraceful blackmailing of the Greek government into a savage, Irish-style fiscal contraction. Prior to that, they had engaged in no significant fiscal change at all. The projected path for their deficits was 12.7%, 12.2% and 12.8%.

So, even an economy with a higher deficit than Ireland's would have achieved a lower deficit than Ireland's by doing nothing.

Of course, that was before the Commission and the ECB did their worst. The outcome wlll be as dismally poor in Ireland.

Indeed, I am willing to wager now against any supporter of the idea you can cut your way to deficit-reduction. The Cssn. forecast 2010 and 2011 deficits for Greece, which were made before the fiscal contraction measures this week, were 12.2% and 12.8% of GDP. My bet is that, just like Ireland, those deficits will go higher, not lower than these Cssn. forecasts.

Proposition Joe said...


Without suggesting here that those who were taken out of the tax net in Ireland through the social partnership process should be put back in

Why not?

In tandem with corresponding tax rises throughout the income deciles, of course.

But I can't see how we can realistically keep half the workforce out the tax net, but yet somehow make our way to the sunlit uplands of a Nordic-style social democracy.

Tomaltach said...


Regarding the "unsustainable path of our finances" what I mean is that, without corrective measures we were heading to a very bad place. Of course, the problem isn't simply that government expenditure rose quite rapidly. The problem is primarily that our tax base is all wrong and our government adopted policies which fostered the extra-ordinary property boom. But back to spending: my point was not that the increase in spending was the main factor in the financies being out of kilter, but rather the question how can it be that we made very significant increases in spending in key areas and ended up with services that are not yet modernised.

I neither welcome nor decry that our spending on health as a proportion of GDP increased dramatically. That is merely an accountant's yardstick. For me the important question is the kind of service we get in return for our money.

I find it remarkable that so many on the left defend the spending levels we have now arrived at and the increases under the Ahern regime. It is almost as if the goal is to reach a certain proportion of GNP on health, on education, etc and all else will follow. This must be wrong. We all lament the disastrous FF led government which presided over the Celtic Tiger: it was incompetent, cowardly, unaccountable, and much else besides. Even if we hadn't the visible examples of how they wasted money, and they are legion, we would guess from knowing how they operate that they were never capable of making spending decisions that are even half wise. There is no escaping it: much of their increasing budgets was pure waste. How much? Impossible to tell but imperative to find out and the only way to do that is to battle hard to discover where every penny goes and whether it is put to good use.

In my view, therefore, Ahern-era spending must be looked at and ajusted where necessary.


To compare Ireland's deficit with that of Greece and observe that Ireland's will be higher after fiscal adjustment, might be fun but reveals nothing. It takes a remarkable pyhysician indeed to look at innards of the Irish and German economies and conclude they always require the same medicine.

Michael Taft said...

Tomaltach - as someone on the Left, I don't defend 'the spending levels we have arrived at'. I have criticised that level for a long time. We should, of course, be spending more - on investment in education, healthcare, physical infrastructure, credit for SMEs, and indigenous enterprise.

We all want 'fiscally corrective' measures but that is not what we are getting from the Government. For instance, the ESRI has assessed two of the principle 'cost-cutting' measures: cutting public sector wages and jobs. When they ran a simulation whereby the Government 'saved' €2 billion from these measures they found that by 2014 (a) it would reduce the borrowing requirement by 0.3 percent, (b) would reduce employment by 1.0 percent (or about 18,000 to 20,000 jobs), and (c) reduce consumer spending by 2.2 percent (between €1.8 and €2 billion). Needless to say, growth would be depressed by about 1 percent, cutting the Government's projection in 2014 by about a quarter. So, all that downside (reduced employment and spending, more businesses reliant upon domestic demand, growth depressed) for a return of a reduced borrowing requirement of 0.3 percent? That's hardly rational, efficient or 'cost-effective'.

That's why an investment strategy - one that puts people back to work, increasing spending, raising tax revenue, reducing unemployment costs, promoting growth (never mind the long-term return of, for instance, early childhood education, Next Generation Broadband, increased wind energy capacity, etc.) - is a better approach to fiscal corretion.

Tomaltach said...

@Michael Taft,

You say we should be spending more on health and education. I am in favour of the state providing a world class universal health system. I am prepared to pay more tax to get it. But I am not prepared to pay more until I am assured that current spending levels are being put to good use. I described why I believe the Ahern governments, far from delivering value for money, splashed out money without providing the oversight to manage how it was spent. Result: enormous waste. The classic example is the HSE. Throwing more money at it is not the way to go. I believe that health policy and the machinery to deliver it need to be created first. Otherwise, we are simply building on a flawed system and even if we reach or exceed EU spending levels on a GDP basis we will not have the services we desire. For me, it is about the service, not the level of spending per se (though it is clear that for you the priority is to spend a certain amount of GDP and it appears that this goal is so paramount for you that you are willing to condone Ahern's spending regime).

Regarding investment strategy, you mention putting people back to work and increasing tax revenue. On the latter, I agree: the tax base (and overall tax levels) needs to be significantly adjusted. To be fair, the current government didn't simply rely on cuts: the first two budgets of the three made significant increases in tax rates, particularly at the upper end. No, not enough has been done, and the overhaul needs to be more radical, but it must be acknowledged that the corrective measures thus far have not by any means been entirely on spending. And we can be sure, as the finance bill signals, that more taxes are on the way - though I cannot bring myself to believe that the current administration will be bold enough to make the necessary reform.

But the main problem with your investment strategy proposal is that it requires money that isn't available. Currently we are paying about 60 cents for every euro of services the government provides. The other 40 cents are borrowed. Perhaps half of this gap or more is structural. So even with economic recovery we need to close a substantial gap. Even a radical overhaul of the tax base will not deliver the revenue required. The trouble with this picture is that it renders any significant increase in our borrowing almost impossible. The euro has already fallen over nervousness relating to the fiscal situation in the European periphery, and without question the markets are extremely nervous. It takes no great acuity to realise that for Ireland now to renounce constraint and launch a spending spree would risk ruin. People like Michael Burke point to Germany's stimulus. This is facile for it ignores the vast difference between the two economies. European leaders know this: that is why they are happy to applaud borrowed stimuli in Germany and France, while at the same time applauding Ireland for its different approach. They know that Ireland is not Germany.

Proposition Joe said...


I don't think anyone on this site thinks our public services consuming a certain %-of-GDP really is a goal worth pursuing in and of itself. There may however be a certain mental straight-jacketing going on, the obverse of the "four legs good, two legs bad!" commentary prevalent in the Sindo, that results in a focus on inputs as opposed to outputs. An unfortunate consequence of the anti-PS agenda dominating the MSM is that there's a body of progressive opinion finding it well-nigh impossible to call out under-performing service providers. Presumably for fear of appearing to pander to that orchestrated campaign of ... well, vilification is strong word, but its definitely robust and fairly unbalanced criticism.