Thursday, 3 March 2011

The murky world of Exchequer statistics

Michael Taft: I don’t want to pre-empt An Saoi’s more informed analysis of Exchequer returns, but there are some real issues emerging even at this early stage of the year.

The Government is hoping to increase the overall Exchequer tax take by €3.1 billion, or 9.9 percent over last year. This is a key determinant to whether the deficit will fall to below -10 percent of GDP (other determinants are public expenditure and the overall level of GDP). This projected increase is made up of increases in the following sub-categories:

• Income tax (including USC): 25.3%
• VAT: 1.3%
• Corporation: 2.4%
• Customs & Excise: 0.1%
• Capital Taxes: 4.5%

The real driver in the projected increase is income tax revenue which includes receipts from the Universal Social Charge. This category is expected to make up over 90 percent of the entire projected tax increase. Of the projected increase of €3.1 billion, income tax/USC is expected to increase by over €2.8 billion.

Why the increase of 25 percent? It’s not because the economy is growing – more employment, more businesses, more tax revenue. The primary reasons are the income tax changes introduced in the budget (cuts in personal tax credits, standard rate tax band, certain tax reliefs, etc.); and the introduction of the USC.

And here is where it starts to get murky. The USC amalgamates the Income Levy and the Health Levy into new thresholds. While the income levy was included in income tax receipts last year, the health levy wasn’t; it was paid directly into the Department of Health and showed up as a Departmental Balance in the Estimates.

What this means is that comparisons between last year’s tax revenue (for both income tax and overall tax) are somewhat skewered since they are not comparing like with like. So when we get headlines like ‘Tax receipts up over 2 percent’ – we have to treat this carefully since last year’s tax receipts didn’t count the health levy which is now part of this year’s USC.

Of course, the Department of Finance could have made this all easier by putting in a like for like comparison. This would have meant taking last year’s figures and adding last year’s monthly receipts of the health levy. This has not been done and I can’t find these monthly figures for last year.

Last year the health levy was estimated to raise €2,431 million. This relates to full year increase. The comparator for this year would be less as January receipts relate to December payments. Therefore, February is the first month that we have to readjust to see how this year’s income tax receipts relate to last year.

• February 2011 income tax receipts: €980
• February 2010 income tax receipts: €784

This might suggest a substantial rise over last year (25 percent) but we have to include the February health levy receipts for 2010 – a figure not readily available. So here is an extrapolation: €186 million. When we add that to the overall February 2010 figure we find the following:

• February 2011 income tax receipts: €980
• February 2010 income tax receipts: €970 (including extrapolated health levy receipts)

The increase for February, therefore, is not 25 percent as the Finance numbers suggest but, rather, 1 percent – and this is with the additional revenue arising from other Budget 2011 changes.

Therefore, the overall tax receipts do not show a 2.2 percent increase over last year. Rather, it shows a -1.7 percent decline.

We should pause here. It is, as they say, early days and we shouldn’t rush to conclusions. But the early returns are not good. The second biggest category – VAT – is showing sluggish receipts so far. They are -2.4 percent down on last year’s outturn and -5.9 percent on the Government’s targets this year.

Throughout the year the important categories to watch are income tax and VAT (it would help if the Department of Finance produced comparable data). Together, they are projected to make up 70 percent of all tax receipts. These best reflect domestic economic activity; corporate tax receipts can reflect the accounting activities of the multi-national sector; namely, transfer pricing and profit imports.

On present trends, the Government will come in about €1 billion under target. But these are early trends which could improve or worsen as the year goes on. Will the deflationary policies of the last two years –now deeply embedded in the economic base – undo the deficit reduction targets? Watch this space but don’t be surprised if the answer is yes.


An Saoi said...

Michael, I can't get a feel yet for the way taxes are moving, other than they do not seem to be moving in a very positive way. I am awaiting more detailed figures to see what is going on at a more micro level.

The February Income Tax target was a very brave figure (€1,010M) compared to payments in Feb 2010 of just €784M. It never looked like it could be reached, even taking the USC into account.

The net VAT figure, €226M compares to €304M in Feb 2010. This may be down to the processing of some very large repayments and/or also cash flow problems for businesses, leading to non payment of taxes. Retail sales, excluding cars, remain very weak and Credit card expenditure on personal cards continues to decline. Banks are very slow to extend credit for payment of taxes.

It is unclear yet which way Corporation Tax is going.

The March tax figures will include the Jan/Feb VAT returns and will give far more real information.

My personal guess at this stage based on the published figures is that the local (non multi national) economy remains in serious decline.

The increased taxes, decline in population, further job losses and more Public expenditure cuts seem likely to perpetuate the problem. There may be quite strong GDP growth as some of the more recently arrived multi-nationals crank up their tax avoidance operations in Ireland, e.g Facebook, Zynga Linkedin etc. However any growth will bypass the local economy.

An Saoi said...

I have been looking at Mortgage drawdowns in 2010 compared to 2005 by quarter. They have fallen by the follow percentages,

Q4 90.5%

Q3 86.79%

Q2 84.46%

Q1 79.65%

This gives a feel for the level of dependence there was on borrowed money to pay for the housing bubble, which yield much of the tax paid in earlier years. There is a huge amount of deferred tax in all those empty houses and flats.

Total drawdowns in 2010 were €4,746M compared to €34,114M in 2005 and €39,872M in 2006. It is hard to see much more than €4,000M being dished out in 2011.

All those silly people who borrowed and contributed so handsomely to our bubble will spend most of the next 20 years paying for their follies and not spending.

It should be remembered that the VAT on input costs for all those empty housing units has been claimed by the developers, leaving the State seriously out of pocket as long as they remain empty.

Seamus Coffey said...

It is also worth noting that most of the "improvement" of €462 million in the Exchequer Deficit is due to a sleight of hand by the DoF.

In the first two months of 2010, the Exchequer spent €363 million on Debt Interest. 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 no idea either but it strikes me as unusual that an account with Capital in the name is being used to meet Current expenditure needs.

The full debt service cash cost for the first two months of 2011 was €626 million. This is €522 million than the total given in the Exchequer Account.

The public finances didn't improve by €462 million in the year to February - they deteriorated by a further €60 million.

Michael Taft said...

An Saoi - I didn't produce these numbers for any predictive purpose; rather, it was to point out that unless we compare like-with-like, we could come to misleading interpretations. As always, I await your more detailed presentation of the numbers.

Seamus, you had me running to find out what this CRSA was. This is what I found:

'The capital services redemption account was established under section 22 of the 1950 Finance Act, on foot of a decision by the then Government that borrowings for voted capital services should be amortised over a period of 30 years so that they would involve no permanent addition to the public debt.

A new annuity is calculated each year which is designed to provide the annual sum which, when accumulated over 30 years, will repay the expected expenditure on voted capital services for that year. The annuity calculated for the previous year is also revised in the light of the outturn for that year’s voted capital services and both annuities are given statutory effect each year in the Finance Bill.

The annual payment from the Central Fund into the account is comprised of a principal and an interest element. A sum not exceeding the interest portion of the annuity may be paid from the account each year towards meeting interest on the national debt. The balance of the annuity may be applied to any of the ways set out in section 22 (7) of the Finance Act, 1950. In practice, the balance is applied towards funding debt redemption. The overall effect is that the interest and principal received from the Central Fund into the capital services redemption account in any one year are not retained in the account but are expended in that year.

The CSRA annuity system is basically a product of an era when the only borrowing undertaken was for capital purposes. The prevalent view then was that the Exchequer should be openly seen to be placing aside moneys each year from the current budget which, over a 30 year period, would fund the full cost, interest and principal included of the capital borrowing undertaken for the expenditure in question.

In practice, the system charges the cost of capital projects to the current budget over a 30 year period thereby increasing the current budget deficit or reducing the current budget surplus. However, given that the cost of the capital projects has been included each year as they are incurred, it is necessary to credit the capital budget with the amount charged to the current budget in order to avoid double counting. Thus, the net result is to increase the current budget deficit and to reduce the capital budget deficit by the same amount, leaving the Exchequer borrowing requirement unchanged. Accordingly, termination of the system would not confer any benefit on the Exchequer borrowing requirement.

A Government decision that it no longer considered it appropriate to set funds aside each year to repay over time part of that year’s EBR could be viewed in certain quarters as a softening of its resolve to keep down borrowing and this would be an unnecessary risk to take for a measure which would convey no benefit in fiscal terms.'

I'd like to get your thoughts on this but it seems a potentially dubious activity - leaving us with larger payments down the line.

Link for this explanation:

Slí Eile said...

@all - all of this only goes to show that there is an urgent need for a standardised, transparent and accessible gateway to the latest data on public expenditure, revenue and debt. Citizens deserve better.
@Michael - I agree that month to month changes just as quarter to quarter to quarter changes in GDP need to be taken with huge caution given seasonal, one-off and measurement issues There is far too much media hype over short-term movements in major aggregates.

Seamus Coffey said...

Hi Michael,

I'm not sure what to make of the Capital Services Redemption Account (CSRA). I don't know anything about it! I'd like to be able to track where the money in this account came from, but there is no trace that I can see in the Exchequer Account.

It's a sad indictment of our system of public finance that we cannot actually see what is going on. The concept of "net expenditure" is another one that irks me. We're either spending money or we're not. When the full-year 2010 Exchequer Returns were released the statement from the Minister for Finance contained the following: "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." What?? Spending was up because receipts were down. This is crazy stuff. These "appropriations in aid" that are netted against gross expenditure were €15.9 billion in 2009. In 2002 they were €2.2 billion.

Another thing I would like to see is what is going on in the Social Insurance Fund (into which PRSI contributions are paid). The SIF had a surplus that was managed by the NTMA but this was transferred back in April 2010. Since then the fund is in deficit and requires a transfer of €1.5 billion from the Department of Social Protection to meet its commitments. Why can't we get monthly data on PRSI contributions and the balance in the SIF?

Our system of public accounts was devised and legislated on in the 1860s and is little changed since then. The antiquated legislation does ensure that we get monthly updates on the Exchequer Account but the Exchequer Account is not the public finances. The Exchequer Accounts stated that tax revenue in 2009 was €32.6 billion. In actual fact government revenue in 2009 was €56.4 billion. Why can we not have a single report that consolidates all this? We spent €75 billion in 2009.

The Exchequer Account is reported monthly and gets far more coverage than it deserves. The media generally take the press release and regurgitate only the bottom-line figures. In many cases this can be misleading and the detail is ignored. This month's example with the CSRA paying our debt interest is a case in point.

Paul Hunt said...

@Seamus Coffey,

Couldn't agree more. On a previous (making the case for a 'debt audit') I tried to make the case that governments throughout the EU should be required "to develop and present proper government accounts (rather than the current 'tennis club' receipts and expenditure versions) that included income statements, funds flow and balance sheets which could be used for auditing and fiscal planning purposes." Not surprisingly this intervention was considered irrelevant.

I'm pleased that you also see a need for major refrom in the preparation and presentation of the government accounts.