46  February 2016
I
n a nearly picture-perfect setting for a politician in
the last days of a pre-official campaigning season,
framed by snow, sun and high alps, surrounded by
an unctuous cabal of journalists and global elites
largely impervious to Ireland’s economic realities,
Enda Kenny delivered his new vision for Government.
His new Three Point Plan is composed entirely of the
remnants of his 2011 Five Point Plan with a 2015/16
twist.
“Since a new government was formed under my lead-
ership in 2011, we have followed”, chirped Kenny, “a
clear plan: fix our banks and the public finances quickly
and get our country working again. That plan involved
huge sacrifices by the people, but has clearly worked.
Since the end of the bail-out in 2013, our economy (real
GDP) grew by 5.2% in 2014 and is likely to have grown
by a further 6.2% in 2015. Unemployment has fallen
from a peak of over 15% to below 9%. Government bor-
rowing has fallen from 11% of GDP in 2011 to less than
2% last year”.
With his usual smile so full of thoughtfulness and
compassion, he went on to add that “the recovery of the
Irish economy is now driven by exports, business invest-
ment and high productivity, and is diversified across a
range of sectors”.
As half-truths go, these were pretty much on the
money.
It’s the economy… stupid
Yes, GDP has expanded in the aggregate at a blistering
pace. However, in per capita terms (even with massive
outflows of migrants out of Ireland over the recent
years), Final Domestic Demand (the sum total of house-
hold spending, government spending and private and
public investment – the measure least polluted by Mul-
tinationals (MNSs)’ accounting shenanigans) remains
11% below pre-crisis peak and 40% below the level if
the pre-bubble growth trend had persisted up to today.
Unemployment has fallen significantly over time, but
Ireland’s labour-force participation rate was 60.5% in
the third quarter of 2015 (3Q 2015), virtually unchanged
on 60.4% in 3Q 2011 and down on the 62.8% average
for the pre-crisis period. Actual unemployment –
according to the latest CSO data – stands at 9.3%,
which is somewhat different from the “below 9%”
claimed by Taoiseach.
The Government is keen on citing the 137,400 new
jobs added in 3Q 2015 compared to 3Q 2011, while for-
getting to note that the current total level of employment
is still 186,600 short of that for the same quarter in
2007. All of these missing jobs are accounted for by
employees (155,500 short) and self-employees with
employees (29,000 short). Meanwhile, stripping out
people in self-employment with no employees and
those assisting relatives the actual increase in employ-
ment during the tenure of this government falls to
107,100. A good number, but not as good as the bois-
terous claims from the Taoiseach’s quarters suggest.
As to Enda Kenny’s claims that the Irish economy is
now being driven by “sustainable” exports and invest-
ment, these too constitute a sausage roll: one quarter
pork, three quarters fillers. In the first three quarters of
2015 (the only data we have so far), our GDP at constant
market prices rose €9.94bn compared to the same
period of 2014. Over the same period of time, exports
More 'Points' than Growth
The government’s substantial achievement
is steadying the public finances
by Constantin
Gurdgiev
GENERAL DELIVERY
  February 2016 47
net of imports fell €828m. Worse, unaccounted
in the above, net factor payments from abroad
(the balance between what MNCs expatriate out
of Ireland in profits and what Irish companies
and households earn abroad) rose €3.25bn.
Which means our overall “exports-led recov
-
ery” delivered a net loss to the economy of
€4.1bn in the first nine months of 2015. The
table below sums up sources of growth in Irish
GDP.
So contrary to Mr Kenny’s assertion, 69% of
growth in Irish GDP and more than 103% of
growth in Irish GNP in 2015 came from one
source: Fixed Capital Formation. This includes
investments by the MNCs, the IFSC and aircraft-
leasing businesses, and vulture funds
transacting with the likes of Nama.
Our fabled growth also comprises some of
the effects of tax inversions, for which Ireland
is now well known worldwide. For example: in
2015, the top 5 Mergers and Acquisitions (M&A)
deals in Ireland included the Pfizer-Allergan
merger with a total value of €143.564bn, Teva
Pharma’s purchase of the generic drugs busi-
ness of Allergan at €35.454bn, Shire’s deal with
Baxalta at €29.533bn and Willis Group Hold-
ings’ purchase of some of the assets of Towers
Watson at €15.566bn. The only Irish deal was
CRH’s acquisition of Holcim & Lafarge’s assets
at €7.671bn - outside Ireland, with no real effect
on the Irish economy.
According to the NTMA, the Irish current
account surplus of around 4.3% of GDP over
2014-2015 reduces to 1.6 - 1.7% if we factor out
tax inversion-driven PLCs from our national
accounts. Adjusting for intellectual property
imports and aircraft leasing (just two distorting
factors), Investment contributed 2.7 percentage
points to GDP growth in 1Q - 3Q 2015 year-on-
year, while net exports contributed only 1.6
percentage points. The balance of 2.6 percent-
age points accrued to all other sources.
Last, but not least, Enda Kenny cited the mira-
cle of Irish productivity growth. Recent analysis
from the EU and NTMA shows that Ireland has
the largest gap between claimed competitive-
ness gains and recorded productivity increases
of all EU countries. This gap is explained by one
simple factor – completely outside the Govern-
ment control – devaluation of the euro. Other
sources of our productivity growth include such
‘organic’ gains as changes in MNCs’ tax optimi-
sation strategies, corporate tax inversions,
changes in the mix of goods and services billed
through Ireland and so on. Now devaluations
work the following way: they improve trading
conditions for exporters (predominantly MNCs)
at the expense of importers (predominantly
households). So based on EU data, Ireland
leads the way in transferring real income from
its people to foreign multinationals. That is
some ‘productivity growth’.
Exchequer Bubbly
Mr Kenny is on stronger ground when he speaks
about our public finances.
Yes, the Government deserves some serious
credit here. The General Government Balance,
as a percentage of GDP, has declined from a
5.7% deficit in 2013 to an estimated deficit of
2.1%, while General Government Debt is down
from 120% of GDP to an estimated 97% of GDP.
These are impressive numbers.
And the 2015 figures look equally impressive
compared to 2014. In the full year 2015, the Irish
Exchequer took in €45,601m in revenues, up
€4,319m on 2014 (+10.5%). Three key sources
of this tax bonanza were: VAT receipts that rose
€791 million (+7.1% on 2014), Income Tax
(including USC) that went up €1,202m (+7.0%
y/y) and Corporation Tax that rose €2,257m
(+48.9%). No one can cogently explain where
the massive increase in corporation tax came
from. However, if we are to use income taxes as
a benchmark, the ‘sustainable’ (over time)
share of corporation tax increases for 2015
should have been around one third the rate of
the registered increase.
On the non-tax revenue side, one-off sales of
shares in Bank of Ireland, PTSB and AIB, as well
as of Aer Lingus netted the Government
€4,016m or just €300m of the total increase in
tax receipts.
According to the Exchequer Statement for
December 2015, overall Exchequer deficit
improved from €8.189bn in 2014 to €62m in
2015 – a swing of €8.13bn in favour of the State.
Which sounds fantastic, except that half of this
was due to the sales of assets and the other half
was due to increased tax extraction from the
economy. Additional improvements in the fiscal
balance came from reduced cost of interest on
Government debt (a credit to the ECB more than
to the Irish Government) and cancellation of
transfers to the Sinking Fund, passed in Budget
2014 – which saved the State some €1.13bn.
Meanwhile, the reformed Public Sector
coughed up an increase in Government spend-
ing of €57.06m in 2015 compared to 2014, with
Voted Departmental Expenditures up more than
€639m, or 1.51%.
Stripping out action on banks, the chart
below shows that the Irish Exchequer perfor-
mance during the years of Mr Kenny’s
Government tenure was not as spectacular as
he claims. Tax revenues rose €8.2bn, but ex-
banks’ Government spending rose by €219m.
Final Domestic Demand
(the measure least
polluted by Multination-
als’ accounting shenani-
gans) remains 11 percent
below pre-crisis peak
PERSONAL
EXPENDITURE
1-3Q
2014
1-3Q
2015
CHANGE
EUR millions
63,769
65,987
65,987
20,122
20,528
406
26,097
32,976
6,879
968
1,970
1,002
159,018
180,104
21,086
28,852
28,024
-828
141,287
151,230
9,943
GOVERNMENT
EXPENDITURE
FIXED CAPITAL
FORMATION
CHANGES
IN STOCKS
EXPORTS NET EXPORTS GDP
Sources of GDP growth, January-September 2015
48  February 2016
Stuff of the future
All of this means three things from the fiscal
policy perspective.
1
In the short run, things appear to be sustain-
able and there is some room for cutting
income taxes. The key risks to this consid-
eration are:
On the downside: corporation tax and the
cost of funding Government debt; and
On the upside: VAT and Income Tax receipts
and one-off capital receipts that can benefit
from more domestic growth
2
Also in the short run, there is no room for
accelerating increases in expenditure, as all
the improvements in our fiscal performance
in 2015 can be attributed solely to one-off
revenue gains and increases in tax receipts.
A large share of the latter, relating to corpo-
ration tax receipts, is questionable from the
sustainability point of view.
3
In the long run, Ireland still needs significant
reforms of taxation, and of public manage-
ment and governance.
We do not have, yet, a full break down of 2015
expenditures under ESA2010 (the EU account-
ing framework) guidelines, but latest data show
that for the period of the first nine months of
each year, taxes and social contributions are
now up €8.22bn, while Government expenses
are down €6.89bn on the same period of 2011.
This is not a picture consistent with reforms-
driven rebalancing of fiscal management.
Compensation of Government employees is
down only €25m on 2011 levels, while the use
of goods and services and taxes payable on
these is up €28m and subsidies are up €167m.
The real problem lies not in the structure of
social welfare or health benefits, but in man-
agement of the public workforce and
expenditures. And that problem is rapidly
becoming obscured under cover of booming tax
extraction from the economy.
Three Point Plan
Some of these points are in Mr Kenny’s ‘Three
Point Plan’ from Davos, but there are few details
to go by in actually assessing their expected
impact. Instead of providing costed and inde-
pendently verified numbers, the Taoiseach is,
for now, happy throwing around lofty
aspirations.
In the first part of his ‘Davos Plan’, he asserts
that the Government will “continue to create
even more job opportunities… to add an addi-
tional 200,000 jobs by 2020” at which point
“everybody who wants a job will be able to get
one”. Now, according to the latest CSO projec-
tions, the Irish labour force in 2021 is expected
to be 2,313,500 or 127,500 more than in 3Q
2015. At the same time, there were roughly
75,000 people on State Activation Programmes,
such as Job Bridge, on average, at the end of
2015. The Government is also aiming to bring
back some 70,000 of Irish emigrants. Taking
the above numbers together, the Taoiseach is
promising to create 200,000 jobs for about
275,000 potential candidates, and still create
‘full employment’. You’d need the mathematics
of quantum physics to make these numbers
work.
Beyond this, Enda Kenny claims that to
achieve his job-creation targets, the Govern
-
ment “will… invest more in skills and
infrastructure and cut taxes on smaller, Irish-
owned businesses”. Which is fine in theory, but
tough to swallow in practice. First, as Budget
2016 showed, the Government is hell-bent on
creating more and bigger loopholes for tax opti-
misation by MNCs. Second, investing in skills
and infrastructure requires money; as does cut-
ting taxes on Irish-owned businesses. The
Government also promises “to continue cutting
personal income tax rates, reforming our wel-
fare system and improving affordable access to
childcare and medical care for working parents
in order to “make work pay”.
All of these objectives, save reforming Social
Welfare, will have to carry a net cost to the
Exchequer in either revenues foregone or
increased expenditure. Even if the Government
replicates its claimed successes to-date in
‘reforming’ Social Welfare, the savings achieved
will be at the most about €600m per annum.
Based on the average revenue uplift over the
last 3 years, the Exchequer can count on addi-
tional €3bn in annual revenue increases, in the
absence of any changes to the tax regime.
Can roughly €3.6bn in additional fiscal
cushioning cover all of the above spending
objectives? I have my doubts. And so do the
IMF and the EU.
But Enda Kenny is not finished, yet, with
spending money he doesn’t quite have. “…The
third step in the plan is to continue to fund sen-
sible improvements in key public services and
housing...”. In other words, more promises of
increased public spending on everything – from
social housing to support ‘packages’ for fami-
lies and the elderly, to increased levels of
employment and pay in the public sector.
The good news is: according to the Govern-
ment, the fiscal rules “will cap the growth of
government spending below the underlying
growth capacity of the economy”. The bad news
is: according to the hard fiscal balance numbers
to-date, the rule simply does not appear to
hold, while in terms of forward assessment, the
idea of quantifying the “underlying growth
capacity of the economy” is simply a pipe
dream.
In summary: the Taoiseach’s latest ‘Three
Point Plan’ is based on soft numbers and hard
promises – something that is reminiscent of his
predecessors’ approach to policy formation in
government and indeed in opposition.
Ireland has the largest
gap between claimed
competitiveness gains
and productivity –
explained by devaluation
of the euro
Irish Government Performance
Cumulative 1Q-3Q figures
Euro millions
0
30000
60000
90000
120000
2011
2012
2013
2014
Irish Government Performance
Cumulative 1Q-3Q figures
Euro
millions
GENERAL DELIVERY

Loading

© 2015 Village Magazine

Back to Top