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More ‘points’ than growth

In 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 leadership 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 borrowing 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 investment 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 capital terms (even with massive outflows of migrants out of Ireland over the recent years), Final Domestic Demand (the sum total of household spending, government spending and private and public investment – the measure least polluted by Multinationals (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 forgetting 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 employment during the tenure of this government falls to 107,100. A good number, but not as good as the boisterous 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 investment, 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 recovery” 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 aircraftleasing 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 business of Allergan at €35.454bn, Shire’s deal with Baxalta at €29.533bn and Willis Group Holdings’ 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 percentage points accrued to all other sources.

Last, but not least, Enda Kenny cited the miracle of Irish productivity growth. Recent analysis from the EU and NTMA shows that Ireland has the largest gap between claimed competitiveness gains and recorded productivity increases of all EU countries. This gap is explained by one simple factor – completely outside the Government control – devaluation of the euro. Other sources of our productivity growth include such ‘organic’ gains as changes in MNCs’ tax optimisation 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 spending 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 performance during the years of Mr Kenny’s Government tenure was not as spectacular as he claims. Tax revenues rose €8.2bn, but exbanks’ Government spending rose by €219m.

Stuff of the future

All of this means three things from the fiscal policy perspective.

1 In the short run, things appear to be sustainable and there is some room for cutting income taxes. The key risks to this consideration 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 corporation 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 management and governance.

We do not have, yet, a full break down of 2015 expenditures under ESA2010 (the EU accounting 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 reformsdriven 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 management 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 independently 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 additional 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 projections, 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 Government “will… invest more in skills and infrastructure and cut taxes on smaller, Irishowned 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 optimisation by MNCs. Second, investing in skills and infrastructure requires money; as does cutting taxes on Irish-owned businesses. The Government also promises “to continue cutting personal income tax rates, reforming our welfare 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 additional €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 sensible 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 families and the elderly, to increased levels of employment and pay in the public sector.

The good news is: according to the Government, 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 oppositi