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A Tale of two Budgets

by Frank Schnittger Mon Oct 3rd, 2022 at 09:54:58 AM EST

The contrast between how the recent budgets in the UK and Ireland have been received by the markets and the general public couldn't be greater and tells us much about where the respective economies are currently at. (Let us ignore the distinction that the UK budget was officially dubbed a "Fiscal Event" rather than a formal budget. That euphemism has uncomfortable resonance with the Russian "Special Operation" rather than invasion of Ukraine).

In Britain £45 Billion in unfunded tax cuts and £120 Billion in energy price cap expenditures was greeted with dismay by the markets, who lost trust in the UK's debt expansion trajectory. The Pound slumped, shares crashed, and, most crucially, pension funds were at risk of becoming insolvent as their holdings in government debt - normally the safest of investments - went underwater.  The Bank of England was forced to intervene with an emergency programme of buying up £65 Billion in government debt from private investors now unwilling to hold it.

Politically, the UK budget was also a disaster for the fledgeling Truss administration. The elimination of the top rate of 45% on earnings over £150,000 p.a., the removal of the cap on banker's bonuses, and the cancellation of planned corporate tax increases all contributed to a general sense of unfairness at increasing inequality at a time when most people are experiencing a cost of living crisis. Wages increases haven't been sufficient to cover the inflation rate, and more and more workers are contemplating strike action leading to greater social division. In a humiliating climbdown the government has now been forced to reverse the 45% tax rate cut - only a day after the Prime Minister defended it.

Economically, too, the UK budget faced huge criticism, from institutions such as the IMF, no less. What particularly spooked investors was the refusal by Kwasi Kwarteng to submit his proposals to the usual scrutiny by the Office of Budget responsibility - which might have disputed his claim that such measures were required to kick start the UK economy. The inflationary effect of all this extra (borrowed) cash being injected into the economy at a time of supply constraints has also forced the Bank of England to consider a rapid acceleration of already planned interest rate increases - heaping more misery on borrowers and homeowners and negating the stated intention of the "Fiscal Event" to grow the economy.

Paul Krugman, the Nobel prize winning economist was scathing in his assessment: In an article headed The UK suffers a full-scale policy zombie apocalypse, he argues that the `Trickle-down' notion that cutting taxes on the rich will create an economic miracle is a classic example of a walking-dead idea -- ideas that have failed repeatedly in practice, and should be dead, but somehow are still shambling around, eating policymakers' brains. The pre-eminent zombie in US economic discourse has long been the belief that cutting taxes on the rich will create an economic miracle.

He goes on to explain:

The important point to understand is that there isn't a serious debate about the proposition that tax cuts for the rich strongly increase economic growth. The truth is that there is no evidence -- none -- for that proposition.

Of course, people on the right, raised on the legend of St Reagan, believe that his tax cuts did wonders for the US economy. But the data doesn't agree.

Reagan did drastically cut taxes on high incomes.

So what did happen to economic growth? It's important to distinguish between the long-run trend -- which was what tax cuts were supposed to improve -- and business cycle fluctuations.

Underlying US growth was pretty much unchanged through the 1970s and 1980s. The economy slumped during recessions -- especially the double-dip recession of 1979-1982 -- and grew rapidly during recoveries, but by the end of Reagan's reign it was more or less exactly where you would have expected it to be if you extrapolated the trend from 1973 to 1979.

Bill Clinton effectively undid the original Reagan tax cuts, amid many predictions of imminent disaster. The economy actually grew somewhat faster than it had under Reagan, and by the end of the Clinton years it was above the level it would have reached if you just extrapolated the 1973-1989 trend.

Krugman goes on to give other examples of such failed "supply side" policy experiments in the US and elsewhere.

Janan Ganesh in Liz Truss learns the hard way that Britain is not the US has a less radical take, but comes to the same conclusion:

Britain is in trouble because its elite is so engrossed with the US as to confuse it for their own nation. The UK does not issue the world's reserve currency. It does not have near-limitless demand for its sovereign debt. It can't, as US Republicans sometimes do, cut taxes on the hunch that lawmakers of the future will trim public spending. Reaganism was a good idea. Reaganism without the dollar isn't. If UK premier Liz Truss has a programme, though, that is its four-word expression.

So much of what Britain has done and thought in recent years makes sense if you assume it is a country of 330 million people with $20 trillion annual output. The idea that it could ever look the EU in the eye as an adversarial negotiator, for instance. Or the decision to grow picky about Chinese inward investment at the same time as forfeiting the European market. Or the bet that Washington was going to entertain a meaningful bilateral trade deal. Superpowers get to behave with such presumption.

The UK doesn't.

So not only was the Truss/Kwarteng budget politically inept. It was social divisive and economically illiterate. But why was the Irish budget then so well received? It’s €11 Billion increase in public expenditure is about half as big, as a proportion of the economy, as the £165 Billion budget bonanza in the UK, which seems excessive when you consider that Ireland is coming off another stellar year of economic growth and has no need to boost the economy. Growth last year was 13% of GDP with a 200,000 increase in the size of the workforce to a record 2.55 million. Will injecting a further €11 Billion into the economy not be even more inflationary?

There were a number of distinguishing factors which mean that this may not be the case.

Firstly only €7 Billion of the increase is ongoing. €4 Billion is in once off measures specifically designed to reduce the cost of living for ordinary families - not just the super-rich. There has been a particular emphasis on cutting energy, childcare, healthcare, and education costs for all and increasing social welfare payments for the most disadvantaged. Housing costs are being addressed by the introduction of tax credits for renters and a tax on vacant homes in an attempt to incentivise an increase in supply in the housing market. As a result, the rate of inflation in Ireland is expected to decline from 8.5% this year to 7% next year. Not great, but not too bad in comparison to our neighbours.

All of the above measures are open to the criticism of being inadequate to fully address the cost of living and housing crises, but at least they are a step in the right direction.

Secondly, Ireland still expects to record at least a €1 Billion budget surplus this year, followed by €6 Billion next year, and that is after it has set aside €2 Billion this year and €4 Billion next year for a contingency fund for future economic disasters or a decline in Ireland's soaring corporate tax revenues. (More anon). Ireland's national debt is actually declining in absolute terms and has already come down from 120% of GDP in 2013 to 56% now. In contrast, the UK's national debt has been rising and is now heading for 100% of GDP in the short term.

Thirdly, being part of the Eurozone, Ireland doesn't have a currency to defend, and Eurozone interest rates, while rising, are not expected to rise at the precipitous rate expected in the UK.

The biggest fly in the ointment in Ireland's budgetary strategy is that, as Cliff Taylor says: This budget was brought to you by Ireland's five multinational `superstars'. He argues that the Government is looking two ways on corporate tax revenues: delighted to get them but terrified they might disappear. Ireland is very beholden to the tax planning strategies of the many major corporates who now make their EU headquarters here, and particularly the big four: Microsoft, Apple, Google and Pfizer. Corporate tax receipts have increased from €4 Billion to €21 Billion in the last 10 years, which is huge in the context of the government's total annual spend of €90 Billion this year.

All these companies have major and expanding operations in Ireland, but undoubtedly a major (and unknown) proportion of the tax they pay here is in respect of profits they have made on sales elsewhere. The fate of Blackberry and Nokia, once pre-eminent in their markets, should act as a warning that these companies may not always be so profitable.

In the short term, Ireland's tax take from these companies may actually continue to increase due to a number of factors: The capital allowances these companies gained by "investing" their intellectual property (IP) in Ireland are beginning to run out which means that much more of their profits will become taxable here. Global corporate tax reform, if enacted, will also increase Ireland's tax take from 12.5% to 15% and prevent undercutting by other countries with lower corporate tax rates. But ultimately these companies are free to locate their IP wherever they choose, and any decisions to relocate their IP would have major repercussions for Ireland's budgetary strategy.

Reducing our national debt and setting aside even more "windfall" tax revenues as a contingency against global recession or the relocation of corporate IP is therefore the budgetary imperative for Ireland. Let us hope that this and future governments do not give in to the temptation (and opposition pressure) to fund future ongoing expenditures from what could be very temporary windfalls.

Northern Ireland, of course, also benefits from being adjacent to such a buoyant consumer, employment, and investment market. The risk that the conflict over the protocol will kill off prospective investment requiring access to the Single Market is very real. How many of those 200,000 extra jobs created in Ireland last year could have been created in N. Ireland had the policy environment in Britain and NI been less fraught? With Ireland reaching full employment and much its infrastructure operating at full capacity, the temptation to locate new investment in a cheaper operating environment in N. Ireland must be great. But who would take that risk with the UK pursuing Zombie economics and N. Ireland becoming increasingly unstable?

The opportunity cost of current unrest is growing all the time, and those opportunities may not be available again in the future. Once decisions are made to invest elsewhere, even future investments tend to follow the same route. Both parts of Ireland need to be aware that current gains cannot be taken for granted and opportunities must be grasped while they are still available.

I would like to have it recorded in evidence that I did not use the term "Brexit" once in the above story. Who can now doubt, however, that it is the elephant in the room?

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Oct 3rd, 2022 at 10:06:58 AM EST

Truss on explanation "local consent".

'Sapere aude'

by Oui (Oui) on Mon Oct 3rd, 2022 at 12:54:12 PM EST

The shortest economic suicide note in history? How the mini-budget fails to help long-run growth | LSE |

Headline Bloomberg: "Truss May Need to Match Brutal 2010 Austerity Cuts to Calm Markets"

'Sapere aude'

by Oui (Oui) on Mon Oct 3rd, 2022 at 12:55:12 PM EST
From your link:
The government's answer is that these tax cuts will generate supply-side growth. Common sense and reams of economic studies show that this is simply not the case. Many high tax economies like Germany and the Nordic nations are robustly successful and big tax cuts for top earners have no clear relationship with growth (although they definitely increase inequality).

The current government seems entranced with US Republican ideas that have been mugged by reality. The idea that lowering tax rates will bring in more revenue is called the "Laffer Curve" after Arthur Laffer who was, well, having a laugh. It is possible that when top tax rates are extremely high (as the 90% plus rates immortalised by the Beatles), cuts can be self-financing. But no respectable economist believes this to be the case for current UK levels of taxation.

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Oct 3rd, 2022 at 06:32:19 PM EST
[ Parent ]
Macron is a supply-sider too. Since his election, massive reductions in tax for high earners and reductions in social security payments by enterprises has lead to :
  • massive increases in dividends on capital
  • greatly increased income inequality
  • no measurable economic growth

The moral is : it doesn't matter whether the right wingers believe their snake-oil economic solutions or not; they are serving their electorate very well (not talking about the people that actually voted for them, most of whom vote against their own interests)

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II
by eurogreen on Tue Oct 4th, 2022 at 03:28:06 PM EST
[ Parent ]
Until yesterday's "European Political Community" news, I had forgotten about the EU.gov COVID-19 recovery re-insurance aka NextGenerationEU bond issue FKA Cohesion Fund FKA Stability and Growth Mechanism (ESM) issued in 2Q2020. Am having trouble this morning pinning down total proceeds from sale (€600B? €800B? €1.5T?), currently being distributed by EC, ahem, to EC guarantors aka EU27 central banks in the form of cleverly labelled tranches such as SURE, RRF, and CEF—possibly the NEW! Ukraine Solidarity sieve.

Are you familiar with the structure of this supplemental EU 2019-2024 Budget fianancing?

by Cat on Tue Oct 4th, 2022 at 08:06:44 PM EST
[ Parent ]
I'm afraid not. I would be relying on Mr. Google to give me the answers.

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Tue Oct 4th, 2022 at 10:53:30 PM EST
[ Parent ]
Next Generation EU borrowing: a first assessment | Bruegel |

Credit ratings Europe

European Union : AA stable
United Kingdom : AA downward
Ireland : AA-
Scandinavian countries, Germany, Netherlands, Luxemburg, Switzerland : AAA

Ukraine : CCC+ downward

'Sapere aude'

by Oui (Oui) on Wed Oct 5th, 2022 at 09:53:32 AM EST
[ Parent ]

What's in the draft bill now at parl.uk? Has HOC even got to first reading?

by Cat on Mon Oct 3rd, 2022 at 01:57:28 PM EST
The UK does not issue the world's reserve currency. It does not have near-limitless demand for its sovereign debt.

As soon as a reporter or pundit starts yammering about reserve currency status I'm basically done listening.

The UK trying with all its might to turn itself into a backwater has nothing to do with some of kind of magic reserve currency status or thirst for bonds.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Mon Oct 3rd, 2022 at 02:50:45 PM EST

Corporate Income Tax Rates in Europe

IE.gov fiscal year is calendar year, 1 Jan - 31 Dec. I detect reporting discrepancies, perhaps attributable to deferred domestic and TNC payments...

OECD.stat | Details of Tax Revenue - Ireland, 1965-2020 (€M)
line 1210, Corporation profits tax
line 1110, Income tax paid by corporations

revenue.ie | Corporation Tax - 2021 payments

... which finance.ie might realize (GAAP def) as post-pandemic "recovery", but doesn't obviously explain headline 2022 surplus receipts (total tax revenue) --attributable to "tax competition" domicile growth--or forcast 2023 tax value growth, excluding EU 2019-2027 fund allocations to IE.

What more has the Irish Times reported? I for one am interested to know how the surplus, when collected by FYE 2022, will fund the 2023 budget--assuming status quo USD:EUR.

by Cat on Mon Oct 3rd, 2022 at 04:57:31 PM EST
It is interesting that the larger and more central the economy in Europe, the higher the rate of corporate tax it can sustain. Tax competition seems to be the primary mechanism by which smaller and more peripheral economies can equalise the playing field within the Single market. Otherwise every major player would locate their primary operations and profit centres in the larger or more central economies.

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Oct 3rd, 2022 at 06:11:54 PM EST
[ Parent ]

revenue.ie | Corporation Tax - 2021 payments

Irish Times | Record tax receipts deliver €5bn surplus for exchequer, 3 Aug

Strong exchequer returns driven by corporation tax, VAT, income tax[,] and lower spending on Covid supports
The Government admitted that some of the additional receipts from VAT and excise duty were the result of higher prices generally.
gov.ie. | Annual Taxation Report September 2022, 1 Sep
gov.ie | Statement by Minister Donohoe on Budget 2023, 27 Sep €11B Budget 2023
The recovery in tax receipts is broad based: at the end of August, tax revenues stood at almost €50 billion, up by over €10 billion on 2021. Income tax continues to perform well, and reflects the resilience of our labour market and the success of our employment schemes during the pandemic. The strong performance of VAT receipts confirms the rebound in consumer spending once public health restrictions were lifted.

As a result, I can announce to the House that we will register a General Government surplus of €1 billion, or just under ½ per cent of national income this year, and €6.2 billion or 2¼ per cent next year. To put this recovery in context, last year we recorded a General Government deficit of €7 billion.

While this is extremely welcome news, headline deficit and tax revenue figures do not account for the fact that much of the surge in tax revenue is due to excess corporation tax. These receipts could change significantly in the future, and with little warning. Corporation tax amounted to nearly €12 billion to end-August and my officials expect these receipts to exceed €20 billion this year. I will return to this point shortly....

higher borrowing costs
If we continue to follow our current strategy we should see a stabilisation of public debt at approximately €225 billion. It is also important to acknowledge that on a per capita basis, public debt amounts to around €44,000, which is among the highest [?] in the world.

However, we will achieve a continued decline in the debt-national income ratio over the coming years by delivering budget surpluses.

By 2025, this ratio is projected at around 73 per cent - this is the lowest level seen since 2009. But this is contingent on maintaining the stance we have shown to date....

hedging corporate tax dependencies
Ireland has committed to the two-pillar agreement and has engaged intensively at OECD and EU level to follow through on this commitment. The agreement is in line with Ireland's long-standing position that co-ordinated multi-lateral action is the best approach to ensuring the international tax system keeps pace with changes in how business today is conducted internationally.... However, as noted earlier, we need to be mindful of our reliance on corporation tax. My department has undertaken significant work on these vulnerabilities, showing that approximately one in every eight euro collected by the State in tax comes from the corporation tax payments of a very small number of firms. At the same time, our income tax system is heavily reliant on a relatively small number of employees; just 500,000 workers and 10 multinational companies account for over one third of our total tax revenue....
fingael.ie |€1 billion in Brexit funding for Ireland shows European solidarity, 6, Dec 2021
..."Ireland will receive €361.5 million in 2021, €276.7 million in 2022 and €282.2 million in 2023. This can be used for retraining people, helping different industries, including fishing, and assisting with the cost of new red tape at EU-UK border....
gov.ie | Department of the Environment, Climate and Communications, 27 Sep
energy poverty "combat" strategy 2023
ec.europa.eu | European Union budget for Ireland, 2021-2027
• NextGenerationEU recovery instrument
• Recovery and Resilience Facility
• Just Transition
• Cohesion Fund €1.4B a/o 22.09.22
• EAF for Rural Development
enterprise.gov.ie | Energy supports for business, 2023
• €1.25B TBESS
• € 200M Ukraine Enterprise Crisis Schem
• €1.2B Ukraine Credit Guarantee Scheme, 2023-2029
• €500M GSLS, 2023-2033
• € ? Small Firms Investment in Energy Efficiency Scheme
by Cat on Tue Oct 4th, 2022 at 12:56:05 AM EST
Updated 3rd. Quarter figures just released, and they are even more positive:

The Republic's corporation tax bonanza continued in September as receipts for the month of €2 billion were double those of the same month last year, according to the latest set of exchequer returns.

The third-quarter exchequer returns also show that the Government has raised €958 million so far this year selling shares in Bank of Ireland, from which it has now fully exited, and AIB, where the State is the majority shareholder with a stake of about 63.5 per cent.

The returns show the State reaped a total of €13.8 billion in corporation taxes over the first nine months of the year, up €5.8 billion or more than 70 per cent on the same period last year.

The boom in corporation tax receipts, along with steep rises in income tax and VAT, helped to boost the State's fiscal surplus to €7.9 billion for the first nine months of the year, compared to a €6.2 billion deficit last year. On a rolling 12-month basis, the surplus was €6.8 billion.

The State is now on course to post only its fourth budget surplus in the last 15 years. Most of the rolling surplus is set to be wiped out by the end of the year, however, with about €4 billion in one-off budget measures to cushion people and businesses against energy prices rises. A further €2 billion is due to be put into the State's National Reserve Fund. John McCarthy, the chief economist of the Department of Finance, confirmed that the final budget surplus for 2022 is expected to be about €300 million.

Total tax revenues rose by more than 26 per cent over the nine months to €57.9 billion, while the State's total gross revenues were up 12 per cent to €75.9 billion. The Government had spent a total of €68 billion by the end of September. While corporation tax receipts doubled last month, income tax was also up by 15 per cent to €2.2 billion, while VAT receipts were up by about one-fifth.

Mr McCarthy said the strong recovery in the income tax figure was the "most important" number in the returns, as it indicates that there are no lasting "scarring effects" on the labour market from the Covid-19 pandemic.

He said the department does not know when the boom in corporation tax revenues will end, although he said State officials had noted recent profit warnings from companies such as Facebook, which is among the State's top 10 biggest sources of corporation tax due to its international headquarters being located here.

"The strength of potentially volatile corporation tax receipts provides an artificially positive picture of the public finances," said Paschal Donohoe, the Minister of Finance. "These receipts are highly concentrated among a small number of companies and, as such, are subject to extreme potential volatility and cannot be guaranteed at current levels into the future."

He said the department has modelled that between €8 billion and €10 billion of the State's estimated €21 billion of corporate tax revenues for 2022 could be at risk of a "shock" in future years.

"If these `windfall' receipts were excluded, a significant deficit would be in prospect this year," said Mr Donohoe.

It should be noted that the sale of the state's stake in Bank of Ireland means it has more than fully recovered its bank guarantee costs in bailing out the bank back in 2009. (From memory it recovered €1.4 Billion more than it put in).

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Tue Oct 4th, 2022 at 08:21:28 PM EST
[ Parent ]
by Cat on Tue Oct 4th, 2022 at 11:18:12 PM EST
[ Parent ]
I've thought for 40 years now that trickle-down economics was like going to a restaurant, buying dinner for the richest guy there, and hoping he'll let you lick his plate when he's done.
by rifek on Tue Oct 4th, 2022 at 09:51:08 PM EST
It seems a classic case of inventing an ideology which addresses your interests at the expense of others while claiming to be objective, scientific, evidence based etc. Mr. Laffer was indeed having a laugh, but lots of people took him seriously...

I have a theory and it's true unless you can disprove it!

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Tue Oct 4th, 2022 at 10:56:41 PM EST
[ Parent ]
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Wed Oct 5th, 2022 at 09:05:31 AM EST

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