Monday, January 28, 2013

Where was the Xmas “surge” in Retail Sales?

The CSO have released the December 2012 Retail Sales Index.  There is something missing from the data – the much heralded “surge” in retail sales that apparently took place around the Christmas period.  Here is the core retail sales index which excludes the Motor Trades.

Ex Motor Trades Index to November 2012

There was an increase in December but only marginally.  The trend in retail sales is up but this data do not reflect what was feted as “the best Christmas for retailers since 2007”.  Here it might be a little instructive to use the unadjusted series that just looks at the amount of retail sales without taking seasonal factors into account.  This chart has the unadjusted series for core retail sales (with December 2008 equal to 100).

Unadjusted Ex Motor Trades Index to December 2012

Unsurprisingly there is a spike in retail sales each December.  At 94.2, this year’s December peak was higher than each of the last two years (92.5 in 2010 and 93.3 in 2011 using the base in the chart) but was below both 2008 (100) and 2009 (94.7).

Maybe we are not looking in the right place.  It would be great if the CSO provided a resource that allowed us to create selected sub-indices from the categories provided.  The retail sales shown in the above charts include fuel, furniture, hardware, medicines and other categories which were likely excluded when Retail Excellence Ireland were making their seasonal claims.  These items only make up about one-fifth of the indices shown above so their effect is unlikely to be significant.

Although limited we can use one of the indices to check for the retail surge.  Non-food sales in Department Stores are only about 1/12th of the above indices but might be expected to reflect the broader pattern in Christmas shopping.  Here are the unadjusted series.

Unadjusted Department Stores to December 2012

That seems more like it.  The volume of non-food sales in Department Stores in December 2012 was indeed the highest since 2007.  In fact, volume was nearly 20% higher than 2008.  However, the value index was identical.  See here.  The adjusted series also shows a jump last month.

Unadjusted Department Stores to December 2012

And this also shows that the trend in sales in Department Stores has been positive since about April of last year.  However, apart from Department Stores it is hard to find evidence of the Christmas surge.  Sales in bars did jump 5% in December but the underlying trend in this sector is unmistakeable.

Aadjusted Bar Sales to December 2012

The retails sales of electrical goods (computers and peripherals, televisions, radios and DVD players, games consoles and software and telecommunications equipment) has been positive in recent months (in volume terms at least). 

Adjusted Electrical Goods Sales to December 2012

The recent jump was due to the digital switchover in October rather than any pre-Xmas exuberance.  Even still, the volume in this category in December was up 4% on last year, though the value of sales was down by around 1%.

It looks like the warning at the end of this post that “the plural of anecdote is not data” is borne out by the above data.

Monday, January 21, 2013

Debt and Deficits Decomposed

A new dataset from Eurostat has received a lot of attention recently as it highlights the deficit costs of the bailout of our banking system that began with the blanket guarantee of September 2008.  On the other side of the same coin the data allows us to determine the non-banking crisis element of our recent deficits.

The following table shows the €105 billion of general government deficits that were accumulated between 2008 and 2011.  According to the Eurostat data €41 billion of these was due to measures introduced to deal with the banking collapse.  The final section of the table gives the ‘underlying’ deficit which is simply calculated as the difference between the total and banking-related figures in the sections above it.

Banking and Underlying Deficits

Between 2008 and 2011 the ‘underlying’ deficits totalled €64 billion and this is a running total as the deficits continue to accumulate. 

At the end of 2007, the gross general government debt was just over €47 billion.  2007 was the last year when the general government accounts were close to balance and a small surplus of €143 million was recorded.

Since the end of 2007, the debt has ballooned and by the end of 2012 it is estimated to be around €190 billion.  The increase can be broken down as follows:

Debt Changes 2008 to 2012

The figure for the 2012 general government deficit will be finalised later in the year and is likely to come around €13 billion.  With guarantee fees, interest on contingent capital notes, dividends on preference shares it is also likely that the revenues from the banking measures will exceed the expenditures. 

The surplus income paid to the Exchequer from the Central Bank has increased significantly in recent years (2008: €290 million; 2012: €958 million).  The increase is mainly as a result of profits made by the Central Bank on the Exceptional Liquidity Assistance it is provided to Anglo/INBS.  This is not included in the ‘banking’ revenues measured by Eurostat.

The stock/flow adjustment is mainly the increase in cash balances held by the NTMA from €4.4 billion at the end of 2007 to €24.0 billion at the end of 2012.

Just over one-fifth of the 2012 debt is due to the banks though the full cost of the bank bailout is larger when non-deficit increasing expenditures are included.  This includes the value of the some of the funds depleted from the National Pension Reserve Fund to buy ordinary and preference shares in AIB and BOI. It also includes the expenditure by the Exchequer on shares in PTSB and Irish Life and the contingent capital notes remaining in AIB and PTSB.  

Nearly two-thirds of the debt has been accumulated because of deficit spending by the government sector.

The 2007 debt accounts for 25% of the current total and that was the legacy of the last incident of national insolvency in the 1980s. The debt that resulted from the accumulated deficits of the time were simply rolled over and never repaid.  Growth and inflation meant the debt burden fell from 120% of GDP in the late 80s to 25% of GDP by 2007. 

The ongoing deficits since 2008 have contributed around 40% of the current debt mountain but the nature of them is changing as we move closer to a primary budget balance.

Friday, January 18, 2013

Patrick Honohan on ELA

The exchanges in this week’s Joint Oireachtas Committee on Finance at which Governor of the Central Bank, Prof. Patrick Honohan attended as a witness provided some useful insights into to Promissory Note/Exceptional Liquidity Assistance arrangement used to prop up Anglo Irish Bank and the Irish Nationwide Building Society.  

Most of the details of the arrangement were generally known but some confirmation of them was provided by Prof. Honohan.  These are from the transcript.

1. The money is owed to the ECB.

Patrick Honohan: “Two years ago on 30 March 2011, some €3 billion was handed back to the Central Bank. The Government paid some €3.1 billion in cash to the IBRC. The IBRC is already borrowing and I cannot remember how much it had borrowed at that stage. It would then repay the Central Bank of Ireland, which has drawn on facilities in the ECB. Our drawing on the ECB facilities, in other words the money we owe to the European Central Bank as a whole, will decline by that amount.”

1b. Patrick Honohan owes it to the ECB!

Patrick Honohan: “I am the chief executive officer of the Central Bank and I owe that money. I am personally responsible for making sure that debt is repaid.”

2. Default on the ELA would be “uncomfortable” in some undefined way.

Patrick Honohan: “A unilateral action of the type Deputy Humphreys is talking about would be taken very poorly indeed by the ECB, which – without over-egging the case – has provided a lot of finance to this country at a low interest rate. There are a number of ways the European Central Bank, if it chose, could find to make things uncomfortable in a graduated way. It is not in that space but I have to think what it might do. It could do things that would make us uncomfortable. I will not give a list because it might give people ideas.”

“Large sums of money are being lent by the ECB to various Irish institutions and very low interest rates are being applied. All of that could change if the ECB wanted, but I do not say it would. The reaction of the international markets would also be of concern. I am too much of an academic and I take up the question when I should probably have said it is unthinkable and that I could not possibly imagine such a case. If the Deputy wants to go through it blow by blow, the blows would be unpleasant.”

2b. But the ATMs will stay open!

Patrick Honohan: “I will not describe on television some dramatic situation and give a one-liner such as that ATMs would be closed. ATMs would not be closed, but it is not as if one can decide not to give the money and use it oneself. There are consequences. There is a network of international contracts and lenders who will take action against the Government and we have seen it.”

3. The interest rate charged on the ELA is 2.50% (ECB + 1.75 percentage points)

Patrick Honohan: “I am afraid of getting this wrong but as far as I recall, the IBRC currently pays 2.25%.” [Subsequently amended to 2.50%]

4. The interest rate payable by the Central Bank for the facility is 0.75% (ECB MRO rate)

Patrick Honohan: It is at 75 basis points.

Nobody in the session mentioned the interest rate being paid by the Exchequer to the 100% state-owned IBRC so maybe it has sunk in that it doesn’t really matter.  Of the interest rates in the PN/ELA arrangement the one that counts is the 0.75% paid by the Central Bank to the ECB.

There was also some useful information (or at least the non-rebuttal of some information) on the ECB’s holdings of Irish government bonds through the now-defunct Securities Market Programme (SMP) which is below the fold.

Wednesday, January 16, 2013

Is Ireland low-tax? Again!

Over on Notesonthefront there is a post which contains the following:

As seen, Irish high-income earners are taxed at relatively low-rates.  We’re right down there with other peripheral countries (with the exception of Italy) and low-tax, high-poverty UK.

The accompanying chart in the post purports to support the claim but is a little wide of the mark.  High-income earners are not taxed at relatively low rates in Ireland.  Here is the same chart for the EU15 but breaking  income deductions into Income Tax and Social Contributions, and ranking them by effective income tax rates.

Tax and Social Insurance

All data is 2010, except for Ireland which is 2011.  Of the EU15, Ireland has the 6th highest effective rate of Income Tax on a double-income no-child couple earning 200% and 167% of the average wage (as determined by the OECD).   The arithmetic average of the effective tax rate on this group across the EU15 is 27.1%, 2.8 percentage points below the effective rate in Ireland.

The same chart ordered by employee Social Insurance contributions presents a different picture.

Tax and Social Insurance 2

Ireland is last among the EU15 when it comes to employee social insurance contributions.  For high-earners, Ireland is an above-average taxed, low-social insured economy.  A chart ranked by total deductions is here.

The OECD tax-benefits calculator used in the linked post allows us to determine what happens when the couple above lose the income of the person earning twice the average wage.  The chart below shows the percentage of their original net pay the couple will have from claiming unemployment benefit during the first month of unemployment, what is known as the replacement rate.

Net Pay

All data is 2010.  In Ireland, the loss of income would see the couple drop to 59% of their previous net pay.  This is the third lowest in the EU15.  Ireland has low social insurance contributions on high earners and in return high earners get (relatively) low social insurance benefits against unemployment.

What happens if we repeat the first chart but instead use a single-income no-child couple with that income equal to the average wage?

Tax and Social Insurance 3

Ireland, which has the sixth highest effective income tax rate on the “high-income” couple, drops to 12th place when it comes to the effective income tax rate on the “average-income” couple.  The arithmetic average for the EU15 is 14.0% which is greater than the 9.6% levied in Ireland.  If we rank the above chart by social insurance contributions we get:

 Tax and Social Insurance 4

For average earners Ireland is a low-taxed, low-social-insured economy.  A chart ranked by total deductions is here.   Ireland is at the bottom.

And what happens to the “average” income couple should they lose this income?  Here is the net income compared to the original income in the first month after becoming unemployed (the replacement rate).

Net Pay 2

The Irish single-income couple earning 100% of the average wage makes the lowest social insurance contributions in the EU.  However, if they lose that income in the first month of availing of unemployment benefit their net income drops to 78.1% of the previous income.  This is the second lowest drop in the EU15.

So for a “high-income” no-child couple (200% & 167% of the average wage) Ireland has (Ireland versus EU15 mean):

  • the sixth highest effective income tax rate in the EU15
    • 29.7% versus 27.1%,
  • the lowest rate of employee social insurance contributions in the EU15
    • 3.6% versus 10.1%,
  • the 13th highest replacement rate after the loss of the first income in the EU15
    • 59.1% versus 68.5%.

And for an “average-income” no-child couple (single income at 100% of the average wage) Ireland has:

  • the 12th highest effective income tax rate in the EU15
    • 9.6% versus 14.0%,
  • the lowest rate of employee social insurance contributions in the EU15
    • 3.2% versus 11.9%,
  • the second highest replacement rate in the EU15.
    • 78.1% versus 63.9% .

All data (bar Ireland 2011 data where appropriate) are derived from the OCED’s tax-benefit calculator and is posted below the fold.

Tuesday, January 15, 2013

Savings Confusion and an Investment Collapse

It has been a confusing day for reports on the savings behaviour of Irish households.  One story on the Irish Times site tells us that:

The savings index fell from 98 to 81 in December, the lowest ever level since the index's inception in April 2010, as increased negative sentiment towards the economic environment discouraged saving.

While another story posted to the same site says:

The institutional sector accounts, which brings together information on the activities of households, businesses and the Government, show that the gross amount of household savings was €11.92 billion for the first three quarters of 2012. This is more than the €9.3 billion of total savings recorded during 2011.

The derived gross savings ratio increased by 14.5 per cent in the second quarter to 16 per cent in the third quarter last year. This ratio expresses household savings as a percentage of gross disposable household income.

Of course, the Savings Index from Nationwide UK (Ireland) and the Institutional Sector Accounts from the Central Statistics Office are dealing with very different meanings of the term ‘saving’.  The focus here is on the measure produced by the CSO which relates to the gap between disposable income and consumption expenditure and is shown in the following chart.  The savings rate is the percentage of gross disposable income (plus an adjustment for pension funds) that is not spent on consumption.

SA Household Savings Rate

It is often suggested that the current rate is somehow “too high”.  A recent Irish Examiner report states that:

At a press briefing to announce the end-of-year exchequer figures on Thursday, Finance Minister Michael Noonan said that the national savings rate was now 14%, compared with 1.5% during the Celtic Tiger years. If people spent more and brought the savings rate down to 10%, then it would add 1% to growth, the minister said.

Is Ireland’s savings rate “too high”?  The Q2 2012 figure shown in the above chart is 14.5%.  Eurostat figures show that the EZ17 figure for the same quarter was 12.9%.  In fact, after going above the EZ17 rate  for the first time in Q1 2009 the Irish savings rate was below the EZ17 average for the next three years.  It is only in Q2 2012 that the rate has exceeded the EZ17 average.

EZ SA Household Savings Rate

While the Irish household savings rate has shown some volatility over the past decade, the most dramatic changes in household behaviour have not been to do with savings but to do with capital formation (investment in non-financial assets).  In national accounts, household investment mainly consists of the purchase of new dwellings and the renovation of existing dwellings. 

Household Savings and Investment Rates

Household investment has gone from close to 30% of gross household disposable income in 2006 to less than 5% now.  Again the comparison to the EZ17 average is revealing.

EZ Household Investment Rate

Compared to the EZ17 average, the household investment rate in Ireland has gone from being significantly “too high”, to what seems to be a small bit “too low”.  The household investment rate fell dramatically from 2007-2009 and has continued to fall, albeit more slowly, since then.  By Q3 2012, the household investment rate in Ireland had dropped to a low of 3.6% of gross disposable income.  The EZ17 average is around 9%.

The gross investment rate of households is defined as gross fixed capital formation divided by gross disposable income, with the latter being adjusted for the change in the net equity of households in pension funds reserves.

In the first three quarters of 2006, the household sector in Ireland invested €19.5 billion in gross capital formation in non-financial assets (mainly buying new houses but also paying stamp duty on second-hand houses).  For the first three quarters of 2012, the equivalent figure is €3.8 billion, a drop of more than 80% from the peak. 

If the EZ17 average of a 9% household investment rate applied in Ireland then the 2012 figure for the first three quarters would be €6.2 billion.  The quote from Michael Noonan above shows that he thinks that reducing the savings rate to 10% (below the EZ17 average) would add 1% to GDP growth.  However, if the household investment rate rose to 9% (just equal to the EZ average) it would add 2% to GDP growth.

Where is this saving going?  Excluding the adjustment for pension funds the household sector “saved” €31 billion in the two and a half years from the start of 2009.  As it wasn’t used to fund consumption where did this €31 billion go?

The Central Bank produces quarterly financial accounts which show the changes in the financial position of the household sector.  For the household sector, the key measures are currency and deposit assets and loan liabilities.

Household Deposits and Loans

Since the end of 2008 the currency and deposit asset of the Irish household sector has hardly moved.  It was €120 billion in Q4 2008 and was €124 billion in Q2 2012.  Over the same period the loan liabilities of the household sector declined from €204 billion to €180 billion.

Since 2009, Irish households have not used €31 billion of their disposable income to fund consumption expenditure.  In the main this unspent money has been used to pay down debt rather than accumulate deposits.  The Nationwide UK (Ireland) survey shows that Irish households are not building up “savings”; the CSO data clearly show that Irish households are “saving” but that this is going to pay down debt.

The Irish background data used above in the non-financial charts and some additional comments are below the fold.

Wednesday, January 9, 2013

€14 billion in Bank Assets

Today’s sale of a €1 billion contingent convertible capital note (a form of subordinated bond) in Bank of Ireland brings the assets the State holds in the banks into focus.

There is another €1.6 billion of these bonds held from AIB and €0.4 billion from PTSB.  The NPRF holds the State’s preference and ordinary shares in AIB and BOI.  These are currently valued at €8.6 billion.  The Minister for Finance holds the State’s 99.75% holding in PTSB but no value is put on this.  The same goes for Irish Life which it is hoped can be sold for €1.3 billion.

All told, the State probably has about €14 billion of remaining assets in the ‘viable’ banks.

  • €2 billion contingent convertible notes in AIB and PTSB
  • €8.6 billion of preference and ordinary shares in AIB and BOI
  • €1.3 billion through ownership of Irish Life
  • 99.75% shareholding in PTSB

These valuations for AIB and PTSB are questionable as BOI is the only bank the State has been able to sell anything from.  Still it is better to be seeing the banks as vehicles for reducing our government debt levels rather than sinkholes to increase it, not that that problem has completely gone away.

Monday, January 7, 2013

Irish Examiner 04/01/13

The unedited text of a recent article from The Irish Examiner is continued below the fold while the published version can be read here.

Lower paid would be hit if State were to raise taxes

Friday, January 04, 2013

Ireland is not a low-income tax economy and collects more income tax relative to the size of the economy compared to many of our EU peers. There have been many calls to raise income tax in Ireland to levels in other countries. What these suggestions fail to acknowledge is how these countries raise more income tax than us. They do so by levying significantly more taxes on low and middle incomes than we do.

It is a common refrain that Ireland is a low-tax economy. This is not true. In 2011, the EU average for tax receipts as a percentage of gross domestic product (GDP) was 26%. The figure in Ireland was 24%, and using gross national product (GNP), which may be a more appropriate measure for Ireland, the figure is 28%. Ireland does not collect a low amount of taxes.

Retail Sales slip

There isn’t much that goes to plan in the Irish economy but a monthly drop in November’s retail sales after the fillip offered by the digital switchover at the end of October went as expected.  This is from the November Retail Sales Index published by the CSO today.

Ex Motor Trades Index to November 2012

Retail sales had been on an upward trajectory since July and are still well ahead of the June levels but the annual growth that was seen in the three months is no longer present.  In order for the annual change to remain above zero for December, monthly growth of around 0.5% will have to be seen.

Annual Change Ex Motor Trade Index to November 2012

The monthly changes continue to be volatile and as indicated above November recorded the first monthly declines since June.

Monthly Change Ex Motor Trade Index to November 2012

Although electrical goods showed the expected decline (down 18% by volume on the month) there were falls in nine of the 13 business categories reported by the CSO.  Monthly volume falls in excess of 1% were also recorded for:

  • Food beverages & Tobacco –1.7%
  • Fuel – 3.2%
  • Books, Newspapers and Stationery –1.5%
  • Other Retail Sales –1.8%

The categories showing a monthly volume increase were:

  • Non-Specialised Stores +0.1%
  • Department Stores +2.4%
  • Furniture and Lighting +2.7%
  • Bars +3.2%

There has been a lot of talk of strong retail sales in the run to Christmas and in the post-Christmas sales.  It will be next month’s RSI before this will be seen.  Retail Excellence Ireland have been particularly bullish in the past few weeks but at the end of November (the time the above data was being collected) they issued this press release.

Irish retailers are predicting a drop of -0.47% in Christmas 2012 Trading, according to a survey published today by Retail Excellence Ireland (REI), Ireland’s largest retail industry trade body.

The December 2012 and January 2013 Retail Sales Index releases will show us whether things went to this plan.

Friday, January 4, 2013

Irish Examiner 02/01/13

The unedited text of a recent article from The Irish Examiner is continued below the fold.

UPDATE: The published text is here.

Counting up the myriad costs of five years of running a budget deficit

The last year in which Ireland did not run a budget deficit was 2007. In that year, general government expenditure was €68 billion which was matched by revenue of €68 billion, giving a balanced budget overall.

The outlook for 2008 was described as “uncertain” but the budget announced by Brian Cowen on the 5th of December 2007 allowed for an eight percent increase of spending in 2008, with increases across all areas, as well as reductions in income tax through changes to tax bands and credits. All of this was supposed to result in a budget deficit of less than 1% of GDP because the assumed growth rate facilitated such largesse.

Intrade moves

There is no reason to put much weight on them but here are one-year charts from two markets on  The markets are whether any current eurozone country will announce their intention to drop the euro before either:


As recently as the start of November the 2013 market was showing a near 50% estimated probability of an exit while the 2014 market was above 60% at the time.  Since then both have dropped by around 30 percentage points.  The green bars which indicate the volume show that activity was greatest in the period since November (though the number of ‘shares’ traded is relatively small).

Why bondholders are not the problem

(but could have been part of the solution)

The issue of bank bondholders continues to garner significant attention with articles such as this which proclaims:

IN THE LAST of over €20 billion in bonds paid out this year by Irish banks, Bank of Ireland has paid out €37.3 million to senior unsecured bondholders today.

It seems there are attempts to put some significance on the amount of bond repayments made by the banks.  For some reason, no significance or detail is provided of deposit redemptions made by the banks.  Both give money to the banks and expect it back at some stage.  Deposits can be withdrawn at any stage or after a short notice period.  The money given for a bond can only be withdrawn from the bank on maturity of the bond. 

The interest earned on a bond will usually be greater than the interest earned on a deposit because of this restriction.  Deposits tend to be non-transferable whereas somebody providing money to a bank via a bond will be issued with a saleable security.  Although, the money for the bond cannot be withdrawn until maturity the holder can choose the sell the bond in the secondary market at the prevailing market price.

Before Christmas, Stephen Donnelly wrote: