More on closing the gap

Update on this.

With the IMF in town and the EU’s 3% GGB target by 2014 now seemingly the drivers of our economic policy it is probably worth a moment to take stock and look into the numbers behind our fiscal crisis.  This may be moot at the banks threaten to pull the country into the abyss regardless of what Budget is or is not agreed in the next few weeks.

The public finances have a €19 billion hole to be filled.  In 2009 the government had €53 billion in receipts and spent €72 billion running the country.  We will look at both of these in turn.

First, let’s take the revenue side. 

Looking at the euro amounts shows the drop in tax revenue that has occurred since 2007.  See here.  However, it is more intuitive to look at how much of our income (i.e. Gross National Product) the government is collecting in revenue.

This is not showing much movement for an an economy that has shown a dramatic swing from boom to bust.  In 2009, government revenue as a percentage of GNP was 40.4%.  This is a slight drop from the 41.6% recorded in 2006.  Although this measure hasn’t show much variability over the past decade, it my view it is (and has been) too low.  We should be aiming for a tax/GNP of around 46%.  In terms of 2009, this would require an increase in government receipts of close to €7.5 billion.

Now we’ll turn to expenditure.

Again it is not the euro amounts which are most intuitive but they are revealing.  See here.  Again we will look at the expenditure figures as a percentage of GNP.

Wow! And this is just “normal” government expenditure as it excludes the monies used to start our ill-fated bank bailout in 2009.  As a proportion on our income, government expenditure has risen from 38.5% in 2006 to 55.3%.  Many of the most socialist regimes in Europe would not a level of government expenditure this high.  

With a stated revenue target of 46% of GNP, this would ‘allow’ a expenditure level of just under 50% of GNP to meet the 3% GGB target.   Again in 2009 terms, this would require an expenditure cut of about €7.5 billion.  Equal pain between tax and expenditure.

Here are the total revenue and total expenditure graphs combined.

The expenditure graph above also shows that the driver of the increase in total expenditure has been current expenditure.  Lets looks at the components of current expenditure.

All of these have been increasing, but the rise has been greatest for social transfers (up from 15,4% of GNP in 2006 to 22.8% in 2009)  and the public sector pay bill (up from11.2% of GNP in 2006 to 15.1% in 2009).  Debt service costs have started to edge up (from 1.2% of GNP in 2006 to 2.4% in 2009) and we can expect this to increase substantially further over the next few years as our borrowing escalates.

The last issue we will consider in this post is the breakdown of the increase in transfer payments.

The increase in unemployment benefits is readily observable but these transfers remain the fourth biggest category of social protection transfer payments.  The largest area of expenditure here is on old-age benefits which have increased from 3.4% of GNP in 2006 to 5.5% in 2009.

Here are the details of some of these payments in €millions.

The table excludes old-age health-related benefits provided (medical cards, drug purchases).

Highlighting these payments is not to suggest that they should be cut, but with the ‘Croke Park Deal’ supposedly ruling out pay cuts in the public sector and politicians from all sides voicing opposition to pension cuts it is hard to see where the announced expenditure cuts can be found without affecting these areas.

A related point is that if we want to maintain public services and social protection payments at existing levels we have to be willing to pay the taxes to finance them.  We cannot be a “low-tax economy” and cry out for high-cost public services. 

The current strategy of a €15 billion adjustment with a €10 billion expenditure cut and €5 billion tax increase split is being undertaken as a mere accountancy exercise.  Our target should be where we want to the country to be in five years , not aiming for some artificial goalpost. 

Let’s get government revenue up to about 46% of GNP in the next two to three years and have a four to five year plan for getting government expenditure down to a similar level.

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