The hole in the public finances is a tax problem.

Contrary to popular opinion, public spending as a percentage of GDP did not explode during the past 15 years. When viewed comparatively across the EU, government spending from 1995-2008 was about average. At no year did public spending grow more than GDP. This data can be captured from the National Accounts from the Central Statistics Office. Go to page 18 of this document, and it will give you figures from 2002-2008.  Total receipts exceeded total expenditure (I was made aware of this by Karl Whelan at a lecture on data sources this morning). Thus, the weekly ‘analysis’ on reckless public spending by political commentators in established papers like the Irish Times are, quite frankly, wrong. A simple examination of the governments national accounts proves this.

This raises a fundamental question: how is there such a big hole in the public finances and how should we fix it? The general consensus is through cuts in public expenditure. But, expenditure has not exceeded GDP over the past few years, and expenditure is no more or no less than the average across the EU. What has dropped significantly over the past few years, and well below average across the EU is tax revenue as a percentage of GDP. This graph from the OECD clearly illustrates our low tax economy. In 2007, revenue was 32.2 per cent of GDP. The average for the EU was around 39 per cent, and 35 for the OECD.

This low level of revenue from taxation would have decreased even more during the past 12 months, given that so much of our revenue is reliant upon indirect consumer taxes. Hence, when consumer spending drops, so does revenue. This is what explains the gaping hole in our public finances. Low taxes not high public expenditure is the problem. So, to put it neatly and succintly; Public spending did not grow more than GDP,  but tax revenue has dropped as a percentage of GDP. Our public expenditure is around the EU average, but our tax revenue is below the EU average. Cogito, taxation should be raised, and public expenditure made more efficient. This is a more optimal policy solution to solving the crisis in our public finances.

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One response to “The hole in the public finances is a tax problem.

  1. A few points …

    1. The key denominator for measuring Ireland’s tax take is GNP as opposed to GDP, because the latter is massively inflated by the transfer-pricing activities of MNCs. This is mostly pure vapour that cannot be taxed more heavily than its currently is, for the simple reason that much of the profit-funnelling through Ireland only occurs because of our low corpo tax rates. If we substantially increase our kick-back from this money laundering operation, then the whole scheme loses its raison d’être.

    2. Even when taking GNP as the denominator, public spending during the noughties still looks artificially low, by virtue of a huge chunk of output being borrowed from the future (in the form of building for stock, way above the true level of demand).

    3. “expenditure has not exceeded GDP over the past few years” … I should hope not! A public spend of over 100% of GDP would require the government to literally burn cash in huge pyres, or else totally ban private enterprise. However the key point is that the *growth* in public spending out-stripped the *growth* in GDP (itself massive inflated) for every single year since 2000.

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