Prebudget Outlook – Ireland’s public spending to top 55% of GNP

The Department of Finance has released it’s pre-budget outlook. A back of the envelope calculation puts spending as a proportion of GNP at a whopping 55.3%. Higher than earlier estimates by Ronan Lyons and Goodbody StockBrokers.

Calculations –

GNP – €138.3bn – based on last years GNP of €154.5bn * 10.5% drop reported in pre-budget submission

Spending

Gross Current Expenditure = €61,234
Gross Capital Expenditure = €15,169

Total = €76.4bn

Per cent of GNP = 55.3%

Links –

Pre-budget Outlook
Goodbody report on spending
Ronan Lyons on Spending

  • DR

    Does that mean they are bust yet?

    more seriously, how does it compare to the UK, USA and a basket case of economies?

  • george

    DR,
    believe it or not, the UK has an even larger deficit. It will be 200 billion this year alone.

    One question is whether the UK will get back to growth sooner because of the quantative easing and stimulus packages going on there at the moment.

    The other is whether the serious cuts in Ireland and the discussions now taking place about how to pare back the budget mean the Irish economy will outgrow the UK in the medium term.

    Some commentators think the fact that there will be no serious cuts this side of the election in the UK will have serious knock-on effects, leading to the Irish Republic outstripping it in growth from around 2012 onwards.

    Time will tell.

  • Mack

    You can compare it to last years EU figures here –

    http://www.ronanlyons.com/wp-content/uploads/2009/10/govspend.png

    I would say it suggests we are spending far too much, _or_ not getting the services you would expect for that spend (more than Sweden, Denmark, France, Belgium). Bearing in mind Sweden and France have large militaries and older populations.

  • kensei

    Mack

    The problem is revenue has collapsed. Thus things that seemed affordable now do not. While other countries have been hit, the revenue hole isn’t anything like the same, excpet maybe in the UK. That doesn’t mean spending isn’t going to have to come down, simply it’s an apples to pears comparison.

    And why not GDP here? IRC correctly, foreign earnings taxed in the Republci inflate GDP wrt GNP, but for the time being at leats theer is still revenue from it. So a little cheeky?

  • DR

    what is the UKs projected percentage I wonder?

    one big difference in the UK and RoI appart from size is the UK can make its own decisions on issues like interest rate and to some extent currency, yes it leaves them a bit more vulnerable but if euro interest rates were to rise much earlier surely that cant help Ireland and exagerate the currency difference.

  • Mack

    Hi Kensei –

    The problem is revenue has collapsed

    That’s part of the problem, but what the Spending-to-GNP ratio shows is the scale of the collapse in the economy-at-large. That the contraction in the overall size of the economy hasn’t been greater is because the government borrowed an _additional_ €26bn this year. So assuming _no_ effect from Fractional Reserve Banking / Velocity of money the actual economy is around about €112bn. To put that in perspective to fund the same level of government spending with no borrowing we’d need to collect 66% of all economic transactions in the economy as tax!

    And why not GDP here?

    That’s pretty standard. The GDP figures are inflated by accounting. Revenues earnt elsewhere are booked here. The economic activity that generates them by and large does not occur in the state. GNP gives a fairer representation of actual economic activity here – although our revenues are boosted by the corporation tax returns.
    The GDP figures are about 15% larger, and the profits generated from this are taxed at much lower rates than in other European countries (12.5% vs 30-40%). You have to take into account that Irish firms are also paying lower corporation tax than the otherwise would on economic activity in the state – there are some lost corporation tax revenues (on internal economic activity), but those are obviously outweighed by the additional revenues we gain.

  • Mack

    DR –

    Good points, and unfortunately, one we’ll experience down here sooner or later, the Eurozone officially exited recession today..

    http://www.telegraph.co.uk/finance/economics/6560031/Europes-recession-officially-ends-as-Britain-lags-behind.html

  • Mack

    Kensei –

    Note that it’s only a portion (i.e not all of it) of the difference in GDP and GNP that can be taxed in Ireland (that which is pure profit), and at a low rate.

  • Paddy Matthews

    George:

    The other is whether the serious cuts in Ireland and the discussions now taking place about how to pare back the budget mean the Irish economy will outgrow the UK in the medium term.

    If “medium-term” is anything less than 10 or 15 years, I can’t see it happening unless the UK economy implodes.

  • That’s why we need sustained cutbacks here before we attain Zimbabwean levels of GDP debt. So which of our political parties advocate severe cuts in the Public sector….??

  • kensei

    Mack

    That’s part of the problem, but what the Spending-to-GNP ratio shows is the scale of the collapse in the economy-at-large. That the contraction in the overall size of the economy hasn’t been greater is because the government borrowed an _additional_ €26bn this year. So assuming _no_ effect from Fractional Reserve Banking / Velocity of money the actual economy is around about €112bn. To put that in perspective to fund the same level of government spending with no borrowing we’d need to collect 66% of all economic transactions in the economy as tax!

    There may have been some structural problem in the economy before the crisis but the giant structural problem is a result of the crisis and revenues that people thought would be there, aren’t.

    It is useful in illustrating the scale of the problem that has developed. But I think that saying “We are getting terrible value compared to x” is aa touch mischievous on your part. The public sector may have been terrific value, assuming 2006 revenues. Given what’s happened, there just isn’t the revenue for everything previously.

    That’s pretty standard.

    I’ve only ever seen debt-to-GNP

    The GDP figures are inflated by accounting. Revenues earnt elsewhere are booked here. The economic activity that generates them by and large does not occur in the state. GNP gives a fairer representation of actual economic activity here – although our revenues are boosted by the corporation tax returns.
    The GDP figures are about 15% larger, and the profits generated from this are taxed at much lower rates than in other European countries (12.5% vs 30-40%). You have to take into account that Irish firms are also paying lower corporation tax than the otherwise would on economic activity in the state – there are some lost corporation tax revenues (on internal economic activity), but those are obviously outweighed by the additional revenues we gain.

    It might be a small cut, but it’s a small cut of a significant amount. You are essentially ignoring revenue that, earned in the state or not, is going on the balance sheet. Again a little mischievous.

    The figures are bad enough. Do they really need further spun?

  • Mack

    Kensei –

    The figures are bad enough. Do they really need further spun?

    If you want to compare them, which is what Ronan Lyons was doing originally across the EU – then spending as a proportion of GNP is a better measure. Remember GNP will capture the tax revenues raised via transfer pricing and spent in the economy. Higher GDP should mean we could have lower taxes relative to other countries with equivalent GNP levels.

    This might be interesting..

    http://neweconomist.blogs.com/new_economist/2005/09/is_ireland_real.html

  • Mack

    Kensei –

    but the giant structural problem is a result of the crisis and revenues that people thought would be there, aren’t.

    I disagree. The structural problem was the bubble economy, inflated by _huge_ amounts of borrowing on the European wholesale markets and magnified internally thanks to Fractional Reserve Banking. This whole thing – from the fiscal crises to NAMA – has as it’s root the credit bubble in our economy for most of this decade. It’s not simply a matter of raising taxes – the economy has shrunk & the government is borrowing heavily if not to stimulate, to slow the pace of decline.

  • Mack
  • George

    Paddy Matthews
    If “medium-term” is anything less than 10 or 15 years, I can’t see it happening unless the UK economy implodes.

    Believe it or not, Ernst and Young expect growth in the Republic to outstrip the UK by 2011 and for this to continue in 2012 and 2013.

    They base this on the fact that the UK has yet to make its public spending cuts.

    http://www.ey.com/Publication/vwLUAssets/EY_Economic_Eye_-_2009_Winter_Forecast/$FILE/0249_Web.pdf

  • kensei

    Mack

    I disagree. The structural problem was the bubble economy, inflated by _huge_ amounts of borrowing on the European wholesale markets and magnified internally thanks to Fractional Reserve Banking. This whole thing – from the fiscal crises to NAMA – has as it’s root the credit bubble in our economy for most of this decade. It’s not simply a matter of raising taxes – the economy has shrunk & the government is borrowing heavily if not to stimulate, to slow the pace of decline.

    I didn’t say the answer was to raise taxes. If I think my income is going to be £50,000, I might buy a better car and a better house. They migth be fantastic value for money, but if it turns out my income is actually only £30,000, I might not be able to afford it regardless of how good a dela they are. You can’t just pull those figures and go the public sector is crap. It strikes deeper.

    Ireland has choices to make on what types of things it puts more limited resources in, and whether or not the tax burden should be higher, and so on. It’s more complciate dis all I’m saying.

  • Mack

    Kensei

    It’s more complciate dis all I’m saying.

    Funnily enough, that was my point too 😉

  • kensei

    Mack

    Funnily enough, that was my point too 😉

    But never miss a chance to bash the public sector 😉

  • Mack

    Kensei –

    Where? You mentioned the public sector several times, I didn’t mention them once.

  • kensei

    Mack

    I would say it suggests we are spending far too much, _or_ not getting the services you would expect for that spend (more than Sweden, Denmark, France, Belgium). Bearing in mind Sweden and France have large militaries and older populations.

    By implication. I don’t think you can make those statements knowing revenue has just collapsed.

  • Mack

    Kensei –

    Revenue is independent of that, I mean spending is only maintainable at current levels by huge levels of borrowing.

    I don’t think that statement constitutes an attack on the public sector. It encompasses all public spending after all. And I think everyone would agree there is superior service provision in those other countries mentioned.

    But you have to question priorities – clearly spending that much proportional to the size of our economy – we could reconfigure it to get better value. More people in work, better services etc. But we won’t do that. Because we don’t have a culture that facilitates managing that type of spending effectively, it’s inevitable that spending gets cut back significantly.