Ireland’s Fiscal Challenge

Brendan Keenan has an excellent analysis of the fiscal challenge facing the government: you can read it here.

6 replies on “Ireland’s Fiscal Challenge”

Brendan Keenan echoes the comments made by others on the very light tax burden on those with moderate incomes and the very high proportion of earners that are outside the tax net altogether. For a good (I hesitate to say excellent) analysis of how this situation came about, readers might be interested in this blast from the past. It’s a piece, written by Gerry Boyle and myself, that appeared in the Sunday Business Post in December 2006, just after the 2007 budget was announced.

A cynic might be a little put off by the less-than-equal attention paid to the fact that consumption taxes are so high, and that in the case of excise, they are so very regressive. Keenan mentions the first fact, but only as an afterthought at the end. Regressivity in excise is nowhere mentioned.

Building on this point, carbon tax is almost universally thought to be a good idea – but it too has the potential to be regressive.

So, as we think ahead, we have to be careful about upsetting the progressivity balance in the overall tax system, in light of what eco-taxes may well do to the poor.

I have a problem reconciling Brendan’s figures with those in the Department of Finance’s Stabililty Plan update. Brendan rightly mentions that the Department’s projections are made on the technical assumption of no changes in public sector pay rates, social welfare payments or tax rates. On this basis (and before taking account of the recent proposed changes in fiscal policy in 2009), the Department’s projections of the government’s fiscal position are set out in the table below. Essentially, to close the gap with the Stability and Growth Pact target, the budget deficit has to be reduced from 9½% of GDP to 2½% of GDP. Each percentage point of GDP is around €2 billion, so the required adjustment amounts to €14 billion over the five years, not the €8 billion mentioned in Brendan’s article. Indeed, if you cumulate the Department’s absolute figures for the required adjustment in each year over the five years, the total comes to €16½ billion, which does not tally either with the 7 percentage point GDP adjustment. Can anyone point out where I am going wrong in these calculations?

Sorry, I could not find a way of including the table in my earlier comment above, so here I enter it manually. These are the figures for the net indicative annual adjustment required in the government finances, taken from the Department of Finance Addendum to the Stability and Growth Pact Update Jan 2009 (figures as % of GDP apart from annual adjustment)

The figures reading across are for 2009 2010 2011 2012 and 2013
Emerging general government balance -10½ -12½ -12¼ -12¼ -11¼
Additional annual adjustment -€2b -€4b -€4b -€3½b -€3b
GGB following adjustment -9½ -9 -6½ -4¾ -2½

There is a simple way and a complex way of reconciling the numbers.
The simple way is to recognise in the first instance that the cumulative €16.5bn adjustment referred to in the DoF Addendum document of early January assumed a budget deficit of 10.5% of GDP in 2009. (The 9.5% figure is post the package of measures announced a fortnight ago, which brings the outstanding cumulative adjustment required between now and 2013 to €14.5bn.) Since the 2013 target, per the DoF document, is a 2.5% deficit in 2013, and each percentage point of GDP equates roughly to €2bn, the 8% point adjustment and the €16.5bn are easily reconciled.
Of course, this is all very approximate, which is not a problem, but a more rigorous way of approaching the issue is to compare the 2013 target of 2.5% with the 11.25% deficit that is projected for that year on a no-policy change basis. This is an 8.75% point gap which, using the DoF’s projection of 2013 GDP (€209bn), suggests an adjustment of €18.3bn. Why is this higher than the €16.5bn? The reason is that the no-policy change trajectory for the deficit (the second line of your table) gives rise to a significantly higher interest bill than does the trajectory following adjustment (your last line).
Hope this helps.

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