Both tax and spending need attention

Now that we all recognize the way in which the tax system has gone wrong and the need for adjustment so that it collects more revenue, it’s time to have a look at the balance between tax and spending adjustments needed to get back to the kind of reasonable budgetary structure that we had in the late 1990s.

To this end, I thought it would be useful to post charts showing total government expenditure and total government taxation as (i) % of GDP; (ii) Real terms.

I’ve used the latest NIE and the data in the October 2008 budget book, together with the ESRI’s latest GDP forecast. So this is all a little out of date.

Both charts reveal both the sudden collapse in taxation.

They also show the way in which real spending had a strong upward momentum which ran ahead of economic growth, especially as soon as this started to slow in 2007. (Some of this is the operation of automatic stabilizers, so important not to overcorrect.)

Pretty clear then that, if we’re to get back to the comfortable zone we were in in the late 1990s, it’s not just a tax adjustment that’s needed,  but also a reining in and rollback of spending.

5 thoughts on “Both tax and spending need attention”

  1. It might be useful to look at per capita figures – Ireland has experienced a significant increase in population: 22% growth from 96 to 06 – which puts strain on the public purse. Of course, this will push down the slopes of both your spending and tax lines, but at least that way you can get a truer sense of which side of the accounts the blame for the structural deficit lies on.

    While not explicitly mentioned in this post, there is also a worrying tendency among contributors to this blog to studiously ignore the capital side of the budget, as if current spending was necessarily public sector waste and building lots of train tunnels and roads automatically equated to a positive return on investment.

  2. Expenditure as a percentage of GDP has soared while tax revenue has remained pretty constant.

    Would it be fair to say that expenditure needs more attention than tax?

  3. Paul,

    I agree that the above graphs seem to lead us to this conclusion, and that is exactly my problem with the way these graphs present the problem. If you look at per capita figures, you get the impression that expenditure has increased moderately while tax revenues have fallen rather drastically.

    Then it is fair to say, tax needs more attention than expenditure.

  4. I think it’s fair to say that expenditure needs more attention than tax. What I don’t understand is the reticence of people to reach that conclusion. I think the penny is dropping with the government though, partly because they’ve so little room to move.

  5. Thanks Graham, is there anywhere we can find more detailed analysis of the per capita figures?

    There is also a serious danger in relying on current spending to assess the needed level of spending in Ireland (barring for deficit calculation purposes) – the deficit in accumulated spending over the years is enormous (particularly as a high % of expenditure in the 90s was debt repayments). So the underlying level of resources is much weaker than in many countries with similar levels of spending (all those mising libraries, computers in schools, community centres etc – and roads of course…). Not that relevant in terms of immediate balancing the books but highly relevant when thinking about ‘waste’ and medium to long term development.

    Also, to really figure out how to square the tax and expenditure sides we would need to make some assessments of changes in GDP and in the tax take from GDP. Both are highly uncertain at the moment but it should be possible to work through some altrnative scenarios. Anybody got any good ideas/ data on that?

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