During last night’s Prime Time, former Department of Finance official Cathal O’Loghlin made the following comments:
There’s a €16.5 billion gap to be filled by 2013 … If we go down the tax route to fill the whole of that, we’d be talking about a tax burden which is way above European levels … solving one-third of that problem by raising taxes would push our tax burden to the same levels as the Euro area average.
If true, these figures suggest that the room to use taxation to close our deficit is very limited and this should be a central issue in public debates about the fiscal crisis. However, I would not have characterised the tax burden in this way and thought I’d explain why.
Let’s go back to the where the €16.5 billion comes from. It comes from the Stability Program Update document released in January. An adjustment of €2 billion was proposed for this year. Subsequent adjustments of €4 billion in 2010 and 2011, €3.5 billion in 2012 and €3 billion in 2013 were projected to gradually reduce the deficit over time to 2.5% in 2013. As percentages of GDP, these adjustments were 1% this year, 2.25% next year, 2% in 2011, 1.75% in 2012 and 1.5% in 2013. Adding these adjustments together, the 16.5 billion translates into a cumulative adjustment of 8.5 percentage points.
Table 6 of this document then set out an illustrative plan in which all of the adjustment occurred through expenditure cuts. The revenue share of GDP stayed stable at about 34% while the expenditure share declined from 43.3% this year to 37% in 2013. Suppose, however, that the government’s plan had instead reported a scenario in which the 8.5 percentage points of adjustment had all occurred on the revenue side. Then instead of the 34.4% projected in the document, the projected tax share for 2013 would have been 42.9% (i.e. 34.4% + 8.5%). Taking O’Loghlin’s other scenario in which only one-third of the adjustment occurs through taxes, the projected tax share would have been 37.2% (i.e. 34.4% + 2.8%).
Where would these hypothetical tax burdens place us relative to European levels? Consider this chart from my presentation at the DEW conference in January. Based on data from Eurostat, it shows that, as of 2007, the average government revenue share of GDP in the EU-15 was 45.3%. So, a full tax-based adjustment would still leave us below the EU-15 level and the one-third tax-based adjustment wouldn’t even put us close.
I guess one can raise these tax share figures by using GNP instead of GDP (and perhaps this is what Cathal had in mind). I don’t particularly agree with that argument but, in any case, as I pointed out the last time I had the temerity to raise the issue of tax shares, you can’t then include all the corporation tax revenue we get from the income included in GDP but not in GNP, so this adjustment isn’t as big as some think.
In any case, I was a bit puzzled by Cathal’s comments and thought I’d try to clarify what I think the right figures are.