Government Spending Under Ahern

On page 144, total government revenue (% of GDP) is estimated at 31.9% for 2009. While government spending is 45.6%(granted it was 35.7% in 2007, so the increase is due to automatic stabilisers), but even at 45%, its still a modest spend. The exchequer crisis is on the revenue side.

Another inaccuracy appeared in an article titled “Finel Gael warns of summer of discontent on jobs crisis” by Stephen Collins in the Irish Times on the same date (August 8, 2009, pg.17)

“…Labour Party Spokesman on enterprise and employment, Willie Penrose…said July was the 21st successive month in which the numbers on the live register had increased…lives have been devastated by unemployment.”

According to an article titled “10,500 extra people sign on last month bringing number out of work to 423,400” by Suzanne Lynch
on the same date, the net weekly increase in people joining the Live Register has actually decreased in recent months.

In addition, according to the CSO the Live Register is not designed
to measure unemployment, rather, unemployment is measured by the
Quarterly National Household Survey.

The Irishtimes is proud of its right to protect its sources,
but what about when sources make unsubstantiated claims?

Karl, my cousin Bertie (via his mother, a Hourihan from West Cork) would be pleased with your analysis.

Maybe the CV on the Washington Speakers Bureau site should be taken seriously after all!:

“Bertie Ahern dedicated his career to re-inventing his country’s economic and political stakes in global affairs. He persuaded his fellow politicians and citizens to accept short-term sacrifices to achieve long-term gain. His ability to persuade his constituents to follow his vision provides lessons for even the most seasoned executives. In this thought-provoking presentation, Ahern describes:
· His approach to developing and executing a successful long-term vision
· How to persuade employees, customers and stakeholders to participate and embrace change
· What every leader must do to achieve large-scale success
· How to successfully bring people with you by building consensus”

Nevertheless, this is one of these cases where the facts on the ground trump the figures.

The highest growth rate of the Celtic Tiger period was achieved in 1997 @ 11.5% of GDP, following a prudent Budget from Ruairi Quinn (“For years we have been bled white – now it’s payback time” – – Irish Independent, June 1997).

Thanks to Bertie, merchandise exports rose 27.8% in 1998; 16.8% in 1999 and 25.3% in 2000 — or maybe thanks to Intel, Dell and so on as the high tech boom was heading for a peak.

In the small economy, with the US companies having a huge impact, revenue grew at annual rates from 1997, at 12.7%, 14.8%, 15.6% and 5.6%, matched by total spending growth of 7%, 10.7%, 10.4% and 16%.

So following a tale of two booms, with construction output rising to 23% of GNP in 2007; and with a fall in employment in the tradable goods and services sector in the period 2000-2007; tax revenues from property @ 17% of total revenues in 2007, compared with 4% in 1995, we know now that petro-economy spending on the basis of bubble revenues, more often than not, ends in tears.

In 2006, in the peak year of the boom, 83,000 new jobs were added in the economy but only 6,000 were in the tradable goods and services sector.

So as we Irish say, in fairness to Stephen Collins, while spending was not ahead of growth, it was nevertheless based on a soufflé.

@Michael

Perhaps it’s already too late to avoid turning this thread into anything other than a political ding-dong but I should clarify that I have not done any “analysis” in this post nor is there any implicit endorsement of our former Taoiseach’s record. As I noted, many policy mistakes, fiscal and otherwise, were made.

My only point here is the following. If we are going to debate issues relating to economic policy then its important to start from actual facts, rather than what people imagine to be true.

@Kevin

Perhaps I misunderstood your comment but I don’t see any inaccuracies in the report you cited. Weekly increases becoming smaller still implies an increase.

And yes, the QNHS is the best unemployment measure. But the live register figures produce a “standardised unemployment rate” that is consistent with the QNHS definition. It’s not perfect but it’s the best figure we have for estimating a monthly unemployment rate.

I agree with your main point that economic policy matters should be based on fact.

A pertinent example would have been to cite the following CSO figures, covering the 21 month period referred to in the article:

Persons on the Live Register by Month

March 2008 – 197,992
April 2008 – 195,600
August 2008 – 247,400
Sept 2008 – 240, 217

Although the above figures may be exceptions they nevertheless
show that the Live Register has not increased for 21 successive months.

I should qualify my own statements with the facts 🙂

At the risk of re igniting an old debate it might be interesting to see these figures as a % of GNP as opposed to GDP

Why can’t the live register figures be split into part-time signing and total unemployment easily – I mean the people are getting paid different amounts depending on circumstances – then it would reduce the need for a qnhs, saving some of the tax raised.
Maybe saving some our money is the reason this is not done….

Karl, have a quick look at Cap 1, Vol 1, of Bord Snip, on spending as % GNP (the tax base, approx., if you follow these matters) under Bertie. Get with the figures!

Colm, switching from GDP-based calculations to GNP-based calculations doesn’t at all change the (narrow) point I was making here. From page 5 of volume 1 of the Report of the Special Group on Something or Other (link here http://www.finance.gov.ie/documents/pressreleases/2009/bl100vol1.pdf)

“total government spending fell below 40% in 1997 (largely due to a denominator effect arising from strong increases in GNP rather than expenditure reductions). It then fluctuated in a range below 40% until 2007”

So, just as the GDP-based figures show, the figures you’re citing also show that Bertie Ahern’s two governments did not raise spending at a pace far ahead of economic growth as claimed by Mr. Collins. In fact, spending grew slightly slower than GNP during this period.

And in case I get accused of an error of ommission, I’m aware that the next words in this passage from the report are:
“but reached 44% in 2008 and is expected to reach 51% in 2009. These figures do not include some elements of local authority spending. This trend is clearly unsustainable” and I agree with the conclusion. However, these figures relate to the post-Bertie era and don’t justify Collins’s “year-after-year” assertion.

Again, I’m not attempting “analysis” here, just reporting facts. Of course, the Ahern policy of over-reliance on the construction sector left us vulnerable to the declines in denominator and increases in numerator (through welfare spending) but as regards what occurred in the years after 1997, the facts, as the they say, are stubborn things.

Finally, even though it doesn’t matter for this argument, I’d note that (as I’ve argued here a few times) I believe GDP, not GNP, is the tax base. For starters we do actually collect tax revenue on repatriated multinational profits.

You’ve raised an important point, Karl – whether using GNP or GDP figures. What’s also interesting to note in the very useful Statistical Annex is that in 2007, the average current spend in other EU-15 countries was 43.2% (unweighted) while Irish current spend was 35.3% of GNI (GNP + net EU transfers) That leaves Irish current spending over 20% behind the other countries’ average. In 2007, we would have had to spend nearly €13 billion more in current expenditure just to be an average European spending economy. Of course whether that would be desirable is another debate.

As Colm has pointed out, using the Bord Snip tables, Government expenditure has increased substantially as a % of GNP since 2007. This is a feature both of the decline in economic output (much larger here than the rest of the EU) and the significant increase in Social Affairs expenditure as a result of rising unemployment (this made up nearly 80% of the total increase in gross current government spending over the last two years).

@ Michael Taft

Given that we spend hardly anything on defence and a large part of health insurance and pensions are from own income (albeit subject to tax incentives in addition to the fact that we have a younger demographic profile then is the gap as stark as you state.

Moreover, given that wage levels in the public service are 50% higher than in the private sector is the conclusion now that we spend too much on wages & possible even transfers and not enough on services.

When the time comes for an expert and detached review of the Celtic Tiger’s rise and fall, it will be monetary policy rather than fiscal policy which should be its key focus. For it was EMU and the ultra-cheap interest rates (relative to Ireland’s particular conditions) which drove much of the economic activity of the last decade.

If credit was the key influence of the last decade, as look forward to the next decade we need to consider credit. What is the Taylor Rule now saying about EMU interest rates?

Using forecast data set out in the recent Supplementary Budget (HICP inflation of -1.4% and an output gap this year of 6.3%) generates an implied interest rate for Ireland of -5.5%. That is fully 6.5% below the current ECB rate of 1.0%. This suggests that Ireland is facing a very severe monetary headwind that will depress economic activity whatever happens on the fiscal front. But there is a wider and more worrying point than the appropriateness of the current EMU interest rate for Ireland.

The situation where the EMU interest rate is much too high for Ireland’s circumstances is likely to persist for some time. This is because our output gap is likely to remain large as the collapse of the property sector spills over into other sectors and as public spending is curtailed and tax revenues increased: that will keep our output gap larger than in the rest of the Eurozone. That in turn will put a dampener on Irish inflation: that will keep our inflation lower than in the rest of the Eurozone. These two factors mean that EMU interest rates may, for some considerable time (a decade?), remain significantly too high relative to Ireland’s needs.

The downward swing in the Irish economy may have transformed a situation where EMU interest rates were structurally too low for a long time to one where they will be structurally too high for a long time.

There has been a comprehensive failure of comprehension by the economics establishment regarding the boom and the bust. There is an associated failure of comprehension today regarding the bust. Consider the 2008 agenda of the DEW in Kenmare: not a mention of credit, banking, monetary policy, interest rates even though we were then already well into a severe downturn triggered by precisely those factors.

In establishing NAMA, the government is attempting to stabilise the Irish banking system. The government is right to do so. But it risks paying well over the odds for a project that may repair the banking system and restore the supply of credit only to find that demand for credit has dried up.

The recent report into the Mazars report on bank finance for Small and Medium-Sized Enterprises confirmed this. While it found that total credit to SMEs had remained relatively static over the 9 months covered by their review they also found that “the value of new applications for credit decreased by an average of 42%”. The implication is that we face into a prolonged period of deflationary pressures as credit supply remains constrained while credit demand falls off sharply as people and businesses repair damaged balance sheets.

The central choice facing Ireland is between (a) exiting the Euro and recovering monetary policy autonomy but losing credibility and ECB support and (b) remaining within the Euro and enduring a deep depression.

If, as I think we have to, we remain within the Euro, then we simply have to get our fiscal house in order. The government will have to borrow some €20b this year. The prospect of increased tax revenues over the coming years is low: the international economy is still struggling; unemployment here continues to rise; and retail sales continue to fall. The scale of government spending reductions needed may therefore be of the order of €15b. Yet Colm McCarthy’s team was only asked to come up with suggested cuts totalling €3b. In fairness, they came back with a menu of cuts totalling €5b. But that is still not enough.

It is by no means clear to me how our political system will cope with this challenge. But implementing the Bord Snip recommendations would be a good start. In that context, arguing over Bertie’s fiscal legacy is a distraction.

Current spending annual growth was 14.5% in the period 1998-2007.

Ireland has a low social security charge on earnings compared with Germany and France but it’s the private sector which carries this burden.

@Karl

Should GNP/GDP to 2008, be adjusted for empty unused houses that exceed the 2006 peak output by 10%?

The excess unused housing, which Goodbody estimated at 104,000 in 2008 (267,000 vacant dwellings according to the 2006 Census, comprising 216,500 vacant houses and apartments and 50,000 unoccupied holiday homes. This suggested a vacancy rate of 15%, compared with the EU average of 7.3%. Based on a second home ownership rate of 5% from the CSO’s household budget survey, Goodbody surmised that in fact only 193,500 of the vacant stock were not holiday homes. Excluding holiday homes, the vacancy rate was closer to 11%, but still leaving the Irish economy with 67,300 more vacant houses than the EU average. It then added part of the subsequent output, that was unmatched by mortgages and making an allowance for cash purchases, to give 104,000).

GDP/GNP

Isn’t there a lack of transparency on multinationals’ profit that would make use of GDP unreliable.

US multinational profits in Ireland doubled between 1998 and 2002, even though activity was falling in the last two years of this period.

Then there are the transfers into Ireland, unrelated to business activity in Ireland e.g. Microsoft’s two multi-billion dollar firms, which operate from a Dublin law firm.

@Michael

Whether GDP or GNP is the right answer depends on the question. If we’re looking at the flow of income to people who live here, it’s GNP. If we’re looking at economic activity in the state, then technically it’s GDP but as you note some (though probably not most) of the stuff that’s in GDP and not GNP may not relate to much economic activity at all.

However, if the question is what’s the tax base, then the reported income related to transfer pricing is definitely included because it is taxable (getting a low tax rate is presumably the reason it’s being reported here). So, as I say, GDP is the more relevant measure of the tax base.

I don’t think examining Bertie’s fiscal (and economic) legacy is a distraction as it tells us much about why we are where we are and what needs to be done. The relative stability of both Exchequer current and capital spending as a % of GDP (or GNP) in the Bertie years conceals or reveals (according to taste) a more interesting story.

A huge demand for infrastructure investment built-up during the 2000s – exacerbated by a back-log from the mid to late ’90s. The first NDP sought to address this in a number of respects, but, for the semi-states ,successive governments were either unwilling or unable (newly privatised Eircom) to part-finance this investment. The result was increased up-front financing by consumers (very high and increasing “point-of use” charges in most infrastructure and utility sectors) or higher direct and indirect costs from inadequate investment and poor service quality (Eircom). This policy has imposed implicit taxes on all citizens and residents. Successive governments could have borrowed to part-finance this investment and would have received regulated returns higher than their cost of funds, but choose not to.

One can add to these implicit taxes in high “point-of use” charges the capture of rents by some professions and service-providers exercising market power that is inadequately curtailed by ineffective competition policy and regulation. (A comparison of the prices changes in the CSO’s CPI sub-indices over the last 12 months gives an indication of where regulation and competion is working and where it isn’t.)

These implicit taxes and rent-gouging have fuelled the demand for high pay which is also reflected in the level of transfer payments and the minimum wage. As tax revenues collapse and unemployment rises the reality of Bertie’s legacy, perhaps, is beginning to dawn.

Stripping out these implicit taxes and rent-gouging would benefit almost all citizens and residents and might encourage a wider public acceptance of the severe fiscal adjustment that is required.

@ Cormac

“When the time comes for an expert and detached review of the Celtic Tiger’s rise and fall, it will be monetary policy rather than fiscal policy which should be its key focus. For it was EMU and the ultra-cheap interest rates (relative to Ireland’s particular conditions) which drove much of the economic activity of the last decade.”

Perhaps, it may be more on taxation.
The introduction of a property tax before the boom would have taken the steam out of the sprint, and decommodified property a little bit; debt holders may have been in a better situation if this had happened then.
Also, consider the tax exemption and relief schemes that put more fuel on the fire.

Al

Depends on you stats I suppose.

OECD stats show annualised GG expenditure growth of 9.5% pa and GDP (at nominal market prices) of 9.4% from 1997 to 1998.

Of course, the more sanguine point relates to not to national output (a complete fudge in Ireland) but income and importantly,

Potential, rather actual output. Tthe stupendously parlous state of the cyclically-adjusted Irish gevernment balance being the bull elephant that seemingly no Irish economist saw stroll into the room.

That’s 1997 to 2008 of course.

Simpleton – yes, our military expenditure is a factor in the gap between overall current spending. But not that much. In 2005, average military spend in other EU-15 countries was approximately 1.9% of GDP, compared to our own 1.1% of GNP. This would account for a little over 10% of the total gap between Irish current spend and other EU-15 countries. And, yes, we have a younger demographic profile, reducing demand on health and pensions (though our high relative poverty rate puts additional demand on health and social services). But we also under spend on education relative to EU-15 averages; more demand, less spend.

Regarding public sector pay costs, our expenditure is again, below the average. According to the EU Annex, our payroll costs in 2007 were 4% below the EU-average and according to Eurostat’s Government Finance statistics we were 8% below average. We’d have to increase, in 2007, spending on public sector pay by between €650 million and €1.3 billion – or employ an extra 13,000 and 27,000 public servants. As to the public-private pay differential, you might be interested in this perspective:
http://notesonthefront.typepad.com/politicaleconomy/2009/07/boy-have-public-sectors-workers-been-kicked-around-the-block-for-drill-they-wear-the-mark-of-cain-they-are-one-of-the-ma.html

From these perspectives, no matter how you look at it, Ireland is a low-public spend economy. But, as Karl mentioned above, whether this is a good thing or not, is another debate.

@ Michael Taft,

Having read you blog, its all clear to me now what the solution to our problem is
*raise taxation levels to EU average
*raise public spending levels ot EU average
*employ more public servants & pay them more
*raise private setcor wages to EU average
&
*nationalise the banks

@Michael Taft

Research produced by public sector staff, shows that in 2008, there was a differential in pay between the Irish public and private sectors in the range of 10% to 30%, excluding pensions.

In an ideal world, should the Govt. mandate a comparable pension scheme for the private sector and similar level salaries?

Brian Lenihan said last Feb that the total cost of a State pension for an Irish public sector worker, hired after 2004, was 26.1% of pay, and the employee paid on average 4.8% of the cost, before the introduction of the Government’s controversial pension levy.

Board Snip had higher percentage costs for different positions.

Arguments can be made about comparable grades in regard to pay, but it is interesting that there are no calls for a new benchmarking study.

I’m not arguing for public sector pay cuts across the board but compare Irish public salaries with a comparable country – New Zealand — also with 4.2 population.

An MP earns about €60K and the expenses regime would seem like chicken-feed in Ireland.

Ireland has to survive on exporting and comparing wages with Germany, the world’s leading exporter, according to the Statistical Annex, public pay costs are expected to be 11.1% of GDP in 2009 in Ireland and 7.4% in Germany.

National unit labour costs, total economy, in Ireland in 2009 will be 129, using a base of 2000=100, compared with Germany’s 108.3.

@Cormac/Paul

Of course examining the second period of monumental economic mismanagement in a generation is important.

It’s striking how little emphasis there has been since the crash on institutional reform; the vested interests of course prefer the status quo while others appear to view the overwhelming odds against change in the sclerotic system, as not meriting the energy for a fight.

The OECD report on the public sector was commissioned in June 2007; published in April 2008 and taskforces are still examining the proposals.

The OECD report on the public sector was commissioned in January 2007

I think that data Karl quotes is highly misleading as it implies that the growth in GDP (and gov spending) was sustainable from about 2002 onwards, we know this not to be the case, so Stephen Collins point will be shown to be correct as gov spending explodes as a proportion of GDP this year, next year and so on…

Ahern was grossly irresponsible and reckless…what’s more, it’s not like the Irish people got better public services for all the extra spending!

@ Michael,

Our problems are rooted in the private sector: we have an over-indebted private sector owning too much over-valued property and we have a bust banking system.

We have many public sector problems i.e. an inbred, over-paid, under-performing public sector. But the public sector is not the epicentre of our current problems.

Whatever the World Bank says, the fiscal policy followed under Bertie is not the reason for our problems. In their recent report the World bank revised completely their assessment of the underlying fiscal balance over the last decade. If the government tried such a stunt it would be accused of characteristic chicanery. But the reality is that, at the time, the government ran surpluses for most of the decade and built up the National Pension Reserve. Whatever mistakes were made, a profligate fiscal policy wasn’t one of them.

In any event, the other political parties each advocated spending plans which were similar in extent to the government’s. Look up FG’s “Just Economics” from 2002 the next time George Lee Tee Dee asserts that the Govt “blew the boom”. Actual spending aggregates differed little from those set by FG in 2002. By 2007 Labour had become a party of tax cuts. SF had become a low-tax party!

Bottom line: no political party and not even the government body granted institutional independence to allow them withdraw the punchbowl as the party gets going (the Central Bank) clearly advocated stopping the credit binge. We can have great fun playing the blame game re fiscal policy from 1997 – 2007 but we have far greater problems staring us in the face and requiring speedy action.

@Michael Taft
What’s your line on Corporation tax?
Ireland’s CT rate is less than half of our EU neighbours.
We must by definition collect less in CT than them (if you have comparisons I would be interested)
If we want to spend the same as them in public services we need to make up this shortfall in tax somewhere else

So to match the EU level of public expenditure we need higher personal tax or VAT if our CT is lower.

Is there a flaw in my logic?

@ Cormac Lucey

I suppose as a former PD advisor you have to defend your record but your analysis does not bear scrutiny.
The Irish economy was growing far above trend in your period in office, buoyed by loose monetary policy (beyond your control) but also by factors within your control namely an absence of bank regulation, fiscal incentives to an over inflated property sector and a rate of growth in spending commitments beyond that of the sustainable rate of growth of the Irish economy.
I could add narrowing the tax base to an irresponsible level by leaving shelters in place for the very wealthy and removing those at the bottom of the scale from the net. This concentrated the tax burden on the property owning middle class.

To wring your hands & claim that the Irish bust was largely a function of joining the Euro or of lax global monetary policy is a monstrous rewrite of history. I agree with you on one point, the govt of 2002-07 did not set out to blow the boom. It was their sheer incompetance that did it.

Michael – the usefulness of Karl’s point in starting this thread is to stress the need for a fact-based debate, starting with agreed data starting-points. That doesn’t mean there won’t be disagreements over the policy implications. Indeed, as I stated before, your work on Finfacts regarding export data is a good example of the need to get the ‘facts’ right, rather than let Ministers creatively (putting it mildly) interpret them for us.

For example, public sector pay comparisons should come with the OECD’s health warning:

‘Presently, because of methodological difficulties, no international comparative data exist on public employment that give practitioners good comparable information on the size and weight of employment in the public domain across OECD member countries. Across countries, and even within countries depending on the source of information, the definitions of “government organisations”, “the public sector” and “the public domain” vary significantly.’

The OECD established a new project – GOV – to rectify this. Their first report can be read here: http://www.olis.oecd.org/olis/2008doc.nsf/LinkTo/NT00000A16/$FILE/JT03239319.PDF

This is relevant to the German example you raise but we have to be careful to compare like with like. For instance:

In 2007, Irish current expenditure was 25% below German current spend.
Yet, in 2005 German civil servants, excluding defence, made up 3.2% of total population compared to 2.25% in Ireland (we’d have to employ an extra 35,000 civil servants to reach the German ratio)

So how, as you pointed out, is German public service pay so much lower as a % of GDP than Ireland? Because they operate a different system than us, whereby a high level of ‘public services’ are delivered by non-Government agencies, but funded by the Government. In effect the Government pays individuals to perform public domain activities who are not counted as ‘Government employees’.

In Germany 17% of all Government expenditure is made up of ‘social transfers’ via market producers, compared to Ireland’s 5% (in this respect, we’re closer to the direct provision practice of Sweden and Denmark). That particular type of German expenditure won’t come up as ‘public sector payroll’, anymore than GPs on the GMS scheme come up as Irish Government employees.

All things being equal (public, quasi-public and private sector output is the same), it doesn’t matter to the bottom line how the work is performed – the bottom-line (overall expenditure) is the same. But what won’t be the same is the numbers on the public sector payroll line.

This is just one small example of taking care in making comparisons between different regimes. This is not an argument for more or less public sector employees or pay. It’s merely an attempt to define the data and the context. If we can do that, we assist the debate, regardless of our particular position on the issue.

How much does the state spend?

According the board snip report spending is €73.6bn, 51.2% of GNP.
But government figures suggest it is about €58bn, about 40% of GNP.

What is the difference between the two numbers and what is the best for international comparisons?

Stephen Collins assigns blame for our current fiscal crisis to the former Taoiseach but 30 posts by distinguished economists leave the charge at best unproven.

On one point Collins is wrong – public expenditure did not rise significantly as a % of GDP or of GNP in the Bertie years. Chart 1.1 in the Bord Snip report shows the trend in relation to GNP since 1993.

The more serious question is: did Bertie allow public spending to rise on the back of unsustainable revenues from the property bubble?

If there is no consensus among experts about the causes of our current crisis, how will the Irish people ever be persuaded to accept the harsh measures that are necessary to rectify the fiscal imbalance and to put our economy on a sound footing?

@ JL

You make the valid point that the economy “was growing far above trend in your period in office”.

That is the precise point. Go back to 1980 and graph either house prices against time or total numbers employed against time. You will note a distinct break in the series from the mid/late 1990s onwards. In each series, a limp growth trajectory was replaced by an extremely strong growth trajectory.

It was EMU wot done it.

And if a decade of EMU interest rates that were way too low for us could give us a decade-long boom the likes of which we had never seen (and were intellectually ill-equipped to deal with), what might a decade of EMU interest rates that are way too high for us do?

It already seems that we are intellectually ill-equipped to deal with this variant of EMU for there is precious little discussion of EMU interest rates now being way too high / ECB monetary policy way too tight for our needs.

@ Cormac Lucey
It is a pity that this analysis was not borne in mind when we adopted the euro. The fiscal balance was lacking and you also neglect the clear bubble in housing and land. We have known of the propensity to over-value land for many decades. Yet we have no land based taxes to ensure that we retain some sanity on the use of land. Land is not a personal asset. The income from the land is. Land is a national asset. Proper taxation of it will ensure it is used or sold to someone who will use it.

Playing the blame game might have some entertainment value, but it doesn’t get us very far. It is necessary to go back to Karl W’s original factual observation that Government current spending did not rip ahead of GDP (or GNP) growth during the Bertie years. Nor, it seems, did Government capital expenditure. It is easy to sit here now and say that fiscal policy should have leaned against the looser monetary conditions that membership of the Euro entailed. Certainly fiscal policy, particularly on the revenue side, leaned with the monetary loosening to fuel the property bubble, but it seemed to dove-tail with a deep-seated Irish predisposition to value possession (of land, property, power, a secure pensionable job, etc.) much higher than performance.

Therefore, it is probably necessary to examine the composition of the spending and revenue measures to get some handle as to why, when the wheels came off, the fiscal gap is much larger, in relative terms, than it is in other developed economies.

The automatic stabilisers on the spending side have gone into over-drive, primarily, I would contend, because of a need to maintain pay and transfer payments at high levels in the good times to compensate for implicit taxes and widespread rent-gouging. With the precipitious decline in economic activity these implicit taxes and rent-gouging are becoming more stark and blatant, but there is no politcial will to tackle them.

The revenue side, however, is another story…

@Cormac/Paul/Pat

BIS house price data for 18 countries1970-2006 here:

http://finfacts.ie/irishfinancenews/article_1012464.shtml

@ Michael Taft

Michael, comparisons certainly should come with a warning and current and capital distinctions can vary as can outcomes.

Does Ireland spending 7.5% of GDP on health in 2007 according to the OECD compared with New Zealand’s 9.2%, mean the latter delivers a better service?

The OECD said in its report on the Irish public sector that public expenditure as % of GNI in 2005, was 40.5% in Ireland, compared with the OECD average of 42.7% of GDP; New Zealand was at 40% a country that is comparable to Ireland in terms of population and development.

What ever about ratios, there should be agreement that the cost levels in Ireland, a small export dependent economy, are out of line.

In 2009, average weekly pay in the Irish public sector is €973 – – compared with €600 in New Zealand (the NZ dollar has risen 28% against the US dollar in the past 6 months) and €780 in Australia.

It’s not that all Irish public sector staff are in clover; cost levels across the economy have been excessive for some years as confirmed in a recent Eurostat report.

Some excess relates to high indirect taxes e.g the average price of a new car in Ireland is 30% above the Eurozone average.

We can talk about “upskilling” and so on but it’s not only in Asia where price is a factor in selling.

@ Cormac Lucey

So you do not recognise that the 2002-07 government inflated the bubble by pump priming the property with fiscal incentives & used the resultant wind fall tax receipts to dole out cash to every interest group that darkened the door of the Chas Mahal.

It was all the fault of “dem foreigners” for keeping interest rates low and it will continue to be their fault for raising them.

Maybe Myles na Gopaleen’s molecular theory must be correct. Take a PD & expose his to FF for too long and it becomes difficult to spot the diff.

We should be careful about using the euro as a scapegoat.

With a reckless fiscal policy and no tradition of standing up for principle in the senior ranks of the civil service, would we have got something different from the central bank than what was served up by its subsidiary unit, the financial regulator?

UK level interest rates during the past decade would have made a marginal difference and too high a rate would have attracted a flood of hot money.

Anyway, FF would hardly have dumped on their developer friends.

@JL

Over its life, the 2002-2007 government reduced property incentives. It should have got rid of them altogether. But even if they had, it would have made little difference. Those who bought houses on PE ratios approaching 100 (Rossa White of Davys wrote extensively on this at the time) were not making rational decisions. They were caught up in a bubble mentality.

There are two things I find questionable in the analysis:
1. The exclusion of local authority spending. This presumably excludes social housing schemes, road schemes, sewerage schemes etc.? I put it to you that local authority spending is both ‘public spending’ and proportionally higher than it was in the 1990s.
2. The use of PPP in infrastructure spending. This is borrowing future spending by landing the debts there. No?

It’s all smokes and daggers to me…

@Cormac,

True, they reduced tax expenditures in the same way as a drug dealer only handed out two fixes per day rather than three. A lot of the property investment in hotels, buy to lets ,private hospitals (another accident in waiting) was tax driven. The bubble mentality was driven by an artificially low cost of capital which included tax incentives which continued under the govt which you advised.

This brings me to my concluding point, we are here because of policy decisions, to enter the euro (bad then but good now?) and to run with a pro cyclical fiscal policy at a time when the economy was growing above trend.

You seem to have no problem blaming previous governments, foreign influences but yet fail to acknowledge the culpability of 2002-07 govt.
To those that say this does not matter, I would say that the first step to redemption is an open and honest aknowledgement of why we got here.

I find your analysis useful but partial.

@ Dreaded Estate.

You are forgivably confused by the different definitions of State spending. My understanding goes like this:

The fig of €73.6 bn is the sum of Gross current spending (including Central Fund, which is mostly debt service), Exchequer capital (including non-voted) and the payment to the NPRF. It is the amount by which the Exchequer gross debt rises. The net debt would rise by this amount less the NPRF payment, €3 bn in 2009. The definition is not the same as the GGB concept used by the EU for Stability and Growth Pact purposes.

Budget documents often feature an item called Net Supply Services expenditure, which is below Gross spending by an amount corresponding to the direct revenues of Government departments, or so-called Appropriations in Aid. The biggest of these is PRSI receipts. This net/gross distinction is a regular source of confusion.

There is a booklet explaining all this on the DoF website.

The total number of people in Ireland who understand the Exchequer accounts fully is believed to be six, of whom three are deceased.

@colm

Thanks for the explanation 🙂 . So does that make us better or worse off?

(As I understand it, PRSI income also goes into a separate fund and is not considered tax revenue, so the 73.6 bn of gross spending is not directly comparable to the 31-34 bn of tax revenue expected this year).

@colm mccarthy
Would this be an international method of recording this form of government incomes and expenditure?

I’m not sure why the government would net off some expenditure against revenue to produce 2 lower figures.

Does the state spend 51% of GNP or 40%?

43 replies on “Government Spending Under Ahern”