Government Revenues and Spending

One of the problems that plaugues discussion of the Irish public finances is there is a fairly widespread confusion over how much the government takes in as revenues and how much it spends.

Many people know that the figure for “tax revenues” has been about €30 billion in recent years, via press coverage of the monthly exchequer returns. (See here for the 2010 end of year exchequer returns showing €31.7 billion in tax revenue.) Many people also know that we have run deficits of close to €20 billion in recent years.

Together, these two facts have lead to the wide repetition of statements along the lines of “we are taking in €30 billion and spending €50 billion.” Often, a particular item of government expenditure, such as public sector pay or social welfare is then compared to the revenue take of €30 billion to illustrate the huge fraction of government revenues that it takes up.

It turns out however that a more accurate description of the Irish public finances has been the government has been taking in about €50 billion and spending about €70 billion. This pattern is hard to assess from looking at the Exchequer statements because, for example, they do not count the €11.4 billion in “social contributions” such as PRSI as taxes. Indeed, the whole definition of tax revenues is a bit arbitrary. I believe the USC is being counted as tax revenues, while various levies that it replaces were not.

The most useful description of the state of the Irish public finances is the materials provided to the European Commission, for example in Friday’s Stability Programme Update. Go to the second last page and you’ll see a useful breakdown of exactly how the General Government Deficit of €49.9 billon was determined. Take away the promissory note worth €30.8 billion and this deficit would have been €19.1 billion, determined by spending of €72.4 billion and revenues of €53.3 billion. (The last page contains a description of the relationship between the Exchequer Balance and the General Government Balance.)

Unfortunately, this simple and clear presentation of the public finances is not emphasised in the materials regularly released by the Department of Finance. Perhaps one of the reforms that the two new minsters in charge of spending and taxation could agree to would be to release regular clear presentations of the tax and spending figures underlying the general government deficit.

29 thoughts on “Government Revenues and Spending”

  1. And once again it would also be lovely to have gross figures, not net. So the HSE would publish the income it gets from charges, private health insurers etc. and the amount it pays out.

    Likewise rates, published per council district or university income from registration fees.

    It is hard to assess the extent of government taxation required and to propose ‘in toto’ solutions without having a clear idea of what the full expenditure is. (I don’t mean for me, I mean for ‘hexperts’ in the relative fields.

  2. A very useful post Karl, as ever.
    A simple T-account with spending on one col and receipts on the other would help. As would a decent historical dataset on the dept website.

  3. @ Karl Whelan

    “This pattern is hard to assess from looking at the Exchequer statements because, for example, they do not count the €11.4 billion in “social contributions” such as PRSI as taxes.”

    Thnaks very much for the post, which I will chew. Holy God though:

    “The most useful description of the state of the Irish public finances is the materials provided to the European Commission”

    Implies that that the mushrooms can argue loud and long between each other, but this is largely meaningless (or wildly innacurate) as we’re not looking at the figures we’re suppling to the farmer. Tricky.

  4. Isnt it interesting that its not clear what our tax revenue is and likewise its not clear what our tax expenditure (tax breaks are).

    the usefulness of this site in informing public debate should not be underestimated.

    posts like the above are useful counter weights to the poor fare we are force fed via RTE and the newspapers.

  5. Karl,
    Thanks again for a concise post which clarifies an area that is not often made clear, at least for the general reader, in relation to the Irish economy or finances.

  6. Good points.
    I guess there were some raised eyebrows last November when the accounts were being examined in ever more detail.
    There are standards, and one is Eurostat’s ESA 95. There is ESA nomenclature in table 5b, making comparisons with other countries much easier.
    I don’t see why there’d be extensive logistic obstacles to moving to Eurostat standards for good. And transparency I think is in the long term interests of the Irish taxpayer.

  7. Excellent post and surely points to one more benefit of outside professional management of the Irish Economy. We’ve been ducking and diving with key economic statistics for years and maybe it takes the EU/IMF to start putting the real numbers in the public domain.

  8. The argument that will be put against changing the existing presentation – which will be made by civil servants – is that it will make comparison with previous years more difficult.

    And if you accept that you’ll accept anything!

    I fail to see why the changes proposed should not have already been made.

  9. As a follow up I note in the update on Greece they removed the economic statistics section from the Dept. of Finance and set it up as an independent unit to ensure more reliable and relevant numbers. Lesson for Ireland?

  10. This is due to a huge confusion on how to do the government sector accounting. and mixing up of income-expenditure flows with generalized flow of funds.

    Let us say that the government purchases financial assets by issuing liabilities. Its PSBR (public sector borrowing requirement) increases but assets also increase.

    Usually the government is not purchasing financial assets and PSBR = DEF (deficit). So accountants seem to follow this rule, calculate the PSBR and equate it to DEF, forgetting that this is identity is valid only if the government is not purchasing assets.

    In the case of Ireland, the government issued promissory notes in exchange for purchases of newly issued equities by the banks. It seems that the promissory notes were added to the PSBR and then equated to DEF.

    The US did the TARP accounting correctly. TARP added to the public debt and to the deficit only to the extent of loss estimates. So the $700-750B TARP led to an addition of only $200-250B instead of the whole $700-750B.

  11. @hugh + all

    Thanks for the mention above: my post in October 2010 which sets out some of the issues is at

    http://www.irisheconomy.ie/index.php/2010/10/08/the-csos-detailed-public-finance-data/

    As I explain there, the CSO does good work in presenting government finance data in a comprehensive and consistent way — at least for the ‘flow’ data i.e. revenue, expenditure and deficits. They also do work on the stock data, i.e. assets and liabilities: so far I haven’t found this quite as useful, particularly in drilling down from the aggregates they present (for all economic sectors, not just the government) to the components. We’ve seen so much use of “innovative” mechanisms in this respect (whether via NPRF, NAMA, or promissory notes) that I suspect some attempt to bring together the balance sheets in a more interpretable way would be useful for a wide audience.

    On the flow side, the CSO essentially implement the national income accounting frameworks, such as ESA 95 which Ciarán O’Hagan mentions above, and these are the same, as far I can see, as the “General Government” concepts used by the EU etc. which Karl mentions in the main post.

    (It was of course the CSO data that I worked on to generate the spreadsheets Hugh kindly pointed to above.) So this work is in fact done, and done fairly well, already.

    The real problem is that these presentations are ex-post, and the fiscal system actually operates along the train tracks laid down by legislative requirements and administrative/political conventions, (and inertia). Thus the oddities of netting and grossing various items in the majority of government documents have a logic in terms of internal budgetary procedures, but generate needlessly complicated and opaque data for policy makers/observers and everyone else.

    I think Karl is absolutely right that the relevant Minister should insist on a more consistent and comprehensible approach along CSO/ESA/General Government lines: I imagine that the detailed work of aligning budgetary practice (e.g., parliamentary procedures) with clearer data formats would be a useful task for the new Fiscal Council to drive.

    The Central Bank under Patrick Honohan has clearly devoted some considerable efforts to improving the relevance of its statistical products, and gone some way to explaining those improvements in e.g., via articles in the Quarterly Bulletins. It’s time for DoF and the wider government system to see the need for timely, comprehensive and comprehensible data as an important part of the their remit, and not just for specialists or policy wonks. The bulk of this data is not rocket science and should be easily understood by a very wide audience, if only some serious thought were given to making it so.

  12. DOF higher civil service time for a clear out long over due i think

    is this realy a Republic or a cosy cartel ?

    who is responsible for with holding the hidden tax figurers?

    can we name and shame

  13. @Ramanan
    In the eurozone, the PSBR is not counted, it is the GGDeficit that ‘matters’ which excludes borrowing for investment purposes.

    “In the case of Ireland, the government issued promissory notes in exchange for purchases of newly issued equities by the banks.”
    No, this is not the case. The promissory notes were for purely bailout money to prevent the banks in question (Anglo and INBS) becoming insolvent. The preference shares to AIB and BoI were bought as investments by the NPRF and so did not count towards the GGD, they have since been partially converted to equity.

    The promissory notes are accounted for correctly. They are unrecoverable losses.

  14. Ronan Lyons in December 2009:

    We all know that the Government will take in just €34bn this year while spending over €60bn, right? Wrong! Those figures are net figures, it turns out. To go back to basics, we need to look at the gross figures, i.e. count receipts such as PRSI and health levies as part of income, as opposed to netting them off against government expenditure. Doing that, total receipts for 2009 come to just over €50bn, while total expenditure will top €76bn.

    http://www.ronanlyons.com/2009/12/22/what-will-irelands-government-finances-be-like-in-2015-a-five-year-view-on-the-budget/

  15. Here is one document from the DoF that actually lays out most of this information in a fairly clear manner.

    Bugdetary and Economic Statistics

    The first of set of tables give data on the public finances from 1983 to 2010 and largely omit this nonsense of net expenditure and non-Exchequer tax revenue.

    Table 1 gives gross expenditure. Tables 2 and 3 give some details of current and capital expenditure. Table 4 gives gross revenue up to 2009 and shows some of the non-Exchequer Account revenues that accrue to the government.

    This information should be more widely discussed but the media are anchored to the Exchequer Account because it is produced on a monthly basis. Other accounts do not have the same requirement.

    Our public finance accounting methods are a historical relic. They have been in place since the mid-1860s. I do not think there is any attempt to conceal information, but the method of accounting makes it very difficult to determine the true aggregates. The time to change has long passed.

  16. @Seamas
    These figures prove at least to my eyes that the role of goverment defecits if held by Domestic banks and citizens is integral to the effecient running of the state as it controls domestic demand and prevents malinvestment.
    And yet Europe wants us to cut these defecits ?
    Something is just not right about this relationship.

  17. “No, this is not the case. The promissory notes were for purely bailout money to prevent the banks in question (Anglo and INBS) becoming insolvent. The preference shares to AIB and BoI were bought as investments by the NPRF and so did not count towards the GGD, they have since been partially converted to equity.

    The promissory notes are accounted for correctly. They are unrecoverable losses.”

    hoganmahew .. at the end of the day, the government owned shares of some banks right ? Or is it not the case ?

  18. @Ramanan
    “at the end of the day, the government owned shares of some banks right ? Or is it not the case ?”
    Owns.

    In the case of Anglo and INBS and EBS, it owns 100% – the existing shareholders were removed when they were nationalised.

    In the case of AIB, it is about 93%, I think, based on converting preference shares and a capital injection of 7bn. What form the capital injection has taken place that has left a 7% private shareholding, I have no idea!

    In the case of BoI it is about 36% from converting preference shares and from the existing share payments in lieu of dividend.

    But none of these transactions stem from the promissory notes. They are after the event of nationalisation in Anglo and INBS. They are to make those banks solvent – cover up their losses – so they can continue to receive funding from the Irish Central Bank and the ECB.

  19. The real story from the link that Seamus provided is the total collapse in tax revenue over 2008 and 2009. Current spending increased by a surprisingly small amount given the massive increase in unemployment, and non-debt spending actually decreased in 2010. The reason spending as a proportion of GNP is so high as compared to what it was a few years ago is that GNP has fallen by so much.

  20. hoganmahew,

    “But none of these transactions stem from the promissory notes”

    Doesn’t the government’s balance sheet have ownership held in banks as assets ?

    Question for you: If the government purchases a corporate bond financed by issuance of government bonds, will you add this to its deficit ?

  21. @Ramanan
    “Doesn’t the government’s balance sheet have ownership held in banks as assets ? ”
    It may do, if you think they are worth anything. The promissory notes are purely to cover expected losses. Therefore they have a nil asset value.

    “Question for you: If the government purchases a corporate bond financed by issuance of government bonds, will you add this to its deficit ?”
    No, or rather, I would, but Eurostat won’t. This is the wheeze that was the NPRF – a good chunk of it was borrowed money as, at the same time there were current spending surpluses, there was a capital deficit – so the state was borrowing money for ‘investment’ as the current surplus was less than the total spend (including capital spend).

  22. hoganmahew,

    The promissory notes pay so it has a positive assets value not nil.

    “No, or rather, I would, but Eurostat won’t.”

    Yep. The government capitalization of banks is also a transaction on the financial account. Hence shouldn’t be included in the deficit unless the government expects that this leads to a loss.

  23. @Ramanan
    Um, the promissory notes pay who? What?

    They are assets of the banks gifted by the government in the form of a reverse loan (the banks count them as a loan to government which is paid back at yearly intervals or as required until 2025).

    Ownership of the banks in question, Anglo and INBS, was achieved through legislation because they were insolvent.

    The promissory notes ‘fix’ the insolvency by recapitalising the banks that the government already owned. As the banks are no longer insolvent, they can borrow from the ICB and the ECB.

    “The government capitalization of banks is also a transaction on the financial account. Hence shouldn’t be included in the deficit unless the government expects that this leads to a loss.”
    *Sigh* which the promissory notes are. They are a loss. The money is gone. All of it. And the 4bn that was put into Anglo the previous year. It is gone. Lost. Not of this world. Debt that has yet to be paid over (in some cases). That is why they are not classified as investment. That is why they are classified as debt even though they have not yet been paid out.

  24. “The promissory notes ‘fix’ the insolvency by recapitalising the banks that the government already owned.”

    Yes the promissory notes are assets in the banks’ balance sheets.

    “*Sigh* which the promissory notes are. They are a loss.”

    Promissory notes are assets which pay. Its like a bond – just a different name. The money “gone” is losses already incurred by banks. That doesn’t mean the value of the promissory notes is zero.

  25. No it’s not like a bond. A bond is a loan from someone to a bank. The promissory note is a loan from the bank to the government.

    Bonds are liabilities of the banks, promissory notes are assets of the banks.

    Promissory notes are not assets of the government, they are liabilities of the government. They confer no ownership, dividend, share, nothing. They are an interest bearing liability which the government will pay over until about 2025 and get in return for the payments nothing, zero, zip.

    It is not losses that have already been incurred, it is expected future losses on liability mis-matches. While they may be recognised now, they have not yet been paid out on.

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