Government Accounts

The monthly Exchequer Account publications tend to get more attention than they deserve because of the frequency of their release.  Although the Exchequer Account is useful, it is a somewhat distorted view of the overall fiscal situation.  On the revenue side it excludes PRSI and Motor Tax, among others, while the expenditure side is based around the largely meaningless concept of “net expenditure”.

The Exchequer Account gives the misleading impression that the government “spends €50 billion and brings in €30 billion”.  We can get a truer, but less timely, insight into the fiscal situation from the CSO’s National Income and Expenditure Accounts which were published a few weeks ago for 2010. 

Here we focus on Table 21:  Receipts and Expenditure of Central and Local Government.  Tables 22 to 29 provide further details of the aggregate figures provided here.

First, here is government expenditure since 2006.  Item 246: Redemption of Securities and Loan Repayments is excluded from the extract reproduced below.

Grants to Enterprises includes €4,000 million to Anglo Irish Bank in 2009 and  €31,575 million of Promissory Notes issued to Anglo, INBS and EBS in 2010.  These are the only items directly related to the banking bailout in the table.  If these are excluded total expenditure was €71,737 million in 2009 and €69,947 million in 2010. 

Government expenditure in 2010, excluding the banks, was 44.8% of GDP and 54.6% of GNP.

Second, here is government revenue.  Item 236: Borrowings is excluded in this instance.

Government revenue in 2010 was 32.8% of GDP and 39.9% of GNP

Since running close to a balanced budget in 2007, expenditure has increased from €68 billion to €70 billion while revenue has fallen from €67 billion to €51 billion.

In 2010, there was an overall deficit of €18.8 billion.  This is expected to fall to around €15 billion this year.  It has been revealed that a “three-year plan” will be published in the autumn giving outline details of how this will be brought down to €5 billion by 2015.

On the expenditure side the largest items are transfer payments and public sector pay.  The capital budget has already been cut by one-half.  The deteriorations on the taxation side are well known as these are  not clouded by the archaic accounting practices used to generate the Exchequer Account.  

The “low-lying fruit” has been picked and the time for the “heavy lifting” is approaching.

87 thoughts on “Government Accounts”

  1. Thanks Seamus for another valuable contribution. The line about “taking in €30 billion and spending €50 billion” has been something that has been misleading people for a long time.

    I wrote about this here a few months ago but it bears regular repeating
    http://www.irisheconomy.ie/index.php/2011/05/01/government-revenues-and-spending/

    In relation to “On the expenditure side the largest items are transfer payments and public sector pay”, it is worth pointing out that the net cost to the state of the wages and pensions budget is substantially less than €18 billion because public sector workers pay taxes and the pension levy. By contrast, very little of the €29 billion transfer payment budget is recouped as tax revenue.

  2. (Probably too late but …) before the army of public sector critics view the above comment as an argument against public sector pay cuts, it’s anything but. I think those who believe the budgetary situation can be restored without further cuts in public sector pay are deluded.

    However, those who like to tot up the large savings that can be made from these cuts should remember that for public sector workers earning above €36,000, taxes and levies take 62% of every increased euro in pay earned. When working in reverse, this means that the net savings to the state from a particular percentage cut in public pay will be a lot less than the headline figures may suggest.

  3. There is still loads of ”low hanging fruit’ if we abandon the madness of the Croke park agreement.
    We have some of the highest paid public servants in the world. Average salaries are 50k. if this was cut by 20% to 40K (you could cut proportionately more those on higher levels to an extent where people on less than 30k could be excluded from pay cuts) you would save approx 3.6 billion, the entire ajustment required for 2012
    No cuts in NSA’s, no tax increases for the 50% who earn less than circa 25k, no increase in teacher pupil ratio, no cuts to social welfare.

    And after this our public servants would still be paid more that their nearest EU counterparts (UK, France).

    We are moving our tax and social welfare rates to normal EU levels, if we do the same with public sector pay levels we can protect the genuinly vulnerable in the country.

  4. @ Sam

    “if this was cut by 20% to 40K (you could cut proportionately more those on higher levels to an extent where people on less than 30k could be excluded from pay cuts) you would save approx 3.6 billion, the entire adjustment required for 2012”

    As I mentioned above, I recommend factoring in the lost money in tax and pension levies into those calculations. A 20% cut wouldn’t come close to getting you 3.6bn.

    Now perhaps that just means you’d favour larger public sector pay cuts than 20 percent instead of a mixture of different spending cuts and tax increases. But it’s just not true that a twenty percent cut in public sector pay would allow the entire €3.6 billion planned adjustment without any additional measures.

  5. What exactly are you saving when you cut wages and where does the new surplus flow to ?
    Is fiscal debt the economy ?
    Is it not but a metric.
    What is the core strategic objective of fiscal cutting ?
    If it is just about reducing one metric in the economy , what is the economy ?
    Are you just doing it because you can’t think of anything else / are being told what to do.
    In a classic depression would you not increase fiscal debt to pay down private debt and raise taxes on imports abeit via stealth in our euro pc world.

  6. However, those who like to tot up the large savings that can be made from these cuts should remember that for public sector workers earning above €36,000, taxes and levies take 62% of every increased euro in pay earned.

    Hiya Karl. Have you a reference on that? That seems very high. Is it including implied VAT or something?

    (If so, is there a similar “VAT loss” estimate for reducing e.g. dole by €1?)

  7. Karl Whelan makes some very good points here. Once lost taxes etc. are taken into account, you would be looking for one humdinger of a cut to public sector pay to come up with the adjustment required for 2012.

    Apart from that though, what politician is going risk strikes etc. when you can just slash the welfare budget, do a big PR exercise prior to it about the ‘lazy scrounging idle etc.’ (though we all know most of them have landed there in the past two years through no fault of their own) and probably get away with it. Irish society seems to do divisive very well: private v public sector; taxpayer v unemployed ‘scrounger’; etc. No wonder it’s so easy to manipulate us.

    Sigh.

    It will be interesting to see what drops out of the 3 year plan Mr Noonan is going to unveil in the autumn.

  8. @ Karl Whelan

    Apologies, also off topic. MarkMcSharry (FF) on Newstalk about 7.53 am mentioning that thay are open to you (and/or Morgan Kelly) by name if you can come up with a practical and fair method for debt forgiveness. They’ll bring it forward.

    Using ‘Family Home Bill’ as step 1 in Dail, and 2 find scheme ‘dealing with moral hazar’, they’d look at it.

  9. @ Seamas
    ‘The “low-lying fruit” has been picked and the time for the “heavy lifting” is approaching’

    The Dork rightly asks whether any thought at all being given to economic strategy. I doubt that he expects a response, although he would be entitled to one in any reasonable forum.

    As we can see once more from yesterday’s trade stats, the domestic economy is completely dwarfed by the activities of the US TNCs. The opaque nature of their transfer pricing practices makes it impossible to determine the associated real economy activity, but we know this for sure. There will be no net jobs increase from that enclave. IMHO, the loss of our tax haven status is only a matter of time.

    While there is a welcome increase in food exports to our traditional markets in the UK, much of that is cancelled out by increased food imports. The steady penetration of giant retailers will tilt the balance further against RoI producers, who are mainly trapped in the role of generic suppliers to UK brands. The awarding of the prison food contract to a NI firm is a further sign of the remorseless race to the bottom in which we are engaged.

    Withdrawal of AIB from the IFSC is part of a shrinking and re-domestication of our financial. Tacit credit rationing is in full swing. All the signs are that our domestic economy, which is the one most of us live in, is being relegated to junior, regional status. Not that different from Scotland or Wales, when all is said and done.

    It was a matter of pride to the first free Sate government that they managed to reduce income tax below British levels. That was heavy lifting, I suppose, as long as one disregards the resulting mass unemployment and emigration. Given that government spending, as you say, comprises more than half of GNP, how can further cutting of public expenditure fail to wreck the SME sector ? As for mortgage defaults……….

    None of which is to deny the need for major reform of our public sector.

  10. David O’D

    Thanks. Interesting that Enderlein, who is very Europe-oriented, should say:
    ‘It can’t be that one country with a ridiculously low corporate tax rate, such as Ireland, gets money from the rest of Europe’

    That’s what our friends are thinking. I rest my case on the potential contribution of TNCs.

  11. @ Dork

    Friedman cast a long shadow, not least because he provided a respectable rationale for looting. While he identified some real problems, history will not be kind to him.

  12. @Enda H

    Well above 32,800 (it was 36,000 in 2010 but bands reduced this in 2011) you pay 41% on each additional euro.

    The public sector pension levy is 6.4% on those earning 35k or more

    PRSI 4%

    USC 7% on money over 16,016

    So thats 41% + 6.4% + 4% + 7% = 58.4%

    Then I guess we get into what ever specific pension fund contirubtion you make depending on your department/occupation.

  13. Interesting topic, but at the end of the day if we are to survive as an indepependent economy and get back some control over our financial affairs surely we need to focus on two basic requirements:
    1. Bring about a substantial reduction in our debt level by removing (not rescheduling) all private bank debts ( legacy and current) from the national balance sheet.
    2.Bring our current government spending and revenue into a surplus position asap so that we can pay off genuine sovereign debt on schedule in future years.

    So far even with all the austerity and pain our strategy seems to be finding ways to hide/ignore reality and ensure we can borrow even more from the ECB,EFSF,Eurobonds etc.to pretend we can continue living beyond our means indefinitely.
    Even more depressing is that all of the corrective action is only being done at the behest of the EU/IMF with our own politicians sitting on their hands and then blaming outside forces when they have to make unpopular decisions. It will be very interesting to see how the government is going to show Irish financial solvency in the upcoming 3 year financial plan factoring in a likely zero growth assumption.
    We are wasting time waiting for salvation from Frau Merkel’s “goldenen gans” or M.Sarkozy’s “oie dore”.

  14. All low hanging fruit gone??? Indeed. The State pays the telephone rental bill and a substantial amount of the electricity bill/gas bill for everyone over seventy in the country regardless of means!!!

    But of course this could only happen in Greece…or Ireland.

    Too many county councils/town councils etc and councilllers.

  15. @Edward

    Employers PRSI is not included in somebody’s salary. In this case, if I earn 36,000 then that is exlcuding Employers PRSI (which is paid by your employer proportional to the gross wage).

  16. @Paul Quigley

    We could discuss, in a European context, ‘effective’ vs ‘nominal’ with Enderlein …. Sinn does not really recognise the context, hence substantive discussion not possible …

  17. Rob S,

    public service pension conts are 6.5%, though it’s a bit complex, as it’s not a simple 6.5% of gross wages.

    NB: I am not referring to the pension levy here.

  18. @Stephen

    Thanks for that – I think its the only grey area.

    Is it universal across the 300,000 though? Are there not different rates depending on your profession within the PS?

    Regardless, 58.4% +6.5% = 64.9% and approximates the point made by Karl in earlier in the thread.

  19. The figures that jumped out at me in reading this article were underlying government expenditure at 54.6% of GNP in 2010 against total revenues of 39.9%.

    With tax rate increases to come and hopefully a return of employment and private consumption growth, I can see the revenue ratio increasing by a few basis points by 2015. Expenditure must come down by around 10 basis points, however, if the budget is to balance.

    To achieve the latest government target of <3% deficit in 2015, I think we need to see modest decreases in government expenditure (which implies steeper cuts in voted expenditure) combined with a nominal growth rate in the region of 4% per annum as assumed in the government’s forecasts.

    If we do not get nominal economic growth of at least 3% CAGR in the 2012-2015 period then the fiscal targets become very difficult to meet. The temptation in that scenario for deeper cuts in expenditure to compensate for lower than assumed GDP growth might end up being counter-productive if they further stifle recovery.

  20. Rob S,

    yes, the 6.5% pension cont is standard across the PS, although as I say it’s not actually a straight 6.5% of the gross.

    Note that civil servants pay just 1.5%.

  21. @Paul
    Just as the post 1957 / 1987 Ireland led to successive gross distortions in the domestic albeit severely limited physical economy to fit into narrow economic indices and the will of external capital – this narrow view of the world will lead to further interesting events.
    The difference is this time the banks are not producing credit to fill the fiscal void.
    Extreme efficiency in nature leads to a lack of redundency………. leads to possible breakdown………..leads to interesting times.
    Now that the domestic economy no longer really exists what happens when foregin capital wishes to leave this relationship ? – this is but a desperate attempt by a jilted lover me thinks . one more slightly embarrassing public projection of a dysfunctional relationship.
    Hibernia is no longer the woman she was – although she never really had much respect for herself to be honest – this centuries long history of whoring around will be her undoing again.
    Forgive me I am reading Dmitry Orlovs posts again – even I think he is somewhat pessimistic – maybe we can get another 20 years out of this relationship , maybe new petro babies can drop from the Financial storks – who knows ?
    Libya is looking good for another 20 years anyhow ………….

  22. I share Vincent Browns pet peeve when people use the marginal rate, when they talk about the rate of tax they are paying.
    Its factually correct but is still very misleading.

    I have yet to hear someone say e.g. my (effective/actual)tax rate for last year was 25% but this year its gone up to 35%.

    Seamus does the USC get excluded from the exchequer account as well?
    Is it included in the Social insurance figure in the national income and expenditure account?
    It would explain why the figures have held up so well.

  23. @Carson

    You say:

    “With tax rate increases to come and hopefully a return of employment and private consumption growth, I can see the revenue ratio increasing by a few basis points by 2015. Expenditure must come down by around 10 basis points, however, if the budget is to balance.”

    I just don’t get a situation where anyone truly believes as you do that your likely to see private consumption growth in an increasing taxation environment. It seems to me more wishful thinking than hard nosed analysis.

    The truth of the matter is that in Ireland people react positively to lower taxation and tax breaks generally. It is also very clear from the analysis over the past number of years that increasing tax rates, especially on excise and indirect taxes, simply doesn’t work. The last VAT increase was a case in point the 21% to 21.5% increase to compensate for increased cross boarder trade was an unmitigated disaster and had to be reversed within a year as VAT takings collapsed.

    A recent suggestio by Philip Lane (from Donegal summer school if memory serves) in relation to bringing forward VAT increases to stimulate or give would be buyers the hurry up, to go out and spend before the VAT increase is equally as daft.

    These measures don’t work. The penny has dropped in Spain where they have recently reduced VAT in order to stimulate the housing sector to clear the overhang. To me this makes a lot more sense. Some VAT collected is better than none.

    Why Oh why we don’t seem to be able to learn from the past mistakes in relation to tax rates is very annoying. It is clear that under many tax heads increasing rates reduces yields – i.e. less tax collected. What’s so difficult to understand about this concept.

    Its not about a left or right wing political leaning its about consumerism – consumers react positively to lower prices and tend to spend more thereby increasing the velocity of cash in circulation, increasing taxes and God forbid perhaps give businesses some incentive to employ someone on the back of increased activity.

  24. Seamus Also any updates on whether the deficit has actually started on the downward trajectory from 18.8 to 15 billion? I remember one of your previous posts stating that the deficit had not started lowering.

  25. @ Eamonn,

    The data is only to 2010 so the effect of the USC is not included here. In the Exchequer Account the USC is counted under the ‘Income Tax’ heading.

    As to the deficit; this is where things get messy. The Exchequer Deficit and the Government Deficit are not the same thing. This year’s Exchequer Deficit includes a €3.1 cash payment on the Promissory Notes. This were included in full in the Government Deifict when they were issued in 2010, so to include them again would be double counting.

    My previous post highlighted that the current deficit isn’t falling. At the time it was expected that the Exchequer Deficit would be €18.2 billion. If you subtract the €3.1 billion for the Promissory Notes you get the €15 billion for the Government Deficit. I trust you are confused at this stage! Anyway the €15 billion Government Deficit is still where we are headed.

    I am not sure yet how the recent round of bank recapitalisation will feed into the accounts but it doesn’t change the underlying deficit.

  26. @Eamonn Moran

    “Seamus does the USC get excluded from the exchequer account as well?
    Is it included in the Social insurance figure in the national income and expenditure account?
    It would explain why the figures have held up so well.”

    Last year the Income Levy went to the Exchequer and the Health Levy to the Social Fund. This year the USC (which obviously replaced them both) is paid directly to the Exchequer and is included under the monthly heading of “Income Tax”

  27. @Seamus

    “I am not sure yet how the recent round of bank recapitalisation will feed into the accounts but it doesn’t change the underlying deficit.”

    That will be interesting: I believe the money went in as below at the end of July (I can’t confirm all the AIB money went int – perhaps someone else can?)

    AIB/EBS: 13.1bn

    BoI: 1bn

    IL&P 2.7bn

    A total of 16.8bn but:

    1) Technically, alot of that was spent on shares i.e. an investment.
    2) I think the figure of 16.8bn allowed us to use exisitng balances from the NPRF and Exchequer

    I am not entirely sure how Eurostat will rule here when calculating our headline deficit.

    Total of 16.8bn

  28. @ Seamus. Yep very confused.
    Don’t we have to pay a 3.1 billion promissory note payment every year?

    Rob very interesting.
    So when the Media were highlighting a 25% increase in Income tax year to date v last year, they should have also highlighted that the figure now included the health levy number which it did not in the past?

  29. @Eamonn

    Yeah the increase in the income tax is only partially due to the reduction in bands/credit from budget 2011 and has alot to do with the reclassification of the Health Levy to the Exchequer.

    In fairness to them though, they have been making that point in the DoF press releases with the figures (they also sometimes mention specifically the PAYE portion of the ‘Income Tax’ Figure in order to allow for better comparison with last year.

  30. @Rob

    As a result of the rate increase and band adjustments what is the true increase in income tax receipts as a result ex the reclassifications do you know?

  31. Business insider has a interesting graph of GDP per head – if only they used GNP………………………
    I was really struck by the bankruptcy of thinking on last nights VB show

    What exactly is Professor Toll saving when we reduce water consumption ?
    The water is not a declining resourse in Ireland , he proposes to save water by not consuming it – but where does it go ? – it leaks from the pipes.

    But will this water austerity solve the underlying problem ? – no it merely reduces consumption in one sphere so that we or to be more precise outside actors can consume in another.
    No real investment takes place.

    Will fiscal austerity solve the basic underlying problems in Ireland ? no – it merely transfers consumption from one group to another , no new investment takes place.
    Again I would have no problem reducing wages if capital investment on reducing imports were to take place here – but alas the plan is to continue with the old plan despite the fact that contact with the enemy has made the plan obsolete.
    Lets do everything to peserve the love of external capital flows mantra – despite the fact its on its death bed.
    Ireland the canary in the worlds financial mine has merely transformed itself into a absurd dead Parrot.

  32. @Yields or Bust Says

    “@Rob

    As a result of the rate increase and band adjustments what is the true increase in income tax receipts as a result ex the reclassifications do you know?”

    The don’t release the information monthly in a table form but they have referred to it in the associated information notes. I just had a look back and Apil was the last time they mentioned PAYE – I just copied and pasted the following:

    “PAYE receipts show the impact of the Budget 2011 income tax measures but as they do not include receipts from the USC, they allow for a comparable year-on-year analysis to be made. PAYE receipts in the first four months of the year amounted to €2.8 billion, a 4.9% increase on the same period in 2010.”

    http://www.finance.gov.ie/documents/exchequerstatements/2011/aprinfonote.pdf

  33. Seamus:

    Excellent presentation.

    I am still going through your figures to find the €20 billion in expenditure cuts that have already been made per Joan Burton on Newstalk this morning.

    It would be interesting to break down the ‘ Social Transfers’ item into meaningful subheadings.

    I would also point out that the reduction in VAT (the main item in expenditure taxes) is not exclusively related to the fall in economic activity. Please bear with me on this complex item.

    A significant change to VAT was introduced on July 1st 2008, most probably in an effort to bail out hydra headed monster of banks, developers and FF.
    The change means that the VAT of 13.5% that was previously due when a house or apartment or apartment complex was put into ‘first use’ (sold in layman’s terms) can now be deferred over 20 years, if the apartment etc is rented as distinct from being sold.
    The immediate impact was to provide a whopper of VAT cash relief to developers who were failing to sell apartments but chose to rent them instead.
    Despite the very severe loss to the Exchequer, the matter has received little attention. Not only is there the issue of the immediate loss to the exchequer but there is also the issue of attempting to collect this VAT over a 20 year period. Impossible I would say. Perhaps NAMA would like to let us know how the collection of this VAT is going in relation to the properties in its ‘care’.
    I am very surprised that the Dail Accounts Committe has not asked to discuss this item. The change should be reversed.
    VAT will also be important in realtion to items rated at zero vat. All consumers are benefitting from the VAT at zero relief, which is another universal relief that needs to be tackled. I don’t know how much VAT loss is involved.

  34. I wonder where the growth necessary to refloat the finances will come from. Is Ireland counting on Asia? John Authers referred to “China, nucleus of all hopes” on Saturday in the FT. Here’s a very good rebuttal from today.

    http://www.ft.com/intl/cms/s/0/493b2838-ccb7-11e0-b923-00144feabdc0.html#axzz1VkZXg5Uz

    “An additional complication now is that policymakers in the US and Europe have long stopped viewing subsidies and undervalued currencies in developing nations with benign neglect. With high unemployment and stagnant economies, they are likely to be even more vociferous in opposing such policies.
    Hence, the policies optimists hope will sustain growth in the emerging markets are unlikely to work, while the policies that would deliver growth are unlikely to be permitted by industrial countries. Growth in the developing world will most likely remain episodic and too weak to propel the world economy.”

  35. @PRGuy

    Spot on. Strongest, longest finger nails win.

    What are the socioeconomic consequences down the line.?

    This will be discussed in hoodathunkit terms after the event.

    Anyone writing a paper on this?

  36. Great post.
    So if somebody is paying 50% tax and earning say 100k then a pay cut of 20% only yields a real saving of 10k (forgive my remedial brain here).
    So – if we need 20% less “drain” from public sector pay then a cut of 40% is actually needed.
    At this rate it’s not inconceivable that pay cuts if up to 50% could be on the cards. Now some will say – good enough but that sense of wealth destruction is going to murder demand for private sector goods and services.
    As Dork says any cuts are lost out of the economy.

  37. @Eureka
    Its the buy our cars not your pints economic strategy – although to be fair these multinational profits are externalised anyhow.
    They will be coming for our grass soon.

  38. There’s something I don’t understand about the “Transfer Payments” category. It has only increased from €21.3 to €28.9 billion from 2006 to 2010–an increase of 35%–but the live register figures went from ~150,000 to ~450,000 in the same period–an increase of 200%.

    Assuming the €7.6 billion increase was entirely due to social welfare payments, that would mean that the total social welfare payments budget is only around €11.4 billion.

    So what comprises the remaining €17.5 billion in the transfer payments category?

  39. Whats the current GNP per head of pop using first quarter GNP & new census figures ?
    Anyone anyone ?

  40. Karl

    its a useful corrective that cuts do not equal savings. Spelling it out, if increasing public sector pay (above €36,000) by €1bn only costs the state €380mn, the rest being recovered in taxes and levies, then reducing it by €1bn will only save €380mn.

    But of course the absence of savings doesnt stop at the pay deductions, when our much-maligned public sector worker walks out the door she spends, which also produces tax revenues for the public sector and incomes for private sector, on which they pay taxes in turn.

    Since €1bn of public sector output requires €1.59bn in private sector inputs (I-O Tables) and the sensitivity of government finances to changes in GDP is 0.6 (DoF, probably 0.4% decreased taxation & 0.2 increased spending) then reducing government spending by €1bn will achieve ‘savings’ of just €46mn in the first year alone. Thereafter, the consequences ill continue, even if the cut is a one-off.

    Of course if the DoF estimate of the sensitivity of government finances is even a slight underestimate, then the cuts will produce a widening in the deficit. Which is of course what happened.

  41. Don’t forget that transfer payments are also usually spent (very often in their entirety in the domestic economy) and that tax revenue follows from that.

    Plan A currently might be – as suggested in a thread the other day posted by John McH – unforeseen global gdp flatness – so lets all sign up to the idea that because of circumstances beyond the state’s control, the credit lines will be in place indefinitely.

    Plan B, if that doesn’t wash, might be – foreigners forcing the state’s hand in going for the demonstration that when tried genuine “austerity” doesn’t work – so try it for a while until the international consensus moves.

  42. @Karl, MB, & Grumpy

    I would have thought that the 20-30% pay premium that public servants recieve is more likely to leak from the economy than (social transfers )payments to social welfare reciepients etc.

    I think it is save to say it is a fact that Civil servants are more likely to have savings, investments, buy foriegn cars, and go on foriegn holidays than the average social welfare recipient

  43. @Karl
    the above post was in response to this ” By contrast, very little of the €29 billion transfer payment budget is recouped as tax revenue”. One way or another I would assert more comes back to government.

  44. @Sam you may assert that more comes back to government, but that does not make it so. Salaries are subject to pension deductions, income tax, universal social contribution and PRSI. These amount to more than is likely to be recovered from a social welfare payment. The person receiving their salary may also spend money on heavily taxed things, e.g. petrol to drive to work. All cars in Ireland are foreign, but these too heavily taxed.

    Transfer payments rose more than salaries during the good times and their reduction to levels previously obtaining is also part of the solution.

  45. Cuts do not equal savings? 1b of public service salaries only costs 46m and the rest is just state paying itself? That means public service salaries are next to free! Why don’t the state then employ everyone from the dole and pay them 35k p.a. at a bargain of 36b resulting in a real cost of only 1.6b? Since we are already borrowing 18b to keep the show on the road surely the EU/IMF won’t notice the extra 1.6b and we will have full employment!

  46. @ Sam

    When I wrote “very little of the €29 billion transfer payment budget is recouped as tax revenue” I should have been clearer that I meant income tax.

    But the broader point has to be true. I can’t see how whatever hypothesised difference in spending patterns between public sector employees and welfare recipients offsets the fact that 62 percent of the cuts in pay for most public sector workers will be offset by reductions in tax.

    That said, I find people on this blog generally just believe whatever they want to believe.

  47. The most effective way of cutting the public sector pay is after tax has been deducted.
    So imagine a public sector worker has 30k after tax (this is their actual cost to the state).
    Imagine they spend 25k on essentials and 5k on discretionary spend. That 500 goes to their local restaurant, 1k goes on a family holiday, etc, etc. Now if the govt reduces that pay by even 1k the remaining 4k is not spent as it previously was. It is much more likely to be saved. So even if 1k extra is saved you move to a situation where the impact of the cut is doubled on the real economy.
    Problem is that the 1k that’s saved and the 1k the Government takes is largely dead money servicing debt etc.
    Won’t work but no other options

  48. @Karl

    You may be right that the difference in spending patterns may not make up the full difference but it would make an interesting study. 100% of the social welfare recipients income will be spent in domestic economy and generally despite objections they do not buy cars from abroad (they may buy second hand cars).

    ”That said, I find people on this blog generally just believe whatever they want to believe”

    The moral arguments for cutting public service pay ahead of social welfare payments are very strong

  49. @ Sam
    Selective application of morality is a very dangerous thing.
    Here’s how it worked. Mr B worked hard went to college, liked to help kids and became a teacher. Didn’t want to be a millionaire – just wanted to help kids.
    Mr D went into banking to become a millionaire. He blew the countries money and saddled all our kids with debt.
    Who should have the pay cut? See what I mean?

  50. @Sam
    The goverment does not obtain any revenue from tax – the revenue commissioners do not have a giant Trocaire box that they give to goverment every month – its just filed and stays put.
    Tax just subtracts units from a bank account or payslip and therefore this takes away from aggregate demand.
    Taxes function is to make the economy more effiencent – at least I cannot see any other logical function.
    Remember Goverment expenditure is dependent on the availability of paper or stored electronic digits only.
    When interest payments on goverment loans increases – it just transfers more money to the bond holders – if the bond holders are outside the country the domestic money supply decreases.
    Goverment policey essentially is the transfer of wealth to outsiders in the hope they will buy our goods and holiday here – not a very closed loop system I imagine.

  51. PS maybe there’s a few cuckoos in the nest of “outsiders”.
    Its clearly not a rational policey unless the policey has been formulated by cuckoos.

  52. Eureka,

    Mr C (that is me) is currently being royally shafted by both Mr. B and Mr. D. Add to that Mr A. who only wanted to be a government minister or the financial regulator responsible for creating a situation where Mr. B and Mr. D blew away billions.

  53. @Eureka
    ”Selective application of morality is a very dangerous thing”
    Yes I see what you mean, very selective indeed

    Spare a thought for the Mr B’s of this world that find themselves on the dole, and class sizes being cut to maintain employed Mr B’s premium

  54. @ Dom K
    Yep but whatever way you look at it applying morality isn’t useful.
    What’s depressing is how we still have no concept of ourselves as a country. We are not an island of economically independent individuals or factions – we are interdependent.

  55. @ Eureka,

    We are a country with a government which is bust and unable to finance itself from regular revenue and regular borrowing and yet this bust employer pays premium wages to its employees over and above of what other (not so bust and not bust at all) governments pay their employees. This is beyond application of morality or indeed the common sense.

  56. @ Sam
    ….but he still has to pay his exhorbitant mortgage that (you guessed it) Mr D lent him…..
    And then risk losing his home…..
    What a tangled web……

  57. @ Dom K
    I like common sense. Govt can cut – no problem with that. But has to bring in bankruptcy laws and increased taxes too. And it has to remember that there is a finite amount that can be achieved through austerity. Default will come into this at some stage

  58. Eureka,

    The lending of this ‘exorbitant mortgage’ was not solely the responsibility of Mr. D. Mr. D has a simple job of moving credit from point of creation to point of investment/spending. This credit was created by government(s) and the situation which necessitated an ‘exorbitant mortgage’ was created by a specific set of government policies designed by the benefactors of such policies in the Galway tent. Mr. D has always been a handy scapegoat since the time of Jesus Christ and his anti-lender adventure in the Temple.

  59. Eureka,

    The time for common sense was 2000-2006. Now is the time for Mr. Government and Mr. Teacher (mostly the same thing judging by composition of subsequent cabinets) to fix what they broke. I am not interested in further tax rises, in fact the savage tax rises brought about already have pushed me over the edge and towards the Terminal 2.

  60. @ Karl

    ‘That said, I find people on this blog generally just believe whatever they want to believe’

    Three cheers for the irisheconomy.ie. We’d be lost without it.

    “The results of licence are awful — but not so awful as the results of complacency, and immunity from the necessity to defend a point of view. For this reason I would promote discussions and controversies on everything under the sun, and the more controversies the better. One never knows how much illumination can come out of a royal row until one has had it.”

    Sean Keating, painter.

  61. @ Dom K
    It’s good to see where you’re coming from. I respect your political and slightly tea-party viewpoint. In fact i think in Ireland the tea-party mentality has become somewhat mainstream. Teachers did not single-handedly break the Irish economy – private sector builders, bankers and their bought politicians did.
    We won’t agree. Maybe lets just leave it at that.

  62. Its goverment bankruptcy or private bankruptcy – you can’t square this circle…… although I noticed a very slight increase in June household private sector deposits………. is this the famous corner ?

    I doubt it somehow.

  63. @ Eureka,

    I can see how tea-party mentality has become mainstream and yet the government has managed to resist this this enormous tea-party pressure and maintain 70b spending (that’s 100b minus what went into banks) in the middle of the greatest fiscal crisis ever. A country with 50%+ tax on incomes above a reasonably modest income level is far from being a tea-party paradise. Add to that all stealth taxes and the fact that these continental levels of taxation result in Latin-American level of services and you can see why my tea-party heart is cringing.

    And I don’t appreciate this assassination of viewpoint through subtle application of labels.

  64. Even on this very same thread people argue that there is a vast difference between the gross and net savings that can be achieved by public pay cuts, which is a direct result of high levels of taxation. And yet when the argument is put forward to end this taxation madness (proven not to work in the past in this very same country mismanaged into financial oblivion every two or three decades) the response is a label the application of which is typical for Irish Christian-socialist circles, which in fact are prevalent and mainstream.

  65. @ Dom K
    Look – we come from different ideological stand-points. I do not mind paying a highish rate of tax if public services are good and the country is well managed (a la Sweden). I am left wing on economic politics

    You believe that we should live in a country of low taxation and not prioritize public services. You seem to also believe that it is the public service and not hte banks that are responsible for the current mess. It is, I think, fair to say that your view point is to the right. Both are legitimate view points shared by millions across the world. There is nothing wrong in holding either.

    In every country in the world the right and left divide defines political parties – apart from Ireland. We must accept that it exists. It’s no big deal. But because we refuse to acknowledge and accept its existence we cannot move beyond it. Our approach to this crisis has been handicapped by endless squabling between both sides without either side recognizing the real bona fide legitimacy of the opposite view point.

    So we don’t need to re-hash this public sector private sector argument again. We just need to accept that different view points exist. Most important thing is to stop approaching this crisis as factions and unite for a common purpose.

    All sections of society will have to pay but judging by the post here – it is very hard to see how a deficit gap will be bridged through austerity that is not accompanied by growth. We will suffer the pain, ruin our country’s services and then end up defaulting any way.

    We need to look at alternatives to the current approach fast. (that doesn’t mean abandoning pay cuts etc – we just need to think about how we’re doing this and how we can tie it in with debt relief/forgiveness and some strategy to protect growth)

  66. @Karl

    “That said, I find people on this blog generally just believe whatever they want to believe.”

    First, I think you could shorten that as bit. Try:

    “That said, people generally just believe whatever they want to believe.”

    Its important for understanding politics and politicians’ relationships with themselves and their electorates. Don’t be fooled by students – they have a rational incentive to at least pretend to believe what you tell them.

    Second, (and you could use a slightly huffy font here if there was one)given that the discipline of economics is often taught by adherents of essentially two sets of laughably divergent belief systems and who often conduct research and write papers principally to defend those beliefs against the other side, why would you have higher expectations of “people on this blog”?

    I noticed one of your counterparts who I am fairly confident is not a person-on-this-blog this evening stating with absolute certainty that “anyone with even one ounce of understanding” would agree with what seemed to me to be a rather simplistic, partial and evasive analysis of the question of mortgage forgiveness.

    I don’t think not wanting to be bothered with opposing views is in any way unique to this site.

  67. @Eureka
    ”I do not mind paying a highish rate of tax if public services are good and the country is well managed (a la Sweden)”

    I think most people would agree with that. The problem is that is a very big if. Taxes raised are increasingly spent on maintaining pay and not services. Tax are raised & services cut in order to fund the excessive pay. This is the essence of Croke Park.

    We spend a similar % of GDP on education as the UK, they have free books, computers in schools and good faciities, we have much higher pay.

    We spend a similar % of GDP on health as the UK, they have an excellent service, free for all, and free GP’s…we have much higher pay.

    The public at large will have no problem paying taxes to fund public services if they see that public servants are acting as servants of the state instead of soley looking after their own interests.
    The Croke park agreement is a clever way by which politicians (whose salaries are benchmarked with civil servants) and civil servants can maintain their current pay premium. All the cuts now will fall on services and those recieving social transfers….i.e the most vulnerable in society.
    If you are truely left wing (instead of a public servant using that ideology as a mask to protect your own interests) and want to create a european style social democratic economy then your first priority should be to at least maintain the funding of public goods & services & social transfers instead of making them the exclusive target for cuts.

    There is nothing ‘Left wing’ about paying teachers 60k per year when 50% of population earn less than circa 25k. Then again, some animal are more equal than others.

    Politics is more about values judgments than economics. Whether or not cutting a billion from public sector pay or social transfers will yield a greater net saving (factoring in the spending patterns etc) is interesting and relevant but ultimately the moral argument to protect those in need over the elite trumps for me.

  68. @Sam “We spend a similar % of GDP on education as the UK”
    Would you care to indicate the source of this statement, or are you making it up? And when you are at it, perhaps you’d like to make a statement on the level of spending per student.

  69. The most effective way to cut the public sector pay bill is to cut public sector numbers. No private company would approach restructuring following a financial shock in the way that retrenchment in the Irish public sector has been handled. The McCarthy report on Public Sector Numbers observed:

    the numbers at middle to higher management levels in the civil service grew by some 82% in the period 1997 to 2009 at a time when civil service numbers as a whole increased by 27%.

    Instead of looking like a pyramid, the civil service looks like a pear. There are too many middle managers. In any private company these are typically the first to go (after voluntary redundancies). The organization is flattened, so that you have worker bees on the bottom, chiefs at the top, and far fewer middle managers / program managers / co-ordination roles than before. Entire groups/departments are also eliminated where overreach occured – i.e. in boom times charters tend to expand and all sorts of new activities are started. In a crunch these need to be cut back.

    There are two completely different sets of rules in Ireland – one for the private sector, and one for the public sector. Croke Park benefits most of all the middle and higher ranks that almost doubled in numbers during the boom, and whose jobs are protected no matter what. Even the reductions in pay that have occurred don’t on average bring the public sector pay levels down to private sector equivalents (public sector was 30% above at one point). Since the rise in public sector numbers was to a significant degree the result of credit-boom fuelled revenues, now that the boom has gone shouldn’t the numbers be reduced to pre-boom levels (adjusted upwards for overall population growth). Or is that too simple and obvious to be considered seriously?

  70. @Dork of Cork

    The goverment does not obtain any revenue from tax – the revenue commissioners do not have a giant Trocaire box that they give to goverment every month – its just filed and stays put.

    While I don’t claim anything more than some handwaving-knowledge of MMT, it seems to me that statements like the above, which can make sense in a country that can print its own money (e.g. USA), do not make sense in a country that cannot (e.g. Ireland). Ireland essentially uses a foreign currency and so deficits aren’t just book-keeping entries, but have a real impact.

    I guess to be more precise Ireland can’t print money for the benefit of the population at large (i.e. fiscal spending) but can and does for the benefit of bank bondholders (€51bn ELA), but my basic point remains. I think MMT as applied to a country that uses and borrows in a foreign currency and thus cannot control exchange rates, and cannot control interest rates, needs a lot of adaptation to make sense.

  71. @ Bryan G

    ‘I think MMT as applied to a country that uses and borrows in a foreign currency and thus cannot control exchange rates, and cannot control interest rates, needs a lot of adaptation to make sense’

    Yes, The steps recommended by Dork could only be carried out at EZ level, and that would require a very different orientation on the part of the ECB and the national governments. While they will probably eventually be forced into QE, it’s difficult to imagine them challenging the hegemony of the financial sector. Unless there is a European Spring. I wouldn’t bet against it if u-25 unemployment becomes endemic.

    Any grounded consideration of Ireland’s economy has to begin with our colonial and agrarian history. I do not think we had genuine monetary independence since independence. Our educated classes had been inculcated with British values, and we continued to trade in our usual Bristsh regional manner. We did not have a sufficiently diversified and industrialised economy to sustain monetary independence.

    The options we took subsequently raised our standard of living but ultimately eroded our sovereignty. If we had not entered the EC, we would never have got the CAP supports, the regional funds, or the FDI inflows, and we’d be miles behind the EZ average in GDP terms. But we would have had to have more focus on business and entreneurship, instead of the traditional property, protected professions and state employment.

    Joining the EZ opened the door to a credit casino around property. It’s hard to believe that our bankers, developers and political cronies didn’t push hard for that one. That bubble, and prior smaller bubbles, allowed us to replace much of domestic economy with public sector expenditure. No disrespect to those in the agri food sector, but the sector is dwarfed by state spending.

    I guess the Corpo Tax regime and the ECB backstop are the real pillars of our economy now, but fiscal consolidation and jobles ‘recovery’ is the only show in town. We are like the guy who has fallen half way down a cliff, except we also broke a leg.

  72. @ Sam
    I am against Croke Park. I do believe that pay needs to be cut and services maintained. I’ve always maintained this.
    I don’t know how you thought I was pro Croke Park. I think it’s appalling.
    If you want to define my political view point for me – fine -but pay attention to what’s actually being said.
    Our problem is that we are so politically insular that we just don’t get that it’s ok to have different view points. There’s a bludgeoning of opposing views until they conform to a mashed up consensus.
    We have to accept differnent points of view and stop attacking each other for holding them.

  73. Eureka,

    I hope you do notice the difference between ‘I want to pay higher taxes for better services’ and ‘I want to pay higher taxes to keep bust banks alive and overpaid public service buttressed’.

  74. @Bryan G

    Sure absolutely – but my point is – its the banks / people that hold the paper that dictate to goverment.
    Even in a Euro country the tax revenue does not flow into goverment coffers.

    I have called for the transfer of credit deposits guaranteed by goverment into the post office (at the very least everything but maybe BOI given the apparent power dynamics )
    This may stop at least some of the bleeding which is money being externalised to pay interest.
    But this would leave bank assets linked to the remaining bond capital – in a near cash market these holders must accept losses so it seems unlikely I guess – so again the ECB holds the cards unfortunetly

    But a general divorce of the state from state backed vehicles used to support the credit market would be nice.
    Locking in pseudo goverment money such as NAMA & Promissory notes to the holding up artifical credit fueled assets / paying for private losses is a disaster for the state.

    I can only really speak for myself but in the summer of 2007 I split my deposits into sections , then in 2008 ran to the post office , after the socialisation of credit losses became apparent and the breaking of contract in early 2009 I ran into the arms of Gold.
    This trajectory I suspect was not unique and a deliberate aim of the ECB in my opinion ( they need credit deposits to flow into their independent balance sheet rather then reinforcing the power of goverment at the banks expense)

  75. @ Sam,

    I think your comment…

    “There is nothing ‘Left wing’ about paying teachers 60k per year when 50% of population earn less than circa 25k. Then again, some animal are more equal than others”

    is a touch unfair. Perhaps it would have been better if you used another example.

    At least teachers are qualified with 3rd level qualifications. In addition they do carry out a very important role in society, which is giving young people a chance to achieve. Teachers actually do something very productive.

    In addition teachers are now being increasingly exposed to violence by immature teenagers, they get little or no support from the parents (who cannot believe their son / daughter did wrong), little or no support from the principal (because the Principal is out at a match), or dept of Education. In addition the Gardai want the toublesome teenagers to stay in school as it makes their life easier on the street.

    I believe teachers can now be reallocated when required to a different school up to 100km away from their home. I could be wrong but I believe they are not entitled to milage for this either.

    Irish education is facing its most severe test, the lack of discipline among youth is going to destroy education and this countrys reputation.

    Earlier this year there were a number of articles in the Independent, about young Irish people not been welcome in California due to their tendency to indulge in destructive drunken behaviour. In another recent article a question was asked why does the hospitality industry in Ireland employ foreign nationals instead of native Irish. In short, the answer was the young Native Irish are unemployable, phoning in sick on Monday, unable to turn up in a clean uniform, or follow instructions.

    And you know what Sam, nobody actually cares.

    Unless the people involved actutally admit the elephant in the room which is destroying education is “Ill Discipline” the situation will continue to deterioriate. This includes parents, politicians, Dept of Education, boards of management and society.

    After all, what you reap is what you sowed.

  76. @ Sporthog

    You raise real, serious issues. As the Dork says, it’s like the fall of Ancient Rome. Social disorder will wreck our economy and devastate the national accounts. At the moment we are still whistlnig in the dark.

    Many people do care, but not many take the time to study the dimensions of the problem. Social order is complex.

    We have a fundamental problem of national and international governance, and we are seeing a real deterioration in democracy. The mass irresponsibilty which you deplore is part and parcel of the ‘consumer society’, which in turn is the engine of the 30 year credit bubble.

    That is part of the Washington consensus, which holds that the job of governments is to facilitate plutocrats and speculators in dominating the globe. This is, believe it or not, the supposed recipe for global economic development. It is, in reality, another totalitarian lunacy.

    How can one expect the have-nots to act responsibly when the top 1% is utterly focussed on itself ? When the ‘entrepreneurs’ of society milk the bubble for all it is worth ? When the professional classes are blindly focussed on the size of their own slice ? When the unions, seeing all that, can see no good reason to back off ? When social protection is totally disconnected from social responsibility ?

    This not the Middle Ages. People will not support a social order in which they do not have a significant stake. I strongly recommend Karl Polanyi’s 1947 Great Transformation, in which he describes the limits of ‘market forces’.

  77. So if we all get to include our pension contributions to calculate our marginal tax rate, mine is now 80%… 😯 Shame there is no S1 calculator…

    Anyway, is the low-hanging fruit not the one that returns most to the economy (capital spend)? Have we not totally repeated the mistakes of the 1980s? (slashing capital spend while trying to leave current spend untouched).

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