Tuesday, 20 April 2010

Ich bin ein Berliner

Slí Eile: Garret got it wrong on 'Hiring economic advisers would have been government's smartest investment' He wrote:
In particular, there is no evidence that any minister challenged the increasingly dangerous financial policies being pursued by minister for finance Charlie McCreevy in his budgets of 1999, 2000, and 2001. Those three budgets increased current public spending by more than one-half within that very short period of three years, at an annual rate of almost 15 per cent a year.
The evidence is otherwise. Check out the latest downloadable Eurostat data (and go to Government statistics) Taking 2000 as a starting point - total spend was 31.3% of GDP. This figure moved up, during the Bertie years, to reach 36.2% by general election time 2007. By contrast, our already socialist afflicted Berlin-inclined EU neighbours (EU15) suffered a small increase from 45.4% in 2000 to 46% in 2007 - the year before the crisis broke and unemployment started increasing.

The thing is spending tracks revenue and revenue tracks the economy along with the business cycle and different electorates and different countries have different preferences and tastes for public spending. Some folks like to spend lots on childcare, hospitals and schools from various revenues - local and national. Other folks like to spend less and boast about us (us) while leaving the private sector, business, households and individuals take on the burden (for those who can better afford of course). Its down to political economy and there are no magic solutions. As for me I am more Ich bin ein Berliner than Bostoner. By the way, Germany’s public spend went from 48.4% in 1997 to 43.7% in 2008. So, if the Germans have to bail out some time we can say that we want their level of taxes and spending in equal measure.

Not only was there no rampant and runaway public spending in the noughties contrary to established wisdom, taking account of income growth and our depleted social infrastructure, there was retrenchment. The year Ruairí Quinn left office in 1997 public spend was 36.7% and it fell to 31.3% by 2000 due to the arrival of that other socialist Bertie. Neo-liberalism was having a party in Ireland at this time and the Seanies and the Fingles were laughing all the way before any accelerated property and lending boom in the 2002-2007 period.

In a previous blog by Nat O'Connor mention was made of a 'low tax target' of 34.9% of GDP.
However, we need to distinguish between total revenue (taxes plus social insurance plus other revenues to central and local government) and total taxes. Using latest Eurostat data, the % of GDP raised in total revenue was 34.9 in 2008. The corresponding total public spend ('Total general government expenditure') was 42.0%. Of the 34.9% in total revenue about 30.8 percent points was accounted for by taxes (referred to ideologically in Government accounts as tax BURDEN!). Moving forward to 2010 the latest estimates (from the Stability Programme Update SPU issued by D/Finance in December 2009) show 35.2% for total revenue for 2010 for Ireland of which 29.4% points is tax revenue.

If Social Justice's proposal for 34.9% points 'low tax' target were implemented right now (2010) it would push total government revenue up towards 40%. Keeping at that level for next 4 years would generate a lot of extra revenue (which could be used for higher spending). However, it would suggest a level of spending coming down gradually from 46.8% of GDP in 2010 (source: SPU update) towards what I estimate would be 42.8% in 2014 per Social Justice Ireland. This would be still short of the 'John Fitzgerald' benchmark of 45% and well short of the EU average (which was 47% in 2008 for EU15 average and is probably higher in 2010) and way way short of the 'Nordic' model used in France (!), Sweden, Belgium and Denmark (all above spend of 50% of GDP in 2008).

On the other hand, it may be argued that - all going well and avoiding another financial volcano and double dip etc - a gentle increase in revenue while keeping Ireland in the 'low tax' club can raise spending on welfare and public services. However, I would not like to sell a 'low tax' solution and comfort to the poor, the unemployed and children in schools and hospitals all in one breath. I'd aim for the top and compete with those Nordics. After all they have the highest well-being, best health and most cohesive societies and levels of civic participation. Now that's where we need to compete - on inequality and quality of life!


Conor McCabe said...

As always, Garret Fitzgerald and the Irish Times get it wrong. Charlie McCreevy's policies were criticized by the Department of Finance itself back in 2000. Not that anyone noticed, of course.


Aidan R said...

A timely contribution. Do the figures change much when you swap GDP for GNP?

I have had informal debates with people who think public spending exploded post 2000 and that this was the causal factor behind our current public finance problem. When I ask for the evidence, the conversation tends to go silent.

The problem in our public finances is not an expenditure problem it is a tax problem. The overall tax take in Ireland is simply too low. It is now equivalent to Estonia.

But, arguing for an expansion of the tax base (nobody is outside the tax net in the social democratic policy regimes of Denmark, Sweden) is economically sensitive for both political parties and trade unions. You are arguing for a decrease in net disposable income and simultaneously asking the citizen to trust the state to spend the money on your behalf.

The average Irish worker (and voter) consider tax a 'burden' for good reason. Why would anyone support an increase in taxation when you have a government who dont really in public service. A government that incentivises the use of private pensions, private health, private transport etc. Any change is fiscal policy has to be coupled with a change in how the state designs its use of public money. People have to trust the government of the state to spend their hard earn cash.

The reduction in effective income tax rates has been shown to be unsustainable by the collapse in the asset-based taxes over the past few years. I personally think that whilst the higher rate of tax is too low, the primary problem in Ireland, is that income tax as a share of total taxation is too low. When I make this argument to friends and colleagues, understandably it goes down like a lead ballon.

But, any political or policy actor aiming to achieve Nordic type social services will eventually have to make this argument. It is not an easy one, money like power, when you give it someone is hard to take back. It requires a sea change in public opinion - to view public spending not as a 'welfare issue' or a burden but a collective responsibility, a 'well being' issue.

Slí Eile said...

@Aidan R Thanks. If GNP is used instead of GDP you get a % spend of about 49% in 2008 (compared to 42% on the standard GDP comparison). Yes it does make a big difference and Ireland is relatively unique (along with Luxembourg) in the extent to which GDP and GNP diverge. There is an argument for using both measures of national expenditure.
Regarding income taxes - the latest OECD data in Government at a Glance indicate that the main difference between Ireland the OECD average is in social security taxes where the take, at 13% in 2006, was half the OECD average. Income+profits tax was somewhat higher, on average, compared to OECD average but the real difference was in social security taxes. Matters have changed since 2006. However, the collapse in property taxes is only one aspect of the situation and relatively minor compare to the collapse in VAT and income taxes consequent upon the fall in employment and compounded by Government deflationary measures.

beep.sys said...

I Am Not An Economist, but ...

is an interesting contemporary paper (Autumn 2003) from DKM Economic Consultants that appears to back up Fitzgerald. According to Colm McCarthy and John Lawlor nominal gross current government expenditure was €19,738m. in 1999 and €30,225m. in 2002, an increase of 53% over 3 budgets. It seems hard to argue with Fitzgerald's claim that this rapid increase in expenditure was inflationary.

Some quotes from their conclusion:
'While as a percentage of GDP public expenditure in Ireland is indeed lower than the EU average, this is not a meaningful comparison, since GDP in Ireland is now 125% of national income, as measured by GNP.'
'Based on 2003 estimates, Ireland’s public expenditure on health as a percentage of GNP is the highest in the EU and in per capita terms it is the third highest, behind Denmark and Luxembourg. Public expenditure on education as a percentage of GNP (and per capita) is likewise above the EU average.'
'The rapid acceleration in Irish public spending over recent years has created a situation where it is no longer accurate to describe Irish public spending as low by some EU or other international standard. Ireland has caught up.'

Slí Eile said...

@beep.sys Thank you for your comments. The key to McCarthy's argument (Autumn of 2003) is the following:
"The rapid acceleration in Irish public spending over recent years has created a situation where it is no longer accurate to describe Irish public spending as low by some EU or other international standard. Ireland has caught up."
It is not legitimate, in my view, to base total spending or total revenue comparisons on GNP since all of GDP including profits of multinational companies can be taxed by Irish public authorities. Alternatively, if people insist on using GNP for comparisons of tax take as % of national income then they should deduct corporate taxes paid by MNCs. We can't have it both ways.
By the way, if GNP were used it would put the GDP spending proportion of 46.8% estimate for 2010 at 58.2% forGNP – yes 58.2%. GNP collapsed in a most spectacular way in 2009 and the gap between GNP and GDP opened to 25% in 2009 and again in 2010. I estimate that the gap between GNP and GDP, in 2010, will be at its highest ever (since data going back to 1970). GNP contracted relatively more in 2009-10 as Irish companies faced profit losses abroad and as interest payments to foreign bond holders increased with rising corporate and public debt.
Measured by GNP – which is problematic – taxes were still below EU15 average in 2008. Spend exceeded the EU15 average only in 2008 as unemployment increased. It is not clear how Ireland would compare in 2009 and 2010 on either GDP or GNP measures.

Slí Eile said...

@all I have been advised by someone with a better grasp of the German language than I have that Ich bin ein Berliner indicates that I am a doughnut! In defence, I can say that I was not the first person to make such a declaration. Furthermore, I would rather be a doughnut any day than an apologist for the status quo!