Friday, 24 May 2013

Ireland's Secret Deficit

Nat O'Connor: Reports about the deficit in the public finances are not as clear as they could be. For example, The Irish Times (2nd May) reports that the deficit is now predicted to be 7.5 per cent of GDP rather than 7.3 per cent. But they don't give us the figure for Ireland's GDP. Arguably, only a small number of readers are likely to look up the figures for GDP and dig out a calculator to work out what the deficit is in money terms.

The amount in billions matters, because we can only have a meaningful conversation about things like the €500 million to be raised in property tax if it can be compared against the deficit. The focus on percentage of GDP is spurred on by Ireland's annual EU targets to reduce the deficit towards 3 per cent of GDP. But a much wider public conversation about tax and spending is needed, way beyond that narrow target.

GDP was €160 billion in 2012 (CSO, March 2013 preliminary figure). So 7.5 per cent of €160 billion would be €12 billion. If GDP grows 1 per cent in 2013, it will become €161.6 billion and the 7.5 per cent deficit will be €12.1 billion.

But calculating the deficit as a percentage of national economic output doesn't really help explain where the deficit is really coming from. What part is the gap between public spending and tax revenue? And what part is due to the interest payments on the national debt?

The Department of Finance provides monthly updates on net spending and on revenue (the Exchequer Returns). Here are end-April's figures for spending and revenue.

We can see from the end-April spending figures that the State has spent €13.97 billion against a predicted spend of €14.23 billion; so we are pretty much on target. We also see from the same document that the State plans on spending a total of €43.4 billion in 2013, of which €40.3 billion is current spending and €3.1 is capital spending (i.e. one-off spending on infrastructure, etc.).

As ever, the big three spending areas (in net current spending) are Social Protection (€13.1 billion), Health (€12.2 billion) and Education (€7.5 billion). These three total €32.8 billion, or 81 per cent of all net current spending.

On the revenue side, we can see that (as of end-April), tax receipts are pretty much on target at €10.945 billion. However, this document does not give us the estimate of how much tax will be raised in 2013 in total. We find this in the website on page 12, Table 6 of the Budget 2013 - Economic and Fiscal Outlook. According to this table, the 2013 target is for €37.95 billion in tax.

Of course, the eventual tax take in 2013 will very much depend on whether or not the economy grows. And estimates for GDP growth vary with different organisations offering different predictions.

Nonetheless, if we end up spending €43.4 billion and our tax take is €37.95 billion, this gives us a deficit of €5.45 billion, which is considerably less than the €12.1 billion suggested above (when we simply take a percentage of GDP). So what are we missing in this calculation?

Off to a third website ( to view the Revised Estimates for Public Services 2013 (published in April 2013). Ireland is unusual in the developed world as we publish the detailed spending plans after the Dáil has voted on the budget, not before! Anyway, this document confirms the plan for net spending of €43.4 billion (see Table, page 27 in the PDF. And no, the document does not have page numbers for some reason).

However, we can find the cost of the national debt on a fourth website (, where the national debt interest cost €5.68 billion in 2012. If it costs something similar in 2013, added to our €5.45 billion gap between tax and spending, that could come to around €11.1 billion - closer to the above €12 billion estimate. But is this right?

We can look at a fifth website ( to see if the Ministers for Finance or Public Expenditure and Reform have given an update on the deficit recently. Lo and behold, on 21st May the Minister for Finance predicted a deficit of 7.4 per cent of GDP this year. So we are back to where we started with The Irish Times.

But we can at last find some clarity in the Maastrict Returns Information Note of 22 April 2013. We are obliged to submit these returns twice a year to Eurostat. Here we can see (Table A, page 1) that the General Government Balance for 2013 is set to be €12.575 billion in deficit. On Table 2 (page 2), the underlying balance is given as €12.5 billion or 7.4 per cent of GDP, so we finally find a figure that corresponds with what the Minister for Finance was saying in the Dáil.

Having found this source at last, I could of course simply delete most of this post. But the point I want to make is that the Government is failing to clearly present these basic and very important facts for public understanding of the country's economic situation. At a time when people are suffering, it does not help to have the basic facts about public spending shrouded in mystery and coded language.

Ireland has just sent a letter of intent to join the international Open Government Partnership (OGP). The growing alliance of countries is committed to strengthening democracy by slowly and surely making open and transparent government into something real and useful for citizens.

One of the four minimum eligibility criteria for any State joining the OGP is Fiscal Transparency: "the timely publication of essential budget documents". The OGP currently measures this by reference to the international Open Budget Survey, but Ireland is not yet included.

It is vital for the democratic legitimacy of measures to balance the State's finances, that this information be clearly and simply presented.

To that end: in 2013 Ireland plans to raise €37.95 billion in tax and spend €43.4 billion, the vast bulk of which will (rightly) be spent on social protection, health and education. Even if we had no national debt (and no banking debt) we still have a shortfall of €5.45 billion. Hence, if we don't want to reduce public spending by another 12.5 per cent (one eighth!) than we absolutely need to raise more taxation to pay for public services. In adition, we do have an enormous national debt (including banking debt). The cost of paying interest on this adds a further €7.05 billion to the decifict, for a total of €12.5 billion.

This is the kind of clarity we need around facts, so that we can then have an open discussion about policy choices.

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