Thursday, 25 June 2015

Do we want the fewest public services in Europe?

Cormac Staunton: One of the key indicators in TASC's analysis of economic inequality is the level of taxation and government expenditure.  We have argued that Ireland is trapped in a 'low-tax triangle' with low taxes leading to lower public service provision, leading to a higher cost of living, leading to calls for tax cuts. This is a downward spiral that ultimately exacerbates economic inequality.

Recent data confirm that there is no plan to reverse this and that Ireland will continue to have a low-tax, low public service economy. Indeed by 2019 we could end up with the lowest government expenditure in the EU.
Chart 1: Expenditure as a % of GDP in Europe (2014). Source: NERI 

The data presented here come from NERI’s Quarterly Economic Observer (table 4.3) . The data they use comes from the IMF’s Fiscal Monitor.

The first thing to note is on the revenue side. Government revenue as a percentage of GDP in Ireland is currently well below the Euro Area average (Chart 2). Interestingly, it is projected that over the coming years that government revenue will fall in Ireland (as a percentage of GDP).

Chart 2
One of the common criticisms of this analysis is that Ireland’s GDP is so unusual that we should not compare our tax revenue to GDP – we should use GNP instead. The Irish Fiscal Advisory Council in fact use a hybrid measure that comes out somewhere between GDP and GNP.

Even using these measures it is clear that government revenue in Ireland is still below the Euro Area average  - and again, is predicted to fall over the coming years (Chart 3)
Chart 3
A reduction in government revenue should of course lead to a fall in government expenditure. Looking at it as a percentage of GDP we see that this is the case (Chart 4). Expenditure will fall to just over 30% of GDP, against a Euro area average that is closer to 50%.
Chart 4
Even using GNP or the hybrid measure we are still far below the Euro Area average (Chart 5).
Chart 5
It is sometimes argued that Ireland doesn’t ‘need’ average levels of public spending because we have a young population (‘favourable demographics’) and a smaller military.

Against that of course it can be argued that a young population requires investment in early childhood and education (with long-term benefits). Ireland of course also has other quirks -including higher debt service payments than other countries.

We currently have the third lowest government revenue in EU (Chart 1). If the trend continues we are likely to end up as the absolute lowest. In turn we are going to end up with the lowest public-service provision.

The problem with this is that we should be thinking further ahead.  Our demographics are changing and we have a choice: we can either invest in our future now, or wait until we have a demographic pressure and then have to raise taxes significantly or cut vital services.

And yet we clearly have a system that is already under strain. A health service that needs investment and a significant housing crisis. A lack of adequate childcare. Huge cuts to community and voluntary groups that impact on the most vulnerable in society.

Instead of reducing our 'fiscal capacity', we could expand free GP care, provide affordable childcare, invest in our community and voluntary sector and increase our capital investment to EU averages (or even beyond!).

And this could be achieved without raising any taxes.

Instead we are predicted to have €2bn of tax cuts over the next three years.

We keep saying we have learned the lessons of the crisis. A focus on short-term tax cuts over longer term investment says otherwise.

Cormac Staunton is Policy Analyst at TASC. You can follow him on Twitter @Cormac_Staunton 

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