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Government spending and revenue in the Republic of Ireland

Posted on February 26, 2015 by Tom McDonnell

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The NERI’s Quarterly Economic Facts contains a range of indicators on the public finances. One of these indicators compares levels of government revenue and public spending in the Republic of Ireland with that of other European Union economies. The basic method of comparison is to measure total government revenue and total public spending as percentages of GDP. Total general government revenue is largely obtained from taxes and social security contributions but also includes other receipts of public authorities. The largest items of public spending by function are social protection measures (mainly social transfers), followed by spending on health and then spending on education.

The latest comparative data available from Eurostat is for 2013 and can be found here. Government revenue in the Republic was 34.8% of GDP in 2013. Within the EU28 only Romania and Lithuania collect less revenue as a proportion of GDP. The average for the EU (45.3%) is over 10 percentage points higher than in the Republic and two countries (Denmark and Finland) have a revenue-to-GDP ratio that is over 20 percentage points higher than in the Republic. 

Government spending in the Republic was somewhat higher than revenue at 40.5% (representing a deficit of 5.7% of GDP). This was less than the average amount of public spending in the EU as a whole in 2013 (48.5%). Public spending in the Republic dramatically exceeded the EU average in 2010 (see the Chart shown) but this is attributable to the large fiscal costs associated with the bank bailout.

There is a school of thought that contends the Republic is somehow ‘different’ to other EU countries and that government revenue and government spending  in the Republic should be measured as proportions of GNP rather than GDP, at least when international comparisons are being made. The reason given is that a significant portion of Ireland’s GDP is repatriated out of the country by multinationals in the form of profits and that GNP is therefore better for measuring the capacity of households to meet their tax burdens/contributions.

Using GNP does bring the Republic closer to the EU average for government revenue and government spending. However, using GNP instead of GDP as a measure of the fiscal capacity of taxpayers brings its own problems. GDP measures all income generated in Ireland, and all of this income is theoretically available to be taxed by the Irish government. Profits intended for repatriation are not immune to taxation. Therefore if we are to use GNP instead of GDP as the benchmark for international comparison we ought to also disregard all corporate tax revenue from repatriated profits which appears as part of GDP but not as part of GNP.

Overall the data for the Republic is consistent with that of a low tax and low spend economy by EU standards

Posted in: Government SpendingMacroeconomicsTaxation

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