Low tax, low spend?

Posted on January 06, 2016 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 (Ireland) with that of other EU 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 early exchequer returns for 2015 suggest the public finances were approaching balance in 2015. An exchequer deficit of €62 million was recorded with an underlying exchequer deficit in 2015 of close to €3.4 billion.

There is a school of thought that contends Ireland is ‘different’ to other EU countries and that government revenue and government spending in Ireland 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 Ireland closer to the EU average for government revenue and 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.

The latest comparative data available from Eurostat is for 2014. Government revenue Ireland was 34.4% of GDP in 2014. Within the EU28 only Romania (33.5%) and Lithuania (34.1%) collect less revenue as a proportion of GDP. The average ratio for the EU28 (45.2%) is over 10 percentage points higher than it is in Ireland and two EU countries (Denmark and Finland) have a revenue-to-GDP ratio that is over 20 percentage points higher than in Ireland. This gap is of course smaller if we use GNP or the Fiscal Council’s hybrid-GDP measure as the baseline for Ireland’s fiscal capacity. The Euro area had an average revenue-to-GDP ratio of 46.8% in 2014.

Government spending in Ireland was somewhat higher than revenue at 38.2% (representing a deficit of 3.9% of GDP). This was below the average amount of public spending in the EU as a whole in 2014 (48.2%) and the fifth lowest ratio in the EU28. Public spending in Ireland exceeded the EU average in 2010 but this deviation can be attributed to the large fiscal costs associated with the bank bailouts. Overall the data for Ireland is consistent with that of a low tax and low spend economy by EU standards.

Posted in: Government SpendingTaxation

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