Irish economy fragile despite higher tax receipts

Ireland’s Revenue Commissioners reported a €2.28 billion uplift in tax receipts for 2011, as a consequence of receipts in respect of the universal social charge and the public sector income levy.

That ought to be encouraging news except that the exchequer deficit in 2011 was over €6 billion higher than in 2010. 

It was in 2006 when Ireland last recorded an exchequer surplus.  Government expenditure since then has been €269 billion but tax revenue in the past five years were only €186.8 billion, leaving a cumulative exchequer deficit of €82.6 billion.

The reduction in exchequer receipt is reflect in lower VAT (-€4.75 billion), lower Excise (-€1.16 billion), lower Corporation Tax (-€2.8 billion), lower Stamps (-€1.79 billion) and lower Capital Gains Tax (-€2.68 billion).

Some €233 billion of the Government expenditure was voted while a further €36 billion was in respect of non-voted expenditure which covers costs such as interest on the National Debt – which reached €119 billion last month.

During the past five years the Government has reduced spending by a total €5.45 billion but spending in four departments, Health, Social Protection, the new departments of Public Expenditure and Reform and Health & Children caused an increase in spending of €6.55 billion.

The Eurozone convergence criteria requires the exchequer deficit to be no higher than 3% of the prior year’s GDP.  If this criteria had applied since 2007, the following circumstances would have applied:

Year	Actual Deficit €billion	Deficit permitted by 3% GDP Eurozone Criteria	Overrun
2007	1,618.5	5,697	-
2008	12,713.8	5,397	7,316.8
2009	24,640.9	4,815	19,825.9
2010	18,744.2	4,677	14,067.2
2011	24,917.1	4,620	20,297.1
TOTAL	82,634.5	25,206	57,428.5

Public sector employment has been reduced from 320,387 at the end of 2008 to 302,769 in mid 2011, a cut of 5.4% after employment in the Department of Social Protection was increased by over 1,200 to oversee additional expenditure of €5.2 billion.

If Ireland is to meet the convergence criteria and continue State spending at prevailing levels it would require a GDP of the order of €830 billion, 5.3 times larger than 2011 GDP.  If that was to be achieved our GDP would equate with that of Indonesia (population 237.6 million) ahead of that of countries such as Australia, Holland and Saudi Arabia.

But if expenditure is to be trimmed to comply with the Eurozone criteria the Government will be limited to spending of the order of €37 billion, over €20 billion less than it spent last year but close enough to its 2003 expenditure.