Were we reckless spenders?

Tom McDonnell20/08/2010

Tom McDonnell: Tuesday’s €1.5 billion bond auction by the National Treasury Management Agency ensures that Ireland will successfully get through the year without defaulting.

One rare and related piece of good news is that Ireland has today dropped out of the top ten list of countries most likely to default (we were ninth as recently as Tuesday). The odds on us defaulting/restructuring are now just over 20 per cent. Greece, in contrast, is still considered to have a better than even chance of defaulting. Nonetheless the overall picture is still pretty grim and this brings us back to how we as a country tax and spend.

In a previous blog I looked at where Ireland prioritises its spending. The table of public spending shown below (click on it for a bigger view) compares Irish spending to EU 15 spending across the functional categories of government; for example, defence or health. Blue boxes show where Ireland spent a smaller proportion of its GDP on a particular functional category and orange boxes show where Ireland spent a higher proportion of its GDP on a particular functional category.

2007 is an interesting year because it provides a snapshot of spending just as it was just before the economic crash. In 2007, Ireland’s public spending/GDP ratio was just 79 percent of the EU15 average public spending/GDP ratio although this figure rises to 93 percent if we choose to use GNP as a better measure for Ireland (see table below). These numbers appear to indicate that Ireland’s public sector was smaller than European norms before the crash.

The Eurostat data shown below indicates that Ireland had the lowest level of public spending in the EU15.

However if we break the figures down by functional category we get a more complicated picture. Ireland (measured as public spending/GDP) spent relatively more than the EU 15 average on housing and community amenities; environmental protection; economic affairs (primarily physical infrastructure) and health. If we use GNP instead of GDP for Ireland then education spending and public order spending are also seen to have been above the EU 15 average.

The very low unemployment rate prior to the crisis had kept public spending on social protection, which is by far the largest area of public spending, very low prior to the crisis. In GDP terms social protection spending was just three fifths of the EU 15 average. This was the main driver keeping overall public spending below the EU 15 average. Our relatively mild debt burden (part of general public services) also helped in keeping our public spending at low levels.

It is self-evident in retrospect that such a low level of social protection spending could not have been maintained in perpetuity. This is because levels of social protection spending move counter to the economic cycle. We were at the peak of the cycle in 2007 (a precipice as it turned out) and therefore social protection spending was at a natural trough. The figures for 2010 will paint a very different picture.

Public spending only tells half the fiscal story. I’ll turn to the tax revenue side next week.

Posted in: EconomicsEconomicsFiscal policyTaxation

Tagged with: debttaxationCOFOGexpenditure

Dr Tom McDonnell

McDonnell, Tom

Tom McDonnell is senior economist at the NERI and is responsible for among other things, NERI's analysis of the Republic of Ireland economy including risks, trends and forecasts. He specialises in economic growth theory, the economics of innovation, the Irish and European economies, and fiscal policy. He previously worked as an economist at TASC and before that was a lecturer in economics at NUI Galway and at DCU. He has also taught at Maynooth University.

Tom obtained his PhD in economics from NUI Galway.



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