Ich bin ein Berliner

Slí Eile: Garret got it wrong on 'Hiring economic advisers would have been government's smartest investment' He wrote:

In particular, there is no evidence that any minister challenged the increasingly dangerous financial policies being pursued by minister for finance Charlie McCreevy in his budgets of 1999, 2000, and 2001. Those three budgets increased current public spending by more than one-half within that very short period of three years, at an annual rate of almost 15 per cent a year.

The evidence is otherwise. Check out the latest downloadable Eurostat data (and go to Government statistics) Taking 2000 as a starting point - total spend was 31.3% of GDP. This figure moved up, during the Bertie years, to reach 36.2% by general election time 2007. By contrast, our already socialist afflicted Berlin-inclined EU neighbours (EU15) suffered a small increase from 45.4% in 2000 to 46% in 2007 - the year before the crisis broke and unemployment started increasing.

The thing is spending tracks revenue and revenue tracks the economy along with the business cycle and different electorates and different countries have different preferences and tastes for public spending. Some folks like to spend lots on childcare, hospitals and schools from various revenues - local and national. Other folks like to spend less and boast about us (us) while leaving the private sector, business, households and individuals take on the burden (for those who can better afford of course). Its down to political economy and there are no magic solutions. As for me I am more Ich bin ein Berliner than Bostoner. By the way, Germany’s public spend went from 48.4% in 1997 to 43.7% in 2008. So, if the Germans have to bail out some time we can say that we want their level of taxes and spending in equal measure.

Not only was there no rampant and runaway public spending in the noughties contrary to established wisdom, taking account of income growth and our depleted social infrastructure, there was retrenchment. The year Ruairí Quinn left office in 1997 public spend was 36.7% and it fell to 31.3% by 2000 due to the arrival of that other socialist Bertie. Neo-liberalism was having a party in Ireland at this time and the Seanies and the Fingles were laughing all the way before any accelerated property and lending boom in the 2002-2007 period.

In a previous blog by Nat O'Connor mention was made of a 'low tax target' of 34.9% of GDP.
However, we need to distinguish between total revenue (taxes plus social insurance plus other revenues to central and local government) and total taxes. Using latest Eurostat data, the % of GDP raised in total revenue was 34.9 in 2008. The corresponding total public spend ('Total general government expenditure') was 42.0%. Of the 34.9% in total revenue about 30.8 percent points was accounted for by taxes (referred to ideologically in Government accounts as tax BURDEN!). Moving forward to 2010 the latest estimates (from the Stability Programme Update SPU issued by D/Finance in December 2009) show 35.2% for total revenue for 2010 for Ireland of which 29.4% points is tax revenue.

If Social Justice's proposal for 34.9% points 'low tax' target were implemented right now (2010) it would push total government revenue up towards 40%. Keeping at that level for next 4 years would generate a lot of extra revenue (which could be used for higher spending). However, it would suggest a level of spending coming down gradually from 46.8% of GDP in 2010 (source: SPU update) towards what I estimate would be 42.8% in 2014 per Social Justice Ireland. This would be still short of the 'John Fitzgerald' benchmark of 45% and well short of the EU average (which was 47% in 2008 for EU15 average and is probably higher in 2010) and way way short of the 'Nordic' model used in France (!), Sweden, Belgium and Denmark (all above spend of 50% of GDP in 2008).

On the other hand, it may be argued that - all going well and avoiding another financial volcano and double dip etc - a gentle increase in revenue while keeping Ireland in the 'low tax' club can raise spending on welfare and public services. However, I would not like to sell a 'low tax' solution and comfort to the poor, the unemployed and children in schools and hospitals all in one breath. I'd aim for the top and compete with those Nordics. After all they have the highest well-being, best health and most cohesive societies and levels of civic participation. Now that's where we need to compete - on inequality and quality of life!

Posted in: Inequality • Europe • Taxation

Tagged with: incomeinequality • tax take • nordic model