Tuesday, October 5, 2010

A High-Spend Economy?

After some analysis of the claim that Ireland is a low-tax economy we now turn to the government spend side of the equation.  Again the source of all the numbers used here is eurostat.

Per eurostat the weighted average (government) spend-to-GDP in the EU 27 member states for 2009 was 50.7%.  The equivalent figure for Ireland was lower at 48.4%.  This equates to a government expenditure level of €77.3 billion.  This is higher than than the €72.1 billion given by the Department of Finance (page 44 here) but this may because of differing definitions of what classifies as government expenditure and whether the monies used as part of the bank bailouts are included.  Here is the trend for the past decade.  The recent convergence of the series is due to the money spent on Anglo Irish Bank in 2009.

Ireland and EU Annual Spend Proportion

Anyway it would appear that Ireland is a low-spend economy and that an increase in government expenditure of about €4.2 billion would have been needed in 2009 to bring us up to the EU average.

Ireland has the 14th highest spend-to-GDP ratio in the EU.  The countries with lower levels of government expenditure are Germany (47.6%), Cyprus (46.4%), Czech Republic (46.1%), Spain (45.9%), Estonia (45.4%), Poland (44.5%), Malta (44.3%), Lithuania (43.0%), Latvia (42.9%), Luxembourg (42.4%), Slovakia (40.8%), Bulgaria (40.7%), and Romania (40.4%).

As with the tax analysis, a major issue in the Irish case is the growing divergence between our GDP and GNI figures.  For most EU countries these measures of National Income are equivalent.  As we have seen this is not the case for Ireland with GNI only 83.1% of GDP

In terms of GNI the average spend-to-GNI ratio in the EU ratio is 51.0% (again not much different from the average spend-to-GDP ratio of 50.7%).  For Ireland the spend-to-GNI ratio is 58.3%.  This is the highest level of government expenditure in the EU. Yes, by this measure Ireland has the highest rate of government expenditure in the EU.

The countries that approach the Irish level of government expenditure are Denmark (57.2%), Finland (56.0%), Sweden (55.8%), France (55.1%), and Belgium (53.8%).  As a percentage of GNI, Ireland has more government expenditure than all of these countries.  If we take the Department of Finance’s expenditure figure for 2009 of €72.1 billion (which excludes the bank bailout monies) we get a spend-to-GNI ratio of 54.3% – fifth ranked in the EU and still above the EU average of 51.0%.  Here is the spend-to-GNI ratio to Ireland for that past decade.

Ireland and EU Annual Spend GNI Proportion

For government expenditure, it would seem appropriate that Ireland should have a spend-to-GNI ratio of close to the EU average.  In my view a spend-to-GNI ratio of 50% is appropriate for Ireland.  This relates government expenditure to the income of Irish residents rather than to the measure of GDP which is inflated by the presence of foreign multinationals in Ireland.  This would bring Irish government expenditure relative to Irish income to a level comparable to that in other EU countries.  In terms of GDP this gives a spend-to-GDP ratio of 41.5%.

To satisfy this equates to a government expenditure level in 2009 of €66.3 billion.  This would mean a reduction in the 2009 expenditure level of about €11.0 billion.

The 2009 figures used in this post are available below the fold.

eurostat national income and expenditure figures

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