Ronan Lyons | Personal Website
Ronan Lyons | Personal Website

Tax increases or spending cuts: is Ireland’s government too big?

In the last 24 hours, the pace of pre-Budget submissions seems to have gone up a notch. And, if things were confusing for the average citizen before, they surely must be now. For example, in its advice to the Government for its Budget, ISME – which is one of two umbrella groups representing small business – said that the focus must be on public sector expenditure and that the economy cannot stomach more tax hikes.

Meanwhile, CIT’s Tom O’Connor has given the government the exact opposite advice, saying that government policy focusing on public expenditure cuts – and not tax increases – is “doomed to failure”. He even writes off the entire Bord Snip Nua in a sentence, saying that “four billion worth of cuts will impact very little on a deficit of 22 billion.”

So, who’s telling the truth? One way of sorting this out is to look at the size of the Government in the economy. If Ireland’s government is small, relative to our EU peers, for example, perhaps that’s a signal that we have plenty of scope to expand our government and just reorganise our taxes and our economy to deal with it. On the other hand, if we’re already spending a lot on our Government, particularly when you bear in mind the smaller range of public services in the economy compared to, say, France or Sweden, then maybe taxes are not the solution.

The chart below shows how much the Government made up of each economy across Western Europe in 2008 (using GNP as a measure of the size of the domestic economy). Ireland 2008 is in brown, while the European average (across the 20 or so economies shown) is in blue. As you can see, in 2008, Ireland’s government was larger than the EU average.

Government as a proportion of the economy, 2008
Government as a proportion of the economy, 2008

Given the economic upheavals we’ve witnessed in the last 18 months, particularly the “downward readjustment” in Ireland’s economic size, I’ve also included Ireland’s 2009 figure. The shocker, though, is that in 2009 it is likely that the Irish government will make up a larger proportion of its domestic economy – almost 55%, based on current estimates of 2009 GDP and government expenditure – than any other economy in Europe. It’s worth pointing out at this point that pay, in its various forms, makes up almost two thirds – not one third, as is widely quoted – of public expenditure. We’ve already had an enormous fiscal stimulus – we just did it during the height of the boom years.

(It’s also worth acknowledging, before comments open, that there is at least some element of apples and oranges, as the 2009 figures for most countries will be higher than 2008, due to fiscal stimulus and economic contraction. Nonetheless, Ireland’s economic adjustment of the countries shown will be easily the largest, twice the size of the typical contraction. And if  you take 2008 as a broad range of countries in a vaguely normal year, the comparison is still instructive.)

I’ll leave it up to the reader to evaluate whether, for all our spending, we are getting good value for money relative to countries such as Denmark or France.

  • Gavin ,

    Very interesting. Try arguing this point with Jack O Connor. Or alternatively you could just bash your head off a pebble dash wall. Both will have equal result.

    • fiscalstudent ,

      ” €4bn worth of cuts will impact very little on a deficit of €22bn” ??

      I think it is obvious that €4bn worth of cuts would make an impact, especially as it has been suggested that another €4bn will be cut again next year.

      If the government is to spend money it should be in the form of capital expenditure.

      *I think Tom O’Connor is a lecturer at CIT not UCC

      • Ronan Lyons ,

        Thanks FS, I’ve fixed Tom’s credentials.

        • CorkBoy ,

          Ireland rapidly increased it’s public sector annual cost during the boom years, through benchmarking, additional hires, increments and expanding service budgets.
          This was always going to end in tears – and so here we are.

          I believe that we would still have had this serious difficulty ticking away in the background even if the boom, albeit at a slower rate, had continued or fizzled out softly. We just would have encountered this squeeze a few more years down the line.
          The spectacular boom collapse has just made the squeeze all the more crippling for the state – and a lot more immediate.

          In recent years funding the public service on the back of the boom has been a lot like buying a large house with a large mortgage on the back of a series of big wins on the horses. The elation clouds your judgement.
          The wins might pay the mortgage for the first
          few years, but you won’t win all the time. Or as frequently as you did during your purple patch. And the mortgage is going to need it’s payment every month, every year for the next 30 years… regardless.

          The public sector unions want Ireland to keep paying the current mortgage… The construction industry wants us to go back to betting on the horses…

          We need to move to a smaller house?

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            • Paul Hunter ,

              We really need strong leadership around about now – someone who can take on the public sector and finally turn it into a lean, cost-effective and efficient operation. There are too many of these outdated work practices, too little flexibility, too much administration. If an entrepreneur was hired to run the public service and run it like a business, I reckon we could halve the cost of it and probably increase it’s productivity. But the big question is……is the monster too big to control? And more importantly, which one of our political leaders has the guts to do it?

              • john ,

                Those are incredible statistics for what is supposed to be a politically rightish leaning state

                • Mack ,

                  Hi Ronan,

                  This post is causing some debate on . Michael Burke has pointed out that year-to-date government spending (to October 2009) is €51bn.

                  This report by Goodbody’s, which concurs with your analysis, estimates government spending for the year will be €73bn.


                  The figure seems to be derived from the McCarthy report –


                  Table 1.1 Projected Government Finances 2009 (as per Supplementary Budget April 2009)

                  Have you any idea of why the discrepency exists between McCarthy’s estimates and spending reported by the department of finance here?


                  It’s difficult to see how both could be right at this stage?

                  Being discussed here :-


                  • Ronan Lyons ,

                    Hi Mack, thanks for pointing that out to me. There’s no mystery re where my figures came from. For cross-country comparability, you can’t use national sources, IMO, you have to use something like the EU or the OECD, to make sure you’re comparing apples with apples. My figures came from Eurostat:
                    And actually came from a version of the table when Ireland’s Gov-GDP ratio was projected to be 1% lower than currently (presumably these tables get updated every month or two). Knowing the GNP-GDP gap in 2008, I then adjusted for GNP and, knowing projected growth rates of Government expenditure (+2.7%) and of GNP (-9%) this year, was able to calculate a figure for the Gov-GNP ratio in 2009.
                    I can see why people might want to argue with the numbers, but until our Government (through the CSO) alerts Eurostat otherwise, this is the best cross-country comparison that I know of.

                    Thanks again for giving the opportunity to clarify,


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