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.
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.