Ronan Lyons | Personal Website
Ronan Lyons | Personal Website

Just like that! 200,000 jobs and the Government’s magic trick

A month on and on the face of it, Budget 2012 was a bit of a Houdini-style magic trick. How could the Government possibly achieve a correction of between €3.5bn and €4bn in the public finances without changing headline rates of income tax or social welfare? In fact, how could they do it when the single biggest measure in the Budget, the increase in VAT to 23%, would just about break even, according to their own forecasts? The only thing people are really complaining about is a household charge that will at best raise just €150m, a rounding  error in the grand scheme of things – and people are only really complaining because it’s such an unfair tax.

Phantom Income, Phantom Jobs?

The problem with a magic trick, though, is ultimately it’s nothing but a bit of sleight of hand and misdirection. And that is what Budget 2012 is, both in receipts and in expenditure. Let’s look at receipts first. When it comes to government revenues, there are effectively six main headings:

  • taxes on consumption (in particular VAT and Excise),
  • taxes on income (both personal and corporate),
  • other taxes (in particular stamp duties)
  • social insurance (in particular PRSI)
  • other current receipts (that departments receive doing their day-to-day business)
  • and then some various other current and capital receipts (e.g. EU transfers, Central Bank income and even interest on our loan to Greece)

The Government has judiciously assumed that most of these are going nowhere next year: even with the higher rate of VAT, consumption tax revenues are only predicted to grow by 1%, as are revenues from other taxes. Social insurance receipts are projected to fall. And yet – out of nowhere – direct taxes are projected to grow by 7% or over €1.3bn to €18.9bn. This is being driven entirely by projections about income tax, which is expected to grow by almost 10% in 2012.

Bear in mind that tax credits were not changed, nor were the headline rates. So how would this stack up – where will this extra €1,250m in income tax come from? This would only stack up in two scenarios. The first is that everyone’s income grows by 10% next year. “Not bloody likely!”, says you, so I think we can rule it out. The second is that employment grows. How many extra jobs would we need for the Government to meet its targets?

Let’s assume that two types of job are created in equal measure: high-skill jobs, where the salary is €60,000 and more tentative new jobs for those with fewer skills or years of experience, where the pay is €30,000. Let’s also assume that the typical job is created in June (a rough way of saying that not every new job will give 12 months of taxes to the Government in 2012). This means that over the six months, the typical high-skill job will generate €7,200 in income tax and about €1,800 in USC. The other job will generate €3,000 in income tax and a further €700 in USC (all figures thanks to HookHead’s tax calculator).

So without any changes to the tax code, and barring unforeseen growth in incomes, for the Government’s figures to stack up, the economy will need to generate an extra 100,000 high-skill jobs and the same number of lower-paying jobs! Economists are often criticised for making heroic assumptions but surely we’re in the ha’penny place when it comes to this. Really does the Government really believe this is going to happen?!

Clearly, it won’t all come down to jobs growth. As last week’s controversy about older people paying their fair share of tax shows, there is some income that is not being taxed fully at the moment and doing so may generate some extra one-off and recurring revenue. But even as the year only starts, the idea that even a hundred thousand new jobs might be created this year seems far-flung. And without that and without any other measures to boost income in any substantial way, it seems pretty clear that the Government’s revenues are going to fall next year, not rise.

Spending: the usual suspects

There is any number of ways of divvying up how the Government spends money. Two key distinctions to understand are current vs. capital (capital leaves an asset, current does not) and voted versus non-voted (non-voted is effectively done outside the Budget, i.e. no element of choice for the Government of the day). My preferred classification has eight main headings:

  • Social welfare
  • Health (and children)
  • Education (and skills)
  • All other current expenditure
  • All capital expenditure
  • Servicing the national debt
  • Bank recapitalisation
  • Other “non-voted” expenditure (both current and capital)

As the graph below shows, almost three quarters of all expenditure in 2012 will be current: €52bn out of €71bn. (Quick note for those interested in reading through the budget.gov.ie 2012 reports themselves: always work in gross figures even though the Government insists on working in net figures!) The remainder is made up of €4.4bn in capital spending and €15bn in non-voted expenditure, which in 2012 includes €7.5bn on servicing the national debt and €4.4bn on bank recapitalisation.

Government spending 2012, by major area

The Government of the day has no say in non-voted expenditure (at least not without major fuss such as international defaults), so we can set that aside. And as I’ve pointed out before, there really is no more scope for cutting the capital budget. More importantly than that, provided capital spending is done according to proper cost-benefit analysis, deficits due to capital spending do not matter – the deficit that matters is the one on current spending (including national debt repayments).

So when it comes to closing the deficit, we need to get the €66.8bn in non-capital expenditure back down into line revenues of just €51.2bn. Realistically, if we ignore the bank recapitalisation as finite deposit insurance that is added to the national debt, this is about closing to zero over the next five years the gap between current spending of €62.3bn next year and receipts of €51.2bn.

To give you an idea of the scale of the challenge, it is expected that gross expenditure by the Government will be €1.2bn lower in 2012 than what was budgeted for 2011. To give you an idea of the strategy so far, the pie-chart below shows you which of the four areas of expenditure has contributed to these savings. The share of expenditure is shown in brackets in the chart’s legend.

Proportion of 2011 savings and 2012 cuts by area (area's share of 2012 expenditure in brackets)

All current expenditure outside the areas of health, education and social welfare constitutes about one sixth of all spending but has made up almost two thirds of the cuts. Clearly, this can’t go on. You could scrap every single one of these departments, from Taoiseach’s right down to Arts & Heritage and you still wouldn’t have cut current spending by enough to balance the books.

So if the country is to avoid bankruptcy, it needs to face up to the harsh reality: spending on the poor (social welfare), the young (education) and the old (health) will have to be reformed. One giant step in that direction would be to make all income from any source – including jobseekers allowance, children’s benefit or the statutory pension – should be taxable. Ironically, given the discussion above, doing this would actually significantly boost income tax receipts, perhaps not by the equivalent of 200,000 news jobs – but it would make sure that those who earn enough anyway pay their fair way. And perhaps even more importantly than that, there would be no welfare trap.

 

  • Eamonn Moran ,

    Excellent Article Ronan. It puts a bit more meat on the assertions made by Seamus Coffee on Irisheconomy.ie and An Saoi from the Tasc website. From An Saoi. “Budget papers expected the 2012 yield to increase by €1,202M (8.7%) over the 2011 outturn and looks well nigh impossible. This surely will be clear by the end of March or April, leaving a mini-Budget inevitable.”
    I imagine you would agree and that the cuts (I prefer the word to reforms) will have to come from Social welfare, Health and Education (Croke park revisited). My guess is that even with a mini budget we are looking at 22 billion deficit for 2012. Its projected at 18 but I am adding 2 billion more for extra bank recaps and 2 for a mixture of further shrinkage and overestimation of effectiveness in this years measures. It gives me no pleasure but I think it is time for more economists to face up to the reality of the “D” word happening to Ireland.
    Without the bank debt we had a small but real chance, with it, and its been firmly attached to the sovereign at this stage, we are sunk.

    • otto ,

      I’ll say it again: a tax on capital gains on the sale of the main residence would bring in a lot of money, all drawn from purchasers pre Celtic Tiger, be easy to collect (the money is there when the transfer takes place), and would not damage work incentives. Finance ministry take note.

      • otto ,

        BTW, have you asked the Finance Ministry to comment on the view that their projections imply that income tax take would rise by 10% in 2012? Do they agree and how do they justify it?

        • Diarmuid ,

          Ronan
          The last pie chart looks wrong. Or at least the figures in the legend don’t correspond to the chart itself

          • Unemployed Person ,

            200,000 jobs in 2012 eh? It will be like all my birthdays have come at once 🙂

            I strongly suspect that a 2,000 gain over the year would be a result the way things are panning out.

            I see the girls in La Senza at Liffey Valley are occupying the shop tonight as they don’t believe they will be paid their wages. KPMG refused to comment as they were too busy typing up their invoice at the time.

            • Niall ,

              Ronan, Table 1.4 of the Revenue’s Comprehensive Expenditure Review provides some of the answers. http://www.revenue.ie/en/about/publications/comprehensive-expenditure-review.pdf/. However I personally think the targets are impossible.

              The additional month of the USC and other tax changes are budgeted to bring in €500M. Again I think this is overestimated.

              Income tax for December fell below the Government’s estimate made as part of the Budget process by €32M.

              The emphasis in the Revenue document and this last figure seems to suggest that there is a lot of unpaid or late paid taxes out there. This is a direct effect of the inability of many employers to fund cashflow as access to credit is reduced.

              Even a minor improvement in access to short-term funding could dramatically improve the tax position.

              Looking at the January tax figures, the 2012 total would need to be over €3,700M up from Jan 2011 (€3,131M) and Jan 2010 (€3,074M)if the Government is to be anywhere close to target. They have the delayed CT payment of €261M received in the post Xmas electronic post with the USC and last year’s tax changes should add around €350M. My own guess is it will be less than €3,400M leaving the April mini budget “inevitable”.

              • Roger ,

                Ronan wrote:
                “This would only stack up in two scenarios. The first is that everyone’s income grows by 10% next year.”

                We don’t have a flat tax in Ireland, so it’s not necessary for everyone’s income rises by 10% for income tax to rise by 10%. No tax is paid on the first part of a person’s income, the lower rate applies to the next part, and it is only the higher part that attracts tax at the higher rate. An increase of just a few percent in an “average” person’s income might easily result in paying 10% more tax.

                Also, most income tax is paid by a relatively small group of people who pay a lot of tax at the higher rate. If these people’s income were to rise by 10% it might be enough to increase the overall tax take by 10%. In other words, increasing inequality might lead to a higher tax take, because the poor don’t pay much tax.

                I’m not saying it’s going to happen. Just that you don’t need a 10% rise in general incomes to increase income tax take by 10%.

                • Niall ,

                  Roger, Your basic point is well made. Many of the recently announced jobs are in the higher paid ICT sectors, while this might not apply to the jobs lost. However the decline in Public Service numbers will have a particularly heavy loss as those leaving and not being replaced are mainly in senior positions and/or higher paid technical professional posts. Also many people who have an income below the tax threshold.

                  I would expect the Income Tax figures to come in far below the €15,000 target. Roll on mini-budget!

                  • Seamus Coffey ,

                    Hi Ronan,

                    A €1,165 million increase in Income Tax receipts is large but is it not quite as heroic as it might appear.

                    A lot of the tax collected in 2011 was based on 2010 income and tax law (e.g. self-employed, director, rent and other incomes). This year’s budget has no Income Tax changes but the December 2010 budget did (cuts in credits, bands and the introduction of the USC). Those in the above categories will not pay at these higher rates until they declare their 2011 income sometime before the November tax deadline.

                    In December 2010 it was estimated that this “carryover” effect would yield about €600 million and this was included in the €3,800 million adjustment in this year’s budget. It is hard to tell what the actual outturn will be. Income Tax came in 2.3% behind target in 2011 but PRSI was 5.3% ahead of target so it’s hard to know what will happen to a carryover measure this year.

                    I looked at the table referred to by Niall above and it does list about €500 million of revenue raising opportunities, but apart from a minor change to the USC yielding €50 million it is not clear what taxes the measures would affect.

                    The pensions’ tax debacle this week looks like it could yield around €75 million of additional tax. It could be that the revenue raising opportunities by the Revenue could yield an additional €200 million of Income Tax.

                    Between these and the carryover measures around €800 million (and maybe more) of forecast increase in Income Tax can be explained.

                    Even with this I agree with the overall point that the budgetary targets are unlikely to be met and the lack of resolve to tackle the current deficit either through tax increases or expenditure cuts.

                    • Brian Sammon ,

                      Hi Ronan,

                      Excellent post, agree that significant public sector reforms are vital. Perhaps the real trick might be to start looking at how the various activities of government are being performed (cost recovery and an emphasis on tech focussed processes and financial modelling) if efficiencies won’t be addressed with a Croke Park 2.0.
                      Also, how would you mark this Noonan Budget 2012 versus Lenihan Budget 2011 – http://www.ronanlyons.com/2010/12/08/dude-wheres-my-six-billion-perspective-on-budget-2011

                      Hope to read many more excellent posts in 2012.

                      B

                      • Niall ,

                        Seamus, In relation to the “carry forward”, there is only one month’s PAYE returns (January 2012) which will be influenced i.e. taxes paid in January 2011 referred to December 2010 and thus January 2012 will be the “twelfth month of the USC. I would suggest that the real level of the carry forward is no more than €300M (€250M USC & €50M other changes).

                        The real reflection of the state of income tax yield was the December tax figure I mentioned above.

                        An examination of the income tax payments in Oct/Nov 2011 suggests that there is precious little extra in yield from the self employed. Indeed taking into account the USC, income levels must have fallen quite substantially. The position for 2012 will surely be equally dire.

                        On the Revenue pursuit of the our pensioner tax defrauders, Ms Feehily mentioned yesterday a figure of over €300M taxable but not included in the Revenue calculations. Assuming one third is liable at the higher rate and the balance at 20% would assume a liability in the region of €80M. She came up with a net figure of €55M ish after additional claims for credits and deductions.

                        My own feeling is that there is a lot more to follow about the pensioners. For example there were a large number of pensioners claiming the half carer payment. Has this been included in the figures given to the Revenue? It appears not from the discussions yesterday.

                        Also you have huge numbers of pensioners resident in Ireland receiving Social Security pensions from abroad, in particular from the US & UK. These pensions are taxable in Ireland and many are unlikely to be known to the Revenue.

                        The yield from a concerted examination of the affairs of pensioners could provide a substantial windfall to the Revenue.

                        The loss of a large number of well paid jobs in the Public Sector and in financial services industry will hit the PAYE yield

                        • Seamus Coffey ,

                          @ Niall,

                          An examination into the Oct/Nov 2011 tax receipts can only give a partial insight into what the self-employed earned in 2010. It is only this Oct/Nov that their 2011 earnings will be taken into taxed (and at higher rates).

                          It is impossible to say what will happen but a large aggregate earnings drop from 2010 to 2011 is unlikely. With higher tax rates to be applied to 2011 income I think it is clear that more revenue will be collected from the 2011 income. This will be collected this year.

                          • Niall ,

                            @ Seamus The payment of tax made in October/November was the preliminary tax for 2011, which must be at least 90% of the year’s liability. If anything many self employed may have overpaid the tax, USC & PRSI due because their income will not reach the expected levels. People are likely to overpay slightly to avoid getting caught for interest. http://www.revenue.ie/en/tax/it/leaflets/it10.html#section4

                            There is also an issue in relation to the self employed that most of the high earners of course are in fact no more than agents for the State. Rates paid to doctors and barristers for example have been cut substantially. The need for a top up over PSWT is consequently a lot less.

                            I would not be expecting any additional tax due for 2011 from the self employed as I imagine overpayments will considerably exceed those who need to make a further remitance to balance their liabilities.

                            • Martin Neary ,

                              An excellent analysis. But the books will not be balanced until we cut Public Pay, Pensions and Welfare by at least 30% and Ministerial and TD salaries by at least 50%. And eliminate the obscene contracts being awarded to RTE commentators and entertainers. The Croke Park agreement is not the problem; the inane politicians who have lacked the political courage to scrap it are the problem.

                              • tadghoneill119 ,

                                The stupid politicians are unwittingly leaving a new generation with a dire choice. Leave the country OR Rebel. This is going bad fast.

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