Business Budget 2017

Friday 24 February 2017

Dan O'Brien: If you are confused by the Exchequer numbers, there is ample reason

Dan O'Brien

Dan O'Brien

'Because government and official presentations of the basic data are often so confusing, it is little wonder that there is so much confusion in the public sphere.'
'Because government and official presentations of the basic data are often so confusing, it is little wonder that there is so much confusion in the public sphere.'

How do you feel about paying social insurance? About the same as you do about paying income tax I would guess. There is every reason to feel that way. PRSI comes out of your income. If you are on a salary it is taken by your employer before you ever see it.

It is, in effect, exactly the same as income tax.

Why then do government ministers who deal with the public finances and their officials talk about the tax take but routinely exclude the €12bn that they take from incomes in PRSI?

The answer is as simple as it is stupid. Social contributions don't go to the Exchequer in Merrion Street. Instead, they go into the 'social fund' that is run by the Department of Social Protection.

There was once a logic for this, as there still is in most other countries. Traditionally in Ireland (and as remains the case elsewhere) social contributions are different from income tax. The latter is among the most general form of taxation, used for all manner of things, while social insurance is supposed to be a form of, well... insurance.

If, for instance, you lose your job in most European countries the benefits you receive for a period of time are much higher than in Ireland. That is because they are linked to the amount you have paid in social insurance. It is the same with pensions.

In Ireland there is almost no difference between contributory benefits and non-contributory benefits. Currently the difference, for instance, between a contributory pension you might have paid into for over 40 years and the basic state pension which everyone is entitled to regardless of contributions, is a trifling few euro.

Social insurance in Ireland is therefore identical to an income tax for all intents and purposes. That makes it even more annoying when ministers responsible for the raising and spending of tax make speeches - but ignore PRSI revenue.

This is but one of the many infuriating aspects of the budgetary arithmetic that obscures rather than enlightens issues around taxation, public spending and the size of the State in Ireland.

Because government and official presentations of the basic data are often so confusing, it is little wonder that there is so much confusion in the public sphere.

Let me try to bring some clarity here.

Many people believe, including some usually very well-informed people, that the figures produced by the Department of Finance - called the 'Exchequer returns' - are the definitive set of government accounts. That is very understandable given the focus of government and officialdom on them. But they hugely understate the size of government in Ireland.

On the revenue side the ignoring of PRSI explains a lot of this - Exchequer tax receipts are expected to bring in €48bn this year, while social insurance receipts will raise a quarter as much again. But that is not by any means the only gap.

Revenues that are raised by local government, including business rates levied at municipal level, are also absent. So are a series of non-tax revenues, such as the profits of the Central Bank, which have been considerable in recent years, running at almost €1bn.

All told, the State expects to raise just over €72bn this year, as measured by the widest, most comprehensive and most accurate public finances number, 'general government revenue'. That is a full €24bn more than the Exchequer tax receipts so frequently cited.

(The general government figures are also the only comparable numbers, as they are compiled on a harmonised basis across the EU - which, among other things, means less scope for funny business by finance ministers.)

As the chart shows, the State will take in more this year than it has ever done before, even surpassing the bubble-era peak year of 2007.

Despite this, it will not be enough to close the deficit. That is for the rather obvious reason that there is no little pressure for more public spending.

Again, by the widest 'general government' measure, the State's total spend this year is expected to stand at €74.5bn. This is below the peaks that were reached when the massive bank rescue costs were heaped on taxpayers - but is higher than the last full year of the boom in 2007, when the spend stood at €70.7bn.

Currently, the difference between a contributory pension you might have paid into for over 40 years and the basic state pension which everyone is entitled to regardless of contributions, is a trifling few euro...'

Despite the absence of inflation over that time (the basket of consumer goods used to measure consumer prices is almost identical in 2016 as it was nine years ago), resources are much more stretched.

The most significant factor in stretching those resources has been demographics. This year's census found that the population was much bigger than previously thought.

With now almost 4.8 million people in the Republic, the population is 300,000 above the level at the time of the crash. That clearly means the public spending per person has been stretched even further than headline rates would suggest.

Another important factor in reducing the real impact of government spending on people's lives and on the domestic economy has been the very sharp increase in debt-servicing costs over the past nine years.

In 2007, interest on the national debt stood at just under €2bn. This year it will be more than three times that. With just over one in every €12 spent by the State going on debt servicing, non-interest expenditure is down by considerably more than the headline level. And as the lion's share of interest goes to non-resident foreigners, the impact on the economy more widely has also been much reduced.

With the return of net migration, rising pay demands in the public sector and general austerity fatigue, the pressure on public spending in the years to come is only going one way. On the other hand, demands for tax cuts will become at least as loud.

Squaring the circle would be difficult for a government with a commanding majority. For a minority government it will probably prove impossible. My money is on this Budget being the last produced by the 32nd Dail.

Sunday Indo Business

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