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Boom in benefit payments funded by loans, not tax

POSSESSION being nine-tenths of the law, it is always exceedingly difficult for governments to confiscate monies given to its citizens in earlier times, and populist governments quake when they have to withdraw benefits.

However, an examination of some payments made since 2004 indicates that benefits have risen hugely beyond what legitimate expectation might have been -- and increases in many benefits have exceeded inflation. In 2004, the net tax yield amounted to about €35bn, the same amount as 2011. Net tax yields at the beginning of the millennium were in the €20 billions, rising to the stratospheric heights of €47bn in 2007 -- the pinnacle of the boom.

Four years later, the net tax yield of €35bn is three-quarters of what was collected for 2007 -- and there are now over 300,000 more people out of work, not paying income tax and claiming benefits of some description.

The increases in benefits are worth considering in the context of what they were in 2004 as compared with 2010, where the rate of inflation for that same period was 10.3pc.

The growth in payments far exceeded inflation, with the contributory state pension up by 37.7pc, the rate of welfare payment by 45.4pc, the qualified child payment by 77.4pc and the national fuel scheme by 122.2pc.

It is important to note that, after 2007, this financial munificence was funded by loans and not by taxes.

The country wishes to put a brake on the level of borrowing necessary to finance day-to-day expenditure, as the cost of finance is burdensome.

But the generosity of earlier years makes it politically difficult for the current administration to make cut-backs, however rational they may be.

In the past, countries and governments did not spend what they did not have. Then the concept of deficit -- a posh name for overspending -- became popular.


Last Sunday, the Taoiseach said that the current year's deficit was €16bn; that is the amount Ireland is spending in 2011 over what it takes in. It will be borrowed.

It will be rolled up with all the other borrowings of the State, which form the total borrowings upon which interest is paid.

The annual deficit borrowings have been growing since 2008 although at a lower rate more recently.

The current budgetary strategy is to cut the annual deficit so that, even when the four-year budgetary cycle is over, there will still be a small annual deficit in 2015.

The Government hopes and prays that the economy grows in the meantime to allow Ireland to repay its deficit loans, which have nothing to do with the so-called banking debts, contrary to popular misconception.

Current budgetary cuts are in the context of this strategy.

Suzanne Kelly is a barrister and tax expert

Irish Independent