Wednesday 13 December 2017

Colm McCarthy: Government spending is just too high for us to escape this rut any time soon

Raising funds has become a struggle as cutting social welfare and upping income tax rates are ruled out

Ireland's efforts to get the budget deficit under control are into their fifth year, having started with mid-year expenditure cuts way back in July 2008. There have been tax increases in every Budget since, as well as cuts in both current and capital spending. But the deficit remains stubbornly high.

The underlying deficit (stripping out once-off costs of bank rescue) peaked at 11.5 per cent of GDP in 2009. In the current year it will be about 8.5 per cent, a small reduction and a meagre return for the enormous fiscal effort of recent years.

The reason why extensive cuts and tax increases have failed to cut the deficit more rapidly is straightforward: the pace of economic contraction in Ireland has been unprecedented. Over 300,000 jobs have been lost and gross national income has fallen about 20 per cent in money terms since the peak year of 2007. Even with increased tax rates under many headings, government current revenue last year had fallen by the enormous sum of €12bn from the peak 2007 level. The bubble-era tax bonanza through stamp duty, VAT on house sales and capital gains tax evaporated and routine revenues from PRSI, income tax and the 'old reliables' weakened as employment and consumer spending collapsed.

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