Armchair Economics

I heard recently how a highly respected (non executive) Board member of one of our enterprise agencies notes that the answer to every suggestion she makes is: “well,  nice idea,  but we have no money”.

While I’m sure it is of course true,  I thought it might be interesting to do a little armchair analysis to confirm.

A reminder that I’m not an esteemed economist,   just a mere engineer:  so my “back of the envelope” scribbles in this posting may be inaccurate.  You may well wish to check the numbers yourself and post me a correction..

I looked at the Department of Finance’s “Ireland – Stability Programme Update”,  published by them in December after the recent budget.    Table 11 of their document shows a set of figures for 2008 and projected through to 2014.   Our tax take – the income earned by the Government – was 35% of our GDP in 2008.  In 2009,  our economy severely faltered and so of course did our tax take. Both fell in proportion:  our tax take was 34% last year (ie similar to the 35% of the previous year).   The Department’s predictions show it hovering around 35%-37% for the next five years to 2014.

Our expenditure – the money spent by the Government on health, education, social welfare, roads, etc, etc, etc – was 42% of our GDP in 2008.   Last year it rose to 46% (remember:  meanwhile our tax income fell in proportion to the drop in GDP…).  Their predictions show our expenditure rising to 47% this year,  before falling back to 40% by 2014.

Note that the expenditure projections (47% down to 40%) are ahead of the tax income projections (in the range of 35%-37%) for next five years. They thus predict that we will spend more than we earn,  which of course means even more borrowing from international investors..

Our borrowing in 2008 was 7% of GDP to fund that particular year alone.  To fund 2009,  we had to borrow a further 12% of GDP.   To fund this year,  the Department expects we need to borrow a further 12% of GDP.   But by 2014,  we will only be borrowing 3% of our GDP to fund that particular year.   In each of these years we are thus expected to add further and further to our national debt..

How much does it cost us to pay the interest on our rising national debt ?   In 2008,  according to the Department of Finance’s document,   it cost 1% of our GDP (that is, €1,879,000,000).  Last year it 2% of our GDP,  and this year the Department expects it to cost 3% of our GDP.   They expect it to rise to 4% of our GDP for both 2013 and 2014.

What about the cost of our unemployment – 437,000 people at the moment ?  The cost of all social payments – including unemployment benefits – was 14% of our GDP in 2008 (€25,181,000,000).   Last year it was 16% of our GDP.   They project it rising to 18% this year,  before falling back to 16% by 2014.

Here is a summary of all these figures (as a percentage of GDP):

As I looked at these numbers,  I thought it might be interesting to “normalise” the figures based on tax revenue.   That is,  for every 100 euros raised in tax,  how much is going on interest payments on our national debt,  and how much on social welfare payments – and how much is left over to invest in the rest of the economy and to run Ireland ?   Or,  equivalently,  if tax revenue is fixed at 100%,  what are the other figures relative to this.  Here’s the resulting analysis:

The blue line is the summation of the cost of social welfare and interest payments on the national debt.  In 2008,   for example,  it was 43% of our tax revenues.   This year,  for every 100 euros raised in taxes,  59 of them will be spent on interest payments and social welfare.  By 2014,  the Department of Finance projections show this dropping back to 53.

The green line is showing how much is being spent (or predicted to be spent) by the Government.   Since the green line is above the red one (we are spending more than we are earning in taxes…),  the difference between the green line and red line is the amount of further,  new,  additional borrowing we need each and every year.   Even by 2014,  we are still expected to borrow 8 euros for every 100 euros of tax revenue,  and thus Government expenditure is expected to be 108 euros for every 100 euros of tax revenue.

The difference between the green line and the blue one is how much money is left over for everything else,  after the cost of interest payments and social welfare,  from the residual tax revenue and the fresh borrowing.  So,  I’ve divided the Government expenditure into two pieces:  (a) the combination of social welfare and national debt interest payments;  (b) “everything else”,  meaning items such as health care,  education,  enterprise,  gardai,  defence forces and so on.

Here is how much money we have for “everything else”,  as a proportion of annual tax revenues:

So: for every 100 euro of tax revenue in 2008,   we spent 57 euros (the blue area at 2008) of it on “everything else”;  and the remaining 43 euros on social welfare and national debt interest payments.  We also borrowed a further 21 euros (the red area) to also spend on “everything else”.  Thus in total we spent 78euro on everything else.

In 2010,  the spending on everything else is dropping to just 74euro out for every 100 euro of tax revenue raised – 41 euros (blue area) left over after social welfare and interest payments;  and a further 33 euros (red area) to borrowed to help pay for everything else in 2010.

By 2014,  we will be spending 55euro on everything else per 100euro of tax revenue.  Out of that 55,  8 (the red area) will be borrowed that year,  and 47euro will be left out of the 100 after paying the costs of social welfare and interest payments.

So,  you can see the squeeze – the track of the graph above falls from 78 in 2008 down to just 55 by 2014.

So,  my friend – the Board member of one of our enterprise agencies – is being told::  “well,  nice idea,  but we have no money”.

Ho hum.

Out of the money we do actually have for “everything else”,  how much of that is going to the Department of Enterprise, Trade and Employment (DETE) so as to encourage enterprise and growth in the economy ?   Table 1e of the Department of Finance’s document shows it in 2010 to be €1.5B out of the total Government spend of €54.9B – that is less than 3%.   Or,  equivalently,  in 2010 for every 100euro of tax revenue raised,  we will borrow a further 33euro;   and out of this total of 133euro,  just under 5euro goes to DETE to foster the enterprise economy.

Should we be investing more of our tax revenues,  and more of borrowings,  on direct enterprise stimulation to grow the economy,  via DETE ?

Ho hum.

How well does DETE spend its budget in the IDA and Enterprise Ireland to foster enterprise,  and create jobs and drive exports ?  See my previous post on this topic.

———–

Footnote:  there’s some other interesting topics here – what are the actual euro numbers,  rather than %ages of GDP;  what are the total national debt projections rather than just the annual increments;  how dependent are we on the US and UK economies for economic growth;  how about the cost of public sector pensions and the role of the national pension reserve fund;  and should we be including the depreciation costs of our capital investment programmes (on roads,  schools,  infrastructure) like a normal business would do ?   Further posts perhaps sometime..

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3 Responses to Armchair Economics

  1. Pingback: The future is in data « Mary Mulvihill

  2. Liam McGarry says:

    Hi Chris

    Great practical and methodical assessment. A few less scientific but well illustrated Global GDP & Debt comparisons

    http://www.cnbc.com/id/30308959?slide=21

    http://anepigone.blogspot.com/2008/03/government-spending-as-percentage-of.html

    http://en.wikipedia.org/wiki/File:Public_debt_percent_gdp_world_map.svg

    A few sobering issues:

    With Ireland seemingly more reliant on exports to the UK than anytime in last 10 years (Your Previous Article, EI client companies) – and the UK in poor health even after all the recent interventions – can Ireland generate more tax revenue from traditional exports? Especially with a strong Euro?
    If Ireland is dependent (Again, Previous Article)on FDI – especially USA FDI – to generate increased productivity (as means to generate more revenue from existing employees), how will this continue to be achieved in light of Obama’s State of the Union address and desire to keep investment in the USA?
    If (proposition, not a statement of fact) Ireland’s key advantage in attracting FDI is low tax – especially in light of increasingly high costs (e.g. staff) – can Ireland realistically increase tax to reduce deficit?

    In addition, you may want to consider what the spread or interest rate is on Irish Debt, i.e. how Ireland’s debt repayments may be affected by factors beyond its control (and to follow what happens in Greece)? Will Ireland’s public debt become more expensive over next four years?

    Not forgetting Ireland’s personal debt, corporate debt or negative equity? Should we be critcial of ‘Ireland Inc’and neglect the fact many made the same mistakes? which may ultimately result in increased direct or indirect public support

    And what about the effect of elections in Ireland and the UK? ascertaining the real cost of Public Private Partnerships? Provision for pensions for both public sector and the large amount of pensionless private sector workers who will ultimately look to the public purse?

    Ireland has at least made attempts at cutting government debt. However the often cited Canadian example highlights that it can come at a price http://www.guardian.co.uk/society/2010/jan/13/paul-martin-budget-deficit-trailblazer#start-of-comments

    No matter how bad Ireland is, consider the economic abyss that NI is in… spending approximately £16bn per annum and generating only £9bn

    More questions & tangential issues than answers for you Chris…. Great read as always Chris, Thanks.

    Liam

  3. chrisjhorn says:

    Thanks very much Liam!

    My intention in the post was to give a back of the envelope, an engineer’s assessment, of the Dept. of Finance’s projections. I agree that the risks you identify are real, but there’s not much analysis in the Dept of Finance’s own report and so I didn’t elaborate too much on them here.

    very best wishes
    Chris

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