What will Ireland's government finances be like in 2015?

Somewhere in the intersection of my post-Budget musings and thoughts on the 2010 predictions thread, I started crunching some numbers on a baseline scenario for Ireland’s government finances by 2015, not convinced that we’d seen the last of the tough Budgets! The result is here: What will Ireland’s government finances be like in 2015? A five-year view on the Budget

Some of the key points:

  • While tax revenues have collapsed, government income from PSRI and other levies (such as health) is up 70% in the last five years
  • Aggressive productivity improvements (certainly by Government standards - 5% p.a., over and above any increases in pay) in areas of current spending will be needed over a sustained period.
  • These improvements, together with a benign economic environment (average growth 2011-2015: 2%) and the introduction of a land value tax (or other stamp duty replacement), are unlikely to get the deficit below 4% by 2015 (a year beyond current EU grace).
  • In 2008, we spent €2.6bn servicing our national debt. By 2015, it’s likely that figure will have reached almost €8bn.
  • National debt of more than 100% of GNP, and growing unfortunately.

Not very uplifting, unfortunately. Estimates for all the main headings of income and expenditure are as follows:
https://www.ronanlyons.com/wp-content/uploads/2009/12/2015-budget2.png

Any questions and thoughts on the overall scenario, or indeed on how to improve particular areas or assumptions, are welcome as usual.

R

(PS. Apologies for starting a new thread on this - didn’t see a logical fit anywhere else.)

Ah c’mon Ronan… An economist predicting something (in the future) accurately! We’re straying a little out of comfort zone here, eh! :wink:

EDIT: Good post by the way, if a little heavy on the union rhetoric… :stuck_out_tongue:

Thanks! Well, I did mention in the post I used a crystal ball!
Re the union rhetoric, not my intention but the numbers and shortfalls are so crazy - and clearly in the possession of everyone in social partnership three weeks ago - that I decided a mention or two might do!

Isn’t there a ghost at the banquet here though Ronan? Namely, where is the wealth and job creation going to come from? What will we be doing in 2015 on these fronts that we are not doing now? I don’t really understand how you can have an analysis of spending and income without speculating about where, for example, the income tax will come from.

(I’m not an economist by the way, so 4 letter words and short paragraphs help me enormously!).

The jobs scenario doesn’t look very good.

IDA Ireland on Monday said that the companies it supports now employ 136,000 – this is below the level in the year 2000.

finfacts.ie/irishfinancenews … 8714.shtml

In the period 1999-2008, only 4,000 jobs were added in the tradable goods and services sectors, while overall employment expanded by over half a million.

The international environment ex-Asia is a lot less benign now.

There is lots of advice on developing exports but apart from feeding commodities into a global market system, opening new markets is far from an easy task.

The challenge of creating 160,000 jobs:

finfacts.ie/irishfinancenews … 8704.shtml

I’m sure Mary coughlan will set-up a task force and all will be sorted. :angry:

100% proof positive that 99% of the “boom” was 100% bullshit.

Yeah but unions aren’t tasked with social partnership (didn’t that process end a good while ago anyway), they are tasked with representing their member’s interests, collective bargaining, etc.

Maybe, if you put a little bit more focus on the social than the pure numbers side it might be appropriate but I think you either go all in or not at all.

Not enough about that and back to the numbers.

Whichever way you squeeze the numbers, they make for unhappy reading. Interest payments and future growth are a huge elephant. The government will not be able to grow its income (i.e. get the economy growing so jobs are created, reducing social welfare) faster than interest costs are going to grow.

The horror show will come when we start to pay back some of the debt.

If the ECB sticks to its mandate of no more than 2% inflation, it basically means not much more than 2% growth is going to be sustained. That has serious implications for wages and prices in Ireland. But it has most serious implications for government finances.

Two/three questions that I have,

What basis( Interest rate) did you use to extrpolate interest payments from €2.8bn in 2008 to €8bn in 2015?
(how would an upgrade to our debt effect your figures)

Additionally, what % of GDP or GNP does this represent? you may also included a % of income if you wish.( perhaps an overlay from 1980 to 2007 would also assist)

Finally, since we will have a new income tax system next year, what does this do to your figures? This system is going to be more progressive btw.

Ronan, where do you see Euro/Sterling during the period and its effects on consumer spending flows?

As for what 2015 will look like, there’s no way to be sure, but at the risk of going all Taleb (or is it Rumsfeld?)

The known unknowns;
a) we will be at the end of, what is currently planned as only, 4 budgets of austerity and the resultant deflationary effects on the economy.
b) history suggests that the Irish don’t stay at home in a recession.
c) even if the IDA were to “pull a rabbit out of a hat” with a new Intel-esque mega FDI investment or even a number of more modest ones, it would take, at a minimum, 3-5 years before they reached the stated direct employment targets
d) at around 5 years in, there should be some strong indiciations as to the level of quality and performance (or not) of the loans owned by NAMA, which if below the stated “expected” levels, despite being off balance sheet, could impact on the State’s credit rating and borrowing costs
e) with a the Tankan survey in Japan, still the worlds 2nd largest economy, suggesting most companies there will cut capital expenditure in 2010, that will knock on into sales to Japan form their major partners China (Japan is their 3rd largest export market), the US (again 3rd largest export market) and the EU (6th largest market for the EU27). In an interconnected world, that’s going to affect companies both directly and a step or two removed.

Then there is the effect of the likely leveraged boyout (or is it leveraged bailout) of the main banks by the government in 2010 and it’s effects down the road on the credit rating. Perhaps the EU will clamp down on our “favourable” tax regime. Where will ECB rates go?

And they’re just “the little things”.

Blue Horseshoe

Eh, no. We’ll have a new social security tax next year. Maybe.

Did that chap get a different copy of the budget to everyone else?

Lenny! Is that you in there! Or better still, is it George or Richard? When’s the handover lads!

Its neither, btw read the speech, “It is my objective to introduce in 2011 a new system of just two charges on income”.

Further on he says" Income Tax will apply on a progressive basis".

Please have the manners of reading something before attacking me, stick to the facts not your opinion.

Perhaps your version is flawed?

Next year is 2010 pal.

Tut tut, budgets are released in Dec of each year, for the following year, therefore next years budget which will be delivered in Dec 2010 will refer to 2011.

Pal.

You sort it out then. :unamused:

All very good points but you are missing the single biggest unknown. Just how much of Irelands tax evasion and regulatory evasion economy will survive the next five years? I see absolutely no scenario where they survive in their current form.

Starting about 3 to 5 years out as the domestic budget crunch becomes politically unbearable you will start seeing very serious moves from countries like the US, UK, Germany etc to stop the flow of funds through Irish subsidiaries purely to avoid tax. These countries loose many many billions of tax each year due to Irish state facilitated tax evasion by MNCs. The Irish subsidiary of Microsoft on it own costs foreign taxpayers somewhere north of $7B a year in lost revenue. Add up all the rest of the MNC tax evasion that is facilitated by Irish subsidiaries and you are talking a noticeable percentage of the domestic countries tax revenue.

This situation will not be allowed to stand when the desperate scramble for revenue by governments starts in 2 to 3 years times. The MNC tax evasion will no be shut down completely but I would be not very surprised if the majority of the current Irish revenues of MNC’s is repatriated in 5 years time.

So there goes 40% of Irish exports and maybe 20%/30% of Irish tax revenue. And all hope of recovery through economic growth for several decades.

And we have not even got to the festering cesspit of the IFSC yet. Having already destroyed the domestic banks and spawned NAMA if the IFSC implodes in the next few years (and I cannot see how it can not by this stage) then the international political and financial liability fallout has a very good chance of propelling Ireland to Trans-dniester levels of pariah status.

The real pain has not even started yet.

budget.gov.ie/Budgets/2010/F … aspx#item6

So, Income Tax will apply on a progressive basis. That is how it currently applies. That is a ‘no change’ item.

New universal social contribution will replace employee PRSI, the Health Levy and the Income Levy. That is a new social security tax. As I said…

We will have the same income tax system and a new social security tax system. Both will be progressive. ‘Everyone’ will pay the social security tax.

The ‘everyone’ is interesting, as it implies it will be paid by those on welfare and pensioners…

Now, about opinions…

Firstly I wasn’t responding to you.

Why shouldn’t everyone pay, the system that we have at the moment isn’t progressive enough when the min wage is essentially untaxed,first €7500 tax free with rates starting at 5% up to 50% all in, thats a progressive tax system, where everyone pays, even a little.
I would additionally remove all automatic free medical cards for the over 70’s and have the amount they can earn be dropped to €30,000 per household.
Most of the income tax gathered in this country will come from those earning €40k plus, whilst those on €15k pay nothing except an income levy.