Ireland is a high public spending economy but remains a low tax economy according to a report published by Goodbody on Monday.

Ireland is no longer a low Government expenditure economy compared with public spending as a % of GNP (gross national product) relative to the Eurozone average (% of GDP) until 2007, when both were c. 44%. The brokers say that since the onset of the economic crisis, government spending has shot up to 60% of GNP compared to 50% of GDP (gross domestic product)  for the Eurozone. This increase was largely driven by the collapse in GNP experienced by Ireland (-19% between 2007 and 2009 vs. -1% for the Eurozone).

Economists Juliet Tennent and Dermot O'Leary say that while public spending has shot up, Ireland remains a low tax economy with a total revenue to GNP ratio of 40% in 2010 versus 45% (to GDP) for the Eurozone. On this measure the State's expenditure is 10% above the Eurozone average, while its revenues are 5% below.

The economists say part of the revenue decline is cyclical, reflecting the scale of the collapse. However, construction related revenues have shown a structural decline, highlighting the undiagnosed structural deficit that the State was effectively running during the boom years.

...resulting in a primary deficit of €14bn - In 2010, Total Revenue came to €53bn and Total Expenditure (less banking costs) came to €72bn, leaving a general government deficit of €19bn. Adjusting for the €5bn interest bill, the primary government deficit was €14bn or 9% of GDP. This is forecast to fall to 6% in 2011 and needs to be converted to a surplus of 3% of GDP by 2015 to bring Government debt onto a sustainable trajectory and meet the EU/IMF target of a 3% general government deficit by 2015.

More than €6bn in expenditure cuts required - The last Government outlined a 4 year plan with a total of €10bn in adjustments required between 2012 and 2014. Within this, expenditure cuts of €6bn were targeted. The current Government is currently drawing up its own multi-year plan and is conducting comprehensive spending review (CSR) to identify areas for possible cost reductions.

With savings in the big spending departments necessary - Health and Social Protection are expected to account for 65% of total gross current spending in 2011 and it is in these departments that the largest cuts may be seen. From another perspective, the public sector pay and pensions bill is expected to total €18.6bn in 2011. Despite previous reductions it accounts for over half of the total current spending in both the Departments of Health and Education. It is in these areas that the CSR is likely to focus.

Recent positive developments not enough - The economists say a reduction in the interest bill and a return to economic growth in Q2 is positive, but there is still much hard work to do to engineer a successful fiscal consolidation. A slowing international backdrop creates risks to meeting tax revenue projections. In our view, these should not be replaced with further tax increases. With expenditure out of kilter with the Eurozone, the momentum needs to be maintained on the cost side and current adjustments of €6bn need to be implemented.

Spending beyond our means (pdf)