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Both tax and spending need attention

by Patrick Honohan @ theirisheconomy.ie

Now that we all recognize the way in which the tax system has gone wrong and the need for adjustment so that it collects more revenue, it’s time to have a look at the balance between tax and spending adjustments needed to get back to the kind of reasonable budgetary structure that we had in the late 1990s.

To this end, I thought it would be useful to post charts showing total government expenditure and total government taxation as (i) % of GDP; (ii) Real terms.

I’ve used the latest NIE and the data in the October 2008 budget book, together with the ESRI’s latest GDP forecast. So this is all a little out of date.

Both charts reveal both the sudden collapse in taxation.

They also show the way in which real spending had a strong upward momentum which ran ahead of economic growth, especially as soon as this started to slow in 2007. (Some of this is the operation of automatic stabilizers, so important not to overcorrect.)

Pretty clear then that, if we’re to get back to the comfortable zone we were in in the late 1990s, it’s not just a tax adjustment that’s needed,  but also a reining in and rollback of spending.

Posted in Money Systems, News, Site Value Tax.

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