This paper was prepared by S. M. Ali Abbas with substantial inputs from Ruud de Mooij, John Norregaard, Ian Parry, Baoping Shang and Mauricio Soto (all FAD). Asad Zaman and Ari Binder provided outstanding research assistance. The author is also grateful to staff in Ireland’s Departments of Finance, Public Expenditure and Reform, Health and Education, and Irish Revenue, for providing data and for helpful suggestions.
The bulk of this increase in the primary current expenditure-to-GNP ratio occurred between 2007 and 2011, given the crisis-induced peak-to-trough collapse of 18 (24) percent in nominal GDP (GNP). However, absent a commensurate expected boom in output, the very high spending ratios today are largely structural.
Given the unusually large and expanding wedge between GNP and GDP in Ireland, it is instructive to scale fiscal variables to both measures of economic activity. Ratios to GNP may, in fact, be more relevant, insofar as GNP is more closely linked to tax revenue.
The authorities expect to update this statement in October 2012 in preparation for Budget 2013.
Evidence from past European consolidations, especially the recent Latvian experience, suggests that expenditure reductions become progressively more difficult in later phases of consolidation, or when key services begin to be affected. For evidence on past European consolidations, see Abbas et al (2011). For a summary view on the Latvian case, see Blanchard (2012).
Indeed, taxes on production and imports (i.e. indirect taxes) are comparable to EU levels (in percent of GDP), so that as a share of total taxes, the reliance on non-distributive taxes is quite high.
Issues related to pension tax reliefs and PRSI base broadening to unearned income are discussed under “Other”, toward the end of this section.
The Irish welfare system does not differentiate significantly between social insurance and social assistance, or between contributory and non-contributory state pensions. Accordingly, PRSI contributions do not bear a strong link to welfare benefits, so that it is acceptable to combine (employee) PRSI with income tax and USC when looking at personal income taxation in Ireland.
Note that Table 3 uses the term “exemption threshold” to connote the level of income that, if one earns below it, no tax is incurred. In this sense, both the USC and PRSI have exemption thresholds: i.e. those earning below €10,036 pay no USC, and those earning below €18,304 pay no employee PRSI. However, those earning above these levels pay the said tax on all income, including the income below the threshold, implying a jump in the effective tax schedule around the threshold. By contrast, the “entry point” for income tax refers to the amount of income on which there is no tax payable at all. Thus, a person earning €16,499 pays zero income tax, a person earning €16,500 pays 20 percent of €1 (= €16,500-16, 499) or €0.2 in income tax, while a person earning €30,000 pays 20 percent of €13,501 (= €30,000-16, 499) or €2,700 income tax (which is 9 percent of the gross income of €30,000).
The effective tax rates for self-employed individuals and couples are much higher, as they are not entitled to the PAYE tax credit. However, these taxpayers are entitled to deduct business expenses from income in their tax returns, so the actual tax take for the government would not be much higher.
The entry point for the income tax (€16,500) for a PAYE earner is determined by the combination of the basic tax credit of €1,650 and the PAYE credit (similar to an earned-income tax credit) of €1,650. For earnings below €16,500, the annual tax liability would be less than €3,300 given the (lower) 20 percent income tax rate, which would be covered by the sum of the personal and PAYE tax credits (each €1,650).
Note that €16,500 is only slightly lower than the minimum wage of €17,542: €8.65/hour*39 hours a week*52 weeks a year.
This is possible in the case of the over-70s who still have near-universal entitlement to the medical card. Separately, it is quite unusual for a health entitlement to determine the PIT tax rate applicable to a person.
Like most other OECD economies, Ireland does not have a net wealth tax.
These rates have been brought down significantly from the 7-8 percent prevailing before the crisis.
Ireland had a recurrent property tax on principal residence of 1.5 percent till 1997, when it was abolished. This tax was levied on the excess of the market value of all relevant residential properties of a person over a market value exemption limit and was payable provided the income of the household exceeded an income exemption limit.
The 2010 data suggests a high share of transactions taxes in Ireland (mainly stamp duties), but these have been brought down since then.
Taxing Immovable Property: Revenue Potential and Implementation Challenges”, IMF Staff Discussion Note.
These studies saw a property tax as a combination of a tax on mobile capital and a tax on immobile land (the former got shifted to renters, consumers, and labor, while the latter borne by landowners).
Based on U.S. property tax rates, as reported in State-by-State Property-Tax Rates.
Persons on pensions/welfare would presumably require such deduction to be implemented by the Department of Social Protection, which could undermine somewhat the perceived benefits of collection by a single central agency.
Based on data through 2008, Grigoli (2012) and Clements et al (2012) reach similar conclusions. OECD (2010) finds Ireland to be among the least efficient even within countries with similar health care systems.
See comparisons in a recent staff analysis of savings in the public wage bill (Box 5 in Ireland – Sixth Review Under the Extended Arrangement – IMF Staff Report).
A forthcoming study by the Central Statistics Office is expected to shed some light on the question of a public wage premium in Ireland.
For a recent staff analysis of social welfare spending, see Box 3 in Ireland – Fifth Review under the Extended Arrangement – IMF Staff Report.
Box 2 in the accompanying Article IV staff report shows that in 2010, Ireland had the second lowest relative at-risk of poverty gap in Europe, after Finland, while consistent poverty, at 6.2 percent, remains below 2006 levels.
These shares are based on announced measures (relative to the baseline of no policy change), but adjusted by staff for baseline realism.
The EC’s 2012 Ageing Report estimates the increase in gross pension expenditure between 2010 and 2060 at 4.1 percent of GDP, the 8th highest increase in Europe (despite the rise in the retirement age to 68 by 2028). Moreover, the benefit ratio (average pension to average wage) is expected to rise, making Ireland an outlier in Europe (along with the U.K.).
Generic drugs account for only one-fifth of all prescriptions, which compares poorly to four-fifth in neighboring United Kingdom.
The recent HSE Governance Bill should be helpful in this context.