# Why are we still running a deficit on government spending?



## dewdrop (19 Jul 2013)

Why are we running a deficit of nearly 15 billion euros despite all the cut backs etc over past few years. No detailed response required just a few pointers to explain this.


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## TRS30 (19 Jul 2013)

dewdrop said:


> Why are we running a deficit of nearly 15 billion euros despite all the cut backs etc over past few years. No detailed response required just a few pointers to explain this.



Our deficit was much higher, we have lowered it in recent years. Government policy to make smaller & longer adjustments then deeper cut and bigger tax hikes.


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## TarfHead (19 Jul 2013)

dewdrop said:


> Why are we running a deficit of nearly 15 billion euros despite all the cut backs etc over past few years. No detailed response required just a few pointers to explain this.


 
Still living beyond our means. The amount of money the State disperses via salaries, pensions and benefits is out of synch with the amount of revenue it receives.

It's a structureal issue and not easily 'fixed'.


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## Purple (23 Jul 2013)

TarfHead said:


> Still living beyond our means. The amount of money the State disperses via salaries, pensions and benefits is out of synch with the amount of revenue it receives.



The money that the state borrows and distributes through public sector wages and salaries is, to a large extent, what's keeping the retail sector going. It is the stimulus that many are calling for but don't understand that it's already in place. It is also the best way of stimulating the economy as it seeps into the private sector without causing a big increase in imports and it allows many people to maintain their mortgage repayments.


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## Woodie (23 Jul 2013)

Purple said:


> The money that the state borrows and distributes through public sector wages and salaries is, to a large extent, what's keeping the retail sector going. It is the stimulus that many are calling for but don't understand that it's already in place. It is also the best way of stimulating the economy as it seeps into the private sector without causing a big increase in imports and it allows many people to maintain their mortgage repayments.


Where is the evidence that the public service is keeping the retail sector going?  Evidence from the status of high street seem to suggest otherwise.  Many sales of significant value in stores is for items like white goods, cars etc which are all imported.  I think many believe that the public sector is now making efforts so I'm not taking a shot at those efforts, but I think that it is not enough and in many areas we are still out of sync with other countries.   I think that your argument for continuing to run a public service beyond our means as a hidden stimulus measure is tenuous at best.


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## Gerry Canning (23 Jul 2013)

Woodie; 
From surveys I have seen, our public service is more efficient than most countries.
It would seem that we just gorged in the fluffy times and the skill is now to negotiate and manage down to a sustainable position that society will accept.

If we can believe the economists ,it seems we are managing  in an orderly manner and are on a workable pathway.

You say we are out of sync with other countries in many areas. Can you explain ?


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## mandelbrot (23 Jul 2013)

Woodie said:


> Where is the evidence that the public service is keeping the retail sector going? Evidence from the status of high street seem to suggest otherwise.


 
I think you've missed the point there - Unless you believe, or have evidence, that public sector workers do all their shopping and spend all their disposable income in other jurisdictions then it's self-evident that they spend it here in the domestic economy.

Thus the more money you take from workers (private or public) the less they have to spend on the high street, and you will see it suffer even more.


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## Purple (23 Jul 2013)

Woodie said:


> Where is the evidence that the public service is keeping the retail sector going?  Evidence from the status of high street seem to suggest otherwise.  Many sales of significant value in stores is for items like white goods, cars etc which are all imported.  I think many believe that the public sector is now making efforts so I'm not taking a shot at those efforts, but I think that it is not enough and in many areas we are still out of sync with other countries.   I think that your argument for continuing to run a public service beyond our means as a hidden stimulus measure is tenuous at best.




I’m not arguing that we should run a deficit; I’m in favour of a balanced budget and the smallest government and public sector possible. The problem is that we cannot just cut the massive amount of overspending overnight. It took 15 years to screw up the economy this badly and it will take years to fix it. The economic and social shock that would be caused by balancing the budget in one go would be far more damaging than what we are now doing. 
My point about stimulus was aimed at those that say we are having austerity budgets and need to stimulate the economy. We are doing so in the most effective way possible; we are continuing to pay state employees with borrowed money. What’s  that if it’s not an economic stimulus?
I can’t say that state employees are overpaid as that’s a subjective issue but I can say that we can’t afford the wage bill. Saying that is the easy bit, finding the solution is the hard bit.


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## TommyB (23 Jul 2013)

We spend 70% of our income on welfare. You really don't have to look much further than that. 50% of all person in the state have access to a medical card.


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## TRS30 (23 Jul 2013)

Purple said:


> I’m not arguing that we should run a deficit; I’m in favour of a balanced budget and the smallest government and public sector possible. The problem is that we cannot just cut the massive amount of overspending overnight. It took 15 years to screw up the economy this badly and it will take years to fix it. The economic and social shock that would be caused by balancing the budget in one go would be far more damaging than what we are now doing.
> My point about stimulus was aimed at those that say we are having austerity budgets and need to stimulate the economy. We are doing so in the most effective way possible; we are continuing to pay state employees with borrowed money. What’s  that if it’s not an economic stimulus?
> I can’t say that state employees are overpaid as that’s a subjective issue but I can say that we can’t afford the wage bill. Saying that is the easy bit, finding the solution is the hard bit.



How long though can we keep borrowing to stimulate the economy? At some point this becomes unsustainable. 

I would rather the borrowed money be used in other ways to get (or keep) the economy going such as capital projects that create jobs and would hopefully generate long term benefits to the economy, i.e. income generating.


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## Purple (23 Jul 2013)

TRS30 said:


> How long though can we keep borrowing to stimulate the economy? At some point this becomes unsustainable.
> 
> I would rather the borrowed money be used in other ways to get (or keep) the economy going such as capital projects that create jobs and would hopefully generate long term benefits to the economy, i.e. income generating.


Capital projects are not labour intensive and don't create long-term jobs.
Paying public sector employees is a much better way of maintaining jobs.
Cutting the pay of state employees to pay for capital projects would probably result in net job losses.


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## Woodie (23 Jul 2013)

Gerry Canning said:


> Woodie;
> From surveys I have seen, our public service is more efficient than most countries.
> It would seem that we just gorged in the fluffy times and the skill is now to negotiate and manage down to a sustainable position that society will accept.
> 
> ...



I am quite sure that many public servants are now making huge efforts towards redressing in previous imbalance, even if the new entrants to the system are apparently "sharing" a larger burden of the cost. In my post I was not implying as being an advocate for slash and burn but indeed the policy of  reform which is occurring has  some evidence of progress.  The impact of what is happening elsewhere on our economic growth cannot be denied but it seems to me that unfortunately the reforms in government are not happening at a fast enough pace.  
If I understand the costs of procurement and the failure to reform substantially the central political system are just two areas where we appear to have failed thus far.  
I am open to be corrected of course but I think that the question of the OP is a good one which deserves open debate and hopefully better understanding as to why precisely this state still exists.  Is it waste, is it lack of revenue or is it a case of lack of substantial reform?


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## TRS30 (23 Jul 2013)

Purple said:


> Capital projects are not labour intensive and don't create long-term jobs.
> Paying public sector employees is a much better way of maintaining jobs.
> Cutting the pay of state employees to pay for capital projects would probably result in net job losses.



Depends on what you build. 

I just don't believe that over paying state employees and state benefits in a long term solution to economy recovery and growth.


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## ontour (23 Jul 2013)

We are running a deficit because we are a center-left country that believes everyone is entitled to a certain standard of living.  We are willing to pay for this through taxes and borrowing.

If you look at Detroit where pensioners may get 20c in the dollar on their pension or the growth in the use of food banks in the UK you will see a different relationship between citizens and their government. there is not the same expectation that it is up to the government to solve all personal challenges.  I am not proposing that 'burning the pensioners' of inflicting food poverty is the way to go.  Without major changes in the relationship between citizens and government, we are just buying time until the US MNCs pack up and move to their next destination.


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## demoivre (23 Jul 2013)

Purple said:


> My point about stimulus was aimed at those that say we are having austerity budgets and need to stimulate the economy. We are doing so in the most effective way possible; we are continuing to pay state employees with borrowed money. What’s  that if it’s not an economic stimulus?



It's not much of a stimulus if the wages are being used to service the mortgages/loans of overly indebted households. Mortgage arrears cases grab the headlines but debt overhang is stifling consumption expenditure, and will do for years to come imo compounded by further fiscal tightening.


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## Purple (23 Jul 2013)

demoivre said:


> It's not much of a stimulus if the wages are being used to service the mortgages/loans of overly indebted households. Mortgage arrears cases grab the headlines but debt overhang is stifling consumption expenditure, and will do for years to come imo compounded by further fiscal tightening.



What happens if the debt is not serviced?


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## MrEarl (24 Jul 2013)

Purple said:


> What happens if the debt is not serviced?



Germany forecloses and takes over Ireland ? 
... might not be the worst thing that could happen to us 


As for the country still running a deficit ....

The situation is simply nuts.  We continue to live beyond our means and while I fully appreciate that it takes time to slow down the cost of running the country, there are various things which should have been done to help deal with our current problems and simply have not been attended to, including:

* Sale of non essential State Assets

* Further reductions in the State Payroll Costs / Increase in Productivity

* Reduction and / or means testing in all Benefits paid by the State coupled with all unemployed forced to provide X hours per week labour for the State's benifit (assuming they are genuinely fit for work). No, I'm not quite talking chain gang forced labour, but even the unskilled could help tidy up the beaches or public parks, cut the grass etc.

* Further increase in taxes for those who can afford to pay

* Massive improvement in effeciencies, when it comes to costs associated with providing public services etc


As long as we continue to vote for the likes of school teachers, when selecting who will run our country rather than astute and capable business people, we will continue to have commercial problems ... granted, social benifits cannot be ignored however


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## mandelbrot (24 Jul 2013)

MrEarl said:


> Germany forecloses and takes over Ireland ?
> ... might not be the worst thing that could happen to us
> 
> 
> ...



Show me the astute and capable business people who have tried and failed to get elected? And given that our woes were caused in no small part by a lack of State oversight of the financial sector, surely if our business community was as astute and capable of governing as you seem to think then they'd have governed themselves better...?? 

The rest of your points above are largely just soundbites that roll off the tongue (and the keyboard).


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## MrEarl (24 Jul 2013)

mandelbrot said:


> Show me the astute and capable business people who have tried and failed to get elected? And given that our woes were caused in no small part by a lack of State oversight of the financial sector, surely if our business community was as astute and capable of governing as you seem to think then they'd have governed themselves better...??
> 
> The rest of your points above are largely just soundbites that roll off the tongue (and the keyboard).




Are you saying that my "soundbites" are wrong ? 

As for showing you the astute and capable business people who have tried and failed to get elected, the key problem is that they don't even try to get elected from what I can see.... probably because they know what sort of a mess our political system is in or perhaps, they don't have any family members to pass down their seat in the Dail to them, or they simply would earn significantly more in the private sector (begs the question, would we be better off with 26 TDs, one per county, paid 3 times the current TDs salary perhaps ?)

While I agree with your point regarding the previous failure to properly regulate the likes of the financial services sector (I think I recall the Regulator of the time "retired" on quite a generous package - again showing what a "wonderfully" run country we live in) ... 

I don't think it correct of you to assume that I was referring specifically or exclusively to people in the financial sector, when referencing the business community (although I would seek to include them, alongside many other types of business people). 

Time for bed, me thinks


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## dub_nerd (24 Jul 2013)

Public service pay is certainly a stimulus to the economy. However, the question should be whether it is an _efficient_ and _worthwhile_ stimulus. There are three reasons why it is not:

1) We have an open economy that exports food, services, and intellectual property embodied in products like software. We import most of our engineered goods. So a good proportion of any stimulus spending by way of public service pay leaves the country.

2) Spending has to be funded by borrowing which incurs debt servicing costs, and tax hikes. All this results in higher charges for businesses, reflected in rates, water and waste charges, high electricity and fuel costs. This hurts both the domestic economy and our export competitiveness. Basically, business has to shoulder the burden of public service costs. This hampers growth so that the so-called stimulus is self-defeating.

3) The ultimate logic of those who argue for government stimulus is that the more we borrow the better the economy will do. That clearly is untenable. There may be an argument for counter-cyclical spending when you have put away some money in the good times. That's not the situation we're in. We massively increased public spending on the back of transaction taxes levied against private borrowing. The whole thing was based on fiction, on money that never existed. For some reason we fool ourselves that the early 2000s was "normal" and that we are aiming to get back there. The truth is that it was a one-time splurge funded by borrowing. Now that the party is over, the solution is not to simply replace private borrowing with public borrowing ... it is to start living within our means.


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## Purple (24 Jul 2013)

In broad terms I agree but the speed of the correction is the issue in question.
My point about borrowing to fund public sector pay was that those who argue for stimulus ignore the fact that we already have a stimulus; that borrowing.


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## demoivre (24 Jul 2013)

Purple said:


> What happens if the debt is not serviced?



The debt can still be serviced by paying interest only - plenty of time down the line for your typical family to pay off the mortgage.


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## dub_nerd (25 Jul 2013)

Purple said:


> In broad terms I agree but the speed of the correction is the issue in question.
> My point about borrowing to fund public sector pay was that those who argue for stimulus ignore the fact that we already have a stimulus; that borrowing.


 
But, indisputably, that borrowing is hiking up our debt repayments every year, and it is happening at an extraordinary pace. If we don't close the gap in short order, the debt burden will have gone past the point of no return -- it is already close to the limit that most sane economists consider sustainable. The other worrying thing is that the plan is for the debt to peak just within the limits of sustainability, but that plan is also predicated on growth figures that have been consistently over-optimistic for several years. Even if we manage to avoid catastrophe, the higher the debt, the longer it will take to pay it off -- like a mortgage holder with a forty year mortgage who ends up paying several times the interest payments of one with a ten year mortgage. There is really no excuse for us pushing today's cost of living onto the next two generations. The pain has to be taken some time.


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## DerKaiser (25 Jul 2013)

I'm relatively relaxed about the deficit. The real number to look at is the current deficit, €10bn in 2012. In the longer term, deficits of about €3bn a year would be sustainable at our level of GDP. So we're probably €7bn over target before the measures from last year's, this year's and next year's budgets kick in.

Of that €7bn, about €2bn is interest in respect of bank bailouts - I hope we never attempt to balance our books to service  this (not to mention pay down the capital!) unless we are seriously flush with cash.

If the global economy eventually returns to any kind on normality, we should see at least 150,000+ people return to work. Between reduced social welfare and higher income tax, this would reduce the deficit by about €3-4bn.

My position is that we should not now levy taxes and set public sector wages and social welfare rates to immediately balance our books because:
1. Some level of current deficit is tolerable
2. We shouldn't be setting up the economy to service the bank bailout
3. We shouldn't be setting up the economy to have a balanced book in midst of the worst recession ever
4. There is a planned schedule of budget adjustments already in place and there's little point in accelerating or extending these.

In short, We have to look at what would be a long term sustainable position if we were in a normally functioning economy i.e. no massive debts, lower unemployment rates, etc and aim towards an equilibrium in that scenario. There's no point in trying to overshoot budget corrections or we'll simply destroy the domestic economy.

The weakness in this argument is what happens in a low growth scenario where we become swamped in debt, but I believe that we're done for regardless if we cannot grow and inflate away the debt.


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## DerKaiser (25 Jul 2013)

dub_nerd said:


> The other worrying thing is that the plan is for the debt to peak just within the limits of sustainability


Very convenient! Reminds me of the soft landing argument. As you say, this fact is hugely sensitive to other factors such as growth. Once things eventually pan out, I would be shocked if decisions such as whether to make budgetary adjustments of €2bn or €3bn in the next budget will be the difference between survival and bankruptcy.

I think the important thing is that we are perceived to be actively taking measures to keep the deficit under control. We are doing that successfully (whether that's real, down to spin, because some guy in the US bought up €10bn of Irish govt debt or otherwise is irrelevant), and that is enough for now.


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## dub_nerd (26 Jul 2013)

We could afford to run a budget deficit of 3 bn on GDP of 150 bn _IF_ we got sustained GDP growth of 2%. We haven't seen that in a while.

We could afford to not pay the interest on our bank bailout money _IF_ we weren't relying on the same sources for ongoing funding and to roll over existing debt.


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## demoivre (26 Jul 2013)

dub_nerd said:


> There is really no excuse for us pushing today's cost of living onto the next two generations. The pain has to be taken some time.



We should have extended the maturity date of the promissory notes on to the next 20 generations at least - pay them off over 1000 years and let normal inflation take care of the real value of the notes. We need every ounce of help with can get because  austerity coupled with a contraction in private sector lending across europe will result in no recovery. Corporations and households deleveraging is the last thing you need with austerity.


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