We should measure the defict as % of expenditure and not GDP

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Brendan Burgess

Brendan Burgess

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We have a target of achieving a deficit of 3% of GDP by the end of 2015. By the end of this year, it looks as if we will be down to around 4% of GDP, so it sounds as if we are doing very well.

But this is not a very meaningful measure.

  • GDP has less relevance in Ireland's case because of multinational activity
  • It tends to be very volatile
  • The measure isn't very accurate anyway. It was revised upwards recently due to a change of definitions.
And it's not very helpful for the public to understand the state of the public finances.

  • Few people understand what GDP means
  • People aren't great with percentages so a figure like 3% sounds very small
  • It doesn't have any real life comparison
So we should focus on the deficit as a percentage of government expenditure. The turnout for 2014 will be something like this



Expenditure|€60 billion

Taxes and charges|€53 billion

Shortfall|€7 billion


So we are still borrowing 11% of every euro the government spends.

I think that most of us understand that if someone has a salary of €53,000 a year, they can't spend €60,000 a year indefinitely.
 
At the end of August, the [broken link removed]t was €180 billion. That is over three times our annual income from taxation.

That is a much more significant yardstick than saying it is 110%(?) of GDP.
 
2014 estimated GG deficit = 8,090m [the turnout will be better than this.]
2014 estimated exp = 60,140 current + 4,525 capital = 64,665m

2014 GG deficit was estimated to be 12.5% of 2014 est gross expenditure.
 
Brendan Burgess said:
I think that most of us understand that if someone has a salary of €53,000 a year, they can't spend €60,000 a year indefinitely.
Click to expand...
That's because a person has a finite life and, in particular, a finite income-earning life - so a day of reckoning will eventually come. If a state has continuous upward growth in income and can afford the ongoing repayments on its debts, it could continue to spend more than its income - obviously within reason...

I do agree though that expressing the national debt as X times taxation income or borrowing costs as X% of expenditure would be more meaningful to most people - and improvements would be more understandable and appreciated.
 
But surely the whole point of expressing it the way it currently is, is because of the EU requirement that we get below 3%? That's the focus of the Government at the moment and that's why it's used. Once we get there we can start talking about other more meaningful measures.
 
Hi Derek

But we have always expressed it this way as far as I remember.

Even if we were not part of the Eurozone, we should have our own targets to eliminate the deficit. We should express it as a percentage of the spending or taxation.
 
I've never understood why the goal was not set as eliminating the deficit, and having the books balance.
 
Thought provoking OP Boss.

The main reason national deficits and debts are expressed as a % of GXP is that it is reckoned that it is the country as a whole which is incurring the deficit and not just the government as just another agent in the economy. GXP is the better measure of the capacity of the country to pay its debts. Taxation superficially is the capacity of the government but it can always adjust taxation (as we have seen) but subject to the constraints imposed by the economy as a whole.

One can envisage situations where expressing the deficit as a percentage of tax and/or revenue would be most misleading. For example if the government got the tax down to 10B and expenditure down to 12B then the deficit would be 20% of taxation but only 1% of the national economy.
 
John McHale uses both measures in an article in the Irish Times

Politicians need to keep cause of collapse in mind as economy recovers



But we must not forget that the excess of spending over revenue is still projected to be close to €7 billion this year, and the government debt is roughly 1.2 times the size of the economy. Policy adjustments that lead to higher borrowing than under the original plan will eventually have to be paid back with interest, so the bill for any policy easing would be pushed to the future.
 
I must say I find the recent talks of tax decreases in the forth-coming budget quite worrying. Why can't we continue on the path we're on? We have a semi-stable economy now despite all the cuts. Personally, I would like us to run a budget surplus for a few years before we even countenance tax cuts. We're still piling on the debt!
 
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