Counting up the myriad costs of five years of running a budget deficit

The last year in which Ireland did not run a budget deficit was 2007.

In that year, general government expenditure was €68bn which was matched by revenue of €68bn, giving a balanced budget overall.

The outlook for 2008 was described as “uncertain” but the budget announced by Brian Cowen on the Dec 5, 2007 allowed for an 8% increase of spending in 2008, with increases across all areas, as well as reductions in income tax through changes to tax bands and credits. All of this was supposed to result in a budget deficit of less than 1% of GDP because the assumed growth rate facilitated such largesse.

Just five months later Brian Cowen became taoiseach and Brian Lenihan took over as finance minister. Within two months he introduced the first austerity package with €1bn of expenditure measures, as the assumptions of Budget 2008 unravelled at an alarming pace.

Lenihan began the process of austerity in Jul 2008, but in his first budget two months later he announced a package of increases in social welfare spending.

The State pension, which was €209 in 2007, was further increased by Lenihan to €230 for 2009. Social welfare rates such as jobseeker’s, illness, injury and disability benefits were increased from €186 to €204 over the two budgets.

The deterioration in the public finances was startling. From a position of balance in 2007 there was a deficit of almost €20bn in 2009. From €68bn, government revenue fell to €56bn in just two years, while expenditure in 2009 had risen to over €75bn.

This represented a deficit of more than 12% of GDP. Borrowing at this level cannot be sustained, particularly when you cannot print your own currency, and steps had to be taken to reduce the deficit.

Since peaking in 2009, the deficit has fallen in each year since. The rate of progress is slow and under official targets Ireland has to get the deficit down to 3% of GDP by 2015. This will be eight years after the deficit emerged in 2008, by which time the deficit will still be €5bn per annum. It is likely to be more than a decade between the last balanced budget and the next.

In 2010 the deficit edged down to 11% of GDP, in 2011 it fell to 9% of GDP and this year it looks like the out-turn will be around 8% of GDP. A deficit of about 7% of GDP is projected for next year.

For 2012 government revenue will be €56bn, just as it was in 2009, while expenditure will have declined to €69bn.

If we achieve the 3% of GDP deficit target by 2015 the plan is that revenue will have risen to €63bn while expenditure will be largely unchanged at €68bn, the level it was when the economy peaked in 2007.

There are many claims that austerity is not working because the deficit reductions are small, relative to the size of the measures being introduced. Since Lenihan’s first package of expenditure measures in Jul 2008 about €28bn worth of austerity measures has been announced.

Since 2008, the cost of providing State and public sector pensions has risen by an average of €380m each year. Over €1.5bn of the improvements made in the deficit elsewhere has gone to fund increased expenditures on pensions.

In the main, this is as a result of demographics rather than any policy decision.

It is also the case that borrowing for these massive deficits has added to the interest bill. From 2008 to 2012, the combined deficits sum to nearly €80bn. This is not including any monies provided to our delinquent banks. To borrow this money at 5% has added €4bn to the annual interest bill. Paying the interest on previous deficits makes reducing the current deficit harder.

The deficit is falling. This is the objective of austerity. To judge it relative to another measure is incorrect. Austerity is not about generating growth, expanding employment, or preventing poverty. These should be the goals of budgetary policy but such is the disrepair of our public finances that the instrument has become the target.

We cannot continue to borrow huge amounts of money to fund the day-to-day operations of the government. If anything the money from the troika has slowed the rate at which the public finances must be brought back on track. When order is restored to the public finances the emphasis can rightfully be put on growth, employment and poverty. That day is still a way off but at least it is clear now that we are moving in the right direction.

* Séamus Coffey is an economics lecturer in the College of Business and Law at UCC

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