More tax and less spending equals stagnation

The latest exchequer returns show that Ireland’s fiscal adjustment continues apace.

In the first six months of the year, the country borrowed €6.6bn, which means that so far this year, we have spent more than a billion more than we have taken in revenues every month. However, this is €2.9bn less than we had to borrow in the equivalent period last year.

The returns also show that those of us who engage in productive economic activity are paying more and more in tax. The Revenue collected €17.6bn in the first six months, €585m or 3.4% ahead of the same period last year.

There was €126m collected from the Local Property Tax, roughly half what is expected to be collected for the full year. Clearly, many hard-pressed home owners have elected to pay the tax on a monthly basis over the remainder of the year. God only knows how people will cope with the full-year bill that will be payable for 2014. Despite this massive tax collection, we still hear some describing Ireland as a low-tax economy. Hard to see it.

On the expenditure front, the minister with responsibility is still keeping the pressure up. In the first half of the year, total net voted expenditure stood at almost €21bn, 6.5% lower than the same period last year. Capital expenditure is down by 15.1%, while current or day-to-day expenditure is 6% down on last year.

For citizens, this double whammy of more and more revenue extraction and the ongoing reduction in expenditure is not terribly pleasant. However, this is a direct result of the sins of the past in general, but the sins of the macho maniacs in Anglo Irish Bank in particular. I said it last week, and I repeat, just remember that when one focuses on the pain, think Anglo.

At least here in Ireland, we are still managing to preserve a strong semblance of political and social stability despite much provocation. It is not so everywhere.

The political turmoil that has gripped Portugal over the past week with the exit from office of some of the politicians who have driven Portugal’s austerity programme has highlighted the ongoing fragility of the eurozone situation. It has also highlighted the fragility of the political careers of politicians who have been pushing the process of fiscal austerity.

Bond yields in peripheral eurozone countries in particular have increased; equity markets have weakened and the euro has come under some pressure.

It all just goes to prove that despite the lack of market concern in recent months, the eurozone crisis has not gone away. Of course the suggestion that the US Federal Reserve will at some stage ease back on its bond-buying programme has not helped. It just goes to prove that as we celebrate the sixth anniversary of the implosion of the US sub-prime mortgage market, the global economy and the global financial system is still in a very fragile place and fiscal consolidation is exacting a heavy price.

We saw last week the effect it is having on the Irish economy, and we know all about the extreme pain and hardship in Greece, but the Portuguese economy has also been struggling in the face of fiscal austerity.

Figures released by the EU statistical agency this week show that in the euro area, the unemployment rate stood at 12.2% of the labour force in May, which is equivalent to 19.34m people. In the broader EU27, 26.5m people in total are unemployed.

In the eurozone, the unemployment rate for under-25s stood at 23.7%, which is equivalent to 3.6m young people. The youth unemployment rate stands at 56.5% in Spain, 42.1% in Portugal, 38.5% in Italy, and 26.3% in Ireland. This is a massive unemployment crisis that is economically very damaging, but from a social and political perspective, it is truly frightening and potentially very dangerous.


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