‘Big state’ is all the rhetorical rage. Ireland is a ‘big state’, is becoming a ‘bigger state’, how are we going to pay for this ‘big state’, etc. etc. The idea that spending is so large we are becoming (if we haven’t already become) a ‘big state’ has already embedded itself in the public debate. My favourite headline comes from last year:
‘How are we going to pay for the Irish big state utopia?’
The problem is that this is completely wrong. We are not becoming a big state. The Government is intent on maintaining our historical low-tax, low-spend, low-service model.
There are two ways to test this ‘big state’ thesis. First, by looking at our historical levels of tax and spend. This shows we are returning to pre-crash levels.
In terms of spending on public services, we’re pretty much back to pre-crash levels. Between 1995 and 2007, spending on public services averaged 18.4 percent of GNI*. The Government is projecting public service expenditure to be 18.8 percent in 2025. In fact, the Government’s 2025 projection will put public service spending below the pre-pandemic level of 2019 which was 19.7 percent.
[Note: the spike during the recession / austerity period does not indicate an increase in spending on public services. During that period public service spending was cut. The reason for the spike was that national income fell even faster.]
When it comes to primary spending (total spending excluding interest payments), again we’re pretty much back to where we started in 1995, with the same caveat about the spike during the recession/austerity period. Spending in 2025 is projected to be lower than in 2019, the year before the pandemic hit.
When we turn to taxation, we find a similar pattern.
Once again we see that government revenue reverts back to 1995, with the 2025 projection coming in below 2019 levels.
So if we are to look at this historically, we do not find a ‘big state’ nor are we ‘becoming a big state’. It’s the same ol’ low-tax, low-spend state that we have been mired in for decades.
The second way to test the ‘big state’ thesis is to compare our spending and taxation levels with other EU countries; specifically, our peer group in the EU – other high income economies. In this test, while we have Irish government projections out to 2025, we don’t have projections for other EU governments. I have used the average spend (as a percentage of GDP) between 2014 and 2019 for EU countries and assigned that to 2025. Therefore, this should be treated indicatively.
Ireland comes at the bottom of the table of our EU peer group, lagging well behind average. But as has been pointed out, Ireland doesn’t need to spend as much as other EU countries (and, so, doesn’t need to raise as much revenue) due to a lower number of pensioners. Factoring this in would reduce the gap between Ireland and the EU peer group average by about two-thirds. Therefore:
- For total government spending to reach the average of our EU peer group, we would have to spend an additional €9.3 billion in 2025
- For total government revenue to reach the average of our EU peer group, we’d have to increase taxes by €8.7 billion
In gross terms we would need to increase spending on public services by €9 billion in 2025 to reach our EU peer group average. The impact of an older demographic would be balanced by the need to spend additional money on education given our youth demographic.
Whichever way you cut this, we fall well behind our peer group average. Compared to that benchmark, we remain a low-spend, low-tax, low-service economy.
No, we are not a big state. We are not becoming a big state. Indeed, if the trends continue beyond 2025, we are getting smaller and smaller.
Big state Ireland is just a myth.
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