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Incomings and outgoings: Here is a very (very) basic guide to the State's finances

How has Covid hit the State coffers so far?

Image: Leon Farrell/Photocall Ireland

BUDGET DAY IS upon us and whether you’re interested or not (and, frankly, no one would blame you for being in the latter camp) it promises to be one of the more contentious in recent Irish history.

Against the backdrop of a pandemic-linked recession and a looming Brexit deadline, the government will set out its spending plan for 2021 following a year of unprecedented crisis, unforeseen costs and emergency measures, all of which took a sizeable chunk out of the State coffers.

With that in mind, it might be helpful to quickly run through the various components of the government finances and what sort of state they’re in.

How bad, for example, has the damage been to tax receipts and how exactly does a government go about financing extra spending when it, on paper at least, isn’t taking in as much money as it had hoped?

Where does the government get its money from?

Key to the formulation of the government’s spending plan for the coming year is understanding, roughly at least, what sort of condition the country’s finances are in currently.

On the weekend before the Budget is announced, the government publishes a ‘White Paper’, outlining estimates of its incomings and outgoings for the current year.

These figures are subject to change in the final months of the year but they’re usually not very far off the mark.

Ahead of last year’s Budget, for example, it was anticipated that the State would receive around €58.6 billion in tax revenue for the whole of 2019. Something like €10 billion of that was expected to come from corporation tax alone.

But in January 2020 — three months after the Budget was announced — exchequer figures revealed that the State’s corporation tax take in 2019 was closer to €11 billion. This helped push the State’s total 2019 tax revenue to €59.3 billion.

This year, it’s expected that total State income — from tax and non-tax sources — will be about €64.3 billion. For obvious reasons, this figure is about €2 billion smaller than was expected 12 months ago.

Of that €64.3 billion, the lion’s share — some €56.8 billion — will come from tax revenue.

As you can see, that figure is projected to be down about €2.5 billion from last year. (The good news is that it’s up from the estimated €49.6 billion the government expected to raise when it first began to assess the economic damage from Covid in April).

Among the individual tax heads, income tax receipts are usually the biggest single source of government funds and this year is no different.

Screenshot 2020-10-12 at 17.05.05 Source: The Economic and Social Research Institute (ESRI)

Overall, the government expects receipts from income tax to decline from €23 billion in 2019 to about €21.6 billion in 2020.

Interestingly, corporation taxes are actually projected to increase from nearly €11 billion last year to almost €12.5 billion in 2020.

This is actually about €2 billion ahead of what the government expected to raise via the business tax this year and has to do with the strong performance of large-scale companies during the pandemic, particularly those in the pharmaceutical and computer services sectors.

The State’s income from sources other than tax is expected to be about €4.7 billion. This includes €1.5 billion drawn down from the ‘rainy day fund’ and a transfer of €2 billion by Nama to the exchequer in July along with EU grant funding worth about €118 million.

What about expenditure?

Naturally, the other component of the ‘White Paper’ is an estimate of the government’s spending for the current year.

Crucially for curious Budget-watchers, it also includes a forecast of what it plans to spend next year.

This year, the government has pencilled in a total spend of just over €80 billion, some €14 billion ahead of what the previous government planned for when it unveiled Budget 2020 in October of last year.

This takes into account huge increases in spending on public health as well as emergency measures like the Pandemic Unemployment Payment and the Temporary/Employment Wage Subsidy schemes.

As you can see, it means the State will also spend €15.8 billion more than the €64.3 billion it expects to take in through the exchequer in 2020, contributing to a national budget deficit this year.

What is a budget deficit?

Over the weekend, you may have heard finance minister Paschal Donohoe say that the total government deficit this year is likely to be €21 billion.

So what’s the difference between that and the €15.8 billion shortfall mentioned above?

Well, when we talk about government deficits and surpluses, we’re talking about the entirety of the State’s income and expenditure, not just what goes into the exchequer from tax revenue and comes out in the Budget to fund government departments or service the national debt. 

The exchequer is the central government fund and while it represents something like 75% of total government revenue and expenditure, it’s not the whole picture.

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In a nutshell, the €21 billion is what’s called the ‘general government balance’ and it includes non-exchequer funds.

This includes the income and expenditure of semi-state bodies, the social insurance fund (into which we all pay Pay Related Social Insurance or PRSI), the Irish Strategic Investment Fund (ISIF) and local authorities.

According to the Irish Fiscal Advisory Council, differences between the general balance and the exchequer balance often relate to “surpluses in the social insurance fund” or “the impact of accruals and changes in the ISIF funds”.

So when all of those components are accounted for, the Department of Finance expects the State to spend a total of €86 billion this year, some €21 billion more than it takes in.

This is the largest bill for running the State in its history.

The government has also pencilled in another deficit of about €14 billion next year to finance another year of heavy spending, the details of which will be revealed today.

But where does the extra money come from?

Like all of us when we want to spend more money than we have, the government has to borrow. This year, it has borrowed on a huge scale.

The government raises debt by issuing bonds, which — to ridiculously oversimplify it — are effectively IOUs.

So far in 2020, with one more bond auction slated for November, the government has already borrowed a whopping €22.3 billion, around €4 billion more than it planned to.

As a result, Ireland’s national debt has swelled from about €204 billion at the start of the year to about €227 billion currently.

When an investor buys a bond, the government that issues it promises to pay back the original price of the bond at its date of maturation: some specified time in the future.

Happily, Ireland has been able to borrow at near-record-low costs, thanks to demand for Irish debt.

This demand is being driven largely by the European Central Bank, which — through its emergency bond-buying programme — has snapped up over half of all the Irish bonds issued this year.

Details of Budget 2021 will be announced from 1pm today and you can follow all of the latest developments on TheJournal.ie.

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