Irish economy is “in rude health” (not)
6 March, 2011
From the Irish Times a few days ago:
GERMANY’S MOST influential economist has said the Irish economy is “in rude health” and the incoming government should increase income taxes before demanding a cut in interest rates on Ireland’s EU-IMF loans.
Prof Hans-Werner Sinn, head of Munich’s Ifo economic institute, insisted yesterday that Ireland doesn’t need any EU bailout because there was “huge room to manoeuvre” on tax.
“The German tax ratio is 40 per cent and the Irish is 29 per cent, 11 percentage points lie in between,” he said. “If you take just three points from the 11 you still have a huge difference to Germany and would have all the money you need.”
He said the Irish desire to renegotiate an interest rate cut was understandable, but that it should not be considered “if Ireland isn’t prepared to increase its taxes”.
“Ireland is a country in rude health, in no way comparable to Greece and I cannot understand any of these insolvency stories, there’s no reason to place Ireland under the rescue shield,” said Prof Sinn, head of the Ifo institute which is behind Germany’s closely watched monthly business confidence index.
His pronouncements on our tax take are rubbish, and I’m surprised not to see the figures being challenged. It is very important, given the continuing debate as to whether we should place the emphasis on cutting public sector costs or on raising taxes further, that we at least use correct figures when referencing our existing tax burden.
It would appear that Prof Sinn is basing his diatribe on Taxation trends in the European Union, 2010 edition which uses outdated 2008 numbers and, moreover, bases the comparative ratios on Gross Domestic Product (GDP), not on Gross National Product (GNP). Ireland’s GDP figure is distorted by multinational profits and their repatriation, and is some 20% higher than our GNP (in most countries the figures are effectively the same). It is therefore misleading where Ireland is concerned to compare our tax burden based on % of GDP.
In addition, as anybody who lives in Ireland can tell you, Irish taxes have risen sharply since 2008 and GDP/GNP has fallen significantly. Therefore, I would be surprised if our tax take wasn’t now higher than the German tax take in percentage of GNP terms.
The other factor which may be at play here (and I would be grateful if some reader would confirm this) is that sometimes elements of PRSI are excluded from reported tax take and netted in our statistics against certain social welfare costs. This naturally has the effect of understating the tax burden ratio.
I have a horrible feeling that we will see Prof Sinn’s comments regurgitated by the usual suspects (Vincent Browne / Fintan O’Toole / Social Justice Ireland / ICTU etc), not because his pronouncements are accurate, but because they assist a particular agenda. And if as a result policy is skewed excessively towards higher taxes, or our case for lower EU/IMF interest rates is damaged, we will ultimately all be the poorer.