Ireland’s Tax & Spend: Closer to Bristol Than Berlin?

New Research Questions Public’s “Deal” with the Government

Households often feel the pinch of taxes while questioning the return in public services. New analysis from the Fiscal Advisory Council sheds light on Ireland’s unique fiscal position, comparing its tax and spending levels to other wealthy nations.

Comparing the Irish Fiscal Model

Ireland’s tax and government spending levels are generally lower when measured against affluent EU countries. Research by economist Niall Conroy places Ireland between the high-spending European nations and the United States. Early sentiments suggested Ireland was more spiritually aligned with Boston than Berlin, and current fiscal data indicate a closer resemblance to English-speaking nations like the UK and Canada.

Government expenditure hovers around 40% of national output (GNI*). While this is significantly less than the 49% seen in a dozen comparable EU countries, a substantial portion of this difference stems from Ireland’s younger demographic and robust economic growth, which naturally reduce public spending needs.

Adjusting for these factors, the spending gap between Ireland and wealthier European peers shrinks, but a per-person difference of approximately €1,800 remains. The comparator group includes Austria, Belgium, Denmark, Finland, France, Germany, Italy, Netherlands, Norway, Portugal, Spain, and Sweden.

The Tax Gap and Who Pays

Conversely, Ireland’s tax burden is also lower, with a per-person tax gap estimated at €2,600. This figure is influenced by significant corporation tax receipts, partly due to multinational tax planning. Excluding these “windfall” revenues, the tax gap widens considerably to €4,700 annually.

This positions Ireland as a lower tax and lower spend economy compared to many European counterparts. However, an aging population is projected to increase future spending, particularly in areas like pensions and healthcare, potentially shifting Ireland towards a more European spending model.

Ireland’s overall tax revenue as a percentage of national income is among the lowest in Europe. The tax gap compared to high-income European countries is approximately 4.7% of national income, or €2,600 per individual. On a global scale, Ireland’s tax share aligns more closely with countries like the UK, Canada, Australia, and New Zealand, though it remains higher than the US.

Income Tax and Social Contributions

Despite overall lower tax revenues, many households perceive a high tax burden. This perception is partly explained by the structure of income taxation. While Irish citizens pay average income tax rates similar to their European counterparts, social security contributions (PRSI) are notably lower, affecting both employers and employees.

A younger population may contribute to lower PRSI collection. However, future increases in the state pension bill could necessitate higher contributions. The value of social contributions is intrinsically linked to the services received, such as healthcare, which can vary significantly between countries.

Research indicates that lower-income households in Ireland face the lowest effective tax rates, especially those with children. In contrast, higher earners experience combined income tax and social contribution rates comparable to those in other affluent European nations.

For instance, OECD data reveals that a low-earning household in Ireland (under €50,000) pays around 17.8% of their income in combined taxes and social security, compared to a European average of 23.4%. An average earner (just over €70,000) pays approximately 28-29%, while a high earner (€118,000) pays slightly more at 37.2% versus a European average of 36.4%.

Ireland’s distinct position is also marked by its significantly higher corporation tax receipts, which bolster lower taxes and increased spending elsewhere. Consumption taxes, such as VAT and excise duties, are slightly below the European average due to reduced revenues from alcohol, tobacco, and petrol excises.

Evaluating Public Services

The Fiscal Advisory Council also examined the quality and efficiency of public services funded by taxation. While measuring spending on health and education is straightforward, comparing the actual services received is more complex, depending on delivery structures and effectiveness.

Education: High Attainment, Efficient Spend

In education, Ireland appears to be an efficient spender. After adjusting for its young population, Ireland’s spending is slightly below the average of comparable rich European countries. Despite this, the nation boasts high educational attainment, ranking just below Finland, and has the highest proportion of citizens with a third-level degree.

Ireland also performs well in standardized tests across reading, science, and mathematics, suggesting strong outcomes from relatively modest investment.

Healthcare: High Spend, Persistent Challenges

The healthcare sector presents a different picture. Ireland is a high spender, particularly when adjusted for its younger demographic, with a notable portion of spending being insurance-funded. The country achieves good health outcomes, including high life expectancy, but faces ongoing pressures in accident and emergency services and lengthy public waiting lists.

The council questions whether better value for money is being obtained, given the significant recent increases in service delivery costs.

Pensions and Childcare

Spending on pensions is lower in Ireland than in other wealthy European countries, even after demographic adjustments. Irish state pension payments, while rising, remain below the European average. A key factor is that Ireland’s state pension is not automatically linked to inflation, unlike in most other nations.

In childcare and family social protection, Ireland’s spending is lower, again when adjusted for population size. While direct cash transfers to families are higher, the state plays a more limited role in investing in and providing childcare services compared to other countries.

Future Fiscal Challenges

A critical policy consideration is Ireland’s aging population, which will inevitably lead to higher spending demands in healthcare and pensions. Simultaneously, the nation’s increasing reliance on potentially volatile corporate tax revenues presents an ongoing fiscal challenge.

With spending rising rapidly but delivering mixed results in public services, the government faces crucial decisions regarding its medium-term financial strategy. The central task is determining how to fund future public service needs effectively.