I started looking into government revenue v. expenditure (taxes and spending) for the Euro area as a way of investigating why Ireland is in such big trouble. I see many are calling for Ireland to raise the corporate tax rate as a way of picking up their revenue to cover the expenditure. I wanted to see if the reason certain countries were in trouble were because of imbalances in revenue and expenditure. In other words, were governments spending themselves into trouble? So, I grouped EU countries into four categories: bilaterally by use of the Euro, and bilaterally by being above or below the average 10-year government bond yield for their currency grouping (Euro or non-Euro). So, there are four categories: on the Euro and below average debt yield (non-distressed); on the Euro and above average debt yield (distressed); on own currency and below average debt yield; on own currency and above average debt yield.
I collected data on total government revenue and expenditure for each country from the European Central Bank for 2000 - 2009. The graphs of the data appear below, following the order of the above list.
I think what we're seeing here is that there are move than a few countries that could be in trouble here. Some of these countries' imbalances started going up from 2008, which is clearly a drop in tax revenue due to economic slow-downs. However, some of the countries in trouble saw their imbalances either continuously high (above 1) are pick up prior to 2008. Ireland is one of these.
In a coming post, I'll look at the underlying driver of the imbalance. Mostly, I want to see if governments started spending more, or if tax revenue went down.
One thing is clear - there will be more trouble in the future.