Thursday, November 25, 2010

Euro Area T-R-O-U-B-L-E

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.


  1. Governments tend to spend more in good times and when economic projections are rosy.

  2. Many in the Euro zone are calling on Ireland to raise its corporate income tax rate from 12.5% to something higher. Officials claim the government needs the money. I hope you will show that it was gov’t spending and not lack of revenue that put them in the current predicament.
    Greece, which taxes corporations at much higher 28% tax rate, also needed a bailout, but I didn’t hear calls for raising its tax rate. Why then should Ireland? Hang tough, ye Irish.

  3. Sam,

    Government spending keeps up, or gets ahead of, revenue. But, then when revenue drops off, it appears that spending just keeps going. Because, you know, governments just keep spending.