Business Budget 2017

Friday 28 October 2016

Pressure for more government spending will only grow

Published 11/10/2015 | 02:30

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'Last year total spending was 8pc lower than the 2008 peak. When spending excluding debt servicing is considered, the decline was almost 16pc'

Where do your tax euros go? With the Budget upon us, it is timely to look at what the Government does with taxpayers' money and how spending patterns evolve over time.

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Among other things, doing so helps to identify where the biggest spending pressures are - something that may interest readers when the country's interest groups are making the case for why they should get more in their pre-Budget submissions.

First off, the headline spend: last year it was €69bn, as shown in the first chart. It was NOT the much lower 'Exchequer' figure which is cited so frequently, including by people who should know better (the reason for the gap is that the Exchequer figures don't cover all public spending, such as local government expenditure).

Total spending in 2014 was 40pc higher than 10 years earlier, but the past decade was one of two very different halves. From the turn of the century until the crash, successive governments spent almost everything that was taken in. The spending frenzy, which had begun in the run-up to the 2002 election, saw Ireland (along with Greece) share pole position in Europe on the speed of public spending growth.

But when revenues collapsed, the age of austerity began. Last year total spending was 8pc lower than the 2008 peak. When spending excluding debt servicing is considered, the decline was almost 16pc (the divergence is illustrated in the first chart). When a growing population is added into the mix, the decline per person was bigger again.

Although this column is firmly of the view that there should be no headline spending increase or tax cuts until we stop borrowing to cover day-to-day costs of running the State, there is no doubt but that severe strains exist in many parts of the public sector after seven years of fiscal famine.

But where has austerity taken the greatest toll? Government finances are usually presented on departmental lines. As a full set of numbers on this basis are not yet available from the statisticians, an alternative (and in some ways more illuminating) breakdown is given here in the second chart.

On this basis, five items make up more than 97pc of total spending. These are, in ascending order: transfer payments via the welfare system; public pay and pensions; the State's purchase of goods and services; the payment of interest on the government's debt; and capital expenditure.

As the second chart shows, the welfare bill is the largest area of spending among the five. It amounted to €27.5bn last years, accounting for 40pc of total public spending. It is worth noting that the figure is considerably higher than the budget of the Department of Social Protection because some transfer payments (housing, health, education and the like) come from other ministries and local government.

As the chart shows, welfare spending has been perverse over the past two decades. In the Tiger years it soared, but plateaued during the crash (one would expect welfare spending to be the other way around). Positively, though, the welfare bill is now falling for the right reasons.

With more people getting back to work, fewer are dependent on transfers from their fellow citizens. As the strain on the social safety net lightens thanks to a growing economy, it should continue falling. That will free up resources.

Public sector pay and pensions comprises the second biggest cost for the State, coming in at €18.6bn last year. That is a reduction from the peak of 12pc, but much of it has been the result of fewer workers on payroll. Public sector employment was down by one tenth between the end of 2008 and the end of last year according to the Department of Public Expenditure and Reform.

The Government decision earlier in the year to start giving pay increases from early next year has been little commented upon in the lead-up to the Budget. But as this column has said before, on the basis of all available data - public versus private differentials and public pay compared to peer countries - this is no justification for moving remuneration back towards bubble-era peaks.

That public sector unions have secured for their members around €300m of the €750m the Government has allocated to total additional spending in 2016 speaks volumes. If it is deemed correct to spend more on pay, it would be more equitable that the additional money be used to employ more people, so that more services can be provided.

The third largest item is the purchase of goods and services. This includes everything from fees for lawyers and medical products for healthcare professionals, to chalk for teachers and paper clips for bureaucrats.

Almost one fifth was pared off this line of spending from peak to trough, which was no bad thing because a good deal of it was fat. Lax habits developed when money was being sprayed around in the boom years - the way pharmaceutical companies were allowed to charge ever more inflated prices for medicines was among the more scandalous examples of waste during the Tiger times.

Cutting waste and reforming procurement across the entire public sector were among the more successful reforms of the post-crash period. It is to be hoped that the better habits which developed during times of crisis are not unlearnt as pressures ease - as has happened so often in the past.

That the bill for goods and services rose by 7.5pc last year in a near zero inflation environment could give some reason to fear that better practice might already be going into reverse. Among the most depressing aspects of returning to the public debt levels of the 1980s and early 1990s is the cost of servicing it. Last year interest payments stood at €7.5bn, and well over half of that left the economy to repay foreign holders of Irish public debt. If there is anything approaching a positive aspect to the interest bill it is that it fell by €100m last year, despite the total stock of debt rising.

Capital spending has been most affected by the ups and downs of the past decade and more. The increase was particularly marked in the years immediately before the crash, in large part reflecting the view of the then government that the boom would continue indefinitely and demand for infrastructure would continue growing as a consequences.

But, as usually happens when economies crash, the capital budget is the first thing to be slashed, and Ireland in the post-Celtic Tiger era was no exception. Although the recent announcement of a capital spending plan stretching out into the next decade renewed the focus on public investment, the turnaround actually occurred in 2014, when the first post-crash increase in spending was recorded.

Because capital spending bore the brunt of the cuts, the impact on resources available for the three major services that the State provides - welfare, health and education - was less marked on a per capita basis than it would otherwise have been.

That said, the past seven years have been exceptionally tough. Calls for greater spending will only grow.

Sunday Indo Business

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