Thursday 25 August 2016

Brendan Keenan: Reform is more important than reduction -- in every sphere

Most savings will be wiped out by the debt interest rate -- welcome to the austerity trap

Published 07/10/2012 | 05:00

IT'S the little things that get you, right enough. There we were, looking at a €300m hole in the 2012 health budget and all the fuss was about two primary health centres which may, or may not, be in the wrong place

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That €300m is an impossible figure to grasp (though not as impossible as the €13,000m spent on the health service this year), whereas everyone can grasp the issues in Swords and Balbriggan. As a result, this has caused the Government far more trouble.

It may have nothing to do with the Health Minister's political woes, but one got the sense at the presentation of official financial figures for the first nine months of 2012 that there was little stomach for trying to correct the health budget overshoot between now and the end of the year.

It could have something to do with it, though. With internecine war in the department, and the threat of it in the Labour Party and the Coalition, another round of health cuts could provoke an outbreak of ferocious hostilities.

Tuesday's Exchequer returns suggest the Government could meet its budgetary targets without such cuts. Despite all the promises that it would not happen, and the bad historical experiences when it did, it looks like capital investment will make up the brunt of the shortfall, bringing the total close to target.

Services already stretched will have to cope with ever more shoddy equipment, just as in the past.

That may be the Government's fallback position -- but will they get away with it? The troika likes to say that they don't dictate the details, just the overall outcome -- but that's only partly true. A figure was agreed for 2012 health spending, as well as how it was to be achieved. And the troika may well insist that those commitments are honoured.

The real difficulty is that, even if the shortfall is tolerated this year, it then adds to the cuts to be made next year. The next Budget requires "cuts" of over €2bn to achieve an actual fall in day-to-day spending of €1.3bn. Other bits keep rising, as is the way with government spending -- including the automatic payment of increments in the middle of a €6bn reduction plan.

Tax increases planned for 2013 are more modest -- perhaps less than €1bn when the carryover from this year's Budget is included. But actual revenue is meant to increase by €2bn, because growth will be stronger and will generate fresh revenue.

That looks an increasingly forlorn hope. The original plan for a €3.5bn budget correction next year may not be enough to achieve the €800m reduction in the deficit.

No, that is not a misprint.

Most of the budget reduction will be swallowed up by a €2.5bn increase in the interest bill on the burgeoning debt.

This is the austerity trap, where the lack of growth means the corrections produce inadequate reductions in the deficit.

Next year is a turning point. Ireland was the subject of fulsome praise again last week from the heads of both the EU Commission and Parliament. But the targets which were successfully achieved were based on forecasts of low growth. The forecasts were certainly correct, but future targets are based on good, albeit not exceptional, growth.

On this basis the debt payments are supposed to reach their peak next year, before starting to decline. If they do not do so, the hair-trigger limit on debt contained in the plan will be exceeded. Its last bit of credibility will be shot.

I do not know if the government delegation made these arguments on their Brussels trip, but they would have been foolish not to. There really is no scope for Ireland to stimulate growth, and no alternative to continue trying to construct a public service which can be financed at tolerable tax levels.

That leaves debt relief. The Government appeared to make good progress in its arguments for such relief -- perhaps because they can see in Europe as well that time is running out.

But they may also get that same impression that ideas, and political will, are also running out, when it comes to fixing the public finances. The plan to cut more public sector jobs seems to be the only thing that could be described as a policy.

It may help that redundancies can be targeted to where there is seen to be over-staffing. But since it is up to the over-staffed themselves whether they wish to leave, it may not. There are grave doubts whether the size of the public service is really the problem.

Reform would seem more important than reduction. It is a bit depressing then, that reform is what primary health centres are supposed to be about.

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