Friday 27 April 2018

Brendan Keenan: Level of public spending still too high despite cuts

THE poet Burns thought it would be a great help if we could see ourselves as others see us. That isn't easy. Perhaps the next best thing is to compare ourselves to others, and see how we shape up in fitness and probity.

Something like the comparisons of government performance produced every three years by the OECD (Organisation for Economic Co-Operation and Development). The latest one appeared last week and, of course, there has rarely been three years like the ones 2009-11 covered in the report.

There are some surprises in this mirror. According to the OECD measures of a thing called the Gini coefficient, changes to taxes and transfers in successive Irish Budgets produced the biggest reduction in income inequality among OECD countries.

From having one of the highest Gini coefficients of 59 (meaning a lot of inequality) Ireland went to just above the OECD average at 33. More taxes for the rich seems to have been a general pattern, with the OECD figure falling from 47 to 31.

I have always been suspicious of the Gini figures as applied to Ireland. It defied belief, for instance, that Ireland was more unequal than Italy. But those who did espouse it have been remarkably silent about this latest result.

There will be less argument about the other area where Ireland led the way. Between 2007 and 2012, it recorded the highest fall in confidence in government. The number of people who felt our rulers would be able to deal with the country's problems dropped from 63pc to 35pc.

Other changes were not as great as one might have expected, given the scale of the crisis. The average OECD budget deficit in 2011 was 3.5pc of GDP, which hardly seems excessive after such a protracted recessionary period. Peering deeper, what that shows is the scale of the response to the crisis.

The average budget position moved from close to balance in 2001 to 5.5pc of GDP in 2009. Fiscal corrections reduced that by two percentage points in the following two years.

Averages tell very little in present circumstances. Some countries had to make only minor adjustments, and some were huge. The biggest was in Hungary, with an improvement of almost nine percentage points. But that was achieved largely by seizing private pension funds. Perhaps we'd better not talk about that.

The statistics lay bare the unique horrors of Irish government from 2001-08. Public spending as a share of the economy rose from 35pc to 50pc, even as the economy itself was roaring ahead.

The measurement of GDP is misleading for Ireland, but government spending per person tell its own tale. Only Korea and Estonia beat Ireland's average 4.3pc increase. By 2011, at $19,000 per person, it was higher than that of France or Germany, and 12pc more than in the UK.

It has not come down much since. Most of the "cuts" just prevented large increases in public spending, rather than achieving actual reductions. The implications are worrying.

The figures show public spending at 48pc of GDP, compared with an OECD average of 45pc. The percentage should really be even higher, if one adjusted for the oddities of Irish GDP. Yet, with a young population and small defence budget (almost three percentage points less than the average), Ireland's public spending ought to be in the lower half, not the upper.

Only the very wealthy European countries have public spending in excess of Ireland's $19,000 per person. It is worth noting that these figures are adjusted for prices, to give the real purchasing power of the money. Given the level of Irish prices, the actual figure would be higher still.

France, Germany and Britain all spend less per person than Ireland (yes, even the much-maligned French). Spain, which ranks closest to Ireland in income per person, is 10 places further down in public spending.

This is what others see, especially The Others in the troika. The report gives a handy breakdown of where the money goes, as compared with the OECD as a whole. Ireland looks fairly typical, except when it comes to the actual amounts spent. Social protection, at 36pc of government spending, is bang on the average. Health, at 14.5pc, is a percentage point higher, and does not include the significant amount spent on private healthcare. Education is 0.6 points below the average, which seems odd in a country with one of the youngest populations.

The big outlier is "economic services." More than 16pc of government spending goes under this heading, compared with 10.5pc across the OECD. Most of it is supports of varying kinds for business, industry and farming. It is surprising that this received so little attention from the troika. It would appear to be an area crying out for a root and branch value-for-money analysis.

The other worry is that the health service bosses tell us they cannot provide a proper service for this kind of money – $3,800 per man, woman and child (lots of healthy children). The UK spends $3,500, with very little extra private health spending, although the German universal insurance model admired by the government costs $4,800.

We can assume that the saving on defence will continue, but the impact of an ageing population will far outstrip that. Health costs will rise – half the average person's health costs are in the last two years of their life – and state pensions will impinge mightily on the social protection budget. The crisis has seen more public services provided with the same amount of money, but the process appears to be running out of steam. Yet it will have to continue, because demand for services is going to grow faster than the money available possibly can. The next €12bn in tax revenues are earmarked just to meet eurozone rules on debt and deficits.

The report demonstrates no obvious reason for this sorry state of affairs. Numbers employed in the Irish government service are not out of line. Conveniently perhaps, Irish data does not allow comparisons on public sector pay, but the OECD average of $126,000 for middle managers and $230,000 for senior managers does not seem terribly out of line.

One is left with the impression, already conveyed by the Croke Park process, that the root problem is not so much cost – although it is part of it – as failure in management and organisation. Whatever it is, the system seems unfit for the future that is expected.

Irish Independent

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