Saturday 17 March 2018

We need better value, not more public spending on services

Seamus Coffey

A common refrain in Ireland’s political discourse is that our public services are not up to scratch because we don’t spend enough money on them.

Across areas such as health, education, social protection and housing, there are strong arguments that the government should do more – but doing more is almost always equated with spending more.

Proposals are made for additional spending with little genuine appraisal of what we already spend.  The reality is that already we provide resources at the level of our European peers for the provision of these services. If we judge the services to be below what it is provided elsewhere, it has more to do with how we spend the money rather than how much money we spend.

At an aggregate level government spending in Ireland is the lowest in the EU15. On average, government spending across the EU15 is the equivalent of ten percentage points of GDP higher than it is in Ireland. This suggests that if government spending in Ireland was at a level comparable to other EU countries there would be an extra €20bn available.

There are two issues we must consider before jumping to the oft-reached conclusion that our health, education and social protection systems would be better if only we spent more money on them.. And, of course, we cannot forget that we tried that before. Between 2000 and 2006, government spending on health, education and social welfare increased by €20bn. What assessment would be made of the service improvement brought about by that increase?

The first issue is the rather technical but important fact that GDP overstates our national income due to the oversized presence of multi-nationals here.

This factor probably accounts for around one quarter of difference in overall expenditure but even after doing that we still seem to be the equivalent of €15bn below the spending levels seen in other EU countries.

Which brings us to the second issue we must consider: what is it that other countries are getting for this additional spending? The remarkable fact is that almost all of the difference can be explained by one spending category – old-age social protection – mainly state pensions.

In 2014, the €7bn or so we spent on old-age social protection was equivalent to 3.7pc of GDP. This was the lowest in the EU – and by some distance. The next lowest spender in this category was The Netherlands, where this spending was equivalent to 6.8pc of GDP.

Just to move up to second-last in the EU15 would require us to almost double our old-age social protection spending. And other countries spend much more. If Ireland were to move to EU levels of spending in just this one category it would involve spending an extra €15bn a year on State pensions.

With that, the spending gap between Ireland and the rest of Europe would be gone, even though all we have done is note that GDP overstates our national income and examine differences in just one spending category.

In 2014 our spending on health, education and social protection (excluding old-age) was the seventh highest in the EU.  The six countries that spend more were Denmark, Finland, Belgium, France, Sweden and the Netherlands. Our spending exceeded that of all other countries in the EU. In some cases the gap to those above us is not very wide. An additional €2bn would bring our combined spending levels on these services up to that of Sweden.

If State pensions explain most of the difference between government spending in Ireland and other EU countries it is worth considering why this is the case. The first reason is relatively straightforward: demographics. We have fewer pensioners compared with other EU countries.

The second reason is by design. The benefits from Ireland’s State pension system are flat-rated with a maximum payment at present of €233 per week. In most EU countries, if someone makes social insurance contributions based on a salary of, say, €100,000 they will receive a state pension commensurate with those contributions. Those who put the most into the system get the most out.

In Ireland, the size of PRSI contributions has no impact on the benefits received which are based on duration and number of contributions. This means our system is very redistributive and reduces inequality, but does leave us with a system that provides inadequate savings for retirement.

 Some people have private or occupational pension schemes but in many EU countries the state takes responsibility for this. Public pension expenditure in France, for example, was 13.7pc of GDP in 2014. In terms of Irish GDP that would be around €26bn. And note again that our spending on public pensions was €7bn.

EU governments that spend more than Ireland are not providing a huge amount of additional services to their populations. The government sector acts as a giant money laundering vehicle, taking in pension contributions while people are working and paying out pension benefits in retirement in line with the incomes from which those contributions were made.

Would those calling for more public spending in Ireland to match our EU peers be happy if that resulted in bigger state pensions for those earning €100,000 and more? It would probably be better than the haphazard and patchy pension coverage that we have now but I don’t think it is what those advocating additional spending have in mind.

We could, and probably should, provide more for the provision of public services but the first step should be to ensure that we are getting the best for the money we are currently spending. Housing provides a case in point.

 Public spending in Ireland on housing development and social protection is the second highest in the EU. On the revenue side, we have significant tax expenditures such as mortgage interest relief and the capital gains tax exemption for primary residences.

We have a system that, once you are in it, means you can enjoy lifelong subsidised rents or substantial tax reliefs. The problem now is that people are being locked out from these benefits and any re-organisation is bound to be met with opposition.

This opposition means there are lots of calls for more spending, some of which are justified, but let’s see if we can get more use from the billions we are already spending.

Seamus Coffey is an economist at UCC and is a member of the Irish Fiscal Advisory Council. He is writing in a personal capacity.

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