Assessing Ireland’s public expenditure

During the past week the International Monetary Fund issued what is know as a ‘Staff Report‘ on Ireland, setting out the IMF analysis of the Irish economy and a set of recommendations. In the report we find the following passage on the need to regain control over the public finances:

With the large looming deficits, the task of consolidation presents formidable
challenges. The needed consolidation comes at a moment when the economy is undergoing
substantial contraction and prices are likely to fall for a number of quarters. The
consolidation will help the recovery only if it generates confidence that a fundamentally-
strong reorientation of government priorities is under way. If not done right, the downturn
could worsen. This, in turn, will require a substantial effort to scale back the scope of
government activities and to improve the efficiency of government services. The tax base
must be broadened, while limiting the impact on unit labor costs.

‘With the large looming deficits, the task of consolidation presents formidable challenges. The needed consolidation comes at a moment when the economy is undergoing substantial contraction and prices are likely to fall for a number of quarters. The consolidation will help the recovery only if it generates confidence that a fundamentally-strong reorientation of government priorities is under way. If not done right, the downturn could worsen. This, in turn, will require a substantial effort to scale back the scope of government activities and to improve the efficiency of government services. The tax base must be broadened, while limiting the impact on unit labor costs.’

This assessment is substantially in line with the stated intention of the Government to focus, in the Budget later this year, on public expenditure cutbacks rather than further increases in taxation. It is in fact probably a matter of consensus amongst most economists that this is the correct approach. The problem is that the gap between revenues and public expenditure is now so large that the further cutbacks that are needed to address this will have to be dramatic.

The temptation at such moments is to go for random cuts across the board. However, it is arguable that a reorientation of the public finances could well have hugely damaging side-effects unless they are part of and the result of a fundamental re-assessment of what we expect exchequer funding to deliver. Some of the issues that should be addressed by way of a fundamental policy re-assessment include the capacity of the taxpayer to provide adequately for demand-led services such as healthcare, the affordability of universal benefits, and the capacity to fund higher education on public money alone.

The problem we currently experience is that in these areas it is almost impossible to control public expenditure. Yes, the government can decide to reduce spending on the system of public healthcare, but this could be shot out of the water almost immediately if, for example, the new strain of swine ‘flu were to spread widely as some are predicting, or if the ‘winter vomiting bug’ becomes particularly severe, or if any number of other conditions were to take hold. Declaring a limit to public expenditure on health is a purely notional thing, to which the factors that will in reality determine the cost of healthcare pay no attention whatsoever. The same is true of the social welfare budget. Education costs can be controlled, but at the price of visibly declining quality.

It seems clear to me that we have a framework of public expenditure that now appears to be no longer viable. Rather than attempting to impose harsh (but often unachievable) expenditure cuts on this framework, it would make sense to conduct a fundamental review of what we feel we need to fund and how we should fund it. And it also seems to me that this must include a review of the affordability (and efficacy) of universal benefits.

Public expenditure to pursue and achieve important social goals of health, education and welfare is a vital ingredient of an equitable society. But that counts for nothing if the method of funding ceases to be workable and economic chaos threatens to be a consequence. We need to ask much more fundamental questions about public funding, and we need to ask and answer them now before any further expenditure decisions are taken.

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