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.

Advertisement

Public investment priorities

Another day, another public finances disaster story, another rise in unemployment, another question mark over what will and what will not be affordable for us, another onset of pessimism. It still seems to me that what we need more than anything else is a government statement of a national vision that will temper the mood of gloom and encourage a more can-do attitude amongst us.

But in the middle of all that, we will need to start looking again at some of our capital investment programmes. On RTE Radio’s ‘Drivetime’ today, my DCU colleague Tony Foley suggested that it is time to look again at the National Development Plan published by the Government in 2006. Over the period 2007-2013 this envisaged expenditure of €184 billion on major infrastructural and related projects, some of them seen as important on the basis of economic and trading projections that we now know to be wrong. Even as employment creation measures, as Tony Foley suggested, these projects could be questionable, as there would be much cheaper ways of achieving the same thing.

We may now need to face up the fact that some curtailing of these projects, and in some cases a re-engineering of them to fit changed circumstances, may be preferable to major tax increases that could damage Ireland as a place in which to invest. We should not scrap the NDP as such, but rather look at it again to see which elements of it are now important, and which could be reconsidered.

On the road to God knows where

It is said that Barack Obama’s Chief of Staff Rahm Emanuel remarked recently that you should never let a good crisis go to waste. In fact, there are many reasons for suggesting that Ireland’s current difficulties provide an opportunity to re-consider our economy, our political habits and our society. People are generally willing to think more radically when the status quo isn’t working as well as it should. So we need to ask ourselves where we are going; and we need to use the debate prompted by that question to set out a vision. Armed with the vision, we are more likely to be willing to make sacrifices, and we are also more likely to be able to contribute to the process that will lead to our destination.

So far we haven’t done much of this. What’s going on right now is a kind of national firefighting, with teams of people pouring water over conflagrations here and there, and others running around shouting, and others again in shock looking at the charred remains of some of the fires that wouldn’t go out. You get the picture.

Much of the public commentary, and I think a good deal of the chatter at the bar over a pint, is about the Horrible Bankers. Without wanting to take away from the truly amazing story of what some of these good people apparently considered right and proper in conducting their business, at this point it’s a sideshow. Putting the men from the financial boardrooms in the stocks and throwing rotten tomatoes at them may be perfectly justifiable and even fun, but right now it doesn’t help us at all. We need to move beyond the firefighting and finger wagging and get to the vision thing. We need to know where we’re going next and how we’ll get there.

A few people have started making suggestions about a very different form of society and economy than the one that brought us the Celtic Tiger. Higher taxes (at least for the rich), public ownership of this and that, cast iron regulation of the other, are amongst the things on the menu. The Boston versus Berlin thing is also being resurrected, but it’s a little tricky because Berlin is also in a bit of chaos right now and Boston may, in the Obama era, be rather unlike Boston.

The serious point of this post is that when you want to recover from a crisis you need a strategy, not merely tactics. And the strategy requires a vision. And it may be time to suggest, gently, that cutting public expenditure is not a vision (even if it is right), and may not even be a tactic. Nor is raising taxes. Some of the big questions we need to be asking now include: who will be creating this country’s wealth in five years’ time? To what extent and in what way do we expect to distribute that wealth? As we keep talking about innovation, what kind of innovation do we want Ireland to be known for, and how can we harness that innovation to generate both growth and jobs?

Some of these questions are put and addressed in the Government’s plan, Building Ireland’s Smart Economy. But on the whole that document is too busy, and perhaps contains too many detailed ideas without setting it in the context of an overall vision. And most important of all, that vision, when we have it, needs to be communicated directly to the people.