This year, the State will spend approximately €64bn of taxpayers’ money. A little over €7bn of this is capital expenditure, dominated by social housing and new roads. The other €57bn is current expenditure. Tax receipts for 2009 are likely to be in the region of €34bn. This leaves us, therefore, with a €23bn gap to sort out – and that’s assuming that capital expenditure is being spent on projects that deliver enough social good to pay for themselves over time. If cleaning up the banks ends up costing us about €1bn a year for the foreseeable future, and there is indeed some waste in the capital expenditure, it’s fair to say that the true fiscal gap is in the region of €25bn.
With a gap that size and a faltering international economic reputation, Ireland needs more than just a series of harsh budgets. Ireland needs a clear and well communicated overall recovery plan that it can show citizens and investors – of both the bond and FDI kind. Prospective bond buyers will demand less of a risk premium if they see Ireland has a well thought out plan for its recovery, so even announcing the plan itself could reduce the cost of the national debt in terms of servicing.
What should Ireland’s plan be? The general tenor of opinion is that public sector expenditure has to be drastically reduced, while the tax system needs to be rebalanced to provide a sustainable base for income. €42bn seems like a good target – both for tax receipts and for current public sector expenditure. Elsewhere, I’ve discussed some options to get our tax receipts up to €42bn. What elements of current expenditure must we look at, though, to reduce the Government’s outgoings by about one quarter?
The graph below shows three likely candidates: social affairs, health and education. These three areas alone account for €45bn, or four fifths of gross public expenditure. If €15bn is to be saved, these areas will have to contribute the lion’s share. As the first of hopefully a series of posts on how we can get public sector expenditure back into line, here’s a high-level look at how to save a few billion, without changing the overal structure of the public services…
The Irish taxpayer will spend €11bn in 2009 on ‘Social Assistance’, and a further €10bn on ‘Benefits’. In ‘Social Assistance’, the two biggest ticket items are child benefit (€2.5bn) and job seekers’ allowance (€2.2bn). Other items costing in the region of one billion euro each include the State pension, the one-parent family allowance and the disability allowance. Various supplementary welfare allowances, such as rent, mortgage interest relief and back-to-school clothing cost a further €1bn in total, while all the other Assistance schemes (such as the Carer’s Allowance, Free Schemes, etc) come to a further €2bn. To this must be added money spent under the ‘Benefits’ heading. The biggest items here are €3.3bn spent on State pensions, €2.4bn on Jobseekers’ Benefit, and a further €1.4bn on widow(er)s pension. About €1.5bn is spent on illness and invalidity.
Some awkward questions:
- Why is Ireland’s job-seekers allowance/benefit so generous compared to other countries? Particularly when one bears in mind that rent allowances are separate and cost the taxpayer a further €500m.
- Why should payments to job seekers not be index-linked both ways? Should these payments not be going down in line with price levels generally, just as they went up in inflationary times?
- Why is child benefit not means-tested? €2.5bn is an awful lot of money – is there any evidence to suggest that it has contributed to Ireland’s higher birth rate?
- Why on earth is mortgage interest relief, which admittedly is only costing €40m in 2009, considered social assistance?
- Why do one-parent families receive special assistance? Is this a blunt instrument targeting one-parent families in certain socio-economic circumstances? If it is, should it not be better honed for this end?
- Is everyone on disability allowance really in need of it?
- Likewise widow’s allowance… Without wanting to sound like Homer Simpson (who grumbles about “mooching war widows“), Ireland pays about as much on widow’s allowance as it does on civil service pay! What is the goal associated with this policy tool? Why do we have something in the region of 100,000 widows being paid €200 a week? One simple interim solution would be requiring the widow in question to sign on to receive the money, rather than pay it directly into their account – that would hopefully eliminate some of those who just don’t need it.
Overall, expenditure on Social Affairs will increase by €3.5bn this year, with 60% of this increase due to greater jobseeker payments. This should at least in part be regarded as cyclical (say €1.5bn), meaning the base from which to start trimming is €20bn. It should definitely be possible to reduce expenditure in this area to €17bn or so, by ‘better targeting the vulnerable’, as the IMF put it in their recent report.
In addition, reducing jobseekers payments by 5% would save in the region of €250m, while a similar amount could be raised from reducing the State pension for those with other sources of income in retirement. Restricting payments such as child benefit, disability, widow and one-parent allowances to those that need it makes a savings target of €3.5bn more than achievable.
The Department of Health and Children will spend €15.5bn on current expenditure this year. Within this, the HSE is the chief money-spender, spending €11.6bn in 2009. On the face of it, this represents a saving of €1bn on 2008. However, these figures include income, such as money given to this particular budget line from the public sector pensions levy: actual gross spending will be €15bn – up 1% on 2008, not down.
€7bn is spent directly on the HSE regions – the vast majority of this, €5.5bn, is core pay. A further €2.5bn is spent on grants to hospitals. Most of the remaining money is spent on schemes, in particular the €2.75bn spent on medical cards and the €1bn spent on long-term residential care.
No matter which way one looks at the numbers, one cannot ignore the fact that, along with those on a HSE pension, the 136,000 people employed by the HSE will be paid over €8bn. The HSE regions will together spend 3.5% more on pay this year than last, while non-pay costs will go down by 15%. If only that sort of flexibility were possible on the pay side: a 15% reduction in pay costs, rather than a 3.5% increase, would have saved the Irish taxpayer €1bn this year.
Ultimately, Ireland needs to consider its health model. I would love to see policymakers explore a Singapore-style model of a mandatory personal health savings account, similar to a pensions account, taken out of tax paid and stored as an investment account, to be used for general medical expenses. In the meantime, though, further savings of about €1bn could be achieved through reform of the medical card scheme, long-term residential care and in particular the block grants given to hospitals.
The Irish taxpayer will spend €9.5bn on education this year, the vast bulk of which is current expenditure. Primary and secondary education will consume about €3bn each, while tertiary will cost just over €1.8bn. In relation to primary and secondary education, my primary concern is well known: Ireland’s primary and second school teachers will cost the taxpayer €3.5bn this year – that’s an average cost per teacher of €70,000. This excludes superannuation, which costs a further €700m.
The VECs constitute a further €1bn in spending, €770m of which is pay, while a further €1bn is spent by the taxpayer on college grants towards current expenditure. If this is like other parts of the education system, this is likely to be about 75% pay. Flexibility in pay costs from primary right through to tertiary, similar to that suggested above for healthcare workers – and similar to the upward flexibility previously shown by education workers in benchmarking – could save the taxpayer in the region of €1bn.
Incidentally, there is relatively frequently a hullabullo in the media about free fees. This initiative is hardly spare change, but in comparison with the items listed so far, its costs are actually relatively small – just €330m. That is not to say, of course, that the free fees initiative should not be re-examined for efficacy – is it just another blunt tool to particular aims in relation to specific cohorts of the population?
Where does that leave us?
Even a quick look at the numbers shows that with 65% of taxpayers’ money being spent on pay costs, the solution to Ireland’s fiscal woes is definitely going to have to involve cutting the public sector payroll. I don’t think necessarily that this should come from cutting the numbers at work, particularly at a time of high unemployment. I think it should come instead from a competitive readjustment of public sector wages – perhaps a further benchmarking exercise, only this time open and transparent, could be used for this purpose.
When the public sector wants to, it can certainly cut costs. It can be ruthless even when it comes to someone’s wages. For example, €77m was spent by the civil service on consultants in 2008 – this is being cut to €53m in 2009. That’s a very commendable 30% reduction! I’m not sure why, when you multiply those numbers by 100 and replace “consultants” with “public sector workers”, the same principle doesn’t hold. The maths above shows that, even without making any major reforms to the public sector, better use of taxpayers money could save about €6bn across social affairs, health and education.