As taxpayers, and international newspapers, worry about the latest results from Anglo Irish Bank, a deeper problem continues to bubble under the surface. That problem is the Irish Government’s underlying deficit. It is easy – and understandable – for people to focus their anger on potentially €25bn being wasted on Anglo. However, over the same timescale, the sums involved in the Government’s day-to-day excesses will be much, much larger. In 2020, what will stand out is not the extra debt we have from the banking bailout, but the extra debt we have from day-to-day Government spending.
This year, Ireland’s government deficit, excluding bank recapitalisation, will be about €20bn. Next year, even to keep the deficit the same size, given higher national debt repayments, savings of €1bn will be needed. To actually reduce the deficit by a meaningful amount, significantly more savings will be required. That will require some mix of tax increases and spending cuts.
However, this week, the numbers signing on grew for the sixth month in a row, while core retail sales fell, having risen in the first half of the year. Incomes tax and VAT are the Government’s two most important sources of revenue. So, with VAT and income tax receipts still falling, the Government cannot depend on tax revenues to help close the gap any time soon. It must look to expenditure instead. At the start of the year, though, the Government promised its employees through the Croke Park Agreement that it would not cut their rates of pay or impose any compulsory redundancies.
The government’s logic behind the Croke Park deal was that it copper-fastened existing savings (the Pensions Levy and the pay cuts) while buying industrial relations peace for the next few years. In return for the pay freeze and job security, it would get free rein to pass a range of productivity-enhancing measures, expected to pay off in the long run, such as redeployment of staff and consolidation of public service organisations. Many public sector workers might not have thought it was much of a deal in January. By now, though, there can be few taking even a cursory look at the budgetary arithmetic who doubt that Croke Park represents an excellent deal for public sector workers.
Consider the top-level figures. Total government expenditure this year – excluding what is being spent on the banks – will be about €69bn. Meanwhile, total revenue from taxes, levies and other sources is likely to be around €50bn. The Government employs about 370,000 people at a direct cost of €20bn (an average of €54,000 per worker). The Croke Park deal has effectively set this €20bn off-limits from active cuts.
Realistically, total revenues (currently €50bn) are unlikely to grow far above €55bn by 2015. Even getting to about €55bn requires a relatively favourable scenario. It would happen if economic growth returned next year and averaged 2% until 2015, provided the government reformed income tax and introduced a universal property tax.
Let’s suppose, though, that total revenues do reach €55bn by 2015. That means the Government will need to get its annual spending down from the current level of €69bn to no more than €62bn, if it is to get anywhere near the deficit that the EU and the markets are expecting (currently 3% of GDP by 2015).
It has to achieve these savings even as the snowball of national debt repayments starts to form. As we run large deficit after large deficit, the cost of servicing the national debt will rise from about €4.6bn this year to closer to €8bn a year by 2015, depending on interest rates. This means that, before anything is touched, the cut in spending needed between now and 2015 has just increased to €10bn. The interest on national debt has to be paid and the Croke Park deal means that the €20bn in public sector pay cannot be touched. Thus, the €10bn adjustment will have come from the remaining €45bn of spending.
The sheer scale of this challenge is shown in the graph below, which breaks the €69bn of spending down into three groups: off-limits for cuts (post Croke Park), namely public sector pay and national debt payments; social welfare payments, a political mine-field; and, by process of elimination, the third of spending that is prime target for cuts, current (non-pay) expenditure and capital expenditure.
Currently about half of the €45bn spent by the government aside from national debt and public sector pay is spent on social welfare. A return to some sort of jobs growth over coming years, plus significant reform of social welfare, may reduce social welfare payments by €3bn per year. In relation to capital spending, forecast to be €6bn this year, it might even be possible to shave another €1bn off.
But that still leaves the government needing to cut somewhere in the region of €6bn out of what one might call “non-pay current expenditure”, currently about €14bn. This money is spent on the “raw materials” of Ireland’s vital public services. Will it really be possible to maintain, let alone transform and improve, Ireland’s public services if project budgets are going to be cut by 40%? Healthcare, education and other public services are going to have to deliver ongoing costsavings of between 5% and 10% each and every year until 2015 if Ireland is to stand a chance of meeting its Budgetary targets for 2015.
The Croke Park Agreement does contain a get-out clause but that requires “an unforeseen deterioration in finances” , not the relatively benign set of economic conditions outlined above. (This is more than likely a moot point anyway, as unions have stated they will no longer be bound by the Agreement if that clause is invoked.)
Clearly, nobody wants to cut public sector wages or workers just for the sake of it, particularly given the impact on consumption this could have. But in putting pay-cuts and redundancies out of reach, the Croke Park Agreement is effectively a huge gamble by the Government that something unforeseen is going come along and make the Exchequer arithmetic easier over the coming five years.
So, has the Government, in its attempt to buy industrial peace and transform Ireland’s public service, actually locked itself into a scenario where it cannot afford to implement the reforms Ireland needs?
This is a slightly altered version of an OpEd piece I had in the Sunday Independent earlier in September.