Ronan Lyons | Personal Website
Ronan Lyons | Personal Website

Where should Ireland cut its public spending? Thoughts for Budget 2011 (II)

John Maynard Keynes once wrote, “If economists could manage to get themselves thought of as humble, competent people on a level with dentists, that would be splendid.” My ambition for Ireland’s government finances is similar: if Ireland could get its government finances humble and competent, on a level with the standard OECD economy, that would be splendid. Two weeks ago, when looking at public sector income, I examined how across two key aspects of Ireland tax system in particular – excessive income tax credits and the lack of a property tax – Ireland is an oddity compared with the typical OECD economy.

This week, as Budget 2011 draws ever closer, it’s time to look at public sector expenditure. As with the post two weeks ago, this post looks for areas where Ireland sticks out like a sore thumb in international comparisons, as the focus for reform, rather than where Ireland is already a “humble, competent” OECD country. First, though, it’s important to review the big picture, to see how much needs to be cut in the years to come. Gross expenditure by the Irish government this year, excluding any bank-related payments, will be about €69bn, while gross income is estimated at €50bn. The government – and the main opposition parties – have committed to reducing that €19bn deficit to about €5bn by 2014.

Personally, I think such remarkable savings are not possible in such a short time-frame and that a target deficit of €7bn by 2015 is more realistic. (For once, this puts me quite close to Sinn Fein’s economic policy!) Either way, increasing taxation revenue to €57bn is about as much as the government can aim for in that time period (see the last Budget 2011 post). Coupled with this, higher national debt means higher debt servicing, so if no other government expenditure item changed, total spending in 2015 would grow to about €73bn, not €69bn.

This means that over the coming 4-5 years, the Irish government has to deliver public expenditure cuts of €10bn (give or take €1bn). This is a huge task for any government, particularly given that all €10bn of the cuts will come from the €65bn of expenditure that is not interest payments on the national debt. This is an average cut of 15%. But should it be an even 15% cut on all non-debt expenditure?

Where is Ireland spending above the odds?

The first point to make is that, relative to total income in the country, Ireland’s government spends more than most others in the EU. Excluding defence, Ireland’s government spends 52.4% of national income, putting Ireland’s government fifth in the EU league behind Denmark, Sweden, France and Finland (all around 54%) and well ahead of the UK, Germany and Spain (less than 50%).

To see where this money is being spent, it is important to look at the breakdown of government expenditure. Eurostat breaks government expenditure down into 10 main parts, the latest figures being for 2008. The first is “General Public Services”, which includes money spent on the executive and legislative, on foreign economic aid and on public debt transactions. The second is Defence, the third Public Order and Safety (police, courts and prisons), while the fourth is “Economic affairs”, which includes money spent on agriculture, energy, transport and communication.

The fifth is Environment Protection, including waste and waste water, while the sixth is “Housing & community amenities”, which covers housing developments, as well as water and street lights. A relatively small category is what is termed “Recreation, culture and religion”. The final three categories are three of the largest, on average, Health, Education and “Social Protection”, which includes old age pensions and unemployment.

The graph below shows total spending in each of these ten areas for 14 European countries. The colours represent different types of spending, with larger areas such as social protection and health at the bottom. The scale is percentage points of gross national income in 2010, so you can see governments in most countries spending either just above or just below half of national income.

Public sector expenditure, by sector, % of GNI 2010 (est.)
Public sector expenditure, by sector, % of GNI 2010 (est.)

Of 14 countries analysed (the EU-15 plus Norway, minus Greece and Luxembourg), Ireland is almost always an outlier when looking at spending by sector. Ireland’s government is one of the top two spenders in five of Eurostat’s ten areas but in the bottom three in four other areas. Only in education is Ireland’s 6.7% of national income spent close to the typical EU figure of 6.2%. The areas where Ireland spends less than any other country are Defence (predictably) and “General Public Services”, while Ireland comes 12th out of 14 in expenditure on both Social Protection (17% of national income) and Recreation & Culture (1%).

In two relatively small areas of expenditure, Ireland’s government spends a multiple of the EU average: in housing and community amenities (principally housing developments) and in environment protection (principally management of waste and waste water). The figure for housing – 3% of national income – is actually over four times the typical country’s figure of 0.7%. Halving total expenditure in these areas would still leave Ireland spending more than most but would save about €2bn, assuming since 2008 about €500m has already been saved.

Other expenditure areas that are predominantly capital projects also look unsustainable, particularly “Economic Affairs” which includes money spent on energy, transport and communication. Ireland’s 6.7% of national income spent in these areas is just over one quarter higher than our peers. Cutting spending in this area by one quarter would save in the region of €3bn, again assuming that since 2008 about €500m has already been saved in this area. Aware as I am that capital investment is important, Ireland cannot afford to invest twice as much as our peers – at least not from central revenue. For projects that have a verifiable rate of return, the National Pensions Reserve Fund may be an option.

The other two outliers are not capital-intensive, though: they are labour-intensive. The smaller of the two is “Public Order & Safety”, where Ireland spends 2.3% of its national income, behind the UK but more than twice Belgium or Norway. Bringing Ireland’s spending in this area into line with the EU average would save somewhere in the region of €700m.

Unhealthy Irish Public Spending?

Last, but unfortunately by no means least, is Irish public spending in health care. Ireland’s government spends 10% of national income on healthcare, more than a quarter above the typical EU-15 country. What makes this truly puzzling is that Ireland should be an outlier in the other direction: Ireland has a significantly younger population than its EU-15 peers. The graph below shows a scatter of public spending on health and the average age in a country, for a sample of thirty countries. A trend-line in light green shows the mild upward relationship between a country’s age and its spending on health. Ireland is the anomaly: by far the youngest population apart from Cyprus but spending by far the most.

Spending on health compared to average age, various European countries
Spending on health compared to average age, various European countries

The figures are if not astounding then by any definition significant. If Ireland’s government spent – as its median age might suggest – just 7% of national income on health, rather than the 10% currently spent, the government could expect to save anywhere up to €3.5bn on its healthcare bill, taking into account some of the savings that have been made in the last two years.

In review, bringing expenditure in these five areas outlined above – health, economic affairs, public order, housing and environment – back into line with our EU peers would save about €9.2bn. General efficiency savings and ensuring social welfare reaches only those intended could achieve the remainder, giving the total of €10bn needed to bring Ireland’s deficit back to manageable levels.

At that point, Ireland would have “bare bones” public expenditure. I don’t think this is a wise end-point. Rather, I think this represents the ideal opportunity to put the country’s public finances on a sustainable track once and for all. This will involve devolving responsibility for money and for people to individual public sector organisations. As they strive to match their budgets to the outcomes they deliver for the country, this will mean finally switching how the government spends its money from an accounting mentality (costs) to an economic approach (benefits to society, relative to costs).

On previous occasions, I’ve talked directly about the sustainability or not of the Croke Park Deal, which binds this government and the next one on redundancies and further cuts in public sector pay to 2014. I’ve deliberately avoided any discussion here about the number of people at work and how much they get paid. I’ll leave it up to the reader to judge whether – in an environment where €10bn needs to be cut from €65bn and where two thirds of costs in health are pay costs – the government can afford to ring-fence €20bn in public sector pay. I think the point to make today is that identifying where we’re off track is the first step to getting back on track.

  • Shane ,

    Great piece Ronan, thanks

    • Joseph ,

      Thank goodness we don’t have a real army to pay for.

      The health spend is very odd. It’s difficult to see what great value or service we are getting for it. I can only assume it was designed by an older person (thinking along the lines of what care they might need in their latter years) and implemented by a trades union!

      Personally, I don’t think we spend enough on education in Ireland and will laugh at the irony if they cut education spending in December after listening to all the drivel over the past two years about how we need to grow into a knowledge economy, that’s where future jobs will come from, etc.

      I would agree with you that we don’t need to spend more than a country like Belgium on public order and safety.

      • Treasa ,

        This is all well and good Ronan, but as I see it, a key issue that we have in Ireland is not the recognition that we overspend in certain areas – health is a key example, and I really don’t understand how we are spending so much on housing developments either, since most of that was supposed to be private expenditure…but that we do not get effective value for money. Whether that is paid for privately or publicly, this remains the case.

        Most comments regarding public services and the spend on them are bald cutting exercises. Colm McCarthy’s Bord Snip reports are a case in point. No one has suggested that we need to look at the efficiency of our systems. Just grab scissors to the budget. If we sorted out the inefficiencies, we would get the cost/standard gains we need.

        It’s all very disheartening.

        • Ronan Lyons ,

          Hi Treasa,
          If you were to give Ireland 10 years grace, I think it would be possible to not have to do an accounting exercise of snipping and instead steadily rebalance public services on an economic footing, of social benefits relative to costs and therefore efficiency. However, we are in a fire-fighting situation and have a public service where each individual part has no idea of the relative scale of value it creates for society. Therefore, we have to use relatively crude rules of thumb to deliver the savings by 2015, at which point I think we should certainly build up our public services around each organisation knowing the value it creates relative to the cost it incurs.

          The question is what rule of thumb do you use for efficiency gains in the short-run. The one used so far is: can’t you do more or less the same using 20% less. Here I opt for a slightly different tack, that Ireland’s public services offer broadly similar public benefits to their European counterparts and therefore we should be looking to spend similar amounts of money on them as our EU brethren.

          @Joseph
          I think that at least part of the high health spend can probably be explained by a reckless decision at the time of the switchover to the HSE to essentially incur the costs of the old Health Boards system as well as the new HSE system until everyone in the old Health Boards is retired. I’m pretty sure we can’t afford that now, though.

          Thanks to one and all for the comments,

          Ronan.

          • Donal O'Brolchain ,

            Well done Ronan.

            Two things strike me
            1) Comparing data based on one year, to what extent is that “skewed” by the state of development of say things like infrastructure eg. up-to-date water services, electricity grids (regardless of generation facilities, urban transport services. Has there been a degree of catch-up with underinvestment in the past?
            2)Are the definitions the same in each country? Two examples
            Health. I am very struck by the HSE’s responsibility for much of the social services eg. the HSE involvement in the recent Roscommon family and other similar cases. Personally, I would have thought that Health should be confined to things of a medical nature and children’s welfare be dealt with under Social Protection.
            Housing. To what extent are water services included in this, as opposed to say Environment.

            @Treasa,
            I agree with you about value for money being the key issue – even now. Some “economic analysis” (present company excluded, of course) strikes me as little more than cost accounting, with an “all public expenditure” is wasteful by definition.

            • Miriam Cotton ,

              Stealth subsidies, grants and perferments to private companies almost certainly account for a large portion of the overspend. It is galling that we spend so much more on health than other EU countries and yet have a far worse service than they do. Corruption, maladministration, insane give-aways for private companies, private hospitals: the whole thing is a monument to Mary Harney’s blind, ruthless, ideological folly.

              • Ronan Lyons ,

                Hi Miriam,
                I don’t think I’m likely to convince you but for what it’s worth, assuming Mary Harney’s “blind, ruthless, ideological folly” was a pro-market one, then we would expect to see less money being spent on healthcare, not more. You might not like Ms. Harney but she’s hardly pro-maladministration. In fact, as outlined below, if she had her way, the layers of bureaucracy that were preserved in the changeover from Health Boards to HSE would probably not have survived. But we are left with them and they are not a testament to some sort of ultra-market ideology, they are a testament to a government that didn’t particularly fancy taking on the “insiders” (healthcare workers) at the expense of “outsiders” (the general public).
                R

                • FT Alphaville » The Rock of O’Sisyphus is getting mighty heavy [updated] ,

                  […] links: Where should Ireland cut its public spending? – Ronan Lyons When Irish margins are biting – FT […]

                  • gerard clarke ,

                    One factor who have not taken into account is that in Ireland, the HSE includes functions that in other jurisdictions properly fall under the realm of social protection. A specific example is long term care (both elderly and young). In the UK this is not funded by the NHS.
                    THe HSE budget also includes a direct €100m subsidy to private investors in the form of the NTPF who get a double dip in the form of tax reliefs in relation to their investment.
                    Other significant anomalies exist- for example there are 3,000 (vs. 2,400 Consultant medical staff) ICT employees in the HSE yet alomost every ITC development has to be outsourced to the private sector.

                    • Conor ,

                      nice article, and food for thought..

                      Id like to make a point about the public spending on healthcare… We as a nation prefer not to visit doctors and buy medicine (with the exception of over the counter products), The primary reason is cost. We tend to take the line that saving the €70 visit to the doctors and the perscription he/she serves us might outweigh the need for treatment. I think taking this line, we also avoid going to the hospitals too, so i think if you or indeed i had figures for the amount of patients taking up residence and care in hospitals in comparison to your European peers, I would assume Ireland would have significantly less numbers.

                      This can be seen too if you are to look at the dentist trade in Ireland, its shockingly expensive, and i for one have been holding off a visit to save the linings of my pocket. In the news only recently they talk about Irish people travelling to Serbia, Hungary, Poland etc for treatment. Because its cheaper to fly and get treated than it is to walk to the local dentist. Frightening really the fee’s we are expected to pay.

                      Lets get back to the hospitals, I know a person who works in a hospital, and Im told that the doctors are wined and dined so to speak (just like the politicians, regulators, bankers in their case) by Pharmacutical companies, so that the same doctors and consultants will buy “their” product.

                      Compare this to Australia where by law a pharmacist, nurse, doctor MUST inform you that you can have this medication or the cheaper brand which is the exact same, but 1/4 (or so) the price.. If we adopted such a legal policy, i think we would save our health care system plenty..

                      • Caroline ,

                        It annoys me how much money the HSE wastes. Managers lack people management skills. There seems to be an apathy with Staff. Very demoralised.

                        My idea to save the HSE money is to pay those employees who work, and dicipline / fire those that dont! Do not pay employees out sick, or on maternity leave – let them claim social welfare.

                        At the moment, staff on Mat Leave get full pay, less Maternity Benefit. Staff on sick leave, get 84 days, to six months full pay, less Illness Benefit. There are employees who take their full sick leave entitlement each year, then miraculously recover before they are due to go of pay.

                        • John McDowell ,

                          All corporations have procurement and its governance at the top of its agenda to transform and gain bottom line contributions necessary to reduce costs. Not once have I heard about a public sector spend review and reform during this whole debacle.

                          The public procurement body in Ireland needs as much reform as the political system and those that have been at the helm guiding us to the iceberg and dipping their snouts into the trough should be replaced immediately. Obviously with the govt that involves a democratic process however in the case of tax payer money and its management this is not the case. A new procurement structure must be created with a strong governance and accountability immediately to assist in cost reduction and improvement of services (yes they can be done together – the private sector do it all the time !)This will benefit tax payers in 2 ways 1. Reinvestment of money saved to front line services and 2. Less (but not absent) reliance on redundancies to achieve cost reductions required.

                          Unfortunately Ireland has not recognised the importance of procurement at a strategic level, whilst the rest of the world has. Ireland seems to have a heavy reliance on finance depts to do that job and you only have to look at the fundamental errors made by the govt finance dept to realise what a mistake this is. Unfortunately this is pervavsive in Ireland and must change.

                          • BARRY ,

                            Thank you for a simple overall picture of where we stand

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