A little over a year ago, I wrote about the “eight things on Ireland’s to-do list” when it came to Government finances. It outlined three taxation measures and five expenditure measures that would help a Government get the deficit back to manageable levels by 2015, while facing an interest rate above 5% on a growing national debt.
The three main tax measures will be familiar with to long-standing readers of the blog: increasing the amount of income tax the typical earner pays, introducing a Universal Social Charge, and bringing in a sustainable annual property tax. These were designed to bring total Exchequer revenues up from €51bn to about €58bn by 2015.
The job for expenditure was an even bigger one: to go from total spending of almost €70bn in 2010 to about €60bn. The reason that this job is so tricky is because €45bn of the €55bn in current expenditure in 2010 was spending on healthcare, education or social welfare, areas many members of the public most want to see protected.
Low hanging fruit
One of the eight things I had was reducing capital spending slowly over the period to a sustainable level of €4.6bn. This would save almost €2bn of the €10bn needed. Already, though, the estimate of capital spending for 2011 is €4.6bn. This means that in three short years, capital spending has been halved. Aside from those work on these projects, whose livelihoods we should not discount, the people who benefit from capital projects are “future us”: you, me and our children, using better roads, rail, or broadband, for example. Compared to the public servants that the Government has to work with every day, though, “future us” is a very easy target. The easy cuts have been made.
If the same scale of cuts had been made in health, education and social welfare, the government would have saved €20bn! Instead, spending in those three areas this year will be €2bn higher than in 2008, largely due to more people needing social welfare. The depressing conclusion is that, three tough Budgets later, all the “low-hanging fruit” has been picked, leaving just the more painful cuts needed to close the deficit.
Clearly, though, it isn’t as easy to cut spending in health, education and social welfare. That’s because the bulk of all this money goes directly into someone else’s pocket as income. What these departments need is a combination of natural attrition of staff and productivity-driven growth that delivers savings each year every year for five years of the order of 5%. This is on a completely different scale to what the Croke Park Agreement has currently planned. It is estimated that its efficiency measures in education would save 0.5%, one tenth of the savings needed in a single year.
Slash and burn?
Worryingly, there isn’t the first indication yet that the new Government has a grasp on the scale of transformation in public spending needed. Earlier this month, the Department of Finance published its briefing note to the new Minister – complete with blacked out paragraphs right out of Hollywood. It included yet more easy targets: there are plans to further cut capital spending to just €3.6bn. Amazingly, though, where one might have expected cuts of the order of €4bn in health and education over the next five years, there are cuts of less than €300m! Spending in education is actually projected to increase slightly. Given that, it’s almost surreal to see Ruairi Quinn, Minister for Education, come out today and say that cuts in education will not be ‘slash and burn’…
A comparison of 2008, 2011 and where we might be in 2014, both my own thoughts [RL] and those gleaned from the Department of Finance report [DOF], is in the graph above. Income is on the left, spending is on the right. The Department of Finance do not include projections in relation to taxation – but we can at least back out some round numbers, the shaded purple numbers on the left, based on the total for spending and the ceiling on the deficit.
Looking to Budget 2012
There are three things that worry me about the Department of Finance’s numbers.
- The first – as mentioned above – is that they are still going for the easy options, cutting capital spending and increasing spending on education.
- The second is that to compensate they are, even if only implicitly, planning for greater tax increases on a private sector already credit starved and hard-pressed with unemployment and negative equity.
- Lastly, the only way the numbers tally as they do is because they are counting on social welfare expenditure to fall by almost €3bn. I had estimated a fall in welfare payments of €1.2bn, based on a 2% economic growth rate. What growth rates are they using?
Budget 2012 will be the first proper opportunity the new Government has to stamp its authority on the direction its finances take over the next few years. It must seize that opportunity and put in place realistic targets.
Last week, I appeared on Eamon Dunphy’s radio show. Someone texted into the show and referred to myself and others as public sector “bashers”. This came as a surprise to me. I want well-funded public services that deliver an excellent social return on the investment taxpayers make. Nor am I a public-sector-worker basher. I want those who work in services that are publicly provided to be well-paid. But we won’t be able to do these things if we can’t prove to ourselves and others that the Government is able to spend in accordance with the money it earns. And there is no indication yet that the new Government is aware of the size of the challenge.