This year, the Irish Government will spend €68.3 billion, in an economy where total income (GNP) is of the order of €128bn. About one sixth of this total amount spent by the Government is what is known as “non-voted”, i.e. it’s not up for discussion. This includes €5.2bn in the form of interest payments on the national debt and €3.1bn in the payment of promissory notes. It also includes our contribution to the EU budget, which is about €2bn, and a further €300m in various odds and ends (such as judges’ pay).
The remaining €57.5bn – or the vast bulk of what the Government spends – is “voted expenditure”, and as such is up for Ministerial and Budgetary discretion. Of that amount, this year just €4.7bn will be spent on capital investments, down from €8.9bn in 2008. So of the €68.3bn in total spending, almost four fifths (€52.8bn) is current voted expenditure.
Ireland’s deficit is currently €15bn and by 2015 that will need to be no more than €4bn. So the country needs about €11bn in savings, about €7bn will have to come from spending cuts, while the remaining €4bn will be from tax increases. But where can we find spending cuts of €7bn over the coming five years?
Closing the budget gap by 2015
Clearly, it is in current expenditure that the bulk of savings will have to be made. This is because we’ve practically no wriggle room in relation to non-voted expenditure and we’ve already taken the low-hanging fruit of drastically cutting capital spending (down over €4bn in three years). The beneficiaries of capital spending are disparate and often distant, as they are members of the general public in the future. In contrast, the beneficiaries of the bulk of Government spending – current spending – are concentrated and current.
The 2011 Revised Estimates for Public Services break down that €53bn in current spending. Three quarters of the total, €39bn, goes directly as someone else’s income, either in the form of public sector pay (€15.8bn), public sector pensions (€3.2bn) or social welfare (€20bn). Of these three, public sector pay has already been significantly reduced, once to partially offset the money spent on pensions but also to reduce to actually reduce the Exchequer’s pay liabilities. The scope for further reductions is limited. Public sector pensions could be reduced but is unlikely to save large amounts. That leaves social welfare. How can you cut monies spent on social welfare and not appear callous? […aware as I am of the opinion certain fringe commentators have of me!]
What’s not clear to me is why we should treat half the money given out by the State as income in one manner and the other half completely differently. What I mean by this is that the €20bn given out in public sector pay and pensions is part of taxable income. The State gives 100% with the right hand but then – as with everyone else – takes away with the other hand in the form of income tax. On the other hand, the €20bn given out in social welfare is – by and large – “free money”. For large swathes of it, there is no means-testing so there is no guarantee that is going to households that need it.
How can cuts be fair(er)?
For example, there’s a lot of talk at the moment about whether the country can afford to give universal child benefit to people regardless of their income. That strikes at the heart of the point: a family earning €100,000 a year get their child benefit tax-free, just like the family earning €25,000 a year. Another point about fairness could be made here: is it fair that a family earning €50,000 a year through hard work have to pay more than half of their income over in various taxes if they work hard for another €5,000… but no tax at all on €5,000 by dint of having three children?
People are very imaginative at justifying when they have to. On child benefit, this is also true. But to me there is a gap between the reason most commonly given, that society needs children, and what is the real – or certainly more political – reason: universal child benefits convince the middle classes that at least some of their taxes go on something they would call useful (i.e. something they benefit from directly). But, to my mind at least, these issues of “externalities” (i.e. indirect benefits of having children) and fairness can easily be achieved in other ways. On the first, give tax credits for children. On the second, tax all income.
Even on a practical level, it just will not be possible to close the deficit while also ring-fencing all €20bn spent on social welfare schemes. And more fundamentally, we should be using this crisis as an opportunity to craft the fairest system we can, one that will promote future growth.
The graph above shows the amount spent by the taxpayer on over a dozen main headings of spending in Social Welfare. To understand the scale of these payments, here are three examples:
- The €4.7bn spent on various forms of the State pension would be just enough to pay the wages of every single public servant in the country outside the education and health services for a year.
- The €1.5bn spent on the various widows and deserted wives benefits is similar to the entire higher education budget of €1.7bn (which includes €400m in direct student income support).
- Almost €500m is spent on rent supplements a year, broadly similar to Ireland’s entire overseas aid budget (the amount voted for 2011 for International Cooperation was €533m).
These comparisons hopefully show that even at the smaller end of the scale, these are significant sums of money. The entire national spend on Gaeltacht support (€37m) or on sports (€87m) are almost rounding errors in comparison.
Joining Social Welfare & Revenue
The good news is that the Department of Social Protection is now cross-checking the people in its system with those elsewhere in the Government records. While looking for rogue taxi-drivers and landlords is useful, really the main system that needs to be hooked up to the Department of Social Protection Records is the Revenue Commissioners.
My suggestion for Ireland’s Exchequer finances is that all income – from public sector employment, from private sector employment, or from the taxpayer in social welfare – should be treated as part of the household’s income. In Budget 2012 for the first year as a transitional measure, only Universal Social Charge could be levied. Thus, those for whom these measures are almost their entire income would be subject to tax of just 2%. Those for whom these payments are certainly welcome but not the boundary between starvation and survival will see their payments fall 7%. An average saving of 4% across the various social welfare schemes would save about €700m.
The aim from Budget 2013 on, though, should be to integrate USC into the income tax system anyway and thus full tax liability on social welfare income should apply from 2013. This is not for a minute to deny the underlying reason for many of these benefits, such as the “socially optimal” supply of children or ensuring those with disabilities truly have equal opportunity. However, these issues should be dealt with through tax credits, not income loopholes. These tough decisions should be made during 2012. Assuming that half of recipients of any given scheme (apart from unemployment) would be liable for an additional marginal rate of 20%, this would generate additional savings of approximately €1.5bn from 2013 on.
Remember the context. About €7bn in spending cuts is needed from €60bn in discretionary expenditure and social welfare accounts for one third of all discretionary expenditure. Therefore, the question is not whether social welfare should contribute between €2bn and €2.5bn in savings but how. To me, and to hopefully anyone who engages with the issue for more than a minute, blanket cuts in social welfare rates are not the solution. In my opinion, the solution lies in ending the loophole that has kept social welfare out of taxable income. Not only would this help the country balance its books, it would also boost transparency, simplicity and fairness.