John Bruton

Opinions & Ideas

Category: Irish Government

IRELAND NEEDS A SERIOUSFIVE YEAR BUDGET PLAN

Revised article for “Irish Times”

We will only have an intelligent debate about spending and taxation, in the forthcoming Irish General Election, if we know that spending and revenue estimates for all the following five years, and if the policy choices that underlie them, are accurate and fully explained

The Spring Economic statement by the Irish Government was criticised, mainly because it contained “nothing new”.

This type of criticism showed how little had been learned from the recent economic crisis. A constant search for novelty in annual budgets is what got Ireland got into difficulty in the first place. New” initiatives” in budgets from 2000 to 2007 eviscerated the tax base, and led to unsustainable spending commitments.  In that deluded era , if the annual budget did not contain a  new and costly announcement , the Minister would have been accused of lack “vision”!

Now the same chorus is beginning to be heard again. Memories are indeed short.

In  the debate on the Spring Statement, Minister Brendan Howlin said  the government was “now planning expenditures on a multiyear basis”, and  that Departments are operating under “multi annual expenditure ceilings”.  

Although these ceilings are legally mandated, are they firm enough, or can they be  too easily raised without serious questions being asked?

Certainly, in the 2000 to 2006 period, the second and third year ceilings on spending were fictitious.  It turned out that spending in the second year exceeded the” ceiling” by 6%, and the third year by 12%. Low figures were put on paper, but the decisions needed to stay within the figures were not taken. This was politically understandable, but financially disastrous, as we now know.

Since 2011, three year spending ceilings have been much firmer in most Departments, but not in all. 

In fact, one Department, Health has been responsible for 70% of the breaches in the ceilings (which altogether totalled over 600 million euros ). 

This should not be. Health spending should be predictable.

When allowance is made for the relative youth of the Irish population, Ireland is nearly the highest spender on health in the OECD.  But health outcomes here are only average. We have the second highest number of nurses per 100000 people, and 5th highest number of physicians of 34 countries surveyed by the OECD.

As the population ages, pressures on health budgets will further increase. 

Brendan Howlin has pointed out that the ageing of Irish society will add 200 million euros per year to health costs and that high birth rate will necessitate the appointment of 3500 extra teachers by 2021.

Next year, the natural growth in demand for existing services public spending will on its own increase spending by 300 million euros, without ANY change in policy.

Furthermore, the  Government is obliged  to reduce public expenditure as a percentage of GDP up to 2020 by its Stability Programme published in April.

Under it, GDP is set to grow by 3%, but public spending by only 1%. The difference is needed to allow for reduction of debt, as required by the Fiscal Compact the Irish people approved in a Referendum.

In essence, demographics are pushing spending UP, while tough debt reduction requirements are pushing it DOWN.

Of course, taxation can be increased too, but not by much, without risking a flight of capital and talent to elsewhere in the mobile, globalised, world in which we live.

So expenditure ceilings, for the forthcoming five years for each Department, including Health, will have to be set with rigorous honesty and courage, and then kept to. There can be no optimistic under estimates, as there sometimes were in the past. 

This natural increase in spending, without policy change, needs to be spelled out for each Department, and separated completely from any increase (or reduction) that is due to a policy change.

The budget system should incentivise local managements, who know their services best, to make the necessary savings and reallocations in time. They know how to do it in the least painful fashion.  That job cannot be done as easily by Merrion Street.

If a Department or service  finds itself on track to exceed its published annual expenditure ceiling,  for the present year or a future year, Dail Eireann should be immediately alerted. There ought to be a special procedure whereby both the Minister, and the Secretary General, explain the deviation.

The same should apply to any tax concession that turns out to cost more than estimated.  The criteria for this should be formalised  in Dail Standing Orders .

The Minister would account for, and quantify any policy changes, unexpected events, or recalculations, that account for an excess, and the Secretary Genera would account for any lapses in expenditure management.

This would ensure that the costing of future spending and tax commitments would  be “evidence based”.  

A family has to plan its finances five years ahead, and take corrective action if things are getting off track. 

Government should do the same.

Note ; As Minister for Finance in 1981, John Bruton published ”A Better Way to Plan the Nations Finances”, which advocated multi annual budgeting by the State.

THE CONSTANT SEARCH FOR NOVELTY IN ANNUAL BUDGETS LED TO THE 2008 CRISIS, AND IS NOT THE WAY FORWARD NOW… EXPENTITURE CEILINGS SHOULD BE REALISTIC AND MEANINGFUL

The Spring Economic statement by the Irish Government  has come in for criticism, mainly that it contains “nothing new”.

This sort of criticism is understandable from the point of view of a media ,for whom novelty is what gets attention. 

But  a search for novelty  is what got Ireland got into difficulty in the first place.

The persistent search for novelty and “new initiatives” in annual budgets, every year from 2000 to 2007,was one of the reasons Ireland overspent, and got itself into a crash. Novelties in annual budgets eviscerated the tax base, and led to unsustainable spending commitments. 

At that time, if the budget had not contained some sort of big new announcement every year , the Minister would have been open to the criticism that he lacked “vision” or “imagination”. 
Now the same chorus is beginning to be heard again. Memories are indeed short.

The Spring Statement does not contain any such novelties,  but from the point of view of the public, if not the media,  that is a very good thing. It restores an important sense of perspective.

The important perspectives  in the Spring Statement are that 

  • Growth in Ireland was 4.8% last year and will probably be 4% this year. This is the highest growth rate in Europe
  • 95000 new jobs have been added since 2012, and the IDA plans to attract a further 900 new investments by 2019, adding 80000 new jobs
  • net emigration is likely to cease next year, on present trends
  • The government deficit of spending over revenue was 15 billion euros, and it is now 4.5 billion euros

In his contribution o the Spring Statement, the Minister for Public Expenditure said again that the government is “now planning expenditures on a multiyear basis”, and  that Departments are operating under “multi annual expenditure ceilings”.

He also drew attention to the fact that the ageing of Irish society will add 200 million euros per year to health costs, and that the high birth rate will necessitate the appointment of 3500 extra teachers by 2021.

In fact, next year, the natural growth in demand for existing services public spending will on its own increase spending by 300 million euros, without ANY change in policy

This natural upward pressure on spending will mean that the setting of expenditure ceilings  for each Department will be a difficult task, requiring honesty and courage. 

This natural increase in spending, without policy change, needs to be spelled out for each Department, and separated completely from any increase that is due to a policy change.

In recent years, the expenditure ceilings for one or two major services have been repeatedly breached. A ceiling that can be too easily breached will not keep out the rain!  It certainly imposes no discipline on local management.

This sort of breach in an expenditure ceiling can, of course, be easily explained, if there has, for example,  been an unexpected increase in unemployment. It is less understandable if the demand for, or the cost of, normal health services has been underestimated .

It should be possible to predict the level of demand for, and the cost of, health services a few years ahead, on the basis of known facts about the age structure of the population, and to separate that from increases in spending that arise from unexpected one off factors. 

The budget system should incentivise local managements, who know their services best, to make the necessary savings and reallocations in time.  That job cannot be done as easily by Merrion Street.

If a Department exceeds its agreed annual expenditure ceiling, there ought to be a special procedure whereby both the Minister, and the Secretary General, of a Department, provides an early special statement to the Dail. This could be provided for in Standing Orders .

The Minister would account for, and quantify any policy changes, unexpected events, or recalculations that account for an excess, and the Secretary Genera would account for any lapses in expenditure management.

That procedure would ensure that future expenditure allocations would  be “evidence based”,  which is one of the  goals of the Minister for Public Expenditure and Reform.  It would add to the seriousness of the Estimates process and impose better accountability.

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