John Bruton

Opinions & Ideas

Category: “Irish Times”

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 IRISH BUDGET FOR 2012…….KEEPING THINGS IN PROPORTION

A FEW  IMPORTANT NUMBERS
The media in Ireland are full of fear laden stories about prospective cutbacks in spending in the budget to be announced  tomorrow and  on Tuesday.
It may help, to  keep this in proportion, to reflect  how much spending increased in recent years.
Stephen Collins, one of Ireland leading political journalists, pointed out in the “Irish Times” yesterday that , since 1997,
*The standard Old Age Pension  rate had increased by 120%
*Unemployment benefit rate had increased by 130%
*Child Benefit rate   had increased by 330%
*the public service pay and pension bill had increased by 400%
BUT the cost of living only increased by 40% in the same period, he said.  
This meant that the real value of these payments increased by the amount by which the  rate increase exceeded 40%, which in all cases was a lot.
The so called Bord Snip, chaired by Colm McCarthy, report for the previous Government pointed out that , between 2000 and 2006 alone ,
*numbers employed in the health sector (nurses, doctors, administrators) increased  by 20%
*numbers in the education sector (mainly teachers) increased by 27%
*numbers in Justice sector ( Gardai and prison officers) increased by  22%
*numbers in the civil service by 7%, but the increases in numbers in the higher grades were much  greater.
All the above were financed by taxation or borrowing.
It is fair to ask if service improved in the health, education,  and policing sectors by the same percentage,  as numbers employed in those sectors did and if not, why.
It is also only fair to point out that, in 1997 and 2000, before all these increases in spending took place, the country in general was not suffering acute hardship.
In 1997, the country  was living within its means. It is not doing so today.
But increases in service, or payments, once granted, are very hard indeed to reverse. This is the unenviable task that the government has inherited from its predecessor.
.  

MORGAN KELLY

Professor Morgan Kelly of UCD has published an article in the Irish Times of 7 May which, like his previous interventions, has sparked a lively debate about Irish economic policy. He has a lot of credibility because he foresaw the bursting of the Irish housing bubble before the bust happened.

Now, he is advocating a two pronged strategy

1)    That Ireland  walk away from the  EU/IMF deal (a notion that is, of course, attracting a lot of favourable media  comment)


2)   That , in order to be able  to pay its way in the absence of funds from the EU/IMF , Ireland should immediately  eliminate its  budget deficit ( a  drastic notion that, equally predictably,  is being ignored in the  same media comment). While I favour speeding up the adjustment, doing it all in one year would be impossibly disruptive.

He claims that a strategy along these lines is needed because otherwise he thinks our debts are unsustainable. He bases this on pessimistic growth assumptions, which may or may not transpire. And he argues that a slow  messy bankruptcy would destroy an Irish  economy that depends so much on international trust. Better, he argues, to do the whole job immediately.
There are a number of elements missing in Professor Kelly’s analysis.

He does not consider the impact of what he is doing on other countries, and how they might react.

If Ireland were to walk away from the EU/IMF deal, that will leave the European Central Bank itself with a huge shortfall. In fact the ECB would be broke. It would have to go to the member states to look for more capital. Emulating Irelands example,  they would probably refuse,  and then the euro itself would collapse.

Ireland would then have to launch a new currency of its  own in the same  year that it  was having to  cut wages by 40% and increase tax revenues to meet Professor Kelly’s other requirement of balancing  its budget in one year.

Ireland would also presumably, because it would be reneging on freely contracted debts to an EU institution and to other EU members, find itself excluded from the benefits of EU membership. For Ireland, the Common Agricultural Policy would disappear overnight, as might our access to EU markets for other products.

Professor Kelly, who is an economic historian, should look up what happened when we last walked away from international financial obligations. We refused to pay land annuities over to the UK in the 1930s, and found some of our critical exports excluded from the UK market, with devastating effects in what came to be remembered as the “Economic War”.

That is not to say that the EU should not be challenged. The EU/IMF programme may indeed be too optimistic. There is a lack of joined up thinking on economic policy in the EU.  The EU institutions may be too nervous about burden sharing by private bondholders. There is a selfish nationalism  about  some of the stands being taken by our EU  partners.   But then there is a selfish nationalism about some of our own attitudes too. We all have domestic political constituencies and media to appease

Ireland may not be as influential as would like to be in the EU. But at least we are still in the EU, and we have some influence still.  We can use that influence to move the EU towards a more credible long term strategy  that allows  countries like Ireland time to  restore their  finances, and allows surplus countries like Germany time to   rebalance their economies  towards consumption.

But trying to that overnight, by holding a gun to everyone else’s head as well as to our own as the Professor urges, seems to me to be needlessly reckless. Professor Kelly argues that we need to do something like this to keep our international credibility. I am afraid the course he advocates would  destroy our international credibility instantly.

Al banking, all money, is based on mutual confidence.

Why else do we accept a scrap of paper, with no inherent value itself, as worth 100 euros or 500 euros or whatever other number is written on it?

Why else to we hand over our saving to banks on the promise that the money will be there when we need it?

It is all about trust. Without trust, the entire modern economy, built up over three centuries, would disappear…..overnight.

Breaking trust with our European and international neighbours would undermine the future of our own economy, and the economy of those to whom we sell,  and  that is why I  do not think Professor  Kelly’s article  offers  good advice at all.

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