Once the growth in public spending has gathered a head of steam, it can prove difficult to control, writes Paul Tansey, Economics Editor
This year, for the first time, it is costing €1 billion a week to finance the day-to-day activities of Government.
Gross current public spending is expected to amount to some €52.7 billion in 2007. Annual gross current public spending has risen by almost €20 billion or by nearly three-fifths over the past five years. These increasing bills for Government spending must ultimately be settled by taxpayers.
Even as the economy boomed over the past five years, gross current public spending raised its share of national income. As a proportion of Gross National Product, total day-to-day Government spending has increased from 31.2 per cent in 2002 to 33 per cent in 2007.
Despite the efforts of Minister for Finance Brian Cowen to contain its growth, the share of current public spending in national income will rise again next year.
It is estimated that gross current Government spending will account for more than one-third of Irish GNP in 2008.
Gross voted expenditure is, by some distance, the largest component of current public spending. Voted expenditure includes the day-to-day spending by Government departments and expenditures under both the Social Insurance Fund and the National Training Fund.
Such spending covers the provision of goods and services to the public, income supports for the disadvantaged and the bill for public service pay.
As can be seen from the table, voted spending has risen by three-fifths over the past five years, increasing from €30.3 billion in 2002 to an estimated €48.6 billion this year.
The principal factors driving up day-to-day Government spending include the demographic pressures imposed by a rising population, demands from the public for improved Government services, large additions to the public sector workforce and a rapidly rising public service pay bill.
The financial implications of these pressures were outlined by Mr Cowen when he launched the Pre-Budget Outlook in October. Maintaining the existing level of public services through 2008, he pointed out, would add a further €2.3 billion or 4.8 per cent to current public spending next year. Any improvements would cost extra.
A fortnight ago, Mr Cowen added the extras. He committed himself to raising current public spending by 8 per cent next year. On this basis, the total bill for gross current public spending will increase by some €4.2 billion to almost €57 billion in 2008. In consequence, the Government's day-to-day spending will further increase its share of national income to a projected 33.7 per cent next year.
Three conclusions can be drawn from the performance of current public spending in Ireland over the past five years. First, in economic terms, current public spending has acted in a pro-cyclical fashion since 2003. It added to demand when the economy was bursting at its seams over the past three years.
The economic explanation for this pro-cyclical behaviour lies in the fact that, if ministers for finance have access to extra cash, they tend to want to spend it. Thus, the ballooning tax revenues generated by the boom provided the ammunition for Government to go on a spending spree. If you've got it, flaunt it.
Second, trends in public spending are shaped by political as well as economic cycles. Voters benefit from extra public spending. Politicians expect them to be grateful as a result.
So, when an election is on the horizon, public spending is pumped up. It is thus unsurprising that, during the last five years, the rate of growth in voted current spending peaked in 2007, at almost 12 per cent.
However, once the growth in public spending has gathered a head of steam, it can prove difficult to control.
Despite the commitment to halving of the rate of public expenditure growth in the Fianna Fáil election manifesto, Mr Cowen will do well to contain the rate of growth in voted current expenditure from 11.8 per cent in 2007 to his 8 per cent target in 2008.
The third and most important conclusion is that increasing the level of current public spending is not, in itself, a sufficient condition for improving public services.
If cash were the only criterion, then the 60 per cent increase in gross voted current public spending between 2002 and 2007 should have provided Ireland with public service provision in the Rolls Royce class by now.
Instead, it is becoming increasingly clear that the efficient management of public service delivery, the pursuit of value for money and the productivity of public service providers are the ultimate determinants of public service quality.
A slowing economy will limit the future growth in resources available to finance current public spending. In these circumstances, improvements in public services in the years ahead will depend increasingly on enhanced management capability, more efficient use of public resources and higher productivity. It is not before time.
