ECONOMICS: Plans to change the management of public finances offer glimmer of hope in dark times

EVEN BY the standards of these times, this week has been eventful. From potentially historic decisions on saving the euro, to the unveiling of the budget and the publication of reams of related documentation, there is a great deal to make sense of.

Difficult and all as it is to see the wood for the trees with so much happening so rapidly, permit me two observations - one profoundly frightening, the other cause for optimism.

Today's EU leaders'summit may bring the breakthrough that has long been needed to avoid a domino effect of mass default and the collapse of the euro. Opinions naturally vary, but I put a probability of the worst happening somewhere in the region of 40 per cent. A radical departure today will lower the risk, but yet another underwhelming response will push it up, perhaps past the 50 per cent level.

I do not wish to be alarmist, but an alarming situation requires some consideration because this society would be tested in a manner that no one has any experience of in the event of a currency/financial system meltdown.

In what would be a full-scale national emergency the State is the only actor with the capacity to co-ordinate a response. But it would restricted in doing so to an extent that may not be fully recognised.

To say that all the budgetary plans set out by the Government this week would be redundant does not begin to describe how the situation would change, both because tax revenues would collapse (again) and because the bailout funds used to cover the already yawning gap between revenues and spending would likely dry up.

To see the magnitude of what could happen one needs to consider the sums involved. This year the State took in €52.2 billion as measured by the general Government accounting standard. This is the widest, and therefore most accurate measure of revenue.

It was stated a number of times this week by Ministers that tax revenues fell by one-third from their peak in 2007 to last year. When all revenues are included, the decline was less sharp, but massive nonetheless, at just under one quarter (it would have been larger if additional taxes and charges had not been imposed over that period).

Working on a relatively mild assumption that, in the event of the euro breaking apart, general Government revenue was to fall by the same 24 per cent that took place between 2007 and 2010, annual revenues would amount to around €38 billion, with most of the contraction happening in the initial period. With general Government expenditure (again, the widest measure) running at just under €70 billion this year there would be shortfall of - in ballpark terms - €30 billion.

The existing deficit is being funded by subsidised loans provided by EU countries and the International Monetary Fund. Given the chaos internationally that would follow a meltdown it is unlikely that these monies would continue to flow.

The European Financial Stability Fund, from which the Irish State receives bailout cash, would probably cease to exist, and an event of the magnitude of euro break-up/mass sovereign default would overwhelm the IMF, whose resources depend to a large extent on European countries.

Even for a society as moderate and accepting of austerity as Ireland has shown itself to be, it is very hard to avoid the conclusion that a budgetary adjustment of  €30 billion (Budget 2012 made a fraction of that, at €3.8 billion) would bring the country deep into social unrest territory. It is appalling that this is a real risk, but real risks have to be planned for. It is to be sincerely hoped that those in positions of power are aware how bad things could get and the choices that they could face.

The more optimistic observation on the week's events concerns new plans to be put in place to manage the public finances in a manner that will lessen the risks of a third fiscal crisis in the future, on top of those in the 1980s and now. The framework outlined this week is informed by the vast accumulated literature on how best to manage public finances.

However belated these changes are in coming, they are to be hugely welcomed - provided of course the are implemented with due rigour. They include: a greater focus on outputs achieved rather than the historical focus on cash inputs; more evidence-based expenditure evaluations; more comprehensive value for money codes and the modernisation of antediluvian accountancy practices.

Of particular interest to those across the public sector who want to do things better - and there are many such people - are new incentives to save taxpayers' money and allow managers use part of the proceeds in ways they know are most effective.

The absence of such incentives is cause of huge frustration among the reform-minded who are more often than not penalised when they make savings - anyone not spending his/her full budget allocation has it cut in the next round. Although this has always been recognised as a serious problem in public sectors everywhere, chronic Irish inertia meant nobody did anything much about it.

That changed this week. Included in the new framework is a facility to allow 80 per cent of cash saved in one year to be carried over to the next and used on one-off projects. Another initiative that will help reformists is the freedom - subject to checks - to manage property portfolios so that half the cash raised by disposals can be invested.

In combination, the frameworks set out this week will mean less waste of taxpayers' money and a reduced risk in the future of yet another fiscal disaster.

In Tuesday's newspaper I wrongly attributed a statement contained in the Department of Public and Reform's budget documents to the Comprehensive Review of Expenditure. The reference to delays in preparing reviews related to value for money reviews, not the Comprehensive Review of Expenditure. Sorry.