Economics: The 2005 Budget will be delivered by a new finance minister, and the incumbent faces growing political pressure to increase Government spending, particularly as the Department of Finance has acknowledged that tax receipts will overshoot the 2004 budget target by more than €1 billion, a forecast that errs on the conservative side, writes Dan McLaughlin
The idea that spending is too low, particularly on specific areas such as health and education, has its adherents and one might be forgiven for thinking that there is a widespread political consensus behind the notion that a substantial increase in Government outlays is required.
Yet, despite occasional rhetoric to the contrary, the main political parties are not dissimilar in their ideas on the appropriate level of State spending in the economy - witness the detailed five-year fiscal plans produced before the last general election, which showed little significant differences in the share of national income taken in tax or spent by the public sector.
The consensus is all the more remarkable given the downward trend of Government spending over the past decade, which has transformed the relationship between the public and private sectors.
The extent of this change is rarely spelled out, and certainly not articulated to the electorate, partly because the political emphasis at budget time is on the minutiae of spending and tax changes, with little attention given to spending or tax in relation to national income, which is a better measure of the tax burden or the real level of Government spending.
In 2004, for example, the budget projected gross Government expenditure of €46.6 billion, which is a huge amount of money, but without a context is difficult to comprehend. That context is best provided by relating it to spending in the economy as a whole as measured by gross domestic product (GDP). This was expected to be around €145 billion in 2004, so projected gross Government spending amounted to 32.2 per cent of GDP, against 31.9 per cent in the previous year, implying a marginal increase in the State's share of GDP. Yet, 10 years earlier, gross spending amounted to more than 42 per cent of GDP, so the past decade has seen a massive decline in State spending relative to national income.
Some of the decline can be explained by the fall in the Government debt burden and the trend towards lower interest rates, which combined to reduce the share of GDP needed to service the national debt.
In 1993, for instance, the annual cost of servicing the debt was €3 billion, or 6.9 per cent of GDP. In 2004, the figure was lower in absolute terms, at €2.4 billion, and hence much lower relative to GDP (1.7 per cent).
Perhaps a better measure of the change in Government spending might be to adjust for this, and concentrate on non-debt spending. This has also fallen substantially over the period. Voted current spending, which includes day-to-day spending on public sector pay and welfare payments, has declined from around 30 per cent of GDP to 24.5 per cent in 2004, although there has been a marginal increase in capital spending - this has risen from less than 4.1 per cent in 2003 to 4.9 per cent in 2004, having peaked at 5.4 per cent in 2002.
The past decade has also seen the State move from a mass unemployment society to that of full employment, which is an additional dampener for Government spending, tending to push it down relative to GDP over time because less resources have to be transferred from those in work to those without.
This is not the full story, however, because there has also been a downward shift in Government spending relative to GDP across many economies in the developed world in recent years, albeit not as pronounced as in the Republic.
This points to a common thread, which may be that electorates generally have lost faith in the State's ability to deliver public services at a price and of a standard comparable to the private sector, particularly if that involves an unacceptable tax burden.
Taxpayers may wish to retain more of their income in order to choose from service providers in the private sector rather than hand it over to governments that are seen as incapable of delivering quality services at an acceptable cost - there is a disconnect between taxes paid and services received.
The scale of the fall in State spending relative to national income was never planned, of course, and also owes something to the unexpected growth of the economy from the mid-1990s.
But it is certainly striking that none of the major political parties in the State is proposing to increase Government spending from here in a meaningful way - i.e. to increase State spending by 1-2 per cent of GDP, let alone 5-6 per cent, bringing it back nearer the position a decade ago. To do so would require a similar increase in the tax burden, of course, which few seem prepared to advocate.
Without such a change, Government spending can only rise in line with the growth in national income, which under normal circumstances will deliver a corresponding increase in tax receipts to fund that additional spending. This reluctance to aggressively challenge the current spending/tax mix is the real legacy of the outgoing finance minister.
