An untrammelled public sector will need to be reformed if the sums are to add up, writes Marc Coleman, Economics Editor Economic analysis
Minister for Finance Brian Cowen did a lot yesterday to deflect accusations that the Government was trying to buy the election. Presenting the abridged Estimates for 2007 to the Dáil, he has targeted an 8 per cent increase in government spending.
With real growth in the economy next year set for about 5 per cent and inflation expected to be just short of 3 per cent, this implies that as a share of the economy, government spending should remain steady next year.
The Estimates are the Government's latest statement of intentions regarding the Budget since the pre-budget outlook (PBO) was issued last October. In the PBO, Mr Cowen announced that under so-called "no policy-change assumptions", ie just to keep things going without changing spending or taxation, an extra €3 billion in spending would be needed. Yesterday, he added another billion to that figure.
That extra billion raises some important questions. The first is whether the Government can still be accused of buying the election. The answer to that question is no. This year alone some €60 billion is being pumped into the economy in the form of private-sector credit. Another €14 billion or so is entering as SSIAs mature and the economy is still feeling the inflation effects of this year's spending increase - more than €5 billion.
The rate of increase in spending targeted for next year - election year - is significantly lower than the 11 per cent recorded last year.
So no, the Government has not engaged in an election year spending binge. It just doesn't need to, we are bingeing along quite nicely without it.
The second relates to the Government's budgetary position. Last October, it forecast that next year's budgetary balance would be in surplus to the tune of 0.4 per cent of GDP, or about €760 million. Despite another billion in spending, yesterday's Estimates are - seemingly - still consistent with a surplus of about 0.4 per cent of GDP. According to the Minister, a reserve fund of about €1.5 billion was put aside to meet budgetary policy contingencies or possible tax revenue shortfalls.
With over half of that now eaten up, Cowen can throw a few hundred million euros at additional spending measures in the Budget and still run his targeted surplus.
The third issue is really an accounting rather than an economic issue, but no less important for that. Last year, Cowen announced that what he called "output statements" would accompany each Estimates "from 2007".
Although not starting in 2007, the Estimates procedure of which yesterday's announcement was part, does not end until March, three months into 2007.
The absence of any such thing in yesterday's Estimates means that in this context "from 2007" means after the next election. There is here a touch of St Paul's prayer to God: "Make me holy, Lord, but just not yet."
Belated though they are, these output statements will measure spending increases against targeted policy outcomes for the first time in our fiscal history. This is an important development. An assessment of the Estimates should be an exercise in management accounting and not macro-economic analysis. The final impact of government spending on the economy is the meat and drink of the Budget, not the Estimates.
The Estimates just tell us how much will be spent. Only by matching this against revenues will we know whether those spending plans will stimulate the economy or cool it.
What yesterday's Estimates should have told us is what, precisely, we will get for the extra €4 billion the Government will spend next year. Higher public services salaries and pensions along with more public-sector staff, it seems.
Nowhere is this clearer than in the largest spending sector of the Government - health. Already at €14 billion, spending here will rise by €1.4 billion next year, of which €500 million will be immediately lost in the form of higher pay.
Some €330 million is going towards the Long Stay Charges Repayment scheme and an extra €120 million is going towards additional costs in the drugs payments scheme.
So because of a failure by the Government to achieve greater efficiencies in staffing and drug payments, as well as the nursing home debacle, public spending in just one department will rise by just under €1 billion, arguably unnecessarily.
In aiming to reform budgetary procedures and make them more transparent, Brian Cowen is undoubtedly sincere, but without a parallel reform of the public sector itself, he will never be successful.