ECONOMIC ANALYSIS: The Estimates will lead to real cutbacks in services and a sharp drop in State investment, writes Cliff Taylor, Economics Editor
All pretence that we were talking about "adjustments" in public spending have finally been abandoned. What the Minister for Finance announced yesterday were cutbacks in some areas and an effective spending freeze in others.
For spending Departments, which have been cruising along with 15 to 20 per cent annual increases, it will be a shuddering adjustment.
The Minister announced an overall 2 per cent rise in spending next year, with current spending on the provision of services to rise by 4 per cent, just about keeping pace with expected inflation.
Of course, spending will rise considerably further on Budget day. A social inclusion package could easily add a further 2 per cent and some provision will have to be made for public pay awards. The total increase in current spending could easily rise from the Estimates figure of 4 per cent to 6-8 per cent plus after the Budget. This would still represent a significant slowdown from the 14 per cent current spending increase targeted for this year - if the Government can stick to it. And given the record of the last couple of years that is a big "if".
Have the Estimates "solved" the fiscal difficulties? Not quite. Day-to-spending is made up roughly of half of pay costs (paying public servants) and half of non-pay costs. The Minister has taken the axe to the non-pay bit. This will rise by just €300 million next year, or less than 2.5 per cent. As this will be below the expected inflation rate of around 4 per cent, it will translate directly into lower service levels. This is what has led to the "cutbacks" element of yesterday's package.
However, the amount being spent on public sector pay is set to rise by 6 per cent next year before any account is taken of the increases recommended in the benchmarking report.
Mr McCreevy has said he will deal with this on Budget day; full implementation of the awards would cost €1 billion-plus in a full year and Mr McCreevy indicated yesterday this was not on the table for next year. However, public sector pay is now the clear pressure point on spending and difficult negotiations between the Government and the public sector unions are in prospect.
Even more dramatic adjustments have been made on Exchequer investment spending. Here the amount being spent next year - €5.268 billion - is 7 per cent lower than what is being spent this year. In many ways cutting capital spending is the easy option for the Government, as it is less politically sensitive.
However, the real cut announced yesterday is substantial. With inflation in the building sector running well above the general inflation rate, the 7 per cent reduction could represent a "real" (inflation adjusted) drop of up to 15 per cent.
State spending on investment will still be twice what it was in 1998, the Minister said yesterday and is high by EU standards. However, it is poor management to have pushed up this spending sharply during the economic boom and be cutting it back when the economy has slowed and could do with a boost. The Minister indicated there might be some room for limited extra capital spending on Budget day.
The Government now urgently needs to address its whole approach to funding and completing the National Development Programme. So far the experience has not been an entirely happy one. Much of the infrastructural investment programme has been hit by continual delays due to planning and other factors, while the soaring cost of completing many programmes has eaten away at State money. And what way the private sector will chip in through public-private partnerships has still to be fully sorted out.
To ensure the required infrastructural improvements are completed, these issues must be addressed. Otherwise the prospects for economic growth in the medium term will be damaged and the quality of life issues arising from our poor roads and public transport will not be addressed.
Overall, the Estimates yesterday appeared to have been driven by key political and economic considerations. Politically, the Government wants to get the bad news out of the way early in its term - the Taoiseach and Tánaiste thus gave Mr McCreevy their full support in controlling spending and the Department of Finance is clearly in the ascendant.
Economically, Mr McCreevy looks set to keep Exchequer borrowing at a modest level next year and avoid any significant increases in the level of taxation. Full judgment of the appropriateness of this strategy will have to await the Budget package, although there may have been an argument to borrow a bit more to fund infrastructural investment.
Yesterday evening, economic analysts predicted that the Minister might aim for an Exchequer borrowing requirement of around 2 per cent of gross national product next year, at the lower end of expectations.
Dr Dan McLaughlin of Bank of Ireland said the Minister could push up spending on Budget day by around €1 billion and raise a similar amount in revenue through excise increases and some other measures.
This would keep Exchequer borrowing under 2 per cent, he calculated. On the wider measure of borrowing used by the European Commission - general government borrowing - he calculated that the position could be close enough to balance. (The EU measure doesn't count the money given to the National Pension Reserve Fund and is thus lower than the EBR).
Mr McCreevy is thus aiming to play the fiscal prudence card. After the spendthrift ways of the last couple of years, it would be some turnaround to pull it off.