The explosion in public spending has coincided with a sharp weakening in the real economy, and hence in the tax base. The result is the disappearance of a once very large fiscal surplus and a return to Exchequer borrowing, writes Colm McCarthy
Yesterday's Book of Estimates is the first publication in the Budget cycle, and the full picture will not be clear until Budget day, December 4th, when additional spending plans and the taxation measures will be revealed.
The Book of Estimates is meant to be a guide to Exchequer current and capital spending for the year ahead. Over the last decade, and particularly in the last few years, it has been a very poor guide indeed.
There have been substantial overshoots on planned expenditures in most years, including years such as 2001 and the first 10 months of 2002 when the planned increases were substantial to begin with.
The result has been an expenditure explosion which is entering its third year. Government spending has begun to rise again as a percentage of GNP, and tax burdens are already rising to match it.
The explosion in public spending has coincided with a sharp weakening in the real economy, and hence in the tax base. The result is the rapid disappearance of what had been a very large fiscal surplus and a return to Exchequer borrowing.
Opposition parties have accused the Government of a loss of control over the public finances, an accusation which would carry greater weight had they shown any concern on the issue of public spending control during the last parliament, or in their election manifestoes last May.
The accusation is nonetheless deserved: not since the crisis-inducing period of fiscal profligacy in the earlier 1980s has the real volume of current spending risen as rapidly as it has in the years 2001 and 2002.
In 2001, the rise in gross current spending exceeded the rate of CPI inflation by 10.6 per cent. In the current year, if one is willing to go along with Minister McCreevy's expressions of confidence that the out-turn will be in line with Budget, the real increase will be a further 7.3 per cent on top of inflation.
Current spending absorbed 35.3 per cent of GNP in the year 2000. It will likely exceed 39 per cent just two years later. Those who have been arguing that spending should rise relative to GNP have had their prayers answered.
BUT it is difficult to share the Minister's optimism on the out-turn for 2002, given the pattern which is evident in the monthly returns up to October. Unless spending nosedives for the final two months, there will be another overshoot in the current year and an even faster rise in the spend-to-GNP ratio.
For next year, the estimates provide for an increase of just 2 per cent on the predicted out-turn for the current year. This, however, is on the so-called "pre-Budget" basis. It does not include several items which are likely to be announced on Budget day, most importantly the increases in social welfare and the provision for the benchmarking pay awards to public servants.
The first of these will cost, at minimum, €600 million, and the lobby groups concerned with this area will be disappointed with such a figure.
The benchmarking awards will cost at least as much, and have the potential to cost a lot more. Roughly €280 million should have been paid for the current year, and will fall to be paid in 2003. In addition, the full cost for next year will be about €1,100 million. Thus the total bill in 2003 could reach €1,380 million. If this is added to the €600 million or so for social welfare increases, the total is almost €2 billion, bringing the increase in total current spending up to around 7.5 per cent, about double the likely rate of price inflation for the year.
In other words, there would be another sizeable real increase in current spending. There may be other spending initiatives in other areas in the Budget speech aside from pay and social welfare.
I have no doubt that the Government will seek to defer at least some of these benchmarking costs beyond 2003, and will provide a smaller figure than the one quoted on Budget day. But the awards have been made, and the public service unions will seek whatever was awarded. Many of them will seek more than they were awarded, citing relativities.
The range of awards, with some groups getting 3 per cent and others over 20 per cent, is a timebomb given the relativity culture in the Irish public sector, exacerbated by the extraordinary decision to publish none of the calculations on which the awards were made.
Any group which feels badly done by can claim that no basis has been offered, and that their treatment is arbitrary. And the suppression of whatever research was undertaken means that many taxpayers in the private sector will feel that no case at all has been made for further large increases in the public payroll overhead.
All of the weaknesses in the partnership process, including the built-in proclivity to solve problems by spending public money, the lack of transparency and the long-fingering of difficult decisions, have been prominently on display throughout the benchmarking circus.
ANY Budget day provision for current spending much below about 7 per cent should, in my view, be treated with circumspection as containing the potential for another overshoot.
There can be no expenditure control without clean decisions, including the use of the word no. One such was the decision to scrap grants for first-time homebuyers. There is always a suspicion that cash grants which stimulate demand in the housing market, but which have no effect on supply, end up in the price, and really benefit landowners rather than the intended beneficiaries. The decision to scrap this scheme is long overdue.
The public capital programme has, inevitably perhaps, been trimmed, a victim of the sharp increase in costs of procuring capital projects and of the failure to control spending on the current side. Budget day will see tax increases on the old reliables, with rumours of various "stealth" taxes which will increase costs to business. Welcome back to tax and spend.
Colm McCarthy is managing director of DKM Economic Consultants