The National Development Plan needs urgently to be reassessed in light of the clear underestimation of costs, especially in relation to roads and the new spending commitments, writes Gerry Boyle
The recent announcement by the Government that it has set up an Expenditure Review Group (a reconstituted "An Bord Snip", according to some) is welcome in view of the serious expenditure overrun gripping the public finances. In fairness to the Government, no government in the recent past has successfully managed to rein in public spending.
Confronting expenditure control in a credible way can yield rapid economic dividends. When Ray McSharry tackled spending control in the late 1980s some economists claimed it resulted in the phenomenon of "expansionary fiscal contraction" (EFC). The idea of EFC is simple: cut spending and you signal to consumers and investors that taxes will be cut, and they respond by spending and investing now. While the jury is still out on whether EFC actually existed in the late 1980s, the message is clear: when government sets about a policy change, and if this change is perceived to be credible, very real economic gains can be secured quickly. Credibility is thus crucial, so an initiative like the review group helps to create that climate of credibility - but much more is needed.
We need a change in the culture regarding public spending among government departments and ministers, lobby groups and the general public. Basic principles need to be accepted: there is an overall budget constraint; extra spending in one area means less in another or higher taxes; where to find the money for extra spending is not someone else's problem; it's not good enough to simply argue for increased spending and leave it at that - the onus must be on the proposer to make serious suggestions on where additional resources can be found.
A five-year macroeconomic framework should be prepared, published and explained to the public. This should outline realistic projections for the public finances on the basis of a continuation of existing policies. It would spell out the political choices between borrowing, taxation and current spending.
The balance to be struck between these three is ultimately a political choice but it will be influenced by the macroeconomic framework. Government could decide, for instance, first that no tax "give-backs" will be possible; then, based on an appraisal of public infrastructural needs and priorities, what level of borrowing is prudent. Current spending levels would then fall out as a residual.
This framework, along with the broad government decisions on the balance between borrowing, taxation and spending, should be published in, say, June of each year, long before the estimates and Budget process. This ought to highlight the constraints. As in New Zealand's case, it would be worth enshrining this requirement in legislation.
Borrowing for spending that creates a GNP-enhancing asset is clearly sensible but the overall level of borrowing needs to fit into the macroeconomic framework. In this context the National Development Plan urgently needs to be reassessed in light of the clear underestimation of costs, especially in relation to roads and the new spending commitments. The Government should not shy away from re-organising priorities. Simply because spending is labelled as capital does not mean it is justified. Based on the macroeconomic framework and the re-assessment of borrowing options, an implied level of affordable spending growth would emerge.
Let us suppose it implied that overall current spending (gross non-capital supply services) could grow by 8 per cent per annum. I would advocate that a share of this allowable growth, say 3 per cent, should be held in a reserve fund. Each department would be given a 5 per cent "envelope" and told to come back with their spending plans within this range. It would be up to each department and minister to determine the best way to do this. The Minister for Finance would only need to ensure that departments had adhered to the "envelope" and set in place the mechanisms to ensure adherence to it. This common sense approach is at variance with the present system which, I believe, encourages excessive spending demands and overruns.
The idea of the reserve fund is to allow for the inevitable and genuine difficulties some departments may face in a given year of living within the "envelope". What I advocate here is the establishment of a high-level Cabinet sub-committee composed of the Taoiseach, Minister for Finance and Tánaiste who would arbitrate on claims from the fund.
Departments would not be allowed to reduce the quality or scale of services while leaving untouched the efficiency of service delivery, which means looking at numbers and assessing the feasibility of contracting out activities. These measures would provide a needed jolt to the system.Over the medium term the need for expenditure control must be a routine feature of political deliberation. I propose that all significant spending programmes should undergo an evaluation on a regular basis, including non-pay and pay elements (efficiency). In many cases this is already being done but many such reviews are not published and there is little political engagement. I believe you need to get the public on board to effect the culture change needed. These reports could be submitted to relevant Dáil committees and then debated.
New Zealand has enshrined many of these expenditure control processes in legislation under their Fiscal Responsibility Act, 1994. The introduction of such an Act here a would be a powerful signal that the time had come to stop talking about spending control and do something about it.
Prof Gerry Boyle is head of the department of economics, NUI Maynooth, former economic adviser to former taoiseach John Bruton and author of Controlling Public Spending in Times of Plenty (with William Kennedy) published by Oaktree Press