ANALYSIS:Nothing can be ruled out as Government considers its options, writes DAN O'BRIEN
IN SEVEN weeks and six days – on Tuesday December 7th – the detail of next year’s budget will be unveiled. In the meantime, the din of speculation will grow ever louder.
There was speculation aplenty yesterday as a throng assembled at the country's largest public policy think-tank – the Economic and Social Research Institute (ESRI). The occasion: its annual Budget Perspectivesconference.
The think-in was a sell-out, indicative of the heightened level of interest in budgetary matters right now. The contributors – mostly academic economists – considered what could, should and must be done in the years to come in order to regain control of the country’s fiscal destiny. There was no shortage of good ideas.
Two ESRI scholars considered the sustainability of spending on healthcare. Growth in public expenditure on health outpaced our peer countries by a distance during the boom. One reason for this was hyperinflation in medicine prices. Aoife Brick and Anne Nolan showed that spending on pharmaceuticals and payments to community pharmacists rose by an astounding 181 per cent in real terms in the nine years to 2009.
The authors don’t ask why this was so, but the answer is plain. Along the medicines distribution chain, there is very little incentive for medics and others to save by buying lowest-price products.
Such incentives are common in most other countries, and aggressively implemented. Here, the Department of Health has underused the enormous power it wields as the dominant purchaser of most medicines (economists call this “monopsony” power).
The pharmaceutical industry makes an important contribution to this country’s economy, but it is not the business of taxpayers to subsidise it.
Joe Durkan, an economist at University College Dublin, advocated stripping the Department of Finance of some of its powers, transferring them to an independent entity. This is how most European countries do things because separating fiscal powers helps prevent abuses by politicians. Given the political class’s appalling record of managing the public finances – blowing them twice in a generation – such a separation of powers is needed here more than most countries.
Durkan also advocates abolishing the Social Insurance Fund. This is where PRSI goes and whence contributory benefits, such as Jobseeker’s Benefit, come. Flows into and out of the fund account for a big chunk of total Government revenue and expenditure. Currently, the Department of Social Protection manages the fund. It provides precious little timely information. This obscures the overall position of the public finances. As greater transparency is recognised as central to sound public budgeting, Durkan’s call for merging the fund with the exchequer budget is well-judged.
Jim O’Leary, wearing his academic hat even though he has recently joined the Department of Finance as an adviser, spoke about the wider euro zone failure of budgetary discipline. The Stability and Growth Pact, which was supposed to prevent the sort of crisis facing Ireland, has failed. O’Leary is correct to say that the future is one of tighter EU fiscal rules, and that most governments’ top priority in the years ahead will be “consolidation” (more taxes and less public spending, in layman’s terms). Welcome to Europe’s age of austerity.
Apart from that, not much else is certain in the post-Lehman Brothers world. David Miles, a member of the committee which sets interest rates at the Bank of England, reminded the audience that interest rates in his country were now at their lowest since its monetary authorities were established in 1694 (under William of Orange, as it happens). Whither the British economy? On the one hand, inflation could take off as a result of such cheap money, he said. Deflation, too, could set in, so fragile is the recovery there. In other words, nothing can be ruled out. So it is with Budget 2011.
Dan O’Brien is Economics Editor