The Incredible Shrinking State


From top: Minister for Finance and Public Expenditure & Reform Paschal Donohoe giving a media briefing of the Draft Stability Programme Update 2018 in the Department of Finance last week; Michael Taft

The Government produced their Draft Stability Programme Update containing projections for the economy and the budget up to 2021. They will firm up on these numbers – along with the projected fiscal space – in the Summer Economic Statement. But it is not likely to differ in any substantial way.

There’s been lots of commentary: the validity of GDP, rising employment, available budgetary resources, etc. Let’s take a step back and look at the long-term, using the CSO’s GNI* which attempts to factor out distortions in our GDP.

What we find is an ever slowly shrinking social state.

There’s been a long-term stagnation at best. Since 1995 there has only been one year that public spending was lower than it what it is projected to be in 2020/21.

(Note: during the crisis years, spending as a percentage of GNI* shot up. This was not due to increased public expenditure which actually fell (though bank debts were included). It was GNI* falling by 22 percent between 2007 and 2011. So a fall from that peak was inevitable).

There is a projected slow reduction in public spending (as a proportion of output) between 2017 and 2021.

We find primary public spending falling, with current spending (public services and social protection) falling faster. Fortunately, investment is on the rise.

The above doesn’t mean that public spending is being cut in nominal terms. It is actually increasing, from €71.4 billion to €83 billion – an increase of 16.3 percent between 2017 and 2021. This may seem like a substantial amount.

But when you factor in prices and population rise, the increase comes to 7.4 percent. This increase, however, reflects greater emphasis on investment. Current spending will rise by only 3.2 percent up to 2021, or less than 1 percent annually. That is going to be a tight squeeze.

How does this compare with our peer –group in the EU; other Northern and Central European economies?

We can compare the Government’s and EU Commission’s projections for 2019.

Ireland would have to spend an additional €23.5 billion just to reach the average of our peer group. However, this doesn’t take account of the different factors that drive spending in particular countries. For instance, because of the older age demographic other EU countries have to spend more on pensions than Ireland.

So if we exclude expenditure on pensions (taking the proportion of pension expenditure in 2016 and applying it to 2019 levels), we find that Irish primary public spending comes in at 29.6 percent of GNI* compared to our peer group average 35.1 percent. While reduced, this still leaves a gap of €12.3 billion.

However, we also have to factor in our higher young demographic, which should drive education and family support expenditure higher than our EU peer group. There are other factors: prices, defence spending (which, however, is a discretionary category), dispersed population, and categories which constitute expenditure but are counted as household and not government spending (e.g. our old friend – water and waste spending).

Therefore, we should be careful about using comparative headline rates. However, there is strong evidence that Ireland is an under-spender compared to our peer group.Becoming a more European-type spending economy is not an easy task. One could argue for higher taxation but there is no gold at the end of the fiscal rainbow.

Clearly, we have a low ‘social wage’ (employers’ social insurance). In other countries this finances enhanced in-work benefits and health services. But increasing the social wage would require systemic multi-employer collective bargaining structures to ensure equity – and we don’t have these structures.

We could be entering into a difficult fiscal and economic cycles. Even before the EU starts bringing multi-national tax avoidance under control (and, so, reducing our revenue), companies are taking unilateral steps to reform their tax strategies which could put downward pressure on Irish corporate tax revenue.

Then there’s Brexit. Then there’s the still the high level of general government debt, though estimates vary depending on the measurement.

We seem to be stuck in a structural trap – a trap that is becoming tighter. How do we break out of it?

Here are three responses:

First, abandon net tax cuts. If there are to be tax cuts then these should be funded by tax rises in other areas. And within this, push out the boat a little. A good start would be to let the 2019 property valuations come on stream without amendment.

Second, constitute a collective bargaining structure which would integrate an increase in the social wage with overall wage increases. This would have the benefit of strengthening our automatic stabilisers (e.g. pay-related unemployment benefit) which would keep domestic demand up if there are job losses with a Brexit gone wrong.

Third, engage in real ‘public sector reform’ (not the crash n’ burn of the austerity years). This would focus on increasing productivity through the introduction of employee-driven innovation (discussed here).

However, this process requires trust between all partners. The Government could help to build such an environment by committing itself to full pay-restoration and an end to the two-tier pay structure and negotiating in good faith the time-scale.

In other words, we don’t have to immediately reach for the tax hike cudgel. But we do need a long-term vision of where we want to be in the future.

And being in in a low-spend, low-tax society where people continue to purchase public goods in private markets and doing without benefits that other European workers enjoy – well, that’s not much of a future.

Michael Taft is a researcher for SIPTU and author of the political economy blog, Notes on the Front. His column appears here every Tuesday


13 thoughts on “The Incredible Shrinking State

    1. david

      Yep all to soften us up for the increases planned for public sector pay
      Time for public sector pay cuts and pensions to be reduced inline with the private sector
      When I started working I was told part of my deductions was for my pension at 65
      That is a contract now I have to work an extra two years
      We need a French style system of local taxes and national taxes
      there was more talk about reducing the hours the public sector work
      Also all lump sums on retirement must be taxed fully like in the private sector
      Public sector workers get all these perks that private sector workers are denied
      At times I wish this country goes bankrupt so its impossible to fund these insane retirement packages and are going to be the biggest black hole this country has ever had
      The clock is ticking and in years to come the day of reckoning is to arrive
      Its a public sector ticking time bomb that should of been addressed years ago
      I would say brexit will be the firing pin

  1. Jake38

    …..”Third, engage in real ‘public sector reform’ (not the crash n’ burn of the austerity years). This would focus on increasing productivity through the introduction of employee-driven innovation (discussed here)……….”

    Michael “real public sector reform” would actually mean strange things like accountability, redundancy, actual real performance appraisal, pension funding reform, flexibility and other nasty real world phenomena that would have your union buddies frothing at the mouth.

    1. Fact Checker

      Between 2011 and 2014 Ireland saw an improvement in the primary balance (revenue minus non-interest expenditure as a share of GDP) of TEN PERCENTAGE POINTS. This is a massive improvement in public financial performance and is almost unique for an advanced economy in the last fifty years. By contrast France managed 0.7 and the UK 3.5.

      1. johnny

        if my aunt had liathróidí she’d be my uncle…..
        Ireland despite years of savage austerity that would make a Tory blush,has a DEFICIT-that’s a FACT !

    2. david

      And the 200 billion of distressed property assets sold off for a fraction to vulture funds has not come off the national debt
      Each year they are borrowing more and flogging bonds
      Where has that money gone?
      I bet to pay the public sector wage and pension bill
      But the question is still there
      Where is that money?
      Maybe when fianna fail sees the books they will tell us
      Maybe this is the reason fine Gael is clinging on to power
      Anyway soon brexit will be the trigger

  2. dav

    As if FFG will make those “tough choices” it’s only when the their choices involves leaving the poor and the sick worse off that they do it. They’ll try and buy votes before their ff brothers, pull the plug on the government.

  3. Hansel

    Raise taxes: fine.
    Increase the social wage in line with overall wage increases: OK, but a little light on detail.
    Public Sector reform: read a link somewhere else.

    Not surprisingly, we’re all noticing the “engage in real public sector reform” line Michael. That’s possibly because you glossed over what most of us see as the biggest problem of all.

    I read your public sector reform link: some interesting concepts, certainly worth a try. But the problem again comes from Irish unions themselves who don’t focus publicly on quality of work metrics, job satisfaction metrics etc. Instead, they focus very publicly on pay-and-conditions.

    In the private sector we don’t spend much effort theorising and pontificating on the possible methods of Public Sector Reform: we’d just like the results please. And we don’t often get to see results, because the unions don’t champion them. The unions themselves should be the ones doing the theorising, trialling and improving. Until they bring something meaningful to the table regards reforms, all we’ll ever read in your column will be “higher taxes and better public sector pay”. It’s rational that we treat your discussion of reform with extreme scepticism.

  4. Baffled

    Michael should re-run those numbers in terms of spending per capita and then compare it to our European friends. He might be surprised by the results!

Comments are closed.