Michael Taft: Ireland’s Low-Spend Economy Facing into a Storm

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From top: Taoiseach Leo Varadkar and Minister for Finance Paschal Donohoe; Michael Taft

In the run-up to the budget we will hear a lot about how the Government spends a lot or not enough, and needs to spend a lot less or more.

While there is considerable scope for legitimate disagreements, let’s at least get the context right.

For instance, does Ireland spend too much in comparison with our peer group in Europe? Are we a high or low spender?

Different Ways of Categorising Spending

Comparing public spending is not straightforward. Countries have different ways of spending money on ‘public goods’, but not all of them are considered state spending.

Some spending is conducted by non-state bodies; for instance, spending on housing and water/waste in other EU countries is done through off-balance sheet vehicles such as public cooperatives or public corporations.

Then there is social protection spending which is organised through civil society organisations (the Ghent system in countries such as Belgium and Sweden where trade unions operate unemployment benefit insurance schemes); these do not necessarily appear on the state balance sheet.

Finally, there are demographic issues. Countries with a high proportion of pensioners will (or should) spend more on pensions, while those with a higher share of young people will spend more on education and family supports.

Demographics even apply to policing: countries with younger demographics or high levels of youth poverty are likely to need more policing.There is no one formula to accommodate all these contingencies and differences.

What Measurement?

There is also the problem of how to measure public spending. We know, for instance, that assessing public spending as a proportion of GDP will wildly understate Irish spending. We can use the CSO’s measurement of modified Gross National Income (or GNI*) for Ireland, but it can give a slightly skewed result since we don’t have a similar modified measurement for other EU countries.

For instance, the CSO removes intellectual property depreciation and aircraft leasing when calculating their GNI*, but we can’t do that for other countries to get a like-for-like comparison.

Acknowledging these caveats and differences, let’s see what we can come up using three measurements:

Gross National Income with the CSO’s GNI* measurement for Ireland

Public spending per capita – this is a measurement used by the Nevin Economic Research Institute

Net National Income – this is not used as much though, for comparison purposes, it is probably more robust than Gross National Income. It essentially removes capital depreciation in much the same way as the CSO removes intellectual property depreciation to obtain their GNI*.

Using these three ways of measuring ‘primary’ public spending (excluding interest payments), what do we find?

In all measurements Ireland is at the bottom of our EU peer group, exceeding only the UK. On the basis of the above, we can estimate the amount of additional public spending needed to reach our EU peer group average.

Ireland would have to increase public spending by between €14 and €18 billion to reach our EU peer group average, or between 20 and 26 percent. However, this does not factor in key variables.

Demographics

As noted above, demographics drive a substantial proportion of public spending. For instance, people aged 65 and over make up 20 percent of our EU peer-group population; in Ireland, they make up 14 percent. There are two ways to adjust for this:

If we just exempted expenditure on social protection pensions, the gap between Ireland and our EU peer group would fall to between €5.2 and €8.6 billion.

If we were to adjust by assuming that Ireland has the same proportion of elderly as our EU peer group, then the spending gap would be between €9.4 and €13.7 billion.

The reason these figures differ is because not only do other EU countries have an elevated age demographic; they also spend more on pensioners (per elderly capita).

However, when we turn to young people, it is Ireland that has an elevated demographic: 27 percent of the Irish population are 19 years or younger compared to 21 percent in our EU peer group.

At the same time Ireland underspends on education on a per pupil basis. Different ways of measuring this gap shows that Ireland may be spending €2 billion less than our EU peer group average on education.

Another category impacted by a high youth demographic is social protection spending on families and children. A back-of-the-excel-sheet estimate shows Ireland, because of a higher demographic and lower per capita payments, could be spending approximately €1 billion less than our EU peer group average.

Fiscal Capacity

While we should be hesitant about putting a definitive number on it, it appears that when age-related spending is factored in, Ireland – using the conservative GNI measurement – spends somewhere between €8 and €12 billion less than our EU peer group average, and this could be an under-estimate.

Of course, merely increasing spending is no guarantee of quality or efficiency (though underspending is sure to undermine quality).

But this raises the question of our fiscal capacity to meet the current challenges: the fastest growing elderly demographic in the EU, Brexit, a global trade slowdown, the climate emergency, Eurozone stagnation and the housing crisis – to name only a few.

Increasing our fiscal capacity, however, is not something that can be done in the short term. It requires a long-term strategy consistent with the economic cycle. Raising resources for public services, social protection and investment to European levels would mark a systemic break with our historical low-spend economy.

We squandered the opportunity to start this strategy in the years following the recession, and now we are heading into what could be a storm.

Let’s hope the Government doesn’t set us back with unnecessarily tight budgets in the years ahead.

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

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22 thoughts on “Michael Taft: Ireland’s Low-Spend Economy Facing into a Storm

    1. Zaccone

      +1

      The Irish Times or Indo should pick them up. They’re at least as good (I’d actually say a lot better) than David McWilliams, and his columns are very popular.

        1. White Dove

          That assumes that Michael would want to write for the Irish Times or the Indo, both failing rags.

          He has far more influence on Broadsheet.

          Get out of that 2005 mindset, Zaccone.

  1. eoin

    Interesting article Michael, thank you.

    Given the narrative that Ireland is practically a world leader in health spending, what area is being diddled? You mention education, but suggest it’s just €2bn which would be around 1% of GNI/NNI, whereas we’re around 15% behind the leading country in your table above. We don’t have very much in defence spending do we, around 0.5% of state income, we don’t do nuclear weapons. Still though, this might add just another 2% to our state spending. Even with another 2% on defence, we’d still be at the Netherlands/Germany, and way below the Nordic countries and France. What are the main differences?

    1. Hansel

      We’re spending very little on infrastructure I think eoin.
      Despite the big announcements of cost overruns on infrastructure projects, that money is not actually being spent (yet).

      Just a guess

    2. Michael Taft

      Eoin – I’m hoping to do up a sectoral analysis for next week’s Broadsheet which would breakdown spending per category (general public services, economic aid, transport, housing, environmental protection, health, social protection, etc.). This should help identify areas of low-spending. I suspect it is spread across the board.

      1. Otis Blue

        That’ll be interesting.

        Michael – would you give credence to the claims that €116bn will be spent on the delivery of the 2040 National Development Plan ?

        1. Michael Taft

          Otis Blue – the €116 billion is projected for the years 2018 – 2027, the National Planning Framework. However, €91 billion is projected Government spending (the remainder comes from public enterprises). This comes to 3.9% of GNI over the 10-year period. This should be do-able, unless the Government starts implementing another round of austerity measures in the event of a severe Brexit downturn. The big question is how efficient it will be. Is the €3 billion spend on rural broadband – which will end up with private investors – part of that expenditure?

  2. Cian

    What criteria are used to make these countries our peer group?
    Every week you do an Ireland Vs these “peers”. And every week Ireland trails way behind them. So in what way are they our peers? Should Ireland not be compared to our old PIIGS peers?

    1. Michael Taft

      Cian – Our peer group is essentially the EU-15 excluding the poorer Mediterranean countries. This also excludes the even poorer New Member States. Among our peer group, the range of GDP per capita goes from Denmark (€51K) to France (€35K). Ireland is at €40K (using the GNI*), just behind Germany at €41K. Ireland is approximately average in this group (the average is also €40K). This comparison is an attempt at a like-for-like. Italy, on the other hand is at €29K while Spain is €25K – the next highest countries outside our peer group.

  3. V

    The higher than anywhere else public pay grades, and increments would surely account for the high ranking per head
    also the stupid money paid out to Consultants who always seem to be the same handful of firms for the 100s of gigs dished out every year

    Ye’ve seen there with the Children’s Hospital and Rural Broadband
    Advisers, and consultants and studies and what have you have driven costs demented
    You can’t get any infrastructure out of the ground in Ireland unless we’ve already spent twenty / thirty – an on million just on reports and hearings

    You wouldn’t see that in most of the Countries in the peer group

    Just saying

    Value for money is what we are lacking
    As well as accountability, and transparency, and I suppose Independent expertise not afraid of speaking truth to power

    Not the spend

  4. Big Dave

    If Irl is as wealthy as some claim,why do half a million kidults live with parents? In 1981 the figure was 180,000.

      1. Rob_G

        and housing costs, for those that remained, were cheap – can’t charge high rents if everyone has crappy wages.

      2. Cian

        Depends on your definition of ‘young adult’.

        2016 census: From 1981 to 2016 the total population increased by 35%.
        The number of
        20-29 year-olds decreased by 2%
        30-39 year-olds increased by 71%
        40-49 year-olds increased by 114%

        1. Cian

          Depends on your definition of ‘young adult’. (more details)

          2016 census: From 1981 to 2016 the total population increased by 35%.
          The number of
          20-24 year-olds decreased by 18%
          25-29 year-olds increased by only 15% (relative to a general population increased of 35%)
          30-39 year-olds increased by 71%
          40-49 year-olds increased by 114%
          50-59 year-olds increased by 89% (and all older groups increased too)

          There was a huge drop in early 20s, a small drop in the 25-29; and a huge increase in all older cohorts.

  5. Cian

    Depends on your definition of ‘young adult’.

    2016 census: From 1981 to 2016 the total population increased by 35%.
    The number of
    – 20-24 year-olds decreased by 18%
    – 25-29 year-olds increased by only 15% (relative to a general population increased of 35%)
    – 30-39 year-olds increased by 71%
    – 40-49 year-olds increased by 114%
    – 50-59 year-olds increased by 89% (and all older groups increased too)

    There was a huge drop in early 20s, a small drop in the 25-29; and a huge increase in all older cohorts.

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