What you need to know ahead of the Spending Review: the Irish experience
Patrick Nolan 6:27pm
This is the latest of our posts with Reform looking ahead to the Spending Review. The
first six posts were on health, education, the coalition’s first hundred days, welfare, the Civil Service, and the New Zealand and Canadian experiences.
Ireland
As Colm McCarthy, Chair of Irish Special Group on Public Service Numbers and Expenditure, noted at a recent Reform conference the macroeconomic downturn in
Ireland has been more severe than in almost any other European country:
To deal with the worsening fiscal position the Government introduced spending reduction packages in July 2008 and January 2009 as well as full Budgets in October 2008, April 2009 and December 2009. The goal is to cut the deficit to 3 percent of GDP by 2014 and reduce the gross debt to GDP ratio to 100 percent. The cumulative impact has been to stabilise the underlying deficit at a level which, although acknowledged to be unsustainable, has meant that access to sovereign credit has not been lost.-- The budget deficit, excluding the Exchequer cost of the banking collapse, went from near zero in 2007 to 11.5 per cent of GDP in the current year, despite fiscal cutbacks which began in July 2008.
-- There was a system-wide banking collapse – every single domestic credit institution required rescue, several collapsed altogether, and the total cost to the taxpayer could approach 20 per cent of GDP.
-- Since the first quarter of 2008, real GNP has fallen 17 per cent and the unemployment rate has gone from under 5 per cent to 13 per cent.
-- Ireland’s sovereign borrowing costs have risen sharply and the AAA credit rating has been a casualty.
Key changes made in Ireland have included tax increases, public service pay cuts, reductions in social welfare payments and restrictions on programme expenditures. The Special Group report also made extensive proposals for streamlining public service delivery, including the abolition of some Quangos and the merger of others.
As Colm McCarthy noted in developing these fiscal plans it has been crucially important for politicians to pick the right battles. He said: “[politicians in Ireland] haven’t shown a shortage of bottle, but they have rationed out their bottle very carefully.” It is unrealistic to expect politicians to spend capital on saving a million here and two million there, when they are trying to save billions more on big issues. He also noted problems caused by ringfencing the health budget and major parts of the welfare budget. The advantage of not ringfencing is that you are proofed against accusations that you are picking on people.
This discussion highlights a key lesson from the Irish experience for the UK. The key to getting fiscal consolidation right is to focus on important issues not sideshows. Rather than initiatives to reform the number of street signs, for example, the Coalition should invest time and political capital in reducing the longer-term cost of the major areas of spending, such as health and welfare. Otherwise plans to rescue the public finances will lack credibility.
Further information
Bassett, D., T. Cawston, A. Haldenby, P. Nolan, L. Parsons, N. Seddon and K. Trewhitt (2010), Budget 2010: Taking the tough choices, Reform.
Nolan, P (2010), ‘The First Hundred Days,’ The First Hundred Days, Reform.
Previous
Marcher Baron
September 5th, 2010 8:06pm Report this comment"He also noted problems caused by ringfencing the health budget and major parts of the welfare budget" Coalition, please note and add overseas aid.
Cormac Lucey
September 5th, 2010 8:40pm Report this commentBrown and Balls got (and continue to get) many things wrong. But they did the UK a signal service in keeping you out of the Eurozone.
By entering EMU, Ireland got a monetary policy which was hopelessly loose when the economy was booming and which is now hopelessly restrictive as we endure a depression. EMU membership triggered huge economic imbalances in Ireland (and in Spain and Greece).
Two figures give an idea of the scale of the problems left behind:
a. the Irish government has taken measures (tax rises and spending cuts) which exceed 12% of GNP in total to reduce the exchequer deficit.
b. notwithstanding the adjustments at a. above, Ireland's exchequer borrowing will exceed 14% of GNP this year(and that's before making any adjustment for the considerable costs of repairing our banking system).
The implication is that without the cuts, Ireland's exchequer borrowing might have exceeded 26% of GNP.
Note: at no stage, as Britain called in the IMF in 1976, did the UK's exchequer borrowing exceed 7% of GNP.
Conclusion: cuts are poltically doable if they are seen as necessary. Where Ireland and the UK differ is that Ireland, having just run an arduous marathon, is required to go out and run one again in the face of a hostile monetary policy. The UK, coming fresh to the cuts race, has only one marathon to run and will be helped by a accomodative monetary policy.
KurtS
September 5th, 2010 9:11pm Report this commentIreland hasn't been encouraging at all.
Dennis Churchill
September 5th, 2010 10:13pm Report this commentOne aspect worth noting is whether the reluctance, for historical and cultural reasons, to order possession of properties for default undermines property as security against loans in the future.
Even former developers are sitting in their multi-Euro properties owing vast sums to banks that canâ™t get the courts to grant possession.
Victor Southern
September 5th, 2010 11:23pm Report this comment"Rather than initiatives to reform the number of street signs, for example, the Coalition should invest time and political capital in reducing the longer-term cost of the major areas of spending" - a remark of staggering irrelevance to the subject of major cuts in state expenditure, Mr. Nolan. The advisory from Eric Pickles wsa realted to visual pollution and raid safety, nothing to do with savings directly except inasmuch as fewer signs will cost councils less money.
Ireland's case and that of the UK are very different. Ireland is a nett recipient from the EU and has virtually no defence force costs nor committments to NATO. It can no more be a model for us than an artist will use a pear to copy as an apple in a still life.
Dennis Churchill
September 6th, 2010 8:57am Report this commentThere is also the difficulty a political culture where more members of the Irish parliament are related to former members than in our House of Lords gives them. They are very much dependant on their local parties in ways we have no equivalent to.
No, view the proposals through Blarney filters and wait to see the figures.
Nickle
September 6th, 2010 11:12am Report this commentNote: at no stage, as Britain called in the IMF in 1976, did the UK's exchequer borrowing exceed 7% of GNP.
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Yes it has. It's been way over that figure for a long time.
The ONS has just published an assesment of the debts including off balance sheet debts of the UK. 5 trillion. Even this is an underestimate in my opinion.
That is multiples of GDP.
Even using GDP is misleading. It's just like going to a bank and asking to borrow money. To borrow more, you include your neighbour's income. When GDP is used, the goverment is using not only its 'income' from taxes, but all your income used to buy food, transport, shelter, clothes, ... as well.
As for the general tone of the article, its the big things that matter. However, the big figures are made up of lots of smaller figures.
The historical advice, how do you eat an elephant still holds. One bite at a time.
Austin Barry
September 6th, 2010 11:31am Report this commentAll you need to know about the corrupt, incestuous, mendacious nature of Irish politics is reflected in the gombeen face of our current Taoiseach.
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