What you need to know ahead of the Spending Review: the Irish experience

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:

— 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.

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.

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.