Sunday, June 16, 2019

Is Irish public spending out of control?

The Irish Government's Expenditure Data

No, but prepare for surprises!!

Ireland's gross public spending was at €76bn in 2009 — the first grim year of the property and bank bust — and the budgeted spending for 2019 is €76bn.

The population has risen 8% since 2009 or about 370,000 people.

Eurostat recently reported that across the EU member states, the highest percentages of households with children were observed in Ireland (39.0%), Poland (36.5%) and Cyprus (35.6%), the lowest in Germany and Finland (both 21.8%). The highest share of households with three or more children was registered in Ireland (26%).

Using a Modified Gross National Income (GNI*) as a proxy for Irish national output with several multinational distortions (but not all) stripped from the headline GDP (gross domestic product) the Irish denominator of €200bn results in a spending ratio of 38%. Organisation for Economic Cooperation and Development (OCD) data for 2017 as a ratio of GDP show German public spending at 44%; UK 41%; the Netherlands 42%; Austria and Sweden 49%; Denmark 51% and France 56%.

If we add 3% for Irish private healthcare spending, it results in a ratio of 41%.  

Social Protection: The spending has been about €20bn and unchanged for many years as the drop in unemployment payments have been offset by growth in pension payments and disability claims.

Health: Total health spending of €17bn (public) +  €6bn (private) is a ratio of 11.5% — this is among the highest rates among OECD advanced countries.

The recent appointment of Paul Reid as director general of the Health Executive may result in sunlight on this expanding black hole. Last March the Economist wrote that the Irish healthcare system "leaves much to be desired."

Ireland has the highest rate of graduation of medical students in the OECD while about 40% of medical staff in Ireland are from overseas compared with 2% in the Netherlands.

The Irish Fiscal Advisory Council (IFAC) has highlighted persistent health spending overruns on budget and while reform is overdue in the sclerotic system, there are unlikely to be opportunities to cut spending.

Education: With a budget of €11bn and a large young population, it would be difficult to contain spending.

Debt servicing + EU payments: The estimated cost in 2019 is €10bn while the ratio of public debt is 103%.

Ireland had a budget surplus of €500m in 2018 and without inflation and continuing surpluses, it will be difficult to reduce this debt.

Departmental Expenditures: The biggest portion of the almost €12bn allocation is for housing and local government.

With demands for more investment in social housing, there is little leeway here.

The economy today is on a much firmer footing than 2009, with low single-digit growth in household credit and a rise in disposable income.

A Department of Finance paper last March shows that multinationals including the fake Irish firms that move headquarters to Ireland for tax purposes distort the level of Irish private debt.

For example, non-financial corporation (NFC) debt-to-GNI* ratio was 95% in 2017, while household debt-to-GNI* was 77%. 

Debt-to-GDI (gross disposable income) peaked at 212% in 2009 and fell to 126% in Q3 2018, back to its 2003 level. However, the paper acknowledges that "Ireland currently has the fourth highest debt-to-GDI in the EU, behind Denmark, the Netherlands and Sweden."

Since the end of 2012 about 400,000 full-time jobs were added in the Irish economy.

Brexit and the likely loss of corporation tax windfalls are the biggest risks for the economy while the housing crisis in Dublin, the health service and reducing greenhouse gases are continuing challenges.

Public pay freezes, tax rises and public borrowing at low rates, may be necessary to prepare the economy for a changed future rather than halting investment.  

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