We have now had three years of so-called austerity budgets in Ireland that have focussed largely on expenditure cuts. So how much has expenditure being cut by? Lets start with gross expenditure by central government.
At first glance it would appear as if the austerity measures are beginning to bite. After showing a continual rise to 2009, gross central government expenditure fell from €75.3 billion in 2009 to €69.1 billion in 2010. However let’s break this down by Voted and Non-Voted expenditure. Voted expenditure is essentially the money allocated to government departments and offices. Non-voted expenditure is money that is spent under specific legislation and does not require a separate ‘vote’.
Since 2008 the increase in voted expenditure has moderated and actually decreased slightly in 2010. However, most of the decrease in gross expenditure that occurred in 2010 is due to non-voted expenditure. So called ‘budgetary cuts’ on voted expenditure have had little effect so far in tempering expenditure, with any reduction seen mainly in voted capital expenditure as shown in the next graph.
In fact, if we look at breakdown of total expenditure into current and capital expenditure we see that all of the decrease can be attributed to capital expenditure. There has been no year when day-to-day or current expenditure has fallen. None.
When looking at non-voted expenditure it is clear there has been no actual cuts in expenditure. It is the result of some once-off events in non-voted capital expenditure.
Non-voted current expenditure (mainly interest payments on the National Debt) has been increasing since 2008. The apparent reduction in non-voted expenditure seen in 2010, is simply due to the once-off increase in non-voted capital expenditure that occurred in 2009. In 2009 there was €4 billion transferred to Anglo Irish Bank and €3 billion paid to the NPRF to fund the recapitalisations of AIB and BOI. These payments did not occur in 2010 (and most bank recapitalisations since have been off-balance sheet).
On the current side there has been some reduction in voted current expenditure but this has been more than offset by the increase in interest payments that is pushing up non-voted current expenditure. Any ‘savings’ being made on current expenditure are more than offset by expenditure increases elsewhere.
The one area where there has been actual reductions is in capital expenditure. We saw above why non-voted capital expenditure spiked in 2009 and fell sharply in 2010. Voted (or departmental) capital expenditure has been cut sharply since 2008 and in two years has been reduced from €9.0 billion to €6.4 billion.
Cutting, or just hiding, capital expenditure is the ‘low-lying fruit’ of an austerity package. It does not offer sufficient long-term reductions if order is to be restored to the public finances. Closing a €19 billion budget deficit requires expenditure cuts and tax increases. Thus far we have grasped neither nettle properly.
Delaying capital projects like road improvements, new railways, metros and other public construction projects does not ‘save’ money as most of these are projects will have to undertaken at some point in the future anyway. A properly implemented austerity programme has to look to cut current voted expenditure. The main elements of this expenditure are transfer payments, public sector pay and pensions, and expenditure on goods and services. The 2010 figures suggest we have seen little austerity so far and it is too early to forecast the impact of the changes announced in Budget 2011.
The budget deficit remains (and is actually getting bigger!). Is there anyone who will grasp the painful nettle?
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Seamus – this is very useful but may I suggest it doesn’t fully capture the extent of the real austerity measures that have been imposed? Leave aside for the moment the deflationary impact of such measures (which account for the sluggishly high deficits). The Government started its austerity drive in April 2009, though there were some small cuts in the ‘February measures’ (cuts apart from the pension levy which didn’t count as a ‘cut’). The Government projected, in the Estimates, that without the measures contained in the April budget, gross voted current spending would come in at €57.5 billion in 2009. With the April measures, current spending fell to €56.6 billion by end-of-year. With the Budget 2010 measures, current spending fell to €54.9. With the 2011 measures, current spending is estimated to fall to €52.8 billion.
ReplyDeleteThat represents a contraction of over 8 percent – sizeable enough for a period of less than two years. If we exclude social transfers, current spending fell by over 10 percent – an even more sizeable contraction. Given that there is little give in demographics (old age) and automatic stabilisers (unemployment and related costs) – though the government has done considerable trimming in these areas – the impact on the remainder of the budget could be considerable. The numbers I have used are the provisional outturns in the relevant Estimates – final numbers may be slightly different but probably wouldn’t change the overall downward dynamic.
Of course, these cuts have had the perverse effect of keeping deficits high: reduction in demand which translates into higher unemployment costs, reduction in tax revenue, etc.
In grasping the nettle it is imperative that policy-makers take full account of the impact of austerity measures on the economy which in turn impacts on the ability to generate revenue and reduce costs (namely, unemployment). Without this, we may find that the next tranche of fiscal contraction of €14 billion will end up like the last tranche of €14 billion – a weakened economy with high debts and little confidence in the debt markets.
@Seamus Coffey.
ReplyDeleteExcellent graphs. The net revenue and expenditure approach used by the govt is very misleading and only serves to confuse the overall picture.
@Michael Taft.
Lets get real about austerity and where it has fallen. Public servants are still getting pay increments while temporary and contract public service staff have been sacked.
How many more jobs would have been saved if the unions offered to forego incremental increases in exchange for holding on to non permanent staff?
That would have shown real solidarity. And it would have far less negative implications for the economy.
Further I cannot agree with your analysis that 'we saved money because we didn't spend the increases we had been planning to spend'
Hi Michael,
ReplyDeleteI agree that looking at these aggregates can be deceptive and they can hide the true impact of budgetary changes. In fact, aggregate current expenditure could stay exactly the same but significant changes in the components of the expenditure (transfers, wages, goods and services) would remain hidden.
I'm not so sure we can see that these cuts (such that they are) "have had the perverse effect of keeping deficits high". In 2006 the Exchequer ran a surplus of €2.3 billion. In the National Accounts both Consumption and Government Expenditure are now back to 2006 levels. It is Investment which has collapsed and is now 60% below 2006 levels.
If the levels of Consumption and Government Expenditure were sufficicent to generate an Exchequer Surplus of €2.3 billion in 2006 it is hard to see how we can blame them for a deficit of €18.7 billion in 2010. Of course, the structure of the economy has changed since then.
I do agree that reducing Government Expenditure will have an effect on the economy and the effect of this must not be ignored by policymakers. However, it is important that the nettle of the public deficit is grasped and grasped quickly. The banks have flung us into the deep end of the debt pool but unless we can reduce the public deficit we will be dragged underwater pretty quickly.
Cutting the deficit has to be a combination of expenditure cuts and tax increases. Thus far, I have seen little evidence of either. Compared to 2009 current expenditure was up (though current voted expenditure was down) and tax revenue was down). These are the wrong directions for a country with an €18.7 billion deficit.
The pernicious Croke Park Agreement in action. No pay cuts, no compulsory redundancies.
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