Social Welfare Expenditure

Following a recent theme here’s another misperception from RTE News last Friday in a report on the release of the White Paper. 

The issue is the true nature of the cost of our social welfare system.  In the report David Murphy stated that social welfare expenditure would rise from €13.2 billion in 2010 to €14.2 billion in 2011 (if no changes were introduced in the Budget).  This is partially true.

The White Paper details expenditure by department and the above figure is the estimate of expenditure by the Department of Social Protection in 2010.  It is broken down as follows.

Relative to our banking crisis this would suggest that, although growing, our expenditure on social welfare should be manageable. It seems a relatively light burden for an economy with an expected GDP this year of around €157 billion.  Here is how the €11.2 billion of welfare payments are distributed.

It is fairy clear that this is not the full list of social welfare payments.  The remainder come from the Social Insurance Fund (SIF).  This fund received a €1.55 billion payment from the Department this year.  However most of the funds receipts come from PRSI contributions.  These were estimated to contribution just over €7 billion to the fund in 2010. 

These do not form part of the Exchequer Accounts as they are paid directly to the SIF so we do not get monthly information on them.  Overall details of the SIF are also difficult to source.  Anyway with €7 billion from PRSI and €1.55 billion from the Department of Social Protection this represents a substantial sum of money.  Here are the payments made from the SIF this year.

It is only by adding the expenditure on social welfare payments by the Department of Social Protection (€11.2 billion) and the Social Insurance Fund (€9.3 billion) that we get a true measure of total social welfare expenditure.  This is €20.5 billion in 2010.

This is not the full extent as cash transfer provided by the government.  Schemes run by other Departments brought total expenditure on direct transfer programmes to over €26 billion.  This is now a sizable burden for an economy with a GDP of €157 billion (17%) and particularly one with a GNP of €130 billion (20%).

A recent study by TASC shows that our expenditure on Social Protection as a percentage of GDP is now above the EU15 average.  One consequence of the economic crisis has been the complete erosion of the surplus in the Social Insurance Fund.  At the end of 2008 the SIF has a surplus of €3.4 billion.  This surplus was managed by the NTMA and the investment income generated was available to meet social welfare payments.  The NTMA’s annual report for 2009 contained the following section on page 38.

Social Insurance Fund
The income of the Social Insurance Fund derives mainly from Pay-Related Social Insurance (PRSI) contributions by employees, employers and self-employed persons. Payments from the Fund are made in respect of items such as State Pensions, Illness Benefit and Jobseekers Benefit. Since July 2001 the NTMA has managed the accumulated surplus of the Fund, with performance measured against a benchmark agreed with the Minister for Finance.

During 2009 the NTMA transferred €2.9 billion from the Fund back to the Department of Social and Family Affairs, bringing the total under management at the end of the year to € 157 million. The balance of the Fund was transferred back to the Department by the end of April 2010.

The Social Insurance Fund is now empty! It is not just the National Pension Reserve Fund that has been wiped out.

The SIF needed over €1.5 billion from the Department of Social Protection in 2010 just to meet its requirements.  Some changes to PRSI in Tuesday’s Budget will generate some additional revenue (c. €220 million) but it is likely the fund will need to subsidised for the foreseeable future.

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Government Expenditure

Here is central, local and total government expenditure in Ireland in 2009.

It should be noted that local government is part-funded by a grant from central government.  In 2009 this totalled €6,737 million so central government expenditure is actually €69,163 million but to avoid double counting this transfer is excluded from the above table and the money is counted as local government expenditure.

With GDP measured at €159.6 billion in 2009, total government expenditure equates to 47.1% of GDP.  The equivalent GNP figures are €131.2 billion and a staggering 57.3%.  Is there a higher figure in any country?

We just saw that government revenue in 2009 was somewhere around €56.4 billion. A simple subtraction shows us that there was a deficit of around €19 billion in 2009.  This figure is in the public domain.  The process of getting there is, unfortunately, less widespread.

I do not put much value in the division of government expenditure by Department or Vote.  These are not really comparable and are subject to the transfer of functions and agencies between votes.  The CSO data above tells us what the money was used for, the following table of data from the OECD shows us the functions that year’s €76.4 billion of expenditure was used on.

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The Exchequer Account is not The Public Finances

There is a widespread assumption that The Exchequer Accounts represent the Government Accounts.  This is not true. 

The Exchequer Account only represents money which actually passes through the Exchequer Account in the Department of Finance.  There are a multitude of government receipts and expenditures that do not pass through the Exchequer Account.  These should form part of any analysis of our public finances.

Yet, time and again it is the Exchequer Accounts that get the only media exposure.  One reason for this is that they are released every month and are available in a readily digestible form.  A second reason is that many commentators and observers simply show no inclination to verify the statistics they use and go with the most accessible information.

Just one example should be enough to highlight the relative uselessness of depending on the Exchequer Accounts as a measure of the overall Public Finances.  Government revenue is examined below the fold. 

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Free Webinar - Banks, Budgets and Bailouts

The Department of Economics, UCC is hosting a free webinar (online seminar) on Wednesday morning from 11-12am.  Registration is free but places are limited to 200.

Details here.

Update: The short slide set I used for the webinar are below the fold.

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Presentation to UCC Economics Society

Last Thursday night I gave a presentation to a UCC Economics Society event on the Irish Budget Deficit.  My task was to consider some of the issues on the expenditure side of the debate.  Here are the slides I used.

Government spending

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