The Level and Composition of Irish Public Spending

The over-runs in health spending, last week’s stimulus package and the preparations for the 2013 Budget are putting renewed focus on the government’s fiscal strategy.  Certainly, there is plenty to be done in relation to taxation but here are some links in relation to the expenditure side

On public investment

  • Rory O’Farrell (NERI) has a new working paper here
  • Colm McCarthy’s latest SINDO piece is here

On controlling health expenditure

  • An IMF team has some (general, not Irish-specific) recommendations in this VOX article

19 replies on “The Level and Composition of Irish Public Spending”

Rory O’Farrell’s paper should be crosschecked with what €1bn would buy in project terms in a year — e.g office blocks and what material would be used etc. John Corcoran’s quantity surveyor friends could help!

The rise in exports effect using headline export data needs a sack of salt.

As for permanent jobs, a return from Colm McCarthy’s Wexford example, would surely require a return to sustainable economic growth and that is not going to return very soon no matter what is spent now on projects.

An Irish Times report suggests how inadequate the spending controls are in the health area:

Health Minister James Reilly has said all doctors employed by the State are being asked to prescribe cheaper generic drugs “in the national interest”.

The Health Service Executive is also writing to all community pharmacists from today asking them to intensify efforts to make savings, he said.

@Michael Hennigan

Yes, every project should be evaluated separately, the €1bn in my paper is an average.

As the EIB are likely to be involved in any financing, they will do their own evaluation before they lend their money, which will help prevent vanity projects.

The EIB have a very good track record.

I think it’s important to consider also the potential secondary benefits to consumer confidence from capital expenditure by the government at this time. If people feel that activity is starting to pick up and see some highly visible public works projects resuming, then it may encourage people to save a little less and spend a little more.

Shouldn’t a link to constantin Gurdgiev’s piece in the Sunday Times also be included in this thread in particularly his analysis on publc v private pay.

The announcement last week by Brendan Howlin brings another issue back to the fore. Off V On balance sheet items.

There has been significant growth since the crisis began of Off balance sheet Items. Everyone knows that this just masks the truth.

It would be an interesting exersize of someone could try to come up with figures for the growth in these off balance sheet items.

This Enron style of accounting should end immediately.

Do the national debt repayments include the off balance sheet repayments?

Constantin’s Article..

Tiger left us with a soft underbelly

With nearly 15% unemployment and almost 530,000 people in receipt of some unemployment support, the minds of Irish policymakers and analysts are preoccupied with jobs creation. Alas, the economics of jobs creation is an entirely different discipline from that of political PR. In the real world, it is commonplace for jobs to be created on the basis of a sustainable, long-term availability of skills to meet a demand.

Others are generated on the back of tax advantages and subsidies, including stimulus. In the short run, these jobs can yield a positive boost to economic activity. In the longer run, they are not sustainable and drain resources that can be better allocated to other areas. The ultimate difference between the two type of jobs is found in productivity growth and the competitiveness gain or loss they generate for the economy.

The prospects of economic recovery have been rhetorically coupled with the improvements in our cost competitiveness since early 2008. And for a good reason. The rapid deterioration in competitiveness in the years leading up to the 2008 crisis is what got us into the situation where a structural collapse was inevitable. During the Celtic tiger era of 2001-2007, competitiveness indicators (HCIs) deteriorated by 26%. Productivity growth was well below the average rate of advanced economies once multinational transfer pricing and tax arbitrage activities were taken out.

During the years of the property bubble, Ireland was the least competitive economy in the entire euro area. Structurally, this was underpinned by labour cost inflation. Consumer costs-related competitiveness deteriorated 38% between the end of 2001 and mid-2008, more than one-and-a-half times the rate of deterioration in producer costs-linked measure.

An even more pervasive and long-term force at play was the creation of hundreds of thousands of jobs in construction, retail and finance that lagged in economic value-added well behind the exporting sectors. This was not a model for sustainable jobs creation. Instead of incentivising investment in real skills and aptitude to work and entrepreneurship, the tiger generation was taught to expect a €40,000-€45,000 starting job in a “professional” occupation or laying bricks at a construction site. Not surprisingly, the uptake of degrees in harder sciences and more mathematically intensive fields slumped. At the same time, degrees in social and cultural studies were booming.

The workforce rapidly produced an expanding mismatch between pay expectations and career prospects and the reality of an internationally competitive economy. It was a bubble within a bubble. Placated by the opportunity to locate in our corporate tax haven, multinational corporations played their part, perpetuating the myth of the superior workforce with great skills and education. When some within the sector eventually woke up and spoke out, it was far too late in the day.

The government and its quasi-official economic mouthpieces in academia and the banks are still in denial. In truth, the crisis laid bare the reality about our fabled competitiveness beyond the corporate tax rate regime. The focus of the government labour market reforms, in rhetoric, if not in real terms, has been on regaining cost competitiveness. Sadly, the process so far is threatening to replicate, rather than correct, the errors of judgment pursued before the crisis erupted.

This conclusion might seem odd since, in terms of headline numbers, things are looking up. Ireland’s HCI has improved 5% between January 2009 and April 2012 — the latest data available. These gains, however, are accounted for by two prime drivers. First, the jobs destruction in the construction and retail sectors has led to rapid elimination of less economically productive activities.

Second, a collapse in domestic business activity added price deflation to the equation, distorting gains from any real productivity improvements. Thus our HCI deflated at the producer level 7.7% over the above period of time, while the consumer prices-deflated HCI dropped 12.5%. Much still remains to be done on the competitiveness front. Deflationary pressures in the economy are no longer rampant. The momentum of gains in competitiveness experienced between 2008 and 2010 has slowed dramatically and is likely to continue declining.

Jobs destruction has moderated markedly, while across the economy overall earnings are rising. Wage inflation in several sectors where skills shortages are present, such as ICT and internationally traded services, now exacerbate the declining competitiveness of individual tax policies. Year on year, average weekly earnings have increased in Ireland by 0.7% in the first quarter of 2012. Weekly earnings in the private sector were up 1.5% annually, while there was an increase of 2% in public sector over the year. Between 2008 and 2012, average weekly earnings fell 3.5% in the private sector and rose 0.8% in the public sector. The earnings inflation reflects a skills shortage in the larger-size enterprises and certain occupational categories.

The earnings of managers, professional and associated professionals rose 5.7% year on year in the first quarter in 2012 and are now 1.1% ahead of where they were in 2009. Earnings for clerical, sales and service employees are up 2.4% in the same period, though still down almost 2% on 2009. The real problem with labour costs competitiveness is that, with rising tax burdens, it is becoming increasingly difficult to import skills. Our system of training and education simply cannot deliver the growing demand for specialist knowledge. This issue has been highlighted by indigenous exporters but nobody has been listening. It is news only when the larger multinationals raise their voices.

Louise Phelan, PayPal’s global operations vice-president, warned last week that Ireland needed to focus on language skills, especially in German, Dutch and Nordic languages “to protect our status as a European gateway”. The government is listening to the latter more than to the indigenous entrepreneurs. Yet reforming the education system is a long-term process and should not be tailored to the demand for narrow skills. Instead, it should aim to provide a broad and diversified education base, including leading modern languages, as well as proper teaching of core subjects such as history, philosophy, arts and sciences.

Such reforms will not have a direct impact on the likes of PayPal’s ability to hire people with narrow skill sets. If PayPal wants a fluent Swedish speaker for a call centre, the correct response is to reduce the costs of importing human capital. To derive real competitive advantage, sustainable jobs creation and productivity growth, we need to focus on creating the right mix of tax incentives, educational supports and immigration regulations. The aim should be to lower the cost of highly skilled workers and at the same time maximise returns to an individual’s investment in education and training.

PS: The CMA Global Sovereign Credit Risk Report for the second quarter shows Ireland improving its ranking position from the seventh highest risk sovereign debt issuer in the world to the eighth — a gain that, on the surface, should signal that the country credit default swap spreads (CDS) are improving. While Ireland’s CDS has indeed improved during the quarter, falling below 600 basis points (bps) in the last two days of June, in effect it ended Q2 2012 pretty much where it started it in terms of CDS levels.

What really propelled Ireland’s rankings gain was the return of Greece to the CDS markets a few weeks after the country’s “selective default”. In fact, Ireland’s rate of improvement (by one notch) is identical to that of Cyprus and marks below-average performance.

Perhaps even more revealing is the comparative between Ireland and Iceland. The latter is ranked 20th in the risk league table, improving by two ranks. At the end of June Icelandic five-year CDS were trading at 290 bps, meaning the implied cumulative probability of it defaulting over the five-year horizon is 22.9%. Ireland’s CDS were trading at 554 bps with an implied cumulative probability of default of 38.6%.

“To derive real competitive advantage, sustainable jobs creation and productivity growth, we need to focus on creating the right mix of tax incentives, educational supports and immigration regulations.”

The problem with this is that European states who have taken the same approach have found that the respective nations they represent have reacted badly to the idea that their nation doesnt exist but is as flexible a concept as a labour force – fire (emigrate) the high cost workers and hire(immigrate) the lost cost workers. Inevitably there is no downside to this in some peoples eyes as a random collection of consumers in one spot is no different to another. We need immigration here but as long as immigration is used as a tool of economic repression against respective nations then that plan by Constantin is going to cause serious political blowback.

Projects cannot be evaluated one at a time. There are project dependencies, synergies etc..

Eamonn Moran, Michael Hennigan:

On PPP (in the UK PFI) projects, there is a variety of financing arrangements. One arrangement involves ‘unitary payments’ which are expensed in future years, so they add to the deficit but not to the debt. Deferred liabilities like this would be shown as debt under normal accounting standards. There can also be arrangements which create contingent rather than deferred liabilities. Governments all over the world embrace contingent liabilities with abandon, and rarely account for them at all, never mind properly.

BTW, the Spanish auction this morning cleared at 2.43 on 3-month but 3.69 on the 6-month. Can anyone remember a pick-up like this in a sovereign bill market?


30-35% of €1 spent on general building works would go towards labour costs.

“Projects cannot be evaluated one at a time. There are project dependencies, synergies etc..”

+1. If only the Banks and their risk committees had applied this simple concept they may have realised that in a 10 house town nobody was going to buy the 300 houses spread over 4 estates.

The domestic construction industry is now at a stage where sustaining jobs is of critical importance lest the capacity of the industry reduce any further. The third level, semi-state and government departments could assist this through following the lead of the Milk Board and encouraging a “Buy Irish” campaign for professional services – send someone over to Paris to learn how the French do it within the strictures of the EU procurement directives if necessary.

Jobs destruction is still ongoing in the construction sector with wages certainly not increasing and a race to the bottom regarding fee levels (although not construction tender prices which have stabilised and are moving upwards as supply now more closely matches demand). It is unclear whether this really is a stimulous given the nature of the projects and the fact that many of them had been in the pipeline for a while.

@Barry T

Where do you get the 30-35% figure. CSO I/O tables suggest just over 40%

Estimated from construction project data using a resource schedule with measured output (QS valuations) and salary levels (rebased to 2012). It is very dependent on the type of project.

The proposed resource loading is asked for a lot in public procurement as part of the qualitative assessment criteria during the award process.

At the time the objective was to indicate on an order of magnitude basis how many direct jobs would be created (construction workers employed) over the course of a major project that was proposed.

@ Barry T

Thanks for the info. Is there a link available?

The CSO figure also includes some spillovers. Eg the construction firm buy services from an accounting firm, and the accounting firm buys pens from a shop etc etc., all of which have a labour component.

Perhaps that explains the difference, but I’ve been looking for a quotable source for the direct employment.

I see we are pumping 38m into CIE. Should we burn the Bondholders?
My informant tells me that the trip to Cork takes longer now than 15 years ago and also is slower than a fast car.

Health spending projections: thanks for posting the link to the Vox piece by the IMF guys.

Did anyone notice that their projections for health spending from 2010-30 show Ireland having one of the lowest projected increases (0.7% GDP it seems), and that nearly all of this is to come from ageing effects (of our relatively still youngish population), with almost no contribution from excess cost growth?

Looks like the IMF see health spending increases as less catastrophic than many others tend to, notwithstanding the real pressures of the 2012 over-run rate, which is certainly non-trivial.

Comments are closed.