Four thoughts on the reformed budgetary process

The new budgetary process announced last week includes an oversight committee within the Oireachtas and a series of stepping stone documents en route to the formal Budget Day announcement speech in October.

These processes are the Spring Statement, to set the tax and spend parameters for the coming 12 months, the National Economic Dialogue, to bring what used to be called the ‘social partners’ together to discuss spending priorities en bloc with Ministers, an expenditure report in early July and the tax strategy papers being circulated by late July.

First thought: A lot of this is happening already, and has been happening for years if not decades.

Think about the process. About half way through the year, a rough spending envelope is envisaged. Lobby groups try to convince Ministers to spend more on their thing, whatever that is, and within the walls of Merrion St., the boffins figure out various tax and spend combinations, which then gets presented to the Minister for her or his sign off on budget day. The same people performing the same processes will be working on the new budgetary processes.

The big difference in today’s formulation is how open and transparent it could be. It may not be. The simple way to make it less transparent is to under-fund the budget oversight committee’s secretariat, plunge them into a sea of unsearchable .pdfs, ignore any requests for raw data by saying something like ‘commercial sensitivity’ or something else, and go to the pub.

Second thought: Assuming everyone engages with an open heart, the big wins may still not be transparent. This is because really stupid ideas like Decentralisation won’t even make it to the floor of the Committee.

The process will have a hard time establishing its importance without additional reports on the distributional impacts or gender impacts of new policies, new models, or an open data framework. Unpopular but necessary fiscal elements (say increasing the local property tax at some point) may well get stymied by a committee afraid to make an voter-unfriendly decision.

Third thought: None of this will avoid last minute dot com political flyers. We may still see weird little subsidies for greyhounds or taxidermists or endangered snails or whatever still creeping in at the last minute, because that’s the way our politics works.

Fourth thought: This is the start of a longer conversation about fiscal oversight and control, vote by vote, within the Oireachtas and within the Government. It is going to be fascinating.

By Stephen Kinsella

Senior Lecturer in Economics at the University of Limerick.

17 replies on “Four thoughts on the reformed budgetary process”

The National Economic Dialogue aka Lobbying will probably be quite effective at maintaining a bias towards current rather than capital spending, and within that, current spending bias towards those sectors equipped with effective lobbying techniques, economic muscle and political influence.

Transparency, and a press/commenterrati that can be bothered to report it to an interested electorate would seem to be the only obstacle to business as usual. However both of those latter groups have largely abandoned the field.

Business as usual (aside from presentation) would be my guess.

This, as opposed to the usual routine where current and capital spending are slashed in order to avoid discommoding the wealthy in any way by, say, imposing meaningful wealth taxes or making the income tax system progressive beyond the current €80,000 plateau.

But grumpy doesn’t complain about that sort of thing.

A fifth thought might be that none of the previous four matters if the tact of expenditure ceilings fails to be accepted politically i.e. both at the level of politicians and electorate. There is a good chance that it will be because, with that unique talent for self-preservation which characterises Irish politicians in particular, they will perceive that such an approach is unavoidable and, most importantly, that the blame can be laid at the door of the EU. The electorate, on the other hand, on the evidence, still needs to catch up.
What characterises the the Irish public administration, on the other hand, is a near total incapacity to think outside the box, to take a modern term. Not alone do the duo DOF/DPER not have a capacity for ongoing real-time control of public expenditure, they seemingly do not think that it is their responsibility to acquire it cf. the link I posted on the other thread on the budgetary administrative actions to be followed in the matter of the “transfer of functions”.
Two further links to illustrate the point.
First, this paper by Public Policy (with a large input from Dr. Donal Donovan) which is excellent within its own terms of reference.
And another which draws attention, once again on my part, to Sweden, because it is a country which experienced both a budgetary and banking crisis (which, one would have imagined, would have justified its experience being included in what has many elements of a comparative study).
To quote the IT, or rather, the document leaked to it, they – the senior public servants involved – say that “the critical areas are public-service pay, public-service pensions, State pensions, HSE expenditure, long- term unemployed, schools expenditure, higher-education financing, social housing, Irish water and water charges, climate change, broadband, justice group expenditure and capital investment generally.”
Indeed! Equality of treatment, notably in terms of ability to pay, of those in full-time education, workers, the ill, and pensioners, remain the core choices facing Irish society. Getting on top of the pubic finances is an essential first step.

I wonder what sort of growth rate the DoF assumes in its models. The Fed is not going to be able to save the US economy. Equity markets are priced on “I believe I can fly” levels.

Bearing in mind Colm McCarthy’s Sindo observation about the relaxation of constraints on public public spending appearing to be the sincerest wish of all 158 members of the Dáil, I agree that the budget scrutiny process might be fascinating (Stephen K) – but probably for all the wrong reasons. I struggle with DOCM’s conviction that a combination of external and internal pressures will impose sufficient scrutiny, restraint and accountability. So I’m leaning towards grumpy’s BAU.

There are a number of additional factors that tend to reinforce this outcome. First, Ireland is a small, open, regional economy at the intersection of the Transatlantic and EU economic spaces. If the broad policy stance viz-a-viz these economic spaces is broadly sensible (which to a large extent it is – but requires further changes) and the greed and stupidity of the various powerful special interests can be contained and managed (which, unfortunately, they weren’t in the long run-up to 2008 – with only limited progress since), then Ireland can prosper. But it can be a volatile ride. (Despite the best efforts of the CSO to monitor and account for them, the machinations of one or two MNCs operating in and through Ireland can throw the headline numbers around.) This reinforces the self-preservation and Micawberish (something will turn up) tendencies of TDs.

Secondly, the large and volatile gap between GDP and GNP and the resulting volatility of tax revenues renders any fiscal budgeting exercise extremely difficult – even with the best quality data. (This again reinforces Micawberish tendencies.)

Thirdly, the DG Ecfin fiscal rules don’t make much sense for the larger EZ economies. They are totally ludicrous when any attempt is made to apply them to Ireland. And the best brains in the DoF are focused on ducking and diving around them.

Finally, a large proportion of public expenditure is designed and applied, however inefficiently, to compensate for the detrimental impacts of officially authorised rent-seeking. None of the participants in this unholy bargain have any incentive – and mutiple incentives not – to seek to pursue changes in the public interest. (The Irish Water debacle revealed the blatant greed, inefficiency and rent-seeking of parts of the semi-state and public sectors. Public disgust and anger were aroused when it was decided to reduce public funding of the service and to require households to pay directly (irrespective of how small thre payment) to fund these antics. It is easy to understand why it became such an important issue during the formation of the government.)

The point that you are missing is that, hitherto, the game was an open-ended one i.e. with no apparent overall limit to the bets that could be placed or, as the current political language puts it, no calculable limit to the demands for more “resources” for this or for that. The rather frantic near daily press briefing by various official sources demonstrates unequivocally, it seems to me, that this game is over. This development coincides with the trend of what is happening elsewhere in Europe, as the briefing note prepared by the Dutch for a meeting of MOF in April also clearly demonstrates.
The following is the extract dealing with the so-called “structural balance”.
“The structural balance is an anchor in our system, deeply embedded in the legal framework. Importantly so, the structural balance anchors the outcome of fiscal policies. However, the structural balance is unobservable, volatile and subject to major revisions, even ex-post. These revisions stem mostly from the economic cycle which alters potential output estimates. Substantial efforts have been made to improve the structural balance estimates, but it remains highly doubtful whether fine-tuning this highly complex indicator will yield sufficient improvements. As a result, Member States are held accountable for an indicator which to a crucial extent lies beyond their control.”
In short, it doesn’t work and we need something much simpler with “political salience”, as one IMF staffer puts it.
The full story is in footnotes 9, 10 and 11 of this Dutch paper to which I have linked earlier.
Meaningful expenditure ceilings set in the context of a four year MTBF are clearly on the way.
To extend the game metaphor a little more, to participate one must be able to count the bets, so to speak. I nearly choked on my porridge when I read this in Pat Leahy’s IT report yesterday.
“Controlling costs in hospitals will require a “hard edge of managerial accountability that is currently lacking”.”
Talk about the pot calling the kettle black!
It seems that there is now recognition also that statutory changes relating to the budgetary cycle are required. Member countries of both the EU and the Euro Area are entirely free to design these in accordance with their own national legislation provided they stay within the broader parameters set collectively by the Member States of the EU.
But the introduction as a matter of absolute priority of the technical accounting capacity to control the bets in real-time is a sine qua non.

I’m not denying that the scope for the usual ducking and diving and Micawberish behaviour has been considerably reduced. And I wouldn’t be surprised if the MoF and the MfPER are actively encouraging their officials to highlight via various media channels the extent of the reduction – so as to encourage their own personal fiscal continence and to strengthen their ability to push back against the latent fiscal incontinence of the other 156 TDs. (In passing, it is probably worth noting that the Economic Management Council, when first established, mirrored the “quad” of the Prime Minister, Deputy Prime Minister, Chancellor of the Exchequer and Chief Secretary to the Treasury established for the Coalition Govt. in the UK in May 2010. In Ireland the MfPER had to be established and, arguably, now has lost its previous political justification. But the division of responsibilities may still have some value and benefit. For example, the MfPER and the M for Social Protection could investigate why a chunk of the social welfare budget has to be applied to ameliorate the impact on those on low and fixed incomes of excessive and regressive charges by some of the semi-states.)

In addition, it is entirely typical of the EU’s institutions, having been blind-sided by the blatant fiscal fraud in Greece, the fiscal stupidity in Ireland and Portugal’s own brand of fiscal muppetry, to overcompensate by imposing asinine and potentially counter-productive fiscal constraints.

The failure to differentiate appropriately between current and capital expenditure – with the result that there is now a large shortfall in infrastructure investment – is probably the most egregious error.

‘The Government’s reforms will provide all members of the Oireachtas with the opportunity to influence and critique budget allocations and priorities, making budgetary debate and discussion in Ireland more realistic, informed and effective’

Some changes in spending or taxation can be small enough in aggregate to escape scrutiny or comment but end up having a very significant effect on the lives of the groups or families affected. These ‘reforms’ will serve a good purpose if resulting in more focus on the detail ex ante and hence the likely impact of such budgetary measures .

On the broader issue of the fiscal policy stance there will probably be little change from the current practice, which centres around how much is there to ‘give away’ in the coming year. That sum is constrained by EU rules , however ill-judged, with some discussion around the edges, and so the debate boils down to the split between spending and taxation changes. It is quite legitimate to argue for higher spending, of course, but some proponents have a hazy notion of how this can be funded, so if the process does lead to more ‘informed’ debate about the latter it will be worthwhile.

Your last point is, of course, true. Indeed, the – re-appointed – MOF has encouraged this approach, one which is hardly consistent with sound budgetary management and which has had no obvious positive political results. This suggests that there may be a change in overall public sentiment reflecting changes in the structure of employment in the economy i.e. with a diminishing level of popular support for the fanciful idea that all that is required to conjure up “resources” is to be among those that shout loudest for them.
Another pointer would be whether, when meaningful “ministerial allocations” are decided, a “margin” is agreed i.e. below the overall ceiling for developments not forecast, it being certain that this will happen. If not, their binding character will be as open to question as it currently is.
Another point is the articulation between the various existing legislative elements, which is by no means clear, other than that the overall structure is in need of radical reform.
Given the complex issues raised, it is no real surprise that a two-stage approach recommended itself politically. The BOC would otherwise have jumped in the swimming pool before any of its members had learned to swim.

Edmund Burke in 1774 gave a speech to the electors of the rotten borough of Bristol, that is regarded as a classic outline of representative democracy.

Your representative owes you, not his industry only, but his judgment; and he betrays, instead of serving you, if he sacrifices it to your opinion. [ ] Parliament is not a congress of ambassadors from different and hostile interests; which interests each must maintain, as an agent and advocate, against other agents and advocates; but parliament is a deliberative assembly of one nation, with one interest, that of the whole; where, not local purposes, not local prejudices, ought to guide, but the general good, resulting from the general reason of the whole. You choose a member indeed; but when you have chosen him, he is not member of Bristol, but he is a member of parliament. If the local constituent should have an interest, or should form an hasty opinion, evidently opposite to the real good of the rest of the community, the member for that place ought to be as far, as any other, from any endeavour to give it effect.

“The scene was sickening and all the Irish were there, most of them vying with each other in eagerness to plunder the public purse,” William Ewart Gladstone, British chancellor of the exchequer, wrote in an 1859 letter to his wife concerning a House of Commons debate, on the cancellation of a subsidy for the mail steampacket service between Galway and Newfoundland. Gladstone was facing a budget deficit of £5m.

It was rational of course to squeeze as much as possible from the colonial master.

Before self-rule, we had run big US cities such as New York and Boston and in ‘The Americans: The Democratic Experience’ (1973), Daniel Boorstin wrote:

Although the Irish were quickly and spectacularly successful in politics…they did not prove masters of the arts of good government.

Boorstin said in the third of his American history trilogy, that the Irish politician made himself into “a social service or more precisely a personal service agency.”

Parish pump politics continue to dominate in Ireland and apart from emergencies, there is no significant public support for public spending restraint.

There were some parliamentary expenditure changes during the bust but Irish cost levels are much higher than for example in a richer country such as Sweden. Why expect support for budgetary restraint?

Sweden has typically large multi-seat constituencies and political engagement is much higher than in Ireland with about 20% more of the voting population voting compared with Ireland. In 2011 even after a crash and 305,000 job losses the Irish vote was only at 65% and down to 60% in 2016 compared with 80% in the most recent Swedish election.

What is commonplace in Ireland would be viewed as corruption in Sweden.

In 1997 Independent TDs demanded and were given participation in the Leaders’ Allowance system that in euros was worth €205,000 tax-free over a Dáil term — no questions asked, it could have been spent in Las Vegas or whatever.

Brendan Howlin cut the annual allowance from €41,142 to €37,137 per year and those of non-party senators from €23,383 to €21,145 and required actual receipts of expenditure. This is a report on 2014 and note categories such a “policy formulation” and “consultancy”:

The Irish Independent reported in Nov 2014 that members of Dáil Éireann pocketed an average of €147,000 in expenses and allowance payments each since the General Election in early 2011 but only one in 10 of them were asked to provide receipts. Eamonn Maloney who was a Labour TD until Sept 2015 did not claim expenses — and he admitted to being criticised by colleagues over his stance. He lost his seat in Feb 2016.

I calculated in March 2015 that the basic pay of a member of Dáil Éireann was €87,258. A member of Sweden’s Riksdag was paid SEK 61,000 per month or €78,000 annually.

The annual travel & accommodation allowances for TDs ranged from €9,000 per annum for Dublin based TDs to €34,065 per annum for those living 360km or more from Leinster House.

Journeys made by members of the Riksdag within the framework of their official duties are regarded as official journeys. Members living more than 50km from the Riksdag are entitled to reimbursement of up to SEK 8000/month for overnight accommodation in Stockholm. This is about €10,300 annually. Members are entitled to an annual season-ticket on the Swedish State Railways; where use of a car is necessary, costs are normally reimbursed at the rate of SEK 26.50 per 10 kilometres, of which SEK 18.50 are exempt from tax.

The Riksdag has government-owned apartments in Stockholm that members can use — in Ireland the country is beyond 15 miles from Leinster House and long-term rural TDs end up with private apartments without a mortgage as the loans are effectively paid by the taxpayer.

Every country is a product of its history; not yet at an end!
The Swedes, of course, have answered the major questions I posed above e.g. no distinction between employment in the public and the private sector, equal and universal access to pension rights, universal health care etc. No wonder there is such a high turn-out at elections! The most important breakthrough by them, however, is to have related expenditure by the state – on behalf of society broadly defined – to economic growth i.e. the capacity to fund it. The result is that the country has traversed the economic crisis with the minimum of disruption and has gained the recent qualification as the most competitive country in the EU. Ireland, however, is not that far behind which demonstrates that, with a public expenditure about half the Swedish level, one can have a very competitive but UNEQUAL society.
Things, however, continue to move.

A recent Eurostat publication on summary government finances:
provides some further context to your observations.

Public expenditure as a share of GDP in Sweden (at 50.4%) is less than half as high as the share in Ireland (at 35.1%). Your observations about relative competitiveness (by the standards of a Swiss business school) are probably less salient than your uncharacteristic highlighting of inequality. And even here the story is nuanced. It is true that the Gini coefficient for market income (before taxes and transfers) in Ireland is very high at 0.582. (Indeed it is the highest in the OECD, not to mind the EU. Even the US comes in at 0.513.) The corresponding Gini coefficient in Sweden is much lower at 0.431. However, Sweden appears to spend much more proportionately to get the disposable income Gini coefficient (after taxes and transfers) down to 0.274 than Ireland which gets its coresponding Gini coefficient down to 0.304.

This suggests that much of the economic rents being captured (that contribute to the exceptionally high market income Gini coefficient of 0.582) is being recycled within the economy. Obviously it is far from being an economically efficient outcome. Sustained rent-seeking is doubly costly and welfare transfers have to be increased and funded to ameliorate the impact of the rent-seeking on those on low and fixed incomes. Rather than being applied to facilitate it (and the inefficiencies associated with it), it would be far better if competition policy and economic regulation were applied effectively to reduce rent-seeking. But there is no appetite for that.

The alternative of increasing taxes to expropriate rent capture post hoc, as those on the left would advocate, is gloriously inefficient and would be counter-productive. (In general, those on the left refuse to contemplate changes that would reduce rent-seeking – and seek to introduce irrelevant distractions – because many of the special interest groups they favour are highly skilled at rent capture.) In addition, it appears that a significant plurality of voters is consistently opposed to such an approach.

The small size of the polity and the closeness (using a variety of measures) of those exercising power and influence leads to a cosy collusive corruption which appears to be broadly tolerated once the rent capture isn’t blatant or demonstrably extortive and the proceeds are recycled. (The public reaction to water charging is the exception that proves the rule. Public disgust and anger were aroused because the rent capture was blatant and perceived to be extortive. And that is why the government is establishing so many bodies and entities to moderate and conceal the rent-seeking and inefficiencies.)

When the unofficial recycling of a largish share of the proceeds of rent-seeking (whose capture is facilitated by pervasive and endemic collusive corruption) is combined with the official fiscal redistribution to reduce the inequality of market incomes it appears that the Irish approach is actually more effective than the Swedish approach.

It is an Irish solution to an Irish problem. It resonates perfectly with the quintessential Irish capacity to suspend disbelief. What the eye doesn’t see the heart doesn’t grieve over. It would literally require a revolution to effect any change. So any changes will be small-scale, incremental and reactive to problems that were long apparent, with the result that remedies will always be more costly than if the problems had been tackled when they first surfaced.

However, there is one area where Ireland is lagging Sweden – and the detrimental impacts are becoming increasingly clear. Over the last decade Sweden has been able to maintain its gross physical capital formation in excess of 4% of GDP. Ireland’s share is currently below 2%. And so we come back to the asinine nature of the EU’s fiscal rules.

You have tilted at quite a few windmills there. Once again, I suggest that you drop the word corruption. By any international measure, Ireland is a country that observes the rules (soon to be put to be put to the test as to whether the Offaly or the EU version applies to the question of water charges). The suggestion that I am not concerned about the issue of inequality is entirely at odds with both what I believe and what the record of my contributions to this blog will show. Indeed, one could sum up the present contrast between Ireland and Sweden with the simple observation that it is about time that Ireland discovered a social conscience. I am not holding my breath.

When one is on one’s horse charging towards one’s own targeted windmill I expect it’s easy to assume that anyone who has not joined the charge either has no interest in or understanding of what is at stake or is tilting at other windmills.

As for your “windmill” I would contend that the vast majority of Irish citizens and voting residents has a well-developed social conscience. In addition to depriving the two previously dominant parties of the opportunity they enjoyed sequentially in the past to dominate and often to abuse the Dáil, the voters have elected a Dáil that appears to represent the full range of economic and social interests and concerns. And I suspect that a majority of voters want those they have elected to just get on with it – to resolve the inevitable economic and social conflicts that arise and to provide some sensible governance.

There is a huge difference between extortive corruption – which is widely and publicly abhorred in Ireland – and collusive corruption – which varies enormously in relation to the formality/informality of its incidence and enforcement and whose more formal incidence is broadly tolerated in Ireland. Ironically, and I expect totally unintentionally, you concede the point by drawing a distinction between the “Offaly” rules and EU rules in the case of water charges. It would make sense to start with the “Dublin SW and Carlow-Kilkenny” rules which were enacted via the Water Services legislation rammed through the Oireachtas in 2013 – and which authorised blatant rent-seeking and the persistence of egregious inefficiencies at the expense of the majority of ordinary citizens. This is a perfect example of officially authorised collusive corruption.

These were followed by the “Tipperary” rules which comprised the then government’s panicked response to the perfectly understandable public expression of disgust and anger – and which were enacted via further water services legislation rammed through the Oireachtas at the end of 2014. The “Offaly” rules reflect the failure of the “Tipperary” rules to secure a sustainable resolution and will require the enactment of legislation. When this is enacted, I expect the European Commission will initiate formal infringement proceedings. But I would be surprised if this is not a long drawn-out process. I’m sure the Commission officials are well aware that the national legislative process was thoroughly abused and that the widespread public discontent was justified – though they’ll never admit it publicly. The proceedings are likely to extend beyond the life of this Dáil. Who knows? By then the landscape may have changed sufficiently and the necessary political ingenuity may be applied to secure public consent for some form of water charging that achieves a balance between efficiency and equitability and is compliant with the Water Framework Directive.

The combination of the institutions and processes facilitating this collusive corruption is no windmill. It is a virtually impregnable fortress comprised of a vast edifice of enabling legislation, regulations and procedural decisions. All of the advanced economies are characterised by aspects of this collusive corruption. They combine with other factors to provoke the widespread and growing popular discontent with the mainstream parties that have facilitated it. In Ireland, however, this collusive corruption is broadly tolerated. While great efforts are made to conceal its prevalence its existence is generally well known and it is broadly tolerated once much of the economic rents captured is recycled and the process has some redistributive features.

I have come to the conclusion that seeking to expose and reduce this collusive corruption is totally futile. It is simply part of what we are.

I find your position a tad contradictory. If an Irish social conscience existed, it would find a two-tier health system intolerable, a system of education which starves funding at the basic primary level, especially in disadvantaged areas, equally so, not to mention nearly half the workforce with no pension arrangements of any kind etc. etc.
There is gross rent-seeking in the Irish economy. And it is collusive (especially on the part of the pubic sector). But it exists to a greater or lesser degree in all free market economies. It is on that we differ.
And it can be reduced, not least by better analysis and education by economists.
On whose law applies, we will see! The EU is a rules-based organisation or it is nothing. These rules have seen off bigger players than those from any of the counties that you mention.

Good luck with your conviction that Irish rent-seeking can be reduced. And double good luck with this reduction being facililated by “better analysis and education by economists”. It’s not their fault. They have no incentive to do so – and every incentive not to.

And as for the EU and its rules. We will indeed see. But it appears to be committed to enforce zealously the rules it shouldn’t; and reluctant to enforce those it should.

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