Category: Fiscal Policy

Comptroller and Auditor General Report for 2010

The annual report of the Comptroller and Auditor General contains lots of useful information. However, one criticism I would level at the report is its use of an accounting framework that differs from the General Government Budget that we report to Brussels.

The report states that “Overall State expenditure in 2010 was €53.8 billion, a reduction of 9.5% on the 2009 level” figures that are being widely reported in the news today. The report also lists “Total Receipts” at €35.6 billion up from €34.7 billion the year before.

However, if one looks at the more comprehensive accounts that we provide to Brussels—and which are used as the basis for reporting and compliance with our EU-IMF programme—one finds (page 49) that total expenditure by the Irish government last year was €103.2 billion while total revenues were €53.2 billion.

The €103.2 billion expenditure figure includes €30.8 billion for promissory notes, and one can understand that there are various possible accounting treatments for these notes. However, that still leaves non-promissory-note spending at €72.4 billion, almost twenty billion higher than reported by the C&AG. So despite the use of “overall” and “total”, it’s pretty clear that these are not overall totals at all.

Some of these differences are accounted for by the exclusion of capital spending and on the tax side there’s differing treatment of PRSI contributions. I could go on listing other differences but, frankly, who cares? The GGB figures provided to Brussels are the most comprehensive indicators of our fiscal position and they are being closely watched by the EU and IMF.

As I’ve written about before, these kinds of figures also mislead the public about key magnitudes, thus undermining public debate about fiscal options. For example, you will hear various expenditure items compared against a total tax revenue figure of €31.7 billion—those who’ve read the C&AG report will think total revenue was €35.6 billion. This usually ends up distorting the actual fraction of revenues devoted to these expenditures.

Towards a private ESB

The government has announced that it will sell a minority share of the ESB. This is welcome news. Privatization of non-core activities is a matter of principle. The ESB has paid poor dividends. It has frequently been used to bankroll projects of dubious commercial (yet clear electoral) value. Selling a minority share is a low risk strategy for price discovery and much better than a fire sale.

So far so good. However, the government also announced that it would keep the ESB “as an integrated utility”. The ESB is a conglomerate. It generates power, it owns the transmission network, it sells electricity, and it provides consultancy services.

The network is a natural monopoly, and should probably not be sold. The rest of the ESB can be safely left to the market (if properly regulated).

As an integrated utility with a natural monopoly, The ESB enjoys considerably market power. The nominally independent transmission system operator, EirGrid, gets electrons from ESB, transmits them over lines owned by the ESB, and delivers them to the ESB (who then retails them). The ESB’s dominant position is the main reason why few companies have entered the Irish electricity market.

Today’s announcement suggests that the government plans to continue the current situation. It would make more sense to sell the network to EirGrid. The price of such a sale matters because the ESB is part-owned by an ESOP; and because the ESB is using the network as collateral for cheap loans.

The future ESB will therefore face three demands, compared to two now. The workers will want well-paid jobs, as they had in the past. The political masters will want their pet projects, as they had in the past. And the private owners will want dividends. The consumer will have to pay for all of this.

Public Pay and the Sindo

Former Bertie Ahern Seanad appointee, Eoghan Harris, writes in the Sunday Independent today that he is confused that I can believe public sector pay should be cut and yet also believe that his newspaper has demonised this issue. His silly comments about academics and the Irish Times aren’t worth responding to but I’m happy to clarify what my position is.

In relation to public sector pay, one can argue until the cows come home about whether public sector workers in Ireland are paid more than private sector comparators or comparable public sector workers in other countries, and about how these premia have been altered by the pay cuts of the past few years. However, that debate doesn’t change the fact that Ireland has a very large budget deficit and every major component of expenditure will need to be cut to put the public finances back on an even keel. And that must include public pay.

I’m sceptical about whether an approach that doesn’t see pay rates cut can deliver substantial savings and would also prefer pay cuts to reductions in numbers of front-line workers that will affect the delivery of key public services. So my position is that public sector pay rates need to be cut.

If that’s my position, then what’s my problem with the Sunday Independent? My problem is its focus on high rates of public sector pay as the single cause of the budget deficit. Its coverage repeatedly gives the impression that “we are borrowing to pay for the public sector”. Other areas of spending such as welfare rates receive comparatively little coverage and topics such as our narrow tax base and generous income tax exemptions receive no coverage at all.

An examination of the figures reveals that a focus on public sector pay as the source of the deficit is misplaced. This year, the government will spend €18.1 billion on pay and pensions for the public sector. The general government deficit is projected to be €15.6 billion.

You might think this means we can eliminate the deficit via an 86 percent cut (0.86=15.6/18.1) in public sector pay. But, even if you did manage to get anyone in the public sector to work for 14 percent of their current salary, this strategy still would not work because public servants pay PAYE, PRSI and a pension levy and most of these payments would have disappeared. (They also pay VAT when they spend their salaries.)

I don’t believe the government releases figures on the net cost of the public sector pay and pensions, subtracting taxes and levies, but I would be surprised if it was more than €11 billion. So you could fire every public servant in the country and still not close the deficit.

Back in the realms of reality, even substantial cuts in pay rates will still leave a yawning deficit. For example, consider a cut of 25 percent in pay rate, reducing gross pay by €4.5 billion. The marginal tax rate on public pay rates above €36,000 is 62 percent. (See tax calculator here) so the deficit would only be reduced about one-third of the amounts cut for people on salaries above this level. I suspect the net reduction in the deficit, before accounting for reduced VAT revenues, would be less than half of the gross amount, i.e. somewhere below €2.25 billion.

So, sadly, if the enormous deficit is to be closed, then other categories have to be looked at. These include spending on social payments (which will cost €26.8 billion this year and are largely exempt from income tax), on capital programmes (which will cost €6.1 billion this year) and on the narrowness of our tax base.

The idea that public sector pay is the source of the deficit has a satisfying ring for many. It means that an identifiable group of “other people” is responsible for all our problems. And it allows people to think that the pain of all the spending cuts and tax increases they are being hit with is unnecessary and is only occurring because public servants are being protected: Nothing sells newspapers quite as effectively as rage. I suspect the commenters on this blog have well above the average level of economic literacy and I can tell from repeated comments that many of them believe the deficit is solely due to high rates of public sector pay. Unfortunately, the arithmetic doesn’t support this position.

So that’s why I dislike the Sindo’s coverage of public sector pay. It leads its readers to believe that there is a simple single bullet solution to the deficit and, via that logic, to a demonisation of a particular group as the cause of our problems. Ultimately, this kind of coverage is unhelpful because it undermines public support for the additional measures that need to be taken, over and above public sector pay cuts, if the public finances are to be stabilised.

No doubt Eoghan would still diagnose my position as being down to status anxiety twitch or some other mysterious condition but I’m happy to take a few shots from the Sindo if the result is a more informed debate about the options for closing the deficit.

Oireachtas Committee Transcripts: September 1 and 2

The transcripts from last week’s meetings of the Joint Committee on Finance, Public Expenditure and Reform are now online. The transcript for Michael Noonan’s appearance is here. The Honohan-Elderfield transcript is here. I’m happy to say the website has improved since the last Dail and you can now read the transcript for a full meeting without having to hit lots of arrow buttons.

Did Wolfgang Schäuble really say this?

I’ve seen various explanations for the 2008 crisis: global imbalances, dodgy financial innovations, lack of proper financial supervision, the interaction of all of the above. And a few others besides.

But this is a new one to me, I must confess.