NAMA is just one policy problem facing the government this Autumn. I review some issues in the public expenditure debate in this article in today’s Irish Times.
The Public Spending Challenge
- Post author By Philip Lane
- Post date August 27, 2009
Category: Fiscal Policy
John provides an alternative fiscal strategy in today’s Irish Times: you can read it here.
Professor Luke O’Neill of TCD reckons that the recommendation of the Bord Snip report to cut €100 million from our state-funded scientific research budget is “crass and ill-informed”.
Professor O’Nell is obviously a man who only puts forward well-informed opinions. For that reason, I was interested in his statement that
it is also well known that investment in basic research, as well as being an investment in what economists prosaically call human capital, pays back on average three to one in the long run. What other sector that the Irish government funds can boast such a return?
Funnily enough, well-known facts are sometimes the trickiest to actually find evidence for.
I’m willing to be pursuaded that Professor O’Neill’s well-known fact is actually a fact. I’m even willing to be pursuaded that it’s well known. But I’ll need some help here—can people tell me the source of this well-informed opinion and whether this source applies well to Ireland?
In yesterday’s Irish Times, Stephen Collins wrote:
The current appalling plight of the public finances is a direct result of the profligacy of Bertie Ahern’s governments since 1997 when public spending was ratcheted up far ahead of economic growth, year after year.
If public spending grew at rates far ahead of economic growth, then government spending must have increased as a share of GDP. However, when I check one of my favourite sources of information, the Statistical Annex of the European Commission’s European Economy publication, page 174 tells me that government spending as a share of GDP fell from 39.1% in 1996 to 36.9% in 1997 and fell further to 31.5% in 2000. The ratio moved up to 33.4% in 2001 and then stayed at essentially this level until the final two years of the second Ahern government at which point there was a gradual rise in this ratio to 35.7% in 2007, still below the level inherited by Ahern.
So the figures show that on average, rather than increasing public spending at rates far ahead of economic growth year after year after 1997, Bertie Ahern’s governments on average increased spending at a lower rate than economic growth.
Many fiscal policy mistakes were made during the Ahern era but it would be better if public discussion of these mistakes started from facts rather than imagined truths.
The €250 million job subsidy scheme is open for applications from today until the 4th of September. I’m still not a big fan of this scheme, particularly given that it has to fit within overall budgetary parameters and thus necessitates €250 million of spending cuts and tax increases elsewhere. However, it is fair to say that some thought has gone into dealing with the deadweight loss element of the scheme.
Applicants for the subsidy will be scored out of 100 against the following three assessment areas: Credibility of restructuring plan (35 points), viability of the enterprise in the medium term (10 points) and the ratio of supported jobs to committed jobs (maximum score of 55 points).
This worst allowable score for this latter category is a score of 30 for a ratio of 1:1, meaning for each supported subsidised job the applicant would be required to commit to retaining another full time job for the duration of the subsidy (though how a struggling firm could really be made commit to this isn’t clear—what happens if they shut down?)
The best score for this category of 55 is for a ratio 1:10. If I understand this correctly, this means that the subsidy will not be allowed to apply to all employees in a firm and you will be more likely to get the subsidy if you only look for it to be applied to a small fraction of your employees.
In theory, this is good news if you’re worried about deadweight loss because the subsidy won’t end up being applied to all the employees of firms that are actually going to keep most of them on anyway. This element and the other two categories are also designed to avoid the jobs going to no-hope firms and pouring good state money after bad private money.
However, it’s pretty impossible to achieve both of these outcomes and as constructed, the scheme does seem likely to attract reasonably healthy firms, who may not really be planning to lay off many employees, to look for subsidies for a small fraction of their workers, knowing that this will give them a good score and make them more likely to obtain the grants. So one can still see plenty of potential for serious deadweight loss, which could blow up the actual cost of job saved well above the apparent level of €9,100 per employee.
The assessment process will involve Enterprise Ireland, IDA Ireland, Shannon Development and Údarás na Gaeltachta, and without doubt, will be a cheap and efficient process untinged by political interference or corruption related to existing relationships firms have with development agencies.