Tuesday, March 3, 2009

Rightsizing the Government

The only insecurity which is altogether paralyzing to the active energies of producers, is that arising from the government, or from persons vested with its authority. Against all other depredators there is a hope of defending oneself. John Stuart Mill

In a democracy, the two major parties spend the majority of their time and energy trying to inform an ignorant electorate that the other party is unfit to rule. And both do that admirably. And both are right. H.L. Mencken
Ireland is being run by teenagers: the government has spent all their pocket money, all their savings and their part-time job wages and now they're asking mummy and daddy for some more cash to keep them in the style they've become accustomed to. Or at least that's how it seems to me. Tax revenues are crashing in all categories: vat, income, excise duties - according to February's Exchequer Returns. Meanwhile spending across the main categories of expenditure is up. The government tells us in a note with the returns that it's determined not to let the General Government Deficit exceed 9.5% of GDP. Kind of like the teenager that 'promises to pay it all back'.

The emerging consensus - at least among those not working in the private sector - is that taxes have to be increased in order to meet public sector expenditure commitments. Nobody is asking 'why'? I find that disturbing: when an individual or a business lacks the income/revenues to continue spending at previous levels then they cut back on their spending. But not governments: instead we're all asked to divvy up - regardless of the value of the spending we are now funding.

I get that some categories of spending will inevitably rise in a recession such as unemployment benefit expenditure. But do we need all the other spending? Do we need Fas (or want them, for that matter)? Or the defence forces (€1 billion and rising - mostly on salaries and pensions)?

We seen to have a situation in Ireland whereby government spending goes unquestioned in the boom times (e.g.: benchmarking - think of a number, then add a little of whatever you're having yourself). And it goes unquestioned in the bad times (tax revenues are falling ergo we need to raise tax rates). And nobody seems to be asking: if it's 9.5% of GDP this year then what will it be next year - and how will we plug that gap? We have a fiscal policy of make-it-up-as-you-go-along, with no strategic sense of where it is going or why (e.g.: the vat rate went up in the last budget, and vat revenues have subsequently plunged).

Even those on the left - such as Michael Taft - are querying the implied consensus on tax policies because of their potential to make things a lot worse (taking taxes off people leaves them with a lot less to spend which isn't exactly the best way to kickstart a recovery). Meanwhile, we need to recognise that it is the low level of government debt to GDP that is keeping us from shooting up the global vulnerability scoreboard (as illustrated above).

We therefore need a plan to rightsize the government (national, regional and local) to meet the needs of this country's citizens. That might mean raising some taxes/cutting some benefits (e.g.: domestic rates, third level fees, means-testing child benefit); and reducing/outsourcing expenditures to deliver services more efficiently. But that means one of the major political parties standing up for the taxpayer who has to ultimately fund present and future government expenditures (including repaying borrowings and paying for public sector pensions).

But after last week's disgraceful silence over the behaviour of CPSU members denying access to services to social welfare recipients I won't be holding my breath.

1 comment:

  1. Nice post Gerard, I agree with the principle but you do need to educate the public sector to the realities of life. Monday's Q&A was a prime example of where a public sector contractor worker lost the plot when one of the audience make a similar argument. Her husband has been let go and she was a special needs teacher, where the whole profession are somewhat up in the air given the potential for possible cuts. Savings need to be make in middle and upper tiers first, then perhaps on the lower tiers / front line services. Trying to explain this is more than a battle given the example of the likes of the CPSU.

    I think the polls have gotten to the political parties, Labour saying everything the public sector workers want to hear. Fine Gael is probably reconsidering it options and policies in this area given its stall in the low 30's. I'm hopefully that maybe something might come of the new mini budget at the end of the month however it will not be enough given the track record of the government. Ivan Yates made a good point on Q&A echoing comments from Garret Fitzgerald and others about front loading the suffering / cuts now rather than later. Perhaps with a bit of luck somebody in the government was listening an will take it onboard.

    There are interesting parallels with how New Zealand modernised or contract-ised its civil service. Parts of it could potentially work for Ireland as a developed nation. Have a look at ``Why Most Developing Countries Should Not Try New Zealand's Reforms'' with the reminder that we're supposedly a developed country but that's an argument for another day.

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