Budget watchdog calls for more realistic health budgeting

Healthcare spending forecasts need to be more realistic and developed earlier, the head of the Republic’s budgetary watchdog has told an Oireachtas committee.

Budget overruns that have caused conflict in Cabinet are predictable, said Michael McMahon, the acting chairman of the Irish Fiscal Advisory Council (Ifac) and professor of macroeconomics at the University of Oxford, to the Budget Oversight Committee. But he said they could be prevented by using a more accurate way of assessing the money needed to maintain services at existing levels.

“Part of the problem seems to be that hospital and primary care budgets are often set very tight, maybe with the hope that efficiencies will be generated,” Prof McMahon said in his opening statement. “This might have had more merit if it had a record of producing savings or preventing overruns. Instead, providing limited budget increases in big spending areas appears to have set the scene for spending overruns.

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“This looks like a failure of planning, coupled with wishful thinking.

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“What economists call a ‘soft budget constraint’ seems to have taken hold. Managers know that overruns will be financed and so there is little incentive to stick to ceilings and create efficiencies.”

Prof McMahon said “existing level of service” budget estimates – which are used to set departmental allocation – failed to give an accurate picture of the real cost of maintaining service levels in part because they are based on certain blunt assessments in relation to areas like wages and prices.

The Ifac argues that a different method of standstill costs it uses presents a more accurate projection of likely budgetary needs to maintain services with the same number of staff for a larger and older population.

He told committee members that an Ifac analysis in 2021 suggested that the size of health budget overruns was fairly predictable.

“The size of the overruns corresponded closely to the additional amounts that would have been needed to stand still,” Prof McMahon said. “Simply allowing for standstill costs in full would have been broadly sufficient to cover both the planned allocations and the overruns eventually seen.”

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He noted that despite concerns over health budget overruns in the run-up to the budget last month, the Budget 2024 allocation was less than the expected 2023 overrun plus estimated standstill costs for 2024.

The budget provided an increase of €800 million for core current health spending in 2024, with €700,000 earmarked to maintain the existing level of service.

“This is less than the Ifac’s standstill estimates for 2024 of €1.1 billion (€800 million for demographics and €300 million for higher prices),” he said.

He said the “existing level of service” model’s presumption that costs would rise by 3 per cent was based on Ireland’s historical experience but was not a good guide to what we can expect in future with the population ageing rapidly and price pressures possibly remaining higher than historical averages over the next few years.

Addressing the challenge of meeting the healthcare needs of an ageing population requires more realistic budgets looking further into the future, he told TDs.