Economics: We have an unhealthy obsession with averages. Across so many areas of economic activity we benchmark our performance with reference to some international average. Likewise, we tend to use such averages to frame our vision of what we might attain in the future. To what level of living standards is it realistic for Ireland to aspire?
Typically, the answer to this question starts with something like the EU average and moves on to suppose that we can't seriously expect to move a whole lot higher than that. This despite the fact that the EU average is just a statistical construct that, on its own, tells us nothing about the distribution of national or regional living standards around it. Did you know, for example, that there are EU regional economies that enjoy living standards of twice the EU average?
We also tend to lean heavily on international averages when it comes to figuring out whether we're doing the right thing in areas like health and education. Are we spending enough on education? Well, what's the OECD or EU average? If we fall short, it's taken as a sure sign that we're spending too little.
I was reminded of the gravitational pull that international averages exert on analysts when I read Maev-Ann Wren's paper on health spending this week. This is a paper that she initially published in the ESRI Quarterly Economic Commentary last September and reprised at a Foundation for Fiscal Studies seminar on Wednesday night. It's a thoughtful and absorbing paper that is well worth reading as a counterpoint to the health-spending-is-a-black-hole school of thought.
According to data compiled by the OECD for 2002, per capita public spending on health in Ireland was 101.4 per cent of the EU average. If this is your benchmark, it seems we're doing fine, but there are a couple of issues with this statistic.
The first is that it lumps current and capital spending together. Maev-Ann Wren's point here is that Ireland tops the EU league on capital spending (at more than twice the per capita EU average) because we are making up for a big shortfall in our capital spending on health dating back to the early 1980s. Looking at the current component on its own, Ireland falls to 98.4 per cent of the EU average.
The second issue is that the current component includes expenditure that would be more properly classified under a heading other than health. If that were done, Maev-Ann Wren infers, public current spending on health in Ireland would fall to about 93 per cent of the EU average and Ireland would rank eighth out of the 14 EU countries for which the relevant data are available.
Assuming that all the necessary adjustments have been made and that this 93 per cent is the outcome of a rigorous comparison of like with like, how relevant is it? Can such a statistic be reliably used as an indicator of how deficient our health spending is, or of how much more spending is required to fulfil policy objectives in the health area? I doubt it.
For one thing, the comparison from which the 93 per cent figure emerges is entirely silent on the question of the health service needs of different populations. In this respect a key factor is age structure, in particular the proportion of the population aged over 65. In Ireland, that proportion is 11 per cent; the average of the other 13 EU countries included in the expenditure analysis is 16.4 per cent. A related point is that in all those EU countries where current public health spending per capita is higher than in Ireland, death rates are also substantially higher.
The Irish death rate is 7.5 per 1,000 of population while death rates in Germany, Sweden and Denmark are in the range 10-11 per 1,000. The relevance of this? The elderly are disproportionately heavy consumers of health services. According to US research, people in their last year of life account for almost one-third of all Medicare spending.
Maev-Ann Wren is a committed advocate of higher health spending, and she may be right, at least as far as capital investment is concerned. But if she is, it's not because of how our spending levels compare with the EU average. In any event, she is honest enough to admit that spending may have risen too fast in the recent past. Her paper presents some evidence that health agencies were overwhelmed by the scale of additional funding they received in some years, especially 2001, and didn't have the capacity to absorb it properly.
This brings me to a point that I have made before in this column, namely that those who advocate higher public spending should demonstrate the capacity of the public sector to absorb the funds and to deploy them efficiently and effectively. In fairness to Maev-Ann Wren, she is not only a champion of higher health spending but also of reforming the system in a way that would improve its effectiveness and efficiency.
Health spending has increased rapidly in Ireland over the past decade or more and this, in the absence of clear evidence of commensurate improvements in service, has caused a mixture of outrage and alarm. While international averages are quite inadequate benchmarks for policy here, it serves no purpose to be insular either. The fact is that rapidly rising health spending has become a worldwide phenomenon (and probably popular dissatisfaction with the results too). The reasons are explored in a challenging paper* published on the Web by Prof Charles Jones, a leading economic growth theorist: a combination of technological progress, which allows diseases to be cured today at considerable cost that could never be cured in the past (at any price), and systems of financing health care that mean that consumers of health services do not pay directly for them.
And now, a 'Trivial Pursuits' question. Which country spends the greatest proportion of its GDP on health? Answer: the US, at 14.6 per cent (compared with Ireland's 7.3 per cent and Germany's 10.9 per cent). It kind of puts the Boston vs Berlin dichotomy in a new light, don't you think? Maybe it explains why Mary Harney chose the Health portfolio at the last reshuffle.
*Why Have Health Expenditures as a Share of GDP Risen So Much?, Charles I. Jones (September 2002)
Jim O'Leary currently lectures in economics at NUI-Maynooth. He can be contacted at jim.oleary@may.ie
