ECONOMICS:The pattern of cutbacks that emerges from the Budget strategy is likely to be neither efficient nor equitable, writes ALAN MATTHEWS

AT A time of economic and social crisis, it would seem important that a government can respond quickly to changing circumstances and that it has the flexibility to bring about the changes it feels are needed to adjust to and ameliorate the downturn and prepare the road to recovery.

Of course, proposed reforms should still be judged in terms of their effectiveness, efficiency and fairness. Not all proposed solutions will pass these three tests.

Even solutions which do pass these tests may run into problems. Any government measure, once introduced, will create a political constituency supportive of its continuation. At the end of the day, a government must decide whether it has sufficient political support to push through reform. There may also be difficulties in terms of the administrative feasibility of implementing a desired reform.

These issues were all in play in the recent Government announcement of how it proposes to reduce expenditure on child benefit. Instead of introducing means-testing or the taxation of child benefit, as had been flagged in the supplementary Budget, the Government has decided to make a flat-rate cut in the value of the payment.

According to a report by Carl O'Brien in The Irish Timeson April 17th last, "briefing notes released under the Freedom of Information Act show senior officials are concerned about the legal implications of major changes to benefit payments. Concern has been expressed that the State could be vulnerable to legal action where recipients may have had a legitimate expectation a welfare benefit would continue."

The doctrine of legitimate expectation arises in administrative law where a public authority has made a promise or adopted a practice that represents how it proposes to act in a given area. Fairness then requires that the public authority honour its promise or practice, unless there are overriding reasons in the public interest not to do so. However, it seems to have been accepted that this cannot impinge on the right of the legislature to legislate.

Thus, leaving aside the substantive issue of whether a cut in child benefit is necessary or desirable, the quote above, presumably based on advice from the Attorney General, is striking. It suggests that a government must not only consider the political imperative of taking into account the effect of a proposed change on affected groups, but that there may be a legal constraint not to interfere with expectations of benefits to be received.

If taken literally, this would represent an enormous constraint on the freedom of a government to reallocate resources in a way that it saw fit. On the other hand, where a legitimate expectation is established, it may provide beneficiaries with protection against an arbitrary government action.

More generally, there can be very different treatment of beneficiaries where proposals to change benefits have been made.

Two recent examples where changes to benefits were made or proposed provide interesting contrasts. In the supplementary Budget, annual payments for farmers enrolled in the Rural Environment Protection Scheme (Reps) were cut by 17 per cent in 2009. This is despite the fact that these are contractual payments – farmers enter into an agreement to follow certain environmentally sensitive farming practices for a five-year period, in return for a payment from the State.

However, the Reps contract includes a clause that “the Minister reserves the right to vary, where occasion so demands, the amount of financial aid wherever specified in the scheme subject at all times to the provisions of any relevant European Union legislation”.

Given that farmers incur costly obligations on entering Reps, this unilateral right on the part of the State to vary the amount of payments may appear rather extraordinary. Indeed, if a farmer were to leave the scheme in response to the change in payments, aid already paid would have to be reimbursed.

If these farmers had no legitimate expectation that payments would continue at the level agreed at the start of the five-year scheme despite a contractual agreement with the Department of Agriculture, Fisheries and Food, it may appear strange that the Attorney General would advise that any change to welfare payments might be challenged on the basis of “what we have, we hold”.

The other example is the commitment by Minister for Finance Brian Lenihan in his Budget speech that Dáil deputies would no longer receive long-service payments or increments, and that the arrangement whereby former ministers are paid ministerial pensions while they are still members of the Oireachtas would be discontinued.

In both cases, legal difficulties forced the Government to row back on these decisions. Apparently, the Attorney General advised that pension arrangements for former ministers could not be changed during a Dáil term and would require separate legislation to implement it from the beginning of the next Dáil. In the case of long-service payments, it was decided that sitting TDs could keep their increments and that only TDs set to qualify for increments in the future or those newly elected to the next Dáil would be affected.

When it comes to changes in contractual public sector pension terms and conditions, this is a common way of proceeding. Existing employees get to keep their entitlements, while the changed terms and conditions apply only to new employees. However, these constraints arise more from industrial relations realities and the need to reach agreement with the public sector unions rather than legal arguments. Such conditions do not apply to social welfare pensions, which, like other government transfer payments, are at the discretion of the Government.

What seems clear is that, over the full range of Government expenditures, including pay, pensions, grants, the purchase of goods and services and transfer payments, different factors come into play in determining how feasible it is to make changes, regardless of their intrinsic merits or otherwise. As a result, the pattern of cutbacks that emerges from the Government Budget strategy is likely to be neither efficient nor equitable.

Alan Matthews is director of the Institute for International Integration Studies and professor of European agricultural policy at Trinity College Dublin