Memo details were in line with official policies

The €900 million in cuts and adjustments represent 2.4 per cent oftotal spending, which is hardly a number that suggests a savage"slash-and-burn" approach, writes Jim O'Leary.

Before we are swept off to La-la land by the tidal wave of outrage and indignation that has been generated by Charlie McCreevy's leaked memo, let's get a few things straight.

First, the status of the memo and its contents. It was the opening gambit by the Department of Finance in the public spending estimates campaign - a well-rehearsed part of an annual ritual. As such, it does not set out Government decisions, but decisions that the Minister for Finance is recommending to Government.

The most prominent of those recommendations, and the one that has raised most ire, is the recommendation that Government reduce the 2003 expenditure allocation, estimated on existing service levels, by €900 million.

Before using this as the basis for all sorts of blood-curdling allegations, it is important to understand where the figure comes from. It is also worth noting that it represents just 2.4 per cent of total spending, not a trivial proportion perhaps, but not a number that suggests a savage "slash-and-burn" approach.

The €900 million figure is driven by the objective to limit the growth of overall Government spending in 2003 to just under 8 per cent relative to the 2002 allocation. Given the assessment of the economy's performance and prospects that it seemed reasonable to subscribe to back in May/June, this was the rate of increase in spending that would have been consistent with a small budget deficit (0.25 per cent of GDP) and a broadly unchanged tax burden in 2003.

The objective of limiting spending growth next year to around 8 per cent is consistent with the election manifestos of Fianna Fáil and the PDs, each of which allowed for current spending growth of this magnitude in their respective medium-term budget frameworks. The same is true of the objective to tightly limit the budget deficit and to refrain from raising the tax burden.

On this account, charges of electoral deceit or duplicity are difficult to sustain. On the contrary, in most key respects, the objectives and targets that underpin the analysis and recommendations in the leaked memo are in line with the declared policies of the coalition parties. It is arguable that the real breach of faith with the electorate would have occurred if budgetary strategy were to be based on materially different objectives.

So, where does all of this leave the by-now infamous €900 million of spending cuts/adjustments? Well, restricting the growth in public spending in 2003 to just under 8 per cent converts into the requirement that next year's overall allocation be no more than €2.8 billion above this year's. At the same time, the Department of Finance estimates that maintaining the existing level of services (at the rates of pay provided for in the Programme for Prosperity and Fairness) would require that spending rise by €1.8 billion.

That would leave just €1 billion to fund an expensive list of items - the "budget package" - including:

increases in social welfare payments over and above indexation;

improvements in health service provision;

additional spending on infrastructure;

increases in public service pay.

According to the Department of Finance, €1 billion would not be enough for these purposes.

Having regard to the cost of the equivalent package of measures in last year's budget, which was €2 billion, and to the fact that the pay pipeline is heavily pregnant thanks to benchmarking, the Department of Finance reckons that at least €1.9 billion would be needed to adequately cover these elements.

That being the case, the Existing Level of Service allocation needs to be reduced by €900 million if the overall spending envelope proposed by the Department of Finance is to be observed.

Viewed in this way, the €900 million simply becomes an illustration, albeit a vivid one, of the choices facing the Government and the consequences of choosing a particular way.

The core truth here is that the bigger the budget package, the more needs to be saved by reductions in the existing level of other services; the more it is that the existing level of services is preserved from cuts, the less resources are available to finance the budget package.

In the limiting case, the Government could decide to leave the existing level of service unchanged, in which case it would be constrained to design a budget package costing no more than €1 billion.

Given such a constraint, it would be impossible to deliver generous increases in social welfare payments and significant improvements in the health service and implement the recommendations of the Benchmarking Body's report.

Given a €1 billion constraint, it would be impossible to deliver benchmarking on its own because of its €1.1 billion price-tag.

Of course, the choices and trade-offs illustrated in the memo are predicated on limiting spending growth in 2003 to just under 8 per cent.

That limit itself represents a choice. There is no iron law of economics or public finance management that ordains that spending must be limited to 8 per cent.

However, the 8 per cent limit has the merit of having been given widespread currency during the recent election and to that extent, it can be argued, has the weight of an electoral mandate behind it. It has the additional merit of being broadly in line with the kind of growth in nominal GNP that it seems reasonable to expect over the medium-term.

As for this week's clamour of recriminations, was it the sound of a stampede away from tough choices or the sound of pennies dropping?

Jim O'Leary is a lecturer in the economics department of NUI Maynooth