Mounting expenses will test McCreevy to limit

The benchmarking pay bill will be a huge iceberg for the Minister forFinance and the National Development Plan is in imminent danger of careering off track Pay is eating up more and more of the money and the Government is being forced to cut back on non-pay spending, writes Cliff Taylor

It has been entertaining to listen to the Government's two-part "spin" on the estimates. In part one, ministers have argued that the Government spent the money when it had it - what else would it have done with it? - and now that it isn't coming in any more, sure what can they do.

"When we had it, we spent it," was the Taoiseach's pithy summation of this argument earlier this week.

Part two is that spending has now reached a high level - described in "spintalk" as a plateau - and that this level should allow us to maintain a high level of services and investment, even if there is trimming around the edges.

It is really not worth spending much time on the first argument. If the Government believes that it should run Budgetary policy on this basis then we really are in trouble. The level of current spending needs to be set on a basis that can be sustained in the long term, not hiked up and down with the economic cycle. State investment spending needs to be planned over a lengthy period.

And what of part two of the argument - the plateau theory? Here it is useful to look back at the secret Government memo inadvertently sent to the Sunday Tribune a few months ago. Comparing this with the published estimates suggests that the Government is sticking closely enough to this plan on day-to-day (current) spending, but has reduced investment (capital) spending to help it balance its books due to falling tax revenues.

The leaked document suggested that €31.7 billion in current spending would be needed to maintain the existing level of services next year, before any consideration of public pay benchmarking. The estimates published last week allow for spending of €31.3 billion - and this will increase considerably on Budget day.

In fact, the leaked memo suggests total current spending of €32.650 billion after the Budget; so, if the Government sticks roughly to this template the Minister will, on Budget day, announce over €1 billion in extra current spending next year, mainly on social welfare increases and public pay benchmarking.

The big issue here remains public sector pay. There is an existing commitment to pay €550 million in backdated pay relating to benchmarking next year. And this is before any consideration of the rest of the benchmarking awards or any other public pay increases related to a new national agreement. So most of the extra current spending on Budget day could go on pay spending. And this could leave total Exchequer pay spending rising by 10 per cent this year, while non-pay current spending rises by 4-5 per cent.

Obviously public servants are involved in the delivery of services to the public - a better health service needs more doctors, a lower pupil-teacher ratio requires more teachers. However, it is clear that the public pay bill continues to surge ahead. And this is where the "plateau" theory runs into difficulty - pay is eating up more and more of the money and the Government is being forced to cut back on non-pay spending, affecting services to the public in a number of areas.

Against this background, the benchmarking report and its associated bill of at very least €1.1 billion per year when fully implemented, is a huge iceberg facing Mr McCreevy. At the moment, he simply cannot afford to pay it. And the real danger is that some kind of deferred implementation is agreed, which does not secure the necessary increases in flexibility and productivity which must be part of any sustainable agreement.

Looking at State investment spending, the Government is allowing for €5.35 billion next year, while the leaked memo suggested €5.96 billion would be needed to maintain the current level of investment.

The Minister will add to this total on Budget day, but it is now clear that the National Development Programme is heading off course.

A Farrell Grant Sparks report earlier this year estimated that, because of the increasing costs of completing projects, a funding "gap" of €9 billion had emerged in the infrastructural element of the report - compared to total planned investment under this heading of €27 billion. The rising cost of completing the projects related to a range of factors, mainly construction inflation, planning delays and poor costing and management of projects.

Clearly then, the main issue is not a few billion here or there for 2003 investment plans. It is the need for a re-evaluation of our investment strategy and a realistic assessment of timescales and funding options.

The Government has continued to insist that the NDP is broadly on track. It would serve it better to concede that investment is behind schedule, that much-improved project management is essential and that it needs quickly to come out with a clear policy on funding, via borrowing, Exchequer resources and public-private partnerships.

The new National Development Finance Agency will have a key role in this area, but political leadership is required to drive the key decisions and to ensure that investment crucial for our economic future and to meet our social needs is completed within some kind of reasonable timescale.