No wriggle room on State spending cuts

ECONOMICS: Second only perhaps to Fine Gael, language was the biggest loser in the election campaign. Probably the most abused word of all was "crisis".

The health service, we were told, is in crisis. The housing market is also in crisis. Likewise, the system of law and order, childcare provision, transport, the semi-state sector and a host more besides. To cap it all, the public finances are in crisis, which, if true, would mean that there was precious little chance that any of the other "crises" would be resolved. How the Government managed to be re-elected in the face of such catastrophe is surely one of the great mysteries of our time.

But are the public finances in crisis? Well, if the benchmark is the early 1980s, then the answer is: not by any stretch of the imagination. We are nowhere near the vicious circle of massive budget deficits, spiralling government debt and double-digit interest rates that characterised that period. Nor is it remotely likely that we will revisit that kind of nightmare in the foreseeable future.

If nothing else, our membership of EMU and, by extension, the requirement that we adhere to the Stability and Growth Pact, will look after that. As I pointed out in this column three weeks ago, adherence to the pact implies the avoidance of excessive deficits and virtually guarantees that government debt will fall relative to GDP over the medium term.

Still, while the public finances are not in crisis in the 1980s sense of the term, there is a problem. Simply put, the problem is that government spending is currently rising at a rate that cannot be sustained, given the rate of change in receipts. Simply put, the resolution of the problem resides in bringing the rates of growth in spending and receipts into alignment.

And lest anyone think that there is any alternative to this, there isn't. It is an imperative. The key question at this juncture is whether it can be done without raising tax rates and without abandoning the pursuit of better quality public services and infrastructure.

An optimistic answer is suggested by Charlie McCreevy's take on the spending splurge of recent years. What he has been saying, in his disarmingly straightforward way, is that spending increased as it did simply because the money was there.

One could interpret this to mean that the extraordinary buoyancy of tax revenue created the rationale for the spending splurge, that the justification for big increases in spending was the fact that the Government simply "had the money".

This paints a picture of spending programmes being expanded and new programmes being put in place without regard to efficiency and value-for-money criteria. It also suggests that whatever fat and waste existed in relation to the delivery of public services five years ago has greatly increased in the meantime.

Why does this lead to an optimistic conclusion? Answer: because it strongly suggests that there is plenty of potential to reduce the rate of growth in public spending while at the same time enhancing the quality and scope of public services but without having to resort to higher taxes.

That potential can be realised by improving the efficiency and effectiveness of spending programmes and by increasing the productivity of public sector employees. Those who propose that the choice facing the country is a choice between better public services and the existing low level of taxes overlook this. (Some of them perhaps, have a vested interest in overlooking it.)

Of course, greater efficiency and productivity will not be easily accomplished. After a long sequence of fat years, years of bountiful resources, of "free money" as it were, wasteful and inefficient practices have probably become more entrenched (and acquired a higher value to the practitioners), and additional layers of feathering may have been added to already comfortably upholstered beds. One thing is for sure: the status quo will not be changed without vigorous and vociferous attempts to preserve it.

In these circumstances the capacity for firm management and for taking tough decisions will determine whether the quality of public services can be improved (or indeed, whether the existing standard of public services can be maintained) without raising tax rates and risking the overall competitiveness of the economy.

In the new climate, the incoming government may well have to introduce some discordant notes into relationships that the fat years had made cosy and comfortable, and adopt a more assertive posture in its dealings with the relevant interest groups.

This will pose challenges to the prevailing political culture. It will also require the forging and demonstration of the strongest political will. The effective control of public spending and the rigorous pursuit of efficiency and value-for-money criteria throughout the public service have to be underpinned by political commitment at the highest level.

It is clearly not enough that the Minister for Finance be the standard-bearer.

Jim O'Leary is lecturing in the economics department at NUI-Maynooth