The spending allocations for 2003 reflect the age-old inclination of politicians to protect current programmes and long-finger capital projects when under pressure, writes Jim O'Leary.
The outcome of the budgetary process is the culmination of a series of choices made by Government.
This year's Budget is no exception, despite protestations to the contrary.
Resources may be tighter than in previous years, but they are not fixed, and their distribution is not pre-determined. There is nothing inevitable or inexorable about the shape of budgets, even in hard times.
One can conceive of the budgetary choices made by Government on two levels - macro and micro.
At the macro level, there are essentially three questions to be settled: (i) how much to spend; (ii) how much to raise in revenue; and (iii) how much to borrow.
For an economy at Ireland's level of development, it makes sense to complicate this picture just a little and propose that the spending decision be split in two - how much to devote to current spending and how much to spend on capital projects.
The sequence of events in the budgetary cycle suggests that the order in which decisions are actually taken is as set out above.
First, we have the Book of Estimates, which purports to set out the Government's spending plans, both current and capital, for the year ahead. Then, several weeks later, we have the Budget itself, which concerns itself principally (or used to, at any rate) with tax changes and the overall target for borrowing.
In this scheme of things, the scale of borrowing might seem to be the residual. And, indeed, that was the way things were back in the 1970s and 1980s when Irish governments routinely ran deficits of around 15 per cent of GNP.
It is not the way things are now. For one thing, the Stability and Growth Pact (SGP) outlaws deficits of more than 3 per cent of GDP. For another, we have a Minister for Finance who has a strong aversion to borrowing in any circumstances. Yesterday, he chose a Budget deficit target of just 0.7 per cent of GDP for 2003. This is not only comfortably within the SGP ceiling, but is also a good deal lower than what he could prudently have stretched to.
Had the Minister been prepared to run a deficit consistent with an unchanged debt-GDP ratio, a stringent enough rule when the ratio is just 35 per cent, he could have borrowed the equivalent of 1.5 to 2 per cent of GDP. This would have given him an additional €1.1 billion to €1.7 billion of resources, enough to entirely obviate the need for tax increases, or to substantially boost capital spending.
According to the Minister, his decision to eschew anything more than a very modest amount of borrowing was based on a desire to learn and implement "the lessons of the past".
But, of course, the past yields up more than one lesson, and some of them are a good deal more relevant to the present than others.
True, Irish governments of the late 1970s and early 1980s committed grave errors in borrowing far too much and plunging the economy into a spiral of rising indebtedness and crippling debt service costs.
But does the Minister seriously believe that we are at significant risk of replicating that scenario at this point, given the current relatively healthy state of the public finances, and the implications and obligations of our membership of EMU?
In my view, a lesson from the past that has far greater resonance at this stage concerns capital spending.
In the 1980s, capital spending bore the brunt of successive governments' attempts to restore order to the public finances. As a result, public capital spending declined from 5.4 per cent of GDP in 1980 to 1.7 per cent in 1989. The yawning infrastructure deficit and grinding congestion of recent years are the legacy of the choices made then. Nor have the problems of inadequate infrastructure receded much since the inception of the National Development Plan.
Solving them remains an urgent priority and a critical requirement if this country is to retain (regain?) its position as an attractive place in which to live, work and produce goods and services.
Notwithstanding this, even after yesterday's additional allocation of €209 million to the roads programme, gross capital spending in 2003 is projected to be 2.3 per cent lower in nominal terms than in 2002. (In real terms, the fall between the two years will be more like 10 per cent).
In contrast, gross current spending is projected to rise by over 7 per cent. Can it be that a 10 per cent-reduced level of real capital spending is as much as the Government thinks the construction industry can handle in 2003? Or can it be, perhaps, that this level of capital spending represents the totality of projects that the Government considers will yield an adequate rate of return? I doubt it very much.
What is much more likely is that the spending allocations for 2003 reflect the age-old proclivity of politicians to protect current programmes and long-finger capital projects when under pressure. Why? Because, the benefits from consumption are concentrated in the here and now, while the benefits from investment are spread out, sometimes quite a long distance, into the future.
Actually it's precisely because the benefits from investment accrue over a long period of time that it makes sense to finance such spending from borrowing rather than saddle the taxpayers of today with the full bill. That's a piece of simple economics that Ken Whitaker placed at the heart of economic policy in this State almost 50 years ago.
Which brings me to one other important lesson from the past that might have been more fully reflected in yesterday's Budget.
The Minister made much play of his conviction that avoiding an increase in the burden of direct taxation is important if the country's competitiveness is not to be further eroded. A fair point, though not far-reaching enough because the threat to competitiveness comes not only from increases in direct taxes but in other taxes too.
Most of the relevant research shows that Irish labour supply, for example, is a function of, and highly sensitive to, the real after-tax wage.
What this means is that any rises in indirect taxes, as well as in income-related taxes, put upward pressure on wages.
Both these sources of pressure will be the greater after yesterday's Budget. The package of income tax reductions is not sufficient to index the system for inflation, and so the real burden of income tax will rise. Moreover, the raft of increases in VAT, excises and stamp duties will boost the CPI by about 1 per cent.
Meanwhile, public service workers, it seems, will be well insulated.
Yesterday's additional allocation in respect of pay means that average earnings in the public sector will rise by around 8 per cent in 2003. That includes provision for the element of benchmarking that is supposed to be backdated to December 2001, but does not include anything in respect of the larger part of the benchmarking awards or a successor agreement to the PPF.
And here's the ultimate irony.
Numbers in the public service are to be capped at their current level, preparatory to bringing about a reduction of 5,000 over the next three years, just as pay increases, supposedly designed to resolve recruitment and retention problems, are being negotiated.
Jim O'Leary is currently lecturing in the department of economics at NUI Maynooth
Jim.oleary@may.ie