Runaway health sector spending putting public finances and economy at risk

The worrying pattern of large, unplanned increases in Government spending could put Ireland’s public finances and economy at risk. The health sector is consuming more and more resources with no prior assessment and little subsequent accountability. This cannot continue.

The end-September exchequer data show that health spending is running 8 per cent ahead of last year and is already €300 million over the expected profile with the full-year overrun likely to be somewhere in the region of €600 million.

Thus, rather than increasing by a planned €500 million in 2018, public spending on health is set to increase by more than twice that: €1.1 billion. And 2018 is just following a pattern we see every year. Since 2015, the within-year increases in the allocation to health have been €600 million, €500 million and €200 million.

The danger of this spending drift is that it is cumulative and long-lasting. Add in the €600 million likely for this year and we will have had almost €2 billion of unplanned increases in health spending in just four years.

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The Department of Public Expenditure and Reform recently published a review of the acute hospital sector for the years 2014-2017. The review documented a 17 per cent increase in net spending over the period with increases in both pay levels and the number of staff.

Did this increased spending lead to an improvement of the output of the acute hospital sector? The conclusion of the review is blunt: “Despite significant increases in expenditure over the three-year period, there has been little improvement made with regard to acute sector output.”

Spending limits

It has become obvious that health spending plans are not credible. This can lead to a self-perpetuating problem: what economists call the “soft budget constraint”. In essence, spenders may become more and more convinced that overspends will be accommodated and, in turn, less and less convinced of any real pressures to stick to spending limits.

Unplanned increases in expenditure require supplementary estimates to be passed by the Oireachtas. These first go to a committee for scrutiny and approval before being voted on by the Dáil and Seanad. But the committee the supplementary estimates must pass through is the joint health committee rather than the finance or budgetary oversight committees.

There is a risk that, as the support is pulled back, market participants cop that Ireland's fiscal position has deteriorated

The members of the Joint Committee on Health include the various health spokespeople of the political groupings in the Oireachtas. Being in such a position means they are unlikely to oppose more resources going to health. And they don’t.

An assessment of the €2 billion of unplanned additional spending provided to health since 2015 show that no politician has voted against any of them.

The fact that these spending increases do not come before the finance or budgetary oversight committees means that the budgetary and economic implications are being overlooked.

Public finances

Two major risks arise. The first relates to the sustainability of these increases in the context of the public finances and the second relates to broader impact of this additional stimulus to an already fast-growing economy.

At present, Ireland is under relatively little scrutiny by participants in financial markets as the ECB’s policy of quantitative easing keeps Government borrowing rates low. There is a risk that, as the support is pulled back, market participants cop that Ireland’s fiscal position has deteriorated, thanks in part to a sequence of budget plans not being delivered on. This could lead to a loss of credibility and an increase in borrowing costs.

From the perspective of the fiscal council the main issue with the rise in health spending is that it has been unplanned and not assessed

One reason why the underlying fiscal position, as measured by the structural primary balance, has deteriorated is that unexpected revenue windfalls have been more than offset by unplanned spending increases – a large share of which has gone to health. Irish Corporation Tax receipts are extremely volatile and, for reason of that volatility alone, will fall at some stage. They should not be used to fund permanent increases in expenditure.

From the perspective of the fiscal council the main issue with the rise in health spending is that it has been unplanned and not assessed. In its recent pre-budget statement, the council advised that pressures in the Department of Health budget this year should be absorbed through savings elsewhere.

There is now a clear risk that this will not happen, meaning the stimulus being provided by the Government to the economy may well be larger than planned. This risks a repeat of the pro-cyclical policy mistakes of the past.

Increases in recruitment

This year’s €600 million overspend has been attributed to unforeseen increases in recruitment. The associated salaries will have been paid from the month the person was hired; in 2019, these salaries will have to be paid for the full year.

This is the “carryover cost” of budgetary measures whose full-year cost does not arise in the year they are introduced.

We cannot be certain, but assuming a reasonably dispersed distribution of this unplanned recruitment across the year this means the full-year cost could be about €900 million. This €300 million carryover in 2019 will have to be accounted for in Budget 2019.

In the summer economic statement, the Minister for Finance indicated that the overall budget package for 2019 would be about €3.5 billion. The Irish Fiscal Advisory Council assessed this in its pre-budget statement and concluded that such a package would be in line with prudent economic and budgetary management.

After demographic pressures and the cost of commitments already given, the amount available for new measures in Budget 2019 was estimated at about €800 million. This is what the Minister for Finance has said he will deliver and IFAC’s assessment is to follow through on this plan.

The €600 million unplanned increase in health spending in 2018 should be absorbed by savings elsewhere. It does not change council’s view of what would be prudent in 2019. However, the €300 million carryover cost of that spending must be taken into account.

Sticking with the plan as set out in the summer economic statement means that, in the absence of offsetting savings, the €300 million carryover cost into next year will reduce the amount available in the budget from €800 million to €500 million.

The fact that a large share of the available resources for the budget may have been used with little formal assessment is not just a concern for the Minister for Finance; it is a concern for all of us. The pattern needs to be stopped.

Seamus Coffey is a lecturer in economics in University College Cork and chairman of the Irish Fiscal Advisory Council