We must revise our estimates and budget cycle; the methods used would not be best practice in business, writes Danny McCoy
Once the clocks go back, the rituals of the management of the public finances begin to unfold. Today, we get what should be the most significant piece of all: the Estimates of public expenditure for 2006. These will contain the pre-budget estimates of the funding likely to be available to individual Government departments.
Today's estimates will be scrutinised and spun on the basis that they reveal Government's intent to steer the economy with the funding implications and further policy changes occurring in the budget on December 7th.
As in other years, the focus will be upon the growth of individual expenditure headings, with scant attention placed on the existing expenditure bases.
The gross amounts, which include social insurance fund expenditure, are likely to exceed €50 billion in 2006, which, in scale, is treble the entire 10-year spend on infrastructure envisaged under Transport 21.
One-third of this enormous sum will relate to public sector pay, while less than one-fifth will relate to capital expenditure. Even though current expenditure is by far the largest component, it generally receives much less emphasis in terms of consideration of value for money than the capital equivalent.
Expenditure review initiatives have begun, but appear slow to tackle the major expenditure items. The Irish economy is likely to be growing in money terms in 2006 by between 6 to 8 per cent, so the overall package, when revealed in full at budget time, should be steering into this range.
However, more modest growth rates than these are likely to be contained in today's estimates, leaving more drama for budget day.
The subsequent revised estimates for 2006 will not actually be agreed until next March, along with the Finance Act giving effect to budgetary changes. By that time, Government departments and agencies will already be well advanced in their expenditure programmes for the year.
This is nonsense, and certainly does not foster efficient public expenditure planning and control. While the tax year was advanced three months to follow the calendar year five years ago, no move has been made to alter the timing of the budgetary cycle. This ritual would certainly not measure up to best practice in the business community.
Indeed, the Public Accounts Committee (PAC) recently published a report addressing this issue of the inappropriate timing. The major weakness the PAC identified is that the current system allows only limited time for ex-ante appraisal of the budget. This is true. But, just as important is the need for ex-post evaluation of expenditures, before rolling over the same unchanged base for subsequent medium-term expenditure rounds.
In line with many other European countries, the negotiations between individual departments and the Department of Finance should begin in January of each year for the following year, with a view to completing the estimates process by the summer. This would then facilitate the publication of the Estimates and the budget as a single event in early autumn.
Such a change would enable departments to carry out more relevant annual budgetary processes well in advance of the new financial year, and would allow increased time for Dáil debate on the budget before it proceeds to a Finance Bill.
A traditional argument advanced for retention of the existing arrangements is that the out-turn for the current year is not known until the year has ended so as to form the base upon which next year's Estimates can be created.
This perverse inherent logic bedevilled capital expenditure planning in particular, until the recent welcome introduction of five-year envelopes allowed carryover between years. Similar moves toward medium-term planning for current expenditure should be advanced. Broad and all as the Estimates of the public services are, there remain significant expenditures that are not explicitly accounted for and, as a consequence, neither have, nor will, receive due public scrutiny.
The first set is tax expenditures or, as they are more commonly called, tax reliefs and exemptions. The revenue forgone from these reliefs are justified on the basis of encouraging private sector provision of the expenditure for desirable objectives. The initiative in last year's budget to examine a group of tax reliefs is worthwhile.
But the acknowledgement that the use of tax reliefs, in place of direct financing by public expenditure, constitutes an ongoing cost that should be explicitly accounted for, has been slow to materialise. The need for constant review and evaluation of direct public expenditure, while now broadly accepted, has to be extended to cover these other major expenditure items.
The second set relates to the implicit costs of the public sector pension provision, notwithstanding the €1.5 billion annual payment to the National Pension Reserve Fund to part-provide for public service pensions post-2025.
Even this substantial expenditure from the taxpayer only amounts to around 10 per cent of the annual public sector pay bill. This is seriously below the typical funding cost ratios in the private sector, a situation exacerbated by the more generous provisions in the public sector pension schemes.
The failure to account adequately for the true cost of these public sector pensions is hiding the full cost implications for both the current and future taxpayer.
In the absence of a full and true picture of the necessary expenditures, it is difficult to judge the appropriateness of the proposed spend that will emerge today. Given the buoyancy apparent within the economy from recent data on retail sales and emerging recovery in industrial production, the need for a stimulatory fiscal stance in terms of current expenditure is weak.
However, the productive capacity of the economy will continue to require measured expenditure growth, particularly in the areas of physical infrastructure and ongoing training of the workforce.
The promised big childcare initiative and the very desirable incentives for SSIA-type pensions expenditure will be kept under wraps for another day.
It is only when the clocks go forward in spring that we will see the full picture of the spending plans for 2006. What is clear, though, is that our budgeting and estimate processes must change with the times.
• Danny McCoy is Director of Economic Policy at Ibec