Shock! Horror! McCarthy Vindicates Public Sector Efficiency! 20th July: The Recession Diaries

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Noel Whelan wants you to read The Report. He wants you to read it now. Call in sick, dump the kids on grandma, kick the cat out – and read it. Mark Hennessy also wants you to read it – to know why you must take that bitter medicine. Ed Walsh wants you to read it because it will open your eyes to the vast range of waste and fat in the public sector. I want you to read it, too. But with a difference.

Don’t read it with it pre-conceived notions, based on previous leaks, spin and the current commentary. Read it carefully. Read what it says -not what others say. For if you do, you might find there is relatively little waste and fat in the operation of the public sector. Though there are improvements to be made – they are in the vast scheme of things, relatively small. You may find that The Report supports the findings published by the OECD and the National Competitiveness Council – that the Irish public sector is small and highly productive. And that in terms of tackling our fiscal crisis, never mind the broader economic crisis, proposed savings in the ‘structural and operational reforms’ in the public sector, always desirable, will nonetheless produce little in the way of ‘savings’.

Let’s start with the shifting of costs. The Report is fairly ruthless and comprehensive in targeting low to average income earners. Over 41 percent, or €2.2 billion, in ‘savings’ doesn’t come from public sector employment cuts or operational / structural reforms. It comes from slashing social transfers – including cuts in social welfare, health (e.g. prescription co-payments for medical card holders, etc.), FAS trainees pay, education (e.g. increased school transport fares) to name a few.

Regardless of whether one supports or opposes cutting social transfers, the point here is that cutting transfers makes no impact on operational efficiency. Whether social welfare is increased or cut by 5 percent doesn’t impact on the number of public servants operating the distribution of social welfare payment schemes. These ‘savings’ are achieved by transferring and increasing ‘costs’ on to, by and large, low-income earners.

Secondly, there are a range of cuts that shift Exchequer costs on to enterprise, social organisations, and the self-employed. Examples of these are:

  • Increase Agricultural Disease levies
  • Terminate Energy Awareness Schemes (require energy companies to pay for this)
  • Reduction in allocation for community and voluntary sector supports
  • Reduced IDA and Enterprise Ireland capital investment

This category comprises nearly €400 million. While there would be minor employment rationalisation if whole schemes are cut (the Cow Suckler Scheme) the disproportionate burden of ‘reform’ and ‘costs’ are borne by business and social organisations.

Thirdly, there are cuts that don’t reflect on the operational efficiency of the public sector. The Report uses criteria such as ‘in light of the economic circumstances’ and ‘in light of the budgetary circumstances’.On this basis they call for the postponement of our Overseas Development Aid commitment, cuts in cultural and sporting expenditure, assistance to Chernobyl survivors, discontinuation of programmes such as the Active Citizenship Office, recruitment to the school psychological service, etc. Whether one agrees with these cuts or not, they don’t reflect on the operational efficiency of the public sector but rather how we prioritise expenditure (or shine the light). These cuts amounted to more than €200 million.

So what are the ‘cuts’ or the ‘reforms’ that The Report suggests will create a ‘meaner, leaner and fitter’ public sector? A leading proposal is to rationalise state and public sector agencies. There are no doubt considerable inefficiencies (never mind issues of democratic accountability and transparency) in the proliferation of some agencies. The Report identifies 43 rationalisation measures including mergers, amalgamations, transfer of functions and discontinuations.

In total, these savings – including employment reduction – would come to €170 million. Now, €170 million is nothing to sneeze at. But after all the outrage over ‘quangos’ and ‘self-serving bloated agencies’, we discover that slashing and burning so many, would ‘save’ 0.3 percent of current public expenditure and less than 3 percent of the Committee’s total proposed savings.

Another big proposal is

‘. .  that that the policy and funding mechanisms for STI should be radically rationalised and streamlined into a single stream of funding, and that the level of Exchequer funding for STI activities can and should be better-focused and made less costly to achieve given goals’.

Okay, fair enough. To achieve the same goals with less resources – through cutting waste and fat; always a good idea. If the proposal were implemented in full it would save €101 million in current and capital expenditure. This makes up less than 0.2 percent of current public expenditure and 2 percent of the Committee’s total savings.

Then there are a number of proposals that are ‘policy’ in nature – not designed to increase efficiency per se but rather to yield ‘savings’. These proposals may be good policy or bad, but their implementation would not effect a change in operational efficiency. Let’s look at some of these savings in the Education head:

  • Increase class sizes
  • Reduction in the number of Special Needs Assistants
  • Cuts in capitation grants
  • Cuts in subsidies to fee-paying schools (a very good proposal, btw, which should have gone much further)

These may or may be defensible (would increasing class sizes and cutting capitation grants increase or reduce ‘productivity’? Does the current supply of Special Needs Assistants meet the demand?) These are contestable propositions but don’t suggest ‘fat’ and ‘waste’ in the public sector. They make up 27 percent of savings under this head (another 12 percent is made up of cutting social transfers).

Or take Health. The Committee proposes to ‘save’ €1,300 million under this head. 22 percent come from cutting social transfers (reducing medical cards, prescription medicine co-payment, increase hospital charges, etc.). A further 35 percent involves ‘policy’ proposals, mostly reducing payments to professionals (GPs, pharmacists) – proposals that have a lot of merit but are not in any way new.

The main proposal to achieve public sector ‘efficiency’ calls for reducing health staff. This is distinct from Departmental and HSE ‘staff administration’ efficiencies which amount to less than 8 percent of the total savings under this head). It calls for a reduction of 6,000 staff. Sarah Burke notes that this is on top of 3,000 planned reductions. However, it doesn’t say where these staff reductions will occur – labelling them all ‘administration and support’. It is questionable whether a total of 9,000 staff reductions can be done without affecting the productivity and quality of healthcare delivery. Even so, this major category will result in €300 million cost reductions- or less than a quarter of all savings under this head.

Closely reading the report one finds that, once you strip out reductions in social transfers, cuts arising out of ‘economic circumstances, cuts based on ‘policy’, etc. – the number of proposals dealing with the operational efficiency of the public sector make up only a minority of savings.

A major omission in the Report is the cost of reducing public sector numbers. The Committee states that the Government will have to go further than current strategies – such as not filling vacancies. But it doesn’t calculate the cost of reducing public sector numbers (e.g. redundancy packages, early retirement schemes, etc.). Even allowing that this is a ‘once-off’ cost, it will reduce the ‘savings’.

But it doesn’t end there. The Committee puts forward a number of proposals to enhance the ‘operational efficiency’ of the public sector – proposals which are inconsistent or lacking any evidence. Here are some examples:

  • The Committee proposes to outsource a number of staff across the various cultural institutions such as attendants, porters, cleaners, security staff etc. Payroll savings are estimated at approximately €2.0m with an associated estimated staff reduction of 50. That’s about right – €40,000 per these lower-paid jobs. But there is no indication that they factored in the cost of ‘buying in’ these outsourced jobs.
  • Under the Justice Incidental Expenses sub-head, the Committee writes that the budget:

‘ . . . may have some scope for savings in the order of 10%. This should provide savings of €1.1m.’

The use of subjunctives throughout The Report – ‘may’ and ‘should’ and ‘potential’ – abound. The point of The Report was to identify concrete savings, not proclaim maybes and unsubstantiated conditionals.

  • The Committee, in a few instances, counts as savings cuts that have already been made. They accepted that the Gaeltacht Housing Scheme, Local Community Grants Scheme and the Community Scheme for Older people have already been suspended but nonetheless count these as proposed savings.
  • The Committee, when considering rationalising the District Court Network, writes:

‘The efficiency of the Courts system could be improved by providing prospective judges with judicial training prior to going on the bench and ongoing professional development, by providing the Presidents of the Courts with meaningful powers and functions in the area of discipline and the issuing of practice directions, by establishing a Judicial Council to address serious disciplinary issues and by strengthening the independent role of the Judicial Appointments Board in the appointment of judges.’

This may well be the case. However, judicial training, establishing a new public agency, and provision of ‘ongoing professional development’ all require extra expenditure – expenditure the Committee didn’t refer to in their tabulations.

  • The Committee proposes a number of new ‘means-testing’ procedures (criminal legal aid, Homecare packages). Okay, but as the Committee knows, means-testing is expensive in administration terms. Yet, they don’t seem to factor in this increase in costs when producing their ‘savings’.
  • Under a number of category heads, the Committee proposes reductions in non-pay administration costs. Is this because they identified ‘waste’ and ‘fat’? No. They merely called for across the board 10 percent reduction. For instance, they called for cuts of 10 percent (or €400,000) in the administration costs of the Attorney General’s office:

‘The Group understands that the AGO is experiencing an increase in its volume of work, particularly in the area of parliamentary drafting of legislation. Nevertheless, it recommends further efficiencies in the non pay administrative budget consistent with similar reductions across other government departments and offices.’

Was this €400,000 ‘waste’? No. Just money to be cut without regard to the impact it might have on productivity.

The Committee puts forward proposals but doesn’t count the extra costs arising from implementing those proposals (a small example which they didn’t include as a ‘saving’ was their suggestion to introduce entrance fees to museums, suggesting that up to €3 million could be raised; they didn’t factor in the cost of introducing those fees – handling, transporting and accounting for cash can be an expensive proposition).

On the day of The Report’s publication, Ingrid Miley advanced a more sophisticated perspective:

‘There is a proposal that removal of graffiti from buildings should be done by people who are on community service, by offenders. But what are you going to do with the people who used to remove the graffiti, will we have to borrow money to pay for their redundancy packages or to take early retirement. In the meantime who’s going to supervise the people removing the graffiti? Will we have to hire extra people to do that?’

Indeed.

When one adds up the actual ‘savings’ arising from increasing the operational efficiency of the public sector, we find the figure, on a generous basis, to be anywhere between 15 and 20 percent of the Committee’s proposals. Or, more interestingly, between 1.4 and 1.9 percent of the gross voted current expenditure (and the Committee’s savings includes €200 million in capital expenditure as well).

Indeed, the Committee’s centre-piece – reducing public sector employment by 17,000: it would amount to 1 percent of total current expenditure. And if the ESRI’s multiplier tables are correct – it would reduce the fiscal deficit from -12.2 percent to -12 percent – an improvement of 0.2 percentage points Wow. What medicine.

Yet even here, caution must be employed when using the Committee’s employment numbers. The Irish Times reported:

‘Dr Michael Somers said the NTMA, which manages the State’s debt, employs a staff of 168 and not the 217 cited in the report by the review group chaired by economist Colm McCarthy. Mr McCarthy’s group recommended that staff numbers at the NTMA be reduced by 40. “We never had 217 staff, so cutting us from 217 is absolutely not a problem because we are below that,” said Dr Somers. “We would be delighted to cut 40 jobs on that basis.’

The small net savings identified by The Report – does it excuse ‘inefficiency’? No. Should progressives take this issue any less seriously? No. The more money that can be realised from real (as opposed to aspirational) efficiencies in the operation of the public sector can be diverted into funding an investment stimulus programme without resort to higher borrowing. That’s a good thing. That’s an expansionary as opposed to a deflationary approach.

I agree with Noel Whelan and company. Everyone should read the report – or, at least, read a sampling of the specific proposals under particular heads. But they should do so without any pre-conceived notions of ‘waste’ and ‘fat’. Just let The Report speak for itself. And when all efficiencies are realised – whether through rationalisation of public bodies, STI and IT savings – even reduction in public sector employment if you want to go there – we will realise the fundamental truth of this debate.

That the next morning we will be faced with the same fiscal crisis.

That we will still need new strategies to deal with the consequences of economic decline.

That we will need ‘economic’ as opposed to ‘accountancy’ policies.

That cutting public expenditure can, if we are not careful, create its own set of problems that will impact adversely on the economy.

Most of all, those who perpetrate the myth that public sector cuts are the ‘medicine’ we need to heal ourselves must have gone to the same upstairs correspondence medical school as Dr. Nick.

 

One Response

  1. Proposition Joe

    July 22, 2009 9:44 am

    You do of course realize that the Bord Snip terms of reference precluded consideration of the most obvious source of savings from the public sector.

    Though that didn’t stop McCarthy from sneaking a reference to reverse benchmarking under the radar.

    But it shouldn’t really be surprising that the bulk of savings identified are around non-pay transfers, given that this is the area at which the Bord was effectively instructed to direct their fire.

    Had say welfare payments or rural supports been given the blanket protection instead, the outcome would of course be different.