Starving Ourselves: Ireland’s Low-Spend Economy

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When we look at the headline numbers, it appears that Ireland is a low-spend economy – that is, Government spending is well below EU averages.  This helps explain why we don’t have anything near the public services, income supports and investment that other EU countries enjoy.  However, it is claimed that a significant part of the extra spend in other EU countries is due to their older demographic which necessitates higher public resources (pensions, healthcare, etc.).  Strip this away, and we may find that Ireland is actually a high spending country.

Seamus Coffey has contributed to the debate by doing just that – stripping out spending on the elderly.  When this is done Ireland comes in, not near the bottom, but near the top:  the 5th highest public spending economy in the EU-15, even ahead of ‘high-spend, high-tax’ Sweden.

This is a politically loaded argument.  If it can be established that we are, in fact, a high spending country this would justify a tax-cutting agenda.   We have the money, so the argument would go, we just don’t spend it right.

So are we an average or even high spending economy by EU standards?  No.  Not even close.  In fact we are starving ourselves of public resources.  Let’s go through this argument because I’m sure we’ll hear more of this as the campaign to cut taxes continues.

Headline Figures

First, with the help of the EU Ameco database, let’s look at primary expenditure (public spending excluding interest payments) with an adjustment for GDP per the Irish Fiscal Advisory Council (which has created a hybrid measurement between GDP and GNP).  2012 is the last year we have data for old age expenditure – and as we will see below, it is highly misleading to make any conclusions about spending levels for this year.

Starving 1As seen, Irish public spending is low (there is no data for Belgium and Luxembourg’s GDP/GNP differential is even more distorted than Ireland’s).  We’d have to increase spending by over €8 billion to reach the EU-15 average and €16 billion to reach the average of our peer group – other small open economies.

However, given that other EU countries have much higher elderly-related expenditure, what happens to this graph if we strip out that expenditure?  We will turn to the more detailed Eurostat table.  This expenditure includes more than just pensions.  It also includes dedicated medical care (e.g. nursing homes), benefits-in-kind (e.g. home helps, transport facilities), carers’ allowances and, in the words of Eurostat, ‘miscellaneous services and goods provided to elderly persons to enable them to participate in leisure and cultural activities or to travel or to participate in community life’.

Starving 2It would appear that there is some substance to the argument that Ireland is not a low-spending economy.  We’re above the EU-15 average though still behind other small open economies – ranking 6th.  If there are deficits in the public sector and income supports compared to other European countries, then whatever the issue it isn’t that we don’t spend enough.

However, the operative word here is ‘appear’.  When we go below the surface, the picture changes dramatically.

Old Age Expenditure

A country can spend a lot of money on the elderly for two reasons:  first, because there is a high proportion of elderly (demographic); second, because they choose to invest more in the living standards of the elderly (policy).

In terms of the demographic element the average proportion of elderly (65 years and older) of the whole population is 18.7 percent throughout the EU-12 countries we’re examining; in Ireland it is 12.1 percent.  So we have a 35 percent lower cohort of elderly people according to EU Ameco.

Now, let’s take two countries with the same proportion of pensioners.  But one country spends extra – on pensions, healthcare, community supports, etc.  Their spending levels are different because they have different priorities (e.g. higher taxation to pay for higher spending), not because of their demographics. Therefore, subtracting elderly-related expenditure doesn’t take into account the policy differences.  We can see this from the following table which shows old age expenditure per each elderly person in the EU-15 countries.

Starving 3This should be treated as indicative as I have just taken amount spent as shown in Eurostat and divided it by the number of elderly (over 65 years) .  But what we find is that Ireland is a low spending economy when it comes to our elderly living standards.  We’d have to increase spending on the elderly by nearly 30 percent to reach the EU-15 average.

So if we are to exclude old age expenditure we must separate out the demographic element from the policy.  There are various ways to do this but I will take a rather straight-forward approach.  Let’s assume that Ireland had the same proportion of elderly as the EU-12 average.  We then increase Irish spending on the elderly proportionately:

  • Increasing the proportion of elderly in Ireland from 12.1 percent to 18.7 percent means an increase of 55.4 percent
  • We then increase Irish expenditure on the elderly by 55.4 percent.  Therefore, if we had the same proportion of elderly as the EU-12 average, we’d be spending 7.7 percent of our GDP (up from the current 4.9 percent).

Now let’s go back to primary spending and add the difference (2.7 percentage points) to Ireland’s primary expenditure. This would show Ireland’s spending if we had the average number of elderly as the other EU countries.

Starving 4When we separate out policy and demographic we find that Ireland falls back down the table, below the average of other EU-12 countries and even further behind our peer group.  We’re now about €1.5 billion below the EU-12 average in 2012.

Let’s go further into this.

 

 

The Youth Demographic

True, we don’t have to spend as much on our elderly as other EU-15 countries – though as we saw above, the difference isn’t that much.  But what about the other end of the age scale – the youth demographic?   Ireland is fortunate to have a high youth population but this comes with a current cost in the form of social transfers (e.g. Child Benefit) and education.

  • In Ireland young people 19 years and younger make up 27.6 percent of the population
  • In the other EU-12, this age group makes up 21.1 percent of the population

Therefore Ireland has to spend nearly 31 percent more on education and family transfers (e.g. Child Benefit) than other EU-15 countries.  This is as much a demographic-related expenditure as pensions but there are few who suggest looking at our overall expenditure excluding youth-related expenditure.  But let’s be consistent here and adjust Irish expenditure accordingly.

We spend 8.5 percent of GDP on children (family-related expenditure, education, etc.).  If we reduce this number by the demographic percentage difference with the other EU-12 countries – this would mean that Irish expenditure would fall to 6.0 percent.

This is, of course, highly stylised.  While one could argue that cash transfers would fall accordingly, education costs might not fall as much as you would still need to maintain an infrastructure of school buildings, teachers, equipment, etc.  A similar argument could be made for increasing the number of elderly.  So this is not intended to be percentage point perfect; it only gives an indication.

The point here is that while we benefit in spending terms because of our lower elderly demographic – a large portion of this is wiped out because of our higher youth demographic.  When you combine the two, the demographic difference with the rest of the EU makes up only a conservative two percent of GDP.  In other words, not that much – and certainly not as much as merely stripping out headline numbers.

This is confirmed by the 2012 Ageing Report which looks at age-related expenditure:  pensions, health care, long-term care and education (thanks to Tom Healy for alerting me to this report).  When they factor in all these costs, Ireland doesn’t even come last in the EU-12 table.  It does come in at 3.6 percentage points of GDP behind the mean average of the other EU-12 countries in 2010.  But they project that this gap will almost halve by 2020 – given our rapidly rising elderly demographic and still strong youth demographic.  This data appears to be more comprehensive – factoring in taxation measures as well as total expenditure.  Any way you look at it, suggesting that age-related expenditure makes a big difference in comparative expenditure between Ireland the rest of the EU is to over-state the issue.

* * *

But all that was in 2012; to borrow a film phrase – that was a long time ago in a fiscal galaxy far away.  So what about now?

2015 – Resuming Low Spend Business

In normal times, one can make comparisons between countries using GDP figures.  But in times of volatility – when a country’s GDP is collapsing – focusing on one year can give a highly misleading picture of public spending.  Here’s an example.

  • In 2007 – the year before the recession – Irish primary expenditure was 35 percent of GDP.  By 2012 this had risen to 38.1 percent (there’s no GDP adjustment here).  So looking at these numbers you might say, hey, during this period of austerity our spending actually went up.
  • However, during that same period actual spending – in Euros and cents – actually fell; from €68.8 billion to €65.5 billion.

What accounts for this difference?  GDP fell.  In this period of volatility, Irish public spending fell but GDP fell faster.   That’s the kind of quirk that can be thrown up when comparing countries during periods of volatility.  In short, to use 2012 as a benchmark for our spending status can be highly misleading.

How misleading?  We’ll first look at the situation projections this year and then look at projections out to 2018.

Remember, there was a 2.7 percent (of GDP) demographic benefit for elderly spending but a 1.5 percent disadvantage on youth expenditure.  Let’s be conservative and call it a 2 percent benefit (this is the figure the EU Ageing Report uses for Ireland coming into 2020).  We will add this to the Irish figure as we did above to create equivalence with the other EU-12 countries, using the EU Ameco estimates for other countries and Irish government projections.

Starving 5Ah, there we are – at the bottom of the table, even with the demographic benefit.  Why the big difference with 2012?  Ireland’s GDP volatility is smoothing itself out.  What does this mean in Euros and cents?

  • To reach the average of other EU-12 countries, we’d have to spend an extra €12 billion.
  • To reach the average of our peer group, other small open economies, we’d have to spend an extra €25 billion.

Now imagine that we were just an ordinary European economy.  We’d be spending an extra €12 billion.  How much better would our current services be, how many new services could we roll out (e.g. affordable childcare), how much new investment, how much stronger would our income supports be if we spent €12 billion more?  Its’ worth pondering.

Boldly Going Where No Low-Spend Economy has Gone Before

When we step back and take a longer look at what the Government has planned for us it only gets worse.  The following looks at the EU as a whole (there’s little difference between the expenditure of the all EU countries and the EU-12 countries we examined above).

Starving 6The EU projections come from the IMF (they are similar as the EU-12 we have been using above); for Ireland the projections come from the Government’s 2015 budget.  Irish primary spending will continue to fall further behind the EU average.  By 2018, we will have achieved truly ultra-low expenditure status with the lowest levels of expenditure of an EU country with the possible exception of Latvia and Lithuania.

There may be changes when the Government publishes its Spring Statement to accompany the 2015 Stability Programme Update.  The Taoiseach mentioned that the Government would keep expenditure below the GDP growth rate.  If we assume, on this basis, that the Government will increase public expenditure by two percent annually out to 2018, projected primary expenditure would be 35.0 percent, only marginally above the figure in the chart above.

What is the gap in Euros and cent?  The following should be treated as a rough approximation.

Starving 7Factoring in GDP adjustments and demographic benefit, the spending gap will widen out to 2018 based on the Government’s own projections.  This year, we will be spending €12 billion less than other EU countries; by 2018 we will be spending €19 billion less.  Even with a higher growth rate in primary expenditure – as referred to above based on the Taoiseach’s statement – the gap would still be over €16 billion.

Some will counter by saying the Government projections are based on a no-change policy – that is, these are the expenditure levels if there is no policy change.  This, however, only suggests it could be even worse.  If the Government continue its tax-cutting agenda, this could put further downward pressure on spending.  This might be off-set if the EU gives Ireland some breathing space on spending and the deficit but this remains to be seen.  All in all, wherever we end up with this Government, it won’t be in a good space.

* * *

Ireland is a low-spending economy.  Historically, this has always been the case.  In 2000, Ireland was well below the EU average.  Even in the boom years we never got near the spending levels of other EU countries.  The crash made it look like we were catching up to the EU average but this was a statistical illusion created by GDP volatility.  Coming out of the recession and stagnation the numbers are reflecting our true state – a chronic and substantial under-spender.

So let’s knock all claims to the contrary.  Whether it is public services, social protection and income support, or investment we are starving ourselves.  The question is not whether we are a low-spender – we are most definitely.  The question is:  will we let this happen.

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