We are potentially heading down a dangerous stretch of road ahead –leading us into the Ultra-Low spend zone. In this zone, investment declines and, so competitiveness and productivity; health and education services suffer; income supports falter adding fuel to the inequality engine. A low-service, low-waged, low-productivity future awaits.
Of course, spending a lot of money doesn’t guarantee you optimal results. But spending too little certainly won’t get you optimal results. So how far behind are we falling? Let’s compare public spending (excluding interest – this is called ‘primary’ expenditure) in the EU-15 countries.
I’ll use the method devised by Seamus Coffey who hangs out at Economic-Incentives. He excluded elderly-related expenditure and then compared Ireland with the rest of Europe. He did this because Ireland has an advantage here – we don’t have to spend as much on pensions and related expenditure because we have a smaller proportion of elderly. In the EU-15, the over 65 cohort makes up 19 percent of the population; in Ireland, this cohort makes up 13 percent.
2014 is the latest year we have data for old-age expenditure. In the following, old-age expenditure is subtracted from total primary spending. For instance, Ireland spent 37.2 percent of its adjusted GDP (adjusted per the Irish Fiscal Council’s hybrid-GDP estimate that factors in the accounting practices of multi-nationals). It spent 4 percent on the elderly, leaving an expenditure level of 33.2 percent excluding elderly-related spending. Figures for European categories are mean averages.
Ireland ranks below all the European averages. What difference would it have made in 2014 in actual Euros and cents?
- To reach the average of other EU-15 countries, we would have had to increase public spending by €6.5 billion
- The next comparison is with other Northern and Central European economies (other NCEE). This is the EU-15 excluding the poorer Mediterranean countries like Greece and Portugal. To reach this average, we would have had to spend an additional €9.6 billion.
- The final comparison is with Other Small Open Economies, a category used by the IMF. These are economies with a small domestic market and a high reliance on exports. Austria, Belgium, Denmark, Finland and Sweden are in this category. This is arguably our peer group. To reach this average we would have had to spend an additional €15.5 billion.
[Note: some will say that defence spending should also be factored in as other European countries spend more than us. This is true. In the EU-15, defence spending makes up approximately 1.3 percent of GDP; it’s 0.4 percent in Ireland. In any event, defence spending is a policy choice and, in my opinion, shouldn’t be excluded from comparisons. But if you insist, knock off about €1.5 billion off the numbers above.]
In 2014, it could be argued that we are already a low-spend economy but as I wrote here, the situation could actually be worse. I have reservations about Seamus’s method. Excluding old age expenditure not only removes the demographic driven part of overall spending, it removes policy choices. Most other EU-15 countries spend more on elderly per capita than we do. Second, if we are to adjust for the elderly population, then we should also adjust for youth demographics. In Ireland, under-20s make up 28 percent of the population, compared to 21 percent in the EU-15.