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'Our living standards aren't improving because of the unwillingness by govt to correct market failures'

Despite strong headline growth figures, living standards in Ireland are actually below Italy and just a little above Cyprus, writes economist Robert Sweeney.

WITH THE DUST settling on the recent budget, it is a good time to take stock of Irish economic policy, current and future.

In June, the Department of Finance calculated the government had a ‘net fiscal
space’ of €1.4 billion to use – through either spending increases or tax reductions – in what was the upcoming budget.

The government could have run a deficit of 0.4% of GDP. However, the government is planning to run a budget balanced for 2019, but in reality could spend or use an extra €1.4 billion at least.

Because spending has increased some have labelled the budget expansionary.

The relevant metric is, of course, how much the government is spending as a proportion of national income, not the absolute spending increase.

This is especially the case with spending on government services, which tend to be labour intensive – being services they have less scope for efficiency savings than goods production, which can be automated.

As the economy expands and wages increase, we expect spending to increase at least as much so that its share of national income remains the same. On that measure, a balanced budget for 2019 is anything but expansionary, quite the opposite in fact.

Even if we use GNI*, which attempts to adjust for distortions to GDP caused by multinationals (though which is not used to calculate the fiscal space), the budget is still set to be balanced in 2019, and run surpluses thereafter.

As is apparent from the table below the Irish state is set to shrink, except for capital spending.

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Regarding health, it’s difficult to see how the government can meet its stated aims given its commitment to shrinking spending.

Many have probably heard of recent spending overruns.

Spending, moreover, is set to increase by €3.3 billion or 4.5% in 2019, which is quite impressive sounding. But as a percentage of national income, which is much more relevant, it is set to fall considerably.

How this will impact the proposed move toward Sláintecare is anyone’s guess. Given
ageing pressures, one would expect health spending to increase, independent of any substantial improvements in service.

Social protection, the largest item, is set to fall relative to national income. While some fall-off is natural as the economy recovers and more people are employed, most of the savings arises from reductions in pension spending as the retirement age is due to increase to 67 in 2021.

Ireland is set to have one of the highest retirement ages in the developed world as the age is pushed further to 68 in 2028. This is despite highly favourable demographics which mitigate against such a high age.

This includes a young population and the highest fertility rates in the EU. Indeed if the demographic problem is so severe, then why is health spending set to fall?

As for housing, capital spending is set to increase by 24%. But, again, as a percentage of national income, little is to change. The government has committed to the ‘delivery of 10,000 new social homes’.

The word ‘delivery’ is important as it is not necessarily a commitment to build anything new, which could mean little prospect of significant price falls any time soon. Based on last year’s figures of approximately 1,000 local authority builds, that would translate into less than 1,300 houses for 2019 if the present composition of capital spending is maintained.

A sea change is required in how spending is currently allocated, namely toward more direct construction by local authorities, if supply is to increase and prices are to be brought down.

The ramping up of capital spending under the National Development Plan is welcome to redress years of underspend.

The slight increase in childcare spending is also welcome, but a long way off the Unicef goal of 1% of national income.

In the coming years, Irish people are admittedly likely to be employed but work longer, and continue to lag behind European neighbours in health outcomes.

Housing is unlikely to become affordable any time soon.

The idea that reductions in taxation generally translate into extra money in people’s pockets needs to be challenged. Despite strong headline growth figures, living standards in Ireland are actually below Italy and just a little above Cyprus.

The unwillingness of the government to raise and spend money to bring costs down by correcting market failures in housing, health, and other areas is a major reason.

And it is unlikely to change soon.

Robert Sweeney is an economist and policy analyst at TASC.

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