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

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 low, 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 are 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 defenders. Bur 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.

Comments

[WorldbyStorm]

You've said something beautifully succinctly that was sort of only vaguely and imprecisely dawning on me. This is the worst that they can say about the PS? That after all the rhetoric in the SBP, the IT and elsewhere, when it comes down to it they're shaving (and incidentally in a manner I think is still highly destructive) only minimal bits here and there. Where is the waste? Where is the fat? I've been looking it at the other side, that the scope of these proposed cuts remains, despite the fact they'd cause massive dislocation across a range of areas, minor in the scale of our public expenditure, and one question remains unanswered, one I put to a GP person last week. How, given that the McCarthy Report figures are in that scale so relatively low is it seriously proposed that they will magic us to a better and more 'sustainable' level financially. The answer was a dubious 'well... it must be that it'll help with the interest on borrowing'. Right. Okay. So... he didn't know. And McCarthy himself does a not dissimilar trick in his constant reiteration of €400m per week and dark mutterings that it may not be possible to borrow on international markets in the future. Yet he never quantifies precisely how the proposals will in actuality improve our situation in a clear casual fashion. Odd that.

One other thought, an interesting letter in the Irish Times today which directly disputes the analysis of the Report by one who might know. If that's the level of detail and attention in the Report...well... :(

[coc]

That's an interesting post that reveals the idealogical blinkers of the Bord Snippers. I know it was outside the remit of the Report but there is one obvious element of the public sector that could yield big savings and that is payroll costs. A reverse benchmarking exercise is crucial. If 20% cuts in public sector payroll were to be achieved it would be better done by an average 20% paycut for everyone (which would translate to 25% or 30% for the fatcats), rather than 20% of staff being fired. But try explaining that to the Unions.

[Yvonne]

COC, unions are respresenting their members, workers who are trying to best for their families. You seem to have internalised the logic that the only way is down that workers must reduce the price of the labour, and that somehow this will translate to improved social circumstances for us all. If there's any useful benchmarking exercise to be undertaken at this point I suggest it is the overdue one between those at the top of organizations (public and private) and those at the bottom. There's an opportunity here to make this a more equal society but we're too busy pitching worker against worker in a world where 'objective and professional economists' see nothing immoral in proposing cuts to social welfare and to essential services that many in our society depend upon.

[Carrigaline]

I agree that the notion that there are billions of Euro of savings to be made from cutting public sector waste is a fallacy. When we look at the last budget, it is a matter of fact that social welfare, health and education make up 80% of government spending. To seek billions in savings, there is no course but to increase class sizes and waiting list times. This is a brutal option, but is there really any alternative?

I know that you have written about our disproportionate tax-base and multinational tax havens as an alternative to bridging the deficit. But really. In a recession, can we really countenance a hiking of corporation tax in an attempt to balance the books? The source of Ireland's indigenous wealth (bankers and developers) are bankrupt. That leaves only flagging multinational profits that we can try and wrest some revenue out of.

How long would they hang about if we tried to make them pay their fair share?

[WorldbyStorm]

coc, what does a 20% pay cut do in the real economy? What does it do to those who have mortgages, who spend in local businesses, who take out loans and so forth? I couldn't imagine a more dangerous way to proceed at this point. And even then what would the actual impact on the public finances and in particular the deficit be? As it stands the ESRI has gamed a 5% decrease and found that it would deliver a reduction of around 0.9 % of the deficit. Imagine your 20% cut. Would that deliver perhaps 3%? Most likely not since other effects would kick in. Well, all that pain to achieve so little?

Same goes for your point Carrigaline. Precisely how do you quantify the effects of increasing waiting times and class sizes. The first one incidentally will... without fail... generate deaths from people who are unable to get access to medical care quickly enough. And that will be overwhelmingly be those who cannot afford private health care. Perhaps you're sanguine about such matters. I'm less so. I had a precautionary colonoscopy earlier this year which I waited over a year to get publicly. I was fortunate that it was so relatively quick and that it was negative, others haven't been. I don't consider that an ethical way to proceed. It's certainly brutal though.

[Tipster]

COC: A reverse benchmarking exercise is crucial.

It has happened, although not at the 20% level you proposed. It was called a pension levy, but since it did nothing to the level of or entitlement to a pension, its name is a fig leaf. (And the future acquisition of a defined-benefit pension was stated to have been factored into salary levels being set at below levels for equivalent posts in the private sector during that there benchmarking process.)

[Mack]

WorldByStorm -

During the boom we borrowed huge amounts of money from abroad much of which wound it's way into government coffers via property tax revenues (and others). The government increased public sector salaries on the basis that these tax revenues were stable.

In truth they were dependent on a private sector credit bubble that has now burst.

The government could attempt to continue to borrow to fund those salaries until the economy grows to such a level that they can be paid out of earnings (rather than borrowings). This assumes that foreign creditors will trust that we can do this without our debt to GDP ratio spiraling out of control. Also I think, with the banking crises, we are reliant on European goodwill at the moment, and I guess such borrowing is fundamentally anathema to them too.

The other alternative - raising taxes, has exactly the same impact you describe. It reduces the net salary of all workers, it means they have less money to spend in local businesses and more problems paying their mortgages. You may feel Irish taxes are low, which may well be true (much like many feel public sector salaries are high). The problem is changing it now is deflationary and lands eople in the crapper either way.

Question is - Is it fairer to raise taxes on less well paid workers so that public sector workers can enjoy salaries significantly above average?

[Michael Taft]

There are difficult issues when it comes to achieving fiscal consolidation. I have put the emphasis on stimulating growth through investment in our physical and social infrastructure, job retention and boosting, where possible, low incomes. But this doesn't exclude other sources - such as taxation and public expenditure reform.

But WBS's point is well taken with regard to the An Bord Snip report - the lack of quantifying the upside and downside of particualr proposals (even though it was wholly open to them). Without such impact assessments we won't know which proposals are productive or not, or even if they would produce perverse results. That is why, again, I have highlighted the ESRI's simulations.

As to public sector wages (on which I have done a new post today) the argument that cutting the payroll will bring benefit is highly contestable. For instance, to cut public sector wages by 20 percent would in the first year drive down consumer spending by over 3% minimum. With the recent drop in the retail sales index following on from the April levy hikes, how many businesses reliant upon domestic demand would close, how much would this drive up unemployment, how longer would this lengthen the recession? And the benefit? The ESRI suggests (pre-April budget, so current situation would be less) that the deficit might fall from 12.2% to 11% - and that is if it doesn't have the cumulative effects on our already fragile domestic sectors. Not much of a gain - but a hell of a lot of pain.

That being said - is there anything we can do with wages - public and private? Yes. The fundamental rule in the middle of a contraction is to increase low incomes (wage increases, income suppelement) and reduce, for the purposes of tax revenue gain, the incomes of those at the top end. The former is expansionary (they spend money and their expenditure has less import-content) while the latter is less deflationary (more likely to see a reduction in savings rather than expenditure). This can be effected both through wage deals and taxation.

We have a real 'information' deficit but a surplus of commentators who aren't interested in what little information we have. That's why the debate is getting more degraded by the day (now some people want to cut the minimum wage - good grief; even Leo Vradrucker knocked that one on the head).

Also, Carrigaline, I wholly agree with you on the issue of the corporate tax rate adn have written about it on this blog (I'm a bit of a heretic on this one in progressive circles). Raising the tax rate will have little effect on tax revenue but could undermine our ability to attract FDI. It's a sad state of affairs and we should seek to address in the post-recession scenario. But only after we get out of this mess.

[Carrigaline]

WorldbyStorm: I can assure you, there's no sanguinity on my part about the deaths that will result of the proposed cuts. Infact, I agree with everything you've wrote in relation to this topic.

The issue I have is not just the mistaken belief of the right; that there are billions of Euro of public sector savings that can be made without reducing services. I also take issue with the belief that we can simply tax and borrow our way out of recession. With GDP collapsing, we have to increase taxation significantly just to maintain the services we already have! When you throw in unemployment, the contraction of credit, a global recession; it seems as if we almost have a perfect storm of calamity. By the time we emerge from this crisis, you can rest assured that you'll get your wish of increased taxation. The problem is, you'll also see brutal cuts in public spending.

It seems the penny simply hasn't dropped for Sindo commentators, or the unions. No amount of public sector cuts or taxes on the rich is going to return us to our 2007 way of living. All we can do for the moment is to try and carve up the shrinking pie, so that the pain can be distributed equally.

A finaly point, for me, the white elephant in the room is neither the civil service, nor multinationals. NAMA won't differentiate between public sector, private sector, and unemployed people. This €90 billion millstone will hang over our necks for the next decade, hoovering up cash that formerly went towards services to the economy. With this money now being shoveled into a hole (which we don't know how deep), people will face immense suffering and yes, some will even die. This hair-brained plan comes from the same people who said "no one saw the crisis coming".

Do we really want to mortgage our future to people who have got everything so hopelessly wrong?