A Smart Approach

Nat O'Connor: I agree with some of what Philip R Lane wrote today about taking a smart approach to balancing the public finances.

I agree when he says that “a smart approach to expenditure cuts would avoid crude, across-the- board solutions in favour of a clear ranking of projects and programmes, by which those expenditure lines that offer the highest economic and social benefits suffer the least.”

He argues that due to a lack of cost-benefit analysis “it seems clear that the pre-crisis levels of public spending in many areas were not set at the socially optimal level.” I’m not so sure about “many”, or the infallibility of CBA, but I agree that some programmes probably need to be seriously revised. In fact, I believe that the Government should take a hard look at every year’s Budget and cut out poorly performing programmes of expenditure, but I might disagree about the criteria for measuring success and hence which ones are poorly performing. I would question the value for money of many tax incentives for example.

Professor Lane argues that “The long-term level of public spending must be closely matched by the sustainable level of government revenues” and I agree with that, although logically there are always two ways to achieve this: cut spending or raise revenue. And raising revenue doesn't have to mean an increased tax burden, as it can also result from additional economic activity.

But then I disagree. Professor Lane argues that as “A richer population will typically desire better-quality public services” and Ireland’s income per capita looks likely to decrease, so “the economic forces driving demand for higher public spending in many areas will be quelled.” I would argue instead that a better educated population, and one in which more people have travelled or worked abroad, will be more critical of public services here. And once the population has tasted the fruits of better services, it is not going to cease wanting them during a recession. So I think demand for public spending will remain high.

I don’t disagree that some public expenditure can be cut, if we can agree on the evidence of inefficiency. But I also think that there is plenty of scope for continued public spending, funded by borrowing (within limits) especially if it lays the foundations for sustainable economic development in the future. There is a pressing need to generate new areas of economic activity as part of the solution to the crisis, from which higher revenue can be raised and better public services can be funded.

Finally, I have a problem with the suggestion that “Once the crisis phase is over, a new fiscal debate will be required concerning the optimal level of long-term public spending in the economy.” That debate is needed now, and is happening now, as the role of the state in the economy, including the level of public services that people desire, is a major part of what path we take out of the current crisis.