Spending Review 2018 Trends in Public Expenditure
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Spending Review 2018 Trends in Public Expenditure DEPARTMENT OF PUBLIC EXPENDITURE & REFORM JULY 2018 Table of Contents Overview of Public Expenditure: Trends, Key Drivers and Main Challenges 3 Agriculture, Food & the Marine 19 Business, Enterprise & Innovation 29 Children & Youth Affairs 41 Communications, Climate Action & Environment 55 Culture, Heritage & the Gaeltacht 67 Defence 73 Education & Skills 89 Employment Affairs & Social Protection 109 Finance 129 Foreign Affairs & Trade 133 Health 139 Housing, Planning & Local Government 155 Justice & Equality 167 Public Expenditure & Reform 185 Rural & Community Development 195 Taoiseach 201 Transport, Tourism & Sport 205 1 | P a g e 2 | P a g e Overview of Public Expenditure: Trends, Key Drivers and Main Challenges Fiachra Kennedy Introduction The spending review process provides an important opportunity to step back and reflect on how government expenditure has changed over the course of the last two decades or so. This has been a period during which expenditure increased substantially over a prolonged period of time only to be curtailed in a short number of years with the onset of the recent economic and financial crisis. As economic growth has been restored, so too have the public finances and government expenditure has expanded. The allocation for 2018 is just shy of peak expenditure in 2009. A common challenge encountered in most OECD countries is that the budgetary process tends to focus on incremental changes in expenditure to the detriment of a broader consideration of how public resources are allocated across all sectors and how these allocations have changed over time. The purpose of this overview is to set out the most recent changes in resource allocations but to do so by locating them within a broader context. This broader context is shaped not only by the passage of time but also by those key factors that drive public expenditure policy, the purposes to which public resources are put and the main challenges that inform any discussion about the sustainability of public expenditure policy. Irish Public Expenditure – 1994 to 2018 This discussion examines trends in Irish public expenditure by focusing on two distinct periods. The first period are the years leading up to the emergence of the economic and fiscal crisis (1994 to 2007). The second period encompasses the subsequent decade of fiscal effort and strengthening economic growth (2008-2018). The purpose of this section is to compare where Ireland’s public expenditure is today with where it was prior to the emergence of the economic and financial crisis. As such, this discussion differs from the more familiar presentations that tend either to focus on presenting a contemporaneous picture of expenditure policy or the policy decisions that were taken in the context of the recent crisis.1 The year 2007 serves as a useful anchor because it is the final year before Irish governments had to implement expenditure decisions in reaction to the economic and financial crisis. It is clear from Figure 1 that the 2018 total allocation in nominal terms is greater than the volume allocated in the final year before the onset of the crisis and that it is now almost equal to peak 1 These issues have been discussed in a series of Expenditure Reports published in conjunction with annual budgets and have been supplemented by resource and performance data published in the annual Revised Estimates for Public Services as well as in the recently introduced Performance Reports. For an extensive discussion of expenditure policy over the course of the economic and financial crisis see R. Scott and J. Bedogni. 2017. The Irish Experience: Fiscal Consolidation 2008- 2014. IGEES Staff Paper 2017. Department of Public Expenditure & Reform. http://igees.gov.ie/wp- content/uploads/2017/06/The-Irish-Experience-Fiscal-Consolidation-2008-2014.pdf Accessed 24 May 2018. 3 | P a g e expenditure. (The allocation for 2018 is 98% of total voted expenditure in 2009.) After the emergence of the crisis, overall expenditure continued to increase for a couple of years but this took place in the context of a significant effort to slow down the level of expenditure increases and ultimately reduce the volume of resources being consumed in the provision of public services. Figure 1 –Total Voted Public Expenditure, 1994-2018 Source: Department of Public Expenditure & Reform DataBank. Accessed 24 May 2018. Trends in Public Expenditure Figure 2 examines long-term trends in both overall public expenditure and its main component parts. As outlined above 2007 is selected as the anchor point for the various indices. Figure 3 seeks to supplement this information by setting out the year-on-year changes in total public expenditure and its main component parts. In the years prior to the crisis, total expenditure grew from some €15.3bn in 1994 to €56.4bn in 2007 (and increase of almost 270%). Figure 2 suggests that the various components of expenditure grew more or less in line with total expenditure: expenditure on pay and pensions increased by just over 210% while that for non-pay related current expenditure increased by just over 275%. To some extent, the axis on Figure 2 probably distracts the eye from the very significant increase in government investment that occurred over that period as capital expenditure increased by just over 460%. During this pre-crisis period, total expenditure grew by an average of 10.6% a year, ranging from 5.9% in 1996 to 20% in 2001. That said, the first few years of the new millennium were particularly notable for strong growth in public expenditure as it increased from €22.8bn in 1999 to €35.8bn in 2002 (an increase of 57%). There were some notable differences in the average rate of increase across the various types of public expenditure as the average annual 4 | P a g e increase in expenditure on pay and pensions was 9.2% while that on non-pay related current expenditure was closer to the overall average at 10.8% with expenditure on capital growing by a notably stronger average of 14.6% a year. As is evident from Figure 2, the late 1990s and early 2000s was the period during which there was very strong growth in each of these types of public expenditure but it is worth noting that expenditure on capital is much more volatile than the other components of overall expenditure.2 Figure 2 – Indices of Public Expenditure, 1994-2018 (2007 = 100) Source: Department of Public Expenditure & Reform DataBank. Accessed 24 May 2018. It is abundantly clear from Figure 2 that the economic and fiscal crisis had a significant impact on public expenditure. This impact was keenly felt in capital expenditure. It is also evident from Figure 2, as well as from Figure 3, that government decisions impacted earlier on some types of expenditure than on others. For instance, despite total government expenditure continuing to increase over the first few years of the crisis (until it peaked at almost €63.1bn in 2009), capital expenditure was the first type of expenditure to experience a reverse in that it peaked in 2008 at just over €9bn. Expenditure on pay and pensions peaked in 2009 at almost €20.1bn as did non-pay related current expenditure at some €35.6bn. In subsequent years, public expenditure was reduced each year until 2013 and 2014. This trend has since been reversed. 2 Expenditure on pay and pensions increased from €8.9bn in 2000 to €11.7bn by 2002 (+31%) while that on non-pay current expenditure increased from €13.3bn in 2000 to €18.5bn by 2002 (+39%). On the capital side, expenditure increased from €2bn in 1997 to €5bn by 2001 (+150%). While overall expenditure continued to increase in 2003 and 2004, capital expenditure in these years was reduced when compared with the previous year. 5 | P a g e Figure 3 – Year-on-Year Change in Public Expenditure, 1994-2018 (%) Source: Department of Public Expenditure & Reform DataBank. Accessed 24 May 2018. Distribution of Public Expenditure – 2007 and 2018 In addition to setting out the overall trends over time, it is useful to compare the distribution of expenditure across two different points in time. This provides some insight to how resources are distributed across policy areas and how these may have changed, or stayed the same. In a sense what this section is looking at is how resources were prioritised at the end of a period of strong economic growth and how they are now prioritised as the nominal volume of expenditure returns to levels last experienced at the start of a difficult period in the history of Irish society. In terms of the types of public expenditure, the distribution has shifted in the sense that non- pay related current expenditure in 2018 accounts for 57% of total expenditure having accounted for 54% in 2007. The share of total expenditure accounted for by pay and pensions has increased by 1 percentage point to 33%. The share of total expenditure account for by capital investment by government has decreased from 14% in 2007 to 9% in 2018. In overall terms, in 2018 almost 78% of total government expenditure is accounted for by four policy areas: social welfare, health, education and justice. (See Figure 4) In 2007, these four sectors accounted for 73% of total government expenditure. While there have been some marginal changes in three of these sectors, the share accounted for by social welfare has increased by 5 percentage points. When the perspective is broadened to include the next largest sectors, the share of total voted expenditure accounted for by these policy areas increased by 1 percentage point to 90% between 2007 and 2018. 6 | P a g e Figure 4 – Distribution of Total Voted Expenditure, 2007 and 2018 (% of Total Voted Expenditure) Source: Department of Public Expenditure & Reform DataBank.