The local government system in Ireland is one of the smallest in the OECD. Despite the common perception of a country overloaded with local councillors and authorities the reality is that Ireland has relatively fewer councillors than all other EU countries while its spending is near the bottom of the table. There is, as a result, a perception that there is huge scope for expenditure savings within the local government system and that the Government should be doing more to identify these and put them into effect. Overall Government expenditure does include a contribution to the financing of local government. While day-to-day expenditure is largely self-funded through commercial rates and other charges (about 60% is self-funded) there are huge national government contributions to capital investment (about 80%) undertaken by the local government system. This is principally due to the system acting as an agent of the national authorities in providing national infrastructure such as roads and water treatment facilities. As a result it sometimes seems that there can be confusion about this expenditure and the day-to-day spending which the local authorities undertake to support local services over which they may have some discretion.
Such simplistic thinking however misses the real point about the systems of administration generally in Ireland. More specifically, there is a need to reform these systems by taking a whole of government view on what really has to be put in place if we are to achieve any realistic and sustainable savings on all government expenditure. Reform should not be limited to local government and particularly not just the relatively limited monies which are spent by local authorities.
To place things in context it is worth noting that the Government of Ireland has committed itself to bridging a €15 billion gap in the national finances by 2015. This is the equivalent of the Government having to win the main prize in the European Lottery twice a week for evermore….a most unlikely scenario!
Nonetheless, and regardless of who is spending the money, this huge gap of 15,000 million Euro must be filled if the country is to have any sort of sustainable future. That means that a comprehensive review of the public service systems and structures is a necessary condition to meeting the challenges of the IMF/EC/ECB package, and getting the economy back up on its feet.
One of the most critical features of any effort to reduce the budgetary gap is to achieve greater efficiency and effectiveness for every euro spent. One of the barriers to doing just that is the fact that the country still maintains a largely 19th century configuration when it comes to the organisation of all the public services. It would be reasonable enough to suggest that were the last Lord Lieutenant of the British Empire to return to our near 100 year old Republic there would be many aspects of public management with which he could identify, including the Department of Education, the Office of Public Works, many of our hospitals and, of course, the local government system. What would be new to him would be the national health system, the government departments in name but not necessarily organisation, city and county managers and the fact that financial overview is now provided by people in Washington, Brussels and Frankfurt – not London!
What would really confuse him would be the fact that alongside the local government system the State now has, almost uniquely in Europe, several vertical layers of government addressing local delivery of policies on economic development, rural development, primary education, training, social benefits, etc. It is these newer systems which require an equally cold examination to that of the local government system. What has happened in Ireland is the creation of local departmental administrations reporting back to silo based central departments. In more successful economies the work undertaken by these vertical administrations tends to be delivered through a local government system. Using the local government system respects local identity without sacrificing the need to spend public money as effectively as possible. This principle has long been held in the rest of the EU.
If the time was taken to examine how other countries have brought through significant reform it would become clear that such reforms are based on a root and branch review which places national priorities at the heart of public policy-making while allowing for local perspective and participation in decisions impacting local communities. Such policy-making is genuinely informed about local concerns by ensuring that the local authority system is fully integrated with the national policy process. A failure to recognise this as a central feature of public service reform will, it seems from experiences and the hard learnt lessons in countries like Canada and Sweden, merely create further difficulty in controlling public expenditure and will do nothing about the parallel systems which have been created in Ireland.
The Comprehensive Spending Review now underway is an effort to apply at least some strategic overview to public spending in Ireland. It remains questionable whether the thinking in the Department of Public Expenditure and Reform fully appreciates the need for a comprehensive overhaul of silos and systems referred to above. Time will tell.
Even if the Department were to succeed in moving towards a model of public expenditure control, monitoring and evaluation which a CSR implies, the gap between spending and revenue would be a continuing challenge to fill. The Government acknowledges that this is the case in their budgetary profile to 2015. There is a need, according to the profile, to raise taxes, charges and other fees to meet, at least in part, some of the gap. The profile suggests that this will be in the order of €8 billion Euro. Overall net expenditure is broadly expected to remain as is, notwithstanding the many expenditure cuts envisaged in the consolidation of the budgetary position. This is due to the huge increase in interest payments on the national debt. While there will be some relief arising from the decisions of the European Council to reduce interest rates on our loans from the EC/ECB/IMF package, the reality confronting the government is that for much of the euro saved in expenditure there will be euro lost through the unavoidable national debt interest obligations now confronting the country.
This means that the State, if it is to survive, needs the economy to get growing again to generate the sort of tax buoyancy that would allow the budgetary gap to be filled. The profile suggests that this is going to have to be in the order of €5-6 billion by 2015, a sum which will be a feature annually of our lives for the foreseeable future. Assuming, and it is a big assumption, the tax generated through increased buoyancy does come through as outlined in the profile for the exchequer, there is likely to be at least a remaining €1-2 billion which will have to be raised in the form of extra taxes annually from 2015. There is very limited option for the government, therefore, but to begin to seriously re-examine the scope for new taxes. This will mean, as Ollie Rehn put it, a move towards a “more normal tax economy”. The tax burden, at around 30-31% in Ireland does remain at levels well below the OECD average at around 36-37%. It is likely that, under even the most optimistic scenario, the burden will rise by a number of percentage points towards the OECD average by 2015 in order to meet our international obligations not to mention the need for balanced and sustainable budgets.
It is under such circumstances that it begins to make sense to examine the revenues of local government as well as the expenditures. The day-to-day spending of local government in overall terms is relatively small (only 16% of public expenditure). There will be some limited benefit (possibly in the order of €300 million) to applying the efficiency review, but it is by no means an answer to our overall financial need. Where more substantial savings, beyond those in the Efficiency Review, will be derived is in a move towards shared service platforms across all locally delivered public services, national and local. This means getting away from the hang ups we have that every government department and its local agents must have its own system of administration etc. There is considerable scope for moving towards shared services etc. which are public service focused rather than departmental as is currently the case. The CSR, if it is to achieve its overall objectives, has to have this thinking at the heart of its review processes.
Nonetheless, even with such savings new taxes and charges are likely. The extent of these will be influenced by the capacity for increased buoyancy through a growing economy, as acknowledged above. The country must grow by 3% annually to create the tax buoyancy to ease the financial burden confronting the taxpayer, not to mention reducing the level of unemployment. However, when the options for increasing the tax burden are examined the realisation that much public spending is over dependent upon taxes on the productive sectors of the economy becomes critical. Direct taxes on the productive economy are a clear barrier to economic growth and reduce the capacity of the economy to grow. Therefore taxes and charges on consumption and on some forms of wealth may be necessary if we are to address the budgetary gap and at the same time grow the economy.
This is a reality which the government has now recognised, with the introduction of the levy on pension funds to part fund the Jobs Initiative and the decision to advance a property charge. It is also likely that we will see some form of charge being applied in the case of water as the move to establish a national water utility comes into effect.
So what does this mean for the average citizen?
The likely scenario confronting all those in employment, on pensions and, to some extent, on social benefits is that there will be extra calls upon their incomes in one form or another. These, however, must be kept to a minimum given the fragility of the economy. In light of this there will necessarily have to be a greater focus on consumption based taxes and on taxing non-performing assets/stocks and other forms of wealth, a considerable proportion of which is held overseas. This non-taxation is an area where there is some considerable contrast between the taxation system in Ireland with other countries in the OECD. ( Taxation trends in the European Union, Eurostat 2011 edition, Luxembourg: Publications Office of the European Union, 2011)
Most particularly there will have to be a renewed focus on local taxes and charges. In England people are expected to pay for local services with property taxes which can exceed €3,000 annually alongside water charges of up to €1,200. In the Netherlands people can expect to see property charges of around 1% of their property value while also having to sustain water charges of up to €1,200 per annum. Germany is not much better with similar levels of water charges but slightly lower property costs. They do charge up to €500 for a dog licence!!!
These economies would not by any means be among the more taxed economies in Europe such as Sweden and Denmark but they do provide us with a signal as to where local taxes may have to go even if we manage to get greater efficiency into the public service generally. The big ask is whether the economy can be turned around quickly enough to begin to generate the tax buoyancy which will be central to avoiding a big increase in the general tax burden. In the absence of such buoyancy several ministers, but most particularly the Minister for the Environment, Community and Local Government, will be under considerable pressure to increase taxes and charges beyond the relatively small increases currently on the table.
The terrible reality is that the influences on whether we will see a considerable expansion of local taxes is almost completely out of the hands of the Government. International influences, as we have all too clearly come to recognise, will determine the extent to which new taxes and charges along with increases on existing taxes and charges will fall or rise. What does lay within the Government’s influence is the way we organise our public services and the lessons from others suggests that we need to really focus on getting decision-making back into a more structured framework where government clearly sets out the policy expectations and national resources but that decision-making is placed back to the end user arena as in all other successful economies.
The Government may, as Napoleon would put it, ‘be lucky’ and so far so good with the renewal of the economic condition of the patient. But in the absence of a whole of government reform process perhaps we should start buying those Euro lotto tickets…just in case.
