pointing won’t resolve borrowing crisis
Hardly a week goes by without a minister or backbencher reminding us, usually in stern tones, that “we are bor michael jordan rowing 1bn a month to pay for (insert public sector worker group eg nurses’) salaries”.
So we borrow for nurses sala michael jordan ries, for public sector pay, for all sorts. Sometimes this is couched in terms of borrowing for social welfare, but usually it is attached to public sector pay.
Regardless of where it is attached it is a useful encapsulation of bias and special interest pleading from those doing so. First, it is as clear a demonstration as can be of what is called mental accounting; second it demonstrates an unconscious or conscious demand for cuts to be made, and third, there is a concomitant sotto voce element usually that suggests that the money if it ha michael jordan s to be borrowed would be best directed elsewhere. All three are challengeable if not demonstrably fallacious.
Take mental accounting. This has nothing to do with how Bertie dealt with shopping bags of money, but instead is a michael jordan well known psychological bias. This bias leads people to have money on deposit earning small amounts of interest while simultaneously having large debts costing a lot. The most sensible thing would be to use the deposit to pay off the debt. At present we have over 30bn in cash balances earning 1% or less while also having 190bn plus in debt costing nearly 5% per annum. Government money is fungible.
Treating public sector pay or welfare as separate elements and attributing to them the excess of spending over income is a further classic case of mental accounting. If we examine the Government expenditure and revenue over the last 18 years we find that by far the typical pattern is for the sum of public sector wages and pensions plus social welfare to be vastly exceeded by the total tax plus social insurance take.
One might well argue that we do not want to spend money on these issues but that is a separate issue. What is clear is that if we want to play the mental accounting game we need to accept that depending on the categories we use the result will differ. But from a purely cash basis we raise enough to pay our teachers and doctors and to pay the welfare. Where then does the money go?
This year total deficit is pretty much the sum of what we spend on private sector provided goods and services plus interest. Anyone who has any experience of public sector procurement knows that there is vast waste. Private sector companies have done as least as well as the public sector workers over the years.
The interest bill also requires some thought. That which has tipped us over the edge is the cost of the bank bailout. And we bailed out non Irish bondholders and Irish based depositors. The ongoing cost of this are part of the borrowing also.
Hidden here is the assumption, or sometimes as recently by Ibec the overt suggestion, that we should further cut expenditure on current Government spending and divert it to capital. Apart from this being a naked play for resources, it also is questionable in the circumstances in which we find ourselves.
The ESRI benchmarking analysis in 2010 suggests that there are remarkably similar dynamics in terms of their effect on the economy of cutting public sector wages and cutting capital expenditure. There is no guarantee that increased capital expenditure will offset the falls in employment and consumption from cutting current expenditure.
We borrow to spend on all Government expenditure. To finger point and attribute this borrowing as being uniquely directed at one sector or another is neither economically sensible nor coherent, no matter how politically pleasing it may sound.