€4bn from the public sector… easy… says Michael Casey

I like Michael Casey, formerly of the Central Bank, currently of the IMF. Not because I agree with him, I usually don’t – at least not on the broad brush-strokes, but because by and large he’s open about what the policies that he champions mean, and because he’s also quite critical of aspects of them in certain circumstances.

And in a piece in Monday’s Irish Times I find myself both agreeing and disagreeing. First up let’s consider his overall thesis which is that ‘jobs for the boys frustrate vital public sector reform’.

He starts with an impressive admission that…

THE INTERNATIONAL capital markets and the Brussels mandarins have been impressed by the Irish Government’s tax increases and expenditure cuts. They, of course, could not care less about deflationary implications or rising Irish unemployment.

Unfortunately, impressing the international establishment is not the end of the matter. We have to continue taking the painful medicine for at least another two years and, as George Lee recently reminded us, we may have to suffer deflationary consequences for even longer. This is a classic reminder that no economic policy is costless.

And he notes that the Government is now keen to pull €4billion per annum out of public expenditure. Some of us are dubious that that can be done, or at least that that can be done without profound damage to the social structure. Consider the impacts already from the monies removed in the last twelve months and more from expenditure.

Anyhow, Casey argues that:

RTÉ recently estimated that €2 billion of social welfare spending each year is due to fraud and inefficiency. It follows from this that the amount of waste in the public sector as a whole is at least €4 billion per annum. As well as wasteful expenditure there is also considerable tax evasion. Real public sector reform would save this amount of money every year and avoid the self-flagellation of higher taxes and expenditure cuts.

Now this is most interesting because for once Casey is pulling a figure seemingly from next to nowhere. Sure, RTÉ in a Prime Time programme did ‘estimate’ €2 billion of social welfare expenditure is from fraud and inefficiency, but.. and here’s an irony, although no fan of Minister for Social and Family Affairs, Mary Hanafin, I think she may be right when she argued that….

“There is no evidence whatsoever that fraud is costing the State €2 billion a year.

“The Department takes the issue of fraud very seriously. The level of fraud on most schemes is very low as evidenced by surveys carried out by the Department over the past number of years,” she said.

And although, as is obvious in regard to any expenditure…

Ms Hanafin acknowledged that within schemes, some categories of claimants can be a much higher risk than others and “when these are identified the Department moves to address the issue”.

“This does not mean that all schemes or all groups of recipients are involved in fraud. The vast majority of people who seek a Social Welfare payment are doing so correctly and within their entitlement,” she said.

Now perhaps she’s wrong, but even her own efforts to seek savings from fraud aren’t pulling in the monies expected. I use the word expected because there are few who believe Hanafin is a soft touch on such matters (indeed Vincent Brown this weekend made a similar point as a criticism of her)…

In early 2009, admittedly during a period where social welfare was reconfiguring due to the increasing numbers:

GOVERNMENT MEASURES aimed at saving money on welfare fraud last year yielded almost €60 million less than expected, new figures show.
In a statement yesterday, Minister for Social and Family Affairs Mary Hanafin said that tough new fraud measures resulted in savings of almost €476 million during 2008. However, the Government had forecast savings of €511 million at the beginning of last year. This figure was later revised upwards to €535 million last July after the Minister announced new anti-fraud measures. These included a stipulation that people signing on would have to collect their weekly benefits at a post office instead of having them paid automatically to their bank account.

More broadly, and perhaps unexpectedly, let us bring Brian Cowen into the picture to support the notion that welfare fraud isn’t costing the state as much as Casey and others would assert…

A CLAIM that welfare fraud was costing the State €2 billion annually, was rejected by Taoiseach Brian Cowen yesterday.
“That figure arose in respect of certain high-risk categories that were being investigated and a discrepancy of 10 per cent was found,” he said. “It is not right to extrapolate from that figure that the total level of fraud in the Department of Social and Family Affairs is 10 per cent.”
Mr Cowen was replying to Fine Gael leader Enda Kenny who said that in the RTÉ Prime Time programme it had been estimated that social welfare fraud was running at 10 per cent. This led one “to believe the fraud is of the order of €2 billion per year, half of what the Minister for Finance is looking for in his overall cuts”.

And more recently again…

AN ESTIMATED €660 million a year is lost to social welfare fraud or error, the secretary general at the Department of Social and Family Affairs said yesterday.
Bernadette Lacey told the Dáil Public Accounts Committee that an average rate of 3 per cent of payments a year was lost across all welfare categories.
However Ms Lacey said she expected fraud and error to be reduced by new controls and as a result of surveys being carried out by the department.
This year the department would carry out fraud and error surveys on two schemes which carried the highest level of fraud at 7 per cent: disability allowance and one-parent family payments.

Now, perhaps Casey can point to the entirely intangible ‘inefficiencies’ term to cover the extra €1.3 billion that he speaks of, but I’m not really convinced. As to the other €2bn, one will look in vain for any evidence as to where that figure is sourced.

And that’s a pity because his other thoughts aren’t really, once one delves into them, about public sector ‘reform’ in the sense that term is most often used by the right, but rather a sensible and measured approach to ‘the pandemic of political appointments to public bodies.’

He’s far from incorrect in noting that:

When the former taoiseach Bertie Ahern admitted openly that he had no compunction about appointing personal friends to State boards, no politician of any party criticised this practice, which is obviously deeply rooted in our political culture. The silence was deafening.
It is apparent that politicians of every hue wish to retain these top jobs in their gift because it helps them achieve popularity. Installing friends in top positions throughout the public sector also allows politicians to know what is going on in many different sectors of the economy. This was very important to the presidential style of Mr Haughey but it has now spread to all political parties. Public sector reform is simply not possible as long as this practice continues.

It is inefficient and a shoddy way (to put it at its mildest) to organise crucial areas of public service. Still, so besotted is he of the €4bn that he simply can’t resist throwing it back in….

The practice of political preferment at the highest levels is disastrous for the economy and it should come as no surprise that waste of some €4 billion occurs every year. There are at present something like 850 public bodies and quangos in the country. They range from Dublin Bus to the HSE, from Iarnród Éireann to the National Consumer Agency, from the Dublin Port Company to the Dublin Docklands Development Authority, from regulatory bodies to ombudsman offices. The idea that bodies like these can be run by personal friends of politicians is absurd. What happens is that inefficiency and mediocrity become embedded in the system and valuable assets, owned by all the people, remain underutilised.

There’s more than a little something to that. A lot of us, and not just those of us in the North Inner City like myself, are waiting with a degree of anticipation to see the DDDA Report released.

A pity too then that he ramps up the negative public sector rhetoric…

This is one of the main reasons why the public sector is in such poor shape, why so much taxpayers’ money is wasted, and why such a small contribution is made to the economy as a whole. First, many of the political appointees are out of their depth. They lack the basic knowledge to assess the senior executives or chief executive of the organisation in question. They will tend to rubber-stamp much of what is put in front of them. If in doubt they may revert to the politician who appointed them and canvass his or her views. This politicises the body in question and discourages innovation.

Is all of this absolutely true? There’s little doubt that political appointees can be poison in organisations, but… I’d wonder if the public sector is really guilty as charged as respect the economy. This simply does not mesh with international surveys by those antithetical to the very concept of the state, I think of recent polling data on economic freedoms. Even the OECD, not given to rosy analyses of such matters was much less negative in its criticisms. But more importantly it is a view positioned within a narrow focus where only ‘economic’ benefits are valid and all else is chaff. I’m not suggesting that that is all Casey is about, we’ve seen in previous contributions a balanced view of such matters. But that he too is prey to such prejudices – and in particular the €2bn trope, is depressing.

And when his critique crystallizes around more considered issues, as with the point that this can demoralise staff and – and this is most important to my mind – can lead to ‘the political ruling class influenc[ing] events by stealth – it improves markedly.

And difficult to disagree with his thoughts as follows:

It should come as no surprise that bodies like Fás were out of control for years, spending €1 billion a year even at a time of full employment. The Dublin Docklands Development Authority is now in financial difficulties because of property deals, and is seeking a handout from the exchequer. Why did the authority of the Financial Regulator not curb the commercial property lending of Anglo Irish Bank and Irish Nationwide, which had clearly become the canaries in the coalmine? Were politicians ultimately behind the decision not to take any action? It is doubtful if any inquiry will answer that question.
Whenever a political party talks about the need for public sector reform, they should be asked where they stand on political appointments. That is the litmus test.

It sure is.