There’s a reason the Treasury departments sit beside the offices of the Prime minister in most countries. A country unmoored from financial anchors is ungovernable. A country run as a business misses one of the fundamental benefits of democratic accountability: responsiveness to the wishes of the people. The civil service is the buffer between the wishes of the governed, and the wishes of those who govern. 

Ireland’s Treasury department has been split since the crisis. Finance deals with taking in taxes, and international issues. Public Expenditure and Reform deals with spending, and, well, reform. 

We talk endlessly about international issues like Brexit. In this Budget week, we have talked about taxation and expenditure. But very few people talk about the mechanics of reform. In this wide-ranging discussion with the Secretary General of the Department of Public Expenditure and Reform. The meeting took place in Mr. Watt’s office, which is a walk to the Taoiseach’s office and at the top of the Department of Finance building, looking out over Merrion St and into the Houses of the Oireachtas. 

We cover the reform of the Department’s culture post-crisis, the institutional reforms that have taken place, the need for a robust public debate around issues related to the political economy of spending, the criteria we might use for medium-term budget reform, the transition from cash-based to accrual national accounts and computing the net worth of the State, the influence of the European experience on Ireland’s official mind since we joined the OECD in 1961, and more. 

Putting the R in DPER

Stephen Kinsella (SK): How many budgets have you done now?

Robert Watt (RW): Too many I suppose! I have been in this role since 2011 that’ll be eight. It puts a rhythm to the year as well. Because not all of the work, but a lot of work, is determined by the rhythm of the year, and when the budget happens, and all of the things that have to happen before that and afterwards of course. So it’s great to get to this stage, things have gone well obviously from our perspective. 

Well there are two things: obviously the minister and the government are happy that the budget has been delivered and at this stage has got through the house, but also from our perspective in the Department there’s a lot of work, a lot of papers prepared, a lot of detailed documentation and it’s an enormous task for the team to get all the documentation together.

So from our perspective it’s a great relief that the documents were prepared, and there’s no problem with them, and they set out very clearly what the spending plans and the other plans are for the year ahead. So, when we get to this stage we’re sort of relieved, the minister is happy that the budget is on track, the financial resolution is passed. We are happy that the work has been done and we’ve delivered our part of the bargain so it’s always good to get to this stage.

“We’ve tried to change to a culture where we are much more direct in terms of our advice, really focusing on our objectives as being independent.”

SK: One of the things that I have been consistently writing about is that the quality of the documentation when you compare budget 2020, say to Budget 2002, it’s chalk and cheese in terms of the analytical rigour is being brought to bear now. One of the things that I would imagine is causing the kind of reforms that you’ve brought in. What I’d like to focus on in the next hour is the R in DPER. We can’t talk about public expenditure all the time. We’re aware of how much the State spends in gross and net terms, we’re aware of debt to GDP ratios and everything else, we’re aware of Brexit, we’re aware of these things.

So the E in DPER is sort of talked to death. It’s the R that is as important if not more important than the E, but it’s by far the less urgent of the issues, so I was thinking really in order to set the scene – ministers decide, civil servants implement. So I’d like to take us from a place where ministers decided to do the thing, to institute the Irish government economic evaluation service, to actually produce reform. And he says: Robert, make it happen. Starting from there, the minister has decided – you must now act, you must implement and give you advice. How do you see the process of reform happening and maybe take me from the crisis: the crisis has happened, Minister Lenihan has put in place the spending and taxation measures and from the crisis then, you as the Secretary General have to actually create a new department (that’s an organisational innovation in and of itself), you have to to get a team together and you have to actually implement something at speed to repair the finances of the country. How does this happen? 

RW: There are many different dimensions to the question and we’ll try in the next while to go through those. Certainly in the civil service, our job is to implement, but it’s also our job to advise. That’s a key part of what we do and we take that responsibility very seriously. That leads to situations where of course where we advise and the minister goes along with our advice, and other occasions when the minister will say “thank you very much but I don’t agree, I’m going to do my own thing”. And that’s something we absolutely respect. I think a key part of the reform (and reform has many dimensions, and we can talk over the next hour about what that actually means) has been to change the culture in this place and this building. We’re talking about the Department of Public Expenditure and Reform, the Department of FInance, the Treasury departments and the Merrion Street departments. 

We’ve tried to change to a culture where we are much more direct in terms of our advice, really focusing on our objectives as being independent and impartial and acting in the public interest. We’ve tried to develop much more of a culture of constructive challenge. I think it is a fair criticism of the period before 2008 where groupthink was a problem, not only in society but certainly in key institutions like the Department of Finance and the Central Bank. This is something I’ve spoken about before and I don’t think it’s controversial to say that. We do need to have an environment where people challenge more. A number of things need to happen. 

“If I was to think about all the things that we’ve done over the last eight years, the cultural change – not just here, in the Central Bank as well – has been profound.” 

First of all you need to have people who have the skills, the capacity, the data to develop good, robust arguments. So we need the capacity and also the ability to marshal the evidence of the data and we’ve done an awful lot in terms of both of those. Secondly, we also need to provide a supportive culture, a culture where you’re going to say to teams of people in a department like this, which is a large, hierarchical organisation, that the lead team at the top support you in actually saying challenging things and that might lead to difficulty. 

There was a report that we produced a while back looking at expenditure in the acute hospital system and it said some things – I don’t think for example everybody within the political system, Minister Harris included, would have been very happy with some of the things that we said. But it’s very important when there was a bit of a row, a bit of controversy or discussion about that report that as a leadership team in the department, we sent a very strong signal back to the people who wrote the report that we support you in your job and actually putting out the evidence and saying some things that might be very uncomfortable. 

“More people are focusing their time primarily on trying to think about the problems we face and writing it up.”

I guess that’s a key part of the R in reform, to actually put in place the capacity and the data, but also the culture. If I was to think about all the things that we’ve done over the last eight years, the cultural change – not just here, in the Central Bank as well – has been profound. But it’s very important that we sustain that because of this generation of leaders will move on, that’s inevitable, and memories of the crash fade. We need to ensure that there is enough memory and a strong enough culture to ensure that continues into the future. 

Just to talk about two reforms to continue on the reform conversation in respect of trying to give robust advice to the political system: something that we in the Government Economic Service decided in 2012 that we would do was the recognition that economic skills and capacities had been denuded and we had lost some good people. There were many reasons for that, but we felt that we didn’t really have the type of capacity that you would need so we decided to establish the Government Economic Service and we have a large number of people now who work in this Department of Finance and throughout the system and I think the improvement in the quality of the documentation that you mentioned is partly a function of that. 

“We are happy to engage in any critique of work we do and if people are positive or negative, we’re open to hearing all views.”

We have, I think, more people who are focusing their time primarily on trying to think about the problems we face and writing it up. That’s very important as well – you could be pulled in every direction in a Department like this answering the latest media query, parliamentary questions – that work is very important, it has to be done, but within all that you have to time find time to think and reflect and people need to make a conscious effort to find time to think and reflect. But also it’s a great discipline as you know when you’re thinking and reflecting to actually write it down and produce something, or else you wonder what is the point of all this thinking, apart from the fact that it’s enjoyable of course. But actually they have to produce a piece of paper, an analysis that means that that reflection is concentrated in the production of various papers and we publish those papers. I think the start of IGEES has been really important. 

I think the second thing which has helped, and it’s not just relevant for this civil service, it’s relevant for other civil service departments around the developed world and for academia, is the availability of data. We have incredible data sources now, we have linked data, we can link administrative sources with survey sources from the CSO, and we have obviously significant computing capacity now. We can do things which would have taken us all morning 20, 25 years ago and now take somebody down the corridor 10, 15 minutes to run a program and do some analysis. 

I think those things have really made it made a difference. When we produce reports, we’re always saying to the various teams in the department: you produce analysis today of a scheme which is not working, but yet for overriding reasons we’re still funding it – that doesn’t mean that report has not had an impact. It will have an impact, it’s there, we’ll build on that, and over time that can change how people perceive spending and have a positive impact of decisions that are ultimately taken by the political system.

Finding value for money

SK: It is interesting, last year’s budget for example, there was a brilliant piece of work – I think it was by Jenny Connors or one of your colleagues – looking at the evolution of health spending. It was rigorous, it was detailed, it was expansive and I think one of the real privileges of being in a place like this is that you are the people who know, ultimately. And it’s the ability to marshal a conversation around not just how much you spend, of course, but around how one might reform, not just health, but everything else. It’s not specific to health, but it’s a good example actually of what I’m talking about when I say that there is an analytical ability there now and that analytical ability added to the data actually allows us as a society to have a more informed conversation, particularly about the more arcane aspects of government policy. 

The simple stuff, like how much the government spends, how much it doesn’t spend, what it spends on what, people can get their heads around that. But the actual funding processes, for example, for the acute hospital system or the difficulties within the system about simply counting consultants, or the really interesting reports on how you measure small open economies – those were all in last year’s budget papers. They’re still having an impact in terms of the conversations that people in academia and business are actually having about this. They’re referenced and referred to, which is really helpful. When we on the “outside” are using this data, some of us are agreeing with your estimation, some of us are disagreeing, some of us are saying you need to go further, some of us are saying you need to pull back. How does that feedback influence the next work that you do?

RW: We are happy to engage in any critique of work we do and if people are positive or negative, we’re open to hearing all views. One of the things we try to do is to have more seminars and engagement. We present the work in a sort of traditional form, but I think it’s a format that works quite well, and people give comments. We’re very happy to hear that and that would lead us hopefully to have better insights and be more effective in terms of our job.

I think the two papers you mentioned – one is a very micro paper, the other is a macro paper – the one about the small open economy is interesting. What struck me is that the vast majority of economies are small. You and I did economics a long time ago, we studied small open economies and said yes – there are unique features about Ireland. We are fairly open, for a whole variety of reasons. We are also very small, but that smallness is not unique. There are 190 UN countries, there’s maybe four or five big countries that count for 78 per cent of GDP and everybody else is small. That might be relevant for debates we have about Brexit and the geopolitics of Brexit, because the UK of course is not a large significant economy. Is it a small economy now? Maybe, maybe medium-small, you can debate that, but it’s certainly not large, and it’s certainly not as significant as some people across the way may think. The health paper was interesting and I think what’s interesting about the health paper. So the health budget this year, the Minister announced for 2020 €17.4 billion. Indeed that is a 30 per cent increase on the number in 2014. That’s about €3.5/4 billion extra. A lot more money going into the system. 

“You have to get into the detail you have to lift up the bonnet and that provides insights about what should the policy be, what should the direction be, how can we do things differently?”

The big challenge I think for everybody, our colleagues in the HSE, the Department of Health, the political system, people in the Dáil, this group of ministers, future ministers, is how do you get value for money? It’s not just about throwing more money at issues. It’s about actually trying to figure out how can you provide the best possible service for our citizens. In health, that only works if you actually get into the detail because in effect you are talking about dozens, scores, hundreds of different types of services. So the budget will fund disability services. It will fund elective surgery. It funds Fair Deal, it funds A&E, it funds a whole variety of different things. 

When you actually start thinking about the health system – why we want to have a health system which is integrated and where there’s better coordination between the different elements – of course we are funding services which in many ways are very discrete and very different. So in order to understand what’s going on, you have to look at the spending. Fair Deal, that’s going to cost around a billion for this year, or next year. It provides support for X number of people. There is a cost. So for us to figure out, how is that working? Is it delivering? And how sustainable it might be in the future, which is a key issue in terms of Fair Deal, given our demography and other supports that are available for citizens. 

You have to get into the detail you have to lift up the bonnet and that provides insights about what should the policy be, what should the direction be, how can we do things differently?

The A&E is a good example of how you manage the flow of people turning up at A&E. There was a very interesting study looking at the number of people who, on repeat, came back to A&E within a few weeks of being there before. Why was that? Obviously, in most cases it’s a recurrent of the same condition, the same problem. So how come people end up back in A&E again? Why were they not  able to deal with the GP in a community setting? What happened?

To be able to look at the data helps the managers to improve the service. It should, because that information can help them do things differently. But also, at our level, I mean in the Department of Health, it can give us more a view on how we should prioritise spending and how we should try and allocate spending.

Robert Watt
Robert Watt, Secretary General of the Department of Public Expenditure and Reform. Photo: Bryan Meade

But if you think of some of the classic public sector problems are allocated in the absence of prices. We don’t have prices because these are public goods. So how do we allocate in the absence of prices? We need to have much better data, much more of a conversation about what are we achieving and then at our level, at a policy level, we then figure out how is the best way to allocate. Of course that becomes a political process then and there’s a whole variety of interest and other influences that lead to the outcome. 

But at our level, at official level, we need to have an understanding of what we think works and that requires a very detailed examination of inputs, outputs, outcomes in order to have that informed discussion.

SK: When you’re thinking about value for money, reforming public spending process is one of the things that came in after the crisis. Our value for money reviews, public expenditure, public spending code of course, and the set of guiding parameters around which one might decide this programme is good value for money, that programme is bad value for money. 

These are technocratic processes. They play out in a very “spreadsheety” way. You run a programme in Stata or whatever and it comes out and says: “This cycling programme is not good value for money” or “the introduction of this particular drug is not good value for money” or “this programme is not good value for money.”

So one of the issues I see with health, in particular, is that I think as you correctly identify it is not one thing. It is probably tens of thousands of things on each of these programmes. So should these programmes be budgeted for?

RW: It gets back to the central challenge of public sector economics, public policy. So if you look at, let’s say transport for a moment, it’s just a little bit less emotive than talking about some health spending, but it does raise different issues. So you’re looking at “we want to improve public transport in Galway”, Dublin, whatever.

SK: Limerick.

RW: Limerick, let’s say limerick. So, how do you do that? So what are your objectives? Your objectives are to reduce times, reduce congestion, improve traffic flow, reduce emissions now increasingly. So how do you do that? So there are various different options. So, let’s say we’re going to do significant level of investment in Limerick. What are the options? You could build an underground, you could do Luas, you could do bus corridor. So, you look at the costs and then you try to figure it out. The costs are straightforward enough in the main. But of course you’re looking at the benefits.

So you’re looking at the number of people using a transport corridor. The time it takes, the reduction in time, or the reduction in the uncertainty of travel, which is probably more important for a lot of people. So, if you know you’re going to take 25 minutes to get there, that’s fine. If some days can be 50 and the next day it’s going to be 40. That’s more of an issue for everyone. And then the environmental benefits and so on. So we’ve got a good idea. So we can say objectively that cycling will be good, improve bus corridor will be good, a Luas line would be good.

All of those provide benefits of course. The reach happens then to do with the relative, the relative ranking. So we can’t fund them all. So all of them are good things, but which is the best relative to the cost. And that becomes a very difficult judgment. And that’s when society of course through the political system gives us a sense of what are the societal values and how that impacts upon the decision making process. 

Pull quote: “This is an almost impossible situation for governments and we set up processes where we independently assess the benefits and we try to give a view. There’s no answer here. There’s no easy answer.”

So even within the transport system, and transport is probably the area where we have done a cost benefit analysis in transport for 50 years. It’s probably the best developed. And we still talk about Sean Barrett’s cost benefit analysis of 40 years ago. 

SK: Still a classic. 

RW: Yeah absolutely. But if you look at a more difficult area for policymakers in relation to drugs. So, the new wave of drugs can be incredibly effective and life changing for people in terms of improving their quality of life and their life expectancy. But if you look at a drug and you say “yes that provides benefits,” so you might say “OK there’s a cost of X million and it provides benefits” and we try to figure out what those benefits would be. And of course this becomes very emotive because you are talking about people, it could be individual loved ones or so on. And it becomes a very difficult policy decision for people who are involved. 

But if you look at the benefits rather than the costs of supporting a particular drug, they need to look at “well if we didn’t spend the money in that area, could we actually lead to better outcomes elsewhere by providing services that might benefit the population more generally?”

But of course, this doesn’t benefit the people who would benefit directly from the drug. This is an almost impossible situation for governments and we set up processes where we independently assess the benefits and we try to give a view. There’s no answer here. There’s no easy answer. 

But of course, when we’re talking about, let’s say a particular drug, you only hear at that time about the people who benefit from that drug. You don’t hear about all the people who could benefit if the money was spent elsewhere. And that of course leads to the difficult decisions that people have to make.

Robert Watt
Robert Watt, Secretary General of the Department of Public Expenditure and Reform. Photo: Bryan Meade

SK: It’s interesting that you identify something that is taught but very rarely – opportunity cost. The value of what you give, you get something. But we very rarely talk about opportunity benefit. So who would have benefited had you not given the money to buses or drug X or another area? I’m really interested that some of the classic value for money analysis is on capital spending, more or less discrete chunks of cash that play out over a couple of years that derive benefits into 10, 20, 30, 40, 50 years. I can see how the public spending code sits within a capital spending framework. And obviously there are challenges around that in this economy, but going back to the current spending for a second, when we think about value for money in current spending and much of health is current spending, much of the government is current spending. Mostly, I mean, what is it €9 billion in capital invested in current. 

So, when I think about a program like the HPV vaccination, my son just got the HPV vaccine and it’s a really interesting programme. So it’s a thing, the government funds it, it’s clearly got a benefit. You know that they come in, they jab a load of 13-year-olds and it’s a really interesting programme with a clear clinical benefit. So it passes pretty much every cost benefit analysis you want. But in terms of performance budgeting, the clinical benefit aside, there is a good way to do that and a really bad way to do that. You could have the public health nurses driving around in Humvees and sort of tank the value for money. 

So, how do you think about evaluating a programme like that?

RW: It’s an interesting one, the vaccine. We’ve been doing these programmes now in Ireland for a long time and it’s probably the case that this is an area of policy where the view from the UN or the European Union and what other countries, developed countries are doing is probably having a very significant effect of what we’re doing. 

You know I’d imagine that ultimately there’s a group of medical officers at international level who are reaching views, I presume to the UN, about the merits of different programmes and governments and go along and support them.

“It’s true that on the capital side we have these systems well worked out in terms of cost benefit and people can critique. When it comes to current spending it isn’t the same.”

And we’ve been doing this, like when we were in school in the 1970s, we got our various vaccinations and that was done through the school system. 

It’s an interesting idea just in terms of delivery because if you didn’t do it through the school system you wouldn’t have the rates of vaccination in order for them to be effective. Because people just wouldn’t. Who knows. But you wouldn’t have the same level of coverage that you have now and that of course eliminates the effect of some of these programs. Not all of them of course but some of them.

But, the delivery question is interesting and nobody seems to object to this. If you think about it you would imagine that a lot of libertarians who would say: “God this is disgraceful that you’re using the school system in this way to make sure these kids get vaccinated.” But nobody seems to have a problem. I shouldn’t have mentioned that, now somebody will have a problem with it actually. That’s an example of how the benefits are very clear and the delivery mechanism I guess is very straightforward because the kids go to school and therefore that’s a good setting in which to do it.

It’s true that on the capital side we have these systems well worked out in terms of cost benefit and people can critique.. 

“And of course there are outcomes from studies which the political system, for whatever reason, can’t accept because that’s their prerogative. We have a reasonably good idea though what works and what doesn’t.”

When it comes to current spending it isn’t the same. And I think that’s because current spending is something that obviously is recurrent. It’s ongoing and there is a constituency in favour of the legacy spend and the historic spend. There are a lot of vested interests. So if you decide to go do Bus Connects, lots of people are in favor of that and there are an awful lot of people who are against it. 

Most current spending programme, there’s only advocates. Very rarely, I hear people out there saying we should reduce that spending by the nature of it. And it is also more difficult in a lot of cases to figure out the benefits of a particular program without the data to evaluate it. It’s just too complex and too messy. But we have made great strides. If you look at areas of active labor market policy or education there’s now a wealth of evidence in terms of what works and what doesn’t.

And we have a pretty good idea of things like training for example. We know that specific skills-based training that’s linked to the workforce, that involves an employer, close to the labour market, those sort of skills programmes are much better at reactivating people who’ve lost their jobs who are trying to get back into the labour market again. We know that other types of programmes aren’t as effective. So we’ve a lot of information there. 

We have a lot of information in terms of education. Like what works and what doesn’t. In terms of class sizes there are other types of curriculum that might help kids achieve their potential. And a lot of that work does inform decisions in relation to education spending.

And of course there are outcomes from studies which the political system, for whatever reason, can’t accept because that’s their prerogative. We have a reasonably good idea though what works and what doesn’t.

I think the debate should always be about the opportunity cost. If you decide to stop funding something, we should be looking at the benefits of the spending being reallocated elsewhere. And that is a real problem and that is ultimately a major political challenge because the political system of course gets no reward for closing something down and upsetting a whole lot of people. They’re very vocal. 

Of course the people who would benefit from the reallocated spending, you don’t hear from them because it’s part of the general pot. In a nutshell, that might be one of the public policy challenges that we face. 

“We are living in this age of outrage, anti-social media. In terms of the popular media, it’s very hard to have a proper conversation about the choices that politicians are grappling with.”

RW: And this might be a greater issue in the future now that we’ve gone through a period of very rapid economic growth. If you think about the recovery from 2013/2014, the budgets have been expanding. We are living through an incredible period and they have been very positive, very positive headwinds, low interest rates and corporation tax receipts which are a function of a variety of different changes. Those set of circumstances won’t be repeated in the future. Notwithstanding what’s going to happen with Brexit, we are going to have slower growth. We are going to have less resources available and we do have a demographic challenge which is gobbling up any additional revenue, every year. 

So these types of issues, about choices, will be a big challenge for future governments and it’s something we may need to talk more about. But it does need to have a more informed opinion, informed conversations. We are living in this age of outrage, anti-social media. In terms of the popular media, it’s very hard to have a proper conversation about the choices that politicians are grappling with.

Beyond annual budgets

SK: It’s one of the reasons I was so excited to join The Currency because that is what this is there to do. It’s hard to have that conversation and it takes depth, it takes analysis, it takes expertise and it’s hard to get that across. 

You mentioned thinking about the future, of course Ireland has medium-term budgetary and fiscal frameworks that it has signed up to. We have a budget cycle which is essentially annual or semi-annual in that it probably runs over an 18-month period if you add in the Comptroller General processes and everything else. So we have an incremental annual budget, we have medium-term budgetary frameworks that set three- to four-year ceilings, and then we’ve got fiscal frameworks that sort of snap on top of that at a legislative level. I’m not talking about the European-level fiscal rules here, I’m just talking about the idea of an annual, incremental system that essentially innovates four or five per cent of the system – and that’s in a good year. 

Having to deal with something like climate change, an older population, the pensions challenge, or simply accounting properly for capital spending could change medium-term spending frameworks, backed by accrual accounting, backed by the kind of data analysis and the people – obviously that’s a process that’s not complete. How do you see those tensions?

RW: I think it’s very interesting this week. It’s budget week. The minister stands up and makes changes very much in the margin. The increase in current spending is 3.5 per cent. There’s a larger increase in capital spending of around 10 per cent. The Minister made tax changes that I think will raise money of €300 to 350 million. These are very small sums in the context of a €70 billion budget. So there is a lot of focus on that. 

In terms of the discussions in the departments and ministers and all that goes on, there isn’t as much focus on the quantum of resources that’s there. There are very good reasons for that, because a lot of it is tied up so we know the number of pensioners and the rate of pension and the public servants and teachers and so on, and we know how much they get paid. So a lot of the spending is precommitted. 

I think two things that are really important in terms of a budget process that is more sensible are to agree a top-down approach, to agree a fiscal target. So let’s say we’re going to run a surplus or deficit, and from that say okay, how much have we to spend and what does that mean for tax and spending that’s linked to the fiscal rules? I don’t think the fiscal rules, as constituted, are appropriate for Ireland. I think they can be gamed too easily.

SK: I agree

RW: There are measurement challenges. There is volatility in terms of corporation tax receipts. We need to have a proper discussion.I think in effect they are not tight enough during good times and then maybe too tight…

SK: It’s a tactical issue of the estimation of potential…

RW: It’s unobservable. We all know what happened with the fiscal treaty. It was approved by referendum because it was required in order to access the funds in the stability mechanism at the time. That was a change brought about in particular circumstances. Is it a rule that works for us in the future? I don’t think it does. Will there be debates and changes at EU level? We’ll see. But even if we don’t have a change at EU level, I think we need to have a debate here in Ireland about whether we can supplement that rule. 

Can we have our own rule that helps us manage our affairs more prudently, more sensibly? We’ll see but I think it’s absolutely essential that we have a fiscal rule that then leads to a discussion about what type of resources we have available. 

“The approach to ceilings works pretty well on the capital side but hasn’t worked well on the current side.”

But then you get into the question of how you allocate. In the past, we had these comprehensive reviews of spending, which stood back from it all and looked at spending and tried to make decisions. It then set out three-year and multi-annual ceilings. The approach to ceilings works pretty well on the capital side but hasn’t worked well on the current side. Certainly we’re going to have an election in the next six months. The Taoiseach will want to have an election. We will have a new government and I think as part of that process, there is merit in standing back doing a comprehensive review of spending, taking account of all the issues you have mentioned, more comprehensively look at spending in the context of our climate obligation and see how can we change things to reflect that. 

We could set out three-year envelopes that are more binding and more concrete than we’ve had in the past. Look at the health budget. To say to the HSE, it’s going to increase by three or four per cent each year for the next, and you know that’s what you have to spend and decisions have to be taken in that context. If people really believe that is a hard budget constraint, well then they have to start making the decisions that ultimately drive value for money and change. 

Then you could have an annual budget where the minister stands up and says the economy is still doing okay and we have a deficit target or surplus target and we’re going to tweak it, but that we’re in year two or year three of a multi-annual budget and I don’t have much more to say about spending – maybe a few tweaks around social welfare. 

I think that’s a system which we had a debate about post-crisis, got some of the way, made some progress, but it might be worth standing back and thinking about that again. To actually, say, have a comprehensive review every two or three years, set out multi-annual ceilings and within that, provide efficiency targets and stretch targets for departments and link those targets on the spending side, on the input side, with outputs and outcomes we are looking for. 

With that, we’ve done a lot with this performance report we’ve produced. We’ve produced a lot of information on what we’re getting for public spending, so that information can be used in terms of informing a decision. It’s obviously a political decision and it’s for the new government to decide on that. Our advisory input would be, there are merits in standing back now and trying to think about what the budget would look like over a three- year cycle and try and get away from an annual budget. 

“It’s probably the one time in the year where the ordinary person actually thinks about what the government does or about taxation.”

It’s a historical thing. I’m amazed at how people are. It’s probably the one time in the year where the ordinary person going about their business, paying the mortgage, looking after their kids, actually thinks about what the government does or about taxation. A lot of people do watch, listen and buy the newspapers to read about it. So in that sense, it’s valuable because it’s an opportunity where people are actually engaging with how their money is spent and these policy questions that are important for the country. 

That’s a positive of the budget but the downside is that, of course, it introduces unnecessary uncertainty. There’s this tendency to say “you need a package on here, here and here,” and that tends to push up the overall spending in a way that isn’t as efficient than if we set up a more concrete approach in a three year envelope. Ultimately it’s a political decision, but there could be merit in exploring that further.

SK: It feels cultural. You see the Australian budgetary system, the New Zealand budgetary system, the one they have in Germany. There are no budgets.

RW: We can blame the British on this as well. It’s the 1866 appropriations.

SK: (Laughs) indeed the appropriations.

RW: And what happened in 1921. Joseph Brennan, who established the Department here, invited some of his friends and their friends from the Treasury came over and they in effect replicated the system. We have all the language of the exchequer account of appropriation, of supply services and net and gross. We’ve all that. And that works.

SK: It does.

RW: It’s mostly worked well for us. And there are accounting officers, the comptroller and auditor general, all that architecture which comes form that tradition has been very effective for us. But the annual budget in the way it has evolved historically – I’m not quite sure it has served us as well. 

It’s interesting in the UK now, they basically have two budgets. I’m sort of confused as to what goes on, they seem to have the pre-budget report and the actual budget. So they’ve moved away, as we have to an extent with the summer economic statement, and I guess we hope that will be more of an event than it is, that that is actually the minister saying that’s how much I have to spend, we need to have a debate in terms of what that means in terms of choices and that takes place a good time before the October budget. 

Maybe as part of talking about reforms in the future, part of it could be about trying to do more with the summer economic statement, maybe make more of a play of it.

One other aspect and this is where it gets really anoraky but it’s really important…

SK: Maximum anorak. 

RW: Maximum anorak for this event. If you think about public finance, you think about two things. You think about the deficit whether it’s the Exchequer balance or the general government balance, that’s your thing, or the overall debt. They’re the two metrics you look at. We really need to be thinking about net worth, the net worth of the State. If you think about it, a decision we take today in relation to pensions policy will change the general government balance for next year but the real thing though are what implications will they have for the net worth of the State.

SK: When there are more pensioners.

RW: When there are more pensioners. Likewise, if we are investing in an asset in our cash world, we have accruals as well, but in our cash world we think of that as a cost and that’s going to cost us X billion. Whereas we should be thinking that has a value and that is improving the balance sheet of the State. So we need to move away over time from thinking about these cash flow metrics, which is very important if you don’t have the cash as we discovered ten years ago. 

“We envisage in the future the State will produce a balance sheet along with the budget and we’ll show the impact of the budget on the balance sheet.”

It was very interesting when we got into discussions with the IMF, the key thing for them was the net cash balance every quarter. We had to produce our cash requirement and that was the key metric for the IMF; the net cash position, what our requirements would be, because they were part-funding it, but it was interesting. The fact we had a very sophisticated approach to managing our cash and knew where we would be at any given time was very important. That was okay for the execution of the budget, but in terms of the preparation of the budget and the presentation of the budget, in terms of policy choices, much better to move away from the cash to look at the implications for the net worth of the State.

That’s a big reform programme. We envisage in the future the State will produce a balance sheet along with the budget and we’ll show the impact of the budget on the balance sheet, the net worth of the State and that will give us a much better insight into the types of decisions we’re taking and will be more informative for policymakers. 

Think about management of capital assets in that vein, so issues around disposals. If we had a proper balance sheet, we’d actually look at the asset and say okay, that’s worth X. If we changed its use and disposed of it, that could generate cash of this amount, which would be worth more than the value we have on the balance sheet of the asset not being used appropriately. To actually provide the right incentives for people to manage our enormous assets appropriately would be one of the massive benefits. So this is a reform which will be a big thing over the next number of years.

SK: That’s amazing. One of the key institutional innovations places like New Zealand and Australia have brought in is precisely this process. What happens is, it changes the nature of their conversations both at the technocratic level but also at the political level. For example, in the last Australian election, they were actually able to have discussions around changing spending five years and eight years into the future and what the impact of that would be. And at the general election across the country in every home was fought on that basis and it changed in five years time. 

The fascinating aspect of that is there is a really strong culture of programming budgeting performance, budgeting and all that in Australia and New Zealand and other places. They seem to not be able to be as responsive as our system is to things like the current public clamour for carbon taxes for example. So our system seems to be able to react in a way that their system hasn’t actually. 

There is a balance to be struck but the idea of computing the net worth of the State. The benefit to me, apart from the obvious technocratic benefit, is that it would change the nature of our conversations.

Robert Watt
Robert Watt, Secretary General of the Department of Public Expenditure and Reform. Photo: Bryan Meade

RW: It would certainly provide more of an understanding of the decisions that are being taken. It is not just about the cash impact next year, but the full-year costs and the costs into the future. I suppose it provides more information and, over time, we hope that we will be able to look into the future and say that a pension change or an investment change will have a cash impact for next year but also on the net worth of the State. This is the real objective you need to have in mind when you are thinking about those decisions.

SK: This is interesting because when private companies and the people in private business listen to this, I don’t think they are aware of the extent to which decisions are made on a cash basis. Obviously, cash flow matters in a private business. But the balance sheet does also matter, particularly when you are making slightly longer-term decisions.

RW: We present the data on a cash basis and a general government basis, which is accruals on the current side. We don’t allow pre-payments. Whenever we receive a bill, we pay for it within 15 days. For a private company, there could be much more pre-payments and accruals would be much more of an issue on the current side. But it’s not an issue for us. If you look at the end of the year and the revenue we receive in cash and then the accrued revenue, there is very little difference. 

It is really about the asset side of the balance sheet where it can make a difference, how we think about assets, how we put a value on assets and the incentives that people in the system have to actually use assets more appropriately. But also to look at issues on the current side where we need to think about the longer-term impact as opposed to next year’s impact. There are a number of different ways we think this can actually help. It is a reform that is starting. Over time, it will have a big impact upon how people see the Budget. I would be delighted at some future stage – I will probably be retired – to be looking at budgets and the minister stands up and says that the net worth implications of these changes is this. We will get there.

Opening to outside influences

SK: That is positive, and it is very reassuring to hear. I can see the benefits of it. Finally, Ireland and the EU. You mentioned earlier on that many of the things that we bring in as policy innovations come from the UK or the EU. I won’t say they are imposed upon us, that is not fair. But we change our system slightly in order to cope. Ireland and the EU – how is the reform agenda? I am not talking about the European semester project; I am talking about some relatively discreet reform that takes place at European level like higher education funding of research or something at the programme level. How does that impact the reform agenda that you do here in DPER?

RW: Our membership of the European Union has been transformative for our country, mostly for the better in my view. But it also enabled generations of civil servants since then to be open to influences beyond the UK and London. Traditionally, we would have looked to London because that was the nature of our relationship with the UK. We were in that post-colonial phase. Of course, in the 1960s and 1970s we joined the OECD and the European Union, officials then started to go routinely to Paris and to London. That had a profound effect. 

If you read a paper on higher education that can have an impact – we need to look at the policy. If you have to go to a working group at the OECD and you have to go there once a month ten or 11 months of the year, they were sitting down with other countries who were developing rapidly after the Second World War and who were investing in education. That had a profound effect ion official in this department and in the Department of Education who were participating. 

It is hard to think of it in our world now where we can instantly click on an OECD report and download it or participate in a web chat with researchers from the OECD on different issues. That was not the case in the 1960s and 1970s. I think that had a profound effect on policy making in Ireland. I still see it now when people go to meetings and come back with ideas and say, “why didn’t we think that?” That has improved the quality of public administration and enabled people to be much more open about outside influences.

“Of course, we will make mistakes. But we should be making new mistakes. We should not be making mistakes that other countries have made.”

The developed world is very similar. Its similarities are incredible. If we are grappling with an issue like how to we tax carbon or deal with carbon pricing, Treasuries all over the developed world are having the same conversations. If you are having an issue about taxing different types of cars, colleagues internationally are having the same conversation and a lot of these people come together at OECD level and at EU level. It does not mean that we don’t make mistakes. Of course, we will make mistakes. But we should be making new mistakes. We should not be making mistakes that other countries have made, and we can learn a lot from what people are doing.

It is part of what we do in the department – we try and encourage people to spend time in the OECD or the European Union or the IMF, to travel and become immersed. I was really struck reading Joe Lee’s book for the first time, it must have been in the early nineties, when he talked about the official mind and the quality of the official mind. He talked about the lack of research in economics and the lack of policy research. 

In Patrick Honohan’s new book, in the footnotes, he talks about the debates back then. I was struck by that. We are very conscious of the obligation we have here to ensure that the official mind is as equipped as it can be to deal with the challenges that we face and being open to the world and institutions like the OECD and the EU in terms of that development.

SK: I have never thought about it in that way. But when you say it I see exactly what you mean. The thing that has always struck me about the Irish civil service and particularly the Treasury departments is that they seemed relatively walled up. I have often thought we tend to be less porous to influences within the polity – there is not a strong tradition of civil servants being seconded to academic or academic being seconded into the Treasury departments.

There seems to be less of a bilateral conversation between domestic bodies. What is interesting about that is the traditional of the generalist civil servant was that you did hop between departments. Are you thinking about how to have those kinds of conversations in a different way? Like someone who is into needs testing and not means testing, or equality budgeting or gender budgeting – people who have a set of ideas but have not road-tested them through the policy system. 

Lots of people have lots of ideas that sound great or look great and maybe even use data from another country that supports having a go, but they don’t have what Minister Donohoe might call a “political economy mind”. There is a political lens to a lot of things, there is a legislative lens to it. What I have found in years of talking to officials is how subtle they are in applying these lenses and people outside the system are not subtle at all.

RW: There is more crossover. You mentioned equality budgeting, we prepared a paper which was published on Tuesday and that was influenced by a lot of academic research and our colleagues talked to researchers. We have had a lot of contacts with the ESRI and that has improved over the last number of years. We have more seminars; we have colleagues here producing papers and more contributions on policy conferences. 

There is definitely more and it is enriching for people here to go to academic settings ad see research, and it should be equally enriching for academics to come to a policy setting and hear from officials who are trying to relate the theory to the reality. It is the applied economics of political economy and that raises a whole variety of different challenges. 

I think it would be better to have more dialogue and we are open to it. There are silos. Maybe too many, but we have tried to have more mobility within the civil service through secondments. We encourage that. But also to understand that academics have a different role and that applied policymakers have a slightly different role as well. More engagement is positive.