I want to be an agent of economic recovery, but they won't let me play!

Why not do something creative with the €400 million cut from the drugs bill? Maybe address a social need, increase growth and employment, and reduce household costs? By Michael Taft.

One of the keys to an alternative budgetary strategy is to stop cutting current public spending. This would provide an opportunity to re-direct or re-invest productivity gains and spending efficiencies into expanding growth and employment. This would be more effective at repairing public finances than the current austerity strategy.

Let’s take an example. The Government reduces the drugs bill by €400 million. This is a good cut. There is likely to be little if any deflationary impact; jobs will not be lost, income will not fall, and growth will not be cut. This is one of the few examples where a cut actually equals a saving of the same magnitude.

What do we do with that cut? Do we just remove it from public spending? If so, the deficit falls by €400 million but not much else happens in the economy. So, why don’t we do something creative with it – address a social need, increase growth and employment, and reduce household costs? Why don’t we roll out an affordable childcare programme?

Childcare in Ireland is one of the most expensive in the OECD and has been identified as a substantial cost to households in work, or attempting to return to work. What would be the economic and fiscal impact of rolling out an affordable childcare network?

Let’s first examine the cost of rolling out such a network. Deloitte, on behalf of the National Children’s Nurseries Association, prepared a detailed study - Review of the Cost of a Full-Day Childcare Placement (it no longer seems to be available online). They calculated the cost providing childcare places – wages, rent, insurance, materials, food, etc. In 2007 they found that the average weekly cost of providing a full-time childcare place was €227.

I updated costs – by increasing non-staff costs by 10% and staff costs by 17% (employing childcare assistants at €19,300 is far too low for this important function). When I do this, the cost of providing a place in a childcare centre comes to €260 per week.

Therefore, the €400 million drug bill saving would, if redirected, finance 30,000 affordable childcare places. Does this mean there is no deficit reduction? Let’s see.

Employment: The €400 million investment in childcare places would directly create 7,700 jobs – based on the ratios used by Deloitte. Of course, a portion of this would be a transfer of staff from existing private and voluntary crèches so that job creation would not be net. Still, there would be considerable job creation from this. This doesn’t count the jobs created/retained due to non-wage expenditure – purchasing materials to run the childcare centres from private sector (purchase of food, materials, etc.).

Impact on GDP: Being job dense, this investment would increase GDP by €350 million. This only counts the wage element of the expenditure. There would be additional growth from the non-wage investment.

Impact on Deficit: Using the Department of Finance’s Debt Sensitivity Analysis, this growth would reduce the deficit by €175 million – but this would be slightly higher when the non-wage impact is included.

Fees Income: If we assume an average weekly fee of €60 per week at 45 weeks, the potential income would be €80 million. This would reduce the gross cost and, so, feed into deficit reduction.

There’s more. What’s the impact on those using this service? Let’s assume a household is paying €185 a week for childcare for one child. This new public sector-driven childcare network costs €60 a week. Over the year (45 weeks) the saving is €5,625. That’s substantial. What happens to this money?

A large part will be spent in the consumer economy, some may be saved, and some may be used to pay down debt. It is difficult to assess the economic impact but it amounts to a mini-stimulus. The total savings to households could be as high as €168 million (the total savings on childcare costs from 30,000 affordable childcare places) - with a high percentage being redirected into other consumer spending.

So let’s summarise.

usage of drug bill reductionThere is no impact on employment, growth and household income from the Government’s strategy of pocketing the savings on the drugs bill. By reinvesting those savings into childcare, all these categories turn positive. And the difference on the deficit is trivial – with the reinvestment strategy being an underestimate as it does not include the impact of non-wage expenditure or the reduction of childcare costs to households.

This is, of course, a back-of-the-Excel–sheet calculation and, therefore, should only be treated as indicative. Much of this would replace existing activity, though where voluntary organisations exit, this new strategy could just upgrade - which would reduce the overall costs as many of these groups are already subsidised. There may be a reduction in informal childcare as many families cannot afford creche places.

But there are other boosts that are not included in this shorthand balance sheet: namely, the impact on the little ones in childcare centres that integrate care and education. This should lead us into a more integrated package of childcare/early childhood education. That is the ultimate goal – for this is an investment with one of the best returns.

The point of this post, however, is to narrowly focus on the comparative advantages of taking savings and directly reducing the deficit, or taking the savings and reinvesting into public services. In the case of childcare, it needn’t be a state agency. A co-ordinated strategy linking up local authorities, social and voluntary organisations, and not-for-profit establishments could roll out the network. The same case can be made for early childhood education, or primary health care, or support services for the elderly, or community services for the unemployed, drug rehabilitation schemes, etc. etc.

This is the lesson, a lesson that the best businesses understand. You don’t downsize, you expand. Drive efficiencies and reinvest. Constantly seek out new opportunities.

And when it comes to children, the opportunities are countless. Serve them and they, in turn, will drive the economy. So let them play.


Image top: garann.