ECONOMICS:IN JULY this column began a series of articles on how Government spends taxpayers' money. The series is in the context of September's publication of the coalition's Comprehensive Spending Review, an exercise that will show more than any other action or decision to date whether or not the new Government is truly reformist.

Public spending can be classified in different ways. For a number of reasons, mostly relating to data availability, this series breaks spending down by its three largest generic components: transfers of cash (overwhelmingly welfare payments of various kinds); capital spending (mostly investments in infrastructure) and current spending (public sector pay and purchases of goods and services).

On July 29th, welfare spending was discussed here. Next week, capital expenditure will be analysed. Here, current spending is considered.

Current spending can be further disaggregated according to its pay and non-pay components – the latter includes everything from office equipment for bureaucrats to syringes and gowns in hospitals, cleaning bills, lawyers’ fees and consultants’ reports.

Start with public sector pay. It is among the most discussed aspects of government spending. One reason is its sheer size – the public sector pay and pensions bill is the second largest expenditure item after welfare spending. In 2010 it amounted to €18.2 billion, or just over one quarter of total public expenditure (excluding bank bailout costs). Another reason is that many in the private sector believe it unfair that those who enjoy the greatest job security are, in many cases, paid more than they are and more than counterpart public sector workers in peer countries.

Though this column does not go in for gratuitous bashing of the public sector, there is good reason for this disgruntlement. The chart shows by how much that bill expanded relative to other selected spending items and the overall economy over the past decade (to best illustrate comparative trends, each spending line is rebased to the year 2000). In the 2000-08 period, the total pay and pensions bill rose by 141 per cent. This was above the increase in total government spending over the period (at 135 per cent) and far above nominal gross domestic product (GDP) growth (at 79 per cent).

Most of this was accounted for by pay increases rather than additional hiring – the number of full time-equivalent jobs in the public sector over the period grew by less than 20 per cent.

It was then, as it is now, patently clear that the public sector pay bill was allowed to rise much too quickly.

Since the property bubble burst, public sector workers have taken significant hits to their incomes and the numbers employed in the sector have shrunk. As a result, the total pay and pensions bill fell by 10 per cent between 2008 and 2010. But the State’s total income has fallen by 20 per cent from peak. As a result, the public sector wage bill has continued to rise as a percentage of government revenues.

Few think this can be sustained, including the new coalition. It has committed to shrinking the numbers employed by 18,000-21,000 over a four-year period, with a further 4,000 reduction in 2015. This would bring numbers back to 2003 levels, at approximately 281,000.

If it is questionable whether this cut is large enough, it is unquestionably the case that the manner of achieving the reduction – early retirement and hiring freezes – is the least effective means of the available options. When early retirement is on offer the more able are more likely to leave, given their greater likelihood of finding alternative employment. Hiring freezes slow the flow of fresh blood into the system. It is thereby weakened. Together, and all others things being equal, the current plan will undermine the capacity of the public sector to deliver by more than is strictly necessary.

As is usually the case, politics explains why this was decided. These inefficient ways of shrinking the pay bill generate less opposition than the more efficient methods – targeted lay-offs and pay cuts.

Further pay cuts may come back on the agenda if the Croke Park deal fails to deliver or if the budgetary situation worsens. That has been stated explicitly by the Government. The issue of involuntary redundancies has not been raised explicitly. It should be.

There is no inherent reason why one grouping in society should be offered cast-iron employment security, paid for – ultimately – by those who have no such guarantees. In countries that are committed to equity, such as Sweden, all workers enjoy the same basic rights regardless of who their employer is.

Labour law must always try to find a balance between giving management as much freedom as possible to deliver efficiently and employees as much protection as possible so they can enjoy job security. There is no balance in the public sector. Taxpayers and those who are served by the public sector pay the price. That should change.

The non-wage component of current spending is much smaller than the wage bill, standing at €9.2 billion last year. As the chart shows, current spending on goods and services grew more slowly during the boom years, at 88 per cent in the eight years to 2008. But a good deal of that increase could have been avoided if better procedures had been in place to ensure value for money.

They were not, and this is despite the ever-present driving force pushing every bureaucrat to spend every last cent of his budget, and then some more if he can get away with it (in the public sector, power and prestige come from the size of your budget, not what you do with it or, as in the private sector, how much profit you make). Best practice in public sector management recognises the perverse incentives facing bureaucrats and very deliberately creates counter-incentives to offset them.

These were non-existent during the boom. The 2009 McCarthy report on public spending (aka An Bord Snip Nua) is worth quoting on how the sector operates: “Public service culture is insufficiently focused on how public resources are allocated, how efficiently they are spent and what results are being achieved”.

Given this, and that the reduction in total non-wage current spending in the two years to 2010 was just 9 per cent, there is a lot more fat to trim.

In achieving this, and modernising the management of public expenditure more generally, the McCarthy report recommended improved procurement procedures, better supply chain management and inventory control, the inclusion of sunset clauses in spending laws, greater use of outsourcing and ex-post evaluation of programmes.

Only limited progress has been made on making such best practices standard procedure. With a new Cabinet-level Minister, Brendan Howlin, tasked with improving public spending, and an entire Government department to support him, there is no longer any excuse – if one ever existed – for Government and officials not to accelerate the introduction of the McCarthy proposals. Next month’s Comprehensive Spending Review will give the clearest indication yet as to whether that will happen.