Picture of Economic Consultant Tom Ferris

Tom Ferris is a Consultant Economist specialising in Better Regulation.
He was formerly the Department of Transport’s Senior Economist.

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Last September, the Government announced a plan for €42bn in capital investment in public infrastructure between 2016 and 2021. The Think-tank for Action on Social Change (TASC) has now suggested that this be increased by a third, by a further €15bn. This blog looks at the pros and cons of the latest intervention.

TASC Report

The report was produced for TASC by Paul Sweeney, Chair of TASC’s Economists’ Network. The report, “A Time for Ambition: Ensuring Prosperity through Investment”, makes the case for substantially-increased State spending to compensate for underinvestment in public infrastructure during the past decade.

The report argues that the State investment plan should be boosted from the €42bn planned by Government to €57bn for the six years up to 2021. On the institutional front the report suggests two innovations:

  • The establishment of an Infrastructural Commission, which would bring long-term planning to the fore in government policy; and
  • The adoption by the EU and each Member State of a ‘Golden Rule’ of minimum infrastructural investment by governments.

Why Mr Sweeney seeks a further boost to public investment boost is set-out below.

TASC’s Case for  increased Government Investment

 

  • Ireland desperately needs the assets – social and affordable housing, public transport, schools, clinics, as well as education and training.
  • Interest rates are historically low.
  • Investment costs less during a recession and, while it may be over, there is still output gap and high unemployment, especially among construction workers.
  • The lack of investment is reducing future economic growth and development.
  • Investment leads to innovation which makes the economy more efficient.
  • Governments never cut investment – they only postpone it.

 

Source: TASC, ‘A Time for Ambition: Ensuring Prosperity Through Investment Issued’, author Paul Sweeney, December 2015

 

Catch-up

Mr Sweeney argues that Ireland has been under-investing in public infrastructure in recent years. He goes on to say that

“The government must increase investment substantially because we need the assets – social and affordable housing, public transport, schools, clinics, etc and importantly, education and training”.

It must be recognised that the Government Plan, Building on Recovery, does already plan for significant investment — a grand total of €42bn in public infrastructure between 2016 and 2021. What the TASC report is arguing is that €42bn should be increased by a further €15bn.  And TASC is not alone in its recommendation. Ibec, which represent the interests of business, make a similar case, for a similar amount.i

Specifically, Ibec argues that

“… we need to be spending an extra €2.5bn every year because smart investment in transport, telecommunications, health, education, water, environmental services and energy will power a more productive economy. An increase in the supply of affordable and quality housing is needed to accommodate our ever growing population”.

 

The public investment forecasts are also adverted to in the recent report from the Irish Fiscal Advisory Council (IFAC) that assesses the macroeconomic and budgetary projections set out by the Government in Budget 2016.ii

Specifically, the IFAC comments that the official capital forecasts

“… imply a small rise in capital spending by the end of the decade; however, the chart shows that capital spending is projected to remain at very low levels by historical standards over the forecast horizon”.

Funding

It is one thing to make commitments to making significant public investment; it is another matter to arrange the financing of such investment. The Government’s Capital Plan confirms that a financial framework is designed to accommodate the €27bn Exchequer capital expenditure. Specifically, the Plan states that

“The scale and profile of the Exchequer component of the Capital Plan has been developed with reference to the Government’s present medium term economic growth forecasts and is fully consistent with Ireland’s fiscal targets over the coming years. As is normal in a programme of this length, there will be a Mid-Term Review, which will take stock of progress to date and provide the Government with an opportunity to reaffirm priority projects”.

The balance of the funding for the Government Plan will have to come mainly from the commercial State sector and from Public Private Partnerships (PPPs).

The question arises as to where the additional funding suggested by TASC would come from. In fact, Mr Sweeney suggests in his report that most of the additional investment should be funded by part of the proceeds of the privatisation of the bank shares currently in public ownership. However, it would appear that the Government would prefer to use the proceeds from the sale of bank assets to reduce the National Debt. In a speech last March, Michael Noonan TD, Minister for Finance, stated that

“By taking the proceeds of these sales off the debt, the ratio can improve by another 10% to 15% over time. So we are well on our way to reducing the cash balances, monetizing our investments in the banks and reducing the Gross Debt to GDP ratio significantly in the years ahead”.

If that is so, then more work needs to be done to generate other forms of finance. This will not be easy, having regards to the fiscal rules set domestically and by the EU. But, as Mr Sweeney puts it:

“…we need to develop new strategies to undertake public investment adequately and successfully. Some of these may seem akin to financialisation but with a strong emphasis on public return and equality we can deliver good public investment projects, which in turn will lead to increased private investment”.

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