Lack of ambition on capital spending is a missed opportunity

The famous philosopher and occasional football manager Roy Keane famously once said “fail to prepare, prepare to fail”.

The phrase came to my mind when looking at the details of the Irish Government’s capital investment plan Building on Recovery: Infrastructure and Capital Investment 2016-2021.

The plan, announced with great fanfare by hard-hat wearing government ministers in September, set out the future key investments in transport, education, health and enterprise.

It contains some very worthy projects in all of these areas, including the metro link to Dublin Airport, an upgrade of the Dunkettle Interchange, a large-scale replacement of prefab school buildings, an upgraded maternity hospital for Limerick and a significant investment in social housing across the country.

These larger projects will be complemented by a whole host of capital projects at a local and community level, which the Government is already in the process of attempting to maximise to their political advantage with an election around the corner.

The numbers involved, on first glance, look enormous — €27bn in Exchequer spending is supplemented by a further €15bn in additional expenditure by the semi-state sector and in the form of PPPs.

The plan will support more than 45,000 construction-related jobs over the period.

These are, of course, positive developments and should be welcomed after the barren period for capital investment since 2008.

However, large numbers such as these can sometimes obscure informed opinion. Some context is required.

The plan runs over the six-year period from 2016-2021.

It is somewhat unusual for semi-state spending to be included in the overall spending plans.

If we take the €27bn Exchequer capital envelope alone, annual spending will amount to €4.5bn per annum.

The plan, though, is very much back-loaded towards the end of the period.

In fact, based upon the estimates set out in Budget 2016, capital spending will in fact fall next year relative to expected 2015 levels, while spending in 2017 will rise by only a small amount.

Relative to GNP, the most appropriate gauge for Ireland, capital spending will amount to just 2% of output in 2016, rising to 2.3% by 2021.

This compares to a European average of 2.8%, while in the US public investment amounts to 3.4%.

Compared with history, the level of spending over the coming years also looks low; since the early 1980s, public investment has averaged almost 4% of GNP every year, twice the current level.

The Government correctly points out that sound management of the public finances over recent years has brought Ireland back from the brink and that prudent fiscal policy must continue.

This prudence is underpinned by the newly introduced fiscal rules which limit increases in public spending to close to the sustainable growth rate of the economy over the medium-term.

Given this constraint, tough choices must be made between “giving back” to the public — by way of increases in current spending — and making an investment in the future through capital projects.

It is somewhat unfortunate that the Government has decided to take the former route.

This is particularly the case in 2016, given the still large amount of spare resources in the construction sector.

This will not always be the case. Construction costs have already started to rise, despite a large amount of unused resources.

With office building in Dublin on the up and housebuilding in the main urban areas now commencing, the Government will be competing for resources towards the end of the decade, thus costs are likely to be higher than they would otherwise be.

As a result, an opportunity is being missed to put the Irish economic expansion on a more firm footing into the medium-term and, in the process, some important projects are put on the long finger.

This is in the context of a significant infrastructure deficit.

The Cork-Limerick road upgrade is a case in point.

This €850m project had the potential to create an important economic corridor that would link the two most important regions of the south-west.

Housing is another area that, while getting significant attention over recent months, will not receive the level of investment required to solve the crisis situation in the sector.

An important point to make, here, is that borrowing for investment is very different for borrowing for day-to-day spending.

The former is very likely to bring about a return that exceeds Ireland’s funding costs, currently standing at 1% or so.

That funding environment provides a perfect opportunity to prepare for the future. It should be grabbed with both hands.

Dermot O’Leary is chief economist with Goodbody Stockbrokers


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