State ‘should increase’ capital spending

The Government should use the improving economic situation to bolster investment in capital infrastructure — but ensure it avoids the “speculative” investment mistakes of the past, an economist has said.

Tom Healy of the Nevin Economic Research Institute highlighted the steep decline in capital spending between the height of the boom and subsequent years.

“Following the crash of 2008-2010, by 2011, Ireland recorded the lowest level of investment as a percentage of GDP of any EU state with the public and private sectors deleveraging in tandem,” he said. “The proportion of investment devoted to capital investment was 15% in that year compared to 30% in 2006. Moreover, the rate of public investment was among the lowest in the EU.”

Mr Healy pointed out that, in 2014, the rate of public capital expenditure was the second lowest in the EU.

“While there has been some recovery in investment activities since 2011, it is clear that there are acute shortages in areas of key need including provision of suitable and affordable accommodation for a rising population as well as investment in areas such a renewable energy, building conservation measures, public transport, broadband and water infrastructure. Total investment was still no more than 17% of GDP in 2014 — representing the fourth lowest rate in the EU.”

However, while calling for increased investment, Mr Healy warned of the pitfalls of “speculative, wasteful or socially destructive” spending. He said as Ireland’s economy underwent rapid expansion before the crash, some of the investment at the time was speculative in nature and “highly dependent on cheap credit and a tax-distorted system that fuelled a property bubble, including investment in the wrong type of assets and in many cases the wrong physical location”.

Mr Healy believes there is a chance for public bodies here to avail of cheap credit to finance long-term strategic investment — as long as it is done carefully, with access to what, he said, should be “rigorous cost-benefit evaluation of the project proposals”.

“The level of public capital spending — 1.9% of GDP in 2014 — is too low and should be increased gradually over a three to five year period to reach a long-term goal of around 4% of GDP.

“Such public general government investment can be complemented by ‘off the books’ public commercial investment based on appropriate commercial criteria and revenue flows.”

Mr Healy said investment in hospitals and schools should, generally, be undertaken ‘on the books’ while other areas of potential commercial enterprise can be undertaken ‘off the books’ provided user charges can make up in excess of 50% of the revenue stream.

“Broadband infrastructure, social/affordable housing, and green energy are three examples of investments that could be taken off books,” he said.

At the end of last month, the National Competitiveness Council identified areas of concern it had surrounding the country’s infrastructure which, it said, could jeopardise the foundations of the recovery.

It said there had been insufficient investment in transport, energy and broadband infrastructure to meet the needs of a growing economy and said the opportunity should be taken with the improvement in GDP to channel additional funding into capital investment projects to deal with such infrastructural deficits.