GOVERNMENT INFRASTRUCTURE SPENDING

The government has responded to the country’s critical infrastructure deficit in housing and other sectors by committing to increase public investment over the next few years but given the scale of our infrastructural shortcomings the planned increases will not be enough, says Professor Eoin Reeves is Head of the Department of Economics at University of Limerick.

Also, with the economy operating near full capacity there is a danger that new investment will not provide value for money. In the summer of 2016 the government committed an additional €5.14 billion to its Capital Investment Plan 2016-2021. This is good news given the savage cuts in capital spending during the recession. These cuts were excessive and inflicted lasting damage on the economy and societal welfare.

It is worth reminding ourselves of the scale of collapse in public investment during the crisis. Between 2008 and 2013, exchequer funded investment fell from a historic high of €9 billion to €3.4 billion. This led to the cancellation of much needed infrastructure such as roads, school and university buildings, social housing and public transport facilities. Moreover, the five year period of annual reductions commenced at a time when the quality of Ireland’s infrastructure was still poor in international comparative terms despite record levels of investment during the boom years.

Now that public investment is set to increase again it is vital that the best decisions are made about: (1) the appropriate level of public investment; (2) how that investment will be financed and funded; (3) how fiscal policy remains controlled and sustainable; and, (4) the institutional framework required to ensure that infrastructure spending provides the best economic and social returns. In relation to the size of exchequer financed investment the most recent announcement indicates that the government plans to spend €35.5 billion over the period 2016-2021. This is a vast improvement on the original plan to spend €27 billion announced in September 2015 but is it sufficient to meet current needs? Unfortunately not. Given the growth rates forecast for the economy over the next few years it is generally agreed that pubic capital spending should be running at three per cent of GDP. But the government does not expect to meet a three per cent target until 2021. In fact, given the poor state of Ireland’s infrastructure the case could be made for capital spending at a rate closer to 4 per cent. Even if public investment hits the three percent target there is a danger that it will contribute to the economy overheating. As the economy is close to operating at full capacity there is a real danger that tender prices will increase and value for money will not be achieved. Increased capital spending will have to be balanced by reductions on other expenditures or increased taxes.

For a more extensive article see our September/October 2017 Issue of Irish Construction Industry Magazine available on subscription, email catherine@mcdmedia.ie