Choices, choices. The rows are now starting about what projects are in and out of the Government’s new investment plan. We can expect much more entertainment here in the weeks ahead. Some of these debates will be important – like whether the Dublin metro plan is the right way to go. And some will be purely political and be about who “wins” and “loses”, though of course this will not be the way they are presented.
But underlying this whole strategy is a choice – and a really big one. We are committing ourselves to spend more – a lot more – on capital investment projects and so we will have less cash elsewhere. This will mean not cutting the overall tax burden and settling for slower increases in day-to-day spending. In other words, this Government is placing its political bets on the capital plan.
If this can’t be sold politically, then this plan will collapse just as soon as the first economic slowdown arrives. It will face a myriad of other challenges, of course. Already it has been chipped away a bit to prioritise more areas for development and pressure here will continue relentlessly. Then there is the arm-wrestle which changing our national planning regime will involve and the sheer inertia which can overtake major projects.
But the first question is whether the money will be there, year on year, to do this and whether we are willing to make the sacrifices elsewhere so this can happen.
Nowhere has the boom and bust cycle in Ireland been clearer than in investment spending. At the peak, in 2007 State capital spending was €9 billion, but by 2013 it had crashed back to less than €3.5 billion. When cuts had be to made, it was politically easier to opt for pain in future – by cutting investment spending, rather than the immediate pain of yet more current spending cuts.
Clogged roads
To put this in context, a recent International Monetary Fund report said that in recent years we weren’t even spending enough to deal with the normal depreciation of assets – roads, railways, public housing and so on. We weren’t even running fast enough to stand still. No wonder we have a housing crisis and clogged roads.
Now the plan is to increase spending very significantly, averaging €9 billion a year over the next decade. This raises some issues for Minister for Finance Paschal Donohoe and whoever follows him in that job.
One is the obvious one. Does the investment plan get thrown out the window the next time the public finances come under pressure? The point of laying out plans for so many years ahead is to make it less likely that this will happen. If the diggers have started on Metro North, or the Cork-Limerick motorway, then it makes it all the more difficult to call a halt. But it will – as ever – come down to the politics of the day.
Even if we don’t hit big pressure on the public finances, this plan requires choices. Forecasts for the next couple of years suggest that there may be significant wriggle room in the budgets for 2019 and 2020. But economic growth can’t continue at the pace we have seen in the past couple of years – not unless we are really going to go back to boom and bust. And there are threats. A report commissioned by the Government by respected consultants Copenhagen Economics suggested that, in a worst-case Brexit scenario, growth in the next couple of years to 2020 could be 2 per cent less than otherwise.
Who knows what might happen. But there are always economic ups and down. We simply won’t be able to keep cutting taxes, investing more and spending a lot more on services all at the same time.This is particularly the case if we want to build the buffer of a rainy-day fund when times are good. This would give the public finances some leeway to support the investment programme if things do get a bit tighter - and also a safeguard if corporate tax revenues,which have shot up in recent years, come under pressure.
Some taxes could be cut, of course, but this would mean increases elsewhere. We can’t make a one-way bet on corporation tax continuing to rise, or leave our tax base vulnerable to the next slowdown. To afford this plan, the overall level of tax will need to remain roughly where it is now.
Fears of overheating
And there is a twist for the Minister for Finance here, too. If, for the sake of argument, growth remains strong this year and the Brexit talks stay on track, then on the face of it he will have significant leeway in the budget. But with big increases in State investment spending planned for 2019 and 2020, adding in further tax cuts and more day-to-day spending might really risk pushing the economy into overheating territory.With a general election then looming, can the Government resist the temptation it may well face in October?
Investment spending does let the economy grow more quickly, by increasing its productive capacity. It is the right thing to do. But this benefit comes on stream slowly. Meanwhile the additional spending adds fuel to the economic fire immediately.
Of course to get the long-term economic kick-back, the money must be well-spent. A proper economic analysis is needed before they are signed off. No full assessment was published previously for the then Metro North, for example – though we were assured one was done. Now it will need to be done again on the new plan. And proper prioritisation and planning of the rollout of projects will be vital, an area where we have been often lacking in the past.
Fundamentally this plan is about choices. It is a commitment that investment will be the priority over the next few years. Realistically, that means a bit less to spend elsewhere – and no big cuts in our taxes.Otherwise the likelihood is that all the big plans will be ditched when the next economic wobble hits.