The new Programme for Government commits to spending an additional €5 billion on capital over the term of the current Capex plan. It also commits to bringing a review of the plan forward to 2017 in order to effectively target appropriate capital projects. These are both welcome developments but are unlikely to be sufficient in order to head off the real risk the economy faces following a decade of underinvestment. Averaging 2.2% of GDP per annum, even with added expenditure, the Exchequer contribution to the new capital plan will be the smallest on record (since 1970) and likely its smallest in the post-war era.

Ireland has a relatively weak public infrastructure, as witnessed by our international rankings, and the fastest growing population in Europe. At the same time our average level of investment has been half that of our European competitors - many of whom have spent between 3 and 4% of GDP over decades on public investment. Over the long-term this investment will be a key driver of competitiveness. As such Ireland should be spending at least the equivalent of 4% of GDP on public infrastructure.

Issue 16: The capital budget

Ibec recommends

Under the fiscal rules it will be difficult to enhance public investment sufficiently in order to meet the demographic or economic pressures Ireland will come under. Increases in capital spending under current plans will be backloaded until 2019 – with most projects unlikely to be completed before 2022 at the earliest. By this time, it is likely Ireland will have critical infrastructure deficits across a number of areas – having seen over a decade of underinvestment relative to any international or historical norm. In the face of the potential impact of Brexit it would be a mistake for the Government to row back on existing funding allocated to public investment from 2018 onward.

Where fiscal space dissipates it should come from the €3 billion in funding currently earmarked for the rainy day fund with other sources used to put together a reserve cash fund. This is the only prudent course at a time when interest rates are at an all-time low (allowing for the cheap carry of debt financed cash reserves) and when the State has significant liquid value built up in both cash, ISIF and the retained value in the pillar banks (cumulatively worth in the region of 15% of GDP). Budget 2017 instead should see some provision made in order to aid fast tracking of planning and procurement for key projects.

How Ireland will benefit

During previous slowdowns the first budget item to lose out was the capital budget. Ireland’s experience both in the early 1990s and in recent years is that the cyclicality of our investment spending only exacerbates downturns and stores up major infrastructure shortages for the recovery. The consequences of these mistakes are clear in our housing and key infrastructure – they should not be repeated.

Issue 17: Investment under the fiscal rules

Ibec recommends

Ibec supports the fiscal rules for day to day spending and taxation. However, conventions in government accounts, which would be considered non-standard in any other setting, mean these rules bias against sensible long-term investment. The fiscal rules should be reformed to include a separate capital account more in line with its corporate treatment. This would include spreading the fiscal cost of assets over their lifetime.

Concerns about these changes allowing excess build-up of debt could for example be overcome by limits on debt financing of capital expenditure or by setting targets for capex or interest on capex as a proportion of tax revenue. In either event it should be kept in check by the current debt rule.

To ensure better value for money for the taxpayer from these projects it would be sensible to establish a National Infrastructure Advisory Council reporting to the Oireachtas which would advise on appropriate projects and the efficiency of public spending.

How Ireland will benefit

Ireland and Europe would benefit by allowing a greater proportion of strategic investments to be made by recognising that their capital cost is not the same as a recurring cash flow or operational cost. In the long-term, removing this barrier – by operating under more generally accepted accounting principles – could save European States money by reducing the need for otherwise sub-optimal current expenditure.


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