Paul Sweeney: There is a simple solution to directly funding an immediate major social housing programme and other infrastructure. It is to use the billions already flowing into the Exchequer from the sale of the shares in the rescued banks for infrastructural investment, instead of paying down the national debt. Interest on the debt is only 0.7 percent and it can be paid down over a longer period from taxation.
It is argued that the EU is forcing the Government to pay down the debt rapidly with this bank capital. This is not correct.
The taxpayer has major stakes in the rescued banks worth between €20 and €30bn which will flow into the exchequer over several years as they are sold off. Already almost €2bn has flowed into the Exchequer and flowed out again to pay down some of the national debt. Interest on Irish ten year bonds is only 0.7 per cent, lower than even the UK at 1.5 and US at 1.9 percent. There is no need to rush to repay the debt which will be repaid over time from taxation and some bank capital. About €15bn of the bank capital should be invested in Irish infrastructure over the coming years - in social housing, in public transport, in hospitals, nursing homes, schools and human skills.
Further, the state should retain a share of AIB. With its long history of financial skulduggery, this biggest Irish bank is too important to be left in full private ownership.
Planned exchequer investment this year will fall to a 50 year low. It may not even cover depreciation. Public investment is the most effective short-run fiscal policy instrument. It has an immediate impact on unemployment. The IMF found each 1% Exchequer invested gives 2% increase in ouput within a year. Return on such investment is excellent with strong multipliers in many areas.
The EU Commission itself critically warned “public investment in Ireland is well below EU average.” This point has also been made by the NCC, IMF, Engineers Ireland, IBEC, Congress and other bodies.
The reason why the billions from the privatisation of the bank shares are being used to pay down the national debt, instead of investing it in Ireland, is because of EU rules. Many believe that Ireland must be a good EU citizen and strictly adhere to the EU’s Growth and Stability Pact rules.
However, the EU rules have been loosened for investment and this needs to be explored. Italy pushed these rules to the limit last October, with no sanctions from the Commission, which merely said Italy, Austria and Lithuania “risk breaching the rules”. Italy introduced a €30bn programme of mainly tax cuts which will be funded by further borrowing, even though it has the second highest debt in EU after Greece. Italy also gave a one-off €500 handout to all 18-year-olds to be spent on cultural activities, such as cinema trips.
If the EU Commission is urging more investment in infrastructure, it is hardly likely to sanction us for investing our own bank capital here, rather than repaying the national debt, which is being repaid anyway. The EU target of reducing gross national debt to 60 percent of GDP is arbitrary and flawed. There is nothing magical about 60 percent of GDP. Net debt, not gross, should be the criterion. Ireland’s net debt is substantially lower than the gross. The offical net debt figure excludes substantial holdings of debt owned by the state itself.
Investing the capital from the bank shares in direct public provision of housing is certain, fast and has immediate impact. Fooling around with so-called “off balance sheet financing” and continuing to financialise housing in the middle of the worst housing crisis is costly, bureaucratic and simply does not work. Once the state invests directly in quality social housing, the rest of the housing market will return to sanity.
Direct exchequer provision of investment capital also ensures certainty. Certainty is vital for long-term planning of projects and the public capital programme.
To iron out the roller-coaster flows in Irish investment, the new Government needs to set up an Infrastructural Commission (in consultation with the public, local authorities, developers, builders etc.,) to plan 20-30 years ahead, with 10 year assessments. Fianna Fail have proposed this in their recent manifesto. An “Investment Golden Rule” should also be established to ensure that public investment spending at least covers depreciation plus inflation.
The Irish economy is performing well, but unemployment is still too high. The new government must increase public investment. The proceeds of the bank bailout funds, already flowing into the Exchequer can directly fund a major programme for years.
This article appeared as an Op-Ed in the Irish Times on Wednesday April 6th 2016.
See it here.
The case for funding infrastructural investment is available at http://www.tasc.ie/news/2016/02/19/a-time-for-ambition-ensuring-prosperity-through-in/)
Paul Sweeney is Chair of TASC’s Economists’ Network