Monday, 13 June 2016

Taoiseach appears to seek Increased Public Investment, as does OECD.

Paul Sweeney: The leak in the Irish Times (13th June 2016) that the Taoiseach has written to Mr Juncker, President of the EU Commisson, on the need for greater investment in Ireland is welcome, but appears somewhat disingenuous. 

His letter appears to quote the report published by TASC last December which pointed out that Ireland’s level of investment was at its lowest level ever and was the lowest in the Union. Mr Kenny said investment in infrastructure in Ireland was at its “lowest level for many years, and also represents the lowest level of any member state at present” – the two points emphasised by TASC.

That Mr Kenny has now recognised this is welcome, but it was his government which set out the investment plan last autumn which proposed to cut investment even lower than the lowest level ever, from 1.8% of GDP in 2013 to 1.7% in 2016.
What Level of Investment as % of GDP?

TASC argued in its detailed programme that there needs to be more ambition on the level of investment. The investment programme launched by the last government, “Building on Recovery”, was so lacking in ambition that in its first year – this year, 2016 - public invesment would fall even lower - to its lowest level (1.7% of GDP) in history.
In spite of TASC’s report and the urging of many other bodies like IBEC, Engineers Ireland, CIF, etc on how lacking in ambition the Government’s report was, few party manifestos had public investment as a priority.
Investment is important and would have an immediate impact on housing and on reducing unemployment, particularly for unemployed construction workers.
The government’s own plan Building on Recovery, pointed out very clearly how important investment is: “High-quality infrastructure is an important element of a modern society and economy. It strengthens economic growth through enhancing efficiency, productivity and competitiveness. It also underpins social cohesion through providing vital facilities for people in the form of schools, public transport, health care and housing.

This new government intends to be only a little less unambitious, with an overall increase of €4bn on the €27 promised in last autumn’s plan. TASC suggested that it should be increased to €42bn using some of the privatisation proceeds from the banks. The plan is for public investment averaging only 1.8% of GDP till 2021.

Many call for public investment to be around 4% which it was in the years before the crash (and it was not wasteful compared to much private investment at that time). TASC’s increase on the government plan to a total of €42bn, would boost it to 2.8% of GDP, which is still modest.

Mr Kenny - more Investment or more private opportunities?

So has Mr Kenny finally woken up to the need for greater direct public investment? For example, is he seeking permission from Europe to directly invest some of the banks’ proceeds in Ireland, instead of making the error of using them to accellerate repayment of the national debt?

It seems not. He appears to be looking for new ways of avoiding direct public investment and to increase private investment in public infrastructure. It seems he wants leeway to have more Public Private Partnerships, even though they cost more in the long run and take much longer to execute, than direct public funding. 

“Mr Kenny said he felt sufficiently concerned about how Eurostat was classifying public-private partnerships – widely used to fund infrastructural projects – that he felt the need to ‘raise the matter at the highest political level’”, according to the Irish Times.

But he also said ““We are also acutely conscious of the constraints and obligations of the fiscal rules, and the need to broaden sources of investment as widely as possible within those constraints and obligations.” Clearly using some of the bank proceeds for investment is not even being discussed. The flavour still is “broader sources of finance.”
OECD and Investment

In its recent Outlook, the OECD joined the EU in arguing that there should be a rise in public investment. (The EU contradicted itelf in its Ireland Country Report, urging fiscal rectitude and simultaneously, more investment). OECD says that a commitment to raising public investment, collectively, would boost demand and allow economies to remain on what it calls “a fiscally sustainable path”. 

It points out that public investment spending has “a high-multiplier, while quality infrastructure projects would help to support future growth, making up for the shortfall in investment following the cuts imposed across advanced countries in recent years.” 

It calls for what it terms “collective public investment action”. It says that this would lead to a increased GDP and it would also “reduce the debt-to-GDP ratio in the near term.”
First year effects of a 1⁄2 per cent of GDP public investment stimulus by all OECD economies would boost world GDP by almost 0.4% but it would boost it (in year one) in the Euro area, the US and  Canada by 0.6%. 

This is based a simulation using the NiGEM model, based on a two-year increase in the level of government investment equivalent to 1⁄2 per cent of GDP per annum in all OECD countries. The euro area figures are a weighted average of Germany, France and Italy.
The investment would immediately reduce the stock of public debt in the US by over 0.6% of GDP and by a lesser but not insignificant 0.4% of GDP in the Euro area.

In conclusion, there is finally recognition of the need for greater public investment. However, it needs to be direct state investment, with much less reliance on costly, cumbersome and slow private “partnerships”. These will cost us €225m this year and each year from now on for many years.

Indeed, it realy is time for a truly independent cost-benefit analysis of PPPs which amount to €5.87bn – so far. It is surely time for real talk about VFM – value for money. Before Mr Kenny gets EU permission to expand PPPs, is it not time to analyes if this method of funding gives value? Lets look at this Elephant in the Exchequer.

In the next blog, the OECD Outlook for the world economy and for Ireland will be reviewed.

Paul Sweeney is chair of TASC Economists’ Network.

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