Stimulus to be welcomed but real effect will be small
ANALYSIS:The psychological benefits of the package are clear. But it will only cut the jobless rate by 0.6% at very most, writes DAN O'BRIEN
STATE INVESTMENT spending has been scythed many times in recent years. The most recent cut was made last November by the Fine Gael-Labour administration. Yesterday, for the first time since the recession began, that same administration announced an increase in investment spending.
The Taoiseach, Tánaiste and Minister for Public Expenditure trumpeted an additional €2.25 billion over the seven years to 2018. The cash is on top of €17 billion already allocated for investment in the 2012-2016 period. None of the €2.25 billion will be borrowed by an already over-borrowed State. This is a stimulus package for an age of austerity.
What effect will it have?
Stimulating an economy is easy to do. If, say, a government employed 100,000 workless builders to dig the world’s biggest hole, the economy would be stimulated. Their wages and the money spent on machinery and the like would boost demand. Having the 100,000 workers fill the hole in again would provide another shot in the other arm.
But nobody advocates such make-work schemes because the stimulus effect ends the minute the hole is filled in and because the filled-in hole yields no returns.
By contrast, real investment, such as the construction of schools and roads, produces the immediate stimulus of the money spent and then goes on yielding returns long after the work has stopped – better-educated kids go on to have more productive working lives and better roads cut costs for users by reducing journey times.
The Government estimates its new plan will create 13,000 jobs, a number that is consistent with previous estimates of how much public spending – about €100,000 – it takes to generate one job.
But the number of jobs to be generated also shows the effect of the package will be small. At last count, there were 313,000 people out of work. If all the promised stimulus jobs materialised tomorrow (and nobody – not even the Government – is claiming they will), the rate of unemployment would fall from 14.8 per cent to 14.2 per cent. That would be important for the 13,000, but not transformative for the economy.
It is easy to see why yesterday’s stimulus will not turn gloom to boom. The €2.25 billion additional spending announced yesterday is spread over seven years, averaging out at €320 million a year. That is a fraction of 1 per cent of gross domestic product, or, in plain language, a drop in the bucket.
That said, announcements such as yesterday’s can have intangible benefits, mostly by boosting confidence. Headlines of multibillion investments in health, education and transport facilities can give a sense that a corner has been turned and that there is new momentum in the economy. They can also give the governed a sense that those who are governing are competent, in control and getting ahead of the curve.