ESRI calls for prioritising of infrastructure

The ESRI has said the the Government should stop making payments to the National Pensions Reserve Fund and divert the funds to infrastructure.In its Medium-Term Review, published this morning, the institute argues that the Government should prioritise its infrastructural programme over other calls on the public finances.

When the infrastructural deficit has been adequately addressed, the Exchequer will have the means to make significantly larger payments to the pension fund, according to the ESRI.

The Government is committed to contributing 1 per cent of gross national product (GNP) to the fund each year until 2030.

Making bigger annual payments - of more than 3 per cent of GNP - later on, would produce a larger fund by the time it reached maturity, argues the ESRI.

Research professor and editor of the review, Prof John FitzGerald said that, while he was not opposed to small amounts of borrowing, the funding of future pension provision was not a sound basis for a deficit.

The institute also claims that, by funding infrastructure through taxation, the current generation of workers is - in effect - providing for its pension already.

The infrastructure that is being built will still be used by the next generation of workers and, as a result, a greater portion of their taxes will be available to fund the pension of retired workers.

When the infrastructural programme is largely complete, "most of the 5 per cent of GDP that is currently spent by the Government on investment will then be available," the ESRI argues.

"After 2015, that's when you start to save for pensions," said Prof FitzGerald yesterday.

The National Pension Reserve Fund was established in 2001 to address a perceived problem with funding public service pensions from 2030 onwards. The shortfall is expected to arise as the current favourable demographic trend reverses.

This year the Exchequer has paid €552 million into the fund, on top of €8.1 billion paid in since 2001.

The national infrastructure deficit is one of a number of issues that must be addressed if the economy is to grow at its full potential, according to the ESRI.

The institute has predicted that the economy could start to grow at 5 per cent or more from 2005 onwards if competitiveness can be maintained and the international economy - the EU economy in particular - starts to recover.

There were signs yesterday that this second criterion may be met, with Germany's leading economic think-tank predicting a noticeable recovery in the second half of this year or early next year.

The Ifo said the German economy was still suffering from the "extraordinary shocks" of September 11th and the collapse of the new economy.

Even with an economic turnaround later this year, the Ifo warned yesterday that unemployment would continue to rise, with an average 4.45 million people out of work this year, rising to 4.6 million in 2004.

Nevertheless, there have been scraps of good economic news of late. Investor confidence has risen in July for the seventh consecutive month to an 11-month high, according to data from the ZEW economic institute. The euro zone-wide ZEW index made a similar jump in the same time.

"The indicator suggests that Germany is about to leave the economic trough," said ZEW president Mr Wolfgang Franz. "Rising stock prices, the slightly weaker euro and progress in the reform debate contributed to the new-found optimism."