ESRI calls for slowdown in capital spending

Too much, too soon is the ESRI's verdict, writes Marc Coleman , Economics Editor

It was Nikita Khruschev who once described a politician as someone who will build a bridge where there is no river. The ESRI has the same suspicion about politicians, if its latest evaluation of the next National Development Plan is anything to go by.

The evaluation, published yesterday, calls on the Government to slow down its plans to invest almost €10 billion a year on developing infrastructure over the 2007-2013 period.

In a mammoth document, 350 pages in all, the ESRI gives a comprehensive analysis - at times praising and at times damning - of the Government's record on infrastructure and its future priorities. Those priorities are laid out in the draft National Development Plan 2007-13, and in the multi-annual framework for capital spending that tots up the bill for the plan.

Too much, too soon is the ESRI's verdict. And for once the institute is not concerned about a lack of fiscal prudence. It hardly could be. The Government will run modest surpluses in 2007 and 2008 according to pre-budget projections published by the Department of Finance last week.

Those projections are for a surplus of 0.4 per cent of GDP in 2007 and 0.2 per cent of GDP in 2008, assuming the Government increases capital spending by amounts set down in its multi-annual framework. From around €7.6 billion this year, that framework predicts capital spending to reach €7.8 billion in 2007, €8.4 billion in 2008, €9.8 billion in 2009 and €10.5 billion in 2010. The average annual spend over the whole period of the next NDP is a shade under €10 billion.

And these increases planned by the Government are nothing compared to what it could do, if it were minded. The limits of its actions are, in theory, prescribed by the Stability and Growth Pact. That rule - now partly defunct - proscribes deficits above 3 per cent of GDP and also says that EU member states are supposed to avoid walking too close to the 3 per cent border in case unforeseen events - a recession or a property crash for instance - push them over it.

In reality, both France and Germany have given the Pact the two fingers and gotten away with it. Ireland would be unlikely to receive a serious reprimand if it responded to clogged roads and crowded hospitals by pushing its deficit out to 2.5 per cent of GDP, thereby increasing its allocated capital infrastructure spend by a full three percentage points of GDP. With that number projected to reach around €180 billion in 2006, the Government could - if it pushed out the Stability Pact and gave up on significant increases in spending or reductions in taxation - hike its capital spending by almost € 5 billion.

In the real world of pre-election budget formation, tax cuts and spending increases will cause the Government's opening budgetary position to deteriorate by at least €2 billion. But that would still leave room for the Government to go beyond the increases that so worry the ESRI. That will especially be so if Fianna Fáil ends up in government with Labour rather than the more fiscally cautious Progressive Democrats.

As the ESRI notes in its analysis, the construction sector is already too dominant and accounts for one-quarter of the economy. And even if the Government's plans didn't overheat the economy, poor evaluation, bad planning and a disregard for the national spatial strategy would limit what the next NDP could achieve

But, as the ESRI must have noticed, the implementation of the next NDP will coincide almost exactly with the expected period of office of the next government - 2007 to 2012. If from 2008 - as many including the ESRI say could happen - an economic slowdown occurs, the construction sector is likely to be at the forefront of the Government's concerns.

Then the NDP will become even more important than a programme of building infrastructure. It will be a strategic tool to keep the dole queues short as the 2012 election approaches.