Leading economist warns State to cut back spending

Government spending is too high, the Nobel Laureate professor of economics, Robert Mundell, warns in an interview with The Irish Times.

Increases of more than 20 per cent in day-to-day spending are unsustainable and risk cutting off economic growth, Prof Mundell says. He also questions whether now is the right time to be spending a billion pounds on a new national stadium.

Despite this, the professor is supportive of Irish economic problems in the face of Commission criticism. Prof Mundell is known as the father of the euro and his theoretical work underpinned the new currency. He has been an adviser to the European Commission, the Organisation for Economic Co-operation and Development, and the World Bank. Following his forthright remarks about the Commission after the row between Brussels and Dublin earlier this year, Prof Mundell was invited to Brussels and had lunch with a number of commissioners, including Commission president Mr Romano Prodi and economic affairs commissioner Mr Pedro Solbes, who has been at the forefront of the criticism of the Republic.

The question according to Prof Mundell, is who makes fiscal policy? Theoretically, it should be the finance ministers or Ecofin but it is so unwieldy that it leaves a vacuum, which the Commission is trying to fill. In the process, he says, it is overstepping the boundary of being an advisory body.

Prof Mundell believes the whole strategy may backfire on the Commission. The very public reprimand of the Republic has notified all other states of the Commission's ambitions and most will be very reluctant to agree anything that line them up for a potential attack. "They will look very carefully before making a gratuitous commitment that must be adhered to no matter what the change in circumstances," he says.

The whole public strategy of criticising the Republic for high inflation is completely wrong, according to Prof Mundell. However, he says that day-today spending should be cut back. Capital growth is different, he says. If the Commission is suggesting that capital projects be cut back to meet its targets, that is wrong headed. "It is even right to run a deficit to support capital spending."

However, he also cautions that it is important to be clear what constitutes capital spending. "Is it more important to give priority to projects such as transport which have an effect on current productivity?" he asks.