The right stimulus?

If next year there is some limited scope for economic stimulus to offset the impact of austerity, is a €1 billion investment programme to benefit the construction sector the best use of borrowed money? The Government, it seems, is examining that option, encouraged by Department of Finance projections that suggest the budget deficit in 2014 could be lower than the 5.1 per cent of GDP target agreed in the EU/IMF bailout programme, and so provide some leeway.

The Government in next year’s budget is set to take out some €3.1 billion spending cuts and tax rises, and ministers are debating whether to put €1 billion back into the economy, by boosting capital spending to assist an ailing construction sector.

The case for doing so would be compelling if Ireland actually had an infrastructure deficit: one that was constraining growth and that needed to be tackled to remove bottleneck. However, it does not.

Since 2007 with the economic downturn, growth has contracted sharply, and in successive budgets capital spending has been cut to reflect much lower levels of economic activity. As yet there are few if any signs of capacity constraints emerging in key areas of the economy to justify further investment.

Certainly, no sector of the economy has been hit harder than the construction industry. In 2007, it accounted for one quarter of national income in an economy, which, during the boom years, was largely reliant on the construction sector for what were unsustainable levels of growth that culminated in a dramatic bust.

A €1 billion investment programme for the construction sector would, undoubtedly, help to reduce the numbers on the live register, but with little lasting effect. For, more likely than not, it would involve building infrastructure that we do not currently need, with money a heavily indebted State cannot afford to borrow. Short-term jobs financed by longer-term debt are not what is now needed to set the economy on the road to recovery.