ANALYSIS: Cuts to the capital budget are justified and less damaging than they appear at first sight
THE 2006 National Development Plan, published at the height of bubble-era hubris, set out an artificially puffed up figure for public investment over seven years of €184 billion – or €26 billion each year. Yesterday the Government said it would invest an average of €3.4 billion annually over the next five years. Nothing quite illustrates how things have changed in the intervening years than a back-to-back reading of the two documents.
The proximity of the State to bankruptcy has left this administration, as it did the last, with little option but to seek cuts in all areas of expenditure. But in no area of spending has the axe been wielded as aggressively as the capital budget.
At its peak, annual capital outlays were just shy of €10 billion. By last year that figure had been almost halved. In 2015 and 2016, it will be just a third of the peak and back to the levels of the late 1990s in cash terms.
From a political perspective, it is always easier to postpone the building of a railway or road than it is to cut public workers’ pay or welfare benefits. This calculus means politicians everywhere are quicker to cut productive investment than pick a fight with powerful interest groups.
While some members of the Fine Gael-Labour administration have yet to prove their mettle in facing down vested interests, further cuts to the capital budget are justified and less damaging than they appear at first sight. But before discussing the big picture impact, has the Government made a decent fist of allocating its meagre resources to ensure that they yield the greatest returns? The answer is broadly yes on the basis of the detail that emerged yesterday.
In order to emphasise how its priorities are different from those of the last government, yesterday’s plan compares the new spending priorities with those set out with some fanfare as a “stimulus” package in July 2010. This comparison was more than a little misleading given that the last government slashed the capital budget again in the 2011 budget. When compared to the last Fianna Fáil-Green Party plan, yesterday’s headline allocation by department shows less change than the Government claimed yesterday.
The explanation for the comparison with July 2010 was that it was the last fully comparable capital spending plan. That explanation doesn’t hold water in most cases. It is more plausible where big changes have been made, such as transport. In July 2010, public transport was allocated the second largest amount of nine spending categories. Yesterday it got the second smallest allocation, with just 8 per cent of the total. This reflects the belated abandonment of some of the more grandiose rail schemes that had until yesterday managed to survive in the changed environment.
The State’s house building programme has also been cut again in cash terms. This stacks up. With massive oversupply of residential property, it makes no sense for the State to be building more houses.
When compared to the last budget plan of the previous administration, health is the only area to be subject to no significant additional cuts among the big five capital spending departments. Education is also little affected, bearing out the emphasis Government politicians put on investing in schooling yesterday, and the need for more classrooms given that Ireland’s highest birth rate in Europe means the number of schoolchildren will grow fast over the next five years.
Yesterday, when launching the plan, the Taoiseach, Tánaiste and Minister for Public Expenditure and Reform put considerable emphasis on the potential to supplement the taxpayers’ money that will be invested in the next five years by seeking additional sources of funding. Brendan Howlin enthused about his (good) idea to extend the timeframe of the lottery licence when it is auctioned, thus raising more cash. He also spoke glowingly of public-private partnerships as a means of directing more private investment into public goods. With approximately €70 billion in private pension money invested abroad, there is scope to entice some of it back.
But even if a worst case scenario unfolds in which no additional cash is raised, a number of factors mitigate the damaging effects of the massive capital spending reductions introduced in recent years.
First, a shrunken economy needs less public investment. The Irish economy is now about 10 per cent smaller than at the peak of the boom and the domestic economy more than 20 per cent smaller. With less economic activity, there are fewer infrastructural bottlenecks to be addressed. As the document containing the detail of the much reduced capital programme said “it is unlikely that economic activity is being constrained by the quality of infrastructure”.
Second, there is a great deal of brand new infrastructure already in place. Yesterday the Cabinet members were at pains to emphasise that €70 billion has been spent on infrastructure since the turn of the century.
A third reason the huge capital cuts are less damaging than they appear is that they are smaller in real terms, ie when adjusted for deflation. The big falls in builders’ bills since the construction industry collapsed means that the bang for buck is much greater now than when the industry could dictate terms to customers. More schools can be built today for €100 million than five years ago.
A fourth reason to believe that yesterday does not mean disaster is that many of the things money was spent on during the boom are no longer needed. A country needs one motorway network, and now that ours is built that budget line can disappear without causing harm. Another example is social housing, spending on which peaked in 2007 at more than €2 billion. Then there appeared to be a housing shortage. Nobody would argue that now. Housing the needy can be done more cheaply than by building more homes.
But it is comparison with our European neighbours that provides the best reason to believe yesterday’s cuts will not prolong the slump or hinder future growth. By the middle of the decade, public investment is budgeted to be about 2 per cent of gross domestic product. This is in line with the long run average across the euro zone. If our peers can get by on that much public investment, we can too.
Dan O’Brien is Economics Editor