Huge opportunity cost for State if prudence is primary economic aim

Focus should be on projects not undertaken rather than on those already under way

“We need to effectively and efficiently deliver the projects our rapidly-expanding population requires in the form of public infrastructure.” Photograph: Cyril Byrne

“We need to effectively and efficiently deliver the projects our rapidly-expanding population requires in the form of public infrastructure.” Photograph: Cyril Byrne

 

The Minister of Finance, Paschal Donohue, is not short of advice right now. More will undoubtedly be offered during this week’s National Economic Dialogue, including from ourselves in the business community.

Truisms will abound. The situation is well rehearsed – we need to be ambitious, we need to be prudent, the economy is overheating, the economy is on the verge of a downturn induced by a hard Brexit. We range from the “seen it all before” sages, to a “naive generation” believing that both economic laws and political sanity stop at Holyhead.

The dilemma is between “we have been here before” or “never saw the like”.

Like all truisms, they can be simultaneously right depending on the framing context. The Government, however, must choose which version it gives preference.

Right now, the prudence camp appears to have the high moral ground, being able to point to profligate spending on the back of unsustainable windfall revenues. Prudence, they contend, is the primary objective. Purpose becomes subordinate, leading to the Gordon Brown-inspired slogan “prudence with a purpose”. It has its own logic.

Projects such as the inter-urban motorway network, the port tunnel or Terminal 2 at Dublin Airport have all been through the nay-sayers’ sights

Purpose, or rather effectiveness, I would argue, is more important right now for the Irish economy and society. We need to effectively and efficiently deliver the projects our rapidly-expanding population requires in the form of public infrastructure. Effectiveness is the first-order condition, with efficiency subordinate. Those pushing efficiency can declare how fast a pace they will run a mile, but it is meaningless if the mile is not run. Efficiency is operative only in the context of effectiveness.

Projects not undertaken

Purpose with prudence is what is required for Ireland at this point. Ireland is not short of money but it is short of public investment to match the moment and so the order of preference must be right. The real costs for our society are the projects not undertaken and this is where the focus should be instead of obsessing over those already under way.

The current obsessions are the large-scale investments of the national children’s hospital and the national broadband plan. Yes, there are legitimate cost concerns, but time and again public infrastructure projects in Ireland have more than justified initial scepticism over costs by providing the underlining context for the benefits of our current economic success.

Projects such as the inter-urban motorway network, the port tunnel or Terminal 2 at Dublin Airport have all been through the nay-sayers’ sights. Terminal 2 is a case in point given the current standoff at Dublin Airport, where capacity is being reached, requiring further investment for effectiveness. Efficiency-motivated proposals to reduce charges by more than 20 per cent per passenger appear strange in a capacity-constrained context. Demand is not the problem here: supply of critical infrastructure is.

Why is the context in Ireland now appropriate to advance purpose over prudence? The most significant factor is that our population is increasing dramatically. Ireland’s population growth is nearly five times the European Union average, which justifies the already significant step change in public capital expenditure growth.

The most egregious example of misaligned priority is the underfunding in our third-level institutions

Indeed, the question is whether the step up in investment is against population forecasts that are already far too conservative. The housing demand pressures alone could be instructive in having a reassessment of the population forecasts underpinning the Project Ireland 2040 plan.

The economic performance since 2014 has been both truly remarkable and exceptional. This does not, as many have rushed to conclude, imply unsustainability. Not investing to underpin our economy with public infrastructure to match our surge in private investment would, however, make it unsustainable. If you wake up at night in case you lose sleep, you at least have the comfort of having your prediction confirmed.

The most egregious example of misaligned priority is the underfunding in our third-level institutions. Ireland’s current exceptional growth is being driven by intangible assets reflective of intellectual property in copyrights, patents, brands, etcetera, in corporate balance sheets. Yet Irish university rankings are now a major cause of concern in the perception – even if the real-world impact is different – that Ireland does not value this intellectual asset hub.

The fear that corporate taxation is unsustainable may prove well founded

The necessary financing can come from both households and business too as much as from further requests from the exchequer. Households have the money. Household disposable income in Ireland has risen by more than 25 per cent in the last five years. The median Irish household has an income level of €45,000 already, among the highest globally. The level of tax paid falls heavily on a small proportion of households: the top 10 per cent pay more than 60 per cent of income taxation, but the average household pays only 17 per cent of gross income on taxes and social security.

Public-private funding

Greater use of public-private funding could help the Government substantially increase public investment while staying within our international fiscal rules if average household contributions can be increased through special-savings-type incentive schemes.

The fear that corporate taxation is unsustainable may prove well founded, particularly in light of OECD proposals, but already we have had five years at elevated levels and it may get larger before it gets lower in the coming decade. The level of corporate tax revenue last year was more than €10 billion on an effective rate of 10 per cent. The net profits of €100 billion implied were reduced by a significant amount of capital allowances, with gross profits in excess of €200 billion.

As these capital depreciation allowances unwind, the effective rate against the higher base could see corporate tax revenues as likely rise as fall in the medium term. It would be imprudent to assume that they are a permanent feature but to let prudence be our primary aim would miss the purpose of this generation’s opportunity in spectacular fashion.

Danny McCoy is chief executive of employers’ body Ibec

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