‘How we steer economy through next decade is the real test’ – Spillane
08 December 2015
Though Ireland’s economy will expand by six per cent this year – outstripping the EU average of 1.9 per cent – how we steer the economy through the next decade and beyond is the litmus test, Engineers Ireland director general Caroline Spillane said at the launch of the TASC report, ‘A Time for Ambition: Ensuring prosperity through investment’.
“After more than six years of austerity, we have arrived at a period of sustained, though fragile, growth,” Spillane said. “The macro-indicators are being revised upwards. Ireland will be the European Union’s fastest-growing economy this year and next year, according to the most recent analysis by the European Commission. Our economy will expand by six per cent this year, exceeding initial Department of Finance estimates and outstripping the EU average of 1.9 per cent. Growth is prompted by buoyant consumer spending, investment and exports.
Authoritative analysis of Ireland’s infrastructure landscape
“These are welcome signs of recovery. But how we steer the economy through the next decade and beyond is the litmus test. This report by Paul Sweeney of TASC is an authoritative analysis of Ireland’s infrastructure landscape, and makes a compelling case for increased investment.
“While the Irish economy is now growing rapidly there are a number of signs that things are not back to normal. Investment in Ireland is well below what would be expected in a developed economy that is growing. The indicators are there in plain sight.
“This is perhaps unsurprising as our spend as a proportion of gross domestic product was the lowest in the European Union in 2013, and the fall in infrastructural investment since 2008 is the sharpest across member states. At the same time our population is growing – at the fastest rate in the EU placing severe pressure on housing, transport, education and health. Indeed, the commission report I mentioned a moment ago warns of potential strain on housing and infrastructure as the country moves into a position of net migration.
“It seems cuts in infrastructure spending are the first casualty of a recession. But, as TASC’s report shows, governments should be like businesses, not households, when it comes to spending. They should borrow, invest, expand, repay debt and prosper.
‘Boost employment and innovation by investing in productive areas’
“TASC makes a cogent case for more public investment in infrastructure. The report argues that we need to build our physical and human resources – social and affordable housing, public transport, schools and hospitals, and education and training capacity. While interest rates are low and cost of labour is less than during the boom; now is the time to invest. And we can boost employment and innovation by investing in productive areas of the economy.
“All of this is well aligned with the work programme of Engineers Ireland, the professional body representing 23,000 engineers across every discipline of the sector. We have called for a single government unit to plan and fund the country’s long-term strategic infrastructure across the economy. The unit, sitting in the Taoiseach’s office, would better integrate investment in key areas like transport, education, health, energy and the digital economy. Like TASC, we believe the government’s €27 billion capital plan is insufficient to meet the needs of a growing economy.
“Ireland is simply investing too little, the timeframe for major project delivery is too long, and we are not thinking strategically enough about the long-term needs of the country.
“A recent report by the McKinsey Global Institute estimates that €51 trillion in infrastructure investment will be needed between now and 2030 to keep up with projected GDP growth. That will require countries to spend between at least three per cent to four per cent of GDP.
‘One unit responsible for streamlined project planning and delivery’
“But, in Ireland, the government is planning to invest less than two per cent of GDP. This underfunding, combined with delays in approval and land acquisition processes, are likely to hold back growth in the productive capacity of the economy. It will take at least a decade for Metro North in Dublin to start operating, for example. By making one unit responsible for streamlined project planning and delivery, we can improve our readiness for economic demands.
“If Ireland is to prosper, infrastructural development across every aspect of the economy will be an essential part of the process. Our prosperity depends on the continued ability of this country to attract inward investment and to trade our goods and services internationally. In both cases, our competitiveness is paramount and is hugely dependent on the quality, efficiency and reliability of our infrastructure. Aside from its economic importance, infrastructure is the cornerstone of modern society.
“We rely upon treatment plants and water mains to supply us with drinking water; energy plants and gas pipelines for heat and light; phone and broadband to connect us for global business, social and entertainment purposes; roads, rail and ports to deliver the goods we buy and sell; and, a waste management network to recover renewable resources.
“Our island nation on the edge of the Atlantic has always been subject to extreme weather, but with increased incidences of severe flooding, coupled with storm damage to electrical and communications networks, we have witnessed first-hand just how vital robust infrastructure is to the smooth running of modern Irish society.
‘Simultaneous need to address climate change’
“The quest to maintain and develop the capacity of infrastructure to meet the future needs of Irish society is further sharpened by the simultaneous need to address climate change. In the pursuit of a low-carbon society, the sustainability of infrastructure and the way infrastructure can facilitate environmentally friendly initiatives at all levels is of essential importance.
“Before the end of this year, the government has pledged to publish the energy White Paper, setting out our energy policy up to 2030. Energy policy is an issue that exercises the public and stakeholders like few others. The White Paper process started with a Green Paper on energy policy, published in May last year.
“The consultation process attracted more than 1,200 submissions. But we are concerned about the delay publishing the final document. Ireland cannot afford to wait any longer for clarity on our energy policy. It is causing uncertainty for those in both the public and private sector who want to invest in the economy as growth takes hold.
“We need clarity from the government about the profile of Ireland’s future energy mix which should include a mix of fossil and sustainable sources. Investment in Ireland’s renewable energy can bring down energy bills in the long term, spur investment and new enterprises, and deliver our fair share of the global effort to tackle climate change.
“Under the 2020 framework, there are legally binding targets at European and national levels to decrease carbon emissions, increase the proportion of energy from renewable sources, and enhance energy efficiency. As part of this, the government has set a target for the proportion of electricity sourced from renewable sources of 40 per cent by the end of this decade – one of the most demanding targets in the world.
“Last year, just less than 23 per cent of electricity was generated from renewable sources and we are calling on the government to create an energy policy, with an appropriate mix of incentives, vision and targets, that will underpin Ireland’s transition to a low-carbon society. The publication of the White Paper is an opportunity to reset Ireland’s energy policy, and show the world that we can lead on renewable sources balanced against a proportionate share of fossil fuels.
‘Engineers Ireland strong ally for people who believe in environmental sustainability’
“Engineers Ireland will be a strong ally for people who believe in environmental sustainability and a diversified energy mix that can accelerate economic growth and advance responsible citizenship.
“Engineers Ireland recognises that, although the economy is growing, there are still very real demands on our fiscal resources, and that government is obliged to operate under EU rules and particularly the Stability and Growth Pact to manage and reduce our debt and deficit. We welcome the commitment in Building on Recovery to a mid-term review of the Capital Investment Plan to reaffirm priory projects and importantly to consider the scope for increased levels of investment.
“Since being appointed director general just a number of months ago, I have been weighing Engineers Ireland’s priorities chief among which will be to help to build a modern capital infrastructure that underpins economic growth, raised living standards, and a sustainable environment. I believe in the capacity of engineers, across all disciplines, to crack the challenges that face Ireland and the world – but only if we are supported by responsive and responsible public policy that treats infrastructure investment as a priority, not as an optional extra.”
Meanwhile, state investment in public infrastructure must be substantially increased to make up for lost ground and ensure future social and economic development, according to research issued by TASC. A detailed analysis by Paul Sweeney, chair of TASC’s Economists’ Network, makes the case for substantially increased state spending to compensate for underinvestment in public infrastructure in recent years.
‘A Time for Ambition: Ensuring prosperity through investment’, suggests exchequer funding of €42 biilion in the six years to 2021 – this is €15 billion more than the €27 billion provided for in the government’s capital and infrastructure plan for 2016-2021 released earlier this year.
“Ireland has been under-investing in public infrastructure in recent years – exchequer investment fell to its lowest level in 50 years in 2013,” said Sweeney, speaking at the launch. “Investment in infrastructure is vitally important because it underpins economic and social development and ensures future progress. This report shows that public investment can be difficult to get right both fiscally and because of various EU rules.
Develop new strategies
“Nevertheless it is essential and we need to develop new strategies to undertake public investment adequately and successfully. Some of these may seem akin to financialisation, but with a strong emphasis on public return and equality we can deliver good public investment projects, which in turn will lead to increased private investment.”
Sweeney makes the case for a substantial increase in exchequer investment because:
- Ireland desperately needs the assets – social and affordable housing, public transport, schools, clinics, as well as education and training;
- Interest rates are historically low;
- Investment costs less during a recession and, while it may be over, there is still an output gap and high unemployment, especially among construction workers;
- The lack of investment is reducing future economic growth and development;
- Investment leads to innovation which makes the economy more efficient;
- Governments never cut investment – they only postpone it.
According to Sweeney, the government’s plan, ‘Building on Recovery: Infrastructure and Capital Investment, 2016-2021’, will see an increase in exchequer investment in cash terms. However, as a percentage of GDP, government investment in this vital area will actually fall in the first three years to the very low level of 2013.
Funded by some of proceeds of planned privatisation of bank shares
It is proposed that most of the additional exchequer investment of €15 billion over that provided for in the government’s plan should be funded by some of the proceeds of the planned privatisation of the bank shares currently in public ownership.
“These bank proceeds of €21 billion to €29 billion are coming on stream from 2016 onwards. It is currently proposed that all of this capital be used to repay national debt. However, in a time of great infrastructural need, with low interest rates on a declining (as percentage of GDP) debt level, this is a mistake. I would urge the government to change its mind and instead invest this money in our future. None of it should be used for current spending,” added Sweeney.
He said an IMF study on public investment found that for every €1 million invested there is a rapid return of €2 million. When there is a high loss of potential output, as Ireland has suffered, the returns on infrastructural investment are high.
The key institutional reforms suggested in his report include:
- The establishment of an Infrastructural Commission, which would bring much needed long-term planning back into government policy;
- The adoption by the EU and each member state of a ‘Golden Rule’ of minimum infrastructural investment by governments.
Sweeney said he suspected that the government plan may lack ambition because of fear of EU institutions with their “overly restrictive economic rules”. However, he pointed out that the EU had a great record in the past on investment through the structural funds; had relaxed its rules on investment slightly; and become less ideological on other economic issues.
But most importantly, Europe had, in the words of former Troika member Ajai Chopra “treated Ireland badly”. Sweeney concluded: “The EU’s moral authority is undermined. It cannot inflict more punishment on Ireland by insisting that taxpayers’ money from the bank shares be used to pay off creditors (who will be paid anyhow) rather than investing them in Ireland.”
At the Q&A session afterwards, Engineers Ireland president Bill Grimson asked Sweeney whey the government’s ambition level was so low, to which Sweeney replied that it was “terrified of Europe”. He added: We’ve been through trauma and they’re scarred. They’re vulnerable – it’s a psychological effect, not an economic one.”
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