Why the EU Commission is right to call for increased public investment in infrastructure

Paul Sweeney: The new EU report on the Irish Economy EU Ireland report 2016 makes for interesting reading, if only to see how Brussels views our recovery. There is probably something in its 85 pages of analysis and data for everyone, depending on your perspective.

It even includes an “In-Depth Review on the prevention and correction of macroeconomic imbalances” according to how well our government is adhering to the sets of overly-restrictive economic rules which the Commission has imposed on all 28 member states.

This is just one of the 28 country specific reports. The Commission consults widely and I attended one such consultation in December with the authors on behalf of the ETUC and made a presentation on Ireland.

Indeed, the case made on the need for increased investment, based on the analysis in TASC’s A Time for Ambition, was taken on board and the EU report recommends that ‘Infrastructure needs to return to the forefront of policy issues.”

It points out, as did TASC, that “Following a peak of 5.2 % of GDP in 2008, public investment fell to a low of 1.8 % of GDP in 2013 before slightly recovering in 2014. It was still well below the EU average. In addition, the crisis appears to have led to a structural shift in the composition of general government expenditure away from investment towards current spending.”

It also points out that “transport infrastructure, by far the largest component of government investment before the crisis, has been cut sharply, together with investment in housing. Other sectors, including education and health, were affected less severely, even though they were also cut.”

As we pointed out in the TASC report, investment fell to the lowest level ever since records began 50 years ago and did not even cover depreciation in 2013. In short, Ireland became a Banana Republic in that year, depleting public infrastructure. But in spite of that, the new plan Building on Recovery, set out an even lower investment spend in Year 1 of the plan - this year, 2016, at a mere 1.7% of GDP!

The Commission is quite damning of the new Plan. “This implies that the capital investment to GDP ratio would remain at historic lows of about 1.7 % in 2016 before marginally increasing to 2.0 % by 2021, well below the still depressed EU average of 2.9 % in 2013-2014. Capital expenditure would average only 6.4 % of the total in 2016-2021, thereby extending the crisis-driven reallocation of government expenditure towards current spending.” It appears as if they were listening as the figures are exactly the same as ours.

The Commission report calls for action on “housing, water services and public transport.” They are correct but some populists will not like continuing, or worse increased, public investment in water. Similarly the obsession with “off-balance sheet funding” of housing by governments through PPPs has to be abandoned. The financialisation of housing led to many bad outcomes, for many, including ironically, the banks. Direct provision is far more simple, efficient and far less costly in the longer run.

The report praises investment in roads, airports and ports but is highly critical of the low level of investment in public transport. While the LEAP card, real time apps and bus and tram and train stop information has greatly improved access to more modern buses etc., public transport in Ireland’s urban areas is still relatively poor, without a real connectivity within a whole system. And it is not cheap, by any standard.

It has improved and by a lot in my opinion, especially considering the low investment. But if climate change, connectedness and congestion are to be dealt with, a massive public investment programme is needed in Dublin, Galway, Limerick and Cork over the next decade or more. Here is what the report says on this for the capital. It can be funded directly with some of the proceeds of the banks, which may top €30bn over the coming years.

“The shortage of mass transit facilities around Dublin has led to increasing road congestion and high associated economic and environmental costs. Dublin was the fourth most congested city of fewer than 800,000 people in the latest TomTom traffic index, with an overall congestion level of 38 %. If only peak morning and evening hours are considered, the congestions index surges to 81 %, ranking Dublin as the ninth most congested city of any size among more than 200 cities monitored by the index.”

In the 2016 Election there was no serious focus on the need for investment in any party manifestos. This is deeply disappointing. The misuse of the word “investment” for current expenditure was a regular occurrence in many. But no party seems to have realised how deep the cuts in investment have gone and how weak the response in Building on Recovery was.

This EU report points out “Public investment in infrastructure typically has a potent short-term stimulus effect,” a point ignored or perhaps unknown by all Irish political parties in 2016.

TASC has set out a modest proposal of Exchequer investment of 2.8% of GDP in infrastructure, up from the Plan’s deeply, over-cautious 1.8% pa to 2021. Others like IBEC and the Nevin Institute call for public investment to rise to 4%.

In the next blog, I will examine other aspects of this report on Ireland’s economy, like these statements: “Ireland's tax revenue to GDP ratio is low compared with the EU average and is marginally decreasing,” and “Some of the concessions made to the legal professions have significantly reduced the initial ambition of the reform.”