State’s surplus tax revenue should be put into a fund to pay for new infrastructure

Ireland is in an enviable financial position. Business investment is strong and households have a record level of savings. On top of this the current Government forecasts are for a budget surplus totalling over €65 billion between 2024 and 2026, significantly higher than even the most well-performing developed economies.

Despite this growing affluence there is a strong sense that society needs to feel the benefits more directly. There are obvious reasons for this beyond the current inflationary environment. A failure to plan for affluence by building capacity has left the economy running into limiting constraints. Access to cash and a growing economy has not translated to proportionate delivery of physical assets, infrastructure or services, which many regard as the mark of a prosperous society.

This congestion in turn has led to productivity being capitalised in rising asset prices rather than broad-based growth in quality of life. It is leading to a fraying in Ireland’s social cohesion and a growing sense of a generational gap.

These threats to the social contract all stem from a common root; investment in the private sector is outgrowing many parts of our public infrastructure. This is resulting in a social balance which is out of kilter.

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In the context of massive surpluses in the State’s finances proposals to put some of that money into a sovereign wealth fund are understandable. Given the strength of economic tailwinds, there is a limit on how much we should be building into new day-to-day spending or tax cuts. It would also be foolhardy in the extreme to bake potentially non-recurring tax revenues into the future cost of delivering day-to-day public services. We have significant reservations, however, about using these uncertain tax windfalls as a source of funding for future deficits in the pensions system as has been proposed.

While the challenges of population ageing are undoubtedly significant, certainty and reliability must be core to the future of the State pension. This requires a permanent and reliable source of tax revenue rather than variable and unknown potential dividends from a wealth fund. In either case those dividends could only ever cover a small fraction of future costs of an ageing society. Permanent expenditure commitments will need to be met with permanent revenues.

Ireland faces greater risks from underinvestment in the coming years. The State has not had a consistent stream of public capital projects in the past three decades, unlike other similar economies. Since the early 1990s Ireland has only consistently invested in public capital at or above the level of its peers in fewer than 10 of those years. This has left us far behind comparator countries when it comes to the stock and quality of our public infrastructure.

In addition, a recent analysis by the Irish Fiscal Advisory Council shows that because of higher inflation and underspends the real value of government capital spending between 2021 and 2025 will be 24 per cent lower than had been planned. Almost €20 billion in additional capital spending would be needed between now and 2030 to protect the existing level of project ambition within the National Development Plan. We see an additional need on top of this of at least €10 billion to reflect growing demands for investment in areas such as net-zero, a more rapidly growing population than was allowed for in the National Planning Framework process and continued deficits in infrastructure which remain unaddressed.

The confluence of an abundance of cash we can’t spend right now, an uncertain revenue source and our inconsistent record on investment all point in one direction. The Government should use a significant portion of record corporate tax revenues to establish a new national infrastructure fund and underpin public capital projects over the next decade and more as we develop our capacity to take them on. This fund would have three significant advantages.

Firstly, it would guarantee projects are protected during downturns. It would smooth tax receipts used toward public infrastructure over time. This would allow us to meet investment needs over the coming decade rather than spending all the money at the top of the economic cycle. It would lessen the need for rapid “catch-up” in capital spending and improve value for money.

Secondly, our proposal would treat infrastructure not merely as a tool of economic stabilisation with mythical “shovel-ready projects” to be turned on and off but rather a consistent need to be met for the future of a modern economy.

Finally, the two benefits above would also give greater certainty to sectors in the supply chain of infrastructure delivery. It would allow organisations and workers to build capacity and to retain skills in both the public and private sectors. This signal of sustained ambition to both domestic and international firms would help grow project delivery capacity and ultimately deliver better value for money for taxpayers.

The reasons for our current infrastructural challenges are simple: past downturns resulted in cutbacks to capital projects which ultimately accumulated significant and expensive investment deficits. By channelling record tax receipts into a national infrastructure fund we now have an opportunity to ensure this never happens again.

Fergal O’Brien is executive director of lobbying and influence at Ibec