IDA Ireland should slow down its stream of new projects

We have become used to celebrating announcements of new jobs, especially by foreign multinational enterprises. When the “old” Irish economy had chronic unemployment, with continuing involuntary emigration, these arrivals were a harbinger of better times.

Ireland has become a rather different economy since the 1980s, although the financial crisis marked a short return to that kind of world. The huge expansion of the high-tech export sector supports our current high standard of living but that very success is raising new challenges. Today there is full employment and the problem now is a shortage of people to do all the work that needs to be done in our society.

This changed environment calls for a new way of looking at the management of the economy. Instead of seeking work for our people, the Government needs to consider what the national priorities are for delivery of public goods and services, and how best these needs can be addressed when labour is in short supply. How can our resources of people be best deployed to deliver the standard of living that we seek?

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The share of the wage bill accounted for by foreign multinationals rose from 27 per cent in 2013 to 33 per cent in 2021. Last year it rose further to 35 per cent, and it is likely to be higher again this year. Most of these companies produce goods and services for export. A big exception is retail, where firms such as Tesco, Aldi and Lidl have a big share of the supermarket trade at home.

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As companies producing for export absorb an increasing share of the skilled workforce, it leaves a declining share available to produce other vital goods and services that we need in areas such as healthcare, education, electricity, water, housing, and public transport. The result is that even if there’s enough funding, it can be difficult to hire the staff to provide the desired services.

There are two possible approaches to meeting our need for improved public goods and services.

The public sector could enter a bidding war to attract the personnel and other resources that are needed for public services. This would drive up wages and other costs, until the resulting inflation halts, or even reverses, private sector growth. This was very much what happened in the 2000s, in the lead-up to the financial crisis.

The disadvantage of this approach, relying purely on market forces, is that it could do permanent damage to private sector firms, which are priced out of competing for workers. When the financial crisis hit, we badly missed those businesses that had been forced to close by the cost inflation they experienced in the boom years.

An alternative approach would involve active management by the Government of the economy to deliver the desired public goods and services while keeping inflation low.

We know our growing population and creaking infrastructure needs more investment. However, the National Development Plan needs to reprioritise projects, given the physical constraints on what can be built. We can’t deliver on all our ambition within the planned timescale, without a bidding war for builders and materials that just pushes up costs.

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Rather than see domestic cost inflation slow the inward investment, it would be preferable for IDA Ireland itself to slow down the stream of new projects that could exacerbate pressures in the economy. We should give a low priority to projects that require big building and construction work, that could crowd out our ability to deliver improvements in essential infrastructure.

In the energy sphere, our regulatory system could prioritise projects that will deliver renewable energy we badly need, over facilitating investment in more data centres.

Taxation is another lever that could temporarily discourage investment in lower-priority sectors. An advantage of using this tool is that changes in taxes can be reversed, while increases in domestic costs such as wages, tend to be irreversible.

In dampening demand now that strains our capacity to deliver essential public services and infrastructure, we can unwind those policies when the economy begins to slow down, and once again welcome new private sector investment.

Delivering critical infrastructure supports people’s daily lives, but helps businesses too. Dubliners would be pretty unhappy if the city ran out of water because water infrastructure investment was squeezed out by building more factories. But businesses would also take a hit. Prioritising critical infrastructure is in the interest of citizens and of the wider economy. If that means hitting the pause button on lower-priority projects, whether in the public or private sectors, so be it.