Ireland’s greatest economic failing: poor public services

To paraphrase Homer Simpson, capital spending seems to be both the cause and the solution to all of Ireland's economic problems.

If you were to take a straw poll on what most people see as the State’s chief failing, there’s a strong likelihood it would be public services. Everywhere you look there are bottlenecks.

Expensive housing, long commutes and stretched health services. You might say every country has these problems – and that’s true to a point – but Ireland’s legacy of underinvestment and bad planning make us a standout internationally.

Public infrastructure hasn’t kept pace with the rapid rise in private sector investment. Between 2014 and 2019, the Irish economy grew by more than 50 per cent. The surge created more than 400,000 jobs – 25 in the private sector for every one in the public sector.

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The additional demand has sapped the capacity of State services. It's not quite what economist JK Galbraith calls "private affluence and public squalor" but it's a faultline that seems to be at the core of so many issues here. And Ireland is becoming a less attractive place to live as a result. Hence the clamour for greater public spending on infrastructure.

But what if State investment – the seeming panacea – was actually one of the root causes of the problem? This point was made by economist Colm McCarthy at the recent Dublin Economics Workshop. Repeated financial crises in Ireland, he said, had nearly always been followed by increases in taxes and cuts to the capital spending programme. The capital budget was halved after the 2008 banking crisis, which led to underinvestment in water, housing and transport.

“Far from acting to stabilise economic activity, the capital programme here in Ireland has been an independent source of macroeconomic instability,” McCarthy said.

Housing is the perfect example. If we hadn’t stopped building social housing after the financial crisis, we wouldn’t be in the situation we’re in now and the construction industry wouldn’t be so bereft of manpower.

Poor value

McCarthy said the stop-start pattern of capital spending had delivered poor value for taxpayers. He highlighted three "extraordinary debacles" to do with capital spending in the past two years: the National Broadband Plan; the National Children's Hospital; and the National Maternity Hospital, all of which have have been mired in controversy and have run way over budget.

The MetroLink project connecting Dublin city centre to the airport may be going the same way. It’s not the medicine he’s quibbling about but the timing of the dose and the management of flagship projects.

Either way, it seems we’re following the same pattern as before of ramping up spending when the economy’s hot. In its Summer Economic Statement in July, the Government dumped a balanced-budget strategy in favour of running bigger budget deficits out to 2025 in order to facilitate more capital investment.

In September, it launched what Taoiseach Micheál Martin described as an “unprecedented” housing strategy underpinned by €4 billion in State funding annually for the next five years. And last week, its revised National Development Plan promised €165 billion over 10 years for a range of infrastructural projects and the so-called green transition.

Both the Economic and Social Research Institute (ESRI) and the Central Bank warned last week that planned increases in public expenditure are coinciding with a period of rapid growth in the domestic economy and that this posed an overheating risk.

The Central Bank cautioned that a significant public spend on housing could run up against capacity constraints, which could fuel further inflationary pressure in the sector.

Increasing pressure

While not directly criticising the Government's budgetary strategy, the Central Bank's director of economics and statistics Mark Cassidy said that "by putting more money into the economy than you're taking out – which is what a budget deficit does – you are increasing demand pressures at a time when the economy is getting back towards capacity at a faster rate than we thought".

The ESRI said the Government would have to prioritise certain investments over others while keeping a tight rein on current spending. The Government’s revised budgetary strategy also contains €2 billion in tax cuts.

Economists typically advocate pulling against the wind; spending in a downturn, cutting in an upswing. Easier said than done when you’re a politician in the midst of a public outcry over State services.

One idea might be to put capital spending or the parameters of capital spending on a statutory footing so it can’t be slashed in a crisis or ramped up too high in a boom.

UK economist Simon Wren-Lewis argues that public investment should be treated differently from public consumption. The idea would be not to remove it from the fiscal rules but to have governments aim to achieve overall levels of public investment at a certain percentage of GDP.

“This would be a much more transparent way of having the discussion about what appropriate levels of investment were required for intergenerational equity,” he says.

Intergenerational equity is exactly what we don’t have at the moment.