Major capital spending projects that create jobs should remain

ANALYSIS:There is merit in sticking with significant capital expenditure schemes in the budget

THE GOVERNMENT has to date stuck with its plans to continue with significant capital expenditure projects in 2009, despite the dire state of the public finances.

There are a number of reasons for this. Major infrastructural projects provide employment. At a time of substantial and growing unemployment, the net cost of such projects is reduced by the fact that they bring people off the dole, and create income tax receipts.

Borrowing to invest in infrastructure that adds to the wealth and productivity of the State is more justifiable than borrowing to pay for day-to-day expenditures.

For this reason, borrowing for capital expenditure is not frowned upon by the international markets to the same extent as, say, borrowing to pay welfare payments. Also, with the economy generally, and the construction sector in particular, in a deep slump, significant cost reductions in the prices of land, materials and labour can be had.

Early last month when announcing the pension levy on public sector pay, the Government said it would be seeking savings of €300 million arising from such factors.

This would bring the planned outlay on capital expenditure to €7.93 billion from €8.23 billion, it said. “There will be increases in allocations to labour-intensive sectors to be funded by reductions in other areas.”

The question now is that given the further deterioration in the economy and the public finances, would it on balance be better to put a few of the planned projects on hold, for a year or so.

Transport has a €2.88 billion estimate for capital expenditure this year while Environment, Heritage and Local Government has an estimate of €2 billion.

Education and Science has a budget of €889 million.

The transport budget is mainly devoted to the improvement of the road and rail infrastructure.

Work is under way on the major road routes between Dublin and Galway, Limerick, Cork and Waterford as well as on the extension of the Luas to Cherrywood, the Docklands and Citywest and the western rail corridor project.

Projects planned to begin construction this year are the Castleisland bypass, the electrification of the Maynooth rail line, and the Marlborough Street Bridge, in Dublin. There is also a range of lower order, ongoing works such as minor roads, quality bus corridors and railway safety infrastructure.

A significant part of the Environment, Heritage and Local Government expenditure is taken up with water and sewerage improvement schemes. The 2008 figures show that €471 million of that year’s capital expenditure allocation went on water and sewerage projects. While such work is necessary, there may be scope for delaying some projects so as to ease the State’s overall borrowing requirement.

As far as Education is concerned, the renovation of old schools and the building of new schools may be the area of relatively labour-intensive work as well as being an area where particularly sharp reductions in costs could be achieved. There have been ongoing queries about the efficiency of the department’s school building operation, and in particular the interaction between the parts of the department responsible for temporary and permanent school building provision.

Overall, much of the capital expenditure due to occur during the remaining nine months of this year may be already contracted for and so delaying or cancelling the projects could incur costs for the State.

Some commentators have said there may be scope to channel the very substantial savings and investments that have been accumulated during the boom years, to fund some of our infrastructure programme.

The Bank of Ireland produced a Wealth of the Nation report for 2006 that estimated that the gross assets of Irish households were approximately €800 million net.

The collapse in property prices and the value of shares in addition to other assets has without doubt reduced that figure significantly but there must still be a considerable number of millions of euro in net wealth in society.

If savings could be channelled into bonds that were kept off the State’s balance sheet, then the funds could be used to invest in infrastructure and create employment.

The Government’s annual 1 per cent of GDP payment into the National Pension Reserve Fund (NPRF) is considered to be capital expenditure. The figure for this year as per the Government’s plan produced in January for the European Commission was €1.69 billion. On the face of it, it appears odd to be borrowing money abroad to invest it in a pension fund, especially one that has lost a lot of money through the punishing loss in share values in recent times.

However, the AIB and Bank of Ireland recapitalisation scheme is be funded from the NPRF. As Minister for Finance Brian Lenihan said at the time the recapitalisation was announced, “€4 billion will come from the fund’s current resources while €3 billion will be provided by means of a front-loading of the exchequer contributions for 2009 and 2010”.

In other words, the money is not being set aside but rather is going to be put into the two main banks as part of the programme aimed at nursing them back to health.

The fund is also apparently well regarded by the international markets and rating agencies. Rating agencies can influence the interest rates Ireland is obliged to pay on its borrowings by altering the rating they ascribe to the State. These same agencies gave triple A ratings to the securitised loans based on US subprime mortgages that have since triggered the international banking crisis, but regard is still paid to their views.

The pension reserve fund has served as a buffer for Ireland in the first stages of the sudden and severe economic downturn.

Overall, the January plan envisaged the State maintaining a capital expenditure programme equal to between 4.4 and 4.6 per cent of GDP in the years to 2012, and the Government will now have to re-examine this. The plan envisaged that by 2012 the economy will have begun to grow again.

The contraction that is occurring in the economy, and the falling levels of wages and costs, should eventually return Ireland to competitiveness. If growth returns in 2012, it will be from a much lower base and will be a factor of a number of issues, including infrastructure.

Colm Keena is Public Affairs Correspondent