Wednesday 18 September 2019

Costly temptations run the risk of overheating economy

The Government has to get its priorities right and resist diverting resources into capital programmes, says Colm McCarthy

Political temptations of Varadkar's government: Irish Water
Political temptations of Varadkar's government: Irish Water
Colm McCarthy

Colm McCarthy

PASCHAL Donohoe’s first budget next Tuesday week will see only minor changes in taxes and expenditure.

If something close to budget balance in 2018 is required there is simply no leeway for significant spending increases or tax cuts. Government, opposition and the sizeable Leinster House press corps will work hard to sustain public attention through a desultory few weeks. The government will proclaim the generosity of the measures taken, the opposition will denounce their stingy neglect of the deserving, while the journalists will report breathlessly on disaffection amongst the government’s independent supporters and the imminence of splits, resignations and a fresh election.      

The real action over the next few months will be in the capital spending plans, where the government has been hinting at a major expansion. There has been some restoration of capital spending in the last few years and minister Donohoe will doubtless give some indication of his intentions in the budget speech. A detailed capital plan is due before Christmas. EU budget rules include Exchequer-funded capital spending as part of the overall deficit and a hunt is under way for off-balance-sheet borrowing manoeuvres. This involves a double misunderstanding of the constraints on the capital programme. Off-balance-sheet debt is real debt, and has to be sustainable whether or not the EU statisticians count it properly. Some politicians have been talking about off-balance-sheet borrowing, via non-Exchequer vehicles or public-private partnerships, as if it was some kind of forgotten free money to be liberated from captivity down the back of the sofa at the Department of Finance.     

Political temptations of Varadkar's government: Road infrastructure
Political temptations of Varadkar's government: Road infrastructure

The second misunderstanding, voiced recently by both the Central Bank and the Fiscal Council, is to ignore real, as distinct from financial, constraints. The Irish economy has recovered strongly since 2013 and is now into the mature phase of a sustained expansion. There is growing evidence of tightness in the labour market, including the more rapid recent growth in full-time, as against part-time, employment. As the economy approaches capacity any further diversion of real resources into the capital programme brings risks of overheating. Whatever about free money, there are no spare construction workers hiding in the Merrion Street furniture.

If prudent financial limits can be observed, preferably without financing trickology, there are obvious priorities for whatever extra capital spending can be afforded over the next several years. There are also some political temptations to be avoided.  

Irish Water: The recent supply interruption around Drogheda has reminded everyone that there is an accumulated deficit in the water (and wastewater treatment) infrastructure that will take decades to address. Since water in Ireland is apparently free the costs will fall on the Exchequer – Irish Water borrowings cannot be kept off balance sheet as if IW was a proper self-financing commercial outfit like the ESB. 

Political temptations of Varadkar's government: Housing
Political temptations of Varadkar's government: Housing

The company will spend about €500 million on capital works in 2017 but the management believe that a figure of at least €800 million is needed up to 2021, with further heavy spending thereafter. Since there is no revenue from domestic users the cash operating losses of about €600 million per annum will have to be met through Exchequer subvention. Out of roughly €800 million per annum of cash operating expenses, Irish Water can recover only about one-quarter from its commercial customers. Thus the Exchequer will be writing an annual cheque to IW of about €1.4 billion to cover the operating losses and the capital spending requirement. A company eating cash at this rate should be safe from the privatisation vultures, even without constitutional protection.

Roads: Some important road projects had to be shelved during the financial emergency, notably the M20 connecting Cork and Limerick. During the week the M17 was opened, completing the route from Limerick to Galway and Tuam, while the M11 extension south to Wexford is proceeding. The most overburdened road in the country is the M50 around Dublin, originally envisaged as a Western by-pass of the city. The first plans for a Western by-pass date back to a time when the M50 would actually have been outside the city limits. Decades of urban sprawl mean that the ‘by-pass’ is now the main street of the city of Dublin, as well as an inter-regional route connecting flows on other motorways which have neither origin nor destination in the city. Volumes are now reaching 150,000 per day, well beyond the capacity of a 3+3 motorway, and the addition of further lanes is apparently not feasible. A more attractive, although unavoidably costly, solution is the construction of a new orbital motorway further to the west. Preliminary plans see this road curving from around Drogheda south of Navan and on to the M7 in the area of Naas, relieving the M50 and providing better journey times for inter-regional traffic into the bargain.

There are other road priorities, including routes connecting Dublin to the northwest and numerous national secondary roads throughout the country which are inadequate for current volumes.

Public Transport: The investment in motorways is also an investment in public transport given the popularity of inter-city bus services. Inevitably, and predictably, the road improvements have called into question the viability of passenger rail services. But no matter, the Taoiseach was reported a few weeks back as favouring a high-speed railway connecting Dublin and Belfast and his opponent in the Fine Gael leadership contest, Simon Coveney, suggested a full national network of high-speed rail connecting all major city-pairs. High-speed railway lines require completely new rights of way and cannot be simply superimposed on the existing system. Costs for new lines around Europe, including rolling stock, range up to €100 million per kilometre (this is not a misprint). In a recent report the European Commission suggested that the minimum passenger volume required to make high-speed lines viable is about 9 million passengers per annum. End-to-end volume on Dublin-Belfast was 182,883 in the year 2015, that is to say, about 2% of the EU’s estimate of viability. 

Political temptations of Varadkar's government: Public transport
Political temptations of Varadkar's government: Public transport

A more attractive public transport project is the ‘Bus Connects’ scheme for Dublin, involving three cross-city bus rapid transit routes (one to the airport), orbital routes, extra bus lanes and rolling stock, cashless ticketing, a re-modelled route structure and extra frequencies. The scheme would take seven or eight years to implement and would cost €1 billion. Unlike the Metro North, costed at a whopping €2.5 billion for a single line, it would bring tangible benefits to the entire city.      

Housing: Whatever extra allocations are announced for a resumption of public housing construction would be greatly enhanced if the government abandoned plans, supported by Fianna Fail, to resume the sale of local authority units to existing tenants at enormous discounts. This expands the hole in a bucket which is costly to fill. 

Private developers are inhibited through lack of zoning, services including water and roads, and planning permission. There is no shortage of vacant and derelict land, even in some inner suburbs of Dublin. While the provision of zoning and planning permission are costless local authority budgets for servicing zoned land need to rise.       

Resisting Temptation: Ireland has suffered for generations from the ‘feast or famine’ approach to public capital. This time why not a measured expansion, with projects carefully evaluated, and in public? 

Sunday Independent

Today's news headlines, directly to your inbox every morning.

Don't Miss