Monday 16 September 2019

Conor Skehan: 'Think big, spend big to secure our country's economic future'

We must have the confidence to spend on large capital projects to get us through future lean years, writes Conor Skehan

'Capital projects can provide a deep stabilising continuity for a small economy that can reduce the extremes of unemployment caused by economic cycles' (stock photo)
'Capital projects can provide a deep stabilising continuity for a small economy that can reduce the extremes of unemployment caused by economic cycles' (stock photo)

When the news cycle stirs back to life in September we will hear renewed calls for the Government to spend less on big projects. That would be a mistake. Ireland has got to have the confidence to spend on large capital projects to continue the recent improvement of our infrastructure, housing, hospitals and colleges, for instance.

We have got to stay ahead of demand before the post-Brexit tsunami of new business overwhelms us. We've got to be prepared to catch that wave.

Note the emphasis on capital spending - it was current expenditure on unrealistic pay and pension levels that brought the country to the brink of ruin - this will always need to be stringently questioned and controlled. Like all businesses, we must learn the difference between productive investment and expenditure and covering day-to-day costs, borrowing only for the former and never for the latter.

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But there is another, even more important reason for Ireland to start to become comfortable with continuous large-scale capital spending. Capital projects can provide a deep stabilising continuity for a small economy that can reduce the extremes of unemployment caused by economic cycles.

Typical economic cycles last about six to seven years up and six to seven down. So, after a particularly deep trough in, say 2013, we should ''peak'' around 2021. Thereafter, the economy may enter a plateau, a shallow, short dip or another long deep fall. We can't prevent these cycles - but we can prepare for them.

If there's any lesson from the last recession, it's the need for the State to continue to spend on capital projects throughout the depth of recession. This helps on many levels by keeping money in circulation; lessening the depth of unemployment; obtaining good value for money; accelerating recovery and improving ''positioning'' during recovery.

The spending should all be on capital projects - in particular those that increase Ireland's productivity.

Some of these are already planned and budgeted for in our excellent €116bn National Development Plan, but we need to spend this, and more, during the likely next recession between 2024 and 2030. The amounts need to be huge because the return on investment will be huge. Not spending it is not an option. Ireland must spend to stay open for business.

Our current National Development Plan is an excellent document - a good example of joined-up thinking. But it only plans to spend slightly over the EU average of 3pc of national income which is simply not enough. Most of Europe is blessed with deep reservoirs of existing infrastructures - much of it renewed after World War II. Ireland has no equivalent quality or quantity of infrastructure, institutions or housing stock.

We still have so much to do, merely to catch up. For another generation, 30 years, we need to aim to spend at least 6pc annually and not the 4.5pc planned for 2027. We need to spend around €33bn every year between 2020 and 2030.

This spending needs to follow the good example laid down by the existing NDP - but it needs more ambition. The biggest part of the spending will need to be on our cities. We have to get our heads around the reality that we are now an urban society and that means that we must spend and invest accordingly.

Where is the ambition that built Ardnacrusha? In 1922 that single project cost 20pc of the entire national budget - it would go on to provide all of Ireland's power in the early years, laying the foundation for the equally ambitious Rural Electrification Scheme of the 1940s. Our ambition in 2022 will need to be a worthy successor to 1922.

At the foundation of the State, in the 1920s, about two thirds of us lived in the country; now more than two thirds of us live in urban areas. Accordingly, we need to spend the majority of our money on ambitiously renewing and improving our cities.

We need to spend on our city regions. Limerick needs a rail line to Shannon Airport. Waterford needs a huge new deep-water port connecting Ireland to world sea routes and Europe. Cork needs an even more ambitious plan to renew the entire city centre - not just the Docks. Eastern Ireland needs a new road and rail corridor to serve the emerging Belfast-Waterford corridor while avoiding the congestion of Dublin and the erosion of the east coast routes. Dublin needs to twin-track all the main railway lines and build three more bus and car tunnels under the city; Meath, Kildare and Dublin have to create a huge new industrial hub where the counties meet, to accommodate the next generation of large industry. We need to think big.

Some of our spending will also need to go on structures to manage and house these new resources - we need to spend on key institutions of the State - especially local government, security and defence. We need massive increases on defence - building up our Navy and air cover to a level appropriate to the scale of the North Atlantic that we control in an increasingly complex and chaotic world.

Big capital projects have long gestation periods. Three to five years is typical. Projects need to be designed, permitted and procured. Currently we have a good ''pipeline'' of large projects for the near-term in the hands of bodies like Irish Water, Eirgrid, Transport Infrastructure Ireland and others - but these are not enough. Project identification and design needs to begin now to allow them to start by 2025 when these will be needed to help to lift the country out of the next economic trough.

Most importantly of all, financing needs to be put in place while we have good credit ratings. As so many businesses know, the best time to borrow money is when you have money - not when you need it.

Lenders take confidence from a country with a large spending plan for projects that add productive capacity. At the moment Ireland has high A+ credit ratings, a considerable improvement from our BBB rating back in 2013. This needs to be used to secure the largest borrowing at the most competitive rates.

We have two or three years left during which we can prepare like this.

What are we waiting for?

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