Notes on the Front

Fair dues to the Government. They take old news, an old set of policy projections, repackage it with a shiny new bow, and launch a fresh programme – which is presented as a stimulus and investment-driven job creation programme. And a lot of folk go along with it (though some like Miriam Lord sees the three-card trick being played). Let’s look at the headline figures behind the new capital infrastructure review – for there is spin, but there is (finally) a good news story.

The Government announced as early as December last year that capital investment would be cut to €5.5 billion annually from 2011 to 2014. Yesterday, the Government announced that capital investment would come in at €5.5 billion annually from 2011 to 2016. Same ol’, same ol’.

Actually, the Government has been taking a hatchet to capital spending projections. In January last year, they projected capital spending to come in at €27 billion for the period between 2011 and 2013. Within a few weeks, this was cut to €17.5 billion. Now it will be €16.5 billion.

This is important as here lies a big spin. It is claimed that since tender prices have fallen by 30 percent from a peak in the second half of 2006, the volume of spending and, therefore, the level of activity, won’t be affected. However, the tender index published in the review shows that tender prices have fallen by about 20 percent since 2008. Yet, capital spending in nominal terms will fall by nearly 40 percent. The volume cut is still considerable.

Any growth and job creation arising out of the new capital review was already factored into projections last December. Yesterday’s launch doesn’t change those macro-numbers. And capital spending has been cut – whether measured in nominal terms or in volume. So much for stimulus.

But let’s look at one set of figures that can help us reconstruct an alternative perspective. The ESRI asserted that capital spending is inefficient when it comes to creating jobs. As mentioned before, they asserted this but didn’t put forward any arguments or data to back up this assertion. They did cite another ESRI study, by Edgar Morgenroth, but this hardly backed up their contention.

The Department of Finance measured the job creation element of the programme. They found that there are between 8,000 and 12,000 short-term jobs created for every €1 billion spent (with HSE capital spend having the highest job density and water services having the lowest). These numbers are consistent with Morgenroth’s study.

Of course, these numbers don’t include downstream, or induced employment (arising from sourcing, extra demand, etc.). Again, Morgenroth’s study suggests this element – which remains in the medium-term after the project has been completed and the direct jobs are gone – is about half the number of direct jobs created.

So let’s examine the benefits of a significant, temporary boost in capital spending. If it were increased by €3 billion over and above what the Government projects, this could create:

• Between 24,000 and 36,000 jobs directly
• Between 12,000 and 18,000 indirect jobs

That would be quite an accomplishment. With some boldness, some vision, some courage (I like using that latter word, since deflationists are forever advising the Government to be ‘courageous’ when it comes to fleecing pensioners, the jobless, the sick and low-paid), the Government could make serious inroads into growth, employment and the fiscal deficit.

On the latter, the Morgenroth study quotes Construction Industry Federation numbers showing that – adjusted to our sample €3 billion extra boost – tax revenue would rise by about €900 million with a further €900 million saved on the social welfare budget. That’s a big turnaround – and probably doesn’t include further tax revenue arising from increased consumption.

So capital spending can be a useful instrument in terms of job creation and the fiscal deficit. But the real benefit is the long-term addition to our economic base. For instance, IBEC estimates that installing a Next Generation broadband network to cover 90 percent of all household and businesses would cost €2.5 billion – with about two-thirds of that cost composed of civil engineering works.

If such a project were undertaken, we’d get a jobs boost and a public finance boost. But we would have an extremely valuable asset on the national balance sheet, an asset that would facilitate indigenous enterprises’ ability to compete in the traded sector. In other words, the good stuff would keep coming.

All this to say that, beyond the spin, investment works. It puts people back into jobs, it helps repair the public finances and it can leave us with wealth-producing assets for years to come.

Now, isn't that a good news story?