Notes on the Front

It is better not to be cynical.  But this Government is not only making it easy to be cynical, they are practically making it mandatory.  We now read that the Government is preparing the economy for a sustained and substantial investment programme in an anticipation of a U-turn by the EU.  That this has been announced only days before the referendum . . . what timing, what fortune.

‘Government departments have been told to draw up lists of capital projects with potential to create thousands of jobs for which funding would be sought if EU leaders agree on the package at the meeting to be held a week before polling day here.’

‘He (the Taoiseach) is drawing up the list, which would create thousands of jobs on road, rail, housing, school, health, broadband and water projects.’

This will be a new experience.  The Government cut €750 million in capital projects last year.  They intend to cut capital projects by approximately €600 million next year, with an additional €150 million the following year.  Over the lifetime of this Dail, the Government has announced that it will cut public investment by 32 percent in real terms (after inflation).  These cuts, according to the Department of Finance, will slash direct employment by nearly 13,000, not counting the downstream effect.

So at the very same time that the Government is cutting investment and jobs, it is drawing up investment lists to create thousands of jobs.  Anyone think this is contradictory?

What are the sources for all this new funding?  Three have been named.

• The European Investment Bank:  this would certainly be helpful if more capital was pumped into the EIB, which co-finances and provides loans at competitive interest rates for a range of physical and social infrastructural projects.   Whether member-states would put in this capital or the ECB could be induced to do so remains an issue.  However, it should be noted that where the loan is to the state, the state has to put up half the investment (see here for a proposed school building programme) – so extra Exchequer resources will be needed.  It should also be noted that EIB funding can take up to 12 to 18 months from application to  start-up activity with Ireland having to join a queue.  Currently, there is only the one programme being appraised.

• Project Bonds:  This is a pilot-project by the EU and essentially involves supporting private companies tendering from public authorities.  These bonds would replace traditional bank lending.  This would involve public support for the private component in essentially public-private partnerships in commercial activities.  While this could have some impact – especially in commercial telecommunications and energy activities – it will be limited as ultimately intended in getting non-banking private markets to provide debt financing.

• Unspent Structural Funds:  The EU Commission has proposed that €82 billion worth of unspent structural funds be re-allocated and spent.  However, there is a catch – states would only be able to re-allocate the structural funds they themselves did not spend.  It would not be transferable from one state to another (though this could change).  I don’t know how much unspent structural funds Ireland has, but it’s not likely to be much. 

All of this shouldn’t be dismissed but clearly it is limited – both in the scope of activities that can be funded, the amounts involved and the time-lag.  A progressive government would exploit these programmes as ‘additionality’ – additional to a public-led investment programme from our own resources.

And here’s where we get to the root of the Government’s cynicism.  They are pursuing a highly deflationary programme – planning €8.6 billion in cuts and tax increases up to 2015.  They claim they will off-set against this an unknown amount of reflationary investment measures which can only be drawn down over the medium-term under limited conditions (including additional borrowing) and limited scope.  All the while, the Government’s budgets are tearing demand out of the economy now, dampening employment growth now and undermining domestic businesses now. 

The Government is trying to buy the referendum.  However, unlike good ol’ fashion general election buy-outs, we don’t know what electoral brown-envelope contains, if it contains anything.

The Government is robbing impoverished Peter but only giving crumbs to starving Paul.