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Capital review must be meaningful

Posted on March 05, 2017 at 10:58 AM

Reflecting on the capital review, Leader of the Labour Party, Brendan Howlin writes about why the upcoming capital review must be meaningful.

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The Lord Giveth and the Lord taketh away. And so it is with Paschal Donohoe.

Three weeks ago, we were treated to an announcement of the Capital Review, the first truly post-crash opportunity to look at our capital funding requirements.

The following week, we were briefed on the contracting fiscal space for 2018 and the need for Ministers to pare back programmes in their Departments.

In need of headlines the Taoiseach recently told the IIEA that the plan would be a 10 year plan. More ambition or spreading the marmite more thinly. Look at the scope not the quantity. Who knows? Contradictions abound.

What we already know suggests the Plan is already a puff of smoke. The additional money allocated by this Government amounts to a one off 2.6bn over 6 years. That’s no more than 7% of the existing allocated expenditure. As the Children’s Hospital project proves it won’t buy much.

Fanfare aside and despite both the European Commission and the IMF arguing that Ireland needs to increase capital spending, the Government has little commitment to this area.

There are two identifiable problems. Political priorities are off for a start. For Minister Noonan to have anything to say on Budget Day he needs tax cuts. Hence they get priority. He made his case again only last week.

The second is the Rainy Day Fund, which drains an additional 3bn from potential spending over the latter period of the existing plan.

Now a rainy day plan sounds good. But this isn’t even a ‘soft day thank God’ plan. That it is listed as one of the Government’s key Brexit protections is risible and illustrates the paucity of thinking on that front.

€3bn (over 5 years) doesn’t even amount to a point and a half on the debt/GDP ratio. In debt terms it is buttons. For context, remember how quickly the Pension Reserve Fund was drained following the banking crisis. This money would be much better used increasing the productive capacity of the economy.

The reality is that our underlying debt position has improved remarkably since its peak at 120% of GDP only a few short years ago. As Minister I remember being told that our debt dynamics were unsustainable. That Ireland was not viable. Thankfully that proved not to be the case.

Our focus on economic and employment growth also improved our debt position anyhow. It is now remarkably at 76% of GDP. Net of assets it could even be 10% lower than that. Yes GDP measurement is a factor but regardless €3bn here and there is irrelevant. €3bn on additional hospital beds would not be.

And, it would render the Capital Review worthy of the name.

Our post economic crash economic thinking is muddled.

And this continuous but understandable obsession with the past clouds our perspective on current challenges.

People talk about preparing for similar tsunamis. But that misses the point. If Europe has done anything in the last five years it has been to fundamentally change the manner it would respond to a crisis like that Ireland endured. Unfairly too late for Ireland. But the scale of the recession of 2008 should not be repeated.

The current crisis is a political one, one which has it roots in the sacrifices of the recession. We cannot continue to deny people the fruits of their sacrifice and think that it does not have political consequences. It does and they are manifesting themselves across Europe and wider afield.

My own experience as Minister has taught me different lessons. We have an opportunity we should grab.

The first is that the European Fiscal Rules should support additional investment expenditure to a greater degree. Particularly when money is cheap and inflation non existent.

That is why I have been raising the issue at meetings of the Party of European Socialists. Our Government is silent on the question. Perhaps embarrassed by the audacity of the spin on display at the Review briefing, Minister Noonan started taking about off balance sheet EIB investment. This has never happened and is unlikely to do so.

The second lesson is that economic growth is the solution to concerns about debt and risk. And an additional €3bn would contribute to that. States manage debt not pay it off and affordability is the key.

The paucity of the Government’s ambitions in this regard were displayed as Minister Donohoe kicked off budget process with a tough as boots briefing.

My advice to his colleagues would be to take this advice with a grain of salt.

We overstate the capacity of our forecasters to predict the future.

This time last year we fought an election on the basis of the available fiscal space for this year’s budget being €500m. The Budget Day figure was €1.2bn – an increase of 140%. What a difference a few months makes. And indeed having conjured up another 500m of that by the summer the Government swore blind that it could not increase any further. It did, by another €200m.

And Minster Donohoe understates his own flexibility too. We would do well to look at the 2017 position. This week, the Oireachtas committees began to be asked to debate Estimates that are €120m shy following changes to the Lansdowne Road Agreement. The Government’s line that this money can be found elsewhere, (before a health supplementary remember!), isn’t serious.

There is I believe, a political price to be paid for this parsimoniousness.

Europe’s problems have now moved firmly onto the political stage. The 10 year recession has had its impact. People don’t believe their children will be better off than they were. Millennials, we are told, are losing their faith in democracy.

Central to combatting these challenges, is proving that democracy works and that open market economies can deliver for ordinary people. Even in Ireland, which ranks 6th on the Human Development Index, Fine Gael’s failure over six years to make any impression on the health portfolio undermines progress made elsewhere.

We should make a start by rendering the Capital Review meaningful. There is an additional €3bn available without any changes required in the fiscal rules. It should be deployed.

What is remarkable is that having lost the election on their plans for the economy, FG are now presiding over a single party Government in that area. Ministers Noonan and Donohoe may be pleasant men, but at their core they are old school Fine Gael.

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