Finance minister Paschal Donohoe has published the government’s Summer Economic Statement (SES) which sets out the key elements of the government’s economic strategy.

Taking account of pre-committed expenditure and resources available for new expenditure measures, total gross voted expenditure is to grow by almost €2 billion or 3.4% in 2018.

The SES estimates the fiscal space for 2018 at €1.2 billion. However, the full-year costs of public spending measures introduced in 2017 mean that the current scope for new additional measures is around €500m for next year.  Only €300m of this amount is available for new expenditure increases, according to Donohoe.

The minister anticipates increased capital investment by an additional €500m in each of the years 2019-2021. This will result in gross voted capital spending of nearly €7.8 billion in 2021, which would be 85% higher than the outturn of €4.2 billion in 2016.

The Department of Finance is currently budgeting that the tax burden on the economy will increase by €2,830m, or 5.6%, in 2018 as GDP growth slows to 3.7% from an expected 4.8% this year.  The extra tax is earmarked for a €2 billion increase in current and capital spending.

Significant Challenges

The SES document cautions: “Significant expenditure challenges remain that have the potential to jeopardise the maintenance of fiscal stability. As the economic recovery continues and the economy performs strongly, there are considerable expenditure pressures and strong expectations for higher levels of public spending.

“The pressure to rapidly increase public investment, notwithstanding emerging capacity issues, to fully unwind the FEMPI pay measures and to meet the increasing demographic costs will have to be  managed whilst also complying with our obligations under the Stability and Growth Pact and the Fiscal Responsibility Acts 2012 and 2013. This is especially pertinent in the context of external challenges to be faced though the UK’s decision to leave the EU.

“An ongoing systematic programme of assessment and evaluation of how we spend public funds is, therefore, essential to ensure that limited resources provide much needed public services and social infrastructure.

“This has commenced in 2017 through the initiation of the Spending Review process. This is designed to replace periodic, sharp fiscal retrenchments with an ongoing emphasis on prudent and sustainable growth in public expenditure. A major challenge is to prioritise between policy initiatives to ensure resources are allocated to areas where they can have the greatest impact in terms of economic and social gain.”

Donohoe (pictured) pledged to establish a ‘rainy day fund’ from 2019 onwards, to be capitalised with annual contributions of €500m from the Exchequer. The ‘remaining’ €500m (of the €1 billion originally envisaged for the rainy day fund) will be used to finance investment in physical and social infrastructure.

Donohoe signalled that after the debt to GDP ratio is reduced to the 60% EU-mandated threshold, work will begin on reducing the ratio to 55% of GPD. “Once major capital projects have been completed, the reduced rate of 45% will be targeted,” he added.

CIF Criticism

Construction Industry Federation director general Tom Parlon expressed disappointment that a major increase in capital spending has been deferred until 2019. “If it’s a good idea to invest in 2019 to improve the economy and address the housing issue, lack of broadband and creaking road and rail infrastructure, why not start today,” he said. “Waiting until 2019 to invest in a major road project such as the M20 will mean that we won’t see that road completed until nearly 2030.

“Our analysis of the existing Public Capital Programme shows that after other agreed commitments are factored in, only €1.515 billion remains for infrastructure investment over the next four years. To put that into perspective, the Metro North project would easily absorb all of this capital expenditure (and still not be completed), leaving nothing for other essential projects around the country.”

The CIF claims that Ireland spends the least on infrastructure amongst all EU countries, as a percentage of GDP, at 1.7 per cent in 2015. The average rate was 2.7 per cent for the EU19 and 2.9 per cent for the EU28.

“When you consider that 40% of the programme has been committed to housing and an increasing amount of the remainder is spent on maintenance, there is very little left to develop the much needed infrastructure that will sustain our economy in the future,” Parlon added.