Economic Update: The National Development Plan. And an Improving Fiscal Situation
Jim Power
Another iteration of the National Development Plan. Fiscal position improves ahead of Budget 2022.
· With the launch of the NDP, and given the amount of expenditure involved, the focus must remain firmly on the quality of capital spending rather than the quantity, as has too often been the case in the past. It is important to remember that not all capital spending is good.
· Tax revenue buoyancy very strong in first nine months of the year, but the pressure on spending is still intense.
THE LATEST ITERATION OF THE NDP
The Government launched or re-launched (it is hard to tell) another national development plan yesterday. €165 billion to be spent in the period from 2021 to 2030 would be no mean feat. Looking down through the list of areas targeted – compact growth; regional accessibility; rural communities and economies; sustainable mobility; enterprise, innovation and skills; international connectivity; amenity and heritage; climate action; water and environmental resources; childcare, education and health services – one would find it hard to disagree with much, although there are those who believe that there is too much emphasis on building roads. These people should drive between Limerick and Cork or Limerick and Waterford more often.
If by 2030, all of these objectives had been achieved or were in progress, then Ireland would certainly be a better place to live, work and play. Good capital investment expands economic potential and improves quality of life. Furthermore, many of the projects identified will be essential to sustain Ireland’s attractiveness as a location for FDI, now that the tax advantages are on the brink of being modestly undermined.
However, I remain deeply sceptical on a number of fronts. The launch of the NDP is all about politics, and I am afraid I have a fundamental apathy about the ability of the political system to take a long-term perspective, set out a clear strategy, and deliver it. I hope I am wrong on this occasion.
There is the obvious question about the amount of money involved, and while borrowing costs are still very low and it does in theory make sense to borrow, it appears likely that borrowing costs will rise, and indeed are already showing some modest signs of doing that. Borrowing is not a one-way bet, particularly in the context of the already very onerous level of debt that has been accumulated. Despite what some modern monetary theorists suggest, debt actually does matter, particularly for a small open economy like Ireland.
There are also serious issues surrounding the cost of delivery, and one thing that is very obvious at the moment is the cost of construction. There appears little doubt but that inflation will increase the cost of delivery of many of the projects.
Climate action does appear to get greater recognition in the latest iteration of the national development plan framework. There are a number of specific spending proposals aimed at the climate change agenda, but perhaps more significantly the impact of infrastructure projects from a greenhouse gas perspective will have to be taken on board when carrying out cost-benefit or value for money assessment. The Public Spending Code is a tool used by policy makers to assess public investment decisions in order to ensure value for money. This code will now seek to ensure that public spending decisions will put climate action at the centre of all public investment decisions in the future. The new rule means that the cost of measures needed to offset any greenhouse gas emissions associated with new infrastructure must be calculated, taken on board, and become part of the decision-making process.
The priority will be on significantly increasing the costs associated with any release of additional greenhouses gases into the atmosphere. For example, the calculation of greenhouse gas emissions associated with a road project will include emissions attributable to the construction work and the materials used in the project, and also some assessment of the emissions that will be caused by future usage of the road, including the traffic it causes.
In effect, projects associated with higher greenhouse gas emissions will become less cost effective and may never see the light of day. That seems sensible as it is now a legal requirement that Ireland’s greenhouse gas emissions must be reduced by 51 per cent by 2030.
With the launch of the NDP, and given the amount of expenditure involved, the focus must remain firmly on the quality of capital spending rather than the quantity, as has too often been the case in the past. It is important to remember that not all capital spending is good. It has to be hoped also, that the system will become better at delivering projects on time and on cost. A photograph of the National Children’s Hospital should be put up all over the corridors of political power, particularly in the offices of the permanent government.
TAX REVENUE BUOYANCY CONTINUES UNABATED
In the first 9 months of 2021, an Exchequer deficit of €6.2 billion was recorded, but on a 12-month rolling basis, the deficit was €9.1 billion. Total tax receipts in the first 9 months of the year were 15.9 per cent or €6.3 billion higher than the equivalent period of 2020. Income Tax receipts were 19.5 per cent higher; Corporation Tax receipts were 7.9 per cent higher; and VAT was 26 per cent higher.
The strength of tax receipts reflects strong profitability in the multi-national component of the economy; a strong rebound in consumer spending; and the highest earning and highest tax-paying element of the labour force was not significantly affected by Covid-19. The very progressive nature of the Irish income tax system is ensuring that income tax revenues are remaining buoyant. The strong performance of multi-national profits is ensuring that corporation tax receipts are also buoyant.
On the expenditure side, the pressures are still high. Total gross voted expenditure in the first 9 months of the year amounted to €60.7 billion, which is 3.9 per cent higher than the first 9 months of 2020. Gross voted current expenditure accounted for €56.3 billion of the total, and was 4.9 per cent up on the same period in 2020.
Current spending on Social Protection totalled €23.1 billion and accounted for 41.1 per cent of total gross voted current expenditure. Current spending on Health totalled €14.6 billion and accounted for 26 per cent of total gross voted current expenditure.
The latest Exchequer returns are good news for a government about to deliver a government, but they must not cause intoxication in government.