No excuse for pulling back on projects
If ever we needed a reminder of the legacy of the crash, it has been the response to the cost overruns to the National Children’s Hospital.
Despite the public finances now being in surplus and the cost of public borrowing remaining at a historical low, it is remarkable that so many buy into the notion that a cost overrun in one area of spending has to be made up for by cutting back on much needed projects elsewhere.
Last month, we heard that €100 million has to be reduced from the health budget to upgrade maternity units and elderly care facilities among others. The cost over-run caused by “low-balling” or under-representing the true cost of the tender bid is now presented as something of a new phenomenon. It is not.
Standard practice over the past decade in most major public private partnerships across advanced countries has been to include penalty clauses for cost over-runs. It appears that no such clause applied to the National Children’s Hospital project.
What is more worrying is that lax practices within one project have now ensured that punishment will be inflicted on many other, long-awaited and much needed ones. This is the classic accountant’s response to a cost over-run. But this is a society and economy we live in, not a business.
What the Government calls “prudence” in terms of its management of the public finances is little more than conservative accounting practice – it is designed to manage the public finances in the here and now. This mindset is not solely confined to health infrastructure. It also prevails in official thinking on housing. Local authorities cannot borrow directly from the Housing Finance Agency but instead have to seek approval from the Department of Housing.
This centralised approval system means there is a major blockage in the system in approving access to finance for local authorities because such borrowing is added to the stock of national debt. The stock of national debt is frequently portrayed as a major concern and risk factor for the Irish economy.
Yes, the total volume of debt as a share of modified gross national income is above where we would like it to be but the far more important metric is the cost of servicing and timing of the refinancing of that debt. Just think about your mortgage – the vast majority of us would be crippled if the full loan was called in immediately.
Rather it is our ability to pay the monthly loan repayments that is important. It is vital to understand that most references to the national debt are designed to distract from the true nature of the public finances in Ireland at this point in time.
The reality is that money is available now to deliver on long awaited and major infrastructural investments, but only if the Government chooses to do this. This is not a call for across-the board spending hikes.
Instead, it is a call to deliver on current and capital projects that will ultimately expand the productive capacity of our economy and improve the quality of life for workers and all those living here. Planned exchequer surpluses over the next half a decade should not be a badge of honour. The EU’s fiscal rules do not require budgetary surpluses and the Government’s commitment to them reflects the myopic thinking that it has with regard the very substantial housing and demographic challenges that lay ahead.
Despite the fanfare surrounding the new National Development Plan which is costed at €116 billion over a 10-year period, the actual additional financial commitment over and above what is currently being spent is relatively modest.
Capital spending in 2027 will only be €5.8bn higher compared to 2018. This comes in a period where the Government is planning to generate cumulative exchequer surpluses of up to €12.7 billion between 2020-2023.
There can be no doubt that the threats to our public finances are very real, whether from Brexit, international tax recommendations by the OECD or a sudden change in corporate tax revenues here. But a threat is no excuse for pulling back on planned projects when they are necessary, when failure to act will cost more over the long run and when the money is actually available.