Beyond the Spin – Finally a Good News Story: Investment Works. The Recession Diaries – July 27th


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Fair dues to the Government. They take old news, an old set of policy projections, repackage it with a shiny new bow, and launch a fresh programme – which is presented as a stimulus and investment-driven job creation programme. And a lot of folk go along with it (though some like Miriam Lord sees the three-card trick being played). Let’s look at the headline figures behind the new capital infrastructure review – for there is spin, but there is (finally) a good news story.

The Government announced as early as December last year that capital investment would be cut to €5.5 billion annually from 2011 to 2014. Yesterday, the Government announced that capital investment would come in at €5.5 billion annually from 2011 to 2016. Same ol’, same ol’.

Actually, the Government has been taking a hatchet to capital spending projections. In January last year, they projected capital spending to come in at €27 billion for the period between 2011 and 2013. Within a few weeks, this was cut to €17.5 billion. Now it will be €16.5 billion.

This is important as here lies a big spin. It is claimed that since tender prices have fallen by 30 percent from a peak in the second half of 2006, the volume of spending and, therefore, the level of activity, won’t be affected. However, the tender index published in the review shows that tender prices have fallen by about 20 percent since 2008. Yet, capital spending in nominal terms will fall by nearly 40 percent. The volume cut is still considerable.

Any growth and job creation arising out of the new capital review was already factored into projections last December. Yesterday’s launch doesn’t change those macro-numbers. And capital spending has been cut – whether measured in nominal terms or in volume. So much for stimulus.

But let’s look at one set of figures that can help us reconstruct an alternative perspective. The ESRI asserted that capital spending is inefficient when it comes to creating jobs. As mentioned before, they asserted this but didn’t put forward any arguments or data to back up this assertion. They did cite another ESRI study, by Edgar Morgenroth, but this hardly backed up their contention.

The Department of Finance measured the job creation element of the programme. They found that there are between 8,000 and 12,000 short-term jobs created for every €1 billion spent (with HSE capital spend having the highest job density and water services having the lowest). These numbers are consistent with Morgenroth’s study.

Of course, these numbers don’t include downstream, or induced employment (arising from sourcing, extra demand, etc.). Again, Morgenroth’s study suggests this element – which remains in the medium-term after the project has been completed and the direct jobs are gone – is about half the number of direct jobs created.

So let’s examine the benefits of a significant, temporary boost in capital spending. If it were increased by €3 billion over and above what the Government projects, this could create:

  • Between 24,000 and 36,000 jobs directly
  • Between 12,000 and 18,000 indirect jobs

That would be quite an accomplishment. With some boldness, some vision, some courage (I like using that latter word, since deflationists are forever advising the Government to be ‘courageous‘ when it comes to fleecing pensioners, the jobless, the sick and low-paid), the Government could make serious inroads into growth, employment and the fiscal deficit.

On the latter, the Morgenroth study quotes Construction Industry Federation numbers showing that – adjusted to our sample €3 billion extra boost – tax revenue would rise by about €900 million with a further €900 million saved on the social welfare budget. That’s a big turnaround – and probably doesn’t include further tax revenue arising from increased consumption.

So capital spending can be a useful instrument in terms of job creation and the fiscal deficit. But the real benefit is the long-term addition to our economic base. For instance, IBEC estimates that installing a Next Generation broadband network to cover 90 percent of all household and businesses would cost €2.5 billion – with about two-thirds of that cost composed of civil engineering works.

If such a project were undertaken, we’d get a jobs boost and a public finance boost. But we would have an extremely valuable asset on the national balance sheet, an asset that would facilitate indigenous enterprises’ ability to compete in the traded sector. In other words, the good stuff would keep coming.

All this to say that, beyond the spin, investment works. It puts people back into jobs, it helps repair the public finances and it can leave us with wealth-producing assets for years to come.

Now, isn’t that a good news story?

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3 Responses

  1. Robert

    July 27, 2010 3:16 pm

    …so dear Michael, the government are beginning to abandon their neo-liberal agenda shaped sinking ship are they? I’m not so sure and if so, they are jumping of with gritted teeth and a bitter acceptance of a real politik. Us ordinary folk on the other-hand, have to accept that we are now in an age of what is a perverted and immoral version of economic socialism for the rich and a warped disgusting model of capitalism for the poor. Moreover, creating between 24,000 and 36,000 jobs directly, 12,000, and 18,000 indirect jobs through capital investment is but a drop in the stagnant pool of the 450,000 unemployed. Indeed the figures put side-by-side present a stark reality of how this country has been, (through the actions of a selected; because we did select them by voting for them few), fundamentally changed, probably forever. Further, the government tells us to do our patriotic duty: spend our meagre savings into the economy, and so stimulate growth. No any spending will have to be done by those public servants who are in receipt of some of the highest paid and best-protected jobs in Europe.

    However, depending on a ‘political system-built’ work force constructed from the blood and sweat of ordinary taxpayers is typical of this governments right wing ideology becoming wrapped up in centrist yarn spinning, now having to go cap in hand to the proletariat to shore-up the whole rotten edifice. Give me a break!

    Finally a wee reminder of Fredrich Engels insight… “By bourgeoisie is meant the class of modern capitalists, owners of the means of social production and employers of wage labour. By proletariat, the class of modern wage labourers who, having no means of production of their own, are reduced to selling their labour power in order to live”… the difference between then and now? If only we had some fields to toil, some industry to work in. Rather we live in a perverse economy that provids low-grade services to itself in ever decreasing circles…

  2. Michael Taft

    July 27, 2010 5:23 pm

    Robert – there may be some confusion. I didn’t suggest the Government was abandoning its fiscal conservatism. In fact, just the opposite – as the first part of the post shows.

    The extra €3 billion in capital spending – above and beyond what the Government intends – would create between 36,000 and 54,000 jobs in the short-term. That would reduce unemployment by between 13% and 20% if the DoF figures hold. That would make quite a dent in unemployment – and that’s not counting further inroads that could be made through the current budget. One could argue that its not enough but clearly no government, no matter how progressive, could wipe unemployment in one or two years. Howeveer, moving in that direction would be a giant step forward.

  3. Robert

    July 27, 2010 8:31 pm

    thanks Michael…of course to take giant steps forwards, one needs to have at least the disposition of a giant, certainly in terms of ambition and intellect…
    And it seems to me, that for too long our politicos have been standing on the shoulders of giants, and as usual it will be the ‘little people’ here in Lilliputtlecarryon that will provide the where-with-all to pull the whole shaggin lot of them out of the bog…
    Anyway despite our (my) Hobbesian urges to fight them tooth & claw, and hope they sink further into the mire, the country and those hundreds of thousands, yes… hundreds of thousands of people standing in the cold & the rain in the dole queues, just haven’t got the time we just want to get a job, regain our dignity, really we just deserve better.

    Again cheers & thanks