Investment is still the key

Posted on June 10, 2013 by Tom Healy

Tom Healy, Director NERI
Tom Healy, Director NERI

Unemployment is the biggest single problem confronting Europe today. Ireland is no exception. With one in seven out of work, here, and one in four young people either out of work or not in education or training currently we are faced with a huge challenge. President Michael D. Higgins is correct to draw attention to the challenge that this problem poses to the future of European cooperation and social stability.

The answer to unemployment is employment - sustainable, quality employment that pays a living wage and not short-term, precarious jobs or no jobs at all. Fiscal austerity, alone, is the wrong answer. Most recognise this now even the most recalcitrant austerians. However, talk of 'structural reform' is potentially misleading especially if it means a continuing attempt to drive down wages, shrink public services further and sell off public goods and assets to the highest bidder for their long-term profitability.

Europe needs a new social deal.

A plan for economic recovery such as proposed by many national trade union federations including the DGB in Germany, the TUC in Britain and the ICTU here is called for. Recently the European Trade Union Confederation has outlined a proposal for a European wide investment stimulus.

To make a start, European Member States including Ireland should priorities an investment shock of between 1 and 2% of GDP per annum for a period of up to 5 years if necessary. This could be funded in a number of ways. In the case of Ireland the NERI has suggested a mix of public, private and European investment sources on a commercial basis without any necessary additions to General Government borrowing.

At 10% of GDP investment in Ireland is at its lowest ever and is at the very lowest of all 27 EU Member States. This is not sustainable economically or socially. In the absence of a State-led initiative to mobilise public and private sources of funding it is possible that investment will stagnate at around 10% of GDP for the foreseeable future. The history of capital investment during the so called Celtic Tiger boom years was one of chronic under-investment by the private sector in productive capacity coupled with over-investment of a speculative nature in particular types of commercial and residential property (not withstanding the shortage of good quality living accommodation in many areas now) and a public investment of mixed results but generally good outcomes in regards to public transport, education, health and roads. The absence of an innovative indigenous sector with sufficient scale and research power to compete on world markets is a continuing feature of lop-sided Irish industrial development over-reliant as it is on tax competition and badly coordinated social and economic investment.

The recent Government announcement of an investment stimulus using €150m of exchequer money next year is welcome. It seems that this will be combined with money from public-private partnerships as well as possible additional funding from the European Investment Bank. It is difficult to say how much additional investment is envisaged per year. Even if the additional overall investment were to be as high as €300 between now and the end of 2014 it represents about 0.2% of GDP. The scale of additional investment needed is much, much bigger than this. A modest and entirely realistic target of an additional 1% of GDP should be set rising to 2% of GDP over time so that we can boost investment by 2% of GDP from its current crisis level of 10 to 12%. Over time more private investment may flow. We need a combined public-private-European stimulus of at least €1.5 billion (or 1% of GDP) next year to make a start at addressing Ireland's infrastructural deficit and unemployment crisis.

The somewhat optimistic creation of 13,000 jobs claimed by government (based it would seem on an underlying additional investment of €600 million over a number of years) as a result of this latest announcement needs to be multiplied up many times. Even using conservative model estimates by the ESRI for investment impacts as well as NERI estimates using the HERMIN macro-economic model we estimate that an investment stimulus 'off-the-books' could yield over 16,000 jobs for every €1 billion of investment.

It should be remembered that public capital investment has declined from €6 billion in 2009 to approximately €3.3 billion this year. Government has made cuts of €1.3 billion to the public capital programme in the last two budgets. A decision to increases exchequer spending on capital by €150 million over the coming 18 months, while welcome, represents a 12% reversal of cuts over the last two Budgets. And it falls short by far from the scale of investment needed to make a serious inroad in terms of job creation and strategic investment.
But jobs are only one outcome of an investment stimulus. Economic activity, revenue buoyancy and a lowering of the fiscal deficit are other outcomes. An investment stimulus would be smart because:

  • It addresses infrastructural deficits in areas such as water, building insulation, broadband as well as the social infrastructure of primary health services, childcare, elder care and education/training;
  • It drives growth and employment which leads to a positive fiscal consolidation
  • It places Ireland on a positive footing to avail of better international conditions and opportunities in the future.

Where will the money come from? Do we need more investment? How many jobs?

These are important questions and will continue to be considered in NERI research. However, we need to go for a much more ambitious investment plan now and not later. If we don't we risk incurring higher costs, fewer jobs, less money, lower tax revenue and even less hope.
And Hope is what Europe needs right now.


Posted in: Government SpendingInvestmentJobsMacroeconomics

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