Spending on productive capacity includes not just ‘bricks and mortar’ but all those resources that give rise to socially useful results over time. Spend today and reap a return in the future: this is the logic of investment. It can cover investment in education and skills as well as investment in knowledge and, of course, machinery, building, lands and equipment. Not all forms of investment are equally productive and distortions can arise in favour of speculative, wasteful or socially destructive investment. In many cases the gains from investment are not fully captured by the private investor making the investment, this is common with investments in knowledge production for example, and significant under-investment can arise where private returns are perceived as too low or too risky. Lack of access to funds may also hamper investment if the cost of borrowing is too high or the terms and conditions too onerous.
Ireland’s economy underwent rapid expansion in the years prior to the financial crisis of 2008-2012. Some of this investment was speculative in nature and highly dependent on cheap credit and a tax-distorted system that fuelled a property bubble including investment in the wrong type of assets and in many cases the wrong physical location.
Following the crash of 2008-2010, by 2011 Ireland recorded the lowest level of investment as a percentage of GDP of any EU state with the public and private sectors deleveraging in tandem. The proportion of investment devoted to capital investment was 15% in that year compared to 30% in 2006. Moreover, the rate of public investment was among the lowest in the EU. In 2014 the rate of public capital expenditure was the second lowest in the EU (Chart 1). While there has been some recovery in investment activities since 2011 it is clear that there are acute shortages in areas of key need including provision of suitable and affordable accommodation for a rising population as well as investment in areas such a renewable energy, building conservation measures, public transport, broadband and water infrastructure. Total investment was still no more than 17% of GDP in 2014 – representing the fourth lowest rate in the EU (Chart 2).
With improving public finances and some limited fiscal space there is an opportunity for the public authorities in Ireland to avail of cheap credit to finance long-term strategic investment. However, this needs to be undertaken in a careful and measured way with access to rigorous cost-benefit evaluation of project proposals. The level of public capital spending (1.9% of GDP in 2014 – see Chart 2) is too low and should be increased gradually over a three to five year period to reach a long-term goal of around 4% of GDP. Such public general government investment can be complemented by ‘off the books’ public commercial investment based on appropriate commercial criteria and revenue flows. Investment in hospitals and schools should, generally, be undertaken ‘on the books’ while other areas of potential commercial enterprise can be undertaken ‘off the books’ provided user charges can make up in excess of 50% of the revenue stream. Broadband infrastructure, social/affordable housing and green energy are three examples of investments that could be taken off books.