Support for domestic stimulus

03/04/2009

The Fine Gael document ‘Rebuilding Ireland a NewEra for the Irish Economy’ was published on 26 March but has received comparatively little attention in the media as commentators focus, narrowly, on the string of bad news and impending budget adjustments. Like the curate’s egg, the Fine Gael document has many ‘excellent parts’. It also contains a few suggestions that raise serious issues and concerns.

In summary:

  1. The proposals by Fine Gael have considerable merit and are worth considering not only in the medium-term but immediately given the need to rebuild the economy and start generating new employment this year;

  2. The document is well grounded empirically without being overly technical and the case for a targeted domestic stimulus is well made – countering the pessimism of many commentators with regard to the efficacy of a domestic stimulus in general in Ireland; however:

  3. The main drawbacks relate to the narrow focus on just two sectors as well as the propensity to follow its sister party in the UK in regard to privitisation.

Read on ………

On a first read the document strikes the reader as being:

State activist in the role it assigns to a new public body ‘The New Economy and Recovery Authority’ (NewEra) along with no less than six other proposed semi-state companies – Smart Grid (following re-structuring of ESB), Broadband 21, BioEnergy Ireland, Renewable Energy Ireland, Irish Water; Greener Home Bank (involving a ‘significant Government recapitalisation of EBS - Education Building Society - to convert it into a state-supported mutual bank, with a particular focus on mortgage lending and home environmental improvements’).

Green in the weight it gives to environment-friendly initiatives (stating that ‘the winners of global competition will be those countries that move quickly to low carbon and resource efficient economies’)

One detects a green-blue-red alliance in the making? However, the devil is in some of the details. It should be noted that:

  • NewEra would be a State Holding Company comprising existing companies such as Bord Gáis and ESB along with others and would, ‘over time’ sell ‘existing and new state assets no longer considered strategic to the goals of the NewEra initiative (starting with Bord Gáis and ESB International)’ – in other words, NewEra along with other holding companies would be vehicles for gradual privitisation of existing (or newly created) state assets;

  • The Board and CEO of the proposed Authority would be political appointments (refer to page 7 where the ‘Taoiseach of the day’ would appoint these);

The Fine Gael proposals focus on two key sectors: energy/environment and broadband. Areas not addressed include capital spending on schools (e.g. cited in the Sinn Féin document), early childhood education and care, social housing and infrastructural provision for primary healthcare.

One of the key goals set by Fine Gael is to break the link between fossil fuels and car use by setting a target of 50% by 2025 and 100% electric cars by 2030 (p13). By contrast, Fine Gael say that the current Government target is to reach 10% electrically powered vehicles by 2020. It also places a big emphasis on Ireland becoming a world leader in ocean energy technology – both in terms of generating power as well as selling it on international markets.

The failure of privitisation to deliver sufficiently on broadband in the case of Eircom is acknowledged by Fine Gael (p16):

‘…in countries like Ireland with low population densities, widespread roll-out of high-speed fibre networks is too expensive, and the pay-back period too long, to be quickly delivered by the private sector. Eircom has announced a scaling-back of its already limited investment plans, and all private telcos are struggling to raise capital for new investment. It is crucial that the State now take the lead in this area.

The projected additional 100,000 jobs by 2013 are based on what are described as ‘conservative assumptions, drawn from empirical evidence of the economic impact of investment in construction and infrastructure’ (page 11). The document goes on to estimate the likely public spending (on social welfare) and borrowing reductions (arising from reduced current spending on welfare and reduced exchequer financing of infrastructure since funding of the various new initiatives would be ‘off the Government’s balance sheet. The projected reduction in Government borrowing would be as much as €4.1 billion by 2013 (but only €1.2 billion in 2010).

The multiplier effects are as large as 2.2 in the fourth year of the four-year projection. Two significant sources of empirical research are cited:

The funding of the scheme would come through: loans from the European Investment Bank and financial markets (echoes of matching private equity for the banks’ Government recapitalisation scheme), the National Pension Reserve Found, NewEra bonds for the Irish public (echos of the ICTU proposed national recovery bond) and asset sales ‘in the medium-term’ beginning with ESB International and Bord Gáis (echos of New Labour and UK Conservatism).

Posted in: PoliticsFiscal policy

Tagged with: stimulusFine Gael

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