Spending on infrastructure makes sense, cutting VAT on hospitality is quite mad

Irish Times

5 days ago

Looking at the performance of the economy over the last 18 months, things look pretty good, as long as you aren't looking for somewhere to live.
On to an already buoyant economy, last year's election
budget
ploughed in more money, equivalent to more than 1 per cent of national income. With full employment, this served to further drive up domestic demand, and also house prices. It hasn't made us much better off, even if it proved popular and garnered a few votes.
As election budgets go, it could have been worse. The election budget of 1977 was the biggest culprit in the economic misery of the 1980s, and the election budget of 2007 pushed the economy and house prices to new heights, leaving it even further to fall in the ensuing financial crisis. By these standards last year's election splurge, while ill-conceived, was much less damaging.
This year, with no election in sight, it should be time for wiser counsels to prevail in government. While we are seeing continuing growth in the economy, the
Department of Finance
provides a much more sombre assessment of what is to come due to US president
Donald Trump
's wrecking ball.
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Tariffs
and a possible trade war would directly affect Ireland, with possibly more serious consequences stemming from the damage done to the wider
European Union
economy.
While this downbeat assessment calls for fiscal caution, instead of heeding their own advice, the
Government
plans to increase expenditure next year by more than 7 per cent, while national income may rise by 5 per cent.
This might be acceptable if they also planned a big increase in
taxes
, to avoid stimulating an already fully employed economy. However, without tax increases it will add to inflationary pressures.
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The Government also, correctly, has highlighted the huge deficit in infrastructure in Ireland stemming from the economic success of the last decade.
In countries such as Germany, Italy and Greece, more older people die each year, vacating their homes, than new young households are formed. As a result, these countries don't need a big increase in housing or in related infrastructure.
In contrast, with our rapidly growing population, we need to invest in more housing, water and energy, as being provided now in the updated
National Development Plan
(NDP).
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While the Government has the money to spend on building more infrastructure, this will work only if a range of other complementary policies are implemented.
Firstly, while spending money on infrastructure makes sense, in a fully employed economy we need to redirect resources from other sectors to building and construction. For example, the plan to cut
VAT
on catering and accommodation is quite mad.
The latest data shows that that sector is booming. Instead we need to free up resources for new building by spending less in other economic sectors. In sectors that are already thriving, it could make more sense to raise taxes than to lower them, to encourage redirection of labour to our most urgent problem,
housing
.
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The NDP sensibly provides funding to build new wires to link homes and businesses with electricity generation.
There is also funding for a long overdue
metro
for
Dublin
, and to bring water from the Shannon to Dublin to tackle the knife-edge water supply in the capital. However, these projects will get under way only if the planning and regulatory systems are dramatically reformed.
It has already taken five years for planners to consider a verdict on the metro. Countries such as Spain would have built the metro in that time, instead of merely scrutinising the plans.
The North-South electricity interconnector was announced 20 years ago, while planning delays on both sides of the Border mean it will be 2032 before it finally happens. Once started, the actual construction will just take months to complete, not the decades spent in planning.
The need to pipe water from the Shannon to Dublin was established over a decade ago, yet it could be many more years before it is delivered under the present planning system.
In the 19th century, specific legislation was enacted to build our railway system. As Michael McDowell has suggested, a similar legislative approach should be taken today to developing key infrastructure.
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We need to enact a specific legal mandate, in the overriding national interest, to drive forward critical projects and avoid the endless round of planning applications, appeals and judicial reviews. Had we done that for the metro, it would have been finished a decade ago.
But unless the planning system is reformed, I'm unlikely during my lifetime to ride the metro or drink Shannon water from my tap.