A Patent Lie: Ireland's Capital Investment Stimulus

In its April 2008 review of Ireland's economy, seen by the Government some 5 months prior to its publication, OECD has identified two salient medium term problems linked to the twin crises we are currently experiencing:

Reforming the taxation of housing. "...the unusually favourable tax treatment increases the role of housing in the economy and adds to volatility in the housing market. There should be a gradual move towards a more neutral system of housing taxation," said OECD. Thus, even assuming its ignorance prior to the OECD report, the Government had at least 15 months since to design a functioning system of either land-value or property taxation, there by reducing the impact of the house prices slowdown.

Public spending needs to slow. "Fiscal performance has been strong in recent years but revenue growth has moderated as the economy, particularly the housing market, has weakened. Public expenditure is set to slow but it is important to avoid locking-in expensive commitments, particularly on public sector pay. As spending rises more slowly, improving public services will have to rely more on undertaking further reforms to public sector management and getting better value for money." Once again, nothing has been done in over 15 months to address these recommendations.

Chart below - taken from the OECD report, illustrates the extent of the problem.
However, a closer examination of the components of the public expenditure in Ireland show even more dramatic failure by the Irish Governments to stop the gravy train of wasteful expenditure.

Consider the following chart plotting actual net current expenditure against capital expenditure, incorporating my own forecast for fiscal consolidation in 2009-2010 and DofF January 2009 forecasts for the same period.
Two features can be glimpsed from the chart:

1. Over the last decade, there has been a steady, unrelenting rise in the current expenditure - largely reflecting social welfare spending and the wage bill increases in the public service.
2. Even before the mini-Budget this month, our capital expenditure has peaked in 2008. Recall that Brian Cowen and Mary Coughlan are endlessly repeating that in 2009-2010 NDP-linked capital investments will act as a stimulus to the economy. Either they have not seen their own Government projections, or cannot comprehend the reality. During the recessionary 2009-2010, Ireland Inc is planning to spend decreasing net amounts of funds on capital programmes. If the Government can think of the NDP (created two years ago) as a recession-busting stimulus, then it has fired virtually all of its ammunition in 2008. And, of course, that has made no difference to the recession, as we all know.

But there are more sinister trends in the expenditure figures. The DofF does not provide a historical data set for budgetary dynamics over time. Instead, possibly to keep the taxpayers in the dark about the real nature of our spending, DofF produces a multitude of largely useless, technologically backward annual reports. A troll through these reveals the following.

Chart below shows the net current and capital expenditures as a percentage of GDP.
According to this chart, the economically unproductive spending which is largely absorbed into public sector wages and social welfare subsidies (our current expenditure):

• has grown virtually exponentially as a share of economy, whilst the capital investment programmes have bounced along a declining trend, and
• has far outstripped capital investment in terms of its role in the economy.

This blows apart Governments' arguments that since the beginning of this century Ireland Inc was aggressively investing in the productive capacity of its economy. Instead, it shows that we were 'investing' in wages, perks and working conditions of our public sector 'servants' and in welfare subsidies at the time of unprecedented growth in prosperity and low unemployment. First Bertie & Cowen and now Cowen & Lenihan have engaged in a classic tax-and-spend banquet where the already-stuffed were getting fatter and fatter on taxpayers cash.

Should you wonder how high were the rates of growth in current and capital expenditure over the last decade, chart below shows that in 2000-2009, even by DofF own (excessively optimistic) projections for this year, cumulative capital investment's importance in overall economy will decline by 39%. In contrast, cumulative current expenditure growth will reach +27%.In short, the above figures show that:

• Our leaders have deceived us about the importance of capital investment in the economy: between 2000 and 2009, capital expenditure share of GDP has actually fallen, while the current expenditure share of GDP has risen much faster than the GDP itself;
  
• Since 2000, our Governments have misled the public about the nature of Exchequer expenditure growth by stressing less rapidly expanding investment portion of the budget and downplaying a rampant expansion of payoffs to the public and social welfare sectors promoted by the Social Partners;
• Our current leadership is now deceiving the country and the markets by referring to a falling capital-spending programme as economic stimulus. That 'stimulus' applied to 2008 and not 2009-2010 and even in 2008 it was relatively small, compared to the current spending waste;
  
• Our Governments since at least 1999 have engaged in reckless and unsustainable increases in the current expenditure - in 2000-2009, current spending has grown in nominal terms by 138%, outstripping almost 2:1 the rate of growth in the nominal GDP (72%). Meanwhile capital expenditure has grown by 57% - over 2.5times slower than the current expenditure.
  

Mr Cowen and the rest of the Government should stop talking about Ireland's plans to invest in infrastructure and knowledge economy. They should come clean on the fact that their leadership has left the country with a current spending bill well beyond our means.