Economics:In some parts of old China it was often the case that favoured sons of wealthy families were spared punishment for any crimes they might commit. But the public always demands justice, and so the parents, according to custom, would select a powerless and illiterate peasant to be beaten in their stead. Thus was born the term whipping boy.
Since Irish fiscal policy began, capital spending has been the whipping boy for current expenditure. Last Tuesday, Brian Cowen finally ended the obnoxious practice.
Of course, we shouldn't spend money on capital infrastructure for the sake of it, and an immediately worrying feature of the unveiling of the new National Development Plan was the way in which the Government proudly announced - before outlining what it intended to deliver - that it was going to spend €184 billion of our money.
But just as silly is the idea that capital spending should be reduced to contain inflation when that inflation is coming from current spending, public and private.
As a matter of fact, the sum just mentioned includes substantial amounts of current spending included in the plan for electoral purposes.
For the purposes of productive capital investment - what the plan should really be about - we are talking about a package of around €78 billion, split approximately 70/30 between capital infrastructure and research and development. The urgent priority of government should be to ring-fence this money and insulate it from the vagaries of economic and political cycles - ie from the Whipping Boy Syndrome.
This syndrome had its last serious outing in the budget of December 2002. Fresh from an election victory - won on the back of strong tax revenue growth and generous spending commitments - the Government suddenly found itself with slowing tax revenues. Its promise to increase public-sector pay under the benchmarking process - economically the least important of its commitments - was politically the most important. Its promises on capital spending and taxation - amongst the most important promises economically - were the least important politically. Once again, the favoured son was spared.
As well as raising VAT by 1 per cent, it sharply cut back on badly-needed capital expenditure. Infrastructure projects were badly disrupted and vital projects delayed at a cost of hundreds of millions of euro, not to mention unnecessary commuter congestion.
Although the most obvious, this is not the only form of whipping boy syndrome: neither is it the most damaging. Although the easiest to spot - because it is short-termist and knee-jerk in nature - there is another type. More benign in inspiration, but much more damaging in result, it comes from a surprising source: the Economic and Social Research Institute (ESRI).
Along with the Department of Finance and the European Central Bank, the ESRI is an organisation with which I usually agree (whether this is a case of fools seldom differing I leave to your judgment). But when the ESRI argued - as it did last October - that planned infrastructure spending under the new National Development Plan should be cut back to contain inflation, I disagreed. I still do, and here's why. While I cannot claim to have memorised all 300 pages of its analysis of the new NDP, nowhere have I seen a complete and coherent explanation of the channels through which capital spending will lead to inflation.
If anything, the inflationary environment of the next plan promises to be far more favourable than the last: average growth rates over the 2007-2013 period are likely to be significantly lower and the supply of labour significantly higher.
And as any student of recent Irish inflationary trends will tell you, their cause has little to do with capital spending.
In so far as they are driven by any domestic factor, one of them is the rising cost of housing, which magnifies the impact of rate rises on the consumer price index (CPI). This is greatly influenced by the lack of infrastructure in transport, education and health. By confining the habitable and commutable parts of the country to a small fraction of its land mass, it has concentrated housing demand on the capital with all the force of an elephant in stiletto heels.
Far from causing inflation, infrastructure development is critical to achieve a greater geographical spread of demand, not just for housing, but for jobs and services. And that, in turn, is critical to lowering the cost of living and increasing Ireland's competitiveness.
The goal of rebalancing the eastward slant of the State's growth is relevant here. Here a simple fact about rural infrastructure needs to be grasped: if population and traffic flows along the west do not yet justify an economic return to such investments, it is precisely because that infrastructure is lacking in the first place.
The objections to proposals such as the Atlantic corridor and high-speed rail are blinded by static economic models. They assume that either the chicken or the egg must come first. But infrastructural investment is a vital part of a two-way iterative process involving government action and private-sector responses. The relationship between economic growth and infrastructure is organic, not mechanistic.
Two valid criticisms of the new plan can be made, however. The first criticism relates to the fact that, despite spending €184 billion on this latest plan, not one cent will be spent on creating an effective management structure to govern it. The second criticism comes back to our old friend. Escalating land prices, an inflexible approach to environmental impact assessment and tortuous planning process are all examples of Government policies and behaviour that significantly pushed up construction costs under the last NDP. Capital underspending - which causes the costly and disruptive stop/go approach to building - was another.
Instead of taking responsibility for these problems the Government has done quite the opposite. Last November it announced a new system of contracts, coming into force next month, whereby construction firms will bear an amount of contract risk far beyond that portion that is justified (relating to building input costs, wage costs and so on). They will also have to carry costs imposed on them by politicians through their inability to sort out our planning mess, convoluted regulations and erratic approach to spending capital investment.
As is usual, it's the Government that makes mistakes, and it's the private sector that gets the whipping.
