The political parties are struggling to find ways to fund massive investmentin roads, schools and hospitals. The omens for control of the publicfinances are not good, writes John McManus.
Just 48 hours from the calling of the election, the economic battleground is becoming clear. The four main parties have tried to square the circle of how to fund much-needed investment in roads, schools and hospitals, at a time when the public finances are deteriorating. The answer, in every case, has been to return to borrowing, after five years of abstinence, and to blithely ignore the pressure on current spending.
Like alcoholics falling off the wagon, our politicians feel they have good excuses for returning to borrowing. The case is that public pressure for improved services - particularly health - is irresistible. In addition, by failing to invest now in roads and other types of infrastructure the next government would damage the Republic's long-term economic future.
The sums being proposed are substantial. Fianna Fáil proposes investment in the region of €52 billion over the period 2002 to 2007. Labour is talking about investing €56 billion, while Fine Gael has indicated €33.4 billion, but its projections only go out as far as 2006. The Progressive Democrats are pencilling in €40 billion.
The shortfall between what the State can afford to invest from its own resources and what it needs justifies borrowing, they all agree. But they disagree about how the money should be raised.
Fianna Fáil wants to set up a new government agency called the National Development Finance Agency. Its brief would be to find the optimal way of funding the investment with a special emphasis on getting the private sector involved. It could also raise the money for the projects by borrowing on the international debt markets. Outgoing Minister for Finance Mr Charlie McCreevy expects that some €10 billion of what he plans to spend will come from this route. The remainder will come from the government, who will get it through tax receipts or borrowings.
The Labour infrastructural spending plans will be funded entirely out of tax receipts and borrowings. In order to maximise the amount of tax left over for investment, they have decided to cut back on other areas of expenditure. In particular, Labour plans to ditch the commitment made by the outgoing Government to put aside some 1 per cent of gross national product each year to fund future pensions commitments. Labour will reduce the contribution to the fund and divert the money into its investment plans. Some €5 billion will be raised this way but it still leaves a large chunk to be funded out of borrowings.
Fine Gael also favours plain old-fashioned government borrowing over the sort of hybrid borrowing plan proposed by Fianna Fáil. At the same time, it hopes that some €2.8 million will come from the private sector through public-private partnership projects.
The Progressive Democrats plan to raise some €6 billion of the €40 billion they want to spend through the sale of State companies. A new National Transformation Fund will be established, which will draw revenue from the sale of State companies and from windfall gains such as the sale of State licences and the transfer from the Central Bank of its excess reserves. The PDs have not given borrowing projections. But, even allowing for privatisation receipts, they are unlikely to be able to avoid borrowing in the region of €10 billion.
So do the figures presented by the parties add up? Here the key figure is the General Government Balance (GGB) - a rather technical figure that is of supreme importance to Brussels and hitherto of little interest to anyone else. It is the annual borrowing figure by which the European Commission measures how closely we are adhering to the deal the Republic struck when it signed up to the single currency. Under this deal , the GGB would never exceed 3 per cent of gross domestic product (GDP) in any year and would generally be kept not far from balance.
The GGB is a variation of the more familiar exchequer borrowing requirement - the gap between annual revenue and spending. The GGB offers a fairly objective yardstick by which to judge the prudence of the various spending plans unveiled this week. Economic best practice would be ensure that the GGB never fell into deficit. This would also ensure no more criticism from Brussels.
Three of the parties - Fianna Fáil, Labour and Fine Gael - have made projections about the impact of their plans on the GGB. Fianna Fáil says that it will touch 1 per cent of GDP in 2004 but remains below that level on average for the entire period. Labour, on the other hand, is prepared to let the GGB rise up to 1.6 per cent of GDP, while Fine Gael is adamant that the GGB will remain in surplus for the life of their administration. The PDs undertake to keep it at or close to balance.
Leaving aside the wider issue of whether or not the Fine Gael plan allows for enough investment, it would appear to be the most prudent. But one only has to look at how the various parties arrived at their figures to realise that it is not quite that simple - and that borrowing levels may have to be even higher to fund the investment plans.
All the parties have employed a range of accounting techniques to massage their figure for the GGB. The most obvious is Fianna Fáil, which by routing €10 billion through the proposed National Development Finance Agency has kept €5 billion of it off the books as far as the GGB is concerned. However, all money borrowed will still have to be repaid.
Fine Gael has done something similar in its treatment of the €2.8 billion it plans to raise from the private sector - it claims that any State liabilities involved will not count towards the GGB.
The figures the PDs put forward for its National Investment Fund are also questionable - there is no guarantee, for example, that it can raise money quickly from privatisations, while it is also counting considerable public-private partnership funding.
Crucially, whichever party gets into government will also face other pressures. In particular, all the calculations put forward so far are assuming much tighter control on current day-to-day spending than was evident in recent years. This will be very difficult to achieve, particularly with pressure on public sector pay from the benchmarking process.
If current spending rises more quickly, then either borrowing rises further or there is less left over for capital investment spending - or taxes rise.
But before you start trying to work it all out, remember the maxim of the famous Prussian general, Carl Von Clausewitz, that no plan, however good, survives contact with the enemy. What we have seen this week gives us a good insight into the economic thinking of the various parties, but their projections will go out the window once the negotiations to form the next government get under way.