Spending on this huge scale poses major challenges for the economy, writes Marc Coleman, Economics Editor.
In what is quite simply the largest spending project in the history of the State, the Government yesterday committed itself, if re-elected and if economic conditions permit, to spending €180 billion of taxpayers' money over a seven-year period starting this year.
In the real world that most of us live in, you first think of things you need to obtain and only then do you decide how much to spend, economising as much as possible in the process. Things work differently on planet politics. Although carbon-based like us, politicians - particularly politicians at election time - constitute an entirely different life form and, in their universe, things work differently. First they decide on an impressive amount of money they want to spend and only then do they decide what to spend it on.
Instead of kicking off by describing the length of road it wants to deliver, or type of rail services to be provided, or the improvement in broadband access, the final National Development Plan document proudly introduces itself as "a €184 billion investment framework". Perhaps it would be easier to understand the magnitude of this programme if it was put like this: between now and 2013, the Government will spend €40,000 for every man, woman and child in the country.
Is it too much? There are two main concerns about the amount of money involved. The first was raised last October by the Economic and Social Research Institute (ESRI). Commenting on a preliminary draft of the plan, it warned that spending on this scale would push up inflation. For totally different reasons, the rate of inflation has since then risen from 3.9 per cent in October to 4.9 per cent in December.
But as any student of recent Irish inflation knows, capital spending has played a very small role in driving up inflation. The main culprits here, among other things, have been interest rate rises, oil price increases and rises in the cost of almost everything to do with the cost of public services.
For the first time in the history of national development plans (the latest is the fourth such plan), the lion's share of spending is going on current, rather than capital, spending. The amount that is actually going on "hard-core" economic infrastructure, €54.7 billion over seven years, is a fraction of what the Government will spend on public sector pay over this period.
And even if it weren't, this may turn out to the economy's benefit. With around 280,000 employees, the construction sector is now - after the public sector - fast becoming the State's biggest employer. One in eight Irish workers now works in construction, compared to an EU average of one in 13. Were the construction sector ever to return to this EU norm, around 100,000 workers could lose their jobs.
Contrary to popular myth, the vast majority of construction workers are Irish (only around 40,000 are from accession states).
The assumption that no domestic unemployment would result from a downturn in the construction sector is moonshine, not just for the reason just mentioned: layoffs in the sector may well be targeted at more expensive Irish workers, rather than their immigrant counterparts.
If a shock does come, the National Development Plan may yet prove to be the Government's flexible friend in softening the blow. One clear danger remains here: the Government has not yet outlined how the spending will roll out over the term of the plan.
With SSIAs unlikely to be repeated, there is the danger that the next government might use the plan as a substitute to buy the 2012 election.
This would concentrate spending in 2011 and, in this case, an inflation spike of the kind we are witnessing now could not be ruled out.
In the long run and if well done, however, capital spending should actually lower inflation, not raise it: by shortening commuting times, it allows workers to purchase housing across a larger geographical area.
In this way, housing supply is effectively increased and house prices lowered. Business productivity should also rise as work-related travel times fall and delivery speeds increase.
Cost overruns in previous plans have been the subject to stinging criticism, from both the ESRI and the Comptroller and Auditor General's Office. One source of this - inflation in the construction sector - has become less of a problem as migrant labour and foreign firms increasingly participate in construction activity here.
Other sources such as planning constraints and escalating land prices remain, but constitute less of a reason for curbing capital spending and more of a case for reforming our planning system and the law applying to compulsory purchase orders.
But the issue of value for money remains a huge concern: the last plan ran some €12 billion over its original cost estimate and that plan aimed at spending just over €51 billion. With a price tag of €180 billion, a proportionate overspend would cost a cool €45 billion - almost as much as the Government spends annually at the moment. The Government assured us yesterday that an "enhanced value for money framework" is in place.
But in one of its more valid criticisms, last October's ESRI critique points out that the Department of Finance remains devoid of a dedicated unit that can conduct cost/benefit analysis of projects at the selection phase and better management of them at the implementation phase.
In that regard, the call made by Patricia Callan of the Small Firms' Association for an NDP "supremo" to be appointed is a constructive and useful idea: spending €180 billion on infrastructure development without spending anything managing that spend hardly seems like good public management.
There is one last concern about the plan, best expressed as follows by Bloxham stockbroker economist Alan McQuaid: "Although we welcome the ambitious nature of the plan, we worry that Ireland may in infrastructural terms end up as a kind of jack of all trades and master of none".
As mentioned above, the present National Development Plan differs from previous ones by including Government spending on areas such as childcare services, education and home help support.
Worthy in themselves, these areas of spending are best managed as part of day-to-day current spending. The National Development Plan should do precisely what that title says: provide for capital infrastructure spending.
That it has snowballed into a catch-all wish list for national happiness will blunt its purpose and impair its implementation.