Leo Varadkar wants to spend big money on transport infrastructure – and he has form in making good on this. Just three years ago, he signed a €550 million contract for the 57 km M17-M18 Gort-Tuam Motorway, which is set to open in early 2018. This will provide critical connectivity for the west and mid-west regions – and ease traffic congestion in towns and villages like Clarinbridge, Claregalway and Tuam.
During the Fine Gael leadership campaign, Varadkar pledged €5 billion in tax cuts and transport links. To pay for this, he said, he would relax the 45% debt-to-GDP target adopted by Michael Noonan in Budget 2017, and replace it with a figure of 55% instead. (EU Stability and Growth Pact rules mandate a debt-to-GDP ratio of 60%).
With one bound, the incoming Taoiseach would legitimate the ‘legacy’ of the outgoing Minister for Finance, head off the potential for friendly fire from the bean-counters in Merrion Street, and assure our European ‘partners’ that Ireland is not partying again.
So, how much money might the new debt-to-GDP benchmark actually release? Could the Cabinet be trusted to spend it on the infrastructure necessary to deliver the goal of ‘balanced national development’ in the Programme for Government? And would the Government be strong enough to tell the public sector unions to take a hike?
If my maths are right, there’s little enough room for manoeuvre.
On the first question, it depends on how fast the economy grows. If we achieve 3% a year from now until 2025, GDP should rise by c. €90 billion (while GNP, excluding multinationals, should grow by c. €72 billion). In other words, steady but shock-free growth, yields €70 to €90 billion in additional national output by the mid-2020s. If the public-sector share of the economy holds at 24%, this frees up between €17 and €22 billion for tax cuts, spending rises, and productive investment from now until 2025.
On the owings side, the national debt is currently €204 billion. If GDP did indeed increase by 3% a year, and Ireland was to hit the 60% debt-to-GDP rule in the Stability and Growth Pact, the debt pile could rise to €228 billion. Varadkar’s alternative, 55% target would level it off at €209 billion, which is just €5 billion more than it is now.
In short, the Varadkar Government, and its successors, should have an extra €12 to €17 billion from a growing economy – albeit with a shrunken public-sector share – by 2025.
If we could be sure the lion’s share of this €17 billion was diverted into productive investment, the €5 billion estimated cost of Varadkar’s tax cuts and transport plans is easily afforded. In fact, he could do more – almost the ‘last mile’ of the €15 billion all-island motorway proposed by IBEC. The problem, however, is that a weak government and ramshackle parliament is no match for public-sector unions howling for the return of ‘stolen’ money and much else besides by way of public service improvements.
Here’s the problem. While the Government has €1.225 billion fiscal space in 2017, just under €1 billion of this is earmarked for higher public pay and social welfare increases. That leaves a mere €228 million for service investment and improvement. Continue that spending pattern to 2025, and more than €13.5 billion of the €17 billion potentially available for public capital investment would go instead on day-to-day spending.
In other words, Varadkar is short at least €1.5 billion for a €5 billion plan that he should be trying to deliver by 2020 but which, in reality, may not be achieved until closer to 2030.
Given the figures and pressures outlined above, there has to be a serious doubt about the capacity of a Varadkar Government to deliver the infrastructure necessary to realise the goal of ‘balanced national development’ in this Programme for Government. That goal becomes even more problematic given the growing pains being experienced in Dublin, which still needs huge levels of investment to become a decent place to live and work.
So, does all of this tell us anything about what kind of Taoiseach Leo Varadkar might be? On this analysis, he appears to be promising a lot, but is arguably tying his hands more than he needs to. He’s committing to cut the national debt pile by more than the EU is asking – and the potential shortfall for investment is as much as €19 billion. On the other hand, the relentless pressure for more current spending, and the weakness of politics and parliament, all suggest much of the extra money might be wasted anyway.
What he could do, instead, is talk tough on tax-and-spend to keep the unions in check, but allow his two Finance Ministers to work quietly to the softer, 60% EU-mandated debt-to-GDP target. While that could release up to €22.5 billion for infrastructure investment, it would challenge the Government to hold the line to spend it right.
The other alternative, as I have argued in an earlier post, is to allow public spending to increase to the OECD average by the mid-2020s. That releases a lot more for productive purposes, but it also adds greatly to the pressures for even greater day-to-day spending. Which would be fine if we could be assured that money was being spent wisely. Unfortunately, past performance is a highly reliable guide to future prospects!
Anyway, Varadkar won’t go that far. He’s made it clear there’ll be some give on public spending, but not so much as to really transform the place and our prospects. He’s likely to be a steady-as-she-goes Taoiseach, working to ensure the gap between expectations and reality doesn’t become so wide that his own Government falls through it.