After the 2008 financial crash, the budget deficit ballooned and had to be reined in. It has ballooned again and from a far higher debt level, due to the COVID-19 recession. It will have to be brought back into balance in due course, unless you believe in free money forever. The pattern of budget retrenchment last time round included public pay cuts and sharp tax increases.

Contrary to public perception, the greatest burden of adjustment on the expenditure side fell on capital, not on current, spending allocations.

Spending cuts

Politicians find it difficult to defend and implement cuts in current spending and the soft option is to let the capital programme wither on the vine. As projects are completed, they need not be replaced with new ones and overall spending declines rapidly.

There is heavy unemployment in construction and, when recovery finally comes along, infrastructure inadequacies begin to emerge – poor roads, shortages of public housing and school capacity.

Prior to 2008, there had been a surge in capital spending, some of it on projects of debatable merit, coinciding with boom conditions in private investment and rapid construction cost inflation, so the dud projects cost extra. In the years after the bust, public capital spending collapsed to less than half the pre-2008 numbers, and private investment plummeted too. This is not what the textbooks recommend – any government with the capacity to borrow should bolster the capital spend in a downturn, especially when the downturn looks likely to last a few years.

It is difficult to rev up the capital budget quickly, but COVID-19 could depress the economy for several years to come, long after a vaccine becomes available. The timing is right for a better approach.

The Government has committed to a stronger capital programme this time round. Minister for Public Expenditure Michael McGrath told the Sunday Business Post: “This is the time to ramp up capital investment in vital projects that we really need to do anyway such as in climate action and in housing, transport, education, health, community facilities, sports facilities…”

The public capital programme has a mixed reputation. Dozens of smaller projects get delivered on budget every year, but the own goals can be spectacular.

McGrath’s comments come in the wake of the twin debacles of the Children’s Hospital and the National Broadband Plan, both way over budget and neither of which was subjected to proper appraisal in advance. Aside from the destabilising stop-go approach evident in the chart, the other characteristics of Irish capital spending down the years include sloppy project selection and serious cost overruns.

Whenever ministers promise to tighten up project appraisal, those with longer memories are inevitably reminded of the infamous Bertie Bowl, a €1.1bn stadium favoured by the then Taoiseach which received the thumbs-up in 1999.

The pattern has been repeated time and again with major projects.

There is political support for some scheme. It becomes a public commitment, welcomed by the opposition parties and lobby groups.

A Government department or State agency is charged with design and delivery before any assessment of costs, let alone benefits, has been conducted.

As an afterthought, and in belated compliance with the public spending code, a firm of consultants is engaged by the body promoting the project and they inevitably pronounce that the sums add up.

The revelation of understated costs and inflated benefits comes later, and worthier projects cannot be funded as the latest mega-mistake gobbles up the available capital allocation.

It is salutary to recall that the Bertie Bowl was prevented not by the project appraisal system but by the erosion of support from within the ruling coalition. Has any catastrophe ever been prevented because consultants engaged by the project promoters found against it?

Minister McGrath is also quoted as follows: “One of the reforms that we’re looking at is to incorporate independent peer review at two key decision points in the delivery of a major project worth over €100m.”

Persistent failures

Project appraisal conducted by the project promoters is at the heart of the persistent failures in Ireland.

Minister McGrath should consider a simpler reform: the appraisal of major projects should be taken away entirely from those charged promotion of the scheme. Nobody should get to mark their own homework.

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