Current versus Capital

Here are some quick snapshots from my presentation at Friday’s conference in Croke Park.   Some background information can be found in the following:

From 1983 to 2010 capital expenditure averaged nearly 12% of gross voted expenditure.  In 2011, capital expenditure was 8.1% of gross voted expenditure, the lowest since 1992.

For the four years from 2012 to 2015 it is planned that capital expenditure will be 6.4% of gross voted expenditure.  For every €100 of voted expenditure, €93.60 will go to the current budget (transfer payments, public sector pay, and other non-pay expenditure on goods and services) and €6.40 will go to the capital budget.  Would this satisfy the equi-marginal principle?

In 2012, it is planned that gross voted capital expenditure will be €3.9 billion.  If the €55.5 billion allocation for gross voted expenditure was adhered to, but capital expenditure was set at the long-run average of 12% of voted expenditure, then capital expenditure in 2012 would be €6.6 billion.  To stay within the spending ‘envelope’ this would require a reduction of €2.7 billion in current expenditure.

Since the beginning of the CSO’s Institutional Sector Accounts in 2002 there has been a gap between investment in fixed capital and consumption of fixed capital by the government sector.  This peaked in 2008 but has dropped considerably since then.

We can see that over the next few years that planned capital expenditure will converge on the depreciation line.

This is confirmed in the Infrastructure and Capital Investment 2012-2016 programme which in relation to local and regional roads, for example, says “At present over 85 percent of investment is targeted at maintenance and rehabilitation work and this trend is expected to continue.”

Table 25 of the National Income and Expenditure Accounts provides a breakdown of government investment by use.

By 2013 this total will be down to around €3.5 billion and is planned to remain there until at least 2016.

There are also some non-voted sources of public investment.  In 2012 it is forecast that semi-state companies, the housing finance agency and some other non-commercial state agencies will have a capital expenditure of €2.7 billion.  Of this, €1.7 billion will come from their income/own resources and €1.1 billion will come from borrowings/EU receipts (including through PPPs).  In 2010, these sources provided close to €4.0 billion of investment.

The Infrastructure and Capital Investment Programme states:

The large gap that still exists between Government spending and revenue must be closed. Continuing to run considerable deficits and borrowing to fund them is simply not viable. It is clear that the Public Capital Programme must make a further contribution to budgetary consolidation.

Thus far, the Public Capital Programme has made the only contribution to narrowing the gap between revenue and expenditure.  In a recent look at the end-of-year Exchequer Returns we saw the following.

The deficit on the current account in 2011 (blue) was almost identical to the deficit on the current account in 2009 (green).  Unless there is a significant improvement in the current account we are not going to be in a position to increase borrowings for capital purposes in the medium to long term.

In its autumn review of Ireland (page 25) the European Commission  made reference to “the Government’s preference for taking politically easier measures”.  Both the current and previous government have set out a deficit reduction programme that is broadly two-to-one in favour of expenditure cuts over tax increases.  However, by 2011 gross voted current expenditure was still at 99% of its 2008 level, while gross voted capital expenditure had fallen to 54% of its 2008 level over the same time.

[Aside: Gross expenditure does not have Departmental receipts or ‘appropriations in aid’ (A-in-A) netted against it.  The main A-in-A is PRSI for the Department of Social Protection but there are many more charges and fees levied by Departments which they get to retain.  One such A-in-A is the Public Sector Pension Levy.  There is about €1 billion collected via the Levy.]

Due to the easily identifiable expenditures and outcomes a lot of attention is given to the effectiveness of capital expenditure projects.  One such instance is the €106 million spent on the Ennis-to-Athenry section of the Western Rail Corridor and the annual €3 million subsidy required to keep it open.  There is no doubt that this is an inefficient use of public money and does little to improve the productive capacity of the State.

In 2012, gross voted current expenditure is projected to be €51,880 million.  That is enough to build and run 475 Ennis-to-Athenry type railways.  We don’t need those but there are roads, schools, hospitals, water works and other projects which we do.

9 thoughts on “Current versus Capital”

  1. @Seamus
    Thanks – very clear.

    Do Government Ministers and TDs see this type of material? If they do then they should take action on the CPA etc.and start raising capex on viable projects and if they don’t they are living in an ivory tower and should get out more.

  2. Excellent presentation and well done on having the courage to fight this uphill battle and not to be deflected by cheap shots at previously wasted government capital expenditure.

    ‘A gallant failure is not in vain
    It hath a victory of its own
    A bright delectance from the slain
    Is down the generations thrown’

    Shifting expenditure from current to capital requires savings on the current side, the trough from where the decisions makers sup.
    The fact that there are 100,000 buliding workers out of work should make the incremental cost of the labour content of capital projects very low.

  3. Yes this is thee most important topic with regard to the Irish economy outside perhaps external monetory flows which we have little control of.

    I was struck by the small decline in gross physical capital formation figures during the 80s slump.
    Y1982 (peak) :4674 M
    Y1985 (through) : 4507 M
    Y1989 (credit recovery) : 5759 M

    The physical capital formation collapse now is nearly off the scale.

    However the quality of the investment is more important then the volume.

    Because of the post 1987 credit malinvestments we are now importing more energy in Euros then ever before but yet with declining BTUs – this is a devastating one / two combination.
    If we are to remain non sovereign we must push up the excise on fuel by 10 cents to near UK levels & redirect much of the remaining road infrastructure funding to rail projects.
    Refer to my Post about Nothinghams rail Renaissance although I believe it had EIB backing – for some reason they have ignored us – perhaps because we bankrupted ourselfs bailing out credit deposits.

    This from a recent rail.co article
    “Nottingham’s tram network is set to double in size with a similar boost to the tram fleet after funding was agreed.
    The consortium includes Vinci Investments, Alstom, Keolis, Wellgrade, Meridiam and OFI Infravia. The DfT will contribute £371 million of the £570 million needed to complete the scheme.
    The 22 new Citadis trams will complement the 15 Incentro trams already in service.”

    I am sure you know Seamus the centre of Cork is dying because of competition from car centric Mahon shopping centre.
    Nottingham is not a big or rich city but it has extensive polycentric urban centres that are being linked into by a very extensive DMU / Tram commuter service and now new 2 big tram links all feeding into the central train station by 2014.
    en.wikipedia.org/wiki/Nottingham_Urban

    http://www.youtube.com/watch?v=W5u-MmUuURo

    Towns such as Ballincollig & Carrigaline are on a comparative scale although less compact in their formation with the entire south side of the river following a more linear pattern which ironically makes a train tram a more viable option then the more circular settlement pattern of Nottingham which requires multiple lines.
    Theres more to physical capital formation then houses & roads – however we may have to export more of our money to reduce exports of our money / imports of oil as we have little expertise in these matters – we only do roads & houses………………..
    We are in a terrible bind to be honest.

  4. @Seamus Coffey,

    “We don’t need [475 Ennis-to-Athenry type railways], but there are roads, schools, hospitals, water works and other projects which we do.”

    Agree completely, but the real issue here – which most people seem afraid to tackle – is the efficient financing of public sector and semi-state capital expenditure. The glorious inefficiency of the financing of semi-state investment (which relies on final consumers part-financing investment to compensate for failures by the state) would be hilarious if it were not causing so much damage to consumers and the economy.

    Restructuring most of the key semi-states and privatising them would release significant proceeds that government could use to pay down debt and to finance the type of investment you identify, would massively increase the efficiency of investment financing in these businesses and would reduce charges to final consumers (which would boost real disposable incomes and economic activity).

    Don’t find many of our leading economists presenting this ‘open-and-shut’ case. I wonder why? I suppose like ‘Deep Throat’ advised Woodward and Bernstein I should ‘follow the money’.

  5. @Paul
    I agree the Ennis to Athenry thingie was a disaster after they built the M18 – but back in 2003 when that campaign started it was not there.
    (look at the OSI 2005 photographic survey vs the modern street view map to get a feel for how the geography has changed)

    People don’t seem to understand what a non optimum currency does to a domestic economy.
    Cars only appear to be cheap on a individual level because of the euro – its a mercantiles dream.
    But much of our collective money supply is now draining away to feed this monster leaving very little for internal demand.
    I don’t understand why most of the Irish economists seem to miss this.
    Have yee looked at our energy import figures lately ?
    Even shoe wear is declining to feed the oil monster- so we will soon not even have the shanks mare option.

    We have a deformed domestic economy because we have been living with a non optimum currency since 1979 – to cover the now huge cracks in this edifice they used European fiscal flows & multinational scraps – but both of these is either declining or in danger.

    Don’t yee guys get it ?

  6. I think when fuel imports exceeded food imports in Y2005 it should have set off alarm bells – but people were in a deep sleep I guess.

    In Y2008 the oil component alone exceeded food imports – this finally destroyed discretionary final demand almost totally in my opinion.

    So in Y2009 / 2010 – food imports exceeded total oil inputs but not total fuel inputs so we were essentially back to the 2005 / 07 era when looking at those paired import metrics.

    The Sep trade figures are dramatic
    They show
    2010 : Jan / Sep imports : Food :3,241 M
    2011 : jan / Sep imports : Food : 3,668 M

    2010 : Jan / Sep imports : Fuels : 4,051 M
    2011 : Jan / Sep imports : Fuels : 5,131 M

    This is a more dramatic version of what happened in 2008.

    Yet people are locked into their consumption mansions out in the sticks while empty apartments lie fallow to peserve fictitious bank balance sheets.

    A complete divorce of banking from the physical economy.

    Even Drink imports & shoe leather is gone down.

    Meanwhile we must be the only Western European economy that does not have a oil pipe distribution system and also no rail oil distribution system.

    The goverment thinks it is saving money by not subsidising Rail freight but it fails to realize it is in a non optimum currency…………..therefore the money supply is being exported to save the fiscal makeup.

    Very very sad economics.

    Hint to Colm & the lads – you can’t tax money that is not there because of our import dependency. / money exports
    We have fantastic GM Physical assets but are not using them because of a obsolete ideology that has no basis in fact when operating under a non optimum currency as we are now.

    en.wikipedia.org/wiki/IE_201_Class

    You can’t help but think as a nation we are retarded.

  7. Seamus, if I think about Irish gilts as an investment I find it hard not to conclude that there is a possibility that bouncing global and EZ gdp, conversion to Keynesian-ism by EU leaders, conversion to soft currency tactics by Germany and the inspirational leadership of Enda will combine to put Irish public finances on a clearly sustainable path – all without the need to apply the Croke Park Deal’s self negating clause 1.28, and thereby vindicating the premium levels of pay and costs in the Irish economy. They could be cheap.

    However it is hard not to conclude that this should be regarded as a central expectation.

    I think your post usefully illustrates the extent to which politicians have behaved like politicians and ducked the stuff that would make them less popular, and that that is not a sustainable strategy unless the EZ changes course.

    Some of your counterparts seemingly regard the vast majority of foreign investment analysis of Ireland as very incisive (I don’t, I think they just don’t understand the politics). It will be interesting to note the extent to which the reported economic numbers lag gilt prices should not enough of the first scenario play out.

  8. or rather …..”However it is hard to conclude that this should be regarded as a central expectation”

  9. Shocking to see capital expenditure as a percentage of voted expenditure falling below the levels seen during the 1980s. One of the failings of that period was a lack of investment in the capital stock of the country which left Ireland decades behind comparative countries in Europe and without the physical infrastructure needed to absorb the boom in living standards during the 1990s. It seems we are destined to repeat the same mistake during the 2010s ensuring Ireland slips even further behind where it should be and is incapable of taking the next boom in Irish living standards without causing another round of gridlock.

    We need to cut current expenditure and raise taxes more than cutting the capital budget as that mix best ensures balanced budgets and a growth incentive to the economy. We need to see much more investment in public transport, water, broadband, electricity and waste management facilities if we want Ireland to be competitive in the 21st century and definitively end the current crisis.

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