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.