Pat McArdle, Ulster Bank: National Development Plan lacks numerical transparency and gives the impression that spending is greater than it actually is

Analysis/Comment
Pat McArdle, Ulster Bank: National Development Plan lacks numerical transparency and gives the impression that spending is greater than it actually is
By Pat McArdle, Chief Economist Ulster Bank
Jan 24, 2007, 22:53

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Pat McArdle

Joined-up Government thinking is good, indeed, we usually bemoan its absence. However, yesterday we got more than we bargained for. Instead of just concentrating on the key Central Government area as usual, the National Development Plan (NDP) includes capital spending by commercial State Bodies and much current spending as well. The result is a mind boggling headline figure but the reality is different.

The positive from this is that it gives a good broad overview of all the investment activities. The negative is that it lacks numerical transparency and gives the impression that spending is greater than it actually is.

Appendix 2 at the back of the 300-page document gives a breakdown of the core NDP, that is, the Central Government Multi-Annual Capital Investment Framework. This comes to €78.1 billion and is the usual measure of investment spend – it is obviously a long way away from the headline €184 billion figure. It is some €14 billion above the recommended ESRI figure. The extra spend goes on transport (€4bn), housing (€1.7bn), environment (€1.4bn), health & education (€1.1 bn) and an unallocated reserve of €5bn. The gap between them is not as big as commonly supposed.

The difference of opinion with the ESRI gave rise to the impression that the NDP spend has been ramped up. This is largely, if not totally, illusionary. We can compare the Exchequer capital spend in the NDP with that in the recent Budget for the three years 2007 to 2009, inclusive. The extra spend over the three year period is only €0.3bn or 3.2%. In reality, the capital spend in the NDP is unchanged from the December Budget which was regarded as being more responsible than many of its predecessors. By the same token, there is no reason to suppose that current spending has changed either, though we are not given details which would enable us to verify this.

The size of the capital spend is usually measured by expressing it as a percentage of GNP. The long-term target is 5% but this has been missed in recent years. In 2006, the outcome was 4.5%. This is now forecast to increase to 4.9% this year, 5.3% next and to peak at 5.9% in 2009. It will then fall back as it is expected to average 5.4% over the period of the Plan. There is no major economic impetus here over and above what was in the Budget although most people did not realise this as the Budget was deliberately vague on capital matters, no doubt to save the thunder for yesterday.

Fears that the taxpayer will have to pick up an extra bill are misplaced. First, it is unlikely that all of the capital will be spent. Second, the economic forecasts are conservative with growth at just over 4% and inflation a lowly 2%. Third, if the economy does slow, there is scope to lower the Budget surplus or run a modest deficit – even the EU have accepted that this would be valid.

Inflation should be no different from the Budget projections – 4.1%, 2.4% and 2% in 07, 08 & 09, respectively, – as the NDP does not change the Budget figs.