Signed Article: Irish Government Investment, Financing and the Public Capital Stock

27 July 2018 Press Release

Central Bank of Ireland
The Central Bank of Ireland has published a signed article from the third Quarterly Bulletin of 2018, due to be published on 31 July 2018.

The article, “Irish Government Investment, Financing and the Public Capital Stock (PDF 457.58KB)”, by Rónán Hickey, Matija Lozej and Diarmaid Smyth, considers two aspects of plans for higher investment spending by the Irish government: the potential impact on the public capital stock (government owned assets such as infrastructure); and the macroeconomic consequences of how investment is financed, given that a range of indicators suggest that the economy is close to capacity.

The key findings are:

  • Based on current government spending plans, the annual level of general government investment would rise to just over €11 billion, or approximately 4% of GNI*, by 2027. The stock of public capital could increase by close to 16% in the four years to 2021, compared to an increase of 5% from 2013 – 2017. This would bring Ireland close to the rates of expansion experienced in the early 2000s.
  • Two scenarios are simulated using the Central Bank’s economic model (the Dynamic General Equilibrium model). One assumes the increase in government investment is fully financed by borrowing. The other assumes the increase is budget neutral, i.e. financed by taxes. In both scenarios, the increase in investment leads to higher economic output and growth in the longer term.
  • However, the budget neutral approach avoids a build-up of public debt. It also limits pressure on prices and wages and the associated risk of eroding competitiveness in the economy. With the economy currently approaching full employment, this highlights a key challenge facing policy makers in trying to increase the public capital stock and the productive capacity of the economy, while limiting the risk of overheating.

Notes

The views expressed in this article are not necessarily those held by the Central Bank of Ireland.

GNI* refers to adjusted Gross National Income. It is designed to exclude significant globalisation effects that disproportionately affect the measurement of Irish economic activity.