Investing in another, better future
The best way to increase our competitiveness, drive down unemployment and repair our public finances is through investment; the fiscal cul-de-sac of austerity will get us nowhere. By Michael Taft.
What if we bought a modern telecommunications system, bringing next generation broadband to every household and business in the country?
What if we purchased a state-of-the-art waste and water system to secure an increasingly scarce resource?
What if we provided one-on-one intensive tutorials for all those with literacy and numeracy problems that keep them from entering the workforce?
What if we retrofitted every building with conservation deficiencies (some 800,000 or so) to reduce our reliance on fossil-fuel imports?
What if we established a strategic investment bank to focus on specialist business and infrastructural investments?
What if we established a public enterprise company that would oversee directly or through partnerships the exploitation of our natural resources in the public and environmental interest – especially the potentially rich ocean-floor deposits?
What if we rolled out a national early childhood education and childcare network as a public service?
What if we implemented Fianna Fáil's primary care strategy – 500 community medical centres throughout the country, one for every 10,000 people, providing free GP and related out-patient services (this strategy has been hanging around for a decade)?
You'd probably say – gee, that would be great. And you'd be right. These would increase our productivity, reduce inefficient spending (e.g. band-aiding 100-year-old water pipes), improve people's work-skills, health and education, create thousands of jobs, promote enterprise start-ups and expansions; most of all, these measures would prepare us for a highly competitive future marketplace.
But the next thing you would say – how in the world could we afford all that? Well, we can. In fact, we can't afford not to pursue these investments. Here's how (and this is only one outline - there can be others and better ones).
We can access more than €100 billion for investment purposes (give or take a few billion) in combined public and private savings to purchase (invest in) the above assets. Of course, we wouldn't need, nor would it be desirable, to use all that money. A five-year investment programme of between €15 and €20 billion would make up a relatively small proportion of the amount available to us. So what is that €100 billion made up of?
Public savings and cash stand at €20.3 billion in 2011 and is estimated to be €14.6 billion by 2015. This is made up of the discretionary portfolio of the National Pension Reserve Fund (that is, money not tied up in bank recapitalisation) along with Exchequer cash balances and other liquid assets.
There is the potential of an additional €3 billion available owing to reduced interest rates under the EU-IMF deal. If the Government has confidence in its own budgetary projections, this money will not be needed for deficit reduction purposes.
And then there's the vast amount of private savings – in pension and insurance funds.
Daniel Gross of the Centre of European Policy Studies has found that Irish pension and insurance funds own approximately €100 billion in foreign assets – 25% in non-Irish government debt (e.g. German Bunds, US Treasuries, etc.) with the remainder in foreign equities. A small proportion of this could be redirected into Irish infrastructural and enterprise investment.
Gross proposes that pension/insurance funds 'should somehow be induced' to invest in the Irish economy. This is a euphemism for 'directed' investment or financial repression. But given that pension funds have already expressed interest in directing money into Irish investment, we would be pushing at an open door.
We could go further, as suggested here, and abolish the pension level and substitute a mandatory bond purchase from the pension/insurance funds on a long-term basis with interest rates tied to German or bail-out interest levels. For the funds, this would mean that they would have an asset on the book (whereas the current pension levy represents a drain on income) while earning interest each year.
For the contributors into the funds, it would be a bit of a boon. Pension funds especially seem to have a tough time earning returns. Over the last 10 years they have only managed an annual 1.1% return. But when you factor in inflation, the real returns have been negative. One can only guess how the latest dive on the equity markets will affect returns.
By investing into the Irish economy, the pension funds would be getting a much better return – from 2.5% (German levels) to 4% (bailout levels). That would be a better performance than Conor McCabe's "coked-up futures deal on Wall Street".
So a multi-billion, multi-annual investment programme is more than do-able. With half coming from public savings, we wouldn't incur any extra borrowing costs on this (this is money we already have). The other half would make up less than 10% of what pension/insurance funds already invest in foreign assets.
In addition, much of this investment could come from via private sources. For instance, IBEC claims a Next Generation Broadband network would cost about €2.2 billion. A public enterprise company could be set up to roll this out but private investors, looking for a potentially positive long-term return, could also buy into the company with minority stakes. Ditto for specialist investment banks. There are other, strictly commercial, areas where we could get private investor buy-in.
The maths looks good. The increase in our interest payments, depending on the amount of pension fund involvement, would amount to about €300 million a year. But each €1 billion in capital investment increases tax revenue by nearly €400 million in the first year alone, increases the GDP, and lowers public spending (through lower unemployment costs). The return would greatly exceed interest payments. Investment, therefore, not only increases growth, productivity and employment - it is a tool to repair public finances.
We need this investment to increase our competitiveness, to drive down unemployment, to repair our public finances.
Now what we need is the Government to grasp this opportunity. With austerity pulling us down a fiscal cul-de-sac, this programme can get us back on the high road of recovery.