Republic using productivity boom to invest public infrastructure and housing

A typically spunky piece from the New Statesman’s new columnist Wolfgang Münchau starts with a great quote from Otto von Bismarck: “Only a fool learns from his own mistakes. The wise man learns from the mistakes of others.” He has Angela Merkel in his sights.

He notes that despite the appearance of economic success, her austerity policies have led to a public investment shortfall in public investment of some half-a-trillion pounds, with the dire consequences only leeching up from the ground slowly in a series of spectacular shortfalls.

He cites a motorway linking the north and south of Germany which has been closed because there’s no money to repair a bridge that’s become unsafe, and one Bundeswehr general has warned the army is so underfunded it cannot fight a war for more than a few weeks.

He accuses Merkel of not being interested in solving problems, something he argues you can get away with until they accumulate and blow up in your face. Germany has relied on cheap Russian gas to sustain old industries so many sectors have missed the digital revolution.

Productivity has fallen through the floor. Münchau recommends higher public investment as a way to levering it back up again on the basis that even a modest increase in productivity ‘would have a disproportionately large effect on the government’s ability to borrow’.

So, finally, to Ireland. There have been worries about the fact the current coalition government has been throwing caution to the wind and doing the opposite: borrowing like crazy to fund infrastructure investment and critically from a political point of view, housing.

According to Cliff Taylor there is a gap growing in the government’s plans in the south to calm a housing crisis which burgeoned out of af largely inactive period from the time of post crash ghost estates, until the present government set out its plans in the summer of 2020:

The end of the era of super-low interest rates is the fundamental reason. For years, house building and the wider construction sector was funded almost exclusively by the Irish banking sector, via loans to builders and developers and also mortgage borrowers. Irish banks were in on both sides of an over-inflating market. Then, after the crash, Irish banks stepped out in terms of lending to developers and international funds stepped in.

But now, as interest rates rise, the game has changed for these investors. When you can get a safe return of 3.5 per cent for putting your cash into US government bonds, the profit needed to justify investment in Irish property goes up. Meanwhile the cost of building has shot upwards. The economics of building apartments – already challenging – is now undermined and even house building becomes more financially difficult. So the international investors are stepping out. And with domestic builders also hit by higher costs and the Irish banks still loath to extend their lending to the property sector, there is a funding gap.

The Irish government is now planning to offer support…

…effectively giving a Government guarantee to buy some or all of certain projects when completed. In turn, this would help builders and developers to get finance from banks or investors to get schemes under way and finish them.

It is also eyeing up some 70,000 planning permissions that have already granted and hoping that if can these could be got moving, it would make a huge difference to the figures. But, and this where the contraction of the two former dominant parties at local level hurts…

Development efforts by local authorities and State agencies seem painfully slow and there is often little sense that everyone is pulling in the one direction. Local politicians try to secure their positions by objecting to many projects. Whoever is in government will face the same problem of “getting things done” when faced with a dysfunctional system, and a Nimby culture.

Against this background, the challenge now for the Government is to ensure that the bucks being thrown into housing – probably €5 billion or more this year when the cost of tax incentives is added to direct spending – generate the required bang.

Luckily (because of the presence of multinationals) productivity in the south is not the burden it is in the UK or Germany. The sun is shining in the south (€12bn or £10.5bn in corporation tax receipts in 2020) and the government is mending (and building) roofs.

As Münchau notes of Liz Truss’s failed productivity experiment:

It is not the debt that is the problem, but what you do with it.

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