Oireachtas Joint and Select Committees

Wednesday, 27 February 2019

Committee on Budgetary Oversight

Macroeconomic Analysis and Fiscal Risks: Central Bank of Ireland

Dr. Mark Cassidy:

As for the first scenario, in which there is a withdrawal agreement, this could ultimately lead to either a customs union-type agreement or a free trade-type deal. The impact on the overall economy would be rather similar, that is, around 1.7% less growth over the medium term and around 18,000 or 19,000 fewer jobs.

The third part of the Deputy's question relates to public investment. Overall, public capital investment fell extremely sharply after the crisis, by around 60%. As a result, there was a significant depletion of the overall public capital stock, which remains very low. There is certainly now the opportunity, after several years of very strong growth, for an increase in public capital investment. This could have the positive effect of increasing productivity across the economy and could also be used to attain regional objectives.

We support the projections in the national development plan to 2027.

From an economic perspective, if the private sector participates in that, it is useful in terms of risk-sharing across the economy, as well as the business incentives it can bring. Hopefully, the private sector can be involved over the coming years. The public capital investment plan has to be set out regardless because we now need to address our public capital stock. It would be welcome if that could be done in collaboration with the private sector.

We would fully welcome public capital investment but we need to acknowledge that it is occurring at a time when the economy is operating at close to full capacity. If the full benefits of this capital investment are to be enjoyed, then it is important it does not crowd out the private sector. It can do this by contributing to capacity constraints for private producers. If higher capital spending is debt-financed, it will have the effect, when the economy is close to full capacity, of pushing up both prices and wages which then makes the private sector less competitive, particularly exporters. Our recommendation is rather than debt financing under these circumstances, it is better if public capital investment is met by financing from elsewhere in the budget, whether through taxation or other expenditure measures.