There's No Such Thing as a "Shovel Ready" Project

The only thing the Minister for Finance needs to do is to push the “money on” button, and all the shovel-holding lads will begin digging immediately.

Somewhere in a darkened room, presumably lying on a pile of money, a man is laughing his head off. This genius, this Don Draper-level marketing guru, is the man who invented the phrase “shovel ready”.

A shovel-ready project is a large, capital-intensive project that is ready to go, so ready to go in fact that there are lads sitting around, shovels in hand, just waiting for the cash to kick on with the job. The only thing the Minister for Finance needs to do is to push the “money on” button, and all the shovel-holding lads will begin digging immediately.

Austerity is a bad idea, and results in unnecessarily harmful policies for large sections of the populace. The Government has finally realised this, perhaps because of mid-term poll slumps, and has decided to wind up the National Pension Reserve Fund and funnel the remaining €6.4bn into a Strategic Investment Fund for broadband, water, energy and other projects. They will also spend up to €750m on shovel-ready construction projects to be announced in October’s Budget. These are two very good ideas.

There’s only one problem.

There’s no such thing as a shovel-ready project. There never has been. It’s a buzzword invented by some guy sitting on a pile of cash to get ministers to open the purse strings and let fiscal policy loose.

Fiscal policy is about how the Government taxes people, and how the Government spends the people’s money. When the economy is depressed because the highly indebted private sector isn’t spending, one way to create jobs and extra demand for goods and services is for the Government to spend money on projects to soak up unemployed workers who will increase demand.

Usually when the Government spends, say, €750m, it would expect the value of national output to go up by a bit more than €750m as thousands of jobs are created. In addition, the stuff that gets built typically hangs around for decades, giving off a stream of benefits for society into the future. Think of the benefits we’ll get from our road network for the next 30 years, or the new buildings built during the boom, or the next-generation broadband the Strategic Investment Fund will hopefully deliver. At the end of the day, these projects do create something useful for the future. The key questions are: how useful, and when?

The Government doesn’t spend money like you or I do. There is a delay in targeting, approving and disbursing funds and implementing and completing a project. Typically, the lag from decision to implementation can run from six months to 18 months, and that is at top speed. In the US, the Congressional Budget Office (CBO) monitors fiscal policy, and found in 2009 that only 11pc of the $308bn earmarked for stimulus spending on projects like highways, mass transit and educational buildings was actually spent. Even in 2011, only 72pc of the money earmarked in 2009 had been spent. The CBO estimates the average time to fully roll out a programme of spending is three years.

So: announcing spending increases in October 2013 might result in a bump in 2014 and a bigger bump in 2015. Right around election time, if the projects are very well chosen. The minister better hope his civil servants in the Department of Finance have had their Weetabix. The Department of Finance officials are very smart and highly competent individuals, but these will typically be one-off projects with highly uncertain rates of return, so the chances of betting on a dud project are pretty high.

Worse still, everything we know about fiscal policy and stimulus shows stimulus programmes which end before the economy has started to regain its footing risks exacerbating any underlying economic weakness. Put another way, if a doctor puts a crutch under the patient’s arm, to pull it away as they recover is sometimes more harmful.

The Government wants to grow the economy and get people back to work. This is good for us and good for them. The Irish people vote, essentially, on the economy. The key for success is implementing the spending so projects deliver short-term and long-term returns.

Let me make two suggestions for our colleagues in Finance when targeting programmes to fund. First, study Japanese spending programmes on areas like early childhood education and social services. The Japanese do stimulus spending like no one else.

Recent studies done in Japan show early education programmes deliver more bang for the buck than infrastructure spending, but, importantly, because the programmes created childcare facilities that were government subsidy junkies, there is a large threat to any programme of turning off government funding. We know there will be a demand for early childhood education because of our recent baby boom, and the long-term benefits of these programmes are well researched and evidenced.

Second, the temptation will be very strong to “finish off” bits and pieces of the capital programme abandoned in 2009 and 2010 as the Government reduced its expenditure, probably related to finishing off roads. This temptation should be avoided.

There is no doubt Ireland needs investment to grow. There’s only 40pc of the investment happening today relative to the peak of Ireland’s boom. But do we really need more people digging up more roads? We know we need the right investments in people, in labour market activation programmes, in early childhood education programmes, and in public health. The €750m should not be directed towards lobby groups with short-term agendas, nor towards projects that look easier than they turn out to be. Remember: there is no such thing as shovel ready.

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