Ireland's National Development Plan: Navigating substantial investment needs in housing, health and climate amidst full employment

New ESRI research funded by the Department of Public Expenditure, National Development Plan Delivery and Reform examines the National Development Plan (NDP).

The challenge – more investment needed but the economy is at full employment

When the current National Development Plan (NDP) was launched in 2018, it identified a clear need for substantial public investment in Ireland and set out an ambitious programme for this investment. The needs were set out again with the launch of the renewed NDP in 2021, along with an updated set of projects.

Despite the ambition that underpinned the NDP, the latest information suggests that the earlier level of ambition may have underestimated what is needed. Population growth is exceeding expectations and targets on greenhouse gas emissions look increasingly challenging.

In this report, ESRI researchers discuss investment needs across the following areas – Housing, Energy, Transport, Healthcare and Education.

In the absence of any constraints, the obvious response would be to increase the near-term ambition of the NDP through higher spending allocations and the acceleration of projects across the areas listed above. However, the existence of capacity constraints largely in the form of labour shortages implies that the policy options which would apply in an unconstrained setting may not be optimal in the immediate future. In essence, an accelerated NDP risks generating increased inflation in the construction sector whereby the costs of delivery increase.

This conflict between the need for public investment and the constraints on investment provides the context for this report. The challenge for the ESRI was to provide high-level guidelines on how the conflict can be managed.

It is not possible for the ESRI to say if one policy goal (such as housing) should be prioritised over another (such as climate), and we do not attempt to do so. This is the role of the political system. But we do provide some broad principles which might be applied in deciding how projects might be prioritised.

Towards a solution – some standard instruments

An acceleration of the NDP could avoid an inflationary impulse if it was combined with an overall budgetary stance where other measures such as taxation and current expenditure balanced any NDP-related stimulus. Another option would be to direct construction activity towards, for example, housing and away from other activities such as office space, hotels and car parks. A tax could be used, not for the purpose of aggregate demand management but for the more microeconomic purpose of re-directing activity. Yet another approach would be to delay any acceleration until labour market conditions have changed.

Clearly, approaches based on tax increases, spending reductions and deliberate delays are likely to present political challenges, so we need to think creatively about the speed and sequencing of NDP delivery.

Towards a solution – a more nuanced approach based on enhanced metrics

Decisions on public spending will almost always have a judgment component and such judgement is particularly important in giving weight, for example, to socially valuable outcomes in health and education. However, some form of metrics must inform decisions too. It is suggested that Cost-Benefit Analyses and Multi-Criteria Analyses of projects be re-assessed with altered parameters that capture the more severe capacity constraints and the more demanding climate targets which have arisen since the original NDP was drafted. For capacity constraints, the labour intensity of projects should be considered, with the climate impacts of projects (whether positive or negative) also featuring more prominently in the Cost Benefit Analyses.

A further factor which could be incorporated into revised Cost Benefit Analysis metrics is the impact of projects on easing inflationary pressures through supply-side impacts even if the demand-side impact in the short-run is inflationary. For example, increased building of housing units will lower the price of the existing stock, all else being equal. With regard to energy, a faster transition to renewable sources could reduce energy costs.

A similar consideration arises in terms of whether the demands created by investments are largely met from domestic resources or through imports. An increased demand for imports will have no impact on inflation given that Ireland is a small purchaser in the relevant markets. It would also be desirable to favour projects which use innovative methods and materials that economise on labour and other inputs.

Commenting on the study, ESRI Director Alan Barrett noted the following: “The government faces a dilemma. On the one hand, there is a clear need for investment in public infrastructure as our population and economy grow and our climate targets remain challenging. However, on the other hand, the economy is operating at full employment so the resources needed to accelerate the NDP are not readily available. In this report, we suggest that the government revisits the analyses undertaken for capital projects and re-assesses the sequencing of projects to account for the demands they will place on resources. This re-assessment should also consider the potential of projects to ease inflationary pressures. While decisions must ultimately be made by those who have been elected, the use of quantitative metrics can aid decision-making”.