Implications for Policy
STRUCTURAL POLICIES
While governments can smooth the cycle through appropriate use of fiscal policy, it is not an effective instrument to influence future productivity growth and living standards in a modern economy. Instead, a range of structural policies, including investment in suitable public infrastructure, is the appropriate instrument that governments can use for such longer-term goals.91
91In effect, structural policies work in tandem with fiscal policy, but they differ in that the
financial commitment to them should be more long term in focus and remain independent of the economic cycle. This is consistent with the current commitment to the NDP in the present budgetary situation.
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The shift from dependence on growth in the manufacturing sector to growth in business and financial services as a driver of growth has important implications for policy. For example, there is a need to consider how the requirements of the business and financial services sector can be best met through structural policies in the future. In the past “Industrial policy” focused on manufacturing, with some considerable success. However, while industrial policy has been gradually changing its focus, there is a need for a broader reassessment of the suitability of a wide range of other public policies for the changed circumstances.
Like the high-tech sector, parts of the business and financial sector are very human capital intensive. To some extent the labour market is already adjusting to the sector’s needs as individual students choose their courses of study at third level. In addition, it is noteworthy that the financial sub- sector has a relatively high proportion of foreign workers and the continued ability to attract and hold such skilled labour is important to the sector.
With a downturn in the economy and a return to significant unemployment it will be important to revisit some of the labour-market policies of the 1990s. Research then showed that it was important to invest in developing the skills and education of those who become unemployed to ensure that they return rapidly to the active labour market. In addition, the changing structure of the economy will also need to be reflected in future policy on training and education.
Because of the importance of skilled labour to the internationally-traded sections of the services sector, the factors affecting the supply of such skills are also of concern. This not only includes ensuring an appropriate range of suitable third level graduates but it is also necessary to ensure that Ireland is an attractive location for the skilled workers in the sector, be they Irish or foreign. Other economies have increased the supply of skilled labour only to see this labour move abroad in the search for more attractive living conditions and lifestyle. Thus ensuring a good quality of life92 may be
of substantial indirect benefit to the sector through its potential effects on labour supply.
Since the late 1990s, there has been a strong commitment to investing in Research and Development. This policy is being implemented through a substantial increase in public funding for R&D, both in third level institutions and in businesses, as well as in supports to build research networks and collaborations across public and private institutions. While it is early days to assess the effects of this policy, it requires increasing attention to ensure that the economic benefits will begin to be realised over the forecast period. This is essential to ensuring the process of structural change into high-tech manufacturing and high value-added internationally traded services. Also policy on R&D needs to take account of the changing structure of the economy, as discussed in Chapter 2.
92We use quality of life to indicate access to good housing, a supportive working
environment, high quality health services, good educational system, and a broad based cultural and social environment.
The analysis in this Review suggests that the objectives of the National Development Plan remain appropriate to the needs of the rapidly changing economy. The range of physical infrastructure projects planned is necessary, not only to facilitate future economic growth, but also to improve living standards, broadly defined. Even if it is not directly captured in GNP or GNDI, the benefits that flow from the improved infrastructure, such as reduced congestion, improved health services and a better environment, all improve the welfare of those living in Ireland.
There remain certain concerns about the implementation of the NDP. These pertain in particular to the public transport area. It is not clear that the necessary planning has been undertaken to ensure the investments will produce the benefits that are promised. In addition, the ability of the public administration to manage and implement very large projects in a very tight time scale has yet to be proved. Ramping up investment in any sphere, be it public transport or R&D, is difficult at the best of times. This was one of the reasons why Morgenroth and Fitz Gerald (2006), suggested that large projects should be ramped up gradually.
In addition, that report on investment priorities suggested that the implementation of supporting policies to ensure efficient use of resources is at least as important as the physical investment. In some cases, for instance public transport, more competition is the appropriate response, while in other cases more but especially better regulation is required. In particular, there is a need for policy on physical planning to focus on developing sustainable urban centres that can provide a high standard of living. This not only involves investment but it also requires an appropriate regulatory response to move towards much denser development. If good value is to be obtained from the huge investment in infrastructure, and if we are to develop sustainable urban centres, it will be important to move fairly rapidly towards some system of congestion charging. Given the EU’s plans for reducing emissions of greenhouse gases, and given its proposed limits for Ireland, the current trend towards dispersed development and long-distance commuting is simply not sustainable on environmental grounds. In fact, one of the key policy challenges over the forecast period will be to explore how to increase the spatial coherence of the large stock of housing that has been created over the past decade.
To some extent the shift in the sectoral pattern of production emphasises the need for a review of how regional policy is implemented. For example, jobs in the internationally-traded sections of the business and financial services sector are generally concentrated in large urban centres. Policy will need to take this into account and it provides additional urgency to implementing the National Spatial Strategy.
In addition, to public infrastructure, the analysis in this Review suggests that there will be a need for many more dwellings over the coming ten or fifteen years. Over the period it would appear that there will be a need for up to 50,000 dwellings a year to meet the needs of the growing and wealthier population. Even with the slowdown in immigration envisaged in the Benchmark forecast, the relatively low existing headship rates (proportion of adults of a given age who are in an independent household) suggests that, with more realistic prices, there is scope for significant new demand for independent living from those in their twenties. This analysis suggests that there is an effective demographic floor under the housing
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market. While output and prices may fall in the short term, with continued economic growth as envisaged in the Benchmark forecast, the housing market will eventually rebound. Thus, as suggested in Chapter 2, the current slowdown may provide an opportunity to explore how fiscal policy and government intervention can best influence the housing market in the future.