The scale of investment under the National Development Plan (NDP) needs to be increased, because the projections underpinning it now underestimate future needs, new research has found.
But the report by the Economic and Social Research Institute has warned that labour shortages and other severe capacity constraints in the economy mean options for expanding the plan, which would normally be open, may not be suitable in Ireland at present.
This is because any action that would lead to an acceleration in output under the NDP could risk stoking inflation in the construction sector, where it says higher labour supply is simply unavailable.
"The Government faces a dilemma," said Professor Alan Barrett, Director of the ESRI and a co-author of the report.
"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."
Speaking on RTÉ's Morning Ireland, Prof Barrett outlined Ireland's "dilemma" of a labour shortage.
"It is an economy of full employment. We don't have the people," he said.
Prof Barrett said the findings show that while Ireland's population is growing, public infrastructure is "creaking".
He referred to hospitals and the education system as examples of areas where there are "real difficulties".
"You can't overnight just build the houses, roads and hospitals, they take time," he said.
"Because we are operating at full employment there simply aren't a whole load of people sitting at home with nothing to do who would be in a position to build all these things.
"So, it is really a dilemma. We have the needs, we actually have the money, because the bulk of finances are in a good situation, but there is this difficulty that we have a supply constraint."
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The ESRI argues that while the 2018 NDP, and the revised €165bn version in 2021, set out an ambitious programme of investment based on estimated future needs, population growth is exceeding expectations, partly due to the inflow of Ukrainian refugees.
It also points out that targets on greenhouse gas emissions look increasingly challenging and so policy actions need to increase rapidly to ensure targets are met.
"In the absence of any constraints, the obvious response at this point would be to increase the near-term ambition of the NDP through higher spending allocations and the acceleration of projects which are at various stages of readiness," the report said.
"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."
The research explores the options for meeting new increased requirements across a range of sectors, including housing, energy, transport, healthcare and education, without stoking inflation.
The analysis said that if budget measures, including tax and current spending, were adopted that balanced off the extra stimulus connected to the NDP, then inflation might be avoided.
It also suggests that the same outcome could be achieved if construction were directed away from certain activities, such as office space and new hotels, for example, and towards priority areas, such as housing.
Tax could be used to help re-direct that activity, the authors suggest.
As another alternative, the ESRI said any increase in activity under the plan could potentially be delayed until the labour market has improved.
Challenges posed by population increase
The researchers said the decisions and judgements about how to allocate any additional spending would have to be informed by metrics.
This would involve carrying out a reassessment of cost-benefit analyses and multi-criteria analyses of projects that take account of the tighter conditions now present in the labour market and the more challenging climate targets.
The fresh analyses could also take account of the ability of projects to reduce inflation, like for example through increasing the supply of housing, which should in turn reduce the price of existing homes, the authors stated.
The analyses should also consider whether increased investment in revised NDP projects would be driven by imports that would have no impact on inflation or from domestic resources which would.
"While decisions must ultimately be made by those who have been elected, the use of quantitative metrics can aid decision-making," Prof Barrett said.
Regarding housing, the researchers concluded that it is almost certain that existing targets for housing supply understate need given the stronger than expected increase in the population shown by early results from the 2022 Census.
"Hence, higher output will be needed," the report said.
On energy, the report stated that Ireland has well-established targets around energy infrastructure.
But combining likely labour needs for onshore wind, offshore wind, solar PV, conventional generation and energy efficiency, it is estimated that the annual additional employment requirement would be approximately 24,000.
In relation to energy, the study said the faster pace of population growth and the pace of ageing has implications for capital needs in healthcare and long-term care.
As a result, it said that while Sláintecare is in place and identifies the needs for investment in acute, primary and community care, the required scale and geographic distribution of the investment is likely to be changing.
On education, the report states that population growth and increasing participation will lead to an increased need for education facilities from early childhood through to higher education.
Commenting on today's report, the Minister for Public Expenditure, NDP Delivery and Reform Paschal Donohoe said it provides insights and recommendations on the NDP which he will consider in the context of updating NDP ceilings across various sectors over the medium-term.
"Departments will be engaging with my officials in the coming months to ensure that capital projects have funding allocated up to 2026," Mr Donohoe said.
"I am mindful of the ESRI's guidelines in terms of prioritisation and the potential for the government through fiscal policy to steer construction activity towards those sectors where demand is greatest," he added.
Minister for Health Stephen Donnelly has said that he was not surprised by the ESRI report which, he said, points to a strong argument for additional investment in infrastructure and capital.
However he said that it also sounds a cautionary note about going "too fast" because inflation could impact the government's ability to get value for money.
The minister said that he looked forward to speaking with his Government colleagues about the report and said it was encouraging that the finance ministers have allocated additional capital funding this year.
He said he was making the case for additional capital funding in the health sector and that the ESRI report was in line with the position he has held in this regard.
Meanwhile, Education Minister Norma Foley said that society is always in a state of flux, adding that reports like today's are important indicators of where we need to focus our attention going forward.
"I always say in education, we never stand still - we project to the future," the Minister said at the BT Young Scientist and Technology Exhibition in the RDS today.
"To where we need the additional resources, where we need the additional personnel, right across society - then we work towards that and I think having signposts like those that are being provided today are very helpful in that regard," the Minister said.
"We will not be found wanting in providing the resources - whether financial or human resources - it directs us all the more in terms of what we need to do going forward," she added.
Additional reporting Samantha Libreri
