Paschal Donohoe (Dublin Central, Fine Gael) | Oireachtas source

I thank the committee for the invitation to the meeting to discuss the forthcoming budget and I welcome the contributions members will make in this regard. I also thank the committee for its recent report which I had an opportunity to read in the last few days.

The budget will be presented to the Houses of the Oireachtas on Tuesday, 9 October next. Over recent months, many elements of our reformed budgetary process have taken place. In June, the summer economic statement was published, followed by the national economic dialogue. In July, the Government published the mid-year expenditure report and the tax strategy group papers in respect of budget 2019. These are all new features of our budgetary process, which I hope make options clearer. Earlier this month, my Department published its second annual debt report and an analysis of demographic trends and their input on sustainability of the public finances. As I set out in the summer economic statement, I am committed to not adopting a budgetary policy that would further increase the deficit and result in additional borrowing.

The focus of budget 2019 will be to sustain our recent progress and to maintain our careful management of the public finances. The summer economic statement laid out what we believe is the appropriate policy on the basis of what is right for the economy. From a budgetary perspective, this facilitates the building up of fiscal capacity to help deal with future risks and potential shocks. In terms of our current position, we are in good shape. With gross domestic product, GDP, up by 2.5% in the second quarter of the year, quarter on quarter, and up 9% year on year, it is encouraging that robust growth is being recorded across all sectors of the economy, both domestically and in our international traded sector. There was an annual increase in employment of 74,000 jobs in the year to the second quarter of 2018, bringing total employment to over 2.25 million. We are close to approaching what could be termed full employment.

The next set of official macroeconomic forecasts will be produced as part of budget 2019, following the Irish Financial Advisory Council, IFAC, endorsement process which is currently under way. We must be mindful, however, of new challenges in the wake of the growth we are now experiencing in our economy. Internationally, some of the other risks are being widely recognised. They include a general rise in protectionist policies and the unpredictability of the international tax environment. Ireland, as a small, open economy is particularly exposed to these risks and we must be careful in our budgetary policies and continue to look after our public finances while, of course, meeting the needs of our society.

In 184 days, our most important trading partner will formally leave the European Union. While a transition period remains our baseline assumption, there will still be a major structural change in our economic relationship with the United Kingdom. It is important to be clear that the agreement on a future relationship can only be finalised and concluded once the UK has become a third country, that is, after it leaves the EU on 29 March 2019. This is why agreement of a status quotransitional arrangement is so important. It is in the interest of everyone that a future relationship agreement is concluded as quickly as possible after the UK leaves the EU to provide certainty sooner rather than later.

I note that the committee's pre-budget discussion document points to the possibility of a no-deal Brexit outcome as a potential budgetary risk. With Brexit some things are going to change and we are planning accordingly. The risk of a more adverse outcome than expected is one of the principal reasons that the Government has put in place careful measures in the case of a failure to reach a Brexit agreement. The measures include: targeting a balanced budget over the cycle, including using windfall receipts to reduce public debt; rebuilding our budgetary buffers, including the establishment of a rainy day fund; increased capital expenditure; and the significant suite of measures to support small and medium enterprises, SMEs, announced in previous budgets.

In terms of other risks, I note the committee’s recommendation that the Government consider using fiscal policy to decrease Ireland’s dependence on imported oil and gas. As an energy importer, Ireland is adversely affected by increasing oil prices. However, I hope the careful policies of recent years have placed Ireland in a stronger position to deal with any shock which may materialise, including a shift in oil pricing.

Reducing our public debt and its servicing costs remains a priority. Our current debt level equates to €42,000 per capitaand is the third highest in the developed world. That is why we remain steadfast in the pursuit of sound budgetary policy. Legislation has been drafted on the Government’s proposal for a rainy day fund. We are committed to initially seeding the fund with moneys from the Ireland Strategic Investment Fund, as well as setting aside some of the high levels of corporation tax for the purpose of creating the fund. This means the risk of permanently increasing expenditure on the basis of transient receipts is reduced. With this in mind, a contribution of €500 million to the rainy day fund will be provided for next year, in addition to the €1.5 billion planned for this year.

The Government recognises the clear supply and affordability constraints in the housing market. In my previous two budgets, I introduced significant increases to both capital and current allocations of the Department of Housing, Planning and Local Government. The capital budget has increased by 145% since 2016 to over €1 billion, which reflects the Government’s position that the only way to solve the current issues in the market over the long term is to build more homes, including social housing, student accommodation and affordable homes for people on average incomes. Some of the measures introduced include the allocation of €200 million for the local infrastructure housing activation fund, LIHAF, and the introduction and subsequent increase in the vacant site levy from 3% to 7% for the second and subsequent years. I also increased the rate of commercial stamp duty to help rebalance the construction industry. These and other measures are helping to boost supply. The latest figures from the Central Statistics Office, CSO, show a 34% increase new home completions from last year. The number of planning permissions granted for residential development is now 39%. Clearly, however, we have some way to go and I will continue to work with the Minister for Housing, Planning and Local Government, Deputy Eoghan Murphy, on the various initiatives in which his Department is engaged.

Regarding our current fiscal position, the €32.4 billion of tax revenues collected, which is up €1.6 billion or 5% on the same period last year, were broadly on target, highlighting that our budgetary position is continuing to improve and we are closing in on a balanced headline budgetary position.

Turning to expenditure, maintaining a sustainable public expenditure policy requires focus not only on the quantum of expenditure each year, but also on the quality of that expenditure. In tandem with the policy of sustainable current expenditure increases is the role of capital spending and how it can reduce risk and strengthen the economy. Indeed, I welcome the ESRI’s advice published today highlighting the need for an overall approach to fiscal policy in this year’s budget. I agree that, given key infrastructural deficits in areas such as housing, along with the possibility next year of a more adverse than expected outcome in the Brexit negotiations, a non-contractionary budget is appropriate. That is why €1.5 billion has been allocated towards increased capital investment next year, an increase of almost 25%. This allocation will allow us to ensure a sustained increase in the delivery of social housing, offer additional schools places and make progress on key projects.

Systematic information about the efficiency and effectiveness of expenditure is crucial. Over recent years our framework has undergone significant reform. Many initiatives are now in place that focus on what is being achieved by public spending. Underpinning this progress has been a number of structural reforms that support targeted improvement. The committee has made a number of recommendations. The aim of this process is to embed an evaluation mentality in the public service, with the goal of avoiding reactionary budgets and large annual shifts in expenditure. It should also maintain an ongoing evaluation of the effectiveness of existing levels of expenditure. Other structural reforms include performance and equality budgeting, including establishment of the equality budgeting expert advisory group, an area this committee has considered.

We have made good progress in the area of climate proofing through tracking climate-related output targets in the annual Revised Estimates Volume, REV, and ex postevaluation of climate-focused expenditure programmes. These reforms are aimed at increasing transparency and accountability.

Ensuring the implementation of Project Ireland 2040 is of the upmost importance to this Government. That is why we published an expanded investment project and programme tracker, which builds on the work of the programme delivery board, which has met on a number of occasions. The projects it is working on include improving information flows for project monitoring, establishing the Land Development Agency, establishing a construction sector group and progressing the four development funds. Addressing these issues will ensure that projects outlined in the national development plan can be delivered on time and on budget, and that the objectives set out in the national planning framework are achieved on a value-for-money basis.

I note the committee’s recommendation that consideration be given to increasing carbon tax over a number of years. While I consider that carbon tax can play an important role in reducing national emissions, in any analysis of the carbon tax it is also necessary to consider not just its potential to reduce national emissions, but also other economic and social impacts. The ESRI, as part of its joint research programme with my Department, has produced initial research which will inform my decisions. I am informed it is developing a multi-annual model for the same purpose.

The committee’s report makes a number of other recommendations that I will consider. I thank the committee for the opportunity to attend. I will do my best to answer any questions.