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

I thank the committee for the invitation to attend. I look forward to a good exchange of views. I remind the committee of the Government's main priority in the framing of budget 2020, which is to help our economy and society to deal with the potential impacts of a disorderly Brexit. As the committee is aware, on 11 September the Government agreed to base budget 2020 on the assumption of a disorderly Brexit at the end of October. A primary reason for making this decision was to give certainty to businesses and citizens that the Government is prepared for a no-deal Brexit and stands ready to support the economy in such a scenario. Although the risk of a disorderly Brexit in 2019 has clearly receded, considerable uncertainty remains with regard to the final outcome. Consequently, assuming a no-deal Brexit ensures that the Government has the necessary resources at its disposal to be able to meet this exceptional challenge, while preserving the longer-term sustainability of our public finances. Those sectors and regions most affected by a disorderly Brexit will be supported through timely, temporary and targeted measures. Before taking into account certain Brexit-related costs of €1.2 billion and timing-related cash costs of €169 million, the overall increase in core voted expenditure on public services and infrastructure in 2020 is estimated at more than €3.3 billion

After taking account of discretionary revenue-raising measures of more than €400 million, this results in a net budgetary package of more than €2.9 billion. This package is broadly in line with the amount of €2.8 billion set out in the summer economic statement that would apply under the orderly Brexit scenario. Further, taking into account commentary, including advice received from the Irish Fiscal Advisory Council, in relation to in-year spending increases, two things have happened. The first is that a significant effort has been made this year to reduce the level of Supplementary Estimates that are required, without jeopardising our ability to meet the public service needs of our citizens and, second, the additional funding increases for this year have been carried into our budget day package for next year. This package is consistent with the advice we have received from the Irish Fiscal Advisory Council but more broadly, is appropriate given the current position in the economic cycle and the risks in the external environment.

As outlined on budget day, in the event of a no-deal Brexit, the Government will intervene to protect the impacted sectors and regions. This funding will be borrowed money used to protect our economy. If a no-deal Brexit does not happen, the money will not be borrowed for other purposes. In the event of it happening, €650 million of expenditure and funding will be available to be released in different waves and additional funding for the Department of Employment Affairs and Social Protection will be made available but that will only happen in the context of a no-deal Brexit. Mitigating the effects of Brexit has been a feature not just of budget 2020 but also of the past three years' work. This has included initiatives to increase competitiveness and put in place greater resilience in our economy. For these ongoing initiatives, which are already in place, approximately €200 million is included within the departmental allocations published on budget day. This amount is additional to the €1.2 billion noted earlier.

Since I published budget 2020 on 8 October, an extension of the EU's deadline for withdrawal to 31 January 2020 has been agreed. As such, the risk of the UK departing the EU without a deal has been averted for now. However, the ultimate outcome is still uncertain and a disorderly Brexit is still possible. We hope that the UK's withdrawal will take place on the basis of the deal agreed between the UK and the EU at the October European Council, while also awaiting the outcome of the UK's general election. The extension of the Article 50 exit point means there is likely to be some upside to my Department's forecasts. However, if the withdrawal agreement is ratified, Ireland's position will improve with increased revenues and lower expenditure than forecast in budget 2020. Growth could be expected to be in the order of 3.1% for next year, approximately 2.5% higher than forecast. In addition, the general Government balance could be around 0.5% of national income or gross domestic product in 2020.

Furthermore, I want to indicate to the committee, because of the distinct possibility of stronger corporation tax receipts, it is conceivable that the fiscal position for this year could be better than assumed at budget time. However, that depends on the continued careful and improved management of public expenditure. As such, I will make a call on the end-year position following the publication of the November fiscal monitor, given that November is the single most important month of the year for tax receipts. In addition, the Government is committed to running surpluses over the medium term, to reduce our debt and guard against risks such as the possible transient nature of some corporation tax receipts and potential reductions in revenue as a result of the OECD base erosion and profit shifting, BEPS, project.

Our public finances continue to move in the right direction and this is testament to the right policies in recent years. However, Brexit is not the only risk we face. Due to the highly open nature of the economy, our public finances are always vulnerable to potential knock-on impacts from a shift in tone in global trade. Should these risks not materialise, the principal risks then relate to potential overheating if the economy approaches full employment and changes in other jurisdictions affect the competitiveness of our corporation tax regime.

Going forward, we must continue to build on the hard-won gains of recent years and ensure our public finances remain on a stable and secure footing. Some of the policies I have implemented in this regard include the establishment of the rainy day fund, which I will say a word about now, and, in addition, we must continue to maintain a broad and stable tax base to ensure the State's finances continue to be financed properly.

I am happy to tell the committee that I commenced the National Surplus (Exceptional Contingencies) Reserve Fund or the rainy day fund on Thursday, 31 October. On foot of commencement and the necessary delegation order to the National Treasury Management Agency, NTMA, regarding the management of the fund, I then directed the NTMA to transfer €1.5 billion from the Ireland Strategic Investment Fund to the rainy day fund by 30 November. In preparing budget 2020, I set out that a disorderly Brexit was the baseline scenario for budget planning purposes, and therefore a budget deficit was in prospect. On that basis, I decided that there would be no transfer of €500 million from the Exchequer in 2019 to the rainy day fund. That will remain as a cash balance and, in particular in the context of a no-deal Brexit, will be used to meet the Exchequer funding requirement that would arise, which in turn will then be used for public spending priorities. However, on budget day, I also set out that the funds transferred to the rainy day fund can be deployed in the event that the economic impact of a disorderly Brexit is larger than assumed.

I will now turn to the fiscal position. Our economy has performed well in the year to date. Gross domestic product growth of 5.5% is expected for 2019, which is generating for now a planned surplus of 0.2% of national income. It is worth noting that this surplus could have been in the region of 1% to 1.25% of national income had the Government not increased capital expenditure from levels prevailing in 2016. Public capital investment will increase this year by 22%. Unemployment, at 4.8%, is now at its lowest level since 2012. The end-October Exchequer returns indicate that tax revenues are up 6.7%, driven by broad-based buoyancy in all major tax heads. We expect to meet our tax revenue target of €58.6 billion by year end. This represents a €200 million increase on the stability programme update, SPU, forecast.

Turning to the outlook for next year, the economy is forecast to grow by just over 0.7% if we have to deal with a disorderly Brexit. However, even in that scenario, our economy will grow. It will be a two-speed economy with continued growth in the multinational-led sectors but a much more difficult situation in UK-facing sectors. In the event of a no-deal Brexit, my Department is forecasting a deficit of 0.6% of national income and we also expect to see a slower increase in the rate of employment. However, as I stated on budget day and, as outlined by the Irish Fiscal Advisory Council, there is much more uncertainty regarding short-term prospects than is normally the case.

I will now turn to expenditure and give a brief overview of the outturn.

At the end of October total gross voted expenditure was just over €53.5 billion, made up of €48.9 billion in current expenditure and €4.7 billion in capital expenditure. The amount is €3.6 billion, or 7.2%, ahead of the outturn for the same period in 2018. Of this, €2.7 billion relates to current expenditure, while just over €900 million relates to capital expenditure which, as I stated, will be up by over one fifth by the end of the year. This is broadly in line with the projections set out on budget day when the need for additional spending was announced for 2019 in a number of areas.

The biggest pressure remains in the health sector, with the 2020 expenditure report outlining the potential scale of the Supplementary Estimate. In recognition of the risks arising in health expenditure in recent years, a new health budget oversight group was established this year, incorporating members from the Department of Health and the HSE and chaired by the Department of Public Expenditure and Reform. The purpose of the group is to monitor health spending and staffing against the current budget allocation and act as an early warning mechanism for any deviation. It is fair to say that while further progress is required in 2020 on health expenditure, the expenditure management position in 2019 is very different from what it was when I appeared in front of the committee last November.

In recent years the Government's priority has been capital investment. We have seen a 90% increase since 2016. Making large strategic capital investments was the right course of action in recent years, given the large fall-off during the crisis period. Given the scale of investment in recent years, the growth rate is set to decline to more normal levels from 2022 onwards.

From a debt perspective, an important milestone is in prospect for this year, namely, that the ratio of debt to gross domestic product, GDP, is projected to fall below the 60% threshold set in the Stability and Growth Pact for the first time in the post-crisis period. Having said that and as I stated on a number of occasions, our debt burden remains highly elevated and is forecast at 100.2% of GNI* for 2019, albeit declining to 97.4% in 2020. Reducing the nominal level must be our priority. In that context, at budget time my Department projected a surplus in headline terms of 0.2% of national income for this year. However, given that the external economic outlook is deteriorating and the remaining uncertainty surrounding Brexit, our policy approach should be to run budget surpluses into the future if the economy continues to perform strongly and to use them to reduce the national debt. Furthermore, windfall receipts that arise from the State reducing its involvement in the banking and financial sectors will be used to reduce the level of public debt. We must continue to prepare for the inevitable slowdown, ensuring we do not spend money we might not have in the future and building on the achievements thus far.

Corporation tax revenue has been growing strongly, driven by increased company profitability. Receipts to the end of October stand at 10.6% ahead of target. November is the largest collection month of the year and we expect receipts to be stronger than forecast. Ireland has been very successful for several decades in attracting leading multinationals. Given the size of these multinational firms and our high level of integration with the global economy, we have seen the corporation tax base become somewhat concentrated, with the ten largest firms accounting for approximately 45% of all corporation tax receipts.

While Ireland's corporation tax receipts as a proportion of economic activity are broadly in line with those of other small, open, trading European economies, the Government is still acutely aware of the risks associated with the concentration of receipts. That is why we will continue to broaden the tax base, prioritise the reduction of debt and run Exchequer surpluses in the future and for now. In addition, on budget day my Department published a scoping paper entitled, Addressing Fiscal Vulnerabilities, to identify possible solutions and initiate a discussion on how best to mitigate our increasing reliance on corporation tax receipts. The paper also sets out several proposals to ensure our fiscal rules will not contribute to budgetary imbalances. I am considering them. My Department will undertake a further assessment of corporation tax receipts in the context of the OECD process. It will be published next March.

I will turn to specific matters I understand the committee wants to discuss. On our expenditure review, a sustainable expenditure policy needs to meet certain key requirements, including ensuring the overall level of expenditure remains affordable and delivering sustainable improvements in public services and infrastructure. Consequently, this requires that expenditure growth be set at a level that is consistent with the longer term growth potential of the economy and that there be an ongoing focus on the quality of expenditure. In that regard, spending review papers provide an evidence base for departmental spending that informs budgetary choices. The spending review process is aligned with the Estimates process as most papers are published in July or August each year. In addition, given the rolling nature of the spending review process, the analysis produced in one year can help in other years. The findings of spending review papers feed into the policy process by providing evidence to make well informed decisions in the relevant policy area.

I wish to comment on the demographic pressures and their impact on the budget. The population is young, but this will change in the coming decades. Last September my Department published a report entitled, Population Ageing and the Public Finances in Ireland. It outlines that the ratio of retirees to workers is set to more than double by 2050. There are around five persons of working age for each person aged 65 years and over. By 2050, the equivalent figure will be just over two. The greying of the population will have an adverse impact on the public finances, with age-related expenditure expected to rise by 6% of GDP by 2070. Accommodating demography-related costs was a feature of budget 2020. As with previous budgets, budget 2020 includes €500 million for demographic pressures in the areas of health, social protection and education. These allocations are informed by the paper Budgetary Impacts of Changing Demographics 2017–2027 which was published by the Irish Government Economic and Evaluation Service, IGEES. An updated paper was published alongside budget 2020.

While we are potentially heading into choppier economic waters, we do so from a position of relative strength. We do not have the imbalances that marked the economy a decade ago. There is no credit-driven bubble, for example, but there is still uncertainty about the final outcome of Brexit. Consequently, we must seek to continue to manage our finances next year within the parameters set out on budget day, with borrowing to fund the Brexit contingency measures to be triggered only in the event of a no-deal Brexit.

I again thank the committee for giving me the opportunity to speak today. I will be happy to address questions members may have.