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

I thank the committee for the opportunity to participate in the meeting this afternoon. I will make a short opening statement and I look forward to the questions from members of the committee.

Looking at where we are now, this week marked a critical moment in our public and economic health, with many people returning to their workplaces for the first time in a year and a half. In about a month from now, if everything goes according to plan, almost all of the remaining public health restrictions will be lifted. We can, therefore, be increasingly confident that, absent a vaccine-resistant variant emerging, the worst of the pandemic may well be behind us. This is very important. The past 18 months have been unbelievably difficult for all. The disruption to family life, the pain of losing loved ones and health issues and the impact of successive, but necessary, public health restrictions hindered our normal economic and social life in an unprecedented and highly intrusive way. Throughout the pandemic it has been clear to me that the Irish people have responded with resilience. Ordinary people, business owners and especially our front-line workers have risen to the challenge in an extraordinary way. In particular, I acknowledge all those who were part of the vaccination programme. Let us be clear – the programme has been one of the most successful in the world. We owe them a huge debt of gratitude.

For the Government, it has been our job to match the success of the vaccination programme with an economic approach that has protected incomes, supported business and invested in the health service. I will make the case to the committee this afternoon that we have succeeded in doing that. To date, the Government has made a total of €48 billion available to mitigate the worst impacts of the pandemic. All of our budgetary tools have been utilised, including direct public expenditure, tax policy and below the line supports such as credit guarantees. For example, more than €17 billion has been spent on the three main income and business support schemes, the pandemic unemployment payment, the employment wage subsidy scheme and the Covid restrictions support scheme. These schemes worked. The success of these and other schemes is clear from official data. Most economic indicators are now moving in the right direction and, most important, people are returning to their jobs. For example, there were more than 480,000 of our fellow citizens on the pandemic unemployment payment in February, while today that figure is closer to 110,000.

As we enter the next stage of the pandemic, and I hope the next phase is the final one, we must move on to the next stage of our policy response. The counter-cyclical budgetary stance has served us well over the past 18 months. Such an approach should continue to serve us well in the recovery.

With all economic indicators suggesting a strong recovery is in prospect, we need to be careful we do not add fuel to the fire by maintaining current expenditure, which would be at an unprecedented and unsustainably high level. This is particularly important given potential trends in inflation. Accordingly, temporary supports such as the pandemic unemployment payment are being phased out in a careful way. Similarly, employer supports such as the Covid restrictions support scheme will also come to a natural end.

While the pace of the recovery has been quicker than many expected, I fully recognise that some businesses and employees will continue to need support. This is why the Government has committed to maintaining the employment wage subsidy scheme until at least the end of the year, but this has not come cheaply.

Over the summer, we estimated a budget deficit of around €20 billion for the year. During the pandemic, borrowing costs were kept to a minimum as central banks in all major economies purchased government bonds. This looks set to continue for the next few months but, thereafter, we can expect a change to how central banks engage in financial markets. We can expect, over time, a gradual change in borrowing costs and gradual renormalisation. Only time will tell how different the new norm will be from the old, but it will be very different from where we are today. This highlights the importance of policy supporting a credible path towards fiscal sustainability, as reflected in the target of borrowing only for capital investment from 2023.

Having said that, I believe there are genuine challenges that need to be addressed. Additional public expenditure will be required to meet them. This is particularly true in respect of capital infrastructure. The forthcoming national development plan will lay out a multi-year plan for a decade, outlining expenditure of over €136 billion.

Borrowing to fund investment that raises long-term productivity which changes our future is the right thing to do, but borrowing for day-to-day expenditure is not. The latter runs the risk of changing the living standards of future generations, who have to pay for it. We are determined to minimise the debt-service burden on our children. However, the next generation will and must benefit from an improved stock of infrastructure. This is why the Government will continue to borrow for capital investment from 2023 onwards.

Let me elaborate on public debt. It is approaching a quarter of a trillion euro. To express it more meaningfully, this is the equivalent of around €50,000 per person, a figure among the highest in the developed world. At some point, the debt will either have to be paid back or, more likely, rolled over. What is likely is that it will be rolled over to a higher interest rate because we cannot expect the exceptionally low interest rates of today to last forever, nor can we base a strategy on such an expectation. We need to be aware of our obligation towards future generations. This is particularly true given our ageing population and the impending transformation of the economy away from fossil fuels.

The budgetary strategy outlined in the summer economic statement tries to get the balance right, with a total budget package of €4.7 billion. On the expenditure side, core expenditure will increase by €4.2 billion, including €1 billion for entirely new measures. The remaining €3.2 billion will allow for demographic pressures and deal with any changes to public pay. There will be a significant increase in capital expenditure of some €1.1 billion.

A further €500 million will be focused on some tax measures, and these will be outlined on budget day. The summer economic statement outlines how, over the next two budgets, temporary Covid-related spending measures will be phased out. A pathway will be provided to meet core objectives set out in the programme for Government.

In practical terms, this means the implementation of an expenditure rule whereby total expenditure is fixed at just over 5% growth per year. This is in line with the trend growth rate of the economy. The rationale for this approach is to ensure that temporary or windfall revenues are not used to finance permanent changes.

For next year, an expenditure ceiling of €88.2 billion has been fixed. A key point to note here is that the summer economic statement committed to decoupling expenditure from tax revenues that could be temporary, such as lower than assumed or higher than assumed tax revenues.

Let me be clear that managing the public finances involves trade-offs. When we consider the challenges and the options for new expenditure, we see there are only three options: raising taxes, increasing borrowing and reducing expenditure in other areas. Budget 2022 will aim to strike the right balance between these choices.

In conclusion, as is always the case in the run-up to any budget day, there will be decisions, including difficult ones, that need to be taken, but that is the role of the Government. We will take decisions against the background of improving economic health. I look forward to being able to discuss some of these issues with the committee this afternoon.