Paschal Donohoe (Dublin Central, Fine Gael)
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I welcome the opportunity to attend the committee to discuss the summer economic statement published on 25 June 2019. The statement sets out the key elements of the Government's medium-term economic and fiscal strategy and updates the economic parameters for discussion in the Dáil in advance of budget 2020. A decade on from the financial crisis, we have experienced a remarkable recovery. We have a well-managed economy, public finances are on a sustainable trajectory and economic growth is steady, robust and broadly-based. However, while progress has been made, in particular in respect of the number of our citizens who are now in work, we cannot take it for granted. It has been achieved and must be maintained through careful decisions. The job now is to build upon this progress to ensure we are ready to respond to the challenges of today and tomorrow as well as to the opportunities that lie ahead.

This year, my Department projects GDP growth of 3.9% and a budget surplus of 0.2% of GDP. With unemployment at its lowest level since 2005, the labour market is approaching full employment. As I have said previously, budgetary policy must lean against the wind. When times are good, we must do our best to build up our budgetary resources and reinforce the resilience of the economy to withstand external shocks. A clear policy lesson from our peer group of small open economies among EU member states is that they typically operate budget surpluses when their economies are performing close to potential. This not only facilitates the building-up of fiscal capacity, it means these states have been able to increase public expenditure in a sustainable manner through incremental spending increases based on solid improvements in their economies.

As such, they have been largely able to avoid a procyclical policy approach. Furthermore, they enjoy a high stock of public infrastructure as investment is maintained. This, in turn, improves economic competitiveness, increases growth potential and improves both the standard and quality of life for their citizens.

Since the publication of the stability programme update, SPU, the risks to the economy have intensified. Volatile corporation tax revenues continue to be of concern. The international trade environment is increasingly uncertain. The economy moving towards full employment raises the issue of potential overheating and, perhaps most worrying, the prospect of a disorderly Brexit in October has become significantly more likely. Given these risks, both at home and abroad, framing budget 2020 in the autumn will be more challenging than in recent years. As Minister for Finance, my task is to guide the economy through these risks with careful management of the public finances. I will do this through steady and sustainable improvements in living standards financed by steady and sustainable revenue streams.

As I have said many times, the UK's exit from the EU will have a detrimental impact on our economy but the magnitude of that impact depends upon how disorderly that exit is. There is no precedent in modern economic history for an event like Brexit and, as such, predicting its impact precisely is difficult. Given all of the above, the summer economic statement has been prepared on the basis of one budget with two budgetary scenarios. The same broad strategy applies to both scenarios. The outcomes, however, are different in each.

Consistent with the fiscal projections published in the SPU, the budget 2020 framework involves a budgetary package of €2.8 billion for 2020 with expenditure pre-commitments of €1.9 billion, including a €700 million or a 10% increase in capital investments, and an expenditure reserve of up to €200 million with the capacity to accommodate funding requirements for the national broadband plan and the national children's hospital. This leaves €700 million to be allocated specifically as part of the budget. In the event of an orderly Brexit, given our position in the economic cycle, this is the appropriate budgetary policy and delivers a surplus of 0.4% of GDP. This would allow for capacity to deal with the impact of Brexit. Further expenditure or tax reductions outside of these parameters would risk contributing to overheating in the economy, jeopardising the sustainability of the public finances.

If, as appears increasingly possible, there is a disorderly Brexit, significant pressure will be placed on the public finances. Upon a disorderly Brexit, the Government will adopt a holding position and allow the automatic stabilisers to provide countercyclical support. We will then put in place temporary, targeted Brexit supports to help our citizens and those sectors and parts of our country that will be most affected. This is in line with the advice of the IMF. A disorderly Brexit scenario could involve a headline deficit of between -0.5% and -1.5% of GDP for next year. This or the outer end of that spectrum would involve a negative swing in the headline balance of up to €6 billion.

This twin approach mitigates the requirement for a supplementary budget in the event of a disorderly Brexit. As the picture becomes clearer, the Government will take a decision in September as to which of these two scenarios will underpin the economic and fiscal forecasts for budget 2020.

As Brexit approaches, it is essential that we are cognisant of the risks to the economy domestically. The high concentration of corporation tax receipts experienced in recent years could represent a more vulnerable revenue stream in the future. I have said that public spending must only be financed by revenue that is predictable and sustainable. Basing public expenditure increases on transitory and unstable sources of funding would not be in line with my commitment to a careful budgetary policy. With this in mind, I have asked my officials to prepare a paper on fiscal vulnerabilities in Ireland, examining a range of policy options to mitigate the risks inherent in the concentration of corporation tax receipts and those resulting from a narrow and literal interpretation of the European fiscal rules. This paper will be published shortly and I will consider the proposals contained within with a view to making a recommendation to Government in the autumn. I should point out that action has already been taken. We have begun to run budgetary surpluses, established the rainy day fund and broadened the tax base. However, we need to continue to work at this in the years to come. The medium-term approach outlined with regard to expenditure under the orderly scenario with, post-2020, current expenditure growing at 3.25% and overall annual average expenditure growth of circa 3.5% would allow for an annual increase in expenditure below the growth rate of the economy as represented by modified gross national income. This is appropriate given the uncertainties in the external environment and the current position in the economic cycle.

Because of the progress we have made, we are entering a time of uncertainty from a position of strength. Capital spending has substantially increased, laying the foundation for future improvements in our living standards. The unemployment rate has fallen to close to historic lows. However, new risks are developing, and with that in mind, I will look at putting in place the most sensible budgetary strategy and recommending that to Dáil Éireann.