Michael Noonan (Limerick City, Fine Gael) | Oireachtas source

I welcome the opportunity to discuss the Irish Fiscal Advisory Council, IFAC's pre-budget 2015 statement. As a result of the actions of this Government and the sacrifices of the Irish people, the fiscal and economic framework underpinning the budget was much more favourable than in previous years. However, like all other EU member states, Ireland is required to take actions to not run excessive deficits and to manage our public finances towards a balanced position. An excessive deficit is defined as a deficit above 3% of GDP. Ireland has made significant progress in recent years in reducing our deficit and, as I outlined to the House last week, our budgetary plans are designed to reduce the deficit to 2.7% in 2015.

The Government took the decision to go further than required under the Stability and Growth Pact to underpin solid, steady economic growth into the medium term. Getting the deficit below 3% is an important step on the way to balancing the budget and I agree with the IFAC's pre-budget statement that compliance with the official targets does not mean that the overriding task of repairing the public finances has been accomplished. The IFAC's advice was an important consideration in our decision to go beyond our requirements under the Stability and Growth Pact. In addition, and as I outlined last week, the 2.7% deficit does not fully reflect the cautious and prudent approach, as an element of the surplus income due from the Central Bank in 2015 is being used to reduce the debt. If the entire surplus income was counted for deficit reduction, the forecast deficit would be 2.5% next year.

The IFAC fulfils a number of key statutory roles in Ireland's compliance with the Stability and Growth Pact and the fiscal compact. It is the independent institution responsible at national level for monitoring our observance of the balanced budgetary rule and assessing the fiscal stance. It is also responsible for endorsing the macroeconomic projections upon which our fiscal planning is based. These functions have been given to the IFAC by the Oireachtas in the Fiscal Responsibility Acts 2012 and 2013.

Let us recall the reason we are all here. Ireland has come through tough times to become the first euro area member state to exit a programme of financial support after the sovereign debt crisis. We made a number of major structural reforms and placed our country on a much sounder footing. One of these major reforms was of our fiscal framework. Ireland was unbalanced economically and fiscally at a time when the crisis in our banks led to a need for exceptional Government intervention. These issues combined to place us under extreme pressure and a resulting necessary fiscal consolidation of almost 20% of GDP has been introduced since 2008.

As part of the fiscal reforms, our fiscal framework was overhauled to ensure greater stability, transparency and prudence. Among other changes, a referendum was placed before the Irish people to ask if they wished to introduce new budgetary and debt rules to embody these characteristics at a constitutional level. They voted overwhelmingly to do so. We legislated accordingly to implement the results of the referendum. These new rules mean that, following the expected exit from the excessive deficit procedure, EDP, post 2015, Ireland will be subject to the preventive arm of the Stability and Growth Pact that applies to all relevant EU member states. These rules mean that, until Ireland has reached its medium-term objective of a balanced budget in structural terms, it must improve its structural balance by more than 0.5% of GDP per annum.

Changes to our fiscal framework also led to the IFAC being placed on a statutory footing, with a mandate to provide an independent view of our overall budgetary decisions and assess our fiscal stance. Since its establishment, the IFAC has published six fiscal assessment reports, all of which can be found on its website. I respond to these reports, typically in the next fiscal policy publication after the IFAC report. When there is a large gap between a fiscal assessment report and a subsequent publication, I respond to the council in writing soon after its report. My responses can be found on the websites of the council and my Department.

With regard to the topic at hand, the IFAC's pre-budget paper set out its opinion of the level of consolidation that might form the basis of the budget package and outlined its opinion of the strategic fiscal direction that the Government should take in budget 2015. This was a new departure for the council. Its report noted the positive economic data that had changed the fiscal outlook since the April update, including the positive Exchequer returns, the benefits flowing from the switch-over to the European system of national and regional accounts, ESA 2010, which is the new internationally compatible EU accounting framework for a systematic and detailed description of an economy, and the improved economic environment. The council suggested that the consolidation package of €2 billion as contemplated in the April fiscal update should take place in budget 2015. The council's paper acknowledged that this level of consolidation was not required to achieve the less than 3% deficit target.

The council's position was that the additional consolidation should take place in order to break the boom and bust pattern and show commitment to a new fiscal policy stance. It also commented that this would put debt on a strong downward path and comfortably secure compliance with the 3% general government deficit target. The council was correct to highlight that the target was not the end-goal. When Ireland emerges from the EDP, we will not permit ourselves to return to poor fiscal habits, but will move towards a balanced budget. I agree wholeheartedly with the council's view that we need to break the pattern of boom and bust economics and have said so on many occasions. This position also fed into the Government's consideration of the budgetary package. I made it clear in my Budget Statement speech that I was targeting a deficit of 2.7% in budget 2015 in order to go beyond our requirements under the Stability and Growth Pact and build upon the progress made to date. I also agree with the IFAC's view that, taking account of demographic and other challenges, maintaining tight expenditure control will be tough. The Minister for Public Expenditure and Reform, Deputy Howlin, discussed this with regard to the ceilings indicated for Departments in the comprehensive expenditure report.

Taking tough decisions is the role of Government, a role it has not shirked over the past three years. The hard decisions of recent years have paid off and I am confident we are best placed to drive forward the recovery into the future.

The budget I introduced to the House last week was designed to secure the recovery, to grow the economy and to create jobs. I believe this budget is the right approach for Ireland at this point in our recovery and builds for a better future. The measures I introduced support sectors of the economy like tourism, small and medium-sized enterprises and agrifood, as well as reforming the tax system to support the recovery. I announced changes in order to enhance the corporation tax regime and to create an income tax system that positively contributes to, and strengthens, the economic recovery and promotes job creation. I also increased the tax on tobacco to contribute to the costs of these tax changes. These changes were structural in nature and part of a package of reforms to increase the productive capacity of the economy and to place it firmly on a positive path. Available resources were carefully targeted. However, the principal reason for increasing the tax on tobacco products pertained to health. At present, 5,200 people die each year from smoking-related illnesses and it has been accepted policy for some time across a number of Governments that increasing prices is the best way to control consumption of tobacco products.

The council is a permanent group of experts, who are highly trained, experienced and very knowledgeable about their area of expertise. They consider the long-term fiscal approach they believe should be taken. Their views formed part of the overall considerations of the Government. The Government's commitment on consolidation was that it will do what is needed to achieve the target and its track record in this regard speaks for itself. Each year, it has set ambitious targets to reduce the deficit and each year, it has gone further. The deficit target and the direction of the budget policies are what is important. The Government has stated many times that it would do whatever is necessary to reach that target and has exceeded the interim targets of the excessive deficit procedure, EDP, each year to date. Budget 2015 is the budget that will lead Ireland out of the EDP and this forecasts that we will exceed the final deficit target of 3%, leading to an underlying general government deficit of 2.7%. This is no small achievement, especially in light of the weak growth in the euro area. Eleven of the EU's 28 member states remain subject to the excessive deficit procedure, which is a reduction from 24 during a 12-month period in 2010-11. The euro area recovery is fragile and downside risks prevail. It is important to recognise the impact the weak economic recovery in the euro area is having on dampening price dynamics. Problems of weak growth in the euro area are more structural in nature. In Ireland, as I am sure is the case in other member states, the focus of political and public attention is on the consolidation measures introduced. From the outset, the Government set out a target and stuck to it and while the attention was firmly internally on the consolidation measures and externally on the headline targets, it is the many structural reforms that were introduced that are making a major contribution to growth and job creation in Ireland. There is no doubt in my mind but that the path the Government has taken for Ireland was the right path and is now paying dividends.

The mistakes of the past have not been forgotten by the Government, which has no intention of ignoring the lessons learned and which knows the pain of austerity. I acknowledged in my budget that there are risks but these all will be monitored closely by my Department. The Government has listened carefully to the council's view and has no intention of putting the painful lessons and decisions out of its members' minds. I appreciate that the council has the same overriding focus as does the Government, namely, on making sure that Ireland's recovery is sustainable and balanced and I welcome this focus. Honest brokers are needed in the system who highlight the risks and concerns that should be taken on board. The council is a key component of our strong fiscal framework. I look forward to its upcoming fiscal assessment report, which will indicate the councils' position on the fiscal stance contained in my budget.

See this speech in context