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

I thank the Deputies.

Underpinned by the improving economic environment, one of the main achievements of the outgoing Government has been the dramatic improvement to our fiscal position. These hard-won improvements to our public finances provide a sustainable budgetary platform on which funding for provision of public services can be provided for the years ahead. A clear indication of the enormous distance we have travelled can be gauged when one considers that the general government deficit was 12.6% of GDP when we took office in 2011. For this year, it is currently projected to be at 1.1% of GDP and it is projected to fall further to 0.4% of GDP next year. Therefore, we are within striking distance of a balanced budget.

Underlining these developments, just last week the fiscal outturn data for 2015 indicated that the excessive deficit has been corrected in a durable manner. The underlying general government deficit for 2015 was 1.3% of GDP. This now means that Ireland should exit the excessive deficit procedure, as expected, later this summer.

This means that from this year the Irish public finances will be subject to the rules of the preventive arm of the Stability and Growth Pact. Our new fiscal anchor will now become the achievement of a structural deficit of 0.5% of GDP.

While the nominal deficit continues to decline, we still have a structural deficit. However, based on our current trajectory and assumptions set out in the stability programme, on a no-policy change basis, we are on track to achieve our medium-term objective, that is, a balanced budget in structural terms by 2018. Under this new fiscal regime, increases in public expenditure will be sustainably financed and safeguarded from dependence on cyclical revenues. These rules are designed to ensure that fiscal policy enhances economic growth and macroeconomic stability.

The benefits accruing from our policy approach in managing the public finances can be seen in the expenditure and revenue trends contained in the stability programme. Over the 2015-2021 period it covers, it is forecast that on the current basis, the economy will grow by more than 35% in nominal terms resulting in more people in work and providing higher living standards. The resulting combined revenues from taxation and appropriations-in-aid are expected to increase by 25% or just under €14.5 billion. Meanwhile gross voted expenditure will increase by just 8.8%, or €4.8 billion, over this horizon. This positive differential between our revenue and expenditure growth rates will underpin our public finance dynamics over the forecast period.

These positive developments are clearly seen when recent debt developments are considered. Our general Government debt-to-GDP ratio peaked at over 120% in 2012 and has declined to 94% at the end of 2015, assisted by strong economic growth and declining deficits. Furthermore, my Department is projecting a debt ratio of 88% of GDP by the end of this year, well below the euro area average. This positive trend is projected to continue on a sharp downward path over the forecast horizon.

The market reaction to our management of the public finances is clear, with the cost of borrowing close to historic lows, reflecting our continued economic and fiscal improvements and assisted by wider developments. Irish bond yield movements are now trading in line with core European sovereign yields, having successfully decoupled from the eurozone periphery, to which we had become linked. In 2011, the yield on a ten-year Irish Government bonds reached 14%. Now, it has remained steady through 2016, trading at below 1%. The NTMA's last auction, on 14 April, of the ten-year bond maturing in 2026 raised €750 million at a yield of 0.82%.

The Government has decided to change the medium-term objective, MTO, to -0.5% of GDP. This is not a policy change, given that a future Government is free to exceed the MTO if it so chooses. In other words, a future Minister for Finance can overachieve the MTO. It is a technical assumption. If there is a change of Government and Minister for Finance, the incoming Minister may decide to beat the MTO and continue with zero as the definition of a balanced budget. I thank Deputy Pearse Doherty for raising the issue with the Taoiseach. This is why it is still a no policy change position in this paper. While the Government has indicated the way it would change policy, it does not tie an incoming Government of different personnel.

The economic outlook is subject to increasing uncertainty. The upcoming referendum on Brexit and a weakening in the international outlook are key risks facing the Irish economy. While many of the risks are external, there are also internal risks. Chief among the internal risks is the risk of losing control of expenditure by adopting policies that we cannot afford. The best way to deal with these risks is through prudent management of the public finances and competitiveness-oriented policies. That is what the Government has been doing. We have come a long way. We are on the right path and we must stay on this path. I thank the Ceann Comhairle for his indulgence and I thank colleagues for allowing me to over-run my time and complete my statement.

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