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

The Government published its annual summer economic statement yesterday. It outlines the broad parameters that will underpin discussions on our economic and fiscal policy over the medium term and the main pillars of this approach. It revolves around six key principles: ensuring sound and sustainable public finances; managing public expenditure carefully; targeted increases in investment; a tax system that is growth friendly and fair; ensuring inclusive growth; and facilitating access to SMEs. The statement also provides an updated assessment of the fiscal space for next year, estimated at €1.2 billion, which is consistent with balancing with our books next year. It provides my best assessment of the framework for discussions over the coming months on budget 2018.

On economic development, the outlook in the statement is set out in the stability programme update. I am greatly encouraged by the pace of expansion, with the preliminary estimate for growth in 2016 at 5.2%. On Friday, the Central Statistics Office will publish the outturn data for last year and the preliminary data for the first quarter of this year. The Department will then update its forecasts in advance of the budget, as is the norm. Growth is now increasingly driven by domestic factors, following an initially export-led recovery as consumer and business confidence recovers. This is important as growth in these areas is jobs and tax rich. The Department of Finance forecasts growth domestic product growth of 4.3% this year and 3.7% next year. From 2019 onwards, gross domestic product is expected to grow broadly in line with the potential growth rate of the economy, with positive contributions from export and domestic demand. In this context, it should be noted that gross domestic product is over-stated as a measure of living standards in the case of the Irish economy. Notwithstanding this point, economic expansion has been very strong in recent years. This growth while vital is a means to an end and not an end in itself. Growth allows us to raise living standards, advance social progress, promote inclusivity and provide better public services.

On the jobs market, we have now had 18 successive quarters of employment growth, representing an increase of over 230,000 jobs since the depth of the crisis. For every ten jobs lost, seven have been recovered. The latest data show employment growth accelerated to 3.5% year-on-year in the first quarter of 2017, representing the addition of almost 69,000 jobs. The number of people in employment has exceeded the 2 million mark since the second quarter of 2016. The unemployment rate has fallen. This has been broad based and the return to positive net migration is another sign of the positive momentum in the labour market. By the end of this decade, there will be more people at work in Ireland than ever before. It is important, in these circumstances, that budgetary policy leans against the wind and does not in the future contribute to overheating the economy.

The central element of the conduct of fiscal policy is that we remain on course to achieve our medium-term budgetary objective in 2018. Sustainable public finances are essential for economic growth. We must ensure a sensible budgetary policy in the future. The fiscal architecture under the Stability and Growth Pact provides the framework to facilitate the conduct of fiscal policy in a way that is sensible. Recent developments in the public finances show that, following a very difficult period, the public finances are continuing to improve. General Government deficit targets have been consistently over-achieved to date. This strategy has been implemented through a careful approach to fiscal and expenditure policy. The latest Exchequer returns for 2017 are very positive. Following a slightly disappointing performance in the first quarter of 2017, tax receipts have stabilised and cumulative receipts deliver a 4% improvement in comparison with a year ago. We are now well positioned to deliver an overall tax target of €50.6 billion, the highest in the State's history.

The pre-crisis period saw very large increases in expenditure. While these increases helped address important deficits and provided the resources for significant improvements, a difficult consolidation period followed and over the past three years budgetary policy in relation to expenditure has been careful and sensible, averaging 3% per annum below the nominal growth in the economy. This approach is necessary to avoid the need for future intolerable cutbacks that can be disruptive and damaging to our society. We must make choices. I will shortly publish two documents, the comprehensive spending review and the mid-year expenditure report, which will underpin this approach. Total voted expenditure for next year will be approximately €60 billion. The spending review must examine how we can make better progress in careful use of resources.

Investing in capital infrastructure is clearly a important way in which we will do this. Capital spending will be up 17% next year, 24% in 2019 and 85% in 2021 relative to 2016 levels. We will follow this work by the publication of a ten-year capital plan to lay out the clear choices in mapping out how Government intends to ensure that our public capital infrastructure will be of good quality for the future.

Turning to the fiscal outlook, a general Government deficit of 0.4% of GDP is projected for this year. I confirm that we will achieve our medium-term budgetary objective, which is a structural deficit of 0.5% of GDP next year, but it is my clear view that in the future we need to focus on our fiscal stance, and not just on our fiscal space. We have to ensure that budgetary policy is appropriate in supporting sound macroeconomic conditions and helping our economy grow in the long run.

We must be conscious of our overall debt levels that, while below the European Union average, are still of a level that could cause difficulty in the future and need to be managed carefully. To strike a new balance in how we manage this, I have decided to amend our previous debt-to-national-income ratio of 45% of GDP to 55% of GDP to deliver additional medium-term flexibility to look at how we can increase capital expenditure that would increase the ability of the economy to grow in a sustainable manner in the future. When we have completed significant projects, the Government can recommit and re-target a longer-term objective debt ratio of 45%. I am clear that the medium-term approach of 55% is the sensible and sustainable approach for our economy.

We must be conscious of the external environment in which Ireland operates. A rainy day fund was announced by the Government as part of the summer economic statement 2016. In this context, the Government will set up and maintain this rainy day fund, but with an annual contribution of €500 million per annum. This is half the size of the contribution originally envisaged, with the difference being used to finance capital investment.

The additional allocations will be subject to an assessment of the capacity of the economy to absorb the additional funding at each point in time. It is clear that the volatility of the economy can be pronounced. The rainy day fund will provide a sensible counter-cyclical buffer, with annual transfers from the Exchequer to the rainy day fund helping to mitigate against the ups and downs of the economic cycle. The Government will also reassess the role of the Ireland Strategic Investment Fund, ISIF, which was established at a time when private investment was constrained, and consider whether an element of the ISIF should be reoriented towards complementing the rainy day fund, as I have just described.

Turning to the issue of fiscal space, the statement sets out that the estimated indicative net fiscal space over the period 2017 to 2021, inclusive, is over €11.2 billion. I emphasise that the net fiscal space is the amount that remains after providing for pre-committed policies in the area of capital expenditure dealing with the consequences of demographics for our society. For next year, my Department estimates that net fiscal space amounting to €1.2 billion would be consistent with delivering a balanced budget. Of this, approximately €700 million will be absorbed by the full-year cost of measures implemented this year. Without any other change in our policies, this would leave just over €500 million for new measures. This leads back to the earlier point I made that, at overall public spending of over €60 billion next year, it is now crucial that we focus on the totality of expenditure and not just incremental changes.

As our recovery is now entering a more mature phase, we must broaden the definition of economic success for the future. We must recognise that success will be incremental, and that additional and existing resources we are providing are already yielding benefits. The results will not be instant, but we must keep at reform and at providing additional resources.

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