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

Today, the Government published its summer economic statement which is, as the House knows, a key element of our reformed budgetary process. Before I outline the key points from this statement, it is appropriate to take stock of where we are now in terms of the economy.

Our economy is now very different from that which prevailed a decade ago when Ireland entered the most acute phase of the financial crisis. It is more diversified. Economic activity is more balanced. Living standards have improved. The public finances have finally returned to surplus.

Unemployment now stands at just 4.5% compared to a peak of 16%. Gross domestic product, or national income growth, of 3.9% is projected for this year and 3.3% for next year.

However, the risks to our economy have self-evidently intensified. There is now a greater likelihood of a no-deal Brexit outcome. A risk of overheating in the domestic economy exists as it closes in on full employment and mounting wage changes. There is the possibility of a deterioration in the international trade policy environment. Finally, as I have acknowledged, there are vulnerabilities in the future in regard to corporation tax revenues.

The key principles underpinning the Government’s economic strategy are, first, a steady and sustainable approach to improving living standards in our country; second, a sustainable budgetary policy; and, finally, with reference to budget 2020, an approach that protects domestic living standards to take account of differing Brexit outcomes.

The Government must formulate the appropriate budgetary policy on the basis of what is right for the economy in order to ensure continued, steady improvements in Irish employment and living standards. As such, our budgetary policy must lean against the wind, first, to try to avoid a scenario where our economy might grow too quickly in the future and, second, at this stage to build up our buffers and economic resilience in order that we can stabilise the economy in the event of shocks.

Against this unique backdrop, the task of framing the budget this October, weeks before the UK is due to leave the EU, will be more challenging than usual. Our obligations to the European Union mean that we must submit a draft budgetary plan to the Commission by the middle of October.

The approach of the summer economic statement is therefore one budget, two scenarios. The economic statement sets out two budgetary scenarios. The first involves an orderly Brexit, while the second involves a disorderly Brexit. Both are indicative and unprecedented levels of uncertainty mean that there are many possible economic outcomes.

Either scenario suggests a careful budgetary stance is needed in preparing for budget 2020. This is in line with the policy advice that has been made available from the IMF, the European Commission, the OECD and the Irish Fiscal Advisory Council.

In the event of an orderly Brexit and given that we are at the top of the economic cycle, the appropriate budgetary policy is to stay inside the parameters outlined by my Department in the stability programme update in April. This involves a budgetary scenario and strategy of €2.8 billion for 2020. In an orderly Brexit scenario, this is consistent with a 0.4% headline surplus as a percentage of national income for next year.

With current and capital expenditure commitments amounting to €1.9 billion, including a planned increase of €700 million in our capital investment, and with the additional commitments that we have - the demographics - to meeting our commitments to public servants, and an expenditure reserve of up to €200 million being established to accommodate funding requirements for the national broadband plan and the national children’s hospital, this leaves €700 million to be specifically allocated as part of this budget.

Over the medium term, the strategy envisaged under this scenario would see an improving headline surplus, with expenditure growing below the projected growth in the economy. This is appropriate given the uncertainties arising in the external environment and the current position of the economic cycle.

It goes without saying that a disorderly Brexit will put pressure on the public finances and presents a clear and present challenge to domestic living standards. Under a disorderly Brexit scenario, this could involve a headline deficit in the region of 0.5% to 1.5% of national income for next year, depending on the magnitude of the economic shock.

Under a disorderly Brexit scenario, in addition to the strategy outlined for the orderly scenario, a disorderly response would consist of the following measures. First, by allowing our social welfare and tax systems to provide counter-cyclical support for our citizens, we would ensure that for those who found themselves suddenly without work or with lower incomes we would have the resources in place to provide the supports back to them through our social welfare systems in particular. Second, there would be temporary, highly targeted and meaningful support for the sectors most affected.

In September, the Government will decide which scenario will form the basis for budget 2020. The approach being proposed is the correct one to ensure on the one hand that we do not generate further inflationary pressures within the economy and, on the other, to build up appropriate resources in order that budgetary policy can support the economy in the event of a disorderly Brexit.

By taking these decisions now, it will help with the choices of the future. For example, it would allow continued support for our national development plan and allow us to maintain and improve public services in the future.

Budgetary measures must be financed by revenue streams that are sustainable into the future. I have previously flagged the risk arising from this, and this was one of the drivers behind the decision on the VAT rate for the hospitality and services sector last year.

I have asked my officials to develop proposals to manage windfall corporation tax receipts to ensure the sustainability of the public finances and to ensure that the fiscal rules do not contribute to budgetary imbalances. I will publish a discussion paper on this topic in the coming week. I will also publish and build on a commitment in the summer economic statement to examine a process the Department of Finance will put in place to establish the sustainability of corporation tax receipts into the medium term, conscious of the work that is under way in the OECD, with the objective of completing the work by March.

The rainy day fund is another policy response to mitigate over-reliance on revenue over-shoots, including corporation tax receipts. In addition to the rainy day fund, the best solution to an excessive reliance on any tax head, including corporation tax, is to run budgetary surpluses. This year a surplus of 0.2% of national income is in prospect with a further improvement next year to a surplus of 0.4% of national income.

The economy is in good shape but we face uncertain times. Now is the time to look at the decisions we can make to ready ourselves for what the end of 2019 and 2020 might bring for our economy, country and society for all on our island. We have important choices to make and we will have to frame this budget, even in an uncertain time, with more of an eye to the future. I look forward to working with the Dáil to frame such a budget and see it pass on 8 October.

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