Dáil debates

Thursday, 14 July 2022

Summer Economic Statement: Statements

 

1:20 pm

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail) | Oireachtas source

This debate provides an important opportunity to consider the Government’s fiscal strategy for budget 2023, as set out in the summer economic statement. This morning I was glad to have the opportunity, alongside the Minister for Finance, Deputy Donohoe, to engage with colleagues at a meeting of the Committee on Budgetary Oversight. The meeting gave us a good opportunity to tease out in more detail some of the issues involved.

The summer economic statement is an important part of our annual budgetary timetable. It sets out our fiscal and budgetary strategy for the year ahead, outlining the resources available in the context of budget 2023. Back in 2020, when the Government took office, the most pressing issue was tackling the pandemic and ensuring lives and livelihoods would be protected insofar as possible. The scale of the Government intervention has been truly unprecedented. Some €37 billion in direct public expenditure supports has been made available to fight Covid and its effects. This investment was complemented by a range of further taxation and liquidity measures.

Assessing the economy today, it is clear the Government made the right call in supporting incomes, jobs and businesses. As we emerge from the pandemic, our economy and labour market have shown remarkable resilience. At the end of June, the monthly unemployment rate stood at 4.8%. At the end of June last year, the Covid-adjusted unemployment rate was almost 16%. In the first quarter of this year, more than 2.5 million people were in employment. This is an all-time high in the history of our country and far exceeds pre-pandemic levels. It clearly demonstrates the scale of the recovery in the labour market, which was supported by the significant income and employment supports implemented by the Government over the course of the pandemic.

Businesses, too, have shown strong resilience, as the many Covid supports, such as the employment wage subsidy scheme and Covid restrictions support scheme, have been unwound. The economic rebound Ireland has achieved has not been the experience universally. Ireland's record, by comparison with that of our peers in terms of health outcomes and the strength of our economy, indicates Ireland has done remarkably well. We owe a considerable debt of gratitude to the public and private sector workers and the thousands of volunteers around our country who made this a reality.

While the economy has rebounded strongly following the pandemic, the global economic outlook has changed significantly. A complete cut-off of Russian gas to continental Europe is now a possibility, making the European economy especially vulnerable. This impact can be seen in the value of the euro, which has now reached parity with the dollar for the first time since 2002. For Ireland, as an exporting country, a slowdown in the European economy will have an impact on prospects.

As a consequence of the intervention during the pandemic, Irish Government debt has now reached nearly €0.25 trillion, representing €47,250 for each person in the country.

As the Minister for Finance has said on a number of occasions, the era of zero- or low-cost borrowing has come to an end. These are some of the many challenges that we, as a Government, need to consider when framing the budget 2023 package.

Domestic and international inflationary pressures are foremost among those challenges. Supply issues that developed over the past two years have contributed to price increases. This has been exacerbated by the conflict in Ukraine and the resultant impact on energy prices. We are acutely aware of the impact of these price pressures on households, families and businesses. We saw further evidence of that today, with the official measure of inflation now being at 9.1% annually, which is the highest level in almost four decades.

A range of expenditure measures that assist with the impact of cost-of-living pressures were included in this year's budget. They included €1.2 billion in expenditure across a range of sectors, with increases in social protection weekly rates, health affordability measures and childcare supports. They were complemented by a significant tax package. I recognise that the economic context has changed considerably since the last budget and Government and fiscal policy has been responsive to this. More than €500 million in cost-of-living spending measures have been introduced in the current year. This included an electricity credit of €200, which benefited more than 2 million households. Further targeted measures in respect of the fuel allowance, reductions in the drugs payment scheme threshold, reductions in public transport fares generally with an additional reduction for young people, and improvements in the working family payment have also been announced. In addition, the Government introduced a temporary reduction in the excise duties charged on petrol, diesel and marked gas oil and reduced the VAT rate on the supply of gas and electricity. We have to continue to fund these measures.

Last week, acknowledging the strain many families are facing with back-to-school costs, we announced a further package, including the abolition of school transport fees for the 2022-23 school year, a €100 increase in the back-to-school clothing and footwear allowance and the expansion of the school meals programme to the newly designated DEIS schools, benefiting 60,000 children. The Government is committed to continuing to help our people with the challenge presented by the current level of inflation. This context has framed our preparations for this summer economic statement and shaped today's debate.

Last year, the medium-term expenditure strategy set out the dual objective of delivering sustainable expenditure over the medium term by setting the core expenditure growth rate at sustainable levels and providing the necessary resources for ongoing improvements in public services. The strategy was developed against the backdrop of an average of 2% inflation over the past 20 years. The strategy must take account of the nature of the economic shocks we are experiencing. These shocks are exceptional and globally driven. It is clear that to protect public services, a short-term adjustment to the expenditure strategy is required for 2023. This is an important element of our budgetary plans. In framing the summer economic statement and budget parameters, we are seeking to balance the need to protect the real value of public services with policy measures that do not add to inflationary pressures. While the Government cannot absorb the full impact of the current inflationary shock, we have taken concrete action to support households, protect public services and continue invest in our critical public infrastructure. We must and will continue to do this through an adjustment to the expenditure strategy.

Budget 2023 will be a cost-of-living budget. We will follow up on the measures introduced this year and as part of the budget 2022. The summer economic statement sets out the key parameters for budget 2023. It outlines a total expenditure package of €90.3 billion for next year. This funding will deliver core services and help businesses and the economy to deal with the adverse impacts of Brexit, provide ongoing Covid supports, which will continue to be necessary, and provide for the humanitarian assistance of refugees arriving from Ukraine through additional non-core funding. This upward adjustment will result in an increased overall budgetary package of €6.7 billion, comprising approximately €5.7 billion in additional expenditure and a further €1 billion for tax measures. Some €400 million of this spending will allow for the early implementation of measures in the current year while €5.3 billion will be provided for the 2023 budgetary package.

Compared with the position set out in budget 2022 last October, this package will see core spending increase by 6% this year and 6.5% next year, meaning an additional €1.7 billion in resources will be available compared to the stability programme update we published back in April. This is a significant but warranted increase in the circumstances.

Next year, €85.8 billion in core expenditure will be provided for both the ongoing support of, and improvement in, public services and additional public investment. Approximately 3% of the core current expenditure base will be available to meet existing levels of service costs next year compared with the current year. This includes meeting public service pay commitments that have been made in the Building Momentum agreement and funding for demographic developments, including supporting a growing population and the changing profile of our citizens. It also includes meeting costs from the full year impact of measures from budget 2022 that are being implemented on a phased basis, such as the changes to the childcare scheme later this year and the changes to the Student Universal Support Ireland, SUSI, grant system that will kick in in the autumn. Funding has to be provided next year for such measures. There will be a €800 million increase in capital expenditure in line with the ceiling set out in the national development plan, NDP. Overall core capital investment will reach some €11.7 billion next year, with an additional €200 million as part of the national recovery and resilience plan. This represents 7% increase, in line with the NDP.

This funding will provide for important investment across all sectors, including housing, health, education, transport and also to tackle climate change. There is also likely to be some carryover from any unspent element of the capital budget in the current year. All of this means that €2.7 billion will be available for new current expenditure measures, of which approximately €400 million will take effect in the current year. This must accommodate priorities across a wide range of Government policy areas, including the public service pay bill, which is a significant driver of current expenditure, amounting to close to a third of core current expenditure each year. Spending on social protection accounts for a further third of core current spending. It must also provide for Government commitments on housing, climate change and health. Core spending will continue to provide the funding required to support and provide improvements in public services, while investing in our capital infrastructure around the country. As the Minister for Finance said, we plan to introduce a number of one-off measures for implementation in 2022. Those are being developed by Government and an announcement on this will be made on budget day in September.

Next year, the Government will provide €4.5 billion in non-core spending for temporary measures. This follows the provision of €37 billion since March 2020 in non-core funding, mostly for Covid-related spending. This reflects the Governments two-pronged approach to fiscal policy and expenditure management and is a vital tool to ensure responsive fiscal policy to significant external shocks. This funding will provide for the continuation of important Covid measures in the health service, the provision of supports to help counter the negative impacts of Brexit through the Brexit Adjustment Reserve fund and the continued provision of humanitarian supports for refugees arriving from Ukraine.

The revised strategy provides for a 6.5% increase in core spending for next year. This will be a considerable increase in funding and resources for the budget but it must accommodate a range of priorities. It can have a significant impact on the lives of our people but this requires a focus on the design of policy and it requires prioritisation. We cannot meet all the competing demands on public expenditure, but we can provide support to those most vulnerable and continue to enhance our public services. This will require decisions to be made across government and prioritisation of demands. A range of expenditure reforms have a role to play in supporting this process and ensuring that spending delivers efficiency, effectiveness and value for money.

These reforms include the ongoing spending reviews, performance budgeting and the use of Irish Government Economic and Evaluation Service resources across government to provide key information and critical insights to inform decisions. In that context, my Department will publish the mid-year expenditure report this month. This is an important document setting out a clear and detailed view of the baseline expenditure position in advance of the upcoming Estimates process.

While we undoubtedly face many new challenges, we have seen considerable improvements in the fiscal position of the State and we recognise the extraordinary resilience of the people and of our economy. This will allow us to respond to these challenges in a manner that is affordable and fiscally sustainable while protecting public services, improving outcomes and investing in our future, and above all else, recognising that we do need to respond to the significant cost-of-living pressures so many people are facing at this time.

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