Dáil debates

Thursday, 3 October 2013

Ceisteanna - Questions - Priority Questions

Budget 2014 Issues

4:30 pm

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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1. To ask the Minister for Finance the approximate adjustment required to achieve a deficit of below 5.1% in 2014; his views on whether the recent GDP figures which show a continued weak domestic economy support the case for a moderation of the planned adjustment in budget 2014; and if he will make a statement on the matter. [41626/13]

Photo of Michael NoonanMichael Noonan (Limerick City, Fine Gael)
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The deficit target of 5.1% of GDP to which the Deputy refers is the maximum general government deficit in 2014 which the Government is required to deliver under the excessive deficit procedure in the Stability and Growth Pact. This is part of an agreed consolidation path which Ireland will follow in order to return the public finances to sustainability. The European Commission, the International Monetary Fund, the European Central Bank and most economic commentators have acknowledged that Ireland has met all of its targets to date and that substantial progress has been made in setting the public finances and the economy back on the road to good health.

However, while it is right to recognise progress, it should be remembered that, regardless of commitments we have made to our international partners, these deficits represent the annual shortfall between what the State collects in revenue and what it spends. Every year in which there is a deficit the Government must borrow money, adding to the quantum of outstanding debt. This borrowing attracts additional interest and in turn this adds to the national debt. Interest payments divert scarce resources from areas where they are badly needed. It must be evident to everyone that this situation cannot persist in the longer term and that every effort must be made to alleviate this burden on the Irish people. This is the primary reason the Government is taking action to close the deficit but in such a way that seeks to find a balance between the need to tackle the deficit and the need to promote growth in the economy.

Last April in the stability programme update, I set out, on a purely technical basis, that consolidation of €3.1 billion would result in a general government deficit of 4.3% of GDP in 2014. That estimate was based on the latest available data at the time. Since then, we have received more up to date information, most recently the quarterly national accounts from the Central Statistics Office and the end of September Exchequer returns published yesterday. My officials are currently analysing these data for incorporation into the budgetary forecasts. The work is well under way and I will not be drawn into speculation on the composition of the budget at this time. However, the Deputy may rest assured that budget 2014 will include the required combination of revenue raising and expenditure reduction measures to ensure that Ireland continues on the road to repairing its public finances while providing an environment suitable to allow economic recovery to continue. This will be done in such a way as to spread the burden as equitably as possible.

Additional information not given on the floor of the House

Turning to your question on recent economic data, while activity in the domestic economy remains at muted levels, I think it is fair to say there is growing evidence of stabilisation in recent months. Personal consumption increased by 0.7% in seasonally-adjusted terms in the second quarter, and more high frequency data point to further growth in the third quarter. Core retail sales, excluding motor trade, have increased in year-on-year terms in each of the past four months. While the impact of the new motor registration regime impacted on headline retail sales in the first half of the year, strong growth in car sales in July and August was reflected in a 3.7% increase in the July-August headline retail sales when compared with the same period in 2012.

Recent labour market developments should also support more robust personal consumption in the second half of the year. Employment has now increased in seasonally adjusted terms in each of the last four quarters, with employment increasing by 1.8 % in year-on-year terms in the second quarter, representing an additional 33,800 jobs over the year. The Government is under no illusions about the importance of a recovery in the domestic economy to sustain the impressive momentum in the labour market of late and will continue to support the domestic economy where fiscal space allows.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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I thank the Minister for his response. There were two parts to the question I tabled, the first of which is an attempt to establish the nominal adjustment required in the budget on 15 October to deliver a deficit of 5.1%. As the Minister indicated, we are still going by the April stability programme update numbers. Given that the Minister now has the quarter 2 economic data and the end of September Exchequer returns, can the Minister confirm the adjustment required to achieve a deficit of 5.1%? I am not asking the Minister what adjustment he will propose.

The second part of the question concerns the moderation of the adjustment. There is a strong case for a modest moderation of the adjustment. I am not suggesting an adjustment of a few hundred million euro would make an enormous difference to the overall economy but it could make a significant difference to those affected by cuts in social protection, health, education and other areas. I am particularly concerned by the spending side. Spending cuts between €1.8 billion and €2 billion are deep and will hurt people severely. The Minister will take that into account but perhaps he can come back on the issue of what adjustment would deliver a deficit of 5.1% based on the current available data.

Photo of Michael NoonanMichael Noonan (Limerick City, Fine Gael)
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I do not have the figure yet because my officials are still crunching the numbers. In April, the technical exercise showed that an adjustment of €3.1 billion brings us down to 4.3%. The situation deteriorated after that, when the CSO revised downwards the GDP estimate for 2012. The denominator became smaller so the arithmetic drove the deficit up. There was low growth in the first quarter but then it improved in the second quarter data. The revenue figures published yesterday are consistent with that third quarter growth.

We are working our way through it. A consolidation of €3.1 billion would get one below 5.1%. I saw a letter I received from Deputy McGrath just before I came to the Chamber. I will see what I can do to provide him with some kind of ready reckoner to make it easier for him to make the adjustments when he hears what we announce in the budget. I will provide the same data to other Opposition spokespersons.

4:40 pm

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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I thank the Minister. That would be very helpful in order to allow us to finalise our own proposals which we will submit to the Minister in the coming days. There are a lot of moving parts and without access to such critical information we would have to take a guess at what level of adjustment is required to achieve the different deficit levels.

The Minister indicated yesterday that he would consider an adjustment of somewhat less than €3.1 billion. Is he minded to bring in an adjustment that delivers the 5.1% or is he minded to send a strong signal to the markets by aiming for a deficit below 5.1%? What factors is the Minister taking into account in setting the overall adjustment figure? How important is it to come in below 5.1%, or on 5.1%, and to what extent will he be driven by the composition of the budget? The most important issue is the composition from a tax side and from an expenditure side and the impact the specific individual measures will have on people who rely on essential public services and those who are paying taxes.

Photo of Michael NoonanMichael Noonan (Limerick City, Fine Gael)
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The target we must achieve is at least 5.1% to be operating in accordance with the programme. For reasons of market sentiment it is probably important to beat the target. At present, without having the full data available to me, I hope to bring in a deficit in the high fours. I think that would be sufficient to give the kind of market confidence we need on exiting. They will also be looking at what is implicit in the programme, namely, that we run a primary surplus in 2014. I hope that if one strips out interest rate payments we will get our deficit either into balance or just on the plus side so that we would have a primary surplus because that would be a very strong signal as well.

While there are targets implicit in the level of consolidation, it is more of a means to an end than a target. The targets are the deficit percentage and the primary surplus. I hope we will achieve both but there is final number crunching to be done before I could be certain of that and then there is the composition of the consolidation, as Deputy McGrath pointed out, in terms of what expenditure cutbacks and tax increases will be put in place and the magnitude of both when combined.