Patrick O'Donovan (Limerick County, Fine Gael) | Oireachtas source

There are worse places one could be. I am here to discuss the summer economic statement which was agreed by the Government and discussed in Dáil Éireann last week. It sets out the key elements of the Government’s budgetary strategy. Broadly, it revolves around five key areas, namely, ensuring steady and sustainable improvements in living standards; rebuilding fiscal capacity; the need for prioritisation and realism; the need to avoid pro-cyclical fiscal policies and ensuring budgetary policy will focus on ensuring fiscal sustainability.

On the macro-economic position, a suite of economic indicators confirm that the economy is growing at a healthy pace. The Department of Finance is forecasting GDP growth of 5.6 % this year and 4% next year. From 2020 onwards, GDP is expected to grow broadly in line with the potential growth rate of the economy, with positive contributions from both exports and domestic demand. Of course, economic growth is a means to an end, not an end in itself. It enables us to pursue our goals of advancing social progress, promoting inclusivity and providing high quality public services. Importantly, the strong growth performance is paying dividends in the labour market, in which there are now more people at work than ever before. In parallel, the unemployment rate has fallen, from a peak of 16% in early 2012 to 5.3% in May 2018. We are fast approaching full employment. In that context, it is crucial that budgetary policy be managed in a way that will not overheat the economy.

Against that positive backdrop, broadly, we plan to balance the books by running a very small deficit next year of 0.1% of GDP. This reflects the political choices we have made in Project Ireland 2040 and the national development plan to increase capital spending substantially by €1.5 billion or 25% next year, bringing expenditure to in excess of €7 billion. The Government will not adopt taxation and spending measures that will result in a larger deficit than this. It will accommodate a budgetary package of €3.4 billion, of which €2.6 billion has been pre-committed to expenditure measures, leaving €800 million for further allocation. Any unfunded taxation or expenditure measures that go beyond this figure would necessarily involve even more borrowing and result in a subsequent increase in the deficit.

The summer economic statement makes it clear that budgetary policy will be designed to ensure steady and sustainable improvements in living standards underpinned by stable and predictable tax revenue. Incremental and sustainable improvements in public services are always to be preferred over the feast or famine alternative. Expectations have increased, given the remarkable performance of the economy. However, I make it clear that not all demands can be met. In the first instance, expenditure continues to exceed revenue and we are still borrowing to meet the shortfall. If more resources are allocated, the deficit will be even larger. Excessive levels of expenditure in an economy with full employment would be unsustainable.

The Government will prioritise spending that mitigates risk, enhances the resilience of the economy and raises our growth capacity. In that context, it has set out its vision for Ireland in the medium term in Project Ireland 2040. It includes the national development plan and is the blueprint for Ireland’s sustainable development – economically, socially and environmentally – in the future. The national development plan will improve public infrastructure to ensure all can benefit from the fruits of economic growth.

As the Minister for Fiance and Public Expenditure and Reform, Deputy Paschal Donohoe, said, the provision of public services can also be enhanced within existing allocations by reforming the way public services are delivered. That is why the Government has prioritised public sector reforms. By improving management and raising efficiency, through training, technological progress and other means, we can better align inputs with outputs and ensure better value for taxpayers’ money.

Each year central government spends more than €60 billion. I am convinced that scope remains to improve the efficiency with which this sum is allocated. The spending review which will be published in July will be crucial in that regard. It is also vital that we maintain a broad tax base that generates a sustainable revenue stream necessary to fund public services. We cannot build permanent expenditure commitments on revenues that may not be sustainable. That is why the Government is setting aside some of the historically high levels of corporation tax for the purpose of creating the rainy day fund. Our debt position continues to improve, with the general government debt-to-GDP ratio projected to be 66% for the year and declining to 63.5% in 2019. However, it must be acknowledged that the recent evolution of the debt-to-GDP ratio presents an overly benign view of public indebtedness. The debt-to-GDP ratio has decreased only because GDP has increased. Other measures, notably the ratio of debt to modified gross national income, or GNI*, show that while declining, public debt still remains high in Ireland. With a debt-to-GNI* ratio of 100% last year, the focus must be on balancing the books and reducing the nominal debt.

The legacies of the crisis persist, with the total stock of debt amounting to €206 billion this year. This represents approximately €42,000 worth of debt for every man, woman and child, one of the highest levels among OECD countries. It is essential that we start to reduce this burden of debt in order that the economy will be able to withstand adverse developments, if and when they occur.

The application of the fiscal rules has led to a focus on the total amount available, that is, the fiscal space. There are a number of reasons utilisation of the fiscal space is not appropriate in the current circumstances. First, applying the rules fully would involve the adoption of pro-cyclical policies which would not be remotely appropriate to our position in the economic cycle. Second, the elevated debt burden means that the focus must be on balancing the books and reducing nominal debt.

Risks to the global economy are increasingly titled towards the downside. In that context, the priority must be to rebuild fiscal buffers in order that the economy can best absorb economic shocks, if and when they occur. The Government will frame budgetary policy on the basis of what is right for the economy to ensure continued, steady improvements in employment and living standards.That is why the Government is prioritising reducing public debt, establishing the rainy day fund, and avoiding pro-cyclical budgetary policies.

While the latest economic data all point to an economy with considerable momentum, a continuation of robust growth cannot be taken for granted given the increasingly uncertain external environment. The United Kingdom's imminent exit from the European Union, changes in the international corporate tax landscape, and the possibility of disruptions to the global trading system are some of the principal external risks currently facing the economy. The best way to improve the resilience of our small and open economy is to build up our fiscal capacity to respond to these challenges. That is what the summer economic statement sets out and what the Government will continue to do.