Michael D'Arcy (Wexford, Fine Gael) | Oireachtas source

I welcome the opportunity to speak today on the summer economic statement, SES. The SES constitutes a key part of our improved budgetary process and provides the basis for fiscal policy formulation in advance of budget 2020. It outlines, in broad terms, the parameters that will frame discussions due to take place at this year's national economic dialogue over the next number of days about options and priorities in advance of October’s budget. It builds on the stability programme update, SPU, published in April and it sets out the Government’s medium-term economic and fiscal strategy as well as the constraints facing the economy over the medium term.

On the short-term outlook, the SPU projects growth of 3.9% of GDP this year as well as a budgetary surplus of 0.2%. Our public finances have been firmly placed on a path to sustainable recovery, with this Government prioritising budgetary policies that are focused on economic stability and growth. Recovery is evident across a range of economic indicators, with the labour market in particular now close to full employment. Notwithstanding the progress to date, there remain a number of significant risks to the outlook which I will touch upon shortly. This is why the Government has been continuing to rebuild our fiscal buffers, to ensure we have capacity to deal with any adverse economic shock that could emerge. This fiscal strategy includes targeting budget surpluses, reducing our public debt and establishing the rainy day fund. In addition, the decision to more than double our level of capital investment from €4.2 billion to €8.6 billion from 2016 to 2021, will mean that the necessary conditions are in place to help boost the growth potential of the economy.

While we have made significant progress in terms of ensuring our recovery, we must be cognisant of the risks to the economic outlook. Since publication of the SPU, risks to our economy have intensified. Domestically, we are facing the possibility of overheating as well as the fiscal vulnerability that stems from the volatility of our corporation tax revenue. On the international front, there is an increasing likelihood of a no-deal Brexit as well as the risks associated with possible changes to the international trade policy environment. Against this backdrop of uncertainty, it is crucial that budgetary policy is centred on building fiscal capacity and supporting economic stability.

On the risks associated with Brexit in particular, this year's SES has been prepared on the basis of two budgetary scenarios, with the first scenario assuming an orderly Brexit and the second assuming a disorderly Brexit. In the event of an orderly Brexit, the appropriate budgetary policy will be to stay within the parameters as set out in the SPU. Any expenditure increases or taxation reductions outside of these parameters would risk further inflating the economy. The SPU projects a surplus of 0.4% of GDP next year. Targeting this surplus will mean increased capacity to absorb the impact of Brexit.

The budget 2020 framework involves a budgetary package of €2.8 billion for 2020. Under the orderly Brexit scenario, with current and capital expenditure commitments amounting to €2.1 billion, which include pre-commitments of €1.9 billion and a capital reserve of up to €0.2 billion being established to accommodate funding requirements for the national broadband plan and the national children’s hospital, this leaves €0.7 billion to be specifically allocated as part of budget 2020. Under the disorderly Brexit scenario, this could involve a headline deficit in the region of -0.5% to -1.5% of GDP for next year, a swing of up to €6 billion. Come September, if a disorderly Brexit is the most likely scenario then a no policy change approach will need to be adopted for budget 2020 in order to ensure the State has the necessary resources at its disposal to meet the impact of this exceptional challenge, while preserving the longer-term sustainability of the public finances. This will also ensure that sustainable improvements in living standards can be maintained.

As set out already, the risks to the public finances arising from the high concentration of corporation tax receipts and from increasing public expenditure on the basis of transitory receipts have been well documented. The Minister for Finance has requested his officials to prepare a paper to examine policy options aimed at ensuring that the concentration of corporation tax receipts and the fiscal rules do not lead to budgetary imbalances. The Minister will publish this paper shortly and will give consideration to some of the policy options in advance of drawing up recommendations for Government in the autumn. Running budgetary surpluses and establishing the rainy day fund are examples of policy measures that are being adopted by this Government to mitigate the vulnerabilities in our public finances. Furthermore, the broadening of the tax base over the last decade has ensured revenue streams into the Exchequer have stabilised to allow for the funding of essential public services.

As we enter this period of increasing economic uncertainty, our priority is to pursue sound, budgetary policies. This means continuing to invest in our public services and, as a small and highly globalised economy, ensuring that we maintain balanced books and continue to reduce debt in order to build resilience against Brexit and any further shocks to our economy.