Michelle Mulherin (Fine Gael)
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I welcome the Minister for Finance, Deputy Noonan, to the House.

Michael Noonan (Limerick City, Fine Gael)
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I welcome the opportunity to be here to discuss the summer economic statement.

The statement is an important part of the budgetary reform process. It sets out the framework for economic and fiscal discussions on budget 2017 and gives us the opportunity to discuss the budgetary strategy over the medium term. It frames the debate around our priorities and allows us to examine how best to use the fiscal space available in achieving our objectives.

The summer economic statementforms part of the new budgetary reform framework and its discussion here today is a key component of the process of enhanced engagement with the Oireachtas on matters of budgetary scrutiny.

The national economic dialogue is a further pillar of the budgetary framework which provided a forum for an open and inclusive discussion on competing priorities and economic perspectives in advance of budget 2017. This year's event was especially beneficial in facilitating a constructive dialogue on how to foster growth towards a more just and inclusive society. The positive discussions held at this event will be reflected upon in the coming months.

The third element of the process involved yesterday's publication of a mid-year expenditure report. Prepared by the Department of Public Expenditure and Reform, it sets out the baseline for departmental expenditure and provides a starting point for the examination of budgetary priorities by the Oireachtas. The report provides the basis for ex anteinput and feedback from the Oireachtas on budgetary proposals and gives Oireachtas committees the opportunity to engage with Ministers on sectoral spending priorities.

Economic recovery is now firmly established. We have seen the contribution from domestic factors continue to strengthen as the recovery of both consumer and business confidence advances. This is very encouraging as domestic sectors are both jobs and tax rich. Earlier this week, the CSO published the national income and expenditure results for 2015. These figures suggests that the economy grew by 26% last year. The make-up of that statistic requires a lot of qualification and explanation. The upward revision is the result of reclassifications related to a number of exceptional one-off factors. These reclassifications do not reflect changes to the real economy, nor do they reflect the activity levels we are seeing on the ground. On an underlying basis, the economy continues to perform strongly, as evidenced by developments in the labour market indicators and taxation receipts. Data from the CSO on net national income, which includes net factor income from abroad but strips out now considerably elevated depreciation levels on account of Tuesday’s revisions, suggest the economy grew by a more plausible 6.5% in 2015. This is arguably a more reasonable figure corresponding to actual activity levels occurring within the State.

For this year, my Department’s latest projections, as published in the summer economic statement are for GDP growth of around 5% this year and 4% for 2017. This more plausible outlook is the basis on which we will undertake future policy decisions. Forecasts will be updated in the context of budget 2017 to reflect all relevant developments in the interim, including any impacts arising as a result of the British referendum outcome and revisions to the components of GDP growth seen in the context of data from the CSO this week. I should also emphasise that economic growth is not an end in itself; rather it is the means through which a social recovery can be achieved. Growth provides the resources necessary to advance social progress, promote inclusivity and provide high quality public services to all citizens. That is why growth matters.

Economic recovery is perhaps most clearly evident in the labour market where we have now had 14 successive quarters of employment growth, representing an increase of almost 160,000 jobs since the low point of the crisis. Importantly, the recovery remains broad based with gains recorded in virtually all economic sectors reported by the CSO, with the construction sector showing particularly strong momentum. In parallel, the unemployment rate fell to 7.8% in June, a decrease on the peak of over 15% in early 2012. Given the distortions in the GDP data, I view employment and unemployment data as the best indicators of current trends in the economy. In the short run, we expect labour market dynamics to continue to strengthen. My Department is projecting that an additional 50,000 jobs will be created this year. As a result, employment is set to exceed the 2 million mark this year for the first time since 2008. These figures are a testament to the continued success of the Government's Action Plan for Jobs, which will help ensure that we reach full employment of 2.1 million by 2018. Turning to fiscal developments, following a very difficult period, the public finances are continuing to move in the right direction. The budgetary position has been placed on a safe and sustainable path. For 2015, revised figures published by the CSO on Wednesday show a headline deficit of 1.8% of GDP. This is some 0.5% of GDP better than the data indicated at the time of the summer economic statement. These data revisions will not, however, impact the amount of fiscal space available in 2017. Based on preliminary GDP figures at the time of the summer economic statement, the deficit was estimated at 2.3% of GDP. Accordingly, we have now formally exited the excessive deficit procedure by an even stronger significant margin than was previously estimated.

Under the preventative arm of the European fiscal rules, Ireland will have room for budgetary manoeuvre to accommodate increases in Government expenditure and tax reductions in a prudent and sustainable manner. The summer economic statement allows us to debate our priorities and to examine how we can optimise the use of the fiscal space. Positive developments are also evident in the debt trajectory. The general Government debt to GDP ratio peaked at over 120% of GDP in 2012. Figures set out in the summer economic statement projected a debt ratio of 88% of GDP for this year, which is below the euro area average, with the debt ratio set to decline further to 72% by 2021.

I also am greatly encouraged by the latest Exchequer returns which provide a real-time indication of the budgetary position. Tax revenue collected in the first half of this year increased by over 9%, or €1.9 billion, relative to the same period last year. Taxes are some 3.5%, or €0.7 billion, above profile. Importantly, with the exception of VAT, all tax categories are on or above profile, pointing to the sustainability of the recovery of the public finances.

Having successfully exited the excessive deficit procedure, from this year onwards the Irish public finances will be subject to the rules of the preventative arm of the Stability and Growth Pact. We will strive to achieve our medium-term fiscal objective, defined by a structural deficit of 0.5% of GDP. Based on the revised trajectory and assumptions set out in the summer economic statement, we expect to achieve this medium-term objective by 2018. The market reaction to our management of the public finances is clear, with the cost of borrowing close to historic lows reflecting our continued economic and fiscal improvements and assisted by wider developments.

With regard to fiscal space, this document sets out that the estimated indicative fiscal space over the period 2017 to 2021 is in the region of €11.3 billion. This is the net fiscal space that remains after providing for pre-committed policies such as demographics, the Lansdowne Road agreement and capital plans. For next year, it is currently estimated that there will be just shy of €1 billion available for additional expenditure increases and taxation reductions. This amount has already been locked in on the basis of inputs provided by the European Commission. However, for the remaining years, as stated in the document, any estimate of the fiscal space is subject to revision as macro-economic conditions change and new information becomes available. Estimates of the available fiscal space beyond 2017 will be updated in the context of budget 2017 to reflect all relevant developments in the interim, including revised data published by the CSO and impacts arising in the context of the outcomes of the UK referendum. At this point, it is not expected that these events will impact the fiscal space available for next year.

The fiscal space will be distributed in line with the programme for a partnership Government, which is a split of at least 2:1 between public spending increases and tax reductions. On taxation measures, the programme for a partnership Government contains a commitment to ask the Oireachtas to continue the process of phasing out the universal social charge as part of a wider medium-term reform of income tax.

One of the lessons learned from the crisis is that as a small and open economy, Ireland’s public finances are vulnerable to swings in economic conditions. As a prudent and counter-cyclical budgetary measure, I am pleased to state that a contingency fund will be established and it will be known as a rainy day fund. The summer economic statement outlines how, after achieving our medium-term objective in 2018, some €1 billion will be remitted to the fund each year from 2019 onwards. This can be used to support activity and employment if necessary. My Department will bring forward proposals in due course for consultation with the Oireachtas on the operation of this fund, the circumstances in which it will be deployed and whether other sources of funding can be used to help capitalise it.

While the short-term prospects are positive, it is also clear that we face increased risks, not least those related to the potential economic impacts for Ireland and the wider European economy resulting from the UK voting to leave the European Union. These impacts will be kept carefully under review. Revised projections in the context of budget 2017 will include updated estimates of economic growth, the public finances and the fiscal space taking account of developments up to that time. As a small open economy, the best way to protect against risks is to maintain an appropriate fiscal stance and adopt competitiveness-oriented policies. That is what the Government will continue to do. I wish to emphasise that the significant upward revision to last year’s GDP figures will not alter the basis on which we conduct medium-term policy decisions. They are not expected to boost the ability of the economy to sustainably finance future spending decisions. The fiscal rules are intuitive and are designed to ensure that policy choices are underpinned by a robust ability to finance those choices. It is important that we maintain the hard-won progress to date on the path to recovery. I thank the Seanadóirí very much for their kind attention.