Summer Economic Statement
Paschal Donohoe TD, Minister for Finance, Public Expenditure and Reform
13 July 2017
Check Against Delivery
A Cheann Comhairle,
As you know, the Government published its annual Summer Economic Statement – the SES - yesterday.
The Statement outlines the broad parameters that will underpin discussions of economic and fiscal policy over the medium term and the key elements of the Government’s economic strategy.
This strategy revolves around six key pillars:
•Ensuring sound and sustainable public finances;
•Managing public expenditure to ensure maximum return on taxpayers resources;
•Targeted increases in public investment;
•Reforming the tax system to ensure it is growth-friendly;
•Ensuring inclusive growth;
•Facilitating access to finance, especially for SME’s.
The Statement also provides an updated assessment of the fiscal space for next year – this is estimated at €1.2 billion, consistent with ‘balancing the books’ next year.
This sets the framework for discussions on Budget 2018 over the coming months.
ECONOMIC DEVELOPMENTS AND OUTLOOK
Turning firstly to economic developments, the economic outlook in the Statement is as set out in the Stability Programme Update.
I am greatly encouraged by the pace of expansion with the preliminary estimate for growth in 2016 at 5.2 per cent.
The Central Statistics Office will publish the outturn data for last year and preliminary data for the first quarter of this year on Friday and the Department of Finance will update its forecasts in advance of the Budget, as is the norm.
Growth is now increasingly driven by domestic factors, following an initially export led recovery, as both consumer and business confidence continue to recover.
This is very important, as the domestic sectors are both jobs and tax rich.
My Department is forecasting GDP growth of 4.3 per cent this year and 3.7 per cent next year.
From 2019 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.
In this context, I should note that GDP is clearly overstated as a measure of living standards in the case of the Irish economy.
Notwithstanding these well-known limitations, it is clear that the economic expansion has been very strong in recent years.
Of course, economic growth is a means to an end and not an end in itself.
Growth is important not only to raise living standards, but as a means of advancing social progress, promoting inclusivity and providing high quality public services.
A LABOUR MARKET THAT IS GROWING SUSTAINABLY
Turning to the jobs market, we have now had eighteen successive quarters of employment growth representing an increase of over 230,000 jobs since the low-point of the crisis.
As a result, for every 10 jobs lost during the recession, 7 have now been recovered.
Many in this House said this would never happen and indeed, some still deny it has happened at all.
Nevertheless, the latest data show employment growth accelerated to 3.5 per cent year-on-year in the first quarter of 2017, representing the addition of almost 69,000 jobs.
Importantly, these increases are driven entirely by gains in full-time employment.
The number of people in employment has exceeded the 2 million mark since the second quarter of 2016 and is now at its highest level since the end of 2008.
Crucially, the improvement in employment is more balanced than before, with increases in a number of sectors, rather than being concentrated in construction as happened previously.
In parallel, the unemployment rate has fallen to 6.3 per cent in June – down from a peak of over 15 per cent in early 2012.
This has also been broad based – with significant declines in short-term, long-term and youth unemployment in recent years.
The return to positive net migration last year is another clear sign of the positive momentum in the labour market.
This improvement is set to continue.
An additional 55,000 jobs will be created this year while the unemployment rate is expected to fall below 6 per cent by year-end.
By the end of this decade there will be more people at work in Ireland than ever before.
It is important, in these circumstances, that budgetary policy ‘leans against the wind’ and does not contribute to overheating the economy.
The central element of the conduct of fiscal policy is that we remain on course to achieve our medium term budgetary objective in 2018, and to maintain this position thereafter.
Sustainable public finances are essential for economic growth and prosperity and the Government will not repeat the mistakes of the past.
The fiscal architecture under the Stability and Growth Pact provides the institutional framework to facilitate the conduct of domestic fiscal policy in a sensible and sustainable manner.
While scope remains to improve the functioning of the fiscal rules, they provide a good framework aimed to ensure sustainable improvements in living standards for all our citizens.
Recent developments in the public finances show that, following a very difficult period, the public finances are continuing to move in the right direction.
I am pleased to point out that significant successes have been attained in this regard, with General Government deficit targets being consistently over achieved to date, underpinned by our improving economy.
This provides further evidence that the public finances are being positioned on a sustainable footing.
Furthermore, the strategy has been implemented through a prudent approach to fiscal and expenditure policy.
In this context, it is important to point out that while tax revenue in 2016 grew by 5 per cent year-on-year, the growth in gross voted expenditure was 2 ½ per cent.
This demonstrates the commitment of this Government to maintaining sound public finances so we don’t repeat the policy mistakes of the past.
Turning to 2017, the latest Exchequer Returns were very positive.
Following a slightly disappointing performance in the first quarter of 2017, tax receipts in Quarter 2 have stabilised and have been much more robust, with cumulative receipts coming in broadly in line with target.
This represents a healthy year-on-year increase of 4 per cent.
As a result of the strong performance in the second quarter, we are now well positioned in terms of achieving the overall annual tax target of €50.6 billion for 2017 - the highest in the State’s history.
SUSTAINABLE INCREASES IN SPENDING
The pre-crisis period saw very large increases in expenditure.
While these increases helped address key infrastructure deficits and provided the resources for significant improvements in public services and social supports they were ultimately unsustainable.
Very significant and painful expenditure consolidation was required to repair the public finances.
Over the last three years, budgetary policy in relation to expenditure has focussed on prudent and sustainable increases in expenditure averaging 3 per cent per annum - below nominal growth in the economy.
These increases have, however, allowed additional resources to be directed towards key Government priorities including in Health, Housing, Social Protection and Childcare.
As outlined in the Summer Economic Statement, over the medium-term we will look to continue with moderate and sustainable growth in overall expenditure to deliver improvements in our public services and infrastructure on a prioritised basis.
This approach will help ensure that we avoid the need for intolerable cutbacks in the future which can be so disruptive and damaging to our society.
PRIORITISATION OF EXPENDITURE
The increasing and competing public service demands mean that strong prioritisation and robust evaluation must continue to be embedded within public expenditure policy by ensuring that best use is made of all available fiscal resources.
In other words, we make choices and spend wisely.
I will shortly publish two documents- the Comprehensive Spending Review and the annual Mid-Year Expenditure Report- which will underpin this approach.
Total voted expenditure – that is current and capital expenditure- will be around €60 billion next year. It is this number, and not the much smaller Fiscal Space, on which we should focus.
The Spending Review will highlight the very significant progress made in addressing key public service needs and will help the Government re-appraise and if necessary reprioritise spending.
This year’s Spending Review will examine a significant portion of the expenditure base for each Department, with the remaining current expenditure to be examined over a three-year horizon.
INVESTING IN CAPITAL INFRASTRUCTURE
Since publication of the Capital Plan in September 2015 there has been significant progress on the delivery of many pieces of infrastructure which our country so badly needs.
- Luas Cross City has already started testing trams on the new line and the project is due to be completed later this year;
- Construction on the Gort to Tuam Road Scheme is well advanced;
- The new Children’s Hospital, the National Forensic Mental Health Hospital on Portrane campus and the new National Maternity Hospital have been approved;
- And the delivery of 14 Primary Care Centres through Public Private Partnership continues apace.
Coinciding with such progress, the Government has consistently highlighted its intention to increase capital investment in public infrastructure over the coming years.
Capital spending will be up 17 per cent next year, 24 per cent in 2019 and 85 per cent in 2021 relative to 2016 levels – with the extra capital expenditure contingent upon the delivery of clear value-for-money.
This intent was signalled as far back as the Programme for a Partnership Government which committed to additional capital investment over the period of the Capital Plan to 2021, to be allocated on the basis of the outcome of a review of the Capital Plan.
The Review of the Capital Plan is currently ongoing.
Submissions in relation to the review and the additional funding available for allocation were sought from Departments in January of this year and are currently under review.
A public consultation process was also held in April to ascertain the views of the public and key stakeholders on what our national infrastructure priorities should be.
The assessment by my officials in the Department of Public Expenditure and Reform of the submissions received as part of the Capital Review will be based on relevant evidence and research such as, for example, an Infrastructure Capacity and Demand Analysis carried out by the Irish Government Economic and Evaluation Service, or IGEES.
My Department is also liaising closely with the Department of Housing, Planning, Community and Local Government in order to ensure close alignment with the new National Planning Framework due to be published later this year.
All of this work being carried out by my Department will ensure that the additional capital resources available are targeted on priority public capital infrastructure required to support Ireland's medium-term growth potential and strengthen social cohesion.
The longer-term 10 year Capital Plan has a crucial role to play in mapping out how the Government intends to ensure that our public capital infrastructure will be of a quality and extent to constitute a key pillar of our strategy for:-
- long-term sustainable economic growth and social progress;
- resilience in terms of key risks and challenges such as Brexit;
- balanced growth across all regions of our economy aligned with the National Planning Framework; and
- achieving critical climate action goals.
Turning to the fiscal outlook, a general government deficit of 0.4 per cent of GDP is projected for this year, which is unchanged from Budget 2017.
In addition, I believe it is important to point out that our fiscal objective is to ‘balance the books’, that is to achieve a structural deficit of 0.5 per cent of GDP.
I am pleased to point out that we will achieve this Medium Term Budgetary Objective – the MTO - next year - a remarkable achievement given where the public finances were almost a decade ago.
Achieving this key objective is paramount in terms of providing greater flexibility to facilitate emerging expenditure pressures.
Finally, it is worth noting that increases in public expenditure will be sustainably financed and safeguarded from dependence on cyclical revenues.
The fiscal rules are designed to ensure that fiscal policy enhances economic growth and macroeconomic stability and this is something which should be welcomed.
I also want to stress that the Government is acutely aware that some capacity constraints are beginning to emerge and that budgetary policy should not contribute to overheating the economy.
The limited resources that are available will be prioritised towards those areas where needs are greatest.
So, in future, my view is that we need to focus on the fiscal stance and not just the fiscal space.
In other words, we will ensure that budgetary policy is appropriate in supporting sound macroeconomic conditions and helping our economy grow in the long term.
Ireland’s general government debt to GDP ratio, having peaked at just under 120 per cent in 2012 and 2013, is steadily declining and is projected to reach 72.7 per cent of GDP this year.
This is below the euro area average – and set to reach the 60 per cent of GDP target mandated by the European Stability and Growth Pact in 2022.
This means that more of our resources can go towards paying for a fairer society rather than servicing our debt.
While the gross government debt ratio has fallen considerably in recent years, this arises from the distortions in our GDP data.
A wider assessment using metrics such as General government debt per capita and interest payments as a percentage of revenue all point to a very high level of public indebtedness.
It is therefore necessary to take additional measures.
In Budget 2017 the Government indicated a new debt-to-GDP target of 45 per cent of GDP.
Following an opportunity to take stock of policy priorities I have decided to amend this target to 55 per cent of GDP with the extra flexibility this entails being directed at increasing expenditure on growth enhancing capital formation. Thereafter, once major capital projects have been completed, the Government will target a further reduction in the debt ratio to 45 per cent of GDP.
RAINY DAY FUND
As Deputies know, we must be conscious of the external environment in which we in Ireland operate.
At present there is considerable uncertainty related to, for instance, Brexit and the economic policy stance in the US.
A Rainy Day Fund was announced by the Government as part of the Summer Economic Statement 2016, in order to plan for the future and ensure we are ready for any unforeseen events that may occur.
In this context, the Government will maintain a rainy day fund with an annual contribution of €500 million beginning in 2019.
This is half the size of the contribution originally envisaged, with the difference being used to finance capital investment.
The additional allocations will be subject to an assessment of the capacity of the economy to absorb the additional funding at the time.
It is clear that the volatility in the economic cycle can be much more pronounced in Ireland due to the open nature of the Irish economy.
The rainy day fund will provide a prudent counter-cyclical buffer, with annual transfers from the Exchequer to the rainy day fund helping to mitigate against the vagaries of the economic cycle.
The Government will also reassess the role of the Ireland Strategic Investment Fund – ISIF - which was established at a time when private investment was constrained and the banking system was restricted in its capacity to finance the real economy.
Based on a review of ISIF’s investment strategy currently underway, the Government will consider whether an element of the ISIF should be reoriented towards complementing the role of the rainy day fund.
Finally, I would like to turn to the issue of fiscal space.
The Summer Economic Statement sets out that the estimated indicative net fiscal space over the period 2017 to 2021 is over €11.2 billion.
I want to emphasise that the net fiscal space is the amount that remains after providing for pre-committed policies.
For next year, my Department estimates that net fiscal space amounting to €1.2 billion would be consistent with achieving a balanced budget.
Of this, around €700 million will be absorbed by the full-year cost of measures implemented this year.
Without offsetting measures, this would leave just over €500 million for new measures.
I will announce the allocation of this between spending and taxation measures on Budget day, taking into account discussions in the meantime as well as our commitments under the Programme for Partnership Government.
This means that overall public spending will be around €60 billion next year - it is crucial that we focus on the totality of expenditure and not just incremental changes.
BROADER INDICATORS OF SUCCESS
As our recovery is now entering a more mature phase, it is appropriate to broaden the definition of economic success for the future.
We should first of all recognise that future progress will, of necessity, be incremental.
The significant existing and additional resources we are providing for current services and capital projects is yielding benefits.
The results will not be instant and we should recognise that.
The continuing process of public sector reform will play a significant role in this respect.
We should also focus on continuing the progress achieved to date in the sphere of regulation, which is an increasingly important feature of public service provision.
Greater diversity of growth, including in terms of sectoral composition and regional balance, will enhance the resilience and durability of the recovery.
In this context, it is important that the fruits of the economic recovery are spread as evenly as possible.
I think we would also all agree that a properly functioning housing market and health service are also essential to our economic and social well-being, and the Government is committed to this.
While the short-term economic prospects are positive, a continuation of robust growth cannot be taken for granted given the significant challenges facing the Irish economy.
With the gravity of the external risks we face, we must not lose sight of the fact that domestically we also face a number of challenges.
As a small and open economy, the best way to prepare ourselves for such risks is to maintain an appropriate fiscal stance and adopt competitiveness-oriented policies.
That is what the Summer Economic Statement sets out and what the Government will continue to do.
With the economy on the cusp of full employment, we must – and will- stay the course.