Speech
Launch of the Summer Economic Statement 2018 – Opening statement by Mr Paschal Donohoe TD, Minister for Finance and Public Expenditure and Reform
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Good morning/afternoon and thank you for coming.
Today the Government is publishing its annual Summer Economic Statement. This Statement is a key element in the reformed budgetary process by providing a policy background for discussions in the Dail and, subsequently, at the National Economic Dialogue next week.
It also sets out this Government’s medium-term economic and fiscal strategy.
A suite of economic indicators confirm that the Irish economy is growing at a healthy pace.
My Department expects GDP growth of 5.6 per cent this year and 4.0 per cent next year.
This strong growth performance is paying dividends in the labour market where the unemployment rate has fallen below 6 per cent and the number of people working in our economy is close to its highest level ever.
Indeed, the economy is fast approaching full employment. In this context, we must take due care with our management of the economy.
Against this positive backdrop, we plan to run a very small deficit next year because of the political choices we have made in Project Ireland 2040 and the National Development Plan to substantially increase capital spending, which is increasing by €1.5 billion (25 per cent) next year to over €7 billion.
This investment will ensure the delivery of vital social housing projects like O’Devaney Gardens, critical transport infrastructure like BusConnects and the prioritisation of new health new projects like the children’s urgent care centre that will be completed next year at James Connolly Memorial Hospital.
We are prioritising capital spending in order to address the serious infrastructural deficits that emerged during the recession and to position our economy and society for the opportunities and threats ahead.
As the ESRI noted today in its Quarterly Economic Commentary, more public investment increases the potential output of the economy by enhancing productivity and employment and thereby supporting growth in the long run.
Crucially, by increasing internal demand, the impact of public investment is mainly felt in the domestic sector of the economy.
This is the right way to rebalance our economy for the future.
The Stability Programme targeted a deficit of 0.1 per cent of GDP next year.
The Government is re-iterating this as our minimum target today – we will not adopt taxation and spending measures that result in a larger deficit than this.
This would accommodate a budgetary package of €3.4 billion, of which €2.6 billion has been pre-committed to expenditure measures leaving €0.8 billion for further allocation.
Any unfunded taxation or expenditure measures that go beyond this would necessarily involve more borrowing and will result in a subsequent increase in the deficit position.
Increasing the deficit would also mean that we would miss our Medium Term Objective (MTO) target for 2019 and as a result we would be in breach of the fiscal rules.
Let me stress what borrowing is: it is spending other people’s money and, of course, it will have to be repaid.
The Summer Economic Statement sets out the key elements of the Government’s budgetary strategy. Broadly speaking this revolves around five key areas:
Public Expenditure
Turning now to public expenditure, the Government is determined to ensure that our budgetary strategy is based on steady increases in public expenditure underpinned by stable and predictable tax revenue.
Incremental and sustainable improvements in public services is always to be preferred over the ‘feast-or-famine’ alternative.
Expectations have increased given the remarkable performance of our economy.
However, I want to 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 would be even larger.
Excessive growth in expenditure in an economy at full employment entails risk. This is not a risk I want to expose the Irish taxpayer to; especially given the abundance of external risks now facing the economy.
The provision of public services can be enhanced – within existing allocations – by reforming the way public services are delivered.
Each year, central Government spends over €60 billion; I am convinced that there remains scope to improve the efficiency with which this is allocated. The spending review , which will be published in July, will be crucial in this 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.
This 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.
Finally, I would like to turn to the issue of fiscal space.
The full and literal application of the fiscal rules in recent years has led to a focus on what is available in terms of the fiscal space.
This was appropriate in a period when the amounts were somewhat constrained and there was a need to bring about service improvements following many years of consolidation.
However, there are a number of reasons why utilisation of the fiscal space is not appropriate in the current circumstances.
Firstly, fully applying the rules would involve the adoption of pro-cyclical policies not remotely appropriate to our position in the economic cycle.
We don’t have the available tax revenue to use up all of the so-called space, meaning that we would have to borrow more to do this.
That would be the wrong path for our society and economy.
Secondly, with a debt to GNI ratio of 100 per cent last year the focus must be on balancing the books and reducing nominal debt.
Finally, risks to the global economy are growing . In this context, the priority must be to rebuild fiscal buffers so that the Irish 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 in order to ensure continued, steady improvements in Irish employment and living standards. We only have to look at other small, open countries like Finland, Sweden and Denmark to see well-managed economies with excellent public services paid for on a sustainable basis; this is what the Government wants for the Irish people.
In conclusion, we are approaching the 10th anniversary of the deepest crisis in the modern era.
While the economic situation is relatively healthy at present, it is clear that the external environment is becoming increasingly challenging.
The UK’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 risks facing the Irish economy at present.
A crucial policy response is to build up our fiscal capacity in order to respond to these challenges – to enhance our resilience.
This is why the Government is prioritising reducing public debt, establishing a Rainy Day Fund , and avoiding pro-cyclical budgetary policies.
While there are risks ahead there are also opportunities; our goal is to position our economy to minimise the risk and to maximise the opportunity.
Economic growth is not an end in itself – but it is a necessary means to an end. Continued economic growth is the way that we will achieve our objective of ensure progressive and steady improvement of living standards in our Republic.
Thank you once again for coming and I will now take your questions.