From Department of Finance; Department of Public Expenditure, NDP Delivery and Reform
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Chairman,
At the outset, I wish to thank the Committee for the invitation to appear here today as part of your ex-post scrutiny of Budget 2019 and I look forward to a fruitful and positive exchange.
I would like to take this opportunity to touch briefly on some of the key milestones that have been reached recently in terms of the public finances.
In terms of the outturn for 2018, for the first time in over a decade, our public finances are balanced in cash terms. This is not an insignificant achievement given where we were only a few short years ago; the main budgetary metric for international purposes is the ‘general government balance’ and this will be reported by the CSO at end-March.
However, based upon the Exchequer figures, a small general government surplus is now possible. A modest deficit of 0.1% was projected in the recent Budget. We are now aiming to deliver a surplus of 0.1% which represents an over-achievement on this target.
To achieve this Exchequer (cash) surplus we used the 2018 revenue over-performance, albeit largely driven by Corporation Tax. This represents a positive development in terms of reducing our overall debt burden as the day-to-day running of the central Government is being met from within resources and we are not borrowing to fund these activities.
In 2019, current expenditure will grow by 3.9% compared with the 2018 outturn. In 2018, the equivalent growth compared to 2017 was 5.6%. However, much of this increase was driven by overruns in the Health sector. If we exclude growth in Health expenditure current expenditure grew by a more modest 4.8% in 2018 compared to 2017.
Turning to the outlook for this year, in assessing our Draft Budgetary Plan, the European Commission, the body charged with formally assessing our compliance with the EU rule, has assessed Budget 2019 as being compliant with the fiscal rules and have projected that we will achieve our medium term budgetary objective this year. However, this of itself does not represent grounds for complacency.
Indeed, it should be noted that our debt burden remains highly elevated at 105% of GNI* versus a comparable 87% for the euro area and reducing this must be our priority. In that context, at Budget time, my Department projected a balanced budget in headline terms, moving to a surplus thereafter. However, given that the external economic outlook is deteriorating, the probability of a disorderly Brexit is rising and quantitative easing is ending – driving up our borrowing costs, our policy approach should be to target larger surpluses to build up our fiscal buffers for when times become less favourable.
It is my intention to run budget surpluses into the future if the economy continues to perform strongly and to use them to reduce our national debt. Furthermore, any windfall receipts that arise from the State reducing its involvement in the banking and financial sectors will also be used to pay down public debt.
A notable feature of well-performing small open economies is that they typically operate budget surpluses when their economies are operating close to potential. From a budgetary perspective, this facilitates the building-up of fiscal capacity which can help mitigate against future negative risks and potential shocks.
This approach has also enabled these states to increase public expenditure sustainably, with incremental spending increases based on solid, structural improvements to their economies thus avoiding a pro-cyclical policy approach.
Sustainable expenditure management has enabled these Member States to expand the volume of public services delivery without increased funding being absorbed through inflationary pressures. Furthermore, these countries enjoy a high stock of public infrastructure as investment is maintained. This in turn improves economic competitiveness, increases growth potential and improves both the standard and quality of life for their citizens.
Notwithstanding this, our public finances continue to move in the right direction and this is testament to the sound, sustainable fiscal policies we have implemented over the past number of years. Our task, going forward, will be to continue to build on these hard won gains and to ensure that our public finances remain on a stable and secure footing.
Some of the policies I have committed to implementing in this regard include the establishment of a Rainy Day Fund from this year which will increase the State’s resilience to potential economic shocks. In addition, by continuing to maintain a broad and stable tax base we can ensure that the State continues to be financed properly.
The rate of VAT in the hospitality sector increased to 13.5 per cent from this month. This measure allows me to reduce our over-reliance on increases in other tax heads, such as Corporation Tax and allows me to continue to broaden the tax base.
In recent years, different measures have represented a positive move in this direction. In addition to the VAT change, measures include the introduction of USC, local property and sugar tax. For 2019 these are projected to raise revenues equivalent to approximately 1.5 per cent of GDP or 5.7 per cent of overall general government revenue.
These measures also underline my commitment to responsibly manage the public finances and maintain a broad tax base.
Furthermore, it is my intention to publish a set of proposals in the coming period aimed at reducing our over-reliance on Corporation Tax.
At this point, I would like to acknowledge the work of the Irish Fiscal Advisory Council in relation to Budget 2019, in terms firstly of their assessment and endorsement of the Macroeconomic forecasts underpinning the Budget as well as for the analysis set out in the November 2018 Fiscal Assessment Report (FAR).
I welcome the observations of the Council and I recognise the important role their reports play in bringing greater transparency to the budgetary process. My response to the FAR will issue shortly and will be available on my Department’s website.
I would also like to acknowledge that I am in agreement with many of the points made by the Council in the FAR, including their assessment of the economy’s strong performance as well as the key risks it is facing – mainly external in origin such as Brexit, rising trade protectionism and an evolving international tax environment – these are similar to the main risks identified in the Autumn forecasts published by my Department as part of Budget 2019.
One of the issues that arose at the meeting of your Committee on the 5th of December with members of the Fiscal Council, was the charge that my Department faces ‘serious challenges’ in predicting Corporation Tax receipts. In fact, a widely recognised feature of our Corporation Tax base, is its high concentration of receipts among a small number of firms, leaving this tax head much more exposed to sector and firm specific developments.
A further complicating factor in forecasting this tax head is the budgetary timetable, which means that the second instalment of annual Corporation Tax does not fall due until November, a full two months after the forecasts have been finalised. In addition, the Revenue Commissioners and my Department both rely on information from companies around expected profitability, which can often be under-estimated.
In fact, the Council in a 2016 review of the challenges forecasting Irish Corporation Tax, indicate this is due to the concentration of receipts amongst a small number of firms (mirroring our export sector). IFAC acknowledge forecasting Corporation Tax has traditionally been difficult in Ireland. They test a number of alternatives to my Department’s methodology and these provide a slightly better outcome, but still provide a large variation versus forecast. They conclude this suggests the importance of idiosyncratic developments in explaining annual movements in Corporation Tax.
A second charge that was made at the meeting on the 5th December, was that Budget 2019 was based on a ‘relatively benign outcome’ in terms of Brexit. However in Chapter 6 of the Economic and Fiscal Outlook document, alternative Brexit outcomes apart from this central scenario were explored.
Indeed, the possibility of a ‘no deal’ Brexit has influenced policy decisions made in relation to the public finances in terms of our stated aim of balancing the books and investing in capital infrastructure. This is also why I am adopting measures to ‘build-up’ our fiscal buffers, so that our economy is well placed to withstand the impact of possible adverse economic shocks. By running a balanced budget this year and targeting budgetary surpluses beyond 2019, we are ensuring that we do not add to our already elevated levels of public debt.
A third issue raised at your meeting was the assertion that the medium-term spending projections lack credibility given the probability of expenditure overruns. I would point out that when preparing the expenditure allocations beyond 2019, the ceilings are prepared on a prudent and contained basis, which maintains allocations across all spending areas and which takes account of demographic factors in the areas of Health, Social Protection and Education.
In addition, the overall spending projections include a separate unallocated provision. This amount is distributed across Departments in the context of the annual budget process to reflect developments, for example, in public service pay and pension agreements. In adopting this approach to forecasting, my Department is mitigating against the risk of simply restating ceilings and applying inflationary increases.
This approach would lead to expenditure baselines ratcheting ever upwards, and would pre-empt the space for rational and prudent discussion of policy priorities.’
Turning to the expenditure side more generally, I will first give a brief overview of the outturn for 2018. At the end of the year, total gross voted expenditure was just over €63 billion, made up of €57 billion in current expenditure and €6 billion in capital expenditure. This amount is €1.3 billion, or 2.1 per cent, ahead of profile for the year.
Of this, €1.1 billion relates to current expenditure, while €118 million relates to capital expenditure. This is broadly in line with the projections for the year set out on Budget day last October, when additional spending was announced for 2018 in a number of areas, primarily in support of our key social priorities of Health, Housing and Education.
These priorities are also reflected in the allocations for 2019, which were published in the Revised Estimates Volume last December. This year, the Government has allocated a total of €66.6 billion in gross voted expenditure. The vast majority of this is for day-to-day current expenditure, amounting to €59.3 billion, with a further €7.3 billion allocated to capital expenditure. Funding for the key day-to-day public services of Social Protection, Health and Education together account for 80% of total gross voted current expenditure.
The allocation for Health for 2019 is over €17 billion, reflecting our commitment to supporting our health service. However, given the scale of this allocation, I am also acutely aware that the last number of years have seen overspends in this area which impact on the overall level of resources available for public services.
With this in mind, there is ongoing engagement between my Department and the Department of Health in relation to how we can best manage this expenditure and ensure that the provision of these additional resources is matched with increased levels of accountability and transparency in expenditure matters, in particular by senior management within the Health Service Executive.
Housing has also been prioritised for 2019, with an overall allocation to the Department of Housing, Planning and Local Government of over €4 billion. This represents a significant increase in year-on-year terms, in particular in relation to capital expenditure which has increased by over 20% compared to the 2018 outturn. In terms of Education, this years’ allocation amounts to €10.8 billion, an increase of over 5% on the 2018 outturn.
Looking more broadly at Expenditure policy in recent years, the FAR refers to the ‘rapid pace’ of spending growth between 2015 and 2018, noting that this was largely driven by in-year increases in spending. In assessing the Council’s criticisms of recent expenditure policy, it should be noted that expenditure growth in the post-consolidation period has been significantly more modest than what was seen in the pre-consolidation period.
Indeed, from 2003 to 2008, gross voted expenditure grew by 63%. In comparison, from 2014 – 2019, gross voted expenditure is set to increase by 23% or just under 5% per annum on average, as set out in section 2.2 of the Budget 2019 Expenditure Report.
I should add that this return to modest, sustainable increases in public expenditure is not to be taken for granted, and reflects the disciplined approach to which I am committed as Minister for Public Expenditure and Reform, and to which the Government is committed. If I were to listen to the many demands made from different quarters, and from lobby groups of various colour, and if I were to accede to even one-half of these demands, then I can assure you that public expenditure growth would not have been managed below 5% a year over the last three years.
Instead, we need to use this period of relative economic strength to deliver improved public services in a planned and steady manner, within the resources that are made available. Looking specifically at expenditure management from 2015 onwards, this goal has been accomplished, subject to a significant additional allocation of resources to meet Healthcare funding needs as I have previously stated. When we take this into account, and also factor in the Government’s decision to reinstate the annual Christmas bonus, then unplanned deviations across all other sectors of Government spending are very small indeed, at approximately 0.4% over the last four years.
Finally, returning again to the higher than anticipated revenue generated in 2018 from Corporation Tax discussed earlier, it should be noted that these revenues are facilitating important Government initiatives, including support for capital investment.
Further, it should be noted that although there was a not insignificant ‘once-off’ element to the increase in receipts in 2018 the over-performance also arose from a combination of enhanced trading conditions and increased product sales. Corporate profitability has almost doubled since 2010 and saw annual growth of just under ten per cent in 2017. Capital expenditure can play an important role in mitigating risk and increasing the resilience of our economy.
As set out under the National Development Plan, 2019 will see an increase in capital investment of over €1.5 billion or 24%. This means, with a total allocation of €7.3 billion in 2019, that we are in a position to provide a sustained increase in the delivery of social housing, meet our commitments in relation to school places and transport infrastructure and progress the delivery of important projects across many sectors of our economy. The Government is not going to apologise for using this period of strength in our Corporation Tax receipts to accelerate infrastructural investment in the areas where we need it most.
In summary, insofar as expenditure management is concerned, the Government has a record of steady increases in support of social and economic development of our country, at much more sustainable levels than in the past; and moreover these planned increases are being delivered on-budget and on-time across virtually all areas of public expenditure. I do recognise that there are particular challenges and pressures within the Health sector where management and accountability practices are now being stepped up.
To conclude, the commentary around our economy tends to fluctuate between the risk posed through overheating on the one hand and the challenges arising from Brexit on the other. As Minister for Finance, the best course of action open to me is to maintain stability in the public finances, build up our fiscal buffers for when times become less favourable and balance our books.
I would like to thank the Committee again for the opportunity to speak here today and I am happy to address any questions you may have.