From Department of Finance; Department of Public Expenditure, NDP Delivery and Reform
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Chairman,
I would like to thank the Committee for the invitation to appear here today to discuss the forthcoming Budget and I welcome the contributions you will have to make in this regard. This year the Budget will be presented to the Houses of the Oireachtas on Tuesday, 9th October.
Over recent months, many elements of our reformed budgetary process have taken place. In June, the Summer Economic Statement was published and the National Economic Dialogue also took place. In July, my Departments published the Mid-Year Expenditure Report and the Tax Strategy Group Papers in respect of Budget 2019. These new and transparent features of our annual budgetary process ensure that all stakeholders can have an input into the way in which our budget policies are formulated. Earlier this month, my Department published its second annual debt report and an analysis of demographic trends and their input on sustainability of the public finances.
As I set out in the publication of the Summer Economic Statement, I am committed to not adopting a budgetary policy that would increase the deficit and result in additional borrowing.
The focus of Budget 2019 will be to sustain our recent progress and to maintain our careful management of the public finances.
The Summer Economic Statement makes clear that budgetary policy will be designed on the basis of what is right for the economy. From a budgetary perspective, this facilitates the building-up of fiscal capacity, which can help mitigate against future negative risks and potential shocks.
In terms of our current economic outlook, we are in good shape. With GDP up by 2.5 per cent in the second quarter of the year, quarter-on-quarter, and 9.0 per cent year-on-year, it is encouraging that robust growth is being recorded across all sectors of the economy, both domestic-facing and exporting. There was an annual increase in employment of 3.4 per cent or 74,000 jobs in the year to the second quarter of 2018, bringing total employment to over 2 ¼ million – we are close to approaching what could be termed ‘full employment’.
The next set of official macroeconomic forecasts will be produced as part of Budget 2019, following the IFAC endorsement process which is currently underway.
We must be mindful, however, of new challenges in the wake of the growth we are now experiencing in our economy.
From an international perspective, some of the other risks are being widely recognised now as the general rise in protectionist policies and the unpredictability of the international tax environment. Ireland, as a smaller, open economy, is particularly exposed to these risks, and we must ensure that we continue to implement sensible fiscal policies and strive to steer our public finances along a sustainable path.
In 184 days, our most important trading partner will formally leave the EU. Whilst a transition period remains our baseline assumption, there will still be a major structural change in our economic relationship with the U.K.
It is important to be clear that the actual agreement on a future relationship can only be finalised and concluded once the UK has become a third country, that is, after it leaves the EU on 29 March 2019. This is why agreement of a status quo transitional arrangement is so important. Of course, it is in the interest of everyone that a future relationship agreement is concluded as quickly as possible after the UK leaves the EU, to provide certainty sooner rather than later.
I note that your Pre-Budget discussion document points to the possibility of a ‘no deal’ Brexit outcome as a potential fiscal risk. With Brexit some things are going to change and we are planning accordingly. The risk of a more adverse outcome than expected is one of the principal reasons that the Government has put in place prudent measures in the case of a failure to reach any Brexit agreement.
These measures include:
In terms of other risks, I note the Committee’s recommendation that the Government consider using fiscal policy to decrease Ireland’s dependence on imported oil and gas. As an energy importer, Ireland is adversely affected by increasing oil prices. However, the prudent economic and fiscal policies implemented over recent years have placed Ireland in a stronger position to weather any shock which may materialise, including an oil shock.
Reducing our public debt and its servicing costs remains a key priority. Our current debt level equates to €42,000 per capita and is the third highest in the developed world. This Government is steadfast in its commitment to the pursuit of sound budgetary policy. Legislation has been drafted on the Government’s proposal for a Rainy Day Fund.
The Government has committed to initially seeding the fund with monies from the Ireland Strategic Investment Fund, as well as setting aside some of the historically high levels of corporation tax for the purpose of creating the fund. This means the risk of permanently increasing expenditure on the basis of transient receipts is reduced. With this in mind, a contribution of €500 million to the rainy day fund will be provided for next year, in addition to the €1.5 billion planned this year.
This Government recognises the clear supply and affordability constraints in the housing market. In my previous two budgets, I introduced significant increases to both capital and current allocations of the Department of Housing, Planning and Local Government. The capital budget has increased by 145 per cent since 2016, to over €1 billion which reflects the Government’s position that the only way to solve the current issues in the market over the long-term is to build more homes, including social housing, student accommodation and affordable homes for first time buyers and people on average incomes.
Some of the measures introduced include the allocation of €200 million for the Local Infrastructure Housing Activation Fund (LIHAF) and the introduction and subsequent increase in the vacant site levy, from 3 per cent in the first year to 7 per cent for the second and subsequent years.
Last year I also increased the rate of commercial stamp duty to help re-balance the construction industry away from commercial construction towards more residential building.
These and other measures are helping to dramatically boost supply. The latest figures from the CSO show a 34 per cent increase new home completions from last year. The number of planning permissions granted for residential development are similarly showing very strong growth, up 39 per cent in the year to June.
Despite these promising figures, there is still a long way to go before the various issues in our housing market can be resolved. Homelessness is an area that the Government is committed to resolving and I will continue to support my colleague Minister Murphy, in the various initiatives his department is engaged in.
To touch on our current fiscal position at end August, €32.4 billion tax revenues were collected – up €1.6 billion (5%) on the same period last year, and broadly on target, highlighting that our fiscal position is continuing to improve and we are closing-in on a balanced headline budgetary position.
Turning to expenditure, maintaining a sustainable public expenditure policy requires focus not only on the quantum of expenditure each year, but also on the quality of that expenditure and the results being achieved. In tandem with the policy of sustainable current expenditure increases is the recognition of the role capital spending can play in mitigating risk, enhancing the resilience of the economy and raising our growth capacity.
Indeed, I welcome the ESRI’s advice published today in their Autumn Quarterly Economic Commentary, highlighting the need for a holistic approach to fiscal policy in this year’s Budget. I agree that given key infrastructural deficits in areas such as housing, along with the possibility next year of a more adverse than expected outcome in the Brexit negotiations, that a non-contractionary Budget is appropriate.
That is why €1.5 billion has been allocated towards increased capital investment next year, an increase of almost 25 per cent, as set out in the National Development Plan (NDP). This allocation will allow us to ensure a sustained increase in the delivery of social housing, offer additional schools places, enable the provision of new transport infrastructure and help progress the delivery of the National Children’s Hospital among other important projects.
Systematic information about the efficiency and effectiveness of expenditure is crucial in assessing the extent to which public expenditure is delivering key social and economic objectives. Over the last number of years, the budgetary framework has undergone significant reform. A number of initiatives are now in place that focus on what is being achieved by public spending. Underpinning this process has been a number of structural reforms that support targeted improvements in the delivery of public services in a sustainable manner.
The Committee has a number of recommendations relating to the Spending Review. The aim of this process is to embed an evaluation mentality in the public service, with the goal of avoiding reactionary budgets and large annual shifts in expenditure. It also helps to maintain an ongoing evaluation of the effectiveness of existing levels of expenditure. I would welcome engagement with the Committee on how the impact of the review process can be maximised.
Other structural reforms include performance and equality budgeting, including establishment of an Equality Budgeting Expert Advisory Group to provide advice on the most effective way to advance Equality Budgeting Policy and progress the initiative.
Ireland has made good progress in the area of climate proofing through tracking climate-related output targets in the annual Revised Estimates Volume and ex-post evaluation of climate-focussed expenditure programmes. These reforms are aimed at increasing transparency and accountability in the Budget process, facilitating meaningful dialogue around our policies and priorities.
Ensuring the implementation of Project Ireland 2040 is of the upmost importance to this Government. As such, the publication of the improved and expanded Investment Project and Programme Tracker last week is to be welcomed. This builds on the work of the Programme Delivery Board, who have identified a number of important initial priorities which have now seen significant progress.
These include: improving information flows for project monitoring, establishing a Land Development Agency, establishing a Construction Sector Group and progressing the four developmental funds. Addressing these issues will ensure that projects outlined in the NDP can be delivered on time and on budget and that the objectives set out in the National Planning Framework are achieved on a value for money basis.
I note the Committee’s recommendation that consideration be given to increasing carbon tax over a number of years. While I consider that the carbon tax can play an important role in helping to reduce national emissions, in any analysis of the carbon tax, it is necessary to consider not just its potential to reduce national emissions, but also wider economic and social impacts. The ESRI, as part of its joint research programme with my Department, has produced initial research providing a perspective on the environmental, economic and social impacts of increases to the carbon tax. I am informed that it is developing a multi-annual model for the same purpose which will inform our views on the impacts of multi annual increases to the carbon tax.
Finally, the Committee’s Pre Budget document makes a number of other recommendations in the tax area which will be given full consideration in the context of the forthcoming Budget.
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.
ENDS