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Introduction
Chairman, Members, I welcome the opportunity to be here today to discuss the Summer Economic Statement (SES) published on 25th June.
The Statement sets out the key elements of the Government’s medium-term economic and fiscal strategy, and updates the economic parameters for discussion in the Dáil in advance of Budget 2020.
Economic backdrop
A decade on from the financial crisis, we have experienced a remarkable recovery.
We have a well-managed economy.
Our public finances have been placed on a sustainable trajectory.
Economic growth is steady, robust and broadly based.
Our labour market is exceptionally strong, with more people at work than ever before.
However, we cannot take this progress for granted – it has been achieved, and can only be maintained, through prudent policy decisions.
Our job now is to build upon this progress and ensure that we are ready to respond to the challenges, and opportunities, ahead.
This year, my Department is projecting GDP growth of 3.9 per cent. We are also projecting a budget surplus of 0.2 per cent of GDP. With unemployment now at its lowest level since 2005, the labour market is approaching full employment.
Budgetary Policy
As I have often said, budgetary policy must ‘lean against the wind’. When times are good, it is essential that we use the opportunity to build up our fiscal resources and reinforce the resilience of the economy to withstand external shocks.
A clear policy lesson from our peer group of other small open economies at EU level is that they typically operate budget surpluses when their economies are operating close to potential.
This not only facilitates the building-up of fiscal capacity, but also means these states have been able to increase public expenditure in a sustainable manner, with incremental spending increases based on solid, structural improvements to their economies.
As such, they have been largely able to avoid a pro-cyclical policy approach. Furthermore, they 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.
Since the publication of the SPU, the risks to the economy have intensified.
Volatile corporation tax revenues continue to be of concern.
The international trade environment is increasingly uncertain.
The economy moving towards full employment raises the issue of potential overheating.
And, perhaps most worrying, the prospect of a disorderly Brexit in October has become significantly more likely.
Given these risks, both at home and abroad, framing Budget 2020 in the autumn will be more challenging than in recent years.
As Minister for Finance, my task is to guide the economy through these risks with careful management of the public finances. I will do this through steady and sustainable improvements in living standards financed by steady and sustainable revenue streams.
Brexit
As I have said many times, the United Kingdom’s exit from the European Union will have a detrimental impact on our economy and public finances whatever form it ultimately takes.
But the magnitude of that impact depends upon how disorderly that exit is. There is no precedent in modern economic history for an event like Brexit, and, as such, predicting its impact precisely is difficult.
Given all of the above, the SES has been prepared on the basis of one budget, with two budgetary scenarios.
The same broad strategy applies to both scenarios. The outcomes, however, are different in each.
While decisions on the specific breakdown of the budgetary package will not be made until Budget time, in the SES I have set out the broad parameters of the package.
Orderly Brexit
Consistent with the fiscal projections published in the SPU, the Budget 2020 framework involves a budgetary package of €2.8 billion for 2020.
With expenditure pre-commitments of €1.9 billion, (including a €0.7 billion or 10 per cent increase in capital investments), and an expenditure reserve of up to €0.2 billion, with the capacity to accommodate funding requirements for the National Broadband Plan and the National Children’s Hospital. This leaves €0.7 billion to be specifically allocated as part of the Budget.
In the event of an orderly Brexit, given our position in the economic cycle, this is the appropriate budgetary policy and delivers a surplus of 0.4 per cent of GDP. This would allow for capacity to deal with the impact of Brexit.
Further expenditure or tax reductions outside of these parameters would risk contributing to overheating in the economy, repeating the mistakes of the past and jeopardising the sustainability of the public finances. A larger budgetary package would also necessitate revenue-raising measures.
Disorderly Brexit
If, as appears increasingly possible, there is a disorderly Brexit, there will be significant pressure placed on the public finances.
Upon a disorderly Brexit, the Government will adopt a holding position and allow the automatic stabilisers provide counter-cyclical support. Temporary, targeted Brexit supports will be provided to those sectors and regions most affected. This is in line with the advice of the IMF.
A disorderly Brexit scenario could involve a headline deficit of between -½ and -1½ per cent of GDP for next year. This amounts to a negative swing in the headline balance of up to €6 billion.
This twin approach mitigates the requirement for a supplementary budget in the event of a disorderly Brexit.
As the picture becomes clearer, Government will take a decision in September as to which of these two scenarios will underpin the economic and fiscal forecasts for Budget 2020.
Fiscal Vulnerabilities/Corporation Tax
As Brexit approaches, it is essential that we are cognisant of the risks to the economy domestically. The high concentration of corporation tax receipts experienced in recent years represents a more vulnerable revenue stream.
I have said that public spending must only be financed by revenue that is predictable and sustainable. Basing public expenditure increases on transitory and unstable sources of funding would not be commensurate with the Government’s commitment to a prudent budgetary policy.
With this in mind, I have asked my officials to prepare a paper on fiscal vulnerabilities in Ireland, examining a range of policy options to mitigate the risks inherent in the concentration of corporation tax receipts, and those resulting from a narrow and literal interpretation of the European fiscal rules.
This paper will be published shortly and I will consider the proposals contained within, with a view to making a recommendation to Government in the autumn.
I should point out that the Government has already taken action to address potential vulnerabilities in the public finances.
We have begun to run budgetary surpluses for the first time in more than a decade.
We have established the Rainy Day Fund, with a commitment to setting aside some of the historically high levels of corporation tax to build up our fiscal resources. The fund is budgeted for €2 billion by end year.
We have broadened the tax base, most recently with the expansion of the 13.5 % VAT rate to the hospitality sector, in order to ensure that we are not overly reliant on any one source of revenue.
We will continue to work to address the areas of concern in our economy as we approach the turbulent period ahead.
The medium-term approach outlined in relation to expenditure under the orderly scenario with, post 2020, current expenditure growing at 3¼ per cent and overall annual average expenditure growth of c. 3½ per cent would allow for an annual increase in expenditure below the growth rate of the economy as represented by GNI*.
This is appropriate given the uncertainties in the external environment and the current position in the economic cycle.
Conclusion
Because of the progress we have made, we are entering a time of uncertainty from a position of strength. Careful management of the economy has restored our public finances and our fiscal credibility.
Capital spending has substantially increased, laying the foundation for future improvements in our living standards.
The unemployment rate has fallen to close to historic lows.
With the risk of overheating in the domestic economy, and the increasing threat of a disorderly Brexit, the correct budgetary stance is to avoid stoking inflationary pressures, while, at the same time, building up those resources that can be deployed, if needed, in the event of the United Kingdom crashing out of the EU in October.
This is the only sensible budgetary strategy. This is the path forward that the Government will take.
ENDS