Chairman, Members, I welcome the invitation to discuss the draft Stability Programme Update 2019 (SPU) here today.
The SPU sets out the Governments macroeconomic and fiscal forecasts for Ireland and is the first update of the Government’s projections since Budget 2019 last October. The document takes into account the latest information on the economy and the public finances.
In accordance with the requirements under European legislation, the macroeconomic forecasts set out in the SPU have been endorsed by the Irish Fiscal Advisory Council. In the interests of transparency, the presentation given by my officials to the Fiscal Council is on my Department’s website.
As is the norm, the SPU is published in draft form; I am, of course, willing to take on-board constructive suggestions from Members of the Committee.
The final version will be submitted to the European Commission and Council at the end of April, in line with the legal deadline.
Economic Developments
Let me begin with the current state of the economy. The pace of growth seen in recent years continued in 2018, with GDP rising by 6.7 per cent.
While GDP can be inflated in Ireland due to the activities of foreign multinationals, modified domestic demand – a better measure of underlying Irish economic activity – increased by 4.5 per cent last year. Robust growth in this indicator, along with trends in other indicators such as employment growth and consumer spending, confirms the continued momentum in the Irish economy.
For this year, we are projecting a slight moderation in the pace of growth relative to what we projected at Budget time. This is partially due to a slowdown in key export markets, in particular the UK and the euro area. The external environment has deteriorated in the past six months, and this was very evident to me in my discussions at the IMF last weekend.
Reflecting these developments, my Department has revised its GDP growth forecast for 2019 down from 4.2 per cent to 3.9 per cent. For next year, GDP growth of 3.3 per cent is forecast. Growth in modified domestic demand is expected to be broadly in line with GDP growth. Over the medium term, a growth rate of around 2½ per cent is projected.
With regard to Brexit, the outcome of the European Council last week means that an ‘orderly exit’ remains the central scenario that underpins this document. However, it is clear that the possibility of a disorderly, no-deal exit remains, and as such the Government continues to plan for this.
Research undertaken by my Department and the ESRI shows that the impact of a disorderly exit would be to reduce the level of GDP by around 3¼ per cent after 5 years, and 5 per cent after 10 years (relative to a no-Brexit baseline), with adverse implications for the labour market and the public finances.
Other risks to the economy include the possibility of the domestic economy overheating and a rolling-back of globalisation.
Labour Market
The labour market continues to perform strongly and is now close to full employment. Last year saw employment grow by 2.9 per cent, equivalent to the addition of 63,000 new jobs. There was also a shift from part-time into full-time employment.
My Department is forecasting further employment growth of 2.2 per cent this year, or 50,000 additional jobs. Unemployment is expected to further decrease to 5.4 per cent, from its peak of 16 per cent in 2012.
As a result of the tightening in the labour market, wage growth is expected to accelerate somewhat, with pay per employee forecast to rise by 3 per cent in 2019.
In this context, it is my position that Government policy should not overheat the economy.
Fiscal Developments
Turning to the fiscal side, I am pleased to be able to say that after a decade-long road in restoring our public finances, the headline deficit was finally eliminated last year with a balanced budget achieved. This represents an over performance on the Budget Day projections. Furthermore, the SPU now projects that, this year, we will now also over-achieve on our Budget day target of a balanced budget with a headline surplus of 0.2 per of GDP now forecast for 2019.
The structural balance is projected at -1.1 per cent this year, according to the official methodology set out in the Stability and Growth Pact. However, using more bespoke, alternative estimation methods for the output gap developed by my Department, a structural balance of 0.1 per cent is projected this year. This approach to estimating the economic cycle has been endorsed by the IFAC.
The headline surplus for this year represents a further key milestone in the repair of our budgetary balance sheet with this, the first positive general government balance since 2007. This is not an insignificant achievement given where we were only a few short years ago.
Furthermore, we are doing this while simultaneously providing an additional €1.3 billion for capital investment under the National Development Plan to housing, schools, healthcare and removing various infrastructural choke points which are emerging as a consequence of a growing economy.
The prudent economic and fiscal policies implemented over recent years have placed Ireland in a stronger position to deal with potential shocks to the economy.
- Running a headline surplus from this year represents a positive development and means we are not adding to our stock of debt, and can in turn create fiscal capacity to deal with potential downturns;
- Reducing our debt burden: Our stock of debt as a percentage of GDP is forecast to reduce from 61.1% this year and set to decline to 55.8% in 2020 – below the 60 per cent ratio required by the Stability and Growth Pact.
- Building up the Rainy Day Fund: a Rainy Day Fund is being established and will be capitalised by an initial €1.5 billion contribution. Some of the historically high levels of corporation tax are being set aside with a contribution of €500 million per annum being provided for.
This Government is not complacent to the various challenges which lie ahead, including those that exist from Brexit, and is committed to the continued implementation of sound fiscal policies that will prioritise the stabilisation of the public finances. Our vulnerability to such external threats is one of the reasons the Rainy Day Fund is being established this year which will increase the State’s resilience to external economic shocks.
At the same time, I would also like to acknowledge that our ratio of debt-to-national income is still too high, at still over 100 per cent. This Government remains completely committed to ensuring that this ratio continues on its current downward trajectory. In addition to running budgetary surpluses, a cornerstone of our policy approach is to use the proceeds of the resolution of the financial crisis towards lowering this stock of debt, which still represents a significant burden and fiscal vulnerability.
In terms of our revenues, last year total Exchequer tax receipts amounted to €55.6 billion. This was €1.4 billion ahead of the full year profile and reflected strong growth across all the major tax headings, with the exception of excise duty. Turning to the fiscal outlook for 2019, current projections indicate that the tax yield for this year is now projected at €58.4 billion. This amounts to an increase of 5.2 per cent on 2018 and is in line with nominal economic growth.
Turning to expenditure, which is being managed by Departments within their allocations thus far, with overall expenditure slightly below profile (2.2 per cent). Capital expenditure is slightly behind profile but still well up on last year, reflecting the additional €1.3 billion allocated to infrastructure projects in Budget 2019. This level of investment will play an important role in delivering public infrastructure across Ireland, particularly in areas such as Social Housing, Education including for schools and higher education, Healthcare, and Transport.
Conclusion
In conclusion, the economy continues to perform strongly, but a number of headwinds lying ahead mean we cannot be complacent.
The cost to the Irish economy of the UK’s departure from the EU and the slowdown in global growth, in particular, pose significant risks. On the domestic front, with the labour market approaching full employment, capacity constraints could emerge, leading to overheating.
It is therefore essential that budgetary policy does not contribute to any overheating with pro-cyclical policy. Instead, the best way to mitigate these risks is through prudent management of the public finances and competitiveness-oriented policies, including the capital investment in public infrastructure I have already outlined. This will help us achieve sustainable economic growth, now, and over the medium term.