It is my privilege to open tonight’s statements of the 2018 Summer Economic Statement.
Ten years after we were hit by the worst economic shock this country has ever faced, I am happy to report that the public finances have been stabilised, unemployment continues to fall and we are the fastest growing economy in the EU.
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.
Today’s CSO data also confirms that strong economic growth is paying dividends in the labour market.
There are now more people at work than ever before.
The rate of unemployment declined to 5.3 per cent in May, down from a peak of 16 per cent in 2012 and the fall in unemployment has also been broad based with significant declines in short-term, long-term and youth unemployment.
Indeed, we are 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.
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 yesterday 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.
Steady and sustainable improvements in living standards
Well-managed economies are characterised by durable improvements in living standards rather than the ‘all-or-nothing’ approach that has been a feature of Irish economic history, especially in more recent times.
Historically, Ireland’s economic performance has been less consistent than that of other small open economies in the EU, while our propensity to suffer economic shocks and resilience to withstand such shocks has been out of line with these comparator countries.
As we pursued a recklessly pro-cyclical approach to fiscal policy in the past, our comparator countries witnessed incremental and sustainable increases in living standards and retained their national sovereignty when the global financial crisis struck.
To avoid repeating the mistakes of the past, it is critical that we are constant in our approach, which in essence means deciding on the appropriate economic and social model for the country and having the political commitment and consensus to stick with it across political and economic cycles.
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.
This Government and its predecessor have pursued central elements of our comparator countries’ approach since 2011 – fiscal responsibility, active labour market policies and a broadening of the tax base.
However, this work is not yet completed. Particular priorities for the period ahead include:
- A revised approach to social dialogue that enhances consensus for and shared understanding of the appropriate economic and social model for the country;
- Enhancing social insurance to deliver greater economic security;
- Industrial rebalancing with a renewed focus on building an indigenous system of innovation and improving the productivity of domestic enterprise;
- A broad and sustainable tax base; and
- An active land management policy where land is planned and developed in a co-ordinated manner in the public interest; and
- Improving the market incomes of people at the lower end of the income distribution;
The Government will be progressing its work across all of these areas, all within the context of a responsible fiscal approach.
The appropriate budgetary stance
The central argument I want to make tonight and that is reflected throughout the Summer Economic Statement is that it is incumbent upon the Government to actively pursue policies that ensure an improvement in living standards for all and that Ireland never again loses its economic sovereignty.
That is why our budgetary strategy is based on steady increases in public expenditure underpinned by stable and predictable tax revenue.
A balanced budget is our minimum objective. Incremental and sustainable improvements in public services is always to be preferred over the ‘feast-or-famine’ alternative.
We must 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.
We do not need history to tell us this, it is common sense.
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.
Outside of Ireland there are probably greater levels of uncertainty than there have been in a long time.
With these are beyond our control, it highlights the importance of taking the measures that we can in order to enhance the resilience of our economy.
Firstly, we must continue to be prudent in relation to management of the public finances.
The fiscal rules are currently unhelpful in this regard.
A full and literal application of the fiscal rules would involve the adoption of pro-cyclical policies not appropriate to our position in the economic cycle.
Second, we must balance the budget over the cycle and use windfall receipts to reduce public debt.
Thirdly, the Government will prioritise spending that mitigates risk, enhances the resilience of the economy and raises our growth capacity.
Finally, in relation to the forthcoming budget, a headline deficit of 0.1 per cent was projected in the Stability Programme Update.
The Government will not adopt taxation and spending measures that result in a larger deficit than this.
Pre-committed expenditure for next year amounts to €2.6 billion – that is to provide for:
- An increase of €1.5 billion in capital expenditure as part of the NDP;
- €0.3 billion carryover costs associated with measures introduced this year
- €0.4 billion in public sector pay increases already agreed
- €0.4 billion for demographic costs in order to maintain existing levels of service.
The Stability Programme targeted a deficit of 0.1 per cent of GDP next year.
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 will necessarily involve even more borrowing and will result in a subsequent increase in the deficit position.
Targeting minimum compliance with the expenditure benchmark allows an additional €0.9 billion but this would increase the deficit by 0.3 per cent of GDP and be inappropriate at this stage of the cycle.
Conclusion
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.
Ends