Speech to the National Economic Dialogue: Understanding the Context: Economic Perspectives

26th June, 2019

I would like to thank An Taoiseach for his opening address and also our chair Alan for his opening remarks and for once again agreeing to chair our discussions.  

The aim of this Dialogue is to foster discussion on how best to sustain and strengthen the economy while addressing the many competing economic and social priorities within the limited resources available.

In these opening comments, I will set out the economic and fiscal context for our discussions over the next two days on the theme of “Building on Progress at a Time of Change”.  

An Taoiseach’s opening address has provided a clear and concise account of the progress we have made over the past decade.

The Summer Economic Statement published yesterday sets out the framework for discussion on our options for Budget 2020 – particularly in relation to the appropriate budgetary policy and the resources we have available.

It is worth recalling that just ten years ago – Ireland was in the eye of a global financial and economic storm.  

The sharp decline in the global economy exposed home grown economic fiscal and budgetary imbalances that had been allowed to build up.  

The correction of these imbalances, and the recovery from them – has been a long a painful process and the scars of that process remain.  

It is not a road we want to travel again. 

To ensure that we do not repeat those mistake we must • Run consistent budgetary surpluses and reduce public debt;• Deliver steady and sustainable increases in public services;• Continue to invest in our infrastructure;• Maintain our focus on the competitiveness of our economy; • Sustainably improve living standards; and• Meet the challenge of climate change

A decade after the financial crisis, the public finances have been placed on a sustainable path, the economy is at full employment, public services are improving and living standards are rising.

The level of employment has moved above the 2.3 million mark, its highest level ever, almost 100,000 above the previous peak level recorded in 2007.

Involuntary emigration has been reversed and the unemployment rate is now just 4½ per cent the lowest it has been since early 2005.

I should emphasise that our economy is very different now than it was on the eve of the financial crisis.  

Credit growth over 2005-2009 averaged almost 25per cent per annum: over 2015-2019 it is broadly level. 

We have diversified our economy and economic activity is more balanced as reflected in the fact that in the bubble years, nearly 10 per cent of the labour force was employed in construction; the figure is now around 6 per cent.  

When it comes to the public finances, the contrast is even starker. 

During the previous decade day to day spending grew by 57%, between 2005 and 2009, representing an average increase of 11 per cent per annum. 

This pro-cyclical approach was clearly inappropriate for a booming economy.

By contrast, between 2015 and 2019, as we emerged from the bailout period and with significant pent-up demands and pressures in our economy and society, day to day spending has grown by a much more modest 19%, representing an average annual growth rate of about 4%. 

This is below the rate of growth in the economy and the opposite of the pro-cyclical approach of the past.

Our economy is now in a strong position.  

Living standards and measures of well-being have recovered.  

The public finances returned to surplus last year. 

GDP is projected to expand by 3.9 per cent this year and by 3.3 per cent next year. 

Modified domestic demand – a better indicator of underlying activity –is forecast to grow at a similar rate.  

The strong recovery since the economic crisis has been remarkable – given the point from which we started.  

However, we have arrived at a point where the economy is balanced between growing very quickly on one side and the possibility of an exceptional adverse Brexit shock on the other. 

Importantly, the Government recognises that a disorderly Brexit is not the only potential source of stress for our economy at present.  

In many parts of the global economy external headwinds are picking up, with economic growth hitting a soft patch in many of our key export markets.

This slowdown in the global economy reflects to some degree the normal ebbs and flows of economic activity.  

Of greater concern is the potential for a dismantling of the global trading system that has been the primary driving force behind greater global prosperity and which has been central to the continued increase in living standards in this country.

Later this morning – we will have a presentation from Michael O Sullivan on the risks andopportunities for small open economies in this changing environment.

Domestically, overheating pressures are rearing their head as the economy zeroes in on full-employment.  

This is the somewhat unusual backdrop for the formulation of budgetary policy. 

It underlines the fact that in framing Budget 2020 we need to be careful.

Budgetary Strategy

This is the background to the publication of the Government’s Summer Economic Statement 2019 – the SES.  

In the context of an uncertain Brexit outcome, the SES sets out two budgetary scenarios. 

The first involves an orderly Brexit, while the second involves a disorderly scenario. 

Both scenarios suggest a more cautious approach is needed in preparing Budget 2020. This is also in-line with policy advice from commentators such as the IMF, EU Commission, OECD, IFAC etc.

Given the economic cycle, in the event of an orderly Brexit the appropriate budgetary response is to stay within the parameters set out in the SPU. 

This projects a modest budgetary surplus of 0.4 per cent of GDP for 2020. 

This would be consistent with:• €0.7 billion increase in capital expenditure;• €0.3 billion carryover costs for measures introduced this year;• €0.4 billion in public sector pay increases; and • €0.5 billion for demographic costs.

This would accommodate a budgetary package of €2.8 billion.

Built into this in the SES is provision for a capital reserve which has the capacity to accommodate funding requirements for the NBP and the NCH in 2020. 

This means that of the total Budget package of €2.8bn, €700million is unallocated. 

We should not go beyond this unallocated amount for further expenditure increases or taxation reductions. 

Any package beyond €700 million would require commensurate revenue-raising measures. 

Targeting a surplus of 0.4 per cent of GDP, or indeed aiming for a higher surplus, would allow some headroom to absorb the impact of Brexit.

In a disorderly Brexit scenario, the same budgetary parameters will apply.

However, come September, if this is the most likely scenario then an approach will need to be adopted to ensure that we best meet the impact of this exceptional challenge, whilst preserving the longer-term sustainability of the public finances. 

We do this through:• allowing the ‘automatic stabilisers’ to provide counter-cyclical support  (i.e. absorb an increase in social protection payments and falling taxes) allowing for a smaller surplus; and • temporary targeted support for the sectors and regions most affected. 

A decision will be taken in September when there is greater clarity on the outcome of Brexit, as to which option or scenario is to become the central scenario underpinning the economic and fiscal forecasts for Budget 2020.

By approaching the SES in this way we are ensuring that we will be best placed to deal with all eventualities when the time comes.

Broader Policy Context

This macro-economic and budgetary framework is complemented by a number of policy initiatives in key areas – notably Project Ireland 2040, and as An Taoiseach has already outlined, the Action Plan on Climate Change, Future Jobs Ireland and our comprehensive preparations for Brexit. 

The improvement in our economy has created knock-on consequences in terms of the pent up demand for housing and other infrastructural pressures. 

These capacity constraints are the by-product of a strong economy, and Government is addressing them.

This is why we are prioritising capital investment.  

Addressing infrastructural constraints through investment in housing, transport and other key areas is essential to ensure the economy remains competitive and resistant to external shocks.  

Capital spending next year will amount to around €8 billion; more than double the level of a few short years ago.

On Brexit preparations – I would reiterate An Taoiseach’s call to all involved, but particularly businesses who trade with the UK, to ensure that they have taken all necessary steps, including registration with Revenue, to ensure they can continue trading with the UK.

Today’s breakout session themes

An Taoiseach and I, in our presentations today – have outlined the progress we have made, but also the significant challenges we face.

In this context today’s breakout sessions relate to a policy areas which will have a critical impact on how we meet these challenges.  

The discussion at these sessions will provide an important opportunity to contribute to our preparations to meet the forthcoming challenges. 

Concluding remarks

To summarise– the economy is in a good position – as are the public finances but we face substantial external and domestic challenges. 

The global economy has entered a period of growing uncertainty.

In addition the previously shared consensus on progressive economic integration is being challenged.   

Most importantly from an Irish perspective, the scheduled departure of the UK from the EU in the autumn presents an enormous challenge.

The overarching budgetary strategy must be to protect domestic living standards, irrespective of the Brexit outcome.

This means that we must be prepared for all eventualities

We have worked so hard to get to where we are. 

The decisions we make now will ensure that the gains we have made will be protected.

This means that continued vigilance is required to ensure tax and revenue remain on a sustainable footing and that pro-cyclical budgetary policy is avoided.

Given current economic circumstances and the risk of the realisation of those external shocks, the plan set out today will ensure that we are prepared and in a position to meet the challenges that may lie so that the public finance and the progress we have made in recent years are protected.

As I have already outlined, Budget 2020 is being prepared with a tightening domestic economy against the background of an increasingly uncertain external environment.

The amount of discretionary resources we have is limited. 

We need to focus on what is the appropriate fiscal policy in our present circumstances.    

I would encourage all participants today to take this into account in their contributions.

By way of conclusion – I look forward to a constructive discussion today and tomorrow – which I hope will provide a basis for further progress.  

I now hand you over to our conference chair – Alan Barret.