Speech by the Minister for Finance Michael Noonan T.D. at
Joint Central Bank of Ireland & European Investment Bank Conference
Investment and Investment Finance: Funding Growth and Recovery –
the Irish story from a European perspective
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Governor, Ladies and Gentlemen,
I would like to begin by thanking the Governor of the Central Bank of Ireland for the invitation to speak here today at this Conference which is being jointly hosted by the Bank and by the European Investment Bank.
I will take this opportunity to compliment the new Central Bank of Ireland Headquarters. According to the architects, this is a project about “renewal and connectivity” and I quote, the “design solution provides a distinctive civic identity and a revitalised manifestation of the institution which relates to the maritime history of its new docklands home. It does this while creating physical internal connections through occupying the central atrium with bridges, stairs and teamwork areas in support of collaborative opportunity and new working methods”. It is worth commenting that the themes of renewal, connectivity, bridge building and collaboration chime well with today’s conference title.
Today I will talk about the situation in the Irish economy, where we are going and how we intend to protect the good work undertaken by all in Ireland in recent years. I will also then reflect on how we are currently cooperating with the EIB and its programmes and how we plan to further develop this relationship.
I have just returned from the Eurogroup meeting in Malta, where the issue of low levels of public investment in the post crisis landscape was recognised and emphasised by Eurozone Finance Ministers. As one of three common principles agreed to support and promote investment in the Euro Area, Ministers noted – “Productivity enhancing public investment can play a crucial role and should be prioritised to boost growth in the short run as well as potential growth in the medium to long run”.
Low levels of public and private investment have been a feature of the post-crisis landscape. We have also witnessed a prolonged period of below trend productivity growth without much insight or consensus as to its cause. What we can agree on is that there are identifiable infrastructure deficits that can be addressed via concerted policy action.
Before I discuss - in a domestic context - the type of growth-enhancing investment needed, let us first consider the current state of the Irish economy:
The recovery in the Irish economy is continuing at a robust pace with GDP increasing by 5.2 per cent last year.
The increase in economic activity is broad-based. Export growth in recent years has been robust.
Notably, the domestic sector is now contributing positively to growth, with private consumption up 3 per cent in 2016. This is very encouraging, as domestic sectors are both jobs and tax rich.
We now have two quarters of hard data since the Brexit referendum. They show that the immediate impact from Brexit has been more muted than initially anticipated. This is consistent with the trends emerging in the UK, US and Euro Area economies.
Recovery is perhaps most clearly evident in the labour market with annual employment having increased in each of the last seventeen quarters, representing an increase of 212,000 jobs since the low-point in 2012.
The number of people in employment has exceeded the 2 million mark, its highest level since 2008. Unemployment has fallen to 6.4%.
The increase in employment is broadly based, with increases in all 14 sectors recorded by the CSO in the last quarter – the breadth of activity is in marked contrast with the concentration of employment growth in the bubble era. It is also heartening to see that all regions of Ireland are benefitting from this growth in the numbers of people at work.
Ireland - Economic Outlook
We expect the momentum seen in the fourth quarter to carry forward into 2017.
This week, the Department of Finance will publish the draft 2017 Stability Programme Update. The Update will incorporate revised growth forecasts including upward revisions for 2017 and 2018. The Department of Finance is now forecasting GDP growth of 4.3 per cent this year and 3.7 per cent in 2018.
Over the short run, we expect labour market dynamics to continue to strengthen. The Department of Finance is projecting that 55,000 additional jobs will be created this year.
Risks to the Outlook
It is also worth considering the risks to this outlook. It is fair to say that at this juncture the balance of risks is tilted towards the downside.
On a positive note, the European economy has proved more resilient than expected as growth rates and employment levels continue to improve.
There are nevertheless a number of risks to the outlook both domestically and internationally.
Domestically, the main risks relate to a potential loss of competiveness, housing supply pressures and our concentrated industrial base, which leaves us exposed to firm and sector specific shocks.
Principal among the international risks are the change in policy direction in the US, Brexit, the growing influence of populism in Europe, and concerns about emerging market economies.
The principal risk for Ireland is Brexit. The Irish economy is particularly exposed to the UK’s decision to leave the European Union; in the long run any barriers to trade will impact on Irish growth while in the short run, the depreciation of sterling has led to a loss of competitiveness.
In the US, prospective corporate tax reform and the suggested approach of a form of US border adjustment tax could have significant implications for world trade.
Measures to address risks
The best way to deal with such risks is through competitiveness oriented policies and prudent management of the public finances.
Such prudent economic and fiscal policies implemented over recent years have placed Ireland in a stronger position to weather shocks. With the continued reduction in our General Government we have successfully exited the Excessive Deficit Procedure at the end of 2015, and are on course to achieve our Medium Term Budgetary Objective of a balanced Budget in structural terms in 2018.
Competitiveness has also improved significantly. Ireland’s real harmonised competitiveness index has improved by over 20 per cent since 2008.
These positive developments will be underpinned by a number of further initiatives:
For instance, the Government has decided to establish a rainy day fund, starting in 2019, once we have achieved a balanced budget in 2018 as envisaged. This will be both a counter-cyclical measure to avoid overheating, and will also enable us to deal with the initial effects of any shock that may occur.
The Government has also decided to set a new domestic target of a debt to GDP ratio of 45 per cent to be reached by the mid-2020s or thereafter depending on economic growth. This target takes account of the particular risks that Ireland, as a small and very open economy, faces and as GDP is less than perfect as a measure for Ireland.
Investment and the Capital Plan
This takes me to the topic of the day – investment and funding investment. Though we have taken corrective action and restored the economy to growth, the legacy of the crisis remains. This can be seen in the impact of lower levels of public investment over the crisis years. We pride ourselves on having a dynamic, flexible and open economy. This flexibility, which allows us to adapt to an ever-changing external environment, can only be maintained by continually investing in and upgrading our capital stock and investing in our people.
In the medium term we also face significant demographic challenges – there will be many more of us and we need to plan and prepare for this.
The Government is conscious of these challenges. The current Capital Plan, published in September 2015, assessed the existing capacity of the country’s infrastructure and identified critical gaps to be addressed in order to support economic recovery, increased social cohesion and environmental sustainability.
The Plan set out a six year framework for infrastructural investment in Ireland out to 2021. Total State-backed investment under the Plan amounted to €42 billion over the period. Last year’s Summer Economic Statement allocated an additional €5 billion of emerging fiscal resources to capital expenditure including a commitment of €2.2 billion to housing.
With the commitment of additional resources and with a longer timeframe of 10 years in mind, my colleague, Minister Donohue is currently conducting a review of this plan. The mid-term review is designed to take stock of our national infrastructure priorities now and in the future. We will allocate further resources so that they best meet our social and economic needs and prioritise on the basis of benefits outweighing costs.
EIB Assistance
We have many competing priorities for the State’s resources. We also, for good reason, have binding rules limiting Government spending. So we need to be creative and explore all available sources for capital and expertise. For example, although off-balance sheet financing is not a panacea, there are models of financing whereby infrastructural deficits can be addressed without implications for fiscal capacity.
The opening of an Office in Ireland by the European Investment Bank in December last year underscores the commitment of the bank to assist Ireland.
The EIB has always responded when Europe has faced challenges and it should be congratulated for taking forward the mandate given to it by EU Heads of State and Government and by Finance Ministers to help deal with the difficult challenges currently facing the EU. It has created new products to help Europe recover from the financial crisis and it has expanded its operations outside of Europe to face ongoing challenges, in particular in relation to climate change and migration.
European Fund for Strategic Investments (EFSI)
Central amongst the EIB response of course is the European Fund for Strategic Investments or EFSI, as part of the Investment Plan for Europe. Ireland has been a strong supporter of the EU’s steps in response to the crisis in investment from the outset and continues to be so. The first year of operation of EFSI has shown that it is having a very real and tangible impact in supporting Europe’s future job creation, growth and competitiveness.
I am particularly keen that expansion and enhancements of EFSI should raise the potential for Ireland to increase our level of EFSI support, both for public and private sector projects given the twin focus of EFSI. In particular, support for Ireland’s SME Sector is vital. This is particularly the case given the challenges facing that sector following the invoking of Article 50 by the UK.
As EFSI is of course demand-driven, it is important that the other pillars, such as the Investment Advisory Hub, act as indirect supports to Member States, including Ireland, in originating and developing projects for EFSI. In this regard, the positive engagement that is happening between the Strategic Banking Corporation of Ireland and the EIB authorities is critical.
I would also like to acknowledge in this context the role of Ireland’s Strategic Investment Fund, which acts as a sovereign investor with a dual mandate to create jobs and support economic growth in Ireland, and is a strong potential partner to EFSI here in Ireland.
We know that certain sectors in the Irish economy will face more challenging times. The EIB will have a role to play in helping to address the negative economic impact of these challenges.
In this context, the conclusion of an agreement last December between the SBCI and the European Investment Fund for a COSME counter guarantee facility to support a cash flow support loan scheme for Irish farmers is a welcome development. This type of innovative risk sharing product is new to Ireland and enables the quantum of finance provided to business to be greatly increased by sharing the risk between the SBCI, the European Investment Fund and commercial finance providers.
EIB-Ireland Financing Group
The new EIB Office has paved the way for stronger cooperation between the EIB and Ireland. To take forward this relationship, I established a new “EIB-Ireland Financing Group.” This group, which includes relevant Irish Departments and Agencies working alongside senior EIB staff, will provide a new focus for engagement and will work to ensure a strong ongoing pipeline of projects supported by EIB in Ireland.
Let me acknowledge the central role being played by Andrew McDowell as Vice President of the EIB working tirelessly to reinforce the strong relationship we have with EIB. My officials and I have been working with Andrew and his team. The first meeting of the Ireland-EIB Financing Group took place last December. It involved relevant Government Ministers and Agency heads discussing investment in Ireland with the President of the EIB, Werner Hoyer, Vice-President Andrew McDowell and EIB senior management.
Focus for future investment opportunities in Ireland-EIB Financing Group
As EIB Governor for Ireland, I wish to see a significantly expanded role for the Bank here into the future. Ireland has the demand for - and capacity to deploy - EIB resources.
The EIB already has existing strong lending relationships with a variety of public bodies in Ireland, including a direct lending relationship with the Exchequer through the National Development Finance Agency and relationships with a number of commercial semi-state companies. It is not intended that the Ireland-EIB Financing Group will displace these relationships but rather that they will be enhanced.
EIB President Hoyer will be hosting the second meeting of the Group in May where we can take stock of the progress made. We can then move to identify suitable high-level projects.
We have identified the need for further investment.
We are exploring alternative means of funding this investment to complement the Exchequer.
We must now move to the execution phase, together.
Thank you for your time today.