A Cheann Comhairle,
Today the Government published its annual Summer Economic Statement.
This Statement is a key element in the reformed budgetary process. It provides an updated assessment of the fiscal policy parameters for discussion in the Dáil and, subsequently, at the National Economic Dialogue which is taking place tomorrow and Thursday.
It also sets out the Government’s economic and fiscal strategy which will include a twin track approach to Brexit in preparing for Budget 2020.
Firstly, it is appropriate to take stock of where we are now in terms of the economy.
Our economy is very different to that which prevailed a decade ago when Ireland entered the most acute phase of the financial crisis. It is now more diversified and economic activity is more balanced.
Living standards have improved. The public finances, which have been reinforced by a range of initiatives designed to build up fiscal resources, finally returned to surplus last year.
Unemployment now stands at just 4½ per cent having peaked at 16 per cent in 2012. GDP growth of 3.9 per cent is projected for this year and 3.3 per cent next year.
However, the risks to our economy have intensified recently and include:
- A greater likelihood of a no-deal Brexit outcome;
- A risk of overheating in the domestic economy as it closes-in on full employment and mounting wage pressures;
- A deterioration in the international trade policy environment; and
- Heightened vulnerabilities around corporation tax revenues.
The key principles underpinning the Government’s economic strategy are:
- Steady and sustainable improvements in living standards;
- Ensuring sustainable fiscal policy; and
- Budgetary strategy that protects domestic living standards irrespective of the Brexit outcome.
The Government must formulate the appropriate 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 irrespective of the Brexit outcome.
As such, budgetary policy must ‘lean against the wind’ to (1) avoid the economy growing too fast and (2) build-up suitable buffers so that we can stabilise the economy in the event of shocks.
Against this unique backdrop, the task of framing the Budget this October, weeks before the UK is due to leave the EU, will be more challenging than usual. Our obligations to the EU mean that we must submit a draft budgetary plan to the Commission by mid-October.
One Budget, two scenarios
The Economic Statement sets out two budgetary scenarios – the first involves an orderly Brexit; while the second involves a disorderly scenario. Both are indicative – unprecedented levels of uncertainty means that there are many possible economic outcomes.
Either scenario suggests a more conservative budgetary stance is needed in preparing Budget 2020. This is in-line with policy advice from the IMF, European Commission, OECD and IFAC.
In the event of an orderly Brexit and given that we are at the top of the economic cycle, the appropriate budgetary policy is to stay within the parameters set out in the SPU.
The Budget 2020 framework involves a budgetary strategy of €2.8 billion for 2020. Under the orderly Brexit scenario, this is consistent with a 0.4 per cent of GDP headline surplus for next year.
With current and capital expenditure commitments amounting to €1.9 billion (including a €0.7 billion or 10 per cent increase in capital investment) and an expenditure reserve of up to €0.2 billion being established to accommodate funding requirements for the National Broadband Plan and National Children’s Hospital, this leaves €0.7 billion to be specifically allocated as part of the Budget.
Over the medium term, the strategy envisaged under this scenario would see an improving headline surplus, with expenditure growing below the projected growth in the economy. This is appropriate given the uncertainties arising in the external environment and the current position of the economic cycle.
Brexit and the public finances
It goes without saying that a disorderly Brexit will put pressure on the public finances and presents a risk to domestic living standards. Under the disorderly Brexit scenario, this could involve a headline deficit in the region –½ to –1½ per cent of GDP for next year, depending on the magnitude of the economic shock.
Under the disorderly Brexit scenario, in addition to the strategy outlined for the orderly scenario, a disorderly Brexit would also involve:
- allowing the automatic stabilisers provide counter-cyclical support; and
- temporary, targeted support for the sectors most affected.
In September the Government will decide which scenario will form the basis for Budget 2020.
The approach being proposed is the correct one to avoid overheating the economy and to build up appropriate resources so that budgetary policy can support the economy in the event of a disorderly Brexit.
Securing the future
By taking pre-emptive action now, it will help with the choice of the future. This would allow the Government to continue funding the rollout of the National Development Plan and to maintain the existing level of services.
Budgetary measures must be financed by revenue streams that are sustainable into the future. My Department and I have previously flagged the risk arising from the concentration of corporation tax receipts.
I have asked my officials to develop proposals to manage windfall corporation tax receipts to ensure the sustainability of the public finances and also to ensure that the fiscal rules do not contribute to budgetary imbalances. I will publish these proposals shortly with a view to making recommendations to Government in the autumn.
The Rainy Day Fund is another policy response to mitigate over-reliance on revenue over-shoots, including corporation tax receipts. In addition to the Rainy Day Fund, the best solution to an excessive reliance on corporation tax is to run budgetary surpluses.
This year a surplus of 0.2 per cent of GDP is in prospect with a further improvement next year to a surplus of 0.4 per cent of GDP.
In conclusion, Ceann Comhairle, the Irish economy is in good shape. But we face uncertain times ahead and we must plan accordingly. The Summer Statement sets the right course for the journey ahead; this is sensible budgetary strategy and one that the Government intends to follow.