I’m pleased to have the opportunity to speak to you here this evening.
As representatives of the business community you don’t need me to tell you how serious the economic downturn has been. We are facing into another Budget and Finance Bill cycle and, as is well known, there will be no possibility of giveaways or generous breaks for any sector.
You know all about the state of the public finances and how the economic downturn and the requirement for extensive support to the banking sector have had very serious repercussions. These of course have been sufficiently serious that we are presently being funded through the assistance of the IMF and our European partners.
I would like to stress that the ultimate aim of the Government is to get our economy growing so as to create jobs. To do that we must continue to close the gap that exists between our revenues and our expenditures. If we don’t, the level of our scarce resources which will be used up in servicing the interest on our debt will reach levels that are simply not viable. In addition, a sustainable level of growth will reduce our dependence on international borrowing. It is only through a reduction in this external borrowing we will regain our economic sovereignty.
Consequently, the main aim of Government strategy is to return the public finances to a sound position and thereby create the conditions necessary for the attainment of strong, sustainable employment growth.
Let me be quite clear. We are making progress and taking account of the latest available data to hand, this year’s General Government deficit is now expected to be 10.3 per cent of GDP. This is lower than the 10.6 per cent of GDP target set as part of the EU/IMF Programme. The Government is absolutely committed to delivering on the 8.6 per cent of GDP deficit target for 2012 and to reducing that deficit to less than 3 per cent of GDP by 2015.
We saw robust real GDP growth in the first half of the year, and as a result the Irish economy is expected to record its first annual expansion since 2007 this year. This growth is being driven by a strong performance from the traded sector, which, in turn, reflects significant improvements in competitiveness in recent years. The Government is fully conscious that domestic demand remains weak as the imbalances built up during the boom continue to be worked off.
External conditions have, of course, deteriorated in the second half of the year. The level of uncertainty has increased once again, weaker growth is now expected in our main export markets and there are considerable risks to the outlook. This will clearly have a negative impact on Ireland’s growth performance over the near term, and as a result my Department recently revised downwards the growth forecast for 2012, from 2.5 per cent to 1.6 per cent. However, the broad consensus – from both domestic and international forecasters - is for reasonable growth over the medium term, reflecting the fact that Ireland has maintained many of its underlying strengths, such as our highly educated workforce, our very open economy and a pro-business environment. The strong increase of Foreign Direct Investment inflows in the first half of the year reinforces this point. My own Department has forecast an average annual GDP increase of 2.8 per cent over the period 2013 to 2015, which would be well above the average for the euro area as a whole over this period.
We have met all of the quantitative fiscal targets set as part of the EU/IMF Programme so far and the achievement of those targets, largely through strict expenditure management, has been cited as one of the reasons for the improving international sentiment towards Ireland. Notwithstanding the uncertainties that exist in the context of the wider Euro Area debt crisis, we must continue to get our own house in order and the Budget process is an important means of doing this.
No matter what happens in the wider eurozone, we will benefit from a more balanced economy. If the eurozone crisis recedes, we are amongst the best placed to grow quickly, as evidenced by the EU Commission growth forecasts. If the eurozone crisis persists, it is equally important to reduce our dependence on external borrowing.
Achieving the progress we have has required a wide range of difficult decisions. People throughout this country have had to make sacrifices in terms of higher taxes, lower levels of pay, and reductions in public services. Clarity around the measures that underpin the Government’s budgetary strategy will assist the rebuilding of confidence in our economy and in the sustainability of our public finances.
At the beginning of November, the Medium-Term Fiscal Statement was published setting out a year-by-year timetable of how consolidation will be phased over the period to 2015, beginning with a €3.8 billion adjustment in 2012. That document also detailed the split between revenue and spending adjustments and how the expenditure adjustments will be split between the current and capital budgets. The precise measures by which we will deliver on these targets for 2012 will be set out with the publication of the Budget and Estimates in the first week of December.
As to the composition of the adjustment, Government has decided to focus the bulk of it on the expenditure side having regard to international evidence which suggests that budgetary consolidations tend to be more successful when they rely more on spending reductions than revenue increases. It also reflects the view that the scope for raising the overall tax burden in an economy as dependent on international trade and foreign direct investment as Ireland is limited by considerations such as those around our competitiveness.
Two weeks ago, my colleague the Minister for Public Expenditure and Reform launched a Medium-Term Capital Investment Framework and in the coming weeks, will be announcing measures on the current spending side to achieve the necessary adjustment. The Minister also published public sector reform proposals on last week that will see a reduction in public service numbers of 12 per cent from their peak in 2008. Other proposals announced have radically rationalised the number of State agencies as well as drawing a line under the decentralisation programme. These will result in substantial Exchequer savings and make Ireland’s public service more affordable to the Irish taxpayers.
As regards the increased revenue which will be required, there has been much focus over the last few days on the issue of Value-Added Tax. Unfortunately, some of my proposals for Budget 2012 were released early. You way recall that the Programme for Government committed to limit the standard rate of VAT to 23%, a measure also promised as part of our funding programme. People may argue that we should do this in stages or perhaps not make the change at all. However, I would point to all of the international economic analysis, which shows that an increase in VAT that avoids an increase in labour taxes is, in relative terms, a more employment-friendly policy. In other words, increased income taxes have a more negative effect on economic growth and jobs than increases in indirect taxes. This Government wants to protect and create jobs and that is why I will be proposing an increase of 2% in the standard rate of VAT in the forthcoming Budget. However, I still have to discuss this specific proposal with my Cabinet colleagues and no final decision has yet been made.
Employment-friendly policies are vital as unemployment remains unacceptably high, however, with the increase in long term unemployment and the high levels of youth unemployment particular concerns. I am pleased to note that the latest data suggests that the employment situation is stabilising somewhat, and it was particularly encouraging to see the private sector as a whole create jobs on a net basis in the second quarter of the year. We are confident that this has played a role in generating and sustaining employment, particularly in labour intensive sectors such as tourism. The Initiative also introduced a substantial number of additional training and education places, to ensure that those out of work have the necessary skills to re-enter employment.
I am well aware that a VAT increase such as that under consideration will not be popular, least of all with business representatives such as you. However, it is worthwhile noting that for almost two decades up until recent years the UK operated a standard VAT rate of 17.5 per cent while Ireland’s rate was 21 per cent. This meant that there was always a 3.5 percentage point differential between the VAT rates of both jurisdictions. In this context, the 3 per cent difference between the Irish and UK VAT rates that will be in place after the Irish VAT increase takes effect, is still lower than the difference that was in place throughout the 1990s and 2000s.
There has been much comment claiming that the proposed VAT changes will increase cross border shopping. We need to have an informed debate on this issue and not resort to rhetoric. Previous studies have shown that the key driver of cross border shopping is the currency exchange rate – not VAT rates. If tax plays a role in driving cross border shopping, it is the overall level of taxation – which combines income tax, corporation tax, excise duty, VAT and other charges.
The recent increases in the UK VAT rate reflect EU wide changes with most other member states increasing their VAT rates. I want to be clear that there are no plans to change the zero rate of VAT which applies to a range of goods and services including most food, children’s clothes and footwear, oral medicines. Nor is there any change planned to the 9% rate which applies mainly to tourism services including hotel and holiday accommodation, restaurant services, and various entertainment services. Equally, there are no proposals to alter the 13.5% rate which applies to residential housing, home heating oil, labour intensive services and general repairs and maintenance.
I am firmly of the opinion that the best way to support consumer confidence, spending and jobs is to give people certainty about their take-home pay next year - that is why we have changed the previous Government's plan to further increase income taxes in this budget. The Universal Social Charge introduced by the last Government was a very painful experience for the economy and we have no desire to repeat this. In fact almost 80% of the previous Government's tax increases were income tax hikes - this had a very negative impact on take-home pay, confidence and spending. It made it too difficult for families to move off welfare into work.
There is no easy option left for the Government when it comes to increasing revenue. Any low-hanging fruit has long since been picked. We cannot raise money for the Exchequer without inflicting some pain. It is necessary for us to find the most effective but economically least damaging way to do this.
I might add that while nobody is underestimating the impact a budgetary consolidation package of €3.8 billion will have the citizens of the country, nor has this Government been persuaded by arguments for even greater front-loading of the adjustment, on the grounds that it is important to allow the economic recovery that has commenced a chance to strengthen. We are determined to implement the necessary consolidation in a fair and equitable manner and in a way that is as economic and jobs-friendly as possible.
In conclusion I would emphasis that we recognise that restoring the public finances to health will not be achieved by budgetary consolidation alone. Economic growth will play an important role. In that regard it is worth repeating my earlier points about how the economy has started to expand again and real GDP is now expected to increase by 1 per cent this year, mainly driven by a strong contribution from the traded sector. This is evidence that growth can be achieved in tandem with consolidation and this, in the view of the Government, is the only practical avenue open to us as we seek to work our way out of our present difficulties.
Thank you, and may I wish you a pleasant evening here.