Opening statement by Minister Donohoe to the Budget Oversight Committee
From Department of Finance; Department of Public Expenditure, NDP Delivery and Reform
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From Department of Finance; Department of Public Expenditure, NDP Delivery and Reform
Published on
Last updated on
CHECK AGAINST DELIVERY
Introduction
Chairman, Members, I welcome the opportunity to be here today to discuss Budget 2020, which I will publish on 8th October.
The Budget will build upon the Summer Economic Statement 2019 (SES), which outlined in broad terms the parameters for Budget 2020.
Economic backdrop
The Irish economy continues to grow at a robust pace, with GDP growth of 8.2 per cent recorded in 2018, and growth of 3.9 per cent forecast this year.
As a result, Ireland continues to be one of the fastest growing economies in Europe.
The public finances have significantly improved and last year the country ran an underlying surplus for the first time since 2006.
This year a General Government surplus of 0.2 per cent of GDP is projected.
The general government debt-to-GDP ratio is expected to ease further to 61 per cent by end-2019. This is comfortably below the forecasted Euro-area average of 86 per cent.
We are close to full employment with the unemployment rate currently at 5.2 per cent.
Notwithstanding the progress to date, there remain a number of significant risks to the outlook, including the increasing likelihood of a no deal Brexit.
There is increasing evidence of a global economic slowdown with the decline in growth of advanced economies occurring at a more rapid pace than previously anticipated.
Given Ireland’s position as a small open economy with a high degree of integration in global value chains, any further escalation in trade protectionism would have a disproportionate impact on Irish growth prospects.
Vulnerabilities in the public finances arising from the high concentration of corporation tax receipts also remain.
Furthermore there is the domestic economic risk relating to overheating as the economy approaches full-employment.
In summary, the economy is caught between possible over-heating on the one hand and the very real possibility of significant economic disruption on the other.
Budgetary Policy
Given the risks, both at home and abroad, framing Budget 2020 is more challenging than usual.
The appropriate budgetary strategy must be to build up resources which can be deployed in the event of a slowdown.
Budget 2020 will aim to build on the success of recent years but will be delivered at a time of unprecedented uncertainty.
As a result of the level of uncertainty — not least around Brexit — two budgetary scenarios were set out in the SES.
The first scenario involves an orderly exit of the UK while the second involves a disorderly exit.
On 11th September the Government decided that the budgetary strategy would be formulated on the assumption of a no deal exit of the UK from the European Union at the end of October.
Consistent with the fiscal projections published in the SPU, the Budget 2020 framework involves a budgetary package of €2.8 billion for 2020.
Of the €2.8 billion budgetary package, €2.1 billion is already pre-committed (including a €0.7 billion or 10 per cent increase in capital investments), and an expenditure reserve of up to €0.2 billion, with the capacity to accommodate funding requirements for the National Broadband Plan and the National Children’s Hospital.
This leaves €0.7 billion to be specifically allocated as part of the Budget.
In the event of a no deal Brexit, the Government has stated that it will provide counter-cyclical support to the economy through social protection payments occasioned by higher unemployment and on the revenue side, lower tax collections which help cushion aggregate demand.
The Government has also indicated that it will introduce timely, targeted, temporary measures for the sectors most exposed. Brexit contingency support may also be needed to address specific issues in the event of a ‘worst case scenario’ disorderly Brexit.
This could lead to a deficit of the order ½ - 1½ per cent of GDP next year amounting to a negative swing in the headline balance of over €6 billion.
In this context, the scope for budgetary measures, outside the Brexit support package, is extremely constrained.
As such, all Departments need to ensure that expenditure this year is managed within the allocations agreed by Government and voted by Dáil Éireann, and where expenditure pressures emerge that mitigating measures are put in place.
At the end of August overall gross voted expenditure of €42.0 billion was 0.6 per cent below profile, with gross current expenditure 0.3 per cent below profile and gross capital expenditure 3.7 per cent below profile.
Year-on-year expenditure growth was 6.5 per cent with current spending up by 5.1 per cent and capital spending up by 25.5 per cent. This year-on-year increase of 6.5 per cent at the end of August compares to the budgeted full year increase of 5.8 per cent.
Health current expenditure has a budgeted full year increase of 5.8 per cent and Health expenditure at the end of August is up by 6.7 per cent in year-on-year terms.
Given the priority placed on ensuring the delivery of sustainable improvements in the Health service, with an overall allocation of €17.1 billion this year compared to expenditure of €14.1 billion in 2016, it is crucial that Health expenditure, which was within profile at the end of August, continues to be proactively managed with all necessary measures implemented to mitigate the risk to the public finances from an overrun this year.
In this context, and taking into account the requirement to ensure that Government has the resources available to respond to the emerging challenges, in particular arising from Brexit, it is critical that the expenditure position for Budget 2020 is managed within the parameters set out in the Mid-Year Expenditure Report.
This places a requirement on all Government Departments to re-prioritise spending to ensure that offsetting measures can be put in place to mitigate the impact of emerging expenditure pressures and proposed new policy priorities.
Brexit Preparedness
The Government has always been clear that the UK’s exit from the European Union will have a detrimental impact on our economy and public finances whatever form it takes.
Work on no deal Brexit preparations has the highest priority across Government.
From a budgetary perspective, for Ireland, the EU Member State that will be most directly affected, it means ensuring we are prepared for whatever Brexit outcome emerges.
Since the referendum result in 2016, Brexit has been embedded in all of the Government’s economic decision-making, and in the management of our economy.
Steps have been taken to boost the resilience of the economy through:
Government has also been taking steps to make sure that Irish citizens and businesses are as ready as possible for all scenarios.
This is why we have:
Budget 2019 included an allocation of €115m on a number of specific Brexit measures across several Departments:
Budget 2019 also introduced a longer-term loan scheme, the Future Growth Loan Scheme for terms of 8-10 years, to provide a longer-term scheme facility of up to €300m to support strategic capital investment for a post-Brexit environment by business at competitive rates. This will be jointly funded by the Department of Business, Enterprise & Innovation and the Department of Agriculture, Food & The Marine.
Across Government, Departments and Agencies are continuing to engage with their stakeholders. This engagement includes:
Fiscal Vulnerabilities
The high concentration of corporation tax receipts experienced in recent years represents a more vulnerable revenue stream.
I have said that public spending must only be financed by revenue that is predictable and sustainable. Basing public expenditure increases on transitory and unstable sources of funding would not be commensurate with the Government’s commitment to a prudent budgetary policy.
With this in mind, and in terms of medium-term fiscal planning, I gave a commitment in the SES to undertake and publish an assessment of the sustainability of receipts next year, in light of future multilateral policy changes in this particular area.
Conclusion
To conclude, Government’s management of the economy means that Ireland is facing the challenge of Brexit from a position of economic strength.
Our job now is to build upon the progress made to date and ensure that we are ready to respond to the challenges, and opportunities, ahead.
In the forthcoming Budget we will use a well-run economy and the progress we have made of recent years to support and protect our people at a time of unprecedented uncertainty.
Thank you.
ENDS