Opening Speech by Minister for Finance, Public Expenditure & Reform, Paschal Donohoe T.D, to the ESRI’s Budget Perspectives 2019 Conference

 

 

Check Against Delivery

 

10th July 2018

 

I am delighted to be here this morning and would like to thank you for the opportunity to open today’s conference.

The decisions made in the annual budget impact us all and any discussion that informs debate on the implications of these decisions is to be welcomed.

Indeed, the recent National Economic Dialogue provided another opportunity to consider how to optimise available resources in the interests of all citizens.

The aim of the dialogue, which was chaired by the Director of the ESRI, Professor Alan Barrett, is to foster discussion on how best to sustain and strengthen the recovery while taking account of the many competing economic and social priorities within the available resources.

It also affirms the Government’s belief in the value of open dialogue as a public good.

This October, I will deliver my second Budget as Minister for both Finance and Public Expenditure & Reform.

The Government will frame budgetary policy on the basis of what is right for the economy in order to ensure steady improvements in Irish employment and living standards. 

The fact that we can now continue the work of improving the lives of our citizens is testament to the economic progress Ireland has achieved in recent years.

Our economy is in good shape and is again expected to grow significantly this year and next before returning to a growth rate in line with potential.

Economic growth has also resulted in more employment opportunities.

There are now more people working than ever before and full employment, while unthinkable a few years back, is fast approaching.

Against this positive backdrop, we will broadly balance our books again next year and set up a Rainy Day Fund. Due to the political choices we have made in Project Ireland 2040 and the National Development Plan to substantially increase capital spending, which is increasing by €1.5 billion (25 per cent) next year to over €7 billion, we plan to run a very small deficit next year, while positioning our economy to better meet the needs of society.  

We are prioritising capital spending in order to address the serious infrastructural deficits that emerged during the recession and to position our economy and society for the opportunities and threats ahead.

This is the right way to rebalance our economy for the future.

 

The Right Social & Economic Model

 

Well-managed economies are characterised by durable improvements in living standards rather than the ‘all-or-nothing’ approach that has been a feature of Irish economic history, especially in more recent times.

Historically, Ireland’s economic performance has been less consistent than that of other small open economies in the EU, while our propensity to suffer economic shocks and resilience to withstand such shocks has been out of line with these comparator countries.

As we pursued a pro-cyclical approach to fiscal policy in the past, our comparator countries witnessed incremental and sustainable increases in living standards and retained their national sovereignty when the global financial crisis struck.

To avoid repeating the mistakes of the past, it is critical that we are constant in our approach, which in essence means deciding on the appropriate economic and social model for the country and having the political commitment and consensus to stick with it across political and economic cycles.

We only have to look at other small, open countries like Finland, Sweden and Denmark to see well-managed economies with excellent public services paid for on a sustainable basis.

This Government and its predecessor have pursued central elements of our comparator countries’ approach since 2011 – fiscal responsibility, active labour market policies and a broadening of the tax base.

However, this work is not yet completed. Particular priorities for the period ahead include:

  • Deeper social dialogue to enhances consensus for the appropriate social and economic model for the country;
  • Enhancing social insurance to deliver greater economic security;
  • Industrial rebalancing with a renewed focus on building an indigenous system of innovation and improving the productivity of domestic enterprise;
  • A broad and sustainable tax base;
  • An active land management policy where land is planned and developed in a co-ordinated manner in the public interest; and
  • Improving the market incomes of people at the lower end of the income distribution.

 

Policies that Renew Our Social Contract

 

 In this context, I want to highlight two areas where it is important that we continue to make progress in order to renew the social contract that underpins support for our democratic system.

 First, as you are aware, the labour share of national incomes has been on a downward trend in advanced economies since the 1980s.

This trend has been driven by rapid changes in technology and globalisation, with the IMF attributing approximately half of the fall in the labour share to the former and about one quarter to globalisation.

A decline in the labour share is significant as it implies a decoupling of wages and productivity and is also likely to increase pre-tax income inequality since capital tends to be more concentrated than labour.

Ireland has not been immune from this trend.

However, after a number of years of modest wage growth, the latest figures point to a sustainable pick-up in wages in 2017.

Average annual earnings grew by 2.0 per cent last year compared to 1.3 per cent in 2016.

We expect this upward trend to continue as the labour market reaches full employment.

Given low inflation, real wage growth is at a similar level.

As such, the labour share is now broadly back in line with its share during the Celtic Tiger period and it is likely that it will increase over the coming years as domestic demand increasingly drives growth.

It is of course imperative that these wage developments are commensurate with trends in productivity over the coming years.

Everyone has a responsibility to ensure that the pace of wage growth is sustainable and affordable in order to protect Ireland’s competitiveness.

The other area where progress is imperative is in housing.

From a very low base and after a lost decade of starved investment, there are signs of progress.

The measures put into action by Government to increase housing supply have tackled the issue from a number of sides.

We have very significantly increased public expenditure on housing, introduced tax measures like the vacant site levy and improved how the planning system operates and delivers on its objectives

These measures are now taking hold and showing through a strong and sustained increase in housing supply.

New house completions ­– increased by 42 per cent in the four quarters to Q1 2018, to 15,193. The most recent planning permissions indicate that supply will continue to expand with planning granted for 8,405 units Q1 2018, up 81 per cent on Q1 2017.

While these numbers lag behind annual demand estimates of 30,000 – 35,000, significant progress is being made.

 

The Right Budgetary Stance for Our Economy

 

In the Summer Economic Statement, published last month, I set out the parameters of the Budget 2019 package at €3.4 billion.

Of this €2.6 billion has been pre-committed, leaving €800 million for further allocation. Each year, attention is focused on the distribution of this remainder, yet central Government spends over €60 billion annually.

This remainder – or the artist formerly known as the fiscal space – may well have been the appropriate element of focus in the period following the recession, when the amounts available to bring about service improvements were constrained.

However a full and literal application of the fiscal rules would now involve the adoption of pro-cyclical policies not appropriate to our position in the economic cycle. 

Increasingly the risks to the economy are real. As such, we need to build up our fiscal capacity in order to respond to these challenges – to enhance our resilience.

This is why the Government is prioritising reducing public debt, establishing a Rainy Day Fund, and avoiding pro-cyclical budgetary policies. 

What we cannot do is look at the framework of fiscal rules, and say – because a certain element or part of that architecture could say that we might be able to spend more money- is that we go down that pathway if that’s money that we don’t have, and our economy needs to borrow to do it.

So the way in which the Government will be putting together this Budget is looking at what is the right budgetary stance to take.

This approach has the support of many observers of the budgetary process, with the Fiscal Council, in its most recent Fiscal Assessment Report, recommending a budgetary package in line with that set out in the Summer Economic Statement and correctly pointing out that the spending rule is impacted to a degree by pro-cyclical bias. 

As the ESRI has recently pointed out, a challenge we now face is how to use budgetary policy to facilitate the transition from substantial economic growth rates synonymous with a rapid recovery to a more sustainable rate of growth over the medium terms.

 

Spending at a Sustainable Rate

 

Expenditure on public services and capital investment must be financed from a sustainable source. As Exchequer revenue is impacted by the cycle of the economy, basing expenditure commitments on the current high level of revenue would only serve to introduce uncertainty to the future provision of public services.

And, as I said at the National Economic Dialogue a number of weeks ago, I’m struck by the view in relation to the gradual approach we are taking in relation to tax reform or tax reduction, where many would claim that because of the approach being adopted, which is a gradual one, that is a reason for not doing anything at all.

Well, I’d like to consider the alternative to gradualism.

The first scenario is to do nothing at all; to do nothing at all in relation to tax reform and personal taxation in the midst of the changes in income that I’m talking about sows the seeds to undermine the perceived fairness of our tax system.

An alternative to gradualism or to doing nothing at all is to do a huge amount at once. We’ve been there before. Look how that turned out for us. So gradualism, in terms of public expenditure and in terms of tax reform and reduction, I believe, is good and the most sensible approach to take to build a resilient future.

Exchequer revenue is impacted by where the economy is at each point in time. This is why I want to take care in relation to managing the degree to which expenditure grows and of course dealing with all of the pressures that those choices create.

Of course, efficient use of resources will also extend to the National Development Plan, which will implement the recommendations of the IMF’s 2017 Public Investment Management Assessment. This will lead to a greater focus by Government on achieving value for taxpayers’ money when it comes to public capital investment over the period of the plan.

With enhanced risks to the global economy, the priority must be to rebuild budgetary buffers. This will increase the capacity of the Irish economy to absorb any shocks if and when they occur. With this in mind, a contribution of €500 million to the Rainy Day Fund will be provided for in Budget 2019.

On a similar theme, public debt, as evidenced by the debt-to-GNI* ratio of 97% this year, remains high and needs to be addressed. Reducing the nominal debt will reduce the resources required to service that debt. Resources that could otherwise be used to provide public services. Lower nominal debt would also increase the ability to withstand any adverse economic developments that may arise in the future.

Finally, I would like to reiterate that continuing economic growth and year-on-year growth in revenue cannot be taken as a certainty. Our economy will face a stern challenge as the UK prepares to leave the European Union. There are also possible disruptions to the global trading system. As a small open economy, Ireland’s budgetary policy must be directed towards improving our fiscal capacity to provide public services in the face of potential shocks to the economy.

 

Thank you.