Dáil Éireann - Volume 542 - 24 October, 2001

Ceisteanna–Questions. - Priority Questions. Economic Policy.

68. Mr. J. Mitchell asked the Minister for Finance his views on whether his budgetary stance over the past two years is validated by recent events; the extent to which his past management of the economy facilitates the maintenance of economic growth through increased public spending, and his further views on the control of public expenditure over the past three years. [25629/01]

Minister for Finance (Mr. McCreevy): The Deputy may be aware that the Commission has issued a conclusion on its report on the recommendation under Article 99(4) of the treaty and that indicates that the concerns on which the recommendation was based are no longer an issue for 2001.

The report advises a cautious and careful budgetary approach in 2002 and I will study this advice. For obvious reasons, I cannot get into a discussion on the budget for 2002 – the Deputy will have to wait until 5 December.

As far as coping with the new situation is concerned, we need to avoid any weakening of Irish [1496] competitiveness on the cost front, to sustain investor and business confidence through continued prudent management of the public finances, to prioritise public spending towards programmes which improve the long-term capacity of the economy to benefit from the eventual improved conditions and to make further progress on structural and regulatory reform.

In regard to public expenditure, against a background of strong economic growth in recent years the Government has been in a position to make considerable progress in providing necessary resources to deliver on key infrastructure priorities and its commitment to better public services. These priorities are reflected in its approach to multi-annual planning as set out in the NDP and PPF.

Nonetheless, when examining general Government expenditure as a share of national income, the figures show that the level of spending over the past three years has declined. General Government expenditure is the internationally comparable measure used by EUROSTAT and includes all elements of Government spending. While spending grew at a level which was necessary given the needs of a growing economy, it has risen by slightly less than GNP over the period as the economy grew at an unprecedented pace.

In the current economic conditions, the Government is committed to effectively managing competing demands for increased public expenditure, while continuing to deliver on its key priorities.

Mr. J. Mitchell: Is it not true that the Minister should not have allowed expenditure grow at such a rate over the past three years, and that he should now be in a position to spend more money in a decline? Is this not exactly the criticism made by the EU and from Opposition benches? Will he accept that his profligate policies have added to his current difficulties?

Mr. McCreevy: I do not agree, and it appears as if the EU does not now agree with what it recommended some months ago. We have had considerable economic progress in recent years, which has given us the economic largesse and budgetary surpluses to improve public services in a wide variety of areas. We have done that in areas such as health, social welfare and education. We have implemented the national development plan, which in 1999 prices amounted to £40.6 billion, and have improved public services in general. We have also been successful in reducing taxation. The cumulative changes in taxation and social welfare increases amounts to £5 billion over my four budgets. We have succeeded in reducing the national debt, which was 39% of GDP at the end of last year and is 34% or 35% this year, and we have put money aside for the pension reserve fund. All in all we have managed the economy very effectively.

[1497] Mr. J. Mitchell: It is easy to manage the economy when it is growing at the rate it has grown, and given the economy inherited by the Government. Would prudence and wisdom not have told the Minister that he should put money aside for investment when the inevitable downturn arrived? Does he agree he has insufficient funds to keep growth going by investing more because of his profligacy in recent years?

Mr. McCreevy: I do not accept that at all. The policies pursued by the Government in recent years, together with the national social agreements which have been in vogue since 1987 and other factors have considerably improved the economy. The Deputy will be aware that the growth rates in my time in office have been unprecedented. The increase in GDP in 2000 over the previous year is the highest of any OECD country on record. This has allowed us do things in the public service area and to invest in a creaking infrastructure, which would not have been possible in the absence of economic success. The Deputy will know that I am strongly of the view that economic growth creates wealth which provides more money for the Exchequer, and that is the time to do the things one wants to do, and that when one does not have such funds one does not do such things.

Mr. J. Mitchell: The Minister is ignoring the economic reality that when an economy is booming, as ours has been, is not the time to add fuel to the fire – it is merely wasting fuel. Now that the Minister needs to fuel the fire he does not have the necessary resources, which is a manifest failure on his part.

Regarding infrastructural development, will the Minister accept that such are the delays in the national development plan, and such is the rate of inflation, that much less will be delivered in a much slower way than was first planned?

Mr. McCreevy: It is true that in recent years inflation in the construction sector has been higher than anticipated, but it is also true that has now abated somewhat due to the general slowdown, and that over the seven years of the national development plan we will deliver what is set out in it. The NDP does not just provide for sums of money but sets out what is to be achieved over the period of the plan, and the Government intends implementing it.

The Deputy is aware of my view that the general economic textbook analysis does not apply to a small open economy such as Ireland, a view I have held for many years. The Deputy and others in Europe and further afield have said that the budget was expansionary in 2001. However, I suggest to them that if one agrees with this view, and further agrees with some economists who say the economy has been flat for the second half of the year, that textbook analysis is brought into contention with what applies to the Irish economy.

[1498] An Ceann Comhairle: We must move on to Question No. 69.

Mr. McCreevy: It is strongly my view that fiscal rectitude in a small open economy such as Ireland's has very limited effect. I have said that consistently for many years.

An Ceann Comhairle: I have called Question No. 69. We are way over the time.

Mr. J. Mitchell: Will the Minister accept that what we have now is increased inflation and not increased output?

69. Mr. McDowell asked the Minister for Finance the anticipated budget surplus at the end of 2001; the surplus he predicted in his last budget; the anticipated level of economic growth for 2001; the figure for growth he predicted in his last budget; the implications of the reduced budget surplus and growth for the economic situation; and if he will make a statement on the matter. [25559/01]

Mr. McCreevy: In Exchequer terms, the budget day forecast was for a surplus of 3,222 million euro, or £2,538 million which was equivalent to 3.3% of GNP. The end September forecast was that the Exchequer surplus would be at least 1.9 billion euro, or £1.5 billion lower than the budget day forecast and possibly significantly more. These Exchequer figures exclude the proceeds from the new voluntary disclosure scheme and the sales of the TSB and the ICC.

Last December, the forecast for 2001 economic growth, published in conjunction with the budget, was for an increase of 8.8% in GDP and of 7.4% in GNP. My Department's most recent forecast for 2001 economic growth, published in Economic Review and Outlook, is for an increase of 7.2% in GDP and an increase of 6% in GNP. This forecast was prepared in August 2001 and, therefore, does not take account of the impact of the events of 11 September in the United States on global and domestic economic activity. It is very difficult, just a month after the events, to assess the full economic impact of the attacks on Ireland's economic growth. Obviously much depends on the effects on the world economy as a whole and on reactions to the ongoing military response. My Department will, as usual, publish its estimates for economic growth with the budget.

The economic environment has clearly altered radically compared to this time last year. Obviously the reduced tax base has implications going forward for increased tax revenue for surpluses and for debt. These factors are being examined in the context of the forthcoming budget.

Policy at this juncture must be geared towards ensuring that when the international economy recovers Ireland is positioned to benefit fully from that recovery. I am satisfied that in the [1499] medium term, as the global economic environment recovers, we can achieve satisfactory levels of growth which will benefit us all.

Mr. McDowell: Is the Minister aware of the Taoiseach's prediction two days ago when launching the National Centre for Partnership and Performance that economic growth would be 3% this year? Will he agree that his Department's forecast of 6% growth made in the ERO in August is much too optimistic and that it is now virtually certain the economy is, in fact, technically in recession?

Mr. McCreevy: As the Deputy will be aware, my Department and I make two forecasts on economic growth each year, one on the day of the budget and the other during the mid-term review published in August. The mid-term review estimated economic growth in GNP terms at 6% as of that date. I am also aware the Taoiseach recently anticipated that economic growth for the year might be of the order of 3%. On budget day, 5 December, I will give what I believe will be the outcome for 2001, including the estimate for 2002. I have read in recent weeks estimates for growth in the Irish economy in GNP terms for 2002 ranging from 1% to 6.5% across a range of private economists, some institutes and other bodies. Therefore, the jury is considerably out on what will be the economic growth for next year. Some people are of the view that the economy did not grow in recent months. However, as we publish quarterly economic statistics with a time lag, I will have to wait for some time to find out whether that is correct.

For many years after the event there are revisions to Ireland's economic statistics by the Central Statistics Office. I agree with the Deputy that economic growth for the second half of the year was not anything like that predicted at budget time in December of last year.

Mr. McDowell: Taking the Taoiseach's prediction of 3% and assuming that growth would have been front loaded at the beginning of the year, does it not follow that we are now in recession in that the economy has almost certainly declined in the third quarter and will likely decline further in the fourth quarter of the year? On the Minister's starting budgetary position of a no policy change basis, is it not now the case, given what we know about the likely surplus for this year, that he will start with an Exchequer deficit?

Mr. McCreevy: On Friday evening each year before the budget we publish on a no policy change basis the Estimates for the forthcoming year. This takes into account the Abridged Estimates volume which is published in December and our expectations on taxation for the following year. The Estimates will not be published until mid-November, followed by some budget day adjustments. We will have to wait until later [1500] to prognosticate what we estimate income will be. The Deputy is correct that the nine months Exchequer figures show tax revenue is not growing as anticipated at budget time, therefore, the basis on which we will build our estimate of taxation for next year will be considerably lower that was anticipated this time last year. Many variables will have to be considered when trying to predict what economic growth will be for next year. The eminent Mr. Greenspan said in the past fortnight that he was not in a position to predict what economic growth will be in the United States or anywhere else because matters are so uncertain. All these issues must be taken into account when making predictions for next year.

Mr. McDowell: I am not asking the Minister to make a prediction for next year. I am asking him, based on the three-quarter year returns, to tell us the opening position on a no policy change basis.

I am not asking him to tell us what is in the budget.

Mr. McCreevy: This may be a bit technical, but a no policy change basis is based on estimates of expenditure. Taxation matters on which one builds the other side of the budget depend on other factors such as the expected rate of economic growth and on what base one is building tax figures. It is too early to make a prediction on that basis. The overall surplus or deficit is the basis on which one makes estimates on those levels.