I am happy to have the opportunity to debate the 2003 abridged Estimates volume in the Upper House.
Ireland may be an island geographically but it is certainly not an economic island. We live in a small open economy and cannot avoid the effects of the slow-down in worldwide economic growth. The pace of international economic activity is disappointing with continuing uncertainty about the timing of any upturn. The fiscal position in the euro area, the United Kingdom and the United States has deteriorated. The same factors are at work in Ireland. As economic and revenue growth moderates, we must face reality.
I assure the House that the Government did not embark on a strict approach to public spending in 2003 simply because we wanted to balance the books. The European Union Stability and Growth Pact requires us to keep general Government finances close to balance or in surplus, and to take corrective action when there is an actual or expected divergence from this objective. We made it clear in An Agreed Programme for Government that we would respect this sovereign commitment.
We also have responsibilities to the people. We have a responsibility to protect the economy and to foster conditions which will maintain high levels of employment and generate the resources which we need to keep improving our public services. If this requires difficult decisions in the short term, we are willing to take them. The lessons of the past have shown us that high taxation rates and high levels of borrowing will deliver the opposite. We cannot repeat the mistakes of the past.
Certain headline figures about spending this year and next have featured prominently in much of the commentary on the Estimates. The media refer to a planned increase in spending next year of 2% compared to a 20% increase this year. Neither figure is correct.
True, last week's abridged volume provides for a 2% increase in spending. However, I made it clear last week that the abridged Estimates volume (AEV) does not include any provision for social welfare rate increases, benchmarking or any other pay increases. I will deal with these issues on budget day.
True, the end-October Exchequer returns showed that spending at that point was nearly 20% above spending in the corresponding period last year. However, my aim and expectation remain that spending this year will come in on, or close to, the target increase of 14.5%. The forecast outturn figures for 2002 which were included in last week's AEV show that, at this stage, the forecast outturn for net voted expenditure is only slightly above the revised Estimates volume (REV) provision.
Some of those who argue for higher public spending claim that Ireland's share of spending relative to national income is much lower than that of other EU countries. The implication is that our level of public service provision is therefore correspondingly lower. This suggestion is based on cross-country comparisons which indicate, for example, that general Government spending in Ireland is budgeted at about 35.5% of GDP for 2002 compared with an EU average of 47%. However, this comparison is misleading.
Ireland's taxable capacity, which delivers the resources for public service provision, is essentially related to GNP, not GDP. Our GDP is about 20% higher than our GNP whereas there is no real difference between GDP and GNP in other EU member states. In addition, a lot of expenditure is age related – pensions in particular. Other EU member states currently have a far less favourable demographic position than us. On average 16% of other member states' populations are aged 65 plus whereas only 11% of our population is in this age group. This means, for example, that other EU member states have to spend much more to provide the same level of pensions and health services as us. If one takes account of these factors, our spending ratio is much closer to the EU average. Because I have managed our budgetary affairs prudently over the years, we now spend far less on debt service than others – about €1,000 less per household per annum.
There has been much talk of cutbacks and curtailment. I want once again to remind this House of the scale of investment in our public services in recent years. I am proud that our growth rates since 1997 have allowed us to spend more on public services than has ever been possible before. In fact, we have had the highest rate of increase in public spending of all EU member states over that period. Spending on day-to-day public services here rose three times as fast as in the average EU member state between 1997 and 2002.
Inevitably, at Estimates time, many figures are quoted and the scale of overall spending can be lost in the detail. It bears repeating therefore that the abridged Estimates provide for total gross expenditure next year of €36.7 billion. This is nearly double the amount spent in 1997. Current spending will be over €31 billion compared to €17 billion in 1997. Since I became Minister for Finance, funding for the health service has increased by €5.3 billion, education spending has increased by €2.4 billion and social welfare spending has increased by €4 billion. Capital investment next year will be over €5 billion compared with only €2 billion in 1997.
Taking account of the Estimates figures just published and before any budget day allocations, public expenditure will have increased at an average of about 13 % per annum over the period 2001 to 2003. We are now operating from a high spending base which will allow us to continue to deliver high levels of public services.
This Government's philosophy is to share our economic success with the Irish people. We have used resources wisely to reform our tax system, invest in our public services, reduce our debt and establish the national pensions reserve fund to safeguard the pensions of this and future generations.
I have said many times since the publication of the Estimates that spending must be prioritised. It is not possible to afford the same priority to each sector. The debate in the Lower House was characterised by long lists of high priority programmes which Deputies believed should be granted more resources. Constructive opposition might be expected to signal what areas of expenditure are of a lower priority. Yet no one seems prepared to propose reductions in even one specific spending programme. This Government has the courage to make difficult choices. We have decided to continue to provide substantial funding in 2003 for health, social welfare, education and transport infrastructure. Inevitably this has required a tighter approach in other areas.
One thing I have learned from my time as Minister for Finance is that money alone is not the answer to delivering top quality public services. If it were, we would have solved all our problems by now. The funding which this Government has provided since 1997 has produced substantial benefits for the people of this country. However, we all agree that there is scope for securing better value for money through more effective control and management of public expenditure.
In my speech to the Dáil on Tuesday, I outlined a number of improvements to the financial management systems which I will introduce from the beginning of next year. Briefly, I expect Ministers and their management advisory committees to manage within the allocations given to them. I intend to publish the yearly spending profiles which are submitted to my Department at the start of the year to facilitate a more informed assessment of emerging spending trends. I will continue to submit monthly expenditure management reports to Government, reporting on overall spending and revenue trends.
I want to see improvements in risk assessment measures and the introduction of contingency planning to cater for unforeseen pressures which may emerge as the year progresses. I want spending on demand led schemes to be managed effectively, just like other spending programmes. I am introducing revised arrangements for managing capital spending which will provide details of all capital projects being initiated during 2003 and planned for the following four years. I also want to provide incentives for Departments to improve efficiency and cost effectiveness. For example, where Departments secure savings as a result of efficiency measures or steps they have taken to curtail a programme, these savings should, as a general rule, be available for other high priority programmes within the same Department.
While these control measures are very important in their own right they are also designed to encourage public service managers to seek out and exploit greater efficiencies. A number of initiatives are already in place which will help put the spotlight on value for money issues, including the management information framework, the expenditure review process and the forthcoming mid-term evaluation of the national development plan. I am aware, however, that more needs to be done.
For a number of years now a three year planning horizon has been in place for public expenditure. I want to develop this further to give greater certainty to Departments in relation to planned allocations over the medium term. I have already introduced a five year financial envelope in the public transport sector to facilitate greater planning and more effective management of expenditure. My Department is currently considering whether a similar approach can be applied in other large capital spending areas. Ministers and Secretaries General are responsible for managing spending within their area and I want to give them the maximum flexibility to do so effectively. Greater delegation must be coupled with greater accountability. The public has a right to see whether it is getting value for money. I want to see a greater focus on results and outputs achieved.
Many points have been raised about specific aspects of the Estimates but I would like to comment on three particular issues – infrastructural investment, health spending and housing. There has been a lot of loose talk to the effect that the Government has abandoned the national development plan. Nothing could be further from the truth. Investment in NDP economic and social infrastructure will exceed €12 billion over the period 2000 to 2003. This is €700 million above what was promised under the plan even after taking account of actual inflation in the construction industry over that period.
The evidence of this is visible throughout the country as infrastructural projects, especially in the transport and environment areas, of a scale never before seen in Ireland, are either under construction or at various stages of planning. In 2003 alone the Government will invest almost €3.4 billion in the NDP economic and social infrastructural programme. I would like to have been able to provide more, but investment, too, must be subject to overall budgetary policy.
I have commented before on the high level of construction inflation in recent years. I am disappointed that this has eroded the output being delivered in return for this massive level of investment. The taxpayer cannot be expected to write a blank cheque to meet cost increases generated within the construction sector. The rate of inflation in the sector is now reducing to more acceptable levels and I expect to see greater value for money and improved output from the capital investment in 2003 than has been the case in recent years.
Another misconception being peddled is that the 6% increase in health spending next year will not match an alleged 10% health service inflation rate. This is a fundamentally flawed view and the conclusion drawn is incorrect. I will not bore Senators with the details, but the 10% rate of inflation being cited refers to part of the consumer price index. A simplistic comparison of this CPI based data with the rate of increase in the Vote for the Department of Health and Children is both inappropriate and misleading. Some 70% of health spending is pay or pay related. It is not driven by the CPI measurement of health inflation. The 2003 abridged Estimates include adequate provision for the carryover costs from 2002 of the PPF pay terms. As I indicated, I will be dealing with the pay implications of any further increases on budget day. The remaining 30% or so of health spending covers a myriad of different elements ranging from food, light and heat to high technology, drugs and equipment. The increased abridged Estimates volume provision is intended to ensure the existing level of health services is broadly maintained in 2003 and allows for some limited expansion of high priority areas such as cancer treatment.
The new house grants scheme was introduced in its present form in 1977. The main purpose of the grant was to encourage new house building. For this reason first-time purchasers who bought an existing house did not qualify for the grant. In 1977 only 17,000 or so new private houses were being built. Last year private housing output amounted to over 47,000 units. The level of home ownership in Ireland is about 80%, the highest in Europe by some margin. First-time buyers now account for about 40% of all purchases. The abolition of the grant is not intended simply to generate savings for the Exchequer. The intention is that the funding devoted to the grant will in future be allocated to the local authority and social housing programme. Over the lifetime of the Government this could involve up to €200 million.
In recent years a range of better targeted schemes to assist low income purchasers and those with social housing needs have been put in place. Between 1998 and 2001 the provision of social and affordable housing has grown by 35% to 11,385 units and a further increase to almost 13,000 units is forecast in 2002. In addition to an Exchequer investment of over €1 billion in housing in 2003, a further €680 million will also be available from local authorities' own resources and advances by the Housing Financing Agency. In total, over €1.6 billion will be available for social housing compared with €1.5 billion in 2002.
I recognise the impact which the abolition of the new house grant will have on individuals planning to buy a new house. However, in current circumstances, it is essential to look carefully at every expenditure programme to see whether the costs are still justified in the light of changes in circumstances during the years. Most commentators recognise that the new house grant has outlived any usefulness it had as an economic incentive. We, as politicians, are very fond of talking about the need to establish clear criteria for spending programmes and the need to introduce better evaluation of those spending programmes. If we are really honest with ourselves, the new house grant is a classic example of a scheme which was introduced for a specific purpose at a particular time and which has since been overtaken by changing circumstances.
The economy is in good shape and a good position to deal with the current slowdown. The Government did not take decisions on the 2003 Estimates lightly. This is not some form of technical accounting exercise to balance the books. It is a necessary step to ensure our continued prosperity. We want to continue to foster the economic conditions to create wealth and jobs. We cannot do so through high taxation or high borrowing. The only way forward is to have an ongoing sustainable match between revenue and expenditure. The 2003 Estimates will set us on that path.