I welcome the opportunity to be here. I will go through my opening statement briskly in order to deal with the select committee's questions and comments.
The committee will be aware of the objectives I have set for the medium term in terms of future budgetary choices, ensuring steady growth in living standards, how we can rebuild budgetary capacity, the need to be careful in spending choices, the need to avoid pro-cyclical fiscal policies and ensuring budgetary policy will focus on ensuring fiscal safety. Colleagues will be aware of where the economy stands in terms of growth forecast for this year and next. I expect that in the year after next, all things being equal, we will see a growth rate that will move more into line with the potential growth rate of the economy, rather than the heightened figures we have seen recently.
The committee will be aware of where we stand on employment. The unemployment figure in June was 5.1%. The figure for those unemployed for more than one year fell from 200,000 in 2012 to 50,000 in the first quarter of 2018. We potentially face new challenges as the economy moves towards full employment this year. As we approach that point, we have seen more gradual improvements in living standards, rather than an all or nothing approach which characterised some choices in the past. Because of this, I want to be careful to ensure our policies can be consistent in coming years. I have laid out my views on how that can be done in the summer economic statement.
This year, to date, has seen very positive Exchequer returns. They have increased by 5.4% cent year on year, which is ahead of target. I am confident that we are well positioned to achieve the overall annual tax target of €54.2 billion for 2018. Against this, I plan to broadly balance the books by running a very small deficit next year of 0.1% of GDP. The main driver of this is the plan to increase capital spending substantially in 2019, bringing capital expenditure to in excess of €7 billion, an increase of one quarter on the figure for this year. I will not put in place any taxation or spending measure that will result in a deficit of larger than 0.1%. If that is accepted, it will accommodate a budgetary package of €3.4 billion, of which €2.6 billion has been pre-committed to expenditure measures, leaving €800 million for further allocation. Any unfunded taxation or expenditure measures that go beyond this figure will necessarily involve even more borrowing and result in a subsequent increase in the deficit position. If that deficit position worsens, it will mean borrowing more and spending money we are not raising within the country.
There are choices which are open but which I will not pursue. For instance, targeting minimum compliance with the expenditure benchmark allows an additional figure of €900 million, but it would increase the deficit by 0.3%. If the rainy day fund was also used instead to increase expenditure by the same amount, it would be a further deficit of 0.5% of GDP. If both were pursued, it would increase the deficit from 0.1% of GDP to 0.6%. That would be highly inappropriate at this stage of the cycle and ensure we were in breach of the fiscal rules as we would miss our medium-term objectives next year.
I will refer to why I believe we need to take a different point of view now on the fiscal rules. We need to avoid the adoption of pro-cyclical policies. Our debt is still high; external risks are beginning to develop and I want to use a different approach by moving away from fiscal space into the approach of a budgetary stance. The approach to public expenditure I want to take next year is to take care regarding pre-committing to large increases in expenditure. We have many demands in place on the budgetary framework, not all of which I will be able to meet fully. If expenditure continues to exceed revenue and we are still borrowing to meet the shortfall, even if more resources are allocated, the deficit will be even larger and our debt will increase. From our current economic position, borrowing to meet a higher rate of Government expenditure could create further risks.
In the medium term I have outlined the capital framework I propose to follow in terms of Project Ireland 2040. It is looking to increase capital expenditure and integrate it within a better planning framework.
In addition, I indicated during oral parliamentary questions this morning - I will say the same again this afternoon - that what I would do as part of budget 2019 was publish a longer term budgetary framework than I had to date. My economic forecasts have been for a two to three-year window. What I will do - I have asked my Department to begin the work on it - is publish a five-year outlook for what we think will happen in the economy in order that all parties will have information on choices that will be open to me on budget day and beyond.
On other developments in expenditure, I will be publishing, as I did last year, papers on the comprehensive spending review which I can debate with the committee at another point. They will lay out observations we have agreed on 40 areas of Government expenditure. One of the reasons it is important is, with the €60 billion we spend in any given year, the focus is always on the increment in terms of what more we will spend, but we need to be aware of efficiencies and opportunities to do better with what we are spending. I am also very much aware from a revenue point of view that we need to ensure any commitment we make regarding spending in the future is based on revenue we are confident we can continue to collect.
While the latest economic data point to an economy with very considerable momentum, a continuation of robust growth in the future cannot be taken for granted, given the increasingly uncertain external environment. The United Kingdom's imminent exit from the European Union, changes to the international corporate tax landscape and the possibility of disruptions to the global trading system are just some of the risks we face. More generally, it is important to consider that the reasonably favourable external conditions we faced in recent years were just another wave of - to quote the American economist Paul Krugman - a great moderation. If these conditions were to deteriorate in the coming years, what would the impact be on the economy? It is for that reason I want to take a careful approach to where we are with the deficit and establish a rainy day fund. If expenditure or tax commitments move beyond the budgetary framework I have outlined, we will have to be able to establish how it will be paid for.
To end on a positive note, while there are risks, I continue to believe there are great opportunities. Clearly, there are important things we have to deliver at home, but there are also opportunities for Irish companies and the economy abroad. As I have always said, economic growth is a means to an end, not always an end in itself. It enables us to pursue our goals and what we want to do in our society in terms of how we can promote inclusivity and continue to improve public services, all of which have the objective of trying to deliver better living standards and a better society in our republic.
