I thank the committee for the invitation to appear before it and discuss the matters it has raised. On the outturn for 2018, for the first time in more than a decade our public finances are balanced in cash terms. This is not an insignificant achievement given where we were only a few years ago. The main budgetary metric for international purposes is the general Government balance, which will be reported by the CSO at the end of March. Based on the Exchequer figures, however, a small general Government surplus is possible. A small deficit of 0.1% was projected in the recent budget. We are aiming, and believe we are likely, to deliver a surplus of 0.1%, which will represent an over-achievement of that target.
To achieve this Exchequer cash surplus, we used the 2018 revenue over-performance, although it was largely driven by corporation tax, as I have acknowledged. This represents a positive development in reducing our overall debt burden as the day-to-day running of central Government is being met from within resources and we are not borrowing to fund these activities.
In 2019, current expenditure will grow by 3.9% compared with 2018. In 2018, the equivalent growth compared to 2017 was 5.6%. Much of this increase was driven by an overrun in the health sector. If one excludes growth in health expenditure in the current area, total expenditure grew by 4.8% in 2018 compared to 2017.
Turning to the outlook for this year, in assessing our draft budgetary plan the European Commission, the body charged with formally assessing our compliance with the EU rule, has assessed budget 2019 as being compliant with the fiscal rules and has projected that we will achieve our medium-term budgetary objective this year. However, this, of itself, does not represent grounds for complacency. This is because our debt burden remains highly elevated at 105% of gross national income modified, GNI*, versus a comparable 87% for the euro area. In that context, at budget time, my Department projected a balanced budget in headline terms, moving to a surplus thereafter. However, given that the external economic outlook is deteriorating, the probability of a disorderly Brexit is rising and quantitative easing is ending, our policy approach should be to target larger surpluses to build up our budgetary buffers for when times become less favourable.
It is my intention to run budget surpluses into the future if the economy continues to perform strongly and to use them to reduce our national debt. Furthermore, any windfall receipts that arise from the State reducing its involvement in the banking and financial sectors will also be used to pay down public debt.
A notable feature of smaller open economies is that they typically operate budget surpluses when operating close to potential. This helps build up capacity for the future and helps allow steady improvements in public services. This also runs the risk of increased funding being absorbed without risk of inflationary pressures and, furthermore, many of these countries enjoy a high stock of public infrastructure as investment is maintained. Notwithstanding this, our public finances are moving in the right direction and this is testament to sound policies in recent years. Our task, going forward, will be to continue to build on these hard won and difficult gains and to try to maintain stability and security in our public finances.
Some of the policies I have committed to implementing in this regard include the establishment of a rainy day fund. In addition, by continuing to maintain a broad and stable tax base, I hope to ensure that the State continues to be financed properly.
The rate of VAT in the hospitality sector increased to 13.5% from this month. This measure will allow us to reduce our over-reliance on increases in other tax heads, such as corporation tax, and allow the continued development of our tax base.
In recent years, different measures have represented a positive move in this direction. In addition to the VAT change, measures include the introduction of USC and local property and sugar taxes. These now fund 5.7% of overall Government revenue. Furthermore, it is my intention to publish a set of proposals in the coming period to look at how we can further reduce our over-reliance on corporation tax.
At this point, I want to acknowledge the work of the Irish Fiscal Advisory Council on budget 2019, in terms of its assessment and endorsement of the macroeconomic forecasts underpinning the budget as well as for the analysis set out in the November 2018 Fiscal Assessment Report, FAR. I welcome the observations of the council and I recognise its important role. My response to the Fiscal Assessment Report will issue shortly and will be available on my Department's website and shared with the committee.
I acknowledge that I am in agreement with many of the points made by the council, including its assessment of the economy's strong performance to date as well as the key risks, mainly external in origin, it faces such as Brexit, rising trade protectionism and an evolving international tax environment.
One of the issues that arose at the meeting of the committee on 5 December with members of the fiscal council was the charge that my Department faces serious challenges predicting corporation tax receipts. In fact, a widely recognised feature of our corporation tax base is its high concentration of receipts among a small number of firms, leaving this tax head much more exposed to specific developments. A further complicating factor in forecasting this tax head is the budgetary timetable, which means that the second instalment of annual corporation tax does not fall until November, a full two months after the forecasts have been finalised.
In addition, the Revenue Commissioners and my Department rely on information from companies about expected profitability, which can often be underestimated. In a 2016 review of the challenges forecasting Irish corporation tax, the council indicated this is due to the concentration of receipts among a small number of firms, which mirrors our export sector. IFAC has acknowledged that forecasting corporation tax has traditionally been difficult in Ireland. The council tests a number of alternatives to my Department’s methodology and these provide a slightly better outcome, although there is still a large variation versus forecast. It concludes this suggests the importance of idiosyncratic developments in explaining annual movements in corporation tax
A second charge that was made at the meeting on 5 December was that budget 2019 was based on a relatively benign outcome for Brexit. In chapter 6 of the economic and fiscal outlook document, however, alternative Brexit outcomes to the central scenario were explored. The possibility of a no-deal Brexit has influenced policy decisions relating to our stated aim of balancing our national finances and investing in capital infrastructure. This is also why I am adopting measures to build up our fiscal buffers to better ensure our economy can withstand the impact of possible future shocks. By running a balanced budget this year and targeting budgetary surpluses beyond 2019, we are ensuring that we do not add to our elevated levels of public debt.
A third issue was the assertion that the medium-term spending projections lack credibility given the probability of expenditure overruns. When preparing the expenditure allocations beyond 2019, the ceilings are prepared on a careful and contained basis, which maintains allocations across all spending Departments and which takes account of demographic factors in the areas of health, social protection and education. In addition, the overall spending profiles include a separate, unallocated provision. The amount is distributed across Departments in the context of the annual budget process, for example, in public service pay and pension agreements. In adopting this approach to forecasting, my Department mitigates against the risk of simply restating ceilings and applying inflationary pressures, which would lead to expenditure baselines ratcheting ever upwards and pre-empt the space for better discussion of policy priorities.
I will give a brief overview of the outturn for 2018. Total gross voted expenditure was just over €63 billion, comprising €57 billion in current expenditure and €6 billion in capital expenditure, which is €1.3 billion, or 2.1%, ahead of profile for the year. Of the sum, €1.1 billion and €118 million relate to current and capital expenditure, respectively. This is broadly in line with the projections for the year set out on budget day last October, when additional spending was announced for a number of areas, primarily health, housing and education.
These priorities are also reflected in the allocations for 2019, which were published in the Revised Estimates Volume last December. This year, the Government has allocated a total of €66.6 billion in gross voted expenditure, the vast majority of which is for day-to-day current expenditure, amounting to €59.3 billion, with a further €7 billion allocated to capital expenditure.
Funding for the key day-to-day public services of social protection, health and education together account for 80% of total gross voted current expenditure. While the allocation for health for 2019 is more than €17 billion, I am acutely aware, given the scale of this allocation, that over the past number of years, in particular 2018, overspends in this area have impacted on the overall resources available for public services. With this in mind, there is ongoing engagement between my Department and the Department of Health on how we can best manage this expenditure and ensure that the provision of these additional resources is matched with increased levels of accountability and transparency in expenditure matters, in particular within the Health Service Executive, HSE. Housing has also been prioritised for 2019, with an overall allocation of more than €4 billion. This represents a significant increase in year-on-year terms, in particular relating to capital expenditure, which has increased by one fifth. The education allocation is up by 5%.
Looking at expenditure policy more broadly, the fiscal advisory review refers to the rapid pace of spending growth between 2015 and 2018 and notes this was largely driven by year-on-year increases in spending. In assessing the council's criticism of recent expenditure policy, it should be noted that expenditure growth in the post-consolidation period has been significantly more modest than what was seen in the pre-consolidation period. Between 2003 and 2008, gross voted expenditure increased by 63% whereas between 2014 and 2019 gross voted expenditure will have increased by 23% or just under 5% per annum. We cannot take this for granted and I will continue to work hard to maintain a disciplined approach to the management of public spending. If I were to listen to the many demands made from many different quarters, lobby groups and interest groups, all of whom raise legitimate interests on behalf of their members, and accede to even half of them, public expenditure would be significantly ahead of the rate to date. We need to use this period of relative economic strength to be conscious of the great risk we face in Brexit and of the priorities ahead.
Returning to the higher than anticipated revenue generated in 2018 from corporation tax discussed earlier, these revenues are facilitating important Government initiatives, including support for capital investment. Although there was a not insignificant once-off element to the increase in receipts in 2018, the over-performance also arose from a combination of enhanced trading conditions and increased product sales. Corporate profitability has almost doubled since 2010 and experienced annual growth of just under 10% in 2017. Capital expenditure can play an important role in our economy and is up by 24% this year to a total level of €7.3 billion. It is important to use the period of strength in corporation tax receipts to accelerate infrastructure investment in the areas in which it is most needed. As far as expenditure management is concerned, the Government has a record of steady increases in support of the social and economic development of our country at much more sustainable levels than in the past. Moreover, these planned increases are being delivered on budget and on time across virtually all areas of public expenditure. I recognise that there are particular challenges and pressures within the health sector in which all practices are now being stepped up.
In conclusion, I am deeply aware of the growing challenge of Brexit. I have outlined everything we have done to respond to that challenge to date. Much of the commentary on our economy tends to fluctuate between the risk posed through overheating on the one hand and the challenges arising from Brexit on the other. The context of all of this is, of course, the needs of our society and citizens. As Minister for Finance, the best course of action open to me is to maintain stability in the public finances, build up our budgetary buffers for when times become even more difficult and balance our books. I thank the committee.
