This is a useful opportunity to review the 1998 pre-budget Estimates which were published on 12 November. I especially welcome it because it provides the Government with the opportunity to set the record straight. Since the publication of the Estimates, there has been criticism of the Government's public expenditure policies, as reflected in the Estimates.
The criticism centres on the charge that the Government has massaged the figures. The charge is that unusual spending adjustments have been made this year to ensure the increase in 1998 is within the limit set in the Government's programme. The implication is that without these adjustments, the Estimates would be significantly over that limit. I reject this criticism. It is important that the Dáil and the public are given a clear account of the position. I will set out clearly the Government's approach to public expenditure and how it is reflected in the 1998 Estimates.
The commitment we gave to limit expenditure growth was made after much thought. It is taken seriously by the Government. Controlling public expenditure is a crucial element in our budgetary policies. We know only too well from past experience that if public expenditure is not handled properly, budgetary policy can go seriously wrong. If the growth of public spending is not controlled, taxation must be raised or Exchequer borrowing and the Government deficit will increase.
This Government is determined this will not happen. The prudent budgetary policies which have done so much for the success of the economy will be maintained. The commitments the Government made on spending will be met.
I will explain the 1997 expenditure position and then deal with the Government's 1998 spending plans. I will also comment on how the growth of current and capital spending in the 1998 Estimates and Public Capital Programme compares with the limits to expenditure growth set out in the Government's programme. However, before doing so, I will review the general economic position since it provides the context within which budgetary and expenditure policy must be seen.
Ireland is currently enjoying unprecedented economic progress. Growth in 1997 is expected to be around 7 per cent, the fourth successive year of strong growth. Increased prosperity has been accompanied by stable prices and a level of employment growth which is the envy of many larger countries.
The most significant result of our recent success is to be found in the labour market. It is estimated that employment will increase by about 52,000 in 1997, or by close to 4 per cent, with this rise being broadly based across non-agricultural sectors. The increase in employment is being facilitated by a significant increase in the labour force. Projections indicate that the labour force will increase by 37,000, or 2.4 per cent in 1997.
The increase in employment is having an impact on unemployment. The 1997 Labour Force Survey shows there has been a fall of 20,000 in unemployment in the 12 months to April 1997. It is expected that the standardised unemployment rate will fall from 11.5 per cent in 1996 to about 10.25 per cent this year.
It is encouraging that long-term unemployment is falling faster than short-term unemployment. On a labour force survey basis, the number of long-term unemployed fell by 17,000 in the year to April 1997. Since 1993, there has been a drop of 39,000 in the number of long-term unemployed people. This means that just under two-thirds of the fall in unemployment since 1993 has been due to a fall in long-term unemployment.
Consumption and investment grew strongly in 1997, reflecting the favourable economic climate. Supported by excellent labour market conditions, higher disposable incomes and relatively lower interest rates, personal consumption grew by around 6 per cent during 1997. Retail sales remain buoyant, while car sales have reached record levels.
Strong domestic demand, a recovery in external demand, low interest rates and low inflation have resulted in strong investment growth in 1997. This is particularly encouraging because increased investment expands the capacity of the economy and its ability to sustain strong non-inflationary growth. Despite strong growth and demand, the balance of payments has remained in comfortable surplus in recent years. This is expected to continue in 1997, primarily due to strong merchandise export growth and net inward transfers.
Prices rose by just 1.4 per cent on average during the first ten months of the year. The strength of the pound during the second half of last year, greater competition in retailing, and the subdued international inflationary environment are some of the reasons for the moderate inflation so far this year. My Department is forecasting an inflation rate of 1.5 per cent for the full year. This strong economic performance has led to a further surge in revenue receipts. Revenue growth has comfortably exceeded budget-day targets. As a result, the Exchequer's overall position is better than expected. I do not wish to discuss the 1998 budgetary position today. On budget day I will outline the economic and budgetary prospects for next year and up to the year 2000.
The economic achievements I have summarised are largely due to prudent budgetary policy and the consensus between the Government and the other social partners. National programmes have underpinned our competitiveness. In turn, sound fiscal policies have allowed the Government to reduce taxation and to increase spending on key social programmes. It is essential that budgetary policy remains on track, that the consensus remains strong and that a significant investment is made to support Ireland's future development. If the Government's expenditure plans do not strike the right balance between the requirements of budgetary policy and the need to meet social and economic priorities, it will be all the more difficult to sustain the progress of recent years.
I now turn to the Government' expenditure policy. Although I will go into the issue fully later on, I stress now that the 1998 Estimates reflect a rate of growth in current spending, pre-budget, which is significantly below the Government programme limit. Our programme commitment is to limit the growth in net current expenditure to 4 per cent. In deciding the Estimates allocations, the Government was determined that this limit will be respected. The 1998 Estimates show net current expenditure, as defined in our programme, rising by 1.8 per cent in 1998 over the likely 1997 outturn. Budget day spending measures will increase expenditure, but I am confident that the post-budget figure will remain below the 4 per cent limit. I am also determined that the 1998 expenditure outturn will still show net current spending growth below the 4 per cent limit.
The Government's programme also set a limit of 5 per cent to the growth in capital spending on average up to 1999. The figure reflected in Exchequer-funded capital for 1998 is 17.5 per cent. One of the main reasons for this high figure is the provision of £100 million in 1998 for the education technology investment fund, which has been announced by the Taoiseach, the Tánaiste and the Minister for Education and Science. There are justifiable increases in other capital spending programmes which I will outline later.
I now want to review the 1997 and 1998 spending position. Deputies will understand that my remarks on both 1997 and 1998 are based on the figures published in the Abridged Estimates Volume on 12 November and do not take account of any budget day spending changes.
The 1998 Estimates will not change, apart from measures announced on budget day. The 1997 figures shown in the 1998 Estimates Volume published on 12 November are provisional assessments of this year's spending outturn for each Vote and its subheads. This is an innovation. In previous years, Estimates Volumes published before the end of the year generally repeated the year's original Estimate, adjusted where Supplementary Estimates had been approved by the Dáil.
As the 1998 budget will be announced on 3 December it is appropriate that the Dáil and the public are given in the Abridged Estimates Volume the best possible information about the emerging 1997 position. The outturn figures given in the volume include spending which will require Supplementary Estimates for which the Government will be seeking Dáil approval before the end of the year.
The decision to introduce the budget before the end of the previous year taken by the last Administration is a move the Government has fully endorsed. The change in the budget timetable brings Ireland into line with our partners in Europe and will help to make our budgetary procedures and expenditure control more effective. Departments and agencies will know earlier what their allocations are for the coming year and will be able to plan in advance and monitor expenditure to ensure it stays within those allocations.
Total net current spending of £10,148 million was provided for in this year's Revised Estimates published by the previous Government. This was an increase of 6.5 per cent on the 1996 outturn. It is estimated that net current expenditure in 1997 will be £10,385 million, £237 million higher than the budget figure and 9 per cent higher than 1996.
This year the Government has had to meet a number of significant costs on some important economic and social programmes. The main reasons for the increase over the budget day figure are as follows: the pay bill is £126 million higher than originally expected. The main reasons for the increase are Garda and prison officer overtime which will cost an extra £31 million and an increase of £27 million in the cost of local bargaining settlements in the case of paramedics, prison officers and clerical grades in the Civil Service. The Exchequer pay and pensions bill for 1997 will be 10.5 per cent greater than the previous year. I will mention later another significant pay issue.
Additional spending of £59 million will arise this year on health, £42 million of which is in respect of hepatitis C compensation while a further £17 million relates to extra costs mainly on the various drugs refund schemes. Extra spending of £33 million will arise on agriculture, of which £25 million relates to the green pound devaluation. Some £22 million more than budgeted may be needed for Defence, mainly for Army hearing loss awards.
These and other additional costs have been offset to some extent by savings elsewhere and by extra revenue accruing to Departments, the main element of which is buoyant PRSI revenue. This contributed to a reduction of £120 million in the Exchequer subvention required this year for the social insurance fund.
The 1997 expenditure totals include payments which were expected to be made in 1998 but which the Government has decided should be made this year. As this year's outturn for the key budget aggregates, particularly that for the general government deficit, will be substantially less than foreseen in the budget and as the spending commitments involved will have to be met, it is wise to make provision now reducing the burden facing the Exchequer in later years.
A sum of £103 million will be paid this year in the education area to meet liabilities which had been expected originally to arise in 1998. Secondary teachers are paid on the fifth day of the following month. With effect from this December, they will be paid on the last working day of every month. This is a permanent change, not a once-off adjustment. It is justifiable. There is no reason teachers should wait five days to be paid and accordingly, £35 million will be issued in 1997 to allow payment of salaries on this new basis.
Up to now recoupment by the Exchequer of higher education grants paid by local authorities has been made in arrears in the following year. It is proposed to change the system so that recoupment will be made within the relevant financial year. In 1997 £68 million will be spent for the purpose. This is a permanent change which it is right to make. Local authorities act as agents of central Government in this matter. The move will rectify a long-standing cash-flow problem for the local authorities and will put them in funds to meet their current liabilities.
The 1997 budget estimate for capital expenditure was £1,576 million. The outturn is expected to be £1,618 million, some £42 million higher. The main reasons for the increase are: £23 million more education capital was allocated to allow further improvement of facilities in the primary and third level sectors; £22 million more was allocated in the area of health towards the programme of improving and expanding hospital facilities, while in agriculture the on-farm investment programme cost the Exchequer an additional £15 million. Net savings in other areas reduce the total addition to £42 million.
I will now outline the 1998 current supply service expenditure Estimates. The Abridged Estimates Volume shows that total net current supply services spending will increase from £10,385 million this year to £10,811 million in 1998, an increase of £426 million. Of this increase £298 million or 70 per cent is to cover additional Exchequer pay and pensions costs next year. The balance, £128 million, is for additional non-pay costs.
In 1998 the Exchequer pay and pensions bill will amount to £5,607 million, an increase of £298 million or 5.5 per cent over the projected outturn for 1997. This includes the provision of £146 million for general round increases under the terms of the Partnership 2000 pay agreement and a further £128 million to cover the remaining PCW local bargaining cases. The forecast outturn for 1997 is £5,309 million, an increase of 10.5 per cent over the 1996 figure. Of this increase 7 per cent is due to increases in pay rates, both general round increases and local bargaining increases.
These figures demonstrate in stark terms the pressing need to contain the growth of the public service pay costs. They show also that, despite the acknowledged need for pay moderation, successive Governments have failed to translate this into an acceptable level of growth in the public service pay and pensions bill.
Much of the public service pay cost of the PCW is being concentrated in 1997 because of the deliberate back-loading of the general pay increases under the PCW and the slow pace of local bargaining negotiations throughout the public service. A significant part of the increase in the pay bill is attributable to the level of local bargaining increases secured earlier this year by a number of major groups, particularly in the health sector. The nurses' settlement, for example, is adding £49 million over and above what had been provided for originally in 1997 and this, in itself, is adding 1 per cent to the bill.
Although the PCW expired in the public service on 30 June 1997, a number of local bargaining cases remain to be resolved. I would like to see all these being finalised as early as possible in 1998 but they will have to be resolved within the limit of the PCW cost norm as originally established. I stress this point because there seems to be an impression in some quarters that there is now open season on that limit. This is not the case.
I wish to refer briefly to the threatened industrial action by craft workers in the local authority and health services in support of their claim for an increase of £27 a week, which would work out at an increase of approximately 10 per cent. People should be aware that when direct discussions on the craft unions' claim failed to reach agreement it was the craft unions which refused to abide by normal industrial relations procedures and decided instead to ballot their members on industrial action. Threats of industrial action in pursuance of claims under the local bargaining provisions of either the PCW or Partnership 2000 fly in the face of the industrial peace clauses of those agreements and the agreed procedures for dealing with disputes. They are contrary to the spirit of social partnership which has been at the heart of the consensus approach of the national programmes. There is no basis for any group to resort to industrial action in pursuit of its claim.
The Partnership 2000 pay agreement, which came into operation in the public service on 1 July 1997 and is to continue to 30 September 2000, provides for general round increases totalling 7.25 per cent plus a locally-negotiated increase of 2 per cent. In the public service, this 2 per cent increase is not payable before 1 July 1999, payment being conditional on the achievement of verified progress to a satisfactory level on implementation of the public service modernisation programme in each sector of the public service. This is the only provision in Partnership 2000 for locally-negotiated pay increases, clause 6 of which debars the submission and processing of claims other than those permitted under its terms.
It is essential that the terms of Partnership 2000, including the explicit limit on the cost of local bargaining increases, be adhered to within the public service if we are to continue to manage our economy in a balanced and responsible way to the benefit of all.
In the Abridged Estimates the Government allocated an additional £128 million for the improvement of the non-pay element of expenditure programmes in 1998. This will be spent as follows. An additional £122 million is being provided for the Department of Social, Community and Family Affairs to meet the carry-over costs of the 1997 budget measures and for demographic factors such as increases in the number of recipients on certain schemes; budget day social welfare changes will add to the £122 million; an extra £98 million is being provided for the Department of Health and Children, £58 million of which is required for hepatitis C compensation payments; in the Defence Estimate, non-pay spending is being increased by £50 million, necessitated mainly as a prudent provision for the possible cost of hearing loss compensation; the Department of Enterprise, Trade and Employment is being allocated an extra £31 million in 1998, mainly to support improvements in the standard of training being offered on FÁS schemes in addition to some increase in the number of trainee places and, finally, the Justice Vote is being increased by £13 million mainly for the continuation of the development of the courts service.
The significant increase in capital expenditure next year reflects the Government's determination to provide the social and economic infrastructure essential to underpin Ireland's continued development. In 1997 capital expenditure is forecast to be £1,618 million. In 1998, with the Government providing £1,926 million, there will be an increase of £308 million. This additional sum is being allocated to a number of key development programmes: the Department of the Environment and Local Government will be spending an additional £123 million; expenditure on national and non-national roads will increase by £57 million, in addition to a provision of £20 million, the first step in an eight-year redevelopment programme of Ballymun; the capital allocations for the Department of Education and Science will include £100 million for the Education Investment Technology Fund while capital spending within the Health and Children Vote will increase by £18 million to further improve our hospitals and a major investment in the information technology facilities of health agencies; more funds are being allocated to information technology in other programmes throughout the remit of the Department of Justice, Equality and Law Reform and, with the continued implementation of the anti-crime package, an additional £20 million will be spent on the prisons building programme in 1998.
These are important economic and social programmes. I am sure all Members will accept that fast economic growth requires investment in infrastructure and that some of the resources generated by growth should be allocated to the improvement of social facilities.
The Education Technology Fund is a particularly important case, the Government having decided that the need to meet the merging skill shortages in our economy and give a boost to research and development activity necessitated its establishment. Without skilled workers and access to the latest available technology, it would be very difficult to sustain economic growth. It was becoming evident that bottlenecks were arising which could choke off growth unless we acted quickly and on a scale that matched the seriousness of the emerging problem.
I want to explain fully how the 1997 outturn figures and the 1998 expenditure plans fit into the Government's capital and current spending targets. The Government is committed to limiting the growth in net current expenditure to an average annual 4 per cent over its lifetime. The base to which the 4 per cent net current spending limit applies — as was made clear in our election manifesto and repeated in the programme for Government — is spending on the Central Fund, comprised mainly of debt-servicing in addition to expenditure on net current supply services. This is an appropriate measure since the difference between spending defined in this way and current revenue equals the current budget surplus or deficit.
Central Fund expenditure is not included in the Abridged Estimates nor in the Summary Public Capital Programme Expenditure since Dáil approval thereof is not required each year. Therefore, we have to add the figures in the Estimates volume to those for the Central Fund. I must emphasise that the figures for the Central Fund for 1997 and 1998 are provisional. On the basis of the 1998 Estimates volume and the provisional figures for the Central Fund, total current spending will rise by 1.8 per cent over the likely 1997 outturn. While budget day spending will add somewhat to that 1.8 per cent figure, I can assure the House that post-budget spending will remain below the 4 per cent limit. It is my clear intention that the 1998 outturn will also be within the 4 per cent.
In commenting on the end-September Exchequer returns, I announced that the Government had discharged certain matured liabilities. Similar payments were made in previous years. These payments were made from the Central Fund in relation to An Post and Telecom Éireann pension funds and the Small Savings Reserve Fund, £150 million having been paid to the pension funds and £100 million to the Small Savings Reserve Fund. The allocation to the Small Savings Reserve Fund will be increased by a further £158 million before the end of the year, as I made clear on the publication of the Estimates. The provision being made under this heading this year covers the total unpaid interest accruing on small savings schemes this year. From 1999 onwards the Exchequer will follow a change in European Union accounting rules which provides for full accrual of interest under these schemes.
Much of the criticism directed against the Government is based on those adjustments. The charge appears to be that the Government deliberately made these payments to increase this year's base in order to reduce the 1998 percentage increase.
