I welcome the opportunity provided by this debate to review the 1999 spending Estimates published on 11 November. I welcome it because it is important that the Government's expenditure policies are explained and understood to the greatest extent possible. In particular, it is important that there is a full and open account on the record of how the Government has succeeded in meeting its commitment to limit the growth in current spending to 4 per cent.
I reject any criticism that the figures in this year's Estimates, or the presentation of those figures, have been manipulated in any way so as to create a misleading impression of what the true increase in spending is. In my statement on the publication of the Estimates on 11 November, I set out in a clear and unambiguous way the basis on which the annual average increase of 3.9 per cent represented by the 1999 Estimates was calculated. The figures were presented in an open and transparent manner. There is nothing to be gained by attempting to conceal the facts and, as I said when presenting the Estimates, whether one agrees with the Government's 4 per cent limit, there can be no doubt as to the basis on which that limit is measured.
I am glad, therefore, to have this opportunity to set out clearly again for the Dáil and the public the Government's approach to public expenditure and how it is reflected in the 1999 Estimates. The Government takes very seriously its commitment to limit expenditure growth. If the growth of public spending is not controlled, we risk undermining the prudent budgetary policies which have done so much for the success of the economy in recent years. The Government is not prepared to let this happen.
Before I set out the position on the Government's spending plans for 1999, I would like to review the general economic position since it provides the context within which budgetary and expenditure policy must be seen. On the whole, 1998 has turned out to be another year of very strong economic growth, well balanced between exports and domestic demand. It is very encouraging that strong growth in output has again been translated into strong growth in employment. Employment has risen by about 4 per cent for the second year in a row. There are more than 100,000 more people at work now than there were two years ago. Unemployment has fallen to below the EU average.
Over the past five years or so, Ireland has managed to combine very strong growth with modest inflation. However, exchange rate movements in 1997 and the early part of this year saw a significant depreciation in the Irish pound's trade weighted exchange rate. Largely as a result of this depreciation, there was a pick up in inflation here from 1 per cent in August 1997 to 3.2 per cent in August of this year. Since then, inflation has fallen back to 2.9 per cent in October and should fall further in the coming months. However our inflation rate is still well above the EU average and there are inflationary pressures in the housing sector and in terms of labour shortages and wage pressures.
As we prepare to join EMU in less than six weeks' time, it is vital that price stability be maintained so as to sustain our international competitiveness at a time of slower world growth and very low inflation in our trading partners' economies.
Our economic assessment for 1999 and the following two years will be presented in our first stability programme which is being prepared in accordance with the terms of the Stability and Growth Pact. This will be published on budget day, 2 December, so I do not propose to go into detail on this today.
It is already clear, however, that next week's budget is being framed against the background of more than usual international economic uncertainty. The IMF and OECD have reduced their forecasts for economic growth for next year. In short, we are facing a significant slowdown in growth in the United States and the UK, two of our most important trading partners, and greater uncertainty regarding the international economic scene.
As a small and very open economy we cannot expect to remain immune from a world economic slowdown. We are likely to see its impact in terms of slower export growth and a slower rate of growth in foreign direct investment into this country.
Our budgetary planning and our expectations generally must take account of these realities. We cannot prudently base our plans for the future on the assumption that the extraordinary rates of economic growth we have seen in the past will go on forever.
I do not wish to discuss the 1999 budgetary position today. On budget day I will outline the economic and budgetary prospects for next year and up to the year 2001. The economic success we have achieved is based on sound budgetary policy and on the consensus between the Government and the other social partners. Prudent fiscal policies have allowed the Government to reduce taxation and to increase spending on key social programmes.
Stable budgetary policy will become even more important in the new environment which we will be entering on the establishment of the euro on 1 January next. This will mark the beginning of a new phase for the Irish economy with new challenges and also new opportunities. Ireland must be in a position to take advantage of these new opportunities. The maintenance of prudent and stable budgetary policies will be crucial in ensuring that we can do this. In these new circumstances, firm and effective control of public expenditure will play a key role.
If we want to make certain that significant reductions in taxation can continue to be delivered over the medium to long-term and that the competitiveness of our economy can continue to be improved through wage moderation and strong social consensus, the growth in public spending must be contained within reasonable limits.
I use the word "reasonable" deliberately. I am aware that there is a perception in people's minds when the phrase "control of public expenditure" is mentioned, a perception of severe cutbacks in public services and the hardship which that entails for ordinary people. However, I can assure the House that this Government's commitment to the control of public spending does not and will not result in such cutbacks or hardship for the public.
This Government fully accepts that our society faces many social and economic pressures. Many sections of our community continue to feel excluded from the general economic progress of recent years and the increased wealth which this has created. I assure the House that neither I nor the Government are complacent about this. On the contrary we are acutely aware of these problems and the need to ensure that they are addressed in a fair and equitable manner.
As the economy grows and more resources become available, it is inevitable that there will be pressure to increase spending on improving public services. The Government is constantly faced with demands from strong and vocal interest groups seeking more resources. It is simply not possible to meet all the demands that are made. It must be recognised that there must be prudent limits on the amount of resources we can commit to improving public services. This is why the Government's programme includes a commitment to limit the increase in net spending to 4 per cent on average over its lifetime.
I am satisfied that this objective strikes the right balance between the requirements of a tight budgetary policy, particularly in the context of our participation in EMU, and the need to provide real additional resources to meet pressing social and economic priorities. The Government knows that if expenditure plans do not strike this balance it will be all the more difficult to sustain the progress of recent years.
I am satisfied that our approach to controlling spending is a concrete expression of the Government's desire to see that economic progress is accompanied by real social advance for those in genuine need.
I will now turn to the Government's expenditure plans for 1999.
I want to stress at this point that the overriding aim in the Government's consideration of the 1999 Estimates was to ensure that the commitment to limit the annual average increase in net current spending to 4 per cent over the lifetime of the Government was respected. This has been achieved.
The 1999 Estimates show net current expenditure as defined in our programme, increasing by an annual average of 3.9 per cent in 1999 over the 1997 outturn. Budget day spending measures will add somewhat to expenditure. However, the Government's planning and preparation for the budget are based on adherence to the 4 per cent limit.
The 1999 Estimates also provide for a very substantial increase in capital expenditure. Exchequer capital spending will increase by almost 27 per cent in 1999 over 1998. The increase in 1999 follows a similar large increase in 1998 which will bring the cumulative increase in capital spending to 58 per cent over the two years. The Government is determined that the continuation of strong economic growth in the future is not put at risk by deficiencies in our infrastructure. Public capital investment has to be increased to ensure that bottlenecks which could hinder growth and development are removed. The level of increase in capital expenditure in 1998 and 1999 underlines the Government's commitment to public investment which will help to sustain the growth and development of the Irish economy over the medium to long-term.
I now want to review briefly 1998 spending and set out the position on 1999 expenditure. My remarks today on both 1998 and 1999 are based on the figures published in the Abridged Estimates Volume on 11 November and take no account of any budget day spending changes.
The Abridged Estimates published on 11 November included summary tables showing the latest assessment of the 1998 outturn for each Vote. As the 1999 budget will be announced on 2 December, it is appropriate that the Dáil and the public were given in the Abridged Estimates Volume information about actual emerging 1998 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. As the general note at the front of the Estimates Volume indicated, the 1998 outturn figures reflect present knowledge and they have to be revised. Present indications are that the outturn figure for the total net voted current spending will be somewhat higher than that published in the Abridged Estimates. However, it is expected that the outturn will still be lower than the original Estimate.
The 1998 Revised Estimates Volume provided for total net voted current spending of £11,020 million. This was an increase of 6.6 per cent on the 1997 outturn. The figures published in the Abridged Estimates indicate that net voted current expenditure in 1998 is estimated at £10,991 million, £29 million lower than the budget figure and 6.3 per cent higher than 1997.
The Government has had to face pressures for increased spending in a number of areas this year, the main one being public service pay. It has been possible, however, to keep overall net voted current spending within budget due to lower spending in some areas, most notably on social welfare.
The main changes on the budget day figures are as follows: as I have already mentioned, the pay bill is estimated to be £131 million higher than originally expected. The main reasons for the increase are the Garda pay agreement and the Garda and prison officer overtime which, together, will add an extra £80 million to the original Estimate on the Justice Group of Votes. As a result of this and additional costs in other areas, the Exchequer pay and pensions bill for 1998 will be 9 per cent greater than the previous year. Extra spending of £29 million will arise in agriculture and food, primarily because of the package of measures approved by the Government to support farmers. Spending on social welfare will be significantly lower as a result of lower than anticipated numbers on the live register and increased PRSI receipts.
There has been much comment in this House and elsewhere since the Abridged Estimates were published on the position of health spending in 1998. The Minister for Health and Children and I have explained the position at great length to the House and I do not intend to go over this ground again today. I will simply repeat the fundamental point that the gross allocations of the Department of Health and Children in this year's Estimates will be fully applied to improving the health services. It is absolutely incorrect and misleading to suggest that moneys allocated to health agencies will remain unspent.
The 1998 Estimate for capital expenditure was £1,948 million. The outturn is expected to be £1,928 million, some £20 million lower. The main changes on the Estimate are that £22 million education capital was allocated to allow for the primary and second level schools building programme, an extra £13 million was provided for IDA building grants and for the county enterprise boards and lower spending in other areas resulted in a reduction of overall spending of £20 million.
I will now outline the 1999 current supply service expenditure Estimates. The abridged Estimates volume shows that total net current supply services spending will increase from an estimated outturn of £10,991 million this year to £11,939 in 1999, an increase of £948 million. Of this increase, £301 million, or one third, is to cover additional Exchequer pay and pension costs next year and the balance, £647 million, is for additional non-pay costs.
In 1999 the Exchequer pay and pensions bill will amount to £6,077 million, an increase of £300 million, or 5.2 per cent over the projected outturn for 1998. This includes provision of £130 million for general round increases under the terms of the Partnership 2000 pay agreement and a further £58 million to cover local bargaining increases under Partnership 2000. There will be a reduction of £66 million due to retrospective payments during 1998 in relation to various local bargaining settlements under the terms of the Programme for Competitiveness and Work. Other factors, including the cost of service improvements, will add a further £179 million to the bill. The forecast outturn for 1998 is £5,776 million, an increase of 9 per cent over the 1997 figure.
The Exchequer pay and pensions bill represents 51 per cent of total net voted current expenditure in 1999. The significant increases in the Exchequer pay and pensions bill in recent years and the fact that it represents over half of all net current voted spending demonstrate clearly that containing the growth of the public service pay costs is crucial to the Government's efforts to control public expenditure.
The costly series of PCW local bargaining settlements have been a major contributory factor in the increase in 1997 and 1998. For example, in 1997, the settlements with nurses and paramedic grades in the health services added about £100 million to the bill, and in 1998 the settlements with the craftworkers, Garda and Defence Forces have brought significant costs. The PCW local bargaining process has only now effectively drawn to a close, although the terms of the PCW expired 16 months ago in the public service. Only a small number of claims covering about 5 per cent of Exchequer funded employees, remain to be resolved. I expect that the bulk of these will be finalised by the end of this year.
Each Department and office of State's Estimate in the abridged volume includes provision for the 1999 cost of pay increases due under Partnership 2000, both the cost of living increases and the 2 per cent local bargaining increase. As a consequence, there will be no Vote for increases in remuneration and pensions in 1999, unlike in previous years. This change, which is part of the new pay management and control arrangements I announced in the 1998 budget, means that Civil Service Departments and other public service employing organisations are allocated funding now for the cost of the agreed Partnership 2000 terms and will have to deal with whatever claims arise during 1999 within those allocations. There will be no central contingency fund to fall back on, as has been the case under the PCW.
It is essential that the terms of Partnership 2000, including the explicit limit on the cost of local bargaining increases, is adhered to within the public service if we are to continue to manage the public finances and the economy in a balanced and responsible way.
In the Abridged Estimates, the Government has allocated a net additional £647 million for the improvement of the non-pay element of expenditure programmes in 1999. Some £224 million of this increase is accounted for by the establishment of a new local government fund next year — I will come back to this shortly. Leaving aside this technical item, the increase in non-pay current expenditure in 1999 is £423 million. Some of the key policy areas to which this is allocated are as follows.
An additional £121 million is being allocated to Health. The Government is very much aware of the pressures on the health service. This substantial increase will be used to fund hospital services and to continue to develop the important initiatives launched by the Government in areas such as child care and mental and physical handicap. The Social Welfare Vote includes an extra £80 million to cover the full year costs of the improvements made by the Government in the 1998 budget and other technical factors, for example, demographic changes which will lead to increased numbers on certain schemes next year. The gross increase is higher since savings are expected to come from a fall in the live register, reflecting recent trends.
An extra £69 million is being provided for Education, including provision for a significant increase in capitation grants for primary schools from £50 to £60. This means that capitation based funding for primary schools will have increased by over 40 per cent in two years. Major increases have also been included to provide services for children with special needs, and both second and third level funding will be increased significantly. There will be further significant growth in the number of third level and apprenticeship places. Defence will receive an additional £32 million, mainly for new equipment for the Defence Forces.
As I mentioned, the increase in non-pay current spending in 1999 includes an extra £224 million on the 1999 Estimate of the Department of the Environment and Local Government as a result of the introduction of the local government fund from next year. This change arises from the new arrangements agreed by the Government for the financing of local authorities. Because of its one-off nature, it is necessary to adjust for this item in the calculation of the percentage increase in current spending in 1999. It is important, therefore, that the changes which are being introduced are set out as clearly as possible so that the rationale for making the adjustment is apparent to, and understood by all.
At present, local authorities receive the proceeds from motor tax revenue and their expenditure on non-national roads is paid for from money voted by the Dáil. With effect from next January, a local government fund will be established to fund the non-national roads programme and to make a contribution to the general costs of running the local authorities. The fund will have two sources of income: receipts from motor taxation and a contribution from the Environment and Local Government Vote. Some £270 million is provided in the Estimate for the fund in 1999.
Current spending on non-national roads is now provided for in the 1998 Environment and Local Government Vote. Adjusting for this, the net increase in current spending in 1999 is £224 million. To allow a valid comparison between spending in 1998 and 1999, the £224 million must be taken out of the 1999 figures for net voted current spending. For similar reasons, to allow proper comparison of the 1998 and 1999 capital spending figures, £178 million in capital spending, which is included in the 1998 Environment and Local Government Vote but which will be financed from the local government fund in 1999, must be deducted from 1998 voted capital expenditure figures.
The significant increase of almost 27 per cent in Exchequer capital expenditure next year reflects the Government's determination to provide the social and economic infrastructure which is essential to underpin Ireland's continued development. In 1998, capital expenditure is forecast to be £1,928 million. In 1999, the Government is providing £2,216 million, an increase of £288 million. This additional spending is being allocated to a number of key development programmes
Education and Science will receive an extra £18 million. Of this, £12 million is for the primary building programme, with a further £3 million for special schools. The Government has decided to allocate an extra £26 million to Agriculture. Some £19 million more is being provided for Leader and INTERREG and the Western Development Commission is being allocated an extra £3 million, more than double its 1998 allocation.
Tourism, Sport and Recreation will receive an additional £21 million next year to fund a wide range of developments. Grants for sports and recreational facilities are being increased by £5 million. An additional £6 million is being provided for tourism development grants and £6 million is being allocated for the development of a 50 metre swimming pool.
Capital spending on the Public Enterprise Vote is set to rise by £90 million in 1999, reflecting in large part the Government's decision to make a substantial investment in public transport, with particular emphasis on taking immediate steps to meet Dublin's traffic problems. CIE will receive £36 million to support its investment programme.
An additional £212 million is being provided for Environment and Local Government, taking account of the adjustment for the changed arrangements in local authority funding. Housing will receive £28 million extra. An additional £90 million is being provided for water and sewerage schemes. The Government has decided that significant additional resources are required to meet road transport needs. Accordingly, road projects are being allocated an additional £54 million in 1999.
The allocation for Health capital spending is £155 million, over 5 per cent higher than the 1998 outturn, which is significantly higher than that for 1997.
I am satisfied that the very substantial increase in capital expenditure which the Government has provided in both the 1998 and 1999 Estimates is fully justified. The very strong economic growth in recent years has placed severe pressures on the country's infrastructural capacity. Significant investment is required to ease these pressures. It is also essential to the healthy and balanced development of the country that some of the resources generated by growth should go to improve social facilities and amenities.
I want to explain how the 1999 expenditure plans fit in with the limits on spending to which the Government is committed. The Government is committed to limiting the growth in net current expenditure to 4 per cent a year on average for the lifetime of the Government. As I explained to this House previously, net current expenditure for the purpose of the 4 per cent limit is defined as net voted current expenditure plus spending on central fund services, which is mainly the cost of servicing the national debt.
As I have made clear to this House also, particularly in the context of its consideration of the Estimates for 1998, the base to be used in calculating the average increase in net current spending for the purpose of the Government's 4 per cent limit is the 1997 outturn. Much criticism was directed at the Government when the 1998 Estimates were published. It was said that using the 1997 outturn as the base was misleading in view of the fact that significant additional expenditure was incurred at the end of 1997 which had the effect of increasing the 1997 outturn, thereby reducing the percentage increase in 1998 and the annual average increase in subsequent years. As I indicated in this House when the 1998 Abridged Estimates were being debated, this criticism was totally misplaced. The payments that were made at the end of 1997 were completely legitimate and proper.
I set out the position on these payments clearly and fully when the 1998 Estimates were published and again when they were debated in this House this time last year. The reason I mention this now is that I have heard the same criticism on the use of the 1997 outturn repeated this year in relation to the 1999 Estimates. Having explained the position fully last year, I have no intention of going over the same ground again this year. As far as I am concerned, the matter has been dealt with comprehensively and the criticism shown to be unjustified.