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Dáil Éireann debate -
Wednesday, 10 Nov 1999

Vol. 510 No. 4

Other Questions. - Public Expenditure.

Michael Creed

Question:

12 Mr. Creed asked the Minister for Finance if his attention has been drawn to the advice of the NESC that expenditure could be safely increased by 5 per cent in each of the next five budgets; if this view will be reflected in the forthcoming Estimates; and if he will make a statement on the matter. [22515/99]

I assume the Deputy is referring to the overview of the NESC report, Opportunities, Challenges and Capacities for Choice – the council's new report on Ireland's economic and social strategy for the three year period 2000 to 2002 – published last week.

It is important to be clear on what precisely the NESC report states on public expenditure. A key statement in it reads:

The Council believes that, over the three years to 2002, the real increase in public expenditure should, at a maximum, correspond to the real growth rate of GNP. Allowing current public spending to grow by a rate no greater than the increase in GNP implies a significant slowdown on the trend increase in spending during the 1990s if, as expected, the economy grows more slowly in the period ahead. If the previous increases were to continue against a background of slower growth, the health of the public finances would be seriously weakened.

The report did not recommend that the increase in expenditure should be 5 per cent per annum over the next five years. Real growth in spending means the rate of increase above inflation which, for the purposes of its report, the NESC has assumed to be 2 per cent per annum. The NESC outlined two scenarios, which showed the impact on the budget surplus of given real increases in current expenditure based on an assumed real GNP growth of 5 per cent and an assumed real GNP growth of 2.5 per cent.

Under the first scenario, the report shows that if real current spending growth is 4 per cent per annum, that is, less than the assumed 5 per cent real rate of economic growth, the budget surplus would gradually increase over the period to 2005. If the real increase in current spending is 6 per cent per annum, the budget surplus would stabilise at about 1 per cent, which is less than the present surplus.

Under the second scenario, with an assumed real rate of economic growth of 2.5 per cent, the NESC report shows that real current expenditure growth of 4 per cent would result in the elimination of the present surplus and progression to a balanced budget position by 2005, while real current expenditure growth of 6 per cent would produce a large deficit by 2005.

Additional InformationThe NESC report emphasises that the assumption, which it uses about a 5 per cent rate of economic growth, is not in any sense a forecast but a “reasonable conjecture about future economic performance”.

The NESC's view of the possible maximum rate of growth in public current expenditure in the context of an assumed 5 per cent economic growth rate is clearly well above the Government's commitment to limit the growth in net current expenditure to 4 per cent per annum on average. The 4 per cent is a nominal figure, that is, it includes inflation and is equivalent to a real increase of about 2 per cent.

The NESC report concluded that the evolution of the fiscal balance hinges on the relationship between the real rate of increase in current public expenditure and the real growth rate of GNP. This is true after taking into account other budgetary variables, notably the levels of capital expenditure and taxation. The Government's ceiling of 4 per cent on the growth of current expenditure was not, however, linked to the growth rate of GNP.

A change in the Government's 4 per cent annual average limit on net current expenditure growth is not envisaged. The recently published review of the Government's programme, An Action Programme for the Millennium, restates its commitment to the 4 per cent ceiling on the average annual growth in net current expenditure.

It is difficult to formulate a supplementary on a truncated reply.

Yes, it is.

Will the Minister reconcile the manner in which the NESC calculates increases in expenditure with his commitment on behalf of the Government to contain public expenditure increases to 4 per cent in nominal terms? Is he speaking in two languages?

There is a difficulty regarding definitions. As far back as the publication of the Fianna Fáil manifesto, I said what the 4 per cent referred to. The manifesto states net current spending, that is, net voted current spending plus the central fund. That was carried over in the Fianna Fáil-PD programme for Government and it was not until Deputy Garret FitzGerald, in a series of articles in The Irish Times, pointed out this matter that people realised it did not mean a 4 per cent increase in spending. In recent years the net voted current expenditure has been much more than 4 per cent, but the commitment is to an average of 4 per cent of net voted spending plus the central fund.

There are problems with definitions in this regard. NESC is referring to current spending, voted spending and what the overall growth rate should be vis-à-vis the real rate of economic growth. The real rate is the rate of GNP growth less inflation. There are differences in the definitions. Even the NESC report switches between current and real spending and that is confusing. We are speaking in two languages, so to speak, but I have read, with increasing interest, that even eminent commentators refer to a 4 per cent increase in spending whereas the net voted spending in each year I have been in office has been much higher than 4 per cent. The intention, however, is to keep the average increase in net current spending at the level as defined, at an average of 4 per cent of net current spending plus the central fund, over the lifetime of this Government.

Is it not the case that in the Book of Estimates for the two budgets introduced by the Minister the increases in real expenditure – as a normal person would understand it – have been between 6 per cent and 7 per cent and that the Book of Estimates he will publish tomorrow will continue that trend?

Yes, the increase in current spending, net voted current spending, in each of the published Books of Estimates since I took up office has been greater than even 6 per cent. The Deputy referred to "real expenditure" in his question. If one allows for inflation, the increases probably have been 6 per cent. We will have to wait until tomorrow to see what is in the Book of Estimates for this year. I am very clear about this because I spent a good deal of time in Opposition thinking up how I could control expenditure in Government and rather than referring to real, net and gross figures, or no figures at all, I came up with this definition. I am clear about what I promised in Opposition and in Government, although others may not be.

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