It is my privilege to open tonight’s statements on the 2018 summer economic statement.
Ten years after we were hit by the worst economic shock this country has ever faced, I am happy to report that the public finances have been stabilised, unemployment continues to fall, progress is being made in improving our public services and our economy is one of the fastest growing in the EU. A suite of economic indicators confirm that the Irish economy is growing at a healthy pace. My Department expects national income growth of 5.6% this year and 4% next year. Today’s Central Statistics Office, CSO, data also confirm that strong economic growth is delivering improvements in the number of jobs in our country. There are now more people at work than ever before. Indeed, we are fast approaching full employment, and in this context we need to take care with the management of our economy.
Against this positive backdrop, we plan broadly to balance our books again by running a very small deficit next year because of the political choices we have made in Project Ireland 2040 and the national development plan to increase capital spending substantially by €1.5 billion or 25% next year, bringing expenditure to in excess of €7 billion. We are prioritising capital spending in our schools, hospitals, universities and public transport system to deal with the deficits that emerged during the recession and to position our economy and society for the opportunities and difficulties that lie ahead.
As the ESRI noted in its quarterly economic commentary, more public investment increases the potential output of the economy by enhancing productivity and employment, thereby supporting growth in the long run. Crucially, by increasing internal demand appropriately, the impact of public investment is felt in the domestic sector of the economy. This is the right way to rebalance our economy in the context of the increasingly volatile world that was vividly demonstrated during the previous debate.
Well-managed economies are characterised by durable improvements in living standards rather than the all-or-nothing approach that has been a feature of Irish economic history, especially in more recent times. Our economic performance has been less consistent than that of other small open economies. Our propensity to suffer economic shocks and resilience to withstand such shocks has been out of line with countries with which we can compare ourselves. When we pursued a procyclical approach to fiscal policy, our comparator countries witnessed incremental and sustainable increases in living standards and retained their national sovereignty when the global financial crisis struck. To avoid repeating the mistakes of the past, it is critical that we are constant in our approach. In essence, this means deciding on the appropriate economic and social model for the country and having the political commitment and consensus to stick with it across many different cycles.
The Government will frame budgetary policy on the basis of what is right for the economy to ensure continued steady improvements in Irish employment and living standards and to make a difference to the many challenges we face in areas like housing and homelessness and the daily challenges we face in our health services. If we look at other small open countries like Finland, Sweden and Denmark, we will see how they deliver economies with public services that are paid for gradually. This is what I want for the Irish people. This Government and its predecessor have pursued central elements of this approach since 2011. We have taken care with our budgets, we have taken active approaches to jobs markets and we have gradually broadened the tax base. However, this work is far from complete.
Our particular priorities for the period ahead include a revised approach to social dialogue. This is why I am looking forward to next week's national economic and social dialogue. We are working on how to improve social insurance to deliver greater economic security, for example, for our self-employed. We need to continue to rebalance our economy to support our indigenous sector and improve productivity. We want to have a broad and sustainable tax base. The Minister of State, Deputy English, is at the forefront of adopting a better approach to land planning to ensure it is developed in a co-ordinated manner for the public interest. We will seek to improve incomes, particularly for people in low-income and middle-income parts of our economy.
The central argument I want to make and which is reflected in the summer economic statement is that there is a need for us to actively pursue policies that lead to an improvement in living standards for all and ensure Ireland never again faces the risks it faced in the past. That is why our budgetary strategy is based on steady increases in public expenditure and predictable tax revenue. Our minimum objective is to continue to deliver a balanced budget. I argue that incremental and sustainable improvements in public services are preferable to how we dealt with this in the past. We want to broaden our broad tax base and ensure expenditure commitments are based on revenues that will be sustainable. This is necessary not just because of the lessons of our history but also because it is common sense. This is why we will be setting aside some of the high levels of corporation tax for the purpose of creating a rainy day fund.
Outside of Ireland, we can see greater levels of uncertainty than have existed for a long time. We need to take care of what is inside our control. First, we need to continue to be careful in how we manage our public finances. The fiscal rules are currently unhelpful in this regard. A full and literal application of these rules would involve the adoption of policies that would mean more borrowing, which is not appropriate for where our economy is now. Second, we must balance the budget over the cycle and use windfall receipts to reduce public debt. Third, the Government will prioritise spending that mitigates risk, does the right thing by our society and improves the ability of our economy to grow in the future.
A headline deficit of 0.1% in the forthcoming budget was projected in the stability programme update. The Government will not adopt taxation and spending measures that result in a larger deficit than this. Pre-committed expenditure for next year amounts to €2.6 billion. That will provide for an increase of €1.5 billion in capital expenditure, €300 million in carryover costs, €400 million in public sector pay and another €400 million for demographic costs. With the deficit I mentioned earlier, all of this will accommodate a budgetary package of €3.4 billion, of which €2.6 billion has been pre-committed to expenditure measures. This leaves €800 million for further allocation. Any unfunded taxation or expenditure measures that go beyond this will necessarily involve even more borrowing. I believe this would be wrong. Targeting minimum compliance with the expenditure benchmark would allow an additional €900 million to be spent or used for tax reductions, but this in turn would increase our deficit.
We are approaching the tenth anniversary of our deepest crisis. While the economic situation is relatively healthy, we have many demands in our society. Developments in the outside world, including Brexit, changes in the international corporate tax landscape and the possibility of disruptions to trade are some of the risks we face. We need to respond to all of this to build up our budgetary strength for the future. That is why the Government is prioritising reducing public debt, establishing a rainy day fund and avoiding pro-cyclical budgetary policies. While there are risks ahead, there are also great opportunities. It is clear that there are many needs within our society. As I said yesterday, economic growth is not an end in itself. It is a necessary precondition for the creation of the resources needed to deliver a better Ireland. Continued growth is the way we will achieve our objectives of bringing about steady improvements in the lives of our citizens and meeting the sharpest needs in our society.