I thank the Chairman for inviting me to appear before the committee to discuss Ireland's Stability Programme - April 2014 Update. The document was approved by the Government earlier today, with this meeting being the first public engagement on the update. In a new departure, the Government is making the document available in draft form with a view to facilitating constructive and robust discussion. The finalised document will be submitted to the European Commission later this month in line with our obligations under the European semester. There is a great deal of information and detail in the document. In the interests of brevity, therefore, my opening remarks will focus on the main messages contained therein.
The forecasts set out in the update have not changed greatly from those published on budget day. This is a positive development and indicative of the general improvement in and stabilisation of the economic and fiscal outlook. Encouragingly, the greatest changes are in the stronger employment forecast. Job creation is the best indicator of economic activity and the top priority of this Government. We are seeing real progress in this regard, with an average of 5,000 jobs being created each month. The stated objective of the medium-term economic strategy published in December is full employment by 2020. Today's update suggests we have made a strong start on reaching that target.
The European semester is about improving economic governance in the EU. The rationale is that member states will better align their economic and fiscal policies with the rules agreed at EU level. In this co-ordinated way, the aims of the semester are to promote economic growth and ensure sound public finances in member states and the Union as a whole. As part of this annual cycle of policy co-ordination, each member state submits a stability or convergence programme to the European Commission in April. The stability programme update sets out the stance for fiscal policy in the coming years.
It complements and is prepared in conjunction with updates of national reform programmes, NRP. In the case of Ireland, the NRP details the progress made under our EU-IMF programme and it maps out our continued progress towards achieving our Europe 2020 targets. A draft of the NRP was discussed at the Joint Committee on European Affairs in early April. As part of the semester, the fiscal and economic policies set out by each member state are subject to peer review at a European level and country-specific recommendations are subsequently endorsed by the European Council in June for each member state to ensure that the policies are consistent with the goals of the Union as a whole. In my remarks this evening I will concentrate on the stability programme update. With respect to economic developments, preliminary figures indicate that real GDP declined by 0.3% last year. However, the disappointing outturn was due largely to sector-specific developments in the pharma-chemical sector, commonly referred to as the patent cliff, which acted to depress goods exports in the year. Because of this, the headline growth figure somewhat distorts what was otherwise an encouraging year for the Irish economy. GNP, which excludes the impact of this sector-specific issue, increased by 3.4 % last year.
Signs of economic recovery are increasingly evident. Investment returned to growth in 2013 and recent indications are of a strong pick-up in consumer spending so far in 2014. As I mentioned earlier, the most concrete piece of evidence comes from the labour market, where data have been unambiguously positive over the past year or so. For instance, employment rose by 3.3%, the equivalent of 61,000 jobs over the year to the fourth quarter, the strongest annual employment growth in the entire EU in this period. The vast majority of job gains were in full-time employment and broadly based across sectors. Unemployment, while remaining at a level which the Government regards as too high, continues to fall every month. I think it fair to say that signs of economic recovery are everywhere except in the initial GDP figures for 2013 which will be reassessed by the CSO in June.
Turning to the economic outlook, my Department expects GDP growth of 2.1% this year, broadly unchanged from budget time. GNP growth should be somewhat stronger at around 2.7%. The perennial question of which measure to use to assess economic progress, whether GDP or GNP, is very pertinent at this time. My view is that the labour market provides the best indicator of what is happening on the ground at present. As I said earlier, the developments over the past year have been extremely encouraging.
A pick-up in GDP growth in 2015 and beyond, is anticipated, accompanied by further recovery in the labour market. There is now a consensus that unemployment is on a downward path and my Department is projecting an unemployment rate of 8.0% by 2018. While this would represent considerable progress from the unemployment rate seen in early 2012, I would stress that the Government does not see these labour market forecasts as targets nor do we limit our ambition to their achievement. The economic forecasts upon which the stability programme update is based have been provided by the Irish Fiscal Advisory Council. I am happy to report that the projections were endorsed by the Council earlier this month. The letter of endorsement is contained in an annex to the stability programme update. In the interests of transparency, a publicly-available memorandum of understanding between the two institutions sets out how this endorsement process operates.
There is, of course, much uncertainty at the moment and there are both up side and down side risks to the outlook. Externally, although developments over the past year have been reasonably encouraging, the emerging recovery in our key trading partners remains at a fragile stage. In particular, risks associated with excessively low inflation in the euro area have of late been flagged by both the European Commission and the IMF.
Domestically, a deterioration in confidence among Irish consumers could result in a re-escalation of household deleveraging, which would serve to dampen consumer spending. On the upside, there is also the possibility that the labour market may be stronger than we have assumed. Last year, for instance, employment growth surpassed all expectations and a repeat performance would indeed be welcome.
On the fiscal front, a general government deficit of 7.2 % GDP was recorded last year according to the CSO. This was within the 7.5% of GDP ceiling imposed under the excessive deficit procedure, the third successive year of over-achievement. The projected deficit for this year announced in budget 2014 remains at 4.8% of GDP. This is inside the EDP ceiling. Therefore, we remain on track to bring the deficit below 3 % by next year, in line with our commitments.
In line with the requirements of the Stability and Growth Pact and the fiscal stability treaty, once Ireland corrects the excessive deficit in 2015, it will be necessary to ensure convergence towards our medium-term budgetary objective, also known as the MTO. In Ireland's case this will mean achieving a balanced budget in structural terms by 2018. More specifically, this involves a budgetary position where general government revenues and expenditures are equal in a given year, once correction for the position in the economic cycle has been made. The projections in the stability programme update are consistent with this.
The stability programme update also highlights that the debt-to-GDP ratio has now peaked at 124% at the end of last year. For this year and beyond the debt ratio is now on a firm downward path. Of interest to investors and analysts, the document also includes figures on the debt ratio in net terms, in other words, excluding the impact of cash reserves that we have built up in order to smooth our re-entry to capital markets following our successful exit from the EU-IMF programme. On this basis, the debt ratio was 98% of GDP at the end of last year, a figure which is not dissimilar to EU norms.
In conclusion, sustainable public finances are a necessary condition for the economic growth that is required to raise living standards and reduce unemployment. The stability programme update confirms that revenue and expenditure are being more closely aligned but there is still work to be done. The Government's policies are paying dividends, a fact which is clear from the turnaround in the labour market over the year.
I welcome questions and the constructive observations that I am confident I will hear from members.