I am speaking this evening on behalf of the Minister for Finance who is attending the ECOFIN meeting in Brussels today.
I very much welcome this motion which endorses the recent measures introduced by the Government to improve the management of public expenditure and underlines the need for continuing effective control of public expenditure in 2003. In my address I will outline the context within which this debate should be approached, as well as dealing with a range of issues relating to the management of the public finances and, in particular, the management and control of public expenditure.
Following a prolonged period of unprecedented economic growth, we now face a more difficult economic environment. Given the nature of our open economy, the prolonged slowdown in global activity has had a major impact. Data for the first nine months of 2002 show an average GNP increase of 1.4% compared to an increase of over 5% for the same period in 2001. As in other developed countries, the lower than anticipated economic growth has created a new environment for budgetary policy. It was this environment which informed the necessarily more restrictive approach adopted in budget 2003.
It is important in this context that I correct some misinformed comment made in relation to budget 2003 and particularly the Government's handling of public expenditure. An often repeated erroneous claim is that the tighter budgetary stance adopted in relation to public expenditure in 2003 was because of budgetary profligacy by the Government in earlier years. The record proves this to be a wrong suggestion. In reality over the period 1997 to 2002 the Government and its predecessor ran up accumulated Exchequer surpluses of €6 billion. It reduced the debt-GDP ratio from 65% to 34%. In a notable act of prudence and budgetary foresight it established the national pensions reserve fund to help provide for the major pensions burden which will face the State in the coming years. Commentators have questioned the level of improved services we have secured for this investment. It is undoubtedly true that we must try at all times to ensure optimal value for money for investment funded by taxpayers and I will refer to this and other expenditure management issues shortly.
We must, however, deal with reality rather than perception. The reality is that massive increases in investment in the health and education sectors have facilitated a significant expansion in the range of services in these sectors, that the rollout under the national development plan of capital projects is unprecedented in size and scale and that there has been a real increase of 41% in the level of social welfare expenditure since 1997. We have, therefore, real and tangible achievements to show for our recent levels of public investment. The challenge going forward in a much less benign environment is to continue to invest in our public services in a prioritised way and within a sustainable budgetary framework.
The need for a more restrictive approach to public expenditure in 2003, coupled with the inflexible nature of much of our public spending, underlines the real challenge in bringing about a reduction, in a balanced and fair way, in the scale of increases seen in recent years. This difficulty was referred to by the independent Estimates review committee – the three wise men – in its report on the 2003 Estimates. In light of this, the Department of Finance is committed to undertaking a medium-term review of spending over the coming months which will allow Government to review and assess its overall priorities over the next three to four year period.
The Government did not embark on a strict approach to public spending in 2003 simply because it wanted to balance the books. The EU stability and growth pact requires us to keep the general Government finances close to balance or in surplus and to take corrective action when there is an actual or expected divergence from this objective. We made it clear in An Agreed Programme for Government that we would respect this sovereign commitment.
We also have responsibilities to the Irish people. We have a responsibility to protect the economy and to foster conditions which will maintain high levels of employment and generate the resources which we need to keep improving our public services. If this requires difficult decisions in the short term we are willing to take those decisions. We take these responsibilities seriously. The lessons of the past have shown us that high taxation rates and high levels of borrowing do not deliver the economic and employment growth levels of recent years. We cannot repeat the mistake of the past.
Looking at the economic prospects for 2003, the international outlook, which is critical to Ireland's open economy, remains characterised by uncertainty. At budget time last December we expected that growth would be modest this year, at 2.5% in GNP terms and 3.5% in GDP terms. However, the global economic and political outlook is shrouded in doubt and the risks to all economic forecasts are, therefore, on the downside. The difficulties in the Middle East, the prospects for the information and communication technology sector, as well as further exchange rate movements are key factors in this regard.
In the current climate of uncertainty, careful management of the public finances is particularly important. We are facing the prospect of having to borrow more than €3 billion in both 2004 and 2005, in addition to the €1.9 billion budgeted for this year. This reality heightens further the need to adopt a strict approach to the management and control of public spending in 2003 and beyond.
In the new and foreseeable economic environment, it is vital that priorities are established in relation to future resource allocation. Investment in education, health, infrastructure and protecting those on lower incomes will continue to command priority. Even within these areas, however, ambition will have to be tempered by the reality of available resources. Proposals which fail the Exchequer affordability test or would otherwise lead us to breach our stability and growth pact obligations do not assist the adoption of a prioritised framework for public expenditure policy.
A range of expenditure management reforms are mentioned in the motion. The improvements in management systems in those specific areas, which have been introduced since the beginning of this year, are as follows: the 2003 spending profiles for each ministerial Vote group area were published at the end of January, this is a new initiative and it will facilitate an informed and transparent assessment of emerging spending trends for the year as a whole; the Department of Finance is also publishing, for the first time, a breakdown by ministerial Vote group of the issues or spending figures which underlie each monthly Exchequer statement; and the Minister for Finance will continue to submit monthly expenditure management reports to the Government on overall spending and revenue trends, which will enable any emerging problems to be identified early at Government level and remedial action, as deemed appropriate, to be taken.
A number of measures have been introduced to facilitate expenditure control with Departments. These are: improvements in risk assessment measures and the introduction of contingency planning to cater for unforeseen pressures which may emerge as the year progresses; a requirement for spending on demand-led schemes to be managed effectively as with other spending programmes; and incentives for Departments to improve efficiency and cost-effectiveness. For example, where Departments secure savings as a result of efficiency measures or steps they have taken to curtail a programme, these should, as a general rule, be available for other high priority programmes within the same Department.
In this context, I am heartened by the responsible approach adopted by Ministers and their respective Departments to the overall management of public spending last year. When faced with a significant number of pressures across Votes, Ministers and their Departments contributed, in a positive and constructive way, to assisting the Government in establishing priorities and ensuring that spending at end December 2002 was slightly below the planned level for Government Departments and offices as a whole. This contributed to the surplus of €95 million achieved in 2002 and also underlined the ability of the Government to adhere to its expenditure targets. Similar resolve will be necessary this year to adhere to the overall post-budget level of expenditure.
While these control measures are important in their own right, they are also designed to encourage public service managers to seek out and exploit greater efficiencies. A number of initiatives are already in place which will help put the spotlight on value for money issues, including the management information framework, the expenditure review process and the forthcoming mid-term evaluation of the national development plan. I am aware, however, that more needs to be done. Greater delegation must be coupled with greater accountability. The public has a right to see whether it is getting value for money. I want to see a greater focus on results and outputs achieved.
Value for money and output commensurate with the level of investment is particularly important in relation to capital expenditure. As part of the new expenditure management initiatives, the Minister for Finance intends to agree a five year capital expenditure envelope with each of his colleagues. This will provide relative certainty to Departments in planning their capital programmes going forward. In return, Departments will be expected to identify the project and programme outputs they will achieve for the envelopes provided and to deliver this output as far as possible within both budget and projected timeframe.
Our economy is in good shape and in a good position to deal with the current slowdown. We want to continue to foster the economic conditions to create wealth and jobs in this country and we cannot do so through high taxation or high borrowing. The Government did not take decisions on the 2003 Estimates lightly and did not engage in some form of technical accounting exercise to balance the books. Necessary steps were taken to ensure our continued prosperity. The only way forward is to have an ongoing sustainable match between our revenue and expenditure and the 2003 Estimates will set us on that path. A key element of management is that Government will receive timely information which ensures that any emerging problems are identified early and remedial action is taken. The expenditure reforms recently agreed by Government, and set out earlier, will contribute to this.
I, therefore, commend the motion before the House and commit the Government to a resolute control of public expenditure in 2003 and beyond, while ensuring resources are allocated to priority areas.