I am grateful for the opportunity to address the House on the theme of where the economy stands. The Government's policies are beginning to bear fruit and the economy is showing signs of growth, which is the first step towards our national recovery. The aim of Government policy is to improve living standards for all. A growing economy and an improved jobs market are essential prerequisites. That is our focus and objective, and that is what we intend to obtain.
Before discussing the Government's response to the opportunities and challenges facing us, I will provide Senators with a brief overview of the economic situation. Last year's 1.4% expansion in GDP followed three successive years of annual declines. Growth has continued into this year, rising modestly at 0.5% in the first half of this year compared with the same period last year. The recovery is being led by the external sector. Exports of goods and services are now well in excess of pre-crisis levels. This demonstrates that the improvement in competitiveness, which has been evident in recent years, is now yielding benefits. It highlights the inherent flexibility of the Irish economy given the significant improvements in relative prices and costs. Strong export performance means that our balance of payments with the rest of the world moved into surplus in 2010 for the first time in more than a decade.
More recently, a surplus of €3.2 billion was recorded on the current account of the balance of payments in the second quarter of this year. This is the largest nominal surplus recorded since records began in 1981. While the figures can be volatile, it is notable that in the past four quarters the current account balance has averaged 3.3% of GDP. In the second quarter of the year services exports recorded an 8% annual increase. This again reflects the competitiveness improvements of recent years. It also reflects the continuing willingness of foreign and domestic multinationals to locate new business in Ireland. The pipeline for more foreign direct investment is strong and IDA Ireland has secured 77 foreign direct investments to date this year.
Notwithstanding these positive developments, the Government is acutely aware that the greatest fallout from our economic difficulties is in the labour market. The October unemployment estimate at 14.8% is simply too high. However, the only reliable way to bring down unemployment is to secure economic growth. I repeat that is the main focus of the Government's economic policies.
On the budgetary front, the gap between revenue and expenditure remains large despite the reduction in the underlying deficit to an estimated 9.1% of GDP last year - well within the limit set under the EU-IMF programme. The Government is committed to reducing the deficit further. The latest available data are consistent with achieving this year's target of 8.6% of GDP. Aggregate tax receipts for the 12 months to the end of October are up 6.3% on the same period last year on a headline basis and are 0.3% ahead of target with three of the four main sources of revenue outperforming expectations.
The majority of Departments continue to manage within their agreed limits. That said, spending is somewhat higher than planned in the social protection and health areas, which is a serious cause for concern. First, in order to achieve budgetary targets and, second, to restore confidence in the sound management of the public finances, the Minister for Public Expenditure and Reform, Deputy Howlin, is working with ministerial colleagues in these areas to ensure that allocations are managed effectively.
The Government continues to meet the quantitative fiscal targets set out as part of the EU-IMF programme, most recently for the end of September. Compliance with these targets has helped a great deal in restoring Ireland's reputation as we seek to return the public finances to a more sustainable path. Our recent return to the bond markets is a clear measure of the progress Ireland has made towards emerging from the programme. Success here illustrates that the strong programme implementation by the Government is recognised by investors and that Ireland's recovery is on track.
As a small, open economy, Ireland's prospects are inextricably linked to wider global developments. Concerning our main trading partners, GDP in the euro area contracted by 0.2% in the second quarter of this year following a flat first quarter. UK GDP grew by 1% in the third quarter, following three successive quarters of negative growth. The United States figures are a little more encouraging, with GDP increasing by 0.4% in the second quarter. The IMF recently revised downwards its global growth projections for 2013, including for Ireland's main trading partners, in particular the UK and euro area. Thus demand for our exports in 2013 will not be as high as had been anticipated when the Department of Finance last published its growth forecasts in April.
The Government is acutely aware that many in our society who have been negatively affected by the economic difficulties of the past four years are under immense strain. I repeat that job creation is our key objective in this regard, and putting in place the right policies to encourage growth in employment is at the centre of the policy action.
I wish to go into detail on some issues, particularly mortgage arrears, as colleagues have requested that this be done during the debate. The Government is aware of the significant difficulties homeowners face in meeting their mortgage obligations. The Government is committed to advancing appropriate measures to assist those mortgage holders experiencing real and genuine difficulty. The Government is now actively implementing the main report recommendations of the interdepartmental working group on mortgage arrears, and significant milestones have been achieved.
The Personal Insolvency Bill passed Report Stage last week in Dáil Éireann. The Minister of State with responsibility for housing and planning formally launched the mortgage to rent scheme on a nationwide basis. Lenders have provided the Central Bank with details of their proposed forbearance and loan modification options. Some forbearance measures have been introduced on a pilot basis and are being further rolled out. The Minister of Social Protection has put in place an extensive independent mortgage advice framework. This comprises an enhanced website, www.keepingvourhome.ie, a mortgage arrears information helpline, and the provision of free, independent, one-to-one professional financial advice to borrowers considering a long-term forbearance or resolution offer from their lender.
The Government remains committed to progressing these measures to assist genuine mortgage holders in difficulty. These are in addition to existing supports such as the protections offered by the Central Bank's code of conduct on mortgage arrears. The Government sub-committee on mortgage arrears, chaired by the Taoiseach, continues to ensure this issue receives priority attention.
In terms of the labour market, the Government's Action Plan for Jobs 2012 was launched earlier this year by my colleague, the Minister for Jobs, Enterprise and Innovation, Deputy Bruton, and builds on work throughout Government to deliver reform and create economic growth. We will build on the progress made on economic reforms to accelerate jobs growth and get the economy working again.
Action Plan for Jobs 2012 is the first instalment in an ambitious multi-year process. It aims to create, by 2016, the environment where the number of people at work will increase by 100,000 people net to approximately 1.9 million and reach 2 million people by 2020. Its success will depend on whether it fosters greater job retention and creation. The latest progress report shows that in the third quarter of 2012, Departments and agencies had delivered on schedule. This equates to an 87% completion rate of the 67 measures due.
That said, structural unemployment is a key concern, and is reflected in the regrettably high share of long-term unemployed. This remains in part a legacy of the aftermath of the construction boom and the decline of associated sectors. To combat this the Government has prioritised job creation and retention through the action plan on jobs and Pathways to Work which is the Government's jobs activation programme. We have also successfully negotiated with our programme partners that some of the receipts from the sale of State assets will be directed to support job creation.
Ireland must maintain its position as an attractive destination for inward investment. We must position our economy to take advantage of the global recovery when it emerges. While the sustainability of the public finances is paramount, the Government has taken, and will continue to take, steps to support competitiveness. These include the Government's commitment to the 12.5% rate of corporation tax and to maintaining and enhancing our pro-business tax policies. As a result, Ireland continues to attract inward foreign direct investment. Almost 1,000 companies, including Google, eBay and Facebook, have chosen Ireland as their European hub. Equally encouraging are recent investment decisions by Irish companies to locate new business at home.
Since 2011 the Government has introduced and enhanced a number of pro-business tax measures. The 2012 Finance Act introduced the special assignee relief programme to attract key talent and innovators to Ireland. We have also introduced the foreign earnings deduction to support companies looking to expand into the emerging BRIC markets of Brazil, Russia, India and China, and also South Africa. Significant enhancements to the research and development tax credit scheme have been internationally recognised as best in class. Improvements in the three-year tax exemption for start-ups now ties the value of the relief to employment creation. Furthermore, the jobs initiative introduced a reduction in the VAT rate on certain employment intensive industries such as tourism, while a reduced rate of PRSI payable by employers supports wage competitiveness.
Given Ireland's labour costs contribution to total costs, its competitiveness significantly impacts on overall competitiveness. Unit labour costs, relative to the euro area, have improved substantially in recent years and are forecast to continue to converge in the coming years. Exchange rate movements also benefit our competitiveness. Last year's euro depreciation against the dollar and sterling has been of great benefit given our greater exposure to trade outside of the euro area.
Despite the challenges we face, the Government will spend €17 billion on the 2012-16 capital programme. That level of expenditure is based on what we can afford and targeted at where it is needed most. The programme is designed to facilitate economic growth and build our social infrastructure. An increasing share of our scarce capital resources will be allocated to schools and health care facilities. These areas will benefit the construction industry in terms of stimulating increased demand and the consequent jobs that will follow.
Last July my colleague and Minister, Deputy Howlin, announced the Government's plan for an additional €2.25 billion investment in jobs-rich public infrastructure projects in Ireland. Intensive efforts were made to identify projects that are realistic, credible and deliverable. The bulk of project funding will come from a combination of the National Pensions Reserve Fund, the European Investment Bank and Council of Europe bank, domestic banks and other potential private investment sources. Phase 1 of our public private partnership programme is estimated to generate up to 13,000 jobs. Phase 1 will focus on projects valued at up to €1.4 billion in the education, health, transport and justice sectors.
The importance of ensuring a sustainable public finance position is clear to all. The Government must demonstrate, nationally and internationally, that the public finances are gradually returning to a sustainable level. Our debt-to-GDP ratio must be put on a downward path and the ratio is expected to peak next year and will fall thereafter.
With regard to the medium term, the external environment is expected to strengthen from 2014 onwards, as is our export growth. As stronger exports start to feed through to investment and employment, consumer confidence is expected to improve and the savings rate should start to fall. I expect to see economic activity beginning to gradually firm up and broaden out from being externally driven to domestic demand beginning to make a modest contribution.
The strong performance of foreign direct investment points to the fact that many of the underlying strengths of our economy remain, including a well educated workforce, favourable demographics, an open and flexible economy and a pro-enterprise environment.
Much, however, remains to be done and I reiterate that addressing the difficulties in the labour market remains our biggest challenge. Recent figures point to signs of stabilisation in the labour market. The next task is to get unemployment on a downward path.
While the Government is taking every step to support economic recovery, there are no quick fixes. We must continue to deliver on our commitments under our EU-IMF programme and, in so doing, ensure that the programme is working for us. The Government's main priorities, to restore order to the public finances, repair the banking system and improve competitiveness, reflect the scale of the challenge we face.
We are on track to bring the deficit below 3% of GDP by 2015. The banking system has been recapitalised and the economy returned to growth last year following three successive years of annual declines. The Government is delivering a return to sustainable growth that plays to the underlying strengths of the economy.
Tomorrow, the Department of Finance will publish its revised forecasts for 2012 and later years. These will take account of more recent information and the outlook for the international economy.
The Government is reacting decisively and in a timely manner to address our economic challenges. This is widely recognised internationally by those who objectively assess our performance. Hard decisions have been taken and these have helped reposition our economy on a more sustainable, export-led growth path. The return to modest growth demonstrates that these hard decisions are now beginning to bear fruit. While this has not yet had a positive impact on the labour market, as momentum builds in the economy we can expect further positive dividends, particularly in the labour market.
I look forward to the debate that will follow my contribution. I assure Senators that the Government has an open mind when it comes to listening to the contributions of colleagues on all sides and considering sensible suggestions that will help us all to get the economy working again.
