The risks posed by an external shock to our economy have been consistently highlighted for some time by both myself and my Department. These risks are being managed by building-up our fiscal capacity through broadening our tax base, debt reduction, targeting improvement in the general government balance, and establishing the Rainy Day Fund.
The tax base has been broadened by a series of measures, most recently by extending the standard rate of VAT to the tourism sector. These policies will help improve the resilience of the public finances to shocks to various sectors of the economy.
Separately, our debt as a percentage of GDP has almost halved from a peak of around 120 per cent in 2012 and continues on a downward trajectory. However, our debt burden remains elevated when measured as a share of modified GNI. Accordingly, this Government has committed to further utilising resources realised from the resolution of the financial crisis towards reducing this burden.
A small Exchequer cash surplus was achieved last year, the first underlying surplus since 2006. A general government balance of 0.0 per cent of GDP was also achieved in 2018. A surplus of 0.2 per cent is targeted for this year, improving to 0.4 per cent in 2020 under current assumptions.
Furthermore, the Rainy Day Fund will be established this year with an initial capitalisation of €1.5 billion from the Irish Strategic Investment Fund. Some of the historically high levels of corporation tax will be set aside for this fund, with an annual contribution of €0.5 billion budgeted. From the perspective of the sustainability of the public finances, this means the risk of permanently increasing expenditure on the basis of transient receipts is reduced.
The potential impact of an external shock is being mitigated by focusing on competitiveness-oriented policies. Capital expenditure has been prioritised to address the bottlenecks to growth which emerged during the recovery, such as the need for more residential development and public infrastructure investment. Total capital expenditure is set to more than double from €4.2 to €8.6 billion between 2016 and 2021. Such sustained levels of investment will increase our capital stock, improve the long-term growth potential in the economy and help build resilience to external shocks.
The Summer Economic Statement, to be published later this month, will set out the Government’s overall economic and budgetary strategy and establish the parameters for the forthcoming Budget, particularly in the context of the increase probability being assigned to a disorderly Brexit.