In setting out expenditure projections and associated expenditure ceilings, it needs to be recognised that such projections and ceilings can play a significant role in creating expectations for future increases in expenditure. Consequently, the approach currently adopted has been informed by the experience in the period leading up to the fiscal and economic crisis.
In the years preceding the crisis, large increases in expenditure were implemented on an annual basis, which ultimately proved to be unsustainable. Reflecting on this, there are clear risks to the expenditure position associated with restating expenditure ceilings and for example applying inflationary increases as a revised baseline for any new expenditure. This can lead to the expenditure ‘ceiling’ becoming a ‘floor’ from which further expenditure increases are negotiated, which in turn can lead to unsustainable trends that are not affordable on a long-term basis.
To mitigate against this, the Summer Economic Statement (SES) 2016 set out an expenditure strategy for 2016 to 2021 in which current expenditure would grow by an annual average of 2 ½ per cent, while capital expenditure would grow at 12 ½ per cent on average. There have been variations from these expenditure growth rates, largely driven by policy decisions, such as additional funding for our Health Service and increased investment in public capital infrastructure.
Work is underway on the Summer Economic Statement (SES) 2019. In setting out the Government’s overall fiscal strategy in the SES, I will take into account recent developments, in particular in the external environment, and will consider the points raised by the Irish Fiscal Advisory Council in its recent fiscal assessment report.