Earlier I said that against a background of significant economic progress, coupled with the continuing challenge of unemployment, I wished to look at three issues: first to set our key national economic objectives; second, to summarise the progress made in achieving these goals in recent years, and, third, to discuss the prospects for the future.
These aims are closely related because much of the gap between Irish and EU average living standards in attributable to our higher unemployment rate. Other policy goals, such as low inflation, improved competitiveness, moderate Government borrowing, reducing the national debt/GNP ratio and so on should all be seen as means to achieving these key objectives rather than ends in themselves.
How have our policies to date been delivering on our key objectives of creating jobs and improving living standards? For a small open economy like ours, there is only one test. If a country as open as ours to international competition, as dependent as ours on international trade, fails to match the pace of progress in our main trading partners, then its policies have not been successful. On the other hand, if it out-performs its competitors, there is clear evidence of a correct policy stance.
With this as our yardstick, what results have been achieved in recent years? Taking the years 1987 to 1993, a period of economic and social consensus and consistent budgetary and monetary policy as our reference period, the results are impressive.
Irish economic growth in terms of GNP has been on average 2 per cent per year better than the EU average. If I were to take output or GDP growth, the comparison would be even better still. Relative living standards here, as measured by GDP per head, have improved from 62 per cent of the EU average in 1986 to 77 per cent in 1993. Employment growth in Ireland has been on average 0.5 per cent faster than the EU average. If I were to take growth in non-agricultural jobs, the comparison would be even better. These results suggest that policy has been on the right lines and that we are moving in the right direction. Given our employment needs, the challenge is to accelerate the pace of progress.
This brings me to my third theme. What about the period ahead? What do 1994 and 1995 hold in terms of jobs and living standards? How are things likely to develop over the medium-term? This year and next will see further substantial progress in growth, employment and living standards. The international environment is improving. Domestic and international economic analysts are revising upwards their economic forecasts.
The OECD and the IMF now expect growth in the industrialised countries to be about twice as fast as last year and to accelerate further next year. The European Union is returning to growth following a small decline in output last year. The Commission's latest forecasts are for GDP growth of 1.5 per cent this year rising to 2.5 per cent next year. The OECD is predicting a rate of expansion in the OECD area of 2.5 per cent this year, accelerating to 3 per cent in 1995. International inflationary pressures remain quite moderate. This relatively favourable international background presents major opportunities for our exporters, although further gains in market share will not come automatically but must be earned through better competitiveness.
Here at home, against a background of low inflation, the moderate pay increases under the new national agreement and the personal tax reductions in this year's budget have combined to provide the basis for an increase of 3 to 3.5 per cent in real disposable incomes. Allowing for some fall in savings, I expect that growth in consumer spending will pick up to about 4 per cent. Trends so far this year in retail sales and new car registrations support this view. The low interest rate environment and the substantial increase in public capital spending should result in a considerable improvement in investment this year. The climate for investment here has rarely been better.
As is customary at this time of year, my Department will review the growth and budgetary outlook in the light of the Exchequer returns for the first half of the year which are due to be published on Monday next. The results of this review will be published in Economic Review and Outlook around the end of July.
My budget day prediction of 4 per cent growth is now supported by almost all public and private sector analysts. The EU Commission recently predicted growth of 4.2 per cent for Ireland. Others speak of even stronger growth, all are agreed that this year will see a faster rate of employment growth here than among developed countries generally. Provided that the recovery in the international economy is maintained, next year will see further strong output and employment gains at home.
Ireland's economic prospects for the next three years are described in the Convergence Programme for Ireland 1994-96, which we have just published. As with the previous programme, this new convergence programme is founded on the agreement between the Government and the social partners which maintains the consensus approach of recent years — the Programme for Competitiveness and Work. The new convergence programme coincides with the first years of a major investment effort under the Community Support Framework, CSF, which I will be examining later.
The programme outlines our growth and employment prospects for the period to 1996 and sets out our anticipated performance in relation to the nominal convergence criteria in the Treaty on European Union. These criteria mainly concern the public finances in the form of the general Government deficit and the debt-GDP ratio. A further requirement is that inflation must be close to the best performers in the European Union. Ireland has satisfied these criteria over the last several years and is expected to continue to do so. The convergence programme has been transmitted to Brussels where, in keeping with the new Treaty arrangements for the mutual surveillance of the economies of the Union which apply to all member states, it will soon be discussed at a meeting of Finance Ministers. I will come back later to look at budgetary policy.
The outlook for the medium-term presented in the convergence programme is very good. An annual economic growth rate of 4 per cent is in prospect, with non-agricultural employment expected to rise by about 60,000 in the three years to 1996. Inflation is likely to remain low, averaging 2.5 per cent. This promising economic performance is predicated on a general Government deficit below 3 per cent of GDP each year. This will enable us to reduce the debt-GDP ratio at an annual average rate of 3 to 4 percentage points — in line with the objectives contained in the Programme for Competitiveness and Work.
This convergence programme is the third major medium-term economic policy document published this year. It builds on the central elements of the two preceeding documents, namely the Programme for Competitiveness and Work and the Community Support Framework and it flows logically from them. The three documents should be seen together as linked policy statements, with the second and third document each restricting on the successful implementation of its predecessor.
First we had the Programme for Competitiveness and Work under which we agreed to maintain the consensus approach to policy formulation which has served this country well. Associated with this programme were pay arrangements which, if followed in a commonsense way, will provide the necessary backdrop of competitive strength and industrial peace. Both of these elements are vital. Next, we had the CSF which spelled out the largest investment plan ever attempted in this country. Now we have the convergence programme which sets out the results which we can expect over the next three years from the successful implementation of the Programme for Competitiveness and Work and the CSF.
The central goal of all three strategic statements — the Programme for Competitiveness and Work, the CSF and the new convergence programme — is essentially the same: to improve conditions for the creation of sustainable employment. The policies which will deliver this objective are also similar — the continuation of the improvement in the public finances and a deepening of the competitiveness of the economy grounded on a moderate and reasonable pay settlement for both the public and private sectors.
Price stability will continue to be the objective of exchange rate and interest rate policy. While the widening of the ERM bands in August last year changed the foreign exchange environment, the Irish pound has maintained a stable relationship with other low-inflation currencies. These macro-economic policies, reiterated in the convergence programme, are enhanced by micro-economic policies to make markets more efficient. It is appropriate that the process of structural reform should be given prominence in the new programme as it is central to maintaining sustainable growth in output and employment over the medium-term.
Ireland's employment record has been good in recent years, better than all of our partners in the European Union. Despite the gains in non-agricultural employment and even with the fall over the last year in the number on the live register, unemployment is still unacceptably high. In addition, the natural increase in the labour force will remain strong over the next few years.
The programme acknowledges that unemployment is our greatest economic problem. It explains that the structure of the economy determines how effective we can be in turning growth in output and incomes into sustainable jobs and that structural reform must be part of the response to the unemployment problem. The programme goes on to indicate the Government's intentions in that area.
The improved international outlook and the prospective increase in domestic demand suggests that employment growth could accelerate over the next three years. Total employment may expand by 17,000 per annum, or about 1.5 per cent, in the three years to 1996. Within this total, non-agricultural employment is projected to grow by 20,000 per annum, or 2 per cent.
This is by no means a guaranteed outcome. Its achievement is conditional on the maintainance of our competitive strength. Although such an outcome would be better than that expected for most industrial countries, it would still be inadequate to match the projected natural increase in the labour force of 25,000 per annum.
Emigration is not an acceptable solution to the problem of unemployment, nor is it consistent with the aims of the Maastricht Treaty in relation to convergence. The growth and employment figures set out in the convergence programme can and must be bettered through a renewed commitment from all sections of the community to give top priority to the maintainance of jobs, especially when these are under threat, and to the creation of new jobs. This is my central policy goal; it is the key aim of this Government.
As the Dáil is aware, agreement has now been reached on the other major policy document I referred to, namely, the Community Support Framework. It was approved in principle by the Commission on 15 June and, once certain consultative procedures have been completed, will be formally approved during July.
The Government's development strategy as set out in the National Development Plan is incorporated in the Community Support Framework. All the key elements of the plan are maintained. The allocations between Departments of total combined Exchequer and EU expenditure arising from the Community Support Framework are consistent with the allocations as adjusted by the Government on a pro rata basis last February.
The total amount of EU aid allocated at this stage under the Community Support Framework is, as has been known since last October, less than the amount on which the National Development Plan was based. Account was taken of this shortfall in respect of 1994 in framing the 1994 Estimates. The pro rata adjustments addressed this issue for the balance of the period.
While reductions of £130 million were made to plan expenditures in the 1994 Estimates, this was not the full amount of the projected aid shortfall. It proved possible for the Exchequer to meet some £40 million of the cost which would have been covered by EU funding on the basis of the plan. Throughout the period to 1999, the Government will look each year at the budget possibilities to see whether additional Exchequer resources can be made available. The Government would regard it as imprudent to commit itself at this stage to further increases in public expenditure. The determining factor will be the budget and economic position each year.
Work is very well advanced on the operational programmes which form the legal basis for the commitment of EU aid. We expect some of these to be approved in July and the rest in the early autumn. The EU aid will then start to flow.
Implementation has not been held up while all of these arrangements are being put in place. The greater part of the plan expenditures are funded by the Exchequer. In those cases, the arrangement is that the gross expenditure totals are provided in departmental Estimates at the start of the year, with the EU aid element being recouped later in the year. Thus implementation has been going ahead since the start of the year.
We should now look forward to continued efficient and effective implementation throughout the period to 1999 with all the necessary steps being taken to ensure that the country derives the maximum advantage from this unprecedented injection of funding into constructive investment.
I now want to look at budgetary policy and the public finances in more detail. The general improvement in Ireland's economic performance has been reflected in the public finances. Ireland's performance in relation to the agreed EU convergence criteria has to date been among the very best in the Union. Ireland's general Government deficit has been below 3 per cent of GDP each year since 1989, thus meeting the minimum required under the Maastricht Treaty. The debt ratio, apart from the once-off effects of the 1993 devaluation on the Irish-pound value of the foreign currency denominated element of the national debt, has been declining steadily. Our inflation performance has also been excellent.
A central objective of the 1994 budget, of which the Estimates are an essential part, was to maintain the soundly-based public finances which is a necessary condition for the creation of sustainable employment. The prudent budgetary policy we have pursued since 1987 has been the correct approach.
The reduction of our dependence on borrowing, the control of public spending, the easing of the tax burden and its more equitable distribution, have restored confidence and strength to the economy and enabled us to weather the currency crisis, to introduce a new climate of low inflation, and to unwind the differentials which had emerged between the Irish and other European interest rates. The basis for the medium-term developments I have been discussing has been laid by this policy. It is no coincidence, either, that we maintained very reasonable levels of economic growth throughout the recent downturn in the international economy.
The key budget statistic this year is the restriction of the Exchequer borrowing requirement to 2.7 per cent of GNP. While the half-year Exchequer returns are not yet to hand, the indications suggest that the outturn should be close to that target.
Certainly, Ireland's level of borrowing is now down to a level which could not have been envisaged as being within our grasp during the period of large Exchequer deficits which emerged in the period up to the mid-1980s. This reduction in the level of the annual budget deficits combined with a professional approach to treasury management, has meant that the burden of debt and debt-service costs has also declined as a proportion of GNP. The debt-ratio will fall again this year, and we are determined to ensure that, in accordance with our obligations under European Monetary Union, the level of debt will continue to decline in the years ahead.
The convergence criteria set out in the European Monetary Union Treaty put a firm obligation on member states to meet challenging budgetary guidelines. We are now consistently satisfying these criteria. However, because of the large overhang of public debt still remaining, we must continue to keep our annual deficits low — even lower than those in other EU member states.
The deficit and debt criteria set out in Maastricht may seem rather academic issues at present. However, these criteria are in accordance with our own domestic needs and reflect the policies we were pursuing in any event. The fact is that, irrespective of European Monetary Union, the overhang of debt must be reduced as rapidly as possible so that we can continue to release more of our national resources for other needs. It is a sobering fact that almost one-twelfth of GNP must be allocated each year to meet deficit servicing costs before the Government can address the many other spending priorities which are of more direct benefit to the community and for which Members of this House continually call.
Of course, the Government has done far more than simply create the right environment for increased employment. In the last two budgets and Finance Bills, substantial measures have been introduced by the Government with the direct, specific aim of promoting enterprise and job creation. As Minister for Finance, I want to ensure that all aspects of Government policy — taxation and expenditure — work towards this aim.
In particular, the Government reduced the tax burden on employment income this year and made a number of changes in the tax code which are of particular benefit to small and medium-sized businesses. Those businesses were given a major boost in the budget, with a wide range of significant measures designed to increase the number of start-ups in this important sector. Among other things, the 1994 budget and Finance Bill, increased VAT thresholds, taking many small firms out of the VAT net altogether; helped small business cash-flow by putting the VAT system on a cash receipts rather than an invoice basis; reduced capital gains tax on shareholding from 40 per cent to 27 per cent for small businesses; extended the capital gains tax roll-over relief for shareholding in small companies to the wider services sector; introduced a new business relief in capital acquisitions tax which is particular beneficial for the transfer of family businesses; increased the company value limit for the purposes of BES investment by the "original entrepreneur"; improved capital allowances for hotels, farm buildings and business cars; extended the PAYE allowance to the children of proprietary directors and of self-employed persons, where they are working in their parent's business; and, to improve access to funding — an issue of major significance for the small enterprise — the budget introduced a £100 million loan fund for small business. The fund, which is administered by the ICC, advances business expansion loans to firms in manufacturing, tourism and internationally traded services.
These, with all the other policy measures of recent years, are helping to improve the economy's capacity for job-creation.
Since the publication of the 1994 Estimates, there has been some criticism of the Government's policy on spending. The charges are usually summed up in the slogan that somehow this is a "tax and spend" administration. While the Government may point to an Exchequer borrowing requirement held well within the Maastricht Treaty guidelines, the critics — even though very few of them are here——