Yesterday I published the 1996 Abridged Estimates Volume and the Summary Public Capital Programme. Deputies will be aware that it is the first major step in preparing the 1996 budget. I also announced the total level of current spending in 1996 which has been agreed by the Government and which will be detailed in the budget. This new policy initiative will make it possible to see the Abridged Estimates in their overall context.
This Government is committed in its programme of renewal to the prudent management of the economy, the improvement of essential public services and the maintenance of the social partnership. These Estimates, which outline the Government expenditure decisions for next year, clearly meet these objectives.
The Abridged Estimates follow exactly the same format and accounting conventions as in the past. It is clear from comments in the House and else-where that there is dissatisfaction with this methodology because it gives some flexibility in the way in which figures can validly and correctly be presented.
The suggestion has been made that we should move from the present cash-based system of Government accounting to an accruals-based system.
Work is already under way to improve Government accounts and to assess the feasibility of having accrual accounting. The 1994 Appropriation Account was expended to provide additional information of an accrual nature, and more will be done for the 1995 and 1996 accounts. A pilot project in the Department of Transport, Energy and Communications aims to assess the feasibility of accrual accounting.
The constitutional requirement of the Government to prepare Estimates of Receipts and Estimates of Expenditure for each financial year, which is met by the pre-budget White Paper, always has been on a cash basis. Consistent with this, the departmental Estimates voted by the Dáil have been prepared on the same basis.
We cannot then decide overnight to change to an accruals-based system. If we did decide to move, there would be a great deal of costly, time-consuming work to be done.
I am prepared to consider the case for further movement towards accrual accounting. The appropriate committee of the Dáil might, I suspect, consider the matter. Accrual accounts are not simple, and are open to interpretation. A glance at the accounts of any major company will show this. Neither are they free from elements where judgment is involved, such as how much should be set aside to meet future contingencies.
My essential point is this: I am not interested in creative accounting, we should aim to agree on the figures and the way they are computed. Our debate should be on the policy choices involved in managing the public finances, not on the ways the figures are put together.
This Government deliberately set itself very demanding targets for restricting the growth in public expenditure over the period of its programme. These targets required that firm action be taken to arrest the pattern of significant real increases in public expenditure which had developed since 1990. The Government has ensured that the 1996 Estimates reflect the policy set out in the Government programme. Reaching final agreement on the departmental spending allocations for next year was a long and complex process. The 1996 Estimates demonstrate that expenditure is clearly under control.
The trend in real increases in gross non-capital supply services in recent years has been as follows: 1991 over 1990, 6.5 per cent; 1992 over 1991, 6.6 per cent; 1993 over 1992, 6.2 per cent; 1994 over 1993, 4.8 per cent and 1995 over 1994, 3.5 per cent.
These figures are derived from the outturn for gross non-capital supply services for each year, brought to 1990 prices by the use of the consumer price index. The figure of 3.5 per cent for the real increase between 1994 and 1995 is based on my Department's present forecast of the 1995 outturn less the £140 million additional spending on equal treatment decided by the Government after the budget. The 1995 deflator used was 2.5 per cent.
This pattern of very fast growth in real spending in the early 1990s was the context in which the Government adopted an average 2 per cent real increase as a policy objective for 1996 and 1997. That policy objective has served the Government well as a lever in achieving a significant downward shift in the trend in real expenditure in 1996. As a consequence, expenditure growth in both 1995 and 1996 will be much lower than the trend between 1990 and 1994.
The 1996 Abridged Estimates Volume shows an increase in gross current supply services spending of only 2 per cent in nominal terms over the 1995 Estimates as adjusted by the Supplementary Estimates which have been passed by the Dáil this year.
I stated previously in this House that the calculation of the increase in spending in 1966 for the purposes of the Government's 2 per cent real target would exclude from the 1995 base the additional £140 million which was provided after this year's budget for equal treatment payments. This, of course, made the attainment of the 2 per cent policy objective next year more stringent in its effects on other programmes. After excluding the £140 million from the 1995 total the increase in gross current spending provided for in the 1996 Abridged Estimates Volume is 3 per cent in normal terms.
The definitive measure of the increase in current expenditure in 1996 will not be available until budget-day when the increase in 1996 post-budget current spending over the 1995 provisional outturn will be known; but the best measure of that increase that can be made at this point in time is as follows. The Government has decided that gross current supply services expenditure, post-budget shall be no higher than £12.087 million. That represents an increase of 3.9 per cent in nominal terms, or 1.6 per cent in real terms over the 1995 total figures in the Abridged Volume, after excluding the £140 million equal treatment payments. If the £60 million hepatitis C moneys voted this year were also excluded from the 1995 base the real increase would become 2.1 per cent.
It is quite probable that the 1995 outturn will be lower than the amount voted this year by the Dáil, due to savings in departmental spending which may emerge by year-end.
My Department's best estimate of the outturn for 1995 is £11.7 billion or £11.56 billion after deducting £140 million for equal treatment payments. This would imply a real increase, post-budget, of 2.25 per cent. If hepatitis C is excluded from the 1995 base the figure would be 2.8 per cent. These figures represent the best measure of the underlying trend in expenditure.
In calculating the real level of expenditure increase in 1996 we use an inflation rate which is forecast at 2.25 per cent. If inflation is higher, the real increase in public expenditure will be correspondingly lower. These figures of 2.25 per cent or 2.8 per cent should be compared with 6.5 per cent in 1991, 6.6 per cent in 1992, 6.2 per cent in 1993, 4.8 per cent in 1994 and 3.5 per cent in 1995.
The most important budget figure is not the increase in spending but the general Government deficit, as defined for Maastricht purposes. The Government has decided that the deficit in 1996 will be maintained comfortably within the Maastricht guidelines.
This Government recognise the importance of public capital spending for the development of the economy. We have decided on 1996 allocations for the programme which are up 14 per cent on those for 1995, the figure for the Exchequer element being 8 per cent and for the non-Exchequer element being 31 per cent. The picture by sector is as follows. The biggest increase, 21 per cent, is for sectoral economic investment. The allocation for industry is up by 25 per cent, and that for tourism by 30 per cent. These figures reflect the priority the Government gives to job creation. Allocations for productive infrastructure are also increased significantly, by 18 per cent overall. The allocation for social infrastructure is held close to its 1995 level.
The 1996 inflator for capital investment is forecast at 4.2 per cent. With a 14 per cent increase in the total allocation, the public capital programme is set to increase in real terms in 1996 by almost 9 per cent. This should support economic activity, employment and the building industry. I am glad to acknowledge the welcome the building industry has given to the publication of the Estimates in today's newspapers.
The 1996 Estimates include provision of £4.8 billion for the Exchequer pay and pensions bill, an increase of £160 million over the 1995 Estimate. As I indicated in my Budget Statements earlier this year, we will have to adhere strictly to the cost parameters of the Programme for Competitiveness and Work pay agreement in both the public and private sectors if we are to achieve our overall economic and employment targets. The 1996 Estimates include provision for pay increases of £97 million for public servants in accordance with the Programme for Competitiveness and Work pay agreement. These include the carryover cost of 1995 increases at £38 million as well as general round increases of 1.5 per cent from 1 June 1996 at £41 million, and 1.5 per cent from 1 October 1996 at £18 million. Provision has also been made for the implementation of restructured increases under the local bargaining clause of the Programme for Competitiveness and Work pay agreement as it applies in the public service. It is vital that such negotiations will result in settlements which will give value for money by improving the quality, efficiency and effectiveness of services to the public.
The size of the public service and its cost is a matter on which public concern has been expressed in recent years. Many of the tasks undertaken by Government — particularly in the areas of Health, Education and security — are by their nature staff-intensive.
Public service numbers have been creeping up in recent years and the Government has felt compelled to take measures in all parts of the public service to control that rate of growth. These measures are not, and cannot be, identical in all public service organisations given differences in their operating environments and the control mechanisms which apply to them.
The Government acted earlier this year to contain the growth in numbers in the biggest areas, Health and Education. Departments are being instructed to ensure that they pursue numbers policies throughout the public service. These should fully reflect the financial allocations for 1996 determined by the Government and published in the Estimates and should also comply with existing Government decisions on numbers policies in particular areas.
In the area over whose numbers the Government has the most individual and direct control — the Civil Service — the introduction of administrative budgets had the effect of releasing the controls which traditionally applied to the recruitment of staff with resultant increases in staff of over 3,000 since 1991.
At the start of the year the number serving had reached 28,370 — a figure the Government was prepared to live with. By June of this year, it had become apparent that the tempo of increase had changed dramatically. At that date, some 29,162 civil servants, 792 more than in January, were serving and it was evident that if that trend persisted, numbers would have reached 29,500 by end-1995.
The Government decided that the growth of the Civil Service had to be curtailed and took certain limited steps which it hoped would dispose of the problem. Despite this and some normal shedding of seasonal staff, at 30 September the numbers had increased by another 80.
The Government has now decided to reverse to some degree the growth which has taken place in the early part of this year. This will be effected during 1996 by leaving two out of three vacanies unfilled and allowing only temporary increases to deal with some limited once-off tasks. The reduction which will be thus effected during 1996 will be relatively small — 300 posts out of a Civil Service strength of 29,400.
There are three points which should be emphasised in this context: the control arrangements we have instituted for the Civil Service differ in method rather than effect from those being applied in other parts of the public service; while recruitment will be allowed for specific limited work requirements such as the EU Presidency, staff will, as they become free, be absorbed into other priority areas; recruitment for the limited purposes I have mentioned will continue during 1996 and at the end of that year the number of continuing posts will still exceed that which obtained at the start of 1995.
I am aware that previous restrictions on filling vacancies were applied in a somewhat mechanical way and that those measures were seen at times as bearing unfairly on the lower levels of the Civil Service. Steps have been taken on this occasion to avoid these problems. I am delegating to Heads of Departments the authority to decide which post in any sequence of three is filled but have made it clear that such delegation will be revoked if it is not exercised equitably as between various categories of staff.
This growth in numbers has revealed deficiencies in the administrative budget system in terms of controlling overall Civil Service numbers. The Government intends, as part of its programme for public service reform and the development of the strategic management initiative, to devise arrangements which will guard against similar expansion in the future. It is hoped that developments on this front in the coming year will allow the restrictions now announced to be limited in duration.
The central goal of economic and budgetary policy has been to enhance the economy's capacity to achieve the maximum possible rate of sustainable growth in employment and output. All our actions in the economic sphere are directed to that end.
It is now clear that economic growth this year will again be very strong following on last year's exceptional performance when GNP grew by some 7 per cent.
The composition of growth is in some ways as important as its magnitude and here, too, the news is most encouraging. Growth is well balanced with both the domestic economy and exports contributing strongly. Consumption has been buoyant this year and last, especially in areas such as new car purchases, reflecting much improved confidence among consumers. Investment has been even stronger as businesses have expanded capacity in response to low nominal interest rates and generally favourable demand conditions.
Our export performance continues to be exceptional, as our good competitive position and our success in attracting investment helps us gain market share. For instance, the latest figures show that, in the first six months of the year, merchandise exports were one-fifth higher than in the first half of 1994.
Because growth has been both robust and well balanced, employment has responded strongly. My Department estimates that over the two year period 1994-95, employment increased by over 80,000. In fact, the increase in employment in the year to mid-April last of 49,000 was the highest ever recorded in the labour force survey.
Normally, one might worry that the very strong increase in economic activity would give rise to an upsurge in inflation or perhaps a deterioration in the balance of payments. Far from it — inflation has remained extremely moderate at under 2.5 per cent in each of the last two years, which is below the average of our EU partners. This has been confirmed by the CSO figures published an hour ago which show average inflation for 1995 at 2.5 per cent. Our balance of payments was in surplus to the tune of £2 billion last year and the expectation is that this will be exceeded this year.
Looking ahead, I believe that the conditions are right for a continuation of this strong performance into 1996. Confidence among consumers and investors remains high, interest rates are low and international economic prospects look fairly good. There is no sign yet of the current growth phase running out of steam. So I expect another year of strong economic growth although somewhat slower than the exceptional rates of this year and last. Growth again should be well balanced so that a further strong increase in employment is in prospect.
This Oireachtas will not be well served by a contradictory and confusing debate about interpretation of numbers and systems of accountancy. I have already made my position clear on this issue. I believe that we should agree what new form, if any, of national method of accounts we wish to adopt. I suggest that the appropriate committees be asked to examine that question. I expect Deputy McCreevy will agree and respond to that in his contribution.
In the meantime, I must abide by and utilise the existing system prescribed in law and under the Constitution in the best way possible. I also believe that I, as Minister for Finance, should be direct and open with the Oireachtas. That is exactly how I have acted since taking up this office one year ago and I have demonstrated it again here today.
The performance of the economy over the last year shows clearly that this Government has a coherent and effective set of economic policies. It is committed to reducing the rate of increase in public expenditure and will continue to keep the public finances under control.
The publications which we are debating demonstrate the Government's commitment to this policy through a significant tightening of expenditure management in 1996 relative to the pattern of the last five years.
We have achieved this objective while honouring our commitments to the Programme for Competitiveness and Work and maintaining or improving essential public services for the people. Significantly, it is the only Government in the European Union that will be able to achieve this in 1996.