I assume the Deputy is referring to the overview of the NESC report, Opportunities, Challenges and Capacities for Choice – the council's new report on Ireland's economic and social strategy for the three year period 2000 to 2002 – published last week.
It is important to be clear on what precisely the NESC report states on public expenditure. A key statement in it reads:
The Council believes that, over the three years to 2002, the real increase in public expenditure should, at a maximum, correspond to the real growth rate of GNP. Allowing current public spending to grow by a rate no greater than the increase in GNP implies a significant slowdown on the trend increase in spending during the 1990s if, as expected, the economy grows more slowly in the period ahead. If the previous increases were to continue against a background of slower growth, the health of the public finances would be seriously weakened.
The report did not recommend that the increase in expenditure should be 5 per cent per annum over the next five years. Real growth in spending means the rate of increase above inflation which, for the purposes of its report, the NESC has assumed to be 2 per cent per annum. The NESC outlined two scenarios, which showed the impact on the budget surplus of given real increases in current expenditure based on an assumed real GNP growth of 5 per cent and an assumed real GNP growth of 2.5 per cent.
Under the first scenario, the report shows that if real current spending growth is 4 per cent per annum, that is, less than the assumed 5 per cent real rate of economic growth, the budget surplus would gradually increase over the period to 2005. If the real increase in current spending is 6 per cent per annum, the budget surplus would stabilise at about 1 per cent, which is less than the present surplus.
Under the second scenario, with an assumed real rate of economic growth of 2.5 per cent, the NESC report shows that real current expenditure growth of 4 per cent would result in the elimination of the present surplus and progression to a balanced budget position by 2005, while real current expenditure growth of 6 per cent would produce a large deficit by 2005.
Additional InformationThe NESC report emphasises that the assumption, which it uses about a 5 per cent rate of economic growth, is not in any sense a forecast but a “reasonable conjecture about future economic performance”.
The NESC's view of the possible maximum rate of growth in public current expenditure in the context of an assumed 5 per cent economic growth rate is clearly well above the Government's commitment to limit the growth in net current expenditure to 4 per cent per annum on average. The 4 per cent is a nominal figure, that is, it includes inflation and is equivalent to a real increase of about 2 per cent.
The NESC report concluded that the evolution of the fiscal balance hinges on the relationship between the real rate of increase in current public expenditure and the real growth rate of GNP. This is true after taking into account other budgetary variables, notably the levels of capital expenditure and taxation. The Government's ceiling of 4 per cent on the growth of current expenditure was not, however, linked to the growth rate of GNP.
A change in the Government's 4 per cent annual average limit on net current expenditure growth is not envisaged. The recently published review of the Government's programme, An Action Programme for the Millennium, restates its commitment to the 4 per cent ceiling on the average annual growth in net current expenditure.