This is the budget the country needs at the present time. While not without some pain, it is a fair and progressive budget that looks after those who are least well off. It seeks some contribution from everyone else, especially those sectors that have prospered most in recent years. The Government is determined to maintain a strong economy for the benefit of all our people. This budget will send out a message of confidence at home and abroad that we are determined to remain on top of the situation, despite the further deterioration in the world economy.
The positive features of the budget in this regard are: a modest general Government borrowing requirement of 0.7% of GDP in 2003 after achieving near balance in 2002 and a continued drop in the GGB to GNP debt ratio to 34%, the second lowest in the European Union after Luxembourg; the lower personal tax rates achieved by the last Government are maintained and the move to the unified corporate tax rate of 12.5% has been completed on schedule; and there is no deviation from the target amount set aside for future pension liabilities or modification of the special savings investment account scheme, despite the siren voices. The lack of provision for future pensions is a serious problem, particularly in some European Union economies. We are maintaining one of the highest public investment ratios in the European Union with an extra 20% being provided for roads, compared with the Abridged Book of Estimates.
I regard it as a great achievement in these times that we can still look forward to a net increase in employment of 18,000 this year and, following the budget, 11,000 next year. Until recently, we were never anywhere near the top of any international comparative employment table. On the contrary, until 15 years ago we were bumping along the top of the unemployment league in the company of Spain. One only needs to look around Europe, both now and in the past, or at the former Asian tigers to see how quickly economic reputations built up painstakingly over a long period can be undone if the right action is not taken in good time.
The point may be made by some that we could use more room for manoeuvre under the Stability and Growth Pact to borrow more. I have no desire to see this country under the sort of pressure we faced in the past or some of our partners are under today in struggling to achieve acceptable deficits, nowadays defined as below 3% of GDP. There are many uncertainties in the world economy, not least the uncertainty over Iraq, and our aim must be to get through this period with minimum disruption and in a strong position to resume higher growth as soon as external conditions improve.
In real terms, there is no reduction in Government expenditure. In fact, there is likely to be a modest real increase and gross current expenditure is set to grow by 8.7%. All talk of savage cutbacks is simply ignoring the figures. Besides, nearly every sector has benefited from huge increases over the past five years, in many cases of 80% to 100% or more. The tighter current situation in which spending is levelling off on a high plateau will be an incentive to ensure concentration on the essentials and the more important priorities, rather than to behave as if money were no object.
The budget has to be understood in the context of two key facts, the difficult economic circumstances we face domestically and internationally in the short-term and the need to manage our way through the coming period of uncertainty. We should be poised to take best advantage of the upturn as soon as it comes in order that we can, at all times, fully protect the position of the weaker members of society. The budget meets these two imperatives. It strikes the right balance between social protection for today's people and needs and investment to underpin and secure our economic prospects into the future.
We are one of the most open economies in the world. We must protect our competitiveness and astutely plan to regain better competitive advantage if we are to secure future economic growth, job creation and social justice. It is the very open nature of our economy, combined with stability orientated domestic policies, that has driven the exceptional economic growth of recent years, most notably over the period 1997 to 2000. With the global economic downturn and the slowdown in our economic growth last year and into this year, the Government has had to take stock. We have had to take unpalatable measures to bring the public finances into line with the economic reality and protect our future prospects.
In formulating the budget for next year, the Government has been guided by the need to ensure levels of public spending are appropriate to actual and projected economic growth which, in turn, affects revenue levels. In other words, spending increases for next year have to be brought into line with changes in tax revenue. This is precisely what is being done through the Estimates and now in the budget. It is especially important to make the point that corrective action to account for the uncertainties we face next year will help us achieve the vital goal of consolidating the important and unprecedented economic and social gains of recent years. Without such action, we would risk rapidly eroding all that has been achieved.
In formulating the Estimates, the recommendations of an independent review committee informed the decision making process. I am grateful to those who gave of their time. It is the job of the Government, however, to evaluate choices and make final decisions, taking all factors into consideration. Everyone can see which suggestions have been adopted. The proposals which have not been taken on board do not have the status of an agenda for Government, but are available for anyone to consult or debate. The very large spending increases of recent years led to a big expansion in services and capital investment in many priority areas. While the rate of increase could not be sustained indefinitely, it was a justifiable part of our economy in a rapid catch-up phase. The sheer level of these increases are an important fact against which any outcry about the moderation of spending in the Estimates and the budget must be judged. On average, Departments and agencies are spending at least 40% more on services to the public than they did two years ago. That is not, necessarily, the same as saying that we have seen a 40% increase in the quality or quantity of services. It is reasonable, therefore, to look critically at where taxpayers' money is going and at whether our structures and delivery mechanisms are giving us the best possible value for money.
Taking into account that the base expenditure figure on public services is some 40% higher than it was two years ago, the Government has had to make decisions about where resources are to be prioritised in the current very different circumstances. In line with our overall objective to improve the general quality of life and raise national competitiveness, priority is being given to health, education, social welfare and transport infrastructure.
There is a very substantial social inclusion package in this budget, costing €500 million. We are maintaining our commitment to the older section of our population with a €10 increase, with a similar increase of €11 for widows and widowers on the contributory pension. This is broadly the same level of increase as was given last year, and is comfortably in excess of inflation.
In considering what has been done for our older people, we have given another substantial increase in the age exemption limit from €26,000 to €30,000 for a married couple, as well as some further improvements in the carer's allowance, the respite care grant, and the extension of the free telephone allowance to residents of nursing homes who have their own telephone account.
We have also provided a further increase of between €8 and €10 a month in child benefit this year, even if not on the scale of the spectacular increase last year. Of all the improvements made in recent years, those in pensions and child benefit have been particularly appreciated by the public.
With regard to health, the gross allocation for next year will be €8.9 billion, an increase of €520 million on 2002. That rise needs to be set within the context of a massive 147% cumulative increase over the period 1997 to 2003. Of itself, that represents a clear demonstration of the Government's consistent commitment and determination to bring about a marked and substantial improvement in health care provision. However, the health delivery agencies have a vital role to play too, especially in the effective management of resources on behalf of patients and those on waiting lists, as well as on behalf of taxpayers generally. We will make further progress in extending the medical card as soon as possible, but I remind the House our pledge is to be implemented over a whole term of government, and not necessarily in the first year.
In the area of education, the gross allocation for 2003 of €5.6 billion represents a €190 million increase on 2002 and brings the cumulative rise over the period 1997 to 2003 to 77%. This includes a threefold increase in capital spending. While teachers are the most important educational resource, continued investment in school buildings, to bring them up to the best modern standards, is a high priority for the Government. I look forward to public private partnership projects making a significant contribution in this regard. I welcome the proposals of the Minister for Education for improved transparency from the beginning of next year as to where each school building project is at.
On social welfare, the gross allocation for the Department of Social and Family Affairs has now risen to nearly €10.2 billion. This is an increase of €800 million or a bit over 8% on last year. Overall spending on social welfare has increased by €4.5 billion since 1997, despite the halving in unemployment from 10% to less than 5%.
This allocation of scarce resources demonstrates the Government's commitment to accord special priority to those sections in our society who are most marginalised or most vulnerable; those in need of health care, those depending on social welfare payments for their incomes, as well as those who will drive economic and social performance in the years ahead – people giving and receiving education. In principle, we have close to full employment, and, generally speaking, taking up employment opportunities which are available or accessible from most parts of the country, is the best cure for low incomes, as far as anyone in the labour force is concerned.
Having regard to the limiting effects on economic activity of accumulated under investment, €5.5 billion will now be invested next year in capital projects. By any objective reckoning, and in particular by previous standards, that is major expenditure. It is almost twice the equivalent rate for the EU generally.
Next year, €1.7 billion will be spent on capital investment in transport, €1 billion on housing, a further €1 billion on health and education capital projects and more than €470 million on environmental services. The extra €209 million for the national roads programme announced in the budget represents a large increase on the outturn for this year, and will allow a number of new projects to be started. Of particular importance is that a significant easing in construction price inflation presents a good opportunity now to achieve better value for money deals. In the round, the allocation for capital expenditure sets a correct balance for this economy and this society, by continuing to invest at a high rate to improve the competitiveness of the economy, while, at the same time, sustaining the gains achieved in promoting greater inclusion and equality in our society. If we attempt to pour too much into the capital side, we will run into capacity constraints, drive up prices, and end up no further forward at more cost. That was our position in part of 1999 and in 2000 as well. We poured extra money into the these areas and got less in return. If logic follows, then we should get a far better return for our input next year.
We have not fallen into either of the traps to which some commentators referred. We have not concentrated all our resources on day to day spending and abandoned the necessary investments in long-term infrastructure. Neither have we pursued physical capital investment programmes, regardless of the changed fiscal situation to the detriment of those people who need support today and a helping hand up to avail of the opportunities that still exist.
As one would expect, the allocations to the higher priority areas have implications for other areas. This is not to say we have abandoned other objectives and important areas. It means, however, that we have to accept that progress in those other areas will be made at a more gradual pace and over a longer time scale than we might initially have hoped.
With regard to the post-PPF talks that are under way, it is still early days yet in the talks process. Good progress has been made in clarifying the key issues involved for each of the pillars of social partnership and identifying the priority issues and areas for attention as the talks progress. Government and the social partners have had a good working relationship in the past, and I look forward to their continuation. Even though Government has to make decisions at the end of the day, and this year that has meant some tough and unpalatable ones, we have always listened to and taken account of the points made by the social partners and have sought to implement the agreements and commitments entered into, in good faith. That has stood us in good stead, and I look forward to being able to continue the good working relationship that has served our people so well.
The Government side remains committed to achieving, if possible, a new partnership agreement. I look forward to continued engagement by all the social partners to achieve that objective in the coming weeks. Social partnership has yielded huge benefits and advantages to all sectors of society over the past 15 years, which are recognised inside and outside the country. The challenge for us all is how we manage our way through the current uncertainty to position ourselves to respond quickly and with agility when we turn the corner, while protecting the social gains made in recent years. Social consensus and cohesion is a big plus factor that will help us to do that.
Our commitment to social partnership is also demonstrated by the fact that the budget includes a provision of €565 million to cover implementation of the first phase of benchmarking under any new agreement.
Public sector numbers have increased very rapidly in recent years as part of a planned improvement in services; by 20,000 excluding health, or 33,000 including health, since September 1998, and more if one goes back further. These include 18,000 extra teachers, 24,000 extra health workers, 1,200 extra gardaí and prison officers, and nearly 5,000 administrative civil servants. The numbers employed in semi-State companies, a few of which have moved into the private sector, have declined by 6,000. In the light of these increases, the capping and reduction over three years of the total public sector by 5,000 or by 1.5% is attainable through redeployment and greater efficiency. I recognise that past experience must guide us towards a more refined system. In consultation with the public service unions we need to put systems in place which allow us to switch people to where they are most needed. At a practical level, I do not envisage any decline in the numbers of front-line staff providing priority public services.
In the last Government we went to great lengths to reduce what for a long time has been perceived as an excessive burden of taxation, falling particularly heavily on employees on PAYE. Rates have been reduced to internationally competitive levels, and bands broadened, so that after the budget only 30% of those potentially subject to tax will be on the higher rate, which has been reduced to 42%. A continued increase in relief for the low paid has been given via the employee tax credit, formerly known as the PAYE allowance, and more substantial mortgage interest relief given to first-time buyers, which will go some way towards compensating for the abolition of the first-time house buyer's grant.
We have over-indexed tax credits and bands consistently in the past few years, so the pause in this year's budget, given the difficult circumstances, will, I believe, be understood by most taxpayers. We still have a tax system that is the most benign in Europe towards the low paid and one that is competitive at almost all levels with other OECD countries.
With lower personal tax rates and income growth in recent years, it should not be necessary to offer as many tax-based incentive schemes as a means of persuading our wealthier and more successful citizens to contribute their fair share to society in the most direct and efficient manner. Property investment is an even more attractive option at present and can have the effect of crowding out first-time buyers and others requiring more spacious accommodation for a growing family.
As Minister for Finance, I greatly broadened the tax base between 1992 and 1994 but it is a job that has to be done every few years, as new schemes rise up to take the place of those that have been cut down. In any case, many development incentives only work if the Government is serious about them being time limited.
It would have been very unwise from a confidence point of view to delay or defer completion of the process of achieving a unified rate of corporation tax of 12.5%. To have delayed at a time of renewed European debate might have been seen as a wavering in our commitment to this, which was announced by Deputy Quinn as Minister for Finance, but implemented by the Fianna Fáil-PD Government over the past four years with the agreement of the European Commission.
I remind our EU partners that we have raised, not reduced, the rate of corporation tax in the international traded sector from zero up to 1981, then to 10% and now to 12.5%. Harmonising corporation tax at a high level is not the answer to the economic problems of any European country. In the United States, which has a fully federal constitution, a key part of competition between different states is their freedom to set different rates of business taxes.
If we want the European economy, as a whole, to be more dynamic, like the United States, we will not stifle legitimate competition or systematically remove all the freedom which enables poorer countries to catch up, particularly when the richer countries have no intention of providing extra resources to the EU for serious wealth redistribution. Legitimate competition on a transparent basis is healthy, not unfair, and large countries that in their day have experienced industrial revolutions and economic miracles should be the last to complain about fair, if unwelcome, competition from smaller and historically much poorer countries.
