A Cheann Comhairle, 2016, the centenary of the Easter Rising, is an opportunity to reflect on the journey travelled over the past 100 years and to recall the many major social and economic challenges along the way. It is an opportunity to celebrate the achievements and to remember how we overcame the challenges and emerged from each stronger than ever before.
The banking, fiscal and economic crisis of recent years will rank as one of the greatest of such challenges but we have emerged from this challenge too and we are now on a new path. The last few budgets have been hard but they made it possible for Ireland to exit the bailout, reduce its debts and move into a real recovery. The top priority of this budget is to keep that recovery going, while providing relief and better services for the Irish people. It includes measures such as a cut in the USC, more nurses and doctors for the health service, more affordable and quality child care and an end to the unfair treatment of the self-employed. These are sensible, affordable steps that will keep the recovery going and bring its benefits to every family.
The economy is growing strongly, with 1,100 jobs being created on average every week. The public finances are in a strong position and we will exit the corrective arm of the Stability and Growth Pact this year. The banking system has been strengthened, with domestically focused, well capitalised banks operating within a European-wide banking union. Most important, our people and our country are in a much stronger and certain position than in 2011 when this Government took office. The Irish people gave this Government the task of fixing a broken economy and getting Ireland working again. We put in place a plan and the people stuck with us. It is a testament to the commitment and resilience of the Irish people that Ireland is on course to be the fastest growing economy in Europe for a second consecutive year.
Both parties in government, Fine Gael and the Labour Party, know that the job of recovery is not yet complete. Though strong, the recovery remains fragile and the benefits of a growing economy have not yet been felt inside the door of every family. We must keep the recovery going and provide relief and better services for the people. We must not gamble with the future. The Government will not take chances that destabilise the recovery.
To raise living standards for all citizens in the medium term, we need to boost productivity, foster innovation and remove barriers to employment. We must invest in the critical infrastructure needed in a modern economy and our plans to do so are set out in the Government’s capital investment framework, Building on Recovery. We must create the conditions in which new ideas, innovation and entrepreneurship will be encouraged, leading to increased long-term growth and well-being. We must ensure work pays.
This is the final budget of the 31st Dáil, but it is also the start of a new series of budgets in which we start to meet these challenges.
Economic and fiscal position
The economy has been transformed. It is growing strongly across all sectors and, most importantly, sustaining and creating jobs. It has recovered all of the output lost during the crisis and is bigger than ever before in our history. Ireland is forecast to be the fastest growing economy in Europe again in 2015 and my Department is forecasting growth at 6.2% in 2015. This forecast has been endorsed by the Irish Fiscal Advisory Council. The Department of Finance is forecasting growth of 4.3% in 2016 taking account of the figures endorsed by the Irish Fiscal Advisory Council and the full impact of today's overall budget package. Economic growth is expected to average around 3% per annum thereafter.
Despite the strong economic position emerging, we must remember that Ireland is a small and open economy and that there are international concerns about the outlook for the global economy. These risks which are discussed in the Economic and Fiscal Outlook of the budget inform our policy choices. This emphasises the importance of managing the public finances and the economy prudently.
Some 130,000 more people are now in work than at the low point in 2012 and this growth in employment is spread across the vast majority of the sectors of the economy. The Action Plan for Jobs, the Pathways to Work initiative and the strategy in successive budgets of focusing resources on small and medium enterprises in key sectors of the economy such as agriculture, tourism and construction are supporting businesses to create new jobs. The pursuit of foreign direct investment means that Ireland continues to attract and retain a higher proportion, relative to our size, of new jobs and investment than any other European country.
The 53,000 new jobs forecast to be created this year will bring the number in employment close to 1.97 million people by the end of the year and the Department of Finance is forecasting that 48,000 jobs will be created in 2016. This will bring the total number of people in work in Ireland to just over 2 million. We are on track to recover all of the jobs lost and have more people working in Ireland by the end of this decade than ever before.
Importantly, unemployment continues to fall. My Department is forecasting that the unemployment rate will fall to 8% by the end of 2016, down from 9.4% now and the peak of over 15% in 2012, a significant improvement but still too high. Unemployment is forecast to drop to 6.25% by 2021.
The public finances continue to improve, with a broad and growing tax base, providing stable funding for vital public services. Our reformed budgetary framework and fiscal rules are designed to protect the public finances and ensure the mistakes of the past will not be repeated. The National Economic Dialogue held in Dublin Castle last July has helped to frame the policy choices in the budget.
The forecast deficit for 2015 of 2.1% is well ahead of our original target of 2.7% and our excessive deficit requirement of less than 3% of gross domestic product, GDP. Consequently, we will exit the corrective arm of the Stability and Growth Pact and move into the preventive arm of the pact. The Government has consigned to the history books the days of boom and bust and the attitude of "if I have it, I'll spend it."
My Department forecasts that we will balance the books in headline terms in 2018 with balance in structural terms following in 2019. While headline deficits will continue to reduce, the anchor for fiscal policy is now a balanced budget in structural terms. This is our medium term objective and in 2016 we will make significant progress towards this target with the structural balance reducing by 0.8% of GDP, ahead of the 0.6% requirement of the Stability and Growth Pact.
This fiscal stance will enable the Government to comply with the fiscal rules and introduce a total budget package of €1.5 billion; to reduce the headline deficit to 1.2% of GDP; and to reduce the debt to just under 93% of GDP, just slightly below the eurozone average.
The benefits of this Government’s approach to managing the public finances can be seen in expenditure and revenue trends. Between the end of 2014 and the end of 2016, my Department is forecasting that the economy will grow by 18% in nominal terms with revenue from taxation and PRSI increasing by just under €7.2 billion or 14.7%, while gross voted expenditure will increase by €2.25 billion or 4.2%. This sustained difference between our revenue and expenditure growth rates is why we will reduce the deficit from 3.9% of GDP in 2014 to 2.1% in 2015 and to 1.2% next year.
Against this background, talk of an excessively expansionary budget is well off the mark.
Reducing the high debt levels
The high level of Ireland’s debt has been an obvious risk to our economic progress in recent years. We are moving into a much better position now and having peaked at over 120% of GDP in 2012, general government debt is forecast to drop to 97% of GDP in 2015. Following the introduction of the budget, as I have outlined, the debt will fall to just under 93% of GDP by the end of 2016, just below the European average.
Taking account of cash and liquid assets, including those held by the NTMA and the Ireland Strategic Investment Fund, our net debt position will be 80% of GDP by the end of this year.
This debt level, while sustainable, remains too high and remains our biggest internal risk. Debt reduction is a critical goal as building fiscal capacity or an ability to borrow is the best way to mitigate the risks of crises as yet unforeseen and undreamt of.
This Government has made significant progress in reducing both the size and cost of servicing the national debt. In addition to bringing the public finances under control, specific initiatives such as the promissory note transaction, the extension of maturities on our EU loans and the early repayment of the IMF loans, have also resulted in real and substantial savings to the Irish taxpayer. The interest cost of the general government debt is forecast to drop below €7 billion in 2015. It is worth recalling upon entering office it was estimated that interest costs for 2015 would be in excess of €10 billion.
The economic and fiscal outlook section in the budget book forecasts that the debt to GDP ratio should be below 80% of GDP by 2021, with the exact level depending on the fiscal stance pursued over that period. This forecast does not take account of the value of the State’s shareholdings in AIB, Bank of Ireland and Permanent TSB. These shares are now valuable assets belonging to the taxpayer and I remain confident, based on the best advice available to me at this time, that we will recoup the investment the taxpayer has made in these institutions.
The proceeds from the sale of the shareholdings in these banks will be used to reduce the debt levels further and there will be a major impact on the debt level when these assets are sold and the proceeds are used for this purpose.
I will now turn to the specific tax measures of the budget.
The budget package includes €750 million in revenue relieving measures in 2016. This cost is partially offset by a single revenue raising measure, specifically the excise duty on a pack of 20 cigarettes is being increased by 50 cent, including VAT, with a pro rata increase on other tobacco products.