I welcome the opportunity to discuss the summer economic statement agreed by Government and discussed in Dáil Éireann last week. The statement sets out the Government's economic and fiscal strategy over the short and medium term. This strategy revolves around six key pillars: ensuring sound and sustainable public finances; managing public expenditure to ensure maximum return on taxpayers' resources; targeted increases in public investment; reforming the tax system to ensure it is growth-friendly; ensuring inclusive growth and facilitating access to finance, especially for small and medium enterprises, SMEs.
On economic developments, the economic outlook in the statement is as set out in the stability programme update. Last Friday, the Central Statistics Office published the outturn data for 2016 and preliminary data for the first quarter of this year, which confirmed the Irish economy continues to perform strongly, with growth of 5.1% recorded last year, the highest in the EU for the third consecutive year. The latest data also provide clear evidence of continued momentum in the economy this year, with annual gross domestic product, GDP, growth of 6.1% recorded in the first quarter. The Department of Finance is forecasting GDP growth of 4.3% this year and 3.7% next year. From 2019 onwards, GDP is expected to grow broadly in line with the potential growth rate of the economy, with positive contributions from both exports and domestic demand. In this context, I should highlight that GDP is clearly overstated as a measure of living standards in the case of the Irish economy. Last week, the CSO published an alternative measure of the size of the economy, so-called modified gross national income, GNI*, which is estimated at €189.2 billion, far lower than the GDP figure of €275.6 billion. This new indicator will help us in our formulation of appropriate policies by giving us a better understanding of what is happening on the ground. It also confirms that economic expansion has been very strong in recent years.
Economic growth is a means to an end and not an end in itself. It enables us to pursue our goals of advancing social progress, promoting inclusivity and providing high quality public services. The labour market remains the best barometer of economic trends. Encouragingly, we have had 18 successive quarters of employment growth, representing an increase of over 230,000 jobs since the low point of the crisis. The latest data show that the pace of expansion in employment picked up to 3.5% year on year in the first quarter of 2017, representing the addition of almost 69,000 jobs. The number of people in employment has exceeded the 2 million mark since the second quarter of 2016 and is now at its highest level since the end of 2008. Crucially, the improvement in employment is more balanced than before, with increases in a number of sectors rather than being concentrated in construction, as happened previously. In parallel, the unemployment rate fell to 6.3% in June, down from a peak of over 15% in early 2012. The return to positive net migration last year for the first time since 2009 is another clear sign of the positive momentum in the labour market. This progress is expected to continue. The Department of Finance projects that an additional 55,000 jobs will be created this year, while the unemployment rate is expected to fall below 6% by year end. Over the medium term, employment growth is expected to remain robust and on this basis, by the end of this decade there will be more people at work in Ireland than ever before. In this context, it is important that the budgetary policy mistakes of the past are not repeated and that a counter-cyclical policy is pursued so as to not contribute to overheating the economy. The Government is acutely aware of this.
In terms of fiscal policy, recent developments show that the public finances are continuing to move in the right direction. Following a slightly disappointing performance in the first quarter of 2017, tax receipts in the second quarter have stabilised and have been much more robust, with cumulative receipts to the end of June coming in broadly in line with target at just 0.5% below profile. This represents a robust year-on-year increase of 4%. As a result of the strong performance in the second quarter, we are now well positioned to achieve the overall annual tax target of €50.6 billion for 2017, which would be the highest in the State’s history.
The pre-crisis period saw very large increases in expenditure. While these increases helped address key infrastructure deficits and provided the resources for significant improvements in public services and social supports, they were ultimately unsustainable. A very painful period of consolidation was required to repair the public finances. Over the last three years, budgetary policy on expenditure has focused on prudent and sustainable increases in expenditure, averaging 3% per annum, below nominal growth in the economy. These increases have allowed additional resources to be directed towards key Government priorities, including in health, housing, social protection and child care. Over the medium term, we will look to continue with moderate and sustainable growth in expenditure to deliver improvements in our public services and infrastructure on a prioritised basis. This approach will help ensure that we avoid the need for sharp fiscal retrenchments in the future, which can be highly disruptive and damaging to our social and economic fabric.
Turning to the fiscal outlook, a general government deficit of 0.4% of GDP is projected for this year - unchanged from budget 2017. In addition, it is important to point out that the fiscal objective is to balance the books, that is, to achieve a structural deficit of 0.5% of GDP. I am pleased to point out that we are on course to achieve this medium-term budgetary objective, MTO, next year, which is a remarkable achievement given where the public finances were almost a decade ago.
The mistakes of the past will not be repeated. Increases in public expenditure will be sustainably financed and not reliant on cyclical revenues. The fiscal rules are designed to ensure that fiscal policy enhances economic growth and macroeconomic stability and this is something which should be welcomed.
The Government recognises the emerging capacity constraints and is also cognisant of the need for budgetary policy not to contribute to overheating the economy. In this context, the limited resources that are available will be prioritised towards those areas where needs are greatest. In future, we need to focus on the fiscal stance and not just the fiscal space. In other words, we need to make sure that budgetary policy is appropriate in supporting sound macroeconomic conditions.
Ireland’s general government debt to GDP ratio, having peaked at just under 120% in 2012 and 2013, has fallen rapidly in recent years and is now estimated at 72.8% last year. This is below the euro area average and is set to reach the 60% of GDP target mandated by the Stability and Growth Pact in 2022. While the gross government debt ratio has fallen considerably in recent years, this arises from distortions in our GDP data. Last week the CSO published an alternative measure of the size of the Irish economy, the GNI*, which adjusts for these distortions. This new measure is used to scale our debt. The debt ratio was 106% last year. This is why it is important to focus on continuing to reduce public debt and that is why careful and sensible management of the public finances is needed. The Government will continue to reduce the debt-to-GDP ratio until the 60% target legal threshold is achieved and, thereafter, will work towards reducing the ratio to 55% of GDP ratio.
Once the major capital projects have been completed the Government will target a further reduction in the debt ratio to 45% of GDP. The Government will maintain a rainy day fund with our annual contribution of €500 million, beginning in 2019. This will be the year following our achievement of our medium-term objective. This is half the size of the contribution originally envisaged, reflecting the need to address emerging capacity constraints. Additional allocations, however, will only be made with due regard for the capacity of the economy to absorb the additional funding.
I shall now turn to the fiscal space. The summer economic statement sets out that net fiscal space over the period 2017 to 2021 is €11.2 billion. I want to emphasise that the net fiscal space is the amount that remains after providing for pre-committed policies. This means that overall public spending will be around €60 billion next year. It is important to note that the focus shifts towards the totality of expenditure and not just incremental changes. This is what the Taoiseach was referring to when he discussed the hidden fiscal space.
It is important that the fruits of the economic recovery are felt as widely as possible. Fairness matters to the Government. I believe we would all agree that a properly functioning housing market is integral to our economic and social well-being. With this in mind the Government is reviewing its housing strategy to address this. From my own perspective, the affordability matter will also be looked at in this review. While the latest economic data all point to an economy with considerable momentum, a continuation of robust growth cannot be taken for granted in light of the significant challenges facing the Irish economy. Principal among these challenges is the UK’s exit from the European Union, the uncertainty associated with the policy stance in the US and rising protectionist sentiment internationally.
With the magnitude of the external risks we face, we must bear in mind that domestically we also face a number of challenges. As a small and open economy, the best way to improve the resilience of the economy to weather inevitable economic shocks is to maintain an appropriate fiscal stance and pursue competitiveness oriented policies. That is what the summer economic statement sets out and what the Government will continue to do.