Dáil Éireann Debate, Wednesday - 18 April 2012
6Deputy Mary Lou McDonald asked the Minister for Finance his views on whether GDP will grow by 1.3% this year; his response to the Fiscal Advisory Council who doubt that this figure will be reached; and the contingency plans that he has in place in the event that this target is not met. [19306/12]
Amharc ar fhreagraAt budget time, over four months ago at this stage, my Department projected that the economy would expand by 1.3% this year, which was in line with the prevailing consensus at the time. The Irish Fiscal Advisory Council, in its recent report, outlines that the macroeconomic forecasts underpinning the budget were appropriate at the time. However, the council also outlines that the recent data, both Irish and international, mean that this projection is now on the high side and points out that other forecasters have recently revised downwards their projections for growth in the Irish economy this year. The council also acknowledges there is a high degree of uncertainty regarding prospects for the Irish economy.
In terms of the macro forecasts, I broadly share the view of the council, that is to say, the forecasts were appropriate at the time of the budget but developments since then have been a little disappointing. Officials in my Department are assessing all available information with a view to publishing revised forecasts at the end of this month in the stability programme update.
Turning to the public finances, this year's general Government deficit must not exceed 8.6% of GDP. Budget 2012 forecast the 2012 deficit at 8.6% of GDP. It is worth noting that the troika's forecast is also for a deficit of 8.6% this year, but based on a lower estimate of GDP than my Department projected at budget time.
The end-March Exchequer returns show that taxes have made a good start to the year, performing better than expected in the first quarter and close to 4.5% ahead of profile on an underlying basis. This is a welcome development as we strive to reduce further the deficit in our public finances. While voted expenditure showed some pressures, I am confident it will be actively managed within agreed limits and I know the Minister for Public Expenditure and Reform will be stressing upon colleagues the importance of adhering to the 2012 spending targets, as was done in 2011. As I stated at the time of publication of the first quarter returns, the figures illustrate that we are on track to meet our deficit target this year.
Given that growth figures are probably the most important determinant of the success of the Government programme, and in my view and that of many others it is the one that actually receives the least amount of attention and investment, and given that growth projections have been revised down three times, most recently by the Irish Central Bank, is it not the case that the Government is at this stage in danger of not meeting its obligations with regard to the troika? What contingency plans has the Government put in place in case this happens? Might there be a situation where a mini-budget is necessary if those obligations are not achieved?
I am quite confident that we will meet our target of 8.6% on the deficit this year. Budgets are built not on real growth but on nominal growth, because it is nominal growth that generates tax. The nominal growth we built the budget on was 2.5%. Even with a growth rate of 0.7%, which is on the average and is where the Fiscal Council is coming in, the inflation rate as last measured by the CSO was 1.8%, so the nominal growth is still 2.5%, which is what the budget is based on. In addition, 2011 ended up better than expected and the outturn was below 10% against a target of 10.6%. Therefore, we are quite confident, with tax revenues well ahead for the first quarter. While there are some problems on the expenditure side, my colleague, the Minister, Deputy Howlin, is dealing with that and ensuring Departments stay within budget.
The Deputy can forget about mini-budgets and all that kind of stuff at this stage. A better line of attack would be that if growth rates go down, then activity in the economy slows down. This does not necessarily impinge on our budgetary targets but I would like to see greater activity in the economy. Our model is export-led growth, so we are very dependent on how the economies in our customer countries are performing. The mark-down is not due to anything that went wrong in Ireland. It is the consequence of things going wrong across Europe, in China and in the United States. However, we believe there will be a better second half to the year.
There are many issues I could take up with the Minister. Given the fact Europe has gone into a double-dip recession, putting all the eggs in the export growth basket is causing difficulty, according to the figures. The Minister must have an idea of a tipping point growth figure, whereby if growth went below that figure, major difficulties would arise and a mini-budget would be necessary. If the Minister does not know that, there is a major difficulty because it is important that level of knowledge is inherent in Government. In the interests of transparency and clarity, will the Minister identify what the tipping point growth figure is that would cause such an eventuality?
We had three years of continuing decline where the economy in nominal terms went down by about 20%.
I am talking about the last two quarters.
In our first year in Government, 2011, the economy grew by about 1% and it is growing again this year. As long as the economy is growing, we are getting out of the problems we are in and we are driving forward. The Deputy cannot question that but he can question the pace of the recovery. If we have to mark down growth figures, it slows the pace. I would prefer if the economy were growing faster but there is nothing we have done or nothing that is intrinsic to the economy at present which is reducing the growth forecast. We are importing consequences from other economies and, as our model is based on export-led growth, events across Europe are very important, as is sentiment in Europe, the UK and the US, as these are our big customer countries.
This is very difficult to understand. The Minister seems to be saying that a downgrading of growth projections does not have consequences in terms of likely increased austerity, and he seems to be very sanguine, if one likes, about the downgrading of growth projections. Does the Minister accept that downgrading the growth projections has something to do with the extreme depression in the domestic economy resulting from the impact of austerity? The Minister suggests that the key issue is what occurs in the rest of Europe and in our export markets and so on. Is the point not that growth projections are now being downgraded because the same austerity is being imposed in those countries, shrinking the potential markets for our exports? This appears to be confirmed by emerging figures for January and February which suggest that our trade surplus has reduced substantially in these months. Are these not worrying indications that austerity is simply not working, that it will kill off growth and that it will require yet more austerity from the Minister and other Governments throughout Europe to meet their targets?
I assure the Minister that Fianna Fáil does not share Sinn Féin's appetite for a mini budget. I believe we stand a good chance of meeting our fiscal targets this year. As the Minister is aware, 2012 and 2013 will be more difficult. Some €90 million must be found this year because of the fallout from the promissory note arrangements and the shortfall on the household charge may amount to €40 million or €50 million when the dust settles. This means there will probably be a shortfall of €130 million or €140 million from these two issues alone. Where will the money come from?
One could pick any figure but one should examine the matter in its overall context. We expect to collect approximately €36 billion in taxes in 2012. Already, we are almost €400 million ahead in the first quarter. Let us consider the debt servicing costs. I have explained the €90 million additional cost on the promissory note. The debt servicing costs for the first quarter are €70 million below the estimate. One is dealing with swings and roundabouts all the time and one cannot be absolutely precise. Deputy Boyd Barrett should note that one cannot be precise about trade figures. Let us consider the February trade figures. There are 28 days in February and 29 days when it is a leap year. If a large settlement comes in on 1 March, it is reported in the March figures. One cannot hang one's hat too much on one month's figures; one must consider it overall.
We marked down growth rates. I do not interfere with the forecasting unit in my Department. It is independent in its assessment of the data. I expect it will mark down the figures again at the end of April. I am simply suggesting that from a fiscal point of view we will still meet our targets. Naturally, if growth is lower it will have an effect on the overall economy.
The Deputy's analysis is always based on an idea of Keynesian economics. The Deputy's whole focus is on demand-led initiatives. He appears to take no cognisance of the supply side of the economy. Much of what we have done involves supply side initiatives because we do not have the wherewithal to carry out a demand stimulus. I agree with the Deputy without gainsaying. If I had several billion euro and I could use it to stimulate demand, I would have a list of projects in my pocket to which I could put it quickly. However, we must play the hand of cards we have. We can play strongly on the supply side and we have done so. Let us consider what we did in the tourist industry earlier in the year. Everyone is aware that had a considerable effect on the restaurant trade. The 21 small initiatives related to the financial services industry in the Finance Bill are beginning to have a small effect. We will proceed in this way. I hope we can encourage our European partners to loosen the purse strings and follow up the rhetoric of growth and jobs with specific proposals. This is becoming centre stage in Europe now. We will welcome this with open arms and we will have shovel-ready projects for any money we can get.
