Thursday, 22 February 2018

Ceisteanna (52)

Michael McGrath


52. Deputy Michael McGrath asked the Minister for Finance the risk of overheating the economy as a result of the national development plan 2018 to 2027; the inflation forecasts for each year up to 2027; if investment in major capital projects will be held back if the economy is overheating; and if he will make a statement on the matter. [9089/18]

Amharc ar fhreagra

Freagraí scríofa (Ceist ar Finance)

Although the economic recovery has been much faster than anticipated, developments in the labour market, which is probably the best barometer of the Irish economy given distortions to GDP and GNP, suggest that the economy is not yet operating at full capacity. While unemployment has fallen rapidly to 6.1 per cent in January, from a peak of 16 per cent in 2012, this is still above the level considered to represent full employment in Ireland. Further, price pressures in Ireland remain subdued, with overall annual inflation as measured by the Harmonised Index of Consumer Prices (HICP) averaging just 0.3 per cent last year, the fifth consecutive year of inflation below 1 per cent.

Forecasts published with Budget 2018 envisage the HICP reaching 2 per cent per year by the end of the forecast horizon in 2021, broadly consistent with the ECB’s target. The Budget 2018 forecasts do not extend beyond 2021. However, the National Development Plan 2018 – 2027 (NDP 2018 - 2027) assumed 2 per cent inflation (GNI* deflator) over the period 2018 – 2027 which is consistent with long term growth forecasts  for the Irish economy produced by international organisations.

Notwithstanding the current slack in the economy, with the labour market approaching full employment, stronger than assumed growth could lead to overheating pressures. While increased public investment through the NDP 2018 - 2027 could potentially contribute to this, it is important to recognise that the plan is focused on rectifying the relatively low levels of public capital investment in Ireland following the recent recession.

In fact, the NDP 2018 - 2027 is targeted at reducing overheating risks by increasing the economy’s potential growth rate and alleviating capacity constraints. Notwithstanding this, the NDP 2018 – 2027 recognises the dangers that increased public investment could contribute to overheating if the pace of implementation was inappropriate for the cyclical position of the economy. However, the NDP 2018 – 2027 adopts a prudent and measured approach to increasing public capital spending. Under the NDP 2018 – 2027 it is projected that public capital investment will reach 3.8% of national income (GNI*) in 2021 and 4% by 2024, with sustained investment averaging 4% on an annual basis over the period 2022 to 2027.

In addition, there are a number of other steps that will be taken to mitigate overheating risks and negate the possible need to defer major capital projects owing to overheating risks:

- The increase in public capital spending will be consistent with overall fiscal objectives.

- The growth in public capital spending will be at a planned and moderate rate which does not outstrip the pace of the supply response feasible from the broad construction sector.

- Increased public capital spending will be aligned with sustainable growth in public expenditure overall by ensuring the continuation of moderate and prudent growth in current spending.

- There will be a renewed strategic focus on supporting the strengthening of the capacity, capability and degree of competition of the domestic construction sector in Ireland as well as on encouraging and promoting market entry from abroad by confirming and highlighting the planned scale of Ireland’s public capital investment plans.

- As detailed in the National Development Plan, a Construction Sector Working Group will be established to ensure regular and open dialogue between Government and the construction sector.

The NDP 2018-2027 will be implemented in the context of broader government fiscal policy, which is to maintain a fiscal stance which is appropriate to the cyclical position of the economy, while targeting a continuing reduction in our debt burden.

I have emphasised on a number of occasions the importance of ensuring that Budgetary policy does not contribute to overheating pressures in the economy and that the pro-cyclical polices of the past are not repeated and this is reflected in the NDP 2018 – 2027.