Medium Term Fiscal Statement
Minister for Finance – Michael Noonan T.D.
This Medium-Term Fiscal Statement provides an update to the Government’s medium-term budgetary strategy. It is the first stage in a sequence of budget-related announcements that will lead in to Budget Day.
The economy has returned to growth. The Government’s strategy is to return the public finances to a sound position and thereby create the essential conditions for strong and sustainable employment growth.
Considerable progress has already been made towards stabilizing the public finances. This progress has required a wide range of difficult decisions from citizens to cut spending and raise revenue.
However, all of this progress has to be seen in the context of the evolving situation in Europe.
Significant challenges remain for Ireland. The large gap that still exists between Government spending and revenue must be closed. Continuing to run big deficits and engaging in the high levels of borrowing required to fund them is simply not viable. To do so would result in unsustainable debt and a long-term loss of sovereignty.
It is estimated that to close the gap between tax and spending will necessitate adjustment measures amounting to a total of €12.4 billion over the 4-year period 2012-2015.
This Statement sets out a year-by-year timetable of how this consolidation will be phased, starting with the €3.8 billion adjustment that is now planned for 2012, how it will be split between tax increases and spending cuts, and how the spending cuts in turn will be split between the current and capital budgets.
The Government is making sure to allow the economic recovery that has commenced a chance to strengthen.
As to the composition of the adjustment, of the overall €12.4 billion consolidation now planned for the 2012-2015 period, it is intended that €7.75 billion will consist of expenditure reducing measures and €4.65 billion revenue raising measures.
In the short term fiscal consolidation dampens economic activity. However, despite that dampening effect, the economy has started to expand again and real GDP is now expected to increase by about 1% this year, propelled by robust export growth.
The likelihood is that exports will remain the only significant source of positive momentum in the economy for the next couple of years. That being the case, safeguarding and expanding the economy’s export base will remain a critically important objective of overall economic strategy.
It is essential that domestic demand recovers. Indeed, it is only when consumer spending and investment start increasing again, that appreciable, broadly-based employment growth will re-commence. The restoration of business and consumer confidence is a pre-condition for this renewed growth.
The Government can assist in the rebuilding of confidence by pursuing a budgetary strategy that is clearly explained and that dispels fears about the sustainability of Government debt.
The economic forecasts paint a positive picture of our economic prospects, but recent data have led to some downward adjustment, notably for 2012. GDP is now projected to grow by 1.6% in 2012 and at an average annual rate of 2.8% over the following three years. A key reason for the downward revisions is that the outlook for the global economy has deteriorated in the intervening period. It is worth noting that the most recent OECD forecasts for the Euro Area as a whole see GDP growth of 0.3% in 2012 and 1.5% in 2013.
The implications of this revised growth outlook for the labour market are a matter of particular concern. It must be stressed that these forecasts are necessarily predicated on policies that have been articulated at this stage, and cannot take into account policies that have not yet been designed or announced.
These macroeconomic forecasts, and especially the forecasts for employment and unemployment, illustrate of the scale of the challenge that the Government faces.
They underline the urgency of designing and implementing reforms that will enhance the economy’s potential growth rate and its capacity to generate employment. The Government is committed to ensuring that the measures taken are as jobs-friendly as possible.