• Chapter 2:
  The Macroeconomic Framework
  
  
  • 1987-1996
  • Outlook for the Medium Term
  • Policy Objectives in the New Partnership

Chapter 2:
The Macroeconomic Framework

2.1 - This Partnership is predicated and dependent on continued strong growth in the Irish economy. Fundamental to its successful implementation and the benefits it will bring to our economy and society, is the management of our public finances in accordance with the Maastricht Criteria and the EU Stability and Growth Pact. This is an overriding principle of the Partnership, its terms — in particular on taxation and public expenditure in its entirety — have been drafted in accordance with it and the principle cannot be infringed in the implementation of the Partnership.

1987-1996

2.2 - The adoption of a consensus approach to economic management based on prudent fiscal policy, moderate pay increases and moderate inflation is reflected in the economic and budgetary performance of the Irish economy since 1987. Over the period of the three National Programmes, 1987-1996, there has been strong economic and employment growth, particularly in comparison to the EU and OECD, which has been accompanied by low inflation, a significant fall in Government deficit and debt ratios and a considerable increase in living standards. Areas of concern, however, are the high level of current public expenditure over the period and the persistence of long-term unemployment.

2.3 - Over the period of the Programme for Competitiveness and Work (PCW), the economy enjoyed a period of very strong growth with GNP growth of 7 per cent in 1994 and 1995 and an estimated increase of 6 per cent in 1996. Employment growth, the key challenge of the PCW, was unprecedented with non-agricultural employment (excluding schemes) increasing by 126,000 between 1993 and 1996. Unemployment fell from 15 per cent in 1994 to 12 per cent in 1996 and inflation remained low averaging 2.2 per cent over the period. The General Government Deficit (GGD) has been reduced from 2.2 per cent of GDP in 1993 to around 1.5 per cent in 1996, while the debt/GDP ratio has fallen from 94 per cent in 1993 to an estimated 76 per cent at end 1996.

Outlook for the Medium Term

2.4 - The economic outlook for the period of the new Partnership, 1997-1999, continues to be positive. While the forecasts are dependent on certain assumptions such as a sustained recovery in the European economy and stability on the currency market, GNP is expected to rise by 5 1/2 per cent in 1997 and 4 1/2 per cent in 1998 and 1999. This is well above the growth rate forecast for the EU. Inflation is expected to remain moderate at around 2 per cent while employment growth is expected to average 38,000 per year.

2.5 - At a European level, the period covered by this Partnership is likely to see the introduction of a single currency, underpinned by a Stability and Growth Pact, further progress towards enlargement, a new financial perspective governing the allocation and use of the structural funds, and progress on the integrated employment strategy developed at the Essen European Council and confirmed by the Dublin Declaration on Employment.

Policy Objectives in the New Partnership

2.6 - The primary objective of macroeconomic policy under this Partnership will be to secure and strengthen the economy's capacity for sustainable employment and economic growth and social inclusion. In framing that policy the maintenance of low inflation, reduction of Public Sector deficits and debt and transition to EMU provide clear guidelines.

2.7 - The participants in this Partnership agree and accept that this requires:

• agreement on the public finances, including a reducing rate of increase in current public spending;
• agreement on the maintenance of a firm exchange rate strategy;
• co-ordinated wage setting, with a strong focus on competitiveness; and
• a commitment to economic and social solidarity.

2.8 - In relation to the public finances, the participants have agreed on an equitable and balanced fiscal policy that incorporates:

• an action programme for social inclusion and equality, involving additional expenditure of £525 million which will, inter alia, maintain the real value of social welfare;
• tax reductions of £1 billion on a full year cost basis representing real reductions of over 0.5 per cent of GDP each year;
• current public expenditure policy over the period of this Partnership will aim to keep the annual growth of gross current Supply Services spending as close as possible to 2 per cent in real terms. Any excess on this target in 1997 will be minimised. For 1998 and 1999 the aim will be to hold to an average annual 2 per cent rate;
• the General Government Deficit to be not more than 1.5 per cent, by 1999; and
• a debt/GDP ratio of 70 per cent by 1999 [ Fn 1: When account is taken of changes in definitions of debt and GDP in that year.] .
  A 60 per cent level can on this basis be achieved early in the 21st Century.

2.9 - The participants to this Partnership believe these elements:

• will assist significantly in promoting competitive enterprise and growth, which within a commitment to the sharing of growth, will in turn create greater employment, social inclusion and equality;
• will enable living standards to increase significantly in real terms while allowing the moderate pay agreement to be ratified and implemented; and
• will deliver a General Government Deficit comfortably within the requirements of the Maastricht Criteria and in line with those of the Stability and Growth Pact.

2.10 - The objective of monetary policy will continue to be price stability. In pursuit of this objective, the Central Bank gives priority to the maintenance of a firm exchange rate. In the context of the Maastricht Criteria and EMU, the Criteria relevant to monetary policy are:

• inflation close to the three best performing Member States;
• a currency which has observed the normal EMS fluctuation margins provided for by the Exchange Rate Mechanism of the EMS for at least two years, without devaluation against the currency of any other Member State; and
• average nominal long-term interest rates that do not exceed by more than two percentage points that of the, at most, three best performing Member States in terms of price stability.

2.11 - In anticipation that Ireland will be ready to join EMU on its establishment, the Government will also continue its efforts to ensure that Article 109m of the Treaty on European Union, whereby each non-Euro area Member State shall treat its exchange rate policy as a matter of common interest, is used to maximum effect, consistent with the Treaty, with a view to avoiding real exchange rate misalignments and excessive nominal exchange rate fluctuations. In the context of Irish membership and possible UK non-membership of EMU and the possible occurrence of a depreciation in Sterling, the NESC in its Report Strategy into the 21st Century advocate that a number of conditions should be in place.

2.12 - These include:

• sufficient trust between the Social Partners to ensure an adequate information flow and burden sharing;
• continuous efforts to strengthen the underlying competitiveness of the Irish economy;
• Irish businesses should, where necessary, be assisted to make full use of financial and hedging instruments; and
• profit sharing arrangements at both the enterprise and macroeconomic level, can also be of assistance.