Speech by Minister for Finance, Mr Brian Lenihan TD, on
Private Members’ Motion in Seanad Eireann on Wednesday 14 May,
I am very glad to have the opportunity this evening, on my first visit to Seanad Eireann as Minister for Finance, to speak in support of the Government’s counter-motion on the prospects for the Irish economy. We have seen the publication today of a very favourable medium term assessment of the Irish economy by the ESRI. However, before commenting on both our short and medium term prospects, I think that it is important that we put our current economic situation in context.
Over the past decade or so,
Since 1997, the rate of economic growth in
It is true to say that the economic environment has become more challenging in recent months and the outlook is less benign and more uncertain. In fact the risks that we identified in the last Budget have materialised, risks such as recent developments in the international financial markets, further appreciation of the euro against the dollar and sterling, lower international growth and domestically a sharper slowdown in housing. We must all therefore accept that the short-term prospects are more challenging and we have to ensure that we respond appropriately.
Global economic developments play a key role in shaping
Domestically, the residential house building sector is undergoing a sharp slowdown following a prolonged period of catch-up. Uncertainty remains regarding what the level of housing output will be for this year and how long it will be before the medium-term sustainable level of activity is achieved. However, what we do know is that the underlying demand for housing remains strong, driven by a relatively young population and continued inward migration. While we may experience a year or two of sub-50,000 completions, it is reasonable to expect over the medium term that annual completions will return to sustainable levels which will remain high by international standards, reflecting the strong underlying demand for housing in
However, one aspect of the change in the housing market, which is being overlooked by commentators, is that the moderation in house price levels, when combined with measures on stamp duty and mortgage interest relief, taken by the Government at budget time, means that better value is being obtained for those wishing to buy their own home, particularly amongst the first-time buyer group.
The key message of the ESRI’s Medium Term Review is that the Irish economy is flexible and resilient. Because of our sound economic management and fundamental fiscal factors such as our low debt to GDP ratio and the substantial surpluses that we have had for the past decade, our economy has the ability to absorb shocks in an efficient manner. By this I mean that there will be limited economic fall-out and a return to trend growth fairly rapidly. Based on their analysis, real growth in GDP of 3¾ per cent per annum is sustainable over the medium term. This rate of growth is much higher than elsewhere in the euro area. In contrast to the prevailing mood of pessimism, the ESRI shares my view in that we should see a return to trend growth from 2010 onwards. As I have said already, economic conditions in 2008 and 2009 will remain weak, but sensible policies will be pursued. The Government remains determined to press ahead with our infrastructural development programme, thereby enhancing our productive capacity. Discipline on current expenditures under all headings will be critical over the next few years given the changed resources available.
As a nation we will have to manage our expectations more prudently and focus clearly on what our spending priorities are. This is a challenge for us all, but it must be seen in the context of the very significant increase in the amount of Government spending that we have provided for over recent Budgets. While there is no denying that our fiscal position has changed from that envisaged at Budget time, it is important, however, to point out that the current situation is manageable given the strong position of the public finances. It is also important to stress that, despite the underlying strength of the public finances, I along with my Government colleagues are determined that there will be no unnecessary loosening of fiscal policy. We need to control current spending to keep it in line with resources. I will be looking at these issues closely in the coming months as I prepare for Budget 2009. Iit is crucial for Government Departments to adhere to the very significant levels of current day-to-day expenditure provided for their activities this year. Successful achievement of this objective when resources are constrained has to be based on sound priorities.
In this regard the Governments priorities are clear and straightforward; they are:
· to protect the weaker in society through maintaining a high level of social spending;
· to deliver better and more effective public services; to seek value for money at all levels of public spending, and
· to continue to invest heavily in public infrastructure.
We are all aware of the impact that unemployment has on the affected individuals, their families and wider community. Despite our economy’s success in creating several hundred thousand new jobs in the past decade, there have been a number of recent high-profile instances of companies making workers redundant. The various state agencies and appropriate bodies are actively providing opportunities to allow affected workers access training programmes to update their skills in order that they can then access new employment opportunities. Indeed, I might remind Senators - as Minister of State Mansergh did in the Dail last night - that as part of its ongoing implementation of the Irish National Employment Action Plan - a strategy which was introduced in 1998 - FAS reduced the Employment Action Plan referral threshold from 6 months to 3 months for first referrals as long ago as December 2006. Last year, under this proactive labour market initiative, over 51,000 people were referred by the Department of Social & Family Affairs to FÁS, of whom approximately 32,000 – or 63 per cent - had left the Live Register by the end of the year. FÁS is also placing particular emphasis on the training of low-skilled workers in vulnerable industries so as to ensure that in the event of becoming unemployed, they will have the skills necessary to make the transition to other employment.
The Government is giving priority to full implementation of the National Development Plan, and an increase in capital spending of around twelve per cent this year has been provided for. In the short term, this will help to absorb some of the capacity emerging from the new house building sector. The medium-term and longer-term impact of this spending will be more important, however. Spending on human and physical capital under the National Development Plan will help boost the productive capacity of the economy; will remove critical infrastructural bottlenecks and will facilitate the re-positioning of the economy in the production of knowledge-intensive goods and services. This is how we will become an even more knowledge-based economy and lay the foundations for future improvements in living standards so as to ensure that our economy’s competitiveness will always be up there with the world’s best.
Social partnership has played a vital role in delivering real economic and social benefits over the past number of years. This partnership framework helps to ensure that all stake-holders in our economy have a shared sense of the difficulties that are emerging. This approach can also ensure that competitiveness is restored, thereby enabling a re-balancing of activity away from residential construction towards export-led growth. In this regard, Government’s commitment to social partnership won’t be found wanting.
The implementation of the public service modernisation agenda has been, and continues to be, driven by the various partnership agreements across the public service. The current partnership agreement, Towards 2016, builds on the progress made under previous agreements and ensures continued co-operation with change and modernisation initiatives as well as improvements in productivity right across the public service. It provides an important framework for meeting the economic and social challenges ahead and builds on the achievements of previous agreements. The Government is committed to developing the modernisation agenda through the partnership process.
The OECD Review of the Irish public service was published recently and it acknowledged the central role played by the public service in contributing to an economic success story that many OECD countries would like to emulate. It says service provision is good but scope remains for improvement. The key will be to get the public service to become more efficient and we will need to rein in the growth in new public sector bodies and rationalise what is there already. The Taoiseach will shortly be announcing the appointment of a task force on public service reform to report to the Government with a comprehensive programme for action.
One of the things that we have known for some time is that in riding out any storm economic flexibility is crucial. We know this from having overcome difficulties in the past. Today the ESRI Review restates this point. The limited economic fall-out from the global IT shock at the beginning of this decade is one of the best examples of the economy’s resilience. In other words, while the short-term prospects are unfavourable and we face them from a position of considerable strength, our economy is sufficiently resilient to ensure that the medium term prospects remain relatively benign. This, of course, is predicated on implementing the correct policies, which the Government is determined to do.
Under this Government’s assured stewardship, the fundamentals of the Irish economy remain strong. Because of this we are well placed to absorb the housing adjustments and external ‘shocks’ so that our medium-term prospects will continue to be favourable. Our public finances are sound, with one of the lowest levels of debt in the euro area. Our markets are flexible allowing us to respond efficiently to adverse developments. We have a dynamic and well-educated labour force. We have a pro-business outward looking society. The tax burden on both labour and capital is low. Not many countries anywhere in the world are facing the present global economic difficulties with such advantages.
In addition to corrective action, if we are to keep our medium term prospects bright, we need to reassert our rightful position at the heart of Europe through a Yes vote on the Lisbon Treaty in June. Participation at the centre of a large political and economic grouping - the European Union - has given us real negotiating power in terms of international relations, particularly in the area of trade and increasingly in the field of diplomacy. Our membership has also given free access for Irish indigenous industry and international firms to the EU’s internal market which numbers 500 million consumers.
I commend the Government amendment to the House.