Introduction

A Cheann Comhairle, never before has so much information, advice and so many expert reports been published in the run up to a budget. This detailed analysis of our economic position together with the Pre-budget outlook, published by my Department last week is already resulting in an informed, rational debate outside of this House about the options facing our country. I hope a similarly constructive debate can take place here this evening.

I welcome the opportunity to set out the current and prospective economic and budgetary position at this stage. And I look forward to hearing the views of the parties opposite on what needs to be done to put the public finances firmly on the road to recovery. I am glad that the two main parties agree that an adjustment of €4 billion to the public finances is necessary next year. I hope we can reach further agreement on how that adjustment should be achieved. What is at stake after all is the economic future of our country.

Before setting out Government’s broad thinking on the public finances, I would like to briefly outline the short, to medium term prospects.

Short-term Outlook

As everyone in this House will be aware, the past year and a half has seen an unprecedented rate of economic decline this year – GDP will decline by around 7½ per cent.

Declining levels of activity have taken a heavy toll in the labour market. This year employment will fall by around 165,000 with the construction, retail and manufacturing sectors the worst affected. Unemployment has risen significantly, standing now at 12½ per cent. This is unacceptably high. All our efforts in government are aimed at getting people back to work.

A reasonable degree of consensus has emerged on the short-term outlook. The current consensus forecast is for a GDP decline of 1.1 per cent next year. My own Department anticipates that growth will return during 2010, but that for the year as a whole GDP will contract by about 1½ per cent. This represents an improved position since the Supplementary budget last April. The world economy has turned a corner. I think it is fair to say that there is light at the end of the tunnel.

While unemployment is anticipated to rise into next year, recent labour market developments suggest that the rate of increase in unemployment has slowed. As I have said already, the creation and protection of jobs remains the overriding objective of Government economic policy. All aspects of active labour market policies are required to ensure that work rather than unemployment remains the norm.

Government Policy

There are three main pillars to this Government’s economic strategy and these were further highlighted in the Pre-Budget Outlook last week. In summary:

o             We are ensuring that we have a properly functioning banking system, capable of meeting the needs of savers and borrowers;

o             We are taking steps to ensure that our public finances are stabilised and put on a longer term sustainable path; and

o             We are helping to regain our international competitiveness so as to be in a position to exploit the global economic recovery and to generate employment growth.

Restoring the Banking Sector

A significant amount of time has been spent both within this House and elsewhere discussing what needs to be done to restore our banking system.

• Whatever divergence of opinion there is between us, I believe everyone agrees that a healthy, fully operational banking system is a cornerstone of any modern economy. Clearly restoring confidence and repairing this system is a fundamental requirement for any economic recovery. That is why the Government, like Governments and Central Banks across the globe, has intervened to provide substantial support to the financial sector and the broad economy in the current crisis. The Government’s priority has been to ensure we have a banking system that can serve the best interests of our economy.

More work needs to be done, but I now firmly believe we are well on the way to a resolution of this most difficult crisis in our financial institutions.

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Public Finances

The deterioration in the economy has exposed weaknesses in our public finances. We are currently in the untenable position where our tax revenues are now back at 2003 levels while current spending has increased by 70 per cent since then. Borrowing for day-to-day spending has now escalated to unsustainable levels and an Exchequer deficit of €26 billion is projected for this year. To put this enormous figure into perspective, we must borrow €500 million each week to fund it. Another way of looking at this annual deficit is to consider it in the terms of our National Debt. At end 2008, our National Debt stood at about €50 billion, next year it is now likely to be nearly €100 billion and without action would continue to spiral out of control.

Clearly, all of us in this House who subscribe to the basic tenets of responsible economic management will agree this cannot continue. Debt service costs are rising rapidly and are absorbing a large and growing share of tax revenue. We must halt this phenomenon and ensure that it does not become ingrained and inhibit the Government’s ability to provide essential public services. It is also imperative to inspire confidence both internationally and domestically that the deterioration in the public finances is being arrested.

It is also important to restore balance to Government expenditure and ensure that taxation is at more sustainable levels. As a number of commentators have remarked, the improvement in the economy over the medium term will not be sufficient to close the budgetary gap. There is a significant underlying deficit that must be tackled in a targeted manner. The Report of the Special Group on Public Sector Numbers and Programmes and the Report of the Commission on Taxation will form the basis for future tax and spending policy.

Fiscal Stabilisation is our priority

That said, our immediate priority is to stabilise the deficit at this year’s level, which on a General Government basis is a deficit of 12 per cent of GDP. To do so requires an adjustment of €4 billion. Without such savings the deficit would be around 14 per cent of GDP. Between now and Budget-day, the Government will decide how the necessary savings will be achieved.

Turning to where the adjustments should come from, as I said at the outset, I welcome the views of this House. However, it is important to bear in mind some key facts.

Taking account of the very significant increases that have been made to personal taxation, the marginal tax rate is now at 52 per cent for PAYE earners and higher for the self-employed. We know from our experience in the eighties that we cannot tax our way out of a recession. That is a point on which the Fine Gael Party agrees with us.

However, who funds the income tax yield tells its own story. In overall terms 4 per cent of income earners contribute almost half of the income tax yield. Furthermore, for 2010, it is now estimated that around half of income earners will pay no income tax. While they may have some exposure to the Income levy, having 50 per cent out of the tax net is not viable if we want to fund the range of services we expect Government to provide.

In terms of the other significant taxes - VAT and excise duties - our rates are already high by international standards. The rate of corporation tax must be seen in terms of international markets and our ongoing ability to foster enterprise and future job creation. Consequently, given that these four tax areas represent the vast bulk of overall tax revenue, I believe that there is limited capacity to raise additional revenue in the forthcoming Budget. Consequently, I have already indicated that the immediate focus will have to be on expenditure reduction measures.

In terms of expenditure, the overall amount of Gross current Voted Expenditure stands at almost €56 billion in 2009. Roughly one third of spending is on social welfare related matters, one third on programme expenditures and the final third on public sector pay and pensions. Therefore, the bulk of the adjustment, which will have to be on day-to-day spending, will have to consider each of these spending lines.

Of significance in relation to considering such matters is that we are currently in a period of falling prices. While a prolonged period of price decline would bring its own problems, the current short term decline in consumer prices does have the effect of supporting real income levels. In this light, I believe that there is some scope to adjust public spending while still protecting the living standards of those most in need.

The Government is determined to achieve the necessary savings and this evening’s debate can help inform how the savings will be achieved, ahead of next month’s Budget.

Government’s budgetary approach is sensible

The Government’s approach to correcting the public finances has been acknowledged by the European Commission. In its Excessive Deficit Report which was published last week, the Commission acknowledged the balanced approach taken and the measures which have been implemented towards reducing the deficit. The Commission has also proposed a one-year extension to 2014 of the deadline to bring our deficit below the 3 per cent of GDP threshold. This proposed extension, which will be considered by the Council of Ministers in early December, is to be welcomed. However, an additional year to correct, while easing somewhat the adjustments required in the later years, does not change the focus of our need to stabilise our very large deficit. If anything, it reinforces the need to continue to take effective action in 2010.

Restoring Competitiveness

In addition to restoring the banking system to health and stability to the public finances, this Government is also focused on the needs of the wider economy and in particular the promotion of favourable employment conditions.

The Pre-Budget Outlook reiterates the requirement that we reposition our economy on a more sustainable, export-led growth path through regaining our international competitiveness.

Ireland’s cost competitiveness has deteriorated in recent years. As a number of agencies such as the National Competitiveness Council have outlined, elements of our costs are higher than that amongst many of our competitors. While this has not been helped by some factors beyond our control, such as the euro appreciation in recent months, there are measures we can take through domestic policy action to address this issue.

In recent years our labour costs have moved out of line with productivity developments. As we refocus our economy on export-led growth, a focus on these crucial input costs will become more important. Therefore, reducing labour costs – through some combination of nominal pay reductions and enhanced productivity – must form part of the strategy to improve competitiveness.

The Government has already taken measures to reduce the public service pay bill through the pension levy and initiatives to reduce the headcount. I acknowledge the contribution made by public servants in this regard. However the Government has indicated that a further €1.3 billion in savings from the public service pay bill will be required next year and there is engagement with the public service unions on the manner in which this will be done.

The public sector has already made an important contribution but more is required. In the private sector jobs are being lost, working hours reduced and there is some evidence of downward adjustment in earnings. Engagement with the Social Partners is ongoing and important but Government must ultimately balance all the challenges and issues and present the best way forward, particularly in the forthcoming Budget. We do of course have strengths, for example our labour force continues to be highly skilled and flexible, and we have made significant investment in education at all levels to ensure we have the skills demanded by our increasingly knowledge-intensive economy. Pursuing a responsible, fast and balanced approach to tackling the challenges we face is at the heart of the Government’s approach.

Conclusion

We are facing tough challenges, and, to succeed in dealing with them we must continue to pursue appropriate policies to position the economy to benefit from the global recovery. The Government is acutely aware that businesses, families and almost everyone in our society are affected by the deterioration in economic conditions. In the forthcoming Budget we will bring forward policies that will ensure that the burden of adjustment is spread as evenly as possible.

A number of challenges face us, and this Government has and will continue to address them all:

• we have taken significant actions curbing expenditure and raising additional tax revenue since July 2008 to address the crisis in our public finances – our immediate priority is to stabilise the deficit and this we will do in the forthcoming Budget; in this regard our actions have been commended by various outside commentators and international market reaction has changed in our favour;
• bank lending must be facilitated and our actions in regard to the very difficult banking situation are taking hold and are the right decisions;
• finally, we have through various measures sought to protect a climate that will facilitate employment, but more needs to be done here in terms of the ongoing restoration of our competitiveness.

Implementing measures in all of these areas, as this Government has and will continue to do will enable the economy to return to a more sustainable growth path over the medium term. In so doing, this will facilitate a return to employment growth and a sustainable improvement in the living standards of all.

Since I became Minister, I have taken action on all of these matters and in my Budget in a few weeks time I will continue to take the decisive action that is require.

In anticipation of Budget day, I look forward to hearing the views of Deputies.