Wednesday, 18 February 2009
Dáil Eireann Debate
Minister for Finance (Deputy Brian Lenihan): There is no doubt that 2009 is a very challenging year for the global economy. Ireland is very much a part of the global economy and we are experiencing an international recession of unrivalled severity, prompted in turn by the worst crisis in international financial markets in living memory. Domestic processes in the Irish economy, in particular, the ongoing contraction in the construction sector and its effect on the wider economy, compound the deterioration in international economic conditions. Consequently, GNP is forecast to decline by 4.5% this year. Unfortunately, overall employment levels will decline considerably and, as a result, unemployment, which has increased significantly in recent months, will continue to rise this year.
The deterioration in economic conditions has had a significant effect on the public finances. Due to the unprecedented pace of developments in the global and domestic economic environment, the forecasts contained in the October budget were revised in light of the end-year data. Consequently, in early January revised forecasts for 2009 and the following years to 2013 were set out in the addendum to Ireland’s stability programme update, which was submitted to the European Commission on 9 January 2009.
I am happy to report that the relevant recommendation for a Council opinion was published by the Commission this morning. An inaccurate version appeared in a leading Irish newspaper this morning which is not in accordance with the terms of the opinion. The Commission has made it clear in the opinion recommended to the Council that the measures adopted by the Government in response to the downturn can be regarded as welcome and adequate, given the high deficit and sharply increasing debt position, and in line with the European economic recovery plan.
In terms of tax receipts assumed for this year, my Department expects that tax revenue of just under €37 billion will be collected in 2009. This means that revenue is expected to contract by 9.25%, thus representing a decline of about 20% from the taxes collected in 2007. Current expenditure now exceeds revenue and in simple terms this is not sustainable.
In overall terms, an Exchequer borrowing requirement of almost €20 billion is expected in 2009 not just to finance capital spending, but also to pay for current expenditure as well as the associated costs from the bank recapitalisation programme. However, it must be acknowledged that we have a low debt ratio relative to many other EU countries. At the end of 2008, general Government debt stood at 41% of GDP, well below the 60% average of our EU partners. This measure does not take account of the significant value of the National Pensions Reserve Fund — which was accumulated in better times — or the substantial cash balances held by the National Treasury Management Agency. When account is taken of these, our net debt at end-2008 was close to 20% of GDP. While this will increase in the coming years, our low level of debt has provided us with the leeway to target a restoration of balance to the public finances over a number of years. In this way, we can avoid placing too great a shock upon the system as we restore order to the public finances and re-position our economy.
Consequently, the Government has been clear in its strategy to address the difficulties in the public finances over the medium term and is strongly resolved to do so. Given the scale of the problem, we have set out a five-year framework for the consideration of the Commission on the restoration of order to the public finances. In this year’s budget, I brought forward various tax measures to secure a substantial amount of additional Exchequer revenue for this year. On 3 February, the Government announced a series of measures to secure the targeted savings of up to €2 billion on a full year basis that are needed to help restore fiscal balance. The larger part of these savings is in the area of public sector pay and pension contributions, yielding savings of €1.4 billion in a full year.
These measures are focused not just on short term needs, but on the vital need to prepare the ground for economic recovery. By increasing welfare payments this year in the budget, at a time of easing inflationary pressures, we have sought to protect those less well off and those bearing the brunt of the poorer labour market conditions.
We have also sought to maintain capital spending in real terms and redirected some of it to areas that can protect jobs. More needs to be done in a planned way in 2010, 2011 and beyond. The Government’s Framework for Sustainable Economic Renewal, published before Christmas, provides the guiding light to show the way. What is now clear is that further controls on expenditure, ensuring greater value for money and additional taxation will all be required as we work our way through the five-year plan for restoring fiscal sustainability. In this regard, further budgetary decisions will be informed by the important work being conducted by the special group on public service numbers and expenditure programmes and the commission on taxation.
The budgetary strategy the Government has set out is challenging and will require that we all put our shoulders to the wheel in the national effort to deal with this unprecedented economic downturn. The fiscal position we take, especially this year and next year, is of fundamental importance to the future of the country. The stabilisation and sustainability of the public finances is an essential prerequisite to the renewal of the economy and it is for this reason that it is the primary focus of our budgetary strategy.
Deputy Richard Bruton: I thank the Minister for his reply. People are terrified their jobs will be the next to go. Businesses are fearful they will have to pull down the shutters because they can neither get credit nor paid. The confidence the Minister expressed that the Government has a strategy that is understood and clear is far from shared by either international markets or people at home. People feel leaderless and lack direction and this is a core problem. If we want to protect jobs, people must have confidence the Government knows what it is doing.
If the Exchequer position deteriorates relative to the Minister’s forecasts, will the Government allow the deterioration to be taken up in extra borrowing or does he intend to introduce other measures? We need clarity on that issue.
While the Minister may dispute the description of the strategy he sent to Europe as “unclear” and “underdeveloped”, I would describe it as nothing less. Would he not agree that if we want people to invest for the future, whether in energy or elsewhere, we need clarity about the direction of Government thinking on taxation and other matters covering the five-year period? Without that clarity people will continue to postpone investment and wait to see what happens.
Deputy Brian Lenihan: The Deputy may choose to borrow words inaccurately attributed to the opinion, but I must go by the record of what the Commission said, namely, that the measures adopted by the Government in response to the downturn can be regarded as welcome and adequate. That is an endorsement from the Commission. I worked closely with the Commission——
Deputy Brian Lenihan: I have had numerous contacts with the Commission since last September to deal with Ireland’s position in advance of going into the excessive deficit procedure because it is important we work with it to resolve our difficulties. We have the support of the Commission on the measures we are taking.
The fundamental issue with regard to generating confidence is the need to stabilise our public finances. This is essential in terms of fostering public confidence. At all stages, we have taken the necessary measures to stabilise public finances — last July, last October in the budget and through the announcement made by the Taoiseach in early February with regard to further expenditure adjustments.
Deputy Richard Bruton: I must beg the Chair’s indulgence as the Minister did not answer either of the questions I asked him. He proceeded to cite inept measures the Government adopted in the past, as if this would in some way demonstrate it has been decisive. The truth is a flimsy document was submitted to the European Commission, we have no forecast of what the Government believes it will collect under any tax head in the next year, we have no monthly forecast of what it expects to collect each month, and we do not know its view on what will happen if we do not meet the borrowing target of €20 billion, if that. Goodbody forecasts the requirement will be at least €2 billion over that.
What will happen if it is €2 billion over? Will the Minister take additional measures? He did not answer that question. How does the Minister expect people to make decisions if they do not know the direction of his thinking on key variables that will affect the climate for making decisions? We need a five-year programme that has credibility. The Minister has not delivered that.
Whoever described the plan as “unclear”, “unconvincing” and “underdeveloped” got it right, even if it was someone in Timbuktu. People are saying the same thing on the streets. People are losing jobs because there is no leadership from the Minister, his Department or the Government.
Deputy Brian Lenihan: People are losing jobs because of the unprecedented international climate, as the Deputy is well aware. The forecast in my Department for the downturn this year is 4.5% and this forecast is in line with the bulk of other forecasts. On the question of tax receipts for this year, an overall predictive figure for tax receipts has been produced and the receipts received in January are in line with the overall predicted figures.
Deputy Brian Lenihan: The Deputy should bear with me. The percentage which January tends to bear to the year as a whole has been confirmed in the receipts received this January. The predicted overall tax receipts this year, as the Deputy is aware, are well short of what was received last year.
With regard to the detailed monthly breakdown and the breakdown under the different heads, my Department is taking particular care with its forecasts this year, but they will be available later this month. It is a five year programme and it would be a brave person who could predict what will happen in 2011 and beyond. We need to stabilise our finances now——
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