Professor John McHale:

These are important questions. Deputy McGrath suggested that growth is absolutely central to our pulling our way out of this crisis. One thing we stress in the report is the significant uncertainty that surrounds the growth prospects of the Irish economy, given that we are in a post-bubble economy whose dynamics are hard to predict.

We also have a volatile international environment. Once a bubble bursts, there can be all sorts of adverse feedback effects which feed on each other and harm growth for a number of years. Problems in the banking sector spill over to the fiscal sector and problems in the fiscal sector spill back to the banking sector as the credibility of guarantees declines and holdings of Government assets are marked down on the balance sheets of the banks. As the fiscal sector adjusts this hurts demand in the real economy while decline in the real economy feeds back to worsen the fiscal situation. As the banking sector is impaired this harms credit growth, which harms the real economy, and as the real economy deteriorates this, in turn, harms the banks. All these adverse feedback loops can pull down growth and lead to a very uncertain growth environment.

I would stress the uncertainty aspect. It is not all bleak. If one can start to turn these dynamics around things can turn around fairly quickly. This is not easy to do and is certainly not guaranteed. There is, however, an upside. The Deputy mentioned the assumption that the economy will return to an underlying trend growth rate close to 3%. This is what modellers have been assuming will happen when these adverse feedbacks begin to turn around and domestic demand begins to turn around.

In the report, we draw on the literature on financial and economic crises that have followed the bursting of property bubbles in other countries, such as Japan. Economies can go through a long period during which things are pretty flat. In the report, we highlight the pattern of downward revisions to the forecasts as one comes closer to the date. We include a graph showing that some earlier forecasts assumed that by 2012 we would be back to 3% growth. Of course, that did not happen and the forecasts are continually revised downward. This suggests that there is a downside risk. Beyond the issue of uncertainty, we think the risks are to the down side and that we could be in for quite a flat period. That, of course, has important fiscal implications that should be planned for. It will make it hard to reach the target for a general Government deficit of less than 3% by 2015.

One of the things that contributes to low growth is fiscal adjustment. We are well aware of the adverse effect fiscal adjustment has on the economy. It is, however, important to note that the economy is facing other headwinds besides fiscal adjustment. Let me deal with the Deputy's fourth question, because it relates to this, and I will come back to the others. We think of an appropriate fiscal stance as a balancing act between trying to support the economy as much as possible in the here and now, while people's lives are being hugely affected by the state of the economy, and trying to ensure debt sustainability. Debt sustainability can sound like an abstract thing that cannot be compared to the pain people are experiencing now with unemployment and so on. Part of the concern about debt sustainability, however, is that if we were to lose control of the debt, with the debt-to-GDP ratio on an upward path and looking as though there were no chance of getting it under control, we could certainly lose access to market funding and maybe to official funding as well. Certainly, official funding would come with much stricter conditionality and tougher fiscal adjustment, and possibly a fourth restructuring of the debt. It is that risk that requires that we take action and plan for actions to prevent such unsustainability. It is also a concern about the real economy because it is a forestalling of a very serious risk in the future. That is the balancing act we are dealing with.

One could ask why we are engaging in the fiscal adjustment at all. I think everyone realises it is because we have to get our fiscal situation under control. The job is not fully done and, particularly with the uncertainties about growth the Deputy mentioned, there is a significant probability it will not be done if we get a bad draw on that growth. In the report, we estimate there is a 40% probability that the debt-to-GDP ratio will not have stabilised by 2015, given these uncertainties about growth. It is to make sure the job gets done, or to improve the chances that the job gets done, that we are recommending those additional adjustments.

In terms of keeping the various margins of adjustment under review, we note in the report that the planned adjustment to 2015, particularly on the expenditure side, is daunting, with two thirds of the €8.6 billion being on the expenditure side. We estimate that the average reduction in real expenditure is about 3.5% per year. This is a very significant, almost unprecedented, reduction, coming on top of big reductions so far. The more one narrows the margins of adjustment the harder it will be. Where the adjustment does take place - in health services, for example - the damage caused to people can be very great. We think it better to keep all margins on the table. We are concerned that a political equilibrium may be reached under which different sides are able to take different things off the table. This would make for a more damaging and, potentially, less feasible adjustment. If the adjustment is that damaging it will be less credible and it will be harder to regain our market creditworthiness. For that reason, we think it is important to keep all margins under review.