Professor John McHale:

Very quickly, what we are getting at is the key trade-off we examine when we think about the appropriate fiscal stance. On the one hand, we absolutely recognise that more fiscal adjustment hurts the economy in the short term. It reduces demand which is not what we need at the moment. If there were no other constraints we would be calling for less fiscal adjustment, not more. We also know that, not that long ago, the Irish economy lost its credit worthiness. There were real risks of default. The implied probability of default in mid-2011 was close to 90%. If Ireland had defaulted, the international evidence indicates - even though it does not always speak with one voice - that the costs of defaults are very large. It would send the crisis into another vicious phase.

One way to help regain that credit worthiness and avoid default is to improve one's fiscal position faster. Even the fear of default raises interest rates, which have knock-on effects on the banking system so in itself it can be contractionary even in the short term. This was the balancing act that underlay our thinking about what the appropriate fiscal stance is. Over time that trade-off is changing and the State's credit worthiness has been substantially restored. However, it goes back to some of the risk factors we discussed before. We do not want to undo many of those benefits by starting to miss key targets. There is also ongoing uncertainty concerning the eurozone so the crisis could flare up again. We are continually re-evaluating that particular trade-off.

Members of the committee may recall that we had been calling for more adjustment in the past at a time when the State was clearly not credit worthy and that trade-off was much less favourable. We have eased back on what we have been recommending in terms of adjustment. The key now is to hit those key targets we have agreed to. As regards the Deputy's basic point on the importance of supporting demand in an economy that is still in recession, we are in full agreement.