Professor John McHale:

I will certainly try to be brief. Some of the ground has been covered already in reply to Deputy Michael McGrath so that will probably allow me to proceed somewhat more quickly.

On the size of the adjustment we recommend or the fact that we do recommend an additional adjustment, this relates to the balancing act to which I referred earlier. We would very much like to be in a position where we could stimulate the economy because that is what is appropriate for an economy in recession. We are of the view that demand management can have a very positive effect, so we take a generally Keynesian approach from that perspective. That is wonderful if one's country is robustly credit worthy. If it is not, then one faces constraints in that one must achieve debt sustainability in order to establish that robust credit worthiness. There is a general sense that people want to get the State's sovereignty back and this requires that it must be robustly credit worthy. If we cannot do that, then at least we will have a reliable source of official funding that will not impose even more onerous conditionality upon us. This is why we are trying to achieve the balancing act to which I refer. That point sometimes seems to become lost in the debate.

As circumstances change, that which is in the different scales also changes. As the Deputy noted, in scaling back the amount of adjustment we were recommending, we considered two issues, namely, the fact that greater than anticipated weakness in the eurozone economy was having what we saw as a short-term further dampening effect on the Irish economy and that there had been substantial improvements in credit worthiness since our first report, in which we suggested the biggest additional adjustment. Given that the purpose of making such difficult additional adjustments is to regain the credit worthiness of the State and because the evidence of that credit worthiness is improving in any event in the context of the current programme, this allows us to scale back. If we can scale it back to having no additional adjustments or perhaps suggesting a greater stimulus beyond the Government programme - if we thought that was appropriate in light of the balancing act to which I refer - we certainly would do that. We are absolutely not pushing austerity just for the sake of it. In view of the essential aspect of debt sustainability and credit worthiness, however, we are of the view that this is the appropriate macroeconomic policy course for the Government to pursue.

In the context of the stimulus programme, a broader question arises with regard to the fiscal stance and how contractionary or stimulative it should be. What having a stimulus programme that is focused on specific capital investment projects is about is something that is somewhat separate from the main fiscal adjustment programme. In our report we seek possible rationales for having such a separate programme. There are arguments to be made in this regard. One set of such arguments relates to the fact that it can be financed without adding to the gross debt of the State. However, to repeat something I noted earlier, it is necessary to examine the broader balance sheet of the State in terms of financing it by running down assets, accessing the National Pensions Reserve Fund, using privatisation revenues that could have been used to pay down gross debt or taking on particular contingent liabilities relating to public private partnerships and so on. This matter must be considered in the round. It is sometimes presented as almost off-the-books money about which we do not have to worry in terms of what it is doing to the credit worthiness of the State. Taking that broader balance sheet perspective, we become less convinced of this separate stimulus idea.

Another rationale for having a separate stimulus programme is one which is very much part of the international debate on fiscal policy. Many countries are of the view that their economies must be stimulated in the present but that they must also credibly commit to carrying out fiscal adjustments in the long term when those economies are in better shape. One hears this in the UK and the US. The problem that arises in this regard relates to how to stimulate one's economy in the short term while making it credible that one will actually start behaving differently in the future. One could view the separate stimulus approach as giving one an extra instrument in the context of achieving a better trade off, whereby one sticks to one's main fiscal adjustment programme while also having an explicitly temporary stimulus programme in place. In theory, there is a rationale in this regard but it would be extremely difficult to credibly commit that this would be a once-off improvement in capital spending.

There are rationales to consider and we take these very seriously. Following much discussion, however, we reached the conclusion that if one was going to implement a special programme of capital spending, it would be better to build it into the main programme. This would be partly for reasons of transparency in order that it would be possible to see exactly what was happening and that matters would not hidden off balance sheet or whatever. Even if one is using some of these other funding mechanisms, which certainly have a great deal of merit to them, it should be made part of the main programme. The question then arises as to whether the fiscal stance should be relaxed. In that context, I return to the first matter we debated with regard to the trade off between supporting the economy in the short term - for which there are very good reasons - against the risks to debt sustainability, particularly in the uncertain environment in which we find ourselves. We reached the conclusion that at this point we do not really see an argument for relaxing the fiscal stance beyond where they Government is at present. We did, as I have already noted, scale back the additional adjustments for which we had been calling.

I accept that there are time constraints which apply. However, these are important and complicated questions and I hope the Chairman will forgive me for taking a long time to answer them.

Deputy Pearse Doherty inquired as to why we changed the advice we are giving since our first report. In the context of how the Government formally responded to our advice, the stability programme update contained a short response. We would perhaps like a more lengthy response. It is very important that the Government does not feel that it needs to respond immediately to what we say - sometimes such responses can come a little too quickly - but that it should take the advice on board and then provide a more considered reaction in the appropriate way. I refer, in this regard, to the budgetary documentation and the stability programme updates.

I did not take note of all the points the Deputy raised so I will, perhaps, allow some of my colleagues to reply in respect of any matters with which I do not deal. However, I will conclude by responding to his final question on the terms of reference of the council. I understand what he is saying with regard to the fact that we sometimes discuss big macroeconomic figures and adjustments which seem very divorced from the reality that such adjustments will have on people's lives. That is something with which we really struggle. We take the mandate we have been given seriously. We have not been given a mandate to discuss anything we want and put our own particular views or preferences forward. Our mandate is to assess the Government's macroeconomic and budgetary forecasts, its fiscal stance and, under the new fiscal responsibility legislation, the level of compliance with certain fiscal rules. This is what we are supposed to be doing and we have largely been focusing on that.

As we discuss making these adjustments, we see that we should be saying more about what are the possibilities and laying down certain criteria for judging good and bad adjustments. We are struggling with this ourselves, as a council. One of the matters about which we are concerned - this was discussed at earlier meetings we had with the committee - is that we do not wish to become only political in our outlook. It is one thing to talk about the size of these adjustments - which of course is a political question to a certain degree - but once we begin to suggest that welfare rates or public sector pay should be cut, we will, as a council, become much more politicised.

That may take from our main function which relates to these macro-economic issues. We are struggling with that tension and it is something we will talk a good deal about before the preparation of our next report in terms of whether we need to say more in regard to the details of the adjustments. It is not to give our preferences but perhaps to give more analysis of the options as opposed to the dangers of going into those more micro questions.