Martin Mansergh (Tipperary South, Fianna Fail)

I move amendment No. 1:

To delete all words after "Dáil Éireann" and substitute the following:

"—welcomes the Government's firm commitment to position the economy for sustainable development over the years ahead, while adapting to the reality of more moderate growth in the future;

welcomes the Government's commitment to improving national competitiveness, as demonstrated by its maintenance of a low burden of taxation on labour and capital and by the priority that it has given to investment under the National Development Plan in the economy's physical infrastructure and skill levels which will enhance Ireland's productive capacity and thereby lay the foundations for future improvements in living standards; and

commends the Government for ensuring that Ireland's public finances are in a strong position to meet the existing challenges with one of the lowest levels of General Government Debt in the euro area, General Government surpluses delivered in ten of the last 11 years, net debt forecast to be around 14% at the end of 2008 and a current budget surplus."

I am pleased to have the opportunity to contribute to this debate. I welcome especially the opportunity to set out clearly the record of the Government on the management of the economy and the public finances and to outline the prospects for the Irish economy in the short to medium terms. I welcome the subject put forward for discussion by the Labour Party and thank Deputy Higgins for his good wishes.

Over the past decade or so, we have witnessed unparalleled levels of economic success and prosperity. Ireland is now an international showcase of how a country's economic landscape can be transformed when the appropriate Government policies are coupled with stakeholder involvement, through social partnership. Since 1997, the rate of economic growth in Ireland has averaged 7.25% per annum. This strong rate of expansion has brought average incomes per head in Ireland, not just up to, but above those prevailing in most other advanced countries. Over this period the total number at work has risen by some 700,000, resulting in a fall in the unemployment rate from some 10% to about 5.5% now, although for the most of the past few years it was in the region of 4.5%. If we consider the situation 21 years ago, employment has doubled since then from just over 1 million to over 2 million, an enormous achievement. Involuntary emigration has been eliminated and Ireland is now a destination country for migrants, with non-Irish nationals amounting to almost one in every six in the labour force.

Over the past year or so, the economic environment has clearly become more challenging and the outlook less benign and more uncertain. This reflects a combination of both international and domestic factors. As a small and open economy, global economic developments play a key role in shaping Ireland's economic horizon.

The Irish economy is highly integrated into the global economy. In this context, therefore, the slower growth anticipated this year for our main trading partners, the euro area, the United States and the United Kingdom, will have an unavoidably negative impact upon our prospects. The difficulties in the United States stem mainly from the housing market and particularly from the sub-prime mortgage segment of that market. These developments have impaired the functioning of international credit markets and, it is fair to say, the problems have persisted longer than had been initially expected. Given the openness of our economy, recent exchange rate developments are also unhelpful with the euro appreciating against the dollar and, more recently, sterling.

On the domestic front, the residential construction sector grew in importance in recent years. For instance, roughly one third of the housing stock was built within the past decade. As recently as 2006, we were producing over 88,000 units on an annual basis and last year we produced 78,000 units. Given our rate of population growth, this rate of output was excessive and an adjustment towards more sustainable levels of output in new house construction was inevitable. At this stage, it is too early to say with certainty what the level of housing output will be for this year, with most commentators now saying it will be in the 40,000 to 50,000 range, but in any event, housing will exert a negative drag on economic growth. Also, it is not certain how long it will be before the medium-term sustainable level of activity is achieved. Where there is an inevitable and natural adjustment, there is no point in trying to behave like King Canute and trying to hold back the tide.

Another unwelcome economic trend over the past year or so has been an increase in the rate of inflation. This too, has largely been the result of external factors, over which we have little control. For instance, the wholesale price of oil rose to over $120 per barrel recently, while some food prices have reached all-time highs in recent months. It is worth pointing out, however, that the rate of inflation, as measured by the consumer price index, moderated in April, down to 4.3% from 5% in March. The general view is that a further easing is in prospect during the second half of the year. It is well to remember that in the domestic context we use a measure which registers higher than measures used in the European context. The stronger exchange rate and easing of domestic demand should lead to a further moderation in the rate as the year progresses. I expect that, over time, the stronger exchange rate should lead to a decline in import prices, especially for products such as food. On an EU harmonised basis, Irish inflation was 3.3% in April, in line with that in the euro area. In other words, real earnings in other advanced countries are also being affected by global commodity price developments. I propose to refer to the national pay talks later but it is important to make the point that it would be futile to try to compensate ourselves through wage increases for the fall in the terms of trade which these externally-generated price increases represent.

On a more positive note, I am happy to be able to say with confidence that the fundamentals of the economy remain strong. This will help us to absorb the housing adjustment and external shocks so our medium-term prospects should continue to be favourable. Among the pillars of this strength are that public finances are sound with one of the lowest levels of debt in the euro area, especially if one takes the net rather than gross figure; our markets are flexible, allowing us to respond efficiently to adverse developments; we have a dynamic and well-educated labour force; we have a pro-business outward-looking society; and the tax burden on both labour and capital is low. Not many countries anywhere in the world are facing the current global economic difficulties with such advantages.

On another positive note, the Government is giving priority to full implementation of the national development plan and provision for an increase in capital spending of around 12% this year has been made. In the short term, this will help to absorb some of the slack emerging from the new house building sector. Throughout the length and breadth of Ireland people are seeing real progress in terms of our infrastructure as the benefits are clearly there. Whether one lives in the greater Dublin area or further afield everybody is conscious, particularly those undertaking medium and long-distance journeys, of the major improvements in road and public transport. There is much more in the pipeline and as it comes through it is achieving major improvements.

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