Brian Lenihan Jnr (Dublin West, Fianna Fail)

We find ourselves in one of the most difficult and uncertain times in living memory. Turmoil in the financial markets and steep increases in commodity prices have put enormous pressures on economies throughout the world. Here at home we face the most challenging fiscal and economic position in a generation.

This budget sets out a plan to deal with this most unfavourable set of circumstances. The aim is to restore order and stability in the public finances, to increase productivity and competitiveness and to protect those who are most vulnerable in our society.

This budget seeks to secure the real gains we have made in the last 15 years. These gains have been substantial: 2 million at work, real improvements in living standards, a more generous welfare system and the biggest public investment programme in the history of the State. All these advances were made in the context of sound public finances and record levels of economic growth, but the economic context has changed very dramatically and with great rapidity. We are confronted with severe budgetary pressures and negative economic growth. We face difficult choices. In making those choices we will be guided by the principles of fairness, sustainability and affordability. By the decision to bring the budget forward by two months, the Government has seized the initiative and provided political leadership in this time of changed economic realities.

Today I am setting out targets for the next three years. In that timeframe, we must take the necessary steps to bring order to the public finances.

Some 50 years ago, Seán Lemass set his generation the task of consolidating the economic foundations of our political independence. Our economic achievements, particularly during the past 20 years, have fulfilled his vision. However, the historical task facing us today is to consolidate and build on that economic success. We will do this through sustainable, progressive and balanced policies that will create a fairer, more productive and competitive Ireland.

CHANGED ECONOMIC REALITIES

In his Budget Statement last December, my predecessor — now Taoiseach — referred to the significant uncertainty in the international economic environment as well as the slowdown in our construction industry. Nobody foresaw the speed with which the global and the domestic downturn would gather pace. In the past few months, the world financial system has been turned upside down. Household names in global finance have been rescued by governments and blue chip companies have either failed or been subsumed into other entities.

A fortnight ago, when the stability of our own banking sector came under threat, the Government took bold and decisive action. On the advice of the Central Bank and the Financial Regulator, we put in place a guarantee arrangement to safeguard the financial system in Ireland. We did so to protect our economy, as well as those who work in it, and we are grateful for the support of the House in that endeavour.

As a small open economy, we are especially vulnerable to economic shocks beyond our shores. The international credit crisis has compounded and deepened the downturn in the construction sector and led to a fall off in consumer confidence. The rapidity and severity of this downturn has taken even the most pessimistic of commentators by surprise. The result is a sharp rise in unemployment and a steep decline in revenue, with businesses experiencing the kind of economic difficulties we have not seen in this country for over 20 years, although we are now in a better position to address those difficulties.

The most recent data show that economic activity contracted in the first two quarters of this year. My Department expects that GNP will decline by over 1.5% this year, the first decline since the early 1980s. Throughout the world, economic forecasts have been revised downwards. The prospects in our main trading partners remain poor. In this context the forecast of my Department is that GNP will contract next year by 1%, with GDP contracting by about0.75%; unemployment will continue to rise, averaging 7.3% for the year as a whole; and inflation will ease to 2.5% on average for the year.

We must remind ourselves that, even in this global downturn, Ireland continues to attract a disproportionate amount of all foreign direct investment into the EU. Scarcely a week goes by without an announcement of new investment in cutting-edge companies and new high-value jobs for our graduates. IDA Ireland is optimistic regarding the prospects in the year ahead. The Government is determined to retain and enhance Ireland's reputation as a pro-enterprise economy and as an attractive location for foreign direct investment. The most important action we can take is to stabilise our public finances.

ORDER AND STABILITY IN PUBLIC FINANCES

Fiscal responsibility has been the cornerstone of our economic success. Fiscal responsibility has ensured a modest national debt burden, a strengthened ability to deal with the financial and economic crisis now shaking the world economy and a credible tax regime which incentivises work and investment.

While the strength of the economy in the past decade has given us some room for manoeuvre, we cannot put our reputation for fiscal responsibility in jeopardy. We must take the right decisions now to put the budgetary position on a path to stability in the interests of everybody who lives and works in this country. A soft option of ignoring the budgetary challenge might prove popular in the short term. This soft option would have grave consequences for the future of the country. It would risk all the economic and social advances we have secured in recent years.

In framing this budget, the Government faced a deficit of the order of approximately 8% of GDP on the general Government balance unless decisive action was taken. As the White Paper on Receipts and Expenditure shows, we have, as a Government, reprioritised our spending focus. The opening position this afternoon is a reduction in the deficit to 7% of GDP. This is a significant adjustment. Our approach has been to reduce public expenditure as much as possible on the current side and as much as is sensible on the capital side.

The changes I am announcing in this budget build on those decisions. This budget will adjust the incidence and focus of taxation to those better able to contribute. It will also provide a social welfare package of €515 million. As a result of these budgetary adjustments, the deficit will be approximately 6.5% of GDP in 2009. This is the maximum reduction that we can achieve in 2009. Our intention is to reduce it further.

Our spending will be concentrated on our schools, on our health services and on the protection of the elderly and the most vulnerable. We will continue to invest in our public services but, in a time of scarcer resources, the value for money principle becomes all the more imperative.

A substantial increase in borrowing is unavoidable if we are to minimise the impact of the tighter fiscal position on the economy. Accordingly, the 2009 budgetary targets are as follows: an increase in gross voted spending of 1.8%, a current budget deficit of just over €4.7 billion, a capital budget deficit of just under €8.7 billion, a general Government deficit of just over €12 billion or 6.5% of GDP and a debt to GDP ratio of 43%.

It is my intention to secure a progressive reduction in the deficit as a percentage of GDP in 2010 and 2011. The time for corrective action is now. By moving to restore stability, we will ensure the economy stands ready to benefit from the next global upturn. We are a small nation facing a major challenge in these uncertain times. We must all pull together if we are to return to more prosperous times.

In July the Government announced that Ministers and other senior public servants would forego pending pay increases recommended by the Review Body on Higher Remuneration. I wish to advise the House that members of the Government and Ministers of State will surrender 10% of their current total pay. Officers at Secretary General level in Government Departments have volunteered to make a corresponding surrender in respect of their pay. Other public servants in leadership and senior positions may wish to consider whether it is appropriate for them to make a similar move in current circumstances.

The Government has also decided to introduce an income levy at the rate of 1% on all incomes up to €1,925 per week or just over €100,000 per annum and at the rate of 2% on the balance of all income above that level. We realise the solidarity it demands of all taxpayers. However, there is too much at stake and we all have too much to lose by not taking action now. The levy will allow all income earners to contribute in a proportionate manner to the restoration of order and stability to the public finances. This will enable Ireland to return as soon as possible to a natural level of economic growth. The levy will be kept under review in the light of economic conditions.

I am conducting a review of the National Pension Reserve Fund in the context of recent economic and fiscal developments. It is my intention to complete this review before the end of the year. Any changes requiring legislation will be brought forward in due course.

CURRENT GOVERNMENT SPENDING

General Policy

In the past ten years there has been a big increase in the public services financed by taxation. Day-to-day expenditure rose by 200% between 1998 and 2008. Spending on health has risen by 293%. Education spending has increased by 174% and that on social welfare by 200%. Successive Ministers ensured the public received higher quality and more extensive public services. However, public spending can only increase in line with available resources.

We must continue on a path of bringing spending into line with resources. There is no option. However, in so doing, the Government is determined to safeguard key public services, protect the vulnerable, refocus spending to enhance our productive capacity, regain export competitiveness, reskill our labour force, retain the substantial gains already made and continue our work in building a fairer Ireland. This means doing more with existing resources, paring down administration to focus squarely on delivery of services to the public and reprioritising our spending goals.

That is why my predecessor announced an efficiency review of all public service spending in last year's budget. In July of this year, I implemented the findings of that initiative and other specific measures agreed by Government with the intention of achieving overall savings of €440 million this year and €1 billion in 2009. This is a first step towards addressing the emerging difficult fiscal position. These savings included a 3% cut in the public service payroll, a halving of expenditure on areas like advertising, public relations and consultancy and major savings from procurement reform.

This initiative was just the beginning of the process but it sent a strong signal of our firm intention to tackle the emerging fiscal difficulties.

I am pleased to report that those savings have been achieved and that the payroll reduction intended to deliver €190 million will in fact yield savings of €260 million. The savings achieved have already been used to relieve pressures in areas such as health, where additional provision had to be set aside to meet the costs of a new consultants' contract and education, where the full year salary costs of about two thousand extra teachers and special needs assistants taken on this year had to be provided.

Despite the challenging fiscal context, the Government will make significant allocations to social welfare, education and health. The Government has agreed that gross current spending in 2009 will grow by no more than 3.6%. Within this overall figure, spending on social welfare will grow by 8.4% to €19.6 billion; education will see an increase of 2.7% to €8.7 billion; and spending on health will increase by 2.1% to €15.8 billion.

To accommodate these increases, gross current spending in other areas will require substantial reductions. The individual allocations for each Vote for current spending are set out in the budget documentation published today, together with the main policy changes they require.

Welfare/Protecting the Vulnerable

Social Welfare Rate Increases

We are determined to protect the most vulnerable in our society and we will redirect resources to that end.

Pensions

I am happy to announce that the full personal rate of the State pension will be increased by €7 per week for all pensioners. This will bring the State contributory pension to €230.30 per week and the State non-contributory pension to €219 per week.

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