Brian Lenihan Jnr (Dublin West, Fianna Fail)

I propose to take Questions Nos. 2 and 4 together.

In the period since the budget was presented to this House, the economic environment has become considerably more difficult. Many of our trading partners have entered recession and projections for demand in our key export markets have been revised downwards significantly. To put this into perspective, the IMF now expects economic activity in the world's advanced economies to contract next year, the first contraction for this group of countries in the post-war period. On the domestic front, the economic and fiscal data which have become available since the budget have been poor, confirming that the outlook for next year has deteriorated further.

The November Exchequer returns show that overall Government spending for 2008 is close to what was planned. However, the latest 2008 tax returns reflect the severity of the current economic slowdown which has accelerated considerably both at home and internationally in recent times. The gap between spending levels and tax receipts in 2008 has widened and as a result I now anticipate that the Exchequer will need to borrow approximately €13 billion in 2008.

In the budget my Department projected that the economy would contract by 1% in 2009. Forecasts produced by the ESRI and by the Central Bank at the time set out a similar economic assessment. Reflecting the unprecedented recent economic developments since then, by the end of November the consensus of market forecasters was for economic activity to decline in 2009 by approximately 3%.

At budget time, I identified that there were significant risks to the economic and fiscal forecasts for 2008 and for 2009. The further deterioration in tax receipts in 2008 as seen by the end of November Exchequer returns, the continued weakening of consumer and investor confidence, adverse currency movements, continued difficulty in the international financial markets and depressed economic conditions are all evidence of those risks materialising. All the indications are that economic activity in 2009 will contract by significantly more than the forecast in the recent budget with an overall contraction of perhaps somewhere in the region of 3% to 4%. The fall in the 2008 revenue take alone would push the 2009 general Government deficit up by approximately €1.5 billion to 7.25% of GDP. In addition, each 1% deterioration in economic activity in 2009 beyond the contraction of 1% already forecast would increase the general Government deficit by approximately 0.5%.

Upon receipt of the end of year fiscal data and the latest economic data, including the third quarter national income data, a revised economic and fiscal assessment will be prepared by my Department in early January and brought forward for Government consideration. This assessment will reflect the dramatically changed environment now being faced. We are living in a time of unprecedented economic difficulties and the changed circumstances that have occurred in a short period of time must be addressed.

In terms of Government action, I remind the Deputies that last summer, in response to the weakness in tax receipts, we took steps to address the growth in public expenditure. In autumn we decided to bring forward the budget in order to address the fiscal situation. In the budget various measures were adopted which were essential to safeguard the public finances as well as to underpin economic activity. We are continuing to invest approximately 5% of GNP in capital projects that will enhance the productive capacity of the economy. The Finance Bill has a number of pro-enterprise measures including various improvements to the research and development tax scheme.

Now, in the light of the further deterioration in the economic and budgetary position, the Government will continue to identify measures to ensure the sustainability of the public finances, while also focusing on areas that can expand the productive capacity of the economy. This will enable the economy to be suitably positioned to exploit the global recovery when it emerges either late in 2009 or, as is now more likely, well into 2010.

The strategy for addressing the economic difficulties will be based on a number of inter-related areas. First, the public finances must be restored to a sustainable position and a key milestone in this process is the restoration of the current budget to a balanced position as soon as possible. Given that a very high level of borrowing was already planned for 2009, the main focus must now be on the very significant amount of money the Government is spending on current services. In this regard the work of the special group on public service numbers and expenditure programmes will have a significant role to play.

Second, we will continue to prioritise our current level of spending on public investment, which at 5% of GNP, is among the highest levels of capital commitment in the EU. Third, we must ensure that Ireland is competitive to ensure that the economy is in a position to take advantage of the global recovery when it emerges. Wage levels in the public and private sector will be crucial to this task. Fourth, we will continue to invest in education and training to equip the labour force with the necessary skills. Fifth, we will continue to identify all possible measures to boost the productive capacity of the economy. Finally, as evidenced in our recent budget, the Government will continue to support the less well off through our welfare and income policies.

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