Willie O'Dea (Limerick East, Fianna Fail)

The global economy is facing its most grim and uncertain outlook for a long time. As a direct result, Ireland is now confronted with a wide range of unprecedented difficulties on a budgetary and economic front.

The Irish economy has several distinctive and unique features. It is an exceptionally open economy. We do not have a sufficiently large domestic market to consume the goods and services we produce and are, therefore, heavily dependant on foreign trade. Consequently, the economic conditions of those countries to whom Ireland sells its goods and services is central to the health of the Irish economy. The United Kingdom and the United States, which represent the destination markets for approximately 80% of our exports, will remain mired in recession this year. This has consequences for the Irish economy which are all too predictable.

Unlike our EU trading partners, we conduct an unusually large amount of our business with the United Kingdom and the United States, both of which trade in a currency different to ours. This explains why the dramatic falls in the value of the dollar and sterling against the euro have had disastrous consequences for Ireland's competitiveness. A number of studies, the most recent by the National Economic and Social Council, have concluded that currency changes between the euro on one hand and sterling and the dollar on the other are the direct cause of 70% of Ireland's falling competitiveness.

Countries have reacted differently to the economic typhoon sweeping the world. Some have concentrated exclusively on fixing their public finances while others have thrown caution to the wind and indulged in an orgy of borrowing and spending to stimulate their moribund economies. Ireland has adopted two approaches, namely, we are spending massively in an effort to stimulate our economy and invest for the future. This year, we will borrow more than 5% of our GDP to invest in capital projects, which is enormous when compared with what other countries are doing in this regard. It is proportionately the largest capital programme in the European Union. If the Government were not borrowing this money the Exchequer figures would look much better and would move much closer to the Maastricht guidelines of 3% of GDP.

The Government has recently taken steps to refine this massive spending so as to reorientate it towards more labour-intensive activities. In addition, we have invested enormously in education, retraining, upskilling and so on, as suggested here earlier. Our capital spending is focused on specific projects. Unlike other countries, we have not tried to revive our economy by an unfocused stimulus such as a general tax cut. From our point of view this makes perfect sense. Our economy is fundamentally different from that of the United Kingdom and the United States. It is reasonable to expect that in the US higher spending and lower taxes will benefit the domestic economy but the calculation is totally different here. We tried this fiscal stimulus approach previously. It constituted the Government's response to the oil shock of the late 1970s. The increased spending power given to the Irish consumer at that time was largely dissipated on increased imports, leaving us in an even worse position. There is absolutely no evidence to suggest that the same would not happen if this strategy were repeated today. In other words, that cure, instead of ameliorating the disease, would make it infinitely worse.

In the United Kingdom, where obviously the risk of such an outcome is much less, most of the respected economic commentary suggests that the significant risk that Prime Minster Gordon Brown is taking with the country's finances will inevitably end in disaster.

The second part of our strategy is to take firm control of our burgeoning budget deficit. This year, in the absence of action by the Government, it is estimated we would have to borrow €55 million per day.

The process of bringing this expenditure back in line with revenue will be long, painful and inevitably will involve a reduction in living standards. However, it is not a sideshow or an afterthought; it is vital to restore confidence in our economy. In a small open economy such as ours, confidence, credibility and sustainability are vital factors in both boosting domestic confidence and attracting foreign investment. The imperative now is to rebuild confidence in the economy both at home and abroad. The only way to do that is to be seen to be making a determined effort to put our public finances back in order by bringing expenditure in line with revenue. This applies especially to current public expenditure. Borrowing to run this country from day to day is not sustainable and it means that the interest to be paid will consume more and more taxation that could have been spent on paying for services.

The approach taken in the late 1980s focused on restoring stability to the public finances, increasing business and consumer confidence and restoring economic growth. It more than outweighed any direct impact on the economy from spending cuts. There is no reason to believe that this cannot and will not happen again. The very fact of stability being restored to the public finances increases business and consumer confidence and thus helps to restore economic growth.

Normally cutting expenditure slows growth because it takes money out of the economy. In the late 1980s, however, the opposite happened. While we are now in a very difficult international economic climate, the Government has taken, continues to take and will in the future take difficult decisions which will help lay the foundation for our future growth. We must not lose sight of the fact that we have strengths. We have a very low level of public debt compared to most of our trading partners. Our level of employment is at its highest in Ireland's history at some 2 million, 1 million more than in the late 1980s. Ireland is still a high income country by international standards. We have spent massively on infrastructural projects together with science, technology and education.

The difficulties we confront are great, but they can be overcome by taking the decisive action now to place this country in the position where it can avail of the inevitable improvement that will occur in the international economic environment.

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