Brian Lenihan Jnr (Dublin West, Fianna Fail)

The Government has had its discussions on the matter and has identified clearly the need to make reductions in our payroll costs. It also shares a determination that all sectors of our country should contribute in accordance with their ability to so do and conversely, that the most vulnerable are insulated from the worst effects of this recession. The importance and value of agreement at a time when many other countries are experiencing industrial unrest and social unrest should not be underestimated. It sends out a powerful signal to international investors and to the markets that we are capable of managing our way out of the most serious economic downturn in 80 years.

However, time is of the essence. The latest figures confirm that economic activity has gone into reverse, with gross domestic product, GDP, declining by an estimated 1.4% last year, which constitutes the first decline in a quarter of a century. This year, GDP is projected to contract by 4%, which would be the sharpest decline in activity ever recorded. Looking towards next year, a further albeit more modest reduction in activity is forecast. In other words, successive years of contracting activity are in prospect, something which has never happened before.

Ireland faces an extremely difficult set of economic circumstances and it is clear we are in for a difficult number of years. The reversal of our economic fortunes stems, in the first instance, from the correction in the new house building sector. This year, completions of new housing will amount to approximately 20,000 units, compared with approximately 90,000 units completed in 2006. Because of its importance to the economy, lower levels of activity in this sector exert a major drag on overall activity and the effects of the housing market correction now have spread to other sectors of the economy. However, there is no point in believing this is the sole cause of our current difficulties.

Internationally, an economic slowdown has been under way for some time, reflecting the impact of financial market turmoil which first surfaced following the collapse of the market for sub-prime mortgages in the United States. The effect of this has been to restrict access to credit and to weigh on confidence in our main export markets. The global financial crisis intensified dramatically last autumn, reinforcing the global economic downturn. As a result, the outlook for the global economy has deteriorated significantly in the space of just a few months and international forecasting agencies are revising downwards their projections for world growth. The European Commission published revised forecasts last week showing that growth in the United Kingdom, the United States and the euro area will decline significantly this year. In fact, this will be the first year since 1945 in which activity in the world's advanced economies, as a group, will decline. This is not something which is unique to this country. While we have unique and distinctive problems, they form part of a wider international pattern, which we must recognise and learn from. We are in a truly global recession, the scale of which has not been seen for a very long time.

From our perspective, the deterioration in the international economic environment will affect our export performance, which is the life blood of a small open economy such as ours. Exchange rate developments, especially recent movements in the euro-sterling rate, have been most unhelpful. Most exposed are small and medium-sized firms, whose competitiveness position has been adversely affected by the weakness of sterling. Given our land border with the sterling area, movements in the sterling rate have elevated cross-Border shopping to levels not seen for a long time, with adverse implications for our Exchequer position. Contrary to some of the suggestions made in the House yesterday, changes in the VAT regime in both jurisdictions have had little, if any, impact on cross-Border shopping decisions.

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