Brian Lenihan Jnr (Dublin West, Fianna Fail)

If all our difficulties related to the recent construction boom in Ireland, I would not be before the House this afternoon. We are the living witnesses to the most dramatic collapse in the world financial system since 1929. We are a small open economy with a huge exposure to international economic trends. Our confidence, our finances, our exports and our banks have been dented. The depreciation in the value of the currency of our nearest neighbour has compounded this adverse international picture.

Recent data show that the gross national product declined by 3% last year. A more substantial contraction of the order of 8% is in prospect this year. This is a serious decline in national living standards - the sharpest fall on record. Forecasts for 2010 are not as severe. However, we must place our performance in context. Economic activity is shrinking in almost all of our main trading partners. In the OECD area which covers most high-income countries, incomes will decline by 4.25% this year. The slowdown has been sharper in Ireland, reflecting the contraction of the property sector, and the openness of our economy.

Last October, forecast inflation for this year was 2.5%. Like many forecasts this prediction has seen radical revision. It is expected that consumer prices will fall by close to 4% this year. As consumers, we are accustomed to rising prices. However, prices of goods and services are now falling, moving back toward levels pertaining in other euro zone countries. This decline in prices mitigates the effects on real household incomes of falling nominal wages and higher taxes on incomes. With falling costs our economy is displaying remarkable agility. This will strengthen us in the euro zone. I am confident that sooner than many observers expect, we will position ourselves to take full advantage of a global upturn. This adjustment in our cost structure sows the seed for export-led economic recovery.

There are six steps we must take to restore and renew this economy. First, and most urgent, we must stabilise our public finances. Until we show that we can put our own house in order, we cannot expect those who have invested here and who might invest here in the future to have confidence in us.

Second, we must restore our damaged banking system to ensure credit flows to businesses and consumers. Credit is the life blood of the economy. Unless we take radical and bold action to resolve the crisis that has staunched the flow of credit, this economy will not recover.

Third, we must regain the competitiveness we have lost through over-reliance on domestic spending during the boom years. The future of our economy lies in exports. We must work harder to gain market share. We must drive down our costs and improve the quality of our products so that we are well placed to gain when the tide changes.

Fourth, we must protect the jobs we have and invest in retraining those who have lost jobs. Already this year, 80,000 additional people have gone on the live register. At the end of the last year, there were 2 million people employed in this economy but this is falling and we must take all possible and sensible measures to protect and support existing jobs.

Fifth, we must support and stimulate economic confidence as much as we can within the resources available. However, as I said earlier, stabilising our public finances is crucial to the recovery of confidence among investors, consumers and businesses.

Sixth, we must restore our reputation abroad. We have been badly damaged by the actions of some in our financial sector. We have been damaged by our rejection of the Lisbon treaty. We must show our EU partners that we, who have gained so much from the European Union, want to remain at its centre. We must show the world that our financial system is soundly based and governed by the highest standards of regulation. If we follow the six steps I have outlined we will be well on the road to economic renewal.

Fairness must be the cornerstone of all our efforts to achieve economic renewal. Everyone wants fairness but there is less agreement about what it means. For many, it means the next person should pay, but the reality is everyone must give according to their means. Those who have most must give most. However, before we ask anyone else to give, we in this House and in the Government must examine our own costs. Those of us in politics have been entrusted with a great privilege by the people. We must lead by example.

The Government has decided to introduce a number of additional changes to the remuneration of Deputies and Senators. There will be a 10% reduction in all expenses other than mileage rates where a 25% reduction has already taken place. Deputies will no longer receive long-service payments or increments. I know that Deputies do not enter this House as a career. It is an honour and vocation to be elected by the people, and all Deputies are equal. The arrangement whereby former Ministers are paid ministerial pensions while they are still Members of the Oireachtas will be discontinued. Oireachtas Members who are on paid leave of absence as teachers may no longer avail of the arrangement whereby they can keep the difference between their teachers' salary and the cost of employing a replacement. The allowances paid to Oireachtas committee chairs will be halved and the payments to whips and vice-chairs are to be abolished. The Oireachtas Commission has put forward its own proposals for a reduction in the number of committees and I am happy to leave that matter to the Houses. Some of these changes will require legislation which will be introduced shortly.

The Members of this Government reduced their salaries by 10% last October. Ministers of State made a similar reduction. The public service pension levy was applied to members of the Government and Ministers of State. As a result, Ministers have seen a reduction of one fifth in their incomes. I have asked the Review Body on Higher Remuneration in the Public Sector to undertake a fresh review of top level pay rates to take account of the changed budgetary and economic circumstances and the changed private sector pay environment and to benchmark rates against those of other EU countries of comparable scale. This review will be completed by July. I believe pay at leadership levels in the public sector should be more in line with pay in other countries rather than with top level private sector pay in this country which had become over-inflated in recent years and is now falling in any event. Yesterday, the Taoiseach announced that the number of Ministers of State will be reduced from 20 to 15.

In framing this budget, the Government has been guided by the principle that everyone should contribute according to their means. Tax increases are required and they will not be easy to accept but the measures I am announcing today are progressive. Those who can best afford it will pay most. For example, as a result of the changes proposed today, a person earning the minimum wage, which is approximately €17,500 per year, will be asked to pay €350 per annum or €7 per week, representing 2% of their wages. A person earning €50,000 per year will pay €1,500 or €29 per week, which is 4% of their income. A person earning €300,000 per year will pay €15,655 or €300 per week, or 9% of their income. Fairness requires that the real value of social welfare benefits should be protected as far as possible at this stage of the economic crisis. It is for the Government and this House to adjudicate on fairness, but we all have a responsibility to accept a proportionate share of the burden of adjustment needed in this economy.

STABILISING OUR PUBLIC FINANCES

The Financial Context

The pre-budget data published last week show a €5 billion widening from the budget deficit projected this January. A correction of this amount in a full year approximates to a €3.25 billion adjustment in the part of this year which remains. The Government recognises that part of this shortfall relates to the global economic cycle. It is reasonable to expect part of the shortfall to disappear as economic activity recovers here and abroad. However, part of the gap between spending and revenues derives from structural problems in the public finances. We must take firm actions to eliminate these problems within a reasonable period of time. Our approach is rooted in a determination to control our own destiny. We cannot control developments abroad, and we cannot control what others think of us, but we can take decisive actions to put this economy on the road to renewal and demonstrate that we have the ability to make the right choices for everyone in this country.

The problem is our expenditure base is too high and our revenue base is too low. If we fail, refuse or neglect to address this structural problem we will condemn this and future generations to the folly of excessive borrowing. Already, the share of tax revenues that goes to service the national debt has risen from 5% in 2007 to more than 11% this year. As we accumulate more and more public debt, this figure increases. This is dead money that should be used to improve vital public services.

Without this supplementary budget the general government deficit would have been 123⁄4% of GDP, reflecting the large gap needed to fund the difference between spending and revenue. In the prevailing economic circumstances, the natural preference would be to leave expenditure and taxation as they stand. This is not an option for the Government or this House because of the scale of the deterioration of the public finances. A difficult balance must be struck between the need to show a credible way forward on our structural problems and the need to protect our economy as far as we can this year. It is the considered view of the Government that a borrowing target of 103⁄4% strikes the correct balance.

To date this year, the Government has reduced public expenditure by €1.8 billion primarily through a reduction in the public service pay bill. Measures announced today will result in a further reduction of nearly €1.5 billion in gross public expenditure and additional revenue of €1.8 billion. The scope for additional expenditure reductions at this stage of the year is limited. Further immediate reductions in expenditure today would have necessitated additional pay cuts for public servants, reductions in the rates of payments for welfare recipients and the cancellation of all contractually uncommitted investment projects. It is important that Members of this House understand that in commenting on this budget.

The deterioration in tax revenues from €47.25 billion in 2007 to almost €41 billion in 2008 to an envisaged €34.50 billion this year is a far greater decline than the decline in the economy. This illustrates that in recent years our tax system became over reliant on fast growing, construction heavy economic activity. As we move to the next stage of our economic development, we must restructure our tax system to suit an export-led economy growing at a more sustainable pace.

Multi-Annual Plan

Last January, the Government proposed to the European Commission that we could fulfil our obligations to secure stability and growth over a five year period. I am glad to report to this House that following intensive discussions with the European Commission, agreement has been reached with the Commission that five years is the appropriate timeframe for addressing our structural problems. I want to express my gratitude to Commissioner Almunia and my colleagues among the eurozone member states who have been supportive of our efforts to stabilise the public finances.

To bring sustainability to the public finances, the Government is today announcing the necessary multi-annual consolidation plan. In 2010 and 2011, the plan envisages greater reductions in expenditure than increases in revenue. I want to stress that the expenditure figures are the minimum that must be achieved and the figures mentioned for tax are the very maximum that can be imposed.

Spending reductions that the Government has decided on for 2009 to 2011 will have a cumulative full year effect on current spending of €2.7 billion in 2010 and €4.2 billion in 2011. Reductions in capital spending will accumulate to €1.3 billion in 2010 and €2.4 billion by 2012. The policy decisions underlying these reductions are already in train. They entail further reductions in pay costs, programmes and numbers. There is no provision for extra social spending, other than that dictated by demography and unemployment. There will be a cap on capital spending and efficiencies will be found throughout the public sector. Savings on day-to-day spending will be made through more targeted welfare provision and further reductions in public service costs and numbers and the wider application of charges. Sharper targeting of programme spending and more efficient use of resources across the board will be required. Difficult decisions in all areas of policy are in prospect. In 2010, we will seek up to an additional €1.75 billion from taxation. In 2011, the target will be to raise up to an additional €1.5 billion.

Options to raise this may include the taxation of child benefit, the introduction of a carbon tax, a form of property tax and significant further base broadening through the elimination of unnecessary reliefs and a review of all areas of tax exempt incomes. Over the later years of the five year plan, further adjustments will be required. The scale and nature of these measures will depend to a great extent on the strength of the economic cycle. If growth is better than forecast, less will need to be done at that stage.

Public Spending

Public expenditure can be divided into four parts. The public sector payroll at €20 billion and welfare spending at €21 billion account for two thirds of all expenditure in the State. Non-pay programmes cost €15 billion and public investment will amount to €7.3 billion this year.

Public Sector Payroll

The Government has decided that a permanent reduction in the cost of the public payroll is an essential element of this plan. In February 2009, we introduced the public sector pension levy which resulted in an average deduction of 7.5% from the salaries of public servants delivering savings of €1.4 billion this year. This is a considerable contribution by public servants to the unavoidable economic adjustment. It is also necessary to control public sector numbers which have grown by 11% in the past five years alone. A key part of such a policy is the ban on recruitment and promotion, with certain exceptions, announced by me on 27 March last. Today, I am announcing a scheme whereby, in those areas of the public service where permanent reductions need to be brought about, staff aged 50 or over may retire from the public service without actuarial reduction of pension entitlements they have accrued to date. Ten per cent of the relevant lump sum will be payable immediately with the balance paid later at the normal retirement age of 60 or 65 without actuarial reduction and subject to current tax law provisions. This scheme will be open to applications from 1 May and will be subject to local management arrangements to ensure the scheme operates in an orderly manner. Those leaving under the scheme will not be replaced except in specific cases or circumstances sanctioned by my Department. The continued availability of the scheme will be reviewed in the budget for next year. The Government sees no scope for introducing other, more generous early retirement schemes in the present budgetary circumstances.

The Commission on Taxation is examining various aspects of pension tax treatment. including the treatment of lump sums and I expect to be dealing with its recommendations in the 2010 budget next December.

Social Welfare Spending

Over the past decade, we have been able to provide very significant increases in welfare payments. For example, the payment of child benefit has increased from less than €44 to €166 per month. The State contributory pension has gone from €113 to more than €230 per week. The weekly rate of long-term job seeker's allowance was raised from €93 to €204. These payments compare very well internationally, particularly with payments in the United Kingdom.

It was right that when times were good, we increased payments to those who are vulnerable. Now that we are in recession, we must look at how we can use the €21 billion welfare budget to afford maximum protection to those in need. The Government has examined very carefully how we might make savings in welfare. In the budget last October, we increased payments by around 3%. Notwithstanding the fall in consumer prices, which we expect to be close to 4% this year, we have decided not to reduce welfare rates in this supplementary budget. However, it may be necessary to review rates of payments in future years if reductions in the cost of living materialise.

However, we do need to make some savings in order to absorb the additional expenditure of over €2.8 billion due to the sharp rise in unemployment since December. For this reason the Government is not in a position to pay the December bonus which it has been able to deliver in previous years. We are also making limited changes in eligibility to certain benefits. Specifically, the job seeker's allowance for the under 20s will be halved to €100 a week so as to incentivise the young unemployed to participate in training programmes.

See this speech in context