Brian Lenihan Jnr (Dublin West, Fianna Fail)

Never before has so much information and advice and so many expert reports been published in the run-up to a budget. The publication of the McCarthy report represented a dramatic new departure in the organisation of our public finances because detailed papers on the Estimates for expenditure and the options facing the Government in this regard were published well in advance of budget day. Therefore, a major reform of our financial procedures has taken place this year.

This detailed analysis of our economic position, together with the pre-budget outlook published by my Department last week, has already resulted in an informed, rational debate outside this House about the options facing the country. I hope a similarly constructive debate will take place here this evening.

I welcome the opportunity to set out the current and prospective economic and budgetary positions. I look forward to hearing the views of the parties opposite on what needs to be done to put the public finances on the road to recovery. I am glad both the Fine Gael and Labour parties agree an adjustment of €4 billion to the public finances is necessary for 2010. I hope we can reach further agreement on how that adjustment should be secured. What is at stake, after all, is the economic future and well-being of the country.

Before setting out the Government's broad thinking on the public finances, I will outline the short to medium-term prospects. As everyone in this House will be aware, the past year and a half has seen an unprecedented rate of economic decline. Gross domestic product will decline this year by approximately 7.5%. Declining levels of activity have taken a heavy toll in the labour market. This year, the number in employment will fall by about 165,000, with the construction, retail and manufacturing sectors the worst affected. The unemployment level has risen significantly, standing now at 12.5%. This is unacceptably high. All the Government's efforts are aimed at getting people back to work. A reasonable degree of agreement has emerged on the short-term outlook. The current consensus forecast is for a GDP decline of 1.1% next year. My Department anticipates that growth will return during 2010, but that for the year as a whole the economy will contract by approximately 1.5%. That represents an improved position since the supplementary budget last April. The world economy has turned a corner. It is fair to say that there is light at the end of the tunnel.

While unemployment is anticipated to rise into next year, recent labour market developments suggest that the rate of increase has slowed. The creation and protection of jobs remains the overriding objective of Government policy. All aspects of active labour market policies are required to ensure that work rather than unemployment remains the norm. There are three main pillars to the Government's economic strategy and these were further highlighted in the pre-budget outlook last week. We are ensuring that we have a properly functioning banking system, capable of meeting the needs of savers and borrowers. We are taking steps to ensure that our public finances are stabilised and put on a longer-term sustainable path. We are helping to regain our international competitiveness to be in a position to exploit the global economic recovery and to generate economic growth. All three of those problems must be addressed, as their resolution is complementary. If they are addressed we are on the road to addressing the social problems which unemployment causes and putting the economy on the road to recovery.

A significant amount of time has been spent both within this House and elsewhere discussing what needs to be done to restore the banking system. Whatever divergence of opinion there is between us, everyone agrees that a fully operational banking system is a cornerstone of a modern economy. Restoring confidence and repairing this system is a fundamental requirement for economic recovery. That is why the Government, in the same way as Governments and central banks across the globe, has intervened to provide substantial support to the financial sector and the broad economy in the current crisis. The Government's priority has been to ensure we have a banking system that can serve the best interests of the economy. Much work remains to be done, but I firmly believe we are well on the way to a resolution of this most difficult crisis in our financial institutions.

The deterioration in the economy has exposed weaknesses in our public finances. We are currently in the untenable position where our tax revenues are now back at 2003 levels while current spending has increased by 70% since then. Borrowing for day-to-day spending has escalated to unsustainable levels and an Exchequer deficit of €26 billion is projected for this year. To put that enormous figure into perspective, we must borrow €500 million each week to fund it. Another way of looking at this annual deficit is to consider it in terms of our national debt. At end-2008, our national debt stood at approximately €50 billion, next year it is now likely to be approximately €100 billion and without action would continue to spiral out of control.

All of us in this House who subscribe to the basic tenets of responsible economic management will agree this cannot continue. Debt service costs are rising rapidly and are absorbing a large and growing share of tax revenue. We must halt that phenomenon and ensure that it does not become ingrained and inhibit the Government's ability, and that of successive Governments, to provide essential public services. It is imperative to inspire confidence both internationally and domestically that the deterioration in the public finances is being arrested.

It is vital to restore balance to Government expenditure and ensure that taxation is at more sustainable levels. As a number of commentators have remarked, the improvement in the economy in the medium term will not be sufficient to close the budgetary gap. There is a significant underlying deficit that must be tackled in a targeted manner. The report of the special group on public service numbers and expenditure programmes and the report of the Commission on Taxation will form the basis for future tax and spending policy.

That said, our immediate priority is to stabilise the deficit at this year's level, which on a general Government basis is a deficit of 12% of GDP. To do so requires an adjustment of €4 billion. Without such savings the deficit would be approximately 14% of GDP. Between now and budget day, the Government will decide how the necessary savings can be secured.

Turning to where the adjustments should come from, as I said at the outset, I welcome the views of this House, but it is important to bear in mind some key facts. Taking account of the significant increases that have been made to personal taxation this year, the marginal tax rate now stands at 52% for PAYE earners and is higher for the self-employed. We know from our experience in the 1980s that we cannot tax our way out of a recession. However, who funds the income tax yield tells its own story. In overall terms 4% of income earners contribute approximately half of the income tax yield. For 2010, it is estimated that approximately half of income earners will pay no income tax. While they may have some exposure to the income levy, having 50% of earners out of the tax net is not viable if we want to fund the range of services we expect Government to provide.

In terms of the other significant taxes - VAT and excise duties - our rates are already high by international standards. There is a significant risk in terms of cross-Border factors of further deterioration in the receipts if substantial increases are imposed in those forms of taxation. The rate of corporation tax must be seen in terms of international markets and our ongoing ability to foster enterprise and stimulate job creation. Consequently, given that those four tax areas represent the vast bulk of overall tax revenue, there is limited capacity to raise additional revenue in the forthcoming budget. Consequently, I have already indicated that the immediate focus will have to be on expenditure reduction measures.

In terms of expenditure, the overall amount of gross current voted expenditure stands at approximately €56 billion in 2009. Roughly one third of spending is on social welfare related matters, one third on programme expenditure, including the capital programme, and the final third on public sector pay and pensions. Therefore, the bulk of the adjustment, which will have to be on day-to-day spending, will have to consider all spending lines.

Of significance in regard to considering such matters is that we are currently in a period of falling prices. While a prolonged period of price decline would bring its own problems, the current short-term decline in consumer prices has the effect of supporting real income levels. In that light, there is some scope to adjust public spending while protecting the living standards of those most in need. The Government is determined to achieve the necessary savings and in this evening's debate can help inform how the savings will be secured, ahead of next month's budget.

The Government's approach to correcting the public finances has been acknowledged by the European Commission. In its excessive deficit report, which was published last week, the Commission acknowledged the balanced approach taken and the measures which have been implemented towards reducing the deficit. The Commission has also proposed a one-year extension to 2014 of the deadline to bring our deficit below the 3% of GDP threshold. That proposed extension, which will be considered by the Council of Ministers in early December, is to be welcomed. However, an additional year to correct, while easing somewhat the adjustments required for 2011 and subsequent years, does not change the focus of our need to stabilise our very large deficit now. If anything, it reinforces the need to continue to take effective action in 2010.

In addition to restoring the banking system to health and stability and restoring stability to the public finances, the Government has focused on the needs of the wider economy and in particular the promotion of favourable employment conditions. The pre-budget outlook reiterates the requirement that we reposition our economy on a more sustainable, export-led growth path through regaining our international competitiveness.

Ireland's cost competitiveness has deteriorated in recent years. As a number of agencies such as the National Competitiveness Council have outlined, elements of our costs are higher than that among many of our competitors. While that has not been helped by some factors beyond our control, such as the appreciation in the value of the euro in recent months, there are measures we can take through domestic policy action to address this issue.

In recent years our labour costs moved out of line with productivity developments. As we refocus our economy on export-led growth, a focus on these crucial input costs will become more important. Reducing labour costs through some combination of nominal pay reductions and enhanced productivity is an essential part of the strategy to improve competitiveness. The Government has already taken measures to reduce the public service pay bill through the pension levy and initiatives to reduce the headcount. I acknowledge the contribution made by public servants in that regard. The Government has indicated that a further €1.3 billion in savings from the public service pay bill will be required next year and there is engagement with the public service unions on the manner in which that will be done.

The public sector has already made an important contribution but more is required. In the private sector jobs are being lost, working hours reduced and there is some evidence of downward adjustment in earnings. Engagement with the social partners is ongoing and important but Government must ultimately balance all the challenges and issues and present the best way forward through the budget.

We do have strengths. For example, our labour force continues to be highly skilled and flexible. We have made significant investment in education at all levels to ensure we have the skills demanded by our knowledge-intensive economy. We have greatly enhanced our infrastructure. Pursuing a responsible, fast and balanced approach to tackling the challenges is what we face and it is at the heart of the Government's approach.

We are facing tough challenges. To succeed in dealing with them we must continue to pursue appropriate policies to position the economy to benefit from the global recovery. The Government is acutely aware that businesses, families and almost everyone in our society are affected by the deterioration in economic conditions. In the forthcoming budget we will bring forward policies that will ensure that the burden of adjustment is spread as evenly and as fairly as possible.

A number of challenges face us, and this Government has and will continue to address them all. We have taken significant action to curbing expenditure and raising additional tax revenue since July 2008 to address the crisis in our public finances. Our immediate priority is to stabilise the deficit and this we will do in the forthcoming budget. In this regard our actions have been commended by various outside commentators, internal commentators and the international market reactions have changed in our favour.

Bank lending must be facilitated. Our actions in regard to the very difficult banking position-----

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