Dáil debates

Wednesday, 27 October 2010

Macro-Economic and Fiscal Outlook: Statements

 

12:00 pm

Photo of Eamon GilmoreEamon Gilmore (Dún Laoghaire, Labour)

Yesterday, the Minister for Finance told the Irish people that the Government has decided to make a €15 billion adjustment in the budget over the next four years, double the amount that was previously expected. Where does this €15 billion come from? When I asked the Taoiseach earlier today for the detail of the information and projections on which that figure must be based, he either would not or could not give me the information. How, therefore, are we to rely on the figure of €15 billion? How credible is it when it comes from the same source that has already told us we had the cheapest bank bailout in the world, that we had seen the last of the really difficult budgets, that the worst was over, that we needed only one more push and that we had turned the corner? Some corner.

What we still do not know is what is the basis for this €15 billion figure. According to the Government, the Opposition has been shown the books. Two meetings lasting a total of three hours and now the Opposition is supposed to know everything. After three hours in the Department of Finance, the Opposition parties are expected to have the same level of knowledge and information about the public finances as the Government has after 13 years in office.

Let me put on the record what we were actually given. The kernel of the briefing last week was three sheets of paper, with a table on each, containing nine rows of figures. The first table shows what would happen if one went ahead with the €7.5 billion plan, and what would happen to the deficit and GDP with a €15 billion plan, assuming a €4.5 billion adjustment in 2011. That is it and no more - GDP figures in ranges. On another page, we were given the same table, this time assuming a €7 billion adjustment in 2011. The GDP figure for 2011 in this table is lower, as one might expect, but the figure for 2012 is higher. What explains this particular form of "bounce back economics"? We do not know because the table contains no data on consumption, investment, exports, imports, inflation, wage growth, interest rates, exchange rates or growth in the US, European or world economies.

When one asks how it could be the case that a massive hit on the economy in 2011 - we are told the reductions in spending are to be front-loaded - is going to produce higher growth in 2012, the answer is one word, "confidence". Not a worked out spreadsheet showing how different levels of interest rates will affect investment or consumer spending, just "confidence", or what Professor Krugman calls "the confidence fairy". While five-year olds in Ireland are understandably prepared to believe in the tooth fairy, it is unwise for a country or an economy to put its faith in the confidence fairy.

Despite all the damage done to the economy, Fianna Fáil still insists on playing political games. The Fianna Fáil spin machine is putting it about that it has opened up the books to the Opposition and now it is up to the Opposition to produce the answer, based on a few so-called scenarios about how the deficit might possibly be reduced, depending on two possible sets of adjustments and two possible sets of growth forecasts - possible, not probable or definitive. We have not yet been given the official growth forecast for next year because, we are told, the Government is still negotiating it with the European Commission. We have not yet been given the official forecast for the three years after that, and we have not yet been given the figure for cuts in next year's budget. Nor have we been given what the Department's estimate is of the additional impact of extra budget measures on jobs and growth. We have simply been told to believe in the confidence fairy.

We do not have a template for the four-year plan. We do not have a figure from Government on what Croke Park will save next year. We do not have an answer on how the bank bailout will be treated in the national accounts and how that will affect the deficit target. If one asks for projections for 2011, one will be told that they do not have the October or November Exchequer returns.

The horrifying thought is that this might actually be the kind of information that has been used to inform Cabinet decision-making over the past few years. Either Fianna Fáil is genuinely uncertain about these key figures, which would be extraordinary after more than 13 years in office, or it knows them and is simply not willing to tell the Opposition or the public because it does not suit its carefully worked out political choreography.

After everything that has happened up to now, one would have to be naïve not to be sceptical about any figures that come from this Government. What we do know is that after Black Thursday, there has been an enormous bill to pay for the banks, of at least €45 billion. We know there has been a catastrophic loss of confidence in Ireland abroad and that the cost of Government borrowing has shot up to the point where the Government feels unable to continue borrowing money. We know there is to be a four-year plan and a budget that are supposed to restore order to the public finances and confidence in the country. However, beyond that the Government has provided very few specifics. There were no specifics at all in the Taoiseach's speech today. The Opposition parties are, justifiably, often challenged over specifics. It is astonishing that, in the opening of today's debate, the Taoiseach did not set out a single specific measure under consideration by the Government. Today's debate should be about solutions. The economic crisis we now face is the worst in the history of the State. Disastrous mismanagement of the economy and the catastrophic error of the blanket bank guarantee have brought the country to the edge of bankruptcy. The reality is that we face a fight to hold on to our economic freedom and the right to make decisions about our own future if the Government cannot convince investors to lend money to Ireland at reasonable rates again.

This crisis is not about economic jargon, or graphs or numbers; it is a human crisis. It is a crisis for the hundreds of thousands who have no work, for families at risk of losing their homes, for people who have lost their businesses. If we are going to solve this problem, we need clarity on numbers. However, we also need clarity on objectives and a serious, sustained approach to achieving solutions.

What I and the Labour Party have been saying throughout this crisis is that there must be more than one objective. We need to lower the deficit to 3% by 2014, but not just for the sake of it. It is a means to several ends. Our objectives must be to get people back to work, re-start economic growth, increase exports and restore our reputation abroad and confidence at home so people will invest and spend in Ireland.

We need to come up with a plan not so much to satisfy our partners in Europe, but to convince international bond markets to invest in Ireland while we go about the difficult work of restoring our public finances. We must combine deficit reduction with a strategy to re-start economic growth. We must do all of this in a way that is fair.

Ever since the Government made its agreement with our partners in Europe to reach the 3% target by 2014, the Labour Party has supported it in that objective. We have done so because we believe it is extremely important that Ireland send a united signal to the wider world that we are serious about dealing with our deficit. People who invest in this country do not necessarily follow our politics or have any understanding of what a change in Government might mean. The Labour Party wants to make it clear that a change in Government in Ireland will not result in the goal of deficit reduction being abandoned. I regret that Fianna Fáil has taken so long to grudgingly accept that this is the case. Had it done so earlier, it could have made more of it, to the advantage of the country.

It is important to be clear, however, about what Ireland has actually signed on for. We have agreed to try to lower our deficit to 3% by 2014. That means having a credible multi-annual plan that addresses the problem over a period. It does not mean we are tied to any particular deficit figure for next year. We will not solve this problem by resorting to ever-greater and ever-more-crude adjustments. We will solve it by having a strategy that combines reduction in the budget deficit with a programme of action on jobs and growth, and which puts in place reforms that signal to the wider world that Ireland is a serious country that will not allow this disaster to happen again.

Bond investors are just like any other investors. They want to see the whole story. If they invest in a country, they want to know how much debt it has and how big its deficit is, but they also want to know whether the country will be able to pay the money back. They will look at headline numbers, but they will look also at the medium-term story. They will want to know whether this country has a growth model that is going to ensure it can service its debts. It is the presentation of that story - of a credible plan to reduce the deficit while re-starting economic growth - that should be the focus of debate and of the four-year plan.

The figures produced by the ESRI and what we have been given by the Department of Finance make it clear that the position is extremely challenging. A fundamental rethink of every aspect of the budget is required. The problem also calls for purposeful and sustained action. What must happen now, and what should have happened long since, is the adoption of a multi-annual approach to budget policy, not just a set of announcements every December and a set of projected multi-annual figures, but continual and determined action on a multi-annual basis. We know we are not going to fix this overnight. We know also that 2014 is a long time away. Relying on the forecasts of a Government that cannot forecast one week ahead for four years from now is a bit uncertain, to put it mildly.

What we need now is a credible multi-annual plan for stability, growth and jobs that gets the economy moving again. That means looking at each aspect of the budget and how savings can be made while limiting the damage to the economy, and promoting jobs and growth. It means cutting expenditure but it also means raising additional revenue. Unfortunately, taxation must be part of the mix. This is a point that Labour has been making for the past two years while others were trying to pretend that the whole adjustment could be achieved by cutting spending. We are finally seeing some rational thinking on this issue. It is regrettable that extra taxes are necessary, but they are nevertheless. While everyone will have to contribute in some way, I do not subscribe to the notion that the only people who should pay more are those on modest incomes.

We should aim for an even split between additional revenue raising and lower spending, roughly at a ratio of 50:50. Given the scale of the deficit, we need to spread the burden of adjustment for it to be economically or socially credible.

We need completely new approaches to both capital and current expenditure. In respect of capital spending, it is clear that the Government will have to go back to the drawing board once again. Our current level of capital spending is still high by European standards and, unfortunately, that will now have to be reviewed. A reduction of approximately €2.5 billion over three years would leave us with capital expenditure of just under 3% of GNP, or approximately the same as the eurozone average. However, if capital spending by the Exchequer is to be reduced, as it must be, until we stabilise the public finances, we should be looking for ways to replace it from elsewhere.

There have been numerous proposals put forward in this area to find alternative funding for capital projects. Labour has proposed taking €2 billion from the pensions reserve fund to provide the capital for a strategic investment bank that could give the lead in this area. Similar banks exist in other countries, and the UK Government is establishing a green investment bank on a similar model.

It no longer makes sense to make payments into the pensions reserve fund. We are now borrowing money on the international markets at an interest rate of 6% to invest back into the international marketplace through the purchase of shares by our own National Pensions Reserve Fund. Borrowing at this rate for this purpose is the wrong way to use our depleted resources and should be suspended until we return to some form of normality.

In the area of current spending, we must stop lurching from budget to budget with crude cut after crude cut. What we now require is a proper comprehensive expenditure review with a three-year time horizon, such as has been carried out by the new Government in the United Kingdom, but using the Canadian model. The truth is that the Government-commissioned bord snip report has been a failure because it has not produced either the savings it promised or the reform we need. It was never likely to do so because it never sought or received buy-in from Ministers and Departments. The problem with the bord snip approach is that it started by looking at the level of expenditure and asked what can be cut. What we actually need is a process, such as was developed in Canada, that is led by Ministers themselves and by the managers of Departments and agencies. They started with the opposite question: what service do we want to provide? We must have a root-and-branch examination of spending that identifies what we believe is really important, such as keeping the schools open and maintaining a decent health service.

A proper comprehensive spending review would lead to a reduction in both pay and non-pay costs. It would very likely result in a reduction in the number of agencies and to a merger of back-office functions in several of those remaining. The results of a comprehensive spending review would then provide the basis for sustained and ongoing reform of the public service, which should include negotiation with staff to bring about change. That was supposed to be the idea behind the Croke Park agreement, but it is not happening. It is now abundantly clear that having spent months attacking the Labour Party for not telling people how to vote on the it, once the agreement was accepted, the Government has done little or nothing to work it. We cannot keep lurching from one budget to the next, inflicting crude cut after crude cut. If we want to reduce costs in the public service, including head counts and payroll costs - but also input costs - while minimising damage to front-line services, then it must be done in a determined and sustained way.

The Revised Estimates for 2010 show that total current spending, excluding social welfare and public sector pensions, was budgeted to be some €31.6 billion. A programme to reduce both pay and non-pay costs by only 3% per annum would yield savings of €2.8 billion over three years, including payroll reductions of €1.4 billion. That is readily possible and the process relating to it should have begun long ago. Public sector workers have already endured big adjustments in their pay and the Croke Park agreement contains a commitment to the effect that there will be no further pay cuts prior to 2014. At this stage, however, it is unlikely that the necessary payroll reductions will be achieved through natural wastage and redeployment. A voluntary redundancy scheme in the public service will, therefore, be necessary. Such a scheme should be strictly confined to areas of identifiable over-staffing and should be tailored to ensure that critical front-line public services do not have their essential staffing levels eroded.

Non-pay costs will also have to be addressed as part of the review. There are a number of areas that have long cried out for reform, particularly the cost of drugs in the health service, which the Irish Medical Organisation, IMO, estimates could be cut by €300 million through use of generics. It could be further reduced by a more robust approach to negotiations with drug companies that uses the State's bargaining power more effectively. Professional fees are also a serious issue. The bord snip report estimated that GMS fees could be reduced by €370 million over time.

The social welfare budget must also be curtailed. It is possible to achieve considerable savings in social welfare by reforming the way in which the system works. Labour's spokesperson on social protection, Deputy Shortall, recently produced a report for the relevant Oireachtas committee which shows that major savings can be saved by more robust and modern enforcement of anti-fraud measures. Savings of at least €100 million can be made in this area. A second area for potential savings is rent supplement. The State is now spending €500 million per year to supplement the cost of private rented accommodation at a time when there is an overhang of residential property. A saving of at least 10%, or €50 million, could be achieved in this area. The most effective way to reduce the social welfare budget is to get more people back to work. Every job lost costs the State €20,000 a year in tax foregone and direct payments. The number of jobs lost since 2007 stands at 288,000, which costs the Exchequer an additional €5.8 billion per annum.

We now face a difficult challenge to gradually raise the total level of tax revenue as a share of GNP without hurting employment. This will be difficult but not impossible. As the Governor of the Central Bank has pointed out, our ratio of tax to GNP has been higher in the quite recent past when the economy was still performing extremely well. For example, if Exchequer revenues as a share of GNP this year were to be the same as they were in 2001, then an additional €5 billion would be coming in. That does not mean that we should just return to the tax rates that were in force at that time. Instead, the place to start is with broadening the tax base. It is time for a major programme of reform to finally curtail the network of tax breaks and tax expenditures. A recent paper by Micheál Collins and Mary Walsh again highlighted this issue which my colleague, Deputy Burton, has been addressing for many years.

Some €3 billion is being spent in the area of pension reliefs. This amount should be curtailed by at least €500 million, particularly by limiting the total amount of relief that can be claimed by any individual in order to make the system fairer. The reliefs for property-based investment, which cost €380 million, should simply be scrapped and interest relief on rental income from investment property must be significantly curtailed by at least €430 million. An entire series of minor reliefs, mentioned in the report of the Commission on Taxation and including relief on trade union subscriptions, should be scrapped. The relief on patent royalties, which is an avenue for avoidance that costs €50 million, should be abolished.

Labour has been arguing for some time that, in the area of taxation, those who have the most must contribute the most. We have proposed a 48% tax rate for the highest earners. There is also a need for a system whereby a minimum effective tax rate is applied to high earners to limit the total relief that any one person can obtain from all tax breaks combined. The Government claims to have done this but the system it is full of holes and deliberately so. There must be more equality of treatment of earned and unearned income in order that income from capital gains is subject to PRSI and levies in the same way as earned income.

There is room to increase the tax on second homes. It should also be possible to phase in water charges on a metered basis as part of a broader reform of how we manage and deliver this vital environmental resource. In addition, we should plan to introduce a new bank levy when the capital levels in the banks are adequate. These will be extremely profitable businesses again and they are not just going to be allowed to ride off into the sunset and leave the rest of us to sort out the mess.

We must make hard decisions but they must be the right ones. They must include the decisions that are required to bolster economic growth. This is the hard work of economic management that really matters. Such work was recently described by Will Hutton as involving "the policies that sit between the glories of headline-catching changes in tax, spending and interest rates, and the habitual invocations of labour market flexibility and deregulation".

One of the reasons for the gloom in economic forecasts is the level of price increases in the economy that is depressing nominal GNP. However, we should not assume that there is no work to do in dealing with the cost base and competitiveness. Wages may fall on average next year but underneath that average we are likely to see wage pressures re-emerging in more sheltered sectors. As of now, the Government effectively has no pay policy outside the public service. I favour a return to social dialogue, in a new format with a far more limited agenda than before. Arising from that, I would like to see a negotiated pay freeze for three years.

We must also tackle the level of fees and prices in the protected professions. While some in the legal profession have taken a major hit, I am concerned with regard to what seems to be happening in respect of NAMA, which has an enormous budget for professional fees. In this economic crisis, emergency measures are needed. Such measures must include the State exercising its right to control fees, in areas such as law and medicine, through a temporary fees commission. If we are to deal with the crisis fairly, then everyone must play his or her part. The medical consultant who charges €150 for a ten-minute appointment must be reined in.

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