Frank Fahey (Galway West, Fianna Fail)

Yesterday for the first time Deputy Gilmore outlined the key economic and fiscal policies the Labour Party would introduce if it got into government. The cornerstone of its policy is raising taxes and providing a stimulus package through the establishment of a strategic investment bank. Both policies are fundamentally flawed. At a time when the international markets are scrutinising our every move they will do nothing to reassure investors or restore confidence in Ireland.

Some 18 months ago we first heard of the Labour Party proposal for a strategic investment bank. The plan has received no support from any national or international institution or economic commentators. Yesterday, Deputy Gilmore once again reiterated his proposals to set up the bank with funding of €2 billion from the National Pensions Reserve Fund and raise a total of €20 billion for the bank.

What the Labour Party does not make clear is from where the funding for the bank will come. A bank does not create credit out of nothing. Every euro lent by a bank to a customer must be drawn from deposits or borrowed by the bank from somewhere else. As we all know, funding has been scarce and expensive for our banks. Why would funding be more readily and more cheaply available for a State-owned bank?

We all know that to reach a budget deficit of 3% by 2014 we will need to make significant public spending cuts and tax increases. The Taoiseach has confirmed that the Government favours an emphasis on cuts rather than taxes in order that our competitiveness is not impeded and Fine Gael agrees with his assessment. The Labour Party has stated its preference is that savings be divided equally between taxes and cuts. This means raising €7.5 billion in four years through extra taxes. Its proposal would introduce a new 48% tax for those earning over €100,000 which will only raise €410 million in year 1. Where will the other €6 billion come from?

As the Minister for Finance said in the Dáil yesterday, a 48% rate would effectively mean a marginal tax rate of 62%. I have no difficulty with taxing wealth or retained income. However, a 62% marginal rate would be the highest personal income tax rate in Europe and would have a detrimental impact on foreign direct investment. This week we heard that IBM rated Ireland as the best location for foreign direct investment in the world. Some eight of the world's top ten technology firms are based in Ireland. IDA Ireland has secured 75 investments to date in 2010, which have the potential to create 6,000 jobs. Does the Labour Party want to jeopardise this foreign direct investment when there are over 450,000 people on the live register?

Deputy Gilmore said yesterday he would put an end to the blunt year-by-year spending cuts approach. He seems to suggest we adopt a sophisticated multi-annual approach, citing the Canadian example, and that we take lessons from the austerity programme implemented there. If that is to be the Labour Party's approach, it makes a complete mockery of everything it has said over the past two years. According to The Wall Street Journal the Canadian Minister of Finance spelled out a programme of massive spending cuts from 1994-96. He slashed spending from $118 billion to $104 billion, some 15% once inflation is factored in.

The BBC reported:

The length of hospital waiting lists shot up, thousands of nurses lost their jobs and some hospitals even had to close. The hospitals that remained open suffered from overcrowding and infection rates rose as a result. In schools, average class sizes shot up from 25 children to 35, as fewer new teachers were taken on. And separate special needs classes were abolished.

If that is the example the Labour Party is giving us of how to make cuts in public expenditure, then I would rather not know about it.

In regard to the magic bank proposed by the Labour Party, it does not tell us how it will provide for bondholders. Deputy Burton said on her website on 15 April 2010:

Some commentators are keen on pointing out that senior bondholders rank the same as depositors and so can't be made to take a hit when they cease to be State guaranteed. This is nonsense. In normal times, bank depositors are explicitly protected. Bank bondholders are not. Protecting depositors is critical to any functioning banking system. While sovereign default should not be contemplated, protecting corporate bondholders is highly questionable.

The reality is that senior bondholders rank equally with depositors under Irish law. I would have thought a party that claims to be ready for Government would have at least known that. As Dan O'Brien said this morning on Newstalk's "Breakfast", "How can you tell one set of bondholders that you are not going to pay them back while at the same time try to borrow from other bondholders?" The Labour Party's strategic bank simply does not add up.

The Minister, Deputy Lenihan, said yesterday the reality is the strategic investment bank would compete with our two established banks and the State for scarce funding. Every euro this bank would attract would mean one less euro for Bank of Ireland and AIB as well as for this State which must now borrow €2 in every €5 spent on providing our public services. That would mean less lending by Bank of Ireland and AIB and higher interest rates for the State. I challenge Deputy Gilmore to spell out now where and how he will raise €18 billion. I challenge him to test the views of the ECB on such a proposal in the current banking climate. It is not possible to establish a strategic bank as proposed by the Labour Party at this time in our crisis.

We have invested considerably in our two main banks. In return, we are insisting that they provide credit for strategic investment in this country. It makes little or no sense for the State to set up a new bank to perform the functions that we are now rightly demanding from Bank of Ireland and AIB in return for the support given to these two institutions by the Irish taxpayer. The Labour Party policies, as we heard outlined today, will not work.

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