Michael McGrath (Cork South Central, Fianna Fail) | Oireachtas source

I thank the Minister for his Second Stage speech on the Fiscal Responsibility Bill. I welcome the positive jobs announcement by the Kerry Group of up to 900 jobs in Naas, County Kildare, plus construction jobs, which is a tremendous boost for the economy. We all want to hear many more such announcements in the weeks and months ahead. It underlines the point that must be borne in mind in the lead-up to the budget, that we should not make any decisions that damage those sectors and companies that have the potential to create employment and bring about growth in the economy. The Minister must consider carefully the implications of decisions such as the proposal of the Minister for Social Protection, Deputy Joan Burton, on the introduction of a statutory sick pay scheme or that employer's PRSI would be increased. If such decisions were made they would impact on the ability of companies such as the Kerry Group and many others to bring about the job creation which was confirmed today, which I warmly welcome.

It also confirms that if we nourish our enterprise sector anything is possible. We all know the very humble beginnings from which the Kerry Group developed. There are other Kerry Groups out there, other companies now laying down foundations, enterprising people who are taking risks, investing in business and creating employment at an extraordinarily difficult time in our economy. We should give those people every support possible. We all know that employment across the public service will continue to reduce, contracting by probably another 10,000 jobs in the coming years. The only area for potential growth in employment terms will come from the private sector. We should listen very carefully to what that sector tells us about issues such as the introduction of a sick pay scheme and the mooted increase in employer PRSI contributions.

During recent days the Minister has continued his efforts to negotiate a deal for Ireland on the banking debt, the two main streams of the promissory note and the direct recapitalisation by the ESM. Yesterday he said he hoped for a statement of intent from the President of the European Central Bank, Mario Draghi, in advance of December's budget. I assume he hoped for a positive statement, although in response today to the Minister's party colleague, the MEP Gay Mitchell, Mr. Draghi's comments were less than positive. If one analyses what was said, he was essentially restating the position of the ECB and ruling out any possibility of a write-down of the debt because that would represent monetary financing in terms of the ECB. If there were to be a write-down of the promissory note on the balance sheet of IBRC there would have to be a corresponding write-down on the liability side, namely, a write-down of the exception liquidity assistance which that bank owes to the Irish Central Bank. If there were to be such a write-down, that would represent monetary financing in the eyes of the ECB. It has the power to prevent that from happening by exercising the power conferred on it by a vote of two thirds of the governing council. We can take from Mr. Draghi's statement today that if we were to undertake a bold move of that nature the ECB would invoke that power and would prevent such a write-down. Therefore, what we are looking at, which is consistent with the Government's stated position for some time, is a re-financing of the promissory note arrangement.

Progress has been slow, however. As I stated in the House last Thursday, I accept that next March is the real deadline. I also agree with the Minister that it would be desirable to have greater clarity on the intentions of the ECB in the lead-up to December's budget. After the interest holiday on the promissory note has expired, there will be an impact on the general Government deficit next year, arising from the interest element thereof, which will be there for many years to come. I agree there should be clarity on that point in advance of the budget even though the actual cash amount does not have to be paid until next March. Mr. Draghi's comments today will be seen as a set back to our efforts to get a deal on the promissory note. That deal is important and I wish the Minister well in his ongoing efforts to achieve it.

It is essential we get progress not only on that point but on the other aspect of the ESM recapitalisation of banks and revisiting the direct recapitalisation made by the Irish State. I realise Ireland was not on the formal agenda of the inaugural ESM meeting today and I also note the comments of Klaus Regling who stated that no European body has yet discussed the question of whether the summit statement in June takes account of legacy debt. That issue has not yet been decided. There were comments from the German Finance Minister, Wolfgang Schäuble, clarifying that the use of the ESM for direct recapitalisation would involve additional conditionality, an application by the member state, an adjustment programme and a memorandum of understanding. The deadline, or target, of October, imposed by the Commissioner, Olli Rehn, will now be missed, probably by a substantial period. The very least the Taoiseach should be looking for at the European summit later this month is for his colleagues to reaffirm their commitment to a June summit and to go further by laying out a road map and timeline for its implementation, not just for Ireland but for the other member states affected.

As the Minister observed, the Bill before us tonight is essentially to give legislative effect to the rules in the fiscal stability treaty and to establish the fiscal advisory council on a statutory basis. There is little point in spending the time we have rehashing the debate on the rules which formed the core of the arguments in the referendum last May. My party actively supported that referendum, which passed decisively by the people on 31 May. We support the Bill before us although we are considering the need for amendments. Such amendments would have to be submitted by Friday, in advance of the Committee Stage debate on the Bill.

It has long been recognised that the Stability and Growth Pact rules need to be updated and strengthened. The rules were flouted by many countries; Ireland was not the first country to be in breach of them. As we know, the medium-term objective for Ireland in terms of a structural balance, even prior to the referendum last May, was a structural balance of minus 0.5% of GDP. We are now required to work towards that although there is an interregnum period, as the Minister outlined, given Ireland is a programme country. The second element is the debt brake rule, the reduction of the debt-to-GDP ratio, to 60% over a maximum period of 20 years. These are strict, tough rules and they will have an impact on the preparation of budgets for many years to come. They are rigid, too, but I would hope, as we were given assurances during the referendum campaign, there would be flexibility in their application. In his speech, the Minister referred to the "exceptional circumstances" condition, which is in the actual treaty. If the need arises for that to be invoked I would expect our colleagues in Europe would understand this and that the authorities would make the necessary adjustment so that we are not chasing targets for the sake of it, however counterproductive, given the state of the economy. That needs to be front and centre.

The rules we are now enshrining into domestic law build on the six pack rules of 2011, the five regulations and the directive. The bottom line is there is no getting away from the overall principle enshrined in the treaty, which we are now putting into legislation, namely, the overriding requirement for a balanced budget over a period of time. As a country, we must spend no more than we take in in income. It will take Ireland time to achieve that position but it is one towards which we must work. There is no point in misleading people or giving them the impression there is an easy way of doing that; there is none. We all accept the centrality of economic growth in achieving these targets, particularly the debt brake rule. A modest amount of real GDP growth coupled with inflation will achieve the targets for Ireland over a period, which is the most painless way of doing it. For that reason, I refer to my opening remarks about the need to support the enterprise sector and those in the private sector who are ambitious and want to develop and grow their companies, build on the strong export base we have, and who wish to bring about additional employment in this country. That is the best way to achieve our fiscal targets.

Most people at home are not interested in debt-to-GDP ratios, structural deficit, general Government deficits or primary balances. They measure the strength of the economy by the amount of money in their pockets at the end of the week or month. It is essential we create the conditions that will allow the sectors with potential to grow. There were some positive measures in the budget last year which targeted particular sectors. We need to build on that and give the private sector every support possible rather than strangle the undoubted potential that exists.

In an effort to prevent a recurrence of the eurozone sovereign debt crisis, the fiscal treaty rules provide for some enhancement of the Stability and Growth Pact rules that are already in place. As we are aware, however, rules do not solve or entirely prevent crises. The design flaws in the euro and the weak aggregate demand in Ireland and across the European economy remain to be addressed. The original Stability and Growth Pact proved to be unenforceable in the case of large countries such as France and Germany, in particular, which were its strongest promoters when it was first agreed. The failure of the original pact was largely due to its soft-law nature. Enforcement was inconsistent and patchy. When efforts were made to enforce its rules, these were simply inadequate. The recent change in thinking among the European political elite, specifically Germany, has been striking. There has been a rush to introduce far-reaching, hard-law provisions as part of the Stability and Growth Pact. The result has been the introduction of a stricter set of rules, which are outlined in the fiscal treaty and which we are now proposing to enshrine in Irish law in the form of the Fiscal Responsibility Bill.

Putting in place a credible commitment to responsible budgeting will help to reduce bond yields further and unlock credit availability for investment and job creation. There is a direct correlation between sound, sustainable finances at national level and the stability of the euro currency. If all countries in the euro area comply with the two basic rules of balancing their budgets and controlling their debt levels, then the euro will become a stable currency over time and the economic foundations of the European Union will be made more secure. The implication of the balanced-budget rule is that the level of revenue or expenditure is a matter for national governments to determine. That is currently and will remain the case. The one proviso is that revenue and expenditure should be brought into balance over a period. If we want to have high levels of expenditure, then we will need to have high levels of taxation. If we want low levels of taxation, we will be obliged to tolerate low levels of expenditure. It will be up to the Government of the day to make the policy choices in this regard. The one choice we will not be given relates to whether we should run a deficit and build up the national debt on a continual basis. It is good that the choice has been taken away from us in this regard.

It appears that in some respects the Government is in denial with regard to the true state of the economy and the public finances. There is a need to strike a careful balance in the context of the messages we send out in respect of the state of the economy. I accept that there are benefits to talking up the economy, particularly as this is of assistance in attracting the attention of overseas investors. For example, stories such as that which appeared on the cover of Timemagazine under the title "The Celtic Comeback" can have a positive effect. However, any analysis of the economy must be grounded in reality. If we talk up the economy in the absence of proper facts and in a way that does not reflect reality, it could create an impression across the EU that Ireland is fine and does not require a deal in respect of its bank debt because it is meeting all of its commitments under the EU-IMF programme, is ticking all the boxes and has ensured that its public finances are on target. The Minister knows as well as I that this is far from the true position of the Irish economy. There has long been evidence of a two-speed economy. The domestic economy is shrinking, while exports driven by foreign direct investment have performed well. In light of the weak external environment, the latter are showing some signs of slowing.

Since entering office, the Government has introduced a jobs initiative, a job-friendly budget and an action plan for jobs. In the past 12 months, however, the number of people at work has fallen by 1.8% or 33,400, with the total standing at just under 1.8 million. I acknowledge the fact that this fall was driven by the number of early retirements in the public sector, but it has not been compensated for by any growth in employment in the private sector. There is no buoyancy in private sector job creation at present. A slew of recent economic reports show just how fragile is our underlying economic position. In its stability programme update last April, the Government was - in comparison to 2011 - projecting lower growth rates, lower GDP, lower job creation, higher unemployment, lower real wage growth and higher public debt.

In its recent report, the IMF pointed to significant risks to Ireland's economic outlook and revised downwards the growth forecast for the current year and also that for next year, from 1.9% to 1.4%. The Government is still stating that the Irish economy will grow by 2.2% next year. I suspect, however, the Department of Finance will revise that figure downwards later this month when the medium-term fiscal statement is published. The IMF also states in its report that a deal on Ireland's bank debt is needed in order to ensure debt sustainability. It further states that material investments in Irish banks by the ESM could transform the public debt outlook, cut the bank-sovereign link and cement a much-needed win for Europe. We all accept that of the countries which are currently in programmes, Ireland has the best prospect of being such a win for Europe. Not that we needed to be told, but the IMF indicates that the banks are still not supplying credit to meet the needs of households and SMEs.

The recent report from the ESRI states that there is little appreciation of just how bad the country's finances are, and points out that further cuts in health, education and welfare are inevitable. The ESRI points to the need, in its view, for the public sector pay bill to be adjusted through either a voluntary redundancy scheme or additional working hours. Such a redundancy scheme has now been announced. The ESRI also highlights the rate of unemployment, at 14.8%, and predicts that this will fall only very marginally to 14.6% next year. In its stability programme update last April, the Government predicted that it would fall to 13.6%.

The Irish Fiscal Advisory Council, which will be placed on a statutory footing when the Bill is enacted, issued a sobering report last month in respect of the public finances and the state of the economy. It is a matter of concern that the council indicated that, in its opinion, there is a 40% chance that the debt-to-GDP ratio will fail to stabilise by 2015 under the current policy framework. The current forecast from the Government is that debt will peak at approximately 120% of GDP next year. However, the Fiscal Council has indicated that there is a 40% chance that in a further two years it will still not have been stabilised. What is driving that is a lack of buoyancy and economic growth. The council has also indicated that given the scale of the total adjustment required, all options - including tax rates, public sector pay and pensions and welfare rates - should be kept under close review. I know the Government disagrees with the council in this regard. The Fiscal Council agrees with the projected adjustment of €3.5 billion in the forthcoming budget. It advocates that an additional €400 million be taken out in the budget that will be introduced in December 2013 and a further €1.5 billion be taken out in December 2014. That is a sobering assessment. Overall, however, the council still gives a relatively positive report in the context of our hitting the percentage deficit targets we are required to achieve. We all accept that this year's target will be met and I am of the view that next year's is also eminently achievable. However, these are not the measure of where the economy actually stands.

As the quarterly national accounts indicate, GDP was flat for the second quarter of this year. In fact, the economy avoided slipping back into a technical recession by just €3 million of economic output in the second quarter. The quarterly national household survey shows that unemployment continues to increase. The Comptroller and Auditor General's report indicates that general Government debt increased by €25 billion in 2011 and now exceeds 100% of GDP. The report also states that almost 50% of income tax is now spent on servicing the national debt.

The reason I highlight these issues is to reinforce the need to present a sober picture of where we stand. I accept that there are areas of the economy which are doing very well; I refer in particular to the export sector. Inward investment also continues to be strong and the pipeline remains pretty robust. This is all very welcome, but the domestic economy is extremely weak and continues to contract. In the absence of an overall deal on our bank debt, we are going to encounter difficulties in the context of our debt sustainability in the coming years. More importantly, the preparation of forthcoming budgets could well result in a need to increase the level of adjustment. This would place an intolerable burden on citizens.

Only a very naive individual would believe that the rules set out in the legislation will be a major game changer in terms of Ireland's recovery.

While they will help somewhat, the real issue for this country is to follow up on the June summit. An incomplete currency union remains vulnerable to asymmetric shocks, regional credit bubbles and sovereign defaults. The elements of a solution have been outlined a number of times; one of these is closer fiscal integration, including the introduction of a banking union involving key elements of centralised bank supervision, common rules for dealing with insolvent banks, a banking resolution fund and a common deposit insurance scheme. These issues remain to be resolved, and we do not know when the single supervisory system, which is a precondition for the overall deal on banking debt, particularly with regard to the question of pillar banks and the use of the ESM, will be in place.

I welcome the establishment of the Fiscal Council on a statutory basis as this should help to improve the overall budgetary process. The resources being allocated are limited and I hope this does not hamper the work of the council. For the council to be successful in the longer term, it will need to be trusted by the general public as a clear and objective voice on budgetary issues. It will be required to provide crisp, concise reports which are accessible to the engaged and informed citizen. We had a good discussion with the members of the council about their report. They are impressive people, and I commend the Minister - as I did previously - on his choice of individuals for the board of the council. We are fortunate that people of such calibre are willing to give their time to the State for no reward. Such is the importance of their work that I would not object if the members of the council were paid a reasonable retainer.

The budgetary process needs to be reformed. Thus far, the Government has not lived up to the programme for Government commitment to reform how the budget is prepared. The programme states: "We will open up the Budget process to the full glare of public scrutiny in a way that restores confidence and stability by exposing and cutting failing programmes and pork barrel politics." I do not know what that means. I am in favour of having a debate about the budgetary process before the budget but this should be carried out in a structured and co-ordinated way and not on the basis of Ministers or officials leaking decision options, thus provoking a public debate which is not desirable. A proper debate on the property tax can take place only if the Thornhill report is published. A more open budgetary process would achieve a better economic outcome and greater public support for the necessary adjustment process. I do not blame the members of the council if they feel abandoned at this stage because their recommendations have not been supported. They support the €3.5 billion in December. The pace of change in the economy and the wider eurozone issues are such that it is difficult to look beyond that date. We need to keep an open mind as to budgets beyond December.

The members of the council have an important voice. While I commend the Minister on his appointments, the committee system should be given some input into the future selection of members to serve on the council. I would like their reports to be sharper and more pointed. They should not be afraid to criticise the Government or the Opposition. Their conclusions should be firmer, as they are nuanced with conditionality and caveats. They would contribute more to the debate if their conclusions were more clear-cut. It could be that they are finding their feet, as the council is a body in its infancy. They should not be afraid of a bit of cut and thrust in their reports, as this would be in the public interest. I hope to see the council develop a higher profile over time to give citizens the opportunity to robustly question why the Government does not act on the recommendations.

I welcome this Bill and Fianna Fáil will support it on Second Stage. We are considering a number of amendments on Committee Stage and I look forward to a full debate on the Bill in the weeks ahead.

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