Dan Boyle (Cork South Central, Green Party)
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Question 103: To ask the Minister for Finance the measures he has taken since taking office to protect vulnerable borrowers and the economy more generally from excessive levels of indebtedness; and if he will make a statement on the matter. [33306/05]

Brian Cowen (Laois-Offaly, Fianna Fail)
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The role of Government on credit growth and associated indebtedness has a number of distinct dimensions. First, it is important to note that, as far as overall economic and financial stability are concerned, the relevant measure of credit encompasses both public and private sector credit and debt levels. The Minister for Finance has a key role in this regard in ensuring prudent management of the budget and overall sustainability in the public finances. In this context, Ireland's fiscal performance is among the best in the developed world with Government indebtedness the second lowest in the euro area.

Responsible budgetary policy has made a significant contribution to economic performance overall, to the maintenance of low unemployment and to the achievement of record employment levels.

Similarly, the growth of private sector credit and indebtedness needs to be assessed in an appropriate context. In evaluating the financial position of the private sector, it is too narrow an approach to consider the level of indebtedness in isolation from the asset side of the private sector's balance sheet. A high proportion of household indebtedness in Ireland relates to borrowing for house purchases which, in turn, creates an asset for the households. In the same way, borrowing by the business sector underpins high investment levels and the creation of business assets yielding future income.

Account must also be taken of private sector savings levels. The Government has been actively promoting saving by individuals in the recent past, notably through the SSIA scheme. Comparatively high household savings rates by international standards in Ireland support the sustainability of household debt overall.

As far as looking after the interests of the individual borrower and the individual investor is concerned, the function of Government is to provide an appropriate legislative framework for regulation of the financial services sector, one that is both comprehensive and robust. I am satisfied that on foot of the progress made in recent years, especially in establishing the financial regulator with a particular focus on the interests of the consumer, we have such a framework in place.

Within the implementation of the overall legislative framework, private sector credit growth and debt levels are, in the first instance, a matter for the Central Bank and Financial Services Authority of Ireland. This follows from its role as part of the European system of central banks and its functions, as the financial regulator, concerning the prudential supervision of financial institutions and the protection of the consumers of those firms.

Dan Boyle (Cork South Central, Green Party)
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I regret the Minister has not taken the opportunity of referring to the most recent Central Bank report, nor has he expressed his personal concern as to whether he thinks debt levels of 160% of average incomes represent a sustainable level of personal credit. The fact that this situation has been flagged in several recent reports by the Central Bank demands a political response from the Minister. His reply highlighted that the national debt has been stabilised, but that has largely been achieved through economic growth and the efficient management of that debt. The State still owes €33 billion. Other factors must also be taken into account, including a recent OECD report that inflation is undervalued by 1% because of high price inflation. Property values here are probably overvalued by between 5% and 7% and, therefore, they hardly provide the asset-backed measures to which the Minister referred in his reply.

The debate is not about whether the European Central Bank is likely to raise the base interest rate, but by how much, 0.5% or 1%. In the coming year, the 160% level of personal debt is likely to rise substantially through default. The Minister seems to be devoid of responses as to what he intends to do politically to avoid this risk being experienced by individual citizens. It seems to be a transference of a national debt that the State owes to a large-scale personal debt for each citizen. What policies are being put in place to counteract that?

Brian Cowen (Laois-Offaly, Fianna Fail)
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The Central Bank's recently published Financial Stability Report concludes that a range of fundamental factors, such as growing employment and incomes, falling inflation and low interest rates, have supported the pattern of mortgage growth and associated debt levels in the economy. The report, however, emphasises the importance of responsible behaviour by both borrowers and lenders to factor into their financial decision-making the prospective impact of potential changes in any future economic environment. I share the Central Bank's assessment of the importance of maintaining financial and economic stability. In that regard, I intend to continue a responsible approach to maintaining stability in our public finances, which will ensure that the strategic direction of our economy will focus on sustainable real improvements in public services, social provision and infrastructure.

It is important that individual borrowers act sensibly. I agree with the Central Bank which recently reiterated the importance of prudent behaviour by borrowers and lenders. The possibility that interest rates may rise in the medium term, with obvious implications for the burden of repayments, should be kept firmly in mind. In so far as the banking sector is concerned, the Central Bank in its recent financial stability review concluded that the Irish banking system is in a good state of health and is reasonably well placed to cope with any adverse short or medium-term developments.

The functionality of credit growth relates to demographics, including employment and population growth. For example, our population includes 1.3 million people aged from 15 to 34. On the supply side, we see mortgage growth being met by an expanded capacity in the construction sector of over 7,000 houses this year. The decrease in house price inflation is occurring because supply and demand are coming back into sync.

People are borrowing more, but one must also examine the savings ratio which is high in Ireland. In addition, it is a function of the domestic demand in a growing economy to meet construction requirements. Those factors are all part of the dynamics of the economy. At individual level, borrowers and lenders must act sensibly, which is what they are doing. It is in the interests of banks and building societies to have good mortgage books. Nationally, we have a low debt to GDP ratio and we are in a responsible, stable position. We could have a recession with no growth in credit, but that would not be a good thing. Therefore, one must see the situation in the context of where demand is coming from, while recognising that people need to be sensible in exercising judgments. In a competitive market economy, however, people make these decisions based on a variety of products from which to choose.

Dan Boyle (Cork South Central, Green Party)
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When our national debt was 120% of GDP, Ireland was seen as the economic basket-case of Europe. Is the Minister concerned that a current 160% debt rate on average income levels is unsustainable and dangerous? Some signals are needed from the Government on how this situation should be controlled.

Brian Cowen (Laois-Offaly, Fianna Fail)
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I have indicated to the Deputy that prudential issues in the market situation in which we find ourselves are a matter for individuals, banks and other financial institutions. Having examined the full economic picture, the Central Bank made the point that the Irish banking system is in a stable, sound position for the reasons I cited — demographics, income capacity and the supply side in terms of the construction sector. It is a function of demand in the economy and low interest rates constitute an important factor. When we came into office, the band was between 7.1% and 8.8%, while currently it is between 3.25% and 3.6%.