Richard Bruton (Dublin North Central, Fine Gael)
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Question 49: To ask the Minister for Finance if he has estimated the impact of a one per cent increase in interest rates on business and on personal repayments; if this will fall disproportionately on recently formed families; and if he will make a statement on the matter. [39233/05]

Brian Cowen (Laois-Offaly, Fianna Fail)
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As the Deputy will be aware, there is a broad range of factors that determine the effect of changes in interest rates on individual loan repayments. These include, for example, the outstanding loan amount, whether the lending rate is fixed or variable, the length of time over which the increase takes place, the pass-through of interest rate changes to lending rates, the repayment term and the specific nature of the financial product involved. My Department, having consulted the Central Bank, has concluded that, as detailed information relating to all these factors is not available, an accurate estimate of the figure requested by the Deputy cannot be constructed.

In reviewing the broad impact of any projected increases in interest rates on households and businesses, account must also be taken of private sector savings levels as any increase in interest rates will obviously have beneficial effects for savers. In addition, in assessing the overall financial position of both businesses and consumers following interest rate changes, 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 purchase which, in turn, creates an asset for households. In the same way, borrowing by the business sector underpins high investment levels and the creation of business assets yielding future income.

As far as the position of recently-formed families is concerned, the Central Bank's recently published Financial Stability Report concludes that fundamental factors, such as increasing employment and incomes, low inflation and interest rates, have underpinned the pattern of mortgage growth and associated debt levels in the economy. The maintenance of Ireland's strong economic performance and, in particular, its strong income and employment growth, provides a positive and supportive economic environment within which households can successfully manage their finances.

Richard Bruton (Dublin North Central, Fine Gael)
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Is the Minister concerned about the rate of growth in indebtedness? The latest figures show that in the past 12 months alone, private sector indebtedness went up by €55 billion. That is more than the Minister spent in his entire budget this year. The rate of private sector borrowing is now 190% of GNP. In commenting on the past, the Minister has often said that when public sector borrowing was 120% of GNP we were in a precarious situation. What is the Minister's response to the Central Bank when it says that the most worrying aspect of private sector indebtedness patterns is the accelerating speed at with debt is increasing in the context of an already high level of indebtedness? Is the Minister aware that our private sector indebtedness is now the highest in Europe? It is almost double the European average. Does he agree that even a 1% increase in interest rates would wipe out all the benefits of concessions in the budget and elsewhere? Half of our mortgage lending has occurred in the past 24 months. Does that not mean that many young couples have entered into debt commitments that are quite precarious for them against a current background of rising interest rates?

Brian Cowen (Laois-Offaly, Fianna Fail)
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While current levels of credit growth could become a cause for concern were they to continue, I do not believe current levels of indebtedness represent a danger to the economy. In fact, it is to be expected that consumers would seek to make use of historically low interest rate levels. It is also a fact that Ireland has traditionally had low levels of personal debt in comparison to other EU countries. I should also point out that credit has an essential role to play in any functioning economy, allowing households to smooth consumption over time if disposable income is subject to shocks.

It is important to remember that while personal liabilities have increased these are backed by real assets. In this context a major element of outstanding indebtedness is accounted for by residential mortgages. Demand for residential mortgages is underpinned by a number of factors, including strong new housing output, growth in the economy, the accompanying pick-up in employment creation, the increase in household formation, significant net immigration, lower public sector indebtedness which facilitated easier fiscal conditions, and the decline in average inflation over several years.

At an individual level, it is important that borrowers act sensibly. I agree with the Central Bank which recently reiterated the importance of prudent behaviour both by borrowers and lenders. The possibility that interest rates may rise over the medium term with obvious implications for the burden of repayments, should be kept firmly in mind. Insofar 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.

Richard Bruton (Dublin North Central, Fine Gael)
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The Minister is just reading out a prepared answer. The Central Bank said there were three major threats to us. One is a decline in the construction industry and another is the rapid growth in our private sector indebtedness.

Rory O'Hanlon (Cavan-Monaghan, Ceann Comhairle)
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The Deputy should put a brief question because we are almost out of time for this matter.

Richard Bruton (Dublin North Central, Fine Gael)
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It also remarks that, in the past, where countries got into trouble, it was through very intense, debt-driven property booms, stating that it was a concern. At what point do the three threats of declining exports, rising indebtedness and risks in the construction industry cause concern, and when must a Minister for Finance produce a policy response? We ought to be planning to deal with this issue, which is now a serious concern.

Rory O'Hanlon (Cavan-Monaghan, Ceann Comhairle)
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I will allow the Minister a brief final reply.

Brian Cowen (Laois-Offaly, Fianna Fail)
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The fact that I am reading my replies testifies to the accuracy with which I have anticipated the supplementaries. This is for information and not to allow the Deputy to joust with me regarding interest rates. It is about putting on the record the facts of the situation, and I have quoted from Central Bank reports.

Richard Bruton (Dublin North Central, Fine Gael)
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The Minister said that we had low indebtedness, and I quoted figures to him showing that we are by far the worst in Europe.

Brian Cowen (Laois-Offaly, Fianna Fail)
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We are only now reaching European levels of debt.

Richard Bruton (Dublin North Central, Fine Gael)
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We are not.

Brian Cowen (Laois-Offaly, Fianna Fail)
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Yes, we are.

Richard Bruton (Dublin North Central, Fine Gael)
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The Minister should read the Central Bank reports.

Brian Cowen (Laois-Offaly, Fianna Fail)
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I have already done so. Economic prospects for the Irish economy, despite the Deputy's best efforts to suggest otherwise, remain very positive, notwithstanding the increased uncertaintly evident in the international economy.

Séamus Pattison (Carlow-Kilkenny, Labour)
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Let us move on to Question No. 50.

Brian Cowen (Laois-Offaly, Fianna Fail)
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Perhaps I might answer quickly. There is broad consensus among commentators that the Irish economy is set to continue to perform strongly, expanding close to its growth potential both this year and next. Over the medium term, the economy is expected to grow at almost double the rate forecast for the eurozone overall. The pace at which new housing output adjusts downwards to long-term, sustainable levels is an important risk for the economy, and new housing completions are projected to decline by 2.5% next year and 5% in 2007 and 2008. That will be offset by investment in other building and construction, including a significant increase in spending on the public capital programme. That is the level of economic activity that we predict, and we therefore anticipate a soft landing. We envisage that the issue will be dealt with in a planned way over a period owing to demographic, employment and other factors that differ greatly from those in other European economies and this means that housing output is justified.