Dáil debates

Thursday, 11 December 2008

6:00 pm

Photo of Joan BurtonJoan Burton (Dublin West, Labour)
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Question 2: To ask the Minister for Finance the expected tax revenue outturn and Exchequer borrowing requirement for 2008; his views on the November 2008 Exchequer returns and live register figures and their implications for the modification of his budget forecasts for 2009 tax revenue and average unemployment; his strategy to address Ireland's economic difficulties and get people back to work; and if he will make a statement on the matter. [45389/08]

Photo of Richard BrutonRichard Bruton (Dublin North Central, Fine Gael)
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Question 4: To ask the Minister for Finance if he has assessed the extent of the expected shortfall in tax revenue in 2009 and the additional cuts in current spending which he is targeting. [45545/08]

Photo of Brian Lenihan JnrBrian Lenihan Jnr (Dublin West, Fianna Fail)
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I propose to take Questions Nos. 2 and 4 together.

In the period since the budget was presented to this House, the economic environment has become considerably more difficult. Many of our trading partners have entered recession and projections for demand in our key export markets have been revised downwards significantly. To put this into perspective, the IMF now expects economic activity in the world's advanced economies to contract next year, the first contraction for this group of countries in the post-war period. On the domestic front, the economic and fiscal data which have become available since the budget have been poor, confirming that the outlook for next year has deteriorated further.

The November Exchequer returns show that overall Government spending for 2008 is close to what was planned. However, the latest 2008 tax returns reflect the severity of the current economic slowdown which has accelerated considerably both at home and internationally in recent times. The gap between spending levels and tax receipts in 2008 has widened and as a result I now anticipate that the Exchequer will need to borrow approximately €13 billion in 2008.

In the budget my Department projected that the economy would contract by 1% in 2009. Forecasts produced by the ESRI and by the Central Bank at the time set out a similar economic assessment. Reflecting the unprecedented recent economic developments since then, by the end of November the consensus of market forecasters was for economic activity to decline in 2009 by approximately 3%.

At budget time, I identified that there were significant risks to the economic and fiscal forecasts for 2008 and for 2009. The further deterioration in tax receipts in 2008 as seen by the end of November Exchequer returns, the continued weakening of consumer and investor confidence, adverse currency movements, continued difficulty in the international financial markets and depressed economic conditions are all evidence of those risks materialising. All the indications are that economic activity in 2009 will contract by significantly more than the forecast in the recent budget with an overall contraction of perhaps somewhere in the region of 3% to 4%. The fall in the 2008 revenue take alone would push the 2009 general Government deficit up by approximately €1.5 billion to 7.25% of GDP. In addition, each 1% deterioration in economic activity in 2009 beyond the contraction of 1% already forecast would increase the general Government deficit by approximately 0.5%.

Upon receipt of the end of year fiscal data and the latest economic data, including the third quarter national income data, a revised economic and fiscal assessment will be prepared by my Department in early January and brought forward for Government consideration. This assessment will reflect the dramatically changed environment now being faced. We are living in a time of unprecedented economic difficulties and the changed circumstances that have occurred in a short period of time must be addressed.

In terms of Government action, I remind the Deputies that last summer, in response to the weakness in tax receipts, we took steps to address the growth in public expenditure. In autumn we decided to bring forward the budget in order to address the fiscal situation. In the budget various measures were adopted which were essential to safeguard the public finances as well as to underpin economic activity. We are continuing to invest approximately 5% of GNP in capital projects that will enhance the productive capacity of the economy. The Finance Bill has a number of pro-enterprise measures including various improvements to the research and development tax scheme.

Now, in the light of the further deterioration in the economic and budgetary position, the Government will continue to identify measures to ensure the sustainability of the public finances, while also focusing on areas that can expand the productive capacity of the economy. This will enable the economy to be suitably positioned to exploit the global recovery when it emerges either late in 2009 or, as is now more likely, well into 2010.

The strategy for addressing the economic difficulties will be based on a number of inter-related areas. First, the public finances must be restored to a sustainable position and a key milestone in this process is the restoration of the current budget to a balanced position as soon as possible. Given that a very high level of borrowing was already planned for 2009, the main focus must now be on the very significant amount of money the Government is spending on current services. In this regard the work of the special group on public service numbers and expenditure programmes will have a significant role to play.

Second, we will continue to prioritise our current level of spending on public investment, which at 5% of GNP, is among the highest levels of capital commitment in the EU. Third, we must ensure that Ireland is competitive to ensure that the economy is in a position to take advantage of the global recovery when it emerges. Wage levels in the public and private sector will be crucial to this task. Fourth, we will continue to invest in education and training to equip the labour force with the necessary skills. Fifth, we will continue to identify all possible measures to boost the productive capacity of the economy. Finally, as evidenced in our recent budget, the Government will continue to support the less well off through our welfare and income policies.

Photo of Joan BurtonJoan Burton (Dublin West, Labour)
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The Minister has made a number of important concessions in his reply. On budget day the Minister suggested the decline in GNP next year would be 1%. Four separate sets of very reputable economic forecasters have all indicated a 4% decline in the Irish economy in 2009. In his reply the Minister has accepted that it will be between 3% and 4%. This means that the Minister's budget day forecasts were basically hopelessly optimistic and it means that the basis of the figures in his budget has been rendered shambolic. The Minister had forecast a general Government deficit of €12 billion or 6.5% of GDP. In his reply he acknowledged that it is likely to be at least 7.25% of GDP next year, which would be at least €13.5 billion which, of course, would necessitate a significant range of additional borrowing. Would the Minister agree that we are sleepwalking into a devastating economic depression? Either the mandarins and number crunchers in the Department of Finance are not able to do the counting or they want to deny reality until it is too late thereby preventing an adequate and timely response.

The Minister said nothing about unemployment in his response. In his budget he suggested that the average unemployment figure for next year might be 7.3%. I put it to the Minister that is also hopelessly optimistic because although he points to the tax credits for research and development in the budget, where in the budget are the other measures to get people who have already lost their jobs back to work? The Labour Party has made a series of proposals to get people back to work. We have not yet heard any sort of strategy from the Government other than tax breaks, which are welcome, for research and development. Can the Minister offer any hope for people who have lost their jobs that they might get back to work next year?

Photo of Brian Lenihan JnrBrian Lenihan Jnr (Dublin West, Fianna Fail)
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The Deputy has raised a great range of questions. First, the officials in my Department work very hard. I would not consider them either mandarins or number crunchers. They work on the statistics and their forecasts throughout this year have been in line with the forecasts of reputable organisations such as the ESRI and the Central Bank. We are where we are. We have gone through a remarkable deterioration this year. The Government has responded with a distinct response at each phase of the deterioration.

Regarding joblessness, in my reply I pointed out that we would continue to invest in education and training to equip the labour force with the necessary skills. We will continue to support the less well off through our welfare and income policies. Of course we can give hope to those who are out of work. The Taoiseach has made it very clear that with his Government colleagues he is preparing a comprehensive programme of economic stabilisation and renewal. That programme will be considered by the Government and submitted to the social partners in order that we can all pull together in the vital task of economic stabilisation and renewal.

7:00 pm

Photo of Richard BrutonRichard Bruton (Dublin North Central, Fine Gael)
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What has been the rise in the cost of borrowing by the Minister to date? He predicts, based on the figures he quoted and the likely outcome, that he will borrow approximately one sixth of gross national income next year — €24 billion. Does he believe he will be able to fund this without a very sharp escalation in the cost of borrowing? Is he confident he will place that borrowing?

How soon will we have a clear fiscal strategy? In the budget the Minister set out that by year three, 2011, we would be back within the stability pact requirement of 3%. Is that still his objective? When will we see the three year fiscal strategy to deliver this? As the Minister has said on repeated occasions, policy changes will have to be made to achieve this, but we have not been told what they are. Does he rely exclusively on Mr. Colm McCarthy "& Co." to come up with these policy changes or will Ministers come up with their own? Does he accept that it was a serious mistake to bring forward the budget which was built on numbers that do not hold water? Can he still say, as he said during the week, that tax increases and cuts in capital spending are out in 2009?

Photo of Brian Lenihan JnrBrian Lenihan Jnr (Dublin West, Fianna Fail)
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I do not have the exact information to hand on the increase in the cost of borrowing. The Deputy appreciates that there are considerable difficulties for all countries accessing funds in international financial markets. I am confident, however, that we will be in a position to fund whatever borrowing will be necessary next year, even on the revised assumption set out in my reply. It is clear that the fiscal strategy will have to be revised on receipt of the end of year returns. No reputable economist predicted the scale of the international deterioration in the second half of this year. No reputable forecaster made these forecasts; they have come to pass.

Regarding the suggestion that it was a mistake to bring forward the budget, the situation was already very serious by the end of August. That is the reason the Government made a decision to bring forward the budget. Having access to a revised set of figures at the end of November would not have advanced the budget. There is a deterioration and when one is faced by a deterioration, the quicker one takes effective action the better. We took effective action in the budget in October. The most important feature of that effective action which the Deputy will have to persuade many of his party colleagues to accept is that the country needs to take certain harsh economic medicine. The Deputy cannot oppose every saving every Wednesday evening here and then turn around and maintain his economic purity.

Photo of Joan BurtonJoan Burton (Dublin West, Labour)
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The Minister has a nerve talking about people unwilling to take harsh medicine. Does he recall that many other reputable economists and I advised time and again that his predecessor, the Taoiseach, Deputy Cowen, was stoking a property bubble in land speculation and construction prices which was totally unsustainable? We warned him time and again. Last year and the year before the cost of the property-based tax reliefs which drove this was almost €500 million. The Minister has the nerve to lecture others when he received eminent advice. He mentioned the ESRI. I admit that its medium-term review must rank as one of the oddest in the history of forecasts. I suspect there may be a story behind this because the Government chose to take what it wanted from it. The Minister has a nerve blaming others.

Photo of Richard BrutonRichard Bruton (Dublin North Central, Fine Gael)
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Will the Minister answer my questions? Does he rule out tax increases next year, as he said only a couple of days ago on the radio? Does he rule out cuts in capital expenditure? I share Deputy Burton's dismay at the Minister's saying the Opposition is not facing up to reality. We said the pay agreement into which he entered was unaffordable. That is harsh medicine. That is telling people we cannot afford to pay what the Minister said he would. I am not afraid to face up to hard decisions but I am not willing to see my grandparents and other people's grandparents being told they cannot have medical cards if their weekly income is over €201. That was the harsh medicine the Minister initially decided to dish out. It targeted the most vulnerable. Can the Minister convince me that making grandparents sacrifice their health entitlements was the route to solving our problems? He knows as well as I that this was not part of the problem. The problem is we need to reform how we spend our money. The sooner the Minister faces up to this the better.

Photo of Brian Lenihan JnrBrian Lenihan Jnr (Dublin West, Fianna Fail)
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Regarding Deputy Burton's dismay, the roots of our problems are far beyond the necessary correction in the domestic housing market. I am concerned if she entertains the view that that is the sole root of our problems. There has been a major international financial and monetary crisis.

Photo of Joan BurtonJoan Burton (Dublin West, Labour)
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I did not say it is the sole, but the most significant, cause.

Photo of Brian Lenihan JnrBrian Lenihan Jnr (Dublin West, Fianna Fail)
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It is not the most significant cause.

Photo of Joan BurtonJoan Burton (Dublin West, Labour)
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Yes, it is.

Photo of Brian Lenihan JnrBrian Lenihan Jnr (Dublin West, Fianna Fail)
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The contraction began in late 2006. Our difficulties in the last six months stem from an international phenomenon which everybody in the country can see on their television screen every evening. It is a world economic crisis. Regarding the question I neglected to answer, I do not propose to increase taxes for the next financial year because any increase in taxation above what is envisaged in the budget would considerably damage the economy. I said this the last time we were at Question Time together. The capital programme envisaged in the budget is our investment programme for next year. It is our economic stimulus and we must preserve it to help sustain levels of economic activity in the economy.