Tom Parlon (Laois-Offaly, Progressive Democrats)

I am also delighted Senator O'Toole is such a good watchdog. He made fair comments on value for money in Ireland. I was going to comment on his jacket but he is not in the House. Clearly, he threw caution to the wind when he purchased it but it is certainly very becoming.

The real story of this Government is lower taxes, more jobs and better public services. This Government has a strong record of economic achievement and we intend to continue to implement the prudent policies that have proven so successful in recent years.

Before turning to the specifics of the motion before the House, I want to set the issues in context. This Government's track record on the public finances is second to none. The performance of the Irish economy over the past decade or so has been excellent in both international and historical terms. Since the mid-1990s, gross domestic product, GDP, growth has averaged 7.5% per annum resulting in a convergence of Irish per capita incomes towards and subsequently beyond the old EU 15.

In addition, the labour market has been transformed beyond all recognition. It is not so long ago that the defining features of the Irish labour market were poor job creation, low participation rates, high unemployment and involuntary emigration. Now the labour market is effectively at full employment with 2 million people in work, more than 500,000 jobs created since 1997 and an unemployment rate which, at 4.5%, is among the lowest in the developed world. Emigration, the curse of Ireland for so long, has been replaced by substantial net immigration.

Thanks to the policies we have pursued in the past decade, we have been able to more than halve our general Government debt burden. As a consequence, debt servicing takes up a much lower share of overall public spending than it used to do. To put this in perspective, debt servicing now accounts for only €1 in every €25 of tax revenues whereas ten years ago, it accounted for €1 in every €5. The combination of our taxation reform and our success in reducing debt servicing has given us more than €40 billion more in resources than we had ten years ago. This has been allocated to priority areas such as investment in infrastructure, education, maintaining the low tax burden and providing for future pension commitments.

While justifiably proud of its achievements to date, the Government cannot and will not become complacent. A firm and disciplined approach to national budgetary policy has been the keystone of our recent economic prosperity. We will continue to maintain our commitment to sound public finances and improving the economy's competitiveness so that our economic and social objectives can be met. Central to this is ensuring that public expenditure grows broadly in line with available resources. Appropriate management of public expenditure reduces the pressure for increased tax levels and keeping tax levels low generates the economic growth that in turn generates the tax revenues to fund public expenditure.

With this in mind, last week the Government published its pre-budget spending plan for 2007. This plan allows for more than €14 billion to be spent on health, almost €8 billion on education services, and almost €14 billion on social welfare. The strong economy we have built since 1997 makes such expenditure possible. These Estimates will lead to improved public services and better infrastructure not only in 2007 but in the years ahead. They are sustainable, targeted and appropriate as we work to build a stronger and fairer Ireland.

I refer to competitiveness which was raised by a number of Senators. Over the short to medium term, the prospects for the economy are favourable, as was recently set out in the Department's pre-budget outlook. Growth rates of 5% per annum are in prospect, more than twice the EU average. However, we recognise that clear challenges remain which must be addressed if living standards are to continue to improve as they have done over the past ten years. As a small and very open economy, many of the main risks facing the economy are external in origin. For example, it is generally accepted that the large current account deficit in the US will have to unwind at some stage. Given our strong trade and investment links with the US, Ireland is potentially more vulnerable than most other EU member states to any correction of this position. In addition, there is growing concern regarding developments in the US housing market and potential spillover effects to the wider US and global economies.

To ensure our economy continues to evolve favourably, a key priority for this Government is enhancing national competitiveness. The Government is keenly aware of the importance of Ireland's exporting sectors to investment and jobs and, in turn, of the importance of competitiveness for these sectors. Inflation is just one of the factors impacting on competitiveness. Competitiveness is also influenced by exchange rates, wage inflation, public spending growth and capital spending on infrastructure. Therefore, the Government has developed a broad approach to deal with the factors it can influence.

The annual rate of consumer price index, CPI, inflation was 3.9% in October, down marginally from the September increase. A better measure of underlying inflation is the EU comparable measure of inflation, that is, the harmonised index of consumer prices, HICP, to which Senator Mansergh referred. The HICP differs from the CPI in terms of coverage. The most notable difference relates to the exclusion of mortgage interest repayments from the HICP. Annual HICP inflation in Ireland was 2.2% in both September and October. Last year CPI inflation measured 2.5% and HICP inflation was 2.2%, the same rate as for the euro area as a whole.

When discussing inflation, it is first important to point out that the pick-up in inflation in 2006 has been largely due to external developments over which the Government has no control, namely, higher oil prices and increased interest rates by the European Central Bank. The impact of these factors cannot be overstated. For example, when the CPI is calculated excluding mortgage interest payments, it stood at 2% in the year to October. There have been some positive developments recently with oil prices falling and this has reduced the retail price of petrol. I am confident that over the course of next year, inflation will moderate as the impact of higher oil prices falls out of the annual comparison.

As the bulk of the recent increase in inflation has been due to external factors which are outside our control, we must concentrate on areas which can be influenced domestically. It must be recognised that tackling the problem requires a response from all sections of society and not only the Government as many of the domestic driving forces of inflation are outside the control of Government. Annual services sector inflation is running at 7.8%, and this is a cause for concern. This highlights the need for more competition in the economy as well as pay and profit restraint in all sectors to keep down our cost base.

Where it can, the Government is taking action to contain inflation by implementing responsible fiscal policies. For example, excise duties have not been increased in the past two years and the Government has removed the groceries order which should in time lead to greater price competition. I also understand the Minister for the Environment, Heritage and Local Government specifically requested that to support competitiveness in the economy and to protect the interests of communities, local authorities should exercise restraint in setting any increases in commercial rates and local charges in 2006 and he intends reiterating this request to them in the context of their budgets for 2007.

The Government is also investing in public infrastructure which will enhance our ability to produce more goods and services more efficiently and, therefore, help keep down inflation on a continuing basis. To the extent that the prices of Government services reflect increased wage cost factors, the effort must be to make the provision of the services more efficient. This is what we are seeking to do in modernising the public service. Such Government action should assist in keeping down inflation but, as I have already mentioned, Ireland's competitive position is influenced by much more than inflation.

One crucial factor in ensuring our competitiveness is how we respond to the opportunities and challenges posed by globalisation. Ireland has been a substantial beneficiary of globalisation and we are now one of the most globally integrated economies in the world. This integration into the world economy takes a number of forms, including deep trade linkages as well as through flows of capital and labour. The emergence of large, labour-abundant countries such as China, India and Brazil, where labour costs are much lower than those in Ireland and the rest of the EU, means labour-intensive activity will increasingly relocate to these regions. To maintain and enhance competitiveness in the context of a higher-cost economy, a greater focus on productivity across all sectors of the economy is essential because in the long term in a small economy like Ireland, economic prosperity ultimately depends on our ability to sell goods and services abroad. Productivity means the effective use of innovation and resources to increase the value-added content of products and services. It enables both domestically and internationally trading firms to sustain their competitiveness in a relatively high-cost environment by using inputs more efficiently and this in turn supports long-term economic growth and a higher standard of living for all.

Realising that we cannot compete on the same basis as in the past and that we increasingly face competition from emerging economies for mobile foreign direct investment and for export markets, we need to protect our current strengths and develop new bases for competitive advantage. Recognising this challenge, the Government has developed policies which are designed to help Ireland's competitiveness. Important policy issues in the medium term include developing our innovation potential, improving the regulatory environment, enhancing the human capital of our country and developing our economic and technological infrastructure. These should raise living standards, improve the quality of life and lay the foundations for future growth.

In this context, it is expected that the next national development plan for the period 2007 to 2013, due to be launched next January, will further enhance our economic and social infrastructure, notably in the key areas of transport, environmental services, social and affordable housing, health, education, broadband and energy. Investment in support of the strategy for science technology and innovation and in education at all levels, with a particular emphasis on the third and fourth — PhD — levels, in tandem with continued investment in labour force training and lifelong learning will ensure we are well prepared to face the challenges ahead.

The Government is keen to enhance our competitiveness as a location for new, internationally mobile, research related investment. Recognising that research and development is the key to a more knowledge intensive economy aimed at providing a sustainable long-term basis for growth in employment and incomes, the Government introduced a tax credit for research and development. The aim of the tax credit scheme is to encourage existing overseas and indigenous firms to add research functions to their operations in Ireland or to increase their levels of research activity. This, combined with our single 12.5% corporation tax rate on trading profits in all sectors, will continue to support the necessary stable enterprise environment which Ireland has so carefully nurtured through the years and help to underpin our economic and social development.

From a public finances perspective two main challenges face us, an infrastructural deficit and an ageing population. To close our infrastructural deficit we are investing approximately 5% of gross national product, GNP, per annum on improving the public capital stock, roughly twice the EU rate of investment. The already mentioned national development plan, NDP, will go a long way to putting in place a first class infrastructure that will improve the quality of life of ordinary people and create the conditions for the economy to continue to grow. On the ageing population, we are prudently planning for the future. While Ireland enjoys a considerably longer lead-in time than the EU as a whole before shifting demographics begin to impact, we are using our demographic window of opportunity to prepare for this. For example, we are maintaining budgetary discipline and investing 1% of gross national product, GNP, annually in the National Pensions Reserve Fund.

These fiscal policies mean that Ireland remains an attractive place to do business. Keeping taxes on work and business down has been a key factor in helping competitiveness and employment growth. The income tax reductions which have been one of this Government's key policies since 1997 have helped to alleviate the pressures for wage increases. In an international context, OECD data show that Ireland has the lowest tax wedge in the EU and one of the lowest in the OECD. Our low rate of corporation tax has been a strong contributor towards our ongoing economic success. This Government remains strongly committed to continuing this policy.

I am grateful for this opportunity to outline how we are putting in place the framework conditions upon which we will consolidate the significant economic and social gains made since 1997 and upon which future gains can be made. We believe the stable macroeconomic environment we have created through the pursuit of sound public finances and supporting the economy's competitiveness is the basis for achieving further economic and social policy objectives in the long term.

On average we are growing at three times the rate of the eurozone but have more or less the same inflation rate. That is not a bad inflation score for such a dynamic economy. I therefore commend the counter motion to the House:

That Seanad Éireann notes that Irish inflation in EU terms is now not far off 2% per annum and supports the Government's prudent approach to fiscal policy as the best guarantee of continuing to meet such low inflation targets.