Martin Mansergh (Tipperary South, Fianna Fail)

I am very pleased to have this opportunity to address the Seanad and to contribute to this discussion on the current condition of the economy. I look forward to listening to the views of Members.

For the information of Members, my colleague, the Minister for Finance, will introduce a Bill in the Dáil later this evening which will give powers to the measures taken earlier today to improve confidence in the Irish banking sector. He will give full details of the proposed legislation and the decision to safeguard the sector and the reasoning behind it. Members will, therefore, understand that in advance of the Minister's statement in the Dáil, I am somewhat constrained in what I can say on that subject and I will focus mainly on the current condition of the economy.

Considerable improvements have been achieved in recent years for the majority in society. Notwithstanding these improvements, it is important to acknowledge we are in the midst of an international economic and financial storm and we are far from immune from its effects. We must be realistic about what has to be done so that we safeguard the gains made and ensure we are well positioned to benefit from the global economic pick-up whenever it emerges.

In any debate on recent developments in the economy, it is instructive to consider our recent economic progress. Ireland has enjoyed unparalleled economic success over the past two decades. The economy has been transformed beyond recognition. More than 2 million people are now in work while Irish per capita income levels have converged with those in the rest of the developed world. In fact, since this Government came to office in mid-1997, more than 700,000 jobs have been created and since 1987, employment has practically doubled. This transformation has been achieved by the hard work and enterprise of our citizens and of those who have come to our shores and has been underpinned by Government economic strategy.

There have been very real gains but we must acknowledge that the short-term economic environment in Ireland has become much more difficult. Ireland is not unique in this regard. Prospects in virtually all the world's developed economies have deteriorated sharply over the past year or so. This international slowdown reflects a number of factors, including the continued fall-out from global financial market difficulties and rising commodity prices. Growth in our trading partners has slowed and combined with the appreciation of the euro exchange rate, this has created a difficult trading environment for the exporting sector in Ireland.

In Ireland, we have to cope also with the very sharp correction in the house building sector. Over time, output will return to more sustainable levels but there is a process of adjustment and a bumpy landing is not pain-free.

The level of economic activity remains at a very high level, as does the level of employment and income per capita. The underlying health of our economy remains robust. We have a dynamic, highly skilled labour force, together with a business environment which is supportive of enterprise and rewards work. We have flexible markets and a low public indebtedness. In other words, we are in the relatively fortunate position of being able to face the current stresses of economic adjustment from a position of strength.

The publication of the national accounts data last week has received widespread attention. These figures show that the economy contracted in gross domestic product terms at an annual rate of 0.8% in the second quarter of this year and -1% for the first half of this year on an annual basis. In other words, we have confirmation that we are in recession. While these figures are poor, they are not surprising. Other indicators such as retail sales, house completions and labour market data had indicated a contraction in the second quarter. They are in line with a sharp decline in tax receipts. In the context of preparations for the forthcoming budget, the Department of Finance is assessing these figures with a view to publishing a revised economic growth forecast for this year and the next three years.

The sharp slowdown in economic activity is having a considerable impact on our tax revenue and this poses challenges for all of us in terms of what public services can be delivered in the year ahead. Irrespective of the size of the shortfall in tax revenue this year, we must remember a considerable amount of revenue will be collected this year, and this will be spent on the various services and capital projects required for a modern society. The Government will address the funding gap in a measured and balanced manner in the forthcoming budget.

I refute assertions that the Government has taken no action so far. In recognition of known spending pressures, mainly reflecting the weaker labour market and the resulting increase in the live register, the Government in July announced a savings package of €440 million in 2008 and €1 billion in 2009. The purpose of these measures was to make certain adjustments within the overall expenditure amounts. They include €50 million in procurement savings next year, for which I have particular responsibility. We also made it clear that additional economies would be required in the event that the fiscal position deteriorated further.

Over the summer months, the poor performance of tax revenue worsened, and it is now clear there will be a substantial tax shortfall this year. Following analysis of the end-September tax revenues, the Department of Finance will set out its assessment in the normal manner at the end-quarter press conference on Thursday. September is a key month for tax revenue. While we do not have full month data yet, early indications suggest that the poor performance in tax receipts witnessed over the summer months is continuing.

We have brought forward budget 2009 to 14 October. The budget will reflect the necessary prioritisation of expenditure in light of expected tax revenues. Without going into details of the budget today, which have yet to be finally settled, it will set out steps to stabilise and restore balance to the public finances by, among other things, prioritising current and capital public expenditure to reflect the changed realities. The Government also intends to take decisive action now so as to safeguard our future sustainable growth.

Ireland is better placed than most economies to meet the challenges ahead with our low debt rate, our educated and young workforce, and our low tax environment for workers and business. We are also undertaking relatively the largest public investment programme in Europe. The Government will ensure that Ireland's economy is in the best possible position to resume trend growth as soon as international conditions improve.

The national development plan, launched in January 2007, set out a strategic and comprehensive strategy for investment in the economy over the period 2007 to 2013. The principal aims of the plan are to consolidate and enhance Ireland's economic competitiveness, to remove infrastructural bottlenecks which inhibit economic development, to educate our workforce, and to build a more socially inclusive society. The first annual report on the national development plan was published in July 2008 and gives a comprehensive picture of what has been financed and delivered under the plan in its first year. The total outturn for 2007, at €22.4 billion, was very close to the allocation envisaged under the national development plan.

A modern roads network and efficient public transport are absolutely vital for long-term economic and social prosperity. Under the Minister for Transport's ten-year investment programme, Transport 21, our major interurban routes, which link Dublin to Galway, Cork, Limerick, Waterford and Belfast, will have been upgraded in full by the end of 2010. We have already made significant progress along these routes. On the public transport side, important commuter routes into Dublin and Cork and between Dublin and the major cities have been enhanced, and further work continues on these.

The delivery of Transport 21, and the NDP in general, are dependent on the level of economic growth and the level of resources that are available to the Government over the medium term. In this context, the Government has indicated that, despite expenditure pressures which have arisen this year, capital expenditure will remain a top priority. In response to falling revenue pressures, and as part of the current budget and Estimates process, the Government has decided to review all capital expenditure proposals for 2009 to 2011 to ensure that constrained resources can be targeted at investment in core economic infrastructure that adds to our productive capacity. This should enable Ireland to recover quickly, when the current economic downturn abates.

As in many other countries, the pick-up in Irish inflation over the past year or so has been driven primarily by the global rise in food and oil prices. In Ireland, increases in interest rates have also had a direct impact on inflation. Recent inflation trends have been more positive. The annual rate of CPI inflation eased to 4.3% in August from 5% two months earlier. On the EU harmonised basis, annual inflation in August was 3.2%, significantly below the 3.8% increase recorded in the euro area, and the third lowest in the European Union over the past 12 months.

The Department expects to see an easing in the average rate of inflation in the latter part of this year and into next. Most commentators share this view. In addition to a moderation in commodity prices, the large increases in food and oil that occurred towards the end of last year will fall out of the annual comparison. The pass-through of the strong euro will also contribute to an easing in inflation, as will more modest domestic demand.

In pursuit of moderate levels of inflation, the Government is committed to implementing responsible fiscal policies and promoting competition and increased price transparency through the work of relevant State bodies. We are also continuing to prioritise productive investment in public infrastructure that the Government is undertaking as part of the national development plan which, over the longer term, will enhance our ability to produce more goods and services. By improving the economy's efficiency, this should also help to keep inflation in check.

Improving our competitive position is essential to facilitate a re-balancing of the economy towards more sustainable, export-led growth and to maintain our attractiveness as a location for inward investment. While the external factors referred to earlier, such as commodity prices and exchange rates, have an impact on domestic costs, these are beyond our control. Therefore, we must seek to control those costs over which we do have influence. We must also take steps to improve productivity. Recent months have seen Ireland's rate of inflation fall below that in the rest of the euro area, which is welcome.

In further support of our competitiveness objectives, the Government is committed to maintaining a low burden of taxation on capital and labour, and has implemented a range of policies aimed at improving competition in product markets and flexibility in the labour market. At the present juncture, improving our competitiveness position also means ensuring that we do not allow externally-driven price increases to be exacerbated by internally-generated second round effects. In this respect, the willingness of the various parties to compromise and adopt a realistic approach to wage determination in the recent pay talks is commendable.

We are also continuing to prioritise productive investment in physical and human capital under the national development plan. These measures will equip the Irish economy with the skills, infrastructure and operating environment needed so that we can take advantage of the global pick-up when it emerges.

As referred to in the Dáil last week, the Government and the social partners recently concluded a draft agreement as a successor to the first module of Towards 2016. I endorse the comments made by the Taoiseach when he remarked that a national pay agreement will provide a sense of confidence, certainty and stability in the challenging period ahead, while at the same time providing wider economic and social benefits. As Senators will know from my time as a Member of this House, I am a strong champion of social partnership. The cohesion it provides is needed more than ever in critical times. Here again the Government kept its nerve and played a key role in helping to bring it together and secure our future.

No doubt much will be said about the reform of the public sector, to which the Government is committed. This is an ongoing process which now has even greater importance. However, the financial turbulence which is a backdrop to this debate has developed within a part of the private sector, but it is the State everywhere that is being called on to provide a safety net.

A new balance must be struck, so as to try and avoid future disasters of Icarus proportions. We all understand the importance of markets, but some of the more exotic ones have led us to where we are, and the State on behalf of the citizens has been left with much of the responsibility for retrieving the situation, accepting forced priorities. It seems clear to me that we need not a weaker State that withers away, but a strong and resilient one that can protect without being overpowering.

The economic environment has clearly become more challenging, and the openness of Ireland's economy makes us more exposed to global economic developments. We have benefited substantially from positive developments in the global economy in the past but at present we are clearly being adversely affected by what is happening elsewhere, especially in the United States, and the difficult conditions in the house building sector are not helping. The Government has taken initial decisive steps to steer the economy through these difficult times and will take further substantial steps with the measures that are to be announced on budget day.