Brian Lenihan Jnr (Dublin West, Fianna Fail)

We need to move away from this shallow criticism and knee-jerk reactions, which are not helpful to our economy and are damaging social cohesion. Our public service has been an essential support for economic progress in Ireland over the years. We need to move forward together on the basis of the facts, and on the basis of a thoughtful analysis of where we need to make progress. We need to make progress in this area. That is not in question. I am simply outlining the basis upon which we can make progress. There is no doubt we need root and branch reform of the manner in which public services are delivered to our citizens. We can no longer afford the increases in numbers we have seen over the past decade. In this time of economic difficulty, we must do more with less. Scarce resources must be used wisely to produce better quality public services. Our public servants enjoy very favourable pay and working conditions by international standards. As economic conditions worsen, those enjoying protected status need to contribute in a broader sense to the greater good.

One of the most limiting factors I have found in my short time as Minister is the lack of flexibility in reallocating staff resources to areas of greatest need. This has to change. Where there are clear staff surpluses in certain areas, or where policy priorities change, staff must be correspondingly reduced or reassigned. Taxpayers are entitled to an assurance that the favourable terms and conditions enjoyed by public servants are matched with excellence in the delivery of public services. Public service pay currently accounts for about €18 billion or 32% of total current expenditure, an increase of €5 billion or 39% from 2004. Over that period, the numbers employed in the public service have increased by 31,500, or 11%, to more than 316,000 at the end of 2008. While the increase in numbers has been driven mainly by Government decisions to upgrade public services for a growing population and create new agencies in line with Government priorities, there is now a need for adjustments and economy in this overall area.

It is important to put the current difficulties in perspective. What we are seeing is a global downturn in activity. While I recognise that the scale of the downturn is larger than we have witnessed for a long time, it should be remembered that we retain the majority of the gains in living standards that have been achieved over the past decade and a half. For instance, the level of income per capita has reached high levels by international standards and there is no reason to expect a significant reversal of this. While we are in a very challenging labour market, the number in employment remains greater than 2 million, double the level that pertained in the 1980s. There can be no question that it is very difficult for those losing their jobs, and that is why we are responding in an appropriate and timely way which I shall describe shortly.

We know the economy is contracting. For the year as a whole, we expect gross domestic product to contract, with a further decline in prospect for next year. The main factor weighing on activity is the correction in the new house building sector. This year, completions of new houses will decline by around 40%, and next year by a further 50%. To put this into perspective, levels of home building next year will be close to the levels that obtained in the early to mid-1990s. House building will return to more sustainable levels over time, which levels are estimated to be in the region of 45,000 units per annum. In the short term, however, the correction under way will exert a major negative drag on overall economic activity.

This has spread to other sectors of the economy. Consumer spending, for example, has gone into reverse, with retail sales falling sharply during the third quarter. The housing adjustment is having a major impact in the labour market, where the unemployment rate has picked up sharply. Figures published earlier this week show that the number on the live register reached 277,000 in November, the highest level since 1996. The pace at which the live register has deteriorated is of particular concern.

Compounding domestic problems has been the major deterioration in the global economic environment. The origins of this can be traced to developments in the market for US sub-prime mortgage debt, in which difficulties began to emerge in the summer of last year. What began as a disruption to the operation of a specific credit market has spread to financial markets more generally, intensifying over time and culminating last September in severe global financial problems, with a succession of threatened collapses and rescues of financial institutions across the developed world. A pervasive uncertainty about credit risk emerged, such that the market for interbank lending became very challenging.

Against this background and on the advice of the Central Bank, the Government acted with purpose and determination to guarantee the liabilities of credit institutions so they could access funding in interbank lending markets. The unequivocal advice to the Government was that without such a guarantee, our banks would not be able to access the liquidity that is essential for them to continue their business of providing credit. I thank Senators for the assistance they gave on that occasion.

The impact of financial market turmoil internationally has been to reduce access to credit and to weigh on confidence, pushing many of the world's advanced economies into recession. The euro area, the UK, the US and Japan are all either in or on the verge of a recession. This deterioration in the international climate will weigh on Ireland's ability to achieve a suitable rate of export growth. Exports are the lifeblood of a small, open economy such as ours. The appreciation of the euro against sterling has had a negative impact in this regard. In recent days, the euro has reached its highest level ever against sterling, which is of particular concern for the exporting sector. While our exposure to the UK economy is not the same as it was, it must be recognised that firms exporting to the UK are often fairly labour-intensive and operate off tighter profit margins. The fall-out from negative trade developments vis-À-vis the UK is potentially significant.

On a more positive note, the rate of inflation has eased in recent months. On a harmonised basis, our inflation rate has been below that of the rest of the euro area since the summer. I expect the rate of inflation to continue to ease next year in the face of falling commodity prices and the general easing of economic activity. I also expect the benefits of exchange rate appreciation to be passed on fully to the consumer. Most commentators are of the view that inflation will ease significantly, even turning temporarily negative next year on the basis of the consumer price index, which will help protect real incomes and support consumption. The recent reductions in policy interest rates will provide timely support to the economy, as will the decline in oil prices to under $50 a barrel in recent days from almost $150 a barrel in July. Notwithstanding these positive developments, we are facing a very difficult set of economic circumstances and it is clear we are in for a difficult number of years.

Having dealt with the overall Government response, I will address two crucial issues: support for those losing their jobs and the restoration of competitiveness. The number of people on the live register increased by two thirds in the year to November, an unprecedented rate of increase. For those losing their jobs, the focus must be on helping them gain alternative employment, and the Government has clear arrangements in place for this. Some of the key measures include strengthened capacity for referrals to FÁS under the national employment action plan for advice on available job, training and education opportunities; eased eligibility requirements for the back to education allowance whereby those who are made statutorily redundant may access it immediately; extra short-term training and education courses from FÁS, especially in growing sectors such as energy efficiency and information technology; and the introduction of measures to help apprentices who are made redundant to complete their training as far as possible, for example, by providing simulated work experience opportunities. In the recent budget, despite the changed circumstances in which we find ourselves, further modest improvements were made in welfare payments, thus demonstrating the Government's continued commitment to protecting those less well off. The prospective easing of inflation will help the real incomes of those dependent upon social welfare.

For a small, open economy such as ours, sustainable increases in living standards can only be achieved by supplying goods and services to the wider global economy. Therefore, we must ensure the economy is in a position to take advantage of the global recovery when this emerges. This will require a greater focus on competitiveness, something of which the Government is acutely aware. To support 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.

In addition, the Government is maintaining capital investment at 5% of national income, twice the EU average. This policy has both short and long-term benefits, supporting jobs in the short term and improving competitiveness and productivity over the longer term. Already, this level of investment has delivered significant improvements in our roads, public transport network, waste facilities and housing stock. In recognition of the deterioration in tax revenue, the Government has taken the view that while some scaling back of capital investment is unavoidable in the future, we must continue to deliver the core infrastructure that will support our future economic development. With this in mind, the budget provided for Exchequer capital investment in 2009 of some €8.2 billion.

In a time of scarce resources, we must be much more targeted in the way we invest taxpayers' money. We must concentrate investment spending on those areas that generate the greatest economic return. Investment which enhances our productive capacity and delivers the greatest benefit in terms of future improvements in living standards is being prioritised. In terms of physical infrastructure, we continue to invest heavily in transport. The Department of Transport will invest more than €2.8 billion of Exchequer money next year in enhancing our national road network and developing our public transport system.

A key priority for the Government is finishing the motorway network connecting Dublin with the other principal cities in Ireland by 2010. In addition, the Department of the Environment, Heritage and Local Government will spend €2.1 billion of Exchequer money in providing social and affordable housing, enhancing our water services infrastructure and other projects at local and community level. The Department of Education and Science will spend its increased Exchequer capital allocation of €889 million to build schools at both primary and second level and to support the development of higher education. This investment in education skills and the investment in training engaged in by the Department of Enterprise, Trade and Employment will assist in and are part of the Government's strategy to re-position our economy further along the value-added chain. We recognise that it is only by producing goods and services with a high knowledge context that we will be able to sustain high wages in an increasingly globalised economy. These are significant sums of money and they reflect the Government's commitment to fund the infrastructure investment that will help us to benefit from an international economic recovery. They will also assist in dealing with the deteriorating position and will provide a stimulus package in the economy.

In common with virtually all the world's advanced economies, we are facing substantial economic and fiscal challenges in the immediate future. Notwithstanding this slowdown, the level of economic activity remains at a very high level, as does the level of employment and income per capita. It is clear that the underlying health of our economy remains robust but there is no room for complacency and the Government is not complacent. We must all work together and, for its part, the Government is making tough decisions that will help to lay the foundations for recovery. These involve putting the public finances on a more sustainable path, improving competitiveness and maintaining international confidence in Ireland as a place to work and invest. I look forward to hearing the views of Senators.