Martin Mansergh (Tipperary South, Fianna Fail)

I wish to set out the basis for the Government decisions on expenditure and the economy, announced on Tuesday, and to commend them to Senators for their support. As the Taoiseach and the Minister for Finance have made clear, we are now living in exceptionally difficult budgetary times, and the measures announced on Tuesday are likewise exceptional. The Government has had to take resolute action, and, despite constant criticism, the Government has not been found wanting. It is easy to castigate, speculate and to make pronouncements from the sidelines, but ultimately it is the responsibility of the Government and the Oireachtas to act in necessary time in the interests of all our citizens.

The economic background is stark. Growth is forecast to decline by 4.5% this year, and export growth will be negative. Unemployment has increased significantly to date and, unfortunately, is set to continue to rise to 400,000 or beyond. The Government has prioritised the creation and maintenance of jobs above the maintenance of income levels. Improved competitiveness must be at the heart of our economic policy. The Government's resolute actions must be seen in this light. On the positive side, inflation is set to ease considerably over the course of 2009, reflecting reductions in interest rates and lower prices of oil and other commodities. All of this helps to boost any given income in real spending terms and means we can obtain better value for money from a given level of expenditure, including of course in the capital area.

The current condition of our public finances is such as would require us to borrow €18 billion this year. In the present international climate, and against the background of easily alarmed sentiment among global bond markets, such borrowing must be financed at ever-steeper interest rates. This is why the national debt will rise to more than 45% of GNP, although it is still below the Maastricht guidelines, and spending on interest costs alone will come to €4.5 billion, or 12% of the total tax take, in 2009. This is of course an unsustainable position and must be corrected.

To listen to some critics, one might think that Government fiscal policy over the past decade and more was without any thought to the future. The reality is different. Our establishment of and investment in the National Pension Reserve Fund means our net debt has been much lower than in most other EU countries, and this, together with the cash balances built up by the NTMA, allows for a better funding position than would otherwise be the case.

The Government has set out a clear three-pronged strategy to correct our public finances and restore our economy. We must lower our cost base as rapidly as possible and become the highly competitive economy we once were, rebuilding a platform for future export-led growth; we must maintain the real value of our investment in our national productive capacity; and last but not least, we must carry through this policy in as fair and balanced a manner as possible to reinforce social solidarity along the lines that have long been a hallmark of this Government. Reducing public expenditure is never an easy task. At present, social welfare spending accounts for around €20 billion of the €55 billion or so the Government spends on current goods and services. The pay bill accounts for a further €20 billion, and the balance of €15 billion represents all other day-to-day spending on public services, grants, administration and consumables. There is limited scope to reduce social welfare given the Government's priority of protecting the vulnerable. In the past number of years, there has been a strong focus on securing greater efficiencies in the delivery of the €15 billion that is not pay, and further such savings are planned. All that remains is the public pay bill. We cannot avoid looking to this area to secure major savings.

Of course, we could have recourse straight away to tax measures, but let us think that through a little. Increases in indirect taxes would undermine already weak consumer confidence and drive more shoppers north of the Border. Further increases in income tax would affect our ability to produce goods and services. Meddling with company taxation would drive away foreign direct investment, which is a key driver of jobs growth. The scope for capital tax increases is simply not there at the moment. The Commission on Taxation will take a considered look at these and all other options and report to Government later this year. For now, we must start to put our fiscal house in order by looking at the expenditure side. That is the task that is facing the Government. Its actions are essential to underpin our creditworthiness and the confidence of investors both at home and abroad, and ultimately our ability to continue paying for public services.

International investors understand that the problems we are experiencing are not unique to us. In fact, we are now in the midst of an international recession of unsurpassed severity, prompted in turn by the worst crisis in international financial markets since the Bretton Woods agreement was instituted. All major world economies, and most of the minor ones too, are now suffering or will suffer this year. As Ireland is a small, open trading economy, its difficulties are exacerbated by exchange rate movements. It is also true that our excessive reliance in the recent past on the domestic market and the housing sector as drivers of growth has proven to be a serious structural weakness within our economy. That is the diagnosis. The Government is now concerned with finding the solution to our problems and setting us back on the path to recovery and ultimately prosperity. The budgetary measures we have had to take are not pleasant, and we are profoundly conscious of the burden we are asking public service workers, including all in these Houses, to share.

It is now fashionable to charge the Government with recklessness in our desire over the years of plenty to improve public services and improve the lot of those who were poor and marginalised. Generally, the only voice of dissent from the Opposition benches to our initiatives in these areas was that we should have been doing even more, and sooner. The same voices now berate us for having tried to do too much, spend too much, and reduce taxes too far and too fast. In the May 2007 election platforms of the parties opposite, the main commitment was to reduce the standard rate of income tax to 18%, plus a raft of other tax concessions.

We were all mistaken about the relative security of our position. Now is not a time for mutual recrimination but for common purpose — for social solidarity, which is the principle behind the Government's response to our current problems. We engaged fully with the social partners and sought to draw up a solidarity pact to put before this House together with a series of measures to secure savings of €2 billion on a full-year basis, which are needed as a minimum to start restoring fiscal balance. Regrettably, it was not possible to reach full agreement on that. But that does not alter the fact that the savings are essential, or the continuing value of social partnership. Unless we are prepared to shoulder the burden collectively now, much greater sacrifices may be forced on us at a later date. The Government, therefore, must proceed with the proposals it formulated in our discussions.

The larger part of the savings proposed are in the area of pay and pension contributions. In total, these changes will yield savings of €1.4 billion in a full year. The great bulk of the saving will come from a new pension-related payment which will be paid by all public servants, including TDs and Senators. Those who have already made a voluntary surrender of salary, among them some Members of the Oireachtas, may discontinue that surrender should they so choose and substitute their contribution through the new pension payment. For its part, the Government, which includes for this purpose Ministers of State, has decided to continue with its 10% voluntary surrender in addition to the pension contribution of more than 9%. Those in positions of leadership in all parts of this country must lead by example. The remuneration of political advisers will also be adjusted in line with the pension contribution.

The payment will be on a graduated, progressive scale, with the average payment being 7.5% of total earnings. It will apply to all elements of the public service pay bill, with the exception of employers' PRSI, including both pensionable items and non-pensionable items such as overtime. This payment is in recognition of the fact that public service pensions are significantly more favourable than the generality of pensions in the private sector, together with the need to reduce net public service pay costs. This change will require new legislation which will be introduced as a matter of urgency. A much smaller component of the total pay-related savings will be achieved through reductions in travelling and subsistence rates and other savings. In addition, the increases provided for under Towards 2016: Review and Transitional Agreement 2008-2009 with effect from 1 September 2009 and 1 June 2010 will not now be paid on those dates. Further discussions on these increases will be held in 2011 without prior commitment. This will represent an additional saving of up to €1 billion in 2010, making a start on the €4 billion savings that will be required then.

The pay-related savings will also apply to local authority staff. To that end, it will be necessary to amend the existing legislation on the local government fund. Again, it is proposed that the necessary legislative amendments be introduced as a matter of urgency. Public servants paying the new pension contribution will be treated for tax purposes in the same way as those making pension contributions in the private sector. Contributions will be deducted from gross pay by employers before income tax, PRSI and health levies are calculated and, as such, will be effectively relieved of tax at the marginal rate.

Flexibility in responding to changing service demands must be pursued with determination. In this context, the Minister for Finance is establishing an innovative mechanism via the Public Appointments Service and the Commission for Public Service Appointments to facilitate the redeployment of surplus staff in several areas and the matching of vacancies at all levels across the civil and public service. The redeployment of staff across different sectors of the public service organisations, for example, Civil Service, local authorities, HSE and State agencies, gives rise to technical, legal and human resource issues that will require consultation with local management and staff unions. Discussions have been taking place already with relevant Civil Service unions about the redeployment of staff into social welfare offices.

The Government's approach sets the pay-related savings measures across the public service as part of the comprehensive national effort to adjust incomes, with the aim of restoring competitiveness in national incomes generally. This is not about targeting the public service, which we value. I have been a public servant for 34 years, both permanent and temporary, apart from some periods in opposition. We are simply asking public servants to share in the adjustment that is taking place more broadly across the economy, especially in the unprotected sector.

Savings will be also vigorously pursued in all appropriate State payments to individuals, including fees payable to medical and legal professionals. The need to engage in consultation with professional interests, and the delays that may ensue, may limit the scope for securing the full savings we would like in 2009. Here again, the Government would appeal to all sections of our country and our society to engage expeditiously and with good will in the collective national effort to deal with this unprecedented economic downturn.

The following supplementary measures are required to realise the full €2 billion: a modest retrenchment on overseas development aid this year in view of our diminishing resources — this still leaves our ODA spending rate among the highest in the world at about 0.53% of GNP; a small reduction in the early child care supplement to €1,000 per year and a lower maximum age of five years — this will save €75 million in a full year; a further €140 million to be pruned from administrative and other spending on staff, advertising, travel and procurement; and a reduction of €300 million across the board in spending on capital, still leaving our spending rate as a percentage of GNP at more than 5% and among the highest in Europe.

Within this revised capital envelope, a sum of €150 million is being reallocated, half each, to labour intensive spending on schools building projects and energy saving measures, which is being funded from all parts of the capital programme, including education. With falling construction prices, we should be able to maintain a high output of projects even with reduced allocations. Tender prices in a variety of areas such as national roads, schools, higher education and social housing tell a consistent story. We are getting a bigger result from a given level of capital funding or more from less. Even with reduced allocations, careful and proactive management of capital allocations will enable priority, high-return projects to be delivered.

We are already well on track to complete the major inter-urban routes next year. We will continue to invest in public transport. We will continue to expand commuter rail and the Luas network and invest in other suburban rail services such as the Cork-Midleton line, the Kildare line upgrade and phase one of the Navan line. We will continue to support the development of the smart economy and direct capital investment towards science and technology, inward investment and indigenous enterprise.

The total saving comes to €2,090 million in a full year. In addition, there will be saving of up to €1 billion in 2010 from not paying pay increases next year. In announcing these measures, we have focused not just on short-term needs but also on the vital necessity of preparing the ground for eventual economic recovery. We have tried to protect the most vulnerable. We have sought to maintain capital spending in real terms, and redirected much of it to areas that can sustain and protect jobs. We have sought to make a firm start now to take us off the path of high borrowing and job-destroying tax rises in the future that would cripple us before long.

More must be done in a planned way in 2010, 2011 and beyond. The Government's economic framework published before Christmas provides the blueprint that informs all of our progress. We have a competitive advantage in the knowledge and skill base of our people, and we will build on it further. We have an advantage in our flexibility in responding to change and to challenges and we are demonstrating that flexibility and firmness of purpose now. This Government will play to our strengths in rebuilding our economy and seeking new opportunities for job creation, export growth and future prosperity for all our people.

A Chathaoirligh, I am happy to commend the Government's expenditure measures and economic strategy to this House.