Martin Mansergh (Tipperary South, Fianna Fail)

In recent decades we have positioned ourselves as a flexible and open economy, deeply integrated into the globalised trading environment. This economic strategy has served us well in recent years, leading to a period of unprecedented economic growth as our living standards moved into line with those of our European partners. This point is perhaps most strikingly highlighted by the fact that in 1973, GDP per capita was only 58% of the European average. By the end of 2007, GDP per capita represented 144% of the EU average. Of course, as we all understand the figure substantially overstates the position because of the earnings of multinational corporations.

However, as a small, open economy, this strategy necessarily leaves us vulnerable to downturns in global economic activity. When such periods of declining economic growth occur, it is crucial that we take the opportunity to ensure that our domestic structures are realigned to maximise our potential when the global recovery emerges, as it inevitably will.

We are all aware that the global economy is in the midst of its deepest and most widespread slowdown in decades. Arising from the international financial crisis, global economic prospects have deteriorated sharply. Last week, the International Monetary Fund announced that it expects the world economy to shrink for the first time in more than 60 years. Global trade has fallen dramatically and manufacturing output in many economies is contracting, with the advanced economies most severely affected. Globally, car sales, for example, were down 20% in the opening part of this year. This is impacting upon Ireland as our economic prospects are so closely aligned with developments elsewhere. Allied to this, unfavourable movements in the euro to sterling exchange rate are unhelpful for our exporters and are raising competitiveness concerns in that sector. It was interesting to note this week that whereas our prices are falling, the British inflation rate is rising sharply, which obviously reflects exchange rate movements.

On the domestic side, the downturn in the residential construction sector has spread to the rest of the economy, impacting upon the labour market and public finances and weighing upon consumer and business confidence. Due to this unprecedented confluence of adverse external and domestic factors, economic activity in Ireland will be very weak this year.

We must continue to pursue appropriate policies to position the economy to benefit from the global recovery when it eventually emerges. Through taking the necessary action now, we will safeguard our recent progress and secure our future prospects. Our economy remains flexible and resilient and this will facilitate an adjustment to reflect the prevailing conditions. Despite our constrained budgetary parameters, we have continued to make productive investment in physical and human capital under the national development plan. These measures will help equip the economy with the requisite skills, infrastructure and operating environment needed to participate in a future sustainable, export led growth pattern.

The economic downturn has been felt in the Irish economy on two fronts, namely, the rapid decline in the domestic construction industry and, by virtue of our small open economy, our exposure to the international deterioration. The speed and severity of the downturn has been unprecedented.

The Government is determined to deal with the economic challenges we face. In such instances, it is vital to prioritise our goals. The immediate task facing the Government is to address the difficulties in the public finances. If we cannot bring our public finances back to a sustainable path, we will fail to position ourselves to take full advantage as the global economy improves. We are absolutely committed to taking resolute corrective action and confident that we will succeed.

The Government has taken important action to address the emerging difficult economic and budgetary position, bringing forward the budget, implementing taxation and spending changes and introducing a pension contribution for public servants. Many governments are continually adapting and revising their responses as the recession deepens. Last July, the Government acted by announcing spending cuts of €400 million, effective for 2008, and €1 billion in 2009. This was followed up by the introduction in the budget of additional revenue raising measures of close to €2 billion.

The Government, in early January, set a five year framework to restore order to the public finances. In February, in line with the framework, a series of measures were introduced to secure further savings of up to €2 billion on a full year basis. We are committed to sustainable public finances and action taken to date points to this. It also demonstrates the difficult trading position in which we find ourselves.

The Government's determination to restore order to the public finances is recognised by our European partners. On Wednesday, the European Commission published the proposed Council recommendation on the excessive deficit procedure for Ireland which is a normal part of the operation of the Stability and Growth Pact. I welcome the endorsement in the Commission documents of the Government's aim to reduce the deficit below 3% by 2013, as set out in the January 2009 addendum to the stability programme and in its overall budgetary strategy. I understand the Minister for Finance has been in regular contact with colleagues at EU level and support for his approach has been expressed by the Commissioner for Economic and Monetary Affairs, Mr. Almunia, and the ECB President, Mr. Trichet, who was in Dublin recently.

I was glad to note that last week's edition of The Economist recognised the efforts Ireland has been making. It made two interesting points. It noted that despite the bursting, if one likes, of the housing bubble, Ireland has made strong gains from the Celtic tiger era. It is sometimes suggested that much of the growth was squandered. While I would accept some criticism, it is important to remember that, for example, we were frequently praised by the European Commission for the way in which we spent Structural and Cohesion Funds. The Commission was able to compare our expenditure of such funds with that of other countries. In addition, we managed to drive down our debt to an exceptionally low level and, as we discussed in other contexts, we put aside a substantial national pension reserve fund.

The second point made by The Economist was that when it came to retrenchment Ireland had form. Its commentary seemed to recognise that, as a country, we were buckling down to do what is necessary in the present circumstances, namely, to lower incomes and costs. I attended an Irish Financial Services Centre conference this morning at which one of the speakers made the point that since the recession has hit — so far its effect on the IFSC has been relatively light — it has become much more competitive to hire people and rents have fallen a good deal. With the drop in incomes and costs, we will shortly begin to see that Ireland will recover much of its competitiveness, as we most certainly need to do.

With the continued difficult international conditions, the public finances have inevitably come under pressure, with declining tax revenues and rising unemployment related payments. There is no doubt that the position in the public finances is extremely challenging. Our tax revenues in 2008 fell by 14% and the early Exchequer returns in 2009 have continued to be disappointing. Action must be taken to address this worsening position and the Government is determined to meet the difficult challenge of restoring the public finances to a stable and sustainable footing. We will do this as well as adjusting our cost base, improving our competitiveness and ensuring the economy is again positioned to provide employment, prosperity and opportunity for all our people.

To achieve this, necessary additional measures are required this year involving the introduction of additional taxation and expenditure measures to stabilise the budgetary position. These measures will be presented in a supplementary budget on 7 April, which will, it is fair to say, be a supplementary budget like no other.

Although we face considerable challenges at present and are experiencing a relatively sharper adjustment and slowdown than many other countries, it is worth emphasising that many of the factors which facilitated Ireland's economic success in recent years remain. We continue to have a young, flexible and highly educated, English speaking workforce. This labour force continues to be highly skilled and we are continuing to invest in education at all levels to ensure we have the skills demanded by our increasingly knowledge intensive economy. We have a flexible and export orientated, open economy with low corporation tax and a pro-enterprise focus. The Government is positioning the economy to benefit when improvements in the international environment arise. It will achieve this by building on our strengths in innovation and research and development, through continued investment in critical infrastructure and by supporting employment intensive activity. Building Ireland's smart economy, the framework for sustainable economic renewal launched in December will provide a blueprint for ongoing developments in this regard.

As far as possible we will continue to invest in capital projects in areas such as roads, public transport, schools and housing to provide an ongoing stimulus to the economy, support future development and enhance our productive capacity. With regard to Government borrowing, while this will increase in the coming years we are starting from a relatively low position, having had one of the lowest debt-GDP ratios in Europe at the end of 2008. We will continue to remain, despite increased borrowing, below the Commission's projected EU and eurozone average.

As a small trading economy, sustainable improvements in Irish living standards can only be achieved by supplying goods and services to the wider global economy. The Government's overriding objective is to position the economy to exploit a global recovery when it emerges. This is important because from our experience in the 1980s, while the global recovery emerged in about 1982 or 1983, we were not able to take advantage of it until the late 1980s. We do not want that position to arise again.

That is the reason we are taking action to put the public finances on a more sustainable path to get credit flowing and improve competitiveness. Our position as a small open economy means that we attract a high degree of international intention, particularly from the markets, on which we are increasingly dependent for borrowing because of our budgetary position. These markets must have confidence that we will take the necessary budgetary measures to restore the public finances to a sustainable footing. We cannot look outward for solutions. The primary source of our recovery must be found within the Irish economy and I have no doubt we are in a position to overcome our problems.

The second important element of restoring Ireland to a sustainable path of growth is to deal with the difficulties in our own financial system. The international financial crisis has demanded Government interventions in most developed countries. It is a global problem and Governments across the world have intervened repeatedly to ensure financial stability. Governments have guaranteed the liabilities of banks, injected capital into them, provided short-term liquidity facilities to ensure banks can access funds as required and, in a number of cases, taken banks into the protection of public ownership.

The Government's approach has at all times been informed by advice from, and in consultation with, the Central Bank and Financial Services Authority of Ireland, the National Treasury Management Agency and legal and financial advisers. The Government has had and will continue to have regard to discussion with our partners at European Union level. We have provided real support to the banking sector through the bank guarantee, recapitalisation and the protection of public ownership. The support is conditional, meaning that the State will receive substantial fees for the assistance provided, has representation at board level, ensured commitment to a bank customer package and imposed restrictions on remuneration following completion of the report of the Covered Institutions Remuneration Oversight Committee.

The Government is committed to securing the position of our financial system and protecting systemically relevant institutions. With the six month review of the guarantee scheme to be completed by mid-April 2009, the Government will consider examining how the scheme can be revised, subject to European Commission approval and consistent with EU state aid requirements. The Government is also committed to reviewing proposals to deal with the risks associated with certain assets. In this context, the Minister for Finance asked Dr. Peter Bacon and the National Treasury Management Agency to report to him on the matter. This has been completed and will inform the Government's ongoing considerations.

Furthermore, the Government is committed to reforming our regulatory system as a matter of priority. The Government will introduce new structures for banking regulation, provide for the integration of Central Bank responsibilities with the regulatory and supervisory functions, new standards of corporate governance and a new approach to enhance consumer protection. These changes will restore our reputation and will be consistent with the emerging international agenda for reform in the financial services sector. Structural changes and a substantial increase in regulatory capacity will lead to a more effective and efficient financial services regulatory system, which will be aligned to the best international standards.

The world is watching. It is vital that we demonstrate that we are following sound and sustainable policies that will ensure a growth economy and a productive society. The first step in this regard is restoring order to the public finances. The second and related task is to reform our own financial system. The Government will continue the processes of delivering on these goals and will address the detail of the changes proposed to the public finances in the forthcoming supplementary budget on 7 April. The restoration of the public finances to a stable and sustainable footing and the revitalisation of the Irish economy is a challenge this Government will address successfully.