Feargal Quinn (Independent)

I welcome the Minister of State. I listened to him say he had read The Economist. I have since read it and when I saw the heading, "The Party is Definitely Over", I thought it was the usual stuff it publishes. I listened to the Minister of State speak, however, and looked at the last paragraph of the article. The Economist is not usually a friend of Ireland so it is interesting. It states that for all its ills "Ireland has form when it comes to retrenchment, it cut debt sharply in the 1980s. If adjustment within the euro means wage cuts, that is a price Ireland seems ready to pay." It is certainly a positive article overall, not what I expected from The Economist.

We must bear in mind that this mini budget will be the fourth financial package in one year. It seems certain that income-tax rates will rise, many capital projects will be halted and more current spending will be cut. I am more concerned, however, about the fundamental way we are going about our recovery and how we can avoid long-term damage.

As highlighted in the international media, this country's response to the recession goes against the grain. In America and Britain, policy is geared to avoiding deflation, which raises the real cost of debt. This country, however, is going down the route of pushing for lower wages, even though households here are also heavily indebted. I understand why. I was in Dundalk a couple of weeks ago talking to some of those who have lost their jobs. I asked if they would be able to find work in Newry, which is only 15 minutes away, but they said the same jobs in Newry only pay a third as much for the same work. How can we survive if our costs are so high?

Many countries want to lift their economies by fiscal expansion but we are tightening the budget. The Brown-Obama model, however, cannot necessarily translate successfully in Ireland. We have pushed our economy into a corner where mere domestic demand, the few euro extra spending power of a couple of hundred thousand worker-consumers, is hugely insufficient in terms of the scale of the stimulus we need to get ourselves out of the recession, especially since so little of what we buy is Irish. Only another enormous bubble on items like houses could possibly sustain growth based heavily on domestic demand, and not only is that not likely to happen for a decade or two, it is perhaps not desirable, given the recent effects the burst in this bubble caused for our economy and the economy of Spain.

Tax rises during financial hard times, however, must be questioned. We only need look at the increase in the VAT rate which lost us so much business in this country. It only increased by 0.5% but Britain cut VAT by a few per cent at the same time as a drop in sterling.

The Government never seems to learn that by having lower tax rates, it may in many cases bring in more revenue. I learned this as a grocer many years ago. Sometimes reducing the percentage, if one is clever enough, can bring more money in. It is not always the thing to do but we have had some success stories in Ireland, reducing tax rates, such as corporation and betting tax, while bringing in more money.

Few other countries face deficits as large as ours. We do not have the large debts we had previously but we can only hope the budget measures will result in improved confidence among foreign investors and at home. Alan Barrett of the ESRI says that consumers are aware of the gap in the budget and know tax rises are coming and that spending may even pick up if the uncertainty over taxes is ended.

For all our drawbacks, we have form when it comes to reduction of expenditure when we cut debt sharply in the late 1980s and some are optimistic that we can do it again. For instance, The Economist is hopeful about Ireland's economic recovery saying that "once the economy bottoms out and new measures take their full effect, the 2010 deficit ought to be less scary to the markets". Outside observers are impressed that the fundamentals that brought Ireland such success have not gone away. We still have a highly skilled workforce, greater productivity than many EU countries, a pro-business regulatory regime and speak English in the eurozone. These all help and none of them has disappeared. Comparing where we were 15 or 20 years ago with the position three or four years ago, we are now in a much better situation. However, wages must fall in line with deflation and prices must also fall. A lot of the gains Ireland made in the last 20 years will be preserved despite the collapse of the housing bubble. I hope Ireland's infrastructure, international profile and links have been advanced irreversibly. The country has also become more accustomed to success and what I call the psychological advance will help us to bounce back because we have more confidence than we had in the past.

The fundamental challenge is to find a sustainable long-term growth model founded on productivity, not just corporate tax and labour cost competition. The Government needs to take the bull by the horns and do what those banking experts say is inevitable. It must give serious thought to nationalising AIB and the Bank of Ireland. This would allow for a cleaning out of the toxic junk while getting credit into the economy and giving business people some breathing space. It would also send a strong statement to the markets that the Government is on top of the crisis. We must seriously grab hold of the situation in some form or other.

Increased competition is being advanced as a cure-all, but even if it results in price reductions it will fail to improve Ireland's international competitiveness, while the underlying controllable, but excessive, costs are left untouched. We have to tackle the wide range of "point-of-use" charges for utility and other services, combined with low nominal tax rates.

A number of Senators have referred to the cost of communications and energy. It is these excessively high charges which, more than anything else, have driven labour costs and contributed to the precipitous decline in Ireland's international competitiveness. For example, Ireland has the highest electricity prices in the EU. These high charges have resulted, in the main, from totally inept policy and regulatory decisions, but no serious consideration is being given to how they might be reduced. I do not understand what happened in the case of energy costs, but the objective of competition in the energy market was to bring down prices. However, in order to introduce competition, the regulator said prices had to increase to make it more profitable and encourage in competition. If the objective was lower energy costs, we have got it back to front. The objective was to introduce competition, but it should have been to achieve lower costs, although I do not quite understand how that works.

I wish to make one or two points on the budget, although they may have been made before. One of them concerns philanthropy. Following criticism in the Dáil, particularly by the Labour Party, of wealthy individuals who were not paying any tax, the Government said everybody would have to pay a certain amount of tax, even the very wealthy. However, philanthropists were included in that measure. Therefore wealthy people who decided to donate their money to charitable causes, were included in that along with all the tax breaks. That was an error, however, and was not the objective. The former American ambassador to Ireland, Mr. Thomas Foley, held an interesting function last year in his residence in the Phoenix Park. He invited a number of organisations that rely on philanthropy, including universities and hospitals, to encourage philanthropic thinking in Ireland. However, the tax measures I referred to have closed the opportunity for wealthy people who might consider donating money to charitable, philanthropic causes. They cannot donate to the same extent as before because we have closed the door in that respect.

Gorta and other charities have indicated they benefit from a tax rebate on a standard €250 annual donation. A number of people now say, however, that they are unable to donate such a sum due to straitened conditions. Therefore, the Minister might consider reducing that sum to €100 to make it more attractive to potential donors.

Let us make sure we get this budget right, but let us also ensure we do not damage the infrastructure and long-term fundamentals that enabled us to get it right in the past.