Billy Kelleher (Cork North Central, Fianna Fail)

On behalf of the Government, I welcome the opportunity to contribute in the Seanad to the statements on the recent IMF and OECD reports on the economy. Given the prevailing economic environment, the analysis and policy prescriptions set out in these reports have received widespread coverage and were the subject of a Dáil debate last week. This is entirely appropriate as it raises understanding of the scale and complexity of the challenges the nation is facing. Discussing the reports in both Houses also provides an opportunity to clarify some of the issues which have arisen during this discussion so far. In particular, it allows us to put on record the endorsement of these influential international organisations for the policies the Government is pursuing.

The OECD analysis of the economy was published as part of a normal forecasting exercise for all the OECD member states. Its forecast is for GDP in Ireland to contract by 9.8 % this year, which is the most pessimistic projection for the economy to date. Leaving aside the scale of the contraction, nobody would disagree with the OECD that the economy is in the midst of a severe contraction, reflecting a correction in large domestic imbalances, which is being compounded by the global economic and financial crisis. Two further aspects of the OECD analysis should be highlighted. First, given the scale of the adjustment so far, the OECD takes the view that the underlying economic imbalances are unwinding rapidly and this could add more strength to recovery than anticipated. Second, the OECD is projecting large contractions in other advanced economies. Economic activity in the euro area is forecast to decline by -4.8%, -4.3% in the UK and -2.8% in the US. While we take no comfort in this, it points to the negative impact from the deterioration in the external climate, so that some improvement in domestic conditions can be expected when the global economy improves. As is the normal practice, every year or so economists from the International Monetary Fund conduct an in-depth analysis of the Irish economy. The recent report was a balanced and realistic assessment of the economic, fiscal and financial challenges we are facing. Crucially, the report endorses the policies being pursued by the Government. It says that in the two areas that matter most - the healing of the financial sector and the correction of the budgetary situation - the Government has moved in the right direction. As we all are aware, the fund is a rigorously independent organisation, with a considerable economic expertise, so the endorsement it provides for the actions being taken by the Government carries considerable weight internationally.

In terms of the economic outlook, the IMF is projecting that the Irish economy will experience a cumulative fall of 13.5% between 2008 and 2010. While this received widespread coverage, informed commentators recognise it is broadly of similar magnitude to the earlier forecast made by the Department of Finance in the April supplementary budget. Attempts have been made in some circles to link our present economic difficulties with earlier Government action. The reality is that virtually nobody anywhere foresaw the nature and scale of this global recession, which as has been pointed out before is the most severe in post-war Europe. Some people have attempted to portray the report as critical of budgetary policy in recent years. Clearly, policy must be formulated on the basis of information which is available at the time. In this regard, previous IMF analyses, as well as analyses by others, showed that fiscal policy was broadly appropriate at the time. Hindsight, as we all know, has 20:20 vision.

In terms of the current budgetary situation, the IMF report commends the Government for its actions to resolve our fiscal difficulties, pointing out that the approach and elements of Ireland's budgetary plans are appropriate. There is a broad welcome for the fiscal measures which have already been taken, including initiatives to curb public sector costs. One of the key elements of the Government's approach to deal with the current economic challenges is to restore sustainability to the public finances. In this regard, the supplementary budget in April set out a multi-annual consolidation plan for the public finances in order to bring the general government deficit to 3% of GDP by the end of 2013. This is the Stability and Growth Pact limit. It should be noted, therefore, that this approach has also been welcomed by the European Commission.

As Senators will be aware, a substantial number of concrete steps have been taken by this Government to reduce the public service pay bill through a reduction in the numbers employed. The initiatives to achieve this include a freeze on the recruitment and promotion of public servants, the introduction of incentivised early retirement and a career break scheme. In terms of pay, the review body on higher remuneration in the public sector has been asked to undertake an examination of the remuneration of higher level posts in the public service. Part of the remit of the review body is to take account of the pay of comparable posts in other countries with similar economic and political systems, particularly those in the eurozone. The Minister for Finance has publicly indicated that the report of this review body is to be completed by the end of September. These measures represent a comprehensive set of actions to reduce the cost of the public sector wage bill and to supplement the introduction of the average 7% public sector pension levy and the non-payment of the terms of the latest pay deal. Measures to reduce the public wage bill will, of course, be complemented by public sector reform. The Government has adopted the recommendations in the report of the task force on the public service, Transforming Public Services, which sets out a framework for what amounts to a radical transformation of the public service. It has recommended specific actions over set timescales which the Government has agreed to implement.

While the IMF report commended the Government for its actions to date to bring sustainability to the public finances, it also emphasised that these actions need to be sustained. In this regard, the fund has highlighted that further fiscal consolidation efforts should focus to a greater extent on expenditure reduction, as opposed to revenue raising. The Government is keenly aware of these considerations. Earlier this week, the Minister for Finance received a copy of the report by the special group on public service numbers and expenditure programmes. The Minister will consider its deliberations before bringing it to the Government where the analysis and recommendations it contains will provide a framework to help identify economies which can be made on the scale necessary to ensure that the public finances are restored to a more sustainable path. The group's conclusions will be considered on an ongoing basis in the context of preparing estimates of expenditure for 2010 and later years.

One of the key priorities identified by the IMF in addressing our current economic difficulties is the stabilisation of the financial sector to ensure it can discharge its vital role in credit provision to the real economy. Before addressing some of the points made by the IMF, it is important to provide some context to the rationale which underpins the Government's interventions to stabilise the banking sector. At a fundamental level, the banking system is at the core of a functioning economy and needs to be maintained in the interests of the economy and society at large. The Government's approach to tackling the financial crisis has been structured and considered at all times. The Government has demonstrated its commitment to prevent the failure of any systemically important financial institution. Over recent months, the Government's priorities have been to prevent the collapse of liquidity to the banking system; where necessary, to maintain and rebuild the capital position of systemically important banks; and to address the issue of confidence in asset quality of the banking system. The introduction of the bank guarantee scheme was a necessary urgent measure to ensure the banks had sufficient liquidity to operate on a day-to-day basis. If this action had not been taken at that time, there would have been a serious threat to the overall financial system. In the circumstances, the Government had to fully address the systemic risk in an urgent and effective way. The bank guarantee scheme was the best way to do that.

We continued our support through the nationalisation of Anglo Irish Bank and the recapitalisation of our two largest banks. Every country in the world has had to take a number of different measures in response to the evolving banking crisis. This is what the situation has demanded. The €3.5 billion recapitalisation of Bank of Ireland and AIB and the more recent capital injection into Anglo Irish Bank have indicated this country's strong resolve to stand behind systemically important banks in the interests of jobs, the economy, the country and society as a whole. NAMA is a further and crucial step in resolving the banking crisis as it will deal with uncertainties about asset quality, in particular those relating to land, property and associated loans on the banks' balance sheets. As long as this matter is not addressed, there will be question marks about the banks' ability to play their part in the restoration of economic growth. The IMF states that the Government has responded to the crisis in the right manner. It says that, along with ECB facilities, the bank guarantee has helped the banks to obtain market funding and stabilise the banking system. It also notes that the Government is willing to provide additional capital, subject to EU approval and an appropriate return, to important banks.

In the report, the directors of the IMF registered their support for the Government's proposals to restructure the financial sector and establish NAMA. Further, the IMF commended the speed and scale of the initiatives taken by the Government to counter the severe shock to the financial system. The IMF report notes that the estimates of the losses faced by the banks vary. It also provides its own estimate. However, the IMF has made it clear that its estimate was not based on a detailed accounting assessment of the banks. It was based, with adjustment, on the wide range of estimates already in the public domain and arising from a high level review. The IMF report notes the importance of getting the legislative and operational structure for NAMA right and of ensuring the agency is up and running as soon as possible. The establishment of NAMA has been a key priority for the Government. Preparations for the establishment of NAMA continue apace. Recently, a number of expert advisors were appointed to advise the interim managing director and Government in the drafting of the NAMA legislation, as well as the practical preparations for the operation of NAMA. This expert advice will enhance the drafting process and help to ensure the agency is up and running without delay. The legislation establishing NAMA will be published later this month and will be brought to the House for debate in September.

Many commentators seem to be suggesting that the wholesale nationalisation of the State-guaranteed banks is an alternative to an asset management agency approach. It has also been suggested in some quarters that the IMF favours nationalisation, but that is not the case. The IMF sees it as possibly being necessary in certain circumstances. The Government does not accept that the nationalisation of the entire Irish banking system will be the short-term panacea many people envisage. As has been previously indicated, the Government believes it is important, where possible, for the banking sector to have a market presence and operate within market disciplines and constraints. The Government's objective is to ensure the lending needs of the real economy are met. A commercially focused banking system, which includes banks having a market presence and operating within market disciplines and constraints, is best equipped to achieve this aim. In itself, nationalisation will not address any of the problems faced by the banks. Many of the difficulties relating to managing impaired loans, cleansing the balance sheets of the banks and dealing with legal challenges will also arise in the context of a nationalised banking system, perhaps even to a greater extent. It should be noted that no country is currently adopting a policy of wholesale bank nationalisation. There is no immediate reason for Ireland to adopt such a policy. If Ireland were uniquely to proceed down that route, it could, from an international perspective, be very damaging to Ireland's reputation and attractiveness to international investors. Importantly, this would not be limited to the provision of funding to the banking sector but could affect international investment more generally into all areas of the economy. Nationalisation is something the Government believes should be avoided if possible. We acted in the case of Anglo Irish Bank to nationalise it when it was clear this was the right option in the circumstances of that specific bank. However, the minister for Finance has made it clear in the past that if any further capital injections are required from the State for either of the two main banks, these will be in the form of equity capital which would have the effect of increasing State ownership of the two banks although we are hopeful that this will not be necessary.

Overall, therefore, the Government has taken a number of significant steps to protect and restore the financial system in the sole interest of protecting the economy and the Irish people. It is clear that the IMF endorses and supports that broad framework of our approach. It is also clear to me that the actions taken to date have helped support the financial system and it has not been satisfactorily demonstrated that any other proposed option would have been better.

Before finishing, I would like to say a few words about competitiveness. Both the IMF and OECD reports identify enhanced competitiveness as crucial to a restoration of economic growth. In this regard, the Government is implementing measures which will ensure that the economy is in a position to take advantage of the global recovery when it emerges. For instance, notwithstanding the deterioration in the public finances, the Government is maintaining capital investment at relatively high levels by European standards. These investment programmes will help to eliminate bottlenecks, reduce costs and enhance the attractiveness of Ireland as a location for foreign direct investment.

The Government also continues to invest in education at all levels to ensure we have the skills demanded by our increasingly knowledge-intensive economy. The Government remains committed to providing a pro-enterprise environment and to maintaining our relatively low tax burden on business.

Enhanced competitiveness is recognised as a key feature of the smart economy strategy launched by the Taoiseach which sets out our agenda over the next few years on how we are to re-orientate and reprioritise the business of Government to achieve the goal of building a more competitive economy that will help underpin our future.

The Government remains committed to implementing measures that continue to support the smart economy through investment and incentives to reach a research and development target of 2.5% of GNP by 2013. Ireland has already trebled economy-wide expenditure on research and development over the last decade to around €2.5 billion. In this regard the recently increased tax credit for research and development is seeking to encourage the promotion of sustainable areas of economic activity and growth.

In addition, the flexibility of our economy, a function of the many pro-business reforms implemented in recent years, has improved our capacity to adjust to the new economic climate. There is considerable evidence that labour costs are responding rapidly. Regardless of what some may say, wages are falling in the public sector also. In addition, figures published yesterday show that consumer prices continue to decline, supporting real incomes and improving our competitiveness position.

In summary, we are facing tough challenges and to succeed we must continue to pursue appropriate policies that will position the economy to benefit from the global recovery when it eventually emerges. The Government is acutely aware that businesses, families and almost everyone in our society is being affected by the deterioration in economic conditions. What we are attempting to do is to ensure the burden of adjustment is spread evenly and that the deterioration in our living standards is minimised.

The analysis undertaken and published by external agencies in recent weeks is clearly useful, and confirms that we are moving in the right direction. I look forward to the contributions from other Senators.

The IMF report was discussed in the Dáil last week and it was a useful debate. In the context of making contributions, if Senators are referring to the IMF report, I urge them to cite the detail as opposed to dwelling on some of the perceptions put out, probably by people who had not read the report. It is well worth reading and in general it gives a positive endorsement of the Government's policies in what are clearly very difficult times. We all know the challenges, but importantly from a public representative's viewpoint, they are most visible in terms of rising unemployment, with the ensuing difficulties for families, individuals and society at large. While we speak about facts and figures we must always be conscious that behind them are individuals who have lost their jobs.

The Government is acutely aware of the situation and is trying to introduce policies to ensure that training and upskilling programmes are in place for those who have lost their jobs. It is crucial that we do not allow the situation to drift into chronic long-term unemployment. That is one of the major challenges facing Government, to ensure we do not again experience the long-term unemployment norms that persisted in the early 1980s.

The challenges are there. The Government is resolute and determined to bring forward polices that are right, if not necessarily always popular. In the interests of fairness, any adjudication of the policies being pursued to date in the key areas of bringing stability to the financial sector while addressing the budgetary deficits, will reveal that the Government is on the right path. It may be unpopular but we are trying to ensure the burden is carried by as many as possible. At the same time we must ensure the most vulnerable are not left behind.

I look forward to the Seanad contributions. Incidentally, the perception that Dáil Éireann is rising today and we are all off on a jolly holiday for months, as portrayed by sections of the media, is simply not the case. The Government will be working, as will the committee system, I am sure. More importantly, the policies we have outlined in the context of the Supplementary Estimates in the budget in April and equally the drafting of the NAMA legislation which will be before the Oireachtas in September, are key critical components. We shall be working on them throughout the summer, for fear that those who might not believe us think we are all off on holidays, in what is clearly a very challenging time for everybody in Ireland.