Martin Mansergh (Tipperary South, Fianna Fail)

Last month, the Department of Finance published the pre-budget outlook, which set out the economic and fiscal forecasts in advance of the budget. It is the intention that this document will provide the platform for a debate on economic and budgetary decisions on a more fully informed basis. Accordingly, I welcome this opportunity to set out the current and prospective economic and budgetary position. The debate also provides an opportunity for Senators to state what they believe needs to be done to put the public finances and the economy firmly on the road to recovery. There is widespread agreement that we must narrow the gap between income and spending by approximately €4 billion next year. Such an agreed view is a positive starting point and I look forward to hearing the views of Senators on how this can and should be achieved.

However, before setting out Government's broad thinking on the public finances, I would like to outline briefly the short to medium-term economic prospects. The past 18 months have been a period of exceptional economic difficulty. The contraction in the construction sector, together with a severe global recession, have resulted in an unprecedented rate of economic decline this year. GDP will decline by approximately 7.5%, GNP by even more at 10.5%. The scale of deterioration in the global economy has been the worst in decades. Given that our major trading partners have been badly affected, Ireland could never have expected to be immune from such a global recession. Clearly, for an open economy such as ours which relies heavily on international trade, this highly unfavourable environment has presented enormous challenges. Declining levels of activity have taken a heavy toll in the labour market. This year, employment will fall by approximately 165,000 people, with the construction, retail and manufacturing sectors the worst affected. Unemployment has increased significantly and this is the most tangible part of this recession.

A reasonable degree of consensus has emerged on the short-term outlook. The current consensus forecast is for a GDP decline of 1.1 % next year. The pre-budget outlook anticipates that growth would return during 2010, but that for the year as a whole GDP will still contract by 1.5%. Nevertheless, this is an improvement since the April supplementary budget forecast. While unemployment is expected to increase into next year, recent labour market developments suggest the rate of increase in unemployment has slowed. While the data do not make it clear whether this is due to emigration, the Government does not regard emigration as a solution to our labour market problems. The creation and protection of jobs remains the overriding objective of Government economic policy, and all aspects of active labour market policies are required to ensure work rather than unemployment remains the norm.

There are three main pillars to the Government's economic strategy and these were further highlighted in the pre-budget outlook: to ensure we have a properly functioning banking system capable of meeting the needs of savers and borrowers; to ensure our public finances are stabilised and put on a longer term sustainable path; and to regain our international competitiveness to be in a position to exploit the global economic recovery and to generate employment growth. With regard to restoring our banking system, substantial time has been spent both within this House and elsewhere discussing what needs to be done. Whatever the differences of opinion may be regarding solutions, everyone agrees that a healthy, fully operational banking system is a cornerstone of a modern economy. Clearly, repairing this system is a fundamental requirement for economic recovery. That is why the Government, like governments and central banks across the globe, has provided substantial support to the financial sector and the broader economy in the current crisis. Much more work needs to be done, but we now have the basis for ensuring we develop a modern healthy banking system whose focus is to support economic activity and underpin employment, especially among small and medium-sized enterprises.

The deterioration in the economy has exposed weaknesses in our public finances. Our tax revenues have returned to 2003 levels while current spending has increased by 70% since then. Borrowing for day-to-day spending has escalated to unsustainable levels and an Exchequer deficit of €26 billion is projected for this year. To put this enormous figure into perspective, we must borrow €500 million each week to fund it. What is striking about the figures is that the deficit has emerged not because the share of Government revenue in our economy has become disproportionately small, but because the share of Government spending has become disproportionately large. Over the past decade, Government revenues have moved within a relatively narrow range of between 34% and 37% of GDP while the share of Government spending has increased from 36% of GDP in 2007 to a projected 45% this year. As a country, we face the hard reality that if one continues to spend more than one earns, one must keep borrowing the difference. If one keeps borrowing the difference, the interest bill will soon become overwhelming and all one's money will be spent repaying it.

Everyone who subscribes to the basic tenets of responsible management knows that the current position cannot continue. Debt service costs are rising rapidly and are absorbing a large and growing share of tax revenue. We must halt this phenomenon and ensure it does not become ingrained. If it does, it will greatly inhibit the Government's ability to provide essential public services. It is also imperative to inspire confidence both internationally and domestically that the deterioration in the public finances is being tackled.

It is also important to restore balance to Government expenditure and ensure taxation is at more sustainable levels. As a number of commentators have remarked, the improvement in the economy over the medium term will not be sufficient to close the budgetary gap. There is a significant underlying deficit that must be dealt with in a targeted way. The report of the special group on public service numbers and expenditure programmes and the report of the Commission on Taxation will form the basis of future tax and spending policy.

Our immediate priority is to stabilise the deficit at this year's level, which is already one of the highest in Europe. To do so requires an adjustment of about €4 billion. Without such savings, the deficit would rise further next year. Between now and budget day, the Government will decide how the necessary savings will be achieved.

Turning to where the adjustments should come from, I would welcome the views of Senators. However, it is important to bear in mind some key facts. Taking account of the very significant increases that have been made to personal taxation, the marginal income tax rate is now at 52% for PAYE earners. It is abundantly clear that the scope for further income tax increases is limited. Moreover, the data on who funds the income tax yield tell their own story. In overall terms, 4% of income earners contribute almost half of the income tax yield. Furthermore, for 2010, it is estimated that around half of income earners will pay no income tax under the current regime. While they may have some exposure to the income levy, having 50% of earners out of the tax net is no longer viable if we want to fund the range of services we expect the Government to provide.

In terms of the other significant taxes - VAT and excise duties - our rates are already high by international standards. The rate of corporation tax must be seen in terms of international markets and our ongoing ability to foster enterprise and future job creation. Given that these four tax areas, income tax, VAT, excise duties and corporation tax, represent the vast bulk of tax revenue, there is limited capacity to raise additional revenue in the forthcoming budget. Consequently, the immediate focus must be on expenditure reduction measures.

The overall amount of gross current voted expenditure stands at almost €56 billion in 2009. Roughly one third of spending is on social welfare related matters, one third on programme expenditures and the final third on public sector pay and pensions. Therefore, the bulk of the adjustment, which must be on day-to-day spending, must consider each of these spending lines. A further significant fact is that we are currently in a period of falling prices. While a prolonged period of price decline would bring its own problems, the current short-term decline in consumer prices does have the effect of supporting real income levels. Consequently, there is some scope to adjust public spending, including welfare expenditure, while still protecting the living standards of those most in need.

The Government's approach to correcting the public finances has been acknowledged by the European Commission. In its excessive deficit report which was published recently, the Commission acknowledged the balanced approach taken and the measures that have been implemented towards reducing the deficit. On the basis of stabilising the deficit the Commission has also proposed a one-year extension for a number of countries and in our case this will mean an extension to 2014 of the deadline to bring our deficit below the 3% of GDP threshold.

This proposed extension, which will be considered by the Council of Ministers today, is welcome. However, let there be no misunderstanding about what this implies. An additional year to correct, while easing somewhat the adjustments required in the later years, does not change the focus of our need to stabilise our very large deficit. If anything, it reinforces the need to continue to take effective action for 2010.

In addition to restoring the banking system to health and stability to the public finances, the Government is also focused on the needs of the wider economy and in particular the promotion of favourable employment conditions. The pre-budget outlook reiterates the requirement that we reposition our economy on a more sustainable, export-led growth path through regaining our international competitiveness. Ireland's cost competitiveness has deteriorated in recent years. As a number of agencies such as the National Competitiveness Council have pointed out, elements of our costs are higher than those of many of our competitors. While this has been aggravated by some factors beyond our control, such as the euro appreciation in recent months, there are measures we can take ourselves through domestic policy action to improve our competitiveness.

In recent years, our labour costs have risen faster than productivity growth. As we refocus our economy towards export-led growth, these crucial input costs become all the more important. Therefore, reducing labour costs through some combination of nominal pay reductions and enhanced productivity must form part of the strategy to improve competitiveness. On a positive note, our labour force continues to be highly skilled and flexible. We have made a significant investment in education at all levels to ensure we have the skills demanded by our increasingly knowledge-intensive economy.

In discussions with the public sector unions, both the Taoiseach and Minister for Finance have indicated that, in view of its share of total spending, the public service pay and pensions bill will have to contribute to the overall budgetary adjustment. An indicative figure of €1.3 billion was identified for the level of adjustment required in the pay bill for 2010. As a Minister of State and public representative, I am in daily contact with public servants. In some senses I have been one since 1974. From my experience in dealing with officials from all grades and sectors of the public service, I readily acknowledge the professionalism, integrity and ability of the majority of our public servants and the important and continuing role they play in delivering essential services to our citizens. However, the public service, no less than any other sector of the economy, must adapt to meet changing social and economic conditions. Maintaining the status quo is not an option. However, the public service has changed and adapted in the past and significant measures have already been taken in the public service since July 2008 to deal with the economic crisis. These measures include the suspension of payment of the general round increases under the terms of Towards 2016 review and transitional agreement, the application of a general moratorium on recruitment and promotion in the public service, the introduction of a pension related deduction of an average of 7% from the earnings of all public servants and the implementation of incentivised early retirement and career break schemes.

Despite these measures, the reality is that public service pay still accounts for about one third of all current expenditure and cannot be sustained at current levels given the severe reduction in tax revenue and other spending pressures that have arisen. The measures introduced and under consideration by the Government to reduce the cost of the public service pay bill reflect the absolute priority to bring the public finances under control so as to provide any sort of foundation for economic recovery. To achieve the necessary savings in public expenditure, the public sector pay bill has to make a further contribution, as indeed all other areas of public expenditure are required to do. This will affect those employed in the public service but it is a matter not of choice but of necessity as expenditure cannot be sustained at current levels without adversely affecting economic recovery.

Discussions with the unions have been ongoing for some time at both plenary and sectoral level to find an agreed basis for achieving the necessary reduction in the public sector pay bill. Discussions have centred on identifying alternative measures to pay rate reductions to achieve the necessary saving. These discussions reflect the Government's preferred option of reaching agreement with the unions on measures to effect the necessary reduction in the public sector pay bill.

It is regrettable that public service workers engaged in a national day of industrial action on 24 November that interrupted the availability of services to our citizens. Industrial action will not further the interests of public sector workers, it will not change the economic realities of our current national finances and it will not create a situation where public service workers can be excluded from the contributions required from all sectors to meet an unprecedented economic crisis that will inevitably impact negatively to some extent on all our citizens.

Given my ministerial responsibility for the Office of Public Works, which has responsibility for flood risk assessment and major flood relief works, I could not let this occasion pass without referring to the recent flooding in the west and south which had such devastating consequences for everyone affected. I have just been discussing these issues with the Oireachtas Joint Committee on the Environment, Heritage and Local Government. I spent the first half of the morning viewing flood damage in Carrick-on-Shannon and Leitrim.

The impact would have been even more severe had it not been for the tremendous efforts of the emergency teams who have worked tirelessly. Thanks to them, no lives have so far been lost. We have witnessed a co-ordinated and dedicated response from all the emergency services, including local authorities, the Defence Forces, Civil Defence, the gardaí and local volunteers, for which we are immensely grateful. OPW engineering staff have provided technical and additional material back-up in many places. While it is important to note that many of the affected areas have not experienced this scale of flooding in living memory, we must make every effort to improve our capacity to anticipate and react to such events.

I have given the highest priority to progressing the OPW's programme of major structural flood relief schemes to reduce the flood risk in areas which already have a long history of flooding. Several successful schemes have been completed, including those in Kilkenny, Carrick-on-Suir, the River Tolka in Dublin, Dunmanway, Gort, Cappamore, Sixmilebridge, the River Nanny, Hazelhatch, Leixlip and Newport, County Tipperary. However, there was still some severe flooding in Gort when I walked through after midnight last Sunday week.

Construction works on flood relief schemes at Mallow, Clonmel and Ennis are substantially complete. Work has just commenced on the first phase of the flood relief scheme for Fermoy. The OPW is also funding major schemes in Waterford and Carlow. It has been undertaking major works on the River Dodder in Dublin for the last three years, an area that suffered severe flooding in the past. It also commenced works on a major scheme in Mornington, while minor works have commenced in Newcastle West, in Mullingar and at Ballymacoda, County Cork. In addition to those at construction stage, major schemes to deal with flooding problems in Templemore and Enniscorthy were formally placed on public exhibition earlier this year. The design of a scheme for Tullamore is at an advanced stage.

OPW officials are also working closely with the local authorities in Bray and Arklow to develop flood relief measures for both towns. Yesterday, I, together with the Minister for the Environment, Heritage and Local Government, issued joint planning guidelines to prevent, as far as possible, aggravation of the problem by inappropriate development in flood plains. I would add a word of caution in this respect. Experience elsewhere has shown that while we can build up flood defences, even the best flood defences do not provide an absolute guarantee for the future that the places concerned will be protected but they should mitigate the risk and frequency of flooding. There are many lessons that will need to be learned and many actions that will need to be undertaken in the short, medium and long term in regard to this issue which, I understand, will be debated in more detail in this House on Friday.

As a country we face some extremely tough economic and fiscal challenges. To overcome them, we must continue to pursue appropriate policies to position the economy to benefit from the global recovery. We have already taken action but much more is needed. To summarise, we have taken significant actions curbing expenditure and raising additional tax revenue since July 2008 to address the crisis in our public finances. Our immediate priority is to stabilise the deficit and this we will do in the forthcoming budget. In this regard our actions have been commended by various outside commentators and international market reaction has changed in our favour. Bank lending must be facilitated and our actions in regard to the very difficult banking situation are taking hold and are the right decisions. We have, through various measures, sought to promote a climate that will facilitate employment, but more must be done here in terms of restoring competitiveness. In taking action now, we must keep our eyes set on the goal to be achieved. Implementing difficult measures now will enable the economy to return to sustainable growth over the medium term. This will facilitate a return to employment growth and a sustainable improvement in living standards.

The Government is acutely aware that businesses, families and almost everyone in our society are affected by the deterioration in economic conditions. In the forthcoming budget we will bring forward policies that will ensure the burden of adjustment is spread as fairly as possible. In anticipation of budget day, I look forward to hearing the views of Senators.