Martin Mansergh (Tipperary South, Fianna Fail)

I am pleased to appear before the House to discuss public expenditure and in particular the background to the Appropriation Bill 2009 which gives statutory effect to voted expenditure for 2009. Before discussing expenditure in detail it would be useful to put it in context by reviewing briefly the performance of the public finances in 2009.

The initial Estimates for 2009 were set out by the Minister for Finance in his budget of October 2008. As the Minister indicated at the time, no one could have foreseen the speed with which the global and domestic downturn would gather pace. He pointed out that in the months leading up to that budget, the world financial system had been turned upside down. Household names in global finance had been rescued by governments and blue chip companies had either failed or been subsumed into other institutions. He also reminded the House that just two weeks before budget 2009, when the stability of our own banking sector came under threat, the Government had taken bold and decisive action by putting in place a guarantee arrangement to safeguard the financial system in Ireland. This was done to protect our economy and all who work in it.

This international credit crisis compounded and deepened the downturn in the domestic construction sector and led to a fall off in consumer confidence. The rapidity and severity of this downturn took even the most pessimistic of commentators by surprise. The result has been a sharp rise in unemployment and a steep decline in revenue with businesses experiencing the kind of economic difficulties not seen in this country for more than 20 years. In response to this situation, the budget for 2009 was brought forward by two months to 14 October 2008, in order to seize the initiative and provide political leadership in the face of a rapidly and dramatically changing economic context. At that time it was envisaged that GNP would contract by 1%, with GDP contracting by about 0.75%, that unemployment would rise, averaging 7.3% for the year as a whole, and inflation would ease to 2.5% on average for the year.

In framing that budget in October 2008, spending was concentrated on our schools, our health services and on the protection of the elderly and the most vulnerable and contained a social welfare package of over €500 million. Investment in our public services continued but in a time of scarcer resources the value for money principle became all the more imperative. The 2009 budgetary targets were as follows: an increase in gross voted spending of 1.8%; a current budget deficit of just over €4.7 billion; a capital budget deficit of just under €8.7 billion; a general Government deficit of just over €12 billion or 6.5% of GDP; and a debt to GDP ratio of 43%, with the intention of securing a progressive reduction in the deficit as a percentage of GDP in 2010 and 2011.

However, the global economic and financial crisis, together with the correction in the domestic property market, continued to have a significant impact on budgetary and economic developments in Ireland in early 2009. Tax receipts in particular were severely impacted by the contraction in economic activity. To underpin the sustainability of the Government finances, expenditure savings amounting to €2 billion in a full year were announced in February 2009. The most significant component of this package was the introduction of a pension-related pay deduction of an average of 7% from the earnings of all public servants.

The supplementary budget in April of this year continued the process of adjustment begun by these earlier savings measures with further expenditure adjustments of €886 million in gross current expenditure and €576 million in capital. A number of initiatives were also announced in the supplementary budget with the aim of reducing the cost of delivering services, including the introduction of a general moratorium on recruitment and promotion in the public service and the implementation of an incentivised early retirement scheme and career break schemes for most of the public service. These measures have resulted in a significant reduction in public service staff numbers in 2009, and this is developed and built upon by the Government's new multi-annual numbers control strategy.

In April's supplementary budget, the Minister for Finance outlined six steps that had to be taken to restore and renew this economy. First, the stabilisation of our public finances; second, the restoration of our damaged banking system; third, the regaining of competitiveness; fourth, the protection of jobs; fifth, the support and stimulation of economic confidence; and finally, the restoration of our reputation abroad.

The first and most urgent of these was the stabilisation of our public finances. It was vital to show that we could put our own house in order before we could expect those who have invested here and who might invest here in the future to have confidence in us. The supplementary budget in April 2009 forecast that €34.4 billion in tax revenue would be collected this year, a decline of over 15% on the receipts for 2008. This projection was revised in budget 2010, with approximately €32.6 billion now expected to be collected. This represents a decline of over 30% on the level of taxes received in 2007 and means that tax revenues are now back to 2003 levels. In contrast, current expenditure has increased by 70% over that period. This weakness in taxation receipts reinforces the need for expenditure reductions to stabilise the position in the public finances.

In this regard, budget 2010 is the latest in a series of measures, which began in July 2008, designed to restore order to the public finances. During the past 18 months the Government has made budgetary adjustments with both taxation and expenditure measures designed to yield around €8 billion in 2009. In view of the substantial revenue raising measures undertaken in the budget and supplementary budget 2009, budget 2010 focused on the expenditure side of the account. An expenditure adjustment of €4 billion was set out, including cuts in public sector pay, social welfare and capital expenditure, as well as substantial reductions in programme expenditure. It is true some tax changes were made both upwards and downwards but the net impact of that exercise was a mere €17 million in comparison.

Budget 2010 is the latest step in the expenditure control programme begun in July 2008. In regard to the Exchequer paybill, budget 2010 introduced salary reductions averaging 6% across the public service with reductions of 15% for those at the most senior levels. In addition, long-run pension costs in the public service should fall following implementation of the budget 2010 announcement of a new pension scheme which will apply to all new public servants. In addition, the Special Group on Public Service Numbers and Expenditure Programmes, set up to examine the current expenditure programmes in each Department and to make recommendations for reducing public service numbers in order to ensure a return to sustainable public finances reported in July 2009. Its report made a series of recommendations for savings totalling €5.3 billion in a full year and entailing staff reductions of 17,300. These recommendations have been taken into consideration in formulating budget 2010 and will be further considered in the context of future budgets. In budget 2010 adjustments have been made across the board such that if unemployment related expenditure is excluded, overall Government spending has been reduced by more than 10% in the period 2008-10 in net terms.

The Government is also implementing a new, more rigorous approach to controlling public service numbers, to drive greater efficiency and productivity from the system of public administration. This will lead to significant additional savings on a multi-annual basis, making a contribution to the progressive lowering of our deficit. The new public service numbers policy draws upon the findings of the special group, and will facilitate a progressive reduction in staff numbers across the public service by end-2012. This is to be achieved while respecting Government commitments to maintain and improve teaching resources in primary and second level education.

Additionally, a review of the capital programme was carried out in advance of budget 2010 to ensure this investment programme focuses on the priorities that are most appropriate to the challenges we now face and which promote economic recovery. Government decisions on capital allocations for 2010 and subsequent years have been informed by this review, which it is intended to publish shortly. Capital expenditure, at an average of approximately 4% of GNP over the period 2009-14, remains at a high level and reductions in tender prices mean it is now possible to deliver capital projects more cheaply, enabling many of the goals of the National Development Plan 2007-2013 to be more readily achieved.

In conclusion, this Bill deals with expenditure during the course of 2009 - expenditure that has been managed and controlled in a responsible way by this Government over the course of the year. That process of responsible and prudent budgetary management will be continued into 2010, as set out in the recent budget. The decisions which the Government has had to take are not easy and are clearly not designed to court popularity but they are the right and responsible decisions. As a result of the decisive and consistent steps taken by the Government, we are now in a position to stabilise our national deficit in 2010, and to bring it back below the 3% ceiling by 2014.

The scale of future adjustments needed to restore order to the public finances will not now be as large as previously thought. For 2011, it is estimated that the necessary adjustments will be of the order of €3 billion, with €1 billion already identified and incorporated into the capital expenditure forecasts. Budget 2010 re-emphasised the Government's commitment to restoring stability to the public finances which will in turn help return the economy to a sustainable growth path. Sustainable growth is what will generate the additional resources we need to deliver further improvements in our schools, our hospitals and across the full spectrum of public services.

As the experience post-1987 showed, in which Senator MacSharry's father, the then Minister for Finance, was heavily involved with the support of the then leader of Fianna Fáil, expenditure reductions are a much more effective and less economically damaging way of dealing with a large deficit.

With regard to light at the end of the tunnel, I hope it will be a bright day at the solstice in Newgrange on Monday.