Martin Mansergh (Tipperary South, Fianna Fail)

I am pleased to have the opportunity to contribute to statements on the economy. It is a critical day in our recent development. The economic downturn that has afflicted this country over the past two years has been unprecedented in its severity and complexity. It has therefore presented the Government with a series of major challenges to deal with it. The Government had to respond swiftly and boldly to each of these challenges, and there are four key strands to the Government's policy response to dealing with them. These are fiscal consolidation in order to put the public finances on a sustainable path, repairing the banking system to ensure credit is available to finance viable business and consumer lending, improving our competitiveness so exports can once again become the engine of growth in the Irish economy and upskilling the labour force to ensure those who lose their jobs are in a position to gain employment in expanding sectors of the economy.

Much attention has been given in the media here and abroad to the quarterly national accounts data which were published by the Central Statistics Office last week. Whereas the data were somewhat weaker than market expectations, the figures were not uniformly negative. For example, the quarterly GDP decline of 1.2% comes on the back of a very strong increase of 2.2% in the first quarter of the year, which essentially indicates that the level of economic activity has stabilised in the first half of the year.

In addition, the figures show a very robust export performance in the second quarter, following a good performance in the opening three months of the year. This is encouraging and is clear evidence that the improvements in competitiveness in recent years are having the desired effect. In addition, the export figures show a broadening of our export performance, with strong performances recorded across a number of sectors.

The quarterly figures also point towards a bottoming out of gross national product, which is the most appropriate measure of Irish living standards. This fell by just 0.3% in the second quarter compared to a decline of nearly 11% last year. In summary, the latest figures point towards stabilisation rather than to further output falls and there is certainly no evidence to support the hypothesis discussed in the international media regarding the world economy and a double-dip recession.

Competitiveness improvements are an integral part of Government policy, and its actions in this regard have been timely and decisive. Public service wages have been reduced, providing a clear lead to other sectors of the economy, which is now being followed. The latest data confirm that economy-wide earnings have fallen, and this is helping to restore some of the loss in competitiveness. Moreover, consumer prices have fallen compared with rises elsewhere in Europe, helping to improve our competitiveness as well as protect disposable incomes.

Notwithstanding recent reductions, capital spending remains high by international standards, enhancing our competitiveness and boosting our capacity to grow over the medium term. In addition, our economy is flexible and resilient, due in no small part to the measures implemented by this Government in recent years.

Regarding the emerging fiscal position for this year, I am pleased to say that based on the performance of taxes and expenditure in the period to the end of August the overall borrowing target for the year has not been revised. The Exchequer returns of revenues and expenditure covering the period to the end of September will be published on Monday, 4 October and the Department of Finance will comment at that stage as to the likely end-year position.

Last week, the National Treasury Management Agency raised €1.5 billion in its ninth bond auction of the year, meaning the target of raising €20 billion from the bond markets in 2010 has been achieved. Allowing for cash balances, retail debt and long-term funding carried over from last year, the Exchequer is now fully funded to the middle of 2011. Accordingly, the NTMA has decided not to proceed with the bond auctions scheduled for October and November. The agency will return to the bond markets in the normal way in early 2011.

The underlying general Government deficit for 2010 is expected to be broadly in line with the budget day target. However, as a result of including within the deficit the capital injections to support certain financial institutions, on a headline basis our general Government deficit will be around 32% of GDP. It is important to remember that the classification of this capital support as a capital transfer would impact on the general Government deficit in 2010 only. This is because it is a once-off action and does not alter the stated aim of reducing the deficit to below 3% of GDP by the end of 2014. It must be stressed also that no additional borrowing would be required this year as a result of this technical classification. In cash terms, the capital injections will be paid out over the next ten years or so, thereby lessening the burden on the Exchequer.

Over the course of the past two years, the Government has clearly demonstrated it is willing and able to take the necessary steps to bring stability to the public finances. The Government is fully committed to stabilising and restoring sustainability to the public finances by bringing the general Government deficit below the 3% of GDP Stability and Growth Pact threshold by the end of 2014. It is of vital importance that we have a credible path to show how we propose to meet this commitment and, accordingly, the Minister for Finance stated this morning that a four year budgetary plan, incorporating annual measures, will be published in November.

The latest national accounts data point to a stabilisation of economic output. I am pleased that the latest information on labour market trends also provides evidence of stabilisation. The CSO's quarterly national household survey provides a definitive measure of labour market trends. Last week the survey for the second quarter of this year was released. The year on year decline in employment in the second quarter of 2010, while unwelcome, was not unexpected. It was the smallest annual decline in employment since the third quarter of 2008, and half the rate of decline this time last year. QNHS figures show there was a small increase in employment in the second quarter of 2010. Although seasonal factors account for this upturn, nevertheless the trend is encouraging, particularly because on a seasonally adjusted basis employment rose in several economic sectors in the second quarter of 2010. Employment also rose in the second quarter in certain occupations such as professionals, managers, and plant and machine operatives. The Government is particularly concerned at the growing rate of long-term unemployed. Upskilling and retraining this group, in particular, therefore will continue to be a priority for this Government. These figures, although encouraging, highlight the considerable work that still needs to be done. This Government will continue to focus on improving our price and labour cost competitiveness which is a necessary condition for improving the labour market.

Last week, the CSO released its population and migration estimates for April 2010 which show that gross outward migration in the year to April 2010, although high, was virtually unchanged from last year. The high level of net outward migration recorded is due to a sharp fall in inward migration compared to the previous year's figures. Net outward migration of Irish people in the period was just under 14,500. The CSO data show a healthy distribution of population. The number of people aged 65 years and over reached 500,000 for the first time; this, however, represents just 11.4% of the population. The EU average is 52% higher than this. The data also show that the natural increase in the population is at its highest rate since at least 1987 which is an encouraging pointer to the overall sustainability of the Irish economy over the longer term.

More evidence of stabilisation in the economy is provided by September's live register figures which saw a decrease of over 24,500 compared to August, or a decrease of 5,400 when seasonally adjusted. The live register year on year increase of 22,563 is the lowest increase since December 2007. September's unadjusted fall in the live register was the largest ever recorded. The seasonally adjusted decrease last month of 5,400 was the largest in over ten years. The live register figures for September give the first indication of a levelling out of the numbers on the register for one year or longer. Typically, live register numbers dip in September as the academic term commences. This year, ever greater numbers are returning to education to retrain and re-equip with new skills to compete for jobs the Government is committed to creating under its trading and investing in a smart economy strategy for job creation launched by the Taoiseach earlier this week.

The Government's jobs strategy is built on export-led growth as the principal basis on which to deliver sustainable jobs and growth. For a small open economy like Ireland's, exports offer the highest potential for growth on the basis of value added through increased productivity, innovation, competitiveness and a strong enterprise mix. Export-driven growth will turn the other wheels of the economy and create a virtuous circle to deliver jobs. The report of the innovation task force, ITF, which was published in March 2010, provides a road map for positioning Ireland as an international innovation development hub and to assist in making the smart economy a reality, including the creation of sustainable jobs.

Significant progress has been made in implementing a number of key recommendations in the ITF report. The €500 million Innovation Fund Ireland which was announced by the Taoiseach on 12 July targets the development of a vibrant venture capital community in Ireland through attracting top international venture capitalists. The launch on 16 July of a €296 million investment supports third level research and leverages €63 million private investment. This is a strategy which is already delivering, notwithstanding the major challenges which Ireland faces. Recent successes include 75 investments to date in 2010 from IDA supported companies, which have the potential to create 6,000 jobs; 44 new high potential start-ups approved to date in 2010 by Enterprise Ireland; major marketing promotions by Enterprise Ireland and An Bord Bia, which have seen exports of Irish goods, including food products and services, increasing in 2010, with Enterprise Ireland expecting that in 2010 Irish companies will recover over 70% of exports lost in 2009. In addition, employment in the tourism sector grew by 5,500 in the first quarter of 2010, compared with the same period last year.

This week the Taoiseach launched an ambitious five year integrated Government plan for trade, tourism and investment aimed at generating 300,000 jobs and boosting exports by one third. The new plan, "Trading and Investing in a Smart Economy", is the first integrated strategy to promote overseas trade, tourism and investment. The plan aims to create over 150,000 direct new jobs in manufacturing, tourism and internationally trading services, with another 150,000 spin-off jobs; increase the value of Irish exports by indigenous agency-assisted firms by one third; increase the number of overseas visitors to Ireland to 8 million; and attract an extra 780 foreign investment projects through IDA Ireland.

The new Foreign Trade Council will bring together all of our activities in a fully integrated fashion. It will devise new common "brand Ireland" initiatives, exploit marketing platforms such as St. Patrick's Day and trade missions, open new markets for Irish small and medium-sized enterprises, align our visa policy with strategic business interests and maximise the effectiveness of our overseas diplomatic and agency representatives in key markets. I have seen this strategy at work. I was in China for about nine days in connection with Expo and the Asia Pacific Ireland Business Forum, and it is very clear that these opportunities provide a basis for increased business to Ireland. This was obviously the main purpose and object of discussion.

The global financial crisis, which took hold in August 2007, resulted in unprecedented difficulties across international funding markets. This is a global problem, and governments across the world have repeatedly intervened in domestic banking systems to preserve financial stability.

Irish banks, reliant on international funding, have suffered as a result of the reduced availability of credit. Government intervention was necessary to secure the liquidity of our banks. Concerns about the quality of assets held by banks and possible impairment levels have focused the attention of international markets on the level of capital that banks hold. Most developed economies, including Ireland, have had to commit state funds to recapitalise their banks and initiate policies to deal with impaired assets. The downturn in the global economy is having a negative effect on banks. At a time when the financial position of banks is fragile, poor earnings prospects and concerns that asset quality will deteriorate further do little for confidence in the banking system.

The Government's approach has been based on three broad principles: one, not to let any systemically relevant financial institutions fail — this involves protecting depositors and creditors; two, any State involvement in the financial institutions will protect the interests of taxpayers; and three, to ensure the flow of credit to the real economy. The Government in its actions has sought to reflect agreed principles at EU level and comply with state aid guidance. Guided by these three principles, the Government's approach to the banking crisis has been to ensure stability through the two guarantee schemes which have been essential to maintaining banks liquidity; ensure appropriate levels of capital to meet solvency requirements and enable lending to the economy through capital injections; remove the most risky assets, large property and development loans from bank balance sheets through NAMA; promote the flow of credit to viable companies through the establishment of the Credit Review Office and the small and medium-sized enterprise, SME, lending plans; and minimise the immediate budgetary effects of banking support spending through the use of NAMA bonds rather than cash to purchase property and development loans at a discount from banks and the phasing of capital injections through the issue of promissory notes.

Senators will be aware that a statutory instrument which extends the eligible liabilities guarantee scheme to 31 December 2010 was approved by both Houses of the Oireachtas yesterday. This is an important support to the Irish banking system which facilitates its access to both short and longer-term funding to help maintain the overall stability of the banking sector and complements the broad Government strategy to restore the banking system fully and maximise its contribution to overall economic recovery.

With regard to the situation beyond the end of 2010, the Department of Finance and the relevant State authorities, along with the European Commission, will continue to monitor market developments over the coming months to confirm that the guarantee continues to underpin the core principles of financial stability and funding access for the financial institutions. Approval for the continued provision of financial support under this scheme must be sought from the European Commission every six months in accordance with EU state aid requirements.

Much of the concern over asset quality internationally has revolved around toxic financial assets whose value is now highly questionable. In contrast, concerns over asset quality in Irish banks relate to loans based on property, both here and in the UK, especially land and development lending. Having regard to international developments and ongoing work at EU level, the Government examined proposals to manage and reduce the risks on these specific exposures. Following an examination of potential solutions and receipt of advice from the Central Bank, the Financial Regulator and the NTMA, the Government concluded that the establishment of an asset management agency was the most effective way to bring stability to the Irish banking system. The National Asset Management Agency Act was passed in late November 2009, and the European Commission approved the establishment of NAMA on 26 February 2010. The financial institutions participating in NAMA are Allied Irish Banks, Bank of Ireland, Anglo Irish Bank, the Irish Nationwide Building Society and EBS.

NAMA is taking a borrower centred approach to dealing with risky assets. Where a portfolio of eligible asset transfers to NAMA, it includes the entire exposure of the borrowers concerned. Thus, some performing as well as non-performing loans will transfer to NAMA. The largest exposures are being transferred first to remove from bank balance sheets the most systemically significant risks.

It had been predicted by many commentators that NAMA would overpay for assets but this has not been the case. NAMA has to date acquired loans with a nominal value of €27.2 billion for consideration of €12.7 billion, an overall discount of 53%. The discounts are being calculated following detailed loan-by-loan assessments, which include legal due diligence, a detailed valuation process and internal and external checking processes, including external audit.

The Government on 8 September announced its proposals for the restructuring of Anglo Irish Bank. The approach is to split the bank into an asset recovery bank, which would work out the bank's assets over time, and a funding bank which would raise funds for the asset recovery bank. The statement indicated that the Central Bank would determine the capital needs of the two institutions and announce its findings by October. The detailed development of this broad outline is under way and it is intended to submit a plan to the European Commission for approval in the near future. The Central Bank today published its assessment of the capital requirements resulting from the recently announced restructuring of Anglo Irish Bank. This assessment has been applied to both the proposed funding bank and the asset recovery bank that will be created. The total capital required for both institutions under the base or expected loss scenario is €29.3 billion. Under a stress scenario, an additional €5 billion of capital could potentially be required.

The Financial Regulator has made a statement outlining the total capital requirement for the restructured entities today. As a follow on and to bring certainty to the situation, the Minister for Finance has also made a statement today on this matter and on the Irish banking system generally. The Financial Regulator now requires banks to put in place an 8% core tier 1 capital ratio, of which 7% must be equity. After performing a detailed assessment of the capital requirements, both current and under a stress scenario, over a three-year time horizon the regulator determined the additional capital requirement of each NAMA participating institution to be in place in each of the institutions by the end of 2010. The Government has made it clear that to the extent that an institution's capital requirements cannot be met from private or internal sources, the State will make up the shortfall in the form of ordinary shares.

Work has begun on forging a new model to govern the conduct and behaviour of the financial sector, both here and internationally. Ireland will play its part internationally and especially at EU level in seeking to ensure that the redesign of the financial system and financial regulation is consistent with the objectives that underlie a strong, stable and functioning national banking system.

I have focused on the detail of the most recent economic data. When this is omitted it is not surprising that assessments of the prospects for the Irish economy have been unjustifiably negative, which is having a serious impact on the spread of Irish interest rates against the German benchmark. While we cannot underestimate the extent of our current economic problems and of the difficulty of the task in dealing effectively with them, we can be heartened by the recent evidence that points to economic recovery. Ireland's economy is resilient and has great strengths. The Government must do whatever is necessary to repair the breach. This Government must continue with its policies and demonstrate in next December's budget its commitment to meeting its fiscal targets. Then the recovery will become firmly established and evident to all.