Michael Noonan (Limerick City, Fine Gael)

I thank the Acting Chairman. I am pleased to be in the Seanad to discuss the latest economic and financial developments. At the outset, I wish to highlight that, notwithstanding the more negative view of the euro area and global economies which has emerged recently, both market and international sentiment towards Ireland has improved since the summer. I believe that this reflects a number of developments. The economy is expanding once again; the public finances are on track; tangible progress is being made in resolving the banking situation, at a lower than assumed cost to the taxpayer; and the cost of external financial assistance to the State has been reduced significantly.

This, I believe, highlights the importance of continuing to do what we can to put our own house in order. In my opening remarks, I will elaborate on each of these key developments, outlining in each case the main policies the Government is putting in place to nourish the emerging economic recovery. First, as regards the macro-economic situation, the latest published figures provide at least some grounds for encouragement. Gross domestic product increased by 1.6% in the second quarter of this year, following on from a relatively robust expansion in the first quarter. This was the first time there have been two successive quarters of increasing activity since 2006. As has been well documented, the external sector is leading the way. Exports of goods and services are now well in excess of pre-crisis levels, confirming that the improvement in competitiveness is standing to us. Last year, the balance of payments moved into surplus for the first time in over a decade.

I would also highlight that recent inward investment announcements provide further grounds for optimism, clearly demonstrating that Ireland remains an attractive location for the production and export of high-technology goods and services. I see this as a clear demonstration that the Government's strategy regarding the 12.5% corporation tax rate is an appropriate one and I believe most Members of this House would endorse this position. The broadening of the Irish export performance to include large parts of the indigenous exporting sectors is also a welcome development. For instance, the agrifood sector is making a significant contribution as is the tourism sector, in part due to the measures implemented as part of the Government's recent jobs initiative.

While the exporting sector has certainly been the shining light in recent times, I am very conscious of the ongoing difficulties elsewhere in our economy and, indeed, in our society. For instance, large parts of the household sector have ramped up their precautionary savings in response to the major deterioration in the labour market. Unemployment has risen to over 14%, an unacceptably high figure and addressing this statistic is undoubtedly the greatest challenge facing the Government. I assure Members that virtually all the main macro-economic policies being implemented by the Government, from recapitalising the banking system to fiscal consolidation, are designed with the objective of boosting employment in a sustainable manner so that unemployment can be put on a downward path once again.

In the euro area, the sovereign debt crisis has entered a new phase, with negative spill-over effects to parts of the European banking system. While the euro area is not unique among advanced economies in terms of sovereign debt problems, unfortunately it has been the focus of markets. There is considerable uncertainty and nervousness and this is weighing on growth prospects in many of our main export markets. At this stage, the most likely scenario appears to be for a slowdown in our main trading partners as opposed to a slip back into recession. Even this, however, will have less favourable consequences for Irish growth prospects. On balance, it would appear that notwithstanding the relatively good performance in the first half of the year, a slowdown appears likely in the second half, mainly on foot of external developments. A full assessment is currently being undertaken by my Department and will be published in the pre-budget outlook later this month. In this context, I note that the Central Bank earlier this week scaled back its growth forecasts for next year, a not unreasonable decision at this stage.

Moving onto the public finances, my Department published figures for the first nine months of this year last Tuesday. The position at the end of September is one in which the Exchequer deficit, excluding banking-related payments, is over €3 billion lower than it was in the same period last year. There is clear evidence that real progress is being made in terms of putting our public finances on a more sustainable path. However, there can be no room for complacency; our deficit remains far too large, and it is crucial that we continue to bridge the gap between revenue and expenditure in the coming years.

The agreed target for next year is a deficit of no more than 8.6% of GDP and the Government is committed to implementing the necessary level of consolidation to ensure that target is achieved. In this regard, the results of the comprehensive review of expenditure will inform the future path and composition of public spending. The final CRE reports have now been submitted by all Departments to my colleague, the Minister for Public Expenditure and Reform.

It is important that we provide as much clarity as possible regarding future consolidation in order to generate certainty and thereby enable households and firms to plan their spending and investment decisions. In this regard, the forthcoming pre-budget outlook will set out a medium-term fiscal consolidation path covering the period 2012 to 2015, with the overall composition of revenue and expenditure adjustments for each year being outlined.

With regard to the banking sector, it is fair to say that signs of progress are becoming increasingly visible. As Senators will be aware, the Government's overall strategy is to create a leaner, more resilient banking system centred around two pillar banks whose primary focus is supporting economic recovery in Ireland. In terms of resilience, a €24 billion recapitalisation of the banking sector took place in July of this year, in line with the PCAR analysis. The State's net direct investment was €16.4 billion, considerably lower than initially envisaged. The remaining capital was sourced from liability management exercises with subordinated bondholders in the various banks, anticipated asset sales and the injection of private capital into one major bank. I see the private capital injection as a vote of confidence in the Irish banking system and indeed, in the future of the Irish economy. With this additional capital, Irish banks are now very well capitalised and capable of withstanding very distressed scenarios.

Progress with regard to restructuring has been significant in recent months. The legal merger of AIB and EBS was completed on 1 July 2011, as was the merger of Anglo and INBS. Restructuring is also continuing at Irish Life & Permanent. Considerable progress has also been made on the renewal of the boards of banks, while management structures have been strengthened with clearer roles and lines of responsibility. The banks have also had success in securing term wholesale funding from international banks with some €4.5 billion funded to date and further transactions being negotiated. This is ahead of the second quarter 2013 schedule envisaged in March 2011. At the same time, the programme of asset deleveraging is under way, with significant progress expected to be made this year in spite of the difficult environment in international financial markets. It should be noted that more than 80% of the assets to be disposed of by the end of 2013 are located outside Ireland. All of these measures are helping to rebuild international investor confidence in the Irish banking sector. We have confidence in and are committed to the bank restructuring plans.

Within the European context, we actively participate in and contribute to the discussions. However, we maintain a steady and considered dialogue with all of the European authorities regarding the current challenges while continuing to ensure that the primary focus is on needs of the Irish people and our economy.

The cost of external financial assistance is also moving in the right direction. Last July, the Heads of State and Government in the euro area agreed to address design flaws in the financial support mechanisms available to member states. In particular, it was agreed that the cost of the EFSF facility to beneficiary countries should be close to funding costs. Combined with other technical changes, this will imply a reduction in EFSF lending rates of around 2.6% when approved by all euro area member states. The Chancellor of the Exchequer in the United Kingdom has also agreed to reduce the margin charged on the bilateral loan, although the precise figure has yet to be finalised. In September, the European Commission proposed to eliminate the margin on the EFSM facility.

This was considered at this week's ECOFIN meeting, and while no objections were raised, national parliamentary procedures must be completed before a final decision is made.

Given these changes, figures provided by the NTMA show that the total savings on the original facility, with an average life of 7.5 years, are approximately €9 billion, or approximately 5.7% of GDP. In addition, the cost of our IMF loans will decline as a result of recent and forthcoming increases in our IMF quota. Again the saving is significant. In the case of the IMF loans, the estimated savings take account of a quota increase which will not come into effect before autumn 2012 at the earliest. These expected savings may change either upwards or downwards in the light of future quota revisions.

At the same time, changes are being implemented to both the EFSF and EFSM to allow for longer loan maturities. While there are costs associated with this - borrowing over a longer time horizon is typically more expensive - the lengthening of maturities is beneficial from a cash flow perspective as well as ensuring that the profile of redemptions is more orderly. In other words, the benefits exceed the costs, so this is to be welcomed.

As has been well documented, yields on ten-year Irish Government paper have fallen by over 600 basis points since their peak in July. The message from this is unambiguous - clear, comprehensive, timely and credible polices that are consistently implemented help to reassure markets. With greater reassurance comes lower borrowing costs.

There is, of course, much more to be done. Our deficit remains unsustainably high and further consolidation is necessary. The external outlook is much less benign than it was six months ago and notwithstanding the decline in market interest rates, borrowing costs remain excessive and are not yet consistent with a return to market-based funding. There are substantial challenges ahead, but we are on the right path, and that is where we intend to remain.

I look forward to hearing the comments of Senators.