Irish Economy 2009: Cowen says Ireland facing most difficult global conditions in 70 Little point in looking back at what might have been anticipated or avoided
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Irish Economy 2009: Cowen says Ireland facing most difficult global conditions in 70 Little point in looking back at what might have been anticipated or avoided
By Finfacts Team
Jan 28, 2009 - 3:38:04 PM
David Beggs, General Secretary of the Irish Congress of Trade Unions (ICTU), speaking to the media.
Irish Economy 2009:Taoiseach Brian Cowen told the Dáil today that Ireland is facing the most difficult global economic conditions in 70 years. He said there is little point in looking back at how some of this might have been anticipated or avoided.
Cowen said the reality is that the present situation is unprecedented& and calls for clear thinking and resolute action.
He said the Government is in the process of finalising a framework with the Social Partners within which it is intended to develop and implement a Pact for Stabilisation, Solidarity and Economic Renewal.& This embodies the conviction which is shared by the social partners that failure to take radical decisions in the years ahead has the potential to erode national and international confidence in the Irish economy.
The draft framework being discussed with the Social Partners covers the following areas:
- an outline of the challenge facing the country and the rationale for urgen
- the potential contribution of a shared approach
- the need to stabilise the public finances over five years through an appropriate combination of tax and expenditure measures, with an adjustment of the order of EUR2 billion in 2009;
- areas which require short-term stabilisation measures, including maximising economic activity and employment, stabilising the financial and banking sector, maximising employment and helping those and
- a number of policy issues where the Government and Social Partners can work together over the period ahead to implement reforms which ensure Ireland emerges from the crisis as quickly as possible drawing in particular on the Government's Framework for Sustainable Economic Renewal published in December.
The Taoiseach said services exports generally, on which future prosperity is increasingly reliant (foreign firms , mainly American are responsible for 90% of Irish exports), have seen a threefold increase since 2000, bringing to over 40% their share of total exports – a figure the ESRI expects could reach 70% by 2025.
Unemployment could rise to over 10%, with over 120,000 people losing their jobs between 2008 and 2010.
The Pact document says that national income could fall by up to 10% over the same period. It forecasts a general Government deficit of between 11% and 12% of GDP each year up to 2013.
The parties agree to reduce exchequer borrowing over the next five years to get the general Government deficit to below 3% by 2013, through an appropriate combination of spending and tax adjustments.
The document acknowledges the need to cut the public pay and pensions bill, but stresses the need to maximise sustainable employment, to increase efficiency and to maintain high priority public investments.
Changes in taxation will be brought in to broaden the tax base with a higher proportion fall on the better paid.
The Government is also asking the Commission on Taxation to identify appropriate ways of raising tax revenue by September.
The Irish Congress of Trade Unions (ICTU) today supported the proposed framework for talks with the Government and employers on how to cut EUR2 billion in public spending this year.
The executive council of the ICTU approved the framework at a meeting this morning, clearing the way for talks on details of the cuts to get under way this afternoon.
'Delivering sustainable economic renewal and securing our public finances’
Introduction
I welcome the opportunity at the beginning of the new Dáil session to address the current economic challenges facing this country and to outline the Government’s strategy in response.
We are facing the most difficult global economic conditions in seventy years.& The most severe financial crisis since the Great Depression is taking its toll, for example, on the US economy, now in the middle of recession that began in December 2007 and which may prove to be the longest and most severe of the post-war period.
The IMF is expected to make further significant downward revisions to its global forecasts, beyond those already made in November.& Most of the world’s advanced economies are in recession.& And global output is expected to decline for the first time in recent memory.
International trade is also declining sharply—with the World Bank expecting global export volumes to be down for the first time since 1982.
Ireland ’s Vulnerability
As a regional economy accounting for around 1.8% of Eurozone output, Ireland is particularly exposed to these developments.
The combined value of our imports and exports is equivalent to around 150% of national output – which is among the highest shares in developed world.& Exports of goods and services represent around four fifths of our national output, which is over double the EU average, and means our fortunes are inextricably linked with those of global and European markets.
The scale of the economic challenge which we in Ireland face is clear. It is evident in the distressing rise in the number of people becoming unemployed. It is evident in the downturn in economic activity and the associated sharp reduction in Exchequer revenue. It is clear from the crisis in the banking sector and the associated difficulties in securing access to credit on a consistent basis and at competitive rates. It is also evident from the global spread of the crisis, and the uncertainty about its likely depth and duration.
Economic Contraction
The economy contracted by close to 2% last year and this is likely to represent the beginning of an adjustment that will see a reduction of up to 10% in national income over the 2008-10 period—a scale of decline that is without precedent here in Ireland and with few international parallels.& The direct impact on the labour market is already evident, and we are faced with the prospect of further job losses totalling over 100,000 between this year and next.
The challenge is severe – but the Government has a clear strategy which we will continue to implement.& This combines a clear medium-term approach to renew and revitalise the economy based on a deepening of competitiveness and specific short-term measures to address the immediate difficulties we face.
A Strategy for the Crisis
In assessing how well we are placed to confront the crisis, it is reasonable to consider how well the nature of the problem is understood, how clear is the strategy that is designed to respond to it, how credible are the measures to be taken and how likely are they to succeed.
In the first case, the various elements of the interactions which have brought us to the present stage are well known. The unexpectedly rapid collapse of activity in the construction sector in Ireland, the crisis in the International Financial and Banking system, the sharp appreciation in the value of the euro, especially against sterling, and the decline in demand in our export markets associated with the general downturn have all impacted severely on the Irish economy.
There is little point in looking back at how some of this might have been anticipated or avoided.
The reality is that the present situation is unprecedented& and calls for clear thinking and resolute action.
Fiscal Stablisation
A critical challenge to be faced is the rapid decline in tax revenue requiring an unsustainable level of borrowing to fund day-to-day expenditure.& Tax revenues in 2008 were over EUR8 billion below expectations, reflecting the rapid downturn of transaction-based taxes in particular.&
Last July we took early, and successful, action to restrain the growth in public expenditure.& As the situation deteriorated further, we brought forward the Budget, containing some very difficult expenditure and taxation adjustments to give a clear signal of our determination to respond to those pressures.
The outlook for the public finances in the period ahead is subject to more uncertainty than normal and depends on the timing and extent of an international recovery, and how well-placed we are to participate in that upturn.& However our considered assessment is that, in the absence of appropriate further measures, a General Government Deficit of between 11 and 12 per cent of GDP would be in prospect for each year up to 2013.& This is not sustainable and urgent measures are now required to start the process of fiscal stabilisation.
Earlier this month the Minister for Finance published a five year fiscal consolidation programme which sets out how we will progressively reduce the level of Exchequer borrowing over the next five years in order to reduce the General Government Deficit to below 3% by 2013.& This will involve a combination of expenditure and taxation measures over the period.
We have also indicated that a credible start in 2009 requires a further adjustment of EUR2 billion and we are committed to making decisions to achieve that adjustment.
The EUR2 billion required now is only the first phase in the process. Further adjustments of the order of EUR15 billion will be required for the five year period as a whole.& The Government has established two independent processes – the Commission on Taxation and the Special Review Group on Public Service Expenditure – to inform our decisions in 2010 and beyond.
Banking Sector
The international financial crisis, alongside the fall in housing prices, has created enormous pressures on our domestic banking sector.& We swiftly introduced a banking guarantee to ensure the viability of our banking system.
As experience in other countries has shown, the scale and complexity of the difficulties facing the banking system do not lend themselves to simple solutions.& We have adopted a comprehensive approach and acted with care and prudence at all stages.& We are determined to ensure that our two main banks continue as strong, independent institutions, while our financial system as a whole can enjoy international confidence and provide adequate liquidity flows to business.
As part of our strategy for the banking sector, we are also acting to support mortgage holders who get into arrears on their mortgages.& The Financial Regulator is developing a statutory code of practice on mortgage arrears and home repossessions, and funding under the mortgage interest scheme has been greatly expanded.
Thankfully, at present the level of home repossessions remains very low, and significantly lower than the UK, but we will be monitoring trends very closely and will take further measures if required.
On the banking issue, I also want to say this: In the banking sector there must be a new approach to doing business.& The Government will support efforts at international level to establish regulatory mechanisms to ensure that this financial crisis, which is crippling the world economy, can never happen again. But, even more importantly, the financial community internationally must work to a higher ethical standard. Poor standards of behaviour on the part of well paid executives must not be allowed to result in ordinary decent people losing their jobs and businesses struggling to stay afloat.
Unemployment Challenge
Another area of concern is the dramatic impact the downturn in our economy is having in terms of increased unemployment. Indeed, this represents one of the starkest and most immediately understood impacts on the lives of individuals, families and communities.
Despite the budgetary constraints, the Government is maintaining proportionately the largest capital investment programme in Europe.& We will prioritise, to the greatest extent possible, employment-intensive activities like school buildings and energy efficiency improvements.
The Government is also working to significantly improve access for unemployed persons to job search, training and education, and employment programmes.& Relevant Ministers and their Departments are working together to maximise opportunities for up-skilling and re-skilling so that people will be better placed to avail of new job opportunities where they become available, including in new sectors such as energy efficiency.&
Specific actions already taken include:
- We have identified scope for approximately 30,000 additional places in 2009
ensuring that unemployed people have access to all existing full-time further and higher education places
- We have established a training fund to enable a speedy response to identify re-training needs for low skilled and redundant craft workers
The Government will bring forward further measures in these areas which ensure that we get the maximum impact from resources available and that innovative approaches are used to maintain people in employment as well as assisting those who lose their jobs.
Building Ireland’s Smart Economy
Our people need to have confidence that the difficult decisions taken now are part of a coherent approach to return the economy to sustainable growth.& That approach is articulated in the Framework for Sustainable Economic Renewal published by the Government in December.
That Framework, based on the development of a ‘Smart Economy’, reflects the Government's determination not only to meet the severe short-term challenge we face, but also to make the structural reforms which ensure that Ireland emerges from the global downturn in pole position to benefit from the international recovery when it comes.&
We have set out clearly the measures we are taking to support a return to sustainable growth and jobs over the medium term, with specific actions in the areas of:
maximising the potential for growth by building on our strengths in innovation and rese
addressing the huge market for environmental and energy-related products, ser
investing in critical infrastructure, while favouring more employment-intensive activi and
driving our reform agenda for a more efficient and effective public service supported by smart regulation.
We have already taken steps in the Budget and Finance Bill to help realise these objectives, including:
- an increase in the R&D tax credit available to companies from 20% to 25% putting it to the forefront of R&D regimes globally. This will increase Ireland’s attractiveness as a location for R&D activity and it will provide a well-targeted stimulus for such value-added activities.
- an exemption from corporation tax and capital gains tax of up to EUR40,000 for the first three years of a new start-up business, and other measures to help people who want to start enterprises and create jobs.
We are working to bring forward further measures to implement the vision set out in the ‘Smart Economy’ framework.
Economic Renewal
Over the medium-term, our economy, our employment prospects and our living standards require a rebalancing of economic activity towards sustainable, export-led growth.& That is why we are determined to build on our core strengths – strengths which have brought us two decades of economic expansion, doubling to around 2 million the number of people employed.&&
The ‘Smart Economy’ Framework will see continued high levels of investment in upgrading the knowledge-intensity of key growth sectors.& And it will move the economy to a more sustainable growth path, reducing our reliance on fossil fuels and further lowering the carbon-intensity of what we produce.
This is not fanciful or speculative on our part.& On the contrary, it represents a deepening of our commitment to the measures we already know are delivering for our economy.&
OECD figures show that our investment in knowledge—including higher education—has increased by an annual average of over 10 percent in the last decade, compared with EU and OECD averages of around 3 percent.
The critical mass we are building means that R&D investments accounted for over four-in-ten of all new projects announced last year by the IDA.& This pipeline remains strong, and will be further strengthened by the initiatives we are taking.
Services exports generally, on which future prosperity is increasingly reliant, have seen a threefold increase since 2000, bringing to over 40% their share of total exports – a figure the ESRI expects could reach 70% by 2025.
We are confident that the measures we have set out in the Framework for Sustainable Economic Renewal will continue to attract the best of internationally mobile technology- and talent-driven investment.& But no less important, they will bring a new emphasis to embedding this investment more deeply in linkages with the rest of the economy.& We will create new funding and venture capital for Irish firms, and new niches of excellence in which they will succeed on world markets.
Partnership and Fiscal Consolidation
I have outlined the core elements of the Government’s strategic response to the crisis and we are determined to continue on that path.& However, all our experience tells us that effective implementation requires mobilisation of stakeholders behind this effort. It is that which builds confidence and credibility, at home and internationally. It is particularly important in a small economy in which flexibility and consistency of response can become critical sources of competitive advantage.
For that reason, the skills and relationships built over the past twenty years of social partnership are, potentially, an asset of great value to Ireland in finding a coherent way through these difficulties.& Other countries with similar systems of social dialogue, such as the Netherlands, are also using them to help navigate through this crisis.
Social partnership was central to Ireland’s economic resurgence starting with the Programme for National Recovery in 1987.& The Government believes that a similar approach now, where all sectors agree to share in the difficult adjustments required, will greatly enhance internal and external confidence in our economic strategy.
The Government is in the process of finalising a framework with the Social Partners within which it is intended to develop and implement a Pact for Stabilisation, Solidarity and Economic Renewal.& This embodies the conviction which is shared by the social partners that failure to take radical decisions in the years ahead has the potential to erode national and international confidence in the Irish economy.
The draft framework being discussed with the Social Partners covers the following areas:
- an outline of the challenge facing the country and the rationale for urgen
- the potential contribution of a shared approach
- the need to stabilise the public finances over five years through an appropriate combination of tax and expenditure measures, with an adjustment of the order of EUR2 billion in 2009;
- areas which require short-term stabilisation measures, including maximising economic activity and employment, stabilising the financial and banking sector, maximising employment and helping those and
- a number of policy issues where the Government and Social Partners can work together over the period ahead to implement reforms which ensure Ireland emerges from the crisis as quickly as possible drawing in particular on the Government's Framework for Sustainable Economic Renewal published in December.
The achievement of significant reductions in public service pay and pensions costs will only be realistic if the burden of the adjustment is fairly spread across society and the proposed framework identifies some of the implications of such an approach.& These include moderation in executive remuneration, in the banking sector in particular, and that those who benefit most from the economic boom make a particular contribution to the adjustment required.
I hope that it will be possible to conclude a Pact with the Social Partners based on this shared understanding of the problem and the best way forward. In any event, the Government will simply have to take the decisions necessary to achieve our objective of stabilising the public finances.
Conclusion
The Government has a clear strategy for the very difficult times which lie ahead, based on the Framework for Sustainable Economic Renewal published in December.
We have a five year fiscal stabilisation strategy, and will announce measures next week to make a significant start by a further adjustment of EUR2 billion in 2009.
We will continue to act decisively to ensure that we have a banking system that serves the needs of our economy, including appropriate extension of credit to the enterprise sector, and assistance for householders facing mortgage difficulties.
We are taking immediate measures, within the fiscal constraints we face, to maximise economic activity, sustain employment and help people who lose their jobs.
We are reforming and restructuring across the economy to ensure that we emerge well-placed to benefit from the global upturn, with a focus on& innovation and research & development, green enterprise and energy efficiency and high productivity employment.
This strategy addresses the challenges facing the country. We are working with the Social Partners to conclude a Pact based on an approach of solidarity and equity which ensure that all sectors of society make an appropriate contribution.
Our strategy is clear, appropriate and credible.
There are no easy options and challenges will be faced across all sectors of society. However if we work together constructively we can meet those challenges.
In the period ahead, we face many difficult decisions.& It is easy to call for quick action – but we need to ensure they are the right decisions – based on careful analysis of a fast-changing economic situation and following consultation with major stakeholders in Irish society.& This debate is an important opportunity for Dáil members to make their views known as a contribution to this process.
In conclusion, the world is in recession. Ireland is being battered by international storms the like of which this generation has never seen. But I am saying this to the Irish people - if we work together as a team we can ensure that we have a prosperous future for ourselves, our children and future generations on this island.
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