I welcome the opportunity to debate the important reports published recently by the International Monetary Fund, IMF, and the OECD. We are living in a time of unprecedented crisis in the global economy, a crisis worse than any predicted by leading economic commentators. As a small, open economy which earns its living by trading on world markets, Ireland is uniquely exposed to this crisis. It is no exaggeration to state that responding to this crisis is one of the greatest challenges the country has faced since independence. Meeting that challenge is the primary focus of the Government's effort. It requires the energy, imagination and determination of everyone in this House and the country.
However, before I outline the Government's strategy, which has been broadly endorsed by the IMF, I want to respond to some of the misplaced efforts to use this opportunity to criticise the Government's economic policies in recent years.
When I took up office as Taoiseach in May 2008, the experts in the IMF, OECD and ESRI were predicting economic growth of over 3% in 2009. They are now predicting a contraction of between 8% and 10%. In simple terms, nobody predicted what has happened globally or in Ireland.
In 2007, the IMF stated that "economic performance remains very strong supported by sound economic policies". Its executive directors commended Ireland's continued impressive economic performance, characterised by one of the highest growth rates of GNP per capita among advanced countries and one of the lowest unemployment rates. This performance has been underpinned by outward-oriented policies, prudent fiscal policy, low taxes, and labour market flexibility. They expected economic growth to remain robust over the medium term. Nevertheless, they did warn of a possible overheating in the housing market.
The IMF's latest analysis showed the housing boom was mainly caused by cheap credit due to low interest rates. This combined with rising incomes, a fast-growing population-workforce and pent-up demand for housing to create a structural weakness in the economy now exposed by the international economic crisis. However, our interest rates are set by the European Central Bank, not the Government.
Regarding those aspects in my control when I was Minister for Finance, I moved to end the tax incentives that then existed for the property market. In my first budget in 2005, I announced a review of tax incentive schemes. In 2006, in line with the recommendations from Goodbody Stockbrokers, Indecon, the Department of Finance and the Revenue Commissioners, I announced a termination date of 31 July 2008 for all existing property-related tax incentive schemes with the exception of private hospitals, registered nursing homes and child care facilities.
Most importantly, despite a concerted attempt in the media and by the Opposition, I refused to get rid of stamp duty, the largest transaction tax on property in the EU. If we had heeded those calls to remove stamp duty, the brakes would have been off entirely and we would be in far greater trouble than we are now.
This goes to show none of us was right in what we thought would happen. As the NESC said in a widely-praised report on the current crisis:
In Ireland, until autumn, 2008, there were grounds for hoping that a substantial housing-market correction, which began towards the end of 2006, and strategies to renew the economy's competitiveness by focusing on knowledge and innovation, would enable the country to enter a new phase of more moderate but soundly-based growth without major dislocation. But the global financial crisis precipitated the credit crunch which spilled over into the real economy. Ireland is now experiencing the vulnerability of its economic openness (without which, of course, the rapid expansion and higher living standards since 1993 would not have happened).
My regret is that I did not manage to predict that such a seismic shock to the world economy was going to happen. Neither did anyone else. If my crystal ball had been better than those of the IMF, the OECD and the ESRI, I would have done more to reduce spending so it would have been easier to deal with this international recession. However, I stand over the decisions I made based on the best information and advice that I had.
When times were good, I chose to spend on badly needed public services, against the wishes of the Opposition which wanted me to spend more. I also ran budget surpluses and brought down the national debt. The cumulative current budget surpluses for 2005 to 2007, inclusive, amounted to €22 billion. The national debt as a share of national income fell from 30% in 2004 to 23% in 2007.
At all times, decisions were made in good faith to reduce the debt and improve public services. This was the political consensus at the time and was consistent with the view of many IMF directors. When I was Minister for Finance, the 2006 and 2007 country reports commended our economic management and sound fiscal position.
No one has the benefit of hindsight. What I can do, and will do, is provide honest and strong leadership through this crisis. The Government is implementing a coherent strategy to manage through this difficult situation, an approach broadly endorsed by the IMF. The IMF stated the Government "has moved with resolve to counter the severe economic and financial shocks" and the IMF directors "commend the scale and speed of the authorities response so far".
The first part of the Government's strategy is to return the public finances to a stable and sustainable position. We have set out a pathway for reducing the deficit back below 3% of GDP by 2013, striking a balance between sustaining economic activity in the short term and making a credible start on the difficult adjustment required. The IMF has supported this approach, stating "the basic approach and elements of the plan are appropriate". In particular, the IMF shared the Government's view that fiscal stimulus measures that further exacerbate the imbalances in the public finances would prove counter-productive.
The IMF acknowledged the initial reliance on increases in income taxes in the October and April budgets was appropriate and that those tax increases were "a necessary process of returning tax rates to more normal levels". We have taken some difficult decisions on both public spending and taxation, and more difficult choices lie ahead over the next several years. The Government shares the IMF's view that a greater focus on reductions in current spending is needed.
The second part of the Government's strategy is to restore stability to the banking and financial system. This is not about helping the banks per se, it is about helping businesses and citizens access the credit required in a modern economy. The IMF welcomed “the important steps to stabilise the financial system” taken by the Government. It specifically mentions the State bank guarantee scheme which they say was vital to maintaining financial stability. That is the same guarantee the Labour Party opposes.
The IMF supported the establishment of NAMA which it described as:
pivotal to the orderly restructuring of the financial sector and limiting long-term damage to the economy . . . NAMA offers the prospect of extracting distressed assets from the banks, a precondition for their return to healthy functionality.
The IMF agreed it can be self-financing and stated: "if well managed, the distressed assets acquired by NAMA could over time produce a recovery value to compensate for the initial fiscal outlays." If there is a shortage as a result of getting rid of those assets over that period and the longer time horizon as suggested by NAMA, the question of a levy on the banking system to make up the difference is also envisaged. Protecting the exposure of the taxpayer to the greatest extent possible has been a fundamental perspective we have been seeking to maintain in whatever policy responses have been formulated and devised.
The IMF has the most experience in dealing with banking crises around the world. It has real banking and economic experts and their informed view on NAMA is very much at variance with the arch positions that have been adopted by the Opposition and some commentators.
The IMF rightly emphasised the importance of the prices at which the assets are purchased, a factor with which we agree. That is why NAMA has hired experts to make recommendations on valuation methodologies. The methodology will have to be validated by the European Commission. The IMF has emphasised the importance of getting the legislative and operational structure for NAMA right and ensuring the agency is in place as soon as possible. We agree with the IMF in this respect and share its sense of urgency.
Preparations for the establishment of NAMA are continuing. We have appointed experts to advise and assist departmental officials and other Government legal advisers on the drafting of the legislation and on practical preparations. We expect to publish the legislation later this month and hope to have it debated in the Oireachtas in September.
Some people seem to support the wholesale nationalisation of the State-guaranteed banks. It has been suggested that the IMF favours nationalisation but that is not the case. The IMF sees nationalisation as possibly necessary in certain situations. The Government believes it is important, where possible, for the banking sector to have a market presence and to operate in line with market disciplines. The best way to achieve this objective is to provide for a commercially focused banking system, which includes banks that have a market presence and operate within market disciplines and constraints. The nationalisation of the entire Irish banking system is not the panacea some people suggest. By itself, it would not address any of the problems faced by the banks. No country is adopting a policy of wholesale bank nationalisation. If Ireland were to take that route on its own, it could damage its international reputation with investors. That would affect not only the funding provided to the banking sector, but also the economy more generally.
The Opposition has claimed many times that no independent economist supports the Government's approach to the banks. The IMF, which is independent and has more expertise in advising on banking problems than most commentators, supports the Government's approach. The IMF does not even give consideration to the Fine Gael proposal of setting up a magic recovery bank and some legacy banks. It is clear that the IMF does not regard the proposal as a viable alternative.
The third aspect of the Government's strategy involves restoring competitiveness and returning to sustainable economic growth. The Government set out its approach in Building Ireland's Smart Economy: A Framework for Sustainable Economic Renewal. A smart economy combines the successful elements of the enterprise economy and the innovation or ideas economy. Such an economy also promotes a high-quality environment, improves energy security and promotes social cohesion. The lesson to be learnt from the severe global recessions in the past is that as well as weathering the economic storm, countries need to restructure their economies to target the next wave of economic growth. Our overall objective is to increase the productivity of our people by creating greater value in what we produce and provide as a nation. This is the key to driving economic development and improving living standards. Our vision is based on specific objectives. For example, we want to attract a greater proportion of high-value, research and development intensive, foreign direct investment. We intend to develop a critical mass of Irish and international companies that are at the forefront of innovation, create the products and services of tomorrow and provide well-paid jobs for this and future generations. We will create the conditions in which entrepreneurs will want to come to Ireland because it provides the best environment for turning ideas into products and services for sale.
Ireland will be at the leading edge of renewable energy and environmentally friendly markets. The Government intends to enhance the environment, secure energy supplies and build the green technology sector. It will provide for more efficient and effective public services and smarter regulation.
The Government has already introduced a number of significant initiatives to move towards the vision I have outlined. It has introduced a range of taxation provisions to encourage venture capital activity in Ireland and support investment in research and development and start-up high-tech companies. It has introduced a new tax regime for intellectual property. It has established a high-level group on green enterprise to identify new opportunities to create jobs and growth. The ESB has recently announced 3,700 new jobs in this area. We are promoting the restructuring of the higher education sector to better concentrate expertise and investment. The recent announcement by UCD and Trinity College of an innovation alliance is a major step forward in that regard. We are targeting a range of new opportunities for Ireland in international services including financial services, the international education sector, the maritime sector and arbitration services. We are developing an action plan to improve trade, investment and tourism links with new and fast-developing markets, for example in Asia, the Middle East and South America. This reflects the growing importance of such regions. Work on these and other aspects of the smart economy is ongoing. To take this effort further, we have established an innovation task force to support a co-ordinated approach to the development of Ireland as an innovation hub in all sectors of the economy. The final part of our strategy involves maximising employment in the short term and helping those who lose their jobs.