My fear is that I may forget some of the sub-clauses of which no doubt the Chairman will remind me.
Deputy Michael McGrath asked about sustainability. We will not get the forecasts of growth right. There is a wide range of uncertainty around that. Our view is that we are looking at significant growth in the economy in the medium term but what happens if it were only 1%? In section 4 of our article we tested what would happen with different growth rates and it is sustainable no matter what, providing we do the fiscal adjustment planned. It begins to come down. Obviously, the higher the growth rate the more rapidly it will come down and the better.
The Deputy asked about the confidence in our forecast of a borrowing requirement for this year of 9.6%. That is not our forecast for this year. I took the Department of Finance's forecast, estimated the savings as a result of the good news in the first six months of the year and decided that if nothing else changed it would bring the deficit below 10%. My current assessment and that of my colleagues is that the outturn could be ahead of schedule this year, but that is not forecast in this document.
Deputies Michael McGrath and Pearse Doherty raised the issue that the proceeds of sales of assets are the proceeds from the National Pensions Reserve Fund. The research done by my colleagues suggest that the best value in terms of creating jobs in Ireland is to avoid having to cut social welfare and expenditure more than we need to do in the period up to 2015.
In terms of using State money to invest in the economy, and my colleague, Dr. Edgar Morgenroth, has written a paper on this, if, for example, we are only digging holes and filling them in again to create jobs, it is a very expensive way to create jobs because the value for money from doing that is poor. A range of research by previous colleagues going back over a decade recommends that investment should not be undertaken unless it will produce a good rate of return for the State. The rate of return for the State must be massively higher than it was in 2005 because of the changed circumstances. There is a danger if we do not get this right that we could face even more austerity, and various people are promoting the idea that we should do more rather than the €15 billion over the four years but I do not want to be in that position. Using up something now and finding ourselves having to continue the austerity programme over a much longer period is a bad idea. That would be my advice on that area.
On the matter of the ICTU proposing a longer period of adjustment and Deputy Twomey's question on the level of austerity we should impose, the answer on that is a fine call. It is pretty miserable being in Ireland today for everybody and more miserable for many people who are in negative equity, unemployed or whatever. If we delay this, however, will we remain miserable for a much longer period or should we get it over with more rapidly? My assessment in respect of the €3.6 billion is that if things come in on schedule, and Deputy Doherty raised a relevant issue about the forecast for next year, and assuming the forecasts for the next year are as they are currently, I would stick to the €3.6 billion because we would be coming in ahead of schedule this year and next year and we would build up leeway for future years for things to go wrong.
On the issue Deputy Pearse Doherty raised, I do not know yet what will happen next year and I would delay making that decision. I set this out in a paper for the Budget Perspectives conference which is available on our website. I referred to a figure of between €3.6 billion and €4 billion but I would delay making that decision. If we come in ahead of schedule early in December and it appears that Europe has sorted out its mess, that it has a future and it will not be too heavily affected by the current crisis, we will probably come in ahead of schedule next year and I would not do more in that respect. Our assessment is that the prospect of growth in the medium term is reasonable. Once the fiscal adjustment is completed, one will see things come right rapidly. The Government would have a surplus in 2016, 2017 and 2018. I may be wrong. Growth or the recovery could be slower to occur but there is some leeway. Having experienced the misery of moving from a €7.5 billion austerity package in July 2010 to one of €15 billion in December 2010, one does not want to have to return to the people to tell them one got it wrong and that circumstances are worse than predicted. One needs to have some leeway. One should wait until December and operate on the basis of a figure between €3.6 billion and €4 billion.
On the issue of front-loading, or enduring more misery now, which a number of commentators are recommending, one could say that if we get it all over with now, people will suddenly wake up in 2013 and say the nightmare is over. Deputy Twomey referred to the importance of consumption. There is an argument for this but there is a risk associated with putting more people out of work now in the hope that more jobs will be created later. There is a fine balance to be struck but it is a bit too early to do so. The figure will be within a relatively narrow range, unless new information about the Irish economy emerges that states circumstances are much worse than we believed. Everything that has happened in the past nine months suggests circumstances are probably slightly better than expected in Ireland, whatever about the European Union as a whole.
Deputy Twomey stated income tax and VAT rates have peaked. We do not want more austerity than we need. Fortunately, we have a wonderfully generous and very large EU-IMF umbrella to last until the end of 2013. While the measures are not easy, they do not have to be implemented all at once.
We have now gone into detail on what we do. The tax changes made should be as employment friendly as possible, or as little unfriendly to jobs as possible. The same applies to cuts and expenditure. There was a theory that if one knocks hell out of the economy, it grows more rapidly. Last autumn, the IMF, in a very good review of the literature, stated this is not the case based on evidence gleaned from Irish data from the 1980s. If one knocks hell out of the economy, it is hell. What was called expansionary fiscal contraction is a delusion. Although cutting expenditure is pretty serious, it has a lesser impact on the economy in Ireland than it would have in larger economies. Many of the IMF-EU commentaries expected growth to be substantially lower in Ireland as a result of the cuts. While they have been pretty awful, they are not as awful as might be expected elsewhere because when people spend less, they spend less on imports. Much of the adjustment has fallen. One reason we have a balance-of-payments surplus is because we have stopped spending and buying imports to the extent we used to.
The only way we will get out of this mess and return to job creation is through spending and investment. Exports provide the platform. The balance-of-payments surplus will allow us to expand consumption and investment in a pretty dramatic way. The bigger the surplus in 2015, the greater the recovery will be in the period 2015 to 2020. However, spending by consumers or households and investment in Ireland are tax-revenue intensive and jobs intensive. I hope to see some recovery in the jobs market driven by exports in the coming two or two and a half years, assuming the European Union sorts itself out, but the real factors that will make a big hole in unemployment will be consumer spending and confidence that money can be made by investing in Ireland.
The problem is that we are all depressed. The story I am telling – I am not infallible – may not be believed by many. Many outside Ireland do not believe it but the proof of the pudding is in the eating. It is only when matters evolve and better news emerges steadily that people will believe it. One needs to take measures that will do as little damage to employment as possible. Whatever one does will damage employment. If one tightens fiscal policy, it has a negative impact. The problem is that if we do not do so, we will go bust and the debt-to-GDP ratio will mushroom.
Deputy Doherty asked about promissory notes. It appeared to me as if somebody had a great idea, a wheeze, to keep Anglo Irish Bank out of the national debt figures. It did not work and involves really complicated accounting. It is a case of mirrors; instead of looking good in this one, one looks bloody awful. It is very difficult to work out what is going on.
Essentially, the hole in the bad banks was estimated to be €35 billion in the early part of last year. It was said this would have to be paid off over a period. The promissory notes system was then set up. There was an unpleasant surprise, however, because the interest on the notes had to be the market interest rate. The figures were calculated based on a 4% interest rate but, by the time the system was in place, there was a 6% interest rate. However, that money is being paid into what, unfortunately, the people of Ireland own, that is, the remains of Anglo Irish Bank and Irish Nationwide Building Society. We are planning to pay in more than was estimated to be necessary in March of last year.
What happens in the end? It was interesting that the CEO of Anglo Irish Bank suggested in August that eventual losses could amount to €1.5 billion less than predicted. What will happen if we put in too much is that, at some point – it will be a few years before we can have any certainty on this – there will be a repayment on a tiny part of the losses of the bank. With regard to the cost to the State, the interest payments are too high in respect of Anglo Irish Bank. Unfortunately, we wholly own the bank and are paying in more than is probably necessary. There are different approaches given the complicated accounting procedures. There was an interesting and relevant paper in the last Central Bank quarterly by Mick Lucey of the CSO and an individual from the Central Bank stating accounting in respect of this issue may change.
The refunding of the promissory notes was raised. At present, we are paying 3.5%. If we returned to the markets and paid 5%, it would be more expensive but it would be less expensive than the cost of paying what we are paying on the promissory notes. If one replaced all the promissory notes today with debt at 5%, the actual interest bill would be smaller. Ultimately, the liability of the Irish taxpayer would be unchanged because the money would be paid into a black hole. The black hole, however, would throw out something at the end.
