Seanad Éireann debate -
Wednesday, 5 Jul 1989

Vol. 122 No. 22

Adjournment Matter. - Economic Trends and Prospects.

Mr. Lanigan

My reason for raising this matter on the Adjournment is that we are in an unprecedented situation. Up to now we have had gloomy economic forecasts from outside bodies and glowing indications from Government circles that things were going extremely well. Over the past few weeks we have seen a change in the trend. We have seen the Government being very conservative in their attitude towards growth in the economy and towards prospects for growth. At the same time, because of an enormous buoyancy in tax revenue in the first few months of this year, Government forecasts have been overtaken since over £200 million in tax over and above what the Government were expecting came in in the first period of the year. This morning we had the very confident view of the ESRI on the economic prospects for this country over the next few years.

My original reason for raising this matter was that in the past a Government that has an excess of revenue might have decided to spend it to buy votes or enter into arrangements which might in the long term be damaging to the economy. I would like the Minister to reassure the people, not alone in this country but abroad, that our economy is in the hands of people who want long-term economic advancement for this country and who will not buy votes for short-term advantage. This could have been done; it was done in the past.

The Government are, and have been, working towards long-term solutions to the problems that have overtaken us over the past ten years. That there has been a buoyancy in the tax returns is due to confidence coming back to our business people. This confidence is permeating businesses. As a small businessman in the motor trade, I am at last seeing a change in the business area. That industry is beginning at last to get off its knees. The building trade and the motor trade have been the two indicators over the years of economic growth in the country. The building trade has not yet got back to the levels reached in the late seventies, but the position is improving. People are returning who had gone to work in what they considered to be a better environment in the south of England, in the United States and other areas. They are starting again into speculative building in the housing area. They are beginning to get involved in the construction of commercial projects. The fact that people are willing to come back is an indication that the economy is on the upturn. Unfortunately there are problems in regard to people wanting to set up business finding workers because many people who left the country are not willing to come back unless there is a long-term prospect for work.

The ESRI report shows that there is a long-term prospect for security of jobs and growth for people who go into business. Because this report comes from an independent group outside Government it is important to take cognisance of it. The fact that they say there will be an increase of 80,000 people at work over the next few years must be taken into account. When the population is increasing it is difficult to provide employment for all but that 80,000 figure should be noted. That is the important statistic which should not be forgotten.

It is amazing to note that the ESRI also state that within the next few years no Government borrowing will be required. I do not think anyone, two years ago, could have foreseen that the ESRI would have made a statement of that magnitude. They say there will be a GNP rise of over 7 per cent next year, a huge increase by world standards. No matter what statistic is taken, from any country, for an independent body to state that there will be a GNP rise of 7 per cent next year — when the average all over the world will be less than 3 per cent — shows that the Government have been working solidly to produce long-term solutions to our problems. Of course it takes time to resolve all our problems in terms of work, attitudes to work and investment. There was an attitude that this was not a country in which to invest and many companies ceased to invest here and invested abroad because the returns were much better. I am glad that in the past few months there has been a huge investment abroad by indigenous Irish companies. They are doing so because they have profits to invest abroad and the money they make on them will be repatriated to this country, which is a very positive sign. Avonmore, Waterford Co-op and others have invested in the United States resulting in Irish banks being very positive towards investment abroad. These companies can compete abroad and repatriate their profits, which is very encouraging. It is a result of positive Government action over the past two or three years.

I put down this motion because the Minister for Finance should be given the opportunity to state categorically that the Government will continue to work extremely hard to get the country back into line, to provide jobs and education for our young people and the services necessary to support the very young — and old — population.

Another significant figure from the ESRI was that Government borrowing has dropped from 30 per cent of GNP in 1986 to about 4 per cent this year. That is a figure of enormous magnitude when one considers the economics involved. There are problems associated with our level of growth and training in a number of industries. Many firms have not taken on an apprentice for the last four or five years because they could not guarantee employment at the end of the training period. The Government should look into this area and also at the fact that the economy will grow with the result that there will be a demand for more work from people within the economy. However, they will not be interested in doing this work if they are excessively taxed on overtime. I ask the Minister to look at the system in Germany of a seven or eight hour day and where the remuneration for anything over that is taxed at a normal rate. The same should apply here if people are willing to work longer hours. I am talking about skilled and semiskilled workers.

The economy in full bloom will cause problems associated with steady growth. People may decide to buy imported goods to such an extent that inflation could rise. That will have to be controlled to a certain degree as we do not want a booming economy if it causes a huge increase in inflation because we are importing too many goods. Irish standards in production and the range of Irish goods available have never been so good. Standards in design and technology here are in the first class world league. With an increase in prosperity we should look to the Irish product first — not to the exclusion of the foreign product — and, if we can, to buy it instead of the imported one. After 1992 the marketplace will be much more open and we must look at Europe as the single market. After 1992 goods imported from within the EC will not be treated in the same way as goods from outside the EC. We must live and survive in the open market which is Europe.

Many firms are spending a lot of money in getting involved in the process of preparing for 1992; 1 January 1993 is not far away and those who are not yet involved in preparation for 1992 should be encouraged to get into the mainstream to try to force them to get their act together to take advantage of the prospects for 1 January 1993.

The major problems we have to face which will not be totally resolved, irrespective of our economic progress, are those of emigration and the creation of jobs for our young people. We should do everything possible to ensure that Irish people continue to receive a high standard of education in our schools. If they have to go away so be it but they will gain experience abroad than will be of enormous value to the country when they return. Young graduates who have experience in foreign commercial concerns make a great contribution when they return. There is little point in continuing with the old slogan that our young people are our future. Our young people will only be our future if they get an opportunity to work here. I do not mind if they leave the country for a short time to gain experience but the Government must continue their efforts to provide the commercial environment to entice them back after they have gained the experience of working with international firms.

The Government, according to the independent reviewers, have been adhering to the task they set themselves. They must be allowed continue with that job. If they are not the country will return very smartly to the depths of depression it was in three years ago. There is a good attitude among Irish people at present and it must be maintained. I am appealing to the Minister and the Government to continue with the work they have been engaged in in the last two years. Independent economic advisers, whether they are the ESRI, or The Economist intelligence unit from Britain, or Newsweek reporters all say that in the last two-and-a-half years our Government transformed the state of the Irish economy. My plea is that the Government should be allowed continue with their task. They should not be denied that opportunity.

Mr. Cassidy

I should like to congratulate Senator Lanigan on raising this issue on the Adjournment. It was an excellent idea to raise it on the conclusion of this Seanad. I agree with the sentiments Senator Lanigan expressed and, as a young Member and a young businessman I am aware of how important it is that we should have a continuation of Fianna Fáil Government policies. In the last two years it has been exciting and challenging trying to create growth in the economy. We all felt proud to be Irish when we were seeking markets abroad. After all the years of doom and gloom the Government succeeded by implementing the proper policies in turning the economy around. It should be remembered that it was a minority Fianna Fáil Government that gave us all this great opportunity. I hope their hard work and dedication will be recognised. If they are allowed to continue with their work I have no doubt that as we approach the nineties the standard of living of our people will improve.

I agree with Senator Lanigan that the danger is that imports will stream into the country and stem our progress. However, I am confident that our Government of experienced politicians and businessmen will be able to deal with that problem. The ESRI report is a tremendous vote of confidence in the Government. It should be remembered that that body consists of people of all political persuasions. I understand that the son of a former Taoiseach Deputy FitzGerald is an auditor with the ESRI. It is encouraging that such a body should predict a growth of 7 per cent in the future. The compliments paid by the ESRI to the Government speak for themselves.

Mr. McDonnell

I do not intend to detain the House on this issue but I am glad to be given an opportunity to support Senator Lanigan. The ESRI report is a marvellous commentary on the work of the Government in the last two years. When one compares that with reports from the same body between 1983 and 1986 one will find that it makes the best possible case for a single party Government, whether it is a minority or a majority Government. The report is a tribute to the dedicated work by the last Government for the benefit of the Irish people. We are seeing a repeat of the work by Seán Lemass in the sixties. Many of us recall his phrase that the rising tide lifts all boats. The last Government have lifted the plains; the skies are freer and tourists are coming to Ireland. I travel widely on business and I am aware that people in Europe are envious of the progress we have made. We are only beginning and those from all sides who talk of the national interest could do no better than transfer their sincerity into a vote of confidence in the outgoing Government and re-elect them to continue the job they started.

Minister for Finance (Mr. A. Reynolds)

I should like to thank Senators Lanigan and Cassidy for their comments and to extend a welcome to the new Senator, Senator McDonnell. I am delighted to see him in the Seanad and I was pleased to hear his contribution. He has had vast experience as a businessman. In saying that I am not taking away from the yonger generation such as Senators Lanigan and Cassidy. I agree with the hope expressed by Senator McDonnell that the difficulties that have dead-locked the other House up to now will be resolved and that in the not too distant future we will see white smoke emerge following the election of a Taoiseach. We will then be able to get on with the business of developing the country. In that context I hope that all parties will play their part in the national interest. However, one must say that some parties are not doing that.

If we are foolish enough as a nation to undermine the progress that has been made in the last two years and the foundations we have laid for a take off, as represented in the ESRI review, we will be mad in the head. We will be committing national suicide if we do that. Sacrifices have been made in recent years to allow the proper foundation to be put in place. We are aware that some of our decisions were not popular. We found it difficult to take those decisions but the fruits of them can be seen. The ESRI mid-term review is clear on how we should proceed in the future. Indeed, we confounded most economists who said that the fiscal adjustments we made in the public finances would deflate our economy. We proved that in doing that we could at the same time achieve a growth rate of 3 per cent in the last couple of years. While it is estimated that our cutbacks in public expenditure took away 1.5 per cent of the growth rate, this gives us some idea of the growth which took place in our economy. How did this come about? It came about through the restoration of confidence and by the investment which took place when people both outside and inside the country saw that the economy was in the hands of an excellent economic management team. This restored confidence and the people responded to that. There was both public and political consensus for what we were doing. As I have said, having come so far it would be absolute suicide to think of doing anything which would endanger that growth or stop us getting on with the job.

Some of the semantics being engaged in at present are of little relevance to the people who are looking for work, to the young people who are emigrating or indeed to many other sectors of our society. If politics are to regain any part of the high ground, then there is an obligation on everybody in the next few days to help resolve the problem. Every party has a role to play. Every party has a national responsibility to play that role. As I have said, I do not know why this responsibility should be imposed on one party, having regard to what we have achieved having made every effort to put our economy right. We are prepared to play our part, and let us hope others are prepared to play theirs.

I want to welcome the medium term review which covers the period up to 1994. It is an extremely useful contribution to the most challenging and important task faced by Government — to evolve policies which will ensure stable, sustainable and solid economic growth for the benefit of all. Policy formation demands informed assessments of the likely thrust of broad economic developments, and against such a background, a teasing out of the implications of those developments, leading to action both to build on anticipated strengths and to avoid possible pitfalls.

I also want to welcome the review for its contribution to our understanding of the remarkable turnaround which the economy has witnessed in recent years. This independent assessment clearly acknowledges that a resumption of growth has taken place, and that the underlying rate of growth is now very strong. It confirms that there has been a resurgence of the productive investment necessary to support sustainable employment growth, and a consequent increase in total employment itself. The conclusions which the authors draw from their analysis about the policy risks we face in the future provide an insight into the primary domestic development which have contributed to this turnaround, namely, the recovery in international cost competitiveness, and the improvement in the public finances. As I said, the improvement in the public finances was carefuly managed by the Government during the past couple of years. The recovery in our cost competitiveness was a major factor in the growth rates we have achieving in our exports abroad. This has come about primarily as a result of The Programme for National Recovery and the consensus of our social partners, the most valuable contribution given to us. I want to compliment all who have been involved and, hopefully, in the future we will be able to sit down and work out another sensible three year programme in order to sustain the growth levels which will be achieved this year and next year. As Senator Lanigan rightly remarked, would anybody have believed it was possible to achieve the growth rates which hopefully can be attained in the future. Those growth rates can be attained if we all manage our business sensibly and well.

Much more important, the review holds out the possibility of steady economic growth in the medium term. It considers that the international environment, allied to sound domestic policies, offers the prospect of continued growth in exports, investment, output and consumption, all leading to significant employment gains.

Whatever academic economists may feel about the precision of its forecasts, their thrust is very clear. We are moving forward, and we can continue on that path. The authors' central forecast suggest that real growth averaging 5 per cent a year is possible between now and 1994. I would mention in this respect that we need to achieve a growth rate of 4 per cent before we begin to see appreciable and recognisable indents into unemployment levels in this country. If we achieve a 5 per cent rate it is quite clear what we can do to that unemployment level, and for those who are involuntarily emigrating.

This, if achieved, would represent an historically high growth rate, and would be considerably in excess of the 3 per cent plus annual average of the national development plan, which, of course, covers the period to 1993. It thus confirms that the basis for the national development plan was prudent and, as indicated in the plan, that a higher growth rate is credible. It underlines the realism of the estimates of employment growth contained in the plant. It also confirms the plan assessment that, while the responsible course of fiscal policy now is to continue budgetary consolidation, the progress already made enables future consolidation to be at a less pressing pace than heretofore.

In the round, the prospects held out by the review are enticing. We must not, however, look only to the attractive elements of the ESRI assessment. As the review says "the improved environment does not mean that immediate or easy answers are possible".

Defining optimum policies, indeed the very well being of the Irish people over the years ahead, depends on our facing up to the issues which this assessment brings into focus. Failure to deal with the real dangers highlighed in the ESRI central forcast "would put at risk the possibility of making lasting economic progress over the next five years".

The key issues which domestic policy must address are that were there a buildup in domestic inflationary pressures, this could permanently damage the economy; any loss of international competitiveness in the exposed sectors would slow the rate of economic expansion; the potential exposure of the economy to world financial problems requires us to cut the level of national debt, and, in the short term, while the scope for reform must be exploited, the economy does not need any net stimulus from fiscal policy, which is growing of its own accord and does not need any stimulus from Government; and there are deep seated structural problems in the economy which it is now opportune to tackle.

There are two further issues which we must also address. Firstly, the assessment we are discussing indicates that we could face a period of high growth, unfortunately giving rise to economic tensions which cause the pace of growth to slow progressively in the latter years of the forecast period and beyond. Policy should seek to maximise longer term, sustainable, growth. If the past has any message for us it is that we lose rather than gain by opting for short term benefits.

Secondly, any forecast over a period so far ahead, as acknowledged by the authors, "is subject to great uncertainty". This derives, on the one hand, from uncertainty about the responses of policy itself and of key interest groups to the manner in which economic developments may unfold. On the other hand, it derives from the need, in order to make a forecast, to adopt technical assumptions about which the only certainty is that they will not turn out as assumed.

In this latter context, it is important that the particularly buoyant scenario envisaged in the review is seen as a view of what could emerge and not as a preordained and inevitable outcome. To many, including myself, certain features of the review would suggest that its 5 per cent average annual growth rate is rather closer to the optimistic end of any range of plausible outcomes, as also is its predicted reduction in the burden of the national debt to 84 per cent of GNP by 1994. These suggested possibilities are crucially dependent on two factors where some, I know, will take issue with the authors' views.

I would like to be able to claim that the underlying and, therefore, sustainable growth rate of the economy in the period 1987-89 has been raised to 4½ per cent from virtually nothing but, in honesty, I cannot. Certainly, we hope that growth will emerge at an average of 3 per cent or better; and the superficial effect on economic activity of reducing the Exchequer borrowing requirement may have approximated 1 to 2 per cent per annum over the same period.

However, part of the growth actually achieved, offsetting the immediate down-side effects of a responsible correction of the public finances, undoubtedly flowed from the positive impact on confidence of that very correction. Growth benefits most while confidence is actually improving. Once fully restored, the scope for further benefit is scaled down. To this extent, it is arguable that the underlying growth rate is less than 4½ per cent.

In addition, while we can anticipate continuing increases in the real level of Structural Fund assistance from our EC partners for a few years ahead, such annual increases can scarcely be assumed as a permanent feature. However, the doubling of the Structural Funds which we expect to get from the EC will obtain until 1993. It is what will happen beyond 1993 that may have some influence on growth rates beyond that point. If the Community pursues its objective of economic and monetary union the policies of economic and social cohesion come into play in a straightforward manner. There is no question in mine or anybody else's mind but that our economy will have reached economic or social cohesion at the levels necessary to obtaining the final objective of economic and monetary union. Consequently, we shall have to maintain a very close eye on whatever funds we may be seeking post-1993 to ensure that economic and social cohesion continues.

Mr. McDonnell

All provided the present policies continue.

Mr. A. Reynolds

Absolutely. These projections put the 5 per cent forecasted growth into perspective as potentially optimistic.

A second crucial feature is the assumed decline in the personal savings ratio. International experience indicates that the rapid decline assumed could occur. Unfortunately that experience does not demonstrate in any way that it must take place. However, experience does show that a rapid decline in the personal savings ratio can indeed take place.

The trend assumed, by facilitating substantial growth in consumption and generating a positive investment response, contributes significantly to growth itself but in the initial years only and to the major improvement in the budgetary balance forecast. A different pattern of savings could imply substantially altered projections.

In addition, as the authors point out, its effect on domestic demand would be inflationary which, they caution, could damage the economy permanently. This presents us with a dilemma — the inflationary consequences of an over-rapid expansion in domestic demand. We cannot avoid these consequences unless, as a society, we make secure arrangements to ensure that such expansion in demand will not lead to wage or price pressures. Have we matured sufficiently to so ensure? That is the challenge presented in the next stage of the Programme for National Recovery. It would be our hope that the social partners, in their wisdom and commonsense, will see what benefits can be had if we are all sensible in the manner in which we order our affairs and resist unrealistic increased wage pressures.

I am sure that one stark feature of the ESRI projection will not have escaped the notice of the House. Despite the record growth performance involved, the forecast for employment falls far short of our requirements. The numbers unemployed are forecast to decline by less than one-fifth by 1994 notwithstanding net emigration of well over 100,000. Put another way: while we must anticipate up to a net 125,000 new entrants to the labour force over the five years to 1994 more of those are expected to opt for emigration than remain at home, though those who remain at home are more likely to be in employment. That is one scenario. The annual increase in the labour force — those leaving school — is of the order of 70,000 while in the region of 35,000 to 40,000 retire, giving a final net figure of about 30,000. The projections contained in the national plan are for the creation of 30,000 jobs by April 1990 and, in order to raise that figure to 35,000 — the ESRI medium-term report forecast an additional 4,000 to 5,000. We shall certainly make inroads into the unemployment and emigration figures if we achieve the targets that can be achieved on the assumptions and scenario drawn here.

This cold but necessary analysis represents the core message of the study for the welfare of the community. It underlines the absolute requirement that we all face up to acceptance of policies which can promote sustainable job growth in the interests of the many who would otherwise face a future of unemployment or involuntary emigration. We must remember that that could be result if we choose the wrong policies and do not continue to accept the necessary disciplines.

I am confident that we are following the right path in the interests of all of those people. Indeed the past few days have provided further strong evidence of the growing success of the financial and economic policies pursued by this Government since assuming office. All the time conditions are improving for higher self-sustaining economic growth and the further increase in jobs so badly needed.

As I have said, the improvement in the public finances has been crucial to the success of this Government's policies. In 1986 the Exchequer borrowing requirement was just 13 per cent of GNP. By the end of the last year we had reduced the underlying level of borrowing to 6 per cent of GNP; in other words, we more than halved the level of borrowing in just two years. This dramatic turnaround in the public finances has been the single most important element in restoring confidence and in encouraging new investment.

For the present year the budget set a borrowing requirement of 5.3 per cent of GNP so as to continue the downward pressure on borrowing and debt. The end-June Exchequer returns, published on Monday of this week, give a useful half-year report on the financial and economic position so far this year. Those returns demonstrate that not only will the 1989 budget targets be achieved but that Government borrowing will be below target for the third year in succession. This will give a further fillip to confidence and growth. If present improvements are maintained the level of the Exchequer borrowing requirement is now expected to fall to some 4.5 per cent of GNP as against the budget estimate of 5.3 per cent to which I have already referred.

That significant reduction in borrowing reflects a number of welcome features. The level of Government expenditure remains under control and is broadly in line with the provisions announced in the budget. Expenditure on debt servicing will be slightly lower than estimated because of the lower level of borrowing now emerging. This is particularly encouraging when one realises that debt servicing costs still eat up such a huge amount of our resources — over £2 billion in the current year or £40 per week in taxation taken out of the pay packet of every worker. We have no alternative but to continue to reduce borrowing so as to free up these resources for other purposes.

The trend in tax revenue is particularly encouraging, being well up on the budget estimate. The additional revenue is coming from excise duties, especially from higher car sales signalling a welcome return to buoyancy in the whole of the automobile market which had been on the floor for so many years, higher receipts of VAT and higher stamp duties from property in which there has been a huge lift, as there has been in the whole of the building and construction industry which had been on the floor for the past eight years or so. We have witnessed a welcome return to buoyancy in that industry also with much investment already this year. Already in house-building there has been an increase in the range of 37 per cent in new house starts in the first quarter of this year. Other taxes also are performing well.

All this provides encouraging evidence that the level of economic activity is increasing and will be even stronger than was expected at the time of the budget. We now expect private consumer expenditure to grow by approximately 4 per cent in volume terms and that GNP will also grow by approximately 4 per cent as against the 3 per cent expected at budget time. This higher level of activity is clearly reflected in the buoyancy of tax revenue. The further fall in the level of borrowing is being achieved notwithstanding the fact that this year we were able to provide in the budget a major package of income tax and social welfare concessions which will cost up to £180 million this year.

The results show what can be achieved with continuing financial discipline. Far from causing a weakening of economic activity, the actions of the Government in tackling the problems of the public finances have proved to be the catalyst which is lifting the rate of growth of our economy and transforming our prospects for the years ahead. I am glad that we now have an independent, expert report which encourages and confirms that transformation.

The Seanad adjourned at 8.5 p.m. sine die.