Seanad Éireann debate -
Thursday, 18 Oct 2001

Vol. 168 No. 7

State of the Economy: Statements.

Minister for Finance (Mr. McCreevy)

The brutality and wickedness of the terrorist attacks in the United States on 11 September were an affront to humanity. These attacks were such a human tragedy that it may seem inappropriate to discuss their economic implications. However, there is no denying that the economic impact of these events will be felt all over the world.

It is clear that even before the terrorist attacks, the major economies of the world – those in the US, the EU and Japan – had already experienced a sharp downturn in activity. The IMF in August had forecast a slowing of world GDP growth to 2.6 % this year. However, even this forecast is now thought to be overly optimistic. Commentators have remarked that this was the first time since 1982 that all three of the major economic areas were underperforming at the same time.

As far as the US economy is concerned, prior to the attacks of 11 September, it had already slowed down significantly. In August, the IMF had forecast a GDP growth rate for the US of 1.3% this year. There is no doubt that the adverse impact on the US economy of the attacks will be substantial in the future.

The exact extent and duration of the economic impact on the US will very much depend on the ongoing military response and whether this leads to further terrorist activity. It will also depend on the reaction of consumer confidence in the US to these unfolding events. The latest figures from the US show a continued fall in consumer confidence. The US is therefore likely to experience recession for the remainder of this year and a recovery is now thought to be unlikely before mid-2002, at the earliest.

Oil prices will also play a very important role in the world economic outlook. It is true that Saudi Arabia and Kuwait have given assurances that any disruption to oil supplies will be neutralised. However, if oil prices were to rise sharply, it would have a negative impact not just on the US economy, but on all the economies of the world.

In the medium term, the interest rate cuts by the US Federal Reserve and the fiscal measures taken and proposed by the US Government will eventually boost economic activity and return the US to economic growth.

As regards the likely impact that the attacks will have on the EU economy, it must be noted that there was already a slowdown under way before 11 September. Quarter 2 GDP growth had fallen to just 1.7%, compared with 3.8 % for the same period last year. Developments in the EU will obviously have important implications for us because over 60% of our exports go there.

However, the effect in the EU may be less severe than elsewhere. The economic fundamentals of the EU are felt to be sound and the recent ECB interest rate cuts should help it to avoid the worst effects of the downturn so that it can return to sustainable growth levels sooner rather than later.

Since we have an open economy heavily reliant on trade and foreign investment, the attacks in the US will obviously have unfavourable implications for us too. My Department had already noted the adverse effects of the US slowdown prior to 11 September and had reduced its 2001 GNP growth estimate in the August Economic Review and Outlook by 1.5% to 6%.

The latest tax revenues up to the end of September support the view that the economy is slowing, with tax receipts growing by 2.2% for the first three quarters of the year compared to a budget target for the year as a whole of a 12.5% increase over last year's outturn. The latest expectation for our Exchequer surplus this year is that it will be at least €1.9 billion or £1.5 billion lower than that forecast on budget day and, possibly, significantly more.

Private sector leading indicators, tax revenue and housing data had already indicated that there would be reduced carry-over of growth from 2001 to 2002. The events of 11 September will only hasten this slowing of the Irish economy, with the main effects manifesting themselves in 2002.

It is very difficult, just over a month after the events, to assess the full economic impact of the attacks on Ireland's growth and employment. Obviously, much depends on the effect on the world economy as a whole and its reaction to the ongoing US military response. Estimates by market commentators for GNP growth next year vary between 1% and 5%. This illustrates the degree of uncertainty in the current global economic environment. My Department will, as usual, publish its estimates for economic growth when the budget is being delivered.

Let us now consider exports. As regards the areas of our economy which will be affected by the lower world economic growth, we can expect export growth to be negatively affected. The US is a very important destination for our exports, accounting for almost 18% of total exports. However, this figure somewhat overstates our dependence on the US because firms exporting to the US are less employment-intensive and source less of their inputs domestically than other firms.

It should also be noted that 35% of our exports to the US are in the chemicals-pharmaceuticals sector, which has been holding up well to date, with 23% annual growth in the first six months of this year. Despite this, there is no doubt that our exports to the US will be affected by the terrorist attacks. If we regard tourism as an export, the effect will be greater still.

A key risk to the outlook for exports would be a sharp and significant fall in the value of the dollar and sterling against the euro. This, if it occurred, would impact upon our competitiveness at a time when wage increases remain high. In the recent past, Irish exporters have benefited greatly from favourable exchange rates against both the US and the UK currencies. This provided significant competitiveness gains. However, the US slowdown had already led to some weakening of the dollar and sterling against the euro. Continued weakening would make Irish exports less competitive and reduce export growth further. This is why we must ensure that wage and cost developments generally do not add to our exposure in terms of competitiveness.

However, the United States slowdown had already led to some weakening of the dollar and sterling against the euro. Continued weakening would make Irish exports less competitive and reduce export growth further. This is why we must ensure that wage and cost developments generally do not add to our exposure on the competitiveness front. We must adapt our expectations to meet the new economic environment.

Foreign direct investment, or FDI, from the US will also be affected by the US attacks. Foreign direct investment has been one of the main driving forces behind our record growth rates of recent years. Employment in IDA assisted firms represents 8.5% of our total employment. The ICT sector is of particular significance to the economy as it accounted for almost 40% of exports and 5% of total employment in 2000. Job losses had already been increasing in this sector prior to the terrorist attacks. We had already expected a reduction in foreign direct investment and an adverse impact on the ICT sector due to the slowdown in the US. The attacks on 11 September will further reduce and delay investment from there.

As regards the impact on the inflation rate, in the short-term weaker global demand and lower growth can be expected to have a dampening effect. Interest rates and oil prices have already fallen. If the global downturn were to be accompanied by a depreciation of the dollar and sterling against the euro or further reductions in euro area interest rates, there would also be further beneficial implications for inflation.

I will mention briefly the implications the events of 11 September have for specific sectors of the economy. Our tourism sector represents 9% of employment and 5% of GNP. This sector will be unfavourably affected for the remainder of this year and next, adding to the difficulties already experienced in the first half of this year due to foot and mouth disease. The experience following the Gulf War was that US visitor numbers fell by 20% and did not recover for three years. A similar impact on this occasion would suggest a significant fall in revenue, although any tendency toward holidaying closer to home by Irish or European tourists would offset this to some extent.

The global aviation industry has been hit hard following the terrorist attacks, with revenues expected to be reduced significantly. Aer Lingus, which generates 70% of its profits from transatlantic routes, has suffered an extremely serious further downturn in traffic. Aer Lingus has already announced a programme of measures which involves significant staff reductions and cutbacks in services.

As regards Dublin's International Financial Services Centre, there is unlikely to be a substantial negative impact on firms there. In the short term, there has been a pick-up in business in some areas as some firms have assisted their US counterparts by conducting operations previously undertaken in New York.

Growth in Ireland both this year and next will be lower than had been previously forecast. The resulting lower tax receipts will reduce our room for manoeuvre on the budgetary front. Recent events underline the need for a prudent approach to the public finances, especially in coming months, to ensure the economy weathers current stormy conditions. A prudent approach to the public finances has served us well over the past decade, especially during those rare periods of uncertainty. It is certainly the best option now.

Since there is little Ireland can do to change the external environment, the focus must be on internal policy responses. Policy at this juncture must be geared towards ensuring that when the international economy recovers, Ireland is positioned to benefit fully from that recovery. Only then can we return to a strong growth path in line with our economy's medium-term growth potential. We therefore need to avoid any weakening of competitiveness on the cost front, to sustain investor and business confidence through continued prudent management of the public finances, to prioritise public spending towards programmes which improve the long-term capacity of the economy to benefit from the eventual improved conditions and to make further progress on economic structural reform.

Looking slightly further ahead, I have no doubt that the economy is in good health and that, with the right approach, we can pass through these short-term difficulties with which we have been presented. I am confident that, in the medium term, as the global economic environment recovers, we can return to acceptable levels of economic growth which will benefit us all.

Mr. Coghlan

I welcome the Minister and am grateful for this opportunity to say a few words on the economy. I thank him for his outline and overview of the state of the economy and I wish him well with the increasingly difficult budgetary situation he faces. Never before has an incident had such an immediate and extensive impact on the global economy and adversely affected us. It is possibly too early to assess the full economic impact of the appalling and horrific terrorist attacks in the US on 11 September last. Being a small, open economy so dependent on tourism, we have already experienced the adverse short-term impact. It has added to huge economic uncertainty, and stock markets throughout the world have clearly demonstrated the resultant volatility which is likely to continue for some time.

I know the Minister will advance the argument that, even before the terrorist attacks, the major world economies of the US, the EU and Japan had already slowed somewhat, and some commentators remarked that this was the first time since 1982 that all three major economic areas were under-performing at the same time. Apart from the foot and mouth restrictions and consequent effects together with the "tech bust", we had escaped very lightly up to that point. There is no doubt that the impact on the US economy has been both immediate and substantial. However, it is good to know that President Bush and all with influence in America are doing their damnedest to reinstill confidence.

Some commentators are saying the US can experience a pick-up before the middle of next year, although the chairman of the Federal Reserve, Mr. Greenspan, admitted that forecasting the immediate future is impossible in this hostile world. He said that where risk and prices were being reassessed, the record productivity levels of recent years could not be guaranteed. He also stated that the pronounced rise in uncertainty had dampened consumer spending and capital investment. He also said no one has the capacity to fathom fully how the effects of the tragedy of 11 September would play out in economies. Economies were never more interdependent and, as the Minister said, we are hugely dependent on the US.

Despite that, it is encouraging to hear so many say that Europe can return quickly to sustainable growth levels. We know how exposed we are, given the open nature of our economy, and how dependent we are on developments elsewhere. We are like a cork in water. As one of the top three information and communications technology economies in Europe, together with Sweden and Finland, we have already taken a hit as the technology market has taken a dive. Our outlook, however, is not altogether gloomy. GDP growth was expected to slow to about 8% in our case, and the Minister said that this has been revised downwards further to 6%. I know the planned closures by Gateway and General Semiconductors have made the IDA nervous, not just because of the job losses but also because of the loss of capital for the country. Some 4,500 jobs have been lost in the foreign owned ICT sector out of a total of 55,000. Fortunately, unemployment has yet to rise because new job offers continue to come on stream.

It is true that, prior to the terrorist attacks in the US, that country had been experiencing a slowdown and we expected to be affected by that. As the Minister explained, tax figures have confirmed that the economy was slowing. Tax receipts at the end of September showed an increase of 2.2% over the same period last year compared to budget expectations of 12.5%. The Minister faces the greatest challenge of his career in the upcoming budget in that he must do everything possible to keep us properly positioned for further growth and not let the slowdown develop into a recession. One of the greatest dangers in the short term would be any sharp or significant fall in the value of the dollar and sterling against the euro which would seriously impact adversely on our competitiveness. The Minister is in an unenviable position and must do everything to ensure that wage and cost developments do not create a weakness in our competitiveness.

Our economy will be helped by the reduction in interest rates and oil prices and inflation should reduce as a result. Lower tax receipts will reduce the Minister's room for manoeuvre and recent and ongoing events underline the need for an ongoing prudent approach to public finances. Because of the current good shape of our economy we will, I hope, ride out the storm with a prudent approach and the right policies.

The most devastating and immediate blow has been to our tourism industry which was heavily dependent on the American market. The consequent knock-on effect has already had disastrous consequences for Aer Lingus and many other airlines. Many of our leading hotel operators relied on this market for up to 80% or 90% of their turnover, many of which were golfing visitors. These operators now have no choice but to switch to the upper ends of the British and European markets which have not been fully exploited. The Irish Tourism Industry Confederation has estimated that Irish tourism could be facing a loss of £500 million this year following the setbacks caused by the foot and mouth disease crisis earlier in the year. Hopes of a recovery in the second half of the year have been dashed by the events of 11 September.

My area of Killarney and Kerry, which earns an estimated £200 million from tourism, has always been a favourite with Americans who comprise 25% of visitors to the area. Kerry has a high dependence on tourism and there have already been job lay-offs as a result of the early closure of a number of hotels. The appalling events of 11 September have been disastrous for the county. Many of our hoteliers had 80% of the remainder of the season wiped out in the aftermath of the attacks. We all know how uncertain the situation is for next year as a result.

At present the future of the North American market is unknown and unquantifiable as Americans are unlikely to travel while military engagements are ongoing. This was demonstrated at the time of the Gulf War when Americans did not begin to travel again for up to three years. Pessimists in the business believe the decline in US visitors will last that long. Marketing at a high powered level to other markets is now more necessary than ever to try to offset losses from the US. The Government could help this marketing effort and undoubtedly the Minister will address this. Europe and Britain must be targeted more seriously than ever.

If airlines continue to suffer our hotels and their employees will not be far behind. Just as President Bush is encouraging Americans to get back in the air, we must encourage more people to travel and must promote Ireland as a first choice destination. We must offer better value than ever. Aer Lingus has reduced its fares somewhat but for a short period we need to publicise something spectacular such as a $99 return airfare to the US. There is scope for great improvement in relation to Europe. Only 1.5% of the 300 million EU citizens visited Ireland last year. The average spend of a tourist in Ireland is calculated at £563 from which the Exchequer receives 52p in every pound. The new Tourism Ireland chief executive needs to be seen promoting next year's marketing plans. We wish him well but have not yet heard his plans.

The slowdown in house building was raised by Senator O'Toole on the Order of Business this morning. The Minister could make moves, at no great cost to the Exchequer, to encourage house building, particularly where planning is already in place. He could also provide tax incentives or allow interest relief on borrowings to people engaged in the sector. One of the auctioneering institutes spoke about this recently and pointed out that those engaged in the provision of accommodation were the only businesses where interest relief was not allowed. If that is so, will the Minister address and rectify the situation?

The Minister has a difficult task. I wish him well in framing his budget and hope Ireland merely suffers from a slowdown and not a meltdown.

Mr. Bonner

I welcome the Minister of State at the Department of Tourism, Sport and Recreation, Deputy Eoin Ryan, to the House. The events of the past year have been difficult for us and world economies generally. All the eggs in the basket appear to have been broken at the one time. The Minister for Finance, Deputy McCreevy, projected a surplus of £2.5 billion in his budget speech last December. Since then we had the foot and mouth disease problem and the forecast was revised to £1.5 billion. There has been an international recession, particularly in the US, and that would have affected the forecast even before the events of 11 September.

The downturn in the IT sector was already forecast. Employment losses of 10,000 were forecast for this year before the events of 11 September. It may be years before the full economic impact of the terrorist attacks in the US will be evident. We are now told that we may have a surplus somewhere in the region of £1 billion or £800 million this year. That is not bad for such a difficult year considering that before the Minister took over our finances we regularly had deficits of £800 million.

The most immediate impact of recent events is the introduction of considerable uncertainty which in itself damages confidence and is one of the main reasons we are having this debate. Some recession is inevitable but whether it is temporary or prolonged remains to be seen. Our economy can bounce back quickly as we are resilient. Most of our problems have been created from the outside. The foot and mouth disease problem originated in Britain and as its closest neighbour we suffered most. The recession in the IT sector in the United States had a knock-on effect here as many US companies are based here. The downturn with our tourism is due to the foot and mouth disease problem and the terrorist attacks.

It will be necessary for international economies to begin recovery if our economy is to recover. Decisions made in December for the 2002 budget will be important. The type of budget needed may not be what the Minister had hoped earlier in the year, especially with an approaching general election. Prudent decisions must be made to keep public finances strong. We must secure value for money in both current spending and investment in infrastructure at a time when less money is available. It has been suggested that we need a budget that neither stimulates nor deflates the economy.

The downturn in world economic activity which has affected our performance will cause the Minister to keep increases in spending and services to a minimum. However, as he and the Minister for Health and Children, Deputy Martin, have promised, there may be exceptions in relation to health services. The Government must also address the inadequacies of the transport, telecommunications, electricity and waste management systems because these will delay further economic growth. Even during the short-term downturn in the economy, the Government ought to borrow to improve infrastructural difficulties and prepare the country to avail of the upturn when it arrives.

In recent years, we successfully reduced the level of unemployment from 10% to under 4%. Inevitably the downturn in the US high-tech industry will increase the numbers of unemployed. The ESRI predicted that by 2003 unemployment will be at 7%, while the Central Bank expects it to be at 4.5% by next year. We must look after our own citizens by limiting the number of permits to those entering the country to fill the employment gap that existed heretofore. Wage demands due to inflation have, through the partnership process, benefited those in professional and high skilled jobs. Such people shared in the economic growth but excessive wage demands must be curtailed. I hope I do not offend Senator O'Toole when I say—

Mr. O'Toole

I am afraid the Senator is about to.

Mr. Bonner

—that some people receiving £90 per week in social welfare, while Senator O'Toole's colleagues reject £27 per hour for supervision work and labourers in the construction industry can earn up to £1,000 per week, highlights the gap that still exists in our society. The budget must concentrate on the less well off by cutting taxes to benefit the low paid. The Government reached its tax cuts targets a year ahead of time, but the coming budget must widen tax bands. It must also address the quality of life and standard of living for those on social welfare or socially disadvantaged, people suffering from disability or with learning and educational needs, and carers. The Minister for Social, Community and Family Affairs, Deputy Dermot Ahern, acknowledges that, despite a doubling of social welfare spending compared to last year, he needs an extra £4 billion to meet all the demands made on his Department. We ought to have continuing growth in that area rather than dramatic policy changes because of current economic conditions.

The economic slowdown does not mean bad times but a reduction in the growth and surpluses we experienced in the last four years. The good times are not over for good and, by 2005, employment will return to levels of 11 September and earlier. Despite difficulties over foot and mouth disease, there is a silver lining for our beef industry because the Egyptian market has reopened, and the value of exports to Britain could increase to £100 million according to the British meat and livestock commission, which forecast that demand for imported beef will rise by 60% due to the return of consumer confidence in that meat. We already are the biggest exporter to Britain with 12% of the market.

Our economic health was seen as very good, particularly last year when growth was 10% with 6% forecast for this year, but commentators are now revising that and the ESRI projects 2% growth next year. However, the economy will continue to grow and by 2005, it will still be above the European average. Difficulties will arise after 2010 when growth will fall to the European average because of our ageing population. The Minister for Finance has set aside 1% of annual GNP towards the pension reserve fund, which was itself a surplus and I hope continues to be so.

It is crucial that we address the infrastructural difficulties. We must meet the national development plan's targets. Particular attention must be given to the regions that have yet to benefit from the Celtic tiger. Some commentators say that the cat is taking a nap, but some of the cream that was stored must go to the West, Midlands and south-east areas where there has been no major investment because of delays in putting programmes in place. These areas must not suffer further because of the economic downturn. In my region, employment is 17% and many jobs were lost recently. The Herdsman factory in Ballybofey closed with 85 jobs lost while other smaller factories experienced additional job losses. The effect of these losses is probably ten or even 100 times worse here than similar losses in Dublin.

There is concern about the BPI factory in Gweedore. It employs 23 people full-time manufacturing good quality plastic bags, which were shown to the Minister for the Environment and Local Government, Deputy Dempsey, and are not the type seen hanging on roadside briars and fences. I hope the Minister will exempt this bag from the proposed legislation, otherwise these jobs will be lost.

The continuing failure of the IDA and Údarás na Gaeltachta to get jobs for Letterkenny and other parts of the county has a devastating effect on young people who must seek employment in Dublin and elsewhere. There is an inadequate road structure through the west of the county, particularly the N56, and more money is needed than was included in the county roads programme to upgrade the road system. We have problems with sewerage and water treatment plants and some work, included in the programme from 2001 to 2004, was postponed due to the economic downturn. I ask the Ministers for Finance and the Environment and Local Government to provide for such work in the next budget.

The inadequacy of the N2 creates problems in accessing the county as a whole and there are no plans to upgrade it to the same standard as other major roads. Further difficulties are created by the ESB's failure to get planning permission. There is much talk of taking gas to the north-west. I remind people that the north-west does not end in Sligo or Letterkenny. The pipeline should carry on to Letterkenny by way of Donegal town, Killybegs and Ballybofey. We fared badly in the Structural Funds from 1994 to 1999, and the 2000-06 funding is delayed. There is concern that this will be reduced because of prevailing economic conditions.

Our tourism industry was badly affected by the foot and mouth disease crisis. People from Northern Ireland did not come until August, instead of from Easter onwards. Numbers of visitors from America may be reduced by 50% which would mean a disastrous loss to the economy of £260 million in the coming year. Every year during the budget debate, I raise with the Minister for Finance, who is unfortunately absent, a rural renewal scheme for west Donegal. The town renewal scheme applied to Ardara but was a disaster. It received the same benefits as towns near Dublin and so the scheme had little impact. The Minister ought to look into this.

The Government has achieved much. Although this is the gloomiest time in ten years, we must be confident that times will improve. For the present, the Minister cannot cut taxes, bow to demands for higher spending and still produce a surplus. Over the last ten years, and particularly over the last four, we have built a sound foundation. Despite recent bad news the economy is still growing well above the EU average. We are still getting richer albeit at a slower pace than before. People are wealthier, and there are more and better paid jobs. We have more disposable income, interest rates are down and there is no forced emigration.

The Government has delivered £3.5 billion in tax cuts to date and reduced unemployment. There are now 1.7 million people in the workforce compared to 1.1 million in 1990. Tax has been cut from 27% to 20% and from 48% to 42%. Social welfare payments have increased, particularly the contributory old age pension which is now £106 per week. Some 40% of the labour force are outside the tax net. There has been a 67% increase in funding for education and an 86% increase in health spending. The average industrial wage after tax has increased by £60 per week and there have been huge increases in child support. These improvements are reflected in the large number of cars being sold now compared to 1992, and also in the figures for foreign holidays which were taken by nearly 1 million people last year.

However, we may have to tighten our belts. Senators O'Toole and Coghlan have referred to the housing issue. The biggest advantage of the downturn in the economy is that house prices are dropping and may enable people who could not previously afford houses to get into the market. I agree that speculators and property developers are easing up and waiting for things to boom again. Property prices went up far in excess of material prices during the boom.

I agree with Senator Coghlan about interest relief for investment in property, particularly rental property. It is something that I opposed at parliamentary party level following the first Bacon report. Members who have children studying and renting accomodation in Dublin will know that rents have increased by nearly 25% in the last year. I always believed that interest relief was a legitimate business expense and the Minister should reinstate it. I do not know why it was taken away. Interest relief is a constitutional right of anyone who wants to buy property. The Minister listened to Members last year in relation to the 2% property tax at a time when developments in rural areas were being decimated. Now the building industry has contracted again.

The Minister for Finance has a difficult task. Tax revenue is only up 2.2% instead of a projected 12.5%. I hope this is a short-term downturn in the economy. Growth for next year may be as low as 2%. I have great faith in the Minister for Finance who has done a great job over the last four years. He took on Commissioner Solbes last year when he tried to tell us how we should run the economy and spend our money. The Commissioner is now trying to restrict the projections that Ministers in the EU will be making in their budgetary forecasts for this year. He has no need to warn the Minister, who has done an excellent job for the economy.

Mr. O'Toole

I welcome the Minister of State at the Department of Tourism, Sport and Recreation, Deputy Eoin Ryan, who has come to the House on behalf of the Minister for Finance. It is time we looked at where we are going and made decisions in the context of our overall strategy. There has never been a financial plan based on the experience of four or six months. A good plan will be based at a minimum on a three year period, and it will be better if the period is five or seven years. We need a proper review of where the economy is going. Having established what that view is we should not deviate in any way from it.

It is important to remember that this time last year the debate in this Chamber was about raging inflation. This time last year, the Government, social partners, and other groups got together and looked at what might be done. There was support for the Government in the measures it had to take and a recognition of the direction the global economy was going. Inflation is now under control and dropping, as are oil prices. On the question of growth, which is the only outstanding issue, a number of points must be made.

I want to dispose first of the subject of pay and taxation. The PPF was based on fundamental economic indicators. One of them was inflation, which we have dealt with, and the other was economic growth where an average growth of 5.6% per annum was needed to fulfil the conditions of the PPF. Growth last year was roughly 11% and this year, according to the Minister's speech, will be in the region of 6%. Even if there were no growth next year, which there will be, those two figures give us the required average over a three year period. These things must be kept in mind. It is people like myself who must go out and sell Government policy and national partnership policies in ways that other Members do not.

Mr. Coghlan

There is no better salesman than the Senator.

Mr. O'Toole

We must have credibility. That is the basis on which we have done our business and that is why the Government must reassure workers that they will get what they expect. The funding is there for that.

I do not agree that the Government has achieved its tax objectives. It has not achieved either its objectives, with which I disagreed, or its commitments on taxation and the PPF. The Government is working towards them. It is more than half-way there and ahead of schedule but it is incorrect to think that people do not have tax improvement expectations. I accept that those expectations do not have to be fulfilled in this budget; they can be fulfilled over two budgets because the PPF stretches that far. However, people must be reassured on this and, particularly at a time of downturn in the economy, it is important that we meet our commitments.

That is also the case in relation to the National Development Plan, 2000-2006, which Members have discussed in a very negative fashion. It is a multi-year plan. There can be no question of deviating or pulling back from that plan for a very important reason. To get out of a recession, we need to have solid infrastructure. Roads, telecommunications and the plan's other targets are vitally needed. The most important time to press ahead with such a plan is when we are facing a possible recession. We should be speeding up the plan rather than slowing it down.

The major question concerns where the money is to come from. I asked the Minister this before we entered the House today and told him that I looked forward to his answer. Has he the nerve to bring in a deficit budget? In recent years, we have had budget surpluses, which is a good thing and one that all Members welcome. However, budgets should be looked at over a period of time. The ESRI and Central Bank projections – and there are differences between the two bodies – agree that the downturn in the economy will be reversed. Whether we come out of the downturn on a V-graph trend or a U-graph trend I do not know, but we are coming out of it. If we believe that, the case is made for not pulling back from our national development plan commitments and investments. If necessary, we should be prepared to budget for a deficit this year in order to ensure that we bring forward investment for roads, train ing, broadband communications and so on. We will be back in more positive growth territory in later years and we can use the surplus to do that.

In 1987 this country had a debt-GNP ratio of approximately 125%. Our national debt was one and a quarter times our gross domestic product. At that time we were faced with meeting the Maastricht requirement that states should have a debt-GNP ratio no higher than 60%. The Irish Government had to argue its case with Europe. Even though the economy was improving, we know we could not make the 60% in time for Maastricht and the Government proposed a change to the requirement, allowing for the ratio to be approaching 60%. This was accepted. Our debt-GNP ratio is now under 30% – half the European average. It is no longer a millstone around our neck. I am not saying that we should be anything other than thrifty in our spending but if we need to budget for a deficit this year, then we should be prepared to do so.

The Minister for Finance should listen to the advice of the economists and make his own decision. That is what makes him the man he is. He should be prepared to budget for a deficit if he is convinced the investments are important. He should forget he is an accountant. Accountants do not know how to run countries, how to run economies. They do not know any more than the bottom line. He should forget his accountancy training, look at the people, the country, the investment and the plan and make it work. That means budgeting for a deficit if necessary.

The other area we need to look at is research. There was a very good business story last week which got little publicity. It pointed to the fact that in this period of downturn in the IT industry, young Irish companies in that area in progressing the product of their research and development have managed to get a greater investment in their companies on a pro rata basis than in any other country in the world. There has been an extraordinarily successful year for some start up companies like these, believe it or not. There is a number of statistics in the Minister's speech which we should all be aware of. I direct attention to the statistics about the IT industry.

We export only 18% of our product to the US. The companies which do export to the US also have the lowest levels of employment. From memory, employment in the tourism industry is about 18% of total employment, whereas employment in the IT industry is only 6% of total employment.

Minister of State at the Department of Tourism, Sport and Recreation (Mr. E. Ryan)

The figure is 9%.

Mr. O'Toole

It is only half. Our tourism industry is more important to us in terms of its immediate impact than the other. This is important to note.

In his speech, the Minister did not distinguish between European investment and Euroland investment. We need to look at UK, European and Euroland exports separately. This would allow us to see where our market is. I direct Members to the Minister's references to the chemical and pharmaceutical industry. I have been saying for 18 months that the next big thing in terms of investment globally is chemicals and pharmaceuticals. It is not just in Ireland that this industry has grown in the course of this year. People are worried and care about their health and this is an area in which we should encourage investment.

Yesterday's inflation and August production figures from the European Union have been heartening. They show that Europe was moving forward before 11 September. We recognise that almost all the world's markets are at their 11 September figures. The Dow Jones and NASDAQ indices are just marginally below them. The markets are recovering.

I completely disagree with Senator Bonner on the housing issue. Whatever the Senator's views were on the Bacon report, it did have the impact that the Government said it would. There was general support for it. It did have an impact on reducing the price of houses. It is not the case that there are people ready to invest in houses for rental income with the objective of reducing that rent for students or workers. It will not happen. The real issue regarding housing is that the latest figures from the Central Statistics Office show that housing completions, which are predicted in the national development plan to be at least 50,000 per annum, are estimated to be 45,000 this year and 40,000 next year. That will be 10,000 less per annum than planned for.

I dispute the assertion that the prices of houses have dropped and that it will be easier to buy next year. This will not happen. Our population is rising and there are more young people and more immigrants than ever before. An increase in the housing stock is necessary. The figure of 40,000 houses per annum was based on need and even at that is not meeting demand. What we have seen in the last six months is a lack of confidence in the housing market. Instead of buying houses, people are staying with their parents or in rented accommodation. This is a deferred demand. The demand has not gone away. The people who need the houses are there and they will have to buy, a fact which informs the callous attitude of developers. They are sitting on the land with the capacity to build the houses but because over the past ten years they have become so accustomed to selfish and greedy profits – I have no objection to people making profits, I encourage it – they want to hold out for more.

These people with land banks, contrary to what the Leader and Chief of the House was saying this morning, will not build because they do not like the Minister's Bill on social housing and they are not about to build social housing. My answer to them is very simple – if they do not build on the land, the Government should build social housing on the land. There is an extraordinary shortage. There are queues for local authority housing are getting longer, as other Members who are on local authorities will know. The demand is not being met. I ask all those in the Government parties to recognise that fact. They will be coping with the fallout from this when they are canvassing for next year's election.

People in the construction industry have been saying to me that builders will not build houses because of the fall off in demand. I do not know of any place where there are newly built houses that have not been sold. They are all being sold. The starter homes market has not been impacted upon. The front page story in today's edition of The Irish Times is about a house in Foxrock which, instead of selling for £8 million, made a paltry £6 million. How terrible. The problem is at that end of the market and we all feel sorry for the person selling that house.

The question of immigration is more complex. It is not just about jobs and the people coming in. Nobody could object to looking after our neighbours' kids, but the jobs that people coming into this country will do are the jobs one does not want one's children to do. That is unanswerable and has happened in every country in the world. The Irish went to New York, Melbourne and New Orleans and built canals and roads. Do many Irish people want their children to shovel stones? The reality we have not faced is that people coming in will mostly be taking on employment that Irish people do not want, but which is nonetheless work that has to be done.

We should be upbeat about the economy. In that I support both the Government and the Opposition. We can work our way out of this if we hold our nerve. We must not retreat into our corner and start building a wall around ourselves. Now is the time to take a chance, to invest, to plan for the future and to spend money.

Mr. Mooney

I welcome the Minister of State, Deputy Eoin Ryan, to the House. He is probably more acutely aware than most of house prices, considering the constituency he represents, although I do not think they are in the £8 million class yet – it depends on whether one is in Shrewsbury Avenue or Aylesbury Road.

I endorse what has been said about the presentation by the Minister for Finance, Deputy McCreevy. It is instructive to find between the lines a pointer towards our budgetary policy over the next 12 months as we attempt, as he puts it, to weather the storm of the fallout from 11 September. It is important to prioritise public spending towards programmes which improve the long-term capacity of the economy to benefit from the eventual improved conditions. This echoes the conclusions contained in the report, Medium Term Review: 2001-2007, published by the Economic and Social Research Institute in September. In its conclusions, referring to policy priorities, it is clear that the full implementation of the necessary infrastructural investment under the NDP will play a vital role in expanding the capacity of the economy for future growth.

It is vital that, notwithstanding the projected economic downturn and lower growth rates of the next year to two years, there should not be any dilution or diminution in the expenditure vote for infrastructural development as part of the NDP, as there was in the 1980s. I had this argument with economists and politicians who were in positions of influence during that period and they argued strongly against my premise that a major mistake was made by administrations, even at that time of severe economic inactivity, in cutting back severely on public services and infrastructural development. We did it at our peril and we are now reaping the whirlwind.

There are massive deficiencies in the public service, health and infrastructural areas and we have been playing catch-up for the last six or seven years. Many of the road projects which should have been implemented in the early 1990s have not been implemented and those that are only now being carried out cannot possibly absorb the significant increase in traffic, especially on the east coast. We also cut back severely in the area of public health and are now reaping the whirlwind. It was argued strenuously that there was no money in the kitty and that we were borrowing beyond our needs, but there are lessons we learned in that period which can be put to good use now.

We are no longer in the same economic climate. The worst-case scenario according to the ESRI is a continual slowdown of the economy in the USA, which will mean that instead of growth rates of more than 5% we will have growth rates of 2% or 3%. It is possible to budget for a small deficit instead of a surplus. Senator O'Toole pointed out that we could manage to budget for deficits for the next two years and we would still be within the benchmarking regime under the Maastricht Treaty stability pact.

We have been enjoying surplus revenue over the last few years and have had huge surpluses at budget time. Now that things are beginning to get shaky, people may advise the Minister not to have budget deficits as there were in the bad old days. It would not be like the bad old days.

Senator Bonner made a point about which we empathise with each other because of our geographical location and our experiences. It is vital for future economic growth and to eradicate the disparities existing between the regions that the NDP is implemented in full, not only on national primary routes but on the secondary routes and arterial roads that link various counties and areas within counties. We cannot afford to hold up progress, irrespective of what is happening in the wider world. The ESRI say, and the Minister will appreciate, that we could fall into a serious trap. If we cut back significantly in order to maintain budget parity and to store for a rainy day we could find ourselves, in five or six years' time, dealing with a far worse legacy than successive administrations have had to deal with since 1987.

There seems to be a consensus in this House that it is important to convey to the Minister the strength of feeling of people from the regions that the NDP should be continued unaltered and that money should be made available to the Department of the Environment and Local Government and to the other Departments involved in infrastructural development, notwithstanding any other problems. If this means having a neutral budget in order to maintain existing tax rates, so be it. It is a short-term pain for a long-term gain. This should not be interpreted as a suggestion of cutbacks in social welfare or in helping the needy and the socially and economically disadvantaged in our society.

This would be a major plank in the Government's budgetary policies come December. My colleagues on the Government side of the House will testify that at gatherings of the Fianna Fáil parliamentary party, it has repeatedly been made clear that the issue that now needs to be addressed is that of the underclass – the socially disadvantaged and those who have fallen through the economic net, Celtic tigers notwithstanding.

There may be a downturn in the American economy, but companies in Ireland should look east rather than west. Figures have been quoted about the amount of investment in America. Enterprise Ireland reports about development in the east indicate that Irish industry is not taking advantage of growth in the euro zone. Their paper, Developing Business in the EuroZone, states that with 290 million customers, continental Europe represents industry's largest potential market, yet only 29% or IR£2.726 billion of Irish company exports go to continental Europe. Some 45%, representing £4.136 billion, go to the 58 million-customer UK market. This is an extraordinary statistic – 58 million customers in the UK are receiving 45% of our exports while 290 million potential customers in continental Europe receive only 29%.

Obviously the UK will remain an important and valued market for Irish exporters but the Enterprise Ireland report strongly suggests that strategic management would imply a more balanced market portfolio. It seems, sadly, that many firms have given a lower priority to continental Europe. It is a huge market with a greater percentage of world trade than even the US or Japan. Europe leads the world in many industry sectors, with particular growth in the newer industries such as telecommunications, pharmaceuticals, medical products, biotechnology, information and computer technology and financial services. There are quite a few defensive stocks, as they are called, that have long-term viability.

The Enterprise Ireland report goes on to state that given the increasingly globalised nature of business, Irish firms need to be active competitors in the significant European marketplace. I was in Hungary recently and it came home to me very forcibly the way the Irish economy is developing. There are applicant countries like Hungary that have highly developed economies notwithstand ing the fact that they were part of the former communist bloc and are outside the EU. Most importantly they have a very low cost base.

One company that has taken advantage of the Enterprise Ireland initiative is Digico, which is involved in digital printing. I had the opportunity of visiting its Hungarian plant which it works with on an equity partnership arrangement. It is the third largest printing company in Hungary. Its general manager, a Scotsman, who looks after the Scottish Digico enterprise, informed me that in Ireland and Britain the cost factor of the product is based on 25% production costs and 75% labour costs, whereas in Hungary it is the opposite. He said the company is poised to ensure that any possible downturn on production line jobs here – that would be the low value jobs – would be offset by the shared equity partnership with a Hungarian company, even if products are to be exported to Hungary. Although it will possibly lose jobs here in the short-term, in global terms the company will be viable in the long-term, which would protect jobs in Ireland.

Irish industry should take the message from the Government, Enterprise Ireland and the State industries to look east. Europe is where our future lies. In the context of enlargement we should give it much greater priority than companies appear to have been doing.

Mr. Costello

The Minister began his speech today by outlining that the economy has suffered enormously because of the atrocities in New York and elsewhere on 11 September, but that there were already significant signs of a downturn in the global economy both here and elsewhere. That is now reflected in the end of year outcomes in terms of a very substantial reduction in exports and surplus. It appears that the growth rate will be approximately 2% this year, which is hugely different from last year's 10%, and there will be knock-on effects for the coming year.

Nobody has a crystal ball to tell what the result of the war will be and to what extent it may further affect the world economy in the long-term. We are living in difficult times and the great prosperity that was with us over the past six years is fading fast, but I hope it will be of short duration. It is time to reflect where we are at, where we are going and what we need to do in regard to preparing the budget for the coming year.

I was amazed to read yesterday that Irish companies employ 65,000 people in the United States and US companies employ 100,000 people in Ireland. If we look at the figures proportionately, with a population of 200 million in the US, we employ roughly 33 times the number of people that US companies employ. We are clearly providing hefty employment for people in the United States. Having said that, the companies which the United States has here, which are largely in the ICT sector, produce an enormous quantity of exports. Some 40% of exports come from that sector, with 5% of the employment. It obviously contributes enormously to the Exchequer. A downturn in that area, coupled with a downturn in tourism which provides 9% of our employment, would have serious effects on our economy. Undoubtedly with the US market providing 70% of Aer Lingus business on the transatlantic route, this is clearly another area where we are subject to an adverse impact.

Last year's budget surplus was £2.5 million. The first surplus was created in 1996 under Deputy Quinn who was then Minister for Finance and every year since there has been a budget surplus. I am somewhat disappointed that in the good years of budget surplus more was not done to benefit those who are least well off. Disproportionately, it was payback time for those who were better off. The Minister, Deputy McCreevy, reflected that in his budget and the statistics are there to show that those who are better off did better from those budgets than the less well off.

We have come 16th out of 17 industrialised countries in the United Nations development report for 2001. Some 15.3% of the population is living in poverty while there is only 3.5% unemployment. There is a contradiction in those figures in terms of how we distribute the benefits that have been produced by the Exchequer surplus and the high employment levels. The largest category living in poverty are lone parents. The NESF figures showed that almost half of all lone parents – 47% – said they had only primary level education and that there was only 2% participation in FÁS schemes despite the 10% limit that exists. We are clearly not moving in the right direction. Labour force participation by lone parents is 22% compared to a high of 65% in Finland. These are areas of high deprivation and social exclusion.

We still have disturbingly high illiteracy levels, as revealed in the annual OECD reports. The most recent one showed that 23% of our population is both illiterate and innumerate. There are clearly serious problems to be addressed and it is a pity that there was so much payback given to those who did not need it. It is a bit rich for people to say that we should now direct our scarcer resources at those who are less well off. I agree we should do so, but we should have done so over the past four years of plenty.

There are huge problems in the health sector where in the past four years the Government has recruited 4,000 extra administrative staff but only 2,000 nurses. Why was recruitment in that proportion? People are needed at the coalface, not in administration. The numbers in administration should be cut. Certainly there should be extra recruitment but the numbers dealing with patients should be increased. As a result beds have had to be closed as there are not sufficient nurses to keep them open. There has been a wrong skew in the manner in which employment has been created in many areas of the public sector.

The question of housing is one of the most serious issues. There is a downturn in the number of houses being built despite the need for an upturn. I was in the new homeless persons unit in Gardiner Street yesterday – the old one was closed down – and learned that it is facing a winter of discontent and that it is totally incapable of dealing with demands while the numbers sleeping rough are increasing. The construction industry is sitting on landbanks because it is displeased with the requirement by the Minister for the Environment and Local Government, Deputy Dempsey, to provide 20% of social and affordable housing. That industry has made enormous profits during the past decade. Property prices and house prices have shot through the roof, yet it will not take a little pain. The Government will have to ensure basic rights, such as shelter and health. I compliment the Minister, Deputy Dempsey, on his proposal to provide 20% of social and affordable housing. If policy is enunciated here on health but housing is not implemented the laws remain on the Statute Book without being of any use. There is a need for implementation action from the Government on these matters. It should be dealt with immediately because the situation has deteriorated. The great hope was that there would be sufficient social and affordable housing within the local authority and voluntary sectors.

The Minister of State, Deputy Ryan, is responsible for the drugs strategy and much good work has been done in drawing up that strategy with local drugs committees, but the drugs position is still deteriorating in the Dublin area. Heroin is becoming an increasing problem. We still do not know the number of heroin addicts. It has been suggested there are 10,000 to 15,000 heroin addicts in Dublin. This is the only place they are and they are not being dealt with adequately. The health board said that every addict who presents for treatment will get it and that there is no further waiting list. Yesterday I dealt with a person who was trying to get off drugs and who had been waiting for four months. I was told in the clinic that he could expect to wait for another six months. The problem will not be dealt with unless the resources are available to get people off the waiting lists. There are hospital waiting lists, waiting lists to get into homes for the elderly and waiting lists for treatment for drug abuse, and a community service is not put in place.

Given the scarce resources there are no further tax cuts. Tax cuts mean that money is given to those who will spend on imported goods or luxury goods. If, instead, the money was given to those on the minimum wage and the less well off it would circulate on bread and butter issues and would be kept within the economy, generating more activity, more employment and further consumption. If the money is given to the well off it will be spent on goods that will not necessarily bring benefits to the economy. Certainly if it is spent on new cars or such items, the money will go out of the country and is lost to the economy.

I call for a quorum.

Notice taken that 12 Members were not present; House counted and 12 Members being present,

Mr. Lydon

It seems strange for one to call a quorum and then not appear.

Acting Chairman (Mr. Caffrey)

The Senator has returned. I call on Senator Costello who has four minutes remaining.

Mr. Byrne

We now know the Senator's interest in the economy.

Mr. Costello

As I already said, the Minister, Deputy McCreevy, should direct his attention at the less well off and those on the minimum wage.

The national development plan is quite ambitious. It contains many desirable proposals in terms of infrastructure and should not be allowed to fall by the wayside. We should proceed full steam ahead in regard to the existing proposals which will generate employment and help the economy grow. We are in an attractive position in terms of our debt ratio figures which compare very favourably to any of our European neighbours, with the exception of Luxembourg. As a result I believe this country can manage to soak up a degree of borrowing. It would be great if we could continue without further borrowing and obviously public-private partnerships are a way round that. The plans that are in place are important. There needs to be investment in infrastructure because this country has never had a proper infrastructure in terms of roads, rail, IT and broadband structures. This would help the economy in rural regions and ensure there is balanced development throughout the country.

We should continue to monitor the situation and try to keep the budget on an even keel. It will be a pleasure if the Minister for Finance, Deputy McCreevy, decides to give disproportionate benefits to the less well off. I look forward to that possibility.

Sitting suspended at 1.45 p.m. and resumed 5 p.m.