Seanad Éireann debate -
Thursday, 19 Jun 2003

Vol. 173 No. 11

OECD Economic Survey of Ireland 2003: Statements.

Minister of State at the Department of Justice, Equality and Law Reform (Mr. B. Lenihan)

On behalf of the Minister for Finance, I am pleased to have this opportunity to open the debate in this House on the recently published OECD Economic Survey of Ireland 2003.

The OECD undertakes an examination of the economies of its 30 member countries at up to two yearly intervals. Such examinations involve a visit by a team from the OECD's economics department to the country being examined. During the visits to Dublin the OECD team met officials from a number of Departments and representatives from organisations in both the public and private sectors, for example, employers, unions, the banks and economists from academic institutions. The OECD team is well placed to obtain a thorough and comprehensive understanding of the state of the economy and how it is likely to perform in the short and medium term. More importantly, the OECD is in a position to see how similar issues are dealt with in different countries and weigh the advantages of various approaches. Members of the OECD team are also able to see how the global economic situation evolves and the economy of a particular country is likely to be affected by international developments.

The draft report by the OECD team is reviewed by the economic development and review committee which is made up of representatives from the 30 member countries. The OECD's analysis and advice are a very valuable contribution to the development of economic policy. It is not surprising that most of the coverage in the media of the OECD economic survey tends to highlight specific recommendations in one or two areas rather than the broad thrust of its analysis and recommendations. However, I hope the debate in this House today will focus on the central themes of the OECD's examination and its key recommendations.

The OECD notes that Ireland's remarkable growth performance, which began in the mid-1990s and continued into the start of the new millennium, has led to rapid convergence of productivity levels towards the EU average, while employment growth has also been exceptionally strong. Living standards have increased dramatically as a result. It goes on to note that the unemployment rate fell from as high as 15.7% in April 1993 to a low of 3.7% in the first half of 2001 which led to recruitment difficulties. In the view of the OECD, the above potential growth has resulted in growing infrastructural pressures as evidenced by rapid house price increases, congestion and longer commuting times.

Competitiveness has been reduced by price and wage inflation which has been reinforced by infrastructural constraints. The OECD concludes its analysis by stating that, given these considerations, growth had to slow sooner or later, even though the downward shift in economic growth has undoubtedly been linked to the slowdown in the international economy and its impact on the ICT sector. It notes that the apparent resilience of economic activity is somewhat surprising given the series of economic shocks that affected the economy between mid-2000 and 2002. It attributes this resilience to the diversification in FDI investment in recent years as well as housing construction and the expansion of economic investment.

According to the OECD, after showing remarkable resilience up to the third quarter of 2002, the economy seems to have lost momentum as export growth slowed and confidence weakened substantially. The economy will, therefore, have entered 2003 with little momentum. However, given the expected recovery of world economic growth and the negative impact of the earlier appreciation of the euro fading, Irish GDP growth is forecast by the OECD to increase from 3.25% in 2003 to 4.25% in 2004. Meanwhile, the unemployment rate is projected to edge up. Inflation is forecast to fall due to wage moderation and the impact of the euro appreciation. The HICP rate is forecast by the OECD to fall from 4.75% in 2002 to 4.25% in 2003 and to fall more sharply in 2004. The Department of Finance will be updating its economic projections for this year in its economic outlook and review, which will be published later this summer.

The OECD considers that the long-term prospects for the economy remain broadly favourable. Some of the structural forces underlying the economy's recent slowdown remain of great importance when examining its future prospects. These include the prospects for business investment, for responding to the economy's infrastructural constraints and for future labour force growth.

One of the OECD's most significant conclusions is that prospects for business investment will depend on the extent to which regulatory reform opens up latent business opportunities domestically and the extent to which Ireland remains an attractive location for foreign direct investment. Ireland will face competition for inward foreign direct investment from the new members of the EU. It will face competition in respect of the skill level of the workforce and cost competitiveness. However, the OECD acknowledges that the rapid improvement in infrastructure and the skill levels accumulated should help Ireland to remain an attractive location for foreign direct investment and that the enlargement of the EU is also likely to increase total foreign direct investment flows substantially. As regards infrastructural constraints, the OECD acknowledges that those are rapidly being dealt with under the national development plan.

Having set out its analysis of Ireland's current economic situation and medium-term prospects, the OECD goes on to identify the key challenges which the economic situation now presents. First, it refers to the need to ensure that the public finances adjust to the slower growth environment so that their soundness is assured. This involves reconciling continuing large demands for public expenditure with smaller increases in tax revenues. While the report acknowledges the substantial improvement in public expenditure monitoring and control arrangements in recent years, it also recommends ongoing reform in this area.

The second challenge identified in the report is that of minimising the risks of a weakening in growth performance. This requires safeguarding competitiveness and maintaining the attractiveness of Ireland as a destination for inward investment. Finally, the report identifies the need for regulatory and environmental policies to focus more clearly than before on consumer interests.

The OECD sees these challenges as being related and mutually reinforcing. It says that reform of the public expenditure management system should entail an improvement in the quality of public services and help preserve the low tax environment. These should then contribute to safeguarding competitiveness as well as enhancing welfare. Regulatory reform in non-traded sectors should result in a better quality of services as well as lower prices. This should contribute not only to better welfare, but also to improved growth prospects by limiting the deterioration in competitiveness and supporting labour force growth.

This year's OECD report has a special chapter on enhancing the effectiveness of public expenditure management. The Minister for Finance welcomes this initiative by the OECD and views its recommendations as a positive and practical contribution to the ongoing improvement of public expenditure management arrangements. Members will be aware of the ongoing challenge of matching very genuine demands for improved public services with the Government's overall responsibility to ensure sustainability of the public finances over the medium and long term. This challenge is now being faced by many of the other OECD members and the organisation, therefore, has much valuable insight to offer based on best international practice.

I would like to deal specifically with some of the key recommendations of the report in that regard. The report acknowledges the reforms introduced to the budgetary process in 2002 and 2003, including the setting of expenditure targets by the Government for individual spending Departments at an early stage in the process. It welcomes moves towards a multi-annual capital framework for investment to facilitate greater planning of our infrastructural spending over the medium term. The Minister welcomes the recommendation of the OECD that we continue to build on these reforms. He intends to examine ways of further strengthening our budgetary and expenditure management arrangements in the coming years.

Members will be aware of the Minister's strongly held views on the need to achieve results for the money invested in public services. He secured the agreement of the Government last year to strengthen the expenditure review process to enable better quality information on results to be available in respect of key programme areas. To enhance accountability and public debate, completed reviews will in future be laid before the Houses of the Oireachtas. Senators will be aware that the national development plan accounts for more than 80% of our capital investment. A mid-term evaluation of the entire plan is currently underway and will be published in the autumn.

To progress further the agenda on results-oriented budgeting, the Department of Finance is currently leading a pilot project with three other Departments which is focused on linking resource allocation with outputs. Following this study, the Minister will consider whether the approach should be mainstreamed across other Departments.

The OECD also refers to the need to strengthen the accountability framework further. The management information framework currently being implemented across Departments will represent a significant step forward in this regard. It will also be a key tool in moving towards a focus on results rather than inputs, with the availability of better quality performance information. Members will be aware of proposals announced this week to strengthen the accountability framework in the area of health.

The report raises the issue of reform of the funding systems of local government. The Minister for the Environment, Heritage and Local Government has indicated his intention to carry out a fundamental review of local authority financing. That review will provide an opportunity for consideration of those and other views in this regard.

The OECD is a supporter of market instruments, including user charges, to help generate higher efficiency and better delivery of publicly funded services. The report points out that Ireland is unique among OECD countries in not charging domestic consumers for water services. It highlights the heavy subsidisation of third level education in Ireland, a topic which has been the subject of much intense debate in recent weeks. It also suggests that serious consideration be given to raising local revenues by reintroducing a local property tax on residential housing. The OECD's views on the introduction of water charges, for example, are based on its view of best practice around the world. It is interesting that it echoes, in some respects, the views of the independent Estimates review committee – or the "three wise men"– which made its report last October.

While these issues are undoubtedly sensitive and tend to draw a range of strongly held views right across the political spectrum, the OECD makes a useful contribution to the debate. It is the Minister's hope that the report will inform mature public debate on all these issues in Ireland.

As regards competitiveness, the OECD notes that the increase in prices in the non-traded sectors of the economy has been quite pronounced in recent years. The cost base of that sector is substantially determined by wage growth. Higher prices in the non-traded sectors increase the cost base for the traded sectors of the economy. The traded sector cannot easily pass on higher costs through higher prices. The profitability of firms in the traded sector risks being curtailed, with the potential to lead to retrenchment in their operations and job losses. The rising cost of living in the economy is also likely to reduce the attractiveness of Ireland as a location for high value added investment and associated high-skill workers.

The OECD is somewhat critical of the role of the social partnership agreements regarding wage increases. However, it acknowledges that the agreements have forged a common understanding of the problems facing the country and have contributed to industrial peace. The report also points out that there are signs that an adjustment in income expectations has begun to take hold and points to the new national agreement, Sustaining Progress, as a welcome example of this.

As regards regulatory reform, the OECD acknowledges that we have had some success in introducing competition in certain sectors, particularly in telecommunications and aviation. Such competition has yielded greater choice, improved services and led to lower prices for consumers. It notes that there has been progress in substantially strengthening the power of the Competition Authority and that new reform initiatives have been taken in the energy and local transport sectors as well as in the professions. The OECD concludes that success in pursuing reforms in the sheltered sectors of the economy will be the key to safeguarding cost competitiveness.

It is clear from what I have said that the OECD conducted a wide-ranging and incisive examination of the Irish economy and of the prospects for the future. The Minister for Finance shares the same vision for the economy as that put forward by the OECD. He also shares most of its views on how to make that vision a reality. However, he might differ with some of the more detailed and specific policy prescriptions in one or two areas. This is not tantamount to criticising or rejecting the OECD's valuable report. It is simply a recognition of the fact that, as Minister for Finance, he, together with his colleagues in Government, must decide on the best approach to be adopted in seeking to achieve our goals. The Minister agrees with the broad thrust of the OECD's advice regarding the need to safeguard our international competitiveness and the associated requirement to ensure sound public finances and foster greater competition in the non-traded sectors of the economy.

We must recognise the budgetary implications of lower economic growth. Lower economic growth means lower tax revenue growth and, as a result, the funds we have available to spend on public services will grow at a slower pace than in recent years. We must adjust our expectations to this new reality.

Mr. Bradford

I welcome the Minister of State. I am pleased that we can discuss this report. It is, however, only a report; it is not a Bible of economic certainty, nor is it the only economic road map charting the country's fiscal future. It is simply an analysis. the report provides much food for thought and we need to study it, picking and choosing from it where appropriate, but the bigger political picture must also be taken into account.

A former Taoiseach once told the Oireachtas that economics was a dismal science. I am not sure who wrote those words for the former Taoiseach, Mr. Haughey—

Dr. Mansergh

Politics is a science of hope.

Mr. Bradford

—but regardless of whether it is a dismal science, economics is certainly not rocket science. The challenge for the country in the years ahead, in an economy without the Celtic tiger, is to ensure that whatever taxes we collect are gathered in the fairest and broadest fashion possible. We will face the challenge of ensuring that public moneys are spent in such a way as to get the best possible value for money. We must also ensure that we have a system of administration at national and local level which delivers. Those are key challenges which must be met.

Money alone will not solve the country's problems. We all bemoan the fact that the Celtic tiger appears to have officially disappeared. This means that the choices and revenue available to the Government are more restricted and limited than heretofore, but, as we have seen in the past five or six years in various sectors – such as education, social welfare and health, in particular – pouring money into trying to solve problems is not always the best solution. While revenue will be down and the Government's options may be fewer, that does not mean that we are facing financial ruin or disaster. It means that, politically, we must face new challenges. We must look for new ways forward and ensure that money is well spent.

Value for money is a crucial issue when we look at our public projects. Oireachtas committees, particularly the Joint Committee on Transport, are investigating in detail the way our road and rail works – including the metro – are undertaken. We must face the fact that all over Europe these projects are carried out at a lower cost and a faster rate. In North America, the authorities do not talk about taking so many months to build a kilometre of road, but rather about how many kilometres per month can be built. Ours is not a second rate country and we should not accept second rate standards. Value for money in public construction projects is an issue that requires urgent attention. I appreciate that the Minister for Transport seems to have taken this on board as his number one priority and he recognises that it will take time to achieve results. However, it is important that action is taken so that results are seen quickly for the billions of euro in taxpayers' money that are being spent.

Public expenditure is not bad. There is a certain political philosophy which tries to give the impression that all public expenditure is bad, which is not the case. However, bad public expenditure is very bad and that has been seen in recent years, particularly in the waste of resources on infrastructural projects such as delayed road projects. We must abandon the notion that public expenditure is somehow bad, but we must ensure that we get value for money for it.

I welcome recent progress made in this regard, particularly in terms of the health strategy. It may be an issue for another debate, but the way we spend money on health services over the next five or six years will be the key to getting value for money. In light of the way the Department of Health has swallowed resources in recent years without delivering services, there must be agencies and people with major questions to answer. It is not the Government's money which is being squandered, it is that of the public. The Minister for Health and Children and the Government – and the rest of us – face a big challenge in responding to the recent health proposals and in bringing about the required improvements. The Government will be obliged to ensure that every cent spent in the health service produces results. Sadly, that has not been the case in recent years.

The report mentions inflation, particularly that relating to wages, and there have been several calls from Senators for an extended debate on benchmarking. This is a matter of one's idea of public service. We deserve public services of the highest quality and they should be as good as those of any other country in the developed world. One does not get public services of the highest quality unless one has public servants of the highest quality. One cannot expect to employ public servants of the highest quality unless one provides them with top rates of pay. I have no difficulty with the way pay was addressed as a stand-alone issue in the benchmarking process, but we are missing part of the jigsaw in that we have not yet dealt with quality of delivery of services. As a member of a local authority, I have seen huge changes in the past 12 to 18 months in the grading of staff and their pay structure. However, has there been a change in the way services are delivered to the public? Have those services improved? To date, the answer seems to be no. Improvements in performance and service as a result of increased pay, which in turn lead to an improvement in quality of life among citizens, is a matter that needs to be examined. We are talking about the taxpayers' money. Public service delivery should not just be about public servants; it is about the public as well as public servants.

The report refers to local government and local taxation. Some people regard this as a minefield, but as society progresses, we must look at how local government works. The Cathaoirleach has been involved in local government but, sadly, since the 1960s, while Ireland incorporated has moved ahead, local government Irish-style has moved backwards. The current Minister seems willing to look at local government anew, but obviously the delivery of services at that level must run in tandem with local taxation and charges. Imposing local charges to substitute for national taxation or to plug holes in State finances is not enough. If we want to debate the issue of local taxation, we must discuss the quality of local government seriously.

We must look at the fact that, as of now, if one is a local councillor, one is almost politically irrelevant. One has no power whatsoever. If one is a member of an unelected Leader group, local development organisation or ADM group, then one has millions to spend. Local government can take back the important roles of community development and expansion, though that will require resources and funding. As we go down the road of talking about local taxation, we must put down a marker that local taxation and charges must only be considered in the context of making local government real and strong as it was in the 1930s, 1940s and 1950s until we changed our minds politically in the 1960s and 1970s.

The report mentions waste management and waste charges. In recent months we debated the Environmental Protection Bill which was debated in the other House in recent days and in which the Minister took back from councillors the power to make waste management plans and handed it to council management. Sadly, while this may have been necessary in the case of a few county councils in which councillors were unwilling to take tough decisions, it certainly was not necessary in the case of Cork County Council. Where local councillors are willing to lead on matters such as waste management, charges, etc., this power should not be stripped from them.

There is a recognition among the public that waste management costs money and that it is not the county or city council which creates waste but rather the public. There is a recognition that if one wants a clean environment, one must pay for it. However, a balance must be struck. There is little point in a national diktat being issued instructing local charges on issues such as waste management unless one gives local councillors the power and responsibility to decide on such matters.

I note with satisfaction that the report mentions sustainable growth, which is not the preserve of any political party in the House and concerns us all. Young people, in particular, have taken to these buzz words and it is a course we can follow with effect. Sustainable development should be kept to the fore in economic debates because if considerable growth rates occur at significant cost to the environment, they will come back to haunt us in the long run. Checks and balances must be kept to the fore. Again, this should be a job for strong local government. I look forward to the day when we will have strong local government delivering on many of these issues locally and having powers, responsibilities and resources. It will take a changed mind-set at national level. Perhaps we are moving slowly but surely in that direction.

Small business is an issue which did not receive particular attention in the report. It would be remiss of us not to note that small business persons appear to be struggling. The main issue they bring to my attention and I am sure that of many of my colleagues, is insurance. The report is not about insurance but insurance costs have a considerable impact on economic development or lack thereof. It is an issue which needs to be kept firmly on the Government agenda. While there have been numerous reports and there seems to be a Dáil, Seanad or committee debate on the issue almost every week, the action required has not been taken. I encourage the Minister of State to keep the issue at the top of his agenda.

In regard to regional and balanced development, I wish to comment on decentralisation, a chestnut which has been around for many years in this House and elsewhere. The Government has indicated, as part of its programme and as promised, that decentralisation will occur in the coming months. There is a large number of submissions before the Minister for Finance. While I appreciate there must be political dilemmas for all concerned, if we want strong, regional and balanced growth, we must make positive moves in this direction. Decentralisation is one of the more straightforward routes. When the matter was debated in the House in recent weeks, there was a clash over the number of civil servants inquiring about decentralisation. In response to a parliamentary question, the Fine Gael leader, Deputy Kenny, was advised that 18,000 civil servants wished to be considered for decentralisation. Even if only eight civil servants are involved, not to mention 18,000, the sooner we move them to the regions, the better from the point of view of sustainability, transport and regionalisation. I hope the Minister of State will respond to this point.

I welcome the opportunity to have a mini-discussion on the economic options facing the Government. If value for money, fairness in taxation and quality administration at local and national level are kept to the fore, we will not go too far wrong. I suppose we have all had too easy a time over the past five or six years in that money was available to plug the odd gap but this covered up some of the many problems. Money might not be available in such abundance now but the problems still remain. We must solve them and look at new ways of doing so. It is a challenge for all of us in respect of which I wish the Minister of State well in his endeavours.

Dr. Mansergh

I welcome the Minister of State and his officials with whom I had the pleasure of working in a collegial capacity. I welcome the tone of Senator Bradford's contribution and endorse, as I have done on a number of occasions in this House, the wish that decisions on decentralisation be taken, preferably within the next couple of months. The matter should not be allowed to drag on any longer.

To give Senator Bradford the correct quotation, it is: "If economics is the dismal science, then politics must be the profession of hope." This was said by C. J. Haughey at the New Ireland Forum in either October or November 1983.

Mr. Bradford

And the author.

Dr. Mansergh

Economics and politics were very much out of kilter 20 years ago but have become much more closely aligned. I pay tribute to the economics profession and the economic institutions which have made a significant and important contribution to the prosperity we enjoy today.

I welcome this debate on the OECD report on the economy, which is always valuable reading. I called for this debate on the Order of Business last week and I am glad the response has been so quick. The OECD has always been respected for the quality of its analysis. As the Minister of State said, it is a body comprising about 26 developed countries. The only parallel of which I am aware – I am not sure the European Union reports in this detail on individual countries but its annual economic reports are valuable – is the International Monetary Fund.

I note the Minister of State said the OECD met officials from a number of Departments and various organisations. He will forgive me if I observe that, not for the first time, the tone of this report is rather more that of, say, the Department of Finance and the Central Bank than, say, the Department of Health and Children, for example. In fact, one can often read into OECD reports the ideal world as the Department of Finance and the Central Bank envisage it but, as the Minister of State said, Ministers hope – I think he was referring to Ministers for Finance – that its input will inform mature public debate on these issues. That is one of the values and purposes of such reports. The Minister of State went on to say that he shared the same vision for the economy – surprise, surprise – and most of the views on how to make this vision a reality. However, political pragmatism comes into the equation in that the Government must take the decisions. Needless to say, some of the prescriptions could, either singly or together, bring down a few Governments.

One of the values of the OECD is that it brings a comparative perspective to bear and, therefore, provides a basis for a more objective debate on the economy. I wish to highlight a few parts of the report that I regard as significant. It notes the slowdown and elements of overheating, particularly in the past two years and states:

The policy challenge facing the Irish economy in the immediate future is to ensure that both income expectations and public finances adjust to a slower growth environment. The former is necessary to guard against deterioration in international competitiveness, while the latter is required to ensure fiscal sustainability and the maintenance of a growth supportive tax environment.

There certainly is no support that may be read into that – or into the remainder of the report – for the type of prescriptions that come, perhaps, from the Green Party or the Labour Party, for substantially raising levels of taxation.

Surprisingly, or perhaps not so, the OECD praises the social partnership process. Even if social partnership is not in keeping with neo-liberal orthodoxy, the organisation appreciates and recognises the contribution it has made to Irish economic and social progress in the past 50 years. They praise it specifically for promoting "the common understanding of the emerging economic reality, even without a tax concession as offered by the government in the past". That is significant because a few years ago the view was that social partnership would hit the buffers once there were no longer tax concessions to offset against income moderation. However, that was not the case at the outset and the position remains the same. It is a great tribute to the good sense of the social partners that it continues to be the case.

The OECD points out that, as far as the public finances are concerned, we have a debt-GDP ratio in the order of 35%. Public finances are, therefore, quite healthy at present and it is important that they should remain that way. As Senator Bradford observed, the organisation puts great emphasis on the importance of value for money, be it in the area of health or that of public transport. We have had examples of matters involving both areas in recent days. The thrust of the health reports and the recommendations they contain is that we must get better value for the level of health spending. Increased health spending has not necessarily been ruled out, but there is a strong desire that it should be more efficient when, and if, it is increased. The position is similar with regard to public transport, in respect of which a number of alarming estimates have been doing the rounds for a year or two. Before we embark on projects in areas such as those to which I refer, it is essential to ensure that we are getting what we need at a reasonable, as opposed to an absolutely astronomical, price. While I am all in favour of a metro, I do not think the country should bankrupt itself several times over to obtain it.

The OECD also lays emphasis on the importance of regulatory reform in the sheltered sector. One of the issues that has emerged clearly from the report is how much better the Irish economy and employment are doing than was expected. In light of current conditions, an unemployment rate of 4.5% is a remarkable achievement. There is no doubt that in the euro zone – I had the benefit this morning in my home town of talking to the chief executive and other representatives of a US multinational – Ireland compares well. It was pointed out, for example, that in terms of wage costs in France, one would add on 50% in social costs, while in Germany one would add 30%. In France, employers also have to contend with the 35-hour week.

The strength of the euro, which is a cause of difficulty for some indigenous industries such as, for example, the mushroom industry, can, on the other hand, be a benefit for some multinationals. I was informed this morning that the ideal situation for the firm to which I referred earlier would be a strong euro, a weaker sterling and a weak dollar. The company's prices are calculated in dollars, so if it get more dollars for its euro, it will obviously make gains.

I wish to refer to another passage from the report which states:

The slowdown in world economic conditions in the wake of the September 11th terrorist attacks, corporate overheating scandals and the ongoing threat of war throughout 2002, suggested that an open-ended economy like Ireland's would have been expected to experience a much more pronounced slowdown in economic activity.

This part of the report explores why we have not had more of a slowdown and more job losses and why we have not been poised on the brink of recession. It gives various answers, one of which is the strength of the diversification that we have had into the biomedical pharmaceutical industry in particular, the strength of the housing market, the level of public investment and, perhaps, the very low interest rates we enjoy within the euro zone. The report's net point is that, in light of current circumstances, the economy is – one must not jump to conclusions – doing quite well to date.

The OECD takes take a positive view of the way that we will be able to solve our infrastructural problems. Anyone who has been on the Drogheda bypass will know that it is a fantastic addition to our infrastructure. There might be a grain of truth in the criticism that until now we have not had much to show for the boom. That is because the things in which we have invested are only now coming on stream. In two or three years we will have a great deal to show, in infrastructural terms, for the boom. I agree with Senator Maurice Hayes that there ought to be a lane on the Drogheda bypass tolling booth where sterling is accepted because the road is, after all, on the North-South economic corridor.

Inflation is decreasing towards the EU average. The OECD's report states that "The Irish economy is operating at or close to full employment and participation rates are now close to the EU average." This places the onus squarely on underlying productivity and the key determinants of the potential growth rate. The organisation stresses the importance of retaining Ireland's attractiveness as a location for investment. I am pleased that, under the negotiations on the Convention on the Future of Europe, it seems as if the right to set our own corporate tax rates will remain reasonably secure in the short to medium term.

The OECD comments – I would probably agree with it – that Ireland still suffers from the legacy of a policy orientated towards protecting producers' interests at the expense of consumers. It does not anticipate any difficulty in terms of Ireland complying with the growth and stability pact.

I have a number of reservations. It is popular to say that when we had money we spent it. However, that rhetoric is not strictly true because we put aside money into pension funds and we ran a surplus.

I have to skip over other interesting points. I do not agree with the assumption that community employment schemes should be run down further as quickly as possible. I do not believe there is adequate appreciation of the importance of these schemes – if there is, it is not being acted upon. I can speak only for the less developed parts of rural Ireland where the schemes make a contribution both to the individuals who participate in them and also the community. They are particularly important in the RAPID programme towns. In County Tipperary these include Tipperary town, parts of Clonmel and Carrick-on-Suir. I hope there will be a rethink of this issue in the deliberations about where we go next year and in the Estimates. It is true that unemployment is low overall but there are pockets where this is not the case. The OECD report paints a reasonably positive and encouraging picture of the economy but, at the same time, makes it clear that we have a lot to do.

Mr. Minihan

The first thing to be said about the OECD report is that it paints a very positive picture of the economy. There has been a huge amount of gloom and doom over the past 12 months or so with commentators and Opposition politicians vying with each other to see who can best talk down our economic performance. While it is true that conditions have become a lot tougher and the economy has slowed down compared to the hectic days of the Celtic tiger, as the report makes clear, this is normal.

The outlook the OECD projects for the economy in the years ahead is very encouraging. It agrees with the view that the trend growth rate in the medium term is between 4% and 5% in real terms for GDP and a shade lower for GNP. This is economist-speak but in plain man's language the OECD is saying the economy is due a period of very healthy growth and that it has the capacity to out-perform the rest of Europe over the next four or five years. This is a slower growth rate than we have been used to in recent years but very impressive nonetheless, and sufficient to allow for a very significant improvement in living standards and substantial extra investment in public services.

The OECD report makes clear that we have the capacity to achieve growth but that this growth cannot be taken for granted. Specifically, it itemises two key areas in which we will have to pursue the right policies if we want to get the right results. The first concerns income expectations and the second, management of the public finances.

To all intents and purposes, market forces drive income expectations in the traded sector of the economy. If an exporting firm allows its costs to run out of control, jobs are lost. The real challenge is to ensure responsible pay growth in the sheltered sector, that is, the area of the domestic economy, which is not open to outside competition, particularly in the public service.

The benchmarking process has substantially increased the public service pay bill. My understanding of the process is that we benchmark pay in the public service in return for significant improvements in performance. It is vital from an economic perspective that we secure the reforms necessary to deliver these improvements in return for the multi-billion euro investment we are making in the benchmarking process. The OECD clearly states: "It is important that future wage adjustment in the public sector should be strictly conditional upon the demonstration of higher efficiency." This sentiment would command widespread respect on all sides of the House.

Public service pay is the single largest component of overall public expenditure. It follows that if we can manage the public sector pay bill well, we should be able to manage the public finances well. The OECD report devotes considerable attention to value for money in public expenditure, as Senator Bradford stated. It argues that we should move from an input-oriented system to an output-oriented one. This is a very valid point, on which we should concentrate. Consider the health service, for example, into which massive resources have been put since 1997. This is because the coalition parties genuinely wanted to improve the quality of our public health service and were willing to invest money to achieve this. However, the political debate about health was too narrow and always focused on resources – another word for money. There was so much talk about money that we were inclined not to talk about patients. The Government proclaimed how much it was spending as a badge of its commitment to health while the Opposition and media lambasted it for not putting enough into the system. "Underfunding" was the key buzzword.

Almost without noticing, we discovered that we were spending very heavily on health but not getting a lot for it. France is often put forward as a role model for us to follow in the area of health. However, it now transpires that we are spending more than France on health on a per-head basis, yet our health system is nowhere near as good as the French model. If we had focused on achieving outputs from the start, we might be in a much better position now. I am glad the Government is now taking decisive action to reform the health service and put new structures in place. The new structures will enable us to establish a clear and transparent relationship between inputs and outputs in the service. This is not too much to expect when one considers the money being invested. The treatment purchase fund serves as a template for what can be done. To the best of my knowledge, this fund represents the only area of the health service in which it is possible to allocate a defined amount of funding and be confident that one will get a defined level of output in the form of patient treatments in return. The debate on health will now focus much more on issues of reform, value for money and accountability and move away from a crude emphasis on funding.

The OECD makes a number of recommendations to promote greater competition in the sheltered sectors of the economy. The Government is working on this agenda and we are likely to see further considerable progress on competition in the coming years.

The report makes only a brief reference to the subject of infrastructure. I was somewhat surprised by this. One does not have to be an economic guru to realise that the lack of adequate infrastructure, particularly in the area of transport, is one of the major constraints on the development of the economy.

We have made a lot of progress in recent years but when it comes to the efficient planning and delivery of major transport projects, we still have a long way to go and are falling well behind our continental counterparts. We had an extensive debate in the House last week that covered subjects such as Luas and the Red Cow roundabout. We now have to add to our list the south-eastern motorway in Dublin – the final section of the M50. It seems that we will have two sections of new motorway with a gap in the middle. In other words, one will not be able to drive on it because there will be no through road, no way of getting onto the route and no way of getting off it. This is a €500 million project, one of the most important projects, not just for transport in Dublin but also for the national road transport system. The road may be completed in 2005 or 2006 or it may not be completed at all unless a way can be found around the archaeological obstacle which is Carrickmines Castle.

It defies belief that we could have created a mess such as this and that a motorway could have been routed through an historic site. I strongly urge the Government to do everything possible to resolve this issue as quickly as possible, otherwise Carrickmines could become a tourist attraction. Visitors would come not to view the meagre remains of the castle but to look at the road to nowhere, the two sections of motorway which do not meet in the middle.

We have made considerable progress on the roads infrastructure in recent times. The Drogheda bypass has just opened and the motorway from Dublin to Dundalk will be completed when the other two sections open in the next week or so. The rate of progress still leaves much to be desired. It may be that we need to subject the roads programme to the same kind of rigorous review and far-reaching reform that is now being applied to the health service.

The OECD report makes no mention of any crisis in the Irish economy. That is a matter on which we should concentrate. It views our economy as being in basically good shape, but more importantly, as having excellent prospects for future growth. It allows no grounds for complacency. Clearly, we have to stick to the task of managing the public finances, getting a better return for public expenditure, promoting competition. The report does not paint the kind of negative picture of Ireland that we hear from so many media commentators and from so many people on the Opposition benches.

We have always been a great people for talking ourselves down. Negative thinking has never achieved anything. It has never opened a business, created jobs or won a football match. This country has changed a good deal in recent years. Ireland is now a more confident place than ever before. Our young people are more confident. They see opportunities, not difficulties. They feel part of a modern, dynamic, European economy that is capable of competing with the best.

We as politicians must recognise the energy, enterprise and enthusiasm that is out there. Let us stop talking our country down and start talking it up.

Dr. Mansergh

I am sorry there are not more groups here to participate in what has been a very constructive debate. I thank the Minister of State, Deputy Lenihan, for participating and giving the House the opportunity to have this debate.

Sitting suspended at 3.35 p.m. and resumed at 5 p.m.