I move:
That Dáil Éireann takes note of the 1990 Estimates for the Public Services (Abridged Version) and of the 1990 Summary Public Capital Programme.
The publication of the 1990 abridged Estimates and Summary Public Capital Programme on 15 November last affords Deputies the opportunity for the third successive year of having an early debate on the Government's spending plans.
In 1987 and 1988 the abridged Estimates volume and Summary Public Capital Programme were published in advance of the resumption of the Dáil for its autumn session. This year publication was slightly later because of the new system for the European Community's Structural Funds. This slightly later publication will not of course, as Deputies will appreciate, have any significant practical consequences. Spending Departments and agencies have ample time in which to plan their 1990 spending programmes within the allocations decided by the Government.
The broad economic strategy of the Government was set out in the Programme for National Recovery in 1987 and in the National Development Plan, and was further articulated in the Programme for Government in the National Interest 1989-1993. That strategy comprises a number of inter-related key elements. The main elements are: the pursuit of budgetary and financial policies designed to progressively reduce the constraint on economic progress imposed by a high level of debt and its associated debt-service cost; the firm linking of the IR£ exchange rate to the European Monetary System; the achievement and maintanance of a low rate of domestic inflation, to the benefit of our international competitiveness; the reform of the taxation system in order to stimulate growth, and to promote employment and equity; and the reorientation of sectoral policies to increase their effectiveness and their contribution to the creation of sustainable employment.
The fundamental objective of our approach is straightforward. It is to achieve strong, but sustainable, economic advance, leading to increased employment and higher real incomes. The strategy is the right one. The evidence of this is already clear. That is why it remains in place and was confirmed as the basis of Government policy in the documents I referred to earlier.
The performance of the economy since 1987 shows the success of the Government's economic and budgetary strategy. Growth, as measured by real GNP, has increased at an annual average rate of almost 3.5 per cent over 1987 and 1988. A growth rate of about 4 per cent is forecast for 1989. This contrasts sharply with complete stagnation from 1982 to 1986.
The volume of manufacturing output grew by 11.5 per cent in 1987, followed by growth of over 12.5 per cent in 1988, and a somewhat similar performance is expected again this year. This is in marked contrast to a growth rate of under 3 per cent in 1986 and an annual average rate of 5.5 per cent for the 1980 to 1985 period. The recovery in manufacturing output is broadly based, with the traditional sectors making a contribution as well as the high technology sectors. Construction output is recovering strongly after a long period of stagnation and decline, and is forecast to grow by over 6 per cent in 1989.
The volume of exports of goods and services grew at an average annual rate of over 11 per cent in 1987 and 1988. Exports are forecast to grow by 12 per cent in 1989. For the first time ever the trade surplus topped IR£2 billion in 1988 and a repeat performance is forecast for this year. Both 1988 and 1989 have been excellent years for tourism, with growth rates of around 13 per cent per annum in real expenditure by foreign tourists.
This year, the current account of the balance of payments will be in surplus for the third consecutive year, a sequence that has not occurred in over 40 years and then only in the unusual years of the Emergency when world trade was disrupted. Over the three year period 1987 to 1989 the surplus is estimated to have averaged over 1.75 per cent of GNP. From 1980 to 1986 the annual deficit in the current account averaged over 8 per cent of GNP. This gives an indication of the magnitude of the recovery.
The recovery is not confined to the manufacturing and exporting sectors. It is also reflected in consumption and investment. Personal consumer expenditure was stagnant for the first half of the eighties. In 1988, it grew by over 3 per cent and is forecast to grow by over 4.75 per cent in 1989. Public Sector consumption, on the national accounts basis, has fallen in real terms since 1987, as part of the process of budgetary correction.
During the recession of the eighties, investment suffered very badly with the volume of fixed investment declining by an average of almost 3 per cent per annum from 1980 to 1986. There is a major boost in investment this year, with a growth rate of over 8 per cent forecast. Investment in building is set to grow by over 6 per cent. Economic recovery and restored business confidence are both combining to stimulate private construction. Machinery and equipment investment, the basis of industrial expansion, is showing accelerated growth, with a volume increase of 3 per cent in 1988 being followed by a forecast increase of about 10 per cent in 1989. Real final domestic demand, which grew by almost 1 per cent in 1988, is projected to grow by 4 per cent this year.
The latest labour force survey indicates that the strong upward trend in private non-farm employment, evident in the previous survey, continued through 1988, although performance on employment overall was dampened by the necessary reductions in the public sector. In the 12 months to April 1989, there was a nett gain of 6,000 jobs in manufacturing. Private services employment again expanded strongly, mirroring the favourable developments in the economy. In 1988 the total number at work is estimated to have been at least 5,000 greater on average than in 1987. In 1989, non-agricultural employment is projected to be up to 13,000 higher, on average, than in 1988, reflecting strong job growth in the private sector. Over the two years, 1988 and 1989, private sector non-agricultural employment is forecast to increase by well over 30,000. This is most encouraging. It reflects the improvement in general economic conditions, the continued growth of exports, the strengthening of consumer spending and investment and the confidence which our policies are creating.
Another very encouraging feature of the employment picture this year is the decline in notified redundancies. For the first ten months of the year they were 41 per cent down on the corresponding period in 1988. Registered unemployment increased rapidly during the early eighties and peaked in 1987, when the annual average for the live register was over 247,000. In 1988, the average annual decline in the live register was 6,000 and an average decline of about 10,000 is forecast for 1989. On a labour force survey basis, unemployment has fallen by an estimated 29,000 between April 1987 and April 1989.
Another outstanding success of our economic strategy has been the moderation in inflation and the associated improvement in competitiveness. Consumer price inflation fell to just over 2 per cent in 1988, the lowest level since 1960. Largely as a result of international pressure on prices, over which we have little control, inflation this year will average about 4 per cent. But our inflation rate will still be below the European Community average and will be well below that of the UK, our main trading partner. Our low inflation rate and the moderate wage increases, that are part of the package agreed between the Government and the social partners, have given a major boost to our international competitiveness. Relative to those EC countries that account for the bulk of our trade, there was a gain in cost competitiveness of almost 3 per cent in 1988 and further gains are expected this year. Improved competitiveness is vital to growth and the expansion of sustainable employment in our economy.
Hourly earnings of manufacturing workers increased by 4? per cent in 1988 and are expected to increase by over 3½ per cent in 1989. When the tax concessions granted in the 1988 and 1989 budgets are taken into account, the real take home pay of workers has increased. This shows the benefits to workers of the Programme for National Recovery.
Irish interest rates have fallen dramatically relative to rates abroad since March 1987. Notwithstanding the interest rate increases this year, caused mainly by higher international rates, the differential between key Irish and UK interest rates has improved by 6.5 percentage points since 31 March 1987. For example, in March 1987 the UK three month interbank rate was over 3¼ per cent below the corresponding Irish rate; the UK rate is now 3¼ per cent above the Irish rate. During this period the differential with German rates has also improved by about 5¾ percentage points.
This dramatic improvement is a reflection of the much better management of the Irish economy during the period. A greatly reduced borrowing requirement, a surplus in the current account of the balance of payments, low inflation and a falling debt-GNP ratio have all combined to create confidence in the value of the Irish pound; confidence is the key requirement for lower interest rates.
The Government's success in managing the economy is also reflected in control of the national debt. In our 1987Programme for National Recovery we set ourselves the target of stabilising the national debt-GNP ratio by 1990. We achieved our target ahead of schedule, with the national debt-GNP ratio by end-1988 showing a marginal reduction on the previous year.
Our medium-term fiscal policy set out in the National Development Plan set a minimum target of reducing the national debt to 120 per cent of GNP by 1993. The emerging end-1989 national debt-GNP ratio is set to produce a very substantial reduction on the end 1988 ratio of 131 per cent. Therefore, we are already well on the way towards achieving our target ratio of 120 per cent of GNP.
We should not let this progress obscure the underlying reality. Our debt remains far too high, and it is out of line with other countries. It is still rising in absolute terms and this is reflected in the cost of servicing it. There can be no questioning the good sense of continuing the emerging downward trend in the debt ratio. This is one of the keys to freeing scarce resources from debt servicing to more productive purposes.
The success of the Government's economic and budgetary strategy in 1987 and 1988, proved that the momentum should be maintained in the 1989 budget. We have shown for once and for all that an increase in investment, growth and jobs can, and does, go hand-in-hand with improvement in the public finances. This year's budget, therefore, provided for a further reduction in Exchequer borrowing requirement at £1,055 million or 5.3 per cent of GNP, compared with the underlying borrowing of 6 per cent of GNP in 1988.
While budgeting for lower borrowing, we were still able to strengthen the emphasis in our strategy on employment and developmental aspects. In particular, the budget made significant further reduction in the burden of personal taxation, so as to improve incentives to work and facilitate further moderation in pay which is essential for job creation; and made an important start, even in advance of the conclusion of EC negotiations, in using the assistance of the enlarged Structural Funds to build up the economy's production potential. A further objective of the budget was to help the position of those on social welfare and low incomes. This we did with the introduction of a major package of welfare measures.
I want to underline the significance also of the reductions in income tax rates which were made in the budget. The reduction in the standard rate from 35 per cent to 32 per cent was the first for 20 years. This was the first step on the road to achieving a standard rate of 25 per cent by 1993. Overall, despite the constraints we face, the income tax reliefs given in the 1988 and 1989 budgets will have a cumulative cost of over £700 million over the period of the Programme for National Recovery—nearly three times the amount promised in the programme. This highlights the seriousness of the Government's commitment to the programme, which has played such a central part in all the progress we are making.
It is now very apparent that the budgetary outturn this year will be much better than was envisaged at budget time. The trends reflected in the mid-September Exchequer returns indicated that the level of borrowing by the Exchequer this year would probably be of the order of 3½ per cent of GNP as against the budget estimate of 5.3 per cent. Developments since then suggest that borrowing could be even lower than this, possibly around 3 per cent of GNP. This will mean that the underlying Exchequer borrowing will have been reduced to less than one quarter of its 1986 level in the course of three years, from £2,100 million in 1986 to a projected outturn of just £600 million this year; a reduction in our borrowing requirement of £1,500 million. This ranks as a truly major turnaround in the public finances and lays an excellent foundation for further progress.
The procedure followed in settling the 1990 Estimates was the same as in the case of the 1988 and 1989 Estimates. The Expenditure Review Committee was reconstituted in the early summer. All Ministers were asked by the Taoiseach to look at ways in which their Departments' spending could be curtailed in 1990. There were discussions between the committee and the secretaries of all Departments, which led to a series of memoranda being put to the Government on which decisions involving substantial savings were taken before the end of July. During October, the Government went through the 1990 spending proposals of Departments in detail.
In settling 1990 expenditure allocations, the Government were determined that the level of expenditure would have to be consistent with continuing downward pressure on the 1990 Exchequer borrowing requirement. There could be no question of undoing the rapid and hard won progress that had been made since 1987. At the same time, however, the Government were conscious of the need to make additional resources available in selected priority areas. Our task was to meet these joint aims.
The Abridged Estimates Volume and Summary Public Capital Programme show that this is exactly what we have accomplished. Exchequer funded net non-capital supply services show an increase of just 0.4 per cent on the 1989 post-budget Estimate, while overall Exchequer funded non-capital and capital spending is up just 1 per cent on the corresponding 1989 figures. This level of increase is considerably below the projected inflation rate for 1990 of about 4 per cent. Within this low level of overall increase we have directed additional resources to the health sector and to the security sector and have modestly boosted the Exchequer funded Public Capital Programme.
Despite this limited increase in Exchequer funded spending as compared with 1989, I am confident that total Exchequer expenditure as a percentage of GNP will continue its downward trend in 1990. In 1986 the ratio of Exchequer expenditure to GNP stood at 53 per cent and it has fallen consistently since then to a budgeted figure of 43.5 per cent for 1989. Based on budgetary developments in 1989, which I have already outlined, the outturn is likely to be somewhat lower still.
The 1990 non-capital allocation for health is almost £98 million higher than the budget provision for 1989. The 1990 allocation includes increases in the allocations to health boards and voluntary hospitals and reflects the 1990 impact of the increased finance provided by the Government this year, and increases in health pay. I want to stress, however, that the increase in spending does not imply any attitude that health spending, or health services, are no longer subject to the same kind of general constraint that applies, and will continue to apply, elsewhere.
Spending on social welfare illustrates the Government's continued commitment to protect and, where possible, improve the position of the under-privileged in society, a commitment which was maintained right through a period of otherwise severe Government expenditure reductions. The Estimate for 1990 provides for the full year cost of £135 million in respect of the extensive improvements in payments introduced in this year's budget. Moreover, in drawing up the Estimate for Social Welfare, no measures have been adopted which will adversely affect entitlement to, or levels of payment in, social welfare schemes.
Some have drawn attention to the fact that the net amount being made available in the Social Welfare Vote for 1990 is some £100 million lower than the post-budget provision for 1989. I want to emphasise that the reduction in the Vote in 1990 over 1989 shown in the Book of Estimates is due mainly to PRSI revenue buoyancy and once-off factors such as the decision of the Government to amalgamate the occupational injuries and the redundancy and employers' insolvency fund with the social insurance fund. In fact, total gross expenditure on social welfare, including that for the social insurance fund, is set to increase in 1990 over the 1989 budget provision, as is shown in table 5 at the start of the Abridged Estimates Volume and this is before making any provision for 1990 budget improvements. The allocation for 1990 does not, of course, as is customary, include any improvements in social welfare rates, which will be a matter for decision in the context of the 1990 budget.
The Government's concern to maintain a high level of security is reflected in the increases we have made in almost all areas of spending under the Justice group of Votes. The provision for the Garda Síochána is up 8 per cent on the 1989 allocation and reflects measures to increase the number of gardaí actually on the beat combating crime. Provision is included for the recruitment of up to 250 clerical staff to reduce the demand on Garda time from civilian type tasks. This will mean that an equivalent number of gardaí will be released for outdoor operational duties.
The Prisons Estimate for 1990 has been increased by 14 per cent. This increase provides, inter alia, for the recruitment of about 200 prison officers so as to allow the full opening of Wheatfield, which will relive some of the present overcrowding in prisons. Allocations for other important areas, such as probation and welfare services, the community service orders scheme and educational services have also been augmented.
The Labour Estimate reflects the Government's strong commitment to job creation and training the unemployed. FÁS and CERT will be able to expand their training activities, which equip the unemployed with necessary skills. Activity on employment schemes which help the unemployed to regain a place in the labour market will also rise.
The FÁS allocation has been framed by the Government in the light of increased ESF resources. It is estimated that total expenditure by FÁS on training and job creation, funded by the Exchequer and the ESF, will rise from around £170 million in 1989 to £185 million in 1990.
The CERT budget has also been increased to allow for expansion of its training programme, which will also receive additional ESF grant aid in 1990, reflecting the rapid growth of the tourism industry. It is estimated that CERT's budget will increase from about £6 million in 1989 to £7.5 million next year. These provisions for CERT and FÁS provide for the measures to enhance job creation announced by the Minister for Labour on 27 September last. The Labour Estimate also provides for increased funding for the industrial restructuring programme and management training support scheme, and for Teamwork, the employment scheme for young people.
In the Education area, the net provision for second and third level education is shown as falling in absolute and percentage terms. This is, of course, a misleading picture of spending in these areas and reflects unusually high ESF receipts expected in 1990. Gross expenditure on second and third level education will increase by 4 per cent and 13 per cent, respectively. This will allow for an overall increase in numbers in the system, particularly at third level by up to 4 per cent. Specific provision has been made in the 1990 Estimates to allow the educational opportunities scheme to be expanded from the present 60 places to 660 places by end 1990. This scheme allows the long-term unemployed to return to full-time education, while retaining their full social welfare entitlements. Other measures reflected in the 1990 provision include the appointment of 30 additional remedial teachers and 95 teachers to posts in disadvantaged schools.
The public capital programme for 1990 shows a rise in expenditure of 19 per cent, the first significant increase since 1982. It reflects a determination on the part of the Government to apply resources to the productive sectors of the economy, the allocations to which have been increased by £269 million, 25 per cent up on the 1989 budget provision.
The Government expect the increased expenditure on the public capital programme to have a significant impact on the creation of jobs particularly in building and construction, where extra expenditure of £94 million, an increase of over 11 per cent, is expected to generate over 2,000 additional new jobs. The main increases come in the roads and sanitary services programmes which are up by a total of £25 million; Agriculture is up by £27 million, a substantial amount of which will go to the farm modernisation scheme; industrial construction which will be up by £20 million; the local authority housing programme which will rise from £39 million to £51 million.
The Government are providing £215.7 million, current and capital, for roads in 1990 compared with £194 million this year. The 1990 allocation is the highest ever made for roads. It will allow further significant progress to be made on the development programme for national roads. Among the major projects in progress are the public section of the Western Parkway, the Navan Road and Bray-Shankill in the greater Dublin area, the Glanmire by-pass and Cork-Mallow Road in Cork and the Athlone by-pass. The Government are providing an extra £17 million for non-national roads. This demonstrates our commitment to improving the quality of county and regional roads which are very important for the development of tourism, industries and forestry as well as meeting the every-day needs of rural communities. The Government provision will be supplemented by any private sector investment in tolled roads.
The Government's concern for an environmentally clean farming sector is reflected in the virtual doubling of the allocation for the farm modernisation scheme, much of which is to be spent on farm anti-pollution grants.
The provision for industry includes funding for factory construction and refurbishment, together with land purchase and sited development to attract private industrial developers, especially in disadvantaged areas of the Dublin region. The acquisition of additional land will meet the shortage of space which would otherwise arise.
While the construction industry is emerging from the recession of the past few years, this expanded investment through the public capital programme will invigorate the revival taking place in building activity and underlines the Government's confidence in the sector.
The commercial semi-State sector is both contributing to and benefiting from the exceptional growth of the economy, and this position is expected to continue during 1990. Overall, the sector is showing increasing levels of profit; likewise, its financial position is strengthening. In 1990 the momentum towards growth will be sustained by a substantial increase in investment This applies not just to the sector in aggregate but to most individual bodies. The provisions in the public capital programme for some companies in particular will show very large increases, notably Aer Lingus, the ICC and the ACC.
Aer Lingus's performance in recent years has been highly commendable, and has put the company in a position to finance both its European fleet replacement programme and major investment in ancillary activities, including an aircraft overhaul facility at Dublin Airport which will create 560 skilled jobs by 1997, over 230 of which will be recruited for the start up in 1991 when construction of the facility is completed. The company expects to spend £189 million on capital expenditure in 1990, as against £90 million in the current year, without recourse to the Exchequer.
The ICC and the ACC aim to lend appreciably more next year than in 1989. This reflects the growing confidence among their clients in the prospects for remunerative investment in the Irish economy. Other State bodies, such as the ESB and Bord Telecom, are entering a period of consolidation after very significant outlays in recent years. Expenditure will continue at a very high level, but has peaked as far as the current investment programmes are concerned. The benefits of these programmes are already on stream.
The EC Structural Funds have played a significant role in helping to finance Government development programmes over the years. They are now playing an even bigger role with the reform and expansion of the funds. The impact of the additional resources have already been seen in 1989 and are evident in the 1990 spending allocations made by the Government.
The Community has now made a commitment of £2,860 million to Ireland over the period 1989-93. In addition to this amount, Ireland will benefit from additional funding through Community initiatives yet to be announced, which should bring the total assistance to over £3 billion.
The Community commitment is set out in a document called the Community support framework, which was adopted recently by the Commission in agreement with the Government. It is the result of lengthy discussion and negotiation with the Commission since the National Development Plan was submitted in March 1989. It sets out both the levels of assistance to be provided and the sectors to which it will be channelled.
The Community support framework will be followed up by a series of operational programmes. These will set out in more detail the particular measures which will be implemented in each sector. They are currently under discussion with the Commission. It is expected that some of them will be finalised shortly, with the remainder being agreed early in the new year. The operational programmes will be published when they have been adopted.
The assistance which will be available to Ireland from the Structural Funds in 1990 is £539 million. In addition, some £18 million of commitments from the Social Fund in 1989 will be carried forward to 1990, giving total assistance of £557 million. This compares with an adjusted 1989 figure of £462 million, an increase of over 20 per cent. The 1989 figure itself showed a significant increase over 1988, when commitments were £361 million. The 1990 figure therefore shows an increase, in nominal terms, of 54 per cent on the pre-1989 position. This is a large increase by any standards.
The House will recall that the 1989 budget made provision for additional expenditure of £75 million in anticipation of the increased Structural Funds. This was devoted to roads, sanitary services, industry, tourism and fishery harbour developments. The 1990 Structural Funds will enable us not only to maintain this higher level of expenditure but to build on it.
The Community assistance available to us in 1990 is, of course, less than we sought under the National Development Plan. The plan was effectively our bid for as high as possible a share of the available resources. Like all the other member states, we bid in the knowledge that we probably would not obtain all we sought. The total of all member states bids added up to well above the amount available. While we would naturally have preferred a higher allocation for Ireland, the allocation made gives us the highest level of assistance per capita of any of the less developed regions.
On a per capita basis, for example, Ireland will get 242 ECUs in 1991 per head of population. This will be substantially above per capita commitments in any of the other less developed regions. Ireland will also get the highest per capita increase in 1992 compared with 1987. Portugal comes next with a payment of 161 ECUs per capita in 1992 and then Greece with 158 ECUs per capita in 1992, giving a clear demonstration of how well we have faired in relation to other regions in the allocation of the Structural Funds.
The National Development Plan made it clear that commitments to spending on structural measures of the nature and scale envisaged in the plan would be dependent on the volume and phasing of the Community aid. The Community support framework scales back the level of expenditure in line with the level of assistance now available. However, in reviewing the expenditure Estimates each year in the light of the budgetary situation, the Government will look at the scope for additional expenditure from domestic resources. This was done in preparing the 1990 Estimates and certain additions were made, including £15 million on county roads, £10 million on sanitary services and £43 million on various human resources measures.
Let me now deal with our economic prospects for the coming year. I am looking to 1990 with considerable optimism. We have restored domestic and international confidence in our ability to bring the economy around, in our ability to overcome the difficulties that had beset it, and in our capacity for economic growth. Irish interest rates now take their cue from European developments; wage and other cost moderation flowing from the consensus approach of the Programme for National Recovery is enabling better international competitiveness; the trend in productive investment, the key to future job opportunity, is solidly upward; and development of key infrastructure, vital to longer-term advance, is in progress, with welcome assistance from the European Community.
Internationally, trade prospects, even if less buoyant than hitherto, offer continuing potential for solid expansion of exports. A period of relative stability in international exchange rates and of low worldwide inflation, combined with anticipated further expansion in world trade, is prompting significant international investment. With an eye to the opportunities of the evolving single market, much of that investment will seek a home within the EC and this is becoming more evident every day with the strongest ever IDA pipeline of projects.
Provided we adhere to the fundamentals of the strategy I have outlined, we stand to benefit from this international outlook, but we should not delude ourselves with the idea that we can have the benefits without adherence to the discipline. In other words, the prospect for exports and output is solidly positive, provided we retain competitiveness on export markets; the atmosphere is right for continuing investment growth, provided we remain disciplined on costs and in the budgetary area; the expectation for international inflation is downward; we will witness a similar trend here, provided we remain sensible in our approach to pay, profit margins and other related developments; the EC assisted programmes of infrastructural improvement will make a major contribution to longer-term capacity for growth, provided we gear ourselves to capitalise on the increased competitive ability these improvements will provide. The prospect is, therefore, for a continuing expansion in output over the period ahead. We can achieve a growth rate of about 3½ per cent in 1990. This, in turn, would create a further significant increase in self-sustaining employment.
In stressing the vital necessity for cost moderation in the interests of competitiveness, growth and jobs, I am not preaching further austerity. The evidence of the past two years is that moderation in nominal incomes can be consistent with advance in real income. The evidence of earlier years is that uncompetitive income increases were accompanied by declining living standards, insecurity of employment and, inevitably, a spate of corporate failures and redundancies. We have secured growth over 1987-89 through moderation. We now have the opportunity to build on that progress. In the interests of those in employment today — and of the unemployed. Those approaching adulthood, and those who have had to opt for a start abroad — we have an obligation to learn from the past that moderation is the key to a better future.
Looking specifically to next year, I have already suggested that a growth rate of about 3½ per cent is within our reach. Consequently, I anticipate a continuation of the trend in private sector job creation of the past two years. This will not be offset by the same degree of public service streamlining as obtained up to now. It will, therefore, mean a significant net increase in total employment. I also anticipate a decline in the level of unemployment — together with a reversal of the trend in emigration.
Equally, taking account of likely world inflation trends, the rate of price increase here can move down towards 3 per cent, year on year, as 1990 progresses. Extending the kind of pay moderation we have been experiencing will underwrite this reduction and underpin our prospects for advance in employment. It will support continuing growth in investment and will enhance the impact of the Structural Funds' programmes on our output and competitive capacity.
However, I want to point, also, towards some of the key implications of the strategy needed to produce these results. It is not enough to say what might be achieved if we act responsibly, without specifying what makes for sensible behaviour, particularly in sectors of the economy which are less exposed to the harsh realities of the international marketplace.
Competitiveness is not about pay moderation alone, nor is it a matter of developments only in those sectors directly involved in export markets. Cost competitiveness reflects both wage and profit trends. Expended profits based on increased volumes of production do not put pressure on prices, but if based on higher margins, they do. There may be opportunity to take greater margins, but there is a trade-off in terms of higher imports and lesser exports. This, in turn, would reduce economic growth and lessen prospects for expanding employment.
Many domestic sectors supply exporters, whether with energy, transport, services or other inputs. Their pricing can significantly affect the sales ability of their exporting customers. Heightened efficiency is needed in all economic sectors, to support the necessary growth in output. Nor is it a matter of costs, only. The total product mix, from innovation in design through quality of production to marketing flair and after-sales service, is involved. Expansion, if not survival, depends on improving all elements of the product mix.
Nor is Irish competitiveness about what happens in the private sector only. Developments in the public sector inevitably impinge on the economy at large. Budgetary and economic policy is now providing lower interest rates, exchange rate stability and the prospect of a moderating tax burden — in particular as the national debt begins to fall as a percentage of GNP. These are of key importance to investment decisions and thus to growth potential. But there can be no guarantee that the climate we have now will inevitably continue. It will not, unless we continue the broad thrust of policy to date. We must, therefore first and foremost, assure still further reductions in the level of Government borrowing; at the same time, make further progress in the direction of taxation reform, towards diminishing disincentive impacts; avoid fuelling inflation; and work towards a new consensus and programme between the Government and the social partners to carry us forward in the early nineties.
Solid foundations for growth and for a substantial increase in employment have been established. Our objective must now be to make the most of the opportunities which are now unfolding and sustain the progress we need over a number of years so that the major problems we still face can be reduced in scope and even eliminated. Everything confirms that we are on the right road. While there may be disagreement on and criticism of detail, the overall strategy is unquestionably correct and has already been vindicated by results.
