Reasons for Supplementary Budget for the Republic of Ireland

A supplementary budget for the Republic of Ireland contains tough but necessary measures to set the country on the road to recovery after a difficult recession, said Brian Cowen, Taoiseach for the Republic of Ireland, in this speech.

Original Source

Ceann Comhairle

Yesterday, the Minister for Finance delivered the supplementary budget. You are all aware now of what it contains.

This was one of the most critical Budgets in the lifetime of the State. It is a budget that sets this country on a five-year road to economic renewal.

This Budget was tough. I regret that it will cause difficulties for some. But it had to be tough.

As a country, we are providing 2009 public services on the basis of national income more akin to 2004. People know that it is unsustainable for us to be spending so much more than we are earning in revenue. No household could afford to do it, neither can the State.

We have sought to introduce a fair budget in difficult economic circumstances. All contribute but contribute according to their means.

Most importantly this Budget will give confidence. Confidence that we have a plan and confidence that there is a bright future ahead.

This Budget will provide firm foundations for returning the economy to a positive growth rate when the global recovery begins.

Budget Goals

The Budget presented yesterday had 6 key goals:

1. Stabilising our public finances by taking a big step in bringing our income and expenditure in line;
2. Supporting and stimulating confidence and giving greater certainty to consumers and business;
3. Restoring our damaged banking system and ensuring credit flows to businesses and consumers;
4. Restoring our international reputation and giving confidence to the international investment community.
5. Supporting measures to improve our competitiveness so that our export sector can be sustained and thrive in the future; and
6. Maintaining as many jobs as possible and looking after those who lose jobs.

Stabilising the Public Finances
We have been spending far more money on public services than we are taking in in taxes. This means we are borrowing large amounts to pay for ourselves. The Exchequer requirement this year is just over €20 billion. We cannot afford to continue doing this. Borrowing at the extent we are has an immediate and large cost but it will also cost future generations – we must not unnecessarily mortgage our children’s future. We must begin to work towards living within our means.

The world has suffered an unprecedented economic and financial shock. People across the world have less income and so there is less demand for our goods and services. We are one of the most open economies in the world and this is placing severe pressure on our businesses, on jobs, on our economy and on our tax returns. This is exacerbated by the decline in the value of sterling and the dollar which means our exports seem more expensive in those markets.

The good news is that the world economy moves in cycles and this global slowdown and its effect on our economy and our tax revenues will be reversed in time. We cannot control the international cycle and we cannot continually chase this moving target known as the cyclical deficit. While doing our utmost to improve competitiveness, it is reasonable and appropriate to borrow to ensure we smooth the path through the global downturn. When the upturn comes, we will be able to pay off this debt when Ireland returns to a positive growth rate.

However, we must make adjustments for what is in our control and will not be corrected automatically when the global upturn comes. In the past number of years we have been able to finance significant improvements in infrastructure, public services and social welfare due, in part, to the large tax take from the property market. We were able to pay for these improvements without resorting to borrowing. Indeed, we paid down our national debt and ran budget surpluses.

However, we became over-reliant on that tax source from property and now it has diminished.

We must, therefore, cut back on spending and expand the tax base. Our spending and our tax system must be made fit for purpose and we must fix them so that they are sustainable in good times and in bad. However, we must fix them in a way that minimises further damage as we make the corrections that are necessary now. By doing so we are providing a stronger foundation for the long-term.

That is why we have a multi-year fiscal plan for bringing down the deficit so that Ireland’s public finances will be sustainable in the long-term and provide a strong platform for economic growth in the future. That is what we started this year and what we will continue to do up to 2013, at which point, sticking to the plan, we will have eliminated or be close to eliminating the structural deficit and we will have an expenditure pattern and tax system that is fit for purpose.

Fairness
In making these adjustments in spending and taxation, we have done our utmost to be as fair and balanced as possible.

Everyone is being asked to contribute but contribute according to their means, for example:

A person on the minimum wage is being asked to pay about 2% of their income;
A person earning €50,000 a year is being asked to pay 4% of their income, and
A person earning €300,000 a year must pay 9% of their income.

The changes to the levy are progressive – those with higher income tax pay the most and the burden on lower earners remains low. About 30% of income earners (670,000) people remain exempt from the levy, as do medical card holders above the ceiling.

The Government has also ensured that over 1,000,000 income earners, that is those with income under €26,000, medical card holders and over-70s remain exempt from the Health Levy.

The top 1 percent of income earners (those earning over €175,000) will contribute nearly a quarter (24%) of the total yield from the income levy.

National income is set to decline by about 15% over the 2008-10 period and fixing what is in our control will mean a drop in our living standards.

I realise this is a significant sacrifice for people to make. This will bring us back to 2003/4 living standards. However, in making this adjustment now, we reduce the risk of a further decline in living standards beyond that.

Also, when considering the present situation, I would ask people to think of those who are suffering most in these difficult times. In particular, those who have lost jobs since the onset of the global downturn and are now facing considerable hardship. We must stabilise the economy so that Ireland can reposition itself for a return to growth and job creation over the next three years and beyond.

How Much is Enough?
There is a fine line to be walked between, on one hand taking too much money out of the economy, which would curtail consumer spending, undermine confidence and lead to further job losses – and on the other hand, not taking enough – which would mean the international markets won’t lend us the money we need to provide essential services.

I believe the Budget gets the balance right. It will restore confidence in the international markets and provide a firm foundation for recovery.

Some people may say we should have achieved more in spending cuts than in tax rises. However, if we include all of our initiatives across the year, we will be cutting expenditure by €4.8 billion. Most of the net €3.1 billion increase in expenditure is accounted for by additional unemployment-related expenditure and we are trying to minimize the impact of cuts on front line services. We feel we have struck a reasonable, albeit difficult, balance. In terms of our multi-annual expenditure plan we will secure further savings of €2.2 billion in 2010 and €2.5 billion in 2011.

While we have made some cuts in capital spending, we are still spending 5% of GNP on important infrastructure. That is twice the European average. This is a key investment in improving competitiveness. We expect to see savings of between ten and twenty percent in the cost of projects, particularly from 2010, so we do not envisage a significant reduction in output. Moreover, discussions are advancing with the Pensions Industry regarding a new infrastructure fund to support projects in schools, higher education, hospitals, roads and public transport.

The tax increases in this Budget are regrettable but necessary. Those on the opposition benches who say securing the Irish economy can somehow be done without raising taxes are either fooling themselves or trying to fool the Irish people.

After all of our readjustments, we still retain one of the most favourable tax regimes in the OECD.

Supporting and stimulating confidence and giving greater certainty to consumers and business
We are facing a difficult road to renewal and we need to have confidence in our capacity as a people to overcome present challenges.

We need-
Confidence to spend;
Confidence to lend;
Confidence to take risks.

We need to be confident enough to spend knowing that things will get better – that we have a plan.

Banks need to be confident to lend.

The world markets need to have confidence in us in order for us to access the necessary funds to tide us through these difficult times.

Restoring our damaged banking system and ensuring credit flows
The Banks provide the lifeblood of the economic system. Without banks to lend to households, individuals, small and large businesses, the economy will contract more than it is already doing. While the banks have the very large overhang of underperforming loans to developers, they cannot perform this essential function for the economy. The Government needs to step in to isolate this problem and stop it contaminating the entire economy. That is why we are taking this decisive action. The Government will pay an economic price for these assets which ensures that both the developers and the banks take a significant loss where they were originally purchased at very inflated prices. NAMA can realise these assets over time in a way that protects the taxpayer. The objective of NAMA is to provide the banks with a clean bill of health, to strengthen their balance sheets, to considerably reduce uncertainty over bad debts and as a consequence ensure the flow of credit on a commercial basis to individuals and businesses in the real economy, to protect and grow employment while also maximising and protecting the interest of taxpayers.

NAMA will be established on a statutory basis, under the aegis of the NTMA and will have a commercial remit. It is not a rescue vehicle for developers or other borrowers – NAMA will expect to be repaid, in exactly the same way as a bank would.

The potential maximum book value of loans that will be transferred to the Agency is estimated to be in the region of €80 to €90 billion, though the amount paid by the Agency will be considerably less than this to take account of the banks losses on their loan books. Significant further work on the loans books will be needed to ensure that the appropriate loans are transferred.

NAMA will purchase the assets through the issue to the banks of Government bonds. The amount paid by NAMA will be significantly less than the book value to take account of the NAMA estimation of the worth of the loans and to compensate the State for taking on these risks, and the banks will have to take the associated losses.

Should losses be incurred by the Agency over a 10 to 15 years timeframe, the Government intends that a levy should be applied to recoup any shortfall.

This is not a question of saving developers from going to the wall – it is a matter of supporting the capacity of the financial institutions to grow lending in support of the recovery of the real economy.

The losses absorbed by borrowers and the banks significantly reduce the risk being taken by the State when it takes the assets under its control.

All borrowers will be required to meet their legal obligations for repayment as at present.

The Government also intends in line with its previous commitment to put a State guarantee in place for the future issuance of debt securities with a maturity of up to five years. Access to longer-term funding in line with the mainstream approach in the EU – consistent with State aid rules – will contribute significantly to supporting the funding needs of the banks and to securing their continued stability.

We need banks lending to solid businesses and getting them back to growth. This is the only way to secure existing jobs and support the creation of new jobs.

The businesses that need some cash to keep them going will be able to borrow to get them through this recession;

The innovative company that needs investment to develop new technology that will provide the products and services of the future, will be able to access investment funds;

The company that wants to buy a new technology to make their business more competitive will be able to do so;

The businesswoman who has a good idea will have the confidence to borrow and invest in that idea, creating jobs and wealth.

Irish business is strong. We have strong companies with strong products and strong markets.

Those businesses will be the backbone of our recovery, we must do everything we can to get them the cash they need to invest and to grow.

Confidence Abroad

Ireland has suffered a blow to her reputation abroad. This must be fixed. This will be fixed.

Many of the things said about us are untrue. A worse picture has been painted than exists. But this damages our image with the obvious consequences that investors shy away.

We have taken the right steps at the right times. We guaranteed savings, then we nationalized Anglo-Irish and we recapitalized the two main banks. Now we have a plan to deal with the impaired assets of the banks.

With a solid plan for our public finances and a comprehensive plan to restore our banking system, we must ensure that we communicate both to the international markets.

We will be sending teams abroad, including to London, Frankfurt and New York to demonstrate to international markets that we are taking the right measures to correct our public finances and our banking system. This will restore confidence and get investment flowing.

Securing the ratification of the Lisbon Treaty later this year would further reinforce international confidence in Ireland. Our position in the European Union has greatly assisted us during this crisis – and made clear yet again the value of our position at the heart of the Union. Ratification of the Lisbon Treaty this Autumn is an important part of the Government’s overall recovery strategy.

Competitiveness
In this Budget, we are taking steps to maximise short-term economic activity and jobs.

Our actions are also consistent with our vision for economic renewal based on the concept of a Smart Economy. This requires a return to export-led growth based on improved cost competitiveness relative to our trading partners, productive investment and energy efficiency.

We are establishing an Enterprise Stabilisation Fund of €100 million over two years to support vulnerable internationally-traded companies in adjusting to the current crisis, including those affected by the fall in the value of Sterling.

An Bord Bia will also undertake enhanced marketing measures to assist food companies particularly affected by currency pressures.

We are acting to stabilise the banking system, thereby restoring the crucial flow of credit to the enterprise sector. This is the most crucial contribution we can make to helping business.

Funding from the European Investment Bank of €350m has already been made available to small businesses.

We will act further, if necessary, following the review of credit availability and trade finance currently underway as part of the bank recapitalisation programme.

Energy costs remain a real concern for business, in particular large industrial users. Double digit reductions in the cost of electricity and gas have already been announced for the 1st of May. It is hoped that it will be possible to achieve further adjustments as the year proceeds.

We have already introduced a range of measures to improve cashflow to business by prompt payment from Government Departments, to streamline how local authorities deal with businesses, and to invest in labour intensive investments like energy efficiency.

Despite the severe budgetary pressures, we also are maintaining a high level of investment in research and tax incentives for start-up businesses and venture capital. This is where many of the businesses and jobs of the future will come from.

I want to assure the House that the Government will continue to prioritise this competitiveness recovery agenda.

We will build on the steps taken so far and bring forward further measures to help businesses compete internationally by reducing costs and red tape, investing in productive infrastructure, supporting start-up enterprises and improving the availability of credit and investment capital.

There is no alternative but to restore our competitive position by reducing costs and increasing productivity.

We will act to ensure that we regain that competitiveness, so that we can start growing our exports and creating new jobs again.

Jobs and re-skilling
While everyone faces a downward adjustment in living standards as a result of the current crisis, the greatest burden is borne by those who lose their jobs.

We are seeking to maximise the number of people in employment by sustaining a high level of investment in labour intensive infrastructure.

We have announced measures to support transactions in the housing market and the motor trade.

Unfortunately, because of the severity of the recession, more people will lose their jobs before the crisis is over.

The Government is seeking to maximise the opportunities available to these people for re-training, education or work experience. In this way we will help support people through a difficult time and help them prepare for new opportunities which will arise in future.

Earlier this year we provided new training places under the FÁS Training Initiatives Strategy and introduced measures to help redundant apprentices.

In this Budget we are providing for another 23,500 education and training places on new and existing programmes.

As part of this package we are introducing a work experience scheme which will see 2,000 people, including graduates, placed in jobs.

Changes to the Back to Work Enterprise Allowance and the Back to Education Allowance schemes will also facilitate more claims for support from people who have lost their jobs.

This is an integrated package of measures reflecting co-operation between Departments and Agencies and will help thousands of people through a difficult period of their lives.

Laying the Foundations for Future Growth

By securing the public finances, this Budget lays the foundations for future growth and jobs.

In these difficult times, we must not lose sight of just how much Ireland has transformed itself over the last twenty years. Many of the key factors that fed into that transformation – and indeed many of the results of the process of change – will serve us well now as we rise to new challenges.

Almost 1,000 overseas companies have chosen to invest in Ireland as their European base and are involved in a wide range of activities in sectors as diverse as engineering, information communications technologies, pharmaceuticals, medical technologies, GreenTech, and financial and international services. We also have hundreds of thriving R&D-intensive indigenous companies.

In December, this Government published a blueprint for economic development to Build Ireland’s Smart Economy. Such an economy will support a thriving enterprise culture, ensure the highest quality standards, reward entrepreneurship and ultimately secure our energy supplies.

In the last Budget and the Finance Bill, to support this vision, we retained and enhanced our pro-enterprise tax policies –
we apply a corporation tax rate of just 12.5% — that is unchanged;
we increased the R&D tax credit available to companies from 20% to 25% putting it to the forefront of R&D regimes globally;
we provided an exemption from corporation tax and capital gains tax for the first three years of a new start-up business, and other measures to help people who want to start enterprises and create jobs;
we introduced a new and highly-favourable tax treatment of carried interest which will encourage so-called smart capital to work effectively to stimulate start-up enterprises; and
we introduced a tax abatement scheme for people who own shares in start-up R&D companies to help such businesses attract and retain employees.

In this supplementary Budget we add to this suite of incentives by committing to introducing a scheme of tax reliefs for the acquisition of intangible assets including Intellectual Property. This will provide a significant impetus to the development of the Smart Economy and the provision of quality and well-paid jobs in the future.

Public Service Reform
On my first day in office I identified reform of the public service as a core personal priority for me. That is because I believe passionately in the public service ethos, in the values which animate our public service tradition, and in the motivation and competence of our dedicated public servants.

That is why I set up a Task Force to produce an implementation plan for a root and branch renewal of our public service; why I published a comprehensive policy for public service reform based on that Task Force’s report, and why I have established and chair a Cabinet Committee on Transforming Public Services to drive the process of change.

There is much that is good and positive and world-class about the Irish public service: that is evident from the report of the OECD published last year. But equally, there are aspects of how we organise and deliver public services which fall well short of the best practice of which our own system is capable, never mind international standards. We don’t have the full flexibilities associated with a modern, high-productivity, technologically-enabled service economy. We see all too often examples of traditional work practices, staffing levels and management systems which fail to meet the diverse needs of our citizens and which frustrate the creativity and innovative capacity of our public servants. In many cases, this is a failure of organisational capacity, both on the part of management and of the trade unions and other employee representative structures.

A gradual approach to reform and renewal can be effective, in the public service as elsewhere. But when we are faced with a full-blown national crisis, where the business as usual model is no longer affordable or sustainable, then we must adopt a different approach.

That need not be based on a top-down approach which ignores the views of staff and their practical experience. Still less, need it be based on conflict between the Government and public service unions. On the contrary, I believe that the reality of the crisis which we face as a society is particularly evident to public servants who are dealing at first hand with the consequences – personal, social and economic – of our current difficulties. I know that they resent deeply the unfair criticisms and occasional ideological bias which is expressed against them. I know that they, and their trade union representatives, realise that the best way of protecting the interests of public servants is to demonstrate that we are up to this challenge; that we can do more with less; that we can distinguish between change and flexibility which benefits the citizen without prejudicing the legitimate interests of staff, and change which is an unwarranted attack on decent standards of employment and practice.

This Government wants to work in a collaborative and partnership way with our own staff across the whole of the public service. We have listened carefully to what they have had to say, for example, about the operation of the public service pension levy. The Minister for Finance yesterday announced a significant adjustment to lessen the burden on those on low and modest incomes in the public service, while retaining a levy which is entirely appropriate given the relative benefits of public service pension terms at this time.

Reform can accelerate in periods of crisis, when issues that could previously be ignored have to be faced. We are in such a time. We are not in a position to continue to pay for the public service to operate in an unchanged manner with an unchanged division of labour across an unchanged labour force.

The measures announced yesterday to facilitate the early retirement or temporary departure of public servants are designed to facilitate part of this necessary adjustment on an agreed and equitable basis. However, in combination with the moratorium on recruitment and promotion announced earlier by the Minister for Finance, it does represent a determination on the part of the Government to reduce the numbers employed in delivering public services in line with our reduced capacity to pay. This inevitably requires greater flexibility and mobility so that resources are deployed where they are most needed. It also requires flexibility in the way that work is carried out, in line with good practice. It is only on this basis that we will be able to sustain the approach which has been long enjoyed in the public service in terms of security of tenure, high quality conditions of employment and attractive pay and pension terms. These are issues which will be discussed with the necessary degree of urgency with the public service unions over coming weeks.

Social Partnership
In this context, I want to repeat my firm conviction about the value of the overall social partnership process. Whether in the public or the private sector, I believe that the shared analysis and structured engagement which the partnership process requires are entirely positive in helping to bring about greater understanding of our situation and the challenges which we face, and greater consistency in the way in which we respond to them.

For that reason I welcome the decision of the social partners to continue to engage with the Government to see if it will be possible to agree a shared approach to the many dimensions of our current crisis.

In facing up to this challenge, we have the benefit of the excellent analysis produced by the National Economic and Social Council, on which the social partners and Government Departments are represented. It sets out very clearly the reasons why an integrated national response, which carries the support of broad sections of the community, could be extremely effective in steering our way through these difficult times.

Now, more than ever, we need the coherence domestically and the signal of confidence internationally which a Social Partnership Agreement would represent. The Budget announced yesterday, difficult though many of its elements are, and the broad strategy which accompanied it in the statement of the Minister, are consistent with the Framework which we agreed with the social partners at the end of January. This now provides the basis to complete the negotiation of a National Accord over coming weeks.

We all face Challenges
Everyone is facing problems. Business is down because the domestic and world markets are down. They have to make cuts. Staff are worried. It’s tough.

People in their homes are worried. They worry can they make ends meet. They worry will one of them lose their job. They worry about what the future holds.

I understand that. My cabinet and I are working hard and we know that we have to get the balance right. We know we have to get us out of this.

We are also realistic. This is the here and now. We cannot wish it away. There is no other option. While we can’t change the direction of the wind, we can adjust our sails. That is what we have done in this Budget.

Standing still is not an option in these times. We must act. Leadership is about taking tough decisions when called for.

Conclusion

This economy will recover. This pain will not last forever. There is light at the end of the tunnel.

The consensus among forecasters is that the world economy will begin to revive in 2010 bringing a return to growth in Ireland in 2011.

That will only occur if we take the hard decisions now, work together over the next few years in particular, fix those things that we can fix, and get through this unprecedentedly difficult period.

We are committing all of our efforts to this cause. We are determined to lead the country through this.

We recognise that this requires people to make considerable sacrifices.

But no matter how difficult it seems, I ask the people to work with us to ensure that we get through this difficult period and ensure a bright future for ourselves and our children.

I commend the Budget to the House.

Thank you.