Good Morning Ladies and Gentlemen. Firstly, I would like to thank IBEC for inviting me to address you all at today’s conference here in the National Convention Centre. Today’s theme – "Going for Growth" – speaks to the fact that many Irish businesses have moved beyond the painful adjustment process and are focussed again on growing and winning new business. That’s a very powerful message that I hope will be picked up in the coverage of today’s event and reinforced in the remainder of the sessions throughout the day. Ireland is open for business and business here is thriving thanks partly to recent improvements in our competitiveness but thanks also to increasing confidence in our ability to manage our way out of the current difficulties.
If I could change the title of today’s conference it would only be to add the word – "jobs" – "Going for growth AND jobs". The Government can only put in place the necessary supporting conditions to foster growth and create employment. Then it’s over to you! Economic growth has returned in Ireland based on a remarkably strong export performance. Although employment is still falling, the private sector as a whole was a net creator of jobs in the second quarter of the year. That progress is driven by the businesses represented here this morning at this conference and I want to acknowledge and thank each and every one of you for your contribution to your country.
Confidence is a theme I want to emphasise throughout this speech. Confidence is one of the preconditions for a return to growth. International investors are already voting confidence in Ireland – this is evidenced by renewed inflows of foreign direct investment into the economy. Confidence, along with credit growth, is key to unlocking pent-up domestic demand. Ultimately, confidence in our ability to balance our budget and return to growth is what will allow us to return to the international financial markets and be the first country to successfully exit a Programme of Assistance.
Public Finances
You, as CEOs, will fully understand the pressing need to balance the books. We have two major problems – the Deficit and the Debt. The reason that we need to shrink the deficit so quickly is because otherwise the burden of debt service costs will become unsustainable.
However, the Government is very conscious that restoring the public finances to health will not be achieved by budgetary consolidation alone. Economic growth will play a crucial role.
Consequently, the main aim of Government strategy is to return the public finances to a sound position while trying to minimise the negative impact of the required adjustments on the economy AND society to the greatest possible extent. It is undoubtedly a very challenging balancing act.
Certainty and confidence in the future can also help to mitigate the impact of the adjustments by encouraging spending rather than saving among those who have the means. In order to rebuild confidence, the Government is laying out its budgetary strategy in a way that provides clarity and certainty into the future around the measures that will underpin it.
The Medium-Term Fiscal Statement sets out the scale of the adjustment to be achieved each year from 2012 to 2015. The total adjustment required is €12.4 billion euro and 31% of that target will be met in 2012 with a planned adjustment of €3.8 billion. We have not been persuaded by arguments for even greater front-loading of the adjustment, on the grounds that it is important to allow the economic recovery that has commenced a chance to strengthen.
We have also detailed the split between revenue and spending adjustments – 37.5% of the adjustment is to come from new revenues and 62.5% from spending cuts. When we omit the €600 million of tax receipts, which are raised from the full year effects of Budget 2011, the adjustment is approximately 2 to 1. The Government is focussing the bulk of the adjustment on the expenditure side because we have taken on board the international evidence which suggests that budgetary consolidations tend to be more successful when they rely more on spending reductions than revenue increases. That decision also reflects view that there is limited scope for raising the overall tax burden in an economy as dependent on international trade and foreign direct investment as Ireland.
Now, I know that IBEC would like us to achieve an even greater proportion of the adjustment from spending cuts. We should remember that one person’s expenditure cut is another person’s public service. However, I believe that the Government has struck the right balance between revenue and spending adjustments and we are determined to implement the necessary consolidation in a fair and equitable manner and in a way that is as economic and jobs-friendly as possible.
Having considered the very detailed OECD analysis on the relationship between tax policy and growth, I share the OECD view that indirect taxes are less harmful to economic growth than both corporate taxes and income taxes. That is why the Government has decided to focus the bulk of this year’s tax adjustment on indirect taxes.
I am firmly of the opinion that the best way to support consumer confidence, spending and jobs is to give people certainty about their take-home pay next year and that is why this Government has committed to no increases in income tax in this Budget.
But let’s be realistic, the money has to come from somewhere. I understand the concerns about increases in cross border shopping. But we need to have an informed debate on this issue and not simply resort to rhetoric. Previous studies have shown that the key driver of cross border shopping is the currency exchange rate – not VAT rates. If tax plays a role in driving cross border shopping, it is the overall level of taxation – which combines income tax, corporation tax, VAT, excise and other charges.
Up to now the adjustment has been made largely by increasing income tax. 80% of last year’s tax increases relied on income tax increases. In 2007, 29% of tax was raised through income tax. This is now forecast to be 40% in 2011. In 2007, 31% of tax raised was raised by VAT. This is now forecasted to raise 29% in 2011. In this budget, we intend to restore the balance. We will not raise income tax because that damages growth and costs jobs.
It is also worthwhile noting that for almost two decades up until recent years the UK operated a standard VAT rate of 17.5 per cent while Ireland’s rate was 21 per cent. This meant that there was always a 3.5 percentage point differential between the VAT rates of both jurisdictions. In this context, the 3 per cent difference between the Irish and UK VAT rates that will be in place after both the Irish and British VAT increase takes effect in early January, is still lower than the difference that was in place throughout the 1990s and 2000s and which applied today.
The Economy
As I have already mentioned, the economy has started to expand again and real GDP is now expected to increase by 1 per cent this year, mainly driven by strong exports. In spite of the weakened international outlook, the pace of recovery is expected to strengthen in the coming years.
This, in no small part, reflects the significant improvement in competitiveness that has taken place in recent years, which is a testament to the flexibility of our economy. The IDA note that Ireland’s competitiveness is back to levels last seen in 2003, and further improvements are expected relative to our main trading partners in the coming years. For example, in order to help reduce unemployment, sectoral wage agreements are being prepared, together with a strengthening of activation and training policies. Legislative changes are being introduced to enhance competition in the medical, legal and pharmacy sectors with the view to lowering costs.
It is important to remember that the Irish economy has maintained its underlying strengths throughout the downturn – a highly educated workforce, a very open economy with a high-tech export base and a pro-enterprise environment. With regard to the last, for example, we remained the top-rated euro area country in the World Bank’s latest Ease of Doing Business survey.
A competitive tax framework which encourages foreign direct investment has been at the core of this country’s enterprise policy for over 50 years and remains just as critical today. It remains an important tool of enterprise policy - not only for attracting FDI but also in encouraging Irish job creators and entrepreneurs.
We have maintained a competitive tax offering that has facilitated our transformation from the most peripheral economy in Europe to the most FDI intensive economy. The unequivocal broad based commitment across the Irish political spectrum to that policy remains steadfast and now more so than ever we cannot and will not allow anything to restrict our ability to compete internationally for high value added mobile foreign investment. The 12.5% corporation tax rate will not be changed.
Domestic demand conditions, on the other hand, remain weak and consumer confidence remains low. Furthermore, the export-led nature of the recovery to date means that it will take longer for growth to feed through to employment. As I have already mentioned, the labour market situation is starting to show signs of stabilisation.
That is not to say we are in any way complacent about the economic outlook. Government’s focus remains on supporting growth and creating employment. The Jobs Initiative, launched in May of this year, is one concrete example of this. I am confident that it has played a role in creating and supporting employment in sectors such as the high-value added tourism sector. It also introduced a substantial number of additional training and education places, to ensure that those who are out of work have the necessary skills to re-enter employment.
Investment – Medium Term Capital Programme
Turning now to an avenue through which the Government can directly support economic growth and job creation. Two weeks ago, my colleague the Minister for Public Expenditure and Reform launched a Medium-Term Capital Investment Framework. Despite very difficult Budgetary parameters the Capital Investment Programme for 2012-16 will amount to approximately €17bn. While this doesn’t match the investment of recent years, it still represents a significant tranche of investment designed to facilitate economic growth and build our social infrastructure.
In addition, the Government is pursuing a strategic investment strategy, which brings together a number of strands of non-traditional funding, through NewERA and the Strategic Investment Fund. I am pleased that the Strategic Investment Fund has recently announced a new fund of up to €1billion for investment in new and existing infrastructure assets.
Creating jobs remains a top priority for Government. The Capital Review commits major resources to the Department of Jobs, Enterprise and Innovation. While the need to address fiscal targets will require some reduction in funding to research and development, supports to industry will be maintained in excess of pre-recession levels when total capital expenditure was at its highest.
While the Public Capital Programme has had to be scaled back we believe that we are providing for a level of funding that will not constrain the capacity of the economy to grow – and this is the normal benchmark for deciding on the appropriate level of infrastructure investment. It is worth pointing out that in the years to 2016 average public capital spending will remain broadly in line with the European average, despite the tight fiscal constraints.
Public Service Reform
Turning briefly to Public Service Reform, it is clear that we cannot sustain our current system of Public Service delivery and Minister Howlin made a number of Public Service reform announcements last Thursday.
CEOs are champions for change in large successful organisations. You, more than most, will appreciate the challenges of the change agenda for the public sector.
The proposals will see a reduction in public service numbers of 12 per cent or 37,500 of staff from their peak in 2008. Other proposals announced have radically rationalised the number of State agencies as well as drawing a line under the decentralisation programme. These will result in substantial Exchequer savings and make Ireland’s public service more affordable to the Irish tax-payers.
Specific priority areas identified in the Plan will include eGovernment, shared services, public procurement, business process improvement and financial management and budgetary reform as well as setting out how implementation should be driven and monitored.
Such a programme of reform across a vast organisation of almost 300,000 public servants will not be easy and it will take time. Of course, trying to maintain critical frontline services to the greatest extent possible with substantially reduced resources is one of the biggest challenges facing Government. But it is imperative that we act now to protect these priority services. But we are determined to succeed and we will succeed.
Bank Restructuring
I have previously spoken at length about the Government’s programme of bank restructuring and I don’t propose to revisit it at great length here today.
The Government’s actions in the banking area are designed to support the development of a reformed and reinvigorated banking system that can serve the economy in a proper manner and, within which, there is scope for viable credit institutions operating in the Irish market to play their full part.
The measures we are implementing will result in a more robust, smaller, and better capitalised banking system that will effectively serve the needs of the Irish economy and can operate on viable basis without recourse to the State.
The commitment by a number of significant private sector investors to invest side by side with the State’s retained holding reaffirms the credibility of the stress tests and the health of the banks after the PCAR exercise. It further underlines how the restructuring process is successfully breaking the link between bank risk and the Sovereign.
Conclusion
In conclusion, I want to highlight again the important role that confidence can play in accelerating our recovery. The Government’s plans for the consolidation of the public finances are clearly set out for the next four years. We know how much revenue we need to raise in each year and we know how much spending we have to cut. Achieving our targets will not be easy and I expect and, indeed, welcome robust debate on the different policy options available to us. But, I would stress the need for mature, honest and rational debate. Creating fear among the public will only depress confidence and consumer sentiment even further and, in reality, as our return to economic growth shows, there are many reasons to be positive about our future.
In early December we will have a budget which will be tough but I hope fair also. I believe that we can deliver on our commitments and we will minimise the negative impact on the economy.
Today’s event will highlight the many strengths of the Irish economy and I hope that message will travel far and wide. I would like to thank IBEC for organising today’s event and wish you all every success in the future.
Thank you.