Ladies and Gentlemen,
I am very pleased for the invitation to speak here today at the annual lunch of the Leinster Society of Chartered Accountants and for this opportunity to outline some key actions the Government has taken and will be taking to address the very real challenges that we face over the short to medium term.
We are all acutely aware that the Irish economy has experienced an extremely sharp downturn with the resulting fall in all of our living standards. Gross Domestic Product – the most comprehensive measure of economy activity in Ireland – is now around 15 per cent lower than it was at its peak in mid-2007 having fallen for each of the last 3 years. This dramatic fall in output is attributed to the substantial decline in construction activity and reduced consumer spending.
The resultant severe impact on the labour market is evident across key measurements. The unemployment rate has increased from an average of just 4½ per cent in 2006 to 14.7 per cent in the final quarter of 2010. Few have gone untouched by the economic downturn we have experienced over the last three years – let us be clear unemployment is not a matter of statistics and numbers on a page. The unemployed are our neighbours, our children, and our friends.
• There are now 440,000 individuals signing on the Live Register every week. Around 140,000 have been signing on for a year or more, highlighting the real problem of long term unemployment; and
• Emigration has made unwelcome return as a feature of the Irish labour market.
These are people who want the opportunity to work in their own country, provide for their families, and get on with their lives. This Government is determined to do everything we can to provide those opportunities.
The economy will return to growth…
However, despite the current employment situation, in 2011, there is now a broad consensus that the Irish economy will return to growth. The Department of Finance revised economic forecasts anticipate that the economy will expand by 0.8 per cent this year and 2½ per cent in 2012. This is in line with the forecasts of other institutions such as the IMF, the EU Commission and the Central Bank. The OECD’s assessment of Ireland’s economic prospects for next year, published today, broadly reflect the Department of Finance’s view. It’s outlook for this year however is out of line with our thinking and that of the consensus at this time.
The recovery is being driven by strong export growth which increased by 9½ % last year – the strongest rate of growth in a decade – and has continued this impressive performance at the start of 2011. In nominal terms exports recorded an annual increase of over 14 per cent in February, while survey data points to robust export order books in the first half of the year.
It is also worth noting that foreign direct investment inflows remain strong and Ireland is still the destination of choice for many of the world’s leading firms. Almost 1,000 companies – including household names such as Google, eBay and Facebook – have chosen Ireland as the hub of their European networks. The bulk of these FDI flows are in the high-technology sector. This reflects the investment in IDA and Science Foundation Ireland with several well-known multinational firms recently making announcements on new investment in Ireland. These sectors generate employment in high value-added, knowledge-intensive sectors and they demonstrate the underlying strength and attractiveness of the Irish economy as a place to do business.
Ireland continues to attract this type of investment because we have remained focused on competitiveness. Both wages and prices have adjusted in recent years, reversing the loss of competitiveness that the country experienced in the early part of the last decade. Irish consumer prices have fallen by around 3 per cent in recent years, while they have remained on an upward path in our competitor countries. These necessary adjustments to our cost base demonstrate the inherent flexibility of the Irish economy which differentiates us from other peripheral economies in difficulty. Our other strengths include our young, well educated work force, favourable demographics and our strong pro-enterprise environment. These underlying strengths will help to return Ireland to growth over the medium term.
Government is making progress…..
The Government must ensure that the conditions exist for economic recovery to take hold. I can assure you that the creation of jobs is the number one priority for the Government and returning the country to work is our overriding objective in the coming years.
In this context the recently announced Jobs Initiative is one important step in ensuring that individuals and families affected by unemployment are given additional opportunities to return to work, education or training. The new Government, in launching the recent Jobs Initiative has taken an approach by investing in job intensive sectors, boosting labour market flexibility and improving competitiveness by a series of measures. A key element of the Jobs Initiative is the provision of almost 21,000 training and work experience places available to the unemployed.
The measures outlined in the jobs initiative will re-focus our resources to where they are most beneficial and thereby help to underpin confidence. They are indicative of the proactive strategic approach that will help to ensure that individuals have the necessary skills and are well equipped to take up employment once again as the economy starts to create jobs in the medium term.
There are further challenges……….
Of course there are many challenges that must be faced by the new Government. None more so than managing and delivering in my portfolio of Public Expenditure and Reform.
In relation to the General Government deficit, the situation has stabilised, with data for the first quarter of the year broadly in line with expectations.
The recent quarterly review by our external funding partners has concluded that Ireland is on the right path and that all of the targets have been met. The IMF has concluded that the Programme is off to a strong start, while our EU partners have concluded that the new Government has taken strong ownership of the Programme. These are positive developments, and confirm the Governments determination to maintain the public finances on a sustainable path, to boost the growth potential of the economy, and to put our financial system on a more stable footing.
Notwithstanding this it is a challenging environment; the General Government balance is now forecast to be 10 per cent of GDP this year. This means that as a Government we are expected to borrow €18bn in 2011 and €17bn in 2012 to pay for goods and services. The sheer size of the deficit means that further budgetary consolidation measures will be required to align the State’s spending and revenues more closely in the coming years. Crucially, we are all aware that the Agreement the Government has signed with our partners in the EU/IMF and the fact that this places an onus on the Government to deliver on the consolidation objectives - with clear action.
I believe that the proposed Comprehensive Review of Expenditure, which is currently underway across all Government Departments, is the most effective means of delivering upon these objectives.
The approach adopted by Government is a departure from actions of previous governments, it follows that each Department is undertaking a root and branch evaluation of both their own expenditure and that of bodies within their remit, under the oversight of a Steering Committee of senior officials. These Reports will then be evaluated by the Economic Management Council before being submitted to Government in the autumn for consideration and decision in the annual Budget and Estimates process.
The Comprehensive Spending Review has a number of objectives. We must interrogate all of the options available to us. We must examine not only how we can spend less, but also how we can do more within the limited resources available, and how we can achieve our objectives differently – by working smarter.
The process will provide the Government with a comprehensive set of decision/ options that will
• ensure we meet the overall fiscal consolidation objectives, both as regards spending and numbers reduction targets;
• re-align spending with the Programme for Government priorities and
• in this context, establish new ways of achieving Government objectives in the context of public sector reform.
The key question to be asked of all public bodies is whether they are delivering outputs that are absolutely essential to achieve the outcomes required. This Review process must deliver a more efficient, more effective and more modern public service for less money while continuing to achieve the economic and social progress that is underpinned by our public services.
There is no escaping this fact. I can assure you all here today that the Government will take the necessary decisions arising from the review to ensure that the public finances are returned to a sustainable path.
The Government is committed to a reform agenda – this agenda relates to all aspects of public life; public expenditure, political reform and also the banking sector. It is only through the study of failures in the past that we can learn for the future and achieve true reform and
robust processes and systems.
I am sure you are all familiar with the findings of the recent Nyberg report Misjudging Risk: Causes of the Systemic Banking Crisis in Ireland, Report of the Commission of Investigation into the Banking Sector in Ireland. This report, I believe, provides us with a very important overview of events in our recent past and builds on the work undertaken by Governor Honohan and Regling and Watson in this area. The report clearly identifies failures in banking, in regulation, in the authorities, and in professional standards.
This report is the first to look at the role of external auditors with specific focus on their role in commenting in their audit reports or other communications to the institutions concerned on standards and controls in the context of corporate governance and prudent risk management policy and procedures or the business models and strategies and business and lending practices of the covered institutions.
In brief the main findings relating to auditors were:
• auditors’ commentary regularly focused only on issues which they considered related to the accuracy of the historic accounts,
• auditors clearly fulfilled this narrow function according to existing rules and regulations,
• in the absence of an express requirement for the auditors to do so, there appears to have been no challenging dialogue with the covered banks on their business models and their growing property and funding exposures. Such dialogue could have highlighted the business model risks and might have influenced the banks in relation to their growing vulnerabilities as the Period progressed, and
• Mr. Nyberg found it unfortunate that sufficient, timely and challenging auditor dialogue was not used to influence the banks’ business models and lending practices.
These findings raise a number of issues for the audit profession concerning how it sees its own role and its relationship to both client firms and to external statutory and other stakeholders.
It is clear however that the Nyberg report generally agrees with the view that the audit profession should be able to contemplate an enhanced role in co-operation with supervisory authorities, while recognising their respective statutory functions. This is a view which I generally support and indeed I understand that the Central Bank has commenced a process of engagement with the audit profession to explore the potential for enhanced, regular dialogue between auditors and supervisors and how the profession can best assist the Bank in carrying out its supervisory functions.
I welcome the fact that the Accounting profession is actively engaged in this debate and the Institute of Chartered Accountants is undertaking an industry-level review of the role of statutory audit which is considering issues such as the scope of the audit; how the audit profession interacts with and reports to shareholders and the information included in such reports; relationships between auditors and supervisors; and how the profession is regulated.
I look forward to the outcome of the Chartered Accountants Regulatory Board (CARB) review of the 2008 audits by members in the covered institutions expected to be published this summer.
This work will help to inform debate on the role of auditors. But more importantly I look forward to the recommendations coming from these reviews which will enhance the role of auditors as set out in the Nyberg report and show that we can learn from these events and put in place robust structures and procedures so that they don’t happen again.
Conclusion
The Government is committed to taking the necessary steps to ensure that recovery takes hold and delivers confidence and sustainable jobs over the medium term.
The Jobs Initiative shows our commitment in this regard. This is the first step but the Government has helped to improve the environment for employers and is providing additional opportunities for the unemployed in work, education, and training and through the creation of the National Employment and Entitlement service. Both public and private sectors need to consider whether they can assist in this national endeavour by providing additional work or experience opportunities for individuals.
In relation to the future one of the key challenges facing the Government is the management of the public finances. The Government will continue, through the management of the Comprehensive Expenditure Review, to take the appropriate steps to manage the public finances and the economy. We will do so in a way that is fair and equitable and ensures that the most vulnerable remain protected. The past week has lifted public morale and public confidence. We are determined to build on that restored sense of pride in our ability “to do” – “is féidir linn – to guide this economy and this society to a better place.
Finally, may I take this opportunity to wish the Leinster Society of Chartered Accountants all the very best in the coming year.