Speech by the Taoiseach, Mr. Brian Cowen T.D., in the debate on IMF and OECD Reports on Friday, 3 July 2009 at 2.15pm

Introduction
I welcome the opportunity for a debate on the important reports published recently by the International Monetary Fund and the OECD.

We are living in a time of unprecedented crisis in the Global Economy - a crisis worse than anything predicted by leading economic commentators.

As a small, open economy which earns its living by trading on world markets, Ireland is uniquely exposed to this crisis. It is no exaggeration to state that responding to this crisis is one of the greatest challenges the country has faced since independence.

Meeting that challenge is the primary focus of the Government's effort - it requires the energy and imagination and determination of everyone in the country.

Origins of the Crisis
However, before I outline the Government's strategy, which has been broadly endorsed by the IMF, I want to respond to some of the misplaced efforts to use this opportunity to criticise the Government's economic policies in recent years.
As I took up office as Taoiseach in May 2008, the experts in the IMF, OECD and ESRI were predicting economic growth of over 3% this year, in 2009. They are now predicting a contraction of between 8% and 10%. In simple terms, nobody predicted what has happened globally or in Ireland.

In 2007, the IMF stated "Economic performance remains very strong supported by sound economic policies". The Executive Directors commended "Ireland's continued impressive economic performance, characterised by one of the highest growth rates of GNP per capita among advanced countries and one of the lowest unemployment rates. This performance has been underpinned by outward-oriented policies, prudent fiscal policy, low taxes, and labour market flexibility." They expected economic growth to remain robust over the medium term.

Nevertheless, they did warn of a possible overheating in the housing market. The IMF's latest analysis shows that the housing boom was mainly caused by cheap credit due to low interest rates. This combined with rising incomes, a fast-growing population and workforce, and pent-up demand for housing, to create a structural weakness in the economy now exposed by the international economic crisis. However our interest rates are set by the European Central Bank, not the Irish Government.

Regarding those aspects that were within my control, as Minister for Finance, I moved to end the tax incentives that then existed for the property market. In Budget 2005, I announced a review of tax incentive schemes. In Budget 2006, in line with the recommendations, I announced a termination date of 31 July 2008 for all existing property-related tax incentive schemes with the exception of private hospitals, registered nursing homes and childcare facilities.

Most importantly, despite a concerted attempt in the media and on opposition benches, I refused to get rid of stamp duty - the largest transactions tax on property in the EU. If we had heeded those calls to remove stamp duty, the brakes would have been off entirely and we would be in far greater trouble than we are now.

What all this goes to show is that none of us were right in what we thought would happen.

As the NESC said in a widely-praised report on the current crisis:
"In Ireland, until Autumn, 2008, there were grounds for hoping that a substantial housing-market correction, which began towards the end of 2006 and strategies to renew the economy's competitiveness by focusing on knowledge and innovation, would enable the country to enter a new phase of more moderate but soundly-based growth without major dislocation. But the global financial crisis precipitated the credit crunch which spilled over into the real economy. Ireland is now experiencing the vulnerability of its economic openness (without which, of course, the rapid expansion and higher living standards since 1993 would not have happened)."

My regret is that I did not manage to predict that such a seismic shock to the world economy was going to happen and neither did anyone else. If my crystal ball had been better than those of the IMF, OECD and ESRI, I would have done more to reduce spending so it would have been easier to deal with this international recession.

However, I stand over the decisions I made based on the best information and advice that I had.

When times were good, I chose to spend on badly needed public services but, against the wishes of the opposition who wanted me to spend more, I also ran budget surpluses and brought down the national debt. The cumulative current budget surpluses for 2005, 2006 and 2007 amounted to €22 billion. The National Debt as a share of national income fell from 30% in 2004 to 23% in 2007.

At all times, decisions were made in good faith to reduce the debt and improve public services. This was the political consensus at the time and this was consistent with the view of many of the IMF Directors at that time. When I was Finance Minister in 2006 and 2007, the Ireland country reports commended our economic management and sound fiscal position.

Response to the Crisis
By definition nobody has the benefit of hindsight. What I can do, and will do, is provide honest and strong leadership through this crisis.

We are implementing a coherent strategy to manage through this difficult situation for the country and our approach has been broadly endorsed by the IMF. The IMF state, and I quote, that the Government "has moved with resolve to counter the severe economic and financial shocks" and the IMF Directors "commend the scale and speed of the authorities response so far."

Stabilising the Public Finances
The first part of our strategy is to return the public finances to a stable and sustainable position.

We have set out a pathway for reducing the deficit back below 3% of GDP by 2013, striking a balance between sustaining economic activity in the short-term and making a credible start on the difficult adjustment required.

The IMF have supported this approach saying that "the basic approach and elements of the plan are appropriate".

In particular, the IMF shares the Government's view that fiscal stimulus measures that further exacerbate the imbalances in the public finances would prove counterproductive.

The IMF acknowledge that the initial reliance on increases in income taxes in the October and April Budgets was appropriate and that those tax increases were "a necessary process of returning tax rates to more normal levels".

We have taken some difficult decisions on both public spending and taxation, and more difficult choices lie ahead over the next few years. The Government shares the IMF view that a greater focus on reductions in current spending is needed in the period ahead.

Banking and Financial System
The second part of our strategy is to restore stability to the banking and financial system.

This is not about helping the banks par se, it's about helping businesses and citizens access the credit required in a modern economy.

The IMF welcomes the "important steps to stabilise the financial system" taken by the Government. They specifically mention the State Guarantee Scheme which they say was vital to maintaining financial stability. That is the same guarantee that the Labour Party opposed and continues to oppose in this House.

The IMF supports the establishment of NAMA which they describe, and again, I quote, as "pivotal to the orderly restructuring of the financial sector and limiting long-term damage to the economy". They go on to say that "NAMA offers the prospect of extracting distressed assets from the banks, a precondition for their return to healthy functionality".

The IMF agree that NAMA can be self-financing and say that "if well managed, the distressed assets acquired by NAMA could over time produce a recovery value to compensate for the initial fiscal outlays."

These are the views of the IMF: the organisation with the most experience in dealing with banking crises around the world. These are the real banking and economic experts and their informed view on NAMA is very much at variance with the arch positions that have been adopted by the Opposition and some commentators.

The IMF rightly emphasise the importance of the prices at which the assets are purchased. We agree. That is why NAMA has hired experts to make recommendations on valuation methodologies. The methodology will have to be validated by the European Commission.

The IMF emphasise the importance of getting the legislative and operational structure for NAMA right - and of ensuring that the Agency is in place as soon as possible.

We share this sense of urgency and preparations for the establishment of NAMA are continuing. We have appointed experts to advise on the drafting of the NAMA legislation as well as practical preparations. We expect to publish the legislation later this month and have it debated here in September.

Some people seem to support the wholesale nationalisation of the State guaranteed banks and it has been suggested that the IMF favours nationalisation. This is not the case - they see it as possibly necessary in certain situations.

The Government believes that it is important, where possible, that the banking sector has a market presence and that it operates in line with market disciplines. A commercially focused banking system, including banks having a market presence, operating within market disciplines and constraints, is the best way to achieve this objective.

Nationalisation of the whole Irish banking system is not the panacea that some suggest. It will not by itself address any of the problems faced by the banks - and no country is adopting a policy of wholesale bank nationalisation. If Ireland was to take that route on its own, it could be very damaging to Ireland's international reputation with investors. This would not just affect funding for the banking sector, but the economy more generally.

The Opposition has claimed many times that no independent economist supports the Government's approach to the banks. The IMF is independent, and more expert in advising on banking problems than most commentators, and it supports our approach.

The IMF doesn't even give consideration to the Fine Gael proposal of setting up a magic "recovery" bank and "legacy banks". They clearly don't regard it as a viable alternative.

Sustainable Economic Growth
The third aspect of the Government's strategy is to restore competitiveness and a return to sustainable economic growth.

We have set out our approach in 'Building Ireland's Smart Economy: a Framework for Sustainable Economic Renewal'.

A Smart Economy combines the successful elements of the enterprise economy and the innovation or 'ideas' economy while promoting a high-quality environment, improving energy security and promoting social cohesion.

The lesson from severe global recessions in the past is that as well as weathering the economic storm, countries need to restructure their economies to target the next wave of economic growth.

The overall objective is to increase the productivity of our people by creating greater value in what we produce and provide as a nation. This is the key to driving economic development and improving living standards.

Our vision is based around some specific objectives including:
- attracting a greater proportion of high-value, R&D-intensive, Foreign Direct Investment;

- developing a critical mass of companies - both Irish and international - at the forefront of innovation, creating the products and services of tomorrow and providing well paid jobs for this and future generations;

- creating the conditions where entrepreneurs will want to come to Ireland because it provides one of the best environments for turning ideas into products and services for sale;

- being at the leading edge of renewable energy and environmentally-friendly markets;

- enhancing the environment, securing energy supplies and building the GreenTech sector, and

- ensuring more efficient and effective public services and smarter regulation.

The Government has already introduced a number of significant initiatives to move us towards this vision.

We have introduced a range of taxation provisions to encourage venture capital activity in Ireland and support investment in R&D and start-up high-tech companies. We have also introduced a new tax regime for Intellectual Property.

We have established a High Level Group on Green Enterprise to identify new opportunities to create jobs and growth, while the ESB has recently announced 3,700 new jobs in this area.

We are promoting restructuring of the higher education sector to better concentrate expertise and investment. I believe the recent announcement by UCD and Trinity of an Innovation Alliance is a major step forward in that regard.

We are targeting a range of new opportunities for Ireland in international services including financial services, international education services, the maritime sector and arbitration services.

We are also developing a new Action Plan to improve trade, investment and tourism links with new and fast-developing markets - for example in Asia, the Middle East and South America - reflecting the growing importance of those regions.

Work on these and other aspects of the Smart Economy Framework is ongoing.

In order to take this effort further, I have recently established an Innovation Taskforce to support a coordinated approach to the development of Ireland as an Innovation Hub.

Supporting employment and those who lose their jobs
The final part of our strategy is to maximise employment in the short-term and help those who lose their jobs.

I fully understand the impact which unemployment can have on an individual and their family.

Our objective is to help retain jobs where possible, while ensuring that those who lose their jobs have opportunities to develop new skills or qualifications which will prepare them for a return to employment.

We have introduced an Enterprise Stabilisation Fund of €100m over two years to support vulnerable but viable companies. This will help companies reduce costs and gain sales in recession-hit overseas markets.

As well as stabilising the banking system to restore the flow of credit to the enterprise sector generally, we have taken specific steps to help the SME sector. The re-capitalised banks have committed to increasing their lending capacity to SMEs by 10% over 2008, and European Investment Bank funding of €350m being made available to SMEs.

An independent review of the wider issue of credit availability and trade finance is currently being finalised and the Government has established a Clearing House, with representatives from the business sector, to monitor trends in lending to enterprises and address any blockages identified.

We are seeking to maximise the number of people in employment by sustaining a high level of investment in labour intensive infrastructure.
In addition, we are actively exploring new and innovative ways of accessing private sector finance to support PPP projects.

We have seen average reductions of 10% and 12% in electricity and gas prices. Cost to large industrial users remains out of line with international competitors and we are working to identify and progress further measures, to help improve the situation for Irish business in this critical era.

In addition to these efforts, we are introducing a new initiative to safeguard vulnerable jobs through a Temporary Employment Subsidy Scheme.

This has been developed in consultation with the Social Partners and will provide a subsidy to support jobs in exporting companies in the manufacturing or internationally-traded services sector.

The Scheme has been designed to minimise the risks of deadweight and displacement and its roll-out will be carefully monitored.

This new Scheme is in addition to the significant support that the State already provides to people on short-time work. At present, over 50,000 more workers are receiving social welfare payments in respect of short-time working than 12 months ago. This is the equivalent of, or in many cases greater than, the support offered in other Member States.

The Government's focus is on delivering good outcomes through measures which work - we can reallocate resources where the results are proven.

However there is no avoiding the difficult adjustment that needs to take place in the labour market. Costs have to fall and the level of employment in certain sectors - in particular construction - was not sustainable.

This week's Live Register figures show the scale of the challenge, and the best pathway to sustained job creation and economic growth is to regain competitive advantage in the market place by doing whatever is necessary to retain and regain market share in an environment of depleted demand.

To help those who are out of work presently, the Government has also introduced a wide range of measures to help those who become unemployed. A total of 128,000 training and work experience activation places will now be funded through FÁS in 2009 while provision has been made for 146,000 participants in further education programmes.

Creating job opportunities for these people is the priority running through all our policies - it will only happen when we have stable public finances, a sound banking system and sustainable growth based on a competitive and innovative economy.

Despite what some people claim, there is no short-cut or easy solution. The adjustment is, and will continue to be difficult. The Government is working with the social partners to try to manage that adjustment, and is willing to listen to good ideas from any other source.

But we will not try to fool people into believing that difficult decisions can be avoided.

Conclusion
The global economic and financial crisis has hit Ireland hard.

The crisis was not foreseen by the IMF, the OECD or other economic commentators. The Government's past decisions were informed by the best forecasts and advice available at the time.

The Irish people will not thank us for wasting time and energy wishing things had turned out differently. We owe it to them to concentrate on dealing with the world as we find it - and making the right decisions now.

The benefits of adjustment based on realistic engagement with the social partners and at enterprise level, combined with structural reforms across the economy, will place us on a strong footing to grow again when the international economy recovers.

The Government has set out its strategy for managing this difficult adjustment and welcomes the support for its broad approach from the IMF. We will continue to implement that strategy, and provide the leadership required to bring the country through this crisis.

ENDS