Tánaiste’s Speech to Dáil Eireann on the IMF & OECD Reports

3 July 2009

Introduction

I am pleased the Dáil has the opportunity to discuss both the IMF Report on Ireland and the recent OECD Economic Review. The OECD Report was released in advance of the annual OECD Ministerial Council which I attended in Paris last week. It was instructive to exchanges views with Ministerial colleagues from 30 developed countries and countries where we are building good economic relations such as India, Brazil, China and Russia.

The global economy is experiencing its biggest contraction since World War Two. It is very clear both from the debate at the Ministerial Council and from the analysis done by the OECD that almost all states are undergoing considerable economic hardships in a year where world trade could shrink by up to 16%.

Our economic situation, while urgent and grave, is not unique. As we are integrated into global trade and production networks our recovery will be intrinsically linked to a recovery in global trading. Although the OECD suggested that a global recovery might be ‘weak and fragile,’ the Council focussed its discussions on those policy areas that could accelerate recovery. I was pleased to see the OECD shared our emphasis on innovation and the importance of ‘green growth’ for the next phase of economic growth. There was a consensus around the three dimensions of recovery where government actions are needed. Correcting unbalanced growth and major failures in the financial system is the first of these. Recognition that a collective approach to a cleaner and greener economy is the second. The social and human dimension of the crisis is the third critical factor in our recovery plan.

With specific reference to Ireland, the OECD state that the economic turnaround is likely to begin in 2010 and then further note that exports will pick up as the world economy recovers and as costs are declining. While this is encouraging we fully recognise that we need to take a number of steps to take advantage of the global recovery. The IMF have acknowledged that we have moved “with resolve” to counter the economic and financial shocks. We will continue to act with resolve in our pathway to recovery.

I want to take the opportunity today to outline the steps we have taken and propose to take to make our economy stronger, greener and fairer.

1.Building a Stronger Economy

Cost Competitiveness

I want to focus firstly on the issue of cost competitiveness. The International Monetary Fund also stated in its report that Ireland needs a sustained decline in wages to restore competitiveness. The need for cost competitiveness is now more pressing than ever. Unfavourable exchange rates, particularly with two of our main trading partners, Britain and the United States, add further urgency to the need to lower costs. As an adjustment through exchange rate depreciation is not an option, downward pressure on real wages and costs must be the main drivers of cost competitiveness and future growth. This is an adjustment that is needed by the Irish economy to bring our costs into line with those of our competitors and there is plenty of evidence that this adjustment is taking place.

Our immediate policy objective is to restore competitiveness and in particular cost competitiveness. Restoring our cost competitiveness is a key action set out in the Framework for Economic Renewal. We are aware that strong domestic demand in recent years led to significant increases in the costs of doing business in Ireland. However, the economy is now undergoing a radical adjustment which is incorporating the necessary changes required to restore external competitiveness. As part of this process there are a number of factors which can influence our cost base.

Firstly, the decline in Irish inflation reached -4.7 percent in the year to May 2009, the sharpest fall since 1933. Inflation fell significantly across most goods and services groups in 2009. Input costs for manufacturing and services industries have seen months of consecutive declines. The OECD has predicted mild deflation in Ireland for the next two years. This will maintain the current downward pressure on wages and prices. And while the eurozone area, too, is experiencing deflation - estimated to be the lowest for the region since 1953 – the IMF believes that Irish prices should continue to decline at a pace greater than the rest of the eurozone. This is assist in restoring our competitiveness.

Secondly, the Government have stepped in to exert downward pressure on prices and costs. Although it has been a painful adjustment, the reduction in unit labour costs delivered through public pay reform will strengthen our longer term competitiveness. For most exporting firms, labour costsaccountfor over half of their input costs. While Irish wage levels are moderate when compared to other high income economies, wage inflation in Ireland has been running at up to 50 percent higher than the eurozone average during the 2005-2008 period. More recently, nominal wage growth has slowed and is likely to fall in 2009. The EU estimates that Irish unit labour costs will fall by 4% this year, compared with a 3% increase in the EU on average, translating into a significant improvement in competitiveness.

Thirdly, in line with the commitment in the Programme for Economic Renewal, we will implement the recommendations of the Competition Authority and tackle excessive costs in the non-traded sectors where they can best contribute to overall competitiveness. The IMF acknowledged the importance of Irish labour market flexibility in helping our competitiveness adjustment. They also suggested that competition policy should be used to support the process of price and wage adjustments.

Competition policy in a small open economy is relevant for all sectors of the economy but particularly the services and non-traded sector since it is the non-traded sector that determines Ireland’s cost competitiveness.

Fostering efficient and innovative enterprises through pro-competitive market structures will better enable Ireland to weather the current economic storm and enhance growth prospects in the medium to long term.

The Competition Authority, as the Agency responsible for enforcing Competition law in Ireland, has tended to focus its efforts, especially its advocacy efforts, on the non-traded sectors of the economy. The Authority has issued a number of reports over the last few years on non-traded sectors including the areas of the banking sector, utilities and professional services (such as engineers, architects, legal professions, dentists, optometrists).

The Government have already agreed to accelerate consideration of Competition Authority Report recommendations to see where they can best contribute to greater cost competitiveness. We are determined to remove competitiveness bottlenecks in the economy in order to deliver better value and more innovation. It is my intention to submit a report to Government before the end of the year outlining the progress achieved on the implementation of these prioritised recommendations. Across Government there is already a concerted approach to eliminate structural rigidities and competition bottlenecks that have contributed to high costs. This week the Minister for Justice acted to ban upward only rent reviews. The Minister for Health is taking action to drive down health costs. These are further examples of this cross Government effort.

Fourthly, we are working to bring costs in administered sectors of the economy under control such as local authority charges and also easing the administrative burden that regulations can create. Minister Gormley and I have met with the County Managers regarding actions that local authorities can take to ease cost pressures on business and we plan to meet with them again shortly.

With regard to energy costs for businesses, in recent months, the trend of energy prices has been downward with a 10% drop in electricity prices for residents and Small and Medium Enterprises from 1 May, while gas prices have reduced by an average of 12%. These reductions will result in a further easing of cost pressures for businesses. I should point out that recent data from Eurostat demonstrated that energy taxes in Ireland as a proportion of total taxes are the 3^rd lowest in the EU and that we have the lowest energy taxes as a percentage of GDP. This means that Government is already playing an important part in keeping prices down.

In recent months, the trend of energy prices has been downward. In response to this trend, Comreg has lowered electricity prices for residential customers and Small and Medium Enterprises by 10% from 1 May. The Energy Regulator reduced gas prices by an average of 12%. According to the latest published Eurostat comparisons, smaller SMEs are paying 1% below the average EU 27 price - approximately 60% of ESB’s SME customers are in this category. We are also seeing greater competition among electricity suppliers which is helping to drive down costs for SMEs.

It is my view that we must never again allow costs to drift out of line with those of our competitors. We have learned a harsh lesson but as a government we have acted with resolve and will continue to take the necessary actions to restore our external competitiveness.

Credit Availability and Entrepreneurship

A leaner trimmer but stronger economy is critically dependant on active entrepreneurship with access to finance. Ireland has one of the highest levels of entrepreneurship in the EU. To help firms in the current downturn the Minister for Finance and I recently established the Credit Supply Clearing Group to examine where the flow of credit to viable business appears to be blocked and develop solutions that enable adequate business credit flow. In addition the Minister for Trade and Commerce, Billy Kelleher TD, is holding a series of regional meetings around the country to assess the factors affecting access to bank credit at local and regional level. These meetings allow the Government to hear at first hand the views and experiences of local business representative groups, local bank representatives and state agencies on access to bank lending. This will complement the work of the Credit Supply Clearing Group and feed into future Government policies on the issue.

Inward Investment

The IMF rightly highlighted the increasingly difficult environment for Foreign Direct Investment for all countries. Indeed, the recent Ernest & Young Country Attractiveness Survey showed inward investment was largely flat in 2008. However, that same report highlighted that Ireland experienced a significant increase in FDI projects in 2008, from 80 to 108 with Ireland moving from 13^th to 9^th place overall in terms of attractiveness for FDI.

Furthermore, Ireland grew its share of job creation FDI into Europe from 2% in 2007 to 4% in 2008 and grew its overall share of inward European FDI from 2% in 2007 to 3% in 2008.

Foreign owned companies continue to contribute significantly to employment and exports in Ireland. Foreign owned companies employed 152,364 persons in Ireland in 2008, according to the latest Forfás employment survey. Indeed, the strength of Irish export performance is in large part due to the resilience of the multinational sector, especially in areas such as chemicals and pharmaceuticals.

IDA Performance 2008

Despite the economic downturn, IDA remains guardedly optimistic of Ireland’s ability to continue attracting high level FDI in 2009 and beyond.

A total of 130 Foreign Direct Investment Projects won

• New Investments Secured up 14% on 2007
• Number of new companies investing in Ireland for the first time is up 16% on 2007
• Over 8,800 new jobs created
• A 22% increase in Research, Development and Innovation Projects
• Circa €2 billion in investments secured

In the current economic climate, there is enormous competition in a growing number of locations for high-quality highly mobile investment. Ireland is no longer a prime location for what might be called low cost/low skills, basic manufacturing and service activities. We must instead continue to facilitate and encourage current and new FDI clients to move up the value chain, into higher value added, higher skills products, functions and activities, more in tune with the our competitive strengths today. Continuing to lower costs, in areas such as tendering and office rents, has no small part to play in maintaining Ireland as an attractive location for investment.

Research, Development and Innovation

The global business community now sees Ireland as a prime location for Research Development and Innovation (RD&I) functions. Government policies such as the Strategy for Science, Technology and Innovation (SSTI) have played a key role in establishing this competitive advantage for Ireland.

We will continue to target high value investments in keeping with our current strategy outlined in the recent framework document “Building Ireland’s Smart Economy”. To this end, the focus of this Government and the enterprise agencies are focussing on the four essential ingredients which investors concentrate on – the right people and skills, a supportive environment and infrastructure, locations of critical mass and a positive and forward looking attitude – as the basis for the continued development of the economy and balanced regional development.

This ongoing emphasis on R&D is demonstrated by the fact business expenditure on R&D in Ireland rose to an estimated €1.6 billion in 2008, from €1.3 billion in 2005; carried out by 13,900 employees in 1,200 enterprises. Foreign owned companies accounted for about 70% of the R&D spend in 2005, and a similar proportion is likely for 2008. Already in 2009, a number of companies have announced significant R&D investment in Ireland with the support of IDA, including Sony, Toshiba, IBM and Alps Electric.

New/Emerging Sectors

The IDA’s main focus for FDI is on securing investment from new and existing clients in the areas of High End Manufacturing, Global Services and Research, Development and Innovation. New opportunities are also emerging in areas such as Clean Technology, Convergence and Services Innovation. I have authorised the IDA to reallocate its resources to reflect these new priorities.

I want to turn now to our recent trade performance.

Trade

The OECD Report referred to a ‘collapse’ in world trade in the last quarter of 2008 and the first quarter of 2009. Furthermore, it expects double-digit declines in the exports of OECD members to linger in the second quarter of 2009. However, Ireland has, to a considerable extent, out-performed this trend.

I would like to outline the positive standing of our export performance and the exceptional achievement of Irish exporters in recent years. Page four of the IMF Report ranked us second only to Belgium in terms of imports and exports as a percentage of GDP. A strong trading performance by Ireland is obviously crucial for our economic well-being.

Key achievements in recent times can be summarised as follows:

• Between 2003 and 2007 our total Irish exports increased by more than 6% per annum year-on-year.
• The latest preliminary merchandise trade statistics show that for April 2009 exports rose by 6% compared with the same month last year.
• Total trade over the same period, showed a trade surplus for the month of just over €4bn, the highest monthly surplus in eight years and the second highest on record.
• In addition, detailed data now published for the period January - March 2009, shows that merchandise exports for that quarter rose by 2% on the first quarter of 2008, with a strong performance in March having counteracted the declines that occurred in January and February.
• With data for the first four months of 2009 now available, our merchandise exports are running at 3% higher than the corresponding period in 2008.
• Over recent years net exports have made a very significant contribution to GDP growth. In 2008 the contribution of net exports was 2.7% and in the first quarter of 2009 it was 6.09%. In both cases this made a significant contribution to counteracting the other GDP elements that were negative.
• This performance is against a background of the global downturn and the adverse exchange rate between the Euro and both the US dollar and Sterling, which increases the cost of our exports to the US and Britain,

It is encouraging to note that both the range of export destinations and the commodities for the first quarter of the 2009 show significant increases. In particular exports to Switzerland rose by 53%, to Belgium by 20% and to the USA by 18%.

Our performance is especially significant when compared to our EU partners. The latest figures released by Eurostat, demonstrate that:

• at -1%, Ireland has the smallest rate of decline in exports in the EU for the period Jan-Mar 2009 as compared to Jan-Mar 2008.
• Denmark at –14% is the next best ranked country.
• European countries with similar levels of exports, by comparison, showed a decrease in their merchandise exports of, respectively, Sweden by -30%; Poland by -22% and Austria by -23%.
• The United Kingdom showed a drop in their exports of -24% for the same period.

In a year when it is estimated that world trade volume will decline by 16 per cent, we can be proud of our export performance and the contribution it has and will continue to make to our future economic performance.

The factors which I have outlined here, strengthening our economy by driving down costs, facilitating entrepreneurship, encouraging R&D and inward investment will continue to be the key dimensions to our stronger smarter economy.

2. Building a Greener Economy

The second dimension in the path to recovery is the opportunity to kick start a shift towards greener more sustainable growth.

There is huge potential for the Green Economy to help Ireland meet its economic and environmental challenges. The latest estimates put the size of the global environmental goods and services market as exceeding 700 billion dollars by 2010. The value of this sector for Ireland is growing and estimated to be more than 2.8 billion euro in 2008. I believe the Green Economy provides Ireland with a tremendous opportunity to create quality jobs in a sustainable and high growth sector.

My Department has long recognised the importance of this exciting and emerging Sector. For this reason, we commissioned a study to identify potential enterprise opportunities in the global environmental goods and services sector. This Report was published by Forfás last October and it identified a number of sub-sectors with greatest potential:

• Renewable energies,
• Efficient energy use and management (including eco-construction),
• Waste management, recovery and recycling,
• Water and wastewater treatment, and
• Environmental consultancy and services.

To take this further, as part of our programme for Economic Renewal, I have set ups a High Level Action Group on Green Enterprise to build on the work of this Study. This Group was launched in May 2009. It is being headed up by an experienced Chair from the private sector, Joe Harford and has members from both the private sector and the public sector. The Group is enterprise driven and has a strong enterprise focus, exploiting new opportunities for indigenous companies and attracting increased foreign direct investment. The Group is expected to produce a list of tangible action points by October 2009.

In addition to harnessing greener growth potential we have also encouraged sustainable growth through our National Energy Efficiency Plan which was launched on the 8^th of May last. The best method for businesses to cut energy costs is through energy efficiency. The new Plan includes advice and mentoring for Small and Medium Enterprises on the best means of reducing their energy costs. In addition, we have provided incentives to business to purchase energy efficient equipment and we will continue to promote energy efficient best practice. Sustainable Energy Ireland also offers a broad range of assistance to enterprises in achieving significant savings.

3. Building a Fairer economy

The human and economic cost of this recession has been foremost in our minds as we tailor our economy and resources to new economic realities. Our response is grounded firmly on two fundamental principles. Firstly, to ensure that the progression back to employment is structured and as swift as possible. Secondly, to ensure that people who have lost their jobs are offered opportunities for further education and skill enhancement.

LiveRegisterFigures

Earlier this week the Live Register figures for June were published showing a continued strong trend in the numbers of people signing on. When seasonal factors are taken into account there were 413,500 people signing onto the Live Register last month, a monthly increase of 11,400.

Based on these figures our standardised unemployment rate is currently 11.9%. However, we should also note that in the twelve-month period to the end of May 2009, 144,000 people left the Live Register as they had secured employment. This is important as it shows that jobs are still being created and we need to tailor our activation measures to ensure the unemployed have the best chance of securing employment as soon as possible.

Government’s Response

That said, one of this Government’s priorities is to respond to the challenge of our rapidly increasing unemployment levels. The Government are determined to provide those who are unemployed with the necessary support services and training to enable them get back into employment as soon as possible.

By providing these individuals with the opportunities to improve their skills and competencies we are not only increasing their employability but we are also improving the skills level of our entire labour force, which will benefit us all in the years ahead.

Since the end of last year the Government has taken a variety of actions to help those who are unemployed back to work. For instance, in recent months we have doubled the capacity in the job search support, training and work experience programmes.

In particular, the capacity of the job search supports system provided by FÁS Employment Services and the partnership-based Local Employment Service has been doubled to 147,000 places per year. As well as this, the number of people who can be offered training places under the auspices of the Department of Enterprise, Trade and Employment has been doubled to 128,000 places.

This includes a quadrupling to 92,000 places in short training courses, which are occupation-specific and will give individuals the specific skills they need to compete for specific job vacancies.

I have also introduced specific initiatives, which will enable approximately 3,600 redundant apprentices to progress their apprenticeships or receive training. This includes innovative new initiatives such as the employer based redundant apprentice rotation scheme (500 places) and the new Institutes of Technology training programme for redundant apprentices (700 places).

In relation to Community Employment we have, since the Supplementary Budget, provided an additional 400 places. This means that the number of places on Community Employment Scheme has risen to 22,700 this year.

Last month, I jointly launched, with my colleague Minister Hanafin, the Work Placement Programme and the Short Time Working Training Programme.

The work placement programme provides 2,000 six-month places to individuals who are unemployed, including graduates. Participants on the scheme will retain their social welfare entitlements. FÁS are currently taking applications for the programme and are in the process of matching providers and participants.

The short-time working training programme will provide training to people on systematic short time for the days they are not working (277 places). Individuals will retain their social welfare entitlements while on the programme.

Temporary Employment Subsidy Scheme

Last week the Government presented proposals to the Social Partners which focussed on measures to prevent job losses including the possible introduction of a temporary employment subsidy scheme which aims to helps employees retain their jobs and employers their skilled workforce in these difficult times.

It is intended that the scheme will be for manufacturing or internationally traded service companies and who were not in difficulty on 1st July last year. In addition, in order to qualify for the temporary employment subsidy, companies must be judged to be viable entities and capable of growth in the global upturn. The Government will continue to discuss this proposal with the Social Partners over the coming period.

Conclusion

This week’s statistics from the Central Statistics Office on Ireland’s GDP and the Live Register underscore the seriousness of the current economic situation. What is important now is that this Government is taking the necessary corrective steps and is prioritising policy areas that will expedite our return to growth. The OECD and the IMF have acknowledged that we are indeed on the right track and we welcome those views.

A slow recovery from the current economic crisis is envisaged, both globally and within Ireland. Here, property and banking will constrain growth in the short-term. However, as the property correction continues and Irish economy adjusts, we will regain our cost competitiveness and return to economic growth.

Last week the IMF stated that ‘determined execution over several years’ was required by the Irish Government. This Government is very determined to see through the necessary changes to fruition and we have the policies and strategies to accomplish this.

ENDS\ETE2082