Transcript Brian Lenihan - The Irish Economy

The Plan for Recovery
Presentation by Mr Brian Lenihan T.D.
Minister of Finance
at the 29th MacGill Summer School
21 July 2009
The economic crisis

Causes


Remedies




Domestic and international factors.
Sustainable public finances.
Regaining competitiveness and creating jobs.
Repairing banking system.
Hope for the future

By following these remedies, the economy
will recover.
2
Section 1
Causes of the crisis
3
Export-led growth in 1990s gave way…

25

20

15
% change
Growth in exports (annual, %)
10



5

0
-5


1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008
4
… to an overdependence on house building
New homebuilding, share of GDP
14

residential investment to GDP

12

long run average

10

8

2008

2006

2004

2002

2000

1998

1996

1994

1992

1990

1988

1986

1984

1982

1980


1978
0


1976
2


1974
4



6
1970

1972
%

5
We experienced a loss in competitiveness…
(rise in line = loss in competitiveness)
Competitiveness index*
130

125

120

115
1998 = 100

110

105

100



95

90

85

80

1995

1996

1997

1998

1999

2000

2001

2002

2003

*Trade-weighted exchange rate, adjusted for consumer prices.
2004

2005

2006

2007

2008
6
Spending increases and tax cuts during boom
years 2003-2007 yielded considerable benefits


Social welfare increases of 7-10 per cent annually.
Greater spending on education.






Spending per student rose by more than one-third at
primary and secondary levels.
Spending on health increased 80 per cent and
numbers employed rose 15 per cent.
Average public sector wages rose 6 per cent
annually.
Capital expenditure of €31bn during boom years.
Income tax cuts of €3¼bn.
National Pensions Reserve Fund of €21bn built up.
Source: Jim O’Leary (2009) and Department of Finance.
7
Economy has been severely affected by the
worst global recession since the Great
Depression
GDP growth in major trading partners*

1.0
2009

% change

0.0
2009
2010
2009
2010
2010
2009
2009
2010
2010
-1.0
-2.0

-3.0



-4.0

-5.0

-6.0

UK
*IMF forecasts, July 2009

US

Euro Area
8
Section 2
Remedies
9
2.1 Sustainable public finances
10
…but conditions have changed and we have to
borrow €20 billion this year to plug the hole
between spending and revenues

80,000

70,000
€ million

60,000

50,000

Revenues

Spending


Government spending and revenues

40,000

30,000

2000
2001
2002
2003
2004


2005
2006
2007
2008

2009(f)
Year
11
Public sector pay and welfare account for twothirds of all spending
Components of voted public spending 2009, € billions

21
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16





20

Payroll
Welfare
Programmes
Capital
7
12
Fiscal Consolidation: 5 per cent of GDP in 2009




July 2008 – Expenditure savings €1bn.
Oct 2008 (Budget) - Expenditure containment and
a range of revenue-raising measures yielding €2bn.
Feb 2009 - Expenditure savings of up to €2bn
including pay reduction for public sector.
April 2009 (Supplementary Budget) - Range of
expenditure adjustments and revenue increases
totalling €3.3bn (over €5 billion in full year).
13
Government has set out a multi-year fiscal
consolidation programme



Budget adjustments of €4 billion in
2010 and 2011.
Budget deficit will narrow to below 3%
of GDP by 2013.
EU Commission have endorsed these
actions.
14
Calls for “stimulus” are misguided



Limit to how much State can borrow.
Additional borrowing will push up debtservicing costs.
“Stimulus” leaks out of a small open
economy through higher imports.
15
2.2 Regaining competitiveness and
boosting employment
16
8

6

4

2

0
Unit labour costs (annual change, %)*


% annual change
Regaining competitiveness rapidly through cost
reductions
UK

Sweden
Finland
Portugal
Austria
Netherlands
Luxembourg
Italy
source: EU Commission Spring 2009 forecasts










France
Spain
Greece
Ireland



-6



EU27

a 7% improvement in
unit labour costs vs
the euro area
Germany

Denmark

Belgium
-4


Euro Area
-2


17
2.3 Repairing banking system
18
NAMA addresses the banking system’s most
serious problems simultaneously

Funding: Banks can’t lend unless they attract
funds.



NAMA reduces uncertainty about banks’ balance
sheets.
Banks receive bonds that can be cashed at ECB.
Bad loans: Banks can focus on lending to
SMEs and households while NAMA works out
distressed loans.
19
NAMA is not a bail out for banks or builders


NAMA to buy loans at a discount
 not a bail out for bank shareholders.
Borrowers remain liable for full value of
loans
 not a bail out for borrowers.
20
NAMA expected to pay its own way


Interest received on performing loans
expected to roughly match interest paid
on bonds.
Proceeds on loan repayments and
property sales expected to pay off
bonds in full.

Any shortfall recouped through levy.
21
Section 3
Hope for the future
22
Exports are proving resilient and will drive
growth and jobs as competitiveness improves
EU member states’ export growth*

-5

-10

-15

-20

-25

-30
UK
Sweden


Finland

Portugal
Austria







Netherlands
Italy

France
Greece

Spain
Ireland
Germany


Denmark

Belgium
Euro Area

EU27

% change

0
*First quarter 2009 compared with first quarter 2008.
23
External position moving into balance

% of GDP
Balance of payments current account position*

3

2

1

0

-1

-2

-3

-4

-5

-6

2000

2001

2002

2003

2004
*Department of Finance projections, June 2009.

2005

2006

2007

2008

2009

2010

2011
24
The Government has the right policies and the
economy is on the road to renewal
“Our assessment is that if the world economy recovers
significant momentum by 2011, the Irish economy, as
long as it regains competitiveness, can be expected
to grow quite rapidly in the 2011-2015 period…”
ESRI, May 2009
The policies are right, what is needed now for recovery
is “determined execution” of NAMA and the
Government’s budget plans.
IMF, June 2009
25