The Plan for Recovery

1. The Plan for Recovery Presentation by Mr Brian Lenihan T.D. Minister of Finance at the 29th MacGill Summer School 21 July 2009

2. The economic crisis • Causes • Domestic and international factors. • Remedies • Sustainable public finances. • Regaining competitiveness and creating jobs. • Repairing banking system. • Hope for the future • By following these remedies, the economy will recover.

3. Section 1 Causes of the crisis

4. 25 20 15 % change 10 5 0 -5 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Export-led growth in 1990s gave way… Growth in exports (annual, %)

5. 14 residential investment to GDP 12 long run average 10 8 % 6 4 2 0 2000 2002 2004 2006 2008 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 … to an overdependence on house building New homebuilding, share of GDP

6. 130 125 120 115 110 1998 = 100 105 100 95 90 85 80 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 We experienced a loss in competitiveness…(rise in line = loss in competitiveness) Competitiveness index* *Trade-weighted exchange rate, adjusted for consumer prices.

7. 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.

8. 1.0 0.0 -1.0 -2.0 % change -3.0 -4.0 -5.0 -6.0 UK US Euro Area Economy has been severely affected by the worst global recession since the Great Depression GDP growth in major trading partners* 2009 2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 2010 *IMF forecasts, July 2009

9. Section 2 Remedies

10. 2.1 Sustainable public finances

11. Government spending and revenues 80,000 70,000 60,000 € million Revenues 50,000 Spending 40,000 30,000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009(f) Year …but conditions have changed and we have to borrow €20 billion this year to plug the hole between spending and revenues

12. 21 16 Payroll Welfare Programmes Capital 20 7 Public sector pay and welfare account for two-thirds of all spending Components of voted public spending 2009, € billions

13. 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).

14. 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.

15. Calls for “stimulus” are misguided • Limit to how much State can borrow. • Additional borrowing will push up debt-servicing costs. • “Stimulus” leaks out of a small open economy through higher imports.

16. 2.2 Regaining competitiveness and boosting employment

17. 8 6 4 2 % annual change 0 -2 a 7% improvement in -4 unit labour costs vs the euro area source: EU Commission Spring 2009 forecasts -6 Italy UK EU27 Spain Ireland Austria France Finland Greece Portugal Sweden Belgium Germany Denmark Euro Area Netherlands Luxembourg Regaining competitiveness rapidly through cost reductions Unit labour costs (annual change, %)*

18. 2.3 Repairing banking system

19. 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.

20. 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.

21. 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.

22. Section 3 Hope for the future

23. 0 -5 -10 % change -15 -20 -25 -30 UK Italy EU27 Spain Austria Ireland Finland France Greece Sweden Belgium Portugal Denmark Germany Euro Area Netherlands Exports are proving resilient and will drive growth and jobs as competitiveness improves EU member states’ export growth* *First quarter 2009 compared with first quarter 2008.

24. 3 2 1 0 -1 % of GDP -2 -3 -4 -5 -6 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 External position moving into balance Balance of payments current account position* *Department of Finance projections, June 2009.

25. 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