Fiscal Responsibility Bill 2012

I am grateful for the opportunity to speak on this Bill, which was in draft form at the time of the referendum on the Stability Treaty. We had an opportunity during that referendum campaign to debate exactly what was going to happen and the electorate went into vote knowing what the impact of the treaty would be. What we are now putting into law received a resounding mandate from the people.

The Bill details the commitments required of each member state to underpin the main provisions of the stability treaty, namely the setting up of the ESM, the mutualisation of debt and the supervisory mechanisms that are considered necessary. There is no doubt that a new supervisory system is absolutely essential to control and monitor spending in countries and to ensure that debt accumulation is kept under control. This is required of all countries, as a quid pro quo for the establishment of the ESM and is perfectly understandable. It is also clear that new rules and measures are needed to ensure that alarm bells will ring very early on when countries are at risk, even in a small way, of veering off a fiscally sustainable path. Of course, we had rules in place for years, including the 3% of GDP rule, which was observed by some countries and ignored by others.

It is ironic that it was observed by Ireland almost until the collapse of the economy. That rule did not prevent or even signal the economic crisis that befell us because the low deficit-to-GDP ratio did not reflect the nature of our GDP growth rate. It masked the unsustainable structural debt created by phenomenal increases in expenditure based on the property bubble and the taxes that flowed from it. Ireland is a classic example of a country with a structural deficit. More than any other country in the Eurozone, we should enthusiastically embrace the discipline of the new budgetary measures. They will not directly help us now, but they should prevent similar problems arising in the future and, just as important, allow other Eurozone countries to avoid them. Ireland may be an island, but if we have learned anything from this crisis it is that no country is an economic island.

Our debt-to-GDP ratio did not receive as much attention as other issues during the course of the referendum, but it graphically demonstrates the precariousness of our financial position. The new requirement, with which we do not have to begin to comply until we have reduced our deficit, is to have a 60% debt-to-GDP ratio. This is probably a conservative level, given that many economists think the level of debt can safely increase to 80% of GDP, but the more cautious figure is understandable. Our problem is that our debt-to-GDP ratio is already far in excess of what anybody would consider sustainable and despite all the sacrifices people have made, it continues to grow.

The level of debt was projected to grow until the end of next year, when it would peak at a massive 120% of GDP before the budgetary measures introduced in the past few years, combined with economic growth, would start to reduce it. That would be a reasonable assumption if we had growth and it might still happen, but there is little sign of the growth required to lift us out of the hole. It would be folly not to worry at this stage. As an exporting country, our recovery depends on growth in our markets, but that is not happening. Ironically, our rate is forecast to grow at a faster rate than that of our customer countries. If our debt is to become sustainable, we need our exports to grow. That is why it is important that the promise made at the June summit is kept.

The decision to separate bank debt from sovereign debt was made in recognition of the potential for unmanageable levels of debt to sweep away the best efforts of any country. Nobody wanted that to happen to Spain, Italy, Cyprus or any other country. Once the agreement was announced, it became self-evident that Ireland should not be expected to carry a similar burden. The Government was to the fore in making the argument that the Spanish sovereign and taxpayer should not be expected to carry all of that country’s bank debts. The Government should be commended for its persistence in making this argument and being in a position to push home the point in the context of the Spanish crisis. Spain is playing a smart game. It is using its leverage to best effect because it saw how Ireland’s leverage disappeared immediately once we had accepted a bailout. It may ultimately have to accept a bailout and all the conditions accompanying it, but in the meantime it is using the threat its collapse poses to the euro to get the best possible deal. I do not blame Spanish negotiators for this strategy because we got a shocking deal when we accepted the bailout. I do not blame anyone for this because it is easy in hindsight. We were not in command of all the information and, whether because of ignorance or desperation, accepted a bailout without examining in detail whether the conditions were too onerous.

We knew at the time that we were accepting the bailout to save the euro. Germany, Finland and the Netherlands should realise that the euro and their own economies will be at risk if the bailout fails. If our bailout programme does not work and we are unable to return to the market, we will know the price of co-operation next time around. I do not say this as a threat but because solidarity is a two way street. The Taoiseach was correct to state any reneging on the commitment given in June to use the ESM to buy into our viable banks would be a monumental breach of trust. I believe the Government will deliver on that deal because the European Union will realise it makes no sense from its perspective to allow our debts to become unmanageable. While I understand Deputy Dara Calleary’s position, I do not agree that the Irish Presidency will be a barrier to getting a deal. I do not think we will enjoy any favouritism, but we will certainly be a key driver in the decision-making process. If anything, that will help rather than hinder.

Nobody expects the ESM to compensate us for all of our bank debt. We will have to carry some of it ourselves and the banks are only worth a fraction of the price we paid for them. However, it could help us to reduce our burden by making our debt more manageable. This year the Government will spend in the order of €60 billion in running the country, of which €8 billion will be used to service our debts. This is dead money. We will add approximately €15 billion to this burden next year. This runs the risk of reducing the overall amount of money available to the State by contracting domestic spending and, consequently, tax revenues.
These challenges put this morning’s call by the leader of Sinn Féin for a supplementary budget into perspective. It defies belief that people fail to see the reality of our current situation to the extent that they can call for a supplementary budget at this point in the year. I would love to be able to call for a supplementary budget, but it will be a long time before we are in that space.

I welcome the Fiscal Responsibility Bill, the introduction of fiscal rules and the establishment of the fiscal council on a statutory basis in order to underpin the stability treaty and the commitment to the ESM. However, unless the baby of the stability treaty, the ESM, is used to ensure stability by means of what was promised in June, the other measures are meaningless to Ireland, the eurozone and the entire European project.