Lenihan admits Irish economy was overheated
The Dáil is to debate the financial crisis in the wake of two reports that predicted a huge contraction in the economy and surging unemployment next year.
In a statement released this lunchtime, Government Chief Whip Pat Carey said he would meet Opposition party whips to arrange the debate on the IMF and OECD reports. He said it was hoped the debate could take place on Friday, July 3rd.
“This will give members on all sides of the Dáil time to read the reports and then make informed contributions,” Mr Carey said.
According to a bleak assessment by the International Monetary Fund (IMF) published yesterday, Ireland’s banks face losses of €35 billion to the end of 2010, the economy will shrink by 13.5 per cent from 2008 to 2010 and unemployment will climb to 15.5 per cent next year.
The Organisation for Economic Co-operation and Development (OECD) said yesterday the economy will shrink by 9.8 per cent this year. The Paris-based think-tank has said that unemployment will reach 14.8 per cent in 2010, and that the country’s gross domestic product (GDP) will contract by 14 per cent over the three years to 2010.
Mr Carey said the IMF report “broadly endorses the Governments actions to deal with the current economic challenges. He added: “It is ironic that many of the measures now commended are the same measures which the Opposition have opposed blindly.
“On a procedural level within the Dáil, it is worth noting that the Opposition had their Private Members time available to discuss these reports. Despite this, the Opposition pursued a time wasting parliamentary tactic delaying discussion on essential pieces of legislation.
“The Government welcomes this debate, and are more than happy for it to take place, during Government time.”
Minister for Finance Brian Lenihan said earlier he shared the IMF's “broad assessment” that the Irish economy had overheated and this was contributing to the difficulties facing the country’s finances.
“We did overheat the economy, I have always accepted that and I made that clear in my last Budget speech,” Mr Lenihan said, adding he had “always acknowledged that to the extent that governments contributed to this, they must take responsibility for it.”
Mr Lenihan said the report from the global financial watchdog was supportive of the recent measures taken by the Government to try and address the Exchequer deficit and the banking crisis.
The IMF report says that during the housing boom “Ireland was perhaps the most overheated of all advanced economies and suggested that Government fiscal policy “needed to be substantially more aggressive than it was”.
“I wasn’t a member of that Government, but that is not the fact I supported it. I sat in Dail Eireann during those years and I didn’t see anyone making those points at that stage, he told RTE’s Morning Ireland programme.
Mr Lenihan said all the decisions being taken by the Government with regard the banking crisis, the National Asset Management Agency (Nama) and the budgets “were the right decisions”.
The Minister claimed that the IMF was “totally supportive” of what the Government was doing and said this was in contrast to public commentary on its budgetary decisions and Nama, including “nonsensical interrogations in Dail Eireann from the Opposition parties who haven’t put forward a single positive idea”.
In relation to next year’s Budget Mr Lenihan said the Government had indicated to the European Commission that it would seek an adjustment of €4 million with a minimum of €2.25 billion coming from spending cuts and €1.75 billion coming from higher taxes.
“I have indicated many times since the Budget that I believe we have reached the limits as far as income tax is concerned”.
He said a property tax would have to be paid out of income and “I don’t believe that a property tax can be introduced that would have any substantial yield next year”.
“There aren’t any easy tax solutions so the bulk of the problem must be addressed through expenditure reductions”.
In its report the IMF said pricing of the toxic bank assets to be moved to the State’s “bad bank” Nama might be easier if the banks were temporarily nationalised.
“An advantage would be that prices at which these assets are transferred would become less of an issue,” said the IMF, adding that such a move could also be used as a step towards mergers and the restructuring of the banking sector.
However, IMF report notes that the Irish Government “disagreed with the staff’s view that pricing of bad assets would be any easier under nationalization.”
Mr Lenihan what said the IMF report said was that nationalisation may be “complementary” to Nama and said he does not want to engage in “wholesale nationalization” of the banks.
“What I said in the [April] budget was that if the crystallisation of the loses at any particular bank mean that further investment had to take place in the banks it would take the form of ordinary equity”.
He said the IMF was not advocating a wholesale nationalisation of the Irish banks and pointed to the recent report from Anglo Irish Banks and the outflow of deposits that followed the Government’s takeover of the bank as an example of the dangers of wholesale nationalisation.
Mr Lenihan said the reason the Government had guaranteed the six Irish banks was to assure international investors that “their investments were safe and to assure domestic depositors that their deposits were safe”.
“As long as they [the banks] have these extensive defective loans on their balance sheets they will have a shortage of working capital to advance to small business”.
He said the Government was proceeding as quickly as possible with the establishment of Nama.
“The proposed National Asset Management Agency (Nama) is potentially the right mechanism to separate the good from the bad assets. Its success requires a comprehensive and realistic assessment of impaired assets,” the report says.
According to Mr Lenihan the issue of rising unemployment would be best dealt with by improving the State’s competiveness.
“To secure employment in this country we have to put the economy back on a sustainable path,” Mr Lenihan said.
The IMF issued a bleak assessment of the Irish economy last night saying that it will contract by 13.5 per cent between 2008 to 2010 while unemployment will rise to 15.5 per cent next year.