We are living in turbulent times. The difficulties facing our economy are the most challenging in the history of our State.
We are experiencing an international recession of unsurpassed severity, prompted in turn by the worst crisis in international financial markets in 60 years. Every major world economy is suffering or will suffer this year. Our problem is compounded by unhelpful exchange rate movements and by our over reliance in the recent past on the housing sector as the driver of growth.
Of course, if we could have foreseen the extent of the international crisis, we would have done things differently. Perhaps as a Government we were over-ambitious in trying to meet the understandable demands of our people for more and better public services when the resources were there.
There is little to be gained in beating ourselves up over this. We have to get on and do what we can and do it in a united way.
These are very testing times for our party. But we, of all parties, should know our obligations to the country must take precedence over party or sectional interests. Sean Lemass along with Ken Whittaker rescued this country from the abyss in the late fifties. Ray McSharry, did it in the late eighties. Now, we must measure up to our responsibilities. Our determination must be to do what is right for the country. We will leave the pursuit of political populism to others.
There are three inescapable facts we must all face:
We have an €18 billion hole in the public finances. The world is looking on. We need to persuade those who might invest here that we are capable of taking the tough decisions now to get our house in order. If we cannot do that, we are in danger of losing all the gains we have made over the last twenty years.
Thankfully, our establishment of, and investment in, the National Pension Reserve Fund means that our net debt is comparatively low and this, together with the cash balances built up by the NTMA allows for a better funding position than would otherwise be the case.
Nonetheless we must get our cost base down as quickly as possible and become the highly competitive economy we once were, if we are going to achieve future export-led growth.
Last week, in the teeth of implacable opposition, this government took an important step on the road to our recovery. We voted through the bill that gives effect to levy that will see public servants pay on average 7.5% to the cost of their pensions. We know this will be painful for public servants and their families. We know it has caused anger. But the choices facing us are stark. Unless we take the pain now, greater sacrifices will be needed at a later date. Let us be clear: this is not about targeting public servants. It is about asking those in secure, guaranteed pensionable employment to make the same adjustment that is taking place across the economy. The greatest tragedy of any recession is joblessness. Every day, workers in all our communities are losing their jobs. Each day last month, 1,000 workers became unemployed. Many others are maintaining their jobs only by taking cuts in their pay, in some cases of up to 25%.
The public service pay bill accounts for one third of all expenditure. To get our public finances back in order, there simply was no alternative but to make savings in the area of pay and pensions.
It is also essential that savings be made in the public pay bill as part of the comprehensive national effort to adjust pay bills downwards with the aim of restoring competitiveness in our economy.
There has been much talk in the last few days about the need to increase tax. Both the Taoiseach and I have said tax increases and the broadening of the base are an essential part of our plan to get the country back on the road to economic recovery.
But there is much ill-informed comment about taxation. We constantly hear that somebody else should pay: we all have to pay. It is important to point out that the top 1% of all earners whose income is over €200,000 contribute 20% of the total income tax yield. The 2% who earn over €150,000 contribute 28%. And the 6% who earn over €100,000 contribute 47% of the entire income tax take.
And let us look at the income levy we introduced in the budget. This is levied on gross income; that is, before any deductions. Like income tax, those earning over €100,000 pay a very high percentage of the income levy yield: some 37% in fact.
Over the last ten years, when we could afford it, we progressively reduced the tax burden on the lower paid to the point where 40% of all income earners are now outside of the tax net.
According to the latest figures, a married one-income couple with two children on average earnings in Ireland continues to have the lowest tax wedge in the entire OECD. In fact, for the sixth consecutive year, when cash benefits from the State are taken into account, such families face a negative tax burden, receiving more money in cash transfers from the State than they pay out in income tax and social security contributions.
In Britain, all income above €6,860 is subject to income tax at 20%. In this State, workers can earn €18,300 before they start paying tax, PRSI or income levy.
Our minimum wage is the second highest in the EU. When the minimum wage was introduced in 2000, it was subject to income tax and PRSI. It is now well outside the tax net
You see, our tax system is highly progressive. Those with high incomes pay most. Those on low incomes pay least and those on the minimum wage pay nothing at all.
And yes, tax increases have to be part of the solution to our economic difficulties. But there can be no return to the bad old days of 64% tax rates. Any changes we introduce have to be carefully considered so that they do not impact on employment or our competitiveness. Any tax changes must also be just and fair so that all who benefit from state services pay according to their means. If the main opposition parties have ideas about how we should progress on the issue of tax, I am prepared to listen.
Another essential part of our plan for recovery is expenditure reduction. If we are to increase taxes, I want to be able to say in all confidence that public services are being delivered in a cost effective and efficient manner. The Special Expenditure Review Group, under the chairmanship of Colm McCarthy is busy in my Department and will be making proposals to me shortly. The Government will consider those proposals very carefully and if any savings can be made in advance of the next budget, we will gladly make them.
It is important that this State can pay for itself and put its day to day running costs on a sustainable basis. That is what we do in our own households: the State can be no different.
We Irish are natural sceptics. We tend to wallow in our ills and beat ourselves up. There is an understandable desire to lay blame and in a democracy, the government must take responsibility and we do.
But, this week, it was useful for us all to be reminded by no less a person than Jean Claude Trichet, that we have within us the capacity to work our way out of this acute downturn.
The same ingenuity, hard work and entrepreneurial spirit that built the economic miracle of the last twenty years can put us back on the path to growth. This world recession will pass. We must all pull together to make sure Ireland can secure maximum benefit from the inevitable up turn.