Address by the Minister of Finance, Mr. Brian Cowen T.D. to the Annual Dinner of the Institute of Bankers
3 November 2005
President, distinguished guests, ladies and gentlemen, I would like to thank the Institute for inviting me to your annual dinner.
Before proposing the traditional toast to the Institute, I would like to avail of this opportunity to say a few words on some themes influencing the future environment for the banking community and, indeed, for the economy and the community at large.
Economic prospects for the Irish economy remain very positive – notwithstanding the increased uncertainty evident in the international economy. There is a broad consensus among commentators that the Irish economy is set to continue to perform strongly and to expand close to its growth potential both this year and next. Indeed, over the medium-term the economy is expected to grow at almost double the rate forecast for the euro area overall.
Some economic and news commentators have suggested that I have scope to provide for significant increases in expenditure in the forthcoming publication of the Estimates and Budget for 2006 as a result of buoyant revenues under some tax heads so far this year, particularly strong VAT and stamp duty returns due to a strong performance by the construction sector. Without wishing to sound over-cautious I should point out that the tax receipt figures to date include almost €500 million in receipts from Revenue special investigations which will not form part of the tax base going forward. It is perhaps more useful to look at the costs of certain measures in Budget 2005. For example, the social welfare package for this year, widely perceived as a generous one, cost over €870 million in a full year while taking the minimum wage out of the tax net cost almost €400 million. Looking at these figures perhaps helps to put in context some of the comments we’ve heard in relation to the end-of-October Exchequer figures published by my Department yesterday evening.
Potential downside risks to our economic performance will, of course, also need to be monitored closely and evaluated carefully in finalising the macroeconomic and fiscal framework for Budget 2006.
Stability in our public finances has been hard earned. I intend maintaining a responsible approach which will ensure that the strategic direction of our economy will focus on sustainable real improvements in public services, social provision and infrastructure.
We need to maintain, in particular, a sharp focus on our cost competitiveness. This is a key factor, strongly influencing our overall economic performance, which remains firmly under our own control. Wage increases over and above that warranted by productivity gains - whether in the private or public sector – cannot be justified and will erode the capacity to realise our growth potential and therefore compromise further economic and social progress. Our cost competitiveness can only be improved by further enhancing our transport infrastructure. Getting our goods to the market and making sure our citizens get to work requires an effective road and public transport system.
The capital spend envisaged by Government in these critical areas will be a key objective in expanding the capacity of the country to maintain economic growth. My approval of the Transport 21 Framework is predicated on assumptions that the economy will grow over the medium term at around 4.½% per annum and continued prudent management of the public finances that is fully compliant with the Stability and Growth Pact.
The Transport 21 Framework ensures that investment in our transport infrastructure will continue to be a key priority for this Government. The scale of the Framework is very ambitious and challenging, €34.4 billion over ten years, involving projects of unprecedented scale in the area of public transport. To put these in context, the largest infrastructure project in the United Kingdom at the moment is the construction of the Terminal Five at Heathrow at a cost of over €4 billion. Notwithstanding the predictable negativity from certain quarters I believe that we can rise to the challenge. One has only to look at the “Can Do” attitude that now exists in this country to see that major challenges, across a broad range of economic activity, are now being met. One good example is the very successful development of the roads programme in recent years by the National Roads Authority. Of the twenty-two major roads projects currently under construction, nineteen of them are on or ahead of schedule and within budget. Commuters and businesses will benefit from projects like the Kilcock-Kinnegad Motorway finishing well ahead of schedule later this year. It is only proper that this level of success is acknowledged.
It should also be acknowledged that procuring agencies such as the National Roads Authority and the Rail Procurement Agency have been building up a level of expertise of a standard which is as good as that available to similar agencies abroad. The successful implementation of the LUAS to date under the aegis of the Rail Procurement Agency also deserves proper acknowledgement. That agency’s experience and expertise will be utilised in the roll out of the public transport element of Transport 21.
I and my Government colleagues are also determined to put in place the necessary expert personnel to implement Transport 21 on time and within budgets in line with the best international practice for projects of this scale and magnitude.
The overall investment of €34.4 billion in Transport will involve a significant investment of €8 billion through Public Private Partnerships, of which €2 billion will be toll-based road investment. PPPs are playing, and will continue to play, an important role in providing parts of our improved road network. Some of the road projects that are scheduled to finish ahead of schedule are being procured through the PPP process.
Investment in our capital programme has continuously grown since we came into Government in 1997. There has been much spurious misrepresentation that many projects have ran well over budget due to poor cost control measures and bad management. The relevant yardstick for measuring cost overruns on capital projects is the contract price and not the original pre-tender estimates which may have been drawn up many years ago and may bear no relation to the specification of the project tendered for or indeed completed.
The roll-out of the Roads Programme to date has been facilitated by the fact that An Bord Pleanala oversees planning decisions for major roads and motorways. Under proposals in the forthcoming Critical Infrastructure Bill a new Strategic Infrastructure Division will be established in An Bord Pleanala which will handle decisions on all major infrastructure projects and not just major road projects. The Board will take on a more proactive role in the early stages of planning such projects so that key planning issues are addressed early on and, if necessary, appropriate mitigation measures proposed. The overall objective is to provide greater certainty on the time frame for delivering planning decisions for strategic infrastructure projects.
Outlook for the Financial Sector
The central scenario underpinning the Central Bank’s Financial Stability Report published on Tuesday last, is also that the outlook for the economy is broadly favourable. In overall terms the report concludes, on the basis of a comprehensive and wide-ranging analysis that the Irish banking system remains in a good state of health and is reasonably well placed to weather possible adverse changes in economic conditions.
A key finding of the report is that a range of fundamental factors such as growing employment and incomes, falling inflation and low interest rates have supported the pattern of mortgage growth and associated debt levels.
The report does, however, highlight the continuation of strong mortgage credit growth as an important risk factor. It, therefore, emphasises the importance of responsible behaviour by both borrowers and lenders, to factor into their financial decision-making, the prospective impact of potential changes in the future economic environment.
IFSC and the International Financial Services Sector
I would also like to say a few words this evening regarding the IFSC and the international financial services sector in general, and its continued contribution to our economic wellbeing.
As you well know, 2005 marks the end of the special tax regime that has been in place for quite some time for the IFSC. These special tax breaks served us well in establishing Ireland as a centre of excellence for the provision of international financial services. Since the announcement of the general 12 ½ % rate and the ending of the special 10% IFSC and Shannon tax regimes, much work has been done over recent years to ensure that the right policy environment and benefits are in place to meet the needs of the international financial services sector, while at the same time being appropriate for the overall economy.
According to a recent Finance Dublin survey, employment in the international financial services sector now stands in the region of 17,600. If we add to that some 4,000 back office support jobs, this brings the total figure employed in the sector to over 21,600. As such the sector continues to show signs of strong growth and will, I believe, continue to develop while operating under the general corporate tax code.
Rather than being seen as a problem, I view the end of the special regime as a new challenge in how to ensure the continuing success of the sector, maintaining this level of high value-added employment and the other economic benefits arising from it. My Department is in contact with the financial services industry on an ongoing basis to discuss issues pertinent to the continued success of the sector. This discussion process has led in the past to changes in tax law facilitating the industry, such as the Holding Company measure, the tax treatment of Common Contractual Funds, the reduction in the rate of Companies’ Capital Duty and the Asset Covered Securities legislation. The banking sector has also benefited from the removal of technical or administrative impediments to business, such as the changes made in relation to Encashment Tax in last year’s Finance Act.
In addition, you will be aware of the strategic review of the financial services sector currently underway that is driven by the Department of the Taoiseach. My Department is actively engaged in this process and will contribute, within the parameters in which we operate, to ensuring the continued vitality of a sector that has contributed so much to our economy.
In concluding and proposing the toast this evening, I would like to commend the Institute of Bankers for its invaluable, long-standing role in underpinning the education and professional development of banking professionals throughout the island of Ireland. The deepening and widening of the Institute’s remit over time beyond banking, to embrace the broad spectrum of financial services, is a clear reflection of the enormous range of financial services now provided both domestically and internationally from Ireland. It is a clear manifestation of the increased scale, sophistication and complexity of the financial services industry successfully developed here in Ireland.
The Institute’s mission to develop fully the professional potential of all those working in banking and financial services has obviously played no small part in providing impetus to the increased professionalisation of financial services provision and to the development of a banking and financial services industry in Ireland to world class standards.