john hurley : prospects for productivity and growth in ireland and the euro area opening statement of mr john hurley, governor of the central bank and financial services authority of ireland, at the central bank and financial services authority of ireland conference “ prospects for productivity and growth in ireland and the euro area ”, dublin, 15 september 2006. * * * ladies and gentlemen, i would like to welcome you to this one - day conference on the prospects for productivity and growth in ireland and the euro area. i extend a special welcome to those who have come from abroad, in many cases travelling long distances. today's event brings together a wide range of participants to discuss these important topics, not just academics and policy - makers but also representatives of commercial banks, international organisations, the public sector, industry groupings and economic commentators. the day will be divided into two sessions, the first dealing with the irish economy and the second with the euro - area economy. these sessions will begin with a number of presentations by invited speakers, including some of the bank's economists, and will be based largely on the speaker's own research. after contributions from discussants, there will be an opportunity for a more general discussion of the issues. of course, we do not expect that the conference will end with a consensus on all the issues. the conference topics are ones on which there can be quite a range of views and each of today's participants will naturally present their own particular analysis. however, i hope that, by the end of the day, most of you will feel this event has been useful and that it will stimulate further debate on matters that are of critical importance to ireland and the wider euro area. i would like to stress that this conference is about growth prospects over a number of years or even decades. it is not about what will happen in the next quarter, the interpretation of the latest data or any aspect of the conjunctural situation. it focuses instead on the medium to longer - term growth potential of the economies in question and the factors that will determine this potential over time. at the most basic level, these factors are the supply of labour and capital and the increasing efficiency with which these are used over time, that is, total factor productivity growth. the evolution of each of these three individual components - labour, capital and productivity - is a very complex story in itself. for example, the supply of labour reflects developments in a range of underlying variables, not just demographic developments such as ageing and

attained mainly through a reduction of about six percentage points, to 44 %, in the ratio of government expenditure to gdp. what does this target mean in terms of the savings that need to be made? during the past five years government expenditure has been increasing by an annual average of lm55 million. at this rate, it would exceed lm1. 1 billion in 2007. but the total contemplated in the convergence programme for that year is about lm950 million. in other words, the average annual increase in expenditures during the next three years must not exceed lm5 million, which is just one - tenth of the present growth rate. this implies that measures must be put in place now that would by 2007 reduce expenditures by lm150 million. required expenditure and taxation reforms the attainment of this objective clearly requires extensive reforms. in this context, i would like to propose some policy orientations which would help to reduce the deficit to the planned level. for this purpose, it is useful to look at government expenditure from two perspectives. the first is in terms of what it is buying. the second focuses on what such expenditure is achieving. the first of these approaches helps to identify the potential for savings. this year over 20 % of total spending, some lm200 million, will go towards wages and salaries and another 10 % will go to public sector bodies, again largely to finance human resource costs. in short, the public sector wage and salary bill absorbs close to one - third of total budgetary expenditures. against this background it is imperative that the current negotiations for the renewal of collective agreements in the civil service and in the public sector recognize the need to cut spending. it is important that any wage increases be matched by measurable productivity improvements. it is equally necessary to make better use of the human resources available by strengthening both the management culture and work practices. it must also be accepted that the public sector cannot continue indefinitely to carry the cost of employees who are effectively redundant. a time limit must be set beyond which this burden will no longer be carried, and training and redeployment schemes should be strengthened in the meantime to facilitate the transition. another third of government expenditures is absorbed by social security benefits, a category whose growth over time is conditioned by increases in wages and prices, demographic pressures and the need to preserve the social fabric. along the way, however, the original priorities seem to have been lost sight of. as a result, malta has a welfare system