Mr. Seamus McCarthy:

The annual finance accounts present an account of the payments into and out of the Central Fund of the Exchequer, together with a set of statements that analyse the transactions. The financial statements of the national debt, prepared by the National Treasury Management Agency, are presented in full as Part 2 of the finance accounts. The chapters that are the subject of today’s meeting were compiled to highlight key aggregates and trends in Central Fund transactions and broader State liabilities, as well as overall financial transactions between Ireland and the European Union.

Chapter 1 summarises the Exchequer’s financial outturn for 2011, when Central Fund issues exceeded receipts by €25 billion. About €11 billion of the deficit was due to payments made in 2011 in respect of bank recapitalisation and promissory note payments.

Chapter 2 sets out trends in the general government debt since 2007, when it stood at around €47 billion. The debt has risen sharply since then, reaching €169 billion by the end of 2011. Official general government debt figures for 2012 are not yet available from the Central Statistics Office, but the Department of Finance, as part of its projections for budget 2013, estimated that it would be around €192 billion or 118% of GDP at the end of December 2012.

General government debt at the end of 2011 included the promissory notes issued by the Minister for Finance to IBRC and the Educational Building Society as part of the process of bank recapitalisation. These were not included in the NTMA’s financial statements of the national debt, and are disclosed only in a footnote on page 24 of the 2011 finance accounts.

IBRC had used the promissory notes it received as collateral for borrowing from the Central Bank. When the special liquidator was appointed to IBRC last month, the Central Bank became the owner of the outstanding promissory notes, to the value of €25 billion. Government bonds with a floating interest rate and an average maturity of 35 years were issued to discharge the liability under the promissory notes, thus adding €25 billion to the national debt. Because this was an effective reclassification, the overall general government debt balance was not affected by the refinancing.

The general government debt was the main liability of the State at the end of 2011, but there were other significant State liabilities that are not accounted for in the finance accounts. There are very substantial State liabilities arising from the future pension entitlements of public servants, relating to their past employment, but no estimate was made of that liability at the end of December 2011. The last available estimate, presented in a previous report, was an amount of €116 billion as at the end of 2009. Since that estimate was made, there have been significant changes in public service pay and pension entitlements. In addition, there may need to be revisions in the key assumptions underpinning the estimate, particularly in regard to projected future salary increases and the rate used to discount future estimated payments. These could have a significant impact on the estimate of the liability. I have recommended that actuarial reviews should be carried out at regular intervals to ensure that the State is aware of the long-term cost impact of public service pensions and the timing of outflows.

Future commitments under public private partnership contracts in place at the end of 2011 were estimated at €4 billion. The cost implications of these contractual commitments has been dealt with by the committee on a number of occasions. In my view, those financial commitments should formally be recognised in the finance accounts.

The purpose of chapter 3 is to provide a further update of the costs to the State of the range of banking and insurance measures implemented in relation to the ongoing crisis in the financial sector. The measures taken affect a number of sets of financial statements, and do not all impact on the Central Fund of the Exchequer. As a result, their full financial impacts can be difficult to ascertain. While the chapter contains information up to around mid-2012, the financial position is evolving. The Accounting Officer will be able to give a more up-to-date position on the cost of the bank guarantee, liquidity support for banks, recapitalisation and other restructuring measures.

By mid-2012, the State had made an investment of just over €65 billion in three financial institutions in which it had acquired full or almost full ownership - Allied Irish Bank, Permanent TSB and IBRC – and in Bank of Ireland, in which it has a minority interest. The adequacy of the funding injected by the State to meet the capital requirements of the banks that are still trading depends on the net losses they incur in the period 2011 to 2013 not exceeding those projected by the Central Bank. While no timeframe has been set for the State’s withdrawal from its ownership of the banks, there is a prospect that the State may in time recover some of its capital investment. The State’s residual value in IBRC, if any, will depend on the amounts realised from the disposal of IBRC’s assets.

Ultimately, the objectives of the banking stabilisation measures are to return banks to sustainable levels of profitability and to ensure that normal access to credit is restored for business, especially small and medium enterprises. Chapter 3 reports that AIB and Bank of Ireland have been meeting the lending targets set as a requirement of their recapitalisation by the State. At the same time, reviews of credit availability for small and medium enterprises suggest that normal access to credit had not been restored. In that light, the usefulness of setting performance targets for the banks in terms of gross lending to SMEs may be limited.

The insurance compensation fund, which operates under the control of the President of the High Court, was set up to meet liabilities of insolvent insurers. A significant additional funding requirement for the Exchequer arises from the administration of Quinn Insurance Limited, which has a requirement for funding currently projected at up to €1.65 billion. Related payments out of the Central Fund commenced in late 2011. Up to the end of June 2012, the Minister for Finance had advanced a total of just under €730 million to the insurance compensation fund to allow it to meet its obligations in relation to QIL. Receipts from a levy on insurance sales will ultimately be available to repay the Exchequer, but substantial additional advances from the Central Fund are likely to be required in the short to medium term.

Chapter 5 was compiled to bring together information on financial transactions between Ireland and the EU. The finance accounts reflect most of the payments to the EU, but substantial receipts from the EU do not pass through the Exchequer.

In 2011, Ireland continued to be a net beneficiary of EU funding, with contributions of €1.4 billion and receipts totalling €1.9 billion. Direct payments of €1.3 billion under the European agriculture guarantee fund accounted for around two thirds of the EU receipts.

The finance accounts are primarily a cash-based record of receipts and issues from the Central Fund and of borrowing undertaken by the NTMA on behalf of the State. Certain supplementary information is provided on State shareholdings in commercial bodies, Exchequer loan transactions and guarantees. While the finance accounts comply with the form specified by the Minister for Finance, there is scope for a more complete and transparent account of the financial transactions of central government and of the State’s financial position at year-end. I recommended in my report that the Department should review the level and quality of disclosure in the finance accounts so as to increase the transparency of public financial information. I understand that the Department is making a number of changes for the 2012 accounts. In addition, a broad-ranging review of Irish fiscal reporting is under way. The Accounting Officer will be able to provide details about those developments.