Professor John McHale:

On behalf of the council, I thank the committee for the opportunity to discuss our recent assessment published this day last week. Our engagements with the committee have been valuable in the development of our work and we welcome further feedback from members today. We view the opportunity to explain our assessments publicly as integral to the fulfilment of our mandate and important in fostering greater public awareness of the issues raised in our reports.

With me today are council members Dr. O'Sullivan and Dr. Kearney. This is Dr. Kearney's first appearance before the committee following her appointment to the council in March 2015. Mr. Sebastian Barnes, who is based in Paris, unfortunately cannot attend today. The council secretariat is also present: Ms Doyle, Mr. Casey, Mr. Hannon, Mr. Howlin and Dr. Conefrey, head of the secretariat and chief economist. The secretariat would like to thank the staff of the Oireachtas for their ongoing and useful co-operation.

I will cover our eighth assessment first. The report is written in line with the mandate of the council as set out in the Fiscal Responsibility Act. To begin with some good news, data over recent months have provided further evidence that the recovery in the economy has gathered momentum. A notable aspect of the performance of the economy in 2014 was the expansion in domestic demand, the first such increase since 2007. Crucially, the fruits of the economic recovery are gradually becoming evident in other areas. Unemployment has dipped below 10% for the first time in seven years and Exchequer tax data for the early months of 2015 have been positive.

Assisted by the resumption of strong growth and the impact of the consolidation measures implemented since 2008, the general government deficit, excluding the impact of banking measures, has fallen from a peak of 11.7% in 2009 to 4.1% in 2014. The deficit is expected to fall to well below the 3% excessive deficit procedure, EDP, ceiling in 2015. The main objective of fiscal policy since 2008 has been to reduce the deficit and restore the State's creditworthiness in order to create the conditions for a return to growth in employment, income and living standards. With economic recovery under way, we are entering an important phase in which fiscal policy must be used to ensure that a sustainable pattern of growth is established for the medium term. Ireland's legacy of high debt levels following the crisis calls for continued vigilance to ensure that the debt-to-GDP ratio remains firmly on a downward path in the coming years.

An important accomplishment of recent years has been the institutionalisation of a new budgetary framework comprising EU and domestic components. Consistency between the national and EU frameworks allows the two sets of formal rules and enforcement procedures to reinforce each other. The monitoring, peer pressure and financial sanction procedures of the Stability and Growth Pact helps give credibility to the national rules while the monitoring and enforcement procedures of the national rules, including roles for the Oireachtas and the fiscal council, provide a degree of domestic oversight and ownership of the overall rules framework. If respected, this framework provides an important safeguard against a return to the boom-bust cycle.

In the context of Ireland's new medium-term budgetary framework, MTBF, the spring economic statement, SES, provides a useful innovation in Ireland's medium-term planning by setting out the broad policy stance for 2016 in advance of the budget in October. However, the implementation of the new budgetary framework shows weaknesses that could undermine its effectiveness. As set out in our recent report, the weaknesses are evident in the budgetary plan for 2016 and in the medium-term projections for the public finances, which fall short of meeting what is required under the new budgetary framework in some key respects.

I will discuss the council's assessment of the outlook for 2016 as set out in the stability programme update, SPU. Until Ireland reaches its medium-term objective, MTO, of a balanced budget in structural terms, the Government is required to lower the structural deficit by 0.6% of GDP each year. SPU 2015 sets out a plan that lowers this deficit by just 0.3% of GDP in 2016, thus falling short of the requirement on a forward-looking basis. The rule to lower the structural deficit is supported by the expenditure benchmark, EB, which sets a limit on allowable expenditure growth. As described by the council in April, the original method for calculating the EB contained an anomaly. This has now been corrected. However, the Government has introduced a further adjustment for "tax buoyancy" that goes against the letter and spirit of the EB rule. The council does not include this tax buoyancy effect in its calculation of the EB and, on this basis, there is a considerable risk of non-compliance with the rule in 2016.

The council is strongly of the view that Government plans should be based on expected compliance with the fiscal rules and that the reasons for any deviation should be clearly explained. Rather than a plan that falls short of the requirements, an adjustment in line with the minimum improvement required under the rules would be appropriate in 2016 in light of Ireland's high debt levels and improved cyclical conditions. Full compliance in 2016 would also signal the Government's commitment to the new budgetary framework now that the degree of external surveillance has eased with the ending of the troika programme.

A major theme of last week's report and the council's November 2014 assessment concerned the forecasts for the public finances in the medium term. Proper medium-term fiscal plans are vital for a number of reasons. They provide a comprehensive and realistic framework for the planning and management of public expenditure in the medium term by linking annual budgets to longer term fiscal targets. Well-specified medium-term plans increase the predictability of the budgetary planning process by providing realistic estimates of revenue, expenditure, deficit and debt over a three-year period. Medium-term planning is also important in providing a link between resource allocation and Government policy and priorities and can guard against a return to short-term incremental budgeting.

The budgetary frameworks directive requires the Government to provide medium-term projections of each major expenditure and revenue item based on unchanged policies as well as on the basis of envisaged policies. SPU 2015 falls short of these requirements. The post-2016 budgetary projections in the SPU are based on mainly technical assumptions for Government revenue and expenditure. As a result, the forecasts show overcompliance with the fiscal rules even though stated policy in the spring economic statement is to target minimum rule compliance. Tax forecasts assume no change in policy after 2016 while spending profiles do not adequately take account of underlying expenditure pressures. The ratio of non-interest Government spending-to-GDP is projected to fall by more than 5% between 2015 and 2020.

Analysis presented in our recent assessment report demonstrates how such a sustained fall in Government spending would be challenging to achieve while maintaining current services and meeting demands for increases in public services due to demographic and other pressures. A conservative illustrative scenario for Government expenditure that takes account of likely expenditure pressures is set out in the report. The exercise indicates that Government primary expenditure as a ratio of GDP would fall by approximately 2% between 2015 and 2020. As already noted, SPU 2015 in contrast envisages a much steeper 5% fall in expenditure over the same period.

Given these shortcomings, the deficit projections in SPU 2015 do not provide a useful picture of the fiscal position after 2016 and fall short of the requirements envisaged in the budgetary frameworks directive. While it is not expected that specific revenue and expenditure measures would be detailed over the medium term, full acknowledgement of spending pressures, the overall value of intended revenue measures and, consequently, a deficit path should play a central role in medium-term projections.

A major weakness of Ireland’s approach to fiscal policy prior to the crisis was that expenditure plans focused almost exclusively on the following year, with medium-term expenditure profiles seen as indicative and subject to change in later years. With spending determined on an ad hoc year-to-year basis, this inevitably contributed to pro-cyclicality in fiscal policy. Multi-annual ceilings were introduced to address serious expenditure management problems and represent a core component of the new domestic budgetary architecture. This system is not working effectively because the Government has consistently made adjustments to the ceilings. This undermines its value as an expenditure planning and control tool. Moreover, the move to annual revisions to the allowable expenditure growth under the expenditure benchmark has removed the multi-year anchor from the domestic medium-term expenditure ceilings. The Government needs to clarify how the system of multi-year ceilings will operate under the revised expenditure benchmark framework. The domestic medium-term expenditure framework should be strengthened to ensure that multi-annual planning is a central element in the budget process.

To conclude, Ireland’s post-crisis budget framework should help avoid boom-bust cycles and guide Government debt to safer levels. It is therefore important that the framework is respected in fiscal plans. Rather than being viewed as something externally imposed on Ireland, the new budgetary framework should be seen as something in the national interest to the extent it underpins sound budgetary policy. Adherence to the budgetary framework during good times can help avoid the necessity for the type of painful budgetary adjustments implemented during the recent crisis. In an uncertain growth environment, respect for the framework can improve the resilience of the public finances.

I thank the committee for providing us with the opportunity to attend today and we look forward to taking its questions and hearing the views of members.