Mr. Seamus McCarthy:

The 2014 appropriation account for Vote 7 - Office of the Minister for Finance, records expenditure totalling €24.1 million on five programme areas as summarised in figure 1. At the end of 2014, a total of €9.3 million was liable for surrender from the Vote back to the Exchequer. There were two elements to this.

The Department underspent by €8.6 million relative to its budget. The main components of the underspend were a €2.5 million saving on budgeted administration costs across all programmes, mainly due to the delayed delivery of planned training programmes and delays in the progress of certain IT and accommodation projects, and a €6 million saving on a budgeted spend of around €9 million on a broad category described as consultancy and other services. The Department also received approximately €750,000 more in appropriations-in-aid than budgeted for, mainly due to recoupment of consultancy costs previously incurred on banking stabilisation activities, which had not been anticipated in the framing of the Estimate.

As indicated in figure 1, the expenditure on the Department’s financial services policy programme recorded in the appropriation accounts is €6.8 million. However, it should be noted that this does not include costs associated with staff seconded to the Department from the NTMA to deal with banking sector issues and certain related consultancy costs. These costs are borne by the NTMA and not recouped from the Department. The level of costs incurred in that regard is not disclosed in either the appropriation accounts or the NTMA’s financial statements.

I turn now to the finance accounts for 2014. As provided for in Article 11 of the Constitution, all revenues of the State are paid into the Central Fund of the Exchequer, unless otherwise determined by law. Examples of State revenue which is not paid directly into the Central Fund include PRSI receipts which are paid into the social insurance fund and the proceeds of motor tax which are paid into the local government fund. The annual finance accounts present the receipts into and issues from the Central Fund of the Exchequer, together with a set of bespoke supporting statements that analyse the transactions. The national debt accounts which are prepared by the NTMA and audited separately by me are also presented in full as Part 2 of the finance accounts. The finance accounts are designed to provide an annual statement of Central Fund transactions on a cash basis and are not a comprehensive set of annual financial statements for the State or central government. The chapters from my report on the accounts of the public services for 2014 that are the subject of the meeting were compiled to complement the information in the finance accounts by highlighting key aggregates and trends in Central Fund transactions and State liabilities.

Figure 2 shows the trends in overall issues and receipts from 2002 to 2014. The deficit for the year has fallen each year since 2011. In 2014 the deficit was €8.2 billion, €3.3 billion lower than in 2013. Some significant developments during 2014 which the committee may wish to note were as follows: there was a 2% year-on-year increase in the cost of servicing the national debt which in 2014 amounted to a total of €7.6 billion; there was a transfer of €484 million in local property tax receipts from the Central Fund to the local government fund; there were Central Fund loans to the value of €54 million and capital funding of €407 million provided for Irish Water, on which I report in further detail in chapter 11 of my report; and there was the receipt of €405 million in respect of a 20-year national lottery operator’s licence which is dealt with in further detail in chapter 7. That matter was discussed two weeks ago when the Secretary General of the Department of Public Expenditure and Reform was before the committee.

The aggregate values of Central Fund receipts and issues increased significantly in 2014 due to the stepping up of repayable cash flow funding provided for the social insurance fund. In total, €4 billion was advanced to the fund in 2014 from the Central Fund and these advances were fully repaid by the end of the year. Because of the absence of a balance sheet in the finance accounts, we have included a new "loans and advances" analysis in annex A of the chapter.

Revenues from taxation and other charges represent the primary source of State funding, but, as Deputies will know, the State also borrows substantially to supplement annual funding and cover deficits. Chapter 2 of my report outlines the trends and composition of government debt and the cost of debt servicing. It also provides an update on Ireland’s activity in the sovereign debt market. The most comprehensive measure of Government debt is general Government debt. This is an internationally-standardised measure of the total gross debt owed by all Government bodies to third parties outside government. The ratio of general Government debt to GDP declined to 108% at the end of 2014 from its peak level of 120% at the end of 2013. This reduction was due to a combination of strong GDP growth and a reduction in the liabilities of IBRC in the course of its liquidation. The main component of Ireland’s general Government debt at the end of 2014 was cumulative borrowing undertaken by the NTMA on behalf of the State, referred to as gross national debt. Because the deficit for the year was met by a reduction in the Exchequer’s cash balances, this decreased by a net €500 million during 2014. The gross national debt rose marginally in the first six months of 2015, standing at around €201 billion at the end of June.

The NTMA estimates that the weighted average cost of servicing the gross national debt was 3.5% at the end ofJune 2015, down from 3.8% at the end of 2014. Around 92% of the gross national debt at the end ofJune 2015 was at fixed rates. A significant factor in the reduction in the average servicing cost was the early repayment of the most expensive portion of the EU-IMF lending. The first tranche of early repayment was concluded in the first quarter of 2015 and, in total, just over €18 billion, or 81% of the original IMF loan facility, was repaid early. The repayment was funded by other NTMA borrowing.

In response to the financial crisis in 2008, the State undertook a succession of interrelated measures to stabilise the banking system. The economic impacts of the measures are both complex and long-term. Chapter 3 was compiled to provide an estimate, as at the end of 2014, of the net financial cost of these measures. The sums involved in recapitalising banks, including covering their losses, are relatively straightforward to identify. Income accruing from the investments and capital repayments or disposals of investments are also generally clear. Less easy to identify are the costs incurred by the State in funding the investments. Estimation procedures are required to identify these costs which are substantial and in arriving at a valuation of the State's residual interest in banking assets.

The results of the examination analysis are summarised in figure 3.1 in the chapter. The overall investment in the banks, including the value of shares accepted in lieu of dividends, totalled €66.8 billion. Directly or indirectly, this resulted in equivalent State borrowing which cost an estimated €8.7 billion in interest costs up to the end of 2014. After receipts from disposals, dividend and other payments, fees charged for guarantee protections and the estimated share of Central Bank profits that relate to banking stabilisation measures, the State’s net outlay associated with the stabilisation measures, up to the end of 2014, was just under €60 billion. Against this, the State held an interest in the rescued banks, worth an estimated €16.7 billion at 31 December 2014. Netting the two amounts results in an estimated net cost to the taxpayer for the State’s banking stabilisation measures of around €43 billion.

Members are, of course, well aware that the scale of the State support provided was different for each bank. Therefore, using the same estimation approach, we calculated the outturn for each of the banks. We estimated that, as at 31 December 2014, support for IBRC had cost the State a net €36.1 billion, that support for AIB had cost a net €8.8 billion, that permanent tsb was almost at break-even and that there was a net surplus of €2 billion in respect of the State’s support for Bank of Ireland. I emphasise that these estimates are at a point in time and that the final cost of the measures will not be identifiable for some time to come. The cost of servicing residual banking-related State debt will be an ongoing economic one. We estimate it to be between €850 million and €1.7 billion annually, if the State’s average cost of borrowing is in the range 2% to 4% a year.

The NTMA's average cost of borrowing was around 3.5% at the end of last June, so that cost is likely to be at the higher end of the range.

Of course, other factors will also be at play in determining the final overall cost of the stabilisation measures. These will include the amount the State ultimately realises from the disposal of its remaining bank investments and the period for which the Central Bank continues to hold Government bonds relating to redemption of the IBRC promissory notes.