Michael Noonan (Limerick City, Fine Gael) | Oireachtas source

I thank the Chairman. I am pleased to have the opportunity to appear before the finance committee today in connection with the 2016 Estimates for my Department and for the offices under its ambit, including the Revenue Commissioners, the Tax Appeals Commission and the Comptroller and Auditor General. I wish to take the opportunity to welcome the new committee and I look forward to the ongoing engagement proposed within the new budgetary framework. The publication of the summer economic statement and the hosting of the national economic dialogue, which took place on Monday and Tuesday, form important parts of this new framework.

As members know, the Department of Finance is structured around two directorates, the economic and fiscal directorate and the finance and banking directorate. If I may, I will take a few moments to bring the committee up to date on the key outputs of the Department during 2015 and to date in 2016.

The EU and international division of my Department manages and advances Ireland's interests at EU and international level on issues relating to the economic, fiscal and financial fields. In addition, it ensures effective co-ordination of the Department's EU policy. This division represents Ireland at European Stability Mechanism, ESM, and European Financial Stability Facility, EFSF, meetings. A key output of this division in 2015 was the conclusion of the early repayment of a major part of the IMF loan, thereby achieving significant interest savings. The post-programme review process also continues to be successfully managed.

The EU financial services division of the Department continues to represent national interests in, and made a positive contribution towards Council agreement on, a range of financial services dossiers in the past 18 months. Key achievements in this area included the transposition of the bank recovery and resolution directive, BRRD, the deposit guarantee scheme directive, DGS, Solvency II, the transparency directive, the credit rating agencies regulation, CRAR, the Single Resolution Board (Loan Facility Agreement) Bill and regulations providing An Post with the necessary authorisation to begin providing payment services. The division will also continue its review of policy in the insurance sector, which is expected to be completed by the end of this year.

On the domestic banking landscape, small and medium-sized enterprises, SMEs, are the lifeblood of the Irish economy. They comprise the majority of businesses in Ireland and account for approximately seven in every ten jobs. Data indicate that there is an upward trend in lending application numbers and new money lending by both banks. Approval rates also continue to rise, averaging at 89%. The Strategic Banking Corporation of Ireland, SBCI, was incorporated in September 2014. Its goal is to ensure access to flexible and lower cost funding for SMEs. The SBCI has a total of six on-lending partners and is in advanced discussions with a number of other potential on-lenders. The increased number of on-lenders is a key step in creating greater competition for SME lending in the Irish market.

In the mortgage lending space, there has been a continuing increase in the level of new lending for residential purposes. Recent data show that almost €4.9 billion in new residential mortgage lending was drawn down in 2015. This represented an increase of 26% on the previous year and was the highest level of mortgage lending since 2009. This upward trend continued in the first quarter of 2016 when more than €1 billion in new mortgages was provided. First-time buyers remain the largest single segment of mortgage borrowers, accounting for almost 46% of the first quarter 2016 mortgage borrowing.

It is important to support prudent new lending to help people to meet their desired housing needs and to support overall economic development. The new programme for a partnership Government recognises this and sets out a number of initiatives to promote and protect home ownership.

Following an extended period of increasing mortgage arrears as a consequence of the financial crisis, the trend since late 2013 has been downwards. The most recent Central Bank bulletin - for the first quarter of 2016 - shows that the number of mortgage accounts in arrears for principal dwelling houses fell for the past 11 consecutive quarters and stood at 85,989 accounts, representing a decline of almost 18% since the first quarter of 2015. The number of accounts in arrears declined for all maturity categories. The programme for Government contains some additional commitments in respect of supporting those borrowers who are in arrears and further details on the implementation of these measures are being developed.

Following a difficult period, the public finances are continuing to move in the right direction. I am pleased to state that significant progress has been made in this regard, given that an underlying deficit of 1.3% was recorded last year. This has resulted in the public finances being placed on a sustainable footing, which enabled Ireland to exit the excessive deficit procedure successfully and in a timely manner.

Growth of 7.8% was recorded in 2015, with growth of 5% forecast this year. Importantly, the expansion in economic activity, initially led by the exporting sectors, has broadened. Increasingly, growth is driven by domestic factors, as both consumer and business confidence continue to recover. While economic growth is not an end in itself, it is an enabler and is therefore important. The economic recovery is perhaps more clearly evident in the labour market.

Almost 47,000 jobs have been added in the first quarter of 2016 and CSO statistics show that gains have been recorded in virtually all sectors. This labour market growth is expected to continue and we are forecasting that employment will exceed the 2 million mark this year, for the first time since 2008. I am also greatly encouraged by the latest Exchequer returns. After the first five months of 2016, tax revenues were €750 million, or 4.3 %, above expectation, which represents an annual increase of 9%, or just over €1.5 billion, when compared to the same period in 2015. I should point out that the Revenue Commissioners have assessed that not all of this additional tax revenue is of a recurring nature. Nonetheless, this solid performance provides confidence.

As committee members are aware, from this year the Irish public finances will be subject to the rules of the preventive arm of the Stability and Growth Pact. The summer economic statement sets out the fiscal parameters under which the programme for Government objectives will be achieved, while simultaneously ensuring our fiscal obligations under the Stability and Growth Pact are met. These rules are designed to ensure that increases in public expenditure will be sustainably financed and safeguarded from dependence on cyclical revenues. With this in mind, the summer economic statement also sets out our intention to establish a contingency, or rainy day, fund to cushion our open economy against unforeseen events that might occur.

Revenues from taxation are key to the funding of our public services. To this end, the Department remains committed to conducting ongoing reviews of tax incentives and tax expenditures. We have also undertaken a number of public consultations and a joint consultation with the Department of Social Protection.

Our report on tax expenditure, which was published at the same time as budget 2016, listed all tax expenditures that had effect in the previous 12 months. It also incorporated the outcomes, in full or in summary, of eight reviews and public consultations carried out between October 2014 and September 2015. It is the Department’s intention that this will become an annual publication.

Turning briefly to the decision of the British electorate to leave the European Union, the process must now take its course, which will commence with a formal application from Britain under Article 50 of the treaty. This will be followed by the drawing up of an exit agreement. As such, there will be no immediate change to the free flow of people, goods and services between our islands. The Government has, to the greatest extent possible, prepared for this eventuality. We have published a summary of the key actions we will now take to address the contingencies arising from the UK’s decision. Our primary objective remains to protect and advance this country's interests.

In terms of budgetary impact, the 2017 fiscal space is not expected to change very much because the factors used to calculate it are largely fixed at this stage. Over the medium term, there could be implications for the general government deficit, the structural balance and, potentially, for the level of fiscal space that could be used. We remain committed to adhering to the fiscal rules of the Stability and Growth Pact and we will monitor developments closely.

Turning to the business of the committee today, the funding allocation sought for the Finance group of Votes for 2016 totals €379 million which compares to a 2015 Vote group total of €368 million. This represents an increase of €11 million or 3%. The primary driver of this increase is the provision of €10 million for the new service of a fuel grant scheme for disabled drivers.

Leaving this scheme aside, the allocation sought for the Department of Finance Vote in 2016 is €29.479 million, a reduction of just over €1 million compared to 2015. This allocation provides for the administrative and non-administrative costs of the Department. The vast majority of this, 62%, is provided to cover salaries and allowances, with a further €6 million, or 20%, to cover facilities and non-pay administrative costs. The remaining €5 million is provided to cover the legal, advisory and committee costs necessary to support the Department in the delivery of its remit.

The allocation for Vote 8, the Office of the Comptroller and Auditor General, is applied towards a single programme with the following outputs: auditing the financial statements of 300 Departments and State bodies; control of issues from the Central Fund; and examining and reporting on financial management arrangements in public bodies and the value for money of public services. As committee members know, the Comptroller and Auditor General also assists the Committee of Public Accounts in its scrutiny of the public finances. The allocation for this office in 2016 is €6.761 million, which is broadly unchanged from 2015.

On Vote 9, the Office of the Revenue Commissioners have requested a budget allocation of €331 million, an increase of €2 million or 0.6% on the 2015 net Estimate. The Office of the Revenue Commissioners plays a vital role in our economy by collecting taxes and duties due to the State. Nearly three quarters of the budget is related to payroll for an employment ceiling of 5,924. In its statement of strategy, Revenue is committed to two key strategic priorities, which are to make it easier and less costly to be tax-compliant and to identify and confront non-compliance. Under the first strategy, Revenue's service for compliance approach in 2015 provided more user friendly and digital ways of doing business with them, making it easy for customers to pay the right amount of taxes and duties at the right time. This approach included the initiation of a comprehensive customer engagement strategy.

Proof of the success of the strategy is evident in the numbers. In 2015, almost 1.9 million payments were made through the Revenue Online Service, ROS, an increase of 11.2% on 2014. The number of transactions through the PAYE anytime service increased by 16%, and more than 1.3 million customs declarations were processed by the automated entry processing system, 96% of which were cleared immediately. This focus on service for compliance is paying clear dividends, with the majority of customers filing and paying on time and the number of phased payment requests in decline, down to almost 50% of the numbers at the peak of the economic downturn.

For those who choose not to comply with their tax and duty obligations Revenue, under its second core strategy, operates a range of intervention approaches. In 2015, the yield from Revenue’s audit and compliance interventions grew by 5.3% to €642.5 million. To underpin this commitment to tackling non-compliance, the 2016 Estimates provides for an increase of 50 full-time equivalents to Revenue’s audit and compliance staff resources. Tackling tax evasion is an important element of Revenue’s non-compliance focus. Revenue uses its powers to identify untaxed income and assets held abroad and in 2015 this work yielded just over €60 million. Addressing tax avoidance is another priority for Revenue. In 2015, 160 tax avoidance cases were settled, netting €42 million for the Exchequer. In my budget speech I referenced some additional measures being taken by Revenue to address non-compliance. I am happy to report that significant progress is being made in this area. The introduction of sophisticated analytics and early intervention has been a key part of this success.

In other areas, Revenue continues to assist and support the Department of Finance in the formulation and implementation of tax policy. During 2015, Revenue also continued its active involvement in the OECD base erosion and profit shifting, BEPS, project, culminating in publication of the final reports in October 2015.

On Vote 10, the new Tax Appeals Commission, formerly the Office of the Appeals Commissioners, requested a budget allocation of €1.44 million, a net increase of €665,000, or 86%, on the 2015 net Estimate. The increase in the 2016 Estimate is to take account of the establishment of the new Tax Appeals Commission. Specifically, the increase relates largely to a planned addition to staffing numbers and the provision of new ICT equipment, including an electronic case management system. One of the key reforms designed to strengthen the independence of the Tax Appeals Commission is that since 21 March 2016 taxpayers make their appeals directly to it instead of via the Office of the Revenue Commissioners.

I thank members for their attention and I commend the Estimates for the Finance group of Votes to the committee.