Mr. John McCarthy:

Mr. Hegarty is from the economic side of the Department and Mr. Culhane is with our statistical unit. I circulated a very short presentation to members. The first slide sets out the background, outlining the rationale for trying to classify Irish Water as off-balance sheet. As members are familiar with this, I do not need to go into it in any great detail. The next slide shows that in July 2015 EUROSTAT took the decision that, for various reasons - the market test, the capping of fees and so forth - Irish Water should be classified within the general Government sector.

It is fair to say that it is unlikely, at least in the short term, that there would be any change to that classification. In this sense, the role of the Department of Finance is twofold: we are responsible for fiscal planning over the short and medium terms - and, to an extent, the long term also - and for taxation policy. From a fiscal planning perspective, the revenue and receipts from Irish Water are included in our latest medium term fiscal projections which were published alongside budget 2017. What would be the fiscal impact should a decision be made to abolish domestic water charges? I have set out our projections on slide 5 for the general Government balance over the period 2017-2021. The actual general Government balance includes approximately 0.1% of gross domestic product, GDP, per annum in the form of additional revenue from domestic tariffs. Members can see what the general Government balance would be if these domestic charges were abolished. The deficit in 2017 and 2018 would be zero percentage points worse and the surplus from 2020 and 2021 would be approximately zero percentage points of GDP lower than we have assumed.

I refer to what this means in respect of the fiscal rules, which members are aware are legally binding. We had a referendum on this in 2012 and we have our European requirements also. We corrected the excessive deficit and it was brought below 3% of gross domestic product, GDP, in 2015. We moved out of the so-called corrective arm of the Stability and Growth Pact and are now in the so-called preventive arm, which operates on the principle that prevention is better than cure.

The preventive arm sets targets for both the general government deficit and for general government debt. What does this require? It is government policy that we eliminate the structural deficit by 2018. That is the deficit that would apply if one removed cyclical factors on both the revenue and expenditure sides. On the basis of the projections in the budget, we will just about achieve that by 2018. We are also required to reduce the general government debt to GDP ratio at a sufficient pace, namely to reduce the difference between the actual debt and 60% by five percentage points per annum.

The Irish Water business plan was agreed in October 2015 by the Government and it sets out its expenditure over the period. It, of course, requires a revenue stream to fund this. If water charges were to be abolished, a key question from the Department's perspective is whether taxation would be the appropriate mechanism to actually fund a public utility. We do not fund electricity or gas through taxation, even though they are public utilities. There is also the issue of the user pays principle. From an economic perspective - I must stress I am not going into policy which is a matter for the Government - there would be reservations about this.

What does economics tell us about the taxation impact? If water was to be funded from general taxation, we can look at Adam Smith's kinds of taxation. There will be a pool of taxation which might have to be increased to fund this particular revenue stream. Which particular tax head would be targeted? We all know taxes are distortionary and have an impact on economic activity. The insights of the OECD, the Organisation for Economic Co-operation and Development, are relevant in this perspective. The OECD sets out various scenarios on which taxes are the most damaging to an economy in terms of labour market impact, competitiveness and so forth. Equity would be another consideration that would need to be borne in mind. The incidence of the tax also needs to be considered. Who actually pays would be crucial. The final canon is that the overall administrative cost of tax should be low relative to the yield. It does not make sense to introduce a tax in which administrative costs are high if the yield is relatively low.

On the ring-fencing of tax revenue for particular expenditure, what is involved is tax revenue that amounts to 0.1% of GDP. There are questions as to whether it would be appropriate to put in place a new and potentially expensive tax infrastructure when the yield is potentially relatively low. I use the word "relatively" importantly here. With respect to hypothecation, in the past there has been a long-standing principle that expenditure is funded from the general tax pool. Hypothecation would essentially mean that the hands of government are tied. In some respect, it would not be able to remove or reallocate revenue from a particular area as new priorities develop.