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

I am pleased to have the opportunity to appear before the finance committee today in connection with the 2017 Estimates for my Department and for the other Votes within the finance group: the Comptroller and Auditor General, the Revenue Commissioners and the Tax Appeals Commission.

If I may, I will focus on my Department first. As members know, the Department was restructured in 2016 around two directorates – the economic and fiscal directorate and the finance and banking directorate. This structure remains largely unchanged in 2017. There are a number of divisions in each directorate and I will briefly set out the key outputs from each of those divisions.

The EU and international division deals with the cross-departmental co-ordination of EU policy and with the development and implementation of strategies at European Union, euro area and international levels in regard to economic, fiscal and financial policy formulation. It manages the EU budgetary process and EU economic governance. It also builds relationships through Ireland's diplomatic network and ensures that the Minister and Department are fully apprised of EU and international developments.

The UK decision to leave the EU will result in major challenges for Ireland, as a small open economy with very strong economic ties to the UK. It is one of our most important domestic and EU-level issues. In addition to the priority of addressing the economic impacts, Ireland's key priorities are our economy, Northern Ireland, the common travel area and the future of the EU itself. Government work has been ongoing since well before the referendum vote in the UK. Since then, preparations have been intensified across all areas of Government to best safeguard Ireland's interests and to minimise any adverse impacts on our economy and on the free movement of people, goods and services on these islands.

A Brexit unit has been established within my Department and it is responsible for the co-ordination of the Department's contribution to the overall Government response on Brexit, preparation for the upcoming negotiations on the UK's withdrawal from the EU, and the future relationship; ongoing cross-departmental and interdepartmental consultation contributing to a whole-of-government response; and liaison with the Central Bank of Ireland, the National Treasury Management Agency, NTMA, and other agencies, as appropriate.

We know that, as result of our close economic ties, there are challenges to be met, as was highlighted by further macroeconomic analysis undertaken in November 2016 as part of the joint Department of Finance-Economic and Social Research Institute, ESRI, research agreement. The best and most immediate policy within the Government's control to counter the likely negative economic impacts of Brexit is to prudently manage the public finances to ensure that Ireland's economy continues to remain competitive in the face of future economic headwinds. In that regard, budget 2017 contained a number of prudential budgetary policy measures that will help our economy prepare for Brexit. Additionally, the last budget, budget 2017, laid out an extensive range of policies targeted at the most exposed sectors, including measures to support small and medium enterprises, SMEs, entrepreneurship, agrifood and Irish exporters. These measures are an important step in mitigating the impacts on the Irish economy from the economic implications of Brexit. Furthermore, where Brexit presents potential opportunities, we will seek to maximise these. For example, I refer to the area of financial services, where the Minister of State, Deputy Eoghan Murphy, has responsibility for the IFS 2020 strategy that will build on and compete for mobile international investment in the international financial services, IFS, sector. There are undoubtedly opportunities for financial services firms to locate here as Ireland remains a committed member of the European Union and the Single Market.

The EU financial services division of the Department continues to represent national interests in a European and international context. During 2016 the division made an extensive contribution towards Council agreement on a range of financial services dossiers, including the anti-money laundering directive and the European venture capital funds regulation.

The Department's review of policy in the insurance sector was also initiated in 2016 in consultation with the Central Bank of Ireland, other Departments and agencies and external stakeholders. In July 2016, a joint report on the review of the framework for motor insurance compensation in Ireland was published and work on the implementation of that report is already under way.

The international financial institutions division provides the primary interface with, and management of, Ireland’s shareholder interests and obligations in a number of international financial institutions, including the International Monetary Fund, the World Bank Group, and the European Investment Bank. The opening of the European Investment Bank’s new office in Dublin in December 2016 was an important milestone for that bank and will serve to underpin and build upon the strong relationship that already exists between the bank and its counterparts in Ireland.

Small and medium enterprises, SMEs, make up the vast majority of businesses in Ireland and account for approximately seven in every ten jobs. The latest Department of Finance credit demand survey for the period April to September 2016 indicates that while demand for credit remains subdued, trading conditions for SMEs remain broadly favourable despite the significant economic uncertainties. Profitability also remains high with 87% of the SMEs reporting they had made a profit or had broken even in the last six months.

The Strategic Banking Corporation of Ireland, SBCI, continues to make low-cost, flexible finance available to SMEs across all sectors of the economy and all regions of the country. To the end of September 2016, over 10,600 SMEs, operating across all business and economic sectors of the Irish economy, have benefitted from €458 million of SBCI loans.

The financial stability group, FSG, established in January 2017, replaced the principals group as a forum for senior officials in the Department of Finance, the Central Bank and the NTMA to monitor and discuss financial stability risks facing the Irish economy. The FSG will have a more forward-looking mandate, which is appropriate as the financial system moves from crisis management and the resolution phase into a growth phase.

My Department also constantly monitors and reviews the consumer protection frameworks that are in place in the area of financial services including, in 2016, the implementation of the Consumer Protection (Regulation of Credit Servicing Firms) Act 2015. Under this Act, relevant borrowers, whose loans are sold to third parties, maintain the same regulatory protections they had prior to the sale, including under the various statutory codes issued by the Central Bank of Ireland.

Another very important issue is the Central Bank tracker mortgage examination. The Government is fully aware of the seriousness of this matter. It is essential that affected customers receive acknowledgement for the harm they have suffered from lenders, and appropriate redress and compensation packages are put in place. Therefore, the Government is committed to supporting the Central Bank in its independent examination of this matter in order to ensure a prompt and transparent conclusion.

Central Bank figures contained in its residential mortgage arrears and repossessions statistics to the end of the third quarter of 2016 show that progress continues to be made on mortgage arrears. The number of mortgage accounts in arrears for principal dwelling houses, PDH, has declined for the last 13 quarters. A total of 121,140 PDH accounts were also classified as restructured, of which 88% were reported to be meeting the terms of their arrangement.

Throughout 2016, officials in my Department continued work on our strategy to monetise the State’s remaining investments in the banks. Given its size, our immediate strategy prioritises the return on our AIB investment as the next milestone with disposal strategies for Bank of Ireland and Permanent TSB kept under review. We have received strong advice that a stock market initial public offering, IPO, is best way to optimise the return from AIB, with the earliest possible IPO window being the second quarter of 2017. We intend to be ready to avail of this window and recently appointed three firms from our panel of advisers to form the core of our selling syndicate. The appointment of these firms as advisers does not signal any intention or obligation for us to proceed with a transaction, which will be subject to a number of factors, including favourable market conditions.

In the budget 2017 income tax package I provided, for the third year in succession, for reductions in marginal tax rates for low and middle income earners. The Government’s policy of phasing out the universal social charge, USC, over time, as resources allow, will increase take-home pay for taxpayers, increasing their spending power and allowing for consumer confidence to generate positive knock-on effects for businesses and jobs in the domestic economy.

The well-established economic recovery is maintaining momentum. Gross domestic product, GDP, grew by 6.9% in the third quarter on an annual basis. As a result, the annual average GDP growth rate was 4.7% in the first three quarters of 2016. Encouragingly, the exporting sector appears to be holding up reasonably well despite the weakness in sterling. Recovery is perhaps most clearly evident in the labour market with annual employment having increased in each of the last 16 quarters, representing an increase of over 194,000 jobs since the low point in 2012. The number of people in employment has exceeded the 2 million mark since the second quarter of 2016 and is now at its highest level since the fourth quarter of 2008 - though with a more sustainable composition. While the indicators for domestic activity are encouraging, the international outlook underlines the need for caution supported by prudent economic and fiscal policies. Notwithstanding this, my Department is forecasting real GDP growth of 3.5% this year and 3.4% in 2018.

Public finances also continue to move in the right direction, with significant progress being made on the general government deficit. As members are aware, Ireland exited the excessive deficit procedure during 2016. Underpinned by a growing economy, the hard-won improvements in our public finances provide a sustainable budgetary platform upon which funding for the provision of public services can be provided in the years ahead. The most recent bond sale, in which €1.25 billion was raised through auction at yields of 0.088% and 1.026%, demonstrates that international investors have confidence in the Irish economy and its continued growth.

The market reaction to our management of the public finances has been positive but it is vital we sustain our progress. We must guard against complacency, maintain our prudent management of the public finances and continue with competitiveness oriented policies.

The funding allocation sought for the finance group of Votes for 2017 totals €389 million which compares to a 2016 Vote group total of €379 million. This represents an increase of €10.3 million or 3%. The primary driver of this increase is the provision of a €10 million increase for the Office of the Revenue Commissioners relating to increasing staff numbers and other staff costs, which I will address later.

The allocation sought for the Department of Finance Vote in 2017 is €39.47 million, of which some €10 million is provided for a fuel grant scheme for disabled drivers. Leaving this scheme aside, my Department's allocation provides for the administrative and non-administrative costs of the Department. The majority of this, some 61%, is provided to cover salaries and allowances, with a further €6 million, 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 my Department in the proactive delivery of its remit.

The allocation for Vote 8 is for the Office of the Comptroller and Auditor General. This is an independent, constitutional office which has several responsibilities including controlling the release of funds for public services as approved by Dáil Éireann, auditing public accounts, undertaking independent examinations on the management and use of public resources, and reporting the results of the work to Dáil Éireann. The Comptroller and Auditor General's public audit role covers 290 sets of financial statements and accounts produced by public bodies. Together, those bodies have financial transactions which total over €200 billion of public money each year. The allocation for this office in 2017 is €6.915 million, which is broadly unchanged from 2016.

Vote 9 is for the Office of the Revenue Commissioners. They have requested a budget allocation of €331 million, an increase of €10 million or 3% on the 2016 net Estimate. Nearly three quarters of the budget is related to payroll for an employment ceiling of just over 6,000 officers. The Office of the Revenue Commissioners plays a vital role in our economy by collecting taxes and duties due to the State. In 2016, Revenue collected a record €47.9 billion for the Exchequer. In its recently published Statement of Strategy 2017-2019, Revenue is committed to two key strategic pillars, which are to provide a service to support compliance and to confront non-compliance.

In 2016, Revenue continued to support taxpayers in meeting their tax and duty obligations. Almost 2.1 million payments were made through the Revenue online service, ROS, an increase of 8% on 2015. The use of electronic business and PAYE self-service channels continued to increase in 2016. Almost 1.4 million customs declarations were processed by the automated entry processing system, an increase of 7% on 2015. During 2016, Revenue extended their electronic service channels through the introduction of RevPay which facilitates online payments for non-ROS customers, as well as jobs and pensions with a new online facility which allows first-time employees to register for tax online. In the annual report published by the World Bank last November, Ireland was once again ranked first among EU countries, and fifth worldwide, for ease of paying taxes. Looking forward, a key priority for Revenue will be the fundamental redesign and modernisation of the PAYE system, which I announced on budget day. Non-compliance with tax and duty obligations is an ever present challenge and those who engage in evasion can expect a robust response from Revenue. Through targeted and risk focused compliance interventions, Revenue continued to pursue those who do not meet their tax and duty obligations, as well as detecting those involved in tax evasion, shadow economy and smuggling activities.

In 2016, the yield from Revenue's audit and compliance interventions was €555 million and there were 17 criminal convictions for serious tax and duty offences. There were also 1,672 summary convictions with a total of €5.1 million imposed in fines, as well as the publication of 372 settlements on the list of tax defaulters. Revenue has also introduced a new data analysis system to its debt management operation which facilitates sophisticated case base segmentation and compliance tracking. This allows for quicker intervention in non-compliant cases.

Tackling tax evasion is an important element of Revenue's non-compliance focus. In my Budget Statement, I announced significant changes to the disclosure regime for Revenue audit. From 1 May 2017, tax defaulters who use offshore facilities to hide income, accounts or other assets will no longer have the facility to make a voluntary disclosure. This means that those who do not come forward before the end of April will face penalties of up to 100% of the tax evaded, publication in the list of tax defaulters and potentially criminal prosecution.

In strengthening our commitment in tackling non-compliance, the 2017 Estimates provides for an additional €5 million to the Revenue Commissioners for increasing staff resources by 50 full-time equivalents on audit and investigation activities, as well as enhancing ICT systems capacity for data matching and data analytics. This will lead to a direct increase in tax and duties yield from compliance interventions.

In other areas, Revenue continues to assist and support the Department of Finance in the formulation and implementation of tax policy. Revenue also has a key role and is actively involved in cross-departmental discussions on the implications of Brexit. Additional funding has also been allocated to the Revenue Commissioners to deal with challenges associated with Brexit. The Government's position is clear in that we want the closest possible trading relationship with the UK. In that regard, a key priority is to ensure the continued free flow of trade on the island and the need to avoid a hard Border. The Revenue Commissioners are actively engaged examining a range of scenarios to support Ireland's stated objectives. In this regard, the Estimate makes provision to increase Revenue staff by 40 full-time equivalents.

On Vote 10, the new Tax Appeals Commission, formerly the Office of the Appeal Commissioners, the Commission requested a budget allocation of €1.605 million, a net increase of €165,000, or 11% on the 2016 net Estimate. The increase in the 2017 Estimate is to provide for the Commission to continue to advance its programme of modernisation and reform, as well as to address its caseload in an efficient and effective manner. Specifically, the increase is largely accounted for by the need to provide for a significant number of additional personnel, including temporary commissioners and support staff, to deal with a large number of open appeal cases transferred from Revenue to the Tax Appeals Commission in 2016, as well as completing an ICT development programme for the commission necessitated by it becoming an independent statutory body. With regard to the latter, an amount of spending originally anticipated for 2016 in respect of the provision of an electronic case management system is now expected to fall into 2017.

I thank members for their attention and I commend the Estimates for the finance group of Votes to the committee. An unexpected meeting has come up for me some time after 4 p.m. Accordingly, at some stage, and with the permission of the committee, I may be replaced by the Minister of State at the Department of Finance, Deputy Eoghan Murphy.