Mr. Seamus Coffey:

I wish the Chairman and members of the committee a good afternoon. On behalf of the council, I thank the committee for inviting us to meet it and for giving us the opportunity to publicly discuss our recent pre-budget 2018 statement. As the Chairman has outlined, joining me today are Dr. Martina Lawless and Mr. Michael Tutty. Unfortunately, Dr. Ide Kearney, who is based in the Dutch Central Bank in Netherlands, and Mr. Sebastian Barnes, who is based in the OECD in Paris, cannot attend. Members of the council secretariat are also present, namely, Mr. Eddie Casey, our chief economist and head of the secretariat, Mr. Niall Conroy, Ms Kate Ivory and Ms Ainhoa Osés Arranz. We congratulate Deputy Josepha Madigan on her appointment as Chairman of the committee. The council’s work has benefited from interaction with the committee and we believe that this will continue to be the case. I also acknowledge the ongoing interaction between our secretariat and the Oireachtas staff to support these meetings.

The council published its fourth pre-budget statement on 5 September. The report reviews the fiscal stance in advance of the budget, in line with the council’s mandate as set out in the Fiscal Responsibility Acts 2012 and 2013. Our assessment is based on an economic analysis which assesses the appropriateness of the fiscal stance in terms of the principles of sound economic and budgetary management. It also provides an assessment of whether the Government’s fiscal plans are in line with the requirements of the budgetary framework.

At the outset, we note the substantial progress that has been made since 2008 to move the public finances to a safer position. The Government is likely to run a budget balance in 2018 for the first time in a decade. Debt ratios look to be on a steady downward trajectory and near-term interest and growth prospects are relatively favourable. The positive backdrop means that Ireland is in a good position to move the public finances to a safer position without the need to stimulate the economy beyond what the fiscal rules allow. However, risks remain. While we do not see significant evidence of overheating in the economy at present, this is not a phenomenon with which the Irish economy has been unfamiliar and conditions are changing rapidly. Unemployment rates are already falling quickly and supply pressures are evident in the housing market. Were a sharper than expected recovery in housing construction to take hold and overshoot regular annual requirements for housing completions - what might be needed to satisfy a year’s worth of new households and deal with any backlog of pent-up demand - overheating could materialise in future years. While such a response to apparent housing shortages would be welcome, offsetting actions might have to be taken elsewhere should it cause the economy to overheat. Fiscal policy could have an important role to play in this respect and developments should be monitored carefully.

It is also important to acknowledge that Government debt levels remain very high following the crisis. This leaves Ireland vulnerable to adverse shocks such as those from a harder than expected Brexit impact. On the basis that GNI* is a more appropriate measure of national income for Ireland than GDP, Ireland’s net debt burden ranks as the fourth highest in the OECD. Although recent efforts have succeeded in setting debt ratios on a downward path, progress in moving the public finances to a safer position has slowed in recent years following the introduction of within-year spending increases.

To manage the public finances prudently, we need to think carefully about what rate the economy and, by extension, Government revenues might be expected to grow at in a sustainable manner.

Looking further ahead, the council sees a risk that the trend in terms of long-term growth rates for Ireland might be weaker should a harder than expected Brexit occur or risks related to US economic and tax policy materialise. Productivity, the key driver of growth in the long run, has important links to trade, yet Brexit could reduce trade as Irish exporters face significant challenges in diversifying to other markets.

Recognising the risks, pressures and fiscal position Ireland currently faces, the council's pre-budget statement makes a number of recommendations. For 2017, additional within-year spending measures would not be advisable. The fiscal rules already risk being breached this year, and additional measures would result in a more expansionary stance than originally planned, unless offset by corresponding expenditure savings or new revenue measures elsewhere.

Within-year increases in expenditure like those in 2015 and 2016 contributed to limited compliance with the fiscal rules and a visible lack of progress in improving the primary balance during 2016 and 2017, despite favourable economic conditions. Had unexpected corporation tax receipts and interest savings been used for deficit reduction rather than for within-year spending increases in 2015 and 2016, the budget would have been in balance roughly two years earlier than is now projected.

For 2018, the Government should stick to existing spending and tax plans within the available gross fiscal space of around €1.7 billion as part of budget 2018. This would be consistent with the fiscal rule requirements for next year. If additional priorities are to be addressed, these should be funded by additional tax increases or through reallocations of existing spending.

Looking further ahead, the Government should commit to adhering to all elements of the fiscal framework, including the spending rule, which is called the expenditure benchmark, even if the objective for a structural deficit of 0.5% of GDP is exceeded. Once that objective is passed, as may happen next year under current plans, the spending rule ceases to apply as strictly. Differences in its calculation can provide some safeguards around measurement issues, and continuing to adhere to it would help to avoid the boom-bust cycles that have proved costly in the past.

So far Ireland has shown a minimalist approach to compliance with the fiscal rules, yet Ireland's fiscal framework is a positive legacy of the economic crisis and one which the Government has committed to respecting. Looking through short-run cyclical developments and only increasing budgetary measures in line with the economy's sustainable growth rate would be a sensible way to manage the economy and public finances.

A credible commitment to a framework which ensures debt sustainability can allow Ireland to expand rather than narrow the room for fiscal manoeuvre. For instance, our report highlights that public investment in Government plans already looks set to ramp up quite rapidly while still complying with the fiscal rules. Exchequer capital spending is set to rise from €4.2 billion in 2016 to €7.8 billion in 2021, with some of the allocated resources still available to commit to new initiatives. As a share of either Government spending or revenues, this would involve public investment in Ireland moving from relatively low levels to among the highest in the EU.

The recent experience in Ireland has seen a damaging pattern of pro-cyclical spending, and this has been a pronounced feature of public investment spending in particular. Adhering to all elements of the fiscal framework will help to prevent forced cuts in areas like investment spending in future downturns and will help to smooth out spending on investment projects over cycles yet to come.

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