Mr. Colm McCarthy:

Yesterday, I circulated some notes and I will now run through a few points very quickly. It is my view, and it is a view that I am sure committee members have heard from the entire alphabet soup referred to by the Chairman, that really we probably should have tightened budget policy a few years back as the recovery matured. We are now in a position where if things get troublesome we will not have as much latitude as we might have had.

Government spending can be financed by raising tax revenue, selling Government debt or, if a country has its own currency, it can get its central bank to buy government debt or just print currency. Since we abolished the currency in 1999, essentially we have been using an external currency so we cannot create liquidity for the Government via the Central Bank. This is a constraint. The implication of this is if the Government ever does wish to run deficits, and there are perfectly good reasons it might from time to time, those deficits can only be financed through the sale of Government debt in the market.

We all remember that back in 2010, despite two years in which the Government did everything it could think of, as it raised taxes and cut current and capital spending, we failed to retain market access and ended up in an IMF troika programme, as committee members know. The trouble with leaving ourselves in this situation is we end up having an austerity programme that is not really of our choice and the timing of which is not of our choice.

This is year six of an expansion. The economy began to recover almost six years ago. The budget is balanced again, as the Minister for Finance pointed out in his statement earlier this afternoon. This is true, and it is tempting to argue that expenditure increases or even tax cuts can be afforded. The difficulty is there are various icebergs out there. There will be a public finance crisis at some stage over the next number of years; there always is. The reasons for expecting a slowdown include the end of the recovery phase, the difficult external environment and Brexit.

The point about recoveries is that they end. One can recover only once. We started off with a 16% unemployment rate and it has reduced to 4.5%. We cannot repeat this. We cannot use spare capacity in the economy more than once. There are already labour shortages in many sectors. More than 300,000 jobs were lost during the downturn and we had net outward migration and very high unemployment. A period of very rapid employment growth, as we have seen, eventually exhausts the excess labour supply.

We know about the external environment. There is the risk of a trade war. A slowdown in the USA, should it happen, and the recovery there is pretty mature also and the US economy is pretty close to full employment, would hit Ireland a bit harder than elsewhere. One of the reasons we have done well in recent years is because the US has been doing well. The US is a big export market for Ireland and it is also a big source of inward investment. This cuts both ways and if things slowdown in the US it will hurt us at little bit more than it would hurt others. The medium-term prospects in Europe are not very encouraging and, of course, Ireland is very exposed to Brexit.

I am now showing the committee a slide of the unplanned component in recent spending increases. It is from the recent report of the Fiscal Advisory Council. This is a particularly worrying feature of recent budgets.

The economy was clearly recovering quickly three years ago. Arguably, we should have tried to move the fiscal position into a stronger place as long ago as 2016. One can see that there have been big spending increases in each of these years over and above what was voted by Dáil Éireann. These are the unplanned increases which had to be funded by Supplementary Estimates. The big worry, which was highlighted by IFAC, is corporation tax which is very volatile. Corporation tax could revenues could weaken for cyclical reasons or because there are changes in the international corporate tax regime. Along the way, steadier sources of tax revenue have been proposed and these have been sacrificed, particularly water charges. The residential property tax, which was introduced, has been kept at very low levels. These are, however, stable sources of tax revenue.

Another issue is that we tax cars on purchase quite heavily. We have VAT when one purchases a car but we also have vehicle registration tax. The number of new cars sold in Ireland fell by two thirds during the crash with several hundred million euro vanishing in purchase taxes on cars. There is an alternative where one can tax fuel or one can tax cars annually. We do both of these things. When we were trying to remove the volatility from tax base, one of the proposals that was considered but was not implemented was to get rid of the big purchase tax on cars and push up fuel tax and the annual tax to make up for the lost revenue. That does not deliver any extra revenue, which will remain the same, but it will be less volatile. It is worth reminding ourselves of that as new car sales virtually disappeared from early 2008 until 2010. It was not as big a collapse as with stamp duty on commercial and residential property but it is a transactions tax.

There are other similar taxes. Inheritance tax is a kind of transaction tax as a lot of it is related to the realisation of property assets on death. Capital gains tax is a tax on the realisation of capital gains. There are good reasons for having taxes on capital and wealth but there are still quite a few taxes in the Irish tax code that are transactions-type taxes. We need to move away from them.

There is a risk in current policy. People who draw attention to the high level of outstanding sovereign debt and contrast that with the very low level of sovereign debt which did not save us. The last time we got into trouble the opening level of sovereign debt did not save us because we had borrowed so much so fast and the banks went bust. We ended up in an IMF programme anyway, even with a very favourable starting position relative to where we are now. The people who are saying that we should have been more cautious about budget policy in the last few years and should continue to be now are not saying that there are not occasionally reasons to run budget deficits, but on the other side of the coin is that one should be running budget surpluses when things are going really well and when one has full employment. The benefit of doing that is that one will avoid the imperative of unplanned and badly timed austerity down the road. That is the big risk. The last two Governors of the Central Bank, various people in the ESRI, the OECD, the IMF, and all sorts of people, have been pointing this out for the last few years, that because Ireland is now a heavily indebted country, and because these very low Government bond interest rates are not going to last forever, we are vulnerable if there is an international slowdown, and particularly if there is a resumption of trouble in the eurozone bond market. That is the case for being cautious about budget policy and for lamenting that we have not been cautious in the last few years.

It is not because there is anything wrong with deficits. It is fine to have an active stabilisation policy but we need to ensure our balance sheet is in a position to sustain it and ours is not. We ought to have reassured the volunteer lenders, on whom we will have to rely unless we want to go into another IMF programme, that we have the budget in small surplus and will try to keep it there.