Professor John McHale:

We are delighted to have this opportunity to discuss the Irish Fiscal Advisory Council's latest assessment with the committee. We view our appearances here as being instrumental in ensuring the full delivery of the council's mandate and we look forward to engaging with several new members this afternoon. Other council members in attendance with me today are Mr. Sebastian Barnes, Professor Alan Barrett and Dr. Donal Donovan. Unfortunately, as the Chairman indicated, Dr. Róisín O'Sullivan, who is based in the United States, cannot attend. The council secretariat is represented by Ms Sarah Doyle, Mr. Eddie Casey, Mr. Andrew Hannon, Mr. John Howlin, and Dr. Thomas Conefrey, head of the secretariat and chief economist.

The secretariat continues to have very useful interaction with the staff of the Oireachtas, which enhances the engagement we as a council have with this committee. I would like to acknowledge the co-operation of the Oireachtas staff in this ongoing work.
Today I will cover our seventh assessment report, which was published last Tuesday, 25 November. The report is written in line with the mandate of the council set out in the fiscal responsibility Acts of 2012 and 2013 and also with the memorandum of understanding between the council and the Department of Finance. At our last appearance before the committee in June, I began by noting the progress being made in restoring the public finances and the economy to health. In the intervening months, there have been further encouraging signs that the recovery in the Irish economy is solidifying and that the public finances are improving. The general Government deficit is likely to fall below the 3% excessive deficit procedure ceiling in 2015, and the debt-to-GDP ratio is beginning to fall, albeit from a very high level. Market confidence has improved greatly and the State's creditworthiness has been restored. At the same time, economic recovery appears to be taking hold, with employment growing and the unemployment rate falling steadily. Of course the recovery is not yet being felt evenly across the population, and the crisis has left several challenging legacy problems that require ongoing careful policy attention and action.
It was not always obvious that a recovery pattern of the sort now emerging would materialise. Concerns existed that the implementation of such an enormous programme of fiscal consolidation as that followed since 2008 could trip the economy into a deflationary spiral and even become self-defeating in budgetary terms. These concerns have not come to pass, as the deficit has fallen from a peak of 11.5% of GDP in 2009 and, as noted, signs of a broad-based recovery are evident. While the consolidation measures had a negative impact on domestic demand, they have succeeded in moving the State's finances towards sustainability and in creating the conditions for a return to growth in employment and incomes.
Thanks to the improvements in macro and fiscal aggregates, it was against a comparatively more favourable backdrop that budget 2015 was framed. Despite the announcement of an expansionary package of measures amounting to just over €1 billion, the deficit as a percentage of GDP is expected to fall to 2.7% in 2015, in line with the requirements for exiting the excessive deficit procedure. Achieving this objective has been the key focus of fiscal policy in recent years and is an important milestone on the path towards more sustainable public finances. However, as pointed out in the council's pre-budget 2015 statement, compliance with the official targets does not mean that the overriding task of repairing the public finances has been accomplished.
It is the council's assessment that budget 2015 reflects a missed opportunity to move the public finances more decisively into a zone of safety by following through on previous plans. The State's expenditure is expected to exceed its income by around €7 billion in 2014, a gap which is being closed through additional borrowing. In this context, the decision in budget 2015 to opt for an expansionary package of tax cuts and expenditure increases necessarily results in higher borrowing, larger national debt interest costs and higher debt levels than could have been achieved if previous plans had been adopted. The stance in budget 2015 means that the deficit is projected to be more than one percentage point higher in 2015 than could have been achieved if previous plans had been implemented. An opportunity to create a larger buffer to guard against adverse near- and medium-term growth shocks has thus been missed. All else being equal, the larger deficits will result in the debt level being roughly €10 billion higher in 2018 than if previous plans had been adopted.
The council is keenly aware of the limited tolerance for further tax increases and expenditure cuts following eight consecutive contractionary budgets, compounded by the impact of a deep and prolonged recession. The improved creditworthiness of the State and stabilisation of the debt-to-GDP ratio have reduced the urgency of further adjustment efforts. Nonetheless, it remains the judgment of the council that implementing the plan outlined in the last stability programme update, SPU, and then following the less demanding requirements of the budgetary rule and preventive arm of the stability and growth pact, SGP, would have been, on balance, the most appropriate fiscal stance.
The expansionary measures in budget 2015 are estimated by the Department of Finance to increase GDP growth in 2015 by 0.3 percentage points. The benefits of this limited short-run stimulus, in our view, do not outweigh the longer-term gains and enhanced certainty that would have accrued from implementing one last adjustment effort.
I would like to turn now to a major theme of the fiscal assessment report concerning the importance of Ireland's new budgetary framework and the outlook for the public finances beyond 2015. A positive legacy of the crisis is Ireland's strengthened budgetary framework, incorporating both domestic and European elements. With the State having exited the EU-IMF programme, a new phase of fiscal policy surveillance guided by the new budgetary framework will begin. Adhering to the new fiscal framework should help to smooth future boom-bust cycles, guide Government debt to safer levels, and underpin borrowing capacity during the period when debt will remain unavoidably high by adding credibility to Government plans. If implemented effectively, the budgetary framework can also act as a bulwark against the types of political pressure that have contributed to inappropriate fiscal policy in the past. At previous appearances before the committee, I described the new framework and elaborated on some of its potential benefits. We are now at the point of implementation and so new challenges have emerged.
A major weakness of Ireland's approach to fiscal policy prior to the crisis was that the annual budgetary process paid insufficient attention to multi-annual fiscal planning. Expenditure plans focused almost exclusively on the following year's spending plans, with medium-term expenditure profiles seen as indicative and subject to change in later years. With spending determined on an ad hocyear-to-year basis, this inevitably contributed to pro-cyclicality in fiscal policy.
The need to set out credible medium-term plans for the public finances, including multi-annual ceilings for expenditure for each department for the next three years, is a key component of Ireland's budgetary framework. Budget 2015 did not include such a well-specified plan for the public finances. Published tax revenue projections assume no change in policy in the medium term, despite budget commitments to cut taxes in the coming years. Moreover, the budget spending profiles assume that spending will remain unchanged after 2015, despite higher figures for expenditure being set out in the comprehensive review of expenditure for 2015 to 2017. Taken together, the lack of detail underpinning the Government's medium-term projections for both expenditure and revenue means, in turn, that considerable uncertainty surrounds the overall projected path for the general Government deficit.
Spending plans have been revised upwards each year since 2012, with budget 2015 raising the expenditure ceilings for 2015 to 2017. The almost continuous raising of the Government's expenditure ceilings undermines the purpose of multi-annual expenditure planning, which is designed to protect against the type of pro-cyclical trend in Government spending observed in the run up to the crisis. The lack of a well-anchored medium-term plan raises the risk that incoming cyclical revenues will be spent rather than saved, leading to unsustainable spending levels.
The absence of a well-specified medium-term plan for the public finances in budget 2015 indicates that, although public awareness of and political support for the budgetary framework have increased, problems with implementation remain. For the framework to be implemented effectively, domestic ownership is essential. While the new budgetary framework is not without flaws, the complementary national and European elements provide a valuable structure to guide Irish fiscal policy. Rather than being viewed as something imposed on Ireland, it should be seen as a framework that is in the national interest, in that it helps to create the conditions that underpin sustainable growth in Irish incomes and employment and also ensures the future fiscal capacity of the State.
Broad political support and advocacy of Ireland's budgetary framework will be vital if it is to act as an effective guide to sound management of the public finances. This is especially important now that the degree of direct external surveillance has eased with the ending of the programme. The Oireachtas, as well as the council, can play a vital role in ensuring the effective implementation, monitoring and enforcement of the new budgetary framework.
Finally, on several occasions over recent months the question has been raised as to whether the council feels its advice is being ignored. In this context, it is important to note that our reports are not directed solely at the Government. Our analysis is also aimed at raising public awareness and stimulating debate around important public finance issues and fiscal policy options. As representatives of the public, the Oireachtas can play a vital role in helping to promote informed public debate around the various issues raised in the council's analysis.
To conclude, I thank the committee for providing us with the opportunity to attend today, and we look forward to taking questions and hearing the views of members.