Dr. Kieran McQuinn:

I will first address the Deputy's second point, which related to tax. Research has been done on this issue. Brendan O'Connor in the Department of Finance did a comparison across OECD countries of the levels at which taxpayers enter the various tax bands. It was clear from some simple graphs in his paper that Irish people moved into the top rate of tax at a lower income level than in other countries. If one is looking at desirable levels, which are difficult to quantify or estimate, cross-country comparisons are often a good place to start in terms of looking at where people in comparator countries, if one likes, move into the highest rate of tax. This could provide some guidance in that area.

On the issue of market failure in construction, unfortunately there is no short-term solution to this problem. Ultimately, the solution is that the banks get their balance sheets back into a position such that they are able to lend. This is happening, albeit at a glacial speed, as we all know. This reflects the fact that the banks have taken a long time to deal with the impairment issues on their balance sheets. It is a well known maxim in banking that banks with bad balance sheets struggle to lend or do not lend for a variety of different reasons. One element, therefore, is the need for the banking sector to get its balance sheets back in order to the extent where banks are in a position to lend. The stress testing results published in the summer showed that some Irish banks did not fare terribly well on that score. There is obviously an issue with confidence in the market and this clearly impacts on credit availability.

To return to the issue of social housing, we indicated that one of the reasons greater government involvement in this sector could play a part in terms of resolution for the overall market was that greater levels of confidence in the market could be generated if there was some scheme in place whereby developers were able to access funding and a guaranteed basis for social housing. This would potentially enable them to get greater access to funding for private development, etc. Something along those lines and the greater commitment outlined in the recent housing plan could help in that regard.

The one slight note of caution I always build in regarding the housing market - it may seem slightly strange at this point - is that generally and for whatever reason, there is a three or four-year lag built into the housing market in terms of the point at which house prices start to increase and profitability starts to return to the sector and the point at which supply of housing comes on stream. The Deputy may be familiar with the debate on housing back in the 1990s, which was very much focused on the same issue. We had the famous Bacon reports which told us we needed more supply. Before we knew it, between 40,000 and 50,000 houses were being built every year. There is always a danger than we will swing from one side to the other. This would, in turn, bring budgetary pressures. In our previous commentary, we noted that if we started to build the number of houses we need and possibly more than that number, it could create budgetary pressures.

To return to the issue of capital expenditure, I was reminded when Professor Barrett was speaking of a piece I wrote last year which is tied into this issue, albeit at the European level. I was quite critical in my piece of the European fiscal stance that was taken during the crisis. I believed it was important to note and place on record that Ireland had little or no choice in the matter and had to adopt the measures that were taken to get our public finances in order. We strongly argued from a mainstream economic point of view that the stance taken by the European authorities since 2010-11 was very counterproductive in terms of the fiscal position that was taken, namely, one in which we had economies that were generally recognised as having substantial and large negative gaps in 2010, 2011 and 2012, a banking sector which was in crisis across Europe and high levels of household debt. Ultimately, in these types of circumstances, it is plausible for the Government to step in to provide the kind of aggregate demand that was required. We drew an analogy between what was not done in Europe and what was done in the United States where a stimulatory package - known as the troubled asset relief programme or TARP - was undertaken by the federal authorities. Analysis of what the TARP did - and some argued it should have done more - suggests it offset, at a federal level, many of the measures that were being undertaken at the time on a state by state basis. The individual states were trying to get their budgetary positions in check and back in order while the overall federal response helped to offset the negative impact on economic activity that the corrective measures had. Those are important lessons going forward. Serious mistakes were made at the European level in terms of the fiscal response and they should be noted.