Mr. Fergal O'Brien:

I thank the Chairman and members of the committee for the invitation. It might be useful in my statement to focus on what we regard as some medium-term budgetary priorities rather than on the pre-budget activity for budget 2018. To kick off, I will share some reflections from the business community on the state of the economy, the impact of some of the challenges we are seeing from Brexit and from policy reform in the US and our assessment of the economic context for budgets over the coming years.

It is fair to say the economy is now facing very significant challenges. It is also very positive that we are coming into this period of challenge on a very strong footing. Despite the challenges we have all had in terms of assessing the GDP metrics of the past couple of years - and, clearly, there has been a lot of volatility within those GDP metrics - the core indicators of the economy, such as domestic demand and, crucially, employment, remain incredibly strong. During the course of 2016, employment growth accelerated again. The labour market is probably the single best indicator of what is happening out there in the real economy. It is in great shape.

In terms of the risks of Brexit, for many firms, it has already impacted on their businesses. We have probably seen the impact most clearly in two sectors of the economy. The first is our food and drinks industry. Since June 2016 we have seen double-digit year-on-year monthly declines in the value of our food exports. That is already happening and we have considerable pressure within our food industry. The other area where we have already seen the immediate impact of Brexit is in our retail sector. The core fundamentals of the economy - earnings, the absence of inflation, and strong wage growth are all incredibly strong. That is not translating to the expected buoyancy in the retail sector at present. In the course of last year, we saw that after the vote, the growth in retail spending started to slow quite significantly. We have been seeing much more activity in cross-Border shopping and we have also been seeing more retail activity going online. They are the two sectors where we see risks. Notwithstanding that, other sectors of the economy will be stronger this year and they will compensate for some of the weaknesses. In Brexit-affected sectors, particularly construction, we will see a notable increase in activity this year. We will see it in housing completions and other elements of construction. Our overall assessment from a budgetary perspective is that we will still have very favourable economic fundamentals and strong GDP growth. We do not see any significant risks to the short-term budgetary outlook. That is our assessment.

I will talk a little about what we regard, from a business community perspective, as the most pressing medium-term reform priorities which we would like to see reflected in budgets over a number of years. We have two main issues we would like to highlight. One is our wider investment agenda; the other is personal taxation reform. The business community believes the investment agenda is the single most significant challenge facing the country from both a business and socioeconomic and quality of life perspective. Right now, Ireland has the lowest level of public capital investment of any country in the EU. It is under 2% while the European average is around 3%. In addition to that, we have the fastest growing population and we are most likely to have the fastest growing population for decades to come. In many ways that creates the perfect storm in terms of the pressure on our infrastructure system and what has up until now been an inability to address that. That is already evident in terms of housing shortages. Increasingly, the 3% growth rate in the number of people at work is very evident in the return of congestion we are seeing in our major cities. We must also remember that when we had the money the last time around in the Celtic tiger period, we did not finish the job in terms of a national infrastructure provision in a whole range of areas from education to health and housing. In terms of transport, we did not connect all of the regions to Dublin. The north west, in particular, remains a significant black spot in terms of road connectivity and, crucially, we did not connect the regions to each other.

Looking at the big challenges on the medium-term horizon as we try to address the national planning framework and the vision for the country out to 2040, one of the key things we will have to grasp is that almost 50% of our economic activity is happening in the Dublin region. We had previously put our own estimates on this but last week in the documents published by the Department of Housing, Planning, Community and Local Government, 49% was the figure put on it. This is clearly unsustainable going forward. It is sub-optimal for Dublin and for the rest of the regions. IBEC, as a national organisation, really wants to see a much better spatial distribution of that economic activity across the regions. The best way to do that is to have a long-term vision that creates the framework through which we can achieve that and, crucially, to have the medium-term budgetary framework underpinned by capital investment plans that will deliver the infrastructure in the regions in order to spread the economic activity. Without that infrastructure investment and provision, we will continue to see Dublin over-congested and we will continue to see the regions lagging behind.

We have a particular interest in the all-island economy. For over 20 years, IBEC has been involved on a joint business council with our sister organisation, the CBI in Northern Ireland. As members can imagine, the level of activity through that joint business council has scaled up significantly over the past year with the prospect of Brexit. We have shared the connected report with the committee. What we are trying to focus on is what an all-island investment plan might look like and to try to further develop that all-island economy, particularly in the context of the demographic ambition we see for the all-island economy. We think there will be a population of 10 million people on the island by 2050. Right now Ireland is the only country in the world that has a smaller population than it had 180 or 190 years ago. The potential for population growth is very significant. It is really important. In the context of that national planning framework, we take that long-term strategic view. Crucially, we take an all-island perspective on the investment needs of the economy.

I will make a number of other points and then I will be happy to take questions and comments from the committee.

In terms of the limits and why we have not achieved investment spending, we think that the appropriate level of public capital investment should be 4% for the economy. Ireland is currently below 2% and the European average is 3%. There are two significant limiters. The first one is the European fiscal rules. They do not give sufficient recognition to Ireland's demographic growth as the fastest growing population in Europe. Ireland also comes from a weak starting point in terms of the stock of our existing infrastructure.

We think the fiscal rules make sense in terms of managing the day-to-day expenditure of the State. They do not incentivise a government that wants to prioritise the tough growth and prosperity enhancing medium-term issues of infrastructural investment, education and innovation. They are the three components of our spending that will make a difference in the long term to the overall productive economic capacity of the State and, ultimately, the quality of life and prosperity of people. We call on the committee's support to challenge these fiscal rules. We think they are overly restrictive and that they put an unnecessary constraint on our ambition in terms of investment spending. We have the cheapest money in history that we are not accessing because of the constraints of the fiscal rules.

The other arbitrary constraint on our investment spending ambition is the limit on public private partnerships within the capital investment plan. Again, this is a self-imposed limit by Government. We think it is an arbitrary cap. It prevents private sector money from investing in public capital projects, particularly in the context of the opportunities that we now have with the more active role being played by the European Investment Bank in terms of having a presence in Ireland. Hopefully, we will have a public finance environment that can co-finance projects. We need to ensure that we give an opportunity to private money and seeks project investment opportunities. Unfortunately, the current PPP framework does not enable such activity, which we think is a significant issue.

I will make a few final comments on medium-term taxation issues before handing over to the Chairman and committee for comments and questions. In addition to the infrastructure issue, the taxation reform priority is a significant medium-term budgetary issue that needs to be examined. It has come into sharp focus with Brexit. From a labour market and skills perspective, Ireland is uncompetitive when compared to the US, the UK and many other European countries in terms of the effective tax rate that high skilled workers must pay in the Irish economy. We have one of the lowest entry points to the top rate of tax in the developed world. I refer to €33,000 below average earnings, which has a high top rate of tax. For high skilled workers, that gives us a very uncompetitive personal tax rate.

In the context of opportunities that might arise from Brexit, we know from everyday feedback from our members and businesses that prospective employees turn down jobs because of the rate of tax they would have to pay if they moved to Dublin. That situation is a significant challenge. When one compares the average personal tax system in this country with international metrics one discovers that it is not a high tax system on average. The amount of personal tax paid in Ireland is not particularly high compared with other countries. When one considers at how early income earners are hit with a penal tax rate of over 50% then Ireland stands out. This fact has become an issue in terms of attracting and retaining skills but also in terms of incentivising people to work overtime, accept promotions and competing with the social welfare system. In the context of a very tight labour market the personal tax system in Ireland is a significant issue.

I have outlined two medium-term issues. We ask the committee for its input, feedback and, ultimately, support in terms of how we can progress that through a medium-term approach to budgetary decisions.