Oireachtas Joint and Select Committees

Wednesday, 5 April 2017

Committee on Budgetary Oversight

Engagement on Overall Fiscal Position: Discussion

2:00 pm

Photo of Lisa ChambersLisa Chambers (Mayo, Fianna Fail)
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I welcome the Secretaries General, Mr. Derek Moran and Mr. Robert Watt, and their officials. Today's agenda involves the overall fiscal position based on first quarter returns; a briefing on the first quarter outturn of receipts and expenditure; engagement between the committee and the Departments; the information requirements of the committee and the parliamentary budget office; and an overview of expenditure drivers and the risks to the fiscal position for 2017 to 2021. Before we begin, I remind members and delegates to turn off their mobile phones as they interfere with the sound quality of the transmission of the proceedings.

By virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to the committee. However, if they are directed by it to cease giving evidence on a particular matter and continue to so do, they are entitled thereafter only to qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person or an entity by name or in such a way as to make him, her or it identifiable.

Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official, either by name or in such a way as to make him or her identifiable.

I invite Mr. Moran to make his opening statement.

Mr. Derek Moran:

I am grateful for the opportunity to appear before the committee with Mr. Watt and colleagues from the Department of Public Expenditure and Reform to discuss the issues set out in the invitation letter. I am joined by Mr. John McCarthy, chief economist, and Mr. John Palmer from the central budget office in the Department.

Our last official forecasts were in budget 2017 and our next official forecasts will be published next week in the draft stability programme update, or SPU. I understand the committee has already invited the Minister for Finance, Deputy Noonan, to discuss the draft SPU in more detail. In budget 2017, we forecast real GDP growth would be 4.2% in 2016 and 3.5% in 2017. Since then, the Central Statistics Office, CSO, has published quarter 3 and quarter 4 returns which showed that the second half of 2016 was much stronger than had been assumed. It is reasonable to expect the figure next week to improve to between 4% and 4.25% for this year. In fiscal terms, budget 2017 forecast an outturn general Government deficit of 0.9% of GDP for 2016. The forecast for 2017 was for a general Government deficit of 0.4% of GDP. With regard to these deficit forecasts, the excessive deficit procedure, or Maastricht, returns were submitted to EUROSTAT by the CSO on 31 March and are now subject to the standard clarification process. These figures are confidential but some matters already in the public domain give an indication of the likely direction for the outturn for 2016. For example, the general Government balance is adjusted each year for VAT accruals. VAT received in January and February as collected by businesses in November and December of the previous year is accrued back to the previous year, 2016. As we know that VAT for January and February this year is about €400 million more than for the same months in 2016, it is reasonable to expect that the general Government deficit for 2016 will be lower than the 0.9% forecast last October.

Looking at the first quarter of this year, taxes have come in at just under €11.5 billion, which is some €350 million, or nearly 3.5%, up on the first quarter of 2016. However, this is below profile by €280 million, or approximately 2.4%. Based on these figures, it is unlikely that we will be adjusting our revenue forecast for 2017 in the draft SPU. Indeed, we do not normally adjust forecasts on the basis of first quarter data. Revised forecasts for 2018 out to 2021 will also be included in the draft SPU. As I noted already, the Minister will be here to present these next week but it is anticipated that the macroeconomic and fiscal forecasts for the outer years will reflect increased levels of external uncertainty.

The Department has assisted the Select Committee on Arrangements for Budgetary Scrutiny and this committee since it has been set up. My officials have been available and responded to all requests for information or assistance received. This will continue as anything that increases knowledge of and the level of informed debate about fiscal and budgetary policy is to be welcomed. Obviously, engagement will be driven primarily by the annual budgetary calendar. We have offered to brief the committee each quarter on Exchequer returns, to provide members with a presentation on the results and to answer questions members may have. There will be other events involving the Minister and the Department such as the SPU, which the Minister will present to the committee next week, and the macroeconomic forecasts in advance of the budget which Mr. John McCarthy will present to the committee after the Irish fiscal Advisory Council, IFAC, has endorsed them.

I understand that there is progress with regard to the establishment of a parliamentary budget office. While there have been suggestions over the years that an independent budgetary office should be established, the Minister said in response to a parliamentary question in February 2015 that he was coming to the view that the proposal should be considered in depth. The focus at that time was on independent costings of alternative budgets from Opposition parties. Since then, the OECD has published its review and, based on this, the Oireachtas has decided to widen the remit. However, costings will remain a critical component. Both Departments have provided a costings service for election manifestos for many years and, more recently, for the annual budget.

The Department produces a huge amount of budget relevant information each year. Late last year, we circulated a list with links and also provided a copy of the publications to the committee secretariat. We will continue to forward the links to each publication to the secretariat as soon as they are available. Assimilating this information and having it to hand in a format that enables the Oireachtas to carry out its functions is a key challenge. A parliamentary budget office will potentially have a critical role to play in answering this challenge. We will continue to share all the information we can with the parliamentary budget office and the committee to facilitate this. A memorandum of understanding between the parliamentary budget office and the Department on the sharing of information and operational modalities will be important as the office is developed. I thank the committee for this invitation and my colleagues and I will do our best to address members' questions.

Photo of Lisa ChambersLisa Chambers (Mayo, Fianna Fail)
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I invite Mr. Watt to make his opening statement.

Mr. Robert Watt:

I welcome the opportunity to speak to the committee alongside my colleague from the Department of Finance, Mr. Derek Moran. I am joined by Mr. John Kinnane and Mr. Robert Scott from my Department. In particular, I welcome the opportunity to discuss how my Department can assist the work of the Committee on Budget Oversight in carrying out its duties. I begin by emphasising my Department's role in the recent improvements that have been made on budget clarity, oversight and engagement. The medium-term expenditure framework provides Departments with greater clarity regarding available resources and better planning in the provision of key public services. Moreover, the whole-of-year approach to budgeting facilitates greater engagement with the Oireachtas and shifts the focus on budgeting away from one single event in October.

More information than ever before is now available relating to how public resources are allocated and utilised. A number of key milestone events facilitate the publication of detailed information during the year. The summer economic statement outlines the overall fiscal stance while the national economic dialogue facilitates a robust exchange of views from various stakeholders, including members of Oireachtas committees, on the competing economic and social priorities facing the Government. The mid-year expenditure report publishes the pre-budget baseline for departmental expenditure, represents the starting point for examination of budgetary priorities by the Oireachtas and identifies areas where expenditure pressures may arise. Allocations for the coming year are subsequently published in the expenditure report on budget day, with three-year multi-annual ceilings in addition to details of specific budgetary measures. The Revised Estimates Volume, published in December, details the specifics of the coming year’s allocations and also provides the public and Oireachtas committees with convenient at-a-glance information on what services are being provided. The Minister for Public Expenditure and Reform has announced his intention to go further in this regard with a new performance report to provide more timely performance indicators to sectoral committees than is currently possible through the Revised Estimates Volume. It is expected this new initiative will be published this month.

The prudent management of expenditure has played a significant role in the stabilisation of the public finances, with a reduction in the underlying deficit from 11.5% in 2009 to less than 1%, projected, in 2017. Economic conditions have improved markedly in recent years, and increases in expenditure over the past three budgets have been prudent and sustainable, averaging just 3% per annum. As the committee is aware, the management of the annual Exchequer funding provision allocated to Departments is governed by the rules detailed in public financial procedures. On an ongoing basis, managing the delivery of public services within budgetary allocations is a key responsibility of each Minister and his or her Department, and measures are in place to help ensure that these budgetary targets are met. The Department of Public Expenditure and Reform is in regular communication with all Departments and offices to ensure that expenditure is being managed within the overall expenditure parameters. The drawdown of funds from the Exchequer is monitored against published expenditure profiles, and there is regular and timely reporting to Government on these matters. This information is published monthly as part of the Exchequer statement published by the Department of Finance. As the year progresses, year-end spend can finish ahead of profile. Explanations for this include forecasting issues and higher than anticipated numbers in demand-led programmes. In addition, policy decisions taken by Government can increase expenditure over and above that forecasted in the Revised Estimates Volume.

I turn now to the specific topics raised by the committee in its invitation letter. To set out the expenditure performance for the first quarter of the year, gross voted expenditure to the end of March was €13.599 billion, which is €130 million below profile, with gross voted current expenditure €155 million below profile and gross voted capital expenditure €26 million above profile.

At this stage, there is no evidence of any significant emerging pressures which may have significant implications for the achievement of expenditure targets for 2017.

The finance function in each Department and corresponding Vote section in the Department of Public Expenditure and Reform monitor emerging expenditure trends closely on an ongoing basis. This is to help ensure that there is early identification of areas of expenditure pressures. This means that early action can be taken to ensure that overall expenditure levels at Vote group level are fully consistent with Voted allocations and overall expenditure targets are achieved.

I would like to reiterate my Department’s intention to be engaged with the committee to the fullest possible extent. My officials have made themselves available to the committee on numerous occasions and I will ensure that this continues in order to assist with the work of the committee.

I am aware the Committee have been considering their information needs to discharge their mandate. I would like to address these suggestions in turn. As previously mentioned, the timely expenditure information already published as part of the Exchequer statement contains detailed information on current and capital expenditure by Vote group. This is publicly available and my officials would be happy to engage on any issues related to expenditure performance on a monthly or quarterly basis. The orders of reference for the committee refer to a situation where significant variations from the expenditure profile could impact on the overall fiscal position. The Exchequer statement provides information to facilitate such an assessment and could be enhanced by advising the committee of the reasons for any substantial variances that could negatively impact the end-year position.

The committee has highlighted the issue of potential expenditure risks and I would like to address this in regard to Voted expenditure. A fundamental principle of the medium-term expenditure framework, MTEF, is that responsibility for meeting expenditure needs within agreed envelopes is a matter in the first instance for the relevant Department via reprioritisation or procedures such as virement within Votes. This is necessary to avoid an expectation that emerging issues need to be addressed through increases in expenditure allocations. Another important consideration in reporting potential expenditure risks is the Government’s prerogative in terms of decision-making. This includes expenditure priorities and choices inherent in allocating increased funding resources to any spending programme.

In regard to the committee’s query on the main drivers of expenditure, the most well known of these relate to demographic pressures such as the provision of additional teachers or a larger number of citizens qualifying for the State pension. The Irish Government Economic and Evaluation Service, IGEES, staff within my Department conduct regular analyses of such trends in order to inform the setting of ministerial expenditure ceilings published in the expenditure report. The detailed analyses of demographic trends are available on our departmental website. As a result of the ongoing work, an amount of €45 million was provided for these issues in 2018.

Another key driver is staff numbers. There has been significant recruitment in front-line areas in recent years with almost 18,000 or 6% additional staff recruited since 2013. Public sector pay is another issue for which provision has to be made. An allowance has already been factored into the budgetary arithmetic for 2017 and 2018 to take account of the Lansdowne Road Agreement, LRA. Recommendations from the Public Service Pay Commission are expected in the second quarter of this year and following this the Government have committed to begin talks on a successor to the LRA which will obviously have implications for expenditure over the medium term..

My Department has increased both the quantity and quality of its engagement with stakeholders on expenditure matters in recent years. I am confident that the level of information currently available provides a very strong basis for an analysis of expenditure performance.

I would like to express my appreciation once more for the opportunity to speak to the committee.

Photo of Joan BurtonJoan Burton (Dublin West, Labour)
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Like many people, I was slightly surprised at the fall-back in income tax and related revenues in the quarterly returns. While I appreciate that the first quarter is a little too soon to be able to make a reliable forecast for the rest of the year, there are specific questions I wish to ask about it. There has been very welcome news about the continuing rise in the number of people employed and the continuing fall in the level of unemployment. Is there a reconciliation between the numbers of people in employment and the income tax revenues under the principle headings of PAYE, income tax, USC, PRSI and so on? Is that part of the work of either or both Departments?

There are a few issues which may partly explain the fall in the actual figures significantly behind profile at this early stage of the year. Counties such as Donegal have reported a 5% or 6% fall in tourism. The drop is generally agreed to be due to Brexit and the sterling exchange rate. The fall in tourism is similarly evident in some other parts of the country. There is much worry in the tourism sector that the trend could continue.

Another potential reason is that there may have been a very large development of the shadow or grey economy so that while there are a lot of extra people at work, they are not fully accountable for PAYE or other labour tax purposes or contributions. One guideline in that regard is the PRSI figures. Are the figures in line with expectations or behind target?

Third, it is possible that the phenomenon of bogus self-employment which has been a factor in the Irish economy is expanding. This would mean many more people who would traditionally have been employees now being classed as contractors, assistants, operators or whatever. They are deemed to be self-employed but they are not. I would like to know what happened to the report into bogus self-employment which was being worked on by both Departments with the Department of Social Protection. Why has it never been published? I commissioned it when I was Minister for Social Protection. I am sure it is long since finished but, notwithstanding the fact that I have asked many questions about it, it has yet to see the light of day.

Perhaps our statistics or tax and revenue systems are not capturing the contribution being made by people who have immigrated to Ireland, not necessarily returning Irish emigrants.

It is quite worrying that this fall-back should happen. One of these Departments is involved in sensitive wage negotiations. What do the witnesses think may be contributing to this? It is important in terms of forward financial planning and the remit of this committee.

Mr. Derek Moran:

It is a long question. I will try to answer as much of it as I can and perhaps my colleagues can assist with anything I have missed. The Deputy is correct that the softer first-quarter performance of income tax in particular is something that we need to be alive to. The first quarter tends to be unreliable because that is when P35s, refunds and end of year tax returns are completed. It is a little more unstable than other quarters. The figures are not worrying but they are puzzling. We have looked at the performance. It is interesting that over the first quarter, PRSI has performed about 7 % year on year. PAYE has performed at about 6.5% which tallies with the growth in employment and earnings growth. The shortfall results from non-PAYE sources, mainly the USC. That raises a number of questions.

We have done some analytical work in partnership with the ESRI, which was published in the last fortnight. It looks at how elastic these taxes are. We do this on a regular basis for forecasting purposes. Generally, we find that with income taxes for every 1% increase in earnings income tax grows by 2%. That would be the elasticity; sometimes a bit more, sometimes a bit less. We performed a detailed analysis, again jointly with the ESRI, showing that this holds for PAYE very strongly. When taken with schedule D, the average elasticity is still around 2% but it is actually significantly lower for USC at about 1.2%. For every 1% increase in income there is a 2% increase in income tax, but only a 1.2% increase in USC. Some of this has to do with the structure; the rate progression is much slower and it makes it more stable. As the economy slows down, while we do not get a big pick up when the economy grows then we would not get a big drop as it slows. There are pluses and minuses. This is one part of it. We have done a back-forecast as distinct from a forward forecast and it reconciles some of the gap on USC that has emerged over the last 12 months.

We are also looking to see if there are other aspects of USC that make it different to income taxes. The Revenue Commissioners and the Department are putting in efforts to try to explain it. Some of the more obvious structural differences in USC is that on return to employment a person can retain their medical card for up to three years. It means that they are capped in how much USC they will pay, which is at the middle rate I believe. They still pay at that rate for a combination of three years no matter how their income increases. Given the employment generation over each of the last three years, and if we accumulate that USC rate figure, it may be acting as drag on it. We are at the early stage of looking at this, but together with the elasticity it may explain some of the performance issues around that.

Reference was made to people coming in and out of employment, especially from abroad. Members will have seen in the report that the Revenue Commissioners are in the process of a consultation to modernise the PAYE system to give more real-time information. This will be a huge help in making adjustments to tax in real terms and given data for that.

With regard to the self-employed I understand that the report initiated by the committee and the Minister is due for publication shortly. I will come back to the committee with a timeline on that.

Photo of Joan BurtonJoan Burton (Dublin West, Labour)
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The report has not fallen into a hole.

Mr. Derek Moran:

No it has not.

Photo of Joan BurtonJoan Burton (Dublin West, Labour)
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It has not been burned.

Mr. Derek Moran:

The consultation has been done and I will come back to the committee on that. I am not sure about the impact of sterling on tourism. On the reconciliation with VAT we see that VAT is still doing quite well but we do not get the level of disaggregation to give us a real-time insight into it. It might, however, be worth looking at that aspect. Is there any query I have missed?

Mr. John McCarthy:

I will elaborate on the issue raised about employees incorporating. There are data published by the CSO in the labour force survey. The committee will be familiar with the quarterly labour force figures. These figures break down the total employment into the number of employees and self-employed. Up until the fourth quarter of last year there was absolutely no change in the share of self-employed as a percentage of the total. I am familiar with the arguments made that this may be one of the explanatory factors. Up until the fourth quarter of last year, however, it does not seem to be an issue but I guess we might find out more when this report is published.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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Cuirim fáilte roimh an fhinné chuig an choiste. Tá cúpla ceist agam agus phléigh an Teachta Burton cúpla ceann de na hábhair. I wish to dig a bit deeper on the taxes, in particular on PAYE and the USC. Mr. Moran spoke of the elasticity and the different rates and I would like to go into that a bit deeper. One of the clear ways that we may be underestimating the USC is around the return to work and the retention of the medical card in certain circumstances if a person was eligible for social welfare provisions in the preceding year. Is the Department considering breaking the link and would those cases be based on income alone as opposed to a medical card for a person who returns to work? When the measure was introduced it was for a different reason. Is any consideration given by the Department in that regard?

Mr. Derek Moran:

That is a policy matter. When one looks at this situation for analytic purposes, we look at how to explain the behaviour of the tax. Policy is what policy is and we work within that framework. The analysis tries to understand why one element of a charge on income behaves differently to another charge. One of the things that must be done is to identify what characteristics are different between the taxes. To some extent we will fix the issue of elasticity in the next forecasting round and we will be using a lower elasticity for USC projection, but we also look to see if there are other structural aspects and what modulation must be done within the forecast. It is strictly a forecasting issue.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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Okay. Does Mr. Moran have any indication of the cost of the tax foregone as a result of that rule?

Mr. Derek Moran:

This is part of the work we need to do, to see if ultimately it is this reason. One must look at the differences between the structures in the tax system and ask if the effect is due to the cumulative effect of very strong employment growth where people may be returning from the live register and retaining benefits. This would work its way out over time as the entitlement ends after three years in certain circumstances. We are just trying to get an analytical handle on why certain elements of the tax base are behaving differently to other elements, even though they are charged broadly on the same income base.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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Outside of that issue, will Mr. Moran explain to the committee the USC matter. Income tax is up by 1.4 % in its profile and USC is down 3.9%. USC is not linked to income tax in all cases, but a large proportion is linked. How could we be behind by nearly 4% in terms of profile?

Mr. Derek Moran:

I believe we have the income tax and then the rest, which includes USC - if I am correct. All elements such as DIRT, professional services withholding tax and those smaller elements of income tax are behind profile. It is not just USC. USC is not the biggest part of it.

Mr. John Palmer:

They are not all behind profile but it is probably best to look at it in year-on-year terms. Some of the taxes such as life assurance exit tax, which is put into the income tax pot, is down for the first quarter by approximately €25 million year-on-year according to Revenue. Schedule D is a little behind. DIRT - which we are expecting - is €33 million behind. It is a combination of some of these smaller taxes being behind and then USC coming in lower than anticipated. Obviously, given the budgetary package, we were expecting to have reduced revenue in USC this year but the loss rate from the package is running higher than had been anticipated. This is why we shall do this piece of work with Revenue to try define the characteristics of that and see if there are any reasons that can be clearly identified.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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I am going to move on. Reference was made to the first quarter figures, and we take those figures with all the caveats that have already been mentioned. Mr. Moran has said that the Department is puzzling over that. Are corporation tax receipts for the first quarter also puzzling the Department given that this figure is 25% behind profile?

Mr. Derek Moran:

I believe this would be less of a puzzle. The lumping nature of corporation tax means that the variation from one month to the next, especially in the lower target months, is not significant. I would be far more concerned if we saw big shortfalls as we go through May and June, which are big payment months. The capacity for that to be picked up as a change in the reporting of payment dates by a small group of companies is quite significant. This is why I do not believe that it being behind profile would raise concerns. If we saw a repeat in May and June then, needless to say, it would perhaps be a more serious concern.

Mr. John McCarthy:

I would like to make one small point before we move off income tax. This time last year income tax was also behind profile and it came in at the end of the year pretty much there or thereabouts. As the Secretary General mentioned earlier, the first quarter is a little bit messy in terms of reconciling P30 and P35 and so forth. We will monitor it but I would not read too much into it at this stage.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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I welcome that clarification. The lumpy nature of the corporation tax is probably best shown by the fact that ten companies paid 40% of the entire corporation tax. I have been screaming about this for a long time. Are the witnesses concerned about the volatility of corporation tax or the risks associated with such a large amount of tax in small firms?

Mr. Derek Moran:

There is no doubt that the concentration is a risk. The Department has published its concerns about it in the past two or three years. The top ten companies paid approximately 41% two years ago. It has come back a little bit to 37% last year. That is a feature. Big profitable companies tend to pay the most corporation tax. In the UK the Saïd Business School analysed UK corporation tax and found that 1% of companies paid 80% of corporation tax. The Revenue Commissioners' analysis of what 1% of companies would pay would be very similar here.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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One per cent of companies could be 1,000 or thousands of companies, particularly in the UK. We are talking about ten chief executive officers, CEOs, making a decision and there would be a huge hole in the bucket if they made that decision here and we would have serious austerity.

Mr. Derek Moran:

That risk is there and it is a question of how we handle that over time. I know concern was expressed, particularly in 2015, about the sudden step change in the level of corporation tax. When we have the data, the Revenue analysis always suggests that there was an aggregate improvement, an overall profitability reflected in it. The national accounts measure of profitability showed that there was a big step change in that as well. It has been maintained in the base. The growth rate in 2016 was approximately 7.5% and we are projecting more normalised levels. I always keep an eye on is the fact that corporation taxes generally contribute within a range to the overall Exchequer take. It is between 10% and 16%. Certainly we are at 15.5% but we are within the normal range.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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The European average is 10% but we are 15% so we are 50% ahead of European averages.

Mr. Derek Moran:

The vulnerability is in the spread.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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In last year's budget they spent last year's fiscal space and half of this year's fiscal space in terms of the carryover. The net fiscal space that was available for the coming budget was approximately €0.5 billion. Has the Department altered the projections on that? Will we see something significantly different? The Department surprises us quite often. It came before the committee last year and told us it was €1 billion and a week later it was €1.2 billion. Will we get another pleasant surprise next week where the fiscal space has increased again?

Mr. Derek Moran:

The fiscal space will not be included in the stability programme update, SPU, next week. We will do that as part of the summer economic statement, SES. Part of the reason for that is to have the maximum amount of information so that we can get a number that is less volatile and less subject to those external data inputs that we need to actually make it work. We do take inputs in making those calculations from the European Commission. People like me and Mr. Watt who have to draw the strands of this together are never happy where there is uncertainty. Two years ago, and there was some confusion about this, when the Commission was setting the structural objective it was moving around all the time. We needed it to fix in the spring on a number that we could prepare a budget towards. For example, the deflator is the average of the spring and winter forecasts, so we interact with the Commission in the autumn trying to figure out its deflator so that we can apply it to the fiscal space measure. It will fix that in May which takes that uncertainty out of it. In many respects we produce a figure based on the data that we have at a point in time. To make that figure less volatile we will produce it in June as a part of the SES, when we have some of that additional external input.

Some of the changes float from the national accounts, which are only ever published in July and are agreed with EUROSTAT in terms of what the expenditure base was. That is not done until the end of September. There is a volatility built within it. We do our best to get it as stable as possible. Some of the changes will help with that.

Mr. John McCarthy:

There is this iterative process between EUROSTAT, the Central Statistics Office, CSO, when it is finalising the base for the current year and last September there were quite sizeable changes to the investment figure which because it is smoothed over four years carried through into the following year. There was also an issue with the full year cost of some of the budgetary measures, the Revenue Commissioners had made revised Estimates as to what the full year costs would be. Our intentions are to provide as much information as possible. We can never rule out, unfortunately, that there may be changes. There might be other issues on the investment side this year. There could be something that we just do not anticipate. We do in good faith put the information out and stand over it as best we can but there is always the potential at the last minute.

Mr. Robert Watt:

In respect of the fiscal space, the changes that were made need to be seen in the context of €58 billion. While we look at the increment from budget to budget it is a not insignificant sum but in the overall size of the budget it is not as significant. The estimation of it, and the team has gone through it, the number of variables and the uncertainty is significant in respect of what is potential growth in real and nominal terms and the CSO is revising real gross domestic product, GDP, and deflators in calculating the nominal GDP every quarter and every year so it is very difficult.

The Department also has to calculate the gap between where we are now and the structural balance in order to calculate the convergence margin to adjust then the potential growth. The medium-term objective is structural term so it is unreservable so there are calculation issues which adjust. There is enormous complexity. While everything is done to reduce the possibility of surprises it cannot be ruled in the future that changes will be made from mid-year to budget day to take account of things that may change. That could go in the other direction. It could be downward rather than upward adjustment.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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We know that it will be continually revised. The exception taken by this committee, which monitors these issues, is to the fact that it was revised within a week and jumped 20%. That was not the first time it happened. It happened in the same way the previous year. We will tease that out.

Could Mr. Watt tell the committee where we found the €120 million for the pay deal, the €50 million for the gardaí and the €59 million that will be required for the continued suspension of water charges to the end of the year, that is almost €230 million? Will that money be found within the allocated resources because the Estimates are out, it is additional money that was not there at the time or additional commitments that were not factored into the budget.

We were told not to worry about it at the time, which is a complete and utter insult. I thought the Minister's performance before this committee really devalued this committee. I have lost a lot of faith in the committee if the Minister is going to treat it like that when a deal is struck, and I have no problem with the deal, by telling the budget scrutiny committee not to worry, we will find that. That is ridiculous and it would not be tolerated in any other jurisdiction and should not be tolerated here. There are commitments which have to be found from current resources. Can Mr. Watt enlighten the committee about where that money is coming from out of this year's allocated resources?

Mr. Robert Watt:

I will go through the different issues. The €50 million for the Garda Síochána was addressed in the Revised Estimates. There was an increased allocation to the Department of Justice and Equality to reflect that. The Department also had to make savings within its allocation. The issue of the Garda pay was addressed in advance of the Revised Estimates being published in December, so that has been accounted for.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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We have €5 million savings but we do not have the breakdown under the Garda headline. Has that €25 million-----

Mr. Robert Watt:

The Revised Estimate for the Department of Justice and Equality contains all the allocations across the different programmes, including the pay allocation to accommodate the pay arrangements for the Garda Síochána. The issue of the Garda pay was addressed. The €120 million-----

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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The additional €25 million was allocated in the Revised Estimated but there was another €25 million to be identified in terms of savings in the Department. We do not have the detail of those savings in the presentation as to whether the Department is running ahead or behind profile or is on profile.

Mr. Robert Watt:

The Department of Justice and Equality is running more or less on profile for the first three months of the year. The different components of the Department of Justice and Equality have to stay within the allocation that is set out for them. They are running €8 million below the profile. They spent €578 million for the first three months and that is marginally below so, in effect, they are on profile. The variance is marginal. Their job is to stay within their allocation for this year and we will see how the year pans out in terms of how they do that.

On the €120 million, which was the Government's response to the implications of the Garda deal under the Lansdowne Road agreement and to provide space to discuss the future of pay determination, the Government decided to bring forward the payment from September 2017 to April 2017. That will increase the budget requirement and the Minister before this committee and previously said that is a matter that will be looked at during the course of the year, as the budget evolves. A figure of €120 million is an important number but, in the overall scheme of things, we will see how we can accommodate that, given the differences between the budget allocations and the actual emerging positions for Departments as the year progresses.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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Does Mr. Watt have any idea of where we can make savings? Will the number of home help hours be cut or perhaps we will not renew some Garda cars? Will we cut social supports or community schemes? Savings have to be identified somewhere, savings which the Departments were not able to identify last year. Last week, public sector workers were notified of an increase under a pay deal which will be welcome. Where is the money coming from? Surely there are officials working on where that money will be found.

Mr. Robert Watt:

At various stages during any fiscal year, issues will emerge. Previously we had issues around flooding, where the country was subjected to a very significant storm and there was a lot of damage. The Government responded to the calls from every single Deputy in the House and lots of people outside the House to allocate more money. The Government decided to commit to allocate additional money to local authorities. At the time the Government stated it would consider how to fund the allocation during the year, as the budget evolved. A Government needs the flexibility to be able to make decisions during the year and find the money over time and to adjust its budget accordingly. It is an enormous budget. The budget is set in October but the world moves on, and now six months after the budget was set, issues have changed and we are addressing them and trying to find solutions that arise. As the Minister said on the previous day, the Government decided for policy reasons to bring forward the welcome pay increases for public servants and we will see during the year how we will fund that additional commitment.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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As Secretary General of the Department of Public Expenditure and Reform, does Mr. Watt believe the budget scrutiny committee should scrutinise where the money for the additional commitment is coming from or should we just accept that the Minister will find it? I agree with everything Mr. Watt has said. There needs to be flexibility and one needs to respond to things, but I am sure our role - Mr. Watt can correct me if he has a different opinion - is that when Government needs to respond fiscally to an issue or a demand, we should scrutinise it. As I have said, for every euro one spends in one area, one must take it from another area. We may support that idea or we may not. I have no idea and this committee has no idea of where the €120 million will come from at this point in time. We hope it will come from efficiencies or something similar, which will not impact on people or front-line services. However, we have no clue. We have not been given an indication of where it is coming from. Does Mr. Watt have an idea of where this money will come from at this point in time?

Mr. Robert Watt:

I do not wish to repeat the answer again, or waste members' time, but the process of members asking questions is scrutinising what is happening in terms of the budget for this year. As the months proceed, we will be able to discuss in more detail how the position is emerging.

The options for the Government are clear. The Government can make a policy decision to save money elsewhere. A demand-led scheme might deliver savings, a capital project might slow down or might not be delivered on time, or there could be other efficiencies. There could be a variety of changes. The Government might decide to have a Supplementary Estimate if the House supports it in the autumn and then the allocation will be increased. There are a variety of different options available to the Government. We shall see as the year progresses how we deal with it.

I do not think this is a new or startling development. This happens every year. It is unusual in as much as it is a high profile policy decision that the Government took in respect of public sector pay, so in that sense it is different. Every year things emerge between budget day, Revised Estimates and then as the year progresses, and the Government is flexible and adaptable in terms of policy choices and options in order to deal with the consequences of that.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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I will not go over the point about the role of this committee to scrutinise all of those steps again. I asked a question on the €59 million that is required to meet the cost of not collecting water charges for the rest of the year. Will that be found from the same place?

Mr. Robert Watt:

We will have to see what the decision of the committee is in respect of water charges and what that means for the fiscal position.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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I will leave it at that. We are all puzzled.

Mr. Robert Watt:

I do not wish to be argumentative, but what does the Deputy find puzzling? Does Deputy Doherty think the Government faces a changed budget position in respect of a budget line before it knows all the other things that will happen during the year and announces that it will fund that change from money in one place, when there are hundreds and thousands of moving parts in the budget? No government or company operates on that basis. If there is such a significant material change to the budget that requires corrective action in order to keep the budget on track, that is obviously an issue that the two Ministers and the Government would have to decide, because that is different.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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I mentioned three areas, Garda pay, the pay deal for public servants and water charges. I raised this with the Minister on budget day because I expected this would be the outcome. These issues amount to close to a quarter of billion euro. In the next budget the net fiscal space will be half a billion euro. This is not an insignificant sum. I have no doubt that this will be accommodated within the budget because it is quite large. That is neither here nor there, but the point is that I am on this committee to do a job. My job is to scrutinise the expenditure and where tax revenue is being raised. It is not a case of making a decision the following week. It is three months since this decision was made. It was done in January. I would expect that officials and the Department would have an indication that they will have to delay a capital project, withdraw a scheme or delay the starting of a scheme to try to trim the costs.

In terms of the Garda pay deal, it was very clear that €25 million extra had been allocated and €25 million had to be found from the Department. We have no indication where the €120 million from the pay deal or the €59 million forgone in water charges will be found. Will it be found from one or two or every single Department? Will it come from capital or current expenditure? We have no idea. It is really difficult, and I am speaking personally, to come to a budget scrutiny committee meeting when one does not have the information to scrutinise or when one puts questions on the position from January to date, and we do not have the information. That is not a reflection on the officials. I have listed to Mr. Watt and Mr. McCarthy provide information. I have put genuine questions on the things that I believe we have to do. God forbid, we might find out.

The history in this State is that we scrutinised it afterwards. We dealt with the expenditure of the State after it was spent. We find out six months later that the Department took so much from the mental health budget or the hospital services budget to pay for that. That would not be acceptable, and we would be asked by the public what this committee was doing when our job was to scrutinise these issues. That is the problem.

Photo of Dara CallearyDara Calleary (Mayo, Fianna Fail)
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I want to follow up on that. We had the notion that the Department was just asking questions. We want answers. This is an independent budget scrutiny committee. Its establishment was part of the reforms that came about to try to stop the last financial crash and we are not getting answers. Mr. Moran's Department representatives came in here a week before the budget and said that the fiscal space was €1 billion but on the day of the budget it became €1.2 billion. An additional €200 million was magicked up out of nowhere on the morning of the budget. What is our role in terms of asking interest groups to come before this committee to present their case and for us to make an assessment of that case when in terms of an additional €200 million, it is as if the Taoiseach went out and bought a lottery ticket?

Public service pay was done on the hoof. We had a Garda deal bringing forward aspects of the Lansdowne Road agreement. As I look at the various Department figures, all of them are more or less on profile, which is a tribute to everybody, but in terms of the room to find that kind of expenditure, it will come from making choices within Departments. That means cutting other programmes. This is a budget scrutiny committee and if we are to work to the role of this committee, we have to make an assessment on that in terms of choices that will be made within Departments so that when the witnesses' colleagues in line Departments come before us, we can put that to them. That is the frustration felt by the members of this committee. We are either an ornament or part of the budgetary process and until we start getting answers, and using the answers to the questions we are asking to make our contributions to this debate, I will continue to be frustrated.

I want to raise a couple of other issues. Regarding yesterday's figures, we focus on income tax in terms of corporation tax, excise tax and across all the headings they are behind profile. For instance, excise tax is down €244 million on 2016; it is €91 million behind profile. Corporation tax is down €134 million on 2016; it is €180 million before profile, and we have gone through the income tax. Mr. Moran explained that by describing corporation tax as being lumpy etc. but is it not time to change the profile modelling system? Ten years ago, the Department of Finance was getting its forecasts completely wrong and that was an element that should have been addressed in terms of the position post-crisis. Are we moving back into the space where the Department's forecasting models are not reflecting what is happening in the economy?

Mr. Derek Moran:

On forecasting, the overall tax takes came in on or just ahead of the forecast. In terms of the numbers, if they fall within an estimated forecasting margin of 1% or 2%, the numbers either side of that are quite big. Can we be happy with the figures, and particularly the March performance? No, we cannot. It is a cautionary note. This is not a good performance and we have to scrutinise that as we go forward. We have spoken about income tax and corporation tax. The Deputy may recall that last year we had a very big surge in excise because the tobacco industry was taking stuff out of bonds in advance of the introduction of plain packaging, which ultimately did not happen, and we got a very big uplift in receipts in that year. There is a distortionary effect in that which makes both the year on year forecasting and the profiling quite difficult.

Photo of Dara CallearyDara Calleary (Mayo, Fianna Fail)
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Before Mr. Moran moves on, in terms of excise, is there a county by county breakdown? Pursuant to the line Deputy Burton was following, are we noticing a trend in specific areas in the country?

Mr. Derek Moran:

It is product by product rather than county by county. The brunt of it is taken out of bond. It gives us that level of insight.

VAT over the quarter is strong. Profiling is imperfect. We had the example of the pre-purchase of tobacco last year in advance of the introduction of plain packaging and we get a distortion and try to work our way around it. There is always the risk of profiling being wrong. Generally speaking, tax forecasting falls within a reasonable bound of statistical error. It is very easy to talk about the abstract. If it is on the negative, there are fiscal implications but it is a forecasting exercise. We are taking information now and predicting the future compared to the trends in the past. As Mr. Watt mentioned earlier, even GDP data is revised for five, six and seven years after the initial Estimates. We have to continually adjust for that. The point is to keep it continually under scrutiny and to review it in a root and branch way every few years. In terms of the elasticities, so to speak, of the ESRI, part of the joint research programme is to examine those very issues, give time to the analytical piece and look at the reason the income tax base is behaving slightly different across its components. Does Mr. McCarthy want to say anything on the forecasting side?

Mr. John McCarthy:

No.

Photo of Dara CallearyDara Calleary (Mayo, Fianna Fail)
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The growth figures etc. are very interesting. We took a huge international hit about our own growth figures last year. The term "leprechaun economics" was branded, which did not do our profile any good and caused difficulties in terms of our relationship with the EU. What has the Department done to manage those lumpy bits, to use Mr. Moran's own phrase, out of our growth figures to ensure we can have some sort of a credible presentation on the current state of our economy?

Mr. Derek Moran:

An expert group was established to look behind the GDP numbers so that we could give an insight into a more stable set of aggregates. The report, and Mr. McCarthy was a member of the expert group, suggested that a new measure called GNI was more representative. It will not be published until the autumn.

Mr. John McCarthy:

In June.

Mr. Derek Moran:

It will be published in June, and we will be looking at producing budgetary aggregates using that as well as the more traditional GDP data to give a cleaner view in terms of taking some of that distortionary effect out of it. It is particularly important in terms of other countries looking in and trying to get a handle on the Irish economy, which structurally may be different from other economies with which they are familiar. Does Mr. McCarthy want to add anything to that?

Mr. John McCarthy:

With regard to GDP in an Irish context, the information content is quite limited. It is highly distorted by the multinational companies, the globalisation process and issues that are evolving over time such as so-called contract manufacturing and so forth, which is production that takes place elsewhere but from a statistical perspective is included in the Irish accounts.

The figures are compiled to the highest European and worldwide standards. However, they must be treated with a certain health warning in an Irish context because of the multinationals. To give the Deputy an example, approximately five or six firms account for approximately one third of exports. If something happens in one quarter and it happens on the first day of the next quarter it can raise huge issues.

There is no doubt that we took a bit of a reputational hit on foot of the 26% growth figure. The 26% figure was compiled to the highest standard but it was due to the operations of a very small number of firms. The so-called expert group, which was chaired by the Governor of the Central Bank, has come up with a new indicator which will take out some of these multinational practices. The retained earnings of redomiciled firms and the depreciation of the capital stock owned by foreign firms will be excluded.

This measure will give a better indicator as to the level of living standards in Ireland and the Central Statistics Office, CSO, has also committed to publishing indicators that exclude some of the more volatile components of investment, exports and so forth in order that we and others who look at these issues can get a better handle on where the economy is in the cycle.

Photo of Dara CallearyDara Calleary (Mayo, Fianna Fail)
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I want to ask about the performance to date of one specific measure in the budget, namely, the help to buy scheme to which €50 million was allocated in the budget. What is the position in terms of likely expenditure on that at the end of the first quarter?

Mr. Derek Moran:

Off the top of my head, so far there have been about 4,700 applications, 1,200 of which are gone to stage 2, which is the approval stage, and about 500 of which have been paid. The average payment to date is approximately €15,000. I should say refund rather than payment because it is a refund of tax paid.

People have been taking the 4,700, multiplying it by 15 and getting a larger number. At the end of the day, we do not know how many of the applicants will proceed and get a mortgage or buy a second-house instead. The cost to date is approximately €8 million. We are watching the situation closely and Revenue is producing real-time, publicly accessible data as we go along.

Photo of Dara CallearyDara Calleary (Mayo, Fianna Fail)
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Based on the 4,700 to date, what does Mr. Moran anticipate will be the number of applications for the full 12 months?

Mr. Derek Moran:

Given the nature of house purchasing, many will be loaded towards the end of the year. It will not be constant. The number of applications has slowed down significantly. We are picking up many people who would have been eligible from the second half of last year as well.

Like some other expenditure, this is a demand-led scheme. Our best estimate at the time was a cost of €40 million to €50 million. We are running at a spend of €8 million after the first quarter. The average or the quarter's number could be multiplied by the 4,000. It will fall within a range. There may be pressures over the 15, but it is too early to say. We are watching the situation closely.

Photo of Dara CallearyDara Calleary (Mayo, Fianna Fail)
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Regarding the income tax figures, what is the median salary in the economy? Is there a concern that much of the job creation that has been trumpeted is low wage and part-time? This relates to Deputy Doherty's point. If people are still entitled to benefits, are we driving a low-wage model of job creation?

Mr. Derek Moran:

During the transition to work from unemployment, someone's earnings can increase by quite an amount, but he or she might retain the concession. That in itself is not driving wages down. One of the positives from the employment data over recent quarters is the extent to which jobs are now full-time ones rather than part-time ones. Some job creation early on might have been part-time, but there has been a great deal of migration from part-time into full-time. Mr. McCarthy is closer to the data than I am.

Mr. John McCarthy:

I do not have the median to hand, but the average wage is between €35,000 and €40,000 per annum.

Photo of Dara CallearyDara Calleary (Mayo, Fianna Fail)
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How does that compare with the EU?

Mr. John McCarthy:

It is probably higher than the median, but I do not have the figures to hand. I am sorry.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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The median income is closer to €28,500.

Photo of Dara CallearyDara Calleary (Mayo, Fianna Fail)
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We are reviewing the capital plan and a consultation process hosted by the Department of Public Expenditure and Reform is under way. We have received several depressing presentations on the state of capital infrastructure, be it roads or public transport. The Transport Infrastructure Ireland, TII, presentation some weeks ago was particularly depressing. We will be spending less on our road network in 2025 than we were in 2008. Spending on road maintenance, never mind new road projects, will be €400 million behind where it should be by 2020. Deputy Ryan will probably discuss public transport, but we are ignoring the potential value of public private partnerships, PPPs, as regards roads. The TII has been told that it cannot use the PPP model for road projects. We have not engaged with the Juncker capital plan in terms of the money that it makes available.

Is Mr. Watt or Mr. Moran engaging with the EU on relaxing its fiscal rules for capital projects? Such projects seem to be coming to a standstill. TII's pipeline will dry up by 2018. That means that, even if extra funding were to become available, the pipeline will not exist. It takes seven years to get a road project from commencement to being on site. Many factors are conspiring against our capital infrastructure at a time when it is creaking. What are the witnesses' thoughts on that and the rules and how are their Departments engaging with the EU on relaxing fiscal rules in terms of capital expenditure?

Mr. Robert Watt:

The Deputy said a few moments ago that he was worried about repeating the mistakes of the past, but he is now proposing that we should relax those rules that are preventing us from making some of the fiscal mistakes of the past-----

Photo of Dara CallearyDara Calleary (Mayo, Fianna Fail)
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I am proposing a relaxation of the rules as they relate to infrastructure-----

Mr. Robert Watt:

-----when we are just getting the budget balanced and the economy is approaching full employment, so-----

Photo of Dara CallearyDara Calleary (Mayo, Fianna Fail)
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No. I want to be very clear on this.

Mr. Robert Watt:

I am being fairly clear.

Photo of Dara CallearyDara Calleary (Mayo, Fianna Fail)
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My proposal relates to infrastructural projects that this country needs, have a long-term return, add to employment creation and, in particular, address the regional balance, which Mr. Moran's predecessor and namesake was concerned about. These could be in public transport or health projects. The capital expenditure in the health field is behind schedule. I want to be clear - I do not want to see a relaxing of the rules for day-to-day expenditure, but what are the witnesses' proposals on infrastructural projects?

Mr. Robert Watt:

The Government has set out its capital spending plans. This year, there has been a 10% increase on the 2016 allocation. Last year, the Government announced an additional €5.2 billion of spending over and above the previous plan. It has allocated half of that spending to housing and we are engaging in a consultation process with Departments to discuss where the remainder of that money will be allocated.

When considering infrastructure, it is useful to start with an assessment of the quality of our infrastructure. The Deputy used various terms like "dire", "chronic" and so on, but what is the assessment of our airports, sea ports, motorway network, gas and electricity? No one would deny that there are issues with housing and public transport in Dublin and the issues with health infrastructure, schools and so on are known. When demanding infrastructure, one needs a realistic and fair assessment of the quality of current infrastructure that is based on supply and availability relative to demand now and into the future.

The Government is in a process of consulting on how the additional funds will be allocated. That will lead to an increase in spending across various areas that will be decided upon over the next six months. The Minister's intention is to make announcements on budget day.

Regardless of what rules or fiscal framework we have, there is a limit on how much we can spend. We should not just focus on the quantum of capital, but also on the need in question, how we are addressing it and the nature of projects. Previously, we built infrastructure that was not required. Whatever we do in future will need to address a clear need and the infrastructure must generate a benefit.

I do not know about TII saying that it cannot undertake PPPs or that PPPs are off the table. Most of the motorway network has been built in partnership with the private sector. There are various tolling schemes and schemes that do not involve tolling but are funded by unitary payments, which are fully funded by the taxpayer. Hybrid models have been used. PPPs remain a liability to the State and are not necessarily off-balance sheet. The unitary payment is paid every year. Based on the projects that we have supported, the liability to the State is between €4 billion and €5 billion. PPPs spread the cost of funding over a period but do not eliminate the cost to the Exchequer. A liability remains.

We have a programme of PPP works in place in primary health care, schools and social housing. The Minister would be open to discussing whether any of the potential road projects could be funded through PPP or a mix of PPP and tolling. All funding opportunities are being explored. When deciding on whether to fund something from the Exchequer directly in the traditional way or via PPP, we need to determine the best value for money for the Exchequer. It is debt on the State's balance sheet, so we need to determine the best financing and cost approach to funding our capital needs.

Photo of Dara CallearyDara Calleary (Mayo, Fianna Fail)
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Might TII's presentation be sent to Mr. Watt? It is not us saying this. I will bring Mr. Watt on a spin around my part of the country to show him infrastructure if he wants. TII's presentation----

Mr. Robert Watt:

I know what TII said. The Deputy identified a particular issue-----

Photo of Dara CallearyDara Calleary (Mayo, Fianna Fail)
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Does Mr. Watt-----

Mr. Robert Watt:

-----around road maintenance, which is fine. I am making the general point that, if one considers infrastructure in its totality, it should be acknowledged that there are positive aspects.

We should recognise the fact there has been significant investment in parts of our infrastructure which are now yielding significant benefits and providing fantastic services to people. That is the point I was making. I am not suggesting for one minute there is not a need to increase investment in the road network. Of course, we are familiar with the numbers. We know the debate. Those debates are ongoing and they reflect the fact we have a fairly dispersed population and an enormous road network, which is expensive to maintain and to improve. The debate is taking place on where the funding goes over the next while. There is a consultation process and we are engaging in how the funding should be allocated.

Photo of Dara CallearyDara Calleary (Mayo, Fianna Fail)
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In regard to the departmental heads, for the past number of years the Department of Health is always the one that went out of kilter. It is bang on profile at present. Mr. Watt mentioned, in his interactions with Deputy Pearse Doherty, that we can come back and look at the revised figures but, actually, we cannot. The Department of Health must act within its own resources if it goes over the expenditure allocated this year. The Department of Health is on target. Does Mr. Watt anticipate any difficulties in that Department in terms of expenditure for the remainder of the year?

Mr. Robert Watt:

We are hopeful the Department will manage within the allocation that has been approved. Within the Department of Health, as the Deputy will be aware, there is a large number of demand-led schemes. It is difficult to forecast the demand activity in the hospitals or the demand for medical cards, but the expectation is that we will remain close to or within budget this year.

Photo of Dara CallearyDara Calleary (Mayo, Fianna Fail)
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Has Mr. Watt any concerns about the help-to-buy scheme from the information just given by Mr. Derek Moran-----

Mr. Robert Watt:

No.

Photo of Dara CallearyDara Calleary (Mayo, Fianna Fail)
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-----in terms of the scheme going beyond its budget?

Mr. Robert Watt:

It is a tax issue. As Mr. Moran stated, in any demand-led scheme, whether it is one funded from tax forgone or expenditure, there is uncertainty about what the final cost will be. With a new scheme, there may even be an increased risk because it is more difficult to anticipate the likely demand.

Photo of Eamon RyanEamon Ryan (Dublin Bay South, Green Party)
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I apologise for being late but I had to meet the Minister for Justice and Equality on the review of the Garda, etc. I have a question for Mr. Watt on that. At the last meeting of the Policing Authority the deputy commissioner was asked why he had not appointed the staffing needed in the communications unit in Castlebar and he answered that they had only just got the authorisation and were to advertise. That had been recommended by the Olson report on changing Irish policing. Similarly, the Garda Commissioner, during questioning on the breath test issue, stated that she had only just received authorisation to get her executive team in place and that was part of the reason the Garda it effectively took three years to address some of the figures. Will Mr. Watt briefly summarise for me, because I am not up to speed on it, the authorisation process? I am aware we got rid of the employment control framework. Is there a role for Mr. Watt's Department? I recall him stating previously that we have to start thinking in the Committee on Budgetary Oversight about where we would save, not only about what we would spend? Is there a mechanism in the Garda, where several hundred staff retire every year, for it to decide that instead of replacing them, it would prioritise putting in place the communications team in Castlebar? Why did it take it a year and a half or two years to get authorisation to advertise for a job?

My second question relates somewhat to the Garda in that it seems one of the big problems there is around digital management and digital systems. The PULSE system clearly is not fit for purpose. Has the Department of Public Expenditure and Reform looked at states such as Estonia or Finland which have introduced a digital identifier system which could be used in the health, justice and education systems and which would bring significant efficiencies and savings? If we are looking for savings as well as expenditure options, that seems to be one mechanism which would achieve significant efficiencies and perhaps benefits in terms of our overall expenditure system. We would have a much easier job in the drawing up of budgets and the assessment of what is happening. Has Mr. Watt considered the introduction of such a system or where are we in terms of an overall State management of digital information which would be audited and traceable so that, for example, Garda could take a photograph of a scene which would go immediately into a system which is auditable, traceable and avoids all this incredible paperwork? I believe Department is still responsible for the digitalisation of the public service. Has Mr. Watt looked at what Estonia or Finland has done in that regard? I will put those questions first and then come to Mr. Moran on the tax side.

Mr. Robert Watt:

For 2017, the Garda has been given the resources to increase recruitment of civilian staff by 500 and to have 800 new trainee gardaí coming on stream. There is a significant increase in the resources now available to provide additional services within the justice family of Votes, in particular the Garda Vote.

Within the employment control framework under the delegated arrangements that have been in place for a number of years, the Garda itself can decide the allocation of resources. If the budget is there, it can recruit. For very senior positions, there is a restriction that they have to undergo an approval process with the Department of Justice and Equality and, ultimately, ourselves. I will come back to the Deputy in respect of the communications unit in Castlebar because I am not exactly sure of the details of that and what has been the delay. There has been ongoing discussion between the Department of Justice and Equality, ourselves and the Garda about the nature of recruitment, open recruitment and the types of skills mix that are required within the Garda, but I will come back to the Deputy specifically in regard to the Castlebar matter. Overall the Garda has delegated authority and sanction to recruit up to a certain level. With the senior levels, there is a different process in place.

In regard to ICT, we have in place the Office of the Government Chief Information Officer, OGCIO. We now have an office within the Department and it is involved in a number of issues.

Perhaps we could provide a separate briefing on such issues as digital identifier and verification to Deputy Ryan. There are a number of provisions in place which we have been building on. There is the public service card and the data behind the public service card. There are now 2.5 million people who have a public service card. Two weeks ago, we launched myGovID, which, in effect, is the online version of that. If somebody has gone through public service card verification, in other words, the SAFE 2 process, he or she can now apply for a variety of different schemes online through myGovID on the basis that he or she will have a digital password. In effect, his or her PPSN number and a digital password will be the way in which they will access public services in the future. The plan is to increase the number of people with the public service card who have gone through SAFE 2 and then, over time, increase the digital offering through myGovID so that more services are available so that people can renew their driving licence, passport, access various social welfare services, etc. That is on the basis of, in effect, the digital verifier the Deputy is talking about. It is the public service card, the SAFE 2 process and the verification process that people have to go through in order to access things. That programme of reform in regard to data sharing, safety of verification, etc., is ongoing. We would be happy to provide the Deputy with more detail on where we are now with our plans for the future in regard to that.

Photo of Eamon RyanEamon Ryan (Dublin Bay South, Green Party)
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I have a concern that we are employing 800 new gardaí when we do not even know what the gardaí were doing. The statistics on what they were doing showed twice the amount of activity in one not insignificant area. It is a slight concern in terms of assessing that we need 800 gardaí when we do not know what the gardaí are doing.

In terms of the digital identifier, myGovID, we are good at such matters as driving licences and the Revenue Commissioners, but when it comes to the likes of the PULSE system we are clearly inadequate. For example, they are opening ledgers in Garda stations. I would make the point that such lack of digital information is influencing all our decision making.

Mr. Robert Watt:

There is a programme of reform. We established this office a number of years ago. We are now investing and implementing the various reforms. I cannot speak about the ins and outs of the Garda and the extent to which its processes are modernised and renewed and the extent to which it has embraced ICT. Within the Civil Service of 37,000 staff, we have spent the past number of years implementing a suite of applications based on SharePoint, ePQs, eFOI, eSubmissions and eRecords, and by the end of next year we will have all Departments and 37,000 staff using these processes. It depends of the part of the public service. I cannot speak for the Garda. The Garda Commissioner is obviously talking about further initiatives in ICT and the digital transformation.

If the Deputy wants to have a detailed discussion about the progress that has been made, I am happy to have that discussion but it is not fair to make these general statements that we are not embracing this or that. Of course, the system can always improve.

That is what we are about but I will be very happy to set out for the Deputy in detail the progress we have made in the Civil Service and in respect of the digital offering we are providing citizens in terms of the external stuff.

Photo of Eamon RyanEamon Ryan (Dublin Bay South, Green Party)
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That is fair enough. I will come back to it. It is a separate issue but it is relevant, as I said, because what has been exposed in the breath testing story is that it took three years to collect information. When we did, we found the level of activity was half what it really was. That has exposed a real problem within the Garda.

With regard to the senior positions, the Commissioner said it took her a long time to set up her executive team. In a critical reform area, where we are spending an additional 5% in pay, or whatever was in the pay agreement, and putting in 800 gardaí, we do not even have the executive team in place, according to the Commissioner, to work out what is happening within the force. We had such an experience here. Going through the same process, it took us six months to get a senior adviser for our budgetary advisory office. To my mind, that was unnecessarily long. We agreed the process a year ago on the back of an OECD recommendation. It took four or five months to proceed to the Department of Public Expenditure and Reform, in November. There was then a four- or five-month row over whether the officer would be an assistant secretary or principal officer. Therefore, we find ourselves putting in the advertisement a year after discussing the matter at the Dáil reform committee. It will be a year and a half by the time the person is appointed. This committee will not be able to do its work as effectively because of the nature of our budgetary process, which starts now and runs to October. We will start kicking only in October. The Garda would seem to have had the same experience, according to Deputy Commissioner Twomey and Commissioner O'Sullivan. Are we happy that the process of senior-level appointments is taking a year and a half?

Mr. Robert Watt:

The Deputy has chosen two examples of appointments but it is not fair to generalise based on them. I will be very happy to provide the Deputy with the information on how long it takes us to issue an approval to fill a vacancy when the letter is sent to us, and how long it takes for the advertisement to be placed in the paper and for the person to be appointed. That issue has been addressed so there is an opportunity to recruit somebody. The issue was tied up with a variety of other issues and discussions that were taking place between the Oireachtas Commission and our Department. There was not a specific relationship and there were other issues that complicated the matter. It normally does not take that long. Obviously, in the case in question there was a new office. An issue arose over the drafting of the terms of reference, the scope of the job, the grade and so on.

Photo of Eamon RyanEamon Ryan (Dublin Bay South, Green Party)
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I might come back on a future date to the national planning framework and investment in roads. I could not disagree more with Deputy Calleary on what our investment priorities might be. It would take too long to address it now.

I have two questions for the Department of Finance. The information I seek may be publicly available but I would just like to be given a sense of it. I found the information we got last year from the Tax Strategy Group very useful. It was based on very good, detailed analysis. We did not follow through on the diesel issue and dropped it like a political hot potato but there was still a useful outlining of the issue. Do we know at this stage what issues the Tax Strategy Group will be considering? Are we expecting a similar type of report in June or July? Are there issues that are due to be considered? What is the broader context within which tax strategy is decided? I recall from my time, in 2008 and 2009, the tax commission setting the wider perspective on our wanting to widen our tax base and generate tax efficiencies. The Tax Strategy Group seems to be doing useful work but is there a broader context within which the strategy is set?

The second question I have is on the latest tax figures. Is there any assessment from the Department of the ongoing exchanges on EU taxation rules on corporation tax, the common consolidated tax base, reporting and transparency in corporate tax auditing? Lord only knows what US President Mr. Donald Trump will do on the tax side. In its modelling of where we are going in regard to corporation tax, has the Department assessed whether the European changes will increase our corporation tax revenue, or are there risks on the other side given the American position? What is the modelling? How does the Department make its forecast, particularly on the European developments, which we know are happening and are real or in train?

Mr. Derek Moran:

Or not. I will come to that in due course. It is great to hear that the output of the Tax Strategy Group is still of value. It has been doing its work fairly unanimously for a very long time. I spent nearly a decade as head of tax. The group goes back to the fundamentals and looks at each tax head annually and sometimes poses fairly fundamental questions for the purpose of discussion and framing debate. I do not believe one could say anything in the analyses is a specific policy proposal but it poses the questions as to what happens if one equalises diesel and petrol, what it looks like and what it means? The group surfaces those issues and will continue to do that. Since it has a more strategic focus, it allows one to bring forward issues that may not be topical in the public policy debate. It allows them to be tabled in a manner such that people can develop their thoughts on them over a period of time. It serves a very good purpose.

I anticipate the papers will be of an equal standard. We have been publishing these since the late 1990s but they have got very little attention-----

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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After the budget.

Mr. Derek Moran:

Publishing them in advance is a huge positive. The Department is very happy with that. It adds value. As one examines the papers over the coming years, one will see the issues evolve in them rather than representing big changes. It allows for the discipline of looking back at the core tax head at a reasonably fundamental level. I am pleased to hear the analyses were well regarded.

Photo of Eamon RyanEamon Ryan (Dublin Bay South, Green Party)
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What are the questions Mr. Moran is thinking of answering this year?

Mr. Derek Moran:

I do not know yet. I am being honest. At this stage, the guys are sitting down to start to develop the framework of what might be in the questions. We deliver the information in July. The issue of equalisation and its implications will be there or thereabouts.

In terms of corporation tax, the group will examine how the world has changed since last year in policy terms and what that might mean. At European level, the CCCTB proposal is one of those proposals that has been around in various iterative forms for a very long time. Both Houses of the Oireachtas took a view that it stood outside subsidiarty and sent a view back to the Commission in that regard. The Oireachtas was not alone because seven or eight other Parliaments did the same.

With regard to vulnerability – this will go through the normal process at a European level, which is, to say the least, slow - one of the concerns is the base, which is supposed to be easier of the two pieces. The base, as published, would significantly reduce the Irish corporate tax base. It would actually cost us money. Therefore, it is not something one would welcome in and of itself. I believe there will be a very long process of discussions.

With regard to US tax reform, we had not seen anything yet. We do not have a true sense of what that might be. If one were to have asked me six months ago, I would have said it would most likely look like a deemed repatriation of profits whereby the US would bring money back in from multinationals abroad on a one-off basis, involving a sort of amnesty bringing money in to help with the capital plans. I believed we would see some sort of rate reduction in the headline rate. To be honest, a number of months in, we do not have a clear picture of what it would be.

Major economies such as those of the United Kingdom and United States, both of which seem to be saying lower tax rates with broader bases are a good thing, seem to be pursuing a policy very much like the one we pursued for a very long time. That is not necessarily a bad thing, in itself. We will watch both very closely. As of yet, it is unclear where that will land.

Photo of Eamon RyanEamon Ryan (Dublin Bay South, Green Party)
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Would Mr. Moran welcome suggested questions for the Tax Strategy Group? We might submit them in the coming weeks.

My final question is on the judgment on the Apple tax case. I presume the Department of Finance acts as the lead agency within the State on that. Could I be given an update on the timelines for a judgment from the European Court of Justice and how the hearings are going?

Mr. Derek Moran:

That makes tax forecasting look really easy by comparison. It is going to be several years. We have entered our case, as has Apple.

We are now going through a process where third parties can join on either side. I think that comes to a conclusion quite soon and it will go into the court of first instance. One goes through that process before one ends up in the ECJ. My guess is that it will be three to five years before we come out of that process.

Photo of Lisa ChambersLisa Chambers (Mayo, Fianna Fail)
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I have a few questions but I will begin by sharing the frustrations felt by other members of the committee. Our job is to scrutinise the work leading up to the budget and analyse the previous budget as we go on. It is a new committee and we are still feeling our way through this. There is a suggestion that simply asking a question amounts to scrutiny but we need to get answers as well. I know the point was made that it is not a new thing and that something would happen during the year that would necessitate additional funds being allocated somewhere, but what is new is our committee and the work we are doing so it must fit in somewhere. This means an adjustment on all sides. I have a concern that we should all reflect on our roles in this and that the wrong attitude might be developing on all sides. We are here to work together to achieve certain outcomes. This involves a certain level of respect on all sides to members and witnesses who appear before the committee.

In respect of the issues raised by Deputies Calleary and Doherty regarding the €200 million that appeared in a very short timeframe, speaking as an Opposition Deputy, it makes our task of putting together an alternative budget impossible. We cannot do that if we are operating off a completely different amount of money. While things can change at certain periods, it is the timeframe of change with which members have a difficulty. We did flag that quite early on.

The fiscal space has been touched upon and I do not want to revisit it. In terms of capital investment, it appears that the UK takes a much longer-term approach, looks at a 30-year capital investment plan and reviews it every five years. Have the witnesses considered the idea of a national infrastructure commission with a 30-year plan being examined that will transcend different Dálaí and go beyond a five-year term? Could Mr. Watt tell me whether the Department of Public Expenditure and Reform has access to the necessary expertise to engage in this type of long-term planning?

Mr. Robert Watt:

I will answer the last question regarding the capital investment plan first. The tradition has been to have five-year plans so a Government sets out an allocation for five years. Beneath that, Departments, commercial semi-State bodies and agencies would have longer-term plans. For example, ESB Networks will have a ten, 15 or 20-year plan for the development of the network and other sectors. We have never published something that went beyond that. What we are doing now in the two processes I discussed involves the Government deciding how to allocate this additional space available for the next term of years. There is also a commitment to have a longer-term plan - I think it is ten years but it might be more appropriate to have a 15 or 20-year plan - where we would set out in more detail the plans across the different sectors indicative allocations envelopes, but also to look at a capital plan in a different way. The concern in the past has been always been that the capital spending plans are divorced from spatial or land use plans. The Department of Housing, Planning, Community and Local Government is developing a national planning framework and we are now working on this longer term plan. A really important issue that we will address over the next period is the extent to which those plans are actually linked and formalised and that spatial development drives the capital plan because in the past, we published them but they were not connected. We are committed to planning infrastructure and spending over a longer period than was the case previously, which was more medium term. We now have a much longer-term timeframe of between ten, 15 or 20 years.

We have no issue with the question of whether there is a role for an infrastructure commission but, ultimately, it is the Government that will decide the allocations. The Government is not in the business of outsourcing policy responsibility to other bodies. Ultimately, that body will be subject to enormous pressure from every vested interest in the country whose sole objective is to get more money for capital projects at the expense of the taxpayer so the extent to which that would be useful is something we are considering. Within our Department and the system across all the different Departments and the different bodies and agencies that support those Departments, we are happy we have the capacity and expertise to be much better at longer-term planning for infrastructure provision. As we develop the current plan, it is something we will come back to and are happy to do that.

In respect of the Acting Chairman's comments about working together, we are here to help members and facilitate the committee in any way possible and we have said so. We have engaged with the committee and provided vast amounts of information. There is no comparison between the amount of information that is now available in terms of the budget process and what we had five, ten, 15 or 20 years ago. It should be acknowledged that the way we budget is much more open, transparent and accountable than it ever was. The engagement with Oireachtas committees is much more extensive, as is the amount of information provided. This should be acknowledged by the committee. On the basis of us working together, we are very happy to engage with the committee in terms of how it discharges its mandate. Officials from my Department have provided an incredible amount of information and will make themselves available to deal with the team that is there in supporting the committee. We are happy to continue that in any way the committee thinks appropriate.

Photo of Lisa ChambersLisa Chambers (Mayo, Fianna Fail)
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I am very glad to hear that. We certainly acknowledge the vast amounts of information that have been provided. Deputy Doherty's question concerned the fact we are still searching around for details as to how a decision taken in January was taken and where the money was found. If there is extra expenditure in one area, it is fair for a budgetary scrutiny committee to ask where it is coming from. These are the questions we must ask. The point was made that when we do go back to the public, we will be asked why we did not question that and who we asked. In his opening statement, Mr. Watt said that more information than ever before is now available. I suppose this is why we are asking why €200 million was found so close to budget day if all this information is there. I am sure Mr. Watt will acknowledge that working to such a tight timeframe made our job quite difficult. It meant our alternative budgets were not very useful at that point.

Mr. Robert Watt:

We are very happy to help Deputies in terms of providing them with assistance in costing the many proposals that are discussed in the House and put to a Minister. We fulfil this role in respect of parties and Deputies. We cost proposals so that people understand that if people are making a comment in a debate or on Private Members' motion, there are cost implications. We are very happy to ensure that we know exactly what the cost is and, ultimately, have a debate about where that could be funded into the future. We support that role at present.

Photo of Lisa ChambersLisa Chambers (Mayo, Fianna Fail)
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The committee accepts that some spending pressures will arise in terms of industrial relations issues on a year to year basis. In terms of pressures, what are the priority issues that are discussed at the management advisory committees of both Departments?

Mr. Derek Moran:

Engagement is hugely important. As Mr. Watt said, the budget-specific information that is available is vast compared to what it used to be. I said in my opening statement that one of the issues for the committee relates to the capacity to digest that. The parliamentary budget office will help that. Having a memorandum of understanding between the Departments and the parliamentary budget office in terms of that interaction will help hugely. I am very pleased with some of the interactions. Things like the tax strategy group were a minority sport but having them discussed in this type of forum gives them a currency at a more fundamental level. It is not about choosing individual policy items. It is about looking at the core structure and this is to be welcomed.

Tax expenditure is expenditure under any other name. Voted expenditure gets scrutinised at a level which tax expenditure, traditionally, has not been subjected to. The Department brings far greater attention to what the costs would be. We set out our tax expenditure guidelines, start to produce a tax expenditure report setting the various costs of that and try to ensure that when a tax expenditure is introduced, there is a drop-dead date - there is an evaluation requirement.

When we hit the bad times we found that we had huge massive amounts of expenditures that we had to wheedle out of the way, I believe it was €1.5 billion over a couple of years. We should not allow that to develop because submissions must be rational and sensible. People who present themselves here and who lobbying for change must be challenged around why the change is being done and what is the cost. It is as much about cost as expenditure terms of voted expenditure with consideration being taken of revenue foregone, even if that aspect is a little less easy to see. I welcome that level of engagement and it can only be positive with respect to the scrutiny of proposals. We always have the risk of people coming in and telling us that tax expenditure can be self-financing or that it will effectively cost nothing. That is nonsense. Has Mr. Watt thought of it as being inappropriate?

Mr. John Palmer:

I wish to come in on one point. Both of the Secretaries General have made reference to the vast amount of information. Last year we provided the clerk of the committee with a list of links to all the information. We went to the trouble of printing it and we gave him a copy. That is what we gave to them.

Photo of Lisa ChambersLisa Chambers (Mayo, Fianna Fail)
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Was that for his benefit?

Mr. John Palmer:

We had thought of doing a copy for everyone in the audience but took pity on the rainforest.

Photo of Lisa ChambersLisa Chambers (Mayo, Fianna Fail)
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Very good. I thank Mr. Palmer.

Mr. Robert Watt:

A question was asked about expenditure pressures. Every week there are demands for new services, pay increases, capital projects and members have heard a flavour of this here today. Every day in the Oireachtas there are demands for more and more of everything. Every lobby group wants to spend more money on everything and reduce taxes. It would seem that the demands are infinite and obviously resources are finite. This is the reality of the budget spending challenge. The tax challenge faced by Mr. Moran and the spending challenge faced by us and our respective Ministers are happening all the time. There are never ending demands for expenditure on absolutely everything. Within our managing board, from week to week we would-----

Photo of Lisa ChambersLisa Chambers (Mayo, Fianna Fail)
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There are issues.

Mr. Robert Watt:

The priority issues for the management board would vary from week to week. We have had issues about public sector pay, which Deputies have been discussing at the end of last year and early this year. That is now in a process and is something we will return to when we get to May, June and July. There are also issues around capital spending. There are various legal cases the State is managing and we have provided some information on some of those. These could lead to an increase in spending in the future. There will be proposals in regard to policy changes, ideas, projects or other issues across the board, which could impact upon the allocation.

The main task of our job, within the year and certainly from budget to budget, is to ensure that those demands and suggestions for spending are met within the allocations set out. New initiatives and proposals are considered in the context of the next spending round. We are now in the process of preparing that. To answer the question, in effect there are pressures and demands across all areas, all Votes and all aspects of public expenditure all of the time. From week to week there are certain issues that will bubble up and will need to be addressed, but it is a never ending, constant part of the process of managing the implementation and execution of the budgets and preparing for the next budget round.

Mr. Derek Moran:

We ensure that we work very closely with Mr. Watt around those pressures. It is very important that there is consistency between the two Departments around the approach to it. We set the limits and the Department of Public Expenditure and Reform and the Minister does the allocations within those limits, but we must have a unity. We ensure we work very closely, especially the central expenditure evaluation unit and the central budget unit within the two Departments. We have ensured this over the past number of years and it is a very strong relationship.

Photo of Tommy BroughanTommy Broughan (Dublin Bay North, Independent)
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I apologise for missing the earlier part of the meeting. One of the events I was attending was with the Union of Students in Ireland who were putting forward their strong opposition to student loans as a way of funding third level education into the future. Do either of the Departments have any ideas on a way forward in that regard? I was also questioning the Minister about it. There may be an extra €360 million spending from the employers and from the Department of Education and Skills but has there been any long-term planning around our grossly under-funded third level system - particularly since 2011 - and how it could be maintained to a high level into the future? The media gets very worried when our universities drop out of the top 100 lists. The students have told us that in countries such as Germany where there is State funding the colleges seem to be very close to the top of the lists.

Mr. Robert Watt:

I thank Deputy Broughan. He is aware there is a consultation process about that, which I presume was the motivation for the Union of Students in Ireland talking about this issue. We want world-class universities and we want the best education for students who go through the process. Year on year we see an increase in the number of students going in to third level education. I believe the last data shows that 70% of the leaving certificate cohort is going on to third level broadly defined across the institutes of technology and post-leaving certificate universities. If this increase continues it presents an enormous challenge and the taxpayer pays for it, along with all the other competing demands.

If students are to make a greater contribution, now or in the future with some deferred loan system, there are many issues around the pros and cons of that system. There is a debate to be had around the extent to which employers may contribute more and employers benefitting directly from the improvements in human capital. A consultation paper has been set out and the two Ministers concerned are very interested in hearing the views of different sectors of society around how the system could be funded. If the numbers of students keep on increasing and the costs to the system keep going up it creates an enormous challenge in how we fund it. The average undergraduate course costs €10,000 or €11,000 and the student contribution fees are €3,500. Half of the students are on grants and as the Deputy is aware the fees are waived. There is enormous support in that regard. The Department of Public Expenditure and Reform and the Department of Education and Skills are concerned about the sustainability of the system. A debate needs to be had about how it can be funded in the future.

Photo of Tommy BroughanTommy Broughan (Dublin Bay North, Independent)
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In reply to Deputy Calleary's point the witness said that people want to spend and spend and reduce taxes. Not all Deputies, however, feel like that.

Mr. Robert Watt:

I am aware of that.

Photo of Tommy BroughanTommy Broughan (Dublin Bay North, Independent)
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We make submissions to both Departments where we try to balance budgets. It is the role of this committee. We propose a surplus, which may be from different new tax initiatives.

Mr. Robert Watt:

Mr. Moran is always interested in those proposals.

Photo of Tommy BroughanTommy Broughan (Dublin Bay North, Independent)
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He is interested in tax expenditures. I know it only exists since the last Government, but has the Department of Public Expenditure and reform taken tax expenditure seriously enough? Recent reports show that, for example, the research and development, R&D, tax credit which has operated over the period of the Department of Public Expenditure and Reform, is costing up to €1 billion in taxes foregone each year. Is there a serious cost benefit analysis of that measure and how the money could be best used?

Mr. Derek Moran:

This goes back to my earlier point. The difficulty in the past has been that expenditure was put on the books and then left there without evaluation. As recently as last year - or the year before - we completed a review of the R&D tax credit. One of the objectives of policy is to get the R&D tax credit spend for Ireland up to 3% of GDP and we are currently well short of that. The R&D tax credit contributes to this spend. It is just one example. The evaluation of the measure showed that the credit makes a positive contribution. We will come back to it in a few years' time to look and it again. It cannot just be there as a passive measure that rolls on, which was a feature of-----

Photo of Tommy BroughanTommy Broughan (Dublin Bay North, Independent)
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Is there an expiry date on those expenditures?

Mr. Derek Moran:

In that case, I do not think there is. Every time we introduce a new expenditure we try to include the provision that it will last for three years and before it is extended it must be reviewed. We are trying to make sure that most of the major expenditures are reviewed every three years or so. It depends on our capacity to get around to all of them.

It is treated much more as an expenditure line and it is about getting value out of that expenditure line. Some base tax reliefs introduced in the 1960s, which were still with us in 2010, had delivered whatever objective was set for them at that stage and we have spent a very painful time trying to get them out of the system.

Photo of Tommy BroughanTommy Broughan (Dublin Bay North, Independent)
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What is the global estimate of those tax expenditures at present?

Mr. Derek Moran:

I do not have a number. We have produced a tax expenditure report for the past three years and we will provide the Deputy with a copy.

Photo of Tommy BroughanTommy Broughan (Dublin Bay North, Independent)
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With regard to the fiscal monitor on the debt servicing costs, Exchequer debt servicing to the end of March was €2 billion. Does this mean the figure for the entire year is heading for €8 billion?

Mr. Derek Moran:

No, it will be between €5.5 billion and €6 billion.

Mr. John McCarthy:

I will get the exact figure shortly. We published it in the budget.

Photo of Tommy BroughanTommy Broughan (Dublin Bay North, Independent)
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I had a discussion last week with the Minister for Finance on what the NTMA calls chimney stacks of debt, which must be refinanced in late 2018 or 2019.

Mr. Derek Moran:

In 2018 and 2019.

Photo of Tommy BroughanTommy Broughan (Dublin Bay North, Independent)
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Obviously the NTMA is following a strategy in this regard, and it gave the committee a thorough report several weeks ago on the work it has done on earlier ESF and austerity-era loans. Observers remain concerned about exactly what is its strategy at present and whether it should be moving faster to address this huge chunk of 34% or 40% of our national debt, which we will have to refinance at that particular time. Does the Department share any of these concerns or is it happy enough to see the NTMA proceeding the way it is going?

Mr. Derek Moran:

It has a good strategy in place for the bond redemptions. They have been flagged well down the line. Going back four or five years, when the economy was not performing as well as it is now, this could have been an event, but we have turned around and it is hoped we will balance the budget next year. We are not adding to the stock of debt in the way we were. There would be downsides if there was a change in ECB policy and policy rates start to drift up or if the economy softened and we started to borrow. The NTMA's strategy is well hedged against this so I am confident in its plans.

Photo of Tommy BroughanTommy Broughan (Dublin Bay North, Independent)
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Is the disappointing tax take we have had so far related to the beginnings of the uncertainty associated with Brexit? We have been debating Brexit and the start of negotiations yesterday and today in the Dáil . Is it a natural result of our fears of what might happen?

Mr. Derek Moran:

It is too early to say and it probably cannot be linked to any one item. There are things we better need to understand, for example, income tax. PAYE grew by 6% in the first quarter and PRSI grew by approximately 7%, but USC and the rest of income tax was disappointing and we must better understand why this is. On the excise side there are distortions because of the pre-funding of tobacco withdrawals last year. Corporation tax is very lumpy. Another point on first quarter data is we have the P35 season and tax refunds. The first quarter is not the best judgment point. If we see the same at the end of the next quarter it will be a cause for far deeper concern but at present I do not think we would change anything.

Mr. John McCarthy:

If there had been issues regarding Brexit we would also see it in the macroeconomic data in the first quarter, but so far there is nothing to suggest the economy has slowed in the first quarter. Retail sales figures increased by more than 6% in January and February. Thankfully, unemployment has continued to decrease and was down to 6.4% in March. All of the soft data from purchasing managers' indexes, PMIs, are very strong. There can sometimes be a delinking of some of the macro data and fiscal data. They are never one to one, particularly on a quarterly basis. I do not think as yet we are seeing a Brexit impact with regard to the macro numbers or on the fiscal side.

Photo of Tommy BroughanTommy Broughan (Dublin Bay North, Independent)
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Improvements in infrastructure were mentioned but it is certainly the case that much of our regional secondary road network is disastrous, even in places which might be familiar to the Secretary General, such as the Howth Road or the Malahide Road. There is much damage there that looks like something from a country that might be struggling to get a basic infrastructure.

Will it always be the job of the Department to manage the rationing of health services?

Mr. Robert Watt:

I never get beyond Donnycarney on the Malahide Road or Harry Byrnes in Clontarf. They look fine from my house, but I will take the Deputy's word for it.

Photo of Tommy BroughanTommy Broughan (Dublin Bay North, Independent)
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Drivers head into potholes and barely survive.

Mr. Robert Watt:

I have not travelled beyond Coolock village for a while, but I will take the Deputy's word for it. We had discussions with Deputy Calleary who wants us to spend more money in Mayo on roads. We can add it all up when we are finished and see what the total might be.

Photo of Dara CallearyDara Calleary (Mayo, Fianna Fail)
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Consider the return of the investment.

Mr. Robert Watt:

Of course. With regard to health rationing, as with any publicly-funded system where there is a limit on resources, there will be a form of rationing. This is inevitable and is a feature of all systems.

Photo of Joan BurtonJoan Burton (Dublin West, Labour)
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I am sure that provided the roads to St. Vincent's and Na Fianna are in good nick, Mr. Watt will not worry too much.

Mr. Robert Watt:

The road to St. Vincent's is fine.

Photo of Joan BurtonJoan Burton (Dublin West, Labour)
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It is excellent.

Mr. Robert Watt:

The journey back from St. Vincent's is never as good as the journey there, in my experience.

Photo of Joan BurtonJoan Burton (Dublin West, Labour)
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Not in recent times.

A number of weeks ago, a report was published by Oxfam on international banking in Dublin and how profitable it is from a tax point of view. The report stated that out of 160 foreign banks located in Ireland, which are generally in the remit of the IFSC, approximately 120 of them had a corporation tax rate at or below 6% and some of their tax rates fell as low as 2%. Ireland is shipping quite a lot of reputational damage, notwithstanding the very detailed participation in the OECD BEPS process. It is very difficult to understand, because service companies such as banks do not make anything and push money around. They have a low tax rate, which is very competitive internationally at 12.5% and which is very defensible, but we have a report that fairly reliably indicates the vast majority of these companies pay between 2% and 6% corporation tax on their profits.

The tax strategy group was mentioned, and earlier in the meeting, before I had to leave for a while, it was stated the Department found the recent tax returns for the first quarter, whereby overall income tax came in below par, to be very puzzling. The Department must surely be puzzled by this phenomenon with these companies. They do not necessarily have a lot of capital investment. I do not know whether they have a lot of intellectual property in Ireland or shipped here from abroad or whether they have other mechanisms but I am at a loss, particularly because of my accounting experience, to understand how a low 12.5% rate can be reduced to between 2% and 6%.

This could potentially cause serious damage to Ireland's reputation at a time when we need friends. The Brexit negotiations are going to be incredibly difficult. All sorts of people will be coming along with their requests in quite complicated negotiations. How does one approach this kind of study? Has the witness engaged with the authors of the study? The Minister for Finance tells me that he has finally asked some officials to meet the authors of the study. How does one address this?

In terms of the overall leadership roles of the two Departments in respect of the public sector, has each carried out a detailed Brexit impact assessment and, if so, can the findings be shared with us?

Mr. Derek Moran:

In terms of the report, the Deputy is correct that Oxfam has been invited in to meet officials in order to go through the analysis to get a better handle on it. On an initial look, it appears as if some of the estimations of profits are based on filings for items and subsequent calculations made which have nothing to do with tax. A number of years ago we asked Seamus Coffey to look at the Revenue files on tax returns and to calculate what the effective corporate tax rate would be. His analysis showed that it was somewhere in the range of 10.5% or 11%, which is much closer to the 12% that has been presented. We are bringing Oxfam in and we do need to get behind it. We also need to understand the analytical work behind it and how those rates are determined before anything else can be said. I agree that these things are damaging to our reputation. It is not just one thing, but a drip feed of many things. That is why it is important to make sure that the factual position is established.

On the Brexit impact assessment, my colleagues on the economic side have been involved very heavily with the ESRI and, indeed, published a Brexit impact analysis some time ago. Perhaps Mr. McCarthy can say more about that.

Mr. John McCarthy:

We have published a number of sectoral impact papers. The piece that was covered most was the impact on the economy more generally of different scenarios, for example, a soft exit or a WTO-type arrangement. I can show the Deputy the simulations after the meeting. We have put this in the public domain but for the information of the committee, if we were to have a WTO-type situation it would take about four percentage points off the level of GDP, so the economy will grow but not at the same pace. This is relative to baseline. It would reduce the level of employment by about two percentage points, with a mirror image increase in unemployment, and would add approximately one percentage point to the deficit every year so that over a ten-year framework the debt ratio would be up by about ten percentage points. We carried out that analysis. We do not know which scenario is most likely at the moment, but we have looked at the three different scenarios.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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Can the witnesses enlighten the committee any further on the correspondence between Revenue and the Department? There are approximately 20 e-mails, which have not been released under FOI, concerning the preparations being put in place to prepare for customs posts on the Border because of the potential for customs between the North and the South. The Department of Finance is not the only one; Revenue has also written to the Departments of Transport, Tourism and Sport and Foreign Affairs and Trade. Is this something about which the committee should be concerned? What type of resources is that drawing from the Department?

Mr. Derek Moran:

The policy is quite straightforward. The Taoiseach has stated that there will be no return to a hard Border and we operate within that framework. At the same time, Revenue must look at all the contingencies. Off the top of my head, of the value of trade coming in and out of Ireland, 98.5% goes out through channels other than back and forth across the Border. I do not want to minimise this, but it is a very small part of that framework. There will have to be adjustments in terms of the UK as a third party, but most of the activity is based around Dublin Port, Rosslare Port and the airports. That is where the volumes go. I am not familiar with the FOIs, so I cannot comment.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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The witness is not across this-----

Mr. Derek Moran:

No.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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-----but there have been briefings and presentations provided.

Mr. Derek Moran:

There is a range of contingencies. The negotiations on the final outcome of Brexit have not started. On 29 April next, the special European Council meeting takes place at which there will be agreement on the mandate. A couple of days before that meeting, the Government intends to publish its priorities within that context.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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We saw in the NAMA reports last year that it made a preliminary tax payment to Revenue in the region of €158 million for the profits accrued from 6 September, the kick-in date for the changes to section 110 and qualified investor funds that were introduced in budget 2017. That profit covers three months and would have been accounted for in last year's tax receipts. Do we have any indication that we will see a recurrence of that next year? The expected revenue from it was €50 million, but we see that NAMA made a preliminary payment of €158 million for three months. That is just one institution. Is there any indication from the Department on what has been profiled against that? After the preliminary payments are made at the end of next year, will the Department be able to isolate it to inform us how much money actually came in compared to what was expected?

Mr. John McCarthy:

We had the estimates which were put together by the Department and the Revenue Commissioners in the context of the budget.

Mr. Derek Moran:

We will take that question away. We do not know.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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One of the big fears is that people and behaviours will change. The question is whether NAMA has indicated that it is going to change its behaviour? If one was to project NAMA's payment over the full year - and it did not pay over the full year because the changes only kicked in on 6 September - it would have had to pay around €600 million in tax to the State. It may have to do that again, unless it has changed its structures. Has there been any indication to the Revenue that those structures are changing?

Mr. Derek Moran:

I am not sure one can extrapolate that payment by four and come up with that figure. Leaving that matter aside, the question fundamentally is can we pull out what section 110 is going to bring in during the year, and I do not know the answer to that.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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The commission of investigation will be established. There is an agreement in principle. The leaders of the political parties will be meeting with the Taoiseach in the next couple of days to agree a terms of reference. As the Minister said yesterday, the Department of Finance is likely to be subject to the terms of reference. The commission and the Department will each do their own work. It is a serious issue when a commission of investigation is set up and it could potentially draw quite a large amount of resources from the Department. How is the Department prepared in terms of resource allocation to deal with the commission of investigation and the budgetary issues we are dealing with, and also the Brexit issues that were mentioned, along with the other unknowns that exist. Are the witnesses comfortable that they will be able to deal with it and that there will be no issues in respect of resources within the Department of Finance?

Mr. Derek Moran:

We are legally obliged to provide the service that a commission of investigation requires. We have been doing that for other commissions of inquiry. We have applied whatever resources were required.

We have a tender process around e-discovery in order to make sure that we find all of the documentation over whatever period. We are already servicing that with whatever resources are required. It was the same with the banking inquiry. We had to divert resources into it and did what we had to do to meet our legal obligations.

Photo of Lisa ChambersLisa Chambers (Mayo, Fianna Fail)
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I thank the witnesses for their contributions and for taking the time to answer questions. That concludes our proceedings for today.

The select committee adjourned at 4.20 p.m. until 2 p.m. on Thursday, 13 April 2017.