Oireachtas Joint and Select Committees
Thursday, 19 April 2018
Public Accounts Committee
Chapter 1 - Exchequer Financial Outturn for 2016
Chapter 2 - Government Debt
Chapter 24 - Irish Fiscal Advisory Council
9:00 am
Seán Fleming (Laois, Fianna Fail)
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In dealing with the main business we will resume with the Department of Finance. We will start with the opening statement from the Comptroller and Auditor General which will be followed by Mr. Moran's opening statement.
Mr. Seamus McCarthy:
The annual finance accounts present the receipts into and issues from the Central Fund of the Exchequer, together with a set of statements and schedules that itemise the transactions. The financial statements on the national debt which are prepared by the National Treasury Management Agency, NTMA, are presented in full as Part 2 of the finance accounts.
Chapter 1 of my report on the accounts of public services is a recurring chapter, designed to summarise the transactions under the Central Fund in an accessible format and highlight relevant trends over time. In addition, because the finance accounts do not include any kind of balance sheet, the summary position on key assets and liabilities at year-end is also set out. Exchequer receipts in 2016 totalled €55.1 billion, which represented a decrease of €3.5 billion, or 6%, compared to 2015. Issues from the Central Fund in 2016 amounted to €56.1 billion, a year-on-year decrease of €2.6 billion, or 4%. The deficit in receipts relative to issues for the year was just over €1 billion. The chapter provides an overview of the public funding provided for Irish Water from all sources up to the end of 2016, which totalled €2.53 billion. This included a capital contribution of €184 million provided from the Central Fund for Irish Water in 2016. In addition, a €96 million working capital loan to Irish Water provided from the Central Fund in 2015 was converted into a capital contribution in 2016. The chapter also refers briefly to the European Commission's state aid ruling on the Apple Group. The Accounting Officer will be able to update the committee on developments in that regard.
Chapter 2 of my report outlines the trends and composition of Government debt and the cost of debt servicing. At the end of 2016, the general Government debt stood at just under €201 billion. This was marginally lower than at the end of 2015. While the ratio of general Government debt to gross domestic product continued to fall in 2016, international comparisons indicate that Ireland still has a relatively high debt burden. The cost to the Exchequer of servicing the national debt fell from €7.1 billion in 2015 to €6.8 billion in 2016, reflecting the impact of the refinancing of debt by the National Treasury Management Agency. The cost of servicing the national debt relative to the debt level dropped from an estimated 3.5% at the end of 2015 to 3.2% at the end of 2016.
The 2016 appropriation account for the Vote for the Office of the Minister for Finance records gross expenditure of €31.2 million. This was a net underspend of €10.63 million relative to the Estimate. The appropriation account presents expenditure under three expenditure programmes. They relate to the costs incurred in 2016 in respect of economic and fiscal policy, on which the Department spent €15.8 million; banking and financial services policy, on which the Department spent €6.8 million; and the provision of shared services, on which the Department spent €8.6 million. The expenditure on banking and financial services policy recorded in the appropriation account does not include costs associated with staff seconded to the Department from the NTMA to deal with banking sector issues and certain related consultancy costs. These costs are borne by the NTMA and not recouped from the Department.
The Fiscal Responsibility Act 2012 requires me to report to Dáil Éireann on the correctness of the sums brought to account by the Fiscal Advisory Council each year. Chapter 24 is my report for 2016. I gave a clear audit opinion on the council's financial statements for 2016 when it incurred expenditure of €633,000.
Mr. Derek Moran:
I thank the Chairman for giving me the opportunity to address the committee. With me are Mr. John McCarthy, our chief economist; Mr. Gary Tobin, head of banking; Ms Mary McSharry, head of corporate affairs; and Mr. Fiachra Quinlan from our finance unit. Our colleague, Mr. William Beausang, from the Department of Public Expenditure and Reform was here.
The agenda covers chapters 1, 2, 5 and 24 of the 2016 report of the Comptroller and Auditor General on the accounts of public services; the appropriation accounts for 2016 - Vote 7 - and the 2016 finance accounts. The 2016 gross budget for the Department was €40.994 million, or €39.6 million net of appropriations in aid, including a capital carryover from 2015 of €115,000.
There were three key categories of operational budget, namely, pay bill, at €18.5 million; administration, at €5.9 million; and programme consultancies, at €6.1 million. The gross spend for the year was €31.2 million which was €9.8 million or 23.8% under the budget estimate of €40.994 million. With higher appropriations-in-aid, this left a €10.4 million surrender figure at the end of the year. This surplus arose for a number of reasons. There was an underspend of approximately €4.6 million on programme expenditure related costs arising from the completion of some consultancy work using in-house resources and lower costs in the defence of certain legal cases and their timing in court. There were also savings of €2.1 million in relation to the fuel grants scheme. Recruitment did not progress at the pace anticipated during 2016, resulting in a pay bill underspend of €1.9 million. This situation was addressed in 2017, which saw the pay bill underspend reduced to about €600,000. There were further savings of €1.1 million on non-pay administration expenses. Certain information technology and capital projects did not take place during the year, accounting for most of this saving. The Department also recouped an additional €900,000 in respect of costs associated with the stabilisation of the banking sector.
The fuel grant constituted a new service in the context of the finance Vote in 2016. A sum of €10 million was provided for the new fuel grant under the disabled drivers and passengers (tax concessions) scheme to replace the excise repayment on the fuel element of the scheme. Spending under the scheme in 2017 amounted to €9.6 million, which was much more in line with the original estimates.
As regards the Exchequer financial outturn for 2016, I draw the committee's attention to the following key points. Tax revenues for 2016, at €47.8 billion, were up by €2.3 billion or 5% year on year and €600 million or 1.4% above profile. In relation to income tax, the largest tax head, the performance in 2016 was solid, with receipts finishing the year 0.9% or €174 million above profile. This represented an annual increase of 4.4% or €810 million. Corporation tax receipts in 2016 of €7.4 billion were €700 million above the budget 2016 forecast. The major consumption tax heading, VAT, was up 4% or €476 million in annual terms in 2016, at €12.4 billion, albeit some 3.4% or €439 million below expectations. This underperformance can be partially attributed to stronger than expected repayments and muted price pressures.
On the expenditure side, total expenditure, at €68.065 billion, was down €2.393 billion or 3.4%. This was due to a reduction year on year in short-term loans to the Social Insurance Fund for cashflow purposes. When the impact of loans to the Social Insurance Fund are removed, gross expenditure for 2016 amounted to €66.695 billion. This is a year on year increase of €602 million or 0.9%, driven by an increase in gross voted expenditure of €1.311 billion or 2.4%, partially offset by a reduction in debt servicing costs of €269 million and non-voted expenditure of €503 million.
The general Government debt for 2016 was €200.6 billion. General Government debt as a percentage of GDP fell to 73% in 2016 from a peak of 120% in 2012. The decline in the general Government debt to GDP ratio since 2013 has been influenced by the growth in GDP, rather than the reduction in nominal debt. This downward trend is projected to continue, with a debt to GDP ratio of 60%, the target set by the Stability and Growth Pact, forecast in the early part of the next decade.
As members are aware, the Irish Fiscal Advisory Council was established under the Fiscal Responsibility Act 2012 to provide independent assessments of the Government's budgetary plans and projections and inform public discussion of economic and fiscal matters. There is a joint memorandum of understanding between the council and the Department underpinning the endorsement process of the macroeconomic forecasts prepared by the Department on which the budget and stability programme updates are based.
The robust pace of recovery in the economy continued in 2017, with GDP increasing by 7.8%. The increase in economic activity is broadly based and the economic fundamentals are strong. Ireland has been one of the fastest growing economies in the European Union in the past four years. The recovery was most clearly evident in 2017 in the labour market, with approximately 2.2 million people in employment. This reflects the creation of 318,000 additional jobs since the low point in 2011. Strong employment gains have driven a substantial turnaround in unemployment which has fallen from a peak of more than 16% in 2012 to slightly more than 6% in March 2018. As set out in the stability programme update yesterday, it is anticipated that employment levels will get back to pre-crisis levels in the first half of this year.
Both domestic demand and exports are making positive contributions to growth. Key economic indicators point to continued solid growth this year. The Department is forecasting growth of 5.6% this year and 4% next year. However, the United Kingdom's decision to leave the European Union will have a substantial impact on the economy. At this stage, the most likely scenario involves a transition period for 2019 and 2020.
In December 2017 Ireland repaid its remaining programme related loans to the International Monetary Fund, together with the bilateral loans from Sweden and Denmark, early and in full. Ireland has maintained its A grade rating with each of the three major credit rating agencies.
A key focus for the Department in the past year has been the part disposal of the State's investment in Allied Irish Banks. The successful initial public offering, IPO, of AIB in June 2017 was the second biggest in the world last year, raising €3.4 billion for the taxpayer. This has created a strong platform for the State to recover over time all of the money it has invested in AIB.
The National Asset Management Agency, NAMA, is also making continued progress, with 100% of senior debt now repaid, while the Department is working towards the introduction of the new Home Building Finance Ireland, HBFI, which will help to increase the supply of funding for residential developments.
Brexit is a serious challenge for the economy. As members are aware, the Government has increased its strategic oversight of Brexit by assigning the Tánaiste and Minister for Foreign Affairs and Trade with special responsibility for co-ordinating the whole-of-government response. Brexit issues are mainstreamed into the Department's work in all areas, including economic analysis, financial services and taxation.
Intensive negotiations between the United Kingdom and the European Union on the phase one issues culminated on 8 December 2017 when an agreement was reached on all three exit issues, reflected in an EU-UK joint progress report. Based on the report, the European Council, on 15 December 2017, concluded that "sufficient progress" on all phase one issues had been achieved and negotiations could move to the second phase. This work is progressing.
I take the opportunity to express my appreciation to the staff at the Department for their ongoing hard work. It is through their efforts and dedication that we deliver on our objectives. In turn, we try to support our staff by providing the training and skills necessary for the job. Our efforts in that regard were acknowledged last year when the Department was awarded a national training award as best learning and development organisation by the Irish Institute of Training and Development. We have been short-listed again for 2018.
I thank the Chairman and members for their attention and would welcome questions.
Seán Fleming (Laois, Fianna Fail)
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I thank Mr. Moran for his opening statement. Members have indicated and will speak in the following sequence: Deputies Catherine Murphy, David Cullinane and Marc MacSharry.
Catherine Murphy (Kildare North, Social Democrats)
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I will switch between several aspects of the accounts. To give a snapshot of the Central Fund, it includes everything, apart from PRSI receipts. I understand motor tax receipts have been included in the Central Fund since 2017. Is that the case?
Seán Fleming (Laois, Fianna Fail)
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That is 2018.
Catherine Murphy (Kildare North, Social Democrats)
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Has anything else been changed?
Catherine Murphy (Kildare North, Social Democrats)
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We will be able to see a sizeable difference from this year onwards, given the large amount of money generated in motor taxation.
Mr. John McCarthy:
We have published a revised profile that takes it into account. When one sees the year on year vis-à-visprofile, one will be looking at it on a like for like basis. We published the information in our tax profiles in February or early March. Motor tax receipts came in and local property tax receipts went out; therefore, it will be on a like for like basis.
Catherine Murphy (Kildare North, Social Democrats)
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However, the amounts are not equal.
Seán Fleming (Laois, Fianna Fail)
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Motor tax came in. That is fine. Where did the LPT go?
Seán Fleming (Laois, Fianna Fail)
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Does it come under appropriations-in-aid? We know motor tax goes into the Central Fund.
Seán Fleming (Laois, Fianna Fail)
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Where will the LPT be going from this year onwards?
Seán Fleming (Laois, Fianna Fail)
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Are there many major sources of Government money that are not going to the Central Fund? Why is that taken out? Why can it not go into the Central Fund so we can see where it is and then disburse it? Why is it taken out of-----
Seán Fleming (Laois, Fianna Fail)
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Local government-----
Mr. Seamus McCarthy:
When representatives from the Department of Housing, Planning and Local Government came before the committee, we talked about how if one only looks at the Vote, one will not get the full picture of what that Department is spending. It does require a presentation of a consolidated position for the Department to really get a sense of what the Department is spending and where.
Seán Fleming (Laois, Fianna Fail)
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The Department of-----
Seán Fleming (Laois, Fianna Fail)
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It is difficult to know from year to year. It is one way of keeping the public in the dark. The LPT is collected by Revenue and is not lodged in the Central Fund. I know there is a rationale but there is another rationale-----
Mr. Seamus McCarthy:
If all these were consolidated, one would have all the receipt side and all the expenditure side. As the Accounting Officer was going through the items, I noticed that he was referring to a figure of the order of approximately €68 billion, which is not listed anywhere in the finance accounts. It is adding the Social Insurance Fund to the finance account figures so it makes my case.
Seán Fleming (Laois, Fianna Fail)
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We are not discussing the Social Insurance Fund today. Out of curiosity, where did the money surrendered by the Department go? Did it go back to the Department? Did the Department surrender some funding at the end of 2016?
Seán Fleming (Laois, Fianna Fail)
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But that is the Department.
Seán Fleming (Laois, Fianna Fail)
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I know but other Departments surrendered moneys to the Department of Finance. Does the Department of Finance surrender moneys to itself?
Seán Fleming (Laois, Fianna Fail)
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It is only a light-hearted question.
Catherine Murphy (Kildare North, Social Democrats)
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If the Department surrenders moneys to itself, I presume it can ask itself permission to include those moneys again. I presume that is a policy matter relating to the budget.
Catherine Murphy (Kildare North, Social Democrats)
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I want to touch on the contribution to the EU budget, which is quite a sizeable amount of money that is determined by our GDP. Is that the case?
Catherine Murphy (Kildare North, Social Democrats)
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Obviously, we have GNP, GDP and GNI. How do we relate in terms of GNI and our profile? There is quite a lot of movement by multinationals. There was an onshoring of IP. As a result of how we account for things, are we paying more than we would if we did not have the abnormal situation we have in this country?
Mr. John McCarthy:
We will probably pay approximately €2.7 billion into the EU budget for this year. This is not affected that much by the multinationals. We would have a big difficulty if it was done on the basis of GDP because the latter includes all the massive profits of the multinationals but GNI takes them out because the profits do not accrue to Irish people, so Irish living standards are better assessed on a GNP or GNI basis. Yes, there is an issue with GDP overinflating living standards. In terms of the EU contribution, however, it works its way out. We have a new measure - GNI* - which removes even more of the multinational activity. The Deputy mentioned the onshoring of IP, which would be excluded from GNI*. We do not have the 2017 figure yet but in 2016, the ballpark figure for GDP was €275 billion whereas the figure for GNI* was just south of €190 billion. There is quite a substantial difference between the two.
Catherine Murphy (Kildare North, Social Democrats)
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What would we calculate that additional cost at?
Mr. Seamus McCarthy:
Members can see the contribution to the EU budget on the screen. The middle column deals with 2014 and the figure is €1.685 billion. The amount for 2015 is €1.952 billion. Again, it is cash accounting so it is the claim that was made at the time. There was probably a bit of settling up after the year. Members can see that there was an increase of between €250 million and €300 million.
Catherine Murphy (Kildare North, Social Democrats)
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That was unique to 2015.
Catherine Murphy (Kildare North, Social Democrats)
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I will go through a number of different matters.
Catherine Murphy (Kildare North, Social Democrats)
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That is quite a sizeable amount.
Catherine Connolly (Galway West, Independent)
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From which page is the Comptroller and Auditor General reading?
Catherine Murphy (Kildare North, Social Democrats)
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With regard to general government debt, there was very strict control right across the sectors, particularly at the time of the crash. I was very conscious of local authorities having very sizeable amounts of cash in hand from development contributions that they were not permitted to spend. They were only permitted to spend what they took in during a particular year. Does that still apply? Does it apply to sectors other than the local government sector?
Mr. John McCarthy:
There are only two real sectors within general government in Ireland so we have the Exchequer and local government. Exchequer is obviously set by Government. There is balanced budget rule that still applies to the local government sector. As a result, local authorities are supposed to only spend what they take in.
Catherine Murphy (Kildare North, Social Democrats)
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They have cash in hand from development contributions, etc. Does Mr. McCarthy have any idea of the amount involved in this regard?
Mr. John McCarthy:
Not offhand but I am sure the figure is available and we can get it for the Deputy. Local government is relatively small. The bulk of the general government figure is that relating to central government at north of 90%. I know the flows into and out of the actual stock of local government but I do not know the stock of cash on hand.
Catherine Murphy (Kildare North, Social Democrats)
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I know that at one point, it was over €1 billion. I know it is substantially less than that now but I do not know the figure.
Catherine Murphy (Kildare North, Social Democrats)
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I would appreciate that.
Mr. Derek Moran:
When we moved to general government accounting in the early to mid-1990s there was always a deficit restriction placed upon the local authority sector. Up to the crash I believe it was some €200 million a year. During the crash it moved to a balanced budget situation. It is about giving visibility and knowing there are no shocks to the system. It is a very small part of the overall, as Mr. McCarthy has said.
Catherine Murphy (Kildare North, Social Democrats)
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They are the only two sectors. We had the conversation last year about the ratio of debt. That ratio changed because of a quite dramatic increase in GDP. If I remember correctly the Department expressed surprise at that. Has the Department figured out what really happened? The Central Statistics Office is responsible for producing the figures. Is this change accounted for and does the Department understand why it happened? Is there a risk of the reverse happening? Is it on the Department's risk register with regard to the stability of the economy?
Mr. Derek Moran:
At this stage it is fair to say that there was a large increase in onshore intellectual property, IP, with no counterpart expansion on the far side, which gave us a very big jump in GDP level. It could happen that there is a risk IP could be taken offshore in the opposite direction. It did not accrue any benefit for Ireland on the way in and it is unlikely to cost us anything on the way out, if that was to happen. As Mr. McCarthy has already referred to, the important point on the metrics is that Ireland needs to take great care when using IP in our measure of GDP. Our real level of indebtedness is somewhat higher than the 70% suggested by the GDP.
Catherine Murphy (Kildare North, Social Democrats)
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I was going to come to the point around risk. The reality is that we are trying to get to 60%. We have a huge national debt of more than €200 billion. The amount of money did not change so we still owe that-----
Catherine Murphy (Kildare North, Social Democrats)
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Give or take the odd billion.
Mr. Derek Moran:
Yes, give or take the odd billion between friends. The current Governor and Mr. McCarthy worked on this with a statistical group some years ago. They looked at the concept of GNI*, which puts the debt ratio in 2016 at 106% rather than the 70%. Another aspect, which the Minister spoke about this week, is how much money we have borrowed based on every man, woman and child in the State, which is nearly €40,000 per head. This is an extraordinary number. It gives some context of where we stand.
Catherine Murphy (Kildare North, Social Democrats)
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How that figure is calculated is incredibly important. Obviously, Ireland's ability to borrow for capital projects, for example, is determined by our debt to GDP ratio. Is this the case?
Mr. John McCarthy:
That is absolutely correct and I believe the point made by Deputy Murphy relates to GDP. It has fallen by 50 percentage points. The only reason it is falling, however, is because GDP has gone up by 26% in 2015, as the Deputy has already referred to. The money amount of debt actually continues to rise. At the moment it is €200 billion but it will go up to some €210 billion over the forecast horizon, and if we look at it on a range of other metrics to get to GNI* it is about 100% at the moment. In order for the analysis not to focus on some of the green dots - and on foot of the IMF recommendations - last year we started publishing an annual debt report, which we will update in June this year. In this we look at debt across seven or eight different indicators and at interest payments as a percentage of revenue on a per capitabasis. They all show that Ireland is an outlier and that while the debt is manageable it certainly needs to be managed and that the debt to GDP ratio is an irrelevant metric for Ireland.
Catherine Murphy (Kildare North, Social Democrats)
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I am looking at the calculation for every 1% change in the annual cost of servicing the debt. It is €500 million euro to service the debt. This is a very sizeable amount of money and it limits the State's scope to do other things. When it goes from 3% to 3.5% the 0.5% makes quite a bit of difference.
These accounts tell us that the National Treasury Management Agency, NTMA, has paid off the Danish and the Swedish bilateral debts. The UK debt remains. Is that €7 billion?
Catherine Murphy (Kildare North, Social Democrats)
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The IMF debt was paid off also. Were they more expensive and is this the reason they were paid?
Catherine Murphy (Kildare North, Social Democrats)
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What interest rate are we paying on the UK loan?
Catherine Murphy (Kildare North, Social Democrats)
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It cost Ireland €6.7 billion in 2016 to service that debt. This is the cost of running the Department of Education and Skills, or maybe just a little bit more, from pre-school services right through to third-level funding. To quantify it, it is a very sizeable amount of money. Not all of that is the debt from the crash as there would have been a residual debt before that.
Mr. Gary Tobin:
I would like to point out that the debt interest costs are coming down. I am aware that we are looking at the 2016 accounts today but if debt interest, for example, in 2018 is forecast to be €5.9 billion it reflects the fact that interest rates generally are very low. The NTMA is able to retire more expensive debt and then refinance at lower rates. To answer the Deputy's point, it is still a very high amount of money.
Catherine Murphy (Kildare North, Social Democrats)
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Mr. Tobin has actually anticipated the question I was going to ask, which was around the anticipated case for the 2018. What was it for 2017?
Catherine Murphy (Kildare North, Social Democrats)
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Interest rates may not always stay low. Of the interest rates for debt we are currently discussing, how much is at a fixed rate?
Catherine Murphy (Kildare North, Social Democrats)
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That payment was accelerated, if I remember correctly. What stage is that at?
Mr. Derek Moran:
Some €3 billion was bought back last year. There was an agreed minimum schedule and it has been accelerated. The NTMA has been using the opportunity to buy back the debt at very low interest costs and replacing it. A capital gain then arises to the Central Bank, 80% of which the Exchequer gets back by way of surplus income coming back to the Exchequer.
Mr. Gary Tobin:
I can give the Deputy a couple more figures just to supplement what the Secretary General has said. The Central Bank has a minimum schedule of disposals on floating rate notes, FRNs. The schedule says that between 2014 and 2018 they would retire about €500 million, and then from 2019 to 2023 they would retire €1 billion. That was the original schedule but the actual sales are well ahead of that. By the end of March the Central Bank has disposed of €10.5 billion of the floating rate notes. This is €10.5 billion of the €25 billion. The timing of the trigger for disposal of the floating rate notes is completely at the discretion of the Central Bank.
At the moment, there is a low interest environment so the NTMA can pay these off with cheap money.
Catherine Murphy (Kildare North, Social Democrats)
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I still have a big problem with us having that liability in the first place. Has there been any discussion on our liability in this regard over the past year?
Catherine Murphy (Kildare North, Social Democrats)
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I refer to the IBRC unsecured creditors payment of €270.6 million in 2016. How much of that was carried over to 2017 and 20148?
Mr. Derek Moran:
The IBRC liquidators will pay back the unsecured creditors over a period of time in tranches of 25%. That was the first 25%. If that is taken as the estimate of what is coming back to the Exchequer, we anticipate getting around €1 billion back over the next period. A second tranche has been paid or is due to be paid shortly.
Catherine Murphy (Kildare North, Social Democrats)
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Will Mr. Moran explain that figure?
Mr. Derek Moran:
We got back 25% of their estimate of what will come back to us. If one extrapolates from that, the Exchequer will get back approximately €1 billion from the liquidation. The reason it is coming back in tranches is the liquidators continue to fight a range of legal cases. A total of 120 cases have to be settled before that is finally paid out.
Catherine Murphy (Kildare North, Social Democrats)
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Has Mr. Moran concerns about the oversight of IBRC? Deputy MacSharry raised this previously. It is highly unusual. The High Court usually supervises these situations but in this case it is the Department.
Catherine Murphy (Kildare North, Social Democrats)
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Will Mr. Moran explain the payment to Kinsale Energy Limited? To a lay person, there is a hole in the ground, from which oil is extracted. The asset is not ours. What are we getting from it? Am I correct the State is paying a subsidy? If so, why is there a liability in this regard?
Catherine Murphy (Kildare North, Social Democrats)
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Yes. When Mr. Moran reverts, he might include the sector. There is also the Corrib gas field. I do not understand how we end up with a liability. I would appreciate it if he could give me that.
Catherine Murphy (Kildare North, Social Democrats)
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There is a loan balance of €96 million outstanding in respect of Irish Water. Has it been turned into a grant as opposed to a loan?
David Cullinane (Waterford, Sinn Fein)
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I would like clarity on an issue that was touched on regarding Mr. Moran's opening contribution. He referred to total Exchequer expenditure and gross Exchequer expenditure. What is the different between them?
Mr. Derek Moran:
The Comptroller and Auditor General has referred to this. In this instance, there are cash flow issues in the Social Insurance Fund and sometimes money has to be made available to it to meet those cash flow obligations. There are fund expenditures that we have to make money available for, which is repaid as an income on the other side coming back.
David Cullinane (Waterford, Sinn Fein)
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With regard to presentation of expenditure in the accounts, what figure is used?
Mr. Derek Moran:
If we are talking about real expenditure, it is the lower figure. There was a particular issue that year, which was the move to SEPA. There was a requirement to make larger amounts available to meet transitional costs. We have an exact amount coming back on the far side. The real figure for what the State spent on services and so on is €66.695 billion.
David Cullinane (Waterford, Sinn Fein)
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We might come back to that. I refer to the GDP issue in dealing with Government debt. Mr. Moran correctly said that it is not a reliable indicator for Ireland for various reasons. Mr. John McCarthy said that debt-to-GDP measurements in Ireland are pretty much irrelevant. Is that correct?
David Cullinane (Waterford, Sinn Fein)
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But the problem is this measurement is not irrelevant. I will put questions to Mr. Moran first on this. When the fiscal rules are being implemented, what measurements are used?
David Cullinane (Waterford, Sinn Fein)
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The legal measurement is GDP, not GNI* or a bespoke arrangement. Debt-to-GDP, therefore, is not irrelevant.
David Cullinane (Waterford, Sinn Fein)
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It is the legal requirement that we have to abide by when the rules are being implemented.
David Cullinane (Waterford, Sinn Fein)
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What we can agree on, whatever about its relevance, is it is unreliable. Mr. John McCarthy used the word "outlier" in the context of debt. We have a bizarre scenario where our debt-to-GDP ratio is being used to implement the fiscal rules. That is peculiar given it is an unreliable measurement. Are many other member states in a position where GDP is a difficulty?
David Cullinane (Waterford, Sinn Fein)
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Why in Ireland?
Mr. Derek Moran:
It is just the global nature of the economy. Single transactions can have a profound effect on GDP, with a dramatic uplift. 2015 was a case in point. We have not witnessed those dramatic changes in the intervening period but we are vulnerable to them. The Deputy is correct that in terms of the legal requirement, GDP is the measure. When we report to the EU around the fiscal rules and the fiscal compact, it is debt as a proportion of GDP and the deficit as a proportion of GDP.
David Cullinane (Waterford, Sinn Fein)
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That is important because the implementation of policy is important and how we work out the fiscal rules. They are, at least, made to appear complicated but one of the measurements used to work out the fiscal space under the fiscal rules is debt-to-GDP ratio. When a state goes above or below a certain threshold relating to the ratio, that has an impact on how the rules are implemented. Is the State's current debt-to-GDP ratio 73%?
Mr. John McCarthy:
It is an actual outturn so, as reported by the CSO, it is 68% or just below 70%, as the Secretary General said, and it is expected to be 66% this year. When I talk about debt-to-GDP being irrelevant, I am not talking about the rules; I am talking in terms of assessing debt sustainability in Ireland.
To elaborate on the point made by the Secretary General, in practically every other country in Europe there is virtually no difference between GDP and GNI. We are the outlier because of the size of the multinational sector in the Irish context. We have a situation where there are approximately 190,000 firms in Ireland and five of them account for one third of our exports. We have a very small economy with a very large multinational sector that distorts our GDP. This means that one must look below the bonnet in order to get a better indication of what is happening, including with regard to debt sustainability. I am sorry that was more than ten to 15 seconds.
David Cullinane (Waterford, Sinn Fein)
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Okay. None of that answered my questions. However, it provided more clarity. I wish to break this down into layman's terms because it can bamboozle people who are not economists and who do not understand how it works. They hear terms such as "debt-to-GDP" and now there is GNI*. We use a host of measurements and we have to figure out which ones are the most accurate. We know for certain that, legally and in terms of implementing the fiscal rules, GDP and debt-to-GDP are used. GDP is, essentially, a measurement of all goods and services in the economy over a year in the State. Does GNI* strip out the multinationals?
David Cullinane (Waterford, Sinn Fein)
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It does not strip out all multinational activity.
David Cullinane (Waterford, Sinn Fein)
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That is not the problem. The problem in Ireland is not so much that we have many multinationals. If they are producing goods and services, that will not be a problem. Is it the difficulty that a number of companies that are based here are booking a great deal of revenue but are not making anything here?
David Cullinane (Waterford, Sinn Fein)
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They are not doing anything in terms of goods or services. Is that the problem?
David Cullinane (Waterford, Sinn Fein)
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I will stop the witness there. Can he tell me, explicitly and clearly, what is excluded when the GNI* calculation is being made?
Mr. John McCarthy:
We talk about GDP as a measure of the output of goods and services in Ireland. That is certainly the case. One goes from GDP to GNI where the income arising from the production of those goods and services does not accrue to Irish residents in the case of foreign-owned multinationals and there are profit outflows. That is where one goes from GDP to GNI. Every country has GNI but in most cases GDP and GNI are very close. Two very important adjustments have to be made to go from GNI to GNI*-----
David Cullinane (Waterford, Sinn Fein)
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Before that, I wish to be clear about what the witness is saying. The difference between GDP and GNI is that it is not necessarily the profits generated by the multinational companies on the basis of goods and services but the profits that they make not being repatriated to Ireland but being repatriated somewhere else.
David Cullinane (Waterford, Sinn Fein)
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Is that because of the nature of multinational companies?
Mr. John McCarthy:
No, it is because of the size of the multinationals. We all know they are quite profitable in many cases. However, there is also a profit inflow from Irish firms abroad that are profitable too, but in net terms it is a net profit outflow. That is GDP to GNI. The Philip Lane group came up with the concept of GNI* two years ago. One goes from GNI to GNI* by removing the depreciation of foreign-owned capital assets in Ireland, especially the depreciation on intellectual property assets. They depreciate quite rapidly so that is a huge amount in the difference. The second major adjustment is to exclude the profit inflows of firms that have redomiciled to Ireland. This is the so-called inversion issue. The profits of these firms do not accrue to Irish residents. They are ultimately paid in the form of dividends to their foreign owners. That is not Irish income so that is the second adjustment. The biggest one, however, is the depreciation of foreign owned capital assets.
David Cullinane (Waterford, Sinn Fein)
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I am looking at Figure 2C.1 in the Comptroller and Auditor General's special chapter. It gives a definition of gross national income and GNI*. Can the Comptroller and Auditor General take us through that from his perspective?
Mr. Seamus McCarthy:
Essentially, the top part of the table gives figures for what are conventionally defined as GDP, GNP and GNI. It is done on this basis everywhere. The working group looked at what elements within GNI were causing a distortion. One can see that there was an unusual effect in 2015, particularly with regard to depreciation of research and development intellectual property imports. Something very significant happened in that period.
David Cullinane (Waterford, Sinn Fein)
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As a percentage of that debt, how much of it is accounted for by the EU-IMF programme loan balance?
David Cullinane (Waterford, Sinn Fein)
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It is approximately 25% of the overall debt.
David Cullinane (Waterford, Sinn Fein)
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Essentially, we still have very high debt levels. We hear about a recovering economy but would Mr. Moran agree that we have to be careful in terms of how we spend money? At budget time we have debates in the political sphere regarding how we spend money on cutting taxes and so forth, but as we still have a high level of debt compared with other countries would he agree that we need to be cautious?
Mr. Derek Moran:
Absolutely. This is why so much effort is put into the production of things such as the annual debt report. We need to do that because debt to GDP, which is the legally required measure, is a misleading indicator of our position regarding our national indebtedness. One is better off looking at different ones, which include GNI*, and metrics such as borrowings per capitaor whatever, because our nominal debt of over €200 billion has not gone down. It has only gone down in terms of growth and, indeed, by reference to one piece of exceptional growth in 2015. Debt should be one of the things we keep the closest eye on in terms of making plans for the future, certainly minimising what we add to it on an annual basis or ideally reducing it over time.
Catherine Murphy (Kildare North, Social Democrats)
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I wish to clarify something. There was a referendum on the fiscal compact rules. That is the framework under which we are working. If GDP is the legally defined definition, as Deputy Cullinane said and as the witnesses agreed, are we in compliance with the fiscal compact rules in the context of the definition using GNI?
David Cullinane (Waterford, Sinn Fein)
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The point is that we report on the basis of GDP. The difficulty is that the outworking of the rules is based on figures which are not reliable.
David Cullinane (Waterford, Sinn Fein)
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That is an extraordinary position for the State and for policy at such an important level. The fiscal compact rules have a big impact on how much money the State has to spend.
We each have our own view as to whether the fiscal rules are too rigid or otherwise - there was a referendum on that point - but they are the rules in place. That is the legal requirement. It is extraordinary that decisions and the policy outworking of the rules are being made on unreliable figures in terms of debt to GDP . As stated by Mr. McCarthy, Ireland is the only state in the European Union in that position.
David Cullinane (Waterford, Sinn Fein)
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However, we must rely upon it.
David Cullinane (Waterford, Sinn Fein)
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It is not just for reporting purposes. If it was just for reporting purposes, that would be fine because in a report one can have debt-to-GDP, debt-to-GNI, debt-to-GNI* and so on. That is fine. However, it is not just for reporting; it is for the implementation of rules which have an impact on my job and that of Deputies Catherine Murphy and Catherine Connolly, as legislators, in terms of the fiscal space which is available. It is not just the fiscal space, it is whether or not we meet the mid-term review and the targets that are being set. It has implications for the State implementing fiscal rules which have an impact on our ability to spend and borrow.
Mr. Derek Moran:
To be fair, over the past two days, the Minister has made it clear in terms of the launch of the stability programme update, SPU, and the statements he made that he does not and cannot rely on fiscal space as the metric. There must be a more complex consideration of the underlying performance of the economy and the metrics rather than a reliance on that potentially misleading figure.
David Cullinane (Waterford, Sinn Fein)
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Is GNI* an Irish phenomenon? Is it a bespoke Irish measurement?
Mr. John McCarthy:
We are the only country which uses GNI* because we are the only country which is such an outlier. However, there is huge interest at academic conferences and among policy makers across Europe and at the IMF and so on because issues such as contract manufacturing and intellectual property, IP, onshoring are beginning to affect other countries. We are at the coal face but other countries are beginning to come to us to discuss these metrics because although they are not affected to the same extent, it is coming down the line. The globalisation of the economy is increasing and IP is very mobile. Although we are at the coal face, it is an issue for all advanced economies and other countries will have to deal with it at some stage.
David Cullinane (Waterford, Sinn Fein)
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I wish academics well in the work that they do.
David Cullinane (Waterford, Sinn Fein)
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Absolutely. I wish academics well and I am sure it is very interesting for them. However, policy makers are key to this issue. Has there been any interaction between the Department of Finance or the Department of Public Expenditure and Reform and the European Commission in regard to using GNI*? If it is the accepted position of the Minister for Finance, Deputy Donohoe, and the Secretary General of the Department of Finance, Mr. Moran, that GDP is, as has been said, irrelevant, unrealistic and not to be depended upon and that GNI* is more appropriate, have we made any recommendations that this is not a one-size-fits-all situation and that debt to GNI, which would be a more accurate reflection of our debt versus what is happening in the economy, be used instead?
Mr. Derek Moran:
The bald answer is "Yes". If one looks at the launch of the stability programme update, Mr. McCarthy and his colleagues have looked at the measurement issue in terms of where we are in the cycle and, importantly, whether we are in a healthy position, and have developed alternative methodologies which strongly support an endorsement by the Irish Fiscal Advisory Council of being a far better tool for determining where we are in the cycle and, therefore, being far more germane to policy making.
David Cullinane (Waterford, Sinn Fein)
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What was the response of the European Commission in that regard?
David Cullinane (Waterford, Sinn Fein)
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What does EUROSTAT use?
David Cullinane (Waterford, Sinn Fein)
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EUROSTAT, yes.
David Cullinane (Waterford, Sinn Fein)
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Mr. Moran is aware that the calculations of EUROSTAT have an impact on all sorts of issues, including whether or not spending or borrowing can be on the State balance sheet. That has been a challenge for us in the past. EUROSTAT uses GDP rather than GNI or GNI*.
David Cullinane (Waterford, Sinn Fein)
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I did not support the fiscal compact treaty for that very reason. I agree that that is a problem with standardised rules.
David Cullinane (Waterford, Sinn Fein)
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Have we asked for a break from the fiscal rules or should they be amended?
Mr. Derek Moran:
In its response, the Irish Fiscal Advisory Council made the same point as Deputy Cullinane. It stated:
Well-founded forecasts for the medium term are necessary to provide a sound basis for setting the economy and the public finances on a sustainable path. The Council also welcomes the intention of the Department to include these estimates in the headline table of macroeconomic indicators in future endorsement rounds.
In other words, to make sensible decisions, we must have alternative measures that get us to that sensible position.
David Cullinane (Waterford, Sinn Fein)
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The logic of that position is that we should break from the fiscal rules. If the Commission tells Mr. Moran and the Minister for Finance that it is sorry but GDP is the figure it uses, does Mr. Moran think we should break from the rules?
Mr. Derek Moran:
We have an alternative way of measuring the position of the Irish economy in the cycle and we will use that going forward. The European Commission will be receptive of and positive towards that idea because it recognises that the common methodology works well for very large economies but less so for a very small economy which is very open. The further one gets from the centre, the less well they work.
David Cullinane (Waterford, Sinn Fein)
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Mr. Moran stated that the Commission is looking at this favourably. However, if it says that although it is very interesting that Ireland has a bespoke GNI* measurement, it is not allowed and GDP is the sole measurement to be used, what happens then?
David Cullinane (Waterford, Sinn Fein)
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We will continue using unreliable figures.
David Cullinane (Waterford, Sinn Fein)
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I mean in terms of the implementation of the fiscal rules.
David Cullinane (Waterford, Sinn Fein)
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For reporting and implementation of the rules, we will continue to use unreliable figures.
David Cullinane (Waterford, Sinn Fein)
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Mr. Moran is dancing on the head of a pin. He has repeatedly stated that GDP is the legally required measurement. At no point will we be allowed to use GNI* to implement the fiscal rules but, rather, GDP alone. In that context, we will continue to use an inaccurate measurement.
David Cullinane (Waterford, Sinn Fein)
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That is my point. I thank Mr. Moran for being honest.
David Cullinane (Waterford, Sinn Fein)
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That is a ridiculous situation.
Seán Fleming (Laois, Fianna Fail)
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I take it there have been discussions at Council of Ministers meetings in regard to the Irish use of GNI*. I understand Deputy Cullinane's argument on GDP. Having this bespoke measurement is well and good at official level. However, has it been discussed at Council of Ministers meetings? Have they agreed that GDP is the official position but the GNI* figure will also be considered because Ireland is a unique case? Has that been discussed at the Council of Ministers?
Yes.
Seán Fleming (Laois, Fianna Fail)
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I agree with everything. However, if the issue has not been discussed, this is just a discussion between me and Mr. Moran. I am trying to be helpful. I suspect an agreement could not have been reached at official level to use GNI* to supplement the figures.
David Cullinane (Waterford, Sinn Fein)
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We know the matter has been raised. The problem is that the European Commission has not agreed to it.
Seán Fleming (Laois, Fianna Fail)
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What is the position at Commission and Council level regarding the use of GNI* to supplement the information on the GNP figure?
Mr. John McCarthy:
The point I would stress is that GNI* is a purely domestic measure. It is only available at the moment in nominal terms so we do not know what the real growth rate of GNI* was, even last year or the year before, because the figures are not available yet because it is difficult to deflate and so forth. We use GNI* for domestic purposes and because we think it is more relevant to assess fiscal variables on that basis. It has no legal standing at a European level. However, where it is discussed at a European level is when the Commission does its post-programme surveillance reports on Ireland every six months. It will get to GDP, on which Ireland complies, and then get to GNI* where Ireland has still high indebtedness and that is discussed by Ministers. I stress that there is no legal basis for GNI*. EUROSTAT has a legal basis for GDP and GNI but not for GNI*.
David Cullinane (Waterford, Sinn Fein)
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My point is that not only does GNI* have no legal standing but the GDP figures, which are unreliable, will continue to be used to implement the fiscal rules, with which Mr. Moran agreed.
Seán Fleming (Laois, Fianna Fail)
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No other country uses GNI*. Is it acknowledged when we use it in documents? Does EUROSTAT use GNI* in its documents?
Seán Fleming (Laois, Fianna Fail)
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GNI* is not found in any EUROSTAT document and is only found in Irish documents. It is an Irish solution to an Irish problem.
Mr. Derek Moran:
When ECOFIN sits down to consider Ireland's performance - our fiscal outturn - the presentation from the Commission will include: "Here are the metrics but if GNI* is used..." There is, therefore, an understanding of the challenges Ireland has in this regard and it will be discussed at that level, as Mr. McCarthy said. Deputy Cullinane is right that GDP remains the legal basis.
David Cullinane (Waterford, Sinn Fein)
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I do not disagree. Incidentally, this is not Mr. Moran's problem and I am not blaming either him or Mr. McCarthy for it.
Mr. Derek Moran:
I am a very strong supporter of the Irish Fiscal Advisory Council. To be fair, what Mr McCarthy and his colleagues have done is find a way to develop the metrics that allow us to have a much more sensible position and policy. That is exactly where one wants to be to be able to make sensible decisions around policy by sensible measurement.
Seán Fleming (Laois, Fianna Fail)
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It takes the whole view of the economy into account.
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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On that point, are there grounds for changing the fiscal rules to take account of this?
Mr. Derek Moran:
The Commission will look at the rules over the next couple of years. One has to remember that the problem with a common methodology is that it works for many countries - it works for a large chunk of the European economy - but it just does not work for us. I anticipate that over the next two or three years, there will be some movement on the rules.
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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As Deputy Cullinane stated, that has implications for our borrowing and expenditure decisions.
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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There probably should be some cognisance taken or an adjustment made to the rules to permit it.
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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Is Ireland advocating that position?
Mr. Derek Moran:
When we make our returns around performance we will highlight these various things and make arguments as to why these are better metrics that should be taken into account. I think that is widely understood within the Commission in those assessments and that eventually gets up to discussion at the Council.
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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While I want to focus on the Irish Bank Resolution Corporation, IBRC, I am interested in one figure that jumped out at me, namely, the €1 million provided for the secret service. I did not know we had a secret service.
Seán Fleming (Laois, Fianna Fail)
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It is a secret.
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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For what is this allocation used?
Seán Fleming (Laois, Fianna Fail)
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The Deputy hardly expects an answer to his light-hearted question.
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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I do.
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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We clearly have a secret service.
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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Maybe I watch too many box sets but is it spent on men in dark suits and glasses, moving packages and so on?
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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He is the Accounting Officer for the €1 million.
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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I note a small underspend.
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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Does the secret service fall under the Garda Síochána Ombudsman Commission, An Garda Síochána or the Policing Authority?
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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Is it jointly administered?
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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Does Mr. McCarthy have sight of what the money is spent on, confidentially?
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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I understand the nature of what is involved, intelligence gathering and so on. Is the expenditure used for staff or activity costs?
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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It is activity.
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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It would not be bribes for information.
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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I did not know we had a secret service or that money was allocated for this purpose.
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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Can they tell us anything?
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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Is a definition of the secret service available publicly?
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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Which Oireachtas did that?
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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That committee agreed, on behalf of all Members, that we would not ask any questions. Is that the case?
Mr. Brian O'Malley:
The Minister gave an overview of the €1 million figure, which is an annual figure. As the Deputy stated, there have been underspends in relation to it historically. As the Comptroller and Auditor General correctly said, the expenditure was drawn down by An Garda Síochána and the Department of Finance. At that juncture-----
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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They use it for their activities.
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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That is interesting. To address the issue of the IBRC, there is an ongoing case and the witness was not in a position to appear before the committee when we last discussed the matter. I was extremely frustrated by the way in which the issue was handled at that meeting because we were essentially told by the relevant officials that, on account of the ongoing case, they had been legally advised not to answer questions. This was not much different from the answers given to parliamentary questions on 7 and 11 September 2017, which pre-dated the legal case, in terms of the level of scrutiny of the IBRC liquidation. The statement of claim had not been made at that stage as it occurred only a few days before the meeting took place. However, the statement of claim would have issues now.
I do not have the transcript with me for that section of the meeting. I recall that Mr. Carville said at the time that when they got the statement of claim, they might be able to tell us more. Having got the statement of claim-----
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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There is no statement of claim.
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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Having read what is available publicly about this, it is a kind of case that does not involve the State being sued for money, compensation or anything like that. I asked the last day if the plaintiff has standing to take this case, first of all. Have we a view on that or can we say?
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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The individual involved is taking it as a director of the Irish Mortgage Holders Organisation, which is an advocacy group in a sense for people in debt difficulty and mortgage arrears and so on, which would be honourable enough. Obviously this is going to cost money. May I ask formally would the Department consider allowing this committee to make contact with the plaintiff's representatives and see if questions we can put in this forum might satisfy and avoid litigation? It would cost the State very substantially less to do it in this forum if those questions could be asked. It seems to me that the questions I was posing the last day to Mr. Carville would be precisely the ones that somebody would be getting ten grand a day to ask down in the Law Library.
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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We would not be interested in wasting our time but if it could save the State money, get rid of this case and at the same time ask the pertinent questions to which the public would be entitled given the expenditure involved in the ongoing liquidation, would that not tick a lot of boxes for people?
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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I know it would be unusual but I ask the Chairman that the committee would consider doing so and that we would communicate with the representatives for the plaintiff to see in the interests of the taxpayer if they might consider pulling back their case, on the basis that we were happy to ask questions pertinent to the oversight of the IBRC expenditure. It would serve all parties well. I might be able to get answers.
Seán Fleming (Laois, Fianna Fail)
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I ask the Deputy to give us a formal request. That is a fairly serious request.
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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It is a very serious request. It is nice to be pioneering now and again and, if it saves taxpayers' money, why not?
Seán Fleming (Laois, Fianna Fail)
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Would the Deputy help the secretariat and myself?
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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I will always help.
Seán Fleming (Laois, Fianna Fail)
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Will the Deputy try to work it up into something written that we can properly consider rather than just a verbal form? I know we will have it on the transcript and I know what the Deputy is saying but so many members are not here.
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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That is their choice.
Catherine Murphy (Kildare North, Social Democrats)
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As a member who is here, I certainly would not be agreeing with Deputy MacSharry in advance of talking to the individual involved.
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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He might say "No" but I just think it is worth asking, that is all.
Catherine Connolly (Galway West, Independent)
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I think it is something that should be discussed separately from this. I do not think we can answer that.
Catherine Murphy (Kildare North, Social Democrats)
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I do not think we can ask the committee to do that.
Catherine Connolly (Galway West, Independent)
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Not at this point.
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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At the meeting the last day it was agreed that we would ask Mr. Carville for sight of the contract in private. The Chairman pointed out that it was possible for the committee to view things and not publish them. Mr. Carville said he would check that. We also asked for the minutes from the update meetings. He indicated that was a reasonable request and that they should be able to provide them. I also asked for minutes between Department officials and the Minister on anything to do with the costs of the liquidators. Those requests are on the transcript. Was there a response? Were the minutes of those meetings provided?
Mr. Derek Moran:
As is normal practice, we get the letter from the committee on the list of items to be delivered. We delivered the items requested. One of those items, which was the minutes, seems to have fallen between stools and we are looking at that now. We picked that up in the periodic report and we are working on it. We were asked to deliver, and in fairness I think the secretariat will confirm that we did.
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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Did we not ask for the minutes?
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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There is nothing personal here. If we did not ask for them, we did not ask for them.
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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Okay, that is a bit of an issue. We asked for more than that at the meeting but I would say the key question was whether we could have the minutes.
Seán Fleming (Laois, Fianna Fail)
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What tends to happen is the secretariat goes through the transcript when it becomes available. It is probably something we should discuss in private session. Sometimes members make individual comments or requests. A request is deemed a request by the committee if it comes through the Chair. A personal, individual request that did not get any support does not always make its way into that. It is a protocol-----
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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I have a problem with that. If we need a proposer and seconder to every suggestion-----
Seán Fleming (Laois, Fianna Fail)
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We do not.
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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Well then what is the problem?
Seán Fleming (Laois, Fianna Fail)
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The protocol by which we issue those requests would be a useful item for discussion in private session.
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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I think it is appropriate to have this discussion. I know we have eight minutes because the bell has just started to ring, and I will be in possession afterwards. I have a problem if, after a Committee of Public Accounts meeting, the Chair and the secretariat or whoever, another person, not me anyway, sits down and decides to cherry-pick from the transcript what we seek and what we do not seek. I asked for the minutes. Mr. Carville actually felt he should be able to do that. On the contract, he was going to check. Was that in the request?
Seán Fleming (Laois, Fianna Fail)
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Voting has started in the Chamber. We will be coming back and Deputy MacSharry will be in possession.
Seán Fleming (Laois, Fianna Fail)
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We will resume our discussion with representatives from the Department of Finance. Deputy Marc MacSharry is the speaker in possession.
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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I thank the Chairman. Before we suspended we were talking about the stuff that came up when Mr. Carville was in the last day and I made a number of suggestions. In particular, I asked if we could see the contract with the special liquidator even in private session. The Chairman pointed out it was possible for us to view documents in private session which would not be published. Mr. Carville said he would check it out and come back to us. We also asked for the minutes of meetings on the updates. In 2016, there were eight such update meetings. At that stage in December, there had only been three in 2017. The commentary around that was it was up and running so there was less of a need for meetings. I asked for the minutes of those and minutes of meetings between the Minister and any officials to do with the costings or fees. Mr. Carville was going to check all of those. Speaking outside the ring, the secretariat has said it was an oversight not to include it in the letter that went to the Department but it said to look at the transcript. Mr. Moran and others must have missed it when they were looking at the transcript.
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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So we will be able to get those minutes.
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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In the contract.
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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Will Mr. Moran come back to us on that-----
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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-----even if it is not in the letter?
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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Could we see the contract in private session? It is hugely frustrating that in parliamentary questions and committee meetings two reasons are given. One is legal advice and the other is commercial sensitivity. We all have our individual definitions of commercial sensitivity. It seems to be the Department can procure whatever legal advice it is looking for. If I want legal advice to say the Department is able to tell me that, I am sure I can get a solicitor to give it to me because it is an arguable thing. It is very frustrating from our point of view. In our report of activity, which was published at the end of the year, Mr. Moran will no doubt have noted we made a recommendation on the establishment of a committee of inspection, which would have been similar. What is the Department's position on that recommendation?
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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I hear Mr. Moran and I find it hugely frustrating because-----
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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-----if and when Mr. Moran is down in the Law Library having to answer that question it will cost somebody €40,000 to ask him the question and it will cost the Department €40,000 to answer it.
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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I genuinely mean it. I know it is highly unusual but it is not somebody looking for money or compensation. They are possibly coming from a good place in terms of public advocacy. The committee has said it would like to discuss it in private. Legal representatives talk through the back channels regularly. Maybe it is something that could be looked at. If it saves people money and leads to a greater public oversight of this, it is something to be welcomed. As of the end of 2016, it was €222 million. Have we an indication of where it is at now?
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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Yes. It is reasonably safe to assume it is more than that.
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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It is obviously a huge amount of money. My concern with a committee of inspection - I appreciate Mr. Moran will say he cannot answer this but I want to put it on the record again - is there are a number of people in the Department responsible for the liquidation.
This was the biggest liquidation in the history of the State and it probably compares reasonably well in size to some of the biggest funds in Europe, if not the world. I ask the witnesses to tell me if they cannot answer this question. When we worked on the Act we extracted the need for a committee of inspection that would have overseen fees, who got paid when and how many hours were being put into what task. It could have questioned matters and if there was a dispute it could have gone to the High Court. Is this the procedure in regular liquidations?
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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We do not have this. We just have a situation whereby the Minister has powers to issue directions. However, we established the last day that no such directions have been issued, and Mr. Carville suggested I was stretching it to conclude this did not mean there were any queries on fees or numbers of hours. One of my key questions the last day was if the Department is being billed for three accountants doing repetitive relatively menial work, who is saying that only a junior is needed to do this or are there people saying this? Mr. Carville said he could not answer that because it was very specific to the case. It is obviously a huge concern that we have a level of expertise. This is not to impugn the qualifications or efforts of anybody in the Department, but the fear here is there might be a level of autopilot. Liquidators pay themselves in the normal way, through recoveries and sales, and this is retrospectively approved by the Department or the Minister. With such huge amounts of money at stake this is the concern.
Mr. Derek Moran:
I understand entirely the Deputy's frustration, but we were where we were in December. My colleagues made the point they were happy once they understood the scope of the action. In some cases they went through with the liquidators all of the details. We do not have the statement of claim. It was due last week but it has not been received. It is being pursued. We just do not know the-----
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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I have reason to believe that it was received by the Office of the Chief State Solicitor. Perhaps Mr. Moran does not know this.
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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Absolutely. Perhaps it could all be avoided. This is frustrating. We will have to come back to it, either after the case concludes or if the committee decides to make an attempt to facilitate it, and it would be good for all if we could do this.
I will move on to another issue. The Valuation Office has expenditure of approximately €10.5 million.
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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Yes.
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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The witnesses from that Department have left.
Seán Fleming (Laois, Fianna Fail)
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Where is the figure?
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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I will have a quick look at my notes and I can leave this-----
Seán Fleming (Laois, Fianna Fail)
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It is Government Department Votes.
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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I will leave it then, and Mr. Moran will come back to me on several issues raised on the previous occasion, or tell us what we cannot have if he states we cannot have it. When is it proposed that we speak in private about the proposal I made?
Seán Fleming (Laois, Fianna Fail)
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Presumably next Thursday.
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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The Chairman wants a full complement.
Seán Fleming (Laois, Fianna Fail)
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By the time we get to finish this evening, and we are still in public session-----
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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I appreciate that, but in case I have to leave the meeting I do not want to miss it. Will the Chairman do it this evening?
Seán Fleming (Laois, Fianna Fail)
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No, we will note it for next Thursday.
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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At the full meeting.
Seán Fleming (Laois, Fianna Fail)
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Yes, in private session next Thursday.
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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The clerk would like me to email a form of words to reflect what I proposed.
Seán Fleming (Laois, Fianna Fail)
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Yes, which the Deputy wants us to consider.
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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We can discuss it as a full group next Thursday.
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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Okay. I thank the Chairman.
Seán Fleming (Laois, Fianna Fail)
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By the time we finish in public session, there may only be several people in the room, so not today.
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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I thank the Chairman.
Catherine Connolly (Galway West, Independent)
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I will begin with some practical questions. With regard to the appropriation accounts and the financial accounts, and perhaps the Comptroller and Auditor General might answer this, are they the two accounts that should be consolidated or am I mixing up something?
Catherine Connolly (Galway West, Independent)
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In one document.
Catherine Connolly (Galway West, Independent)
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A fuller picture.
Catherine Connolly (Galway West, Independent)
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Is the Department accepting this suggestion?
Catherine Connolly (Galway West, Independent)
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That is lovely.
David Cullinane (Waterford, Sinn Fein)
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There will be more work done outside in the corridor.
Catherine Connolly (Galway West, Independent)
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I will refrain from saying so. With regard to page 16 of the finance accounts, there are receipts to the HSE for a substantial amount of money of €101 million in 2015 and nothing in 2016. Will the witnesses clarify this?
Catherine Connolly (Galway West, Independent)
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Is it money the HSE was giving back to the Department of Finance?
Catherine Connolly (Galway West, Independent)
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Why was it giving it back?
Seán Fleming (Laois, Fianna Fail)
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Was it because the Vote was changing from the HSE to-----
Catherine Connolly (Galway West, Independent)
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It is a practical matter.
Mr. Derek Moran:
Yes, it changed over. Sorry, it just took me a bit to catch up. The governance of it went from the HSE as a standalone fund-----
Seán Fleming (Laois, Fianna Fail)
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To the Department of Health.
Catherine Connolly (Galway West, Independent)
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That is fine. With regard to the figures, I do not know whether "amused" is the word. I certainly came here as a greenhorn and remain so with regard to financial matters, but listening to the questions put today by my colleagues I find it extraordinary. The Department is obliged under the fiscal rules to use GDP to report back. Is this a legal obligation?
Catherine Connolly (Galway West, Independent)
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Even though it is completely unrepresentative of the real economy in Ireland.
Catherine Connolly (Galway West, Independent)
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I think it is more than can be, is it not?
Catherine Connolly (Galway West, Independent)
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So it is unrepresentative. We are caught in legal rules that do not make sense for our economy.
Catherine Connolly (Galway West, Independent)
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Okay.
Catherine Connolly (Galway West, Independent)
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I heard that and I listened carefully, but GDP in other countries more accurately reflects the economy.
Catherine Connolly (Galway West, Independent)
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GDP in this country as measure does not accurately reflect-----
Catherine Connolly (Galway West, Independent)
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-----what is happening in the economy. This seems bizarre. I presume the Department has made representations to the Minister to state this is bizarre, or whatever words it uses.
Catherine Connolly (Galway West, Independent)
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That is very good. In a minute I will come to Mr. Moran's statement and try to get to the heart of what constitutes a thriving economy. I have made this point before and I will make it again today, and if I see Mr. Moran before me again I will make it again. He made an opening statement to say the key economic indicators point to continued solid growth this year, and there are almost two pages on this. He stated the robust pace of the recovery in the Irish economy continued in 2017, that it is broadly based and that the economic fundamentals are strong. On a practical level I have a great problem with this. I have mentioned the housing figures previously.
How could an economy be thriving when we have a housing crisis? The word "crisis" no longer covers it. Would Mr. Moran accept that more than 10,000 people are homeless, and that the figure is rising? Can he explain to me how he can say that the figures are fundamentally correct? Are the more than 10,000 who are homeless just collateral damage?
Catherine Connolly (Galway West, Independent)
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Appropriate.
Mr. Derek Moran:
-----fair. If she notes what I said, I believe I refer to GDP just once and then point to the real indicators of economic wellbeing including more people at work, underlying demand on the economy and falling unemployment. They are the more fundamental measures of what is going on, not the GDP headline number. In fact, I only mention the GDP number in line 1.
Catherine Connolly (Galway West, Independent)
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I am picking up Mr. Moran on the statement that the economy is thriving but to go back to the GDP, he is saying the Department is being forced to do that under the rules. It is difficult for me to understand that and then try to explain to somebody else that we are literally playing some type of game. Until now, we were not allowed spend money on housing because that was throwing money at the economy or inflating the economy; all of those words were used. Recently, I heard Mr. FitzGerald, who I understand is on the Irish Fiscal Advisory Council-----
Catherine Connolly (Galway West, Independent)
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Not any more, but he was on it.
Catherine Connolly (Galway West, Independent)
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I heard him talk recently about not throwing money at the economy and using that type of terminology. I am trying to get my head around it. What type of economy do we have when we have a major housing crisis in Galway? Dublin is mentioned frequently but in Galway, people are on a waiting list since 2002 because we have not built a single social house since 2009. I prefer to use the term "public house" because public housing should be available for everybody. Is it good economics that not one social house has been built in Galway when in 2017 we gave €152 million for the housing assistance payment, HAP, scheme? We increased that up to €301 million in 2018. Is that not throwing money at private landlords and vulture funds and overheating the rental market?
Catherine Connolly (Galway West, Independent)
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Yes. It is a simple question.
Catherine Connolly (Galway West, Independent)
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Is it not?
Catherine Connolly (Galway West, Independent)
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We did, yes.
Mr. Derek Moran:
-----around housing starts. The reality is that during the worst of times we were not building any houses. There was not any investment. The Deputy is correct. We were in the biggest crisis the country had ever seen but what we are seeing now, and it takes time, but what we are starting to see now is that on the new build side - new houses for purchase - all the indicators indicate that we are in strong growth, albeit off a very weak starting point, so-----
Catherine Connolly (Galway West, Independent)
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Just let me-----
Catherine Connolly (Galway West, Independent)
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Mr. Moran can come back in-----
Catherine Connolly (Galway West, Independent)
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-----on the Chairman's time, but I am trying to understand it. Economists and financial people talk about not overheating the market or throwing money into the market and making a bad situation worse but I am looking at a figure of €301 million going into a rental market that clearly is not sustainable. It continues to rise. Most people are evicted for non-payment of rent, as I understand the figures, and not for non-payment of a mortgage, which is also big, but has a huge focus. They are evicted for non-payment of rent and we are now putting €301 million into the private landlord market. Is that not overheating the market? Mr. Moran can disagree with me; I do not mind.
Catherine Connolly (Galway West, Independent)
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Yes.
Mr. Derek Moran:
-----but we have seen that begin to take off over the past couple of years. It has not got to the point where it fixes this problem but, for example, between this year and last year, and there is always a dispute about the number of new houses that are built because there is no single metric but if we look across all the piece, ESB connections are up 27%, commencement notices are up 25%, planning permissions are up 23%-----
Catherine Connolly (Galway West, Independent)
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Okay.
Mr. Derek Moran:
If the Deputy will just let me finish. It is lifting off a very low base and coming on again.
On the social housing side, the increase in money available for capital housing has grown from about €800 million a year to €1.8 billion between 2016 and 2018. The resources are there, and part of the budget is about having the money and making the choices about where we put it and there are strong indications that very strong choices have been made in terms of putting it into social housing and addressing these problems.
When people talk about overheating, they talk about the economy at large. They are not picking one sector. One cannot put money in everywhere. One prioritises, and if the priority is housing then the money is put into housing but one chooses not to put money elsewhere.
Catherine Connolly (Galway West, Independent)
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I understand that, but I do not agree with what the Department is doing. Mr. Moran is using the market language to justify something yet when it comes to the GDP, it is a very serious game. I am not saying Mr. Moran is playing a game but he is being forced to play a game. He is actually not complying with the law in regard to GDP. As a country we are not complying with our obligations yet when it comes to housing, it is not put into Mr. Moran's statement that housing is a huge risk. It is not put in anywhere in his statement. I might have missed it because I have been in and out of the room. Is it a good economic indicator to put that much money into the private system that is already overheated in my opinion? It is a simple question.
Mr. Derek Moran:
One thing about preparing a statement is that we are asked to keep it short to accommodate the business of the committee. If the Deputy takes it in terms of a longer document which refers to risks and the balance of risk in the Irish economy, page 35 of the stability programme update published yesterday states that in terms of housing supply pressures the likelihood is high. It is identified within the overall as being one of the biggest domestic risks in economic terms. The opening statement is written-----
Catherine Connolly (Galway West, Independent)
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It is nine pages long, and Mr. Moran is talking about the fundamentals of the economy being solid and thriving.
Catherine Connolly (Galway West, Independent)
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No. Anyway, I am running out of time because I have to be somewhere else. I cannot accept that the fundamentals of an economy are good if almost 10,000 people are homeless, and that figure is rising, the waiting lists are getting longer and we are channelling money into the private market that is already overheated. I cannot accept that the fundamentals are right. Mr. Moran can either agree or disagree with me on that. I take it that he is disagreeing with that.
Catherine Connolly (Galway West, Independent)
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Absolutely.
Catherine Connolly (Galway West, Independent)
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It is not being done because-----
Catherine Connolly (Galway West, Independent)
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-----the social housing term is being used to house people in private houses.
Alan Farrell (Dublin Fingal, Fine Gael)
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It is a policy issue.
Catherine Connolly (Galway West, Independent)
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No. It is not a policy-----
Alan Farrell (Dublin Fingal, Fine Gael)
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It is a policy issue.
Catherine Connolly (Galway West, Independent)
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Chairman, I ask that Deputy Farrell would allow me deal with this. I am within my time and I will finish within my time. If I have a nine-page document telling me that the economy is fundamentally sound, and if Mr. Moran is sticking to that, then I have to interpret that as meaning that the collateral damage of a good, functioning economy is 10,000 people homeless and a major housing crisis. That is the only way I can interpret it. Is it a wrong interpretation?
Catherine Connolly (Galway West, Independent)
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Mr. Moran is entitled to his opinion.
To conclude, as I do not want to upset Deputy Farrell regarding a viewpoint about housing, what confirms my opinion on this is that, as I said, we are playing games with official figures. We are actually breaking the law. Is there a way out of that? Is there a way we are not breaking the law when we are breaking the law?
Catherine Connolly (Galway West, Independent)
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Absolutely.
Catherine Connolly (Galway West, Independent)
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Yes, the Department complies with the law.
Catherine Connolly (Galway West, Independent)
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It does not reflect what is going on in the economy, and so it is not accurate. Is that correct?
Mr. John McCarthy:
And, as the Secretary General said in the statement, that is why we looked at employment growth, consumption, taxes, unemployment, GNI*. That is why we look at a suite of metrics, including underlying domestic demand, which the Minister mentioned at Tuesday's press conference, is growing at around 4% which we think is better in line with what is going on in the economy.
Bobby Aylward (Carlow-Kilkenny, Fianna Fail)
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I am sorry for being late. I was here earlier but I had to go as I had a question in the Dáil and had to stay there. My question may have been asked already, in which case I apologise.
On the EU budget and the €2 billion that we paid in 2016, is this the first year in which we contributed or was that also the case in 2014 and 2015? I know we were neutral prior to that and we were getting out more money than we had been putting in.
Bobby Aylward (Carlow-Kilkenny, Fianna Fail)
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It was €2 billion in 2016, what were the figures for 2017 and 2018?
Bobby Aylward (Carlow-Kilkenny, Fianna Fail)
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Who is that from? How is that formula arrived at for our contribution? By what method do we calculate this?
Mr. John McCarthy:
A couple of metrics are used to calculate this. One is the level of GNI*, which has been discussed before. It is like GNP, it is not distorted as much as GDP. The level of GNI* goes in and there is a complex calculation which relates to harmonised VAT to calculate our contribution, but that is a much smaller input into the overall formula. GNI* per capita is the most important metric, which is an indication of how wealthy each individual is. We put a lot in whereas some of the less wealthy eastern European companies would put in less.
Bobby Aylward (Carlow-Kilkenny, Fianna Fail)
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Where is Ireland in the pecking order of contributions compared with the last 11 member states to join the EU, which would be poorer countries? I know we would not be up with Italy, England or Germany which are paying 50%.
Bobby Aylward (Carlow-Kilkenny, Fianna Fail)
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On Brexit, there are various predictions about what will happen and where it will leave us. If the £11 billion which it puts in annually is removed from the system, other countries will have to make up the difference or we will be behind in our budgets. What do the officials see as happening to Irish contributions post Brexit? Will the contributions increase?
Mr. John McCarthy:
I can give my best estimate. This may change and there are a million and one parts to this, but if one assumes that expenditure will not change and that the gap needs to be filled by the UK leaving, our working assumption is that would lead to about €400 million additional contribution per annum.
Bobby Aylward (Carlow-Kilkenny, Fianna Fail)
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To Ireland?
Bobby Aylward (Carlow-Kilkenny, Fianna Fail)
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So we would go from contributing about €2 billion to €6 billion?
Bobby Aylward (Carlow-Kilkenny, Fianna Fail)
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So it would be €6.7 billion.
Mr. John McCarthy:
No, sorry, it is an additional €400 million so the figure would go from €2.7 billion to €3.1 billion. That is the ballpark calculation at this time. However, who is to know if the EU might cut expenditure because there is a larger pot. There are many moving parts. I do not know if it is a best or worst case scenario but if one assumes that the entire pot must be made up by the remaining 27 states, that is what our contribution would be.
Bobby Aylward (Carlow-Kilkenny, Fianna Fail)
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I understand that. I am only asking for a ballpark figure.
Mr. Derek Moran:
The next round of the multi-annual financial framework has to come around and there will be debates over whether the contribution should increase from 1% to 1.1%, for instance, so there is a whole range of moving parts in this area of policy. Mr. McCarthy has described the ballpark of what will happen.
Bobby Aylward (Carlow-Kilkenny, Fianna Fail)
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When looking at Ireland's capacity of going from €2.7 billion to €3.1 billion, does our large national debt come into play? I suppose other countries also have one, but per head of population our debt is large. Does that come into play?
Bobby Aylward (Carlow-Kilkenny, Fianna Fail)
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How is it formulated then?
Bobby Aylward (Carlow-Kilkenny, Fianna Fail)
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Are there any allowances for the big national debt?
Bobby Aylward (Carlow-Kilkenny, Fianna Fail)
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On gross domestic product, could the officials elaborate on EUROSTAT figures and the huge surge in GDP? There was a peak of general Government gross debt of 120% in 2012 and 2013, 79% in 2015, and 73% in 2016. There was an exceptional increase in Irish GDP in 2015 and 2016. Can the officials explain that?
David Cullinane (Waterford, Sinn Fein)
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Was there -----
Mr. John McCarthy:
There was speculation in the media but I can only give the official position that it was a small number of firms. The change in the assets was dramatic. Before then the total assets in the economy, public and private was about €700 billion. That went up to over €1 trillion in one year, which is practically unheard of.
Bobby Aylward (Carlow-Kilkenny, Fianna Fail)
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How did that happen?
Bobby Aylward (Carlow-Kilkenny, Fianna Fail)
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Was this a paper figure or was it real?
Mr. Derek Moran:
Our view is that it was more of a paper issue. Let us face it, neither the Deputy's income nor my own went up by 26% which is what GDP is supposed to measure in theory. That is why we had a group under the Governor of the Central Bank looking at what would be a better measure of income per capita - I sat on the group - and that is where we came up with GNI*. I do not know if it is in the figures that the Deputy is looking at but they do not go up by anything like those rates.
Bobby Aylward (Carlow-Kilkenny, Fianna Fail)
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Is it more balanced now? That was one particular year when it went mad. Is it at a more level rate now?
Mr. John McCarthy:
What happened in 2015 was that GDP was increasing and then there was a level shift and we are growing off that level, so that has not fallen back down. However, we are seeing a number of other issues going on now. The Deputy may have heard of the concept of contract manufacturing to which the Minister has referred several times. That is production which takes place in China but for statistical reasons is included in the Irish national accounts, and correctly so because, I stress, GDP is compiled in lines with best standards. There are quite a lot of distortions in the number which is why we have had the discussions with Deputies Cullinane and Connolly about GDP being problematic. It is compiled properly but as an indicator of how our living standards are changing, it is not particularly good and has not been for the past five or six years.
Bobby Aylward (Carlow-Kilkenny, Fianna Fail)
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That leads on to corporation tax, which is also under the Department's remit, and all the trouble with the EU and America, where the President is talking about trying to bring back jobs and so on. Our corporation tax of 12.5% is under pressure. The EU has been at it this week too. The President of France wanted to change the rules and regulations and that would have an effect on us.
What is the officials' opinion on how we can protect our rate of 12.5 %? Will we be able to hold out against the big powers in Europe to protect the 12.5% corporation tax? I would be happy if everyone paid 12.5% but some pay only 3%, 4% or 5% with sweetheart deals. They can invest in education or other things to offset the money they should pay.
Mr. Derek Moran:
The Deputy is correct that international corporation tax is currently a major issue for discussion. We came under our biggest pressure on the corporation tax rate at the start of the crisis when, I will not call it a threat, but there was an observation that if we wanted help that this might have been a price to pay.
One of the fundamentals of the Irish economic model is that it is an exporting economy that relies on foreign direct investment and exports to the world. If we were going to recover, this had to be part and parcel of the formula. We have seen various tax harmonisation proposals that have come around, most notably the common consolidated corporate tax base proposal. I think there have been five or six iterations of this proposal over the years.
Bobby Aylward (Carlow-Kilkenny, Fianna Fail)
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Does Mr. Moran think we can hold out at 12.5% as the pressure comes on us?
Mr. Derek Moran:
A great deal of change is happening in the international tax environment. To be honest, this is far less about the rate than it is about other factors. The US has introduced its first piece of reform since 1986 or 1987. It has reduced its rate to 21% or 23%. It has provided for the repatriation of profits from abroad. US multinationals were not obliged to bring their profits back to the US. They were expected to do so at one stage, but they were entitled to defer it. The money would come and we would tax the proportion of income that applied to Ireland. Then the money was just out there. Some major companies with tens of billions of statements are now saying they have a liability to the US Internal Revenue Service and will be repatriating that money to the US. That is a good thing for the international tax environment.
Mr. Gary Tobin:
The international tax rules have been in a state of flux over the past decade. Many international tax rules have stayed pretty much the same for the past 50 years. Many of them were developed by the OECD when someone who wanted to have a business in a country needed to have a bricks-and-mortar building in that country. With the advent of digitalisation and the Internet, there is no need to have a physical presence in a country in order to trade in that country. Many of the international tax rules that were designed by the OECD have been under discussion and debate at international level for many years. Deputies may have heard of the base erosion and profit shifting project, which is all about trying to get an international consensus on how international tax rules can be changed to reflect that fact that business has changed so dramatically. Ireland is very important in that context because there are so many Internet companies, etc., based here. Our colleagues in the Revenue Commissioners and some of our own tax colleagues in the Department have been influencing those discussions at OECD level. In general, we are reasonably happy with the way the OECD discussions have been going, although there are times when we do not agree with what is said.
Mr. Derek Moran:
I would like to speak about our capacity to defend our position. We believe the world is changing, particularly with regard to digitisation. The best way to proceed is by means of multilateral action in which all countries move together internationally. Action should not be taken by one group, one region or an individual country. That would cause a huge amount of concern. We are very committed to the work being done as OECD level as one of the strategies around-----
Bobby Aylward (Carlow-Kilkenny, Fianna Fail)
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Are we going to lose out? The finger is being pointed at us. Many international companies were coming here, selling into Europe and bringing their profits here. It was suggested that Ireland was a low-tax destination. Some individuals were even calling Ireland a tax haven. I would like to hear Mr. Moran's view on that.
Mr. Derek Moran:
I put it to the Deputy that in light of the forthcoming departure of the UK from the EU, multinationals and especially US multinationals are going to want a base within the EU so they can access its market of 400 million of people with free movement of goods and labour. The advantage this offers to multinationals is at least comparable to, if not more important than, the tax status of this country. The position is changing all the time. I would not be unduly pessimistic.
Bobby Aylward (Carlow-Kilkenny, Fianna Fail)
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An effort is being made to change the rules so that companies with certain sales in France or Germany pay tax on those sales in those countries. We would lose out in such circumstances. Up to now, we would have gained from such transactions. Now it is proposed to take the tax at source in Germany, France or wherever these sales are made. That means we will be at a loss, which will affect our GDP.
Bobby Aylward (Carlow-Kilkenny, Fianna Fail)
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That is right.
Bobby Aylward (Carlow-Kilkenny, Fianna Fail)
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No one will have to pay tax twice. It will be paid in other countries and not here.
Mr. Derek Moran:
When this interim measure was considered at the OECD, there was no consensus on it among OECD members. An effort is being made to rebase the tax system to take account of the concept of a digital place or some other very technical term. Attempts are being made to work that out. Those involved reckon that the work programme which lasts up to 2020 will get them there.
Bobby Aylward (Carlow-Kilkenny, Fianna Fail)
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Mr. Moran is saying that this will not happen for years.
Mr. Derek Moran:
No, sorry. I have set out what they are working towards. The European Commission recently published a proposal to have an interim measure which would impose this type of surcharge or VAT charge on these sorts of transactions. The proposal is at its early stages. There was no consensus within the OECD and I am not sure there is any consensus within the EU either.
Bobby Aylward (Carlow-Kilkenny, Fianna Fail)
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My final question relates to the stabilisation of the banking sector here. Can the witnesses explain why it is mentioned, in the context of receipts of €1.4 million, that some €500,000 has been budgeted for in respect of the recoupment of certain expenses in the stabilisation of the banking sector? Will Mr. Moran explain how the stabilisation of the banking sector cost the Department so much money?
Bobby Aylward (Carlow-Kilkenny, Fianna Fail)
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I would have presumed so. I am just reading it here.
Bobby Aylward (Carlow-Kilkenny, Fianna Fail)
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Sorry, I am talking about total receipts.
Bobby Aylward (Carlow-Kilkenny, Fianna Fail)
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So this money is coming back into the Exchequer.
Bobby Aylward (Carlow-Kilkenny, Fianna Fail)
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They are paying it back.
Bobby Aylward (Carlow-Kilkenny, Fianna Fail)
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It was budgeted at €500,000, compared to a total of €1.4 million. Can Mr. Moran explain the difference?
Bobby Aylward (Carlow-Kilkenny, Fianna Fail)
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No, €1.4 million. The difference is €900,000, which is a lot of money. I am talking about the recovery of receipts.
Bobby Aylward (Carlow-Kilkenny, Fianna Fail)
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How did someone get it so wrong?
Bobby Aylward (Carlow-Kilkenny, Fianna Fail)
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Yes.
Bobby Aylward (Carlow-Kilkenny, Fianna Fail)
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Is there more money to be recovered under this heading in years to come? I am thinking particularly of next year and the year after.
Bobby Aylward (Carlow-Kilkenny, Fianna Fail)
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Is this money being repaid by the four pillar banks?
Bobby Aylward (Carlow-Kilkenny, Fianna Fail)
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The banks that we put money into.
Seán Fleming (Laois, Fianna Fail)
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I thank Deputy Aylward. I call Deputy Farrell.
Alan Farrell (Dublin Fingal, Fine Gael)
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I apologise for missing this morning's session. It was unavoidable. I want to mention two issues that have been touched on in the last few minutes while I have been in attendance. Mr. Moran spoke about the capacity of the State to defend its position with regard to our robust tax system, among other things. I want to focus on the digital taxation proposal. I am fairly confident that despite international pressures, we will not have a difficulty with adjusting our corporation tax rate. I figure that we have been through the worst of it. Although that pressure may be sustained, it is highly likely that it is lessening somewhat. Deputy Aylward hit the nail on the head when he said the potential exists for digital taxation and transactional taxation to have an impact on us. Have we done any studies on that? Has the Department or any other State body looked at the potential impacts on our economy?
Mr. Derek Moran:
The detailed proposal is quite young. The Revenue Commissioners, in conjunction with the Department, will look at the negative impact this would have if it were to become a reality. We will work our way through that bit by bit. The nature of the way these things are done at European level means there could well be considerable differences between the proposal we go in with and the proposal we come out with. The real risk with this goes beyond taxation. There is a view in the US that if a threshold of €750 million of turnover applies to the charge on digital companies advertising in countries, that will confine this measure to American companies. There is a real risk of a retaliatory response from the US if this were to happen.
Alan Farrell (Dublin Fingal, Fine Gael)
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Particularly given the current occupant of the White House.
Mr. Derek Moran:
Yes. Europe is very wary of the US on trade and the US is very sceptical of Europe on tax. There is a long way to go on this. It is not remotely straightforward. The 3% levy that is being proposed as a turnover tax is based on a global turnover of €750 million.
This tends to bring it down to very specific companies and they tend to be US owned. That is not particularly well understood but that is a significant problem for this proposal.
Alan Farrell (Dublin Fingal, Fine Gael)
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I am not sure the witness can answer, but from an observational perspective it appears the big states in the EU are pitching this for their own benefit as opposed to the European Union as a whole. The potential knock-on effects of what they propose - Mr. Macron in particular - will not be beneficial to the EU. It will be beneficial to France and Germany. Part of me is very much in favour of what the EU does and how it does it but parts of this discussion trouble me because it is clearly national protectionist and it does not benefit the EU as a whole. It would have a considerable impact if the model Emmanuel Macron, in particular, was looking at were introduced.
Alan Farrell (Dublin Fingal, Fine Gael)
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I will move on. Does Mr. Moran know what the UK's contribution, in percentage terms, is of the overall EU budget?
Alan Farrell (Dublin Fingal, Fine Gael)
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A potential extra contribution of €400 million has been spoken of, pending all of the discussions that I know have yet to take place.
Alan Farrell (Dublin Fingal, Fine Gael)
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A sum of €10 billion or €11 billion?
Alan Farrell (Dublin Fingal, Fine Gael)
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What is that in percentage terms of the overall budget?
Alan Farrell (Dublin Fingal, Fine Gael)
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Is it 7% or 8%?
Alan Farrell (Dublin Fingal, Fine Gael)
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That is fine. The main issue I want to focus on is the national debt. It is €203 billion I believe.
Alan Farrell (Dublin Fingal, Fine Gael)
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I was reliably informed that is about €35,000 per person or something along those lines. We should all take out a loan from the credit union and pay it off.
Bobby Aylward (Carlow-Kilkenny, Fianna Fail)
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Statistics are a great thing.
Alan Farrell (Dublin Fingal, Fine Gael)
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Yes, they are. I refer to the management of the national debt. What do we do in the event of an international downturn or an all out trade war between China and the US and its implications for the EU and Ireland? We like to say we are in the heart of Europe but we are a small island off the edge of it. That is a problem in these potential scenarios. I refer to protecting Irish taxpayers and the ability of the State to meet its multi-annual demands over a generation to get from that figure of €206 billion. Some of the figures I was looking at are fairly static over the last few years. I refer to page one on the Government debt. It shows that figure plateauing in or around €200 billion since 2013. It was not far off it in 2012. What projections have the witnesses made in respect of the ability of the State, on an ongoing multi-annual basis, to not just meet its minimum payment but to be able to reduce it in any kind of meaningful way? What sort of net impact is it foreseen to have on the domestic economy?
Mr. Derek Moran:
We have taken the opportunity to retire the more expensive debt which we had from the IMF and the bilaterals. We have replaced it with much cheaper debt. We have been trying to take those opportunities every time they have arisen. The best thing for us is managing a sensible budgetary position over a period of time to make sure debt is not increasing. It is ticking up over the forecast horizon to €208 billion or €209 billion, there or thereabouts.
Mr. John McCarthy:
This year our projected money amount, rather than as a percentage of anything, is €206 billion. It is still rising all the way out to 2021. That is our forecast horizon in the stability programme published on Tuesday. It rises to €211 billion. The main reason is we are still running a significant Exchequer deficit. People talk about the general Government but we will have an Exchequer deficit of the order of €2 billion.
Alan Farrell (Dublin Fingal, Fine Gael)
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Is it around 1% per annum? Or 2%?
Mr. Derek Moran:
During the morning we talked extensively about the debt exposure. That is a real domestic threat. We are approaching the top of the current economic cycle and there will be a place on the way down on the other side where pressures will come on spending on employment, unemployment and all those sorts of things which will add to this debt. That is why last year we produced for the first time an annual debt report. We do think it is one of the more important things and we should not lose focus on it. If we go back to the very long conversations, we have had GDP as a benchmark. If we take debt as a proportion of GDP it all looks very healthy. That is because of distortions in the level of GDP.
However, the reality is - and the Deputy is absolutely right - the nominal level of debt is not changing. It is slightly ticking upwards. It is not going up alarmingly but it is going up. Mr. McCarthy ran three scenarios last year. I refer to a GDP shock and a slow down in the world economy, an interest rate shock and then a combination of the two. They show the debt to be sustainable on either of the first two but we really come under pressure if we get both an interest rate shock and a GDP shock. We would come under pressure and the debt ratio would start to go back up again.
Mr. John McCarthy:
Our real exposure arises from nominal income growth. If there is a shock to what is going on in the economy, we do not have much exposure to an interest rate shock. That is because between 80% and 90% of the debt, taking into account interest rate hedging, is at fixed rates. The National Treasury Management Agency, NTMA, has been able to lock in money at very low rates. It is something we identify and the Minister has spoken about it on numerous occasions. He mentioned a figure, as the Deputy said, of about €40,000 for every man, woman and child in the State. What is positive, if we can take anything positive from this, is that because of the NTMA debt management operations, the average interest rate on the debt is down to 2.7%. The debt maturity profile has been pushed out quite a bit. The weighted average maturity is about 11 or 12 years. The norm in the Euro area is about six or seven years.
Debt is manageable but I stress it has to be managed. What does that mean? It means not adding any more debt. It means continuing to keep the interest rate down. Even when the interest rate cycle turns, we need to keep our spread vis-à-vis the bund to an absolute minimum. I do not want to stray into policy here but we have published this report. It also means we need structural reforms to improve the growth potential of the economy so that the denominator - GDP, GNI* or whatever - can do some of the heavy lifting as well.
When we talk about the €206 billion, the NTMA has accumulated about €25 billion or €30 billion in liquid cash assets to meet various amortisation humps that will arise over the next couple of years. Therefore, for our net debt, about ten percentage points of GDP have to be taken off to get the underlying position. All debt management offices across Europe will hold debt because it is not possible to go to the market with nothing in one's back pocket. However, we have quite an amount of cash. That is a mitigating factor.
Alan Farrell (Dublin Fingal, Fine Gael)
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Are we running the risk of repeating the same pattern, I will not call it a mistake, that we finished in the 1990s following the racking up of debt in the 1980s? We did not manage the debt. We let our national growth reduce the national debt instead without having paid anything off of it. Given the level of national debt at the moment, is there a concern, if we continue to grow at significant rates, that debt as a percentage is reduced but not as an actual figure?
Alan Farrell (Dublin Fingal, Fine Gael)
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It is huge.
Alan Farrell (Dublin Fingal, Fine Gael)
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What is the nominal debt for Ireland within the EU, given its current size? What would be a normal, average debt?
Bobby Aylward (Carlow-Kilkenny, Fianna Fail)
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Zero, if possible.
Mr. John McCarthy:
The euro area average is in the late 80%s; between 85% and 90% of GDP. Obviously there is a large amount of dispersion within that. Greece and Italy are at 130% and 180%, and then Estonia is at 10% or 15%. We are below the European average, but if we look at it as a percentage of our preferred metric, GNI*, we are still at 100%, which is too much.
Alan Farrell (Dublin Fingal, Fine Gael)
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I would be very interested to have a session on the annual report the witness referred to at some point in the future, when the Department is available.
Seán Fleming (Laois, Fianna Fail)
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The Deputy would like a session on the debt.
Alan Farrell (Dublin Fingal, Fine Gael)
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Yes, just on the debt.
Seán Fleming (Laois, Fianna Fail)
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The NTMA will be here before the summer to discuss its annual report.
Bobby Aylward (Carlow-Kilkenny, Fianna Fail)
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Is this Department or the NTMA responsible?
Seán Fleming (Laois, Fianna Fail)
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The NTMA manage it.
Seán Fleming (Laois, Fianna Fail)
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We expect to have the NTMA before the committee as soon as it has its financial statement for last year cleared. That normally happens before the summer.
David Cullinane (Waterford, Sinn Fein)
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To pick up on something Teachta Connolly said earlier, in Mr. Moran's opening statement he spoke about the increase in economic activity, the fundamentals of the economy being strong, the fact that we have one of the fastest growing economies in Europe, rapid growth in the economy, and a massive increase in employment - indeed, that we are heading towards full employment. Does any of that sound familiar?
David Cullinane (Waterford, Sinn Fein)
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It sounds like McCreevy economics again. I am old enough to remember - I am one of the victims of the Celtic tiger, having bought a property at the wrong time - that the fundamentals of the economy were strong. Many people were buying homes on the strength of people such as the witness coming in to committees such as this and saying that the fundamentals were strong and that we had a fast growing economy. Is there any concern?
David Cullinane (Waterford, Sinn Fein)
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One of those mistakes would be to rely on one element of the economy. At that time consumption taxes and the property sector were the main drivers. We now hear from the experts that we have a very high level of concentration of corporation tax from a small number of companies. Is that correct?
Mr. Derek Moran:
Yes. In January we published a document on the concentration risks of corporation tax. We are trying to make sure that people are well informed about whether there is a debt risk, a concentration risk and so on. At the moment growth means that contributions are coming from every sector. There is no sign of overheating. There is no sector dominating us in the way that occurred in the noughties when construction essentially drove the economy. That is not the case.
David Cullinane (Waterford, Sinn Fein)
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There is a wider spread.
David Cullinane (Waterford, Sinn Fein)
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I will make a mental note of that and hope that I do not have to play it back to the witnesses at some point. Teachta Connolly also asked about the delivery of housing. There is a big focus on housing at the moment, and while it is not necessarily in our area - it is a matter for that Department - the witness mentioned in his response that there is no single metric for calculating how many houses need to be built. Is that the point he was making?
David Cullinane (Waterford, Sinn Fein)
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The witness is talking about the amount of houses that were built rather than how many we need.
David Cullinane (Waterford, Sinn Fein)
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I want to return to the issue of GDP, GNI and GNI*. Mr McCarthy has been very helpful to the committee. His knowledge of the issues is quite impressive, and I thank him for sharing. However, I have concerns, and I hope that someone with his knowledge can help someone like me, a layperson, to understand exactly what is happening here. I am looking at page 20 of the Comptroller and Auditor General's report, which says that GNI* is defined by the Central Statistics Office, CSO, as gross national income. It then discusses the adjustments. The witness earlier said that the difference between GDP and GNI* is that there are a number of adjustments or exclusions made that would not be included in GDP but that are included in GNI*. This section seems to suggest that profits of redomiciled firms - where profits go out of the country - is a concern, as are the depreciation of research and development related to intellectual property imports and aircraft leasing. Do those areas have a distorting impact on GDP?
David Cullinane (Waterford, Sinn Fein)
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All of them?
David Cullinane (Waterford, Sinn Fein)
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Does that include aircraft leasing?
David Cullinane (Waterford, Sinn Fein)
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I am not a layperson, but I do worry about things and I ask the Minister for Finance for comfort when I am concerned about matters to do with finance. I asked a parliamentary question on 24 May 2016 and received a response from the former Minister for Finance, Deputy Noonan, which I am sure was compiled by civil servants. I dealt specifically with intangible assets and growth-fixed capital formation and the impact it has on GDP. The response I received from the Minister stated:
Aircraft investment, as presented in the annual national accounts, at current market prices by the CSO, is entirely GDP neutral, i.e. for every €1 increase in investments there is a corresponding increase in imports. The exclusion of aircraft investment would therefore have no impact on the debt to GDP ratio.
It goes on to say that the majority of intangible investment is imported. At that point the Department was saying that there was no difficulty with either aircraft leasing or intangible assets, but yet in the Comptroller and Auditor General's report I am looking at, which looks at the difference between GDP and GNI, the disturbing elements are the profits of redomiciled firms, depreciation, research and development, intellectual property and aircraft leasing.
Mr. John McCarthy:
The two are absolutely consistent. The parliamentary question refers to investment in aircraft leasing and investment in intangible assets. What is excluded, as can be seen from the CSO note, is not investment in but the depreciation of intellectual property and aircraft. The reason they are GDP neutral on the investment side is because they are imported.
David Cullinane (Waterford, Sinn Fein)
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That may be true, but it would have been great if it was included in the response to my parliamentary question last year. I would have been able to see that the investment side does not have any impact, that it is neutral and would not have any distorting impact on GDP, but that the depreciation of the assets would have an impact.
David Cullinane (Waterford, Sinn Fein)
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I will read it all out. It was: "To ask the Minister for Finance the gross fixed capital formation for investment in aircraft for leasing and intangibles for core investment, excluding investment in aircraft for leasing and intangibles"-----
Seán Fleming (Laois, Fianna Fail)
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The Deputy mentioned investment and he got an answer about the investment. He did not know that-----
David Cullinane (Waterford, Sinn Fein)
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I am not finished; it is a long question. "[....] for public investment at market prices, the level of gross fixed capital formation in total as a percentage of gross domestic product; the level of gross fixed capital formation, excluding investment in aircraft for leasing and intangibles, expressed as a percentage of GDP; the debt to GDP ratio; the effect of exclusion from GDP of investment in aircraft for leasing or intangibles on the debt to GDP ratio".
Is the witness essentially saying that my mistake was that I just focused on investment?
Mr. John McCarthy:
I would not call it a mistake. The Deputy asked about investment. That is fair enough. We do not build aircraft in Ireland, so if an aircraft leasing firm buys an aircraft it buys from the US, France or wherever. As such, it is an import, so there is no impact on gross domestic product, GDP. However, the depreciation of that is included in GDP, which was not part of the question. That is excluded from-----
David Cullinane (Waterford, Sinn Fein)
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Is that the depreciation on assets, or-----
David Cullinane (Waterford, Sinn Fein)
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As such, we now have a depreciation on assets and also a depreciation on research and development-related intellectual property.
Catherine Connolly (Galway West, Independent)
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I think the Deputy flew too low in his questions.
David Cullinane (Waterford, Sinn Fein)
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I flew too low is right. In any event, I still think there was a sleight of hand in how the percentage was calculated. Can I ask a quick question about the profits of re-domiciled firms? I am trying to understand that as well. Let us say that company A makes X in profits, and those profits are taxed in Ireland. The economic activity which underpin those profits, the production of the goods, takes place outside of Ireland. However, that is counted, and it is having a distorting effect. Would that be accurate?
Mr. John McCarthy:
Yes. It is having a distorting impact on the national accounts, but in the vast majority of cases we do not get any corporation tax. Essentially what happens is that there is an inversion. A company inverts in that its headquarters comes to Ireland, but where it actually undertakes its economic activity and makes its profit, and where it pays tax-----
David Cullinane (Waterford, Sinn Fein)
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Exactly. That is it. It might not make the goods here. They are made in Belgium, France or Germany, but the company is in Ireland because of our corporation tax rates, availing of the incentives we give them, including at one point the double Irish. When we look at the real distorting elements, is the full picture that Ireland is essentially a tax haven? Is that what the figures show?
David Cullinane (Waterford, Sinn Fein)
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Mr. McCarthy would not say it, but is it a possibility?
David Cullinane (Waterford, Sinn Fein)
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Firms that do not make anything here.
David Cullinane (Waterford, Sinn Fein)
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However, they put their profits here, some of them paying less than-----
David Cullinane (Waterford, Sinn Fein)
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Exactly.
David Cullinane (Waterford, Sinn Fein)
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Hang on a second. That purely national accounting element is then calculated into the GDP, which is the problem.
David Cullinane (Waterford, Sinn Fein)
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Sorry, I meant to say GNI.
David Cullinane (Waterford, Sinn Fein)
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I meant to say GNI.
David Cullinane (Waterford, Sinn Fein)
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As a final observation, a lot of this area is very complex, and it may be deliberately so. I was sincere in saying that Mr. McCarthy is very capable and knowledgeable on it, which is good. I ask him to give the committee a detailed note on it, because-----
Mr. Derek Moran:
I agree. We spent a lot of time talking about this and related issues during the course of the hearing. We will try to go away and develop a document that walks through GDP, GNP, GNI, GNI* and various concepts. It is in our interests that people understand, and it is extraordinarily complex.
Bobby Aylward (Carlow-Kilkenny, Fianna Fail)
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The ordinary Joe Soap has to understand it.
Seán Fleming (Laois, Fianna Fail)
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We will start with ourselves.
Bobby Aylward (Carlow-Kilkenny, Fianna Fail)
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I was talking about the ordinary Joe Soaps.
Seán Fleming (Laois, Fianna Fail)
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I am going to call Deputy Kate O'Connell for a few questions, because I have to go to the Chamber. I ask the witnesses to give me a quick response to this. The finance accounts clearly show the contributions to the EU as €2 billion to €3 billion per annum. That is fine. Why are the contributions to the Irish economy from the EU not reflected there? I know there is a separate account, and we spoke about consolidation of all the various State accounts. The payments that come to Irish farmers under the various schemes come directly from Europe. They do not go through the Central Fund and they are not audited by the Comptroller and Auditor General. They are audited by the EU auditor. Why do they not they come through this account? If the payments to the EU go through this account, why do the receipts from the EU, the €1 billion or so, not do the same?
Seán Fleming (Laois, Fianna Fail)
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I ask the witnesses to give us a response to that. When representatives of the Department of Agriculture, Food and the Marine were here we asked this question. Where is all the money coming in? We could not see it in the Vote for that Department. The official responded that the Comptroller and Auditor General does not audit it, nor does the Accounting Officer. It is an EU account audited at EU level. That is another major account, probably with €1.5 billion going through it, that is not remotely integrated into our finances. The witnesses know the question I am asking. I ask them to come back to the committee with a detailed note on that issue.
I also wish to address the debt. The witnesses show that the debt is to increase slightly during the next couple of years, by a couple of billion euro. I take it that the State is running a current account surplus?
Seán Fleming (Laois, Fianna Fail)
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This year?
Seán Fleming (Laois, Fianna Fail)
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That applies to 2017 and 2018. Is the debt then as a result of capital expenditure?
Seán Fleming (Laois, Fianna Fail)
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Are we in a surplus?
Seán Fleming (Laois, Fianna Fail)
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What was the surplus for 2017? The witnesses might also give me the figure for 2018. I notice that one of the submissions predicts a return to deficit in a couple of years. It is on page 21 of the briefing note. The gross debt is shown in billions of euro in table 14 of the briefing note. A general Government deficit of - €0.3 billion is shown for 2020, and - $0.8 billion in 2021. It seems to be going back to deficit. That is on page 21 of that document. Am I right in saying that?
Seán Fleming (Laois, Fianna Fail)
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That is fine, but the Department predicts that a general Government deficit will re-emerge as years go by.
Seán Fleming (Laois, Fianna Fail)
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I am looking at general Government deficit, figure 1. What does that mean? I read the figure of - 0.3% in a couple of years. While the witnesses are preparing a response, there is one more point I want to ask about. When the witnesses were before the committee previously we were dealing with receipts, revenue and corporation tax. Can the witnesses give the committee a quick update on the Apple escrow account? Is the money in it?
Mr. Derek Moran:
The Chair is probably aware that we appointed the custodian last month. We appointed the investment managers, and I anticipate that the final legal details should be concluded over the next couple of weeks, with money starting to flow thereafter. We have said all along that we except the money to flow in the second quarter, and we still anticipate that. There is nothing in the account at the moment, but the infrastructure is there to do it.
Seán Fleming (Laois, Fianna Fail)
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The last item I want to refer to is on page 25 of the finance accounts. It appears as "Payments to Department of Social Protection under section 48 (b) of the Pensions Act, 1990". Footnote 9 says that the sums of €42 million in 2015 and €13 million in 2016, relates to a special agreement concerning to former Waterford Crystal employees' pensions.
Mr. Moran is familiar with the issue.
Seán Fleming (Laois, Fianna Fail)
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What further payments will have to be made in 2018 and onwards? What are the projections?
Seán Fleming (Laois, Fianna Fail)
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Mr. Moran can send us a note on it.
Bobby Aylward (Carlow-Kilkenny, Fianna Fail)
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It was a long battle. They had to bring it to Europe to get the money.
Seán Fleming (Laois, Fianna Fail)
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Yes. I am asking what is the projected estimate.
Mr. John McCarthy:
I have the answer to the Chairman's earlier question. The figures he was quoting were from our last set of forecasts. They were published alongside the budget figures last October. The figures, as published by the Minister on Tuesday, are as I outlined them and show a projected modest surplus in 2020 and 2021.
Seán Fleming (Laois, Fianna Fail)
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At this stage, I ask to be excused as I have to go to the Chamber. I ask Deputy Catherine Connolly to take the Chair. Is that agreed? Agreed.
Kate O'Connell (Dublin Bay South, Fine Gael)
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I am sure the projected growth rate for next year was mentioned at the outset of the meeting when I was not here. What are we expecting next year?
Kate O'Connell (Dublin Bay South, Fine Gael)
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In Mr. McCarthy's opinion, is it a sustainable level of growth? Does he have concerns about it?
Mr. John McCarthy:
The position is that there is still a small amount of slack in the economy and we are kind of catching up. We are not yet at what one might call full employment. Because of the crisis, there are still scarce resources in the economy, but by next year we will be close to full employment. Thereafter, the cruising speed of the economy will be about 3%. In the medium term our best estimate is that we can probably grow the economy at about 3% per annum. Therefore, it is sustainable, but there is always the possibility of a surprise, be it positive or negative. At this time, the economy is in good shape.
Kate O'Connell (Dublin Bay South, Fine Gael)
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On the reasons for growth, before he left Deputy David Cullinane was talking about GNI. Companies with their intellectual rights here, whatever way one wants to term them where their transactions are made and VAT is gathered in other places, form part of the GNI. However, the GNI* does not include them.
Kate O'Connell (Dublin Bay South, Fine Gael)
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Other than on a graph, do they have any net effect on the economy in real money in the till terms?
Kate O'Connell (Dublin Bay South, Fine Gael)
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Am I correct in saying they are regulated here? There is regulation here because they are based here.
Kate O'Connell (Dublin Bay South, Fine Gael)
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Are they costing us anything? That is really what I am getting at.
Kate O'Connell (Dublin Bay South, Fine Gael)
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How?
Kate O'Connell (Dublin Bay South, Fine Gael)
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How are they making a positive impact? Forgive me if I do not get it because, like Deputy David Cullinane, I am a layperson, too. How are they having a positive effect on the economy if there is no money in the till as a result?
Kate O'Connell (Dublin Bay South, Fine Gael)
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Therefore, they are employing people.
Kate O'Connell (Dublin Bay South, Fine Gael)
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In the case of companies that have no sister firm, they are contributing nothing to the till.
Mr. John McCarthy:
They cost us money. The reason for that is - Professor John Fitzgerald and others have written about this and are absolutely correct - their global profits are transferred into Ireland via the profit inflows in a national accounting sense. They boost our GNI and our EU budget contribution goes up. We get zero from them and they cost us in the ballpark of a couple of hundred million euro every year. That is not something that is going to happen; it is happening right now.
Kate O'Connell (Dublin Bay South, Fine Gael)
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Are we doing anything about this net loss to the economy?
Mr. John McCarthy:
There is not a lot we can do in the sense that we cannot control whether a company changes its domicile to Ireland for tax purposes. What I will say is that they are not all from a particular country, but some of them are and there have been tax changes in that country which have reduced the incentive for companies to change domicile. What we have seen in the national accounts is that, to the best of my knowledge, no new firms have changed domicile to Ireland in about two years.
Kate O'Connell (Dublin Bay South, Fine Gael)
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It is almost as if they will die off naturally, for want of a better word.
Kate O'Connell (Dublin Bay South, Fine Gael)
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It is almost like grandfathering.
Kate O'Connell (Dublin Bay South, Fine Gael)
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We have what we have, but it is not as attractive as it was to come here-----
Kate O'Connell (Dublin Bay South, Fine Gael)
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-----because the places from which they were coming have stated, "We will fix you up at home."
Kate O'Connell (Dublin Bay South, Fine Gael)
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At some point Mr. McCarthy mentioned that the gap between borrowing and spending was approximately 0.2%.
Kate O'Connell (Dublin Bay South, Fine Gael)
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Perhaps Mr. McCarthy might tell me where were we at the start of the recession. Comparatively, what was the gap nine or ten years ago?
Mr. John McCarthy:
At the height of the recession in 2010, when one takes out the one-off figure due to the banking crisis - at one stage we ran a deficit of 30% of GDP, of which about 20% was due to "recap", which, obviously, is painful for everybody - the underlining mismatch between revenue and expenditure peaked at 11.5% of GDP.
Kate O'Connell (Dublin Bay South, Fine Gael)
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Who was in government in 2010? Not us, I do not think.
Bobby Aylward (Carlow-Kilkenny, Fianna Fail)
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We were.
Kate O'Connell (Dublin Bay South, Fine Gael)
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I thank the Deputy for reminding me.
Bobby Aylward (Carlow-Kilkenny, Fianna Fail)
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We had to make cuts of €16 billion. I lost my seat over it.
Kate O'Connell (Dublin Bay South, Fine Gael)
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I thank the Comptroller and Auditor General.
Catherine Connolly (Galway West, Independent)
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Does it also capture the constituencies?
Kate O'Connell (Dublin Bay South, Fine Gael)
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I am not sure if anyone asked about the rainy day fund before I came into the room. Did we put €500 million into it last year? Are we going to put €500 million into it or what is the plan?
Mr. John McCarthy:
Next year. The Minister stated, either in the Budget Statement or the summer economic statement which was published in July, that he would put €500 million into the rainy day fund which would only be established the year after we had balanced the budget. That was to be in 2019. Now there are issues about whether we will actually balance the budget in 2018, but the Minister was crystal clear, when he and I were at the Committee on Budgetary Oversight yesterday, that even if we did not, he was going to go ahead and capitalise the rainy day fund with a sum of €500 million. He is also going to seed the fund with funds of €1.5 billion from the ISIF. Legislation is being prepared to that effect.
Kate O'Connell (Dublin Bay South, Fine Gael)
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Just to clarify, it was said initially that it would happen when the books were balanced, but the term "broadly balanced" has come in now. He said yesterday that even if it is "broadly", he is going ahead.
Kate O'Connell (Dublin Bay South, Fine Gael)
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Who is managing that fund? Is it the National Treasury Management Agency, NTMA? Who does this?
Kate O'Connell (Dublin Bay South, Fine Gael)
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On the budget for next year and net fiscal space, will Mr. McCarthy outline what commitments have been made with next year's money? When we take out all the stuff we have spent such as the credit card or whatever, where are we in fiscal space?
Mr. John McCarthy:
With regard to what is precommitted, there is €2.6 billion of additional spending. That €2.6 billion is broken down into €1.5 billion for the national development plan; €400 million for demographics, for example, to keep pupil-teacher ratios and existing levels of services constant; €400 million for the public sector pay agreement; and €300 million for carry-over effects for measures that were introduced this year that did not happen on 1 January. These measures happened during the year but there will be a full year effect next year. This is the €2.6 billion the Minister was referring to at the launch of the stability programme this week.
Kate O'Connell (Dublin Bay South, Fine Gael)
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Is it the case that no matter what the fiscal space is, there is €2.6 billion spent from it?
Kate O'Connell (Dublin Bay South, Fine Gael)
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Without the €2.6 billion, does Mr. McCarthy have any idea of a ballpark figure for the fiscal space?
Mr. John McCarthy:
At the Committee on Budgetary Oversight yesterday the Minister said that there are so many moving parts, and I appreciate this is problematic, and that we are dependent upon the European Commission. Every member state is in the same boat. May is the kick-off point for the whole budgetary process across the EU. This is when the Commission gives the member states the relative inputs for calculating the fiscal rules, for compliance with the rules and for calculating fiscal space and so on. So much has happened and so much water has gone under the bridge since the summer economic statement last year, which is now nearly ten months old. The Minister now wants to wait until the summer economic statement this year before he will make any statement on that.
Kate O'Connell (Dublin Bay South, Fine Gael)
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It is a secret.
Kate O'Connell (Dublin Bay South, Fine Gael)
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Whatever it is we can take it that €2.6 billion has been spent.
Mr. Derek Moran:
There is an important context in the stability programme update document that was published yesterday. When the €2.6 billion that has been committed is taken into account, the deficit for next year is 0.1%. We are improving from 0.2% this year to 0.1% next year. It is flat. This goes back to our discussion on debt and whether one starts to borrow money to spend. There is a long way between now and a budget set of decisions and the metrics change etc. It raises the question about whether, on the basis of the set of numbers that are available at this time, we borrow to do more or we make choices around reprioritisation and so on. There is a way to go on this.
Bobby Aylward (Carlow-Kilkenny, Fianna Fail)
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The headlines are saying €4 billion is available for the budget. That is what the newspapers are printing every day. I am sorry for cutting in.
Catherine Connolly (Galway West, Independent)
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We will let Deputy O'Connell finish.
Kate O'Connell (Dublin Bay South, Fine Gael)
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I am nearly done. We are talking about the national debt ratio moving down. When the recession hit, did the countries that had a low debt to GDP ratio fare any better? At the time we referred to it as GDP before GNI* was introduced. I understand that there was no real benefit when things fell. Did the low GDP to debt ratio of certain countries have any positive effect on their outcomes? I may be wrong on that. Countries, for example, with astronomical national debt managed fine.
Mr. John McCarthy:
I will give two examples. Ireland went in with a debt ratio of 15%, in net terms, of GDP. The Deputy is quite right to say GDP because we did not have these distortions then. The headline figure was 25% but we had 10% of GDP in the National Pensions Reserve Fund at the time. We went in with a low debt ratio, but our outcome was horrendous. Consider Italy, for example, which went in with a high debt. On foot of that Italy has had to be very restrictive in its fiscal policies. It can do nothing. The Italian GDP is still below its pre-crisis level. Its debt ratio is now 130% of GDP. This is because it did not have the fiscal buffers to smooth the shock. Estonia and Luxembourg, however, had no problems accessing markets because they had debt ratios of 10% to 15%. They were still able to borrow, in some cases at negative interest rates. Their GDP did not suffer as much as countries that went in with a high debt ratio.
Kate O'Connell (Dublin Bay South, Fine Gael)
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Was there any point to it if the outcome was going to be bad any way? Is Mr. McCarthy saying that the low debt ratio Ireland had when we went into the programme served us well in the long term because we are exiting better than countries such as Italy? Is it a good idea to pay down debt?
Kate O'Connell (Dublin Bay South, Fine Gael)
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Reference was made to the national debt and the NTMA's €20 billion to €30 billion in cash reserves. What is happening with this?
Kate O'Connell (Dublin Bay South, Fine Gael)
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Sorry?
Mr. John McCarthy:
We have big repayment humps in 2019 and 2020. A lot of bonds will be maturing. That cash is needed now because when the time comes to repay, for example €10 billion, Ireland will have that money ready rather than going to the market two days before the repayment is due when the markets would charge more. It would be a "name your price" situation. This is why the NTMA has built up this cash and it is sitting on deposit in various commercial banks or the Central Bank. It will be used to refinance the debt that matures. I believe a big bond is to mature in October of this year. In 2019 and 2020 a lot of bonds will mature.
Mr. Gary Tobin:
Many countries were borrowing substantial amounts on the bond markets ten years ago. It was just around the time of the financial crisis. A lot of those bonds were ten-year bonds and many are now coming to maturity. A lot of countries will be out in the debt markets trying to pay off the bonds and get new ones. It makes sense for the NTMA to have significant cash balances so it can decide when is the most opportune time for Ireland to be in or out of the bond markets. It will be a crowded place.
Kate O'Connell (Dublin Bay South, Fine Gael)
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Sorry?
Kate O'Connell (Dublin Bay South, Fine Gael)
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Blind. I can see lines.
Kate O'Connell (Dublin Bay South, Fine Gael)
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Essentially we are building up a war chest to deal with the bonds that come in so Ireland is not as exposed and so we do not have to go elsewhere to get the money when they know we are really desperate for it, as happened before.
Kate O'Connell (Dublin Bay South, Fine Gael)
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I thank the witnesses.
Bobby Aylward (Carlow-Kilkenny, Fianna Fail)
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Reference was made to a war chest. Is it €15 billion or €16 billion?
Bobby Aylward (Carlow-Kilkenny, Fianna Fail)
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That money is sitting in a bank somewhere. Are we gaining anything or any interest with that money?
Mr. John McCarthy:
Very little. If the Deputy was to put money on deposit, he would get practically nothing. There is a cost to holding this.
However, the benefits of having this war chest greatly exceed the costs. If we had to go and re-finance €15 billion tomorrow, markets would hold us to ransom.
Bobby Aylward (Carlow-Kilkenny, Fianna Fail)
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In layman's terms, if we paid that off our national debt and brought it down €180 billion instead of the €203 billion we owe, we would save on interest. Then in two years time or whatever time it comes to be paid back on the markets, we went out and borrowed money which we got very cheaply. Would we gain more by doing that - saving on the €20 million or whatever amount of money for the next two years whenever these bonds mature - and then borrowing at that stage? Is it better to have this money sitting there not making much profit? It is sitting there waiting for these bonds to mature and then we will have the money, which is great, but would we gain more fiscally the other way?
Mr. Derek Moran:
The NTMA's assessment is that the risk of increasing bond prices out over the next couple of years is higher than the risk of holding the money. Therefore, it has that cash. It will always have cash on hand to meet liabilities. It can raise money so cheaply at the moment. As Mr. McCarthy said, if one goes into the market looking for €15 billion to redeem a bond, in six or eight months time, it is not guaranteed that one will get it at the same-----
Bobby Aylward (Carlow-Kilkenny, Fianna Fail)
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When we go to the market, money is available at very cheap interest rates that are fixed for 15 or 20 years. Is that still there?
Bobby Aylward (Carlow-Kilkenny, Fianna Fail)
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In ten years time - not that many of us will be here then - where does Mr. McCarthy see our €203 billion debt if we keep going the way we are going? We have a good fiscal position and are gaining ground the whole time. In ten years time, will we be back to 4% and 5% of GDP? We are going in the right direction. Is that our aim or will we always have it at 10% or 15% of GDP fixed and if we want to bring it down to 10%, we can borrow more and go ahead and spend it? Is that the way life works?
Mr. Derek Moran:
Predicting the future is a zero sum game. Generally speaking, when one has a normalised level of debt, and we do not believe our debt level is normal because it is very high, one will allow the economy to outgrow the debt and the debt burden falls down but we have that per capita burden of about €40,000 for every person in the country. We need to work it out. Where will we be?
Bobby Aylward (Carlow-Kilkenny, Fianna Fail)
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Where will we be happy? The figure is €40,000 per person. Will we be happy when it is €5,000 per person?
Mr. John McCarthy:
We still have significant banking assets, which are not included in the figures and our net debt figure. We sold 25% of AIB last year generating €3.4 billion so when we sell these assets over time, and they are not included in the numbers because nobody can know when they will be sold, if they are used to redeem debt, that will have big impact on the €200 billion.
Bobby Aylward (Carlow-Kilkenny, Fianna Fail)
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Where are we at the moment?
Bobby Aylward (Carlow-Kilkenny, Fianna Fail)
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Still 100%.
Catherine Connolly (Galway West, Independent)
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I have two quick questions. One concerned a rainy day fund. Did we have a pension reserve fund at some stage? Where is this at?
Catherine Connolly (Galway West, Independent)
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That is one question because I do not want to take up time. The second question concerned our contribution to the EU. That comes under two headings: the European Stability Mechanism and a separate contribution. Did I hear the witnesses say that this contribution is based on GNI?
Catherine Connolly (Galway West, Independent)
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Can the witnesses clarify that for me? The first question concerned the pensions reserve fund.
Catherine Connolly (Galway West, Independent)
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How much of that is left?
Catherine Connolly (Galway West, Independent)
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What about the contribution to the EU?
Catherine Connolly (Galway West, Independent)
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We would love a note on our contribution to the EU, the heading it is under and how it is calculated.
Catherine Connolly (Galway West, Independent)
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I thank the Comptroller and Auditor General and his staff along with Mr. Derek Moran and all his colleagues from the Department of Finance. They have been very straight with us. We might not have agreed totally but they replied to our questions and we could not ask for more. The next meeting of the committee is on 26 April 2018 when we will discuss chapter 13 of the Comptroller and Auditor General's 2016 report on the development of ICT systems by the Department of Justice and Equality, the Department's Appropriation Accounts and Vote 24.