Oireachtas Joint and Select Committees
Wednesday, 30 May 2018
Committee on Budgetary Oversight
Ireland Country Report and Country-Specific Recommendations: European Commission
I remind members and witnesses to turn off their mobile phones as interference caused by them affects the sound quality and transmission of the meeting.
On behalf of the committee, I welcome members of the European Commission to our meeting: Mr. Carlos Martínez Mongay and Ms Polona Gregorin from the Directorate General of Economic and Financial Affairs, who are accompanied by Mr. Gerry Kiely, head of representation in Dublin, and Mr. Patrick O'Riordan. I am conscious of the fact that the witnesses are on a timeline and that we need to finish by 3.50 p.m. Members of the committee will be conscious of that, but we want to have as full as possible an exchange with the witnesses.
In March 2018, the Commission published its country report on Ireland. It is an in-depth review of the macroeconomic situation in Ireland. Last week the Commission published its country-specific recommendations, CSRs. Member states are expected to have regard to these recommendations as part of the budget, and I know that the witnesses have been engaged in consultation with others today on those recommendations.
By virtue of section 17(2)(l) of the Defamation Act 2009 witnesses are protected by absolute privilege in respect of the evidence they are to give to the select committee. However, if they are directed by it to cease giving evidence on a particular matter and they continue to do so, they are entitled thereafter only to qualified privilege in respect of their evidence. Witnesses are directed that only evidence connected with the subject matter of these proceedings is to be given and they are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person or entity by name or in such a way as to make him, her or it identifiable.
Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official, either by name or in such a way as to make him or her identifiable.
I invite Mr. Martínez Mongay to make his opening statement.
Mr. Carlos Martínez Mongay:
I thank the Chair and the committee for inviting us to come here. It is an honour and a pleasure to be in front of the committee for a second time. In this short presentation I would like to walk the committee through the country-specific recommendations that were adopted last week on Wednesday, 23 May. Before I do that I would like to explain the context in which these recommendations have been adopted by the Commission.
Last week the Commission adopted what we call the spring package. The spring package is part of the European semester, which is a process of economic policy co-ordination within the European Union. This package includes the country-specific recommendations, but also the assessment of the Commission concerning the national reform programme and also the assessment, in the case of Ireland as a country with the euro as its currency, of the stability programme.
The European semester starts in the autumn with the adoption of what we call the autumn package, which includes the annual growth survey, the alert mechanism report and the recommendations for the euro area. In the annual growth survey the Commission establishes the policy priorities to be implemented in the European Union. In November last year, in the annual survey, the main policy priority was to continue the efforts along the virtuous triangle which consists of boosting investment, pursuing structural reforms and ensuring responsible fiscal policies. This year, on top of this, much emphasis has been placed on the European pillar of social rights. The second document adopted by the Commission last autumn was the alert mechanism report in which we carry out a screening of the economic situation in every member state and identify the countries for which we have to carry out a more detailed analysis, what we call an in-depth review.
Last autumn Ireland was identified as one of the countries that would benefit from an in-depth review. In November the Commission adopted the recommendations for the euro area. These recommendations must be implemented and all member states in the euro area should ensure they implement them.
Once the Commission has adopted this autumn package which sets out the policy priorities and identifies the countries for which an in-depth review is necessary, the Commission services prepare the country reports. The county reports were published on 7 March 2018. They provide an assessment of the economic and social situation in the member state, including progress made in the implementation of the country-specific recommendations of the past year. The country reports also include the results of the in-depth review of the concerned countries. On the basis of the in-depth review published in the country report in March, the Commission concluded that Ireland was still experiencing macroeconomic imbalances characterised by large stocks of external private and public debt, a high number of non-performing loans and rising property prices.
On the basis of the conclusions of the country reports and taking into account the national reform programmes, which are presented by the respective member states in April, the stability programmes, which present the medium-term budgetary targets of the Government, and the national reform programme, which presents the economic policy priorities of each member state, the Commission adopts the proposal for the country-specific recommendations that we adopted last year. This is the context in which the country-specific recommendations were adopted as part of the European semester cycle of economic policy co-ordination.
This year the country-specific recommendations adopted by the Commission are framed in a context of the fastest growth pace of the European economy in a decade, with record employment, recovering investment and improved public finances. The Commission noted, however, that new risks are emerging such as volatility in global financial markets and trade protectionism. For this reason, it is important that we use without delay the current favourable conditions to make Europe's economies and societies strong and more resilient.
The Commission proposes three recommendations for Ireland, that is, three blocks of priority areas: first, budgetary policy and fiscal structural issues, including taxation and sustainability of public finances; second, infrastructure and skills; and third, measures aimed at fostering productivity growth and reducing the stock of non-performing loans.
I will explain the rationale behind the different recommendations, beginning with the first, the compliance with EU fiscal rules. In 2019, the structural balance is forecast to reach a deficit of 0.4% of GDP, thus achieving the medium-term budgetary objective of a deficit of 0.5% of GDP. For this to happen, growth of Government expenditure should remain below 5.3% in 2019. Ireland is expected to comply with these provisions, including the debt rule. The debt-to-GDP ratio has declined significantly, but it is also true that part of the decline in the debt-to-GDP ratio is due to the denominator effect. GDP in Ireland includes contract manufacturing. Members will remember that in 2015, Irish GDP grew by more than 25%. In terms of GDP, while we see that debt is declining, in nominal terms, in terms of size, Ireland's debt is still very high. This is the reason that the Commission recommends that given the current cyclical conditions and the heightened external risks, Ireland should use any windfall gains to reduce general Government debt further. The Commission is recommending that this is the prudent fiscal policy to follow. I have learned that the recent plans for a rainy day fund would set aside €8 billion over the medium term. I believe this is an important development and could provide a fiscal buffer during a future economic downturn.
I will now deal with the composition of public finances, in particular taxation. Corporate taxes as a proportion of total taxes continued to increase. Such taxes are highly concentrated among a few large multinational enterprises which are prone to high volatility. Some recent tax measures have focused on cuts and reliefs and seem to have increased further reliance on highly procyclical sources of revenue. The Commission considers that broadening the tax base could help improve revenue stability in the face of economic fluctuations. Moreover, there exists further potential to improve the way the tax system can support environmental objectives.
The long-term sustainability of public finances presents risks related to the cost of ageing, although it is true that Ireland has introduced some significant measures to increase the efficiency of public healthcare, such as a cost-saving agreement with the pharmaceutical industry, a financial management system and activity-based funding. Some measures have also been taken to improve the availability of primary health care. The Government has also introduced a wide range of reforms to contain public pension expenditure. Nevertheless, according to the most recent long-term assessment approved by the ageing working group of the economic policy committee, the cost of ageing represents a medium fiscal sustainability risk for Ireland over the long term. On this basis, the Commission believes there is a need to increase the cost-effectiveness of the healthcare system and to pursue the envisaged pension reforms.
I will now address the second recommendation. The Commission found in the country report that barriers to inclusive growth remain in the form of skills mismatches and skills shortages.
The country report also found there was insufficient access to affordable and quality childcare.
Although unemployment fell to 6.7 % in 2017, certain groups are still largely detached from the labour market and socially excluded. In addition, years of reduced Government investment are taking their toll on the availability of housing and appropriate clean energy, transport and water infrastructure. In housing markets, persistent supply shortages, coupled with increasing demand, continue to fuel property price increases.
The Commission concludes that addressing emerging infrastructure bottlenecks is essential for sustainable and balanced growth in the future. It therefore recommends that Ireland improve the skills of the adult population and effectively implement in a timely way the relevant parts of the national development plan, including infrastructure and childcare.
The Commission finds that the productivity of domestic companies is lower, or growing at a slower pace, in comparison with the multinationals operating in Ireland. Given the current favourable economic conditions but also keeping in mind the existing risks and uncertainties, the Commission's third recommendation is that Ireland stimulate research and innovation with a view to enhancing the resilience of the domestic sectors.
Although Ireland continued to make progress in reducing non-performing loans, their ratio-to-total gross loans remains among the highest in the EU. Particularly worrying are long-term mortgage arrears, which are those in arrears for over two years. These represent 60% of the total mortgages in arrears in 2017. Reducing the long-term arrears could improve the resilience of the Irish banking sector and help to address the problem of debt overhang, which reduces the incentives for SMEs to put credit to more productive uses. On this basis, and as part of the same third recommendation, the Commission recommends promoting a faster and durable reduction of long-term mortgage arrears through promoting write-offs while protecting consumer rights.
In sum, the Commission proposes a comprehensive package to underpin the sustainability of public finances, foster productivity and enhance the resilience of Ireland's economy to external shocks, to which Ireland, like any other small open economy, is highly exposed. This is along the lines of the strategy of the Irish authorities to build resilience in the face of global challenges and the recommendations of the National Competitiveness Council.
I thank Mr. Martínez Mongay. I will call on a number of Deputies, who should keep their contributions to five minutes each. Replies should be kept to approximately the same time. That should allow everyone who has indicated thus far to be accommodated in the time available. The first to indicate was Deputy Chambers.
I thank Mr. Martínez Mongay for attending. I am conscious that I do not have much time but I have two questions. I note that Brexit has been mentioned in the country-specific recommendations as a risk to our economy. That it is probably the greatest short-term risk is obvious. In that regard, has Mr. Martínez Mongay recommendations on our budgetary process? What provision should we make for it? Is he satisfied that the rainy day fund is sufficient or should we be doing something in addition to buffer our economy against the threat of Brexit?
My next question is on childcare and labour activation rates. This issue impacts on women more. How do we compare with our EU counterparts? Is it a major concern for the Commission?
In line with the country-specific recommendations, Mr. Martínez Mongay has stated that we need to reduce our reliance on countercyclical taxes, corporate tax receipts and windfall tax revenues to fund services. Would he consider an increase in corporation tax receipts a windfall? If so, how should we proceed if we see a substantial increase?
Mr. Carlos Martínez Mongay:
I thank the Deputy for her questions. We are not making a particular recommendation concerning Brexit, which we consider to be one of the risks to the current economic framework, because we have not introduced in our analysis in the country report and when preparing the country-specific recommendations any hypothesis or assumption regarding the final institutional framework of the relationship between the EU and the UK. As the committee knows, negotiations are ongoing and we do not know exactly how the transition period will operate. Issues remain to be resolved. Nothing will be agreed until everything is agreed. As such, the Commission will not make any hypothesis about particular impacts based on the process and final result of the negotiations.
Regarding the rainy day fund, it is important that we acknowledge that the Irish economy is a small and open one and, therefore, is exposed to external shocks. Given that we are in the positive phase of the cycle, the Irish economy should be ready to deal with a possible slowdown owing to various causes. Public finances are one of the first areas of an economy to be affected by a slowdown caused by an external shock. For this reason, the Commission proposes the creation of buffers. They will not only apply to Ireland. The Commission's global recommendation is that Europe should take advantage of the good times to prepare the economy for a possible future slowdown. As such, and without assessing whether €8 billion is enough, the rainy day fund is important for us and we are supporting the Government's decisions because the rainy day fund would provide the necessary buffer to an external shock, no matter its cause, and allow Ireland to deal with a slowdown's impact on public finances.
In the Commission's view, the lack of affordable childcare in Ireland can be a barrier to accessing the labour market for certain workers, particularly single parents. Childcare is a condition for more inclusive growth. Workers who need someone to take care of their children during their working hours must be supported in accessing the labour market.
On corporate taxes, the Commission sees they are booming in Ireland at the moment. Corporate tax receipts are increasing at a faster pace but at the same time we see that these receipts mainly come from, or are heavily concentrated in, a group of multinational companies. Those revenues, therefore, are subject to high volatility. That is the reason the Commission recommends that these extraordinary revenue gains are used to reduce debt further.
I also want to touch on the rainy day fund. We are told its creation will allow the Government to address future crises, if and when they happen. The difficulty I have with the rainy day fund is that we have crises that need to addressed right now. I refer to homelessness, the lack of affordable childcare, which Mr. Martínez Mongay pointed out himself, and a skills mismatch, which he likewise pointed out. To address them, I feel it would be more prudent to invest now rather than squirrelling away some funds in a rainy day fund. There is an issue around whether what is being proposed by the Government is actually a rainy day fund or a contingency fund. Given recent experience of downturns and shocks to the Irish economy, €8 billion would be just a drop in the ocean of what has been previously spent.
I have some questions. On the rainy day fund, would there need to be a change in the fiscal rules to allow its creation? The Commission made, and Mr. Martínez Mongay spoke of, some recommendations on the over-reliance on corporate tax, the narrow tax base, the issue - that we saw even this year - regarding commercial stamp duty, the effective and timely implementation of the national development plan, addressing the skills mismatch and the lack of affordable healthcare. There is a contradiction between putting away the extra money we have into a rainy day fund but having to address all of these issues as well. Will Mr. Martínez Mongay comment on that?
It was my understanding that the whole point of the fiscal rules was to create buffers in the first place that would ensure prudent public finances and prevent unsustainable expenditure and trends. Would Mr. Martínez Mongay agree that the Stability and Growth Pact, SGP, in the forms of the medium-term objectives, MTOs, and the expenditure benchmarks, is not an adequate countercyclical buffer in itself and therefore minimises the need for a rainy day fund now? I refer to having crises that we have to deal with now rather than preparing for ones that may come farther down the line.
Mr. Carlos Martínez Mongay:
I thank the Deputy. His first question referred to the extent the Commission wishes to promote and support a rainy day fund in Ireland and if the fiscal rules would need to be changed. We do not need to change the fiscal rules. The rainy day fund is consistent with the fiscal rules in the sense that it has a countercyclical nature. When the economy is booming and there are extraordinary revenues, those revenues are saved in the form of assets. They can then be spent when the economy is in a slowdown, revenues are lower and expenditures increase - to pay unemployment benefits or other things. The idea of the rainy day fund is precisely that the additional money is not spent in a procyclical way that may lead to overheating in good times. On the other hand, when revenues go down, there is then a reserve of money which can be spent in the rainy days so that it is not necessary to go to the markets to borrow money. That is the basic idea of the rainy day fund and therefore it is consistent with the spirit of the fiscal rules.
On expenditure, I am not talking about expenditure in respect of taxes or anything like that. I am talking about investment in capital projects which will stand to us farther down the line as well.
Mr. Carlos Martínez Mongay:
In my interpretation, the Deputy's second question - taking into account that revenues are higher than expected and there is this positive surprise of extra revenues on one hand and some expenditure needs on the other - was whether the extra revenues should be used to cover expenditure needs. That is what I understood from the Deputy's reasoning. The key issue is that most expenditures are permanent, while part of these revenues are extraordinary. There is a risk that extraordinary revenues will be used to finance something which is permanent. That would then have a permanent effect on total expenditure.
That is precisely the reason the European Commission is proposing not to be procyclical in good times. The economy may be overheated if all the higher revenue from the good times is spent. As the growth rate in Ireland is high compared with the potential growth, the country is in the positive phase of the cycle. The European Commission is proposing on that basis not to use permanent revenues. Some of the increases in revenues do have a permanent nature, but the part of the revenues that are purely cyclical will disappear once the economy slows down. I mention that because the Deputy referred to it. That is precisely the idea with reaching the MTO where the structural balance is zero given the conditions of each country.
In Ireland's case, given its high growth, structural balance is considered to be in equilibrium when the structural deficit is 0.5% of GDP. That will be reached next year. The idea is that we then allow automatic stabilisation to operate so that permanent increases in expenditure are not adopted without being financed by permanent revenues. That is the essence of the fiscal rules in the European Union once countries have reached the MTO. Discretionary increases in expenditure should be matched by discretionary increases in taxation - but in permanent taxes and not in taxes associated with extraordinarily high revenues.
I thank Mr. Martínez Mongay for a very interesting presentation. My comments are not in order of importance but just as they come to me.
On the issue of labour activation and supporting the social benefits derived from it, there is a concern in some circles that the agenda being pushed by the European Commission and OECD discriminates against those who decide to stay at home and raise children. An economist will argue that where someone looks after another person's child, that is good work which is measured, but where someone looks after his or her own child, that is not work as it is not measured and therefore does not count. My preference is to leave it to parents to decide what is best because every family and every circumstance is different. For example, the policy decision to introduce child benefit many years ago achieved this objective because the benefit is paid to all parents for all children. It is a form of basic income. However, in recent years we have discriminated by providing tax breaks and particular subsidies. I would not argue against them, but I fear in that respect if it is done in a way that creates a differential. The American Senator, Elizabeth Warren, has written about the dual income trap. I do not know if Mr. Martínez Mongay has read any of Senator Warren's books. The trap she describes is that in an economy where everybody is working, the price of property increases and there is no flexibility or room to manoeuvre, for example, if one has a child who is sick. Every family has different circumstances. Elizabeth Warren argues that this is socially disadvantageous and the consequences are measurable and specific. Everything I hear from the European Union is driving in that direction. It is all about the economy, economic growth, labour activation and perhaps not having as many migrants, although that final point is an assumption on my part. I express that fear and also that while economists can measure everything, perhaps they cannot measure the real value of quality of life. Every family can achieve quality of life and balance in different ways but for us to discriminate so clearly carries a risk.
I have a second broad question. Ireland is an open trading economy and many of my friends work internationally. Some who have returned from China tell me that the costs of wages in China have gone incredibly high. The price of steel has also increased. One of the reasons we have expensive construction costs is that material costs are all rising because the world economy is growing at full throttle. We have also been printing money. The printing presses in America and in Europe have been rolling for ten years now. At some point, this will surely feed into inflation. What is Mr. Martínez Mongay's assessment? When the Commission makes country assessments or wider assessments, how does it indicate a risk of inflation? I presume inflation brings a risk of higher interest rates which, in turn, would create certain risks for a country such as Ireland with high nominal debt levels. How does the Commission forecast inflation? Does Mr. Martínez Mongay hear the same argument that I hear from friends working in the global economy, namely, that inflationary pressures are becoming real?
My third question-----
Mr. Carlos Martínez Mongay:
I thank the Deputy for those interesting questions in the sense that none of them can be given an immediate answer because they all relate to complex issues. On the question concerning whether the Commission is discriminating against people who would like to stay at home and take care of their children, the answer is definitely "No". There is no discrimination. The idea is to allow people to make choices and to give a choice to people who want to participate in the labour market but cannot do so because they have to take care of their children. We are not promoting a choice but giving them a choice. If people decide to participate in the labour market and would like to develop a professional life, the Commission's line is that we should ensure that a lack of sufficient and affordable childcare does not prevent them from entering the labour market. We are not saying that everybody should work. However, when an economy uses its maximum resources it is good for everybody because living standards increase. I agree with the Deputy that some things cannot be measured by economists or statisticians. In terms of the essence of the recommendation, we are not saying that everybody is obliged to participate but that a structure should be in place and all those who would like to benefit from it should have the option of doing so.
Parents who stay at home forego income. The cost they bear is the income they do not receive. If dual income becomes the standard in an economy, house prices increase to the extent that the person who forgoes income is unable to buy a house. For this reason, should the provision not be to support both parents or to leave the choice to parents? One side should not be neglected because in a rising property market, it becomes impossible to make the choice.
Mr. Carlos Martínez Mongay:
It is difficult for me to see the link between both issues. What the Commission tries to recommend is that governments, policymakers and economic policy put in place conditions to support people to make the most rational choices based on their preferences. The failure to provide enough affordable and good quality childcare is not fair because it means many people who would like to develop a profession cannot do so. That is the Commission's line.
I agree with the Deputy that GDP does not cover everything and certain factors other than GDP are not easy to measure. However, when one wants to buy a house, one needs the money to do so. In respect of housing, the Commission is pushing and supporting the Government with its national development plan in order to foster and promote social housing. The Commission is recommending action on both fronts. Economic policy should allow people to make their own decisions, not to impose a decision from one side or another.
Concerning the risk of inflation, the Deputy will understand that as a representative of the Commission, I do not comment on monetary policy. Inflation comes under the remit of the European Central Bank, ECB. According to our forecasts to date, inflation is still subdued in the euro area. In particular, in terms of core inflation, which is inflation net of the impact of energy prices and more volatile components of inflation, we are still far below the ECB target of 2%. When the economy is gathering strength inflation increases and we see inflation building up. However, it is still far behind the ECB targets.
On the question on broadening the tax base, the Deputy mentioned environmental taxes. The way pollution is taxed in Ireland and the way the environment and environmental policies are supported leave some room for introducing some environmental taxes.
Such taxes would lead to a more permanent source of revenues, particularly as these taxes depend on investment in certain goods that are more or less stable. This is what we are recommending.
I thank the Commission for its comments. I will try not to get into great detail because many of those whom we represent who may be following proceedings to try to take something from this process will get lost in highfaluting language.
The bottom line is we are meeting the demands the European Union has placed on us through the fiscal rules. The Commission acknowledges the Irish economy is growing fast but we must be careful about external factors. However, Mr. Martínez Mongay stated he cannot comment on the great damage that could be done to our economy by Brexit. The Commission represents the EU member states which represent us in the Brexit negotiations. The Commission has a duty to ensure the effect of Brexit on Ireland is minimised. If everything goes south, we have a development plan for the next ten years that is not Brexit-proofed and against which both the ESRI and the Department of Finance have warned. The Copenhagen Economics investigation discussed the significant effect Brexit will have on a wide range of sectors. It is unfortunate, to say the least, that Mr. Martínez Mongay cannot give us any comfort on that issue. We are speaking in a vacuum when we do not address the issue of Brexit directly.
Mr. Martínez Mongay states we have record employment but there is a skills shortage and a particular issue with childcare costs. He states our public finances are under control but, because of years of underinvestment, we have major issues in housing. If nothing else, Mr. Martínez Mongay has confirmed for me and my party that this year's budget must be focused on health and housing. I failed to mention Mr. Martínez Mongay's point that we were not getting value for the investment made in health. That is an understatement in capital letters, so to speak.
I have a question on Mr. Martínez Mongay's comments on the mortgage arrears issue. He stated the Commission recommends "promoting a faster and durable reduction of long-term mortgage arrears". This goes back to the Central Bank which is, I am sure, dancing to the Commission's tune. The Commission argues that certain banks in this jurisdiction should sell their loans that are in mortgage arrears. In response, I put it to Mr. Martínez Mongay that the Dáil and the Minister with responsibility in this area want relevant and appropriate protections in place for consumers who are, in this instance, homeowners. We cannot stand idly by on this issue and we will not take direction without safeguards and legislation being put in place. I am surprised and disappointed that Mr. Martínez Mongay has not qualified his comments on this matter with such an essential proviso. This recommendation will not be implemented unless legislation is put in place.
Mr. Carlos Martínez Mongay:
On Brexit, allow me to repeat that Brexit is still under negotiation. The negotiations are ongoing. There is a chief negotiator and the chief negotiator is the only person who should speak on the state of play of the negotiations. For this reason, I will not comment on the state of play in the negotiations. What I can do is point out to the Deputy that my personal interpretation of the progress made so far is that the issue of the Irish Border has been at the centre of the preoccupations of the Commission. As a matter of fact, the issue was included in the first phase of the negotiation together with the issues of the budget and citizens' rights. The Commission is putting Ireland at the front of its preoccupations and this is shared by all the member states.
Mr. Carlos Martínez Mongay:
Of course. The point is that in the case of Brexit, as Mr. Barnier said, nothing is agreed until everything is agreed. Therefore, it is premature to speak of whether we are in this or that position. In any case, it is clear from the facts that the Irish Border was placed at the centre of the first phase of the negotiations.
Concerning the budget for 2019 and priorities, what the fiscal rules do is fix targets but it is up to member states and parliaments to decide on the composition of budgets. What the Commission can do is advocate for a certain course of action, for example, investment in human capital or infrastructure or measures to enable people to participate in the labour market. For these reasons, we should try to ensure the composition of public finances is growth friendly but that composition is a national affair.
Mr. Carlos Martínez Mongay:
On mortgage arrears, specifically long-term arrears, the final sentence of recital No. 18 states: "The viability of repossessions and write-offs could be improved and complemented by a stronger consumer protection framework for secondary market loan sales..." The Commission, if I understood the Deputy's point, goes exactly in the same direction.
I thank our guests for their presentation.
On the Brexit issue, Mr. Martínez Mongay stated that Ireland is at the centre of the Commission's concerns in this matter. I am a little sceptical that this is part of a political blame game the Commission is playing about Brexit and the decision by a member state to leave the European Union, in other words, that the Commission wants to send a warning signal to any other member state that might choose to go down the same road. Let us say I am wrong and my scepticism is unjustified. The position of people here, clearly articulated by the Opposition and the Government, is not only that we do not want a hard border but we will not accept one. Much of the focus has been on whether Britain, despite the so-called backstop, might try to wriggle its way out of that commitment and have a hard border of sorts through another name. We will not accept that. There will be resistance if there is an attempt to impose a hard border. Will Mr. Martínez Mongay provide an assurance that if the negotiations with the EU do not work out, the Commission will not insist on some sort of border by another name in order to protect the integrity of the European market? In the same way that Irish people have no intention of accepting hard borders imposed by Britain, they have no intention of accepting from the European side a demand to impose hard borders or any other kind of border to protect markets or anything else.
I would like a comment on that.
Mr. Martínez Mongay is correct to identify huge infrastructural deficits in housing, health and childcare. We could add water infrastructure, which is a huge area, to that. We might not have such infrastructure deficits if the European Union had not imposed such cruel austerity in the aftermath of the banking collapse. Setting that aside, as Deputy Jonathan O'Brien said, it seems a little odd to identify the need for urgent investment in these areas to essentially buffer our economy, diversify our economy, prepare it for possible external shocks and so on, and then say we should put a load of money into a rainy day fund, which effectively means investing in bonds, the international markets, etc., rather than investing in these key areas of education, housing, health or childcare. Such investment would buffer the people and the economy against external shocks, rather than essentially depending on the vagaries of the financial markets. If there are further financial shocks, rainy day funds based on that could evaporate quickly. We should not set aside on a rainy day fund. We should invest in areas that would genuinely enhance the strength and infrastructure of the economy to provide a meaningful buffer against further external shocks and over-reliance on certain sectors, which Mr. Martínez Mongay rightly identifies.
I have a question regarding the windfall gains. I do not agree that they should be put against debt but they should not just be squandered on pointless expenditure. They should also be diverted into meaningful capital investment and infrastructural development in education and so on to build up the skills base to which he referred. Would he include in those windfall gains the €13 billion that Europe has said we should collect in taxes from Apple. Does he think it is folly in the extreme for the Government to legally resist the collection of that money rather than use it for investment?
I agree with the Mr. Martínez Mongay on tax reliefs but I would like him to elaborate because there is massive over-reliance on tax reliefs. Whatever economic benefit we might get from them now, that could evaporate, because, in many cases, they are not strengthening the underlying domestic economy. The benefit is going in many cases to multinationals. Could he elaborate on what is meant by shifting from tax reliefs? One of our major corporate tax reliefs is research and development, mostly benefitting large multinational corporations. Does he mean that expenditure should instead go into universities, third level education and so on?
Mr. Carlos Martínez Mongay:
Coming back to Brexit, I have made the position clear. Nothing is decided until everything is agreed. My personal reassurance here is not relevant. All I can do is remind the committee that there was a first phase of the negotiations in which the Irish Border was a key issue, among the three most important issues. Now the negotiations go on. Mr. Barnier reports back to the member states and he travels to the different capitals to inform and maintain contact. I have nothing more to add on this.
Concerning infrastructure and the social income, there have been several questions relating to the same issue. I have answered them indirectly. First, the key issue is that the Commission does not decide composition. Composition is Ireland's business. It is up to Ireland to decide which part of the expenditure goes where; it is not up to the Commission. The Commission can recommend certain areas which we consider to be our priority in the country.
Second, the Commission does not establish the level of structural expenditures or the level of structural revenues. The rules say that member states should achieve what we call "structural equilibrium", which means a structural balance that simply allows automatic stabilisers to operate, and does not create any pro-cyclical fiscal policy, either in good times or bad times. However, it is up to the member states to decide on the levels of expenditure and revenues. By that I mean that one can perfectly comply with fiscal rules by setting certain levels of expenditure and setting the corresponding level of revenue. It is up to the national parliaments to decide the spending they want to carry out and then set up the corresponding level of revenue.
What the Commission is saying, not only to Ireland but to almost every member state, is that revenue has a volatile component. This volatile component, which depends on the cycle, and in the case of Ireland, depends on the role and activities of multinationals, can disappear in the same way it appears. It should not, therefore, be allocated to finance permanent expenditure. This is the reason the Commission says that next year, Ireland should in principle achieve the medium-term budgetary objective, MTO, that is, equilibrium in structural terms. Now it is up to the Irish to decide their level of expenditure. I cannot remember the figure exactly, but let us say it is 22% and the Government would like to spend 27%. The Commission is saying that Ireland should look for a way to finance this additional 5% of GDP in a permanent way, with permanent revenues, that is, structural revenues. The Commission is not telling Ireland that it is spending too much or too little or how much it should spend on every item; that is up to Ireland to decide. The Commission is telling Ireland that given its cyclical position and the fact that it is growing above its potential, these additional revenues should be put aside to be prepared in the case of a slowdown, to avoid needing to go to the markets for additional money when the markets are closed or not ready to lend much money.
The need for infrastructure, which the Commission clearly recognises, has been mixed up with the need to create a buffer. The buffer can be created. The Commission is not exactly recommending the rainy day fund, although we support the initiative. The Commission is telling member states - not only Ireland because there are other countries in the same situation with booming economies growing above potential - that extraordinary revenues should be allocated to reduce debt.
The less debt there is in a slowdown the easier the access to the markets.
Concerning Apple the answer is simple. Apple is paying the €13 billion to the State but it is in an escrow account, which means that the money cannot be touched until there is a decision of the European Court of Justice. Fortunately, in the European Union we are under the rule of law. The Commission decided that Ireland had in place a selective tax system and was giving some competitive advantage to a given company. Ireland opposed the decision, as was its right, which is the beauty of the law, and now we have to wait until the court decides who is right and who is wrong. If, for instance, the court decides that the Commission is right, this money can be spent by the member state because it is revenue it should have received in the past. It is possible that the court will decide the Commission was not right for reasons I do not know and then the member state should surrender the money. So for now, this money cannot be touched but it will be there.
I very much agree with the concept of a rainy day fund because counter-cyclic economics make sense. We have a Parliamentary Budget Office, which did a good report on that. Its recommendation was that it only makes sense if, within the fiscal rules, such a fund can be used in future years to provide fiscal flexibility. I asked the Minister for Finance when he appeared before the committee whether he is confident that the Commission will recognise it in that way and I would be interested in getting such reassurance from Mr. Martínez Mongay that if we have a rainy day fund we will be able to use it when it rains.
Mr. Carlos Martínez Mongay:
Ireland can use it when it rains because that is the goal. However, there are two different issues. The first is the fiscal rules. The rainy day fund is completely consistent with them, and precisely with this idea of achieving the equilibrium and then using the extraordinary revenues to compensate extraordinarily low revenues in the future. The other issue, on which we need to do further work, is how this is accounted for by an independent authority, EUROSTAT and the EU's statistical network with which Ireland's statistical institute works. From the economic point of view, the rainy day fund is completely consistent with the spirit and the rules of the Stability and Growth Pact, in particular with the preventive act because the idea is precisely that when the good times come we prepare for the bad times so that over the cycle we have a totally neutral fiscal policy. The other question is how is this accounted for statistically and this is perhaps where we will have to do work in the future.
This is something the committee has done a great deal of work on. It is at the heart of that answer. We can understand the perspective of the Commission and, depending on their perspective on a rainy day fund, people might agree with the general thrust of what Mr. Martínez Mongay is saying. The question, however, is how EUROSTAT views it because if it takes one particular view of it that will have an impact on the idea of having a rainy day fund. If it takes the view that the Government, several members and I would like it to take, it will be using it in the correct way, which is important.
We were told some aspects were agreed but it seems they are not.
Am I correct that the preference of the Commission is to reprivatise the banks, which the Government is busy doing? I understood from the beginning, when nationalisation of the banks was required as a result of the financial collapse, that the position of the European Union that we might have to nationalise but at no point should nationalised banks depart from a commercial profit-orientated focus. That has had bad consequences for mortgage holders. I do not understand the logic of it. I want to understand the extent to which this preference is imposed on the country. I have no doubt that the Government wants to do that anyway because that is its ideological predisposition but I would like to know why the European Union favours the reprivatisation of the banks given that these institutions nearly bankrupted Europe and did bankrupt this country. Having nursed them back to health at a terrible cost, Mr. Martínez Mongay thinks we should set them up to potentially do it all over again to us and that they should have the power to crunch on credit and not invest in particular sectors. He said we need to invest in particular areas of infrastructure, which is great, but now the people who have all the money might just say they do not want to invest in that area or they do not want to extend credit. What is the logic of that? After what happened, it is a perverse logic that, having bailed these banks out, the preference of the EU is to reprivatise the banks. I ask for an explanation please.
Mr. Carlos Martínez Mongay:
I will try. First, the treaties are totally neutral with respect to the ownership of the companies. Nobody in the Commission, on the basis of the treaties, is suggesting that public ownership is bad. This is not stated anywhere in the treaties. On the contrary, the treaties say that wherever the ownership is, if the company is operating in a market, it should follow the market rules. The Commission is completely neutral with respect to the ownership. It will not accept a public company receiving public money when a private investor would not put a single euro in it while the company operates in an open market because this public company would have a selective advantage with respect to the other companies operating in the market. This is the basic rule.
There is no preference for any kind of ownership, but if public and private enterprises operate in the same market they have to operate on the same level playing field. What happened with the banks, not only in this country but in other countries, was that we had a private company that went bankrupt. A private company, such as a news agency, should go to the market. In the case of the banks, since they carry systemic risk it was accepted that public money would be put into companies which were already bankrupt. We kept rolling, thanks to public money, companies that should have disappeared from the market. Public money is the taxpayers' money. In some cases, and I do not mean all of the decisions made concerning banks, the Commission accepted putting in this public money, with the single goal of ensuring the company would go back to the markets in an independent way without the need for more support. In some cases, and I do not want to enter into the specifics of each case, the positive decision by the Commission to allow the Government to put money into a given bank was made with the condition that the money should be recovered. Who should pay this money back? It is the bank and nobody else. In my view, and perhaps this is more personal, the taxpayers have the right to get back the money they put into the banks. This is why in some cases when the public money has done its work, which is to put the company back on its feet, and the company has recovered value, then this value should go back to the taxpayer. These are the principles the Commission consistently applies to every member state.
I thank Mr. Martínez Mongay very much. This has been a very interesting exchange of views. Much information has been covered and there have been a lot of questions. I thank Mr. Martínez Mongay for coming before the committee. We have certainly found it interesting. I also thank all of my colleagues who have contributed.