Oireachtas Joint and Select Committees
Wednesday, 27 February 2019
Committee on Budgetary Oversight
Macroeconomic Analysis and Fiscal Risks: Central Bank of Ireland
I remind members and witnesses to turn off their mobile telephones because they can affect the sound quality and the transmission of the meeting. I welcome Dr. Mark Cassidy, who is the Central Bank's director of economics and statistics. He is accompanied by Mr. John Flynn, who is the Central Bank's head of Irish economic analysis; and by Dr. Thomas Conefrey, who is also involved in Irish economic analysis. I thank them for making themselves available to the Committee on Budgetary Oversight today. The committee is charged with monitoring the macroeconomic forecasts and developments that affect the Irish economy. We are meeting representatives of the Central Bank today to consider its first quarterly report.
I would like to go through the privilege statement. I wish to advise the witnesses that by virtue of section 17(2)(l) of the Defamation Act 2009, they are protected by absolute privilege in respect of their evidence to the committee. However, if they are directed by the committee to cease giving evidence in relation to a particular matter and they continue to so do, they are entitled thereafter only to a qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given. 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 or her 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 by name or in such a way as to make him or her identifiable.
With that important and necessary privilege statement over, I call Dr. Cassidy to make his opening statement. We will then take questions from members.
Dr. Mark Cassidy:
I welcome the opportunity to appear before the committee. I am joined by Mr. John Flynn, head of the Irish economic analysis division, and Dr. Thomas Conefrey, manager of structural macroeconomic modelling and also from the Irish economic analysis division. I will start with a brief summary of the outlook for the economy and the macroeconomic forecasts set out in our recently published quarterly bulletin.
The Irish economy grew at a strong pace in 2018, supported by the strength of activity on the domestic side as well as a relatively favourable international growth environment. While headline gross domestic product, GDP, growth last year was distorted by the activities of multinational enterprises, the evidence from a range of domestic spending and activity indicators is that the domestic economy, overall, grew robustly. We estimate that growth in underlying domestic demand last year was approximately 6%. The strength of domestic activity has been underpinned by continuing strong and broad-based growth in employment, which has stimulated incomes and supported the growth of consumer spending. The growth of key domestic components of investment, such as building and construction, has also accelerated.
Looking ahead, the Central Bank’s most recent forecast, shown in the accompanying table, is that if a disorderly no-deal Brexit scenario can be avoided, the outlook for the economy in coming years remains broadly positive, although with some moderation in growth in prospect. We expect economic growth of 4.4% this year, with a moderation to 3.6% next year. This moderation partly reflects the projected impact of a less favourable and more uncertain international economic environment, with prospects for growth in our main trading partners having been lowered in recent months, and also some dampening impact from the uncertainty associated with Brexit. The moderation also partly reflects the limits imposed by domestic capacity constraints due to the tightening of conditions in the labour market. The most recent published forecasts also represent a modest downward revision compared with our previous bulletin, which was published in October. Exports, private consumption and investment are all weaker than previously expected, while, following budget 2019, the contribution of Government consumption to economic growth this year is stronger.
The main impetus in respect of growth in coming years is expected to come from domestic demand, driven by further growth in employment and incomes, though some moderation in employment growth from current rates is projected. Reflecting the moderation in employment growth, and with some uncertainty about economic prospects weighing on sentiment, the growth of consumer spending is projected to ease towards 2% over this year and next. Regarding investment, while overall investment has been quite volatile in recent years, primarily reflecting the activities of multinational enterprises, some key domestic components of investment, such as building and construction have rebounded strongly. While this growth is forecast to continue, the outlook for some other components, such as machinery and equipment investment is more mixed, reflecting some negative impact from increased risks and uncertainty. Taken together, the growth of underlying investment spending is expected to moderate.
Given the outlook for consumption and underlying investment, the growth of underlying domestic demand is also projected to moderate and grow by 4.1% this year and 3.3% next year. On the external side, while exports grew strongly in 2018, with projected growth in trading partner countries being revised downwards, some moderation in export growth is also projected, with exports forecast to grow by 4.3% this year and 3.9% in 2020. With Brexit-related uncertainty weighing on demand, the weakness evident in the UK market last year is likely to persist.
Turning to the outlook for the labour market, while moderation in the pace of employment growth in line with the outlook for aggregate demand is forecast, growth of 2.2% this year and 1.7% next year is set to exceed growth in labour supply of about 1.5% in both years. As a result, the unemployment rate is projected to drop from an average of 5.8% last year to 4.9% this year and 4.7% in 2020. As has been the case for some time, gains in employment have been broad-based, with employment growing strongly in many parts of the services sector and in the construction sector. In our central forecast, growth in employment, while moderating, will continue to be relatively broad-based. In light of the outlook for employment, we also expect a further pick up in wages which, combined with expectations of modest inflation, should translate into higher real incomes and purchasing power for households. We are forecasting the average increase in compensation per employee to increase from 2.8% last year to 3.4% this year and 3.6% in 2020.
Turning to Brexit, we have previously published work examining the potential medium-term impact on the Irish economy of both an orderly transition to a World Trade Organization, WTO, scenario and an orderly transition to a free trade area-type agreement such as the current withdrawal agreement. In our most recent bulletin, and using our economic modelling tools, we also examined the possible macroeconomic implications of a sudden and disorderly Brexit on the outlook for the Irish economy. Given the unprecedented nature of a no-deal Brexit scenario, quantification is highly uncertain and this exercise represents a scenario analysis and not a forecast, in that it looks at what could happen under certain assumptions, not necessarily what is most likely to happen.
With a disorderly Brexit, significant additional frictions and costs arise. These result not only from the introduction of new trade arrangements, but also from a breakdown in some of the arrangements that make trade possible - for example, as a result of regulatory and customs issues, Border infrastructure issues and legal uncertainties. This would be likely to have immediately damaging consequences for trade and the functioning of supply chains for production, distribution and retailing. Modelling and forecasting tools can be used to estimate the impact of long-term changes to trade arrangements, but are less suited for predicting the short-run effects and potential disruption arising from a breakdown in those arrangements. The scale of that disruption would also be influenced by the ability of firms and retailers to adjust to any new arrangements, as well as any policy responses or mitigating actions taken as a result. I mention this to emphasis the uncertainty inherent in these estimates.
Nevertheless, it is clear that a no-deal Brexit scenario would have severe and immediate disruptive effects, which would permeate almost all areas of economic activity. Certain sectors and regions would be disproportionately affected, particularly the agriculture and food sectors, as well as Border regions and other rural regions with a heavy reliance on agriculture and a particular reliance on the UK as an export market. We estimate that a disorderly Brexit could reduce the growth rate of the Irish economy by up to four percentage points in the first year. Given the current favourable forecasts for the economy as a result of domestic demand and the strong non-UK multinational sector, our assessment is that there will still be some positive growth in output this year and next even under a no-deal scenario, but materially lower than in the central forecast. It will be closer to 1% growth in both years.
Brexit is not the only risk to the economic outlook and other material domestic and external risks persist. On the domestic side, while some moderation in underlying domestic demand is in prospect following a period of strong growth, labour market conditions are still set to tighten further. As the economy moves closer to full employment, there is a need to continue to guard against the risk that strong cyclical conditions give rise to overheating dynamics. On the external side, in addition to Brexit, there continue to be some clear downside risks facing the Irish economy. The international economic outlook has weakened since the publication of the last bulletin, while risks related to international trade and taxation persist.
In view of Ireland's position as a small, very open economy and the important role that multinational firms play, changes in global trade, taxation and currency arrangements have an important bearing on economic performance.
I thank the members for their attention. We are now available to take any questions.
I thank the Central Bank officials for their public service and for all the work they have done on this. I have a number of brief questions. They are the kinds of questions we have put to the Irish Fiscal Advisory Council, IFAC, the Governor, the Minister and so on over time. Are our guests of the view that there is an over-reliance on corporation tax receipts? They might have a comment to make on that, which we could add to previous comments.
It seems we may be in territory whereby the idea of a no-deal, fall-off-the-cliff-edge Brexit, may not, dare I say it, be as strong a possibility as previously feared. I certainly hope this proves to be the case. Could Dr. Cassidy expand a little on what he had to say about the other two scenarios to which he referred, including that relating to the UK trading under WTO rules?
Last week, the Chairman and I were present at EU parliamentary week. One of the events was addressed by the vice president of the European Investment Bank. I wish to raise two questions in this regard. First, public expenditure on capital programmes has shrunk by 20% across the EU. Regarding investments in public infrastructure and our climate change obligations and challenges we face, the vice president stated that the private sector must be incentivised to lead in many of these big capital projects. Our guests might comment on that matter.
The employment figures are really good news, but we heard last week that youth unemployment in some of the modern economies in Europe is at about 30% to 40%. Where are we in the youth unemployment figures? What is the trend and trajectory in this regard? Clearly, our rate is nowhere near as high as 30% to 40%, but what do our guests think accounts for the high rates in some European countries? Are youth unemployment rates higher than overall unemployment rates? I would like to hear any comments our guests might have on that.
Dr. Mark Cassidy:
I will address each of the four parts to the Deputy's question in turn. Regarding over-reliance on corporation tax, it is clear that there has been an unprecedented surge in corporation tax revenues since 2014-2015. The increase has been in the order of 125%, such that revenues are now approximately €10 billion. This accounts for around 19% of overall tax revenues and is extremely high by historical and international standards. On one hand, the increase in corporation tax receipts we have seen is very welcome. On the other, corporation tax, particularly for Ireland, given that 40% of corporation tax is paid by the top ten multinational firms, is an inherently volatile source of taxation revenue. We do not predict that there will be any decline in the revenue from the tax, but the volatility inherent in this source of revenue is such that we just do not know what the future is for corporation tax revenues. There must be some risk that the share of revenues will decline in the future.
I seek a little clarity. Is that on the basis of market circumstances? Is it perhaps to do with a fall in firms' market share such that they are not earning as much, as opposed to the way they account for this? Am I right in that?
Dr. Mark Cassidy:
Uncertainty is the key element. A decline could come about as a result of either firm or sector-specific circumstances. It could come about because of a deterioration in the global trading environment or because of a change in the international taxation environment. Of course, Ireland participates fully in global taxation regimes and environments. There are a number of possible sources of uncertainty. Our advice has always been that it is very likely that some element of the surge in corporation tax revenues over the past four to five years could represent a temporary or transient windfall element and that it would be much more prudent for that element to be put aside and saved rather than committed to permanent expenditure increases. The extent of the increase in corporation tax revenues is very similar to the surge we saw in construction taxes prior to the boom. The increase in corporation tax revenue has contributed 40% to the overall increase in tax revenue since 2014 to 2015, which is significant.
May I ask Dr. Cassidy to clarify something? My understanding is that there is a complete disproportionality in the figures as to what property tax revenues prior to the boom amount to in terms of overall Government revenue compared with corporation tax revenues at this point.
Let us look at what corporation tax revenues amount to in their totality rather than the top ten payers and compare. It is important that we try not to compare apples and oranges. The share of corporation tax revenues overall, as a percentage of tax revenue in the budget, is currently-----
Dr. Mark Cassidy:
We will get back to the Chairman with the exact figure. I know that overall housing-related tax revenues amount to 16% to 17%. Income tax always dominates in terms of what it contributes. The amounts are roughly similar, but the question is whether we consider housing as opposed to overall property, and there might be an element on top of that. I will confirm that for the Chairman. We have concerns about the degree of reliance on corporation tax receipts. While we welcome the high amount of revenue, we think the prudent course of action is not to spend what could turn out to be a temporary source of revenue.
Deputy Lahart referred to the other scenarios. Yes, we think that some form of deal is a more likely outcome than a disorderly, no-deal Brexit. He referred to two other scenarios, first, that some form of deal such as the withdrawal agreement materialises. In this case we would see a transition period until the end of 2020 and, after that, some restrictions on trade coming into effect but free trade and therefore no tariffs between the economies. Under these circumstances, we think that the long-term impact on output would be such that output would be around 1.7% lower than under a scenario in which Brexit had not taken place and that there would be around 19,000 fewer persons in employment than under a no-Brexit scenario. The other scenario the Deputy mentioned is one in which there is no deal but there is a transition period until that no-deal scenario. Under those circumstances, the impact on output over the longer term would be such that output would be around 3.2% lower than under a no-Brexit scenario and there would be around 50,000 fewer jobs.
Dr. Mark Cassidy:
As for the first scenario, in which there is a withdrawal agreement, this could ultimately lead to either a customs union-type agreement or a free trade-type deal. The impact on the overall economy would be rather similar, that is, around 1.7% less growth over the medium term and around 18,000 or 19,000 fewer jobs.
The third part of the Deputy's question relates to public investment. Overall, public capital investment fell extremely sharply after the crisis, by around 60%. As a result, there was a significant depletion of the overall public capital stock, which remains very low. There is certainly now the opportunity, after several years of very strong growth, for an increase in public capital investment. This could have the positive effect of increasing productivity across the economy and could also be used to attain regional objectives.
We support the projections in the national development plan to 2027.
From an economic perspective, if the private sector participates in that, it is useful in terms of risk-sharing across the economy, as well as the business incentives it can bring. Hopefully, the private sector can be involved over the coming years. The public capital investment plan has to be set out regardless because we now need to address our public capital stock. It would be welcome if that could be done in collaboration with the private sector.
We would fully welcome public capital investment but we need to acknowledge that it is occurring at a time when the economy is operating at close to full capacity. If the full benefits of this capital investment are to be enjoyed, then it is important it does not crowd out the private sector. It can do this by contributing to capacity constraints for private producers. If higher capital spending is debt-financed, it will have the effect, when the economy is close to full capacity, of pushing up both prices and wages which then makes the private sector less competitive, particularly exporters. Our recommendation is rather than debt financing under these circumstances, it is better if public capital investment is met by financing from elsewhere in the budget, whether through taxation or other expenditure measures.
Dr. Thomas Conefrey:
The Deputy is correct there was a large increase in the youth unemployment rate, a much higher rate than average unemployment rate, which went into the 20% sphere. It has fallen significantly. It is currently twice the average unemployment rate. It is high but it has fallen much.
One positive development is that a phenomenon we saw during the boom was the tendency for young males to go out of education and straight into employment, particularly in the construction and related sectors. From current data, it is clear that the tendency for that to happen has declined much. The labour force participation rate for young males in the 15 to 19 year old age group fell quite significantly in 2008 and 2009 and has not recovered. In one sense, one might think that is a negative. When we look at the data, the major reason for that seems to be that they are staying on in education, which is a benefit in the long run. Improvements in youth unemployment and a greater tendency for younger cohorts to continue in education, which benefits their earnings and their employment prospects in the long term, are the case now.
I welcome the delegation.
What really is the difference between a scenario analysis and a forecast? Is it a case of hedging one’s bets either for a cliff-edge Brexit or various types of softer Brexits which will impact hard on us after 2020? The European Commissioner, Günther Oettinger, stated a no-deal Brexit will probably lead to a general recession. I assume that will mean quarter after quarter of declining output. Is it the case that the cliff-edge Brexit is an existential threat to our economy? We have seen the anxiety - to put it mildly - in the farming sector. It is a significant bedrock in our intrinsic domestic economy. Is the Central Bank being too sanguine about its scenarios or actual forecasts?
On budget 2019, we have been asking about the Revised Estimates and the possibility of another budget. Has the Government taken on board sufficiently the profound risks of Brexit, an event which we are days away from?
The great Fintan O’Toole said geography is destiny. Napoleon once said, when he would not send us troops to help us to get rid of the English yoke 200 years ago, that “L'Irlande est une Ìle derriere une Ìle.” Is it the case that Brexit will have a profound impact on us? We are located in the North Atlantic Ocean with this large economy between us and our European partners. There are all kinds of logistical issues which we are going to have to unravel, whether it is Irish Ferries going out of Dublin Port or Rosslare. The Governor of the Central Bank, Professor Lane, stated at the European Financial Forum that the financial sector has become strong enough to withstand profound shocks.
The Dáil is debating Second Stage of the Brexit omnibus legislation and we all have this sense of unreality discussing changes to significant areas of tax law and whether they will be implemented. The Central Bank has a core role in the Stock Exchange and the insurance industry. How does it view its viability going forward?
What are the estimates for the levels of household debt going into the early 2020s?
Dr. Mark Cassidy:
We make a point of emphasising the inherent uncertainty relating to the estimates of a disorderly no-deal Brexit. There is no prior example of such a large economy suddenly withdrawing from such a large trading bloc. Our economic models are useful in projecting medium-term and long-term outcomes based on historical relationships. They are less good, however, at predicting short-term outcomes of this sort when one has such uncertain events.
We are projecting a major impact in the first two years after Brexit. We are projecting that economic growth over the two years combined, rather than being above 8%, would be closer to 2%. A decrease of 6% is three quarters of growth taken off the economy in the first two years which is a major impact. I certainly hope that we are not underplaying the extent of the estimate. Our estimates are somewhat more adverse than those projected by the Department of Finance for the first year. Projected growth could be somewhat above or somewhat lower than 1.5%.
This is a shock which would permeate almost all areas of economic activity. We know about the direct impact upon exports, particularly those parts of the economy where a high share of their produce is exported to the UK. There are certain sectors of the economy which are particularly vulnerable both to tariffs and trade frictions, non-tariff barriers, such as delays in moving goods into and out of the country.
There is no doubt that the sector most affected in that regard would be the farming, agricultural and food producing sectors. Around 42% of the exports of the food sector go to the UK. Many parts of that sector, particularly beef, are already encountering problems with viability even before Brexit comes into effect. The food sector is subject to the highest tariffs of any types of products if imposed. For example, tariffs on beef exports could be up to 60%. In addition to overall severe macroeconomic effects, we would highlight there are parts of the economy, not only the food and agriculture sectors, that will be affected.
Overall, the economy now exports only 11.5% of our goods to the UK. In a way this is a very misleading figure because the overall export figure is inflated by such high exports from multinationals. Approximately 42% of the exports of indigenous Irish-owned firms go to the United Kingdom. We also import more from the UK than we export. In addition to food products and consumer products, approximately half of the imports of Irish firms are intermediate products used in the production of other goods and services. Disruptions to supply chains and production processes will be encountered throughout the economy and will particularly hit small and medium enterprises. In our estimates, we tried to take into consideration all of these effects. We believe these are severe overall macroeconomic effects and that we will see particularly severe effects on various parts of the economy.
Over time, after the first one or two years, we believe the overall effects will begin to level off. The reason for this is we see two separate things happening. In parts of the economy, including parts of agriculture, the decline will continue beyond the first couple of years. It will be persistent. On the other hand, we will have such adverse effects in the first one or two years because in many respects the economy is just not prepared. The trading infrastructure of many firms will be taken by the suddenness of this. Over time, the economy, our ports and customs facilities and the ability of small enterprises to fill out the new customs forms will adapt to an extent and begin to recover. Much of the economy will begin to recover and it is hoped new export markets will be found. We will have some positive reaction over time but that is not to downplay the overall seriousness of these effects.
I will come back to Deputy Broughan's other questions but he asked a lot of technical questions at the beginning about scenarios versus forecasts.
Dr. Thomas Conefrey:
It may seem like we split hairs when we state it is a scenario rather than a forecast but methodologically there is quite a difference between the two. In the case of a forecast exercise, such as the central forecast in our bulletin, we make assumptions on all of the factors we believe would impact on the evolution of the Irish economy in 2019 and 2020. A scenario is a much more limited exercise. In the case of the Brexit work, we vary only the nature of the UK's relationship with the EU. In this particular exercise, on a no-deal Brexit, we looked at the evolution of the economy if the UK's relationship reverts to a WTO-type relationship and all other factors we believe will affect the path of the Irish economy over the coming ten years were held unchanged. If we were doing a forecasting exercise, we would think about all of the various aspects that would impact on the growth in the economy over ten years, such as other changes in the external environment and all of the other ingredients that go into a forecasting exercise. In this particular no-deal scenario analysis we are only varying this single part, which is the nature of the UK's relationship with the EU. It is a more limited exercise in this sense.
Dr. Mark Cassidy:
I will go back to Deputy Broughan's other questions. He asked about the budgetary situation. I will summarise our position in that we recommended a more ambitious budgetary position should have been taken with a larger surplus for 2019 and beyond. Our main reasoning in this regard was, given high current debt levels, to leave the economy better prepared for Brexit or any other shocks that may come down the line. Up to 2015 or 2016 we saw a substantial improvement in the public finances. This has stalled more recently. The best indicator of this is the primary budget balance, in other words, a budget balance excluding interest payments, which has stabilised or even deteriorated somewhat since 2016. Our view is that during this period the economy has experienced extremely strong economic growth. Growth has outperformed expectations in almost every year. We have seen an unprecedented surge in corporation tax revenues and, as per our previous discussion, we have concerns that this might not be sustainable or might contain a windfall element. The economy is clearly getting closer to full capacity, a time when Government spending should not seek to add overheating pressures or capacity constraints in the economy. We still have extremely high public sector debt. It is the fourth highest in the European Union, at approximately 105% of national income when national income is properly measured as gross national income adjusted. For all of these reasons, we believe the environment was right for a more ambitious fiscal policy and running a higher surplus, and we believe this would have been particularly important not just to reduce overheating pressures but to increase the resilience of the economy to withstand any possible economic shock. As I mentioned in my opening remarks, the risks relate not only to Brexit as there are also significant risks relating to current uncertainties in the global economy, taxation environment and trading regime. I hope this answers the question.
Overall, household debt remains high in Ireland by international standards. It is still measured as a proportion of household disposable income, which is the best measure. It is still the fourth highest in the European Union, standing at approximately 125% to 130% of household disposable income. It is clearly on a downward trend, having picked up extremely quickly following the crisis. It has been on a steady downward trend for two reasons, namely, that households have been paying off their debt as part of a deleveraging process and, more noticeably, as household incomes increase, the ratio will decline. It is falling by approximately ten percentage points per annum. If current trends continue, this means it would fall below 100% in the coming years. It remains rather high but the more it falls, the more resilient to any future shock the economy becomes. The position we are in now, which is a legacy of the crisis, is that Irish households overall, particularly certain cohorts, including those age groups that bought houses during the early 2000s, have extremely high debt. This makes them extremely vulnerable in terms of any shock to income or house prices. This reinforces the need for overall economic prudence. The banks' contribution in this regard, the mortgage market measures, is also important.
Dr. Mark Cassidy:
It is clearly in a far better position than it was in 2006 or 2007 in many respects. Irish banks have significantly reduced their loan books. Their lending ratios have improved significantly. Their capital ratios are now significantly stronger and more robust than they were before the crisis. We also have a much more intrusive supervisory system than we had before the crisis. The Central Bank has taken a number of actions in addition to more intrusive supervision. The purpose of the mortgage market measures is to prevent banks from lending too much in the way they did in the early 2000s and to prevent borrowers and households becoming over-indebted in the same way they did then. In addition to these tools, the Central Bank has other macro-prudential tools now available to it, which we have already deployed. These are the capital requirements we impose on the banks, the ultimate objective of which is to safeguard the stability of the financial system as a whole. In recent years, we have introduced two capital buffers. One is a countercyclical capital buffer and one is a buffer for large systemically important institutions. Both of these serve to increase the stability of the particular banks. The banking system is in a much safer position and we have introduced measures to ensure this will remain the case.
While Brexit will have a severe overall economic impact and some temporary market dislocation cannot be ruled out, overall the risk to the financial system as a result of Brexit is manageable but it is something we are monitoring very carefully within the bank.
Many questions have been asked so I will be brief. Brexit is the big challenge at the moment but, as the witnesses have been quick to point out, it is not the only one. I want to touch on employment, housing and non-commercial properties and the factors at play in those issues. From reading the report, we are reaching full employment and there is now a transition of employment across sectors that is leading to wage increases. That is my reading of it, in summary. How much will that play into a possible risk of overheating the economy?
Another area touched on in the report is housing. We have almost reached capacity in construction due to skill shortages and because we are reaching full employment. I do not understand the references in the report to non-commercial properties maintaining a very moderate level of growth. Reports produced by the Irish Fiscal Advisory Council, IFAC, and the Department suggest that the greater risks of overheating in the economy are coming from the commercial sector rather than the non-commercial sector. Will the witnesses briefly discuss that and how we could address it? We only have so many workers in the construction sector and are reaching full employment, so how do we overcome that?
The report states that more properties are becoming available for rent in the Dublin area. There has been an increase of approximately 7.1% in the number of properties available for rent in Dublin and, as a result, we are seeing a slight decrease in rental prices there. That is not being replicated outside Dublin and fewer properties are becoming available for rent elsewhere. The figure in the Central Bank's quarterly bulletin is a 4.5% decrease in the number of properties for rent outside Dublin and rental prices are going up. The report indicates that there is a significant issue with supply and demand outside Dublin.
I was taken by surprise at the figures for the Dublin region because Dublin always seems to be an area where there is little supply of housing, yet the report states there has been an increase in the number of properties available to rent in the capital. I am not questioning the figures but that is not the information we hear in constituency offices or debates in the Oireachtas. We hear that Dublin is at saturation point and there is no place to rent in Dublin. However, that is not borne out by the analysis in the report. I ask the witnesses to address that issue.
Dr. Mark Cassidy:
I have that here. These are all extremely important issues for the economy at the moment. Let me first deal with the issue of overheating and employment trends. It is important to emphasise that we do not currently see overheating in the economy. Prices and wages remain contained. Unlike a decade ago, we are certainly not seeing any signs that economic growth is being fuelled by either excessive domestic credit or inflows of money from abroad. The situation now is very different to then. We are seeing that the unemployment rate has been falling steadily. We are getting closer to a position of full capacity and there are signs of increasing tightness in the labour market. There has clearly been an uptick in wages. Figures released this week show that the average increase in weekly wages during the final quarter of last year was 4.1%, up from 3.5% in the previous quarter. There has also been an increase in job vacancy rates which is now at an historically high level. There has also been an increase in job switching rates, the rate at which people are switching jobs within an economy, and we have produced an analysis of this year which shows that this tends to be an indicator that further wage increases are on the way. While we do not currently see overheating, we are seeing signs of getting closer to full capacity.
Within the labour market, some sectors are clearly experiencing more pressures because of a shortage of available workers which is leading to higher wages in those sectors. The sector that particularly stands out is the information and communication technology services sector. Wages in this very fast-growing sector are increasing by approximately 7%, which is perhaps what one would expect.
Across the rest of the economy, employment growth is strongest in the construction sector. I will come back to that in a moment because it relates to the second part of Deputy O'Brien's question. Employment in construction increased by about 11% over the past year. We are also seeing strong employment growth in accommodation and food services and in sectors like education and public administration. It is quite broad based across the economy.
Wage increases are fastest and vacancy rates highest in some of the modern services sectors. Aside from the information and communication technology, there is a high vacancy rate in financial and professional services. Wage pressure is more contained in other, more traditional parts of the economy.
Our concern is not that we currently see overheating but we are looking out for whether wages and prices start to increase at a faster rate than might be justified by the performance of the economy. We are not seeing that now. The increase in wages across the economy is very welcome, particularly because of the wage cuts and moderation experienced by so many after the financial crisis. It is right that the benefits of economic growth are being spread. This is a cautionary word about ensuring we do not get into the position we got into in the past.
There are things to do with supply, labour demands and the differences between the different elements of the sector when considering the housing market. I share the consensus that the main issue currently facing the housing market is a shortage of supply. Housing supply last year was around 18,000 units which is extremely low in comparison with the needs of the economy. The medium-term needs of the economy are probably somewhere closer to 35,000 or 40,000 units a year so 18,000 was well short of that. Housing supply is picking up at a strong rate. It is increasing by maybe 25% a year but this still only brings us up to about 23,000 units this year and 28,000 units next year. Even by 2020, the number of houses being built will still not be enough to meet the needs of the economy. This means pressures will manifest themselves in both prices and rents. The pressures in the rental market have been much greater than in the housing market for a number of years. House prices are still approximately 20% below where they were before the crisis, whereas rents are now significantly above where they were in 2007.
I was asked about regional trends. Prices first began to pick up in Dublin and this was followed by the rest of the country but the rate of both price increases and rental increases across Dublin is now lower than in the rest of the country. Price increases in Dublin are running at between 3.5% and 4% per year, compared to 6.5% nationwide. This probably reflects a couple of factors. One may be the earlier pick-up in prices in Dublin but affordability is also a factor. Prices and rents rose high enough to become less affordable, pushing the price pressure to regions outside Dublin. Another interesting trend is lower-priced houses increasing at a much faster rate. Prices at the higher levels are flat or declining and, because prices are generally higher in Dublin, this leads to a slower overall increase in the capital.
I was asked about the supply of houses. We did an analysis of what was required to address the deficit in the housing sector in coming years, in particular the availability of construction sector workers. The author was Dr. Conefrey.
Dr. Thomas Conefrey:
The tight labour market for construction workers was mentioned. We looked at what happened to construction workers who lost their jobs during the crash between 2009 and 2013 and found that a significant number of people who lost work either moved into other jobs or emigrated. We did not find evidence of a significant pool of unemployed construction workers. It was suggested that we were running out of these workers. The role of migration is important for Ireland and the labour market is extremely open. In good times we see significant inflows and there are outflows during a downturn. In the year to April last year there was a net inflow of 34,000 workers. Even though the domestic supply of construction workers is likely to be quite low, there should be inflows of workers to sectors with labour scarcities and this should help ease labour shortages in tight sectors. A pick-up in inward migration, however, creates pressures in other parts of the economy.
Dr. Mark Cassidy:
Foreign construction workers left the country when the crisis hit and we have not seen a significant return in inward migration since then. It is only since 2015 that net inward migration has turned positive, though it has turned positive at a quick rate and last year 34,000 more people came into the country than left. This alleviates labour supply constraints somewhat and construction is increasing as a result, but there are additional pressures on demand because these people need places to live. The overall effect will be positive for the sector because it will add to the net supply of housing.
I was asked about the supply of rental properties in Dublin as compared to elsewhere. A change is under way in the rental market, and in commercial property, relating to the financing of investment in the sector. Commercial investment and the buy-to-let rental sector are no longer being financed by the banking sector. Finance is now coming from equity investment and institutional investment and this has a lot of different effects, positive and negative. The positive effects include risk sharing and the long-term stability of the rental market that comes from institutional apartment ownership with longer contracts. It creates additional demand in the economy, however, for a fixed supply of housing. There has been a change in the structure of the commercial market and this affects not only commercial properties such as offices, retail and industrial, but rental apartments too. The Deputy suggested that there was more availability in Dublin than in other counties and this might partly reflect the changes too. Rents are higher in Dublin so the incentives are higher for institutional investors in Dublin. The Central Bank is looking at the impact of non-banking financing on the overall property market and we are hoping to publish more about this important research theme in the coming year.
I am sorry for not being here earlier but Brexit legislation is going through the House and we are going into and out of the Chamber all day as a result. I was struck by the comments of the Governor, Professor Philip Lane, who spoke recently in Dublin Castle. He said the immediate cliff-edge risks of a hard Brexit had largely been addressed because of the work of the Central Bank. Can the witnesses go into more detail on what they have done? What immediate cliff-edge risks did they identify and what steps did they take to address those?
The Governor also spoke of the redistribution of financial services away from London, which has been the centre point for such services within the European Union. He said it would bring challenges as well as opportunities. The opportunities are clear in the shape of jobs relocating to Dublin but what are the challenges for Ireland? What are the challenges of more dispersed financial services markets across the EU and its member states?
Of all the key financial risks to the economy, do the witnesses consider Brexit to be the biggest? Is the Government sufficiently prepared for a disorderly or no-deal Brexit at the end of March? If not, what do we need to do now to prepare ourselves in the course of the next 30 days?
Dr. Mark Cassidy:
I can say more about the Central Bank's preparations than about the Government's. We have had close interaction with the Department of Finance over recent years and a lot of work is being done but I am less close to the preparations that are being done outside the financial sector. Are we prepared as an economy for the end of March? I would say we are as well prepared as any other economy but not fully prepared. I do not believe any country in Europe, including the UK, is fully prepared for a no-deal Brexit. If firms and the Government had known a year ago what the outcome was going to be they could have prepared but there has been such uncertainty and so many different scenarios that the degree of preparedness for the most adverse scenario was never going to be 100%.
Our remit on the macroeconomic side is to provide advice, economic analysis and commentary but I believe the Deputy's question to have been about the financial system, the stability of the system and supervisory issues.
The bank has been working on these since well before the referendum. I remember having our first meetings about preparations for the potential of Brexit around the summer or autumn of 2015 and we have worked intensively on potential Brexit risks in the three and a half year period since. With respect to the type of work we have done, we have engaged closely with the banks to ensure they have sufficient capital and have undertaken stress tests in order to be able to withstand all Brexit scenarios. From the outset, we have emphasised in all our communications that while a no-deal Brexit was not the most likely outcome, it was always a possible outcome.
Dr. Mark Cassidy:
That has always been a part of our advice.
The Deputy mentioned cliff-edge risks. I will give an example of the some of the cliff-edge risks that have come on our radar during recent months and quarters that we have had to address on many occasions along with the Department of Finance because we have shared responsibilities. There was a risk to the settlement of Irish securities in the event of a no-deal Brexit within the whole European framework and there were risks regarding the settlement of derivatives. Both of these risks have now been mitigated by European level legislation which allows for the settlement of securities and derivatives to be continued for two years in one case and three years in another beyond the Brexit deadline of 29 March.
We had concerns about the continuity of insurance contracts post Brexit. If there were insurance providers into this jurisdiction which were no longer authorised after Brexit came into effect, what would be the status of existing contracts with those companies for Irish citizens? As part of the overall legislative package announced last week, legislation to allow the run-off of these insurance contracts to occur over the next two years was announced by the Government and it will hopefully come into effect in early March. We have also been dealing with a very large number of authorisations for new applicants to come into Ireland, with which we have been engaging successfully in terms of the size of the sector.
The Deputy mentioned the challenges for firms locating here. I will not refer to any individual firms but in addition to a substantial increase in the size of the balance sheet of the Irish financial sector as a result of Brexit, we will also see new types of very sophisticated business models attracted here. We have known this has been on the horizon and this has involved challenges in terms of upskilling, interactions and liaising with other supervisors to ensure we are fully prepared to fully supervise all aspects of the business models of these new types of operations. We have done much in that regard.
On the question of whether Brexit is the biggest threat, it is clearly the most immediate one. If a no-deal Brexit materialises, it will certainly be the largest threat the economy has faced since the financial crisis. Over the longer term, I am not inclined to rank the threats. We will know about Brexit sooner rather than later. With respect to the figures I mentioned earlier, if a deal is agreed, the aggregate figures are reasonably large but not excessive, with the important consideration that certain sectors of the economy such as agrifood would be severely affected. With respect to the risks we are seeing in regard to the global taxation environment and risks regarding potential protectionist threats, Ireland is one of the probably about the fourth or fifth most open economy in the world. We have a very high degree of reliance on a small number of multinational firms and a high degree of sectoral specialisation. Approximately 55% of our goods exports are in the chemicals and pharmaceuticals sector and approximately 47% to 50% of our services exports are in IT type services. There are vulnerabilities there. We would be particularly affected if there was an escalation in protectionist trends or any changes to global taxation arrangements. These are all material risks. Brexit in the short term is the most immediate and the most in focus, but I certainly would not underplay the other medium-term risks.
Dr. Mark Cassidy:
Our estimates point to very significant adverse effects, particularly in the first two years after a no-deal Brexit. They point to growth being around 4% lower in the first year than in our main forecast and a further 2% lower in the second year. We expect this would still leave positive growth over those periods, probably of between 1% and 1.5% in each year compared with 4.5% and 3%, respectively. Our scenario in the event of a no-deal Brexit is for materially weaker growth but avoiding recession and for output and employment growth both remaining positive. I emphasise the inherent uncertainty regarding these estimates. We do not have prior experience of the type of shock and disruption in which a no-deal Brexit would result, so either better or worse outcomes than those cannot be ruled out.
I will follow up on the potential decline in growth of up to 4%. When the Minister for Finance, Deputy Paschal Donohoe, appeared before the committee, I asked him if he perceived the need to have a supplementary budget mid-cycle. He was adamant there was no need to do so as there was enough funding available across Departments to deal with whatever might come. That sounds strange given that we do not know what is coming. What is Dr. Cassidy's assessment of that particular position indicated by the Minister for Finance?
Dr. Mark Cassidy:
In the event of a no-deal Brexit and the adverse implications I mentioned, which the Department of Finance have also spelled out, it is clear with respect to the public finances in the past that the appropriate policy response would be somewhat different, including our own policy advice in that regard. In the more likely scenario whereby a no-deal Brexit is avoided, for the reasons I mentioned, we would like to see larger budget surpluses than are currently envisaged. In the event that there is a disruptive no-deal Brexit, despite the fact that public sector debt is still high, the state of the public finances allows in that situation for the running of a countercyclical fiscal deficit through the operation of what we call the automatic stabilisers on tax revenues and transfer payments. What we mean by that is that the public finance situation automatically and without the need for a budget alters in the case of an economic shock. Owing to lower incomes, people would pay less tax. Government spending on unemployment benefits and other transfers would increase and the increase in spending on benefits and the lower tax collection would keep more money in the economy, help to limit the fall in aggregate demand and cushion the impact of the shock. These are what we call automatic stabilisers. Automatically, there is some relief for the economy without the need for a budget, albeit that the deficit worsens, although that is appropriate in such circumstances. The state of the public finances allows for that.
Without getting into whether a supplementary budget would be required - I am certainly not saying one would be required - beyond those automatic stabilisers, the nature of a hard Brexit and what it would involve in terms of the impact on the economy and possible changes to the structure would allow for some one-off measures. These might be used, for example, to support Brexit trade routes or perhaps targeted measures at those parts of the economy that would be particularly affected by Brexit. In addition to automatic stabilisers, there would be scope for some one-off measures to alleviate the effects and to help the adjustment of the economy towards a new post-Brexit situation. The nature of those would be a matter for the Government. The critical factor I would emphasise is that they would need to be explicitly temporary measures. We need to avoid permanent spending commitments that we may not be able to finance over the longer term, particularly if there was to be a shock to corporation tax revenues or another shock to the economy.
Of course. I have one final question. The quarterly bulletin published by the Central Bank raises the prospect that we might see an increase in foreign direct investment, FDI, because of Brexit. On what evidence was that based? How likely is it to happen? By how much do the witnesses see it increasing? Could Dr. Cassidy provide a little more detail about the process behind coming to that conclusion?
Dr. Mark Cassidy:
We expect to see an increase in foreign direct investment, particularly over the medium term. We think this will be one of the mitigating effects which will somewhat reduce the longer-term impact of Brexit. The reason is that all of the foreign direct investment that locates here does so to sell goods and services outside of Ireland. Much of that activity is undertaken to sell to EU markets. Around 40% of our exports are to non-UK EU countries. Once the UK is no longer part of the EU, international firms will have less incentive to locate in the UK with a view to selling into the Single Market and the EU. If they are looking for alternative locations, Ireland may be the optimum location. We may see foreign direct investment that is currently in the UK being redirected here. New investment seeking to locate in the EU, which previously might have considered the UK as a prime option, may instead come to Ireland. We expect to see an increase in FDI. We are already seeing very tangible signs of that in the financial sector. There is a good reason for that. Firms in the financial sector need to get authorisation in order to locate. Financial services sector firms need to make their plans much earlier than those in many other sectors. Therefore, as I have mentioned already, we have seen a very large increase in authorisation applications for the financial services sector and we will see significant new investments in that sector.
Outside of the financial services sector we expect to see a positive impact. The extent of that is still a little uncertain. It will take a little bit longer. Firms probably have more capacity to wait and see what exactly the nature of the new arrangements will be before they make definitive plans. We do not have estimates of the positive impacts on growth, but I have seen estimates projecting an increase of about 3% in output because of higher foreign direct investment over the medium to long term.
Dr. Thomas Conefrey:
I wish to add a point on FDI. Dr. Cassidy mentioned that one of the potential drivers of higher FDI in Ireland is the diversion of FDI from the UK. It is important to note that a lot of the studies in the UK on the impact of Brexit anticipate a reduction in FDI inflows to the UK. In the event of Brexit taking the form of a WTO-type shock the numbers are quite big - a reduction of about 25% in UK FDI. The partial diversion of some of that to Ireland, in line with its current share of FDI, would be-----
Before I go to Deputy Boyd Barrett I want to follow up on something Deputy Chambers said. That projection of investment is presumably predicated on a harder Brexit. Would that development be delayed if there was an agreed soft Brexit with ongoing negotiations on the future arrangements? Would the witnesses expect that investment not to happen until those negotiations on the future relationship are concluded?
Dr. Mark Cassidy:
Whether the outcome is a hard or a soft Brexit will have an impact on the amount of foreign direct investment we are likely to see here. We still expect to see some more foreign direct investment even in the event of the softer Brexit scenarios. There are two reasons for this. First, the choice of a hard Brexit or a soft Brexit has a smaller impact upon trade in services. Once Brexit takes place, whether it is hard or soft, there will no longer be passporting of services between the UK and the rest of the EU. Under all circumstances in which Brexit takes place and the UK is not a part of the Single Market, the incentives for foreign direct investment to locate here will still exist, particularly in services. There will still be a benefit under both circumstances.
With respect to goods, there will still be barriers to trade as long as the UK is not in both a Single Market in which there are no regulatory checks and a customs union in which there are no customs checks to enforce rules of origin, even in a free trade agreement. UK goods exports still will not have unrestricted access to the EU. These restrictions will be smaller in the case of a deal than in the case of a no-deal outcome with tariffs and the like. In summary, we expect to see more FDI flows under all circumstances, but the incentives will be even greater in the event of a no-deal outcome.
In regard to timing, the scenario in which there is a deal, which we still think is the most likely, involves a transition period up to 2020. That allows firms a lot more time to prepare their investment strategies. I certainly do not see any benefit in the no-deal scenario, even in foreign direct investment. The suddenness of the change in arrangements will lead to uncertainty and a decline in sentiment right across the economy, including in exporting sectors. More disruptive and bigger changes in the trading arrangements will add a lot more friction, trade costs and the like. We would benefit in terms of FDI in both circumstances, but I do not see any silver lining in a no-deal outcome.
I can see that point. I have a question to follow on from that. What particular sectors will be hurt? Could the witnesses be a bit more specific? The chemicals industry was mentioned. The graphs showing the contribution chemical exports have made to export growth are quite stunning. The graph shows that without increased chemical exports our exports would be negative, which is a pretty stark indication of the reliance on one particular sector. I presume another sector that has contributed very significantly to our growth over recent years is the IT sector. I do not see either of those being significantly impacted by Brexit one way or another. The Central Bank's representatives' commentary suggests that most export growth goes to the United States and, interestingly, Belgium. The IT sector will not be significantly impacted. If I understood what Dr. Cassidy said about financial services, there could be a positive spin-off for us if anything. There is no particular negative impact there. Where will the negative impacts be? I presume they will be felt in agribusiness because of the huge portion of agricultural output that is exported to Britain. I imagine tourism will be hit. I would be interested to hear the witnesses' comments on that. To what extent does the Central Bank's analysis take these swings and roundabouts into account?
Does this Brexit crisis not highlight much more deep-rooted structural weaknesses in the economy that need to be addressed no matter what happens, regardless of whether there is a soft or hard Brexit? One such weakness is that we are considerably over-reliant on a few sectors. If problems emerge in any of them, the economy will be in serious trouble. If this is true, what should we be doing about it? Diversification is what is needed. Do our guests believe that Ireland is moving to take serious steps to diversify its economy or is industrial policy concentrated on growing the sectors on which we rely and potentially increasing our vulnerability in the medium to long term?
Dr. Mark Cassidy:
I thank the Deputy. I will try to address each question in turn. I will first refer specifically to the chemicals sector, including in the context of the figures to which the Deputy referred. The fact that he referred to them is absolutely correct but I can update the position slightly because we have a few more data. Overall, there was strong export growth in the economy last year. If the contribution of the chemicals sector is excluded, it was approximately zero. It was slightly negative at the time we produced the box. We now have an additional two months' data. Effectively, there would have been no overall export growth in the economy last year without the chemicals sector. Some 55% of our goods exports are chemicals and pharmaceuticals and 47% of our services exports relate to IT. Therefore, there is the high degree of sectoral reliance that the Deputy referred to. I will come back to that because it is very relevant to the final part of the Deputy's question. We export a lot of chemicals to the United Kingdom. We do not believe that this sector will be particularly affected. There are no tariffs in the chemicals sector. Non-tariff barriers are much lower. The chemicals sector is a highly profitable sector in any event. When we talk about sectoral effects, we should note that while a large proportion of chemical exports goes to the United Kingdom, we do not have chemicals in mind.
We very much have in mind the agrifood sector. I will come back to that. We also have in mind Irish exporters across other parts of the economy. Exports from Ireland to the United Kingdom comprise only 11.5% of our total exports. That is a very misleading figure because that total export figure is boosted so much by the chemicals exports. That is a goods figure. Some 43% of the exports of Irish-owned firms go to the United Kingdom. Therefore, Irish-owned firms are extremely vulnerable to the effects of Brexit.
Let me first mention the food and agriculture sector and then some of the other affected SMEs. Last year, 42% of our food exports went to the United Kingdom. Exporters of beef, other meat products and dairy are very exposed. Tariffs on food products are by far the highest among any types of products. The ESRI has estimated that the effective tariff on meat products in a no-deal Brexit would be 59%, or almost 60%. On dairy products, it would be 47%. Food and agricultural products involve moving time-sensitive goods and goods that are fresh and need to be moved quickly. They are also most subject to regulatory delays, such as phytosanitary checks. The food and agriculture sector is undoubtedly extremely vulnerable to a no-deal, hard Brexit. The ESRI has estimated that whereas overall exports to the United Kingdom could fall by 20% in the worst-case scenario, the decline in exports of beef could be 65% and the decline in exports of dairy could be 60%. The agrifood sector is, therefore, extremely exposed to a disorderly no-deal Brexit.
There are Irish-owned SMEs across a range of sectors that are particularly exposed. In the region of 93% of the firms that export to the United Kingdom are Irish-owned SMEs. Around half of those have no export market apart from the United Kingdom. Therefore, there are many firms in other sectors of the economy that will also be affected. In addition, many of the small and medium enterprises that do not export to the United Kingdom import intermediate products from the United Kingdom. The restrictions on trade, trade friction and the like will increase costs and may reduce the availability of those intermediate products, thus affecting the supply chains and production processes of SMEs. All parts of the indigenous enterprise sector will be affected rather than the multinational sector, which tends to be much more diversified. It tends to have much more experience and skill in exporting to different countries at the same time, and it tends to be less vulnerable to tariffs and non-tariff barriers. I have outlined the sectors of the economy that we believe are most exposed.
I agree that we are extremely reliant on the multinational sector. This sector continues to serve Ireland extremely well. It contributes significantly in terms of employment created, revenues for the Exchequer and the contribution to overall growth. It creates higher-paid employment than other sectors of the economy. There is also evidence, although perhaps not as much as we would like, of skills transfers to other parts of the economy. That needs to be balanced against the fact that there is a high degree of reliance. The top five multinationals account for approximately 33% of goods exports. We are vulnerable to any downturn affecting multinationals, be it a shock to one of the individual firms, a shock to one of the relevant sectors - be it chemicals and pharmaceuticals or computer services - or a shock to the global trading arrangements.
The other potential impact is if the multinational sector crowds out the indigenous sectors as opposed to being a complimentary force within the economy, that is, if it is able to pay higher wages and obtain more skilled workers or capital. What we need to ensure is not a change of the economic model. We strongly need to encourage the multinational sector and provide a supportive environment but, to reduce the two risks, we need to do two things in addition. First, public finances must not be overly reliant on the revenues from the multinational sector and the corporation tax revenue, which is so high, at 19%. Second, we need to ensure that we have a dynamic, successful indigenous sector in the economy. If anything, Brexit will accelerate the diversification in terms of exports because many producers will need to find new markets. Developing and supporting that sector needs to be a very important part of policy.
On the final point, I am not so sure we are doing so well but we will leave that discussion for another day.
I find the table on page 73 quite striking. It indicates that Government net financial wealth fell by €2.3 billion during quarter 2 of 2018 as the increase in liabilities outstripped the increase in financial assets. I am referring to the quarterly bulletin of the Central Bank. It is chart 32. I am curious about it. Could our guests comment on what are the liabilities? What is the significance of the fall in the Government's net financial wealth?
I am connecting it, in my mind, with a policy the Government has pursued in recent years and to which I am strongly opposed. It was touched on earlier. I refer to the sale of large amounts of property-related assets to institutional investors who have moved in on Irish property. The National Asset Management Agency and the banks have sold a large number of properties to them. That makes no sense as these were assets, which generate revenue, were in State hands and could have counterbalanced this. When one looks at the extent to which-----
That is exactly what I am doing. When one looks at the extent to which the Government's housing plans, particularly on social housing, are dependent on renting back property, through the housing assistance payment, rental accommodation and social leasing schemes, from the institutional investors to which NAMA sold that property-----
Dr. Mark Cassidy:
My apologies as I cannot give a complete answer because I do not have a full breakdown here. The assets side which is above the line - the financial assets side - seems to have been reasonably stable for five or six years. The large increase in the negative net financial wealth position clearly represents a massive increase in liabilities after the crisis hit when Government borrowing increased enormously. It seems to have stabilised since 2014. The text may be a single quarter figure which seems to have declined.
I am sorry to be direct but if the witnesses do not have specific knowledge on this, I would prefer if they reverted to the committee with the information. It is not possible for the Deputy to interpret a chart and then ask the witnesses to agree with it if they do not have the information.
My specific question is what was the impact on the State's assets and liabilities position of the Government's decision to sell large amounts of property assets. I would be very happy if the witnesses could come back to me with the answer. There is also the question of the cost of renting those assets back and the outgoings. Is the projected expenditure included in the liabilities?
If I read the Central Bank's table correctly, household wealth is now as great as it has ever been. It has increased dramatically both in terms of financial and property assets. One can look at that alongside the Central Statistics Office survey on income and living conditions, SILC, reports on the distribution of those assets, which show a very high concentration. I believe they show that the top 10% own 58% of it. Is the over-concentration of wealth, both property and financial, in the hands of a very small number of people a vulnerability when we speak of risks and vulnerabilities in an economy?
Dr. Mark Cassidy:
There are many important issues in relation to wealth distribution. From the perspective of vulnerability, the distribution of those in indebtedness is probably the greater vulnerability. There are important and interesting distributional trends within these aggregate figures. On the debt side, overall indebtedness, which is the figure below the line on the chart, has declined significantly but Irish household debt is still the fourth highest in Europe. There are certain cohorts within that, particularly the age group between 35 and 45 years, who are still extremely highly indebted. This is the generation which purchased property just before the crisis in the early 2000s. From the perspective of wealth, indebtedness and net worth, the vulnerability of that cohort to a shock to either income or house prices is the greatest vulnerability.
Dr. Cassidy referred to a shock to income or to house prices. The global economy makes this less likely, but interest rate rises must pose a substantial risk to that cohort. Anecdotally, many people who have managed to bring their monthly finances into line because of the reduction in interest rates would be extremely vulnerable if interest rates were to rise. How do interest rate rises compare with the other factors to which Dr. Cassidy referred?
Dr. Mark Cassidy:
I agree. There has been a sustained period of extremely low official interest rates. While mortgage rates for those on variable interest rates have been higher than those in other European countries, there is a very large group of people who are on tracker interest rates. In fact, the share of tracker interest rates among those who bought property just before the crisis and who are, therefore, the most vulnerable cohort is extremely high. While those mortgage holders may have suffered negative equity and reductions in their wealth because of prices, they have been protected to an extent from an affordability perspective by tracker mortgage rates remaining so low. Once official interest rates begin to increase, that cohort will start to see an increase in their repayments for the first time. There is a potential financial stability risk there. During the time that has gone on, most borrowers have been paying down their debts so the vulnerability has reduced. However, there is a cohort which is highly indebted and which will find repayment burdens increasing significantly when interest rates rise. That will increase the risk to a shock but even under normal circumstances, they will find themselves more stretched. This is an area where it is crucial to examine the different groupings as the aggregate figures mask the vulnerability somewhat. However, the cohort of those aged between 35 and 45 years who bought at the peak prior to the crisis is vulnerable to higher interest rates.
We will conclude shortly. It might be too early to ask about the impact of VAT changes as it has only been a couple of months since the rate increased. Have any indications become apparent that this increase has had any substantial economic impact?
I thank Dr. Cassidy and his colleagues for appearing before the committee. This has been a very informative and interesting exchange. Some of the Deputies who asked questions earlier have departed but on behalf of all members, I thank the witnesses for taking time to attend.