Oireachtas Joint and Select Committees
Wednesday, 26 October 2022
Committee on Budgetary Oversight
Post-budget 2023 Examination: Discussion (Resumed)
I welcome Ms Anne-Marie Walsh, Mr. Joe Cullen, Mr. Matt McGann and Mr. Niall Cassidy from the Department of Finance, and Ms Caroline O'Loughlin, Ms Jenny Connors, Ms Niamh Callaghan and Dr. Patrick Moran of the Department of Public Expenditure and Reform.
Before we begin I must explain some limitations to parliamentary privilege and the practice of the Houses as regards references witnesses may make to other persons in their evidence. The evidence of witnesses physically present or who give evidence from within the parliamentary precincts is protected pursuant to both the Constitution and statute by absolute privilege. However, if evidence is being given remotely from a place outside the parliamentary precincts, witnesses may not benefit from the same level of immunity from legal proceedings as a witness physically present may. Witnesses are reminded of the long-standing parliamentary practice that 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, or otherwise engage in speech that might be regarded as damaging to the good name of the person or entity. Therefore, if their statements are potentially defamatory in relation to an identifiable person or entity, they will be directed to discontinue their remarks. It is imperative that they comply with any such direction.
Members are reminded of the long-standing parliamentary practice to the effect that members 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 remind members of the constitutional requirement that they must be physically present within the confines of the place where Parliament has chosen to sit to participate in public meetings. I will not permit a member to participate where he or she is not adhering to this constitutional requirement. Therefore, any member who attempts to participate from outside the precincts will be asked to leave the meeting.
Invite Ms Callaghan to give an opening statement.
Ms Niamh Callaghan:
I thank the Chairperson and the committee for the invitation to attend the meeting today to provide an update on budget 2023 and to assist the committee as part of its post-budget examination. Today I am joined by three colleagues from the Department of Public Expenditure and Reform, Ms Jenny Connors, Dr. Patrick Moran, and Ms Caroline O'Loughlin, alongside colleagues from the Department of Finance.
The medium-term expenditure framework, published in the summer economic statement for 2021, outlined the strategy to set core expenditure growth rate at sustainable levels of approximately 5% per annum and to provide for ongoing improvements in public services. Developments in 2022 have altered the economic landscape significantly. As part of the this year's summer economic statement, the growth rate for expenditure in 2023 was adjusted upwards. The Government’s objectives for budget 2023 are: to continue to invest in public services and infrastructure through core expenditure without further adding to inflationary pressures; to provide a comprehensive response to the cost-of-living pressures for households, businesses and wider society; and to ensure sufficient resources to respond to external challenges, including Covid-19, Brexit and the Ukrainian humanitarian response.
Budget 2023 allocated €90.4 billion in gross voted expenditure for next year. This is made up of €74.3 billion in core current expenditure for the delivery of public services, €11.6 billion in core capital expenditure as set out in the national development plan, and €4.5 billion in non-core expenditure.
Budget 2023 contains a significant response to support households, public and community services and businesses with inflationary pressures. This includes both once-off and permanent measures, including a €2.2 billion winter cost-of-living package for households with three energy credits for all households and a series of additional social protection and education payments. In addition, a Christmas bonus will be paid to eligible social protection recipients in 2022. In recognition of the unprecedented rise in energy bills, Government is also making available €340 million in 2022 to provide further support to public and community services. The Government is also introducing a €200 million Ukraine emergency response scheme to support businesses.
Budget 2023 also includes a number of core permanent spending measures, focusing on cost of living, with an estimated value of €1.3 billion, including a €12 weekly social protection rate increase for working age and pension payments and an increase in the universal subsidy on the national childcare scheme.
Chapter 2 of the Budget 2023: Expenditure Report sets out an analysis of the impact of the various cost-of-living, tax and social protection measures. Households are estimated to record an average gain in weekly disposable equivalised income of 3% as a result of budget 2023, with the overall impact being strongly progressive. The disposable income of those in the first three income deciles is estimated to increase by an average of 5.2%. This demonstrates the important role of social protection measures at the lower end of the income distribution.
I shall turn now to budget day publications. Budget 2023 saw the development and publication of key budgetary documentation such as Budget 2023: Expenditure Report. This document sets out the public expenditure strategy, expenditure allocations by Vote and the Estimates for public services. This year the report included detail regarding cost-of-living measures and non-core funding required to respond to external shocks. A series of additional analytical papers were also published this year, including Budget 2023: Forecasting Live Register Recipients and Expenditure, and a paper on the use of carbon tax funds. In addition to these publications, The Budget in Brief: A Citizen's Guide to Budget 2023 was published. This provides a high level overview of the budget decisions in a clear and accessible format.
It is useful to consider the range of budgetary documents alongside the budgetary reform initiatives as part of a whole-of-year budgeting process. These initiatives place an emphasis on broadening the approach to how public expenditure is appraised, implemented and reviewed across Departments. This is also alongside examining the impact of public expenditure among different cohorts of society and on the different types of objectives we want to achieve. It is with this more complete type of understanding that policymakers can work towards the achievement of value for money in the context of the entire budgetary process and enhance the impact of these policies and programmes. The range of budgetary reform initiatives include the public spending code, the national development plan, performance budgeting, equality budgeting, green budgeting, well-being budgeting and the spending review process.
A range of papers and strategies are produced throughout the calendar year, including the public service performance report, which was published in May, the National Economic Dialogue 2022 held in June, the summer economic statement and mid-year expenditure reports published in July, the spending review papers, which are generally published in two tranches in August and in September, the budgetary publications which I have previously referred to, and the Revised Estimates Volume in December. This demonstrates the breadth of information feeding into the preparation of the budget and the ongoing management of public expenditure in a planned, balanced, and evidence-informed manner.
I thank the committee for the opportunity to address it and I look forward to answering members' questions.
Mr. Niall Cassidy:
On behalf of my colleagues from the tax and economic sides of the Department of Finance, I thank the Chair for the opportunity to attend the committee today to discuss budget 2023, which was laid before the Oireachtas on 27 September.
I will begin by briefly outlining the budgetary process for this year. This process began in earnest with the National Economic Dialogue 2022 on 20 June in Dublin Castle, where participants debated a wide range of challenges facing the economy at this time. This was followed by the publication of the summer economic statement, which set out the Government’s fiscal strategy and the parameters for the subsequent budget. As the committee will recall, the Government set out a medium-term budgetary strategy in last year’s summer economic statement outlining a plan for keeping the public finances on a sustainable trajectory while allowing for reductions in personal taxation and continuing to invest in public services.
For this year, in the context of the changed economic environment, the Government departed temporarily from the parameters set out in the medium-term plan. To deliver a cost-of-living budget, the Government doubled the size of the planned tax package and increased public expenditure. The intention is that this will be a one-time departure in recognition of the exceptional circumstances we find ourselves in.
The process for budget 2023 took place in a uniquely abbreviated timeframe. In response to the pressing challenges facing the economy arising from the cost-of-living issue, the Government decided it was appropriate to bring forward the budget by two weeks from its usual date in early October. Following the summer economic statement, the tax strategy group set out policy options for consideration by Government across a range of tax policy areas as well as PRSI. The tax strategy group met on 12 July and the group's papers were published on 10 August.
The next staging post in the budget documentation was the publication of the White Paper on receipts and expenditure, which sets out a no-policy-change baseline estimate of the fiscal position for this year and next. In line with standard practice, this is published the Friday immediately preceding the budget to take account of the latest economic and fiscal data and to provide figures that are as accurate as possible. Accordingly, the White Paper this year was published on Friday, 23 September.
The documentation published as part of budget 2023 is comprehensive and aims to provide as much information as possible to the Oireachtas and the public. The core documentation published by the Department of Finance includes the Budget 2023: Tax Policy Changes document, which sets out the detail on budget tax changes across all heads, Budget 2023: Economic and Fiscal Outlook, which contains revised macroeconomic and fiscal projections out to 2025, and this year the Department also published a new document, Beyond GDP: Quality of Life Assessment. This included a distributional analysis of the impact of the tax and welfare changes that were announced as well as further analysis from a well-being, equality and green budgeting perspective to complement the more traditional macro fiscal analysis.
I will now turn to the key headline points of budget 2023. The total budget package for next year is €6.9 billion, consisting of around €1.1 billion in new taxation measures and €5.8 billion in public expenditure. In addition to this, there was a once-off package of cost-of-living supports to be introduced this year at a cost of €4.1 billion. This brings the total budgetary package across the two years to €11 billion. This is consistent with a general government surplus this year of €1 billion, or 0.4% of modified national income, GNI*. For next year, the surplus is projected to increase to about €6.2 billion, or 2.2% of GNI*. However, as the committee will be aware, the very positive headline figures are heavily skewed by windfall corporation tax receipts. The Government has frequently warned that this windfall revenue, while in many respects welcome, cannot be relied upon and must not be used to fund permanent expenditure commitments. That being the case, budget 2023 incorporates a new metric, the underlying general government balance, GGB, or GGB*, which sets out the fiscal position if these windfall receipts were excluded.
This metric suggests that removing excess corporate tax would lead to a significant deficit this year in the region of €8 billion. For next year we would face a deficit of about €3.8 billion.
In recognition of this vulnerability, the Government has decided to commit part of this excess to the national reserve fund. A transfer of €2 billion will be made this year, rising to €4 billion next year. This will enable the Government to take advantage of windfall corporate tax receipts by rebuilding fiscal buffers and providing resources that can be drawn down to meet future challenges while ensuring we do not allow unreliable tax revenue to fund ongoing permanent spending measures.
Budget 2023 was framed in recognition of the urgent challenges the economy faces, both through an expanded budget package and an accelerated timeline. It takes action to address the cost-of-living issue while outlining a credible pathway for rebuilding our fiscal buffers for the future. My colleagues and I are happy to try to address any issues the committee would like to raise. As members will appreciate, the budget covers a wide range of areas within the Department and it would not have been practical to bring all the lead officials to cover them today. As such, if there are specific issues outside of our remits, we are happy to get our colleagues to follow up afterwards.
Gabhaim buíochas leis na finnéithe as teacht os comhair an choiste. We all appreciate there is a lot in the budget but my questions will not be that specific so the witnesses will be more than able to answer them.
I want to mention one of the issues I had when trying to interpret the budget, and I am sure others had the same issue. I do not come from the same background as the witnesses so sometimes it can be difficult when reading the terminology that can be used because it is not always consistent. There were different categorisations in budget 2023, which created some problems. There is core, non-core, temporary, once-off, allocated and unallocated funding and spending. Some of them are established terms but some are not as established and sometimes they can be used interchangeably and, as we felt, inconsistently. I do not have a question on that; I just wanted to comment on it. I checked the public financial procedures document for guidance, but that handbook is some years out of date and some of the terms are not defined at all. We want as many people as possible to be able to read the budget if they so wish, although I am not sure how many people would sit down to do so, but it assumes a strong level of insider knowledge and you must be part of the furniture of the process to read it. It is important to note that and look at it so that others like me can read the budget more easily.
Most of my questions are for the officials from the Department of Public Expenditure and Reform but I have a quick question for Mr. Cassidy on the GGB and the windfall corporation tax element. Will he explain what exactly are categorised as windfall tax receipts over ordinary corporation tax receipts? That would provide clarity to us.
Mr. Matt McGann:
I will take that question. The Deputy is probably aware we have been banging on about corporation tax receipts and the dangers of allowing windfall receipts to enter the expenditure base. One of the lessons of the financial crisis is that we can speak about it but that we need to try to put some numbers to it because we had the issue with the property taxes before the financial crisis and we all saw the unhappy end we had with that. We published a paper in September; I am not sure if they Deputy has seen it?
I can Google search that. I thank Mr. McGann for that because I was not sure about what is categorised as a windfall and what is not. We hear the Department and we hear what the Irish Fiscal Advisory Council, IFAC, says every time it comes in here, so members of this committee are aware of the over-reliance on corporation tax receipts.
My following question is for the Department of Public Expenditure and Reform officials. One of the things that comes up a lot at the moment is the issue of having capital carryover. There is a massive issue with housing targets and there can be delays to other infrastructure. We know a lot of it is to do with construction sector capacity. In 2018, the Department of Public Expenditure and Reform established the construction sector group that comprised multiple Departments, State bodies and construction sector industry partners and participants. Several important documents have been published on how we could transition to modern methods of construction. I also sit on the Committee on Finance, Public Expenditure and Reform, and Taoiseach, and today we had the Construction Industry Federation, CIF, before us and we touched on modern methods of construction in terms of productivity, turnaround time and environmental performance. It seems to me the progress in that has been a bit slow. Is there anything being done to speed that up? If that is not something somebody here can cover, that is no problem and I can move on to my next question.
Ms Niamh Callaghan:
We do not have colleagues from the capital section here but I can answer generally. The national development plan, NDP, was published back in 2021. It sets out €165 billion in expenditure out to 2030 and a number of reforms are also set out in that document, of which the Deputy may be aware. One of those was to set up a Project Ireland 2040 delivery board which oversees the delivery of the NDP. Two major reforms within that were the introduction of independent external reviews of projects in excess of €100 million at two decision points in the project life cycle. We also have a major projects advisory group set up in our Department to review those business cases. That is looking to strengthen the process we go through for large projects, but a number of issues have been highlighted around the significant underspending in capital expenditure, and the Deputy has alluded to some of them. There were ongoing supply chain issues and delays, there was some progress in the contracts due to Covid and then there were challenges in the labour supply. If the question is spending-specific, we can get the Deputy more detail.
It is specifically on using modern methods of construction to build. The Madrid metro was built quickly for an underground project and it was able to move forward. I am quite interested in this and I raised it with the CIF earlier today, but it is not specifically a budgetary matter, which I appreciate. I will follow up on that.
If we are looking at different subsidies like the housing assistance payment, HAP, and the rental accommodation scheme, RAS, to a certain extent, we see they will exceed €1 billion this year. We have spoken to the Parliamentary Budget Office, which we deal with quite a lot in this committee, about the sustainability of the model because it has led to the State funding two fifths of private rental tenancies and how many people have called that into question. Does the Department of Public Expenditure and Reform have any major concerns that this is unsustainable and a poor use of scarce resources? I was elected as a councillor in 2014 and since then I have been dealing with people on housing and I have never seen it quite as bad as it is. I want to ask about the sustainability of relying on the likes of HAP. I know the answer will probably be that we have Housing for All and we will have all the houses from that, but it seems to be slow off the mark and I am not seeing it coming on stream in Galway. If there was an issue with delivery in Housing for All, would the Department be concerned at the sustainability of that reliance on rental subsidies?
Ms Niamh Callaghan:
We are involved in setting the overall allocations for different Departments. Significant funding was provided to the Department of Housing, Local Government and Heritage for next year, including €2.8 billion for core current expenditure.
In terms of the delivery of specific projects, however, that is a matter for the Department of Housing, Local Government and Heritage.
Given the fact that Ms Callaghan is talking about €1 billion going into the housing assistance payment and so forth, I would be concerned about how sustainable that is in the long term. Obviously, I hope all those houses get built and that people who come to me end up in homes they are not worried they will have to leave. At this stage, many people would be quite concerned about the amount of money that is being spent on that. I will take Ms Callaghan's point in that regard, however.
There are two matters I wish to address. Ms Callaghan mentioned in her opening statement the issue of one-off payments as part of the cost-of-living package. I wondered about the likes of those payments that are recurring in nature. One thing I have not really fully understood since being here is the Christmas bonus, which is recurring but is seen as a surprise every year. I have pointed out that this has been a recurring measure since 2014 but it is classified as a once-off payment. Obviously, I understand that gives flexibility in that it can be withdrawn if there is a crisis. What is the Department's view of continuing it is a once-off payment rather than realising it is recurring? It is just kind of announced as something on budget day when everybody really knows it is a recurring payment. I would also argue that it speaks to short-term solutions being used for more longer-term problems. The general inadequacies of the social welfare system are these kinds of one-off payments that are really recurring things. We rely on them to have something to announce on budget day.
Ms Jenny Connors:
I thank the Deputy for that question. The Christmas bonus is obviously a budgetary decision every year. The reason for that really is because of the fiscal position. I take the Deputy's point that we have paid the Christmas bonus for the last number of years, but it is not always a 100% Christmas bonus. There are decisions to be taken around that and it is dependent on the fiscal position in year. In terms of making the announcement this year into next year, we cannot then pull back on that so we need to make sure it is fiscally possible.
I thank everybody for all their great work on all the documents they produced around the budget. I know it is a huge job. I am glad to see the tax expenditures report as well, which is an area at which our committee is looking. I will ask a question about that in a minute.
On the overall view of the budget, however, it was suggested that the overall impact of the budget is "strongly progressive". In a contribution to us last week, a representative of the Economic and Social Research Institute, ESRI, stated that when we disregard the one-off measures:
The effect of permanent 2023 policy measures to inflation-proofed policies for 2020 gives an indication of the more medium-term challenges facing households and policy-makers. Compared with indexing tax and welfare policies in line with inflation since 2020, budget 2023 leaves households worse off on average.
I understand the ESRI is saying that if we strip out the once-off measures, people are left worse off. It also said that pensioners and lone parents are "likely to experience average income losses" and that the increase in the cut-off rate for the standard rate of tax was going to favour higher-income households. This would challenge the view put forward here that it is "strongly progressive". I am curious as to how the Departments would respond to the ESRI's assessment.
Mr. Matt McGann:
I will perhaps lead off and then other people might want to come in. We published, and have done for a couple of years, a distributional analysis of the budget. This one was contained what we have been referring to as the third budget document, that is, the quality of life or Beyond GDP document. This is what our distributional analysis shows. We separated the 2022 measures from the 2023 measures. There might have been a temptation to lump them one on top of the other because it looks bigger, but it is affecting people's incomes in different years. It would be a bit disingenuous if that was done and, therefore, we separated 2022 from 2023. Looking at the 2022 measures, we see the largest increases in income to the first three deciles, which are, on average, a 4.5% increase compared to 1.4% for deciles four to ten. Then, it is similar for the 2023 measures but the increase for the first three deciles is even larger at 5.2%.
As the Deputy stated, the ESRI analysis does say that with the once-off measures, lower-income households will be better off in inflation-adjusted terms. It is important to clarify that our analysis is not inflation adjusted. It is in nominal terms whereas the ESRI's analysis is inflation adjusted. Neither is wrong; they are just asking different questions. We would argue that ours is less complex and simpler, but perhaps more communicable, because it shows people the change to their income before and after the budget purely as a result of the budgetary measures. The ESRI shows the change compared to a hypothetical inflation-adjusted scenario for 2023, or a multi-annual one to which the Deputy referred. Obviously, one of the key assumptions in the inflation-adjusted scenario is the inflation projection. If the inflation projection or the number is different then it will completely change the results of the analysis. That is not to say it is not legitimate. It is, but it is just doing a different thing to what we do, which is looking at it on a purely nominal basis. Doing that inflation-adjusted analysis for the next year is dependent on the projection. Doing it on a current year basis for 2022 is really difficult. That is why the ESRI actually goes back to 2020, rebuilds 2021 and then compares it across 2022 - all the measures across the year - to a hypothetical rebuilt 2021 population, so it is even more complex.
On the point about excluding the one-off measures, I am not really convinced of why the one-off measures are excluded. That is real money that is going to people and going into their income. The one-off measures are very significant. The reason why the budget utilised those one-off measures is because of the broader environment in which the budget was framed, which was extreme unprecedented uncertainty, most obviously in the case of inflation. To be fair to the ESRI, I watched last week's session and Dr. Karina Doorley said the use of the one-off measures was a good solution in the face of the level of uncertainty in which the budget was framed.
Is it fair to say, though, taking into account the projected level of inflation, particularly because a lot of the once-off measures will have an impact shortly, that, as we head into next year, after the bump people will get from the one-off measures, the ESRI's assessment will be correct, that is, that people will see income losses and that certain groups, particularly vulnerable ones, will be worse off, notwithstanding the fact that the ESRI says exactly what has been said here, that is, that initial-----
Mr. Matt McGann:
I do not think it is totally accurate to say that because what the ESRI said is that the welfare increases in 2022 and 2023, together with the one-off measures, are large enough to leave the lowest income households better off, on average, than they would have been had welfare payment rates risen in line with inflation.
Ms Jenny Connors:
I accept the point about the ESRI's comments but, overall, it was quite positive about the Government's response cushioning the lowest deciles. I draw the Deputy's attention to the fact that our Department answered a parliamentary question a number of weeks ago, I think, about this issue. In our response we stripped out the once-offs and redid the analysis for next year and the welfare package for 2023 was found to be progressive. For the lowest decile, we found that there would be a gain of about 3.7%, down to about 2.9% for the third decile. However, I take the point made about that landing in people's pockets. I am not sure why one would strip out the once-off measures, but the analysis is there and there is transparency in that regard.
On the point Deputy Mairéad Farrell brought up, may I try to elaborate on the question about the cost of the HAP, RAS and leasing schemes and the current expenditure threat, that is, the financial threat of the current expenditure between those schemes being €1 billion, with rents going up and, therefore, the potential for the payments under those schemes to go up? The point which the Opposition makes and which the Government sort of acknowledges is that we would be better off phasing out and moving away from those schemes and that if we had our own housing stock, we would be able to start to reduce reliance on the HAP, RAS and leasing payments. I know that the Department of Public Expenditure and Reform, in the Irish Government Economic and Evaluation Service, IGEES, report, has more or less made that point as well. I know that the witnesses are not the policymakers, but is there a plan to get to a point at which we wean ourselves off those schemes? Do the witnesses get my point? Often in this debate the point is made that we cannot get rid of the HAP, RAS and leasing schemes immediately, and of course we cannot, but is there a plan to phase them out whereby, at a certain point, the scale of social and public housing provision we have projected we will deliver will get us to a point at which we no longer have to rely on HAP and RAS leasing? I am talking about the financial projections of that, of large current expenditures year on year starting to reduce because another thing is happening, that is, that people are moving out of HAP and RAS tenancies and into permanent public housing, whereby there is no longer a big current expenditure. Do the witnesses get my point? Maybe I am not explaining it very well, but do they see a point at which we will no longer have that reliance? Are there projections of that sort? Such a policy is talked about but I do not see it.
Ms Jenny Connors:
-----but our Department is engaged in drafting spending review papers on different issues. Housing is one of the issues that has been looked at. I guess, however, that these are matters for the Department of Housing, Local Government and Heritage to progress in the context of the roll-out of Housing for All.
May I suggest that they are not and that they involve both Departments? It is very much a public expenditure concern if there is a very big area of current expenditure. Yes, it is absolutely the job of the Department of Housing, Local Government and Heritage to say, "Here is our plan for public housing, and our policy is to reduce slowly but surely the level of HAP, RAS and leasing payments and the level of current expenditure." Surely, however, the trajectory of the reduction in that level of current public expenditure is very much the concern of the Department of Public Expenditure and Reform. Surely-----
Ms Jenny Connors:
Absolutely. We are engaged in a whole-year budget process, as I mentioned. That involves extensive engagement between the Vote sections in our Department and the relevant officials in the line Department to review the trajectory of both current and capital expenditure. We have various initiatives to try to improve the evidence base that feeds into decisions to allocate money at budget time. There is therefore ongoing engagement as to how we spend money on different types of housing schemes.
At the moment, however, there are no particular projections of an incremental reduction over a period of years. The witnesses will know the way we project out expenditure over a five-year period or whatever. There are no projections as to how these payments, the nearly €1 billion going out now, will reduce, are there?
From the point of view of expenditure of public funds, it would be quite useful to know that. I have made the point.
On the tax expenditures, the tax expenditures report acknowledges that it does not cover all tax expenditures. I think it identifies €7.7 billion of tax expenditures as the ones it looked at, the large ones, the significant ones or whatever, but it does not include intra-group transactions. I am curious about that because in the Revenue tables, intra-group transactions are by far and away the biggest, by multiples of all the others. In the latest Revenue tables I think intra-group transactions as a tax expenditure amount to €35 billion. That had jumped from, I think, about €29 billion in just one year. It has gone up by similar amounts each year. That is a huge tax expenditure - it dwarfs all the rest of them - but it is not included in the tax expenditure reports. Why not?
Ms Anne-Marie Walsh:
I will try to respond. It is not my area. I know that the committee has had this conversation about the Revenue list and the Department report with our colleagues. We start from different places. With Revenue, it is really just a list of all Revenue costs, whereas with the tax expenditures it is the tax forgone. As I said, I am not an expert on intra-group transactions or the particular relief in that regard. Is it corporate tax or stamp duty? I am not-----
Ms Anne-Marie Walsh:
I would have to defer to colleagues who are not here and maybe come back to the Deputy. It comes back to the essential point that we have been over in that the Revenue list and the Department's list are different things. It has come up here in these discussions. It has also been identified in the Commission on Taxation and Welfare's report. It is probably homework for the Department, it is fair to say.
It is just to signal that it would be good to get a response on that because it is huge.
Without a shadow of a doubt, it revolves around the area of intellectual property and royalties from same, intangible assets and all that kind of stuff, which we know is the big area where profit shifting is going on. At the very least, it bears scrutiny and some explanation when such a big figure is involved. I do not see why it would be left out of the tax expenditure report.
Mr. Matt McGann:
I am way out of my wheelhouse here but I happened to be sitting beside Ms Deirdre Donaghy when the Deputy asked her about this matter in June. I am open to correction but my memory is that we do not consider it a tax expenditure, in that it is part of the general operation of businesses in the same way that businesses' costs are deductible and not necessarily tax expenditures.
The Deputy mentioned intellectual capital. That is listed within the tax expenditure report. I cannot remember the name of the-----
I have not even mentioned some of the allowances, which also deserve scrutiny. There are big figures involved. Assuming they are part of the base is not necessarily a fair assumption. Figures that high deserve scrutiny, particularly when there is an incredible variation in them. An amount described by Revenue as a tax expenditure can jump by €6 billion or €7 billion in a year. That warrants explanation, at the very least. I will just say that.
I have not studied every single page of the public expenditure report but I have read quite a bit of it. Am I right in saying that when the Revised Estimates, which are a sort of consolidated version of the public expenditure report, come out, we tend to get a more detailed breakdown of the different programme expenditures, whereas on budget today, we only hear about programme expenditure, current, capital and total? We get last year's and this year's figures but we do not really get any breakdown. I can see there are certain practical and logistical difficulties and perhaps the issue relates to those. It would certainly help clarify certain debates about how much has been allocated to capital expenditure in housing or how much is going to this or that programme if the same level of detail, or something close to it, was available in the breakdown of programme expenditure on budget day. It would help to avoid some interminable rows about how much has actually been allocated, for example, to capital expenditure on housing. Would it be possible for that level of detail on programme expenditure to be made available on budget day in the budget book?
Ms Niamh Callaghan:
The budget book contains programme expenditure per Vote. The Deputy mentioned housing and the budget book would include the overall capital-current split for the whole housing programme. The Revised Estimates that will be published in early December and brought before the House will have the breakdown. There is a whole process to go through to look at the final 2022 figures and the 2023 figures.
The Minister will often say on budget day that a certain amount is being allocated to additional capital expenditure and such and such. I would like to know whether the Minister and the Department have that information. When capital expenditure on housing is broken down, it includes, for example, retrofit. It does not all go to the building of houses but instead includes quite a few other things. It involves grants for the adaptation of houses and a whole number of other headings. We do not quite know what it is. Do the Department and the Government know the allocations on budget day but do not include that in the book or do they not know until December when a more detailed breakdown is available? Perhaps our guests are not allowed to tell me that.
I just make that as a suggestion, considering this is the budget scrutiny committee. It would be great if a more detailed breakdown of the programme of expenditure could be available on budget day. I understand it will be adjusted with the Revised Estimates but it would be useful if it could be included in the budget book.
Mr. Niall Cassidy:
I will come in on that point. The broader theme of transparency came up earlier with Deputy Mairéad Farrell. We have made major efforts over the past couple of years to improve the transparency in the overall budgetary documentation. We fully took note of some of the points that were raised at the committee meeting last week.
The economic fiscal outlook in the budget documentation from, for example, 2013 contained 20-odd pages and 13 tables. The same part of this year's documentation runs to 60 pages and approximately 30 tables. Within those, we are trying to bring greater transparency to what is happening on an underlying basis, as Mr. McGann talked about earlier, in respect of GGB*, GNI*, etc. We take these concerns on board. We are always trying to improve upon transparency and get that balance right. It is a wide audience, which includes the public, Deputies, the media and academics. However, as I say, when one looks at some of the boxes and tables within the economic fiscal outlook, they are very much designed to walk people through some of the very technical issues facing the economy at the moment. The Deputy probably saw the citizens' guide published by the Department of Public Expenditure and Reform, which is an important piece of work in trying to illuminate some of these areas.
Mr. Niall Cassidy:
That is exactly the case. I fully take the Deputy's point. It is an iterative process and it is something we are anxious to constantly improve.
Ms Callaghan alluded to the point that we are pushing up against the limits of what can be achieved on the day itself with all those tables and data. It is getting more and more difficult to get all that documentation together, populate all the spreadsheets, check them against the narrative, get the document to the printers and then to the Houses in time for the budget debate. We are probably coming to a place now where if we want to include additional material, we probably need to look at withdrawing other tables or bits and pieces. The broader point on transparency is well made and fully understood. We will take that back.
Ms Niamh Callaghan:
I will come back in briefly to say the second section of the expenditure report sets out each chapter per Vote area.
Pages 122 and 123 go through programme A - housing - and goes into detail about some of the deliverables from some of the schemes. I might pick out one or two. It states "AHBs will deliver 750 Cost Rental homes - these homes will be delivered via €75 million provided under the Cost Rental Equity Loan (CREL) mechanism", so a level of detail is available but I take the Deputy's point. Again, we are working to deadlines but we will have another look at that.
I thank the witnesses for their presentations. The amount of money involved in the budget can be overwhelming. When you read documents and reports, you get confused. I am concerned when Revenue bring forward a set of figures that are different from the Department's set of figures and are working from a different base. There needs to be common approach to how reporting is done, be it from Revenue or somewhere else.
To pick up on Deputy Boyd Barrett's point about the breakdown of particular spends, when the witnesses say we are spending so much on housing and there is a top-line figure, underneath that a breakdown is there before budget day. I presume it is not the case that they are picking a figure and try to match figures to it afterwards. It is there beforehand. There is a scientific proposition regarding this. It is important that as a budgetary oversight committee, we see more of how things are done.
Regarding the capital cost under-runs last year and the year before and how they are accounted for, do they just go back into the pot and we start afresh the following year? In the past couple of years, we have underspends. We might have overspends given inflation. How does the Department track that going through the year or going through the process? For example, in the area of housing, does it get a quarterly report from every local authority setting out what they spent? Does it get reports from any Department regarding how money is being spent? Is it being tracked or does the Department wait until the end of the year when the all the receipts are in? How is that done and how is that accounted for? If there is a programme of works to be done and there is expenditure to go with it, if the expenditure is not coming up to what it should be in the projections, obviously the programme has fallen behind and perhaps corrective action could be taken during the course of the year rather than leaving it and finding out it has fallen short. I do not know how that can be done.
When Dr. Seán Healy was here last week, he spoke about how a €20 increase for those on a fixed income should have been a baseline, as opposed to an increase of €12.50. The €20 increase was to meet inflation. He said this was a missed opportunity. What is the Department's attitude towards the linking of social welfare payments and inflation, setting a baseline and working from there so that every year, the increases will be in line with inflation to keep living standards level with inflation as opposed to people falling behind?
Ms Niamh Callaghan:
I will deal with the question on capital. We have monthly reporting in place. At the beginning of each year, each Department will set out a profile of its expenditure on a monthly basis and will provide returns to us each month. They are published as part of the fiscal monitor every month by the Department of Finance. We have ongoing engagement with various Departments, for example, the Department of Housing, Local Government and Heritage, about the profile of spending, whether it is over or under profile and the reasons for that. We track that on an ongoing basis.
The second part of the Deputy's question was about capital carryover. Under section 91 of the Finance Act, there is a statute of provision for 10% of capital carryover so 10% of a Department's overall capital expenditure can be carried forward into the next year if it is not spent in the allocated year. For example, €819 million was carried over from 2021 into 2022 and that money has first call on being spent in 2022 and that is also reported on.
Ms Jenny Connors:
I might jump in on the questions around the €20 rate increase and the point about indexation. There was a lot of talk before the budget about potential rate increases but we must take it within the overall suite and package in the social protection area. Obviously, we did not just do a rate increase. We had the rate increase plus the once-offs and other more targeted measures. This must also be taken in the context of the budget parameters that were provided and with spend across other areas of public expenditure. The €12 was taken in that context - that it is not just a rate increase that was provided. With €20, you would be talking up to €1.5 billion in expenditure, which is pretty significant even though the overall package was €1 billion and those targeted measures impacted and cushioned the lowest deciles.
We have more clarity about the direction of travel for indexation for pensions. That was put forward with the recommendations of the Commission on Pensions and it was agreed that there would be an earnings approach to the indexation of the State pension. That will inform the budget process in 2023 but still will give the Government discretion around that. There is more clarity but there is no Government decision around indexing beyond pensions. At least the clarity is there on that.
Ms Jenny Connors:
We have a policy for pensions. There is a lot of work to do in terms of how you calculate that. I know we have an approach and there will be learnings but as there is a lot more to do around what data you use, the implementation process and the calculation, there is a lot of consideration around how we do this. In terms of indexation overall, Mr. McGann has made the point a number of times that it is really uncertain regarding inflation and the overall economic context. They are points to note. We have a clearer path in terms of indexation for pensions and the overall recommendations of the Commission on Pensions.
Mr. Matt McGann:
If I could come in on the broader points, we know that ultimately it is a policy decision, so I can give the Deputy some considerations for thinking about it. This was discussed at the committee in February. As Ms Connors said, it is not simple. It can quite complex. The first question concerns whether you are indexing to wages or to inflation. Indexing to wages looks more natural when you are thinking about the tax system because if wages are moving up, people are moving up into higher brackets. Indexing to wages allows people on social welfare to maintain parity with people with paid income whereas indexing to prices allows them to maintain their purchasing power. Even if you index to wages, it is a question of what is the appropriate metric to use. The ESRI uses compensation of employees but this is like a wage bill for the entire economy. That has numbers in it. It is impacted by the number of people at work, which is not necessarily the same thing as people's rate of pay - weekly earnings that have hours or hourly earnings. There is still the question of whether you are using projections or a figure from the previous year. If you are using projections, obviously they can be higher or lower if you over-compensate and the figures come in lower.
I believe a suggestion was made at the committee that it could be retracted the following year by giving a lower amount to balance it out, which, from a political economy perspective, might not be as easy as in theory. There are also data revisions. Considerable Irish data are linked to a metric but there can be revisions to the data.
The wider consideration is about flexibility. The great trade-off is that you lose flexibility in your budgetary policy setting every year. It might mean the Government of the day has less room to target resources to a particular area to which it wishes to target resources, because this automatic indexation has been locked in. A relevant example is in the UK where it has had the triple lock on pensions. A commitment was made that pensions were to rise by whichever was the highest of wages, inflation or - I cannot remember - a hard-wired 2.5% or 3%. However, the UK has had to walk back from that, and not just because of the considerable volatility of inflation. Even before the invasion of Ukraine, it had problems with the triple lock because the nature of how employment fell during Covid meant people at the bottom of the income distribution or lower earners more prominently fell out of work. Arithmetically, that pushed up average wages. More people who lost work were average earners and the average wage growth became quite large because of a compositional arithmetic issue. That can be the problem with tying yourself to a specific metric.
It has implications for people's legitimate expectations as well because one of the benefits of automatic indexation is that people have some certainty about what will happen next year. People were told they have a triple lock which, by its nature, sounds guaranteed but it has not been deliverable due to unexpected circumstances or volatility and inflation and the UK has had to walk back from that. There are benefits such as certainty but it can be complex. That should be part of the consideration.
Is there a conflict between increasing social welfare and the lower income workers who feel they would be better off not working because student grants and such like would be easier to get? Is the budget doing enough with regard to the take-home pay of people who are working to ensure it is of benefit to them? Is there a fine line? How do the Departments monitor or do analysis on that? I have seen figures that show parents in an average family with two children going to college may be better off not working, unless they are earning more than €50,000 or €60,000. Do the Departments do analysis on whether they are doing a disservice to the workforce by not looking at that and seeing how taxation can help? That is a big question. It might take considerable time to answer but I ask for the representatives' thoughts on it. Do the Departments analyse or monitor whether work is paying?
Ms Jenny Connors:
We obviously do analysis on replacement rates as well as the distributional analysis to inform the budget. I cannot think of the year off the top of my head, but we have done a number of papers to look at the replacement rates, work incentives and what we can model with regard to social welfare, HAP and medical cards. I believe that analysis was published as part of the spending review process in 2017 or 2018 and a paper was done before that. We definitely monitor it. The policy area is for the Departments of Social Protection and Health but it is something we look at ourselves. We carry out that analysis through the spending review process. A good example of that was probably through Covid and some of the work that was done around the work incentives with the pandemic unemployment payment, PUP. As we have seen, many of those people went back to work and transitioned back into employment. It does not seem to be an issue there but much of the work in replacement rate analysis was done to inform that.
Mr. Niall Cassidy:
There is a slight discrepancy there. We report on a gross basis with our receipts whereas Revenue reports on a net basis. Thus, they do not always match. Some receipts come directly to us via the Exchequer, such as motor tax, which do not go to the Revenue Commissioners. That is why one sees a little bit of a discrepancy sometimes. I know there have been various calls for us to use the net receipts on our monthly figures, but our problem is that the overall Exchequer statement would not add up properly. They are largely marginal and the discrepancies between both sides would not be massive.
I am crystal ball gazing at this stage. How long will we see maintained the level of income from the foreign direct investment, FDI, corporate tax we are enjoying? When might the rate start to decrease or will it continue to grow? What is the Department's expectation for the next five years?
Mr. Niall Cassidy:
We have seen very strong growth in corporate tax receipts in the past couple of years. We are seeing that in our monthly fiscal monitor. Last year was a record year in its own right when approximately €15 billion came in. It is nearly equal to that. Last year would have been a major change even compared with a couple of years ago. We are already up at approximately €14 billion for the year to date and are likely to see record returns again this year. The Department has done significant work in this area to look at the overall volatility associated with some of those receipts. We are very mindful of it and that is exactly why the new statistic is being developed as part of the budget this year, GGB*, which I am sure the Deputy has seen. Mr. McGann's team led a paper to look at that very specific issue to identify excess receipts and build a new statistic of what public finances look like on an underlying basis when some of those windfall receipts are taken away. We are forecasting a surplus this year of approximately €1 billion. However, looking at that on the underlying basis when the corporate tax receipts are stripped out, we do not see a surplus for another two years. It makes a very big difference to the overall stance on the public finances.
Does the Department do analysis as to how come these windfall taxes have arrived? What has caused them? Is there a reason this happens? Will the reason be there next year and the year after? When the money comes in, does the Department say it is a windfall because it is over its expectations?
Mr. Niall Cassidy:
The ultimate question will be the overall level of sustainability. That is why we have been bringing attention to that. We have certainly done so on a month-by-month basis with the Exchequer returns with regard to overall profitability within the multinational sector as a whole. There is certainly further analysis of that by the Revenue Commissioners. It publishes a report every year which looks at the corporate tax receipts in a little bit more detail, between foreign-owned and Irish-owned companies, the sectors and various issues.
Mr. Matt McGann:
Mr. Cassidy covered most of it. On the Deputy's specific question, the other point to bear in mind is the extraordinary level of increases in corporation tax receipts we have seen, which have gone from less than €5 billion 2014 to heading above €21 billion this year. I think the receipts were at €12 billion in 2020. It has been €12 billion to €15 billion to €21 billion in two years.
The other point is the concentration risk. Half of that is coming from just ten large payers. We do not know who those payers are, as that is Revenue confidentiality. However, Revenue identifies that it is not the same ten every year. We know it changes slightly. It is a huge concentration risk. Because corporation tax receipts are now almost 25% of total receipts, that means one in eight of total tax receipts is coming from those ten large payers. That is not factoring in the income tax that is also associated with those multinationals.
On identifying it, that is in firm specifics and we are into confidentiality issues because it is such a small number of firms. That is why we took a more statistical approach in the paper we did in September. We can send it on to the committee or I can go through in boring detail how we estimated windfall. Essentially, the truth is that nobody can definitively say what the quantum of structural or potentially at-risk receipts is, which everybody acknowledges. We took a suite-of-models approach. We looked about five or six different ways at the potential windfall and we took the mid-range of those five or six different models. Based on that, we estimated that from last year’s receipts, the windfall could be in the region of €4 billion to €6 billion. For this year, we are talking about €9 billion and next year €10 billion of receipts that are potentially transient or volatile. This is where we then remove that new figure and take it out of the budget balance. Everybody is thrilled to get a new acronym, GGB*, under which, if you take out those windfall receipts, instead of a surplus, we have an €8 billion deficit. Of course it is great to get these receipts and they are not unwelcome. However, we have to be cognisant that there are not potential vulnerabilities building up within the public finances. As I alluded to earlier, that is what happened in the financial crisis, where we had a huge reliance on the property-related receipts. We lost one third of our tax revenues in two years.
We are regularly warned about dependence on or possible flight of the multinational corporations. Of course, we need to recognise one thing. First, it is good to have them there and it is a good sign of our economy that they remain and want to remain here. They will all be hit by international events at present and we need to take that into account. Things do not go on forever. We need also to be looking at possible other avenues of revenue we can rely on in the future, not in any way to overlook or minimise the contribution being made by the corporate sector at present, but to recognise we should not depend entirely on it as we did in the case of the construction sector at the time of the crash. However, that was not the only reason for the collapse at that time.
The question always remains that we must have a budgeted balance. We must spend in a way that is in the national interest, not to live today and let somebody else pick up the tab tomorrow. It is very responsible of us to recognise that at some stage in the future we might well be asked to take cuts, perhaps as bad as before - I do not know. That depends on the effect of the war in Ukraine and what happens as a result. However, the fact is we need to use carefully the funds we have. We need to ensure we are prudent in our spending and do not borrow to spend. We had to do it in some circumstances in recent years, but it is to be hoped we will not have to do it anymore. We should save for unforeseen events as we go along. That is very important.
I heard politicians in the House stating repeatedly that we did not need to save and did not need a rainy day fund, that it is raining now so we should spend it now. That is fine and it sounds good. However, it will lead to a disaster if we repeat the mistakes of that particular era. There are always the flowery speeches politicians make and I am sure I make them myself, though I try not to. The flowery bit might not relevant but the exaggeration might well be. The point is we need to realise we have to be careful in our dealings in this area and these fragile times in which we live. We should not try to expect to enter the economy and fund it deliberately to keep people afloat and then do the same the next year and the year following. That can only be done with the new resources. It may well have political consequences for those who are in the driving seat at the time, but the fact remains the Government cannot buy its way out of difficulties all of the time. Anywhere that has happened in the past, it has gone awry. Look at a place such as Venezuela, which has lots of resources, and the situation it is in now. We need to be very careful and sound in our economics, recognising and reading the future carefully and taking measures that do not get involved in creating or extending inflation. We have to pay for our own running costs, as it were. We have to pay for our own economy insofar as we can, except in extreme emergency.
We have to tell the people as we go along that there are easier ways to do it and we can live less frugally and gain more. That is fine and I have heard all of that before. I do not want to go apologising to economists all over again about all of the things they said and I said about them in the past. We need to keep a close, cold and hard eye on reality as we move forward carefully.
Mr. Niall Cassidy:
I thank the Deputy for his comments. We would identify with so much of what he said. In particular, if we are looking for examples, just before we moved into the Covid period, we registered a surplus of about €2 billion or so. Why was that important? It was important from a public finances point of view because it gave us the platform and foundation on which we could then support the broader economy through the various measures that were put forward at that time. Again, because the public finances were in order, the Government had the confidence of the markets behind it. We still have the confidence of the markets, but that can turn very quickly. As we have seen elsewhere, that can turn very quickly if a government is not managing those public finances in a coherent and sustainable fashion. That is ultimately what the Government strategy was about, when you look at we were trying to do at the time of the summer economic statement, SES, in particular, last year. We had to get that balance right between continued investment in the productive capacity of the economy and putting the public finances on a sustainable trajectory at the same time to prepare the economy to ensure the markets did not turn on us and we were in a stronger position to respond to these types of challenges that we have been facing.
Unfortunately, as the Deputy has seen, they are becoming more and more frequent. Look at the challenges we have seen over the past couple of years between Brexit, Covid and now the cost-of-living crisis.
None of those issues were on people's horizons a couple of years ago but they are becoming more and more frequent and impactful. As a small, very open economy, it is essential that we are on a strong enough footing to be able to deal with those challenges as they arise. That was the key argument that was part of our countercyclical approach, which we have undertaken over recent years.
I will mention one other matter. Far it be from me to diagnose the ills of our country, but one of the things we need to realise is that we had a very well-distributed budget or, at least, as well distributed as could be done in the circumstances prevailing at the time. To listen to commentators in some quarters, you would swear that the economy was broken and that people were all starving. Yes, some people are in difficulty. We recognise that and it has to be dealt with. It is not fair to say, however, and it is not a true reflection of the economy, that everything is going bad and we are on a race to nowhere.
At the end of the day, we are managing the economy, as are the Government and the people. The people are no fools either. They will do what they have to do, whenever it comes. Incidentally, they do not like being referred to as it they are on brink of starvation every day. There are people who are on the fringes of our society and we have to deal with that. That is our responsibility but we should not condemn everybody as being in that boat. We need to do all that has to be done in order to improve the lot for all without drawing upon us a kind of syndrome to the effect that we are all on the brink and will go back to where we were before, at the financial crash.
I apologise for coming in late; I had another meeting. I also apologise if I ask repetitive questions. I thank the officials for being here. Social Justice Ireland also appeared before the committee recently. It called for social welfare rates to increase by €20 instead of the €12 provided for in budget 2023. Was the cost of the €20 increase examined? How did the Department settle on €12?
Ms Niamh Callaghan:
We had a range of discussions in the run-up to budget 2023. The decision on the rate for social welfare increases is a policy matter for the Government. As the Government set out in its summer economic statement, the public expenditure strategy is a balancing act all the time. It is about ensuring the public finances are sustainable, ensuring we are not adding to inflationary pressures, and ensuring that we can provide continued investment in different public services, including through social welfare. Ms Connors may wish to say something about the distributional analysis around social welfare.
Ms Jenny Connors:
Sure. I will make the point that the €12 was not the only measure that was provided to the Department of Social Protection. There was a really significant cost-of-living package and targeted measures on top of that of, amounting to approximately €1 billion in the 2023 package. It has to be taken in that entire context. It is not just about the rate that was provided.
The distributional analysis informed the process that Ms Callaghan spoke about and the discussions that were held before the budget. As we published in the expenditure report, it cushioned those in the lowest deciles and was progressive. I make the point that the €12 was not the only measure that was taken.
I appreciate that. Diesel prices have increased to more than €2 per litre and other energy costs are rising. What is the likelihood of additional measures being needed in the coming months into 2023? What might those measures be?
That is fine. I hope I am not straying into policy again, but there was a debate in the run-up to the budget on the introduction of middle-rate income tax. Is that something that will be revisited in the future?
Dr. Patrick Moran:
The Department of Public Expenditure and Reform has a programme of work around performance budgeting and trying to align the budgetary process with the type of outcomes we ultimately want to achieve in each of those areas, whether it be climate targets or well-being goals we set as a society. We can provide detail on the individual programmes of work but, in general, all those pieces of work take the same sort of trajectory. The idea is we want to align expenditure with the outputs we want to achieve and then try to track the changes in those outcomes over time so that we are confident we are using resources and getting the most value for money out of them in making progress.
Two streams of work are going on in respect of the well-being budget. One is looking at the overall national picture and the national well-being indicators that are published on the Central Statistics Office, CSO, website. We are gathering data on how the country is faring over time as regards those types of outcomes. We also track expenditure across all the Departments that is targeted at effecting those outcomes. At present, as the Deputy knows, the budget tells us what Departments got what in the allocation. We are engaging in a piece of work that will involve tagging all expenditures across all the different Departments to see how much is being spent on each of those wellness areas, including mental and physical health, safety and everything else. That is the well-being bit.
Similarly, with green budgeting, we want to be able to track Ireland's performance as regards how we are faring and to be able to tie that back into how much of the country's resources we are allocating into each of those areas and make that link more explicit. The benefit of doing that is threefold. It tends to produce better prioritisation and agenda-setting discussions within Departments. It also feeds into the whole embedding of evidence into policymaking and the formulation of policy but also how we evaluate it afterwards to make sure we have met policy goals. Finally, many of the climate change and well-being targets do not live in one Department alone but are across many different Departments. This sort of performance budgeting framework allows better strategic alignment across Departments that are all working towards the same goal.
As I said, if there is any specific information the Deputy wants on any of those programmes, we would be happy to tell her about it.
I do not see anybody raising their hand to come back in. I have some questions of my own. I will start with the national reserve fund, which we are not allowed call the rainy day fund anymore. I will go back a little to the national reserve fund in order to clarify some points. Some €2 billion was allocated to it in 2022 and €4 billion in 2023. There is a cap of €8 billion generally on the national reserve fund. The annual transfer is meant to be €500 million. Am I correct in thinking that if we transfer the proposed amounts, we will need a Dáil resolution to do so? I do not want to get into policy but we are exceeding how the fund was envisaged so we have to change it.
I am sorry. This is from the Parliamentary Budget Office, PBO, numbers. The revenue windfall as outlined in the way we are outlining it for the previous allocations, if we were taking it the same way, is quite extensive so one would imagine some of that would end up in the reserve.
Mr. Matt McGann:
-----between the reserve fund and a more long-term focused fund. What we were flagging there was there was previously the National Pensions Reserve Fund that the State seeded with money from the Telecom Éireann sale and then was making annual contributions to. When we went back and looked at it - it is an annexe in the paper - if you translate the amount that was put in during those years into current GDP terms, we put in at least €2 billion every year into that and I think-----
Mr. Matt McGann:
-----as Mr. Cassidy was alluding to, so if you are in a severe economic downturn you have those reserves available to support the economy in countercyclical fiscal policy. However, that also means the money needs to stay quite liquid and be available, so it is probably not invested and making much of a return.
Mr. Matt McGann:
By contrast, the intention behind the old National Pensions Reserve Fund was it would be there to meet long-term demographic ageing pressures that were coming down the line, so it was very invested and managed and we were making a return on it. It did not need to be as liquid, because it was intended for a longer-term purpose.
Was there an exploration by the Departments of a retrofit fund, for example, or a greening fund? I am aware demographics put huge pressure on the economy but was there a version of this that answered the other pressures, including the major, long-term, existential pressures, that are on our economy?
I would like to talk a little about uncertainty, which we have already mentioned a bit tonight. I was interested in the discussion of indexation just there because I am interested in it generally. Some of that discussion somewhat implied indexation locks you into a particular decision and of course in most countries that is not the case. It is about what Mr. McGann mentioned, which is expectation. It might lock you into an expectation but in the context of what the OECD says about the Irish budgetary process, that might not be a bad thing. I am not asking a policy question here but a question about the possible levers. There will probably be no meaningful reduction in the cost of living between now and the next budget we put together. By focusing so much on once-off payments we have not bridged that gap or at least we will have a wider gap to bridge the next time around and indexation would perhaps have been part of the answer to that. What can we do next year? On the indexation of pensions, not to make life difficult to pensioners but they are one of the cohorts who are best protected by our social welfare and it seems slightly ironic they are the ones who are now going to get indexation. Is it fair to say we might have made a rod for our own back by focusing so much on one-off payments?
Ms Niamh Callaghan:
I might start with the point the Chair made about indexation and pensioners. That is a policy that has been floating for quite a number of years, so there has been a lot of work done in the area and a number of officials have been at the committee to talk a bit more about the methodology.
Ms Niamh Callaghan:
-----to go beyond pensions. I mentioned the roadmap for pensions and that that was included in there. We have a method in terms of the smoothed earning approach. Obviously that would all have to be discussed if we were to go any further. There would be other policy considerations as well; it is not just social welfare. It is a really significant policy shift and as Mr. McGann alluded to earlier, there are issues with data, the methodology and how we do it. It is something that needs a lot of consideration before it is taken forward.
On the once-off payments, this is obviously quite a different context. We have had Covid and Ukraine before but the cost of living is something we have just had to deal with in the last year. The once-offs were something other countries also did. We are not the only ones who have taken these types of measures. We have been pretty much in line with what other jurisdictions have done.
We have done a number of universal once-off measures. Usually, when I am asked to defend that, I say it happens because we can get it to people quickly but we are almost a year into this process now.
I am not sure that argument is going to run for much longer.
Absolutely, but people on a lower income level are buying necessities, not luxuries, which is mostly what will fuel inflation. I wonder about the thinking around once-off measures as opposed to the 67% of tax measures which benefited higher income earners, which could be seen as more permanent.
Ms Jenny Connors:
The summer economic statement set out a two-pronged approach to the fiscal strategy for budget 2023. We have increased the growth in public expenditure for 2023 above the medium-term expenditure framework because that was based on an expectation of 2% inflation, and inflation is clearly above that. That was one element that has facilitated an increase in the budgetary package to €5.8 billion on the expenditure side for budget 2023, through which €1 billion in permanent social protection measures were rolled out. We also have tried to be as flexible as possible on the other side with the once-off measures for cost of living but also, on the non-core side, we are trying to respond to external challenges, bearing in mind the experience from Covid, where we brought in very substantial supports and we tried to unwind those over time. This is all working towards ensuring we can have a sustainable ongoing framework and funding of public services.
During Covid, we were all hoping it would be over within three months. None of us think that is going to happen with the current Ukrainian crisis and the cost-of-living crisis. I want to stay with the idea of uncertainty, particularly in my questions to the Department of Public Expenditure and Reform. In terms of budgetary costings, considering how volatile the situation is at the moment, what does that mean for costings or estimates and how is the Department operating in terms of a methodology to build that into its systems? I presume that is very challenging.
The costings in terms of funding particular programmes and capital costs. What is the methodology of the Department when it is so incredibly volatile at the moment in regard to everything from construction costs to the cost of medicines, for example? I suppose there is a particular challenge in ensuring the Department has adequately funded the things it thinks it has adequately funded.
Ms Jenny Connors:
Absolutely. There are a couple of things. First, we go through a very rigorous process in the run-up to the budget allocations. We were here in September talking about the provisions for the existing levels of service, ELS. We had about 3% in mind as an increase in the core expenditure base for ELS and it came in at 2.7%. You could look at public expenditure as three different elements. Public sector pay is a big element of how we deliver services, and that has obviously been dealt with in the context of the new extension of the Building Momentum pay deal. There are non-pay costs, which are obviously subject to inflation, and there is social welfare as the third and biggest component, and that has obviously been addressed as part of the budget package. We have been rigorous in our analysis and engagement with Departments in arriving at budgetary allocations for next year. Obviously, they are kept under review throughout the year, and I alluded to the fiscal monitor and the ongoing reporting that is in place. We are absolutely alive to those issues. On the capital side, we are looking at those through the different processes we have with the major projects advisory group and the Project Ireland delivery board. This requires ongoing management.
Most of the costing or the funding allocation is annual, and I know every NGO and every service in the country would like it to be multi-annual. Is there a halfway house whereby we would forecast out multi-annual requirements or needs without actually allocating the money to give people more certainty in terms of what their requirements will be?
I will stay on that topic in my questions to the Department of Finance. I know Mr. McGann said he watched the meeting last week and he might be the only person here who did. We talked to Professor Stephen Kinsella about the cost of borrowing and the fact some of our national debt will mature in the next five to seven years. Again, we are in a volatile place, not just in Ireland but throughout the global environment, and our debt servicing costs might change in the medium to long term. What kind of preparation is the Department of Finance making or what research is it doing in terms of any possible increase in that regard?
Mr. Matt McGann:
In terms of research, we publish an annual debt report. Unfortunately, we have to admit we got the last one out a bit late and it only came out in January or February of this year for 2021. I will make a rod for my own back and say we are hoping to get the next one out ahead of Christmas. One of the things we do in the debt report is to try to take a wider view of the assessment of the sustainability of debt. We do some projections out the line, more arithmetical ones where we look at different interest rates and growth rates, and some of what we might call more stochastic projections, using the COSMO model.
Mr. Matt McGann:
I have the debt report somewhere in my bag. It is probably four or five years. One of the things it showed is that we are less susceptible in the immediate term to a big impact from an interest rate increase because we have termed out quite a lot of the debt. I think the average maturity is now about ten years, which compares quite favourably with other countries.
Mr. Matt McGann:
Yes. It seems likely they will rise considering a lot of it was termed out at historically low interest rate levels, so, yes, that is absolutely the case. All of that speaks to the need not to lose sight of debt sustainability and fiscal sustainability in the immediate term. By bringing our debt levels down, we build our fiscal buffers and the markets take cognisance of that. It is about generally pursuing, for want of a better word, sensible macro fiscal policy, and we have seen in the UK what can happen when you do not, as Mr. Cassidy alluded to earlier. The problem with market discipline is that it is not linear or uniform. It can go away and the markets do not seem interested in you, and then it comes back very suddenly and very heavy. Especially for a small country, that can be really brutal. We know from our own history that we went into the financial crisis with 25% of debt to GDP, but even the Latvians and Lithuanians, who did not have the kind of financial crisis we had, went in with debt in the 30% or 40% range and got priced out of the market. One does not have to hold Latvian or Lithuanian debt. A fund manager needs to hold French debt, UK debt and US treasuries, but not particularly debt from small countries. There is a premium on maintaining market confidence for small countries.
Mr. Matt McGann:
It is a good question. The Office of Budget Responsibility, OBR, in the UK has flagged the idea that instead of a weighted maturity, it would be about the median maturity or how much is going to come up in the next four or five years. That is something we are looking at for the debt report we are hoping to produce.
If the Department can pass anything on to the committee, we would appreciate it. I want to finish on performance budgeting. I am glad to hear so much work is being done and I commend the work of both Departments on moving ahead with this as I think it is going to be the future of all policy decisions. It is to be hoped that will be evidence-based and we can only do that with good data. One of the things I put to the Tánaiste at another committee recently was that the data are not transparently available to the public, or even to people like me who are not the general public in that we have access to all sorts of things. It is not immediately obvious. Part of the point of performance budgeting is not just that we get an evidence base but also that we build public trust that tax is being spent properly and well, and we have an issue with that in this country.
Will Dr. Moran talk a little bit about access to information and legibility for the public around equality budgeting, green budgeting and so on?
Dr. Patrick Moran:
The whole performance budgeting framework started out with adding information into the Revised Estimates on what the actual deliverables were in services and activities and what outcomes they were supposed to influence. That has been successfully rolled out for a number of years. The amount of performance budgeting information that is included and published every year in the Revised Estimates Volume, REV, has grown as well. This was expanded to include equality budget metrics as well. Last year, all Departments reported equality budgeting and equality metrics. This year, I believe that every Department will report equality metrics by programme. This is where the performance budgeting information gets published on a yearly basis.
The other big source of information there is the public service performance report. It gets published around May each year.
One of the things that has come across this committee's desk previously - and it came up at the health committee too - is that often the performance indicators are written by the people or the Department who are running the programme. This might not always be the best reflection of outcomes. Sometimes the authors write a performance indicator because they are looking for an answer that they can actually achieve, not necessarily the right outcome. Is third-party reporting, or some kind of independence in that process, something the Department has considered?
Dr. Patrick Moran:
Certainly there is a fine line to be trodden there in some respects, because ownership must remain within the line Department that is responsible for the activity. We cannot dictate to them which metrics they should be reporting, or which metrics they should consider to be the most important. Equally, there is a risk that you will pick the metrics that you believe the Department will do well in.
Ms Caroline O'Loughlin:
I will make a couple of points on that. The Chair asked if we audit. As Dr. Moran has said, the Departments must retain ownership. When they appear before the committees, they cannot say that the Department of Public Expenditure and Reform told them to pick those metrics. They know their work best and they can tell where the priorities are. The Chairman asked if we audit them. We provide a lot of guidance within the performance budgeting the division and within the Vote section. Within the Department of Public Expenditure and Reform there is a dedicated Vote section for each Department. We provide as much guidance as we can but ultimately the Departments must retain ownership so they are answerable on those.
Ms Caroline O'Loughlin:
That must be addressed within the scrutiny when they appear at committees. As was said, and we have had this conversation at previous meetings of the Committee on Budgetary Oversight, the public service performance report is an excellent tool for transparency and accountability of how public expenditure is allocated, and how impactful that is. A big part of that is to do with the scrutiny of that and how this information is used. When the Departments appear before the committees this information should be looked at and the Departments should be challenged. That is part of it. They must be asked why they picked the metrics, if they are the most appropriate ones, and what do they actually tell.
Reference was made earlier to the quality of accessibility of the information. When we are collecting this information and working with the Departments to get it, we very much keep in mind that this cannot be information that is so technical that only people with financial expertise can access it. We make sure that the information is targeted at the general citizen, so that he or she can understand what is being done with that, and at the people such as those on this committee, who are challenged with scrutinising that. Again, these are people who may not be financial experts. A huge part of our work is to make sure that this information is very accessible.
There are two points within the budgetary cycle where performance budgeting is captured. One is in the Revised Estimates Volume, which is published each December. As we know, this is a very data-heavy document. It is not the most appealing read for somebody to pick up. We do a lot of work in the public service performance report to make sure that this information is as accessible as possible. We have spoken with this committee previously about the structure of that. We take back feedback from all committees and stakeholders, and particularly from this committee, on how that information should be captured so that it is a tool in the dialogue and the scrutiny of public expenditure. Every year we try to ensure that this best serves this purpose.
Dr. Patrick Moran:
If I may, I will add to that point around the specific availability around metrics. For well-being budgeting there is a well-being dashboard published on the Central Statistics Office, CSO, website, which gets updated. That gives national indicators and trends in time over those. It is very useful in getting a handle on what areas we need to look at and how they perform comparatively. With regard to embedding this within Departments and them carrying out comprehensive and rigorous assessments of the well-being impacts, they need to pick their own metrics for that as well, depending on what the policy question is and depending on the cohorts involved.
I would suspect that it is challenging to get Departments to do that when it is not a legislative necessity. I noticed that some countries have a future generations commission that require and make well-being budgeting a mandatory exercise. We can only hope that we could do that some day.
Dr. Patrick Moran:
It is in Departments' own interests to do that to maximise the impact of their policies. On equality budgeting, the Revised Estimates Volume metrics have an equality metric for each programme. There is also a national equality data strategy being developed at the moment. That is due to be made available in 2023. It is being led by-----
Dr. Patrick Moran:
No, I do not. The CSO is heavily involved in that also. Of all the areas, green budgeting is the area that has really good empirical data and outcomes around carbon emissions and everything else. There is a lot of scope there for connecting up expenditure with the actual effect and the outcomes.
I thank Dr. Moran. I will now ask my final question. When the Minister for Finance, Deputy Donohoe, was with us last, we discussed VAT, the greening of VAT, and that the EU has slightly changed its approach and is interested in a way that perhaps it was not before in talking to countries about variations of VAT that would lead to carbon savings. Is any work being done on that? I refer, for example, to measures in France that were brought in for a lower VAT rate on repair, or for electrical items that could more easily be repaired, or for the rental of clothes and so on. It recognises things that are identifiably more green.
It would be good if anyone had any information on this. It does seem that if the EU is open to the discussion, then the Department would have to give somebody that job of finding out what could be done in that regard.
Okay. We have no more questions. That concludes the session. I thank the witnesses for attending tonight. I am aware that this committee can go late. The meeting is now adjourned until Wednesday, 9 November. I thank everyone for their attendance.