Oireachtas Joint and Select Committees
Thursday, 17 November 2022
Public Accounts Committee
2021 Annual Report of the Comptroller and Auditor General and Appropriation Accounts
Vote 7 - Office of the Minister for Finance
Finance Accounts 2021
2021 Report on the Accounts of the Public Services of the Comptroller and Auditor General
Chapter 1 - Exchequer Financial Outturn for 2021
Chapter 2 - Net Cost of Banking Stabilisation Measures
Chapter 22 - Ireland Apple Escrow Fund
9:30 am
Brian Stanley (Laois-Offaly, Sinn Fein)
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I welcome everyone to the meeting. We have received apologies from Deputies Kelly and Carthy. If attending from within the committee room, attendees are asked to exercise personal responsibility to protect themselves and others from the risks of Covid-19. Members of the committee attending remotely must continue to do so from within the precincts of Leinster House. This is due to the constitutional requirement that, in order to participate in public meetings, Members must be physically present within the confines of the Parliament.
The Comptroller and Auditor General, Mr. Seamus McCarthy, is a permanent witness to the committee. He is accompanied this morning by Ms Orla Duane, deputy director of audit at the Office of the Comptroller and Auditor General.
This morning, we will engage with officials from the Department of Finance to examine the 2021 appropriation account for Vote 7 - Office of the Minister for Finance, Finance Accounts 2021 and the following chapters of the 2021 Report on the Accounts of the Public Services of the Comptroller and Auditor General: chapter 1, on the Exchequer financial outturn for 2021; chapter 2, on the net cost of banking stabilisation measures; and chapter 22, on the Ireland Apple escrow fund. The Department has also been advised that the committee may also wish the examine the following during the meeting: expenditure relating to the liquidation of the Irish Bank Resolution Corporation, IBRC; the funding of superannuation liabilities at the Financial Services and Pensions Ombudsman, FSPO; exceptional payments made from the Central Fund to the European Union arising from an audit of customs; and the separation of Irish Water from the Ervia group.
We are joined by the following officials from the Department of Finance: Mr. John Hogan, Secretary General; Ms Emma Cunningham, assistant secretary; Ms Scline Scott, principal officer; Mr. John McCarthy, chief economist; and Mr. Des Carville, assistant secretary. We are also joined by Mr. Dermot Nolan, principal officer in the finance Vote section at the Department of Public Expenditure and Reform. All of the witnesses are very welcome.
I remind all those in attendance to ensure their mobile phones are on silent mode or switched off. Before we start, I wish to explain some limitations to parliamentary privilege and the practice of the Houses as regards reference witnesses may make to other persons in their evidence. As the witnesses are within the precincts of the Parliament, they are protected by absolute privilege in respect of the presentations they make to this committee. This means that they have an absolute defence against any defamation action for anything they say at the meeting. However, they are expected not to abuse this privilege. It is my duty as Cathaoirleach to ensure it is not abused. Therefore, if the witnesses' 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 such directions.
Members are reminded of the provisions within Standing Order 218 such that the committee shall refrain from inquiring into the merits of a policy or policies of the Government or a Minister or the merits of the objectives of such policies. Members are also reminded of the long-standing parliamentary practice that they should not comment on, criticise or make charges against a person outside the Houses or an official either by name or in such a way as to make him or her identifiable.
I call the Comptroller and Auditor General to make his opening statement.
Mr. Seamus McCarthy:
All revenues of the State must be paid into the Central Fund of the Exchequer, unless required otherwise by legislation. Funds are issued from the Central Fund on the authority of the Oireachtas to pay for public services, either through annual voted provisions in the estimates process or under standing statutory provisions, to pay for what are called Central Fund services. The finance accounts are prepared each year by the Department of Finance to present an account of the Central Fund transactions, together with other information, including information about the national debt.
Chapter 1 of my report on the accounts of the public services is a recurring chapter, designed to summarise the transactions on the Central Fund in a more accessible manner and to highlight key trends over time. In 2021, receipts into the Central Fund totalled €82.2 billion. Payments from the Central Fund totalled €89.6 billion resulting in an Exchequer deficit for the year of just under €7.4 billion. At the end of 2021, Ireland’s national debt stood at €237.2 billion. This was up €17.7 billion from the end of 2020. However, the cost of servicing the national debt in 2021, at €3.75 billion, was 20% lower than in 2020 as a result of the National Treasury Management Agency's ability to avail of the prevailing low interest rates over recent years.
Ireland’s contribution to the EU budget was €3.5 billion in 2021. This was €937 million, or 36%, higher than in 2020.
In addition to the impact of normal economic growth, the increase in contribution in 2021 related to the commencement of a new budgetary cycle for the EU, the impact of Brexit on trade levels, a new levy of €146 million related to the level of unrecycled plastic waste in Ireland, and correction of prior year under-contributions of almost €186 million.
A new transaction that emerged in 2021 related to the State's liability in respect of the Eircom No. 2 pension fund. The fund's assets were exhausted in early 2021 and the Exchequer paid €81.2 million into the scheme to meet pension liabilities in the year. The latest actuarial valuation, as at October 2021, calculated the outstanding State liability to the scheme at €1.1 billion.
Chapter 2 reviews the estimated net cost to this State, as at the end of 2021, of the complex and interrelated public measures undertaken in response to the banking and financial crisis that commenced in 2008. We estimated that the State invested a total of €66.8 billion to stabilise Ireland's banks. There have been significant recoveries from the investments, including the proceeds of share sales, dividends, and Central Bank profits, offset by borrowing costs and other expenses. At end 2021, the State expected to recover some further value from its remaining ownership of shareholdings in some of the banks, and some further surplus funds from the National Asset Management Agency, NAMA. Taking all the cash flows into account, the examination estimated that at the end of 2021 the net cost to the State from the banking stabilisation measures was around €45.7 billion. At an individual institution level, the most significant net costs were in respect of the Irish Bank Resolution Corporation, IBRC, and AIB. Their stabilisation had an estimated net cost of €37.3 billion and €13.1 billion respectively.
From previous reports, Members are probably familiar with the origin of the Ireland-Apple escrow fund. Acting as the agent of the Minister for Finance, the NTMA produces annual financial statements for the fund. The net assets of the escrow fund were €13.633 billion at year end 2021. This represents a decrease of €351 million from end 2020. The reduction in net asset value reflected a third-country adjustment amounting to almost €246 million. Within the scope of the EU Commission's decision, this refers to a situation whereby profits subject to tax in Ireland can be reduced if Apple was required to pay taxes in another jurisdiction in respect of the same profits. The remaining €105 million decline in value for the year reflected the prevailing negative interest rate environment, negative yields on bonds, and the fund’s operating expenses.
The 2021 appropriation account for the Vote for the office of the Minister for Finance records gross expenditure of €36.4 million. This was divided between two expenditure programmes. These related to the costs incurred in respect of economic and fiscal policy, on which the Department spent €24 million, and banking and financial services policy, on which the Department spent €12.4 million. The economic and fiscal policy programme expenditure includes €8.2 million spent on the disabled drivers and passengers fuel grant, which, unusually, is administered by the Department of Finance. There were appropriations-in-aid of Vote 7 totalling €1.15 million in 2021, bringing the net spend to €35.2 million. The surplus for the year was €4.3 million and, in accordance with the standard rules for appropriation accounts, this was liable for surrender at year end. I am glad to say I issued a clear audit report in relation to the account.
Brian Stanley (Laois-Offaly, Sinn Fein)
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I thank Mr. McCarthy. Mr. Hogan has five minutes to deliver his opening statement. At nine pages, it is quite long. In the circumstances, I ask him to please summarise it.
Mr. John Hogan:
I thank the Chair and committee for the opportunity to address them. I am accompanied by Mr. John McCarthy, the Department's chief economist, Ms Cunningham, head of tax, Mr. Carville, head of the shareholding and financial advisory division, Ms Scott, head of corporate affairs, and Ms Laura Cunningham, our finance officer. I will focus on the specific items on today's agenda and try to keep my comments brief.
Before beginning with the appropriation accounts, I thank the Comptroller and Auditor General. We are always grateful to his office for the engagement and assistance we receive in ensuring the Department produces accounts that meet the highest standards in public accounting. The estimate for the Department for 2021 was set at €40.66 million, or €39.51 million net of appropriations-in-aid available. The gross outturn spend for the year was just over €36.3 million, which was €4.28 million or 10.5% under the available allocation. As a result, the Department surrendered €4.28 million to the Exchequer. The end-of-year surplus arose for the following reasons: there was an underspend of more than €1.9 million on consultancy and other services costs; approximately €670,000 of the capital budget was left unspent as a result of public health restrictions in the construction sector; for similar reasons, there was an underspend on travel and subsistence of €450,000; and there was an underspend on the disabled drivers fuel grant scheme of €2.79 million. That scheme is demand-led and difficult to predict with great certainty.
With regard to the Exchequer financial outturn for 2021, I draw the committee’s attention to the following key points. Despite the continuing impact of the pandemic, tax revenues held up very well, rising by €11 billion or 20% on 2020. The two key drivers of the better than expected performance were income tax and corporation tax. Income tax is the largest tax head, accounting for 39% of overall tax revenues in 2021. Taxes in the year were €26.7 billion, almost €4 billion higher than the previous year. The strong performance in income tax was very encouraging.
The economy in general, and the labour market in particular, adjusted well to the imposition of public health restrictions. Generally speaking, the economic impact of each successive round of restrictions was less severe than those of the previous rounds. The critical role of the Government’s main income and business support measures, namely, the pandemic unemployment payment, PUP, the employment wage subsidy scheme, EWSS, and the Covid restrictions support scheme, CRSS, should not be underestimated. Despite their significant costs, in the absence of the measures, the position for households, businesses and the economic situation, including the public finances, would have been far worse.
Corporation tax receipts once again over-performed, mainly due to high levels of profitability in a number of key sectors. Deputies will be aware that the Department of Finance published a paper in September this year, De-Risking The Public Finances: Assessing Corporation Tax Receipts. That paper estimated the level of corporation tax, CT, revenue at risk in 2021 could be in the region of €4 billion to €6 billion. The fiscal metrics published with budget 2023 reflect this underlying vulnerability. The GGB*, general Government balance, adjusted for excess CT, will be reported in all future documentation. The domestically focused tax heads also recovered strongly as public health restrictions eased. VAT receipts, for instance, increased by 24%. On the expenditure side, total net voted expenditure was €71.6 billion, an increase of €3.7 billion, or 5.5% on 2020.
Moving to the chapter on banking stabilisation measures, I note the estimated cost has increased from €41.7 billion at the end of 2018 to €45.7 billion at the end of 2021. The increase was primarily due to the value of the State’s investments in the three banks falling over this time. The most significant costs to the State at the end of 2021 were in respect of the IBRC, which had a net estimated cost of €37.3 billion, the vast majority of which will unfortunately never be recovered. Of the three remaining banks, we have made good progress on reducing our shareholding during 2021 and 2022. Some €21.1 billion has been recovered by way of disposals, investment income and liability guarantee fees. As part of this activity, the State has fully disposed of its investment in Bank of Ireland. The remaining investments in AIB and Permanent TSB, PTSB, are currently valued at approximately €5.3 billion.
On the Apple escrow fund, the committee is aware that as part of the European Commission’s decision of August 2016, Ireland was ordered to recover from Apple the alleged State aid plus interest related to a ten-year period from 2003 up to 2014. Notwithstanding Ireland’s appeal against the Commission’s decision, the Government complied with its obligation to recover the sum of €13.1 billion, plus interest of €1.2 billion. The Minister agreed with Apple that the amounts collected would be held in an escrow fund until the legal process is completed. The Ireland-Apple escrow fund was established under the terms of a formal agreement between the Minister for Finance and Apple, pending the final outcome of legal challenges to the findings of a State aid investigation. The investment and management of the fund is jointly overseen by the Minister and Apple, with the Minister’s functions delegated to the NTMA. The financial statements for 2021, published in July 2022, set out the net assets of the fund at the end of December 2021 as totalling €13.63 billion. The year-on-year reduction in the balance on the account is primarily due to a third-country adjustment of €246 million, which was transferred out of the fund. There were also significant negative interest rate charges over recent years.
As Deputies will know, 2021 was a very challenging year. Families all over the country lost loved ones, front-line workers bravely continued to go to work to ensure the safety and health of the rest of us, and economic and social life was heavily curtailed. I take this opportunity to express my appreciation to the staff of the Department for their work during this period. Thankfully, much of the work of the Department could be done from home. However, staff members continued to service, in person, various Oireachtas committees, as well as attend on-site to produce the Department’s set-piece programmes of work, such as the budget and Finance Bill.
As the worst impacts of the pandemic receded earlier this year, the optimism that accompanied this was quickly tempered by the fallout from the invasion of Ukraine. The energy crisis precipitated by the war has led to an inflationary environment not seen in decades. As prices rise, the Government has sought to protect the most vulnerable. The Department of Finance is at the forefront of these efforts. Budget 2023 introduced a number of measures via the tax system to protect people’s incomes and alleviate some of the pressures individuals, families and businesses are facing.
The Department has also led the implementation of financial market sanctions against Russia. Officials from the Department continue to work with colleagues from across the public service to ensure these sanctions are implemented. The Government is committed to supporting Ukrainians as they flee the horror of the war. The Department will continue to do what it can to support that effort.
The global economic environment has worsened considerably since my last appearance before the committee. Rising energy prices have translated into higher prices for food, clothing and basic services across the world. Reduced real incomes, falling consumption and a slowdown in investment will likely lead to recessions in some of our key trading partners. Although better placed than most, Ireland is not immune to these global trends. In budget 2023, the Department revised downwards the forecast for modified domestic demand, which is the best measure of domestic economic conditions, by 2.7 percentage points to just 1.2% in 2023. Inflation is estimated to average at just over 7% next year and 2.4% in 2024. Like all central banks, the European Central Bank has been responding, raising interest rates in recent months. Increased rates mean higher borrowing costs for individuals and businesses, potentially dampening consumption and leading to less investment in the economy. In summary, the economic situation will worsen over the short to medium term.
In such uncertain times, the core mission of this Department, which is to lead in the achievement of the Government's economic, fiscal and financial policy goals, is critical. The senior management team and I will continue to work with the Government to ensure these goals are achieved.
I thank the committee for its invitation to address members as well as for their attention. My team and I are happy to take follow-on questions.
Brian Stanley (Laois-Offaly, Sinn Fein)
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I thank Mr. Hogan.
Paul McAuliffe (Dublin North West, Fianna Fail)
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I welcome Mr. Hogan and his team. Let us start with the external factors. Today, the British Chancellor of the Exchequer will introduce austerity measures amounting to nearly £24 billion and increase taxation by something similar. From an Irish perspective, this is in direct contrast with the €11 billion cost-of-living package we were able to put in place a number of weeks ago without borrowing. If we were to be uncritical, we would think that was great, but everything we learned from the previous recession has taught us we should be more critical and should examine our situations clearly.
I wish to discuss some of the external threats, not just to be all doom and gloom, but to try to ensure we are prepared and derisking where possible. I will first discuss the link between corporation tax and income tax. The numbers are concerning - five sectors account for the largest share of income tax receipts and approximately 85% of corporation tax receipts. Any shock in those sectors, particularly the multinational sectors, will have a significant impact on our revenue. Will Mr. Hogan discuss what the Department is doing to ensure the State is protected?
Mr. John Hogan:
There is a great deal of attention on the international situation. It is fair to say that, when we consider our position vis-à-visother countries, we are approaching the forthcoming difficulties from a position of relative strength. We have strong public finances as we move into a period of increased economic uncertainty. Some of that is down to what we are seeing in the corporation tax receipts. According to Revenue's data, corporation tax performed above expectations in 2020 and 2021. It represented a sizeable element of the Exchequer's tax take for those years - 22.6% in 2021 and 20.7% in 2022 - and was second only to income tax and VAT. Much of the increase we have seen in this regard is attributable to the higher tax receipts from the large multinational sector, as the Deputy alluded.
Looking at the picture internationally, there is a great deal of attention on what is happening in the tech sector in terms of announcements in recent weeks about job losses in particular and what we could describe as a realignment. Mr. John McCarthy might wish to comment on this, but our analysis is that some of the announcements in the tech sector almost point to a realignment of expectations. As we saw through the course of the pandemic when we all experienced working from home, there was a large and increased reliance on technology to allow us to do the important jobs we had to do. The Department had to top up its own IT infrastructure to facilitate all of that. To a certain extent, projections within the tech sector of a continuation of that is beginning to come up against a more uncertain economic future.
Paul McAuliffe (Dublin North West, Fianna Fail)
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Given the increase in corporation tax receipts in the years we are examining, does Mr. Hogan expect an increase in 2022?
Mr. John Hogan:
We are going to continue seeing an increase in the coming time. In recent years, the Department has tried to moderate expectations about what that might mean for the future. We have been consistent in identifying the potential risk. This risk was evident to us on a number of bases. First, was there the potential for continuation against the background of expectations in the industry? Second, could there be an economic shock? We have seen a shock unfolding before our eyes in recent months.
There has also been a fundamental discussion at international level through the OECD around the rewriting of international tax rules. The committee is well aware that that discussion surrounded two elements, namely, the minimum effective tax rate and the idea of the reallocation of taxing rights to other jurisdictions. Given that Ireland is at the centre of a multinational sector, we have been identifying that, over time, there could be a cost to us associated with those changes. That cost is interesting. Ireland has traded over recent years, in particular around our corporation tax policy, on the basis of three principles, those being certainty, predictability and stability. This has served us well in our ability to allow multinationals to locate here. Even though we have seen the potential of it costing us money, especially around the pillar 1 discussions at the OECD, we are willing to pay that price in terms of then having predictability, stability and continuity in the international tax framework.
Paul McAuliffe (Dublin North West, Fianna Fail)
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I suppose-----
Mr. John Hogan:
I am sorry, Deputy, but I will just finish the point. The reason for this is that, as we came out of the pandemic and, probably more importantly, following the reaction to the war in Ukraine, companies in the tech sector and across the other multinational sectors need to understand what the international tax framework is so that they can make investment decisions and invest in new technologies and research and development against a background of certainty about what that will mean for their tax planning.
Paul McAuliffe (Dublin North West, Fianna Fail)
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That point is well made. It was never about the rate and was always about the certainty. The Department expects that corporation tax receipts will increase next year. Is there a similar expectation that income tax receipts will increase as well?
Mr. John McCarthy:
I am happy to do so. We are looking at a strong increase this year. Last year, overall corporate tax receipts were of the order of €15 billion. We will probably take in €21 billion or €22 billion this year. I am not at all worried about this year. I am more worried about later years, especially if there is a shock to the ICT sector.
The Deputy was right in his opening remarks about the kind of co-movement or correlation between income tax and corporate tax. Many high-income jobs are in the ICT sector, the pharma sector etc. There is a double risk, so to speak.
Paul McAuliffe (Dublin North West, Fianna Fail)
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Will Mr. McCarthy point out the figure for the percentage of the overall income tax take paid by those high-income earners?
Mr. John McCarthy:
Absolutely. Some 500,000 workers - we have 2.5 million workers in the country - and ten firms account for 36% of total tax in the country. To put it another way, the top 25% of earners pay 80% of income tax. It is a very narrow and concentrated base. The Deputy's overall question was on what was being done to address this exposure. There are two points I would make in that regard.
Paul McAuliffe (Dublin North West, Fianna Fail)
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Before we move on to that, what I am trying to calculate is the lag.
At this point, we expect an increase next year, in both corporation tax and ICT. We can see the ICT sector making shifts at this point and I imagine the changes in the interest rate environment will have impacts in other sectors as well. Could that have an impact on the overall Irish taxation system in 2023 or 2024? Is that what we are expecting?
Mr. John McCarthy:
It is certainly a possibility. We have a slowdown in the ICT sector built into our numbers, but since we published the budget, it is fair to say the correction in the sector has been a little stronger than we might have thought. There are other issues going on on the corporation tax front, such as the exhaustion of intellectual property allowances, which is feeding through into this year's numbers, and that may offset it to some extent. Even so, there is certainly a risk to 2023 and, more likely, to the 2024 corporation tax number.
That is just on where the sectors are going. There are also risks on the policy front, which Mr. Hogan was talking about, through the base erosion and profit shifting, BEPS-----
Paul McAuliffe (Dublin North West, Fianna Fail)
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Our time is limited, and our guests were going to outline how we could change that risk. That figure of 500,000 workers in ten firms is stark. The capacity of the economy is such that if there are ten top firms, it is inevitable that the figure will be of that order no matter what we do as an economy. How can we prevent a cumulative collapse in both corporation tax and ICT? Is it a case of taking as much as we can while the international economy is doing well and build in some resilience for when it turns bad?
Paul McAuliffe (Dublin North West, Fianna Fail)
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Will Mr. McCarthy confirm the figure for that surplus?
Mr. John McCarthy:
I will do so in one moment. Second, the Minister tried to capitalise the national reserve fund, sometimes called the rainy day fund. He is putting €2 billion into the fund for this year and €4 billion for next year, so we will have that little bit of a fiscal buffer to be able to absorb, at least to some extent, the shock.
Paul McAuliffe (Dublin North West, Fianna Fail)
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I do not mean to editorialise what Mr. McCarthy is saying, but does he mean the rainy day fund may be used in 2023 or, more likely, in 2024 and that that rainy day fund is there to buffer against what might happen in that period?
Mr. John McCarthy:
Yes, the rainy day fund is there to buffer against lots of things, including a potential fall in corporation tax receipts. The Minister has said on numerous occasions that we are now living in a very shock-prone world. In this decade alone, we have had Brexit, a global pandemic and an energy price shock. The world is much more shock prone, which is why the Minister decided-----
Paul McAuliffe (Dublin North West, Fianna Fail)
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I have been a Member of this House for two and a half years and I am yet to have a month when we have not had a shock, between Covid and everything else.
I might move on to the interest rate environment and we can return to the other issues later. Mortgage holders are seeing increases in their mortgages, and people who might have had mortgages of the order of €1,200 a month are now paying €1,500 or €1,600. That has an impact on Ireland's borrowing requirements, the management of our national debt and the residual impact of bank stabilisation. Will the witnesses comment briefly on interest rates and on what we are doing to protect ourselves in the context of management of the national debt?
Mr. John Hogan:
We are doing our projections in respect of corporation for next year anyway, and our anticipation is there is not going to be any material impact, as we see it currently, for the period in 2023. The Deputy is absolutely right; the interest rate environment is changing and there is a reaction from central banks to the nature of the international environment they are facing. Central banks, over recent years through the pandemic, have been engaged in quantitative easing, QE, facilitating more money into the economy, but we are now seeing them move in an opposite direction, namely, increasing interest rates. Thankfully, the National Treasury Management Agency, NTMA, over recent years has done a very effective job in smoothing out and lengthening Ireland's debt profile. We have seen even in recent weeks an announcement that it is not going to need to go to the market for the remainder of the year, and I think it is calculating its likely borrowing for next year, which is going to be reasonably modest to cover two things. One is the expectation that the sovereign should be in the debt market and should continue to borrow to some extent, but the cash buffers it has, that is, the ability to smooth out and lengthen our debt profile, have been very effective for our approach.
The second point is that, as the Comptroller and Auditor General noted, our debt servicing costs have moderated over recent years and an effective job has been done on that, which again leads us into a strong position.
Paul McAuliffe (Dublin North West, Fianna Fail)
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I think I saw a figure suggesting that almost 90% of our debt has a maturity beyond five years. I would be concerned about the portion that has a shorter period than that because, obviously, interest rates are increasing. Has the Department crunched numbers for what impact the recent increase in interest rates will have on borrowing this year or next year?
Mr. John McCarthy:
A total of 98% of our debt instruments are at fixed rate and there is only one floating rate note left, namely, the old promissory note. The weighted average maturity of Irish debt is 15 years. Moreover, the NTMA would not have to go to the market if interest rates really ramped up because it has €35 billion of cash reserves that it borrowed during the 0% period that was there for a number of years, so there is a big cash buffer there. In the short term, the increase in interest rates can certainly be absorbed.
The Deputy asked about the general Government balance. There is a €6 billion surplus for next year but if we exclude what we see as transitory corporation tax receipts, it becomes minus €4 billion.
Paul McAuliffe (Dublin North West, Fianna Fail)
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My question related to the sum allocated to the rainy day fund.
Catherine Murphy (Kildare North, Social Democrats)
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I welcome the witnesses. It will be only a few short months until it is ten years since the Irish Bank Resolution Corporation, IBRC, was liquidated and we have another couple of years before the outworkings of that are complete. The briefing document refers to “a net estimated cost of €37.3 billion, the vast majority of which ... will never be recovered.” I cannot find a specific figure on that in the Department's most up-to-date progress report. I acknowledge there are unknowns but, when they referred to the “vast majority” never being recovered, do we have any idea what the net loss will be?
Mr. Des Carville:
I can help the Deputy there. In equity terms, about €35 billion went into the IBRC and Irish Nationwide. When we talk about how much we will realise, we have about ten assets left to sell. When I last appeared before the committee, in May, we had 12 assets and we have sold two pubs since then, and there is some litigation outstanding as well. There is a bit of uncertainty but, if I were to put a number on it for the Deputy, I think the recovery from the IBRC will be less than €1 billion, equating to a €34 billion loss.
Catherine Murphy (Kildare North, Social Democrats)
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Returning to the progress report and the remaining loan and asset portfolio, Russia and the Czech Republic account for 60%. How does that break down? Is it 50:50 or is the majority in the Czech Republic, or do we know?
Mr. Des Carville:
It is about two thirds to one third. I would be reluctant to give exact numbers but, to be clear, we wrote that report at the end of December last year, pre invasion. I think we could assume that the realisable value of the assets we have in those two jurisdictions is as close to zero as not making any real difference.
Catherine Murphy (Kildare North, Social Democrats)
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The assets are split across various sectors, including residential. Is that domestic?
Catherine Murphy (Kildare North, Social Democrats)
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In the US?
Catherine Murphy (Kildare North, Social Democrats)
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Why would they not have been sold?
Mr. Des Carville:
There are a couple of reasons. At the start of liquidation, it was a question of getting clear title to the assets. In some cases, it was quite tricky or difficult by dint of the underlying borrower and very complex structures. Particularly in the case of the Indian assets, for example, there was quite a saga.
Catherine Murphy (Kildare North, Social Democrats)
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It is a long number of years
Mr. Des Carville:
It is, but it was quite an ordeal trying to get a clear title to the assets.
The second issue was with the hospitality assets. The liquidators wanted a sale but, unfortunately, the pandemic struck. A pandemic would not be the time to sell a hospitality asset. Then, of course, we have the four assets in Russia and Ukraine. We cannot sell those at the moment.
Catherine Murphy (Kildare North, Social Democrats)
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When the IBRC work is finally concluded, what will happen to the records? Will they be transferred to the Department of Finance? Has that been decided or worked through?
Mr. Des Carville:
It has not been decided yet. The year 2024 is the target date for the completion of the liquidation. To the extent that there might be any assets left, we will have to figure out where they go within State infrastructure. Records, books and so on will be retained, as is normal in liquidations.
Catherine Murphy (Kildare North, Social Democrats)
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Obviously, there is going to be a change in terms of the special liquidators. How is that being managed?
Mr. Des Carville:
It is being managed very actively by me and my team. The liquidators who are partners in KPMG will remain partners there until April of next year. As a result, they have a 12-month notice period or a little more than that. We have been very actively engaged with the liquidators and the managing partner and senior partners within KPMG.
Catherine Murphy (Kildare North, Social Democrats)
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Is the handover going to cost money?
Catherine Murphy (Kildare North, Social Democrats)
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I want to ask Mr. Hogan about education and training in his Department. Who signs off on that? I would be supportive of the upgrading of people's skills in the public service. Who signs off on courses?
Mr. John Hogan:
It depends on the individual involved. It is usually the person's line manager. In my time within the Department, if there was a particular course that I needed to do, I went to my supervisor and identified it. The human resources people are involved as part of ensuring the training individuals are taking is consistent with the objectives of the Department.
Catherine Murphy (Kildare North, Social Democrats)
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In that regard, there was an item in the newspapers last week. I had a reply to a parliamentary question on a very expensive course whose cost was split between the NTMA and the Department. How did that come about?
Catherine Murphy (Kildare North, Social Democrats)
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Is that evaluated against other courses in other Irish universities, for example?
Mr. John Hogan:
The nature of these things is that the individual would look at opportunities to pursue similar courses here and elsewhere. This was one that was in the US. At senior level across the public service over the years, a number of people have partaken in courses external to the country. Part and parcel of that is broadening the perspectives of the individual and of organisation he or she works for and looking at other opportunities and new ways of thinking. That is something we are very minded to encourage in our Department, and I suggest this is the case in other Departments and organisations throughout the public service.
Catherine Murphy (Kildare North, Social Democrats)
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Where there is a very expensive course, how does one ensure the benefit over a period? Is there a clawback if somebody leaves?
Catherine Murphy (Kildare North, Social Democrats)
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How does it work? Does it relate to the cost of the course?
Mr. John Hogan:
It relates to the cost of the course in a particular year. Typically, fees for courses are paid yearly or, in the context of some I am familiar with, upfront where pursued over a six-month period. If the individual leaves during the year or whatever the period is, there is a clawback. There are standard arrangements for the refunding of fees. We see our own Department as a very effective learning and development organisation. We invest strongly in the sort of people we have in the organisation. We try to offer them opportunities to enhance their personal development and career opportunities. In turn, we see a benefit for the organisation in all that.
Catherine Murphy (Kildare North, Social Democrats)
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Can I move on to something else related to the briefing note, namely the motor tax receipts? They were down financially between 2020 and 2021, which is not a huge surprise. Obviously, the revenue is collected centrally. It used to be ring-fenced for the Local Government Fund, which has been replaced by the local property tax. Does the money collected centrally go entirely to the Department of Transport?
Catherine Murphy (Kildare North, Social Democrats)
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Do the delegates know how much goes to the Department of Transport?
Catherine Murphy (Kildare North, Social Democrats)
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To save me writing a parliamentary question, the delegates might come back to me with the information.
Brian Stanley (Laois-Offaly, Sinn Fein)
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Could the motor tax figure requested be obtained before the end of the meeting?
Imelda Munster (Louth, Sinn Fein)
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I want to start with the disabled drivers and passengers scheme. Did I hear Mr. Hogan say that there was an underspend of €2.7 million in 2021?
Imelda Munster (Louth, Sinn Fein)
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Was it €2.7 million?
Imelda Munster (Louth, Sinn Fein)
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I want to talk about the nature of the scheme. The Ombudsman described it as excessively restrictive. After June 2020, when the individuals affected took the matter to court and won the case, nothing appeared to change. The Minister made technical changes but they did not alter the qualifying criteria for the scheme or make it easier for people to qualify. The board itself had a meeting with the Minister in March 2021 and continued to say there was insufficient room to make the scheme more inclusive. In October 2021, the entire board resigned out of absolute frustration. It had had enough. The scheme is not fit for purpose.
Last week there was a response to a parliamentary question in this regard. The Minister indicated that the main conclusion of the criteria subgroup was that the scheme needs to be replaced with a fit-for-purpose, needs-based vehicular adaptation scheme in line with best international practice and that he and his Department share that view. Did it take two years, from June 2020 to November 2022, for the penny to drop?
Imelda Munster (Louth, Sinn Fein)
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Sorry, but in June 2020 when the High Court decision was made and those individuals won their case, the board was coming to the Department flagging that the scheme was not fit for purpose. The Ombudsman passed comment on it. Two and a half years later it has still not been reviewed. Is that correct?
Mr. John Hogan:
Maybe I could take the Deputy through what has happened around this. I think when I was here in May, we also had an engagement on this. At that time I think I explained to the Deputy that the scheme was introduced in the 1960s with a very 1960s view of disability. I expressed the view then that we now have a better understanding of the nature of disability. There were applicants in the scheme, and it is a valuable scheme for those who can participate in it, but the Deputy is correct that there is a rigidity associated with the criteria for accession to the scheme. We often found that the nature of the assistance that the individual necessarily needs is not actually what is available in this scheme. It probably goes beyond what some people may actually need. That was the nature and the focus for us in our policy review and policy approach on this. The Deputy is right; the appeal board did resign. We are in the process of finalising the creation of the new appeal board. That is important in two respects -----
Imelda Munster (Louth, Sinn Fein)
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On the process, there were two campaigns looking for expressions of interest. How many expressions of interest were received in each campaign?
Imelda Munster (Louth, Sinn Fein)
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Three from the two campaigns. How many expressions were there in the first one?
Imelda Munster (Louth, Sinn Fein)
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Can Mr. Hogan get is for us? Just out of curiosity.
Imelda Munster (Louth, Sinn Fein)
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How many positions are available? On these questions, the Department has been banging on about this for two and a half years.
Imelda Munster (Louth, Sinn Fein)
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We need five. Right.
Imelda Munster (Louth, Sinn Fein)
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Is there a timeframe for when the new board will be set up?
Imelda Munster (Louth, Sinn Fein)
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Will it operate as a stopgap until reforms are brought it or how will it work?
Mr. John Hogan:
To be honest, we probably see this as a legacy scheme at this stage. It is an important legacy scheme for people who can still access it and important for us to have to board of appeal available because there are circumstances where appeals are successful and we want to have that in place. Can I talk about the outgoing board of appeal, because there is something very important around all of this? They worked with the Department and we put a team together to look at best international practice and what other jurisdictions are doing-----
Imelda Munster (Louth, Sinn Fein)
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This is the board that resigned.
Imelda Munster (Louth, Sinn Fein)
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They had come to the Department months earlier-----
Imelda Munster (Louth, Sinn Fein)
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The point is, we are where we are because the board came to the Department and flagged how restrictive the scheme was but no action was taken. The board in utter frustration resigned in its entirety. The Department is advertising for new boards. Mr. Hogan does not think that they got anyone in the first tranche and the second there are three who are intended and five are needed.
Imelda Munster (Louth, Sinn Fein)
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I am just curious, when the new board meets, perhaps in a couple of weeks' time, will it operate under the scheme as it has been?
Imelda Munster (Louth, Sinn Fein)
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It is as it has been.
Mr. John Hogan:
That is what I am saying. It will be as it has been. That is what is in the legislation. There is no change in that.
It will be the same scheme as we had before but the important piece in all of this is that there is a block of work that has been conducted by officials in the Department with the outgoing board of appeal looking at best international practice. It runs to five papers and two appendices, with 250 pages of policy analysis, which we have passed over to the review group which is considering the nature of what should and could happen next around all this.
Imelda Munster (Louth, Sinn Fein)
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Is there a timeframe for the review of the scheme?
Ms Emma Cunningham:
It is meeting at the moment under the auspices of the Department of Children, Equality, Disability, Integration and Youth. It has had a number of meetings over the course of the year and I understand it is due to conclude its work before the end of the year.
Imelda Munster (Louth, Sinn Fein)
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Will that include a total revamp of the scheme so that it will be much more accessible and fit for purpose?
Mr. John Hogan:
That is a matter for the review group to decide upon. I think what we are looking at here is not something prescriptive in legislation that we see now but a change in the nature of the provisions of support away from the prescriptive basis in the legislation and more towards a needs-based assessment.
Imelda Munster (Louth, Sinn Fein)
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That is okay. If that comes to fruition, it will be welcome. I want to-----
Mr. John Hogan:
Sorry Deputy but I think there is an important point. I know that constituents go to representatives such as the members here and they almost expect there is something in the system whereby people like this can be helped but the rigidity of the scheme which was under our auspices meant that people were often frustrated because they needed something like an additional rail in their car or seating at the back that was more accessible and all we could offer them was a complete upgrade of their motor.
Imelda Munster (Louth, Sinn Fein)
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But Mr. Hogan can understand the frustration that it is only now the Department is undertaking a review, that is, it took for people to take it to the courts and for the board to resign and still the review is not finished. That is the point that I am making.
Imelda Munster (Louth, Sinn Fein)
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For people outside with disabilities that is cold comfort.
Imelda Munster (Louth, Sinn Fein)
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I want to raise another issue. As of September, there were 670 still awaiting appeal. Has there been an increase in funding for the scheme for 2023? If there are 670 people still waiting?
Imelda Munster (Louth, Sinn Fein)
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Right, but has there been an increase in funding for 2023 given that the scheme will be reviewed and be more accessible? There are 670 people waiting on appeals.
Imelda Munster (Louth, Sinn Fein)
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And at what stage does that change? Say 50% of those 670 have their appeal granted, where is the funding? If the scheme is under review to reflect disabilities, access and inclusively why would you not -----
Ms Emma Cunningham:
One of the challenges of the scheme to date is that the numbers who have been successful at appeal have been quite low because of the prescriptive nature of this. The budgeting is done on the basis of the existing scheme as set out in legislation. If there was a decision taken to bring in a new scheme and there was legislation, then the budget would be adapted for that but when we did the budget we had to do it on the basis of the scheme as it exists.
Mr. John Hogan:
Given that these payments are often made in arrears, it probably would be 2024 before we would see the impact. Therefore, it is an issue for the 2024 Estimate rather than the 2023 Estimate. The reality is that we hope that as the board of appeal works through the appeals, it might give us an indication at an early stage in 2023 as to what the likely impact in 2024 would be.
Imelda Munster (Louth, Sinn Fein)
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Mr. Hogan hopes that board will be set up in the next few weeks and certainly before the end of the year?
Imelda Munster (Louth, Sinn Fein)
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I know that, yes. The board resigned.
Imelda Munster (Louth, Sinn Fein)
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Yes, but this has been going on since last year.
Brian Stanley (Laois-Offaly, Sinn Fein)
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On the board positions, five is the minimum required and there are three. Two rounds of advertising were done. Is there further advertising at present to get the additional two?
Colm Burke (Cork North Central, Fine Gael)
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I thank the witnesses for appearing before the committee this morning to deal with the issues. Regarding the bailout of the banks, the estimated net cost for IBRC was €37.3 billion but the overall cost is around €45 billion. Can we get a breakdown of what each of the financial institutions cost us? I am looking for the net cost in real terms of AIB, Bank of Ireland, PTSB and all the other banks. Is it possible to get that?
Mr. Des Carville:
I can give the numbers as of a couple of evenings ago - the net position in terms of how we calculate it, which is on a cash basis and so is a little different from how the Comptroller and Auditor General calculates because the Comptroller and Auditor General includes the interest cost as well. The net position for AIB is €4.3 negative. Bank of Ireland in which we have a zero shareholding is €2.1 billion positive. PTSB is around €700 million negative. So, it is €2.95 billion negative at the moment. Just to put that in context-----
Colm Burke (Cork North Central, Fine Gael)
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Is Mr. Carville saying PTSB is €2.95 billion?
Colm Burke (Cork North Central, Fine Gael)
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We still have shares in AIB. That is taking into account the value of those shares.
Colm Burke (Cork North Central, Fine Gael)
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Therefore, in real terms, AIB cost us €4.3 billion. The big one was that IBRC was over €37 million in real terms.
Colm Burke (Cork North Central, Fine Gael)
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We have now sold all the shares in Bank of Ireland meaning that we have nothing left to recover from Bank of Ireland, but the net cost to the State is around €2.1 billion in real terms.
Colm Burke (Cork North Central, Fine Gael)
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I want to clarify. We put in over €74 billion in real terms in the amount of loans that were owed by people to the banks where the State as such took responsibility. Then we had a net cost to the State. I am talking about the net cost of Bank of Ireland to the State at the end of the day.
Colm Burke (Cork North Central, Fine Gael)
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Therefore, we made a gain on Bank of Ireland, but what about AIB?
Colm Burke (Cork North Central, Fine Gael)
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Okay.
I move to a different issue. At the end of 2021 we had €237 billion in borrowings in real terms. While interest rates are low, looking at servicing that borrowing in the future, when will there be an increase in the cost of interest on that borrowing over the next three to four years? What is the calculation on that?
Mr. John McCarthy:
Because we are running surpluses etc., the NTMA does not need to go to the markets that much over the coming years. However, if corporation tax were to fall, then obviously there would be a deficit and it would need to go to the market. If it was going to the market now, we would be borrowing at about 2.5% or maybe 3%. Markets are pricing in further interest rate increases later this year and early into next year. As the NTMA goes to the market, the additional borrowing cost will rise. Actually, it does not have to refinance that much debt over the next two to three years. It will take a long time; it will take a few years before the increase in interest rates feeds through into higher borrowing costs.
Colm Burke (Cork North Central, Fine Gael)
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What was the net interest on that borrowing in 2021?
Colm Burke (Cork North Central, Fine Gael)
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Is that likely to increase for 2022 and 2023? I am talking about the immediate-----
Colm Burke (Cork North Central, Fine Gael)
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The debt was at €237 billion at the end of 2021. From here on in if we have a surplus and we do not have to borrow extra money, how much of that will be paid back over the next four years?
Mr. John McCarthy:
There are marginal differences in what the NTMA calls debt and what the CSO calls debt. In 2021 it was €236 billion. That falls to €225 billion for this year and it falls very gradually then over the next two to three years, coming out at €224 billion at the end of 2025. I want to stress that is our baseline scenario. If things go wrong, for instance on the corporation tax front, then that will obviously be higher. We have published our debt interest costs. They are very similar to what the Secretary General said there. It is in and around €3.5 billion for the next couple of years. It does not to change that much.
Colm Burke (Cork North Central, Fine Gael)
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Therefore, we are reasonably secure regarding the borrowing we have. We will not have a sudden increase in rates as happened ten or 15 years ago.
Mr. John McCarthy:
To put it maybe the best way, about ten years ago we were spending about 13% of all tax revenues servicing debt. That figure is about 3% this year. The fact that the public finances are in reasonable shape and the fact that interest rates have fallen are the key drivers there, as well as, of course, the rise in tax revenues. I want to stress that everything I have said is on the basis of our baseline scenario that there is no major hit to corporation tax, no major hit to the economy.
Colm Burke (Cork North Central, Fine Gael)
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I wish to ask about two other issues. Our contribution to the European Union has increased substantially in the past 12 months. I believe it is about €3.5 billion now. Will that increase over the next three to four years or is it set at the same rate?
Colm Burke (Cork North Central, Fine Gael)
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We need to plan to take into account that the contribution will increase.
Colm Burke (Cork North Central, Fine Gael)
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Regarding the changes that will come on taxation as regards the 15% corporation tax, over what time period will that come into place?
Ms Emma Cunningham:
Yes. There is a directive at European level to bring in the 15% rate. It still has not been agreed at European level, but the expectation is that it will be. On that basis, we would introduce it in the Finance Bill next year for implementation in 2024. The agreement is still being discussed at the OECD, but the expectation is that there would be an international agreement and multilateral convention. The expectation is that it would be agreed in mid-2023 with a 2024 implementation date.
Colm Burke (Cork North Central, Fine Gael)
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My understanding is that the forecast for corporation tax yield is approximately €21 billion or €22 billion. Am I correct in that?
Colm Burke (Cork North Central, Fine Gael)
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Regarding the 15%, I know there will be a variation because we will not be able to collect the same level of tax from companies here because of the new rules.
By how much is the yield expected to change by 2025, even if the production and export levels of these companies remain the same?
Mr. John Hogan:
It is difficult to estimate. Earlier in the session, I talked about the two-pillar structure at play in the OECD. Pillar 2 is the minimum effective tax rate. The other pillar is the reallocation of taxing rights, which was part of the overall agreement at the OECD. It is fair to say that the detail of the implementation of that pillar has been difficult to finalise. Ms Cunningham is on the OECD Committee on Fiscal Affairs at which detailed discussions are going on as to what that might mean. Until we see how that turns out, it is difficult for us to assess other than in broad terms. In the last number of years, we have spoken of the need to be prudent in our expectations around corporation tax receipts. That is probably amplified now by what is happening internationally.
Colm Burke (Cork North Central, Fine Gael)
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Could we see a substantial drop in corporation tax as a result of the alignment in how we deal with taxation?
Ms Emma Cunningham:
It is a factor of a number of things. It is the deal, certainly. There will be a certain reallocation of profits from countries like Ireland to market jurisdictions. We have also had healthy corporate tax receipts in recent years and the more a country has, the more that is subject to reallocation. That was the subject of a paper published by the economic division in recent months. It highlighted the risks to our corporation tax receipts, a significant portion of which might be considered vulnerable or unlikely to reoccur in future years.
Mr. John McCarthy:
The Chair asked me to come back during the meeting with a response to Deputy Catherine Murphy's point. It is as I said - motor tax comes into the Exchequer. It all goes into one bundle. It is not hypothecated or ring-fenced to go to the transport Vote or spending in that Department. It links in with the Department of Public Expenditure and Reform separately. There is no ring-fencing.
Brian Stanley (Laois-Offaly, Sinn Fein)
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We are not able to ascertain how much money from that goes to the transport-----
Brian Stanley (Laois-Offaly, Sinn Fein)
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That is a pity because motorists would be interested in knowing what the transfer is. That has always been a question over the years. Motor tax revenue was used for the Local Government Fund and funded everything at local government level, which was a bit of a mishmash. The hope was that when it ended, we would be able to see that direct transfer.
Mr. John Hogan:
I will add one important point, to which Deputy Colm Burke referred and which was raised previously. The Deputy is right that there are higher yields expected in the financial markets at the moment. I will make four points on the situation with our national debt as a result of the NTMA action. First, the cash balances on hand, as Mr. McCarthy mentioned, are likely to be of the order of €20 billion heading into 2023. This allows the NTMA flexibility in looking at any issuance it needs to do during the course of next year. Public finance is supposed to be in surplus, so that also adds to the comfort around the piece and reduces the amount the NTMA has to issue. There is a long average life of the debt on our books. I think it is one of the longest average lives in Europe at the moment. The next bond maturity is in March and there is another one at the end of quarter 4. These total about €9 billion. The NTMA, because of the balances, has an opportunity to make its intervention in the market at an appropriate juncture. Finally, as it looks through the three-year window from 2023 to 2025, coupons ranging from 3.5% to 5.5% are associated with debt that will expire in that time. We are seeing a higher yield expected at the moment, but it is not quite at the level of what is maturing at this stage. Those are important points because the Deputy is right that, given the high level of debt we have as a sovereign, the way we manage it and how we look into the future of it is important for the committee to understand.
Brian Stanley (Laois-Offaly, Sinn Fein)
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In relation to Irish Water, there is a loan from 2021 of €130 million issued by the Exchequer to Irish Water. Under the agreement, €1 billion is to be made available to Irish Water to repay the existing non-domestic and commercial debt. Will the witnesses explain what is happening there?
Brian Stanley (Laois-Offaly, Sinn Fein)
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That will lower the interest rate. What are the terms of that loan agreement?
Brian Stanley (Laois-Offaly, Sinn Fein)
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Please do so. A bone of contention for many of us, raised by Deputy Murphy and me at the time, was that because of the way it was structured, Irish Water was not accountable to the Comptroller and Auditor General's office or the Committee of Public Accounts. The separation from Ervia is welcome. How much debt is held by Irish Water? Will all of that transfer when the change is made? Can we get the current level of debt?
Brian Stanley (Laois-Offaly, Sinn Fein)
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What kind of figures are involved?
Brian Stanley (Laois-Offaly, Sinn Fein)
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Is it €1 billion, €3 billion or €4 billion?
Mr. John Hogan:
I have a note here which states the replacement of Irish Water's non-domestic sector related debt was determined as €1.0216 billion out to 2024, as phase two of the replacement of the commercial debt. There is about €1 billion in that. For completeness, we will come back to the Chairman with a note on that part of it.
Brian Stanley (Laois-Offaly, Sinn Fein)
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Please do so. The cost is noteworthy. I submitted a parliamentary question some time back. In 2021, the overall cost in funding from the Exchequer was €9.34 billion. How much more has the Exchequer contributed this year and last year? That included an estimate for 2021 of €1.3 billion. The figure has continued to increase from €495 million in 2015, accelerating to almost €2 billion in 2019. It seems to be substantial.
Mr. John Hogan:
Yes. The note I have is not particularly clear but it might help. It states there is an overview, which I think we may have provided in writing to the committee, of seven individual facilities under the Minister's facility agreement signed on 24 June 2020. Facility 1 was €127 million committed for historic non-domestic borrowing; facility 2 was €111 million committed for 2019 non-domestic borrowing; facility 3 was €133.6 million committed for 2020 non-domestic borrowing; facility 4 was €116 million, initially uncommitted, for 2021 non-domestic borrowing; facility 5 was €146 million for 2022 non-domestic borrowing; facility 6 was €184 million uncommitted for 2023 non-domestic borrowing; and facility 7 was €204 million uncommitted for 2024 non-domestic borrowing. Facilities 1 to 3, covering pre-2019, 2019 and 2020, respectively, and totalling €371.6 million, were committed at the time of signing the agreement or paid out during 2020.
Facilities 3 to 7, inclusive, can be drawn down through a maximum of three utilisation requests in the year to which they relate.
Brian Stanley (Laois-Offaly, Sinn Fein)
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How much will the State need to provide this year?
Brian Stanley (Laois-Offaly, Sinn Fein)
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In total?
Brian Stanley (Laois-Offaly, Sinn Fein)
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Mr. Hogan has an overall figure for this. How much was provided in State funding between integration in 2013 and the end of operations in 2014?
Brian Stanley (Laois-Offaly, Sinn Fein)
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All State funding.
Brian Stanley (Laois-Offaly, Sinn Fein)
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I have a figure of €9.34 million up to June 2021.
Brian Stanley (Laois-Offaly, Sinn Fein)
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There are many figures. I am interested in looking at those. I do not have time to analyse that and combine everything. Is Mr. Hogan saying that the Department of Finance is not able to tell me the amount of funding provided to Irish Water from State coffers since its inception? That is the key question for us and the taxpayer.
Brian Stanley (Laois-Offaly, Sinn Fein)
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Would it be safe to assume, on the basis of what has been happening and the figures the Department has given out, that we are probably looking at approximately €10.5 billion at this stage?
Brian Stanley (Laois-Offaly, Sinn Fein)
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Absolutely. The question is about the total sum. Has there been any analysis of what was contributed by the State in the eight years prior to that, which went directly to the local authorities, and the resulting improvements to infrastructure? I do not see any great acceleration of it. I see much press and media every time there is a new pipe laid. A host of new technology was used in a Dublin facility a few years ago. As I said, it could not have been done by Irish Water. Apparently local authorities were incapable of doing it. I inquired at the time and it turned out that the pipe had been extended to the sea. One would not need an engineering qualification to figure that out. There has been much media and PR about the achievements. Considering that the Department of Finance is writing the cheques, has there been any analysis of overall funding going to local authorities for water services in the eight years prior to 2014? What have the results since then been?
Brian Stanley (Laois-Offaly, Sinn Fein)
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I understand that.
Brian Stanley (Laois-Offaly, Sinn Fein)
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I do not expect the witnesses to have it. Will they ask for it?
Brian Stanley (Laois-Offaly, Sinn Fein)
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A question arises about whether, if funding had to go directly to local authorities, with a senior engineer appointed in each local authority to oversee matters, the results would have been different. I am aware of an example where work carried out by Irish Water was much more expensive. I will not go into-----
Brian Stanley (Laois-Offaly, Sinn Fein)
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I know. I can give concrete examples. The Department of Finance will be asked to dig into its pockets for the Shannon scheme. Has Mr. Hogan concerns about the cost of that scheme and land acquisitions?
Brian Stanley (Laois-Offaly, Sinn Fein)
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Yes.
Brian Stanley (Laois-Offaly, Sinn Fein)
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What figure has the Department of Public Expenditure and Reform given to the Department of Finance? Has it asked for a specific figure?
Brian Stanley (Laois-Offaly, Sinn Fein)
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What about the Department of Public Expenditure and Reform?
Mr. Dermot Nolan:
I do not know about that specific issue. I imagine if there was a considerable capital outlay, it would have to come to the Department of Public Expenditure and Reform for consideration as part of the Department of Housing, Local Government and Heritage's overall capital programme and how it would fit into the capital allocation for that Department. That would be a multi-annual project, so one would have to see how much it would cost over several years. The capital allocation for that Department would have to be seen in the context of what capital was available throughout the public service. That would be the context in which such a specific, large project would be considered.
Brian Stanley (Laois-Offaly, Sinn Fein)
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The estimated cost in 2013 or so was €500 million. That was when Bord na Móna showed an interest in being involved. Within two years, by 2015, that figure had doubled. What would the figure be? I am flagging up the concern deliberately. Is it a case of this happening again? There are still significant concerns about the broadband scheme. The Shannon scheme could turn out to be very expensive. There are environmental issues related to it, though they are not matters to discuss here. The overall cost is a concern. It is concerning that the Departments of Finance and Housing, Local Government and Heritage have not already done preparatory work on costs and projections. Will it be announced in a press conference, out of the blue, that the State and taxpayer have to pony up this money without any due diligence being done? The Departments of Finance and Public Expenditure and Reform will co-sign the cheque. The public will pay it.
There is concern that there may be much publicity for a time which then dies away. What is happening now? Will there be fewer office blocks in Dublin because many more people are working from home? Will the population flatten at a point? Will there be a shift in population away from the east coast? Is it a good idea to pump water into the leaking bucket that is the water system in Dublin, where 45% is being lost through leaky pipes? Would it be a better idea to fix the leaky pipes? Those are the questions that members of the public are asking. If these issues are not addressed by the Departments of Public Expenditure and Reform and Finance, when the Department of Housing, Local Government and Heritage comes knocking on their door for the cheque, will we see a repeat of past issues? Would they enter into a somewhat open-ended contract with costs that escalate over a period to several billion? I ask the witnesses to take that concern away to consider. Will they come back to the committee with a report and synopsis of any preparatory work and discussions about that scheme that have taken place to date?
Surely, in the nine years since the idea of this project was floated, there must have been discussions and phone calls made between the Department of Housing, Local Government and Heritage and the Department of Finance, and maybe the Department of Public Expenditure and Reform as well. In that time, what discussions have taken place? What assessments have been made in terms of the cost to the State and in terms of due diligence on this? Is it a good idea? If Mr. Hogan could come back to the committee with that, I would appreciate it.
Mr. John Hogan:
I absolutely hear what you are saying on it. I would rarely come in here in and say this is not my area of responsibility. You will not hear that from me but for us to do any sort of economic analysis, we would have to see a detailed proposal. It is fair to say that we have not seen anything yet.
I hear the concerns that you are expressing. My colleague from the Department of Public Expenditure and Reform is here. We will take it away and to the extent that we can come back with any information for you, we will.
Brian Stanley (Laois-Offaly, Sinn Fein)
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I thank Mr. Hogan. I accept Mr. Hogan will not get into the detail of it but I would have expected that by this stage, after nine years, a lot of discussion would have taken place with the Department of Public Expenditure and Reform and with the Department.
Mr. John Hogan:
There may have been discussion with the Department of Public Expenditure and Reform which would not have surfaced at our level because they were not at a decision point. In fairness, much of the attention over the past number of years - Mr. McCarthy mentioned it earlier - has been on other issues and other areas of crisis. We have been reacting to the Brexit situation, we have been reacting to the pandemic and now we are dealing with the war in Ukraine. It is not that I am minimising the importance of this particular issue but that we have not seen at this stage the nature of the work that needs to be done for us to make an economic appraisal of something.
Brian Stanley (Laois-Offaly, Sinn Fein)
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I ask Mr. Hogan seek an estimate from the Department of Housing, Local Government and Heritage of the current estimated cost of this project.
Brian Stanley (Laois-Offaly, Sinn Fein)
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Yes. They gave a figure in 2013 or 2014 of half a billion euro. Of interest today would be the updated cost projection were this project to go ahead.
Brian Stanley (Laois-Offaly, Sinn Fein)
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We will have. We will break for ten minutes and we will resume then in public session.
Catherine Murphy (Kildare North, Social Democrats)
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To go back to the Irish Bank Resolution Corporation, IBRC, do we know what the recovery was pre-liquidation and post liquidation? I presume there would have been some recovery pre-liquidation. Was that work done at the time of the liquidation? Is this known?
Mr. Des Carville:
When the bank was liquidated in February 2013, the Department took responsibility for the bank and the realisation of assets from that point on. As to what happened before that, certainly I have no knowledge or information on that. We took over assets of €21 billion at par value at that point. The liquidators have been realising those assets, and as I said, we are now down to about ten assets yet to be realised.
Catherine Murphy (Kildare North, Social Democrats)
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It was €21 billion at that time.
Catherine Murphy (Kildare North, Social Democrats)
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I am trying to get the liquidation cost, which costs quite a lot of money in its own right, as one would expect. It looks like €1 billion would be retrieved, which is net. Do we know how much the liquidation has cost to date?
Mr. Des Carville:
We have been very proactive in that space with publishing nine update reports. To date, the liquidator fees plus legal fees are €300 million. We estimate that, between now and the end of the liquidation at the end of 2024, there is probably another €16 million to €20 million left in fees. As can be imagined, selling very large loan books is an expensive exercise. We have also included headcount numbers in the update reports, so it can be seen how, from the time of the liquidation, when, from memory, 300 or 400 people, between the bank and liquidators, were working on the liquidation, we are certainly down to considerably fewer than 30 people working on it currently. One can see that tailing off, and obviously the costs tail off accordingly.
Catherine Murphy (Kildare North, Social Democrats)
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Obviously, there would be additional costs, for example the cost to the Department, in the winding down of the banks and the holding of part-ownership of the banks, which is still the case with AIB and PTSB. Is the cost to the Department factored into it as well? I am aware it would not be exclusive to IBRC, but IBRC is the biggest one.
Mr. Des Carville:
There are two separate teams within my division that look after what we euphemistically call "the living banks", and the corollary is obvious. Within the living banks, the Deputy is quite right. We have two investments now, AIB and PTSB, and a three-person team working full time on that project. There are some similarities between what IBRC does and what NAMA does in that they both wind down vehicles selling legacy assets. The same team within my division look after both of those.
Catherine Murphy (Kildare North, Social Democrats)
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From recollection, and I could be wrong on this, I understood that once it was wound down, the original intention was that it would go to NAMA. I might be wrong on that but that was my memory of it at the time.
With regard to NAMA, I am certainly aware of people who are back in charge of the assets despite the fact they went bankrupt. It infuriates people. I am aware there was a loophole around the law relating to directors. I believe it was directors. The Comptroller and Auditor General might remind me.
Mr. Seamus McCarthy:
I am not sure exactly what the Deputy is referring to but there was the situation whereby in the law the assets could not be sold back to the debtors but the loan could be sold. There were intermediate sales of the loans, which then perhaps allowed the sale of the assets back to the original debtors.
Catherine Murphy (Kildare North, Social Democrats)
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Would the Department pursue that particular issue with NAMA?
Mr. Des Carville:
The Comptroller and Auditor General is correct. Under the National Asset Management Agency Act, it was very clear that one could not transact with the underlying borrower.
What NAMA would do is conduct an open market sales process to give maximum price discovery and some entity would ultimately end up buying the loan. As to what happens after that, if we felt there was something untoward, there are powers under the NAMA Act for NAMA to take further action. If the Deputy has specific concerns or examples she would like us or NAMA to look at, we would certainly do that, and quite vigorously, I suggest.
Catherine Murphy (Kildare North, Social Democrats)
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I have not found that it is very satisfactory, and that is not what was intended, given the pain that people suffered. We must remember that people lost their homes and people lost their lives because of the stress. It is very difficult to see other people back in control of their assets and recovering very well, thank you very much.
A group has been seconded. How many are seconded from the NTMA to the Department of Finance? I think we dealt with this the last day.
Catherine Murphy (Kildare North, Social Democrats)
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Irrespective of whether it is a secondment or not, will that number be retained in the Department?
Catherine Murphy (Kildare North, Social Democrats)
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Supposing all of the shares in AIB are sold and IBRC has been wound down, and PTSB would be relatively small in comparison with the others, is there a function for that section?
Mr. John Hogan:
There are two aspects to it. If we think back to the banking inquiry, one of the criticisms of the Department was that we did not have sufficient corporate finance and market expertise or understanding of what was happening in the financial system, which would have been of benefit to the Department when we came to the financial crisis. What the NTMA secondment has allowed us to do is bring in that expertise. The Deputy is right; as the shareholding declines, it raises issues for us in terms of what is the appropriate level of support and resources that are needed against that. Over time, we are going to continue to draw on the NTMA arrangement to support, for example, the banking division or financial services investment fund division in the work they do. It is very much that advisory piece that is probably going to grow as the shareholding piece declines.
The other aspect to it all is that we have Department staff working alongside people from the NTMA to enable the market expertise to be shared more broadly and to align with the public service principles.
Catherine Murphy (Kildare North, Social Democrats)
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I want to go back to the issue of education and training. What is the budget in the Department?
Catherine Murphy (Kildare North, Social Democrats)
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How many people avail of that? Would it be fully used in a year?
Catherine Murphy (Kildare North, Social Democrats)
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If it is demand-led, does the Department not identify the skill sets and identify that there might be gaps and try to fill those gaps?
Mr. John Hogan:
We do. What we have done in recent years is create in-house diploma programmes on taxation, on economics and on financial services, which have proved to be invaluable. We allow people to enrol on and subscribe to those courses. There could be someone coming in with an economics background who would add to their skill set by taking the tax diploma course or the financial services course, so we have that kind of cross-fertilisation of ideas and an overall increase in the capacity and capability of the staff of the Department.
Catherine Murphy (Kildare North, Social Democrats)
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How much did the one in Harvard cost? I know it was split between-----
Catherine Murphy (Kildare North, Social Democrats)
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Was that the most expensive?
Catherine Murphy (Kildare North, Social Democrats)
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What would the assessment be in terms of the Department looking at a course and saying it needs a skill set?
Mr. John Hogan:
The benefit we get from it is what it comes down to. For example, from my perspective, I have done diplomas in organisational development and executive coaching, which might not necessarily have immediately fit with my skill set as an assistant secretary but which have actually been hugely beneficial for me, for the wider team that operates around me and for the Department as a whole in terms of broadening my perspective on how people operate, but also how they operate themselves as individuals in the organisation, and how they operate against best practice and what I would see as organisational development opportunities in other areas. There is the whole piece about culture, which was part of the course that I did. A huge issue for us at the moment is maintaining, enhancing and developing the culture of the Department of Finance against a background where the way we work and our mode of working has changed fundamentally as a result of the blended working arrangements.
We look at these things. To be honest, I am as much into the business of equipping people with skill sets around the core areas of competency as allowing for personal development, which we also get back in spades when we invest in that area.
Brian Stanley (Laois-Offaly, Sinn Fein)
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Are the courses attended physically or online, in particular the one at Harvard?
Brian Stanley (Laois-Offaly, Sinn Fein)
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Thank you. I call Deputy O'Connor.
James O'Connor (Cork East, Fianna Fail)
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I welcome the witnesses. My first question is in regard to the State’s stake in AIB. What is the income the State receives from selling that? If I am correct, a stake was sold off in 2021. I will start with that question.
Mr. John Hogan:
The latest is that the State sold a tranche of a shareholding in AIB earlier this month. It has reduced our shareholding from 62% to 57% and generated almost €400 million for the Exchequer. The key point is that we have gone down below 60% in terms of the shareholding. The placing price of the share was about €2.96. The gross proceeds, as I said, were close to €400 million. Those are the main details, although my colleagues might want to add to that.
James O'Connor (Cork East, Fianna Fail)
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I am time-sensitive so I do not want to continue that line of questioning. I will move to my next question. There seems to be a lot of change happening in the banking sector. There are two facets to that. One concerns platforms such as Revolut, to give one example, which are contemplating going into the mortgage market if that is allowed from a regulatory perspective. Does the Department have concerns about the value of that stake and about the Department and the Minister remaining in ownership of such a large percentage of the shareholding when there seems to be such a revolution going on within the finance space, as well as the potential ramifications of that for small banks? Let us be square: the banks in this country are small in comparison to many European counterparts. What risk is there for the value of the stake that the State currently retains?
Mr. John Hogan:
I will let Mr. Carville comment on that shortly. An important aspect of the work we have under way in the Department is a review of our retail banking system which recognises some of those changes in the environment that the Deputy has referenced, particularly around digitalisation, the new banks and how our remaining banks fit into that landscape. That work is very close to completion at this stage and there has been much engagement at-----
James O'Connor (Cork East, Fianna Fail)
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Excuse me, I am looking for an answer to the question.
Mr. Des Carville:
It is a very interesting question. The answer, unfortunately, is very long but I will try to make it short. There are a huge number of variables that go into the valuation of any of the banks on any day. In particular, there is the outlook and the interest rate environment, and we are seeing the interest rate environment have a massive impact on the valuation of the banks right across Europe, including on our own stakes. There is also the competitive environment and the quality of staff.
James O'Connor (Cork East, Fianna Fail)
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Is there a risk to the value of the current shareholding given continuing developments within this sector? Does Mr. Carville see it as a risk on the radar that the value of the shareholding would shrink? That is basically what I am trying to get at here.
Mr. Des Carville:
Provided the banks continue to have the capital to invest in technology themselves, they can compete with new entrants that are more agile and have arguably better state-of-the-art systems. Legacy banks are always playing catch-up. Is it a risk that keeps me awake at night? No, it is not, at this point.
James O'Connor (Cork East, Fianna Fail)
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What is the value as it stands?
James O'Connor (Cork East, Fianna Fail)
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Is it 58%?
James O'Connor (Cork East, Fianna Fail)
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It would keep me awake at night if it was worth that much money.
James O'Connor (Cork East, Fianna Fail)
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The reason I bring it up is what happened companies like Nokia when the sector changed. It was a world leader. Nobody thought it could be taken down from where it was and circumstances changed very in that landscape. All of a sudden, it was not the company it once was. I worry about banking as one of those traditional foundation stones of the world economy and how it is changing. It is concerning when we see a rise in different aspects of the financial services world.
James O'Connor (Cork East, Fianna Fail)
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Right.
Mr. John Hogan:
It is against that background we see that we have five retail banks currently here, two of which are departing at this stage with all sorts of changes in the international and external environments. Digitisation is becoming much more of a feature of how people want to conduct and manage their banking business.
The other thing we have seen is the growth of non-bank lenders that are looking at particular niches or areas of intervention into the banking market. That is becoming an increasing feature, not just here but internationally-----
James O'Connor (Cork East, Fianna Fail)
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Okay, I am sorry to cut Mr. Hogan off. I thank him very much. The next question I want to ask contradicts what I was coming at in my first line of questioning. It is a concern, however. Earlier this year, there was a significant reduction in Bank of Ireland's cash services across the State and the closure of numerous bank branches. Subsequently, Ulster Bank pulled out of the Irish market, or is in the process of doing so. On top of that, AIB had to reverse its plans, under huge pressure from me and others in this Oireachtas, which would have unfortunately left vast sections of the population without any banking services. Major towns in rural Ireland, including Youghal where I am from, would have had no cash banking services in those. These are towns of 10,000 people. That was the case right across the Twenty-six Counties.
I want to get a sense of the Department of Finance's view on cash. Is it obsolete? Is it departmental policy to try to reduce the amount of cash in use? Does the Department have an issue with it? When the Central Bank of Ireland is asked about these issues, it is very slow to answer. It is a concern. From the Department of Finance's point of view, however, does cash have a role to play in the day-to-day running of society? Small businesses may have an unspoken practice where people might not make that much money and they are not always fully compliant, but this is probably necessary to maintain some bit of activity in rural main streets. I know this is a very abstract line of questioning. However, what is the Department's policy on cash over the next ten years? Is the Department concerned about what happened last year and this year, which seems to be a collapse in community banking services from the commercial banking sector?
Mr. John Hogan:
The Deputy's question very much goes to the answer I gave him already, which is that the banking review is looking at all aspects of retail banking. Since the exercise started, the access to cash piece has grown in prominence in the work of the review team. I do not want to pre-empt what is going to be-----
James O'Connor (Cork East, Fianna Fail)
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The Secretary General will not mind if I ask Mr. John McCarthy the same question. As chief economist, what does he think about it?
James O'Connor (Cork East, Fianna Fail)
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Really?
James O'Connor (Cork East, Fianna Fail)
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Mr. John McCarthy has no comment.
James O'Connor (Cork East, Fianna Fail)
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Okay.
Mr. John Hogan:
It is fair to say that we recognise the value and availability of cash within the banking system. The importance of the value of cash in local communities was very clear from the situation that evolved around the AIB decision. The bank itself might have felt it had the situation covered through its partnership with the post office network. However, that aspect of the attachment to cash became clear to the bank and precipitated a certain decision.
James O'Connor (Cork East, Fianna Fail)
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It goes without saying-----
James O'Connor (Cork East, Fianna Fail)
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There has, yes.
James O'Connor (Cork East, Fianna Fail)
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It must be said that the banking sector moved faster than society in that regard. I recognise that and the statistics are very clear. It is dropping all the time. I am not burying my head in the sand. Sectors such as agriculture and small business such as cafes, florists and bakeries rely on cash payments. Many old age pensioners also rely on cash. They trust it. It was a hugely worrying trend, which nearly happened but did not quite. I hope we will not see a repeat of it in the near future. I will move on if that is okay.
Mr. John Hogan:
I am sorry; I will finish that point. I know the Deputy is tight for time. The piece around the public consultation and impact assessment is something that needs to be developed a little more in the banking sector in order that banks understand the impact on their own customers before they take decisions like this. I expect that to be the case into the future.
James O'Connor (Cork East, Fianna Fail)
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I will relinquish my times and wait for my second round of questioning if that would be more appropriate.
Brian Stanley (Laois-Offaly, Sinn Fein)
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The Deputy may go ahead if he has another question.
James O'Connor (Cork East, Fianna Fail)
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I will wait until the next round as there seems to be a better flow.
Brian Stanley (Laois-Offaly, Sinn Fein)
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That is okay. I call Deputy Carroll MacNeill.
Jennifer Carroll MacNeill (Dún Laoghaire, Fine Gael)
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We were finalising stuff at the Joint Committee on Gender Equality today. I apologise for coming in so late.
I appreciate my colleague touched on this as a beginning, but I wish to go back to the shareholding in AIB. I would like to go through the pricing and timing strategy and also the costs around that process. Could Mr. Hogan open with that?
Mr. Des Carville:
I thank the Deputy for the question. If we start back in 2017, we had more than 99% of the bank. Government policy has reduced its shareholding in a carefully controlled manner ultimately to 0%, like we did with Bank of Ireland. In 2017, we sold €3.4 billion worth of shares in the bank, which was the second largest initial public offering, IPO, in the world that year. We literally could not have sold anything more than what we sold in that transaction.
Jennifer Carroll MacNeill (Dún Laoghaire, Fine Gael)
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Does Mr. Carville know what proportion that was?
Mr. Des Carville:
We went from 99% to just under 72%. What we have been doing since is monitoring the bank's performance against market conditions, and again trying to act like a responsible investor or seller and strike when the market conditions are conducive to a transaction. We have done that twice this year. We sold 5% of the bank in two transactions this year.
We also benefited from a directed buyback by the bank whereby it brought back shares and we sold our pro ratashareholding into that transaction. In the first transaction, which was for 5%, we realised €305 million. In the second transaction earlier this month, we realised €397 million.
The Deputy also asked about costs.The cost to us in terms of our banking syndicates or the selling banks we used is actually zero. We have some legal costs associated with these transactions but they are recoupable.
Jennifer Carroll MacNeill (Dún Laoghaire, Fine Gael)
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Mr. Carville said the cost was zero.
Jennifer Carroll MacNeill (Dún Laoghaire, Fine Gael)
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Why do the banks do it?
Mr. Des Carville:
They do it because selling stock in a high-profile transaction of that nature for a sovereign state is regarded as a prestige transaction. It is a transaction that attracts or carries a huge amount of scrutiny. For that reason, investment banks are very careful around those types of transaction because they know there is a huge amount of scrutiny in fora such as this. They are regarded very much as prestigious landmark transactions that banks can then use to show how good they are when they are pitching for other transactions.
Jennifer Carroll MacNeill (Dún Laoghaire, Fine Gael)
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The law firms do not take the same view.
Jennifer Carroll MacNeill (Dún Laoghaire, Fine Gael)
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No matter what. What are the approximate legal costs involved in the three transactions?
Jennifer Carroll MacNeill (Dún Laoghaire, Fine Gael)
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Even for the two for this year?
Jennifer Carroll MacNeill (Dún Laoghaire, Fine Gael)
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The bank ultimately pays the State's legal costs.
Jennifer Carroll MacNeill (Dún Laoghaire, Fine Gael)
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That is quite nice; well done. That is good. With regard to the pricing strategy, I appreciate there is a market sensitivity about this into the future that I do not want to compromise, but I am interested to know how the Department has been setting the timing. I also notice from the press releases that the Department is careful to note that it will not be doing this again for a period. I am interested in the strategy overall in that regard and maximising the price for the State.
Jennifer Carroll MacNeill (Dún Laoghaire, Fine Gael)
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A small number of them are being discharged all the time.
Jennifer Carroll MacNeill (Dún Laoghaire, Fine Gael)
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At what scale has this been done, say over this year?
Jennifer Carroll MacNeill (Dún Laoghaire, Fine Gael)
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It is not insignificant.
Mr. Des Carville:
No, it is not at all. It is part of the strategy. For the larger transactions, such as the accelerated bookbuild, ABB, transactions, we invite between 15 and 20 investors on a confidential basis to be made insiders on a trade. This is on the day of the trade. We will get their feedback and this helps us with pricing, discounting and price tension. We then go to the wider market later in the day to open it up to a global investor audience. This gives us strong price discovery. In the case of the last trade we did, for example, which was earlier this month, more than 80 investors were offering to buy stock from us at various price points. I am satisfied we maximised the price we could reasonably get on that day, which is important to us.
Jennifer Carroll MacNeill (Dún Laoghaire, Fine Gael)
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It is very important. My colleague touched on this point, that with the State as the majority shareholder, one of the things that comes up for us as public representatives is the conduct of the bank in a range of ways. We talked about the risk of closure of branches that deal with cash etc. Another topic that comes up constantly is communication, especially concerning elderly people not being able to contact the bank and not being able to get any services. As Deputies, we often write to the chief executive officer to point these things out. We do not necessarily ever get a response, but we do try. When people raise these points in the context of the State being the largest shareholder, what concern does the Department have in this regard and what feedback loop does it have in respect of senior management that might cause concern in respect of the share price or value of the bank next time round in the context of some of the feedback received?
Mr. Des Carville:
We are talking about two things from the bank's perspective. One is reputational risk. If a bank gets a bad name for not treating vulnerable or aged customers or another customer cohort the way it should, then presumably over time we would like to think that customers would vote with their feet and leave that institution. This would be a concern in the medium to longer term.
Jennifer Carroll MacNeill (Dún Laoghaire, Fine Gael)
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One difficulty with this perspective in Ireland is that it has become less and less of an option for people.
Mr. Des Carville:
It is, but as the Secretary General mentioned, new entrants are coming into the market, as well as the digital banks. Deputy O'Connor raised this point. There is, therefore, a certain amount of choice, including the credit union sector and An Post as well. Ultimately, what drives the valuation of a bank are things like the interest rate outlook, as well as the bank's underlying financial performance. If a bank does not have customers, is not doing business and is not servicing its customers appropriately, then over time this will clearly have a financial impact, which will in turn have an impact on the valuation and share price of the institution.
Mr. John Hogan:
The Deputy asked how we look at this through the prism of the share price. We also look at this aspect through the prism of consumer choice and consumer protection in the Department. I mentioned to the Deputy's colleague that we have the banking review under way now. It is in the final stages of being completed. This has been an in-depth review of banking policy more generally, particularly on the retail side. From this, I anticipate there will be recommendations in respect of how we can bring forward some of the issues the Deputy mentioned.
Jennifer Carroll MacNeill (Dún Laoghaire, Fine Gael)
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I thank Mr. Hogan. I have a question on a slightly different point for Mr. McCarthy. It is good to see him here. I very much value his opinion as the chief economist. We spoke to representatives of the Department of Public Expenditure and Reform about the national development plan, NDP. Specifically, I have a long-standing concern about construction inflation as well as inflation generally. I would like to hear Mr. McCarthy's view concerning the macroeconomic situation in respect of construction inflation. How is the Department linking in with the Department of Public Expenditure and Reform in respect of long-term borrowing for and financing of the national development plan with this context in mind?
Mr. John McCarthy:
On the second part, we do not borrow just for the national development plan. Borrowing is done based on all Government spending, current and capital. As I mentioned, we are in good shape in this regard. At the moment, the NTMA has about €35 billion in cash that it borrowed at, essentially, between 0% and 1% interest rates during the pandemic and so forth. The overall borrowing situation, then, is one where we are in reasonably good shape on this front.
Construction price inflation is clearly an issue. There are two elements to it, one on the goods side and one on the labour side. On the goods side, we have seen inflation in several inputs, including cement, aluminium and all this sort of stuff. One of the reasons for this is the war in Ukraine, but another factor stems from global supply chains coming to a halt during the pandemic. This has pushed up the price of various imports. On the labour side, there is a shortage in this area in the construction sector. This is of concern in the context of value for money. The Government is trying to build what is included in the national development plan, along with 40,000 and 50,000 housing units per annum and retrofitting homes affected by mica in Donegal and other places. We also then have the usual private sector construction activity, including home extensions, commercial offices and all this type of activity-----
Jennifer Carroll MacNeill (Dún Laoghaire, Fine Gael)
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Competing with the State for the same resources.
Mr. John McCarthy:
Absolutely. It is fair to say that demand for labour exceeds supply now, and this is having an impact on wage inflation in the sector. This is feeding through into property price and land price inflation. In the Department of Finance, we are always concerned about value for taxpayers' money. I always say the Government has no money of its own, not a single penny. It is all taxpayers' money. It is crucial the Government gets value for taxpayers' money.
Jennifer Carroll MacNeill (Dún Laoghaire, Fine Gael)
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This is also the view of our committee.
Jennifer Carroll MacNeill (Dún Laoghaire, Fine Gael)
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The Department is not suggesting stopping these undertakings, though, is it?
Mr. John McCarthy:
Absolutely not. The Government has got the balance about right. Under the NDP, approximately €11.5 billion or €12 billion is being spent this year. This is appropriate in terms of delivering value for money while not putting too much money into the sector, which would only add further to inflation.
Jennifer Carroll MacNeill (Dún Laoghaire, Fine Gael)
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I thank the witnesses.
Brian Stanley (Laois-Offaly, Sinn Fein)
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Following on from Deputy Carroll MacNeill's contribution regarding the construction sector, and focusing especially on the residential context, most people in this room will have bad memories of the Celtic tiger, the crash and all the insanity involved around all that time back in the 2000s. I refer to the Wild West-type banking and lending system, construction undertaken without any regulations and all that nonsense. Some concerns exist now regarding inflationary pressures. Part of this morning's discussion focused on the IBRC, NAMA and AIB, all of which came about as a consequence of the period I referred to. Much of that activity was concentrated in residential property and its financing. The Parliamentary Budget Office, PBO, has raised some concerns that the Department of Finance may not be providing full costings in respect of the concrete block levy and the help-to-buy scheme. Regarding the change in the concrete block levy to 5%, what is the projected yield from this measure annually?
Brian Stanley (Laois-Offaly, Sinn Fein)
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There is a big hole here in respect of the mica redress scheme.
I recognise there is going to be a significant challenge in doing that. There are no easy answers to it. The figure quoted was €32 million. It will have some effect on the cost of construction, although not as much as the 10% that was originally floated. My understanding is the Parliamentary Budget Office has indicated the Department of Finance is not providing estimates for the help-to-buy scheme. Is that correct? It has concluded the scheme may not be providing good value for money. Are our guests aware of that?
Mr. John Hogan:
The help-to-buy scheme had a review this year and it is one of those schemes we keep under regular review. The extension cost was included in the budget and it equated to about €87 million from memory, although Ms Cunningham will have detail on that in a moment.
The housing and residential market is an area the Department sees as a very important part of the economy. While there is pressure on housing at the moment, we are looking at different interventions we can make as part of the suite of measures contained in Housing for All to address the challenges in the housing market. Some of those measures are in the support case, such as help-to-buy, and some of them are in the activation space-----
Brian Stanley (Laois-Offaly, Sinn Fein)
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I understand what Mr. Hogan is saying about the various schemes, and there is no argument about the fact we need homes. We want to accelerate that and get as many as possible delivered, in terms of private affordable homes, social homes, cost rentals and so on. There is broad agreement on that. Mr. Hogan gave a figure of €87 million but there is concern about the scheme. The concern I have relates to the increased costs of construction over and above what we spoke about earlier, and we then add in the help-to-buy scheme and the shared equity scheme. I do not want to get into a debate on the rights or wrongs of them but there is a cost associated with both those schemes. There is also the defective concrete block levy and, in recent weeks, a change in the mortgage rules was introduced by the Central Bank, allowing people to borrow up to four times of their income as opposed to just 3.5 times, a significant move. I have heard some economists ask whether we are just chasing house prices and whether house prices will just keep increasing.
On top of all that, there are increased international interest rates, including in the US and the changes introduced by the European Central Bank, all of which are significant, adding €200, €300 or €400 to the average mortgage. Mr. Hogan correctly said the housing market is a significant part of the economy, and it was the part of the economy that destroyed it the last time round, 14 years ago. It was allowed to destroy the overall economy and we are still paying heavily for that. Is there concern in the Department of Finance about the cumulative effect of the help-to-buy scheme, the shared equity scheme, the concrete block levy, the change in the mortgage rules whereby people can now borrow up to four times their income as opposed to up to 3.5 times, and the overall change in interest rates on international markets, including by the ECB, and the knock-on effect we will feel from that down the line? Is there a concern about all that and the risk to that sector and the overall economy?
Brian Stanley (Laois-Offaly, Sinn Fein)
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I agree.
Mr. John Hogan:
-----in that what drove the difficulties we had at that stage was excessive credit availability in the housing market. In fact, on the mortgage rules the Chairman mentioned, while there has been some loosening by the Central Bank of the rules, they have served to be a very effective intervention in the market in terms of downward pressure on pricing and so on. They have offered some level of protection against changes in the past that caused such difficulties for us.
The Chairman started by asking about help-to-buy and we now have some more information to hand on that if it helps. I think I mentioned €87 million as the number I had in my head, but €83 million is what we had in the budget documentation as the full-year cost and yield. There is a footnote stating the full cost of the measure is estimated to be in the region of €175 million, but because the help-to-buy scheme has been in place for a number of years, it is already in our tax base, so what we are looking at is the incremental cost year on year from the decision to extend the scheme.
Brian Stanley (Laois-Offaly, Sinn Fein)
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I might ask Mr. John McCarthy his opinion as an economist. Does he have a concern in the context of mortgage rules about the change allowing people to borrow not up to 3.5 times their annual gross income but up to four times? Obviously, it means there will be more money, although it might also mean fewer people will get be able to get loans if house prices keep increasing. In the first instance, it is fair to say there will be more money out there, with more money on loan from institutions. Is Mr. McCarthy concerned about the effect on house prices and the economy whereby it may push them up artificially?
Mr. John McCarthy:
Essentially, two macroprudential tools were introduced about a decade ago. One was loan-to-value but the more restrictive one was loan-to-income, which, as the Chairman rightly noted, was up to 3.5 times a person's income. From an economic perspective, that would have been seen as very restrictive in an environment in which interest rates were so low. What ultimately determines a person's repayment capacity is his or her debt-interest payments as a percentage of his or her disposable income.
Brian Stanley (Laois-Offaly, Sinn Fein)
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Interest rates, however, are on the increase in a sharp curve.
Mr. John McCarthy:
The Chairman is absolutely right. They have increased by two percentage points at the policy rate, although that is coming from zero. When we joined monetary union, we were at 5% or 6%, so that needs to borne in mind. If we look at our colleagues across the water, the loan-to-income ratio the Bank of England applies is 4.5 times a person's income.
Brian Stanley (Laois-Offaly, Sinn Fein)
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We should not look there if we want to have a good economy.
Brian Stanley (Laois-Offaly, Sinn Fein)
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Sometimes we should follow what that country does, and if a good idea comes from England, that is good and I would have no problem with it. Nevertheless, some of the decisions it has taken in respect of the economy have been absolutely crazy. I hope the Department is not taking that country's example.
Mr. John McCarthy:
I would tend to agree with the Chairman on that. I am glad we agree on fiscal discipline anyway, because that is where the UK's problems really lie. I think most economists in Ireland have welcomed the relaxation from 3.5 times to four times. It may not be going as far as other countries but it is allowing for households to take on more debt and helps them access the market. People who had reasonable, fairly solid incomes could not afford to get into the market because their incomes were not within the 3.5 range.
From a macro perspective, 15 years ago, the leverage ratios of total debt as a percentage of disposable income were more than 200%. It is less than 100% now. The median household has debt less than income. I am talking about the median, or average, not about the marginal, such as people who have just come in in later years.
Brian Stanley (Laois-Offaly, Sinn Fein)
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Briefly, does Mr. McCarthy have a concern about the cumulative effect of the various schemes such as the concrete block levy, the increase in interest rates internationally and the change in borrowing rules from 3.5 times a person's gross income to four times? I put this question to the Secretary General. Does Mr. McCarthy foresee those factors pushing up house prices in a market where houses are scarce and where we are not producing the numbers of homes required? Does he agree that when we mix all those ingredients together, it runs a serious risk of driving house prices by a further 10%, 15% or 20% in the near future?
Brian Stanley (Laois-Offaly, Sinn Fein)
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Can we get a "Yes" or a "No".
Brian Stanley (Laois-Offaly, Sinn Fein)
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No, I do not expect Mr. McCarthy to comment on Government policy.
Mr. John McCarthy:
On the macroprudential tools, everything being equal, if there is more demand for housing, which is what the relaxation of the tools will allow, it will raise house prices. I do not think it will be dramatic, which is the general consensus among the economic profession, but there will be an upward move.
Mr. John Hogan:
The macroprudential rules are not a target. In addition, there must be a rigorous assessment by the bank as to the capacity of the borrower to meet the repayments. We know the history of mortgage arrears from the last crash and the lax lending standards at the time that allowed for a situation where individuals were unable to meet their repayments. There is stronger oversight of the banking system by our Central Bank colleagues than we might have seen at that time. There has been a review of the help-to-buy scheme by Mazars. It concluded there is no definitive evidence that the scheme pushed up the prices of new houses.
As part of the drive around Housing for All, several interventions on the demand side were mentioned. However, we expect the strong level of interventions on the supply side will have a real effect. One of the interventions on which we in the Department of Finance have worked intensively with colleagues in the Department of Housing, Local Government and Heritage and local authorities in recent months is the zoned land tax. It will have been noticed that the maps associated with this were published in the media in recent weeks. There will be a public relations campaign to bring people's attention to the implications for individuals and businesses in respect of a site or an area that is services and zoned under this measure.
In the round, one must look at all the interventions. Mr. McCarthy is right in terms of pure practicality. If there is a lot of demand, which we do have, and supply is constrained, we have to look at the issues in respect of adding to supply. That is as far as I can go in talking about Government policy.
Brian Stanley (Laois-Offaly, Sinn Fein)
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There is a big mismatch at present. There are five other factors pressing on the issue that will cause an upward push, which will be undesirable. There is concern about that.
James O'Connor (Cork East, Fianna Fail)
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Mr. McCarthy said the average debt is at a very low level compared to where it was. Is that correct?
James O'Connor (Cork East, Fianna Fail)
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Can I make a point to you?
James O'Connor (Cork East, Fianna Fail)
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Debt is not always a bad thing; I know Mr. McCarthy knows that. However, we have reached a situation in this country where people, who have attained an education up to level 9 on the national framework of qualifications, NFQ, and are working in jobs where they are paid in excess of €50,000 and have a possible joint household income of around €100,000, cannot buy in Dublin.
James O'Connor (Cork East, Fianna Fail)
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Mr. McCarthy was kind of saying low debt was a good thing.
James O'Connor (Cork East, Fianna Fail)
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But what are we going to do about it?
James O'Connor (Cork East, Fianna Fail)
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Stall the digger.
James O'Connor (Cork East, Fianna Fail)
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Through the Chair, please. I am asking my line of questions and when I want an answer, I will ask Mr. McCarthy for it.
Brian Stanley (Laois-Offaly, Sinn Fein)
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Put the question.
James O'Connor (Cork East, Fianna Fail)
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Hang on. I wish to make this important point. We have reached a situation where the availability of rental property in Dublin is at a record low. People who traditionally would easily have been able to buy could have done so but billions of euro are being wasted every year in rental payments that otherwise would allow them to purchase homes if the lending rules were done properly.
I fear the attitude in the Department of Finance - tell me if I am wrong - is that keeping household debt low is necessarily a good thing. I do not believe that is the case. People should be able to buy a home and pay a mortgage. Rather than sitting there and pouting at me, Mr. McCarthy, I wish to make the point that rental payments in Dublin are significantly higher than the average mortgage repayments on a two-bedroom apartment in many parts of the city. Does he consider the current trajectory to be sustainable, because I certainly do not think it is?
James O'Connor (Cork East, Fianna Fail)
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But he was insinuating that through his comments.
Mr. John McCarthy:
I said we were in a better position than we were in 2008, when debt to income was way too high, which was one of the reasons the economy collapsed. We are now in a much better position. Some 97% is very low. As I also said to the Chair, the easing of the macroprudential tools will allow people on reasonable incomes to take on more debt and hence, buy a house.
James O'Connor (Cork East, Fianna Fail)
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In response to that, there is a balance to be met-----
James O'Connor (Cork East, Fianna Fail)
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-----between 2008 levels and where we are now. In response to what Mr. McCarthy has just said, we are in an incredibly precarious position. People who want to work and live here are leaving this country because they cannot afford to buy, particularly in the greater Dublin area and Cork. It is so bad that I often wonder whether civil servants get it. The Secretary General may reply if he wishes.
Brian Stanley (Laois-Offaly, Sinn Fein)
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What point is the Deputy making?
James O'Connor (Cork East, Fianna Fail)
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I refer to the point Mr. McCarthy made about us being in a better position than where we were in 2008. The situation is different; it is not better.
James O'Connor (Cork East, Fianna Fail)
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If that is Mr. McCarthy's view on it, God help us.
James O'Connor (Cork East, Fianna Fail)
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Okay, so the deposit requirement has increased. What has happened is that with the Central Bank rules-----
James O'Connor (Cork East, Fianna Fail)
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Sorry, the borrowing capacity has increased.
James O'Connor (Cork East, Fianna Fail)
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Hang on a second. There are thousands of examples of young working professionals paying rents of more than €2,000 per month for a two-bedroom apartment in Dublin city. How are they expected to save for a deposit to buy a property? A two-bedroom apartment in many areas of the city costs well over €400,000, if it has an en suite bathroom, never mind a car parking space. How are they supposed to accumulate the capital to get a deposit?
James O'Connor (Cork East, Fianna Fail)
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Gathering the deposit is the issue.
James O'Connor (Cork East, Fianna Fail)
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Mr. McCarthy may have but he has not answered my question. I asked him about the deposit.
James O'Connor (Cork East, Fianna Fail)
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I will ask it again, if he wants me to be clear with him.
Brian Stanley (Laois-Offaly, Sinn Fein)
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I want Deputy O'Connor to stop for a second, frame his question calmly and address it to the Secretary General or Mr. McCarthy. I want him to get an answer but he should be mindful of the fact that officials do not make the policy. Their job is different. The Government makes policy. If the Deputy has a specific question on the deposit issue and the Department's position on that, he may feel free to ask it.
James O'Connor (Cork East, Fianna Fail)
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I will ask my question clearly. In relation to gathering a deposit, does Mr. McCarthy not accept that a person in Dublin, where the rents are as high as they are, is not in a position to gather money for a deposit to purchase a home unless he or she is on an extraordinarily high income, well in excess of €100,000 per year?
Brian Stanley (Laois-Offaly, Sinn Fein)
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The Secretary General has indicated a couple of times that he wishes to come in.
Mr. John Hogan:
To be clear on this, the problem is that we have to have sustainable lending and borrowing. We cannot have a situation whereby if the Central Bank decides to loosen the rules to ten times, people can suddenly borrow excessive amounts that cannot be met from their sustainable earnings. That is the first point.
The Deputy talked about the deposit. The help-to-buy scheme has been extended for two years. It provides a valuable support to first-time buyers when they are considering how to invest in their first home. Mr. McCarthy has articulated a situation where it is a good thing that we have lower levels of household debt. He was contextualising it in the situation we are now in, versus where we were in 2006 to 2008, when we ran into trouble with the economy. Those of us who were around and worked in the Department at that time saw the difficulties that arose for individuals and households as a result of excessive debt.
When we were looking at mortgage arrears issues and supports that were so important to help those households, we introduced a completely modernised personal insolvency arrangement because people found themselves in excessive debt. All of us here, when we offer advice to a Minister, it is contextualised on a number of things. One is that, yes, there is pressure on the housing market but, second, we want to ensure that where there is sustainable borrowing involved, that can be facilitated.
James O'Connor (Cork East, Fianna Fail)
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There is an important point that needs to be made. There has to be separation in the debate about the collapse in 2008 between domestic household buyers, many of whom struggled-----
James O'Connor (Cork East, Fianna Fail)
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-----but it is a proportion in comparison with what happened in the banking sector around reckless lending, which was entirely different. We are in a much better position today to give people the additional capacity to borrow. The fact that the deposit issue was not touched by the Central Bank review is mind-boggling. It is useless going after the increased lending capacity by extending the multiplier and not touching the deposit requirement, especially with people who have been renting for five or six years. We speak about reckless lending and what has been referred to here. When we are talking about a young couple who need to buy a roof over their heads for the first time to start a family, that is separate from reckless lending but we are now in the position where it is beyond the reach of the vast majority of society and with the direction it is going in, not enough is being done about it.
Brian Stanley (Laois-Offaly, Sinn Fein)
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I think what the Deputy is expressing is there is a general frustration, which I certainly hear. You do not have to come to Dublin for it as you will hear it down in the midlands as well. People are paying very high rents and cannot save for a deposit. Policy is not the officials' gig but they advise the Minister and Government of the day. To help the question a bit, has there been any discussion or advice or has any analysis been conducted on calculating rent paid over perhaps a three- to five-year period in terms of the credibility of the borrower or potential borrower? Let us say a young person or a couple is paying €2,000 per month in rent, which is €24,000 per year and they have done so for three years. That is €72,000. They do not have a deposit but they have evidence of the fact they have paid €24,000 per year in rent. Has there every been any discussion on that given the officials advise the Minister?
Brian Stanley (Laois-Offaly, Sinn Fein)
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Though the Minister must make the policy decisions.
Brian Stanley (Laois-Offaly, Sinn Fein)
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The answer to that question might help us too.
Brian Stanley (Laois-Offaly, Sinn Fein)
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Has that issue ever been looked at though?
Mr. John Hogan:
The Central Bank looked at it recently as part of the change in the mortgage rules. If we look at the background to the decision by the bank on that, it published quite a bit of information on its approach to it, what drove its decision on this particular occasion and so on. There are other schemes as well. The shared equity scheme, for example, has 650 approvals at the moment, so there is help for a deposit with that. We are mindful as civil servants when we offer advice to the Minister that we recognise what is happening out in the world and what the pressures on individuals and households are but there is always that balance to be struck between the piece the Chairman articulated there-----
Brian Stanley (Laois-Offaly, Sinn Fein)
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It is frustration we all hear. Young people - and not-so-young people, because many middle-aged people are now renting and they are trapped as well - constantly tell us what they are paying in rent and how they could get a mortgage where the repayments will be 60% of what they are paying in rent, even with the increases we have talked about. There is a mismatch there and it can be a very frustrating for people. It is an issue that needs to be looked at again and kept under review.
Mr. John Hogan:
We continue to look at it. The amount of time we talk about the housing market in the Department is significant. For Deputy O'Connor's benefit, both myself and the chief economist referenced the 2008 period; we are guided by the experience from that time but we are not driven by it. That is the first thing. The second thing is, ultimately, when it comes to individuals and households there must be an element of sustainability about the borrowings they are taking on, especially as we have had discussion here about rising interest rates. When the Central Bank has changed the mortgage rules, it is not a target and the Governor has been very clear on that. Ultimately, individual borrowers have a capacity to meet their repayments and that comes down to the assessment by the bank as to what they can and cannot meet. You are in a situation there where you are trying to predict the individuals-----
Brian Stanley (Laois-Offaly, Sinn Fein)
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I will let the Deputy in for the second round. Deputy Catherine Murphy is next.
Catherine Murphy (Kildare North, Social Democrats)
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We are having the wrong conversation with the wrong people. This is about affordability, cutting land values and a whole lot of other elements. We are diagnosing the wrong thing. House prices are completely unaffordable and borrowing more is not always the option.
Catherine Murphy (Kildare North, Social Democrats)
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Yes, okay.
Catherine Murphy (Kildare North, Social Democrats)
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Yes. I want to touch on a number of issues. Local authorities are part of general government debt and development contributions fall into that category as an income. I think the local authorities were initially restricted to the amount they took in in a given year. Is the same restriction in place or has it changed? Do the officials know how much is tied up in that restriction?
Catherine Murphy (Kildare North, Social Democrats)
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Yes.
Catherine Murphy (Kildare North, Social Democrats)
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The Department sent us a document. Page 15 deals with State agencies and the item relates to dividends paid to the Central Fund. It was €47 million for the ESB in 2020 and, in 2021, it went up to €77 million. With Ervia, it was the reverse as the figure in 2020 was €70 million and, in 2021, it was €38 million. Why is that the case, given the nature of both are pretty much the same in that they are energy-related? Is that known or can the officials come back to me on that?
Catherine Murphy (Kildare North, Social Democrats)
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It is the Department's document.
Catherine Murphy (Kildare North, Social Democrats)
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All right. The Department might come back to me on it.
Catherine Murphy (Kildare North, Social Democrats)
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I tabled a parliamentary question on cryptocurrencies previously around whether VAT applies when there is payment in them. Is that something that features or what way does the Department handle it?
Catherine Murphy (Kildare North, Social Democrats)
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Yes. Does VAT apply where there are transactions in cryptocurrency?
Catherine Murphy (Kildare North, Social Democrats)
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That is about it.
Catherine Murphy (Kildare North, Social Democrats)
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The officials are saying VAT applies no matter what.
Catherine Murphy (Kildare North, Social Democrats)
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Okay. I asked Mr. McCarthy on previous occasions about the cost of not meeting our climate targets. A fairly large figure was given to me one year but the next it was less. What is it at this point? We have moved on in that there is now legislation and legal requirements, but we still will not meet targets. I assume there will still be cost due from that.
Mr. John Hogan:
I can help as I have the briefing note in front of me. For 2020, Ireland is subject to two key climate and energy targets, namely, greenhouse gas emission reductions and increased renewable energy use. The total cost of compliance with 2020 climate energy targets is therefore likely to be in the range of €63 million. For 2030, the picture is much more complex. Any projected total compliance cost is extremely speculative. There is a lot of change around this. There are European Council decisions and with the Fit for 55 package, there is an EU-wide target of a 40% reduction, to at least 55% compared to 1990 levels, by 2030. The note does not provide a number for that. It is being worked through at the moment with discussions at a European level and in turn how that interacts with our own climate action plan. The note does not give a number but if there is anything we can add to that I would be happy to come back to the Deputy.
Catherine Murphy (Kildare North, Social Democrats)
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It is very difficult to figure out 2030. For the next couple of years it might be easier.
James O'Connor (Cork East, Fianna Fail)
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Returning to the topic, I just want to argue this point with the Secretary General and get a sense of where he stands on this issue. I am talking about what happened in 2008 and now with today's housing crisis, the impact it is having on the economy and the cost to the economy, which is definitely in the high billions at this stage. From the Department's point of view, is there a concern at a domestic level about younger working professionals in the Irish economy who are working and paying taxes but are also paying extraordinarily high rents? Does Mr. Hogan accept the premise that for somebody buying their first domestic home, the current lending rules are a problem, irrespective of the Central Bank's change a couple of weeks ago? Does he accept that that is an issue?
Mr. John Hogan:
I am conscious of two things. The first is that the changes the Central Bank is implementing now will aid people who are trying to buy their first home because there will be an additional capacity to borrow. Second, I reiterate that capacity to borrow has to be matched by a sustainability to meet the mortgage repayments. We are conscious of the pressures that are on households. From a policy perspective, the Deputy will be aware that a €500 rent credit has just been implemented in the rental sector. We have not had a system for renters in the tax code for quite some time. That has been implemented. There is a range of additional measures, such as the shared equity or help to buy schemes, that are there are there to support and enhance the ability of people to move to purchasing their first homes.
James O'Connor (Cork East, Fianna Fail)
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That is fine-----
Mr. John Hogan:
We had a conversation earlier with the Chairman where he identified quite a number of these and suggested that on the other hand, this could have an impact on prices because it would constrain supply and add to the demand functionality in the market. There is always a balance in these things. The market-----
James O'Connor (Cork East, Fianna Fail)
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Supply is king.
James O'Connor (Cork East, Fianna Fail)
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Please do not run down my time. Supply is king. Is the only thing that is going to solve this. All of us accept that. Analysing the new housing supply and what is coming out, in Dublin for example, a lot of the big auctioneers in Dublin are telling me - Mr. Hogan can tell me if I am wrong - that between 30% and 40% of new properties are being sold to cash buyers..
James O'Connor (Cork East, Fianna Fail)
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Hang on a second. I just want to expand my point. The percentage of people buying these properties outright gives an indication of just how broken things are. It shows the level of income they have, and fair play to them because they have obviously done well for themselves. Looking at the bell curve of society, people who should be in a position to buy a home, people who are earning good money, have good educations and who even in a downturn are likely to remain in employment, are locked out of it in the greater Dublin area and in a lot of urban areas. Cork and Dublin are the pinnacle of it because of the rental situation. People are caught in that trap and they are paying rental payments on a monthly basis that are far in excess of what a mortgage payment would be. That is what I am trying to get at here. When I asked about this on previous occasions, witnesses made a point about responsible lending. I fully accept that. I know they have a responsibility to give the Government good advice. However, I would argue that the rate of home ownership is falling out of the sky at the highest level in decades. Does that not concern Mr. Hogan?
James O'Connor (Cork East, Fianna Fail)
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Mr. Hogan has a full minute now if he wants to answer.
Brian Stanley (Laois-Offaly, Sinn Fein)
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The question is whether there is any concern with the drop in home ownership, which may be caused by that deposit issue.
Mr. John Hogan:
I think there is a concern across government about the housing market at the moment. That is why we have an extensive Housing for All strategy, which looks at interventions that can assist with supply. We have the Croí Cónaithe scheme, which has been launched by the Department of Housing, Local Government and Heritage. That allows for a subvention to developments in the apartment space, which is often very attractive for first-time buyers who wish to live in city centre areas where there are viability issues with building apartments at the moment. That intervention is attempting to address that. The Deputy is absolutely right that we need much more supply. That is why many of the Housing for All interventions are focused on addressing the issue of supply.
The Deputy mentioned cash buyers moving into the market. He is right. It could be the case that individuals have done quite well and are now in a situation where they can purchase a home outright on cash but that in turn suggests they could well be trading up, which allows for the availability of homes at other tiers of the market. That churn in the market is of benefit to those who wish to participate in it. The Department is actively participating on a number of levels in the Housing for All strategy. We as a Department are very clear, and Mr. John McCarthy has said this already, that supply is the solution to the housing issue we have at the moment. Ultimately, against a situation where house prices are quite expensive, we have to ensure there is sustainable borrowing and responsible lending. There is very strong oversight from the Central Bank on that with regard to the retail banks and I expect that will continue.
Brian Stanley (Laois-Offaly, Sinn Fein)
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There are a number of potential moving parts there. I think we would all agree on that.
Brian Stanley (Laois-Offaly, Sinn Fein)
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The point is well made. I call Deputy Devlin.
Cormac Devlin (Dún Laoghaire, Fianna Fail)
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I was listening to a portion of the meeting online between various other commitments this morning. I wish Mr. Hogan and his colleagues a good afternoon. It is good to have them before us again.
I will start with the Comptroller and Auditor General's opening statements. He said the national debt is €237 billion. That is up on the end of 2020 by €17.7 billion. He also said that it was 20% lower than that of 2020 on foot of the NTMA's ability to avail of the low interest rates over recent years. How does Mr. Hogan see the various interest rates, the challenges from inflation and everything else happening over the next number of months and potentially years - although hopefully not - impacting on our national debt going forward?
Cormac Devlin (Dún Laoghaire, Fianna Fail)
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I understand. Mr. Hogan has a lot of notes.
Mr. John Hogan:
I do. One of the key achievements of the NTMA over the last number of years has been to smoothen and elongate our debt. I mentioned earlier that it has availed of the low interest rate environment to re-profile our debt and fix in at the ultra-low rates that are no longer applicable or available. As I said earlier, there are four key aspects to the position in relation to the national debt. One is that very strong level of cash in hand with the NTMA at this stage, which is beneficial for it. As it looks to borrow in the market, it can decide on the appropriate timing, depending on what market conditions are like. The second thing is that we are most likely going to have a surplus next year, depending on things continuing as we expect them to.
That is more armour in the NTMA's arsenal to protect us in the bond markets.
On the average life of the debt portfolio, the refinancing needs are light in the coming years. Next year there is one bond that will mature in March and there is an European Financial Stabilisation Mechanism loan scheduled to mature at the back end of next year, in quarter 4. Together these total €9 billion so again that is modest overall when you look at the amount of cash in hand we have; we are talking about €20 billion heading into 2023. In the three-year window from 2023 to 2025, there are three bonds expiring with coupons of between 3.4% and 5.4%. These are the three highest coupons across the 18 bonds that are outstanding. That is a really good and strong position, and it gives us comfort in two points. There is flexibility for the NTMA to decide when the appropriate time to intervene in the market is. It will intervene in the market because it is good for the sovereign to be participating in the market. Equally, we have managed to keep a low level of servicing associated with the debt we have in hand. I hope that is comprehensive.
Cormac Devlin (Dún Laoghaire, Fianna Fail)
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The Comptroller and Auditor General highlighted that Ireland's contribution to the EU budget last year was €3.5 billion. That was 36% higher than in 2020. I know Mr. Hogan has a lot of notes, and I apologise if I am going over old ground but I heard only some, not all, of the contributions. The Department might forward a note to the committee on our contribution to the EU budget and give a year-on-year breakdown of how much we have contributed. What is the expectation for Ireland’s contribution in the coming years? Would it be to the same extent as this 36% increase? Would that be the average growth per year? How is that calculated?
Cormac Devlin (Dún Laoghaire, Fianna Fail)
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Did they relate to the pandemic?
Cormac Devlin (Dún Laoghaire, Fianna Fail)
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Gradually-----
Cormac Devlin (Dún Laoghaire, Fianna Fail)
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Would that demonstrate-----
Mr. John Hogan:
That is an interesting read in that it shows the transformation of our economy over that time. I wanted to plug that book. I do not have one for everyone in the audience, but I will be laying copies at the Oireachtas Library. People will be able to dip into those. It is a fascinating piece of our economic history, which demonstrates the benefit of our European Union membership and how we have-----
Cormac Devlin (Dún Laoghaire, Fianna Fail)
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Dr. Whitaker and others-----
Cormac Devlin (Dún Laoghaire, Fianna Fail)
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I refer to the Lemass era in that regard. I mentioned the escrow account when Mr. Hogan was previously before the committee. Forgive me if he has already done so, but I ask Mr. Hogan to provide an update to the committee on its performance. I note from the information Mr. Hogan provided that there was a reduction in that. That was because of a third country. I ask Mr. Hogan to provide an update on that.
Mr. John Hogan:
The financial statements for 2021 were published in July. They set out the net assets of the fund at the end of December 2021, when they totalled €13.6 billion. There was a €351 million decline for the year of 2021, primarily due to a third-country adjustment, for which an amount of €246 million was transferred from the fund. The remaining €105 million or so relates to the negative interest rate environment we have experienced during that period. That should change now and that is one of the consequences-----
Cormac Devlin (Dún Laoghaire, Fianna Fail)
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There is an ongoing challenge to it. Do we have any time frame on that? I was under the impression that we might be nearing the end of that.
Mr. John Hogan:
We had the first court result, which was at the General Court of the European Union, and we know how that went. It found in favour of Ireland and Apple and we are awaiting the appeal to the Court of Justice of the European Union. There are similar cases in progress. One was heard last week that had a similar line of reasoning from the Commission. The court found against the Commission in that case. It was the Fiat case, and we would have intervened on the principles associated with that. We do not have any clarity on that as of yet. The way it operates is that there is a hearing, there is an advocate general's opinion and then after that there would be the final adjudication by the court. I could be wrong on that but that is the way it works. We are a bit away from it yet to be quite honest.
Cormac Devlin (Dún Laoghaire, Fianna Fail)
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I appreciate that. Is the Department estimating that it has another year to run or could it be many years?
Cormac Devlin (Dún Laoghaire, Fianna Fail)
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I know.
Cormac Devlin (Dún Laoghaire, Fianna Fail)
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That is to be anticipated.
Mr. John Hogan:
There is a lot of money involved in this. There was a great deal invested in creating the escrow fund and so on. It is novel in its size. The amount of money involved was market moving but we are quite happy with the way it has been put in place and has been operating. There is money falling away from the account but that is just the nature of it. We has our expectations from the outset going in, and there were always going to be third-country adjustments. The Commission accepted this because when the company comes and looks for the adjustment, it is cleared by the Commission. That was a facet of how this would operate from the outset anyway. The negative interest rate environment was there, as we know.
Cormac Devlin (Dún Laoghaire, Fianna Fail)
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I have one minute left and if I may-----
Brian Stanley (Laois-Offaly, Sinn Fein)
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I might have to get the Deputy to take the Chair because I am watching another screen and I have a slot in the Dáil. My lucky number came out today in a raffle.
Cormac Devlin (Dún Laoghaire, Fianna Fail)
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Very good.
Brian Stanley (Laois-Offaly, Sinn Fein)
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I can assure members I win few raffles.
Cormac Devlin (Dún Laoghaire, Fianna Fail)
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I was going to say it did not involve six numbers, eight numbers or whatever is needed. If it was the Chair would not be sitting here at all. Does the Chair want me to take over?
Brian Stanley (Laois-Offaly, Sinn Fein)
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Go on. You can continue for a minute.
Cormac Devlin (Dún Laoghaire, Fianna Fail)
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I refer to the corporation tax. The witnesses may have dealt with this already when I was not here. When is that new 15% rate anticipated to take effect?
Cormac Devlin (Dún Laoghaire, Fianna Fail)
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Is that January of 2024?
Cormac Devlin (Dún Laoghaire, Fianna Fail)
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That is it. I thank the witnesses.
Brian Stanley (Laois-Offaly, Sinn Fein)
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One issue was the bank debt. I note that the Comptroller and Auditor General's estimate is for €800 million per annum in payments on that.
Brian Stanley (Laois-Offaly, Sinn Fein)
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Where is that going in the next ten years? Will that reduce or increase over the next ten years?
Brian Stanley (Laois-Offaly, Sinn Fein)
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I thank the witnesses from the Department of Finance and the Department of Public Expenditure and Reform, including Mr. Nolan and his backroom team, for the information provided and for preparing the documents. I also want to thank Mr. McCarthy, the Comptroller and Auditor General, and his staff for attending. Is it agreed that the clerk to the committee will seek any follow-up information and carry out any agreed actions? Agreed. That includes the issue of the Shannon scheme.
Brian Stanley (Laois-Offaly, Sinn Fein)
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If any figures have been received or if there is any information on it I ask the Department to give us a note on it. Is it also agreed that we will note and publish any opening statements and briefings provided for today's meeting? Agreed. The meeting will suspend until 1.30 p.m. and we will resume in public session to address correspondence and any other business.