Mr. Tony Murphy:

I thank the Cathaoirleach and members of the committee very much. It is a pleasure to be back here again. It has been a few years but there are familiar faces, which is nice. I am sure I will get some familiar questions later as well. I am looking forward to them.

I will outline roughly what we want to do today, which is to give the key messages of our annual report for 2022. We will discuss the key EU figures, the annual report itself and then some additional issues regarding funding sources for Ireland. This year probably more than ever the key figures and budgetary figures are important. There is a lot of pressure on the EU budget and it is looking for alternative sources of funding as well. I am sure members are well aware of that.

To put it in the context of the figures we are talking about, members can see that revenue was €245 billion, to which Ireland contributed €3.5 billion. The bulk of that is based on our GNI, which is approximately €2.6 billion, and the rest is basically customs duty and VAT-based contributions.

The expenditure for 2022 totalled €196 billion, of which €2.4 billion relates to funding that has been received by us from the EU. As members are probably aware, the vast bulk of it is with regard to direct payments and European agricultural fund rural for development, EAFRD, payments so, basically, agricultural subsidies and related schemes. The balance is small figures. In terms of cohesion, the figure is €158 million and Single Market innovation and digital is €240 million.

One of the biggest changes in the expenditure profile for 2022 is that Recovery and Resilience Facility, RRF, expenditure took off to some degree. There was €47.3 billion spent on RFF to different member states. Ireland has yet to receive funds under this programme. It recently made its first claim and that will be processed in due course. Based on these figures, as members can see, Ireland is basically a net contributor to the EU budget and will continue to be, probably in an increasing way going forward.

In terms of our annual report, the expenditure, which we looked at earlier, is basically broken down by policy area. Cohesion has now become the major proportion of expenditure in the budget at 40.4% compared to natural resources and environment, which is now 30%. The rest is made up of areas that are becoming more and more important. Migration and border management and security and defence are areas in which there has not been a lot of EU budget until now but, obviously, these areas are attracting much more attention. As I said, that is a breakdown of the €196 billion plus the €47.3 billion for RFF.

We give a couple of opinions within our findings. The accounts are relatively straightforward. We have not had a problem with them for many years. In terms of revenue, we also give a clean opinion. This is based on the revenue that has been booked. We are basically checking the revenue and customs, etc., that have been booked, that is, the so-called customs and VAT gap not covered through this audit.

We have given a qualified opinion on the expenditure for the RRF and we have given an adverse opinion on the standard multi-annual financial framework, MMF, expenditure, if you want to call it that. The reason for the adverse opinion is that our level of error has increased to 4.2% from 3% in the previous year. For high-risk spending, in fact, the error rate is around 6% compared to 4.7% the previous year. Approximately 66% of our population is basically high risk. This is the basis for the adverse opinion.

If we look at the different areas, we can see that Single Market innovation and digital has actually declined from 4.4% to 2.7%. Cohesion is where the big increase has come. That has gone to 6.4% from 3.6%, which is basically an 80% increase year-on-year. Natural resources and environment has just gone above the materiality threshold at 2.2%.

If we look at where these are coming from, the main ones are eligibility errors, that is, either ineligible costs or ineligible projects.

It can be seen that these are almost three quarters of the errors. Then 20% relates to public procurement and state aid which are always very complicated areas.

The big figure that is having an impact is the cohesion expenditure error rate, which is 6.4%. It is 40% of our other population and it is an 80% increase compared to 2021. To be fair we, should take into account that there are extenuating reasons for this increase, which can be partly explained. First, towards the end of any programming period - and we are at the end of 2014 to 2020 - we see pressure on member states to absorb funds, so we always see a trend in terms of an increased error rate. Second, for cohesion the system in place means a lag between the expenditure claimed by the member states. The expenditure in the sample related to the period of July 2020 to June 2021. In other words, this was the first real full year of payments made under Covid-19 conditions, so the member states and other authorities, etc., could not audit on the spot. They were doing more from home or wherever it was so that probably contributed as well. Third, and the easiest one to be clear about, there was a very good initiative which was a Covid-19 response investment initiative where member states could get 100% funding and no co-financing was needed. Again, there was an absorption pressure linked to this. It was for a time period of a year and it was actually extended for another year. However, because it was for a year initially member states were under pressure to submit projects which would attract this financing. Of the 6.4% error rate, 3% are these types of projects. In terms of being a good initiative, it turned out in hindsight that there were problems with it because again, everything seems to be linked to the pressure on member states to just spend money which does not always result in the best outcome.

Natural resources is 35% of our other populations and the errors in this were split. The main two would be, first, the provision of inaccurate information on areas or animals and, second, ineligible beneficiaries or activity expenditure. That again is almost 80% of the type of errors we find in the natural resources policy area. Looking at the Irish transactions sampled, there were payments of €58 billion across the EU. Ireland received just over €1.5 billion from natural resources. In this case we tend to be part of the sample for agriculture rather than cohesion because the cohesion money is quite small and, in terms of materiality, it does not feature very often in our sample. We had 218 transactions which covered 18 member states. There were four transactions for Ireland, two of which were quantifiable errors. One was an ineligible payment to a beneficiary and one was linked to the animal welfare scheme.

Moving on to chapter 11, it is a new chapter and relates to the recovery and resilience facility, RRF. The RRF is a completely new instrument. It is a different delivery model. We will come back to the funding in a minute. Basically, it is completely funded by borrowing. In 2022 we had 13 payments to 11 member states and basically what we checked there were the milestones and targets. We did a reassessment of the Commission's assessment as to whether the milestones or targets had actually been met. We found that 15 of them had irregularity issues and, on this basis, we gave a qualified opinion. We do not have an error rate here because it is not like the multi-annual financial framework, MMF, expenditure. The EU budget has common rules which apply across all member states whereas with the RRF each member state has its own individual recovery plan and they are completely different. It is impossible to consolidate them and come up with an overall error rate.

The challenges with the RRF are that we have issues with the milestones and targets. It leads to an awful lot of room for interpretation and judgment. It is supposed to be a performance-based instrument but for us it is more of an implementation-based instrument. The member states get paid if they do certain things. The common indicators to measure performance are not actually comprehensive enough to measure the performance of the facility. We have an assurance and accountability gap because member states have been self-policing, in a way. They have been asked to declare that all the national and EU rules are being complied with. This is very important as the RRFper sefor Ireland is €915 million but, as we are a net contributor, we have an interest in how the rest of the money is being spent. The concern we have raised is that the investment will follow. A lot of the initial payments were based on reforms that had to be implemented by member states, so now the money will eventually be spent on investments. The investments are very similar to cohesion-type expenditure. If we already have issues with cohesion-type expenditure where there is a traditional control system in place we are a bit worried in terms of relying on member states to self-declare that everything is okay for the RRF-related element of this expenditure.

Another issue, going back to absorption, is that the RRF was an emergency response instrument and we see at the end of October 2023 that only approximately 35% of the total funds, through grants at least, had been distributed so far. In fact, five member states have had no funds at all from the RRF, including Ireland, and another four member states have only drawn down the pre-financing. Out of the 27 member states, even at this stage, there are nine which effectively have not made a proper claim from the RRF.

We highlight the risks and challenges where we are able to do so. We also have the budgetary challenges which are being faced by the EU and are increasing exponentially because of the different additional activities that they are expected to get involved in. There is low absorption of the 2013 European structural and investment funds, ESIF, of 80%, so 20% is still to be spent by the end of December as the cut-off is this year. Again, the pressure means we will probably find more errors. By definition the pressure leads to that.

The outstanding commitments in terms of the EU budget are €453 billion, so it is a multiple of the actual annual budget. Inflation is having a significant impact, as it is everywhere, in terms of the purchasing power of the EU budget. The debt, which is another concern, increased significantly to €344 billion by the end of the year. Most of this is linked to NextGenerationEU, NGEU, borrowings for grants. When the RRF was being designed it was in a very low-interest rate environment, so it was very attractive to go down the road of borrowing money. What we see now is that there was a charge in 2022 of €0.5 billion in the EU budget. The 2024 budget, which was just approved last week between the different legislatures, has a line to cover interest on the NGEU loans and it will be €3.3 billion in 2024. It is becoming a significant expenditure heading.

Ukraine is another area where the budget exposure is increasing. It has basically doubled from €7 billion to €16 billion and during 2023 there have been additional payments so this is an expanding area. Those are the key messages from our annual report.

We do special reports which some people call performance-type reports where we look at the impact of different policies. Here are some reports again that we have mentioned before, whether they were already in progress, that were issued in 2022. Where the Irish flag is there Ireland has been one of the member states sampled because we do not go to every member state. We normally go to five or six member states to get some sort of indicator of how things are across the policy area and we can make recommendations based on that. There is the LEADER programme, a single market for investment funds, GNI data.

Climate spending is obviously a very important topic. Here we had an issue with the Commission. It has a target to spend 20% of the budget on climate-related issues and it said it met its target of just over 20% and we did not agree. We said the Commission has overestimated the green spending by €72 billion compared to the €210 billion it had claimed so it is quite a big difference.

For 2023 we issued reports on sustainable soil management, the internal electricity market, the EU climate and energy targets and the EU's industrial policy on batteries.

As can be seen, we tend to follow the topics which are of interest to the legislators and the taxpayer, including climate. The industrial policy on batteries touches on things like strategic autonomy, which is the question of our dependence on third parties for critical supplies. We have a report due to be published in the next few months which looks at VAT fraud on imports, harmful tax competition, the CAP strategic plans and lobbying law makers. We publish 30 to 35 of these types of reports annually.

The Ukraine facility is a very topical issue with regard to the EU budget. The European Commission has proposed a facility of approximately €50 billion, comprising €33 billion in loans and €17 billion in grants. The aim is to promote recovery and rebuilding of the country. This issue is being discussed in terms of the MFF mid-term review. On the €17 billion, there is a proposal that it would be added to the budget to pay for the grants and on the loan side that there would be an extra €2.5 billion provision to give guarantees on the loans. Our opinion on this facility is that it is a bit like the recovery and resilience facility, RRF, in terms of a lot of leeway for Ukraine to define the conditions for disbursing the support. We will have to see what happens. It is only indicative in terms of the split between loans and grants. That will be finalised in the MFF review, if it is successful.

Another thing of specific interest for Ireland is the opinion on the new own resources proposal. We have been asked for an opinion and our view is based on the fact that it is technically sound from a stability point of view. It is probably easy to calculate and collect, but we are not giving any opinion on whether it is a good or bad system or proposal. There are three categories of revenue, but the large one which has attracted attention here in the press is the third one; namely, the share of residual profits that are allocated to member states from the largest and most profitable multinational enterprises. As the committee may know, Ireland is an outlier in this regard. It would be 80% of our GNI compared to the EU average of approximately 23%. It would significantly impact the contribution to the EU budget, which as I already mentioned is €3.5 billion, but it could increase by almost another €1.5 billion based on the levy of 0.5%. The issue here is ongoing. In terms of Ireland it is very important but it is also important from the Commission's point of view on whether this succeeds. It really needs to find a source of funding to start repaying the debt which will need to be repaid in 2028. If the Commission does not have an own resource, there are two options: member states can be asked to contribute more on an annual basis or the activities of the EU will have to be contracted, with the funds being paid from the existing budget. I know already that the MFF review, which is ongoing at the moment, is for €66 billion. Some member states are adamantly stating they will not pay any more funds into the EU budget. Last week I was in Belgium, where the Prime Minister has stated that it is not willing to pay another €700 million or €800 million per year for the next four years to cover its share. We are almost at a crossroads where decisions have to be made about budgetary management and especially funding sources.

Specifically for Ireland, beyond the €2.6 billion we talked about earlier for agriculture and cohesion, etc., the other area where Ireland is a beneficiary is with regard to the €914 million under the RRF. As I said, we have not received any funding yet. The first payment request was for €324 million. The Commission has two months to process the request, but there is some delay with it. The latest expectation is that it will not be paid this year.

As the committee knows, Ireland is the biggest beneficiary of the Brexit adjustment reserve, BAR. We will get €1 billion now after the €150 million which has been transferred to the RRF. We have received all the pre-financing we were due, which was €802 million. It remains to be seen what will happen in September of next year when the expenditure is submitted in what is an unusual process. It will be submitted in one large block. Either it is eligible and we receive the balancing 20%, or there are deductions for projects which the Commission considers not to be eligible. We will see how that develops.

I have given an overview of what is a very big report. We have an EU audit in brief, which is much shorter and gives the main points about the different policy areas. Chapter 2 deals with budgetary management. This is becoming more and more of an issue for Ireland, given that we are a net contributor and are likely to continue in that direction for the foreseeable future.