Oireachtas Joint and Select Committees
Tuesday, 8 July 2025
Committee on Budgetary Oversight
Engagement with the Central Bank of Ireland
2:00 am
Richard O'Donoghue (Limerick County, Independent Ireland Party)
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I ask everyone to please put their mobile phones and other devices on silent.
I wish to explain some limitations to parliamentary privilege and the practices of the Houses as regards references witnesses may make to other persons in their evidence. Witnesses are protected by absolute privilege in respect of the presentation they make to the committee. This means that they have an absolute defence against any defamation action for anything they say at this meeting. However, they are expected not to abuse this privilege, and it is my duty as Chair to ensure that this privilege is not abused. Therefore, if their statements are potentially defamatory in relation to an identifiable person or entity, they will be directed to discontinue their remarks. It is imperative that they comply with any such direction.
I remind members of the constitutional requirement that in order to participate in a public meeting they must be physically present within the confines of the Leinster House complex. Members of the committee attending remotely must do so from within the precincts of Leinster House. This is due to the constitutional requirement that in order to participate in a public meeting, members must be physically present within the confines of the place where the Parliament has chosen to sit. In this regard, I ask any member participating via Teams that prior to making their contribution to the meeting they confirm that they are on the grounds of the Leinster House campus.
Members are reminded of the long-standing parliamentary practice that they should not criticise or make charges against any person or entity by name or in such a way as to make him, her or it identifiable or otherwise engage in speech that might be regarded as damaging to the good name of the person or entity. Therefore, if their statements are potentially defamatory in relation to an identifiable person or entity, I will direct them to discontinue their remarks. It is imperative that they comply with any such direction.
As regards this afternoon's engagement, we will discuss with the Central Bank its recent June quarterly bulletin as well as its latest economic advice to the Government, as outlined in the Government's pre-budget letter, published last week, and other important current topics, including the Exchequer position, interest and developments, the impact or potential impacts of tariffs and energy costs.
I welcome Mr. Vasileios Madouros, deputy governor, monetary and financial stability; Dr. Martin O'Brien, head of division, Irish economic analysis; and Dr. Thomas Conefrey, head of function, Irish economic analysis. The committee welcomes the opportunity to engage with the Central Bank, and I thank the witnesses for being here. I invite them to make their opening statement.
Mr. Vasileios Madouros:
I thank you, Chair, and all members of the committee for inviting us to appear before the committee today. As you mentioned, I am joined by my colleagues Martin O'Brien and Thomas Conefrey. We very much welcome the opportunity to engage with the committee on our assessment of the outlook for the economy and the public finances.
I will start with the economic outlook and, specifically, the global context because the key factors shaping the domestic outlook stem from developments abroad. Since the start of the year, we have seen a material shift in trade policy, with rising tariffs between the US and its trading partners. We have also seen a sharp increase in policy uncertainty. In light of these developments, the global growth outlook has weakened, with short-term forecasts for world trade and economic activity having been revised downwards. Uncertainty around these forecasts is particularly elevated, given the range of potential outcomes around trade policy.
The openness of the economy and the prominent role that FDI and multinational firms play domestically mean that Ireland is particularly exposed to changes in the global economic outlook as well as shifts in trade policy, and broader economic policy, in the US.
Given uncertainty over the future direction of US trade policy, our June quarterly bulletin presented projections for the economy under a baseline and a more adverse scenario. These were based on different assumptions around the level and coverage of tariffs, the level and persistence of uncertainty and the future path of financing conditions. In the baseline scenario, we expected modified domestic demand to grow by 2% this year and by 2.1% per annum on average next year and the year after that. This is a downward revision to the growth outlook relative to our previous projections, but the central outlook is still consistent with a full-employment economy. The adverse scenario assumed persistently higher and broader tariffs, including due to retaliation from the EU. It also assumed that policy uncertainty would remain higher for longer and that financing conditions would be tighter. In that scenario, annual average MDD growth would almost halve compared to the baseline, illustrating the sensitivity of economic activity to an escalation of trade tensions.
The economy and the public finances are entering this period of heightened uncertainty from a strong position, but there are also underlying vulnerabilities that need to be managed carefully. The exceptional growth in corporate tax receipts since 2015 and the strong pace of economic expansion in recent years have resulted in a marked increase in government revenues. As a result, even with the substantial rise in Government spending and some tax cuts, the headline budget balance has run substantial surpluses in recent years. However, external developments mean that this benign combination of factors, namely, a rapidly growing economy and exceptional corporate tax receipts, could be at risk in the coming years. In particular, risks to the fiscal position from lower corporate taxes and other multinational-dependent taxes have increased given recent international developments. Excluding estimated "excess" corporate taxes, the budget balance has been in a persistent deficit position for 17 consecutive years. At the same time, in the current juncture, an important public policy priority is the need for higher investment, both to address infrastructure deficits and to support the transition to net zero. Indeed, those infrastructure deficits have become an increasingly significant factor constraining the supply side of the economy. Addressing infrastructure deficits will not only help meet important societal and economic needs today, but also enable our economy to remain competitive amid a shifting geopolitical landscape.
Finally, looking into the future, there are known future funding needs that the State needs to prepare for today. Given demographic trends, Ireland is expected to see the largest increase in age-related spending among the EU by 2050. We know already that the Future Ireland Fund, the establishment of which has been a very positive public policy intervention, will not be sufficient on its own to finance the higher level of public expenditure that will be required to meet the needs of an older population. Overall, the current environment presents important trade-offs for fiscal policy: between investing in infrastructure but not adding excessively to demand in a capacity-constrained economy and between addressing the funding needs of today but also preparing for the funding needs of the future.
While this undoubtedly presents a difficult balancing act, careful management of the public finances can contribute to achieving these aims.
I will finish by summarising our economic policy advice outlined in the Governor's pre-budget letter, in light of those trade-offs. I will focus on three areas in particular. It is important that the Government commits to and adheres to a credible fiscal anchor that results in sustainable increases in net Government expenditure over time. In the current context of the economy operating at capacity, it is important that the overall fiscal policy stance does not add excessively to demand.
Within that overall envelope, the public finances need to prioritise investment. Sustainably achieving the necessary rise in public investment requires creating sufficient economic and fiscal space, through off-setting choices in terms of current spending or taxation. Beyond short-term demand management considerations, broadening the tax base is also important for addressing future funding needs and mitigating the reliance of the public finances on corporate tax receipts.
Public investment alone will not be sufficient to address the economy's infrastructure gaps. Measures that reduce delays and, therefore, the ultimate cost in the planning and building of infrastructure are important as well as measures that incentivise scale and investment in new machinery, equipment and technologies in the construction sector, enhancing its productivity. These structural policies can have an outsized impact on strengthening the supply side of the economy, complementing and adding to the effectiveness of additional public investment in infrastructure. I thank the committee for its attention and we look forward to its questions.
Máire Devine (Dublin South Central, Sinn Fein)
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I thank Mr. Madouros for his presentation. There is a lot to it so I will just concentrate on construction of housing, which is the biggest challenge facing us in the country. The article today in The Irish Times gives data from AIB showing that the volume of homebuilding in Ireland decreased again in June, for the second month in a row. This is the fastest rate of decline in 18 months. The Government is likely to fail to achieve its goal of 41,000 new home completions this year. My concern is not only for the new build construction for private renters and buyers but also the funding for regeneration of social housing. In my constituency, Dublin South Central, this is taking decades per project.
Another issue is the repair and maintenance of social homes, including the voids. On the funding for the tenant in situ purchases, people in Dublin South Central are waiting at least 15 years on the council's housing list before they get an offer. This shows how desperate the situation is.
I want to ask about housing construction in Ireland based on the quarterly budget of the Central Bank. Its quarterly budget states:
Housing investment, while expected to increase gradually, will likely remain insufficient to bridge the gap between supply and estimated demand in that market. The outlook is particularly sensitive to how effective tariff rates evolve ...
Apprenticeship skilled construction labour remains very low across the country. Recently, I think there were 500 apprenticeships in the entire year, which is pretty dismal. The increasing demand for labour seems to indicate that inward migration would be needed, but this requires places for those workers to live. Higher levels of labour will also lead to higher inflationary pressures. As a State, it seems that we must turn to improving construction sector productivity, as Ireland's is the second lowest across comparable European countries, according to box 1 in the bank's figures.
The bank recommends the greater adoption of modern methods of construction, which rely less on on-site labour but more on off-site manufacturing processes and economies of scale. That sector's productivity is low compared to other countries and that lower productivity leads to higher unit labour costs. Will Mr. Madouros detail how incremental increases in Ireland's real output per hours worked would correspond with real capital stock per employed person? In other words, what would the greater construction unit output per year would be if we used the modern methods of construction to increase our productivity point by point to catch up with other comparable EU countries?
Mr. Vasileios Madouros:
I will start and maybe my colleagues can come in afterwards. Housing, which depends on addressing broader infrastructure deficits, is one of the most critical issues for people today. From the perspective of the broader economy, these infrastructure deficits are acting as one of the constraints on the supply side of the economy more broadly, as well as having a real impact on people today.
The Deputy asked about productivity, so I will explain why we are focusing on this so much. Construction employment at the moment is around 180,000 people. This is a little bit more than 6% of total employment. If we look at current levels of productivity and these were to remain as they are, to meet the new higher needs for housing, in addition to other investment that is needed in the broader economy, such as retrofitting or some of the broader public infrastructure, we estimate that we would need an increase in construction sector employment of about 30%. This is a substantial increase, which in and of itself, could be difficult to achieve.
We have seen some reallocation of labour within the construction sector from non-housing construction to housing construction. In other words, from office building to housing construction, because we have seen a reduction in the construction of office buildings. There is probably limited scope to see much more of this reallocation going forward. This is why productivity is so important. If we brought productivity up to the European average, it would mean that we could achieve higher output with less labour input. I do not have the precise figures on that and I do not know if my colleagues have them. We can come back to the Deputy with them. This is ultimately one of the reasons we are putting an emphasis on productivity as well as some of the broader factors in terms of housing supply.
Dr. Martin O'Brien:
On the relevant European comparison, we are about 20% below in terms of productivity relative to other European countries. By extraction, if we just got to the European average levels of construction sector productivity, we can see that we would get 20% more output for the same level of labour input. A number of factors contribute to this. The Deputy mentioned a greater adoption of modern methods of construction. We need to think about public procurement in that essence and try to incentivise those kinds of issues.
This is a feature of construction more generally, but construction firms in Ireland tend to be very small. It is very hard for small firms, generally, to innovate and engage in adopting more modern methods or technologies. Anything that can be done to incentivise scale at project level and for firms should be done. This would help firms to invest in the necessary technology and skills that they need to be more productive. Anything that can be done to try to facilitate greater productivity in the construction sector would certainly help us to reach the levels of housing supply that are necessary.
Cian O'Callaghan (Dublin Bay North, Social Democrats)
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I will ask a couple of questions to follow up on that in a minute. Deputy Devine referred to the Central Bank's housing completion forecast. The forecast was for 35,000 homes for this year, which has been revised to 32,000. Media coverage claims that the Department of housing has been advising the Minister that even the revised forecast might be excessive and he should be looking at a figure of about 30,000.
Do the officials from the Central Bank have any response to media reports on the commentary by the Department that the Central Bank's forecast of 32,000 homes may be too high?
Mr. Vasileios Madouros:
As the Deputy has said, our forecast for 2025 is about 32,500 units. The Deputy is right that this is a lower forecast than our previous projections for 2025. The reduction is mainly because of the actual data we have seen. We have been surprised on the downside in terms of completions in 2024 and in the first quarter so that fed into our forecast.
There is always uncertainty around projections. Typically, when we do the projections we look at what has happened to commencements and then there is a lag. It helps us to see what might be happening to the completion of new units. That relationship is not as strong as it used to be because commencements were very strong last year as a result of the waiving of the development levy. There is uncertainty around projections but the real uncertainty is around some of the underlying factors that matter for increasing the supply of housing. I refer to things like progress in the delivery of infrastructure, the availability of zoned and serviced lands, reducing delays in the planning system or some of the issues that we have talked about in terms of productivity in the construction sector. These are some of the fundamental factors that drive the uncertainty around the projections. As always, we will look at the data in the next quarter and will incorporate any new information into our new projections.
Cian O'Callaghan (Dublin Bay North, Social Democrats)
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I want to return to the discussion on productivity in the construction sector. As noted in the Central Bank's quarterly bulletin, Ireland is 20% below the EU average, and the second lowest among a number of comparable European countries examined, in this regard. It is worrying, at a time when investment should be increasing, that the quarterly report notes that investment in the sector's capital stock is declining by 2.5% year on year. The Central Bank has recommended "greater adoption of Modern Methods of Construction". As construction firms are often small, the Central Bank recommends "incentivising scale". Are there any other reasons that contribute to the low level of productivity in the construction sector in Ireland? Is there anything that the Central Bank can suggest to incentivise scale that can be looked at? It has been suggested that procurement could be used to encourage the use of modern methods of construction. I ask the officials to expand on what can be done to help to incentivise measures to address the productivity issue in the construction sector.
Mr. Martin O'Brien:
We are not very prescriptive as to what should be done as it is not our place. When one looks at the experiences of other countries, one sees a range of options for what can be done. For example, public procurement systems can be aligned in a way that incentivises companies to use more modern methods. One can look at land use regulation more generally to think about how we incentivise a particular scale of activities in areas of high demand. Many aspects of construction productivity are linked with some of the other factors that the deputy governor mentioned, such as infrastructure delivery, etc. The larger sense of infrastructure delivery in areas of high demand will allow a greater scale of projects in which businesses can be involved in delivering. In turn, that will help them to invest themselves in their own capital stock, technology, machinery and equipment. All of these things are interlinked. From a public policy perspective, the first areas to look at probably involve looking at aspects of more effective planning to get scale and eliminate planning delays, to deliver on necessary public infrastructure to allow housing and to incentivise adaptation to modern technology.
Cian O'Callaghan (Dublin Bay North, Social Democrats)
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Is it fair to say that the ad hoc method of delivery of housing lends itself to smaller scale? Would better land-use regulation, larger-scale projects and larger delivery of infrastructure with a larger-scale delivery of housing by the private sector, the Land Development Agency or whoever it is lend itself to greater levels of productivity? If we had a more co-ordinated and planned approach to how we are going to deliver housing and infrastructure and to the land use regulation, would that lend itself to greater productivity on the part of the private sector, the Land Development Agency or whoever?
Dr. Martin O'Brien:
It would certainly have the potential to do so. With small-scale projects, it is difficult for construction firms to invest in the necessary skills and technology needed to improve productivity at a firm level. The larger the scale, the better. It is also about trying to align where the demand could be closer to the highest population density centres, etc. All these things could be considered to think about ways and means of incentivising greater productivity and supporting the sector to meet the levels of housing we need.
Cormac Devlin (Dún Laoghaire, Fianna Fail)
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I thank the officials for attending this afternoon's meeting and for their opening remarks, which are much appreciated. Obviously infrastructure is a key issue facing us domestically. As I listened to the remarks, I was struck by the downward projections, particularly vis-à-vis the tariffs. While we have a welcome reprieve from the tariffs for a few weeks, and hopefully longer, they are having an impact globally. That is no different for an open economy such as the Irish economy.
I will ask about the outlook of the Central Bank and that of its European counterparts. The discussion on the tariff rate that will be settled on has been ongoing since about January of this year. I ask the officials to enlighten the committee on the Central Bank's perspective and that of its European counterparts on how that discussion has impacted on projections for each country across the EU.
Mr. Vasileios Madouros:
I will say a few broad things about tariffs and then I will discuss projections. I will focus more on Ireland than on an aggregate, euro area-wide level.
Economists do not agree on much but they agree that tariffs hurt everyone. Tariffs are costly in terms of reducing trade and have implications for the productive capacity of the global economy. For an open economy like ours, which has a big reliance on global trade, tariffs and their implications for global trade are particularly relevant.
As we have said, we do not yet know where tariffs might ultimately land. As I mentioned in my opening statement, as part of our quarterly bulletin we set out different scenarios around what the tariffs might be to get a sense of their impact on the domestic economy. Our baseline scenario assumes that US tariffs on imports from the EU, including Ireland, will be 20%, which is the level post the expiry of the reciprocal tariff pause. There would be exemptions, as there are at the moment, for key sectors, including pharmaceuticals. The adverse scenario assumes that the tariffs will be 20% for all sectors, including pharmaceuticals, which is relevant for Ireland given the nature of our exports, and that the EU retaliates with 20% tariffs. These are the assumptions that underpin the two scenarios. The second scenario has a bigger impact on economic activity. Another relevant point is that if the tariffs are permanent, they will have a permanent and persistent impact on the economy.
We do not know where the tariffs are going to land. What we do know is that uncertainly has been very high, which is evident in the discourse and in different measures. Uncertainty, in and of itself, hurts economic activity, potential investment and potential new employment, which is incorporated in our projections at different levels.
The second thing I will say on tariffs is that while there is uncertainty about where they might land, there is also a degree of uncertainty about their economic effect. We have not seen, at the global level, an increase in tariffs to the potential level we might get to at a time when the global economy has been so integrated. There is uncertainty about what the economic effects of tariffs might be. I am happy to go into some of these things but I just wanted to give the Deputy a bit of a sense of the uncertainty around it. Does anyone want to add anything?
Dr. Thomas Conefrey:
We participate in a euro area-wide exercise where we submit projections for Ireland, along with the other NCBs in the euro area. In the most recent exercise for June, more or less across the board, we saw lower projections across the euro area, reflecting the two elements Mr. Madouros talked about. There was the impact of tariffs but most particularly the main factor was the higher uncertainty that reduced people's expectations for business investment in particular.
Cormac Devlin (Dún Laoghaire, Fianna Fail)
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I only have a little over a minute left. I am glad the Future Ireland Fund was referenced. The representatives highlighted the need for investment in infrastructure, great and small, throughout the State, which is obviously the whole reason for that fund to exist. They are right it is economically prudent to do so. It is one that is good to have in our armoury. However, I also noted the comment that it is not enough. What is ever enough when we are dealing with the uncertainty we are heading into? Is there an ideal scenario for a fund or range of funds, not just on infrastructure, given the openness of the economy? Is there a need for similar funds directly related to different sectors within the economy?
The regulatory perspective, and I was glad the witnesses were coming in, might not be in the Central Bank's remit, but something I raised previously that is to do with the Central Bank is the matter of lifetime mortgages and the regulation around them. There is more prescriptive regulation on websites about the impact on people aged over 60 who are being enticed with this product than there is on TV and radio. That is a ticking time bomb for us in this country. The number of senior citizens we will have in this State vis-à-vis social welfare and other healthcare investments was alluded to. I will highlight to the deputy governor that this is something the Central Bank needs to seriously look at because it will have a knock-on impact for people who go for fair deal or other schemes when they go to release equity in their home, if it has already been released without the full knowledge of the implications of such. Can Mr. Madouros come back on that?
Richard O'Donoghue (Limerick County, Independent Ireland Party)
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I will give Mr. Madouros half a minute to come back on that.
Mr. Vasileios Madouros:
As I mentioned, the two funds that have been established are a very positive public policy intervention for Ireland and the future of Ireland. They have slightly different objectives, which is how we think about them. One is about basically getting infrastructure. The way I think about the main objective of that is to ensure, whether times are good or we are entering into a period where the economy is slowing down, that investment in infrastructure is maintained. What we have seen in the past is that investment in infrastructure can be very pro-cyclical, which can ultimately be very damaging for the economy in the long term.
The second area relates to the ageing of the population. The reference I made is that the fund is a very positive intervention but in and of itself, and we have some material in the quarterly bulletin on this, it will not be sufficient, if we think about the gradual build-up of it, to meet the needs of an ageing population. Our broad overall economic advice at the moment is both of these funds are very positive in the current circumstances where the economy is to continue building up those funds.
Richard O'Donoghue (Limerick County, Independent Ireland Party)
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It is my slot now. The key to building houses is infrastructure. There are areas that for more than 40 years have not received any infrastructure to allow for development. Dr. O'Brien made a comment on the smaller contractors. I will put on record that I am one of those small contractors. I have more than 35 years' experience. I will also put on record that I do not do Government contracts; I never have. I have no intention of doing that but I know an awful lot of contractors and developers throughout this country would deliver infrastructure, if the parameters around pricing for the infrastructure were changed. We have so few contractors that can provide infrastructure because of the mechanism for them to price it. Any contract shows they have to have done a job of more than €2 million to first get on the tendering process, even though these are the same contractors subbed in to do the work for the main contractors, which limits the number of contractors that can price work and have value for money. What we have in this country is a lot of subcontractors that are contracted in. They are doing all the work for the main contractors. There may only be four or five in the country that can price the work for the Government, so they have a monopoly on delivering infrastructure. We need to change the criteria to make sure that the same people who are doing Government contracts under a main contractor can put in a price to put in infrastructure.
If we want to build houses in this country, we also need to look at serviced sites. Limerick Twenty Thirty looked at this in respect of a site at Mungret. It was going to deliver a serviced site that would allow small contractors come in. They would have an outline planning permission on the sites and would agree the design of their houses with the local authority but the sites would be serviced. That is developer-led infrastructure. In this country, we have Irish Water, which is not fit for purpose. I have said this on the record of the Dáil and I am saying it here at committee. It is not fit for purpose on the basis of it not having delivered one project on time or within budget. If any person ran his or her business and were not on budget or on time, that individual would not be in business. I have no problem with people delivering the infrastructure, then giving it to Irish Water and saying they have now built it to the standards Irish Water wants it built. That could be overseen as it is being done. The engineers are there within the local authorities to oversee it. The system could then be run and given to contractors to deliver infrastructure on budget and on time. That is how we will change the numbers from a projected 32,500 up to 35,000. That is from a person with life experience who has been in business for more than 35 years. That is how we will deliver. This is from being an employer working with subcontractors that have been contracted on major buildings in this country. It is from the experience of a person with a business background knowing that if you are not on budget, you are out of business. What we need to deliver infrastructure in this country is accountability, to build on budget and to build on time. From the Central Bank's position, what could it do to look at the smaller contractors, which are doing the work anyway, to allow them bring competition to the market to deliver infrastructure?
Second, we looked at all the different types of housing and models built. I deliver all of them so I have experience of this. A comment was made that we need to be upskilled. We do not need to be upskilled. We build houses and developments every day. I deal with modular and timber-frame houses and with metal structures. Everything we deliver, we deliver, but they are delivered under a main contractor. The skills and technology are there. It is at our fingertips. We have the technology to deliver. What we have got are Departments working against us to stop us bringing in competition to the market, where four or five contractors have control of projects, even though the same contractors I am talking about deliver the projects.
Why can the Departments not work with us? If they do, we will deliver the projects and houses for them on budget and on time. It could then be left to those concerned to run the infrastructure, and then it might be possible to meet the targets. Could somebody comment on that please?
Mr. Vasileios Madouros:
I am not as familiar as others with the specific modalities of delivery. As a general point, it is very good for the Central Bank to engage with various people from industry to understand how some of the specific modalities work and understand better how the economy works, but our perspective is very much a macroeconomic one. Our advice overall to the Government at this stage is that it is clear that there are infrastructure deficits. One can see this in many different dimensions, including when one compares the public capital stock with the stock here historically and with that of other countries, and if one examines specific sectors. From a macroeconomic perspective, infrastructure has implications for our competitiveness. Generally, Ireland has a very competitive economy but, typically, we are further down the rankings when it comes to infrastructure. It matters from a macroeconomic perspective, and that is the lens we bring. Therefore, our advice in the Governor’s prebudget letter, which, to be fair, is much more macroeconomic than some of the specific modalities that the Cathaoirleach has mentioned, is that infrastructure investment needs to be prioritised. That requires choices within an overall sustainable fiscal policy envelope. They are important choices because addressing the infrastructure deficits matters for people now and will matter to people in the future.
Richard O'Donoghue (Limerick County, Independent Ireland Party)
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Reference was made to the population-based delivery of houses. This discriminates against people who have not had their infrastructure upgraded for decades to allow their populations to grow. If the population grows all around the country, we can make a business case for a fast rail network. If we do not allow development in smaller areas where there has been no investment in infrastructure for years, such as places with populations of 3,000, 4,000 or 5,000, and if they cannot expand because they are at capacity, we cannot make a business case for a rail or transport network for the whole of Ireland. Concentrating on highly populated areas discriminates against other areas that wish to develop. Allowing places other than highly populated areas to develop gives an equal opportunity to everywhere else, but it also allows for a business model for a fast rail or bus service for places no matter where they are the country. That is what we actually need to do. No matter where one lived in the country, one would be able to work, but we can achieve this only if there is investment in infrastructure around the country, not just in the highly populated areas.
Edward Timmins (Wicklow, Fine Gael)
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I thank the witnesses for attending. I have just a few short questions. If they are as brief as possible in answering, I will be able to stay within the seven minutes.
In his opening statement, Mr. Madouros suggested broadening the tax base. The Central Bank also referred to an excessively narrow tax base in its quarterly bulletin. How would the witnesses broaden the tax base?
Dr. Thomas Conefrey:
In general, as part of our mandate, we do not recommend specific tax measures. That is ultimately a choice for the Oireachtas. In some analytical work we published with the latest quarterly bulletin, we pointed to some characteristics of the current income tax and VAT base. One of the largest broadening measures introduced in the income tax area in the past 30 years was the universal social charge, but we have seen a narrowing of that base over the past five years, in particular. People have been taken out of the net, so we have seen a narrowing in that area.
On the VAT side, we compared the proportion of total revenue collected through VAT in Ireland with that of some other countries, very much drawing on an analysis produced by the Commission on Taxation and Welfare. What comes out of that work is that the VAT base in Ireland also appears narrow by international standards.
Edward Timmins (Wicklow, Fine Gael)
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Even though we have one of the highest VAT rates.
Dr. Thomas Conefrey:
There are reasons for it. Ireland has quite a large number of exemptions, lower rates, etc., relative to other places. This is pretty well known and has been pointed out by the tax commission. It is not for us here to recommend which measures are chosen, but I have referred to two of the very largest tax headings in Ireland.
Edward Timmins (Wicklow, Fine Gael)
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Mr. Conefrey has answered the question. The Central Bank suggested incentivising investment in new machinery, equipment and technology in the construction sector. Does it mean tax incentives or grants?
Mr. Vasileios Madouros:
Again, we are not specific about how it might be achieved. Actually, it could be achieved without either incentives or grants. My colleague Dr. O’Brien mentioned linking procurement contracts and modern methods of construction as an example. We have seen lower investment in the capital stock of the construction sector in Ireland. Ultimately, the objective is to have it increase gradually so productivity enhances.
Edward Timmins (Wicklow, Fine Gael)
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Would Mr. Madouros suggest targeted tax incentives for purchasers of housing? I am not saying they should be identical to those associated with the old section 23 but implying they could be along those lines. Maybe there could be targeted tax incentives for housing construction, for the buyers.
Mr. Vasileios Madouros:
As my colleague said, we tend to focus much more on the overall fiscal stance of the Government, not so much on specific taxation or spending measures. However, to address the Deputy’s question, the overall point we are making is that the broadening of the tax base is important over time.
Edward Timmins (Wicklow, Fine Gael)
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Mention was made of the savings and investment union, which is a Europe-wide project. How might that work in Ireland? Has any progress been made?
Mr. Vasileios Madouros:
That is a very good question. The ultimate objective of the savings and investment union in Europe is to strengthen the role of capital markets, diversify the portfolios of savers or households such that they move away from bank deposits alone towards a broader range of financial assets, and ensure that companies that want to expand can borrow not only from banks but also from a broader range of capital market actors. The capital markets union is also about integrating the market we have within the EU because it is quite fragmented at the moment. There is a European agenda on that but there is also a domestic element. Last year, the Department of Finance completed a review of the funds sector and that had a number of recommendations, including some that would be consistent with strengthening, say, retail market participation in Ireland and, therefore, the role of capital markets.
I have one more point on this subject: we have growth in the role of non-bank lending into the domestic economy, which would be consistent with a more diversified source of financing.
Edward Timmins (Wicklow, Fine Gael)
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I tend to agree with people who say that, after the financial crash, we slammed rather than closed the stable door after the horse had bolted. We might have overcompensated for errors of the past. Were any measures taken after the economic crash 16 years ago that need to be modified or at least considered?
Edward Timmins (Wicklow, Fine Gael)
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The Central Bank.
Mr. Vasileios Madouros:
We always consider the balance between the benefits any measures we introduce bring for the economy as a whole and the cost of those measures. No policy intervention is cost free; there are always benefits and costs that we try to balance.
We consider that very carefully and continually across all our various interventions. One specific example of where we looked at this closely and made targeted adjustments was in the mortgage measures, which have been in place since 2015. They have been an absolutely critical underpinning of more sustainable lending standards and have been very beneficial for the economy as a whole. Aggregated levels of indebtedness have fallen significantly and the quality of new lending is much better. In 2021 and 2022 we looked at them, as we always do with our measures. We looked at the balance of benefits and costs and our judgment at the time was that the benefits are substantial, but over time some of the costs had gradually increased.
Edward Timmins (Wicklow, Fine Gael)
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Does the Central Bank review all the measures that were taken, including simple things like the massive amount of box ticking and compliance people have to engage in when they take out a mortgage? Does it review the red tape, for want of a better description, measures that were implemented after the crash, which perhaps need to be looked at again?
Mr. Vasileios Madouros:
We generally review our measures periodically for some of the big policy interventions. On the Deputy's specific point, one of the important policy agendas in Europe and here is the simplification agenda. That also has implications for financial regulation. We are actively engaged with it, with our colleagues in Europe and domestically, and it is an important priority for us. We want to look at this and consider how we can simplify the dimensions of our frameworks in a way that delivers benefits, but also being clear that simplification should not lead to a reduction in standards, because the two are very different.
Edward Timmins (Wicklow, Fine Gael)
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Yes, I know. I am talking about reducing risk.
Richard O'Donoghue (Limerick County, Independent Ireland Party)
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Deputy Timmins, there is another speaker. I gave you a minute and a half. I am watching that as well. I like to be fair. Deputy Timmins can come back in the second round.
John Paul O'Shea (Cork North-West, Fine Gael)
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I thank the three witnesses.
The overall economic situation is quite positive and their opening submission outlined that. Do they have any further comments on the impending tariffs, the situation in America, and the ongoing risk from what is taking place there? The national planning framework has been published and the national development plan will shortly be published. The commitment is to increase funding for critical infrastructure such as housing, infrastructure that is needed relating to Irish Water, for example as the Cathaoirleach mentioned, and other critical infrastructure that is required. Does the Central Bank have any further comments on a proposed level of spending for that regime?
Similarly, in the context of welcoming the planned creation of the future Ireland fund and the Infrastructure, Climate and Nature Fund, ICNF, do the witnesses have any comments on how they see those funds materialising in the coming years, especially to the end of the decade? What advice do they have about that?
Mr. Vasileios Madouros:
On tariffs, I do not have much more to say. We outlined some of the different scenarios we have in the quarterly bulletin. These are based on specific assumptions about where tariffs might be and we still do not know whether they will be within that range or what the precise constellation of tariffs will be. Perhaps a broader point is that tariffs are one dimension, but there are broader aspects of economic policy and certainty or economic policy shifts by the US Administration that might have implications globally, including in Ireland. It is important to bear in mind that we are basically starting from a good position but the outlook is genuinely uncertain.
We have covered quite a lot about infrastructure. My colleagues might like to add to any of the points, but the one additional point I will add linking it to the macro situation is that fiscal policy will have to respond to what happens to the economy. That is important. If the economy evolves in line with the centre of expectation we outlined in the quarterly bulletin, prioritising investment will be important, but there will be difficult choices to be made in offsetting measures, whether it is current spending or taxes, because the economy is at capacity. It is important that we do not, in aggregate, add additional demands on an economy that is operating at capacity.
If the economy evolves on a different path and there is more of a slow down than expected, again fiscal policy will need to respond and act to support the broader economy, that is operate counter cyclically. I will hand over to my colleague.
Dr. Martin O'Brien:
I will perhaps again link the public finances and the funds the Deputy mentioned. The funds are being funded by the excess and windfall corporation tax receipts to a certain extent anyway, which we expect to continue to have even in the next few years. We have done analysis asking what if, in all the geo-economic situations going on, the corporation tax receipts evaporate. We know already that the underlying budget balance is still in deficit and would be even further in deficit if those corporation tax receipts were not there. However, in addition, less funds would be available to go into the future Ireland fund or the ICNF during the remainder of this decade. If that were to materialise, it would just bring forward the necessary adjustments that need to be made to cater for the costs that relate to an ageing society and bring forward the importance of broadening the tax base and considering things over the medium- to long-term perspective. I just wanted to bring those two elements together.
John Paul O'Shea (Cork North-West, Fine Gael)
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What is the Central Bank's view on long-term budgeting? We do medium-term fiscal and structural plans. Should we be doing more of that?
Dr. Thomas Conefrey:
The short answer is "Yes". A big issue in Ireland's budgetary process over many years has been the focus on the shorter term or year to year. Even now, there is a large focus on the budget for one year in the future, at the expense of thinking longer term and factoring in the pressures we can anticipate. Such things as ageing are happening relatively slowly. We have a reasonable handle on what size the older age population will be in ten years' time so we can anticipate. We need to broaden the focus of budgetary policy beyond the next year and make sure whatever is decided in the budget for 12 months' time is also consistent with ensuring the public finances are sustainable beyond that. One of the positive features of the reformed rules at EU level is a much greater focus on the medium term, the implication being the need to submit the medium-term fiscal structural plan. That is a recognition of the importance of the longer term perspective.
Mairéad Farrell (Galway West, Sinn Fein)
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Gabhaim buíochas leis na finnéithe as teacht os comhair an choiste to discuss matters with us. First, I want to talk about the Israeli war bonds. In the conversation about Israeli war bonds, one of the big things that is said is that, even if the Central Bank does not approve the prospectus, another member state could do so and the bonds could be sold regardless. I will bring to the witnesses' attention some correspondence I received about the European Securities and Markets Authority, ESMA, and a questions and answers document it has about the prospectus regulation. It says
In ESMA's view, the choice of home member state...should be made only once. As such, except where either of the specific circumstances described in that provision arises - [For example, Brexit was a unique circumstance as Britain had left the EU] a third country issuer's choice of home member state under that provision is definitive.
It is my understanding from that, if the Irish Central Bank refused to approve the prospectus, Israel would not be able to go to another EU member state. Is that the case?
Richard O'Donoghue (Limerick County, Independent Ireland Party)
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Technically, this matter was not included in the letter from the committee to the witnesses, but if they wish to answer it, they may.
Mr. Vasileios Madouros:
To be perfectly honest, we might need to take this away. My understanding is that on the request of the issuer of a bond, the approval of a prospectus could be transferred to a competent authority of another member state subject to prior notification to the European Securities and Markets Authority, ESMA, but, also because this is not my specific area of expertise and the Deputy seems to have somewhat different information, maybe it might be better if we take it away and I come back to the Deputy, if that is okay.
Mairéad Farrell (Galway West, Sinn Fein)
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Absolutely, if we can definitely get that correspondence because sometimes there is a situation whereby we ask questions and do not always get the exact response. I am not saying in relation to Mr. Madouros or anything like that.
Mairéad Farrell (Galway West, Sinn Fein)
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It is really important. This is an issue that has understandably angered people, in my opinion. If there is any doubt that maybe that would be the case, that would add very strongly to the argument. I totally take Mr. Madouros's point and thank him, if he could do that.
I also want to draw attention to something that was big in the news today, and that is in relation to the eight companies that the State invests in through the Ireland Strategic Investment Fund, ISIF, that have links to illegal Israeli settlements. This was something that was queried when the Central Bank was in front of the finance committee recently. I am wondering can we ascertain do they know whether ISIF is holding any of these Israeli war bonds because what we had queried was whether they are currently investing in any of these war bonds or, if Mr. Madouros is not sure, if he could commit to finding out for the committee.
Mairéad Farrell (Galway West, Sinn Fein)
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I understand that the Central Bank does not regulate ISIF, but who does?
Mairéad Farrell (Galway West, Sinn Fein)
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Okay, no problem. I have a number of questions on it. To be honest, it is one of the most pressing issues of the moment. That is why I felt it was essential to raise it here. That would be my view on it.
Some quite interesting things came out of the meeting here today. Something that really interested me was how we could use procurement contracts. I cannot remember which of the witnesses mentioned it in the beginning but Mr. Madouros mentioned it later on. For example, Mr. Madouros mentioned linking them to modern methods of construction. This was in response to one of the questions based on infrastructure. It is interesting because one of the things that they were talking about is that we are not sure what will happen with tariffs. We do not know what will happen. Anybody who thinks they can predict realistically cannot and we have to prepare for all sorts of different scenarios. Taking procurement as an example, obviously the State is a huge spender within the economy, and how we can use that in terms of economic development, but also on a regional basis, is something that I am quite interested in.
Something that has concerned me over the past five years is the fact that we have no data in relation to how procurement is used and no data is published by the Office of Government Procurement, OGP. Mr. Madouros mentioned that we could potentially look at using procurement contracts and linking them to modern methods of construction. How could it be used in terms of strengthening our own local economy and particularly, as I come from the west of Ireland, on a more diverse regional basis?
Mr. Vasileios Madouros:
Unless any of my colleagues want to add anything, we would not have any particularly strong views on how procurement itself could be used as a tool and how it works at present. Similar to the discussion with the Chair earlier, some of the modalities of the implementation of these things are not something we are as close to. We typically take a more macroeconomic perspective on these issues.
Mairéad Farrell (Galway West, Sinn Fein)
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It was on the basis of them mentioning it that I asked.
Dr. Martin O'Brien:
Within the wider framework, as was mentioned previously, we have the national planning framework in place now. Hopefully, the national development plan will hence be published in the not too distant future. That gives an overall outline for where one would expect infrastructure delivery across the board over the forthcoming period. Certainly within the context of that, and I take it back to some of the Chair's comments as well, it is reasonable for us to look at the contracting measures that are taking place and the relationships along the supply chain that would allow us to leverage as best as we can the skills and technologies that not only are there now, but could also be leveraged into the future. It is certainly one area. From a public finances perspective, Ireland is already spending amongst the highest in the European Union on housing-related issues. It is important that we look at other aspects of how things get delivered, not only how much money is spent on them, in order to get the level of impact that we need.
Mairéad Farrell (Galway West, Sinn Fein)
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I totally agree with Dr. O'Brien, especially given the recent report that Donegal is the council that is failing the most in terms of delivery of housing. In the context of the infrastructural deficit in the likes of Donegal and across the west of Ireland, you cannot compare like with like in different areas.
I have one last question. Obviously the Central Bank is dealing with the issues of tariffs and I am sure they are far more across it than any of us. When you look at it on a European level, you talk about the concerns and how it could all impact on us. Given that our level of investment in R&D is lower than that of other European countries and heavy reliance on foreign direct investment, FDI, is there a concern that we will have greater exposure than other European countries depending on what happens with tariffs?
Mr. Vasileios Madouros:
If you look at the end-of-the-line exposures, Ireland is certainly particularly exposed. That is for different reasons. Our exports to the United States are large compared to economic activity. Our links, in terms of multinational companies, including US multinational companies, play a big role in the domestic economy. Our overall both openness and linkages to the United States mean that the exposure of the Irish economy is higher than average in Europe.
We are, of course, starting from a good position, as I mentioned, in terms of the economy and the public finances. As we have been talking about today, there are things within our control that we can focus on, including addressing some of these key infrastructure deficits.
Richard O'Donoghue (Limerick County, Independent Ireland Party)
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Deputy Neville has allowed Deputy Guirke to go ahead.
Johnny Guirke (Meath West, Sinn Fein)
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I will follow-up on a point made by Deputy Farrell. Most Irish people are unaware of the Central Bank's involvement in facilitating the sale of Israeli war bonds. Stopping the sale of these bonds is a concrete tangible action that Ireland can take in the stand against-----
Richard O'Donoghue (Limerick County, Independent Ireland Party)
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This was not within the remit of those coming in today.
Johnny Guirke (Meath West, Sinn Fein)
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I know, but maybe Mr. Madouros can get the answers for us.
Richard O'Donoghue (Limerick County, Independent Ireland Party)
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I respect where the Deputy is coming from. This is not within the remit of the delegation that came in today. It was brought up earlier. I have no problem in the Deputy asking what he will ask but they were given a format of what would be brought up within the discussions and within their remit.
Johnny Guirke (Meath West, Sinn Fein)
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It is the Central Bank that is dealing with these war bonds. It is important that I can ask the question. If they have to come back to me with the answer, that is fine. It is important because of the scale of what is happening in Gaza that we ask these questions. We cannot shy away from this. Whether it suits people or not, we have to ask these questions on behalf of the people of Gaza.
Many are horrified that Ireland plays a role in supporting funding for military actions in Gaza. These bonds are used by Israel to raise funds for military equipment such as missiles, tanks, guns, drones and bombs. The funds are directly linked to Israel's military operations in Gaza which have resulted in significant civilian casualties and destruction of infrastructure. The military equipment financed by these bonds is used to target hospitals, homes, schools and universities. This has led to widespread suffering, displacement and the terrorising of Gaza's refugee population. Israel openly emphasises the crucial role of these bonds during times of conflict and war.
Sinn Féin introduced a Bill in the Dáil to prevent the Irish Central Bank from granting permissions or approvals for the sale of these bonds but the Government voted against this Bill. What can the Central Bank itself do to stop facilitating the sale of Israeli war bonds?
Richard O'Donoghue (Limerick County, Independent Ireland Party)
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Before Mr. Madouros answers this, it is the same as Deputy Farrell's. It was not within the remit when they were coming in. I understand the severity of the question but if Mr. Madouros does not wish to answer this and he wishes to come back to Deputy Guirke directly, he can do so.
Mr. Vasileios Madouros:
Maybe I will cover this. First, I understand why this question is being asked. I share the horror and the sadness about the loss of life that we are seeing in Gaza and the destruction that we are seeing in Gaza in the Middle East.
We have been asked many questions on this issue by Oireachtas Members. There was a Joint Committee on Finance, Public Expenditure, Public Service Reform and Digitalisation, and Taoiseach hearing specifically on this issue a few weeks ago. We have been asked a number of follow-up questions. We have been transparent, provided the answers and published them on our website.
Let me clarify what our responsibilities and role are in this area in response to the question because many not be as close to this issue. One of the functions that has been conferred upon us by law is to be the competent authority under the so-called "prospectus regulation". This is a disclosure regime that sets out the requirement on the information that issuers of securities must disclose to potential prospective investors. Under that regulation, we are responsible for assessing whether a prospectus has been drawn up in compliance with the relevant legal requirements. I am sorry this will get more technical, but this is a technical issue. Specifically, we are required to approve a prospectus where it meets the standards of completeness, consistency and comprehensibility under the legislation. It is a very specific, narrow role. The legislation is clear that by approving a bond prospector, the competent authority does not endorse the issuer of the securities; rather, it means the Central Bank, or the competent authority is satisfied that the issuer has disclosed the required information in the required manner.
It is important to be clear about what we do not do because some of the public discourse on this has not been fully accurate. We do not issue, we do not sell, we do not trade and we do lease these bonds. The Central Bank does not have the mandate or power to decide to impose sanctions for breaches or alleged breaches of international law. The EU implements sanctions adopted by the UN and adopts its own sanctions in certain circumstances. As happened in the case of Russia, if sanctions are adopted, they are implemented, including as relevant to our mandate. At this time, the EU has not adopted sanctions against Israel.
Johnny Guirke (Meath West, Sinn Fein)
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As most of the talk is about tariffs, I can see the weaker dollar is hurting many businesses in Ireland at the moment. Where does Mr. Madouros see that going in the next 12 months? Will the dollar strengthen or weaken? It is bringing in tariffs into the country in an indirect way, but it is still having an effect on businesses here.
Mr. Vasileios Madouros:
That is a very good question. It is important in the context of the global environment. The Deputy is right. The dollar has depreciated significantly and the euro has appreciated. That is one of the surprises we have seen in recent months. If the Deputy had asked what might happen if the US was to impose tariffs unilaterally, a depreciation of the dollar is not necessary what many would have expected. It does have an effect on exporters, especially more indigenous companies. In some cases, it might have a bigger impact in terms of the depreciation of the dollar or the appreciation of the euro relative to tariffs. It is important as an economic variable. In the context of where that might go, it is hard to tell. Some of the patterns we have seen in financial markets, which included a depreciating dollar and rising yields on US Treasury bonds, would be consistent with some degree of a risk premium on US dollar assets, at least temporarily but how this might evolve over time is difficult to tell.
Johnny Guirke (Meath West, Sinn Fein)
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The biggest issue I see with small businesses is accessing finance for building homes. That is to the detriment of house building in the country. Where does Mr. Madouros see access to finance for small construction companies?
Mr. Vasileios Madouros:
Development finance is important in the context of housing supply. It is a capital-intensive activity. Capital upfront is required to build houses. We looked at housing and housing supply in an in-depth piece of work that we did last year, which we would be happy to share with the Deputy. It examined the issue and the question of development financing. I can provide him with our headlines from that.
Additional development financing is not in and of itself going address some of the main challenges we have with housing supply. This relates to some of the issues we have talked about today and in other equivalent fora. The availability of zoned land, availability of serviced land and therefore the accompanying infrastructure, the planning system, reviews and planning delays and productivity in the construction sector are some of the key fundamental factors. When we looked at development financing on the debt side, our overall assessment was availability of debt financing does not seem to be the main constraint on new housing supply. There is balance sheet capacity, both from the perspective of banking system but also from non-bank lenders, which have become particularly important in the provision of financing for construction, including for smaller companies. Where it is more of a constraint is on the equity side for some of the construction companies. That is related to some of the fundamental factors. My colleague Dr. O'Brien referenced scale earlier about productivity, but also the provision of serviced land. This is the area on the equity side that there is more equity constraint for some of these companies.
Joe Neville (Kildare North, Fine Gael)
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I thank Mr. Madouros for clarifying Deputy Guirke's question on bonds. He dealt with it admirably. He did not shy away from answering the question with the knowledge he has. He could have dealt with it later and come back to us, but he dealt with it very well.
I have some general questions. I have read through the information and been listening for the past while. How does the Central Bank see its own role tying in with this committee?
Mr. Vasileios Madouros:
It is mainly to help the committee in performing its duties. Budgetary policy and fiscal policy are critical for any economy but they are particularly critical for a small open economy within a monetary union where monetary policy is set for the euro area as a whole. In that context, fiscal policy and budgetary policy are important macro stabilisation tools. It is important to have the institutional frameworks that ensure fiscal policy operates effectively with a focus on the longer term and on a sustainable basis. The Committee on Budgetary Oversight is a key part of that overall institutional framework. From our perspective-----
Joe Neville (Kildare North, Fine Gael)
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Where does Mr. Madouros see the Central Bank's role and his own role with his team coming before the committee?
Mr. Vasileios Madouros:
In our role, we focus on the economy a lot. We have a mandate to provide economic advice to the Government. We do that through the Governor writing the prebudget letter to the Minister. We also do that through our own economic analysis that we publish. We engage with broad stakeholders. Providing expertise, analysis and engaging with the committee and Oireachtas Members are key elements of that.
Joe Neville (Kildare North, Fine Gael)
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I have found it interesting that the same theme has been playing out in the past few weeks. Last week, we had the Irish Fiscal Advisory Council before the committee and the previous week, the Ministers, Deputies Chambers and Donohoe attended. All of them and the witnesses before us today adopted the same theme. I do not know whether it is a good thing, bad thing or a scary thing. Everyone has painted a similar picture of an economy that is going strong and well, but at the same time is probably being overly reliant, and overly boosted by potentially temporary financial windfalls.
I use the word "windfall" because we used it two weeks ago. As I said at that point to the Minister, the definition of a windfall is that it does not happen all the time and one cannot rely on it into the future. Obviously, that seems to echo what the witnesses have said. They have also painted a picture of the infrastructure gaps. Some of the conversation may have been overly focused on some of those infrastructure gaps and what the Central Bank can do about them because, ultimately, the Central Bank is not responsible for that. All the Central Bank can do is set out what it sees.
I might come back to those points later but before I forget, I noticed interest rates and their impact were referenced. It is one thing I have always been conscious about because, in my lifetime, I have seen Ireland lose its independence in how it sets interest rates. We have seen the impacts of that, negative and positive, over the past 20 years. How does the Central Bank feel about how interest rates set by Europe have been dealt with in an Irish context in the previous two to three years and is it satisfied with the way they have been cut? Does that tie into the Central Bank's thinking and what is its own view?
Mr. Vasileios Madouros:
I will say a couple of things on that. Being part of the EU and the euro area has brought a lot of benefits to Ireland over time. One can see that in terms of public support for the euro, which remains very high in Ireland compared to other euro area countries. There is a recognition of how positive the euro has been in Ireland. Of course, being in a monetary union means that monetary policy is set for the euro area as a whole.
Joe Neville (Kildare North, Fine Gael)
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Exactly.
Mr. Vasileios Madouros:
The way we think about this - it goes back to the response I gave to the Deputy's question earlier - is that fiscal policy has a particularly important role to play in terms of macro stabilisation. It is especially important that, in a context where monetary policy is set for the euro area as a whole, fiscal policy acts in a way that does not lead to pro-cyclical dynamics in the economy, which is why our advice focuses on the fiscal anchor and prioritising investment within an overall fiscal envelope.
Joe Neville (Kildare North, Fine Gael)
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I heard that last week and the week before, but is there a risk of an echo chamber and of that information not being out in the public sphere as it should be? Is there an issue with getting that information out? Mr. Madouros has given the information here and I have heard it over the last couple of weeks but does he feel it translates abroad? Ultimately, political decisions are made with a budget and how that might impact on some of my colleagues who might not be in the Government parties in mind. In fairness, the Taoiseach spoke earlier about how some of them might feel we should give this, that and the other based on what is windfall revenue currently. Does Mr. Madouros feel there is a risk that we are not getting that information out to the public? Is that view not out and known abroad the way it should be?
Joe Neville (Kildare North, Fine Gael)
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Have we learned the lessons? We are aware of the lessons but have learned the lessons.
Dr. Martin O'Brien:
As part of our mandate, we try to engage with broader stakeholders as much as we can. We have civil society round tables and meet groups like this. The deputy governor, the Governor and other executive members travel the country and engage with business leaders and civil society groups. It is the same message we would be bringing to those communities and sectors around the need for a broad perspective and looking at the medium-to-long term. The medium-term fiscal plan that the Government has to work toward provides good guidance and constraint around the way net expenditure should grow into the future. It is important the Government reflects on that and communicates as much as it can, just as the Ministers did when they were before the committee.
In terms of the appropriateness of interest rate policy for Ireland vis-à-vis the euro area, it is important to note that the Covid shock we saw, its inflationary spike, Russia's invasion of Ukraine and the inflationary spike related to that were common shocks. Across the board, we saw this hike in inflation at euro area level and in individual countries. We then saw a similar deceleration in inflation as interest rates went up before coming down. It is not that there has been an idiosyncratic, Irish-specific issue that has been a problem with having a single monetary policy for the euro area. The risk is that, at some point in time, there becomes an idiosyncratic, Irish-specific issue that means-----
Joe Neville (Kildare North, Fine Gael)
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Like the way that happened in 2007.
Joe Neville (Kildare North, Fine Gael)
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Is there a risk it is currently happening right now?
Dr. Martin O'Brien:
The risk is there, which shows the importance of what the deputy governor mentioned about the domestic policy we have within our own control and making sure it presents stabilisation from a macro perspective. Policy should ensure the tax base is broadened, net expenditure growth is in line with wider growth within the economy, and we are investing appropriately in infrastructure to build resilience in the economy going forward.
Joe Neville (Kildare North, Fine Gael)
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It is a complex issue because we do not have the power to pull those levers that other, larger countries in Europe might have. As a smaller county, we do not necessarily have that influence. How do we make those changes to our economy to adjust for not having that power? If we were Germany, it might be a very different situation.
Joe Neville (Kildare North, Fine Gael)
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The reality of that same situation is that it is very hard to sit on massive budget surpluses every year and tell the public that. It is a tricky and complex one.
Mr. Vasileios Madouros:
It absolutely is and to build on what Dr. Conefrey said, in terms of the overall macro stabilisation framework, monetary policy is set for the euro area as a whole. As regards domestic levers, we have fiscal policy but we also have financial sector macroprudential policy. One of the features before the financial crisis, which was partly related to fiscal reliance on the property sector, was unsustainable lending standards leading to unsustainable housing market dynamics and them feeding off one another. This is within our control. We have taken measures, such as the mortgage measures, to guard against the re-emergence of some of these dynamics. The different macro stabilisation levers have different objectives but fiscal policy is really critical for a small, open economy in a monetary union, as is macroprudential policy.
Joe Neville (Kildare North, Fine Gael)
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I get it. This is not a question, but I will leave on the point that it is very hard to make those decisions in light of how it is set up, that being, the revenue we are getting and from whom we are getting it. How do we stop that and how do we make a budget surplus and put the money away in a rainy day fund when the political realities mean it is harder to do that type of thing?
Richard O'Donoghue (Limerick County, Independent Ireland Party)
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That did not go too badly.
Joe Neville (Kildare North, Fine Gael)
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I was listening all the time and I was actually paying attention.
Richard O'Donoghue (Limerick County, Independent Ireland Party)
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As we have time left, we can open it up to another round for the members who are here for follow-up questions. I have a question for the witnesses myself to do with revenue that is VAT implicated. In terms of the increased revenue that is in this country at the moment and with a view to allowing people get on the housing ladder, I have done up a couple figures. Based on a 2,000 sq. ft house, the cost five years ago was about €120 per square foot, which means the cost of the house was €240,000 plus VAT. The VAT was €32,400. Today, the same house costs €400,000 but there is a VAT implication of €54,000. That is nearly a 70% or 80% increase in VAT on the same house. It has the same finishes and is the same house. On top of that, there is a fit-out for any house. This would cost roughly €40,000. There is a 23% markup on that, which is another €9,200. For a house today - we are talking about relief on mortgages - the tax coming back to the Government through Revenue is much more, outside of what the person has earned himself or herself to qualify for the same mortgage.
Combined, the person would be paying on average €30,0000 per annum in income tax to qualify for this mortgage. The Revenue intake for a person trying to get on the housing ladder today for a house of 2,000 sq. ft means that €100,000 of their mortgage is going to Revenue. On top of that, there is the planning permission fee, which is an average of €5,000 per household, plus the buyer is paying for connections to Uisce Éireann services, which is another €2,500. If you work out the taxes on a new house it comes to a minimum of 20% of the new build. We want people to build in this country. Outside of that there are all the other add-ons such as motor tax and insurance, and all the taxes that a person has to pay, at an inflationary cost. These are from the clothes on your back to a hotel stay if you wanted to go away for a weekend, there is monetary tax on that. There is inflation on the cost of food. There are also the increases on employers who employ people. It will come to a stage where something has to give.
Consider the projections for delivering houses. At the moment it is supply and demand but the demand outweighs the supply. This means it is driving inflationary costs. To help people get on the ladder we have to find a way. I understand that a certain piece has been put in to try to control the mortgages but we need to control the amount of tax people are paying on their mortgages. They are borrowing over the next 30 and 40 years for mortgages knowing that 20% or 25% of their mortgage is tax. These are people who might be providing their own homes. They are not being provided with homes by the local authorities. These are people who are working and are paying all these taxes and they are now also providing for the people who cannot work. They do not have an issue with doing that but if we are to encourage the next generation to have a house and to be able to survive we have to come up with something else. It is fine that we have this extra money at the end of the year but there is only so much a person can take before they say "Enough is enough and we cannot survive".
We heard today that parents are skipping one in every four meals to provide for their children. We can look at how many houses we are going to build but we also need to look at how we put money back into people's pockets so they can survive and their money goes further. Having three wage increases within 12 months or 18 months only drives inflation further. The person getting the wage increase is getting nothing extra. It is just more tax revenue because the bands have changed and that pay rise is going back in tax, so people are getting nothing extra. They are earning more but getting less. How do we counteract that? At the end of the day the Exchequer coffers are up with surplus moneys but the people in this country will only be able to take so much before it could drive us into a recession if the Government keeps going the way it is going.
Mr. Vasileios Madouros:
I will make just two high level points. As the Cathaoirleach says, the current state of the housing market is challenging for many people, not just those looking to buy but also those looking to rent. It is challenging and it is really important that the policy focus is on the underlying factor behind a lot of what the Cathaoirleach is saying. The underlying factor is this imbalance between supply and demand. Addressing housing supply and increasing housing supply is the underlying economic issue here.
Richard O'Donoghue (Limerick County, Independent Ireland Party)
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I am sorry to cut across Mr. Madouros but that goes back to infrastructure.
Richard O'Donoghue (Limerick County, Independent Ireland Party)
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One cannot build anything in this country without sewerage, water and electricity services.
Richard O'Donoghue (Limerick County, Independent Ireland Party)
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These are the three things. The Government does not address the issues at hand, which come up in all the different debates. It goes back to Irish Water because it is not able to deliver. We need developer-led infrastructure and then to hand it back to the government bodies to look after it.
We have to find a way, with the help of the economists here today. How do we change the system, so we can get developer-led infrastructure. There are other things we can do to design and deliver developer-led infrastructure and buildings, and we have people who will design and build the buildings. There cannot be any overrides when it comes to looking at the budgets afterwards. The children's hospital was designed by one crowd and built by the other. It allowed for extras upon extras, and then we are back to design. If there is a change in design it means a change in the parameters of the contract. If, however, one has a design that is developer-led, it creates a budget and it has come in on budget. If it does not do that, it is the case it agreed the design and agreed the budget. There can be movement, however, on the monetary side, according to the inflation costs on the materials. How can the witnesses help us to address that and push things forward?
Mr. Vasileios Madouros:
Going back to our engagement previously, our lens is a more aggregate one. It is a more macroeconomic one. We can outline advice on the macroeconomic dimensions of that and the importance of addressing infrastructure benefits and the costs of not doing so, or the risks of not doing so, and then on the overall fiscal position but less so in the specific delivery mechanism, where we are trying to understand better ourselves.
Dr. Martin O'Brien:
The first way of addressing it is to have that sustainable macro position. If one does not have that sustainable fiscal position from a macro perspective then one will not have the flexibility or capacity to address any of the issues the Cathaoirleach has rightly raised as to how we would go about it. It is about having that framework in place where there is a sustainable growth in net government expenditure over the medium term that provides the solid basis from a macro perspective to deliver on key infrastructure, and to introduce other reforms that could help such as how various taxes are levied or how various expenditures are made to greater incentivise the kind of issues that have been raised here as needing to be addressed. The fundamental aspect from our position is that if the macro overall picture is right then it gives the basis on which to make the most effective decisions to deliver on some of the points the Cathaoirleach has rightly raised here.
Joe Neville (Kildare North, Fine Gael)
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I thank the witnesses for coming in. It is a kind of weird dichotomy. I will finish on these points and refer to Governor's pre-budget letter, which is one of the documents we had. Ireland is particularly exposed to fallout. That makes sense and we need to build long-term resilience into the economy and public finances. Yes, we do need to expand the tax base and we need to look across cuts. That is great but capital investment is required to close infrastructure gaps. This means putting more money into the economy, which potentially risks overheating the economy. This goes slightly against the first point. A credible fiscal anchor is needed to guard, absolutely, but how do we expand that fiscal anchor while having this other huge positive windfall of cash coming in? It is almost like saying to people to ignore all that and that we are looking to the future by reducing the risk of public finances from an excessively narrow tax base, which is obviously to that point and why the Central Bank would try to expand it.
There is a political reality, however, but it is not just political. It is as if someone were managing a house budget based on having had a few good years or having a good job or a very good temporary job and is on an annual salary of €0.5 million but is saying that it could be gone, so let us base our house budget off €35,000 or €50,000 a year. The practicality and the logic behind that is such a delicate balance. I have been struck by this in the last few weeks. I was aware of it anyway but how does one plan for a budget knowing all those things to be true at the very same time? It is a difficult thread to get through the needle.
Today the witnesses have backed the information they gave to the committee previously. They have dealt admirably with every question and they have been very informative to the different members who came at the issues from very different angles. I thank the witnesses for helping with the angle I chose to raise questions on.
Richard O'Donoghue (Limerick County, Independent Ireland Party)
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I have one final question on exports and imports into the country. The witnesses may be able to help me on a question about exports and tariffs. Am I correct in saying that if something leaves this country and is not complete it gets a different tariff?
If, for example, it is machinery and is incomplete, is it a different tariff? If something comes into this country that is not fully assembled and is assembled here such as a car, a tractor or a digger, is the tariff different compared with something that is complete?
Joe Neville (Kildare North, Fine Gael)
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It follows the previous material, so it just keeps adding, and whatever is the last country it goes into, it is on that as well, in simple terms.
Richard O'Donoghue (Limerick County, Independent Ireland Party)
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I will let the witnesses answer.
Mr. Vasileios Madouros:
My colleagues might correct me if I am wrong but I think in the context of the tariffs in the US at the moment, subject to the sectoral exemptions they would also apply to intermediate goods. I know there are other types of exemption now. One of the reasons you see that is had those tariffs had been there for the very integrated supply chains between the United States, Canada and Mexico, it would have been very problematic. Intermediate goods would then be incorporated. The value of intermediate goods would be different to the value of final goods but the tariff supply in the context of the US includes intermediate goods too.
Richard O'Donoghue (Limerick County, Independent Ireland Party)
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The reason we are looking at the transport network is for such situations as if you had large machinery or anything that is to come into the country. If it came in in four parts or whatever, it comes in containers and is assembled here. If a big unit was coming on a ship or whatever way it is coming into the country, it is a big unit. If it is broken into smaller units, you can fit much more onto the same ship and have more units land here if they are reassembled here. Could it encourage people, for the purpose of reducing shipping costs, to get more units in and to assemble them here? Would it stop the inflation of goods here due to tariffs coming in? Could it counteract tariffs if units were assembled here and we were able to get more units in? It is a knock-on balance from the transport network of what you can get into a ship, which you can ship across the world to here and assemble here. There would be more room on one ship. Would it help to counteract the tariffs?
Dr. Thomas Conefrey:
It really depends on what is announced next. We have seen past episodes where tariffs have been introduced by various countries on each other that things like that arise. We have tariff-hopping where products are moved around to try to avoid things. We really do not know until we see the details of what is announced. The point, as was made earlier, is that some kind of mitigants may eventually be worked out but on the whole this is a negative for overall trade. Tariffs reduce overall trade flows, notwithstanding that you may see some kind of transactions like the Cathaoirleach outlined emerge depending on the exact details of the implementation of the tariffs.
Richard O'Donoghue (Limerick County, Independent Ireland Party)
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I would like to put on the record before we conclude this meeting that I thank the witnesses for answering these sorts of questions which were not on the invitation letter and how they explained them excellently. They did not have to but I welcome all their answers today. It was informative to everyone. They did not have to do it. I thank them for that. That concludes the session. I thank Deputy Governor Madouros and his officials for attending the meeting today, and Dr. Martin O'Brien and Dr. Thomas Conefrey. I thank them for coming in and for an open and frank discussion.