Oireachtas Joint and Select Committees
Tuesday, 23 September 2025
Committee on Budgetary Oversight
Pre-Budget Engagement (Resumed)
2:00 am
Richard O'Donoghue (Limerick County, Independent Ireland Party)
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Apologies have been received from Deputies Richard Boyd Barrett, Cathal Crowe and Mattie McGrath. I ask everyone to turn off their mobile phones and devices or to put them on silent.
Before we begin, I wish to explain the limitations to parliamentary privilege and the practice of the House 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 the meeting. However, they are expected not to abuse this privilege. 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 public meetings, 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 members participating via Teams that, prior to making their contributions to the meeting, they confirm that they are on the grounds of the Leinster House campus.
Members are also 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.
This afternoon's engagement forms part of our pre-budget 2026 scrutiny and engagements. I welcome from the Central Bank Dr. Robert Kelly, director of economics and statistics, and Dr. Martin O'Brien, head of the division for Irish economic analysis. The committee welcomes the opportunity to engage with both witnesses and I thank them for being here today. I now invite them to make an opening statement.
Dr. Robert Kelly:
I thank the Chair and committee members for the opportunity to address the committee today. Dr. Martin O’Brien, head of Irish economic analysis, joins me. In my opening statement, I will outline how the changing external environment is reshaping Ireland’s economic outlook and how policy can respond by mitigating short-term risks and supporting longer term prosperity.
With regard to the economic outlook in a period of global change, driven by the recent shift in US trade policy, Ireland faces a significant challenge from the current environment of heightened global trade uncertainty. The recently implemented transatlantic agreement, which includes a 15% tariff on EU goods entering the US, provides a measure of stability, although full implementation remains outstanding.
Ireland’s economy presents varied risks across different sectors. A key factor is the structure of Irish multinational enterprises. Roughly half serve the domestic market and are less directly exposed to trade tensions, while the other half, concentrated in export-oriented sectors like pharmaceuticals and ICT, rely heavily on global value chains. These export-focused multinationals, where US-owned firms account for most employment and investment, are particularly vulnerable to trade tariffs and US policy changes. However, Ireland’s multinational export base is expected to remain resilient thanks to its role as a pharmaceutical export platform to the EU and the US, the specialised nature of its products and, potentially, the ability of firms to absorb some of the tariffs through their relatively higher profit margins. Indigenous firms, by contrast, primarily focus on the EU and UK markets. Those exporting to the US tend to be larger, more productive and more geographically diversified, increasing their ability to adapt to the tariff shock. They employ over 120,000 workers, with close to 10,000 tied to US export activity.
This sectoral breakdown informs the current economic outlook. The first half of the year demonstrated resilience with robust consumption and investment, but headwinds persist. Current projections anticipate a slowdown from 2.9% growth this year to just over 2% in the coming years. Medium- to long-term scenario analysis indicates an economy 1% smaller relative to a tariff-free scenario. Lower investment is the main driver, with diverted exports to markets outside the US potentially offsetting the direct impact of the tariffs. We also anticipate a moderate structural shift with reduced manufacturing activity and increased service sector growth as resources are reallocated in response to these global shocks.
With respect to managing short-run risks, the immediate fiscal risk lies in corporation tax receipts, which have increased fourfold since 2015. A decade ago, these receipts would have covered three quarters of Government education spending. Last year, they equalled the combined Government spending on education, housing, transport and justice. While the central expectation is for continued growth in corporation tax, declining export profits for multinational enterprises may still lead to a reduction in receipts. A particularly concerning aspect is the large share of this revenue, often referred to as "excess", that is not dependent on domestic economic performance, making it susceptible to a sudden reduction from broader US policy changes or corporate structure decisions by a small number of multinational companies. The summer economic statement clearly identifies excess corporation tax as a key fiscal vulnerability, warning that a loss of these receipts would turn the current headline surplus into a multibillion euro deficit.
Directing excess corporation tax receipts into the Future Ireland Fund is a welcome step towards strengthening public finances. The fund will help address long-term challenges, particularly those related to an ageing population and associated increased spending. However, even with this fund, the Government will need to secure additional revenue to keep the public finances on a sustainable path. To safeguard Ireland’s public finances, there are two key priorities. First, the tax base should be broadened as recommended by the Commission on Taxation and Welfare report. There are many choices available to Government in achieving this resilience-building step, including the reform of tax reliefs, property taxes, consumption taxes and social insurance contributions. Second, a credible fiscal anchor should be implemented that keeps Government expenditure growth on a sustainable path. This would allow for effective countercyclical fiscal policy, for example, by linking net spending growth, that is, expenditure growth adjusted for tax changes, to the economy’s potential growth rate and a 2% inflation target. This would suggest annual overall net spending growth of around 4% to 5%.
The summer economic statement proposes an additional €3 billion in spending this year compared with budget 2025, implying annual net spending growth exceeding 8% this year. Our analysis of planned spending indicates a significant increase in Ireland's underlying budget deficit, projected to rise from €6.6 billion to €13.9 billion, or 3.7% of national income, by 2027. Maintaining this expansionary fiscal policy during a period of economic growth limits our flexibility to respond with budgetary support during a future economic downturn.
Higher taxes and weaker external demand will undoubtedly present challenges for exposed firms. However, reflecting the vulnerability of corporation tax revenue and the need to contain spending growth, untargeted and widespread fiscal support is neither necessary nor appropriate for responding to the current challenges. Instead, policies should prioritise leveraging existing State agencies to help indigenous exporters that are exposed to the US to develop new networks and markets. The EU, representing our extended home market, holds considerable untapped potential which we should seek to realise through minimising trade friction.
On supporting long-term prosperity, looking to the medium term, maintaining Ireland's attractiveness for foreign direct investment remains essential. Key infrastructure gaps in water, energy, transport and housing are significant constraints on Ireland's medium-term sustainable growth. Closing these gaps is crucial to keep Ireland not only attractive for foreign direct investment but also to curb cost-of-living pressures and to unlock the productivity needed for a more diversified export base. Guided by a credible fiscal anchor, capital spending should be prioritised over current spending increases or tax cuts.
To maximise the return on capital spending, we must cultivate a thriving local business sector. This includes encouraging entrepreneurship and supporting skills development. A more diversified funding ecosystem offering tailored financing and equity will be crucial for supporting high potential indigenous firms. Timely and effective implementation of the recently published action plan on competitiveness and productivity will contribute to achieving these goals and ensuring Ireland's future competitiveness.
Beyond domestic measures, strengthening the EU Single Market through a more integrated payments landscape and progress towards a savings and investment union, which offers the twin benefits of generating increased returns for household savings and creating a robust investor base for businesses across the EU.
Ultimately, Ireland's economic resilience hinges on our ability to adapt to a changing global landscape and to leverage the opportunities presented by deeper European integration. While addressing the immediate vulnerabilities, it is crucial to avoid broad short-term fiscal support and instead prioritise investment and delivery of critical infrastructure and a robust fiscal framework, all of which will be essential for sustaining growth and enhancing our economic competitiveness. I thank the committee for its attention and we welcome its questions.
Edward Timmins (Wicklow, Fine Gael)
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I thank Dr. Kelly for the presentation. I have four or five questions. Dr. Kelly mentioned broadening the tax base but where would he suggest we raise extra tax?
Dr. Robert Kelly:
Does the Deputy want me to take the questions one at a time? I do not necessarily think it is for us to determine the trade-off between raising tax here or there - that really is a decision for the Government - but there are a number of potentials outlined by the commission on taxation, for example, whether that is thinking about wealth taxes versus income taxes, or consumption taxes and what is not included in them. There are many areas across a wide range that can be considered which would get to the point of broadening the tax base.
Edward Timmins (Wicklow, Fine Gael)
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Dr. Kelly has no particular suggestion. That is fine. I am interested in where he came up with the €13.9 billion underlying deficit for 2027. I have previously seen the €6 billion for 2026, taking out the windfall corporation tax. How did he come up with the figure of €13.9 billion? Does he have indications of 2027 expenditure? Does the Central Bank look that far ahead, two years ahead?
Edward Timmins (Wicklow, Fine Gael)
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Dr. Kelly referred to countercyclical policies. We all understand the concept that when things go bad, you spend from your savings fund, and when things are booming, you cut back on your expenditure. In reality, as he knows, it is never that simple. Your instinct when things are going bad is to cut spending. We experienced a crash in 2008 and 2009 and our income dropped dramatically. Going by Dr. Kelly's logic, theoretically, that was a time when you would be putting money back into the economy to sustain the economy, yet we cut spending massively around that time and the economy rebounded incredibly quickly, way ahead of expectations. How would Dr. Kelly explain that? That contradicts his countercyclical argument, does it not?
Dr. Robert Kelly:
I do not necessarily think it contradicts the countercyclical argument. In reality, what happened in that case is that we cut spending because we had to after a massive expansionary piece. Now, 15 years later, we are experiencing a very strong growing economy but we also have the scars of lack of infrastructure spending. We have housing deficits. It is not as if it was costless to not do that capital investment and to cut down on it for a period of five to ten years. We are still bearing the brunt of some of those decisions and cuts in spending. It has not been costless.
Edward Timmins (Wicklow, Fine Gael)
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The written submission provided refers to untargeted and widespread fiscal support not being necessary. What exactly is being referred to there? Is it a reference to the one-off energy credits that were given last year, the double children's allowance, Christmas bonuses and social welfare, or is it a reference to other fiscal supports?
Dr. Robert Kelly:
What we are referring to there is actually a response to the experience of firms that may be exporting to the US. What we are saying right now is that in terms of firm supports, we should not necessarily be leaning towards broad fiscal supports for those. We should in fact be using State agencies to see how they can redistribute some of their trade flow, for example, and incentivise their own repairing-----
Edward Timmins (Wicklow, Fine Gael)
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What particular supports is Dr. Kelly talking about that firms are receiving?
Dr. Robert Kelly:
I am not saying they are. At this point, we should not necessarily lean into that direction. I am not saying right now there is a set of supports but I am saying we should not necessarily think that is the solution to the current risk as we look across the risk landscape. We engaged with firms. We carried out a survey which indicated that firms which are proactively thinking about redistributing their trade flow and how they will respond to this have quite optimistic outlooks. Not to use too blunt a phrase but we should really be supporting firms to self-solve some of this. The reality is we do not necessarily see a change that is temporary in terms of the trading frictions they will face. They need to adapt to this and we need to support them in adapting to it rather than saying there could be a reduction in some cost base for them for a period of 12 months. That would not necessarily solve their problem.
Edward Timmins (Wicklow, Fine Gael)
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Given the high amount on deposit in Ireland - €160 billion or whatever it is - held by people in banks and earning little or no interest, what kind of savings scheme would the witnesses suggest? It was alluded to in the opening statement. I ask them to be more particular on any ideas they might have or that we could replicate? Other countries have such schemes. The Swedish model was mentioned previously. Is there any particular model the witnesses would suggest that would ensure people could get a return on this money and it would benefit the infrastructural investment in the State?
Dr. Robert Kelly:
In essence, what the Deputy is describing there is exactly what savings and investment union at the European level is trying to achieve. It is mobilising those savings now. The reality is there are several ways one could build funds. Even the upcoming auto-enrolment pension is a version of this. There are two elements to this.. One is mobilising the savings that are in the base and creating financial product and deepening our financial system to facilitate that, while the second element that we and the whole European Union are going to have to think about is creating an investable market for that such that the return is there. There is a danger that we could start to mobilise those savings but, in essence, they would end up being attracted to what is the biggest technology of the moment, such as the AI we see in the US with the big tech firms. In reality, we have to show there are returns available - we have the likes of the Draghi report and other things - and ways we can invest across Europe, including Ireland, on infrastructure and all of these things whereby some of those household savings will have the benefit of generating greater returns but also increasing the capacity and competitiveness of the European Union.
Edward Timmins (Wicklow, Fine Gael)
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Is there anything the witnesses have in mind in particular, something like the SSIA that was there 20 years ago? Are there any particular schemes that could be put in place here in Ireland?
Dr. Martin O'Brien:
I do not think there would be any particular scheme but it is also useful to consider the review of the funds industry that the Department of Finance carried out last year. Some of the recommendations in that report relate to things that could be done to incentivise households to move into other products and making sure the financial system is providing those kinds of products. What other elements are there? There are probably other elements to assist businesses to be in a place to take up that financing as well. It is not necessarily the case-----
Edward Timmins (Wicklow, Fine Gael)
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There is nothing in the pipeline at present.
Máire Devine (Dublin South Central, Sinn Fein)
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I thank the witnesses for the presentation. I have two points to address and will probably comment as well as asking questions. We are all well aware of the transatlantic upheavals, to put it that way, the multinationals and our dependency on pharma, ICT, AerCap, the Googles and Microsofts and so on.
It came home to roost. It was dangled over us in 2016 during the first Trump Administration, and it came home to roost. However, it was not as bad as we thought, or at least we had to be grateful for it not being as draconian as it might have. The witnesses are economists more so than I am. In their view, if the US economy tanks, will the US come back for more? It is not necessarily unreasonable to rule that in, as opposed to ruling it out. That would be a lot more damaging to us. The signs are that it is happening, but it is not quite being felt yet. How damaging would that be?
Dr. Kelly mentioned European integration and more diversification of indigenous firms. There are other markets. There are massive markets out there, including India and China. There have been some trade visits. How important are they, or do witnesses see Europe as the steady-Eddie within the family, so to speak?
According to the opening statement: "Key infrastructure gaps in water, energy, transport and housing are significant constraints on Ireland's medium-term sustainable growth." The prioritisation of investments, the delivery of critical infrastructure and the broadening of the tax base were touched on earlier. The Central Bank of Ireland's quarterly bulletin indicates that house prices and rental inflation in Ireland exceed the European average by at least 20%. Renters make up 78% of the population in my constituency of Dublin South-Central. Is it reasonable to draw a line from this Government's damaging housing policies, along with the cost-of-living increases, to a concerning decrease in employment reported among young adults? That is driving more than 60% of young people to think about legging it and getting out of Ireland because they do not have the capacity to pay these massive rents or to get a mortgage. This includes those in the 40s age bracket. They are spending on big concerts, day-to-day entertainment and what might be called luxuries but they do not see a longer term tie they could have to here. We seem to be losing a highly educated younger generation. Obviously, that will have an impact on pensions and on the population as we age. All of that gauges. It is down to the lack of housing and of infrastructure.
Dr. Robert Kelly:
I thank the Deputy for her questions. I will start and then, perhaps, Dr. O'Brien will come in.
Regarding a potential downturn in the US economy, the reality is these are global footprinted firms. If there were to be a downturn in the US economy, they would feel some impact, but they also export globally. Regarding the question as to whether a US downturn would necessarily trigger a change in potential trade policy, I cannot answer that. It may do. The reality is, besides a downturn, there is the potential for other policies within the US to change that would, given the corporate structure that multinational enterprises have here, mean some of the excess corporation tax could be under sudden-stop conditions. It is not necessarily going to be caused by a downturn in the US, there are also potential policy changes they might take. Some of the signals so far, such as the base erosion and profit shifting, BEPS. process, and some of what was agreed at the G7 summit during the summer regarding how profits are treated, all speaks to some resilience in the system for the way US corporates structure themselves here. This is what we point to in terms of where we are right now and the potential vulnerability to sudden changes in decisions. We are talking about a small number of corporates here. Corporates themselves can suddenly decide to put their European base in a different European country. It could be the right decision for them. That is what we are vulnerable to with this extreme concentration we have in corporation receipts. To the point Deputy Timmins raised, that is why we are advocating for a broader tax base.
Regarding diversification, I completely agree with Deputy Devine. We focus so much on EU in terms of diversification because trade frictions are naturally lower with the EU. We do not have tariff regimes. Rerouting trade into the EU could be easier, because it is a more open and integrated market for us. There are small frictions. They could be cultural or small things that, if Irish producers are going to compete in the European markets, we need to help them with. State agencies like Enterprise Ireland are very effective at this with their offices, but we really do see that as a potential solution. When we think about growth globally, south-east Asia is where a lot of the growth will continue to happen. Targeting those markets and growing a presence there definitely makes sense. It is just about the relative complexity of exporting a good to south-east Asia versus the European Union. It is a bigger challenge for firms. Then there are other trade agreements the EU provides. Take CETA, relating to Canada, for example. There are potential trading lines there for Irish products. I am not saying it is only the EU, but according to the data, we are probably a little bit underrepresented in terms of how much we export to the EU and maybe that is the easiest one for us to think about developing.
Cormac Devlin (Dún Laoghaire, Fianna Fail)
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I thank the witnesses for their presentation.
What I start with is probably more within Dr. O'Brien's remit. Looking at the present economy, as it has been outlined, what kind of major challenges are envisaged? I acknowledge what he said about tariffs were mentioned earlier, but what other risks does the economy face over the medium term, given everything is in flux globally, practically by the hour? Could he give us his best effort at a forecast, please? I will not hold him to it.
Dr. Martin O'Brien:
As I alluded to previously, our analysis suggests that tariffs, as we have them currently, will hit the economy but it is not going to be a huge, significant impact. The challenge is if other changes in US tax and industrial policy more fundamentally change the incentives for US companies to operate here. If that were the case, there would be an almost immediate hit on corporation tax revenue and then, over time, a slower level or a much lower level of investment into the country. That would damage the longer term growth prospects more generally. Taking that to a more global picture, Ireland is a small, open economy and a trading nation. In a world where there is such friction generally, not just with respect to the US, and where barriers to trade are growing quite substantially, small open economies will fare worst. We will be open to much lower levels of growth and activity in that case. That is one side. The other side is the factors within our control we can think about to offset those risks or minimise domestically determined risks. Those come back to the facts around infrastructure delivery, and making sure Ireland remains a reasonably attractive place to live and do business in. To come back to Deputy Devine's point, the main issue around affordability of housing and affordability of public services is going to be actual infrastructure delivery to enable additional housing supplies to come on.
Cormac Devlin (Dún Laoghaire, Fianna Fail)
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Regarding the international piece, tariffs are one thing. Are there other challenges Dr. O'Brien can foresee? The turmoil across the globe, including conflicts, etc., is not good. Are there any other major factors to highlight for the medium term for the economy?
Dr. Martin O'Brien:
In general, there was always going to be issues around commodity markets, namely, sensitivity of certain energy products and other key commodities that factor into price developments here. Taking that over the more medium term, there are also the issues around more extreme weather events. Basically, we are going to be in a world where supply-side shocks, which lead to higher levels of volatility and vulnerability in supply chains, are likely to be more frequent. To navigate that world, you need to have buffers built within your domestic economy to try to ensure you are able to steer through those challenges.
Cormac Devlin (Dún Laoghaire, Fianna Fail)
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Would those buffers include the future Ireland funds that have been devised and put aside?
Dr. Martin O'Brien:
They are certainly a good starting point, and it is better to have them than not but if we look at the overarching design and implementation of those funds, they will help us address some of these longer term costs, particularly on the infrastructure side but also on the ageing side.
In and of themselves they are not necessarily going to be sufficient to cover some of the ageing costs that we are going to face in the future, for example, so there are other actions that would be need to be taken on that.
Cormac Devlin (Dún Laoghaire, Fianna Fail)
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Dr. Kelly, in his opening remarks, referred to the Irish firms focusing more on the UK and EU markets. A lot of that came about due to Brexit and the challenges we faced as a nation. In terms of where we stand now, what percentage of the SMEs, predominantly Irish-owned SMEs, are focusing on the EU and UK markets? By how much has their number increased since 2015 and 2016?
Dr. Robert Kelly:
I do not necessarily have the figure for how much it has increased but about 70% of our exports are now to the UK. There are quite a few firms for whom all their exports are to the UK or all their exports are to the EU. In the US, exports are very diversified. It is really only firms that have already expanded past the UK and the EU that are in the US market.
Cormac Devlin (Dún Laoghaire, Fianna Fail)
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I have only one minute left. Dr. Kelly alluded to new financial services. What does he think the Irish banking sector would benefit from in terms of new services? Is it new entrants into the market? Is it new services being offered domestically or even pan-European services?
Dr. Kelly referred to the financial crash in 2008. From the Central Bank's perspective, what new regulatory regimes and oversight has it initiated since that period?
Dr. Robert Kelly:
The first one is a very broad question. There has been pretty much an overhaul of what we call the microprudential regulation within the banking system. That is how individual banks are regulated and the buffers they put in place, and the resilience around those. Then there is, and this essentially it came out of the crisis, an overarching set of buffers and rules, like the mortgage measures, which are macroprudential measures. Because each individual institution could as though it was resilient, this was designed to protect the system as a whole in order where there could be a build-up of risk, let us say, to property exposure. I am happy to go into more detail but there is a lot of detail there.
On the banking and financial system, this is multifaceted as well. One of the areas where we have seen a growth is non-bank financing. The reality is that when we think about some of these firms that we may say are going to grow quickly, they may not be the traditional type of firms that have collateral, which a bank finds it easy to price a loan against. They need to be more specialised, need to understand the risk and need to finance that.
Cormac Devlin (Dún Laoghaire, Fianna Fail)
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I might come back in again.
Richard O'Donoghue (Limerick County, Independent Ireland Party)
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If people ask questions when they have only ten seconds and expect an answer, then we might get caught for time at the finish.
Cian O'Callaghan (Dublin Bay North, Social Democrats)
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I thank our guests for coming in and for their opening statement. Dr. Kelly, in his opening statement, said: "We also anticipate a moderate structural shift with reduced manufacturing activity". What is that based on? Is it based on a forecast? Is there hard evidence or is it just a projection?
Dr. Robert Kelly:
There are two sources. One, at a higher level, is the quarterly bulletin signed article on geo fragmentation. There is also what we call staff insights that give detail on this. I cannot remember the exact name of the staff insights but I can send the title of it to the Deputy. People can look up staff insights on our website. At a macro level, there are all these interactions but they are just done on an aggregate. What this does is it looks at all the individual sectors and how they interact with each other both here and abroad. If there is a shock that affects manufacturing in a certain zone somewhere else and that feeds into our services sector, it picks that up. When we ran that model and looked at the new steady state with a 15% tariff, I would describe it as a moderate change. In particular, pharmaceutical activity came down, as did even some machinery activity. In the case of our services sector, such as the likes of financial services and professional services, they go up.
Dr. Martin O'Brien:
To clarify, the analysis does not show that these sectors are necessarily shrinking. They are just not going to be as big as they would otherwise have been. The pharmaceutical sector would probably be about 5% to 6% smaller in this analysis in about ten years' time than it would otherwise have been. We are still going to see growth in that sector. It is just that other services sectors might grow faster.
Cian O'Callaghan (Dublin Bay North, Social Democrats)
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The quarterly report contains interesting data on the increase in food prices, pointing to meat prices driving some of that quite significantly and then, within the meat sector, it is beef and veal, in particular, that are driving that. The Central Bank notes that the increase in beef and veal prices does not appear to reflect the results that have passed through our input prices and it also seems to reflect what is happening in markets outside of Ireland. I think the report asks what explains the increase in consumer beef prices in Ireland that has also been observed in the UK and some other EU countries. Do the witnesses have any thoughts or analysis on that question that was posed in the quarterly report?
Dr. Robert Kelly:
Yes. The Deputy has correctly identified this. There are three sources. One is dairy, and butter in particular. Beef is the big one and it is driving the 5% inflation we see at the moment.. When we look at it, the reality is that we are a large exporter of beef in Ireland. It is determined by the fact that there is just less beef in our big trading markets. The reality is that production is down about 5% in the last couple of years in these markets and the demand for beef is high. There are OECD reports that look at how it expects this trend to continue. It does not foresee continual price increases. The reality is that production is down in the markets. It is much the same as it was here but production is down in our big export markets. If that were to continue, for example, we would continue to see price pressures on beef, if the demand remains in those markets.
Cian O'Callaghan (Dublin Bay North, Social Democrats)
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What is driving the reduced production in our export markets that is increasing prices?
Dr. Martin O'Brien:
From our understanding, there are a couple of different factors, including the following. On the Continent, there are some elements of disease that have restricted production in this sector over the last year or two. Longer term, there might be other issues with respect to how the sector is changing overall that could influence a lower structural level of supply into the future. At the moment, it is very hard to pinpoint a particular reason.
Cian O'Callaghan (Dublin Bay North, Social Democrats)
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Is that impacting on prices in Ireland?
Cian O'Callaghan (Dublin Bay North, Social Democrats)
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Dr. Kelly made a case for having a credible fiscal anchor and suggested a "net spending growth of around 4% to 5%." Does the composition of that in terms of current or capital need to be specified in a credible fiscal anchor or left flexible? What are the witnesses' views on that?
Dr. Robert Kelly:
Dr. O'Brien could come in again but personally, I would think it should be flexible and discretionary because the reality is there are periods when having more capital spending makes sense. Right now we are in one of those periods when we look at the capacity constraints in the economy. It is all about fitting that within a fixed envelope. Of course, when we think about it, we tend to focus very much on spending here. If we want to spend more, there is the possibility in that spending rule to raise taxes to offset that. It is a net spending rule.
Cian O'Callaghan (Dublin Bay North, Social Democrats)
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Dr. Kelly, in his opening statement, made the observation that those companies "exporting to the US tend to be larger, more productive" than those exporting to UK or European Union markets. Why is that the case? How can it be addressed?
Cian O'Callaghan (Dublin Bay North, Social Democrats)
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So some of it is volume.
Cian O'Callaghan (Dublin Bay North, Social Democrats)
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What about the issue of productivity?
Cian O'Callaghan (Dublin Bay North, Social Democrats)
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Is there not a difference between some elements of the multinational sector in terms of productivity and some elements of the more indigenous sector?
Cian O'Callaghan (Dublin Bay North, Social Democrats)
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More investment and research.
Gerald Nash (Louth, Labour)
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Dr. Kelly and Dr. O'Brien are both very welcome. The Department of Finance has been wrong. Its forecasts have been incorrect in terms of corporation tax receipts for 13 consecutive years. In most comparable countries, if this was the case, the methodology would be independently reviewed. Should it be?
Dr. Robert Kelly:
Truthfully, given how corporation tax receipts have evolved, I am not so sure there is a methodology that can predict excess corporation tax receipts.
The reality there is the decisions of fewer than ten firms. As much as we rely heavily on economic models, I do not think there is an economic or forecasting model that will be able to pick that up. What we can do, to keep a focus on it, is look at the underlying component and ask what the economy would generate absent these decisions multinationals are making. Yes, they might have been wrong for 13 years, but I do not see what we would replace them with.
Gerald Nash (Louth, Labour)
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We were told repeatedly two, three or four years ago by economists in the Department of Finance that by this point in time, we would probably be €2 billion worse off in terms of corporation tax receipts, even though people like me were reminding them at the time that pillar 2 of the base erosion and profit shifting, BEPS, process was likely to beneficial, at least in the short term, for the Irish Exchequer. What is Dr. Kelly's sense of that?
Dr. Robert Kelly:
When we look back at the BEPS process, the Deputy is correct that the pillar 2 minimum floor means we expect growth in corporation tax receipts, all other things being equal, and we have this now in our estimates. The reality is that the bit people pointed to was the pillar 1 process, which has not progressed. There is that trade-off between the two, but as it stands the Deputy is correct.
Gerald Nash (Louth, Labour)
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We are going to benefit significantly next year in the area of BEPS pillar 2. There is still uncertainty with BEPS pillar 1. Does Dr. Kelly agree that continuing uncertainty is to Ireland’s benefit?
Dr. Robert Kelly:
I think that could be a narrow view of the world. If we think about just what is in the BEPS version of the world, then yes, we expect receipts to go up. However, that excess component is very much determined by the decisions of a small number of firms. If they, due to BEPS pillar 1, have not been handled in a certain way or because of other uncertainties created they decide on a certain corporate restructuring, we could see that excess component disappear quite quickly.
Dr. Martin O'Brien:
It is also worth noting that as a result of the G7 statement during the summer, the wider OECD-inclusive framework around BEPS is back on the table. Whatever the conversations being had with respect to that, that may have an influence on what we currently understand as the benefits from pillar 2 in the short run. It points to the fact that we cannot orientate our medium-term fiscal policy, or fiscal stance, on receipts we have little certainty over.
Gerald Nash (Louth, Labour)
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We also do not know how that G7 arrangement is going to evolve or be implemented, and whether or not it is merely a political declaration remains to be seen.
To return to remarks made with regard to broadening the tax base, this is something this Administration seems unlikely to do based on the evidence from the previous Administration. If I were a member of the Commission on Taxation and Welfare, I would be annoyed because none of the recommendations it made on potential revenue-raising have been implemented. We know that there is probably approximately €8 billion in tax expenditures in the economy every year and they are rarely reviewed. A lot of them have taken on the form of permanency in recent years. Now, in anticipation of the budget on 7 October, it is likely that another significant tax expenditure will be added to that, namely, the proposed 9% VAT rate for the hospitality sector. Do the witnesses agree, given that the economy is running hot and that our tax expenditures are rarely reviewed, that if this is done, it has the likelihood of becoming a more permanent feature of the framework, potentially costing approximately €3 billion between now and the end of the term of this Government? Do they agree that is economically irrational from a policy point of view and quite stupid?
Dr. Robert Kelly:
The individual decisions on taxation and what needs to be done is for Government to make. However, the point the Deputy is making is that if we remove a certain sector from the tax base on a consumption tax like that, we are further reducing the tax base. We have a piece in the quarterly bulletin, the last signed article we had in the summer, where we looked at the public finances. It shows that even before we do some of this, although we have a VAT rate that looks quite high, due to the various implementations and carve-outs at a European level the coverage is lower than the rate would be. We would be further reducing our corporation tax base. It comes back to the point about the 5% rule. If we do this, it is necessarily netted off against spending when we take it out of the net.
Richard O'Donoghue (Limerick County, Independent Ireland Party)
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It is my question this time. To follow on from the last comment on reducing VAT to 9%, it is a good thing because it can also counteract inflation. At the moment, if you are on a 13.5% VAT rate, you are looking at wage increases and food production cost increases. When you look at your tax base, it is only year on year you are talking about the tax base being reduced. If you go back three years and look at the tax base you have now versus three years ago, because of the price you are paying for your product the taxes that are received on the products today far outweigh the taxes you were getting three years ago. As for saying that our tax base will be down, it will be down for this year, but if we go back to last year, it will actually be up based on last year's taxes. Factually, we are talking a year-by-year basis. I am a contractor, so I have been in business all of my life. I have been in business for 30 years. I can see from the tax base, from PRSI, from sick pay and everything else across the board that has to be paid that every time there is an increase in the cost of materials and labour, the consumer pays, which drives inflation. No matter what wage increase there is, from the minimum wage upwards, because it is a domino effect, businesses are getting nothing extra for their increase because inflation takes it away. If you have charged more, you have to pay more. It is a circular economy when you look at it. From the tax base we were in last year, even if it goes to 9%, there is no difference. This year we are actually up on the tax base from last year.
I will go further on this. The witnesses said earlier that for capital spending, one of the things you have to do is raise your tax base. That is grand, but it is one thing raising a tax base. It is another thing getting value for money for your tax base. If you look at private delivery versus public delivery and at the cost base between them, private delivery can deliver the same infrastructure for less than the public delivery can do it and there is no overspend because it is based on design and delivery. You have your base price and design price and you might deliver, say, a project of €1 million, whereas you could have a public price based at €1 million and the next thing they change it because they have a figure designed themselves. That project could turn into €2 million, or it could turn into a children's hospital all over again. If we had the tax base we have now, and we had design and delivery for infrastructure, we would then have projects coming in on budget, on time. That means we would have more houses, more delivery and no overspends, which would make an accountant’s job easy. Why do we not look at the basis of a private delivery versus public delivery, with the costs based on the private delivery and what they deliver versus a public delivery? It is public-private delivery, but we would look at the overspends. How much could we save in taxes every year and put back into infrastructure?
Dr. Robert Kelly:
I will start with the last question and work my way back. Again, Dr. O'Brien may want to come in. The Deputy makes an important point, and it is one I did not get a chance to make in the opening statement. We talk a lot about capital spending, but the capital spend itself is one component. There is delivery, potential delivery costs and the frictions in the system. We have said this multiple times. We have pieces where you can look at potential costs from delaying the delivery of infrastructures. As for whether it is a public or private piece, I will let others decide what the best avenue of delivery is, but the reality is that removing all frictions, delays and any of that in the area of efficient delivery is as important as making the capital expenditure available.
There is a second point within that. This is why we talk so much about the 5% rule because if we want to do capital spending, we have to make the space in the economy. You might ask what the hell I mean by space in the economy. If we want to run all our areas of the economy hot because we are doing a lot of fiscal stimuli and our labour market is under 5%, it means we are waiting for labour. It means we are waiting for expertise to come in.
All of these add to cost.
If we are to prioritise infrastructure, we also have to make this space. One way we need to do that is by reducing some of the stimulus that might be supplied to other parts of the economy. Broadly speaking, there are a couple of ways of doing that. One way is through taxation and another is less current spending. If we want to spend on all fronts at once, it is going to be very difficult to get value for money per euro spent. That is one reason we advocate for it so much.
On the question about inflation and the tax rate, if I have understood correctly, how the tax rate would impact inflation in the services sector - I am open to correction - it would be a once-off adjustment. If VAT is reduced and if it is kept down, that would reduce inflation for this year. There is an important consideration if the motivation for these policies is inflation as to who is targeted. We have done a lot of work looking at who consumes what. If this is about a distributional issue, for example, we know food and energy inflation are what lower-income people are most exposed to. On the trade-offs in terms of inflation, it is the upper quartiles of income distribution which are exposed to-----
Richard O'Donoghue (Limerick County, Independent Ireland Party)
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I apologise. I only have a couple of minutes. With the VAT reduction, it means businesses from that sector, if they get the 9%, can absorb costs without raising the price. That means the consumer gets value for money. It stays the same. If the VAT rate does not come down, they have to charge more because of the base coming in. It is about absorbing and keeping businesses going without driving inflation in other sectors. It is about trying to find a balance. Intake is up because of the cost of the product and the VAT rate comes down so it balances out. It also allows businesses to absorb that without raising prices. It is about providing stability across a sector which is vulnerable. The end result is the consumer pays more. No matter what wage increase they get, they are fighting fires because they get no extra value for their money.
Dr. Robert Kelly:
The rationale the Chair outlined is perfect. It is then about making the choice that if there is a fixed envelope of spending overall, this is this sector you wish to support. That is a political choice. If you stay within the 5% rule, you then cannot do some of the other redistributional stuff. That is exactly what the budget process is about.
Richard O'Donoghue (Limerick County, Independent Ireland Party)
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I will come back to Dr. Kelly again on that. I call Deputy O'Meara.
Ryan O'Meara (Tipperary North, Fianna Fail)
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I thank the gentlemen for being with us today. I will start with the point Dr. Kelly made that "looking to the medium term, maintaining Ireland's attractiveness for foreign direct investment remains essential". Is he more worried about the impact of tariffs long term with larger industries and companies not investing in infrastructure such as factories or office blocks because of the uncertainty created by tariffs? Is there more of a worry, which I think comes from private industry and we will probably get it this evening, particularly around planning delays and abuse of the judicial review process, about turning off private investment in this country from multinationals? Are both factors or does one worry him more than the other?
Dr. Robert Kelly:
Dr. O'Brien also may wish to come in. Tariffs certainly do impact the bottom line in exports to the US but this is an export platform as much to the EU as to the US. They could easily increase their global footprint elsewhere. If we think about this purely as tariffs, our assessment, given the high level of some costs in the system, it is probably not a decision point for current investment here in terms of how many are at risk due to the current level of tariffs. Looking into the future and potentially attracting more investment is what is at play. While we can partially control international policy through our influence in the like of EU forums, the reality is we are a taker of a lot of what happens globally. What we can control is some of what the Deputy pointed out. If we want to remain relatively attractive, it is about having the infrastructure. Often, when we engage with multinational companies, they say cost is important but they talk about security of infrastructure, guaranteed power and water and being able to deliver these things at scale. Some of it is workforce, which brings us back to housing and whether we can scale up the workforce they need through immigration. There is a set of controllables. Tariffs are important but the others are what we as a nation can focus on to become as attractive as possible.
Ryan O'Meara (Tipperary North, Fianna Fail)
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On diversification, are we too dependent on the US when it comes to what tariffs could do or the fact that the majority of our corporation taxes come from US companies?
Dr. Robert Kelly:
Our current economic structure, in particular taxation, is dependent on corporation tax from US multinationals. The counterfactual to whether we are too dependent is difficult to understand but we are a small open economy, which creates vulnerability to the global system and within that global system we have a high dependencies on the US. That is the reality.
Ryan O'Meara (Tipperary North, Fianna Fail)
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In his opening statement, Dr. Kelly said, "Current projections anticipate a slowdown from 2.9% growth this year to just over 2% in the coming years." How does that compare with other EU economies?
Dr. Robert Kelly:
That compares quite favourably with other EU economies. Recalling from memory, the projected euro area growth rate is about 1.2% and perhaps slightly lower in coming years. In a European sense, Ireland is growing stronger. That brings us back to the capacity constraint point. Ireland's economy has grown very strongly for the past five years. We are starting from a strong position. This is about positioning ourselves for what the Deputy spoke about - future investment flows - and how we can remain attractive and continue to grow the way we have been.
Ryan O'Meara (Tipperary North, Fianna Fail)
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Following up on Deputy Devlin's questions, Dr. O'Brien mentioned more shocks because of more volatility in future years and that we need more buffers. What does he anticipate those buffers are or what should they be?
Dr. Martin O'Brien:
From a public finances perspective, the ICNF and the Future Ireland Fund were mentioned. Beyond that, the best buffer would be to broaden the tax base. That would copper-fasten the potential for more sustainable growth in tax receipts more generally on a more certain basis. As was mentioned, I can tell the committee within a certain level of certainty that if the economy is about to grow by 2% to 3%, income tax will grow by X% and VAT will grow by Y%. I cannot tell the committee that for corporation tax. There is no real sense for us to be able to say our revenue base over the longer term would be more sustainable. That is what we spoke about in terms of building buffers. More generally, there is investment in and delivery of infrastructure. Planning delays and issues were mentioned. Reducing them and effective delivery of that type of infrastructure is how we build buffers for the future.
Ryan O'Meara (Tipperary North, Fianna Fail)
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There was a bit of discussion about agriculture. Being such an important indigenous industry, the nitrates derogation is an issue raised with me quite a lot. Has the Central Bank looked at how it could affect our productivity in agricultural output if the nitrates derogation was taken away?
Ryan O'Meara (Tipperary North, Fianna Fail)
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Dr. Kelly stated it is "... crucial to avoid broad short-term fiscal support and instead prioritise investment and delivery of critical infrastructure and a robust fiscal framework ..." This came up today in Leaders' Questions again. One-off measures have come up a lot in the debate around the budget. Am I right that the Central Bank is essentially saying it would favour investment in capital infrastructure over the one-off measures in recent budgets?
Dr. Robert Kelly:
It is important to point out that we are saying that over broad fiscal measures, which are very expensive, we favour capital expenditure. We also see that there are cohorts and households who need support but that can be done within the system. It is about avoiding broad supports that are relatively untargeted in terms of income. Vulnerable households experiencing increases in the cost of living can still be protected. It is about saying we cannot provide broad supports and focusing what would have been in broad supports on capital expenditure.
Joe Neville (Kildare North, Fine Gael)
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I thank the witnesses for coming in. We have got used to experts and people who really know their areas coming in such as previous Central Bank colleagues as well as the ESRI and IFAC. There are a lot of the same trends and thoughts. That will help us tomorrow as we have discussions with the Ministers, Deputies Chambers and Donohoe. We want to get as much information as possible. I will ask a number of questions.
I get the sense that the witnesses are essentially saying the economy is going really well and we are getting a lot of money in, but unfortunately a lot of it is coming from one source. If we keep spending it broadly we will be in a situation where we might not get that money in the future, and we will potentially be left with an overhanging cliff down the line. That is something the witnesses want to keep away from. That is the overall theme. That puts us in a situation where we are coming up against a budget where we have this money, but how do we spend it intelligently? At the same time, we must be conscious too that if we spend on capital infrastructure that also has a way of overheating the current expenditure, because it is inextricably linked as we are still spending at the same time.
Why do the witnesses think youth unemployment is growing faster?
Dr. Martin O'Brien:
A lot has been made of rising youth unemployment in the most recent data point. I would rather see a data point over a couple of quarters to see if there is something fundamental going on. That is not withstanding that there are challenges, which Deputy Devine raised very well, that young people are facing in Ireland at the moment. There could be seasonal factors determining why there is a certain increase in youth unemployment in a particular quarter. It is certainly the case and there is a general trend that youth unemployment is typically higher than the average rate of unemployment over a longer period.
Joe Neville (Kildare North, Fine Gael)
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Do we know what sectors it is in? Do the witnesses have a feel for that?
Joe Neville (Kildare North, Fine Gael)
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With uptake, is there no risk of AI in services industries; the likes of the pillar banks-----
Joe Neville (Kildare North, Fine Gael)
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It is far too early to see those sorts of trends.
Joe Neville (Kildare North, Fine Gael)
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Entry level jobs would be the first to go in those sectors.
Joe Neville (Kildare North, Fine Gael)
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What sectors are being seen?
Dr. Martin O'Brien:
We look at sectors and occupations that are more exposed to AI and other technologies. Then, among those, we ask are they exposed in the sense that AI would be complementary or replacing labour. Certain sectors like finance and ICT are a little more exposed and it could be a situation that in the future entry level jobs in those sectors could be more challenging.
Joe Neville (Kildare North, Fine Gael)
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Exactly, that was my point.
Dr. Martin O'Brien:
There are also other sectors, such as healthcare, where use and adaptation of these kinds of technologies are actually complementary. They could boost the productivity and the ability of people to work effectively. Regarding the point the Deputy is making, we are not seeing it in the actual hard numbers just yet and it is probably too early for us to identify that trend.
Joe Neville (Kildare North, Fine Gael)
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Is the energy sector a big risk to the economy?
Joe Neville (Kildare North, Fine Gael)
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Both price and the grid.
Joe Neville (Kildare North, Fine Gael)
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They are linked. We have not invested in our infrastructure so, apparently, our prices are higher because of that.
Joe Neville (Kildare North, Fine Gael)
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Yes, but at the same time, if we put them through a system that has not been invested in, it is more expensive.
Joe Neville (Kildare North, Fine Gael)
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Regarding the reference to encouraging entrepreneurship, we have some great schemes. Enterprise Ireland does great work with certain entrepreneurs. Are there any individual things witnesses would say we could do better? To link that to the increase in savings in Ireland, there are two points. People were saving too much, which the witnesses called out, but also there is not enough entrepreneurship. Is there any way we could get people to invest, rather than saving? In America and other countries there has always been that model. In Ireland, we put our money in the banks and in houses. That is all we do. We need to encourage business start-ups while also getting people to invest. Is there any way we can be more inventive?
Dr. Robert Kelly:
There is an element to the financial system there. If we look at the US, it has a much more developed financial ecosystem for households. It may be direct access to funds, for example, where households invest in them. On the other side of it, which we have to do a piece on how that capital is allocated. The US is at the forefront of how funds are allocated funds to the entrepreneur. We think of Silicon Valley and New York. They are very good at allocating, and we will have to develop that capacity within Europe and Ireland, to make sure we are investing in the growth areas.
Joe Neville (Kildare North, Fine Gael)
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Does Dr. Kelly think we are set up to do that?
Máire Devine (Dublin South Central, Sinn Fein)
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The witnesses tut-tutted the €9.4 billion budget coming in a couple of weeks. I will just leave that there. They think that package is too large.
Going back to the point on loose fiscal policy, under the heading, "Supporting long-term prosperity", the witnesses' opening statement points out that a credible financial anchor was capital spending. Capital spending on infrastructure is staring us in the face, in that our population is to reach around 7 million over the next two or three decades. That is an ageing population, so there are particular health infrastructure needs. We have issues with schools and lots of other things, but I am focusing on health facilities, given my background. What percentage of the budget should capital spending be less taxes cuts and current spending? What should the ratio be given the demands that are coming up?
Climate change was not touched on. It is a short-term risk. We always looked at it in the medium or long term. It is short term. We saw what went wrong in Europe over the summer with the heat, the environment, the land, the water supplies, people's health, all those significant elements and the knock-on effects. How is that gauged? Do the witnesses gauge that at all in their outlook?
Dr. Robert Kelly:
I will not get into relative ratios. If we are looking at the €9.4 billion and saying it is not necessary at the moment, I would certainly not cut the capital spending part. If we were bringing the total figure down, I would be doing it on one of the other strata with the trade-offs that are there.
Máire Devine (Dublin South Central, Sinn Fein)
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If Dr. Kelly was cutting it at one side, would he not just bank it into the capital spend?
Dr. Robert Kelly:
In totality, the projected spend is not necessary for the point that we are at in the economy, which is how we have described it previously. It is more about reducing that envelope, but not at the expense of capital spending. I would keep the capital spending plans as they are and look at the mix between tax cuts and current spending to achieve a smaller budget. There are trade-offs all over the place so small changes may be warranted. Again, that is a decision for Government. However, I would certainly prioritise the capital spending element.
Regarding climate change, we had a piece within our quarterly bulletin in the summer looking at it. We work with the Climate Change Advisory Council. We project we will need about €55 billion worth of investment to meet the climate targets that were pointed out. Dr. O'Brien will correct me if I am wrong. Of that, 20% will be public sector and front-loaded. When we talk about the capital spend, some of that will be targeted at the transition cost. Some of that will be on energy infrastructure, for example, greening the system in terms of energy. All this infrastructure should have the twin benefit of also greening our energy. It is a mix of the two of those I would see. When we look at this need for infrastructure, it is to meet a climate transition and develop the infrastructure needed for growth and for housing. It is certainly though the lens of greener technologies.
Cormac Devlin (Dún Laoghaire, Fianna Fail)
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We did not have a lot of time for the question on the new financial service providers. The witnesses were getting into the issue about new service providers entering the market. Some of them do not have the capital requirement that regular, historical banks do. There is a change in the market. Could the witnesses elaborate on that?
The second question I had was about the revised regulatory environment and oversight since 2008. The witnesses had also been getting into that and had said both questions were quite broad. So, there is a little more time. If we have enough time I will go to a third question.
Dr. Robert Kelly:
If there is anything members would like me to cover on the regulatory question, I certainly will.
There has been a suite of changes. Some of them are resilience building in themselves. We think of things like the more recent AML and that. Some of them are about resilience building in terms of capital within the system, and practices around fitness and probity of people on boards. There has been a myriad of change in terms of having a much more robust and strong financial system and, truthfully, lessons learned from the financial crisis. Probably the ones that people will know most will be the likes of the mortgage measures, for example. Even though they potentially have a cost associated with them, and we have always been very open with this, it is a trade-off between the benefits they derive and the cost associated with them.
In response to the first question, this is something we even had to transition away from. We used to produce statistics. One of the things I am responsible for in the bank is producing financial data. We had to move to a frontier statistics piece where we look at total credit to exactly get at this point and to reflect that.
Dr. Robert Kelly:
Investment and that. There are other areas and I think part of it is focused on agriculture. These become specialised providers. In reality what they are doing is they are understanding what are hard to capture as broad risks. They are understanding those risks in relativity and they are pricing credit to it. Generally, it is more expensive than bank credit but it reflects segments that need investment and carry a different type of risk. We are seeing the financial market moving that way. In ways it is probably redistributing capital globally through our financial system, but that is a little bit different from our discussions around the savings and investment union, which would certainly just increase the amount of that available. Ultimately, that would drive down some of the costs and some of the risk because there would be more liquidity in the system. We would also have the gains for households to potentially have higher returns. I do not whether I have answered everything or there is anything missing.
Cormac Devlin (Dún Laoghaire, Fianna Fail)
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Some would argue that the regulatory regime is more favourable if they can attract that kind of financing versus going through traditional banks or a lender, as it were. That two-way agreement of financing projects, which Dr. Kelly said is for construction mainly, is somewhat easier. Of course, while the risk is borne by the individual entity that is lending the money, the other factor is that one has no say or control because there is no real regulatory requirement around that. It is almost a two-way street between the company and the entity that is getting the investment. Am I right?
Dr. Robert Kelly:
They are non-deposit holding and essentially that is whatever the investor wants in return for the risk it is bearing.
On the capacity of the banking sector, and I do not want to narrow it too much on the construction sector, last year the Central Bank put out a piece on housing. We found that the other component that is an issue is what we call equity financing, that is, the component that is not leveraged for debt. The main banks within this State have facilities made available where they wish to lend but they cannot necessarily lend all their earmarking available to it. They have set up various approaches that involve trying to match with investors that will do the equity component. There are lots of things here. It is not necessarily that the banking system cannot do this. It is complex.
Cormac Devlin (Dún Laoghaire, Fianna Fail)
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The system has changed.
Cormac Devlin (Dún Laoghaire, Fianna Fail)
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I would be the first to say that. Even from a consumer perspective, the banking system is radically changed. One could argue it is also under threat from new models.
I have a little over a minute and I feel that the Chairman is looking. On the eurozone, I think the Central Bank has a bi-weekly meeting with colleagues across Europe. In terms of my initial question on threats, does the eurozone view the European market as stable? What are its view on the things that pose a threat to Europe and Ireland? Dr. O'Brien touched on the threats that face the Irish economy. On a macro level, what are the witnesses seeing or hearing from colleagues in Europe?
Dr. Martin O'Brien:
Over the longer term there are more conventional issues and the point about climate change has been mentioned. Geoeconomic fragmentation is also an issue and it impinges on issues with respect to what would be called strategic autonomy, which the ECB has been quite vocal about. There is some vulnerability there to our payments infrastructure. A lot of it relies on particular providers that are not European. Initiatives around more integrated European payments systems, and developing instruments like the digital euro and so on, could be ways and means for us to ensure more resilience in the European infrastructure.
Cormac Devlin (Dún Laoghaire, Fianna Fail)
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I presume cyber threats are a key issue.
Edward Timmins (Wicklow, Fine Gael)
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Does the Central Bank see a role for targeted taxation measures or incentives to deliver housing or, allied to that, a reintroduction of the development levy, the waiver scheme, that came in two years ago and was dropped a year ago? Is there any scope for that? Would a very targeted tax measure be beneficial?
Dr. Robert Kelly:
Dr. O'Brien might want to answer as well. In essence I would describe the waiver of development levies and what happened in terms of connections to water and so on as much the same thing. They are operating on one side. We have to ask ourselves whether we think that is the biggest issue facing the viability of housing right now. My assessment of that it is not the biggest. It is the same as when we introduce schemes that boost the demand on the housing side, such as the help to buy scheme. The reality is we have pointed to three elements and I call them the three Ps: planning; the preparation of land, which is infrastructure, and productivity because we are going to have to use more modern methods of construction to deliver housing.
Edward Timmins (Wicklow, Fine Gael)
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It is more than structural.
Edward Timmins (Wicklow, Fine Gael)
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The phrase "shutting the stable door after the horse has bolted" has been used to describe what happened post our crash in 2009. Does the Central Bank review all the rules and regulations concerning banking and mortgage applications? I ask because I have received feedback that these applications involved a lot of bureaucracy and red tape, which does not reduce the risk nor help the banking sector. Is there scope for reducing the amount of red tape? Does the Central Bank annually review all of its regulations?
Dr. Robert Kelly:
To summarise, if the Deputy is talking about the individual credit assessments of individuals, that process is ultimately for the banking system to do. It is regularly reviewed by our regulatory colleagues either in consumer protection or from a resilience point of view by our supervisory colleagues. Then there is review at a macro level. That is thinking about the implications of capital within the banking system and what that means for the economy. We undertook two reviews a couple of years ago. Let us be honest, there are costs and benefits to capital within the banking system. You have to find the balance between the resilience you want to build and the growth you want.
Edward Timmins (Wicklow, Fine Gael)
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Does the Central Bank review that all the time?
Edward Timmins (Wicklow, Fine Gael)
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Does that include capital ratios and stuff like that?
Edward Timmins (Wicklow, Fine Gael)
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Has the Central Bank recommended any changes? If so, have any changes happened over the last couple of years?
Dr. Robert Kelly:
Yes. In terms of our capital, some of our buffers continuously change. The countercyclical capital buffer is continuously reviewed on a quarterly basis and reflects the risks in the economy. That one has been moved several times. Our mortgage measures underwent a large review, from memory about three to four years ago, and there were adjustments of the level and the level of allowances.
Joe Neville (Kildare North, Fine Gael)
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What are the witnesses' views on how the economy has been run over the last five or six years?
Joe Neville (Kildare North, Fine Gael)
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Would Dr. Kelly say the economy is overheating?
Joe Neville (Kildare North, Fine Gael)
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Earlier Dr. Kelly referenced the way we export to the UK, primarily as SMEs. I know exactly what he was talking about because I have been involved in those SMEs. A company will do Ireland and want to grow so it will jump to the UK and Europe. However, America is so far away that many companies never get there. What is Dr. Kelly's view on the impact of a possible economic downturn in the UK? Does he think it is relevant?
Dr. Robert Kelly:
At a macro level, you probably would not see it as much in the overall data because of the multinational enterprises, MNEs, but for the sectors pointed out by the Deputy with direct exposure to the UK, it is very important. At a sectoral level, if you think of food exports and things like that heavily concentrated into the UK, if their growth slows, we would a slowing in those sectors.
Joe Neville (Kildare North, Fine Gael)
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I am a member of the Joint Committee on Infrastructure and National Development. What is the key infrastructure? I ask because the word "infrastructure" is almost used as an excuse not to build anything any more.
What does the Central Bank see as the main item that needs to be unblocked? It is almost about unplugging the system.
Joe Neville (Kildare North, Fine Gael)
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I agree with that because houses cannot be built without them. I fully agree with this.
Joe Neville (Kildare North, Fine Gael)
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Does the Central Bank see them as potential economic blockers to future investment in the country? Is this the way it sees it already? Are we already dealing with a scenario where people are walking away because, whatever about the cost, they cannot rely on a dedicated-----
Joe Neville (Kildare North, Fine Gael)
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Yes, that is the word.
Dr. Robert Kelly:
Definitely we have seen some high-profile cases that cited it as the reason they did not invest here or they invested elsewhere. The reality is that when we do soft information infrastructure is continuously cited. Another reason is housing but, let us be honest, water and energy are a major part of delivering housing.
Joe Neville (Kildare North, Fine Gael)
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We do have some areas, such as where I live in north Kildare, where we have seen an increase in housing but almost everybody is stuck because we do not have the community infrastructure behind it. This is a separate issue. If we were speaking tomorrow, how would Dr. Kelly sum up a message to give to the Ministers for Finance and public expenditure?
Gerald Nash (Louth, Labour)
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On new markets, we know the United States is a country on which we are disproportionately dependent for high-quality foreign direct investment, and not only with regard to corporation tax receipts but for a disproportionate level of income tax receipts and high value-added jobs. We are excessively reliant on the United States but, peculiarly for a state that has done so well from globalisation, and when we know we need to look to alternative markets to try to develop our indigenous enterprise space, which is notoriously under productive and unproductive compared to some countries, do the witnesses not think it is crazy that there seems to be a dispute in government at present over the signing of the Mercosur trade deal? In this context, when we speak about Mercosur, we have not had a proper debate on it because it has been closed down. There is huge value in Mercosur for other aspects of Irish industry. Has the Central Bank done an analysis of the value that could be added to the economy if we signed Mercosur, and what we could expect to see in benefits over a four- to five-year period?
Dr. Robert Kelly:
On the direct question as to whether we measured it, no, we have not. I would certainly be supportive of having more trade deals. In a world where the US is maybe not as open and is retrenching its level of globalisation, it is very important for the EU and countries like ours to ensure we have more trade deals with as many destinations as possible.
Gerald Nash (Louth, Labour)
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Is there a smell of 2007 or 2008 off the economy and the way in which the fiscal position has been managed over the past few years? I ask this because we have a Government that continues to spend, refuses to broaden the tax base, is investing in infrastructure and is expecting a different outcome. We have a huge concentration of risk in corporation tax. Our dependency on corporation tax is the equivalent of stamp duty in the 2000s. We have Departments with no spending ceilings in the mid-term framework published two weeks ago. We have a situation where every Department is overshooting its budget every year. Is this not redolent of 2008? Outside of the fact that personal indebtedness is not as high and the banks are in a stronger position and much more resilient, is there a corollary between the situation we are in at the moment fiscally and the policy of the Government and the way in which our fiscal position was managed in the 2000s?
Dr. Robert Kelly:
There are vulnerabilities with regard to the public finances, which we have pointed out that could suddenly stop. They are not domestically generated. This is the other big difference. The last time it was built on, a lot of it was domestically generated in terms of the construction boom. Right now we are more beholden to the actions of outsiders.
Gerald Nash (Louth, Labour)
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Therefore, by definition that is an even bigger risk.
Dr. Robert Kelly:
We examined various scenarios with regard to an adjustment. If we were to lose that excess corporate tax component, and this is not even talking about the impact on income tax, if we were to see the investment leave, it would be much larger. Even the excess component would immediately put us into deficit and we would have to adjust quite quickly.
Gerald Nash (Louth, Labour)
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We forget about the income tax that also comes from FDI. We speak all of the time about the concentrated risk to corporation tax. Looking at the most recent data, a huge proportion - the top two deciles - of high income tax payers are earners working in high-value jobs in the FDI sector. There also is massive risk there.
Richard O'Donoghue (Limerick County, Independent Ireland Party)
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I have been very lenient with the time. This concludes the session. I thank our witnesses for attending the meeting. It has been a very engaging session. We enjoy sessions such as this on both sides and hearing the various aspects and related questions around the table. I look forward to another engagement in the future. We will suspend for a few minutes while the witnesses for our next session join us.
Richard O'Donoghue (Limerick County, Independent Ireland Party)
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I ask everyone to turn off their mobile phones and devices or to put them on silent.
Before we begin, I wish to explain the limitations to parliamentary privilege and the practice of the House 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 the meeting. However, they are expected not to abuse this privilege. 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.
This afternoon's engagement forms part of our pre-budget 2026 scrutiny and engagements. I welcome Dr. Tom McDonnell, co-director, and Mr. Ciarán Nugent, economist, from the Nevin Economic Research Institute. The committee welcomes the opportunity to engage with both witnesses and I thank them for being here today. I now invite them to make an opening statement.
Dr. Tom McDonnell:
I thank the Cathaoirleach and members of the committee for the invitation to appear before them. We will comment on the overall budgetary package as set out in the summer economic statement and touch on the questions asked of us by the committee. Before doing so we will comment briefly on how the economy is doing and the implications for what this means for the optimal fiscal stance in budget 2026.
The Irish economy is now at least three years into a prolonged boom and the employment rate is at a record level. The number of people working in the economy has increased by over half a million since 2019 and is up 2.3% in the last year. All sectors have seen employment growth over this time and there is now clear tightness in certain parts of the labour market, most notably construction.
Data for the first half of 2025 shows a continuation of healthy economic growth with a front-loading of trade to the United States in advance of expected tariffs. Price inflation is now somewhat under control and fluctuating narrowly around 2%, albeit the cost of living has increased 20% in the last four years. The combination of a tight labour market and disinflation is driving significant real wage growth and increasing real disposable income for many households. Indeed, the economy is arguably overheating by some measures with capacity constraints driven by infrastructure and housing deficits.
Business and consumer sentiment are understandably mixed given the uncertainty around tariffs, geopolitics, technological disruption and the fragile economic health of our main trading partners. Even so, the short-run outlook remains positive. Price inflation should be close to 2% next year or even lower and well below expected nominal wage growth of circa 4% to 5%. We also anticipate employment will continue to expand albeit at a lower rate. The strong growth in disposable household income should compensate for the potentially higher savings rate arising from the aforementioned uncertainties.
Key risks to the economy include the following: further tariff shocks, including to services; trading partner slowdowns with the US, France, UK and China all exhibiting their own weaknesses; domestic capacity constraints; and of course the ongoing vulnerability of our corporation tax receipts to decisions made outside of the country. Overall, the economy is clearly experiencing a time of strength and, on balance, we anticipate healthy if moderate growth next year.
Two key factors should underpin budgetary policy. First, what is the current state of the public finances excluding once-offs. Second, what is our understanding of the current cyclical position of the economy. We have already noted that the economy is performing very strongly by most metrics. In addition, while the public finances are ostensibly in surplus, these surpluses turn into deficits once we exclude the windfall portion of the corporation tax receipts.
We also know that these corporation tax receipts are largely dependent on a very small number of foreign companies. This is an inherently fragile position. It should be evident that a booming economy should not be running an underlying fiscal deficit and that, therefore, fiscal policy prior to budget 2026 is already running too hot. This suggests that spending increases net of tax changes should arguably be less than the potential growth rate of the economy though there are of course nuances and caveats to this view.
The proposed €9.4 billion package is clearly expansionary and clearly pro-cyclical. A sum of €7.9 billion of the budget package is for public spending increases, of which €2 billion is for increased capital spending. This type of budget will modestly add to inflation, undermine competitiveness and ultimately reduce the economy’s resilience in the face of future shocks. It is also counterintuitive that the summer economic statement promises that a deterioration of the tariff landscape will cause the Government to recalibrate the size of the budget package downwards. Logic suggests instead that the Government should instead respond to a negative economic shock with a more expansionary budget. Cutting public spending in the wake of a shock would simply exacerbate any tariff induced downturn. It would have been better to start with a net spending increase in the region of around 5% or at least something close to the economy’s potential growth rate, with additional measures held in reserve if needed for deployment as a response to a recession or sectoral shock.
The NERI's view is that the €7.9 billion in spending increases would be better accompanied by a €1.5 billion increase in taxes leaving an overall €6.4 billion net package. Cutting taxes during a boom makes little economic sense, and flies in the face of the analysis and recommendations from the Commission on Taxation and Welfare that there is a need for gradual but material increases in Government revenue as a share of the size of the economy over the medium to long-term. This is to compensate for Ireland’s fiscal position gradually deteriorating under various future pressures, most notably population ageing.
More positive is the Government’s decision to ramp up its level of spending on infrastructure. The economy is already suffering from years of underinvestment and infrastructure bottlenecks are now a major constraint on our competitiveness and are a barrier to future economic development. Much higher public investment is needed in housing, energy, water and transport. The additional capital allocations are both necessary and welcome. We would note that much higher levels of spending on public research and development are also needed to bring us in line with other advanced economies. This has been a consistent and frustrating policy failure.
The emphasis on capital spending casts the budget in a slightly different light. An expansionary budget that nevertheless enhances the economy’s productive capacity and, as a consequence, enhances its medium-term fiscal capacity can certainly make sense if done properly. We have the fiscal headroom to do it provided the windfall corporation tax receipts do not evaporate although there are legitimate concerns about where the additional construction workers will come from given we are at or close to full employment. More inward migration will clearly be needed and is the only plausible short-run solution.
The Government’s commitment to continue funding the longer-term savings vehicles is also very welcome though the annual levels of funding should be increased. On that, I would like quote from the 2024 summer economic statement. On page v, it states:
The health of the public finances is apparent from Ireland’s budget balance relative to peer countries. However, the headline position masks underlying vulnerabilities, with the current favourable position largely attributable to the increase in corporation tax receipts, at least part of which is ‘windfall’ in nature. The Government cannot, and will not, use these transitory receipts to fund permanent increases in public expenditure.
The statement was signed by "Jack Chambers T.D." and "Paschal Donohoe T.D."
Overall, the budgetary package is much too large albeit the pivot towards capital spending is a very welcome shift. The five-year medium-term fiscal and structural plan needs to be expedited and needs to be serious. This document should then frame the budgetary parameters for the rest of this Government. The plan will need to be a mature attempt to adequately tackle questions about medium-term sustainability with a credible plan developed for achieving a fiscally sustainable equilibrium over the longer term.
I will briefly mention what we think should be budget priorities and then I will finish. We strongly support the prioritisation of government spending on infrastructure but believe that a more holistic approach should be taken to the concept of "investment" with greater allocations needed for annual spending on human capital, that is, education and skills, and on innovation, namely, public research and development, technology diffusion and so forth.
The Government should abandon its plans to extend the 9% VAT rate to include hospitality. Instead, over the medium to long term the Government should broaden the tax base by bringing the VAT rate on hospitality into line with the standard VAT rate. Some of the yield from this measure could be used to simultaneously reduce the standard VAT rate.
The Commission on Taxation and Welfare’s broad approach to strengthening the revenue base of the State should be pursued over the medium to long term and, in particular, we note their suggestions to gradually minimise the use of tax expenditures and increase taxes on capital.
The Government should increase the minimum wage to the level of the living wage in 2026, as was previously committed to and promised by the main parties in government. The Government should introduce a second tier of child benefit in budget 2026 in order to reduce by 50,000 the instances of child poverty in Ireland. We note this will not happen in budget 2026. Let us make it part of budget 2027 in that case.
The once-off payments from previous budgets should be replaced by a system of adequacy-based payments benchmarked to average earnings throughout the welfare system, with a rationalisation of the system to minimise cliff edges and distortions, as per the recommendations to the Commission on Taxation and Welfare. Payments should be aligned with the minimum essential standard of living over time.
The Government should begin the process of developing a public childcare option over the medium term, beginning with geographic, often low-income areas that are currently underserved in terms of affordable childcare availability. Government should ensure that budget 2026 and subsequent budgets are countercyclical. Net spending should not exceed 5% in budget 2026, with higher levels of actual spending increases funded by a broadening of the State's revenue base with an emphasis on capital taxes and a watering down of tax expenditures.
Finally, the Government should move to a carrot over stick approach to managing the green transition with much more significant and generous funding made available for public transport and green subsidies to enable lower-income households to invest in housing retrofits and electric vehicles. There is, of course, a tremendous amount to unpack in each of these policy areas. Mr. Nugent and I are happy to elaborate on any of these points and to take questions.
Cormac Devlin (Dún Laoghaire, Fianna Fail)
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I welcome the witnesses and thank them for their opening remarks. To get straight into it, Mr. Nugent referred initially to the tightness in the economy and the labour market, particularly construction, but also alluded to the other factors impacting on that and maybe other tightness in the economy. What other sectors - apart from construction because we are aware of that and it has an impact on targets - would Mr. Nugent say have similar tightness?
Mr. Ciarán Nugent:
I am not sure any other sector sticks out. There are skill deficits in certain sectors that slow down potential growth. There was an issue with IT a couple of years ago that does not seem to be signalled as much now. This tightness in construction spills out into everything else and affects competitiveness in all other areas.
Cormac Devlin (Dún Laoghaire, Fianna Fail)
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What would be Mr. Nugent's solution to resolve that tightness in, for example, the construction sector?
Mr. Ciarán Nugent:
In terms of getting more people into construction, there are issues in apprenticeships due to low pay and precariousness. There are obviously issues in terms of long-term viability of careers. People look at construction and ask if we have learned the lessons of the past and if they will have to emigrate in ten years’ time, if there is a bubble and is it going to burst, etc. If the State intervenes more in construction and building, it can help develop minimum conditions and pay and security for workers that make it a more attractive area for workers to go into instead of, as some of my own research shows, arguably, way too many people going into third level and ending up not having the labour market outcomes they would like on the other side in high end, high status employment.
Dr. Tom McDonnell:
I will follow on from that. Obviously, it takes a number of years to do an apprenticeship, so we are not remotely where we need to be on that and alongside that, because we have close to full employment, that makes it very difficult to induce people to switch over. It would be much easier to do if we had higher unemployment. It is going to be very challenging to magic up the construction workers from within the domestic economy. They are not there and it is going to be at least half a decade before we can get there.
Cormac Devlin (Dún Laoghaire, Fianna Fail)
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Even retention in sectors of employment is difficult. That is what employers are saying. It is hard to retain staff and there are pull and push factors with wages. Dr. McDonnell referred to the Commission on Taxation and Welfare a few times in his remarks. Does he agree with its assessment and recommendations? From what he said and alluded to, it seems like there is a difference of opinion. Is that throughout or on particular points?
Cormac Devlin (Dún Laoghaire, Fianna Fail)
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We are learning that today.
Dr. Tom McDonnell:
In broad terms, the overall analysis of the Commission on Taxation and Welfare is that we are facing into a deterioration of the fiscal situation over the next ten, 20 or 30 years. Ageing is going to have a profound effect on public spending. In terms of healthcare, pensions and long-term care, there will be fewer people working as a proportion of the total population. That will reduce income tax receipts and PRSI. For that reason alone, we would want to be coming into the 2030s and 2040s running budgetary surpluses and very slowly, over time, gradually broadening the tax base a little bit every year, rather than realising when we get to 2030 and 2035 that we have a big problem and we are going to have to put all the burden on the next generation. Instead, it is fairer to do it now and to gradually look at ways of reducing tax expenditures, for example, which are often non-transparent, regressive and bad for the economy in the longer run. Looking at areas where taxation might be quite low, property tax would be one example but I could give many. That is part of the context around our views on VAT and the Commission on Taxation and Welfare's views in terms of VAT but overall yes, to manage the ageing population, we are going to have to have a stronger revenue base. We have a very young population now but that will not be the case forever. The only way we can reconcile that outside of higher taxes is by very high levels of inward migration to maintain employment growth year on year. Those are the two options. Something has to give.
Cormac Devlin (Dún Laoghaire, Fianna Fail)
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I am limited for time but on the competitiveness that Dr. McDonnell referred to in his statement for the economy, what is his assessment of where we are at competitively? Also bearing in mind the Draghi report, on a European level there are discussions about what we need to do for competitiveness across the Eurozone.
Dr. Tom McDonnell:
That is a very good question. As the Deputy knows, Ireland ranks very highly in terms of competitiveness. We are one of the highest ranked countries in Europe, full stop. We tend to do well across most competitive measures. We certainly do well on the level of enterprise supports we give, for example, the whole network around Enterprise Ireland and the IDA is considered a very successful model and indeed it is. However, there are glaring red lights flashing as regards our competitiveness and by far the most prominent is infrastructure, where we do very poorly. For us, boosting competitiveness is, to a large extent, about increasing productivity. One can be competitive in a way that keeps wages high and is not about pushing costs down, in what we might call the British model. Instead, there is a high-road model where everyone, employers and workers, can both gain. That means productivity, an innovation system, infrastructure, human capital in terms of education and having all those pieces in place which do not give immediate returns, but make a more productive economy over a five, ten or 15-year period. It also means not necessarily pouring money into sectors that are low-value added.
Cormac Devlin (Dún Laoghaire, Fianna Fail)
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I will come back in.
Richard O'Donoghue (Limerick County, Independent Ireland Party)
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The witnesses may come back in the next ten minutes.
Edward Timmins (Wicklow, Fine Gael)
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I thank the witnesses for their presentation, as always. I have seven quick, snappy questions. In relation to income tax, what is Dr. McDonnell’s view on indexation? If wage growth in the economy is 5% and inflation is 5% - though I know it is at 1% or 2% at the moment - as a taxpayer, one only ends up with 2.5% and actually has less wages. It is certainly something I would support. What is Dr. McDonnell’s view on indexing tax bands and tax credits to match that inflation?
Edward Timmins (Wicklow, Fine Gael)
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The State is no worse off with that indexation. Does Dr. McDonnell have any suggestions on increasing labour market participation? We have full employment effectively but in the case of participation of people with disabilities, the ratio is only one in three or one in four. It is actually the lowest in Europe. Does Dr. McDonnell have any thoughts on increasing those participation rates?
Mr. Ciarán Nugent:
Before the last couple of years, it was always women and the disabled. We have done quite well with increasing participation rates in the past four or five years. We are still low in a high-income European context. The biggest element there is the excessive cost in childcare and what the State can do for that. It is a similar story with the amount of resources and spending we give to help disabled people into work. There are a lot of unemployed people with disabilities in this country who are highly educated and highly skilled, but we cannot find ways to get them into employment. Public transport is a part of that in terms of mobility. It should be easier now that people can work from home, especially in some high-tech or high-skill sectors. There is a lot we can do there.
Edward Timmins (Wicklow, Fine Gael)
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I can see scope in that area. The witnesses spoke earlier about the late 2020s and 2030s, about how we can see our demographics are changing, and how our pensions and healthcare costs are going to grow quite significantly over those terms. The lack of long-term budgeting is a problem. Does NERI do long-term budget forecasting for, say, five, ten or 15 years? I know it is a lot of guesswork, but some of the figures can be plugged in such as our healthcare and our pensions requirements. Does NERI do that? I know it is not going to be exact, but it tells you stuff and gives you information when you start plugging those figures in. Does NERI do that level of long-term forecasting in detail, rather than percentages and economic growth? Does NERI ever try doing that with hard numbers?
Dr. Tom McDonnell:
Most of our forecasting is focused on the short term. It is a different type of dynamic where we can look at changes in income and employment and so forth. Medium- to long-term forecasting out into the 2030s and 2040s is something we did as part of the Commission on Taxation and Welfare, but the NERI have not done that kind of forecasting looking out into the 2040s or 2050s, or anything like that in the past couple of years. We know what the population demographics are. We know what the projections from the Central Statistics Office are. Assumptions can be made for pensions and healthcare and long-term care and so on based on that. Assumptions can be made based on employment rates and the implications for income tax and so on.
Edward Timmins (Wicklow, Fine Gael)
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Is there a benefit to doing that?
Dr. Tom McDonnell:
Potentially. A lot of other institutions do that already and the Department of Finance ought to be doing that every year. We would strongly encourage that not only should a medium-term framework be produced out to 2050s by the end of this year, but that the process is replicated every year in order for it to inform this committee.
Edward Timmins (Wicklow, Fine Gael)
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Has NERI done any work on cost control in the State's budget?
Edward Timmins (Wicklow, Fine Gael)
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That leads to my next question. Where would the witnesses cut costs? It is not the same thing. Do they have any suggestions about where the Government could cut costs?
Edward Timmins (Wicklow, Fine Gael)
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We could learn from some of our good projects, like the Dublin Airport extension. That was done for a relatively low cost.
Edward Timmins (Wicklow, Fine Gael)
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NERI has spoken in a lot of these forums about saving schemes and all the money that is on deposit in the State. Does Dr. McDonnell have any suggestions as to what type of saving scheme the Government should put in place?
Dr. Tom McDonnell:
We do not have a particularly good history in this regard. The SSIA was unfortunate in its timing, perhaps, but it did add to the boom. Ultimately, what we want to do, and what other countries such as the United Kingdom are trying to do at the moment, is to find ways to leverage pension funds to support equity stakes in high-potential start-ups coming out of the university system. Looking at ways to do that so the money is funnelled into future Irish companies, there is certainly scope to look at-----
Edward Timmins (Wicklow, Fine Gael)
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That is going to be risky though.
Cian O'Callaghan (Dublin Bay North, Social Democrats)
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I thank the witnesses for coming in.
First, the opening statement states that the economy is arguably overheating with capacity constraints driven by infrastructure and housing deficits. What are the signs of it overheating at the moment? What kind of impacts and risks are associated with that?
Dr. Tom McDonnell:
Fundamentally, there is a range of things we look at when it comes to overheating. Clearly, overheating in terms of the property market would be one we would look at. The rate of growth in employment is arguably not sustainable. The level of growth we have seen is unprecedented. This does not necessarily mean we are overheating, because the concept itself is based on the notion that the economy returns to a kind of equilibrium and if you go too fast, inevitably you are going to get inflation. If you have capacity constraints around infrastructure, which makes it very difficult for the economy to grow out, you cannot get those productivity bonuses. Often simply adding money to an economy is just chasing the same amount of stuff, because of these capacity constraints and that just causes inflation. The budgets we are running at the moment are expansionary and are already fuelling the economy perhaps a little bit too much. We have seen the growth figures for the domestic economy were not amazing for the first half of the year, but modified domestic demand is still growing at a fairly thumping pace and has been for a number of years. Do I personally believe we are overheating? No, I do not necessarily. Again, if we make the right policy choices around dealing with those capacity constraints, and we are able to get more construction workers to build out those houses, or to improve the productive capacity of the economy, then we would not necessarily find ourselves in a position where we are overheating. An economy can continue to grow as long as the space is there. It is about whether we can create the space. The way to do that at the moment are either about more infrastructure or inward migration and, of course, often one will help with the other, but in the short-term, can be counterproductive, in that regard.
Cian O'Callaghan (Dublin Bay North, Social Democrats)
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To summarise what Dr. McDonnell is saying, we are at risk of overheating now if we do not make the right choices.
Cian O'Callaghan (Dublin Bay North, Social Democrats)
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On the €2 billion increase on capital spending outlined in the summer economic statement, does Dr. McDonnell think that is sufficient in terms of the ratio between capital and current expenditure?
Dr. Tom McDonnell:
It is certainly an improvement. One of the big mistakes we made in the early 2010s was to trash the capital budget. Most people will acknowledge that. We are getting back to where we need to be. Again, as Mr. Nugent alluded to earlier, construction is considered a very volatile profession now. A lot of construction workers have left so we also have to deal with the capacity constraint on the labour side. We are dealing with the financing issue. We still have issues around planning regulation support. However, if we do not have those construction workers, it does not matter how much we put into the capital budget, we will not be able to build more. Disincentives could be brought in against hotels-----
Cian O'Callaghan (Dublin Bay North, Social Democrats)
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Our construction sector productivity is quite poor relative to comparable countries. There is a lack of investment in equipment and technology, and a lack of private sector investment in particular in those areas. Does Dr. McDonnell have any ideas how to address that productivity gap in the construction sector?
Cian O'Callaghan (Dublin Bay North, Social Democrats)
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There is a lack of private sector investment in that at the moment, and that is what the data shows.
Dr. Tom McDonnell:
There is, yes. Sometimes the State itself is going have to be aggressive and take the leap if the private sector will not or cannot do something because it is constrained for various reasons. There is a rationale for the State to intervene itself, whether it be setting up factories or taking equity stakes or helping out or providing other advantages or whether they be logistic or otherwise.
The same applies for a green transition, where the State should be doing the same. It is about spending more but it is also about removing those potential barriers to induce and bring in private investment.
Cian O'Callaghan (Dublin Bay North, Social Democrats)
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On the area of research and development, in the opening statement it was argued that much higher spending on public research and development is needed to bring us into line with other advanced countries and economies. This is described as a consistent and frustrating policy failure. Does Dr. McDonnell have any view on why this area of public research and development is being neglected so consistently?
Dr. Tom McDonnell:
It is perplexing for a modern advanced economy that claims to be focused on education and innovation, and claims to care about these things, to spend consistently every year about half of what peer economies in north-west Europe spend. It is an absolute mystery to me and it would be great if people from the Department of public expenditure could be brought in to justify why the allocation every year for public R and D is so low and why they are hamstringing the economy in this way.
Cian O'Callaghan (Dublin Bay North, Social Democrats)
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It does seem to be a particular weakness. We had some discussion earlier about some strengths that we have as a country but this seems to be a particular weakness.
Dr. Tom McDonnell:
It is. It may be because we have become reliant on assuming that the US multinationals will be the ones that will do the R and D and that we are too small to be good at anything. We cannot put all our eggs in one or two baskets because it is too risky, and therefore we will not do it. We will simply adopt the best technologies, such as AI or whatever it might be, but we will not spend the money on developing them ourselves. Of course, even when we fail to develop things, we are still building up the skills that allow us to have a world-class workforce that can attract those companies. That is the case even if we do not hit the bull's eye with every type of Government spending or every roll of the dice. One of the problems with R and D and why it is always underinvested in by the market is that there is enormous uncertainty as to whether it is going to work. That enormous uncertainty reduces the incentive. People are afraid to do it, except for a few, so we get less R and D, less innovation and less economic growth than we ought to. That is why the Government needs to intervene. Indeed, at the Foundation for Fiscal Studies, one of the papers that won an award last week looked at the type of R and D regime we ought to have. It starts with the subsidies, the high-potential start-ups and is done it that way. The R and D tax breaks come later on when we get to the medium and large companies.
Gerald Nash (Louth, Labour)
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Leading on from Deputy O'Callaghan's point, we are not serious as a country about innovation, developing and evolving our economic model, developing our notoriously unproductive indigenous SME base and hoping we can scale that to the point that it is exporting and adds value if we are not serious about investment in public research. Instead, we have decided on the tax expenditure side to spend a huge amount of money, diverting it from PAYE workers to the R and D tax credit side, credits that can often be wasteful, really poorly targeted, and often exploited by multinational corporations, not for the wider benefit of the Irish economy. It is a point that is worth making and we need to rebalance and reorient that model. I have favoured that for a long number of years.
We are talking about tax expenditures. I said at the last engagement with the Central Bank that we have about €8 billion in tax expenditures annually, ranging across in excess of a hundred tax reliefs, many of which go uninterrogated for many years and become a permanent feature of the landscape, at some considerable cost to the taxpayer. Insanely, we are about to add another that is likely to repeat ad nauseam, namely, the economically illiterate, fiscally irresponsible and ultimately socially damaging 9% VAT proposition for the hospitality sector. That is not to say I am not concerned about some hospitality sector businesses that might close. There is a natural churn in the hospitality sector and all of the evidence shows it is a sector that is adding jobs and businesses. I appeal to the Minister, Deputy Burke, to publish the data. He has refused to do it and it is unlikely he will do it before the budget. It will be out the gap before he gets to do it properly around November. We have been waiting for this data to inform the policy decision on VAT relief for the hospitality sector, on the number of incorporations, liquidations and trends in that sector. That is good evidence-based policymaking.
It just happens to be that the value of the VAT cut on an annual basis - €632 million - is about the same amount of money it would cost to introduce a second tier of child benefit to finally start to declare war on child poverty in this country. They are the choices. It is as simple as that. I know which side I am on. Setting that €632 million against the context of €1.5 billion in terms of what the Minister for Finance says he has available for tax adjustments, it is a big wedge of money. It is a transfer of wealth from PAYE workers to a sector that has been identified for political purposes to receive some support. This will not be passed on to the consumer. History tells us that it is certainly not passed on to workers in terms of improved pay, terms and conditions in a sector that is addicted to low pay and poor conditions. It is a peculiar decision to take. Looking at it in the round, from what is remaining from the €1.5 billion the Minister says is available for tax adjustments, and accounting for wage growth over the next year, there is no way that we are going to have any form of indexation that is really going to matter for working people. In other words, PAYE workers are going to be paying more tax at the expense of the hospitality sector. They are the calls that are made and that is a call that the Minister seems to want to make.
On tax expenditures, it was mentioned in the opening statement that as far as the Nevin Institute is concerned, the way we should be approaching this budget is to ensure there are revenue-raising measures approaching about €1.5 billion. Significant resources could be generated from reviewing tax expenditures that may have outlived their usefulness. We are not good at reviewing tax expenditures in this country. Only a handful are reviewed every now and again through the tax strategy group and so on. What tax expenditures does Dr. McDonnell believe could be reviewed and could help us to generate some more resources to balance the fiscal situation in a responsible way that does not affect enterprise?
Dr. Tom McDonnell:
We have a lot of tax expenditures related to housing, for example, which obviously would have no impact on enterprise. We would see some of the recent schemes that have been brought in that increase demand for housing, such as help to buy and so on, as obvious ones for the chopping block. We would see shared equity schemes and those type of policies as having very minimal actual benefits and offering very poor bang for buck. That is what we need to think about: the employment and distributional impacts. Are they distorting a market or are they actually helping? Those would be fairly obvious ones to me. I would also note a lot of the environmental fuel subsidies, perhaps, would be seen to be counterproductive in terms of greenhouse gas goals. Overall, the Commission on Taxation and Welfare pointed to a menu of measures amounting to about €14.5 billion, although obviously no one would want to do all of them. There were calls for reform of the VAT system as well. We could bring down the overall rate if we increased some of the reduced rates to remove distortions there.
One obvious one would be in the realm of inheritance tax and the agriculture and business reliefs there. We could say the business relief might perhaps affect enterprise, although I will come back to that in a second. There is potentially hundreds of millions that can be gleaned there that really goes to the very top of the income distribution. We know from the wealth statistics that those type of assets are really only held by the top 10% of the distribution. We also note from the literature that actually second and third generation firms tend to underperform and it might actually be better to induce a transfer to a different entrepreneur who might use the business better. Those type of measures might actually make the economy weaker in the long run. On the VAT issue, it is topical at the moment but essentially it is a massive tax expenditure already because it is already reduced by slightly less than ten percentage points. That works out at billions already. It is not clear why a low value added sector would get it when other sectors of the economy would not. Normalising would seem to be the logical choice there.
Richard O'Donoghue (Limerick County, Independent Ireland Party)
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The Deputy can come back in again later. In the opening statement, Dr. McDonnell said the institute would consider some lower taxes that could be adjusted. One was property tax, but he never mentioned all of the other ones that have increased. Some properties have doubled in value because the cost of building has increased from €120 per sq. ft to €200 per sq. ft., so there has been an 80% increase in the value of property. Insurance follows that, as do energy costs. These are all increases. The cost of living has also increased. Another tax is the planning permission charge. People pay for water, ESB and sewerage connection and are charged a planning permission fee, as well as fees for lights and footpaths which they will never see or use. In an urban setting, there are streetscapes, lights, footpaths and everything and they also have lower rates because of the smaller square footage of properties.
Turning to carbon tax, there are 2.3 million vehicles on the roads today. People are paying higher maintenance charges and fuel taxes. It has been stated that we are at almost full employment, despite an increase of almost 1 million in our population. Extra revenue and taxes come from that. The question as to where we can adjust for more taxes is then asked. There could be two people working in a household, which I call the squeezed middle, who can hardly put food on the table and have no funds left, and we are talking about more taxes.
On the flipside, there is the question of governance and Departments. There are overruns on capital projects of millions upon millions of euro, even into billions, but there is no accountability. I have been self-employed for 30 years and I know that if I had an overrun year on year, I would not be in business. I am a blocklayer by trade. I would probably be better off giving up my job here and laying a few blocks because I would be financially a lot better off, but I would have a bad back. I would have to respectfully not do that. The same people are being hit all of the time. Yet, when we go to governance, there is no accountability.
The institute alluded to overruns. I referred to design and delivery at a previous meeting. In terms of design and delivery, it was said the onus goes back to the contractor. The proper term for that would be design and deliver. It costs between 5% to 8% more, but we would know exactly what we were spending. A €1 million project costs €1 million. If there is an overrun, it is €1 million - that is it. Any time Departments are stuck with any capital projects, there are overruns because people say they do not like or want to move something. A perfect example of this is the children's hospital, which was rolled over repeatedly. Things went out of date and costs increased, and it went back to design.
With the tax regime that we have at the moment, how many billions of euro could be saved if we introduced design and delivery and mirrored capital and private projects against each other? Private businesses build projects and come in on target and on time, and make a profit. Government projects go over budget and make no profit. Not only do the projects go over budget but they lose the profit that private companies make. Our European counterparts seem to be able to do this, but we cannot. How do we change that?
Dr. Tom McDonnell:
I agree with the Chair on design and deliver. It is a model we need to think about going to. I am sure there will be a paper that could justify it; I do not see how it would not. We need to change the model. We need consistency in terms of the people doing projects. It cannot simply be the case that when a person is building the children's hospital, they are then moved to a different part of the Civil Service and somebody else does the next project. We have to keep the skills in place. That is true even with the economic evaluation service, where we want to keep economists doing that work throughout their career. It is problematic.
There are what we call soft budget constraints in government because Governments do not go bust in the traditional private sector way. They can go bust like in 2008, but they do not quite go bust. A Government is not a business in that sense. It is also not a Government's money per se. Those are all concerns. To resolve the soft budget constraint issue, moving to a type of design and deliver model is necessary. It is something we will have to do.
The adjustments out to the 2030s and 2040s, including for an ageing population and all of the other constraints, would ideally not all be done on the taxation side. Ideally, we will be able to use new technologies such as artificial intelligence in healthcare and digitalisation of the health service to create enormous savings. In terms of capital budgeting, we have to seriously consider how we do all of these things.
We need to learn from the children's hospital. It does not need to be about blame. Yes, mistakes were made. Let us find out what they were. We do not have to name names. We need to find out what the mistakes were, learn from them and decide what to do in future. If necessary, we can bring in people from Europe or other countries around the world that have done this very successfully and find out how they did it as a state. They have this same constraints as we do, and they could do it but we cannot. We can ask what is being done differently. It may be to do with our legal system or something else. If it is to do with our legal system, that could, of course, be problematic, but that is what legislators are for.
Richard O'Donoghue (Limerick County, Independent Ireland Party)
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We often say that if we ran our businesses the way a Department runs its business, we would not be in business. We need a model for accountability that will bring in design and delivery, give us more bang for our buck and make sure projects are delivered on time. Then we may not have to increase taxes and could instead curtail what we have and spend it properly.
Mairéad Farrell (Galway West, Sinn Fein)
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I thank the witnesses for coming before the committee. Will they furnish the committee with the report on research and development they mentioned to Deputy O'Callaghan? It was mentioned that a report was released last week. A witness made reference to a report that examined how investment in research and development could work. I understand it related to the equity side. I would be very interested to read that report and I think it would be quite good.
When committees are discussing the budget side of things, I like to learn as much as possible. Some of my questions will relate to how things are defined because last week the ESRI, Social Justice Ireland and IFAC came before the committee. The ESRI discussed the one in five children who are in poverty when housing is included and the fact that every child has to live somewhere. We delved into that a little bit.
One of the things that stood out to me in the opening contribution related to real disposable income. From the information I received from the ESRI, I understand disposable income is earnings plus benefits minus taxes and PRSI. Before we delve into a conversation about that, is that the calculation the institute uses?
Mairéad Farrell (Galway West, Sinn Fein)
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We all know that we have a problem with people who are very clearly in serious poverty, whatever way we want to talk about it. People are really struggling to get by. In the opening statement, Dr. McDonell spoke about an economic boom, and a lot of commentators are using that language when we talk about boom-and-bust cycles, how to invest and all of those kind of things. At the same time, that is not translating into improving the reality for many working people and families.
Shockingly, we know from the ERSI that one in five children lives in poverty if housing is included. To me, that means one in five children is living in poverty because children have to live somewhere. I would like to hear the views of the witnesses on that because that would be very interesting. Is the institute measuring inequality, and if so, has it seen an increase in that inequality when we are talking about this so-called boom time?
Mr. Ciarán Nugent:
The Eurostat sustainable development indicators on poverty uses at-risk-of-poverty and social exclusion. Approximately 20% of the population is included in that, which is more for children. It is more than one in five children, without housing costs. It is a deprivation indicator around the cost of living. Over 1 million people in the Republic of Ireland are at risk of poverty and social exclusion. That has pretty much stayed steady for the last five or six years. As we have grown and as the employment rate has gone up, that has still maintained, so there is inequality straight off the bat there. We have seen that the go-to Gini indicator of inequality has been fairly steady; it has gone down. It is also based on a household survey, which does not include top earners and bottom earners. IF we look at-----
Mairéad Farrell (Galway West, Sinn Fein)
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Can Mr. Nugent explain that?
Mr. Ciarán Nugent:
The CSO conducts this survey. It rings around, mostly on the phone; it is not going to get the likes of Denis O'Brien on the phone. That is basically the concept. Piketty, the famous French economist, has got his own inequality lab and he makes estimates every year as well. They are more about shares rather than this Gini coefficient, which is kind of a summary indicator. It is hard to interpret what going up or going down means for certain sections of society. The easier way to interpret income inequality, for me anyway, is to ask what share of income goes to the top 10%. What share goes to the top 1%? Basically, in Ireland over the last five or six years, the share going to the top 10% has increased more than it has in any other high-income EU country. It is the second-highest out of 15 countries. Greece is the only country that has a higher share in before-tax income. Obviously, we know that the State has to do a lot of heavy lifting in bringing about more equal outcomes in income but, obviously, that is just income. When we are talking about living standards, poverty, etc., obviously, the role of the State and welfare provision is part of tackling poverty by socialising costs to not just make living costs lower in terms of health and childcare and all those kinds of things, but also more competitive. We have this relatively small welfare state, and we also have this high level of inequality. That is why we are getting this 20%. The ESRI stated that 20% of children, after household costs, are at risk of poverty. I think that is an underestimate. It is probably over 20%, at least, who are in deprivation in this social inclusion indicator. It is somewhere around 17% or 18% if we just look at deprivation, which is basically children who are living in houses where the household is unable to afford a certain amount of goods out of a list of goods that most people consider to be essential, and that is continual.
I will say one other thing about household level data and especially about deprivation and living standards. We have had this massive increase in the number of young adults unable to move out of home. Their individual circumstances are not described in these household-level surveys because of the fact that they are still living at home. That disposable income the Deputy is talking about that goes up could be a compositional issue, maybe not of a tech worker but a teacher or a garda in his or her late 20s or early 30s who moves back home with €40,000 and then, all of a sudden, the average household income goes up by €40,000 because they moved back home. This also affects the deprivation rates because by definition they are deprived of independent living and adulthood. Again, it is another-----
Mairéad Farrell (Galway West, Sinn Fein)
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However, that would not be part of the deprived indicator if it is two out of 11 basic goods, would it?
Mairéad Farrell (Galway West, Sinn Fein)
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With their parent-----
Mr. Ciarán Nugent:
Maybe 30 years ago there was one earner, and now maybe there are three or four earners in the house. Obviously, the question is not, "Can you pay rent?" The question is, "Can you afford a second pair of shoes?" They can afford those minimal essentials, but housing is not on that list. That is another massive chunk of Irish society that we do not count as in deprivation or in poverty, which we should. Even with high incomes and high relative international incomes as well this is the case.
Mairéad Farrell (Galway West, Sinn Fein)
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That is very interesting because Mr. Nugent mentioned how increasing real disposable income for households is basically contributing to the economy overheating, but this is obviously happening alongside a cost-of-living crisis whereby workers and families are literally struggling to make ends meet. Is it a bit of that as well? I mean-----
Mr. Ciarán Nugent:
There is probably just an inequality where there are a big chunk of houses that have plenty of disposable income that are driving those things and then there are the others, so if we were to give a leg up to the bottom half of Irish society, the inflationary effects of that are going to much different than giving it to the top half.
Mairéad Farrell (Galway West, Sinn Fein)
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Of course, and then that will actually go into the real economy rather than just going into bank accounts. Mr. Nugent is talking about the increasing real disposable income for households. That is not actually based on the number of households. It is based on the amount of disposable income divided by the number of households, but not actually relative income.
Mr. Ciarán Nugent:
Yes, but it is also income as well. We are a trade union think tank, so wages comprise a lot of the stuff we do. There is a lot mixed into income with the household income. As I said, there might be three workers' salaries but, then again, as Leo Varadkar said a couple of years ago, one man's rent is another person's income. The rentier economy is also pushing up disposable incomes and the average, which is what we rely on, obscures all that and the distribution.
Mairéad Farrell (Galway West, Sinn Fein)
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Yes, that is what I mean.
Mairéad Farrell (Galway West, Sinn Fein)
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The disposable income Mr. Nugent is talking about is not the disposable income of one person. Take, for example, my estate, Mervue; he is not saying every single person's disposable income, or the majority of them, are increasing. What he is saying is that if we take everybody and there are very high earners, say-----
Mr. Ciarán Nugent:
-----and it is skewed. Irish income distribution and wage distribution is so skewed. It is unequal relative to other countries. We have seen that we get the distribution wage data a year later, but we rely on the average data for this year's. We ask is it a quarter away; is it three months away? When the distributional data comes out, and it has been through every year for the last five or six years, what has been driving that has been top incomes. The bottom 40%, 50% or 60% maybe have been pretty stagnant and seen very little change over the last five or six years.
Mairéad Farrell (Galway West, Sinn Fein)
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That was a major part of the institute's opening statement today. We are doing pre-budget analysis here. The economy is made up of the people who live in it. Why is it such a strong focus if it is not the reality for most people? Is Mr. Nugent solely talking about figures and not about people? Surely, the budget is about policy decisions that are made in order to impact on people's lives. People can disagree on how that is done but if we are only looking at it in the context of an average that is not reflective of the reality of people's lives, I do not think it is the way to go if we are being serious about how we are impacting on people's lives.
Mairéad Farrell (Galway West, Sinn Fein)
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I will ask one final question. The witnesses mentioned the childcare aspect, and that they would be looking at doing specific measures of affordable childcare for certain areas. What I got from that is that it was maybe more deprived areas. There is a policy outcome of that as well. We know single mothers are most at risk of poverty because of barriers in terms of accessing childcare and, therefore, barriers in terms of entering employment. Is that basically the focus in order to lift people out of poverty?
Dr. Tom McDonnell:
We talked about capacity constraints and lack of construction workers, but childcare workers is another one as well. Part of it is with a longer-term goal of essentially making childcare a public service, but we would start in the areas where there is no competition or private provision.
That is going to be areas which by and large are low-income households because they cannot make profits there. Of course, that embeds the fact that the options for working are not there for lone parents in those areas. It creates a vicious circle. We are trying to get in there to break that to a certain extent, or to at least remove one of the many barriers. It is also with a view to showing proof of concept and that this can work and move to a place where childcare workers become public sector employees over the longer term with all of the advantages and career possibilities associated with that. That ultimately improves standards within a sector as well. We know that caring as a profession will be one of the growth areas of employment in the next 20 or 30 years, not just for children, but elder care will become very important. Begin the process now of making caring a full profession that we treat as such. It historically has not been done because caring was often not marketised or monetised and therefore, misogynistically, it was not given full value. It is still not to this day. That was the idea.
Mairéad Farrell (Galway West, Sinn Fein)
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My time is up, but I thank Dr. McDonnell. That was informative and really helpful.
Edward Timmins (Wicklow, Fine Gael)
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I will take up a couple of points raised. The witnesses talk about relative poverty and mention very high earners. That may have a negative impact on someone's relative poverty, but does it really matter? Surely, it is the absolute income people receive that is relevant. If you are earning a low or medium income, does it matter if the number of multimillionaires and people with massive income increases? Why are they using that as a measure of someone's poverty? Surely their absolute income is all that is relevant, and that they can afford to live.
Mr. Ciarán Nugent:
The Deputy is talking about top earners. That is an inequality measure and is about the distribution of living standards in a country. We talked about income taxation, etc., and how that is tied into welfare provision and how that then affects poverty and the distribution of living standards in Irish society. We are of course judging ourselves over time and against peer countries and how we are doing in those respects. If average earnings are going up by 4% this year, which is about where they are going, and we find out next year that it was a reflection of a 10% increase at the top and 0% increase for the bottom half, those are policy-relevant issues, especially when we talk about housing, deprivation and people unable to afford the bills and then of course-----
Edward Timmins (Wicklow, Fine Gael)
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Does Mr. Nugent not get a picture or a profile of how wages are increasing?
Edward Timmins (Wicklow, Fine Gael)
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Do they not get a breakdown of earners between €20,000 and €30,000 or between €30,000 and €40,000 and how their wages are increasing?
Edward Timmins (Wicklow, Fine Gael)
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Is that a relevant figure?
Mr. Ciarán Nugent:
It is of course. There is also a generational issue there. Those generational wages are important to judge against the cost of living. For instance, we are talking about the minimum wage going up by between 4% and 5% this year. That is what is being signalled. Rent went up by 7%. We got people again further-----
Edward Timmins (Wicklow, Fine Gael)
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But you would not expect minimum wage to match every different sector in the economy. Rent is just one part of someone's costs. It is not everything.
Mr. Ciarán Nugent:
Yes, but you usually start off renting and every year when that goes up, it results in more and more young people who cannot afford to be financially independent and to move out of home. We have had this massive increase, which is one the biggest increases in the whole of the EU, in the share of young adults who, at the same time as having the highest profile in the context of third level education and taking all of the steps-----
Edward Timmins (Wicklow, Fine Gael)
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And high incomes as well. That brings me to the ratio of the price of a house versus the average income. I did a quick search, and that ratio has increased by 18% in Ireland over the last ten years. I do not know if the statistics are right. That is if you take 2015 as your base year. Looking at the profile across Europe, it seems to be a Europe-wide problem. Portugal is 58%. The Netherlands is 30%. Ireland is number 11, so it is high enough. Has NERI looked at other European countries? This is a European-----
Edward Timmins (Wicklow, Fine Gael)
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Maybe Portugal is a bit freakish and an outlier, but has NERI looked at other European countries? What is the underlying cause of this? Is it our booming economy? Is it the massive number of highly qualified people coming into the country and competing for houses? What are the underlying causes? Have they looked at unique issues in relation to Ireland versus countries? It is purely a western world problem.
Edward Timmins (Wicklow, Fine Gael)
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On that indicator I looked at there we are not an outlier-----
Mr. Ciarán Nugent:
I have ten where we are. One of them is the share of between 25- and 34-year-olds living at home over the past decade, which has almost doubled. It stayed steady in the EU as a whole. Some countries have gone down and some countries have gone up. Portugal has had particular problems in the last couple of years because they brought in new tax arrangements for mobile workers and things like that. They are putting up prices massively in the cities.
Edward Timmins (Wicklow, Fine Gael)
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What is the answer to it then?
Edward Timmins (Wicklow, Fine Gael)
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I am sorry to interrupt. Germany had a housing target of 400,000 last year. It built 220,000 houses. They grossly undershot their targets like we did. Is supply the main solution as Mr. Nugent sees it?
Mr. Ciarán Nugent:
It is the main one. It is a complex picture but supply is the main one. Germany has a population of over 82 million. If you look back to documents in 2015 and 2016 about targets for 50,000 by 2020 and stuff like that, we have undershot all of those targets for a decade. It is complex but we have obviously had a population increase in the last couple of years as well. However, that issue is a minor part if we assume we had hit targets by 2019 that we set in 2015 and then continued growing on that basis to build more houses every year instead of house builds falling last year. Supply is the main issue.
Richard O'Donoghue (Limerick County, Independent Ireland Party)
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On the number of people living at home, I have experienced it myself. I have four sons, two partners and two grandchildren living with me. I am a building contractor. Each time they try to get on the ladder they are finding it next to impossible to get on the ladder. Every time they are saving and trying to meet the criteria from the banking system, they save hard for 12 months and it is shoved out again and again. It is so hard for them to get on the ladder, and they all work very hard. If they are a couple they have some chance, but if they are a couple with a dependant, they have no chance because the criteria to raise funds for a mortgage with a dependant mean there is too much of a gap for them to get to. Where I am coming back to is that down the line, you might have a grandparent or somebody who wanted to leave them their house or who were in that position. Speaking to a lot of younger people in the same criteria who are trying to get on the housing ladder, they say if they inherit a house or a property for whatever reason to try to get them on the ladder there are tax implications in it. It is the same as land, if you have two generations of farmers where one worked hard and is trying to get the other one on the ladder for them to have some quality of life. It is now generation after generation, and there is no handing over or handing anything down.
If they leave something behind, it is a taxable commodity. It will be taxed. People say to me that they have worked all their lives and if they get to a stage where they have to be cared for - they may have savings from having worked hard and paid their taxes throughout their lives; they have paid tax for people who cannot work - and they have to go to a nursing home, the cost will be taken out of whatever savings they have. However, they say that if people who never worked a day in their lives, and never wanted to, get to the same place, the same criteria do not apply. They have no problem with working and paying for vulnerable people, but when it comes to the end of their lives and they want to go to a nursing home, they have to pay the money they have been able to save over 50 or 60 years, up to a threshold, before they even qualify for the fair deal scheme. What I am hearing from people at the moment is that some people change their circumstances in order to qualify for things. They say they are better off not working because their child could go to college or they could put their names down on a housing list. How can we incentivise people who want to work and to contribute to people who cannot work for whatever reason ? How can we give them a reward system? If they work all their lives to protect people who cannot work, what reward system could be put in place so that the next generation might be able to have it a little easier?
Dr. Tom McDonnell:
I will go first. We were cognisant of this on the Commission on Taxation and Welfare because it is a salient issue. What we have at the moment is that benefits are either on or off. People qualify or they do not. There are ceilings and cliff edges that are problematic because they create distortions. What we have now that we did not have ten or 20 years ago is potentially a much better understanding of people's incomes over their lives and at a particular point and so forth. We have data from Revenue, which we used during the Covid-19 pandemic, and data from the Department of Social Protection and we can develop a system of tapered benefits. Instead of having ceilings and cliff edges, tapered benefits do not shut off a benefit, whether it is a medical card or something else. They simply reduce the value by a small percentage as a person's income rises. There is still a small disincentive but it does not create a situation where people decide not to work another two hours because they will lose something or will suddenly have a much higher tax rate. It gets rid of that. Designing that system would be technical and would have to be worked out but it is feasible to do it. It would be useful to try to develop that so that instead of having an on-off system, we would have a tapered system. That could apply to all benefits and the entire welfare system and how it interacts with the income individuals have.
Richard O'Donoghue (Limerick County, Independent Ireland Party)
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Basically, we have the squeezed middle of people who have worked all their lives. The next generation might find life a little easier because of what happens. People might see a benefit go to their children or grandchildren down the line.
Dr. Tom McDonnell:
The benefits would taper away. If people have €20 million or so they would not get benefits, but as income goes down, the benefit eventually reaches 100%. That would be how it would work. It would be technical to design but it is possible. We would have to work out the maths and we would want to make sure the adequacy was there. In some cases, the solution will be universalism. Like with childcare, can we get to a situation in the longer term where childcare is like education or health and is technically free for everyone? Could we do the same with long-term care? How do we attract people into care as a profession to be able to do that? Keeping people in the caring professions means we have to pay them a decent wage and let them see what they will have in 15 or 25 years' time. That is a missing piece because we have moved away societally from where we were in the 20th century. We have a different type of labour market now. We will have an ageing population. That is where we have to get to and now is when we need to be thinking about it, rather than in the 2040s when it becomes even worse than the situation the Cathaoirleach described now.
Richard O'Donoghue (Limerick County, Independent Ireland Party)
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I thank Dr. McDonnell for that contribution. It concludes this session. I thank both of the witnesses for coming and I look forward to bringing them back again in the not too distant future. The interaction today was positive and informative. I thank them for their time.
We will now suspend for a few minutes while the witnesses for the next public session join us.
Richard O'Donoghue (Limerick County, Independent Ireland Party)
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I ask everyone to turn off all mobile phones and devices or to put them on silent. Before we begin, I wish to explain some limitations to parliamentary privilege and the practice of the House 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 the meeting. However, they are expected not to abuse this privilege. 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.
Today's engagement forms part of the pre-budget 2026 scrutiny and engagement. I welcome Mr. Gerard Brady, head of national policy and chief economist with the Irish Business and Employers Confederation, IBEC. The committee welcomes the opportunity to engage with him and thanks him for coming today. I invite him to deliver his opening statement.
Mr. Gerard Brady:
I thank the Chair and the members of the committee for their time and for inviting IBEC in to speak on the pre-budget 2026 scrutiny. This budget on 7 October will be framed in the context of ongoing trade disruptions that have introduced a significant amount of volatility and noise into the global economy over recent months. However, the Irish economy has continued to show significant resilience through the first three quarters of 2025 despite the obvious challenges in the global environment. Domestic investment has broadly held up, consumer spending has continued to grow at a steady rate and employment has continued to expand despite the uncertainty.
Momentum coming into 2025 had been remarkably strong, as it had been for a number of years, but there are some signs of a slowdown in activity, particularly in the labour market. It is not a dramatic one, but it is a slowdown nonetheless. Our IBEC HR update, which surveys more than 400 HR directors and managers and was released in recent weeks, shows falling hiring expectations with the share of companies expecting to increase headcount in 2026 down to 37% from 41% this year and 42% in 2024. It is not a dramatic slowdown, but it is a slowdown nonetheless.
At the same time, a number of IBEC surveys have suggested there has been improved sentiment as the year has progressed. The IBEC CEO pulse for August showed that 34% of CEOs had a positive assessment of the environment for their own business over the coming six months, while only 28% saw that environment as more negative. This can be contrasted with March 2025, when only 15% saw a positive environment and 41% saw it as more negative. It is a remarkable increase in positivity. Two major themes emerged in the survey, which, to put it in context, shows more positivity and a bit more confidence but also some caution. First, 59% of companies said they were reviewing spending plans given the current environment, 28% were scenario planning for supply chain contingencies and 17% were reviewing the location of their global production.
Ireland cannot afford to be complacent as companies review their operations globally. To stay competitive and secure long-term prosperity, we must meet this moment with both vigilance and agility. Budget 2026 should strengthen Ireland’s agility in an increasingly challenging global climate while continuing to support productivity, future-proof public capital projects and build fiscal resilience. While the broader economy may remain resilient, some sectors will suffer significant and lasting damage to competitiveness as a result of tariffs. These businesses and their employees should receive targeted support to diversify, build new markets, build productivity and train, where needed.
The One Big Beautiful Act in the US, that is, the new tax legislation, and ongoing global negotiations around the future of pillar 2 of the OECD corporate tax rules increase the potential for both upward and downward volatility in global corporate tax and poses a competitive risk for Ireland. At the same time, there is much greater market scrutiny of the fiscal position of countries. This is seen particularly in long-term bond yields in the UK, France, the US and elsewhere. We cannot afford to be vulnerable if those risks materialise in Ireland.
There are also major opportunities on the horizon, including the digital and AI revolutions. To capitalise on these, Ireland needs not only strategic vision, but timely delivery in areas like infrastructure, innovation and skills. These investments in our future should take priority over all current spending or tax cuts. We must go much further on skills and innovation in particular. Ireland still falls short of where it needs to be if it is to be an innovation leader and research and development performer. We must also use the tools available to attract investment. Enhancing the research and development tax credit is one such lever. Widening its scope to support all forms of innovation and to support global collaboration would provide a timely and material response to current investment challenges.
It is very encouraging to see many of IBEC's recommendations reflected in the new Government action plan on competitiveness and productivity. It can be a very positive and important step toward future-proofing Ireland’s economic model in a time of global change but budget 2026 must provide the resources needed to underpin that action plan and that ambition for it to be worth the paper it is written on.
IBEC's key business priorities for budget 2026 fall into four categories. With regard to supporting innovation and research and development, we are looking for: a significant enhancement of the research and development tax credits; follow-through on the commitments in the national development plan to fund research infrastructure like labs and equipment; and follow-through on commitments in the action plan on competitiveness and productivity through giving a significant funding uplift to public investment in innovation. With regard to infrastructure, the budget should underpin the new NDP with multi-annual funding for key delivery bodies and fund critical underpinning infrastructure such as water and the electricity grid. To deliver critical skills, the budget should fund Skillnet Ireland business networks, look at a national training voucher scheme and deliver sustainable funding to an integrated apprenticeship system and the further and higher education system. Finally, for those who are most impacted by cost competitiveness and economic uncertainty, the budget should: support sectors worst impacted by tariffs to build new markets and to invest in skills and capital deepening through specific and targeted supports; support dislocated workers through the training system and the National Training Fund surplus; and support cost competitiveness for all companies, particularly in areas such as energy and labour costs.
Seán Fleming (Laois, Fianna Fail)
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I welcome Mr. Brady and I was very pleased to listen to his opening statement, which was concise. I want to put a series of questions to him. I hope I do not have too many and I will put them as concisely as I can. In a way, when I looked at IBEC's prebudget submission, which it produced in July, I found it little bit downbeat because it was all about global uncertainty and tariffs. Now, Mr. Brady is saying that in a recent survey of IBEC members the mood of businesses is different. If IBEC were writing its prebudget submission now rather than earlier in the summer, would it be different? Its members seem to think it would be. It is great to have it early so it is out there for the summer but the mood in the country has since changed, to some extent. The worry about the uncertainty and tariffs has probably ameliorated a little; I am not saying it has gone away. I want to put this question to Mr. Brady.
Mr. Brady spoke about infrastructure for housing. I will put a general question on IBEC's members in the sector. How does a major development for a private sector client, on a scale of hundreds of millions of euro or whatever it might be, compare with delivering for public sector organisations? Is there a difference in approach? Is one more efficient, better prepared or slower? I ask Mr Brady to explain this from his point of view. When we speak about infrastructure, big projects can be done by Irish construction businesses for the private sector, and the same scale of project being done for the public sector is slower. Will Mr. Brady give me his views on why this might be? We all have ideas on it but I would like his view on it.
One thing I do not understand, and Mr. Brady might explain it, is why there should be a temporary PRSI rebate for small firms. Everyone likes rebates but why exactly did IBEC come up with this and what is meant by a small firm? IBEC highlighted new apartments specifically for the benefit with regard to the VAT on development levies. I ask Mr. Brady to speak about this. Mr. Brady mentioned support for companies affected by the tariffs and that there should be Government support. Is the private sector not more resilient and adaptable than the public sector? I get the point but is this just because they are tariffs? Good business people are able to work their way around them and deal with them, without having to go to the Government to look for support because a tariff came in. The tariffs probably came in a little bit lower than what people perhaps might have thought they would be earlier.
Mr. Brady mentioned an increase in the research and development tax credits. I thought we had the most generous research and development tax credits of most countries in the world. They cost the State €1 billion and I do not know how much more beyond. Will Mr. Brady explain why he feels there is a need for something more than the Government is doing? I know it all helps employment and this is what we all want. I am just saying the economy is still quite resilient. I heard Mr. Brady say the mood for hiring has declined, and I understand people have been cautious over the past six months. Perhaps this will improve. I have asked a number of questions and I will not come in a second time. I ask Mr. Brady to answer and respond as best he can.
Mr. Gerard Brady:
I will get to them all. On whether we would change much from the downbeat submission, in our view it is still very early in the global environment we have entered. People are more confident than they were in April, right after it looked like we could have an escalating trade war. If I had been told a year ago there would be a 15% tariff I would have thought it really substantial. Some of our sectors, and some companies particularly in the engineering sector, are facing 50% tariffs. This is where the product is mainly steel focused. Some sectors, particularly on the engineering side, are very troubled. What we are saying is there needs to be targeted supports for those worst impacted. It cannot be across the board. It is not like what we had in Covid. It is more like Brexit, where specific sectors needed support to be able to find new markets and rebuild. This is a time when they will be challenged in the US market. Again, there are probably specific firms in these sectors that have big exposure to the US. A targeted approach is what we are looking for rather than across the board.
On infrastructure, with regard to public sector versus private sector delivery there are several frustrations. One is multiannual funding, whereby State bodies run out of funding before the year end and then there is a wait until the next budget cycle to move on with the project. This does not happen in the private sector. The contracts have probably got more conservative in recent years, which leads to more transference of risk to the private sector than in other countries. We see this in projects. Another issue is decision-making timelines.
Seán Fleming (Laois, Fianna Fail)
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Will Mr. Brady explain about the transference of risk? It is still the same project.
Mr. Gerard Brady:
In order to get fixed-price contracts, and to try to get a fixed price at the outset, the risk is transferred to the private sector. If anything goes wrong the private sector gets the risk. This means the private sector then charges more at the outset, anticipating this risk will happen. I am happy to share more detail on this with the committee. As I stated, another issue is that the decision-making timelines are a lot longer in public sector projects.
On the PRSI rebate, again it would probably be targeted. There are companies significantly under pressure because of the cost of Government-imposed changes in regulated wages. We state that in order to help these companies the best way to approach a labour market cost problem is to support them through PRSI. This would be very focused on a small number of companies.
With regard to new apartments, VAT and development levies, in effect it is too expensive to build apartments in this country. This is why we have seen apartment building collapse. There are many ways to reduce the cost of apartments, some of which the Government has already undertaken, but VAT and development levies are the quickest way to reduce costs tomorrow.
On tariff supports, not everyone will need them but specific companies will need them to be able to build new markets. It is not like Covid. We are not trying to keep the doors open; we are trying to give people the opportunity and support to find new markets where they might not have the resources.
On the research and development tax credit, three or four years ago our research and development tax credit was probably in the top three in the world but other countries have passed us out. If we look at the multinational sector, a research and development tax credit is something that can send a signal to people that we are still being competitive for these types of investments. Infrastructure, housing and skills are all more important in the long term but something could happen on 1 January on the research and development tax credit. It would be the most immediate response to the current environment.
Edward Timmins (Wicklow, Fine Gael)
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One of the questions I was going to ask has been asked by Deputy Fleming. Will Mr. Brady elaborate on multiannual funding? I know what it means, and that private companies want certainty for five- or ten-year projects. This is so they will be sure the funding will be coming on stream and can plan ahead with training, staff or permanent offices, knowing that a project will continue long term. Will Mr Brady elaborate a little on this?
Mr. Gerard Brady:
We have seen projects, particularly road projects but also other projects, that have stalled mid-year, effectively because the agency in charge of them has to wait for another budget cycle to come around, or for a Supplementary Estimate, to get the money to finish the projects. Months of the project's life cycle are wasted while waiting for the money to come through. Many projects are waiting to get to the next stage. Our view is that if we decide to do a project in the national development plan, the bodies that need funding to deliver the project should be given the funding for the whole project or a lot of the project, rather than one step at that time, making people go back through hoops they have already covered. The feedback from agencies delivering projects is that they lose months and months waiting for the decisions on projects to be made again. It becomes more expensive over time. It is bad for the Exchequer.
Edward Timmins (Wicklow, Fine Gael)
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Does Mr. Brady see any way to increase labour participation in the existing workforce? I know we are at full employment. We have a very low take-up of people with disabilities. We have the lowest rate in western Europe, with one in three versus well over 50% in many other countries. Does Mr. Brady see this or other ways of improving labour participation? Does he have thoughts on it?
Mr. Gerard Brady:
We had a big project on this two years ago with some of the disability groups and NGOs in that space. We looked at how we could bring more people with disabilities into the workforce. We had a challenge three or four years ago or more with regard to female participation in the labour force but there has been a remarkable increase in that regard. For people with disabilities, from an employer perspective, there are lots of other supports that we have put in place but more guidance for employers and more engagement is needed. The wage subsidy scheme for employers to employ people with disabilities has probably not kept up with where wages have gone in the last number of years. Improvements have been made to that recently but it could go further in linking it to the living wage, as that is introduced over the next few years. In general, the big challenge is to make sure that the supports are in place for the person with disabilities coming into the workplace. Some of those supports are in place, if people are going into, for example, some State schemes. However, if they go to private employment, they do not have the same support.
Edward Timmins (Wicklow, Fine Gael)
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Are there other areas where we could talk about retraining people and improving things in that way?
Mr. Gerard Brady:
The national training fund continues to have a surplus of over €2 billion, so the issue is not a lack of funding. Employers have paid into those funds. There is still funding available where more training could be part of that solution. From an employer perspective, the main challenges include the terms of the wage subsidy scheme. To be fair, some of these have been fixed in the past year. They were such that if a person worked more or less than a certain number of hours, they fell out of the scheme completely.
Edward Timmins (Wicklow, Fine Gael)
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Our international competitiveness is still quite high but we have fallen a little bit, to perhaps seventh place now. Is there any particular reason for this? What should we be doing to arrest it?
Mr. Gerard Brady:
The major one is infrastructure. If we compare Ireland with similar countries, we stand up pretty well. Companies look at this very closely and still invest here. On skills, the availability of talent and so on, we still stand up. The issues raised with us most regularly are all to do with infrastructure. These are housing and the ability of a company, when it does find staff, to get them to stay in the country or move within the country, which is becoming more of a problem, as well as the electricity grid and water infrastructure. We have lots of challenges in trying to win investment into the country if the grid or the water infrastructure is not there. Planning and the EPA licensing regime are also issues.
Edward Timmins (Wicklow, Fine Gael)
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Does Mr. Brady have any suggestions or gems of wisdom about how we could deliver infrastructure more quickly? We have thrashed this out here with many people over the last few months. Does Mr. Brady have any particular bugbears?
Mr. Gerard Brady:
We recently produced a lengthy publication. I appeared before the Oireachtas committee on infrastructure to talk about it. The multi-annual funding is very important. The resourcing of the bodies on both the regulatory and planning sides is a major issue. The final point is to make sure that we rebalance towards the public good and away from individual objectors in the system. I know the Government is taking steps towards this. That would be a major change.
Edward Timmins (Wicklow, Fine Gael)
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What role will IBEC have in implementing the action plan on competitiveness and productivity, which was published in July? What role will it have in making sure that is implemented?
Mr. Gerard Brady:
We do not have a direct role, but we have a role in terms of pressuring the Government. There is a structure in place in the plan and the Department of enterprise and the Department of the Taoiseach are the ones with lead responsibility for that. For the business representative groups, there are lots of forums and opportunities for us to have input and to hold the Departments and the Government to account in making sure that the plan is delivered. The first test of that will on 7 October. The plan has a lot of good in it and has been well received by businesses. There is no funding in the plan itself but if it does not have funding attached to it in the budget, that will be the first test of whether it is a serious action plan or whether it is a strategy that is just written down and forgotten about.
Johnny Guirke (Meath West, Sinn Fein)
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I thank Mr. Brady for the presentation. He said that there are some signs of a slowdown. What businesses would be the first to be affected? I have a few questions so I will just ask a few of them. Mr. Brady talked about tariffs and how they are affecting business. In my view, what has been affecting business in the last 12 to 18 months has been the weaker dollar and how much business is transacted using the dollar. I think the strength of the dollar has dropped by maybe 20% in the last 12 to 18 months.
What sectors or industries does IBEC believe should be prioritised for public investment in the 2026 budget and why? Given the concerns about the over-reliance on corporation tax revenues, what concrete steps does IBEC recommend to diversify the tax base and enhance fiscal resilience? Does it recommend investment in small and medium enterprises or startups?
On infrastructure spending, how does IBEC propose to ensure that the planned increase in infrastructure spending will be translated into tangible improvements in public capital projects? Has IBEC looked at this side of things? If we do not, it will affect housing, water and sewerage infastructure.
Mr. Gerard Brady:
I will start with the last one on the infrastructure plan. We have said that as new fiscal rules come in for this budget, there should be a target for a minimum spend on infrastructure put into the fiscal rules alongside all the other rules. The biggest challenge we have had that has resulted in the deficits in housing and underpinning infrastructure is that every time we have any slowdown in the economy, the public capital budgets get cut. The most important thing is that we do not this again, if there is any slowdown in tax revenues. We need to protect public capital budgets above everything else, including tax and current spending.
If we look at the other areas, the multi-annual funding is probably the most important side on the infrastructure to make sure that bodies are able to carry that through. The reforms of the planning laws that are already happening will help in future years. The resourcing of the system is also very important.
On fiscal resilience and the corporation tax revenue, Ireland is not in dire risk right now of a correction in corporation tax receipts. In fact, next year, I expect that we will get a lot more corporation tax because we are increasing the rate to 15%. At the moment, the effective rate is probably around 10%. That is a big jump in the effective rate of tax on the same base. The big challenge for us is that we are very vulnerable if anything were to happen on the tax. We have said that we need to try to balance the books as if we just had the corporation tax of a normal globalised, open economy, like the Netherlands or Switzerland. That will have to be done over the course of many years. It means that budgets will have to be a bit tighter and we will need to make sure that if the vulnerability did arise, we would be able to offset it.
On the weaker dollar, more than half of our exports are in dollars, which is the highest of any European economy. That is mostly from US multinationals that are exporting in dollars because they use dollars within the group. The weaker dollar has had a big impact on businesses selling into the US in the first half of the year. We are seeing a slowdown in a number of sectors. The whiskey sector is 90% mothballed, or fully closed, because they produced to get ahead of the tariffs. The sector is now effectively shut because the demand is not there. The engineering sector is very exposed on tariffs. As I said, parts of the engineering sector are not facing 15% but rather 50% tariffs, particularly in agricultural and industrial machinery and other areas where there is a lot of steel in the product. Of the other sectors, medical device manufacturing is probably the largest of the sectors where we see a slowdown.
What we have seen in terms of the labour market slowdown, apart from our own surveys, is that part-time employment is starting to drop off. This is usually a signal that there is a weaker labour market. The applications for work permits and processed work permits are significantly down, because there is less demand for them. This too is a sign that the labour market is slowing. We will have a new economic outlook publication out this week. It shows a slowdown in the pace of employment growth. It is not that we are going backwards in terms of employment; rather, the pace at which we have been expanding will slow over the next few years. Last year, we added 2.7% to employment. Next year, we think it will be well under 2% or thereabouts. It is still expanding but at a slower pace because of the uncertainty and the focus on cost.
Johnny Guirke (Meath West, Sinn Fein)
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Given the demand for housing and trying to entice construction workers home from different countries, what does Mr. Brady think the Government should be doing to help them out with housing, and making it a little easier for them to obtain driving licences and so on?
Mr. Gerard Brady:
There are many parts to that. The biggest single policy challenge that has kept people away is the project pipeline is not certain enough. Many of our members building large projects here have people abroad who would like to come home. The reason is we have a bad track record of cutting back on capital budgets when things get tight. The commitment not to do that again in the new NDP, and following through on that, is a major piece of it, as is the multi-annual funding of infrastructure to make sure there is a clear project pipeline of infrastructure projects and housing projects. The biggest barrier we see to housing, apart from the build cost, which is very high here, is the provision of infrastructure, particularly water, wastewater and grid infrastructure. Wastewater is one that will start to bite particularly in the east of the country in the coming years and become a major challenge. It is already a major challenge, but it will become an even bigger challenge and one we need to get ahead of as quickly as possible.
Cian O'Callaghan (Dublin Bay North, Social Democrats)
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I thank the witness for coming in.
On the point about the challenge of infrastructure, delivering it, and the importance of financing infrastructure, IBEC's pre-budget submission has a costing of €86 million to do the reduction on VAT for apartments and to discontinue development levies on new-build apartments. Does that €86 million include replacement funding for infrastructure in lieu of those development levies as well as the VAT reduction?
Mr. Gerard Brady:
It does, yes. In our view, the way we tax housing is all wrong in that we focus our tax on the purchasers of new-build housing. We pile all the tax in the housing sector on to new-build housing and we do not tax enough at the other side, which is on the existing housing stock. If we look at Ireland versus other countries, we have very low property taxes, recurring property taxes and very high taxes on new-build and new-development housing. In most countries, the things the development levies are used for here would be built using the property tax. Here, we do it the other way around, but it increases the cost of housing and makes housing less viable. Our view is that, in the long term, we would not be using development levies at all, we would be moving that funding to a recurring source spread across the whole community rather than just on new-build houses.
Cian O'Callaghan (Dublin Bay North, Social Democrats)
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Is the increase in property tax in the submission?
Cian O'Callaghan (Dublin Bay North, Social Democrats)
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There is an absolute logic to what Mr. Brady just said regarding where taxation falls and how it is collected. There is a risk with this that it could then lead to higher site values. Are there any measures he can propose to ensure a reduction in VAT would not be effectively captured by increased site values?
Mr. Gerard Brady:
It is difficult in a dynamic environment to guarantee all the money ends up in the right place. There are two ways of doing it that might guarantee we get more of it. One is to do it as a rebate. We have VAT rebates in other areas. We could do a VAT rebate at the end of the process rather than at the start, so it is a rebate to the buyer rather than directly. The other way is to make sure we have zoned and serviced land. Serviced land is probably the biggest challenge there, in that we do not have enough serviced land. If we had more serviced land, the better we get at servicing more land and giving more serviced land out to the market, it will reduce the pressure on costs. If we do not fix those two in tandem, the VAT does not work without also fixing some of the infrastructure challenges, particularly on water, wastewater and grid.
Cian O'Callaghan (Dublin Bay North, Social Democrats)
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Regarding general funding on infrastructure, the IBEC submission provides for €1.3 billion in new infrastructure spending. The summer economic statement provides for €2 billion. IBEC is advocating for less spending on infrastructure than the Government.
Cian O'Callaghan (Dublin Bay North, Social Democrats)
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Okay, so it is €1.4 billion in addition to-----
Cian O'Callaghan (Dublin Bay North, Social Democrats)
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That makes sense.
IBEC is advocating a budget day package of €3 billion, but that is in addition to maintaining existing levels of public service. Does Mr. Brady have an estimate on that and what would be the overall budget package?
Mr. Gerard Brady:
I think there is still a lot of confusion about existing levels of service and how they are going to be done. The Irish Fiscal Advisory Council say it thinks the number is nearer to €5 billion. The Government has said somewhere between €3.5 billion and €4 billion in recent years. It is very hard to know what those existing levels of service look like without the detailed data from inside the Departments. As an outside body we go somewhere between the Government's output in the summer economic statement and what IFAC is saying. I know they have produced detailed examples of what those costs are in both.
Cian O'Callaghan (Dublin Bay North, Social Democrats)
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It could be an overall package of €7 billion compared to the Government's of €9.4 billion.
Cian O'Callaghan (Dublin Bay North, Social Democrats)
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On page 12 of the submission, there is a striking graph of investment into capital expenditure in Ireland compared to other countries. It shows that in almost every year we are significantly behind other countries. This is an ongoing problem. Is what IBEC proposes going to bring us up to a sufficient level of capital expenditure?
Mr. Gerard Brady:
That chart is probably from before the new national development plan, so the 5% of GNI target we are looking at in the new plan is probably the right number. The challenge we have had in the past, which can be seen in that chart, is that every other country in Europe and the developed world has a flat line of consistent investment over time, and Ireland has a kind of sawtooth effect where in good times we spend a lot and in bad times we cut back. The major challenge is twofold. One, is that we lose capacity in the sector in the downturns and then we cannot build as much as we want to in the good times. Second, is that we are always building at the top of the cycle, which gives terrible value for money from an Exchequer perspective. As I said earlier, when we see a new set of fiscal rules, our view is that there needs to be a set target for infrastructure spending as a share of the economy in those fiscal rules. That sets a baseline in the budget that needs to be met every time. At the moment it does look like the NDP will meet those and that is a positive thing, but the multi-annual funding, and the guarantee that is going to be persevered with, regardless of the economic cycle, is the most important piece.
Cian O'Callaghan (Dublin Bay North, Social Democrats)
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The comparator countries in that graph are Denmark, Netherlands, Austria, Finland, and Sweden. Is there any particular reason for that group of countries? I do not know where they sit compared to other European countries in terms of capital expenditure, but it might be suspected they are at the better end of it.
Mr. Gerard Brady:
They are a mix of better end, but they are similar-sized countries to us. That is the basis on which we went with them. I can provide the data for pretty much every OECD economy to the committee, and it is the same kind of story. Ireland is a very unusual case compared to any developed economy in terms of procyclicality. We spend on infrastructure in good times, and we cut back in bad times. Most countries spend on infrastructure at a steady pace throughout good times and bad times and it builds that capacity in the system, which is really important.
Gerald Nash (Louth, Labour)
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I thank the witness for appearing before us this evening. The point that Mr. Brady made on existing levels of service, ELS, is well made. It has been a theme of the engagement we have had with IFAC, the Parliamentary Budget Office, PBO, and others that, putting it diplomatically, that the ELS process could be more transparent, and the methodology could improve and ought to be more consistent from year to year. We know the PBO is doing some work on that at present. I welcome Mr. Brady's comments on that. I also welcome, if I understood him correctly, IBEC's position that there ought to be, as it were, a golden rule in terms of any new spending rule that might be introduced in respect of the public capital budget. That ought to be introduced. That is absolutely necessary.
The provision of targeted support for sectors on the front line was mentioned in terms of absorbing the impact of the new tariff regime and the current uncertain trading regime. I welcomed recent comments by IBEC that tie in with the vision I have had for many years now, namely, the introduction of a form of a wage support scheme. It would be loosely based perhaps on the German Kurzarbeit model. It would be one we could dust down in times of economic uncertainty to help important sectors of our economy to stabilise during difficult periods and retain jobs and skills. If we can learn anything from the last crash, it is that we failed miserably to retain construction workers. We are paying the price of that failure now. Is this the kind of scheme IBEC has in mind?
Gerald Nash (Louth, Labour)
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That said, by the way, there is more commonality, actually, around the fiscal approach and the approach to public investment than you would ordinarily assume.
Mr. Gerard Brady:
One thing we learned from during Covid - and it was a credit to the Government of the time - was the introduction of the employment wage subsidy scheme, the EWSS. It kept people attached to their employer at a time of low employment in the first instance. We have a notional short-time work scheme, but it is not as strong as the type of short-time work scheme in place in other European countries. Some sectors that are viable over the short term might have run up stocks to beat the tariffs, for example, and now they will have people on short-time work for a period. This will mean keeping people attached to their employer and putting them in training. Key for us is that this involves going into companies where there are short-term challenges and saying that during that time, we are going to try to get people into training and other supports to ensure they do not lose touch with their employer and are ready to ramp back up when demand comes back. The other types of supports concerned are mainly around marketing and investment in innovation and skills. Companies will face a challenge as they pay more in tariffs. It will depend, ultimately, on who ends up paying them but in the short term it will be the company here. Eventually, they will have to renegotiate with their US counterparts and the consumers. Meanwhile, these companies will have to cut back on things like innovation and training, and this is to the detriment of the whole economy. We must try to support these companies through that situation.
Gerald Nash (Louth, Labour)
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Well, entirely. This brings me seamlessly to the next point I want to make. We know from our recent experience that at least the current regime in the United States is a less than reliable partner. There is an unpredictability there that is damaging. We are a state that has done well from globalisation and free trade and the view is that we ought to be doing more trade deals with other liberal democracies that share our values and where there are opportunities, especially to expand and add value to our indigenous enterprise base, which is notoriously not as productive or innovative as in comparable countries. Should we sign the Mercosur trade agreement?
Mr. Gerard Brady:
If we look at Mercosur, IBEC is very supportive of trade deals in general. There are probably mixed views within the different sectors in IBEC on this deal. Some sectors will be challenged by Mercosur, and we must listen to them too. Lots of sectors, though, are also supportive of the agreement. For diversification purposes, if we look across the world, we will see that we actually have significant challenges right on our doorstep in Europe. Recent analysis shows that if we reduced some of the Single Market barriers within Europe and got trading more among ourselves, we could offset pretty much all the trade we will lose with the US due to tariffs. The IMF has done some detailed work and it shows that the barriers to goods trade within the Single Market are equivalent to a 40% tariff on the trade of European states with each other. Regarding the barriers to services, things like non-recognition of qualifications are equivalent to a 110% tariff within the Single Market.
At the European level, then, that is the most impactful thing we could do. It is the case from Ireland's perspective as well. Recent work done on this aspect by the Central Bank came out just this week. The most impactful things we could do are to work at a European level to reduce the barriers to trade within Europe and to support our companies in trying to trade within Europe. Lots of reasons explain why we have not done that enough traditionally and have gone straight to the UK. These include language, taste and all the rest. If Brexit were not enough of a reminder, here is another opportunity to address the situation. We learned from Brexit that companies that had the resources diversified very quickly. We saw this in the food sector. The dairy industry diversified very successfully during Brexit. Other, lower margin parts of the food sector did not because they did not have the funding or capacity to invest in those things. It is critical, then, to support companies to diversify that are more challenged in terms of their own resources.
Richard O'Donoghue (Limerick County, Independent Ireland Party)
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I thank Deputy Nash. I call Deputy Neville.
Joe Neville (Kildare North, Fine Gael)
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My contribution will be short enough. Mr. Brady is basically saying things are not as bad as we thought they would have been a few months ago.
Joe Neville (Kildare North, Fine Gael)
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Things could be worse. For now, they are not as bad as was feared, but they could get worse. Regarding IBEC's key business priorities, I have the good fortune to have the Minister, Deputy Chambers, due to appear before two committees I sit on tomorrow. We will have him before the Joint Committee on Infrastructure and National Development Plan Delivery tomorrow, as Deputy Fleming can confirm.
Joe Neville (Kildare North, Fine Gael)
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We will also have him appearing here before this joint committee. He comes in on an ongoing basis too. What would be the main items in IBEC's key business priorities? I ask this because everything comes back to infrastructure, infrastructure and infrastructure. The difficulty that even I have is disassembling this into individual points, and perhaps what we need to be getting to are these individual items. Where would Mr. Brady see as the area where the key focus should be? I am just curious. I am asking the same questions of different people to see what they think.
Mr. Gerard Brady:
Yes. If we look at it from a budgetary point of view, many things can be done in the planning and consenting system that would speed things up. We have given more detail on that point. I discussed this topic with the members of the infrastructure committee several months ago. On budgetary topics, multi-annual funding for the agencies delivering the funding and projects is required to ensure they are not running out of funding halfway through a year and waiting until the next budget to move forward.
A second point would be resourcing the key bodies making decisions, along with making them quicker at taking those decisions. These include the local authorities, the courts, An Coimisiún Pleanála and the likes of the Environmental Protection Agency. It is about ensuring those bodies are adequately resourced to make quick decisions.
The third point is underpinning infrastructure. To be fair, it is probably the number one issue. We are seeing progress in that space. Money has been committed in the new national development plan. It is about ensuring that money gets out and is not replacing old money. We must ensure we are not switching one source of funding for another, and that this is additional money that delivers water, wastewater and grid projects on the ground. Those are the key challenges, particularly the point concerning underpinning infrastructure. Everything else is built on top of it.
Joe Neville (Kildare North, Fine Gael)
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Mr. Brady spoke about multi-annual funding as a key point. What about the skills we have and those we require through apprenticeships or whatever else? What sort of feedback is IBEC getting? We have begun to move the needle back a little, but we probably have not got where we need to be on it.
Mr. Gerard Brady:
IBEC runs a number of apprenticeships. These are not the craft apprenticeships, but the newer ones out across our trade associations. It is critical they get funding, and funding that is adequate for the year. We have seen some further education providers on the public side run out of money midway through this year and have had to cut back on provision. This has been happening across the country. Ensuring, then, that people have adequate provision is one aspect.
More generally, I think reform is happening in apprenticeships to bring together the newer forms of apprenticeships and the traditional craft apprenticeships. The biggest challenge in take-up is ensuring employers have adequate funding for the time employees are going to miss so they are able to backfill for those roles. The challenge we see in our area is in the SME sector in particular. If a company only has a handful of staff, a backfill could account for 20% of staff. This is a real challenge for some of those companies. If we want more companies to take on apprentices, then we will have to fund them better in terms of the backfill, particularly for smaller companies.
Joe Neville (Kildare North, Fine Gael)
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Mr. Brady referenced support and innovation and R and D. I mentioned the R and D tax credit. Would that be typically for larger multinationals? How do we make that more pertinent to our own SME economy?
Mr. Gerard Brady:
It is, unfortunately, mostly taken up by multinationals. We have not seen small firms take it up as much. It is very clear to us why that happens. I have been talking to SMEs for a decade, I would say, or more about this at this stage. It is way to complicated for SMEs to engage with. You would need to hire the big four accountants to do the claim for you. In other countries, such as France, Norway, the UK and, indeed, the North, if you are an SME, you are in a different regime where there is a lot less form-filling and a lot less scientific evidence needed.
Joe Neville (Kildare North, Fine Gael)
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They go the opposite way.
Mr. Gerard Brady:
We make everyone fill out the same form. That is a major challenge. If you do not have the resources to hire accountants to do the job for you, you cannot use the R and D tax credit. I know companies which quite clearly qualify for the credit and would benefit from the funding. It would help them grow but they do not claim the credit because they would spend more claiming the credit than they would get back from the credit.
Joe Neville (Kildare North, Fine Gael)
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It is the same with grants sometimes.
Joe Neville (Kildare North, Fine Gael)
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I am conscious of the time. I thank Mr. Brady.
Richard O'Donoghue (Limerick County, Independent Ireland Party)
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From my own perspective, after meeting with IBEC yesterday, and we met a lot of companies from around the country, some of which had an international presence as well, their concerns were that, in their trade with the likes of the US and other countries, they were going to price themselves out of the market with the way the structure is set up here with energy costs, water costs, PRSI costs and so on. They can actually reflect off the other companies they have internationally and they are saying now that they are finding it hard to tell their sister companies that it is costing them 10%, 15% or 20% more to have the same output here as what it costs in other countries. With the US market being so volatile at present, if those companies see that it is costing 15% or 20% more here for their companies to grow due to energy and water costs, housing for people, and replacements for people into the markets so that they can have people who are on one skill level whom they can elevate and they can have people coming in on another level, is there a fear that they could relocate? We are talking about companies that have massive resources and are massive employers in this country, but it was not only coming from them. It was actually coming from the SMEs - the smaller sector - as well. Every one of the smaller businesses was telling me the exact same thing as the large companies, whether they operate internationally or not. Is that a concern the witnesses have? If it is, how are we going to neutralise it so that they will look at Ireland and say they are going to stay here? How do we make it beneficial for them to stay?
Mr. Gerard Brady:
We got a lot of questions, probably earlier in the year, as to whether companies would up and leave, and that was never the threat. The threat is that we will find it harder to win the next generation of investment. We get a lot of that feedback now and not just because of uncertainty. We have examples of members who have won investments into the country and cannot complete those investments because they are stuck in planning or judicial review, for example. Energy costs is probably the one that comes up, with labour costs probably on the smaller side. For larger companies, Ireland is not cheap on any level but energy costs stand out. We are one of the most expensive energy cost countries in the developed world. It is a major challenge. A large part of that is fixed costs, not of the electricity itself but the delivery of that electricity. We need to look quite seriously about how we can reduce those costs. It will require more funding of infrastructure directly by the State rather than putting that on users in future, particularly as we build so much infrastructure in the next decade.
In the other areas where we look at costs, especially in the SME space, labour costs have been the number one issue, along with energy. A lot of the labour cost challenge for many of them is policy driven. Going back to that PRSI rebate, the idea of that is to take pressure off companies that are most acutely challenged by the labour cost increases of recent years that have been policy driven rather than something that is applying to all companies together.
Richard O'Donoghue (Limerick County, Independent Ireland Party)
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Looking at our budgets at present from private delivery versus Government delivery of projects and the overruns, and I have asked this in the other two committee meetings, I am a business person myself, so it is design and delivery. You design it, you deliver it, you get an extra percentage because you take the risk but you are getting value for your buck. It is delivered on time and, if there is an overrun, it goes back to the contractor that there is an overrun. We are looking at other infrastructural projects that we could get in on time but we have to bring in that type of a model to make sure we have design delivery because it brings in accountability to make sure that we get more value for our buck, but we also get delivery on budget and on time, which makes it a lot easier for the likes of the Departments to say that they have X amount to spend and they can get X amount.
I mentioned the children's hospital before and the overruns. If you look at the likes of UHL, it is building on a 96-bed unit. It is a box. You could put a box alongside a box, you know exactly what it is going to cost, and you have a design and delivery project, which, for governance, shows you that there is accountability, it is value for money, and we get it done and done faster. The same applies for housing infrastructure where we have the likes of Irish Water. Again, it is design and delivery. All the projects I have been involved in with them up along the line have not been coming in on budget and on time. They are actually robbing Peter to pay Paul to try to finish this project and it is to try and get it delivered, whereas when we had the local authorities in there, they had no other choice but to go out to delivery and they got it delivered. Then the likes of Irish Water can take it over because it is delivered.
We have to change away from the model trajectory we are going. We need design delivery, on budget and on time. That means that the taxes being paid are being spent responsibly and we are getting the infrastructure in place so that housing demand will be shortened. If that type of a model is put in place, that means we get more delivery on time and we make sure we can meet our housing targets. Companies coming in here want to bring in people and for them to be housed, but unless we deliver something like that, we are never going to meet the challenges that are there.
Mr. Gerard Brady:
If you look at infrastructure as well, there are lessons that can be learned from other areas of infrastructure. We have a good track of being on time and on budget in some areas, such as roads. We do things well in some areas. Sometimes we can be overly critical of ourselves, but there are other areas, particularly more complex areas, where the design of how we deliver, in particular, through the public contract, can set things up to effectively overrun, and the way it is set up from the very beginning sets it up to become a fight between the contractor and the State rather than setting it up to be something that they are working on together to try to reduce cost. There are things we can do around public contracting. I am happy to share some of the detail of that with the committee.
Richard O'Donoghue (Limerick County, Independent Ireland Party)
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And also for the procurement for us contractors to get on that. We are saying that we have a shortage of large contractors that can do this, but the criteria around getting contractors to do even the smaller projects involve them having to show that they have already taken down €2 million or €3 million worth of projects already. They may have done it for the private sector, but it does not show that they have done it for the public sector so they do not qualify, even though they have done projects of the same size. It would bring more competition to the market as well. I thank Mr. Brady.
Micheál Carrigy (Longford-Westmeath, Fine Gael)
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I thank the Chair for his indulgence. I welcome Mr. Brady, whom I know a long number of years. I have a quick question. I chair the housing committee. Mr. Brady talked about incentives for developers. Both of us are from County Longford. We got blighted with section 23.
We are short of housing. Up until recently there had not been any private development in County Longford since 2008. Does Mr. Brady think we should bring back incentives for developers?
Mr. Gerard Brady:
I would not rush to bring back in section 23. We saw the effect that could have, in particular if it is poorly designed. Our view is that VAT is probably the best way to reduce costs, in particular if it is targeted at apartment building, in a space where we are seeing apartment building fall. It is a more direct support to a targeted area of the construction sector where delivery is falling at the moment. It means that it would effectively reduce the costs of delivery. There is not enough focus on reducing costs.
We are a very expensive country in which to deliver any type of housing. Part of that is land costs and part is tied up in the lack of zoned land. There are changes at government level to bring in more zoned land, which is very welcome. Part of that is the way we cost infrastructure. We talked about it a bit earlier. The cost of infrastructure, including the cost of local infrastructure for the whole community, is piled on to new houses through development levies and other levies. That is not the case in other countries where it would not be paid through development levies but out of general taxation or a property tax. The other part that makes it expensive is that it is an expensive country generally. We have a challenge there more broadly. I know a cost of business advisory forum under the Department of enterprise is looking at lots of different areas in that regard. The action plan for competitiveness and productivity would help productivity in the construction industry and more broadly. We are very good at some types of delivery. Modern methods of construction have the potential to reduce the cost of delivery and to increase productivity. The best way to achieve that, which was in the programme for Government, is for the State to take a role in building the market and then people would be able to invest into the kind of equipment and training they need because they know there is a pipeline of projects that they will be able to build. It will not happen with the private sector on its own as the only actor using modern methods.
Richard O'Donoghue (Limerick County, Independent Ireland Party)
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It was said earlier that when the recession hit in 2008, other countries continued to develop infrastructure but we pulled back in various sectors, whereas we should have continued to provide infrastructure. Hindsight is a great thing. We are where we are now and we are moving forward.
Reports are coming from the likes of Uisce Éireann that many towns and villages around Ireland have reached maximum capacity and there is no more room. We are only taking their word for it. I am involved in construction all my life. I have done a lot recently with sewerage infrastructure to see how we can make those towns and villages viable now and provide more capacity without a massive investment. What Uisce Éireann has told the Department is that it is at capacity and that we need a new system. It says we need to spend €3 million. What it actually should be saying is that we need more capacity, which means bigger tanks to slow down the cycles. We could use the same system by building bigger tanks on site at a low cost until we can put in newer systems in five or ten years. We need to basically slow down the cycle.
I have been dealing with the EPA on various matters relating to this issue. The Government is listening to the experts from the likes of Uisce Éireann, but they want to get as much money out of the Government as they can to cover the big projects it has. It is not looking at the smaller projects at the moment where it could increase the capacity of its own systems by adding larger tanks. It could be done very quickly, with a small investment in areas where the capacity in a town or village has reached the maximum. Increasing the size of the tanks would slow down the cycle, which would mean, with a small investment, we could build more houses in those areas using the existing system.
Why does the Government not get a second opinion from the private sector to counter Uisce Éireann's views and say we could fix this at a small cost to the Government and get more houses at a lower cost until the cycle turns and we can get to those places? In the interim, if we leave the systems as they are, they are polluting the waterways in this country. According to the EPA's standards, there is pollution, including in the farming sector, but the biggest polluters in this country at the moment are local authorities. That has been proven beyond a shadow of a doubt.
If we look at the science and the experience from the private sector they can help, first, to prevent pollution and, second, to increase the amount of housing in areas. If we increase housing in certain areas with a small spend, we can then put a transport network in place and further develop the areas. The Government can then fix one problem at a time down the line when it is in a position to do so. Common sense is not that common.
Richard O'Donoghue (Limerick County, Independent Ireland Party)
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The former Minister of State is present as well. We could have a small pilot project to see if we could do it. We could look at it and say, "Lads, we can actually fix this." If we prove we are right and it is a success, then we could fix a lot more. I am sure it would work around the country for the smaller towns and villages that are currently lacking in investment and businesses.
Seán Fleming (Laois, Fianna Fail)
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I have a very short sentence. I understand exactly what the Chair says. It is a great source of frustration. What I picked up from Uisce Éireann is that it is right to a point, but it is more concerned with water quality than water supply. It does not care if there is no supply, once a small supply is of a high quality. Perhaps it is right in the long term. It is more interested in that than the provision of an adequate supply. There are two issues: quality and supply. Uisce Éireann's emphasis currently has gone away from supply and it is all geared towards water quality.
Richard O'Donoghue (Limerick County, Independent Ireland Party)
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The problem-----
Seán Fleming (Laois, Fianna Fail)
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That is why we have the problem the Chair talks about.
Richard O'Donoghue (Limerick County, Independent Ireland Party)
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I agree 100% with the Deputy. The problem is that when the sewage is treated, they are using the same water to go back into the system for people to drink. Perhaps that answers his question. It is a circular economy. I want to work with people, including him and others, to make sure that we can deliver. I urge him to provide a pilot project to see if we can get some bit of a difference. The Deputy is probably right.
This has been a very educational meeting with great submissions from both sides. That concludes this session. I thank both witnesses for attending today. I also thank all committee members who came. I look forward to meeting the witnesses again in the not-too-distant future for more.