The committee is now in public session. Today we are joined from the Department of Finance by Mr. Derek Moran, Secretary General, and Ms Ann Nolan, Second Secretary General. I am told that it might be Ms Nolan's last appearance before the committee.
Finance Accounts 2015
Mr. Derek Moran(Secretary General, Department of Finance) and Ms Ann Nolan (Second Secretary General, Department of Finance)
called and examined.
Ms Ann Nolan
I think so.
Ms Nolan is moving on. We are also joined from the Department of Finance by Mr. John McCarthy, assistant secretary, Mr. Derek Tierney, principal officer, and Mr. Fiachra Quinlan, assistant principal. We are also joined by Ms Victoria Cahill from the Department of Public Expenditure and Reform.
I remind members, witnesses and those in the Public Gallery that all mobile phones must be switched off and not put on silent mode.
I wish to advise the witnesses that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to this committee. If you are directed by the committee to cease giving evidence on a particular matter and you continue to so do, you are entitled thereafter only to a qualified privilege in respect of your evidence. You are directed that only evidence connected with the subject matter of these proceedings is to be given and you are asked to respect the parliamentary practice to the effect that, where possible, you should not criticise nor make charges against any person, persons or entity, by name or in such a way as to make him, her or it identifiable.
Members are reminded of the provisions of Standing Order 186 that the committee shall refrain from inquiring into the merits of a policy or policies of the Government or a Minister of the Government or the merits of the objectives of such policies. Members are reminded of the long-standing ruling to the effect that they should not comment on, criticise or make charges against a person outside the House or an official either by name or in such a way as to make him or her identifiable.
Before I call the Comptroller and Auditor General to make his opening statement, our intention is to complete this session fully this morning because in the afternoon we will be dealing with the Department of Public Expenditure and Reform. I ask members to keep their respective time slots of 20 minutes for the first speaker, 15 minutes and ten minute slots thereafter to ensure we complete this section of the meeting before the voting slot today.
I call on the Comptroller and Auditor General to make his opening statement.
Mr. Seamus McCarthy
I thank the Chairman. I will commence by speaking about the finance accounts. The annual finance accounts present the receipts into and issues from the Central Fund of the Exchequer, together with a set of statements that itemise the transactions. The financial statements of the national debt, which are prepared by the National Treasury Management Agency, are presented in full as Part 2 of the finance accounts.
The finance accounts provide a statement of Central Fund transactions on a cash basis and are not a comprehensive set of annual financial statements for the State or central government. All revenues of the State are paid into the Central Fund of the Exchequer, unless otherwise determined by law. Examples of State revenue which is not paid directly into the Central Fund include PRSI receipts which are paid into the Social Insurance Fund and the proceeds of motor tax which are paid into the local government fund.
The chapters that are the subject of today’s meeting were compiled to highlight key aggregates and trends in Central Fund transactions and in broader State liabilities.
Chapter 1 summarises the Exchequer outturn for 2015. Receipts in 2015 totalled €58.6 billion, representing an increase of €8.9 billion, or 18%, compared with 2014. This was mainly due to increases in tax revenues of €4.3 billion and a number of one-off capital receipts totalling €3.6 billion.
Issues from the Central Fund in 2015 of €58.7 billion were €750 million or 1.3% higher than in 2014. The movement in Central Fund receipts and issues is shown in the diagram which is now on screen. This indicates that in 2015 the Exchequer deficit was almost eliminated - the shortfall for the year was just €64 million. This compares to an Exchequer deficit of €8.2 billion in 2014.
Members may wish to know that I issued my audit report on the finance accounts for 2016 last week. It is the Department's responsibility to present the accounts to Dáil Éireann.
In chapter 2 of my report, I outline the trends and composition of Government debt and the cost of debt servicing. The most comprehensive measure of Government debt is general Government debt. This is an internationally standardised measure of the total gross debt owed by all Government bodies to third parties outside government. At the end of 2015, the general Government debt stood at just over €200 billion. There was a very small decline in the level of debt year on year. However, the ratio of general Government debt to GDP declined to 79% at the end of 2015 from 108% at the end of 2014. This sharp reduction reflected an exceptional increase in the estimated value of Ireland's GDP in 2015, attributed to the activities of a small number of large multinational firms, including the relocation to Ireland in 2014-15 of a few big economic operators.
The main component of Ireland's general Government debt at the end of 2015 was the gross national debt. This is the cumulative borrowing undertaken by the National Treasury Management Agency on behalf of the State.
Gross national debt stood at €196.6 billion at the end of 2015, down marginally from the end of 2014. The cost of servicing the national debt fell by 6% to €7.1 billion in 2015. This reflected a fall in the estimated average cost of servicing the debt, from 3.8% at the end of 2014 to 3.5% at the end of 2015. By June 2016, the average had fallen further to 3.4%.
Turning now to chapter 18 in relation to the Irish Fiscal Advisory Council, the Fiscal Responsibility Act 2012 requires me to report to Dáil Éireann with respect to the correctness of the sums brought to account by the council each year. Chapter 18 is my report for 2015. My report on the audit was issued on 30 June 2016 and I gave a clear audit opinion. Expenditure by the council in 2015 amounted to €823,000.
The 2015 appropriation account for the Vote of the Office of the Minister for Finance records expenditure totalling €26.3 million on five programme areas. The expenditure on financial services policy recorded in the appropriation accounts is €7.6 million. However, it should be noted that this does not include costs associated with staff who are seconded to the Department from the NTMA to deal with banking sector issues, and certain related consultancy costs. Those costs are borne by the NTMA and are not recouped from the Department. The level of costs in that regard is not disclosed in either the appropriation account for Vote 7 or the NTMA's financial statements. At the end of 2015, a net €6.1 million was liable for surrender from Vote 7 back to the Exchequer.
I thank Mr. McCarthy and call on Mr. Moran to make his opening statement.
Mr. Derek Moran
I thank the Chairman for affording me the opportunity to address the committee this morning. I am joined by Ms Ann Nolan, second Secretary General, Mr. John McCarthy, chief economist, Mr. Derek Tierney, head of corporate affairs, and Mr. Fiachra Quinlan of the finance unit.
I would like to focus on the four specific items on today’s agenda. The first is Vote 7 and the 2015 appropriation accounts for the Department. The Estimate for 2015 was set at €30.6 million. Spend for 2015 was €24.4 million, leaving a surplus to be surrendered of approximately €6.2 million. This surplus arose for a number of reasons. Recruitment did not progress at the pace anticipated, resulting in a pay bill underspend of around €1.1 million and a further €600,000 underspend on non-pay administration expenses. There was also an underspend of €3.1 million on programme related costs arising from the completion of some work in-house and lower costs in relation to the shareholder management unit. The Department also recouped an additional €500,000 in respect of costs associated with the stabilisation of the banking sector. We remain committed to seeking to minimise costs where possible, subject to achieving the best outturn for the State.
I draw the committee’s attention to the following key points. Tax revenues for 2015, at €45.6 billion, were up €4.3 billion or 10.5% year on year and €3.3 billion or 7.8% on profile. Within that figure for tax revenues, the increase was distributed across the three key tax heads. Income tax grew by 7%, corporation tax by 48.9% and VAT by 7.1% year on year. On the expenditure side, total expenditure, at €58.6 billion, was up €700 million or 1.2% year on year. This was driven by increased voted expenditure which showed an increase of €600 million.
General Government debt as a percentage of GDP fell to 78.7% in 2015 from a peak of 119.5% in 2012. This downward trend is projected to continue with a debt to GDP ratio of some 72.9% forecast for 2017, which is in line with the euro area average.
I would like briefly to turn to performance and outputs in recent years. The Department was restructured around two directorates in 2016 – the economic and fiscal directorate and the finance and banking directorate. This structure remains largely unchanged in 2017. The Department is working towards achieving two broad goals, namely, a sustainable macroeconomic environment and sound public finances; and a balanced and equitable economy enabled by a restructured, vibrant, secure and well regulated financial sector.
I am greatly encouraged by the robust pace of the recovery in the economy, with GDP increasing by 5.2% last year. The increase in economic activity is broadly based and economic fundamentals are strong. Export growth in recent years has been robust and exports continue to contribute positively to growth. This is a reflection of the progress which has been made to restore our competitiveness. Notably, the domestic sector is now driving growth in the economy, with private consumption up 3% in 2016.
Recovery is perhaps most clearly evident in the labour market, with annual employment having increased in each of the last 18 quarters, representing an increase of 231,000 jobs since the low point in 2012. Strong employment gains have driven a substantial turnaround in unemployment, which has fallen from a peak of more than 15% to 6.4% in May.
Key economic indicators point to continued solid growth this year. The Department is forecasting growth of 4.3% this year and 3.7% next year. Despite the pace of the recovery and the strength of our underlying economic fundamentals, we must be conscious of the uncertainty in the external environment which underlines the need for caution supported by prudent economic and fiscal policies.
Public finances also continue to move in the right direction, with significant progress being made on the general Government deficit. Ireland exited the excessive deficit procedure in 2016 and it is planned to reach the medium-term objective of a structurally balanced budget in 2018.
Underpinned by a growing economy, the hard won improvements in our public finances provide a sustainable budgetary platform upon which funding for the provision of public services can be provided in the years ahead. The market reaction to our management of the public finances has been positive but it is vital that we sustain our progress. We must guard against complacency, maintain our prudent management of the public finances and continue with competitiveness oriented policies.
Brexit is one of the serious challenges for the economy. The Government approach has outlined twin Brexit goals, the first to secure the closest possible economic and trading relationship between the EU and UK, and the second to prepare the economy to cope with turbulence of coming years and the structural shift of new realities of Brexit. The best and most immediate policy within the Government's control to counter the likely turbulence of coming years is to prudently manage the public finances to ensure Ireland's economy continues to remain competitive in the face of future economic headwinds.
The last budget outlined a number of policies targeted at the most exposed sectors, measures to support small and medium enterprises, entrepreneurship, agrifood, and exporters, while also targeting potential economic opportunities, such as competing for mobile international investment in the international financial services sector. The Government has also put forward Dublin as an excellent location for the European Banking Authority post-Brexit.
A key focus for the Department in the past year has been the sale of the State's investment in AIB. The successful capital reorganisation of the bank in 2015 provided a supportive backdrop for the commencement of this process and significant work has been undertaken by the Department and its advisers over this period to achieve a successful outcome for the State. The recent completion of the initial public offering, IPO, represents a significant milestone and not only has it resulted in a substantial sum of money being returned to the State, but it also creates a strong platform for the State to recover all of the money it has invested in AIB over time. At the end of this process, the State will continue to hold 71% of AIB, which is worth around €9 billion, and will continue to be a substantial focus for the Department for some time.
As with any organisation, we must strive to evolve, improve and embed the skills necessary to the job at hand. This is an ongoing process. I am pleased to report that the Department was awarded the best learning and development organisation for 2017 for a medium-sized organisation as part of the Irish Institute of Training and Development awards.
The award is an endorsement of the commitment of the Department and its staff to the development of a learning culture focusing on both hard skills and those of leadership and management necessary for the job.
I express my appreciation to the staff at the Department for their ongoing hard work. It is only through their continuing commitment and dedication that we can deliver on our objectives. The Department will strive for continuous improvement and develop into the best organisation it can possibly be. I thank the Chairman and committee members for their attention and I welcome any questions.
I thank Mr. Moran. The speaking order is Deputy Catherine Murphy, Deputy Marc MacSharry, Deputy David Cullinane, Deputy Catherine Connolly and Deputy Josepha Madigan. Deputy Catherine Murphy, the first speaker, has 20 minutes.
Good morning. The delegates are very welcome. I want to start with the Government debt. In 2014, it was €203 billion. By 2015, it was €201 billion. The debt-GDP ratio dropped by 120% to 79%. Am I right on that?
Mr. Derek Moran
From the peak.
That is the year in which there was quite a discussion about leprechaun economics. Mr. Moran told us a small number of large multinationals located some of their activities here. Those were not big job announcements. Were the companies already here? Were they new companies? Do we know who they were?
Mr. Derek Moran
May I address that? The year 2015 saw a very significant increase in GDP. I recall a figure of 26%. We do not have the details of the companies because the CSO collects that information. If it is a small number, it does not make it public. The figure resulted from a number of factors, primarily the onshoring of intellectual property, which has a very high capital content.
It is hard to hear.
Mr. Derek Moran
I referred to the onshoring of intellectual property plus-----
Offshoring?
Mr. Derek Moran
No. Onshoring. I refer to intellectual property coming from abroad into Ireland, which gives a big boost-----
It is a problem with the microphone, not the explanation.
Mr. Derek Moran
-----on the capital account. That would have given us a big surge in GDP and it also affected a range of other areas, such as contract manufacturing and a number of more technical-----
Could Mr. Moran explain "contract manufacturing" for the members of the public who do not understand the term?
Mr. Derek Moran
I will ask Mr. McCarthy to help on this. Contract manufacturing is where an Irish company contracts with a third party outside the State to undertake activities for it. It is treated as activities if it is in Ireland.
Mr. John McCarthy
That is it. Let me give a little more flavour on it.
Can the explanation be very short because I have 20 minutes in total?
Mr. Derek Moran
Perhaps I will conclude? The net result was that we had a very big GDP number that drove down the debt ratios and, in fact, improved all the ratios. Internationally, debt ratios and fiscal ratios are reported against GDP. The net result is that we needed to look through the national accounts figures to see if we could develop an alternative that gave a truer picture of the underlying indebtedness of the State. An expert group was set up under the chairmanship of the Governor of the Central Bank, with participation by Mr. McCarthy and a range of other people. We anticipate, with the publication of the national accounts in a few weeks, that we will have the first indication of what is known as gross national income (Star), GNI*. This will be a measure that cleans out a lot of those issues related to globalisation and it will give a truer sense of what the ratio should be.
In terms of hard cash, we owed €201 billion in 2015.
Mr. Derek Moran
Yes.
It had not changed much in a year so it was not that we paid off debt or got a debt write-off.
Mr. Derek Moran
No.
It was purely in regard to this activity. This shows exposure because if it can move in and make that change it can equally move out and make the opposite change. Therefore, there is real exposure.
Is it true that Ireland's debt is the second highest in the world per capita?
Mr. John McCarthy
For each person resident in the State, the Government holds about €42,000 or €44,000 on his or her behalf, so to speak. This makes our figure the second highest. I believe Japan has the highest figure.
I thank Mr. McCarthy. With regard to aspects of that debt, I want to strip the matter back a little. How is the turning of the promissory notes into sovereign debt captured? I got a reply to a parliamentary question referring to the acceleration of the paying down of the debt. A minimum amount was to be paid off. I do not know the exact terminology. The eight floating rate notes had a range of maturity dates from 2038 to 2053. Between 2016 and 2018, the figure was to be €0.5 billion per year. From 2019 to 2023, it was to be €1 billion per year, and from 2024 onwards, it was to be €2 billion per year. The process has been accelerated. There is now an outstanding balance of €17.5 billion in terms of floating rate notes. Essentially, there has been an acceleration. How is that reflected in the debt?
Ms Ann Nolan
It is all part of the debt. It is debt whether it is in the Central Bank or the NTMA. To that extent, how it is stated is the same. One reason the NTMA has accelerated the buy-back is that interest rates are extremely low at the moment. I refer to floating rate notes. If interest rates were to increase, it would increase on those notes. If one can borrow for 20 years and lock in a low interest rate, one would be as well off to accelerate that swap.
I can understand the logic if one accepts this is our debt. Some of us have a real problem with that.
Ms Ann Nolan
I understand that.
There was a commitment – it was called a game-changer – regarding retroactive recapitalisation. This would be the area it would fall into. Has that been eliminated as any kind of a prospect at this stage?
Ms Ann Nolan
Technically, it is our debt. I totally get the Deputy's political point that she does not believe the country should have accepted that debt. They are Government bonds that rank pari passu whether they are held in the Central Bank or somewhere else.
In terms of the classification of debt and the issue of whether there was a game-changer, the argument from a purely market-based point of view was that unless there was a prospect of that debt being locked in for a long time, we could not have gone back into the markets and got the interest rates down to where they are now, which is an extremely low level, much lower than we would have imagined even when we did the deal. Now that the interest rates are so low and there is a possibility of them going up, if we accept that it is debt, which we do, I, as a technician, have to accept it is debt and that the Government has taken it.
The Department, headed by the Minister, has not done anything actively with the European institutions to change that. Is that Ms Nolan's understanding at this stage?
Ms Ann Nolan
My understanding is that there has not been further discussion on possible changes to the nature of the debt.
The opening statement referred to competitiveness.
IFAC will be advising on the fiscal approach and what fiscal space there is, to use the terminology.
One of the big measurements that seems to come into play in relation to competitiveness is wage inflation, but some of the big multinationals on which we are so dependent - we just heard that - are highlighting a whole other issue, namely, the cost of living and accommodation in particular. In terms of being prudent, to what extent is that factored into the management of the economy because, increasingly, we are seeing those costs absorbing huge amounts of household income? Google, for example, said more than two years ago that accommodation was a real issue for it. Is it a real issue for the Department of Finance in terms of prudently managing the economy?
Mr. Derek Moran
In terms of the Irish Fiscal Advisory Council, its role primarily in relation to the Department is, among other things, to look at the forecasts for the economy which bridge all of those issues – the constraints, the capacity constraints, the cost base, employment, unemployment, etc., and to independently assess where that falls within a credible range. It has consistently done that.
One of the issues that we have with success is that as employment numbers go up and as unemployment falls, we start to get to a capacity constraint. We have got higher demand for goods such as housing and so on, but also as one gets down to near enough what technically would be full employment, let us say 5% or thereabouts, one starts to get those additional pressures and the potential for overheating within the economy. I do not think we are quite there yet, but we have to and should be concerned about it. In terms of cost of living and accommodation, everybody is very aware of the supply constraints within the housing sector. That is a concern for all of Government and a set of policy responses is either in place or is being put in place. The reality is that there is a big gap between demand and supply and that puts pressure on prices.
Yes, but if there is such a big gap, the intervention of building becomes a very real issue for the Department of Finance.
Mr. Derek Moran
The Department of Finance provides the economic framework for others. Rebuilding Ireland's policy document for next year is all about trying to get that supply up and the building of increased social provision. That is an integral part of the set of economic challenges that we have. Perhaps Mr. McCarthy wishes to add something.
Mr. John McCarthy
The Deputy is correct. Competitiveness goes beyond simply wages. There are lots of other issues as well, including the capacity constraints, for instance within the housing sector.
The increase in capital expenditure that has already been announced for 2018, including the additional funding for the Action Plan for Housing, is just shy of 17%, and there is an increase of nearly 15% in 2019. At the moment we are looking at capital spending going from approximately 4.5% or 4.6% this year up to over €7 billion on the basis of unchanged policies by 2021. That has of course to be done within a fiscal framework. There are fiscal rules that make sure we do not let debt and deficits get out of hand but the Government is prioritising capital expenditure within that envelope. I do not want to get into policy.
Yes. I might come back to this in a minute but I wish to get a few other questions in that I particularly wish to ask.
We heard this morning about the money that was released from Deutsche Bank for the recent AIB share sale. What is the intention for the additional €400 million?
Mr. Derek Moran
I am sorry but the Government policy on that has already been stated, namely, that the sale of one-off assets is going towards the reduction of the debt.
What difference in percentage terms did the sale of those shares make, including that amount, on the extent of our debt?
Mr. Derek Moran
The rough calculation is that the total is about €3.4 billion. I think it is about 1%.
Mr. John McCarthy
It is nearly 2%.
I want to talk about the general Government debt. Obviously a whole lot of things help to define it. It is not just the Department of Finance. I am acutely aware that local authorities, for example, hold several hundred million, for example, in development contributions that they are not permitted to spend because it is obviously keeping a balance in terms of the overall balance of the State's finances. We heard recently from the universities when they were before the committee. For example, there was a purchase by UCC of the IMI, both the company and the assets. We heard from one of the witnesses that a look is being taken at other issues that might come into play as part of the debt that are not currently counted as part of it. First, the Department has to have some controls and that is evident with local authorities but it does not seem to extend to all sectors, for example, the university sector. Does that stand out in any particular way?
Mr. Derek Moran
The university sector is one that has changed. It is a question of what is on the Government balance sheet and what is off it. The university sector is not on the Government's balance sheet. There is a rule of thumb but it is much more complicated than this, but if an entity derives more than 50% of its income from non-governmental sectors it is outside the general Government expenditure and not counted in that piece. Clearly, local authorities do not do that but the universities do. They have to manage their affairs in that way so it does not fall within our remit.
Is Mr. Moran concerned that it could fall within his remit if it was reviewed?
Mr. Derek Moran
This comes up from time to time but it should not. The universities should manage their affairs appropriately. I do not think there is any question of the Government becoming liable for the debts associated with the university sector.
Okay. I want to come back to the overall debt and the exposure as given that it can move in, equally, it can move out. For example, the Apple ruling at European level is being challenged in the courts but while it is being challenged, where does that sit in relation to our overall debt because it would clearly be counted in as an asset until a challenge is successful, if that is the case?
Mr. Derek Moran
At the behest of the European Commission, it was suggested that the money would be held in an escrow account - in other words, it is held outside of anybody's account. The company paid into the escrow and the escrow is managed until such time as the proceedings are finished. It does not come onto our books now. It will only leave the escrow when the determination is made at the end of whatever period of years the case takes. It does not arise in the context of our debt, plus or minus, in the short term; it only arises when there is a final determination.
Right, okay. We have the debt-----
Deputy Murphy has five minutes remaining.
We have the total amount of debt for 2015. What does it stand at today?
Mr. Derek Moran
I think it is about €207 billion.
Mr. John McCarthy
At the end of 2016 it was €201 billion.
So it has been pretty much static since 2015?
Mr. Derek Moran
Yes.
Mr. John McCarthy
I will pick up on an earlier point about the fall in the ratio being solely to do with onshoring. One has to realise that the economy, as it grows, will increase the GDP, which is the denominator, and it will come down, not at the rate we saw in 2015 but it will come down. As we move from a situation of borrowing large amounts of money to not borrowing, it will help with the ratio falling as well. There is a dynamic there. The affordability of debt is ultimately how much the economy earns in a year and its capacity to repay.
It is quite a sizeable factor in servicing the debt because it obviously takes away our ability to invest in public services. We pay more taxes and all of that. In terms of our exposure, onshoring seems to me to be something to which we should be paying very serious attention. Has a risk analysis been carried out in respect of it? If it was to go back up to 120% as a result of an overnight change, how would it impact on us?
Mr. John McCarthy
In terms of the GDP growth rate, the Secretary General mentioned 26% growth. It is more a function of the nominal growth and such growth was 32% in 2015. The onshoring or growth rate in 2015 reduced the debt ratio by 25 percentage points. We published analysis in June which says that we do not have the GNI* available and GNI*, as the Secretary General mentioned, strips out some of these strange issues. Our best estimate is that the debt ratio to GNI* is still in excess of 100%. We will be able to calculate it accurately next Friday when the CSO publishes GNI* for the first time ever. Our exposure is on the GNI* basis rather than the GDP. The Deputy is absolutely right. There is an exposure if this IP is very mobile. It can move out as well as in. In quarter 4 of last year, we saw more IP coming onshore in Ireland. It is a risk so we carry out a debt sustainability analysis. We have published our annual debt report. What would be the impact on the debt ratio if for instance GDP was to fall by x% or x+2%, if interest rates were to go up or if there was a contingent liability shock? We are doing that war-gaming, so to speak.
If the new calculation brings it up to 100%, is that how it will be viewed with regard to our debt-to-GDP ratio as it relates to the euro, for example?
Mr. John McCarthy
No, this is a purely domestic term to help us, as policy advisers, but from a legal perspective, it is still GDP.
Is analysis carried out in respect of why this intellectual property was onshored and why Ireland was chosen?
Mr. Derek Moran
It is part of a bigger process. In the corporate tax space, there has been this base erosion and profit shifting, BEPS, process. Part of the drive of that was to take intangible assets out of tax havens, usually small islands in the Caribbean, and bring them onshore to countries that had substantive and positive tax rates. It is part of that process. In some respects, the scale of it was more surprising than anything else. Some of the impact on the national account is a result of the way the onshoring was structured. What one will see over a period of years is more and more multinationals taking those intangible assets out of the Caribbean and bringing them into-----
Yes, but they are choosing to come here. Are they choosing to go to other European countries with, for example, higher corporate tax rates or are they coming here because of the corporate tax rate?
Mr. Derek Moran
We do not know the company or companies involved. If we do, we should not say who it is. At the end of the day, they are coming here because they have substantive operations here, such as production services or research and development centres and this is the final part. I do not think one will see companies that have no association with Ireland coming here. One will see companies that are strongly embedded here and that have created substantial employment.
Will they be real activities or could we find ourselves in a situation similar to that relating to Apple?
Mr. Derek Moran
No, I think these are real. A very important distinction is that when intellectual property is brought into the country, it has to be treated as a separate trade. Capital allowances do not swamp the core activities of the companies. It is treated as a separate trade. The capital allowances are offset against that and, ultimately, taxed on that base. It probably removes the risk to the corporate tax that has been paid within the jurisdiction. This is real. It is a consequence of what was happening around the BEPS process.
May I ask one more question?
Yes, final question.
It strikes me that a lot of this stuff is not terribly obvious; ribbons are not being cut and things like that. We did not see a whole lot of it in 2015. There are very real things, such as housing, that have a real impact on the economy on a permanent basis. Where, in theory, there are some funds available, our ability to borrow is one of the big impediments to solving this problem. Would there be some value, in the context of being prudent in managing the economy, to invest more heavily in one of the things that is actually restricting growth in the domestic economy by virtue of the amount of money being absorbed by households in terms of the cost of accommodation.
Mr. Derek Moran
I will give the Deputy the sort of answer I think one of my counterparts in any Department of Finance in any jurisdiction would probably give. We have a set of rules and those rules prescribed a direction. There is a freedom for any Government to make a decision at any point to spend any amount of money but the rules require that we raise the moneys in a way that is sustainable, in other words through a tax or a charge or other channel. We get into debates about fiscal space. Fiscal space is only that piece we can do without going to discretionary revenue measures, without raising taxes.
It is unsustainable not to have an affordable housing option for an economy. It drives a whole lot of things, including wage inflation. That is just an opinion.
I will call Deputy MacSharry next.
I welcome the witnesses and thank them for the points they made. I will make a number of points on the accounts first. Receipts included €701,000 compared with €350,000 budgeted for in respect of the recoupment of certain expenses on the stabilisation of the banking sector. What was the nature of those expenses?
Mr. Derek Moran
Can I search that out for the Deputy?
Ms Ann Nolan
We can get the Deputy a detailed breakdown but, broadly speaking, with certain things such as the guarantees and so on, we can recoup certain expenses along with them. For example, we will have expenses in selling the AIB shares this year but it will all be paid for by AIB. In some cases, for some of the shares, AIB will pay the people we employed directly but in others we pay them and then claim it back from AIB. Where we pay and claim it back, it comes in as recoupments. I could not, off the top of my head-----
I know how expenses work.
Ms Ann Nolan
-----but we can give the Deputy-----
I know how expenses work.
Ms Ann Nolan
What did the Deputy say?
I know how they work-----
Ms Ann Nolan
What happens is-----
-----I just want to know what they were.
Ms Ann Nolan
We will give the Deputy a list for the 2015 ones. I know what the ones for this year are so I can tell the Deputy the type of thing they are. For example, where we employ legal firms to check all the documents before we sell all the shares, we pay the legal firm and then we claim it back from AIB. That is in the original-----
But that was not back in 2015?
Ms Ann Nolan
No, but there are things every year in the banks.
So they could be professional fees.
Ms Ann Nolan
They are likely to be professional fees or they could be in some cases for the guarantee where it was towards the civil servants' costs. We claimed those back from the banks as well. We will get a detailed note and forward it to the committee.
Mr. Derek Moran
Yes. We do not have the details but we can get them.
The witnesses will send that to the committee and we will get that a later date.
Mr. Derek Moran
Yes.
It is unfortunate that they are not able to give it to us now. We have a problem with getting information from some people. I am sure they will be the exception.
Mr. Derek Moran
We do our best.
Can the witnesses tell me who they were recouped from?
Ms Ann Nolan
From Bank of Ireland, AIB and PTSB.
No doubt they will have that detail for us as well.
Mr. Derek Moran
Yes.
Why is it so difficult to predict the annual level of expenses?
Ms Ann Nolan
For example, at the beginning of this year, we did not know whether we would be doing the initial public offering, IPO. There were three windows, as the Deputy will remember the Minister saying. It could have been in June this year, it could have been in the autumn and it could have been in the following June. At the beginning of a year, we do not really know what expenses we will incur, so therefore we do not know which ones we will recoup.
Typically, would it all be legal and accountancy or is there anything else? Is there anything unusual?
Ms Ann Nolan
As I say, there are some Civil Service costs sometimes.
Are the officials charging themselves out at so much an hour or whatever, and they will pay?
Ms Ann Nolan
Yes. There is a standard rate, depending on the grade and so on.
What is the standard rate?
Ms Ann Nolan
If it is a CO, there is the CO's salary-----
Divided by?
Ms Ann Nolan
-----plus a 25% or 16% estimate - I cannot remember the percentage - for the cost of pension multiplied by the number of hours.
Does the Department draw in a margin? Would Ms Nolan not draw in a margin for the State?
Ms Ann Nolan
We do not draw a margin but we are careful to make sure that where we are entitled to recoup, we recoup completely.
The Department should do that. With €201 billion of a hole to fill, it should not miss a genuine opportunity.
Ms Ann Nolan
To be fair, and Deputy MacSharry might remember it as he was probably friendly at that time with the then Minister, the late Deputy Brian Lenihan, when we did the original guarantee, the banks were not in a position for us to be drawing anything other than our costs from them. The piece for the Civil Service costs goes back to the guarantee. There is probably very little of that left now because there is hardly any of the guarantee left but there are other things that have happened subsequently where we have, for example, sold the preference shares. It would have been in the original deeds of the preference shares that if we had expenses, they paid them. We could not always tell in any given year which of those transactions we would be doing so we would make an estimate but we could be right or we might not be.
Okay, I understand. It is not a huge amount of money but the principle of a barter system does not look well. To the extent that it happens, albeit not much, we should be including a margin for anything we are providing.
Ms Ann Nolan
I am sorry to say, and I hope we will not be intervening again and putting in any new instruments, that in that case we cannot change the terms and conditions of the instruments. The margin or non-margin was set in 2010, 2011, 2012 and 2013.
I understand, should it arise. I can assure Ms Nolan-----
Ms Ann Nolan
I will bear that in mind.
-----that if the shoe was on the other foot, they would lay it on pretty thick.
Ms Ann Nolan
I have to be careful what I say. All the actions we took and the kind of recoupment we put in was also overseen by DG COMP and we had to be careful with that too at the time.
As we are on that kind of issue, will Ms Nolan remind me, for those who are tuning in to the committee proceedings, what we are getting annually from the individual banks?
Mr. Derek Moran
In what terms?
Ms Ann Nolan
In what terms? Sorry, I am not sure. We got recoupment.
I suppose, in layperson's terms as opposed to accountancy terms, what I would like to know is what the people are getting on an annual basis in terms of a dividend or-----
Levy.
-----levy.
Ms Ann Nolan
The levy is €150 million, and that is across the banking system.
Is that just a flat rate?
Ms Ann Nolan
It is not a flat rate but the Finance Bill is organised in such a way that makes sure we do not go below the €150 million. The rate of tax goes up if there is a danger that, between them, we will get less than that.
Okay. Do we review that based on the performance or profitability of the bank?
Ms Ann Nolan
No. It is a stamp duty-type levy so it is not a profitability levy.
It is linked to transactions.
Ms Ann Nolan
No. It is based on their deposit interest retention tax, DIRT, payments because we have that figure. It is apportioned between them, depending on what DIRT they pay.
It is a formula linked to the proportion of DIRT payments that they give in a year.
Ms Ann Nolan
Yes.
Is that in a Bill or a statutory instrument?
Ms Ann Nolan
It is in the Finance Bill.
That could be changed.
Ms Ann Nolan
Yes.
Perhaps it is something we could recommend. The amount is €150 million a year. Is there a dividend linked to AIB as well where we still own 71% as a shareholder?
Ms Ann Nolan
Yes. AIB paid its first dividend this year which was €250 million. It paid it based on the shareholding at the beginning of the year so we will get that full amount. I am not certain whether we have got it yet. We may get it at the end of the month.
I am concerned. It is €250 million and Ms Nolan is not sure.
Ms Ann Nolan
It is coming.
The poor Secretary General there thought we were €5 billion more in debt than we were until Mr. John McCarthy intervened.
Ms Ann Nolan
No. It is in the figures. We are getting it this year. There is no doubt.
I am sure Ms Nolan is well on top of the detailed figures but with the headline figures, I am concerned when €5 billion is missing.
Ms Ann Nolan
I am not missing €5 billion. I hope there will be future dividends, but we do not get to say what those dividends are. We will get 71% of whatever dividend the board decides and the board has to get clearance from the ECB for any dividend.
There was mention of €400 million on "Morning Ireland" this morning. To go back to what Deputy Murphy was dealing with, the officials are not allowed comment on policy but at this point the message in the media, which I presume emanates from the Department's press office, is that €400 million went back into the Exchequer. Is that an indication that the fiscal space, to use that terrible phrase, may be different or is it an assumption that it will be paid off the €201 billion?
Mr. Derek Moran
As I said at the outset, Government policy on this is straight up, that one-off sales of assets go against the debt.
Ms Ann Nolan
Not only that, it would not affect the fiscal space because our ownership of the bank is a financial asset. When assets come back from there, we are just changing one financial asset into another. It is not income in the fiscal space sense.
It is once-off money, but once-off money can be useful, for example, for capital expenditure.
Ms Ann Nolan
No. It does not create fiscal space. We owned the shares and now we own the money.
I agree, but money is money.
Ms Ann Nolan
It is just the cash. On European rules, I mean, it is not.
Mr. John McCarthy
It is not general Government revenue or Exchequer revenue.
I understand that. We will get to the European rules in a minute. The Department is saying that under European rules, that €400 million is not spendable money.
Ms Ann Nolan
Yes, under European rules.
Is that absolutely a European rule or is it our interpretation and application of a European rule?
Ms Ann Nolan
No. It is an absolute European rule. We are not the only ones with these type of assets and it is not specific to us.
On page 18 of the Appropriation Account 2015, Vote 7 - Office of the Minister for Finance, note 6.3 refers to contingent liabilities in respect of ongoing litigation relating to the Irish Bank Resolution Corporation, IBRC, Permanent TSB, PTSB, and some third party warranties and indemnities provided in connection with the sale of Irish Life Limited, the disposal of the Bank of Ireland contingent capital notes, the disposal of the preference shares in Bank of Ireland and the liquidation of IBRC. How does referring to these liabilities without indicating their monetary value serve the interests of openness?
Mr. Derek Moran
I am not sure I understand. Sorry, I will just check the note.
While Mr. Moran is looking for that, have we an estimate, an idea or a view on the eventual liability?
Ms Ann Nolan
There is a large amount of litigation going on in that area, particularly around PTSB. It has been going on for many years. We have won most of the cases. We have won every case that has come for decision but there is a contingent liability because we never know for certain that we are not going to win the next one.
Is there any view on what it could be on a good day or a bad day?
Ms Ann Nolan
On a good day, it will never materialise.
On a bad day?
Ms Ann Nolan
It would be a very bad day if it did. "I do not know", is the answer because it is just very difficult to estimate. These are former shareholders in PTSB.
Internally, would the Department have had a look at that, for example, Mr. McCarthy, as the economist?
Ms Ann Nolan
We have looked at it. It is almost like we can estimate it up to the total value of the money we put into the banks, if we say the banks were not worth that.
That is so unlikely it would be at the ridiculous top end. As I said, we won all the cases, but it is----
What is the nature of the warranties and indemnities?
Ms Ann Nolan
When one sells anything, one provides warranties and indemnities.
Are they open-ended?
Ms Ann Nolan
No. They come to an end.
When do they come to an end?
Ms Ann Nolan
Different ones come to an end at different times. In terms of the ones that have come to an end so far, there were a couple of warranties on the Irish Life one, which ended up with it paying us money. It has not happened to date that we have had to pay out extra money on any of these because-----
Surely the Department would not issue such guarantees unless it had an estimate of the exposure.
Ms Ann Nolan
There are some guarantees that one has to enter into. If I sell the Deputy a car, but I shoot out the tyres subsequently, he might say I have to guarantee that I will not damage the car after I have sold it. There are certain warranties one has to enter into where there is not necessarily a financial-----
Is it fair to say Ms Nolan does not know the estimate of the exposure?
Ms Ann Nolan
No. I do not think I know the estimate.
Mr. Derek Moran
We continue a provision in the Estimate in terms of the legal costs of dealing with these issues as they arise. They are unpredictable. As Ms Nolan said, we have not lost any of them to date; we have won them.
Which is great.
Mr. Derek Moran
These are all around the legacy of the crisis, and they can go to law. It is a contingent liability but, as I said, to date we have not lost any of them. This will go on for some time before it comes to an end.
With regard to GNI*, the new system we made up in the CSO in February, does anyone else in the world acknowledge GNI* as a reasonable economic indicator?
Mr. Derek Moran
There is a huge amount of interest in it, the reason being that these phenomena of globalisation are not unique to Ireland. The scale of what hit us before anybody else is quite significant, and Mr. McCarthy was a member of the group. Ten or 11 countries showed a particular interest because they have a greater or less exposure around this. In terms of what it is fundamentally, it is for us not to forget that we have a very high per capita debt and a huge sovereign debt burden. The legal denominator will always be GDP for all the reports internationally, but there are differences in the structure of the Irish economy that we need to acknowledge. GNI* gives us that metric to look at that. We will see the number next Friday, but it will probably be around 100% compared to 73%, which I believe is our current estimate for the end of this year. Mr. McCarthy might deal with our interest internationally.
Mr. John McCarthy
What we are particularly interested in in terms of GNI* is to see where the economy is really going when we strip out some of these strange one-offs. As the Secretary General mentioned, other countries have this issue as well. Within the EU 28, I am aware of 14 or 15 national statistical institutes that have identified onshoring of intellectual property, IP, as being an issue for them. Some of them are large countries and the IP coming onshore is not ginormous, whereas we have the opposite. We are a very small country in terms of IP coming onshore, so it completely distorts our accounts. What we need to do is to try to get an indication in terms of repayment capacity. Debt to GDP is not a good indicator of repayment capacity. Debt to GNI* is.
The reality is that we are at the coalface in terms of these issues. We are a very globalised economy and that presents challenges for us as advisers and for politicians in terms of making decisions, but also for statisticians in trying to measure what is going on because we have issues such as production that takes place in the Far East but which is included in the Irish national accounts for legal and statistical reasons. There are huge statistical issues, so we believe GNI* will be a better indicator of what is going on in the economy.
In terms of the European constraints that are on us, they are prescribing where we need to get to in terms of debt to GDP ratio. Is that correct?
Mr. John McCarthy
That is right.
What percentage do they want to see?
Mr. John McCarthy
We have a legal requirement to get to 60% of GDP. It must be corrected at a sufficient pace and that pace is one twentieth of the difference between the actual debt ratio in a current year and the 60%. To give the Deputy a simple example, if we were at 100%, the difference is 40%, so it needs to be corrected by 2% per annum, that is, one twentieth of the difference, which is 40%. It has to come down by 2% every year.
We have to get to 60% by a certain date.
Mr. John McCarthy
No. It just has to be done at the correct pace. The rules are silent on "when".
As an economist, does Mr. McCarthy believe that is good for a country with such an infrastructural deficit, for example?
Mr. John McCarthy
As was mentioned earlier, the fiscal rules do not tell a government or a sovereign nation state what it can and should not spend on.
No. They are telling them what it can borrow.
Mr. John McCarthy
It is absolutely right that there should be a constraint on borrowing, but if we identify that we have needs in a particular area, funnily enough, the rules say, "That is grand, but you have to finance it." It is perfectly plausible to me, especially when we have a debt ratio on a GNI* of 100% or €201 billion, to be exact, that one should not finance this by issuing more debt. If we decide that we have needs in a particular area, be it infrastructure or whatever, as I mentioned, we are doing it but we have to be able to finance it. That is not unreasonable.
I appreciate that, but it is the way we finance it. Would it not be sensible for a country like Ireland to issue a 100 year paper specifically to enable infrastructure?
Mr. John McCarthy
We have issued 100 year century bonds-----
I know we have.
Mr. John McCarthy
-----but, ultimately, that involves issuing more debt and we are close to the limit as to how much debt we can issue.
We are close to the limit in line with the European rules.
Mr. John McCarthy
And also market constraints.
What market constraints?
Mr. John McCarthy
The market constraint that could easily exist were we to say: "We will not obey the rules. We will not get to 60% of GDP fast enough. We will build on our €201 billion stock pile of debt and continue adding to that." That would price us out of the markets at some stage.
Is there not an argument that we will strangle ourselves unless we invest in appropriate enabling infrastructure in the meantime? Is it counterproductive?
Deputy, we are on time.
I know that. I have a final question.
Mr. Derek Moran
Ultimately, this is in the area of choice. If there are particular needs in one area, one makes choices around how that area is prioritised over others. We went through a phase in the "noughties" where we put huge amounts of money into capital investment and what we ended up getting was only price increase. We did not get an adequate return for that. That was a mistake. I do not disagree with the Deputy about investment needs and so on, but choices have to be made within an overall constraint.
We probably need to find a way to get concessions. That is a separate issue. I do not want to get the witnesses into policy and I am going down that road.
I have a final question. As the Apple case progresses, is it the witnesses' Department that is managing that case?
Mr. Derek Moran
Yes.
How is it going?
Mr. Derek Moran
The first thing to say is that we are not expecting to be in court on this until well into the back end of next year. There is a very long list of work streams. We are working with both the Commission and the company about finalising the escrow, getting an escrow manager and getting the money in, and that is complex. This is not a small amount. It is 25% of our revenues in a year and so on.
I understand.
Mr. Derek Moran
It is going fine within its own terms, yes.
It is going alright. In terms of the outlook, is it three, four or five years?
Mr. Derek Moran
Realistically, yes.
If we lose, has the Department made plans?
Mr. Derek Moran
I do not think we ever go out to plan to lose.
I did not say that we expect to lose. I am asking if the Department has prepared for an unfavourable outcome in terms of what we may need to do as a nation.
Mr. Derek Moran
Ultimately, if we get to that stage, and I averted to it earlier, the money will be held in escrow and when we get a decision, the money is transferred from escrow either back to the company, if our case is upheld, or to the Exchequer if it is not.
What if we lose our case and get our €11 billion plus interest? Have we planned for that eventuality and the steps we may need to take to ensure there is no negative impact on foreign direct investment, FDI, or that it makes IDA Ireland’s job more difficult because our tax regime cannot be trusted?
Mr. Derek Moran
We have been doing that from the start of this process. FDI is generally positive about the approach of the State with its dealings with the Commission and on this matter. That is an ongoing process.
Technically, the bigger issue will be that in the year that it might happen, all of sudden all of this money will come on the balance sheet, will displace any borrowing plans the NTMA, National Treasury Management Agency, might have, and there is an absorption issue. However, that is far down the road. Some of these cases have been going for decades.
I will come to Mr. Derek Moran first. Can we have short and sharp answers from him, if he can, because we are working to a clock today?
If I can start with the GNI*, gross national income (Star), Mr. Moran said it gives a more accurate picture of the market value of goods and services in this State and is more reliable than GDP, gross domestic product? Is that correct?
Mr. Derek Moran
It takes some of the peculiarities which gave us the distortion of 26% and it gives us a clearer picture?
Is it more reliable than GDP?
Mr. Derek Moran
Yes, as an indicator of what is going on in the real economy in Ireland.
Does that mean then that GDP has proved to be an unreliable measurement in this State?
Mr. Derek Moran
As Mr. John McCarthy already said, many countries are facing this challenge. The impact on statistics-----
We are focused on this State.
Mr. Derek Moran
I take the Deputy’s point. That is why in the immediate aftermath, an expert group was established to look at it, meaning there is a comparability.
Mr. John McCarthy
GDP is compiled absolutely correctly but it overstates our living standards.
Mr. Derek Moran said GDP is still used for the purposes of reporting to international bodies. Is it correct then that GNI* would not be the measurement that would be used but GDP instead?
Mr. Derek Moran
Yes, that is correct.
However, it is more than that. Is GDP not what is used to calculate the fiscal rules? For example, I assume the debt-to-GDP ratio, which Mr. John McCarthy went through, still uses GDP and not GNI*.
Mr. Derek Moran
It is GDP.
Are we then essentially calculating the implementation of rules based on unreliable measurements? Will Mr. John McCarthy answer that question?
Mr. John McCarthy
It is our legal obligation. Everything from the Stability and Growth Pact to fiscal rules is done on the basis of GDP. That will always be the case because in most countries, GDP is the correct measure. We are just unusual in the Irish context, given the size of multinationals and some of the more unusual activity-----
Mr. Derek Moran told us we were not unusual. He said this was a phenomenon not unusual for Ireland. Is Mr. John McCarthy now saying it is unique?
Mr. John McCarthy
What I said was that the scale of it is much more so-----
The extent of it is more unique.
Mr. John McCarthy
Yes, it is more unique.
That is a bit different from what Mr. Derek Moran said earlier.
Mr. Derek Moran
I said other countries have it but it is about extent and scale.
We can differ on that. Whatever about that, the extent of it is certainly more unique to Ireland. Is it the case then that we have to calculate the implementation of the fiscal rules based on a measurement which is less reliable in this State than it is in other states?
Mr. John McCarthy
I will give the Deputy an example. If we were using debt-to-GNI*, the fiscal rules would be even more binding than they are now. In other words-----
That is not the point.
Mr. John McCarthy
It is.
With respect, that is not the question I asked. If the question I asked could be answered. I did not ask about the consequences. Are we calculating the fiscal rules on measurements which are less reliable in this State than they are in other states? I am not interested in the consequences. We have to work within the fiscal rules and calculate how they work in this State. We were calculating them on debt-to-GDP on GDP figures. Mr. John McCarthy just said they are less reliable in this State because of the extent of how multinationals locate here.
Mr. John McCarthy
The information content-----
Please do not deal with the consequences. Will Mr. John McCarthy deal with the question I put?
Mr. John McCarthy
I am dealing with the question. The information content in GDP is much less in Ireland than it is in other countries. We are still obliged to use GDP by our legal obligations. International organisations and financial markets will continue to look at GDP because it is the internationally accepted norm. GNI* is a domestic measure which no other country produces because it gives a better indication as to what is going on in the economy.
We can have GNI* figures, put them into brochures and documents and put them up in bright lights but in reality it does not make a bit of difference to how the fiscal rules are implemented because they are based on the GDP figures. That is correct.
On the debt-to-GDP rules, Mr. John McCarthy earlier said the rules are silent on how long it would take to get to the correction of the 60% of debt-to-GDP and that it would have to be done at a reasonable or correct pace. The only absolute rule is that it would be done on the basis of a one twentieth ratio. Are we exceeding that ratio year on year?
Mr. John McCarthy
We did obviously in 2015 because the ratio came down by 25 percentage points.
Do we expect to exceed it this year?
Mr. John McCarthy
Only because of the strong nominal growth.
For example if the State decided, is it possible we could only reduce it by one twentieth? Would that free up extra revenue for the State?
Mr. John McCarthy
No, because one has the other rule. The debt relates to the stock but the more important and binding rule is the balanced budget rule and the need to achieve the MTO, medium-term budgetary objectives, and to correct it at a sufficient pace which is 0.5% of GDP per annum. Both rules are binding. While we may overcorrect or reduce the debt ratio faster, we are still obliged to correct the structural balance.
Is Mr. John McCarthy telling me that, by sticking within the one twentieth rule but not overstating it, there is no wriggle room in slowing down the pace of repaying debt because of the other more binding rules?
Mr. John McCarthy
Exactly.
Is Mr. John McCarthy certain of that?
Mr. John McCarthy
Yes, 100%.
Staying on this issue and how the sale of AIB shares can be used and not used, the briefing document to the committee dealing with AIB receipts for capital spending stated that because it is classified as a financial transaction, it is the substitution of one form of an asset for another. It is correct then that shares to cash are seen as equal.
Would shares to capital be seen as like for like as well?
Ms Ann Nolan
No.
Why not? It would seem sensible that this would be the case.
Ms Ann Nolan
Shares are regarded effectively as just a way of holding cash. When we put the money into AIB, it was not regarded as spending because we were just holding cash in another way.
Are the shares not seen as an asset?
Ms Ann Nolan
They are seen as an asset in the same way as cash is.
Yes, but they are still seen as an asset.
Ms Ann Nolan
Capital is not seen as an asset. If one buys something capital, it is seen as spending. When we bought the shares in AIB, it was not treated as a capital purchase. That is why when we get the money back, it will not be treated as such. Logic might say the other but those are the rules and I cannot change them.
I know we cannot change the rules. Have we sought clarification from the Commission on that rule?
Ms Ann Nolan
We did very much at the time. We went through it in much detail at the time we put the money in and on various occasions since on the various financial transactions.
Can the Department share that with us? Could it give us a briefing note on the clarification it got from the Commission?
Ms Ann Nolan
Yes, I can give the committee a briefing note on that.
It would be useful because one is conscious as well that even at the national economic dialogue exchanges there was much discussion about the need to invest in capital. I think everybody is on the same page, so what we are trying to do is to look at ways in which we can increase capital spending if possible. If it is not possible under the rules that is fair enough but we just need absolute certainty.
The final issue I wish to raise is the marginal tax rate above 50%. We hear a great deal about that. How many PAYE workers are paying a marginal tax rate above 50%?
Mr. Derek Moran
The way it breaks down is that about 20% of income earners pay at the top marginal tax rate.
It is less than that; I have the figure. I just wanted to get confirmation on it. The marginal tax rate is the income tax rate, the USC rate at the top, which is 8%, and then the PRSI rate. For those who earn between €32,800 and €70,000 the maximum they would pay is 49% to 40% on a portion of their salary on PAYE, 5% USC and 4.1% PRSI. Is that correct? They would be under the 50%. Only those who earn more than €70,000 would pay more than 50%.
Mr. Derek Moran
Yes.
My calculation is based on the Revenue ready-reckoner, and the most recent one indicates that there would be 359,754 workers above that. That is the number who earn more than €70,000 and who would pay above the 50%, which is 14.3%
Mr. Derek Moran
I was thinking in terms of who pays at the top marginal tax rate of 40%, which is around 20% of income earners.
If my figures are right it is 14.3%.
Mr. Derek Moran
I am not disputing them.
Okay, it is 14.3%. Then if we were to reduce the marginal tax rate below 50%, what we are doing essentially then is giving a tax cut to the top 14.3% income earners. Is that a fair assumption?
Mr. Derek Moran
Yes.
Yes, okay. Is that the policy at the moment?
Mr. Derek Moran
Again, we do not normally comment on policy matters.
I know, but in terms of what is on Mr. Moran's desk, is it something on which he had to do some work to calculate the costs of doing that and calculate how many people are paying it. He will understand why I am asking it because it is something that is new in the public domain. It will cost us money. If this was followed through it would be a cost to the Exchequer but it would be only the top 14.3% of taxpayers who would benefit.
Mr. Derek Moran
I said we cannot comment on policy matters.
Okay, but does Mr. Moran accept that it would only be the top 14.3% of income earners who would benefit?
Mr. Derek Moran
If one cuts tax at the top rate it affects the proportion that are chargeable at the top rate.
Okay. I have one final question on the working group that was set up by the Department on insurance providers. When was that set up?
Mr. Derek Moran
It was in 2016.
Ms Ann Nolan
Yes, in 2016.
Mr. Derek Moran
I will ask Ms Nolan to respond.
Ms Ann Nolan
The working group was set up in 2016 and the first report was at the end of 2016 on motor insurance.
It was called the insurance working group. What function did it have?
Ms Ann Nolan
The terms of reference are in the public domain. It was to look at the cost of insurance and to come up with recommendations to reduce insurance costs.
Did it examine the possibility of price fixing?
Ms Ann Nolan
I do not think it looked at price fixing. As far as I know, it did not.
This was the Government working group that was to look at problems in the insurance industry and now there are allegations of price fixing. The witnesses are aware that there was a raid on some of the main players in the insurance industry. Was that something the Competition and Consumer Protection Commission, CCPC, did independently? Was the working group essentially not focusing on what was the real issue if it was not focused on price fixing, which is the one issue that now seems to be the big problem?
Ms Ann Nolan
The working group was in contact with the CCPC. I am not sure how many "c's" there are.
The CCPC.
Ms Ann Nolan
Yes. The working group was in contact and had numerous meetings with the CCPC. Inasmuch as the CCPC is independent in the function of its duties the working group would have made a great deal of effort not to interrupt or disrupt the capacity of the CCPC to look at and raid and whatever else.
I completely understand that.
Ms Ann Nolan
Similarly, it would have been very careful not to involve what was essentially a policy group in its operation.
I would not expect it to do that, to usurp the role of the CCPC, but I would expect a high-level working group established by the Department to examine the real issues. Ms Nolan might not be aware of it but it is possible that it examined the possibility of price fixing. Could Mr. Moran confirm that the working group was established by his Department?
Mr. Derek Moran
That is right.
Did it report back to him?
Mr. Derek Moran
It reported back to the Government. The group was chaired by the junior Minister, as distinct from the officials.
Could Mr. Moran furnish the committee with any report or examples of references to price fixing? Is it possible for him to find out whether the working group examined that issue?
Mr. Derek Moran
I will go back and consult.
Yes, it would be helpful if Mr. Moran could report back.
I congratulate the Department on a clear audit account and it was on time. That is the first thing.
I am reminded of A Tale of Two Cities. This is a tale of two countries. I am fascinated by the language that is used. I wish I had more time today to examine it. I know we are a bilingual country but we certainly have two languages going on here, namely, the language of economics, which is very restricted, and the language of those on the ground who are at the receiving end of this very narrow view. I will preface my comments with that. Do the economists and financial people look at that? The last statistic I looked at before I came in here was that house prices are rising by €1,000 per week. At the end of the month 375 people were on trolleys in hospitals, 37 in Galway, and there are constant moderate reports from consultants telling us that a direct consequence of spending time on trolleys is premature death. Before I ask any specific questions, does that come into their reckoning at all?
Mr. Derek Moran
A lot of the issues raised by Deputy Connolly, be they health or housing are sectoral issues that are dealt with in policy spaces other than the Department of Finance. What we try to do is take an overview of the financial and economic position into which all of those challenges fit. In terms of whether we talk to representative groups or people about those sorts of challenges, the answer is "Yes".
That was not my question. Mr. Moran said he does not deal with the policy but in a sense the Department has made judgments in terms of the use of phrases such as: "Key economic indicators point to continued solid growth". He also said: "I am greatly encouraged by the robust pace of the recovery". In addition, he referred to "a balanced and equitable economy". I could name any amount of statistics but if we take health and housing where the latter is in major crisis, where does that feature in the overall report in the context of the "robust pace of recovery"? Where does housing come into that?
Mr. Derek Moran
In terms of a robust pace of recovery, that is fact. The key economic indicators are that the economy is growing. That does not mean the growth is evenly spread. It does not mean that we are without problems. What happens perhaps after the depth of crisis we have had is that periods of underinvestment catch up with one. The reality is that over the past four to five years there are 230,000 more people in work than were heretofore. The unemployment rate has dropped from more than 15% to just over 6% and is on its way down. In terms of what the Department of Finance does, it is a measure of well-being. Below that, in terms of Government policy and in the policy space generally-----
That is okay, but when I look at the Department's five-page document certain things are picked out. I accept that employment is up and that must be welcomed, but it is a discussion for another day as to what type of employment is up, for example, zero-hours contracts and work involving precarious hours. Mr. Moran presents some figures by way of backup for the thriving economy and his view that we are going in the right direction.
There are other figures that indicate the economy is not thriving at all. We see house prices increasing by €1,000 a week and a complete crisis in direct construction by local authorities which is leading to vast waiting lists. For example, the waiting list in Galway goes back to 2002, which means that people have been waiting for 15 years and not a single house has been constructed. Mr. McCarthy has referred to the billions going into housing, but the money is actually going into housing assistance payments which go straight into the pockets of landlords. In turn, this artificially maintains house prices at an unacceptable level. Where does this feature in the five-page document? Can the Department of Finance stand over it as housing policy?
Mr. Derek Moran
I am sorry-----
I have made it easy for the officials by mentioning the word "policy". I take it back. I mean it in the sense of it being an indicator.
Mr. Derek Moran
What we do in the Department-----
Mr. Moran referred to employment and other indicators. I am asking about housing and health as indicators. Are they indicators of a thriving economy?
Mr. Derek Moran
Our job as officials in the Department of Finance is to set the financial framework in which the Government makes all of its policy choices across all of the areas referenced by the Deputy. When it comes to an analysis of the economy, the indicators are the ones about which I spoke. Within any financial framework the Government of the day makes choices as to where it will invest and how it will address the problems to which the Deputy is alluding. I am not denying in any way that there are problems.
I am putting the question to Mr. Moran specifically and understand he cannot comment on policy. However, the Department of Finance's paper refers to certain indicators while ignoring others. That is what I am taking exception to, although that might be too strong a word to use, but that is what I am highlighting. The paper refers to being greatly encouraged by the robust pace of the recovery and so on. There are many other indicators that tell us we should be very concerned about the pace of the economy. Does Mr. Moran agree with this?
Mr. Derek Moran
I suppose we cannot get very far in this conversation without being dragged into referring to the responsibilities of others. Let us take the housing example. Should we be concerned about what is going on? There is no doubt that house prices are going up.
As an indicator, does that cause the Department of Finance concern?
Mr. Derek Moran
Let me pick through it. House prices are continuing to go up and they are going up at a rapid pace. Is that something at which those of us in the Department look and about which we are concerned? Yes, it is. However, house prices are still about 30% below their peak. I do not think anyone should aspire to reaching their peak values because they were not sustainable, but they are well below them. They are, however, going up faster than earnings. Is that a cause of concern at which we look? Yes, it is. Is it being driven by cheap credit or a credit bubble? The answer is no. Credit is not that cheap and the level of mortgage lending is still subdued. Are people over-leveraging, as they did in the past, with all of the social and financial consequences? The macro-fiscal rules the bank has brought in place absolute constraints on what people can borrow as a multiple of their income. We have to take a number of views on it. Are we looking at it as an economic risk factor and so on? Yes, we are.
They are not included in the paper or the opening statement. The Department of Finance did not put them down as indicators that the housing problem was concerning.
Mr. Derek Moran
I am sorry-----
I heard what Mr. Moran said and I am commenting on it. There was no reference to the lack of capacity in hospitals that inhibited a healthy society and how, in turn, it contributed to a thriving economy. They are all indicators.
Let us come back to specific questions about the national debt, to which the Comptroller and Auditor General referred. My colleague also went through it, as did others. We had a leprechaun moment where the national debt seemed to be lower than it was. The matter was brought to the attention of the Department of Finance by EUROSTAT. Is that correct?
Mr. John McCarthy
The Central Statistics Office published the figures.
The Department of Finance did not discover it.
Mr. John McCarthy
We do not measure the economy; the Central Statistics Office does.
The Department of Finance did not alert anyone to what had come from the Central Statistics Office and EUROSTAT.
Mr. Derek Moran
Like anyone else, we would not have known until the day they were published.
Mr. John McCarthy
We get them at the same time; they are published at 11 a.m.
What was the national debt in 2008?
Mr. John McCarthy
It was approximately 25% of GDP.
I will relay what the Comptroller and Auditor General told us. As a proportion of GDP, the general Government debt rose from 42% in 2008 to 120% in 2012 and 2013. In 2008 it was almost one third of what it was in 2012 and 2013. Is that correct?
Mr. John McCarthy
Yes. The figure of 25% to which I referred was for 2007. The Deputy is right.
It was 25% in 2007.
Mr. John McCarthy
Yes; that was the low point.
It was even less.
Mr. Derek Moran
In terms of the vulnerability of the economy, the figure went from 25% to over 40% to 112% in rapid sequence. We tend to think in that way.
Okay, but I am not beholden to figures. The national debt had no role in the crisis that ensued in recent years. Is that correct?
Mr. John McCarthy
It was the fallout from the crisis.
Will the officials explain to me in plain English how it became 120% of GDP? Will they include the role of banks and borrowing in that regard? Will they, please, clarify it simply for me because I am not an economist?
Mr. Derek Moran
There are various elements to it on which Mr. McCarthy can elaborate. We had two crises. We had a financial and a fiscal crisis. Total revenues – taxes coming into the Exchequer – collapsed. The figures dropped from approximately €50 billion to approximately €32 billion at their lowest. We lost €18 billion in revenues on the fiscal side per annum, all of which had to be replaced. At the same time the unemployment rate climbed from full employment to 15% in that period. Suddenly, we had significant outlays in social spending. Spending pressures increased and we had a fiscal contribution.
I understand. What went into the banks?
Mr. John McCarthy
A total of €64 billion, but the actual amount because there is different treatment of general Government revenue was 28% of GDP.
A total of €64 billion was put straight into the banks to bail them out. Is that correct?
Mr. John McCarthy
Yes, of which we are getting-----
Now we are talking about AIB and shares. According to the rules, we cannot use the money from selling the shares because we treat it as cash. Is that it?
Mr. John McCarthy
It is not counted as general Government revenue. It is a financial transaction.
Let us consider one example. We will not mention the IRBC because we do not have time to go into the matter, but let us consider AIB. We bailed out the banks. We bailed out AIB to the tune of 100%. According to the mad rules with which we must comply, we cannot use the money we have just received from the sale of the shares in AIB to help the economy in any way or to reduce the number of patients on trolleys. We cannot give the money to local authorities to build houses directly. Is that right?
Mr. Derek Moran
I am sorry, I mean-----
That is my question. Can we not use it under the rules?
Mr. Derek Moran
Government policy is not to use it in that way. This is money we borrowed to bail out the banks that is now being returned and has been set against the debt.
I am not holding the officials over the coals for policy. I am asking a simple question. Mr. Moran has referred to Government policy. Is it Government policy that we cannot use what we received for the shares, or are they EU rules?
Mr. Derek Moran
Both.
Will the officials, please, try to explain it for me?
Mr. Derek Moran
We will receive €3 billion. As we have explained, that is not an income line; it does not count as revenue. If we spend the €3 billion, we will burst the deficit target and it will be added to it. It is, therefore, a combination of both.
Government policy could be changed to allow us to spend the money. Is that correct?
Mr. Derek Moran
Only at the cost of breaching the fiscal rules.
Then it is the fiscal rules that are stopping us from spending the money. Is that it?
Mr. Derek Moran
It is both.
Mr. John McCarthy
The rules prevent us from spending one-off revenue. That is what was done in the bad old days when we were spending one-off transitory revenue to finance expenditure.
That is why we had one of the worst fiscal crises of any advanced economy ever. The rules prevented us from doing that but the Taoiseach-----
I do not want a history lesson. I do not need a clarification on the history of this. I need to understand so that I can explain this to people. What did we get for selling the AIB shares? Why can we not spend this money?
Mr. John McCarthy
We got €3.4 billion.
To put this in plain English, I will have to explain that to people on waiting lists, people on trolleys and people who cannot get health treatment. Please explain this.
Mr. John McCarthy
The rules do not allow us to spend one-off revenues. The Taoiseach has stated that, even without the rules, this is the right thing to do. Both of these come into play.
The rules are stopping the Taoiseach but he is happy to tell us he is complying with these rules. The Taoiseach is basically stating he will not even attempt to change these rules to be able to get people off trolleys or to build houses. Mr. McCarthy has brought in the Taoiseach on policy. Is that not what he is saying?
Mr. John McCarthy
The Taoiseach has said that even without the rules, this is the right thing to do.
Let me put this in plain English. The Taoiseach has said that we are going to comply with these rules and Mr. McCarthy is repeating what the Taoiseach said. The people left waiting for homes or spending nearly two thirds of their income on astronomical rents are the collateral damage of those rules. Speaking as economists and financial experts, do the witnesses have no views on this? Do they think that the collateral damage of this kind of policy is acceptable? Do they not think that there should be movement to change those rules? I understand if they feel they cannot comment.
Mr. Derek Moran
This is not a comment. We have to consider the concept of one-offs. Let us say that we get €100 million this year and spend it and it then becomes an embedded cost. We do not have €100 million the next year to pay for that or the following year or the year after that. What has happened then is one has opened up a line. That is why one-offs-----
One-offs can make a considerable difference to the number of houses built. They can give hope to people. They can give vision to the country and bring change.
I will leave that for the moment and will ask another specific question about risks to the economy. The only serious challenge to the Irish economy mentioned by the witnesses was the much-discussed Brexit. What other risks have they considered? What other challenges face the Irish economy?
Mr. Derek Moran
Twice a year we produce a risk matrix, which we then publish as part of the budget and the stability programme update, SPU. This matrix looks at everything from geopolitical risks to trade protectionism and uncertainty in the US exchange rate realignment. It covers a whole range of those kinds of risks. When one is only allocated five minutes for an opening statement, one just covers what one can. I tried to keep the focus as much on the accounts as on anything else.
We as members of the committee are allocated even less time. We must read all of this information before us on the table and try to get to the crux of the matter. I have a great difficulty with the idea of a thriving economy, an economy that is moving in the right direction. This idea of keeping the economy going sounds very much like Fine Gael's slogan in the last election but that is just a coincidence. At the same time, we have an enormous amount of problems that could be sorted out. I have many solutions to them. There are many solutions to the housing crisis, for example. The Department's active endorsement of this Government policy, however, is making things worse.
My second question concerned risks. Has the Department considered the risk of climate change? Where does that fit into the Department's risk factors?
Mr. Derek Moran
When it comes to our long-term fiscal planning, we look at the risks and costs associated with climate change. This is an ongoing process because from 2021 or so we will be exposed to fiscal costs as a result of not meeting targets. This is quite significant and it comes under our planning horizon.
The Taoiseach has made a number of statements about the need to move on the mitigation of climate change. This drags us back into-----
I am going to stay away from the Taoiseach and politics. I am looking at risk assessments here and specific mention was made of Brexit. I actually think that Brexit offers opportunities, as has been acknowledged by many people, but that is for another day.
This is the last Dáil in which to take any meaningful step to stop climate change. The 2006 Stern report, which I am sure the witnesses have read, is a landmark study on the economics of climate change. It clearly pointed out in 2006 that it would be 20 times cheaper to prevent further climate change. The London School of Economics, not known to be a particularly radical organisation, published a paper in 2015 that concluded that the net economic benefits to countries from tackling climate change continue to outweigh the costs. I could quote many other groups, none of them radical, arguing that we must tackle climate change and that it is a major risk to economies and to economic productivity on many levels. Where is that built in here? Where is the Department alerting the Government to this risk?
Mr. Derek Moran
What we present, Deputy, is a set of macroeconomic risks. Let us look at how we feed into the issue of mitigation. In 2008 we changed the vehicle registration tax to base it on carbon emissions rather than engine capacity as expressed in cubic centimetres. This was a mitigation factor to try to improve quality. That raises other issues as we go on. Other gases become important and that raises policy challenges in itself. In 2010 we introduced a carbon tax, initially on oil fuels, but now on solid fuels as well. The plastic bag levy is another example. We have had many policy inputs on this matter.
I accept that and I welcome all of these as positive measures. We need to hold these up, however, against what needs to be done. I am talking about the economic challenges posed to our country by climate change in terms both of the direct effects and of the enormous fines we will be obliged to pay within a few years, which range from €600 million up to more than €5 billion. We are talking Monopoly money here. That is not built in to the witnesses' statement. Why is Brexit the only risk outlined here? Am I in trouble, Chairman?
The Deputy is well over her time.
I am sorry. The Chairman should have told me.
I was being generous.
My final question concerns infrastructure. We are about to get an opening statement from the Department of Public Expenditure and Reform. It will refer to the key importance of addressing infrastructural needs. The European Union, which apparently sets the fiscal rules we cannot change, is criticising us for not investing in infrastructure. My questions are on climate change and infrastructure.
Mr. Derek Moran
Mr. McCarthy has said all that he has to say about the economics of climate change. All that I can say is that our direct policy inputs in respect of climate change mitigation involve the kind of things I already mentioned. I was heavily involved with the vehicle taxation change from cubic centimetres to carbon. We are now moving towards addressing nitrous oxide and other such pollutants.
I asked for the bigger picture.
Mr. Derek Moran
Each of these policy components contributes to the bigger picture. When it comes to the issue of fiscal exposure, the Deputy is absolutely right. From the early 2020s on we will be exposed to fines. We have to manage this, which we are trying to do on a cross-Government basis.
Is Mr. McCarthy going to answer that?
Mr. John McCarthy
No.
Grand. Some other members will come back with a second set of questions in a few minutes. One thing that may have surprised people here, and I have never heard it stated so openly and directly, is Mr. McCarthy's comment that Ireland has the second highest debt per capita in the world.
Mr. John McCarthy
Among advanced countries, yes.
Would that be OECD countries?
Mr. John McCarthy
Pretty much, yes.
Mr. McCarthy might send us that list and whatever document of international comparisons that he took it from.
Mr. Derek Moran
Yes, sure.
Send us the list of international comparisons of debt per capita for all of the advanced countries. Are we talking about state debt?
Mr. John McCarthy
It is general Government debt, yes.
One of the biggest difficulties we have in Ireland, and the reason why the recession was more difficult this time around, is the level of personal debt. State debt is state debt but then we add the personal debt to it.
Mr. John McCarthy
I agree.
Most people are carrying more than €43,000 debt on their shoulders as a result of mortgages. Does the Department have an indication of the average personal debt in this country? What is the total debt per person? I am sure that adding in personal debt would put us far above Japan.
Mr. John McCarthy
I have the figure, though it will take me a minute or two to find it.
I will come back to Mr. McCarthy in a moment. Do the witnesses take my point, however?
Mr. Derek Moran
Absolutely. Mr. McCarthy is sourcing that figure now.
Listening to this, one would think we have the debt under control. It is nice to get direct information that we have the second highest debt per capita in the world. I have not heard a Minister putting it as succinctly in recent years.
Mr. Derek Moran
From the Department's point of view, we recently published a first annual report on debt and debt sustainability. I cannot remember the exact title.
The Department might send it to the secretariat.
Mr. Derek Moran
The real worry, as things go along and look quite good, is that people forget we have a legacy of this scale. It is an important contribution in terms of giving an assessment of our vulnerability to changes in economic circumstances as well.
That is fine. Is the issue of personal debt dealt with in the report that the Department produced?
Mr. Derek Moran
No. It is purely sovereign.
Surely someone at Government level between the Department or the CSO has done-----
Mr. Derek Moran
The Central Bank.
Mr. John McCarthy
The Central Bank. It compiles the data on personal debt and non-financial corporation, NFC, debt.
Can the Department put the two together and send us a combined information note?
Mr. John McCarthy
We would be happy to.
I will leave it at that. The next question relates to the GNI* way of doing our national statistics and its approval by EUROSTAT. The officials said that other countries have similar problems. Some of them are big ones, so they affect us relatively. What other countries have a problem relative to their economy like we have on this issue?
Mr. John McCarthy
None. We are the outlier. As it was so important and is a huge issue, EUROSTAT sat on the working group. The OECD, the IMF and the UN all sat on the working group because Ireland is at the coalface here. Everyone, from a statistical perspective, was really interested in this. They support what we are doing, but there is no intention to roll it out for other countries yet. There are other countries with an issue, but they recognise that we are so far out there.
Our problem is unique then in all advanced countries.
Mr. John McCarthy
In its scale.
In its scale. Exactly. That is interesting to hear. Will it require EUROSTAT approval? Will this star have any international standing?
Mr. John McCarthy
No, it will not.
So it is just to keep ourselves-----
Mr. John McCarthy
It is-----
It is just things are not as they are-----
Mr. John McCarthy
Yes.
Okay. A topic that came up over the year on a couple of occasions is the issue of contingent assets and contingent liabilities. We have been told here that contingent liabilities do not really feature and that this is not a priority for the Department to include in the national balance sheet, and the Department is saying that EUROSTAT does not really get into it. However, what contingent liabilities are on the State balance sheet? Is that information in the report?
Mr. John McCarthy
This is the chart. I am happy to send it-----
What are the headings?
Mr. John McCarthy
Most of them are related to the State's exposure to the financial sector. They obviously have declined. Those contingent liabilities have fallen dramatically.
Okay. I will tell the witnesses what we are talking about in the Committee of Public Accounts which we feel the Department is missing entirely. The first is the amount that is due under the redundancy and insolvency fund. We have heard the Taoiseach - the witnesses need not get into the politics - talking a lot about publishing the names of people caught for social welfare fraud of more than €5,000 while it is €33,000 for taxpayers. There is a lower threshold. We understand the majority of the redundancy and insolvency fund will not be paid. We are satisfied from what we have heard that no one gives a hoot about collecting it in public bodies. It used to be in the Department of Enterprise and Employment, which shipped it over to the Department of Social Protection, which has not done an analysis of how much of it is actually collectible. Some of it has to be collected. Some of it refers to companies that have been restructured and are still there. We have had correspondence from the Department of Social Protection. It says that it writes to Revenue to find out if PAYE numbers are still valid. However, there is no connection. If it related to interest on a deposit account of someone on social welfare, the State would be able to match that up and track that down. However, there is no proper tracking down of it here. I am just saying that there is a gap in the Department's national accounts and it needs to look at it.
I will give a second example. When companies are liquidated, sometimes there is an asset at the end of the liquidation process which, ultimately, if there are no shareholders, is to be transferred to the State. We have not established the Department has a mechanism to do that. The Department got a big receipt the year before last of €10 million. A company in England sent it over to us. We heard about that during a meeting last year. To put it in layman's terms, it is the corporate equivalent of someone dying intestate. I am satisfied that there is no mechanism in place by anyone.
I am just giving three examples that have crossed our desk in the past 12 months. The third example relates to the household charge. Before the local property tax was introduced, there was a €100 per annum charge. If it was not paid, interest was charged. If it was never paid, €7,200 is now due. In the year in question, the Department collected €30 million. The following year, it collected €30 million. Last year, it was a lesser amount. When selling a house, a person has to get an up-to-date certificate from the local authorities and normally has to discharge that charge before the sale can go through. That proves to me that there is money out there to be collected but the Department is doing nothing about it. It is only if someone is selling a house that he or she gets caught at that point. There has to be a mechanism in place. The Department has to talk to the people who are over collecting the money. This is not just the Revenue Commissioners. The Department collects money separate from them. The Department needs to talk to those people about having a mechanism to compare those houses which have come into the local property tax net, which I think is nearly 100%, with those that should have had a liability for the household charge. There is tens of millions of euro out there that zero effort is being made by the State to collect. It collects some of it by default when someone tries to sell a house. Some of that is contingent income which I think the Department does not take into account.
How much is in the rainy day fund? I think it was established last year.
Mr. Derek Moran
Perhaps Mr. McCarthy-----
How did that work last year?
Mr. John McCarthy
It does not come in until after we balance the books. We balance the books in 2018, so it comes in the year after.
When does it start?
Mr. John McCarthy
2019.
So there is nothing in it yet.
Mr. John McCarthy
There is nothing in it yet. There is provision at the moment for €1 billion to be provided to the rainy day fund in 2019, 2020 and 2021. The operation of the rainy day fund and the amounts that are to go into it are currently being reviewed. There will be further detail in the summer economic statement, which will be published next week.
Page 21 of the briefing note states:
Following the recent change to the composition of the Government, the rainy day fund is currently under review. An update on the rainy day fund will be provided in the Summer Economic Statement 2017.
Mr. McCarthy is actually telling me that there is actually nothing in it anyway. We are talking about nothing.
Mr. John McCarthy
It does not kick off until 2019 at the earliest.
The public got the impression, as it came in in 2016, that there was something in this. I was wondering if that was the hidden fiscal space. When we talk about that, there is zero in it. When do the witnesses expect that we will have the summer economic statement?
Mr. John McCarthy
It will be either Wednesday or Thursday next. Government will decide after Wednesday's Cabinet meeting to publish it that afternoon or on the Thursday.
It will be published within six or seven days.
Mr. John McCarthy
Exactly.
Okay. The witnesses might send us a note. It is too complicated for the public. Now that we have exited the excessive deficit procedure in 2016 and are under the Stability and Growth Pact, is it possible for someone in the Department of Finance to write a note in layman's English on the difference? I am not asking for it here now because-----
Mr. Derek Moran
We will do our very best.
I think the witnesses know what I mean.
Mr. Derek Moran
I know exactly what the Chairman means.
That is, to give it to us in simple English. We had far greater restrictions on the use of our funds and our targets when under the excessive deficit procedure. I ask the Department to send us a note.
NAMA is heading for a surplus of €4 billion. We need to talk about this. To me, this is a bit like a windfall receipt. In fact, it is not a windfall receipt. It is the working out of loans over a period of time. Has any of that surplus been transferred to the Department yet?
Ms Ann Nolan
There will be no surplus until all the sub-debt is repaid in 2020.
2020. Okay. Everyone pays an annual dividend. Two years ago it was projecting €2 billion, €2.5 billion, €2.6 billion, €3 billion, €3.2 billion and now €4 billion. Given that NAMA is tidying up property loans which contributed to the housing problem and is sitting on what is expected to be a conservative surplus of €3 billion to €4 billion, can some of that not be used in the meantime to deal with the housing crisis?
Ms Ann Nolan
There are two aspects to that. First, the surplus is projected. It does not exist yet to some extent, although NAMA is making profits at present. However, it does not have a surplus because it has not yet paid off all the debt. The surplus is what will be left when it pays off all the debt.
I understand that.
Ms Ann Nolan
In the meantime, we have tasked NAMA to build a number of houses. Obviously, we did not instruct it because if we did it would be against EU rules, but it has agreed to build 20,000 houses between now and 2018 or 2019.
Is it to build or fund it?
Ms Ann Nolan
It is to fund them, effectively.
Is that through local authorities, voluntary housing or developers?
Ms Ann Nolan
It is mainly through developers. In some cases it is funding, in other cases it is co-funding and in others it is merely enabling. It is working with its developers, depending on what funding model the developer has to get those houses.
Could this extend the life of NAMA indefinitely if it is going down this new route?
Ms Ann Nolan
No, it has to-----
This sounds as if it will have loans in place for several years for new housing.
Ms Ann Nolan
No.
It was not established to be a housing finance agency.
Ms Ann Nolan
It is not, and it will not be. Under the EU state aid rules, it finishes in 2020.
What happens to its loans then?
Ms Ann Nolan
At that point, it will have to sell off any remaining interests. The State will have a choice to either monetise what is left by selling it or to take it into some other State organisation, because we will get any surplus. Assuming it has paid off all the debt, the surplus applies to the State.
Okay. When the surplus of €3 billion to €4 billion arises, or it could be more when the time comes-----
Ms Ann Nolan
It could be.
-----can that be used for infrastructure or is it deemed a financial instrument like the AIB shares? We should know the answer to this.
Will it go to write off the national debt?
Will it go against debt or can it be used for the citizens? Will it go to the international bondholders or will it go to benefit the Irish people?
Ms Ann Nolan
The upfront rule would probably be that it is a financial transaction. However, unlike the one we discussed earlier-----
AIB.
Ms Ann Nolan
-----we have no ruling from the EU on that yet. We might be in a position between now and then - I am sure the Department is already looking at it - to consider whether we could make a different argument.
Ms Nolan said there is no argument to be made.
Ms Ann Nolan
With AIB, we cannot make a different argument because many banks all over Europe got money, so there are many comparators and EUROSTAT has made rules. There is nothing exactly like NAMA. I am not promising the committee anything since I am retiring and I will not be responsible for it, but the instinctive rule will be to say it is the same. However, we have between now and then - it will depend on what comes back - to develop a case that might allow us to use the money in another way.
Is Ms Nolan saying that case has not been put?
Ms Ann Nolan
If we put it now, it will just say "No". It has to be nearer the time. One can develop the case but if one puts it upfront, it will just say "No". One develops the case between now and 2020, and it depends on how the money is coming back. One has to ensure all the debt is repaid.
What if NAMA completes its task much sooner? It is on target. It was set up with a ten-year term. The Minister encouraged the quick big sales to the vulture funds. We have had special reports on that and a commission is looking at Project Eagle, which was the first big sale. That was all in an effort to get NAMA to wrap up a little sooner. What if it does? It sounds as if the Department has not made a case yet. I am disappointed to hear that. While there is certainly a minimum surplus of €3 billion, which is a conservative estimate, because we think it is not coming to us any sooner, we are not making a case as to how those funds could be utilised. This is known as planning ahead. Ms Nolan is also saying - in light of current thinking - that NAMA's projected surplus of at least €3 billion will sit there until 2020 and all the good things-----
Ms Ann Nolan
Chairman, it does not-----
It is just sitting there.
Ms Ann Nolan
It is not sitting there.
There is money just sitting there and not being used.
Ms Ann Nolan
NAMA does not have much cash. It does not have €3 billion sitting there. That is a projected surplus. NAMA is continuing to sell things but it has not sold everything yet. It is investing, and those investments will come back between now and 2020. It has some cash and there is €500 million in senior debt still to be paid.
I am looking at the financial accounts for the full year. Half a dozen semi-State companies have made dividend payments to the State each year. They cannot be guaranteed to be profitable two or three years hence. It is exceptionally conservative that NAMA cannot even pay an interim dividend or an interim payment.
Ms Ann Nolan
It is not a question of being conservative. It is the state aid rules under which the EU agreed to keep NAMA off-balance sheet in the first place. NAMA must repay all the debt, which is the senior debt we guaranteed and the junior debt that it owed to the banks, before it makes any dividend payment to the State. The arrangement is that we get the surplus at the end. That was the arrangement from the beginning.
Okay. Perhaps Ms Nolan will send the committee a note on how she thinks that is shaping up. There might be a quick answer to my next question. When some of the banks got into trouble, the taxpayer had to bail them out. Essentially, what happened was that the bank debt, which was a problem debt, was handed over to NAMA, another State organisation, which, through its work, effectively reprivatised that debt to vulture funds such as Cerberus, etc. Instead of the debt being held by Irish banks, it is now held by the international vulture funds. Are the main companies that bought the funds from NAMA regulated here?
Ms Ann Nolan
It depends on the structure of the companies. Some of them would be and some of them would not.
What would happen if one of the regulated vulture funds went bust? Would the taxpayer have to bail it out?
Ms Ann Nolan
No.
Explain that.
Ms Ann Nolan
We would not bail out a vulture fund. We only bailed out the banks because the Irish people had deposits in those banks and if we had not bailed them out the Irish people would have been at a loss. Perhaps, even more importantly, Irish businesses needed the banking system to keep working so they could keep working.
I understand that. There are mixed views on it, but I take Ms Nolan's point.
Ms Ann Nolan
That is the reason.
I take Ms Nolan's point. Others might not, but I do. That is my personal view. AIB and Bank of Ireland are now profitable and they are starting to pay dividends. What is the position with corporation tax from the banks we bailed out? Now that they are profitable and talking about profits of €1 billion, when will we see corporation tax from those banks?
Ms Ann Nolan
Obviously, the Revenue Commissioners would not give us information on individual taxes. When one reads the banks' annual accounts, however, one can see that they still have deferred tax assets, that is, they have losses on their books that they set against corporation tax. We talked earlier about the bank levy and that is one of the main reasons we have a bank levy. It is not just the banks that we bailed out, it is all the banks in the system that have deferred tax assets or losses on their systems.
Who can give us a note on the entire deferred losses of the financial institutions? Ms Nolan said it is in their public accounts. I am asking her to assist us now, because we do not have the research.
Ms Ann Nolan
We can present the committee with whatever is in their public accounts.
Perhaps Ms Nolan will provide a summary of, and a total for, deferred losses for the financial sector that are in the system and we will look at that compared to their annual profits.
Ms Ann Nolan
Yes.
We heard reports that AIB said in its prospectus that it will not be paying tax for 30 years.
Ms Ann Nolan
I will give the committee a note on what is in the public domain on the main financial institutions. I cannot guarantee to get it for all the financial institutions that are outside. We will not get the information from the Revenue Commissioners so we will have to get it from the public domain.
Ms Nolan is not projecting any corporation tax within the next decade from AIB or Bank of Ireland, the main banks we bailed out.
Ms Ann Nolan
I honestly cannot say for certain how much each of them has. I know what is in AIB's prospectus because-----
Refresh the public on that.
Ms Ann Nolan
I think it is approximately 30 years.
So it does not expect to-----
Ms Ann Nolan
It depends. If it makes bigger profits, it will be a shorter time.
That would be 25 years. We get the message, but Ms Nolan might send us a detailed note. The next item is the AIB dividend of €200 million that will be paid this year.
Ms Ann Nolan
It is €250 million.
Is that going against capital or can it go into revenue? It is not a capital receipt or a once-off payment. It is an annual dividend, not a windfall receipt.
Ms Ann Nolan
That is income for the Government. It can be spent and probably will be spent.
That can go into current expenditure.
Ms Ann Nolan
That is current income.
Mr. John McCarthy
It is exactly akin to any dividend from any stakeholder.
Exactly. Like the other semi-States that I mentioned.
I have one or two more questions. Looking at page 11 of the finance accounts, will the witnesses tell me about what is not here in the Central Fund? In 2015, Ireland paid €1.952 billion to the EU. Under that there are receipts from the EU of €66 million, a fraction of that. We had it here with the Department of Agriculture, Food and the Marine and it slipped away from the Committee of Public Accounts because the money that we received from the EU in respect of agriculture does not come through the Department Vote or the Central Fund because it is audited by the European auditor. Essentially, it has not crossed our desk, except that we have asked for it in the last year. What is the net position of Ireland being a net contributor? Could we have a breakdown of the last few years?
Mr. Derek Moran
We can get that for the Chairman. Over recent years we have been on that margin. In some years we are a net contributor and in others we are a net beneficiary, between the ins and the outs. We can get that information for the Chairman.
And also the projections for the next few years. Why in the Central Fund do we have the payments out but not the income in? The Central Fund should capture the total income into the State. Why is that receipt from Europe, which is about €1.2 billion or €1.3 billion, not there? Perhaps the Comptroller and Auditor General might tell us. I know it is a separate fund but why is it not in the Central Fund account?
Mr. Seamus McCarthy
It is not brought to the Exchequer. I cannot say if that has always been that way. I can research the point.
I ask that a note be sent to us because Europe sends about €1.2 billion to Ireland each year. We pay it around €1.9 billion, which is much more, but the receipt of that €1.9 billion does not go through the agriculture Vote.
Is the Chairman talking about the CAP?
Yes, I am talking about the CAP. None of that comes through the Oireachtas. We never see it coming through the agriculture Vote, the Estimates or the Committee of Public Accounts. The Central Fund is meant to capture everything that is not in the Vote of expenditure and it does not come through there either. Please send us a note. We do not have the total picture. The obvious next question is what other major receipts and expenditure is not captured in the Central Fund.
Mr. Derek Moran
We will put something together on that. The position we are in is that of moving from net beneficiary to net contributor.
Mr. Seamus McCarthy
The large figures that are not going through are PRSI receipts. They are not in the Central Fund. They go directly into the Social Insurance Fund. Also motor tax.
And the local government fund, which is motor tax receipts and that goes out to Irish Water.
Mr. Seamus McCarthy
Yes.
Send us a note on all the funds that are not -----
Who scrutinises all of these funds? Does anyone scrutinise them?
The local government fund goes through this committee, as does the Social Insurance Fund. This European Fund for agriculture and CAP does not tend to come through national parliaments. I ask that someone put together a full picture because we do not have a consolidated figure.
Does it go through the Office of the Comptroller and Auditor General?
No. It goes through the European auditor. It does not come through the Oireachtas at all.
Mr. Seamus McCarthy
There is a consolidation account which does come to the committee by agreement. There is not legal basis for it but it is put together by the Department of Agriculture, Food and the Marine in co-operation with the Department which deals with Leader.
That changes. It goes around the House.
Mr. Seamus McCarthy
That does come to the committee as a note.
Okay. Mr. McCarthy knows the full picture. There are a few aspects that are not in these figures, so I ask that the national Parliament be given the overall picture. I am not saying that there is an issue but we want the total picture.
I will move on to page 47 of the same set of accounts. On the money that we borrowed from the troika, at the end of 2015 we still owe €50 billion, mainly from the European Stability Fund, and the Stability Mechanism Fund. Some of it does not have to be repaid for some time. The average repayment of that is up to 18 years. It is the case that we have paid off the IMF contribution in full?
Mr. Derek Moran
About 81% of it.
What is stopping us from clearing that? What interest rate are we paying? The witnesses spoke about refinancing some of our debts. Would it not be better to borrow now over a longer period at a cheaper rate? I recall that the Kingdom of Demark and Swedish money was a little higher than the average. Why are we continuing that?
Mr. Derek Moran
We continue to look at the options. We went down to 81% of the IMF loan. That kept them in the troika system, within the surveillance system.
Yes.
Mr. Derek Moran
It has dropped below that level for Cyprus, I think. We are looking at what opportunities open up for us. We are at a very early stage. The maturity of those loans is very short. There are only a few years left on the IMF money.
There is an average of five years left on the IMF, whereas on the European money, there is an average of 18 years left. The UK, Sweden and Denmark loans are also about five years. There are mixed views on this. Some would say that having the troika keeping an eye over our shoulder is a good thing for the Department of Finance, given what happened. Perhaps it is no harm that it is still under its surveillance but the other view is that if they were paid off, the Department would not be under its direct surveillance. Can the Department give us a note on the pros and cons? Is it good for Ireland to be under the surveillance of the troika or not? As the Secretary General of the Department of Finance, would Mr. Moran prefer to have the IMF having direct surveillance over his Department or would he prefer if were an ordinary member of the IMF, where it makes an annual visit as it does elsewhere?
Mr. Derek Moran
The participation of the IMF as part of the troika is essentially a European choice. It is the decision of the three funding agencies, not only what we would like. We have two visits from the troika annually. They are relatively short compared to what they were. They are primarily interested in our capacity to repay the money we owe it. There is nothing much beyond that. In terms of an annual article 4, our relations with the IMF is back to a regularised position. That is our main engagement with it It is always useful to get some sort of external view. We get that primarily through engagement in the traditional way, such as with the OECD and the IMF visits, not from the surveillance missions.
I have two other questions on which Mr. Moran might give us some information. Looking at the AIB sale again, given that money was borrowed to buy out AIB, now that the State has got some of that money back, it has to go back against the borrowings as a financial transaction. I understand that. Has the Department calculated the interest that Irish taxpayers paid through current revenue on the borrowings to bail out AIB since 2008, since the bailout? I would expect a minimum of that because it was interest paid on a year-by-year basis that came out of current revenues. We could argue about capital, but there is a strong case that part of the proceeds of the sale of AIB should go back to recouping the interest that we paid on the bailout of AIB as a minimum. What are the Department's figures on that equation and where are we on that?
Mr. Derek Moran
All borrowings are just that. The State borrows the money it needs. It is not separately identified against what the need was. We do not have a stream of borrowing that is identified as AIB. It is possible to look at the money that was injected and track what that might have cost over time but it is not an exercise that we do.
Ms Ann Nolan
When talking about the difference between current and capital, it should be borne in mind that when one looks at what we got back from AIB, much of the money, including fees on the guarantee and so on, came in as income. During the years when we were paying interest, the income from AIB was probably higher than the interest going out. That is not to say that justifies what we did but it is not simply one way or the other.
That is an angle. The Department might look at that. I would have thought the capital which we borrowed is different from the interest that we paid on that capital borrowing. It cost taxpayers money to pay for that during that period.
Mr. Seamus McCarthy
In the 2014 annual report, we did that sort of exercise which we cleared with the Department. We plan to repeat that this year. It would bring those numbers to account. Clearly there are policy implications, which is where the Chairman is going on the matter of how it might be applied.
Will the Department of Finance have that for its September figure?
Mr. John McCarthy
Yes, we expect to have that.
Good, so we will see that in September. Is there something in that? Mr. McCarthy is going to tell Mr. Moran that there is something in the book there.
Mr. John McCarthy
There is. In the annual debt report, we have taken figures from the Central Statistics Office, CSO, on the general Government impact of banking support on the revenue side and on the expenditure side, broken down by interest, dividends and so on.
Is Mr. McCarthy emailing that document to us?
Mr. John McCarthy
Yes.
Mr. McCarthy will be pleased to hear that I am on my last question. The briefing note we got from the Department of Finance was document No. 653A(ii). It is interesting how this was brought into it. On page 34, it states that the Department of Finance received €12 million in 2015 under the fair deal scheme into the Central Fund. That note says that the collection of funds commenced in 2011. I do not have the previous years' figures. I ask the witnesses for a note on what has come in from the nursing home support scheme from 2011 up to the estimate for 2017. Is that money collected from the estates of deceased people, or what are we talking about there?
Mr. Derek Moran
Subject to confirmation, that would be my understanding. Under the fair deal scheme, Revenue becomes the ultimate collector where there are outstanding payments. We will get a note for the committee on that.
Is there a corresponding amount going back? The HSE is covering the cost of paying for the fair deal scheme in nursing homes on an annual basis.
Mr. Derek Moran
They are separated.
I ask Mr. Moran to explain that.
How does the cost compare with the income?
It costs us much money.
We have no figures there.
Mr. Seamus McCarthy
The difficulty there is that outlay and loans are extended at one point in time. They are collected at another point in time. I am doing a report on the fair deal scheme. It will probably be a special report.
A special report.
Mr. Seamus McCarthy
It will be towards the end of the year.
Will Mr. Seamus McCarthy look at this issue that I was just talking about here?
Mr. Seamus McCarthy
We are looking at that.
On that €12 million, does it not go back to the HSE, or is it just built into estimates? Is it separately identified as going to it?
Mr. Derek Moran
It is a receipt into the Central Fund.
Mr. Seamus McCarthy
There is not a corresponding transfer.
That is the question because we saw the receipt into the local government fund from motor tax and there is a payment out to match it. We now see a receipt into the Central Fund for the fair deal scheme, but we do not see an equivalent payment going back to the HSE to cover it. I think it is a bit much. It is not right that €12 million from the fair deal scheme, where payments are being met out of the HSE current budget, comes in the back door to the Central Fund and the Department of Finance for receipts from the fair deal scheme, and that there is no mechanism in place to pass it directly back to the HSE to pay for ongoing fair deal schemes. Do the witnesses get the point?
Mr. Derek Moran
I get the point, but that is not the way that it is structured.
Mr. Seamus McCarthy
The way that it is structured is that the money is advanced to the HSE first, and this is method of collection-----
I ask the witnesses for a note. Is Mr. McCarthy doing a report on that?
Mr. Seamus McCarthy
We are doing on a special report on that.
Sorry about that. Deputy Catherine Murphy wishes to speak again.
In response to Deputy Cullinane, Mr. Moran said that the CSO published figures on our GDP. In 2015, what was Mr. Moran's reaction when he saw the figures?
Mr. Derek Moran
The reaction, like that of most people, was one of surprise. We found out when the figures were published and it took us a bit of time to dig into them to try to understand what it was. The accounts themselves, because the number of companies was so small, did not give a huge amount of detail. That led to the establishment of the-----
Did the Department of Finance question it and say it could not be right?
Mr. Derek Moran
That would be our initial reaction, but the CSO is a very professional organisation and it compiled the data in accordance with the standards that would have been acceptable.
Did the Department of Finance have to engage with organisations like EUROSTAT about it, or would EUROSTAT have engaged with the CSO? What is the mechanism there?
Mr. Derek Moran
It would primarily be EUROSTAT and the CSO as independent statistical agencies.
They would have been trying to figure it out. It was more than just a surprise.
Mr. John McCarthy
Absolutely. It was a shock to everybody. It is a matter of record that I get the figures two hours in advance. I was shocked. Everybody was shocked. We had Paul Krugman's tweets. The main interlocutor with the CSO is EUROSTAT, because it sets the rules and the statistical framework. Since we meet credit rating agencies, the IMF and investors as part of our day-to-day job, we had to try to explain where this was coming from. We got the figures a couple of hours in advance, and it was a difficult communications challenge. It still is, because it still crops up in meetings in Brussels, Paris or wherever.
It would be an equally difficult communications challenge if it went in the other direction.
Mr. John McCarthy
Absolutely.
It might be slightly more than that.
I want to go back to the promissory notes. I understand the minimum amount for 2016 to 2018 was €500 million a year. According to a reply to a parliamentary question I got last night, it was €3 billion in 2016. It is €2 billion so far in 2017. That is way ahead. We met the Governor of the Central Bank, Professor Philip Lane, maybe a year ago about this. I think he said that they would be "extinguished". My understanding is that we printed money and have to take it back out of the economy and that is what the IOUs were, and that we have to extinguish them. We do not have to extinguish them as quickly, and the witnesses explained about how money is cheap at the moment. If we can park that and just spend it, and pay it down in the timeframe - I have a real problem with it and do not think we should be doing that - does that not leave some capacity to borrow for things that we can borrow for now and save later on?
I want to come back to a point that Deputy Catherine Connolly made. We are going to have cash fines imposed on us as a consequence of not meeting our 2020 climate targets. It will become a real issue for the Department of Finance when there are cash fines. It will not be something theoretical but something in practice. We are going to miss the 2020 targets and by virtue of the fact that we are on the wrong trajectory, we are going to have a real challenge with the 2030 targets. We should spend on some of the things that would ensure we avoid those fines, which could be very substantial. Would that not be a more prudent approach if there is the ability to pay this other way? Does that space exist if we do not approach the payment of those floating rate notes and have not accelerated it? Does that create a space to spend money in a different way where it is cheap to borrow and we will save money in hard cash and fines as early as 2020?
Mr. Derek Moran
I think we have gone through the promissory note matter in a bit of detail. The accelerated programme of selling over the minimum has been to avail of a very positive interest rate environment which probably makes it sensible to do that.
On borrowing to invest, essentially any borrowing we do at the moment is for investment purposes. The current account is in balance or in surplus and any borrowing we do is on the investment side only. We are not borrowing for day-to-day spending. On climate mitigation, Deputy Murphy is absolutely right. We face a challenge in 2021 and beyond of fines and not meeting the targets, and we are on the wrong trajectory.
Do we have an idea of how much the fines would be?
Mr. Derek Moran
My understanding is that it is about €600 million.
Is that per annum?
Mr. Derek Moran
Per annum. It is a question of what accelerated mitigation programme can be put in place.
I do not think we will meet those targets. Again, this is not my area of expertise. However, we should do everything we possibly can to minimise that exposure because it will be a fiscal charge going forward.
There are three big areas. The two areas we can probably influence the most are housing or built stock - in terms of retrofitting and avoiding the loss of energy in order to make buildings more energy efficient - and public transport. Some of those projects are very big. The ones that will bring a real return are those such as the DART underground, where we could borrow for a long-term purpose in the same way that led to the construction of the London Underground in Victorian times. I am only talking about the capital side here. It strikes me that we are paying off promissory notes when we could invest to save by at least heading towards the 2030 targets by taking an initiative now. I cannot understand why this is not seen as prudent. I am probably straying into policy.
Mr. Derek Moran
We probably are.
It is about being prudent.
Mr. Derek Moran
I think the committee will be talking about the capital plan this afternoon with my colleagues.
The cost of servicing the debt in 2015 was €7.1 billion. What was the cost last year?
Mr. John McCarthy
It was €6 billion. I will get the Deputy the exact figure.
Is it lower again this year?
Mr. John McCarthy
I will come back to the Deputy in one moment.
On AIB, we were getting a dividend and we are probably still getting it. I think it will be approximately €250 million this year. In respect of the sale of the shares, what is the projected dividend? I know it is a projection.
Ms Ann Nolan
We cannot project the dividend because the dividend is a function of how much profit it makes but also its agreement with the SSM - the ECB. So it must clear it. It is for the board, which is independent. If the Deputy is asking me what I am hoping for, I would hope it would pay a bigger dividend next year in view of the fact that last year was the first dividend. However, I do not know.
With less of the company.
Ms Ann Nolan
We have less of the company but if the amount is bigger, we might end up with as much money.
Mr. John McCarthy
The cost of servicing the debt was €6.2 billion last year and it will be €6 billion this year.
The issue of hidden fiscal space has been talked about. Is there such a thing as hidden fiscal space that the witnesses can identify?
Mr. Derek Moran
We have discussed this at other fora and in other committee rooms. Fiscal space is a point-in-time calculation. It is a case of data comes in and a figure comes out at the far end. There were changes between the SES last year and what happened on budget day. They are all explicable for a range of changes within that. If the Deputy is asking me whether there is a heap of hidden money, my answer would be "No". I do not know whether Mr. McCarthy wishes to elaborate.
Mr. John McCarthy
I think that when the Taoiseach was referring to hidden fiscal space, he was talking about the total quantum of expenditure - the €58 billion rather than just the incremental amount - and he made reference to the comprehensive review of spending that is under way to identify efficiencies. This is where we might find hidden fiscal space.
I do not know if the Taoiseach knows how threadbare some of our public services are but let us park that one. We will have that debate in a different place. In respect of NAMA, do the witnesses have any idea of what remains to be sold? What is the estimated quantum that remains to be sold?
Ms Ann Nolan
I am not absolutely certain but I can get that figure for the Deputy. Otherwise, I would just be guessing.
If Ms Nolan could do so, I would appreciate it We have had this discussion before. It is fully funded to 2020 but the Department brought the date for disposing of what remains of the loans in NAMA back to 2018. Given that there is a rising property market, has there been any reassessment of the position?
Ms Ann Nolan
I do not think we brought back the date for disposing of the loans. I think we brought back the date for paying off the senior debt because the senior debt was a contingent liability on the State and was affecting our ability to borrow elsewhere. Only half a billion of that debt is left and I expect it to be paid this year.
I love the way Ms Nolan throws around the term "half a billion euro".
Ms Ann Nolan
I know. It is terrible stuff, but anyway. I did spend time on the spending side and I know half a billion euro is a huge amount of money if one is trying to provide services. Changing that date would not really affect matters because it will have enough to pay that half a billion and I do not think-----
So €500 million is left in senior debt. What is left in junior debt?
Ms Ann Nolan
Approximately €7 billion.
So €7 billion-----
Ms Ann Nolan
I could be wrong. Mr. McCarthy wishes to add something.
Mr. Seamus McCarthy
It is €1.5 billion.
Ms Ann Nolan
Is it only €1.5 billion?
Can we get that clarified?
Ms Ann Nolan
We will have that checked.
That is paid before the people who bailed everyone else out get paid. Could we find out the quantum of what remains? The property market is rising. While I understand that there are state aid rules relating to this, is there scope to do it later if there is a possibility of gaining more? It seems very obvious that by bundling all of these debts and rushing it, we did not get the maximum amount. I am left here to speak about the housing crisis. Even if somebody wants to rent a three-bedroom house in Lucan, they need €2,200 per month. I have a real problem with NAMA in any event but it strikes me that rushing the wind-up of NAMA may well reduce - rather than increase - what we ultimately get. Is there any-----
We will give the others a chance to speak.
Will another look be taken at that? Is there any scope for it?
Ms Ann Nolan
NAMA is independent. It is off-balance sheet. It must act within its own legislation but one of the things it is supposed to take into account is the return and the best way to maximise that return.
Could Mr. Moran tell me which Department is responsible for working out compliance with the fiscal rules?
Mr. Derek Moran
That would be the Department of Finance.
Does the Department of Finance do that in conjunction with the Department of Public Expenditure and Reform or by itself?
Mr. Derek Moran
We work very closely with the Department of Public Expenditure and Reform. In terms of the separation, however, the determination of the setting of the overall aggregate expenditure level rests with the Minister for Finance and the allocation of that then rests within the-----
So it would be mainly the Department of Finance?
Mr. Derek Moran
The political arrangement for the two Departments has changed that dynamic.
We often hear from some commentators that politicians, particularly those of us in Leinster House, live in a bubble but it is nothing compared to the officials in the Department of Finance because I do not see any empathy in some of the commentary I have heard regarding the level of pressure on public spending and ordinary working people. That is a different story and it is just my opinion. At a meeting of the Joint Committee on Finance, Public Expenditure and Reform, and Taoiseach, the Minister said that the fiscal rules are not fit for purpose in light of Ireland's demographic situation and capital needs. He seems to be a step ahead of officials in the Department of Finance.
Who said that?
It was the Minister for Finance.
This morning?
Yes. Can Mr. McCarthy or Mr. Moran outline the work the Department has undertaken to seek changes to the fiscal rules? We have heard a great deal from a lot of commentators and Mr. McCarthy and Mr. Moran will be aware that the Committee on Budgetary Oversight has done much work examining capital spend with regard to fiscal rules. We know there is some flexibility with smoothing the spend over the four-year period but it is accepted that there needs to be change.
If we take the Minister for Finance at his word, he also accepts that there needs to be a change. What levels of work, analysis and engagement have there been between the Department of Finance, which Mr. Moran has said implements the fiscal rules, and the European Commission?
Mr. Derek Moran
I will begin to answer the Deputy's questions and then I will hand over to Mr. McCarthy. We have gotten a range of changes and clarifications at a European level which have actually improved the application. I sometimes upset Mr. McCarthy when I say there is a "problem with the rules", but the rules are a single set of rules to fit every country in the EU. It is a one-size-fits-all approach. They are not very adaptable to the peculiarities and particularities of individual countries. In each of the years since the rules have been put in place we have worked through them and we have gotten a number of very technical changes which have helped us. Mr. McCarthy is the chairman of what is known as the output gap working group, which is an integral part of the process. He chairs that group at a European level in order to drive forward an approach based on a greater degree of common sense.
I have listened for the last minute and a half and I have heard an awful lot of technical terminology. I would be very grateful if I could get specifics-----
Mr. Derek Moran
I will be asking Mr. McCarthy to go----
-----in respect of what has been sought - I hope Mr. Moran will bear with me - from the European Commission in respect of changes to the application of fiscal rules, specifically in terms of capital spend.
Mr. John McCarthy
I will give the Deputy one example. This is unfortunately technical and we will try to provide a note in layman's terms as the Chairman has requested, although it is not easy. In 2015 or 2016, after we came out of the excessive deficit procedure we were concerned about the reference rate, which is a key metric which feeds into the calculation of fiscal space. It is updated in the rules every three years. It is calculated out over a ten-year timeframe and it has backward and forward-looking components. We felt that process was unfavourable in an Irish context because in 2015 it would have taken into account the negative potential growth rate in 2010 and 2011, when the economy was in the depths of the crisis. We made a very strong economic argument to the Directorate General for Economic and Financial Affairs, DG ECFIN, that it should be updated on a annual basis, which would have meant eliminating those years from the calculation. I am open to correction on this because it was a couple of years ago but that change increased fiscal space by approximately €400 million to €500 million in that year and in subsequent years.
What would be helpful----
Mr. John McCarthy
That is one technical change which has been implemented.
It would be helpful if the witnesses could furnish this committee with examples of what they have sought and what they have achieved as well as examples of changes which were sought but not achieved. That would be helpful. Mr. McCarthy offered up a staunch defence of the fiscal rules a number of times. That is fair enough. He also spoke a number of times about the economic crash and said that the reason it occurred was because we did not have rules to the extent that we do now.
We need to bring a big elephant into the room, and park it there, in terms of the reason for the crash. In the first instance, there was an over-reliance on consumption taxes. There was excessive commercial borrowing and excessive lending by the banks which led to the crash. The Department of Finance, the people who in the past sat where Mr. McCarthy and Mr. Moran sit now, were also asleep at the wheel and did not see any of the flags. Let us be realistic when Mr. McCarthy throws this issue back at us in respect of the crash. We understand there was a crash. The people we represent suffered greatly because of it. The Department of Finance, however, needs to take responsibility for having been partly responsible for a lot of the policy decisions and their implementation. Does Mr. Moran think it is possible that in making sure that we do not repeat the mistakes of the past that we are now going too far in the opposite direction? Are we restricting spending to the extent that we are creating pressures in health, housing and infrastructure? Everybody accepts that these pressures are there. Does he understand how difficult it is for us as public representatives to see these huge pressures in public services? They are obvious and real. They are not imagined. Yet all we hear is that academic, economic language about the fiscal rules, which may or may not be appropriate. A debate can be had on them. Mr. Moran can imagine our frustration. That is why I am asking this question.
The Minister has said today that the fiscal rules which currently exist are not fit for purpose because of the demographic pressures in this State. For once I agree with the Minister for Finance. Changes need to be made. What work has Mr. Moran and his Department done specfically up to now to make sure that we can get the changes we need to allow us to spend money - not unrealistically or recklessly - in the way that is necessary to ensure that the people who need health care get health care and that the people who need a roof over their head get a roof over their head? Will Mr. Moran point out to me, in simple language, what changes to the fiscal rules he and his Department have sought but not gotten?
Mr. Derek Moran
Mr. McCarthy has already offered to prepare a note for the committee on that subject because much of it is technical. It goes back to this concept in the rules. I will say this carefully, the fiscal rules as they stand are in general probably a good thing as a framework. We have a set of rules that apply to the totality of the EU. The economies of the area are very different in terms of scale, size, dynamics, recent history and so on. To that extent, there are occasions where they can be entirely counterintuitive in terms of how they apply at any point in time. I absolutely recognise that. In the end, we have come from a situation - and I think we began some of this discussion earlier - where in 2007 we had a debt rate of 25% and we reached 120% within a couple of years, which exposed the country to huge problems. We have to try to get the balance right to prevent that happening again. In the end of the day, the rules are an integral part of the overall fiscal pact. There was a referendum on this whole structure a number of years ago and it is the framework in which we operate.
I am being very patient. I was one of those who campaigned against that referendum. It is very interesting that people who campaigned for it are now saying the fiscal rules are a one-size-fits-all approach which needs to be changed. I welcome their conversion. In my view, which is possibly correct, it is possible that we have gone too far in the opposite direction and have put a straitjacket on ourselves. That is the point I am making. If I was to be political about it, and I do not want to be, I measured the policies of the Tea Party in the United States against the fiscal rules and found very little difference between them. And yet, that group would be seen as very economically conservative, even by the standards of the US.
I would like to comment on capital gains tax, which is discussed on page 11 of the briefing note Mr. Moran has provided to the committee. It says that the top ten in terms of capital gains tax, CGT-----
This is the Deputy's last point. I want to move on to Deputy Connolly as there is a vote coming up.
This will absolutely be my last question. It says that the top ten returns accounted for almost two thirds of receipts with a similar share attributable to company directors or shareholders. This seems to be very similar to corporation tax in that it is peculiar to a small number of companies. Mr. Moran was asked earlier about the corporation tax for companies and he said that Revenue does not give the Department the names of the companies. Is it possible that these are the same companies and that not only do we again have an overdependence on a small number of companies in respect of corporation tax but potentially that same overdependence in terms of capital gains tax?
Mr. Derek Moran
I do not have information that would allow for matching across. In terms of capital gains by corporate entities, there may well be an alignment. We are well aware of the concentration risk on the corporate side, which is a big number in overall terms while the capital gains tax represents a smaller figure. The difficulty with CGT is that when a gain is made at a certain point in time the tax paid becomes payable at that point, so it varies over time. I do not have a particular insight which I can offer the Deputy around how CGT returns match with the top ten payers in the context of corporation tax.
If Mr. Moran is conscious of the overdependence and it is possible that it is not simply in the area of corporation tax but could also be in the area of CGT, would that information not be beneficial to him?
As Accounting Officer and someone who has to make sure we do not repeat mistakes of the past, of which we were reminded several times by Mr. McCarthy, and in order to make sure there is not such overdependence, Mr. Moran should be in a position to see whether there was an overlap. Why is it the case that Mr. Moran was not given that information? Is there a reason-----
Mr. Derek Moran
It is individual taxpayer information. It is just-----
Is it for reasons of data protection?
Mr. Derek Moran
Yes. It is as simple as that, and when one gets down to data sets that comprise ten companies or ten individuals-----
Without Revenue naming them, could it tell the Department that they are the same companies?
Mr. Derek Moran
It is possible to get in and do a data analysis of a bigger pool of data, but-----
I will ask my final question. What I am saying is if there are, to take a round figure, ten companies in respect of which there is a concentration of corporation tax and then ten companies, or nine or whatever, in respect of which there is a concentration of capital gains tax, without Revenue giving the Department the names of the companies, could it at least give the Department data that show that seven of those ten companies are the same?
Mr. Derek Moran
It is certainly well worth-----
Could Mr. Moran ask for that information and furnish the committee with it?
Mr. Derek Moran
Certainly. We will look at doing some of the analysis on that.
I thank Mr. Moran.
Mr. Derek Moran
No problem.
Did Mr. John McCarthy want to come in on an earlier point? He indicated a few minutes ago-----
Mr. John McCarthy
Yes, I did.
-----when we were talking about EUROSTAT reviews-----
Mr. John McCarthy
Yes. Deputy Cullinane accused me and others of being asleep at the wheel, but-----
I did not accuse Mr. McCarthy at all, in fact.
The Deputy referred to Mr. McCarthy's predecessors.
I referred to his predecessor and the Department, so-----
The Deputy directed the comment at Mr. McCarthy's predecessors.
Mr. McCarthy should not be precious about the Department. It is big enough to take criticism.
I call Deputy Connolly. It is to be hoped she is the last speaker.
I am. Deputy Cullinane has asked the Department to come back with a breakdown of what it saw, and I will not repeat the request. It seems the Department is quoting the rules without looking at the consequences and it is leaving out the indicators that I already mentioned and will not repeat.
I have some practical questions. Does the Department of Finance pay rent for the building in which it is located?
Mr. Derek Moran
No. The OPW is the landlord and we occupy the building, so there is no rent payable.
The OPW is the landlord, and the Department is there free of charge as a Government body and a Department. Is that correct?
Mr. John McCarthy
Yes. That is correct. The OPW is our landlord.
There is a landlord but no rent payable.
Mr. John McCarthy
Yes.
That is fine. I just wanted to clarify that.
I was asleep at the wheel when I heard about the universities. Will Mr. Moran clarify the 50% again? Is there less or more funding? What is that-----
Mr. Derek Moran
It is more complicated than that but, as a general rule of thumb, if an entity derives more than half of its income - its revenue - from sources other than the State, it is not on the Government's balance sheet. In general Government terms, if it derives the majority of the money from the State, it is on the Government's balance sheet.
Is that in respect of any liabilities?
Mr. Derek Moran
The liabilities are not the Government's liabilities.
That is if more than 50% of its funding comes from elsewhere.
Mr. Derek Moran
Yes. That is a very crude rule of thumb but it is-----
If we take how Irish Water failed the EUROSTAT test-----
This is important to me. There is a whole movement here with all sorts of things such as trusts and, particularly, foundations. The point has been made to us by numerous third level institutions that less than 50% of their funding comes from the State, so I thank Mr. Moran for clarifying this. We have had Garda representatives come before the committee repeatedly and given them a very tough time regarding off-balance-sheet transactions. It might be a bit of an exaggeration, but it is a parallel system of accounts, and it seems off-balance-sheet methods are the direction in which the Government is now going. If it can find a way to build houses off-balance sheet and have a health system off-balance sheet, it will seek to do so. Is that right? Am I wrong? Am I simple-minded?
Mr. Derek Moran
I do not think we have a health system that is off-balance sheet-----
We do not but if the Government could find a way to have one, it would seek to do so. Off-balance-sheet funding has been mentioned repeatedly in respect of housing, for example.
Mr. Derek Moran
Government initiatives to spend money off-balance sheet are extraordinarily difficult to carry out. It is extraordinarily difficult to find the mechanism by which to do so. There may-----
Is it not extraordinary in itself that we are now playing with these rules and it is extraordinarily difficult to get money on-balance sheet to build homes in order that people can actively participate in the economy and as citizens? Is there not something cracked about this and the fact that we have to find ways to be off-balance sheet? The Garda, for example, thought - as did the Department of Justice and Equality, mind - that it was okay to be off-balance sheet. Is this not worrying for the Department of Finance? In the witnesses' training, do they not look at other things that are equally important in a thriving economy and learn that housing is the most basic requirement? If we have a housing crisis, property prices rising by €1,000 a week and Government policy stating it will give money to the private system in the guise of social housing, does that not trouble Mr. Moran as an indicator that this economy is not thriving? Should the Department not be looking at the rules and telling the Government it will comply with them as that is its job, but that this is the result and the collateral damage?
Mr. Derek Moran
This is the conversation we had earlier. Housing policy is not for us-----
Yes, but what is for the Department is the fact that the housing policy is promoting the market and making the market unsustainable because taxpayers' money is going directly into the housing assistance payment - I am directing this to Mr. McCarthy as well - which is called social housing, and directly to the private market, keeping it artificially high. Does that not concern the Department? No? Okay.
Mr. Derek Moran
I am not sure where I can go on this.
It is a policy issue.
My difficulty with the policy issue is when I get something like this seven-page opening statement, which is really a glorification of the policy. That is my difficulty.
Regarding the EU contribution, what do we pay to the EU? I know we are net contributors now and that this is different from the European Stability Mechanism. What are we giving to that?
Mr. John McCarthy
We do not give anything to the European Stability Mechanism, ESM. We have paid in capital.
That is what I want to have clarified.
Mr. John McCarthy
It was a couple of years back and it was-----
That is okay, but we-----
Mr. John McCarthy
It was a couple of billion euro-----
A couple of billion euro?
Mr. John McCarthy
Yes. The Deputy should remember that the total funding capacity of the ESM is €500 billion across the euro area. There is callable capital also but we do not pay that in. That would only be called if there were a problem in a member state. A couple of billion euro went in but it was a one-off.
We paid that and we are not getting it back. That goes into bailing out countries in the future or helping them.
Mr. John McCarthy
We got a loan from the European Financial Stability Facility, EFSF, which was the ESM's predecessor.
Can Mr. McCarthy come back to me and tell me in a note what exactly we have paid into the European Stability Mechanism?
Mr. Seamus McCarthy
It is in chapter 1. It is now displayed on the screen. Deputy Connolly will see the capital contribution to the European Stability Mechanism was €510 million in 2012, the same amount the following year and then €255 million in 2014.
This is entirely separate from our contribution to the EU. What is that contribution?
Ms Ann Nolan
It is on the third line of the same page.
My final question concerns clarification regarding the harbours. I thank Mr. Moran for his briefing document. It was very helpful. The Government won a share in the harbours. Is that right? In this briefing document Galway jumps out at me, but there is a list of all the harbours. I ask for clarification on this. Mr. Moran will see that reference is made to the Department and Galway Harbour Company.
There is reference to a shareholding. Is that a majority or a minority share?
Mr. Derek Moran
I would have to check.
That is okay.
Mr. Derek Moran
We will furnish a note to the committee.
The Department might give us a note on page 29 to tell us across the board-----
Mr. Derek Moran
That is no problem.
Go raibh míle maith agaibh.
I want to make one observation to Mr. McCarthy. It is not a response, but I will make it seeing as it was mentioned that he chairs a group dealing with some of the fiscal rules at EU level. There would be a concern in some countries - I am not saying it is a unanimous view - that the fiscal rules and this drive to be off-balance sheet to keep within the fiscal rules is resulting in what I would call social engineering.
It is having a serious social engineering effect because of the issue with building houses. We had a financial crash, the banks went bust and some people have large mortgages. We are very quickly moving from a position where 80% of Irish people owned their own houses in one generation to being lucky if 20% of the next generation will own their homes. That is what happens at European level. The attitude to that is so be it, but in the way that Irish people live their lives that represents social engineering in Ireland.
Does the way society operates in various countries come within the financial strictures of Mr. McCarthy's work at EU level? I know that is not exactly the reason that Mr. McCarthy is at this meeting. I accept that he may not agree with that viewpoint, but would he accept that it is a point of view?
Mr. John McCarthy
Absolutely, it is a point of view. I stressed this point when responding to Deputy Catherine Murphy at the start, and the Secretary General also made a reference to it. The fiscal rules do not constrain what one spends, they simply constrain the bottom line. If one wants to choose a Swedish type of expenditure model, one can do it but one has to be able to finance it. If one chooses a UK type, where Government spending as a portion of GDP is at the lower end of the spectrum, one can do that as well. It is a policy choice.
I do not want to go into policy but it is a policy choice as to whether we want to spend to address these issues, and certainly there are issues to address. We do not live in a bubble. There is nobody present who is not conscious of the issues, but it is a question of how to finance them. We would be concerned. The Chairman has a view, which is legitimate. I have a view that fiscal sustainability is the issue, because if we lose that it is back to the troika again. That would create issues. We spoke of the €201 billion debt.
Other countries have issues. I chair a very technical group on how one measures the structural balance, rather than the policy about it. There is another element to it in which I am not involved, that is, the statistical treatment of some of these issues, to which the Secretary General alluded. EUROSTAT does not like anything that Government tries to put off-balance sheet. EUROSTAT had its fingers burnt with Greece, where Greece got the data wrong and suddenly it had a deficit that was three or four times what they thought it was going to be. EUROSTAT has become increasingly strict in terms of the balance sheet treatment of anything. We saw that with Irish Water. We considered that, in conjunction with our colleagues in the CSO and in the Department of Housing, Planning, Community and Local Government that we had done enough to keep it off-balance sheet, but EUROSTAT came up with obscure reasons, which we still do not understand, as to-----
Known as common sense. It came up with a common-sense answer, despite the Department's best efforts. That is a matter for another day.
At this stage we have completed our consideration of the Vote of the Department of Finance. We will sign off on it when we are concluding our meeting.
Is it agreed that we suspend until 2.30 p.m.? Agreed. When we resume we will go into private session to complete the education report. Once we have that done, we will discuss the Appropriation Accounts and the Vote of the Department of Public Expenditure and Reform in public session.
I thank the witnesses for their assistance. We look forward to receiving the information requested which can be sent to the secretariat. At the end of the session with the Department of Public Expenditure and Reform we will note the reports and accounts.
Mr. Derek Moran
I thank the Chairman. My colleague, Ms Nolan, is here for the last time with me. I think we have been colleagues for nearly 30 years. I wish her and her family the best in her retirement.
I have also seen Ms Nolan in Leinster House for a good few years.
Ms Ann Nolan
I am part of the furniture.
We will now suspend the meeting.
Sitting suspended at 12.55 p.m and resumed in private session at 2.30 p.m.