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Joint Committee on European Union Affairs debate -
Wednesday, 10 May 2017

European Semester - National Reform Programme: Discussion

The purpose of the meeting is an engagement on the European Semester with Professor Alan Barrett and Dr. Edgar Morgenroth of the ESRI. On behalf of the committee I welcome Professor Barrett and Dr. Morgenroth. Both witnesses have already appeared before the committee and we would appreciate their analysis and independent counsel on economic developments for Ireland within the European context.

The European Semester process is now embedded in all our ways of doing business but every year there is a new challenge, in particular this year, perhaps more than other years, with the anticipation of the United Kingdom's departure from the European Union. We very much appreciate the witnesses sharing their knowledge and assisting us in considering where Ireland should be this year in the European Semester and any comments they might be in a position to make with regard to the annual growth survey and Ireland's national reform programme.

Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against any person outside the Houses or an official either by name or in such a way as to make him or her identifiable. By virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to the committee. If they are directed by the committee to cease giving evidence on a particular matter but continue to do so, they are entitled thereafter only to a qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person or entity by name or in such way as to make him, her or it identifiable. I ask Professor Alan Barrett to make his opening statement.

Professor Alan Barrett

I thank the Vice Chairman. On behalf of Dr. Morgenroth and myself, I thank the committee for the opportunity to appear before it today. The European Semester is now an important element in the ongoing examination of Ireland’s economy and the challenges which it faces, with the ultimate goal of ensuring that policy is designed and implemented to meet those challenges.

Since the foundation of the ESRI in 1960 by Dr. T.K. Whitaker, the ESRI’s mission has been to contribute to the same examination of the economy, specifically by providing analysis and evidence to underpin policy design. For this reason, Dr. Morgenroth and I are happy to share some insights with the members on the issues raised in the Commission’s Country Report and the Government’s national reform programme.

I should say at the outset that we do not intend to comment on all aspects of the reports but instead we will limit ourselves to areas where we possess some expertise. Also, while our focus will be on economics, the members should understand that we see a close alignment between economic success for Ireland and the achievement of social progress.

The Irish economy is clearly performing well at the moment and this is reflected in the Commission’s report. According to the Commission, GDP is estimated to have grown by 4.3% in 2016 and is projected to grow by 3.4% in 2017 and 3.3% in 2018. Such forecasts are in line with those of the ESRI. While headline rates of GDP growth have become increasingly difficult to interpret as indicators of economic activity, developments in the labour market provide firmer evidence of a strong economic performance. Rising employment levels and declining rates of unemployment will be familiar to the members.

Such a strongly performing economy might generally prompt relative optimism about medium-term prospects but we are in unusual times. Instead of expressing relative optimism, most commentators point to Brexit and the changing internal environment with respect to taxation and trade as real and significant threats to Ireland’s economic prospects in the medium term, and we share these concerns.

We would also be inclined to include two further threats. First, there are pressures associated with rising expectations which could have impacts on the fiscal situation and competitiveness. Second, the housing crisis is having many impacts including a possible impact on competitiveness. It is important that these four threats underpin our thinking on reforms.

I will turn now to some specifics in the documents under discussion. One of the noteworthy elements in the Commission's discussion of the public finances is a slight shift in emphasis from concerns about the debt and the deficit to concerns about the quality of public spending and the volatility of revenue. This shift in emphasis reflects in part the success of the Government in recent times in managing the public finances at an aggregate level, especially since the onset of the downturn.

On the issue of the quality of public expenditure, the Commission has stated that "there has been little evaluation of the effectiveness and efficiency of expenditure programmes". It has also stated that "repeated discretionary changes to expenditure ceilings, which were decided with little or no explanations, have characterised Ireland's recent budgetary implementation".

In the national reform programme, the Government responds to these criticisms and points out that reviews of both current and capital expenditure are currently under way. More broadly, we think it is fair to point out that the Department of Public Expenditure and Reform has sought to improve the analysis underpinning expenditure. For example, the establishment of, and subsequent growth in, the Irish Government Economic and Evaluation Service is a reflection of efforts in that area.

While the spending reviews and other ongoing efforts to evaluate public spending are to be commended, challenges remain in ensuring that public spending is undertaken on more objective grounds. In that context, the national planning framework, which is currently being developed, may represent a break with previous approaches. It is widely accepted that the national spatial strategy suffered from a failure to set priorities so the NPF will be judged in part on the extent to which it overcomes the tendency in Irish policy-making to spread resources in a manner that dilutes impact.

On the issue of tax volatility, the Commission makes some points which we would like to echo. One of the most important lessons from the crisis was the need to ensure that the tax base was broad and, to the extent possible, immune from swings in economic activity. In addition, it is important that volatile revenue streams are not used to fund ongoing spending. Dr. Morgenroth recently co-authored a paper on tax volatility and so can elaborate on the issue in questions if needed.

We have noted the Government's success in managing the public finances and generally we would commend the approach since 2008. However, moves to reduce the universal social charge, the failure to enact broad-based water charges and the tax incentive for first-time buyers strike us as being at odds with prudent fiscal management. In addition, the use of stronger than expected corporate tax revenues to fund budgetary measures in recent budgets is a source for concern.

Next, I want to address some labour market issues discussed by both the Commission and the Government in the reports we are discussing. As the rate of unemployment falls, the Commission's remarks on the labour market have shifted towards specific issues. For example, it refers to the ongoing issue of jobless households and to skill shortages. The national reform programme points to a range of initiatives to combat the labour market challenges confronting certain groups and we will not go over that ground. Instead, we will mention two issues which are absent from the reports but which we think are important.

First, work contracts which are part-time and-or temporary appear to be on the rise in many OECD countries. At one level, such contracts can be viewed as providing the labour market with more flexibility, but there are clearly downsides for individuals who get stuck in either part-time or temporary work. Recent work by a colleague and me has shown the rise in atypical work in Ireland and points to the need to monitor job quality as opposed to just jobs.

Second, work at the ESRI led by Professor Seamus McGuinness has shown that Ireland exhibits a high-level of over-education in its workforce. This is a situation in which peoples' skills exceed those needed for the jobs they are doing. As over-education implies that skills are under-utilised, this means that productivity in Ireland suffers. This raises questions about education provision and job-market matching which require further attention.

Before concluding this opening statement, we will refer to two policy areas which are discussed in the Commission's report and in the national reform programme. Child care has been an area of weak performance in Ireland but it is one where economists have noted significant returns to public investment particularly where high-quality interventions have been directed at disadvantaged children. For this reason, recent positive steps in this area are to be welcomed.

By contrast, the ongoing failure to deal with the issue of third level funding is a disappointment. The failure to adequately resource the third level system is at odds with many policy objectives. However, this seems to be a stark case of the policy-making system failing to deal with a politically sensitive topic even though the need for some sort of action is clear.

I thank members for their attention and we look forward to their questions.

Does Dr. Morgenroth wish to speak?

Dr. Edgar Morgenroth

No. That was a joint opening statement.

I will call two members at a time, starting with Deputy Durkan.

I thank our guests for appearing before the committee and presenting at a very interesting time a very interesting report. My questions are fairly straightforward. In the context of the semester report how well is this country responding in comparison with our EU colleagues? Where do we lie in the pecking order? Are we categorised as reasonably good, very poor, room for improvement, failure to respond to previous admonitions or whatever the case may be?

Is the semester system working throughout Europe? Its predecessor did not work at all in the sense that the Lisbon Agenda was ignored for a ten-year period and when it was found that it was not working, it was too late. I presume that having reviews carried out through the semester process is a much better and more effective system. Is it working?

Taxation returns have seemed to vary from time to time recently. Has the ESRI looked at the possible causes for variations in tax returns under various headings and what does it indicate? There appears to be a lack of evidence as to what the corresponding problems are.

I ask about something that is very important at present, namely, Ireland's attractiveness to foreign direct investment. How is that likely to progress, given that we are in Brexit and are obviously a remaining and committed member of the European Union? Along with other members of the European Union, we will have access to emerging UK markets - for instance, to supply and demand in the UK. Will Ireland have an equal opportunity with other members of the European Union to have satisfactory trade agreements in the future?

Professor Barrett mentioned objective grounds and spreading the taxation net, with which we agree because having all the eggs in one basket was not a good idea. Have sufficient eggs been placed in sufficient baskets at present to prepare for any negativity that may arise in the wake of Brexit and the trade agreements to come about?

This is my last question, which the Vice Chairman will be pleased to know. Is the lack of water charges a negative as regards our compliance with the objectives set down in the semester? How does this country compare with other European countries?

We live in a time of considerable speculation. I believe 89% of Irish people have strongly supported the concept of continued membership of the European Union, which is very reassuring. To what extent will the European Union, as an entity, remain constant and supportive to the European Union member states in the context of negotiations to take place in the aftermath of Brexit and in the context of international trade agreements, things that are happening in the United States and various other countries, indicating a return to old-fashioned protectionism? How are we likely to fare in that context?

I thank the gentlemen very much for coming here this afternoon. Reference was made to corporate tax and volatile tax, and the use thereof. Does the ESRI see any benefit in using windfalls from these taxes to deal with crises like, for example, the housing crisis that exists now in the country? We cannot guarantee these taxes into the future but could we use what is there to meet immediate crises needs?

The witness also spoke of temporary contracts and part-time contracts. It is no secret that these zero-hour type contracts are extremely penal and have found their way into every part of Irish society, including the public service, academia, the education system and the health service. There is a move now by the Government to outlaw the zero-hour contract, but if that leaves the facility for part-time contracts then we must be cognisant that the quality of work available, quite apart from job satisfaction, leads to all sorts of other knock-on effects as referred to by Professor Barrett. Do the witnesses believe there should be a minimum contract or that all contracts of employment should have saleable aspects to them, from the point of view of being able to live one's life? I note from past experience that a person with a temporary contract cannot get a mortgage or loans and all sorts of other effects kick in. That ultimately must be a downward spiral for the economy itself. It cannot help the homeless situation if people cannot get mortgages.

With regard to third level funding, I have always believed that every family and every parent now wants their child to gain third level qualifications from universities or institutes of technology. We seem to have lost the desire to have practical or hand based skills and do not assign equal parity of esteem to the trades sector. I would be interested to hear the witnesses' views on this. We have set up an apprentice body to look at the area of apprenticeships but what else can be done to provide parity of esteem to those who enter apprentice roles rather than going the academic route? When I see a college graduation I wonder how many carpenters, electricians and mechanics might be lost to us and are now walking around with BA degrees or whatever. This feeds in to the concept of over education. Call centres are now looking for people with honours degrees to answer phones in insurance and other services. It seems like total nonsense to me to need those sorts of qualifications to answer a phone.

I will now turn to foreign direct investment as we go through Brexit. We can see part of it happening already. I was away at the weekend with an EU group and the group dealt with two languages, namely, Italian and English. In some cases, such as with a meeting yesterday of a group, the language chosen was French. I wonder if Ireland's reliance on being an English speaking country for foreign direct investment is going to be an important factor as we move forward in a new Europe?

I also wish to discuss the role of Ireland's banks as good citizens. On this morning's Order of Business in the Seanad I brought up the issue of banks refusing mortgages to couples because they do not have savings, yet the average couple in Dublin is paying out €1,500 or €1,600 per month in rent. Why can this outlay not be taken into account when calculating their capacity to pay? What are the witnesses' views on that?

Deputy Durkan spoke about the future of the European Union. Leaving aside Brexit, my final point concerns the threat to the European Union of the massive problem of refugees, economic migrants, asylum seekers or whatever terminology one wants to use. This weekend I had first-hand experience of the lack of solidarity from European partners in respect of their views on how this problem should be dealt with. Do the witnesses see this issue as a threat to the solidarity, and hence the future, of the European project? We all want to benefit but very few of us actually want to take the pain that goes with our role as good Europeans. I thank the witnesses for their time and I apologise for throwing all those questions together.

Dr. Edgar Morgenroth

I thank the Deputy and Senator for the questions. They are very broad ranging questions, which reflect the fact that the semester document itself is rather broad ranging. I will deal with the issues in turn, as they came up, because I took notes along the way.

Deputy Durkan asked about taxation returns, the variations therein and the underlying factors. We have conducted some work at the ESRI looking at tax volatility by tax heading. We put a lot of our effort into income tax to start with so we are close to finalising a report on value added tax. We also conducted another study where we looked at a few different tax headings. When one looks at the relationship between tax revenue and the underlying economic activity of GDP in the State there are very large differences across tax headings. Income tax tends to be a relatively stable tax. Within broad income tax there is the basic income tax and there is the USC. The USC will actually be a much more stable source of income than the basic income tax. Customs tax is very stable as is excise tax. Capital gains tax and stamp duties are very volatile. We discovered during the crisis that tax revenue under those headings really collapsed. Corporation tax is also volatile, within the year, so it is hard to predict the exact timing of some of their receipts. There is also some volatility across years. Some of this is due to how multinationals operate within their overall business as tax changes in other countries are much harder to predict. VAT is also a reasonably stable source of income. In looking at this we are developing our understanding of it.

The question of foreign direct investment attractiveness and Brexit is a very interesting one and is one we have analysed. Current thinking is that Brexit will have something of a positive impact on FDI as the UK becomes less attractive. The UK is the second most important destination for FDI in the world. The UK has a very significant stock of FDI, some of which could move after Brexit. The harder the Brexit the more likely there will be a move. There is also new FDI going into the EU that might otherwise have gone to the UK. It is now available for the remaining EU countries to compete on. It is interesting that Ireland punches well above its weight when it comes to attracting FDI. We pick up some 6.8% of the FDI that goes into the non-UK EU, which is quite substantial given the size of the economy. We should, therefore, also be expecting that Ireland will pick up additional FDI because of Brexit. The degree to which we are able to do this depends on the sectors that are looking to move. The UK, for example, has a very large car industry and Ireland is not terribly competitive in that sector. On the services side, including financial services, we are reasonably competitive and are one of the better performing countries. One would expect that the benefits could be on that type of investment. That is where we are likely to see some positives.

More generally of course, the Brexit issue is very likely to have a net negative effect on Ireland. Even if we pick up some of this foreign direct investment, FDI, the negative effect through trade and other aspects is likely to be substantially larger than the benefits we might get through FDI. Again, we have carried out quite a substantial amount of work and research on this. Of course, there are very big sectoral differences in terms of the negative effects. Our estimates at the moment suggest that the agrifood sector is particularly vulnerable to any imposition of tariffs. That is very important. At the sectoral level, if the World Trade Organization, WTO, tariffs were imposed on the current trading patterns, the average tariff for food and beverages would be approximately 35%. That would be pretty significant.

The Deputy asked a question about water charges and whether they are a negative. I was in this very room a number of years ago giving evidence to the Joint Committee on the Environment, Transport, Culture and the Gaeltacht. In general economists would favour pricing something that has a value and pricing it explicitly rather than implicitly through general taxation. Clearly, water charges would have been an opportunity to generate additional revenues that could have been used for investment. Their introduction is, of course, ultimately a political decision, but it certainly would have generated some additional revenue.

There were very good questions on continued membership of the EU, Brexit, uncertainty in the US and how individual member states are treated. Clearly Brexit and the electoral successes of some, perhaps more extreme, parties should give rise to questions about some of what we are doing at EU level. Clearly, we need to think about what is going wrong that has led so many people to be dissatisfied and how we should respond. In general, I see the EU continuing to look towards being a proponent of free trade. I do not think the EU will itself take any initiatives to reduce free trade. Of course, as other countries or blocs of countries impose barriers or make life more difficult, it is imperative that the EU protects EU jobs and businesses. That will be important in the future. There will have to be reactions to the hostile actions of others.

I will let my colleague, Dr. Barrett, in at this stage. I might come back.

Professor Alan Barrett

I will try to act as sweeper on some of those issues. Both myself and Dr. Morgenroth came in here with an absolute commitment not to talk about water charges but, since members of the committee have started a discussion on them, I will just add a note. Dr. Morgenroth dealt with this to a certain degree but the Deputy asked the question in a narrower way, which was really about water charges in the context of the European semester. I took that to be a question about whether we will ultimately be in compliance with directives and so on. In a very narrow sense, the deal towards which the Oireachtas has meandered will almost certainly pass any European tests. It is, however, a very narrow definition of success. Many of the recommendations from the European Commission are around investment in infrastructure and a whole range of other things. The manner in which the whole debate has progressed has led to a situation in which there is an unfortunate interaction between the desire for investment and the economics associated with it on one hand and the fiscal rules of the EU on the other. We know that under the fiscal rules the scope for expenditure increases is somewhat limited. Had Irish Water ended up in a particular position, it would have been able to make the required investments. Now investment in water will be competing in the same pool with investment in education and some of the other things about which we have talked. The water issue has been put to bed in the context of European directives in a narrow sense but, as I said, the broader ambition in terms of investment more generally has been completely missed. There is this unfortunate interaction with the sort of constraints that EU rules put around us, which I think are quite proper and to which we can return later if the committee wishes.

Let me turn to answering Senator Craughwell's questions, which had a number of strands. On the first issue about windfall taxes and whether they could have been used to deal with the housing situation, the answer is unambiguously yes. The argument here is that windfall taxes or highly-volatile taxes should not be used to fund elements of general current expenditure, especially in areas where it would be very hard to roll back. Regarding the housing situation, to the extent that these sort of windfall taxes could have been used for a very proactive investment in social housing, to be perfectly honest, that would have been a very appropriate way of dealing with this. In fairness to the Government, I know there is a lot of effort in that area anyway and the Government would say that is part of it, but certainly in principle I think that could have happened and it would have been a good thing.

On issues of temporary and part-time contracts, this is something we started thinking about in the institute about two years ago. A colleague of mine, Dr. Eilish Kelly, was the first to really start agonising about this. The context was that as the unemployment rate started to tumble, which was obviously a very good thing, we could have all sat around congratulating ourselves. At one level that would have been perfectly fine, but Dr. Kelly was linking literature from different areas. She noticed an observation across the OECD that there was a rise in what we refer to in economics literature as atypical work. Germany would have been an example of this. During the recession, and as countries were coming out of it, these part-time and temporary contracts were actually a very handy thing for economies. Obviously, they allowed for employment to grow much more rapidly than would otherwise have been the case.

We started to track new jobs, exploring the CSO data to try to get a handle not so much on just the aggregate jobs across the economy, but to focus on people who were getting new jobs and to ask whether these new jobs were more likely to be of an atypical nature, that is to say part-time or temporary. During the recession it can be seen that there was a very significant upswing in atypical jobs. We have seen a little bit of a decrease as the recovery has persisted but we are not back to where we were. The question for Ireland and for policy makers is whether we are entering a new equilibrium where there is simply a higher level of part-time and temporary jobs than was previously the case. Perhaps this sort of thing will work itself out. There is no doubt that at one level it is good and allows an economy to be flexible. At some level it is a bit like the minimum wage. We do not worry about people being on the minimum wage if they are on it for a period of time or as part of a transition path. We worry if people start getting stuck in these sorts of situations. That was one of the reasons we started to flag it and we think it is very important that we keep an eye on it, precisely for the sort of reasons that the Senator mentioned.

The Senator linked some of the things about which I was talking more cleverly than I did, because he then started talking about issues around third level education and linking them to what I had said about over-education and apprenticeships. Let us try to draw some of those strands together. There is a curious thing in Ireland that there seems to be a kind of snobbery - I will use that term though it is perhaps over simplistic - in the notion that one wants one's children to go to third level. Doing an apprenticeship does not seem to have the same social value. That is a tremendously unfortunate situation from a whole variety of perspectives. The Senator will note that there are references to the increase in apprenticeships in Ireland in either the Commission document or the national reform programme. That is a really positive development. The policy objective around getting 50%, 60% or 70% of the cohort into third level education is one of those sorts of targets about which it was worth asking the question - why do we want 70% of people to go onto third level?

As well as the general question of how well we are educating people in Ireland and what jobs they are doing when they finally get into the labour market, we also have a problem with third level funding, which is clearly observed in the Cassells report and elsewhere. We are talking about a reform programme and recommendations from the European Commission which are all about high-skilled jobs, investment, innovation, research and so on, yet our third level sector is really suffering. The problem has been diagnosed and some solutions have been proposed. My understanding is that the matter is under discussion by an Oireachtas committee in this very building. However, those of us observing from outside can see no sign that there will be a positive outcome.

As I said in my opening remarks, myself and Dr. Morgenroth are not going to pretend we are experts on everything. If we do not answer a question directly it is because we think it is on the edges of or beyond our knowledge. On the refugee crisis and the pressure it puts on the European Union, the EU has often had to deal with very complex issues. The Greek situation, for example, was very complex. However, there was more unity of purpose because there was a realisation that if Greece defaulted or left the EU, the whole edifice might be at risk. There was a common threat and a common purpose. In a short-term sense, however, the refugee crisis is just a cost on the European Union. There is a long-term argument, which Angela Merkel and others have made, that these are additional citizens bringing in skills. Although migration tends to be good for economies in the long term, the very rapid arrival of a group of people can put strain on economies in the short term. It is important to recognise that. The EU's response to the migration crisis is all about distributing the costs. Any benefits are ultimately going to be quite long term. It is a very strong and unusual challenge for the Union. I do not know how it will do.

Although the water issue was not on the agenda, I would like to ask the witnesses if the property tax would not have been a better vehicle for including a portion of it, percentage-wise, as a charge? People would then see some return. People are paying property tax at the moment. Would that have been more acceptable, in a sense?

Professor Alan Barrett

The entire water charges issue is a mystery to me. Perhaps economists are overly simplistic people. We do not give electricity to people for free or include it in their property charge because we want there to be some relationship between what one uses and what one pays. I have terrible trouble getting my head around the water debate. I admit that I did not understand the views of 50% to 60% of the Irish population. That is probably why I am sitting on this side of the table while the committee members are sitting on the other side.

Dr. Edgar Morgenroth

The model described by the Vice Chairman is pursued in Northern Ireland, where the council rates include a number of services among which is water. That could certainly be done. However, the Northern Irish system is weak in the sense that it does not identify usage. Although usage is bound into the rates, the real cost of usage is not identified. It is difficult for people to understand that although it rains a lot, the water has to be treated and pumped and waste water has to be dealt with.

At least 10% or 15%, perhaps more, of the population are paying water charges and have done so for many years. I am one of them. I am on a group water scheme. I had to pay my bill earlier this year. The solutions for the wider issue could open up a Pandora's box for these people as well. The property tax model would be interesting, at least as an opportunity to put together and itemise the costs. It is useful for citizens to see that services cost money.

I was just saying to Professor Barrett that there is a difference between water charges and electricity charges. We were not paying for electricity before it came in because we did not have it. We never got free electricity. There is a big difference when we are charged for water, which has been coming into our houses and which we have been paying for through our taxes.

People have always paid on the group schemes.

I appreciate that. I do not want to dwell on this at all. I am taxed out as far as water is concerned, on the farm, on property and everything else.

I think the water issue will be resolved once and for all at the next election.

Many people oppose the idea of the European semester process. Many of us see it as eroding sovereignty and reducing economic independence. My view is that the reform is primarily intended to ensure that member states do not deviate from the economic model that is being pushed in Europe. Countries in need of new, radical economic policy changes have been subjected to this disastrous agenda. Professor Barrett mentioned the situation in Greece.

There is a recognition that the economic and fiscal policies of the European Union have had a catastrophic effect on millions of people across Europe. People are being left behind in every country in the Union. There is a disconnect. Later today, Social Justice Ireland will tell us that the gap between rich and poor in the EU is constantly increasing, social rights are being dismantled and so on. We have seen the disconnect during recent election campaigns. Unemployment is still growing, especially youth unemployment. We are lucky in Ireland that people emigrate, which lowers our unemployment rates. There is a disconnect between what Europe is pushing and those millions of working families that are struggling.

One of the country-specific recommendations in the report is to broaden our tax base. What do the witnesses think the EU has in mind in that regard? For the last budget, there was talk of broadening the tax base, but there is also talk of the overall economic impact of eliminating the universal social charge.

One recommendation for broadening the tax base was the sugar tax. One in five children in fourth and fifth class at primary school suffers from obesity. Do the witnesses see that, or a junk food tax, as a way forward? There is a clear linkage between obesity and social and economic background. It is a time bomb and we are not talking about it enough. It is not really on the agenda of any political party in this building. However, we can see it every day in our communities, schools and homes. What are the witnesses' views on this as a way of broadening the tax base to positive social effect?

The ESRI has data on Irish capital spending in comparison to other countries which indicate that our capital spend is too weak. Many of us who are involved in negotiations around Brexit and so on are asking that fiscal rules be relaxed. What are the witnesses' view on this? We need to get our goods to market and improve our ports. Energy is critical. There needs to be a direct linkage to Europe and infrastructure to get our goods to markets on the Continent.

There has been talk of trying to get things off the balance sheet.

For example, we failed with Irish Water and the Strategic Banking Corporation of Ireland. Would the witnesses agree that the energy expended upon that perhaps should have been spent in renegotiating the fiscal rules, particularly in light of the impact they are having? The fiscal rules need to be relaxed in view of the disastrous effect which Brexit will have on Ireland's economy and its people. Ireland is a special case. This is about the impact on people’s lives, not just the economy.

There is a sense of double standards in terms of targets. Economic targets are often mentioned but social targets such as poverty reduction and so on also need to be considered. I would like to hear the witnesses’ views on that issue.

I welcome that we are having a discussion on the national reform programme, which is a very useful exercise. The witnesses have raised every controversial issue in the political sphere, such as the broadening of the tax base, the universal social charge, the funding of third-level education and water charges. I will be brief as I know time is running out.

As the witness mentioned, the Irish economy is projected to grow over the coming years. What are the current threats to the global economy? The witnesses mentioned the threat to the international environment in regard to taxation and trade. Are they talking about trade agreements in that context? Brexit and the election of President Trump are manifestations of that. How do the witnesses foresee the trend in global interest rates in terms of Europe, the eurozone and the United States? There is a saying that if the world gets a cold, Ireland will be affected. We are a very open global economy so there is cause for concern in that regard.

I do not think Dr. Morgenroth dealt with the question of why income tax revenue is falling, although he touched on it. Economists are surprised by the fall in revenue. I would welcome his views on that issue.

I was very interested in his comments on the over-education of the workforce. Our national skills strategy in that regard needs to be reviewed. It is difficult to tell people that they are over-educated. If they could not get jobs and so on, in particular during the recession, people went back to further education and training and so on. The witness has dealt with that but it is an interesting point.

In the context of the funding of third-level education and the Cassells report, does the witness favour a particular option? A loans system is being considered. I would be loath to go down that route. Young people have many burdens upon them at this time, some of which have been discussed here today. To put more debt upon them by making them pay for their education would not be politically acceptable. Does the witness favour any particular solution for the funding of third-level education?

Regardless of what option is taken in terms of third-level education, it is my view that education is a public good and there should be no system of charges for it. Leaving that aside, does the witness agree that the third-level institutions, driven by budgets, are driving the need for third-level education on the academic side? In the Finnish model, one can come through either the academic or apprenticeship scheme and can cross between those streams as one sees fit. This country has a single stream, although apprenticeship is slowly being brought in. If I were president of a university and saw the opportunity for fees to come in, I would drive programmes. During my time in further education, a successful further education programme was immediately adopted by a third-level college because it was able to attract sufficient students. The number of students is crucial to third-level budgets which, in turn, are crucial for third-level institutions. If one looks at the size of some of our universities which grew from little acorns, they are not just one great big oak tree but rather several oak trees. Universities have several campuses in cities throughout the country. If third-level funding is being looked at, reform should also be investigated. Would the witness agree on that point?

Deputy Michael Healy-Rae took the Chair.

I thank the witnesses for attending. Economics is never neutral. That has been said before at meetings of this committee. The way in which an economist looks at an issue is as much dictated by the science of economics as the ideology that guides the science. I was interested by some of the witnesses' comments. I disagree that it is not correct to cut USC. We have a very high tax rate on employment. Many economists believe that USC can be reduced, in particular if employment is being generated. Ireland is a competitive open economy. That involves attracting inward investment into the country, which involves the labour cost base of that investment. That has been mentioned in discussions of other areas. People on very modest incomes are now reaching a taxation level which is completely disproportionate to that of our competitors in other EU states or the United Kingdom. I challenge the witnesses on that issue. I do not know anybody who is talking about a total and immediate abolition of USC. That would have a catastrophic impact on the budgetary situation. However, a phased reduction in USC and putting that benefit back into people’s pockets would be prudent and positive. It is interesting that the witness highlighted that.

I will not discuss water charges, which is ironic because I agree with 90% of what the witness has said on the issue. However, having spent the past six months of my life buried in rooms such as this dealing with the minutiae of every aspect of water charges, I shall refrain from discussing the topic. That said, very little, if anything, of water charges is to do with economics, it is all to do with politics. I agree with the witness in that regard.

I appreciate that the witnesses must comment on the threats which the country is facing. However, it is worth noting that in recent years there has been a tremendous turnaround in employment. That unemployment has been reduced from 16% to 6% is one of the things which has enabled the Government to prudently finance certain things it wanted to finance. There has been a transformational change for the Department of Social Protection in terms of what it can do with its budget. I am not as dismissive as the witnesses of the achievement of reducing unemployment, although I recognise that challenges on a global basis and so on remain to be dealt with. However, the county deserves to be proud of the achievement of reducing unemployment and optimistic in terms of the potential that driving the employment figure up has for our overall economic strength and ability to fund programmes in the future.

The Government is looking at areas such as third-level funding. There is a process under way in that regard. I was disappointed by criticism of this area when a consultation process is in being. It is clear from the contributions of committee members that it will not be an easy process. However, it is a process in which the Government is solidly engaging.

The EU has done a great number of positive things to enable the economic development of this country and to strongly position it. There is no perfect system but it also has in recent years put in place a regulatory framework, and even though there are constraints at certain times on us and we would like more money for capital investment and so on, it was the lack of decently strong, robust guidelines at a European budgetary level that enabled Fianna Fáil to bankrupt the country through reckless policies and, therefore, we need to be careful when we examine how we address the future. Calls to blame Brexit or to use it to say we should get exemptions from the fiscal rules or to ditch them, or that we should be a special case and we should tax everything and try to spend our way out of this, or calls to make an attempt not to adhere to the moderate and sensible economic rules in place would be incredibly damaging to our economy. I am interested in Professor Barrett's views on that. While changes are needed in EU governance, in particular in respect of the capital budget, the overall fiscal rules are one of the keys underpinning stability in respect of long-term growth.

I was not planning to contribute but it is disappointing to hear comments about bankrupting the country and what happened at the time. Fine Gael has forgotten that it was in opposition at the time and it was asking the Government of the day to borrow and spend more and all of that nonsense.

It obviously does not need our support to form a Government.

Now it is depending on the very same party it called "reckless". Fianna Fáil did the mature thing 15 months ago to allow a minority Government to exist.

I am sorry; I have obviously touched a sensitive nerve. While history might upset the Deputy that much, history backs up the facts.

I would like to maintain order.

Fine Gael will have to support our next Government.

This is opportunistic negative politics operating in a vacuum which I thought no longer existed. Deputy Brophy feels this is necessary, although he has spent many days in committee hearings discussing Irish Water, an entity that Fine Gael set up at a time the country was on its knees and cost the country hundreds of millions of euro. It presided over 20% pay increases for staff on an annual basis when everybody else was struggling to get social welfare payments.

The Deputy knows that is rubbish. I made a measured contribution to this-----

Perhaps the Deputy should play it back.

-----not to have a tirade played back with inaccuracies and so on. It is ridiculous.

This will get us nowhere particularly in an EU context.

In an EU context, party politics was not necessary but it is unfortunate that Deputy Brophy feels that he has to drag it in.

The Deputy has form in this regard.

He felt it necessary to bring it in and he should not interrupt those who are trying to respond.

I was only trying to make the point-----

The Deputy did not make a valid point.

-----that what the Deputy is doing is old-style Fianna Fáil politics. It is crazy.

That is not political?

That is political.

The Deputy alone will probably bring down the next Government.

Deputy O'Rourke, without interruption.

Deputy Brophy should control himself and have a little respect and manners, which is lacking based on the previous comment he made.

We have never had anything like that in this committee.

We will not now either.

Committees are meant to deal with issues and not be politically hijacked.

It was not possible to invest in the capital programme for a number of years for obvious reasons. There has been an opportunity over the past 18 months to two years to invest in the roll-out of infrastructure, including public transport, broadband, education, health services, etc. The broadband programme is to be completed by 2021 but it could be accelerated if there was greater investment in it. If a major capital investment programme was coherently put together and put in place, it could assist positively to deal with economic issues and to continue to deal with unemployment. Currently, interest rates are close to 0% for capital borrowing and, therefore, it is a prudent time to borrow. What are Professor Barrett's views on that?

Deputy Haughey referred to the issue with income tax. The unemployment rate has reduced, yet the income tax returns are decreasing. Why is that? I support the notion that the tax burden for low to middle income earners should be reduced over time. The USC will continue but those on low and middle incomes should be removed from it. It will put more money back in their pockets and it will help to drive local economies. If money is in circulation, there is a dividend to be paid for it. If the country is getting into a position where that can happen, those who need it should be facilitated and supported by putting that money back in their pockets.

Our distinguished guests did not appear before the committee to listen to political wrangling between parties. There must be an election in the air. We want to hear their expert opinions.

I raised the issue of the variation in the income tax returns in my initial contribution. I also raised an equally important question about how we compare in the pecking order with our EU colleagues. We tend to get the odd lecture from some quarters as to the benefits we accrue from FDI, for instance, which implies an unfairness, etc. I have a different view on that because we are on the periphery of Europe and while we do not want that to dictate the conditions governing the future economic performance of the Union, we need it to be kept in mind.

I apologise to members and to the witnesses for not being present at the beginning of the meeting. I had to attend the House to deal with a Priority Question.

Professor Alan Barrett

It seems like a long time since Deputy Crowe asked this question and I will tread softly. He put a terribly interesting set of questions and I would like to deal with some of them. There was an underlying philosophy behind his questioning that the Union is, in some sense, trying to impose something that might be contrary to his political perspective. Some of the recommendations that have been made make perfect sense either way where there is an extremely left wing government or extremely right wing government in place. With regard to the proper analysis of public expenditure, whether a state spends 90% of GDP or 10% of GDP, thorough analysis makes perfect sense. With regard to many of the issues the Commission talks about such as investment in health, education, child care and so on, it does not matter what part of the political spectrum one is on, there is a technical dimension to many of the recommendations - I am terrified to upset Deputy Brophy on this - which is about the efficient administration of an economy as opposed to a major philosophical or ideological push. It is important to read some of these documents in that context.

During the crisis years, when it came to the issue of fiscal policy at EU level, I was one of the original members of the Irish Fiscal Advisory Council and while we stood over the recommendations we made in Ireland about the need for austerity, one of the points we often made was that if we had been in Germany, we would have argued for a much looser fiscal policy.

A lot of economists would accept that the Europeans, in a sense, got fiscal policy wrong during the austerity period but the Americans and British got it right. The Europeans lagged behind an awful long time. Let me put it like this. There are elements of the question that I agree with and there are elements that I disagree with. The notion that it is all part of some sort of right-wing push I do not necessary buy.

I shall focus the question in much more narrowly on the issue of the fiscal rules. This links with a question that somebody else has asked and I apologise for not remembering his or her name. The fiscal rules, at one level, I see as almost like a necessary evil. Let me develop the theme along the following lines. Deputy O'Rourke made reference to the fact that interest rates are at an historically low level, and they are. A normal and straightforward economic analyst would say that we should be borrowing, quite substantially at the moment, to fund the sort of infrastructure that we need. At an economic level that would make perfect sense. The problem is, and this is where I shall be very delicate, political parties of all colours, when given the freedom and flexibility to spend above and beyond what the fiscal rules currently suggest is prudent, tend to go a little bit further. This is where one has the political realities and economics. If there was a purely mechanical economic dictator running things one would say, "Yes, borrow to fund whatever." Unfortunately, the Irish political system has managed to bankrupt the country about three times since Independence. The fiscal rules act as a very useful buffer against that and are a constraint. I often have mixed feelings about the fiscal rules. At one level I think it would be good to see investment and looser fiscal policy. However, when I look back on the 1980s and the most recent period I realise they were dark periods. Sorry, I have given a mixture of responses but we can chat further later on, if needs be.

On the issue of broadening the tax base, there is a general economic principle. I think we would all agree around this table that one of the great difficulties as we moved into the economic collapse was the fact that the tax base was narrow and unsustainable. When the economic tide went out the ordinary people of the country suffered an awful lot. Let us remember that most public expenditure goes on less well-off people. They are the ones who lose the most when the tax base is simply unsustainable. Designing it in such a way that it was so fragile was a really bad idea.

In terms of broadening, there was a lot of broadening done during the time. If one takes property tax and the USC, for example, there was a lot of broadening. When the Commission talks about this issue I think the worry is that we will role back on the progress that has been made.

Sugar tax was mentioned. To be perfectly honest, the big area of potential tax broadening is in the area of environmental taxation. The national mitigation draft plan was published a number of weeks ago. There is a general consensus that Ireland will not make headway with greenhouse gas emissions if we do not impose serious prices and taxes on a lot of the environmental bads. Again, we can agree or disagree as to whether that is a good idea. In terms of the future, a substantial broadening of the tax base would be in that area.

Another question was asked about targets for economic and social issues. I always enjoy coming to the Oireachtas to talk about the work that the ESRI has done in this area over the years. The ESRI, for many years, led the charge on the measurement and monitoring of poverty so it was possible to put targets around poverty elimination. Nobody in Ireland measured the rate of poverty in the late 1980s. The institute starting doing so in the late 1980s and early 1990s and carried out a substantial programme of work over the years. Eventually the Central Statistics Office took over the work. There is no doubt that social targets are just as important and the ESRI has played a strong role in this work over the years.

I shall row back on some of the questions and I might hand some of them over to Dr. Morgenroth. Let me quickly deal with the question on soft tax revenues, which is an issue that arose once or twice. This matter is not easily understood. Clearly, in the context of the growing economy and growing employment we would expect all tax heads to grow at a particular pace.

I raised the issue of part-time and temporary contracts. We are creating lots of jobs. Could it be the case that a substantial proportion of these jobs are not of good quality? If so, it could be reflected in tax.

Colleagues have talked about another issue. Let us remember that our tax take has been lower than expected. If the expectation was incorrect, in terms of taxation forecasting, then that is where the problem could lie. It may not be so much the underlying economics. It could be a forecasting issue. I assume that the Department of Finance and the Revenue Commissioners are working on the matter. We do not have a straightforward answer but I have outlined one of the suggestions that has floated around.

Deputy Haughey asked a question that is linked to the query raised by Senator Craughwell. Deputy Haughey asked whether the ESRI has a particular view on the Cassells report as to which option should be explored. I shall give my personal perspective and I do not know if Dr. Morgenroth has a different perspective. I do not have a strong view on the funding and just have an observation. I think it is well understood that we need to fund our universities in some shape or form, that the current situation is unsustainable and it is not consistent with the sort of modern economy that we are trying to build.

Senator Craughwell began by saying that education is a public good. Again, sorry for disagreeing but I think his belief is only partly true. The biggest beneficiaries of third level education are the people who get the third level education. Let us consider the wage premium or increased earnings one receives over one's lifetime that are associated with getting a third level education. The notion that all taxpayers should fund the third level education of all people just does not sit easily with me. I do not think I am being ideological but there is a sense of fairness.

I shall not comment on which approach to third level funding is the correct one. Let me identify the most important issue that we must confront. While I do not necessarily see education as being a public good, I think education is probably the greatest producer of social equity that exists. If politicians were serious about social equity and social justice they would ensure that whatever resources are available are focused on the people who need it most. We have learned from the experiment with free university education that it did not make a serious inroad into the differential socioeconomic make up of Irish universities. It is still the case that if one grows up in particular parts of Dublin one's chances of going to college are minuscule relative to the probability if one grows up somewhere else. That is the policy challenge. One must solve the funding problem in combination with the social justice issue. I do feel ideologically strong about the matter. I do not know if we can agree or disagree on the matter.

We will see, among all of the ideologues here.

I would like to come back to the professor on that matter.

Professor Alan Barrett

Deputy Brophy claimed that we might have been dismissive about the reduction in unemployment. If that was the case then I apologise. I did not mean to cause offence. Reduced unemployment is one of the remarkable achievements of the past number of years. It is an extraordinary achievement and is a tremendously positive development.

The Deputy asked some of the questions about fiscal rules, which I think I answered. Earlier I said that the fiscal rules were a necessary evil.

Deputy O'Rourke asked questions about the capital programme. I ask Dr. Morgenroth to deal with some of them.

Dr. Edgar Morgenroth

The matter has come up in a number of questions. It is clearly an important aspect of policy right now. Clearly, we did not have money during the crisis to retain the level of capital expenditure that we had previously in the noughties. It was one of the highest in the OECD on a per capita basis.

There is an interesting fact that is not well understood. Over the past 40 years capital expenditure in Ireland, as a share of GDP, is one of the highest in the OECD. I would argue that if one looks around Ireland it does not feel like it was one of the highest.

Perhaps we have wasted some of our expenditure and perhaps we paid too much for some of our projects. In that context, the review of the capital plan and the regular review of capital expenditure are highly welcome.

We need to ensure we target our investment appropriately. Earlier, Professor Barrett referred to the national planning framework, a draft of which will be published this summer. That will be a very important part of the assessment because it is not only about how we spend but about where we spend the money and on what type of infrastructure we spend it. The national planning framework should help us to make decisions.

The national spatial strategy had a problem in that it came at a time when the national development plan, NDP, had already been drawn up. It was far more difficult at the time to reflect some of the spatial strategy objectives in capital spending because the NDP had already started and some of the projects had already started.

I was asked about the overall level of spending. I would always be cautious about setting a target on whether it should be 5% or 6% of whatever. The money needs to go into productive projects. That is the most important thing. In that context, low interest rates are not necessarily much of a help because a productive project will have a double figure return, perhaps a 10%, 15% or 20% return. Even with 2% interest rates, that would not be such a problem. Whether it is 2% or 0% might not make that much of difference if we have a sufficient number of good projects.

We are not always good at assessing those projects. I have been involved in research around the national development plan going back to the 1998 study. We can see that there has been some wastage. Having said that, one should not necessarily compare Ireland to countries that perhaps do not even have population growth. Our needs will always be different if we have population growth. For example, that is a difference between Germany and Ireland. We are likely to have greater construction, investment and infrastructure needs than a country that is not growing, at least not in population terms, or growing relatively slowly in economic terms. One would expect that we should be well above the average if that is true, but we need to find the projects that offer a good return.

Reference was made to Brexit and getting goods to the market. That is an important point. It is not only a question of our relationship with the UK but how we trade with the rest of Europe as well. The land bridge is an important aspect of our trading relationship with the rest of Europe. In so far as there might be barriers post-Brexit, that will obviously have implications for us. In fact, in that case the implications are only for us because no other country would need to trade through Britain to get to another EU member state. That is something we need to keep a close eye on. Obviously, it is something that needs to be emphasised in the context of negotiations.

Another point arises that I should have mentioned earlier. We tend to think about the export side when it comes to Brexit, but it is also important in terms of imports. If the trade costs for exports to the UK go up, then the chances are that imports will become more expensive as well. That is going to matter to people when they go to buy groceries in the shops. Of course we have high penetration of UK multiples in the retail sector. It also matters for intermediate products that firms buy to process further. That is going to have an impact on competitiveness and, therefore, on the wider economy. Again, that is something we need to think hard about. It is something that will only affect Ireland.

Those are two aspects in respect of which we will have specific interests in the negotiations. We do not know yet what the shape of Brexit will be. Whenever we find out, some aspects may require direct interventions, whether in the form of extra funding or some other derogation to help Ireland to adapt to those new changes.

I will make one more point. Deputy Brophy is quite right: income taxation is extremely high in Ireland. However, there are two aspects to that income taxation. One is the USC and the other is income tax itself. The USC has a far broader base than income tax. For that reason, it is far less volatile in terms of its revenue. It should also be stressed that the largest part of tax revenue comes from income taxation at over 30%. Any reductions will have substantial effects on total revenue. Where we go in terms of the tax system to ease the burden of income taxation has a major impact. By virtue of having a wider base, change to the USC will have a far greater impact on tax revenues than some reform in the main income tax system.

Thank you both very much.

I am awaiting an answer to some questions. There is another question to be added on as well.

Brief points, please, Deputy, because we are over time.

I agree. I will make brief points. I will not delay. The question about performance in comparison with our EU colleagues is decidedly important.

Dr. Edgar Morgenroth

I will answer this very quickly. We have not looked at this, but it is actually an interesting question to see how other countries respond to this and, indeed, what recommendations the EU makes to them. Certainly, I have not read any of the other country reports and, therefore, it is difficult for me to answer the question.

It is most important that we make the comparisons. We are part of the European Union, which is an entity in itself. We have access to the Single Market and the associated benefits, negatives and positives. We also have the possible threat of protectionism, which is emerging globally at present. The Chairman is aware, from past experience, that smaller countries and economic entities always suffer most in a protectionist situation. We were in that situation ourselves for years.

Professor Barrett has prompted another interesting question in respect of the comment on Europeans having gone the austerity route as opposed to another route. I am keen to know more about that, because I have had this debate with many people during the past eight or nine years. I visited certain people in Brussels along with a number of others. We were told where we had gone wrong. According to them, no other country went wrong except for Ireland. The Stability and Growth Pact was ignored by several countries. This allowed the economies of certain countries to degenerate as opposed to deteriorate – for the want of a better description – rapidly over a period.

I have debated this question with Professor Barrett on air in the past. Ultimately, the question was whether adopting so-called austerity was the correct option. I believe we did not have austerity; we had the need to live within our means. The previous Government adopted policies. It had to adopt those policies, otherwise Ireland's economy would have imploded and we would have nothing - no pension and no social welfare payments or only 25% of them because that is all we would have been in a position to afford. The reality needs to dawn on us at some point. We need to quit harking back to fantasy land. We do not live in fantasy land. We live in the real world and we should tell our people that. As politicians, we do our best to do that all the time.

I wish to make one final point. Incidentally, the United States went the right way. We are not too sure about that, so perhaps we will wait and see. I would prefer to wait and see where all the Chinese bondholders have gone, what they have done in the meantime, when they will call in those bonds and so on. In any event, issues arise in this regard that we need to look at carefully. We need to look at the necessity for us to compete with our EU colleagues on a reasonably level playing pitch. That is important.

I thank the Deputy. We are running 40 minutes late.

I will make two very quick points, the first of which is very specific.

On the issue of a land bridge, Professor Barrett has made the point that any EU member state that wants to trade with us will be affected. Therefore, businesses throughout the entire European Union will be affected. An example is fresh produce coming into the country. Flowers from Dutch suppliers and stuff like that all present a nightmare scenario for us because of Brexit. I hope, therefore, that in the negotiations the UK Government will facilitate the provision of a land bridge. Its achievement is very possible.

On the ideological issue, at the risk of my Fianna Fáil colleagues being doubly surprised, we had a great Government and a great Minister for Education in Donogh O'Malley who introduced free second level education. If we had been around at the time, we would probably have heard people making the same point, that the beneficiaries of second level education had it reflected in their ability to earn an income afterwards and that, therefore, we should not have it. In an ideal world I would agree totally with Senator Gerard P. Craughwell that we should try to supply an education from the cradle until people reach an age at which they move into the workforce. Even after that, we should supply them with an opportunity to engage in ongoing education. Obviously, Governments have restrictions on expenditure, but I do not accept the point made. It is valid, but I firmly believe it could just as easily be applied to second level education. Not many people in this country would agree that we made the wrong choice in that regard.

Professor Barrett should be brief.

Professor Alan Barrett

I will be.

Economists agree on very few things, but the one thing on which we do agree is that when the economy is growing at a particular rate, we want a contractionary fiscal policy and when it is growing much more slowly, we need an expansionary fiscal policy to lean against the wind. The point I was making in my earlier intervention was that when the recession kicked in, for a lot of European countries it would have been perfectly possible to pursue Keynesian economic policies which were expansionary. At a European level, that sort of policy would have made sense. However, Ireland did not have that option; we were in such dire straits that it was not feasible for us. There was a need for a particular policy here, but one can still make the case that there would have been another possibility elsewhere.

In terms of education, I can see the point, but we will not solve the matter now and will keep discussing it. There is a critical point that we would like education to be free from the cradle to the grave in the same way we would like health care to be free from the cradle to the grave, but, unfortunately, there are so many things we have to prioritise. Sensible people can disagree on where choices have to be made.

Dr. Edgar Morgenroth

When one looks at it, Germany did austerity, but we were broke. That sums up the policy. The way they responded to the crisis in Germany was wrong.

We are way over time, but sometimes that is a good sign of a positive engagement. I apologise again for not being here at the beginning. I thank Professor Barrett and Dr. Morgenroth for giving freely of their time and members for their contributions.

Sitting suspended at 3.34 p.m. and resumed at 3.36 p.m.

We will begin our engagement on the European Semester with Ms Michelle Murphy and Mr. Eamon Murphy from Social Justice Ireland. I sincerely apologise that we are running 45 minutes late. I am conscious that Ms Murphy and Mr. Murphy were waiting outside for so long. I humbly apologise on my own behalf and that of committee members. Ms Murphy and Mr. Murphy are very welcome on a day when we are considering the European semester. Committee members were very interested in the annual assessment of Ireland's national reform programme which was sent to us and felt this engagement would be particularly useful. We appreciate Ms Murphy and Mr. Murphy giving of their time in sharing the benefits of their work and assessment.

Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official, either by name or in such a way as to make him or her identifiable.

By virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to the committee. If, however, they are directed by it to cease giving evidence on a particular matter and continue to do so, they are entitled thereafter only to qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person or an entity by name or in such a way as to make him or her identifiable.

I ask Ms Murphy to make her opening statement.

Ms Michelle Murphy

I thank the Chairman and committee members. Social Justice Ireland welcomes the invitation to discuss with the joint committee the semester process and the national reform programme.

The Europe 2020 strategy was designed to develop a more balanced and sustainable approach to the future of Europe. We welcomed the strategy at the time. It is a significant development for social policy within the European Union because it includes targets aimed at increasing employment, improving education and reducing poverty and social exclusion. It highlights the importance of social policy goals, in addition to economic goals. We have engaged with the Europe 2020 process since 2010 and the semester process since 2013 when Ireland emerged from the bailout process. We publish an annual assessment of the national reform programme and also a broader European report looking at social and economic trends within the European Union as a whole.

I will briefly go through some of the recommendations made in our review of the 2016 national reform programme. We look at three of the five headline targets. They are the employment target, the education target and the target for poverty and social exclusion. The findings made in the report conclude that the policies pursued for many years still result in the ongoing exclusion of people on the margins of society. Ireland is still not close to reaching many of its national targets, particularly in terms of poverty and social exclusion.

This is a concern for Social Justice Ireland. Obviously, economic and social development and environmental protection are complementary in the approach of the Europe 2020 strategy. We believe that inclusive growth is about fostering social cohesion as well as a high employment economy, so this should be integral to the response of the Irish Government.

As regards the key findings and our recommendations, Social Justice Ireland welcomes the recent improvements in employment in Ireland. They are very welcome after a difficult period. However, we note the ongoing problem of long-term unemployment and we recommend, given the recent improvements, that the Government set a more ambitious national target of reducing unemployment to at least 4%. We also recommend that it set two sub-targets. One is that long-term unemployment be reduced to 1.3% of the labour force. The second sub-target relates to addressing policies to tackle the working poor issue, where people are in employment but are still at risk of poverty. Last year, this was identified as a trend to watch by the social protection committee in Europe.

The funding issues in education in Ireland are well known, not just in higher education but also in early childhood education and care. In addition, lifelong learning is key to addressing the needs of people who are distant from the labour market or are in danger of losing their jobs. We have three recommendations in this area. The first is the Government should set a more ambitious target on early school leaving. We have achieved the 8% target so it should set a national target of 5% for the remainder of the process. The second is to adopt an ambitious adult literacy target to reduce the proportion of the population with restricted literacy to 5% by 2020. The third is to adopt the 15% target for participation in lifelong learning, to be consistent with the national skills strategy published last year.

In terms of poverty and social exclusion, Ireland is still a distance from achieving its overall target and its sub-target on child poverty. One of the main policies we continue to propose is that social impact assessments are carried out prior to the introduction of policy measures, particularly in respect of the budget, to ensure they do not have a disproportionate impact on people in the lower socio-economic groups. As regards a revision of Ireland's target, we suggest that the target should be to reduce the consistent poverty rate to 2% by 2020. However, within that target there should be subsidiary targets for vulnerable groups, such as children, lone parents and jobless households, because Ireland is a particular outlier in terms of jobless households, and people living in social and rented accommodation.

With regard to governance, the Europe 2020 strategy is designed to have a partnership approach and ongoing engagement at national, regional and local level and with civil society. In Ireland we are very lucky that civil society has good engagement with the European Semester office in Dublin. We are very involved in the national reform programme, NRP, process in the European Semester. That is down to the excellent work by the Semester officers there. It is important that there is further participation and engagement in this process so that citizens become aware of the interconnection between our national policies, the European process, our European commitments, the targets that have been set, how those interact on national policies and how to influence them. This is particularly important in light of the recently launched European Pillar of Social Rights to ensure it is a success.

Finally, we have recommendations for the European Semester as a whole. To ensure the coherence of European policy and the European Semester process, we recommend that the social objectives of the Europe 2020 strategy should be integrated into the economic process and the priorities of the annual growth survey should focus on the long-term social objectives of the Europe 2020 strategy. In this regard, efforts to promote growth and jobs must be supported while looking at meeting deficit reduction targets in the medium rather than the short term. It is important that fiscal consolidation measures and country-specific recommendations do not have an adverse impact on countries meeting their social commitments in the Europe 2020 strategy. In this regard, we ask for ex ante appraisal prior to the implementation of fiscal consolidation and structural measures of their impact on vulnerable groups and the cumulative impact they might have. In addition, improved targeting for the process could work, particularly in terms of sub-targets, for example, regarding long-term unemployment or different groups that have a high risk of poverty or social exclusion.

To ensure meaningful input by civil society in the process, it is important that people are made aware of the impact of the European Semester process and the strategy on national policy, the benefits of these strategies, the issues they are designed to address and, important, how to influence them so they do not feel so distant from the process.

I welcome the witnesses. I do not know if they were here for the earlier discussion, but hopefully this one will not be as heated.

The witness stated that Social Justice Ireland's recent findings found that the Government policies pursued over many years resulted in the ongoing exclusion of people who already found themselves on the margins of society. I agree with that, and I do not wish to start another argument. The group's focus is on unemployment and I share its concerns regarding the long-term unemployed and the working poor. The witness referred to a target of 1.3% for the long-term unemployed. How does the group arrive at the targets? I presume it is based on the belief that they can be delivered. Did Social Justice Ireland focus on the concept of zero-hour contracts? They are becoming an increasingly difficult issue for workers and the working poor. These contracts dehumanise workers, put huge pressure on State and social welfare transfers and reduce people's disposable income. The witness mentioned the different groups of those affected. People with disabilities are among the groups in Ireland that are marginalised. Travellers are another group, in respect of moving on from education to employment.

The report found that the overall levels of funding for education in Ireland are out of step with the stated objectives of smart growth and inclusive growth. The non-progression rates in some areas of third level education were brought to the fore recently in the Higher Education Authority's report on progression in Irish higher education. It highlights the two-tier nature, if people wish to view it that way, of Irish society in that students from less well-off backgrounds are over-represented in the institutes of technology and are most at risk of dropping out of their level 6 and level 7 courses. There is a link there to the lack of support for students coming from those backgrounds. The non-progression rate is between 26% and 27%, a huge drop-out rate for those people.

Representatives from the ESRI appeared before the committee earlier. Guidance counselling at second level impacted most heavily on disadvantaged students. That policy has been reversed but its impact is still being felt. The ESRI representatives spoke about apprenticeships and so forth. One of the difficulties appears to be apprentices getting a start with an employer. Many people who are in the trades now are being pushed to be self-employed, so there is a difficulty in getting an employer to take on an apprentice. Does the witness see that as an area in which investment and study are required?

With regard to equality proofing, this takes place in approximately 60 countries around the world. The budget in the North is equality proofed, for example. Does the witness have a view on equality proofing our annual budget? Would it help matters to progress? Irish Aid is involved in some of the 60 countries, such as Tanzania, where we support the budgetary process. At the same time we do not do equality proofing in Ireland, which is a contradiction. I look forward to Ms Murphy's views in that regard.

The notion of in-work poverty seems to work its way through everything Ms Murphy has said this afternoon. My own term for it is "living in income poverty". There can be nothing more soul-destroying than picking up one's cheque at the end of the week, or the end of the month as the case may be, to find that all one has is enough to make ends meet, with absolutely no spare cash whatsoever.

I ask the witnesses to correct me if I am wrong - if they agree with me, I would be interested to hear their views - but Government policy on education seems to have moved to an input-output regime. Certainly, in my final years in the education sector before I was elected to the Seanad, we had moved to such a regime. It was all about how many students arrived in a class, how many modules they took, how many they passed, how many they did not pass, etc., and funding was driven by that.

Regarding adult literacy, for some people a return to education in adult life is very much about surviving the year, not about passing exams or being measured as an input or an output. Regarding early school leavers, again, Government policy seems to have let education down badly in so far as we still do not have in place proper supports for children attending first and second level school, or at least the supports do not naturally follow the student as he or she passes through education. I am still concerned that children who suffer from dyslexia, for example, may be told, "Sit there and colour in that page and, so long as you are quiet, no one will bother you." That is down to Government policy, a lack of guidance counselling and a lack of support in schools. Some schools are great at it; some schools are pretty miserable at it.

I would like the witnesses to address one final point. Would they agree that long-term unemployment has a tendency to propagate itself through the family - in other words, that if Dad and Mum are long-term unemployed, the children will more than likely be unemployed? At one stage in my life doing voluntary work in Limerick, there were in some cases three generations long-term unemployed all in the one house or within a house or two of one another. What I am getting at is that unless we improve income levels for those on the margins, we cannot expect an improvement in any of the other elements. We must provide those who are below the margins and those living on welfare with all the supports they need to work their way out of their situations. I would be interested in the witnesses' views on this. I thank them for their report and their constant, ongoing work in the area of social justice. It is very important.

I apologise for being absent initially. I sprinted over in record time to be told that the time had elapsed for my question. It was all to no avail. I thank our guests for coming before us. I have read their report, which is interesting reading and focuses on the issues that need to be focused on now. I wish to raise briefly two or three matters.

The points about lifelong learning and education that Social Justice Ireland makes are all well made. We are coming to the point in our economic development at which we expect to be able to do something about these issues, as opposed to the past eight or nine years when we could do nothing. It is against this backdrop that we need to identify the measures to be taken now and how best to do so. I do not have a magic formula for the funding of education costs in the future. I do not know what they will be. As taxation is increased, the balance of the scales is immediately tilted and a cost is placed on jobs, so the equilibrium must be found, whatever it is. Everyone has their own idea about this. We would all like to divest responsibility and pressure from the areas that affect ourselves but, of course, that does not work either.

Lack of housing is a huge contributor to poverty and dependency on a system that is incapable of delivering. Senator Craughwell made reference in the previous debate to people, for instance, living in private rented accommodation and paying the same as people who have mortgages. That is if they are at work - if they can afford to work. If they can afford to remain in work, the costs associated with being in work are virtually three quarters of their income after their cost of living expenses. That does not work. It is economically not possible. This affects the young generation mostly.

The first step is local authority housing. There were several means of securing a local authority house in years gone by. We had a local authority loans system. When local authorities eased their way out of granting loans and handed their responsibility over to banks and lending institutions, they started to think of themselves as banks. They are not banks; they are housing authorities. They have at their disposal two means of providing houses: first, under the capital programme and, second, by providing loans to people on an income-selected basis, which has a reasonable threshold.

In my constituency, during that period, we were delivering roughly 1,000 houses per annum. That was an incredible amount of housing when one considers that no local authority goes anywhere near that at present despite the fact that we have a much bigger population now. We had 1.3 million people employed at the best of times at that time and we now have 2 million people employed. The biggest chasm I see that must be surmounted is to reach a point at which we can deliver to those young families houses they can afford to live in while having enough to live on.

There are two points there, one of which is the cost of the mortgage. We must also recognise that the only other place for them to go is to become unemployed because if they cannot pay the rent, there is no place to go. The voluntary housing agencies - and this is an old hobby horse of mine, as everyone in the Dáil knows by now - did not deliver the goods. They were supposed to replace the local authorities and they did not, but they are very good at dealing with special housing situations. They are experts in that area and do it extremely well, and no one can deny that. However, they were given the whole weight of the housing requirement of the country, which was grossly unfair and wrong.

We are now achieving a continued fall in unemployment figures. That means that more people are being employed, which is good. However, if, for instance, they cannot afford to remain employed for the reason I have just stated, the whole thing becomes counterproductive and we go back to where we were. There is a social welfare system in place which is there for a purpose. It is the safety net for people in that particular pocket, where they are out of employment, do not have prospects in the reasonable future and need help.

The very last point I wish to make is that there is another group of people who may, psychologically, for various reasons, have been out of work for some considerable time. They may have a disability and may have been in work previously - productive work, good work - but may find their confidence dented, have difficulty getting back into the workforce and feel threatened by the present state of the workforce.

I congratulate the witnesses on what they have done, the issues they have identified and the way they have highlighted them.

Ms Michelle Murphy

I will try to group the questions and comments by theme and then Mr. Murphy and I will go through them.

I will respond to the education questions first. Deputy Crowe mentioned the non-progression rates and progression issues particularly for students from disadvantaged backgrounds. The areas we examined in the report are those which pertain to the reform programme itself. We would highlight lifelong learning as one of the most important areas for investment in Ireland. It has been identified by the Commission as probably the key area to deal with regarding the technological impact on employment and the changing nature of employment. The cuts to guidance counsellors have obviously had an impact. There is also the issue of supports for students transitioning from a system at second level which is very different to the system one moves into once one enters further education.

At second level, one learns in a particular way and one does one's exams, whereas once one moves into the further education system, one is supposed to rely on oneself. It is a much more independent system. That transition can be quite difficult. I think there are issues there around those supports.

In terms of apprenticeships, there are some positive movements. As Deputy Durkan said, there can be difficulties for young people in finding an employer. More needs to be done by the Government to support employers to take on young apprentices. Apprenticeships and traineeships can play a key role in addressing some of the unemployment we have, particularly long-term unemployment in the regions. However, we have to ensure that the apprenticeships and traineeships are not narrowed by age. We have to look at a broader range of things. We have to look at both the skills and the age profile of those who are unemployed in particular regions, the employment that is likely to be available in those regions and how we can move people into them. Apprenticeships and traineeships can play a key role in that and they will play a key role into the future.

Lifelong learning plays a key role in adult literacy. As Senator Craughwell said, it is not just about inputs and outputs, it is about enabling a person to be able to participate fully in the economy and in society and encouraging a person to participate in simple things such as voting. We face a funding crisis in education at all levels. At a European level, the Government could be pushing for investment considered social investment to be excluded from the process designed to calculate the budget deficit. That would include investment in things like education and health care. We should be pushing for that. As policy was driven in a particular direction as a result of funding, we still have not grappled with how we are going to deal with the ongoing funding of education. As the Senator mentioned, it is about seamlessly putting in the supports throughout the system in primary level, secondary level and early childhood education to deal with students who may have particular needs, issues or diagnoses and to ensure the supports are there for them throughout their school years within the education system.

Deputy Durkan mentioned that lifelong learning and education are the keys to helping people who are distant from the labour market or who are long-term unemployed get closer to jobs and get the jobs that become available. There are also people with particular skill sets that are in danger of being impacted by technology. That is an area that we really have to look at. It is something that deserves consideration.

In terms of equality-proofing and poverty-proofing the budget, in Ireland we do have an obligation to poverty-proof the budget. Social Justice Ireland has promoted equality-proofing and poverty-proofing for many years. There is a commitment to it in the programme for Government. The Irish Human Rights and Equality Commission has been tasked with looking at how we might equality-proof the budget process. It is done in Scotland, for example. If we introduce an equality-proofing process, Oireachtas committees would be much more informed when they consider different policy recommendations that they might make to Government, not just for the budgetary process, but for the policy process as a whole. I am of the view that it would be a welcome step forward. With the independent budget office now being staffed, this is a key opportunity to ensure that we can get equality-proofing into this process.

I will move on to employment. I will make a few comments and then let Eamon come in. In terms of why we chose the targets we did, we set the sub-target for long-term unemployment at 1.3% because that is what the long-term unemployment rate was in 2007. We have set the target for general unemployment at 4%. That is why we chose those targets. At a European level and a national level, issues such as precarious employment, zero-hour contracts and low pay are becoming issues that are worrying, challenging and that need to be watched, addressed and brought into the policy process. We need to look at how to address those issues. There are 105,000 people who are working poor in Ireland. What kind of policies can support those people? We have been on record for a considerable period as promoting refundable tax credits. It is a huge cost to the State because the State is essentially subsidising low-wage employers through family income supplement and various other parts of the social welfare system. Therefore, it is in the State's interest to ensure that people can earn a wage that promotes a decent basic standard of living and can cover things for people's housing costs and transport costs. I will ask Eamon to comment on long-term unemployment and on the fact that even though unemployment is coming down, the regional variations that obtain.

Mr. Eamon Murphy

The first thing to note is that employment figures have very much improved. The 2016 job growth figures were the best we have seen in a decade. That is very welcome, but the problem at this stage is less to do with job numbers and more to do with features of the labour market that are developing. They are looking more and more like becoming permanent features, some of which are very undesirable. Michelle spoke already about the incidence of low pay and precarious employment.

Long-term unemployment, which was mentioned by Senator Craughwell, is at this point and has been for several years at a rate greater than half of all unemployment. We have not seen levels like that since the mid-1990s, when the figures were first measured in that way. We published a quarterly employment monitor to look at trends like this. One of the key things we have pushed in the last few issues has been the incidence in which older people are affected by long-term unemployment. Workers older than 45 years of age are being disproportionately affected. For example, the proportion of the total number of unemployed people in the country at the moment made up by long-term unemployed people older than 45 years of age has quadrupled in the past six or seven years. The proportion of all older unemployed people who have been unemployed for more than a year is more than double what is was, which is fairly staggering.

Senator Craughwell asked whether we thought that this leads to longer-term problems. Some of the things that are associated with long-term unemployment include the obvious financial hardship, the potential loss of one's family and slipping into poverty. It can also involve increased mental health issues and an erosion of skills, which become obsolete, particularly for older workers who are less likely to be able to engage in retraining. It is a serious issue which, we believe, does not get enough attention. People are right to laud these employment figures, but behind them are some very undesirable features.

Another aspect we have been looking at is the regional employment trends and the extent to which the perception is being confirmed by the statistics that most of the benefits from the additional employment being created are being accrued in the eastern part of the country in Dublin and the surrounding counties, mainly Meath, Kildare and Wicklow. As somebody from the south west of the country, the Chairman will recognise that the region is struggling greatly and started from a very low base in comparison to the eastern side. The Border and western regions, in particular, have some of the most staggering statistics that we found. They are not actually related to employment numbers, but are more to do with labour force numbers. The rate at which the labour force has fallen in the western and Border counties is 20 times that of Dublin. That confirms the perception people have that in response to a mass lack of employment opportunities in these areas, people are reacting in the same way they always have, which is to emigrate, whether that is migrating to the eastern side of the country or leaving the country altogether. There is a massive social issue around that.

It also has repercussions in this part of the country as well. One of the best examples of what imbalanced growth will lead to is the rental report that Daft.ie published earlier this week. Rents are at an all-time high, particularly in urban areas and in Dublin. This feeds back to what Deputy Durkan mentioned in respect of the cost of trying to house and raise a family while on low pay. It is prohibitive and is quite impossible in some circumstances, particularly when we look at some of the figures being charged for rent.

Many of the issues being generated here would be, if not quite solved, then certainly alleviated by bringing additional investment away from Dublin, which already accounts for roughly half of all economic activity in the country, and bringing it down to a more rural setting, with the focus on cities like Limerick, Cork, Galway and Waterford as economic hubs for the surrounding regions.

Ms Michelle Murphy

I will make a final comment on housing because I know that Deputy Durkan was on the special committee looking at the housing action plan and this issue came up at it. It is an issue of supply. We made numerous proposals to that committee which are on the record. Social housing supply is the key to taking people out of the private rented sector, which will bring down rents. We also need to build houses for people. Supply will not be delivered overnight, but the situation we are in at present is such that homelessness is increasing at an ongoing rate. The pressure that rents are putting, and will continue to put, on wages, in particular in urban centres, is also huge. This has an impact on people on the average wage trying to afford their housing costs. Invoking some of the European clauses, as the Minister did in the action plan in terms of looking at structural reform clause, and pushing for flexibility and social investment would be a means of at least increasing investment in social housing.

I refer to the question of prioritising areas for funding in education now that there are some resources available, and I think that goes across the board. That is one of the tasks facing the current Dáil. When there are resources available, how are these prioritised? In education, we would say life-long learning is one area to prioritise because of its future impact.

On my own behalf and that of members, I would like to thank the witnesses for their time today. They gave a very thoughtful presentation, leaving us plenty to think about. I again apologise for the delay at the beginning of this meeting. To allow the witnesses to leave before we go into private session, we will suspend for a few minutes.

Ms Michelle Murphy

I thank the Chairman, Deputies and Senators.

Sitting suspended at 4.12 p.m. and resumed in private session at 4.15 p.m.
The joint committee adjourned at 4.25 p.m. until 2 p.m. on Wednesday, 24 May 2017.
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