Committee on Budgetary Oversight debate -
Wednesday, 13 Dec 2023

Fiscal Assessment Report: Irish Fiscal Advisory Council

An Cathaoirleach

From the Irish Fiscal Advisory Council, I welcome the acting chairperson, Professor Michael McMahon, and council members Mr. Alessandro Giustiniani, Dr. Adele Bergin, Ms Dawn Holland and Dr. Eddie Casey, chief economist and head of secretariat.

Before we begin, I will explain some of the limitations to parliamentary privilege and the practice of the Houses as regards reference witnesses may make to other persons in their evidence. They are protected by absolute privilege in respect of the presentation they make to the committee. This means that they have an absolute defence against any defamation action for anything they say at the meeting. However, they are expected not to abuse this privilege and it is my duty as Chair to ensure this privilege is not abused. Therefore, if their statements are potentially defamatory in respect of an identifiable person or entity, they will be directed to discontinue their remarks. It is imperative that they comply with any such direction.

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 any official either by name or in such a way as to make him or her identifiable. I remind members of the constitutional requirement that they must be physically present within the confines of the place Parliament has chosen to sit, namely, Leinster House, in order to participate in the meeting. I will not permit a member to participate where they are not adhering to this constitutional requirement. Therefore, any member who attempts to participate from outside the precincts will be asked to leave the meeting.

I invite Professor McMahon to make his opening statement.

Professor Michael McMahon

The council is grateful to the Chair and members of the committee for inviting us to appear before them again. As they know, we value these engagements and see them as an integral part of our work. I am joined by Ms Holland, Dr. Bergin, and Mr. Giustiniani, my fellow council members, and by Mr. Casey, the council’s chief economist. This meeting is a welcome opportunity to discuss our recent fiscal assessment report. The report assesses the Government’s plans as set out in budget 2024.

Ahead of budget 2024, economic activity was strong. Activity had broadly recovered, and employment was at record highs. The economy appeared to be performing above its normal capacity. This was clearly not a time to add too much fuel to the fire. However, the Government announced another substantial package of measures in budget 2024. At about €12 billion, this put it in line with other post-Covid budgets; roughly three times larger than pre-Covid packages. Cost-of-living supports included in the package were mostly untargeted. The everything now approach of tax cuts, a ramp-up in capital spending and current spending increases the chances that Ireland repeats past fiscal mistakes. It entails using strong tax receipts in good times to expand the budget quickly at the risk of adding to price pressures, getting bad value for money, and potentially having to reverse measures in a downturn. There was also evidence of poor budgeting on the spending side. Overruns in health, obvious before budget day, were not catered for sufficiently in the budget. As a result, these overruns are now likely to entail higher-than-budgeted-for spending in 2024. As well as that, the health allocation for 2024 is barely enough to cover demographic and price pressures such that further overruns are highly likely. The substantial increases in spending alongside a package of tax cuts meant that the national spending rule was breached. The breach, taken in isolation, might not be considered massive at 5.8% in 2024 as compared to the rule’s 5% limit. The Government argued that it was necessary to deal with high inflation. However, since the rule was introduced in 2021, the level of budgetary measures is cumulatively €6.6 billion, or 7.5%, above what would be implied by a 5% path. More worryingly, the Government has already signalled that it will continue to breach the rule in later years even as inflation recedes.

The Government also employed fiscal gimmickry, a term used in economics and political science, to flatter its numbers. Several items in budget 2024 were labelled as non-core or temporary but look highly likely to persist beyond 2024. This includes Covid spending in health, Ukrainian supports, and additional capital spending increases labelled as windfall. This is deeply concerning. It undermines the national spending rule, which is now more important than ever. EU rules are unlikely to prove binding in future as they are linked to GDP and do not take sufficient account of excess corporation tax receipts. The rule also takes on greater importance as Ireland is facing into substantial spending pressures from ageing and the costs of the climate transition

These challenges can be managed. However, this Government and those that succeed it should commit to adhering to the rule to avoid adding to inflation pressures and risking painful cuts to spending or tax increases in future.

There are clear pressures to improve Ireland’s public services and infrastructure and we highlight the need for this in the report. However, the lessons from the 2000s are clear. Trying to do everything now would add to price pressures in the economy and worsen value for money on public projects compared with doing them at another time. As we discussed at this committee in September, a boom-bust cycle in the construction sector risks exacerbating capacity constraints. We are not saying there should be no capital spending increases, but rather that these spending increases require careful planning and should be part of appropriate aggregate fiscal budgeting.

We also highlight that Ireland is in the envious position of having favourable debt dynamics, as debt is forecast to fall. This can also help to put us in a good position from which to address the bigger challenges coming as well as to respond to adverse economic developments. However, it does not address the procyclical stimulus provided by the large budget package at a time of high inflation and exceptionally low unemployment, nor does it excuse the nature of the budgeting and the loss of credibility that can result from undermining the national spending rule. As we have seen in Ireland in the not-so-distant past and more recently in the UK, favourable fiscal positions can change quickly and with extremely damaging implications.

The council strongly welcomes the future Ireland fund. It has the potential to put risky corporation tax receipts to good use, with the result that future generations have a smaller burden to offset the costs of a rapidly ageing population. This, coupled with the national spending rule, help to allay concerns about volatility in corporation tax receipts. However, while it is a positive and welcome development, on the basis of the current outlook, this will only contribute around 25% of the additional costs of ageing by 2050. The importance of a credible, forward-looking budgetary framework remains as important as ever.

Deputy Bernard J. Durkan

I welcome the witnesses to the committee meeting. I note their criticism of the budget, which is unfair and unwarranted. That is my opinion.

Some commentators in Europe have raised the question of whether the continued hikes in interest rates, which have, thankfully, slowed down, possibly contributed to inflation. Although the purpose of the exercise was to slow inflation, it is contended in some quarters that, after a certain period, it becomes self defeating and that it contributed to inflation rather than curtailed it.

Professor Michael McMahon

I am happy to take that question. There is extensive cross-country literature on the effects of interest rates. The channel that is being referred to is called the cost channel of monetary policy. While interest rate rises have an effect on cost, the evidence is strongly against it dominating the other channels, such as the effect of the reduction of demand overall. As far as I am aware, there is no credible evidence that the cost channel of monetary policy drives inflation up more than the other effects offset it. I do not put much credence in that, although it is a question the Deputy could put to the Central Bank.

Deputy Bernard J. Durkan

Nevertheless, would Professor McMahon consider that, at a time of cost-of-living increases, the public might be suffering from some cost fatigue and that it might be necessary to alleviate the burden on them in some way to ensure good governance would be seen to be available. I do not accept the notion that it was gimmickry. Sometimes those in charge have to make decisions that are balanced. I put it to Professor McMahon that the decisions in the budget were balanced on the basis of looking at the impact of the cost of living on the public, which the public cannot identify the cause of. They see themselves as having suffered the consequences of cost-of-living increases through no fault of their own, for a variety of reasons. We understand that. What would Professor McMahon say to the suggestion that it was necessary to intervene carefully in the situation by way of various incentives, to guide the economy and at the same time give the public a raison d'être and a reason to go on?

Professor Michael McMahon

I will address the two parts. Two elements are being conflated in that defence. As I have said in this committee and publicly many times, it is for the democratically elected Government to make the decisions and to balance those decisions as it sees fit. The argument that the budget struck a balance that was considered desirable is one that ultimately the Government has to put to the people. We do not necessarily conflate that with what we say is gimmickry. "Gimmickry" is the term used to describe the changing of definitions or adjustment of measures to make your fiscal position look more favourable than what the underlying position is.

I will separate those two and start with the first. It is true that people are being hurt by cost-of-living increases. People are being hurt to different degrees, and both last year and this year we called for the need for the aggregate stimulus not to be too great and for measures to be targeted at those most in need. Again, it is for the Government of the day to decide who they are. By our estimates, more than 70% of the cost-of-living supports were untargeted and, arguably, the tax package also does not necessarily serve those most in need. That is a decision for the Government to take. However, untargeted packages and an aggregate stimulus, as we claim this budget incurred, would not be called intervening carefully, but rather, in aggregate, leans against the European Central Bank's policy. We have fiscal policy leaning against monetary policy. The report is supportive of the potential need for targeted supports. The question is whether the nature of the targeting was targeted enough and we do not think that was the case.

On the gimmickry, if the balanced set of decisions is considered to be the right set to be put in place, I do not see any reason to try to move numbers around. For instance, windfall capital spending is capital spending. It should not be treated any differently from other forms of capital spending that are already in the budget. Those are two separate issues and they should be addressed separately. However, on both there was just cause for our report.

Deputy Bernard J. Durkan

Would Professor McMahon agree that the windfall capital spending he referred to is an intervention by the Government to tweak the economy in a particular direction at a given time, having regard to the economic factors, the projections and the issues prevailing and obvious to it and its advisers?

Professor Michael McMahon

There are many arguments, many of which are in the report, as to why Ireland needs more investment and infrastructure spending. The question we are asking is why it is treated separately in an accounting sense from the other forms of capital spending that are already going on, that continue and that will continue in future years.

Deputy Bernard J. Durkan

It is because it does not have a carryover. There is no commitment for future years. Something else might need an intervention and support in future years.

Professor Michael McMahon

If-----

Deputy Bernard J. Durkan

Would Professor McMahon not agree that there are issues arising from cost-of-living increases that needed intervention and support and got it in the past year? If it had not happened that way, there would have been more serious cost-of-living increases and more serious hardship across the board.

Professor Michael McMahon

Again, as we have said - we said this last year and we are saying it again this year - there are people who are being very badly hit and there are mechanisms within fiscal policy to address that. That is a decision for the Government of the day but the extent of targeting could allow you to rob and spread it so widely, you could spread it more targeted at those most in need. That is a decision for the Government of the day.

On capital however, at some level every capital spending project is a one-off. They come with maintenance costs, which also go into core spending, but we treat capital spending as part of core spending. Windfall capital spending is just extra capital spending and therefore should also be included within the core measures. This is the point we make about gimmicky. We are not arguing that there is no need for extra spending. I really wish to emphasise this conflation of the two as equivalent. There is a decision on the right aggregate amount of fiscal stimulus, and then there is a question about the way in which the budget is presented and the way in which the numbers are accounted for. These are separate issues. As we said, there is a good case for more capital spending. There is, though, a question about the value for money and the inflationary impact of extra spending at a time when the construction sector is extremely tight. This is a point we have made before. This is why we argued, as we talked about in the opening statement, for the need for a plan. We have a national development plan. There are also potential ways to be less inflationary in the capital spending. A case could be made for trying to do that but this was not exactly what was put forward. It was simply put forward as windfall capital spending and treated as neither core nor non-core spending but as its own separate topic. This is the extent of gimmickry.

Deputy Bernard J. Durkan

Well, if it was, it is easy to condemn it as gimmickry but I would reject that. These targeted measures, which Professor McMahon says were non-targeted, were targeted in the sense that they were targeted at a particular need at the time. Professor McMahon said some people had a greater need. I would say, and I think the Minister would say, that all of our society had a need and it might not be a good idea to tilt in one direction only. There needs to be a recognition that there was a need there, that this intervention does not need to be carried on into the next budgetary exercise. It can be corrected any way we wish. We can increase or reduce it on the basis that there is not a carry-on into next year's budget and we will not start with that. For instance, in the Department of Health, issue has been taken with whether that Department had correctly assessed the need first in order to present its figures. I would say that the need was assessed very carefully, in this particular situation and I think it will do its job.

Deputy Rose Conway-Walsh

I thank the witnesses for their statement and report. I wish to concentrate first on health. The opening statement referred to there being "evidence of poor budgeting on the spending side". Professor McMahon pointed out overruns in health, said they were "obvious before budget day" and that despite this, they "were not catered for sufficiently in the budget". I will ask my questions on this issue together. Have we ever had a situation where a known deficit was built into the budget in this manner before? Does IFAC agree with the description of the health budget by the current Secretary General when he said, in an email to the Minister, Deputy Donohoe, in advance of the budget announcement, that introducing a budget on this basis was not being honest and was a clear breach of public financial procedures? What is meant by a "breach of public financial procedures"?

Professor Michael McMahon

Okay. This is a test of my knowledge of the fiscal history of Ireland. I am going to start looking to Dr. Casey and give him time to check, if he can. Off the top of my head, I do not know the answer. Let me answer, though, from the place of first principle on what we would like to see or expect to see. Ignoring existing overruns can occur and it can be sensible to occur, if those are extraordinary overruns that it is genuinely thought will not occur again. As we presented in a very long note the last time we appeared here but which coincided, unfortunately, with the Finance Bill, when we talked about the existing level of service, ELS, and our approach to standstill, work from the council has shown that since 2019, the sort of increase in demand for health services can be, or at least a big chunk of it can be, predicted very well because of our demographics, particularly our increase in those in the population aged over 65. People in this cohort tend to have a higher frequency of use and a higher cost of use of acute services. There are elements, then, where this direction of travel is going in one direction.

When we did our own calculation of what would be a reasonable standstill estimate for next year, the way we approached it was to work out what we thought would be the price costs of that and the demographic contribution to that context. That sort of builds up. Typically, you would build in those overruns from this year that you believe will persist into next year. As we identified it, there are two elements to the bad budgeting for next year. One is that the existing level of service estimate and the overall allocation look to be falling way short of our estimate of the standstill. Moreover, it does not include substantial overruns from this year, which are likely to continue.

Deputy Conway-Walsh may remember, because what I said was in response to one of her questions, that there is sympathy for people in the health service and the Secretary General who can predict that if you continually underbudget when we know we want our hospitals to still serve the over 65s and everybody else, we will be back in this situation again next year of needing Supplementary Estimates of relatively large amounts. We do, therefore, worry about this type of budgeting.

Deputy Rose Conway-Walsh

Yes. Running the health service with an in-built deficit on the scale it is now must be considered as well. It is important to note that. What are the practical implications of running the health service with an in-built deficit, rather than having the same amount correctly allocated through the budgetary process? Are there implications for oversight and transparency in that regard? Are there issues for the HSE in terms of its ability to plan?

Professor Michael McMahon

On the last point, I feel it is just at the edge of my competence to answer. We focus on the budgeting process. As the Deputy said, we think there clearly are issues there. If we went to the HSE and said we were going to give it a budget lower than most people or reasonable forecasts would suggest would be needed, then that clearly puts pressure on the organisation. What is the implication of this pressure? I am going to swerve that question because I am not a health service executive and I have never worked in a health service. I do not know how tighter budgets or budget deficits affect what services are offered or how you can adjust to it. I am afraid, therefore, that I am going to dodge this question. Perhaps Deputy Conway-Walsh can ask this question of people in the health service.

Deputy Rose Conway-Walsh

That is okay. It is possible to make an educated guess. Obviously, we see the moratorium on recruitment. That is the major implication facing us. There are others as well, but I take it that is not within the remit of Professor McMahon to answer that question.

It is important to state that we do not have a national spending rule; we have a Fine Gael and Fianna Fáil spending rule. Since those parties have broken this rule every year since they came up with the idea, I am not even sure that we have that as it is at the moment. Is it Professor McMahon's understanding, however, that the Fine Gael and Fianna Fáil spending rule is a net spending rule? Has there been an attempt this year to present it as only relating to expenditure, without taking into account the reduced revenue from the tax cuts? Would that fall into what Professor McMahon describes as "gimmickry"?

Professor Michael McMahon

Yes. We have had the discussion of the title of it, but as we speak, not only to this committee but also to international bodies, we will continue to call it the national spending rule. On the presentation of the budget, it did not have a presentation of the net aspect of this rule. There was some initial question about whether it was a net or overall spending rule.

That was clarified 18 months or so ago and we believe rightly so. We think if a Government of the day raises extra tax revenue on a sustainable basis, then that should be in the pot that they should be able to spend. So, yes, we were worried. That would probably not fall into what I would classify as the gimmickry. I would put that in the lack of transparency. For ourselves but also for members, as the Committee on Budgetary Oversight, it is important certain details are reported. There is another that I would add. There is the net spending rule but also the breakdown of their existing level of service, ELS, estimates and where they get them makes it very difficult to understand where are the budgeting further outcomes so I would classify that under transparency. All of that falls under the headline of budgetary process that we worry a little bit about.

Deputy Rose Conway-Walsh

Transparency is a key thing here. We have a responsibility as well as the Committee on Budgetary Oversight to look at this. Every year on budget day we get the 250-page expenditure report. Social Justice Ireland has previously raised the issue of how the information is presented there. In many ways it is a political document. For example, there is a list of measures and costs that have no bearing to the real allocation for new measures. Is the budget announcement and the document sufficiently transparent and how does Professor McMahon think that we need to make it more transparent for people?

Professor Michael McMahon

Like I said, if you have put into the budgetary documents in the past the net core spending rule and the assessment of that, then I think it is useful that you still have it in future years. Similarly, with the ELS. We have had conversations at this committee in the past. By we, I am really referring to the hard working team of people behind me, who grind through all the different tables to calculate things like unallocated amounts. I think we would agree that there is a more transparent way to put it together. The information in there; it is just the ease with which you get at it.

Deputy Rose Conway-Walsh

Is it designed to not find the real information? I know Professor McMahon cannot really say that either. Why can you not compare year on year? Why is it less transparent?

An Cathaoirleach

Could it be the budget variation from-----

Deputy Rose Conway-Walsh

And all the different aspects. I mean the way it is presented.

Professor Michael McMahon

Like I said, all the information is in there.

Deputy Rose Conway-Walsh

Yes.

Professor Michael McMahon

Each year it has exactly the same tables in exactly the same place.

Deputy Rose Conway-Walsh

Exactly, yes.

Professor Michael McMahon

It can be a bit tricky.

Deputy Rose Conway-Walsh

Yes.

Professor Michael McMahon

Even with the same tables there are still elements where you have to combine three or four tables together to work things out.

Deputy Rose Conway-Walsh

That is what I mean.

Professor Michael McMahon

That is fine for us to do. The fine folk behind me do it regularly and know how to do it. We definitely think that there could be improvements to that, on the transparency side.

Deputy Rose Conway-Walsh

Do other countries do it the same way? Do they have a better system in terms of follow through year on year?

Professor Michael McMahon

I have not all of them but many of them would follow a similar procedure to ourselves. This is why European countries are obliged to have an independent fiscal institution to keep checking and keep trying to do the maths. I have not done a full cross-country study of them. Maybe Dr. Casey has an input there.

Dr. Eddie Casey

We interact with all the other fiscal councils in Europe quite a bit. We met representatives of them earlier this week. It was quite striking that all of them noted similar problems in terms of dealing with fiscal gimmickry. It seems to be a mark of recent budgets in other countries.

An Cathaoirleach

Does it relate to the same issues that have been mentioned here like Covid, Ukrainian costs and so forth?

Dr. Eddie Casey

I would generalise it more as things that are presented as temporary that probably look more likely to be long lasting or even permanent.

An Cathaoirleach

We never envisaged that the war was going to be permanent.

Dr. Eddie Casey

No. For example, I will deal with the war. The macroeconomic forecast behind the budgets, which go up to 2030, would say that the Ukrainian refugees we are supporting would remain in Ireland that far ahead. That is the central assumption. On the fiscal side, it is assumed that there are no costs after next year, which seems like a disconnect and is part of the strange presentation of the numbers that we would class as part of the gimmickry.

An Cathaoirleach

Would you expect to see some tapering away?

Dr. Eddie Casey

Exactly.

Deputy Rose Conway-Walsh

It is not just that. Did the fiscal councils offer an explanation for why there is a trend in other countries as well of having budget obscurity or less transparent budgets?

Dr. Eddie Casey

To some extent, they are trying to figure this out at the same time. Some of the themes that we are hearing are that lots of countries introduced temporary measures. I mean very large amounts during Covid and the cost-of-living crisis and in response to the war. Rather than see those temporary amounts unwind, they are seeing them not only remain but change in form and other things that looked like they might be more long lasting and less to do with those specific issues that arose at a very specific point in time being classed into the same bracket. The worry is that it is becoming a much more nebulous term.

Deputy Rose Conway-Walsh

How do the fiscal councils suggest that we tackle that?

Dr. Eddie Casey

With fiscal councils, a lot of the time it is just trying to shine a light on what exactly is happening. That is exactly what we are trying to do with our report. It is exactly what we are trying to do in terms of classifying all of these different forms of presentation or classification of things that we think should be classified differently.

Deputy Rose Conway-Walsh

Is the Irish Fiscal Advisory Council calling on the Government to stop categorising areas of expenditure such as temporary, non-core and windfall?

Professor Michael McMahon

Our discussion in September highlighted this for me. Around the room there were many different views on what should be core and non-core. Let us ignore taking the stuff out of it completely, which we think is a real error. If you have some things that we think should be core, then some should be non-core. How we should define between them? I think you can reasonably argue back and forth. If you pick one of them and stick with it, then that can be consistently year by year and we can apply the principles. I am not saying you could do it necessarily with 100% accuracy because there would be little things here and there that you would have to make a decision on. What you certainly cannot get involved in is the gimmickry where from year to year we start shifting things in and out and what counts and what does not. I think that some of the budgeting would be much easier and clearer if we simply did it without core versus non-core and then we made arguments for why. If we think there is a sustainable level of spending and we go above that for some reason, you then put the case for why it is acceptable and sensible to violate it. If you keep doing it year after year then the question will be what revenue is going to be generated to now pay for this because it is not a one year deviation but a multi-year deviation in the same way other types of spending are expected to be paid for.

Deputy Rose Conway-Walsh

Has the Irish Fiscal Advisory Council had discussions with the Department of Public Expenditure, National Development Plan Delivery and Reform on the classification of core, non-core and windfall capitals?

Professor Michael McMahon

We get clarifications from them when we are trying to look through the tables but we do not meet them.

Deputy Rose Conway-Walsh

Did the council meet the Department?

An Cathaoirleach

I call Deputy Nash.

Deputy Ged Nash

The last question seamlessly moves on to my own line of questioning and I thank Deputy Conway-Walsh for the prompt. How difficult has it been since the budget was formulated and presented to the Dáil? How difficult has it been for the council to get the information it needs to make an informed assessment of the impact of budget 2024? How difficult has it been to access that information from the Department of Finance? I am about the kinds of interactions it had. Has it been unhelpful?

Professor Michael McMahon

I am in my fifth year on the council. Every year with every budget there are things that we go back and forth with it on. As the OECD's review of 2021 highlighted, there are definitely fiscal councils that have better access to information. The Office for Budget Responsibility, OBR, in the UK has a right to access information. It is the gold standard and we do not have that. I would describe the working relationship as generally good. We go back and forth. It does not always get answered in one email. There is often clarifications on clarifications.

Deputy Ged Nash

Why?

Professor Michael McMahon

I cannot presume the reason for the need for extra clarifications.

I do not know whether this round was any harder for the team.

Deputy Ged Nash

To get a sense of the question I am trying to ask and perhaps not articulating properly, I will better define where I am coming from. Were the main sticking points with the Department of Finance on its definitions around core and non-core? Professor McMahon might give me a characterisation of how that engagement went. I imagine there would be resistance. The Department is not blind to this. This has been a consistent and valid criticism by IFAC. I should say an informed critique rather than criticism of this Government's approach. Were some of the major sticking points on the access to information concerning the definitions of core and non-core? How did Professor McMahon find that? How would he characterise it?

Professor Michael McMahon

There are two elements to it, namely, how much information the Department gives us and how we react to that. As for whether it likes or dislikes our critique, I will not presume to know that. For instance, within Covid-19 spending, there is an amount of about €150 million which goes to the Department of Transport for reduced ticket prices. That is still in as non-core. The question is whether we really believe, three years on, that is going to continue. Again, 90-minute tickets are available in many European cities. We are not taking an approach to that but rather the budgeting of it. When we find out what that €150 million is covering and that is what it is, then we would say that probably should be in core by now and we should be thinking about how we raise revenue to spend it. If a future Government says it does not want those anymore, it could remove them and that would give more space to the Government under the spending rule. The first stage is we get the information. There was no resistance about telling us what the €150 million was. From that we form a critique, and maybe I should not say this, but friends of mine often think we sit down with the Ministers and advise them. I am sure members are all aware this is not what we do. We assess after the event. After we have received the information, we do not go back to them to get a sense of how they are feeling about what we said.

Deputy Ged Nash

To move on to a couple of real-world impacts, because when we talk about how we generate and make decisions about the distribution of resources, it is about the real-world impact, Professor McMahon said, and has not put a tooth in it, that this is a procyclical budget. I do not mean to put words in his mouth but my interpretation of what he said was this budget could potentially add fuel to the flames of an economy that is at risk of overheating. The real-world impact of many of the untargeted measures, whether they be, in my view, poorly informed decisions to introduce the kind of tax cuts that would disproportionately benefit the better off in a very tight labour market, the reintroduction or the reheating of universal supports such as energy credits regardless of what a person's income may be, all of these things will contribute to ensuring inflation remains higher for longer. Will Professor McMahon tell me, in his assessment, what socioeconomic groups will be most adversely affected by that? It is important to remember and it has become lost in the narrative and the interpretation in the media of what Professor McMahon has been saying, such as phrases like "political gimmickry" which capture the public attention, that at the end of the day there are real-world impacts to the decisions that have been taken and there is going to be a price to be paid for that. Therefore, it would be worthwhile for Professor McMahon to state again for the record what IFAC forecasts the level of inflation to be next year as a result of the untargeted measures and related measures in the budget as against what it would be if the budget had been more targeted, and the kinds of socioeconomic groups that are going to be most adversely affected by inflation being higher for longer.

Professor Michael McMahon

For anyone listening, I would certainly refer them to box A in the report, which is a nice box on the inflationary impact of the tax cuts. The estimates we have and put forward are that, without these measures next year, we would see inflation at around 2.2 and with them we estimate it will be at 2.9. It is absolutely worth emphasising that there is uncertainty around those estimates, but if I were to take a guess, my nervousness or the risk I would see is that those are the average effects of these types of policies. The effects could be much larger at a time when inflationary pressures are already high.

In regard to the effect of inflation on different parts of the income distribution, which I will use as the basis although there are others, we know that, in particular, the lower end of the income distribution spends a disproportionate amount of its money on food and energy. Therefore, particularly when it was driven by energy price increases, this disproportionately affects those groups. It is much harder to say exactly where the effects of this type of general higher inflation go. However, the anecdotal evidence at least is that those in higher earning jobs have generally tended to be able to get higher pay increases. If we simply measured it as a take-home pay after wage increases and inflation, that is, a real take-home pay change, and if a person were to get an inflation busting pay increase because he or she is in a high-skill job or it is difficult to retain him or her as distinct from a person who would get a much lower one, the effect of inflation would be much greater. I do not know whether I can go beyond that because we do not do a full distributional analysis of such inflation numbers, but that would be a reasonable way to think about it.

Deputy Ged Nash

It would be fair to say that those who depend on the State for their income and those on low and modest incomes will be most adversely affected by inflation remaining higher for longer. As an economist, would Professor McMahon say budget 2024 was fiscally illiterate?

Professor Michael McMahon

That is not a term I have seen in the academic literature. I have seen the term "gimmickry". Many people think we chose that for other reasons. When I think about good fiscal policy, I think about two broad dimensions. One is a medium-term sustainability aspect. As we argued in the opening statement and as became apparent when we met with other fiscal councils around Europe, Ireland is in a really envious position on that front. We have really good underlying dynamics. That is a real positive. The challenge here is whether we can do the right countercyclical policy at this moment. In that sense, we would have preferred a more countercyclical policy. For instance, as was said in the discussion with Deputy Durkan earlier, it is a decision for the Government of the day whether to do the tax cuts as well as the cost-of-living supports. It was perfectly within the Government's power to not do the tax cuts, do the cost-of-living support and maybe target them even more and still come in under the national spending rule with no need for any gimmickry. We made this clear in advance in our pre-budget submission. In that sense, given what rule the Government has set out for itself and given where the economy is, it made the "everything now" choice and stopped making the choices that we believed necessary.

Deputy Ged Nash

I recall a number of months ago in national economic dialogue at meetings with civil society groups, and I will paraphrase here but I think it is accurate, the Taoiseach actually contradicted the Minister, Deputy Donohoe and the Minister, Deputy McGrath, when he said we can do tax cuts, we can increase capital expenditure, we can increase current expenditure all at the same time, provided that the economy continues to grow. I disagree with him and I assume IFAC would too. Would it?

Professor Michael McMahon

The report really highlights such matters as the need for infrastructure investment, but we also are realistic that doing it with good value for money at this time is very difficult. If there are clearly people who can be targeted, and it is for the Government to target those, more can be done with the others or you can keep some more back for future needs, which may be infrastructure investment next year or the year after when the market might be more favourable. Certainly in our pre-budget submission and as I believe becomes clear in this fiscal assessment report, we would have preferred some more difficult choices being made.

An Cathaoirleach

What infrastructural development does Professor McMahon believe is not necessary at this time because of the value issue? Is it water, sewage for housing or what?

Professor Michael McMahon

No, the point is finding infrastructure projects that do not take away from the private sector construction industry, etc. If there are projects available that involve financing and importing at a reasonable cost with little labour input in Ireland when they come, they would be ideal. The problem is they are very hard to find.

An Cathaoirleach

Exactly. It is very easy to say we should not commit to infrastructure development because of cost issues that persist without offering examples that people can relate to. People may ask if IFAC is saying we cannot do infrastructure that is necessary for the development of public services and of the country.

Professor Michael McMahon

That is not at all what we said.

An Cathaoirleach

It is open to that interpretation. That is all I am saying.

Professor Michael McMahon

Let me clarify. The report makes clear and has a series of very nice charts to show that on measures of public infrastructure across sectors, including transport, education and health, we fall below the median of EU countries. There is definitely a need. We argue that capital stock adjusts over a long period and one cannot just wake up and suddenly increase its level a lot without big implications for value for money. We require a serious plan with clear shovel-ready projects. If we suddenly find there is extra capacity, then we do extra. It is not simply a matter of throwing money at it. Throwing money at it is not good infrastructure planning and that has never been what we have said.

An Cathaoirleach

Achieving planning permission is the biggest obstacle. Consider Midleton flood relief scheme: if the barriers to planning were not there, that town would not have been flooded. That is an issue we mentioned previously. There is provision in the budget for extra funding allocation towards the national development plan to meet increased costs associated with construction. Was there not a specific provision?

Professor Michael McMahon

That is right. If there was not, we would be upset because we know costs have changed over the life of the national development plan. I want to emphasise that-----

An Cathaoirleach

That does not form part of the "gimmickry" IFAC referred to, does it? The increases in construction are abnormal, owing to the situation we find ourselves in in recent years.

Professor Michael McMahon

We do not think the costs will fall.

An Cathaoirleach

Sorry.

Professor Michael McMahon

Do you expect the costs of these things to fall back?

An Cathaoirleach

After Covid, yes. They peaked because of the impact of Covid. As Covid goes into the distance, they fall back. They have fallen and are falling because of steel-----

Professor Michael McMahon

For steel and cement that is true, and for timber a bit as well, but the big component of the construction sector is wages and wages go up more the higher our inflation rate is because we have to compensate people for lost purchasing power.

An Cathaoirleach

That is fair enough.

Deputy Patricia Ryan

I was not here for the opening statement but have read it and thank IFAC for that. IFAC has been critical of the blurring between core and non-core spending. Will the witnesses elaborate on how they feel the spending should be presented? Is there any spending at present that could be classified as non-core?

Professor Michael McMahon

I will risk echoing the discussion we had in September. We even discuss this, which goes to show reasonable people can disagree on these things. One answer is completely temporary things that you have to pay in a given year and that you want to take out. The EU fiscal rules used to allow what are called one-offs. They were susceptible to potentially mislabelling as one-off something that could persist. It is also reasonable to think Covid is - touch wood - a once-per-100-year pandemic and the costs of adjusting to it should not be borne by one generation in 2020 and 2021 but could be spread out over many. There could be argument about how to do that.

Where our debate in September pushed me is that when we all get to the point of arguing about what is core and non-core, it is probably counterproductive. We should just look at the total spending and if there are things in that we think of as exceptional, we could stand in front of the House or public and explain why those things violate whatever fiscal anchor is set as part of the fiscal framework. We could sit here for many hours into the night discussing whether one thing should be core or non-core but it is clear the ordinary business of fiscal spending should be part of core because it comes with a need to be financed.

Deputy Patricia Ryan

On the better targeting of the cost-of-living supports and their once-off nature, do those supports address the ongoing energy poverty faced by older people who are reliant on electricity? I have constituents on dialysis machines or oxygen. The use of their heating and all of that is going up and continuously high energy bills are coming into their home. They need protection from being disconnected. The bills are still accruing and the once-off payments are not really of any value to them. Is there anything that could be considered for people affected like this?

Professor Michael McMahon

We made our view clear in the report and last year, though last year the untargeted nature was more understandable because we got to the budget at a time energy prices had just shot up. It was not obvious how we would target them or what mechanisms we had which could identify who to target them at. There are occasions when a blanket approach minimises the chance of missing someone needy at the cost of giving to some people who may not need it. That is regularly the case. A year has passed and the question is whether in that year more effort could have been made in Ireland and across Europe to figure out the ideal way to target these in case we decide we need them again. Energy prices have come back a bit but are still elevated over pre-Covid levels. We might ask if we could have tried to figure out a way to target them appropriately. This is an anecdote but there was a panel discussion about this last weekend and people said they get their €150 energy payments but are out of the house all day and live in a small apartment. It makes a huge dent in their bill but they do not need it. We do not look into the mechanisms of that but there is a question as to whether over the past year better attempts to figure out how to target the payments could have been made.

Deputy Patricia Ryan

Hopefully, we will look at it again and target them better, if we need to.

On possible benchmarking of State benefits and poverty prevention benefits this would bring to older people, could windfall capital funds be used to fund for this?

Professor Michael McMahon

Is that to fund increases in the State pension?

Deputy Patricia Ryan

Yes.

Professor Michael McMahon

We have made the case previously and remain of the view that the real value of the future Ireland fund is to deal with the medium- and longer-term challenges associated with demographic pressures. The decision for any government of the day to increase the generosity of the pension should fall under the normal financing arrangements. As I said towards the end of my opening statement, even putting excess corporation taxes into the fund, as currently planned, reasonable estimates of the returns on the fund suggest that by 2050 we will only cover approximately a quarter of the extra costs we have to face. We are putting money away to cover some of it, but there is still a lot of adjustment to do.

It makes sense not to add to that by trying to use up some extra of the excess today to boost the level of pensions to a level that becomes even more unsustainable in 2050. Again, it is a perfectly open choice for any government to make, but it should make it within the overall budgeting package and, therefore, not treat it outside of core or non-core. Pension spending is part of core spending.

Deputy Rose Conway-Walsh

Professor McMahon referred to expenditure on health and that we are lower than the EU median in what we spent on health.

Professor Michael McMahon

That was the infrastructure. That is a measure of our level of infrastructure.

Deputy Rose Conway-Walsh

That was our health infrastructure.

Professor Michael McMahon

The capital stock, which is the number of machines, hospitals and so on that we have.

Deputy Rose Conway-Walsh

When we measure health spend part of the problem, no more than when we compare year-on-year, is that we look at the spend on health in other European countries and when we look here we are including private healthcare spend. Is it any wonder people are confused by what exactly one has spent? Is it possible to get a spend figure for public healthcare?

Professor Michael McMahon

In our analytical note from 2021, we looked at health spending in the public sector, and compared it internationally. That is a really good resource. It does a great job explaining a lot of our thoughts on health spending. We found that Ireland is a high spender on public healthcare, and it has a relatively young population today even though it is aging rapidly. It is unusual to see it as one of the high spenders in that regard. The Deputy raised a good point, which is that we might talk a lot about standstill costs barely being met, but we are already at a point where health spending is quite high. We are not in a position to say whether it is too high, or where there could be savings or anything like that. However, we know it will probably be disruptive if we do not continue with yesterday's policy and increase it in line with the new pressures we are facing year to year, which are demographic pressures - an older population, more people and the rise in prices. That needs to be tracked and there needs to be a clear sense of where savings are going to come from. We lack a lot of information on health and that is not really clear to us, so it is hard to say.

An Cathaoirleach

A vote has been called, but we have reached a conclusion anyhow. We are quite happy with Professor McMahon's presentation and the responses he has offered. We appreciate that and thank him for it. If there are any further questions, we will contact him.

The select committee adjourned at 6.43 p.m. until 5.30 p.m. on Wednesday, 17 January 2024.