COMMITTEE of PUBLIC ACCOUNTS debate -
Thursday, 22 Apr 1999

Vol. 1 No. 2

1997 Annual Report of the Comptroller and Auditor General and Appropriation Accounts.

Vote 1--President’s Establishment.

Vote 6--Office the Minster for Finance.

Vote 7--Supperannuation and Retired Allowances.

Vote 12--Secret Service.

Vote 45--Increases in Remuneration and Pensions.

Contingency Fund Deposit Account and Finance Accounts of 1997.

Mr. P. Mullarkey(Secretary General, Department of Finance) and Mr. J. Hamilton (Director General, Office of the Attorney General) called and examined.

Chairman

We now move on to the 1997 Annual Report of the Comptroller and Auditor General and Appropriations Accounts, Department of Finance Votes, Vote 1 - President's Establishment, Vote 6 - Office the Minister for Finance, Vote 7 - Supperannuation and Retired Allowances, Vote 12 - Secret Service, Vote 45 - Increases in Remuneration and Pensions, Contingency Fund Deposit Account and Finance Accounts of 1997. I propose we take all these items together and then deal with the State claims agency.

I welcome the Secretary General of the Department of Finance, Mr. Mullarkey. It is always a pleasure to see you. Perhaps you would introduce your accompanying officials.

Mr. Mullarkey

I am accompanied by Mr. John Fitzgerald, Mr. Con Breen, Mr. Tim O'Sullivan and Mr. David Hurley.

Chairman

You are all welcome. I also welcome the Director General of the Attorney General's office, Mr. Hamilton. Will you introduce your accompanying officials?

Mr. Hamilton

I am accompanied by Ms Finola Flanagan, Deputy Director General in my office, Mr. Brian Byrne and Ms Helen Heffernan from the Chief State Solicitor's Office.

Chairman

You are all very welcome. I ask the Director of Audit, Mr. Meade, to introduce paragraphs 1 to 5 of the Comptroller and Auditor General's Report and the Votes. Those paragraphs read:

1. Outturn for the Year

The audited accounts are summarised on pages x and xi of Volume 2. The amount to be surrendered as shown in the summary is £293.85m arrived at as follows:-

	£’000Estimated	£’000Realised	£’000
Revenue	4.4	4.7	4.6
Garda Síochána	16.8	37.7	44.2
Prisons	16.3	18.6	28.8
Agriculture and Food	6.1	5.8	7.6
Social, Community and Family Affairs	3.1	2.8	2.8
All other votes where payments were less than £2 million	6.6	7.5	9.8
Total Overtime Paid	53.3	77.1	97.8

Table 2 - Overtime as a % of Pay

Vote	1995	1996	1997
	%	%	%
Revenue	4	4	4
Garda Síochána	6	12	13
Prisons	22	24	30
Agriculture and Food	8	7	8
Social, Community and Family Affairs	4	3	3
Others (Average)	3	3	4

Table 3 - Highest Individual Overtime Payments

Vote	1995	1996	1997
	£	£	£
Prisons	36,253	38,488	38,378
Garda Síochána	19,260	30,882	26,564
Agriculture and Food	28,905	32,179	34,843
Marine and Natural Resources	14,770	13,813	34,599*
Revenue	14,579	26,158	18,128
Education and Science	8,903	11,175	18,318

*Includes arrears of £24,600 for the period October 1991-December 1996.

Mr. Meade

Paragraphs 1 to 4 give the usual information regarding the outturn for the year, the Exchequer extra received and the surrender of balances on the previous year's Votes, while paragraph 4 gives any of the audits of departmental stock and store accounts. Paragraph 24 is mentioned in that paragraph, which was discussed before when dealing with Garda stores. Paragraph 5 gives details of the overall overtime payment, the highest overtime earners and the overall percentage of overtime in the public service in 1997. Relevant aspects of those were taken when Votes in regard to them were before the committee.

Vote 1 provides for the salaries and expenses of the President's office, travel costs and various other expenses. It also provides for the payment of the centenarian bounty. The salary of the President is borne on the Central Fund.

Vote 6 provides for the administration expenses of the Office of the Minister for Finance, the payment of various grants, including those to the ESRI and IPA, payments relating to some EU programmes, including the programme for peace and reconciliation and payments to supplement the income of private charitable lotteries to offset the impact of national lottery products.

Vote 7 essentially provides for pensions and gratuities under the Superannuation Acts to retired civil servants and their surviving spouses and children. It also covers pensions for unestablished officers, their spouses and children.

Vote 12 shows the amount expended on the Secret Service in the 12 months under consideration.

Vote 45 provides for potential excesses and pay provisions of individual Votes due to the effect that pay increases, which had not been finalised for inclusion in the annual Estimates. That should be a thing of the past from 1999.

The Contingency Fund is used under agreed procedures to defray urgent or unforeseen expenditure for which it may not have been practical to seek immediate approval of the Dáil. It was last used in 1995.

The Finance Accounts are the total accounts giving the total expenditure and income of the State under the 1993 Act. These are now audited separately and presented to the Dáil.

Chairman

There are no points of criticism?

Mr. Meade

No.

Chairman

Mr. Mullarkey, I will offer you an opportunity to say a few introductory words. While we do not go into great detail about the Secret Service Vote because of its nature, are you satisfied there are proper controls in place to ensure public money cannot go astray under the guise of secrecy?

Mr. Mullarkey

There has been no change in relation to the Secret Service Vote from the 1920s. The same procedures are in place to deal with cases, where a Minister confirms to the Minister for Finance that money is required for the purposes appropriate to the Secret Service Vote. There is a procedure within the Department involving signature and countersignature of the relevant cheque. I am happy there has been no dilution of the controls applying to the Secret Service Vote.

Chairman

Is a Minister required to certify that request for money to you or to somebody else?

Mr. Mullarkey

The Minister who seeks funds is required to certify that request and that certification is seen by the Comptroller and Auditor General.

Chairman

Is that sufficient?

Mr. Mullarkey

Yes, that has always been sufficient.

Mr. Meade

The audit certificate from the Comptroller and Auditor General is unusual in that it states he has been furnished with certificates from the responsible Minister, which support the payments shown in the accounts. On the basis of those certificates, he certifies the account. By its nature the Secret Service is very secret. The onus is put on responsible Ministers. The cheques issued are under very strict instructions in the Department of Finance and that is how it has evolved in Irish and UK Administrations over the years.

Chairman

The Comptroller and Auditor General does not check beyond the certificates?

Mr. Meade

No, he does not.

Chairman

Could he do so if he wanted?

Mr. Meade

We have not found any reason to do that. At this level we have to be prepared to accept the responsibility of Ministers. If that was misplaced on any occasion, that would be a different ball game. That has been the convention and to date it has worked satisfactorily both for the Department of Finance and ourselves.

Chairman

Mr. Mullarkey, did you want to make a brief opening statement about the general financial situation or any other matters?

Mr. Mullarkey

I had not contemplated that but I will gladly answer any channelled questions that the Chairman or his colleagues want to ask. I do not have an encyclopaedic knowledge on this, but I will try to deal with any questions Members may have.

Chairman

We are almost one-third of the way through the year. What is the present expectation of the Department of Finance about economic growth for this year?

Mr. Mullarkey

I do not have the figures off the top of my head. We projected strong growth at the start of the year. Our revenue experience to date indicates that for the first quarter, growth is somewhat ahead of what we would have expected, even though we were projecting very strong growth with which outside market analysts did not disagree. There is a buoyancy in revenue, particularly in regard to consumption and income tax, which could partly be explained by volume or more employment than was bargained for. An element of higher wages could be involved. The buoyancy in revenue, which is over and above what we expected, is probably a mixture of those aspects.

Chairman

What was the budget projection for economic growth?

Mr. Mullarkey

It was of the order of 6 to 7 per cent.

Chairman

What is your present expectation?

Mr. Mullarkey

We have not revised upwards yet but, on the basis of the first quarter, one could be looking at an extra 1 per cent, although that figure is just an estimate. The first quarter figures point towards something over and above what we expected, notwithstanding what the Kosovo crisis and the uncertainty of the international economy generally might do to growth in Europe and, therefore, to Irish exports. Revenue has been somewhat more buoyant in the first quarter than expected.

Chairman

We are talking about a possible growth of 8 per cent.

Mr. Mullarkey

Seven to 8 per cent.

Chairman

You are being unduly modest and conservative. If the Department of Finance admits to 8 per cent that means it will be about 12 per cent.

Mr. Mullarkey

I do not have the figures. The indications are that we are probably a bit ahead of what we expected.

Chairman

The last monthly figures for inflation are down but what is the outlook for the year?

Mr. Mullarkey

We said 2 per cent for the year as a whole. The figure as of last month was 1.4 per cent, but that reflects a significant reduction in interest rates in the latter half of last year. The calculated average for the year as a whole is done on a month by month basis. The inflation figure will undoubtedly rise somewhat. Another factor will be the strength or weakness of the euro. Although we are in the euro area we are more heavily involved in trading with the non-euro sector than other euro countries. The strengthening of the dollar - or the weakening of the euro, whatever way one likes to put it - will possibly have more impact on us than on other countries. We are reasonably optimistic that the average for the year will not be too far from 2 per cent.

Within that figure there are certain things one would worry about. To some extent, the 2 per cent figure is dependent on the decline in interest rates; we are benefiting from that. Generally, in recent years, international commodity prices have been fairly kind to us, even though oil prices are beginning to turn upwards again. Domestic or service sector inflation is a worrying feature because it is more than 4 per cent at the moment and we have to compete in the euro zone where the average inflation rate is 0.8 per cent.

I can understand why, from a wages point of view, people feel entitled to share in the growth in the economy, but we have to maintain our competitiveness relative to the rest of the euro Eleven otherwise we could quickly price ourselves out of a good deal of employment. We have an ongoing increase in the labour force of between 2 and 3 per cent, which is a multiple of that in the rest of the euro area. We will need exceptional growth by euro Eleven standards to absorb that ongoing increase in the labour force which will remain at a fairly high level until about 2006 or 2007, according to the most recent figures I have seen. I do not want to be alarmist and I know there is scope for moving up the value chain. However, both in terms of continuing to attract investment from abroad and protecting the employment we already have, many people in employment - who may not have the skills to move up the value chain - could be casualties of any undue wage inflation. From that point of view we need to be cautious and watch our inflation figures carefully, as well as how we react to them.

Deputy Durkan

At the end of 1998 there was some difference of opinion between the Department and the National Treasury Management Agency in relation to projections and eventual outcomes in respect of the reckoning that might have been anticipated at an earlier stage in the year. To what extent, if any, do you draw on the expertise of the National Treasury Management Agency in these matters?

Mr. Mullarkey

I am on the advisory committee of the National Treasury Management Agency. It has done a very good job of managing the national debt. Normally it would not offer us particular views on these matters. The agency would not claim to have any particular competence in such matters as projecting growth in the economy or in revenue.

Our expectations, as outlined by the Minister in the budget at the beginning of December, were fairly closely fulfilled at the end of the day.

Deputy Durkan

But there was a disparity between the agency's anticipated surplus and that anticipated by the Department?

Mr. Mullarkey

Yes.

Deputy Durkan

Why was there such a disparity given that, I presume, the same basis was used by both?

Mr. Mullarkey

I am not too sure. I know that this came up and the Minister appeared with the chief executive of the National Treasury Management Agency at the Committee on Finance and General Affairs. That matter was discussed there. It transpired at the end of the year that the surplus was very close to what the Minister had indicated.

Deputy Durkan

Which was the more accurate projection?

Mr. Mullarkey

I do not want to get into differences of opinion. The Minister made a projection in his budget at the start of December and without any manoeuvring or manipulation of figures the outturn was very close to that.

Deputy Durkan

Did the National Treasury Management Agency not indicate towards the last quarter of 1998 that the surplus would be greater than had been anticipated by the Minister and the Department?

Mr. Mullarkey

Not in any way in the run up to the budget. The agency's chief executive said something that could have been interpreted that way some time after the budget, but we had no information or indication from them to that effect.

Deputy Durkan

So the NTMA figures were wrong?

Mr. Mullarkey

I would not put it that way. I would say that the Minister's figures were right.

Deputy Durkan

I will put it another way. In hindsight, which figures proved to be more accurate - the figures as presented to the Minister by the Department or the figures emanating from the National Treasury Management Agency, without any dressing up or down?

Mr. Mullarkey

Of the two sets of figures that were in play at that time, the Minister's figures were much closer to the end of year figure.

Deputy Durkan

Will that be the case this year as well?

Mr. Mullarkey

The NTMA has not made any particular projection for this year.

Deputy Durkan

You mentioned the possibility of inflation arising in the service area and the average inflation rate in the euro zone. What plans, if any, has the Department to ensure this country's growth prospects remain firm given the likely fluctuations in inflation in euro zone countries? What plans, if any, has it to ensure Ireland remains well positioned in that group?

Mr. Mullarkey

That is part of the overall economic policy of the Government and the Department. Our primary concern in that regard would be to see a follow on to the present social partnership agreement, in whatever form, which would continue to protect the competitiveness of the Irish economy. Reasonable wage moderation over a significant period of considerable growth has been helpful in promoting confidence in the economy, both in relation to domestic indigenous industry and services. There was confidence to spend and recruit as well as in the overall stability of the public finances. In the final analysis, all of that was rooted in common sense and a moderate wage policy.

Our priority would be to work towards a strategy for the period post the present agreement which would ensure that type of thing into the future. That is not to say people's living standards have not been rising. There has been significant sharing as regards the growth in the economy. I do not have the figures to hand, but real take home pay has increased markedly for those at work since the social partnership agreements began. On top of that, there has been an increase in the level of employment way beyond even the most optimistic projections throughout the social partnership agreements.

Our priority would be to do everything which would maintain the stability and confidence which come from stability in the economy and in the public finances. We now have substantial stability in terms of the currency, which is reflected in low interest rates and in moderation in wages. As long as we can hold those pieces together, I am optimistic that we can continue to have a relatively high level of growth within the euro Eleven which will enable us to meet the continuing need for increased employment. As I said, we have a particular need because of the demographics. From the point of view of the Department of Finance and in so far as it can influence the overall framework, those are the things on which we will focus.

Deputy Durkan

Have you identified the likely factors which might drive inflation, particularly in the run into the next partnership agreement which, in turn, could fuel further inflation if not checked in the meantime? You mentioned certain service areas as being ones for potential inflationary trends. Have you identified them specifically and individually? Have you identified some ways or means to address those items?

Chairman

Housing costs is a clear case.

Mr. Mullarkey

Housing costs and asset inflation generally is a concern; that is undoubtedly true in a tightening labour market. At one stage, one would have said there were particular areas where one would be concerned about wages inflating over and above the rate provided for in national agreements; one would have thought of maybe the hi-tech and software areas and perhaps the building and construction industry. There is evidence now to show the labour market has tightened to such an extent that there is pressure on wages everywhere.

Chairman

Would you categorise that as severe or serious pressure?

Mr. Mullarkey

I would not call it severe at this stage and do not want to be alarmist about it. Judging from our tax take and the information we have, we must proceed very carefully or we may price some people out of employment. It is true there is a good level of profitability in many areas of the economy, but there are other areas where people are still operating on tight margins and where people, who might be vulnerable because they are at the lower end of the skills spectrum, might find it difficult to gain employment. I do not, however, want to be alarmist about it. Everyone has a rightful expectation to share in the growth in the economy. Part of that is coming through increased employment and part through rising living standards, which is a combination of wage increases and tax reductions. If we try to move too far too fast up the value chain, there will be casualties.

Chairman

Are you concerned about the level of spending?

Mr. Mullarkey

The savings ratio is not at a worrying level. There is tremendous consumer confidence at present which is reflecting itself in spending. There are worrying areas, particularly housing which the Deputy mentioned. Generally, if we can get another good pay agreement or some understanding as to how wages will develop post-Partnership 2000 and in the hope that the various initiatives being taken and planned, particularly in the housing area, work out, I would be optimistic that we could continue with good growth. That is the view of outside agencies. We, with other countries, have annual visits from the IMF and OECD. They feel that if we can keep our act together in terms of the type of arrangements we have had——

Chairman

On the savings ratio, one of the extraordinary things is that despite all this growth, the economy has not overheated. Are there any signs of overheating?

Mr. Mullarkey

That is what I am talking about. We are getting into that type of territory.

Chairman

The possibility of overheating?

Mr. Mullarkey

I do not want to be alarmist. If, however, inflation in the services sector of the economy is at 4.4 per cent and if you are not on the alert and looking to see how you might address it, we would be delinquent.

Chairman

Going back to the savings ratio, there is no reason to save now because of the low interest rates and the fact DIRT is imposed. In fact, people are losing money by having savings.

Mr. Mullarkey

Low interest rates have many good effects but there is a downside.

Chairman

Is there a case to abolish DIRT in the present circumstances?

Mr. Mullarkey

I do not think that has been considered. One can make all sorts of arguments. Interest rates are low and I could respond by saying earned income used to be taxed more lightly than unearned income. A criticism of the tax system was that earned income has been taxed heavily while unearned income may not be taxed as effectively or heavily and that this has made for distortions in the economy. To remove tax from interest would be a step in the wrong direction in terms of seeking to lighten the burden on earned income.

Chairman

The budget forecast for this year in respect of the yield from the deposit interest retention tax is £120 million. The additional surplus in the first quarter alone is greater than that amount. People are now being penalised for saving because interest rates are so low. The position regarding interest rates after tax means that money is losing value in the bank. The incentive is to spend.

Mr. Mullarkey

There is something of a money illusion there in that people hanker after the days when they got 12 per cent on their savings. That was a negative rate of interest because inflation was probably at 15 per cent. Many people can accept the low rates of interest provided the value of their capital is being protected. When we had high interest rates they were still negative in many situations. That can be lost sight of.

Chairman

We need to moderate expenditure and encourage more saving to avoid overheating, yet the incentive to save is not there. We have the wherewithal to provide for this if we want to.

Mr. Mullarkey

While the case may not be compelling, one is then into the tenable and legitimate argument about why we tax earned income more heavily than unearned income. Many of these aspects do not lend themselves to complete resolution.

Deputy Durkan

Current property prices generally create house price inflation because it is more attractive for a person with savings to invest in property and housing rather than get a return of 1.5 or 2 per cent from the financial institutions. Given the current housing market, investors could get a return of up to 30 per cent. Is there not an issue here that needs to be considered in terms of its potential for fuelling inflation at some point in the future? Perhaps inflation could suddenly take off as a result of allowing this situation to continue.

Mr. Mullarkey

The increase in property values has accelerated in the last couple of years, although there has been a trend in this direction for a number of years. Successive Governments have been trying to address it. The Government can most usefully contribute by trying to address the supply bottlenecks in the property area, to increase the supply and in certain ways to reduce the demand for property, as was done in the case of the disallowance of interest for tax purposes for investors in houses as distinct from owner occupiers.

Considerable efforts are being made and will continue to be made to increase supply and to control and, if possible, unwind some of the property inflation through investment in roads, sanitary services, water and so on. The National Development Plan will have as one of its main priorities the suppression of inflation in property generally, particularly in housing property.

Deputy Durkan

Given what you have said about inflationary trends in services areas, is there not a danger that, if nothing is done to seriously address that issue now and to remove inflationary rates above and beyond advisable and permissible levels of inflation, when the partnership programme is being reviewed and a new wage agreement is being negotiated a very high price will be paid at that stage?

Mr. Mullarkey

One must consider overall inflation in the run-up to a national agreement. I am optimistic that, given the situation in the commodities area and the drop in interest rates, etc., overall inflation this year will be of the order of 2 per cent. I would not like to see the figure rising significantly above that. In the last few years we have been accustomed to a rate of 2 per cent. It should be borne in mind that if that is the benchmark figure used when negotiating a new agreement, it is virtually double what applies in the euro area generally. The rate in the euro area may rise in the period to 1.5 per cent. However, we are relatively high at 2 per cent.

Deputy Ardagh

What is the position regarding the amalgamation of the TSB and the ACC and the potential initial public offering on it?

Mr. Mullarkey

I have not been involved in that in the last few weeks. We are optimistic that the arrangements are going ahead. We do not see any prohibitive difficulties arising. The Minister may have answered a question in the Dáil on that topic yesterday. The Government has decided to go ahead on this. Everything I hear leaves me confident that it will go ahead and will be implemented successfully.

Deputy Ardagh

Representations have been made to all of us from long-term customers of the TSB because of the numbers involved; most would be regarded as small savers in terms of the banking system and they wish to get free shares. The Minister said it is not a mutual banking organisation and it is owned by the State and it will be sold, but is there any chance that shares will be offered to long-term customers at a discount from the offer price?

Mr. Mullarkey

I do not think that is contemplated. The legal advice is that there is no legal right there. There would be all kinds of precedents set by allowing discounts to customers of financial institutions. However, I think there could be an arrangement that they would have access to purchase or acquire shares. They would have particular rights in terms of the acquisition of shares at the market price.

Deputy Ardagh

Will 25 per cent of the shares in the company be allocated to these customers?

Mr. Mullarkey

I have not seen any figure and I would not like to make any commitment or promise in that regard. However, the prospect has been expressed in public of them being given particular or special access to acquire shares.

Deputy Ardagh

A newspaper report this morning on the National Development Plan indicated it was a £20 billion plan with £3 billion coming from the EU. There was a list of priorities on expenditure and on the areas of greatest expenditure. Could you clarify the position on the plan?

Mr. Mullarkey

I can clarify it but might not be able to do so to the Deputy's satisfaction. There is no fixed figure at the moment. A few things are coming together, including the National Development Plan, the prospect of negotiations on a post-partnership agreement and general multi-annual budgetary planning for at least the next three years. The National Development Plan will extend to 2006.

While the Department has not finalised its proposals to go to Government, it is doing a projection to 2006 on the economy in general and the type of public finance scenario which it would generate. We are working from present no policy provisions in relation to public services and tax rates and, working with that material, we are trying to work out an acceptable overall public finance scenario to 2006 on the basis of a reasonable set of tax and expenditure assumptions. It is a type of iterative process to see if it gives an acceptable budget profile for the period. If it does, well and good but if it does not, you must go back and mend your hand and assumptions in certain ways.

When that projection is done, we will prepare a memorandum for Government which would outline, in some detail, the budget parameters for the next three years because we are now into three year multi-annual budgeting. It will also cover the next six years because it must cover the lifespan of the next National Development Plan. When we have that projection, we will have parameters for expenditure as a whole as well as taxation. It is within that framework that one must form a view on the amount of public sector resources which would be available based on a reasonable set of assumptions for National Development Plan areas of expenditure without dealing unfairly with other areas of expenditure which are not included in that plan. By doing that, we would have an overall view of the potential scale of a National Development Plan.

Another factor, which is becoming more important, is pubic private partnerships - PPP. That may enable the Government to contemplate doing other works without breaching the prudent parameters of overall budgetary policy or may enable certain works to be done through PPP which otherwise would be done through conventional Exchequer financing. Until we draw those various pieces together, as we must do over the next couple of months, it would be premature to say yes or no to any figure.

Deputy Ardagh

Has any decision been made on whether to use budget surpluses to reduce national debt or to invest in infrastructure?

Chairman

Or create a contingency fund after three years, as Mr. de Silguy suggested yesterday. He proposed a central contingency fund for the euro, something which our finance committee put to him three years ago when he appeared before it.

Mr. Mullarkey

A contingency fund, redeeming debt and infrastructure, has been mentioned. They are all legitimate ways to seek to utilise a surplus for as long as it lasts. The Department is guided by the long-term sustainability of the public finances. That would be its focus, and I will deal with all the points in that context. One will find a very interesting document on our website, which has not been reported on very much. The Department did a long-term issues paper based on a reasonable set of pragmatic assumptions and taking an actuarial lifespan. We compiled a set of figures for the public finances to the year 2050 to explore their sustainability

Deputy Ardagh

Did it accompany the budget?

Mr. Mullarkey

It did not accompany the budget, but is on the website. I will send the Deputy a copy.

Deputy Ardagh

I will download it from the website.

Mr. Mullarkey

That was done on the basis of a reasonable set of assumptions - not an ungenerous set - as to expenditure and taxation developments over the period. Naturally, the further one went the more pragmatic and arbitrary one had to be in one's assumptions. Given our current public finances and the type of reasonable trends in expenditure, it indicated that the public finances were sustainable into the long-term.

It envisaged us being in surplus for a number of years. However, with the substantial aging problem we face from 2015 onwards, we would be in something of an increasing deficit by the end of the period 2050. One may say that it is a long time away and ask how accurate can one be, but all we can do, like an actuary, is take a reasonable set of assumptions. I do not believe anybody would quarrel unduly with what we have. That scenario indicated significant surpluses and what one might call a negative debt for a middle period at around 2020. Again, we felt that was not a realistic scenario. Would people hold back from spending or reducing taxation in that circumstance? The longer term sustainability criterion would suggest that one needs to run that type of surplus in the medium term.

Chairman

Are you heading for a contingency fund?

Mr. Mullarkey

Yes, in a sense. The Minister indicated a willingness, as has the Pensions Commission, to talk about the prefunding of pensions.

Chairman

It is obvious.

Mr. Mullarkey

That is under active consideration in the Pensions Commission, and we would be very supportive of it. This is not prefunding in that one is funding only liabilities which are now arising.

Chairman

Pension funds do.

Mr. Mullarkey

We are, to some extent, saying our present surplus is illusory in that we are not dealing with our pensions on an accruing basis. That would, in one sense, meet both points. To some extent, one might run a lower surplus in the short to medium term in order to prefund for future——

Chairman

To provide for future contingencies.

Mr. Mullarkey

In terms of looking at a short time contingency fund, it is important to bear in mind that the stability and growth pact is designed in such a way that people are, in normal circumstances, expected to run a balanced budget or even somewhat into surplus in good times so that when the shorter-term cycle is against you, you will not breach 3 per cent; your automatic stabilisers——

Chairman

My concern is where there is a cataclysmic or asymmetric shock that requires much more significant expenditure.

Mr. Mullarkey

We are building in a lot of room for manoeuvre by running significant surpluses at present.

Chairman

Does that mean you will reduce the national debt but if a major crisis arises and you are confined by the 3 per cent deficit limit you might end up accentuating your downturn?

Mr. Mullarkey

It depends on how much room for manoeuvre you have built in at the start. At the moment we are running substantial surpluses which give a fair degree of latitude between that and the 3 per cent. The other point is that if you were to set funds aside at this stage for spending at that time, the way the stability and growth pact deficit is calculated is such that in a cash flow sense or ordinary accounting sense your argument would hold but not in the way the pact is calculated. This is because, unless you are putting that reserve totally outside the control of the Government and the public sector, when you would run down that fund, it would also count against your deficit. It would give you protection in a cash flow sense but not in terms of the deficit as calculated for stability and growth pact progress.

Chairman

One weakness of the euro arrangements is the lack of provision for some seismic contingency arising in the euro zone, a major economy or, indeed, our economy. Mr. de Silguy is quoted in the financial pages yesterday as supporting this now, although he did not three years ago when we put it to him.

Mr. Mullarkey

I did not see that but I am sure any Government would look at it. It would entail some change in their method of calculation of the stability and growth pact. I do not regard that as an awful point of principle that could not be looked at. One tries to deal with these contingencies at two levels. In terms of the long-term sustainability of the budget, you are looking at things like prefunding——

Chairman

In other words, some form of future needs contingencies.

Mr. Mullarkey

——yes, and in the short-term by building room for manoeuvre under the stability and growth pact.

Chairman

Would that be run similar to a pension fund with independent trustees and investments which it would be hoped would accumulate?

Mr. Mullarkey

Yes, it would have to be put under some form of investment management. It is a question for political decision but the Pensions Commission is there and the Minister has expressed himself as being very interested in——

Chairman

Would it deal exclusively with future pension costs?

Mr. Mullarkey

Yes, either public sector or social welfare pensions.

Chairman

Would a clause be built in where some of it could be used for some unforeseen exceptional needs that might arise?

Mr. Mullarkey

No, but you would have a lot of latitude in your budget under the stability and growth pact. If in normal times you are running a surplus or a balanced budget and you have latitude of 3 per cent of GDP, that gives you a good amount of latitude. If Commissioner de Silguy is saying something new and different, obviously the Government and the Department would have to look at that.

Chairman

Is the prognosis that if present trends continue we could end up with a negative debt, in other words, we would be in surplus as a country?

Mr. Mullarkey

There are countries in that situation.

Chairman

Which ones?

Mr. Mullarkey

Luxembourg is in surplus but that is not imprudent or unduly conservative when you look at the aging problem we have. Other countries are facing into this——

Chairman

I agree with that.

Mr. Mullarkey

Aging affects not just pensions; it affects health and social welfare.

Chairman

They are prudent provisions for the future.

Mr. Mullarkey

Yes.

Chairman

I wish to turn to the State claims agency. What progress has been made on establishing that agency? It has been on the agenda for four or five years.

Mr. Mullarkey

There has been a memorandum at Government with heads of a Bill for the past few weeks. I know the idea has been around for some time. There was a Government decision in early 1997 to examine this issue. We had that confirmed with the present Government later in 1997. I appreciate that, from the outside, there may be a perception of some delay but you can take it that the file has not been idle in the meantime. There have been quite a number of issues to tease out - what the coverage of a claims agency would be and who should do it. There are a variety of options - if it were done by an existing agency, how would you ring-fence it from the other activities of the body concerned? There were questions of consultations with many Departments involved in one way or another; there was the question of funding. Should it be an insurance structure like a captive insurance company? All those things have been teased out and there is a memorandum with Government. It is public knowledge because it has appeared on the Government's legislation programme under the heading of the NTMA Amendment Bill. The proposal before Government relates to the work being done by the NTMA through a particular arrangement under that heading.

Chairman

Will this duty be assigned to the NTMA?

Mr. Mullarkey

That is the proposal. There are various options around but that is the heading under which it appears in the legislative programme.

Chairman

Can the problem be quantified? Is it correct that claims against the State for personal injuries, etc., are escalating?

Mr. Mullarkey

The coverage of this is difficult. I do not want to disappoint you on this but a dominant issue for quite some time in this area has been Army deafness. It is not seen that initially the claims agency would deal with Army deafness claims until an acceptable quantum has been arrived at through the court procedures. There would be a reluctance to assign that particular task to any agency. It will be ongoing run of the mill claims against the State together with the legal costs going with them, costs in the order of £10 million per year. There are other areas like medical indemnity, which is very specialised and handled through commercial insurance. There is a big issue about what the coverage——

Chairman

The £10 million does not include local authorities or health boards?

Mr. Mullarkey

No, they are handled by a separate existing low profile insurance company. It does not deal with medical indemnity which is a big issue in the health area.

Chairman

You mentioned £10 million.

Mr. Mullarkey

The latest estimates of the cost of new claims excluding Army hearing loss claims amount to £8.5 million per year and the legal costs could be around £2.8 million; that is more than £11 million.

Chairman

That does not include local authorities, health boards or commercial State companies who are suffering as well.

Mr. Mullarkey

They have arrangements of their own through a body called the Irish Public Bodies Mutual Insurances Limited. They are separate. Initially the coverage would not be complete. Over time, whatever claims agency structure is decided upon, the powers are in the Bill to designate other areas which could be brought under the wing of the State claims agency.

Chairman

Mr. Hamilton, what are the difficulties? This has been delayed for a long time.

Mr. Hamilton

Does the Chairman mean the difficulties with the existing system?

Chairman

What are the difficulties with the existing system and why has it taken so long to get a State claims agency up and running?

Mr. Hamilton

As the Secretary General has explained, it is essentially a proposal for which the Department is responsible. The difficulties we are trying to confront are not difficulties in the legal handling of claims which is done in the Chief State Solicitor's Office. They are difficulties in making decisions about the settlement and investigation of claims. They are essentially problems in the individual Departments. The problems as we see them are that, in the first place, there is a problem with the early reporting of claims. When an accident happens to a private individual or company, they would immediately notify their insurance company and there would be an investigation, statements would be taken and so forth. People would then be in a position to deal with a claim when it is made. That does not always happen when an accident occurs in a Department because there is no body responsible for doing that - that is one of the reasons behind the claims agency.

At the other end there can be difficulties getting decisions made about settlement. Our responsibility in the Chief State Solicitor's Office and the Attorney General's office is to give legal advice and advise on how much a claim is worth and the liability issues involved. Making the decision to settle is a matter for the Department at the end of the day. Our experience is that it has not always been easy to get those decisions, in particular there was a feeling that some claims could benefit from being settled early and approached on a commercial basis. That is also something with which we have encountered problems. Those are essentially the difficulties.

In so far as the Secretary General is concerned, there are large issues involved in this business relating to funding and insurance, how one ensures that the system is cost effective and the necessary degree of transparency for funding arrangements and so forth. I could not claim to be an expert on that. It is not a lawyer's business but the business of the Department to address those issues. However, they are complicated and difficult issues.

Chairman

A major arm of the State is being exploited - local authorities, health boards and semi-State bodies which are not included in the remit of the State at this stage.

Mr. Mullarkey

Not in compensation cases.

Chairman

Nor would it be incorporated with the £10 million figure.

Mr. Mullarkey

No, the Irish Public Bodies Mutual Insurances Limited. acts on their behalf. For the moment, they seem to be reasonably comfortable with that. I am not saying they are happy with the rate of claims, but as a method of dealing with them they seem to be happy enough.

Chairman

Is there any estimate at this stage of when the agency will be established?

Mr. Mullarkey

I would be disappointed if the legislation was not completed in the course of this year.

Chairman

The Committee is anxious about that and we hope progress is made. We note the accounts and discharge the witnesses.

The witnesses withdrew.