I ask the Comptroller and Auditor General to introduce these Votes.
National Lottery Fund - Annual Financial Statements 1994-98.
Mr. J. Hurley (Secretary General) called and examined.
Mr. Purcell
There are no paragraphs in my report on any of these Votes. I draw the committee's attention to the national lottery fund and clarify what is involved for the committee. Five years' accounts of the national lottery fund are before the committee today. The fund serves as a receptacle for moneys transmitted by An Post National Lottery Company in respect of lotto and other game proceeds sales after the deduction of agents' remuneration and small prizes. Payments are made from the fund in respect of the larger prizes and to cover the company's expenses within agreed parameters. The balance of the fund is held in a deposit account in the Central Bank and interest paid thereon forms part of the income of the fund. From time to time moneys are transferred as required to the Exchequer to enable it to put Departments in a position to pay national lottery fund grants to approved projects. The disbursements are accounted for in the normal way through the appropriation accounts of the relevant Departments. The arrangements are outlined in summary form in the notes to the more recent accounts of the national lottery fund if the Chair wants to look at them in detail.
The committee will note that at the end of 1998 the Department had a balance of £60 million available for distribution. The Department takes the view that it is prudent to keep a significant reserve to keep current and prospective liabilities in the event of a downturn in lottery income. Happily there has been no such downturn and it could be argued that the reserve is greater than it should be. As part of its monitoring role, the Department receives monthly management accounts from the company and also has access to internal audit reports of the company itself. Copies of those reports were also made available to me. I am satisfied that the Department has exercised its monitoring role in a reasonable way in recent years. Rather than going through each of the other Votes, there is nothing specific that I have to say.
First, we are sorry to keep Mr. John Hurley so long today. He will understand there is other business. He has been an accounting officer before, but this is his first time as accounting officer for a mega-Department. Perhaps he would introduce his officials.
Mr. J. Hurley
Thank you, Chairman. I understood the committee was dealing with a complicated issue and that I was likely to be delayed. With me I have Michael Errity of the Government accounting section and David Hurley, who is responsible for our accounts branch and PMGs. I also have Karen Hill from Government accounting section, Frank Griffin and Niall McSweeney from public expenditure division and Lorcan O'Toole from pay and remuneration division in case there are specific issues that crop up.
The issue before us is the finance accounts, as the Comptroller and Auditor General has said, as well as the appropriation accounts and the lottery accounts. Regarding the finance accounts, 1998 was a very significant year for the public accounts because the Exchequer moved from a deficit position to a surplus balance of approximately £750 million. This rate of improvement in the national finances has maintained and improved since. The turnaround in the Exchequer's fortunes has been underpinned by very strong performance by the economy throughout 1998 and beyond. Expansion of GDP by approximately 9% was by far the best such performance in the EU and over three times the EU average.
However, despite the rapid growth, inflation during this period remained relatively low with consumer prices increasing by just 2.4%. In terms of GNP Ireland would have grown by an average of almost 8% between 1993 and 1999 and this compares very favourably with the rest of Europe, where the average growth rate was approximately 2% per annum.
That is 8% per year over seven years?
Mr. J. Hurley
That is right.
What is the compound rate?
Mr. J. Hurley
The compound rate would not be much higher than that - I do not have the figure for the overall growth.
Somebody might get it for us.
Mr. J. Hurley
I can get that easily enough. Despite the success, problems and challenges remain. It is important that we pay attention to these and one of the problems at the moment which underlies the necessity to watch international and domestic developments is the level of inflation, which has been commented upon recently. We must keep an eye on that.
Regarding the appropriation accounts, the Comptroller has said there are no notations or paragraphs on these accounts, but nevertheless we are happy to clarify any issues members may wish to raise.
Regarding the national lottery accounts, as the Comptroller said this was set up under the 1986 Lottery Act and the Minister for Finance grants the licence for the holding of the lottery and approves the rules. One point the committee may be aware of is that the Department has initiated a two-stage competition for the licence to run the lottery and, following an advertisement in the national press in July 1999, three applicants were shortlisted to be invited to tender for the licence. These three are now being asked to participate in a separate tender process for that licence.
I will come back to the statistics regarding the lottery in a moment for some comparisons, but what annoys me is that national lottery expenditure is distinguished in the accounts from other expenditure and it is only a figment. Do you agree?
Mr. J. Hurley
It is part and parcel and is decided by Government, usually at Estimates time. It is distinguished, but it is a tabular statement set out in the back of the Estimates indicating the lottery money attributable to each Vote. An overall picture is gained of where the national lottery money is under each heading, so a lot of effort is being made to correlate those. That happened as a result of a discussion at this committee. As a result of that discussion significant improvements were made in the layout.
It did. I do not want to labour the point, but the reality is the expenditure in the allocation is decided by the Government in the same way as other revenues - the way other revenues are expended by the Government, unlike in some other countries, where a national lottery board decides where the money goes. To that extent it is just a figment and my concern is that there is a feeling out there that national lottery money does not have to be as rigorously accounted for as taxation revenue. That is my concern; do you share it?
Mr. J. Hurley
No, the Chairman will recall that after recent meetings a review group was established to look at the national lottery under the chairmanship of Niall Greene with a number of independent members. Its report was presented in 1997 and there were a number of recommendations in that report. One recommendation was that national lottery funds approved by the Government should continue to be approved by the Government rather than by an independent body. That approach was supported in the report. I take the point that it may be possible to give greater information and an attempt has been made to do that in terms of publishing compendiums of projects and so on, which I believe are on the Internet. That was the recommendation at the time and it was accepted by the Government.
Yes. I am worried about it. I am concerned to the extent that there is a fiction there in the way that national lottery funding is treated in comparison with other revenue, but there is no difference. What was the yield to the Exchequer from the national lottery last year and what is expected this year?
Mr. J. Hurley
In 1999 the surplus for the national lottery was £125.5 million. The surplus for 2000 I am not sure of, but I think it was £133 million.
There is some growth this year?
Mr. J. Hurley
Yes, there has been some growth.
Come back to the GNP and GDP——
Mr. J. Hurley
Sorry, the Chair asked for the cumulative figure, which I think was approximately 70% - it is 71.5%
Since 1993?
Mr. J. Hurley
Yes.
To the end of 1999.
Mr. J. Hurley
Yes.
Where does that leave us in terms of average per capita GDP/GNP and the European average? The figures you quoted were GDP growth figures?
Mr. J. Hurley
Yes.
Do we have other figures for GNP?
Mr. J. Hurley
I do not have the figures but I can get them.
Largely the same but a different base.
Mr. J. Hurley
There might be a 10 to 15% difference.
How does that compare? Where were we in 1993 compared to the EU average per capita income, and where were we at the end of 1999?
Mr. J. Hurley
I will have to get those figures, Chairman, but I know we have improved enormously in relation to per capita, both in GDP and GNP terms. What you mean is per capita GDP?
Yes.
Mr. J. Hurley
I will have to get those figures. I will ask someone to get them for me, they are here somewhere, but we have improved enormously under both headings. On one basis we are over 100% and on another basis we are over90%.
A recent newspaper report stated that, on a GDP basis, our per capita income was now the second highest in the EU after Luxembourg. Is that correct?
Mr. J. Hurley
I cannot answer that but it is——
We will come back to it. Perhaps someone will get those figures.
I want to ask the figures in terms of tracking over the years of the famous Maastricht criteria we were all struggling to achieve. As I understand it, we have now exceeded them. When they were set out, I have forgotten the date——
Mr. J. Hurley
The Maastricht criteria were established in the run-in to EMU. We certainly bettered the criteria. That has been replaced by a stability and growth pact and we are very much adhering to the stability and growth pact and doing better than average in terms of the requirements under the pact. We are running surpluses at the moment and at our particular stage of the economic cycle when we are in an upturn, it is suggested we would be close to balance or in surplus. We are well in surplus on a GGT basis.
One criteria you mentioned was inflation where we are getting more than a little tetchy, and we will come back to that. I want to discuss the surpluses, what is happening to them and whether they include the contingency fund provisions. There are a number of contingency funds. Will you talk to us about the contingency funds - how much is in them? There are a number of them, is that right?
Mr. J. Hurley
The main fund we are providing for is the pensions fund. At the end of this year there should be close to £5 billion in this fund and it will continue to be increased every year by 1% of GNP. This will run up to the middle of the century with no draw downs possible before 2025.
So there is £5 billion now?
Mr. J. Hurley
There should be close to that by the end of the year. I can get an exact figure. Legislation concerning investing these moneys is published and hopefully it will be passed in the autumn. The National Treasury Management Agency, under commission, will invest those funds according to a mandate.
That is separate from some of the figures I mentioned. For example, in the budget this year we were talking about a current Government surplus of something like £1,600 million. The latest figures mentioned recently by the Minister would push that by £200 million to about £1,800 million. There is likely to be some further growth in that but those figures are separate from the figures I mentioned in terms of the pensions fund.
That is already happening and we have made allowance for that contribution?
Mr. J. Hurley
Yes.
So you are talking about an £1,800 million plus surplus?
Mr. J. Hurley
Yes.
You are always conservative. Why does the Department of Finance leave itself open to criticism? We all know the figures at budget time are underestimates of the reality.
Mr. J. Hurley
I would make two points on that. The surplus or the revenue intake is very much dependent on the performance of the economy and growth. The economy has outperformed most commentators and we have usually been in the mainstream of the projections on economic growth. It has outperformed us, the ESRI, the European Commission and all the mainstream commentators. The increase in revenue essentially comes from increased growth.
There is another point in that we have to be careful. If, for example, we made an error and, let us say, the revenue did not come in by the percentage and Estimates had been determined on that basis, it could lead to a very difficult situation for Departments. It could lead to reductions over the short-term which would not be justified and which could cause very serious problems for independent agencies. We are prudent in our estimates but we do try to be realistic in terms of growth, but growth has outperformed all of us in recent years.
So you err on the side of caution.
Mr. J. Hurley
We are cautious. However, I had an experience many years ago when I was Accounting Officer for another Vote, and if one ran short of resources some very significant consequences flowed from that over the short-term. It is very important that the Department of Finance would take a prudent approach to this.
Of course, and so say all of us. However, even if the most pessimistic forecast leads to a substantial surplus the same problems arise.
Mr. J. Hurley
Except there are very few economists who would have predicted the level of growth currently pertaining in the economy. It is a very healthy economy. We have a few problems. Within a few weeks we will be bringing out an economic review - an outlook - looking at the year as a whole and we will be revising projections in that document. It is a good state at the moment but we have some problems, particularly in the area of inflation.
Any residual surplus - and that is what we are talking about, a residual surplus after contributions are made to these contingency funds - goes against the national debt.
Mr. J. Hurley
It is a matter for the Government to decide exactly how the surplus would be used. Reducing the national debt has been very important and it has been reducing. As you know it has come down very significantly.
What is it now?
Mr. J. Hurley
I can check the figure for this year but my recollection is that it is just over 50% and will be reducing to the forties this year.
What are we talking about in volume terms? Is it £29 billion or £30 billion?
Mr. J. Hurley
I think it is about £30 billion.
Do you see a strong case for getting this down considerably more? I know it isnot just a simple case of reducing the national debt. There are other issues for the future that have to be taken into account but it is still a very high figure.
Mr. J. Hurley
Yes. One of the advantages of reducing it is that if one reduces the current running costs in a shorter period of time one has more resources available to the Exchequer if one can pay off the debt and one does not have to pay interest. That is important and given that we have the resources we should try to improve on that. However, that is a critical decision.
The £30 billion is more or less where it has been for the past number of years. It has not gone down in actual nominal terms. It has gone down as a percentage because the economy has grown so strongly.
Mr. J. Hurley
That is true but it is beginning to reduce somewhat. I would have to check but as a percentage of the overall wealth of the economy it has reduced enormously from something like 120% down to——
Less than 50%.
Mr. J. Hurley
It will be less than 50% but I will have to check the exact percentage at the present time.
I thought it was already below 50%. I got the impression it might be getting below 40% shortly.
Mr. J. Hurley
No. I will get the figures, Chairman, but we would be talking about bringing it down to the mid-40s probably at the end of the year. I would have to check that.
On the contingency funds, how are these to be controlled, audited and accounted for? How do we know we are getting best performance out of these contingency funds?
Mr. J. Hurley
There will be a board of commissioners on the overall pensions arrangement. The legislation will stipulate these are people who will be familiar with investment and have a track record in this area. They will have a commercial mandate under the legislation but there are clear accountability arrangements set out in that legislation - auditing arrangements, reporting arrangements to the Oireachtas and so on. They have been catered for in the legislation.
It is a very important fund. It is a very significant commitment. It is necessary to make a commitment because of the ageing of the population. Now that we have surpluses and the resources it is a prudent thing to do. The draft legislation sets out the conditions quite clearly.
Is any consideration being given to any other contingency funds?
Mr. J. Hurley
In the medium term projections we would make, we would always have contingency provisions. However, they are not funds in the sense of money being given to a fund for investment. We also give to these funds windfall income from privatisation sales. This would be part and parcel of the £5 billion to which I referred. In addition to the 1% GNP, there is provision for this to be topped up when other resources become available.
This is something I have been advocating for several years, particularly when I was chairman of the Finance Committee. I would still like us to continue some sort of contingency plan in relation to any currency instability that might occur in future. I would encourage people to think about this if we have huge surpluses. We should also restrain spending for inflationary reasons because it is a wise long-term policy to put aside money to deal with future problems.
Mr. J. Hurley
The fact that we reduced the burden of the national debt on the economy provides flexibility for the future. Deputy Lenihan spoke about the Maastricht criteria and the stability and growth pact, the whole purpose of which is to provide flexibility for economies should downturns occur. In other words, as a cycle goes up, one has either a surplus or is close to balance and in a downturn, one actually has resources to assist the economy. That is the basis on which the stability and growth pact functions and is an inherent part of our membership of the euro.
Is it correct that under those criteria the maximum budget deficit in any year is 3%?
Mr. J. Hurley
That was under the Maastricht criteria. However, under the stability and growth pact, it is suggested that economies in an up cycle should keep their position close to balance or in surplus. We are now in surplus and I indicated the level of surplus forecast this year.
I appreciate that. However, in the case of a downturn, no matter how severe, would we be restricted to a maximum 3% budget deficit?
Mr. J. Hurley
No. The stability and growth pact talks about being close to balance or in surplus when the economy is in the present cycle. In a different situation, the reason one would do that is that one would be able to assist the economy in the case of a downturn. That would be accepted as part and parcel of the stability and growth pact.
Is Mr. Hurley saying there is no3%?
Mr. J. Hurley
No, that was the Maastricht criteria which have now been superseded by the stability and growth pact. That particular 3% was included as a yardstick for our entry to the euro. That phase is over and we are now into a new phase where we have a stability and growth pact. The conditions under the stability and growth pact are as I mentioned, that is, that we either close the balance or are in surplus at the particular stage of our economy cycle.
Chairman, you are allowed to spend your way out of a recession under this -- -
Suppose a Government in a major European country decided to over-borrow, would it cause problems for Ireland?
Mr. J. Hurley
No.
Is there no restriction?
Mr. J. Hurley
All our programmes are examined by our European partners. We must account for this regularly before the ECOFIN Council. Each country is examined. The economic performance and overall approach being taken to managing the economy is essential in the context of the euro currency. A country cannot act imprudently, it must adhere to the stability and growth pact and account for itself in accordance with that.
It is important to realise the potential damage that could be done to our economy, even in its present state, by some huge aberration on the currency front. There are no adequate provisions made here or elsewhere to provide for that possibility. This factor underlines the weakness of the euro because there is not sufficient provision made or sufficient political control.
Mr. J. Hurley
This is looked at by Ministers in Europe on a continuous basis. They are very conscious that all countries must act prudently if, in fact, the euro is to remain strong and strengthen further. They take that work very seriously. I would not want members to think there is a gap there. We must account for the policies we adopt and other countries must do likewise. We are present when the different countries are examined and they are present when this country is assessed.
Why do you think the euro is weak?
Mr. J. Hurley
That is a difficult question. The economic fundamentals in Europe are very good. Projected growth across Europe at present is in the order of 3.5%. That is a significant improvement because trend growth in Europe is about 2%. We have very strong growth in Europe and in that situation one would expect that the markets would accept and understand the fundamentals of that growth. However, the American economy is performing very well at present and is going through a remarkable period of growth. Even though it has a significant deficit on its current account, that deficit is being funded largely by a lot of investment from Japan and Europe. Some money is moving to the United States because of the strength of its economy.
Recently the American monetary authorities have been increasing interest rates to try to slow down the economy and ensure a soft landing. There were signs in the first half of this year that that tightening is having the desired result. However, we will not be sure until later in the year because there is often a slack period at the beginning of the year in the American economy, followed by a good deal of growth later. Many commentators are suggesting that the monetary policies being followed are now slowing down the American economy with the prospect of a soft landing in the United States. That is good news for Ireland because one of the significant risks for us would be a shock in the American economy. A significant deterioration there would reduce mobile investment, global demand, international trade, foreign direct investment and so on. To the extent that the American economy slows down in a controlled way would be much better for this country and for Europe in general.
I believe the fundamentals of the performance by the European economies ought to be recognised. However, at the moment the strength of the US economy is overshadowing that. The economic growth of 3.5% across Europe is——
Is that across the whole of the European Union?
Mr. J. Hurley
——the European average.
What about the euro zone?
Mr. J. Hurley
Yes, it is of that order. The euro zone countries are critical because it is the performance of these countries that affects the market perception of the euro. I believe there is strong growth in Europe, stronger than we had recently, and a good fiscal policy with a strong performance by many economies. There have been announcements in Germany of significant tax reductions to help stimulate that economy further. There is a good feeling across Europe about how the economies are performing. However, we must wait to see the outcome of the markets.
For instance, by the Bundesrat in Berlin to support the German Government's proposal? There was concern that they would not, but they did.
Mr. J. Hurley
There is a feeling in Europe that if fiscal policies can help the labour market situation, that helps economies.
The point I am leading up to is how exposed are we if, for instance, within a few months we were back on parity with the pound sterling and similarly up against the dollar, especially given our rate of inflation?
Mr. J. Hurley
The position really is that if there were significant changes in sterling and significant changes in the dollar that would affect this country because we have a good deal of trade with both the US and the UK. Unlike quite a number of other countries in Europe, it would certainly affect us.
As I mentioned earlier, it depends really on whether there is going to be a soft landing in the United States and there are encouraging signs there. In relation to sterling, we have had a benefit against sterling for quite a period of time and it would be important that, in that period when sterling is strong and the euro is weak against it, that our industries which are dependent on the UK market would not be complacent in terms of their cost. I think that is very important.
The other thing to add in all of this is that - and this is why I might come back to the inflation question - there is pressure at the present time on inflation in this economy. We know it stems from quite a number of external factors, primarily oil which has significantly increased in cost from $10 to almost $30.
That affects all the European economies and they have a lower rate of inflation than we have.
Mr. J. Hurley
It affects us significantly. There is also the weakness of the euro and excise duty placed on cigarettes for public health reasons. We must be aware of the external factors but apart from that there are domestic pressures in terms of service inflation in this economy which has been high in recent times. We have to be conscious of those. The most important thing we have to be careful about is that we do not get into a wage price spiral. We have been there before. We have to behave sensibly over the coming period because inflation is expected to drop back in the new year. In the meantime we have to behave sensibly.
Would you like to give an estimate as to what the tax concessions in the budget added to the rate of inflation this year?
Mr. J. Hurley
Recently, when asked about this situation the Minister's view was that many of the tax concessions have helped to the extent that they have brought a labour supply onto the Irish market. As you know, the unemployment situation has improved enormously and is now down to about 4.5% so to the extent that tax concessions encourage people into the workforce, they help in an overheating situation.
The figure of 4.5% is quoted and I know that is what the quarterly national household survey says but this committee is exercised and is continuing to pursue the fact that 150,000 or thereabouts get full unemployment benefit, which represents about 9% of the workforce. This is something we are puzzled about. How come, when we see so many shortages everywhere, such a high number - way above the 4.5% and disregarding those who are getting partial benefit - are getting full unemployment payment? Things are said which do not gel and this committee has to query and challenge these figures. Why do you think, and what is your Department doing about the fact that so many more are getting paid full social welfare unemployment benefit than the 4.5%?
Mr. J. Hurley
I know that this matter is constantly being monitored by the Department of Social, Community and Family Affairs and they are clearly being encouraged by the Department of Finance to do this. They have made a lot of progress on this in terms of their examination of this area and I think there is a lot more confidence in recent times that they are doing that through their various audits and so on. However, the figure I mentioned, as a measure of unemployment, is a figure that is accepted as being the level of unemployment in this economy and that is very close to a full employment situation. Quite clearly that leads to pressures, the type of pressures we have just been talking about.
I have the figures myself recently but it is instructive, given that we are talking about inflation, that we have a breakdown of the component parts of that inflation. As I understand it, the internal factors as opposed to the external factors only account for two percentage points of our current level of inflation. Would that be correct?
Mr. J. Hurley
It is difficult to distinguish between internal and external. To go down through some of the points, the oil price increase probably added about 1.25% to headline inflation. The excise duty on tobacco added about 0.75%.
That is a once-off.
Mr. J. Hurley
That is a once-off and should fall out of the index towards the end of the year. There has been a recent increase in food prices and that contributed about 0.7%, but services inflation has added over 1%. The services component increased by something like 6.7%, year on year, in June. Alcohol prices, of course, have added 0.7%.
I am missing some of your figures. The services component is how much?
Mr. J. Hurley
It added 1% overall but it increased by something like 6.7%, year on year.
We are left with the reality that, in the end of the day, the inflation rate here compared to any other euro zone country is several percentage points higher and they have the same problems about fuel imports. Let us be realistic——
Mr. J. Hurley
They are not growing at the extent of growth of this economy. This economy is growing very rapidly. The budget estimates for growth are going to be exceeded. Our revised figures will be included in the economic review which will be published shortly. We are growing very rapidly in this economy.
I mentioned earlier a growth rate across the euro area of 3.5%. My understanding - and these figures would need to be checked - is that their inflation rate is increasing. They were aiming to keep inflation to about 2% but it is likely that it could be higher than that. They are also experiencing, in recent months, inflationary pressures and this led to the ECB interest rate being increased. Because of the level of our growth which is ahead of the other European countries, inevitably there will be inflationary pressure on us which would not be on countries performing at less than half our level.
Where all the slack has been taken up, that is going to happen.
I am glad to see the Secretary General is acknowledging that we are in an overheating situation. When do you think this economy started overheating? That is important because up to about two years ago we were in denial in relation to the economy overheating. It seems now we are publicly acknowledging it.
Mr. J. Hurley
It is a fairly recent development. It is quite clear that the labour market is quite tight. It is clear that inflation is increasing, particularly service inflation for example. That can be seen by people. We also know what is happening in the housing market. You can see that in recent times there is pressure on the economy.
We should understand that the economy is performing very well.
I think everyone understands that.
Mr. J. Hurley
We have a number of problems. If we take inflation, we expect inflation to fall next year. It certainly is increasing currently and is likely to go a little higher, but it is then likely to fall next year. The excise duty will immediately fall out and were, for example, oil prices to change - there has been some encouraging news lately that maybe greater production by OPEC would take place - then that price could fall back and that would benefit us significantly. Similarly, if the euro strengthens, because it has an effect on our inflation——
Oil is paid for in dollars? Is that correct?
Mr. J. Hurley
Yes. It has an effect on our inflation and if that strengthens, it would be an added benefit to us. However, it does have the caveat we mentioned earlier, that when the euro strengthens other problems emerge. People have to compete with those countries which are not part of the euro area.
There are always problems but I think that at the moment we should look at an economy that is performing very well and try to deal with some of the emerging pressures that are there. The Government, for example, has taken action to try to deal with housing supply and housing demand. We have to wait and see whether that will work. The Government recently announced a programme in relation to reducing inflationary pressures in the economy and we have to see to what extent that will have an effect.
There have been three Bacon reports - three slices of Bacon - but, realistically, have they addressed the issue? Is supply the real question?
Mr. J. Hurley
Supply is really the fundamental question. There is major demand at the moment for housing. The number of people employed has increased very significantly so it is inevitable that we would be under pressure in that type of situation.
There is much land in public ownership, some of which is in my constituency, that I have been told for years will be sold for housing. However, it is still not sold. Regarding much of the land owned by CIE, I believe the company should get the full rate for that land. However, using that as an example, there is a huge supply problem in terms of housing. It is preventing Irish people from returning home or immigrants coming here with skills that we need.
There is a 12 acre site between Quarry Road and Carnlough Road in Cabra which I was told five years ago was about to be sold for housing. I was told a year ago that it was about to be sold for housing but it is still not sold. That is only one of many sites owned by CIE. The health boards have many sites so why are these sites not being used? Why is there not a co-ordinated approach by the State to any of its agencies that have land that is serviced or serviceable quickly which is suitable for housing to get it on to the market?
Mr. J. Hurley
A particular effort is being made on the supply situation in the recent package. Every effort is being made to do that. I promised to come back to the Chairman with two figures and I am anxious to get these right. The national debt in 1998 was £29.541 billion. It has come down from £30.689 billion. So there was a reduction there due to the Exchequer surplus and I would have expected that to continue.
In terms of percentages, I referred earlier to the fact that the general Government debt ratio was about 50%. It has fallen to 50% compared to over 120% in 1986. That is expected to fall further to probably some percentage in the forties towards the end of the year or early next year. The figures that I gave really were largely correct but I was anxious that——
They are ball park figures.
Mr. J. Hurley
Yes.
Does Mr. Hurley agree that supply is one of the crucial questions in terms of how we sustain the economic growth? Labour supply is a key question and that is very much connected with housing now because of the housing shortage.
Mr. J. Hurley
Yes. In relation to the point the Chairman mentioned about the properties, as part and parcel of the recent initiatives the Government has decided to carry out an audit of publicly owned property in the context of trying to identify land which might be used to assist with the housing supply. So all those areas are being looked at. Every single aspect of the supply issue has been analysed and the problem really is the enormous demand for houses, the fact that our labour force has increased substantially. We have quite a number of people returning from abroad. It is a problem of success but a very difficult problem to resolve. It probably will take a situation where supply and demand come into balance.
In the meantime, the Government is trying to take action both on the supply side and on the demand side to try to deal with this problem. It is an example of the issues we were talking about earlier when we talked about the signs of overheating. Undoubtedly, the house price situation is one of those signs. We have to take whatever action we can.
Do you foresee any danger in the next few years of a negative equity situation arising as happened in the UK?
Mr. J. Hurley
That will very much depend on the external factors. If there was a very significant shock to this economy, the type of shock that would come from a downturn in the United States and significant falls in equity markets, then one could see that the international trade situation would deteriorate rapidly. As we are heavily dependent on trade, it would have a significant effect on us. Similarly, foreign direct investment would be likely to reduce. It really depends on the impact of that on the economy and what would happen house prices.
Undoubtedly, the very fact that house prices are increasing, and continue to increase rapidly, is a cause for concern. In the wrong situation or conditions, and hopefully now because of what is happening in the United States in terms of the soft landing - at least the suggestion that there might be a soft landing - the risks may not be as high, but the risks are still there.
Interestingly, the Governor of the Central Bank, addressing another committee yesterday, expressed considerable concern in relation to inflation. Like the Secretary General, he referred to oil prices and service inflation. In relation to the justification that oil prices are a major contributory factor, the UK's inflation rate is approximately half the Irish rate at present. It is outside the euro zone and its pound sterling is approximately 20% stronger than euro zone currencies. It is buying oil in the international market with that currency and, through taxation and other reasons, its fuel prices are 20% higher than in Ireland. However, its inflation rate is approximately half the Irish rate.
Mr. J. Hurley
But it is not growing at anything near the levels which have been present in this economy for some time. When an economy is growing at an average of 8% a year, one really has to expect pressures. Most economies are performing at less than half or a third of that.
That is not the point. The growth of the economy has nothing to do with the price of oil and the contributory impact of the price of oil on inflation. If one takes into account the parameters that I indicated, the buying power of the pound sterling and the cost of oil to the consumer in the UK, which are two important factors, turn Mr. Hurley's argument on its head in relation to growth vis-à-vis inflation if that principle is applied.
I believe, and have done so for some time, that house prices are the real engine behind the inflation in the economy. I have said this publicly and privately for some time. For example, if house prices have doubled in five years, and in some cases more than doubled, that is bound to have an impact on inflation. Does Mr. Hurley agree?
Mr. J. Hurley
The house price problem is part of the difficulty we have.
It is more serious than that. The unions have now requested to renegotiate the pay agreement. Does Mr. Hurley agree they are being driven to do so because the agreement they reached a short time ago seems to have run into a siding as a result of inflation which has eroded its benefits? The biggest single contributory factor are house prices. An average family entering into an arrangement to buy a house now, compared to five years ago, must finance a mortgage of £150,000 for a reasonably average house compared to a mortgage of £65,000 or £70,000.
Mr. J. Hurley
There is no doubt that houses prices are a factor in the minds of the members of the various unions. There are many first time buyers among our members. The unions are currently looking at the headline rate of inflation as an increase on the figure discussed at the time the PPF was negotiated. Undoubtedly, the figure is higher than what was expected during the year. We should take the example of the last agreement. Figures were better under all headings, whether it was inflation, tax, expenditure on social welfare, etc., over the period of the agreement. We are only commencing this agreement; it does not commence until later in the year for the public service. We have a problem in relation to inflation and it is important that action is taken to deal with that. The Government has indicated that is the position. It is important that we do not make wrong decisions in terms of pay as a response to short-term questions. We must remember this is where we came from in the 1970s.
I will come to that.
Mr. J. Hurley
We came from high inflation, high unemployment and high nominal increases in pay.
Mr. Hurley said he does not wish to renegotiate and I fully accept that because it could become a question of who lives longest and who blinks first. Did Mr. Hurley receive any warnings about inflation from his colleagues in Europe over the past two years?
Mr. J. Hurley
As regards the previous point, we must avoid a wage price spiral. If that happens, much of the good work undertaken in this economy will be undermined. I get the feeling the Irish Congress of Trade Unions and the various other unions understand this. Next week there will be a discussion on this issue in Dublin Castle. I understand congress will seek a review of the agreement and Ministers will be discussing this with them next week. It is important to avoid the wage price spiral because that will undermine a lot of the good work that has been done.
That is the cause of it.
We echo that. Yesterday congress talked about non-inflationary changes.
Is it true that to do that we must address the causes of the spiral? When did Mr. Hurley first receive any communication from his colleagues in Europe about the level of inflation? I recall numerous times when various people involved in the European economic field drew the attention of the Department of Finance and the Central Bank to this issue. Yesterday the Governor of the Central Bank was before another committee and he indicated the limits within which he can now operate. He also talked about the independence of the ECB. He said it was a matter of fiscal policy. Has Mr. Hurley responded to the warnings about inflation issued by Europe over the past two years? Mr. Hurley referred to the first and second Bacon reports. To what extent did they affect the inflationary spiral which comes before the wage spiral Mr. Hurley mentioned? The inflationary spiral must be addressed.
Mr. J. Hurley
The house price issue has been with us for a period of time because of the pressures I mentioned. The Government has been taking action to try to deal with it. This is not an easy problem with which to deal. Inflation has started to move upwards only in recent times. There is an understanding in Europe that our growth levels are very high and that inevitably there would be inflationary pressures. We are responding to the inflationary pressures. The Government has taken steps and it has indicated that other steps will be taken if necessary. It is clear from what I have said that the figures should move down as we move into next year.
The problem is the Minister has also said that for the past several months but each time he has been proved wrong.
Mr. J. Hurley
Most commentators are saying it. The Central Bank figures have indicated that inflation will drop next year. The ESRI and a number of independent economic commentators have also said it. It is not just the Department of Finance.
Will growth drop as well?
Mr. J. Hurley
We expected there would be some slow down in growth because of the employment situation. As the employment reduces, one would imagine that growth would reduce, given that it is a product of labour plus productivity. However, the labour supply has been increasing and because of that growth has continued to remain high this year. We will be coming out with new figures in the next couple of weeks.
What are the parameters of the stability and growth pact vis-à-vis inflation and growth?
Mr. J. Hurley
The most important parameter is the one I mentioned earlier, namely, that we would keep our economy in balance or in surplus at this point in the cycle.
As regards inflation, the ECB is attempting to talk about a 2% guideline for inflation across the euro area. I mentioned earlier that this is coming under a lot of pressure with growth levels increasing now to 3.5%. There are inflationary tendencies not just in this country but also in other countries. However, they are greater in this country at present for the reason I mentioned. We must take sensible measures in the short-term and ensure that we do not damage the longer term progress of this economy in the knowledge that most commentators, such as the Central Bank, the ESRI and others, believe that inflation will reduce next year. Our view is in accord with those views.
On what is that based?
Mr. J. Hurley
It is based on the fact that a number of things will of necessity come out of the index. We must make assumptions in these matters. We must make assumptions about oil prices and the euro. We make the best assumptions we can. We do not have a crystal ball. However, on the basis of sensible assumptions on the data we have, we can say the inflation figure will reduce towards the end of this year and the beginning of the next year.
We would all love if the Secretary General had a crystal ball and could accurately predict where we will all land in the economy. He is correct that the general expectation is that inflation will drop, perhaps due to international factors but also due to domestic action on that front. There is a widespread assumption that inflation equals evil whereas, as the Secretary General pointed out, it is wage price spirals that are evil rather than inflation in itself. Rising inflation has the knock-on effect of slowing down an economy that may have been overheated and allowing it settle.
Mr. J. Hurley
The real problem is the response to this. If we get into a wage price spiral - and I am heartened by quite a number of the responses - there is an understanding on the trade union side that that is a real difficulty. We have to avoid that and take the measures announced by the Government, and other measures which the Government has indicated it is open to in the budget. However, as I said, all the indications at the moment are that inflation will move up a little further and will then move back.
This committee does not get into policy issues and that sort of thing. However, we are concerned about the national accounts and ensuring the appropriate administrative arrangements are in place to continue our prosperity to the maximum extent possible. The real dilemma is how to share the increasing new found wealth with the population at large without further fuelling demand and, therefore, inflation. Is that not really the question? Ministers and Governments have given tax reductions over the past number of years which did not fuel inflation until this year. We have obviously reached the point of all the slack being taken up in the economy. If my theory is right, does not that pose a challenge for us to find new ways to share the wealth without fuelling demand?
Mr. J. Hurley
The position of the Government at the moment is that is has to honour the terms of the PPF, which include the tax concessions which have been agreed because the overall package was predicated on a tax/pay figure. The second aspect is Government expenditure which is very important is the NDP. That deals with investment in infrastructure and it is quite clear there are infrastructural problems at present. We have a number of policies that must be pursued and there are undoubted risks.
My question is whether any consideration is being given to meeting the tax reduction commitments, which are rightly part and parcel of the agreement, in a way that does not involve fuelling demand. Is anything being done about increasing the savings ratio, encouraging savings rather than spending? Is any consideration being given to tax concessions for shares rather than money into the hand? Are these not the sorts of issues that should be addressed to see if there are other ways of sharing the wealth without fuelling inflation?
Mr. J. Hurley
We will have to wait to see what emerges from next week's meeting. We were talking earlier about the pensions fund, for which lots of money is being put aside. The savings ratio is significant in this country in comparison to some other countries. However, in regard to your overall point, I think we must await the outcome of the discussions which will clearly take place next week. It is very important, in terms of managing the economy going forward, that prudent measures are taken on a short-term basis and that we do not take actions which would cause long-term damage to the economy.
To return to what I said earlier, we all know where we came from and the action that had to be taken to turn the economy around. There was 20% unemployment and 20% inflation. There was a similar increase in pay but there was no real benefit to individuals. That is where we have come from. There are now very real increases in incomes and our unemployment has reduced enormously. Many of the people who had to leave the country in the years I referred to are coming home.
It is very important that whatever action is taken now is very prudent. The Government is taking action on the inflationary front. As I said, it is expected by all commentators, not just the Department of Finance, that this level of inflation will temper in the new year.
Is it not the case that the wage inflation in the economy is really caused, in one key respect, by corporate profitability? The reduction in the tax burden on the corporate sector means it is an employees market, in terms of jobs. The labour market intervention will be crucial here.
I think we should look at Vote 12 itself. The Secretary General has been batting away like a Minister for the past half hour on inflation and other matters. I am intrigued and amused that our Secret Service fund was estimated at £745,000 this year and actually gave a surplus back to the Exchequer as it only spent £327,000. Is this another sign of the wonderful things being done in Government, that we no longer even need the Secret Service and that it has become superbly efficient and is now returning money to the Exchequer?
The ending of the Cold War has led to a reduction in its activity.
What is happening out there?
There is a tradition that we do not ask questions.
Mr. J. Hurley
There was an increase in the Secret Service fund a few years ago because there was a possibility that a Supplementary Estimate might be required. We have tried historically to avoid a Supplementary Estimate for the Secret Service Vote because that would negate the whole purpose of the Vote. For that reason, there was an increase in the funding available to the Secret Service and, as a result, there is a higher level of saving than there might otherwise be. It is for a good reason.
Our democracy is safe.
I have no questions on the account, except a question I asked last year - the Secretary General is the accounting officer for the Office of the President but has no control over expenditure there. Is that right?
Mr. J. Hurley
I am accounting officer for the expenditure in the Vote. Some of the expenditure comes from central funds and from other sources. However, I am the accounting officer for the voted expenditure in the Appropriation Accounts for the President. Of course, that is not the entire expenditure.
But the Secretary General has no real control over it.
Mr. J. Hurley
Expenditure under the various subheads of the Vote would have to be in accordance with the various approvals given by the Department in terms of staff, travelling expenses, salary levels and so on. There are quite a number of controls in those areas and they form the bulk of that Vote.
Why should the Secretary to the President not be the accounting officer for the Vote?
Mr. J. Hurley
I think there is an issue as to who should be the accounting officer for the Vote of the President. Anyone of a number of people could be the accounting officer for that Vote. However, traditionally it has been with the Department of Finance and I have not seen many takers for it.
Are there some constitutional problems with the President being accountable to Parliament?
Mr. Hurley
I could supply you with a note on it.
Thank you. This is the very last item on the agenda for this year. Votes 1, 4, 6, 7 and 12, the contingency fund deposit account, the finance accounts of 1998 for the Department of Finance are hereby noted. The national lottery fund, annual financial statements, 1994-98, are hereby noted. The witnesses are discharged.
Is this the Secretary General's first time before the committee?
It is his first time as Accounting Officer, but he has been here several times before.
I know that. I just wanted to congratulate him on his elevation.
He was here previously as Secretary General of the Department of Health.
The witnesses withdrew.
The next meeting of the committee is currently scheduled for 21 September. There may be meetings earlier in September, but as of now we are adjourning until 21 September when the agenda will include Beaumont Hospital, annual financial statements 1995-98, and the National Roads Authority, annual financial statements 1996 resumed, and 1997.
The Committee adjourned at 2.01 p.m.