I thank the committee for giving me the opportunity to make an opening statement. I wish to refer to the headings listed on the agenda today. While there was an underspend on the President's Establishment, all the needs of that office were met. The bigger expenditures are in other Votes, mainly the OPW and the security area. Significant funds have been invested in the past few years in maintenance renewal of the facilities at the OPW, which have been done to a very high standard. The Comptroller and Auditor General has commented on the outturn of the Minister's office, in which savings rose for a number of headings. We can go into them later if necessary.
The net outturn on the superannuation Vote 7 was about €40 million less than originally provided. There has been a pattern of over-provision in recent years. The provisions under this heading are somewhat uncertain because there are different issues such as longevity and the proportion of people over 60 that may retire. There is a cohort of about 2,500 that could apply at any time. In fact, about 600 to 800 people retire every year. My preference is to see the Estimates under that heading much more closely related to actual requirements. That has been addressed in the current year. The original Estimate presented for 2007 was a bit too tight and we will propose its revision in the Estimates coming out next week.
It would be useful for the committee and the public to note some overall facts on pensions which do not pertain to the Vote, but arise in that context. About 14,000 Civil Service pensioners are paid from the Vote, but there are 75,000 further pensioners right across the public service, such as retired gardaí, teachers, Army members and so on. Therefore, there are already about 90,000 pensioners on the Exchequer payroll, with a bill close to €2 billion. That bill is set to double in real terms over the next 20 years, before any real increase in pay. That is because of the expansion in the public service in the 1970s, 1980s and early 1990s. The number of pensioners coming through will increase dramatically.
A number of initiatives were taken following the report of the Commission on Public Service Pensions to address some of those costs in the long term. One of the main initiatives was that the minimum pension age would be 65 for new entrants in the public service from 2004. At present it is 60 years but a staff member may continue until 65, which is the maximum pension age. That change was achieved after negotiation and consultation with the public service unions. In addition, there are approximately 400,000 people of pension age on the books of the Department of Social and Family Affairs, either through the non-contributory or contributory schemes. The gross cost of their pensions is close to €3 billion.
Looking to the future, in what is a major strategic issue with regard to public services and society as a whole, the number of persons over 65 in the population will increase dramatically — from approximately 500,000 now to approximately 800,000 in 20 years, and will be well over 1 million by 2050. This will have serious implications for social welfare pensions in particular and for the health services.
The National Pensions Reserve Fund, which the Government established some years ago in anticipation of this demographic bulge, contains approximately €19 billion and is increasing at a rate of 1% of GNP in contributions annually, plus earnings on investments. It will meet part of the bill associated with the costs arising from the significant expansion in the elderly population.
The Comptroller and Auditor General has dealt adequately with the Secret Service Vote, including summarising the key points of the financial outturn. Traditionally, Votes as a whole are not so tightly drawn that every one must come back to the House for a Supplementary Estimate. A margin is included to cope with the unexpected. Invariably, there is some underspend at the end of the year. The margin is 3% overall or closer to 2% if one takes account of the capital carryover to which the Comptroller and Auditor General referred.
On the contingency fund deposit account, close to €1.2 million is available, which has not been drawn on since the fund was put in place. The committee will recall from previous contact between it and the Department that the purpose of the fund is to meet urgent or pressing issues that might arise when the Dáil is not sitting and which are not specifically provided for in individual Votes. They must be of a non-controversial category and the Department and the Minister for Finance must be satisfied that the House would approve them in due course, when a Supplementary Estimate is brought before it. Both the Minister for Finance and myself would have to approve the use of this fund. When a decision is made to do so, it is standing practice that the Chairman of this committee and the Opposition finance spokesmen in the House are notified that it will be used.
The finance accounts cover a wide range of headings, and I will refer to the tax revenue heading. The original forecast was that tax receipts would grow by approximately 5.5% over 2004 and net borrowing would be approximately €3 billion in 2005. The outturn for tax receipts was a total of approximately €39 billion, which was an increase of 10.3% or €1.75 billion more than forecast. The net borrowing for the year turned out to be €500 million, which was an improvement of €2.5 billion on the original forecast. There are other miscellaneous receipts and the underspending to which I referred would account for the balance.
Turning to the basis of the forecasts, they are initially prepared by the Department of Finance on the basis of estimates prepared by the Revenue Commissioners, who largely operate based on the pattern in the current year and taking account of the Department of Finance forecasts for the economy and the various elements in that regard. There is a wide range of variable factors feeding into the forecasts.
Comments have been made inside and outside the House with regard to the conservative nature of the forecasting record. We would prefer to regard it as realistic forecasting but it is understandably cautious given that forecasts are inevitably fraught with difficulty as there are so many uncertainties and variables. The "big four" taxes — VAT, income tax, corporation tax and excise duties — account for almost 87% of total taxes and track movements in the economy. When the economy is doing well, there will usually be a surplus above the forecast and vice versa. The most significant reason for the difference in recent years has been exceptionally strong growth in capital taxes and stamp duty. This reflects, among other things, very strong growth in the property market, both in terms of throughput and value, which have both escalated strongly in recent years. However, we have not planned, nor would it be prudent to do so, decisions on the public finances based on an assumption that these receipts will continue to grow in line with growth experienced in the recent past. This is a prudent and sensible approach, which has been endorsed by the external scrutineers of the IMF and other commentators.
I emphasise there is no deliberate under-projecting of taxes to put downward pressure on expenditure or for any other reason. Since 2001, total voted expenditure has grown by an average of 10% per year. Historically, there have been years when tax receipts were significantly short of the forecasts and, to note two recent instances — there are others — in 2001, the tax outturn was some €2.5 billion less than the original projection, and in 2002, the shortfall was €1 billion. The shortfalls in those years were of particular concern to the committee at the time.
Notwithstanding this, the Department aims to provide the best forecasts it can to assist the Minister and the Government with regard to the economy and tax in order to facilitate the Government's decision-making. Due to the pattern which has emerged in recent years, which is one of significant surpluses in tax revenue beyond those expected, we have set up a group, chaired by a Central Bank economist and involving participation with the ESRI and the European Commission, which has a particular expertise in cross-euro zone forecasting. That group is conducting a root and branch assessment of our approach to tax forecasting methodology. In the middle of the year, I would hope to receive the recommendations of the group, which we will take into account. Even allowing that the group may identify improvements in approach, this will never be an exact science — a forecast is a forecast, not a firm prediction on which one can bet one's money. There will always be variables.
I will conclude by dealing with two items that pertain to the Department's activities and which are not referred to on today's agenda, namely, the public construction contracts approach and changes in the Estimates presentations to the House. The traditional approach to construction in the public sector has three principal drawbacks. First, the consultants, including architects, quantity surveyors, engineers and so on, were remunerated on the basis of a percentage of the total contract cost. In the case of a contract initially costed at €20 million but ultimately running to €30 million, for example, the consultants would receive the agreed percentage of 10% of €30 million rather than 10% of €20 million. This arrangement did not incentivise external facilitators in project management. Under the new approach, consultants will bid for contracts that have a far greater fixed price element than was the case heretofore.
The second disadvantage of the existing system is that contracts have, on occasion, gone to the market with underdeveloped scoping of the work specifications. In such cases additional requirements must be picked up as the contract progresses, which may lead to increased costs. The fixed price element of contracts will mean the instructing client must be meticulous in going through every facet of a contract and specify exactly what the builder is expected to deliver.
The third drawback of the traditional process is that the contracts are open-ended as far as the builder is concerned. The successful bidder is at the starting point to the end zone. Specifications might subsequently change, as might wages, material costs and so on. The initial contract price is only the starting price and major efforts are put into maximising additions to it. The builder has no incentive to deliver the project within budget or a particular timeframe. The longer it continues, the more the builder will make.
Under the new arrangements, a builder will bid to a greater degree for fixed priced contracts. The client will specify what is required and the builder must make provision in the contract price for future anticipated price changes. The contract will not be totally fixed but as fixed as possible. This means the builder will be incentivised to deliver ahead of budget and maximise the speed of delivery, while ensuring quality. There will be an incentive to avoid cost increases because a project not delivered on time and within budget will not remunerate the builder. The client and the taxpayer will enjoy the benefit of far greater certainty in project costs and delivery, while the builder will be incentivised to ensure a more efficient timescale and cost basis. That is the practice in the private sector.
We have had ongoing contact with representatives of the building industry in recent years to negotiate the introduction of these new arrangements. Although there was not total consensus within the industry, most of the issues have been resolved and we are pressing ahead with implementation. From next Monday, contracts going to the market will be awarded under the new contractual arrangements. However, it will take some time for the process to feed through because many ongoing contracts were agreed under the old regime.
The first phase of budgetary and Estimates reform was implemented last autumn when the economic review and outlook was replaced with the new annual pre-budget outlook. The economic review and outlook was of limited usefulness because, despite its title, it contained no outlook data but simply reviewed what happened in the preceding year. The new pre-budget outlook will review the performance of the budget and the economy in the preceding year but will also present a forecast for the following two years. This will facilitate the committees of the House, the Government and the public in anticipating developments on the budgetary and economic front into the future.
Another element of the reform process is the effort to make presentations to committees of the House more meaningful. The Estimates for the public service are an impressive collection of financial information. However, this information is limited, as it does not tell Members and the public what is delivered for the funding allocated. Under the new approach, each Minister will present to the relevant select committee an analysis of the output to be delivered for the year by the resources the taxpayer is being asked to approve via the Oireachtas. The following year, he or she must present an output statement outlining what was delivered as against the planned expenditure for that year. This new process will make the Estimates process far more meaningful both for the committees of the House and the public.
For the moment, this new approach will not give rise to any changes in the content of the Estimates. In time, however, as we gain experience of the output statements, there will have to be a fundamental review of the Estimates presentation. They are currently structured as a series of expense headings, many of which are not related to programmes. This imparts little information other than indicating that a particular programme cost X last year and will cost Y next year. We will examine how the nature and content of these presentations might be enhanced. Any changes we contemplate in this regard, after the Government has considered them, would be brought to the attention of the committee in the traditional way.