COMMITTEE OF PUBLIC ACCOUNTS debate -
Thursday, 21 Feb 2008

2006 Annual Report of the Comptroller and Auditor General and Appropriation Accounts.

Vote 1 — President’s Establishment.

Vote 6 — Office of the Minister for Finance.

Vote 7 — Superannuation and Retired Allowances.

Vote 12 — Secret Service.

Chapter 1.1 — Financial Outturn.

Chapter 1.2 — Exceptions to General Procedures in Public Procurement.

Chapter 1.3 — Agency Services.

Chapter 2.1 — Forecasting of Tax Receipts.

Mr. David Doyle, (Secretary General, Department of Finance) called and examined.

Vice Chairman (Deputy Brendan Kenneally)

Witnesses should be aware that they do not enjoy absolute privilege. As and from 2 August 1998, section 10 of the Committees of the Houses of the Oireachtas (Compellability, Privileges and Immunities of Witnesses) Act 1997 grants certain rights to persons identified in the course of the committee's proceedings. These rights include: the right to give evidence; the right to produce or send documents to the committee; the right to appear before the committee, either in person or through a representative; the right to make a written and oral submission; the right to request the committee to direct the attendance of witnesses and the production of documents; and the right to cross-examine witnesses. For the most part, these rights may be exercised only with the consent of the committee. Persons invited to appear before the committee are made aware of these rights and any persons identified in the course of proceedings who are not present may have to be made aware of them and provided with the transcript of the relevant part of the committee's proceedings if the committee considers it appropriate in the interests of justice.

Notwithstanding this provision in legislation, I remind members of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the House, or an official, either by name or in such a way as to make him or her identifiable. Members are also reminded of the provisions within Standing Order 158 that the committee shall refrain from inquiring into the merits of a policy or policies of the Government or a Minister of the Government or the merits of the objectives of such policies.

I welcome Mr. David Doyle, Secretary General of the Department of Finance, and ask him to introduce his officials.

Mr. David Doyle

I am accompanied by Mr. Jim Duffy, assistant secretary, Mr. Patrick Brennan from our Tullamore office, Ms Ann Nolan, assistant secretary in the sectoral policy division, and Mr. John McCarthy, a senior economist on secondment from the Central Bank.

Vice Chairman

I ask Mr. Purcell to introduce Votes 1, 6, 7 and 12, Chapters 1.1 to 1.3 and Chapter 2.1 of the Annual Report of the Comptroller and Auditor General, Finance Accounts 2006, and the relevant sections of Value for Money Report 56.

Chapters 1.1 to 1.3 and 2.1 of the Comptroller and Auditor General's report read:

1.1 Financial Outturn

The publication Audited Appropriation Accounts 2006 (Prn.A7/1594) includes a summary which shows the amount to be surrendered as €878.15m. This is arrived at as shown in Table 1.

Table 1 Outturn for the year 2006

	€000	€000	€000
Estimated Gross Expenditure
Original Estimates	43,732,023
Supplementary Estimates	480,571
Deferred Surrender 2005	289,268	44,501,862
Deduct: -
Estimated Appropriations-in-Aid
Original Estimates	3,998,524
Supplementary Estimates	24,915	4,023,439
Estimated Net Expenditure			40,478,423
Actual Gross Expenditure		43,479,793
Deduct: -
Actual Appropriations-in-Aid		4,038,661
Net Expenditure			39,441,132
Surplus for the Year			1,037,291
Deferred Surrender 2006			159,135
Amount to be Surrendered			€878,156

The amount to be surrendered represents 2.17% of Estimated Net Expenditure as compared with 2.12% in 2005.

Extra Exchequer Receipts

Extra Receipts payable to the Exchequer as recorded in the Appropriation Accounts amounted to €393,249.

Surrender of Balances of 2005 Votes

The balances due to be surrendered out of Votes for Public Services for the year ended 31 December 2005 amounted to €775m. I hereby certify that these balances have been duly surrendered.

Stock and Store Accounts

The stock and store accounts of the Departments have been examined with generally satisfactory results.

1.2 Exceptions to General Procedures in Public Procurement

A significant proportion of day-to-day Government spending is accounted for by procurement of goods and services by Departments, Offices and Agencies. These activities are governed by EU and national legal and regulatory requirements. Practical guidance on the application of these norms is found in circulars and correspondence relating to ethical considerations, good governance and procurement best practice. In addition, an eTenders website is available to facilitate Departments and Offices in the application of these rules.

The most important source of guidance is Public Procurement Guidelines – Competitive Process, issued in 2004 by the Department of Finance which updated and replaced earlier 1994 guidelines.

The guidance emphasises the need for the public procurement function to be discharged honestly, fairly, and in a manner that secures best value for public money. Contracting authorities must be cost effective and efficient in the use of resources while upholding the highest standards of probity and integrity. Management in Government Departments and Offices is expected to ensure that there is an appropriate focus on good practice in purchasing and, where there is a significant procurement function, that procedures are in place to ensure compliance with all relevant rules.

In general, a competitive process carried out in an open, objective and transparent manner can achieve best value for money in public procurement and comply with the principles set out in the EU Treaty and EU Directives on public procurement. EU Directives set thresholds and describe the circumstances in which different types of competitive processes should be used in Public Procurement.

The Guidance states, "It is a basic principle of public procurement that a competitive process should be used unless there are justifiably exceptional circumstances. The type of competitive process can vary depending on the size and characteristics of the contract to be awarded and the nature of the contracting authority."

For contracts or purchases below EU threshold values and not part of a "draw down" or framework contract, less formal procedures may be appropriate as follows

Supplies or services less than €5,000in value might be purchased on the basis of verbal quotes from one or more competitive suppliers

Supplies or services contracts between €5,000 and to €50,000in value might be awarded on the basis of responses to specifications sent by fax or email to at least three suppliers or service providers.

The values and procedures may be adapted as appropriate to suit the type of contracting authority and the nature and scale of the project. Reasons for procedures adopted, including procedures where a competitive process was not deemed appropriate, should be clearly recorded. All contract award procedures should include a verifiable audit trail.

Department of Finance Circular 40/02

Department of Finance Circular 40/02 provided for revised procedures to be applied, from January 2003, in the Central Government sector where it is proposed to award contracts which exceed €25,000 in value (exclusive of VAT) without a competitive process. Prior to 2003, exceptions to the general rule requiring a competitive process were examined by a committee comprising representatives of the Department of Finance and major purchasing Departments e.g. Office of Public Works. This committee is known as the Government Contracts Committee. Under the new arrangements proposed contracts exceeding the limit which were not subject to a competitive process were required to be reviewed within the Departments/Offices by the Internal Audit or by an appropriate senior officer who was not part of the procurement process. A supplement to the Circular, providing guidance for officers reviewing proposed contract awards, was issued by the Government Contracts Committee in July 2003.

The Circular also provides that

Accounting Officers should complete and submit an Annual Return in respect of such contracts to the Comptroller and Auditor General by 31 March of the following year. The returns should give details of the subject or purpose of the contract, its value and the reasons for not having a competitive process. A copy of the return is to be sent to the National Public Procurement Policy Unit of the Department of Finance at the same time.

Each Department/Office should maintain an up-to-date central register of such exceptional purchases and contracts.

Each Department/Office should designate a Procurement Officer to collate the information on these contracts and to be a contact point with the Government Contracts Committee. The earlier 1994 Guidelines provided that the Procurement Officer would "ensure that all matters related to procurement of works, supplies and services and the disposal of property and equipment are in accordance with legal and administrative requirements".

Interestingly, the Health Service Executive, which is funded by a separate Vote, is not required to submit an annual return to me of contracts exceeding €25,000 that were not subject to a competitive process even though that body is one of the major State purchasers of supplies and services. However, the Department of Finance has recently informed me of its intention to apply this requirement to the HSE for the future.

Audit Findings

As required by the Circular, all 35 Departments and Offices submitted returns to me in respect of 2006. In 11 cases, the Departments or Offices indicated that they had not entered into any contract greater than €25,000 without having a competitive process. The returns from the remaining 24 Departments and Offices showed that they had concluded 195 such contracts to a total value of more than €44m without recourse to competitive tendering.

Over 40% of this value is accounted for by 5 contracts concluded by the Department of Defence in respect of purchases associated with its fleet of aircraft –€18.9m. Operational confidence, reliability and safety as well as the proprietary nature of the goods and services involved are at the core of the inability of the Department to use a competitive process for these purchases.

In another case, the Department of Education and Science indicated it had entered into a contract with a benefactor who had offered to transfer to the parish involved a 5.2 acre site and to design and build a new 16-classroom school at a fixed cost of €4.02m. As part of the proposal, ownership of the existing school site would transfer to the benefactor. The estimated cost of building the school was €10m. The Department correctly sought alternative proposals for the provision of the school through the Government's eTenders Website prior to accepting the offer.

Table 2 shows by Department the value of the remaining contracts disclosed in the departmental returns.

Table 2 Value of Contracts awarded by Departments/Offices Reported under Circular 40/02

Department/Office	Cases	€m
Garda Síochána	52	5.761
Revenue	23	2.933
Office of Public Works	22	2.753
Transport	6	1.646
Justice Equality and Law Reform	8	1.513
Enterprise, Trade and Employment	16	1.219
Communications, Marine and Natural Resources	17	1.435
Agriculture and Food	4	0.768
Social and Family Affairs	8	0.761
Environment, Heritage and Local Government	7	0.519
Defence	5	0.278
Other (including the Department of Education and Science)	24	2.157
Total	192	€21.743m

Table 3 sets out the main reasons given in the returns why competitive processes were not used in placing these contracts. While the reasons given were sometimes complex and uninformative, I have attempted to place them in categories which best give an understanding of the underlying circumstances in which the contracts were concluded.

Table 3 Reasons Cited for Departure from Use of Competitive Process

Reason	Number of Cases	Value of Contracts €m
Proprietary Goods	73	9.604
Only Suitable Supplier	32	3.308
Expert /Recent Experience	31	3.739
Extension/Rollover of Contract	15	1.209
Security Considerations	15	2.342
Urgency	15	0.855
Other	11	0.686
Total	192	€21.743m

Issues Arising

The opt out of the competitive process, provided for in Circular 40/02, is designed to be a refuge of last resort, where compliance with the guidance set out in the Public Procurement Guidelines – Competitive Process, would be disadvantageous for Departments or Offices in carrying out their functions in the most effective and efficient manner. It is clear that circumstances arise where it is necessary to resort to procurement by non-competitive processes for reasons of urgency, security or genuine lack of suitable providers of goods or services. However, it is incumbent on the Departments and Offices to ensure that they have in place processes to identify in a timely manner their procurement needs so as to avoid resorting to urgent purchases. Equally, it is important that they avoid identifying their needs by reference to brand products. Specifications should, where possible, be described in generic terms so as to encourage real competition which should lead to better prices, quality and innovative offerings from the market. While the results of many procurements may be the purchase of brand products or services, the procurement process should be characterised by efforts to ensure that “brand capture” does not result in future streams of payments over which Departments and Offices have little or no control.

While it is important that Departments and Offices have sufficient flexibility to carry out their functions, the risk posed by inappropriate use of the discretion exceptionally allowed in the guidance can best be countered by ensuring that there is a properly functioning and independent a priori evaluation of proposed procurements which do not meet the competition norms.

My review indicated that, in general, Departments and Offices comply with the requirement to review proposals to enter into contracts without a competitive process and to maintain central registers of such contracts. There were a number of instances where this compliance was of an informal or random nature.

Proprietary Goods

Generally speaking, purchases in this category comprise named products or exclusive services. In some instances these procurements include maintenance of previously acquired goods or services, upgrades, additional purchases, etc. This accords with EU Directive 2004/18/EC which allows contracting authorities to award public contracts by a negotiated procedure when, for technical or artistic reasons, or for reasons connected with the protection of exclusive rights, the contract may be awarded only to a particular economic operator. Procurement of so-called proprietary goods arises when specific branded goods are selected to meet a need. It can also arise when there is a desire to restrict the number of different products in use for simplicity of maintenance, carriage of spares etc. It is clear that the advantages of a competitive process cannot be achieved where Departments and Offices specify proprietary goods as this may result in a risk to achieving value for money. Of the 73 instances contained in the departmental returns, 44 were in respect of purchases by the Garda Síochána to a value of €5.292m. These consisted overwhelmingly of additions to or support for Garda computer and communications systems. The proprietary goods purchased by other Departments were also predominantly IT related.

These results confirm the importance of considering whole life costs and in particular the cost of future additions when planning all IT procurements.

Only Suitable Supplier and Expert or Recent Experience

These categories include both procurements where there is only one suitable supplier and procurements where Departments and Offices have previously used the services of individuals or firms in the recent past or have identified, without recourse to competitive processes, persons or firms whose expertise coincides with their requirements. The latter cases do not imply that is there is not a suitable alternative to the supplier selected.

This group includes procurements where, on the face of it, there is a self-evident case for the choice made. For example, the Department of Social and Family Affairs entered into a contract estimated to cost between €200,000 and €340,000 with the Northern Ireland provider of Smartcards as part of the All Ireland Free Travel Scheme to enable pensioners to avail of free travel in the North. Another example was the purchase by the Revenue Commissioners of three Drug Detection Dogs and the training of their handlers at a total cost of €50,674.

However, notwithstanding these examples, failure to go to the market on a regular basis may limit the market with the inherent risk of reducing the possibility of achieving value for money in these purchases.

Extension/Rollover Contracts

A number of the arrangements which were extended or rolled over during 2006 had been in place for several years. Justifications put forward for continuing the arrangements included

Experience gained from prior involvement

Contractor best placed to provide for requirements without undue extra cost to the Exchequer

Not possible to go to the market due to staffing difficulties

Service provided suited needs in the past.

One third of the value of this category is accounted for by a contract rolled over by the Department of Agriculture and Food. The Department was required to take over the storage of sugar following the restructuring of the sugar market in 2006 and took the view that it was the intention of the regulations that the existing Irish Sugar Ltd. storage contract with the firm in question be continued by the Department and that this was the prudent and most cost effective way of dealing with the issue. The cost in 2006 was €381,000.

Almost all of the contracts in this category are for the provision of services.

The key risk that arises in this category is that failure to test the market on a regular basis may lead to poor value for money being achieved.

Urgency

Significant examples of urgency were the temporary recruitment by the Departments of Agriculture and Food and Community, Rural and Gaeltacht Affairs of a project manager and a business administrator, respectively, arising from the unexpected resignation of their predecessors. The costs were €132,000 and €109,000.

While there can be ample justification for using urgency as a reason for not using a competitive process in some engagements, there is an absolute necessity for independent reviewers to ascertain the underlying circumstances giving rise to the urgent need for procurement and to confirm whether alternative planning arrangements would have obviated the need to resort to non-competitive processes in similar situations.

Exceptional Circumstances

Two returns illustrated unusual circumstances where specific technical or operational skills/knowledge were required and tenders were not sought.

Following a decision by Enterprise Ireland (EI) to disengage from the provision of certain services to the Irish Offshore Sector, the Department of Communications, Marine and Natural Resources concluded a contract without a competitive process with a company, the principal of which had been engaged in the particular line of work with EI as an employee prior to its disengagement. He took a career break from EI to set up and head the company. The estimated value of the contract, spanning five years from 2004 is €500,000.

The Director of Public Prosecutions had an urgent need to review the manner in which internal management control procedures in the Office had operated arising from a decision in a particular case having taken longer than acceptable to issue. The Director engaged the Chairman of the Office's Audit Committee without competitive tender to undertake this review as his skill set was considered to uniquely qualify him to undertake this review expeditiously. In addition to his wide experience of organisational processes, he also was considered to have a detailed knowledge of the Office and its management control procedures from his role as Chairman of the Audit Committee. The contract cost €28,000.

Although exceptional circumstances came into play in both cases, the way in which the difficulties were addressed was less than ideal.

1.3 Agency Services

The Office of Public Works (OPW) acts as agent for other Departments and Offices in the purchase of sites and buildings, the procurement and management of construction type contracts, and the maintenance of public buildings. Public Financial Procedures (PFP) provide that OPW requests advances from any Department or Office (as principal) prior to entering into contracts or meeting any costs. The costs are charged to a Department’s Appropriation Account when the amounts involved have been certified by OPW as having been duly disbursed by it. Where it may be some time after the end of the financial year before OPW can determine the precise amounts disbursed, a Department may, in order to close its Appropriation Accounts on 31 December, charge an agreed estimated amount in respect of agency services.

If expenditure is not significant OPW as agent may make payments in respect of the service from its own voted moneys on a suspense basis. OPW should secure recoupment from the Department concerned within the year in which the payments have been made.

These rules derive from the cash based accounting system statutorily used by Government Departments and Offices under which Dáil Éireann annually votes the sums to be made available for each service. Under this system, amounts not spent in any year are required to be surrendered to the Exchequer. Each year, I confirm that the amounts for surrender recorded in the Appropriation Accounts for the previous year have been duly surrendered.

Audit Examination

The Appropriation Account for Vote 10 – Office of Public Works shows in its Statement of Assets and Liabilities, net credit balances in suspense accounts amounting to more than €48m at 31 December 2006. This amount consists primarily of unspent balances (mostly advances) from clients totalling €62m, partly offset by amounts due from them totalling €14m for agency services provided without prepayment. The Appropriation Accounts of Departments and Offices that made advances to OPW should reflect, in their Statements of Assets and Liabilities, corresponding debit balances.

As part of my audit of the 2006 Appropriation Accounts, I selected for examination a sample of the significant credit balances recorded by OPW. Examination of the underlying transactions in this sample indicated that the amounts shown in the suspense accounts of Departments/Offices providing the advances did not agree with the corresponding amounts shown in the OPW suspense accounts.

Table 4 Comparison of OPW and Departmental Suspense Account Balances 31 December 2006

Department/Office	OPW Credit Balances €m	Departmental Debit Balances€m
Department of Education and Science	31.969	nil
Department of Finance	3.193	nil
Department of the Environment, Heritage and Local Government	2.325	1.340
Office of the Revenue Commissioners	1.207	0.783
Department of Agriculture and Food	1.619	nil

In the light of the variations between these balances, I sought the views of the Accounting Officers concerned.

I also asked them to outline the procedures in place to ensure that the appropriate expenditure was charged to their respective Appropriation Accounts at the proper time.

Department of Education and Science

The Accounting Officer, Department of Education and Science said OPW acted as agent for the Department in the sourcing and purchasing of sites for schools, management of the asbestos remediation programme in schools and the provision, maintenance and furnishing of its office premises network. For many years, the Department charged amounts advanced to OPW for these services directly to the Appropriation Account. The Department was unaware that it was in breach of prescribed procedures. Its payments to OPW in respect of the site acquisition and asbestos remediation programmes were made in respect of multi-annual rolling programmes of work. The Department complied with requests from OPW for payment prior to work commencing and charged these payments to the Vote subheads rather than to suspense as required. It also believed that building and remedial work were fixed sum contracts and as such did not anticipate there would be credit balances remaining in OPW suspense accounts.

She informed me that while the Department received and examined annual statements for site acquisition and asbestos remedial work it did not in other cases obtain annual certificates of expenditure from OPW. The Department and OPW liaise regularly on the management of the Department's site acquisition programme and OPW supplies the Department with monthly progress reports. In regard to the office premises the Department liaises with both the OPW architect and the contractor to ensure work is completed to the required specification.

While pointing out that the problem highlighted by my audit was one of accounting treatments and conventions rather than improper use of funds, the Department accepted that it needed to review its procedures in consultation with OPW. It would be necessary for the Department to obtain the assistance and agreement of OPW to the preparation, on a timely basis, of quarterly statements on the transactions on each account in order that the appropriate charges might be made to the Vote for agency services in the future.

She added that arrangements had been initiated, internally and with OPW, to ensure compliance with the correct procedures.

The Appropriation Account for Vote 26 – Education and Science – has been amended to reflect the correct charges for OPW agency services, in respect of site acquisition and asbestos work, involving some €30.3m in 2006. This increases the surrender to the Exchequer from €36m to €66m.

Department of Finance

The Accounting Officer, Department of Finance informed me that in the case of his Department the advances made to OPW were charged directly to the relevant subhead of the Vote for Finance and not to suspense as required. A certificate had not been obtained from OPW to support the charge to the Vote.

He indicated that two items making up the OPW balance for his Department did not relate to projects chargeable to Vote 6 – Finance.

He agreed that the correct procedures had not been adhered to in respect of these transactions. The 2006 Appropriation Account for the Vote had been amended to reflect the appropriate charge. As a result the amount to be surrendered to the Exchequer in this case has increased by €2.3m to €16.5m.

He was satisfied however, that on-going and continual liaison with OPW architects for all projects ensured appropriate signoff on completion of jobs and that no loss of public funds occurred as a result of the accounting treatment of these transactions.

He went on to state that when these matters were drawn to his attention he availed of the opportunity to remind staff of the Department of the importance of complying with Public Financial Procedures. As the matter had relevance beyond his Department he indicated that he had written to all Accounting Officers reminding them of the correct procedures to be followed in this matter.

Department of the Environment, Heritage and Local Government

The Accounting Officer, Department of the Environment, Heritage and Local Government in her response agreed that the OPW balance did not accord with the corresponding balance recorded by her Department. The Department had been in touch with OPW and confirmed that some balances go back a number of years. It was the Department's belief that one credit balance for €511,000 described as relating to the Custom House was incorrectly held as an advance for works that had been completed for some time. A definitive reconciliation of payments made to OPW would be carried out to address disparities between the Department's suspense account balances and those of OPW. She has instructed that guidelines be issued to all staff involved on the financial and accounting procedures to be observed in making inter-agency payments, and to ensure that a full reconciliation is effected at year-end.

In general, payments made to OPW were correctly charged to suspense accounts but it had come to light that two payments amounting to €200,000 which should have been charged to suspense accounts had been charged directly to Vote expenditure. In addition, there were further payments to OPW charged to Vote expenditure where it was not possible in the time available to verify beyond doubt that the full amounts were correctly chargeable in 2006. As the combined amounts were not material to the Department's overall expenditure, there was no requirement to amend the Vote.

Department of Agriculture and Food

The Accounting Officer, Department of Agriculture and Food, informed me that the nature of the services for which advances had been paid is such that final statements had not issued in the year in which the advances were made. In these circumstances, the practice has been to charge these amounts to the relevant subhead in the Department's Vote.

Bearing in mind that amounts charged to the Vote in this way are immaterial in the context of the total Vote expenditure in the year and that the difference between OPW records and those of the Department has been reconciled to my satisfaction, I have not insisted on a change to the Appropriation Account as presented.

However, in future, the Department should change its practice and charge the advances to a suspense account in the first instance. The charge to the Vote can only be made when OPW confirms its inability to give, on a timely basis, a definitive amount for expenditure incurred within the year and has agreed with the Department an estimate of the sums spent on the service.

Office of the Revenue Commissioners

The Accounting Officer of the Office of the Revenue Commissioners informed me that advances made to OPW were charged in the first instance to suspense accounts and that these suspense accounts were correctly discharged on the basis of disbursement certification by OPW. The difference between the amounts recorded by OPW and the Revenue Commissioners has been reconciled to my satisfaction.

Office of Public Works

The Accounting Officer of the Office of Public Works, in response to my enquiries, informed me that his Office managed a wide range of services on behalf of client Departments and Offices involving several hundred accounts and expenditure in excess of €75m a year.

As a general principle, OPW opens a separate account for each project and does not normally offset a credit balance in one account against a debit balance in another belonging to the same Department until projects have been completed.

As agency work typically involves contracts between OPW and external contractors, OPW required that clients maintain their accounts in credit so as to ensure that there were always sufficient client funds available and accessible to meet payment demands. These funds are held in an interest bearing account with the Central Bank. The Appropriation Account for Vote 10 – Office of Public Works – for 2006 showed a credit balance in its account with the Central Bank of €122m (€89m when outstanding cheques were taken into account).

The Accounting Officer stated that OPW Business Units regularly briefed client Departments on the status and progress of projects, including the financial position. He cited as an example, the service OPW provided for the Department of Finance for the procurement of crèches at various Government offices. He pointed out that a monitoring committee representing the Department and OPW met regularly to plan, discuss and monitor all aspects of the management and delivery of the programme, including the financial dimensions.

In the case of the Department of Education and Science, OPW provided a hugely important and complex service to the Department – the acquisition of school sites. OPW had a longstanding prudent policy of seeking and accepting funding from the Department only when the finalisation of the legal stages of acquisition was imminent. He said that there was no doubt that in the event of funding not being available immediately on close of sale some deals would fall through. The balance on this account, €23m at 31 December 2006, was reduced to €12.4m by end January 2007 and to €8.6m at end June 2007. OPW provided annual financial statements to the Department of Education and Science.

He added that OPW took a conservative and careful approach to reducing balances to zero and closing suspense accounts. They preferred to keep accounts open until it was clear that there would be no further costs payable.

The Accounting Officer also informed me that, notwithstanding the arrangements already in place for the supply of information to clients, he had decided to introduce a formal procedure of regular notification of project financial statements to client Departments.

2.1 Forecasting of Tax Receipts

The Department of Finance prepares estimates of tax receipts each year with the assistance of the Revenue Commissioners. The final estimate, which takes account of changes introduced in the Budget, is presented on Budget day each year and is known as the Post-Budget Estimate. Details of the actual tax collected each year are published in the Revenue Annual Report. The amounts transferred to the Exchequer by Revenue, as opposed to the actual amounts collected, are published in the monthly Exchequer Statement and the annual Finance Accounts. The total Exchequer receipts for 2006 (€45.5 billion) exceeded the forecast (€41.65 billion) by almost €3.9 billion or over 9%.

Figure 1 Contribution of each Tax to Total Excess over Forecast 2006

In my 2001 Report, I highlighted the taxation shortfall against forecast of over €2.5 billion that occurred in 2001. While there was also a shortfall in 2002, it was somewhat lower at just over €1 billion. Since 2002, the trend has been for actual tax receipts to exceed forecast as can be seen in Figure 2. While PAYE contributed €763m and €730m to the shortfalls in 2001 and 2002 respectively, actual PAYE receipts in 2006 were within €155m of the forecast.

Figure 2 Variation against Forecast 2002 to 2006

I asked the Accounting Officer of the Department of Finance what were the reasons and underlying factors for the large surplus in each of the years 2004, 2005 and 2006. In reply he confirmed that Exchequer tax revenues in each of the last three years had significantly outperformed their Budget day targets. In 2004, tax revenues were 6.5% ahead of target. In 2005, receipts were 4.7% ahead of target and, in 2006, tax revenues were 9.3% ahead of target.

However, he pointed out that focusing on the major tax-heads – VAT, income tax, corporation tax and excise duty – which, in the years 2004, 2005 and 2006 have accounted for around 85-90 % of total taxes and excluding the impact of receipts from Revenue's special investigations, tax revenues had been close to target, particularly in 2004 and 2005.

He provided me with the following analyses of the surpluses for 2004, 2005 and 2006.

2004

The 2004 Budget day target for tax revenues was €33,400m. The actual outturn was €35,581m giving an overall tax revenue surplus of €2,181m. The individual tax-head breakdown is in Table 5.

Over half of the excess in 2004 came from stamp duties and capital gains tax, a reflection of the continued strength of the asset market, particularly the property market that was not foreseen by any commentators at the time of the 2004 Budget. The prudent nature of the tax forecasts for these particular tax-heads in 2004 reflected that view.

Included under the income tax heading were receipts of €673m in respect of the main Revenue special investigations in 2004, the Offshore Assets Group and Bogus Non-Resident Account investigations. Receipts from these sources were forecast at €150m, giving an excess over target of €523m. This represented almost one quarter of the total excess. By their nature, receipts from this source could not be forecast with any degree of accuracy.

Excluding these special investigations moneys, receipts from the major tax-heads, VAT, income tax, corporation tax and excise duty, that accounted for almost 90% of total taxes in 2004 were just 1.4% ahead of target.

Table 5 2004 Exchequer Tax Revenue – Outturn v Forecast

	2004 Forecast€m	2004 Outturn€m	+/- €m	+/- %
Customs Duty	137	173	+36	+26.3
Excise Duty	4,864	4,928	+64	+1.3
Capital Gains Tax	851	1,516	+665	+78.1
Capital Acquisitions Tax	150	190	+40	+26.7
Stamp Duty	1,600	2,088	+488	+30.5
Income Tax	10,077	10,651	+574	+5.7
Corporation Tax	5,348	5,332	-16	-0.3
VAT	10,368	10,693	+325	+3.1
Levies	5	10	+5	–
Total	€33,400m	€35,581m	+€2,181m	+6.5%

2005

The 2005 Budget day target for tax revenues was €37,505m. The actual outturn was €39,254m, giving an overall tax revenue surplus of €1,749m. The individual tax-head breakdown is provided in Table 6 below.

Table 6 2005 Exchequer Tax Revenue – Outturn v Forecast

	2005 Forecast€m	2005 Outturn€m	+/- €m	+/- %
Customs Duty	170	226	+56	+32.9
Excise Duty	5,075	5,233	+158	+3.1
Capital Gains Tax	1,500	1,960	+460	+30.7
Capital Acquisitions Tax	180	249	+69	+38.3
Stamp Duty	2,085	2,725	+640	+30.7
Income Tax	11,105	11,266	+161	+1.4
Corporation Tax	5,760	5,492	-268	-4.7
VAT	11,625	12,089	+464	+4.0
Levies	5	14	+9	–
Total	€37,505m	€39,254m	+€1,749m	+4.7%

As in 2004, a large proportion of the excess in tax revenues in 2005, almost 63%, came from stamp duties and capital gains tax. Once again this was due to the continued strength of the asset market, particularly the property market in the latter half of the year.

18% or €313m of the total excess was due to a greater than expected yield from Revenue's main special investigations. The main tax yielding investigation in 2005 was the Single Premium Insurance Investigation. Receipts from the main investigations in 2005 were forecast at €200m. The actual yield was €513m.

Excluding these moneys, receipts from the major tax-heads, which accounted for 87% of total taxes in 2005, came in just 0.6% above target.

2006

The 2006 Budget day target for tax revenues was €41,650m. The actual outturn was €45,539m, giving an overall tax revenue surplus of €3,889m. An individual tax-head breakdown is provided in Table 7.

Table 7 2006 Exchequer Tax Revenue – Outturn v Forecast

	2006 Forecast€m	2006 Outturn€m	+/- €m	+/- %
Customs Duty	240	257	+17	+7.1
Excise Duty	5,490	5,589	+99	+1.8
Capital Gains Tax	2,035	3,100	+1,065	+52.3
Capital Acquisitions Tax	260	353	+93	+35.8
Stamp Duty	2,685	3,716	+1,031	+38.4
Income Tax	11,810	12,390	+580	+4.9
Corporation Tax	6,030	6,683	+653	+10.8
VAT	13,095	13,448	+353	+2.7
Levies	5	3	-2	–
Total	€41,650m	€45,539m	+€3,889m	+9.3%

As in the previous two years, a significant proportion, €2.1 billion or 54%, of the overall excess came from stamp duties and capital gains tax that continued to benefit from buoyancy in the asset market and, in particular, the property market. Again, this level of activity was not anticipated by forecasters generally.

The corporation tax surplus of €653m was partially due to some unexpectedly high payments from a small number of large companies and partially due to some new companies paying significant amounts of tax for the first time.

Income Tax also performed above expectations, coming in €580m or 4.9% ahead of target. The bulk of this excess arose on the non-PAYE side.

Excluding the impact of special investigations receipts which were not as significant in 2006 as they were in 2004 and 2005 and which actually came in below target in 2006, the major taxes which together accounted for 84% of actual tax revenues in 2006, were 4.8% ahead of target.

Review of Forecasting Performance

In October 2005, the International Monetary Fund (IMF) published an analysis of Ireland's track record on forecasting the fiscal balance. On the revenue side the analysis found that stronger-than-expected economic growth and buoyant asset price developments were the main reasons for the overshooting of tax revenue. In terms of economic growth forecasts, upon which the tax forecasts are based, it was outlined that Department of Finance forecasts were not dissimilar to those of other institutions, and the difficulty in forecasting economic growth in a period of strong economic growth was highlighted. The IMF recommended the continuation of what it called the "prudent approach" to budget forecasts given the risks that asset developments may not continue to contribute significantly to large upside surprises. It also stated that the institutional framework for fiscal policy and budget forecasting practices in Ireland are relatively strong compared with other countries.

The Accounting Officer informed me that many factors can affect the outcome of a tax revenue forecast that is subject to an appreciable degree of uncertainty. He stated

Tax revenue is a product of the level of economic activity, and forecasting economic activity is not an exact science. Budget tax forecasts are made at a time when reliable economic data on the current or forecast year is not available. Economic data for previous years published by the Central Statistics Office (and similar statistical bodies elsewhere in the world) is subject to regular revision for a number of years after the end of the year in question.

The actual composition of economic activity is also a key factor and this, likewise, is difficult to predict in advance.

The actual outturn for current year tax receipts is not known at the time that Budget tax forecasts have to be made and also has to be estimated.

The impact of once-off or extraneous factors e.g. special investigations receipts, from year to year can be significant.

The effect of structural changes in the tax system that can sometimes impact on taxpayer behaviour with unforeseeable results on tax revenues in the short term.

Improving Forecasting

In response to my enquiry as to what action has been taken or is planned to improve the accuracy of budget forecasting, the Accounting Officer informed me that a Direct Tax Base Working Group, an informal group made up of officials of the Department of Finance and the Revenue Commissioners, was set up with the approval of the Minister for Finance in mid-2002. The original purpose of the group was to build on the earlier analyses of shortfalls in direct tax revenue in 2001 and 2002 and to examine issues that may have an impact on the tax yield from direct taxes, including income tax, for the purpose of improving the tax forecasting methodology. The work of the group is ongoing.

The Tax Forecasting Methodology Review Group, chaired by a senior economist on secondment to the Department of Finance from the Central Bank and comprising representatives from the Department of Finance, the Revenue Commissioners, the Central Bank, the Economic and Social Research Institute and the European Commission, was set up in December 2006. The terms of the reference for the group are

To review the existing tax forecasting methodology

To examine the reason for the tax forecast divergences

To analyse the information bases on which forecasts are made

To review the structural parameters of tax elasticities

To look at the experience in other relevant jurisdictions and

To make recommendations for changes to the methodology, where appropriate.

The group first met in January 2007 and has met five times so far. The group has examined a range of issues. These include

The existing approach to tax forecasting

The performance of the tax forecasts produced by the Department since 1998

Revising the forecasts based on the most-up-to date economic data available

Accounting for one-off receipts and recent property market performance

Examining the long-run aggregate tax elasticity and

Examining the tax forecasting methodology of other institutions.

He also informed me that, in order to concentrate resources on the work of this group, it had been agreed that the Direct Tax Base Working Group would postpone its work until after the Review Group had reported. This is expected some time during Summer 2007 and it is expected that its report will be published in due course.

Mr. John Purcell

The material before the committee reflects the special role of the Department of Finance in the overall administration of the public finances. We have the Finance Accounts, which cover all the revenue and expenditure of the State, together with the Vote for the Department of Finance itself, the Superannuation Vote, and two other minor Votes which the Vice Chairman mentioned. We have a chapter on tax forecasting, chapters dealing with oversight of public procurement and Government accounting, follow-up chapters on the training and consultancy value for money reports, and finally the reference in the agenda to the recent minutes from the Minister for Finance, highlighting his Department's particular responsibility in regard to the committee's activities and reports. I will take them in that order, if it is convenient.

The Finance Accounts incorporate the account of the national debt, which is prepared by the National Treasury Management Agency, and the committee has in the past considered that account when it calls in the chief executive of that agency for examination. Apart from taxation, the main sources of income for the Exchequer in 2006 were proceeds from the sale of Aer Lingus, €241 million, sales of property by the OPW, €231 million, the National Lottery surplus of €200 million, capital receipts from the EU, €177 million, and the Central Bank's surplus income of €109 million. The vast bulk of expenditure from the Exchequer is through the Votes, which are considered separately by the committee. The main constituents of the balance of expenditure are service of the national debt, our contribution to the EU budget, and payment into the National Pensions Reserve Fund. I was able to give a clear audit certificate on the accounts.

The committee will see that the financial outturn on voted services for the year is set out in Chapter 1.1. The amount to be surrendered represented 2.17% of the amount provided. This is marginally higher than the percentage surrender in the previous year. There is nothing in the Votes under review that is not self-evident from the information provided in the accounts. Members will note that there was no call on the contingency fund deposit account during this year.

Chapter 2.1 revisits the subject of tax forecasting, an issue previously included in my 2001 report and considered by the committee then and since. The concern in 2001 was a shortfall in receipts against what had been forecast and whether this indicated weaknesses in the forecasting methodology and possibly in the efficiency and effectiveness of revenue collection. In more recent years, the trend has been for receipts to exceed the forecast by significant margins, culminating in a surplus over forecast of nearly €3.9 billion in 2006. The scales of those surpluses are set out in Figure 2. While surpluses over forecasts are not as serious for the public finances as the large deficits in 2001 and 2002, they can have a distorting influence on Government spending plans and all that entails. The main contributors to the surpluses from 2004 to 2006 were, as members might expect, stamp duty and capital gains tax. The strong performance in these taxes was driven by the buoyant property market. Another factor in 2004 and 2005 was greater than expected yield from the special investigations of the Office of the Revenue Commissioners. While receipts from special investigations were down on forecast in 2006, this was more than compensated for by a better than expected return from income tax and corporation tax.

An analysis by the International Monetary Fund in 2005 of Ireland's track record in forecasting the fiscal balance highlighted the difficulty of forecasting in a period of strong economic growth. It found that the institutional framework for fiscal policy and budget forecasting practices in Ireland were relatively strong compared to other countries and recommended continuation of the prudent approach to budget forecasts, given the downside risks associated with the property market.

The review group set up in late 2006 to examine the forecasting methodology has reported within the last week or so. It found that while Ireland's experience with regard to deviations between tax forecasts and outturns is not uncommon internationally, the scale of the deviation is high by international standards. The report reiterates the difficulty of accurately forecasting stamp duty and capital gains tax receipts and supports a cautionary approach to forecasting revenue from these sources. A number of refinements geared towards strengthening the methodology and more regular analysis of forecasting performance are recommended in the report. Figures now available for 2007 show that tax receipts last year were less than forecast by more than €1.8 billion. While there were significant deficits in VAT, corporation tax and excise duty, over half the shortfall was accounted for by stamp duty and capital gains tax.

Chapter 1.2 outlines the extent to which Government Departments and offices, in 2006, exercised the discretion permitted by public procurement guidelines not to use competitive tendering for contracts exceeding €25,000 in certain circumstances. Clearly, circumstances will arise in which it is impossible or impractical to follow the canon of competition, but in the interests of equity of opportunity and obtaining value for money, it is important that every effort is made to ensure that such instances are kept to a minimum. Arrangements introduced by the Department of Finance in 2002 provide that Departments and offices should subject such contracts to independent review and report them to my office in an annual return, with a copy also going to the Department of Finance. Returns for 2006 show that 24 Departments and offices had entered into 195 such contracts, valued at €44 million, without recourse to competitive tendering. Five defence contracts accounted for nearly €19 million of the total. Interestingly, the HSE was not covered by the requirement to make a return, but I understand that this position is to be rectified.

Overall, on the basis of my review, I was satisfied that Departments were not resorting unreasonably to single-tender action and that they were generally complying with the requirement for internal review and central registration, although in some cases this was rather informal. There are two instances, cited at the end of Chapter 1.2, where I was not entirely happy about the way in which the organisations in question engaged individuals to undertake certain work. These are not matters for the accounting officer, who is present today, but they can be taken up with the organisations concerned by the committee in due course, if it so wishes.

There is a general and a finance-specific aspect to chapter 1.3. The general point is that some Departments were charging advances made to the OPW to their appropriation accounts in 2006, despite the fact that the work proposed had not been carried out in the year and the amounts involved were sitting in the OPW's bank account. This had the effect of overstating Vote expenditure in the year and understating the surrender to the Exchequer. The worst offender in this respect was the Department of Education and Science, where the account had to be amended to the tune of €30 million to correctly reflect the true position. The specific aspect of chapter 1.3 is that the Department of Finance itself had to amend its own appropriation account for the same reason to increase the surrender to the Exchequer by €2.3 million. As a result of my findings, the Accounting Officer of the Department of Finance wrote to all other accounting officers reminding them of the correct procedures to be followed in this matter. In addition, the Accounting Officer for the Office of Public Works indicated to me that he had decided to introduce a formal procedure for regular notification of project financial statements to client Departments.

On the value for money report follow-up on consultancies the Department of Finance responded positively to the original value for money report on consultancies by issuing guidelines setting out best practice principles for the engagement and management of external consultants by Departments and offices.

The Department carried out a further review of the guidelines following a Government decision of October 2005. This review involved the participation of other Departments in helping to determine how the guidelines could be improved and strengthened. The outcome of this process was revised guidance geared towards achieving best value in the use of external consultancy and support, together with more transparent accounting for consultancy expenditure.

The follow-up report on training and development in the Civil Service shows that the main concerns expressed in the original value for money report have been addressed in the meantime by the Department of Finance with a slight caveat, which is being addressed as we speak. There might be further scope for development of senior management training. The improvement has taken place within the context of an overall training and development policy framework and the deepening of the PMDS as an integral part of human resource management in the Civil Service. In both cases I regard the Department of Finance's response to the reports as satisfactory.

There are several minutes of the Minister for Finance arising from the work of the previous committee. Generally speaking, the thrust of the committee's recommendations has been accepted. However, there are some issues specific to the Department of Finance's remit that this committee might want to pursue further, if not today. I can elaborate on those later if the committee so wishes.

Chairman

I ask Mr. Doyle to make his opening statement.

Mr. David Doyle

I will touch briefly on some of the principal headings in the report. I will not stick exactly to the formal script but will deal with the bulk of it.

On the pensions Vote 7, while there is a very narrow Vote on the agenda today the much more important issue is the general issue of pensions. The overall pensions bill in the public service is approximately €2.5 billion, which covers health, local authorities, education and the narrow Civil Service. It is costing approximately 1.5% of GDP and that will double in the next 30 years because of the significant expansion in the public service in the past 25 years.

Similarly, in the economy as a whole there is a major issue coming at society generally. The number of aged people will dramatically increase because of our unique demographic structure. Currently, six people of working age support a pensioner in the economy. In the absence of dramatic demographic shifts that will fall to two people of working age to every pensioner, which is a major issue for society as a whole.

On the Department of Social and Family Affairs, close to 500,000 million people are receiving a pension of one form or another. That is set to treble in cost from 3.5% of GDP now to approximately 10%, which is the equivalent of about €12 billion.

One of the issues that concerns the Comptroller and Auditor General and other people is the continued liability for public service pensions and we are considering how to calculate that. A micro assessment could be done for every organisation, for example, the local fisheries board. The pensions could be quantified and a firm of actuaries hired. It might cost €10,000 to get a quantification of it done every year. That would not be appropriate but it is possible for the Department of Finance, using the actuarial in-house expertise available to us generally, to do an annual account. That could be incorporated in the finance accounts as a point of information. The current assessment is that that liability will be about €75 billion in respect of the pension rights earned for the 300,000 people working to date and the current pensioners in terms of net value assessment. We will examine that again in the context of the group we have established to examine the financial information on public accounts.

Those two principal bills — social security and public service pensions — were behind the reason the National Pensions Reserve Fund was established. In due course Dr. Somers, who is the manager of that fund, will be before the committee. There was approximately €21 billion in that fund at the end of 2007 and from 2025 it is intended that the fund will use a proportion of its reserves to help smooth out the impact of the ageing I referred to earlier.

On chapter 1.2 relating to the exceptions to general procedures, the report aptly summarises the principles underlying those guidelines. We expect that any departure from those guidelines would be both limited and subject to an independent review within the relevant contracting authority. As I read the report, its affirmation is that the requirements are being observed to a great extent in regard to central Government contracts. The proportion of the value of contracts listed in the report is quite small but it is important to examine them. In regard to many of those, as the Comptroller commented earlier, there are many valid reasons the particular course was followed.

The original reason Departments were given this discretion to depart where appropriate on their own authority was to get away from an old system we had where every departure from standard process came into a central Government contracts committee for evaluation. The upshot of that was that for about 25 years the committee did virtually nothing but review exceptions. It did not sit back and evaluate the best approach to public service contracts. We have seen some considerable developments on that front in the past year which no doubt will feature in future reports and comments. Those reforms are aimed at trying to secure more certainty on pricing and to get away from the uncontrolled payment of fees to consultants in particular associated with those projects where consultants' fees were linked to a final outturn cost and not to the original contract. There was a rather perverse relationship between the level of fees and the finishing price but that is a matter for another day.

I endorse the Comptroller and Auditor General's general findings. On the specific instances he mentioned on pages 7 and 8, I would not jump to conclusions but I would like to hear the observations of the contracting authorities that awarded such contracts and the views of the committee before offering any comment on those.

In regard to chapter 1.3 on agency services, a technical oversight occurred in the Department's presentation of the first draft of the 2006 accounts. I regret that and am grateful to the Comptroller and Auditor General for highlighting it. A charge of approximately €2 million should have been made to a suspense account rather than directly to the account. We have tightened up that area since then and drawn the attention of all Departments to it. We are reviewing generally with the Office of Public Works the arrangements for providing them with fund imprests to allow them handle projects where they are appointed as contracting managers but our objective will be to ensure that from now on, and this is largely being done as we speak, they will only access funds where they need it on time rather than a long time in advance. The funds released to them by way of imprests do not present any cost to the Exchequer; they are part of public funds.

Turning to the chapter on tax forecasting, the Comptroller and Auditor General's comments relate to the period 2002 to 2006. In that period our tax revenues exceeded the budget forecast by approximately 4% on average. Like every forecast made by the Department of Finance and every other forecaster, as soon as it is made it is out of date. Forecasts are not predictions of fact but rather a tentative attempt to quantify what may happen. Looking back over a longer term at the Department's track record on tax forecasts, during half the period in the 1980s we under-forecasted the outcome and during the other half we modestly over-forecasted it. In the 1990s the average under-forecast was approximately 3.5% and in the current decade it is approximately 1.5%. The Comptroller and Auditor General's report examined particular years and, as he noted, in the year before this review, there was a shortfall of €2.5 billion in 2001 and €1.8 billion in 2007. Therefore, the average shortfall in that decade was approximately 1.5%.

Having dealt at all kinds of levels with tax forecasting, I advise that, sadly, there is no magic formula by which can anticipate the huge range of factors that go into the mix of what taxes will actually be collected. A retrospective analysis of a year, taking account of all factors and assessing everything that happened in terms of consumption, the nature of investment, employment, etc., provides a good analysis but does not equip one with foresight. We indicated last year that we had set up a review of our tax forecasting methodology. The previous one was conducted and published some ten years ago. The current one was chaired by Mr. McCarthy with outside expert involvement and was reported to Government, published and presented to the House in the past fortnight.

The group examined developments during the period 1999 to 2006. There were large under-forecasts of revenue on average during that period. Much of it related to one-off factors such as Revenue investigations which explains approximately one third of it. A large proportion of variation related to capital gains tax, capital acquisitions tax and stamp duties. That clearly reflected the exceptionally strong property market during that period, which was a unique departure from previous decades. Major structural change occurred in the economy and through strong inward migration and a massive expansion in labour force participation rates. All these factors impact on the reality of the thousands of variables that go into calculating the tax yield.

The group suggested, unsurprisingly, that the Department of Finance displays a prudent bias in tax forecasting — I am prepared to follow that approach rather than an imprudent one. It is clear from the report that conditions in the property market in recent years, during which there were price increases of 7% in 2005 and 15% in 2006 with very high output, have now changed and prices and volumes are adapting to new conditions. If there is a record price and volume increase in one year, the Department of Finance will not assume that those conditions will pertain in the following year; some would, but we did not. That is part of the reason we under-forecast tax revenue. Last year our assumptions were somewhat over-optimistic but no doubt I will be here next year explaining why we had an under-forecast of €1.8 million.

Deputy J. O’Keeffe

Hopefully--

Mr. Doyle

I hope to be here as well. We prepared the forecast for 2007 on the expectation that the property market would maintain the level it had achieved in 2006 and, as the Deputy noted, we were implicitly wrong. Other commentators such as the ESRI, which is linked to the Department informally, stated after the 2007 budget that we could not do our sums and that we had got tax figures wrong. It was more bullish and forecasted after that budget that stamp duties would increase by 26% last year, but there was a reduction in that regard by 14% and of capital taxes by 20% — the actual change was 1%. The outcome was not what it predicted at that time.

Deputy Ciarán Cuffe

Who predicted an increase of 26%?

Mr. David Doyle

The Economic and Social Research Institute, in its assessment of the 2007 budget, indicated that it believed we had significantly under-forecast stamp duty receipts in 2007. The outcome indicated that we were both wrong but in opposite directions.

The group made a number of recommendations in regard to the way we should conduct our forecasting for the future, which I have listed and which are being implemented. In the past we were over-inclined to take an aggregate approach and to not examine sufficiently closely the particular performance of the housing and the property market. That is now examined separately and dispassionately and built into our work each year.

In the period reviewed by the Comptroller and Auditor General the improved tax revenues vis-à-vis the budget each year amounted to approximately €7 billion. That surplus helped to reduce public indebtedness. I do not agree with the Comptroller and Auditor General’s introductory comments, if I interpreted what he said correctly, that this represented a distorting influence on Government spending plans and all that entails. Having been through many phases of Government determination of public expenditures, the reality is that the level of the tax forecasts is relevant. In the period to which he referred there were significant surpluses. Any dispassionate analysis of the trends of public expenditure in the period would not suggest that the Government felt constrained by our tax forecasts. The average increase in public expenditure in that period might have drifted into double digits. I have not read of anyone suggesting that it should have been higher. Therefore, I am not sure about the distorting influence in that regard.

On the question of public indebtedness, we have a gross debt level of about 25% of output, which is one of the lowest in the euro area. When one includes the National Pensions Reserve Fund assets, we have a debt to GDP ratio of approximately 14%. Having that low level of debt is a significant advantage for the public finances going forward in the context of the pressures of an aging population, to which I referred, in terms of a doubling of public service pensions, an increase of three times in the burden of social welfare pensions and, to that I could add, the expected increase in the burden of an aging population on the health services, which would probably add approximately another 4% to expenditure in terms of proportional output over the next decades simply because a much greater of number of elderly people will need support.

We have been working on modernising the Estimates and budget processes. The Tánaiste introduced a number of measures, of which it is useful to remind ourselves. While many of these do not affect the Committee of Public Accounts, they affect the other committees of the Houses. Annual output statements were introduced in 2007 as a first step to give a better presentation to Parliament and the people as to what is actually being achieved with the funds that are invested rather than the purely financial figures one sees in the annual Estimates. In the current year those output statements will have to take a retrospective look and comment on what was achieved vis-à-vis what was stated to be achieved last year, as well as setting out what is expected this year. Those output statements are very much embryonic and will need to be developed in terms of their content. The Tánaiste will be looking to the select committees of the House to examine them and put forward their suggestions as to how to enhance those presentations.

The Tánaiste also envisages that the individual select committees, in arriving at conclusions about the annual Estimates and the documentation presented to them, would report their comments to the Committee on Finance and the Public Service, which he would like to see taking an overview on the overall cost and outlook of public services and commenting on them constructively in the context of the economic and fiscal outlook and forecasts that he presents each year for the following couple of years. An initial discussion was held last year with the committee about that and the stability programme which deals with the current year's budget and those of the following couple of years. That will be scheduled again this year.

Last year, also, the Tánaiste introduced a unified budget for the first time. Prior to the formal budget, we presented a pre-budget outlook which replaced the pre-budget Estimates and the mid-year economic review and outlook, which simply looked at the current year. The pre-budget outlook presents an analysis to Parliament and the public as to what the prospects are for the economy and the public finances on a pre-budget policy basis, to allow a debate to take place on what the scale of budgetary policy measures might be and to consider what impact they might have on the economy. Subsequent to that pre-budget outlook, on budget day all policy measures affecting expenditure and taxation were announced.

Finally, the Tánaiste has asked the select committees to consider all policy and value for money reviews conducted by Departments, where they are presented to them, and to comment constructively on them. The new terms of reference of the committees take this into account. We like to think that those measures will remove the focus from the narrow issue of the resource allocation — that looks purely at the financial inputs — to one that looks at performance and the delivery of outputs and outcomes. It puts taxation and public expenditure policy on an equal footing.

I will turn now to better financial reporting. It is not on the committee's agenda today but I wish to keep the committee informed. We have initiated a review of the nature of information that is presented, both in the finance accounts and in individual appropriation accounts, to see if significant improvements could be made to make the information more meaningful to Parliament and the people. One of those items of information relates to the pensions issue, which I mentioned earlier. However, there are other areas where there would be potentially significant contingent liabilities. The committee will be familiar with many of them. They include tribunal costs, redress board costs and claims against the State. There would also be inadequately quantified real value of assets in terms of land-holdings. The group will examine these things and the Comptroller and Auditor General's office has agreed to participate in the group. We look forward to a report from the group this year. When it is considered by the Tánaiste the report will be supplied to this committee.

Vice Chairman

May we publish your statement?

Mr. David Doyle

Yes.

Vice Chairman

Members are aware of the time constraints so I ask them to confine themselves to asking questions. I also ask Mr. Doyle and his colleagues to be as brief as possible in their replies. Before calling Deputy Cuffe, I have a question on something that intrigues me. Vote 12 is a small sum of money for the Secret Service. It appears that our spies are not paid very well. What exactly is that?

Deputy Thomas P. Broughan

Is there anybody here today from the Secret Service?

Deputy Jim O’Keeffe

It is shrouded in secrecy.

Mr. David Doyle

I have no doubt the Secret Service is listening in at present so I could be taken away and shot if I said anything about it. It is so secret, Deputy, that I am unable to share much information with the committee. However, I can assure members that the Department and the Minister for Finance only release funds when they are satisfied that those funds are appropriately charged. There is a well tried and trusted avenue for proposals to come to us for release of those funds from relevant parties. Deputy O'Keeffe will be aware of some of them.

Deputy Jim O’Keeffe

Why is the Department of Finance the relevant accounting body?

Mr. David Doyle

Some things are thrust upon us by history and this is one of them. Whether it is related to the fact that one of our first Ministers was Michael Collins, I do not know.

Deputy Thomas P. Broughan

The Department is good at keeping secrets.

Deputy Jim O’Keeffe

The Department keeps a tight grip on the Secret Service.

Mr. David Doyle

The available accounts relating to expenditures under this heading are fully available to the Comptroller and Auditor General.

Vice Chairman

Thank you. I call Deputy Cuffe.

Deputy Ciarán Cuffe

I thank the Comptroller and Auditor General for his opening remarks and Mr. Doyle and his team for attending today's meeting. I have thoughts on the Secret Service but I will get to them shortly. I will run through the items chronologically. The President's establishment appears to run a tight ship and I do not see a cause for concern. Vote 7 relates to superannuation and retired allowances. There is a significant variance of approximately 30% between the Estimates provision and the outturn. Over the last four years this figure was 30% out in 2006, 22% out in 2005, 19% out in 2004 and 12.5% out in 2003. There appears to be a dramatically increasing variance in this area. This is perplexing. The contributions here relate to civil servants and we do not have dramatic swings in the number of civil servants and pensioners in a given year. It is curious that there is such an increasing variance as the years go by. There could be a little more certainty on the number of contributors and the level of contribution.

Mr. David Doyle

I referred earlier to prudence and the people who did these particular forecasts in recent years were even more prudent than I was. I had hoped to see the variation reducing for 2007 and 2008. There are roughly 15,000 pensioners aged anywhere between 60 and 80 plus, and a number are quite older than that, including a few former Secretaries General of the Department of Finance. However, it is not possible to predict with accuracy how many will pass off the stage in any one year. It is even less possible to predict how many will retire each year because there is a significant cohort of people between 60 and 65 who can retire at any time. That is the second major variable. The third one is the extent to which pension contributions will be collected across the entire system. That is also an area where the Department has struggled to get a firm handle from other Departments as to what is likely to be collected. Some arrears have been collected concerning contributions from the past. I accept the Deputy's admonition that the Estimate should be tighter but the reality is that it has not been. Some Accounting Officers are on the side of extreme prudence when it comes to setting out an Estimate in the sense that there is an incredible fear of having an excess Vote, which is regarded as a mortal sin and leads to terrible retribution from the Comptroller and Auditor General. It then has to be submitted to an incredible examination by the Committee of Public Accounts, which then passes a recommendation to the Minister for Finance who, at his discretion, may decide to agree to a Supplementary Estimate. The alternative of not agreeing to it would be pretty appalling for the Accounting Officers so they move heaven and earth to make sure there will never be an excess Vote. Personally, I think that fear is overdone in the sense that the Estimates should be kept as tight as possible. Our own public financial procedures require Departments to discharge bills, even at the expense of an excess Vote. I do not think anybody has any actual fear there, but that may be an aside. In this context, I agree that the Department's forecast should be tighter.

Deputy Ciarán Cuffe

My concern is not so much about the degree to which the Department is out but the degree by which it is increasing year on year. I would have thought that an actuary's bread and butter is estimating how many people may die, retire or make contributions. It seems curious that we are so out of sync but I will move on to the subject the Secretary General expressed some concern about earlier — the secret service. I am tempted to use the words of David Hanley, "Tell us what you know", but more seriously do we know if this is in the area of Defence or Justice, Equality and Law Reform? Do the relevant Ministers, Deputy O'Dea or Deputy Brian Lenihan, have control over this area? Should we be concerned about the surplus to be surrendered or should we be pleasantly surprised? What benchmark can we use or what indicators or parameters are we working with? Or is Mr. Doyle as much in the dark as we are about what the secret service does, how many staff it has and to what Department it answers?

Mr. David Doyle

I am not as much in the dark as the public are but all I can do is reiterate what I said earlier — there are clear lines in a number of organisations, and between a number of Ministers responsible for the security services, to the Tánaiste and Minister for Finance concerning this area. Clearly, from the scale of the Estimate it is nothing like the size of MI5, MI6 or the CIA. It is a modest sum that is made available for secret service purposes and it is well controlled.

Deputy Ciarán Cuffe

Is it capital or current expenditure?

Mr. David Doyle

It could be either.It is classed within our accounts as--

Deputy Ciarán Cuffe

I find it quite incredible.

Mr. David Doyle

By the way, one would not get much capital for €500,000. That would only provide a few decent bullet-proof cars, probably only two.

Vice Chairman

Perhaps we can ask the Comptroller and Auditor General to comment on this.

Mr. John Purcell

Like everyone else I am sworn to secrecy on this matter. It is a misnomer, however, in that we do not have a secret service as such. There are certain operations carried out both by military intelligence, under the auspices of the Department of Defence, and also the Garda Síochána. What happens is that the amounts paid from the Vote are paid into a bank account which, as the Secretary General has said, is strictly controlled. If there are any issues surrounding the Vote or the bank account which might be seen as somewhat dubious, it has been the case that a senior official from the Department of Finance would discuss the matter with me. That is how it operates. I do not know much more. I get a certificate from the Minister for Defence and the Minister for Justice, Equality and Law Reform stating that the money has been paid out in a particular way and I accept that. That is the convention. So I can say that particular account is, in a sense, correct. I imagine that the money is used to pay for information in the interests of the service of the State, rather than the supply of bullet-proof cars. It would be nice to think of that kind of thing from a graphic point of view but it is more mundane than that, as I understand it.

Deputy Jim O’Keeffe

If there is an issue of paying informers, has there been any suspicion at times of the abuse of the account and, if so, how are those suspicions followed up or have they been followed up?

Mr. David Doyle

I could not even comment on whether what the Comptroller and Auditor General has said the money is used for is correct. As regards the Deputy's question concerning the Ministers and officials concerned and the security services of the State, the chain of communication on the outlays is such that the chain ensures the matters will be handled with full probity, but it is a murky world.

Deputy Jim O’Keeffe

It is as clear as mud.

Deputy Ciarán Cuffe

It seems we are more in the dark than ever. We have one branch of the State saying that it possibly does not exist, while another branch says it does perhaps exist . We have military intelligence and An Garda Síochána but we are really into Alice in Wonderland territory. I would prefer a little less secrecy and a little more service from the State to inform us as to what is going on. I would be concerned if it was simply a slush fund for informers. If it is that, rather than a group of people working within An Garda Síochána or military intelligence, the public have a right to know. I am concerned that we are simply using the best part of €500,000 every year as cash payments to receive information. I will move on, Chairman, because we are pressed for time.

Mr. David Doyle

I registered the Deputy's concern for a little bit more public service, although I do not know whether he is aiming that in my direction. As regards the way Ministers manage it and the Committee of Public Accounts has handled it over the decades, as I have outlined, it is not possible to give the committee more information. The committee can be assured that between the Department of Finance at official level, the Minister for Finance, the relevant officials in the relevant Departments, the relevant Ministers and the relevant security force people, there is full probity in the way the money is disbursed.

Deputy Ciarán Cuffe

We must take Mr. Doyle at his word.

Mr. David Doyle

I thank the Deputy.

Deputy Ciarán Cuffe

I thank Mr. Doyle for his contribution.

I move on to the Exchequer account and the National Pensions Reserve Fund. Mr. Doyle spoke at length about that earlier and noted that there were six people working for every pensioner at present but that will go down to perhaps two in future years. The National Pensions Reserve Fund had €1.45 billion in it in 2006. How are the contributions linked in? Are they linked in directly to GDP, or does it depend on the finances in any given year?

Mr. David Doyle

The relevant statute specifies that a contribution is remitted to the fund on a quarterly basis linked to an estimate of gross national product. It is 1% of gross national product each year. The bulk of the funds there at present represent that 1% since its initiation plus the initial receipts from the Eircom flotation.

Deputy Ciarán Cuffe

What percentage of pension payouts does the fund account for, or is it simply a fund for a time when we will need the money when there is a reduction in the ratio of workers to pensioners?

Mr. David Doyle

There is no prescribed percentage at present. The objective of the fund was to build up a significant reserve against the backdrop of those burgeoning liabilities which will emerge over the next couple of decades. The legislation prescribes that from 2025 onwards, when I hope most of us will be elsewhere, the fund will make a contribution towards the higher annual bill and that it will last a number of decades to smooth the impact on the public finances of those costs.

Deputy Ciarán Cuffe

It is not clearly linked to actuarial figures on how many people may be drawing down from it in 20 years' time.

Mr. David Doyle

No. The fund is only intended to cover part of the burden. It has not been actuarially determined that the 1% contribution would be adequate to discharge this bill. It will not be and will only make a contribution. The legislation covering the National Pensions Reserve Fund requires the pension reserve commission to undertake an actuarial assessment of the public service and social security pension bill at some stage within ten years of its initiation. It is about to consider that. There is already an actuarial assessment of the social security fund position in the public domain. I think that was produced last year. The public service pensions liability is roughly what I intimated earlier. The pensions reserve commission is charged with the responsibility of undertaking a professional assessment of that emerging bill. No doubt when that is available, the Government will assess the position of the fund against that backdrop.

Deputy Ciarán Cuffe

I wish to move on to the issue of public procurement in Chapter 1.2. I note the comments at the end of that chapter that compliance with requirements was sometimes found to be informal and random in nature. They are strong words and create significant concern for members of this committee and others. I wish to look at a couple of contracts which were not put out to tender, principally the Department of Defence placing five contracts in respect of a fleet of aircraft. The value of the contracts was almost €19 million and represented 40% of contracts without a competitive tendering process. I assume someone somewhere, whether the Minister for Defence or someone in his Department, decided that a particular aircraft was the only one for the job. I am concerned that such a large sum of money should be spent without a competitive tendering process. Perhaps Mr. Doyle could comment on that issue.

Mr. David Doyle

I am not sure whether the committee has seen the relevant Accounting Officer from the Department of Defence this year.

Vice Chairman

No.

Mr. David Doyle

I suggest the particular instances featured in the Comptroller and Auditor General's report could be mentioned to him. The requirements in the defence area are not generally applicable and there is a lot more discretion in regard to domestic rules and international obligations. From my experience of dealing with the Department of Defence over the years, it has a fairly robust approach and would be assertive about the manner in which it manages the funds available. It would be strong in securing best value.

I think the Comptroller and Auditor General has commented on the specific reality that in the Department of Defence, the proprietary nature of the goods and services is at the core of the fact it does not always use a competitive process. Security purchases generally are treated differently under EU rules, as are many other purchases.

Deputy Ciarán Cuffe

Would the same apply to the Garda Síochána where there were 44 instances in regard to Garda Síochána IT in which specific branded goods were selected? Would Mr. Doyle place that in the same category?

Mr. David Doyle

Not necessarily. From my recollection of reviewing this, many of those relate to IT-specific contracts tying in with previous ones in regard to particular equipment and software specialities. The exceptions on security would not be as applicable there. Again, I think the Garda Commissioner is now an Accounting Officer. He will appear before the committee and no doubt will be keen to share a robust answer with the Deputy on that.

Deputy Ciarán Cuffe

Does Mr. Doyle know the software concerned?

Mr. David Doyle

I do not have access to that information.

Deputy Ciarán Cuffe

I refer to training and development programmes in the Civil Service where there seems to be a huge variance between Departments and the type of training and oversight of it. There is detailed information available to us on the evaluation, measurement and effectiveness of training. The Department of Social and Family Affairs did not even get to level one on a scale of one to four on the evaluation and measurement of training. Does Mr. Doyle have any comments to make on that, or on the general level of oversight of such programmes?

Mr. David Doyle

If I may, I will make an introductory comment and then ask my colleague, Mr. Jim Duffy, the assistant secretary with responsibility for the training function and the training unit, to comment. In fact, the Department of Social and Family Affairs is one of the best equipped Departments in terms of policy evaluation and assessment of performance, and it may not need the same degree of training as some others. Apart from that general comment, I ask Mr. Duffy to deal with Deputy Cuffe's specific question.

Mr. Jim Duffy

I support what the Secretary General has said. In fact, I found this surprising because they have one of the most effective training units in the Civil Service. What they may be indicating here is that they are not following the Kirkpatrick model of evaluation.

In fact, they are one of the leaders in contributing to discussions going on centrally. The committee may have noted that some of the Departments are at level three where they have tied it in to the performance management and development system. We are trying increasingly to move Departments to get to level four where they start trying to calculate, not just alignment with business strategies but returns on investment. We are at the late stages of procuring a course for that purpose. Big Departments tend to be the main contributors towards developing and fine-tuning our thinking in that area. I suspect that in that case it means they are not using the Kirkpatrick model. There are other models around. I am absolutely certain that their training is tied in to the way they do business and to their business strategy. In reality, they are further along the curve.

Deputy Thomas P. Broughan

I welcome the Secretary General, Mr. Doyle, and his staff. What is the total number of staff in the Department? What is the average rate of pay? How many professional economists and accountants are employed in the Department?

Mr. David Doyle

There are approximately 600 whole-equivalent staff. The average pay, which is mathematically derived from a total of approximately €39 million divided by 600, amounts to close to €60,000. I do not have available to me a rundown of the qualifications of the staff. We would not aim to have 600 economists in the sense that if one only had 600, no two of them would necessarily have the same perspective on something. We have approximately 100 persons on the staff who have an economic competence and we have many other staff with other qualifications and training, whether in sociology, engineering, chemistry, philosophy, languages or history. We like to think that our gene pool is sufficiently diverse that we both get the econometric and numeric assessment from an economist as well as other perspectives.

Deputy Thomas P. Broughan

The Department, on average, is one of the highest paid Departments and it would have significant economic and accountancy expertise. Given that and given the committee's studies of Vote 7 about pensions, the chapter 1.3 report on agency service and, above all, the chapter 1.2 report on tax, is it fair to say the Department has been guilty of significant sloppy accounting and economic forecasting? That view would jump out at somebody. Consider the amazing underestimates of tax in the past few years —€2.2 billion in 2004 or 6.5%, €1.75 billion in 2005 or 4.7%, and €3.9 billion in 2006 which was an astronomical deviation.

I am looking back at some IMF documents on guidelines for national finance departments and treasuries and, according to Ms Paula De Masi, the greatest area of weakness in forecasting in industrial countries is predicting turning points in the business cycles. Obviously, that is a significant factor. Ireland is a small open economy and we have had strong tax incentives for different performance. No matter how one looks at it, it is astonishing that as the years went on the Department of Finance was not able to get predictive tax take into line with how the economy was performing.

I disagree with Mr. Doyle, who seems slightly pessimistic by inclination. There are a few people around the room here who hope they will be around after 2025.

Mr. David Doyle

In their current positions.

Deputy Thomas P. Broughan

Senator John McCain is going well and so is First Minister Ian Paisley. People may carry on. It is significant that there are these deviations for policymakers. How can we make policy, such as in the case of the hearings we held a couple of weeks ago with the Department of Health and Children, if we do not know? What is the current tax to GDP elasticity figure?

Mr. David Doyle

Deputy Broughan asked how many accountants there are in the Department. I do not have that number but it is not enough. We have a modest number of qualified accountants on our staff.

I reject Deputy Broughan's accusation that the Department has been guilty of sloppy work. I would not accept that at all. The net outcome of the Department's input into Government is visible in the economy and I will not trot out what has been the increase in employment, what has been the reduction in the ratio of debt to GDP and what has been the improvement of the living standards of our community. I suppose if the Department had a modest role in that, it had.

Deputy Broughan stated it is sloppy to have an under forecast of taxes. I say it is prudent. In 2006, the increase in taxes was approximately 15%, if not more.

Deputy Thomas P. Broughan

I do not want to be political, but there can be significant consequences. Yesterday a commentator, Mr. Vincent Browne, estimated that 5,000 persons had died in the past year or two who need not have died if we had a different health and social system. There are significant consequences if the Department gets it wrong and does not get this closer.

Mr. David Doyle

I will not comment on Mr. Vincent Browne. To continue where I was, the Department's forecasts for 2006 were that taxes would increase by approximately 8% and the outcome was approximately double that. If, at the end of 2005, the Department of Finance had stated that taxes were to increase by 18%, there would have been a crescendo of criticism stating the Department of Finance had lost its marbles because that would have assumed that what happened in 2006 was going to happen, namely that the volume of housing output would grow exponentially, that the price increases in housing would be 15%, and all the other variables.

Deputy Thomas P. Broughan

The Department--

Vice Chairman

Deputy Broughan may ask a supplementary question in a moment.

Mr. David Doyle

I can tell Deputy Broughan that the Department adopts a prudent approach. As I stated in my opening statement, there are many instances where the opposite to what the Deputy is speaking of now applied. In 2001, there was a tax shortfall of €2.5 billion. Last year, there was a tax shortfall of €1.8 billion.

Deputy Thomas P. Broughan

Absolutely.

Mr. David Doyle

Deputy Broughan is trying to take me into the question of policy and how our work impacts on the area of policy.

Deputy Thomas P. Broughan

No. Policy is our responsibility but the Department of Finance must deliver us the data.

Vice Chairman

Deputy Broughan, give Mr. Doyle one minute to finish and then ask the supplementary question.

Mr. David Doyle

The Deputy referred to the Departments of Health and Children and Social and Family Affairs. The increases in expenditure in respect of these Departments have been extremely dramatic.

Deputy Thomas P. Broughan

I am aware of that.

Mr. David Doyle

Many commentators have stated that the increases in expenditure were excessive and have given rise to waste. It is, therefore, either excessive or if people feel not enough is being provided, it is seen that it is being neglected.

On the interlinkage between the Department's forecasts and policy formulation, one would be obliged first to consider the way policy has evolved in the past ten years while at the same time reviewing tax forecasts. There have been dramatic improvements in public services and major reductions in taxation and the level of debt. Dramatic improvements have taken place across the board in people's standard of living and social services. It may be possible to identify areas in which additional resources could be deployed. There will be an average increase in public services of 8% to 9%, with taxes forecast to grow at 3%. It has been suggested that the level of increase in spending in this regard is excessive.

As regards the connection between tax forecasts and Government policy decisions, it is not a matter for me to comment on policy. In the coming months, however, the Joint Committee on Finance and the Public Service will be considering the overall budgetary context — economic and tax forecasts, the level of expenditure, the assessment of our fiscal position, our medium-term economic prospects, etc. — with the Tánaiste and Minister for Finance. There is a separate forum within the Houses at which that connection can be pursued further.

Deputy Thomas P. Broughan

The report of the tax forecasting methodological review group was published in recent days. Why was it not published last summer, especially in light of the fact that the cycle was changing? I have not been involved in making policy for 11 years but I hope to be so involved at some stage. The tax forecasting methodology review group's report states that the scale of deviation from estimates and reality is found to be high by international standards. In addition, it acknowledges the transitional, structural and other features, such as a small, open economy with no countries to the east, etc., with which we are familiar.

I inquired about the tax-to-GDP elasticity but the Secretary General did not provide an answer. The report to which I refer recommends that the Department of Finance should maintain "an aggregate tax-to-GDP elasticity of 1.0" as a top-down check on the bottom-up approach. This recommendation was put forward in the previous report ten years ago. Why was the advice offered in the 1998 report not followed? We have moved from a position of underestimates through overestimates and back to underestimates. Is it necessary for this deviation to continue?

The economic management credentials of the Department of Finance are considerably undermined by what would seem to our constituents as quite astronomical disparities in the estimates being made. Why did the Department not follow the advice offered in the previous tax forecasting methodology group report in 1998 in respect of tax-to-GDP elasticity? Why was the new report only published in recent days and will the Department implement the recommendation it contains in respect of this matter?

Mr. David Doyle

I was involved in compiling the 1998 report which recommended the use of a unitary elasticity between growth in output and growth in tax revenue of 1% as a top-down check. Someone who reviewed the report at the time stated that it was counter-intuitive and that there would be a need to consider the components of growth to ensure the elasticity to which the Deputy refers was correct. In the final call on the tax forecasts for 2007, the top-down check of 1% in respect of elasticity was applied by my good self. The forecast of taxes it produced estimated there would be an 8% increase. The actual yield was 4%, which suggests that elasticity for last year was more of the order of 0.5% as opposed to 1%. This relates to the changes, such as lower housing output, changes in prices, increases in interest rates, changes in expectations in the international financial markets and in the oil market, etc., that occurred in the make-up of the economy during 2007.

The 1:1 relationship is still in place as a top-down check. No more than any other method, however, it is not perfect. In some years, the relationship between the economy and taxes has been more like 2% and has been as low as 0.3%. Somewhere in there lies the truth.

If one looks backwards, one can determine what was the exact elasticity when one examines all the variables, and one can also explore why it was 2% or 0.3%. The 1:1 relationship cannot be applied. If the tax forecast in a budget envisages a 2:1 relationship, one would question whether the forecasters have lost their marbles or are being grossly optimistic. Equally, in the current year in which the economy is forecast to grow but a nominal 6%, one could ask if the Department's estimate that tax revenues will grow by 3% is again being pessimistic. When I attend at the committee next year, we will see whether that was optimistic. As the Deputy observes the tax returns on a month-by-month basis, he may begin to form a more concrete opinion in that regard.

Deputy Thomas P. Broughan

Can I just ask--

Vice Chairman

The Deputy's time is concluded.

Deputy Thomas P. Broughan

I will conclude with a brief question on a related matter. Something of the order of 15 or 16 budgets have been passed since I became a Member of the Houses. I am always astonished by aspects of certain tax reliefs and tax schemes. I accept some of these are necessary. For example, the people seeking to develop Cork Harbour made a good case in favour of their proposals. Does the Secretary General expect the report of the Commission on Taxation to be of assistance in respect of dealing with the anomalies and lacunae that have appeared in the tax system?

In the context of civil servants' pensions, the Department should have precise information regarding staff numbers. Is it not strange, therefore, that we are hearing about divergences in estimates relating to superannuation?

On chapter 1.3, which deals with agency services, the Department wrote to other Departments in respect of suspense accounts but did not seem to check its own accounting systems. Was it embarrassing for it to discover that it was not following rudimentary book-keeping practices in respect of suspense accounts for the Office of Public Works?

Mr. David Doyle

I will deal with the points raised by the Deputy in reverse order. We expected, as in any commercial enterprise, that the audit by the external auditor would point up areas where our organisation needs to adopt a better position and this is what happened. The Comptroller and Auditor General helpfully pointed out to us that technically we had not been pursuing the proper course. We communicated with all our staff, as I intimated in my reply to him earlier. I communicated with all accounting officers and I expressed regret in my opening statement about the matter. We will try harder and, with the help of the Comptroller and Auditor General to keep us on our toes, hopefully, will do so.

Deputy Thomas Broughan

I asked about the superannuation scheme.

Mr. David Doyle

When I was dealing with Deputy Cuffe, I explained that the degree of prudence followed in assessing the requirements for that Vote was somewhat excessive. I agree we should get the essence of that tighter but I emphasise there are two variables that cannot be predicted with certainty, namely, how many pensions will go on to the next stage and how many of a large cohort aged between 60 and 65 will opt to go in any particular year. The degree of the over estimate was reduced last year but it was not eliminated. At the beginning of last year I was assured there would be an excess Vote. As it happened, there was not. I have also been told the same about the current year but I am quietly confident there will not be.

Deputy Thomas Broughan

What is Mr. Doyle hoping for from the Commission on Taxation? Mr. Daly, who appeared before the committee, recently will be very active on that.

Mr. David Doyle

The illustrious Mr. Daly certainly will be a very fine chairman and he is accompanied by a wide range of groups of interest and opinions from all sectors of the business community and society as a whole. I expect that within the terms of reference, which are not exclusive to any area they want to bring to the table, they will take a holistic view of the structure of the tax system, the nature of tax allowances and incentive schemes and consider in a very reflective way what the nature of the tax system should be going forward, which will discharge our obligation to raise money in a socially responsible and economically proactive way and, depressingly, in a manner that will collect the money we need, which is at a certain volume currently. However, having regard to the pressures I intimated earlier, the level of the tax burden in the economy in the long term will require close assessment. By the autumn of next year, I hope the committee will see a very fine report.

Deputy Jim O’Keeffe

I refer to the issue of the pensions time bomb and the greying of our society. In these politically correct days, I should declare myself as an early entrant in light of my grey hair. In one sense, the figures are encouraging. Mr. Doyle referred to Ireland having the second lowest gross debt to GDP ratio in Europe at 25% and the net figure is even better at 14%, when the National Pensions Reserve Fund is taken into account. How good is our position, in light of the anticipated reduction in the ratio of workers to pensioners from 6:1 to 2:1? How good is the State's position in the context of pension provision? I am concerned about the issue of the contingent liability and what Mr. Doyle referred to as the accrued liability for public service pensions. I take it this refers to the 95,000 public service pensioners and not to the 450,000 social welfare pensioners. Does the sum of €75 billion cover the current 95,000 pensioners or those who will become pensioned in years to come? Will Mr. Doyle elaborate on that? This is a serious issue.

Mr. David Doyle

The Deputy has managed to hang on to more of his hair than I have. The sum of €75 billion covers the current assessment of the pension rights accumulated by the 300,000 people currently working in the public service and the net present value of the future pensions that the 95,000 people will receive before they become non-pensioners. Many people are concerned, particularly accountants. The Comptroller and Auditor General has been pursuing this to quantify the contingent liability on a number of organisations. The State is not like a commercial company where a pension fund must be built up to a level that will discharge at any moment the liability its pensioners and its current employees would draw down were the business to go out of existence. That would be discharged and that is what sustainability means in a commercial fund. At any one time, the liabilities that have accrued both to the current workforce and the future pensioners would be discharged by the assets in the fund. The Government will always be there.

Deputy Jim O’Keeffe

Not this one I hope.

Mr. David Doyle

I cannot express a view on that. Government will always be there and, therefore, the key question is whether it will have the annual resources required to discharge the annual outlay. The €75 billion is a calculation based on the next 70 years but over that time many taxes will be collected. Over time the important factor from the point of view of fiscal sustainability is that the Government would have the capacity, as time goes by, in its annual budget to meet the accruing annual liability for pensions. The figure for the public service is set to double and it is set to treble for social welfare as a proportion of output.

Deputy Jim O’Keeffe

Do I take it the best practices followed in the private sector are not followed in the public sector? In the private sector, a corporation or company is expected to have a fully funded pension fund whereas that is not provided for in Government financing.

I refer to the 450,000 social welfare pensioners. A social insurance fund is in place and this raises a related problem. Is sufficient money in this fund? I gather it is enough for current contributory pensioners but the 450,000 covers many non-contributory pensioners. Is there any estimate of the current accrued liability for social welfare pensions?

Mr. David Doyle

A private sector commercial operation can go out of business at any time. Therefore, the pension fund must be able to discharge the liability for the existing pensioners plus the pensions due to its employees. The private sector commercial funds must operate to a funded pension liability standard. In the case of Government employees, it is a pay-as-you-go scheme. That is the critical difference.

I could not hazard a guess with regard to the equivalent of the €75 billion in the social insurance fund, but a full actuarial review of the fund has been published. I am not fully au fait with all the gory numbers, but my recollection is that the level of social security contributions paid — one factor in the current funding position of the social insurance fund — is in positive territory. If we factored in and ignored the subsidies it received for the first 50 years from the general taxpayer, there would be no surplus, but currently there is a relatively small surplus which will probably be rapidly dissipated in the next four or five years.

Deputy Jim O’Keeffe

Does Mr. Doyle accept that these are linked issues with regard to the Government's responsibility for future pension payments? We need to get a handle on what provisions need to be made now and each year to deal with future requirements.

Mr. David Doyle

I agree. An actuarial review of the adequacy of current social security funding has been published. The actuarial assessment of liabilities suggests there is a need to review current social insurance contributions. With regard to the joined-up nature of the two issues in terms of the pension liability that will fall on the public purse, either generally or through the social security system, they are linked fiscal policy issues. The Green Paper last year looked at them in that context and spelled out the overall economic and fiscal context in which pensions policy must be settled. The Green Paper is the subject of ongoing consideration by the Minister for Social, Community and Family Affairs, the Tánaiste and the social partners. The ambitions of the various people involved will be assessed in the context of the financial and economic realities and will be taken on board in the White Paper in due course.

Deputy Jim O’Keeffe

To pursue the matter a little further and take a broader view--

Vice Chairman

The Deputy must heed the time available for discussion.

Deputy Jim O’Keeffe

In the broader context, has the Department looked at the position in other countries? What do countries such as the United Kingdom and the United States, for example, do in the case of the accrued liability for public service pensions? I know Mr. Doyle will not be involved in policy matters, but has there been a look at possible options? President Sarkozy, for example, is encouraging people to work longer and is providing incentives to do so. Is the Department looking at options being considered in other countries in order that they can be brought forward for consideration here? Is there not an urgent need to do this?

Mr. David Doyle

I agree with the Deputy on the scale of the issues facing the country, not in the short term or the next five years, but in future decades. Current policy must be pitched in the context of the emerging longer term position. The position across the globe on how pensions are addressed varies considerably. The norm is a pay-as-you-go system. There are instances where there are state funded pension schemes. In the United States there are many state pension vehicles. There are very few social security systems in surplus. Many of the systems in place across the Continent are in deficit and many now face the aging problem, as opposed to ten or 15 years hence, as in our case. The level of social security contributions here is among the lowest in Europe, which raises the issue of future policy.

The Deputy asked about the options available to us to address this problem and about Mr. Sarkozy's ambition that everyone should work for longer. The original pension age was probably set by Mr. Bismarck in the middle of the 19th century when he worked out that average life expectancy was 65 years. Average life expectancy is now in excess of 80 years, but pension age remains 65 years. Society has become adjusted to people taking early retirement and has accepted that the burden of retirement will be met by the current labour force. The issue is whether it will be possible to sustain this in the future.

The Green Paper spells out a number of issues that will need consideration, including whether pension age will need to be varied. We could have a straightforward jump to a much higher pension age or a graduated run.

Deputy Jim O’Keeffe

We could offer incentives for people to work longer.

Mr. David Doyle

We could have adjusted pension rates, depending on whether people decide to continue working. For example, if they decide to keep working for a further five years, they could receive a higher pension. All of these issues must be considered in the context of the pensions policy.

Deputy Jim O’Keeffe

If we do not do it, we will bequeath a legacy of pension debt to our children.

Vice Chairman

I wish to ask Mr. Doyle a few brief questions relating to the finance accounts for 2006. I notice there is a figure of €200 million included from the National Lottery. I thought all lottery funds were distributed across a range of Departments and schemes. I did not realise some of the funds were kept for the Exchequer.

Mr. David Doyle

The gross receipts from the National Lottery are lodged to the Central Fund, from which disbursements are made through the Votes across Departments. In a detailed perusal of the gargantuan production of the Abridged Estimates Volume one can see many notes to the effect that a subhead is part funded by the National Lottery. At one stage the National Lottery designated schemes were entirely funded by way of the sum of €200 million, but now expenditure on such schemes is significantly ahead of that figure. I think in excess of €300 million is designated for projects termed lottery-assisted projects.

Vice Chairman

Why is it described as a surplus?

Mr. David Doyle

It is the surplus generated by the National Lottery company after it has discharged the sum for prizes. It is disbursed through the Votes.

Vice Chairman

A figure of €56 million is included for the sale of surplus HSE assets. Is this funding not ring-fenced for other capital projects within the health sector?

Mr. David Doyle

If I am correct, that issue arose when the Accounting Officer for the Department of Health and Children was here. I am not fully informed of all the details but I understand that a portion was ring-fenced for a particular service. The annual capital funding for the health services runs to in excess of €500 million a year. One needs to look at the two figures together. I believe the committee is scheduled to meet Mr. Scanlan and Mr. Drumm again and no doubt that particular issue could be explored further.

Vice Chairman

The Comptroller and Auditor General may be able to explain.

Mr. John Purcell

I think it is part of the arrangements for voting money to the Health Service Executive. The amount which they can bring to account in appropriations-in-aid of the Vote — which all sounds very technical — is limited by the amount estimated and therefore any amount over that must go directly back into the Exchequer. As I understand it, that is why this amount is coming in as we call it, a direct receipt to the Exchequer.

Mr. David Doyle

There were also counterpart moneys. When the HSE was established it was subjected to an appropriation account process. Various liabilities had been accrued by the HSE system when it was brought in under the Vote machine. Those liabilities were discharged through the HSE Vote. The total picture is many billions of euro and the capital side is running in excess of €500 million a year.

Deputy Thomas P. Broughan

I am not clear on a couple of points. How much will the Commission on Taxation cost and how are its members being remunerated?

Mr. David Doyle

The Estimates for the public service will be published this afternoon. This contains a marker for the costs of the commission which I think are approximately €0.5 million. This is a stab in the dark to the extent that the commission will require extra funds and we will need to evaluate whether we can utilise other funds on the Vote.

Deputy Thomas P. Broughan

What level of fees will be paid to the chairperson and to the members?

Mr. David Doyle

I do not have that information with me. The chairman will be a part-time executive chairman. It is envisaged he will be working two days a week. He will not be paid any more than the difference between his salary and his pension under the pension abatement rules. This is a maximum of €100,000 or thereabouts. I recall the figures being talked about for ordinary members. If the commission holds 20 meetings in a year, the fee might be €15,000.

Deputy Thomas P. Broughan

Per person?

Mr. David Doyle

Yes. I think the fee will be something around €700 a day. I am not swearing on the Bible on this.

Deputy Thomas P. Broughan

It is not a bad gig anyway for the lucky recipients.

Mr. David Doyle

If one manages to be the recipient of a bill from a senior partner in one of the accountancy firms, it would be a lot more than €700a day.

Vice Chairman

I will ask the Comptroller and Auditor to comment.

Mr. John Purcell

I wish to make a point before we finish. I think I used the word "dubious" when referring to the Secret Service Vote earlier. That would not be appropriate and I wish to correct the record. I think the word, "unorthodox" would be a better word in that sense. I just want to clarify this for the record in case anyone would be given the wrong impression.

Deputy Thomas P. Broughan

It is a fascinating Department and I thank the Secretary General for answering our questions as fully as he has. Such a powerful Department needs a lot of invigilation. The Department seems to be extremely conservative in the interpretation of trends in movement in the economy. Something that will be of great interest to our constituents over the next two or three months are the net payments to the European Union. What is the net payment made by Ireland to the European Union for 2006? At this stage what amount have we received from Europe, what amounts have we paid in VAT, etc., and what is it likely to be in the future?

Mr. David Doyle

The information will be available in a few moments. The Deputy asked about the number of accountants in the Department — there are about ten accountants.

Deputy Thomas P. Broughan

Is the Department going to hire a few more accountants on foot of the Comptroller and Auditor General's report?

Mr. David Doyle

Every public service organisation would like to hire more accountants. Just because some of one's best friends are accountants does not mean one agrees with them.

Deputy Thomas P. Broughan

I know that. I wish to ask about forecasting. We did not have enough time to examine the additional reports very much. Some of the star economists such as David McWilliams or Jim Power seem to be closer to the nub of what tends to happen in the forecasting than the Government. In the case of consultancy, with the exception of the ESRI and so on, does the Department seek any significant external advice from the general pool of economic forecasting talent in the country?

Mr. David Doyle

As regards the forecasting luminaries in the private sector, to some extent there is a bit of a herd mentality. The first official forecast comes from the Department of Finance and then the Central Bank will fine tune that. The ESRI will have a different opinion and Davy's, Indecon and the rest of them will all say whether the Department of Finance is right or wrong and they will announce their own latest forecasts.

Deputy Jim O’Keeffe

The witchdoctors often looked into the entrails of a goose and sometimes they were probably even more correct.

Mr. David Doyle

The previous Minister for Finance opined in a particular document that the Department of Finance was prepared to cost anything, including the cost of keeping five ducks on top of Howth Hill. I think he put that in a document that came to one of the committees of the House. We do not have any ducks in the Department although we would like to think we have a few eagles but maybe not as many as we should have but we have lots of them.

Mr. John McCarthy is senior economist on secondment to the Department from the Central Bank. He has informed me we are one of the better forecasters. Where we fall down is that we do not forecast every month; we forecast with the budget and we do not produce a real evaluation until the pre-budget outlook the following autumn. In the interim an army of forecasters are fine tuning the forecasts every month. We resist that temptation.

Deputy Thomas P. Broughan

We are used to quarterly reports from the likes of Ryanair in the business pages.

Mr. David Doyle

Indeed. We produce analysis of the fiscal outlook at the end of each quarter for the information of the public and the House. We do not produce quarterly economic updates — perhaps we should but we do not do them. As to whether we seek outside assistance, we have one of the leading economists in the country from the Central Bank working with the Department. We look to the input from the Economic and Social Research Institute. I could instance privately to the committee where we agree with them and where we would not. We listen to their input. The European Commission has a very professional economic service drawn on skills from right across Europe and we listen to them. We are visited regularly by the OECD, which has a similar collection of equally qualified economists and we listen to them. We are visited annually by the International Monetary Fund, which patrols all the member states and spends the bones of a week in Ireland. According to the reports of its headquarters, it is definitely reviewing the economic performance of Ireland. However, I have seen its representatives sampling the social experience here as well.

We are very open to input into our activities. We would like to think we are not insular. We would like to think we look at ourselves and assess our performance and where we need to improve. The Deputy might be interested to know that currently we are engaged in a capability review of the resources the Department employs right across the full spectrum of our activity, which is extremely wide, where we are taking a good look at ourselves. We have a committee of assistant secretaries, chaired by a former Secretary General of the Department of Defence, David O'Callaghan. It is subjecting to scrutiny the Department's capabilities to provide the service it should provide to the House and the public generally. They are talking to all our customers. I think that some of the Members in the House will be spoken to by the committee in terms of their objective assessment of the Department's performance. We aim to look at ourselves and draw appropriate conclusions. I still would not agree with what the Deputy said earlier about the Department's performance on tax forecasts.

Turning to the question the Deputy asked about Ireland's EU receipts and payments, the total cash the State has received since we joined the European Community in simple historical cash terms is €60 billion. The total payments we have made to Europe in that period were €20 billion. The net receipts to date have been €40 billion. That is €40 billion that European citizens have invested in Ireland since 1973. The net receipts in any one year in the past would have been as high as €2.5 billion in 1997. Currently they would be running at approximately €500 million. At the very early stage, it was virtually all one-way traffic because the nature of the Irish economy was such that there were huge inflows. We were seriously economically underdeveloped. That position is now changed, where Ireland is among the wealthiest countries in terms of gross domestic product per head, whatever about some of the other measures. Our level of contributions is now significant because the base on which it is measured has grown so large and the level of transfers to Ireland has begun to decline.

The EU investment in our agriculture system continues at a very high level. The EU investment in our infrastructure is rapidly tailing off. Currently, as I said, the net receipt is approximately €500 million. We receive €2 billion and we pay approximately €1.5 billion. That situation will go into positive contribution territory overall in 2011, by which stage we will be roughly at break even. By 2013, which is the end of the current budget envelope in Europe we will be paying about €500 million more than we receive. Taking the total receipts to date and what we will be looking at out to 2013, roughly we will have received €72 billion in cash terms between 1973 and 2013 — 40 years — and we will have paid out roughly €31 billion. So the contribution to the Irish economy has been massive and will continue to be substantial.

Deputy Thomas P. Broughan

It will obviously take a long time for us to become net contributors for the period since 1973.

Mr. David Doyle

Absolutely.

Deputy Thomas P. Broughan

It will be in the 2030s or 2040s.

Deputy Jim O’Keeffe

There will also be enormous non-cash benefits.

Mr. David Doyle

Our membership of the European monetary system for itself and the interest rates we have enjoyed have both been very positive. Sometimes perhaps the interest rates were at a level that might have been higher for the Irish economic conditions. The overall benefits have been enormous.

Vice Chairman

I thank Mr. Doyle. That concludes our examination today. Is it agreed that the committee notes Votes 1, 6, 7 and 12, the finance accounts 2006, and the contingency fund deposit account, and that chapters 1.1 to 1.3, inclusive, and 2.1 may be disposed of?

Deputy Thomas P. Broughan

I am sure the Deputies who have been here will get the opportunity to talk about the contingency fund deposit account, the National Treasury Management Agency and so on. I presume the Department of Finance will be there at that time. That is another significant commitment in the years ahead. Will we have that opportunity?

Vice Chairman

We will, of course.

Mr. David Doyle

On a technical point, traditionally the Department is not there when the agency is there. The agency has a separate line of responsibility directly to the Minister for Finance. For the purposes of the items it deals with, it is the Department of Finance. We will not have a separate line of communication on that one.

Vice Chairman

I thank Mr. Doyle and his colleagues for attending and for their co-operation with the committee.

The witnesses withdrew.

Vice Chairman

The proposed agenda for the meeting of Thursday, 28 February is as follows: Vote 38, Department of Social and Family Affairs, chapter 9.1 — overpayments; chapter 2 — prosecutions; chapter 9.3 — payment of child benefit by electronic funds transfer; chapter 9.4 — one-parent family scheme, control activity; chapter 9.5 — advance payment of grant to Sustainable Energy Ireland; social insurance fund accounts 2006; and also relevant chapters from the value for money report 56 of the Comptroller and Auditor General, Improving Performance — Public Service Case Studies, part B, specific reports, chapters 3 and 8; and part C, cross-cutting reports, chapters 18 and 19. Is that agreed? Agreed.

The committee adjourned at 12.10 p.m. until 10 a.m. on Thursday, 28 February 2008.