Yes, there is no problem with that. I would point out that an amended version was sent to the committee this morning.
I thank the Chair and the committee members for their kind words on my appointment. I am pleased to meet with the committee for the first time as Secretary General of the Department and I look forward to working with it in a positive way. I have a number of colleagues with me this morning and we will operate as a team in responding to questions, particularly if they go into specific details. I already sent the committee a brief in advance to bring it up to date on developments and I will now touch on some of the key points.
When my predecessor and I met with the committee last July, the Government had already entered into the EU-IMF programme of support, which was agreed in late 2010. Much of my Department's time since then has been focused on restoring fiscal stability, meeting its commitments generally under the programme of support, safeguarding the banking system and reorganising the structure of the Department. Before commenting on stabilisation of the banking sector, which is on the agenda today, I would first like to comment briefly on some of the other topics.
With reference to EU-IMF programme of support,the key condition for returning the economy to sustainable employment growth is restoring order to the public finances. Substantial efforts in this respect have been made and are continuing, with significant steps also being taken on the structural reform front. Last year saw a welcome rebound in economic activity, with GDP recording its first full year of growth since 2007, at 0.7%. A second consecutive year of positive growth is forecast again this year, following which it is hoped there will be a strengthening over the medium term of growth towards 3% per annum on average for the period 2014-15. The economy's return to growth last year was down to a strong contribution from the traded sector, which is expected to continue this year. Obviously, export growth will be affected by difficulties being experienced by the euro area. The substantial competitiveness improvements we have seen in recent years will provide some countervailing support to the difficulties elsewhere. It is also important to point out that a weakening of activity in our main trading partners is already factored into the Department's budget forecasts for economic growth. Similarly, weak domestic demand is allowed for in the budget forecasts. It will take time for the imbalances which were built up during the boom by firms, households and the Government to unwind. That said, domestic demand is set to fall at a more modest pace this year than in 2011 and the drag from domestic demand is expected to be less this year compared to previous years. It is also worth noting that an important contribution to economic recovery is reflected in foreign direct investment activity, with the IDA reporting a record number, 148, investments in the past year. Recent positive announcements in this regard in respect of 2012 are encouraging.
Moving towards a balanced budgetary position is a necessary but not sufficient precondition for restoring the economy to sustainable growth and job creation. An underlying general Government deficit of approximately 9.4 % of GDPwas recorded in 2011, as reported in the April Maastricht returns. This is well within the 10.6 % of GDP targetpreviously set for Ireland by the ECOFIN Council. Rome was not built in a day. It is worth noting that the return of the underlying deficit to single figures is a positive development and reflects the very strong progress that has been made. However, a lot remains to be done.
Notwithstanding the uncertainty around growth rates, the public finances are moving in the right direction and we remain on track to achieve our deficit target for this year of 8.6% of GDP. That said, we must bear in mind that a deficit limit of 8.6% of GDP equates to a gap of over €13.5 billionbetween revenues and expenditure. Our budgetary policy at present is framed against the backdrop of this still large deficit, which we must continue to close over the coming years by either growing revenues or reducing cost, or a combination of both.The analysis is simple:we cannot continue to run the business, which is the Irish economy, with the same cost structures by drawing down forever on our credit card to keep the doors open.
Reorganisation of the Department is another matter I would like to touch on briefly. Much discussion has taken place at this committee regarding the capacity of the Department in terms of skills and any gaps that may exist. I would like to comment on this, in respect of which I suspect we will get into further detail later. We are happy to do so.
Last month, I presented the Department's revised statement of strategy for the period 2012-2014. The revised statement of strategy sets out how we propose to optimise our resources by identifying the most significant initiatives we need to achieve and realigning our resources in line with our revised and more forward looking and in many ways ambitious strategic plan. Everyone throughout the organisation will be working to common goals and to finding the solutions which forward the attainment of our objectives as set out in the statement. Given the limited financial resourcesavailable to us, this may involve giving greater priority to certain tasks and lesser priority to others, but with a particular focus on initiatives which contribute to economic growth and recovery. Specifically, it will involve among others the following initiatives: the development of greater capabilities in our economic planning unit the creation of an enhanced project management unitto deliver not alone on our commitments under the EU-IMF programme, but all the goals we have set ourselves;the enhancement of our risk capabilitiesand a greater embedding of a risk management and control culture throughout all areas of activities in the Department; and the enhancement of our international divisionto play a greater and more leading role in the development of policies for European economic recovery.
To emphasise the break with the past, I took the libertyof explaining our new strategy in public so that everyone might better understand our plans and have the opportunity to question me on it. The Department and our country are confronted by some of the greatest challenges in the history of this State. It is not enough to just say goodbye to the troika at the end of the programme. We must do so having already rebuilt the finances of the State and designed an economic powerhouse on foundations solid and robust enough to avoid the mistakes of the past, including those mistakes we cannot yet foresee today. I will now refer briefly to some of the other issues on the agenda today.
On Vote 6 - Office of the Minister for Finance, the appropriation accounts for the Department of Finance in 2010 show a net outturn of €61.875 million compared to a budget estimate for that year of €70.158 million. This left a surplus of over €8 million to be surrendered to the Exchequer and represented a net reduction in spend of 5% year-on-year. A number of key variances contributed to this saving. These are set out in the brief and as such I will not go into them in detail now. As I have indicated in other fora, this level of savings is not in my view sustainable into the future given the increasing pressures facing the Department and the more ambitious objectives we have set ourselves. I make no secret of the fact that I considered it unwise to have forced the Department to cut into its running costs and staff by 9% when faced by great challenges. Before spending more money and increasing our head count, it was critical for me to set out during the first weeks of my appointment our new objectives and a running model to ensure that money would be spent wisely.
In relation to the Chapters listed for review today, Financial Outturn 2010 and State Funding Developmentsset out a summary of the major Exchequer liabilities and assets. The committee will be aware that this position has moved on significantly in the intervening 15 months. While, as appropriate, I provided an update on this in the advance brief, I will now touch on some of the highlights in this regard. The provisional outturn for 2011 shows a deficit of €24.9 billion. Key to this increased deficit is the treatment of banking related expenditure. The underlying tax revenue of €34 billion compares favourably with 2010 and adjusting for banking related expenditure the underlying deficit actually declined by €2.75 billion to €15.25 billion, which is evidence of the progress that is being made in returning sustainability to the public finances.
End quarter one 2012 Exchequer returns continued this trend and were also generally positive, showing double digit year-on-year tax revenue growth. On the expenditure side, budget 2012 brought forward a budgetary adjustment package designed to reduce further the deficit in our finances. The May Exchequer returns released earlier this week indicated that tax revenues in the first five months of the year are 2.8% ahead of target at €386 million. Encouragingly, three of the ‘big four' taxes, namely, VAT, income tax and corporation tax, are ahead of profile. While overall gross Departmental expenditure is just over €100 million higher than anticipated at end-May, with the main pressures arising in the health and social protection Votes, Exchequer developments to end-May are encouraging and provide confidence that our programme targets for 2012 will be achieved.
Over the period 2013-2015, it is estimated that a further €8.5 billion or so in budgetary consolidation measures will be required to reduce the general Government deficit to below 3% of GDP by 2015, which the Government is firmly committed to doing. I will deal briefly with the banking stabilisation measures, which have also occupied much of our time during the past year. This work is continuing. Returning the banking sector to health is an area that has been a particular priority for the Government and the Department during the past year. We must have a financial system that supports a return to sustainable growth in the economy.
The brief sets out details of the key steps that have been taken in the stabilisation process during the course of 2011 to 2012, reflecting papers published by the Department during the course of the year as we made progress on this road. As members will note from the briefing papers and as demonstrated by the Department, we had set out a five step process that we wanted to go through, starting with the reshaping and recapitalisation of the banks and working towards building banks up for the future, having gone through various funding work and so on.
The steps taken to date since we announced our plans in March 2011 have included the reshaping and recapitalisation of the banks with the State's investment reduced to only €16.5 billion while still delivering the €24 billion target required by the prudential capital asset review, PCAR, process. Ireland now has two universal Government supported pillar banks - Bank of Ireland and Allied Irish Bank - which participate alongside Permanent TSB, Nationwide and other foreign banks that continue to operate in the Irish economy. The State's ownership in Bank of Ireland, which at the time of our last appearance before this committee was anticipated to be much greater, was successfully reduced to only 15% thanks to private investment which occurred in July of last year. We have also embarked on a very ambitious deleveraging programme to resize the banks and are very much in advance of our targets with €36.4 billion in the PCAR banks deleveraged against a target of €32 billion. In addition to that, thanks to what has been referred to as the largest loan sale transaction in global real estate history in IBRC, we also continued to deleverage nearly €85 billion from IBRC's balance sheet. Perhaps more importantly, we have seen that the deposit outflows, which were occurring in significant numbers prior to the PCAR recapitalisation, have now been reversed and the growth in deposit numbers in the second half of last year and the beginning of this year has been significant and we now have above €150 billion of deposits in the banking system in the covered banks, which is more than €10 billion greater than the low seen in June 2011. Our banks have importantly tapped into the wholesale secured "repo" markets in recent months and successfully started to also attract non-guaranteed deposits from corporate customers. All of this improved funding profile and the banks' deleveraging have contributed to reduce the Central Bank funding of the Government-supported banks from a high of €157 billion down to only €109 billion at the end of 2011 and the trend remains positive since then. The pillar banks have been set ambitious targets for sanctioning of lending into the economy and the 2011 target of €3 billion for each bank was achieved while the target for 2012 has been increased to €3.5 billion and the banks are being closely monitored to ensure they meet these targets; certainly the target to be achieved this year remains challenging.
Looking to the future, we are focused on establishing sustainable banks that can survive and prosper without the need for ongoing State support; developing and implementing solutions to the mortgage arrears problems in the country; and supporting economic growth by making access to credit available to viable businesses or individuals.
I would like to add a word on the two reports our Department issued today on the €3.6 billion error in Government debt computations. I think the committee will understand when I say that it is wholly regrettable that an error like this would occur and continue to be reflected in the calculations produced by the Department for such a long period. I was aware of this issue and the need to address it prior to my taking up my new responsibilities and, as a result, many of the steps I took immediately on taking up this office involved restructuring the Department and were designed to deal with the problems such as those identified in the report. It is not, however, sufficient to deal with this isolated part of the Department and fix it in a siloed way. The changes I outlined above around our statement of strategy, including the creation of a new finance and risk office, are designed to do what can be done to prevent a recurrence of a similar situation throughout the Department as a whole. That had to be the priority and I have had much discussion with our internal audit team and the chair of our audit committee since taking up this office to build a more robust control framework across the Department for the future.
It is, however, important to point out that human error while it can be minimised cannot be eliminated altogether. Which of us can genuinely say that we have never made a mistake along the way? While it is important to reinforce in our colleagues the key importance of doing what we can with utmost care, it is even more important to build the checks and balances that will identify any mistakes which will inevitably occur despite these efforts. Responsibilities must be clearly identified on a one by one personal basis and within Departments and no one person should be asked to conduct a key task on his or her own. Resources must be allocated to the task of double-checking results if we are to avoid a similar situation. More important, we must work together to foster a culture across the system where people are not afraid to admit to having made a mistake. Mistakes, when hidden, get worse not better. We need to assure people that recriminations or witch hunts will not be the reward for admitting honest mistakes.
I understand that the committee has also been anxious to get the reports and believed that they may be available earlier than today. The importance of due process in the preparation of the reports and a broadening of their scope have contributed to certain regrettable delays. I endeavoured, however, to have them for the committee in order that the first public debate on these documents should take place, as I thought appropriate, before the committee and not elsewhere. Personally, I believe that the work product completed has been worth this extra effort and I would like to thank both the internal teams and teams from Deloitte for their very significant efforts to help us understand the steps we need now to take. The first step will be a centralisation, as recommended, of the compilation of the data in the CSO which has the better resources to do this task.
On a more general note, I believe that we have made very considerable progress even from early last year when I first embarked on travelling to New York and Europe to engage with foreign stakeholders and explain Ireland's plan for recovery. I took the liberty of including a diagram in the briefing papers from which members will see in one shot the success of the measures to date but the yet very significant headwinds which remain, especially out of Europe, before we are fully back to the market-based funding at acceptable rates. If one follows the trajectory of the lines, one will see the positive impact of the PCAR announcements, which saw the first reduction in Irish Government spreads and, more important, the announcements around the Bank of Ireland restructuring in July, which decoupled the Irish sovereign rates from the Portuguese rates at that time, moving, as one follows through the period since July of last year, to bring Ireland in many ways closer to the yield rates of Spain and Italy. Somewhat worryingly, however, towards the end of the diagram, members will note that, like the other countries in Europe, as pressure builds on the sovereign, the impact of that on Ireland is also significant in worsening the spreads despite the very considerable efforts we have made. Over the coming months we need to continue to buckle down to the tasks we have set ourselves and I hope that further substantial progress will be made on the agenda, as we have set out in our statement of strategy. I look forward to working with the committee and I thank the members for their attention.
