I thank the committee for inviting me here today to discuss the appropriation account for Vote 37, chapters 11, 12, 13, 14 and 20 of the report of the Comptroller and Auditor General, and also the account for the Social Insurance Fund, all for the year ending 2017.
I am joined today by Ms Anne Vaughan, deputy secretary of the Department, together with Ms Kathleen Stack, assistant secretary general with responsibility for control policy, Ms Deirdre Shanley, assistant secretary general with responsibility for finance, and Ms Patricia Murphy, assistant secretary general with responsibility for employment affairs and PRSI policy. I am also joined by Mr. Jim McDonnell, the Department's chief accountant and Ms Gráinne McGuckin, from the Department of Public Expenditure and Reform. With the Chair's permission, I may rely on assistance from my colleagues in addressing some of the questions members may ask.
I arranged for an advance copy of this statement together with briefing material on each of the chapters under review, the annual report of the Department and the annual statistics report and other relevant information to be provided to the committee secretariat last week. I hope members found that material to be of use. In my opening statement last year, I referred to the changes in the nature and role of social welfare over the period dating back to the establishment of the Department some 70 years earlier. I spoke about the role of welfare in compensating for and mitigating the impact of failures in the market economy. I spoke of how the more than 70 different payments and services provided by the Department contributed significantly, not just to cushioning the impact of the great recession but to helping the economy recover faster than it might otherwise have done. I spoke about how our staff are acutely aware, through their everyday work, of the impact of welfare and employment services at the micro level - the level of individual citizens and families - and that while they are mindful of the need to control the distribution of scarce State funds, they are equally mindful of the vulnerability of the people who rely on our services. I spoke about how we work to treat every person with dignity and respect and to make our offices bright and welcoming. I also spoke of how independent research indicates that customers rate our staff and services highly, including those provided under contract by third parties.
I mention this again because the work of the Department is essentially the work of balance, not just the external balancing of market dynamics and social goals but also internal balances. In our work we have to strike a balance between ensuring, on the one hand, that people have access to a payment and, on the other, providing them with, and requiring them to avail of, a service that can help to reduce dependence on that payment. There is also a balance to be struck in, on the one hand, designing and managing large-scale service processes that are reliable, efficient and effective for the overwhelming majority of customers and, on the other, imposing controls and checks intended to reduce fraud and error. As I said last year, we cannot pursue the elimination of error or fraud at the cost of denying entitlement to service or frustrating access to that entitlement. There are also balances to be struck on the revenue side of our operations relating both to intergenerational and inter-temporal equity and to horizontal equity in terms of treatment of social insurance charges on different types of employment. These are the balances at the heart of the five chapters selected for discussion today, and it is on these chapters that I will focus my opening remarks.
The first chapter, chapter 11, summarises the Department's approach to what, following feedback at the Committee of Public Accounts last year, we now call control surveys. It outlines the results of 14 surveys conducted by the Department over the past six years, covering approximately 80% of the Department's expenditure. These surveys are conducted to help identify the risk factors that give rise to incorrect payments on individual schemes and to inform changes to operations processes and control measures to help reduce the level of incorrect payments into the future. The surveys also provide an indicative estimate of the level of control loss, or leakage, in the system at a point in time. In general, for most schemes surveyed, this ranges between 0.5% and 5%, with farm assist being a notable outlier at 10.4%. Across all 14 schemes, the net level of excess payments averaged about 2.2%. As Accounting Officer, I agree, given the scale of the Department's expenditure, with the Comptroller and Auditor General's assessment that this level of control loss or leakage is material. However, as I did last year, I also draw attention to the fact that this rate stands comparison with equivalent rates in social welfare administrations in other states, for example, in the UK it is 1.9%, in Israel it is 5% and in Canada it is 3.5%, and indeed to rates of bad debt, which typically range between 2% and 5%, and shrinkage, which is typically 2% in commercial industry.
The second chapter, chapter 12, reports on a review of the JobPath service by the Comptroller and Auditor General. By way of background, JobPath is an employment advisory and case management service provided to long-term unemployed jobseekers. The service is provided on behalf of the Department by two contractors who are remunerated based on their engagement with jobseekers and the employment outcomes achieved. The service sits alongside and augments the case management and advisory service provided by the Department's own Intreo staff and the contracted service provided by local employment services.
In the past, at this committee and elsewhere, a number of queries have been raised in respect of JobPath. The first is whether it is appropriate to provide and to require jobseekers to engage with a case management or employment advisory service. The evidence on this is, I believe, very clear. Of all of the types of labour market intervention provided by public employment services around the world, the form of intervention which is shown to have the most impact is case management and employment advice. For this reason, it is important to provide an employment advisory and case management service and JobPath is simply a method of doing this.
The second question raised is whether such a service should be provided under a contracted model or should be provided directly by the staff employed by the State. Different people will have different views on the matter. What I can say as Accounting Officer is that most countries use a mixed model, contracted resourcing being used to ensure that resource capacity can be flexibly added as required to core in-house capacity. This was the rationale for the procurement of JobPath services at a time when the Department's in-house resources could not respond, as required, to the large increase in unemployment.
The third question raised is whether the JobPath model provides value for money. I have provided under separate cover some additional briefing material which sets out the costs of the JobPath service and the outcomes achieved. These data indicate that the service is delivering on targets set and that the costs of the service compare favourably with other case management services contracted by the Department. Committee members may be interested to know that preliminary results of an econometric study currently being finalised indicate that people who received the JobPath service have higher rates of progression into employment and higher earnings in employment than people with a similar profile who have not received the service.
The fourth question raised is whether the Department has sufficient controls in place to ensure that payments to contractors are validly made and supported by real evidence of sustained employment. This issue was considered by the Comptroller and Auditor General in his examination of JobPath. Overall, the Comptroller and Auditor General's report notes that the number of people moving into employment from JobPath exceeds the target levels and that the number of people sustaining employment is broadly in line with the reference levels, both of which were set at 62% of the counterfactual or base case level, by which I mean 62% higher than the counterfactual or base case level.
The report also notes that the Department has a reasonable basis for the key performance measures used to evaluate contractor performance and that payments made to contractors were validly supported by evidence of the performance achieved.
Other questions raised in respect of JobPath, including about its interaction with programmes such as community employment, were addressed in a presentation to the Oireachtas Joint Committee on Employment Affairs and Social Protection earlier this year. I have provided the committee with a copy of a statement on the JobPath service which was submitted at the time. I hope it will address questions members may have, although I will be pleased to address further issues of interest.
Chapter 13 summarises the results of the actuarial review of the Social Insurance Fund and notes that it is a valuable exercise to inform discussion on short-term decisions and their impact on long-term outcomes. The actuarial review is a periodic study conducted every five years in accordance with statute to project forward the likely evolution of the funding position of the Social Insurance Fund based on a defined set of assumptions. It is important to note that the Social Insurance Fund, unlike, for example, private pension funds, does not operate on a pre-funded basis, whereby contributions made by a contributor today are invested to fund future disbursements. Rather, it operates on a pay-as-you-go basis, with current year expenditure funded by current year revenues. Deficits in any year are funded by means of an Exchequer subvention paid from the Central Fund. Surpluses in any year are invested by the Department of Finance for the benefit of the fund and used to supplement income in subsequent years, but they are not netted off against deficits incurred in prior years. Therefore, although the fund is projected to be in surplus to the value of €2.3 billion at the end of 2018, that is a somewhat simplistic presentation of the actual position. It has run deficits in six of the past ten years and during the recession the total value of the deficits amounted to €11 billion. These data indicate that the value of benefits paid by the fund greatly exceeds the value of contributions made to the fund. That position is confirmed by the actuarial review which indicates that the value of the State pension alone is more than the value of the contributions made. For that reason, given the projected increases in the numbers of older people and increasing life expectancy, the actuarial review projects significant annual deficits into the future. It is important to note that decisions on the funding of the Social Insurance Fund, in particular on the setting of social insurance rates and the investment of any fund surplus, are vested in the Minister for Finance.
The fourth chapter for discussion is chapter 14 which sets out the results of an examination by the Comptroller and Auditor General of age-related jobseeker's allowance payments. The report finds that approximately 1.6% of jobseeker's allowance payments to people aged 18 to 25 years were made at a higher rate than provided for in legislation, at a cost of some €1.2 million in 2017. It, therefore, recommends that the rules used to calculate payments be coded in the Department’s computer systems and that, pending this change, a greater level of quality control be applied and additional staff training undertaken to ensure all staff are aware of the rules. As Accounting Officer, I agree with the recommendations and have taken steps to put them into effect. These steps are set out in the conclusions and recommendations section of chapter 14.
The final chapter earmarked for discussion is chapter 20 which deals with the collection of PRSI contributions by self-employed persons. As this topic cuts across the operations of this Department and those of the Revenue Commissioners, I will be joined by Mr. Keith Walsh and Mr. Kevin Cashell from the Revenue Commissioners who will endeavour to address questions related to its work. As noted in the chapter, self-employed persons pay the standard rate of employee’s PRSI, or 4%, but they do not pay the employer-related contribution of 10.05%. The difference in contributions may provide a financial incentive for an individual to be declared as self-employed. However, the chapter also notes that despite this apparent incentive, there has been no increase in the proportion of earners classified as self-employed in the past ten years. The issue of disguised employment was the subject of an interdepartmental review group study in 2017 which is referenced in chapter 20. A copy has been provided for committee members under separate cover, together with a recent presentation on the subject to the Oireachtas Joint Committee on Employment Affairs and Social Protection.
Classification of employment for social insurance purposes is based on self-declaration, typically by the employer, with the scope section of the Department determining the appropriate class in cases where the correct classification is unclear or in dispute. The section utilises the agreed code of practice for determining the employment and self-employment status of individuals in making such determinations. The Revenue Commissioners act as agents of the Department in the collection of PRSI. Both the Revenue Commissioners and the Department, working separately and together, conduct investigations of compliance, with correct classifications as part of our standard investigations regime. As part of his review, the Comptroller and Auditor General examined a random sample of 35 determinations made by the scope section during 2017 and found that the evidence supported the basis on which the section made its determinations. No example of a misclassification was reported.
The examination also considered a pilot review undertaken by the Department of the social insurance class applied to company directors in order to assess the merits of a regular annual review and noted that the Department had concluded that such an annual review process was not merited. In addition, the examination considered a number of cases where the Revenue Commissioners or the Department’s inspectors had conducted investigations into social insurance classifications and did not find any issue of concern in them. However, it did note that the investigations had detected what the Comptroller and Auditor General considered to be a significant incidence of misclassification, particularly in the construction industry.
The Comptroller and Auditor General concludes with three recommendations. The first is that the Department introduce a random programme of reviews of PRSI classifications, both to provide assurance as to the accuracy of classifications and to act as a deterrent to deliberate misclassification. In the main, I agree with this recommendation. However, my preference is that it should be achieved by increasing the number of employer PRSI inspections, rather than reviews per se, and that the inspections should include targeted, as well as random, elements. As members may be aware, earlier this year the Department conducted a media campaign on the issue of false self-employment. Following the campaign, we undertook an intensive programme of employer inspections in the Dublin area and a targeted campaign in the construction sector in the Galway area. Based on these exercises, the results of which are being reviewed, we intend to intensify our employer inspection activity, as part of which we will again conduct a media campaign in 2019. The purpose of the campaign will be to increase employer and employee awareness of rights and obligations and encourage reporting of suspected cases of misclassification. The intelligence garnered in response to the campaign will inform the targeting of specific business and industry sectors for inspection purposes.
The second recommendation is related to the compilation of sectoral data for self-employed contributors. The data provided by the Revenue Commissioners does not include sectoral data for the source of PRSI receipts. I agree that receipt of this information would be useful in targeting inspection activity and we are following the matter up with Revenue. In the meantime, the Department has analysed the sectoral data for self-employment available from the Central Statistics Office. I have forwarded a trend analysis of the data in the past 20 years. In summary, it indicates that the share of employment comprising self-employment is in gradual but steady long-term decline. This suggests that, at a macro level at least, the issue of disguised or false self-employment is not as prevalent as it is sometimes presented to be. Within these data, there are some interesting trends worthy of note. For example, the share of self-employment accounted for by the services sector has grown, whereas that accounted for by agriculture has diminished. The share accounted for by other sectors is largely unchanged. However, these changes are largely driven by changes in the composition of employment in the economy, in particular the growth of the services sector. As a result, the share of employment in the services sector comprising self-employment has remained relatively unchanged, at approximately 11%, over the entire period. Again, this suggests there is no systemic reclassification of employment in the sector.
When the data are analysed by type of self-employment, a somewhat different picture emerges. Two types of self-employment are captured for the purposes of statistical reporting. The first is people who are self-employed and employ staff in their business. It is very unlikely that such persons are misclassified as self-employed. The second type of self-employment is people who are employed on their own account - people who do not have staff engaged in their business. This type of self-employment could include some people who should properly be classified as employees. At an overall level, the share of own-account self-employment is in steady decline. This trend is common to all of the major sectors, with the exception of construction. As shown in the charts forwarded to the committee, the share of construction employment classified as own-account self-employment was constant, at approximately 15%, in the period up to the start of the recession. During the recession it doubled to approximately 30%. This can mainly be explained by the fall in construction employment during the period. It is notable that the share of own-account self-employment is falling again as construction employment has recovered in recent years. However, it will be important to monitor the trend to ensure the downward trajectory is continuing. Accordingly, the Department will continue to place a particular focus on PRSI compliance inspections in the construction sector in the next year.
The third recommendation is related to the process undertaken with the Revenue Commissioners to reconcile monthly variances in PRSI receipts versus estimates.
I agree that a more structured process would be useful and would expect more timely data that should become available as part of the PAYE modernisation programme will support such a process. I am therefore arranging to have this recommendation followed up with the Revenue Commissioners.
I understand that members would like to discuss the issue of housing supports today. This Department previously played a significant role in providing monetary supports to help people in receipt of welfare payments to cover some or all of their household rent. The role of the Department has diminished since 2014 when the housing assistance payment, HAP, funded by the Department of Housing, Planning and Local Government and administered by the local authorities, was introduced. Payments by local authorities, which are not contingent on a person being in receipt of a welfare payment, and so avoid a welfare trap problem, now account for the majority, more than 70%, of housing support payments funded by the State. In order to address any issues that the committee members may wish to raise I will therefore be joined by my colleagues Ms Mary Hurley and Ms Marguerite Ryan from the Department of Housing, Planning and Local Government later this afternoon.
In conclusion I would like to say that the scale and scope of the operations of the Department of Employment Affairs and Social Protection are greater than perhaps any other Department or public body. The managers and particularly the staff of the Department work hard to deliver services to the communities from which we come and in which we live, conscious that it is our families, friends and neighbours who not only depend on these services, but who, through their social insurance contributions and taxes, pay for these services. We are proud of the work we do but we know we are not perfect and we do not always get things right. That is why we welcome the oversight of the Comptroller and Auditor General and of this committee. This process plays an important role in reminding us of our purpose, helping us to identify areas for improvement and helping us to learn from our mistakes. It is through such a process that we would hope to improve.
I and my colleagues will be pleased to take any questions members may have.