Fiscal Assessment Report June 2018: Irish Fiscal Advisory Council

We are now in public session. Interference from mobile phones affects sound quality, so I ask that they be switched off or to aeroplane mode.

I welcome Mr. Seamus Coffey, chair of the Irish Fiscal Advisory Council. He is accompanied by Mr. Michael Tutty, Dr. Martina Lawless, Dr. Íde Kearney, Mr. Sebastian Barnes and Mr. Eddie Casey. I thank the witnesses for making themselves available to the committee. A number of other groups will later appear before the committee. The Irish Fiscal Advisory Council, IFAC, is here to consider the June fiscal assessment report, which is its main report and assesses the Department's macroeconomic forecasts and stability programme update.

I wish to advise that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of the evidence they are to give to the committee. However, if they are directed by it to cease giving evidence on a particular matter and they continue to do so, they are entitled thereafter only to qualified privilege in respect of their evidence. Witnesses are directed that only evidence connected with the subject matter of these proceedings is to be given and they are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person or entity by name or in such a way as to make him, her or it identifiable.

Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official, either by name or in such a way as to make him or her identifiable.

Having given that advice, which I will someday learn off by heart, I now invite Mr. Coffey to make his opening statement.

Mr. Seamus Coffey

On behalf of the council, I thank the committee for the opportunity to discuss our recent fiscal assessment report. As the Chair mentioned, joining me today are Dr. Martina Lawless, Mr. Michael Tutty, Mr. Sebastian Barnes and Dr. Íde Kearney. Members of the council secretariat are also present, namely, Mr. Eddie Casey, our chief economist and head of the secretariat, Ms Kate Ivory and Mr. Niall Conroy. The council’s work is enriched by its interactions with the committee and we continue to value these engagements. We hope we can continue to interact meaningfully with elected representatives and I also wish to acknowledge the ongoing interaction between the secretariat and Oireachtas staff in support of these meetings.

The council published its 14th fiscal assessment report on 5 June. The report covers all aspects of the council’s mandate, as set out in the Fiscal Responsibility Act 2012 and the Ministers and Secretaries (Amendment) Act 2013, including assessing the Government’s fiscal stance, assessing the Government’s budgetary and macroeconomic forecasts, including the endorsement function, and monitoring compliance with Irish and EU fiscal rules. The council notes that the Irish economy has experienced a rapid cyclical recovery since at least 2014, which is continuing at a strong pace. Estimates suggest that the economy is producing close to its potential in 2018 and will move beyond it next year and thereafter. In the near term, burgeoning pressures in the housing sector could yield a sharper than expected recovery in housing construction. Although the immediate outlook is favourable, negative shocks will inevitably occur in future. There are clear downside risks over the medium term, including Brexit, US trade policy and the international tax environment to name but a few. Recognising this, the council notes a current window of opportunity that should be used to return debt to safer levels and make the economy more resilient to shocks. Ireland’s debt burden is still among the highest in the OECD and the burden is understated by standard gross domestic product, GDP, comparisons.

The council observes that improvements on the budgetary front have stalled since 2015 despite the strong cyclical recovery reinforced by a number of favourable tailwinds. Although the economy has experienced a strong recovery, that has not translated into any notable improvement in the underlying budget balance, taking into account improvements driven by the cycle. Non-interest spending has risen at essentially the same pace as buoyant cyclical tax revenue since 2015. Allowing for the estimated effects of the cycle, the structural position appears to have deteriorated since 2015.

It is in that context that the council welcomes the fiscal stance adopted by the Government in the stability programme update, SPU, 2018, but the council notes that the Government should at least stick to its existing budgetary plans for 2019. The council assesses that there is no case for additional fiscal stimulus in 2019 beyond those plans and that anything more expansionary is not likely to be appropriate. In its assessment, the council defines an appropriate policy for next year as one in which spending is increased in line with the sustainable long-term growth rate of the economy. That would imply an approximate limit for spending increases or tax cuts of up to €3.5 billion, that is, the gross fiscal space, as the starting point for any budgetary plans for 2019. The calculation is based on forecast price inflation and potential growth rate estimates for the economy.

The council considers a number of estimates of medium-term potential output growth, namely, the Department’s preferred estimates of real potential output growth, which average close to 3% per annum over the forecast period 2019-21, the council’s own estimates of 3.25% and recent estimates produced by the Economic and Social Research Institute, ESRI, of approximately 3.3%. Allowing for inflation, which is forecast to be a little over 1% for 2019, this implies a growth rate of up to 4.5%. Applying this to an adjusted measure of expenditure - the corrected expenditure aggregate in the expenditure benchmark - implies a nominal limit of up to €3.5 billion. The cost of previously announced measures, including sharp increases in public investment, means that the Government’s scope for new initiatives in budget 2019 will be limited. Departmental estimates provided to this committee note that spending pre-commitments of €2.6 billion already have been made for 2019. That is not necessarily the correct estimate to compare against the approximate limit of up to €3.5 billion but it highlights that there is limited scope in the next budget.

A point that is often missed is that the objective of the rules is to ensure overall sustainability, not to prevent government spending. Tax policies that increase revenue in a sustainable manner, that is, in a way that can be expected to last over the long run, allow a government to grow spending at a faster pace than the initial limits set by the rules. Similarly, real efficiency gains in public spending that can be sustained allow a government to provide more services.

It would be desirable for the Government to improve the budget balance by more than planned, especially given the risks of overheating and the opportunity provided by favourable times. Unexpected increases in tax revenues or lower interest costs should not be used to fund further budgetary measures, as has happened in recent years. The window of opportunity should be used to return debt to safer levels and to make the economy and public finances more resilient to shocks. Revenues arising from a faster than expected recovery in housing construction should be used to build buffers either through additional contributions to the rainy day fund or through faster debt reduction. Moreover, spending should not be allowed to continue to drift up as unexpected and likely cyclical or transitory revenues arise.

Looking forward, the council assesses that the Government needs a credible plan for the medium term. As we show in our report, relying solely on the fiscal rules would not have guaranteed sustainability in the public finances during the 2000s and is not likely to fully mitigate future crises. Focusing on the right budgetary stance and being prepared to be more cautious than the fiscal rules allow is the correct approach for the Government to follow. However, there are a number of challenges and no scope for complacency. There is a danger that the current policy framework is insufficiently equipped to prevent a return to pro-cyclical fiscal policy. Sensible policy tools such as the rainy day fund and a medium-term debt target, which were set up to help with medium-term budgeting, are only half-formed and need more development if they are to be effective.

There are a number of solutions which should be pursued. The Government should make an explicit commitment to adhere to what it sees as a sensible medium-term path for spending growth net of tax measures. This could be operationalised on the basis of, at a minimum, following the spending rule, also known as the expenditure benchmark, even when that is not formally required. This should be informed by the Department’s own medium-term estimates of potential output growth and of the natural rate of unemployment.

The proposed design of the rainy day fund should be strengthened. The rainy day fund should be foremost a truly countercyclical fund, one that dampens swings in the cycle and alleviates pro-cyclicality in the rules rather than just allocating fixed contributions regardless of that. A recent IFAC working paper outlines how relatively modest changes in the fiscal rules would help to achieve this.

The Government’s forecast horizon should return to five years ahead. The shortening of the horizon in the most recent projections from five to three years ahead is not compatible with the aim of achieving medium-term fiscal stability. For context, budget 2016, released in October 2015, was forecasting as far ahead as 2021, which is the same endpoint as that of current plans.

This risks complacency seeping into medium-term planning and future publications should extend the horizon back to a five-year-ahead basis.

The Government's medium-term debt target, which aims for a debt level of 55% of GDP over an unspecified timeframe, would be better specified if it were clearly time bound, set against a more appropriate denominator than GDP, set as a ceiling rather than as a target, committed to in a credible manner and actually set at a low or prudent level.

An important area in which the Department has made progress, which the council welcomes, is its publication of alternative estimates of the output gap. Understanding the economic cycle is an essential part of assessing the appropriate fiscal stance. It can help us to understand whether current levels of tax receipts or unemployment benefits are temporarily high or low compared with when the economy is in a steady state. A failure to do so can mean that deteriorations in the underlying budgetary position are not adequately recognised and another painful correction of the public finances might ultimately be required. The economy's potential growth rate is also a critical determinant of how fast taxes will sustainably grow and how sustainable levels of spending and the public debt burden will prove to be. The council believes these alternative measures should feature more prominently in future departmental publications and future endorsements.

I thank the committee for again providing us with the opportunity to attend today. We look forward to taking questions and hearing the views of members.

I will have to leave after I ask my questions as I have a meeting with a Minister to attend. I will return later.

Is what the Minister proposed for the rainy day fund sufficient? Will it be truly countercyclical or more of a contingency fund?

On the macroeconomic risk matrix, the council stated in its report that there is a medium likelihood of overheating in the economy, which would have a medium impact. How important is broadening the tax base in preventing overheating of the economy? What can the Government do to broaden the tax base? Is it fiscally prudent to be looking at tax cuts? Would tax cuts contribute to the possibility of the economy overheating in the next several years?

Mr. Michael Tutty

We certainly support the rainy day fund. However, we have put forward our own proposals as to how it should work and would prefer our methodology to what the Minister has proposed. We would prefer it to be a countercyclical fund rather than just a contingency fund for exceptional circumstances. We would see it working not by putting in a fixed amount every year for a few years and then stopping. Instead, we would base it on growing our expenditure in line with the long-term growth in the economy, while any more space beyond that would be put into the rainy day fund.

We should also be looking for mechanisms which will allow the fund to be used in a way that will be in line with the fiscal rules. Currently, the fiscal rules are not designed for a rainy day fund. There need to be tweaks to allow moneys going into the rainy day fund to be classed in some way as expenditure and then not classed as such when they come out the other end.

There are differences between what we see the rainy day fund being and what the Minister and the Department see it as being. We would certainly prefer to see a rainy day fund, even on the Minister's basis, than no such fund. We have let ourselves walk into spending more and more money at various stages in our cycles over the past 20 and 30 years. This is because we think the economy will continue to grow strongly and we keep spending all the money which comes in, as opposed to limiting the expenditure in the good times in order that more is available in the bad times to avoid having cutbacks.

We have published a paper on our website with our proposals as to how the rainy day fund should work. We would certainly like our proposals to be talked about with the other member states to see a change in the fiscal rules which would allow a rainy day fund to operate properly.

One of the reasons that the council and the Government have proposed a rainy day fund is to prevent the economy from overheating in the medium term. Are there any other measures which could be taken to prevent the economy from overheating?

Mr. Michael Tutty

The real way to prevent overheating is to avoid spending too much or giving too many tax reliefs at a time when the economy is growing strongly. Extra expenditure and extra tax reliefs just add to the demand in the economy, which is what leads to overheating at a time when the economy and employment are growing well and unemployment is falling. Overheating would be avoided by not spending the money and reducing the debt level, as well as by putting money into a rainy day fund.

Could it also be avoided by broadening the tax base?

Mr. Michael Tutty

The fiscal rules and the overall demand in the economy are not affected if expenditure is financed by extra taxation. It is the balance between the expenditure growth and the tax revenue which determines whether the economy is going to be overheating. It is by expanding expenditure at a fast rate without doing anything on the tax side or without cutting other expenditure. It is the overall level of demand that the Government is introducing into the economy that we should be looking at. That should be more modest when the economy is growing fast and when we are reaching full employment.

Dr. Íde Kearney

On overheating, the main emphasis we are trying to bring out in this report is the issue about medium-term sustainability. That is related to broadening the tax base. At the point where the economy is at now, it is important the Government does not add to the stimulus. If there is a tax cut, then there should be a complementary expenditure cut. We do not take a view on taxation versus expenditure in terms of the budgetary measures which are taken. However, it is important that on a position like this, we look at the medium-term sustainability of any measures which are taken and to ensure there is no additional stimulus.

On the macroeconomic risk matrix, the council referred to corporation tax. It gave the example that if one large foreign direct investment, FDI, company were to leave, the Government's revenues would be reduced by approximately €330 million. What advice would the council give to the Government to ensure that, if that did happen, we would not be left with such a massive hole in our revenues? Given that corporation tax receipts have been so volatile over the past 20-odd years, there seems to be a warning there to the Government about over-relying on corporation tax receipts.

Mr. Seamus Coffey

The purpose of the exercise was to give a stylised example of the potential impacts, were one of the large FDI companies to leave. We focused on those companies that are also large payers of corporation tax. There are foreign companies in Ireland, say, in the retail sector serving the domestic economy, which would have a much larger impact on employment if they left. The exit of one of those is likely to be followed by a replacement. We will need the domestic retail sector to continue to be serviced. However, in the FDI sector there is a possibility for a company to leave and simply not be replaced at all. We wanted to assess what would happen if a sample company within that group were to leave.

The biggest relative impact would be on corporation tax, given the large payments made by a small group of companies. There would also be an impact on earnings and employment in the economy. Perhaps 4% of corporation tax receipts would leave the country if such a company was to leave, whereas the impact on employment would be approximately 0.1%, representing a much smaller overall impact.

In terms of mitigation, we have warned in previous reports that corporation tax receipts are at an elevated level and have almost doubled in the past number of years, particularly in 2015 when it increased by two thirds. Receipts from corporation tax are now close to record levels in terms of contribution to the Exchequer. We feel the economy is going through a strong upward recovery, but public finances have been benefitting from tailwinds, whether through additional corporation tax receipts or lower debt interest costs. These are all contributing to a strong position at present. However, we are warning that we cannot expect that to continue indefinitely. We could face a downturn in the economy for a variety of reasons, or we might experience losses of either revenue or employment in the foreign direct investment, FDI, sector. While the economy is performing strongly now, we should not commit all those resources to permanent increases in spending or tax cuts when we may need to use them in future to offset the impact of some of these potential problems. We should keep some of the benefits in reserve while we are getting them. We would like to have fiscal capacity to deal with an inevitable downturn, whether in the domestic economy or in the international FDI sector.

The issue with many of the risks we are raising is that the policy advice is the same - some of the resources should be kept in reserve.

The risk matrix diagram on page 54 refers to the housing supply pressures. They are deemed to have a high likelihood of having a medium impact on the economy. Can the witnesses expand on the harm this could cause to competitiveness within the economy? There is huge demand for housing, which has to be met. The Government and the Opposition are putting a significant focus on filling that demand. Can the witnesses comment on how that might lead to the economy overheating, and what mitigating factors could be taken to prevent that?

Dr. Martina Lawless

There is a strong argument in favour of increasing housing activity and supply in the country. The risk we are talking about is primarily that this individual sector is likely to grow strongly - and there are many arguments in favour of such growth - but that it should not distort the overall balance of the economy in the way it did leading up to 2007, where the economy became concentrated and tax revenues became concentrated in revenues from a single sector. Increased activity in the housing sector, once it picks up - we are not saying that it should not pick up - should be counterbalanced by a dampening down in other sectors in the economy.

With regard to immediate risks to competitiveness in the absence of an increase in housing supply, if increases in housing costs, both in house prices and in the rental sector, continue, there will be risks to the overall competitiveness of the economy in that these might feed into price pressures and wage pressures. We have not seen much evidence of wage pressures in the economy, but there is a risk that continued increases in the cost of housing will feed into wage demands and a loss of broader competitiveness. All of this can further reinforce the social argument for increasing housing activity and the building up of housing supply. I emphasise that increasing housing supply and the extra activity taking place in that sector should be offset a little bit by dampening down activity in other sectors. A previous estimate a number of years ago by the ESRI suggested that an increase of approximately 10,000 housing units generally added 1% to GDP growth. That gives a sense of the scale of how increased activity in the housing sector will feed into overall economic activity.

Mr. Seamus Coffey

We have endorsed the macroeconomic forecast from the Department of Finance which shows reasonably strong growth over the medium term, including growth this year of more than 5.5% and between 3.5% and 4% over coming years. That is on the basis of a 4,000 unit increase in housing output each year. We are trying to identify in the risk matrix the Deputy has referred to factors which might change those growth forecasts. Housing output could rise by more than 4,000 units. That estimate is reasonably modest and, as Dr. Lawless has said, an issue with housing output is that it is a labour intensive sector, which might lead to distortions in the allocations of resources in the economy. Given current forecasts, with the unemployment rate dropping down near to 5%, if there is a large increase in housing output, where will the workers come from? Will they come from other sectors within the economy, which might lead to wage pressures and competition between sectors, or will they be brought in from abroad as we have done previously?

We would like an increase in housing output from the point of view of the competitive concerns that Dr. Lawless raised, but the issue is how we fit that activity, in a sustainable way, into an economy that is operating close to its potential.

I welcome the witnesses. On corporation tax, everybody knows that the largest company, which will announce its results at the end of June, is Microsoft, which is probably what Mr. Coffey was indicating. It is suggested that it must have had an additional €3 billion in sales and output in Ireland to generate the additional corporation tax that the figures indicate. Are the witnesses satisfied that the mechanisms for measuring our output? Will they have enormous implications for the payments we have to make to Brussels in respect of the recognised growth in the size of the economy? How will we deal with that?

The witnesses referenced the demographic pressures, which are evident throughout the country, particularly in the eastern region and all the major cities. Are they happy that the models they are using from Europe give sufficient recognition to the demographic pressures and the associated expenditure, both capital and current, that they require? We have a young population, a large population of children, and also an older population. This has significant implications for housing, education and healthcare for older and younger people.

How are the witnesses modelling the economy in Ireland? Does it capture the full extent of what is happening? Do European rules permit any acknowledgement of the particular set of circumstances at play in Ireland?

Mr. Sebastian Barnes

Demographics is a major issue in many of the ways the Deputy has described, and IFAC examines this carefully. We looked at it in our standstill scenarios. When we refer to the medium-term, which show how much the Government needs to spend to stand still and maintain the same level of services. That reflects assumptions about the changing population and about healthcare. It was encouraging that in the stability programme the Government provided much more information about the long term, in part drawing on the European work. That is important because it is an issue that will rise up the agenda. It is partly demographics, but the bigger effect is healthcare costs and long-term care costs. IFAC plans to do further work in this area. We have seen that the exercises done by Europe and domestically are serious and well thought through, but we want to return to the assumptions because it is important to get them right and this is a subject we will prioritise over the next year.

Mr. Seamus Coffey

The Deputy made a important point about the links between some of the measures of profit and EU payments. However, in instances where the profit translates through to taxable income and the State collects 12.5%, there is no doubt that-----

I am basing that on Mr. Coffey's work.

Mr. Seamus Coffey

-----the net outcome for us is positive because the tax is being collected at 12.5%, whereas the contribution to Europe will be approximately 0.6%. In net terms, we will benefit quite strongly. There are instances where, given how the national income measures used for EU contributions are based on gross measures and tax is paid on a net profit basis, there can be large increases in gross profits that do not translate through to tax receipts. These are leading our EU contributions to be higher. It is an issue relating to the Irish economy. We are well aware of the problems that arise with measures such as gross domestic product. These have now translated into problems with gross national product, and the CSO has tried to step aside some of these issues with its modified measures of national income. When it comes to EU contributions, they are still based on official measures as set out in the internationally agreed standards. If these are distorted, it can lead to distortions in our payments.

Is there a calculation? The additional expected EU contributions the country has to make have been calculated. Alongside a distortion or expansion in corporation tax for the reasons we understand, does Mr. Coffey agree that, in the comparison with this corporation tax figure, the VAT figures are underperforming? I do not know whether he has commissioned a study from Revenue. There is something inconsistent about the VAT figures. Perhaps Revenue knows the answers in this regard. In the context of the corporation tax figures, the VAT figures should indicate and be consistent with lot more activity in the economy. The PRSI and PAYE figures seem to be more in line with growth. Perhaps it is a time lag - I do not know - but does Mr. Coffey have any sense as to why the VAT figures seem to be out of line?

Mr. Seamus Coffey

Estimates regarding corporation tax are outside the remit of the council. In the context of VAT, we have noticed is the system is going through some changes at present. There were changes at EU level on where VAT should be paid and whether it should be the location where the sale is made or where the customer is. There have been moves to locate more VAT payments where the customer is, and Revenue has set up, as have most countries, a mini one-stop shop to try to balance payments for sales made in one country to customers in another. Perhaps there is a rebalancing to happen as these changes work through. It is not something we have considered in any great detail. The PRSI and PAYE figures are showing the growth in the economy, particularly the PRSI figures, which are growing at 7% or 8% because they have not been subject to policy measures in recent years. In general, looking at the overall receipts we see strength in corporation tax. We do see volatility in VAT. With the bimonthly returns, there are some months when the figures up and others when they are down. Part of this can be due to the way the system is changing. The strength in the economy is being reflected in labour-related taxes and receipts.

The other point I want to take up again is the rainy day fund. This is the tenth anniversary of the bank guarantee. Ten years ago, many of Mr. Coffey's counterparts from the Department of Finance were in telling us everything was fine, particularly in the summer and before the recess in 2008. I worry about the rainy day fund. Mr. Tutty gave a very good explanation of its purpose. Would it be beyond our capacity, or would it be outside of the European rules, for example, to find a way to put it into social rented or social purchased housing whereby there would be an absolute calculated rate of return, on the low side probably because it would be through rents and interest payments on socially affordable mortgages? Going back to the demographics, the rent increases, particularly in the areas I represent, are not sustainable. In my constituency, many of US multinational companies - even where they pay a lot of money - are certainly rethinking whether they can really afford to have people here in light of the extraordinary levels at which rents are being charged. These companies can no longer rent houses for staff who come to Ireland in the same way they had been for the past two decades. The availability-----

I thank the Deputy we will have to get an answer.

Mr. Seamus Coffey

We link the rainy day fund to the overall budgetary stance rather than to individual areas or pressure points we might see in the economy based on individual markets. If there are priorities that it is felt should be addressed, and the political system feels additional resources should be used to address them, that can be done while having a rainy day fund. They are not exclusive. We can do both. We can increase spending by even more than the rules allow by increasing taxes and still have the appropriate fiscal stance to try to manage the economy. It is not a very easy thing to do. If countercyclical management was something that could be easily achieved, countries would not go through the boom-bust cycle we have seen over decades. It is something we should at least be trying. If there are additional areas where it is felt more resources are required the decision should be made to allocate the resources. They can be separate decisions and both can be achieved at the same time.

I will go next to Deputy Boyd Barrett. I remind members that, to try to be fair to everybody, there are approximately five minutes each for questions.

Mr. Coffey is saying that we should have a rainy day fund as a countercyclical buffer. He assumes that there is a cycle. Where does he think we are in the cycle? It is ten years since the last downturn. I think we are a lot closer to another downturn than people are projecting. Where does Mr. Coffey think we are in the cycle? Realistically, how much of a buffer can we create given what we know about cycles and their timeframes? Anything we can put together before the next downturn comes will be a drop in the ocean and piddling compared to the potential impact. From where does Mr. Coffey think the downturn he is assuming will happen at some point will originate? We know things about Brexit. It is a known unknown as it were, to use the American hawk's phrase-----

Donald Rumsfeld.

Yes, Donald Rumsfeld. It is a known unknown and we know what we have to do to guard against its potential impact, that is no hard borders and as little friction between ourselves and Britain as possible. At least we know what we have to do. What do we have to do to protect against the possible dangers of a downturn? From where are those dangers likely to come? To me, where we should gear ourselves up and where we should invest is dependent on where those risks are most likely to come. There is no doubt about demand for property and housing. We have a demand and we have got to meet that demand, and there is no two ways about it. Is Mr. Coffey worried about another speculative property bubble here and the fact that we are actually repeating the madness of the previous downturn, which largely resulted from property speculation? What is actually happening is that there is an awful lot of speculation and not lot of building. That is a recipe for a repeat of the previous circumstances, particularly when one considers that the level of demand is objectively big but that, in effective terms, it is weak. People do not have the money to buy property. Are we facing into a possible property slowdown again?

Mr. Seamus Coffey

The first three of these questions are clearly within our mandate. I am not sure about the final one regarding whether a speculative property bubble is on the horizon. In the context of where we are in the economic cycle, most indications point to the economy being close to its potential. The unemployment rate is falling towards 6% and is set to fall just below it and the recovery we have seen in recent years is something that happened back in the early 2000s. People who look at the Irish economy, which had grown strongly in the 1990s when the unemployment rate had fallen, asked what was in store for the Celtic tiger in 2001 and 2002. The suggestion at the time was that we would return to our long-run potential growth rate of 3% or 3.5%, that we would not see an imbalance one way or the other, and that it was something the economy could maintain as the population grew, as we had moderate inward investment and as credit expanded at a moderate pace.

Of course, what we know is that the economy did not return to growth rates of 3% to 3.5%. It stayed at 6% to 7% to 8% right through to the end of 2007. That was achieved by two means - first, by large inward migration that facilitated that increase in output and, second, much of that increase was funded by credit expansion. While the forecasts seemed reasonable at the time, what could not have been, and was not, foreseen was the huge increase in credit and the huge inward migration which allowed the economy to grow above its potential for a period of time. It could not go on forever. If something cannot go on forever it will stop, and it stopped in 2008. We are in a somewhat similar position now. The economy has grown strongly for a number of years, the unemployment rate has fallen and most forecasts are that the economy will grow between 3% to 3.5% over the medium term. That is what the Department of Finance is forecasting, and that is what we have endorsed. Overheating is a potential risk but it may not happen. If the growth rates stay at 3% to 3.5%, the economy can sustainably do that for period of time. The thing is the Irish economy does not do moderation. We have looked at it over a 60 year period. If one takes that 3% to 3.5% as one's middle point and if one reduces it down to 2% and increases it to 5%, and says that that is within the ballpark, over a 60 year period, the Irish economy is within that range of 2% to 5% less than a third of the time. It has either been growing much more quickly than 5% or lower than 2%. While the central forecast is for nice moderate growth of 3.5% and for an economy that is in a stable position, that is not something that tends to happen very regularly in the Irish economy.

The issue is about the direction in which it will go. In the near term, we see some potential upside risk, as has been stated with housing. As one moves out into the medium term, there are more negative risks that could lead to a downturn. How much of a buffer would one need to deal with some of those? The buffer does not need to be huge. The impact of the previous crisis was quite large. One simply wants to avoid getting into a position where one has to have forced austerity at a time when one's economy needs to be stimulated. The average increase in budget deficits around the euro area in 2008 was six percentage points of GDP. The issue was that overall budget deficits across the euro area were either in a small deficit or close to balance. One went from being in a balanced position all the way down to an annual deficit of minus 6% of GDP. One simply cannot keep borrowing 6% of GDP, particularly when growth is anaemic, which in a sense led to the debt crisis, as debts ballooned.

The buffer itself does not have to be very large. If one had a one or two percentage points of a GDP surplus in the other direction, then one is only dropping, when the crisis comes, to 3% or 4%. We know that the EU rules have what might be considered an arbitrary point of three percentage points of GDP for the annual deficit limit. However, if one is just one or two percentage points in terms of running a surplus, one has sufficient space to deal with a reasonably-sized downturn. With a downturn like we had in 2008, it is hard to know what buffer would have been appropriate to deal with that. It does not have to be very large. What one is doing is giving oneself the capacity to absorb whatever downturn is coming, in that one is not adding to the problems by having to cut back spending. Just even cutting back spending growth can lead to problems.

If we believe the economy is growing at 5% or 6% and we are growing spending at 3.5%, that in itself is countercyclical. Where the economy is growing faster, government spending in real terms is growing at a lower rate. If we hit a downturn, and the economy slows to 1% or 2%, and if we keep spending growing at 3.5%, that is an injection. That again is countercyclical. The economy has slowed down but spending is now above it. If we have this stable and steady increase in spending, to which Mr. Tutty referred, that can offer that countercyclical buffer that we are looking for.

Where will the downturn come from? It does not matter where it comes from. By and large, the impact of many of the risks we have identified will be the same. This will be a reduction in economic activity, whether it is as a result of Brexit, trade with our nearest neighbour, US trade policy, trade with one of our largest trading partners or the international tax environment and our key policy plank of attracting foreign direct investment. If one or all of them hit us, the impact would, by and large, be the same. I do not think it necessarily matters which one affects us, as long as we identify there are potential risks out there. Using the Mr. Donald Rumsfeld quotation, there are things there that we might not be seeing there at all.

Does the Deputy have a supplementary question?

In a way Mr. Coffey has hit the nail on the head. He is asking for a rational central scenario-type approach. The evidence is that is not actually how things work in this economy. Frankly, I think that it is fairly dramatic irrational movements of capital that decide when a downturn comes. We should behave rationally, but we know that capital does not behave rationally. What can we do to buffer ourselves against this? To my mind, the obvious thing to do is for us to be less vulnerable to sudden movements in capital, whether it is one foreign multinational pulling out or the property sector being completely controlled by a small number of players speculating and then deciding to flip the property. Should we not be spending our resources shifting things in that direction, rather than sticking it in a piggy bank, in the context of the areas where those dangers are likely to come from? Should we not ramp up investment to create a more sustainable economy as a buffer, rather putting resources in a piggy bank, which is like Peter and the dyke when a-----

We need a short answer to that.

Mr. Seamus Coffey

The size of the rainy day fund itself is something we would see as being more flexible. It should respond to economic changes. Should we be ramping up investment? That is exactly what we are doing. In our previous reports, we would have analysed the planned increases in capital spending, which was set to double from 2015 to 2021, going from relatively low in EU terms to relatively high. We are ramping up investment. This year alone, the figures in the stability programme update show that public capital investment is going to increase by 23.5%. There is quite a rapid increase in public capital spending and it is within the fiscal rules. Looking at the growth forecast of the economy, these are built into the growth and the employment forecasts. That rapid increase is happening. Perhaps we are not seeing the visible signs of it yet because some of these projects take time to go from their initial formulation right through to delivery at the end. That ramping up of capital spending is there, and it has been there with additional elements added to it since we assessed it last year through the various development plans that have been announced. The investment is happening.

I have a few questions. One question is on the forecast horizon. As was correctly pointed out, until relatively recently the forecast horizon was five years. It is now three years on the fiscal side. I would have a concern that we have not got a proper handle on the costs that are coming down the line, when one looks at what is happening in healthcare with the cost of drugs, the ageing population, conditions such as Alzheimer's, etc., that are growing very significantly; pension costs; and costs in the education sector. To what extent would the witnesses have a concern that we are projecting our revenue, some of which is volatile, for the next three years, including corporation tax receipts? We are building up permanent expenditure commitments and we do not have medium-term to long-term estimates of the costs that we are going to be facing as a country. On that question of three years versus five years, is five years enough? How quickly do we need to start publishing five year forecasts?

Mr. Sebastian Barnes

The Deputy is absolutely right. The commitment to medium-term economic stability implies that one has at least five year forecasts. That is a good practical medium-term horizon. One also needs those long-term exercises. The EU goes out to 2050 or 2060, but that those two exercises go in parallel.

One thing that is of concern is that even within the horizon out to 2021, if one looks at what is implied for spending in the later years, spending growth slows quite a lot. That is going to be very hard to reconcile if the Government's forecasts turn out to be right and the economy is still doing well, employment is high and wages are going up. It is going to very hard to meet that. That shows the relevance of these medium-term forecasts. People need to look across the whole thing and ask whether it makes sense. There is a concern about spending growth in those later years.

As regards changes in the bond markets and the cost of borrowing, we know that the ECB is going to start unwinding its quantitative easing, QE, programme. We know that we have €57 billion of government debt that has to be refinanced over the next five years. We must be at the bottom of the cycle in terms of interest rates. They cannot go any lower. It has to be real risk for the country. The cost of sovereign debt is going to increase, perhaps significantly. There will be implications for consumers if interest rates rise. Looking at the risk matrix, the stability programme update, SPU, puts it as a low risk - bond market conditions with a medium impact - and the Irish Fiscal Advisory Council, IFAC, commentary broadly concurs with that. It is staring us in the face that the era of zero interest rates cannot continue. History tells us that.

Interest rates are going to go up sooner or later and that is going to have an impact. The Irish Fiscal Advisory Council recently said that a few years ago we projected that by now we would be paying €10 billion per annum to service the national debt, whereas now it is closer to €5 billion. That is a huge swing. Where is this going to go and what will the impact be?

Mr. Seamus Coffey

There is no doubt that interest rates will change and are likely to increase. Most forecasts for interest rate increases are relatively moderate over the time period referred to, when this large amount of debt is due to be refinanced. The National Treasury Management Agency, NTMA, is a better place to address questions on that. It has built up significant cash reserves at the historically low interest rates to put itself in a position to deal with those redemptions as they fall due over the next couple of years. I think there is close to €20 billion available, with further debt offerings planned for this year. After 2021 there will be a bit of a gap until 2023 or 2024, before the next bonds roll around again. Even if there are interest rate increases, there is no doubt that the debt we have will be refinanced at lower rates. Some of the bonds that are due to mature this year were issued 10 years ago, when interest rates were 4% or 4.5%. Some of them were issued when interest rates were lower, but of course Ireland faced a higher borrowing cost.

I think the bonds will be rolled over at a lower interest cost than the current one, and we are likely to see continued savings on the interest on the national debt. The issue is that over a longer term this will eventually begin to edge upwards. It might be a decade or more before the €10 billion figure which was forecast comes into view, but it is a potential reality. There is no doubt that it is good to identify it as a risk but I think that the low probability estimate is correct, because it is one that will take a while to materialise. The estimation of the medium impact is also correct, because it is not going to happen very rapidly. We have seen the benefits of the low interest rate build up over a number of years, and equally the cost of higher rates of interest will take a few years to build up.

Finally I wish to raise the issue of corporation tax. Today's report of the Committee of Public Accounts describes our dependence as an unacceptable risk. Some 15% or 16% of our tax revenue is corporation tax. Should we be seeking to rebalance the economy somewhat by focusing on the indigenous economy, such as SMEs, and looking at the taxation environment within which they operate? The Tax Institute will talk to us about that later. How concerned is the Irish Fiscal Advisory Council about the growing dependence on corporation tax, which has doubled over about four years, and the concentration within that envelope of money? To reduce that dependence, should we be looking to rebalance the economy and introduce some changes to our overall industrial policy?

Mr. Seamus Coffey

I think the key issue is just to identify it as a risk. There is no doubt that it is better to be receiving this money than not receiving it. If corporation tax had stayed at around €4 billion or €5 billion we might not be identifying it as a risk factor. It is more than €8 billion and projected to hit €10 billion by the, albeit shortened, forecast horizon of 2021. It has moved in the reverse direction to interest. It has gone from €5 billion to €10 billion, whereas interest has gone from €10 billion to €5 billion. These are some of the huge tailwinds being referred to in relation to the public finances.

On the risk, I am not sure I consider it an unacceptable risk. I have not seen the report published today, but I think it is something we have identified as being a potential issue, that is, the volatility which has been referred to and the dependence on a small number of firms, with the top ten accounting for 40%. Within that top ten, there is significant volatility and change in the amounts being paid. To go back to an earlier point about things not being mutually exclusive, I think we can focus on the indigenous economy and also have a foreign direct investment, FDI, strategy. It is not one or the other. Our key point on corporation tax is to avoid building up and building in permanent increases in spending and permanent reduction in tax revenue on the basis that these revenues will be here forever. I do not think that would be an appropriate approach for fiscal policy to take.

We have seen various proposals for how some corporation tax can or could be set aside. Some of those might have been worth following through but over the last number of years, as the corporation tax has increased, much of it has been used to fund budgetary measures. We have seen limited improvement in the budgetary position where the annual balance is concerned, even with these tailwinds. An economy growing strongly, surging corporation tax and falling interest costs are not feeding through into improvements in the public balance. These benefits are being used. The issue is that if one or more of these turns against us, underlying weaknesses in the public finances may be revealed that might not be apparent at the moment but to which these indicators.

I do not think it is something that we have to address. It is good to be collecting €8 billion in corporation tax. It is just a matter of identifying it as a potential risk or a potential source of uncertainty.

I remember ten years ago - at this time of year, not later on in the summer - when we realised what difficulty we were in. When we heard the language coming from the Department of Finance official when he saw the tax returns that month, everyone knew the scale of the crisis we were in.

No, they said it was all sound. I am sorry. I attended all those meetings. What they said is seared in my brain, with due respect. I think various people here would remember the advice.

I will not even comment on that. I remember that, and I remember the feeling and the sense of desperation as to what we had to do. For that reason, I support the rainy day fund. It makes sense, whatever the scale. The bigger the better, in some ways. I listened with interest to what Deputy Lawless said. It was said that because of the potential overheating of the economy, particularly as we ramp up housing, which we have to do, we need to look at other sectors or investment areas that we might scale back to avoid overheating. I do not know how deeply the Irish Fiscal Advisory Council goes into specific projects, but I can suggest one project that might be a perfect candidate for such a contraction. I refer to the motorway programme, where at the moment we are spending massively on upgrading the N11, the N2, the N3 and the N7, all on the approach to Dublin. This will add to our traffic problems. There will be more cars coming into a city where we are taking people's front gardens away because there are so many cars coming in. This would be a double win. It might help us to get some workers off these mad projects widening motorways into Dublin and deploy them to house-building in the centre of the city. It would be a win-win-win situation. They would not have to drive from the far reaches of the N2, N3, N7, N11 and so on. I do not know if the witnesses have any comment on that. It would be a perfect counterbalancing, defeating the construction sector to allow us to build housing.

On that same issue, I was very taken with what a witness said about the interesting statistic that for every 10,000 units there is gross domestic product, GDP, growth of roughly 1%. Again, we are discussing the details of economic strategy. It seems to me that one of the key initiatives we are examining at the moment is the use of the cost-rental model for housing construction and public housing ownership. It has a fantastic advantage in my mind in that I believe it could be done off-balance sheet, as it is done in other European countries. It is the perfect counter-cyclical tool, because it is very much long-term investment, particularly over time, as an asset base is built up. It creates a revenue stream and public housing construction which is not dependent on the Minister for Communications, Climate Action and Environment of the day handing out a big wad of cash, which is the worst form of matching long-term investment requirements with long-term financing.

It makes sense to borrow for housing. Cost-rental is the perfect public borrowing, and indeed housing association and local authority mechanism. We are doing none of it. I think we have got 50 houses in Enniskerry, but nothing compared to where we should be. I do not know if the Irish Fiscal Advisory Council is concerned with these matters. We should change the nature of the housing scheme so that we avoid this boom-bust housing model. When the Minister for Communications, Climate Action and Environment does not have the cash he cannot build it and therefore there is an accentuation of the cyclical nature of the Irish economy, where housing contracts rapidly in bad times and then expands massively in boom times. Cost-rental irons that out. Do the witnesses think that would be a good economic response? I will leave it at that.

Mr. Eddie Casey

I will take the Deputy's first point on the rainy day fund. I am delighted that he thinks it is a great idea. I do too, but it depends on how it is designed. One thing that we noticed recently when we did a lot of work on Ireland's cycle and its output gap was that it actually looked almost exactly the same as the pattern we have seen in investment spending as a share of GDP. During bad times it has crashed really heavily, in line with the overall economy crashing, and in good times it has risen to heights that have also been aligned with the economic cycle. That pro-cyclical pattern in investment spending by Government is a really terrible thing. There is good international research showing that construction companies find it very difficult to plan ahead on the basis of having projects for a long time-frame if they are taking on Government contracts. It means that long-term productivity in that sector is impaired.

When we need to get projects off the ground, many of those businesses are not ready to do the project work we might desire. Deputy Ryan mentioned motorway projects. We are agnostic as to the types of projects but if we continue those at a steady pace and ignore the heights and troughs of the cycle, we should be better equipped to provide them as the need arises. The planning around them would be better also.

Mr. Seamus Coffey

Housing is an area we looked at recently. Our mandate relates to the fiscal side of things and not necessarily on the appropriate model for the provision of housing in Ireland. However, we have looked at some of the changes that have happened and rather than seeing increased housing provision moving what we might call off balance sheet, with the reclassification of the approved housing bodies we have seen more of it come within the general Government sector, primarily because they are almost entirely funded from Government sources, whether they are capital projects with grants from local authorities or borrowing through the Housing Finance Agency. Their current receipts for providing the properties come from the availability payments they get from local authorities, which top up the rent they receive to 90% of the market.

We compare it to other countries in terms of where their capital spending on public housing appears and if it shows up in their general government accounts, and it does not. It is clear, therefore, that there is a different model out there and one of those might be cost rental housing where non-profit agencies charge possibly controlled rents but rents based on the cost. In that way they do not have to be fully funded from Government sources and more of their income is coming through the rent they are charging the tenants rather than on subsidies coming through the Government sector that have been on balance sheet. The current moves in Ireland are the opposite of what the Deputy is suggesting. More activity is coming on balance sheet and it would require a change in the approach to have it move in the direction he suggests but that is possibly a question for the Housing Finance Agency, which deals with many of the approved housing bodies. A change in the way the rental situation is addressed might move it in that direction but, unfortunately from the Deputy's perspective, the move is in the other direction.

I am new to this committee so I will start by asking a general question on fiscal advisory councils, which are relatively new in the process since 2011. To what degree do the Government or Opposition parties listen to the witnesses in terms of their advice? Second, on the issue of costing proposals, we hear Deputies making requests and suggesting proposals daily in the Dáil. They say they want to see improvements in areas and increases in various sectors and there is criticism about how much those will cost. Do the witnesses listen to those proposals and requests? Unlike Deputy Ryan and Deputy Burton, I was not at the centre of the economic crash but I was listening to what was happening at a political level coming into 2011. While my party was being blamed for the crash, many more promises were being made going into that election in terms of increasing spending. To what degree have fiscal advisory councils in other countries been successful in keeping governments and opposition parties on the straight and narrow and making sure we do not get some of the things to which Deputy Boyd Barrett referred? I know that as sure as there is an up in the economy it will be followed by a down but how do we ensure the success of the Irish Fiscal Advisory Council, the ESRI or any of the other independent advice the Government or parties get?

I compliment the secretariat on the types of questions it has indicated, although I am sure we will not get to deal with half of them. Is it important that the questions are dealt with now or are they given to the IFAC for its response if they are not reached?

I will start with the last question indicated, which relates to commercial stamp duty. What are the witnesses views on the commercial stamp duty increases introduced in the 2018 budget? As part of that, on the issue of tax reliefs being provided for research and development, do they believe there are more effective ways of doing that?

Mr. Eddie Casey

On the effectiveness of councils and whether we are listened to, those of us on this side of the table are the worst people to judge that but I will allow the Deputy to form his own views and perhaps ask his colleagues as to whether they are listened to.

More seriously, there are two points. I have been on the council since the beginning and the reason I am still on it is because I believe it does have an impact. Having an independent expert body that does a huge amount of work looking over all these kinds of issues very carefully is of service to the system.

I would point out also that for one of the budgets, which I cannot recall now, the former Minister for Finance, Deputy Noonan, said that his decision had been influenced by the council and that had it not been for the council's advice, he would have done something different. That is reassuring to me that we are having a useful role.

Internationally, a huge number of councils have been set up in recent years, most of which are very new so it is a little too early to say if they have been successful. However, there is a longer history of councils such as in the United States and Sweden. The Office for Budget Responsibility, OBR, has been going a bit longer in the United Kingdom. One of the determining factors in the success of those councils has been the political commitment around them. In countries where people were not committed to sound public finances or listening to the council's advice, they were not very effective. In systems where people were serious minded and concerned about medium-term stability, they found councils a very useful instrument to make that happen. It is a bit like the rainy day fund. It can be set up but if money is not put into it, it will not be of any help. If a country is committed to making the hard choices not to spend money, it may work. I hope that answers the Deputy's question.

Mr. Michael Tutty

On the commercial stamp duty, I commented on that at our last visit here and I found myself being quoted at another Oireachtas committee a few months later and appearing in The Irish Times, which surprised me. At the time, we were looking at the level of increase the Department of Finance was projecting from the stamp duty increase and it seemed to be assuming that the boom in commercial property would continue. We were worried that we would use money from boom time commercial stamp duty to fund long-term expenditures once again. We were querying whether it would bring in that sort of revenue over time. The receipts so far this year have been behind what the Department of Finance was estimating so we may find that all the money is not coming in, even in the first year, not to mind that it will come in in later years. Like corporation tax, we should not be making our long-term expenditure dependent on receipts from a cyclical type of revenue. That commercial building will not last forever at the sort of rate it was taking place.

The Deputy spoke about the proposals that continue to be put forward by Deputies. We do not have a remit to determine where our money should be spent. We have a remit to examine the overall balance between expenditure and revenue. We would not be concerned about more expenditure as long as it is being funded from extra revenue. We do not have to start looking at individual proposals in different areas and say we believe that is good or it is not good. That is a matter for the politicians to look at and determine what the balance is between different expenditures.

Mr. Seamus Coffey

The research and development tax credit is a large tax expenditure. The annual cost now is approaching €1 billion so clearly it is something worthy of consideration again. As Mr. Tutty said, we do not focus on individual measures but something which has a tax cost of €1 billion is worthy of consideration by various bodies. If we look at the broader environment, research and development is a cost. Companies will be looking at the benefit they get from incurring that cost and that will be a reduction in their tax bill. In Ireland, it will reduce the tax bill by 12.5% or whatever cost they incur. In the United States, until recently, it would have reduced their tax bill by 35% of whatever cost they would incur because of the tax rate that applied in the US at that time. That is the environment in which our research and development tax credit was established, given the nature of the companies here and trying to attract activity that might take place in other countries. Given the change in the US tax rates, it might be worthy of analysis to see whether the research and development ax credit itself should be subject to changes. However, given the size of it, it is worthy of scrutiny.

On the proposals made, I agree with Mr. Tutty that that is not within our mandate.

However, there are newly established institutions within the Oireachtas itself that can look at some of these proposals. Perhaps they could move towards costing them and providing the aggregated figures the Deputy has looked for in which the proposals of various parties would be put together. On the Deputy's point on the degree to which Governments listen, I would add that our audience is broader than the Minister, for whom we write the formal report to which he, in turn, writes a response. We engage with the committee to express our views and, equally, the audience is the general public. The reason a fiscal account would be set up is to have that independent analysis and to have an institution that builds up a reputation and offers a view to the public it might not otherwise hear. It might not necessarily just be about changing policy. It can be about getting clear views out there.

I have a couple of specific questions and some general ones. If the rainy day fund was to be strengthened and used as a countercyclical fund, what level of funding do the witnesses think should be diverted to it? Are we currently putting enough aside? On the rules at EU level which would need to be changed in order for Ireland to have enough flexibility to access a rainy day fund, what is required and needed to do that?

Getting back to some general things about the construction industry, it currently makes up 7% or 8% of GDP. At the time of boom and bust it made up 20%. What level do the witnesses think is a dangerous level to be at? I ask that because a number of questions were asked around property speculators and all the bad words that developers are called which go under that umbrella. We had a very interesting meeting yesterday at which we heard that 86% of landlords in our rental market own one or two properties. In my estimation they are either accidental landlords or it is their retirement fund. It is definitely not for profit, so to speak. A very small percentage of our rental sector is made up of those bigger commercial landlords. Some of the rent legislation we have put through in the last year or so has really helped to steady that market. I refer to the rent pressure zones and further measures. My fear is that some of the legislation coming at us again will push things too far and will affect that 86% heavily, meaning that they might pull out of the market, rather than affecting that very small 3% or 5% that have a greater number of units on the rental market. I fear that will create a problem in the property market.

The other thing is around sustainability in construction, which we talk about all the time, and the skills shortage we have. While we are improving the apprenticeship courses and trying to incentivise people to get back into these trades, one of the problems we have in terms of skill shortages is deciding how to incentivise and encourage people to go into these courses, to incentivise and encourage people who emigrated to come back, and to incentivise and encourage people who stayed, who retrained and who might be ten years in another career to get back into the construction industry with the vast experience and knowledge they would have had. My view, and I would be interested to hear the views of the witnesses, is that they will only come back in when they see sustainability in the construction industry and when they do not see another cycle of boom and bust. At the construction levels we have projected, will the national development plan help sustainability? It gives a roadmap to the 500,000 additional homes that will be required in the next 20 years, to the 660,000 jobs that will need to be filled and to the infrastructure that will be required. For the first time in a long time we have a statutory road map for the next 20 years so that people can actually see the sectors in which they will see growth and will be able to plan their futures in a far more cohesive manner.

A number of questions were asked already. Deputy Jonathan O'Brien mentioned cost rental. He mentioned the pilot project in Enniskerry we are talking about. While cost rental is just one measure of a general stock that will be required within the market, other areas at which I am interested in looking are projects such as rent-to-buy. I know we do not want to get into specific projects or policies but, in simple terms, rent-to-buy, which we piloted years ago, means that local authorities develop schemes of, for example, 50 units. People pay rent at a lower rate, for example €1,000 a month. After four or five years that rent is used as their deposit. Do the witnesses see it as sustainable for the Government to introduce a policy such as that? They may not want to answer that here but I can give them the information around it.

The Deputy has just under a minute.

I will leave it at that because a number of questions I had have been asked already.

Mr. Michael Tutty

I will start with the rainy day fund. We would not set a figure for the size of the rainy day fund because we see it as being a countercyclical item. As long as the economy is growing, money would be put into it and, when the economy is not growing so well, money would be taken out, as opposed to us saying €500 million or €1 billion should be put in every year. In the paper we published on our website, we set a certain rate for economic growth - whatever would be viewed as the long-term growth rate of the economy - and then any extra money available would be put into the rainy day fund when the economy is growing quickly. The fund would then build up and when the economy is growing slowly the money could be taken out. We would not set a figure. We would not say that it should be a certain sum and that we should stop there.

In terms of money coming out, the present fiscal rules do not really allow for a rainy day fund to operate. We have put forward proposals in our paper, that would have to be negotiated with the European Commission and with the other member states, as to how this could happen in a way which would regard the money going into the rainy day fund as expenditure at the time we have the fiscal space available to put it in. This would not be the case at the moment as the money is staying in the general government sector. These proposals do not regard the money as expenditure which might breach the expenditure benchmark when it is going out and being spent. I do not want to get into the technicalities here but we think there is an easy way of doing this which we are pretty happy could be negotiated with the Commission and which could also be of interest to the other member states. As I have said, we would not set a figure for it. As long as the boom continues anything above a certain growth level should be put in to be used on the way out.

Dr. Martina Lawless

I will take on the property questions. The Deputy asked whether we had some idea of what a sustainable level for the property sector is. In terms of when the sector gets too big, we could say that it is when it starts to negatively impact on other sectors and we see obvious pressures on prices and wages. A common theme throughout our comments on all aspects of the public finances, the overall balance of the economy and, probably, the construction sector in particular is very much an emphasis on long-term sustainability and avoiding the pattern of booms and busts such as we have seen in both public finances and individual sectors. There should be a formulation in which there is a medium to long-term plan of investment both on the public and private sides that is facilitated by the smooth running of access to finance and the rules in terms of how the property sector gets planning permission and how infrastructure is put in place. The overall objective would be to have investment in infrastructure and residential building proceed at a steady pace that grows in line with demographics and demand for housing and which avoids this boom and bust cycle. We are not able to put a precise figure on what that means for the percentage of employment or amount of activity in the sector. It is really about drawing a smooth path forward with a focus on the medium-term projections both within the sector and within the economy as a whole.

I welcome the delegation from IFAC. I want to ask about the report released today which asserts that we are the biggest tax haven in the world. The figures quoted suggested that there is something like the size of the whole UK economy or twice the size of the Russian economy in funds based here. Following on from that Yanis Varoufakis and others have been saying that we are riding on the back of European taxation policy and that we can raise funds in a different way from everybody else. Do the witnesses see these claims and this kind of discussion outside our country as a significant risk factor for Ireland? Linked to that are the proposals Emmanuel Macron makes in his book Révolution in respect of, for example, the common consolidated corporate tax base, CCCTB, becoming the bedrock of future financing of European budgets.

Are there significant external threats from the way people perceive the way we manage our economy and, also, the European changes? Reference was made to spending drift. What is spending drift? Is it spend on much needed additional beds and the consultants that go with them, orphan drugs for rare diseases, budgets for social housing and pay equality in the public service? On the figures in regard to fiscal space, are we down now to €2.6 billion or €1.8 billion in terms of manoeuvre? It was stated that it is up to us as politicians to decide whether in terms of additional taxation yield we opt for sustainable growth of our expenditures, but the witnesses have been very coy about how we might balance an increased expenditure budget, such as is needed for the crisis in housing. I do not agree with Deputy Eamon Ryan. He was a senior member of the Green Party-Fianna Fáil Government that drove the country off the cliff. It is annoying to hear comments about connections to rural areas like the north west or my ancestral county of Wexford and that we will never have a proper road network linking all parts of this island. As I said, the witnesses are being very coy about how we would balance an enhanced budget. Research and development credits was mentioned. Would there be any scope, for example, for additional personal taxation for the 300,000 tax units who earn more than €100,000? The Taoiseach tells us that people who earn more than €100,000 are not necessarily rich or better off.

On the rainy day fund, why do we need it in 2019? We already have the strategic investment fund, such that we would be only taking money from one fund and putting into another. Why would we handicap ourselves in 2019 given the many areas, including health, housing, education and so on, we need to address for our burgeoning population and our younger population? I agree with a sovereign wealth fund. We did have one but the Government of which Deputy Eamon Ryan was a member, the last Government and this Government raided a chunk of it and blew it or, as the late Peter Mathews would say, tore it up. Why 2019 and why not return to an enhanced sovereign fund at a future date?

Mr. Sebastian Barnes

I will answer two of the questions and leave the others to my colleagues. Deputy Broughan asked about spending and the term "spending drift". The fact that spending is increasing is a good thing, in most cases. The economy is growing and that is good news because that generates resources which, in turn, pay for increased spending in some of the areas mentioned. Spending is not necessarily a bad thing. We believe that spending in the good times should grow at a steady pace and in the bad times should grow at that same steady pace, such that we do not have a boom and bust in public spending for some of the reasons outlined by my colleagues. A rainy day fund allows us to smooth this out. As tax revenue goes up and down we want spending to grow slowly and sustainably to build the type of economy which I am sure members want.

Spending drift, however, is a different concept. Spending drift is about money that comes in unexpectedly and how it is managed. Over the past couple of years we have had favourable tail winds, some on the tax side, some on the corporation tax side and some in the form of lower interest payments, but this money has been spent. Money that comes in that was unexpected is usually money that is less likely to be sustainable. It is sensible to be prudent about this money and to save and ensure that it is available for the future. The concern is around spending drift in regard to new money that comes in unexpectedly, over and above the fact that it was anticipated that the economy would grow. This is very relevant in the context of budget decisions. If by the autumn unexpected additional tax revenues over and above the strong growth that is already factored into the Government's forecasts appear this yield should be saved because there is a big chance it will be a transitory and unsustainable. That that spending is rising in general is encouraging. We are arguing for decisions to be made that will help to sustain that but the spending drift of spending money just because it is there is bad economically and it is risky as well.

Dr. Martina Lawless

I will take up the Deputy's questions on the research which received some coverage in this morning's paper on Ireland's status as a tax haven. There are number of international definitions of "tax haven", including an OECD definition. In those definitions the focus is on whether there is a zero or nominal rate of taxation on multinationals; they are treated differently from domestic firms; whether there is tax secrecy laws or restrictions on sharing of tax information with other countries and whether there is no substantiative activity associated with the multinational activity within the country. It is pretty widely agreed across all of the international organisations that buy this set of criteria that Ireland is not a tax haven. The research that was published this morning took a list of tax havens that had been put together by some academics in the early 1990s, drawing on data from the 1980s. The issue is that it took Ireland's export tax relief, which was 0% in the 1980s, as special treatment of multinationals. It was not particularly evidence of special treatment of multinationals in that it applied also to sales by domestically owned exporters. In any event, this tax relief has long since been phased out over more than 20 years. To the extent that there was initially a rationale in 1993 for Ireland's position on this list of tax havens, I do not think anybody would agree now that Ireland is a tax haven. Ireland is a big base for foreign direct investment, FDI, but that is not in and of itself evidence that the country is a tax haven.

The Deputy is correct that in terms of the perception that Ireland may be unfairly competing for activities where activities are being booked, particularly digital activities where it is hard to distinguish the source of the sales versus where the value is being created, is a concern for Ireland's international image. In terms of discussions at European level on how corporate tax could be differently allocated across countries - the common consolidated corporate tax base proposals - we have raised on a regular basis in our fiscal assessment reports that changes to the corporate tax environment across Europe could be a significant risk for Ireland. If the proposals suggest that the tax revenues be allocated on the basis of where the sales take place rather than where the company is headquartered or the employment is, this would work against a small economy like Ireland that is exporting a lot of these services. We pointed to this as a significant risk going forward for Ireland's economic structure.

Mr. Michael Tutty

On the rainy day fund, our rationale for a rainy day fund is to avoid the booms and busts in the economy. We believe that when the economy is growing strongly and starting to overheat, possibly, we should put funds away rather than add to expenditure in the economy such that we then have those funds available when the economy has slowed down.

As I said, we already have the strategic investment fund. We also have bank assets. Why 2019?

Mr. Michael Tutty

The rationale for 2019 is that the economy is growing in line with its potential and, possibly, starting to overheat. We are not suggesting a figure of €500 million. Rather, we are saying that growth in the economy should be monitored and an amount for next year determined on that basis. The council has not put a figure on the amount.

The rationale is there of trying to smooth out the booms and busts. If we did not spend the money on reduced debt we would not have a fund that could be taken out and we might not be able to borrow the money under the fiscal rules. We see the need for a slight amendment to the fiscal rules to allow a countercyclical rainy day fund to operate in a way whereby we can put the money away and use it in the downturn.

We are over time for this session and I am conscious of the fact we have two subsequent sessions to come. We will draw this session to a close. I thank all of the Deputies for their questions. I thank Mr. Coffey and all of his colleagues for coming before us. It has been very informative and helpful in terms of the work we are doing in our pre-budget preparations.

If we have written follow-up questions, can we submit them?

Absolutely. We will go into private session for a few minutes while we have a change over of witnesses before us.

The select committee went into private session at 3.41 p.m. and resumed in public session at 3.43 p.m.