Fiscal Assessment Report: Irish Fiscal Advisory Council

We are now in public session. This afternoon we are holding our regular post-budget session with the Irish Fiscal Advisory Council to discuss the fiscal assessment report. Before we begin, I would like to ask members and witnesses to turn off their mobile phones for the usual reason that it interferes with the sound recording. I would like to take this opportunity to welcome IFAC back to our committee for what is the third engagement this year. We are delighted to have back Mr. Seamus Coffey, who is chairperson of IFAC. He is accompanied by Mr. Sebastian Barnes, Mr. Michael Tutty, Dr. Martina Lawless and Dr. Eddie Casey. We appreciate all of you giving your time to us again and we thank you for making yourselves available.

I will read the usual privilege statement and then I will call on Mr. Coffey to make his opening statement. I wish to advise that by virtue of section 17(2)(I) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to the committee. If, however, you are directed by the committee to cease giving evidence on a particular matter and continue to do so, you are entitled thereafter only to qualified privilege in respect to your evidence. You are directed that only the evidence connected with the subject matter of these proceedings is to be given and asked to respect the parliamentary practice to the effect that where possible, you should not criticise or make charges against any person or entity by name or in such a way as to make him or her identifiable. I also remind members of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official either by a name or in such a way as to make him or her identifiable.

I now call on Mr. Coffey to make his opening statement to the committee.

Mr. Seamus Coffey

I thank the Chairman. On behalf of the council, I would like to thank the Chairman and the members of the committee for inviting us to meet them to discuss our latest fiscal assessment report. As the Chairman outlined, joining me are Mr. Michael Tutty, Dr. Martina Lawless and Mr. Sebastian Barnes, who are all council members. Also joining us are Dr. Eddie Casey, the council's chief economist and head of secretariat, Mr. Kevin Timoney, Ms Ainhoa Osés Arranz, Mr. Killian Carroll, Mr. Niall Conroy, Ms Friederike Vogler and Ms Karen Bonner. We continue to value these engagements.

At the outset, it is important to note that the council’s mandate does not cover commenting on the choice of individual tax measures or spending items and priorities, but rather commenting on the overall fiscal stance. The domestic economy has shown continuing strong growth since around 2013. It has recovered from a deep crisis and is now operating near capacity. This is most visible in the labour market with the unemployment rate falling to about 4.8%. The rate of people working is high as well. If we take the key working age groups, ages 25 to 54, we can see that 79.7% of these individuals were employed in the four quarters to the second quarter in 2019. This is above the pre-crisis peak of 78.6%.

Efforts up until 2015 to turn around a large budget deficit were successful. Creditworthiness improved, and the budget balance appears to be close to a balanced position. However, even with large tailwinds in recent years, it is telling that the improvements in the budget balance, excluding interest costs, have stopped since 2015. Furthermore, if one were to account for excess corporation tax collected in recent years and for the recovery in the economy due to the upswings in the cycle, the underlying structural budget balance, excluding interest costs, is likely to have deteriorated over this time.

This underlying deterioration reflects fast spending growth, beyond what would be expected for revenues if these were to have grown at a sustainable pace. Between 2015 and 2018, net policy spending growth rose at a nominal pace of 5.4% per annum on average, and it accelerated to 6.9% in 2018. Sustainable growth rates would have been closer to a range of 2.5% to 4% over this period. While spending growth looks set to decelerate in 2019, it is still fast relative to the economy's potential growth and what might be expected for sustainable growth in revenues. This fast pace of spending growth is, to a large extent, unplanned. One reason for upward revisions to spending plans is that each budget introduces additional spending measures than had been planned in earlier years. Another reason is that within-year spending increases emerge over the course of the year. These within-year increases are outside of the normal budgetary process. They are, for the most part, not funded by offsetting measures or decisions to increase revenue elsewhere. They have averaged €0.9 billion per annum since 2015. Absent these, we estimate that the primary surplus, that is, the budget balance excluding interest, would have been 1.6 percentage points of GNI* higher by 2019.

Health spending overruns have been a common feature in recent years, averaging €0.5 billion since 2014. Our report highlights how much of this is accounted for by hospitals spending more than is budgeted for in recent years. Looking into this in more detail, we can see that the hospitals have not had substantial budget increases planned since 2013. On average, annual decreases between 2013 and 2018 of €80 million per annum were planned. By contrast, unplanned annual increases of €280 million occurred over the same period. The persistent health overruns that have taken place in recent years have been the result of weak planning and weak spending controls. This has led to a soft budget constraint problem. That is, the budget allocations are not seen as credible by health managers, and subsequent overruns are largely tolerated. That can perpetuate unplanned increases in spending and weaker controls on spending. If overruns are long-lasting, which they have been, for example, often relating to unexpected recruitment of staff, but are funded with potentially temporary revenues, for example, corporation tax, then the sustainability of the public finances can be put at risk. The concerns that the council has are therefore not with spending itself, but the fact that it is not being planned and budgeted for adequately and that it is not necessarily being funded by sustainable revenue sources.

The council is concerned about the extent to which potentially temporary revenue sources are being used to fund long-lasting spending increases. It is our assessment that large tailwinds worth between €10 billion to €14 billion annually have not been used to improve the budget balance, with the deficit instead only improving by €3 billion over the period 2015 to 2018. These tailwinds include the lower-than-expected interest bill and higher tax and lower unemployment benefits due to the recovery in the economy. Most important, there is the largely unaccounted for surge in corporation tax.

The Government has become increasingly reliant on corporation tax to fund spending. Almost €1 in every €5 of tax collected by the Exchequer is from corporation tax, and some €2 billion to €6 billion of the €10 billion forecast for this year is estimated to be excess. By excess, we mean beyond what would be expected based on the economy's underlying performance and historical or international norms. This range of estimates is something that the Department of Finance also finds in its Fiscal Vulnerabilities Scoping Paper, which was released with the budget. It notes that "scenario analysis based on extreme, though far from implausible, assumptions suggests that, in the absence of corrective measures, a permanent budgetary gap of the order of €2 – €6 billion could potentially open up".

The increased reliance on corporation tax for funding public services and supports leaves these exposed to potential reversals. While corporation tax doubled from 2014 to 2018, the domestic economy grew by just over 20%. This highlights the extent to which non-domestic sources of income are driving the surges we have seen. Concentration is another key problem, with half of revenues accounted for by just ten corporate groups. This concentration, coupled with the fact that 80% of receipts are understood to be accounted for by foreign-owned multinationals, means that the underlying tax base is more prone to idiosyncratic shocks and that the tax base is likely to be more mobile in nature. Corporation tax is also vulnerable to global tax changes, including the OECD's base erosion and profit shifting, BEPS, proposals, which would include firms paying taxes wherever they have significant consumer-facing activities and potential minimum effective tax rates. Yesterday's tax data suggests that corporation tax will overperform again in 2019, despite forecasts having already been revised up in the budget.

An aspect of budget 2020 that we welcomed in this report, and something that the council has been advocating for a long time, was that it incorporated overruns in 2019 into the budget for next year. This meant that overruns expected for 2019 of some €0.7 billion were to be offset by measures elsewhere in the budget on the Exchequer side. The 2019 overruns include the expected €0.3 billion overrun in health spending and the payment of the Christmas bonus, which was again not budgeted for in 2020, despite being paid out to varying degrees in each of the past six years. The health overrun comes despite an extra €1.1 billion being allocated by the Government in last year's budget, an increase of 6.6%. With the overrun, the health spending increase is likely to be more than 9% this year. If health spending goes beyond its forecast €0.3 billion overrun or if social welfare spending is revised upwards to reflect higher than expected payments in 2018, that could worsen the upward revisions to spending for the year.

For 2020, the Government offset overruns on the Exchequer side, but upward revisions to spending outside of the Exchequer mean general Government spending is forecast to expand more rapidly than previously planned. This includes spending by local government and by approved housing bodies. While housing increases are to be welcomed, given the lack of supply in recent years, such increases should be fully incorporated into budgetary plans. They also add stimulus to the economy just as much as central government spending, but there is little transparency about these areas of expenditure in budgetary documents.

The nominal increase in net spending planned for 2020 is now 4.4%, putting it right at the limit of what would be considered sustainable for next year. This compares to 3.1% growth set out in April. The Brexit contingency included in budget 2020, if spent, would raise this further. As regards the rainy day fund, the first annual payments to be made to the fund in 2019 and 2020 were postponed. The Government can ensure a prudent fiscal policy where net policy spending growth does not exceed sustainable growth in revenues. Three reforms would help to achieve this: The first is using the rainy day fund and a prudence account to save temporary receipts, including corporation tax; the second is guiding net spending with sustainable growth rates informed by alternative estimates of potential output; and the third is establishing meaningful debt ratio targets. These are the types of reforms that are needed to help Irish fiscal policy avoid its next crisis. I thank the committee for the invitation to come before it. I look forward to our engagement.

I thank Mr. Coffey very much.

I thank Mr. Coffey for his public service. He mentioned the word "crisis". He is predicting a crisis in fiscal policy based, I presume, on the past. There is a degree of "Groundhog Day" about all of this when Mr. Coffey comes before the committee so rather than rehash and rehearse some of the points I have made on previous occasions, I wish to put a couple of points to him. The first relates to the Taoiseach's comments on the over-reliance on corporation tax, and that it could be offset to some degree by an anticipated increase in growth in stamp duty revenues as a result of increased building. What are Mr. Coffey's comments on that?

My other questions are general ones. The State is going to spend some €17 billion on the health service this year. In Mr. Coffey's view, is that enough to run a good quality health service if everything is equal? In other words, is it sufficient if it took account of the comments Mr. Coffey has made on how health spending has not been controlled in previous years?

The Minister for Finance referred to surplus and there has been another big boost in corporation tax receipts. He is not putting it in the rainy day fund but he is giving it to the National Pensions Reserve Fund. He is not saying exactly what it is for, but he seems to imply that it will not be using it, in other words investing it, and that it will just sit there until such time as we might need it.

Mr. Coffey indicated in the final lines of his statement: "The Government can ensure a prudent fiscal policy where net policy spending growth does not exceed....Three reforms would help to achieve this", and he outlined what they are. That involves a move away from the reliance on corporation tax and setting it aside when one thinks it is a bonus. What is the net impact? There is clearly an impact on day-to-day Government spending. What would the impact of that be, because there would obviously be less available funding? Where would the moneys to replace that come from or is Mr. Coffey saying that the Government will just have to live within the limits below the corporation tax receipts?

Second, we have a copy of the OECD Economic Outlook. To a layman, some of it does not seem to refer to us, and global growth might be different from Ireland, but it does call for an urgent need for a much bolder policy action to revive growth. Obviously, Ireland does not have growth issues but without corporation tax receipts and, perhaps building, there are underlying growth issues. The OECD points specifically to transitioning towards sustainable growth amidst digitalisation and climate challenges that would trigger a marked acceleration of investment, particularly from the private sector. If the IFAC representatives were to answer no other question, I would like them to answer this: were the Government to take all its advice and put these portions of unsustainable, unreliable receipts in either a rainy day or prudence fund, where would we make up the difference? What suggestions does IFAC have on that that are tenable and achievable from a tax perspective?

Dr. Martina Lawless

I will take those in order. The Taoiseach did suggest that a reduction in the windfall we have identified in corporate tax rates could be made up by an increase in stamp duties. One reason we regularly warn about reliance on windfall taxes is that we saw large increases in stamp duties in the lead up to the previous crisis. Has the Government become over-reliant on any one tax heading? When we warn on corporate tax we are really talking about the unreliability of any tax head or over-reliance on any individual tax or sector. In the previous context the construction sector was contributing heavily to stamp duties but also to VAT, income tax and so on. Although we had a lot of money coming in from VAT, one particular sector was driving much of Government revenues and when that sector was particularly badly hit it had a big impact on overall Government revenues. We would be quite concerned that moving from reliance on one windfall tax to another windfall tax is not a way to sustainably manage the public finance. We would prefer to see a long-term balanced revenue and expenditure path that would be based on the underlying growth rate of the economy being matched on both the income and the expenditure side.

Mr. Michael Tutty

The Deputy asked if health expenditure is enough. We cannot comment on that as we do not have all the information but what we have seen is that a budget is set every year for health and during the year it is exceeded. That is not good budgeting by any means. It so happens that corporation tax receipts have exceeded what was expected and, hey presto, that offsets the higher expenditure, even though the health expenditure is likely to be permanent whereas nobody knows if the corporation tax will be permanent. We are not saying that too much is being spent on health but we are saying that there should be better budgeting rather than overruns every year.

What I am trying to drive at is whether looking at international experience, there is a figure that anyone can arrive at that we can say is an adequate amount to run a really good health service, if it is managed properly.

Mr. Michael Tutty

The statistics do show that we are spending quite a lot of money on health and that we are not out of line with other countries, so there is an issue around how we are spending it.

Mr. Sebastian Barnes

It is ultimately a social choice. If one looks across countries, some spend very little public money, some spend a lot and some get better value for money within that. It is a choice, and that is the point that we are making. One makes one's choice and then it should be budgeted accordingly. We do not have a view as to whether the current spending is out of line with anything.

Mr. Seamus Coffey

On what the money is used for, the Deputy mentioned the Minister for Finance's speech yesterday indicating that moneys would be transferred. I think he mentioned the National Treasury Management Agency, NTMA. It would be impossible to transfer money to the National Pensions Reserve Fund as it no longer exists, but he was referencing providing the funds to the NTMA. In general, that is what happens. The NTMA managed the cash and the liquidity of the State. It has ongoing financing needs to roll over debt. This year, it was looking at borrowing around €18 billion. The indication is that any surplus that was available would simply be incorporated into that cash management strategy. It is not the case that the money would not be used, it would simply go into the general cash management of the State and the NTMA would take account of that when it was looking at its borrowing requirements for the year, particularly when it comes to insuring that we have a liquidity reserve. Since the crisis, we have maintained large amounts of cash in the fear that we might lose market access. That might seem remote now but, equally, it might have seemed remote in 2008.

If the Government was to follow our advice on the three things we set out at the end of our submission, what would the impact be? The Deputy referred to the impact on corporation tax and from where the hole would be filled. Our advice when it comes to setting spending plans is that things such as corporation tax should be completely ignored and that spending plans should be based on what the Government thinks is the sustainable and hopefully reliable revenue sources. Looking at temporary or windfall receipts should not impact it. It should not be a case of seeing additional money coming in and then having additional spending on the basis of that. As Dr. Lawless said, one must look at the long and medium term at what can be relied on for a number of years. Taking those proposals into account, one would look at potential growth of the Irish economy. We have done reasonably well in average growth. In actuality it is very high or very low but the average is pretty okay. Perhaps fiscal policy is contributing to that by spending too much in the good times and maybe undermining the economy in the poor times. The impact would be to ignore those temporary revenues and put things on a sustainable fashion. That would mean that services, supports and Government spending would be available every year, not just when money comes in.

If we were to do what IFAC wants tomorrow morning and take that block of unreliable money which has become part of day-to-day spending out, where would we find the funds?

Mr. Seamus Coffey

The issue over the last couple of years is that spending has accelerated beyond the sustainable rates that we have set. If one were to make an immediate adjustment it would, in our estimate, reduce by €2 billion to €6 billion from the budget as the Government has laid out. We are not recommending that has to be done. We are simply pointing out, as is the Department of Finance, perhaps in more explicit terms than we have, that it is a potential risk, that a hole could open up in the public finances. How would we fill that hole? Initially, one would look to borrow the money but we already have a €200 billion debt and the benign financial conditions we find at present might not persist for very long. On the impact of our proposals, it is about putting spending on a sustainable path, having it available all the time, not just when windfall revenues pour in.

Mr. Coffey is not really saying where he would get it from. Aside from borrowing, and that is not really an option, so -----

Mr. Seamus Coffey

What we are saying is that the Government would be forced to grow spending at a lower rate for a period to make that adjustment. When it comes to the overall package of spending and revenue which the Government introduces, the Government can increase spending at a faster rate than we might suggest if it increases taxes. We look at this on a net basis. Say the Government wants to increase spending by more, or a potential hole has to be filled, it can be done through borrowing temporarily or by increasing taxes, it does not necessarily have to be a reduction in spending.

All the members have indicated they wish to come in. I will call Deputies Quinlivan, Broughan, Heydon, Boyd Barrett and Cowen, in that order. As Deputy Quinlivan is substituting today, I will remind him that we operate a five minute total block for questions. There is no limit to the responses he can get but there is five minutes of questioning in the first round.

I welcome the report which is really useful for us. No one can say they have not been adequately warned about the risk of relying on corporation tax to fund spending increases. We were reminded again this week that corporation tax receipts are well ahead of expectations by more than €700 million for November alone. While the windfall is very welcome, the Government's reckless use of windfall income demands consideration, as IFAC has outlined. Overruns are draining resources that could and should be used for the provision of vital services, meeting the demand of our healthcare services to providing social and affordable housing.

The Government, however, is characterised by its putting waste over spending and the misuse of these receipts. That the receipts are under threat in turn poses a great risk to our capital projects.

I have a number of questions so I hope the witnesses might be able to provide us with some insight today into the risks posed by changing the national corporation tax regime. In the next few years, changes will take place to how and where corporation tax receipts are paid as a result of the OECD-BEPS initiative. The representatives have rightly highlighted this risk. While the aim is to clamp down on tax avoidance, it will probably negatively affect our corporation tax receipts. I would like the delegates to expand on this and give their thoughts on potential BEPS reform. What will it mean in practice? How will it affect revenue for the State? Do the delegates have any ideas on how we can replace the lost revenue to keep our public expenditure at a sustainable level without proceeding to austerity? It was reported this week that a surge in stamp duty from house sales will offset this risk. Does the council have a view on that policy? Could the delegates remind us how a surge in stamp duty to fund spending worked out the last time? What case is there for using what are effectively windfall increases in corporation taxes to fund capital expenditure on a once-off basis? Is that more sensible than plugging holes each year, thereby adding the expenditure to the base for the following year?

What is the view of the council on the likelihood of a no-deal Brexit at this point? If the danger of a no-deal Brexit receded, what difference would it make to the council's general advice on how to approach the budget in the coming years? We can discuss how expenditure is accelerating. Does the council have a view on whether the issue is overspending or under-budgeting? If overspending happens, as it does every year, is it surely not more logical to say we are being dishonest and under-budgeting in health, for example, rather than overspending? We need to sort that out over the next couple of years. We cannot keep going on pretending the budget is a certain amount while knowing expenditure will always be more.

On the issue of spending being at its maximum, or beyond, are we really not talking about an imbalance? Spending could be perfectly sustainable but the revenues do not match or are temporary. If revenue streams were to increase through taxes on wealth, for example, would spending not be sustainable if matched by revenue?

I wish to finish up on the issue of transparency or the lack of it in respect of local government and housing bodies. Could the delegates expand on the problems they see and what should be done about them?

Mr. Sebastian Barnes

Let me take one or two of those questions. A very good question was asked on whether it would be justifiable to use the windfall corporation tax to fund capital expenditure. We have two concerns about that kind of strategy. There is a certain logic to it. The first concern is that, essentially, the increase in investment we are seeing is really an increase in the level from what was a very low one to a much higher one that would essentially be sustained over quite a long period. That really requires a matching revenue stream to go with it, which is why we are concerned about sustainability.

There is a second concern, which underlies some of our other answers, and it is associated with the extent to which the economy is able to produce and the risk of overheating. One of the constraints is that the unemployment rate is very low and the economy is pretty active. People are fully employed. Additional investment has to be met within that constraint because the economy just cannot produce that much more on a sustainable basis. That is another reason capital expenditure has to be thought of together with other forms of spending.

At present, we believe Government policy is probably fairly broadly balanced and that the overheating is not excessive. However, the Department of Finance's own projections show that the economy will be overheating increasingly over the next couple of years. That is a constraint on the ability to put more money into the economy. Of course, if one takes the money out somewhere else, one can allow for more investment but one cannot just keep adding it on because there is a limit to how much the economy can produce. That is different from the circumstances facing many countries. A number of continental European countries, for example, are experiencing relatively weak demand. For them, increasing investment would help to increase the level of output in a sustainable and good way but, in the Irish context, in an economy that is already quite close to full employment, there is a constraint on being able to accommodate future spending. The economy just cannot produce that amount.

Dr. Martina Lawless

On the Deputy's question on a no-deal Brexit, we endorse the budget forecasts of the Department of Finance based on the idea that there was a very high risk in September and October of a no-deal Brexit. I believe that was an appropriate approach to take at the time. Since 17 October, a withdrawal agreement was signed. This is very much reliant on the next week's political developments in the United Kingdom. We see the risk as having receded quite considerably relative to the circumstances in October and November. The concern now really moves to what happens over the next year in terms of the negotiation of the second stage. Assuming the withdrawal agreement is completely ratified, a free trade agreement is scheduled to be negotiated over what is really an incredibly short period. One year up to the end of 2020 is a very short time internationally for a significant-----

Was any agreement ever negotiated in that time?

Dr. Martina Lawless

I did look this up. The record is approximately seven months but that was between a very large country and a quite small country. It was not precisely an equal partnership. There is a possibility that the transition agreement will need to be extended in order to give time for the free trade agreement to be fully negotiated and ratified but there still remains a small but significant risk that the end of 2020 could be another cliff-edge Brexit. If there is no free trade agreement negotiated at that point, we will be back to the stage of a WTO crash-out Brexit. It is not off the agenda as a risk.

Dr. Eddie Casey

On the question on transparency, what we are really trying to highlight is that the traditional focus of the Department in budgetary publications has been on the four fifths of expenditure and revenue that is down to the Exchequer definition of expenditure and revenue. It misses a big gap in terms of what we know is Government activity. I refer to genuine Government activity that matters just as much for stimulating the economy as every other form of expenditure and revenue. Towards the end of each budget publication, there is what is called a "walk" from Exchequer to general Government. The general Government figures are the more comprehensive ones that we really care about. We would like to see the walk from the Exchequer to general Government produced in a very clear fashion. We would like to see it on a gross basis, which means what is actually happening with spending could be seen. What is actually happening with revenue could also be seen. Right now, we cannot tell any of this. If there were a huge jump in revenue that were perfectly offset with expenditure, we would not see it because the information is all in net terms.

Do the delegates have any comment on local government and housing bodies?

Dr. Eddie Casey

It is one part of that walk that I mentioned. We would care about that but we would also care about the other parts of non-Exchequer spending that are included. It does include approved housing bodies. It also includes local authority expenditure and revenue.

Mr. Michael Tutty

The reason we are highlighting this in our recent report is that there was an extra €700 million in expenditure shown in budget figures for general Government that had not been there when the stability programme update was published in the spring. We have been trying to find out what that expenditure is and where it comes from. We are told it is in the local authority and approved housing body area and that the bulk of it seems to pertain to approved housing bodies but we cannot get details on that at all. We have regarded the money as an extra €700 million that is being pumped into the economy through public expenditure next year beyond what was talked about on budget day. What was done on budget day was in line with what we expected and what the Government had said it was going to do but we are still trying to work out where the extra €700 million comes from. Approved housing bodies are obviously good if there are more houses being built but it is the overall level of expenditure on a general Government basis that we are or should be looking at because the fiscal rules are all set in general Government terms, not in Exchequer terms. We are highlighting that the extra expenditure is occurring and we are still trying to work out what exactly it is. As Mr. Casey was saying, we would like to see more transparency in the figures published on budget day so we will not be fishing around trying to find this in future years.

It is inevitable that the budget concentrates on the Exchequer. Even the figures for the end of November issued yesterday are Exchequer figures rather than general Government figures. The walk from Exchequer to general Government is important from the point of view of the overall economy and our fiscal rules.

Mr. Tutty said he cannot give the details. Is there anything in particular that is blocking him from doing so? Is there a reason? It is €700 million.

Mr. Michael Tutty

We see that figure but we have not received the full information from the Department of Finance. It may not have it. We are still digging into it and trying to get the information.

Mr. Seamus Coffey

Some of the other points the Deputy raised were covered in earlier rounds but I would like to focus on some of the questions he asked on corporation tax and assessment of the risks posed by some of the international changes. This is not something that has been formally assessed by the Irish Fiscal Advisory Council but I will give my personal views on the risks and what they might entail. When we look at risk, we primarily look at forecasts or projections. These go in both directions. It could be the case that these changes are positive and result in increases, or it could go in the other direction. To highlight that, we could go back to 2012 and 2013 when the OECD first started the base erosion and profit shifting, BEPS, process. Various Oireachtas committees identified these changes as significant risks to Ireland but they have actually contributed to the increases in corporation tax we have seen in recent years. An underlying principle of the OECD's project has been to align profit with substance. Many of these American companies have significant substance in Ireland and we are seeing greater profit being allocated to that substance resulting in greater receipts for Ireland.

The BEPS project has moved on. We are now on BEPS 2.0. One of the principles of BEPS 2.0 is to assign more of the taxing rights to the market countries. Profits are allocated less to production and some of the other activities to which they have traditionally been allocated and more to the countries in which the customers reside, particularly in the digital sphere. More money going to the market countries could present a downside risk to Ireland. There is also a proposal for a minimum effective tax rate. The impact of such a measure on Ireland is unclear. If it is a global minimum across corporate groups, the outcome for Ireland could be relatively benign. If it were to be applied on a country-by-country basis, the outcome may be different.

The issue we are highlighting is that there are significant risks and uncertainty with regard to corporation tax. The Deputy asked whether we could replace the lost revenue if these risks have negative outcomes. We believe that we should not need to replace it all, to follow on from Deputy Lahart's questioning. We should avoid being in a position in which important key public services on which people rely are provided on the basis of potentially volatile revenue sources. They should be on a sustainable footing. We believe that more could have been done over recent years to achieve that. For example, the Government set out a plan for this budget to increase net policy spending next year by approximately 3%. We said that the Government should adhere to that plan. We did not ask for anything additional, only that the Government deliver on the plan it set out. One reason for adhering to that 3% is that doing so would have offset some of the more rapid increases in spending that have happened in recent years which have been masked by those corporation tax receipts. The Government delivered a plan of 4.5% however. This could be considered sustainable but it does not correct some of the reliance on corporation tax we have built up over recent years.

We see significant risks. The money continues to come in. We saw it yesterday. The risks could result in positive or negative outcomes but we are highlighting the uncertainty, the concentration and the potential unreliability of corporation tax as a revenue source.

I welcome the representatives of the fiscal council. To follow up further on corporation tax, the financial journalist, Chris Johns, recently drew attention to the fact that the volatility of corporation tax receipts mainly arises in respect of the companies involved in foreign direct investment. The Department did some modelling of its own with regard to recent developments in corporation tax. This included some interesting information. For example, I notice that Luxembourg's rate is twice ours but that it brings in more tax than we do. Has the Irish Fiscal Advisory Council delved into this issue in the same way as the Department of Finance? Are there problems with the tax itself in respect of its volatility in addition to the fact that Google, which is just up the road, and other such companies provide such a big chunk of the receipts? It is remarkable that the Department's own report from last month modelling the developments shows such incredible volatility over a number of years and that forecasting is so bad. Is something fundamentally wrong? Does Mr. Johns have a point about the way the tax is applied to indigenous enterprise? Perhaps it should be making a more significant contribution to general taxation revenue. He seems to argue that too many things can be written off against an indigenous company's tax liability. Is there a fundamental problem with the tax, aside from the reliance on foreign companies?

We are now speaking after the budget but we also had the council before us prior to the budget. Have things changed fundamentally? Many of us felt the budget was a non-event. Does Mr. Coffey expect another budget in the next financial year? The results of the general election in the UK will soon be known, we will know more about Brexit at the end of January, and we will probably have our own general election. Does Mr. Coffey expect a whole new economic scenario to require a real budget, which the current budget is not? The council has provided a revised heatmap on page 65 of the report. Are there fundamental differences between this and what we saw before the budget?

In response to my colleague, Deputy Quinlivan, the witnesses referred to information the council does not have and to improving general Government accounting by the Department of Finance. Are there still a lot of unknown unknowns or known knowns? The local authorities and agencies are spending money but the Department of Finance still does not seem to know. What does the council recommend in that area?

On climate change mitigation, we have new levels of carbon taxation. It looks like carbon taxes will increase dramatically over the next decade. What role does the council see carbon mitigation measures playing in expanding the sustainable revenue base of the country? Those are the main questions I wished to ask.

Mr. Seamus Coffey

I will begin with the point about corporation tax receipts and the inherent volatility in the contribution of the domestic sector. Even before the recent surge in corporation tax, it was the most volatile of our main taxes. It is a very cyclical tax which depends on profitability and the economic cycle. Even prior to what we are now seeing, this tax has always been fundamentally volatile. The nature of the tax means it can be quite hard to reduce that volatility. It is a tax on something which depends on the economic cycle. Other taxes are not as volatile. Even without the recent surge, that should be taken into account.

With regard to the indigenous sector, one thing to note from recent figures from the CSO is that the share being paid by foreign multinationals has remained relatively stable at approximately 80%. That means that the share being paid by domestically-owned companies has remained at approximately 20%. Whereas in 2014 such companies paid approximately €1 billion in corporation tax, they paid more than €2 billion in 2018. The figure is likely to be a bit higher again this year if the shares remain stable. There has been an increase in the amount of corporation tax being paid by indigenous or domestically-owned companies. That is an increase of 100% in the tax being paid by those companies. The amount of corporation tax being paid by Irish-owned companies now probably exceeds the figures for 2007 or 2008. The bulk of the payments back then came from the financial and banking sector as a result of the large profits they were booking. That industry is in a very different environment now. The amount of corporation tax being paid by other companies is even larger. The indigenous sector is making a contribution but it is being overlooked because of the large amounts coming from the foreign multinational, whose contribution is much greater than it was before.

However, I am not sure how we can overcome the volatility inherent in corporation tax because of the type of tax it is. The issue is how to account for it in medium-term plans.

Dr. Martina Lawless

The final question was on climate change and the introduction of carbon tax to change behaviour and reduce Ireland's climate emissions exposure over time. This is a feature of our fiscal risks matrix on page 111. We have listed missing our climate targets in the long term and therefore becoming subject to EU fines as both a high-probability and a high-impact risk for future fiscal sustainability. It looks almost certain that we will miss the 2020 targets, which will mean fines of between €150 million and €400 million.

Do we not receive a share of that fund? The recent figures have been very confusing. Are the taxes hypothecated? Is the share we get back greater than the fines?

Dr. Martina Lawless

I am afraid I know nothing about how that revenue is shared.

It is a very important point. People constantly say that we will be fined and punished. However, a recent report noted that we get money back at European level through the mitigation fund. I am not sure if the report was from the Department of Finance or perhaps the Department of Public Expenditure and Reform. That figure seems to be significantly higher than the fines we have incurred so far, which range from €121 million to whatever this year's figure is.

Dr. Martina Lawless

I am afraid I do not know the answer to that question. We have included a risk relating to the size of the fines to which Ireland will be exposed, particularly if we miss the 2030 targets, but-----

Is it not important to know if this is still a net benefit to us? I have another point relating to this. Do the witnesses think that all carbon taxation should be hypothecated?

Mr. Seamus Coffey

Without knowing the full details, I do not think the mitigation fund revenue is linked to the amount of fines a member state pays.

I am not saying that. It is linked to a state's share-----

Mr. Seamus Coffey

If the fines were lower, we would unambiguously be better off. I would not make a link. If there is revenue to be received that is independent of the fines, we would unambiguously be worse off if the fines were higher.

Does that mean that we would gain from the fines paid by other countries?

Mr. Seamus Coffey

That does not mean that we should pay fines ourselves.

I accept that. However, it seems that a lot of people are not aware of how this operates.

Mr. Seamus Coffey

I do not think there is much awareness of it here. On the Deputy's other point, I note that, in general, economists oppose hypothecation. The two decisions of how money should be collected and how money should be spent should be separate. Hypothecation is not the most appropriate way to go about things. It could be the case that hypothecation can help with the acceptance of carbon tax at a political and a wider societal level. In the main, however, economists do not approve of it.

It is being hypothecated, is it not?

Deputy Broughan is over time. I gave him a bit of leeway but I am conscious that other Deputies are waiting. Are there other responses to Deputy Broughan's questions?

Mr. Sebastian Barnes

I would like to comment briefly on the difference between the pre-budget and post-budget situations. It is important to note that if fiscal policy is managed well, it should be very boring. What is sustainable does not really change much from year to year. What happens in good times should be the same as what happens in bad times. From our perspective, the less drama the better. For example, we have had very positive corporation tax news since the budget. However, that should not really affect policymakers' view of what is sustainable. It is a windfall and it should be dealt with appropriately.

One thing that did change in the budget is the additional overruns in health spending. That was an obvious disappointment in 2019. However, there has been a new and welcome development where our advice has been followed. In 2020, that money is not being put into the base. Additional measures have been taken to keep the 2020 plan where it was and not shift health spending upwards as happened in the past. That has been a very welcome development. It must now be implemented, which will be challenging. We will look at that very closely in the coming year.

We also got two scenarios for Brexit. That was very helpful. Irrespective of what happens in the next few months, we have a good idea from the Government of what it will look like if things carry on along a relatively smooth path and what will happen if things go wrong for some reason. It may not be very obvious today, but things are very volatile in the UK at the moment. That is helpful and it all contributes to a sense of smoothness and good management.

Dr. Eddie Casey

I totally agree with Mr. Barnes's points. The Deputy also asked about the economic picture and how the heat map has changed. Not much has changed in that specific area, but one interesting area that has changed a bit is the wage picture. I refer to the growth in wages year on year. They seem to have picked up quite a bit again, which is not something we expected. The year-on-year growth rates are running at about 3.6% in nominal terms. The comparable rate in the eurozone is at about 0.6%. When compared with historical norms in Ireland, that does not seem that high because we had very high wage growth rates during the 2000s. However, given that we have low inflation and wages in other eurozone countries are not growing at the same pace, it could become an issue for competitiveness and could contribute to future imbalances. One other thing-----

We have heard representations from trade unions calling for an increase in salaries of at least 4% in 2020.

Dr. Eddie Casey

That is not something on which I have a personal view. The other question concerned other unknown unknowns in the general Government figures. By virtue of them being unknown unknowns, we do not know. It is really unfortunate that we cannot see more detail on this stuff because it is so big. As I say, this accounts for about a fifth of the overall activity that the Government participates in, both in what it puts into the economy and what it takes out. We just do not have enough detail on it.

Mr. Seamus Coffey

There is some information out there in aggregate terms. It is not as though we have unearthed things that are not publicly available. We look at the budget documents published by the Department of Finance and the broader Government accounts included with the budget documents. That information pointed to the €700 million increase in capital spending that was not featured in the equivalent figures in April. There is publicly available information, but the issue arises in understanding what drives spending, what areas it is in and what type of activity it is. We pointed to increased spending by the approved housing bodies, but one issue that arose is their purchase of existing houses. That might not add to economic activity. Alternatively, that spending could signify the construction of new houses, which definitely would add to economic activity.

When it comes to Exchequer spending, the Department publishes a 247-page report that goes line by line through the changes in Exchequer spending. That report focuses on 80% of activity. When it comes to the other 20%, we just get the aggregate figures. It could be a because of lack of quality reliable information. This has been flagged by the Department of Public Expenditure and Reform. The OECD recently published a report on Ireland's public finances and recommended a move from the narrow cash-based approach of the Exchequer accounts to a broader accrual-based approach of general Government accounting. There has been a Government decision to implement the recommendations of that OECD report, and the Government hopes to do so over the next five years. While there might be problems at present, there is an awareness of those problems. An external report has found that changes need to be introduced, the recommendations of that report have been accepted, and there has been a Government decision to move in that direction. Our concern here is that this has had a greater effect when it comes to 2020 than would otherwise have been the case. By and large, the budgetary changes in the Exchequer account drive budgetary changes in the overall general Government accounts, but that has not been the case this year.

Our expectation is that there will not be another budget for 2020. We think the budget was real. Outside of a Brexit contingency, primary Government spending on goods and services, that is, all Government spending excluding interest, is planned to rise by €4.4 billion next year. That is a real increase.

I thank the officials for coming in and for their detailed presentation. I will kick off with the area of corporation tax. The council outlines a scenario in which corporation tax receipts return to 2014 levels. Receipts have overperformed since then, but is there any evidence that all of this increase is excess? Could some of it be a structural increase, meaning that 2014 is not an appropriate base year to work from?

The assessment report is critical of the intention not to transfer the €400 million in contributions to the rainy day fund this year and next year. At the same time the council suggests that the €1.5 billion transfer from the Ireland Strategic Investment Fund should be used for a different purpose to support economic activity and employment in Ireland.

The strategic investment fund discretionary portfolio is worth around €8.5 billion, of which €1.5 billion will be transferred. A further €1.5 billion is to be targeted towards infrastructure and investments, leaving around €5.5 billion to support economic activity. Is that not sufficient, and if not, what is?

The report reads, "There is a case for suspending Rainy Day Fund payments in the event of a disorderly scenario, but the case for suspending payments without the risk materialising is less convincing." Given the Government is projected to run a fiscal deficit, would it not be unwise to borrow to fund the rainy day fund as well as being financially imprudent given the cost of servicing such borrowing?

On the technical expenditure, specifically the forecast for a future pay deal, the council is critical of the omission of any provision of a further pay deal in the expenditure forecasts. Were this included, would it not create a floor for future expenditure rather than working as a ceiling? What impact would it have on the Government's negotiating position with unions if they could see a specific sum had been set aside prior to going into negotiations? That is a practicality that must be borne in mind.

On fiscal rule compliance, the assessment report is 160 pages, including references to three different frameworks for assessing compliance, including the council's own principle-based approach, its old approach, and that of the European Commission. The report claims that the new approach makes assessment simpler. Does including additional approaches have the opposite impact and only act to make the assessment of fiscal rules more confusing for people? Can this lead to a dilution of the messages? Mr. Barnes referred to the two scenarios around Brexit, and they have been helpful. Given that budget 2020 was prepared on a no-deal basis, if that does not come to pass, and I take the point Dr. Lawless made earlier, does IFAC believe that the economic growth forecast set out in the summer economic statement is the more appropriate scenario to rely on for future planning rather than the forecasts in budget 2020?

I note the comments on windfall taxes. The biggest percentage increase year on year in tax take is not corporation tax at 5.9% but income tax at 8.6%. Given that income tax is our biggest tax head and one of the most reliant on the real economy, does that not point to the public finances being in a robust position? There was comment here on not repeating the mistakes of the past, particularly those made by the Government during the Celtic tiger. Will IFAC comment on the income tax take being 38% of the overall tax take compared with 28% in 2006? Does that not point to the economy being in a much stronger position?

Mr. Seamus Coffey

That is a wide range of matters. I will take corporation tax. What we have done in trying to determine the excess is to take a range of approaches, not just a single one. The year 2014 is clearly before the most recent surge happened. We are not saying that everything that happened since then could be considered an excess but it is one of a range of approaches that we use. In overall terms, comparing the initial 10% forecast for 2019, we are saying that the range of the possible excess is from €2 billion to €6 billion. It could be that a very large amount of it is structural, as the Deputy indicated. We are simply highlighting, first, the nature of the increase in recent years, which has been very rapid, and second, that using different measures gives different indications as to what might be considered an excess performance. We are not hanging our hat on one individual approach but putting a range of them out there.

On the performance of taxes, income tax is up 8% this year. Something we have tried to highlight is the performance of PRSI this year. It has grown by almost 10%. Returning to our earlier point on an overconcentration on Exchequer figures, PRSI is a very significant revenue source that is generally ignored. Its growth of 10% is quite significant. It is about €400 million ahead of forecast. It is very deep within the fiscal monitor. We can try to figure it out but it highlights the broader question that there should be more focus on things outside of the Exchequer. Corporation tax for this year looks like it will outperform forecast by 16% compared with what was set out in the budget last year, which was an estimate for this year of just under €10 billion. It looks like it will exceed that and be close to €11 billion. One reason the year-on-year performance might not seem very strong is that in 2018 we were informed that there were significant one-off payments that would not be repeated in 2019. While the headline year-on-year growth rate might look modest enough at 5%, if it is done on the underlying basis and the one-off payment from last year that was not repeated is stripped out, then the growth in 2019 looks stronger again and is probably ahead of income tax and PRSI.

On concentration and income tax being 38% of tax compared with 2006, the Deputy is not comparing like with like. In 2006, significant revenues would have been collected by the health levy that was then in place. It was a tax that did not go into the Exchequer and therefore is ignored by and large. It was collected elsewhere in the general Government sector. At the start of 2010, I think, we introduced the universal social charge, which combined the health levy, which existed in 2006, and the income levy that was introduced in 2009. They are now paid into the Exchequer account. I do not have the figures to hand but a more complete comparison between 2006 and the present day would show that the gap or concentration in income tax is not quite as changed as the figures the Deputy gave suggest. It does highlight some of the changes that have arisen as the income tax system has changed. The universal social charge, which is collected as income tax, was introduced and some of the other changes introduced during the crisis have not been reversed. Our focus on corporation tax is justified, and the growth, when those one-offs are stripped out, is still quite significant.

Mr. Sebastian Barnes

I thank the Deputy for his question about compliance with the fiscal rules, which is something that rarely happens. The fiscal rules are important in providing an anchor for fiscal policy. In recent years they have provided some helpful signals on both when policy was too loose or when it was on the right track. When we move towards a principles-based approach, we did think very carefully and precisely about the Deputy's question whether it was complicated enough and why then we needed another framework.

We had two serious concerns about the European approach and how useful it was for us, at least for us as a fiscal council. The first was the complexity of the European rules, which take the form not only of quite a complicated system laid out in various laws, regulations and treaties but also of a 126 page book provided by the European Commission, called Vade Mecum, which is immensely complicated. We found we were spending a huge amount of time just trying to understand very arcane rules, often in footnotes, that were very hard to rationalise or to explain. We also had a more substantive concern that because of the way the Commission measures the economic cycle, there is a big risk that the European rules are procyclical. In the good times they say to spend more when states should spend less, and in bad times they come back and bite states and say that they should be cutting spending at a time when states should not do that.

Because of this procyclicality, and because in the intervening time the Council and the Department of Finance have provided our own estimates of potential output and the output gap that we think are fairly solid - while it is uncertain, we think they present a reasonable representation of where we are - we thought it was important to reflect that in the fiscal rules. That is why we decided that for our own assessment and the domestic Irish framework, a principles-based approach that was simpler and reduced the risk of procyclicality was a cost worth paying, even if it was a little more complicated. We hope that people will find it a useful tool to think about policy.

Mr. Michael Tutty

We have argued in recent years that the excess unexpected income coming in should be put into a rainy day fund. I would not argue that we should go borrowing to put money into a rainy day fund, but given the strong growth in the economy, we should have been building up through something like a rainy day fund the ability to have money when the downturn comes so that we can spend it then. Instead, the excess revenue has been going out in unplanned expenditure on health and other areas every year. We argue that the whole rainy day fund should be available in a downturn to support economic activity. We are not saying it should be used now to do so because we are reaching full capacity as it is and the economy does not need a stimulus, although it will need it one day when the downturn comes.

Given that excess corporation tax was even announced yesterday, there could still be scope to put money into a rainy day fund if the Government wanted to do so. If the money is effectively going to the National Treasury Management Agency, NTMA, to reduce our debt, it is a good use of it as well.

There was mention of the dangers of putting any estimate of future pay deals into budget forecasts. That is undoubtedly an issue. If one publishes forecasts for the next three years on the basis there would be no pay increases beyond what is already agreed, with no provision for inflation - although there may be provision for demographics - one would not really be producing meaningful forecasts. It would just be a mechanical job of saying that on the basis of current pay and price levels, this is what will happen. Revenue would be done on a different basis, making assumptions about growth, inflation and wages in the economy. If we want a realistic forecast, there must be some provision for these factors. One might not announce a provision for a 5% pay increase and it might be made a little fuzzy. If something like that is not done, however, the forecast would not be realistic.

There is no use in saying the budget would be in surplus by X% in 2022 and 2023 when we know the figures behind that are just not realistic. We have been trying to say that forecasts should be based on realistic figures and not figures which do not take account of realities. I understand the problem of saying that a pay increase of X has been built in but a realistic forecast needs to build in something. Otherwise, the forecasts would be meaningless.

I accept Mr. Tutty's point but if that base is included, it becomes a starting point. If we include a figure of 2.5% as the most we think we can afford to spend, it would become a negotiation straight away. The unions would accept nothing less and push for more. I understand the problem outlined by Mr. Tutty but this is a crux. He must understand there is a problem on the other side as well.

The real world view and the commentator's world view.

Mr. Michael Tutty

If it is a technical assumption, the negotiators can say the base has not been guaranteed and they could start at 1% rather than 2% or 3% in the technical assumption.

Mr. Eddie Casey

It would be one thing to say this would be a good approach if it was clearly working and there was no overrun but in reality there are overruns every year that are quite large. It looks to us that this kind of system of setting out very low ceilings that are surpassed by a large amount is clearly not working.

Is it not fair to say that some of those overruns could be specific to the health area, for example, in recent years? We must also compare this year's overrun to what happened in previous years. There is a sense that a handle has been got on that, perhaps helped by some of the recruitment practices in the health sector. The overrun would not be across the board and in every Department.

Mr. Eddie Casey

It remains to be seen if that is the case but the Deputy raises an interesting point. Much of the overrun in the health area has been on staffing and pay, and these are exactly the types of areas where we have seen no provision. We have not seen wage increases banked for the medium term or pay and price increases, which are really important in the health sector.

The overrun this year has been far less pronounced.

I am sorry but I must be fair to everybody and the Deputy is out of time.

The witnesses have repeatedly said, and the Department of Finance has acknowledged, that the corporation tax revenue we are relying on for spending on our public services, infrastructure, etc. puts us at risk. The witnesses have said they are concerned about that so are they effectively acknowledging we are a tax haven? I suspect the witnesses will be reluctant to go as far as saying we are a tax haven.

Do those who accuse us of being an international tax haven at least have a fair argument? Oxfam, Christian Aid and many countries have said that Ireland is a tax haven. I know it does not fit the technical definition of tax haven but nobody fits that definition. When the Government argues that Ireland is not a tax haven because it does not fit the definition, it is meaningless. The world and its mother believes we are Europe's tax haven and Oxfam, Christian Aid and others believe the same. Do they at least have an argument in saying we are a tax haven? The council has recognised our vulnerability to what it terms "unreliable" revenue but this is unreliable because the move to deal with corporation tax avoidance could close that revenue.

If we wanted a more sustainable economy, we would welcome the move to make the corporations pay more tax and have a minimum effective rate across Europe or globally. Ultimately, it would put us in a more sustainable and less risky position. Is that not at least a fair argument?

It is rarely acknowledged that profits have gone through the roof in this country over the past ten years. The rise in profits has massively outstripped any rise in wages for workers. I was just looking at the documents from the Department of Finance that nobody reads, apart from the witnesses perhaps.

Excellent. Deputy Lahart reads them too. The graphs detailing profits are pretty stunning. They demonstrate that profits of corporations have gone from approximately €40 billion in 2008 to €140 billion, which is stunning by any measure. I am not sure what rate wage increases have been at over that period but perhaps the witnesses know. Will they confirm that wage increases are not even close to that level of increase? To put this in layman's terms, the benefit of the absolutely spectacular economic growth that this country has seen has not gone to working people but rather to corporations.

The witnesses have outlined concerns about expenditure, saying that we cannot borrow to fund public services because of our debt position. They have argued that we must budget properly. We cannot stop spending on health, education and housing. Would it be good to focus on another rarely examined area, namely tax loopholes for the corporate sector? Will the witnesses comment on whether more focus should go on that area? Inter-group transactions are profit shifting and this has gone from €9 billion to €16 billion. These are astonishing figures, leaving aside there was a jump from €2 billion in the previous year to the €9 billion figure. Perhaps we should be looking at such things.

I have a question on approved housing bodies. Do the witnesses find it problematic that the Government's housing policy relies on a process where the expenditure on housing assistance rental accommodation scheme payments to the private sector also contains risk from a public expenditure perspective?

We do not know how much we might be charged by private landlords for providing social housing over the coming years. Would that also concern Mr. Coffey in addition to the AHBs he mentioned?

Mr. Seamus Coffey

I am not sure how much of that would be in the formal mandate of the fiscal council. I will address some of the corporation tax issues but very much in a personal capacity rather than anything the fiscal council assesses.

On the tax haven question, the Deputy makes the argument that because Ireland collects €11 billion in corporation tax, it would satisfy the popular or generally perceived definition of being a tax haven. One must assume that he does not think Ireland was a tax haven when we collected €4 billion in corporation tax.

No, I would not assume that at all.

Sorry-----

Mr. Coffey was asking me a question.

I know, but unfortunately the Deputy is out of time.

Mr. Seamus Coffey

It was a rhetorical device. I am not quite sure in which circumstances Ireland could avoid being a tax haven in that instance if it is a tax haven when it collects what would be considered to be low and also when it collects relatively high amounts.

On corporation tax, I note that the corporation tax receipts in both France and Germany have doubled since 2009. It took a longer period for their doubling to take place. Our doubling has taken place since 2015. However, in those countries the receipts have increased. The BEPS process has not necessarily been about trying to get corporations to pay more tax. It has in large part been about changing that. One of the risks in the Irish case is that more tax could be taken away from the production activities that were traditionally allocated taxing rights to the more consumer or market end of the spectrum. It is not necessarily about increasing the overall amount of tax and it could be about the destination of it.

Recently the body equivalent to ours in France, the French Council of Economic Analysis, undertook a study of the impact of the current BEPS proposals on French corporation tax revenue. When it looked at the Pillar 1 proposal to allocate more taxing rights to the market countries, it found it would have almost no impact on French corporation tax receipts in net terms. While it found significantly more revenue would be collected from digital companies, online companies and Internet companies, on the other hand it would lose a significant amount of tax revenue from the sale of handbags, cognac, cars-----

Mr. Seamus Coffey

----- and wine which are produced in France but sold elsewhere. The net effect was a reallocation and the overall impact on French corporation tax revenues was modest for those proposals.

The Deputy asked who has benefited from the profit increase in recent years and whether this has gone to the workers. Many of the changes the first round of the BEPS proposals have introduced have not been necessarily an increase in corporation profits, but a reduction in corporation profits that were declared in the pure tax haven jurisdictions - and there are tax havens out there - with no income or corporation taxes. These are jurisdictions where the companies have no substance and it was simply unrealistic to say that they could be locating profits in them. The first rounds of BEPS proposals were about limiting the ability of companies to declare profits in jurisdictions where all they had was a brass plate company.

Some of that profit has now been declared in Ireland where the substance is and it has added to the profit figures the Deputy has suggested. However, the biggest increase in profits would be in the multinational sector. I would imagine that is driving a large part of that increase from €40 billion to €140 billion as the Deputy highlighted. The multinational sector is the best-paying sector in Ireland. I do not think the Deputy can suggest that the workers there do not benefit. They are the companies generating the profits and they are also the companies that are paying their workers the most.

The Deputy's final point was about tax loopholes. I have done a second report on corporation tax. Some of those changes have been introduced with more to be introduced from the start of next year. There will be changes to our transfer pricing rules and other things set out in the roadmap the Minister for Finance has published. Some of the problems in Ireland's corporation tax regime are being addressed and may also be contributing to some of the additional receipts we are collecting. That is all entirely outside the remit of the fiscal council, but I thought I would deal with some of the points the Deputy made.

Someone else might wish to pick up the housing issues which is also potentially outside our explicit mandate.

I thank Mr. Coffey and his staff for the presentation. It is somewhat ironic to think that at the time of the last financial crash and crisis, notwithstanding the worldwide scale of it or the overdependency of our economy on property related revenues, we had a National Pensions Reserve Fund with €26 billion in it. We were glad to have it considering the mammoth task that faced the country thereafter.

Fast-forward to today and we are told that everything is being managed. We have fiscal rules. We are told that the economy is managed prudently. We have the Irish Fiscal Advisory Council in place to advise and ensure we do not find ourselves at a similar crossroads again in the future. We have no rainy day fund and yet people ask what we have learned. We would be worse off now if we were impacted with anything of that magnitude than we were then. We have not learned a whole lot, have we? Windfall taxes are being used to plug holes rather than being put into the National Pensions Reserve Fund or the rainy day fund, which is not too prudent. Despite all those who were pontificating for so long, we have not got very far, which is quite alarming when it is brought down to brass tacks.

The commentary in the IFAC report on health spending overruns is rightly quite damning. Others have been saying we have had dishonest budgets in the form of the health Vote in recent years. It needs to be repeated, if we are to learn anything. When I talk about health overruns, I should qualify it. The benefit of that spending is not evident to the public, including those I represent. They get quite annoyed to hear talk of health overruns because it cannot be seen on the ground. There have been no new home care packages in County Offaly since last June except for a few terminal cases. I am part of a team that seeks to make advances in that area and tries to target funding specifically at certain areas in the health budget, which is not necessarily possible in the context of framing a budget because it is something that is agreed between the Health Service Executive and the Department of Health, and the Department of Public Expenditure and Reform thereafter.

People see the closed wards, the waiting lists, the issues with rural doctors and the loss of out-of-hours doctor service in country areas. Mr. Coffey has said that in the last few years of weak planning and spending control, budget allocations have not been seen as credible by health managers. Why is that? Have we learned anything? For example, we hear that a budgetary process provides for an increase in allocation to the Department of Health. We would expect improvements, but we do not get improvements. The increased allocation is just to stand still.

Even in its effort to stand still we realise that the demographics were all wrong this year. It was €60 million out in the space of a few weeks. That €60 million could provide 1,200 primary schoolteachers, 2 million home help hours or 240 social houses. That €60 million might not be much in the context of a €3 billion budget. It might not be much to economists and experts who study this field every day of the week. However, it is a considerable amount to a family who cannot get a package for a disabled family member or to an elderly person who cannot come home and live in their own house or be in their own community.

Mr. Coffey has stated categorically that health is a big problem in the budgetary process. I and others have been saying it is not having the desired effect.

As I said earlier, we are ten years on from that supposedly and improvements had to be made in all those institutions and insulations were put in place to ensure we never arrived at that crossroads again but we are worse off. That is the truth of the matter.

Mr. Seamus Coffey

The Deputy has made a number of valid points. I would broadly break them down into two categories, namely, what have we learned and issues related to health. I will deal with the first category and hand over to my colleagues to deal with the issues related to health. What have we learned? A phrase we use occasionally when describing the current situation is that there are echoes of the past. There are some similarities to what has gone before. We can get too fixated with some of the problems we had in 2006, 2007 and 2008 because there are differences. It is possible we are only doing this in retrospect but if we consider the economy in 2006-07, we can clearly see where the significant problems were. I would point to the over-reliance in the economy as a whole on construction activity and how that over-reliance on construction activity carried forward to a concentration in the public finances in construction related and property-related taxes, so the two were linked. When we look at 2019, there is a difference. I do not think we see the same extent of risks within the broader economy. There is not a reliance on activity in a particular sector or a risk that activity could stop at the rate at which it stopped in 2008. We do, however, see risks in the public finances with a reliance on a volatile source of tax revenue which is not really related to activity in the economy. The profitability of the multinationals, which is a key driver of the tax receipts we are seeing, is based on their international operations and on decisions made not necessarily about what happens in Ireland but about what happens internationally.

Some comparison can be made and the Deputy was right to ask what have we learned. A key objective the fiscal council will have is that we do not forget and that we consider the impact to which some of the mistakes of the past have led. While there is some similarity we would see differences. When it comes to the economy as a whole, the Deputy will note from the report one area where we would see added value is in the analysis of what we would call the current account of the balance of payments, taking account of the overall level of spending in the economy and how that compares to our income. During 2004, 2005 and 2006 that deteriorated. We were running a current account deficit. We were spending more than we were earning and that hole was being filled by borrowing, primarily by the private sector at the time. If we consider the current account in 2018, we are running a significant surplus. As an economy we are generating an income that is greater than our spending. We will not give it a clean bill of health. The corporation tax receipts we earn are counted in that income and perhaps some allowance should be given to that but as an economy we seem to be in a much better position compared to where we were in 2006 and 2007. Our chief concerns would be about the public finances and we highlight the risks that are there.

The Deputy mentioned the level of debt we are now carrying that we did not have. In 2006 and 2007 net debt was close to zero. There was some debt but, as the Deputy mentioned, there was a significant amount of assets. We are now in a position where we have €200 billion of debt, we have some modest assets that can be offset against it, but it still is a significantly worse debt position than what we had in 2006. We see a surge in corporation tax revenue and that surge not being reflected in an improvement in the overall budgetary position. The money is being spent as quickly as it is coming in. We hope people have not forgotten what happened but we would not link too much to what happened in 2006-07. There are differences. Putting the public finances on a sustainable basis is important. We saw the difficulties, problems and trauma involved in pulling back public services. We are not opposed to public spending. We want it to happen every year. The hope is that what we have learned is the importance of putting the public finances on a sound footing. We have seen problems in recent years with spending growing faster than can be considered sustainable and that could lead to problems but, hopefully, efforts will be made to address that spending. It is set to slow down for 2019. It is still close to the limit of what would be considered sustainable. I hope we have learned from what happened. Our role in the fiscal council is to ensure that the rest of you do not forget.

There is also the demographic issues, as witnessed in October. Demographic costs were €60 million out in the space of a few weeks.

Dr. Eddie Casey

The Deputy alluded to the fact that we would consider that in the totality of the health budget. As a share of the overall health budget, that is not really that large. That is how we think about it. We can tolerate some overruns and underruns to an extent when they are small as a proportion of what it is we are spending overall. I would look at VAT in that context. Our points about overruns do not really come from the demographic side. We have looked at demographic pressures in detail and we published a separate report every year called the Stand-Still Scenario. Basically, we take current policy and ask what would happen if we were to continue growing this set of policies in line with demographic pressures and cost pressures, basically prices, wages and things like that, and what budgetary policy might look like in a few years time given those and how they are expected to evolve. We find there are not major differences between us and the Department of Finance or the Department of Public Expenditure and Reform in terms of demographic pressures. Most of the differences are down to that other element, the prices, wages and cost pressures which they do not account for systematically over the medium term. Their argument would be that is something for the Government of the day to legislate for in terms of provision.

Is it surprising the Department could have been out by as much as 15%?

Dr. Eddie Casey

For that specific component, that is a high percentage difference but it must be taken on board with other items which would have been within budget.

I take Dr. Casey's point but in an area-----

The Deputy is over time.

Mr. Seamus Coffey

I would make a summary point on the health overruns and the Deputy said people were not feeling it. One point to note is what we are making our analysis based on, which is on the original figures in the budget, looking at what the outturn is and an overrun relative to what was budgeted for versus what happened at the end. In the report we look at spending on hospitals, which seems to have been a large source of the overruns in recent years. The budgeted amounts between the 2013-18 were annual decreases averaging €80 million. The budget set out an average reduction each of €80 million. The outturns were annual increases of €280 million. What we are comparing are the figures in the initial budget versus what happened at the end. That is not to say there have not been changes or an impact on services. It should be clear what it is we are looking at. The impact of the overruns might not necessarily be those additional services the Deputy pointed out. It could just be a combination of inappropriate or unrealistic budgets to begin with and a failure to stick to those budgets throughout the year. We feel particularly regarding hospitals it looks like it is a combination of the two.

As Deputy Lahart indicated prior to other Deputies, as they had not joined us at the time, I will call him next as I know he has a commitment. I request he ask the briefest single question and that the answer be as brief as the Deputy's question.

I have to leave to make another earth-shattering contribution in the Chamber in ten minutes. I have a few questions. My colleague played good cop and I will play bad cop for a minute or two.

(Interruptions).

I am joking. I want to drill down into corporation tax. We keep saying it is unreliable. Do the witnesses say that because of the proposed changes in tax law that may be made internationally or because these businesses only have a certain life cycle? If it is the latter, why do we not squeeze the absolute pips out of them in the meantime if they are going to leave anyway? We see Intel is making further investment.

In terms of the associated housing bodies, I would say some of that money relates to the purchase of homes. That is what we would see with respect to the €700 million that was mentioned.

My final question, which was not answered in the first round of questions, relates to the OECD paper. Aside from raising taxes as an alternative to corporation tax, is there a policy shift that we can be making to offset our over-reliance on these taxes as the OECD recommends in terms of a digital economy and climate action economy? Perhaps this does not come within the council's remit. I may have to leave half-way through the answer but it is not out of disrespect as I have to watch the clock.

I will allow a very brief answer to the Deputy as I want to be fair to Deputies Burton and Ryan.

Mr. Sebastian Barnes

I will be very brief on both points. To answer the first question, it is partly because of companies' idiosyncratic strategies or profits but it is also because of international developments, such as BEPS, that potentially affect all or many of them at the same time. With regard to the issues the OECD is raising, which are very worthy issues in terms of long-term investment and the digital climate, there is general advice and there is quite a specific Irish context. Ireland has one of the highest public debt ratios in the OECD. It also has an economy that is performing relatively well. This means that some of the arguments that might apply in other places, such as that those policies can be financed through debt to help stimulate the economy, are much less applicable in the Irish context.

Mr. Seamus Coffey

I am unaware of the report the OECD has produced on the changing priorities within the economy. It is correct that some of the spending could be through approved housing bodies acquiring existing properties. The concern from our perspective is that we do not know. There should be greater transparency on what activity the spending is leading to. We are not opposed to the spending. We are saying if it is included in the budget documents, as it currently is, so that we do see the changes, we should know what is driving those changes. The provision of social housing and housing in general is a policy area for the Government. If the Government is achieving its policy objectives through these it should be visible.

That was covered earlier.

How do the witnesses think Ireland is positioned regarding foreign direct investment? What are their feelings on the likely level of contributions we will have to make to the EU budget in the coming years and the way it may be adjusted? I also want to ask about the comparative spending changes between social protection, health and education. This brings me back to the first point. Are the witnesses satisfied that Ireland remains very attractive for foreign direct investment? We are a trading country. We are heavily exposed internationally at a period when there are problems and disputes in the world trade. These are rolling along and may or may not have an effect on us. We do not know yet.

The appetite of social media companies for bringing property and intellectual property into Ireland seems to be without limit. In fact, it looks as though Ireland is not just a target for foreign direct investment but it has become very much a preferred investment spot as the country for investment by these companies. This is significant. It is something we have to take into account over and beyond the tax elements, which we have often discussed.

Alongside this, we have the prospect of becoming the third to fifth largest contributor to the EU budget in the foreseeable future if the figures keep going in the direction they are going. These are not necessarily risks but they are issues that will probably be significant for us. What is the broad outlook of the witnesses on the opportunities and some of the risks involved? We are going into uncertain territory with Brexit and the UK's EU contributions will fall away. The Finnish Presidency has tabled proposals for 0.7% contributions to the EU budget. What are the views of the witnesses on how these are likely to impact?

Mr. Seamus Coffey

This is with regard to our attractiveness for foreign direct investment, which the Irish Fiscal Advisory Council does not assess. In my personal view, we are in a sweet spot when it comes to attracting foreign direct investment, particularly from the US. We are in a sweet spot in all areas with regard to investment, employment and tax being located in Ireland. We see this not only in the social media companies mentioned by the Deputy but also in companies manufacturing computer chips or pharmaceuticals. It is something that has been identified as a risk in recent years, with the emphasis on risk being a downside. What we have seen foreign direct investment holding up and, in many areas, increasing. A possible impact, as the Deputy has pointed out, would be on our EU contribution. IFAC identifies our EU contribution as a potential risk. We do not rate it as a high impact or a high probability but we identify it as something that could potentially have an impact.

Recently, the Taoiseach indicated his belief that over the next six years Ireland's EU contribution will rise by 45%. It is something that is there. There is the potential for it to increase even more if the bases on which the contributions are calculated change significantly. We are getting into the weeds. One of the bases for the calculation is a country's gross national income, which is a standard measure in international accounts. We have our own modified version in Ireland. Traditional gross national income is used at the base. If this intellectual property moves to Ireland it could substantially increase our gross national income and substantially increase our EU contribution.

We have made a change that means these impacts can be offset and paid for because the cap on the amount of the capital allowances that can be used in any given year against the profits linked to those intangible assets has been reduced to 80%. We have some of those profits in our corporate tax base and would collect corporation tax on an annual basis if those intellectual property assets were moved to Ireland, as seems likely. At least for assets that have come since October 2017 there would be additional corporation tax revenue to offset the potential initial EU contribution. There are other factors that could cause our EU contribution to increase, including the UK exit from the European Union and the fact that perhaps the EU budget could be increased. With regard to foreign direct investment, there is the risk that intellectual property could cause it to increase.

I would not necessarily say it is the social media companies that have moved their intellectual property to Ireland in recent years. They have been significant sources of employment growth and have purchased buildings throughout the city. Figures from the CSO suggests that most of the intellectual property moved to Ireland to date has been in manufacturing sectors, particularly pharmaceuticals. Much of the intellectual property linked to social media companies remains offshore. There is the potential for this to come to Ireland over the next 12 to 18 months. The two possible destinations are the US and Ireland. Ireland offers certainty but it might be that the companies move their intellectual property back to the US. There is potential for significant changes to our national accounts, our gross domestic product and our gross national income leading to increases in our EU contribution. We do highlight this as a potential risk but at least we now have the change from budget 2018 which means the cap has been reduced to 80% and we are collecting some additional revenue.

I represent an area with massive investment by multinational companies, including pharmaceuticals and biological drugs. They have spent approximately €5 billion on capital investment in my constituency over a five year period. This would be very striking in any EU country, never mind Ireland. What interests me, looking at the total Government spend figures in the Irish economy at present, is that approximately €21 billion is being spent on social protection, which includes money for older demographics, we have the extraordinary figure in the Supplementary Estimate for health of €17 billion, and another extraordinary figure in education, which is right back down at approximately €11 billion. Attracting quality and sustainable foreign direct investment involves good salaries and conditions.

In conjunction with our tax arrangements, our calling card is our supply of people who are well educated, interested and willing to work in local and international businesses. Notwithstanding the in-flows to the Exchequer, we are not reinvesting in education on the capital or current side in a way that would support the sustainability of the model that, in part, we have developed and, in part, has been visited on us. The UK being outside the EU area and Ireland remaining in it could heighten our attractiveness in terms of investment. Many of the witnesses have academic links. Do they have any concerns about the education budget?

Mr. Seamus Coffey

From the perspective of the fiscal council, the relative allocations between areas is not a matter that it is within our remit or mandate to discuss. We review the overall impact and total of Government spend. We have tried to highlight that changes should be upfront and transparent. If the health budget is increased significantly, as it has been in recent years, the consequences of that should be thought through. The allocation for health should not be provided on an unplanned basis, with Supplementary Estimates towards the end of the year.

The council is not allowed to call for ministerial heads on plates but the thought does come to mind.

Mr. Seamus Coffey

The changes should be made in a transparent and upfront manner. If as a consequence of allocating additional resources to health there are fewer resources for areas such as education, these are the issues that we should be considering. We have calling for better budgetary management. The relative allocations between the areas is a matter for the political process but we believe it should be done in a transparent fashion.

To expand on that-----

No, the Deputy may not comment further. The rules are the same for everyone. A Deputy may come back in where his or her five minutes have not been used. However, once the five minutes have been used, I must move on to the next member, following which I will come back in a second round. I can come back to the Deputy in approximately 20 minutes, if she wishes to wait. In fairness to everybody, I must call Deputy Eamon Ryan.

My apologies for not being here for the earlier hearing. In terms of meetings, this committee tends to clash with the Joint Committee on Climate Action of which I am also a member.

I appreciate that.

I will start with a climate-related question. As previously stated by the Irish Fiscal Advisory Council, there are financial downside risks to our failing to meet our climate targets, including potential fines. There are also spending requirements in terms of what we need to do. Much of what we need to do will be supported by private finance but the public buildings retrofit, which is a huge project, and the social housing retrofit, which is a multibillion euro project, and the ramping up of afforestation, will be State supported. It is possible to transfer the allocation for roads to public transport. There is a proposal to drain some of the bogs and to use PSO levies to part fund that work. The PSO levies are relatively small and the expenditure increases are relatively large. If we do not make that spend, we face the risk of fines yet there is no easy, obvious solution, other than raising taxes in a range of different areas.

Did the Department liaise with the council on the national development plan? Has the council assessed it and, if so, is that envelope fiscally astute in terms of capital spend over the next ten or 12 years? I know that the council has an interest in climate issues but I do not know if it has carried out analyses or research of what other funding mechanisms might arise. We could use the increased corporation tax revenues to increase the budget for the national development plan. I am sure Mr. Coffey's response to that suggestion is that we should not be depending on corporation tax receipts for current expenditure, never mind climate expenditure. If his response is that every tax should be raised, that is not politically easy to do. Cutting current expenditure also is not easy. It is a difficult political question.

Mr. Seamus Coffey

As already highlighted, it is very much a political choice. To increase spend in one particular area does not necessarily require increases in taxes or cuts in spending elsewhere. We are speaking about an economy that in a benign scenario will continue to grow and generate fiscal resources. Choices can be made in regard to how those resources are used. For example, for 2020 we looked at an upper sustainable limit of increasing policy spending of 4.5%, which in monetary terms amounts to approximately €4 billion. That does not involve cutting the level of expenditure in any area or any additional taxes. There is a choice to be made in regard to the priorities for the use of that money. If it is not to be spent on the climate change expenditure areas highlighted by Deputy Eamon Ryan, that would suggest that the political process does not view those as being a priority.

Returning to the national development plan, I presume the ten-year capital window factored in an assumption of 4% growth. That might not necessarily provide much leeway given that everyone will be looking for their slice of whatever was committed to.

Mr. Seamus Coffey

They are the choices that have to be made. If the money goes to particular areas, then the political system has evaluated that they are the priority. The funds are available. The additional fiscal resources can be generated with the continued performance of the economy. It is not a matter for the fiscal council to decide whether those additional resources should be allocated to tax reductions, capital spend or current spend. We repeatedly make the point that a well managed economy generates fiscal resources which can be used in different areas. As mentioned in my responses to Deputy Bruton, we are not being transparent around how those fiscal resources are being used. Every year, massive Supplementary Estimates are provided. This money would create a significant amount of funding for climate change priorities. Supplementary Estimates are ongoing and cumulative. They could amount to €500 million or €600 million per annum, which means that by year four or five they amount to €3 billion or €3.5 billion.

Did the council use the national development plan as a base in assessing priority choices and is it the best projection in terms of our available resources, or is there room above or below it?

Mr. Seamus Coffey

We do not get involved in the choices made between different areas. Prior to budget 2017, we reviewed the planned increases in capital spend and what had happened over the previous decade. It appeared that Ireland had a level of public capital spend that was low in European terms and ranked us towards the bottom of international comparisons. This could, potentially, have led to a public capital stop that was not appropriate for the economy and the growth in the economy. We reviewed the increases that were planned for public capital spend and we came to the conclusion that they were appropriate and should be followed through. We examined the medium-term objectives of the national development plan. There were substantial increases. Capital spend increased from €4 billion in 2013-14 to approximately €8 billion this year, which means it has doubled. We did not assess whether it was appropriate to meet our infrastructure needs, bottlenecks or climate change actions but we came to the conclusion that it was appropriate given the low levels we were coming from and that it was up to the political process to decide how that money should be spent.

The problem is that the cost of the national children's hospital project, among others, has doubled.

Mr. Seamus Coffey

There are consequences arising from it.

I understand there was a meeting in the OECD last Thursday or Friday on the issue of corporation tax, tax harmonisation and the possibility of a minimum corporate tax rate. At a meeting of this committee a few weeks ago, I put the following suggestion to the Minister for Finance. If the minimum corporate tax rate was set at 10% or 12.5%, would it have a stabilising effect in terms of corporate tax revenues in future in the sense that it would result in an increase in revenues and reduce the risk of capital or corporate flight because if the minimum rate is applied by the OECD, it is applicable across the board? Has the council considered that? Is it involved in that process?

Mr. Seamus Coffey

Again, IFAC has not assessed Pillar 2 of the OECD's process. On the minimum effective tax, one of the key issues is not so much the rate but how it is to be applied. If it is a global minimum, the impact on Ireland might be modest enough because, if companies are below the global minimum, the top-up would be paid to their countries of residence where their headquarters are based. If, however, the minimum effective tax was applied as a country by country minimum - which seems unlikely at present as the trend seems towards a global minimum effective tax - that would have a modest enough effect on Ireland and would also be likely to have a modest enough effect on the companies. Considering the larger companies that publish their accounts, they are not reporting or generating effective tax rates in single digits. They might not be much above 20% or close to that rate, but most companies have effective tax rates above what would be considered the low levels of single digits. The impact of the minimum tax rate on Ireland, if it is applied on a global basis, could be relatively modest.

Could it stabilise our revenue source? As we said earlier, the biggest driver of the volatility in corporate tax revenues is corporate profitability and having a minimum rate does not really impact on that. If the profits change, the amount of tax to be collected will be paid. There have been issues with the global tax system, but there is probably more likely to be agreement on Pillar 1 and the move to having more tax allocated to the market countries. In the case of digital companies, there probably is a legitimate and strong argument to be made that more of their profits are generated by the customers in the markets rather than by the developers and software engineers. The impact of the minimum effective tax rate, depending on whether it is agreed, probably will not offer that stabilising force that it might be suggested it could.

The Deputy has a small amount of time if he wants to follow up.

Private debt is down to 77% of GNI. Should we take that into account, as well as looking at Government debt, and make decisions on that basis?

Mr. Seamus Coffey

We absolutely do. Our heat map examines changes in private debt.

I should have said sunk debt.

Mr. Seamus Coffey

The EU has looked at broadening the macro-economic indicators that it looks at and there has been a remarkable improvement in Ireland's private sector balance sheet in the last decade. Household debt, as has been said, has come down significantly. It was some €200 billion in 2008 and it is about €135 billion now. It has been remarkable that the Irish economy has performed so strongly with such high levels of debt repayment. It is something that shows up in our improved current account position. Households are now spending less than they are earning, in aggregate terms, and are reducing that debt by about €5 billion a year. That money is going into the banking system and it is not coming back out. That is a withdrawal from the Irish economy and, even with that money going to repay debt, the performance of the economy has been very strong.

Returning to the points we made in response to Deputy Cowen, we do not see the same level of risks in the broader economy, including the private sector, as we can now see for 2006 and 2007. This is all viewed in retrospect and it is easy to look back now and see where the problems were. Looking at similar metrics, however, we do not see problems to the same extent. It is possible, looking at the private sector, that it is potentially an upside risk for the economy that this deleveraging and repayment of debt will stop. We are talking about mortgages taken out in 2003, 2004 and 2005, some 14 to 16 years ago. Significant inroads have been made in those mortgages and if that debt repayment stops that money will then become available to be spent in the economy. With an economy at 4.8% unemployment, do we have the capacity to absorb that additional spending? There is, then, a potential upside risk to the forecast, but we do take the broader economy and the private sector into account when we are looking at things. Going back, again, to what we said to Deputy Cowen, we see the key risks in the public finances. The public sector has not reduced its debt. It is still close to €200 billion and is potentially becoming reliant on corporation tax because it is running close to a balanced position, even with this surge in revenues. It is correct to highlight the private sector, but there have been significant improvements in that area.

In the few minutes we have left, I want to let Deputy Burton back in. Deputy Eamon Ryan is finished. I call Deputy Burton.

In the context of his experience in recent years, Mr. Coffey will be familiar with the summer economic statement, which is followed by other Estimates and the extraordinary process in the Department of Health. I refer to the situation where month by month, in the first four to six months of the year, that Department gets direct extra Supplementary Estimates because of winter crises. There is also special supplementary funding on occasions such as when the national children's hospital goes wrong. At the end of the year, notwithstanding all the major injections of cash, the Minister is then able to get another €338 million in an extraordinary Supplementary Estimate.

I understand that Mr. Coffey is constrained from commenting, but it is unbelievable that a Department can practise gaming the whole process we are overseeing. That all then goes into the base and Departments such as Education and Skills, significant for the country and its attractiveness, are losing out heavily because of that gaming. That is because they are not inclined to game the system or because they do not have the knowledge of how to game the system. I am not sure how that happens, but it means that our budgetary process is subject to significant subversion. By the way, I would be the first to be concerned if a hospital, another health facility or particular categories of patients were suffering dreadfully. If we stand back, however, and look at this situation from an overall management context, it is appalling what has been able to go on. I am not aware of any other democratic country where it would be possible to game the system in the way it is being done.

We also have this perpetual whipping up of crises. Many of the staff seem to be extremely demotivated because all they read every day about the area in which they work hard is that it has these extraordinary figures. Has IFAC had a conversation concerning how this might be possible? I would like to help the Department of Health, but two weeks ago in the Dáil everybody got the Supplementary Estimates for this year. Some €338 million went to the Department of Health. It is almost like a drug problem - mainline and more is given. It defies reason. Mr. Coffey is an economist and I am just an accountant, but I find this situation extraordinary regarding any kind of commentary on the Government.

We have to finish before 4.30 p.m.

I have concluded.

I want to let the witnesses respond.

If the Chair listened-----

Mr. Seamus Coffey

Deputy Burton has made important points concerning transparency and budgetary management. We have highlighted those in several reports. Yesterday's Exchequer returns highlighted some of the problems we see with the figures for the Department of Health. For the first 11 months of the year, the spending of the Department of Health is below profile. We are into early December, and in the Exchequer cash-based figures there is no indication of a problem. The Department has been below its allocated amount every month for 11 months so far this year. As Deputy Burton has rightly pointed out, however, a Supplementary Estimate has been flagged of more than €330 million. There is clearly an issue somewhere.

We are not sure of the reason for this, but it is something that we flagged in this report. It would be worth looking at the analysis we have done of the monthly profiles, and the fact that even if the profiles seem to be on target significant Supplementary Estimates still seem to be required. Changes do seem to be needed in how the budget is set, assessed and profiled. We hope this situation will lead to increased budgetary management. I state that because, as the Deputy said, one area seems to be getting additional resources in this unassessed and unplanned fashion, when those resources could be having an impact on other areas. That could be on the public finances, which is where our concern lies, or on other areas of spending. I think Deputy Burton is right to highlight this issue. We feel it is a problem and we have done further analysis in this report that is worth looking at.

The Minister agreed, or commented, at our last meeting that the monthly meetings of the oversight group between the Department of Health and the Department of Public Expenditure and Reform would be public. I refer to the monitoring group. That information is subject to the Freedom of Information Act, so those meetings might as well be public. I agree with Deputy Burton.

I have asked about it.

It is an amazing situation that one Department - and I know the amount is one third of what it was last year - cannot manage a budget. It begs some of the questions raised. I am conscious that we are bang on coming up to 4.30 p.m. I thank all of the members of the committee involved in the questioning. I also thank the members of the Irish Fiscal Advisory Council for coming in to us for this third and sustained engagement.

We appreciate the work Mr. Coffey and his colleagues do and we appreciate their engagement with the committee. It is a critical part of the committee's role. We thank Mr. Coffey in whatever guise and whatever way. Hopefully there will be a Committee on Budgetary Oversight to engagement with him and his colleagues next year but I have no predictions as to what it will be or who will be involved.

Mr. Seamus Coffey

Thank you.

The select committee adjourned at 4.30 p.m. until 4 p.m. on Tuesday, 10 December 2019.