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Committee on Budgetary Oversight debate -
Wednesday, 6 Jul 2022

Economic Quarterly Report - Summer 2020: Economic and Social Research Institute

Apologies have been received Deputies Durkan and Doherty. I welcome representatives from the Economic and Social Research Institute, ESRI, back before the committee to discuss the quarterly economic commentary and the inflation outlook.

On behalf of the committee, I welcome Dr. Kieran McQuinn, Dr. Karina Doorley and Dr. Conor O’Toole to the meeting.

I wish to explain some limitations to parliamentary privilege and the practice of the House as regards references witnesses may make to other persons in their evidence. The evidence by witnesses who are physically present or by those who give evidence from within the parliamentary precincts is protected pursuant to both the Constitution and statute by absolute privilege. Witnesses giving evidence remotely from a place outside the parliamentary precincts may not benefit from that level of immunity from legal proceedings as a witness physically present might.

Witnesses are reminded of the long-standing parliamentary practice to the effect that they should not criticise or make charges against any person or entity by name or in such a way as to make him, her or it identifiable or otherwise engage in speech that might be regarded as damaging to the good name of the person or entity. Therefore, if their statements are potentially defamatory in relation to an identifiable person or entity, they will be directed to discontinue their remarks. It is imperative that they comply with any such direction.

Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official, either by name or in such a way as to make him, her or it identifiable. I remind members of the constitutional requirements that members must be physically present within the confines of the place where Parliament has chosen to sit, namely, Leinster House, in order to participate in public meetings. I will not permit a member to participate where he or she is not adhering to this constitutional requirement.

I now invite Professor McQuinn to give his opening statement. Before he begins, for the benefit of anyone watching the committee meeting, both the Dáil and Seanad are meeting now and we may be interrupted at some stage. Hopefully, disruption will be at a minimum.

Dr. Kieran McQuinn

Let me begin by thanking the Chair for the invitation to the ESRI to appear before the committee. I am joined by my colleagues Dr. Karina Doorley and Dr. Conor O’Toole. We are grateful for the opportunity to appear before the committee to provide our views on inflation.

Price pressures are now more broadly based than when we previously briefed this committee. Higher inflation is not unique to Ireland. Growing uncertainty and increases in international prices have led to considerable downward revisions in global output and expectations for slowed growth in the present year. Due to the small, open nature of the Irish economy, developments in global inflationary pressures are likely to feed through into domestic Irish prices. Understanding the global environment allows us to understand the root causes of the rise in the domestic cost of living and to consider the most appropriate response.

The outbreak of war between Russia and Ukraine has disrupted already strained food and energy markets, contributing further upward pressure on international prices. As a result, the International Monetary Fund, IMF, has increased its latest global inflation forecast to above 7% for this year and we now anticipate Irish consumer price index, CPI, to exceed 7% in 2022, with the impact on basic foodstuffs and energy being particularly acute.

As the pandemic began, supply chains abruptly shut down as public health-related restrictions disrupted production activities. The reopening of the global economy contributed to a sudden surge in demand that coincided with a sluggishness in international supply. This surge in demand has also been seen in Ireland with the domestic economy recovering rapidly. Strong economic performance domestically, coupled with the international pressures, create an environment with considerable inflationary pressures. As of May 2022, inflation in Ireland and the euro area stood at 7.8% and 8.1%, respectively. Supply chains have yet to normalise as further disruptions from the invasion of Ukraine by the Russian Federation and ongoing Covid-related lockdowns in China have contributed to further bottlenecks. Altogether, supply chain disruptions have placed considerable upward pressure on international prices.

As a result of these global disruptions to commodity markets, international inflationary pressures have escalated to rates unseen in many years. A further escalation in prices is expected, as indicated by the IMF forecasts for global indices for food, beverages and energy series. In order to understand the pass-through of extreme price pressure in the global market to Irish prices, we have linked certain subindices of the Irish CPI to comparable global series provided by the IMF World Economic Outlook.

Table 1 presents the growth in the international index from the IMF forecast, as well as the outturn in the Irish monthly CPI for the period from January to April 2022. From the table, it is evident that at a global level, some of the increases envisaged are substantial. From an Irish perspective, it is clear, however, that international inflation rates traditionally do not fully pass through to the Irish CPI.

Therefore, we are unlikely to see all of the current inflation observed in international series being passed through to Irish prices.

As indicated by the IMF World Economic Outlook, the areas experiencing the most acute inflation globally and in Ireland are food and energy. Global food prices experienced a near 30% rate of inflation in 2021 due to the disruption in agriculture caused by extreme weather events associated with climate change, and disruptions to food supply chains during the pandemic.

In light of Russia and Ukraine's significant share of the global traded wheat supply, forecasts for food prices in 2022 are likely to come with considerable upside risk as the war continues. The IMF forecast for food inflation is expected to increase an additional 14% in 2022.

In addition to food, the war has had a significant impact on an already vulnerable global energy market. In 2021, prices of energy products had already begun to accelerate as supplies were not prepared to meet the post-pandemic surge in demand. Sanctions imposed on Russian energy products have contributed to further price increases across the market. The euro area is particularly susceptible to price increases of Russian energy products as Russia accounts for 20% of oil and 35% of gas supplied to the euro area.

Given these price pressures, we have divided the Irish consumer price index, CPI, into two main indices, namely, food and energy related items and non-food and energy related items. Food and energy items have accelerated rapidly over the past year, reaching a high point of 23.8% per annum in May 2022. While the increase in non-food and energy-related goods has been more gradual, price pressures on these items are of real concern. As of May 2022, the price of these items had increased by 5.1% on an annual basis. As inflation becomes more broadly based, the likelihood of increased inflationary expectation among the public could result in a greater demand for higher wages, which, in turn, can reinforce inflationary pressures.

Regarding distributional effects of inflation, due to the differences in the composition of household expenditure, households are experiencing different rates of inflation. Figure 2 shows the diverging inflation rates across income deciles and highlights the disproportionate effect of price increases on lower-income households. Due to sharp increases in energy prices, the aggregate share of household expenditure on energy and transportation is expected to rise significantly. For households in the bottom half of the income distribution, inflation exceeded 7% in March 2022 compared to a rate of just over 6% for households in the top three deciles. Figure 3 shows the diverging inflation rates across composition, age and location. When considering household composition, single-adult households experienced the highest inflation rate in March 2022 of 7.7%. Rural households also experienced higher inflation than urban counterparts. Households with occupants aged over 65 experienced inflation of 7.2%, while inflation remained under 7% among younger households.

On monetary policy response, in order to tackle higher inflation rates across the euro area, the European Central bank, ECB, has signalled a tightening of monetary policy with an expected interest rate rise of 50 basis points in the short term. The ECB has signalled a wind-down in the non-standard monetary policy asset purchase schemes. From a euro area perspective, while an increase in policy rates is typically used to counter inflationary pressures, it does pose significant challenges from a sovereign debt perspective and acts to slow growth in the macroeconomy through adversely impacting consumption and investment. The risk of a tighter monetary policy response from the ECB has led to the re-emergence of concerns over the management of sovereign debt as member states across the euro area issued significant amounts of new debt in response to the pandemic. While all member states have experienced increasing bond yields in reaction to inflationary pressures, Italian and Greek spreads from the German bond increased by 58 and 85 basis points, respectively, between 1 May and 1 January 2022. As interest rates rise, high-debt countries such as Italy and Greece could face a higher debt burden and vulnerabilities. From a domestic perspective, the tightening of monetary policy may temper some of the recent inflationary pressures.

This is particularly the case in the housing market. This market has witnessed a significant increase in demand since the pandemic, with the increased savings observed across households additionally fuelling housing demand. The supply side of the housing market was adversely impacted by the public health measures adopted and currently faces significant inflationary pressures in many crucial inputs in the construction sector. Therefore, house prices have witnessed a noticeable pick-up in inflation in recent years with the latest Central Statistics Office, CSO, data revealing that prices are growing at an annual rate of 14.2% for the year to April. The latest quarterly economic commentary contains analysis that indicates that the 50 basis-point increase in the ECB policy rate could by itself result in Irish house prices falling by 2%. Therefore, the increase in policy rates should help to temper the demand side of the housing market and result in a reduced rate of house price appreciation going forward.

In terms of outlook, high food and energy prices weigh heavily on household purchasing power. Increases in the costs of food and fuel prices have a disproportionate effect on lower-income and rural households as they typically spend a higher share of income on these items. Further, wage rates in Ireland for the year to present, while strong, are not expected to keep pace with inflation, resulting in a decline in real wages in 2022. However, we do anticipate real wages to exceed inflation in 2023.

The improvement apparent in the public finance does mean there is still some scope for the Government to assist those most affected by the recent increases in the cost of living. However, it is imperative that any further such measures would be targeted in nature to avoid generating inflationary pressures themselves. With that, we are very happy to take any questions people may have.

I thank Dr. McQuinn. Is Deputy Boyd Barrett ready with his questions? He is first up.

I was not really ready but anyway; it is grand. I thank Dr. McQuinn very much for his contribution. By the way, I commend the ESRI on its recent housing reports. I know it was a different team of people but they are very useful analyses of what is going on with the housing situation.

We in People Before Profit are of the view that we should control some of the prices of things that have increased very substantially; food and energy being two Dr. McQuinn cited as having seen disproportionately high increases, which are really hammering families and, as he pointed out, the less well-off in particular. We have seen very significant increases in other areas, however.

Of course, even before this inflationary spiral we are seeing now, perhaps Dr. McQuinn could comment on this, it seems fairly clear that the cost of many things people depend on was already higher in Ireland than it was in most of the rest of Europe. Our energy prices and childcare costs are considerably higher than the average in Europe. Our house prices and rents are very considerably higher and have seen much more dramatic increases over quite a long period than the rest of Europe.

Why would we not, therefore, try to control the price of some of these things, particularly if the ESRI seems to be suggesting that this inflationary spiral may be temporary? The ESRI seems to be saying the supply chain bottlenecks related to Covid-19 and then the sudden bounceback of the economy and the Ukraine crisis. Those are both kind of temporary things. If it is temporary, why would it not be a good idea, which we think it is, to control some of these prices now and set maximum prices on certain things in order that we do not get a continuation of the inflationary spiral?

If there is concern that people will start to put in wage demands, for example, that would, to use Dr. McQuinn's term, reinforce inflation, would it not it be entirely logical to try to actually control some the key areas in which we have seen prices go through the roof to prevent that inflationary spiral being perpetuated?

Dr. Kieran McQuinn

It is a very interesting question. It is an increasingly relevant debate, if you like, in terms of how to deal with the present inflationary situation. In general, from an economics perspective, we do not tend to favour price controls, which are rather crude in terms of what they seek to do and may lead to distortions in the market in general.

We recommend that issues in childcare, housing, etc. need to be dealt with on a structural basis and that the structural root causes of the difficulties in the markets be dealt with, rather than using something like price controls as a mechanism. However, as the situation deteriorates and the upward pressures continue, all policy responses will be on the table for discussion and evaluation.

Measures in the energy market, in particular, are policy responses which are probably more effective at a European level than a domestic level. If we are to go down that route, it is best if we adopt a more European perspective than as far as the domestic economy is concerned. We have seen recent debate about the supernormal profits certain energy companies are making. A well-known economist, Oliver Blanchard, said people should not be surprised. That is what private companies do. They earn supernormal profits if they can. To deal with the situation, we should look at taxing such profits. That has been discussed but should be looked at more at a European rather than domestic level.

We are wary of price controls because, by definition, they can tend to be distortionary in their impact. Deep-rooted structural issues in the Irish economy, whether in housing or provision of childcare, need to be addressed, rather than capping prices which may bring some temporary respite but problems build up over the longer term and stunt the necessary underlying structural reform. That is the concern around implementing those measures. If those responses were to be considered, it is probably more effective to do so at a European rather than domestic level.

Dr. Karina Doorley

One could probably achieve the same goal by using subsidies for things like housing and childcare, as opposed to price control. Such subsidies would be targeted in a means-tested way at households that need them. Instruments are in place for that which could be expanded, for example, the housing assistance payment and the national childcare scheme. They could be expanded to improve their targeting and affordability for the households that need it rather than putting a cap on prices that some households can afford.

That is in effect what we are doing. Does that not mean that we are chasing inflation and reinforcing the spiral? The ESRI paper from about a month ago identified the fact that the failure to raise the income thresholds for social housing is denying housing assistance support to people who should have it and would have in the past on the incomes they are earning. I agree that, in the immediate term, they should get those supports, but does it not mean we are chasing inflation? Rather than controlling the price of housing and rent, we are perpetuating or reinforcing the inflationary spiral. To me, it would be far preferable to control the prices. The witnesses refer to distorting the market but are we not dealing with market failures? Rent and housing is clearly a market failure. Some people may say - and I think it is possible but am not sure if the current Government's policies will achieve it - that at some point we should be able to address that market failure by building enough houses. In the interim, if the choice to deal with the crisis that situation has produced is between chasing extortionately high levels of rent and house prices or controlling them until we get the supply right, surely controlling is a better option.

On energy, I take the witnesses' point that at European level they should do it. There is profiteering going on. If they can organise sanctions at European level, they should be able to organise controlling energy prices, though there is not much sign they are willing to do it. The French have put a ceiling of 4% on energy price increases. They are not worried about it. Is that not a reasonable response, rather than forking out huge amounts of money chasing excessively high prices?

Dr. Kieran McQuinn

The housing market is a unique case. It is in some ways typical of the problems we face, which are particularly acute in housing because there was inflation in housing before the present pandemic. The policy response is slightly different. We have been in front of the Deputy before saying we feel it is an area where the Government needs to spend more money and increase provision of social and affordable housing. Unlike many areas where in dealing with inflation one is trying to minimise Government expenditure because of the fear of exacerbating the problem, in housing we need to do the opposite and spend more money to provide more public and social and affordable housing. That, in the longer run, should ease price pressures, at least for certain groups in the housing market. That instance is somewhat different from other areas of the economy. One could argue as well though-----

I think we agree we should increase investment on direct construction of public and affordable housing. I am specifically thinking of rents, though.

Mr. O'Toole would like to come in.

Right, sorry. Just specifically on rents, I believe people who should be entitled to the housing assistance payment are currently not, as the ESRI paper suggested; however, that payment is not the ideal way to address the problem. Would it not be better if the rents were lower and we could control them so did not have to spend as much on subsidising rents?

Dr. Kieran McQuinn

Before Mr. O'Toole comes in, I will tee him up, if you like, in terms of possibly what he is going to say. One could argue we have seen some degree of price controls in the rental market with the rent pressure zones which have limited the increase in rental inflation permissible in those areas. They were introduced in early 2017. There have been some moves in that direction. Quite a few local electoral areas are now subject to rent pressure zones.

Dr. Conor O'Toole

In general, I was going to make that point. We are talking about the cost-of-living crisis but the rental inflation difficulty has been there for some time. We already have a series of price controls in the market through the rent stabilisation measures. That is distinct from the international inflationary pressures we face through the energy and food price markets.

As both my colleagues have said, it is a fine balancing act between the type of instruments appropriate in different settings. If you were to put strict caps on food prices or energy markets, the issue is you can create distortion on the supply side. Firms will withdraw investment or may decide not to engage in those markets because they also face extreme price pressures. That is why in general we call for targeted, tailored measures which can insulate those households who are unable to carry the burden of the price increases but allow the general markets to function as best they can in such a high inflationary environment. The reason many economists do not like traditional price caps is that they have distortionary effects on the supply side of the market. In the current environment, when we hope many of these international factors are temporary in nature, it is better from an economic efficiency point of view to not distort the market and protect the households who require that affordability boost for the cost-of-living crisis in the short term.

On wages and incomes, the witness alluded to the danger of potentially reinforcing the inflationary spiral. I hope he would agree that it is clear that wage demands or increased social welfare or pension payments have not created this crisis. They are lagging well behind the rises in the cost of living. At present, workers, pensioners, students and everybody except the corporations, which are doing very well, have seen income cuts in real terms. If income and pay increases do not at least keep pace with the cost of inflation, is there not a danger that this would be more damaging to the economy? I am not suggesting that there should be pay or income increases way beyond the rate of inflation, but is it not the right thing to do and in the interest both of alleviating hardship and also not damaging the economy, particularly the domestic economy, to ensure that incomes and wages keep pace with inflation? If they do not, as is currently the case, there will be less purchasing power and that will hit the domestic economy and potentially tip us into recession.

Dr. Kieran McQuinn

I will outline our overall take on it. Wage rates have been growing. One can see a noticeable pick-up in wage rates in the economy from approximately 2017 onwards. Last year wage rates on average, and it depends on which series one uses, grew by approximately 3.5% and we expect them to grow like that again this year, and possibly increase to 4% next year. It is clear that they are going to lag behind the rate of inflation and that most people will experience negative real growth this year. There is no doubt about that. If one puts it in the longer and broader prospect, and I am talking about the aggregate, over the last three or four years when wage inflation was beginning to pick up, there were very low rates of increases in inflation in that period. Most people in the economy, particularly people working in the economy, would have experienced increases in real wages over that period. That is not to say that offsets totally what they are going to experience this year, but it is important to note that we have had very low inflation in the economy over that period.

In terms of how we see it affecting the economy into the future, and this goes back to much of the work that Ms Doorley and her colleagues have done, there is a great difference in terms of the impact on households. What we see at present, as we have pointed out, is lower income households particularly susceptible to the inflationary pressures. However, we also see the huge impact of a relatively large increase in savings which we have witnessed in the economy over the last year or year and a half. That is probably due to the payments that were introduced quite quickly. That has led to a significant increase in the savings rate. Indeed, when we are thinking about how consumption is going to evolve over the next year or 18 months, one of the big conundrums is how we see those savings levels coming into the economy. Do we see people drawing down those savings to smooth their consumption in the short run, do we see them holding onto them for precautionary reasons and so forth or do we see them diverting them into the housing market, of which we have seen some evidence?

It is very difficult to see the impact on consumption generally in the overall picture, but our take on it is that, notwithstanding the inflationary pressures, we still see consumption increasing this year and next year, even with negative real income growth this year due to inflation and the wage growth. Certainly, it is going to have an adverse impact on consumption and investment, but we still believe that those domestic sources of growth will experience positive growth over the next 18 months.

I thank the witnesses for their insightful and helpful thoughts on these matters. I will pick up on one point that Deputy Boyd Barrett has raised not just today but on other occasions. I appreciate all his contributions and I listen closely to him much of the time. I want to declare an interest in this, as I always do and rightly so, because I have been involved since I was 19 years old. It is the rental inflation problem and the serious difficulty there. There is an elephant in the room and I would like to hear people such as Deputy Boyd Barrett speak more about it. A rent of €1,000 is an awful lot of money for the person who has to pay it, but what it means to the person who receives it is €480. I want that to be acknowledged at all times. The biggest taker in the inflationary process in the rental market is the State because the State is collecting 52% in the vast majority of cases.

I know there are foreign companies that come here and it is questionable whether they pay any tax. Perhaps they do not or they pay it at a company rate or they have set up some type of masterful way of avoiding tax, but the ordinary person in the State who is providing accommodation, be it on a small, medium or any type of scale, is paying 52% tax. That has to be acknowledged. It has to be highlighted that this is a fact.

When we talk about the inflation problem that exists I am dealing with it as a politician, but the coalface in Kerry is something that I have never seen in 30 years of experience. I have never seen such a situation with homelessness, with people threatened with having to leave their homes and with people not able to pay the rents. At one time in the town of Killarney, for example, there was no such thing as a property with a rent of over €1,000 per month. My experience goes back to when rents were €400 and €500 per month. Now, it is of no note to hear people who come to a clinic say that they are on rent of €800, €900 or €1,000 and now they are being asked for €1,400 and €1,500. With all due respect, we know what is happening in Dublin with crazy rent, but when it is hitting places such as Killarney town it is making it just impossible, and no new buildings are being built.

I am sorry if it appears that I am picking on Deputy Boyd Barrett. He knows I am not doing that. I hear people saying that we need to have a building programme. The problem is that this seems to be impossible. The private sector is not willing to build because nobody will be willing to buy. There would have to be something wrong with a person at present to decide to borrow the money to buy a new house and rent it out when Deputies are in the Dáil talking about people who own property making a fortune, taking into consideration that out of every €1,000, some €520 will go to the tax man and there is €480 left to pay the insurance, pay the mortgage on the property and try to maintain it and keep it afloat, as it were. Nobody is going to do that in the future.

The State is finding it impossible. The ideal solution of course is if we could do what happened previously, where local authorities could build 100 houses on a greenfield site. That is what happened in places such as Kenmare and Sneem where we might have built 20, 30 or 40 houses and it was a lot pro rata. It was able to cater for the need in the locality. However, that is not happening now. It is leading to an impossible situation. Some 26,000 or 27,000 people, and the gentleman from the ESRI will be able to clarify the number, have left the rental market in the last couple of years. I am not a bit surprised because everyone I know is leaving it, and more are going to leave it. On Radio Kerry recently people who had properties here and there rang the station and told their stories. Jerry O'Sullivan and others listened very carefully to what was being said and to the questions that were asked. It was a case of every regulation in the world being put on these people.

There is one amazing thing I want to highlight. A person who owns a rental property has to make sure the property is up to a proper standard, and rightly so. The local authority enforces that. If the person who owns the property is told that he or she must do a long list of work and if that person tells the local authority that he or she wants to do it but cannot afford it, that is considered an outrageous statement.

The property owner would be told that is not acceptable, he or she would be given so many weeks to do the work and that would be it. If a person comes to me or any other politician at a clinic and says he or she is living in a local authority house, and the heating, roof or windows are very bad, or the front door is not closing properly, and if I then contact the housing department of my local authority, I can seriously be told - it can be sent in an email to me and confirmed in a letter - that-----


We seem to have lost Deputy Healy-Rae, unfortunately. We will try to get him back but, in the meantime, will Dr. McQuinn address any of the points he brought up?

Dr. Kieran McQuinn

The general point is the increased cost of housing is a major issue. Interestingly enough, we had a webinar this morning where other colleagues presented work on this issue - members may have seen the headlines regarding it - that looked at housing costs for older people, the prospects of the increased housing costs we observe, the impact they will have on home ownership rates in future and what this will mean for what is going on.

I asked Dr. McQuinn to respond to some of Deputy Healy-Rae's points while we trying to get him back.

I am sorry. I do not know what happened. I think I hit a button here or something.

Will Dr. McQuinn continue?

Dr. Kieran McQuinn

We had a seminar this morning about the issue of housing, particularly on the projected increasingly lower home ownership rates in the Irish economy in future and the impact this will have on poverty rates among older people. To put this in a broader context, a point that came up is the major issue of housing affordability, which is not just an Irish phenomenon. It is an international issue that has arisen over the years mainly because we have seen very strong demand-side pressures in the housing market, low interest rates and relatively strong income growth. That has driven house prices and accommodation costs generally, including rents. We are now in this situation where we have seen, over time, this real, sharp increase in housing costs across countries that is probably particularly pronounced in the Irish case. It throws up many difficult questions about how people will get on the property ladder and how we will deal with housing costs more generally. There have been interesting contributions in the UK on this from a well-known contributor, Mr. Ian Mulheirn, a director at the Tony Blair Institute for Global Change, who has talked about this issue etc.

To return to the issue of how to increase rental supply, which I think is where the Deputy is going, there is no doubt there has been an increase in the number of small-time landlords who have left the market over the past number of years. That has caused many problems, particularly around homelessness, where many of the tenants of these landlords were typically those in marginal circumstances. The exodus of these small-time landlords has contributed significantly to the homelessness problem. On the broader perspective of how we increase rental supply, the Deputy is angling towards, or talking about, the use of taxation policy as a way of stimulating the number of landlords we have. If we go back, we are possibly scarred somewhat by the financial crisis in that respect. The use of taxation policy as a way of stimulating activity in the housing market generally is something we have tended to shy away from in the past ten or 15 years because it played a very negative role overall in contributing to the excesses of the Celtic tiger and the difficulties in the housing market. People are naturally reluctant to go down that path but that is not to say that, in some ways, one should look at taxation policy as a way of stimulating supply. It is clear, given the kind of shortages, rental inflation and house price increases we are looking at, all measures to stimulate supply should be looked at, analysed and discussed. As I said, using taxation policy has always had a negative connotation over the past period because of the difficulties we experienced during the Celtic tiger.

I do not know if Dr. O'Toole has anything to add on that.

Would Dr. O'Toole like to contribute? He is one of the authors of the recent rent report.

Dr. Conor O'Toole

I will pick up on two points the Deputy made. The first relates to market exits from the rental sector and the supply in that sector. I will reference a piece of research we published earlier this year which looked at rent stabilisation measures generally in Ireland and internationally. By that I mean the rent pressure zone framework that is in place in Ireland. Looking across the international literature on these types of measures and other types of rent controls, one of the big side effects we see in general is supply withdrawing from markets where there are strict price caps. To come back to the previous argument around price caps, one of the reasons economists shy away from them is we have good evidence they can have these supply effects. Internationally, there have been circumstances where strict price caps and strict price controls in the rental sector can lead to withdrawal of supply or a degrading of housing stock in the rental sector. There are these distortionary effects. That is an important context when we think about how and when to intervene in these particular markets.

One other point that is important to make when we are more broadly discussing the general inflationary context and the high-inflation environment we now find ourselves in, even relative to earlier this year or last year, is that we have seen major inflation in construction cost inputs. Some of the series the CSO tracks from the wholesale price indices see some of the construction material inputs increasing by between 20% and 50%, whether it is steel or general materials. All of this challenges the provision of housing, be it for the rental sector or the owner-occupation sector. It is very difficult to unpick how we can get supply to increase in the short term, especially when we have been hit with these challenges. In general, when we are thinking about frameworks for regulating prices and their impact, the general effects of some of these price-cap measures can be quite detrimental to supply in an international context. I have not done any work on that in an Irish context, but internationally that is what some of the evidence suggests. In all contexts, it depends on the calibration, but in general that is what some of the evidence suggests.

Deputy Healy-Rae is nearly at the end of his time.

I promise the Chairperson I will be very brief. I hope I am explaining myself correctly because I am very interested in knowing what these gentlemen think is a solution to this problem. I will finish the analogy I was giving of the person who owns a property, has been asked to do this list of work, and turns around to say he or she cannot afford to do it. That person will be laughed at, ridiculed and prosecuted for that. The local authority, however, which is the owner of a local authority house, can write a letter to a politician stating that he or she made representations on behalf of Mrs. Murphy and this work needs to be done to her house, but it does not have the funds to do it. In other words, Mrs. Murphy will not get her stove, will not get her back door repaired and will not have the broken window fixed. It is a case of we are very sorry, but tough luck. That is ridiculous.

The gentlemen present are far smarter about this matter than I am. However, am I not right in saying, if we study everything and do the basic sums - even if a Deputy comes along, stands up in the Dáil and ridicules, bad-mouths or tries to say the people who own property are doing something wrong - that what landlords are doing is providing accommodation that, otherwise, if it is put up for sale, will be bought by the private market and will not be rented again? The State is paying to-----

I am very sorry to interrupt but a Vote has been called in the Chamber.

I know. We have to go to it. My point is will anybody ever again buy a property to rent it out the way things are going. What will that mean for the rental market in future? As far as I can see, this situation will get a lot worse before it will get a lot better and the Government is doing sweet damn all to help with the situation.

I thank the Deputy for finishing up. I will suspend the meeting for approximately 25 minutes. That will hopefully be the time required. Deputy O'Donnell will be the first speaker when we resume.

Sitting suspended at 6.19 p.m. and resumed at 6.42 p.m.

I thank everyone for their forbearance. I apologise but I cannot guarantee there will be no more votes called. I believe Deputy O'Donnell had the floor.

I have some quick questions, the first of which relates to the quarterly statement and inflation. What additional measures do our guests believe would work to bring down the rate of inflation? There are pressures in a number of areas, including energy, food and education, impacting children and families. There is a danger that a Government which is spending is only contributing to inflation. Are there specific instruments that can bring down inflation?

The ESRI survey is very interesting. I would like if it had factored in the fact that from 2008 to 2013, no houses were built. That is one of the key elements as to why there is a lag. As a country, we have always had a tradition of encouraging homeownership. There certainly appear to be many benefits to people owning their own homes. While they are in their working life, they can contribute to a mortgage and when they come to retirement, they typically will no longer have a mortgage because banks and financial institutions will not extend mortgages beyond the age of 65. I was around in 2007 and the period around it when banks were giving out mortgages to people in their early 70s. It was madness, to be honest. We forget about that.

Our guests are zoning in on the cohort between the ages of 25 and 34. What is the general rate of ownership? The older age groups are aged between 45 and 54 and 55 and 64. I can see it was the group that was the lost generation in terms of house purchasing. There were no houses being built. They were not able to get on the property ladder and many people in those groups are still not on the property ladder. Is there a policy instrument to get those people onto the property ladder? Our guests are saying that the 25 to 34-year-old group may only have 50% homeownership. That brings a considerable element of risk for the individuals concerned. I do not want what I say next to come across the wrong way. I am a great believer in people being able to own their own homes. I believe in the affordable housing and Part V models. It is about finding a balance. Will our guests tell me what instruments are required? Do they agree that there was a lag in the period after 2007? The period between 2004 and 2007 was mad. That was particularly true in 2006, when things were crazy. People were buying houses they could not afford. Banks were lashing out money. We forget. It is quite amazing how people forget but I was there and saw it at first hand.

What instruments can help to bring down inflation in the core areas in which it exists? The report is good. It touches on food and energy. I did not see a reference to childcare costs but I am sure there is one. It also touches on education. In the context of the ESRI survey on homeownership, what can be done that is not being done to get that 25 to 34-year-old group on the property ladder?

Dr. Kieran McQuinn

It is difficult to point to measures that can be used to bring down inflation in the context of energy and food because we tend to be price-takers in both cases. In the short term, it is hard unless we go down the route suggested by Deputy Boyd Barrett whereby we impose price caps. We have discussed that option. It is difficult to envisage what kind of measures can be brought in. Typically, when there are problems in the housing market and childcare, which Dr. Doorley might talk about a little in a moment, there are structural issues that need to be addressed. Those typically take time to work through. There will be no instantaneous response or reaction in those areas. As far as energy and food are concerned, it is hard to see a solution in the short term.

Greater competition, particularly insofar as the retail sector is concerned, has helped to keep costs down over a longer period of time. That is clear if we think about the inflationary profile of the past ten or 15 years.

Food and energy inflation are very high in Ireland. Why are we not as high as the eurozone? Is there a reason for that? The report makes reference to the fact that-----

Dr. Kieran McQuinn

The Deputy might be thinking of references to the International Monetary Fund, IMF, which is global.

Dr. Kieran McQuinn

In comparison with most other European countries, inflationary pressures are probably greater in the Irish economy. They are certainly average if not slightly greater than average. That is, to a certain extent, understandable in the sense that our economy is growing faster than most others in the euro area, and has been growing for a prolonged period of time. That leads to greater inflationary pressures.

Greater competition in the food area has helped to keep inflation reasonably subdued over a longer period of time. In the short term, it is hard to identify any measures to take that would have an instantaneous reaction in respect of energy and food costs.

Dr. Karina Doorley

I will talk about childcare. Successive OECD and international reports have put Ireland's childcare costs as among the highest.

Does Dr. Doorley mean they are among the highest in the OECD?

Dr. Karina Doorley

That is right. Those figures are based on the average cost of a full-time formal childcare place for a particular type of family. The cost is measured as a proportion of the family's disposable income and Ireland comes out top. Childcare costs are very high.

Dr. Karina Doorley

We did a report last year to look into the issue in more detail. We examined the Irish data to find out who was using childcare, how much they were using it and so on.

We found that most families are actually using far less than one formal full-time childcare place. Half of childcare in Ireland is informal, in that the service is provided by childminders, grandparents or unpaid carers. The formal sector is important and is subsidised by the national childcare scheme. The informal childcare sector is not subsidised. Any attempts to bring down the cost of childcare through the national childcare scheme are going to affect the out-of-pocket cost of formal childcare for households that use it. They may or may not affect childcare costs for other households that do not currently use formal childcare. They may switch if the incentives are there, but they may not. It is quite difficult to predict what the effect of a massive expansion to the national childcare scheme would look like in the Irish market without structural-----

Has the ESRI been able to identify the percentage of childcare that is provided formally, through the State schemes, and the percentage provided in the informal sector, through private services?

Dr. Karina Doorley

It is around 50-50. About 50% of kids are only in formal childcare. The other 50% are either in formal and informal childcare, or only informal childcare.

I am surprised by that figure. What policies does the ESRI advocate for bringing down the cost of childcare?

Dr. Karina Doorley

The expansion of the national childcare scheme is on the cards. It has been flagged for the last year. That set of systems is in place. There is a means-tested component to the national childcare scheme, which is well-targeted at low-income families. It could be better targeted. There is also a universal component to the scheme, which applies to any child in formal childcare. However, those measures will only affect half of the families using childcare services. There really needs to be some sort of discussion about bringing the informal childcare-----

Does breakdown of the number of families using the formal sector as opposed to the informal sector differ from other countries worldwide?

Dr. Karina Doorley

I am not sure. I do not have the figures on that. I would imagine other countries with lower childcare costs use much more formal childcare because it is more standardised. If the State is providing good-quality childcare at low cost, people will take it up.

Apologies. I cut Dr. Doorley off midstream earlier. What policies does the ESRI advocate for bringing down the cost of childcare?

Dr. Karina Doorley

I think the expansion of the national childcare scheme would be a good start. However, there are also structural issues in the childcare sector which we do not fully understand, such as staff retention and the costs of running a crèche or other childcare provision. Perhaps those issues also need to be addressed.

Obviously, there is a social factor involved. It is not just about cost. There is a social tradition in Irish families of grandparents, and particularly grandmothers, looking after grandchildren. It is a feature of Irish society. Is the ESRI proposing to do further work in this area?

Dr. Karina Doorley

It is something we are planning to look at in the next year.

Dr. Kieran McQuinn

Perhaps Dr. O'Toole can respond to the questions about the report published today. Dr. O'Toole was one of the co-authors.

Dr. Conor O'Toole

I can talk generally about the research. The report published today was a piece of work that sought to understand the implications, from a retirement perspective, of the longer-term structural change we have been observing in the housing market over the past number of years. Over a number of censuses, we have seen the share of homeowners decline in Ireland, and the homeownership rate decline for younger age cohorts.

The question I am really asking is whether the authors of the report factored in that from late 2007 to 2013 that there was very little housebuilding in Ireland. The younger age cohort needs to be helped to get onto the property ladder. Did the authors of the report factor that in, in terms of the findings?

Dr. Conor O'Toole

Yes, that was factored in, given that we used data from the present period. Embedded into that is, as the Deputy has said, a lower homeownership rate from those challenges that people have faced historically over the past 15 years in transitioning into homeownership, relative to the experience in Ireland before that date. By using the most up-to-date survey data that we had available at the time we took into consideration the changes that we have seen, and which the Deputy has mentioned, through that structural effect. The Deputy mentioned the factor of the lower supply, over many years, though the crisis period. That naturally had an impact on issues around homeownership and housing provision. That was taken into account by using the most up-to-date survey data, which details the tenure structure from the most recent period.

I read the summary of the report. Did the authors make any specific recommendation as to how we can increase the rate of homeownership for the younger age cohort, particularly those aged 25 to 34? It is not just that group. It is estimated that only 50% of 25- to 34-year-olds are homeowners. Among those aged 35 to 44, the homeownership rate is 58% currently, and could go up to 71%. Looking at those aged 45 and over, the homeownership rate is around 80% to 90%. Have the authors of the report made any recommendations on particular measures that need to be taken to address homeownership rates? To put it another way, do the authors have a particular view as to whether homeownership is a good or a bad thing, as distinct from renting? Obviously, if people are renting, they are more exposed. They are then paying that cost for their entire lives. However, if they buy a house, one would hope that they could clear their mortgage before they reach retirement age. I ask for Dr. O'Toole's perspective on that.

Dr. Conor O'Toole

It was not our aim or intention, with that particular report, to come out in favour of either homeownership or the rental sector. Rather, the research intended to take the proportions in the different tenures and try to scope out what the impact would be of various scenarios around that transition on income adequacy. In a sense, when we are thinking about the income adequacy in retirement aspect, which was the end of aim of that research, we have to come at it from two sides. One is to ask what is going to happen to those who remain in the rental sector. We expect that it will be a higher proportion of people than historically. Certainly, our position is that the development of tenures such as the expansion of the cost rental programme is a positive development. That is happening and we are very supportive of it. It is currently ramping up over time. We see that as quite a positive development, in particular, where the rate of inflation in the cost rents over time is less that the inflation rate of incomes. That should give households breathing space when they come to that income cliff, because those cost rents are not set my market prices. On the rental side, we see the building up of a structural change in the rental tenure provision towards more cost-rental-type arrangements as a hugely promising element.

On the homeownership side, there is a very delicate balance to strike. Naturally, many of the measures that we have been talking about for numerous years around increasing the supply of new homes, such as active land management through the Land Development Agency and other measures that can increase the supply of homes for purchase at affordable rates, are very welcome. There are also demand-side levers that can be used but that can be problematic, given some of the consequences involved. In a sense, the research tried to take a broad perspective. It was not about taking a position on whether renting was necessarily a good thing rather than homeownership. It was just trying to map out, with a series of scenarios, what the implications will be and how that links to the current structure of the pension system, which in a sense has leveraged what we call a double dividend of high homeownership rate, given that wealth and that protection against the income fall by lowering the housing cost.

Does Dr. O'Toole have a particular view as to what the rate of homeownership should be in an economy and country like Ireland, in terms of striking the proper structural balance for society and generally? I see a great risk in people remaining in the rental sector. There are many older people who are renting. Indeed, many of the people who contact me are elderly renters. They are under severe financial pressure.

It is a group of people that are working and then suddenly they are no longer able to work and they are under severe pressure. If they own their own home, it certainly takes serious pressure off, as they are not worried about where they are living. In that context, I can see that it is building up for the younger cohort. From the age of 45 up, we generally have a high rate of home ownership but that is not the case from 45 down. At the moment, the 25 to 34 age cohort is at 30% and the 35 to 44 age cohort is at 58%. The former is certainly very low. What was traditionally the rate of home ownership in Ireland? I know I am asking Dr. O'Toole to express an opinion, and I suspect he will not go into that space, but nonetheless, we must have this conversation. I found it to be a very interesting piece of data and I would like to use it as a basis for seeing what we can do and expediting policy on affordable housing for that younger age group.

Dr. Conor O'Toole

As Deputy O'Donnell mentioned, I am not going to state whether home ownership or renting is preferable, nor am I going to mention anything about an optimal tenure. I do not think that is possible to estimate. These are long-term structural changes that happen in economies. Internationally, we can see the rate of home ownership is coming down in some of the markets that traditionally had high home ownership. A broad change appears to be happening globally in some housing markets.

The research was trying to do two things, and the most important takeaway from our point of view concerns them. First, the timeframe over which we were assessing the piece of research is very long, in particular for those younger age cohorts. Therefore, there is much greater uncertainty around any of the point estimates the Deputy mentions for those particular cohorts. Therefore, there is time for policy measures, many of which I mentioned earlier, to have an impact on where the overall home ownership rate lands in the longer term. The two points are, first, that there is time for those policy measures to have an impact, like we mentioned today. Second, if we are to have a different tenure structure in the future, as we had today, we then need to factor that into our pensions provision and thinking about our pension system and how that may need to be altered or recalibrated in the future to take into consideration the degree of renters who will have a housing payment when they face that cliff of their income.

It is easy for me, as I can express an opinion. I am a great advocate of home ownership. I would be very worried if our model were to become a heavily rental one. There are significant risks at every level. That is why I feel the affordable housing model is preferable for the younger cohort. The focus is there. It is about supply as well. That is something I feel strongly about. Overall, the analysis is quite compelling. It puts what is happening in real time at the moment in terms of reductions, in stark terms. I thank Dr. O'Toole.

Dr. Kieran McQuinn

I will add to what was said. I think I made the point earlier on that this is a huge issue. There is a lot of work beginning in places like the UK to address this issue. If we just look at house prices generally, we all know what has happened to them in Ireland and how they rose, fell and rose again. This is something we observe across countries. We see it in the UK, France, less so in Germany and in Spain.

With due respect to Dr. McQuinn, France and Spain are not the same as Ireland. Germany has a large rental model.

Dr. Kieran McQuinn

The point I am trying to make is that a lot of countries have experienced high house price growth recently and there are certain common factors associated with that, which is low interest rates, high income, etc. It is a kind of international challenge as to how we increase or even maintain home ownership rates at their present level, because if we look at it, we will see that house prices as a proportion of income levels have grown, are growing and continue to grow. To be honest, it is probably a trend that will continue into the future.

Dr. McQuinn referred to the ECB increasing interest rates.

Dr. Kieran McQuinn

That will certainly have an effect but, realistically, how likely are we to go back to the very high interest rates we had in the early 1990s or even in the 1980s? I do not think so. Even after this period of inflation, we are still probably going to witness a relatively low interest rate environment. That is one of the key reasons why house prices have risen so sharply not just here but elsewhere. That presents difficulties if, for instance, we want to promote home ownership in society. That is not something we can readily address here and now but it is certainly something that needs to be looked at.

If we go to a model that is heavily based on rental, even with a cost-rental model, we must consider who owns them. I do not want to create an environment similar to Germany where there are big landlords and in many cases people just rent. We have a good model here, for all its imperfections. I accept that things went crazy up to 2007. Some 93,000 houses a year were being built. It was madness. The model must be sustainable. The research is very helpful. I would have liked a little bit more in terms of advice on the type of policies that should be pursued. Effectively, it is an analysis of data that points to where we are at currently, but I would have thought the ESRI as a body would have a view. However, there is no view. While it is not a criticism, in one sense it is.

Dr. Kieran McQuinn

At the end of the document there are quite a few policy recommendations on how to deal with the likelihood of what we are going to face. That was the mandate of the research. Dr. O'Toole can correct me if I am wrong, but it was to do a factual analysis of how it was going to evolve.

Who mandated the research?

Dr. Kieran McQuinn

The Pensions Council.

Okay. I thank Dr. McQuinn.

I hate to interrupt Deputy O'Donnell, but a vote has been called. Perhaps at a later date I would like to explore his point about the ESRI taking a view. I suspect that Deputy O'Donnell and I take polar opposite sides on that argument.

It is very interesting to have an independent body if its role is to take a view.

My model is a balanced one. This is healthy debate. This is what we should be doing.

That is why I am picking up on it. I would love to explore that more with the Deputy. I am afraid we must stop for another vote. I apologise. I suspect it will be about another 20 minutes and then Deputy Ryan and I will contribute. If we have more time, we will give other members a chance. Of course Deputy Boyd Barrett can come back with more questions.

Sitting suspended at 7.08 p.m. and resumed at 8.05 p.m.

I apologise again for that break in proceedings. There was a vote in the Dáil. We are waiting for Deputy Ryan to come online. She is just coming from the Chamber. In the meantime, I will ask some questions of my own. I noticed that the word “prudent” was used in the context of fiscal policy. This might sound like a blunt question, but could the witnesses outline the parameters of prudent fiscal policy in the context of current interest rate changes, the war in Ukraine, the knock-on effects of distortions to the market and all the things stemming from that. When we refer to being prudent in this context, what are we talking about? I refer to the medium to long term, which is the perspective this committee is concerned with.

Dr. Kieran McQuinn

When we are thinking about fiscal and budgetary policy, we focus on several things. One is if the Government wishes to spend more money, whether we have the wherewithal to do that. An equally important consideration is where we think the economy is at. Do we think the Government should be seeking to stimulate economic activity or to contract it? That question depends on where we see the economy and if we see it performing at or near its potential. Regarding the first matter, and we made this point in our submission on several occasions, because the inflationary situation is having such a disproportionate impact, especially on incomes in the lower decile category, there is scope for the Government to take additional measures to help households in the context of household incomes, etc. What we have stressed, however, and this is where the second issue comes into play, is that these measures should be targeted. This is because the Irish economy is still growing strongly. We believe it will grow strongly this year.

Even if we strip out the contribution of the multinationals, we believe there would still be relatively strong growth as far as the domestic sources of such growth are concerned. As a result, especially in a period when inflation is strong, the Government should not be adding to those inflationary pressures with its spending. The most prudent thing the Government could do now is to direct what resources are there, and, as we said, there is scope in this regard, to those households that need support the most and ensure that is done in the most targeted fashion. We still believe the economy will grow this year and next year, so there is no need for the Government to try to stimulate growth or to try to ensure that the economy continues to grow during this period. It is going to grow. Any measures taken should be as targeted as possible in the context of minimising the inflationary consequences of those actions.

Great. I concur with Dr. McQuinn on the targeted measures aspect. Following on from that, one of the paragraphs, which I am slightly truncating, so I may perhaps be misrepresenting it, refers to the reduction of the taxation burden in general also constituting an unwarranted stimulus into the domestic economy now. We have heard several politicians and commentators talk about how taxation interacts with the cost-of-living crisis now, particularly for those on middle incomes. The ESRI seems to be suggesting that significant changes to the tax burden could actually increase inflation or have an unintended consequence. Will Dr. McQuinn elaborate on this? I ask because I worry that any changes to taxation in budget 2023 could deepen the seriousness of what are already difficult times.

Dr. Kieran McQuinn

A couple of distinctions need to be made regarding the taxation burden. For instance, if we are talking about fully indexing the tax bands, we would broadly support that in respect of trying to ensure that people are not being penalised, because of the inflationary process, by going on to higher income tax bands. In that instance, fully indexing the tax bands would be desirable. It would certainly be the correct policy to pursue now. If tax rates are unilaterally cut, however, or even if people are moved on to lower taxation rates, to a certain extent that is almost the direct opposite of a targeted measure.

This is because it is universal and by itself will increase expenditure and discretionary spending across the economy. At this point in time, that is not what we think is advisable or desirable. This is why I think cutting taxes in that sense would not be the most prudent of policies. Fully indexing the tax bands, which involves maintaining the income levels to allow for the inflationary pressures, is a different issue but cutting the tax rate would contribute to inflationary pressures and would not be the most prudent action to take.

Would Dr. McQuinn consider the introduction of another tax band, a form of tax cut?

Dr. Kieran McQuinn

If it reduces the taxation burden overall then it is a tax cut.

So tax foregone is essentially a cut.

Dr. Kieran McQuinn

There is no doubt there are anomalies within the tax system. People could make the point that the average income earner goes on to the higher rate of tax at a relatively low income level in this country compared to other OECD countries. That has been well established. You could look to address that but what we would suggest is that if you are reducing the taxation burden in that instance, you should increase it somewhere else to offset it so that the overall package would be neutral from a taxation point of view.

And in Dr. McQuinn's estimation, it being neutral from a taxation point of view would lessen the likelihood that it would increase inflation.

Dr. Kieran McQuinn


I apologise for coming in and out and possibly doubling up on questions. In his opening statement, Dr. McQuinn referred to the prospect of further escalation in prices. The forecast regarding fuel and energy is frightening with figures of up to 179% mentioned. What impact will the additional spending measures announced in the summer economic statement have on inflation?

Dr. Kieran McQuinn

One point we should make up-front is that what is called the flash estimate from EUROSTAT was put out in the past couple of days, which suggests that the annual rate of inflation for the year to June was 9.6%, which is higher than what we would have anticipated. We produced an annual figure for this year of 7.2% but that was assuming essentially that inflation would peak at somewhere in the region of 8.2% or 8.3% at this point in the year. The fact that we are now up to 9.6% realistically means that the overall figure for the year will be higher than what we would have said even in our last commentary.

The additional measures that have been talked about have been talked about mainly in the aggregate at this time. Clearly, a lot will depend on the details of the package and the details of the measures that are implemented. This will be the crucial factor. Going back to the response to the previous question, the more these measures are targeted at those who need them the most, the better it will be from an overall macro point of view because if we are seeing income or resources going to people who might not need them as much, the danger is that it will spill over into additional inflationary pressures. It is very difficult at this point to quantify that when you do not know the details of the package but that is the danger of a sizeable package such as what is being envisaged.

There was a report on energy deprivation. I attended a meeting this morning around energy poverty. Regarding the lack of availability of data, obviously we need data to help make decisions but is it as simple as hiring more people to collect and analyse the data in the CSO or is something extra needed?

Dr. Karina Doorley

The report in question used data from the CSO's household budget survey. The latest collection of that was 2015 and 2016. There was due to be another collection in 2020 but obviously there was a pandemic and the CSO decided to suspend collection. If I am not mistaken, the next iteration of that survey should be in the field. Until we see that data, we are using old data to predict things like energy poverty. We are doing what we can with it but obviously expenditure patterns have differed over the past couple of years because of the move towards renewable energy and people retrofitting their houses. The data in the 2015 and 2016 household budget survey will be a bit different to the expenditure shares we would see currently, particularly with things like fuel. It is a matter of getting up-to-date data.

Do we need to hire more people to do that? In the meeting this morning, they were saying we are probably a year behind other European countries. Is it the case that we do not have enough staff to do the job and do we need more people? What is the problem?

Dr. Karina Doorley

The CSO would probably say that it is understaffed if it was here. It does an enormous amount of work with a relatively small number of staff. I could imagine that if it was here to answer that question, it would want more staff and more funds to collect this kind of data because it is time-intensive to collect the data, clean and collate it and make it available to researchers like us to put it to use for policy questions.

Obviously we take it that there has been a delay because everything has slowed down due to Covid but we would expect that we would be up to date at some point and would not always be a year or two behind, which seems to be the case, so I would like to think that this would be resolved at some point. How concerned is the ESRI about the €1 in €8 we take in corporation tax and the fact that it comes from the top ten firms? What can we do to mitigate against any risk from this?

Dr. Kieran McQuinn

It has been an ongoing issue over the past number of years. We produce forecasts of tax revenues as part of the commentary. Every year, like the people in the Department of Finance and elsewhere, we try to be as conservative as possible in terms of our forecasts because we are always wary of the issue of the sustainability of the taxation receipts. Each year, it just seems to outperform our expectations and there are very significant upward revisions in terms of the amount of corporation tax and I think this year is no different. In fact, the receipts this year may be even higher than those of nearly every other previous year. We would share the view that a certain proportion of the increase that is observed in corporation tax should be devoted to one-off or capital expenditure purposes. If you start using those increases in corporation tax receipts to fund current expenditure, the danger is if those receipts suddenly dry up, you can be left with a sizeable hole in the budget. If the money goes into capital expenditure, once-off expenditure or even a rainy day fund, as has been proposed, that is a more prudent use of the surge we are observing in the receipts. As to how we diversify beyond the ten firms, it is a very difficult thing to do. We have a certain number of firms in the jurisdiction that make a sizeable contribution as far as corporation taxation receipts are concerned.

We have a forecast of an unemployment rate of 4% next year. How can we address the labour shortage, particularly in key sectors? I would be very interested in hearing the witnesses' views, particularly around health because I work with older people in the health sector.

Dr. Kieran McQuinn

From an overall perspective, if we were to go below 4% unemployment, which I would not be surprised to see happen next year, it would be almost unprecedented as far as the Irish labour market is concerned. Even with data going back to the mid-1960s, I do not think we have ever really seen unemployment below 4%. It will present sizeable challenges in terms of the resourcing of key sectors of the economy. We are carrying out a study on the implications of this in the construction sector and are coming up with some policies that might be useful in terms of targeting that issue. We hope to have that work published relatively soon. In the past, we relied a lot on inward migration as a mechanism to alleviate those kind of constraints in the domestic sector.

Clearly, whatever policies we can implement to facilitate that going forward will be very important if we are going to avoid some of the shortages in particular sectors.

Dr. Karina Doorley

When we think about how we might want to increase employment, we want to think about reducing barriers that people face - people who want to work but cannot because of whatever barriers they have in their life. Typically that relates to childcare or eldercare. If you want to increase labour force participation and reduce labour shortages, you really need to address the root of the cause. It is not about forcing people to go out and work but rather reducing the barriers that exist so that people who actually want to go to work can do so. Childcare subsidies are key in that area but also support with eldercare and other caring duties that people may have. We spoke about the national childcare scheme earlier in the session. Expansion of the national childcare scheme and possibly bringing informal child carers into that net so that there are subsidies available for families who use all types of childcare, would be important. In terms of elder care, the provision of service in the home so that people who are caring for elderly relatives or disabled relatives are able to go to work in the knowledge that their relative is being cared for, would be another policy option.

I thank all the witnesses and thank you, Chair.

Thank you, Deputy Ryan, and I appreciate you coming back to the committee from the Chamber. I call Deputy Farrell.

Go raibh maith agat, a Chathaoirligh, agus go raibh maith agaibh ar fad as ucht teacht os comhair an choiste.

I have a specific question I hope the committee can help me with because I am finding it hard to get the answer. We know energy inflation is being driven by international factors but my question is in relation to the price regulation of network charges. These network charges are approximately one third of people's bills and the prices that EirGrid and Gas Networks Ireland charge are regulated by the Commission for the Regulation of Utilities, CRU. It is my understand that Britain uses the price regulation formula, RPI-X, where the RPI stands for the retail price index which is a measure of inflation. Here we use a harmonised index of consumer prices and the so-called X factor is a rate the CRU sets which obliges EirGrid and the others to reduce their price in retail terms. In other words, these companies can increase their price in line with the rate of inflation minus the amount set by the regulator. First of all, is this the witnesses' understanding of how the system works? It may not be a question for them but I am trying to get to the bottom of this. My understanding is that the CRU's last review of this was in 2020 which was a year in which we experienced deflation, so if the CRU set the X factor very low that year and we subsequently experienced rapid inflation, the companies would be allowed to increase prices rapidly, which we have seen. I am hoping they can answer my question.

Dr. Kieran McQuinn

Sorry to disappoint the Deputy but what I might do is take the question away. We have our energy experts in the institute such as Ms Muireann Lynch-----

-----the ESRI did a paper on it a few years ago.

Dr. Kieran McQuinn

-----and they will be able to provide the answer.

That would be great because we keep asking different people and they keep coming back and telling us they cannot answer the question but we saw the paper and the committee today. I would be delighted and if I could even get Mr. McQuinn's email-----

Dr. Kieran McQuinn

Yes, sure.

-----through the committee secretariat. That was my main question.

A lot has been discussed and I have been in and out of different meetings. Have we talked about metro north yet today?

We have not.

It is obviously very important to the people of Galway.

There has been talk about €9.5 billion, then €23 billion and the original estimate was €3 billion. What are the witnesses' thoughts on the construction sector here in general? We have long been talking about capacity issues and capital expenditure and we can lag behind a bit in terms of productivity and even environmental performance. I am wondering because of all this talk about metro north if the idea of embracing a more modern methods of construction has been talked about. I know the Department of Public Expenditure and Reform set up a working group and it produced a number of reports and recommendations. I have not seen anything beyond that at the moment. The metro in Madrid was done in a much quicker and cheaper way as a result of these more modern methods. Given the major capital expenditure that has been outlined, I would be interested in the witnesses' views in relation to this. Talk of €23 billion frightens everybody.

Dr. Kieran McQuinn

We are working on a paper at the moment looking at the whole issue of capacity constraints and the construction sector so hopefully we will have something published on that fairly soon. It goes into many of the issues Deputy Farrell talks about, in terms of alternative forms of construction, modular construction or something else, and whether or not significant savings could be achieved through that and other avenues of approach. That is something specific to the construction sector in terms of achieving the residential unit targets that have been set out.

In terms of the metro project itself, I do not have anything particular to say about it apart from saying there are lessons to be learnt in this country when it comes to expenditure on very large capital projects. We have seen it with the children's hospital and the degree to which those costs have escalated, far and beyond what they were originally thought to be. Sometimes that happens and there are legitimate reasons people do not budget.

Clearly in the present circumstances with inflationary pressures as strong as they are, the danger is that whatever we bid in as likely prices for key inputs and costs going forward, they are going to face significant inflationary pressures. It is not altogether apparent that we are going to be able to be able to accurately forecast those. Even setting those aside, there are lessons to be learned in how we spend on particularly large projects in this country. When we are talking about contributing huge, significantly large amounts of public funds on these projects, it is absolutely essential we get value for money on them and ensure we do not have runaway costs that end up consuming very significant resources over time.

That is very interesting. The reality is we are so behind in this State - our infrastructural deficit and all the different things. I am from Galway city but if you look at Connemara, the infrastructure out there is really behind. In general I think that would be an interesting paper and I am looking forward to reading it. We are very behind and even already we are hearing about inflation and the impact that could have on other projects. We have seen what has happened in the NDP and the State aiming to cover 70% of construction inflation and all that. I was listening to my colleague, an Teachta Ryan, asking about corporation tax receipts. Dr. McQuinn mentioned capital investment in that. We have been talking so long about the fact that the corporation tax receipts revenue is so distorting of the reality. If we are going to use that money to invest in something, it should be in an alternative industrial strategy that creates jobs and is good for people locally. Does Dr. McQuinn have a view on that? We cannot rely on this. It is a kind of bubble that at some point will be gone and we will lament that fact then - or some people will.

Dr. Kieran McQuinn

I think attracting multinational corporations to this jurisdiction has been part of our economic and industrial policy for a very long time. It has served this country very well. It has transformed the country in many ways. The revenue corporation taxes have provided over the last three to five years, or even longer, is substantial. If used properly and prudently they can bring huge benefits to the country. We can use them particularly to transform parts of our infrastructure, if this is the logical place we think they should be spent, rather than on funding current expenditure. If we channel those funds in a prudent fashion, they can transform many of the infrastructural challenges we face.

I do not have a problem with the fact that we are in receipt of large amounts of corporation tax. That is a good thing to have as long as we spend it in a wise and prudent fashion and are not using it to prop up current expenditure. This is not something people have been able to do any particular analysis on but there is a growing feeling in this area. With the most recent international reforms of the corporation tax sector, the default position from an Irish perspective was that we would lose out on receipts, although not so much on jobs or investment. It may be that we might actually benefit. That was not the received wisdom.

For pillars 1 and 2, where we were expected to lose out in some ways, it is a little unclear how much progress will be made on those items. The fact is that multinational firms above a certain size will all be paying 15% tax as opposed to 12.5%. Over the coming years, that could lead to a continuation. It would not be the same rate of increase but it could lead to a continuation of an increase in corporation tax receipts. When we are thinking about these issues, we think about upside risks and downside risks. We tend to focus on downside risks, which is fair enough, but we probably also need to think about the fact that we may well continue to get these corporation tax receipts going forward. Therefore, we need to plan the best way to use them.

We have gone over our three-hour allocation, which was hugely disrupted. I apologise again for that. I thank the witnesses from the ESRI for coming in and for their forbearance with all of those disruptions. We will be meeting with the Ministers for Finance and Public Expenditure and Reform next week. We will go into private session.

The select committee went into private session at 8.32 p.m. and adjourned at 8.50 p.m. until 9.30 a.m. on Thursday, 14 July 2022.