Committee on Budgetary Oversight debate -
Wednesday, 19 Oct 2022

Post-budget 2023 Examination: Discussion

Chairman

We will now begin our post-budget examination sessions. I welcome to the meeting as part of the committee's post-budget examination Dr. Karina Doorley and Mr. Mark Regan of the Economic and Social Research Institute, ESRI, Dr. Seán Healy and Ms Colette Bennett of Social Justice Ireland and Professor Stephen Kinsella of the University of Limerick . I thank them for their attendance.

Before we begin, I wish to explain some limitations to parliamentary privilege and the practice of the Houses as regards references they may make to other persons in their evidence. The evidence of witnesses physically present or who give evidence from within the parliamentary precincts is protected pursuant to both the Constitution and statute by absolute privilege. However, if evidence is being given remotely from a place outside the parliamentary precincts, witnesses may not benefit from the same level of immunity from legal proceedings as a witness physically present may. They are reminded of the long-standing parliamentary practice 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 members 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 requirement that they must be physically present within the confines of the place where Parliament has chosen to sit 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. Therefore, any member who attempts to participate from outside the precincts will be asked to leave the meeting.

I invite Dr. Doorley to make her opening statement on behalf of the ESRI.

Dr. Karina Doorley

I thank the Chairman for the invitation to appear before the committee. Mr. Regan and I are grateful for the opportunity to provide our views on the budgetary tax package, temporary versus permanent measures and social protection income thresholds.

Budget 2023 was framed as a cost-of-living budget. Thanks to a strong economic performance, evident in the labour market and Exchequer returns, the Government was in a position to allocate significant resources, without running a budget deficit, to alleviate some of the cost-of-living pressures experienced by households and businesses. In August, year-on-year inflation in Ireland and the euro area stood at 9% and 9.1%, respectively. The ESRI has forecast an inflation rate of 6.8% in 2023. However, the effects of inflation vary by household type. In Ireland, low income, rural and elderly households have experienced higher inflation as more of their consumption relates to food and fuel. The households experiencing a higher rate of inflation are also those who are more likely to be dependent on fixed incomes such as social welfare or pensions and less likely to benefit from wage increases, forecast to be 3.5% and 4.5% this year and next year, respectively.

Budget 2023 included measures directed at maintaining household standards of living. On the taxation side, the standard rate cut-off band was increased by more than forecast inflation, while tax credits were increased by less than forecast inflation. Unlike income tax credits and bands, most of the corresponding thresholds for PRSI and USC were held fixed in nominal terms, amounting to an effective PRSI and USC increase for many taxpayers. Although most excise duties were frozen in cash terms, tobacco products tax was increased and the VAT on newspapers and miscellaneous health items was reduced to zero. There was also a well-flagged increase to the carbon tax which was offset on petrol and diesel by the elimination of the National Oil Reserves Agency, NORA, levy and the extension of temporary cuts in non-carbon motor fuel duties.

A number of taxation-related interventions in the housing market were designed to increase the affordability and availability of housing. A new €500 income tax credit for renters was announced, as well as a vacant home levy. Another extension to the help-to-buy scheme was announced, despite concerns that it is poorly targeted towards its stated aims and likely to fuel house price growth. In addition, the potential for the 10% levy - now a 5% levy - on concrete products to be passed on to future residents of newly built properties may further impact housing affordability.

On the welfare side, budget 2023 saw permanent increases to most social welfare payments. Apart from the €40 increase to the working family payment income threshold, these were all below forecast inflation and follow real cuts to these payments in budget 2022. In line with previous budgets, increases to social welfare payments were announced as a flat euro-per-week amount which, given the different base rates of social welfare payments, means a different proportionate increase for pensioners, those of working age, young jobseekers and other cohorts reliant on social welfare. We estimate that the substantial package of temporary measures announced for 2022 and 2023 will make up for the real cut to permanent social welfare rates. These temporary measures include targeted payments and universal measures.

Changes to the national childcare scheme, NCS, which subsidises registered childcare, were announced. The universal subsidy, which currently pays €0.50 per hour for children under 15, will be increased to €1.40 per hour. However, as the thresholds for the income-assessed component of the NCS have been fixed in nominal terms since budget 2019, some households will lose their entitlement to this more generous subsidy due to wage growth.

In our post-budget analysis, the ESRI compared the direct and indirect tax and welfare measures - permanent and temporary - announced in budget 2023 with a price-adjusted set of policies for 2022. The overall effect of budget 2023 compared with price-adjusted 2022 polices is that, on average, households are slightly better off. There are small average gains in all income deciles. This does not equate to an increase in real income, which will depend on how wages, employment and other factors evolve in 2023, but, rather, shows that the contribution of policy changes to real income changes is expected to be positive. These gains are driven entirely by one-off measures and, despite average gains across the income distribution, detailed analysis showed that some households who are more likely to be reliant on social welfare, such as pensioners and lone parents, are likely to experience average income losses.

Disregarding one-off measures entirely and comparing the effect of permanent 2023 policy measures to inflation-proofed policies for 2020 gives an indication of the more medium-term challenges facing households and policy-makers. Compared with indexing tax and welfare policies in line with inflation since 2020, budget 2023 leaves households worse off on average. The permanent budgetary changes benefit higher-income households most, which leads to steeper losses for lower-income households compared with higher-income households.

Budget 2023 introduced a range of permanent and one-off cost-of-living measures. While these will, on average, insulate households relative to a price-adjusted benchmark, the one-off nature of many of the measures means an erosion of the real purchasing power of structural rates of payments within the social welfare system. There may be a need for further once-off cost-of-living measures in winter 2023 if price rises, particularly energy-related ones, persist next year. Targeted measures will reduce the risk of adding additional demand-side inflationary pressures to the economy.

Through successive budgets, rates of welfare payments have been incremented by fixed amounts. This translates to ad hoc proportionate increases for different cohorts in receipt of welfare. If this pattern of increase continues, it will erode the relativities implicit in the social welfare system and weaken the link between rates of payment and income adequacy.

Once the need for one-off measures to insulate households from inflationary pressures has passed, policymakers may wish to consider benchmarking social welfare payments to reinstate this link between payments and income adequacy.

Dr. Seán Healy

Social Justice Ireland is very grateful for the invitation to address the select committee and to present our views. The Government’s budget for 2023 will widen the gap between rich and poor by €199 next year. This calculation does not include any salary increases to be received by those with a job. Despite the welcome temporary measures to address the cost-of-living and energy crisis, in the long run, this budget will be seen as regressive and unfair. While one-off measures are welcome, when they are gone, they are gone. What we are left with is a skewed distribution of resources that favours those on higher incomes.

The rich-poor barometer introduced in our analysis of budget 2023 measures the gap between those on €100,000 and those depending on core social welfare payments. This gap is currently €979 per week. It seems to us that policy should be focused on reducing this gap. Instead, the Government chose to widen it and prioritised the better-off over the long term. Ministers also made a single-income couple on €50,000 a year a further €192 better off than a couple on social welfare. The €12 increase in core social welfare rates lags behind anticipated inflation in the cost of necessities in the coming year. A €20 boost was the minimum required to set Government on the path to benchmark rates to 27.5% of average weekly earnings over a two-year period, the target set and delivered by Government way back in 2007.

Social Justice Ireland does not accept aspects of the budget that widen income gaps, fail to respect Ireland’s most vulnerable people and leave Ireland’s poorest worse off when budget 2023’s one-off measures are discontinued. We call on Government to revisit its decisions in these areas and to make the necessary adjustments in the forthcoming social welfare Bill to ensure the most vulnerable are prioritised. In particular, we urge Government to increase core social welfare rates by an additional €8 a week to bring them up to €20, which was the minimum required. Anything less is simply abandoning the poor.

We believe one-off payments are not the answer. Government’s focus on one-off payments cannot conceal the fact that those on the lowest incomes, that is, those on social welfare and low pay, will fall further down the income ladder once the one-off elements of the budget have been worked through. By their nature, one-off supports cannot tackle the embedded low-income culture that has prevented our Republic from eliminating poverty.

An additional double week payment to those on social welfare is welcome but is simply a one-off event. It fails to benchmark social welfare rates to ensure they provide a minimally adequate standard of living. It also fails to compensate for the rise in the cost of living, particularly in recent months. In reality, social welfare recipients will be worse off next year than they are now. We very much recognise that poverty is never about income alone, but it is always about income. The Government is continuing to betray the social contract that, at critical times in the past, generated solidarity and social cohesion in this Republic.

In addition, the Government’s focus on one-off payments assumes that all will be well for low-paid workers and welfare-dependent households next year. This is a huge gamble that is likely to backfire on the least well off among us. It is gambling with the standard of living of Ireland’s poorest and most vulnerable people and is totally unacceptable as a strategy. We should consider how this will ramp up anxiety levels in low-income households considering sending a young person to college next year, embarking on a course of private medical care or moving to a larger apartment. For them, after this budget, there remains a fraught present and a bleak future unless Government begins to systematically combat income poverty.

Government policy is expecting the impossible of poor people. This development and what Government has done in this budget is particularly worrying in light of the impact of the pandemic and then the cost-of-living crisis on the weakest among us. A total of 595,000 people in Ireland are living in poverty, of which around 164,000 are children. In 2023 the core rate for jobseeker's benefit for a single adult will be €220 per week. That is €220 a week to provide for accommodation costs, heat, light, food, clothing, personal care, entertainment, education, transport, a television licence, communications, refuse collection, household goods, health, insurance and bank charges. In an ideal world, it is also expected to allow recipients to save for contingencies. That is an impossible challenge for people on such a low income and yet Government decided not to increase the core payments by €20, not to move to benchmark this welfare payment at the required level and not even to protect its true value compared with last year. Instead, it decided to increase the income going to a person with an income of €100,000 by more than €900 a year. This is the wrong priority.

Every household is experiencing rising prices caused by inflation but not every household is in crisis. It is well-documented that low-income homes suffer most. I refer to people on low hourly wages or fixed incomes such as welfare entitlements. Supporting these households requires ongoing targeted measures rather than one-off payments.

There are also failures with regard to taxation policy. Some €1.26 billion was allocated to tax initiatives in this budget. We regret that 67% of the resources devoted to income tax changes were allocated to benefit higher-rate taxpayers. These are permanent changes, unlike a major part of the resources allocated to poorer people, which are temporary.

We welcome the €2.6 million to support delivery of the circular economy strategy. However, Government missed the opportunity to invest in and secure our energy infrastructure, progress the implementation of the climate action plan and ensure a just transition to a green economy.

On housing, the capital allocation, which has increased to €40 million from what was already committed, means funding is insufficient to meet the current target. An increase of €1.4 billion would be required to increase the target of 9,000 social homes to the 14,000 required to address the social housing crisis. To meet the demand for social housing, 14,000 are required while 9,000 have been planned for and it looks like even that target will not be achieved. The additional money is certainly nowhere near what is required to meet the basic requirement of building a housing system that ensures everyone had appropriate accommodation.

I have a question, which is more for the committee and other Members than for the Government, although it is also for the Government. Why does Government continue to hide numbers in the budget documentation? The Government documentation produced on budget day this year contains less essential information than was available in pre-digital days, 20 years ago. We can speak with authority on this because we did budget analysis every year for close to 20 years before the digital world arrived. For example, the key table setting out the impact of all budget changes has been completely removed, which is quite interesting from our perspective. Why? Furthermore, the numbers supplied for the health budget - it is not the only one but we will take it as an example - will simply not deliver the existing level of service together with the new initiatives announced by the Minister for Health. It is impossible to deliver both yet the budget numbers presented suggest it is. We are simply saying that it is not and that there is something wrong with the numbers.

Irish people are very worried about the rising cost of living. As a consequence, they are spending less. This means the economy will slow down in the months ahead. It is widely accepted that low-income households spend heavily within the local economy, supporting indigenous businesses and jobs. Meanwhile, financial top-ups for the rich tend to be spent abroad and on luxury imports.

The Government’s decisions in budget 2023 will see the rich-poor gap grow and the real value of core social welfare rates fall. This is a disgraceful outcome. Cabinet Ministers had huge resources available but chose to use them in a way that exposes their lack of a credible anti-poverty strategy. There is no such strategy in the Government's approach. Gambling with the lives of Ireland’s poorest and most vulnerable is totally unacceptable. The Government should reverse its decision on core social welfare rates and increase these by €20 a week in the forthcoming social welfare Bill. Anything less would mean that budget 2023 confirms that the Government has abandoned those most in need of support.

As a republic smarting under Russia’s use of energy as a weapon of war, our leaders must move to unite the people in the face of continuing and magnifying hardship. By not prioritising the poor, this budget has sent the wrong message to the governed, at the worst possible time.

Professor Stephen Kinsella

I thank the committee for the invitation to appear. It is always an honour to address an Oireachtas committee. Can the committee see my PowerPoint slides?

Chairman

Not yet. They are there now.

Professor Stephen Kinsella

I thank the Chair. To give the committee an idea of the issues I wish to cover, it is not necessarily only about the budget, it is also about how we are choosing to conduct fiscal policy for our small open economy in this particularly uncertain time. To start with the headline, budget 2023 focused almost exclusively on the current problems. That is completely understandable but it leaves us in a quandary because many of the problems we have to solve are longer-term structural ones. I will get on to that.

A key issue that has not come out that much in public conversation is what the forecasts of the Department of Finance in the budget documents are telling us. I will address that momentarily. It is clear that we now expect inflation to be with us until at least 2025. We understand, from previous contributions, that this will hurt economic activity. Growth is expected to slow to 1% or 1.2% next year. The economy as a whole is expected to grow and give rise to a surplus in the State's finances, but we will also see a range of regressions through the period.

An important point in the broadest context is just how big the State is relative to previous years. The first chart on my slides depicts general Government expenditure in billions of euro. We will spend €111 billion this year. That is approximately the same amount as when the banks were bailed out in 2009. It is approximately €30 billion a year more than it was at the onset of the 2007 crisis. That is an important point. We are growing the economy each year but not necessarily having the most in-depth conversation about what that growth means. Like most economists, I tend to look at modified domestic demand - how much people are going to spend in the real economy on goods and services. As members can see on the slide, that demand will be down next year. The forecasts, shown in grey, are modified down relative to the summer economic statement of only a few months ago. The market and market participants, particularly CEOs of major banks and other commentators, are suggesting that it will be lower again next year. That creates a sense of uncertainty with respect to the conduct of economic policy at the same time as we are seeing gushing corporation tax revenues coming in from the buoyant multinational sector.

As Dr. Healy stated, while the change across different household types from 2021 to 2023 leaves everyone better off in nominal terms, they will be worse off in real terms. Members can see from my slides that a couple on a fixed income of €49,000 with one earner will be 3.4% better off but, when one corrects for inflation, they will 11% worse off from the 2021-23 period. Members can see that a person on the minimum wage is slightly worse off again. All of these combinations mean that it will be very difficult through 2023 to have an economy that is growing in statistical terms but will not feel like it is growing. Members can see that it is growing over time but that it will create a problem going forward because growth is not experienced quantitatively; it is experienced qualitatively. People feel like things are just getting slightly worse, and that can have a corrosive effect on many things.

The second point is that budget 2023 forecasts show that we are moving to a larger State. There is very little public debate on how we are going to pay for this. The excellent report of the Commission on Taxation and Welfare, of which I am sure members have copies, is essentially a phone-book-size menu of policies that we can use to think carefully about the State. If one looks at the forecasts of the Department of Finance which are shown on the screen, income tax as a share of the national wage bill is rising quite substantially in the next couple of years, while total tax as a share of modified national income is also rising. Although in political terms the report of the Commission on Taxation and Welfare has, if one likes, been discarded, the forecast of the Department of Finance indicates that this will have to be dealt with in some sense.

There is no doubt that as we move into the future, the size of the State will have to grow. We have an older population and a climate and biodiversity challenge, and migration is also a major issue. This is the major point of my remarks. Budget 2023 did not advance or change the structural questions that we have in this country. We did not see a big change with respect to offshore wind, for example, which is the largest single opportunity Ireland has to exploit natural resources and generate growth for ourselves for another 50 years. We did not see large changes to climate change or biodiversity. We saw nothing to really think about how our inward and outward migration challenges will be met. Of course, we are rapidly running out of time in which to solve this problem of the ageing issue. Every year that we delay, the problem gets worse.

In my previous appearances before the committee, I have urged, cajoled, harassed and harangued members to consider programme- or performance-level budgeting. This is vital. The State is growing. We are asking taxpayers to pay more. As we are doing so, we should find ways to reassure them that their money is being well spent in order that social trust is restored and is as high as possible in the services for which everyone pays. Programme budgeting is well worth doing. It is a type of budget classification. Simply put, one will spend money on health - one will simply allocate it to a particular programme and then should be able, at a certain point, to understand whether or not the programme is doing well on the basis of key performance indicators, KPIs. This should be considered. The OECD has an excellent report on which I am sure it would be happy to brief the committee if invited to so do.

Multi-annual spending ceilings are very important and a welcome addition. The Irish Fiscal Advisory Council has made the previously that they are a welcome addition to the set of fiscal armature of the State. They were slightly breached this year, but for good reasons.

Reviews of the fiscal rules are coming. It would be very good if the committee were in a position to understand how those rules might affect behaviour, particularly of the two Ministries with responsibility for finance going forward. A suggested action for the committee is that some kind of pilot programme of programme-level budgeting should be considered and sourced.

The key question is how to rebalance the contributions of multinationals and the domestic sector to economic growth. This is the big problem because it feels like ti is not a problem. There is loads of money coming in from corporation taxes, which is great and is essentially funding all the activities of the State going forward.

However, it represents both upside and downside risks to the State. Overall contributions by tax head from the multinational sector are around 83% over time. I have provided a table which breaks it down by sector. The table comes straight from the Commission on Taxation and Welfare. The chart shows that the contribution to gross value added per sector. Simply put, multinationals do almost all the growing for our economy in the post-austerity era.

My final point is from research that I have just completed. I have generated a map of the Irish economy, made up of little dots that are sectors. Healthcare is up the top. I have coloured them by the percentage of the multinational employment. The lighter green dots illustrate where there are lots of multinational employment and the darker green where there is very little. The chart is based on about 2.2 million data points. The chart shows that multinational activity is concentrated on a bunch of sectors. There is very little chance of people moving between them and very little knowledge transfer between multinational sectors and the rest of the economy. This will become more of a problem as we move to become more of a knowledge economy.

Chairman

I thank Professor Kinsella and will open up the meeting on the usual rota. Fine Gael is first and then Sinn Féin. Deputy Durkan is first. Is he there?

Deputy Bernard J. Durkan

I think I am. I have to check sometimes. I welcome the guests and contributors to the debate. I will comment on a couple of things. I am reminded of Harold Wilson's Government in the early 1960s when a problem arose. Every company that was losing money, it was decided to nationalise it. They ended up nationalising a bunch of losers and they had to denationalise them at a later stage. That comes about when the state gets involved in running everyone's domestic business and we are in danger of doing that now. It is a very bad thing to do. It has contributed to inflation. When something is put in place, the public expects it to work on the basis that it is primarily to help them.

Many across Europe have their eyes on the taxation of multinationals and it is not necessarily for our good. As far as we are concerned, I strongly believe that we do need to be less dependent on them. That does not mean that we should encourage them out of the country. That means that we should use the taxation that accrues from them to ensure that we have something saved for the future or that we find other ways of doing it. I do not see their existence as a problem at all. It is only when we become dependent entirely on the taxation levels coming from there. We have to get around to putting something aside. I have heard politicians in this House and people outside saying over the last year that there should be nothing for the rainy day fund and that it is a waste of money; that it is raining now and let us spend it now. That is what happened before the economic crash. That is precisely what happened. Everyone said "we have the money now; let's spend it". There is certain expenditure that needs to take place with infrastructure and so on, capital expenditure, but in the event of our getting to the situation where we are funding the domestic economy in terms of the weekly shopping bills etc., that is not going to work. It has never worked anywhere. We can complain about it any way we like.

I am tired of the continuous barrage of criticism of the state of the country and the budget. There is very little recognition of where we came from. Where we came from, not many years ago was an bord snip. Is there anyone around who remembers an bord snip or an bord snip nua, when Colm McCarthy set about identifying the serious cuts that needed to be enacted as a matter of urgency? That is only a little over ten years ago. When that came, it was severe. The options were simple. We could take those cuts in general for a certain length of time or accept them permanently for a longer time. Those were the two options available to us. We have forgotten about that and we need to think of it very carefully again. We need to use the resources available now to us to protect ourselves in the event of a weakness and a real rainy day coming over the horizon. And it could. Remember that Covid came since then. After the economic crash we had Covid and all the attendant difficulties that have come with the energy crisis, the war in Ukraine and so on. There are many things now that we need to be careful about. We need to provide for their impact in one way or another and we need to use the multinational corporations to do it. They are very welcome here and long may they stay. I have been at meetings in Brussels and elsewhere across Europe where they could barely conceal the need to encourage them elsewhere. There are many personalities that I could name - I do not want to but I have done so before many times - who are interested in ensuring that they do not remain here. Let us be serious. I have two or so of them in my constituency. Let us recognise the importance of having them here in providing employment, tax revenue and exports, as well as market demands generating local demand and so on. These are hugely important.

It reminds me of the 1980s, which seems very distant now, when, on a parliamentary visit to Stuttgart, we visited Mercedes which then employed 22,000 people. We had nothing in this country at the time. I remember asking if we could market Ireland abroad and to give us the information and we would use it. There was nothing. It was done on different basis, which was regional and so on. Anyway, there were 22,000 people working there at that time. The company was upgrading and rationalising and there were people who were supposed to be let go. Automation had come about and so on. What they did was they retrained the people they were going to lose and used robots and every other means of re-employing them and doubling their output. I am saying this simply because of this continuous harangue about how bad things are. I know how bad things are and I have been dealing with people all that time. They are bad but they are not nearly as bad as they could have been, had we had no money to pay the bills in the most recent crisis. And there will be more crises -----

Chairman

Thanks Deputy.

Deputy Bernard J. Durkan

Enough of my story.

Chairman

I thank Deputy Durkan. He has raised a number of issues there.

Deputy Bernard J. Durkan

I know.

Chairman

I will invite our witnesses -----

Deputy Bernard J. Durkan

The nub of it is that we should use what we have in a really serious meaningful way to improve our infrastructure and to ensure those international corporations remain there to do the job they are doing and hopefully, we will be able to encourage them. I am sorry for going on so long.

Chairman

No, that is okay Deputy Durkan. Your contributions are always valued.

Deputy Bernard J. Durkan

I heard housing being mentioned before. Housing was an issue 25 years ago. Fr. Seán Healy was there when I told him 25 years ago that housing was going to be the biggest issue of the future in this country. He knows that. He remembers that.

Chairman

I might bring Fr. Healy into the conversation then. There were a lot of issues raised there, if any contributors want to comment.

Dr. Seán Healy

I absolutely remember discussions that Deputy Durkan and I had 25 years ago and even more when we talked about housing. It was one of the most serious issues for us. The first time we negotiated a national agreement was in 1996 or 1997. Of all the social partners in that particular process, our organisation, not the pillar but just our organisation was the only one of all of them that considered housing to be an issue that was coming down the line. To the extent that I remember, Bertie Ahern who was not yet in office but was heading in that direction, sent his chef de cabinet to give them some kind of briefing on the reason we were maintaining this position. Anyway, we did not do what we needed to do at that time and as a result, we are where we are today.

There are many things I could say but it is important to recognise that it is not a question of either-or. We must protect the country's future. We must provide for the infrastructure. For example, a dozen years ago our organisation produced a briefing on infrastructure. I remember having an almost two-hours long discussion with the Secretary General at the Department of Finance at the time and pointing out to him that we had the lowest level of infrastructure investment in all of the European Union but that was not what worried me. What worried me was that if we doubled our level of investment, we would still have the lowest level of infrastructure investment in all of the European Union. The point I am making is that on one side, we have argued consistently for infrastructural investment and we will continue to do so. However it is not a question of doing that and doing things for the future or looking after the poorest and most vulnerable. We can do both-and. The choices that were made left the poorest and most vulnerable, the people on core welfare rates and those on low pay in a situation where they would be worse off in 2023 than they had been in 2022. That is a disgrace, given the levels of new expenditure that were spent in the budget. It can be rectified. We are very clear about what needs to be done. We have said that. It should start by raising the core welfare rate by €20 a week instead of €12 a week.

Professor Stephen Kinsella

I would like to elaborate slightly for the Deputy. When we think about macroeconomic risks, the way we think about it is that everything is connected. One is not bashing the multinational sector except to say that if conditions change and it is more acceptable and more profitable for them to leave, they will. I was in Limerick in 2009 when Dell left and 4,000 jobs were gone. If that were to happen again on a larger scale we would see a vast budget deficit, comparable to the economic crisis of 2007-2008. Right now, when times are good and the economy is going well, things are growing, as we would expect, we must build up our indigenous capacity. The Deputy gave Mercedes as an example. Mercedes is a perfect example of something in that it is a company that spent a century developing, subsidising, building and creating a manufacturing capability in Germany. There are many other examples like it. We do not have as many examples here. We know that the 21st century is going to be characterised by ideas and people being able to take ideas and make them real in the economy. They can do that in Silicon Valley or in Limerick. In both cases, people just need a laptop and an idea. They tend to take that knowledge from the places where they learn it and most of those places are in the multinational sector. That is where the high levels of productivity are. The research shows it is effectively like a gated community. When workers go in there they tend not to go back out to the domestic economy, which means that if they leave, that knowledge and those skills are gone. I agree that we need to spend money and think carefully about how to nurture our own indigenous economies but I would not shy away from recognising the risk, and to be fair the Department of Finance does recognise the risk, that a vast shortfall in corporation tax revenue could cause us, were things to go badly for them. If you were running a business and most of your revenue came from three or four customers, you would recognise that the fortunes of those three or four customers were of direct benefit and direct importance to your own fortunes.

It is not ridiculous to say that the health of the chief executive of a major multinational is a key macroeconomic risk for Ireland because it could genuinely affect us. Therefore we need to spread that risk out a little bit. We have a good chance, with the upcoming enterprise policy, to do precisely that.

Deputy Bernard J. Durkan

I wish to make a quick comment.

Chairman

It will have to be brief because you are at the end of your time.

Deputy Bernard J. Durkan

Even by my standards it will be brief. I agree entirely but I think about the commotion around the time of the financial crash. We were given advice that contradicted itself on a daily basis. I remember this vividly because I was asked by colleagues in the Dáil whether I had read such-an-such a person, an eminent person but I will not mention names. I said no, I had not, that I had heard it all before and it was repeating what was said before. I suggest that we do not do anything to scare off those who might be investing here. It is hugely important. What we do with the resources coming from them should not be a reaction in any way that would undermine their confidence in our ability to allow them to work from and export from this country and to employ people in this country. We have them in abundance at this time but we can deal with more. We can have more. The country is growing and so is the economy. We need labour, people to work, more than ever before. That is just my comment. I am not an expert; I am a home-made philosopher. I have some of those tendencies that emerge from time to time. My regards to Fr. Seán Healy. He has a good memory still.

Deputy Mairéad Farrell

I am beginning to think that Deputy Durkan is angling for Professor Kinsella’s job in terms of lecturing.

Deputy Bernard J. Durkan

Definitely not.

Deputy Mairéad Farrell

I will also say to Deputy Durkan that the 1980s seem a long time ago because they are a long time ago. I would not like to tell him when I was born.

When Professor Kinsella was responding to the previous Teachta, he hit on the concept of an industrial strategy. I thank him for his presentation as well. He mentioned some of the underlying structural issues that remain unresolved. One of those issues to which he alluded related to climate. The last time he was before this committee he also mentioned the need for a new industrial strategy. I read his recent article in The Currency which fleshed out one example in respect of wind energy. If he was to name three things that needed to be done as a starting point for such a green industrial strategy, what would they be?

Professor Stephen Kinsella

The first is a very simple one-stop regulatory shop that aligns the offshore and onshore planning requirements with the needs of the sector. The second thing I would strongly advise is a review of the intellectual property laws around knowledge transfer. I would connect that to large grants for indigenous companies to set up their own technologies that could actually use these new pathways. I think about it like this. Imagine we struck oil off the coast of Galway. We could one of two things. We could either contract out and effectively rent out the seafloor to a private company, have it extract the oil and then take a percentage of that or we could try to build our own oil rig. If you think about it, it sounds ridiculous. Except, the first oil rig would be crappy, the second one would be better, the third better again and the fourth might be just as good the international ones. That is how every economy has developed over the past 50 years. A book that I cite very often is How Asia Works. It describes how South Korea, Taiwan and other countries realised that they did not want just to be multinational export hubs. They wanted to develop their own industrial capacity. That is why you have South Korean phones with Taiwanese chips in your pocket right now, and not Irish ones.

The third point is to be utterly ruthless with firms subsidised by the State that do not perform well with respect to export. If they are not able to export and compete on the global market, let them die. Do not try to pick winners but certainly call losers. Deputy Durkan mentioned that we do not want the State getting too involved, but we want it to support innovative companies to a greater extent than it currently does.

We have a very large wind resource. It is the second best in the world and can generate 75 GW of power if the forecasts are to be believed. That is incredible and ten times what we think we might use into the future. We will be able to force these companies to give us a bit of their IP. In so doing, we will learn to be much better at this as a country. It sounds fanciful but the history of countries which have developed show us this is the path towards becoming a major industrial power. I do not mean heavy industry; we can be a light industrial power. We lost a huge opportunity last year with the Intel fab around Galway. It would have revolutionised our country. I do not want to see us miss opportunities like that again because we do not have the fundamental principles there. Those are the three things I would do.

Deputy Mairéad Farrell

That is fascinating. Professor Kinsella has noted different weaknesses in our current industrial strategy. We have weak linkages and spillover between the foreign direct investment, FDI, sector and indigenous businesses. Would this be different if we had a State-owned enterprise working as a strategic partner? For example, with the wind energy industry, a State company that was heavily investing, doing large amounts of research and development, experimenting with different technologies, etc. This would not be to build a national champion but a strategic partner to boost the industry and support it through subcontracting.

Professor Kinsella mentioned the success of South Korea in electronics and that. There was significant state ownership of companies, some of which were later privatised. Technology spillover and linkages from the state sector to the private sector was a significant factor in that success. What are his thoughts on that?

Professor Stephen Kinsella

That is certainly one way to proceed. The way I would set it up would involve a State-owned agency that did the granting to the private sector because you want smaller companies innovating quickly, learning how to fail, moving on and consolidating. You want that innovative dynamic within it. You want some stable State agency to manage that but that agency should also do the co-ordination and planning to make sure that, for example, fisheries and fishermen's rights were being managed, that there was democratic accountability and that it was not simply a transfer of resources directly to the private sector, most importantly the foreign-owned private sector. Those are key strategic views I espouse and something with that co-ordination capacity would be vital.

I cannot overstress how extraordinary the opportunity is here. I sound like a salesman for the industry but am not. It could be transformative for the State if we were able to grasp it but it would take decades to get right; therefore, we will need some build-up of State capacity to manage that.

Deputy Mairéad Farrell

That is very interesting. We are talking about renewable energy but that can apply to other aspects of the different crises we are dealing with.

Professor Kinsella mentioned the importance of performance budgeting. I am interested in spending that occurs through public procurement. Annually, we spend a huge amount of money on this - €20 billion, according to one source - but there is a serious lack of data on it. The Office of Government Procurement's tendering and spend analysis only comes out every few years. The European Commission discusses using public procurement for strategic industrial policy purposes and we even have things like green public procurement but I am not sure how we can use it for a strategic purpose when the right data analysis is not there. Is this an area we need to improve on in terms of performance budgeting?

Professor Stephen Kinsella

Absolutely. That is why I suggested a pilot. I would start up a new programme or initiative. It does not necessarily matter which Department it is in. I would build in the automatic reporting requirements that would be part of any programme-level budgeting. If, for example, the State is purchasing large amounts of PPE and it is being distributed around the country, where is it being used? To where is it being returned? Where is there overuse? Where is there underuse? Where is obvious value for money to be found? There is vast variation around the country depending on individual practices that can be standardised and improved, but only if there is a feedback mechanism through the procurement process. This could be done intelligently. The best place in the world where it is done is Australia. It does programme-level budgeting extremely well, as does New Zealand, which has a similar system. It finds a way to report back on not just how much is spend but what was done with the spending. This is the key step. If you have that, you are able to say "This was a good programme", "That was a bad programme" or "We're going to look at that and see how we can improve". Until that is done, you are just throwing money at something and hoping it works. That probably made sense in the 1980s and 1990s when it was much more difficult to capture this data but now that everything is basically in the cloud, it makes more sense to have reporting.

The State will get larger. It is very simple. The three issues of climate change, ageing and migration alone will force the State to get larger. We will be taking more taxpayer money in one way or another, through wealth taxes, income taxes, corporation taxes and so forth. Taxpayers have to be assured that their money is being well spent. Programme-based budgeting can give that assurance.

Deputy Richard Boyd Barrett

I thank all the witnesses. Their contributions have been fascinating. I am not sure what my questions are because I have to absorb so much of what has been said.

It is interesting what the ESRI and Social Justice Ireland said, that when you take out the one-off measures it is a regressive budget. I agree. That is an important point for us to make.

My questions revolve around the latter discussion concerning the way forward. What do we do with the windfall revenues we have? Then there is the issue of moving away from reliance on FDI. The two are connected: we have all these windfall revenues and they are largely from corporate tax receipts, which may disappear at some point. There is a dilemma. We need to invest in long-term things, as Professor Kinsella suggests. We have to invest in housing; that is self-evident. We have not got enough housing. We have to invest in public transport; that is pretty self-evident. We have to invest in renewable energy, as well as in retrofitting homes and making them more energy efficient, insulation and all that kind of stuff.

I would argue something that is not talked about enough and that is potentially revenue-generating is the need to invest in a sustainable model of forestry. That is also related to biodiversity. Something that is absolutely not talked about enough is that we should invest a hell of a lot more in arts. If we are talking something at which we could and do excel at a world level, the arts are always forgotten.

I am thinking about how the world is dominated these days by film streaming, gaming and all sorts of creative industries, which are becoming ever more important, yet we put pathetic amounts of money into th arts, even though we are generally held to excel in areas like literature, theatre, music and so on. We have very low levels of investment there. Those are just a few thoughts. I forgot to mention the health service. In a lot of these areas, in order to do the things that we need to do, we have real shortages in skilled people to do the work. Many of those things require engineers, architects, construction workers and so on. Skill shortages are appearing all over the place. Increasingly, there are signs that young people who are qualifying in these areas are now leaving the country. We are in a sort of vicious circle. We need the people who come out of college and qualify as apprentices to do the long-term work to strategically reorientate the economy, but those people are leaving because we have not done those things. I wonder if the witnesses have any thoughts on those dilemmas. We are in a bit of a catch-22 situation.

Certainly, it is not the only thing. Housing and the cost of accommodation are probably the biggest issues that will be cited by people working in the health service who are thinking of leaving or have actually left. At least in some cases, we have to increase current expenditure to keep them here, or in education itself. I think we should get rid of all financial barriers to education because it makes sense for us that people get qualified. Why are we charging people fees and making it difficult for them to be graduates and postgraduates by charging them excessive amounts of money, or even not paying them to study? We need them. For example, I meet regularly with psychologists. Many young people studying psychology now go to the Netherlands because students do not pay fees there, accommodation is cheap and students are basically financially looked after when they are studying. In Scotland, they pay people who are training as nurses £10,000 a year to do it. Here, we make them work for free on placements. I would be interested in hearing the thoughts of the witnesses on that vicious circle and catch-22 dilemma on the need to have a long-term strategic focus, to reconfigure the economy and reduce our dependence on a potentially precarious FDI sector, but also the need to do things now to hold the young people here, the human resource that we have and that is necessary to do all those things.

My last question is on the nationalisation issue. Is what Professor Kinsella is saying an argument for a sort of State-driven industrial policy? I used the example of film. We put a lot of money into the film industry. We have been looking at the tax credit. However, we do not have any major companies of scale in film production in this country. Should we be doing that to build up an industry? Should the State sponsor certain strategic industries in a big way rather than just hoping the market is going to do it for us? Those are my questions.

Ms Colette Bennett

In response to the Deputy's many comments, I think a lot of them are interrelated. He mentioned the need to invest in infrastructure. We would very much be behind that. While we have these windfall taxes, we need a long-term investment plan for them so that what we do invest in is going to sustain us into the future. Certainly, housing would be top of the list. We are hearing stories of teachers and healthcare professionals who are leaving city centres because they just cannot afford it anymore. Whether they are moving down the country or out of the country altogether, we cannot afford that kind of brain drain, essentially. We rank 41st out of 63 countries in the IMD world competitiveness ranking. That feeds into what Professor Kinsella was talking about in terms of how we protect the relationship with multinationals, while also moving towards our goals in relation to the upcoming white paper on enterprise that focuses on building up the capacity of our indigenous enterprises. We certainly need to do all of that.

In terms of the health services, in both capital and current expenditure, as Dr. Healy mentioned earlier, there is a complete lack of transparency when it comes to the budget. The IFAC estimates that we need €900 million just to stand still in terms of our existing levels of service, ELS. When we talk about increases in the health budget of €1.2 billion, that is really not the increase it appears to be when the majority of that is adjusted to safeguard the existing levels of service.

In relation to the artists, certainly there were some moves made in the pilot on basic income. We have plenty to say on that, as I am sure the Deputy is aware. While it is very welcome for those 2,000 artists that it will support, unfortunately, we are closing down artistic spaces. Again, it goes back to the infrastructure issue. We are building hotels and closing down theatres, nightclubs and all of those cultural spaces that we desperately need. In terms of what we need, we need to move away from those regressive measures, we need to build in our infrastructure and we need to plan properly into the future.

Dr. Karina Doorley

The Deputy mentioned the corporate tax receipts. In all truth where would we have been, over the last few years and through the last few crises, without them? It was great to have that money in the bank to be able to respond to the Covid crisis and the cost-of-living crisis and pay these one-off payments. However, as the Deputy has rightly said, we have lots of challenges coming up that are long-term in nature. The answer to some of this is going to be to spend more money in order to build more houses, reorientate our economy or whatever it is. We cannot rely on corporation tax receipts for that. One facet of this has to be a look at the report of the Commission on Taxation and Welfare and what measures in that report make sense to implement for now in order to raise more money in a sustainable medium- to long-term way.

The Deputy referenced the long list of challenges that we face. I would add childcare to the list of things we need to spend money on. The Deputy mentioned that we should be reducing barriers to access to education. In the early years also, access to available, affordable, good quality childcare already starts to reduce inequalities and affords equality of opportunity to many children. If it is left too late, they simply will not go to university even if the barriers are not there. I would definitely add childcare to the list.

Chairman

Does Professor Kinsella wish to come in?

Professor Stephen Kinsella

I simply wish to comment on where State development has gone really well. I do not work for the guy, but I want to plug Joe Studwell's book, How Asia Works: Success and Failure in the World's Most Dynamic Region. The thing that seems to have worked very well there is a key strategic focus by the State in saying, for example, that it will develop the capability to develop produce extremely high-quality steel for export. There was a State body mandated to help that work and oodles of cash were allocated to do that. It was actually the private sector firms that were put in place and allowed to grow a little bit, but also forced to compete internationally, that really got the thing working. It was that balance of State control in a certain sense, but also allowing these companies to fail where they obviously did not meet the test of export markets. There are loads of examples of other countries, for example, the Philippines, where they tried this and did not allow failing companies to fail.

What happened was simply the creation of domestic oligarchs. We want to avoid that, especially for something as large as the wind industry. It is so big and there is so much money involved that if we design the system incorrectly, it will create huge pots of money that will generate disproportionate amounts of economic power, and the Deputies will be lobbied by those concerned in the future. What we create could be privatised later if that is the prevailing mood, but the key is the generation of domestic capacity. This does not threaten the multinationals in any way. It implies we are going to do this ourselves and put up with the inefficiency and increased cost in the short term to have greater efficiency and societal learning in the long run. Thus, we would become the place where you would go if you had to know about wind power. This is exactly true of Denmark today. It started building up its capacity 40 years ago and is now the place to go if someone wants to build the stuff up. The easiest thing to do, or the thing to do at the lowest level of entry, would be to sort out the offshore planning, buy the turbines from Danish companies and have Danish companies install and run them and pay us a fee. That would be fine but no Irish companies would learn much about how it is done and, therefore, we would always be the client. Ireland is like an intellectual property warehouse. We mined the intangible capital for the rest of the world. It would be much more satisfying and conducive to national economic progress if we were able to generate the intellectual property ourselves, have the ideas ourselves and make it work. The balance of public and private is needed to make that a big success.

Deputy Richard Boyd Barrett

On that last point, is Professor Kinsella concerned that most of the offshore wind energy generation being planned will be in the hands of private companies and that there is potential for us to be the prey of speculators who have no real commitment to the welfare or long-term interests of the State?

Professor Stephen Kinsella

That is a possibility if the contracting is got wrong. The State is contracting with a private entity and the latter can essentially do what it likes. There is always a risk involved in that. Fundamentally, however, it is about societal learning. If the resource can be used to figure out how to build the capacity oneself, the nation will be insulated against the changes that happen, the slings and arrows of outrageous fortune. Things go bad, times change and technologies evolve, and all of a sudden it could be like 2009 in Limerick with Dell having left. Happily for the people of Limerick, Dell has come back. There are more people working in the plant than there were before, but the people and functions are different. I am glad Dell is back but it would be much better if we had our own multinationals. The workforce would be better off overall if we were able to spread the knowledge around the domestic sector in a much more egalitarian way.

Chairman

It is interesting to bring up Dell. Many in Limerick are still shell-shocked because Dell left at the time.

Deputy Richard Boyd Barrett

Is part of the plant being used as a film studio?

Chairman

It is.

Deputy Richard Boyd Barrett

It is empty at the moment, though.

Deputy Seán Canney

I was listening to the discussions and presentations from my office before I came here. I was a bit late for the match. This discussion is interesting, as Deputy Boyd Barrett alluded to, and many issues are being talked about that we should be talking about for longer and more effectively.

Based on what Professor Kinsella is talking about, we may be letting the green-energy revolution pass us by in the sense that if we do not pick up the pace now and take control of our potential, we will end up looking at turbines off the west coast of Galway producing energy but being serviced by others in Europe, saying it is a beautiful site or whatever. This will happen unless we become a little more brave in what we are doing and expedite the planning process and our intent to take charge as a nation, whether we use private investors or otherwise. That is an important point we need to discuss.

Reference was made to losing the potential of a chip manufacturing unit in Oranmore, County Galway. In a way, that should be a wake-up call indicating we have the potential to do something to create a huge industry on the west coast. The site is still there. Potentially, other customers will go there but the reason it was not picked by Intel should be examined. We should decide to correct the deficiency so we get things right rather than waiting for somebody else to go to the site and ask the same questions.

There were many references to Dell this evening. Digital, which was in Galway, was a major employer. When it decided to leave, we thought it was the death knell of Galway, but what happened was that many of the people who worked and trained there became business leaders and created factories that are now employing thousands in Galway and the regions. We undervalue the potential of our population. We think we have to have somebody with an American accent coming in to tell us how to do things rather than doing things ourselves. I would like Professor Kinsella's thoughts on that.

Let me return to the budget, where we are going with it, windfall tax and foreign direct investors. There are a number of factors we have to be concerned about. I agree with Dr. Healy that the budget does not meet the cost of living on an ongoing basis, which it should meet. One-off payments can be dangerous in that we may have to make a hell of a lot more of them over the next 12 months to see ourselves through a cost-of-living-crisis whose end we cannot now see. When a one-off payment is made, people expect it every year. How do we cope with people's expectations? Maybe the witnesses would like to comment on that.

Can they explain how they decided between rich and poor in respect of living standards? I will leave it at that. I might have a few more questions later.

Ms Colette Bennett

On the idea that the budget does not go far enough, which it does not, the committee made recommendations on benchmarking shortly before the budget was announced. We would be very much in favour of setting the benchmark at the equivalent of the 2007 benchmark, which would currently be 27.5% of weekly earnings. We believe it should be phased in. Our pre-budget proposal was €20, and it continues to be after the budget, as a move in the direction required. It should come to an increase of €34 on €208. We are continuing to call on the Government to revisit the decision made in budget 2023 and make up the difference, that is, add another €8 to bring the figure to the €20 that we and others have called for. What we are dealing with is genuine income inadequacy. This is not something that is going to go away with short-term measures or universal measures in terms of those who not targeted with the energy credit. We need to address the poverty issue, and that is an income-adequacy issue.

Regarding the rich–poor barometer, the rich are those who are earning €100,000 per year, compared with those in social welfare. There is also a middle poor, who comprise those on €40,000 per year, compared with those on social welfare.

Thus the rich-poor weekly gap is a difference of €979 per week. That has increased since last year. The middle-poor gap is €572 and has been the same since 2018. That is the difference we are talking about when we refer to people who are on the poverty line or on very low incomes. This information is on page 9 of our budget analysis.

Dr. Karina Doorley

The one-off payments were one potential solution to tackling the cost-of-living crisis this year. It was an understandable one in some ways due to the massive uncertainty around how inflation is going to progress next year, where energy prices are going to go, and so on. The trouble with one-off payments is they create an awful amount of uncertainty for people who are reliant on them. The Christmas bonus is a good example of this. It has historically been paid every year - for the last number of years anyway - but it is not announced until the budget after the year it relates to. In October an announcement is made for that Christmas that it either will be paid or a half-rate will be paid, or whatever it is. It seems to introduce a degree of uncertainty that is unnecessary for people who are dependent on social welfare. If we get to a stage where the one-off measures are becoming more common or being used as a prop for low-income households where their core rates of payment are not being indexed in line with inflation, then that is going to create more and more uncertainty and it seems a little unfair. In a situation like the one we are in at the moment where there is so much uncertainty about what is going to happen next year, the one-off payments are maybe a good solution while we figure out where inflation is going to stabilise at. It is unlikely it will roll back but on the off-chance, maybe the rate at which social welfare needs to increase to meet that - to be indexed in line with inflation whether it is wage inflation or price inflation - would be determined next year. It is important consideration is given to that next year and we are not continually relying on these one-off payments, which introduce this degree of uncertainty that seems unnecessary.

Professor Stephen Kinsella

I thank Deputy Canney for the question. The case of Digital in Galway is one of the most studied case studies in all of Europe in the area of industrial development. Everything from the age of the people involved in setting up the companies, to their particular skill sets and everything else, is well studied. I can provide the committee with an excellent paper by Dr. Majella Giblin of TCD. It looks at just what happened in the Digital case. The success has not been replicated across the country. Everyone expected, for example, that when Dell left Limerick that another Digital-type scenario would take place but it did not, and there are loads of examples like that across Europe.

On the Oranmore site and the Intel decision, I think the company is setting up in Magdeburg now rather than Berlin. We are used to the Government announcing 200 jobs or 300 jobs and that kind of thing but in a certain sense we finished the year minus 10,000 jobs because of that one decision. That was not just a chip fab but a fab for fabs. It would have put us in a geopolitical sense on the same level as Taiwan in the sense of having semiconductors and everything else. I am not fully aware of why Intel decided not to come, though energy was a big deal. Having that kind of long-term strategic capability and showing companies like Intel we can do this and generate our own domestic capacity would be well worth doing.

I have a final point on coping with expectations. We have forgotten the art of fiscal forward guidance. When he was Minister for Finance Michael Noonan did an interview with Miriam O'Callaghan. This was during the austerity crisis and literally hours after budget 2013. He said if conditions improved he would slacken the restraints of austerity. At the time, everybody was aghast that he could be saying such a thing but he was well ahead of the economists in understanding fiscal forward guidance because it changed people's behaviour. That is very important and we need to get back to a much more coherent fiscal forward guidance if we are to get ourselves out of this. Exactly as Dr. Doorley said, if everyone expects a one-off every year it is not really a one-off.

Chairman

Does Deputy Canney have any follow-up remarks?

Deputy Seán Canney

The Christmas bonus is the example one would hold up as a once-off that has become expected. If it did not happen next Christmas or the one after there would be war. We have brought in a huge amount of measures this year that are one-offs. Whether we can afford to keep them is the question. I think of the disability sector where the Indecon report said the additional living costs for people with disabilities were between €7,900 and something like €12,000 per person, based on 2019 prices. This year we have given a once-off payment of €500 to people with disabilities. That needs to become permanent and incremental if we are to meet our commitments under the UN convention. We have many challenges like that.

We also have a lot of potential but we have to change our thinking on how we are doing business, how we are setting out to do the business and how we are setting out to put in our infrastructure. We should have a lot more discussion on these kinds of things because we must come to some conclusions at some stage on how we are going to move forward. We must be brave and have a vision that we are going to try it. There was mention of companies failing. I do not think companies fail. They just try again, in the sense that if it is not working they are not a failure as they will try something else. They will do that if the confidence is there for them to do it. I thank our guests.

Chairman

I thank the Deputy. We will come back to things like the Christmas bonus. Many people's Christmases rely on that payment and while I do not want to use emotive language like cruel, it certainly seems unkind that the State enters into such uncertainty around it. Deputy Michael Healy-Rae is next.

Deputy Michael Healy-Rae

I thank the Chair for the opportunity to contribute. I apologise as earlier I had to step out to go into the Chamber. It was to talk about the banks, funnily enough, and what they are doing to us at present.

The presentations made were sound and helpful. I appreciate listening to experienced people like Professor Kinsella and Dr. Healy and getting their outlook not just on this budget but also past ones and looking forward to future ones. I am taking in what they are saying very closely.

Certain things that happen are a catalyst for making us worry about the decision-makers. We are having such difficulty in the housing market at this time. This includes the provision of social housing and the young couples who are managing to go about building their own homes but are then faced with a concrete levy followed by a U-turn on that levy. In the Dáil the other day, I tried explaining to the Taoiseach the harm done to the construction industry and to people's confidence. I am thinking of the young couples who were going about, or in the middle of, building their homes and then heard the Government thought it was a good idea to put up the price of concrete products by 10%, and we all know that would have finished up being a lot more. Then very quickly after that the Government began rolling back on that and saying it was going to make exceptions for first-time buyers or builders. There was all this flip-flopping and total indecisiveness. That is what is going on in the housing sector for example. It is why we have such a serious situation. Everybody knows I have tremendous regard for Deputy Durkan. I listened closely to what he said about telling Dr. Healy 20 years ago or whatever that housing was going to be a massive problem in the future, and it is.

It is probably a bigger problem than he could have envisaged 20 years ago. However, my biggest concern is that we seem to be getting nowhere. With all due respect, if Sinn Féin were in power tomorrow morning I do not believe it would be fixed. The way that the housing issue is being tackled is completely and absolutely wrong.

I say this because I want people to realise that when I am talking about it, I have considerable practical experience. As I always do, I want to declare an interest in housing. It is not that I got any silver spoon in my mouth or anything. I did a house when I was 19 years of age. It was the height of struggling, working at it day and night. Some friends and I worked with lamps to get that going and I have grown the business since. That has given me an experience of what is involved in the provision of housing. Some politicians seem to think that those who are involved in the provision of private housing are some sort of evil people and are doing something wrong.

First, they are paying 56% of their income in tax, which is a great thing for the State. If they collect €1,000 euro, they have €440 to run the property, pay the insurance, keep the roof right, pay the bills and pay the bank. People seem to forget about that. I believe that is an important role when responsible people are at it, but there is an exodus out of it at the moment. Every friend of mine who had property is getting out because they are being demonised every day by all politicians. I am not picking on any one group.

If Sinn Féin says something, Fianna Fáil, Fine Gael and the Green Party want to say it louder because they think that must be the right thing to say. Nobody seems to have an individual thought process and people do not seem to be able to make up their own minds about what is right or what is wrong. When Irish politicians get up in the morning, they wet their finger to see which way the wind is blowing and that is the way they will walk to work that day because they think they may as well go with the flow. People need to stand up for something. People who do not stand up for something, will fall for everything. We had politicians in the past who knew about building homes. They knew that local authorities needed to be adequately resourced to build accommodation that could initially be rented to local authority tenants and then sold on to them, which secured that family with a home.

Something that is not being done at all now is a building called a single rural cottage. Nobody is building them. Local authorities are not building single rural cottages now. They were a great thing. The family provided a site on land, possibly farmland, that was owned by the family and that became their home for generations. We seem to have forgotten all about that.

I do not want to hog this issue but I have great concern over the future. In my clinics I might meet a mother having trouble with her housing. If she has a boy or a girl of 14 or 15 with her, the first thing I think is about the housing needs of that new adult in two or three years' time and that the girl could be a new mom in three or four years' time. We are not taking care of the parents. How will we be able to take care of the children when they become parents? It is a major concern. I worry enormously when I see politicians who do not seem to have a clue what they are talking about making out that they are the bee's knees when it comes to housing.

I always follow what Dr. Healy says. I listen very closely to him and I respect everything he has stood for over the years. Do not get me wrong, there are times when I have disagreed with him on certain aspects. However, that is good because we cannot agree on everything all the time. Plenty of other Deputies wish to contribute. I thank the witnesses for the engagement and for giving their time.

Chairman

The Deputy mentioned a number of issues, including housing and the concrete block levy.

Ms Colette Bennett

The Deputy asked how we might ramp up home building. We really need to start moving beyond concrete and moving towards new technologies. A construction technology centre was launched in July for the purpose of research and innovation on how we build. That is one aspect of what needs to be done. We had recommended the introduction of living labs like those in high-net-worth countries such as Saudi Arabia. It is about getting the experts in a room to thrash out what needs to be done and to make the right models so that we can choose appropriately and procure appropriately. In that vein, we also need to look at our procurement processes so that we are driving down costs. Rather than it being a disparate group of builders and developers, we need to create a procurement mechanism where we take the advantage of buying in bulk where that can be done. Certain measures can indeed be taken.

Earlier Deputy Boyd Barrett mentioned the introduction of apprenticeships and qualifications. We advocate for that in the construction sector. We need onsite learning along with in-class learning whether that is remote or in-person to build on the knowledge of those new technologies that are desperately needed. That would also go towards our environmental goals. There are things that can be done that do not rely on concrete or on single builds which could make a difference in ramping up capacity.

The Deputy also spoke about a landlord exodus. The difficulty with that is that some landlords have not taken it on as being a business. They do not recognise that it is a job and something that needs regulation. There need to be supports on that for landlords and also for tenants to benefit from that.

Chairman

I apologise if I am cutting across Deputy Michael Healy-Rae's time; I do not mean to. However, as this is a review almost of the budget, there did seem to be some surprise that there was no particular provision for landlords. There is a concern that there would be a landlord exodus. I know that in no way does Deputy Michael Healy-Rae expect me to be sticking up for landlords. However, there was a fear of a major reduction in mom-and-pop landlords and there was an expectation that there would be something in the budget for that. That is a comment generally for the witnesses. Would they have expected to see that? While it may have been politically untenable to do that, what would they have expected to see?

Ms Colette Bennett

It was not something we advocated for. We advocated for increased tenant protections. If landlords are to sustain their business, they need the support for what it means to run a business as a landlord, what is expected of them and what they can do in that space. There are very few accidental landlords. At the time of the introduction of the code of conduct on mortgage arrears back in 2011, I advocated that the definition of property within that code should include genuine accidental landlords - people who had bought properties but could no longer afford to live in them, could not sell them because they were in negative equity and were moving back in with parents or renting a room somewhere. They are accidental landlords. There are very few of them left in the market now because of the way house prices have gone. We need to be very clear about what we call accidental landlords. People who bought a property for a pension or bought a property as a second home, holiday home or for the future use of a child and then rented it out are not accidental landlords. They bought that property as an investment to be a landlord and the appropriate supports are supports for them to run a business in the same way as any other enterprise would be supported.

Chairman

I apologise. I feel as though I cut across Ms Bennett as she was in full flow. I might put that point to the witnesses from the ESRI and Professor Kinsella. Did they expect to see something for landlords in the budget? I am not asking if they would like to see it but if they expected to see it.

Dr. Karina Doorley

I did expect to see something on landlords because it has emerged in recent years as becoming a bit more of an issue. Landlords are exiting the market. It is not clear what exactly is driving that. It is partly due to the high marginal tax rate that landlords face when renting a property and a lack of support. Maybe it is being unable to write off all expenses and so on. Obviously renting a property is not as profitable as it was expected to be or used to be. A lot of the demonisation of landlords, as described by Deputy Healy-Rae, stems from the financial crisis where people who had multiple properties for rent were seen to be part of the problem. The Chairman hit the nail on the head when she said that it may politically untenable to support landlords now. When tenants are having such difficulty in affording their rents and first-time buyers are having so much trouble finding a property then it does not seem like a logical step to support landlords. However, it seems that there is a case for supporting landlords in some way.

Chairman

It also would not be logical to lose a load of landlords from the sector.

Dr. Karina Doorley

Yes, it might be one way to address the issue.

Deputy Michael Healy-Rae

There is one very practical thing that I would love to see and that is abolishing from the English language a word that everybody seems to use. To me, if a property owner is involved in the business of maintaining his or her property and renting it out to somebody else, then he or she is a property owner. All the lords and all those sorts of people were dealt with a long time ago in this country. I hate the word "landlord" and believe that it should not exist because there are people who own a property and rent it out in the best way that they can.

I would like to hear what Professor Kinsella has to say about the private rental market. I ask because if we are going to ensure that in the future there will be a private market then no matter who is in power part of the solution, and not the problem, will be the private side of property ownership. I would love to see the day when every young couple and person who is starting out could own their own property. If that could be the case then it would be brilliant but I do not see how that can happen in the real world when one sees the cost of materials and the cost of sites, which make ownership unfeasible. If politicians continue in the way that they have and hunt people out of private ownership, putting it up to people that they should not be doing that, then owners will sell on but it will not be to somebody else who will rent out the property and that is why the amount of available property is so small. Any day of the week one can see on daft.ie that the amount of properties available to rent is ever decreasing and that is why the housing market is a nightmare. At my constituency clinics one continually encounters people saying that they are eligible for HAP, are only starting out and in year one, two, three, four or five of what could be a ten or 12-year waiting list for a local authority house or property, if they were to get it, and they ask what they can do in the meantime. They tell me that they need a private house or apartment and ask where can they get one as it does not exist.

Another thing that has happened is that an awful lot of landlords will not accept HAP. That situation creates an awful problem because it reduces supply even more. Where can we go now? Are we going to finish up with no privately owned properties being available? If one cannot get a local authority house or apartment when one needs it then there will be nothing else available. Such a scenario will be an awful situation. What will the political people who jump up and down and demonise the property owners say then? One would not want to rely on the politicians who are jumping up and down to create one house for anybody because they never built one or have never done anything except talk an awful lot. They talk a lot but they would not be practically able to do one thing of any use for anybody.

Professor Stephen Kinsella

I could not possibly comment on how qualified the Members of the Oireachtas are to build housing but I can answer the previous question about providing help for property owners. One can accomplish a lot with very targeted supports. For example, we know that in lots of rented accommodation the insulation standards are much lower. If there was a very targeted insulation programme for property owners, and particularly one targeted at landlords, then the State could spend money upgrading properties that would be much more energy efficient, better for tenants and better for the property owners who rent out their properties. What I have descried is a landlord support that is politically totally uncontentious. Nobody will kick off about if one simply designs a policy that upgrades a property that will really help tenants, or if one extends a property or one is happy to take on students. I am the head of a department in the University of Limerick and literally every day I talk with students who cannot find places to live. We are halfway through the term and there are still students who cannot find a place to live so this subject is at the top of my mind all of the time.

There are things like large-scale student accommodation. Right now if one talked to property developers they will say that it does not pay them to build these things. It does not pay the universities to build these things. There is nothing beyond the width of a sensible well-educated society to come up with a solution where we can house thousands of students near universities, stop them commuting from all over the place, improve their quality of life and take away the pressure that they would impose on the rest of the rental market. The University of Limerick has the largest amount of student accommodation in the country. We have got 16% whereas most universities are as low as 10%. Even if my university increased accommodation to 25% then, first, the economics of it currently do not stack up and, second, the lead times are simply too long to help this generation of students.

To answer the original question, there are targeted supports that I would like to see as they would upgrade properties and thus help tenants. In so doing the supports would also help the property owners who rent out their properties. It is just a matter of designing and framing the policy in the right way. I do not mean in a sale-like way but designed to help both sides at the same time. It is not necessarily a tax break, which is the simplest and easiest thing to do. It is more like if one does this and provide some societal good then there is a benefit to the property owner, to his or her property, to long-term equity values and so forth.

Chairman

If Members wish to ask a second round of questions then please indicate while I ask my own questions.

I completely agree with Social Justice Ireland. All of the witnesses have raised issues around the nature of one-off payments for some groups versus permanent changes for other cohorts. I also agree with the call for an increase of €8. An issue exists within this prism whereby the financial climate is incredibly volatile, some of the money that we are using to finance current payments comes from a volatile source in the form of corporation tax, and we must also roll into our considerations the idea of not adding to inflation. It is in that context, and as somebody who supports the position of Social Justice Ireland, how can we mediate that? What is the right level of one-off versus permanent? Finally, I agree with the idea that we should be indexing welfare payments.

Dr. Seán Healy

The Chairman has asked critical questions that need to be addressed. We have dealt with some very important issues for a budget in the first two hours of this meeting but these issues are also important.

The financial climate is volatile.

The sources of income, particularly in corporation tax, are volatile. As we have discussed, corporation tax revenue could fall dramatically. We do not want to be inflationary.

Let us take the last piece first. People who are in receipt of core welfare rates or on low pay or the minimum wage are not spending their money on luxuries. Their income is only of a level that barely allows them to survive. It does not even provide a decent standard of living or a minimally adequate standard of living. Many people do not have an income per hour equivalent to the living wage. We have a situation where people are on the margin. Their money stays locally. There is not any great danger that our proposal would cause inflation through more expenditure on luxury goods, imports or whatever the issue may be.

With regard to volatility, at the end of the day, we are left with choices to be made on a budget. We have the idea of an overall contribution that goes to everybody in society - universal grants in various areas. These payments could have been targeted, although maybe not the first time around because they were made in a hurry. However, there was plenty of time afterwards to work out how that money could be awarded in such a way that there would not be an overall net increase. At least part of the money that went to wealthy people who did not need it could have gone to poorer people who were basically having to make choices between food and heat. That has been documented endlessly.

On top of that, we must face something else. It was very well summarised by the Parliamentary Budget Office's, PBO, analysis of the budget. It is a very good analysis. Social Justice Ireland had made a similar point regarding the €12 increase but I will cite the PBO in this case because it is probably better to quote another entity, particularly when it is one that is close to the committee and gives it a lot of information. The analysis stated:

This €12 increase represents a 5.8% increase in 2023 [so, yes, there was an increase] and combined with the €5 increase last year, will result in an 8.4% increase since 2021. However, accounting for inflation, in real terms the rate will fall 1.2% in 2023 and will have fallen 6.7% since 2021 in terms of their purchasing power. To keep pace with inflation over 2022 and 2023, the rate would need to be €235.89.

That is almost €236.00, which is €16 less than the €220 people will get. We are asking for only half of that €16 figure or €8. I do not know how to communicate this to people who have the power to make the difference, all of whom are on six-figure salaries. It is very difficult to explain to people what it means to live on €220 a week, how desperate people are who are in that space and how wrong it is to tease them by giving them a very welcome double week here and a double week there or whatever. People will not say "No" to that but that is not the way to deal humanely with them.

Chairman

People need security.

Dr. Seán Healy

They need security and to be able to plan. A point was made about the Christmas double payment. This must become a permanent part, although it has never-----

Chairman

People already rely on it. In Cabra, mothers are relying on the double Christmas payment.

Dr. Seán Healy

Yes, but it is all wrong. They should have a payment that is at least at a level at which it would provide a minimum standard of living. We are working towards that and it the reason we are arguing for benchmarking. I welcome that the committee is supportive of the idea of benchmarking. We want to benchmark to wages. Ms Bennett made a point about a 27.5% benchmark. We were asking for 27.5% on average. It is not a very high benchmark but it was reached in 2007. This is why we are holding on to it.

Chairman

I have some follow-up questions. Although I support indexation, it is not me personally who is supportive; it is the committee that recommends the Government engage with indexation. That is a meaningful recommendation.

Dr. Seán Healy

We welcomed that early on. We thought it was very important.

Chairman

I agree.

Ms Colette Bennett

Reference was also made to the idea that this increase may add to inflation. With people who are on very low incomes or fixed social welfare incomes, one of two things is happening. They will be either already spending this money because they borrowed it through moneylenders - in the absence of Provident from the market, people are taking out high cost loans or using illegal moneylenders - or they are going without. If they are going without, we will see more money being spent on health services, social services, mental health and child-related services. We will see that money spent elsewhere.

Chairman

Yes, that is what all the research tells us. To be clear, I am not saying this will add to inflation. That is the answer we are being provided with. Does Social Justice Ireland have any truck with the argument that making payments universal speeds up the time it takes to get the money to people? I am not talking about the administrative costs of means-testing but the ability of the State to get that money into people's accounts in October or November.

Ms Colette Bennett

We were not talking about means-testing when we debated this earlier in the year. When the first universal credit payment came out, we and others had those discussions. The response was that it had to be done very quickly and that there was no time to target these payments. We were told we were in an emergency and the State did what it did because it was expedient to do it. That was fine for what it was but seven months later, that does not wash. There are instruments of the State, such as Revenue and the Department of Social Protection, that can identify households and individuals who need these payments. They can also identify, through the local property tax and other mechanisms, those who do not have such need, including those who have a second property for which they are also receiving the household energy credit. There certainly were ways to do this available to the Government.

Chairman

Expanding the working family credit was one. With regard to the SWITCH model, which decile or point would Social Justice Ireland target? I am sorry if that is a bit of a loaded question.

Dr. Seán Healy

It is a loaded question because it depends a lot on the issue and so on. If one is considering income distribution, there are 2 million tax units in the system. The committee understands what a tax unit is so I do not need to explain it. Of these, 1 million benefited from the income tax changes and 1 million did not. It was the better off 1 million tax units that benefited. It is a simple issue. These 1 million tax units are not just the top half of society; they include those earning €36,000 or wherever the ceiling was for the basic tax rate.

We must think in terms of grading or reducing as the income thresholds go up. As I said, while every household has been hit by the cost-of-living crisis, not all have been equally hit. Some people have the capacity to deal with it but a substantial number of people do not.

Sometimes I really struggle to deal with situations in which the people making the decisions do not seem to grasp the position of poor people, people depending on welfare and people on low pay and how difficult life has become for them. We described it in our budget analysis and critique as asking too much of the poor. I tried to give a sense of that in my introductory remarks. The sheer scale of what is expected to be covered is plain nuts. There is no way people can meet even the basic bills, given the increases in inflation, given what-----

Chairman

Given what they are expected to do.

Dr. Seán Healy

Exactly, with the welfare rates they have.

Chairman

Ms Bennett wishes to come in, and then I will turn to the ESRI.

Ms Colette Bennett

Dr. Healy mentioned the phasing in or targeting of these measures. We know there are specific groups of people who will suffer from deficits in heating and energy efficiency within the home. Professor Kinsella referred to tenants, for example. We know there is very little incentive for landlords and property owners to retrofit properties at the moment. Certainly, any household living in a property with a building energy rating, BER, of F or G that is privately let under HAP should be targeted. Any family or household living in local authority rented accommodation that has a low energy efficiency rating should be targeted. There are, however, others outside of that pool of people who can be identified through, as I said, the social welfare and Revenue systems and who could easily be targeted by the very competent civil servants for this type of payment rather than it being made a free-for-all.

Chairman

I turn to the ESRI. It strikes me that a lot of the discussions we have been having about the overall effects of the budget have looked at quite marginal levels of change. I am returning to inflation. It is such a volatile situation. Obviously, in all the modelling the various groups have done and the Government itself has probably done, that inflation has been forecast. How confident is the ESRI that we have gauged that volatility correctly? I am not asking the representatives of the ESRI how they think the war in Ukraine will go; it is as boring as the modelling of inflation economically. I do not know enough about the system as to how economists actually do that. How far under the rate of inflation must incomes increase for a budget to be officially regressive?

Mr. Mark Regan

I will hop in on that. As with any statistical estimate, there will be some underlying variance in the forecast, but it is very clear that overall prices will not go down. As Professor Kinsella mentioned in his presentation, the consumer price index, CPI, is forecast to increase by around 7% next year, steadying then to around 1.2%. We are sort of in a new equilibrium where prices are fundamentally higher. Drawing back to the Chairman's question as to what is the optimal percentage of the budget spend on one-off payments versus structural increases and the parameters in that regard, more emphasis should certainly have been put on increasing the structural parameters in the social welfare system and less weight given to once-off measures. Whereas once-off measures are quite timely, as the Chairman mentioned, they are by definition less targeted. However, even though they are less targeted, they will, given their lump sum nature, give a larger percentage boost to low-income households by design rather than anything else. Then, drawing in the indexation point, it is fair to say that this year and, likely, next year, if indexation does not occur, there will be very high levels of inflation that may be priced into market incomes but are not priced into people who are reliant on fixed incomes, people who might have had a change of circumstances or people who are temporarily unemployed. They will see a sudden swing in their living standards, which should be avoided. People should be given certainty on their living standards. Certainly, welfare payments should be benchmarked or increased closely in line with inflation just to ensure that these price changes are priced-----

Chairman

Would it be accurate to say that by relying on one-off measures this year, we may have created a larger gap for ourselves to jump next year, when we will possibly have to address indexation or a more permanent solution?

Mr. Mark Regan

Yes, definitely in terms of income adequacy, there will be a larger hurdle to jump next year if inflation is around the 6% to 7% rate the Central Bank and the ESRI are predicting.

Chairman

From a purely economic perspective, is it bad practice to rely on one-off measures year on year? I do not mean that from a moral point of view; I mean that we are trying to build an economic system that is sustainable. I presume that is what we are all working for. Is it simply not great practice to rely constantly on one-offs?

Dr. Karina Doorley

There is probably not that much precedent for it. Correct me if I am wrong-----

Chairman

We have talked a lot about multi-annual budgeting and giving people security in respect of social programmes. Now we seem to be getting to the very meat of living life and putting that on a very unsure footing.

Dr. Karina Doorley

It is definitely kicking the can down the road to next year. Next year, in the run-up to the budget, I guess the hope will be that we will be done with one-off payments, inflation will be either still very high or easing off and we will be in a position to make a decision on permanent changes, certainly to the social welfare system, that will bring social welfare rates into line with inflation. I think, however, that at that point - and I think the Chairman made this point earlier - we will need to make decisions as to how we will fund that. If we increase social welfare in line with inflation next year to compensate for everything that has gone on over the past few years, there will be issues with how we pay for that. We definitely do not want to do what our neighbours did a couple of weeks ago and announce massive increases in spending-----

Chairman

We would see a massive Dáil clear-out if that were to happen.

Dr. Karina Doorley

-----without justifying where the money is to come from.

I am going to sound a bit like a broken record here, but this is where we need to go back to the Commission on Taxation and Welfare's recommendation. If we need to increase revenue streams in order to fund something very important like social welfare and income adequacy, where will we start? We know that corporation tax receipts are volatile. Income tax receipts, to some extent, are also very volatile. A lot of the income tax that comes in is from a small number of people on very high incomes. Realistically, therefore, we will probably want to broaden the base. Obviously, tax increases are not palatable to anybody, but that may be where we end up if we are to permanently bring social welfare recipients into line with the rest of the population next year.

Chairman

The committee will do a series of sessions on the Commission on Taxation and Welfare report and, we hope, go through it all with a fine-tooth comb.

Dr. Seán Healy

We would be delighted to come before the committee on that when it reaches that point.

Chairman

We will hit Social Justice Ireland up for that. Dr. Healy need not worry.

Dr. Seán Healy

I will not go into the report now.

There is one other possibility that should produce additional income, and that is if the base erosion and profit shifting, BEPS, process the OECD has been running comes to a successful conclusion. I know there are hurdles still to be crossed and so on, but if we were to get a minimum effective corporate tax rate into place, over time that should guarantee us a certain solidity. It would not provide all the additional taxation we are talking about or the windfall we have been getting in recent years, but it would give us more than the core level of corporate tax revenue. That makes a contribution to dealing with the bills. More than most, I think we could claim that for years we have not just been arguing that the Government should spend X, Y or Z in any year. In our budget choices document we published earlier in the year we also specify how the money can be raised. We go through a lot of trouble and effort to spell out what the costing are and so on, getting things-----

Chairman

That is the hard work.

Dr. Seán Healy

That is the hard work, but we also try to do it by getting Department of Finance numbers and so on. Those kinds of things are not too contentious; whether or not the choices are made is where the contention lies.

Chairman

My next point is in the same area. I will put it not only to the ESRI but also, in a moment, to Professor Kinsella. As Dr. Healy said, the PBO did incredible work this year looking at the budget.

It gave us our own briefing. Something it did, perhaps to put it in context for members who might not be economists, was to talk about the Estimates for public services in 2023 and the average spend. It set out an expenditure ceiling of €90,415 million for 2023. That equates to €172,000 per minute that we are spending. They are mind-boggling numbers for someone like me. It goes down to the second too but I will not start to call those numbers. It was excellent work from the PBO and really useful.

The fiscal rules are suspended, interest rates are going up and we have added to the base, albeit perhaps not as much as all of us want. Nevertheless, particularly during Covid, we added to our core healthcare spending. Of the €172,000 we will spend per minute in 2023, €141,000 will be core spending and €22,000 will be capital expenditure. Is there a concern, even if we have not had it in the past few years, about our debt servicing costs? What does that look like in terms of the fiscal rules? Are those conversations we have sort of parked in recent years ones we must start having again, now the climate of interest rates is changing? I will start with the ESRI but I assume that Professor Kinsella will want to come in on that.

Dr. Karina Doorley

I will make some brief remarks on that, as I am at the edge of my expertise here. The rise in interest rates makes the conversation about our national debt more important. We will be paying more on our national debt. It makes decisions on whether to borrow much more important because we have considerations about the amount of interest we will have to pay. The point on the amount we are spending returns to Professor Kinsella's point on the size of the State. It is growing and there is no escaping that. If we want to have the state we want to live in where there is a certain universality to healthcare, childcare and all those things we think are important, then we will have to embrace it and raise money from somewhere to be able to service all of that spending. I am sure Professor Kinsella will have more to say on that.

Professor Stephen Kinsella

Sometimes it is helpful to be teaching international macroeconomics on a day like today. The students are doing a debt dynamics analysis for their introductory macroeconomics class right now. If any of them are watching this, they will get the answer to the test, which I suppose is some kind of reward for diligence. The National Treasury Management Agency, NTMA, has been extremely sensible in previous years when interest rates were very low by refinancing the austerity level borrowing at lower and lower rates. As a percentage of our total revenue every year, it is actually much lower. It is like a household's disposable income and its mortgage. The interest rate of the mortgage does not necessarily matter. What matters is how much you have to pay in your mortgage every single month relative to disposable income. Ireland's disposable income is really high and the amount that we have to pay is relatively low. As that will be true for the next five or six years, we have a lot of runway as interest rates creep up. The problem is at the end of that five, six or even seven years, when we have to refinance that debt, as if interest rates are much higher then we will hit a fiscal cliff or it will be much more expensive to borrow to refinance the debt that we have already refinanced just to kick the can further down the road. That is on one side. We have a nice runway; we should be fine.

On the other side, there is a difference between the rate of inflation or the amount that you are spending on your debt and the growth rate of the economy. There is a very long-standing relationship which is what the students are actually estimating tonight for their assignments. It shows the amount of interest that you are spending compensated for inflation, I, minus the rate of growth, G. If that is positive, you are in trouble but if it is negative, you are grand. That I minus G relationship has been very favourable for us over recent times. We have been growing really strongly since 2014 even through the Covid era, when the Irish economy performed really strongly. On our debt sustainability, I would not have too many concerns today. Even next year, with all the headwinds in the economy it will probably balance out somewhere between 0% and 1%. I would not be that worried about it. It is five or six years from now that you would start to get worried but we have time to get the house in order. As Dr. Doorley says, we have to start having this conversation about how we pay for this bigger state. The pillars of our state are high-income taxpayers. People in the top 20% of the income distribution pay a disproportionate amount of all taxes relative to the Nordic countries, say, where as you go down the income deciles, those deciles pay a lot more as a proportion of their income. You also find much greater wealth and property taxes etc. It pays for a larger state, which has far fewer debt sustainability concerns. It returns to the question that Deputy Boyd Barrett asked. What is the chicken and egg in this regard? If you invest in productive capability in order that the manufacturing sector in one area such as wind of something else comes up, then that remits tax revenues that can be used to pay for other things. That is the beauty of structural economic change. It creates new things, which remits new revenues, which allows the state to grow and allows services to develop. It is how you get out of the catch-22; in a certain sense, growth is the solution.

To return, to the original question of whether the debt sustainability is a problem, it is not something that I would be worried about.

Chairman

I am glad we are not worried about it today but of course the committee is meant to be looking at medium term budgets which is three to five-years.

Professor Stephen Kinsella

Indeed.

Dr. Seán Healy

We proposed an idea about how to deal with the longer-term danger. I agree there is not a danger immediately. There is provision for €3.8 billion for servicing the national debt in the budget for 2023. We can handle that and we are doing okay on that space. What we have argued for and been proposing for a while is that to minimise future debt financing challenges and to avoid the adoption of austerity measures in the years to come, the Government should prioritise the development of a European-wide debt warehousing strategy for the additional debt brought on by the pandemic.

Chairman

Does Dr. Healy envisage that would be rolled into the new fiscal rules?

Dr. Seán Healy

That would be part of it.

Chairman

Okay. I just want to get that straight.

Dr. Seán Healy

Exactly. We would see it as learning a bit from something that happened a long time ago, which is the way that the Brits paid for the First World War. They spent the best part of a century paying off that debt. We think the pandemic debt should be separated from the existing national debt and financed by a really long-range European Central Bank, ECB, bond at a low interest rate or whatever. That would be available not just for Ireland but across the European Union or maybe the euro area, now I am thinking about it, because we are talking about the ECB and so on. That is the way to deal with this issue in the longer term.

On the fiscal rules generally, we feel they need to be updated. We argued with them on day one because we felt they were political rules rather than economic rules. They were not really based on solid economics. I think we would still be of that view. A lot of people feel now there have to be adjustments. We certainly would be supportive of adjustments. There should be a proper discussion on that.

Chairman

I think we are all expecting to see adjustments. I would be interested in what Germany would think of that kind of warehousing proposal.

Dr. Seán Healy

Absolutely, but there are a lot of issues. I think maybe I would like to tell the Germans what I think of some of the things they did during the austerity.

Chairman

There will be a few of them in town in November apparently, so maybe we can do that then.

Dr. Seán Healy

We will see how it goes.

Chairman

I will finish with one quick question for Professor Kinsella. He spoke a bit about fiscal forward guidance and that it should be more coherent. In the context of our having said recently that we have this 5% rule, which we immediately binned, what would fiscal forward guidance look like into the future?

Dr. Stephen Kinsella

First, it would be a super help to stick to the rule.

Chairman

To not spin the rules.

Dr. Stephen Kinsella

That would be helpful. Assuming that one cannot do that for whatever reason, one has to be able to commit credibly to do something in the future that will guide behaviour today. Everyone expects the carbon tax to increase every year, for example. The one year that does not, credibility goes out the window.

Much of this stuff has been studied in the monetary policy literature to a much greater extent than fiscal policy. In fact, one of the world's great experts on central bank communication is Professor Michael McMahon of Oxford. He is also deputy chair of IFAC. If he is in, I recommend that the Chairperson listen to him before she listens to me. However, I have read Professor McMahon's papers. The basic synopsis is that one needs to be able to show how one's theory of the world is changing as new data comes in. For example, if it turns out that corporation tax revenues fall for whatever reason and the chief executive of a major technology company has a heart attack or something, one needs to be able to show that one's guidance has changed and here is how it has changed. That kind of policy communication is important, particularly for households.

I have been a professional economist for more than 20 years and I talk to lots of people all over the country about the economy and what it means to them. I made a statement earlier on that people do not experience the economy as GDP, percentage changes in consumer price index, CPI, baskets or whatever. It is only a qualitative feeling that things are getting slightly worse. The way to communicate these kinds of changes and what one will do to alleviate them is also to speak qualitatively. That is where previous Ministers for Finance - I mentioned former Deputy, Michael Noonan, because he was pretty good at this - got it right. They say that this is how it will feel when they introduce the next Christmas bonus and they will do that if we see a change in this.

Chairman

Is it accurate to say that it is less about rules and more about transparency and communication?

Dr. Stephen Kinsella

Exactly. The key point here is that one has to be able to tell people that this has changed and now one is updating the rule. One has to be very good at communication to get that right. One has to be clear and nuanced in one's language at the same time. It is a bit of an art, but it can be done. When it is done well, people respond. It might not be the average citizen who is changing his or her behaviour, but it certainly would be, for example, industry group. It would be lobbies. It would be certain sectors of the economy that pay particular attention to the pronouncements of Government. One can certainly have their attention on a much greater level. The more clearly one can communicate to them, the better. The perfect example that is going wrong is the concrete block levy. It is not only bad economics; it is a bad policy. It was badly communicated. It is kind of a case study or at least it will be when I update my slides. It is an interesting way to think. In a small open economy that does not have a monetary policy, this is an extra set of levers that the Government has that it is choosing not to use for one reason or another.

Chairman

We are at the close. We have covered a lot but if there was anything vital that has not been mentioned at all, I am happy for people to mention it now. Speak now or forever hold your piece. I take that as, "We are done."

I want to thank everybody. It is 8.15 p.m. and I appreciate our guests taking the time and staying so late. That concludes the session.

The select committee adjourned at 8.14 p.m. until 5.30 p.m. on Wednesday, 26 October 2022.