Committee on Budgetary Oversight debate -
Wednesday, 30 Nov 2022

Fiscal Assessment Report: Irish Fiscal Advisory Council

Chairman

All those present in the room are asked to exercise personal responsibility to protect themselves and others from the risk of contracting Covid-19. I welcome Mr. Sebastian Barnes, Dr. Adele Bergin, Mr. Alessandro Giustiniani, Professor Michael McMahon, Ms Dawn Holland and Dr. Eddie Casey from the Irish Fiscal Advisory Council.

Before we begin, I must explain some limitations to parliamentary privilege and the practice of the Houses as regards references witnesses 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. Witnesses 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 respect of 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, namely, Leinster House, in order to participate in public meetings. I will not permit a member to participate where he or she is not adhering to this constitutional requirement. Therefore, any member who attempts to participate from outside the precincts will be asked to leave the meeting.

I invite Mr. Barnes to make his opening statement.

Mr. Sebastian Barnes

The council would like to thank the Chair and members of the committee for inviting us to discuss the council’s November fiscal assessment report. We very much value our engagements with the Oireachtas and see these as important opportunities in the context of our work. Joining me are council members, Dr. Adele Bergin, Mr. Alessandro Giustiniani, Professor Michael McMahon, Dr. Eddie Casey, our chief economist, and Ms Dawn Holland.

The council is an independent body established under the Fiscal Responsibility Act 2012. Its mandate is to endorse and assess the Government’s official economic forecasts, assess its budgetary projections, monitor the fiscal rules and assess the Government’s overall fiscal stance.

Ireland’s growth has slowed considerably over the past months. The rapid post-Covid recovery has been stunted by surging prices, mainly for energy and food. This has led to weaker real incomes. While the jobs market remains exceptionally tight, it shows some signs of softening, including in digital sectors. Budget 2023 forecasts real GNI* growth of just 0.4% in 2023 before returning to more normal rates of about 3% in 2024 and 2025.

There are major risks to these projections. Gas shortages this winter seem less likely than they did earlier in the year, but many challenges remain around energy. There is a slowdown in Ireland’s main trading partners, which could be on the verge of a recession. If high prices pass through to wages, it could mean more persistent high inflation, weakening growth further. Housing supply pressures continue to be an important challenge, though household and corporate debt are lower than a decade ago, providing some resilience.

Budget 2023 involved a large package of measures amounting to €11 billion for next year. Of this, some €7 billion is for permanent measures, with €5.8 billion related to spending and around €1 billion to tax. A further €3.9 billion is in the form of temporary measures aimed at helping households and businesses adjust to the rising cost of living. The council’s assessment is that budget 2023 struck an appropriate balance between, on the one hand, supporting vulnerable households and, on the other, avoiding adding to inflationary pressures. The temporary deviation from the 5% spending rule is relatively limited, with core spending rising by 6.8% in 2023. The council assesses that the permanent spending increases in both years are likely to be sustainable. These increases do not compensate for inflation in full, but the gap for lower income households in 2023 is more than made up for by substantial temporary supports.

The Government made an important change in its presentation of the budget this year by introducing a new measure of the budget balance that excludes an estimate of excess corporate tax receipts. This measure, recommended by the council in previous reports, provides a clearer picture of the underlying state of the public finances and is likely to be more robust. On this basis, the budget deficit was forecast to narrow substantially to 3% this year. This reflects the lifting of pandemic supports and strong revenue growth. The budget balance, notably taxes, could ultimately be more favourable than forecast for this year.

Following a further improvement in the budget balance in 2023, a budget surplus of 1% to 2% of GNI* is projected by 2025 when excess corporation tax is excluded. This assumes that the Government sticks to its 5% spending rule as planned. However, we estimate that current spending increases in 2024 and 2025 under those plans would not fully accommodate demographic or price pressures, falling short by €800 million per year on average. This implies that there is no space for additional spending without finding offsetting resources elsewhere.

There is now a window of opportunity for Ireland to reduce its debt burden to safer levels while interest costs remain low, despite recent rate rises. Future shocks to interest rates, growth or debt will be more manageable if we start from a lower level of debt than the one we currently have. Sticking to its plans, the Government could see its net debt ratio fall from 73% at the end of this year to around 58% of GNI* by 2025 on the back of budget surpluses, relatively high inflation and moderate growth. This would provide a buffer to help the Government respond to future recessions or crises in the way it has in recent years. However, this window of opportunity is likely to be short-lived.

The public finances face major long-term challenges, including pensions and the ageing of the population, the costs of climate transition and the need to reduce overreliance on excess corporation tax receipts. The decision to maintain the pension age at 66 adds to future tax pressures. The Government needs to step up its long-term planning about how these challenges will be addressed. The council is concerned that in budget 2023, the forecasts again only go three years ahead. This does not allow for a proper analysis of the medium-term path for the economy or assessment of the Government’s fiscal plans, including how to address medium-term pressures. The Government should return to medium-term forecasting on at least a five-year-ahead basis. To support planning, the Government should make three changes. First, it should reinforce its 5% spending rule. This has proven to be a simple and effective anchor for the public finances. The spending rule should be put on a legislative basis, net out tax changes, be linked to debt targets and capture the full range of general Government spending. Second, the Government should make use of medium-term spending ceilings at the departmental level, as required by law, to anchor the spending rule across government. Third, it should rethink the national reserve fund. The Government’s decision to restore the national reserve fund is welcome and an important step in the management of public finances. However, the Government should consider raising the cap and turning it into a new national pensions reserve fund, which could take pressure off tax increases in future years to fund known pension shortfalls.

While budget 2023 navigates a steady path through the energy crisis, Ireland’s bigger long-term challenges are becoming ever more urgent. Difficult choices will be required in the years ahead, including on how to manage ageing and climate change. This will have major implications for spending and taxation.

Deputy Kieran O'Donnell

I thank Mr. Barnes and his colleagues for their work over the period. The Irish Fiscal Advisory Council was before the committee on 7 September. At that meeting, I highlighted that the council basically stated that it looked like there would be additional revenues of €3.5 billion, particularly from corporation tax. The surplus proposed by the Government in the summer economic statement was €1.2 billion. That is now going to be €4.5 billion, leaving additional headroom of €3.3 billion. I proposed that this be deemed once-off spending in the budget. It is fair to describe the council's view of that as reticent. The Government has spent €3.9 billion on once-off measures in the budget. Before the budget, I felt we could still achieve a €1.2 billion surplus. Based on the table presented by the IFAC, the surplus in 2021 will be €1 billion rather than €1.2 billion. Has the IFAC revised its opinion on once-off payments being made from surplus corporation tax receipts? Its report is broadly supportive of Government measures. The IFAC was quite reluctant when I pushed it on whether it was a good idea to use those for once-off measures. I am putting Mr. Barnes on the spot but that is our job. Has the IFAC revised its view from 7 September? I presume Mr. Barnes remembers the exchange.

Mr. Sebastian Barnes

I remember it well. It is good to come back to these things and discuss how things have or have not changed. Overall, it was important in the budget, as we said then, to protect lower income households, which are facing massive pressures, and winter is upon us now. What we said was important, and I have just said it again, namely, that the challenge is to balance that. The constraint is that putting more money into the economy will lead to higher inflation and could risk being counterproductive. That was the kind of trade-off we were talking about. At that time, the Government had an amount that was put in the budget for temporary measures. That was the kind of figure we were working with; we did not particularly endorse that figure. It was not the only one, but we used it as a natural reference point because it was the point the Government was using. In the event, the Government has taken more temporary measures than anticipated at the time. Our assessment is that they are still within an appropriate range of policies, which is why we reached the judgment we have. We also did not know at the time what the balance would be between permanent and temporary measures but one needs to look at the package as a whole.

Deputy Kieran O'Donnell

At the time, I promoted that they be once-off measures and would not be embedded in core spending.

Mr. Sebastian Barnes

Absolutely. We agree and we disagree, as we did then. We agree on the idea that temporary measures are necessary, warranted and sustainable. Using one-off measures is a helpful tool that can complement permanent measures. The difference is that in our reasoning, we see the amount of corporation tax as not being a relevant factor in this discussion. The fact that corporation tax money is coming in is helpful as it boosts the public finances in the years ahead and helps reduce debt. There are many good things around that, but the amount that comes in should not dictate how much we spend because of this constraint in terms of not putting too much money into the economy.

Deputy Kieran O'Donnell

Mr. Barnes will appreciate that it gave headroom to the Government. If those surplus corporation receipts had not come in, the headroom to do those once-off measures would not have been available at that time. Is that correct? It did not require borrowing.

Mr. Sebastian Barnes

I am not sure that is the case.

The Government's plans and its balance stand on their own merits. If corporation tax had been exactly in line with what was forecast in the year, I do not think that would change that assessment. The fact that it is higher means the public finances are in somewhat stronger shape. Again, it is almost like a one-off revenue. I do not accept that there is really a link.

Deputy Kieran O'Donnell

Will Mr. Barnes explain that? The summer economic statement referred to a surplus of €1.2 billion, whereas the outturn shows a surplus of €1 billion. There is a difference of €200 million. I think €2.5 billion was the figure that was being mentioned in once-off measures and it ended up being €3.9 billion. The point I am making is that if we take the differential, there was €3.3 billion of headroom. In fact, it ended up being €3.5 billion because the measures cost an additional €200 million. If the corporation tax receipts had not been available, where would the money for these once-off measures have been found without it affecting the balance? Would we have then ended up going into deficit?

Mr. Sebastian Barnes

The Government's targets and fiscal framework are structured around the 5% spending rule. The idea is that the Government will continue to increase core spending by 5%. In this case, it was slightly more but the Government would do that irrespective of what happened.

Deputy Kieran O'Donnell

My figure is more of an accounting measure.

Mr. Sebastian Barnes

Yes, I understand that. Maybe Professor McMahon can help.

Professor Michael McMahon

As Mr. Barnes has laid out, we agree that the broad number, which we took from the Government suggestions, was fine. The Government did a bit more than that, while the Deputy was pushing for more again. We did not disagree on that target as it was temporary. What we are trying to emphasise is that there is not a mechanical link. If there are policies that are right to pursue and are judged to be right to pursue, there is scope. Ireland is in a very good position both in terms of its ability to raise funds directly on markets if it wishes to-----

Deputy Kieran O'Donnell

In the limited time I have----

Professor Michael McMahon

The point is one has to separate the financing. As well as excess corporate tax, there is €27 billion in tax reserves.

Deputy Kieran O'Donnell

No, I am making a more fundamental point. Regarding the surplus corporation tax receipts, if once-off measures are being put in place, they have to be paid for at some stage.

Professor Michael McMahon

They do not affect the headline measure which strips out excess corporate tax. This is the measure that the Department of Finance has moved to using and we have moved to using. As Mr. Barnes laid out, this is the right measure to look exactly at these issues. Is there is a bit more money coming in or not? That is the measure that matters and that is unaffected by what the Deputy is saying. One can still be perfectly right to say these are good policies. It is just that we should not tie them to specifics. If we reverse the situation, would the Deputy feel comfortable if we were to say certain sectors have been badly affected by the global slowdown and, therefore, we would like to constrain what Government can do because these tax revenues are not coming in? That would be a very uncomfortable position and it is not the right position.

Deputy Kieran O'Donnell

No, I am making a more fundamental point. While policies have to be driven, at some stage they have to be paid for. Either they will be paid for by taxes or borrowings. It is one or the other. We cannot pull magic money out of the air. I am just saying that the surplus corporation tax receipts have provided a new dimension to our economic performance as a country.

I direct the witnesses to table 2.2, which shows the budget summary fiscal forecast. In it, the IFAC projects that the windfall corporation tax will be €9 billion this year, €10 billion next year, €9 billion in 2024 and €9.5 billion in 2025. This brings a new dimension to our receipts. I have a view that I do not like borrowed money. If I can pay for something out of taxes on a once-off basis, the accountant in me prefers that. I do not want to put borrowings on the heads of the taxpayers. Of the windfall corporation tax receipts that are coming in, how much should be put into the National Pensions Reserve Fund or a similar fund each year? I am asking this fundamental question. We can then talk about policy.

I was around when we could not borrow money on the markets. I come from the old school so I would much prefer to use cash flow than borrowings. Corporation tax provided latitude last year. I am not disagreeing on policy, which is a separate issue. What does the IFAC propose as a policy for those windfall corporation tax receipts, which work out at roughly €40 billion over a four-year period? That is a significant amount of money. What percentage should go to the National Pensions Reserve Fund and how should it be used? I suppose that relates to policy.

Mr. Sebastian Barnes

To clarify, those are not our projections but numbers from the Department of Finance, and they are massively uncertain. Essentially, the Deputy has kept the same number, which is one way it can be done-----

Deputy Kieran O'Donnell

I am turning it on its head. Mr. Barnes spoke about policy.

Mr. Sebastian Barnes

That was just by way of clarification. The Deputy is right that there are potentially massive amounts of money coming in. There is a question about how to manage that. There are a number of risks. One risk is that we build up spending on the back of that but if that money does not appear, we are then caught. That is something we must not do from a public finance point of view. From a good accounting point of view, one should not recognise these things before they come in. The second risk is that from an economic perspective, this money is essentially coming from outside the economy and if we spend it all at once, we will add further to demand, inflation and pressure on house prices. We have to be cautious about spending that money in terms of economic balance. We are quite dependent on it now, so putting it all into the pensions reserve fund overnight could be disruptive as well. In a previous report we looked at various scenarios where we would gradually put more money into it.

Ultimately, some of these constraints and avoidance of risks come down to social choice. We might have this large amount of money that comes in over a limited number of years. We do not know how much it will be or how long it will last. The question is whether we want to spend that now or save it and spend it later when we know there are going to be big costs around ageing. That is a social choice. It depends whether we want to favour the young people or the old people or how we want to make that balance. That is a really big social choice to be made. We in the Irish Fiscal Advisory Council can not tell others how to make that choice but it is the way people should be looking at it. That is why we think there should be serious consideration given to putting it into a pension reserve fund and saving that money. Then in 20 years' time, the baby boomers will be retired and taxes will probably have to go up anyway. However, they will not have to go up by anywhere near as much if we have saved this money and did not spend it on things we happened to have wanted now.

Deputy Kieran O'Donnell

The IFAC is decoupling the windfall corporation tax receipts from policy decisions. I am probably a bit more pragmatic. I do not like borrowing. These receipts gave us the opportunity last year to take once-off measures that we had to take. We were able to that from cash flow on a once-off basis rather than having to borrow. That is my view.

Professor Michael McMahon

I will put the point again. That could have been done anyway without having to borrow. For many years until now, Ireland has been able to borrow at zero interest rates. Borrowing or storing as cash are equivalent. I think the Deputy and I agree but the IFAC is simply arguing for the decoupling and for thinking that the policy is about choosing what is the right thing to do with the funds and to think there is an opportunity cost.

Deputy Kieran O'Donnell

If we did not have the windfall corporation tax receipts last year and we spent €3.9 billion on once-off measures, would we still have had a surplus? How would we have done it without either new taxes or borrowing?

Dr. Eddie Casey

At the end of October, we had nearly €30 billion in cash reserves sitting in an account. We could have used that without increasing borrowing. Now, should we have used that for temporary one-off measures? The answer is "No". That would have been a really bad idea. It would have been injecting a lot of stimulus into the economy at once and adding to the inflationary pressures.

Deputy Kieran O'Donnell

Would it not have given rise to a normal deficit if that had been done?

Mr. Sebastian Barnes

If we had not had that money, this is what we would get if we used the measure excluding corporation tax receipts. If we takes the measure that excludes these excess receipts, we are quite significantly in deficit this year. This year, we will not run a deficit because of the corporation tax revenue. It is helpful to look at other countries. Most other countries have done packages somewhat similar to Ireland's. They have had to borrow.

That was probably the right thing for them to do and that is what we would have had to do, if we had not had these receipts. We are in a lucky position in terms of cashflow as a result of these corporation tax receipts.

Deputy Pearse Doherty

I do not want to pick up on the point on deficit and borrowing but I will pick up on Deputy O'Donnell's point about the consistency of the Irish Fiscal Advisory Council's approach. The council was clear in its pre-budget statement that the Government's budgetary stance should strike an appropriate balance between creating space to protect the most vulnerable and the rising cost of living. The summer economic statement had core spending increases of 6.5% for next year, with core spending €4.9 billion higher than earlier plans and a larger than planned tax package. The Irish Fiscal Advisory Council went on to state that it was important the Government stick to its announced budgetary plans. When the budget came, there was €4.2 billion in extra money on the table and the council stated it was the right strategy. It is only fair to ask how seriously we can take what the Irish Fiscal Advisory Council sates before the budget, if after the budget it states an additional €4 billion is the right strategy.

Mr. Sebastian Barnes

I thank Deputy Pearse Doherty for the opportunity to clarify our remarks. These are good questions to ask. In respect of the permanent part, which is the much more important part because we will live with it forever, the increase was a little bigger than in the summer economic statement but the difference was marginal in economic terms. To us that was the same. The Government stuck to that, which was a difficult thing to do in the circumstances. There is always much more uncertainty about what the temporary measures should be, but it also matters less because it is a one-off measure. Those measures were larger, but we did not put any particular store in a specific number. It is always a question of how much is too much. What the Government did was okay. It did not do too much.

One other matter that is relevant to this conversation is that inflation is much higher this year and will be much higher next year than was forecast at the time. The circumstances changed quite a lot and despite that, the Government stuck to its plans.

Dr. Eddie Casey

I will come in on that. The discussion we had in the summer was along the lines of what the temporary spending should be. That is what the Deputy was pushing the Irish Fiscal Advisory Council on and rightly so. We did not want to put a figure on it because much of it depended on how targeted it would be. The worry was that 90% of the cost-of-living measures we saw in the first part of the year were untargeted. Fortunately, the temporary measures introduced in the budget and directed towards households were much more targeted. That was one factor that changed our judgment and assessment of this. Regarding the overall numbers, as it is a temporary amount that only impacts on one year, it was warranted to support households through the crisis. When we examined it, we saw that the inflationary impact was not that great relative to the permanent measures. These issues fed into the assessment that an appropriate balance was struck.

Deputy Pearse Doherty

There was quite a bit of discussion before the budget about what that package should be. If I were to look back on the record, which I do not have, I think the council suggested there was scope within what was already unspent, which was about €2 billion. As I said, the overall expenditure was double that increase. I will not dwell on it, but it is an issue. I agree there was scope for an additional package, but it was a pity the Irish Fiscal Advisory Council did not state at the time that it could be at this scale.

The second matter the witnesses touched on was inflation. Inflation for this year is projected to be 8.5% and next year is projected to be a little lower at 7%. On a cumulative basis, it will be approximately 16%. Social welfare in the same two years has increased by 8%. The Irish Fiscal Advisory Council made the point that the package should protect the most vulnerable. In the main, those on social welfare are vulnerable individuals. Does the council have any concern that those on fixed incomes will see a significant real cut in living standards as a result of the budget?

Mr. Sebastian Barnes

Ireland is in a difficult position as an importer of energy. When world energy and food prices go up, the country as a whole is made poorer. Then there is the question of how it is distributed across different households. That is a legitimate question for political choices. Our concern is to ensure the economy remains balanced within that context. We see a mixture of these unusually large increases in nominal terms in welfare rates, but, as we stated clearly in our report, they are less than the rate of inflation. On a permanent basis, if nothing else were to change and the forecasts were to be correct, people would ultimately face higher prices and potentially be worse off. However, it is important to look at the package as a whole. There are temporary measures. If we consider the forecast for 2023, some people on lower incomes will be fully compensated for inflation in 2023 but that does not fully make up for what was lost in 2022.

It is also important to say with respect to the balance between permanent and temporary measures, that we do not know what will happen to energy prices. If energy prices were to fall because the supply adjusts more quickly or demand falls more quickly because people find energy savings, prices might come down again. In some ways it is good that the Government has only locked-in part of the permanent increase and the temporary part could fall away. It is a delicate balancing act but the Government has managed to provide substantial support to these groups-----

Deputy Pearse Doherty

Will Mr. Barnes explain something to people who are perhaps watching the committee? We have had inflation of 8% this year. It is projected to be 7% next year and Mr. Barnes has argued that some of the temporary measures can fall away. He has acknowledged that, when we take the two year period, those on fixed incomes will have a lower living standard next year. That is accepted by the Irish Fiscal Advisory Council because the rises in core rates did not match inflation. Unless we have deflation, will it not be the case that they will be worse off every year?

Mr. Sebastian Barnes

Some financial markets indicate that in a few years gas prices will be far lower than they are today. There is a lot of uncertainty about this, but it may lead to much lower inflation or even deflation in the years ahead. We do not know, but it is a possibility that needs to be factored into policy.

Deputy Pearse Doherty

The only way that those on fixed incomes can maintain the living standards they had in 2021, is for deflation to happen which is not projected on anyone's cards for next year or the following year. Is that a fair assessment?

Mr. Sebastian Barnes

On current projections, people will have permanently lower real incomes at the end of this as a result of this shock. However, as I said, there is massive uncertainty about it and about the timespan it may happen in. Energy prices could come back down again and the Government is correct to think about that. The way it does that is by mixing permanent and temporary measures.

Deputy Pearse Doherty

With respect, even if energy prices come down, unless there is deflation those individuals will still be worse-off in 2024 as regards their living standards than they were in 2021. That is just a fact.

Professor Michael McMahon

We agree with that but the point being made is that there will be another budget in the future at which point, if the Government had compensated the full 15% or 16% and then there was deflation, it might be difficult to get that back. It would look like a permanent real income shift up. This allows scope. No one credibly believes that deflation will be of a scale to undo the full 8% so that is locked in permanently and there is scope to bring that up in the future. We do not build that into the forecast because it is not policy. That is a discussion for next year's budget but at that point we will have a better sense of whether 7% was the correct number or whether inflation in the next year, because of developments Mr. Barnes mentioned, came in at 1% or -2%. We also have to acknowledge that there could be a positive inflation shock or the number might be 8% or 9% next year if other untoward events happen. I think that is the point Mr. Barnes was making.

Deputy Pearse Doherty

Okay. I will move on due to time constraints. I understand that the Irish Fiscal Advisory Council is not supposed to discuss policy anyway. The witnesses discuss it a little more than their predecessors but that is perhaps for another day.

I will just talk about inflation and the council's assessment that the primary drivers of inflation are in the areas of energy and food. Obviously food is itself driven by energy and supply side factors. Have the witnesses any view of the appropriateness of the current monetary and interest rate policies when the key drivers of inflation, as they identified, are supply rather than demand driven and are likely temporary, as they suggested? How long is temporary given that those monetary policies are now driving up interest rates and causing pressure on households?

Professor Michael McMahon

I have very strong views, so I am very happy to offer them. I will make a few points. Interest rates in nominal terms have gone up, but in real terms remain very accommodative. The last years have seen very low real interest rates and they remain low, even with the increases. The second point I would emphasise is that you do not have to look very far - a look across the sea - to see that when policy institutions lose credibility, the interest rates people face will go up anyway. The Bank of England has raised interest rates 200 basis points, but mortgage rates have gone up by 450 basis points. They are the interest rates that really matter for households and businesses. Mortgage rates in Ireland have not gone up by that much in the period the European Central Bank, ECB, has been raising rates. Other interest rates have so I think there could be more. We will probably see still more increases from central banks because they are worried about their inflation fighting credibility. If that is lost the nominal interest rates people charge from banks are going to go up anyway, so the pain comes. However, later on in the process when inflation comes down, which we agree it will and the Deputy has emphasised its temporary nature, it will weaken the ability of the Central Bank to lower interest rates and provide stimulus when inflation is under control.

I will emphasise the two points. Monetary conditions remain very simulative relative to some pre-financial crisis period we had in this country. Second, it is also really important these institutions retain their credibility for fighting inflation. If they lose that then we pay costs without getting future benefits.

Deputy Pearse Doherty

People could be tuning in, and God help them if they are, who have seen their interest rates go up. All those who were told not to worry when their mortgage went to the vulture funds because they are regulated the same way, their interest rates today are 4.4% and 5%. They went up overnight. When the ECB announces its interest hike next month, it will go back up again for those individuals. Obviously trackers, which I accept were at a low level, are passed on straight away too. The core question is whether increasing interest rates is the appropriate policy if you are fighting inflation and are recognising that it is a result of energy and food, which is driven by supply and not demand.

Professor Michael McMahon

I do not mean to sound like the nasty Central Bank-type person but the choice between raising rates to look tough on inflation and cutting rates to help people is not really on the table for central banks right now. Cutting rates to help people would not actually feed through to them. The exchange rate impact of loosening or not tightening enough self-fuels inflation, which we know hurts everybody. It also makes the problem they subsequently have to deal with much bigger. This is because while these may be supply driven shocks, they are also typically imported. If you have a big depreciation of your currency, that immediately hits everybody's purchasing power. It builds more inflation into the system making the future job of the Central Bank more difficult. It is an unfair suggestion to say they could cut rates and help people. However, I think the Deputy is right to say that it is difficult-----

Deputy Pearse Doherty

I am not suggesting that they should cut rates. I am asking if the tool they are using to fight inflation is actually fighting inflation now, or is it just giving them the flexibility to deal with the issues when supply issues are dealt with?

Professor Michael McMahon

There is very little a central bank can do to get inflation straight back to target now without causing an extreme amount of pain. Like governments, they have to strike a difficult balance. There are also implications for financial stability. We do not want big defaults in housing or corporate industries. It is a difficult challenge but I am saying that at the moment I think they are striking an appropriate balance. However, it is not a nice time.

Deputy Pearse Doherty

I have two final questions. The witnesses talked about temporary measures, which are still even according to the budget 81%, or if businesses are excluded, 71%. I am not sure if there is any concern that there are still so many untargeted measures in the budget. The witnesses provided a really good chart in terms of health staffing and using the growth in the numbers who have reached ages over 65 over the last number of years. We also see that the minimum targets set out in the national service plan are almost 2,000 below targets, forgetting about the maximum, which are about 4,500 below targets. However, we can see that mental health is 390 below target and disability is 590 below target. Older people is 660 below target at the end of September. They say this will have implications for Sláintecare and service levels. Are they concerned by that?

Second, the growth of health staff has kept in line with the growth of over-65s, but when you look deeper as shown in this assessment, the biggest growth has happened in management and administration. Where we have seen growth lagging way behind demographic growth has been in the area of nurses, midwifery and some other sectors. I want to hear their comments on that.

Finally, I think this will be of interest to anybody concerned about the housing crisis. It is one of the big risks in the economy because it is no longer just a housing issue and is affecting many other parts of our society. The witnesses talked about how capital spending is falling way behind projections. They gave us a figure where we need to see an increase of €2.1 billion extra capital spending per year to return to the original share of capital spending in the economy consistent with what was outlined in the national development plan. The Irish Fiscal Advisory Council agreed at the time that it was an appropriate level of spending. I am wondering if, just as with the budget, it has changed its tune now? Is it going to give us 5% as a proportion of GNI*? We are falling behind significantly year on year in terms of capital spending. There may be some reasons for it stemming from the pandemic and other issues. However, it also made the point very clearly that because of cost increases we are getting less bang for our buck. There are a lot of challenges there and it was pointed out well in the report, so I am asking for comments on that. I thank the witnesses and I appreciate their work and their time at the committee.

Dr. Eddie Casey

I thank the Deputy. I will comment on the health staffing targets, which is an excellent box in the report by a colleague, Killian Carroll. He looked at targets for staff increases versus some of the outturns. You can see there are substantial shortfalls there. We see the increases broadly keep place with demographic trends and particularly the older age cohort where there are lot of demands for healthcare provision. However, as the Deputy said, many of the increases were in the areas of management and administration, whereas the front-line staff increases were not seeing the fastest growth. This seems at odds with Sláintecare where community services are really at the core of what it is trying to do, in trying to promote more provisional healthcare through a more community-centred approach. It looks like it could be difficult to achieve the Sláintecare commitments given that, and given that some of the targeted areas are falling short.

I think the broader point we are concerned about, which we have made a few times, is really planning around staffing where the planning in healthcare staffing is done in a really narrow timeframe, so you get plans issued maybe halfway through the year for how many staff are going to be needed for this year. That is quite useless from a planning point of view. You have already started the year and should be monitoring it at this point. It is more or less useless for monitoring. It is not really providing for adequate planning of what the healthcare system needs. What we really need to see are clear plans on a much longer horizon, looking five or ten years ahead to what the system is going to need and making realistic plans.

Deputy Pearse Doherty

I thank Dr. Casey.

Mr. Sebastian Barnes

On the housing side we obviously agree with the Deputy that this is a major issue socially and for the economy and for labour supply, costs and many things. We have seen shortfalls in capital spending, the amount of money that is being spent, but as the Deputy has rightly pointed out, we have also seen inflation in costs and that has come from two places. Some of that is domestic labour costs and associated things and that is something we had foreseen. As this is a very big ramp-up in investment spending, that will put pressure on supply. What we had not foreseen was the impact of global factors, such as shortages of things like timber coming out of the pandemic and higher energy prices feeding into cement and steel prices and so on. There are a lot of cost pressures and a big question is how that will be managed. Will the same investment be delivered over longer periods, which keeps it within the same budget in cash terms but means we get less at any given point in time or will the Government have to spend more? It is clear, for example, in an area like housing, the needs are very pressing and it is not an area where anyone would be thinking of deferring the spending. It is a big challenge. The level of investments we are going to in Ireland are historically very high. They are very high by EU comparison. I am not sure that we ever said that they are appropriate but we do know there is a big housing challenge and a lot of investment required around climate, so it is clear that investment will be very high. We can debate whether these are the exact numbers. One of the problems, particularly on the climate side, is that we do not really have a very clear plan from the Government as to how much investment is actually needed to manage those targets. It is important to articulate that much better but ultimately supply, particularly on the housing side, and the many bottlenecks there really do need to be addressed. It has been an issue in Ireland for such a long time.

Deputy Pearse Doherty

Is it appropriate or not to go up to €2.1 billion? Was the old national development plan, NDP, appropriate or is the underinvestment of more than €2 billion, at a time when we are getting less for every euro? Does the council have an assessment of the appropriate levels, given the challenges?

Mr. Sebastian Barnes

Not really. A couple of years back, when the level of public investment was very low, we were concerned that it was a level of investment that was unsustainable and that the economy needed more public investment than that. Now that we are ramping up, the speed at which to ramp up on these things are difficult judgements to make and we are not particularly well-placed to make them. It obviously is a concern when the Government has a plan which they think it is a good idea and they are not able to deliver on it. It raises questions about budgeting. One of the big questions we have had is that a lot of the housing investments are outside the Exchequer and is in other parts, where there is very little visibility about what is going on. That makes it difficult to forecast the public finances and it raises a lot of other questions about what is happening there.

Dr. Eddie Casey

One way we tend to talk about this is in terms of what it means for the economy as a whole and whether it will contribute to overheating, for example? We are probably less concerned about that now, given where we are. When we said it looked like a high level, we were really pointing to the concerns that, if we had not been in the middle of a crisis caused by other factors, it could have resulted in a situation where the economy was potentially recovering to a high level of activity and then we were pushing and injecting more stimulus to that circumstance, given that we were rising to a high level by international and historical standards for Ireland in terms of investment.

Deputy Pearse Doherty

Obviously, probably a decade of lost investment has to be factored in as well, so a lot of that type of investment is catch-up. From my recollection, when the national development plan was published and these numbers were factored into the multi-annual spending in terms of the budgets, the Irish Fiscal Advisory Council did not critique or criticise these figures. That is why I drew the view that the witnesses felt it was appropriate. Therefore, given the environment we are in now, what would the assessment be if the level of underspend was sustained? That was my question and I know the witnesses still have not answered it and I am not sure whether they are going to.

Mr. Sebastian Barnes

Again, we are economists so we tend to think about the appropriate range of things. There was a level of public investment, and we warned about this ten years ago, that was too low and clearly damaging to the economy. You could also go crazy on public investment in a way that would definitely not yield good value for money and would push up investment. Then there is the area in between. Where we are is the area in between and the national development plan is the Government's assessment of what it wants to do.

From our point of view, that did not raise particular red flags in terms of sustainability but we did warn that it could have inflationary consequences. As Dr. Casey said, from an overall macro perspective, the economy is going to have a bit less pressure than expected and less private demand, so we are a bit more comfortable with that but then the price pressures have been strong in that sector also. There is a range of policies that are appropriate and I think every country is going through this on the climate side. Future public investment will just have to be much higher than it has been in the past.

We have new technology and renewable technologies are much more capital intensive than what we have seen before. We need to redo our electricity grids, we need to change where we generate electricity and a lot of things, and even in terms of home efficiency, there are huge measures to be taken. How to ramp that historic increase in investment is a difficult question and we do not know the answer. The Government is probably finding its way also and it is not for us to assess whether they are doing that in a perfect way or not as we do not know. It is actually a very big change. We should not underestimate the scale of that increase in investment coming off the back of very low investment in Ireland.

Deputy Richard Boyd Barrett

I thank the Irish Fiscal Advisory Council, IFAC, for its contribution and reports, which are always interesting and informative. I would like to follow on from the last point because it seems to me that some to degree, all roads lead to the housing problem in this country. The witnesses mentioned the need to plan staffing for the health service, I could say the same about education and a number of other areas and it is often that very cohort of people, who have recently trained or qualified in these fields, who are the cohort I suspect are leaving this country at the moment, that is, the younger ones, precisely because it is too expensive to live here. They go to Australia or Canada or wherever, where accommodation is cheaper. We are facing a huge social crisis and it is causing a lot of suffering but it is a win-win if we solve it.

One thing strikes me, although maybe the witnesses think it is simplistic. I get that their basic point is if we keep core spending at a level that does not contribute to inflation, that is okay. One-off measures to mitigate the impact on the vulnerable are fine so they are happy enough with that but do not increase core spending to a level that could potentially lead to inflation. Maybe I have not thought it all through but certainly something we have argued is that it would be a good use of the windfall revenues the State has at its disposal to massively increase its stock of housing. It could do so both through construction and through direct purchase of stock, because every single addition to the State's housing stock in terms of public housing or cost-rental affordable housing also reduces current expenditure on the other side. The State gets an asset which is revenue-generating and it reduces proportionately the amount of money it has to fork out each year in current expenditure for the rental accommodation scheme, RAS, housing assistance payment, HAP, and leasing arrangements. It also means the State will have a bit more control over the cost of housing. In other words, it can make more cheap housing available, which obviously benefits the groups we have just talked about, who might not leave if they have affordable housing here. Would that be a reasonable way to spend the windfall revenues? It would be much more ambitious, far-reaching expenditure in the here and now to dramatically expand the public housing stock through construction and through the purchase of stock particularly where there is a lot of talk about landlords exiting the market. The point I am making is that if the landlords decide they want to exit for whatever reason, the property does not have to exit if the State purchases it.

From a fiscal point of view, would that be a prudent use of windfall revenues that are available that would not contribute to the concerns the council has about inflation, increasing indebtedness or whatever? It would actually help reduce those things because we would be less reliant on current expenditure to make up for the shortfall we have in public housing. Obviously, the members of the council do not have to endorse my policy.

Mr. Sebastian Barnes

It is a very interesting and complex question. As we were arguing with Deputy O'Donnell earlier, that kind of proposition should stand on its own merits and not necessarily be related to the windfall revenue. Whether we finance it with windfall revenue or something else does not really matter. The question is whether that policy makes sense with respect to costs, benefits and its sustainability. There are various modes of providing public supports for housing and we are not experts on them but there should not be any particular prejudices about that. It should be based on what is the most cost-effective way of doing it. Much more money has gone into housing supports over recent years to help people with their rents as rents have gone up. There is a question about whether that is the best mode of delivery for that support or if there is a better mode. A related question in any such scheme is whether the State is taking on more responsibility for more people, that is, whether it is subsidising, in some ways, a wider range of people than might be the case with current supports. Any scheme like that needs to be looked at for costs and benefits. We have made no assessment of that and we are not the right the people to.

Underlying that is the real problem that there is just a shortage of accommodation overall. More accommodation needs to be built. The difficulty is that there are many supply constraints. Even in the best country in the world, we know that is not a problem that can be solved overnight. Even if we undid a lot of the bottlenecks it takes time to build a house and it needs some resources that are specialised. It is not something we can just buy from abroad, in a way. If we want more wind farms we can just buy them from another country or at least buy many of the components. We have to building housing here with our own resources, even if we are importing many of them too. Thus, that is a real constraint. However, there are a lot of additional constraints, caused by various factors, in the context of supply in that industry. That is a real constraint in the context of solving the problem. If more progress could be made on solving that, it would be beneficial to the economy. It would also makes housing less costly, which would also be beneficial to the public finances. As the Deputy said, it is a win-win, but it is hard to achieve that fundamental increase in the number of properties, which is what is needed.

Deputy Richard Boyd Barrett

Unlike Deputy O'Donnell, I am not asking the council to proactively support the expenditure of windfall revenues on those things. I asked the question in order to find out whether the council members object to or thought it was fiscally reckless, as against their thinking it reckless to dramatically increase core expenditure we do not have the revenues to cover because some of those windfall revenues may not be reliable in the future. That is the council's essential argument, is it not?

Mr. Sebastian Barnes

As I said, there is no a priori reason to be against it; it depends critically on the details of the costs and the benefits. This is also where good planning comes into it. These are very long-term things. If the State was to take on assets that have long-term yields, the costs and benefits of that would need to be weighed and put in a longer term context. That is something one could think about.

Deputy Richard Boyd Barrett

Logically, therefore, if some of the other problems we have in that regard relate to energy and timber costs, as we have discovered, then investment in trees might not be a bad idea either.

Professor Michael McMahon

Just to point out, particularly when any state invests in physical assets, those often come with maintenance costs that become part of core spending and so it would be a balancing act. As Mr. Barnes is saying, with details we could work out exactly where the costs would be and what the benefits would be. The Deputy is right that building modern, very energy-efficient housing also has knock-on benefits for whoever is living in those houses and the energy costs they face. Those costs are obviously very salient now but longer term, we know a climate adjustment must be done. That is the type of thing somebody should be thinking about but there is not a proposal in front of us for a spec of housing and a cost in ongoing maintenance, which is what we need to be able to cost these things and think about them.

Deputy Richard Boyd Barrett

Yes, but it is okay in principle so long as the ongoing costs are not increasing, and they could potentially decrease. Another thing suggested to us as a simple measure, which would be one-off and could be done quite cheaply, is to insulate for free everybody's attics. It would be basic insulation. A major amount of energy is being lost just through people's roofs. We do not have to do deep retrofits to make a very big impact but we would dramatically reduce both people's bills and the overall use of energy. That would be quite cheap, relatively speaking, to do.

Professor Michael McMahon

I will add one thing on that. A little like the discussion we had with Deputy Doherty about the housing market and investments in that, in some of these areas, especially now as energy costs have gone up, many countries are trying to do this and so there are supply constraints emerging on, for instance, the insulation and the highest-quality materials we need to in order to do it. There is also the number of qualified people in this country who could roll out a widespread package like that. In theory, however, these are sensible investments from a long-term point of view.

Deputy Richard Boyd Barrett

Yes. Mr. Barnes was saying we should not get into a wage-price spiral and to be careful about raising incomes to match inflation because then we could potentially be locking in expenditure that will fuel inflation and some of the price increases may be temporary and things come back down and so and so forth. Are council members worried about the other scenario, which is that if inflation stays at the sort of levels it is at now or even worsens, if it is greater than any compensatory measures like increases in income the Government provides through increases in wages, social welfare payments, pensions or whatever, that creates a danger of recession? Is that not equally problematic? Mr. Barnes indicated that he is slightly worried about consumer demand and so on. Is that not an equally big danger? Next year, as he acknowledged, people's incomes are going to be less in real terms. They are going to be losing out and surely that will have a knock-on impact on demand, that is, the amount of spending in the economy?

Mr. Sebastian Barnes

If we take the baseline scenario from the budget forecast, it shows aggregate consumption by all households, that is, the volume of stuff people consume, as basically flat from the end of this year through next year. It is not recessionary territory because it is not contracting; it is just at the limit of it. That is the impact of these higher energy prices. Eventually as people get used to it, as the prices come down a bit, we would expect the economy to recover. It will be a bad year next year. In the medium term, however, under those hypotheses, we would expect things to get better. One important thing is income will always be lower than it would have been had energy prices not increased because we are worse off. I hope energy prices will end up lower than they are today but they will be higher than they were before. There is a permanent loss of income there which, unfortunately, we must live with.

What I was trying to highlight in the opening statement was that there are risks that could be worse. That could be because the situation in Ukraine may become much more complicated, because the energy situation becomes much more complicated than we think or because the ECB tightening may end up either having bigger effects than we anticipate or that more tightening that we anticipate may be required.

There are many factors that could tip us into a much weaker economy. We would have to assess at that point what the appropriate response would be. There are so many scenarios, it is hard to know. The scenario that we currently have, based on these reasonable forecast assumptions, is that next year will be bad. People's real incomes will suffer. In terms of real wages, it will take us back to somewhere like 2019 levels, so it is a setback, but for many people before that they were experiencing growing real wages. Ireland is in a better position than countries where real wages have not gone up for a long time. Obviously, that is not true of everyone in the country, but it is true on average. It is a difficult scenario, and it is a consequence of Russia's war on Ukraine.

Deputy Richard Boyd Barrett

It could potentially offer an opportunity to redistribute a little as well, could it not? One of the facts, surprisingly, that people are acknowledging now is that excess profits are being made in certain sectors of the economy, whereas other people are losing out because of rising energy costs. The latter is benefiting energy companies. It is now broadly accepted as an idea that we might even consider the wild left-wing idea of putting more taxes on the profits of these corporations to channel it back to those who are losing out. Such policies would not be fiscally irresponsible in the current situation. One might argue that guaranteeing that those who are less well-off on low and modest incomes do not see losses in real income is money well spent because, by and large, it goes back into the economy whereas excess super profits or a big growth in savings or wealth for the very, very rich do not necessarily feed back into the economy. Is that a reasonable proposition?

Mr. Sebastian Barnes

That is absolutely right. There is a social reason and an economic reason to protect people on lower incomes. One of the points that is striking about the budget is the increase in core spending. It is almost entirely dedicated to raising welfare payments, pensions and public sector pay. There is really very little in the budget, apart from that, because the overwhelming priority is to protect those people. In a normal year, we would expect the Government to shift spending on different new projects, but this year that has been the focus, which is understandable given what a priority it is.

Deputy Patricia Ryan

I thank the witnesses. I want to start by asking about the most recent survey by the Central Statistics Office. Its focus was income and living conditions. It suggests that the number of people in Ireland suffering enforced deprivation has risen sharply from 13.8% last year to 17.1% in 2022. What action does Mr. Barnes feel is necessary to negate the effects of rising energy and food costs?

Mr. Sebastian Barnes

It is not really our role to design policies to help people. We recognise that the fundamental issue is that a lot of people are facing very difficult situations, in particular with heating as we go into the winter, given the cold weather. Our advice is focused on making sure that the support that is provided is sustainable. That is the advice that we gave on the budget. We think the Government struck an appropriate balance. Essentially, all of the additional cash resources in the budget were dedicated to providing a range of supports. In terms of core spending, the Government also had a very large package of temporary measures. If we look at the difference between 2023 and 2022, we will see that work by the ESRI suggests that households have largely been compensated for the inflation that is expected. They are still worse off than they were a year ago because it does not fully compensate for the inflation that we have seen this year. There obviously has been a very considerable effort in that regard. We could argue about whether it is too much or too little or if it could have been targeted or done differently, but that is not something the council looks at. In terms of the overall allocation of resources and its sustainability, and not leading to a second round of inflation, which would have made things even worse, this seems like the appropriate balance to us.

Deputy Patricia Ryan

If I could follow on from that, in the context of the budget, we talked about permanent measures that are there to benefit middle and high earners, more so than the temporary measures which were primarily targeted at low-income households. Does Mr. Barnes think we will need more supports for lower earners in the coming months? If so, where does he feel they should be targeted, or can he discuss that?

Mr. Sebastian Barnes

If we look at the chart that Deputy Ryan might be referring to, based on the ESRI research, we can see that more support went to the lower income people. The composition is a bit different. The way it appears in that figure is a little complicated because it is comparing with a different place, which I will not go into. The negative blue bars indicate that the permanent measures did not fully compensate people. It does not reflect the fact that welfare rates did go up quite substantially. There is a very particular way of reading that chart.

Targeting has been a concern in terms of the balance between the overall amount of support we can provide without leading to too much inflation. The better targeted a measure is, the more we can help people without triggering more inflation. That is something we have been looking at quite closely. It is also difficult to do. Focusing on social welfare is a good way of targeting it, but there are people who do not qualify for social welfare who are still on relatively low incomes, who have limited savings and who are under a lot of pressure. That is why some of these measures are not targeted, but perhaps they are helping those wider groups. Perhaps the State should have better ways of being able to reach a wider range of people, but we do not know exactly what options it had. Probably some mixture of the two is okay, but keeping targeting, which did improve a bit with the budget, is a good thing. The design of quite a lot of the supports in Ireland compared with other countries has been relatively good. At least with supports that provide the same amount to everyone, it is better than something that is related to the amount we spend, because the people who spend the most in cash terms are the wealthier people. That is what we really want to avoid, as it does not seem like a good use of resources at this time.

Deputy Patricia Ryan

What is the best way to mitigate against the depletion of the rainy day fund due to inflation? Would it make more sense to spend it on more long-term projects?

Mr. Sebastian Barnes

The rainy day fund is very good. It is something the Government has called on for a number of years. It should use the fund to avoid excess dependence on corporation tax.

Chairman

I do not think we are meant to call it the rainy day fund any more. I think it is meant to be the resilience fund.

Mr. Sebastian Barnes

I am sorry. You were right to correct me, Chair: It is the national reserve fund, but we all know what I mean.

Chairman

We all know what Mr. Barnes means. I am just being pedantic.

Mr. Sebastian Barnes

Thank you for correcting me, Chair.

Deputy Patricia Ryan

It is my fault.

Mr. Sebastian Barnes

The national reserve fund is something we have been seeking for a long time. Since we first made the call, the context has changed a bit because the Government has taken other measures to try to limit the reliance on excess corporation tax receipts, including the 5% spending rule, which means that it will increase spending by 5% and not whatever corporation tax has increased by. There have been a number of other instruments. In truth, the amount of money coming in is dramatically larger than was the case a couple of years ago. The nature of the problem has changed because the size has changed. Now, there is a big question about what we want to do with this amount of money that is coming in. The first thought might be to spend it now, which is something we hear, but it is a lot of money that is not going to be there forever, so we should think about what is the best thing to do with it. One of our concerns is that we have a large amount of money coming in now, and we know that in about 20 years' time, there will be a massive cost associated with paying pensions for the baby boomers. If we put those two things together, we might think that it is a good idea to save that money, as some other countries have done. Norway has done something similar with the oil money. It can raise a return and sometimes it can be used for social purposes if that has a return as well, and then it will be available at a later date. People might think that is a better use of that money than just spending it without really thinking about it too much. There are other things that we could do with it too.

It is important to take that money out of the economy. If we spend it domestically now, it will add to inflationary pressures. One rule of the Norwegian fund is that it is not allowed to invest any money in Norway, which might seem paradoxical, but it is because they do not want to put that money back into their economy. That can be very difficult for politicians because they want to see some benefit from it, but it really needs to be invested abroad and then we can bring it back when we need it to pay for pensions.

Deputy Patricia Ryan

I will finish with this because we are against the clock. The council previously recommended that multi-annual budgeting would be of significant benefit in the context of medium-term planning. Are there any examples of best practice in that regard in other countries?

Mr. Sebastian Barnes

The country with the best practice on any budgeting question is always the Netherlands. It has a particular system, which may not be fully transferable to here. What we have now is a 5% target, which can be carried forward, and if the Government follows that, it will show how much it spends in total, but we cannot see how it plans to spend it between different things. It is fine that the Government keeps back some money and says that because it does not know exactly what the needs are going to be, it is going to keep this back as a kind of kitty, but saying that, for example, health is going to cost more because of staffing, that we know we are going to need to spend more on housing supports or that there is a discussion about spending more on defence, and starting to put those things into the budget, will help it. Moreover, it will lead to better management because rather than Departments spending a lot of time trying to get as much money as they can in October, they should be thinking about how much money they have and how they can use it in the best possible way.

In the report, we mention strengthening the spending review process. There is a spending review process in Ireland and it produces lots of interesting research, which economists such as me find interesting to read. In countries that carry out good spending review processes, they look at whether the government is getting value for money, whether it is doing the correct things and whether it could provide the same things in a more cost-effective way. We are not doing that in Ireland. That just adds to the pressure because there are potentially savings that could be made and, ultimately, better public services could be provided.

Chairman

I might ask my questions now. Helpfully, Mr. Barnes referred to the 5% spending rule. I was interested in one paragraph in the council's opening statement, which I hope we can discuss in more detail. It states:

This assumes that the Government sticks to its 5% spending rule as planned. However, we estimate that current spending increases in 2024 and 2025 under those plans would not fully accommodate demographic or price pressures, falling short by €800 million per year on average. This implies that there is no space for additional spending without finding offsetting resources elsewhere.

I have a number of questions about that. What does €800 million relate to in terms of the 5%? What percentage of a shortfall are we talking about there? I am intrigued by the 5% rule insofar as we put it in place and then immediately broke it, but I get the impression from the opening statement that the witnesses are very much in favour of that rule. I would like to talk a little more about how we would make that more binding or whether it is a legislative mechanism. I refer not to the policy but to the mechanism by which we would make it a more binding rule. The final sentence of the paragraph relates to offsetting resources. I am not going to use the word "austerity", but are we talking there about reducing spending to hit the 5%? What does that mean?

Mr. Sebastian Barnes

I might ask Dr. Casey to comment in a moment. We take the 5% spending rule and that gives a maximum sum in billions of euro that can be spent in each of these years. We then carry out what we call the standstill exercise whereby we say what the figure will be if the Government continues to provide welfare payments of similar levels in real terms and allowing for inflation. What is making the difference here is that aging costs are kicking in. It is not on a massive scale, as will be the case in ten or 15 years, but it is weighing on the public finances in a material way each year. We have to find much more money for pensions than we did in the previous year.

If we compare those two figures, we end up with a shortfall. If we spent the 5% rule and looked at how much it cost to stand still, it would be more costly to stand still by €800 million. Dr. Casey might give some context on how much additional spending there could be per year and how it fits in.

Dr. Eddie Casey

If we were to introduce the full €800 million to catch up with those pressures, we would be basically 1% above the 5% spending.

Chairman

We would be talking about a 6% rule.

Dr. Eddie Casey

Exactly, but we have this broader argument about how the spending rule should work, and one of the points we make is that it should be thought of as a net spending rule. If we introduced offsetting tax increases to fund it, we could introduce an €800 million tax-raising measure that would bring us back to a 5% increase.

Chairman

Okay. I want to move presently to the council's paper on the Commission on Taxation and Welfare.

Mr. Sebastian Barnes

I might just add to what Dr. Casey said. In a typical year, in cash terms, there would probably be about €4 billion under the spending rule, and the €800 million is the part that is missing. The figure €800 million is not massive within the wider scheme of public spending, but it is not nothing either and, obviously, it accumulates over the two years. The question is what to do about it. To meet the spending rule, we could either not stand still and decide we would allow pensions to be less generous by not adjusting for inflation or taking various steps of that nature, or we should be able, in principle, to offset tax measures or do less by not spending money on some other project we have. As Dr. Casey said, one floor in the existing framework is that there is no offset for tax measures, so we should be able to say we will spend 6% this year while finding the 1% from higher taxes. This speaks to the wider question as to whether it would be helpful to put the 5% spending rule on some kind of legislative footing, partly to make it more credible, because at the moment it appears in the Department of Finance documents to some extent but it is not an official measure that has come before the Oireachtas and that people have had an opportunity to buy into and discuss democratically. Furthermore, if we were to put some of these details, such as the tax part and various other details relating to how it is specified, into law, we would have to write down what it says.

Chairman

Is that possible? I presume this operates like indexation insofar as it is not binding but rather is a benchmark. Is that the way Mr. Barnes envisages it in legislation?

Mr. Sebastian Barnes

I think so. Obviously, in a parliamentary system such as the Oireachtas, we could always pass another law that would outlaw it, but it would be more costly because the Government would have to put up its hand and say it was passing a law to break the spending law. The idea is that we would specify these kinds of details and would be more committed to it because we would have to write it down. When the budget was being passed, it would have to comply with that requirement and that is where it would become more binding.

There were two points I wanted to make for context. The Chair mentioned one but not the other. She pointed out that the rule was broken quickly. Over recent years, we have seen quite a lot of initiatives from the Government regarding different fiscal rules and there have been two or three debt rules in the past five years that came and went, but we see here a real commitment to it that we have not seen previously. Unfortunately, this was the worst possible year in some ways to introduce a debt rule, when the rate of inflation was so high. Despite that, however, it has helped the Government guide its policies at a time when there was a kind of economic storm that could have led to much higher permanent increases and so on without the Government thinking about that. Instead, it had a benchmark and, sensibly, it would have been very disruptive to stick to the 5%, but it stuck quite closely to it. This is kind of the direction the EU rules, as proposed by the Commission, are going in. There is also good reason to think this is a direction in which it would make sense for Ireland to go because it is the general direction in which we are going to have go in any event.

Dr. Eddie Casey

Briefly, the Chair asked whether we could do this, and we have done it. We have put in place the EU fiscal rules in Irish constitutional law, so we have our own fiscal rule domestically.

Chairman

That is interesting. I think of Irish Governments as particularly resistant to anything that constrains their political power in terms of budgets, but that is a good point. Staying with that issue the council's submission refers to the Government’s forecasting three years ahead. Obviously, this committee has been tasked with that medium-term budgeting of three to five years ahead. I take the point, and it is relevant, that these have been the worst few years in a way. We have gone from Covid to the war in Ukraine and a cost-of-living crisis, so in one way it is the worst time to talk about it, while also being probably the best time to talk about it because there is significant disruption. Now is the time to make rules for when there is not so much disruption.

From an economic and budgetary oversight point of view, not in terms of policy but in terms of what would make the budgetary cycle more legible to people like the witnesses and groups like theirs, what would they like to see in medium- to long-term budgetary planning? What would make the decision-making more legible and easier to follow?

Mr. Sebastian Barnes

There are two main parts and many other parts. The first of the two main things to focus on is the shortness of the forecast horizon, particularly because of the crisis. The economists tend to think about the short run and then we go to some normal path of the economy. The scale of these shocks is so big that within a three-year window we are not back at the normal path so we cannot really see what the Government thinks the long term is. Part of our role is to assess its forecasts but they are not there so we cannot assess them. Sometimes we have seen issues, even in the short run. It is hard to understand this because it is like if you leave a film after half an hour. You do not know what the ending is.

Chairman

To be clear, is Mr. Barnes saying he cannot see a plan in place or, not to be too cynical, is it possible that there is only a three-year plan in place?

Mr. Sebastian Barnes

There are two aspects. The forecasting aspect is through the economic and budgetary part. Regarding the budgetary part, with the 5% spending rule and things like existing level of service, in principle we can easily draw those forecasts to the medium term. They can easily get blown off track by Covid or whatever but we can in principle do that and it is not being done. That would help us see the impact of some things. For example, there is a big question about the impact auto-enrolment will have when it comes in. We cannot see that because it is towards the end of the window the Government is looking at.

The other important thing is the planning part. This is not about normal everyday forecasting. It is that we have massive challenges around ageing and climate. Ageing, at least, we understand quite well. It is more a political issue about addressing it. Regarding climate, all countries are behind in their understanding of this enormous economic, social and environmental transition we are going through. In Ireland, we are behind other countries and a long way behind where we need to be. We need to see a clear plan. We now have sectoral targets but we need to know what policies the Government thinks are needed to achieve those targets, how much it will cost, who will pay for it, what the tax and spending implications are. We do not have that kind of information. The planning part, which is a bit different from forecasting, would ultimately inform the forecasting but is missing. In other areas, like Sláintecare, there is bit change going on.

Chairman

I want to come to Sláintecare in a minute.

Mr. Sebastian Barnes

We have very little information about what has happened and what the Government is planning. We need to see how all these things fit together and that is where the forecast would bring it together.

Professor Michael McMahon

I will give an example of how we would have answered Deputy Doherty earlier on the €2 billion shortfall on capital plans. If we had a ten-year forecast-----

Chairman

Of how you were going to make up that €2 billion.

Professor Michael McMahon

-----we could see if it was coming back. If it was not, we could ask why, interrogate those numbers and ask what it means. Maybe it is a sensible thing at a time of cost pressures to not spend €2 billion and get very little for it, but to defer it to a point where you get more. We cannot answer that question with any certainty - and this is not a policy question but is about what is in the numbers - because we have forecasts and are still unwinding big shocks on the economy. That is a tangible case in which we are hamstrung in our ability to help members decide if this is a good or bad thing.

Chairman

IFAC cannot see the steps along the pathway to get to where we want to be. Mr. Barnes mentioned the spending review process, which could be more in-depth. Does that interact with the planning aspect or is it purely retrospective?

Mr. Sebastian Barnes

There is a set of things that are connected to each other. I do not think it is particularly related to planning. That is more about identifying areas. We know there will be big pressures on spending. The Tax and Welfare Commission has had a thorough look at the tax side and what options might be there. We need something symmetric on the spending side to see what options might be there. Then people can take a view as to the balance they want. A silent pressure is coming from everyday spending where money is being spent without value for money being considered in a rigorous way.

Chairman

Even the methodology by which we look for value for money is problematic, particularly regarding climate when it comes to things like time horizons. Who would do that?

Mr. Sebastian Barnes

There are different models of doing spending reviews. Often they are done by civil servants but it is a separate process with its own governance-----

Chairman

Is it annualised or ongoing?

Mr. Sebastian Barnes

There are different examples. The UK model is to do a really big one every couple of years. Other countries, over a five-year cycle, will look over all the major aspects. A lesson from these things is that a lot depends on the political commitment behind it. Some UK ones have been very good and rigorous; some have not reached that standard.

Chairman

Fair enough. I sit on the health committee and am concerned about Sláintecare. Mr. Barnes brought up the legibility of what is happening. We consistently ask the HSE - and this relates to the issue around staffing and what is really happening - what functions are devolved and being devolved and what impact that has on budgets. What is the witnesses' understanding of the functions of the HSE? We have done something as simple as asking the HSE to list its functions and then to list out what was has been devolved. We have not been successful in achieving even that simple list. Is the devolution of powers in the HSE to achieve Sláintecare as opaque to IFAC as to me?

Mr. Sebastian Barnes

The whole health system is opaque to us. It is a major part of public spending and one that has a poor record in terms of budget overruns. We have seen that again. It is hard to obtain information in a timely way or in detail. I would not pick out any aspect as being opaque because our big concern is that we cannot monitor a big part of the public finances until we find out what the number has been for that year. Like, I imagine, the committee, we are trying to understand the underlying processes and drivers. Sláintecare is one but other pressures are coming from costs in different parts of the system. There is incredibly limited information on that and it is a big problem.

Chairman

It is very concerning.

Dr. Eddie Casey

We looked at this in an analytical note before and the questions we have of Sláintecare are huge and wide-ranging. We do not the progress to date in terms of what has been spent on it. We do not know what a proper costing of implementing Sláintecare looks like because it has not been updated.

Chairman

To be clear, IFAC does not know what has been spent to date or the cost of full implementation. Keep going.

Dr. Eddie Casey

We do not really know what will be spent beyond one year

Chairman

We only have one year into the future of what they will spend.

Dr. Eddie Casey

Yes, and I think even that has narrowed. I am not sure if we know next year, which is unfortunate. We do not know some of the basics around Sláintecare.

Chairman

IFAC is following the money. We are following some of the service programming. I can see regional teams are being set up but no serious devolution is happening. You would expect money to follow devolution.

Dr. Eddie Casey

Yes.

Chairman

I will not keep going on that issue because the witnesses have answered that it is as opaque to them as to me.

This is slightly outside the scope of today's session but since it was provided I will go to paper on the Commission on Taxation and Welfare. It is relevant to our discussion of medium-term planning. I enjoyed the paper's bottom-up and top-down approach. That is helpful to us. We have had sessions in recent weeks talking to stakeholders that various chapters relate to. Unsurprisingly, most stakeholders resist the idea of tax increases in their areas. We asked them, and this reminded me of IFAC's top-down approach, if they accepted the principle that we need increased revenue from taxes in this country. Even that was resisted. I will start with a boring question, which is one we talk about a lot in the committee. It concerns the paper's introduction and the issues around data.

For example, the witnesses assert that it is difficult to understand what the recommendations mean and what impact they would have because so much information is lacking - not from the commission, but in terms of information on taxes forgone, pensions, people's private residences and assets after their death, and an assessment of the basic building blocks. Will Dr. Casey discuss this point? The witnesses have been clear, in that we do not know how much income implementing these recommendations would generate for the State. Can we even start to have this conversation without those data?

Dr. Eddie Casey

I do not believe so. A cornerstone of deciding how to address the major challenges we are facing, for example, ageing costs and climate targets, is consideration of what options we have to deal with such pressures. Unless we have a good sense of all the taxes we are forgoing by not taxing areas that many countries tax and the potential revenue we are consequently missing out on, we will not be able to say how we might respond. If we start considering these questions immediately, we could put options on the table and have a clear and honest discussion about how we might tackle issues and what our preferences were. Until we have those clear estimates, though, we cannot do so.

Professor Michael McMahon

I will add something. Legislators often ask where they should look to find best practice. This is not the Netherlands, but most of the Scandinavian countries have detailed administrative data, which allow any authority or researcher to calculate with a degree of precision that would be a dream for us the number of people who, in their wills, leave X million euro of excess above some threshold and, therefore, that Y is the tax that could be raised. We use a back-of-the-envelope calculation, and it is an approximate, but there are countries that have administrative data that are carefully managed and linked.

Chairman

The witnesses are not the experts on this, but would that require a large investment in ICT?

Professor Michael McMahon

I do not know the extent to which these elements can be joined up.

Chairman

Do we have the data and just not make them accessible or do we not collate them?

Professor Michael McMahon

In many cases, the data are available. From an ICT point of view, the challenge is that computer systems that have the same data with perhaps the same linking identifier numbers attached sometimes cannot talk to one another and it is costly to link them. I do not know the extent of the challenge in Ireland, although I know it in other places.

Chairman

Speaking as a member of the Joint Committee on Health, its extent is considerable.

According to the next paragraph in the witnesses' submission, the Government should take up the commission's work and do a deep dive on it. The Government should take the main policy options set out by the commission and do ready reckoners on them. Obviously, the Government has access to that information. Since the paper's publication, the Government and the commission have had a chequered relationship. These commissions do not happen that often, though. I presume it would be useful for the IFAC's work if the Government did a deep dive on the recommendations.

Mr. Sebastian Barnes

Useful for our work, but in an indirect way. Our concern is fiscal sustainability. Different combinations of tax and spending are possible. The concern for us is that people are reluctant to raise taxes even though they want better services, and they are probably going to have to spend more anyway because of ageing and climate issues. This leads to a mismatch where people take risks with the public finances because they cannot increase revenue. As Dr. Casey said, it is important to have a good set of options on the table. We have taken the Commission on Taxation and Welfare's excellent work and done bottom-up and top-down exercises. In our paper, we recognise that these exercises were rough and ready based on the information we had. This is a technical job. The Government should set aside resources to provide a proper assessment of the data that it has access to and we do not. This would allow better options to be put on the table, the council would benefit because a better conversation on what could be done could be held, and Ireland would not get into a position where our tax base was too small relative to the level of spending we wanted, leading to fiscal trouble.

Chairman

I take the witnesses' point that not only is it difficult to understand what effects on revenue these taxes or changes in welfare would have, but also how they would interact with one another. In the course of our previous sessions and this meeting, we have discussed EU norms and what other countries are doing. It seems that, like every country, Ireland's tax system does better in some areas than in others and applies higher taxes here and lower ones there. The commission has recommended that we move more in line with EU norms in respect of some areas. From the helpful table supplied by the witnesses, we know that land, other property and wealth would be large income generators. We have good statistics in terms of income equality after tax, in that the gap between rich and poor is somewhat equalised. Do the witnesses have a sense that some of the measures recommended by the commission would negatively impact that balance or that, given how they are related to capital and wealth, a change is unlikely? They are less governed by income.

Dr. Eddie Casey

To fair to the commission, it carefully considered what the impact would be in terms of inequality, the progressiveness of the tax and welfare systems and how these elements interacted. More than setting out a clear set of estimates of how much tax would be raised from its proposals, the commission wanted to set out a strategy and then let future Governments decide how much revenue they needed to generate using this strategy. The commission tried to design a strategy that was broadly growth friendly, where property and other things that did not move would be taxed. This would be more progressive and we could be reasonably assured that it would not be too damaging to growth and equality.

Mr. Sebastian Barnes

The commission placed a great deal of emphasis on the issue of inequality. This is one of the reasons there is such a focus on capital taxes, given that wealthier people have a disproportionate share of the wealth. Property taxes affect a broad range of people. People at the bottom of income distribution would usually not be affected much, but a lot of the middle class would be. There are complex issues. It depends on the overall package. For other reasons, some taxes could be changed in a way that might be harmful to equality. However, other measures could be taken on the other side. For example, some of the changes on the welfare side are designed to do that.

The Government should produce more detailed empirical analyses of proposals using the data it has. The analyses should not examine just how much money can be made, but also what their economic and equality impacts will be.

Chairman

How to calibrate them to ensure-----

Mr. Sebastian Barnes

This is important for the sustainability of the public finances. If a large share of the population believes that a tax system is unfair, and they are right, then it will be difficult to raise taxes. It just has to-----

Chairman

I am sorry, but we need to conclude. Would Mr. Barnes expect the Department of Finance to undertake that work?

Mr. Sebastian Barnes

I do not believe that we have a clear idea on that front.

Dr. Eddie Casey

No. Since we-----

Chairman

It would be more correct.

Dr. Eddie Casey

It touches on everything.

Chairman

It does, but is this work more for the Department of Finance than for the Department of Public Expenditure and Reform?

Dr. Eddie Casey

I do not know. It is on the tax side, but there is also a great deal on the welfare side, so the Department of Social Protection would be involved. Revenue would be involved because it has some of the best insights into what is available and would not necessarily give all of the information away if the work was to be confidential. There would be a role for the Department of Public Expenditure and Reform as well. It would take a cross-government approach.

Chairman

An interdepartmental body would have to take it up.

Dr. Eddie Casey

Yes.

Chairman

As there are no further questions, it falls to me to thank the witnesses for their time. I am always conscious when people are in here late at night. As per usual, the witnesses have been a mine of information.

The select committee adjourned at 7.30 p.m. sine die.