Richard Bruton
Question:1 Deputy Richard Bruton asked the Minister for Finance his assessment of whether there is a flow of credit to Irish business; and his strategy to deal with this problem. [45544/08]
Priority Questions.
Availability of Credit.
Nobody wants viable businesses to fail because banks will not lend them money. At my meetings with representatives of the various financial institutions over recent weeks, I asked the institutions covered by the guarantee scheme to consider the contributions they can make to the economy by offering appropriate credit initiatives to small and medium-sized businesses and others. Therefore, I welcome the fact that certain institutions have announced initiatives in this regard.
The Deputy may be interested to know that I recently met the vice-president of the European Investment Bank, Mr. Plutarchos Sakellaris. The bank recently announced that it intends to provide additional funding through its lending facility to small and medium-sized enterprises in the EU. Mr. Sakellaris confirmed that the European Investment Bank has been in discussions with a number of Irish financial institutions about participating in this facility for small and medium-sized enterprises. The bank hopes that agreement on providing such loan facilities can be finalised as soon as possible. I have urged the Irish banks to utilise this facility to the maximum extent possible, with a view to making additional funding available to small and medium-sized enterprises quickly. I am pleased that a number of banks have announced their intention to do so.
Along with my colleague, the Tánaiste and Minister for Enterprise, Trade and Employment, I have been in regular contact with the banks to discuss the flow of lending to small businesses. The Central Bank's monthly statistics for October showed that lending to the Irish economy was essentially flat in that month. While this is a matter of concern, we should be cautious about drawing strong conclusions from data pertaining to a single month. Forfás and Enterprise Ireland are surveying 200 businesses, which are supported by county enterprise boards and Enterprise Ireland, to gather more detailed information.
I find the Minister's complacency in the face of these statistics quite alarming. The figures show that there has been a sharp contraction in the level of lending to non-financial institutions. People outside the finance and development land sectors are having their credit squeezed. The number of undrawn overdrafts has decreased by 25%. I can give the Minister examples of businesses that had overdrafts but are now seeing them curtailed. As a result, they are having to lay people off. That is the reality on the ground.
Has the Minister moved beyond urging the institutions to take action during his discussions with them, to the extent that the credit figures that were published in October are about to be reversed? Does he support an approach that allows the banks to play for time by stringing out this process? I am deeply concerned that the experience of other countries will be replicated here. The impact of the banking crisis on real businesses has been deeper and more profound in countries where the necessary action has been delayed. I am worried that the Government's approach, which sees getting involved as a last resort, is allowing the credit freeze to persist, with serious consequences for jobs. That is the reality on the ground.
I am far from complacent on this subject. I referred in my response to the numerous meetings I have had with the financial institutions. At my request and insistence, the various financial institutions have submitted different plans for assisting small and medium-sized enterprises. I do not accept for one moment that my attitude is complacent. I am very concerned about this matter.
The implicit assumption in the remainder of Deputy Bruton's contribution was that the capitalisation of the banking sector, whether by the State or otherwise, would automatically lead to an increase in lending in the real economy. That has not been the experience in the United Kingdom, where an extensive state-sponsored process of capitalisation has taken place. I assure Deputy Bruton that there is no delay in the ongoing discussions with the financial sector about the reflections I invited the banks to make on their own capital positions.
Two and a half months have passed since the Government introduced the guarantee scheme. Where is the Minister's strategy? He is saying there will be a credit flow. He mentioned that other strategies, in the UK and elsewhere, have failed. What is his strategy to get credit flowing? That is the question everyone wants answered. If the strategy does not involve the recapitalisation of the banks, what will it involve? He has had these plans for weeks. The ten-day deadline within which this issue was supposed to have been cracked has passed. The plans have been submitted, but there is no solution.
Deputy Bruton is not in a position to say there is no solution. The plans were submitted in the last ten days. We do not yet have a detailed assessment of whether they have been implemented. It is not correct to say there is no solution.
Is the Minister saying he has a solution?
At my insistence the banks submitted plans to protect small and medium sized businesses in the weeks ahead. On recapitalisation, I was simply drawing the Deputy's attention to the fact that the recapitalisation that has taken place in the United Kingdom has not succeeded in ensuring that banks lend into the economy.
What is the Minister's strategy for success two and a half months on?
Two and a half months ago we secured the position of the Irish banks and a great deal of liquidity went into the Irish banks throughout October. The liquidity of Irish banks was repaired in that month. Let us not talk about two and a half months. I have had the PricewaterhouseCoopers report for a far shorter period than that. The first step taken after the introduction of the guarantee was to carry out a detailed analysis of the asset quality of the Irish banks. That report was only available later in November. Since then I have been in a constant structured dialogue with the Irish banks to ensure they are in a sound position for the months and years ahead.
There is no mention of credit in that solution.
Tax Yield.
Joan Burton
Question:2 Deputy Joan Burton asked the Minister for Finance the expected tax revenue outturn and Exchequer borrowing requirement for 2008; his views on the November 2008 Exchequer returns and live register figures and their implications for the modification of his budget forecasts for 2009 tax revenue and average unemployment; his strategy to address Ireland’s economic difficulties and get people back to work; and if he will make a statement on the matter. [45389/08]
Richard Bruton
Question:4 Deputy Richard Bruton asked the Minister for Finance if he has assessed the extent of the expected shortfall in tax revenue in 2009 and the additional cuts in current spending which he is targeting. [45545/08]
I propose to take Questions Nos. 2 and 4 together.
In the period since the budget was presented to this House, the economic environment has become considerably more difficult. Many of our trading partners have entered recession and projections for demand in our key export markets have been revised downwards significantly. To put this into perspective, the IMF now expects economic activity in the world's advanced economies to contract next year, the first contraction for this group of countries in the post-war period. On the domestic front, the economic and fiscal data which have become available since the budget have been poor, confirming that the outlook for next year has deteriorated further.
The November Exchequer returns show that overall Government spending for 2008 is close to what was planned. However, the latest 2008 tax returns reflect the severity of the current economic slowdown which has accelerated considerably both at home and internationally in recent times. The gap between spending levels and tax receipts in 2008 has widened and as a result I now anticipate that the Exchequer will need to borrow approximately €13 billion in 2008.
In the budget my Department projected that the economy would contract by 1% in 2009. Forecasts produced by the ESRI and by the Central Bank at the time set out a similar economic assessment. Reflecting the unprecedented recent economic developments since then, by the end of November the consensus of market forecasters was for economic activity to decline in 2009 by approximately 3%.
At budget time, I identified that there were significant risks to the economic and fiscal forecasts for 2008 and for 2009. The further deterioration in tax receipts in 2008 as seen by the end of November Exchequer returns, the continued weakening of consumer and investor confidence, adverse currency movements, continued difficulty in the international financial markets and depressed economic conditions are all evidence of those risks materialising. All the indications are that economic activity in 2009 will contract by significantly more than the forecast in the recent budget with an overall contraction of perhaps somewhere in the region of 3% to 4%. The fall in the 2008 revenue take alone would push the 2009 general Government deficit up by approximately €1.5 billion to 7.25% of GDP. In addition, each 1% deterioration in economic activity in 2009 beyond the contraction of 1% already forecast would increase the general Government deficit by approximately 0.5%.
Upon receipt of the end of year fiscal data and the latest economic data, including the third quarter national income data, a revised economic and fiscal assessment will be prepared by my Department in early January and brought forward for Government consideration. This assessment will reflect the dramatically changed environment now being faced. We are living in a time of unprecedented economic difficulties and the changed circumstances that have occurred in a short period of time must be addressed.
In terms of Government action, I remind the Deputies that last summer, in response to the weakness in tax receipts, we took steps to address the growth in public expenditure. In autumn we decided to bring forward the budget in order to address the fiscal situation. In the budget various measures were adopted which were essential to safeguard the public finances as well as to underpin economic activity. We are continuing to invest approximately 5% of GNP in capital projects that will enhance the productive capacity of the economy. The Finance Bill has a number of pro-enterprise measures including various improvements to the research and development tax scheme.
Now, in the light of the further deterioration in the economic and budgetary position, the Government will continue to identify measures to ensure the sustainability of the public finances, while also focusing on areas that can expand the productive capacity of the economy. This will enable the economy to be suitably positioned to exploit the global recovery when it emerges either late in 2009 or, as is now more likely, well into 2010.
The strategy for addressing the economic difficulties will be based on a number of inter-related areas. First, the public finances must be restored to a sustainable position and a key milestone in this process is the restoration of the current budget to a balanced position as soon as possible. Given that a very high level of borrowing was already planned for 2009, the main focus must now be on the very significant amount of money the Government is spending on current services. In this regard the work of the special group on public service numbers and expenditure programmes will have a significant role to play.
Second, we will continue to prioritise our current level of spending on public investment, which at 5% of GNP, is among the highest levels of capital commitment in the EU. Third, we must ensure that Ireland is competitive to ensure that the economy is in a position to take advantage of the global recovery when it emerges. Wage levels in the public and private sector will be crucial to this task. Fourth, we will continue to invest in education and training to equip the labour force with the necessary skills. Fifth, we will continue to identify all possible measures to boost the productive capacity of the economy. Finally, as evidenced in our recent budget, the Government will continue to support the less well off through our welfare and income policies.
The Minister has made a number of important concessions in his reply. On budget day the Minister suggested the decline in GNP next year would be 1%. Four separate sets of very reputable economic forecasters have all indicated a 4% decline in the Irish economy in 2009. In his reply the Minister has accepted that it will be between 3% and 4%. This means that the Minister's budget day forecasts were basically hopelessly optimistic and it means that the basis of the figures in his budget has been rendered shambolic. The Minister had forecast a general Government deficit of €12 billion or 6.5% of GDP. In his reply he acknowledged that it is likely to be at least 7.25% of GDP next year, which would be at least €13.5 billion which, of course, would necessitate a significant range of additional borrowing. Would the Minister agree that we are sleepwalking into a devastating economic depression? Either the mandarins and number crunchers in the Department of Finance are not able to do the counting or they want to deny reality until it is too late thereby preventing an adequate and timely response.
The Minister said nothing about unemployment in his response. In his budget he suggested that the average unemployment figure for next year might be 7.3%. I put it to the Minister that is also hopelessly optimistic because although he points to the tax credits for research and development in the budget, where in the budget are the other measures to get people who have already lost their jobs back to work? The Labour Party has made a series of proposals to get people back to work. We have not yet heard any sort of strategy from the Government other than tax breaks, which are welcome, for research and development. Can the Minister offer any hope for people who have lost their jobs that they might get back to work next year?
The Deputy has raised a great range of questions. First, the officials in my Department work very hard. I would not consider them either mandarins or number crunchers. They work on the statistics and their forecasts throughout this year have been in line with the forecasts of reputable organisations such as the ESRI and the Central Bank. We are where we are. We have gone through a remarkable deterioration this year. The Government has responded with a distinct response at each phase of the deterioration.
Regarding joblessness, in my reply I pointed out that we would continue to invest in education and training to equip the labour force with the necessary skills. We will continue to support the less well off through our welfare and income policies. Of course we can give hope to those who are out of work. The Taoiseach has made it very clear that with his Government colleagues he is preparing a comprehensive programme of economic stabilisation and renewal. That programme will be considered by the Government and submitted to the social partners in order that we can all pull together in the vital task of economic stabilisation and renewal.
What has been the rise in the cost of borrowing by the Minister to date? He predicts, based on the figures he quoted and the likely outcome, that he will borrow approximately one sixth of gross national income next year — €24 billion. Does he believe he will be able to fund this without a very sharp escalation in the cost of borrowing? Is he confident he will place that borrowing?
How soon will we have a clear fiscal strategy? In the budget the Minister set out that by year three, 2011, we would be back within the stability pact requirement of 3%. Is that still his objective? When will we see the three year fiscal strategy to deliver this? As the Minister has said on repeated occasions, policy changes will have to be made to achieve this, but we have not been told what they are. Does he rely exclusively on Mr. Colm McCarthy "& Co." to come up with these policy changes or will Ministers come up with their own? Does he accept that it was a serious mistake to bring forward the budget which was built on numbers that do not hold water? Can he still say, as he said during the week, that tax increases and cuts in capital spending are out in 2009?
I do not have the exact information to hand on the increase in the cost of borrowing. The Deputy appreciates that there are considerable difficulties for all countries accessing funds in international financial markets. I am confident, however, that we will be in a position to fund whatever borrowing will be necessary next year, even on the revised assumption set out in my reply. It is clear that the fiscal strategy will have to be revised on receipt of the end of year returns. No reputable economist predicted the scale of the international deterioration in the second half of this year. No reputable forecaster made these forecasts; they have come to pass.
Regarding the suggestion that it was a mistake to bring forward the budget, the situation was already very serious by the end of August. That is the reason the Government made a decision to bring forward the budget. Having access to a revised set of figures at the end of November would not have advanced the budget. There is a deterioration and when one is faced by a deterioration, the quicker one takes effective action the better. We took effective action in the budget in October. The most important feature of that effective action which the Deputy will have to persuade many of his party colleagues to accept is that the country needs to take certain harsh economic medicine. The Deputy cannot oppose every saving every Wednesday evening here and then turn around and maintain his economic purity.
The Minister has a nerve talking about people unwilling to take harsh medicine. Does he recall that many other reputable economists and I advised time and again that his predecessor, the Taoiseach, Deputy Cowen, was stoking a property bubble in land speculation and construction prices which was totally unsustainable? We warned him time and again. Last year and the year before the cost of the property-based tax reliefs which drove this was almost €500 million. The Minister has the nerve to lecture others when he received eminent advice. He mentioned the ESRI. I admit that its medium-term review must rank as one of the oddest in the history of forecasts. I suspect there may be a story behind this because the Government chose to take what it wanted from it. The Minister has a nerve blaming others.
Will the Minister answer my questions? Does he rule out tax increases next year, as he said only a couple of days ago on the radio? Does he rule out cuts in capital expenditure? I share Deputy Burton's dismay at the Minister's saying the Opposition is not facing up to reality. We said the pay agreement into which he entered was unaffordable. That is harsh medicine. That is telling people we cannot afford to pay what the Minister said he would. I am not afraid to face up to hard decisions but I am not willing to see my grandparents and other people's grandparents being told they cannot have medical cards if their weekly income is over €201. That was the harsh medicine the Minister initially decided to dish out. It targeted the most vulnerable. Can the Minister convince me that making grandparents sacrifice their health entitlements was the route to solving our problems? He knows as well as I that this was not part of the problem. The problem is we need to reform how we spend our money. The sooner the Minister faces up to this the better.
Regarding Deputy Burton's dismay, the roots of our problems are far beyond the necessary correction in the domestic housing market. I am concerned if she entertains the view that that is the sole root of our problems. There has been a major international financial and monetary crisis.
I did not say it is the sole, but the most significant, cause.
It is not the most significant cause.
Yes, it is.
The contraction began in late 2006. Our difficulties in the last six months stem from an international phenomenon which everybody in the country can see on their television screen every evening. It is a world economic crisis. Regarding the question I neglected to answer, I do not propose to increase taxes for the next financial year because any increase in taxation above what is envisaged in the budget would considerably damage the economy. I said this the last time we were at Question Time together. The capital programme envisaged in the budget is our investment programme for next year. It is our economic stimulus and we must preserve it to help sustain levels of economic activity in the economy.
Fiscal Policy.
Kieran O'Donnell
Question:3 Deputy Kieran O’Donnell asked the Minister for Finance if he has assessed the impact on retail sales and VAT receipts of the differential of 6.5 points in VAT with Northern Ireland and the UK. [45546/08]
The budget increase of 0.5% in the standard VAT rate is estimated to yield the Exchequer €208 million in 2009 and €227 million in a full year. As part of a fiscal stimulus package, the UK Government reduced its standard VAT rate from 17.5% to 15% on a temporary basis with effect from 1 December 2008 to 31 December 2009. I have no plans to make a similar reduction in the standard VAT rate in Ireland or to reduce the rate to the UK level of 15%. It is not possible to estimate the effect on Exchequer revenues of tax changes in other member states. The weakening of sterling has had a far more significant impact on relative prices than any VAT changes.
It must be recognised that our starting point is different from the United Kingdom's. We already have a low taxation economy, especially in the area of direct taxation, both income and corporation taxes, which has a direct impact on all employment in the State. This lower starting position for direct taxation makes it is more difficult to reduce taxes further. Already we are borrowing over 10% of all day-to-day spending on public services before capital spending. This is unsustainable and we faced difficult choices in bringing forward corrective measures. The estimated €227 million that will accrue in a full year from the VAT increase will go some way towards funding necessary public services.
Each one percentage point reduction in our standard VAT rate would cost around €450 million in a full year. For Ireland to reduce the standard VAT rate by 2.5 percentage points would cost around €1.125 billion in a full year. For Ireland to reduce the standard VAT rate to the UK level of 15% which would mean a reduction in the standard VAT rate of 6.5 percentage points would cost almost €3 billion in a full year. This is equivalent to approximately two and a half times the amount of revenues to be raised in a full year through the new income levy.
Some of the goods and services that will be affected by the increase in the standard rate are alcohol, cigarettes, cars, petrol, electrical equipment, furniture, telecommunications, cosmetics, confectionery, soft drinks and adult clothing and footwear. The effect of the 0.5% increase in the standard rate is that the price of goods and services which apply at this rate will increase by 0.41%. This equates to an increase of 8 cent on a good costing €20, or 41 cent on a good costing €100.
It must be also be recognised that around half the value of goods and services purchased in the State are not subject to the standard rate of VAT and, therefore, are unaffected by the change in the standard rate. All Government services, local authorities, hospitals and schools etc., are exempt from VAT. The zero rate of VAT applies to the majority of foodstuffs, oral medicines, books and children's clothes and shoes. In addition, housing, electricity, gas, domestic fuels, restaurant services and labour intensive services such as hairdressing and shoe repair are applicable at the 13.5% reduced rate of VAT.
Although the reduction in the UK standard VAT rate will have an impact on the price differential on some goods between the North and South, the United Kingdom has increased excise on alcohol, cigarettes, petrol and diesel to offset the 2.5% reduction in VAT on these items. Consequently, there will be no reduction in the price of these products in Northern Ireland as a result of the reduction in the UK VAT rate to 15%. As a small open economy, many of our standard rated goods are imported and cutting the VAT rate could benefit the economies from which we import more than our own. In other words, while it might help the consumer, it would not be the most effective way of helping our the economy.
There are other means of stimulating the economy, outside of the VAT system. The Government is providing a long-term fiscal stimulus through capital investment of approximately 5% of GNP, twice the EU average. This fiscal stimulus will not only support jobs in the short term but will also add to our long-term productive capacity.
Irish taxation policy of low direct taxation has given us a significant competitive advantage in the past 15 years. We have ensured we have had the lowest levels of direct taxation on income; therefore, we have had marginally higher indirect taxation. That model of taxation has worked well for the economy and will be even more important in leading us back to the path of economic growth.
On Committee Stage of the Finance Bill yesterday the Minister gave a commitment to produce a report on the impact of the VAT differential on retail sales and VAT receipts. Does that commitment still stand? When will the report will be ready, and will it consider the impact in terms of jobs and revenue to the Exchequer? Furthermore, the Minister should reverse the 0.5% increase in VAT, for administrative reasons and also in view of its cost to the economy.
In the last year sterling has fallen by more than 25% against the euro. However, retailers are telling me that the decrease in the cost of the goods they are selling is of the order of 10%. Why? Clearly, wholesalers are not passing on the price reductions. I looked at three products today: the Financial Times, OK magazine and Hello magazine, which are relevant to most people. The Financial Times has a UK cover price of £1.80 sterling. It should therefore cost €2.03, but it costs €2.50. Thus, it is overpriced by 23%. OK magazine is 53% overpriced; it is £2.95 in the UK, so it should cost €3.33 here, but it costs €5.11. Hello magazine is £2.00 in the UK but costs €3.47 here, although it should be €2.25. This means it is overpriced by 54%.
The Deputy is giving information rather than requesting it.
What I want to impress upon the Minister is that the Government should ask the National Consumer Agency and the Competition Authority to look into this issue as a matter of urgency. Consumers are taking matters into their own hands. They are deciding they are paying too much and going directly to Northern Ireland. This is costing the Exchequer money and it is costing jobs.
I do not have information at my disposal about the extent or value of shopping that is being undertaken by residents of the State in Northern Ireland. However——
The Minister gave a commitment to the committee.
If I could finish my reply, I intend to obtain an accurate account of this. For this reason I have asked the Revenue Commissioners, in conjunction with the Central Statistics Office, to examine the losses to the Exchequer arising from cross-Border shopping.
When will that study be concluded and when will the Minister present the findings to the House? What measures does he intend to take?
I am not in a position to advise the Deputy of that today. He will appreciate that I gave the commitment yesterday evening. I will be in a position to communicate with the Deputy about that matter in the coming days.
Question No. 4 answered with Question No. 2.
Public Sector Remuneration.
Kieran O'Donnell
Question:5 Deputy Kieran O’Donnell asked the Minister for Finance if the departmental schemes of performance-related rewards have in all cases taken up the entire pool of 10% of the pay bill of the groups concerned since they were first instituted; and if he will make a statement on the matter. [45547/08]
The current scheme for departmental performance-related awards was introduced following a decision by the Government on the implementation of recommendations in report No. 38 of the Review Body on Higher Remuneration in the Public Sector. In the case of Departments, the scheme applies to posts at the levels of deputy secretary and assistant secretary. The first payments under the scheme were made in 2002. The schemes of awards are based on performance by reference to demanding targets. The pool for performance awards is 10% of the pay bill for participating members of the group concerned. Within that overall limit, individuals can receive payments of up to 20% of pay, although payments at that level are very rare.
Since the introduction of the scheme the full pool, or close to it, has been applied in respect of persons participating in the scheme. The salaries of persons who are eligible to participate in the scheme but choose not to do so are not taken into account in calculating the pool. I have no role in the decisions on awards. Decisions are made by the Committee for Performance Awards, which includes a majority of private sector members. The main roles of the committee are to monitor the application of the scheme and to bring independent judgment to bear in approving objectives for the persons covered by the scheme and in approving recommendations for awards. Details of the procedures, the numbers covered by the schemes, the range of awards and the total amounts paid in Departments are outlined in the annual reports of the committee, which are available on the website www.finance.gov.ie.
Could the Minister give an indication of the number of people who have applied for this scheme, the number who have received awards under it and the amount of money that has been paid in the form of bonuses under it for 2007 and 2008? Is the Minister satisfied that the taxpayer is getting value for money? The output statements for the top-spending Departments for 2007 show that 37% of targets were not met overall. In the Department of Health and Children, 46% of targets were not met while 48% of targets were not met in the Department of Justice, Equality and Law Reform. In the current climate, does the Minister believe the taxpayer is getting value for money?
With regard to the detailed information sought by the Deputy, the range of individual awards varies. In 2007, for example, a total of 194 civil servants received awards ranging from €3,200 to €26,000. Details of awards made between 2002 and 2007 may be obtained by the Deputy from the annual reports of the committee, which are available.
On the more general issue, I have no role in decisions on awards. Each departmental secretary or equivalent agrees annual objectives with eligible members of his or her staff who opt into the scheme. At the end of each year, each Secretary General or equivalent submits recommendations to the Committee for Performance Awards on the level of award, if any, to be made to each participating individual, having regard to his or her performance against the pre-set objectives. Decisions on awards are made by the committee, which includes a majority of private sector members. The main roles of the committee are to monitor the application of the scheme and to bring independent judgement to bear in approving objectives for the persons covered by the scheme and in approving recommendations for awards.
The Minister has not dealt with the question. Does he not agree that people might look in on this and think it is a cosy club? He mentioned that 194 civil servants qualified for payments under the scheme. How many in total applied for the scheme? What percentage of this is represented by the 194 who qualified for payments? We must bear in mind the fact that 37% of targets were not met last year. In the area of health, in which 46% of targets were not met, we are talking about primary care teams and cancer screening services. Could the Minister give proper answers to these questions?
I have answered the Deputy's question to the best——
The Minister has not.
I have answered the different questions posed by the Deputy. I do not have at my disposal detailed information on the number of applications and the proportion of such applications which were successful.
That is the key question.
Perhaps if the Deputy tabled that question I could furnish him with an answer.
Not all eligible persons choose to participate in the scheme. Of those who do participate, key objectives must be agreed in advance with the relevant Secretaries General or equivalents, who subsequently make recommendations to the committee.
How did they fail on half their objectives?
Was the full 10% taken up? Was the full funding taken up?
It was. The Minister said it was all taken up.
It was all taken up.
It was all taken up, with half the targets missed.