Vol. 717 No. 1
1 Deputy Michael Noonan asked the Minister for Finance the discussions he has had with the Governor of the Central Bank regarding the Governor’s comment, that a budgetary adjustment of greater than €3 billion may be required to calm the bond markets; if he sees merit in the Governor’s opinion; and if he will make a statement on the matter. [34222/10]
I am aware of the suggestion made by the Governor of the Central Bank, Professor Patrick Honohan, both in an address on 20 September last and in his comments earlier today, that reprogramming of the budgetary profile over the coming years will be necessary. To ensure that sustainability is restored to the public finances, the Government set out in budget 2010 a multi-annual fiscal consolidation framework to reduce the general Government deficit to less than 3% of GDP by the end of 2014.
Significant action has already been taken in regard both to expenditure and taxation in order to restore sustainability to the public finances. Between July 2008 and the supplementary budget in April 2009, adjustments designed to yield approximately 5% of GDP in 2009 were introduced. Budget 2010 delivered a further adjustment, mainly on the expenditure side, of €4 billion or 2.5% of GDP. Therefore, the cumulative correction to date has been 7.5% of GDP.
The most recent Exchequer returns covering the period to the end of August show that the Government's actions are having a positive effect, with the overall Exchequer position broadly in line with expectations. The target of raising €20 billion from the bond markets in 2010 has now been achieved and, taking account of the funding already completed this year, cash balances, retail debt and longer-term funding carried over from last year, Ireland is funded through to the middle of next year.
I stress once again that the Government remains fully committed to meeting the target of having a deficit below 3% of GDP by the end of 2014. As I said in my statement on banking this morning, it is important that we have a credible path to show how we propose to meet this commitment. Work is under way on a four-year budgetary plan that will set out the annual measures required to restore order to the public finances and bring our deficit below 3% of GDP by the end of 2014.
I expect the Governor of the Central Bank will shortly forward to me his usual pre-budget outlook, and this, along with the most up-to-date economic and fiscal data, will be taken into account in the Government's deliberations in the run-up to the publication of the new four-year budgetary plan in early November.
What target is the Minister aiming at for the budget on 7 December? His adjustment target of €3 billion is well known and he seems to have already achieved €1 billion of that through cuts in capital expenditure. What adjustments, either in tax or current expenditure, does he envisage in order to achieve the new target he implied this morning? Will he indicate what that target is?
As I stated, work is under way on the four-year budgetary plan which will set out the annual measures required to restore order to the public finances and ensure we meet the commitment we have given to reduce the general Government deficit to below 3% of GDP by the end of 2014. My Department will continue to assess the most up-to-date economic and fiscal data and their implications for the fiscal consolidation process in the coming years as we prepare the four-year plan. An adjustment above €3 billion will be required next year, but it would be premature for me to go into the details about the extent of the additional consolidation required. But additional consolidation will be required.
The Exchequer returns for late September are outstanding and there are other data that tend to be assembled on a quarterly basis which are also of value to my Department. The Department needs to assess all this information before the Government is in a position to put precise figures on the sum required in budget 2010.
I would have thought that once Brussels requires budgetary profiles for the next four budgets that the first step would be to set the targets and then fill in the profiles to achieve those targets. Is the Minister saying he does not know what the targets are but that his Department is working on the profiles? If that is the answer, perhaps he will tell us the level of detail Brussels expects on the profiles. Will it accept global figures or will each expenditure cut have to be underpinned by a policy decision? Will the tax increases have to be nominated with an indication of annual yield?
I am glad the Deputy asked that question. Brussels has not required anything in terms of this process. It is a decision of the Government to introduce a four-year plan. I certainly discussed the matter with the Commissioner for Economic and Monetary Affairs, Mr. Rehn, in general terms, but no specific requirements were imposed on Ireland by Brussels and there is no suggestion of that. It was obvious to the Department and to me as Minister that the data in September were mixed and that there were risks on the downside which required to be addressed. Indeed the Governor of the Central Bank indicated some time ago that reprogramming was necessary and I discussed the matter with him as well.
I cannot speak for the Governor, but there are clearly imbalances in the public finances which require to be addressed and which are outside the difficulties faced by our banking sector. There is a significant and unsustainable gap between the State's revenue and expenditure and downside risks in relation to growth. Consequently, tax projections for 2011 were part of the downside risk identified at my Department. For that reason work is under way in the Department in assessing these risks and devising sustainable forecasts for next year. I am not going to prejudge the eventual figure, which the Government will have to arrive at, at this stage. In regard to the €3 billion figure, it is the indicative figure agreed with the Commission and stated in the Stability and Growth Pact, but events have superseded that figure.
2 Deputy Joan Burton asked the Minister for Finance if his attention has been drawn to the fact that the most recent Quarterly National Accounts indicated a contraction of 1.2% in GDP in the three months to June 2010 and a further contraction in GNP of 0.3%; his views on the most recent economic indicators; if his further attention has been drawn to the fact that the most recent Exchequer returns showed a €1.865 billion drop in tax revenues over the same period in 2009; if he is aware that the most recent Quarterly National Household Survey showed a drop of 79,400 in the numbers at work in the past year; the way he expects the economy to evolve over the coming 12 to 18 months and if he will provide revised economic forecasts for the period 2011 to 2014; and if he will make a statement on the matter. [34438/10]
First, I assure the Deputy that my attention is, of course, drawn to all of the important economic and fiscal data as they become available. The quarterly national accounts figures published by the Central Statistics Office last week show that GDP declined by 1.2% between the first and second quarters of this year. This figure must be seen in context, however, as it follows an increase of 2.2% in the first quarter. In other words, taken together, the figures for the first two quarters suggest that GDP has stabilised. The quarterly figure for GNP was a decline of 0.3% between the first and second quarters, pointing towards stabilisation in this measure of economic activity. In annual terms, GDP fell by 1.8% in the second quarter.
Personal consumption and investment moved in line with expectations while exports continued to perform well. However, a somewhat unexpected surge in imports reduced the overall level of GDP in the second quarter. The improvement in our export performance evident in the quarterly figures is encouraging, as is the fact that the export base has broadened in recent quarters. This suggests the significant improvements in competitiveness in recent years are having the desired effect.
The more recent economic indicators paint a somewhat mixed picture. On the domestic front retail sales have weakened over the summer months. On the external front the indications are that exports continue to perform well, which is to be welcomed. The most recent Exchequer returns show that in the first eight months of the year, €18.9 billion in tax revenue was collected. While this was almost €1.9 billion below what was collected in the same period in 2009, it was in line with what my Department had expected. In fact, tax revenues to the end of August were just 0.7% below target.
In terms of the labour market, employment fell sharply over the course of last year and this is reflected in the annual decline in the second quarter of this year. Shorter-term indicators point towards stabilisation. For instance, the seasonally adjusted quarter-on-quarter decline in employment in the second quarter was 0.4%. While we all regret any loss in employment, it is important to note this was the lowest rate of employment loss in more than two years. The unemployment rate picked up over the summer. However, much of this was due to seasonal factors, and this was confirmed yesterday with the publication of the September live register figures showing a very substantial reduction in the number on the live register as well as a seasonally adjusted reduction.
In terms of the short-term evolution of the economy, there is much uncertainty at the moment. Recovery over the next year or so will probably be gradual. As I have indicated, my Department is currently assessing all relevant information and will publish revised macro-economic forecasts in the coming weeks.
I thank the Minister for his reply. At the time of the 2010 budget last December, the Minister famously said that the economy had turned a corner. However, the reality is that the domestic economy remains in recession having contracted for nine straight quarters. Does the Minister agree with Professor John McHale, professor of economics, National University of Ireland, Galway, that the cause of recession in Ireland is a lack of domestic demand. Looking at our situation negatively, almost 14% of our people are out of work. However, looking at it positively, 86% of our people are in work but are, by and large, terrified to spend. Does the Minister accept that returning the Irish economy to growth is fundamental to reducing the rate of interest Ireland must pay for borrowing, putting a floor under the property market and, fixing the banks? Does the Minister accept that they are strategically the three things any Government will have to do to get Ireland out of recession?
On turning the corner, any country with a GNP decline in its economy of the scale of 10% which then stabilised it at approximately 0% in the ensuing year would certainly be judged by any fair economic commentator as having turned a corner. That is a substantial amelioration in our position. In 2009 and the latter stages of 2008, we had a serious contraction in GNP. This year, we have seen a stabilisation, which is a turning of a corner.
I am pleasantly surprised to discover that I agree with the remainder of the Deputy's question. I believe a growth strategy is essential to stabilise the property market——
We need a few harps to make music.
——to ensure that the banking system recovers and, above all, that the real economy recovers and the public finances are corrected. A growth strategy is essential and must form part of the multi-annual plan, which is now being formulated.
I will allow a brief supplementary from Deputy Burton.
The Minister's statement of this morning contains a two-line reference to a four-year budgetary plan. Was this budgetary plan requested by the European Commission? Has it been agreed with the European Commission and who will prepare the plan? Everybody agrees that the growth forecast previously used by the Minister erred on the side of optimism. Will the four-year plan be drawn up independently, as suggested by some people?
Will the Minister provide, as was done in the United Kingdom prior to the general election for George Osborne and Vincent Cable, a direct line of information to me, as Labour Party spokesperson on finance and other finance spokespersons, from the Department of Finance and whoever else is drawing up the plan?
The Deputy has asked a number of questions. My Department did not err on the side of optimism in its growth forecast for this year. In fact, the first quarter GDP out-performed the departmental forecast. On the question of who decided there should be a four-year plan, the Government, on my recommendation as Minister for Finance, decided we should have a four-year plan. There is no question of the authorities in Brussels dictating or suggesting to Ireland it should have a four-year plan.
Did they raise it in conversation?
There are at all stages ongoing discussions with the Commission. Naturally, there were intensive discussions between the Commission and myself prior to this morning's important announcement. I made clear at that stage that we are embarked on such a course, following a Government decision. There was no request from Europe for such a plan although Europe is happy to endorse it, as has been made clear by the euro-group. I participated in the euro-group meeting this morning by telephonic contact.
The following is an important point. The reason we need a four-year plan is not because anyone in Brussels believes we need it but because the crucial element in the stability and growth pact is meeting the 3% target by 2014. To do this, and to demonstrate this can be done, a credible pathway must be shown. I accept we have made substantial progress. I mentioned that we have already executed a 7.5% correction in GDP terms. Clearly, meeting a quantitative target in a given year is not sufficient to establish the credibility of the plan.
We must move on. We have gone well over time on this question.
I would like to respond to one other question. The credibility of that trackway requires a detailed programme of decisions over a number of years. On the request made by Deputy Burton, on her own behalf and that of the Fine Gael party, for information in the period approaching a general election, I will consider that but I am not aware there is a general election pending. I appreciate the request and will raise with my Department the possibility of meeting it during an election period.
3 Deputy Michael Noonan asked the Minister for Finance his latest estimate of the gross and net cost of the Anglo Irish Bank’s restructured wind-down; the time line to the conclusion of the wind down; and if he will make a statement on the matter. [34223/10]
On 8 September last, I announced the Government's decision on the restructuring and resolution of Anglo Irish Bank, which remains subject to European Commission approval.
This envisages the splitting of the bank into two licensed and regulated credit institutions: an asset recovery bank focussed on recovering maximum value for the State from the loan assets and business of Anglo not being transferred to NAMA and a funding bank to fully safeguard Anglo's deposit base. It is important to note that this restructuring is not a cessation of business.
As I indicated in my statement, the Central Bank has completed its assessment of the capital required by the new structure. A statement has been issued by the Central Bank detailing the capital required in a base case and in a stressed scenario and providing an explanation of the approach and methodology adopted to determine the bank's capital requirements.
The Central Bank has determined and advised the bank that in the central, or expected loss case, an additional €6.4 billion in total capital will be needed for the recovery bank and funding bank structure to continue to meet the minimum capital requirements in the coming years consistent with Basel rules. A total of €22.9 billion has already been provided by the State since the bank was nationalised early in 2009. This additional capital requirement brings the projected total gross cost of the restructuring of Anglo Irish Bank to €29.3 billion. This additional capital will be provided by increasing the Promissory Note issued by the State and by appropriate burden-sharing exclusively by holders of Anglo subordinated debt instruments, as outlined in my statement.
The Central Bank has also undertaken a stress test on Anglo building on the PCAR analysis carried out for the other banks earlier in the year by the Financial Regulator. It has determined that on the basis of severe stress assumptions, including a 70% discount on the remainder of Anglo's NAMA loans, the stress case level of losses in Anglo Irish Bank could potentially be €5 billion higher than in the expected case of €29.3 billion. The stress case indicates the upper boundary of the level of losses. It does not represent the Central Bank's expectation of the likely outcome. The Government will, therefore, capitalise the new structure to the expected case requirement of €29.3 billion.
It will be a priority for authorities to press ahead with the restructuring of the bank with a view to achieving its split early in 2011. I will continue to be in close consultation with the European Commission and, in particular with Commissioner Almunia, with the aim of providing in the next month all elements necessary to bring the Commission's assessment of the restructuring plan to a positive conclusion. This should allow the matter to be settled through a formal Commission decision on a timely basis.
Why does the Minister consider it necessary to make transfers from the recovery bank to NAMA given the sole work of the recovery bank will be to work out the impaired assets? With the lifting of the ceiling from €5 million to €20 million this appears like the organisation of a big NAMA and a small NAMA, with assets being transferred from one to the other? This seems superfluous and is also a pretty costly exercise. If the impaired assets remain in the recovery bank the people who are expert in this area can work out and recover value on the assets. The transfer process involves bringing in a lot of professional people, who, as we know from the NAMA business plan which allocates €2.5 billion for professional fees over five years, charge large fees. Is that not superfluous, especially given the changes the Minister announced this morning?
I do not agree it is superfluous. The Deputy's question is why the National Asset Management Agency loans are not simply left in the recovery bank. The whole purpose of NAMA is to deal on a systematic, national, cross-bank basis with all of the toxic loans and all the loans in the land and development sector. This was essential because of the cross-collateralisation of exposures throughout the banking system. As was made clear during the debate on NAMA, the exposure by particular developers across a range of banks made it essential that we establish an agency that would deal with those exposures on a systematic basis. There were a large number of individuals who had such cross-systemic exposures that required to be dealt with in a structured way.
One question which the Deputy did not pose but which follows on from his question was whether we considered putting the rest of the Anglo Irish Bank loan book into NAMA — doing it the other way around, if one likes. The answer is that NAMA is busy enough with the amount of work in hand. The remainder of the non-NAMA book in the bank is not concentrated on land and development matters but constitutes general business lending. It is a matter of public record that there is only one very substantial customer of the systemic type, of which a number transferred with the NAMA book.
When the Minister decided to establish the National Asset Management Agency, the Government's policy was to rescue Anglo Irish Bank to enable it to continue actively trading. Since then, the Government has changed its view on Anglo Irish Bank and has effectively organised it into two parts for a wind-down. The cost and work involved in transferring the toxic assets from the recovery bank component of Anglo Irish Bank to the National Asset Management Agency make such a transfer superfluous and costly. It has the second disadvantage of crystallising the debt before it is necessary to do so.
I do not see the logic of this exercise. While the cheerleaders in the professions will be delighted with it, the taxpayer does not come out of it very well. I cannot see the advantage of going through the whole rigmarole of making transfers to NAMA from what is now a recovery bank with similar functions to NAMA. Circumstances have changed and Government policy on Anglo Irish Bank has changed completely.
The premise of the question, which permeates the Deputy's contribution, is erroneous. That premise was that the purpose of the National Asset Management Agency was to rescue Anglo Irish Bank to enable it to be a functioning or good bank, if one likes.
No, it goes right across the banking sector.
Let us be clear about this. When Anglo Irish Bank was nationalised early in 2009, it did not thereafter substantially expand its existing loan book. The question of whether the bank was being downsized did not arise. From the moment of nationalisation, the policy in relation to Anglo Irish Bank has been to downsize it. The idea that somehow I entertained the notion that it could be transformed into a good bank through transferring assets to NAMA is erroneous. That was the premise of the Deputy's question.
As I have made clear at all stages, management made a case for a split of the bank between a good and bad bank. At times, some Deputies in the Fine Gael Party made a similar case regarding the resolution of the Anglo Irish Bank problem. This was a case that I had examined and it was evaluated by my Department. It was eventually dealt with by Department on the second management application and on the submission of the second application to Brussels.
On the Deputy's point about crystallising the debts, the difficulty is that the Irish banking crisis is clearly related to the fall in asset price values from the peak of the property market in late 2006 and early 2007. The only credible way to deal with a banking crisis of that type and the textbook approach to doing so is to guarantee the liabilities, set up an asset management company and capitalise the institutions concerned. Those are the steps we have taken and completed this morning. The idea that one cannot crystallise the debt and leave these loans lingering on bank balance sheets would lead to a collection of zombie banks which would fail to reform, improve and repair themselves over a long number of years.
Is that not what is being done with the loans of under €20 million?
4 Deputy Michael Noonan asked the Minister for Finance the estimated public service payroll savings in each year, from 2010 to 2015, inclusive, arising from the Croke Park agreement; in which sections of the public service he will introduce redundancy programmes; and if he will make a statement on the matter. [34224/10]
As the Deputy will be aware, over the past two years, the Government has taken a series of difficult but critical steps which have generated significant reductions in the potential public service pay bill. As a consequence, the public service payroll will be more than 8% less in 2010 compared to 2009 and nearly 12% less than in 2008. These measures include the non-payment of proposed general round increases under the review and transitional agreement, the application of a pension-related deduction of an average of nearly 7% to the earnings of all public servants and, at the beginning of this year, a reduction in the rates of pay and allowances for public servants was implemented under the terms of the Financial Emergency Measures in the Public Interest (No. 2) Act 2009.
In addition to these measures, the introduction of a general moratorium on recruitment and promotion together with incentivised early retirement and career break schemes and natural turnover of public servants who retire or leave has led to a reduction in the number of public servants employed by almost 11,000 since March 2009. Government policy on staff numbers in the public service is reflected in employment control frameworks for each sector of the public service. The continued application of the frameworks across the public service will result in a further reduction in public service employee numbers up to 2012.
The agreement provides that, where circumstances warrant it, the Government may offer voluntary mechanisms to exit the public service, either generally or targeted towards specific sectors or bodies. However, having regard to the reduction in numbers I have already noted and the continued application of the employment control frameworks, the Government has no plans to introduce further schemes. The effective implementation of the agreement and the efficiencies and other measures which will arise from that will provide a sustainable framework to manage the provision and delivery of our essential public services despite the reductions in public service numbers and in a period of unprecedented pressure on resources.
The Minister indicated that a reduction of 11,000 staff had been recorded up to March 2009. What are the projections for reductions in staff from 2009 until 2015 under the Croke Park agreement? Will the Minister provide annualised figures?
The reduction of 11,000 has been achieved since March 2009. I will undertake to provide the Deputy with the information he seeks as I do not have information on projected reductions in numbers to hand. Clearly, that projection could be influenced by budgetary decisions taken by the Government.
If I recall correctly, the Croke Park agreement includes a fail-safe mechanism providing that the Government would not necessarily be bound by the agreement under certain adverse economic circumstances. Will the Minister remind me of the terms of this provision? Are we approaching press-the-button time, so to speak?
The agreement includes a clause that in extraordinary circumstances the Government has certain options. There are no proposals before my Department at present to activate it.
5 Deputy Michael Noonan asked the Minister for Finance the action he is taking to replace directors of banks in which the State has an interest who served as directors during the development of the banking crisis; and if he will make a statement on the matter. [34225/10]
I have said previously that Ireland as a country has been let down badly by certain individuals who held senior appointments — both at executive and director level — at some of our covered institutions. Their actions and inaction have and will continue to have severe ramifications for the citizens of this country. Deputy Noonan will appreciate that it would be wrong of me to comment on cases which are subject to ongoing investigation by the relevant statutory authorities.
One of the first actions the Government took in this area was the appointment of two public interest directors to all of the major covered institutions. These appointments were persons whom I am sure the Deputy would concur are of high calibre and have undertaken their roles very seriously.
Contrary to public perception, many changes at director and senior executive levels at the covered institutions have taken place. It has to be accepted that a complete turnover of all of the respective appointments at the covered institutions was neither practical nor desirable in one instant. What the Government has sought to do is to bring certainty to the operation of the Irish financial system by making progressive changes.
Since September 2008, the chairpersons and chief executives of all of the covered institutions bar one have changed. In other words, of the six principal covered institutions, five chairpersons and five of the chief executives have changed since 2008. There has also been a substantial turnover of non-executive directors over this period. In total, based on information supplied to me by the covered institutions, 43 directors have vacated their positions for a variety of reasons since September 2008 with 30 new appointments being made. In addition, some 31 senior executives have departed. The House will also be aware that arising from the actions I announced this morning further changes at board and management level will follow at Allied Irish Bank.
I am sure the Deputy will appreciate the need for people filling directorship roles to be well qualified, with appropriate skills and experience, in order to lead the institutions through the major changes that are taking place in banking.
Additional material not given on the floor of the House.
A mix of board members from the domestic market and outside Ireland is also a desirable objective. Since the introduction of the Credit Institutions (Financial Support) Scheme in September 2008, the Central Bank and Financial Regulator have reviewed the procedures under which applicants for senior roles in credit institutions have been considered. A range of measures have been adopted, or are in process, as part of a wider strategy to update the domestic regulatory framework applying to banks and insurers and as part of these measures a consultation paper on corporate governance standards has been issued. The new Central Bank Reform Act will also introduce a new range of powers available to the Central Bank in relation to the appointment of individuals to control functions and pre-approved control functions, which will include directors. An interview process, as part of the fitness and probity procedure, has been initiated for proposed senior roles in credit institutions.
I have said previously that it is not only a change of personnel that is required but a change of culture. The public interest aspect of decisions taken at board level of these institutions has to have a much greater prominence. The pursuit of selfish profit motives, without appropriate regard for risk, has to be challenged both within the banks and by the appropriate authorities. Decisions undertaken by management have to be severely and robustly challenged by board members which as we have learnt to our cost did not happen to the necessary extent in the past.
The Deputy will also be aware that the appointment by the Government of both the Governor of the Central Bank and the Financial Regulator changed previous practices in this area. In this connection, I might also mention that I undertook a public expression of interest procedure in connection with the appointment of board members of NAMA which resulted in three of the final appointees emerging from this process.
The Minister said there have been 43 resignations of directors across the covered institutions. How many of those who were there two years ago remain?
I will have to provide that information for the Deputy and will arrange to do so. Clearly, in the case of Anglo Irish Bank no one remains. In the other banks, as I said, there has been a substantial turnover of directors.
Now that the Minister has total control or a significant shareholding in all the covered institutions, what is the Government's policy on internal recruitment, as against bringing in expertise from the outside, to top levels of management?
It is a matter, in the first instance, for the board of the particular institution to decide what is in the best interests of that institution. Government policy is that persons of the highest competence and expertise should be appointed to senior management positions. It is a matter, in the first instance, for the board.
One matter which we should discuss on an all-party basis, given the degree of State control that now exists in the banking sector, is how appointments are made to directorships in these institutions.
The Minister announced this morning that the chairman and chief executive of AIB are moving on. What severance packages will apply in those cases?
I am not aware of the severance packages that apply. That is a matter, I take it, for their contractual terms and the remuneration committees of the relevant institution.
When his policy is put in place the Minister will own 95% of AIB. That is not a minor shareholding. Does he not have an interest in severance packages, especially when there have been such rows about these kinds of packages in the past?
Ní lá fós é, a Theachta. The position is that persons have contractual rights as well.
