For the benefit of those who may not be used to it, 30 minutes are allowed for Priority Questions, that is six minutes per question. The Minister is allowed two minutes for an initial reply. There are, effectively, six minutes per question.
9 Deputy Brian Lenihan asked the Minister for Finance if he will provide the precise arrangements for the division of the Department of Finance into two Departments; the proposed distribution of the current business of the Departments between the two new Departments and the implications for staff; and if he will make a statement on the matter. [5517/11]
It is intended to establish a new Department of public expenditure and reform which will have responsibility for all public expenditure as well as the modernisation and reform of the public service. The Minister for Finance will retain responsibility for overall budget, tax and spending parameters while the Minister with responsibility for public expenditure and reform will be responsible for managing public expenditure within the overall envelope set by the Minister for Finance.
The setting up of the Department of public expenditure and reform and the transfer of public expenditure and reform functions from the Department of Finance to the new Department will require primary legislation. The functions and responsibilities which are being transferred to the new Department and Minister need to be clearly identified in the legislation to ensure that there is a sound legal basis underpinning the new Department and ministerial responsibilities, as well as ensuring there is clarity of roles and responsibilities. Work on the legislation has commenced and is being given top priority. The public expenditure and reform functions will formally transfer to the Minister, Deputy Brendan Howlin, and the new Department of public expenditure and reform when the necessary legislation has been put in place.
Broadly speaking, the sectoral policy division and the public service management division of the Department of Finance will transfer to the new Department, as will the modernisation functions from the Department of the Taoiseach. Precise arrangements in relation to functions, responsibilities and staff are being finalised at present.
I thank the Minister for his reply; I wish him well in his office and congratulate him on his appointment. I had not done so in the Chamber yet. He has an onerous task before him.
I take it the Vote officers in the sectoral policy division will be transferred to the new Department so that the detailed supervision of expenditure on an ongoing basis will be the responsibility of the new Department.
I would like to probe the question of the overall envelope, which will be set by the Minister for Finance. I take it that overall envelope will be subject to a Government decision collectively agreed by the Government and implemented by the new Minister. At what stage in the budgetary cycle will that matter come before the Government?
I thank Deputy Lenihan for his good wishes and congratulations.
The manner in which responsibilities are now being allocated in the Department is new. However, it is not entirely new. Deputy Lenihan will recall that it was quite common, over the years, to have a Minister for the Public Service with full Cabinet rank. It was also the practice to combine that portfolio with the functions of the Minister for Labour. Labour and the Public Service was quite frequently the designated ministry. Social partnership brought about a situation where everything was rolled together into the Department of Finance. The Department of the Taoiseach then seemed to take a primary role in relationships with the social partners. There were advantages and disadvantages in this procedure.
In opposition, when we began looking at the situation Deputy Richard Bruton, who is now Minister for industry and commerce, produced a document. That is probably not the correct title, but I am old-fashioned in my titles.
I wish we all were.
Deputy Bruton produced a document containing the analysis that public service reform had failed over a series of Governments for two reasons. First, the person responsible, whether a public servant or a Minister, did not have full Cabinet rank. Second, even when the Minister with responsibility for public service reform had full Cabinet rank he did not have the influential policy levers to deliver the reform in Departments. Two decisions were made in the documents we developed in opposition. One was to vest full responsibility for reform of the public service in a Cabinet Minister. The second was that the Cabinet Minister would have the supervision and allocation of the expenditure within Departments so that he would have the influential levers to encourage Departments to reform along the lines he indicated. That is the background to it.
The functions will be divided along the lines Deputy Lenihan has suggested and in accordance with the legislation. The Minister for Finance will draw on the expertise of the staff who are experienced in public expenditure in drawing up the budget. When the legislation has passed and rolls are clear, legally, we will look at the budgetary cycle to see at what point these things will come before Government. It is intended that both Ministers will operate very closely on the budgetary cycle.
What is the timescale for the legislation? I welcome the appointment of two Cabinet Ministers at the Department of Finance. However, my principal concern is with the Department itself and the transferability of staff within the Department. We will be left with two very small Departments when one Department has been divided in two. The number of public servants of high quality will diminish in each Department and promotional opportunities will be reduced. The reform agenda will have to start now in the Department itself.
10 Deputy Pearse Doherty asked the Minister for Finance the way the new jobs fund will be resourced in view of the fact that the measures contained in the jobs fund will have a cost to the Exchequer; the way the revenue will be made up following the introduction of these measures; the fiscal impact of these proposals given the commitment to the aggregate adjustment as set out in the National Recovery Plan for the period 2011 to 2012 and the expenditure on these proposals will need to be offset by further revenue raising measures; if he has undertaken an economic impact assessment, or commissioned one, into these proposals and any measures that will be taken to offset this expenditure; and if he will make a statement on the matter. [5514/11]
To the extent that the proposals for a jobs fund as set out in the programme for Government involve additional costs, these costs will have to be counterbalanced by offsetting measures to reduce expenditure or raise revenue. Over the coming weeks, I will be examining the options in this regard in conjunction with colleagues on the Economic Management Council and with the wider Cabinet. Full details of the measures, including the impact in 2011 and subsequent years, will be provided in the context of the Government's jobs fund, to which we are fully committed and will be bringing forward as a matter of priority.
The programme for Government sets out the measures that will be implemented as part of this process. These include, among others, a commitment to reverse the cut in the minimum wage, reduce the lower rate of VAT, halve the lower rate of PRSI, abolish the air travel tax conditional on the airlines fulfilling certain conditions and provide for an additional 15,000 places in training, work experience and educational opportunities for those who are out of work.
The Deputy will be aware that the Government has committed, in order to enhance international credibility, to adhere to the aggregate fiscal adjustment for the combined period 2011-12, as set out in the national recovery plan. As such, it is expected that the fiscal impact of the measures to be introduced will, in itself, be broadly neutral.
We are fully conscious of our responsibilities in terms of commitments that have been set out in the context of the joint EU-IMF programme of financial support for Ireland, both with regard to the fiscal adjustment measures that are to be implemented and the quantitative fiscal targets that must be met. During the recent meetings which the Minister, Deputy Howlin, and I attended with the programme partners, the external authorities agreed in principle that the conditions set out in the memorandum of understanding which underpinned the programme entered into last November could be amended to accommodate the new programme for Government, provided the overall targets remained unchanged.
As part of the new European semester to ensure properex ante co-ordination and surveillance of economic policies, member states, including Ireland, are required to submit an updated stability programme update to the European Commission by the end of April. Work is currently ongoing in the Department of Finance, in the context of the stability programme update, to update the economic and fiscal outlook. The stability programme update will contain revised economic and fiscal projections for 2011 and the period 2012-15.
The Minister stated that the budget he will introduce following the first 100 days will be counterbalanced. That is the key to this question. If we consider three of the proposals referred to in the programme for Government, namely, the cutting of the 13.5% VAT rate to 12%, the halving of the lower 8.5% employers' PRSI up to 2013 and the abolition of the airport travel tax, those measures will in a full year cost €779 million, based on Fine Gael's estimates — €327 million for VAT, €369 million for PRSI and €83 million for the airport travel tax. Given that two of those measures will extend to 2013, they will result in a reduction of the take by the Government of €1.8 billion up to the end of 2013. While the Government has announced it will introduce a jobs budget, this will include the offsetting of those two measures at a cost of €1.8 billion, and the other measures will add to that figure. Therefore, we are facing revenue raising measures in excess of €2 billion in regard to the resources that will be part of this jobs fund. In addition, the Exchequer returns are very sluggish at this time and if they continue on the same trajectory, we are probably facing a deficit of €900 million.
Is this the reality? Will we see a mini-budget from the Government that will entail a significant revenue raising exercise to offset or, as the Minister said, counterbalance the proposals outlined in the programme for Government and which will total in excess of €2 billion up to 2013?
In our discussions with the IMF and the European partners, they made it quite clear, and we assented quite willingly because we made it quite clear during the election, that whatever changes we made to the conditions in the memorandum of understanding would be fiscally neutral. In other words, if we substituted a range of measures, whether taxes or expenditure savings, by another range of measures, the fiscal impact would be the same. That is the position. Of course, we will bring forward counterbalancing measures. The Department of Finance is examining a range of such measures and we will announce them in the context of the budget in due course. We will not resile from any commitment we made given that one set of measures will be substituted by another set of measures of equal value or, to put it more correctly, equal fiscal impact.
I take it from the Minister's response that the proposed budget will include measures which will increase revenue in the period up to the end of 2013 by in excess of €2 billion. For this year alone, the three measures I outlined will cost €779 million. Is there any indication what measures the Minister proposes to introduce to bring in this money to the State? Are we facing a finance Bill and a social welfare Bill as part of this budget? What economic impact assessment has been undertaken in regard to the measures the Minister has outlined in the programme for Government and the counterbalancing measures that are being discussed in the Department at this time?
With regard to the measures I outlined in my reply, the measures for 2011 have a cost of €220 million and €640 million in a full year. We slightly overestimated our costs during the campaign so they are somewhat lower than the figures the Deputy has quoted.
Richard Boyd BarrettQuestion:
11 Deputy Richard Boyd Barrett asked the Minister for Finance his views on the future sustainability of the State's debt burden arising out of the EU/International Monetary Fund loan package and the banking crisis; if he will reveal the names of all the bondholders of the Irish banks; if he will now consider unilateral restructuring of Irish bank debt to ease the penal debt burden being imposed on citizens and our economy; and if he will make a statement on the matter. [5516/11]
13 Deputy Pearse Doherty asked the Minister for Finance the stage the State’s debt burden becomes unsustainable; the measures being explored to safeguard debt sustainability; the cost of interest payments in the period to 2015 and the projected tax take for the same period; and if he will make a statement on the matter. [5515/11]
I propose to take Questions Nos. 11 and 13 together.
Is that agreed? Agreed.
The purpose of the joint EU-IMF programme of financial support is to provide the necessary funding while Government continues the process of repairing the banking system, restoring the public finances to a sustainable position and assisting the economy to return to a path of sustained growth and job creation. The programme provides access to a secure source of funding which the State can avail of in the coming years. It is important to bear in mind that a large element of the borrowing that will take place under the programme replaces borrowing that would have been undertaken in any event to fund the day to day activities of the State.
The State's debt burden has increased substantially over recent years as a result of the significant deterioration in our public finances, owing to the economic downturn, and the significant level of State support provided to the banking sector. Clearly, a gross general Government debt level of €148 billion, or approximately 94% of GDP, as it is estimated to have been at the end of 2010, is very high and one that needs our ongoing and close attention. Both the nominal level of the debt and the debt to GDP ratio are forecast to increase further in the coming years, albeit at reducing levels, as we will have to continue to borrow to fill the gap between revenues and spending, and economic growth remains relatively subdued.
The stress tests being conducted at present to determine the extent of additional support required by the banking sector have the potential to increase the level of debt over and above the most recent Department of Finance forecasts, with resulting increases in the level of resources that must be diverted to servicing the interest on that debt. It is my view that an amount above the previously identified €10 billion sum will be required but I cannot give a definitive figure until the outcome of the current stress tests is known.
There is no one rule that states that if one's debt is above a particular level, it is unmanageable. Clearly, however, a debt level on the scale the State is currently at is one that warrants our attention and requires that action be taken. Stabilising and then reducing the debt ratio to lower levels is a key priority of the Government's policy objectives. The narrowing of the gap that currently exists between revenues and expenditure through additional fiscal consolidation, coupled with the implementation of policy measures that will assist in boosting economic growth, will assist in this regard, as will the achievement of a primary surplus — that is, an excess of revenues over expenditure excluding interest expenditure — by 2014.
The budget 2011 forecasts projected debt interest costs at €4.8 billion, €6 billion, €7 billion and €7.8 billion in the years 2011-14 respectively. The budget 2011 forecasts for tax revenue for the years 2011-14 were €34.9 billion, €38.3 billion, €41.3 billion and €44.4 billion respectively. The budget 2011 public finance forecasts are based on a capital injection of €10 billion for the banking sector, which, as I have said, is likely to be higher.
One measure which may be referenced in forming a judgment of whether a particular level of debt is sustainable is the proportion of tax revenues that must go towards servicing the interest on that debt. Based on the forecasts I have just outlined, it is estimated that approximately 14% of tax revenues will be required to service the interest on the State's national debt this year. By 2014, approximately 18% of our total tax revenues will be required simply to service the debt. While this is undoubtedly significant and high, the level of tax revenue devoted to servicing the debt in the 1980s was higher. In regard to the forecasts of debt interest costs and tax revenues for 2015, the current forecasts do not extend that far. However, the projections for both are currently being worked on by the Department of Finance in the context of the upcoming stability programme update which is due to be submitted to the European Commission and subsequently published.
Additional information not given on the floor of the House.
I turn specifically to Deputy Boyd Barrett's query on the names of bondholders of the Irish banks. Credit institutions do not have access to comprehensive information on the holders of their senior and subordinated debt, because such debt is publicly traded and dealt with through clearing house systems. Issuers do not have access to the records of those systems and the issuer has no means of establishing the underlying ownership of its bonds at any given time. Unlike the position of shares, the holders of credit institutions' senior and subordinated debt instruments are not subject to a disclosure regime. Therefore, such information as a credit institution may have on the holders of its debt would be indicative only and based on an institution's client-specific and general market information. Any such information would be commercially sensitive and subject to the normal provisions on client confidentiality, where applicable.
Government consideration of the approach to burden sharing will be further informed by the outcome of the important capital assessment exercise currently being undertaken by the Central Bank as well as international developments on burden sharing.
Are we failing to look reality in the face in respect of the unsustainability of the debt burden imposed as a result of this package? It is not only I who say this — this is a view widely held, including by people such as the Nobel Prize-winning economist, Joseph Stiglitz, lead writers for theFinancial Times and economists in this country such as David McWilliams and Constantin Gurdgiev, who all say the burden is unsustainable. It is shocking that some 18% of tax revenue in 2014 will go to service only the interest repayments on this debt, never mind the capital debt. Many people say we are sinking into a morass of debt which will cripple this economy as well as cause untold suffering for working people and the poor and vulnerable in our society. Again, it is not only I or all those economists and international commentators who say that. I remind the Minister of his own words in February: “It is neither morally right nor economically sustainable for taxpayers to be asked to beggar themselves to make massive profits for speculators”. That was said at the launch of the Fine Gael Party banking policy when the Minister stated he believed the new Government, of which he is now a member, would be forced to restructure unilaterally the debt of Irish banks if agreement cannot be reached with Europe regarding senior bondholders sharing the cost of recapitalising the country’s insolvent banks.
The Minister was absolutely right. I could not have put it better myself. At that time, he was in line with what everybody in the country felt and what all serious commentators were saying. What has changed? Why has the debt now become sustainable when at that time the Minister said it was not so?
I ask the Minister to reply.
Is it not time to consider the Iceland option of defaulting or, at least, giving the people the opportunity to debate issues concerning the possibility of defaulting so that instead of bailing out banks we might put the National Pensions Reserve Fund into a job stimulus programme?
As the Deputy pointed out, there is an ongoing and far-reaching debate on these issues. However, there is not a consensus, as he suggested. There are different views and the debate continues.
I never said our debt was not sustainable; I said it could become unsustainable, which is a different issue. It could become unsustainable and we must be very careful to ensure it does not become so. There are variations regarding that and one such will be known at the end of the month. When the stress tests on the banks are made public, we will know what level of capitalisation is required for the banks in order that they can continue to trade profitably. However, there are other variables including, obviously, the level of growth one builds into the economic model and the actual level of growth achieved. Therefore, no matter how wise one is, it is not possible to say the debt will be unsustainable next week, next month, next year, or in three years' time. However, the total burden on Ireland at present would leave one to believe there could come a time when it would be unsustainable and we must consider all options to guard against that possibility.
I call Deputy Pearse Doherty.
Has my time finished?
Yes. Six minutes are allowed per question.
I presume there will be supplementary questions.
There are only six minutes so, if one multiplies that by two, taking into account the two questions, there are 12 minutes of which three minutes and 37 seconds remain.
I refer to debt sustainability. The Minister stated we could arrive at a position in which the State's debt could become unsustainable and the programme for Government mentions a danger of this burden becoming unsustainable. Therefore, this is the position of the Government, not mine. I believe we have already reached that point, as do many other economists and, indeed, the bond markets. Last week saw the highest rates for ten-year bonds, at 9.75%. They continue to rise and, unfortunately, will hit the 10% mark very soon because of the Government's policy.
The Minister stated it was hard to say whether this would happen next week, next month or next year. Surely to God the Minister for Finance's Department must have some kind of analysis that will tell him that if Ireland takes on additional debt burden it will become unsustainable. Let him not tell me that he, as Minister for Finance, is walking us through the dark of the night towards the big iceberg in front of us and that when we finally hit it he will turn around and say, "By the way, folks, our debt now is unsustainable".
What projections have been made in the Department that led the programme for Government to state a time would come when debt unsustainability might become a factor? The Minister announced that to RTE in Brussels. Is the additional amount to be put into the banks €10 billion? Is it €2 billion or €100 billion? I ask the Minister to tell us the honest to God facts, the truth. That is what he argued on this side of the House and the Taoiseach said he would be honest with the people. What is the level in question? Will we have to put in additional money if the stress tests show it is unsustainable to do so at this point? That is my first supplementary question.
The second question relates to the stress test.
There will be no time for an answer.
The Taoiseach announced he will not commit any further money other than the €10 billion already committed to the banks unless burden sharing is on the table. Will the Minister confirm that, regardless of the figure that emerges from the analysis next week, we will not put anything in excess of €10 billion into the banks unless burden sharing is achieved in this State?
In pressing my position Deputy Doherty seemed to slide over the key word. I never said, as he did, that our position is unsustainable. I said it could become unsustainable if too much of a burden is placed——
What is the figure?
The simplest way of looking at unsustainability is the following: if the State were to reach a point whereby we could no longer afford to service our debts, then we would be coming to the point of unsustainability. However, there are many variables that would build up to that and we are a long way from that position. I have great confidence in this economy. In tandem with the jobs budget we discussed that will put growth back into the economy, we can change the profile and the arithmetic. However, we are certainly in a serious situation.
The stress tests will be available at the end of the month. People whose opinion I respect tell me the figure will be more than €10 billion but I cannot give the Deputy a precise figure. The figure of €10 billion is built into the arithmetic and therefore there will be an additional burden put onto the Irish taxpayer. We will look at the situation then but must move in the context of a bailout agreement being in place with the agreement of the IMF, the European Central Bank, the European Commission and the Irish Government. That Government, our predecessor, spoke for the Irish State. Therefore, the contract is not with the Fianna Fáil-Green Party Administration but with the Irish Republic and one must remember that when considering these issues.
12 Deputy Brian Lenihan asked the Minister for Finance asked the Minister for Finance the way he has progressed the work of the past Government in regard to the reduction of the interest rates applicable to facilities available under the EU-IMF agreement in respect of the proposed 1% reduction in the facility rate; and the projected savings in the interest bill on an annual basis and over the lifetime of the loan. [5518/11]
There is now a general appreciation of the importance of debt sustainability considerations in the pricing of EU and euro area financial assistance loans to member states.
In this regard, the Heads of State and Government of the euro area decided on 11 March that the pricing of the EFSF — loans — should be lowered to better take into account debt sustainability of the recipient countries, while remaining above the funding costs of the facility, with an adequate mark up for risk, and in line with IMF pricing principles.
The Council also decided that the interest rate on the loans to Greece will be adjusted by 100 basis points. The position in regard to the pricing of Ireland's loans was also considered in the context of wider political discussions and the Council did not take any decision in the matter. Following the meeting of euro area Heads of State and Government on 11 March, finance Ministers are now considering arrangements for the implementation of the changes announced on pricing. The meeting of eurogroup finance Ministers on Monday agreed the term sheet for the European Stability Mechanism, ESM, which will replace both the EFSM and the EFSF from June 2013. This term sheet includes a pricing formula, similar to the IMF approach for ESM loans. The pricing formula provides for a lower margin than currently applies for either the EFSF or the EFSM.
It is not possible at this stage to provide definitive estimates on the level of savings which would arise if reductions were agreed in the pricing of the EU loans to Ireland. However, I understand from preliminary analysis undertaken by the NTMA that a 1% target reduction in the interest rate could yield overall savings of the order of €725 million over the life of the €12.6 billion EFSM and EFSF loans which have been committed to so far. The estimated equivalent annual savings would be of the order of €130 million.
That is the saving on the amount drawn down so far but the fund reaches to €85 billion so we are talking about savings on the drawdown of €12.6 billion.
I emphasise that these are estimates based on the amounts committed to or drawn down to date. The actual savings that would arise from any interest rate reduction secured would depend on the total amount of funds drawn down and on the maturity profile of any such loan. We have yet to decide how much we will draw down and the schedule for any such drawdowns.
Does the Minister accept that at the time of his accession to office, the Commission already strongly supported this reduction but that his difficulty has been in persuading the other sovereign states participating in the EFSF arrangement of the validity of our case? That is where matters lay when the Minister took up office and they have not really changed since. There is still a difficulty with other member states using the fact that sovereign consent is required for the facility moneys; essentially that would impose further conditions on the State.
The Minister gave a figure of €130 million as the annualised sum involved. I take it that is on the basis of a current envisaged drawn-down, or is it on the basis of a current actual draw-down?
It is the actual draw-down. The Deputy will recall that when I became Opposition spokesperson for finance at the start of the autumn session, this became an issue. At the time the advice was that a reduction in the interest rate was not possible. That changed as we came to Christmas and Commissioner Ollie Rehn in particular seemed to move his position. I know the Deputy had discussions with him at the time. The Commission was moving in advance of the politicians, which is usually the way in Europe if progress is to be made. The Commission proposes but the political people make decisions.
After Christmas the process began to move to the political side and very significant progress has been made. Considering the drafting of the communiqué after the meeting of the heads of state, it is indicated that a 1% reduction will be given on the Greek loans and the term will be extended in return for a €50 billion privatisation programme in Greece. It is also indicated that the pricing on the EFSF will be reduced by 1% but the only country availing of that is Ireland. The Greek arrangements were in place before the EFSF was introduced. It is agreed by the 27 members that there will be a 1% reduction. There have been interventions on thequid pro quo involving Ireland but there is no quid pro quo written into the communiqué; there is a reduction in the price of moneys drawn from the EFSF, with Ireland the only country drawing down from it. I hope this will be resolved in the coming weeks but it is difficult to know what will happen in the next few days in Europe as there are many other issues.
Does the Minister accept that the amount of the reduction does not impact significantly on the question of debt sustainability in the future and the risks which the Minister has identified in that regard?
It is helpful and will become increasingly helpful as draw-down increases both on the sovereign side and with any potential additional draw-down on the banking side. A 1% reduction is a significant amount of money. This has also influenced the pricing on the new European stability mechanism, which will apply from 2013. There is a complex pricing blend but it ends up at approximately 1% less than the EFSF fund. That is progress and we need the price to be low for the bail-out as a whole. My major policy position is that whatever the negotiations are, the policy objective is to reduce the cost in total of the bail-out, whether on the sovereign or banking side.