Priority Questions

Small and Medium Enterprises Debt

Dara Calleary


1. Deputy Dara Calleary asked the Minister for Finance the actions being taken by the State-supported banks and other banks licensed in the State to deal with the level of small and medium enterprise arrears; his views that the delay in dealing with SME arrears is hurting the wider economy; and if he will make a statement on the matter. [28666/14]

The question seeks a discussion with the Minister on the level of SME arrears on loans and what plans the Government has to deal with the issue.

I thank the Deputy for raising the issue. I am informed by the Central Bank that, in 2012, the bank wrote to each lender active in the SME market requesting they devise strategies and implementation plans for resolving SME debt by making use of longer-term solutions than had been applied to up that point. A key objective of such strategies was to recognise viable businesses and to separate these from overhanging property debt in determining appropriate loan workout solutions.

Resolutions offered to SME customers in difficulty are assessed on the basis of the borrower's maximum affordability. The restructures are often complex due to multiple debt connections. Irish banks are well advanced in restructuring their SME loan books.  I am informed from the latest publicly available information that Bank of Ireland has indicated it had reached resolution in 90% of distressed SME cases and AIB's results indicate a resolution level of approximately 65%.  It is also worth noting that defaulted loans for both banks have reduced year on year. 

The Central Bank's process of assessing financial institutions, in its efforts to move distressed SME borrowers on to longer-term sustainable solutions, is an important element in assisting SMEs to transition to a more sustainable state.  This work will continue throughout 2014. Additionally, the Government's enactment of legislation to allow small companies, as defined by the Companies Acts, to apply to the Circuit Court for examinership and the ongoing work of the expanded Credit Review Office are all initiatives that will assist viable SMEs in addressing their debt situation and, consequently, enhance the employment prospects for the sector as a whole.

In light of the above, I would not agree with the Deputy's assertion that there is a delay in dealing with SME arrears.

I thank the Minister. The Central Bank also published a report about SME debt recently which showed that 26% of SME loans by number and 41% by value were in arrears. This is in spite of the figures the Minister has just quoted to the effect that 90% of Bank of Ireland and 65% of AIB distressed SME loans have been resolved.

The issue for the Central Bank is still hugely significant, in particular the overhang in employment prospects. If SME owners are dealing with that, they cannot expand their businesses and they will not expand employment while the issue hangs there. We see some very high-profile, large business people getting significant debt writedowns whereas small SMEs - the Minister and I deal with them every day - are being put through the wringer. I dealt with a case on Monday of somebody with a relatively small distressed loan who had been put through 15 months of a wringer. When one goes through the file, one sees the delaying tactics being employed by one of the pillar banks. It is ridiculous. There is nowhere for that person to go because the person does not want to distress the relationship with the bank.

We still have a problem if we take the figures of 26% of SME loans by number and 41% by value. What value of Bank of Ireland and AIB loans were resolved under the resolution process that the Minister laid out?

There is no doubt there has been a very significant problem with debt in the economy, including private debt, SME debt and, indeed, national debt. Plans have been put in place by the Department of Finance and the Central Bank to resolve the debt situation. What I am saying is that progress has been made, not that everything has been solved.

There is no contradiction between the figures the Deputy is giving on the percentage in arrears by volume and by value, and what I am saying, namely, that 90% have been resolved. For quite a long period, even though they are resolved, they are still showing as arrears in the bank books as they are not taken as loans that do not have arrears. It is the same with mortgages. Until the Central Bank does the audit and says the repayment arrangements are sustainable, it still remains in the arrears figures. Of course, we will reach a tipping point where the resolution arrangements will be deemed to be satisfactory and people will continue to pay their loans.

Tax Yield

Ruth Coppinger


2. Deputy Ruth Coppinger asked the Minister for Finance if his Department has estimated how much a 5% or 10% rise in wages for low and middle income workers would boost tax receipts and reduce welfare payments; and if he will make a statement on the matter. [28546/14]

Has the Minister considered the impact on the economy of a 5% or 10% pay increase for low and middle income workers in terms of tax receipts and a lowering of social welfare? The reason I ask the question is that the Minister has touted the benefits of a tax cut over pay increases while calling for employers and, indeed, the Government to suppress wage increases.

While it is possible to estimate the additional tax paid by an individual on a certain income, to do so on an aggregated basis would require a significant number of assumptions that would have to be made about incomes and specific circumstances, for example, the definition of low and middle income workers. More generally, on a static basis, I believe it is fair to say that an increase in wages would result in additional taxes to the Exchequer. These would include direct taxes such as income tax and universal social charge, but also indirect consumption taxes such as VAT and excise. Social contributions from employees and employers would also increase. The exact gain to the Exchequer from the taxes would require an assumption regarding an individual's marginal propensity to consume, that is, for every extra euro in their pocket, how much would be spent on goods and services.

The static picture outlined above is not realistic, however.  The wider economic impacts of a wage increase would have to be considered, most notably on competitiveness. An increase in wages and higher employer PRSI contributions would have to be paid directly by the employer. These additional costs would have to absorbed into the bottom line, thereby reducing operating profits available for reinvestment and additional employment, or be passed on to the final consumer, which undermines competitiveness. Research by the ESRI has shown that exporters are price-takers on international markets.  This means they cannot directly pass on higher labour costs to customers in global markets. Higher wages that are not supported by productivity improvements result in a loss in market share and, ultimately, fewer exports and jobs in Ireland.

Additional information not given on the floor of the House

This is a situation which Ireland experienced very recently. During the boom times, wage increases across the economy contributed very significantly to the loss in competitiveness, which resulted in Ireland's export sales beginning to decline. As a small open economy, continued export growth will be key in driving sustainable economic growth into the future. As such, any wage increases should also be viewed through this prism. Further, upward wage pressures in the private sector would also likely translate to calls for increased wages in the public sector. This would place pressures on previously announced agreements such as Haddington Road and place an additional call on the Exchequer.

The tax forecasts prepared by my Department are based on economy-wide levels of employment and income rather than focusing on specific cohorts. These forecasts take into account the most recent labour market data from the quarterly national household survey and the earnings, hours and employment costs survey, both of which are produced by the CSO.  The forecasts were most recently articulated in the stability programme update.

In order to provide additional clarity, I would inform the Deputy that all specific income tax measures undergo distributional analysis in advance of budgetary decisions being made. In addition, the distribution analysis of such tax measures announced in the budget is included in annex A of the budget book. The distributional analysis is based on tables demonstrating the effects of budget changes in respect of income tax, PRSI and USC on single, married with and without children, PAYE and self-employed income earners over a wide distribution of income levels. The tables in the budget book also demonstrate the effect of changes to some payments from the Department of Social Protection, such as family income supplement.

In addition, every distributional analysis contains a section which outlines the effect of budget changes on illustrative cases. These illustrative cases examine the effect of budget changes on various categories of income earners, including single, married, lone parents and elderly in a variety of different occupations and with varying income levels, and not only demonstrate the effects of the budget tax changes but also the effect on changes to a number of payments from the Department of Social Protection, such as family income supplement, child benefit, State pension and one-parent family payment, where relevant.

With regard to potential savings in welfare payments, these are a matter in the first instance for the Minister for Social Protection, Deputy Joan Burton. However, I understand that, in terms of the potential impact on welfare payments from an increase in wages, this cannot be easily estimated. For example, the answer may be different in the case of a single person versus someone who is married with children.

Competitiveness is the argument that is often used, but pay levels in Ireland are still far below the EU average. The Minister is underestimating how much they have fallen since the crash. They have increased by 12% for managers and professionals, but there has been a decrease of 5% for lower paid production, transport, craft and other manual workers.

Wage increases are superior to tax cuts because all low and middle income workers benefit, including those too badly paid to be sufficiently in the tax net. The Nevin Economic Research Institute, NERI, found that one third of households had gross incomes of less than €27,000 and would not benefit from income tax cuts. The Minister mentioned a second benefit of wage increases, that being, an increase in tax revenues, which could be used to pay for public services. Tax cuts could decrease what is available for those services.

If we were to have an economic debate on this matter, there would be validity in the Deputy's points, but we must first distinguish between the private and public sectors. Whatever the economic benefits of increased pay levels in the public sector, the Exchequer cannot afford them at present. Pay reductions have been negotiated as late as last year through the Haddington Road agreement, not pay increases. On the other hand, parts of the private sector can afford pay increases. From the statistics I have seen, I understand that approximately 40% of private sector firms gave small pay increases last year. The test is whether the amount they pay is consistent with not disimproving their competitiveness, the measure of which is decreasing market share. If they can increase pay without losing market share, particularly on the export side, it is good for the economy for them to pay their workers extra.

I do not agree with the Minister about public sector workers. The economy would benefit considerably from the increase in consumer spending that would follow increases in public sector pay. Wealthy people who receive tax cuts tend not to spend in the economy to the same extent. Dr. Micheál Collins of NERI has estimated that an hourly increase of €1 for a low-income worker is equivalent to a gross increase of €1,956 per annum.

The Minister omitted to mention how the social welfare system subsidised part-time and low-paid work. These people could be given pay increases. JobBridge, the family income supplement, FIS, and so on are costly to the general taxpayer and are subsidising employers in taking on workers at low pay.

It is time that we commence the wider debate, and I welcome the Deputy's question for doing so. For the past five years, we have been dealing with the problems of a failed economy. It has just turned and we are beginning to deal with the problems of an economy that is growing and successful again. One such problem is wage demands and wage pressure, which are just beginning to start. We must re-examine what type of model best suits this country, small as it is, in delivering extra income to households. A part of that model involves wages, but all we can afford at this moment is the debate. We are not in a position to deliver with hard cash yet. I do not share some people's position that increased pay is bad. If a company or the State can afford it, increased pay is good and economic benefits run from it. The Deputy has commenced the debate and it is something to which we will return several times.

Corporation Tax Regime

Dara Calleary


3. Deputy Dara Calleary asked the Minister for Finance the steps being taken to ensure that Ireland's economic interest is protected during the European Commission investigation into possible breaches of state aid rules in respect of Apple's operations here; and if he will make a statement on the matter. [28667/14]

Will the Minister update the House on his Department's response to the European Commission's investigation into the questions of state aid surrounding Apple?

Last month, the European Commission announced its intention to open formal state aid investigations into a number of companies in EU member states. This announcement was part of a much wider Commission investigation that had been ongoing for some time into tax rulings and patent boxes in different member states. I am sure the Deputy has already noted the announcement made in respect of the Netherlands and Luxembourg and that Vice President Joaquín Almunia stated in his press conference that a number of other countries were also being examined.

We understand that the Commission has a job to do in investigating potential state aid. Ireland has co-operated fully with the process to date and will continue to do so. However, I assure the Deputy that protecting Ireland's economic interests is foremost in our considerations on this issue. We will provide a detailed, technical legal rebuttal to the Commission's position and, if necessary, defend our position in the European courts.

It is important to emphasise that the Commission has only opened a formal investigation at this stage and has not made a final determination on state aid in respect of Ireland. For state aid to exist in this case, less tax must have been charged to the company than should have been applied and this must have distorted competition within the Single Market. Our response to the European Commission will be clear - the appropriate amount of Irish tax was charged, no selective advantage was given and there was no state aid.

It is also important to emphasise the single focus of this investigation. It relates to this company and this company alone. The Commission has been clear that it is not investigating the 12.5% rate of corporation tax or the Irish tax system. In fact, Commission Vice President Almunia emphasised this point at the press conference he held to announce these investigations. There are no wider consequences arising from this investigation in respect of the Irish tax system or foreign direct investment, FDI.

Additional information not given on the floor of the House

Given the importance of FDI for the economy, members of the Government and officials from various Departments and agencies have taken care to highlight the position of the Commission that I have just outlined. Our message to anyone who is considering investing here is that we have a fair, open and transparent corporate tax regime, and that Ireland remains an attractive, competitive and safe place to invest.

What is the likely timeline of the investigation into Apple? Given the fact that there is about to be a changeover in the Commission, will the investigation continue afterwards? The Minister was correct to state that it was only into one company, but he knows that an adverse finding in this case would have implications for all of our multinationals and, most importantly, our ability to attract inward investment. I get a sense that the Government is sleepwalking through this issue. It is nine months since the initial probe was launched and we are now into a formal probe. Has the Minister received any informal indication that other companies may be investigated?

In the commentary in the US, particularly as it approaches election season, Ireland regularly comes in for disparaging and uninformed remarks from politicians in Congress.

Will the Minister confirm that our corporation tax arrangements and rules are in accordance with the OECD guidelines on taxation?

They are, and no one is putting pressure on our rate. There are three issues with our corporation tax - the rate, which is 12.5%; the regime, comprising the rules and the system; and our reputation. The concern must be about the reputational issues. As the Deputy stated, ill-founded comments are frequently being made in the international media and it is difficult to chase them down and catch up when a mistake is made.

On the assumption that the investigation moves from the informal stage to the formal one, that will happen in a week or two. Subsequently, though, the process may take quite a while. If the issue ends up in the courts, we are talking about somewhere between three and five years.

It is not true to say that there will be knock-on effects. There is a single allegation that Ireland, particularly the Revenue Commissioners in their treatment of Apple, provided what is deemed to be state aid. The investigation is ring-fenced around Apple.

They are not investigating any other companies at present. The Deputy is correct in that we cannot sleepwalk into these things and we have to ensure we position ourselves properly, which we are doing, because in parallel to all this there is a major piece of work taking place at OECD level with which we are co-operating and which we are watching very carefully.

My contention is that the Minister did sleepwalk into it and has said there will be no knock-on effects. If this continues for three to five years, and one is in the inward investment business in, say, Singapore or Scotland, after September, of course they will be hawking around to potential clients who may be looking at Ireland or elsewhere outside the EU and spinning that this process will affect their ability to invest in Ireland and affect Ireland's ability to attract these companies. Our hands will be constrained in respect of attracting inward investment if this continues for five years. I know these are the European rules but if this is a European Union that says it is pro-enterprise and allows an investigation into one company, as specified, to potentially last that long, that is not pro-enterprise. For as long as this is happening, our ability to attract inward investment will be constrained. It may not be done formally. The Minister knows that the informal way of doing this is that international investment companies will seek to attract investment into their countries while undermining our ability to do that as long as this is going on.

The Deputy misunderstands my position. He asked a precise question about how long the investigation process into Apple, initiated by Commissioner Almunia and his staff, would take. I gave the Deputy a timeline on that. That does not mean the Irish authorities will stand idly by and wait until the end of the process before doing anything. In last year's Finance Bill we took the first step in regard to changing the status of companies that, from a tax point of view, are not resident anywhere, and we published a discussion paper a couple of months ago which is providing the basis for a discussion. We have taken the top tax practitioners in the country, who deal with all the multinationals, into our confidence and have briefed them fully, on a confidential basis, on the implications. We also have direct conversations with some of the big investors. At present we are in a pretty good space but we are not making light of this. I see it as an issue that needs to be dealt with at a policy level but getting the timing right and matching it to events as they occur, both in the competition authority in Europe and in the OECD, is important. It is aligning everything so that we can make the moves that may be necessary without any damage to reputation.

Banking Sector

Ruth Coppinger


4. Deputy Ruth Coppinger asked the Minister for Finance his views on the Bank of Ireland selling part of its mortgage loan book to Dilosk Limited; and if he will make a statement on the matter. [28626/14]

What are the Minister's views on the Bank of Ireland selling off its mortgage loan book to Dilosk Limited, an unregulated company, and does he intend to stand idly by and allow this to happen given the huge subsidy put into the banks by the taxpayers of Ireland, or will he take action to prevent this happening?

It is important in answering the Deputy's question to provide the background as to why Bank of Ireland has agreed to sell €250 million of the ICS loan book to Dilosk Limited. In July 2013, Bank of Ireland agreed an amendment to its restructuring plan which had been agreed with the European Commission in respect of state aid received by the bank. This allowed the bank to retain its life assurance subsidiary, New Ireland. As part of this amendment, the bank committed to certain substitution measures, including the sale of the ICS distribution platform together with, at the option of the acquirer of the platform, up to €1 billion of mortgage assets and a similar quantum of matching deposits. The purpose of the ICS substitution measure is to support new entrants in the Irish mortgage market, thereby increasing competition to the benefit of the consumer.

As the Deputy is aware, the bank announced on 26 June that it had agreed to sell the distribution platform, together with €250 million of mortgage assets at par, to Dilosk Limited. No deposits are transferring as part of the sale. Dilosk is an Irish financial services company, headquartered in Dublin which plans to grow its mortgage business in Ireland by offering new residential mortgage loans. According to its website, Dilosk will offer mortgages to borrowers seeking to purchase or refinance residential property with a particular focus on residential investment properties, that is, buy to let.

The ICS sale is the final divestment commitment to be completed by the Bank of Ireland under its EU restructuring plan.  Given the reduced number of lenders now operating in the mortgage market, this transaction is to be welcomed as it introduces a new entrant and should therefore contribute to greater competition.

Why is the bank selling loans that are performing perfectly well? It is alarming that this is happening and that no action is being taken to prevent it. On its website, Dilosk says that it has a focus on residential investment property, that is buy to let. Therefore, it is not the case that it is focusing on ordinary residential lending; it is investment lending. The bank's shareholders and the bondholders were underwritten by the ordinary people of this country who have paid a heavy toll over the past six years, but it appears that ordinary mortgage holders are to be moved into the unregulated sector in which Dilosk Limited operates. There have been accusations that the Minister's Department gave advance warning to the banks to sell mortgages now, a year ahead of new EU laws to force buyers of loan books to observe much stricter codes. Perhaps the Minister would comment on that.

This is part of the restructuring of Bank of Ireland which was agreed with the European Commission several years ago and it is the last piece of it that is now being put in place. It is not a move of a mortgage book into the unregulated sector. As Dilosk Limited has said in its website, it has confirmed that it has applied for authorisation from the Central Bank in Ireland to operate as a retail credit firm. In addition, Dilosk Limited has confirmed that it intends to comply with all the relevant regulatory codes applicable to mortgage lending, including the code of contact for mortgage arrears. Therefore, it is a transfer of ownership of a mortgage book to the value of €250 million but it should not affect the holders of the mortgagees in any way whatsoever. They will just continue to trade according to the terms of their contract and it is regulated by the Central Bank.

People took out those mortgages with ICS Building Society. Building societies were regarded by people at that time as safe and secure places. Now they will be with a company about which we know little or nothing. The Minister appears hell-bent on increasing competition in this sector. Sub-prime lenders who are operating in this sector were brought in for the same reason, to increase competition. Look what they have done to people in this country. Many constituents are suffering because of companies such as Start and Springboard charging exorbitant rates. They are now selling their mortgages to vulture funds such as O3 and Lone Star. Other sales have taken place to Pepper and Tanager. Is this what the Minister means by competition? Those lenders should have been outlawed a long time ago. Their books should have been taken over by the State and the banks, generally, should have been taken over by the State and run in the public interest, not in the interest of the bondholders. We are now seeing the impact of leaving the banks in private hands. They should have been nationalised under democratic control, accountable to consumers and those who work in them.

The banks have not been left in private hands. They have been taken over by the State. AIB is 99% owned by the State, Bank of Ireland is 14% owned by the State and Permanent TSB is 99%-100% owned by the State. The reason building societies were taken over by the State was that they went bust and there was a need to protect the people who were doing business with them, including those who had mortgages. What the Deputy has said simply does not correspond with the facts of the situation. Anything that has happened is in the interests of the people who have mortgages. That is the position.