JOINT COMMITTEE ON FINANCE AND THE PUBLIC SERVICE debate -
Tuesday, 27 Jan 2004

Visit by Latvian Parliamentaries Delegation.

Chairman

On behalf of the Joint Committee on Finance and the Public Service, I extend a warm welcome to the chairperson and members of the Budget and Finance Taxation Committee of the Parliament of Latvia and their officials. I also welcome the president and other officers of the Hypotheken Bank. We are also joined by the first resident Latvian ambassador in Ireland and his first secretary. You are all very welcome.

This is an appropriate time for your visit, coming as it does at the start of the Irish Presidency of the European Union and just a few months before Latvia's accession as a member state. Your visit reflects a growing relationship between Ireland and Latvia, a relationship that is evident by the increased level of political and official contact, the appointment of your resident ambassador and increasing trading activity between our two countries. We are looking forward to Latvia's accession here in Dublin on 1 May and we are pleased that we are being joined by another small country that is, in physical terms at least, on the periphery of the European Union and whose history has some parallels with Ireland. We hope that your experience of EU membership will be as positive as ours has been.

I know that the main purpose of your visit is to examine some of the implementation mechanisms of Ireland's economic policy and to look at the way in which EU membership has contributed to our economic success. I hope we can help you with your questions in this regard. Your chairperson has indicated that there are a number of topics that you would be interested in, and I propose to structure the meeting to facilitate a discussion on those issues.

We will begin with the role of the EU Structural Funds in Ireland's economic development and then move on to the role of the International Financial Services Centre, taxes and fiscal policy, and monetary policy. If there are any other issues you would like to discuss, we will do our best to deal with those also.

Mr. Guntars Krasts

We are really pleased, with our colleagues, to visit your country and to meet you here. We are here in Ireland on a fact-finding mission. It is really very interesting for us to meet you and to get an overall idea of how your committee and the Irish Parliament are involved in the issues that the Chairman has outlined as the main purpose of our fact-finding mission to Ireland.

We had an excellent opportunity to talk to your people in the Department of Finance development agency. We learned a lot about how Ireland has managed European funds and created an attractive environment for foreign investment. That will be a task for our country, which is about to join the European Union. On the one hand it is an appropriate time to visit Ireland, but on the other hand it is not the best timing because everyone is busy as Ireland currently holds the EU Presidency, which creates an additional time pressure as people are involved in different European issues and matters relating to your domestic policy.

We are really pleased to be here and to have this opportunity to talk to you. Apart from the topics the Chairman has already mentioned, we are also interested in discussing the ways in which your committee deals with EU funds. Are you involved in the scrutiny and allocation process? What issues does the committee deal with? How does the committee deal with its public expenditure remit? We do not know anything about this role. What does it mean? A discussion of your involvement in public affairs, and issues such as monopolies, regulation processes and price setting, would be of interest to us.

Chairman

For your information, both myself as Chairperson and the two gentlemen on my right are members of the largest Government party, Fianna Fáil. The next gentleman is a member of Sinn Féin and he is on the Opposition. The two other gentlemen are Independent Members of Dáil Éireann and Seanad Éireann, and also Members of the Opposition. There are three Members of the Government side and three Members of the Opposition, and our views often differ on many topics. You will not always receive the same answer to a question from everyone in Ireland because different people have different opinions.

Senator O’Toole

Just because we are Independent does not automatically mean that we are the Opposition.

Chairman

I am very impressed to hear that.

Senator O’Toole

Independently, we are independent of all others.

Chairman

We will briefly run through the first four topics and we will return to the role of the committee before we finish. Perhaps I might take one Member of the Government side, Senator Mansergh, and one Member of the Opposition, Deputy Ó Caoláin, to speak briefly on the role of EU Structural Funds. Questions can then be asked.

Senator Mansergh

We have a separate Public Accounts Committee that deals with scrutiny of Government expenditure, so that does not fall within the ambit of this committee.

EU Structural Funds have been important to Ireland's development, mainly from 1988-89 to a year or two ago. The funds are tapering off because GDP per capita is now well above the EU average. The funds were important during the late 1980s and early 1990s when we had substantial budgetary and financial problems. We had a debt ratio of well over 100% of GDP; at the same we needed to be investing, not just cutting back. The Structural Funds enabled us to start to undertake the massive modernisation and investment needed for roads, telecommunications, waterworks, railways and so forth.

It would be wrong and simplistic to attribute the Celtic tiger economy solely to Structural Funds. Many factors are involved in the dynamism of the Irish economy, but it certainly would have been one of the helpful factors that made a great difference.

The lack of modernised infrastructure is one of the main deficiencies in the Irish economy to this day. However, we are now funding a national development plan, no longer from European resources but overwhelmingly from our own. The country is divided into two regions. The Border, midland and western region is still receiving full Structural Funds, but it comprises only a minority of the population. The population is much greater in the southern and eastern part of the country. However, after 2007 that will taper off.

In the late 1980s, Jacques Delors, who was president of the EU Commission, once said privately to the Taoiseach, "If the European Union cannot make a success of Ireland, we might as well throw our hat at it" — meaning that we might as well give up. Ireland was a small country with a small population and as the amount of funds needed was not that great the funds made a real difference. They have also made a difference to countries such as Portugal, Greece and Spain. They played an important part in our economic development, but they will be much less important in future because, in a sense, we are flying with our own wings now.

Deputy Ó Caoláin

Ba mhaith liom fáilte a chur romhaibh anseo go hÉirinn. I welcome you, in our own language, to Ireland, and I welcome the Latvian people to the expanding European Union. As a Member of Parliament who on two occasions campaigned against the Nice treaty in referenda here, I want to emphasise that I was not against enlargement but against the course of the governance of the European Union. I hope that as partners in this new experience we will find common cause, particularly with regard to the interests of small member states. Ireland and Latvia will find much on which they can agree.

I also welcome the establishment of a new Latvian embassy in Ireland this year. I welcome the ambassador here today, and I look forward to the permanent residence of the ambassador in Ireland. It is a positive and important development.

My colleague referred to the phrase "Celtic tiger". People are familiar with it — it is globally recognised. However, it did not bless the lives of all Irish people. A number of factors contributed to the Irish economy's boom, particularly over the past decade. Unquestionably, the EU Structural Funds were a significant part of that. The standard of education was also an important factor; we have a highly educated young and enthusiastic workforce. It is also important to recognise that in the past decade we have had the peace process in Ireland, which created the political conditions that allowed people to progress in economic terms. That entailed many challenges.

I disagree somewhat with Senator Mansergh on the issue of Structural Funds. It is important to ensure equitable distribution of funds throughout your country. That has not been the reality of the Irish experience. No argument about the population size along the east and south coasts of the State can justify or excuse the abject neglect and lack of investment in infrastructural development in the Border, midland and western region of this State. I say to the Latvian delegation and its representative that it is important that the distribution of Structural Funds be equitable and that they have a positive impact on the daily lives of ordinary Latvians. That has not been the case in Ireland, and there is significant disappointment that whole swathes of this jurisdiction did not enjoy anything like the investment that other parts of the jurisdiction did. Of course, the opportunity passes by quickly, and that is very much a concern in the areas that I represent.

I will make one significant point about education. Equity in terms of access to third level education is extremely important. As regards development in this country, third level education establishments, and the range of degree and other courses, are concentrated in the significant population centres. Therefore it is extremely expensive and prohibitive for people to give their young people the benefit of third level education. It is not only an issue of the cost of college fees, but of their daily living conditions, accommodation and all the other costs of living away from home. That is a huge disadvantage. It is important that access to third level education is provided equitably and that people have either made provision for it or have the support to enable them to access it — otherwise significant disparities will be seen between sections of the country.

Those are some of the downsides of the Irish experience. I emphasise them because the best suggestion I can make to you is that you learn from the mistakes that were made here so that you can do a better job. I wish you well with the exercise before you. Go raibh maith agat.

Senator O’Toole

I also welcome the delegation and welcome you to the European Union. I look forward to working with you for many years to come.

My background is one of involvement in the Irish Congress of Trade Unions. Deputy Ó Caoláin has just dealt with one of the most obvious issues that has arisen since Ireland joined the European Union — how we might have done it better. Every country that joins the European Union has received a major flow of money soon after joining through various forms of supports — agricultural and so on. That happened to us in the 1970s. Ten years later, in the early 1980s, we found ourselves entering the worst economic depression imaginable. Towards the end of the 1980s all sides had to pick up the pieces. We created this concept of social partnership between the trade union movement, civic society, Government, business and employers to examine the problems. We were 15 years too late in doing that. We started that in 1987 but we should have started it in 1972.

One of the things we have learnt as a result of receiving that added investment is that investing in the infrastructure of the country makes it easier to get out of the depressions that are part of the economic cycle — the boom, the bust and the growing again. If we have learnt anything it is that we should ensure the flow of investment into a country after joining the EU is directed totally towards investment and infrastructure to create good transport and education infrastructures and all that goes with that. There must be positive long-term job creation with added value. Those are the three tests.

If only we had had that knowledge when we started in 1973. All the interests of society, whether they be investors or people who are creating a profit for themselves or who are selling their labour or the Government or the voluntary area of civic society, all of them have a common set of objectives: a sound wealth-creating economy. In the social partnership model everybody must focus on wealth creation and argue about wealth distribution. We have seen that without good infrastructure in a country the difference between good times and bad times is very wide. However, if the infrastructure is there the country can grow itself out of recession.

Briefly, that is the lesson that I think we should have learnt were we starting all over again.

Chairman

I will make two observations about very practical issues that Ireland had with regard to EU Structural Funds. It is important that in your country you have a large number of projects at a sufficiently advanced stage of planning so that when Structural Funds become available you can move immediately to draw them down.

Ireland was particularly successful in having extra projects ready so that it could draw down additional funding, whereas other countries, even though they had been allocated funds, might not have had a project at a stage to go to construction and draw down the funds, with the result that the funds were not given to that country. It involves advance planning. Your Government should be ready to draw down advance funding from projects that other countries may not take up.

We have one word of caution for you. Be aware of inflation. Most countries feel that after they joined the EU a flow of Structural and other funds moving into their countries caused some inflation. That could happen in your country. Unless you are ready and careful and watching for it, inflation will rise. That could do some damage to your country. It is in your own interest to be very careful about it. It is in the natural order when extra money flows into a country. Be careful on that point.

Mr. Ainars Latkovskis

May I ask Senator O'Toole about the concept of social partnership? Yesterday we heard many speakers emphasise that it was probably that concept that gave Ireland its push forward. We also heard a great deal about the agreement between Government, civic society and trade unions. What did the Opposition do? How easily was the concept accepted in political circles? Is there still such agreement in general between Government and Opposition about the way forward for Ireland?

Senator O’Toole

There is agreement among all parties on social partnership. They feel it is very positive because it forces the different viewpoints together. I represented the trade union movement in that area, so you will understand the objectives of the trade union movement. On the other side of the table would be the bosses of business and the employers, and you will understand their objectives. Civic society and the Government were also involved. The value is that people are no longer speaking to themselves. If trade unionists are talking to trade unionists they will always agree. If business is always talking to business it will always agree. However, if they are forced to listen to the objectives, demands and ambitions of the other side, effectively points of common agreement always emerge. They will never be in total agreement, but there will be certain elements of agreement.

The one certainty that must exist is growth in the economy, because no group can make progress unless the economy is sound. Therefore the first issue in any discussions on national partnerships has always been the fundamentals of the economy: growth, interest rates, inflation and the issues that attach to them such as job creation and job losses and investment in the future. That has been a huge element of it.

However, we have seen agriculture go backwards during the course of the national partnership. One of the main lessons that has not been learnt in Europe is that after 2,000 years of focusing on producing as much as possible, the agriculture industry found itself in the European Union being regularly paid not to produce. Agriculture is the only sector that has not advanced in greater productivity, and that is a lesson to be learnt.

Social partnership is not about total agreement; it is about recognising viewpoints and about deciding how profit is shared out and what happens to it next. How much of the profit goes to the running of the State? How much of it goes to profit? How much of it goes to investment? How much of it goes to workers' labour? Those are the questions. It is never easy, but it forces people to work with a common objective. The downside is that none of the groups represented is ever completely happy because they are forced to compromise. That requires a lot of growing up.

Mr. Krasts

I have a question on the same issue. The year 1987 was a turning point for Irish politicians and trade unions in understanding how to work together to reach better results. In 2000-01 there was a huge surplus of some 4.1 billion in the Irish budget. Trade unions and Government discussed how to proceed, and social dialogue was on a broad, solid basis. How did you keep this money in the pocket of the State for future investment and development?

Senator O’Toole

Over 16 or 17 years I suppose that was probably the most difficult period of negotiations. There was a huge fear that the economy would suddenly go back to where it had been in 1987. There was a common viewpoint — not held just by the trade unions but shared by the business community — that the Government should increase its investment in infrastructure. As you will probably have noticed, we in Ireland have a huge problem with traffic congestion. That always comes with fast growth.

The Government was not prepared to move on infrastructure or on health. The trade unions would have been unhappy at the time with the level of investment in health in particular. That continues to be one of the key political issues of the day among all parties and viewpoints. Negotiations will be starting in the next few months for the next national agreement, if there is to be one. That will be the key issue.

Senator Mansergh

I think the problem was when we had that very large surplus. The capacity of the economy to deliver investment was at its limit. We have had quite serious inflation problems. The rate is now under 2%, although it touched 7% at one point. The problem is that if you try and spend too much too quickly, even if you do have a large surplus, all you may do is drive up prices and you do not deliver what you should.

Senator O'Toole explained very well the situation with regard to social partnership, which does have broad political support. Much economic debate between Government and Opposition is about the best way of maximising resources for social spending. At times the Opposition voiced the sentiment that the level of spending as a proportion of national product was too low and that perhaps taxes had been reduced too far. The Government would take the view that the strategy it has been following has maximised resources for spending. We gain far more from corporation tax and capital taxes. The big debates in the 1980s were about how to increase the miserable yield from corporation tax and capital taxes. There has been a tenfold increase in some cases in the intervening years and that has been done by reducing the tax rates.

By encouraging activity and enterprise the yield is increased. The general rate of corporation tax was 50% in 1987; today it is 12.5%. Capital gains tax was reduced from 40% to 20%. The yield went up exponentially because people were prepared to trade and exchange assets and pay the tax at 20% in a way that they were not prepared to do it at 40%.

Deputy Ó Caoláin

: It is important to emphasise that while social partnership has been a welcome feature of the Irish experience over the past decade and a half, the reality is that everybody was not entirely happy with what had been negotiated. That became abundantly clear in the outworking of each of the respective agreements. Too much concentration was solely in relation to restrictions in increases in income across the workforce. It did not apply to the captains of industry and those who were in the director's chair. The return to Irish directors over the past 12 months has increased by around 30%, and that was referred to in the House. However, workers' incomes have been restricted to a certain level. That is a big price to pay.

The real problem arose in relation to the other matters that impact on the daily lives of ordinary people, and those elements were not addressed in any substantive way during the negotiations. We talk about access to free medical health care. If there are restrictions or significant increases in the cost of medical health care, whom do they affect most? The answer is those who can least afford to pay for it. That is only one example — there are many others. With the reductions in the overall intake there have also been restrictions in the services that Government should sponsor and provide. Those people at the lowest level of income always suffer most. Those other elements that impact on ordinary people's lives should have, and can be, part of a real and holistic negotiation that would take on board everything that matters to an ordinary working family and their children today.

Mr. Krasts

The next question is about negative experience. We have only heard the positive side. Ireland is a success story in the use of European funds, but there may be negative cases in Ireland. Maybe you have to go to Greece to study negative experiences.

Chairman

What I might consider as negative, somebody else might consider as positive. The main negative experience regarding our membership of the EU is the belief that too many decisions affecting ordinary Irish citizens are made by the Commission. One of the principal reasons we voted "No" to the Nice referendum was because we were against the democratic deficit within the existing EU mechanisms. It was not a vote against the new countries. It was an anti-EU vote, not an anti-enlargement vote. People will contradict me but that is my opinion.

More and more decisions affecting Irish people are being made at European level, and people are pulling back from engagement in the political and democratic process. The turnout in successive election and referenda is decreasing because people feel it does not matter how they vote, and that Europe will make the decisions one way or the other. There would be negative perception from that point of view but my colleagues might not all agree.

Some people might consider taxation and other issues as negatives. Many schemes and activities that we feel are practical and want to carry out in Ireland may be overruled by the EU because they are not in accordance with EU guidelines. That can cause practical difficulties for people who want to do something in certain regions of Ireland. The power that Europe exercises, right down to ground level, would be a negative.

Deputy Nolan

The whole agricultural scene has changed since our entry into the European Union in the early 1970s. Ireland was primarily an agriculture-based economy until our entry into the European Union. While our farmers have received substantial subsidies throughout the years, the structure of farming has changed. Prior to our entry into the European Union families could have lived on relatively small holdings, but that is no longer the case. Relatively large farmers are still not capable of making a living out of farming.

Other industries, such as the footwear industry, suffered as a result of our entry into the European Union. We did not have a substantial manufacturing base in footwear here, but it will went by the board shortly after our entry into the European Union, and our clothing manufacturing industry also changed. That may have changed one way or the other because of the cheap cost base of the eastern European companies. There are several areas of indigenous industry that suffered because of our entry into Europe.

Senator Mansergh

I wish to make three points. Undoubtedly there was a big shake-out of indigenous industry in the first 10 to 15 years of membership that was unable to cope with the competition. Perhaps when we first entered the EEC we were too optimistic that Europe would take care of all our problems. That was not the case and in some respects we did not manage our affairs particularly well. We have been managing them much better since 1987.

I make one slight correction to my colleague. Agricultural productivity has increased but not necessarily agricultural production, and modern techniques leave free time to a lot of small to medium farmers to pursue other activities.

The Chairman made the point about people's perception of decision-making in Brussels. However, we must never forget that we are part of the Brussels decision-making process. We are represented in the Commission. We are represented in the Council. An Irish member is the current President of the European Parliament. We have the Presidency of the Council. It is not simply something that is imposed by people in a place where we are not represented and have no voice.

By and large, our experience to date has been that Europe does not override vital national interests. It has managed so far — and I hope this does not change in the future — to accomodate the vital interests of different member states. One must not allow too much of a "them and us" attitude, because we are part of them as well as being us.

Deputy Ó Caoláin

One of the certainties that we face is change. Things are going to change. It is about how we manage that change and how we apply the opportunities for the population of our country. Some will find it very difficult. There will be displacement. There will be — as in our experience — a flight from the land. It will not be able to sustain the number of people in the light of competition in agriculture and food production within Europe. Being able to recognise what is needed and putting in place the necessary safety nets to aid and assist people in that change will be very important.

I agree with the Chairman. If one were to go into the streets today, or particularly the rural and country areas, and ask ordinary Irish people for an opinion on the European Union, they would have conflicting views. They would be positive with regard to the economic impact it has had, but they would also reflect on the growing reality that decision-making is taken at a great remove — a great distance — from ordinary people. There is a democratic deficit. Despite what Senator Mansergh has said, there are unquestionably within the EU interests who wish to see that being the case more and more. There is an evident awareness in this country that this is a problem we will face in the future.

Just before the turn of the new year, the President of the European Commission, Romano Prodi, once again articulated a view of a two-tier European Union, a twin-track approach involving the larger, more powerful states that are able and ready to go further, and those that have yet to catch up. He was taken to task. I commend our Taoiseach, the party leader of our colleagues on my left, who took him to task and said that is not what we are about. Our involvement is not going to mirror that aspiration. However, the aspiration is there.

It is very important that the Latvian people have their independence today. It was hard won. There was much suffering over many years, which mirrored and echoed our experience in this country. That independence is something to cherish and be proud of. There comes with it a great responsibility on leaders such as yourselves. It is important that countries with common experience and common hopes and aspirations recognise the importance of a European Union that is based on equal member states, irrespective of population numbers. We never want to revisit times past, when countries with a large population dominated. The European Union must be based on sovereign peoples, on an equal basis and with mutual respect. That is very important if the EU is to serve all our respective interests in the future. Therefore, I hope that Latvian involvement will be complementary to the voices of those who seek a European Union built on respect and the sovereignty of each of the member peoples.

Chairman

Perhaps you would like to discuss briefly the role of the International Financial Services Centre in Ireland?

Mr. Krasts

That was discussed yesterday at the meeting with the Government agency. Time is running out, so it would be good to hear about the role of your committees.

Chairman

I will speak briefly on the role of committees, and then I will invite other members to speak because, as you can see, we do not agree on everything — no more so, I am sure, than you all agree on everything on your side.

In the national Parliament there is a committee to match each Government Minister and Department. Early in the year, each committee discusses the Estimates of expenditure for their respective Department. In a month's time, this committee will discuss the Estimates of the expenditure plan that the Government published last October and finalised last month. Next month we will debate expenditure by the Minister of Finance. The Justice Committee will have its discussion on expenditure by the Minister of Justice, Equality and Law Reform and so forth. Every committee discusses the expenditure of its respective Minister. That is one principal job that each committee does.

This is the committee for finance, what you would call the taxation committee. Each year, the annual budget and annual Finance Bill, which deals with changes in taxation, are examined and discussed by this committee for a week, with the Minister for Finance present throughout the Committee Stage. It is discussed in the national Parliament in as much detail as is possible. It is examined by this committee every year. New legislation initiated by the Minister of Finance with regard to the Central Bank, the euro, financial services and regulations is debated by this committee.

Arising from the Nice treaty, the national Parliament has set up an EU scrutiny committee. The directives that come from Europe each week are referred by the Parliament to the relevant committee. Therefore, any directive that affects taxation, financial or fiscal matters is referred to this committee. We make our observations to the Department of Finance. The Minister for Finance must take the views of the committee into account at negotiation and at council debate on those issues. Those are the principal items that are discussed by the committee.

Most committees are chaired by a member of the Government, and the Government has a majority on all of the committees, because it has a majority in the Parliament. The Government has an in-built majority in committees, so that it will have the majority if there is a vote, which will enable it to carry out its legisative programme during its lifetime. That is a general outline.

This committee meets in two sections. One section which comprises Members of Dáil Éireann deals with legislation. Today, Members of Seanad Éireann are present. Our Parliament has two Houses. When the committee meets, all parties try to work together. Last year, on many items of legislation, we reached all-party agreement on various reports. When it comes to specific Govenment legislation proposals, the Government parties will always side with the Minister and thereby ensure a majority. Perhaps some other members might wish to say something briefly about committees.

Deputy Twomey

The committee tries to work as far as possible with a consensus approach. The Government always has the majority in the committee anyway, so if it wishes to rush through something, that can be done. An issue can be given more time and researched further when it is being addressed at committee level. At times, Ministers concede on certain points and make changes because arguments can be made in a less adversarial way here.

The overall purpose of this committee is to scrutinise various issues relating to finance and public service. We recently decided to decentralise a number of Government Departments from Dublin because it has become almost impossible for many people to work and live in the city in recent years. This decision involves removing entire Departments from the city. The committee will discuss whether the plan is feasible and is examining decentralisation programmes undertaken in the past in which Departments were moved out of Dublin and the problems they encountered.

It is easier to do this in committee because there is less public glare on what we do, which means we are often able to highlight problems as they occur without it being viewed as the Government and Opposition attacking each other. From our point of view, the committee aspect of the legislative role is important and works well, although it is not discussed much because it is boring from the perspective of the media, which is probably also the case in Latvia.

Chairman

One of the problems we experience is that the media tend to concentrate on what happens in the Dáil Chamber and not so much on committees. One could work hard here all day every day and no one would know one was here. I am sure that is a difficulty everywhere. If good work is being done, it is important the public is aware of it, which is not always the case. There is no solution to this difficulty. Do the members of the delegation have any questions on the committee system?

Mr. Krasts

The time for the meeting has concluded and members of the committee are busy in their daily job. We thank the committee and appreciate the readiness of its members to have this meeting and to share their experience and information on the subjects in which we are interested. I wish Ireland a successful Presidency, which would be good for all the European Union countries, including Latvia from 1 May.

Chairman

I thank our visitors for attending this meeting, which I hope they found worthwhile. I hope they will leave with a better understanding of the issues they wished to discuss. I hope they have enjoyed their visit to Ireland and will have a safe journey home.

The joint committee adjourned at 12.05 p.m. until 3 p.m. on Wednesday, 28 January 2004.