JOINT COMMITTEE ON FINANCE, PUBLIC EXPENDITURE AND REFORM debate -
Thursday, 17 Nov 2011

Fiscal Assessment Report: Discussion with Irish Fiscal Advisory Council

Chairman

We will now engage in a review of the fiscal assessment report published in October. I welcome from the Irish Fiscal Advisory Council: Professor John McHale, chairman; Professor Alan Barrett, council member; Mr. Sebastian Barnes, council member; Dr. Donal Donovan, council member; Dr. Róisín O'Sullivan, council member, and Mr. Diarmaid Smyth, chief economist. Ms Eimear Leahy and Ms Rachel Joyce are also in attendance. The format of the meeting is that the opening remarks of Professor McHale will be followed by a question and answer session. I remind members, witnesses and those in the Visitors Gallery that all mobile telephones must be switched off, and I mean switched off, not just temporarily immobilised or placed on silent but completely switched off because they interfere with the sound equipment.

By virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to this committee. However, if they are directed by the committee to cease giving evidence on a particular matter and they continue to do so, they are entitled thereafter only to qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and they are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise nor make charges against any person, persons or entity by name or in such a way as to make him, her or it identifiable. Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official either by name or in such a way as to make him or her identifiable.

Professor John McHale

On behalf of the council, I thank the committee for inviting us to appear today. We very much welcome the opportunity to share our views with the Oireachtas committee and respond to any questions.

I would like to introduce the other council Members, Mr. Sebastian Barnes from the OECD, Mr. Alan Barrett from Trinity College Dublin, on secondment from the ESRI, Mr. Dónal Donovan of the University of Limerick and formerly of IMF staff and Ms Róisín O'Sullivan of Smith College, Massachusetts. The council secretariat is also present: Ms Rachel Joyce, Ms Eimear Leahy and Mr. Diarmaid Smyth, head of the secretariat and chief economist.

Today, I would like to draw attention to four areas: the mandate of the Irish Fiscal Advisory Council; the council's first fiscal assessment report, which is the main purpose of our visit; the council's initial reaction to the medium-term fiscal statement; and an update on the process of inputting into the fiscal responsibility Bill. The Irish Fiscal Advisory Council was established in June 2011. Forthcoming legislation in the form of the fiscal responsibility Bill will establish the council on a statutory basis. The council is initially being funded through a grant-in-aid provided by the Government, with long-term funding to be considered in the context of the Bill. The council is currently being supported by a three person secretariat. The secretariat has been in full-time operation since September.

The council's mandate has four elements: to assess the Government's macroeconomic projections; to assess the Government's budgetary projections; to assess the Government's fiscal stance in light of its own objectives; and to assess compliance with fiscal rules forthcoming as part of the Bill. The council published its first report, the fiscal assessment report, on October 12. The purpose of this report was to assess the fiscal stance as set out in April's stability programme update, which was the most recent Government budgetary publication at the time, with a view to the appropriate fiscal stance for the upcoming budget 2012. With developments unfolding so rapidly, this included updating for developments over the intervening months.

The report firstly assessed macroeconomic developments since the publication of the SPU. The council felt that the SPU macroeconomic forecasts were appropriate at the time of publication. However, since then, most forecasting agencies have revised growth rates for Ireland downwards reflecting increasing uncertainties about the global economy. This was reflected in the report.

In terms of the budgetary projections, the council felt that the SPU projections to 2015 were broadly appropriate at the time of publication, albeit with downside risks. Since the SPU, there has been a series of significant developments impacting on the budgetary outlook. It was a particular focus of the report to try to reflect these. In particular, the changes agreed by European leaders in July will lower the average interest rate on outstanding debt by a significant margin. Furthermore, banking recapitalisation costs are now lower than had been anticipated. However, these developments are being offset by weaker and more uncertain economic activity. For 2011, the council considered that the general Government deficit target of 10% of GDP looked achievable, particularly given the Exchequer data available in early October. The medium-term fiscal statement published on November 4 projected that the deficit is now likely to be 10.3% of GDP.

Over the medium-term to 2015, to meet the deficit targets agreed with the EU-IMF, the Government faces an unenviable balancing act in deciding on the appropriate fiscal stance. Domestic demand remains weak, unemployment levels are elevated and the global economic environment remains uncertain. The domestic economy is operating well below its potential and further pro-cyclical budgetary measures will negatively impact on demand. The debt situation remains fragile, with the debt to GDP ratio projected to decline slowly from a very high level in 2013. This leaves the economy vulnerable to adverse growth and financing shocks.

For 2012, the council suggested that the 8.6% deficit target would be narrowly missed on current policies. It was the council's view that additional discretionary adjustments will be needed above the initially planned €3.6 billion to meet the target. We had estimated the need for additional measures of €400 million. The Department of Finance in the medium-term fiscal statement puts this figure at €200 million, meaning a consolidation package of €3.8 billion for next year.

Over the four year period to 2015, the council saw strong merit in strengthening the fiscal consolidation effort beyond the targets set out in the SPU. In particular, the current plans leave the debt to GDP ratio on a relatively slow downward path. The council believes that a general Government deficit target of the order of 1% of GDP in 2015 would be appropriate. This suggested the need for additional consolidation measures of €4 billion over a four year period.

Retaining the current SPU deficit targets as a percentage of GDP, however, was also viewed by the council as within the range of appropriate courses of action. The council's recommendations for more consolidation have been the subject of much debate. The call for additional consolidation was not made lightly particularly given the very painful measures taken since mid-2008. The massive rise in the rate of unemployment and the surge in emigration levels bear testament to the real and tangible costs associated with the severe and unprecedented economic downturn. On balance, however, the concerns over the fragility of debt sustainability, the slow path of debt reduction under current plans, and the market-official lender funding vulnerabilities facing the Irish State, led to the proposal for a more rapid restoration of sound public finances and specifically a general Government deficit target of 1% of GDP in 2015.

Following the publication of the report we became aware of two errors, including the figure quoted for the 2009 general Government deficit on page 34 of the original report which wrongly identified the unadjusted deficit, inclusive of bank recapitalisation costs, for 2009 as the underlying deficit. The council is committed to upholding the highest standards of accuracy and transparency. These errors were corrected and a correction published on the IFAC website. We would like to stress that these errors in the presentation do not change the conclusions of the report.

Since the publication of the report, the Government has published its medium-term fiscal statement, which updates the projections and fiscal stance set forth in April's SPU. Although the MTFS revises upwards the forecast for the real GDP growth rate in 2011, concerns about global growth and continued weaknesses in domestic demand have led to downward revisions for growth in 2012 and 2013. The required budgetary adjustment to meet a general Government deficit target of 8.6% of GDP was revised upwards to €3.8 billion from €3.6 billion. On the fiscal stance, the Government reaffirmed its target of a general Government deficit of just below 3% of GDP in 2015.

The council will be providing a full assessment of the MTFS and the forthcoming budget in its spring fiscal assessment report. The spring report is timed so as to provide timely input into the next stability programme. However, we would like to briefly make some initial comments on the MTFS ahead of the budget:

There is a pattern of downward revisions to growth forecasts for the upcoming two years, while assuming that growth will return to an underlying GDP growth rate of 3% in subsequent years. For reasons of prudent planning, the council believes that it would be worthwhile to explicitly consider a low-growth scenario for the budgetary projections, under which potential growth remains low over a medium-term horizon. Although the MTFS does provide a broad disaggregation of proposed fiscal adjustments out to 2015, the level of detail does not go sufficiently far in providing certainty to households, businesses and financial investors in terms what measures to expect. While the council appreciates that the chosen fiscal adjustment path reflects a difficult balancing act between the costs-risks of austerity and the costs-risks of debt build-up, we would like to have seen a more detailed response to the council's arguments for a moderately faster adjustment.

The fiscal responsibility Bill is due to be published in the first quarter of 2012. The Bill will provide for the establishment of the council on a statutory basis. The draft Bill also proposes three numerical fiscal rules: the public finance correction rule, the prudent budget rule and a sustainable expenditure growth rule. The council is actively considering the Bill and it is our intention to publish our views by mid-December.

I thank the committee for providing us with the opportunity to meet with it today. It is our firm belief that the council will have an important role to play in the years to come. It is imperative that the budgetary mistakes of the past are not repeated and that Ireland regains full control of its public finances.

The council's main value will be in the long term. At all times we will strive to be independent, considerate and, above all, to ensure that fiscal policy is conducted in the best long-term interests of the Irish public. We hope that regular interaction with the joint committee will be a key part of our role and one of the pillars of the strengthening of fiscal institutions in Ireland.

Chairman

I thank Professor McHale. Before I call my colleagues I will begin with a few general questions that I think are important to touch on. The council is a new body, to some extent it is finding its feet, and has produced one report of substance and another is planned for the spring. Professor John McHale and his colleagues are well known and respected commentators. Professor McHale mentioned there are three members of the secretariat. What kind of fire-power has the council to enable it to engage in this independent role which appears will be all the more demanding given that there are proposals in regard to the NESC? The council was specifically mentioned as being a body that could not necessarily replace the role of the NESC but it might comment on the future role of the NESC.

Given that Professor McHale and his colleagues have other commitments - that is not to take from his expertise or that of Professor Barrett or Dr. Donovan - will there be a sufficient level of fire-power within the council to do the work that would be expected of it? If he wants to use this occasion to fight for more resources, be my guest, but what resources has the council available to it? Are the witnesses sufficiently assured they can do the job that is expected?

Allied to that the fiscal council makes the point that to a great extent it is relying on projections that other bodies have put into the public arena. For example, there is the Central Bank, the ESRI, the Department of Finance, the Commission and so on. Is it envisaged at any stage that the council would prepare its own independent sets of figures and projections or will it in all cases rely on those already provided by other bodies? If that is the case, is that satisfactory? Can it do the independent job, it proposes to do, and that people want it to do, without having the wherewithal to produce its own projections?

With regard to the issue of balancing an accelerated movement on the deficit, as proposed by the council, Professor McHale said he had hoped more attention would have been given to his arguments. I am interested in how this balancing exercise is carried out by economists generally and by the council in particular.

In its report, the council weighs up the different factors and points out that getting the deficit down more quickly will add to our credit-worthiness and will appear better in the international context. The council acknowledges that it would have a deleterious effect on the economy but on balance, the upside of taking this course of action is stronger. There is something missing in the process of weighing those two very important considerations. It is as if the council has considered it and has decided what, on balance, is the best approach. However, in my view it is an open question.

In its report, page 34, the council quotes Professor Krugman and his argumentation. The footnote on page 34 states that another way in which austerity might be self-defeating is that austerity measures adversely affect the debt to GDP ratio. That is merely a truism perhaps. This could happen even if the primary deficit falls as a result of these measures. If the adverse growth effects are strong enough the standard equation for the change in the debt to GDP ratio shows that the ratio could rise despite a fall in the primary deficit, thus austerity is still self-defeating in terms of the goal of stabilising and then reducing the debt to GDP ratio. The next sentence reads, "However, simulations do not indicate that this is the case given the parameter assumptions of the fiscal feedback model used here". The argument is put at some length, yet there is just one sentence to say, however, when the two aspect are put together it does not really seem to add up that way.

Professor John McHale

I thank the Chairman for those very important questions. We have been hard at work all morning working on our input to the fiscal responsibility Bill so the situation regarding the NESC is news to us. We will have to give it much thought. We have a specific mandate at present in terms of what we have been asked to do, in assessing the Government's forecasts, projections, assessing its fiscal stance and we will also have responsibility for assessing compliance with fiscal rules. We have a well-defined set of tasks. While it is possible that the Minister could ask us to do some other things, we are fully occupied at the moment on that set of tasks. We would have to be very careful about our mandate being extended into other areas. At present we have just about sufficient resources for the secretariat to meet the mandate we have been given.

The council has concerns, even with our current mandate, whether the model is sustainable. As the Chairman mentioned we all have other jobs so that, essentially, we are doing this work on a volunteer basis - it is like a second job. We are all extremely committed to it and that commitment is enough to motivate us to do the work that needs to be done to ensure the fiscal council is a success. I am looking beyond ourselves to the future and the sustainability of the council on that model. Anything in a start-up phase requires commitment but only progresses matters to a certain point. It is almost another job for which those involved are not receiving compensation. In that context it could become increasingly difficult to recruit people.

We are considering, in a budget request, the possibility of, for instance, time buy-outs. We strongly believe, certainly for those of us who work in the public sector, we should not gain financially from our involvement with the fiscal council but to make it more sustainable we are considering the possibility of buying out certain time. In my case I work for the university so there may be certain teaching obligations that could be bought out so that I would have the time, outside of evenings and weekends, to work on fiscal council business. We have the resources to meet our mandate at present. There is concern about the long-term sustainability of the model and we would have to be very careful in respect of taking on extra tasks.

The possibility of doing our own projections has been mentioned. It is clearly stated in our mandate that we are not responsible for producing our own macro-economic forecasts or even our own budgetary projections. Our mandate is to assess the forecasts and assessments coming from the Government. We are resourced to do that but we are certainly not resourced to have our own forecasting and projection capability.

If our mandate was extended we would be a very different kind of fiscal council. The Office for Budget Responsibility in the UK does have a forecasting and projection mandate but operates with a much larger staff. The forecasting and projection elements in the Treasury were taken out of the Treasury and put into the OBR. We will have to be very careful before taking on tasks we are not resourced to do.

In terms of striking a balance, the Chairman described well the key trade-off involved in our assessment of the fiscal stance taken. On the one hand, we are very concerned about the state of the domestic economy, particularly the level of domestic demand in the economy. We all believe fiscal austerity measures slow down the economy. Some hold the view that when the deficit is cut, it can span the economy, but that is not the view of the council. It is only with great care and concern that we would advocate further austerity measures for an economy that is already deep in recession, has a truly troubling unemployment rate and in which there are trends towards emigration. However, against this we must weigh the costs and risks of debt build up. Anything we borrow now we will have to pay back with interest. Therefore, it is not as if we can avoid hardship by not cutting the deficit; we would essentially just be postponing hardship, but that is not to say it should not be done. While we do not want to contract the economy in the midst of recesssion, it is something we cannot forget at the same time.

Looking at trends, under the Government's projections, it looks like the debt-to-GDP ratio can be made sustainable; in other words, it will peak and start to come down. It looks like it will peak at 113% of GDP in 2013 and then start to come down slowly. However, that sustainability is very fragile. If there is growth a degree less than projected, that sustainability could be lost. Even if we manage to stabilise the debt-to-GDP ratio, it will stay at a very high level, which will hold back confidence in the economy, with the danger of some shock to the economy, leading to an exploding debt-to-GDP ratio again. Also, based on current fiscal plans and given the size of the primary surplus that will be generated by 2015, the debt-to-GDP ratio will come down very slowly. When we put this together with an incredibly fragile, vulnerable funding environment, in terms of the possibility of getting back into the markets in 2013 and the future of official funding from our European partners and the IMF, as members know from following the news on a daily basis, it is up in the air how these official funding mechanisms will develop or what the future for the eurozone holds.

This a time of great uncertainty when the dangers of debt build-up are even greater than they would be in more normal times. Therefore, it is about balancing or weighing up two unwelcome factors. On the one hand, we must weigh up whether we should put further strain on our already struggling domestic economy and, on the other, weigh the costs of a further accumulation of debt. We felt, given the speed at which the debt-to-GDP ratio was coming down and the fragility of debt sustainability, that it would be better to be somewhat more ambitious in order that when we reached 2015, the job would be well on the way to being done. Even if we kept the primary surplus at the level achieved, which we projected would be 4.7% of GDP by 2015, we would be on a steep downward trajectory for the debt-to-GDP ratio. On the other hand, the Government's projections put the primary surplus at 2.9% of GDP in 2015, which would put us on a much shallower path of debt reduction, with which there are certain risks involved.

It is a judgment call, as these are trade-offs. I would love to be able to say we have an algorithm that we can put it all into and the answer pops out of a complicated set of mathematical equations, but that is not the case. We had to make a judgment, as did the Government. We understand the judgment it made. We stated clearly in the report that the 3% target by 2015 was within the range of appropriate courses of action to take. We are not saying it is inappropriate, but we think that, on balance, there is a strong argument for going a little further. We do not recommend going hugely further, given that we must be concerned about the level of domestic demand in the economy. However, we do recommend going somewhat further.

On the question of ensuring austerity will not be self-defeating in reducing both the primary and overall deficit, it is noted in the report in a somewhat technical aside that it is possible for austerity measures to reduce the deficit, but if they harm growth enough, the debt-to-GDP ratio could rise. Our explanation for this could have been better put and we could have gone into the issue in more detail. However, as we said, we used our basic simulation model to see whether the austerity measures would cause the debt-to-GDP ratio to rise. We also went a little further than this in a way not described in the report and looked at what the fiscal multiplier would have to be for the austerity measures to cause the debt-to-GDP ratio to rise. That multiplier is around 2.5 to 3, which is much higher than anybody believes the multiplier would be for an economy such as Ireland's, a small open economy. In our baseline simulations we assume, based on the international evidence and what seems to have worked well in terms of budgetary projections, that the deficit multiplier in current conditions is about 0.5. Therefore, even if it was higher by a factor of 5 to 6, we still would not be in the range where a deficit reduction would be self-defeating in not bringing down the debt-to-GDP ratio. We should have said more about this, but the report was a balancing act. We wanted to make it reasonably accessible and if it sounded too academic and there were too many technical asides, we would be concerned that people would end up not reading it. However, in this case, we should have said more.

Senator Thomas Byrne

I apologise for the absence of my colleague, Deputy Michael McGrath, our main finance spokesman, who is unable to be present.

Professor McHale has confirmed my understanding that his position is voluntary and requires a significant amount of time. Both he and other members of the Fiscal Advisory Council deserve thanks from Parliament and the public for the work they do. They are an example to other groups in the public service who take on two or three jobs and get paid for them. l mean this sincerely, because the job the council is doing is extremely tricky. It is not just about going in to board meetings, falling asleep and then signing off on something. The members of the council have a significant amount of work to do in order to produce a report of this standard. Notwithstanding the criticisms made of the report, the council has done a fantastic job. I am glad to hear members have concerns about the future operation of the council and the resources required.

One of the criticisms made concerns the composition of the council. Are there any other fields of expertise that would be of advantage to the council not represented among the members and their qualifications?

In the context of the council being a voluntary and independent advisory council to the Government, was it disappointed that certain Ministers, including Deputy Pat Rabbitte, had been immediately dismissive of its recommendations? The Minister, Deputy Rabbitte, suggested making an adjustment greater than €3.6 billion was not in the realm of the real world, that the council had no idea of what the impact of such cuts in services would be on ordinary people and that such an adjustment would be contrary to our objective of economic recovery. Without getting involved in the politics of the matter, if the council is mandated to work on a voluntary basis and give independent advice to the Government, is it disheartening for it when Ministers dismiss that advice and the Government takes a contrary decision? Has a study been conducted or is the council aware of any countries with fiscal councils in which governments ignore the advice given? Does it have a reputational impact on the Government or the country? We have umpteen-----

Deputy Thomas P. Broughan

Has the Senator ever heard of a former finance Minister by the name of Charlie MacCreevy?

Chairman

Deputy, please.

Deputy Thomas P. Broughan

The Minister, Deputy Rabbitte, is a politician; our guests are not politicians.

Chairman

Will the Deputy please control himself?

Senator Thomas Byrne

The fact is there was criticism by a Minister of the stance taken by the Irish Fiscal Advisory Council.

Chairman

The Deputy is asking a perfectly legitimate question, but he should not engage with another committee member.

Senator Thomas Byrne

When a fiscal advisory council is ignored, does it affect the reputations of countries and their governments?

Professor John McHale

We are very aware of the sensitivity of and difficulty attached to the issues we are addressing. When we make a recommendation, having weighed everything up, that the Government should cut the deficit even more, we understand people will sometimes react negatively owing to the pain it would mean for ordinary people. I do not think we can be too sensitive to these things, as people will criticise us. We do not see ourselves as being political, but we understand we are operating in a political arena and if we cannot take some criticism, we probably should not be doing the job we are doing.

I am more concerned that the Government engages with us, which is why I made the point in the medium-term fiscal statement that even when the Government disagreed with us - we expect this will happen many times - it should give clear reasons for so doing. We see our role as being mainly related to what will happen in the long term. We have produced one report in which we made a recommendation which I believe the Government found useful in terms of how one should think about the trade-offs in these issues. We cannot say we are very surprised that it did not take our advice on board lock, stock and barrel, but it was still taken on board. The value of the council will be shown in the long term.

We will endeavour to raise the issue of the political cost of pursuing bad fiscal policy, particularly on a sustained basis. This was a judgment call. Pursuing a 3% deficit target to be achieved by 2015 is a defensible policy, but there may be occasions in the future when we will have much stronger views on the quality of the fiscal policy being pursued and we will be very vocal in noting these assessments. In the long term, if fiscal policy is not conducted properly, it will become harder and harder for governments to easily reject our advice, certainly not without engaging fully with the arguments made by us.

Senator Thomas Byrne

A criticism was made that there was a lack of expertise among the members of the council in certain areas. Does Professor McHale agree? Could the council do with others with expertise among its membership?

Professor John McHale

No, I do not agree, given our mandate. It is very much a macro-economic mandate which involves assessing forecasts, projections and the overall macro-economic fiscal stance. We are not fiscal accountants. Our job is not that of the Comptroller and Auditor General who forensically goes through Government accounts. If that was our mandate, we might need different expertise. Between us, we have much experience at various levels of macro-economic policy and we all have a strong interest in and history of engagement with fiscal policy. Our chief economist in the secretariat has been representing the Central Bank of Ireland on the public finance group at the European Central Bank, working on the tax forecasting group and being responsible for fiscal projections made by the Central Bank. Both on the council and in the secretariat, we have the expertise we need to meet our mandate.

Deputy Liam Twomey

I am sure that when members of the Irish Fiscal Advisory Council were given their positions, they were advised that when they stepped into the public arena, they could wait to have their reputations dissected and their opinions undermined quickly. I come from the field of medicine, in which we have many experts also. One thing that amazes me is how we can actually get things wrong. This should kept in mind.

The delegates seem to be austerity hawks and there is not much in the line of expansionary doves on the Irish Fiscal Advisory Council. They all seem to follow the same idea - that it is austerity all the way. If there are differences of opinion and a few doves on the council who believe we should be doing things differently, perhaps they might let us know. Professor McHale has said they are limited in what they can tell us. Do the delegates have any opinions on wider policy on what we should be saying to our European partners? There is much discussion that if we want to get out of the eurozone crisis, we should also be looking at an expansionary policy such as quantitative easing in terms of the euro. Many issues are being thrown into the mix. Does the council have an input into such a discussion?

There has been much discussion about the banks and we have often had representatives of that industry here. We often get the sense, however, that they are still not telling us the full story. Perhaps they are not lying to us, but they are certainly not giving us all of the facts. When advising the Minister, do members of the Irish Fiscal Advisory Council look at the absolute cost of mortgage arrears or commercial debt? Deputy Mathews who, unfortunately, is not present today could give them a rendition of the total debt of the nation. He would focus on the issues involved and demand answers from the delegates. Do council members give information on where they think the banks are going and whether they think the banks could weaken the economy and our growth figures in a couple of years? Could we end up paying out a couple of billion more of taxpayers' money to bail out the banks when the house of cards of unsustainable mortgages finally starts to collapse? Do the delegates go looking for hidden problems in the economy that could blow up in the Minister's face in a couple of years?

Professor McHale said much about growth and expenditure, but the level of current expenditure is still going up. The reason we can show a reduction is that capital expenditure is taking the biggest hit. If the level of current expenditure is still going up, there are some inherent problems in the economy.

Chairman

Obviously, the questions are being directed at Professor McHale, but he is free to call on his colleagues also, especially if they want to out themselves as doves.

Professor John McHale

Perhaps I will start and let the others join in. I can assure Deputy Twomey that there is diversity of opinion and lots of discussion. We have long meetings before we form our views. Ours is very much a middle of the road council and I do not see evidence that any of us is an austerity hawk. Before joining the Irish Advisory Fiscal Council I was and, to a lesser extent since, I have been an active contributor to the Irish Economy blog, on which I have discussed issues of fiscal policy for a number of years. In the early stages of that debate - before the EU and IMF programme - I had been arguing for a reduced front-loading on the fiscal adjustment. Based on the fact that we had market access, with an interest rate figure of 4% to 5%, and carrying out the exact same balancing act - weighing the costs on the economy and the risks of debt sustainability - my evaluation of the trade off was that we could move a litte slower and argue against some of the stronger proposals coming from many economists in favour of front-loading. However, the facts changed, unfortunately. The situation changed and the risks changed. If anything, I am a bit of a squishy Keynesian when it comes to these issues, rather than an austerity hawk. The facts as we face them involve a huge amount of risk on the side of excessive debt build-up, which could end with loss of access to both market and official funding and the imposition of much more severe austerity on the economy down the road. It is not only a question of worrying about the costs of austerity; there is also a risk of even greater austerity down the road if we let the risks build too high. In discussing these issues, I see the same open-mindedness, a general belief in the importance of demand to the economy and the same engagement with the balancing that I have described. The others may have further comments on that.

I have many views about economics, including the appropriate course for eurozone and ECB policies on quantitative easing. Today, however, I am here as part of the Irish Fiscal Advisory Council, and we have a much narrower mandate in terms of what we discuss. It would be a mistake for me to start giving views that are not fiscal council views - things we have not agreed - as it would just create confusion. However, I have decided to continue to contribute in other areas of the debate outside my role on the fiscal council. I have been engaging a bit in the eurozone reform debate on irisheconomy.ie in recent weeks, but I make it clear when I am wearing a fiscal council hat and when I am not. If members do not mind, I think this is not the forum for me to start giving those broader views.

Deputy Richard Boyd Barrett

We can find out what Professor McHale really thinks on his blog.

Professor John McHale

Members can find out what I think about other issues on the blog.

Dr. Donal Donovan

I want to confirm what Professor McHale said. There is quite a diversity of views on the council. We spent many long days and hours having very good humoured but intense discussions and arguments among ourselves until we arrived at what we thought was a broad consensus. Lest anyone think that because my former employer is the IMF, somehow I am automatically an extreme fiscal hawk, I am not. Even the IMF was closer to the Government's position than that of the fiscal council following the issuing of our report.

I have a lot of opinions, as many of us do, and provide a lot of commentary on some of the issues raised, including the eurozone, mortgage arrears and so on. It is important, as the Chairman said, that we have the opportunity to continue to provide our inputs into the debates on these issues as professional economists. I hope nobody has a problem with that. Of course, we must make it absolutely clear that we are doing so in our personal capacity. It would not be right for the council to take up any position on those issues.

Deputy Liam Twomey

If we go back four or five years, before this crisis started, there was a wide range of diverging views. Some were right who were at the time considered wrong, while the ones considered to be right at the time were clearly wrong. It would be nice to have a panel of people who could reach a consensus on the broader issues, such as the banks and the European Union, which could be fed back to a committee such as ours so that we do not have to consult the individual blogs of council members.

Deputy Stephen Donnelly

I echo the thanks to the council members. I found out only recently that they were all doing this voluntarily, so I would like to add my personal thanks. It is very much appreciated. The report is very useful and I have no doubt the council will improve as time goes on, as it is their first outing.

I would like the opinion of the council members on what they see as the council's unique role. We have the Department of Finance, the Central Bank and the ESRI. I think the council is necessary and I have a view as to what its unique role is. It is a valuable role. However, I would very much like to hear where the members position themselves. What are they adding that no one else is adding?

I want to ask the witnesses about their independence, which is extremely important to me as a non-Government Deputy. I do not trust anything I get from the Department of Finance, frankly, and it gives us as little as possible.

Deputy Liam Twomey

That is not limited to the Opposition.

Deputy Stephen Donnelly

Fair enough. It is politicised, and therefore the analysis from the council is extremely useful. Obviously, there is a tension there because the council members are voluntary; some of them work in the Central Bank while others work with the ESRI and so on. It is a difficult human constraint for anyone. I would like to know what the members are putting in place to ensure I can trust what we get from the council. I am not casting aspersions on anyone's character, but it would be useful to know that the Department, the Central Bank and so on are not even attempting to influence the council.

One of the roles the council can play is not just in providing analysis and recommendations but in communicating the analysis and recommendations. The information provided by the ESRI is not bad, but it is still fairly complex, while that provided by the Department of Finance is just political spin. I can read some of it, but I cannot read all the information that is coming from everywhere. The fiscal council can play an extraordinarily valuable role in explaining these things to the people of Ireland, who have become extraordinarily financially and economically literate over the last three or four years.

I love the graphics in the report and the way it is laid out, and I love the illustration of the benchmarking of different groups. I encourage the council to get people in - maybe it already has them - who can help nail the communications to different audiences, whether it is people such as Professor Barrett, trained economists or people who are scared about what is going on. Within that, some scenario modelling would be useful. Deputy Twomey's point is that there are differences of view. The report is the council's recommendation, an agreed point. However, it would be useful to show, for example, what would happen at 1% GDP growth versus 4% GDP growth, because none of us knows what is going to happen. Something like that would be very useful.

In addition, there is a piece of analysis I would like to see from the council which considers the entire quantum of debt. An awful lot of the conversation is about national debt. Even when people talk about national debt, it is often unclear which parts of the national debt are being included. I would like to see a diagram that says: "Here is the national debt. It is divided into promissory notes, general Government debt and so on, some of it on-balance-sheet and some off-balance-sheet, but we owe it all. And, by the way, here is corporate debt, personal debt and mortgage debt." If Dr. Gurdgiev is to be believed, we are per capita the most heavily indebted country on earth when one includes the total quantum of debt. However, that analysis is not to be found anywhere, so I would love the fiscal council to take a look at that.

I have one specific question on the 3% growth prediction. Obviously, the question of debt sustainability depends on that 3%. I cannot remember whether the witnesses said what the tipping point was, but it sounded like one of those assumptions that I used to put into financial models, which said "I have a rigorous opinion for the next two years, and then what we all drop into the economic growth models for unknown years is 3%, because the developed world tends to tip along at 3%." I am not suggesting that the council dropped in a random number, but I would like to know where the figure of 3% comes from, because it is very important.

With regard to the process, there are two major things this committee will have to examine, namely, the capital expenditure budget and the taxation and expenditure budget, which is the December budget. Does the council get to take a look at that while it is being prepared, or does it have to accept the Department of Finance's report, the same one we all get, which does not contain anything like the information we need to carry out a rigorous analytical assessment?

Does the council have access to additional information? For example, the total figure in the capital expenditure budget is €17 billion. We do not know why it is not €10 billion or €40 billion. All we know is that the Department has decided on a figure of €17 billion. There is no rationale, cost benefit analyses, detailed analysis or scenario model. There is nothing whatsoever to allow us to determine why the figure is €17 billion. When I asked for the information yesterday, basically I was told I could not have it, that it was the Government's job to govern. I am keen to know whether the fiscal advisory council gets to examine the analysis because I am keen for someone other than the Department of Finance to examine it.

Professor John McHale

They are all important questions. The council's role is perhaps unique in the sense that there are two ways in which we can contribute to the debate on fiscal policy in Ireland. First, we can increase the level of analysis and expertise applied to fiscal policy questions. There is analysis from the ESRI, the Central Bank, the Department of Finance and elsewhere but we represent another dedicated group focused specifically on the area of fiscal policy and we do many of the things Deputy Donnelly mentioned, including scenario analysis. Considerable fiscal policy mistakes have been made in the past and I hope we can make a significant contribution to avoiding these mistakes being made in future. This is one important way in which we can contribute.

To go back to something I said earlier, a second way we can contribute is to raise the political costs of bad fiscal policy. There is a vast literature showing that deficit bias is endemic not only in Ireland but in other countries and there are many reasons for this. It does not take a fiscal council to point out the existence of inappropriate fiscal policies or excessive debt build-up but the fact that we are an official body gives us a certain status beyond our day jobs and allows us to raise the political costs of bad policies as we see them. Naturally, people can disagree and there can be a debate about this and, ultimately, people may reject our analysis and advice but because we have official status it allows us to play a potentially important role. This combination between better analysis overall, adding to the analysis and raising the cost of bad policies is where I envisage the council making its key contribution.

The committee raised the issue of independence, which is critical. We must perform a balancing act of our own in that we depend on the Department of Finance for certain information but we try to keep our distance and not become captured in any way by the Department of Finance and the way it thinks about things. It is nothing personal. We have no problem at all with the people in the Department of Finance but we believe we should keep our distance institutionally. It will be important in the design of the fiscal responsibility Bill that, where possible, there are the least possible number of opportunities for the Department of Finance to punish us in any way for advice it does not like in terms of firing us or cutting our budget. There will always be an element of control which the Government has over us; we are not completely divorced from the real world. However, it is important in terms of independence that the ways in which we can be punished for giving unwelcome advice are limited.

The fact that we are volunteers is helpful. Were we dependent on these positions for our careers it would be harder to speak the truth to power. We are giving up our evenings and weekends to do this. Were we to be completely ignored or if there were an absence of the co-operation we might need we could walk away. We do not intend to do so and we are altogether committed to this but it is useful that we are volunteers in terms of sustaining our independence. I will take some of the other points together but Mr. Barnes wishes to make a point first.

Mr. Sebastian Barnes

I wish to make one point about independence which relates to one of the points raised. One important strength of the design put in place in Ireland is the strong international component. One of the mistakes made in Ireland was an element of group-think and because it is a small country people know each other and there are personal relations underneath. Having people from the outside will, I hope, bring in a good deal of experience relevant to what is going on in other countries and an awareness of what is going on in the world. This contributes to the independence as well. I do not live in Dublin, I am not meeting all the people involved and I do not have contacts in the Department of Finance. This is a strength for this kind of independence, political and analytical.

Chairman

That is very useful. Thank you.

Deputy Stephen Donnelly

I believe Professor John McHale was only halfway through his answer.

Chairman

Do you have more to add?

Professor John McHale

I will take a number of things together. Deputy Donnelly mentioned the importance of communication and especially scenario modelling. He also made a point about the overall quantum of debt in the economy and raised concerns about the 3% growth projection for the outer years. I will take these points together. I agree fully that scenario modelling is key. We did not do enough of it in the first report because we were getting our methods in place. However, we intend to carry out a good deal more scenario analysis. We can play an important role in terms of examining the economy and how the fiscal situation might evolve.

The question of the overall quantum of debt was raised. We should be somewhat careful in adding together Government debt, corporate debt, mortgage debt and so on. One of our main concerns is national solvency, especially from the point of view of State solvency. This arises in that the weight of debt - this relates to the point made about growth as well - and the problems of balance sheets throughout the economy feed into the potential growth performance of the economy.

One of the great uncertainties about the economy is the nature of the recession we are in. One key element of the recession is that it is a balance sheet recession in that balance sheets are in poor shape throughout the economy. Other countries have gone through this in the past including, most famously, Japan. However, we know less about how a small, open economy such as Ireland will perform in the context of such a balance sheet recession. The overall debt is important but feeding in through growth and the outlook for growth matters greatly in terms of the possibilities for debt sustainability. I refer back to the point Deputy Donnelly made about scenario modelling. This is the kind of thing we can investigate as we examine various scenarios about how debt affects growth and the fiscal situation. We will be examining all such matters.

Deputy Stephen Donnelly

I asked a question on the capital expenditure part of the forthcoming budget. Does the council get to examine this ahead of time or must it respond based on publicly available information?

Professor John McHale

We must respond to it based on publicly available information.

Deputy Stephen Donnelly

I wish to clarify this. With regard to the capital expenditure programme will the council have only the little booklet that came out? Is that all the council has to respond to?

Professor John McHale

That is all we have to respond to. We could request additional specific information but we are not insiders. This is part of the trade-off. We must keep our distance but this does not mean we cannot request information or, if we believe it to be important, that we cannot demand that we get the information we need. However, we are not working inside the Department of Finance or getting a look inside their books. We operate at arm's length.

Deputy Richard Boyd Barrett

I hope the council has more luck than we do.

Dr. Donal Donovan

As Professor McHale said, it is an arm's length relationship but it goes both ways. This is an important point. The Department of Finance does not see our reports or draft reports at any stage before they are sent out and we value this highly. I want to make sure this is understood.

Professor John McHale

To clarify this point, we send our reports to the Department of Finance 24 hours before we publish them. It is not for input purposes, rather it is to ensure it is not taken by surprise when they are published.

Chairman

Some of the members have to leave at 4 p.m. They are not leaving in a huff.

Senator Thomas Byrne

I have to leave at 4.30 p.m. I am conscious that none of my party may be here and I apologise for that in advance.

Chairman

That is okay.

Deputy Olivia Mitchell

We have asked almost all the questions. I want to return to the hawks and the doves. Given the context in which the fiscal council was set up, including the huge debt and deficits, its mandate is to be cautious. That is how I see its role. It would always be more concerned about the build-up of debts rather than the dangers of suppressing demand. It would be in the Angela Merkel school of economics. Professor McHale said it would be squishy Keynes.

This is not a criticism, rather it is what I feel its mandate is, namely to make sure what happened in the past never happens again. There was a divergence between what was said by the Government and the council. It is almost inevitable that there will be divergence and the Government will have to perform a balancing act. Its outlook will always be slightly more optimistic than that of the council. It will always be more worried about downside than upside risks, if there is such a term. It is a long time since we have had them.

Differences of opinion, whether over €4 billion, €3.8 billion, €3.6 billion or what should be the debt this year as a percentage of GDP this year, are very slight and suggest that the council will have difficulty in bringing added value. Professor McHale can correct me if I am wrong, but I understand its added value is in identifying trends in how the Government is behaving.

I am sure Professor McHale has read criticisms about the lack of resources for the council, the fact it might not have time to do the job and so on. He mentioned it will make a submission to Government on the legislation which will put it on a statutory basis. He said he is worried about long-term sustainability.

In terms of its powers and what it will do, I am not sure it should go along with what a Deputy said about providing alternative budgets. What other powers is it looking for and what will its submission cover when it makes representations to Government in advance of the legislation which is due early in the new year?

Professor John McHale

I thank the Deputy. There is probably something to what she said. A certain caution is inherent in a body of our type.

More broadly, we focus on respecting what we see as the principles of sound fiscal management. They include making sure there is debt sustainability - broad stability in the fiscal system in the sense that we will not have to raise taxes on our children down the line to pay the debt we have built up today - and counter cyclical management. In a small open economy such as Ireland which does not have control over its monetary policy, being able to use fiscal policy as a demand management tool in the short run is a component of good fiscal policy. It is a balancing act between the short-term needs in terms of good fiscal policy and longer-term needs.

What might distinguish us is that we do not have to get elected, therefore it is easier for us to think about the long-term than those who are being judged on a minute by minute basis where short-terms concerns will inevitably make it more difficult to think about long-term issues. It is not that we are not weighing the importance of the short-term elements, rather we have the luxury of being able to properly weigh them against the longer term elements, which probably leads us to be seen to be more cautious in our approach and pushes us in one direction.

A test of our balance is that there could be a point in a future where we say the Government should be pursuing a more expansionary policy. This arose recently with the Swedish fiscal advisory council which did just that, to everybody's shock because they thought it should not be telling the government it should be pursuing a more expansionary fiscal policy. On an analysis of the Swedish case, it was the right advice.

I hope we will be in a situation where the Irish economy is booming so much-----

Deputy Olivia Mitchell

I look forward to it.

Professor John McHale

-----or things have gone so well that debt sustainability is no longer such an issue. Such a situation may need to be addressed with a shock that requires such a response and that is the advice we would give.

In terms of our resources, our input into the fiscal responsibility Bill and the design of the council, we are most focused on independence. We are not looking for more powers to do more things. We have been given our mandate and we want to make sure we are properly designed to fulfil it. It is critical that we are properly resourced and have our independence.

Deputy Mary Lou McDonald

Far from viewing Professor McHale as cautious or conservative, my reaction to his contention that the austerity should be greater and quicker is that it is reckless. I would like him to give us the rationale for his commitment to austerity. Where is the evidence it is working? We have not seen a dramatic reduction in the underlying deficit despite €20 billion having been sucked out of the economy.

Professor McHale has painted a pretty bleak scenario. He said domestic demand is weak, our unemployment levels are elevated, the global economic environment is uncertain and the domestic economy is operating well below its potential. How on earth does it or could it make sense to heap greater austerity, enhance the depressive effect and virtually kill off demand? I ask Professor McHale to give us the evidence for the commitment. It strikes me he has bought into this view of the Department of Finance and the orthodoxy of the current Government in respect of that.

Professor McHale told us he did not take the decision on greater austerity lightly. What was his view on where the austerity should fall? Who carries it? Does the council take a view, as professionals, on the damage that would be done if austerity is heaped on people on fixed, low or middle incomes? What does he make of the views of the ESRI or ICTU which argue convincingly that taxation measures are more effective in remedying the underlying deficit rather than constant cutbacks?

The presentation states it would be prudent to consider a low growth scenario for budgetary projections. Is Professor McHale saying the mid-term fiscal statement of the Government is too optimistic? How low should the projections be?

In respect of the fiscal responsibility Bill, to which reference is made in the presentation, can Professor McHale enlighten the committee on its provisions and purpose? What is Professor McHale's view of any move to have fiscal surveillance but also fiscal management centralised at European level?

On a separate but important matter, the Government has told us there is a taxation carry-over from 2011 of €600 million. The carry-over from the universal social charge is not mentioned but it is noted in a footnote to the Government's fiscal statement which informs us that the universal charge is also expected to deliver an additional €0.4 billion in revenue. What does Professor McHale make of the fact that the Government has been mute in this regard? Has it been massaging the figures?

We all know that hardship cannot be avoided. I appreciate Professor McHale's independence and also his voluntary effort. However, given the state we are in and the reality of austerity when it affects communities and families the Irish Fiscal Advisory Council should, as an independent body, provide an analysis that goes beyond figures and models and which provides information as to who shoulders the austerity. To date, the scenario has been that those at the lower end of the income scale have disproportionately carried that burden.

Professor John McHale

Deputy McDonald asked if the austerity is working. By that I understand her to mean if it is succeeding in bringing down the deficit. The question is sometimes asked whether attempts at deficit reduction is self-defeating in that the deficit does not come down. In my view it is working. Our assessment of the numbers is that it is working. The overall general government deficit fell from 11.7% of GDP in 2009, and the most recent projection is that it will be 10.3% of GDP for this year, so that is a reduction. The Exchequer deficit for the first ten months-----

Deputy Mary Lou McDonald

Is that a satisfactory rate of decrease?

Professor John McHale

That is a good question. It looks like the Exchequer deficit for the first ten months of this year will be €1.8 billion lower than it was for the first ten months of last year.

In making an assessment, we have to recognise that austerity is not the only factor slowing down the economy. There are significant forces pushing the Irish economy down and this refers to the earlier discussion of the balance sheet recession. There are significant issues of confidence and issues of credit access. This economy has been hit with a number of very severe shocks that have been slowing growth and particularly slowing the growth of domestic demand, which is critical to the fiscal position.

The Deputy is correct that these numbers as regards improvement in the deficit are not startling in the sense that the deficit is on this incredibly slow downward path but the fact that this has been achieved in the face of such headwinds shows that it is actually working. It is hopefully a question of when we get back to growth and the measures taken, such as the new tax and expenditure structures, will yield much more. When we get back to growth and, particularly and crucially, growth in domestic demand which is affected by much more than just the austerity measures themselves, the expectation and the hope is that the deficit will improve more rapidly.

Using our fiscal feedback model, we have also conducted simulations of what would have happened if there had been no adjustment at all. The Deputy referred to the €21 billion adjustment which has taken place so far. On conservative assumptions, the deficit in 2011 would have been 20% of GDP instead of the projected 10.3% if there had been no measures taken. We would be heading for a debt to GDP ratio in 2014 to 2015 of approximately 180% of GDP. We would be fast becoming like Greece. We would probably never get there because we would probably have ended up in default before then.

The advantage of our simulation model is that we can see the effects of different scenarios and different assumptions. Even if we assumed a fiscal multiplier of three - six times what we think is the best estimate - the deficit in 2011 would have been 13.8% of GDP - or 13.5% - I cannot remember the figure.

Chairman

Are these figures in the report ?

Professor John McHale

No, this is a subsequent analysis.

Chairman

That is fine. I did not spot them.

Professor John McHale

We will be undertaking more of this kind of analysis in the next report and in particular, more of the scenario analysis which, as Deputy Donnelly said, is so important.

It is my strong view that the efforts at deficit reduction to date are not self-defeating in the sense of not bringing down the deficit.

Deputy McDonald is correct that the pain of these measures is very real. It is a matter of concern to us. I hope that the technical language of these reports does not cause this concern to be lost. We are aware of what lies behind these unemployment and emigration numbers. We are very concerned about the pain of these measures and we do not recommend them lightly. However, we must weigh this against the risks associated with allowing the fiscal situation spiral out of control, which is a possibility. It is not some technical concern about debt sustainability against real people but rather that real people will suffer in the future. Even though the extra pain is serious now, we cannot allow that to happen. That is the balancing act we must achieve. It might sometimes seem to be very technocratic in the way we do it but we are very much aware of the stakes.

Deputy Mary Lou McDonald

I am aware that adjustments had to be made and I hope Professor McHale has not missed my point. The question is the scale of the adjustments, whether they come by way of cutback or by taxation. The critical issue is who carries the can. By what proportion do people who are very well-off, who are propertied and some of whom are wealthy, take up the burden, as against people who are on low incomes, perhaps out of work? This is the issue as regards spending power and any efforts to lift the domestic economy.

This committee is not discussing whether something had to be done because it is clear that much had to be done. The question is whether the measures are correct. What is the view of Professor McHale as regards cutbacks versus taxation measures and the upper echelons taking a stronger proportion of the tough medicine, rather than the working class?

Professor John McHale

These are very good and difficult questions for us. The Deputy's feedback and advice on this matter will be very welcome. The Irish Fiscal Advisory Council is not an elected body and making decisions about who bears the burdens is not something we have been given a mandate to decide. It may seem very technocratic but we focus more on the macro-economics. We can advise on the evidence and we will be undertaking our own research in this area. We will look at the evidence on the impact of different types of adjustment programmes whether expenditure-based or taxation-based, whether based on cuts in current spending versus capital spending. We examine at that level. However, I do not think we have the mandate to start making recommendations that one group must bear the burden over other groups. This may sound like a bit of a cop-out but I do not think this is our work and it would undermine the role we can play if we get into what is the political space and start making those difficult judgments.

We look at these issues from a macroeconomic perspective. One of the arguments we made in the report is that the evidence for the claim that expenditure-based adjustments are superior to tax-based adjustments, from a macroeconomic point of view, is weaker than people assume. As we evaluated the evidence, new findings showed that the superiority of expenditure-based adjustments, that is, cuts in spending, is based on the fact that Central Banks are often more accommodative of the former than the latter in that they offset them somewhat by changes in interest rates, possibly because they believe they are more sustainable. That does not apply in the Irish case because the Central Bank is not in a position to respond specifically to what happens in terms of Irish policy.

We pointed out in the report that the evidence for implementing budgetary adjustments mostly by way of cutting spending is weaker, in the Irish context, than it may have appeared. That piece of evidence, taken by itself, would suggest an adjustment that includes a more balanced of mix of, on the one hand, measures to increase revenues and, on the other, measures to reduce spending. It is at that level that we can make a contribution as macroeconomists.

Professor Alan Barrett

This debate is often grounded in the assertion that people on lower incomes suffer disproportionately during times of austerity. By extension, there seems to be an implicit argument that if there were less austerity, lower-income people would be doing better than would otherwise be the case. There are two points to make in this regard. First, as Professor McHale pointed out, we are agnostic on the question of whether or not adjustments should be expenditure-based or taxation-based. That is something of a departure from what one might consider the long-term orthodoxy in this area. I understand that even the most recent Department of Finance document, the medium-term fiscal statement, repeats the mantra that adjustments on the expenditure side have been more successful. We quote IMF evidence on this - that is another body which would not be held up as particularly unorthodox - which shows quite clearly that the evidence base for that argument is much weaker than generally understood, for the reasons outlined by Professor McHale. From our perspective, were the adjustments done primarily through the taxation route, targeting the types of people referred to by the Deputy, we would not necessarily agonise over that.

Second, on the point of who does better or worse during periods of austerity, I refer to the 1980s, a period during which austerity was essentially postponed. The people who suffered most during that period were lower-income, less educated people. It was not a glorious period for that particular group; on the contrary, it was a horrible period.

Deputy Mary Lou McDonald

I remember it all too well.

Professor Alan Barrett

Indeed. There is the notion that austerity is bad for poor people and non-austerity is in some sense good for them. We have to get away from that-----

Deputy Mary Lou McDonald

A recession is bad for everybody. However, for those reliant on a fixed income who are forced to endure a reduction in their disposable income, it is disastrous, whether in the 1980s, now or at any time.

Professor Alan Barrett

I entirely agree. I am merely making this point in the context of our discussion on deficit hawks and doves. If the Deputy is interested in the diversity of views within the council, I was one of the people who wrote some years ago that social welfare rates should not be cut as part of the austerity programme. I assure the Deputy that this diversity of views, which I am sure she would like to see-----

Deputy Mary Lou McDonald

I hope Professor Barrett is reiterating that view strongly at this time.

Professor Alan Barrett

I can only speak as part of the fiscal council.

Deputy Mary Lou McDonald

I accept that.

Professor Alan Barrett

My views are no longer my own.

Deputy Mary Lou McDonald

I will read Professor Barrett's blog.

Dr. Donal Donovan

As Professor McHale said, our mandate in setting up the council - presumably this will be maintained in the legislation - is to address the macroeconomic impact of whatever is going on. There is a certain element of judgment involved in the sense that, at times, one might conclude that certain specific changes in taxation or expenditure would be of sufficient import to involve a macroeconomic impact on the total outcome, apart from their microeconomic effects in terms of particular sectors. We will have to make something of a judgment as to whether or not potential work or potential views would be judged to have a macroeconomic effect. If not, they would not be within our mandate.

Under its current mandate, the council may be asked to do any task requested of it by the Minister for Finance, in addition to our set tasks on the macroeconomic side. If the Minister were to ask us to look at a particular policy issue affecting a specific tax expenditure, for example, we would certainly endeavour to respond positively, subject to our resources. There is a certain amount of flexibility in this area. We will have to see how it works out.

Deputy Mary Lou McDonald

I also asked about the low-growth scenario and how low is low.

Professor John McHale

We have still to do the analysis on that. Again, it goes back to the idea of scenario analysis. It may be that in terms of the best guess of what growth will be, we may differ from the 3% figure. That analysis remains to be done. The point about the scenario analysis is that we want not only to consider that central forecast, but also to look at other scenarios, particularly a low-growth scenario, in order to ensure we are planning properly for how policy should respond in different circumstances. Clearly, if growth comes in lower, it makes that trade-off of which we spoke earlier even more difficult. On the one hand, one is now more concerned about the state of the domestic economy while, on the other, it can make debt sustainability look even more precarious. We must examine the trade-off in that context. It is important to think this through carefully, and we will be doing that for the next assessment report.

Deputy Mary Lou McDonald

My final question related to the universal social charge carryover.

Professor John McHale

I am not too sure whether I can shed much light on that. We certainly noticed that the carryovers were being treated somewhat differently, that is, the carryover for the universal social charge seems to be in the projections for current revenues while the other carryover is essentially being treated as part of the discretionary adjustment. Therefore, instead of €1.6 billion, the total required adjustment is only €1 billion. We will be inquiring on a technical basis as to why there was a different technical treatment of these two issues. We essentially noted what the Deputy noted.

Deputy Richard Boyd Barrett

I thank the delegates for their contributions. Like other speakers, I commend them on their voluntary involvement in the effort to deal with the State's financial crisis. Having said that, my job is not to be nice to the delegates but to interrogate them. I will begin with a simple observation which has probably struck many other people as well as me. Why should we trust the fiscal council any more than we used to trust priests who were supposed to know about issues of which we knew nothing? I get the distinct impression that economists are becoming the new high priests and that there is as little justification, given their comprehensive failure to predict was has befallen us, for investing them with wisdom as there was for investing priests with wisdom and knowledge or at least not questioning their credentials.

It is a serious question. People are asking themselves whether we have simply had some changes of face at the top while, fundamentally, the same people, politically and in every other area of society, are still running the show. To be more specific, my view, with which the delegates may or may not agree, and I am happy to hear their opinion, is that an addiction to neoliberal economic thinking - there was a suffocating consensus around this thinking - was such that comparative economics was effectively done away with some time in the early 1990s. There was only one debate and it focused on how to make capitalism work. Everything else was done away with and pretty much everyone in mainstream economic, academic and other circles was part of that consensus. Were our guests part of that consensus, which has failed us spectacularly?

I am not merely asking a question about past history or about our guests' credentials in order that we might be able to take them seriously as people who possess the wisdom, knowledge or understanding necessary to deal with this crisis. I am concerned because we have moved from a neoliberal expansionary consensus to a neoliberal austerity consensus. I would like to be reassured that those before us are more than just a team of neoliberal austerity technocrats. Europe is facing an extremely serious challenge at present. Two elected Prime Ministers have just been replaced by austerity technocrats. The markets and the ECB are happy with these individuals because they are going to implement austerity measures, regardless of what the populations of their respective countries think. Are our guests part of the consensus to which I refer? Do they have a mandate to, are they free to or do they even have the inclination to contemplate matters outside the austerity consensus?

Some people - I am one of them - fear that we are moving from one extreme to the other and that this will be disastrous. The neoliberal expansionary consensus is moving to an austerity consensus on the basis that fiscal rectitude and fiscal responsibility will resolve all of our problems. There are those of us who fear that austerity measures will just deepen those problems. I am not the only person who thinks in this way. Paul Krugman, Joseph Stiglitz and the United Nations Committee on Trade and Development all recently stated that austerity is self-defeating, that we must move in exactly the opposite direction and that social transfers, fiscal stimulus and capital investment represent the only way out. Like me, they are of the view that pursuing the austerity route will simply lead to a downward spiral.

Some of the paragraphs in the council's report in which growth prospects are assessed contain comparisons between the projections of the ESRI, the Central Bank, the IMF, etc. The comparisons to which I refer state that there are, for example, 1% or 0.5% differences in the projections provided by these entities. On what are these projections based? At university, when I was concerned with completing an essay quickly, instead of thinking about things from a lateral point of view I would assess the perspectives of two well-known writers on the subject and then try to base my analysis somewhere in the middle. Some of what is contained in the council's report seems to echo what I did at university. I hope there is more to it. On what are the growth projections in the report based? The projections issued right up until the crash indicated that Ireland's economy was going to continue to grow forever. Those responsible for the projections to which I refer just did not see the crash coming.

Despite slight variations, all of the bodies referenced in the report seem to suggest that growth is going to significantly pick up from 2013 onwards. What is the basis for this? The Irish Fiscal Advisory Council seems to accept and acknowledge - although it does not appear to dwell on this - that growth projections have been consistently downgraded during the past year. It appears, however, that growth is, as if by magic, going to pick up again in 2013. What do our guests say to those of us who believe that the reason we are being obliged to downgrade growth projections is precisely as a result of the implementation of austerity measures? Austerity is crippling growth throughout Europe. At present, every country in Europe which experiences a financial crisis moves into austerity mode and domestic demand collapses. This happened in Ireland and Greece. I am of the view that it will happen in Italy and then in Spain and France. It will only then be a question of deciding who will be next. No one will be spared. In my opinion, that is the logic of what is happening.

The one little bit of hope which led to optimism is that our exports are doing well. However, prospects in this regard are now being downgraded as a result of what is happening in Europe. If the contraction in Europe continues, that one bright spark of hope will be choked off and we will be left with the reality of a deeply depressed economy. That will be the case not just here but throughout Europe.

It was stated that in the context of the technical measures necessary for deficit reduction, etc., it is not the fiscal council's job to decide between taxes and cuts. It might not be the council's job, from a political perspective, to deal with such matters. However, I wonder about the logic of that. I do not understand economics if they are not connected to human beings. I see human beings as coming first and economics as being there to serve the needs of human beings. When human beings come at the end of the equation, I become deeply worried. Setting aside that moral point, is it not the case that if it is decided to cut rather than to tax, this can have real implications in the context of making future projections and estimating the impact of cuts on growth, debt, etc.?

I wish to put a simple proposition to our guests. Taxing people who have enough wealth to save - rather than to be spent or invested - frees up money that is not being used and puts it into the economy, while hitting those on low incomes who need their money to survive and who spend it in the economy with cuts has a clearly detrimental effect on consumer demand. In other words, and ignoring the moral aspects involved, taking the first of these routes can breath life into the economy, whereas taking the second could have a damaging effect on it. This is not just a social, moral or political question, it is also an economic one.

What is our guests' view of the argument to the effect that the debt-to-GDP ratio is not as meaningful in this country because, to use the tiresomely popular term, Ireland is a small, open economy which is disproportionately dependent on foreign direct investment and on multinationals which repatriate a great deal of the profits they make? Is it not the case that our debt-to-GNP ratio is a more meaningful method of measurement and that this shows that our economy is in a much bigger mess than is usually stated? How would our guests respond to that point?

Chairman

I will take questions from the remaining members and our guests can respond to them en bloc.

Senator Sean D. Barrett

I welcome our visitors. I may have taught two of them and, in such circumstances, I do not know who bears the responsibility.

Deputy Kieran O’Donnell

I can see the Senator's stamp upon them.

Senator Sean D. Barrett

The work our guests do on a voluntary basis is impressive.

Is there a prospect that we might get lucky in respect of our debt-to-GDP ratio? We bought a large number of banks, golf courses, castles and so on and I wonder whether we will derive a bonus from these at some point.

I agree with the second comment on the multiplier. It is an important message, because it is so small in a small, open economy, but it is beloved as a capture because a large part of the Irish economy is in trouble because of capture by the construction sector and capture by the banks on the most notorious night in question. Multipliers estimated by an independent group like our visitors this afternoon are very important because usually the claim comes from an interest group that by giving it a load of money, it will spend it and thereby ensure the prosperity of the economy. We need the tactical expertise of our colleagues.

I greatly value the group's independence because there was institutional failure in the Department of Finance and in the Central Bank. Our visitors are stepping into the breach, a vital step. I do not know how their role will evolve but as Professor Alan Barrett will know from his work as a journal editor that capital expenditure appraisal is not the most advanced part of economics. We just do not do it; the interest group and the spending Department nominate the project and if it does not work, we are left with a debt mountain and nothing happens. I was glad to see Edgar Morganroth, one of the council's colleagues, was brought in by the Department to get the capital expenditure appraisal correct. We used to boast that our public programme was twice the size of any other country, as if we were somehow hugely advanced and they were not. That lesson was learned with the debt mountain we ended up with.

I see this council evolving into a council of economic advisors like in the United States. On the current side, do the programmes run by the Departments of Health, Education and Skills and Social Protection, the big three, make anyone any healthier or promote Ireland as a smart economy when 80% of kids are taught mathematics by someone with no qualification in that subject? The allocation of scarce resources which have alternative uses has not been appraised. It will fall to the council because we did not do it and that is why we got into so much trouble.

The household debt problem is huge. If a person paid €500,000 in 2006 for a house that was worth €100,000 in Dublin ten years earlier, he is working for the banks. We have a bad starting point in that public and household finances are in a grim state. The assumption in Keynesian terms is that we would go back to stage 1 where there is a reserve fund for a shock that might hit the economy. We put it cumulatively and wound up with debt to GDP figures of 140% to 160%. It is a difficult place from which to start a stimulus programme. The legacy is our starting point and it is a large and, at the top end, well-paid bureaucracy run by powerful interest groups that must get used to the idea of independent groups like the council getting an input into the construction of economic policy. It was pointed out by Micheál Collins in his work that tax lowerers and accountants have an amazing influence on our tax system and that around €12.8 billion in tax waivers were secured by their efforts. On the committee he worked on, Mr. Collins proposed as an economist that we look at those but the majority of tax lowerers said that is how they make their living and refused to do so. The Revenue Commissioners also have a sizeable interest in that.

There is a lot of economic policy that people like our guests must analyse and find a way out of. I welcome what has happened so far. It is vital that we remain independent of the Department of Finance but it is also vital that the deficiencies the Wright report found in the Department of Finance and Mr. Nyberg found in the Central Bank are remedied. Should this council of economic advisors seek to develop economic expertise in the Department of Finance and then in every single spending Department, so simple lobbying does not masquerade as economic policy? An important start has been made but turning economic policy around after such spectacular mistakes needs an infusion of economics, which is well represented by our visitors. We let it slip. The Wright report pointed out that 7% of the staff in the Department of Finance had a qualification as against 60% in Canada. We cannot have serious investment decisions being made when there is only a 7% chance the person in charge might have some qualifications in these economic issues.

In thanking the council for what it has done voluntarily, I can see in the next phase that it will play a major role by bringing that independence and expertise to chart a way out of the unprecedented difficulties we got into this time.

Deputy Kieran O’Donnell

I thank the council for attending and commend the members for the voluntary work they have done. There was not a huge discussion of the domestic economy. We speak about exports and being a small, open economy but the domestic economy kicks in much more quickly to generate employment than the export market.

What does the council see as its role? I cannot see it being relevant unless it has an evolving role and offers advice. Under the European model, when the Growth and Stability Pact was put in place, some of the key components were missing, such as the type of growth that could take place. Will the council come up with a sustainable fiscal model for Ireland? Ultimately, growth plus inflation must at a minimum equate to the interest rate. We cannot lose sight of the fundamentals. Rather than this being perceived as an academic exercise, how does the council see its role evolving? When it sees something happening, could it issue an immediate report that would support or oppose it, as distinct from waiting six months to issue the normal report? There must be an interactive element. How does the council envisage that happening?

There was no oversight in the area of credit in the domestic economy. Senator Barrett referred to 7% of staff in the Department of Finance having economic qualifications but 100% of those they are dealing with are qualified, many of them at the height of their game. I would like to see the council being proactive and determined.

Having regard to the interest rate we will have to pay apart from the austerity measures, businesses here will reach a point that businesses reached in the UK where they had to downsize to such a level that by the time the economy took off again, they did not have the capacity to grow. They downsized to the level of being a one man band and thus did not have the infrastructure to grow. If we introduce austerity measures into the economy that are too severe, when the economy takes off we may not have the infrastructure in place for businesses to grow.

With regard to whether the EFSF becomes a bank in terms of the French model such that effectively it will be a lender of last resort or takes the form of the German model, and they both interact, where does the council envisage its role evolving in that respect and how that interacts with the domestic economy and our stance in the European context? It is a pity a fiscal council was not in place when the crisis happened in and around July 2007 onwards.

Senator Sean D. Barrett

Hear, hear.

Deputy Kieran O’Donnell

For such a council to be effective, independence is an extremely important factor. Every country is different and I do not buy the argument that one size fits all. We are a small open economy and we have to examine what will work for Ireland. The basics are simple. Our debt is too high. We want it to be sustainable and need to maintain it at that level. Deputy Boyd Barrett asked a question in this respect. A factor that is often overlooked is that our domestic economy is larger than our multinational sector. For the ordinary person following these proceedings, what will the fiscal council bring to the table? I would like to hear all the views on this because no doubt the witnesses have individual views but they also have a collective view and the fact that there are different views is extremely important. I am putting them on the spot but this is key to the issue and this is about the future of our country.

Chairman

Deputy O'Donnell and others raised an important point, which presumably will feed into the discussion on the legislation and what the functions and powers contained in it and the expectations of it will be. This relates to a point Deputy Donnelly made about a document he spoke about, which I believe was the capital programme. He asked an insightful question as to whether Professor McHale had seen any of the documentation that led to that, to which he answered no, and that he saw the final product. Drawing on all his expertise and knowledge of previous material, he was dealing post facto with that document. He said he does the spring report - that would be budget and medium-term review, or the fiscal review, that was published last week. Nobody expects Professor McHale to engage in real-time supervision of what is happening. That will not happen, but it would be a disappointment to many people if it was the opposite extreme and it ended up only being a post facto assessment of documents that were already in the public domain. Is there somewhere in between in that respect, which is what people are driving at? This will be a matter for the legislation presumably and Professor McHale may feel constrained about expressing a view, but he might be able to assist us.

Deputy Liam Twomey

When I made my contribution Professor McHale clearly set out how much he can comment on what we ask about. Having regard to the role he will have in terms of the new fiscal responsibility Bill, in the preparation of which he has an input, he spoke about the macroeconomic element. I mentioned the banks, and we must examine the other asset deleveraging agencies in the State such as NAMA, Anglo Irish Bank and Certus, which I believe is deleveraging for Royal Bank of Scotland.

Deputy Kieran O’Donnell

Yes.

Deputy Liam Twomey

It is considering offloading €25 billion worth of assets in the next few years. If it transpires that NAMA has a bad business plan, Anglo Irish Bank costs more than we expect, the banks are not giving us the full facts and mortgage defaulting and commercial defaulting goes wrong, there is a potential for the taxpayer to have to put in anything from €2 billion to €4 billion into these institutions over the next few years, certainly the ones for which we are responsible. Is Professor McHale feeding such considerations into his thinking or is he in a position to do that?

Chairman

No pressure now.

Professor John McHale

Okay.

Deputy Kieran O’Donnell

Is Professor McHale reconsidering whether it should have been voluntary?

Professor John McHale

I am certainly feeling a little overwhelmed. I will do my best to respond and I assume the time available is limited.

Chairman

We will also take your concluding remarks and we will finish at that point.

Professor John McHale

I assume my fellow council members will want to add a few comments as well. First, to deal with Deputy Boyd Barrett's questions, he began by asking why the committee should trust us. He is absolutely right to be sceptical. I do not believe any economist or anybody can claim to have the font of wisdom and we should be chastened by what has happened and the poor prediction of the vulnerabilities that were obviously building up through the bubble period. He is right to be sceptical, to continue to question matters and to question the models. When there seems to be a huge consensus around them, that is when they need to be questioned most. We are a reasonably open-minded group. I do not see us as highly ideological. We are generally a middle of the road group when it comes to economic thinking.

(Interruptions).

Professor John McHale

We may have our radical moments but-----

Deputy Kieran O’Donnell

Are there a few socialists?

Chairman

They are all socialists.

Professor John McHale

To give an example, we talked earlier about whether the idea of deficit reduction is self-defeating. To me, at one end of the spectrum is the belief that deficit reduction just does not work and the evidence does not support that. On the other side, there is the idea of expansionary fiscal contractions, whereby when one cuts the deficit, one causes the economy to grow. I do not believe the economy supports that, but there are people who tend to be more on the right of the spectrum or drawn to that view. What we do is we examine the evidence and the facts. We have frameworks with which we approach this and while to some extent we may be somewhat open to the charge of being orthodox economists with occasional heterodox elements creeping in, on the whole we are a middle of the road group. Hopefully, what the committee members will get from us is balance and an open mind as we address these issues in the years ahead. I anticipate they will continue to be sceptical and hope that they will be because the more scepticism there is, the better the chance of avoiding the kind of mistakes that were made in the past.

Professor Alan Barrett

I wish to add a point regarding Deputy Boyd Barrett's concern as to whether we should be listened to. Obviously, as a profession, we should hold our hands up and say we made huge mistakes, there is much we got wrong and much we clearly do not understand about how the economy works, and it is important that we put all those things out there. However, on the specifics, this is the fiscal council and our main job is to assess fiscal policy and the fiscal stance. It is quite a limited role in many ways. There has been plenty of discussion about how that might expand. If I talk about the ESRI in particular, we can put our hands up and say we got forecasting terribly wrong. We did not spot the banking crisis - that was absolutely the case - but if members check the record they will note that one thing we did was we talked about fiscal policy being overly expansionary going back to the early part of the last decade. In general, while economists disagree about a range of matters, we have a better understanding about how fiscal policy should be run and we talked about this, not only the ESRI but also many other groups. I am sure Senator Barrett talked about this at great length over that time. Yes, we made our mistakes but as I said, when it came to fiscal policy, which is the specific of what we are dealing with now, had economists listened we would not be in the crisis position we are in now.

Deputy Richard Boyd Barrett

This is not a supplementary question; I asked a specific question to which I did not get a reply.

Chairman

The Professor has not finished replying. He is only beginning. He is going through approximately 20 questions. If he has not answered it when he is finished then I will allow Deputy Boyd Barrett to contribute.

Professor John McHale

The Chairman should please remind me if I do not reply to a specific question. I said we could not get into the detail of taxes and particular cuts given that it was a political area on which it was not appropriate for us to make recommendations.

One area on which we should comment is on the effects in terms of the macro-economy of various types of expenditure cuts and revenue changes. What economists refer to as marginal propensities to consume can be different for different types of households depending on the situation they are in. It could well be, and there is evidence to back it up, that less well-off households do have higher propensities to consume which is relevant from a macroeconomic perspective. That is exactly the kind of question that we can debate without making our own value judgments about where the burdens should fall in the adjustment. On the other hand we would have to weigh the disincentive effects of very high marginal tax rates which may go in the opposite direction. It goes in different ways, but they are the kinds of things it is in our sphere to consider. We will certainly do that in future reports.

Deputy Boyd Barrett raised a very important point about whether we should be looking at the debt ratio in terms of debt to GDP or debt to GNP given the nature of the Irish economy. There is a strong argument for focusing on GNP as it is more closely related to the tax breaks. On the other hand, internationally, when the European Union looks at things in a comparative way it tends to focus on GDP, which pushes a lot of the analysis in the direction of focusing on GDP rather than GNP. In future reports we will pay more attention to GNP than was the case in the past.

The reason people talk about the debt to GNP ratio is that when they look at it, it appears that the debt to GNP ratio will probably peak at approximately 140% of GNP. They say that we are not going to be able to stabilise the situation, that it is too high and that this is the right comparison point. When we look at what other countries have done in the past we have got into serious danger territory. One can put too much emphasis on just looking at the ratio. The real question is whether we can get to a primary surplus in which we can stabilise both of the ratios - the debt to GDP ratio and the debt to GNP ratio.

For all the criticisms of the institutions of this country the adjustment that has been achieved so far has been remarkable. One may think it should not have happened but the fact that the political process was able to achieve the adjustment it achieved - essentially €21 billion so far - indicates there is every expectation that we can see it through, that we can see the additional €12.4 billion through to stabilise both of the ratios and essentially to achieve that sustainability giving us a position to get back our economic sovereignty so that we can get away from the EU-IMF programmes.

In the worst case scenario where that cannot be achieved and we continue to depend on official assistance, if we have made this progress towards debt sustainability we will be in a much stronger position to continue to get the support we need to prevent much more severe austerity measures down the road. I accept the Deputy's point that GNP is very important and we will focus a lot on it, but the real issue is whether we can achieve the primary surpluses that are necessary to bring about the debt sustainability.

Deputy Richard Boyd Barrett

On what basis are all the witnesses projecting a substantial pick up in growth from 2013 to 2015?

Professor Alan Barrett

Deputy Boyd Barrett was sceptical earlier about believing in economists. Whatever about believing us on average, when it comes to forecasting he is even more correct to be sceptical. To talk about forecasts in general, first, it is not part of our mandate to produce forecasts. Our only role is to assess the Government's forecasts. There is a very good reason for that if one understands why we exist. We are partly there to act as a force against excessive deficits in more normal circumstances, but another reason Governments often go astray in terms of the public finances is by having macroeconomic projections which underpin their budgetary plans which are overly optimistic. There is a role for a fiscal council to ask whether the forecasts are sensible.

Deputy Boyd Barrett described our approach to that of a student doing an essay just plucking out bits and pieces of information. We do not do our own forecasts so, essentially, in the exercise what we were doing is assessing the official Department of Finance forecast relative to what other people were saying to see, broadly speaking, whether they were way out of line. We then added a certain amount of our own judgment to that. The reality about short-term forecasting is that it is partly model based but much more of it is to do with people's judgment and assessment of likely developments in the economy.

The frustrating thing about forecasts - this is from someone who worked on forecasting for five years in the ESRI - is that they are a necessary evil. We need to have some sort of projection of what is going to happen in the economy because we need to have some sense of what spending plans should be like and the necessary rates of taxation. One has to do it. One could take an extreme example and say let us just choose a number off the top of our heads and use that, but it would probably be better if we try to massage it or nuance it in some way. It is possible to have some sense of likely development for the current year and the following year. We know about the sort of difficulties facing the economy and the further out one goes, obviously the less pertinent the information one currently has and so one tends to fall back on looking at long-term historical growth patterns, which is in the range of 2.5% to 3%. That is really where the projection comes from.

As to whether it is a good way of organising one's life, if we agree that one needs something then members can please give us their forecast and we will happily assess them too but the more substantial point is that once one accepts that there is great uncertainty-----

Deputy Richard Boyd Barrett

What if there is stagnation?

Professor Alan Barrett

Yes, that is precisely what is in the assessment document. We examined the situation that would arise if growth turns out to be substantially or even marginally less than is projected. One of the reasons we arrived at the conclusions we did was precisely in the event of the growth turning out to be marginally lower than is forecast in official documents. One then ends up in a situation where the debt is unsustainable. One has to have the central forecast but one should certainly do scenarios around that. We all need to be aware that there are great degrees of uncertainty.

Deputy Boyd Barrett raised the moral issue. As an economist, yet also as a human being that is one point that always irritates me. The Deputy does not have a monopoly on care and concern for his fellow human beings. Let me assure him that most of us around this table who chose to study economics did so precisely because we were interested in issues of human development and progress. While it may on occasions appear that we discuss these matters in a cold way, I assure him that our concern ultimately is for the material well-being of people in this country and elsewhere. I apologise if it comes across slightly differently but Deputy Boyd Barrett should please be assured that he is not alone in his concern.

Deputy Richard Boyd Barrett

I have no doubt about that.

Chairman

He is entitled to that.

Dr. Donal Donovan

On the subject of economists being humble, raised by Deputy Boyd Barrett, he is correct. The profession as a whole was pretty disastrous, but not in all areas. For example, in the case of Ireland there was a substantial amount of questioning of Irish fiscal policy throughout the decade, not of banking system policy nor regulatory policy. The IMF and everyone else came in and said that the Central Bank and the Financial Regulator were doing a wonderful job. However, a more nuanced approach was adopted to fiscal policy. Several members may recall that both before the 2002 election and the 2007 election serious voices were raised, including from my former organisation, the IMF, about the dangers of pro-cyclical fiscal policy, pre-election spending issues, unsustainable structures of revenue and unsustainable growths of social expenditure. Since we are talking about fiscal policy, in that area there is some hope that the profession did not lose sight of the issues. In Ireland, many of them did not.

Chairman

Professor McHale might address Senator Barrett's questions.

Professor John McHale

Perhaps I ought to respond to both Senator Barrett and Deputy O'Donnell.

Chairman

It is 5 o'clock and we have been here for three hours. We might be able to call Deputy Mathews briefly at the end of the meeting but we will deal with the colleagues who have been here-----

Deputy Peter Mathews

Chairman, I could not avoid it. I was at the High Court under direction.

Chairman

We cannot be in two places at the one time.

Deputy Kieran O’Donnell

Chairman, might I suggest that Deputy Mathews can speak-----

Chairman

I will deal with it now as befits. Professor McHale might finish dealing with the questions asked already.

Professor John McHale

We are flattered that both Senator Barrett and Deputy O'Donnell have such confidence in us to expand our mandate in a significant way-----

Deputy Kieran O’Donnell

We are setting you a challenge.

A Deputy

We are looking for a fall guy.

Professor John McHale

-----that we become a council of economic advisers inputting-----

Deputy Kieran O’Donnell

Be careful about what you are asked to do.

Professor John McHale

I agree with Senator Barrett that there is room for improvement in many areas in terms of the input into the policy making process. He mentioned capital expenditure and other areas but our mandate is a limited one as of now and we respect that mandate. If we try to go beyond it into areas we were not asked to investigate we undermine ourselves in the space we have been given and therefore we must be careful. That is not to say things may not evolve in the future, not necessarily with us but other bodies like us that bring an independent approach to economic analysis into the policy making process. I would very much support that. To the extent that it is relevant to fiscal policy, particularly fiscal policy from a macro-economic perspective, it is relevant to us.

Some of the aspects Deputy O'Donnell mentioned, to the extent that they potentially affect growth, for instance, are relevant to our assessments of forecasts which feed back into our assessments of the fiscal position. It is not that we will be completely narrow in our approach but we will examine these to the extent that they are relevant to the particular mandate we have been given. All of us will continue to be active outside our roles in the fiscal council which will allow us more freedom to get into many of these issues but for now it is better that we stick to doing the best possible job we can with the mandate we have been given. I thank the members for the confidence they have in us that we can potentially go even further in the future.

Chairman

Does that cover Deputy O'Donnell's question?

Deputy Kieran O’Donnell

What are Professor McHale's views on the domestic economy? We have not discussed it at length here but unemployment is the barometer in terms of Ireland Inc. outside of the debt and therefore-----

Chairman

You asked the question earlier, Deputy. Professor McHale should do the best he can in terms of that issue.

Professor John McHale

Even in the context of a mandate the domestic economy is critical. When we think about setting appropriate fiscal policy we are very concerned that fiscal policy is supporting the domestic economy and supporting growth. As I said in response to Deputy Mitchell earlier, we must think about the short run and the long run and therefore supporting growth in employment in the short run would suggest going somewhat slower in terms of the deficit reduction measures. If we allow the debt to build up as we produce that slower path we could be creating risks for the domestic economy in the future. The domestic economy, and going back to what Professor Barrett said about the people and the lives that are being lived in the domestic economy, is what is behind all of this but our job is to both assess the forecast and projections but also the fiscal stance that best supports the fiscal economy over different time horizons. It is not just a case of looking at the short term but making sure we are not doing what we did in terms of building up the risks in the past decade and that we do not do that again or allow it to happen again. The domestic economy is central to that.

Chairman

If Deputy Mathews has a specific question we will take it.

Deputy Liam Twomey

I asked a question about the deleveraging agencies and the banks.

Professor John McHale

My notes are all over the place. Could the Deputy remind me of the question?

Deputy Liam Twomey

Is it part of the council's mandate to examine issues like the banks and the problems they have with bad debs and if the asset deleveraging agencies have to impose an additional burden on the Irish taxpayer in the next few years?

Professor John McHale

To the extent that it has fiscal implications-----

Deputy Liam Twomey

Which it would.

Professor John McHale

-----that is relevant to us, yes.

Deputy Liam Twomey

Would the council examine those-----

Professor John McHale

We would not do that as a banking issue. Our mandate does not cover banking policy but to the extent that it has fiscal implications, I must admit we have not examined that issue as of yet but it would be in our sphere.

Deputy Liam Twomey

It is not that it has to happen first before the council examines it. It can look for it.

Professor John McHale

No. To the extent that it is a risk-----

Chairman

If it is plugged into the fiscal assessment.

Professor John McHale

If it is relevant to us.

Chairman

We have covered a great deal of ground. We have been here for three hours. I call Deputy Mathews to ask a specific question on the fiscal report.

Deputy Peter Mathews

I thank the representatives for attending. Apologies for not being here earlier. I was under direction to attend the High Court and I could not leave until I got my release. I do not have to go to prison.

Deputy Kieran O’Donnell

Not yet.

Deputy Peter Mathews

The fiscal council is a great idea. It is independent and so on but regarding my concerns for Ireland, and I would like to hear the representatives' response on this, the point missed to date in much of the analysis and focus has been on where the combined elements of debt on the economy lies. In terms of the national debt, sovereign debt, household debt, which has mortgage debt as the core, and all other debt added on including non-financial corporate debt and the business debt, whether it is sole traders or larger companies across the economy, those elements of the economy are the engines of production and distribution that must earn the money to repay the debt. In Ireland, if one superimposed the table that the BIS economists at the Jackson Hole, Wyoming conference in August-----

Chairman

The Deputy cannot do a full survey of all these issues. If he has a specific question on the fiscal assessment report I ask him to please ask it. We have been here for three hours. I accept the Deputy was otherwise detained but we cannot reopen every issue. I ask him to put specific questions.

Deputy Peter Mathews

On the economy and growth, the representatives know that the growth of an economy is killed off if those elements of growth on a combined basis are too large relative to GDP, in our case GNP. In our case we are the highest in the world, higher than Japan, and regardless of the little green shoots that might appear occasionally from here and there, as I believe Deputy Boyd Barrett suggested, there is stagnation in Ireland. I am aware of that, and not just anecdotally. People telephone me about it. In the past 48 hours four different people contacted me who had debt to the Revenue Commissioners on their shoulders ranging from €200 million down to €30,000, leading to a suicide yesterday. That permeates our society and we better connect the reality with the growth figures and all the rest because otherwise we will not get out of this hole.

I ask the representatives to advise the Government to seek openly and transparently to present the case to the eurozone leaders and colleagues that we need debt reduction, which can be cascaded on through creditor write-down in the banks to their customers, businesses and households. Without that there will not be the capability to activate and actualise bankruptcy, new laws on which we hope will be introduced soon, and calibrate debt back to what is bearable by the households and the businesses. That is the single most important thing for our country to do.

Chairman

Deputy-----

Deputy Peter Mathews

Please, Chairman. This is-----

Chairman

Please, Deputy. The meeting has been taking place for over three hours.

Deputy Peter Mathews

Democracy is at stake in Europe.

Chairman

We might have to lock the doors in a minute if somebody else gets in.

Deputy Peter Mathews

Greece has a technician government now, so has Italy. Democracy is at stake. Treaties will have to be re-written and adjusted to make allowance for what is needed for the debt write-down across Europe. It is €75 billion for us, €70 billion for Portugal, I reckon €135 million for Greece and approximately €250 billion each for Spain and Italy in some form of debt restructuring.

Chairman

Okay, Deputy. Professor McHale-----

Deputy Peter Mathews

That is €1 trillion, and we need another €2 trillion for reserves.

Chairman

Does Professor McHale have some observations on Deputy Mathews's contribution?

Professor John McHale

This is an issue we discussed previously and therefore I do not have that much to add to what I said but unfortunately Deputy Mathews was not present for that. I agree with what he said in terms of the weight of debt on the Irish economy. We spoke earlier about the recession being very much a balance-sheet recession, with many impaired balance sheets right across the economy. This really does act as a drag on growth. On the positive side, the economy looks like it will grow by 1% this year, despite the huge weight described.

Deputy Peter Mathews

We have heard that several times over the past two and a half years.

Professor John McHale

If we consider the growth figures for the first and second quarters, we will note it is happening. That is why the figure is being revised upwards for this year. I am reasonably confident that this growth will be achieved this year. That is not to say the weight of the debt is not helping us and that we will not be a big risk factor in the future. We will be examining that, the particular nature of the Irish recession and its balance sheet aspects.

The Deputy's broader point could be answered in terms of the current plan A to get out of the crisis, namely, to make the adjustment and keep the financing in place so we can spread the adjustment over time. Plan B involves various levels of debt restructuring, or default, or whatever one wants to call it. Plan A can work but will be difficult. There are huge challenges with it but there are also huge challenges with plan B. As one begins to restructure debts, one is improving the balance sheets of those who have their debts written off, but one is also affecting adversely the balance sheets on the other side-----

Deputy Peter Mathews

Tolerable levels-----

Chairman

Professor McHale should be allowed to finish without interruption.

Professor John McHale

There is no free lunch. Moving into a default model, where it is easy to restructure debts, also affects access to finance. That, as Deputy Mathews will know from his banking days, has an impact on creditworthiness right across the economy. There are huge challenges associated with following plan B, the debt restructuring route.

Plan A, although it will be incredibly difficult, is the best route towards a solution to the crisis. It means we will get through it with our creditworthiness as a state intact. We will not have defaulted and there will be reputational benefits, affecting not just the State but also the economy. We are a trading nation heavily dependent on investment. Plan A would reduce the risk of a really sudden cessation of funding, which could occur and which would be incredibly damaging given our financing needs and the size of the deficit we will have on an ongoing basis. Trying to keep the finances in place and spread the adjustment over time seems to be the best approach. Plan B is just too risky to contemplate at this stage.

Deputy Peter Mathews

I have two supplementary questions. Do the delegates agree that the loan losses deriving from the turbo-charged credit bubble are approximately €100 billion rather than €70 billion? I maintain this to be the case. Do the delegates agree that at least €75 billion within the amounts owed to the ECB and our Central Bank has an odious provenance because it arose as a result of financing losses that were not admitted and ascertained over approximately two years while senior bonds, which would not and could not have been repaid, were repaid? Those are simple questions.

Dr. Donal Donovan

I will not be able to answer the questions because I honestly believe – perhaps I am speaking personally – we should talk about payments we have a mandate to talk about and about which we know a lot. We believe we know a fair amount, although not everything, about fiscal policy. That is what we are devoting our energy, weekends, evenings and other spare time to. It is in this regard that we hope to be able to contribute in a modest but reasonably effective way. I simply would not be in any position to answer Deputy Mathews' questions, nor do I suspect would any of our council members.

Deputy Peter Mathews

They are simple questions.

Dr. Donal Donovan

I simply do not know; it is not my area of expertise and I have not studied it.

Chairman

The difficulty, as was explained earlier, is that the Irish Fiscal Advisory Council has a quite limited mandate, albeit important. It is not yet in statutory form. The council has been asked to carry out certain functions. Professor McHale explained the understandable reluctance on his part to stray outside the mandate, notwithstanding that he may well have views he would not mind sharing with us, perhaps in another context.

Deputy Peter Mathews

I want to thank him-----

Chairman

Absolutely. While Dr. Donovan stated he would not necessarily stray into the broader issue of debt sustainability, we should understand we are not asking the witnesses to do so today.

Deputy Peter Mathews

We are talking about growth.

Chairman

The mandate of the witnesses does not contemplate their doing so. The Deputy must remain focused at this committee.

Deputy Peter Mathews

Fiscal policy is about growth of the economy.

Chairman

We understand that but must remain focused in our business. We have done a lot of very good work this afternoon but, unfortunately, we must finish the meeting at some stage. I have no doubt we will return to these issues.

Deputy Peter Mathews

Please, I just want my point noted.

Chairman

Members such as Deputy Mathews will not forget those issues. It is just that we cannot do everything all the time. We have done a lot this afternoon.

I thank Professor McHale and each of the other speakers. This has been a tremendously important session and it was extremely useful to us. I thank the delegates for their contributions and willingness to answer the questions, even if they were asked on some occasions to stray outside their mandate. They have done very well and we are very grateful for their contributions this afternoon.

The joint committee adjourned at 5.15 p.m. until 2.30 p.m. on Thursday 24 November 2012.