Joint Committee on Finance, Public Expenditure and Reform, and Taoiseach debate

Chairman

We will deal with the Department of Finance's 2017 statement of strategy. I welcome Mr. Derek Moran, Secretary General of the Department, and his officials. Before we begin, I remind those present to turn off their mobile phones, as they interfere with the sound quality and transmission of the meeting.

I advise the witnesses that, by virtue of section 17(2)(l) of the Defamation Act 2009, they are protected by absolute privilege in respect of their evidence to the committee. 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 are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person, persons or entity by name or in such a way as to make him, her or it identifiable.

I invite Mr. Moran to make his opening statement.

Mr. Derek Moran

I welcome the opportunity to present to the committee. I will introduce my colleagues - Mr. John Hogan is from our banking division, Mr. John McCarthy, is our chief economist, and Mr. Derek Tierney and Mr. Aidan Murphy are from corporate affairs.

The Department's mission is to manage the Government finances and play a central role in the achievement of the Government's economic and social goals. To bring the greatest possible focus to the strategy, we have adopted two strategic goals from which flow our detailed business plans, HR strategies and organisational structure. These goals are a sustainable macroeconomic environment and sound public finances; and a balanced and equitable economy enabled by a restructured, vibrant, secure and well-regulated financial sector. Everything that we do derives from these strategic goals.

In delivering on them, we provide independent, impartial and well-informed, evidence-based advice to the Minister and the Government. This will concentrate on the most appropriate fiscal policy to maintain solid economic growth and the policies that will ensure that Ireland's financial system can operate on a stable, sustainable and commercial basis.

I will briefly comment on how we organise the Department and the importance of its people, good governance and openness in our business as the means by which we support our strategic objectives. Our organisational structure derives directly from the two strategic goals. Accordingly, the Department is arranged into two directorates. The economic and fiscal directorate reports on a day-to-day basis to me. It includes the economic, tax, EU and international divisions along with facilities management, corporate affairs and human resources. The finance and banking directorate reports on day-to-day business to the second Secretary General. It includes the banking and financial services divisions, the risk and stability division, the shareholding management unit and the legal and finance units.

The structure is not fixed and evolves according to needs and emerging priorities. It is key to the proper administration of the functions entrusted to the Department that there is clarity about individual roles and responsibilities. This clarity is provided by the senior management team. Indeed, the executive board is currently in the middle of a manpower and organisational review of the finance and banking directorate.

Our success in achieving the goals we set will depend on our people. They are at the centre of everything we do. The senior management team is focused on enhancing and developing skills and capability throughout the Department to allow us to perform better not just as individuals, but as teams. Our strategy, specifically and importantly, acknowledges the need for integration between HR management and business strategy. The Department has been criticised in the past for deficits in its skill levels. The orientation of our HR efforts are to ensure that we recruit and equip our staff with the knowledge, skills and expertise appropriate to their current roles while facilitating personal development and career opportunities.

To this end, the Department, through the implementation of our learning and development strategy, has created and offers professional diploma courses as follows: a diploma in tax policy and practice; a diploma in financial services; and a certified diploma in project management. We are also developing in-house core economics modules for implementation during 2017. These formal learning courses are or will be available to all staff. Currently, a staff of just over 300 hold almost 600 accredited qualifications, of which approximately one quarter are at postgraduate level or above.

We also go beyond simply developing "hard skills" by building leadership capability throughout the Department. In addition to coaching, mentoring and leadership programmes, we have recently introduced a process that aids personal development by helping staff to identify and adapt behaviours in order to achieve their objectives.

Since my appointment as Secretary General, I have sought to promote good corporate governance and compliance in the Department. This has included the development and publication of our corporate governance framework, which informed the development of a common corporate governance standard for the Civil Service. The key objective was to bring clarity to how the Department was structured, directed, controlled and managed in addition to the roles of individual senior managers, and saw the evolution of the old management advisory committee into an executive board. The board operates to the principles of shared participation and personal and corporate responsibility for the operational success of the entire Department. To ensure that each executive board member has a stake in the corporate and operational success of the Department, members have been assigned corporate-related responsibilities in addition to their normal policy areas to ensure shared responsibility across the board.

The Department is committed to delivering information and policy in as open a way as possible, consistent with the law, and to the regular and timely publication of internal technical studies, policy reviews and other relevant statements, papers, reports and action plans. Extensive engagement with stakeholders, think tanks and other experts inevitably helps to improve the quality of our policy advice.

We have sought to improve the evidence base available on macroeconomic and tax policy changes with a view to improving the quality of policy advice. To this end, a joint research programme was agreed with the ESRI in early 2015. Specifically, joint research was commissioned through the programme well in advance of the UK's referendum on EU membership. Identified as a major strategic risk, it was important that an economic framework be developed and widely and publicly disseminated.

The Department conducts a wide range of public consultations to ensure that stakeholders are taken into account in policy development. We actively respond to consultations from other Departments and public bodies, such as the Central Bank review of the macro-prudential residential mortgage lending measures. As part of normal business, we processed 405 freedom of information requests, 2,500 parliamentary questions and 4,500 ministerial representations from stakeholders in 2016.

To enhance openness and transparency, the Department publishes the Minister's appointment diary, my appointment diary and the minutes of all executive board meetings. We also publish and intend to publish minutes arising from our interinstitutional arrangements, such as the Revenue liaison group, which is a quarterly meeting between me, the second Secretary General and the Revenue Commissioners, and the newly formed financial stability group, formerly the principals group, which involves senior persons in the Central Bank and the National Treasury Management Agency.

We will continue to adapt and improve our operating model so that our organisational structure, accountabilities and responsibilities, along with the right people, processes and technology, work together to support strategic priorities over the next three years. I would be happy to discuss any of these matters and welcome questions from the committee.

Chairman

I thank Mr. Moran. In his opening statement, he made a brief mention of the UK's referendum on EU membership. I had expected some comment to be made on the Department's preparations for Brexit.

Mr. Derek Moran

I am happy to make one. As far back as late 2014, we were preparing for the risk - it was only that back then - of Brexit. We engaged with the ESRI to examine what the macroeconomic implications might be so that we would have a framework in the event of Brexit. Building on that work, we published a joint paper on the impact of various types of Brexit. With the budget, we published information on where the greatest sectoral impacts would lie. Flowing from that work, the ESRI has examined the possible impacts of a WTO tariffs regime.

Institutionally, a Brexit unit has been set up within the Department, headed by a principal officer. Staffing of that unit will evolve as the business evolves, although there are already a couple of staff assigned to it. We have also increased the number of staff we have in Brussels. We transferred one person from the European Parliament into the Permanent Representation office in Brussels to support the efforts there. There is no doubt but that once Article 50 is triggered, there will be a significant demand in terms of the granular detail around Brexit preparations. As I said, a dedicated unit has been set up in the Department and we expect to increase the number of staff in that unit and in Brussels as this issue develops.

Chairman

That is a general comment. I was looking for more specific detail and comfort arising from the fact that the Prime Minister of the UK has now indicated that Brexit will possibly be a hard exit, resulting in a very hard Brexit for Ireland. Small businesses and many others affected by Brexit want each Department to spell out a response to the Prime Minister's recent speech outlining the UK's position. People are anxious to know how they fit into Department's plans. Perhaps in the course of the meeting Mr. Moran would provide more detail than that a unit has been established and staff numbers in the Department and in Europe have been increased such that those who are interested will know exactly where the Department stands on Brexit. In this regard, Mr. Moran might outline what skill sets exist, what needs to be done and so on.

Deputy Michael McGrath

I welcome the Secretary General and his colleagues. Returning to the Chairman's comments about Brexit, perhaps Mr. Moran would outline in detail the resources within the Department of Finance and the Permanent Representation office that are dedicated to Brexit and preparing Ireland for the challenges that will inevitably now come.

Mr. Derek Moran

We are all involved in Brexit in different ways across the whole policy piece. The dedicated resources are around having a unit that brings all of that together. For example, issues of taxation and customs and financial services will be the bread and butter of what people are doing at an EU level. We are represented on the Economic and Financial Committee, which is the committee that prepares the agenda for ECOFIN. A huge amount of information flows from that committee.

In regard to the dedicated unit within the Department, its function is to draw together all strands of the work on Brexit. In other words, it will have a co-ordinating function. The target is to have five or six people dealing with that work.

Deputy Michael McGrath

If the target is to have five or six people in that unit, how many are there currently?

Mr. Derek Moran

Currently, there are three staff - perhaps four - in the unit. In Brussels, we have 5.5 posts.

Deputy Michael McGrath

Are the latter staff from the Department of Finance?

Mr. Derek Moran

Yes.

Deputy Michael McGrath

Am I correct that there are three staff in the dedicated unit in the Department with a view to that complement being increased to five or six?

Mr. Derek Moran

Yes. Permanent representation staff deal with the dossiers that are on the Department's agenda in a Brussels context anyway. We will probably need to increase the number of staff in Brussels to seven or eight because there will inevitably be discussions around EU budgets, financial services and so on as the negotiating process gets under way and we will need to support that work.

Deputy Michael McGrath

The Government's Brexit response is being led by the Taoiseach's Department. From an economic point of view, the trade implications, which are central to all of this, are potentially extremely serious for Ireland. Perhaps Mr. Moran would put in context the resources within Government focused on the economic implications. Also, are the implications in terms of export and trade with the UK focused within the Department of Finance?

Mr. Derek Moran

We have done a lot of the economic analysis, which Mr. McCarthy will elaborate on in a few minutes. Trade promotion is the responsibility of the Departments of Foreign Affairs and Trade and Jobs, Enterprise and Innovation. However, all Departments have a contribution to make on this area, as has the Cabinet committee. Senior officials from all Departments are co-ordinating this work but under the aegis of the Department of Finance. There is a lot of activity but we have to bring focus to it. I hope I have answered the Chairman's question regarding what the Department of Finance brings to the table in terms of helping address the issue. The speech earlier in the week by the UK Prime Minister brings focus to the fact that Brexit will be a hard rather than soft exit, which raises a number of issues, some of which are as yet unclear. The UK proposes to withdraw from the customs union but wants to have an associated customs arrangement. It is not clear what that will be. We are working our way through what the WTO will look like if that happens but it is not yet clear that this is what the Prime Minister intends to negotiate. Turkey has an arrangement with the EU around customs union on goods that go into the EU. It is expected that the negotiation will be in that type of space. The effort is centrally co-ordinated but it cuts across all Departments and not only the Department of Finance.

My colleague, Mr. John McCarthy, will elaborate on the economic issues.

Mr. John McCarthy

The Secretary General mentioned that there are three to four staff in the dedicated unit. However, all other units in the Department also have a Brexit impact and so the economics division, the tax division and the financial services division are all interacting on this issue. The co-ordinating unit may be relatively small but all other units are feeding into it.

I am head of the economics division. In 2015, we asked the ESRI to carry out a scoping study, which we funded, of what Brexit might mean. Following the decision in June, we boosted the skill set within the economic division. Some of my team were working jointly with the ESRI on the macro impact of three different scenarios, namely, a soft, medium and hard exit. As stated, a hard exit is becoming increasing likely. In regard to a hard exit, we estimated, using model simulations, that it would shave about four percentage points off the level of GDP after seven or eight years. Alongside the budget, we published a sectoral impact which was a study of which sectors would be affected most. It is not surprising that the sectors most affected are the indigenous sectors of the economy.

The ESRI also looked on a more granular basis at the likely impact in terms of the tariffs on approximately 5,000 products. For example, meat might have an average tariff of 50%. The ESRI looked at what this might mean for Irish exports to the UK. In broad orders of magnitude, it would shave off approximately 30% of our exports to the UK. This means our exports overall would be reduced by approximately four percentage points. That is the type of work we are doing in the economics division. At the time of the budget, the Minister had a Brexit-ready plan which assessed what the Department of Finance could do with the instruments under the control of the Minister of Finance, namely, taxation, financial services and so forth. The Department of Finance co-ordination unit feeds into the Department of the Taoiseach group handling this matter.

Deputy Michael McGrath

Perhaps Mr. Moran would clarify if there are three or four staff in the Department of Finance Brexit unit.

Mr. Derek Moran

I think there are four staff in the unit but I will check that and come back to the Deputy on it. The intention is to move another assistant principal and administrative officer into the unit as the process ratchets up and to also increase staff numbers in the permanent representation in Brussels.

Deputy Michael McGrath

A lot of people will be shocked at how threadbare the level of resources are within the Department of Finance. Mr. Moran said that everyone in the Department is making a contribution but they were all busy people before the Brexit referendum result last June. Almost seven months on from that, there are only four people in the Department of Finance with responsibility for devising our economic policy.

The world has changed for Ireland.

Mr. Derek Moran

I must challenge that. It is a regular item on the management team's agenda and is dealt with on a whole-of-Department basis. This is meant to draw the strands of everything that is happening across the Government together in one place. The Deputy is right, in that this has implications for financial services, taxation, our Border and customs. Departmentally, people are engaged in it. The expertise resides within the divisions. We co-ordinate that into a single piece-----

Deputy Michael McGrath

Are the divisions being beefed up? If people are not sitting within the Brexit unit, are the Department's divisions that are directly affected by Brexit being enhanced in terms of resources?

Mr. Derek Moran

That is always the challenge. Let me be honest about that. We have been beefing up the economic functions for a while. Two or three years ago, there might have been one functional area, namely, the macroeconomy. There are now three, including microeconomy, which entails research, analysis and modelling. With the economy recovering, it has been difficult to expand an organisation when one must compete with outsiders, but we are doing our best to push on that front. We have a high turnover rate, which is a good thing at one level, in that we are refreshing our staff, improving qualifications and so forth, but we must manage the process within that context. We have a core staff of approximately 300. Ideally, I would like to be at 330. We started out with a manpower plan last year and ended up at ten or 15 below it. We are continuing to pursue it.

Deputy Michael McGrath

I take Mr. Moran's point that people do not need to wear Brexit hats while they walk around and can instead sit within their own functional areas, but the corollary of that is that one would expect the Department's international financial institutions, tax policy, EU and international and economics divisions to be enhanced to deal with the threats and opportunities posed by Brexit. Instead, the Department's overall head count is pretty much static.

Mr. Derek Moran

Yes. We are running-----

Deputy Michael McGrath

Is that because the Department cannot get people or is it losing people?

Mr. Derek Moran

Many Civil Service organisations remain stable for a long time. We took on a number of high-quality people at the height of the crisis. After four or five years, however, they have succeeded in winning promotion to other parts of the Civil Service. We must plan manpower to back-fill that. It is healthy in one way. At the start of last year, we estimated a requirement of approximately 40 graduate entrants. Central supply was sufficient to fill in or around 30 of those posts, so we had a deficit of approximately ten at the start of this year. It is difficult. It was only yesterday that we sat down as a management team to discuss our resourcing plans. There are many vacancies to be filled in Mr. McCarthy's unit, for example, statisticians and economists. However, the solutions to all of those vacancies will arrive in the short term. It is an ongoing process. As the economy recovers, the competition for quality staff increases.

Deputy Michael McGrath

I appreciate that. Prime Minister May made her speech on Tuesday. My question is probably more appropriate to Mr. McCarthy. Will he translate as best he can what we heard from her and put it in the context of the analysis undertaken by the Department and the ESRI of what Brexit means for the Irish economy? The UK is definitely leaving the Single Market. Although there is a degree of uncertainty about the customs union, it is safe to assume that the UK will not remain in it. The Prime Minister referred to associate membership or leaving the customs union. In terms of trade and our economy, what is the Department's assessment at this early stage of the emerging position of the British Government?

Mr. John McCarthy

This relates to the macroeconomic modelling work that we did jointly. We have a PhD economist, who is skilled in macro modelling, working on this matter by my side. Three scenarios were published last November. We did not know at the time that a hard exit would become the most likely. This leads us to believe that the macroeconomic impact will be more severe. To put some figures on the macro scenarios, after five years, the level of GDP would be three and a half percentage points below a baseline scenario of no Brexit and closer to four percentage points after a decade. There would be significant front-loading. This would reduce employment by approximately two percentage points and raise the unemployment rate by one percentage point. In terms of the public-----

Deputy Michael McGrath

If employment fell by 2%, what would that be in terms of the number of people?

Mr. John McCarthy

As overall employment is 2 million currently, 1% would be 20,000. As such, the ballpark figure is 40,000 people. The impact on the public finances would be to raise the level of the deficit by one percentage point over the medium term. This would accumulate, as the deficit increases every year, adding approximately ten percentage points to the level of public indebtedness after a decade.

Deputy Michael McGrath

Roughly €20 billion.

Mr. John McCarthy

Yes, that is a close enough estimate. It is a ballpark figure. Prime Minister May stated that she would consider the common travel area, which is a positive from a labour market perspective.

These are broad orders of magnitude and a health warning is attached to all model estimates, but these ones are reasonable.

Deputy Michael McGrath

The Department's headline assessment is that, based on the emerging picture, economic output will be four percentage points less than the baseline over a five-year period.

Mr. John McCarthy

No, after approximately a decade. It will be three and a half percentage points-----

Deputy Michael McGrath

After five years. There will be approximately 40,000 fewer people in employment-----

Mr. John McCarthy

Than the baseline scenario.

Deputy Michael McGrath

-----and the national debt will be approximately €20 billion greater.

Mr. John McCarthy

The Deputy is right, but the model assumes no policy reaction. It is a pure model situation in which no policy is imposed. It assumes that the Government does not respond to the deterioration in the public finances.

Deputy Michael McGrath

What would the impact on exports be?

Mr. John McCarthy

In light of the tariff analysis, which was conducted by the ESRI rather than us, it would take 4% off the total of Irish exports. That figure is probably at the lower end of expectations, given the composition of the exports. A large part of the high-tech and multinational produce would not be affected much.

Deputy Michael McGrath

What does it mean for exports to the UK?

Mr. John McCarthy

They would fall by approximately one third. When weighted alongside our total exports to the UK, overall exports would be down by-----

Deputy Michael McGrath

What trade terms are assumed in that analysis?

Mr. John McCarthy

That WTO tariffs apply, which is the default position.

Deputy Michael McGrath

What are the WTO tariffs on food exports to a country outside the customs union?

Mr. John McCarthy

I can cite a couple of examples. For meat, it is close to 50%. Within meat, it differs by beef, chicken and so on. I just have the aggregate figure. For dairy and eggs, it is approximately 25%. For processed meat, it is approximately 35%. This information has been published and I can provide the Deputy with a copy. Does he see this tariff?

Deputy Michael McGrath

Yes.

Mr. John McCarthy

It goes from 0% to 50%. I will give him a copy of this after the meeting if he wants to look at it.

Mr. Derek Moran

Regarding Mr. McCarthy's qualification of the models, a model specifies at a point in time a set of assumptions and rolls them out. These are the impacts in the absence of mitigating responses.

Those mitigants may well be in the form of the modified customs union, whatever that might be. We do not have an insight into that. Domestic responses might also be factors. The exposed sectors include traditional manufacturing, the food sector and agribusiness. The Government must decide all the time on responses. Modelled outcomes rarely come true but they are a guide to where one should be looking.

With regard to the examples of WTO tariffs, they are maxima. In the absence of a trade agreement, that is what they default to; they are the maximum amounts. The figures can be substantially below those, including down to zero.

Deputy Michael McGrath

If there is no deal on a new trade agreement-----

Mr. Derek Moran

That is what we have to deal with.

Deputy Michael McGrath

-----two years after the triggering of Article 50, the UK will be out and the default position will be the WTO tariffs.

Mr. Derek Moran

We have to have a view of what the worst case would look like.

Deputy Michael McGrath

It is potentially extremely serious.

Mr. Derek Moran

There is a permanent wealth effect from the UK economy. The UK would be smaller, the European economy would be smaller and the Irish economy would be smaller. There is more of a direct effect on Ireland than on almost any other country within the European Union.

Chairman

May I go back to my original question before calling Deputy Doherty? It is on the preparedness of the Department. Did Mr. Moran refer to an unemployment figure of 40,000?

Mr. Derek Moran

I referred to employment.

Chairman

The national debt goes up.

Mr. John McCarthy

Yes, assuming no policy response.

Chairman

Yes, this is what the delegates are saying. Exports to the UK would be down by one third and they would be down generally by 4%. This is all in regard to Brexit and it is before one factors in what Mr. Trump might say to us tomorrow. The Small Firms Association is saying 41% of its members have said they have already experienced a negative impact from Brexit. Sixty-eight percent say they expect an immediate negative impact over the next few months. The only way that can be minimised is for the Department to set out its general strategies to give some sort of comfort regarding the figures the Department has given.

On the tariffs issue, Mr. Moran has just scared the daylights out of small firms and businesspeople with the information he has added. Their livelihoods rely on this.

Alongside the stark reality of Brexit, there is a further stark reality to be faced in terms of taxation. That has to do with Mr. Trump. Then there is the threat associated with Prime Minister May saying the UK will be competitive with its corporation tax regime. What financial supports has the Department put through its model in terms of supporting exporters and small firms of one kind or another that are totally exposed because of Brexit? What taxation model has Mr. Moran put in place on foot of the competition now emerging within the European Union on corporation tax? Will we go down to 10%? Will we adjust rapidly to meet the challenges from the markets and political policy in other jurisdictions?

I am shocked that there are only three or four relevant people in the Department of Finance, which is a key Department in this regard. It is a Department that will outline the taxation strategy for the future. I have not heard a word about it. Quite frankly, two sentences in Mr. Moran's opening remarks do not cut it for me. It is not personal. I would have expected the Department, in light of all that has been said about Brexit and President-elect Trump and all that was said by the UK Prime Minister, to have produced a far more substantial response to what is now happening. We do not seem to be prepared. That is a concern of mine and one that seems to be expressed by the Small Firms Association. I have heard it from exporters also. They want to see real measures put in place to give comfort to those in business who simply cannot wait. They cannot wait; they will be affected overnight.

Mr. Derek Moran

I will pick up on some of those points. There is an entire tax division. The four people in the co-ordination unit do not comprise the Brexit effort on any one subject.

Many of the questions the Chairman wants me to answer are on the Government's policy and what the Government's policy response will be. It is not appropriate for me to answer that. There will have to be responses, however.

With regard to the criticism of the statement, I had no sense of what the committee wanted to talk about overall.

Chairman

I do not accept that. I referred to the strategy of the Department of Finance. The strategy has to take in the immediate risk to the economy posed by Brexit and Mr. Trump. The Department of Finance is the lead Department on taxation. I would have loved to hear Mr. Moran say that, within his Department, there is a model that examines the various reductions necessary in corporate taxation and other taxes to keep this economy competitive. I do not get a sense of that.

Mr. Derek Moran

On the taxation issues, it has yet to be seen what emerges in the United States. We spent some time there in the immediate aftermath of the election. Certainly, the sense in Washington was that this could be anything from radical reform through to nothing happening. That is the range referred to by people who work there.

If something is going to happen with taxation in the United States, it will happen in the first six to 12 months. Generally speaking, US Presidents make advances on taxation policy in the first year of their first term. It is very rare in the second. All our strategy on taxation is predicated on being competitive and being part and parcel of the development of global taxation. We published a strategy, which is updated annually, on where that is going. That will continue to be the case. We have always been very adaptable in our approaches to this. Ultimately, the calls on where we are going to go are policy calls. This will not be part of the Department's strategy. The strategy is across the entire gamut of what the Department is doing. We take Brexit seriously because, when nobody thought Brexit might happen - it was assumed it would not - the Department was out doing the work and asking what it would be like if it did. None of the statistics that Mr. McCarthy has given members is new. They were all published well in advance. The core study was at least 18 months ago. We asked what would occur if Brexit happened. Right up to the day of the vote, nobody believed it would happen. We outlined the challenge Ireland would face it if happened. We have refined that and so on so a focus can be put on what the policy responses might be.

I take the Chairman's point that people want answers now. The UK Prime Minister's response with the ten points was only last week. Personally, I never foresaw a soft Brexit. The vote was less about economics and more about domestic political considerations within the United Kingdom. This is not good news economically for Britain, Ireland and the rest of Europe. We have to address that.

Deputy Pearse Doherty

I welcome Mr. Moran. I, too, shared his view that there would never be a soft Brexit and I said very quickly that we needed to figure out what we could and could not control. Pretending there would be some type of soft Brexit, whatever that means, was just a bit of chat. The focus of the British was always going to be on trying to secure their borders.

If we look back at different times and assessments of the Department of Finance, particularly in the lead-up to the banking crisis, we note there were serious flaws and serious unpreparedness, indicating that the officials in the Department were not raising concerns loudly enough and in the appropriate way and that there was a skills shortage within the Department.

I know many of those issues have been rectified in previous times. Does the witness believe the Department of Finance is ready for the challenges of Brexit?

Mr. Derek Moran

Yes is the answer. This is a cross-Government issue in which we play our role. I return to the point made that, during the crisis, the Department was not modelling those very adverse outcomes. It is the opposite way here. When nobody conceived the possibility of Brexit happening, we said that we needed to look at it and make publicly available what the consequences of it might be. It is a lesson learnt, quite frankly. After the 2014 British general election, which against all expectations led to a majority Conservative Government, the one thing that was certain was that there would be a referendum on Brexit. The right thing to do at that stage was to do the analysis well in advance in order to give an insight into what the likely effect would be. We were the only people to do that. People did not want to talk about it.

One of the failings in the run-up to the crisis was known as the domestic standing group. It was supposed to be an advance crisis simulator on the financial side of things. It did not work. It was at too low a level, was not given priority and so on. During the crisis management period, we had what was called the principal swoop, which involved the head of the Department, the NTMA and the bank meeting on a regular basis to manage the agenda. Going forward, that is not really what we are about. We changed that into what we called a financial stability group, which can be found around the world. It is an interaction between the monetary authority, the institutions that work for the Government, the treasury and funding agency to share information, which we have done, but in a much more structured way, to have a much more structure addenda and to try to model those exact sort of crises and challenges that one cannot see, such as the cyber attacks that bring money transmission systems down and all that stuff. We had our first meeting in that format with defined terms of reference. The membership of it, unlike further down the organisation, involves those at the top in order to give it authority. In terms of learning from the crisis and being ready, I believe we have learnt.

Deputy Pearse Doherty

Is the witness satisfied that the four people in the core co-ordinating team are sufficient, or does he want one other?

Mr. Derek Moran

We get bogged down with the issue of four people. My job is to keep the Department, across all of its policy functions, orientated towards the strategic importance of Brexit.

Deputy Pearse Doherty

If the proverbial hits the fan in a couple of years time, I do not want to find out that Mr. Moran was asking for additional staff or believed that there was a need for an additional capacity within the Department of Finance. I want him to tell the committee now or I want him to say that he is satisfied and, therefore, if things go wrong, we can hold him to account. I want him to tell this committee that he is satisfied with the staff resources that he has, that he is not looking for anything else and that he believes that the team is robust enough to deal with the challenges. I commend the work that the Department of Finance did at a time when Brexit was not being talked about as a possibility. There is no doubt it was outstanding work. It is now eight months since Brexit was voted for. We have clear indications that it will be a hard Brexit with a hard Border. We cannot be harking back to something that happened a year and a half ago. It is different. That was a hypothetical scenario. Now we know it is real. In the next couple of weeks, it is going to get very intense because we are competing with Britain and other member states and we need to be at our best game. Is the witness completely satisfied with the number of staff he has on the core team and everywhere else within the divisions of the Department of Finance?

Mr. Derek Moran

On that specific manpower issue, I reckon we need about 30 more staff. That goes back to a comment I made earlier. We are expanding the economic function and some of the financial functions. However, given the nature of the recovering economy, being the head of an organisation in manpower planning terms is actually more difficult than it was. At the moment, we have about 300 or 310 staff. I would far prefer to be in the territory of 330 or 340 existing staff.

Deputy Pearse Doherty

Has the Department been approved for 340 staff?

Mr. Derek Moran

It is no longer a case of approval. It is about the pay allocation that I manage that involves grading and so on, rather than the approval of a head count.

Deputy Pearse Doherty

Okay. Finance is the constraint of the overall package-----

Mr. Derek Moran

Yes, money is the constraint. In reality, because we could not fill all of the posts that we wanted to fill, we handed back €2 million. Even as we stand, every month that goes by in which those vacancies are not filled means one twelfth of the salary has to go back. We have the capacity to take staff in, but the issue is in getting them in.

Deputy Pearse Doherty

Okay. In regard-----

Mr. Derek Moran

I gave the example that we had a manpower panel after recognising that we needed 40 graduates. We were only able to get 30. There was a saving of ten salaries for a year just in that example, as well as the savings in not taking all of the staff at the start of the year. We are running to standstill. We have around a 14% turnover rate at present, which is very high by Civil Service standards.

Deputy Pearse Doherty

The witness mentioned the different divisions within the Department. There is a co-ordinating group that the divisions feed into. With regard to the job descriptions of individuals working within the divisions, how many of them have been assigned Brexit-particular parts to their job description? That would not have been the case heretofore. People with specific responsibilities have now been tasked with Brexit-related responsibilities.

Mr. Derek Moran

In terms of driving down the business plans from the strategy and deriving the individual roles from that, I do not want to be trite and say that everybody has a responsibility. In the process we are currently going through of driving down the strategy through the business plans to the individuals, Brexit will feature for a very large cohort. Do not ask me how many that will be. With the speech Mrs. Theresa May gave in the last week, it has become a much more focused and clearer responsibility. That will be driven down through the business plans and into the individual tasks. When we complete that, we would like to do a statistical piece and send it to the committee. We are going through that at the moment.

Deputy Pearse Doherty

I make the point that we are a number of months out from Brexit. The witness's own view was that it was never going to be a soft Brexit. For people like myself and the witness who share that view, there was nothing really major announced in the speech of Mrs. Theresa May. Her major announcement, in my view, was that she was going to put the vote to the House of Commons at a later stage. Most people would have seen that it will be a hard Brexit and that she has tried to cherrypick everything else. I am concerned that that part of the work has not been done so far.

Mr. Derek Moran

As I said, we publish the executive board minutes. If one goes back over them, one will find Brexit cropping up as a discussion among the management team on a very regular basis. It is a case of then integrating that down through the business plans. I take the Deputy's point that it is one thing to say that we see it a problem and do a piece of work on it 18 months out. However, we have followed that up. On budget day only a couple of months ago, we published the sector-by-sector exposures and where the concentration might be. Some small measures were taken in the context of the budget. They were not major, but some measures were taken. In addition, there are the more disaggregated impacts. We have continued to do that. I take the Deputy's point. We need to drive that down through the organisation. The Deputy's core question is whether I am comfortable that what I have at the moment is at a good level. No, our manpower plan is for higher than what we have. However, there is the reality of trying to get people through the door. We have had a very high turnover of staff. A 14% turnover in the course of a 12-month period in an organisation the scale of ours is quite significant. Some of it is as a result of our success during the crisis of getting very good, highly-qualified people in who are now doing well within the Civil Service. Most of those people did not leave the public service, but moved within it. That is the benefit of it, but it creates a problem and stretches us.

Deputy Pearse Doherty

Of course it does. Qualifications are one thing, but experience is another-----

Mr. Derek Moran

Experience, no doubt-----

Deputy Pearse Doherty

At this point in time, for an organisation with that type of turnover, there may be very little that can be done about it.

It is a serious problem.

The Secretary General talked about whole of Government or whole of Department responses in terms of intergovernmental groups in which the Department of Finance participates. Does the Department sit on the interdepartmental group on trade, which is chaired by the Department of the Taoiseach?

Mr. Derek Moran

I do not think that we do. Do we, Mr. McCarthy?

Mr. John McCarthy

The senior officials group.

Mr. Derek Moran

The senior officials group.

Mr. John McCarthy

Is the Deputy talking about Cabinet sub-committee?

Deputy Pearse Doherty

No. I am talking about interdepartmental groups. The officials will know the glossy brochure that the Minister for Finance published as part of the budget, entitled Getting Ireland Brexit Ready.

Mr. Derek Moran

Yes.

Deputy Pearse Doherty

In the brochure the Minister mentioned interdepartmental groups on trade and that Revenue sits on the group.

Mr. Derek Moran

There are a series of groups that support the Cabinet committee on Brexit. I am sorry but I was not quite clear what the Deputy's question was. For the trade piece Revenue takes the lead in terms of customs, customs preparedness and business facilitation in the event of Brexit. Six groups sit underneath the senior officials groups on the Cabinet committee in which we participate.

Deputy Pearse Doherty

In which groups does the Department of Finance participate?

Mr. Derek Moran

The Department is involved in all of them.

Deputy Pearse Doherty

Can the Secretary General name the groups please?

Mr. Derek Moran

I do not have that information with me.

Mr. John McCarthy

I do not have the right thing with me.

Mr. Derek Moran

We will forward the information to the Deputy.

Deputy Pearse Doherty

I am interested in the group on trade. Earlier we discussed tariffs. Let us consider the brochure prepared by the Department that contains great statistics. It states that the exports of food and beverages to the UK amounts to 65%, traditional manufacturing accounts for 36%, materials 38% and electrical equipment 49%. The tariffs scare people. How many meetings of the interdepartmental group have taken place? Does the Secretary General sit on the interdepartmental groups? If not, then who does?

Mr. Derek Moran

No. It would be a range of staff from across the Department. I do not have the information with me but I can forward it to the Deputy.

Deputy Pearse Doherty

Brexit is the number one issue at present. It is not good that the Secretary General of the Department of Finance does not know who sits on interdepartmental groups that deal with Brexit. I presume it is one of the four departmental officials. I worry about how prepared we are and how much detail we have on the challenges facing us. I accept that we must have a whole of department approach because that is exactly what we need. Our best and brightest people must work together on this issue. I do not know what official from the Department of Finance is on the group. Should it be the Secretary General?

Mr. Derek Moran

By and large, Dr. Nicholas O'Brien, who is the head of the international division, is the key co-ordinating person who participates in several of the groups. The principal officer who works in the area is Ms Niamh Campbell and she sits on these groups. Then there is the technical support of the likes of the Revenue Commissioners and so on. I do not have the information in front of me but these are senior official groups.

Mr. John McCarthy

It is worth mentioning that as the issues change, I mean if it is about financial services or something else, the composition or attendance will change. In other words, it would not make sense for me to go along to talk about something that is in Mr. Hogan's area and vice versa. The co-ordinating unit, of which the principal officer would attend all meetings, is the way we organise it.

Mr. Derek Moran

The attendance would generally be at the level of assistant secretaries. I would go along to the Cabinet sub-committee with the Minister when it arises. That is the way it is structured.

Deputy Pearse Doherty

I have not been reassured by what has been said. I understand that when questions arise, in particular when one seeks specific details on the number of meetings, the witnesses would not have the information to hand. Mr. Moran is the most senior person in the Department of Finance. His officials attend interdepartmental committees that are trying to deal with the challenges posed by Brexit. I presume that information is given to the Secretary General. I ask the Department to provide to the committee the groups that have been established in which the Department of Finance participates, the dates when the meetings took place and the individuals from the Department of Finance who attended.

Mr. Derek Moran

We will do so.

Deputy Pearse Doherty

Before the budget we had the great unknowns. I mean that the Minister said that we did not know the type of Brexit because we did not know the outcome of the elections.

Earlier President-elect Trump was mentioned. Last week I visited Washington to discuss his intentions with a number of Congressmen and senior officials. Trying to read his mind is a difficult job. On my visit there was a consensus to have a change in tax. There will be a compromise between what the Republicans and the President want, resulting in a change. That is just what they think and there is no guarantee that it will happen, but that is the consensus that I detected in Capitol Hill last week.

I raise this point because we are exposed. How ready are we for the responses? Some of this matter is outside our control. We can pretend that we have a significant influence and can shape what Britain and the EU will do. While we need to influence them as much as possible, is it not the case that, given Mr. McCarthy's point on the impact that a hard Brexit will have on the economy, employment and the available fiscal space, we have been left with little wriggle room to respond to some of the major challenges facing us on either side of the island of Ireland?

Mr. Derek Moran

We included a risk assessment in the budget documentation. The risks, which are external, are balanced on the negative side. It is a technical way of describing the same thing. We have exposures on both sides and a degree of uncertainty.

Not unlike the Deputy's case, although a range of views on what would happen were expressed while I was in Washington, the consensus was that something would happen. It would be the first time since 1987 that anything substantive happened in the corporate space.

Undoubtedly, there are risks and exposures on both sides, but the Deputy should remember that there are also opportunities. Britain will be outside the EU, but FDI will still want access to the Single Market and Ireland remains an attractive place in that regard. The nature of tax reforms in the US will be interesting to see. The devil is in the detail. There has been talk of taxing anything sold by companies that do not come home, but a great deal of FDI is selling into Europe, the Middle East and Asia, not the US. We have always highlighted that our exposures are more on the international side, be they to Brexit or changes in the US. Does Mr. McCarthy wish to discuss the risks?

Mr. John McCarthy

We included a new innovation in the budget documentation. We produced a risk assessment matrix for the economy and the public finances. It might be worth examining. It is a nice piece of work, even if I say so myself.

We are very small and the world is globalised. From a treasury or finance ministry perspective, that puts an additional premium on policy caution. I do not want to delve into the policy space, but the Deputy will be aware that the Minister announced a rainy day fund and that debt would go to 45% of GDP by the middle of the next decade. All of these measures - I am only repeating what he said - are concerned with building up fiscal safety buffers so that, if the situation goes wrong and the risks materialise, we do not have to be pro-cyclical and can instead allow the automatic stabilisers to operate.

In every document that the Department of Finance publishes, we refer to the need to remain competitive.

So many of these factors, including the exchange rate, oil prices and world demand, are beyond our control. We cannot influence them, but we need to be able to be flexible and to be able to respond so that, if shocks materialise, we are in a healthy position and do not have massive peaks and falls in GDP.

I agree that there are many risks. They are not just from the President's side on corporation tax. Obviously there is a concern about issues such as protectionism. For an economy such as ours, where trade and FDI is our lifeblood, protectionism would not be good. On the upside, or perhaps on the downside, there is the overall fiscal package that appears to be likely from the new regime in the US. It would appear that there will be some form of fiscal stimulus, possibly on the infrastructural side. There may be some form of tax cuts, although their economic impact may not be great if they are at the upper end of the income distribution. There are some issues there. We may see some form of short-term fiscal stimulus in the US which could easily be transmitted globally. That should be borne in mind as well. I hope I have not gone off on too much of a tangent.

Deputy Pearse Doherty

That is okay. I wish to raise another point. There has been much talk about Ireland's gain from financial services locating here. Figures have been thrown out in terms of the amount of jobs it would create and dramatic numbers such as 20,000 have appeared in the media, etc. Industry sources have told me that the potential for Ireland's gain from financial services is quite less than that. That is their view and it is only a view. I have picked it up from a number of individuals, however, who said it in terms of jobs particularly.

In the context of Brexit, do the delegates believe that the financial services division has the capacity to deal with the relocation of firms from London to Dublin? Going back to resources, is it adequately resourced to deal with the risk and issues such as stability and compliance? Do they believe that the resources are there to deal with what could potentially be a large influx of financial services coming to our capital?

Mr. Derek Moran

These issues are largely on the regulatory side of the bank and whether it has the capacity to assess and approve. Both the Governor and the regulator have said that they are open for business and have the capacity to do it. As did Deputy Doherty, I have heard the possible range involved. There is opportunity, but how big will it be? More generally, if we were to look at it in the round, there is talk about financial services going to Frankfurt, Paris and so on but the risk for Europe and Britain is that a global financial centre such as that in London would go to New York. Strategically, that is the biggest challenge for everyone that moves outside of Europe, but that is a different issue. The bank has indicated that it will deal with these and that it has and should have the capacity to do it.

Senator Kieran O'Donnell

I welcome Mr. Moran and his colleagues. What does Mr. Moran consider the biggest single issue facing the Irish economy?

Mr. Derek Moran

In terms of risk, we have been dealing with it over the past while. It is the change in the environment in both the US and Europe over the next number of years. It evolves and changes very quickly. This time next year we could have much greater clarity about the US and it will be either less of a problem or a very big one. It is that external domestic uncertainty. It is a sluggish European economy overall in terms of a potential GDP shock. Europe is not growing as fast as it should be and a Europe without Britain will grow slower. Those external factors are the biggest-----

Senator Kieran O'Donnell

It is both the Brexit and the Trump factors.

Mr. Derek Moran

Brexit, Trump and a Europe that is not growing post-crisis in a way one would hope. The European Commission spoke of a fiscal stimulus of approximately 0.5% of GDP. There was a loosening of the budgetary stances of those European economies that can afford to do it. These would include Germany and other such countries. However, there is no policy willingness within the German context to do that, although it is the country best positioned to do it. Many other countries are still in a corrective phase and trying to get their budgets in order and so on. Therefore, we have this prolonged period of very slow growth within the EU combined with the uncertainty of Britain, which is the most dynamic of the bigger economies, moving out of the EU along with all the issues going on in Europe.

Senator Kieran O'Donnell

Taking from that, I will direct a question at Mr. McCarthy. Given what has been announced by Prime Minister May in terms of Brexit and the outcome of the elections in America and President-elect Trump, do the figures for budget 2017 stand up? Do the assumptions that were made in the budget still stand up?

Mr. Derek Moran

I will let Mr. McCarthy take this one, but the answer is "Yes". We did factor it in. For example, in the absence of Brexit we would have assumed a growth rate that was higher by 0.5%. We have taken that out and have buffered against it in our assumptions. I will let Mr. McCarthy pick up on this further, but at this point I do not think we will be changing our assumption. It does not mean that if tax revenues and activities soften during the course of the year it will not change but at the moment they still look sound on the basis of that, if one likes, pre-emptive reduction or assumption of an impact of Brexit.

Senator Kieran O'Donnell

Do the assumptions, including those in terms of the exchange rate with sterling, still stand up?

Mr. John McCarthy

By and large, they do. A lot of water has gone under the bridge between now and October 2015. We projected a GDP growth rate of 4.2% for last year, slowing moderately to 3.5% this year which, as Mr. Moran stated, took into account a Brexit-related impact of 0.5% in the short-term. Given the strong figure for the third quarter, the indications are that the figure for last year might come in somewhere in excess of the 4.2% projected and it is fair to say that high frequency data in the fourth quarter will support a reasonably strong figure for that quarter as well. For the year as a whole, it may come in slightly ahead of the 4.2% that we had assumed.

We had assumed a deficit last year of 0.9%. Taxes came in about €250 million shy of where we thought they would be but expenditure kind of offset it by coming in below what was estimated. We are very much on line for our headline deficit of 0.9% for last year. More important is going forward.

Senator Kieran O'Donnell

I am talking about 2017.

Mr. John McCarthy

We had projected a figure of 3.5% for this year. This figure was endorsed by the Irish Fiscal Advisory Council, as now required under European legislation. At the time, we described it in the budget as the baseline scenario. We did, however, say that the confidence bands around the central scenario were wide and that risks were skewed to the downside. The risks were, as we all know, the world economy, the European economy, Brexit, etc. At the time, we did not know President-elect Trump-----

Senator Kieran O'Donnell

You know now.

Mr. John McCarthy

We know now. We did identify the risks as being tilted to the downside. I still think that to be the case. I think that is the case for Ireland and most advanced economies. I think it is the case for the UK and certainly the euro area as well as the US. In terms of a public finance perspective-----

Senator Kieran O'Donnell

Mr. McCarthy might expand on that. Mr. McCarthy made reference to many different changes. The ordinary person will want to know certain things. We have spoken about jobs and 40,000 fewer jobs was mentioned. Increasing the terms of the national debt by €20 billion was mentioned. A reduction in exports to the UK by one third was also mentioned, something which will have an exponential impact on the SME sector because they are exporting to the UK. Many of those in the sector are constituents of mine in Limerick that employ a lot of local people. This is my question: What impact will Brexit have on the overall tax intake and, by implication, the money available for spending on public services?

Is it true to say that Mr. McCarthy sees no requirement to adjust the current budget?

Mr. John McCarthy

No, because we are now in the preventive arm of the Stability and Growth Pact so our fiscal requirements are set on the basis of the structural deficit. Cyclical variations in tax and expenditure are removed from the calculation. Our requirement, and Government policy, is to balance the books in structural terms by 2018 and our arithmetic takes that into account. If there is a cyclical shock to the economy it should not affect the structural number. It will affect the headline number-----

Senator Kieran O'Donnell

It will affect the amount of money the Government has available to spend on public services.

Mr. John McCarthy

It would not, because fiscal policy is set on the basis of the structural balance rather than the headline balance. One can absorb a short-term shock but if it was to become more prolonged one would have to react.

Senator Kieran O'Donnell

In actual terms, how much does Mr. McCarthy anticipate will be the reduction in tax intake and money available for spending?

Mr. John McCarthy

I still think we are very much on target to achieve our headline deficit of 0.04% for this year. That would mean tax revenue of just north of €50 billion, its highest level ever. There is a lot of uncertainty but we assumed a euro-sterling exchange rate of 0.85 and it was 0.86 as of yesterday. We have a bit of depreciation vis-à-vis the dollar, which will help. Our assumptions for euro-dollar were 1.12 but yesterday's rate was 1.06.

Senator Kieran O'Donnell

Mr. McCarthy is saying that economic output would be between 3% and 4% lower than if Brexit had not happened.

Mr. John McCarthy

After ten years.

Senator Kieran O'Donnell

What impact will that have on taxes? Please quantify the figure for me.

Mr. John McCarthy

After ten years it would raise the deficit by a percentage point and would add ten percentage points to the debt ratio, with a ballpark figure of €20 billion. However, that assumes no policy response. It is a baseline assumption and if it comes about one would advise the Government and the Minister and he or she would then decide on a policy response.

Senator Kieran O'Donnell

The €20 billion would be €2 billion per year on average.

Mr. John McCarthy

Roughly, yes.

Senator Kieran O'Donnell

It is quite significant. Mr. McCarthy said a unit of four people had been set up. What does the unit do?

Mr. Derek Moran

Its job is to co-ordinate the Department's participation in the cross-Government structures for Brexit. It is also its job to participate in those structures.

Senator Kieran O'Donnell

What are the people involved qualified as? Who heads up the unit and to whom does that person report?

Mr. Derek Moran

The assistant secretary is the head of the unit and a former diplomat. The principal officer is a long-term EU expert who has worked on EU budgetary matters and was previously in the representations in Brussels. The assistant principal was on his way back from Brussels to work for Mr. McCarthy and we diverted him from the economic unit into this unit. We will want to get a legal person because a lot of the negotiation will be around legal texts.

Senator Kieran O'Donnell

This is the first occasion we have had the opportunity to ask the Department about how exactly we are getting ready for Brexit. Does Mr. Moran think that a section of four people to deal with Brexit is adequate? Mr. McCarthy raised the issue of tariffs and we are an export nation. What percentage of our GDP is driven by exports?

Mr. Derek Moran

This unit was set up to co-ordinate the effort. Brexit is an issue on the agenda of everybody across the Department, whether it is financial services, taxation or some other area, and this unit brings all the strands together as part of the overall Government effort.

Senator Kieran O'Donnell

Is it adequate?

Mr. Derek Moran

If it is not, we will redeploy more people. This is a start but they might come to me and say they need more people.

Senator Kieran O'Donnell

How long have they been up and running?

Mr. Derek Moran

Approximately six months.

Mr. John McCarthy

The percentage of GDP varies from year to year. On average, between 110% and 120% of GDP is accounted for by exports. It is greater than GDP but exports have an import component which brings it below GDP.

Senator Kieran O'Donnell

What would happen if tariffs were to come in?

Mr. John McCarthy

At WTO tariffs this would reduce exports to the UK by about 30% and overall exports by 4%. The Senator made a valid point when he said the SME sector is disproportionately impacted in comparison with the multinational sector

Senator Kieran O'Donnell

If tariffs came in there would be a fall of 30% in our exports to the UK.

Mr. John McCarthy

Yes.

Senator Kieran O'Donnell

What impact would that have on our GDP?

Mr. John McCarthy

It would take four percentage points of overall exports. We tend to assume an import margin of about 0.5 of exports so two percentage points might be taken off exports in the short term.

Senator Kieran O'Donnell

There would be a deep reduction in employment, of some 40,000.

Mr. John McCarthy

Relative to baseline.

Senator Kieran O'Donnell

Would those 40,000 come from export-orientated SMEs into the UK?

Mr. John McCarthy

In the first instance it would come from people in the trade channels and the exporting sectors, primarily the SME sector. That reduces consumption in the economy and it would have an impact on domestic demand, leading to downstream effects.

Senator Kieran O'Donnell

Will Brexit have an exponential impact on the SME sector in comparison to others?

Mr. John McCarthy

Yes, without a doubt.

Joint Committee on Finance, Public Expenditure and Reform, and Taoiseach debate - Thursday, 19 Jan 2017

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Joint Committee on Finance, Public Expenditure and Reform, and Taoiseach debate -
Thursday, 19 Jan 2017