I am pleased to come before you today to introduce the 1999 Estimates for the Finance Group of Votes, excluding Vote No. 10 - Office of Public Works, and Vote 44 - Flood Relief, which I understand will be taken later today by my colleague, Deputy Martin Cullen, Minister of State at the Department with responsibility for the Office of Public Works.
The Finance group of Estimates totals more than £429 million. The largest Vote in the group is the Vote for the Office of the Revenue Commissioners which amounts to a net total of more than £167 million. The next largest Vote is for Superannuation and Retired Allowances which amounts to more than £106 million while the Vote for my Department is the third largest at more than £46 million. Members will note that there is a new Vote this year, namely Vote 45 entitled Year 2000 Expenditure, to which I will return later. In addition there is a new Vote No. 4 which shows separately for the first time, expenditure on Ordnance Survey Ireland which was previously included in the former Valuation and Ordnance Survey Vote which now only includes the Valuation Office.
The separation of the Valuation Office and Ordnance Survey Votes reflects the development of the two offices. In his 1997 budget speech, the Minister for Finance announced his intention to establish Ordnance Survey Ireland as an agency rather than a sub-office of the Department of Finance. This was to allow greater autonomy in the ongoing development of its commercial activities.
Members have already been provided with background briefing on the Estimates for which approval is sought for 1999. During our debate this afternoon I will be happy to provide any further information Members may require.
I propose, before dealing with the details of individual Votes, to follow the usual practice of summarising recent economic developments and the overall state of public finances.
Ireland has experienced a period of outstanding economic performance in the past five years as illustrated by the following:
- GDP has grown by more than 9 per cent in the period 1994-98. This compares with an EU average annual growth rate of 2.6 per cent since 1993; in 1993 the rate of unemployment was almost 17 per cent. It has now declined to around 6 per cent.
- In 1998, the number of long-term unemployed amounted to more than 10 per cent of the labour force. At present, the corresponding figure is approximately 3 per cent of the labour force.
- The Exchequer borrowing requirement was eliminated in 1998 and an Exchequer surplus of £747 million or 1.5 per cent of GNP was recorded. The level of Government debt in relation to GDP has declined from 120 per cent in 1986 to 52 per cent at end 1998.
Social partnership agreements between the Government, employees and other interests have played a crucial role during this period of fiscal consolidation and economic expansion. Low inflation, moderate wage increases linked to targeted tax reductions and improved social services have underpinned our economic progress. This stability has been a key factor in encouraging business confidence and strong investment by both foreign and domestic companies.
Other factors such as a favourable demographic structure and high levels of public investment in physical and human capital, undertaken with the help of EU Structural and Cohesion Funds, have also played their part in our recent economic progress.
Despite our impressive economic performance in recent years, we cannot afford to be complacent. Already there are signs of pressures which we will have to address. Our inflation rate has been higher than that of many of our EU partners. However Ireland's performance has improved in recent months, falling back from a peak of 3 per cent last August to 2.3 per cent at present as measured by the EU Index of Consumer Prices. There is some evidence of wage inflation accompanied by skill shortages particularly in the construction and IT sectors and there are substantial increases in house prices.
If such developments were to continue, they would represent a serious erosion of our competitive position. As a small open economy, vitally dependent on exports, any loss in competitiveness, vis-à-vis our trading partners would be very serious both for growth and jobs. This is particularly true in the context of EMU. It is imperative that we avoid excessive wage increases which would have the effect of pushing up the cost of exports. Control of public expenditure is essential if we are to avoid higher tax rates which, in turn, would lead to demands for pay increases. The Government has also taken action to ease the rate of increase in house prices.
The OECD in its recent two-yearly report on the Irish economy, has warned that unrealistic expectations could lead to an overshooting of sustainable wage levels and a sharp, cost-based slowdown in growth to well below potential rates. Nevertheless, the OECD considers that most of the factors which have contributed to our recent performance can contribute to performance in the future, though at declining rates. The OECD also raised the question of how much longer output can grow at these superior rates. However, it suggested this will, to a large extent, be determined by how quickly the well known bottlenecks are overcome and to what extent spending and income restraint occur.
The Government was, of course, aware of these issues and took account of them in framing both the Stability Programme 1999-2001 and the 1999 budget. In deciding on the 1999 budget, the Government's primary objective was the continuation of sustained economic and employment growth, supported by social partnership, low inflation and prudent budgetary policies.
The ESRI, in its latest quarterly economic commentary published last week, was once again positive about the prospects for the Irish economy. It suggested the economy can adjust smoothly to a more sustainable rate of growth which it believes to be in the region of 4% to 5% a year. However, it highlighted the danger that excessive wage settlements could undermine a smooth transition. Incidentally, with reference to the ESRI report, neither I nor my colleagues have been advocating or practising what the ESRI calls "fiscal masochism". However, we advocate - as do the ESRI - a responsible approach to public expenditure, especially in regard to current expenditure.
The Government believes the resources now available due to favourable economic conditions must be used in a balanced way. The 1999 budget continued the process of tax reform, while addressing infrastructure needs. The Government also intends to prepare the public finances for the longer term costs of an ageing population in the early decades of the next century.
We are also determined to ensure future wage developments, in the context of social partnership, will be consistent with maintaining the economy's underlying competitiveness. As we approach the end of the current agreement with the social partners, and prepare for discussions on a new agreement, the overriding consideration for all involved must be the continuation of sustainable economic growth.
While on the subject of pay generally, Deputies will be aware that, despite the very substantial increases in the Exchequer Pay and Pensions Bill over the past couple of years, there are still significant pay pressures within the public service. The use of industrial action, in one form or another, by different groups to secure local bargaining settlements under the PCW which were clearly in excess of the norms agreed in that programme is no way to manage incomes policy in the public service.
The immediate priority must be to ensure there is no repeat of the PCW local bargaining experience under Partnership 2000. Unlike the PCW, Partnership 2000 contains an agreed explicit limit of 2 per cent on the cost of local bargaining. In the public service, this local bargaining element is payable not earlier than 1 July 1999 and is conditional on there being verified progress to a satisfactory level on implementation of the modernisation programme set out in chapter 10 of the partnership. The Government has made it clear the 2 per cent limit must be adhered to and this is reflected in the new pay management arrangements I announced in the budget. As Members will have noticed, this year there is no Vote for increases in remuneration and pensions. Civil Service Departments and other public service employers have been pre-funded for the cost of the agreed Partnership 2000 terms and there will be no central contingency fund to fall back on, as was the case under the PCW.
Looking further ahead, negotiations on a possible successor to Partnership 2000 are likely to get under way towards the end of this year. The Government is anxious to negotiate a new national programme with the social partners, but not at any cost. In any new agreement, the Government must be assured there will be industrial peace in the public service and the pay provisions of the agreement will be adhered to in practice. Pay determination in the public service agreement must move away from the very rigid system of relativities that has operated in the past. My Department has begun talks with the public service unions on the need for a new approach to pay determination with a particular focus on how, in the context of public pay policy, pay can be more closely related to performance. These discussions are still at an early stage but the outcome will be crucial in terms of the future of national partnership.
The economic progress of recent years has demonstrated how much can be achieved by all the social partners striving together towards a common aim. If all sides keep in mind the benefits to be derived from the continuation of responsible economic policies, our recent success can be continued and reinforced.
I now propose to deal with some of the principal Votes in the finance group. Vote 2 concerns the Houses of the Oireachtas and the European Parliament. The 1999 net provision of £39.813 million shows an increase of 8 per cent on the provisional out-turn of £36.874 million for 1998. The increase is attributable to a number of factors including the provision for pay and pension increases due in 1999 under Partnership 2000 and the need to provide for certain arrears of pay due under the Programme for Competitiveness and Work which, for a variety of reasons, could not be paid in 1998. In addition, provision is included on a once-off basis in these Estimates for essential telecommunications cabling work which needs to be carried out in Leinster House and for the buy-out by the broadcast unit of a leasing contract on broadcast equipment in one of the committee rooms.
Vote 6 concerns the Department of Finance. The Estimate for my Department amounts to £46.768 million or an increase of 44 per cent on the 1998 out-turn. The increase in 1999 over the actual Estimates provision in 1998 is 26 per cent. The large increase over 1998 can be attributed to additional funding for the administrative subheads AI to A8; the Institute of Public Administration - subhead E; various technical-type activities relating to EU Structural Funds - subhead L; the Euro Changeover Board; the new claims management agency - subhead R; and the new change management fund - subhead S.
The bulk of the increase in the administrative subheads is accounted for by the need to address the year 2000 problem within the Department and the provision and management of modern telecommunications infrastructure for the Civil Service. The additional funding for the Institute of Public Administration is a once-off capital contribution to fund new buildings which are required.
Under subhead L, £2.898 million is provided to fund various technical assistance-type activities related to EU Structural Funds pending recoupment, usually at an aid rate of 75 per cent, from the European Commission.
The activities which are eligible for aid are those included in the CSF technical assistance programme and relate mainly to the evaluation and information requirements of the CSF, improvements to the management of the CSF and the administration costs of the regional authorities in respect of their functions with regard to EU funds. In this year's subhead £750,000 is being provided for an information system for the management of EU Structural Fund and Cohesion Fund data for the Department of Finance. The planned information system will be in place and operational for the next round of funding.
Additional funding of £906,000 is required for the Euro Changeover Board of Ireland in 1999. As Members are aware, on 1 January 1999 EMU began and the euro came into being. The euro can now be used for cashless transactions and euro notes and coins will be put into circulation on 1 January 2002. It is fair to say our participation in EMU and our adoption of the euro is among the most significant economic developments since the foundation of the State.
I established the Euro Changeover Board of Ireland in May 1998. The board's two basic tasks are to oversee the implementation of the changeover to the euro and to provide public information. I will deal briefly with the work of the board under each of these headings. In the implementation area, the board was involved in the preparation of the Economic and Monetary Union Act, 1998, which was passed by the Oireachtas last July. It was also fully consulted in the preparation of the third edition of the National Changeover Plan, which I published last November. The board has also been very active as regards public information and I am glad to acknowledge the part-funding we receive from the European Union in this regard. The board has now embarked on the third phase of its public information programme, with its keynote phrase of encouraging people to "think euro". This phase of the campaign is focused on publicising the conversion rate between the euro and the Irish pound.
A provision of £800,000 is included in subhead R to meet the expenses of the proposed new claims management agency to handle accidental personal injury and property compensation claims against the State.
The final item in my Department's Vote to which I would like to draw Members' attention is the proposed change management fund, the provision for which is £5 million in 1999. The purpose of this fund is to co-finance the cost of implementing, in individual Departments and offices, initiatives arising from the SMI Delivering Better Government programme of change.
Vote 9 concerns the Office of the Revenue Commissioners. The net Estimate for the Office of the Revenue Commissioners at £167.4 million is up £4.452 million or 3 per cent on the 1998 out-turn. Pay increases of £2.19 million and increased computer spending of £2.4 million account for the bulk of this increase. The increase in computer spending is to provide for major developments such as the euro, the impact of year 2000, freedom of information and integrated tax processing. As members are aware, integrated tax processing will enable a consolidated view of a taxpayer's affairs across all tax heads to be taken as opposed to the present single tax head approach. The implementation of integrated tax processing, ITP, is proceeding apace and I am glad to be able to inform the committee that as of 6 April 1999 the collection of PAYE and PRSI has been brought under this framework. This replaced a non year 2000 compliant system. Among the many new features are detailed statements of account that show customers their financial status with Revenue. Internally, the system will enable the automation of routine manual processes thus freeing more resources for dealing with non-compliant customers. Work on incorporating VAT into the ITP framework has commenced and is scheduled to be in place by the first quarter of 2000. Other taxes will be brought into the framework as soon as possible thereafter.
Revenue's investment in computer technology over the years has helped to contain costs and provide flexible systems for a dynamic business environment. Substantial investment continues to be made by Revenue with almost £10 million being invested this year. The completion of the overall programme will put Ireland at the forefront of tax administration in Europe.
As I have said on several occasions in the past, we have seen a transformation over the past ten years in the way the Revenue Commissioners perform their functions. This more business like approach is reflected in the level of tax revenue collected and in the way in which the Revenue Commissioners interact with taxpayers in a more client oriented manner.
Most taxpayers are compliant but some will always be non-compliant, even with lowering of tax rates. Revenue's powers to pursue non-compliance have been considerably strengthened in the Finance Act, 1999, and the Revenue Commissioners recently announced the assignment of additional staff resources to pursue non-compliance through more investigation work and a more active prosecution policy. The new powers are aimed at the non-compliant. Tax compliant taxpayers need have no fears. The Revenue Commissioners have made it clear that the new powers will be exercised in a targeted, judicious and balanced manner taking full account of the rights of the taxpayers concerned.
Finally, Members will note that there is a new Vote 45 - Year 2000 Expenditure - the provision for which is £40 million. As Members are aware there has been in place since 1996 an ongoing and very active Government year 2000 compliance programme to address in the Civil Service and in public service agencies the millennium bug problem which can arise with computers and other equipment. As there is no precedent for the year 2000 problem, it is of course widely accepted that it is not possible to anticipate exactly what corrective action will be required and what the final overall cost will be to the Exchequer. Vote 45 has been established as a contingency provision in order to provide for the unpredictable costs of dealing with this problem, particularly in relation to embedded systems in the public service and is in addition to the provision of £12.8 million which was included in the 1998 and 1999 Estimates for the Civil Service to address the year 2000 problem. I am satisfied that this substantial sum of £40 million should be adequate to cover any essential additional expenditure that may arise.
An interdepartmental year 2000 monitoring committee has been overseeing the achievement of year 2000 compliance in IT systems and other office equipment and plant in the Civil Service since 1997 and has been reporting on the level of progress to Government every two months. In general, year 2000 compliance programmes in Departments and offices are progressing well. At this stage, approximately one-third of Departments and offices have completed all business critical year 2000 projects and most of the remainder are on target to complete their remaining projects before or by the Government deadline of the end of July.
There are two systems - the PULSE project in An Garda Síochána and the fishery protection information system in the Defence Forces - which will not be compliant until September-October. Both are large-scale complex replacement systems which have been in development for a number of years and, although the bulk of remedial work will be completed on these systems by the Government deadline, it will take until the September-October timeframe to implement them fully because of their size and complexity. As a result of the efforts made to date, Ireland is well advanced in preparing for the year 2000 problem. Reports by international industry analysts and monitoring bodies, such as the Gartner Group and the Global 2000 co-ordinating group, rate Ireland at the best state of readiness. This is comparable to countries such as Australia, Canada, Holland, Sweden, UK, and USA.
That completes my review of the Estimates in the Finance group. I thank the members of the committee for their attention and, as I have already said, I will try to answer any questions they may have.
