I am pleased to have the opportunity to appear before the select committee today and look forward to a constructive discussion covering the 2012 Estimates from my Department's group of Votes. I will begin by making some general comments on the economy, the public finances and our progress under the terms of the EU-IMF programme of support.
Last year GDP grew by 0.7%. This was the first increase in economic growth since 2007. Activity is being driven by exports which are up by 4.1%. This owes much to the competitiveness improvements that have taken place in recent years which is testament to the flexibility of the economy. Importantly, many indigenous sectors are performing relatively well, including tourism and agrifood.
In terms of the domestic side of the economy, consumption declined by 2.7% in 2011 on foot of falling disposable incomes and uncertainty. As would be expected in a period of fiscal austerity, spending by the government sector also contracted and is expected to remain in negative territory for some time to come. The pace of decline in investment moderated. In quarterly terms, fourth quarter 2011 data show that GDP fell by 0.2% relative to the third quarter, a slightly disappointing but not surprising performance given developments in the external environment, particularly the intensification of the euro crisis.
We are starting to see improvements in sectors of the economy that are externally oriented such as tourism, manufacturing and ICT. This is in line with the plan for economic recovery that we have set out. The exporting sector is leading the way and this will feed into investment and, in time, the domestic economy.
This year's budget is based on real GDP growth of 1.3% in 2012, a forecast that is in line with the consensus at the time. However, the indications since are that growth will be a little weaker and most analysts have been revising downwards their forecasts in the past few months. My Department will publish revised forecasts at the end of this month, as all member states will do as part of the European semester.
The external environment is expected to strengthen from 2013 onwards. This should feed through to the domestic economy, with lower levels of savings and higher levels of consumption.
Having recorded a small surplus in 2010, the first in a decade, and again in 2011, the current account of the balance of payments is expected to improve further over the forecast horizon. This is encouraging and means the nation as a whole is paying its way. There is, of course, much uncertainty and considerable risk. Obviously, weakness of the euro area is a concern, especially in the past two weeks. The ongoing elections across the European Union and the continued pressure within the eurozone make it very difficult to forecast economic growth with certainty. The Department will continue to monitor the economic situation in the coming weeks.
I would like to turn to the public finances as this is central to our return to economic well-being and exiting the EU-IMF programme. Since the sharp downturn in economic growth that started in 2007, Ireland has been running very large public finance deficits which have driven up significantly the country's debt. That is the backdrop that frames our economic and budgetary policy. We cannot consistently spend more than we take in in revenue each year. It is unsustainable. Through the Government's determination to correct the public finances, enhance economic growth prospects and create jobs, we are beginning to see positive results. The end-March 2012 Exchequer returns data were generally positive, showing taxes ahead of profile in the first quarter.
As I have mentioned, the latest economic data show that domestic activity, especially household spending, remains weak. The jobs initiative contained a number of measures to support the domestic economy, focusing on employment intensive areas such as the tourism sector. The VAT reduction included in the jobs initiative was targeted towards the tourism sector through the introduction of a 9% VAT rate for its goods and services. The positive effects of the initiative can be seen in the 10,000 increase in the numbers working in the tourism sector since the Government took office.
The Government has built on the jobs initiative with the action plan for jobs and pathways to work. These initiatives include targeted measures to reduce the numbers moving into long-term unemployment. The Government knows that we must prevent long-term unemployment becoming the severe structural problem it became in the 1980s and early 1990s. Initiatives such as these show how structural economic problems can be solved without recourse to increased taxation or reduced expenditure.
Very significant adjustments have been implemented and they have not been easy. As Deputies will know, budget 2012 implemented a budgetary adjustment package designed to reduce further the deficit in the public finances in line with our commitments. One of the key objectives of the Government is to get people back to work. The focus of budget 2012 revenue raising measures was on indirect taxes such as VAT, rather than income tax. Indirect taxes have a less adverse impact on economic activity and employment. The key point is that the public finances are moving in the right direction. An underlying general Government deficit of just under 11% of GDP was recorded in 2010, whereas the equivalent figure for 2011 is 9.4% of GDP. This is evidence of the progress being made. Crucially, the underlying deficit in 2011 was well within the limits set as part of the EU-IMF programme and we saw some favourable comment from market participants when this information was published by EUROSTAT earlier this week. All six of the end-quarter Exchequer primary balance targets set so far as part of the EU-IMF programme have also been met, as have the central Government net debt targets, including most recently for the end of the first quarter of 2012. We have achieved these targets, despite weaker international economic conditions than had been previously forecast.
The stability treaty and the fiscal compact are key to supporting Ireland's recovery. Ahead of the referendum on the treaty next month, I want to make it clear that this is a treaty on stability which is about ensuring a stable euro, recovery and a decent increase in growth and jobs. It is about confidence abroad and maintaining and enhancing the influence we have been rebuilding with investors, job creators and our European partners. For job creating investors, from whom so many announcements have come in recent months, their decisions have been thanks to our renewed political and economic stability and, above all, the determination of the people, despite great sacrifices, to restore Ireland's economic health.
The treaty is also about good housekeeping, managing our debt in such a way that over time taxpayers' money will go not into servicing debts but more and more into public services and targeted growth initiatives to create jobs. It is about having an insurance policy, making sure we have access to the money that allows us to fund these public services and all Government spending. We are on target with our programme and sentiment is good, yet we cannot control world events or the world economy. Markets need to know there is a backup in the form of the European Stability Mechanism. Just having this backup will improve our ability to regain access to financial markets at the end of our programme. Ratification will allow us access.
The Government is taking every step to support economic recovery and will continue to focus on creating the right conditions to get people back to work. Returning the banking sector to health has been a particular priority for the Government in the last year. We must have a financial system that supports a return to sustainable growth in the economy. Last year the Government set out its vision for a new core banking system aligned for lending to the economy, businesses and households. In order to help to achieve this goal, a new division was established in the Department to focus on the banking sector. A number of developments driven by my Department in the last year have helped to move us towards this goal. Following the PCAR exercise, the banks have been recapitalised. The State's investment was limited to €16.5 billion, due in large part to the sale of part of our stake in Bank of Ireland, as well as liability management exercises across the covered banks. This is a significantly smaller investment than the initial estimates of €35 billion when we entered the IMF-EU programme of support.
I suspect Deputies will refer to the consultancy costs provided for in the Department's Vote, but I want to make the point that although these costs are in the millions, they have assisted in generating a capital gain of €7 billion in 2011 alone. This has meant a very significant saving to the taxpayer.
Following a number of mergers, Ireland now has two universal Government supported pillar banks, Bank of Ireland and Allied Irish Banks/EBS, as well as Permanent TSB and other non-domestic banks.
Anglo Irish Bank and INBS have been merged to create the IBRC, which is being wound down over time. The banks have embarked on an ambitious deleveraging programme. They exceeded the target of approximately €37 billion in 2011 with deleveraging of approximately €46 billion across the covered banks, despite the challenging economic environment.
We are beginning to see some stability return to the banking sector as a result of these actions. The deposit outflows seen in the period prior to the PCAR and subsequent recapitalisation have been reversed and there has been significant stabilisation and, indeed, growth in deposit numbers.
The level of Central Bank funding for the covered banks has fallen from a high of €157 billion in February to €109 billion at the end of the 2011, and these banks' share of total ECB funding has fallen below September 2010 levels. Government guarantees have also fallen to below €100 billion from a high of almost €375 billion.
We aim to establish sustainable banks that can survive and prosper, without the need for ongoing State support. Weaning the banks off State support will take time of course and will require improved profitability and market access. We are continuing to focus on maximising the value of the State's investment in the banks. We are engaging with our external partners to develop a proposal which facilitates further restructuring in the banking sector, including the promissory note. Discussions on this proposal have been underway at a technical level.
Looking to the future, we are focussed on developing and implementing solutions to the mortgage arrears problems in the economy. My Department is working to ensure that a comprehensive solution is implemented to address this difficult area. Work is ongoing to prepare the personal insolvency Bill for formal publication and the enactment of this Bill is a key legislative priority for the Government. Work is also under way on other initiatives such as mortgage to rent, as well as the Central Bank's oversight of the banks' own strategies to deal with those in arrears.
In addition, access to credit for viable businesses and individuals is a vital part of the banking system's role in supporting economic growth. The pillar banks have been set ambitious targets for sanctioning of lending into the economy. The 2011 target of €3 billion for each bank was achieved. The target for 2012 is €3.5 billion and the banks are being closely monitored to ensure that they meet these targets. The Department is also working closely with the Department of Jobs, Enterprise and Innovation to assist in the implementation of a loan guarantee fund - that Bill was published two weeks ago - and a microfinance fund. The heads of the latter Bill have been agreed and the Bill will be published this quarter.
The overall focus of all of these policy streams is to ensure that the banking sector is fit for purpose for the economy. The actions taken in 2011, and so far in 2012, have made significant progress towards this goal but I and my Department remain committed to completing this task.
Turning to the business of the select sub-committee today, I am presenting Estimates for my own Department, the Office of the Revenue Commissioners, the Office of the Appeals Commissioner, and the Office of the Comptroller and Auditor General.
Vote 7 provides for the administrative and non-administrative costs of the Department of Finance. The format of the Estimate follows the performance budgeting model which was introduced in 2011, albeit that the functions of my Department have been realigned under four programmes in 2012, which gives an increased focus to banking sector policy.
The gross Estimate for Vote 7 amounts to some €33 million, which represents an increase of some €9 million on the 2011 outturn. The net estimate is €32 million, which is an increase of €9.5 million on the 2011 outturn.
The gross increase is accounted for by: an increase in the paybill of €3 million arising from the requirement to upskill the Department in the economic and banking areas; a projected increase in banking-related consultancy costs, which amounts to €4 million; and a provision of €2 million in respect of costs associated with our hosting of the EU Presidency.
The provision for EU Presidency costs is obviously a temporary increase for the duration of the Presidency and these costs will cease from mid-2013. The remainder of the increase is a regrettable but necessary outcome of the ongoing position we face in terms of managing our country's finances and restoring our banking system. A number of external reviews of my Department have commented on the need to upskill staff and supplement skillsets where necessary. The increase in the Estimate for my Department will enable us to address these challenges.
My Department will, however, continue to pursue economies of scale and improved productivity through the expansion of the shared service function to other Departments, agencies and bodies, and through the sharing of consultancy expertise with the National Treasury Management Agency. Consultancy costs will be monitored closely and will be recouped from the relevant financial institutions where possible. However, I am sure the select sub-committee will appreciate that we must utilise expertise where necessary in order to secure a robust banking system and promote an environment of stable sustainable economic growth.
As for the Office of the Revenue Commissioners, the net Estimate of €311.978 million is down by €5.581 million, or 2%, on the 2011 net outturn, of which 74% is related to pay for an employment control framework ceiling of 5,774 staff. Continued investment in information and communications technology, as well as providing better services for the taxpaying public, has been a major driver of productivity growth in Revenue. It continues assisting the organisation to deliver in these more difficult economic circumstances with fewer resources.
In 2011, the net tax and duty receipts increased by 7.3% to €34.2 billion, reversing three years of falling returns to the Exchequer. The level of outstanding debt stabilised. A high level of timely compliance with payment and filing deadlines was achieved despite difficult economic circumstances. Revenue continued to provide quality services to support and assist all customers in meeting their obligations.
Throughout 2011, Revenue increased organisational flexibility, efficiency and innovation. Revenue continues to extend the range of electronic services available to customers and sees potential for further development in online operations. In addition, Revenue continues to collect taxes as they fall due, managing the risks inherent in the shadow economy and improving the skills and tools used in tackling tax and duty evasion. These are all important in maintaining the highest possible level of trust and confidence of the community in the operations of Revenue.
The primary priority for Revenue in 2012 is to maximise compliance with tax and customs legislation. In an environment of difficulty and challenge for businesses and individuals, Revenue continues in its efforts to advance the achievement of its mission, through the following: making it easier and less costly for its customers to comply by delivering quality services to customers so that they are informed, understand their obligations and pay the right amount of tax and duty; increasing timely compliance for filing returns and making payments, as well as reducing debt; targeting and confronting those who do not comply; and contributing to Ireland's economic recovery by ensuring a strong and effective legislative base for its activities and the implementation of international and national customs and taxation policy, and a network of tax treaties and agreements. These are seen as Revenue's most important contributions to the programme for Government, the EU-ECB-IMF programme and the national objective of economic recovery.
A key challenge for 2012 is containing shadow economy activity in a recession and with reducing resources. The shadow economy has the potential to undermine the legitimate economy, reduce tax and duty receipts, and impact negatively on competitiveness and jobs. Revenue's strategy of matching resources to priorities, further developing their risk analysis tools, combined with a strong focus on cash business, will continue. Revenue will also continue to address smuggling and associated criminal activity, particularly in the areas of oil and tobacco fraud.
I thank members for their attention and I commend the Estimates for the finance group of Votes to the select sub-committee. I will be glad to supply any further information or clarification members may request.
