I am pleased to have the opportunity to appear before the select committee today in connection with the 2013 Estimates for my Department and for the offices under the ambit of my Department, including the Revenue Commissioners, the appeals commissioner and the Comptroller and Auditor General. I will begin by making some general comments in respect of the outputs of my Department during 2012 and to date in 2013.
The year 2012 was another demanding year for both this Department and for the economy. We continue to operate in a very demanding and fast changing economic and financial environment and staff continue to respond unstintingly to the demands placed on them. This was very evident in both the successful conclusion of the promissory note renegotiations and the special liquidation of IBRC. The Deputies will have seen at first hand the dedication of and contribution made by staff in the Department where the very thorough pre-planning and delicate negotiation and diplomacy brought to these complicated issues resulted in very real value to the taxpayer. The successful sale of Irish Life, Bank of Ireland contingent capital notes and the efficient management of our EU Presidency programme were also key features of a particularly busy schedule for the Department. Delivery on these issues does not happen without the continued support, often late into the night and indeed through the night, from the staff of the Department. There are high stakes involved and we continue to make steady progress towards achieving our strategic goals.
I am pleased to report that 2012 represented another significant stage on our road to economic recovery. Following a return to growth in 2011, Ireland achieved a second successive year of growth in 2012, with GDP, in volume terms, having recorded growth of 0.9% in the year. As would be expected from a small open economy such as Ireland's, the exporting sectors continue to drive our economic recovery. While product-specific developments in the pharma-chem sector have impacted on goods exports, Ireland's services exports continue to perform strongly, having increased by 8.9% in 2012. This continued success owes much to the significant competitiveness improvements that have taken place in recent years - a reflection of the flexibility of the Irish economy.
While this in itself is encouraging, perhaps of more immediate relevance to the people of Ireland have been the signs of stabilisation in the domestic economy over the past year. For the first time since the onset of the recession, households saw an increase in their disposable income during the year, while quarter 4 saw the first annual increase in employment since mid-2008. On foot of this, personal consumption stabilised over the second half of 2012, recording modest growth over the last two quarters. Last year also saw investment contribute positively to growth, recording the first year-on-year increase since 2007. While Government consumption continues to decline - reflecting the necessary fiscal rebalancing - my Department now expects domestic demand to return to growth this year. The importance of a vibrant domestic economy cannot be understated. Domestic activity drives employment and its recovery is a vital precondition to tackling our high unemployment levels.
Ireland's public finances have gone through an exceptionally difficult period in recent times. After a sustained period of balanced budgets, the economic downturn caused the emergence of large deficits in each of the years since 2008. In addition, the very significant level of support the State has been required to provide to our banking sector has contributed significantly to the deterioration in our public finances and is a large part of the reason for the extremely sharp, steep increase in our debt level. As recently as 2007, our debt-to-GDP ratio was just 25%. This year we expect it to peak at approximately 123%, a very substantial level of increase by any standards and in such a relatively short space of time.
Notwithstanding this, the public finances are moving in the right direction. Ireland has continued to demonstrate signs that the recovery is on track. The latest figures show that our economy is growing, with GDP increasing by 0.9% in 2012. Encouragingly, this was the second consecutive year of recorded economic growth and this positive trend is projected to continue throughout 2013. This year's budget is based on real GDP growth of 1.3%. Stabilising the debt ratio through a reduction in our annual deficit or borrowing requirement continues to be the backdrop that frames our fiscal policy. The fiscal consolidation process has been under way since mid-2008 and all told, measures designed to yield or save approximately €28 billion, or close to 17% of estimated 2013 GDP, have so far been implemented.
However, we know that restoring our public finances to a sustainable path in the coming years cannot come from consolidation alone. Economic growth is a key contributor and in designing economic and budgetary policy, we must be mindful of this. Getting people back to work is at the top of this Government's agenda. In light of this, one of the main focuses of budget 2013 was on small and medium-sized industries, SMEs. We announced a ten point tax reform plan which included measures that will make a real difference to SMEs by assisting their cash position and supporting their creation of jobs.
Turning to the labour market, 2012 saw the first real signs of stabilisation following the crisis. Seasonally adjusted employment increased over each of the last two quarters, resulting in the first annual increase in the number of people in employment since mid-2008 in the fourth quarter. On foot of this, it is encouraging to note that my Department is now forecasting a return to full-year employment growth for this year. The unemployment rate meanwhile stood at 14% in April, having fallen from a peak of 15% in February 2012. The Government remains committed to tackling the unacceptably high level of unemployment by creating an environment which supports enterprise and job creation. Reflecting this, the Action Plan for Jobs 2013 set out over 333 actions to be undertaken in the coming year to support job creation and complement measures already undertaken in the jobs initiative and the pathways to work. The scope of the plan reflects not just the ambition of this Government but a determination to get Ireland's unemployed back to work again.
However, in assessing the economic outlook for Ireland, it is important to recognise that we are in a time of heightened uncertainty and considerable risk. Given the export-orientated nature of our economy, our fortunes are indelibly intertwined with those of our trading partners. Ireland cannot prosper in isolation and any re-ignition of the sovereign debt crisis in the euro area would clearly pose a significant threat to our recovery.
We successfully concluded the ninth review of the programme of financial support with the EU Commission, the ECB and the IMF in April. The tenth review process began recently with the review mission running from 23 April to 2 May 2013. During this and previous reviews we have emphasised that our focus now is on our exit strategy from the programme, our re-entry into the financial markets and improving our debt sustainability. Our programme compliance is recognised as being uniquely strong, and as at the end of 2013 we have completed over 240 actions, and close to 85% of the available external funding has been drawn down as at the end of March 2013.
Importantly, the Government continues to meet each of the quantitative fiscal targets set out as part of the EU-IMF programme, the most recent being for the end of March. In addition, we are on track to meet the annual deficit target for this year, as we did in 2012. Compliance with these targets has helped a great deal in restoring Ireland's reputation as we seek to return our public finances to a more sustainable path. However, we remain cognisant of the fact that a very challenging road lies ahead. The gap between spending and revenues still remains too large. We are determined to continue to reduce this gap in a phased manner over the coming years, to allow the economic recovery take hold. The budgetary adjustments that are required present many challenges for policy makers but we remain steadfast in our commitment to reducing the deficit below 3% by 2015.
Ireland's Presidency of the European Union is now moving into its final stages. The Irish Presidency has been focused on stability, jobs and growth and we have focused on working with our European partners to introduce measures to support this agenda. We have pursued specific objectives and focused resources on the most significant dossiers. This has been a successful strategy and we have made significant progress in a number of policy areas.
First and importantly, we achieved agreement on the extension of maturities of European Financial Stability Facility, EFSF, and European Financial Stabilisation Mechanism, EFSM, loans for Ireland and Portugal. In financial services, we have focused on the legislative dossiers necessary to help complete the banking union. The banking union has been a high priority of the Irish Presidency because of its importance in breaking the link between the sovereign and the banks.
We have gained agreement on the capital requirements directive IV which is important for the stability of the banking sector. We have also achieved agreement on the single supervisory mechanism and adapted the rules of the European Banking Authority to this new framework. This is a fundamental element of the structure of banking union. There was significant progress on the bank resolution and recovery directive at the May ECOFIN and we are working on progressing this with a view to reaching agreement on key political issues at the June ECOFIN.
In the consumer area we have achieved agreement on the mortgage credit directive. Work is also advancing on other important financial services dossiers such as the markets in financial instruments directive and regulation, MiFID-MiFIR. We achieved agreement on the two pack set of economic regulations aimed at improving economic governance in the euro area. We have been moving the European semester economic governance process to its final conclusion at the June European Council.
In taxation, the Presidency achieved agreement to allow those member states who wished to introduce a financial transaction tax to commence work on the proposal. More recently, agreement was achieved on a mandate to allow the Commission to enter into negotiations with third countries on amendments to savings taxation agreements. Agreement was also achieved at the May ECOFIN on a set of Council conclusions on tax fraud and tax evasion. This is part of wider work on combating tax fraud and tax evasion.
We have been engaged with the EU budget, including achieving political agreement on a draft amending budget to the 2013 budget to allow for discussions on the multi-annual financial framework, MFF, with the European Parliament. We have contributed to advancing discussions in the development of European Council President Herman Von Rompuy's roadmap for economic and monetary union for the June European Council.
These are just some of the achievements during an EU Presidency calendar that included not only the very successful ECOFIN meeting, but more than 60 working parties, 50 trilogues and associated bilateral meetings.
I will touch briefly on initiatives in the banking sector. In June 2011 the Central Bank of Ireland, together with my Department, was asked to take a lead role in preparing a national payments plan. The overriding vision for the national payments plan is for Ireland to double the number of e-payments per capita by 2015, leading to a reduction in our cash and cheque usage to the EU average. The national payment plan is the result of extensive consultation with relevant stakeholders and all stakeholders will play a role in implementing the recommendations of the plan.
Ireland is in the unique position of not only being able to catch up to others but even to become a leader in this area. We have one of the youngest populations in Europe and have shown ourselves to be very fast adaptors of new technology. The national payments plan is designed to ensure that the payments environment here facilitates increased adoption of more efficient payment methods. In addition to targeting increased e-payments usage, the national payments plan will target improved consumer payments systems and modernised business payments. In doing so we will ensure that Ireland meets its commitments under the single European payments area regulation but our primary driver is increased competitiveness and efficiency.
One of the key priorities of the programme for Government is to ensure that an adequate pool of credit is available to fund SMEs in the real economy during the bank restructuring and downsizing programme. It is vital that the banks continue to make credit available to support economic recovery. However, it is not in the interest of the banks, businesses or the economy for finance to be provided unless the business is viable and has the capacity to meet the interest payments and repay the sum borrowed. The Government has imposed SME lending targets on the two domestic pillar banks - AIB and Bank of Ireland - for the three calendar years 2011 to 2013. Each bank was required to sanction lending of at least €3 billion in 2011, €3.5 billion in 2012 and €4 billion in 2013 for new or increased credit facilities to SMEs. The credit reviewer said in his most recent quarterly report, "Both banks have achieved their €3.5 billion SME loan sanction targets. Over €8 billion was sanctioned in 2012."
The Action Plan for Jobs 2013 contains a section dedicated to access to finance for micro, small and medium enterprises. There are 24 specific actions aimed at improving access to finance to be undertaken in 2013 by various organisations. The State bodies group was established in 2012 to develop and oversee the implementation of key policy initiatives to support SME access to credit and other forms of finance.
With over 16% of mortgages in arrears and household debt stabilising but still high compared with European peers, the area of mortgage arrears and personal insolvency remains one of our key issues. Following the publication of the 2011 inter-departmental working group report on mortgage arrears, a comprehensive strategy has been put in place across Government to address the problem of mortgage difficulty. It encompasses personal insolvency reform, a mortgage information and advice service, and the development of the mortgage to rent scheme. Much progress was made on this in 2012 which culminated in the enactment of the Personal Insolvency Act. The Insolvency Service of Ireland, ISI, is putting in place the necessary arrangements to make the Act operational and it is hoped it will be in a position to accept applications this summer.
The Central Bank has had intensive engagement with regulated mortgage lenders and required them to develop and implement mortgage arrears resolution strategies. Arising from this, the Central Bank, as regulator, published performance targets for the main mortgage lenders which will require banks to offer and conclude sustainable solutions for their customers in arrears.
These targets will be backed by new and rigorous provisioning requirements and the possible imposition on the banks of higher capital requirements if these performance targets are not met. The Department is also engaging with the main lenders on a regular basis regarding the lenders' mortgage arrears resolution strategies and their progress in meeting the targets set by the Central Bank.
In terms of the operations of the Department, we continue to pursue an ambitious reform agenda which includes a realignment of our Estimate across five programmes, providing greater focus on key deliverables including EU, financial services, fiscal and economic policy together with provision of certain shared services. We are committed to increasing transparency and openness, including regular reporting against targets and outreach to strategic partners and expert groups to better inform our policy development. We are publishing a greater amount of information for as wide an audience as possible. For example, the recent Exchequer statement was published on our website with an accompanying explanatory video. To this end, I have distributed today our recently published annual review and our most recent report card. These publications provide an update on the wide range of issues addressed, and actions taken, by the Department over the past 18 months.
Turning to the business of the committee today, the funding allocation sought for the Department of Finance group of Votes for 2013 totals €362 million and compares to a 2012 Vote group total of €351 million. Of this, some €33 million relates to Vote 7, which provides for the administrative and non-administrative costs of the Department of Finance, an increase of €1 million compared to 2012, arising largely because of the costs of the EU Presidency. This is a temporary increase for the duration of the Presidency and costs in this area will cease in the latter part of this year.
We continue to pursue economies of scale and improved productivity through the expansion of the shared service function to other Departments, agencies and bodies. We have also progressed a number of initiatives, such as the abolition of payable orders and the reorganisation of accommodation arrangements, which will secure long-term administrative budget savings.
The Estimate also contains a significant provision for banking-related consultancy and other costs, including the cost of financial inclusion projects which I referred to earlier. The Department will continue to seek to minimise these costs but we must be equipped to address issues as they arise, in pursuit of the best return for the taxpayer and in the interest of securing a robust banking system and economic climate. We are dealing in billion euro transactions and the results will impact for the long-term for everybody. We must not seek to achieve short-term savings on costs at the expense of long-term failure on a macro level.
As for Vote 9 - Office of the Revenue Commissioners, the Estimate of €322.705 million is up by €14.579 million, or 5%, on the 2012 net outturn. Of that, 73% is related to pay for an employment control framework ceiling of 5,874 staff. The main reason for the increase is the implementation of the local property tax scheme.
In 2012, net tax and duty receipts increased by 7.3% to €36.7 billion, the second successive year-on-year increase in returns to the Exchequer since 2007. Continued investment in information and communications technology, as well as providing better services for the tax paying public, has been a major driver of productivity growth in Revenue. It continues assisting the organisation to deliver services in these more difficult economic circumstances.
Encouraging voluntary compliance is a cornerstone of Revenue's business strategy. Revenue does this by making it as easy as possible for taxpayers and businesses to be compliant on a voluntary basis. In addition to providing quality customer service, Revenue supports compliance by simplifying its procedures and practices and reducing the costs associated with meeting tax and duty obligations. Throughout 2012, despite the difficult economic circumstances and financial difficulties experienced by many taxpayers, high levels of compliance were maintained.
In 2012, Revenue deployed significant resources to the early detection of highest risk evasion, shadow economy and smuggling activities through the greater use of intelligence, data matching and analytics, and an intensified range of risk focused compliance and audit interventions. Revenue continues to develop sophisticated systems to monitor and manage risk in its pursuit of those who fail to meet their tax and duty obligations. Revenue's role extends beyond the administration of the tax system and they have continued to contribute to Ireland's economic development by providing high quality legislation and advice and promoting Ireland's agenda in various national and international fora.
This year Revenue will make an important contribution to national objectives of fiscal consolidation and economic recovery. Revenue will administer the taxes and duties which are placed in its care and management as efficiently as possible, and will strive to maintain, and where possible grow, compliance levels. In 2013, the introduction of local property tax is a significant part of that contribution. Other key priorities include making a tangible impact on the level of shadow economy activities by devoting resources to target and intervene against shadow economy and smuggling activities.
With, regard to Vote 8, the budget of the Office of the Comptroller and Auditor General is applied towards a single programme with the following outputs: auditing the financial statements of public bodies and issuing audit opinions; control of issues from the Central Fund; examining and reporting on financial management arrangements in public bodies; and the value for money of public services. The Comptroller and Auditor General also assists the PAC in it scrutiny of the public finances.
I thank members for their attention and I commend the Estimates for the Department of Finance group of Votes to the committee.
