I am pleased to have the opportunity to appear before the select committee today in connection with the 2015 Estimates for my Department and for the offices under the ambit of my Department, including the Revenue Commissioners, the Appeal Commissioners and the Comptroller and Auditor General. I thank the Officers of my Department for their ongoing dedication and commitment as we continue to develop sustainable macro-economic, fiscal and financial services strategies for the future and work through external programme support monitoring.
Before we commence our discussion of the 2015 Estimates, I would like to touch briefly on the key outputs of the Department during 2014. During the course of 2014, our EU and international division continued to engage at various fora with a view to representing, protecting and advancing Ireland's interests on the wider stage. Following the successful exit from the EU-IMF programme in 2013, the work of the division was refocused on maximising Ireland's position in a post-programmes environment including, managing the EU semester and our interaction with the European institutions, the IMF and the OECD.
A key element of the work of the division in 2014 was the re-financing of the IMF loans, a transaction that will deliver at least €1.5 billion in savings to Ireland over the lifetime of the loans. To date, two repayments totalling some €12.5 billion, representing 54% of our €22.5 billion IMF loan facility, have been completed. The impact of this - the reduction of the interest bill on the national debt - reduces the amount of tax revenues and borrowing that go towards financing the debt. This frees up resources for investment in activities that will grow the economy and create jobs and opportunities. This has knock-on benefits across the economy and can lower the cost of debt for businesses and families.
In the banking and financial services area, the division delivered against an extensive list of objectives across the sector. The banks continue to make significant progress in regaining financial health and have benefited from the general improvement in the macro-economic environment. To date, this progress has allowed us to commence the process of monetising our banking investments with the sale of our Bank of Ireland, BOI, debt instruments. Much of the banking-related work in the Department of Finance in 2015 will now focus on AIB. Given the nature of our investment and the range of options available to recoup value from the bank, officials within my Department are working with AIB on reconfiguring its capital structure. Goldman Sachs International has been appointed to provide financial advice to the Department in this regard.
Both AIB and BOI returned to profit in the first half of 2014, on the back of improving interest margins and reduced levels of impairments. With this improvement in profitability, the rate of the regulatory capital build in 2014 at AIB and BOI has been impressive. The funding position for Irish banks is in good shape with both AIB and BOI comfortably within the required loan-to-deposit ratio and with ready access to the wholesale debt markets at a cost that continues to improve. Overall the results of the recent ECB comprehensive assessment confirm the strength of the Irish banking system. Arrears management is an area of continued focus and the banks are beginning to make real progress in this area with reductions in non-performing loans evidenced across all loan portfolios. The latest Central Bank statistics show that the number of mortgage accounts for principal dwelling houses in arrears fell for the fifth consecutive quarter.
In other areas of financial services, the Minister of State, Deputy Harris, is focused on the new IFS strategy where we will look to build on the success of this important sector of the export economy, which contributes to State revenue as well as employing some 35,000 people directly. The EU legislative reform programme continues, with progress across a number of areas, including the Bank Recovery and Resolution Directive, the Single Supervisory Mechanism, and the Single Resolution Mechanism-Fund.
The key objective for the fiscal policy division in 2014 was to continue to deliver on our deficit targets and to reduce the debt. Restoring ordering to the public finances was a necessary precondition for the growth that we are now experiencing. Taxes continued to perform ahead of targets and we have been exceeding our deficit target in 2014 and are on track to reduce the deficit below 3% in 2015.
Considerable resources were also focused on an extensive study of Ireland's corporation tax policy during 2014. This resulted in a budget day publication of An Economic Impact Assessment of Ireland's Corporation Tax Policy, a comprehensive output the purpose of which was to quantify the effect of the three elements underpinning Ireland's corporation tax policy - rate, regime and reputation. Comprehensive reviews, involving public consultation exercises, were completed in respect of the special assignee relief programme, the foreign earnings deduction and the employment and investment incentive. A review of tax measures in the farming sector, which was announced in budget 2014 as a joint initiative between the Department of Finance and the Department of Agriculture, Food and the Marine, was also completed, resulting in the publication of the agri-tax review. This review detailed a number of recommendations for the agri-tax area, and a cost-benefit analysis of these measures.
Ireland is fully committed to the OECD BEPS process but we must also secure our revenue stream which provides the necessary funding for our public expenditure. In this context, the division therefore also focused the opportunities for Ireland in an international tax policy context. The recently published A Road Map for Ireland's Tax Competitiveness updates Ireland's international tax strategy and sets out a comprehensive package of competitive tax measures designed to reposition Ireland to reap the benefits of sustainable foreign direct investment and a changing international tax landscape.
The budget introduced in October was also the first mildly expansionary budget introduced by this Government and significant resources were focused on reforms to the income tax system to support those at work and create jobs. The changes to the income tax system introduced in budget 2015 which came into effect last month mean that all those who pay income tax and-or USC are seeing an increase in their take home pay when compared to someone on the same income level last year. As Deputies will be aware, this is the first phase of a reform plan to reduce the tax burden on low and middle-income earners.
The economic division continued to engage in research projects designed to inform our policy options and macroeconomic framework in order to better support the Department and the Government in decision-making. In pursuit of this strategy, my Department recently signed an agreement with the Economic and Social Research Institute with the aim of undertaking and disseminating research on various macroeconomic and taxation issues.
Both economic activity and employment are on the rise again in Ireland. The latest economic forecasts were published by the Department of Finance in October last for budget 2015. They include forecast increases in gross domestic product of 4.7% for 2014 and 3.9% for 2015. The rate of economic growth in Ireland was the fastest in the EU. The national accounts figures for the third quarter of 2014 broadly support the expected outturn for 2014 in relation to total economic activity as well as for employment, exports and domestic demand. More recent hard data has strengthened the assessment that 2014 was a very good year for the Irish economy and they provide positive indicators for 2015.
Growth is coming from two main sources, the domestic-facing economy and the foreign-owned sector. Consumer spending was strong in 2014, with retail sales up over 6% compared with 2013. Manufacturing production in 2014 as a whole was 20.9% higher than in 2013. The total number of new vehicles licensed in January this year was some 26% higher than in January 2014. Consumer confidence is at a seven-year high in January and tax revenues grew by 9% last year.
The recovery has been most evident in the labour market, which is a key Government priority. The trend in unemployment continues to be strongly and steadily downward. While still unacceptably high, unemployment has fallen from over 15% to 10.5% in only three years. Over 80,000 jobs have been created since the low point of 2012. Jobs have been created right across the economy, in virtually all sectors.
Inflation was low in 2014, with an average increase in the HICP of 0.3% for the year as a whole. Inflationary pressures are also expected to remain relatively muted in 2015, with the fall in oil prices having a major influence on this assessment.
Although Ireland's economic performance was strong in 2014 and we are expecting the economy to maintain its upward trend in 2015, there are, of course, risks attached to this benign scenario. These risks stem from both external and domestic sources. Continued low inflation in the euro area presents a risk in that it could lead households and firms to defer spending and investment. As against this, however, the ECB's recent quantitative easing announcement is to be welcomed as it should help to avert this threat as well as benefiting the Irish economy in other ways. Another risk is that if more robust growth in our main trading markets fails to materialise this could have a negative impact on our exports.
Although we are, of course, dependent on growth in our trading partners, our experience in recent years has demonstrated that the Irish economy is flexible and resilient, as well as having developed greater competitive strengths than before. I, therefore, have confidence that this increased economic strength, combined with the Government's commitment to fiscal discipline, would enable the Irish economy to cope if external growth was to be slower than expected.
Turning to the public finances, it is important to note that, since 2008, Ireland has introduced consolidation measures in the region of €30 billion, or almost 17% of GDP. These measures were strategically implemented in a manner that was in line with international best practice, that is, the majority - over 60% - of the consolidation measures have been on the expenditure side. Furthermore, in tax measures introduced during this period, the strategy has been to widen the tax base while ensuring a fair, efficient and competitive income tax system, which is essential for economic growth and job creation. The implementation of these measures has seen Ireland make significant progress in correcting the imbalances in the public finances and enabled us to consistently overachieve compared to the Excessive Deficit Procedure, EDP, fiscal targets. I am confident that the 2014 deficit target will also be met by a significant margin.
Budget 2015 targets a deficit of 2.7% of GDP for 2015, which provides a prudent buffer to achieving a GDP deficit of less than 3%. I would fully expect that the continuing revenue growth and expenditure restraint will enable Ireland to exit the Excessive Deficit Procedure in 2015.
With regard to the National Asset Management Agency, at the end of 2014 NAMA had redeemed a total of €16.6 billion in senior bonds, which represents 55% of senior bonds issued. If one includes IBRC-related bonds, total redemptions have reached €29.5 billion.
This significantly reduces the contingent liability for the State, from a possible €43 billion to €13.5 billion at year end 2014. These redemptions yield benefits in terms of the creditworthiness of the sovereign. This has been clearly stated in statements by the credit rating agencies as they have upgraded the Irish sovereign, in part, reflecting the positive impact they consider that NAMA's actual and planned accelerated disposal programme is and will continue to have on Ireland's creditworthiness. Of particular importance has been the manner in which NAMA has not just consistently met but exceeded its targets. NAMA is confident, assuming current market performance is sustained, that it will be in a position to fully repay its borrowings and hopes to achieve a surplus over its life, thus eliminating the State's contingent liability.
Deputies will be aware that the Joint Committee of Inquiry into the Banking Crisis was established last year. The Department is fully committed to supporting the work of the committee and is currently in the process of sourcing, examining and formatting the substantial number of records requested. We have already provided a substantial number of records and will continue to do so. This commitment to deliver applies equally across all areas of work in the Department. It is a knowledge-based professional organisation with enormous responsibility and accountability to deliver to its stakeholders. Changes already implemented ensure that resources are directed towards key priorities. This is complimented by the Department's investment and focus on performance management, enhancement in its IT systems, employee engagement, workforce planning and learning and development. These initiatives and developments are being managed and led by a senior management team and are actively contributed to and supported by staff.
Our change programme for 2015 is focused on continuous improvement and higher performance levels. We will continue to develop and implement underlying actions to our HR strategy to achieve our strategic goals and deliver public value. We will enhance and promote good corporate governance and compliance so that we can best deliver on our objectives in a professional, fair and balanced manner. Through collaboration with Office of Government Chief Information Officer, OGCIO, we will continue to invest in the roll-out of our ICT strategy as a key enabler to introduce innovation to and transform the way in which we work that achieves our business needs and assist us to deliver public value. We will also work with the Office of Public Works and other tenants to ensure that we maximise efficient and co-ordinated usage of our physical facilities.
The ongoing programme of economic repair, having regard to social recovery, will require that we partner and exploit synergies with our colleagues in other Departments, as well as public and private sector bodies. We will continue our strategic collaboration and partnership with the Department of Public Expenditure and Reform in relation to achieving our common goal of ensuring the long term sustainability of the public finances while also delivering widespread positive outcomes for all stakeholders, including citizens, businesses and public servants. My Department is fully committed to the ongoing programme of change in the Civil Service which seeks to build capacity to respond to existing and future challenges and improve the performance of the Civil Service and its staff. Strong leadership and active participation in the implementation of this programme of change will be a key focus over the period.
Turning to the business of the committee today, the funding allocation sought for the Finance group of Votes for 2015 totals €368 million and compares to a 2014 Vote group total of €358 million. This represents an increase of 3%, which is largely driven by a technical requirement to provide for 27 fortnightly payrolls in 2015 - an addition of some €9 million to the Vote group. The remainder arises because of the need to provide for additional resources in Revenue and the Office of the Comptroller and Auditor General, which I will come back to later.
Some €31 million of the 2015 Vote group allocation provides for the administrative and non-administrative costs of the Department of Finance. This allocation is broadly unchanged compared to 2014. Almost 61% of this is provided to cover pay bills, with a further €4 million to cover facilities and non-pay administrative costs, a large portion of which is in respect of transactional pension, banking and financial management shared services. Costs will reduce in this area over the next few years as these services transition to the shared services Vote. The remainder of the gross Estimate is provided to enable the Department to widen its engagement at an international level, to be proactive in addressing policy issues and to secure a robust banking system and economic climate. As I indicated at the outset, our ongoing focus is the development of strategies to secure a functioning and sustainable macro-economic environment, which will lead to a better standard of living for our citizens, to promote domestic consumption and sustainable lending, and to continue to implement improvements within the domestic and international financial services sector.
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. Members will be aware that the Comptroller and Auditor General also assists the Committee of Public Accounts in its scrutiny of the public finances. Additional resources of €760,000 have been allocated to this office in 2015 to enable it to address capacity issues and a build up of work in the financial audit directorate.
On Vote 9, the Office of the Revenue Commissioners has requested a budget allocation of €329 million, an increase of €9 million or 2.8% on the 2014 net Estimate, of which 74% is related to pay for an employment ceiling of 5,874 staff. The Revenue Commissioners, as the Irish tax and customs administration, plays a vital role in our economy by collecting taxes and duties due to the State. These receipts underpin Government's capacity to meet our debt obligations and to fund vital services and facilities for society. In my Budget Statement I signalled an increase in Revenue resources as one of the elements of the corporate tax reform road map to reflect its role as competent authority and in recognition of the many changes taking place globally in corporate tax. I fully support Revenue's proactive approach in sourcing the skilled professional and technical expertise required to allow it to deliver on its challenging role. The additional provision for 2015 will provide for 20 staff for international taxation, 50 permanent staff for the local property tax project and 56 auditors in line with proposals by Revenue in its comprehensive review of expenditure.
In 2014, net tax and duty receipts increased by 3.1% over budget to €41.28 billion, the fourth successive year-on-year increase in returns to the Exchequer. Revenue also reduced total tax debt, maintained high levels of compliance for the taxes and duties under its care and management and delivered quality services to make it easier and less costly for taxpayers to voluntarily comply. As one example of the work undertaken, Revenue achieved a 95% compliance rate and collected €491 million in local property tax, including household charge arrears. This, together with timely filing and payment compliance rates of 99% for our largest business cases and 97% for medium sized business cases, is evidence of a strong compliance culture among Irish taxpayers. Furthermore, during 2014 Revenue introduced the online home renovation incentive systems. The level of home renovation incentive activity
is significant with over 14,000 properties benefiting from the scheme in respect of works with a value in excess of €290 million. In addition to increasing employment and activity in the construction sector, this incentive supports legitimate trade and improves the competitiveness of legitimate contractors and enables Revenue to develop additional compliance programmes to identify and tackle shadow economy activity within the construction sector.
In its new Statement of Strategy for 2015-17, Revenue is committed to two key strategic priorities: to make it easier and less costly to voluntarily comply and to identify and confront non-compliance.
On making it easier and less costly to comply with tax and customs requirements, Revenue will promote the delivery of quality information and services, as well as the early resolution of taxpayers inquiries. To achieve this it intends to promote self-service and electronic channels as its primary service provision channels. Where electronic or self-service engagement is not a viable option, an excellent telephone service, organised around the needs of the taxpayers, will be provided.
Unfortunately non-compliance is still a feature. To support and to underpin its efforts to support voluntary compliance Revenue will confront non-compliance on a risk priority basis. Revenue intends to maximise the use of data and the deployment of analytics and risk assessment approaches to identify the incidence, scale and significance of non-compliance and to target its resources to successfully confront and overcome those risks. In this way Revenue will identify and challenge all forms of shadow economy activity, tackle organised crime activity and smuggling and confront aggressive tax and duty avoidance.
It should be noted that Revenue collaborated with a wide range of Departments and agencies on the implementation of Government policies and on the international side, Revenue has been an active contributor in the development of EU and OECD initiatives providing for the automatic exchange of information between tax administrations and the base erosion and profit shifting, BEPS, action plan. In 2014, Ireland continued to expand its network of international agreements with the signature of two new double taxation treaties, bringing the number of signed treaties in place to 72. Another example of collaboration will be the joint introduction of a new fuel marker in Ireland and the UK to counter fuel laundering. Revenue will continue to contribute to our economic recovery and support the Government's medium-term economic strategy by collecting taxes and duties as efficiently and effectively as possible.
In my Budget Statement for 2014, I also announced a reform of the role, functions and structure of the Office of the Appeal Commissioners. It is expected that legislation will be introduced in 2015 providing, inter alia, for the establishment of a new tax appeals commission. Accordingly, the proposed allocation for Vote 10 - Office of the Appeal Commissioners has been increased by €300,000, or 63%, in 2015 to reflect the part-year funding required to advance this reform.
I thank members for their attention and I commend the Revised Estimates for the Department of Finance group of Votes to the committee.
